congress does its goddamn job

Well, Congress finally passed a bailout, but not without destroying $1 trillion in wealth. Special awards to those Congressmen who were against the bailout on principle but were for it once it had sufficient pork for their district.

"kind of like being poked in the eye with a sharp stick."

I only occasionally blog on economics because there are a lot of smart people who do a much better job than I do.

Brad Delong is one of those. Read this interview excerpted from the Merc.

more on Mark-to-Market

Mark Thoma, Andrew Leonard and Calculated Risk weigh in on the part of this debate I understand the least.

In other news, the manufacturing sector was shrinking last month even before the panic.

a smarter take on the crisis, with less swearing too

Tyler Cowen gives the smart, right of center view of the financial crisis.

bailout q & a (best as I can muster)

Q. What's the big deal about the bailout? So what if a bunch banks and Wall-Street types lose some money?
A. Well, it could be a very big deal. There are a lot of banks and financial institutions of many sizes that are on the brink of failure. This will lead to a contraction of the supply of money, the amount of available loans and a big hike in interest rates (which is the price of money). From that, businesses can't get credit, meaning that businesses without cash on hand will go out of business. Furthermore, the increased price of capital makes it so that fewer new businesses start up.

Financial Panic -> Bank Failures -> Contraction of Money Supply -> Business Contractions -> Unemployment

The number of banks and financial institutions at risk make the idea that the damage could be quite extensive.

Q. Isn't this just a bunch of free money for rich people?
A. Well, yes and no. In the sense that the bailout is going to cost the taxpayers something and save a bunch of banks from bankruptcy, yes. But these banks are going to be selling these assets for far less than they bought them for, under most mutations of the plan. But that doesn't make the bailout less expensive to tax-payers. However, the cost of not doing something should be considered too. The U.S. stock market lost $1.3 trillion in the value of it's assets when the bill didn't pass the house. That's only what happened while there is still time to fix this, and not counting lost wages from secondary effects.

And another thing, you know most of these so-called bailouts end up turning a profit for the taxpayer (though I'm not saying this one will). AIG's bailout was a loan with an interest rate something like what I get on my credit card if I miss a payment. Our bailout of Mexico during the so-called Tequila crisis turned into a net gain.

Q. I don't like the idea of saving these silly banks from their own folly.
A. That's not a question, but it is a sentiment that I understand. Very few people shed a tear for a hedge fund manager. The problem is that finance is a load bearing industry. To let the market deal out harsh justice on the deserving few may well screw millions of innocent people.

Q. Shouldn't there be tighter regulation on these guys? Isn't this just a temporary fix?
A. Yes and Yes. I'm pretty far afield from my expertise but it seems like loosening the rules on how long a bank needs to keep a mortgage after it makes a loan was bad idea. But a long term fix won't get us out of a short-term trap. Even if you change the rules, you've still got all these insolvent banks threatening the financial system as a whole.

Q. Isn't this all the fault of "Mark-to-Market" accounting?
A. Uh . . . I don't know about this one. Mark-to-Market accounting has been around for a long time, but post-Enron it's rules were tightened to prevent firms from using mostly imaginary future revenue streams to determine the value of an asset. I suspect that a lot of people are saying that if banks are allowed to value their assets at some imaginary future value, then they won't be insolvent. I'm skeptical of both the first part and the second part of that, but I'll admit that I'm no expert on accounting, so I'll let Jonathan Weil take this one.

Q. Isn't this the fault of the CRA and affirmative-action?
No. This is really the sort of crap that only someone really committed to defending an ideology could believe. The guy who's name is on both my Macroeconomics and Banking and Finance book should put this one to rest. Best quote, "And that is not political correctness. It is correctness."

Q. I'm against the bailout because I think it violates free-market principles.
A. Congratulations. You've put an ideology ahead of the good of your country, and the world.

Seriously. Fuck your stupid principles.

Q. This mess is all the fault of [Democrats/Republicans/Jews/Media Elites].
A. I'm not interested. The only thing to do is save the financial industry, no matter what scapegoat you pick. If your congressman didn't vote for it, call them up and yell at them. Here I'm looking at you, constituents of John Doolittle and Lynn Woolsey.

538 on the bailout

Nate Silver notes that those congressmen who are retiring this year voted overwhelmingly for the bailout.

I'd like to add that my own congresswoman, Doris Matsui also voted for it.

bailout fails in house

Looks like there weren't enough votes from either party to pass the bailout bill.

/facepalm.

I don't think many people properly appreciate the danger that the economy is in right now, particularly that the money supply is linked very directly with the rate of unemployment and growth.

Some of your congressmen can't stand up to their constituents, some are too enslaved to free-market ideology to do the right thing.

virtue of necessity

Well, I just sent off two of what I like to think of as "Nuisance Ex-Student" letters.

These are letters begging for references from professors that I haven't seen in 6 years from whom I was one student in a class of 30-40. The only thing I've got going for me in the memorability department is A) I'm more opinionated than your typical Davis economics student B) I had a certain fondness for using strange metaphors, forced analogies and odd puns (see Otisms) in my academic writing.

In regard to A) Davis had a lot skinny, geeky shy types in the econ classes. The rest of your typical class was filled out a fair share of befuddled jocklings and confused International Relations majors who had to take the development and international courses. My International Macro TA told me that on days that I didn't come to section he could hear the fluorescent lights buzzing. In regard to B) I'm not saying it's a good way to write, but it certainly isn't normal.

Anyway, Sac state is more a choice of convenience for me as far as Masters programs go. It seems like a good department and certainly a good enough department. So I spent part of the day looking through what electives I might take to fill out my 30 units, and found some stuff that I'm actually downright excited about.

ECON 251. Urban Problems, Economics and Public Policy. Historical development, economics and possible policy solutions of the most pressing problems facing central cities and urban areas in the U.S. are presented. Problems discussed include poverty, crime, urban abandonment/suburban sprawl, edge cities, deteriorating infrastructures, and fiscal stress. Cross-listed: PPA 251; only one may be counted for credit. Graded: Graded Student. Units: 3

ECON 181. Economics of Racism. Economic analysis of the origins and development
of racism, focusing mainly on its impact in the U.S. Differing theoretical
explanations surrounding racism will be compared and evaluated. Graded: Graded
Student. Units: 3.0.

Good stuff, and helpful both for the career and in general as a guy who likes to argue with people.

the worm turns

We're thinking of taking a vacation in China next year, so once again I am compelled to pay attention to the Yuan-Dollar exchange rate. Suffice it to say I'm thinking that maybe it's a good idea to buy some Yuan now, because it seems like the chances that the peg will be intact six months from now are a coin flip.

Fixed exchange rates are a real pain in the arse. They save up all the day-to-day risks of floating rates and focus them within a short period of time. That's the exact opposite of what most people want.

They also encourage governments to complain about each other a lot. Last year our congress was bitching to China about it's undervalued currency, this year they do the same to us. Last year it's their currency and our problem, this year vice-versa. Either way, it's a bitch fest.

income inequality and nobody cares

Quick, think of what you want from the country you live in.

Things rattle into your head, probably remarkably similar for left or right politics.
Environmental security, a large middle class, good inexpensive health care for all that need it, equal opportunity for all races and sexes, and a shiny donkey for every family.

One thing that does not pop into your head, safe to say is: a gini-coefficient under .35. And this is a problem.

Well, it's not really a problem. But it is a problem for Paul Krugman and anyone who likes to bang on-and-on about income inequality.

Herbert Gintis makes this point in his rather testy review of Krugman's latest (thank you, Marginal Revolution).

Ginits touches on something that has always bugged me. There's nothing directly bad about inequality itself. What I truly care about is poverty, and poverty as a result of denial of opportunity more than anything. I always get weirded out by dragging inequality into it. As if taking money away from rich people all on its own was going to do something about poverty and its attendent horrors and nuisances.

Personally, I think the Democratic party should concentrate on more immediate problems, such as Health care, (something else Professor Krugman cares about, at least). The only people who care about income inequality are economists and we don't think it's rational to vote, anyway.

bad government!

Occasionally the United States government, in a fit of bipartisan douchebaggery, decides to do everything it can to make everyone worse off. Lately, this seems like a full time occupation:

1. Why the Price of Your Morning Starbucks Went Up.
2. Congress Passes Anti China Legislation

Not content with bungling energy policy into raising the price of food generally, so that we can switch to a fuel that does not emit less greenhouse gasses than oil, Congress decides to go about attempting to make everything else more expensive as well.

Perhaps this is all part of some generalized attempt to lower social welfare. Did we do something to piss the government off? I'm pretty sure that I've been good lately, but I don't really know about you. Maybe this is a bit of elaborate revenge against Larry Flint.

the four wrong truths

A bank is a big part of the financial world. It takes savings, turns them into the loans that are used to keep the basic workings of the economy going. They are absolutely essential to running businesses and buying a house.

Which is why it is indeed puzzling when they are staffed by people who know nothing about what their institution does.

That's not to say that everyone at the bank that I work it is bad at their job or even ignorant. It's just that they know the products that they service very well and anything else about the bank universe is optional.

This is why there has yet to be any successful conglomerate that has been built upon cross selling financial services. If someone mainly does work on deposit accounts, they will come to know how to structure one's deposit accounts quite well, and will be no more likely than the next person to sound knowledgeable at all about insurance.

Which brings me to my next topic. The bank for which I currently work (and shall soon be leaving) does ask us to cross sell financial services to the customers that call in. One of these is loans, specifically mortgages.

Now, I'm no great expert on mortgages. I have an interest in figuring out the ups and downs of that market that stems from curiousity and the needs of a distant future. Neither is anybody else that I work with, apparently. At least one of them did not know the difference between a first and a second mortgage. No one, our boss included knew what subordination was. Roughly half the people on my team (we have teams) have a mortgage and were therefore, more knowledgeable than I am about the process of getting and maintaining a mortgage.

(In an aisde, one of our mortgage holders opined that getting a mortgage the first time was scary, another who had recently refinanced countered that like getting married, it's even scarier the second time).

So, in order to make us better at cross-selling mortgages Our Bank had us all take a lesson from someone who was quite good at cross selling. She was a team leader, and apparently quite good at talking customers into taking out mortgages at Our Bank.

From this little meeting I did not learn a goddamn thing. Which is good, I think. If I had learned something I hazard a guess that it would prove false or simply relate only to talking people into getting their mortgages from Our Bank.The woman who ran this meeting was not especially dim, she just was a person who was exceptional for succeeding despite not really knowing what she was talking about.

Here are some nuggets from the meeting:
Truth #1. Buying a house is the best investment you can make.
Truth #2. During the first year your house will increase in value by 10%. [sic, no qualification, no reference to location]
Truth #3. There are no investments that can earn you a return of more than 10%.
Truth #4. Interest rates are going up.

When #2 was dropped on the class, I locked eyes with my supervisor. He had an expression which said, "I know what you're thinking. Just please don't say anything."

What I was thinking was. An awful lot of people bought a house last year and did not see their house values go up by 10%.

I think she may have meant on average. Though the average home price per year increase in the United States has been 6.38% if your data starts at 1974(Which mine does). Over the same period, the S&P 500 averaged a yearly gain of 9.83%. That I might add, is the total after one of the worst 8 year stretches on the American stock market (often called "the Bush years"). Whereas the yearly % increase still reflects a housing market that by a lot of measures is still overvalued. So much for #3.

So obviously a house is not the best investment for everyone. Now, amazingly the reason why buying a house is a very good investment for most people was totally bypassed in this meeting. That is, of course rent. You've got to pay rent anyway so why not turn some of that into an investment rather than assure that it is all expense. There are, of course some situations where even considering this, it is not wise to buy a house. For instance if you interest payments end up being more that your current rent, if you think that sounds crazy, then you don't own a house in San Francsico. Or if the increase from rent to payment puts you in danger of default.

In those two cases, paying rent and then investing as close as you can get to the difference is the smarter option. But for an awful lot of people a house is the best way to invest. (Many Americans, you may have noticed, don't like to save unless they put themselves in a situation where it is actualy illegal not to).

Then there's number 4. After the meeting we were reminded by our boss that it is technically illegal for us to forecast interest rates. The woman who seemed so sure of Truth #4 admitted that she did not know what factors affect mortgage rates. Customers frequently ask me whether rates are going up, I usually tell them I would have a different job if I knew that.

After the meeting I actually asked someone who worked for the banks mortgage department. He said that the fed funds rate had an impact and was frequently a leading variable, but essentially he gave me the same line that I give my customers.

I suspect that there is a certain level of ignorance all the way up. And I am part of that great chain of ignorance.

good debate ending badly

WSJ has a debate between Arnold Kling and Brad DeLong on the long impacts of the New Deal.

I think DeLong carries the day, though Kling does score some points. The New Deal like all human endeavors, was awkwardly carried out and had more than one nonsensical platform, the infamous NRA (no not that NRA, this NRA) chief amongst them. But it was overall, a good unradical non-utopian fix to a troubled system.

And on that note I feel I must point how bad Kling's closing arguments are.

In a libertarian utopia, most families take care of themselves by working, saving, and purchasing insurance. Taxes are low, but charitable contributions are high, and most people who cannot take care of themselves are served by charities. As James Bartholomew points out in "The Welfare State State We're In," private charities have many advantages over government programs. Finally, if people slip through the cracks of charity, government programs could be a last resort.

In the progressive/New Deal utopia, we are all wards of the state. Clever technocrats use the coercive power of the state to put all of us into government-run savings and insurance programs. Brad DeLong and others who believe in the technocratic, welfare-state utopia will point to Europe as an example for the U.S. to follow. However, Europe is in demographic decline. Even the clever technocrats lack a plan for dealing with the pending surge in the ratio of pensioners to workers. The work ethic in Europe is slowly melting away. Among young people, the unemployment rate reaches 20% in several countries. There is something rotten in Denmark, and indeed in the entire concept of the technocratically-run welfare state

First of all there is no such thing as welfare state utopianism. The welfare state has always been a middle/muddle of practical minded ( if not always practical) fixes.

Second of all, evaluating politcal philosophies by comparing utopian visions is uneconomical, and silly. Who cares if a libertarian utopia sounds nicer than a welfare state utopia. Maybe you think an anarcho-communist utopia sounds pretty fun too, but how does that affect, say, a decision to cut social security benefits? Policies should be evaluated based on the marginal benefit to actual people in our current topian system, not based on what's going to get us closer to fanciful happy land.

Further thoughts from DeLong.