Category: Current Affairs

What if we didn’t bail out the creditors?

"Could you clarify just how far on the hook I should be for someone else’s frauds?"

That’s MR commentator CK and the answer is "lots."  Here’s more detail on the bail out, by the way.  Not good.

But let’s say that the Treasury did not support the debt of the mortgage agencies.  The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless.  The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly.  The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value.  Most of the U.S. banking system would be insolvent.  Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot.  The rate of unemployment would climb into double digits and stay there.  Many Americans would not have access to their savings.  The future supply of foreign investment would be noticeably lower.  The Federal government would lose its AAA rating and we would pay much more in borrowing costs.  The deficit would skyrocket.

And I haven’t even mentioned the credit default swaps market.  Well, I have now.

But for another point of view, try Jeff Rogers Hummel.

Department of Uh-Oh, The End of the Mortgage Agencies

Fannie and Freddie’s
preferred shares have been considered so safe that banking regulators
let banks count them in the capital required as a cushion against loan
losses.

That should read "*had* been considered so safe."  Further background is here and here.  We also have an impossibility theorem.  I do not see how our government can let the value of this preferred stock fall much further, given the extent to which bank insolvency would increase.  I also do not see how our government can prop up the value of this preferred stock to a significant degree.  Silly me.  I guess that means I bet on the latter impossibility.

Here is yet further discussion of the end game.  It seems the common stock owners will end up suffering more dilution than they had been expecting.  The $340 billion in agency debt held by the Chinese central bank will be protected, as it must be.  Have a nice day.

And the newspapers were wondering why the Dow tanked 345 points.

Does this count as an event study?

…investors are also unnerved by the aftermath of the five-day war in early August.

Russian shares have lost about a third of their value since hitting record highs in May. Russian and Western bank analysts polled by Reuters have cut forecasts for Russia’s gold and foreign exchange reserves.

As much as $25 billion in foreign capital may have left Russia since the Georgia conflict started, they said: while their growth forecasts were little changed at 7.5 percent, the crisis sharply cut the liquidity of the banking system.

Here is the article.  The pointer is from Matt Yglesias.

Sorry people, I can’t resist

Which means I’ve been arguing this with Natasha.  But I’d like to point out: a) none of the commentators know the actual circumstances behind Bristol’s pregnancy, b) it’s unlikely the father was actually forced to marry Bristol; maybe he thought it was the right thing to do, c) I am very glad they are having the baby, noting that I do also favor birth control, d) There is and should be a general rule to treat candidates’ children with the utmost respect, e) I fully understand that John McCain needs to read Adam Smith on the division of labor, overconfidence, and also wise decision-making, f) when an attractive woman is criticized by less attractive men, large segments of the public respond accordingly, g) Obama is wise to say nothing about this, h) Palin should not be required to document every claim she makes about her personal life and it is little short of outrageous to demand gynecological information from her, and, most of all i) without families like this our nation would have no chance of affording the social welfare programs proposed by the Democratic Party.

I love the United States of America.

Addendum: Hail Kevin Drum, but read his commentators.

Levee calculations

I can’t track down the original source here, but it sounds broadly consistent with other things I’ve read:

Under the 100-year standard…experts say that every house being rebuilt in New Orleans has a
26 percent chance of being flooded again over a 30-year mortgage; and
every child born in New Orleans would have nearly a 60 percent chance
of seeing a major flood in his or her life…

At the same time, the corps
has run into funding problems, lawsuits, a tangle of local interests
and engineering difficulties — all of which has led to delays in
getting the promised work done.

An initial
September 2010 target to complete the $14.8 billion in post-Katrina
work has slipped to mid-2011. Then last September, an Army audit found
84 percent of work behind schedule because of engineering complexities,
environmental provisos and real estate transactions. The report added
that costs would likely soar.  A more recent
analysis shows the start of 84 of 156 projects was delayed — 15 of
them by six months or more. Meanwhile, a critical analysis of what it
would take to build even stronger protection — 500-year-type levees —
was supposed to be done last December but remains unfinished.

On the road to recovery, the
agency has installed faulty drainage pumps, used outdated measurements,
issued incorrect data, unearthed critical flaws, made conflicting
statements about flood risk and flunked reviews by the National
Research Council.

When it comes to storm protection and urban reconstruction, "halfway" is not a good solution.  There could have been a real rebuilding and protection, or the price signals from insurance companies could have been allowed to shrink the city more fundamentally than what happened.  Here is a relevant study.

Powerful Women: Does Exposure Reduce Bias?

We exploit random assignment of gender quotas across Indian village councils to investigate whether having a female chief councillor affects public opinion towards female leaders. Villagers who have never been required to have a female leader prefer male leaders and perceive hypothetical female leaders as less effective than their male counterparts, when stated performance is identical. Exposure to a female leader does not alter villagers’ taste preference for male leaders. However, it weakens stereotypes about gender roles in the public and domestic spheres and eliminates the negative bias in how female leaders’ effectiveness is perceived among male villagers. Female villagers exhibit less prior bias, but are also less likely to know about or participate in local politics; as a result, their attitudes are largely unaffected. Consistent with our experimental findings, villagers rate their women leaders as less effective when exposed to them for the first, but not second, time. These changes in attitude are electorally meaningful: after 10 years of the quota policy, women are more likely to stand for and win free seats in villages that have been continuously required to have a female chief councillor.

Full paper here and here.

The economics of Joseph Biden

Here are his votes on trade issues.  They could be better, noting that this is unlikely to be his major function.  Cato gives him 42 percent on trade issues, noting that he once wanted to ban all toy imports from China.  Here is Biden on budget issues; more conservative than I would have thought.  Here is Biden on internet issues.  David Brooks offered an interesting personal portrait of the man:

Honesty. Biden’s most notorious feature
is his mouth. But in his youth, he had a stutter. As a freshman in high
school he was exempted from public speaking because of his disability,
and was ridiculed by teachers and peers. His nickname was Dash, because
of his inability to finish a sentence.

He developed an odd smile
as a way to relax his facial muscles (it still shows up while he’s
speaking today) and he’s spent his adulthood making up for any comments
that may have gone unmade during his youth.

Today, Biden’s
conversational style is tiresome to some, but it has one outstanding
feature. He is direct. No matter who you are, he tells you exactly what
he thinks, before he tells it to you a second, third and fourth time.

Maybe he would have done well in academia.

Go Mason!

U.S. News and World Report ranks George Mason the #1 up-and-coming National University.  The economics department and the law school are doing very well but so are many other innovative departments.  The report notes:

Established in 1972, Mason is a relatively young university. Not bound by tradition and old ways of thinking, the university and its
faculty embrace technology and new approaches to learning. Mason was
the first university in the country to offer doctoral programs in
conflict resolution, bioinformatics, computational social sciences, and
information technology; and the first to offer a graduate degree in
biodefense.

The culture that is Dutch

Jean Marie, a loyal MR reader, writes to me:

In the Dutch parliament there was commotion today because it happens to be the case that parents can apply for some EXTRA day-care allowances (state subsidized) when they want to go on holiday WITHOUT their children. As a matter of fact: the tax department explicitly draws their attention to this fact.

Here is a bit more information (in Dutch).

Markets in everything

A 16-year-old Saudi girl drank a bottle of bleach in an attempt to
commit suicide to escape a forced marriage to a 75-year-old man, press
reports revealed Sunday.

The girl identified only as, Shaikha, said her father was forcing her
to marry the old man so that he could marry his 13-year-old daughter in
an exchange deal, Bahrain’s Tribune reported.

Here is the full story.

Milton Friedman is Responsible for Scarcity

Should we be surprised that the Milton Friedman Institute at the University of Chicago is opposed by the likes of Marshall Sahlins?  I happily farm it out to Brad DeLong:

Sahlins’s claims that it was "the market-industrial system [which]
institutes scarcity"… seemed to indicate a total,
willful, and culpable ignorance of practically all of the non-market
settled agricultural societies of the past ten thousand years.

By the way, guess where these institutes are located?

A reform proposal for Zimbabwean inflation

And thus I suggest that Zimbabwe might as well have a go with free banking.
One of the curios of the Zimbabwean economy is that it still has a
significant presence from UK commercial banks (Barclays Zimbabwe, a
subsidiary of Barclays plc is the largest, with Standard Chartered not
far behind). Not very well informed UK journalists often discover this
fact and then write ill-informed
articles about "propping up Mugabe" (the reality is that neither
company has made a cent in profit in Zimbabwe for about five years, but
both of them have correctly assessed that they would hardly be doing
the Zimbabweans a favour by destroying their domestic banking system.
They don’t "make loans to the Mugabe regime", they hold excess deposits
(which are substantial as there aren’t many viable commercial lending
propositions in Zimbabwe) in short term government bonds.

Both
BBZ and SC have substantially better credit ratings than the Zimbabwean
state and justifiably so, and they have more of an interest in
maintaining sound money in the long term than the Zimbabwean state too.
They certainly don’t have any interest in printing a note with twelve
zeroes on it. Why not let them print banknotes and treat them as legal
tender? There’s my plan for monetary reform; doesn’t work for most
hyperinflationary countries as the local banking system is usually
about as weak as the state but Zimbabwe is a special case.

That’s from DSquared and right on the mark I would say.

The new flight to the suburbs

But this time it’s the dead people:

Detroit has lost half its population since its heyday of the 1950s,
and every year the city hemorrhages an estimated 5,000 people more.
First it was white flight to the suburbs; then with the city’s
continued spiral into poverty and violence, blacks began to flee to
those same suburbs. And while census figures show that whites are
returning to some of the nation’s largest cities, Detroit is
experiencing a flight of a different kind. As the Imbrunones’ second
funeral demonstrates, Detroit is experiencing the flight of the dead.

…From 2002
through 2007, the remains of about 1,000 people have been disinterred
and moved out of the city, according to permits stored in metal filing
cabinets in the city’s department of health. Looked at in another way,
for about every 30 living human beings who leave Detroit, one dead
human being follows. Moreover, anecdotal evidence compiled by a Detroit
professor suggests the figure may be twice as high, meaning city
records may be incomplete and that thousands upon thousands of deceased
people have been relocated from the city over the past 20 years.

Here is the story, interesting throughout.  In one example the relocation cost about $5,000.  I thank Hugo Lindgren for the pointer.