Fannie Mae, Freddie Mac and the Peso Problem
A government bailout of the GSEs should not be a surprise. After all, for a long time the markets have been predicting that sooner or later there will be a very expensive bailout. What do I mean? According to Freddie Mac (quoting the OMB) "mortgage rates are 25 – 50 basis points lower because Fannie Mae and Freddie Mac exist in the form and size they do." Now, that is almost certainly an exaggeration but to the extent that interest rates are lower due to the GSEs some significant part of that is due to the market valuing the government’s implicit guarantee. In other words, interest rates are lower because the market is valuing the implied insurance. Now, the whole point of insurance is that sometimes the insurer must pay. Thus the market has been telling us all along that sooner or later the taxpayer was going to pay.
Maybe the taxpayers will have to pay today or maybe in some future tomorrow but the benefits of the GSEs are intimately tied to the costs – there is no such thing as a free lunch. The lunch may look free for a long time – as in the classic peso problem – but what that means is that when the bill comes due it will be big.
Taliban v. Coase
Sadly, the Taliban are succeeding where Coase (and the Pakistan government) have failed.
The mountain of white marble shines with such brilliance in the sun
it looks like snow. For four years, the quarry beneath it lay dormant,
its riches captive to tribal squabbles and government ineptitude in
this corner of Pakistan’s tribal areas.But in April, the Taliban
appeared and imposed a firm hand. They settled the feud between the
tribes, demanded a fat fee up front and a tax on every truck that
ferried the treasure from the quarry. Since then, Mir Zaman, a
contractor from the Masaud subtribe, which was picked by the Taliban to
run the quarry, has watched contentedly as his trucks roll out of the
quarry with colossal boulders bound for refining in nearby towns.
Mr Fantastic
China Fact of the Day
China is the world’s largest importer of chicken feet and the United States is the world’s largest exporter. Tyson Foods alone send some 2.8 billion chicken feet to China every year. The chicken feet are sold at Chinese Wal-Marts (among other places) which in China are upscale and appreciated for their high quality American goods.
All Tyler, All the Time
The tyler-city blog is a computer generated blog of gibberish meant solely to generate links (can readers explain the economics?). It is drawn from all over, including quite a bit from Marginal Revolution. It’s gibberish but as Tyler might say even a million monkeys occasionally generate some very good sentences. Here are a few, I’ve provide links but please don’t encourage them too much.
I thought both were tyler cogent, for quite complex topics.
The Ton Ball That Keeps The Taipei tyler Tolerant Is Pretty
and it is good to know that "besides his many talents, Tyler was also a really nice kid." But my favorite posting is this one:
A Girl Named Florida
I’ve been reading Leonard Mlodinow’s The Drunkard’s Walk: How Randomness Rules our Lives. The book covers the Monty Hall problem, Bayes’s Theorem, availability bias, the illusion of control and so forth. If these are unfamiliar, look no further for an entertaining account.
On the other hand, I can’t say that I learned much I didn’t already know. Nevertheless, I still enjoyed reading the book – it’s well written and filled with interesting nuggets (Did you know that the great mathematician Paul Erdos refused to believe that you should switch doors?). If you teach probability theory or intro stats you will find lots of good examples to brighten up your lectures.
One problem did intrigue me. Suppose that a family has two children. What is the probability that both are girls? Ok, easy. Probability of a girl is one half, probabilities are independent thus probability of two girls is 1/2*1/2=1/4.
Now what is the probability of having two girls if at least one of the children is a girl? A little bit harder. Temptation is to say that if one is a girl the probability of the other being a girl is 1/2 so the answer is 1/2. That’s wrong because you are not told which of the two children is a girl and that makes a difference. Better approach is to note that without any additional information there are four possibilities of equal likelihood for the sex of two children (B,B), (G,B), (B,G), (G,G). If we know that at least one is a girl we can remove (B,B) so three equally likely possibilities, (G,B), (B,G), (G,G), remain and of these 1 has two girls so the answer is 1/3.
Ok, now here is the stumper. What is the probability of a family having two girls if one of the children is a girl named Florida?
At first it seems impossible that knowing the name should make a difference. Surely, the answer is 1/3 just as before? After all, every child has a name. But knowing the name does make a difference. Here’s a hint, Florida is a rare name.
Onion Futures
There are none.
The bulbous root is the only commodity for which futures trading is
banned. Back in 1958, onion growers convinced themselves that futures
traders (and not the new farms sprouting up in Wisconsin) were
responsible for falling onion prices, so they lobbied an up-and-coming
Michigan Congressman named Gerald Ford to push through a law banning
all futures trading in onions. The law still stands.And yet
even with no traders to blame, the volatility in onion prices makes the
swings in oil and corn look tame, reinforcing academics’ belief that
futures trading diminishes extreme price swings.
Amazing, onion farmers and Congress panic in 1958 with the Senate Committee arguing that
…speculative activity in the futures markets causes such severe and unwarranted fluctuations in the price of cash onions…[that a] complete prohibition of onion futures trading [is necessary] in order to assure the orderly flow of onions in interstate commerce…
and for going on fifty years onion futures are banned. Makes me want to cry.
More here on the banning of futures markets . (A report from 1956 indicates that the fluctuations at that time were due to an attempted swindle.)
Hat tip to Newmark’s Door
Evidence of Absence
Here is China’s new 10 Yuan banknote. Notice what is missing? It’s not on the back either. 
Hat tip to Metafilter.
Authoritarian Regimes
There’s nothing like visiting a foreign country like China to get an appreciation of what it’s like to live under an authoritarian regime. I was reminded of this when I arrived home and found that the TSA had rifled through my baggage.
Ching Ching Desserts
If you are ever in Hong Kong try the cream of almond and black sesame soup at Ching Ching Desserts on Electric Street just around the corner from the Tin Hau metro. It’s like drinking marzipan – with a little garnish and served in style this dessert soup could find its way onto the menu of any five star restaurant in the world but you can get a bowl in Hong Kong for less than three bucks.
Loanwords
Eating lunch in a working man’s restaurant in Hong Kong I hear mostly Cantonese but with occassional English words, "passion," for example. Borrowed words or loanwords surely tell us something important about ideas or concepts that the first language lacks. Most loanwords are for things (e.g. mouse for a computer device), it’s pretty easy to explain the adoption of such words. But what about words for which the thing has always existed but not the word? Chinese speakers tell me that there is a word for love but passion is more difficult to translate.
What are some of the major conceptual loanwords? What do loanwords tell us about the Sapir-Whorf hypothesis? What loanwords does English need? There appears to be a large literature in linguistics on the adoption and evolution of loanwords but less on the cultural significance of loanwords. Comments?
Oil and the Future
On oil I will make one point adding and one point detracting from Tyler’s analysis. First, on speculation remember that demand and supply are both very inelastic so relatively small changes in either can make a big differrence. That means that speculation, if that is what you want to call it, can shift prices a lot without being very significant in total demand. Because of this point Krugman’s analysis is quite right for iron ore but a little off for oil – indeed Krugman’s analysis of oil is difficult to square with his analysis of the California electricity crisis.
My disagreement with Tyler is an agreement with Caplan.
Bryan Caplan notes that commodity prices always have fallen back down in the past and argues that is likely to happen again in the future. I say no, the current price is your best (rough) estimate of scarcity (adjusting for storage costs), don’t expect mean-reversion, future returns (but not prices) are a random walk, and extrapolation is a dangerous method to apply to financial time series.
No, two points. First, commodities are not stocks and nothing need be a random walk. Imagine, for example, that you can produce 10 units of commodity X but no more (fixed production). Thus you produce 10, 10, 10…. Now you know that a big technological innovation is about to increase production possibilities to 20, 20. 20….. Does the price today necessarily fall? No. Price today is determined by supply and demand, supply is fixed and if substitution across time isn’t very easy (you still have to get to work today, right?) then demand doesn’t have to fall much with expectations of future supply. Thus the price is high until it drops, even if everyone expects the drop.
Finally, on oil – who really cares what the price is? The issue is energy, not oil. I am confident that the long run price of energy will fall.
X Prize News
The X Prize Foundation has received $7m in new funding to develop more X prizes and The Aeronautics and Cosmonautics Romanian Association (?!) says they will try to land a robot on the moon within the next 3 months.
China/Syria Fact of the Day
I have been talking with GMU President Alan Merten, who is also in Kunming via Syria. In Syria, Alan was surprised when he was asked to meet with President Bashar al-Assad. Even more surprising, the President wanted to talk about entrepreneurship, GMU, and how Syria can benefit from better economics.
Later, talking with the Finance minister, Merten learned one of the key drivers of this new openness. The Finance minister explained that he was meeting with a counterpart in the Chinese government. "What can we do," the Syrian Finance minister asked, "to increase Chinese investment?" "Well," the Chinese minister replied, "before we invest in Syria you most open your markets, cut your subsidies, and reduce regulation…"
China Fact of the Day
I was just speaking with an expert on the Chinese banking and finance system and I asked him what were the major problems with the Chinese banking system. He replied, "Well, housing prices are falling and many banks have bad loans and if prices fall much further the borrowers won’t have the money to pay the loans back." I kid you not.
Also, contra the U.S. the Chinese Central Bank is reducing the growth in the money supply to combat inflation. Interesting times.