Month: October 2011

Interview with Edward Luttwak on geopolitics

It is interesting throughout, for instance:

There is a good measure of social control in Iran, and that is the price of genuine imported Scotch whiskey in Tehran, because it’s a) forbidden, and b) has to be smuggled in for practical purposes from Dubai, and the only way it can come from Dubai is with the cooperation of the Revolutionary Guard. The price of whiskey has been declining for years, and you go to a party in north Tehran now and you get lots of whiskey. And it’s only slightly more expensive than in Northwest Washington.

But on the other hand, the regime is doing something for which they will have my undying gratitude—that is, they have been manufacturing the one and only post-Islamic society. They created a situation in which Iranians in general, worldwide, not only in Iran, are disaffiliated. They are converting Muslim Iranians into post-Muslim Iranians.

The pointer comes from Steve Sailer.

What can Italy do with its wealth?

Italian private debt is quite low and yesterday I mentioned that Italian homeowners don’t have much in the way of mortgages.  David Henderson then asked a good question:

“Were more Italians to take out mortgages on their houses to buy government bonds, for example, Italy could eliminate its interest-payment problem.” How is that good news? The government would still have to pay interest on this debt.

The Italian government has high debt and productivity is not going up any time soon.  We can expect a mixture of lower government spending and higher taxes, otherwise the country defaults, maybe the country defaults anyway.  Ideally “they” would like to send equity in Italian homes to bondholders in lieu of making the interest payments.  Italy doesn’t do a good job collecting taxes and the economy already has lots of distortions, so pulling wealth out of homes would in principle be a way to go.  A CDO tranche instead of an interest coupon, so to speak.  One can imagine the Italians borrowing more against their homes and sending the money to their government as a tax, or accepting lower transfer payments from the government, and that would implicitly serve as a way of paying off the bonds with fractions of homes.  Of course that probably won’t happen.

Italy is house rich, somewhat cash poor, and has a miserable recent history of growth.  If you look at the wealth side of the balance sheet, you can easily work up a heady optimism for Italy.  If you study public choice theory, it is harder to do so.  How many people in that country are either paid to do the wrong thing, or paid to do not so much at all?  TGS reigns.

Italy’s privileges and distortions are so often so local, and so concentrated in inefficient professional services, that it is hard to imagine clearing them up quickly in the form of a big bang, in the way that say New Zealand or Chile or Thatcher’s England did.  And even those successes took some time to pay off and underperformed for years.

Note that if Italy could credibly be expected to grow a mere 2 pct. a year — maybe less — the entire eurozone crisis probably would be messy but manageable.  It’s not.

File under: non siamo cosi’ ricchi come pensavamo di esserlo!

Buy a House, Get a Visitor Visa?

I have been promoting a “buy a house, get a visa” program for several years, so I was initially pleased to see a new bill on this theme from Sens. Charles Schumer (D., N.Y.) and Mike Lee (R., Utah).

…the proposed measure would offer visas to any foreigner making a cash investment of at least $500,000 on residential real-estate—a single-family house, condo or townhouse. Applicants can spend the entire amount on one house or spend as little as $250,000 on a residence and invest the rest in other residential real estate, which can be rented out.

On closer inspection, however, the bill is very weak. Most importantly, the visa would simply allow the buyer to live in his or her house but would not allow them to work in the United States. Pathetic.

I also liked Matt Yglesias‘s spin on this:

The larger issue, however, is that the Schumer/Lee proposal would deny the new immigrants the right to work in the United States. As with other restrictions on high-skill immigration, this is essentially a form of class warfare against less educated Americans. We should be clamoring to increase the supply of foreign-born doctors, lawyers, engineers, and other highly educated occupations as a way of increasing the real wages of America’s factory workers, janitors, waitresses, carpenters, and retail clerks.

Addendum: Canadians are not impressed with the offer.

Shooting the messenger

The European Union’s executive is leaning toward proposing a ban on the issuing of sovereign credit ratings for countries in bailout talks, European internal market commissioner Michel Barnier said Thursday.

Here is more.  Not that it matters (there are still the yields on the debt, for one thing), but a sad and indeed bad sign for the immediate future.

For the pointer I thank Annie Lowrey.

Italy fact of the day

Italy spends a full 14 percent of its aggregate output on pension benefits for retired government employees.

There is much more, most of it depressing, here.  The good news is that most Italians own their homes outright and so there is this sentence:

Were more Italians to take out mortgages on their houses to buy government bonds, for example, Italy could eliminate its interest-payment problem.

Assorted links

1. Don’t blame Germany.

2. Pete Rugolo, jazz composer and arranger, passes away at 95.

3. Tyler Cowen and Michael Vassar debate the Singularity.  The Singularity Summit was an excellent meeting, by the way, I would go back and I am happy to recommend it to you all.

4. Thomas Scanlon on libertarianism.

5. Put me (again) on the ngdp bandwagon, it is time for a major media outlet to profile Scott Sumner, and how to complete the Kindle experience.

6. “One of the things the baby grapples with is Hegel.”

Should we “get tough” with the banks? (department of secondary consequences)

The EU seems to have that in mind but here is the problem with that idea:

Distressed European Union banks that tap national governments or the region’s €440bn rescue fund for capital will be subject to state-aid penalties, involving compulsory restructuring or – in the worst case – orderly wind-downs…

The proviso – consistent with EU state-aid rules applied throughout the crisis – is likely to discourage banks from seeking public assistance and spur them to shrink their balance sheets instead, raising the danger of a credit crunch, bankers say.

Terrence Hendershott writes to me

Below are thoughts from an author of a paper Tyler cited on algorithmic trading (and HFT). There is a project by the UK government on related topics. Some related working papers on HFT are here, here, here, here, and here.

1. Technology has made financial markets work better; improvements in liquidity are large, important, and should result in lower costs of capital for firms; these do not mean that every application of technology is good.

2. There is evidence that investors prefer continuous to periodic trading, but batch auctions as frequent as every few seconds have not been studied.

3. Until technology allows buyers and sellers to better find each other simultaneously, markets need a group of intermediaries; the lowest-cost intermediaries are those closest to the market.

4. Historically, intermediaries were floor traders, now are HFT; floor traders profit from those further from the trading mechanism as do HFT now.

5. What is the best industrial organization for the intermediation sector? i) free entry (HFT) or ii) regulated oligopoly (NYSE specialists, Nasdaq market makers, etc.)?

6. Floor trading had the advantage that within-market relative latency was not so important and the amount of market data produced was small; costs were floor traders’ large advantages and possible collusion.

7. There is yet to be robust empirical evidence linking HFT to declines in market quality or efficiency; Haldane has interesting ideas, but as comments point out, it is difficult to blame HFT more than the economic and euro crises for recent fat tails in asset returns; systemic uncertainty increases fat tails and cross-asset correlations.

Overall, technology applied to intermediation appears to bring benefits with the standard rent seeking costs of intermediaries making money, possible instability (although 1987 showed human markets have their own failings), and technology costs.

Can markets find solutions?

i) If HFT becomes competitive (zero rents), will HFT then resell their technology as brokers? Could this lead to efficiency without negative externalities?

ii) Do dark pools and batch auctions limit part of the “arms race” of technology investment? Significant volumes are already traded in these ways, e.g., the opening and closing auctions. There are many ways investors can avoid HFT.  If they do not, is it revealed preference?

If regulations are needed they should target behavior, not certain trading firms, otherwise HFT features will simply be incorporated into other strategies, e.g., a HFT strategy is merged with a mid-frequency strategy.

Piero Garegnani passes away at age 81

He combined neo-Ricardian and Marxist ideas with Keynesian aggregate demand and he thought marginalist neoclassical economics was incoherent, for reasons related to the Cambridge capital debates.  Robert Vienneau offers one summary of his work.  Matías Vernengo writes:

As early as 1961, while spending an academic year at MIT, he suggested during a presentation by Paul Samuelson that his results depended on the assumption that all sectors use the same capital-labor ratio. The final results of his critique were presented in Garegnani’s paper “Heterogeneous Capital, the Production Function and the Theory of Distribution.” His paper shows conclusively that the marginalist theory of value and distribution based on an aggregate production function is untenable. This of course builds on Sraffa’s work in the Production of Commodities (PC). By 1966, in the famous Quarterly Journal of Economics (QJE) Symposium, Samuelson had admitted that the neoclassical parable was not defensible.

Here are some of his articles on  He always struck me as a very intelligent writer and capable of a good bracing critique, even though I don’t think his proposed alternatives have gone anywhere.  Every profession needs smart and articulate dissenters and I am glad that we have had Garegnani.

For the pointer I thank Juan Carlos Esguerra.

New novels of interest (what I’ve been reading)

I have benefited from travel in Italy and a keen eye for UK editions in airport bookshops and the like:

1. A.S. Byatt, Ragnarok: The End of the Gods.  Beautifully written, mixing moods from fantasy and Icelandic sagas, but it did nothing for me.  Some of you will like it.

2. Audur Ava Olafsdottir, The Greenhouse.  From Iceland, one of my favorite novels this year, it’s funny and sheer fun to read and short and easy yet deep and moving all at the same time.

3. Julian Barnes, The Sense of an Ending.  This one just won the Booker Prize.  At first I thought it was contrived, then I realized it was deliberately contrived, and then I thought it was contrived in its deliberate construction of the contrivance, and so on.  I’ll try it again, in the spirit of being fooled by prizes, in the meantime you may be better off reading “spoilers” about the book before you start it, so you can skip right to your final opinion.

4. Jeffrey Eugenides, The Marriage Plot.  I’ve read only thirty pages but so far I’m impressed, I doubt the so-so reviews of the book, and note I have never loved his work in the first place.  This one has potential.

5. Michael Ondaatje, The Cat’s Table, above average.

The new Ha Jin sits in my pile, he is underrated.  Next week Murakami and Nadas join that pile, lots to do!

The Rent Seeking is Too Damn High

Bloomberg: Federal employees whose compensation averages more than $126,000 and the nation’s greatest concentration of lawyers helped Washington edge out San Jose as the wealthiest U.S. metropolitan area, government data show.

The U.S. capital has swapped top spots with Silicon Valley, according to recent Census Bureau figures, with the typical household in the Washington metro area earning $84,523 last year. The national median income for 2010 was $50,046.

Does desire for a weaker currency keep Germany committed to a full eurozone?

I hear this argument a lot, but I don’t quite understand it.

Let’s start with a contrast, namely that Ecuador, El Salvador and Panama all use the U.S. dollar.  It is unlikely that lowers the value of the dollar and since it boosts the demand for currency it may even strengthen the dollar a bit, though of course there is a Fed offset on the currency supply side.  The U.S. may have a partial geopolitical commitment to these countries, but it has to do with location, the Monroe Doctrine, and the drug war, not  with their currency choice per se.

So why does it lower the value of the euro to have Greece use the currency?  The simplest reason is that Greek participation, and involvement of the other periphery countries, creates a real chance that the eurozone will blow up, partially or fully.  (El Salvador does not pose a comparable threat to the dollar.)  Fair enough.  But then it cannot be argued that the lower currency value means Germany can/will stop such a blow up.  In equilibrium those are inconsistent conjectures.  For the blow up option to lower the value of the euro, the blow up option must be real and if that is not a real risk now when is it supposed to be a real risk?

Another option is to claim that the the participation of the periphery countries in the eurozone raises the expected rate of price inflation in the eurozone.  First, it’s not clear this is true and it has not been true so far.  Second, it is not obvious why the euro should become weaker before that higher inflation arrives.  Third, if German export prices are equally flexible it doesn’t give us a weaker real exchange rate for Germany, which was the original supposed benefit.  Fourth, if German export prices are not flexible we have an overshooting model, which a) implies the low real exchange rate for Germany goes away over time, and b) implies that far more real exchange rate volatility is predictable than is actually the case.

A related question is whether solving the eurozone crisis, for ever and ever, with a neat nifty eurobond (or whatever ha-ha) also would remove Germany’s supposed real exchange rate advantage.

My analysis has not exhausted the options but perhaps you see the problem.  I have not yet heard a coherent version of the argument.  The simplest answer, and the answer most likely to be correct, is that the euro is lower in value, to the benefit of German exporters, but only because there is very real chance of a crack-up, and this is a reason why a crack-up might happen, not a reason why a crack-up will not happen.

Ultimately, the conjectures have to add up.