As many people suspected someone was manipulating Intrade to boost John McCain’s stock price:

An internal investigation by the popular online market Intrade has revealed that an investor’s purchases prompted “unusual” price swings that boosted the prediction that Sen. John McCain will become president.

Over the past several weeks, the investor has pushed hundreds of thousands of dollars into one of Intrade’s predictive markets for the presidential election, the company said.

This is big news but not for the reasons that most people think.  Although some manipulation is clearly possible in the short run, the manipulation was already suspected due to differences between Intrade and other prediction markets.  As a result,

According to Intrade bulletin boards and market histories, smaller investors swept in to take advantage of what they saw as price discrepancies caused by the market shifts – quickly returning the Obama and McCain futures prices to their previous value.

This resulted in losses for the investor and profits for the small investors who followed the patterns to take maximum advantage.

This supports Robin Hanson’s and Ryan Oprea’s finding that manipulation can improve (!) prediction markets – the reason is that manipulation offers informed investors a free lunch.  In a stock market, for example, when you buy (thinking the price will rise) someone else is selling (presumably thinking the price will fall) so if you do not have inside information you should not expect an above normal profit from your trade.  But a manipulator sells and buys based on reasons other than expectations and so offers other investors a greater than normal return.  The more manipulation, therefore, the greater the expected profit from betting according to rational expectations.

An even more important lesson is that prediction markets have truly arrived when people think they are worth manipulating.  Notice that the manipulator probably doesn’t care about changing the market prediction per se.  Instead, a manipulator willing to bet hundreds of thousands to change the prediction of a McCain win must think that the prediction will actually affect the outcome.  And if people think prediction markets are this important then can decision markets be far behind?

Hat tip to Paul Krugman.

The Environmental Security Hypothesis says that in tough times men will prefer women who are good at production, generally older, taller, heavier, less curvaceous women with less body fat.  In good times, they will prefer women who are good at reproduction, generally younger, shorter, lighter, more curvaceous women.  Pettijohn and and Jungeberg look at the characteristics of playboy playmates from 1960 to 2000 and find:

Consistent with Environmental Security Hypothesis predictions, when social and economic conditions were difficult, older, heavier, taller Playboy Playmates of the Year with larger waists, smaller eyes, larger waist-to-hip ratios, smaller bust-to-waist ratios, and smaller body mass index values were selected. These results suggest that environmental security may influence perceptions and preferences for women with certain body and facial features.

Econometricians who wish to investigate further may download the data here (yes really).  The 2008 Playmate of the year, Jayde Nicole. does not seem to fit the hypothesis however.

The DOT will begin to auction off landing slots at airports…well at LaGuardia, Newark and JFK anyway…and "up to 10%" of the slots…and with "mounting opposition."  I did say this was a little good news didn’t I?   

Tyler and I have both suggested that increased immigration would help to increase the demand for housing and relieve some of the financial crisis.  Writing in the WSJ Lee Ohanian concurs:

We should encourage the immigration of prime-age individuals. Beginning in 2007, net immigration fell to half of its level over the previous five years. Increasing immigration would increase the demand for housing and raise home prices. And note that the benefit would be immediate. Home prices — and the value of subprime obligations — would rise in anticipation of a higher population base. The U.S. particularly needs highly skilled workers. These workers not only would purchase homes, but would generate higher living standards for all Americans.

More generally, Ohanian warns that what made the Great Depression great was the misguided policies that Hoover and Roosevelt adopted to fight the depression.  Ohanian has an ill-considered swipe at Obama on this score but the general point is valid and worth remembering as we rush onwards. 

Today the Fed starts to pay interest on reserves.  The zero interest on required reserves was an opportunity cost to banks, a tax if you like, so paying interest lifts the tax.  Reducing taxes on banks at the present time makes sense and in the long run there are some efficiency gains from paying interest on required reserves, especially to the extent that the previous system could be gamed.  Overall, however, this is small potatoes.

More interesting is why the Fed. will pay interest on excess reserves.  In the long run, there are again efficiency gains but why would the Fed. want to make it more profitable for banks to hold excess reserves now when we want every dollar in the credit markets?  My best guess is that the Fed. wants to play more Operation Twist and in Brad DeLong’s terms this gives them an additional tool to do it on the Pan-Galactic scale.  In short, they will buy long bonds and commercial paper or other such asset and use the interest payments on excess reserves to sterilize.  Although paying interest on excess reserves brings this whole operation under the Fed house it’s unclear to me, however, how the situation is markedly different than with Fed/Treasury cooperation.

The consensus among economists is now clear, the best strategy for dealing with the financial crisis is to recapitalize the banks that need recapitalization.  Paul Krugman, John Cochrane, Luigi Zingales, Douglas Diamond, Raghuram Rajan and many others all advocate some form of recapitalization as do Tyler Cowen and myself.  Krugman would prefer a recapitalization in the form of nationalization.  In my view, there is still plenty of private money to buy banks at the right price and my preferred model is the FDIC leading a speed bankruptcy procedure, as was done brilliantly with Washington Mutual (Cochrane also supports this model.)  In the middle are most of the others who have a variety of good ideas to require the banks to raise equity in various ways. 

The consensus policy of economists would put most of the burden of adjustment on politically powerful holders of equity and bonds.

There is also a consensus among economists that the bailout bill is not the right policy.  None of the above economists, for example, is enthusiastic about the bailout.  My bet is that all of us think that the bailout has a substantial likelihood of failing.  The support that exists is born out of hope and fear not judgment and experience.  Nevertheless, the political consensus is that a bailout is what we will get whether it is likely to work or not.   

Addendum: Lynne Kiesling draws the Olsonian conclusion.

A famous paper in economics showed how cigarettes became a medium of exchange in a POW camp (even leading to booms and slumps depending on Red Cross deliveries).  For a long time cigarettes were the money of choice in American prisons as well but today, according to a great piece in the WSJ, the preferred medium of exchange is mackerel.

There’s been a mackerel economy in federal prisons since about 2004,
former inmates and some prison consultants say. That’s when federal
prisons prohibited smoking and, by default, the cigarette pack, which
was the earlier gold standard.

Prisoners need a proxy for the dollar because they’re not allowed to
possess cash. Money they get from prison jobs (which pay a maximum of
40 cents an hour, according to the Federal Bureau of Prisons) or family
members goes into commissary accounts that let them buy things such as
food and toiletries. After the smokes disappeared, inmates turned to
other items on the commissary menu to use as currency…in much of the federal prison system mackerel has become the currency of choice.

I loved this point which raised the possibility of significant mack seignorage.

…Mr. Muntz says he sold more than $1 million of mackerel for federal
prison commissaries last year. It accounted for about half his
commissary sales, he says, outstripping the canned tuna, crab, chicken
and oysters he offers.

Unlike those more expensive delicacies, former prisoners say, the
mack is a good stand-in for the greenback because each can (or pouch)
costs about $1 and few — other than weight-lifters craving protein —
want to eat it.

Thanks to Brandon Fuller for the link.

R: "I’m quite pessimistic about the current financial system.  I’ve been buying gold."

A: "Gold?  That’s not pessimistic enough.  I’ve been buying rice."