Thursday, October 23, 2008

The Communist Manifesto

I have read it today, for the first time. I am passingly familiar with some of the theories of communism, having debated quite a bit with a number of leftist anarchists, and had a lecture on Marxism crammed down my throat at high school (thanks Mr. Whipple!)

I am somewhat unimpressed. The argument depends on the existence of conflict between the proletariat and the capitalists, and that industrial economies will erode all distinctions in society until we get to the point where only these two classes exist. The reason these classes exist is because they are the two inputs into production (labor and capital). As anyone can tell you, this is a bit simplistic: there are many different types of labor and capital, which leads to many different classes, all fighting each other for a piece of the pie.

On Regulation in the Financial Markets

Some people have suggested to me that regulation is not neccessarily a good solution just because the private market is failing, like in the mortgage crisis. Regulations can be poory applied, or even gamed, thus meaning more wealth for the financial industry (which is what we are trying to avoid).

Well, don't need to listen to me on whether there was regulation that could improve outcomes. Now the Maestro is saying we should have some more regulation, too.

Greenspan softened his longstanding opposition to many forms of financial market regulation, acknowledging in an exchange with Waxman that he was "partially" wrong in his belief that some trading instruments, specifically credit default swaps, did not need oversight.

Economists are still supporting the buying of preferred shares over the mortgage buy-back, though. Guess you can't win 'em all.

Wednesday, October 22, 2008

Econ Panel Discussion

Panel Discussion on the Current Financial Crisis, Thursday, October23, 2008, 2:00 pm, Lecture Center A-1. Concerned about the currentstate of the US Economy? The Department of Economics invites all toattend an open panel discussion with UIC faculty including: Lawrence Officer, Houston Stokes, Joe Persky, Paul Pieper, George Karras,Nathan Anderson, Robert Chirinko and others. Moderated by JohnMcDonald, Head of Economics. Sponsored by the Economics Club and the Department of Economics.

Rememinder to Real Estate 371 Students (and possibly other Econ Students): Attendance and a short 1 page paper means extra credit! That oughta spruce up your marginal benefit a bit.

I have had Officer as a Professor and studied income inequality a bit with Persky: Both are very intelligent and quite capable of turning complex ideas into simple ideas.

Lawrence Officer's CSPAN appearance can be found here

Sunday, October 19, 2008

Is Europe really looking smart?

Well, some people seem to think so

Problem being, as you can see when you read later in the article, is that Europe is still having many of the same problems that we have.

Saturday, October 18, 2008

An Excellent Line of Thought on HealthCare

See Ezra

The basic idea is that the placebo effect is extremely powerful.

Does that mean we should give everyone placebos? of the commenters hits the nail on the head here:

if this is any example of how the left thinks we are really screwed. No one is suggesting we give people placebos. There is no way to ovecome the liability issue. What it proves is when people are not responsible for the cost and spending smeone elses money even faux treatments will garner positive results.

A patient paying for these drugs would make more accurate and informed decisions. It's detaching consumption from responsibility that is killing our system.

Now, other commenters point out that the "placebo effect" doesn't hold for anything besides pain and low-level depression. One wonders, though, how much health care we get that provides little additional value to the person's quality of life because the marginal cost is very low (since insurance covers it, whatever "it" is).

Hence, the rationale behind high deductible health care plans. People have to actually pay for the less costly treatments they need, but, if something REALLY goes wrong, they'll be covered.

Update: Now guest blogging

On Pulp is taken
The blog will be moving to a separate website, but it's pretty darn interesting. Good insight into the mind of a Chicago-area art lover

Pledging Process...

We're now two weeks into the pledge process here at the Eta Rho chapter of Alpha Kappa Psi. We're on a bit of an accelerated pace...6 weeks instead of the normal 7, since the designated first week meeting became a party for the pledges to get to know the Brothers.

What do our pledges have to do? Well, I'm glad you asked...

They are required to attend two professional, two social, and two philanthropy events. Gotta give back to the community, gotta get to know the Brothers, and gotta learn how to be a good business person. They are responsible for putting on their events...each pledge has been put onto a committee so that the workload can be divvied up.

They also are required to fill out signature books. Hopefully I can get a picture of one...basically, they are little pamphlets that the Pledges have to decorate, and then acquire two signatures from all 40 Brothers in the fraternity. The process is designed to get the pledges in contact with the Brothers, so everyone gets to know each other.

Pledges are also responsible for raising $2000 in total, and to get gifts for their Big Brothers.

It's a stressful 6 week practice...but it's worth it.

And we don't haze ;)

Change We Can Believe In!

Mr. Obama is now outadvertising Senator John McCain nationwide by a ratio of at least four to one, according to CMAG, a service that monitors political advertising. That difference is even larger in several closely contested states.

Apparently, "change" means spamming my television set. Truly, a noble campaign.

Sunday, October 12, 2008

Effective Risk Management

Recently, this video has been making the rounds, causing quite a stir on various internet message boards.

While I fully appreciate the efforts of the author to explain global Climate Change through the lens of risk management, the problem is that risk management is inherently...well...risky?

Risk management involves assigning probabilities to various outcomes and analyzing the cost of different types of failures, plus factoring the all-important "unforeseen" instances. It's not an easy task: if it were, insurance would be a zero profit business and people wouldn't have to go to college to work for Allstate.

Even expert physicists and mathematicians can fail in managing risk effectively

Paulson ends up channeling the Economists, too

Well, this author has it nailed it down pat
They said a wiser course -- the one the Treasury now seems to have come around to -- was for government to rebuild the badly depleted cash levels on bank balance sheets. That would cushion institutions against future losses, giving them the wherewithal to lend again

That's alright, at least something is getting done.

Saturday, October 4, 2008

Channeling the Bulk of Economists...

Alex at MR points out that many noted economists, from both sides of the aisle, do not support the Paulson Plan, which passed after the addition of many sweeteners

But, looking through the links, I see a serious misconception that could kill many ideas, and a fatally flawed assumption that would sink most of the others:

1. Krugman and his ilk appear to be ignoring the significant adverse selection process going on. He suggests that instead of purchasing assets, we should instead focus buy preferred stock. This gives us a permanent equity stake, acts directly on the balance sheet, and should even hurt stockholders. However, it does nothing to actually reveal which banks are exposed to bad debt, and which are solvent. That's the biggest problem we have in the financial sector right now: no one really wants to lend out money to someone who can't pay it back, and you don't know if the other guy can't pay it back if you don't know how many assets he has that are linked to the subprime market.

The Paulson plan, in theory, avoids this by buying up a lot of those assets, and creating a market for others to buy them (follow the leader, so to speak?). We can theoretically make money by paying the "Hold to maturity value." Bankers can't hold these assets to maturity because they have significant problems with upholding certain capital ratios: they will have to sell the bad assets at firesale prices.

That's the misconception

2. Because of that, a lot of economists, like Tyler Cowen, state that we need to figure out which banks are insolvent. The problem is that, even knowing which banks are insolvent won't actually help...hence the need for speed bankruptcy. A bank that goes through "speed bankruptcy" can have a payment plan forced down its throat and can force its creditors to accept it through the force of law, and have it done relatively fast: this means that someone new can take over the business, and market operations can return to normal.

The important bit is the "speed" part. Bankruptcy proceedings usually last a very, very long time, and, with all the complex derivatives, will likely take even longer for a modern bank. If you can't get a speed bankruptcy, we end up totally screwed, like in the LDC debt crisis: people fight for years over who gets what, and, in the meantime, the bank can't get capital. So, operations are hampered, and the economy suffers.

But, even if the "speed" part works, we will still have to wait for the banks to fail...even a failing one can keep itself afloat for a while, since not everyone knows that it is in danger and someone is still going to be do we solve that?

The Paulson plan, for all it's flaws, addresses those two fundamental concerns. It may not do anything, being a drop in an ocean of debt, but it's a lot better than nothing, and a lot better than most alternatives.

Oil prices do not create inflation

So says a new letter from the Fed Bank of San Francisco

Should make sense. Here's some BLS CPI data:

Any influence total inflation seems to have on core inflation seems small at best. Admittedly, this includes food prices as well, but energy prices have been jumping over the past several years, and the chart, to some extent, should account for that.

And Mark Thoma on why we use Core Inflation:
.... this paper finds that predictions of future inflation based upon core measures are more accurate than predictions based upon total inflation.

Hat-tip to Economist's View.

Update on Mid-terms

The Upcoming:

Western History: October 22nd
Law and Economics: October 21st
Real Estate Finance 2: Monday

And the ones that have been taken:
Real Estate 1: 97%
Managerial Finance: 96%

I've noticed a lot more studying among my peers recently. I am not sure whether to attribute this to taking harder classes, or being scared silly about the financial crisis.

In my case, the effect of the second is considerably stronger than the first.

Wednesday, October 1, 2008

Is the deficit "too high" to do the bailout?

Summary at bottom

One of the big arguments I see against the bailout package is that it will just kill us in the long-run: not because of the moral hazard problems, not because it doesn't actually solve the credit crunch, but because the government will have to issue $700 billion in additional debt, which is supposed to be "just too high."

Well, admittedly, there could be some problems with crowding out of investments and interplay with foreign exchange rates, but in terms of actual direct impacts on our standard of living? $700 billion isn't likely to break the bank.

The problem with debt spending is that debts have to eventually be repaid. This means, in the long run, either higher taxes or lower government spending: there is no way around it.

But what cuts will we expect?

Let's assume that we will pay for this $700 billion bailout entirely with ten year treasury bonds. Let's also assume that this massive drop of money instantly causes the market to raise interest rates dramatically, so that we have to pay double the current interest rate: that'd be 7.54%.

What would we end up paying over the next 10 years? Using handy-dandy financial calculators, and assuming semiannual compounding, this becomes a cinch: $50.46 billion per year for the next ten years, or about $168 per American.
But we probably won't pay it all in 10 years. Some of that debt will be paid for with NEW debt...meaning that we will end up paying for this over a longer period of time than just 10 years.
So, let's assume we are paying over the next 60 years. What becomes the payment then? $26.7 billion per year, or a paltry $89 per American.

Now contrast that with a recession: What are going to we lose if we wind up in a recession for even one year? Negative 1% growth is a reasonable estimate, meaning, essentially, 4% of the economy is lost (that's because the economy should be growing at 3%)
4% of $13.794 trillion is approximately $551.8 billion.
But...we're not done. If that GDP growth had occurred in the first place, then we would be growing from THAT level: IE, we would be growing 3% on that $551.8 billion, so we lose another

Over the course of, say, 60 years, how much growth will be losing?
Let's assume 3% growth. Hell, let's assume things go bad and we grow only 2%. How much growth is lost? The answer is a cool $1.77 trillion.

"But," I hear people complain, "the increase in increase rates will hurt the private sector and drive down growth!"
The argument is that by printing more debt, the government crowds out private investment. And perhaps it theory.
Looking at the past 50 years, though, we'd be hardpressed to see the story.

Here's a look at real interest rates on US 10 year bonds since 1953. I made this one myself from:
Misery Index
Federal Reserve Documents

And now let's look at the per-person deficit (not a perfect measure, I know, but better than nothing, right?):

Real Interest Rates did indeed increase with the massive increase of the the first year of Reagan. They then fell, and continued to fall. Even today, with the Bush deficits, treasury rates don't seem to be moving anywhere in a northerly direction. Rather, rates remain relatively low (3.77% for a 10 year bond)

So, government deficits...don't really drive up interest rates. Or at least, I don't see evidence that it's doing so right now, or has in the past. Theoretically, it is possible: the government may just not be putting enough T-bonds on the market yet

-Cost of bailout: $89 per person over the 60 years (that's a high estimate)
-Cost of depression: $2.2 trillion (that's a low estimate_
-Real interest rates don't seem to be driven by government deficits

-Discount rates aren't used in this. Discount rates mean that a dollar in the future isn't worth as much to you as a dollar now. That's not adjusting for inflation, it just means you'd rather have a corvette NOW than 10 years from now. People prefer consuming in the present. If discount rates are used, then bailout looks a lot less attractive, since the $700 billion has to be paid out NOW.
-I am also ignoring that we will probably recoup a large amount of the $700 billion outlay
-I am also ignoring the direct effect on public finances, and looking only at social costs. In the short-term, taking on this debt will mean a lot less flexibility, and it means public finances will be in worse position until the debt is fully paid off (or, rather, the tax revenues from increased production pay off). That means that the "break-even" point for the government is later on than it is for society as a whole