Economics/Finance

Christopher Caldwell is a columnist whom I usually find quite annoying, but his “attack today”:http://www.ft.com/cms/s/0/7fe5cc9a-5d75-11dc-8d22-0000779fd2ac.html (unfortunately behind the paywall) on Bill Clinton’s forthcoming book on charitable giving gets to the crux of the issue. [click to continue…]

This “FT piece”:http://www.ft.com/cms/s/0/5f67d75a-5cdb-11dc-9cc9-0000779fd2ac.html on GWB’s magical market pony plan for preventing mortgage foreclosures by handing the problem over to “an opaque part of the financial system normally associated with moves to evict families from their homes” is tough and on-target.

An estimated 6m high-risk subprime loans, worth a total of more than $1,000bn, are outstanding, which will in many cases reset to higher interest rates in the next 18 months, putting more than 2.5m Americans at risk of foreclosure. … The response to this crisis outlined by the president places considerable faith in the ability of mortgage servicers to mitigate this blow by helping distressed borrowers to stay in their homes. … Edward Lazear, chairman of the Council of Economic Advisers, said: “I believe, and I think the president believes, that markets are very good at finding ways to solve problems.” But many experts claim that the mortgage service sector is not fit for this purpose. They argue it does not have the capacity to perform this role, and lacks the personnel, financial resources, technical tools, experience, incentives and oversight to deal with an economic crisis of this scale. “Theoretically, it makes sense, but not in the real world,” said Scott Syphax,a director at the Federal Home Loan Bank of San Francisco. “These institutions are not built to handle this scale and volume of problems.” … as more service companies fall into the hands of vulture investors, the task of co-ordinating a national response is likely to become complicated. “The fixes being proposed by the president are not going to result in Americans being rescued from their homes, quite the opposite,” said Richard E. Gottlieb, a lawyer who specialises in mortgage servicing.

There’s very little that I find more annoying than the “magic of markets” arguments that various right wing hacks and ideologues spew at the drop of a talking-point. It makes me want to forcibly enrol the responsible parties in an economic sociology program until they see the errors of their ways. Markets can indeed do extraordinary and impressive things, but they rather obviously depend on previously existing institutions, expertise and social conditions if they are to work. Not to mention proper incentive structures. These can’t be whistled out of thin air. The claim that a business sector composed of small firms specializing in foreclosure and themselves terrified of bankruptcy will have the appropriate motivations and expertise to stave off this crisis is self-evidently bogus, if you look at it at all closely. But sprinkle some of that schmeconomics 101 pixy dust on it, and you can get away with it, thanks to the supine US journalism industry (I don’t know of any US publication which has even _mentioned_ this as a problem; perhaps I’m wrong).

A few weeks ago, I noticed this piece saying that the mortgage problem in the UK might be worse than that in the US. The reason given (also applicable to Australia) is that the UK boom or bubble in house prices has been much more dramatic than in the US. One statistic quoted in the piece was that there were 14 000 foreclosures in the first half of 2007 a statistic that, as the author notes, makes grim reading. It’s striking then, to read this piece in the NYTimes, predicting 2 million foreclosures in the US this year (since most mortgages are taken out by couples, many with children, the number of people affected is probably more like 4 million). Even allowing for the larger population in the US, this is a huge difference. It now appears that foreclosure has taken over from bankruptcy as the primary mode of financial catastrophe. (Bankruptcy rates plummeted after the “reform” of 2005, but seem certain to rebound in coming months).

Link. Truly, Freakonomics has now entered the mainstream/jumped the shark. Hustlenomics tips from Yung Joc on YouTube (1, 2, 3).

I missed this earlier this week. No more MaxSpeak as of September 3rd. Boo. Max’s posts felt like a very pure form of blogging: his prose style had a way of temporarily wiring you in to his thought process as it was happening. Not many people can convey that feeling well, either because there’s too much post-processing (and it all gets polished up) or there’s not enough (and its incomprehensible). Max hit the sweet-spot a lot more than most. The results weren’t pretty, but they were usually dynamic, direct and right on target more often than not. Soon, the interwebs will be just a bit more boring.

Megan McArdle has a new blog over at the Atlantic, and, browsing through it I notice that “she comments”:http://meganmcardle.theatlantic.com/archives/2007/08/the_real_and_the_ideal.php on “John Q.’s recent remarks about Drezner”:https://crookedtimber.org/2007/08/21/a-perpetual-declaration-of-war/, foreign policy etc. The following caught my eye:

bq. Many economists (not all) might agree that it would be lovely if we lived in an Edenic utopia in which everyone did the best for society without thought of themselves. But almost all economists recognize that self-interest is a powerful force that must be dealt with, and therefore that economic policy must be designed on the assumption that people will try to maximise their own good, rather than society’s. Similarly, foreign policy assumes that states will act in their own interest, and try to design a foreign policy that works within that constraint.

I have three reactions to this. The first is that McArdle’s description of the possible motivations for individuals is just absurdly simplistic: people either maximise their own good, or society’s, and since the latter suggestion is silly, we must work on the basis that of the former. Huh? How about intermediate possibilities, such as that people have a good that they try to realize, but that they also recognize constraints on the reasonable pursuit of that good (such as that other people have lives to live, have rights etc.). The second is that her justification for the self-interest assumption for states isn’t a simple consequence of her self-interest assumption for individuals. If individuals were straightforward maximizers of their own good then states would act in ways that reflect the self-interested action of the most powerful individuals within them rather than the (long term? short term?) interest of the state itself. Maybe there would be convergence, and maybe not, but McCardle isn’t entitled to the conclusion that states act self-interestedly on the basis that individuals do (if they do). My third reaction is that, as “Bruno Frey”:http://www.iew.unizh.ch/home/frey/ and others have argued, the self-interest assumption turns out to be a self-fulfilling prophecy. Design a system on the assumption that people will act to maximize their individual good and they will act on that assumption. They’d be crazy not to: why hold back from the trough when the rules of the game assume that everyone will be pushing their own snout forward? But this proves nothing fundamental. A system designed on the basis of a certain level of solidaristic or community spirit may well foster such attitudes, especially if we have effective mechanisms for punishing those who act greedily or selfishly.

Via a slightly ticked-off Max Sawicky comes this ranking of economics blogs, in which (like MaxSpeak) Crooked Timber does not feature. The author remarks,

bq. Only genuine economics blogs are included. … [and later, in a comment] By genuine, I meant not spam blogs or useless stock tips blogs, and not blogs that claim to be about economics but are really about politics (there are quite a few of those).

Usually, in the U.S., the key test of whether one is a real economist is a simple credential: you must have a Ph.D in economics. Choice of substantive topic certainly can’t be the discriminating factor, as is made clear by the position of the Freakonomics blog at the very top of the list. But by my count, we have at least as many Economics Ph.Ds writing here at CT as several of the blogs on this Top 10 list, and more than at least one of them.

If I were a cynical person — which of course I am not — I might say that the dividing line between what’s “really” economics and what’s “really” politics is itself something of a political question. (As Abba Lerner remarked, an economic transaction is a solved political problem.) Perhaps we often see instances where _I_ hold policy positions informed by scientific economics whereas _you_ are a mere advocate, pushing a political line. There was a pretty entertaining example on Mankiw’s blog the other week.

Anyway, on the measure used, Crooked Timber would be fourth on the list, if only the likes of John or Daniel or Ingrid (whose Ph.D was supervised by someone or other) could be thought of as having an informed point of view about economics.

_Update_: Aaron, the list compiler, comments below and is maybe a bit nicer than this somewhat irritable post merits. I think it was the “genuine economics” comment that set me off.

The US Federal Reserve has stepped in to bail out the financial sector, cutting its discount rate and, more importantly, encouraging banks to borrow directly from the Fed to finance mortgage lending. This action demonstrates that the famous “Greenspan put” has survived, and is now the Bernanke put.

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With stock markets down 10-15 per cent in the last few weeks, it’s a good time to ask whether this will have real effects beyond the value of our superannuation. The immediate starting point of the current disruptions was evidence that defaults on US mortgage markets were worse than expected. An obvious question is whether this underlying shock is large enough to have substantial effects in itself, or whether the problem is mainly one of liquidity and confidence.
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Alex Tabarrok and Dani Rodrik have moved from arguing about industrial policy into arguing about the blinkers (or otherwise) of libertarianism.

“Dani”:http://rodrik.typepad.com/dani_rodriks_weblog/2007/08/irreconcilable-.html

It is in that spirit that I have been mulling about the derision and incredulity with which my recent post on industrial policy was met among some libertarian bloggers. … The real revolutionaries here are the libertarians. They envisage a real good world out there that looks like nothing we have now (or have ever had), and they want us to get there. Second, there are really deep philosophical differences here that have nothing to do with economics per se. Most importantly, I believe government can be a force for good; they do not. But third, libertarians hold on to their priors so strongly that they seem impervious to evidence. They shrug off the fact that there is more freedom and more wealth in those parts of the world where the government is stronger, not weaker. With respect to industrial policy proper, they refuse to engage with the fact that every nation that has grown rapidly has made use of it. I look at the world and see some government programs that work and others that fail. I want to understand what determines these outcomes, and to know how we can improve the ratio of the first to the second. When libertarians look at the same programs, they see one wreck after another.

“Alex”:http://www.marginalrevolution.com/marginalrevolution/2007/08/dani-rodrik-has.html

Dani Rodrik responds here to my pointed remarks on his argument for industrial policy. Rodrik’s response, however, is along the same lines of his earlier – “I’m sophisticated, your simplistic” – post on why economists disagree. In this case, it’s ‘libertarians are ideologues who are immune to evidence.’ Rodrik, however, has painted himself into a corner because he cannot at the same time say that the “systematic empirical evidence” for market imperfections in education, health, social insurance and Keynesian stabilization policy is “sketchy, to say the least” (also “difficult to pin down” and ‘unsystematic’) and also claim that libertarians are ideologues who are immune to evidence. Say rather that libertarian economists are immune to sketchy, unsystematic, difficult to pin down evidence. Rodrik is thus right that he is “not as unconventional as I sometimes think I am. The real revolutionaries here are the libertarians.” The libertarian economists are revolutionaries, however, not because they are immune to evidence but because they respect evidence so much that they are unwilling to accept “conventional wisdom” simply because it is conventional.

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I’ve been following the Peak Oil debate with a mildly sceptical eye for some time, and it struck me a while ago that despite high prices, global oil output hadn’t grown much, but hadn’t declined either. I came up with the innovative description of our current position as “Plateau Oil“. If I had bothered with Google, I would have noticed that the International Energy Agency had offered the same description two weeks earlier. And if I’d thought about for more than a couple of seconds, I would have realised that the supply of topographical metaphors is so limited as to make this a forced move (Australians use “Tableland” to describe the same landform and there’s also “Mesa”, but Mesa Oil is taken, and “Tableland Oil” sounds silly)

Anyway, why are we (apparently) observing Plateau Oil and what does it mean?

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Dani Rodrik argues that much disagreement in economics is between “first-best” economists and “second-best” economists. The former take Mark 1:14-15 as their text, and believe the Kingdom of God is at Hand: repent ye, and believe the gospel. The second believe, with Proverbs 16:18 that pride goeth before destruction, and a haughty spirit before a fall.

You are really not helping your case for massively preferential taxation here, hedge fund guy:

Private-equity executives say they never dreamed that the tax status of their payouts would be questioned. “I don’t think that anybody felt it would ever be challenged,” said Scott M. Sperling, managing director of Thomas H. Lee Partners, a private-equity firm. Managers’ earnings are “capital gains in every technical and spiritual sense.”

That guy is so far at the front of the line that he may be up against the wall right this minute, absent any revolution whatsoever.

Tyler Cowen has a “secret” blog and he made a deal with his readers: pre-order my book and I’ll send you the URL. Don’t link to it, and don’t tell anyone. Inevitably, now, we have this request from this guy:

bq. DO YOU KNOW THE URL OF TYLER COWEN’S SECRET BLOG?? IF YES, PLEASE, SEND ITS URL TO CHRIS MASSE. ANONYMITY GUARANTEED. AND I PROMISE I WON’T PUBLISH IT.

YES I KNOW HE’S SHOUTING. I haven’t pre-ordered Tyler’s book, because pre-ordering things is for suckers. Nor have I been in touch with Tyler. So he didn’t send me the link. But I read Tyler’s secret blog, because it is trivially easy to find it using Google. It took me about 90 seconds when I looked for it. So now I have an interesting dilemma.

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