My Visa Credit Line Just Increased
By Chris | October 12, 2008
By 25%. I wouldn’t know we were in a “credit crunch” if I wasn’t reading the news. About 3 weeks ago Alex Tabarrok wrote a post pointing to evidence that consumer, industrial, and real estate loans are at all time highs. While these numbers don’t include the latest data, housing prices have been sliding for quite some time now. Shouldn’t the credit markets have contracted over the last year?
Financial institutions are certainly spooked. Plummeting short-term treasury yields indicate that investors are seeking the safety of short-term government bonds. Overnight LIBOR rates have oscillated violently and the market for commercial paper has dried up while overnight rates have doubled. This Economist article does a good job describing the extent of the crisis:
Almost every country’s banking system is stricken with three interrelated problems: having taken huge losses, the banks need capital; because they cannot borrow in the longer-term paper markets, they are short of the funds they need to finance the share of their assets not covered by their deposits; and because the short-term money markets are closed, the banks are cut off from their main source of liquidity.
The decline in housing prices has left a lot of financial institutions insolvent and short of capital. It is not surprising that it has become more expensive for corporations and municipalities to access credit. I think the Federal Reserve has taken the right steps by pumping money into the financial system. However, I strongly opposed the Paulson Plan.
The Paulson Plan attempts to solve the current credit crunch by paying financial institutions more for MBS than their current market price. By purchasing these toxic assets, the Treasury hopes to recaptialize financial institutions and decrease their need for capital. I don’t like the plan because:
1. The housing market was grossly inflated. In my opinion, the housing bubble was the primary cause of the whole fiasco. The secondary mortgage market made things worse, but ultimately, the whole house of cards was built on the assumption that housing prices would keep rising. We still don’t know how much further housing prices will fall. Authorizing the government to blindly buy MBS does little more than transfer the losses from shareholders to taxpayers (reverse auctions won’t work if the quality of the mortgages is unknown by the government).
2. We need to reduce the bloated financial industry. I remember as an undergraduate finance major hearing that wages in the finance industry had outpaced all other starting occupations. I should have been suspicious. The Paulson Plan saves those institutions which have made the most egregious mistakes. The last thing we want to do is put these dying beasts on life support.
3. It crowds out private investment. Shortages only exist under price controls. Someone is willing to buy subprime mortgages if the price is right. The Paulson Plan encourages troubled institutions to wait to see what they can get from the government before selling their wares on the private market. This will lengthen the recovery process.
4. The Paulson Plan encourages risky behavior in the future. But, we can’t worry about moral hazard at a time like this you say. The entire financial system is on the brink of collapse. You’re wrong. The precedent the government sets right now will influence the actions of future financial institutions. Talk is cheap after the fact. If we want to discourage financial institutions from taking excessive risks, we need to convince them that they will not be bailed out. The only way to do that credibly is by letting them fail in the heat of the moment. It may be costly in the short-run, but it will pay dividends in the long-run.
The Paulson Plan received a lot of support from Economists who felt that we needed to do something to restore confidence in the economy. Others placed their trust in Bernanke’s wisdom. There is a chance that we could be heading into the greatest economic decline since the Great Depression. However, the market is resilient. Banks are still sending out credit card offers and offering poor graduate students more credit. The economy has lost a lot of wealth that never really existed in the first place. It is bound to endure some damage as the housing market comes back down to earth. Bubbles are scary. And, economists don’t understand why they happen. Nevertheless, we must resist the urge to embrace government as the solution to our economy’s woes. Markets are versatile and flexible, but the precedents and regulations we create today will be with us for decades to come.
Topics: Economics, Markets | No Comments »
Spies…Everywhere
By Chris | October 6, 2008
I’m talking about my students. I have 45 of them and I’m still learning their names and faces. They see me around campus and know who I am, but I don’t always recognize them. The other day I was tying my shoe in the library and I heard someone say “see you in class” before running up the stairs. Sometimes they say hi, sometimes they don’t. Regardless, it is a strange feeling to be so visible, and something I hadn’t expected. I find myself feeling the need to be mature whenever I’m on campus. As the semester progresses, I’m sure I’ll get to know all of the students in my class. Until then, I’ll have to act a little more professionally. That’s probably not such a bad thing.
Note: I recently gave my Intermediate Micro class its first test. The average was a 64 and I curved it. It’s tough to know when I’m failing to communicate material effectively and when students aren’t studying enough on their own. I’m tempted to require students to turn in more practice problems, but I hate to penalize the strong students with repetitive problems. Teaching undergraduates requires providing the right incentives…I still need to figure out what those are.
Topics: College, Economics, Education, Updates | 2 Comments »
Nigerian Bailout Satire
By Chris | September 27, 2008
The following letter has been floating around the web. If you have ever received an email from a Nigerian scammer (i.e. if you’ve had email for more than a month) it’s quite funny.
Dear American:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.
I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.
This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.
Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.
Yours Faithfully Minister of Treasury Paulson
I take issue with the insinuation that this whole financial mess is the result of banking deregulation in the 1990’s. But, the piece was too good not to post. The author even intentionally misspelled transaction.
Topics: Economics, Markets | 1 Comment »
Assorted Bailout Thoughts
By Chris | September 26, 2008
I’m not a Macroeconomist. And, I’m conflicted about the Paulson plan. But, given the recent unprecedented events, I figure I should chime in. A few thoughts:
I had a Macroeconomics test today. In our models we assume No Ponzi Schemes. Representative agents aren’t allowed to pay off their debts by borrowing more, and more and more. The current correction in the housing market is an imposition of a No Ponzi Scheme condition.
According to Robert Shiller, housing prices have lost 5 trillion dollars in value since their peak. He argues (in the link above) that more innovative mortgages could have alleviated foreclosures in the housing market. Interesting, but dubious.
A CNN video clip highlighted on The Daily Show put the 700 billion dollar bailout in terms of McDonald’s’ apple pies. According to CNN, 700 billion dollars is equivalent to 2,000 apple pies per American. I take issue with this for two reasons:
- Apple pies are 2 for 1 dollar so you should be able to give 300 million Americans 4,000 of them each.
- The bailout doesn’t cost 700 Billion, we are just authorizing 700 billion dollars to be used to lend to, and purchase equity in, struggling financial institutions. The bailout will still cost a lot of money on net, but it won’t cost 4,000 apple pies per American.
As a renter, I’m quite happy that housing prices are falling. I’m looking forward to getting more bang for my buck when I decide to purchase a home.
What would happen if the government just let these firms fail? Despite the widespread criticism of the Paulson plan, almost everyone agrees that the government needs to do something. Doing nothing risks financial catastrophe. Maybe government inaction is an experiment better tested in Second Life?
My biggest fear from the bailout is that it will irrevocably change America’s relationship with its financial institutions. We can’t socialize costs without eventually socializing profits. More stringent regulations of financial institutions means less innovation and less efficient markets.
And yet, The Economist does its best to alleviate my fears:
Yet predictions of a sea change towards more invasive government are premature. The Depression witnessed a pervasive expansion of the federal government into numerous walks of life, from trucking and railways to farming, out of a broadly shared belief that capitalism had failed utterly. If Mr Paulson and Mr Bernanke have prevented a Depression-like collapse in economic output with their actions these past two weeks, then they may also have prevented a Depression-like backlash against the free market.
Topics: Markets, Political Science | 1 Comment »
Interesting Links
By Chris | September 23, 2008
I’m preoccupied studying for a Macro test, but here are some interesting stories/sites I have come across recently.
Unigo.com: Provides uncensored student reviews of almost every college and university in America. Similar to the Princeton Review, except up-to-date, uncensored, and much more interactive. Prospective college students making a monumental decision are plagued by asymmetric information. Current college students love talking about their schools. Unigo fills a huge need and advertisers pay big bucks to target prospective students. Prediction: It will be a big success.
Polymeme.com: Blog and news aggregator of interesting stories. Someone described it as a “smart person’s Digg.” You won’t find any top 10 lists or iPhone tutorials here. Polymeme uses an algorithm and human editors to select noteworthy pieces from a database of about 25,000 “leading blogs”. And yes, AspiringEconomist.com is one of those blogs.
A Visual Map of U.S. Ancestry. Take a look. It gave me a whole different perspective on the U.S. as a melting pot.
Stephen Dubner asks MBA students how the last week has altered their career plans.
Topics: College, Economics, Web 2.0 | No Comments »
A New Take on Bottled Water
By Chris | September 19, 2008
Bottled water is immensely popular in the United States. And, while bottle labels display gurgling springs and mountain glaciers, most bottle water comes straight from municipal water sources. The two most popular brands of bottled water, Dasani and Aquafina, (owned by Coke and Pepsi respectively) both get their water right from the tap. Sure, they filter the water and cleanse it of any “impurities” but it’s still the same stuff that comes out of your kitchen sink. Bottled water companies have deemphasized this fact…until now. Tap’d is a new brand of bottled water that prides itself on bottling purified New York City tap water. In their own words:
Tap’dNY is a New York City bottled water company with a local twist and knack for honesty. We don’t travel the world from Fiji to France seeking water or offer the usual bottled water gimmicks. We work with NYC’s public water system to source the world’s best tasting tap water, purify it through reverse osmosis and bottle it locally, leaving out ludicrous transportation miles.
We offer an honest and local alternative to thirsty New Yorkers, giving them a smarter choice: to drink their own (award winning) water.
Tap’D has come under a lot of scrutiny for claiming to be an environmentally friendly company. Bottled water is no longer in vogue as the environmentally enlightened have recently become concerned that all of these disposable water bottles are ending up in the landfills. San Fransisco and Seattle recently banned municipal agencies from spending money on bottled water. I personally like tap water and rarely splurge for the bottled stuff. However, when I’m on vacation or late for a basketball game, I have been known to buy a bottle. Bottled water companies aren’t selling only pristine water, they are selling convenience. That’s why I’m skeptical of critics like this one:
Hard to see how [Tap’d] adding more plastic bottles to the landfill can be considered green. If you like local tap water, get a refillable bottle.
However, this criticism is flawed. Just because Tap’d sells water in bottles, doesn’t mean it is increasing the aggregate number of bottles that fill the landfills. Most people aren’t consuming lots of bottled water in their homes. They purchase it because it is a convenient way to get good water when you are away from home. It’s a pain to carry your Nalgene everywhere. Moreover, the market for bottled water has lots of close substitutes. People consuming Tap’d are substituting away from other bottled drinks. If the original drinks were shipped long distances, the switch to Tap’d likely decreases emissions and is a net gain for the environment. While, Tap’d’s cool label and clever marketing may induce some new consumption of bottles, I’d doubt this outweighs the positive benefits from reduced emissions.
Notes:
Snobbery isn’t just for wine enthusiasts, water connoisseurs claim to detect subtle hints in their fine waters. Penn and Teller raise some doubts when they host water tastings in this hilarious video critique of the bottled water industry. Guess which water everyone raves about in the blind taste test? New York City tap water.
Topics: Economics, Markets | 1 Comment »
A Terrible Idea
By Chris | September 19, 2008
The SEC bans the short-selling of financial stocks. This is a sad day. Fear and politics triumph over individual freedom and sound policy.
Arnold Kling offers a primer on short-selling and why stock prices can fall even if no one is “shorting.”
Tyler Cowen notes that investors are still able to short the exchange traded fund XLF. In other words, traders can a short basket of financial companies, they just can’t short any individual companies.
The options markets for these stocks are still operating. It occurred to me that you could still short stocks synthetically by purchasing a put and selling a call. However, if the call is exercised, you would become short the stock…which is illegal. Does anyone know how the options market functions under these conditions?
Topics: Economics, Law, Markets, Uncategorized | 10 Comments »
What’s So Special About Email?
By Chris | September 18, 2008
As you problem know, someone recently hacked into one of Sarah Palin’s Yahoo! email accounts and posted a number of her messages on the web. As I suspected, the “hack” was nothing more than resetting the password on Palin’s account by answering her secret question. Apparently, Governor Palin didn’t consider someone might be able to guess that she met her husband at “Wasilla High.” In my experience, people don’t always use the best discretion when creating secret questions that can unlock their accounts. In college, I was able to gain access to my friend’s email account by guessing that he was born in Seattle, WA. With access to his email account, I was able to gain access to his facebook account. I promptly updated his relationship status and changed his favorite T.V. show to Grey’s Anatomy.
But, what interests me about this story is the uproar over Palin’s insistence on using private email accounts (such as Yahoo!) to communicate with her staffers. From The NYT:
Interviews show that Ms. Palin runs an administration that puts a premium on loyalty and secrecy. The governor and her top officials sometimes use personal e-mail accounts for state business; dozens of e-mail messages obtained by The New York Times show that her staff members studied whether that could allow them to circumvent subpoenas seeking public records.
From The Guardian:
The use of non-government email services to conduct official business has been criticised in the past. Official government communications are required to be preserved under federal law. Without using official communications channels, it remains unclear whether emails from private accounts are being correctly kept.
It seems excessive to require elected representatives to save every email they ever write. Not all email messages should be considered public records. We don’t record every phone conversation made by government officials and enter it into the public record. Why are emails treated differently? The problem arises because email can be used to send messages of lasting importance. Memos, reports, and agreements are all of this nature. However, email is more frequently used for personal and informal communication. What if Palin emails a staffer for fashion advice or asks for tips on how to connect with older voters? There is no public interest in preserving such chit chat. To make the matter worse, state regulations in this matter are quite vague. From Stateline.org:
On one level, rules about how to preserve e-mail for public records have not caught up with the technology. Sunshine laws in 18 states do not refer to e-mail at all, according to the Reporters Committee for Freedom of the Press, an open government advocacy group. Even in states such as Missouri and Texas where laws or regulations explicitly require preserving some official e-mail, decisions on which messages to keep or discard vary by department and are sometimes left to individual employees.
In this light, Palin’s decision to use different email accounts hardly appears insidious. No one wants to be on the record all the time. If we required all email message to be saved, devious politicians would just switch to other methods of communications. There are lots of substitutes. And, after reading the Myth of the Rational Voter, I’ve come to believe that too much transparency can be a bad thing. The best politicians tell the masses what they want to hear while supporting legislation that produces the best results. That becomes tough to do if your email is under constant surveillance.
Topics: Economics, Political Science, Web 2.0 | 1 Comment »
Favorite Lines of the Day
By Chris | September 7, 2008
From Will Wilkinson:
That Palin reminded my of my school teachers is a matter of her acquired manner and the assumptions beneath them, a matter of her Upper-Midwest-sounding accent. I’m from a small town. She’s from a small town! And damn straight: people who study at the University of Idaho (which is, in fact, where my sister is currently studying law) are every bit as smart as all you snide elitist Ivy League cosmoplitans!
I have to agree with Will that Palin is incredibly likable, and not just because she went to my alma matter. She exudes a type of feminine confidence that is familiar and comforting. I’m very much looking forward to her debate with Biden. I’ll have to save for another day a discussion on the economics of school prestige.
Topics: College, Economics, Political Science | 3 Comments »
Are We Running Out of Engineers?
By Chris | September 2, 2008
No, we are not. From something I came across today:
Concerns about the science and engineering job market are not rooted in a classic labor market shortage. The earnings of scientists and engineers are not rising rapidly, relative to other highly educated workers. There are no massive job vacancies in academe, business, or government. If rapidly rising pay is the primary signal of a market shortage, then the United States has a shortfall of CEOs, professional athletes, entertainers, and hedge fund managers, not scientific and engineering specialists.
The number of science and engineering workers in this country has increased at an annual rate of 2.7 percent — which far exceeds the rate of growth of the work force. The number of bachelors and masters graduates in the fields has trended upward. The supply of PhDs in science and engineering has roughly stabilized at about 28,000 per year, more than enough to keep the stock of PhD specialists rising.
If we want the rest of the world to develop, it is unreasonable to expect the United States to be the R&D capital of the world. There are just too many other good minds in the pool of 5.5 billion who don’t call the U.S. home. Nevertheless, I agree with the author that engineers and scientists create positive externalities that deserve more subsidies.
Topics: Economics, Labor Economics | 3 Comments »
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