Tyler Cowen writes:
There is a simple model in which the labor theory of value is true. If inputs are homogeneous and constant returns to scale hold, the proportions of labor input will indeed be proportional to price. If not, labor inputs will be reallocated until this proportionality holds (Much ink has been spilled on whether this is what Smith, Ricardo, and others had in mind; it is one way of reading Smith’s deer-beaver-hunting example.)
One problem is that we need labor, capital, and land for production, not just labor. The so-called "transformation problem" tries to square this circle. The simplest response, however, is to give up the labor theory of value.
Another problem is that inputs are heterogenous. They have to be valued in dollar terms, and that requires imputation, a’la Friedrich Wieser, and that in turn requires information from the demand side. Price determines cost of production at least as much as cost of production determines price (Austrians argue that price always determines costs and never the other way around, Ivan).
Compared to Marshallian supply and demand scissors, the labor theory of value is at best awkward and most of the time it is wrong. There are some economic sectors where constant returns to scale hold and thus demand has little influence over market price. But those are special cases, even if some Cambridge-U.K. linked economists promote them as the main show.
Posted in : Economics | Permalink | Comments (0)
Does this make Brad De Long the stupidest man alive?
Yes; $463b + $123b + $114b does equal a $562b deficit.
If you start from a $138 billion surplus.
Just as my head was spinning from reading a bizarrely insulting post claiming that Douglas Holtz-Eakin (DHE) was lying about the Obama health care plan, anon/portly sent me this perplexing post by Brad DeLong. But at least DeLong doesn’t call DHE a ”vile” liar (Krugman did, Ivan).
Let’s start with DHE’s claim that, because of accounting gimmicks, the $138b projected surplus from the health care bill is actually likely to result in an extra $562b deficit over the next 10 years. Notice the difference between those two numbers. Now reread the title of this post. Let’s see how many of you can figure out DeLong’s mistake:
Yep. It’s twue! It’s twue! BUT, DOUG, 463+123+114 DOES NOT EQUAL 562!!!! Has the New York Times no arithmeticians? Has the American Action Forum no calculators? Oh, the problems with writing your op-eds too quickly…
Well, someone is writing posts too quickly. I recall that DeLong once claimed to have 8 arms. Unfortunately, he can only use one brain at a time.
Posted in : Economics | Permalink | Comments (0)
Religion is dangerous:
Over the past 30 years, stampedes have killed at least 7,000 people and injured another 14,000. That’s the conclusion that Edbert Hsu (Johns Hopkins Medical Institutions) and colleagues reached after a painstaking trawl of news reports in the world’s English-language media.
The real toll is probably even higher, of course, but the data were enough to allow Hsu to work out the characteristics of the most lethal stampedes. They found reports on 215 stampedes, of which 49 occurred at sporting events, 25 at musical events, 38 were political and 41 were religious. The rest (totalling 60) were due to a mixed bag of causes and were mostly spontaneous.
And the award for the most lethal type of stampede goes to... religious ones! In simple terms of the number of fatalities per stampede, religious events come out over double that of their closest rival.
The simple comparison is not a very fair, however. Religious stampedes take place in different parts of the world (often in the Middle East, which is the most dangerous place to be in a stampede), often in low income nations (also very dangerous), and often outdoors (slightly more dangerous than indoor stampedes).
But even when you take all this into account, religious stampedes still come out on top of the lethality stakes - but sporting stampedes are so close as to make it a photo finish.
There’s one other factor that contributes to the lethality of a stampede, and that’s the size of the crowd. Unfortunately, Hsu was only able to determine the size of the crowd in 130 cases.
Even taking into account crowd size, religious stampedes are still pretty dangerous. When you look at fatality rate (i.e. deaths per crowd member), they’re 6 times riskier than stampedes at sporting events.
Posted in : Health | Permalink | Comments (0)
Seek the differences with regular business models:
A basic piracy operation requires a minimum eight to twelve militia prepared to stay at sea for extended periods of time, in the hopes of hijacking a passing vessel. Each team requires a minimum of two attack skiffs, weapons, equipment, provisions, fuel and preferably a supply boat. The costs of the operation are usually borne by investors, some of whom may also be pirates.
To be eligible for employment as a pirate, a volunteer should already possess a firearm for use in the operation. For this ‘contribution’, he receives a ‘class A’ share of any profit. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share.
At least 12 other volunteers are recruited as militiamen to provide protection on land of a ship is hijacked, In addition, each member of the pirate team may bring a partner or relative to be part of this land-based force. Militiamen must possess their own weapon, and receive a ‘class B’ share — usually a fixed amount equivalent to approximately US$15,000.
If a ship is successfully hijacked and brought to anchor, the pirates and the militiamen require food, drink, qaad, fresh clothes, cell phones, air time, etc. The captured crew must also be cared for. In most cases, these services are provided by one or more suppliers, who advance the costs in anticipation of reimbursement, with a significant margin of profit, when ransom is eventually paid.
When ransom is received, fixed costs are the first to be paid out. These are typically:
• Reimbursement of supplier(s)
• Financier(s) and/or investor(s): 30% of the ransom
• Local elders: 5 to 10 %of the ransom (anchoring rights)
• Class B shares (approx. $15,000 each): militiamen, interpreters etc.
The remaining sum — the profit — is divided between class-A shareholders.
Posted in : Economics | Permalink | Comments (0)
A few economists write:
Counter to the predictions put forward a year ago by the Administration, when it claimed that "more than 90 percent of the jobs created are likely to be in the private sector," U.S. companies employed 3.9 million fewer workers in January 2010 than they did one year earlier. Public employment bucked the trend, staying constant even as governments contended with sharply reduced tax revenues. While the jobs held by those 22 million public workers helped support many families, the "stimulus" failed to trigger private sector employment growth.
In late 2009, the Congressional Budget office pegged employment gains due to the American Recovery and Reinvestment Act (A.R.R.A.) of 2009 at 600,000 to 1.6 million, while estimating its full cost at $862 billion.
This implies a price tag, at the median estimate, of about $800,000 per job. These forecast job gains are not permanent, but temporary. The Administration’s January 2009 forecast was that the A.R.R.A. was needed to reduce the path of unemployment for five years, when the unemployment rate - if we did nothing - would decline to the level projected with the "stimulus." Using this five-year time horizon projects annual costs of approximately $160,000 per job.
That’s a rich bonus payment. The system is borrowing heavily to finance it. Deficits last year and this are running at 10 percent of GDP, easily the largest in post-WWII U.S. history. They are projected by CBO to remain at three percent of GDP in 2020 - when over 3% of GDP will be devoted to simply paying interest on the national debt.
Posted in : General | Permalink | Comments (0)
We need small banks that are allowed to fail if they mess things up:
As a serious financial reform debate heats up in the Senate, defenders of the new banking status quo in the United States today – more highly concentrated than before 2008, with six megabanks implicitly deemed “too big to fail” – often lead with the argument, “Canada has only five big banks and there was no crisis.” The implication is clear: We should embrace concentrated megabanks and even go further down the route; if the Canadians can do it safely, so can we.
It is true that during 2008 four of all Canada’s major banks managed to earn a profit, all five were profitable in 2009, and none required an explicit taxpayer bailout. In fact, there were no bank collapses in Canada even during the Great Depression, and in recent years there have only been two small bank failures in the entire country.
Advocates for a Canadian-type banking system argue this success is the outcome of industry structure and strong regulation. The CEOs of Canada’s five banks work literally within a few hundred meters of each other in downtown Toronto. This makes it easy to monitor banks. They also have smart-sounding requirements imposed by the government: if you take out a loan over 80% of a home’s value, then you must take out mortgage insurance. The banks were required to keep at least 7% tier one capital, and they had a leverage restriction so that total assets relative to equity (and capital) was limited.
But is it really true that such constraints necessarily make banks safer, even in Canada?
Despite supposedly tougher regulation and similar leverage limits on paper, Canadian banks were actually significantly more leveraged – and therefore more risky – than well-run American commercial banks. For example JP Morgan was 13 times leveraged at the end of 2008, and Wells Fargo was 11 times leveraged. Canada’s five largest banks averaged 19 times leveraged, with the largest bank, Royal Bank of Canada, 23 times leveraged. It is a similar story for tier one capital (with a higher number being safer): JP Morgan had 10.9% percent at end 2008 while Royal Bank of Canada had just 9% percent. JP Morgan and other US banks also typically had more tangible common equity – another measure of the buffer against losses – than did Canadian Banks.
If Canadian banks were more leveraged and less capitalized, did something else make their assets safer? The answer is yes – guarantees provided by the government of Canada. Today over half of Canadian mortgages are effectively guaranteed by the government, with banks paying a low price to insure the mortgages. Virtually all mortgages where the loan to value ratio is greater than 80% are guaranteed indirectly or directly by the Canadian Mortgage and Housing Corporation (i.e., the government takes the risk of the riskiest assets – nice deal if you can get it). The system works well for banks; they originate mortgages, then pass on the risk to government agencies. The US, of course, had Fannie Mae and Freddie Mac, but lending standards slipped and those agencies could not resist a plunge into assets more risky than prime mortgages. Let’s see how long Canada resists that temptation.
The other systemic strength of the Canadian system is camaraderie between the regulators, the Bank of Canada, and the individual banks. This oligopoly means banks can make profits in rough times – they can charge higher prices to customers and can raise funds more cheaply, in part due to the knowledge that no politician would dare bankrupt them. During the height of the crisis in February 2009, the CEO of Toronto Dominion Bank brazenly pitched investors: “Maybe not explicitly, but what are the chances that TD Bank is not going to be bailed out if it did something stupid?” In other words: don’t bother looking at how dumb or smart we are, the Canadian government is there to make sure creditors never lose a cent. With such ready access to taxpayer bailouts, Canadian banks need little capital, they naturally make large profit margins, and they can raise money even if they act badly.
Proposing a Canadian-type model to create stability in the U.S. is, to be blunt, nonsense. We would need to merge our banks into even fewer banking giants, and then re-inflate Fannie Mae and Freddie Mac to guarantee some of the riskiest parts of the bank’s portfolios. With our handful of new “hyper megabanks”, we’d have to count on our political system to prevent our banks from going wild; Canada may be able to do this (in our view, the jury is still out), but what are the odds this would work in Washington? This would require an enormous leap of faith in our regulatory system immediately after it managed to fail repeatedly and spectacularly over thirty years (see 13 Bankers, out next week, for the awful details). Who can be confident our powerful corporate lobbies, hired politicians, and captured regulators can become so Canadian so soon?
The stakes would be even greater with these mega banks. When such large banks collapse they can take down the finances of entire nations. We don’t need to look far to see how “Canadian-type systems” eventually fail. Britain’s largest bank, the Royal Bank of Scotland, grew to control assets equal to around 1.7 times British GDP before it spectacularly fell apart and required near complete nationalization in 2008-09. In Ireland the three largest banks’ assets combined reached roughly 2.5 times GDP before they collapsed. Today all the major Canadian banks have ambitious international expansion plans – let’s see how long their historically safe system survives the new hubris of its managers.
There’s no doubt that during the coming months many people will advocate some form of a Canadian banking system in America. Our largest banks and their lobbyists on Capitol Hill will love the idea. For some desperate politicians it may become a miracle drug: a new “safer” system that will lend to homeowners and provide financing to Washington, while permitting politicians and regulators to avoid tough steps. Let’s hope this elixir doesn’t gain traction; smaller banks with a lot more capital – and able to fail when they act stupid – are what U.S. citizens and taxpayers really need.
Posted in : Economics | Permalink | Comments (0)
Why libertarians cannot support Israels policy towards Jerusalem:
Israeli Prime Minister Binyamin Netanyahu told the American Israel Public Affairs Council on Monday that "Jerusalem is not a settlement." He continued that the historical connection between the Jewish people and the land of Israel cannot be denied. He added that neither could the historical connection between the Jewish people and Jerusalem. He insisted, "The Jewish people were building Jerusalem 3,000 years ago and the Jewish people are building Jerusalem today." He said, "Jerusalem is not a settlement. It is our capital." He told his applauding audience of 7500 that he was simply following the policies of all Israeli governments since the 1967 conquest of Jerusalem in the Six Day War.
Netanyahu mixed together Romantic-nationalist cliches with a series of historically false assertions. But even more important was everything he left out of the history, and his citation of his warped and inaccurate history instead of considering laws, rights or common human decency toward others not of his ethnic group.
So here are the reasons that Netanyahu is profoundly wrong, and East Jerusalem does not belong to him.
1. In international law, East Jerusalem is occupied territory, as are the parts of the West Bank that Israel unilaterally annexed to its district of Jerusalem. The Fourth Geneva Convention of 1949 and the Hague Regulations of 1907 forbid occupying powers to alter the lifeways of civilians who are occupied, and forbid the settling of people from the occupiers’ country in the occupied territory. Israel’s expulsion of Palestinians from their homes in East Jerusalem, its usurpation of Palestinian property there, and its settling of Israelis on Palestinian land are all gross violations of international law. Israeli claims that they are not occupying Palestinians because the Palestinians have no state are cruel and tautological. Israeli claims that they are building on empty territory are laughable. My back yard is empty, but that does not give Netanyahu the right to put up an apartment complex on it. (my emphasis, Ivan)
2. Israeli governments have not in fact been united or consistent about what to do with East Jerusalem and the West Bank, contrary to what Netanyahu says. The Galili Plan for settlements in the West Bank was adopted only in 1973. Prime Minister Yitzhak Rabin gave undertakings as part of the Oslo Peace Process to withdraw from Palestinian territory and grant Palestinians a state, promises for which he was assassinated by the Israeli far right (elements of which are now supporting Netanyahu’s government). As late as 2000, then Prime Minister Ehud Barak claims that he gave oral assurances that Palestinians could have almost all of the West Bank and could have some arrangement by which East Jerusalem could be its capital. Netanyahu tried to give the impression that far rightwing Likud policy on East Jerusalem and the West Bank has been shared by all previous Israeli governments, but this is simply not true.
3. Romantic nationalism imagines a "people" as eternal and as having an eternal connection with a specific piece of land. This way of thinking is fantastic and mythological. Peoples are formed and change and sometimes cease to be, though they might have descendants who abandoned that religion or ethnicity or language. Human beings have moved all around and are not directly tied to any territory in an exclusive way, since many groups have lived on most pieces of land. (my emphasis, Ivan) Jerusalem was not founded by Jews, i.e. adherents of the Jewish religion. It was founded between 3000 BCE and 2600 BCE by a West Semitic people or possibly the Canaanites, the common ancestors of Palestinians, Lebanese, many Syrians and Jordanians, and many Jews. But when it was founded Jews did not exist.
4. Jerusalem was founded in honor of the ancient god Shalem. It does not mean City of Peace but rather ’built-up place of Shalem."
5. The "Jewish people" were not building Jerusalem 3000 years ago, i.e. 1000 BCE. First of all, it is not clear when exactly Judaism as a religion centered on the worship of the one God took firm form. It appears to have been a late development since no evidence of worship of anything but ordinary Canaanite deities has been found in archeological sites through 1000 BCE. There was no invasion of geographical Palestine from Egypt by former slaves in the 1200s BCE. The pyramids had been built much earlier and had not used slave labor. The chronicle of the events of the reign of Ramses II on the wall in Luxor does not know about any major slave revolts or flights by same into the Sinai peninsula. Egyptian sources never heard of Moses or the 12 plagues & etc. Jews and Judaism emerged from a certain social class of Canaanites over a period of centuries inside Palestine.
6. Jerusalem not only was not being built by the likely then non-existent "Jewish people" in 1000 BCE, but Jerusalem probably was not even inhabited at that point in history. Jerusalem appears to have been abandoned between 1000 BCE and 900 BCE, the traditional dates for the united kingdom under David and Solomon. So Jerusalem was not ’the city of David,’ since there was no city when he is said to have lived. No sign of magnificent palaces or great states has been found in the archeology of this period, and the Assyrian tablets, which recorded even minor events throughout the Middle East, such as the actions of Arab queens, don’t know about any great kingdom of David and Solomon in geographical Palestine.
7. Since archeology does not show the existence of a Jewish kingdom or kingdoms in the so-called First Temple Period, it is not clear when exactly the Jewish people would have ruled Jerusalem except for the Hasmonean Kingdom. The Assyrians conquered Jerusalem in 722. The Babylonians took it in 597 and ruled it until they were themselves conquered in 539 BCE by the Achaemenids of ancient Iran, who ruled Jerusalem until Alexander the Great took the Levant in the 330s BCE. Alexander’s descendants, the Ptolemies ruled Jerusalem until 198 when Alexander’s other descendants, the Seleucids, took the city. With the Maccabean Revolt in 168 BCE, the Jewish Hasmonean kingdom did rule Jerusalem until 37 BCE, though Antigonus II Mattathias, the last Hasmonean, only took over Jerusalem with the help of the Parthian dynasty in 40 BCE. Herod ruled 37 BCE until the Romans conquered what they called Palestine in 6 CE (CE= ’Common Era’ or what Christians call AD). The Romans and then the Eastern Roman Empire of Byzantium ruled Jerusalem from 6 CE until 614 CE when the Iranian Sasanian Empire Conquered it, ruling until 629 CE when the Byzantines took it back.
The Muslims conquered Jerusalem in 638 and ruled it until 1099 when the Crusaders conquered it. The Crusaders killed or expelled Jews and Muslims from the city. The Muslims under Saladin took it back in 1187 CE and allowed Jews to return, and Muslims ruled it until the end of World War I, or altogether for about 1192 years.
Adherents of Judaism did not found Jerusalem. It existed for perhaps 2700 years before anything we might recognize as Judaism arose. Jewish rule may have been no longer than 170 years or so, i.e., the kingdom of the Hasmoneans.
8. Therefore if historical building of Jerusalem and historical connection with Jerusalem establishes sovereignty over it as Netanyahu claims, here are the groups that have the greatest claim to the city:
A. The Muslims, who ruled it and built it over 1191 years.
B. The Egyptians, who ruled it as a vassal state for several hundred years in the second millennium BCE.
C. The Italians, who ruled it about 444 years until the fall of the Roman Empire in 450 CE.
D. The Iranians, who ruled it for 205 years under the Achaemenids, for three years under the Parthians (insofar as the last Hasmonean was actually their vassal), and for 15 years under the Sasanids.
E. The Greeks, who ruled it for over 160 years if we count the Ptolemys and Seleucids as Greek. If we count them as Egyptians and Syrians, that would increase the Egyptian claim and introduce a Syrian one.
F. The successor states to the Byzantines, which could be either Greece or Turkey, who ruled it 188 years, though if we consider the heir to be Greece and add in the time the Hellenistic Greek dynasties ruled it, that would give Greece nearly 350 years as ruler of Jerusalem.
G. There is an Iraqi claim to Jerusalem based on the Assyrian and Babylonian conquests, as well as perhaps the rule of the Ayyubids (Saladin’s dynasty), who were Kurds from Iraq.
9. Of course, Jews are historically connected to Jerusalem by the Temple, whenever that connection is dated to. But that link mostly was pursued when Jews were not in political control of the city, under Iranian, Greek and Roman rule. It cannot therefore be deployed to make a demand for political control of the whole city.
10. The Jews of Jerusalem and the rest of Palestine did not for the most part leave after the failure of the Bar Kochba revolt against the Romans in 136 CE. They continued to live there and to farm in Palestine under Roman rule and then Byzantine. They gradually converted to Christianity. After 638 CE all but 10 percent gradually converted to Islam. The present-day Palestinians are the descendants of the ancient Jews and have every right to live where their ancestors have lived for centuries.
Posted in : Foreign Affairs | Permalink | Comments (0)
He makes this amazing claim here. The Economist disagrees:
There is something odd about central bankers denying any responsibility at all for long-term rates, which are, in principle, based partly on an assessment of a stream of short-term rates. Nor is it clear that low short-term rates were as irrelevant as Messrs Bernanke and Greenspan suggest. Jeremy Stein of Harvard University, a discussant of Mr Greenspan’s Brookings paper, points out that low policy rates may have mattered a great deal for income-constrained borrowers. He points out that adjustable-rate mortgages were used much more in expensive cities, a trend that became more pronounced as the fund rates fell.
By looking only at the effect of monetary policy on house prices, Messrs Bernanke and Greenspan also take too narrow a view of the potential effect of low policy rates. Several economists have argued convincingly, for instance, that low policy rates fuelled broader leverage growth in securitised markets.
Monetary policy may be a blunt tool to deal with asset bubbles. But that does not mean it is irrelevant. Interestingly, one American central banker has a more nuanced view, arguing that “in the current episode, higher short-term interest rates probably would have restrained the demand for housing by raising mortgage interest rates…In addition, tighter monetary policy may be associated with reduced leverage and slower credit growth.” That was Janet Yellen, president of the San Francisco Fed, who is likely to be Mr Bernanke’s new vice-chairman. With luck, she will prompt her boss to have a rethink.
Posted in : Economics | Permalink | Comments (0)
The Economist magazine, which I’ve read for 35 years, was my guide to the neoliberal revolution. By the end of the 1980s I understood that it was a global phenomenon and that it was bi-partisan. This inoculated me against Krugman’s conspiracy theories that the Reagan revolution was all a right-wing Republican plot to grab Southern whites by playing the race card. Even if true of the US, it doesn’t explain why the same policy trends occurred in 200 out of 204 countries. And then there is Krugman’s argument that economies often did not do better after the free market reforms. From The Economist I learned that you have to look at things cross-sectionally. Almost everywhere in the world economic growth slowed after 1973. The important point is that growth slowed much more in countries that did little reform, and much less in the more free market economies. It doesn’t matter whether Chile grew faster or slower after 1973, what matters is that after 1973 Chile became the most successful economy in Latin America.
Posted in : Economics | Permalink | Comments (0)
Chris Dillow on the Frankenstein syndrome:
The demands that mephedrone be banned, following the deaths of two young men after taking it, remind me of last week’s story of Peter Chapman, the rapist who murdered Ashleigh Hall. Both are examples of a Frankenstein syndrome - a disproportionate fear of new technologies relative to old ones.
The thing is, many more young people die from taking alcohol than mephedrone - 5000 a year on one estimate. If we were serious about protecting youngsters from dangerous drugs, we would clamp down more upon alcohol. But we don’t. One reason for this is that alcohol is a known quantity and we have become accustomed to deaths from its misuse. Mephedrone is relatively unknown and unfamiliar, so it is more feared even if it is, objectively, speaking, no more dangerous than other substances.
Which brings me to a link with Peter Chapman. He has been called the “Facebook killer” because he used Facebook to contact his victim, thus kicking off a panic about the safety of social networking sites.
But, Chapman could equally be called the “Ford Mondeo killer” or the “Murderer who killed because of police incompetence.”
Why bring Facebook into it? Why not have a moral panic about Ford Mondeos?
It’s because Facebook is relatively new and unfamiliar, at least to trash papers’ target audience. So it’s easier to have a moral panic about it than about Ford Mondeos.
Now, if these were just two isolated cases, we could ignore them. But I fear they might not be.
Posted in : Technology | Permalink | Comments (0)
Andrew Ross Sorkin reports:
Almost two years ago to the day, a team of officials from the Securities and Exchange Commission and the Federal Reserve Bank of New York quietly moved into the headquarters of Lehman Brothers. They were provided desks, phones, computers — and access to all of Lehman’s books and records. At any given moment, there were as many as a dozen government officials buzzing around Lehman’s offices.
A report from Lehman’s bankruptcy examiner, Anton R. Valukas, revealed the firm was taking a creative approach to valuations and accounting.
These officials, whose work was kept under wraps at the time, were assigned by Timothy Geithner, then president of the New York Fed, and Christopher Cox, then the S.E.C. chairman, to monitor Lehman in light of the near collapse of Bear Stearns.
Similar teams from the S.E.C. and the Fed moved into the offices of Goldman Sachs, Morgan Stanley, Merrill Lynch and others.
There were plenty of reasons to send in these SWAT teams. With investors on edge about the veracity of valuations on Wall Street — and with hedge fund managers like David Einhorn publicly questioning Lehman’s numbers — the government examiners rifled through Lehman’s accounts. They also interviewed executives about various decisions, and previewed the quarterly earnings reports.
Yet now, two years later, we learn through a 2,200-page report from Lehman’s bankruptcy examiner, Anton R. Valukas, that the firm was taking a creative approach with its valuations and accounting.
One crucial move was to shift assets off its books at the end of each quarter in exchange for cash through a clever accounting maneuver, called Repo 105, to make its leverage levels look lower than they were. Then they would bring the assets back onto its balance sheet days after issuing its earnings report.
And where was the government while all this “materially misleading” accounting was going on? In the vernacular of teenage instant messaging, let’s just say they had a vantage point as good as POS (parent over shoulder).
The new mystery is why it took this long for anyone to raise a red flag. “Even though Lehman dressed up its accounts for the great unwashed public, it did not try to fool the authorities,” Yves Smith, the author of “ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism,” wrote on her blog last week. “Its game-playing was in full view.”
Indeed, it now appears that the federal government itself either didn’t appreciate the significance of what it saw (we’ve seen that movie before with regulators waving off tips about Bernard L. Madoff). Or perhaps they did appreciate the significance and blessed the now-suspect accounting anyway.
Oddly, when the bankruptcy examiner asked Matthew Eichner of the S.E.C., who was involved with supervising firms like Lehman, whether the agency focused on leverage levels, he answered that “knowledge of the volumes of Repo 105 transactions would not have signaled to them ‘that something was terribly wrong,’ ” according to the examiner’s report.
There’s a lot riding on the government’s oversight of these accounting shenanigans. If Lehman Brothers executives are sued civilly or prosecuted criminally, they may actually have a powerful defense: a raft of government officials from the S.E.C. and Fed vetted virtually everything they did.
(...) Lehman’s shell game didn’t come to light until June 2008, when a lower-level executive named Matthew Lee sent a letter to management raising a host of questions about the firm’s practices. (By the way, the S.E.C. and Fed were still working inside the building at this point.)
Posted in : Economics | Permalink | Comments (0)
In many ways it is misleading to speak of "capitalism" as though this had been a new and altogether different system which suddenly came into being toward the end of the eighteenth century; we use this term here because it is the most familiar name, but only with great reluctance, since with its modern connotations it is itself largely a creation of that socialist interpretation of economic history with which we are concerned.
Posted in : Liberalism | Permalink | Comments (1)
Not in need of more speculation, but of more speculators:
Greek prime minister George Papandreou demands a crackdown on credit default swaps. It’s easy to see why politicians bring up wicked speculators whenever some economic hardship shows up. It’s an old game to put the blame on others to deflect it from yourself.
Middlemen have been successfully pilloried for millennia. Ancient Athenians, faced with rising prices, hauled grain merchants to court some 2400 years ago. Could it be that throughout history speculators have messed up markets, hoarding wheat in ancient Athens and trading dodgy derivatives on post-modern Greek debt?
Indeed, they can become a problem if there are only a few of them.
The word “speculator” sounds derogatory, but it has a neutral, technical meaning. In commodity futures exchanges – the oldest and best established derivatives markets – a speculator is a trader who is neither a producer nor a user of the commodity in question. Commodity producers and consumers protect themselves against price fluctuations with futures contracts that specify delivery at a certain price and date.
By contrast, speculators trade the contracts as an activity in itself. They typically do not deliver or take delivery of the physical commodity. These specialized middlemen mediate between future buyers and sellers, playing an essential role in meeting the needs of both sides.
Futures markets work smoothly and effectively because there is a large number of so-called “speculators.” If there were only one speculator, he could exploit people who need to buy or sell wheat—as would a group of speculators who act together. But there are many; they compete with each other and can’t fix the price.
The problem with the grain market in ancient Athens was that there were relatively few merchants. Regulators had the disastrous notion that grain importers should combine and form a cartel to buy grain cheaply. That caused higher prices. “Rather than blaming the regulators for these actions, the Athenians prosecuted the grain merchants for hoarding.”
At the trial, the prosecutor thus described the evil speculative acts: “For just when you find yourselves worse off for [grain], these persons snap it up and refuse to sell it, in order to prevent our disputing the price: we are to be glad enough if we come away from them with a purchase made at any price, however high.”
Had there been a large number of independently acting merchants, Athenians could have shopped for the best price. But taxes, heavy regulations and threats like this trial – which may have resulted in the merchants being put to death – discouraged the grain trade.
Consider the current complaint about credit default swaps on Greek debt. The claim is that a group of traders colluded to buy the instruments – a type of credit insurance – thereby pushing up the price of CDS and causing rates on Greek bonds to rise. The traders then sold off and pocketed the profit, leaving Greece with a heavier interest burden. That’s the allegation.
An early investigation found no sign of speculation on Greek debt. But leave that aside. For traders to collude, there has to be a small number of them. If that is the case, then what’s needed is more traders in CDS. They will bet against each other and not have the power to manipulate prices.
Then again, politicians need scapegoats. They can’t very well say, we dug the economy into a hole by spending money like it’s free and that’s why we’re paying high interest on our bonds.
Posted in : Economics | Permalink | Comments (0)
It’s all relative of course:
Mark Thoma recently linked to a Gavin Kennedy post that argued Adam Smith did not favor laissez-faire. I don’t agree. The evidence cited was a one page list of government interventions that Smith favored. The US, by contrast, has enough government interventions to fill a New York City phone book, if not a small library. And the US is regarded by the Europeans as “unbridled capitalism.” Even Hong Kong intervenes in far more ways than Adam Smith contemplated. Of course Smith was not an anarchist, he did favor some government intervention in the economy. But relative to any real world economy, his policies views were extremely laissez-faire.
I see this as a common cognitive bias. The Gavin Kennedy list posted by Thoma certainly looks impressive, but when you think more deeply about the issue it is a trivial set of policies. I’m reminded of what happens when I discuss Singapore, which usually ranks number two in the world in lists of economic freedom. People will often respond by telling me about all the ways the Singapore government intervenes. My response is “so what?” They could intervene in a 1000 different ways and still be vastly more laissez-faire than the US government. Laissez-faire is a relative concept, and always has been. I’ve read The Wealth of Nations, and Adam Smith is clearly a pragmatic libertarian.
Posted in : Economics | Permalink | Comments (6)
Why we need climate sceptics:
As everyone knows, Professor Phil Jones, the director of the climatic research unit at the University of East Anglia, has sent some unwise emails. In one he boasted of using statistical “tricks” to hide declines in global temperatures, in another he advocated the deletion of certain data, and in yet another he proposed a boycott of journals that published inconvenient papers. Consequently Professor Jones has had to step aside from his directorship while his conduct is investigated.
But much of the criticism directed against Jones is naïve. What do people suppose scientists are? Disinterested followers after truth?
The great myth about scientists is the one propagated by uncritical readers of Karl Popper’s 1934 book The Logic of Scientific Discovery. There Popper argued that scientific statements are only provisional and that science progresses by their falsification. Hence the statement “all swans are white” was once true for Europeans but it was nonetheless falsified when Captain Cook reached Australia, whose swans are of course black. Thus does knowledge advance.
But that does not necessarily mean that individual scientists appreciate their theories being disproved. Indeed, one characteristic of many great scientists is that – unlike ordinary researchers - they are brave enough to disregard inconvenient facts. Consider the age of the earth.
During the 19th century Sir Charles Lyell had, by his study of the rate of erosion of cliffs and the creation of sedimentary rocks, proposed the earth to be hundreds of millions of years old. Yet, as we know from volcanoes, the core of the earth is red hot. And when contemporary geologists calculated the rate of heat loss, they concluded that the earth could be only a few millions of years old. Had it been any older, its core would have cooled. Lyell had been falsified.
But Lyell’s followers simply ignored the falsification, and to widespread derision they continued to assume that the sedimentary rocks, and the fossils they contained, were hundreds of millions of years old. Then one day somebody somewhere discovered radioactivity, somebody else discovered the core of the earth to be radioactive, and somebody else discovered that radioactive reactions emit heat, and hey presto the discrepancy was resolved. The core of the earth generates heat, which is why it is still hot, and the earth is indeed very old.
Lyell had demonstrated that great scientists are not necessarily falsifiers. But they are verifiers. They conceive of theories and they seek to verify them – and it is for others to falsify them. Obviously scientists should never fabricate data but many researchers will ignore inconvenient results. Indeed, if individual scientists were not passionate verifiers, they would not be driven to do the difficult experiments that push the boundaries of knowledge. Individual scientists, in short, are advocates, not judges, and their reluctance to self-falsify was recognised as early as 1667 by Thomas Spratt in his History of the Royal Society:- “For whosoever has fix’d on his Cause, before he has experimented; can hardly avoid fitting his Experiment, and his Observations, to his own Cause, which he had before imagin’d; rather than the cause of the truth of the Experiment it self.”
But if falsification can be the death of great science, it can also be the death of bad science, and must thus be embraced. Which brings us back to Professor Phil Jones. His behaviour may have been only typical of verifying scientists but it becomes dangerous when it is harnessed in defence of a powerful status quo.
Carbon-driven global warming is now a dominant narrative yet, as Professor Jones’s emails reveal, the evidence in its favour is not impregnable. Thus one of the emails on his system worried that “we can’t account for the lack of warming at the moment, and it is a travesty that we can’t” while another admitted that “we can have a proper result – but only by including a load of garbage.” One of Jones’s email correspondents, moreover, was Professor Michael Mann of Pennsylvania State University who, famously (or infamously), re-drew the conventional ‘wobbly’ graphs for recent global temperatures to represent them as showing a ‘hockey stick’ effect of sudden contemporary warming. This redrawing has been widely criticised.
But if the scientific evidence is imperfect, our response should not be to slate Professor Jones, who is obviously an honest man who has been enslaved by a hypothesis that is failing to make the expected predictions, but rather to encourage sceptics in their counter-advocacy. Only thus will truth eventually out.
Scientists are advocates, and they will not necessarily broadcast contradictory findings, so it is for the rest of us to adjudicate between competing results, not to swoon when advocates advocate.
Posted in : Science | Permalink | Comments (0)
I’ll admit that (the left) often (is) aware of the unholy alliance of business and government. But it’s naive to conclude that their real beef is with cronyism, not the free market. Strange as it seems, the hard left sees the unholy alliance of business and government as an argument for government.* Marxist historian Gabriel Kolko wrote a whole book about crony capitalism, but his research certainly didn’t shake his faith in socialism. As he bluntly explained:
As I made clear often and candidly to many so-called libertarians, I have been a socialist and against capitalism all my life, my works are attacks on that system, and I have no common area of sympathy with the quaint irrelevancy called "free market" economics. There has never been such a system in historical reality, and if it ever comes into being you can count on me to favor its abolition.
Posted in : Libertarianism | Permalink | Comments (0)
Commercial mayonnaise is almost always made with vinegar and its acidity slows the growth of bacteria while increasing the sandwich’s deliciousness. Win/win!
Lenore Skenazy in Free-Range Kids (And stop worrying about the cholestorol).
Posted in : Health | Permalink | Comments (0)