Protection Racket
Who is protecting borrowers from "predatory lending"? The trial lawyers! Feel better? I didn’t think so. Ted Frank, writing in the Wall Street Journal has the story. Yours truly makes an appearance.
The trial lawyers’ entrepreneurial solution is to go
after the deep pocket. And so we have lawsuits alleging that the
investment banks providing financing to the mortgage banks are "aiding
and abetting" the alleged fraud through securitization.What would be the upshot? If an investment bank is
potentially liable for every conversation and every phone call involved
in the underlying mortgages, the costs of due diligence becomes
prohibitive, far outstripping the fees it can bring in for packaging
the loans…The securitization
simply will not take place….To make matters worse, the House Financial Services Committee held
hearings last week on writing this judicial mistake — and more — into
federal statutory law. Committee Chair Barney Frank (D., Mass.), wants
to hold not only the packagers of mortgages liable but also the purchasers in
the secondary market. "Anybody, including the original borrower, can
make a claim, and the liability would go up the chain," Mr. Frank told
the press….It is not speculation to say that the results will be disastrous if
such a bill becomes law….the 2002 Georgia Fair Lending Act created unlimited liability
to purchasers of mortgages for any legal violations by the loan
originator…all three of the major credit ratings agencies (S&P, Moody’s, and
Fitch) announced they could not rate any securitization containing any
loans subject to Georgia law for fear that the entire security would be
tainted by unquantifiable liability. Liquidity for the state’s mortgage
market disappeared and the Georgia legislature quickly repealed the
worst parts of the law to restore access to credit.
Let the Taxpayers Take Care of It
A new GAO Report tells us that unlike private insurers government insurers are not planning for the risks of climate change.
Major private and federal insurers are both exposed to the effects of climate change over coming decades, but are responding differently. Many large private insurers are incorporating climate change into their annual risk management practices, and some are addressing it strategically by assessing its potential long-term industry-wide impacts. The two major federal insurance programs, however, have done little to develop comparable information.
This would seem to put some of my free market friends who continue to believe that global warming is a leftist hoax in something of a bind. Is climate change real or are government regulators wise and farsighted?
The Ultimate Resource – Tonight
Bob Chitester who produced Milton Friedman’s Free to Choose series has a new show airing tonight on HDNet at 10pm EST, The Ultimate Resource. The show covers the world and features Muhammad Yunus, Hernando de Soto, and James Tooley among many others. HDNet has limited distribution but the show looks to be of very hgh quality and teachers can get the first episode for free at izzit.org.
Thanks to Lance at ASecondHandConjecture for the pointer.
Harry Potter and the Mystery of Inequality
J.K. Rowling is the first author in the history of the world to earn a billion dollars. I do not disparage Rowling when I say that talent is not the explanation for her monetary success. Homer, Shakespeare and Tolkien all earned much less. Why? Consider Homer, he told great stories but he could earn no more in a night than say 50 people might pay for an evening’s entertainment. Shakespeare did a little better. The Globe theater could hold 3000 and unlike Homer, Shakespeare didn’t have to be at the theater to earn. Shakespeare’s words were leveraged.
Tolkien’s words were leveraged further. By selling books Tolkien could sell to hundreds of thousands, even millions of buyers in a year – more than have ever seen a Shakespeare play in 400 years. And books were cheaper to produce than actors which meant that Tolkien could earn a greater share of the revenues than did Shakespeare (Shakespeare incidentally also owned shares in the Globe.)
Rowling has the leverage of the book but also the movie, the video game, and the toy. And globalization, both economic and cultural, means that Rowling’s words, images, and products are translated, transmitted and transported everywhere – this is the real magic of Ha-li Bo-te.
Rowling’s success brings with it inequality. Time is limited and people want to read the same books that their friends are reading so book publishing has a winner-take all component. Thus, greater leverage brings greater inequality. The average writer’s income hasn’t gone up much in the past thirty years but today, for the first time ever, a handful of writers can be multi-millionaires and even billionaires. The top pulls away from the median.
The same forces that have generated greater inequality in writing – the leveraging of intellect, the declining importance of physical labor in the production of value, cultural and economic globalization – are at work throughout the economy. Thus, if you really want to understand inequality today you must first understand Harry Potter.
Reviewing Landsburg’s Errors
In the Armchair Economist, Steven Landsburg argues that the people who read his book are likely to find that it wasn’t as good as they expected. The logic is impeccable – people who over-estimate the value of the Armchair Economist are more likely to buy it and thus discover their over-estimation (sadly, under-estimators never learn of their mistake). Nevertheless, despite the logic, I and many others discovered that Landsburg was wrong. The Armchair Economist and every Landsburg book exceed expectations.
Landsburg is back with More S-ex is Safer S-ex, and another error. This time Landsburg suggests that writing his book was socially destructive. Again, the logic is impeccable – a good book creates a lot less value than its price because to a large extent it displaces the second best book which was almost as good. Authors however are paid based on price and not on social value and thus write too many books. And yet, I must again disagree for Landsburg’s new book is a treasure. There is something to learn on almost every page.
Here’s one idea I learned. In the debate over the economics of global warming the correct discount rate to apply to future generations is a key variable with those arguing that we should do something now, implicitly (and explicitly) arguing for a low discount rate. But if we count future generations highly we ought also to be in favor of reforming social security. Investing social security in the stock market "royally screws" current retirees but increases the savings rate which will be benefit future generations. Thus, a low discount rate ought to weigh in favor of doing something about global warming and investing social security funds in the stock market. Not many people come out consistent on these grounds (I think Brad DeLong is one of the few.) I know, I don’t but Landsburg has got me thinking.
The Patriarchy at Work
Many studies have shown that women are
under-represented in tenured ranks in the sciences. We evaluate
whether gender differences in the likelihood of obtaining a
tenure track job, promotion to tenure, and promotion to full
professor explain these facts using the 1973-2001 Survey of
Doctorate Recipients. We find that women are less likely to take
tenure track positions in science, but the gender gap is entirely
explained by fertility decisions. We find that in science
overall, there is no gender difference in promotion to tenure or
full professor after controlling for demographic, family,
employer and productivity covariates and that in many cases,
there is no gender difference in promotion to tenure or full
professor even without controlling for covariates. However,
family characteristics have different impacts on women’s and
men’s promotion probabilities. Single women do better at each
stage than single men, although this might be due to selection.
Children make it less likely that women in science will advance
up the academic job ladder beyond their early post-doctorate
years, while both marriage and children increase men’s likelihood
of advancing.
From "Does Science Promote Women? Evidence from Academia 1973-2001".
Addendum: Tyler linked to an earlier version of this paper but if I forgot then probably so did you so here it is again.
Public Opinion and War
Political scientist Scott Althaus was here last week and had a lot of interesting things to say about war and public opinion. Here is one tidbit. The public’s opinion of past wars improves as a new war approaches. Thus, after Vietnam most people thought the war was a mistake and this held true for decades until the beginning of the Iraq war when the opinion of war in Vietnam suddenly improved! Even more dramatically, a majority of people thought that World War I was a mistake until World War II approached when the percentage thinking it was a good war doubled. This is especially perverse in that any rational response has got to see WWI as a bigger mistake the more probable is WWII.
Althaus also shows, in Priming Patriots, that the intensity of new coverage typically increases support for war – regardless of whether the coverage is negative or positive. Until negative news becomes overwhelming and long-lasting, more coverage simply rallies the martial spirit, encourages solidarity and solidifies support for the war. This explains a lot.
What checks on democracy are required to deal with the irrationality of public opinion about war?
The Three Laws of Roombotics
Roomba Violates All Three Laws Of Roombotics.
The Rise, Fall, and Rise Again of Privateers
In August 1812, the Hopewell, a 346-ton ship laden with sugar, molasses, cotton, coffee, and cocoa, set sail from the Dutch colony of Surinam. Her captain was pleased because he reckoned that in London the cargo would sell for £40,000–the equivalent of at least several million dollars in today’s economy. The Hopewell carried fourteen guns and a crew of twenty-five, and for protection she sailed in a squadron of five other vessels. It was difficult, however, to keep a squadron together in the vast expanse of the Atlantic Ocean, and on August 13 the Hopewell became separated from her sisters.
Two days later her crew spotted another ship, armed and approaching rapidly…
That’s the opening of my latest paper, The Rise, Fall, and Rise Again of Privateers.
Hat tip to Jesse Walker at Hit and Run and Instapundit both of whom spotted this before me!
Expand the AMT!
We shouldn’t get rid of the AMT we should expand it. The AMT is a flat tax, it’s broad-based (few loopholes), it doesn’t allow for deduction of state and local taxes (which only increases the incentive of states and localities to raise taxes) and it’s simple. The AMT should be reformed along the edges e.g. by indexing it to inflation (after more people are covered!) but overall it’s a much better tax than the current income tax.
I assume that readers know that I am not in favor of raising taxes but let me be clear. We should expand the AMT but get rid of the income tax.
The Golden Age of Medical Innovation
Writing in The American John Calfee surveys the recent history of medical innovation. I was especially struck by Lucentis, a new drug that Science magazine ranked sixth in its ten breakthroughs of the year (number one was the solution to Poincare’s conjecture). Lucentis has had stunning success in treating age-related macular degeneration, the leading cause of blindness in seniors.
What makes Lucentis, as Calfee notes, especially interesting is that Lucentis is what industry critics call a "me-too" drug, a simple twist on another drug. Moreover, it’s a twist on a drug originally approved to to treat cancer but subsequently used off-label to treat AMD.
Say’s Law of Lobbying
The Washington Post has just finished a 27-part series on lobbying. It’s an interesting series full of colorful characters and great anecdotes but very little on the root of the problem. In the conclusion, I found just one sentence:
As the reach of the federal government extended into more corners of American life, opportunities for lobbyists proliferated.
Can Marginal Utility be Measured?
Reporting in the current issue of Neuron, the scientists
reveal that when a small sum of money is on the line, poorer people
learn quickly how to maximize their profits, leaving their wealthier
counterparts in the dust.In a Pavlovian paradigm, a number of abstract shapes flashed
in front of 14 participants. After each shape appeared for three
seconds, a picture of either a 20-pence coin (roughly 40 cents) or a
scrambled image followed. A card of one particular shape was always
followed by the coin, and subjects were told that they could take a
20-pence piece home if they could accurately predict when the money
card was the next one up….The poorer people tended to figure out
which card signaled money ahead within about 12 trials… whereas the
richer people took about 35 trials.The team next repeated the experiment while the subject’s brains
were scanned by an fMRI (functional magnetic resonance imaging)
machine. …This time, however, the participants did not have to physically respond. "We
didn’t want them to do that because there are neurons in the striatum
that are responding to initiate an action of responding to reward,"
Tobler says. It was this response preparation that the researchers
timed.Once again, an inverse association between wealth and learning
appeared, with poor people displaying more increased activity in the
midbrain and striatum when compared with the more affluent subjects.
From Scientific American, the article is here.
Thanks to Rey Lehmann for the pointer.
Tabarrok in NYC
I will be in NYC tomorrow (Thursday) talking about Bounty Hunters at Victor Niederhoffer’s monthly Junto. All invited. Details here.
Buffett on LTCM
According to Warren Buffet the ill-fated Long Term Capital Management had made the right bets but didn’t have the cash to stay solvent. Buffet wanted to step in and buy the firm but a holiday intervened. Thanks to Newmark’s Door for the pointer.
…Warren wished that he had been able to buy LTCM’s positions when the Fed forced
a resolution of the crisis that was crippling the government bond market.The LTCM crisis was a ready-made example of Warren’s philosophy of buying
firms when the economics was right, yet fear ruled the markets. He noted that
“off-the-run” (non-benchmark) government bonds were selling to yield 30 basis
points more than the “on-the-run” (benchmark) bonds that were maturing just six
months later. He rightly claimed that this made no sense economically.LTCM had taken a huge leveraged position in these bonds when the spreads were
much smaller, but didn’t have the collateral to hold on to it when the spread
widened. Buffett quoted John Maynard Keynes, who wrote in 1931 that “The market
can stay irrational longer than you can stay solvent.” As the spread widened,
Keynes’ dictum became devastatingly relevant for LTCM. But Berkshire, with its
huge cash hoard, could withstand the pressure of even more market irrationality
before the spread eventually returned to normal.Unfortunately, Warren was never able to consummate the deal. He had been
invited by Bill Gates to vacation in Alaska when the crisis broke and it was
hard to negotiate such a deal on a cell phone… “Bill Gates cost me about $3 billion,” he
shrugged.