Category: Law

China moves against Bitcoin

by  Tyler Cowen in

China’s biggest Bitcoin exchange was forced to stop accepting renminbi deposits on Wednesday, sending the price of the virtual currency tumbling in one of its biggest markets globally.

You will find more here, and FT coverage here.  Since Tuesday, the price of Bitcoin in China has fallen more than thirty percent.  Here is my earlier post on China and Bitcoin., where I wrote “If Beijing shuts down BTC China, the main broker, which by the way accounts for about 1/3 of all Bitcoin transactions in the world, the value of Bitcoin very likely will fall.”  And here is Hal Varian on Bitcoin.

From the comments, on lotteries and education

by  Tyler Cowen in

John S. wrote:

States don’t use lottery proceeds to *increase* funding to schools. They tie the lottery to education as a marketing gimmick, both to sell it to the voters initially, and then to deflect criticism (what do you mean you don’t like the lottery — are you anti-education?) See http://goo.gl/f5b55R

We’re told we need lotteries because people would gamble anyway, and yet a large fraction of lottery revenues go toward advertising, presumably so that people don’t lose interest in it.

I also liked the remarks from ant1900:

This (http://en.wikipedia.org/wiki/Racino) suggests that the appeal of racinos is being able to bring in slot machines to an existing race track. After reading only a few pages of ‘Addiction by Design’ I can see why. The smart machines are now subsidizing the humans and the horses. The horses are probably the hook that convinces voters to allow horse tracks to expand into slot machines (‘we have had the hose track for many years and that has worked out ok, and they are already regulated and already in the gambling business, so let’s let them expand into slot machines, which is not a huge leap from betting on horses’).

Software Patents

by  Alex Tabarrok in

Excellent column by Gordon Crovitz in the WSJ on patents and the prospects for reform:

Today’s patent mess can be traced to a miscalculation by Jimmy Carter, who thought granting more patents would help overcome economic stagnation. In 1979, his Domestic Policy Review on Industrial Innovation proposed a new Federal Circuit Court of Appeals, which Congress created in 1982. Its first judge explained: “The court was formed for one need, to recover the value of the patent system as an incentive to industry.”

The country got more patents—at what has turned out to be a huge cost. The number of patents has quadrupled, to more than 275,000 a year. But the Federal Circuit approved patents for software, which now account for most of the patents granted in the U.S.—and for most of the litigation. Patent trolls buy up vague software patents and demand legal settlements from technology companies. Instead of encouraging innovation, patent law has become a burden on entrepreneurs, especially startups without teams of patent lawyers.

…A system of property rights is flawed if no one can know what’s protected. That’s what happens when the government grants 20-year patents for vague software ideas in exchange for making the innovation public. In a recent academic paper (pdf), George Mason researchers Eli Dourado and Alex Tabarrok argued that the system of “broad and fuzzy” software patents “reduces the potency of search and defeats one of the key arguments for patents, the dissemination of information about innovation.”

…For now, the best prospect for real reform is in the Supreme Court, which earlier this month agreed to hear CLS Bank v. Alice Corp., a case about whether a bank’s computerized process for settling transactions via an escrow can be patented. A judge on the appeals court noted this idea was “literally ancient,” developed during the Roman Empire, and should not get a patent now just because a computer is involved.

I think it is too early to call CLS Bank v. Alice Corp. an obituary for software patents as The Economist does but real patent reform is stronger than I thought it would be even 6 months ago.

Addendum: Here is my 2 minute video on some of the problems with patents.

Triply stupid policies

by  Tyler Cowen in

Doubly stupid policies are pretty common, but here is a triply stupid one:

Unique to racino legislation is the allocation of a statutorily set percentage of gaming revenue to purses to support racing and breeding operations in the state.

So what are the three layers of stupidity here?  First, there shouldn’t, as a special legal category, be racinos (that’s casino-style gaming at racetracks).  Second, this legislation is a response to competition from state lotteries, which in general I do not favor.  Third, the money from a dubious policy should not be spent “to support racing and breeding operations in the state.”  Those operations can pay their own way: how about spending the money on poor people, rather than on sectors which extract money from a disproportionately lower income clientele?  Or spending money on animal welfare without at the same time having to subsidize a “legally privileged against competitors” commercial sector?

So what is the background here?

A key theme of the enabling legislation in most states permitting casino-style gaming at racetracks [i.e., racinos] is preservation of the racehorse and greyhound racing and breeding industries in light of competition from other forms of gaming, such as state lotteries and casinos.

In other words, the racinos receive special legal exemptions to help the racetracks compete with state lotteries.  (Why not opt for the simpler solution of no state lottery in the first place?  Or some other notion of a regulatory level playing field?  Oh, how my brain HURTS to ponder how this “problem” arose in the first place.)  But it gets worse.  Often “racino gaming devices” are placed under the state lottery’s regulatory authority.  (Note to self: when attempting to protect B against competitive ravages from A, do not appoint A as regulatory overseer of B.)

So might we have a quadruply stupid policy here?

But wait, on second thought government lotteries, while I do not favor them, perhaps should not be described as “stupid” policies, since there are some reasonable albeit in my view misguided arguments on their behalf.   So maybe we are just back to triply stupid after all, I am not sure.

That is all from Richard Thalheimer’s “The Economics of Racetrack-Casino (Racino) Gambling,” from The Oxford Handbook of the Economics of Gambling, edited by Leighton Vaughan Williams and Donald S. Siegel.

Dear readers, can you think of examples of triply or even quadruply stupid laws and policies?

Guns, Suicides and Natural Experiments

by  Alex Tabarrok in

Slate has a number of articles today on guns and violence including It’s Simple: Fewer Guns, Fewer Suicides by Justin Briggs and myself. The Slate article is based on our paper that I covered in an earlier post but here is some new material including one stunning fact that got cut from the Slate piece:

Suicide kills more people than all of the world’s armed conflicts combined.

and the results of two important natural experiments:

..our findings appear robust and are consistent with a series of “natural experiments” from around the world. For example, following the 1996 killing of 35 people in Port Arthur, Australia, a strong movement for gun control developed in Australia. States and territories made uniform and more stringent regulations for the possession of firearms, and instituted a buy-back of the newly illegal guns, most of which were rifles and shotguns. As Andrew Leigh and Christine Neill determined in a paper published in the American Law and Economics Review, these changes resulted in a reduction of the country’s firearm stock by 20 percent, or more than 650,000 firearms, and evidence suggests that it nearly halved the share of Australian households with one or more firearms. The effect of this reduction was an 80 percent fall in suicides by firearm, concentrated in regions with the biggest drop in firearms. Meanwhile there was little sign of any lasting rise in non-firearm suicides.

Suicide is a leading cause of death among adolescents and young adults, and limiting access to guns during those formative, sometimes unsteady years can have a real effect on suicides. In Israel most 18- to 21-year-olds are drafted into the Israeli Defense Forces and provided with military training—and weapons. Suicide among young IDF members is a serious problem. In an attempt to reduce suicides, the IDF tried a new policy in 2005, prohibiting most soldiers from bringing their weapons home over the weekends. Dr. Gad Lubin, the chief mental health officer for the IDF, and his co-authors estimate that this simple change reduced the total suicide rate among young IDF members by a stunning 40 percent. It’s worth noting that even though you might think that soldiers home for the weekend could easily delay suicide by a day or two, the authors did not find an increase in suicide rates during the weekdays. These results are consistent with interviews with near-fatal suicide survivors, who often say their decision was spontaneous and who typically go on to live long lives.

Our Slate article also includes a cost-benefit calculation that will probably upset many people.

Addendum: By popular demand Elsevier has given us a link to our research article, Firearms and Suicides in US states (pdf), that should work for everyone until late January.

Does Basel III encourage banking fragmentation in Europe?

by  Tyler Cowen in

I had not considered this point before:

Basel III and related regulation generally work against building scale. Larger capital charges based on size, leverage and complexity, and a bias toward ringfenced subsidiaries, may make for a safer global banking system, but applied across euro area countries, and in the absence of a strong banking union, they constitute a recipe for less efficiency and greater fragmentation.

It is an excellent piece by Gene Frieda (FT gated), here is more, on the consequences of an imperfect banking union:

Banks will continue to hold primarily national assets and their size will be constrained by their resident deposit bases. Any reconvergence of funding costs comes not as a function of greater confidence, but from the forced reimposition of national financing constraints.

Loan pricing, on the other hand, will remain highly differentiated amid elevated periphery default risk, as highly indebted economies will be unable to grow their way out of a debt trap. A complete banking union would remove these national financing constraints and promote a greater flow of credit to viable entities.

This will lead to strong deflationary pressures and indeed you will note that private loan growth in the eurozone remains negative, a sign the crisis is not over.  And then there is this:

Finally, given the lack of common fiscal backstops for the banking sector, the ECB’s independence is compromised. Indeed, without a credible backstop, supervisory responsibilities cannot be separated, giving rise to conflicts between monetary policy and financial stability objectives.

I would add that a full and perfect banking union probably is politically impossible, not just by a small amount but by a long mile.  Berlin/Brussels cannot guarantee a country’s banks without also guaranteeing the sovereign as well, either directly or indirectly (in the limiting case, imagine that sovereign nationalizing a bank to get the guarantee explicitly).  I just don’t see that in the cards.

From the comments, on Dodd-Frank

by  Tyler Cowen in

This is on the Volcker Rule:

My own view (and I’m a banking lawyer) is that the ban on proprietary trading will have an immaterial effect on the asset size of banking organizations. It might reduce their complexity.

An overlooked issue is that Volcker applies throughout the banking organization. That is, the ban on proprietary trading is not limited to the federally insured depository institution and restricts the activities of all of the affiliates of the depository institution. That’s a dramatic expansion in scope, with questionable policy justifications.

Another overlooked issue is that Volcker also bans investments in certain types of investment funds. Some think this is simply a ban on investments in private equity and hedge funds that is intended to avoid regulatory arbitrage around the proprietary trading restrictions. The statutory definition of covered funds was sloppy, and so the covered fund restrictions are actually much broader – and without any apparent policy purpose. This is particularly a problem for foreign banking organizations, as it looks that Volcker will have a broad extraterritorial scope.

To me, one of the more interesting aspects of Volcker is its implications for administrative law. There are many who would prefer that Congress delegate less to the administrative agencies and instead legislate with particularity. The Volcker experience suggests that might not always work well. The statute defines “private equity and hedge fund,” “proprietary trading,” “solely outside the United States,” etc. with particularity, but those definitions are generally not well-connected to the underlying policy concerns. The statutory language really left the regulators with few options to salvage a good and sensible rule. We probably would have been better off had Congress deferred more to the agencies here.

Finally, as a general matter, the difference between “security” (subject to the proprietary trading ban) and “loan” (not subject) probably isn’t a distinction that matters when it comes to the safety and soundness of banking organizations. Stepping back a bit, it’s hard to imagine what, why and how Volcker is up to.

Is the Volcker rule a good idea?

by  Tyler Cowen in

Treasury Secretary Jacob J. Lew has strongly urged federal agencies to finish writing the Volcker Rule by the end of the year — more than a year after they had been expected to do so — and President Obama recently stressed the importance of the deadline.

By the way, five (!) agencies are writing the rule, which is not a good sign.  As for the Volcker rule more generally, here are a few points:

1. If restricting activity X makes large banks smaller, that will ease the resolution process, following a financial crack-up.  That is a definite plus, although we do not know how much easier resolution will be.

2. It is not clear that banning bank proprietary trading will lower the chance of such a financial crack-up.  The overall recent record of real estate lending is not a good one, and as Edward Conard pointed out, restricting banks to the long side of transactions is not obviously a good idea.  I do see the moral hazard issue with allowing banks to engage in the potentially risky activity of proprietary trading.  Still, so far the data are suggesting that the banks which cracked up during the crisis did so because of overconfidence and hubris, not because of moral hazard problems (i.e., they still were holding lots of the assets they otherwise might have been trying to “game”).

3. There is no strong connection between proprietary trading and our recent financial crises.

3b.  Today the bugaboo is “big banks” but once it was “small banks” and for a while “insufficiently diversified banks.”  Maybe it really is big banks, looking forward, or maybe we just don’t know.  Small banks have their problems too.

4. There is some chance that proprietary trading will be pushed to a more dangerous, harder to regulate corner of our financial institutions.

5. There is some danger that loopholes in the regulation itself — especially as concerns permissible client activities — may undercut the original intent of the regulation. This will depend on exactly how well the regulation is written, but past regulatory history does not make me especially confident here.  And the distinction between “speculation” and “hedging” cannot be clearly defined.  Should we be writing rules whose central distinctions may be arbitrary?  And yet CEOs will have to sign off on compliance (with 950 pp. of regulations) personally.  Is that a good use of CEO attention?  Here is a good FT piece about how hard (and ambiguous) it will be to enforce the rule globally.

6. I do not myself shed too many tears over the “these markets will become less liquid without banks’ participation” critique, but I would note this is a personal judgment and the scientific status of such a claim remains unclear.

7. Many people, even seasoned commentators, approach the Volcker rule with mood affiliation, starting with how much we should resent our banks or our regulators or how we should join virtually any fight against either “big banks” or regulators.  I see many analyses of this issue which spend most of their time on “mood affiliation wind-up,” as I call it, and not so much time on the actual evidence, which is inconclusive to say the least.

8. We still seem unwilling to take actions which would transparently raise the price of credit to homeowners.  We instead prefer actions which appear to raise no one’s price of credit and which are extremely non-transparent in their final effects.  You can think of the Volcker rule as another entry in this sequence of ongoing choices.  That should serve as a warning sign of sorts, and arguably that is a more important truth than the case either for or against the rule.

When I add up all of these factors, I come closer to a “don’t do the Volcker rule” stance in my mind.  The case for the rule puts a good deal of stress on #1, but overall it does not fit the textbook model of good regulation.  I probably have a more negative opinion of “an extreme willingness to experiment with arbitrary regulatory stabs” than do most of the rule’s supporters, and that difference of opinion is perhaps what divides us, rather than any argument about financial regulation per se.

I really do see how the Volcker rule might work out just fine or even to our advantage.  I also see the temptation of arguing “I am against big banks, this is the legislation against big banks which is on the table, so I am going to support it.”  But let us at least present to our public audiences just how weak is the evidence-based case for doing this.

Addendum: You will find a different point of view from Simon Johnson here.  Here is a counter to his claim that prop trading losses were significant in 2008: “Loan losses didn’t just dwarf trading losses in absolute terms. Loan losses as a share of banks’ total loan portfolios also exceeded trading losses as a share of banks’ trading accounts. Yet no one’s arguing banks should stop lending in order to protect depositors (and rightly so). In short, those expecting the Volcker Rule to be a fix-all for Wall Street’s ills have probably misplaced their hope—the rule seems like a solution desperately seeking a problem.”

The potential for the anti-Nazi music detector in contemporary German culture

by  Tyler Cowen in

Saxony State Police in Germany have developed a smartphone application that can identify neo-Nazi lyrics and racist words in rock songs. Der Spiegel reported Tuesday that German interior ministers will meet this week to discuss whether to implement this new method of policing.

The government said that neo-Nazi music helps radical organizations recruit youth, and it is used as a type of gateway drug to bring in new conscripts. The application, nicknamed “Nazi Shazam,” can identify names of songs just by playing a small sample of a song. The application would allow the police to react instantly if far-right songs are played on radio stations, at concerts, in club nights or at demonstrations.

There is much more here, hat tip goes to MT.  This is of course another method of surveillance and measurement of our tastes, and some version of this idea will be picked up by marketers, whether or not this particular example is adopted.

The legacy of Michael Bloomberg

by  Tyler Cowen in

During his tenure, the zoning rules for 37 per cent of the city were changed to permit redevelopment by the private sector, and work on some of the biggest projects is just getting started as he prepares to leave office at the end of this month.

“He is going to define the city for the next 25 years,” said Mitchell L Moss, a professor of urban policy and planning at New York University, and a campaign adviser to Mr Bloomberg in 2001. “It doesn’t matter who the next mayors are. They are still going to be attending groundbreakings for projects he started,” he said.

Much of this development is along the waterfront, which Bloomberg calls “the sixth borough.”  There is more here, and the pointer is from Paul Romer.

Ferguson and Steinetz on Israeli two-year budgets

by  Tyler Cowen in

…longer-term budgets have important advantages. They reduce uncertainty for the ministries, agencies and private companies that depend on government funds. Public investment in infrastructure is a good example; so are defense contracts. In each case, long-term engagements need to be made with contractors and the results take years to materialize. But the danger always exists of unexpected budget cuts that terminate unfinished projects at high cost to all concerned.

A more subtle advantage of longer-term budgets derives from the argument of the Nobel laureates Finn Kydland and Edward Prescott that rules are often preferable to discretion in the realm of economic policy.

…America’s fiscal problems will not be solved without some bipartisan agreement. Biennial budgets might just be the place to start. After all, this is an idea that was supported not just by Ronald Reagan and both Bushes, but also by Bill Clinton, Al Gore (leader in 1993 of the National Performance Review) and the current Treasury secretary, Jacob Lew.

Moreover, Israel’s experience has been a great advertisement. Not only did it enjoy an impressively rapid recovery from the financial crisis under the system of biennial budgets; more remarkably, when directors-general of Israel’s government ministries were polled in 2010, not one of them favored returning to what one called “the Dark Ages and the madness of the single-year budget.”

The NYT Op-Ed is here.  If you would like to read a criticism of the two-year budget, try this:

“There is no other country that has a dual-year budget. Why? Because it requires long forecasts,” Ben-Bassat told The Jerusalem Post on Monday.

The predictions for economic growth and tax collection for the past year’s budget were made two-and-a-half years earlier, in the summer of 2010. Simply put, Ben-Bassat says, “they were wrong. Very wrong.”

Ben-Bassat noted that although Israel’s hearty growth started consistently declining in the second quarter of 2011, the old estimates were not revised because of the inflexible budget.

“It doesn’t make sense for policymakers to tie their own hands,” he said. “The finance minister said he wanted to give certainty to the private sector, but he provided just the opposite. It actually created uncertainty.”

You will find another criticism here. You will note that the American states have been moving away from biennial budgets, partly because their revenues have grown more volatile.  Connecticut however uses a bifurcated system, where smaller agencies are on a two-year cycle.  In Washington state, the government enacts annual revisions to a biennial cycle (pdf).  In other words, the available space of options here is quite complex.

Overall I would not press a button to make this change happen.  That said, we Americans have not exactly been pivoting on a dime, with optimal changes in fiscal policy, in response to new economic data.

Portugal fact of the day

by  Tyler Cowen in

In 2008, 1.9 million Portuguese workers in the private sector were covered by collective bargaining agreements. Last year, the number was down to 300,000.

The article is by Eduardo Porter and is interesting throughout.  Here is one additional bit:

The drop in unionization in Portugal “is going to blow the wage distribution apart,” David Card, a labor economist at the University of California, Berkeley, said.

Perhaps the most compelling evidence that Europe’s tentative new path will lead to deepening inequality comes from the country that adopted the strategy earliest and came out at the other end a paragon of success: Germany.

Average really is over, for Western Europe too.