Speaking on why it would be a terrible mistake to overturn Washington DC’s 31-year old ban on handguns, Assistant police chief Alfred Durham said today:

The ban on handguns is a matter of life and death because 80% of the murders in DC are caused by handguns.

Not so much.  Here is the overshooting model for those of you who don’t know it.

So what is the problem?  First, most observed exchange rate movements are unexpected ("news"), rather than forecast in earlier forward rates.  The overshooting model, at best, explains expected movements in exchange rates.

Second, the model relies on a Keynesian money demand function.  Specifically, inflation, operating through a portfolio effect, lowers nominal rates of interest in the initial stage of the mechanism.  Well, sometimes, but don’t count on it.  More generally, the currency vs. interest-bearing assets decision doesn’t have many implications for foreign exchange markets, if any.

Arnold Kling offers some further comments, including this bit:

But in the Dornbusch model, countries differ in terms of their
inflation rates. Inflation is described mathematically as a continuous
movement in prices ("Rudi Dornbusch is the master of the logarithmic
derivative," as Rogoff used to put it.) The swindle, which is present
in all modern macro, is to talk about sticky prices and
continuously-moving prices in the same breath.

Exchange rates are not well understood.  The current best theory is a mix of random walk (but in exchange rates or returns?), noise traders, and possibly some predictable, very long-run, PPP-reverting swings, enabled by the possibility that perhaps traders’ time horizons are too short to compress all of the expected future into the present.  But, unlike what the Dornbusch model predicts, these changes are not well-predicted by nominal interest rate differentials.

Here is a more favorable assessment of the model, from Ken Rogoff.

Like Tyler, I think Samuelson has not done his homework.

Here is Paul Samuelson:

But financial panic engendered by the burst bubble of unsound U.S. and
foreign mortgage lending means that even a mammoth corporation like
General Electric would find it expensive now to finance a loan needed
to build a new and efficient factory.

Here is Jeffrey Immelt, chairman and chief executive of General Electric:

Q: What’s your opinion of the "credit squeeze" and the view that the US economy may be about to run into difficulties?

A: It’s clear there has been some bad lending behaviour [by banks] in the
US. But in the world as a whole, there is still a lot of liquidity.
Companies generally have strong balance sheets, giving them the ability
to borrow on reasonable terms….If you consider the problems in the credit markets, they will not have
an impact on the vast majority of GE’s business. In other words, the
overall effect on GE will be limited.

Yes, Immelt’s job is to be rosy but profits are strong at GE.  I’d like to see some evidence for Samuelson’s statement. 

Today, Federal Reserve Chairman Ben Bernanke admits that nobody, including
him, is able to guess how near to bankruptcy the biggest banks in New York,
London, Frankfort and Tokyo might be as a result of the real estate crisis.

Taken literally, Samuelson is correct.  No one can say how near to bankruptcy those banks are but that is because they are not very near to bankruptcy.  Subprime crisis or not, most people are still paying off their mortgages quite comfortably.  Many bank share prices are down but the major banks are not hovering close to p = 0.

I’m not sure what Samuelson counts as "today," but using Google News I cannot find any such statement by Bernanke and if it had been made it would be a) grossly irresponsible, b) headlines, and c) the market would have plunged dramatically.  The most likely possibility is that this passage is a simple untruth, not representing what Bernanke said.

Samuelson draws an analogy between today’s subprime crisis and Herbert Hoover claiming the Great Depression would end soon.  It’s worth noting that Hoover faced high unemployment, radical deflation, incompetent monetary policy, bank runs, and a lack of automatic stabilizers, none of which are the case today.

It is amazing how pessimism and the desire to blame will cloud men’s minds. 

It can be said, however, that if further bad things were to happen, "the crisis so far" would mean we have much less room to maneuver.  So I’m not telling you that everything is fine, I am simply putting this piece in perspective.

Here is the link and much more.

First, engage a company to monitor your exercise regime and punish you financially if you fail; then, buy insurance against the risk of failure.

That’s from Tim Harford, noting that the latter market is still a gleam in someone’s eye.

Trieu, a loyal MR reader, asks:

I’ve recently received "lock-in" offers from my gas and electricity company.  They’re offering me the "opportunity" to commit to the current price of gas and electricity for two years, instead of paying the fluctuating month-to-month rates.  Naturally, this offers set off my scam alert.  Are the energy companies signaling that they think energy prices are too high and will go down?  Or do you think there could be something else behind the strategy?

If you draw a standard and supply diagram, you can see that fluctuating prices (with a constant mean) increase expected consumer surplus but decrease expected producer surplus.  For instance as a buyer you’d rather have a price of 50 half of the time and a price of 200 the other half of the time, rather than 125 all the time; the opposite is true for the seller.  That is one reason why the utility may prefer a lock-in.

There is also a "only the stupidest consumers will respond" effect.  It costs the utility very little to make an offer favorable to themselves but unfavorable to the consumers.  It’s worth doing even if only a few people accept.  Given that utilities are regulated monopolies, you should expect conflict of interest to be high and thus decline most of their offers.

The most general response is simply that you should insure only against catastrophic events, and yes that sometimes includes your wife getting mad because you didn’t buy a product warranty on your latest purchase of toothpicks.