How can the price of oil move so much in one day?

Over the two previous days oil fell $10.50 a barrel.  By definition this is driven by news about supply and demand but has so much news come out so quickly?

Here are two ways to think about the mechanisms at work.  First, some producers could supply more but they figure that China will be buying more tomorrow so maybe it is better to wait.  If they see a signal that future global demand will be lower, they are less likely to let oil sit in the ground.  In other words the market develops the expectation — true or not — that oil supply will rise more rapidly than had been thought (or "decline less rapidly" may in some cases be a more accurate phrase but the net direction of the effect is the same).  Lower expected demand is thus paired with greater expected supply and that tends to make price volatile.  Higher expected demand is paired with lower expected supply in similar fashion. noting in either case that you can make lots of different assumptions about the relative timing of the expected changes.

Second, any new information leads to more trading and to more trading at different ranges of price and quantity.  This trading reveals more information about the elasticities of market supply and demand curves and that information in turn feeds back into the market price.  In a nutshell, some initial price and quantity movements lead to further price and quantity movements.

Neither of these phenomenon are correctly called "bubbles" but neither do they fit the story where the price of oil is determined by fundamentals alone.  "Expectations" is a central word here, noting that only time will tell whether or not the expectations are rooted in reality or not.

Do not buy art on cruise ships

In case you did not know.  Here is one example of a fool:

It was only after Mr. Maldonado landed back in California that he did
some research on his purchases. Including the buyer’s premium, he had
paid $24,265 for a 1964 “Clown” print by Picasso. He found that
Sotheby’s had sold the exact same print (also numbered 132 of 200) in
London for about $6,150 in 2004.

Of course the corruption and foolishness runs deeper than the article lets on.  If you shop for contemporary prints in entirely "reputable" Georgetown galleries, they will charge about twice the going auction rate for the prints.  They might tell you that the prints are "hard to find" when in fact usually they are not.  A good New York dealer, used to dealing with well-informed customers, might charge only 10-15 percent above auction (full price including buyer’s premium).  The bottom line is that you should never spend more than $1500 on art unless you know at least roughly what it is worth at auction.  One of life’s good rules of thumb.

Larry Summers on the agencies

He always had a talent for the bottom line.  On the mortgage agencies he writes:

What went wrong? The illusion that the companies were doing virtuous
work made it impossible to build a political case for serious
regulation. When there were social failures the companies always blamed
their need to perform for the shareholders. When there were business
failures it was always the result of their social obligations.
Government budget discipline was not appropriate because it was always
emphasized that they were "private companies.” But market discipline
was nearly nonexistent given the general perception — now validated —
that their debt was government backed. Little wonder with gains
privatized and losses socialized that the enterprises have gambled
their way into financial catastrophe.

I wonder how general the lesson here might be. My fear is fairly
general. Inherent in the multiple objectives urged for creative
capitalists is a loss of accountability with respect to performance.
The sense that the mission is virtuous is always a great club for
beating down skeptics. When institutions have special responsibilities
it is necessary that they be supported in competition to the detriment
of market efficiency.

It is hard in this world to do well. It is hard to do good. When I
hear a claim that an institution is going to do both, I reach for my
wallet. You should too.

Here is more.  Larry Summers was my professor for Macro II and every lecture was a joy.  "Lecture" isn’t even the right word, it was more like turning on a faucet.

I want you to ponder sentences about vengeance

Females, older people, working people, people who live in high-crime
areas of their country and people who are at the bottom 50% of their
country’s income distribution are more vengeful.

Here’s a more traditional result:

The findings suggest that vengeful feelings of people are subdued as a
country develops economically and becomes more stable politically and
socially and that both country characteristics and personal attributes
are important determinants of vengeance.

Here is the paper, here is the author’s home page.

Robin Hanson on the belief in religion and government

A stunning hypothesis from the latest Journal of Personality and Social Psychology:

High
levels of support often observed for governmental and religious systems
can be explained, in part, as a means of coping with the threat posed
by chronically or situationally fluctuating levels of perceived
personal control. Three experiments demonstrated a causal relation
between lowered perceptions of personal control and … increased
beliefs in the existence of a controlling God and defense of the
overarching socio-political system.  A 4th experiment showed … a
challenge to the usefulness of external systems of control led to
increased illusory perceptions of personal control. … A
cross-national data set demonstrated that lower levels of personal
control are associated with higher support for governmental control.

It
seems we hope a stronger and more benevolent God or State will protect
us when feel less able to protect ourselves.  I’d guess similar effects
hold for medicine and media – we believe in doc effectiveness more when
we fear out of control of our health, and we believe in media accuracy
more when we rely more on their info to protect us.  Can we find data
on which beliefs tend to be more biased: confidence in authorities when
we feel out of control, or less confidence in authorities when we feel
more in control?

I would say "read the whole thing" except that is the whole thing.  Here is evidence from California that voters are more likely to prefer conservative candidates (not exactly what the above study is testing) when economic times are good.

What should government do to stimulate the economy?

Let’s see what New York Times readers think.  Right now there’s only one comment and it’s not totally encouraging:

Triple the minimum wage.

That would bring it more in line with
increases in efficiency and rates in the late 70s. People make more,
they spend more. All the money is just tied up in investments now, like
bonds in Fannie and Freddie.

But surely the quality of the answers will improve as the day passes, no?  No?  No?

Help!

Should donors give to students rather than schools?

Jonathan Bydlak seeks to match donors directly with students, rather than matching donors to universities.  Here is his group.  One advantage of the idea is greater competition:

…the current system ties the amount of accessible financial
aid to the schools that students attend, giving schools with more
resources a distinct advantage…students accepted to a Princeton or Harvard face virtually no
quality vs. price trade-off.

What this means for higher education as a whole is that the
current financial aid system, whereby alumni and other prominent donors
contribute to schools, rather than individuals, reinforces the
perceived status of those schools that are considered “top-tier.”

While demand for high quality higher education continues to increase
massively,
the supply of top-tier higher education has not changed much
at all (one need only look at the lack of variability in the U.S. News
rankings for proof of this point).  And as any Econ 101 student can
tell you, when demand far outstrips supply, costs are inevitably pushed
upward.

I like the idea but fear that institutions of higher learning can offer donors greater perks than can intermediaries that match donors to students.  Might it be possible to, say, offer donors the chance to support students through the Metropolitan Museum of Art, with the Met taking a lower cut than Harvard does, yet still handing out donor perks?

Why might Israel attack Iran

According to this line of thinking, which has adherents…focusing on the tactical questions surrounding such an operation — how much of Iran’s nuclear program can Israel destroy?  how many years can a bombing campaign set the program back? — is a mistake.  The main goal of a hit would not be to destroy the program completely, but rather to awaken the international community from its slumber and force it to finally engineer a solution to the crisis…any attack on Iran’s reactors — as long as it is not perceived as a military failure — can serve as a means of "stirring the pot" of international geopolitics.  Israel, in other words, wouldn’t be resorting to military action because it is convinced that diplomacy by the international community cannot stop Iran; it would be resorting to military action because only diplomacy by the international community can stop Iran.

That is Shmuel Rosner in the 30 July The New Republic.  Personally I do not think that Israel will attack Iran, but since I had never heard this argument before I thought I would pass it on.

Don’t attack the shareholders

So says Ricardo Caballero, here is more:

First, a private sector solution to the current crisis requires fresh capital injections into financial institutions. However, in an environment of widespread uncertainty where the instinctive reaction is to run away from risk-taking, private capital is likely to remain on the side for much too long. Thus, the optimal policy response is to encourage and leverage private risk-taking, not to discourage it with a pending threat of exemplary punishment were a fragile situation turn worse, regardless of cause. Economic policy risk is compounding the private sector’s reluctance to capitalize financial institutions…

Second, during periods of high uncertainty and the potential for runs, large or coordinated shortsellers are more likely to succeed in triggering socially inefficient panic-selling. Rumor-mongering and persistent selling pressure eventually weaken wary investors and depositors. Unfortunately, by choosing to punish shareholders, Secretary Paulson has rewarded shortsellers and raised their ammunition to cause further financial instability.  Again, while shortselling plays a very useful role during normal times, it can turn into a source of instability during periods of high uncertainty.

Two points: first, if we are going to nationalize this argument implies we should do it quickly to avoid further hemorrhaging.  Yet the mortgage agencies are not quite proven to be unsalvageable failures (much as I opposed their initial creation that does not imply immediate obliteration as the proper current response).  Second, even if nationalization is the right response this time, it might not be the next time a financial institution gets into fiscal trouble.  Yet in that subsequent case nationalization will be that much harder to avoid, given the understandable fears of private capital if nationalization happens this time.  Every time you nationalize and wipe out shareholders, you create a dangerous precedent and scare away private capital for a long time.

You are probably reading lots of absolutist recommendations around the blogosphere but these are truly difficult issues and the correct policy responses are not obvious.

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. 

Some simple Ricardian thoughts on the Helmsley bequest for dogs

Here is Posner on the topic, here is Becker.  As I understand the terms, it is about $12 million for her dog and $5 billion to $8 billion for dogs in general.

It’s only the $12 million for her dog that is objectionable; surely one million would have sufficed and in the language of the philosophic literature on inequality, the other dogs can rightfully hold a complaint against the recipient of Helmsley’s largesse. 

$5 billion to $8 billion for dogs in general is not too much for our wealthy society to spend or to regard as a legitimate welfare objective, worthy of the standard tax deduction, at least provided it is distributed equitably.  Here’s a list of possible ways to spend the money to help dogs.  Here’s an estimate that there are more than 70 million dogs in the United States, so that is on average only $100 per dog.  Do note that while not every dog needs help, helping even a single dog requires considerable infrastructure.  If you think that’s too much aid, well, let crowding out operate and cut back on your transfers to dogs.  There’s plenty of room for give there, believe me, since more than 40 million households own dogs and thus have their finger on this trigger, maybe yours too (not mine).  It is we who control the net transfer from humans to dogs, not the dear departed Ms. Helmsley.

Arthur Brooks selected to be president of AEI

From an email:

Arthur
C. Brooks–who is Louis A. Bantle Professor of Business and Government
Policy at Syracuse University and a visiting scholar at the American
Enterprise Institute–has been chosen by the AEI Board of Trustees to
be the InstituteÂ’s next president. He will succeed Christopher DeMuth
on January 1, 2009.

Here is Arthur’s home page.  Here are previous MR mentions of Arthur Brooks, all favorable I believe.  I thank…Alex…for the pointer.  Bryan Caplan and Will Wilkinson have blogged his research as well.