Were the bailouts a good idea?
Following the renomination of Bernanke, it is worth revisiting this question. Here is a recent report:
With the FTSE World Banks index up 130 per cent since its lows of
early March, the paper losses that governments in France, Belgium,
Luxembourg and Germany are sitting on have also shrunk. Berlin's 25 per
cent stake in Commerzbank's common equity is now worth only 2 per cent
less than the €1.8bn ($2.6bn) the German government paid for it.
In
spite of criticism of the bail-outs of lenders such as Citi, Bank of
America and Wells Fargo, the Treasury has reaped gains from the coupons
payable under the troubled asset relief programme bail-out funding,
most of which has been repaid.
If another big negative shock comes the government's liability position still could turn out to be much worse. But if we stop and click pause and evaluate the policy today — the answer to my question is "yes, the bailouts were a good idea."
Without the bailouts we would have had many more failed banks, very strong deflationary pressures, a stronger seize-up in credit markets than what we had, and a climate of sheer political and economic panic, leading to greater pressures for bad state interventions than what we now see. Milton Friedman understood all this quite well, which is why argued bailouts would have been a good idea in the 1929-1931 period.
(By the way, some libertarians like to pretend that Milton Friedman blames the Fed for "contracting" the money supply by one-third in that period but in reality Friedman blames the Fed for having let the money supply fall by one-third and not having run a bank bailout.)
If you are a libertarian, is not our current course more favorable for liberty than would have been a repeat of 1929-1931? If not, I would be curious to hear your counterfactual version of how matters would have proceeded, without the financial bailouts. Is it that you think the regional banks would have raised the financing to pick up the entire bag and keep the banking system afloat? Or is it that natural market forces would have somehow avoided a wrenching surprise deflation? Or do you think the authorities for some reason would have not nationalized the major banks? Please let us know.
Maybe you think that the bailouts will have disastrous long-run consequences. And maybe they will, I worry about this too. But if anyone should know that modern politics can only stand so much short-run panic, it is libertarians and fans of Bryan Caplan's book. If we had not done the bailouts we did, we would, within a few months' or weeks' time have received a much worse and costlier bailout run by Congress and Nancy Pelosi. How does that sound?
I can see that Peter Boettke, on his blog, periodically struggles with these questions. I speculate that Pete even toys with the idea that I am right and that Friedman, a founder of the Mont Pelerin Society, was right about 1929-1931. But I wonder if he can bring himself to utter those magic few words: "All things considered, the financial bailouts were a good idea. They would have been a good idea way back when and they were a good idea this time around."
Addendum: Megan McArdle comments.
Bernanke renomination is up to 90 percent
Here is the betting market, and here, via Daniel Lippman, is one supporting news article.
Addendum: Here is confirmation.
The benefits of competition
More pet rapture insurance! I thank James Hinckley for the pointer. Note that this service, unlike the other, vows not to have sex with your pets. That's what economists call quality competition. Lawrence Abbott once wrote a very good book on that idea.
Insurance markets in everything, no arbitrage condition edition
I enjoyed this one:
You've committed your life to Jesus. You know you're saved. But when the Rapture comes what's to become of your loving pets who are left behind? Eternal Earth-Bound Pets takes that burden off your mind.
We are a group of dedicated animal lovers, and atheists. Each Eternal Earth-Bound Pet representative is a confirmed atheist, and as such will still be here on Earth after you've received your reward. Our network of animal activists are committed to step in when you step up to Jesus.
We are currently active in 20 states and growing. Our representatives have been screened to ensure that they are atheists, animal lovers, are moral / ethical with no criminal background, have the ability and desire to rescue your pet and the means to retrieve them and ensure their care for your pet's natural life.
…Our service is plain and simple; our fee structure is reasonable. For $110.00 we will guarantee that should the Rapture occur within ten (10) years of receipt of payment, one pet per residence will be saved. Each additional pet at your residence will be saved for an additional $15.00 fee. A small price to pay for your peace of mind and the health and safety of your four legged friends.
Unfortunately at this time we are not equipped to accommodate all species and must limit our services to dogs, cats, birds, rabbits, and small caged mammals.
Thank you for your interest in Eternal Earth-Bound Pets. We hope we can help provide you with peace of mind.
For the pointer I thank The Browser.
Is it America or Europe which is overrated?
Bryan says Europe is overrated and here is one excerpt from a lengthy post:
…almost no one in Europe lives in places as comfortable and convenient as American suburbs: The houses are spacious, the cars are huge, cheap Big Box stores and chain restaurants are nearby, and (to quote South Park) there's "ample parking day or night.
Bryan suggests that American tourists like Europe so much because they are visiting it with U.S. incomes. I am not sure which PPP calculation he is using but I disagree at a more fundamental level. Bryan gives some good reasons why America is better for 37-year-olds with young children, namely lots of living space and easy shopping. But I view much of Western Europe as better for the elderly, if only because it requires less driving and they are more likely to live close to their children and perhaps also they receive more respect. Western Europe is probably better for children too, for reasons related to safety and health care.
My alternative view is that Americans rate European life so highly (in part) because the buildings from previous eras are so striking and attractive. If all of the U.S. looked like U.S. postwar construction, the country would still impress more or less as it does. If all of Europe looked like its postwar construction, Americans would be less likely to admire European policies and political institutions. Yes I know about Lille, and contemporary Spanish architecture, but in reality most Americans would think of Europe as some kind of dump.
Addendum: Megan McArdle comments.
Spain fact of the day
To put things in perspective, Spain now has as many unsold homes as the US, even though the US is about six times bigger. Spain is roughly 10% of the EU GDP, yet it accounted for 30% of all new homes built since 2000 in the EU. Most of the new homes were financed with capital from abroad, so Spain’s housing crisis is closely tied in with a financing crisis.
You will find more information here.
Assorted links
1. Which firms give the most to politicians? (David Henderson comments.)
3. Top twenty tracks of the decade?
4. Meat in desserts, a survey.
Why don’t more people like spicy food?
Andrew, a loyal MR reader, has a request:
Tyler, why don't more people like spicy food? What prevents them from trying spicy dishes?
Mexicans acculturate their small children to spicy food gradually, by mixing increasing amounts of chilies into the meal. It takes a while before the kids enjoy it and at first they don't like it. If this has never been done to you, you need to make the leap yourself, usually later in life. The whole point of spicy food is that at first it is painful, causing the release of endorphins to the brain. With time the pain goes away and you still get the endorphins, although you may seek out an increasingly strong dose to boost the endorphin response.
Not all Americans think this is a good deal. Older people are less likely to make this initial investment and endure the initial pain. The same is true for uneducated people (adjusting for ethnicity), who both are less likely to know it will end up being a source of pleasure and who on average have higher discount rates. What other predictions can be made? If you and your country are too obsessed with dairy you will be led away from spicy food, one way or the other. Milk usually counteracts the pleasing effects of chilies.
Ironic Deception
In an interesting article on the history of "photoshopping," the New York Times says that one of the classic photos of Abraham Lincoln is actually the great emancipator's head grafted onto the body of John C. Calhoun! Calhoun, of course, was the great proponent of slavery calling it not a necessary evil but a "positive good."
The article doesn't say, but surely the compositor was sending a message with his ironic deception.
FYI, this caught my eye because the first article that Tyler and I ever co-authored was on Calhoun's constitutional theory. No link, but here's the reference: Tabarrok, A., and T. Cowen. 1992. The Public Choice Theory of John C. Calhoun. Journal of Institutional and Theoretical Economics 148 (4):655-74.
Insurance markets in everything
…two Long Island insurance brokers have developed a way for the
fantasy owner to experience the bittersweet taste of an insurance
payout when their superstar goes down with a season-ending injury.
That's right. Pro teams have hedged against their largest contracts
with insurance for years. Now owners of fake teams can now protect
themselves against the injuries of real players with actual insurance
policies.
I thank Jon for the pointer. I wonder if this isn't a publicity-generating loss leader for their other insurance policies.
*History of the Mafia*
This new book by Salvatore Lupo is a translation from the Italian. I read a bunch of Mafia books before leaving for Sicily and this one has, by a considerable margin, more economic history and more analytic reasoning than the others. It asks how the Mafia interacted with more general changes to the Sicilian economy and also asks why the Mafia were stronger in some parts of Sicily than others. The latter sort of question is a no-brainer for an economist but it doesn't pop up very often in the literature.
On the American Mafia, Mike Dash's The First Family: Terror, Extortion, Revenge, Murder, and the Birth of the American Mafia is both good and readable. See for instance the Jonathan Yardley review at the Amazon link.
The Mafia is a topic I will never understand very well, so it is hard for me to judge the substance of these books but they do signal various impressive qualities.
The economics of rural Thailand
I asked her why she did not wear the costume.
"I am part of a new generation, and I do not like it. It is hot and
uncomfortable," she said. But she noted that she might have to because
the chief is considering forcing everyone to wear the costume. "If the
chief orders us, we will do it." The chief of the village, a
52-year-old named Nanta Asung, told me that Thaijun was the only woman
in the village who did not wear traditional dress and that her choice
was unacceptable. "If you are Palaung, you have to wear the costume of
the Palaung," he said while chopping pork for dinner. "This is a must.
A must!"
Asung said they must wear the dress because of tradition, but he
also spoke excitedly about its appeal to tourists and noted that half
of the village's income of $30,000 a year comes from tourism. That
night an Australian family was paying $15 to sleep in his hut. "He is
very worried that visitors will stop coming," my guide, who served as
my interpreter, told me as we left and headed to our own hut.
As we walked across the village, Asung began broadcasting over
loudspeakers: "This is a reminder that all women should wear
traditional dress. Some foreigners just came to complain that some
women were not wearing their costumes." (We quickly returned to explain
to the tribal chief that I was asking questions, not complaining, but,
unsurprisingly, he did not issue a correction over the village
intercom.)
Here is the full story, which is interesting throughout. A debate is raging as to whether it is ethical to visit villages that stacks rings on the necks of their women or elongate their earlobes.
*Codes of the Underworld: How Criminals Communicate*
That's the new book by Diego Gambetta and it is the best applied book on signaling theory to date. Gambetta's task is well summarized by a single sentence:
Given these propensities, one wonders how criminals ever manage to do anything together.
The signaling problems faced by criminals are unusual in the following regard. On one hand they wish to signal a certain untrustworthiness, namely that they are criminals in the first place. This is useful for both meeting other criminals and also for intimidating potential victims. On the other hand, the criminals wish to signal that they are potentially cooperative, for the purpose of working with other criminals. Sending these dual signals isn't easy and Gambetta well understands the complexity of the task at hand. As Henry points out, facial tattoos are one particular effective method of signaling that one is a criminal for life.
Here is a passage which I found striking:
…Women are significantly less violent than men in the outside world and less lethal when they are violent. This holds in all times and places for which relevant data exist. And yet in prison this universal fact is overturned: women become at least as violent and often more prone to violence than men are. Although women in prison rarely commit homicide, a large study of Texas prisons by Tischler and Marquart showed that there was no difference between women and men in the incidence of violent episodes. Table 4.2, based on comprehensive statistics for England and Wales, shows that the gender pattern is even reversed; women assault each other twice as much as men do, and they fight one and half times as much as men do, a result that disconfirms the testosterone hypothesis.
Generally, women are convicted of proportionally fewer violent offenses than men are and have shorter criminal histories, two circumstances that rule out some of the possible selection effects that could explain away the high rates of female prison violence…
Gambetta wonders whether women in prison resort to violence so frequently because they have fewer alternative credible means of signaling toughness.
Harry Truman, free marketeer?
Is it possible he was the most deregulatory President of his century? John Nye writes:
…Harry Truman left office in 1953 a very unpopular man. Almost no one at the time gave him credit for overseeing a period of rapid recovery that was much broader and more impressive than anything that happened under Roosevelt's tenure — and this at a time when most economists predicted a deep postwar recession. He did this while shrinking the government and dismantling wartime regulation at a rate Ronald Reagan could only have dreamed of. He smoothly pulled us back from a regime of wage and price controls that could have easily been allowed to linger…Thanks to Truman we were once again moving in the direction of a competitive, open-access market economy…Yet Truman's stellar reputation today owes nothing to his economic achievements, which most of those who today praise his foreign policy acumen know nothing about.
That's from the Sept./Oct. issue of The American Interest and the article is entitled The Real New Deal (gated).
*The Inheritance of Rome*
What can I say? I have to count this tome as one of the best history books I have read, ever. The author is Chris Wickham and the subtitle is A History of Europe from 400 to 1000. The author states that this is a book written “without hindsight” so the focus is not on how early medieval times were a precursor of this, that, or the other. In addition to its all-around stunningness, it has the following:
1. Extensive use of Egyptian archives, which it turns out are extensive from this period. Egypt may have been the most advanced part of the world at that time.
2. Fluid integration of historical and archeological sources.
3. An emphasis on “localization” as the fundamental change following the fall of the Roman Empire, and numerous micro-studies of exactly how that localization occurred. Cities shrank, trade networks dried up, etc.
4. An illuminating discussion of how family control made it incentive-compatible to invest so much wealth in monasteries.
5. An interesting hypothesis as to why so many Islamic cities ended up with such narrow streets (I may blog this separately).
6. How the peasantry ended up so downtrodden in England.
7. How the fall of the Roman Empire really happened (more or less).
8. How the Carolingian, Byzantine, and Abbasid empires all drew upon their Roman heritage in varying ways.
And more. If a while ago I defined the category “a book after which you don’t want to read any other book,” I’ll try a new designation: “a book which makes you want to spend a month or more reading follow-up works in the same area.”
Here is one very good review. I got a kick out of one of the Amazon reviews:
This is a challenging book to read. There is so much information
crammed into every page that you have to read slowly or you’ll miss
something. And there are 550 pages of this.
Content! Heaven forbid!