Category: Economics

Manias can persist even though many smart people suspect a bubble,
because no one of them has the firepower to successfully attack it.
Only when skeptical investors act simultaneously — a moment impossible
to predict — does the bubble pop.

…Mr. Bernanke hired finance experts who had broad
interests and were eager to work with the university’s deepening bench
of theorists. He lured Dilip Abreu, known for work in game theory, back
from Yale, to which he had earlier defected. Making a virtue of an
institutional weakness, the absence of a business school, Princeton
assimilated the finance scholars into the economics department and
freed them to pursue research.

They are building on work done by the late Hyman
Minsky, whose once-ignored ideas about investing manias are now in
vogue, and the late economic historian Charles Kindleberger, whose 1978
"Manias, Panics and Crashes" is a classic. But compared with Mr. Minsky
or another student of bubbles, Yale’s Robert Shiller, the Princeton
trio focuses less on mass psychology than on mathematical models. These
they use to show how bubbles can be created even in markets that
include rational, calculating investors.

Here is the full story, interesting throughout.

From some time ago, Kevin Drum reports:

I really loathe retail loyalty card programs. 

These programs serve two functions.  First, they are a form of price discrimination.  Buyers who are willing to collect and show the cards pay lower prices while the "I can’t be bothered with this ****" types pay higher prices. 

Second, retail loyalty cards enforce partial collusion ex post in an oligopolistic setting.  In other words, cards and frequent flyer programs "lock in" buyers to their favored firms.  Once that lock-in is accomplished, all firms have weaker incentives to cut price to lure away buyers from their favorites.  (The smarty-pants point is to note that firms have to give buyers a better deal upfront in anticipation of this lock-in but still if the company moves first with a non-negotiable offer it still can come out ahead and raise the P/MC ratio.)

The first function is usually welfare-improving, the second function usually is not.  Overall you personally benefit from loyalty card programs if you don’t mind holding the cards (you have a thick wallet) and you have a strongly favorite company/product anyway.  In the latter case you are likely locked in anyway, so the strengthening of the lock-in effect doesn’t so much restrict your freedom.  This is tricky of course because you might miss out on preemptive price cuts from your favorite firm to keep you, since maybe they don’t otherwise know how much you love their stuff.  Still, I will stick with this mechanism as a plausible guess of the net effect.

You suffer from loyalty card programs if…you hate them.  Not only do the programs and the smiling clerks bug you but you are the kind of person who ends up paying more.  Which means you hate the programs even more.  Which means…

But wait: the equilibrium seems to converge and so Kevin Drum’s anger at retail loyalty card programs remains, in reality, quite low. 

Here you will find regular updates on prediction markets, with the blog-like news function here.  You’ll see there that the CFTC is requesting public comments on how to regulate "event contracts."  The site is launched by these people.

I thank Chris F. Masse for the pointer.

Paul Krugman writes (and here):

The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding – an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.

But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels.

I’ve never been one to push the bubble hypothesis to explain the high price of oil but I find this an unusual argument to make against bubbles.  Isn’t it easy enough to argue that the relevant hoarding is of oil in the ground rather than oil in strategic reserves or panic stockpiles?  We have lots of state-owned oil companies and maybe their way of speculating is simply to remain sluggish in their exploration and extraction activities, at least for the time being.

I think of a bubble as a market price which is above the fundamental value of the asset, largely for psychological reasons.  But with a commodity like oil the fundamental value of the asset depends on the marginal unit and thus how much oil is supplied.  Fundamental value, at least at the margin, adjusts to the price and in that sense the bubble hypothesis can seem tautologically false if we apply the traditional definition of a bubble. 

The key question, in my view, is how much more the oil-producing nations could bring to the market if a) their state-owned oil companies were not incompetent, and b) they did not tolerate this incompetence as an implicit form of speculation and collusion.  I will not offer an estimate here (I genuinely don’t have one) but b) does leave some room for bubbly-like phenomena, whether or not stockpiles of pumped oil are high.  Note that in b) collusion and speculation work together and a) tosses incompetence into the mix.  The whole foul brew is probably easier to sustain in times of rising demand and thus oil price explanations are not going to be very simple, or easily separable, by the nature of the problem.

Addendum: Read Arnold Kling, here and here.

AdultVest, Inc., the Beverly Hills-based investment bank, which concentrates its practice exclusively on adult industry investments, mergers, and acquisitions, announced today it had been selected by Alternative Investment News as one of four funds nominated for the "Hedge Fund Launch of the Year" award.

Here is the link.  That’s from John DePalma, who also points our attention to this Dilbert cartoon.

In December, the Fed had $775B worth of Treasury securities. That
stock will soon have dwindled to $300B, give or take. The difference,
about $475B, represents an investment by the central bank in risky
assets of the US financial sector.

$475B is an extraordinary sum of money. It is as if the Fed borrowed
more than $1500 from every man, woman, and child in the United States,
and invested that money on our behalf in Wall Street banks that private
financiers were afraid to touch. For bearing all this risk, if things
work out well, taxpayers will earn about what they would have earned
investing in safe government bonds.

…If the Fed were to blow through the rest of its current stock of
Treasuries, it would have invested more than $2500 for every man,
woman, and child in America. Public investment in the financial sector
would have exceeded the direct costs to date of the Iraq War by a wide margin.

Here is much more; the Interfluidity post focuses in fact on the implications of paying interest on reserves.  The sad thing is: if I had my finger on the button, I would not have reversed these loans.  Ouch!

Zubin Jelveh reports:

If you’re a married woman living in the New York City area, there’s
a better than 50 percent chance that you don’t work, according to a recent analysis of Census data by economists affiliated with the St. Louis Federal Reserve Bank.

More specifically, only 49 percent of white high school-educated
married women in their prime working ages were holding down jobs in the
New York area as of the 2000 Census. To put that in perspective, there
are roughly 2 million woman over 15-years-old who are married in the
New York area.

The national average for this particular demographic is 67 percent.
At the other end of the spectrum is Minneapolis where almost 80 percent
of these married women are employed — that’s larger than the
percentage of working men aged 25 and older in the U.S.

And why is this?

Surprisingly, the economists argue, the most important specific thing seems to be traffic.

And if you do work in these traffic-heavy areas, you are likely to work more hours.  But is it all causal?

With all due respect to The Walker Art Center, if I wanted to be a kept woman I would not start my quest in Minneapolis.  High density, as you find in Manhattan, means lots of fun things to do in your copious free time as a kept woman and also a higher degree of income inequality and thus the hope of snaring a rich man.  There’s a reason why they didn’t set Sex in the City in Paramus and most of the women there will be working even when the traffic gets worse.

You’ll find his contrarian take in The New York Times this morning.  It’s a second best, public choice argument: according to Bryan we are usually too nasty to energy companies in bad times, so sending them some excess profits is a bit of needed TLC.  McCain’s plan of course is better in his eyes because it doesn’t include the punitive windfall profits tax.  And without a gas tax holiday we might be tempted to do something worse.  Excerpt:

…even a “giveaway” to the oil industry sets a positive course for the
future. During the last crisis, the industry was a scapegoat for
scarcity. Politicians scrambled to stop oil companies from profiting
from the crisis, even though temporarily high profits end shortages by
giving businesses an incentive to figure out how to increase output.

Stephen Colbert dissents.  And here’s Bryan’s own summary of Bryan.  I don’t know the data on the average rate of tax paid by energy companies, compared to other endeavors, but looking at that would be one place to start.

Yet economists talk much more about trade than they do about health care policy, because they think they know something about it in a way the laity don’t…don’t let economist’s tendency to overemphasize their areas of expertise distort your view.

I don’t agree with every claim in this Krugman piece, least of all his defense of you-know-who, but I think that psychoanalysis of economists is spot on.

The great P.J. O’Rourke:

All politics stink. Even democracy stinks. Imagine if our clothes were selected
by the majority of shoppers, which would be teenage girls. I’d be standing here
with my bellybutton exposed. Imagine deciding the dinner menu by family secret
ballot. I’ve got three kids and three dogs in my family. We’d be eating Froot
Loops and rotten meat.

But let me make a distinction between politics and
politicians. Some people are under the misapprehension that all politicians
stink. Impeach George W. Bush, and everything will be fine. Nab Ted Kennedy on a
DUI, and the nation’s problems will be solved.

But the problem isn’t
politicians — it’s politics. Politics won’t allow for the truth. And we can’t
blame the politicians for that. Imagine what even a little truth would sound
like on today’s campaign trail:

"No, I can’t fix public education. The
problem isn’t the teachers unions or a lack of funding for salaries, vouchers or
more computer equipment The problem is your kids!"

Hat tip to Newmark’s Door.

Hillary Clinton’s proposal is particularly stupid, in my humble
opinion, because it tries to get the money back from the oil companies
with a windfall profits tax. Tax incidence is tax incidence: if the oil
companies can make consumers pay most of the excise tax, then probably
consumers can stick them with your windfall profits tax too.

I believe that is what they call "true enough."  Here is more.

It is here, and I’ll cover the contents once I’ve had a chance to read them.  Here is a symposium on why so few women in economics?