Sunday, January 31, 2010

Three items on finance

Bankruptcies are no picnic, but politicized bail-outs are also unattractive. Here a couple of smart people introduce the idea of the "bail-in" alternative.

How would it have worked? Regulators would be given the legal authority to dictate the terms of a recapitalisation, subject to an agreed framework. The details will vary from case to case, but for Lehman, officials could have proceeded as follows. First, the concerns over valuation could have been addressed by writing assets down by $25 billion, roughly wiping out existing shareholders. Second, to recapitalise the bank, preferred-stock and subordinated-debt investors would have converted their approximately $25 billion of existing holdings in return for 50% of the equity in the new Lehman. Holders of Lehman’s $120 billion of senior unsecured debt would have converted 15% of their positions, and received the other 50% of the new equity.

The remaining 85% of senior unsecured debt would have been unaffected, as would the bank’s secured creditors and its customers and counterparties. The bank’s previous shareholders would have received warrants that would have value only if the new company rebounded. Existing management would have been replaced after a brief transition period.

The equity of this reinforced Lehman would have been $43 billion, roughly double the size of its old capital base. To shore up liquidity and confidence further, a consortium of big banks would have been asked to provide a voluntary, multi-billion-dollar funding facility for Lehman, ranking ahead of existing senior debt. The capital and liquidity ratios of the new Lehman would have been rock-solid. A bail-in like this would have allowed Lehman to open for business on Monday.

Many investors would no doubt complain about the rough justice of a regulator-imposed reorganisation. To preserve value, officials would have to move very, very quickly, leaving little time to fine-tune various claims or observe normal procedures. The new structure would be based on bankruptcy reorganisation principles, allocating value in accordance with investors’ seniority and ensuring that each class of investors would be better off than in liquidation. The process would not be pretty but overall, investors should be relieved by the result. In this example the bail-in would have saved them over $100 billion in aggregate, and everybody—other than short-sellers in Lehman—would have been better off than today.

Where and how did investors fail? Where and how did politicians fail? Who will unscramble the eggs?

In "Why Didn't Canada's Housing Market Go Bust?" James McGee finds that "Housing markets in the U.S. and Canada are similar in many respects, but each fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust." It seems that the Canadians never got around to creating a Fan and a Fred. What were they thinking?

In "Alt-A: The Forgotten Segment of the Mortgage Market," Rajdeep Sengupta describes "aggressive underwriting" by various banks. What were they thinking?

Thursday, January 28, 2010

No falsifiability

Strange things happen when people put their faith in politicians. Noted economists have recently discovered the concept "jobs saved". Others have discovered the win-win two-fer of clean environment plus economic recovery from one investment.

Today, it's high-speed rail in Florida. This project will save-or-create jobs. And it will save-or-create clean air and/or global warming relief.

But if serious people can live with the save-or-create idea, then anything goes. In fact, plausibly serious people have one more line of defense. If the save-and-create results (somehow) fall short, then the obvious response is that we just did not push hard enough. Even more stimulus (high-speed rail, "green" jobs, you name it) will surely be the remedy.

There simply is no falsifiability.


Here are some Florida high-speed rail project numbers from Bob Poole.

Tuesday, January 26, 2010


Money exists to reduce the inefficiencies of barter. But barter makes a comeback where money is suspect (think Zimbabwe). It also makes a comeback when and where people experience liquidity shocks (think U.S. circa now) and where they have access to cheap information exchange opportunities (think Craig's List).

Look at "Let's Make a Deal ... The growing role of barter in the marketplace" in yesterday's WSJ.

Modern communications have changed our lives (mostly for the better) in uncountable ways. Now add people (and businesses, according to the article) finding ways to cope with the recession.

Monday, January 25, 2010

Consumer sovereignty

Karen Stabiner's piece in this morning's LA Times is the latest contribution to the LA-NYC-compared literature.

Among the items compared are women's hair treatments.

Blonds. Clairol's 1960s ad campaign, "Is it true blonds have more fun?," implied that being a genetic minority made life more worth living. But now a highlight and lowlight epidemic on both coasts has turned the stubborn brunet into the outlier. Is it true blonds have more fun? Hard to tell; there are too few non-blonds left for a viable comparison.

This brings to mind Malcolm Gladwell's wonderful "True Colors: Hair Dye and the Hidden History of Postwar America," a chapter in his What the Dog Saw and other adventures.

Do blondes have more fun? Is blondness more alluring? I guess the market has spoken. Gladwell alludes to a "blondness periodic table" published in Big Hair: A Journey into the Transformation of the Self by Grant McCracken, which I must read.

There are appatently six categories in the periodic table ("bombshell" [Mae West, Marilyn Monroe], "sunny" [Doris Day, Goldie Hawn], "brassy" [Candice Bergen], "dangerous" [Sharon Stone], "society" [C.Z. Guest] and "cool" [Marlene Dietrich, Grace Kelly].

All that may have been so in 1995. But, Stabiner would probably agree, the six have have multiplied in NYC as well as in LA as well as in-between.

Consumer sovereignty is a wonderful thing.

Thursday, January 21, 2010

2010 economic freedom

I was introduced to the (possible) endogeneity of market friendly institutions some years ago via John Powleson's Centuries of Economic Endeavor. Since then, the possibility of a virtuous cycle (economic freedom prompts prosperity and prosperous people demand more economic freedoms) has received increasing attention.

The evidence keeps accumulating. Yesterday's WSJ included the Heritage-WSJ 2010 Index of Economic Freedom rankings. There is more than one way to create an index, but the results (general rankings) are fairly robust.

This year's ranking has the UK at #11 and the US at #8. But of the 179 countries ranked, but eight of the top 11 have been significantly influenced by British institutions. Yes, British colonialism had a dark side, but Hong Kong, Singapore, Australia, New Zealand, Ireland, Canada, the US (seven of the top eight) were able to send the colonialists home and build relatively free and prosperous societies on the foundations they left behind.

Friday, January 15, 2010

Nice place to visit

As many as eighty cities can now get new streetcars. Read about it here.

Where to start? One size never fits all. And there are no cost-benefit studies that suggest these modes are a good idea. That was 100 years ago.

All these new streetcars would be in the service of "livability." But do we expect that livability can be scripted via Washington (or any other) politics?

On the positive side, there has been some discussion in recent days about becoming more like Europe. Well it's a nice place to visit.


Re life in Europe, I just found this link at Cafe Hayek.


Clive Crook reflects on US-Europe comparisons. In passing, he says that the mostly one-way migration (from Europe to the U.S.) is "a mystery"

Thursday, January 14, 2010

An old confusion

The Efficient Markets Hypothesis (EMH) is a pretty good conversation starter. Equilibrium requires that we somehow get to equilibrium. No $20 bills laying around sidewalks means that some are (have been) busy snatching them up.

So it is with the risk-return trade-off. It describes an equilibrium across financial markets. But very interesting things transpire as we move towards the equilibrium. So moving along the trade-off curve is one thing, but moving towards it is quite another.

Writing in the Jan 18 New Yorker, Malcolm Gladwell ("The sure thing: How entrepreneurs really succeed" -- partly gated) chooses to describe entrepreneurs (including Ted Turner and Hank Paulson) who have made a (financial) killing as "predators". That may be an unfortunate choice of words in these times. Many in politics and involved in popular discourse live in a zero-sum universe and associate wealth with theft. Do we call those who first see $20 bills laying around "predators"?

Gladwell's review is worth reading. If only we could live with two ideas at once: equilibrium is an interesting mental gadget, but it should not pull us away from the interesting discussions of how in the world we might ever get anywhere near it. In fact, the equilibrium idea and the story of the forces in play in diseqiulibrium cannot be separated.

You cannot make this up

I am no fan of the War on Drugs, the 1970s, Richard Nixon or Elvis Presley. But put them all together and you get this hilarious story. You've seen the photo, now enjoy the rest of story.

Tuesday, January 12, 2010

Free lunch anyone?

The Jan 8 WSJ included "Clean Energy Sources: Sun, Wind and Subsidies ... As Governments Increase Spending and Support for Renewable ower, Even Fans Wonder If Aid Could Be More Efficient" Read it and look at the graphic that compares "the costs of producing energy before subsidies, per megawatt hour" Coal and natural gas come in at $50, wind goes as high as double that, offshore wind goes as high as four times, solar much more, and so on.

Prof Andrew Morriss sums it up nicely when he writes:

If you got an email offering you the chance to invest in a business that would create new profitable industries, employ millions of people, reduce energy consumption without reducing quality of life, and improve environmental quality, would you be skeptical? And if the email went on to claim that the technologies to do all this exist now and could save existing businesses billions of dollars in just a few years by reducing waste and energy use, would you wonder why no one was already implementing all these “common sense” ideas? If the email went on to promise that you could do this all at no risk by investing borrowed money, you’d likely be reaching for the delete key.

If we substitute “the federal government” or “the United Nations Environment Programme” or “the European Union” for “you” and change the email to a proposed law, however, we discover that politicians from Washington to Brussels are embracing measures to “green” the economy and create “green jobs” with an almost religious fervor, despite weak empirical support for these proposals. The Obama administration included billions of spending and tax incentives for green initiatives in its budget, and last spring’s “stimulus” bill poured $62 billion in transfers plus $20 billion in tax cuts into “green initiatives.”

The favorite narrative of President Obama's fans is that he is intelligent and sophisticated. But this is not rocket science. The free lunch that he (and many others) promise is an old fashioned political scam. Among Republicans, many (including Schwarzenegger) peddle the same nonsense. But Governor Arnold does not claim to be an Ivy League sophisticate.

Are these the sorts of policies (and policy makers) that will help us avoid stagflation when the bills come due? For their sake (and everyone elses) I can only hope so.

Thursday, January 07, 2010

Institutions trump policies

Back when I first took undergrad economics, there was "micro" and "macro". And since then there has been much work to try to integrate these. But the original Keynes denies the workings of the price system. Robert Higgs explains how this is so in this delightful essay.

Read it and see how and why the Keynsian policies being mounted to make things better are most likely to make things worse. Recovery will, therefore, be in spite of policies than because of them.

But that same debate is still going on re New Deal policies. That ground is covered here, among other places.

The famous cover graphic of Charles I. Jones textbook suggests that we will somehow revert to the same growth path. Institutions trump policies.

Wednesday, January 06, 2010

On the case

Clifford Winston is not impressed with anit-trust policy (as implmeneted by Democrats or Republicans).

The legally sanctioned NCAA cartel has been much discussed and derided. Even the hit movie and book The Blind Side shows the NCAA cops on their silly mission.

The myth of amateur college sports is widely seen as a joke, but the hypocrisy of high-minded college athletics PR is widely accepted. Now Forbes reports the market valuation of the various "amateur" footbal programs.

Here is a situation where the "compassionate" among us have grounds for complaining about the exploitation of the players. To be fair, it should be noted that Congress and the President are on the case. They want a football championship playoff to replace the BCS Bowls.

Monday, January 04, 2010

The best and the brightest

In the Feb 2010 Reason (apparently not yet online), Matt Welch writes about "More Than Zero ... Anyone who has expended energy arguing for free trade, market competition, and the open exchange of ideas has repeatedly encountered the same obstacle: zero-sum assumptions misapplied to dynamic nonlinear phenomena. ..."

In California, politicians and public sector unions help each other and government is now very expensive. The WSJ (Jan 2-3) reports that "The Golden State starts the year another $6 billion in arrears despite a large income and sales hike last year." And there were some cuts, including to the budgets of the UC system.

Meanwhile, from back at the old school, we get this report from the New Yorker's Tad Friend. "All morning at Pauley, people proposed direct actions. A student facilitator summarized each idea on a projection screen: 'rolling strikes'; 'nationalize all universities'; 'socialist revolution'; 'a tent city in Sacramento'; 'create a shadow Board of Regents'; 'occupy Wells Fargo bank downtown Oakland'; 'strike in March'; 'act now f**k March'; and 'capitalism is bad.'

To be sure, the story highlighted the efforts of Prof Ananya Roy to moderate the crazies. But nowhere is anyone cited as pointing to Sacramento politics. The protestors revert to the romance of class warfare, but their predicament was created by the redistributionists who are their natural allies.

It's very simple and all the people cited in Tad Friend's piece are supposed to be among the brightest students and professors we have.

Saturday, January 02, 2010

Panic mode and poor analogies

Today's WSJ, includes Nick Gillespie's "Don't Fear the 2010s" which tours the last decade's fears and phobias (Y2K, "peak oil", avian flu, etc.). Gillespie includes a reference to John Mueller's comparison of an American's odds of dying at the hands of a terrorist (outside a war zone) with the odds of dying in an auto accident. The latter is 1,000 times greater. We seem not to have things in perspective.

Yet, this well worn analogy is weak. The trade-offs involving auto use and auto safety are more or less understood and freely chosen. And most of us have experienced years of vastly improved auto safety (steering columns used to impale drivers in a head-on collision). Many people are not so sure that the terrorist threat is trending in a benign direction. It is one thing to be in a "game" against a well understood system (autos and highways); it is quite another to be in a "game" with fanatics who do occasionally score big hits against civilian populations.

One can poke at any analogy. And hysteria is easily incited; some people in politics make their living this way. The long term growth in the size and scope of governments is a fact of life and will not subside until we see the panic mode for what it is.