wu-tang financial

First Jay-Z and now the Wu. “Because you and your fam can’t be relying on wankstas like Smith Barney.”

[via Merlin Mann’s Kung Fu Grippe]

a study of myopia and hysteria

I like doing things with Helvetica and the Adobe Creative Suite. I also like infographics explaining why many of you are wrong. This is my latest creation.

election freebie stores learn about price floors

The Dupont Circle Krispy Kreme is handing out free doughnuts to all comers today (though they’re trying to convince people to show their ‘I Voted’ stickers first, against very stupid, anti-doughnut, federal election laws). And guess what: handing things out for free causes some discomfort:

In an almost-too-good-to-be-true foreshadowing of the Obama presidency, the donutistas said that they were concerned about running out of the free election-themed donuts. Apparently, when you give something away for free, it’s hard to know how much of it to make. They’d resorted to (semi-illegally) demanding to see “I Voted” stickers for the special donuts in order to stretch out the supply. They also said customers weren’t as polite as usual. Go figure—when people feel entitled to something, they act as if they value it less. Who could have foreseen such a thing? Oh, wait.

But these patterns of human behavior certainly don’t apply to handing out, say, free healthcare or mortgages. That’s some mighty strong foreshadowing, Krispy Kreme. Yes we can!

(via Jeremy H)

nobel prize roundup

The Nobel Peace Prize went to former Finnish President Martti Ahtisaari. He’ll be receiving the prize without much fanfare, because he’s not quite audacious enough—he isn’t accusing a people trying to not-be-bombed of apartheid, and he isn’t cooking up AIDS conspiracy theories or starting a new religion. Ahtisaari—who grew up during the Finno-Russian Winter War, during which the Molotov Cocktail was invented—has only been spending his life trying to bring an end to warfare. In all seriousness, you can read his rather impressive resume here.

Meanwhile, former economist Paul Krugman won a Nobel (well, not technically) for his earlier work as a real economist. It’s actually an honorable body of work—it (along, of course, with the work of many others) considerably changed our understanding of the dynamics of free trade. The only problem is that giving Krugman the prize today is akin to rewarding a dog for an earlier trick while he defecates on your carpet.

george soros on the danish model of mortgage investment

George Soros, a man who inexplicably cannot see the economic forest from the financial trees he knows so well, makes the case for a Danish-style mortgage market in the WSJ. His first point—that it doesn’t include a major government organization (Fannie/Freddie)—is a good one. But like everything Soros does outside of his own balance sheets, it’s one intelectual step forward and and two steps back:

Second, mortgage originators are required to retain credit risk and to perform the servicing functions, thereby properly aligning the incentives. Third, the mortgage is funded by the issuance of standardized bonds, creating a large and liquid market.

Finally, the asymmetric nature of American mortgages is replaced by what the Danes call the Principle of Balance. Every mortgage is instantly converted into a security of the same amount and the two remain interchangeable at all times. Homeowners can retire mortgages not only by paying them off, but also by buying an equivalent face amount of bonds at market price. Because the value of homes and the associated mortgage bonds tend to move in the same direction, homeowners should not end up with negative equity in their homes. To state it more clearly, as home prices decline, the amount that a homeowner must spend to retire his mortgage decreases because he can buy the bonds at lower prices.

So you restrict the way in which the mortgages can be financed—and call this a more liquid system. Then you peg the value of the loan to the value of the collateral. In other words, shift the brunt of the risk of mortgages to the lenders. Hey, Soros, why not just pass some usury laws and prevent lenders from charging interest while you’re at it?

Better idea: let’s peg the value of George Soros’s assets to his intellectual capital. I ought to be able to buy him out with the 58 cents on my desk right now.

what the indians should learn from the chinese economy

A favorite game among Indian newspaper editors and op-ed writers was—at least back when I was there—to compare their nation’s economic ascendency with China. It was all superficial, course: it was focused on attaining shiny new towers and trains and smooth expressways and an Olympiad, if possible. They seemed to be taking home the wrong lesson—that only an authoritarian regime could bring economic growth.

The Economist (yes, the journal I just mocked) gives us the lesson India ought to take from the Chinese:

But then, in 1989, came the Tiananmen Square protests. A generation of policymakers who had grown up in the countryside, led by Zhao Ziyang, were swept away by city boys, notably the president, Jiang Zemin, and Zhu Rongji, his premier. Both men hailed from Shanghai and it was the “Shanghai model” that dominated the 1990s: rapid urban development that favoured massive state-owned enterprises and big foreign multinational companies. The countryside suffered. Indigenous entrepreneurs were starved of funds and strangled with red tape. Like many small, private businessmen, Mr Nian was arrested and his firm shut down.

True, China’s cities sprouted gleaming skyscrapers, foreign investment exploded and GDP continued to grow. But it was at a huge cost. As the state reversed course, taxing the countryside to finance urban development, growth in average household income and poverty eradication slowed while income differences and social tensions widened. Rural schools and hospitals were closed, with the result that between 2000 and 2005 the number of illiterate adults increased by 30m. According to Mr Huang, the worst weaknesses of China’s state-led capitalism—a reliance on creaking state companies rather than more efficient private ones, a weak financial sector, pollution and rampant corruption—are increasingly distorting the economy.

new evidence on income and taxes

I sat on this September 15 op-ed by Arthur Laffer and Stephen Moore for two weeks intending to type up a lengthy post. Then I realized I’d end up quoting the entire article. But I don’t want to bury this in the feed, so I’m highlighting it here in the main feed anyway.

I ask all of you—yes, even those of you left-of-center—to give this article a read. It’s the easily overlooked numbers that belie the allegations that we’re living in some sort of repressive oligarchy. Numbers like “only 3% of Americans are ‘chronically’ poor, which the Census Bureau defines as being in poverty for three years or more.” Or that income disparities between the sexes and between whites and minorities has decreased in the last three decades: white males’ income is up 9%, far surpassed by white females (+74%), black males (+34%) and black females (+74%).

the economist goes krugman

I’ve often opined (as has the WSJ’s James Taranto) that economist-turned crackpot and former Enron adviser Paul Krugman would do well to read his own economics textbooks. Seems that the Economist itself has gone insane during the latest mortgage crisis and backed government intervention for a problem created by…government intervention.

…But banks play a key role in oiling the system; they provide the credit that lets the rest of us do business. They also have innate risk, because they lend more money then they have cash in hand. To put it another way, they borrow short and lend long. This has made them the subject of panics throughout history, and those panics have always led to economic turbulence. The authorities can let them go bust, but the risk is depression. Or they can hold their noses and bail them out.

And there will be more crises in future. Now that investment banks are part of commercial banks, we have returned to the risks that characterised the system before the Glass-Steagall Act of 1933—specifically, that reckless investment banks can fritter away retail depositors’ money. And what will we have to do if that happens? Bail them out again.

Wow. Not one word about changing government encouragement (expanded during both the Clinton and Bush administrations) of lenders to take on riskier mortgages that led to this in the first place. And the article completely ignores that it’s the repeal of Glass-Steagall (which has allowed investment and commercial banks to consolidate) that enabled organizations like Bank of America to take over failing banks. And what’s more, it’s the Wall Street Journal (whose opinion page has otherwise backed the bailout—unsurprising, given its clientele) that has to give us a lecture on moral hazard.

I was not surprised when the Economist turned around and opposed the Iraq War. Its initial support (while welcome to this writer) was arguably against its roots in the writings of John Stewart Mills. But one expects the journal to at least adhere to the principles of, y’know, economics. So much for that.

bill o'reilly is a douche

There, I said it. I’ve believed it for at least five years, but I’m going on the record. The Steven Colbert interview was amusing, but this interview—with Fox News’s own Neil Cavuto—was refreshing. Finally, someone who puts the populist douche-barrel in his place:

(via Alarming News)

on oil "speculators"

One of the many economic bogeymen of the left (and of national socialists, FWIW) has been the “speculator”. That evil fellow, who drives up prices during times of extreme scarcity while twirling his well-waxed mustache, has been the faceless evil that economic leftists have used to justify massive economic regulation for decades. (Say what you will for Republican foreign policy strawmen, at least they are based on an actual terrorist organization.) Well, those traders engaging in arbitrage (buying low in one market, selling high in another market, inevitably bringing both markets to the same price) don’t seem to be the evil speculators you’re looking for:

Lo and behold, the CFTC found that index traders and swap dealers actually reduced their stake in crude oil futures as prices spiked. The number of contracts held by these investors betting that prices would increase — the net long position — fell by 11%, and more were shorting oil than going long over the six-month period. In other words, index traders and swap dealers were driving the future price of oil down.

But they weren’t hired by the government? How could they possibly be doing good through their own self interest? That’s unpossible! Ooooor maybe we should stop using commodities traders as scapegoats for misfortune and bad policy.

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