Tuesday, March 30, 2010

Alan Meltzer: Market Failure or Government Failure?

For those who still don’t get it….

MARCH 18, 2010, 7:26 P.M. ET wsj

Regulators protect the bankers. They continue to lose sight of their responsibility to protect the public.

By ALLAN H. MELTZER

Last year the New York Times ran several articles about the end of capitalism. Others picked up this meme and reinforced it with claims that greedy bankers and deregulated financial markets had brought the world to the brink of another Great Depression. Then— just in the nick of time—we were allegedly saved by timely, forceful and intelligent government actions. The groundwork was laid for the next phase: more government regulation of financial and economic life.

Left out of this narrative is the government's disastrous mortgage and housing policy. Without the policies followed by Fannie Mae and Freddie Mac—and the destructive changes in housing and mortgage policies, like authorizing subprime and Alt-A mortgages for impecunious borrowers—the crisis would not have happened.

Without warning, the federal government's 30-year policy of bailing out large banks changed when it allowed Lehman Brothers to fail. The Federal Reserve acted forcefully and determinedly to lessen the fallout from Lehman's collapse, but much damage was done.

Would bankers have made so many errors if there had never been a too-big-to-fail policy? Not all bankers overinvested in mortgages, but some got up to dance, believing that they would profit and the rest of us would pay to prevent failures.

Has the government learned from its mistakes by closing Fannie and Freddie and agreeing to put any housing subsidy on the budget? Do you hear the president, the Treasury, or the Federal Reserve insisting on an end to too big to fail?

Quite the opposite. The new financial regulations, spearheaded by Sen. Chris Dodd (D., Conn.), only bring back too big to fail by authorizing a Systemic Risk Council headed by the Treasury secretary.

Regulation often fails either because regulators are better at announcing rules than at enforcing them, or because the regulated circumvent the regulations. Consider the Basel Accord, passed following bank failures in Germany and the U.S. in the 1970s.

This was supposed to reduce banking risk by requiring banks to increase capital if they increased holdings of risky assets. But financial markets circumvented it by putting the risky assets off their balance sheets. Unusual? Not at all. In 1991 Congress passed the FDIC Improvement Act, which authorized regulators to close banks before they lost all their capital. Regulators ignored it. Unusual? Not at all. Bernard Madoff, Allen Stanford, AIG—regulation failed in all of these instances.

This is because regulation is static, while markets are dynamic. If markets don't circumvent costly regulation at first they will find a way later.

The answer is to use regulation to change incentives by making the bankers and their shareholders bear the losses. Beyond some minimum size, Congress should require banks to increase their capital more than in proportion to the increase in their assets. Let the bankers choose their size and asset composition. Trust stockholders' incentives, not regulators' rules.

Secretaries Timothy Geithner and Hank Paulson told Congress at the AIG hearing earlier this month that they faced a choice: a bailout or another Great Depression. This is not true. Classic central banking offered a better alternative. Let AIG fail and lend to the market on good collateral.

The Fed, acting as lender of last resort, should protect the market—not the failing firm. That policy worked well in the 19th and early 20th century by inducing banks and counterparties to hold collateral acceptable to the Fed following failures.

The market is not perfect. It is run by humans who make mistakes. But the same humans run government where they make different, often more costly, mistakes for which the public pays.

At the moment, we see the government spending excessively and making promises to spend that cannot be kept. This is already a major problem in states like California and countries like Greece, but the federal government will soon join them. At all levels of government, promises to pay state and local pensions and to provide health care far outstrip its capacity to pay. The Congressional Budget Office and many others have been warning for years about the $50 or $60 trillion of unfunded liability. Washington's answer on health care? Offer an expensive drug benefit followed by a more expensive "reform" that increases the unfunded Medicare-Medicaid liability. Dissemble about the real costs.

Regulators talk a lot about systemic risk. They do not—and probably cannot—give a tight operational definition of what this means. So setting up an agency to prevent systemic risk, as Mr. Dodd has just proposed, is just another way to pick the public's purse. Systemic risk will forever remain in the eye of the beholder. Instead of shifting losses onto those that caused them, systemic risk regulation will continue to transfer cost to the taxpayers. The regulators protect the bankers. They continue to lose sight of their responsibility to protect the public.

The Senate Banking Committee has considered putting the Treasury secretary in charge of systemic risk management. But Treasury secretaries are the officials who authorized all or most of the bailouts since bailouts began, beginning with the mistaken policy of saving First Pennsylvania in the 1970s. This is not financial reform. Real financial reform requires that bankers—not regulators—monitor the risk on their balance sheet and accept the losses from mistakes. We will not get sound banking until the CEOs of the large banks and their shareholders are forced to pay for their mistakes.

For the first 150 years of this republic, the federal government ran a budget surplus in most peacetime years. Wartime deficits were followed by surpluses that reduced outstanding debt. President Truman paid for most of the Korean War, President Eisenhower ran a budget surplus except during the deep 1957-58 recession. Except for the Clinton years, deficits have been the rule since the 1960s. When Vice President Dick Cheney told Paul O'Neill that deficits didn't matter, he neglected to add "if the Chinese or Japanese buy the debt."

Gold standard rules and a strong belief in a balanced budget protected us from fiscal imprudence for the U.S.'s 150 years. Both rules are gone. Now both political parties favor a balanced budget when they are out of power.

Greece has a reluctant European Union to possibly offer some relief. But who will we turn to if we are so foolish as to wait for a crisis to reduce current spending and future promises? The president talks about freezing discretionary spending one day, but the next promises to build high-speed railroads and enact middle-class entitlements including an expensive health-care plan. When will the administration present a credible plan to prevent the looming financial crisis?

Capitalists make errors, but left alone, markets punish such errors.

Mr. Meltzer, a professor of economics at Carnegie Mellon University, is the author of "A History of the Federal Reserve" (University of Chicago Press, 2004) and a visiting scholar at the American Enterprise Institute.

Thursday, March 25, 2010

Facebook is all “thin” relationships – well worth the read

I can say my FB friends are mainly people I met in the real world  BFB ( before Face Book) or “thin” relationships – I have met only one new friend (Cathy O) who fits the bill of friend, trusted, respected in the BFB sense.

So this piece is more than important – its surly, uncomfortably scrotal creep.

The Social Media Bubble4:05 PM Tuesday March 23, 2010 

| I'd like to advance a hypothesis: Despite all the excitement surrounding social media, the Internet isn't connecting us as much as we think it is. It's largely home to weak, artificial connections, what I call thin relationships. During the subprime bubble, banks and brokers sold one another bad debt — debt that couldn't be made good on. Today, "social" media is trading in low-quality connections — linkages that are unlikely to yield meaningful, lasting relationships. 

Call it relationship inflation. Nominally, you have a lot more relationships — but in reality, few, if any, are actually valuable. Just as currency inflation debases money, so social inflation debases relationships. The very word "relationship" is being cheapened. It used to mean someone you could count on. Today, it means someone you can swap bits with. Thin relationships are the illusion of real relationships.

Real relationships are patterns of mutual investment. I invest in you, you invest in me. Parents, kids, spouses — all are multiple digit investments, of time, money, knowledge, and attention. The "relationships" at the heart of the social bubble aren't real because they're not marked by mutual investment . At most, they're marked by a tiny chunk of information or attention here or there. Here's what lends support to my hypothesis. Trust.

If we take social media at face value, the number of friends in the world has gone up a hundredfold. But have we seen an accompanying rise in trust? I'd argue no. Now, perhaps it will take time for gains to be visibly felt. But social networks have already been around for half a decade, and society seems to be little better off.

Disempowerment. If social tools were creating real economic gains, we'd expect to see a substitution effect. They'd replace — disintermediate — yesterday's gatekeepers. Yet, increasingly, they are empowering gatekeepers. Your favorite social networks aren't disintermediating PR agencies, recruiters, and other kinds of brokers. They're creating legions of new ones. The internet itself isn't disempowering government by giving voices to the traditionally voiceless; it's empowering authoritarian states to limit and circumscribe freedom by radically lowering the costs of surveillance and enforcement.

So much for direct, unmediated relationships. Hate. There's this old trope: the Internet runs on love. Equally, though, it's full of hate: irrational lashing-out at the nearest person, place, or thing that's just a little bit different. Read any newspaper web comments sections lately? Usually, they're giant puddles of bile and venom.

Check out these emails to Floyd Norris. Far from fueling meaningful conversation, today's "social" web is a world full of the linguistic equivalent of drive-by shootings. Exclusion. Hate happens, at least in part, because of homophily: birds of a feather flock together. The result is that people self-organize into groups of like for like. But rarely are the gaps between differences bridged. Yet, that's where the most valuable relationships begin. To be "friends" with 1000 people who are also obsessed with vintage 1960s glasses isn't friendship — it's just a single, solitary shared interest. Value.

The ultimate proof's in the pudding. If the "relationships" created on today's Internet were valuable, perhaps people (or advertisers) might pay for the opportunity to enjoy them. Yet, few, if any, do — anywhere, ever. Conversely, because those "relationships" aren't valuable, companies are, it is said, forced to try and monetize them in extractive, ethically questionable ways.

That's because there's no there there. I can swap bits with pseudo-strangers at any number of sites. "Friends" like that are a commodity — not a valuable, unique good. What are the wages of relationship inflation? Three cancers eating away at the vitality of today's web. First, attention isn't allocated efficiently; people discover less what they value than what everyone else likes, right this second. Second, people invest in low-quality content. Farmville ain't exactly Casablanca.

Third, and most damaging, is the ongoing weakening of the Internet as a force for good. Not only is Farmville not Casablanca, it's not Kiva either. One of the seminal examples of the promise of social media, Kiva allocates micro-credit more meaningfully. By contrast, Farmville is largely socially useless. It doesn't make kids tangibly better off; it just makes advertisers better off.

Let's summarize. On the demand side, relationship inflation creates beauty contest effects, where, just as every judge votes for the contestant they think the others will like the best, people transmit what they think others want. On the supply side, relationship inflation creates popularity contest effects, where people (and artists) strive for immediate, visceral attention-grabs — instead of making awesome stuff.

The social isn't about beauty contests and popularity contests. They're a distortion, a caricature of the real thing. It's about trust, connection, and community. That's what there's too little of in today's mediascape, despite all the hoopla surrounding social tools. The promise of the Internet wasn't merely to inflate relationships, without adding depth, resonance, and meaning. It was to fundamentally rewire people, communities, civil society, business, and the state — through thicker, stronger, more meaningful relationships.

That's where the future of media lies. Now, this is just a hypothesis. Feel free to disagree with me, challenge me — or to extend and elaborate upon it. Next time, I'll discuss what we can do about it.

Sunday, March 21, 2010

Why Basel is Mr Faulty

A neat illustration that young bright stars are still capable of inspiring progress comes from Anna Katherine Barnett-Hart, a BA hons student at Harvard in her hons dissertation which charts the CDO meltdown in simple English without academic pretension or vast quantities of Greek symbol ego.

The findings are obvious enough but some of the implications are apposite.

One is that Basel type regulatory rules (which dictate the levels of capital to be held by banks) generate perverse outcomes. The more equity capital Basel types demand of banks, the greater is the incentive to move debt capital off the balance sheet – into SPV (special purpose vehicles) or SIV structures (structured investment vehicles) whence CDOs and the like may be sold.

This sort of regulation is utterly counterproductive then – and we have just implemented Basel II here and the RB is at present examining capital adequacy ratios in a tightening process.

The thesis may be read here.

Thursday, March 18, 2010

Rural Broadband Policy – or Paternalism?

Says it all

by RUSS ROBERTS on MARCH 17, 2010

in WEB/TECH, WHAT'S WRONG WITH THE COUNTRY

Here’s an amazing story from CNN because it’s so ordinary. It’s about a top-down government initiative that sounds good–giving more broadband access to Americans. Who’s against more Americans getting broadband? The FCC has a plan to get it done. Go Broadband!

So here’s the story. (HT: Best of the Web)

Like a photographer without a camera, or a mechanic who doesn’t own a car, Kelli Fields is a webmaster without high-speed Internet access.

By day, the 42-year-old uses a broadband connection at work to update a university’s Web site, which she built and codes from scratch.

But when she goes home at night, the rural Oklahoman struggles with a dial-up Internet connection so slow, she does chores to pass the time while Web sites load. Her high school-age son is so fed up with the glacial pace of their Internet connection that he asks his mom to update his Facebook page from the office.

That sounds frustrating. But is this a serious social problem the government needs to fix?

“It’s pretty sad that he has to ask me to accept his friends when I get to work,” said Fields, who rarely uses the home computer for anything but word processing.

On Tuesday, the U.S. Federal Communications commission will unveil its much-awaited “broadband plan,” which, among other things, will explain how the government plans to get nine out of 10 Americans online by 2020. That’s no easy task, considering less than two-thirds of people in the country have high-speed Internet access at home today, according to a 5,005-person survey published by the FCC in February (PDF).

The Obama administration’s 2009 American Recovery and Reinvestment Act has put $7.2 billion toward high-speed Internet expansion and has required the FCC to develop a broadband plan.

Taking a personal look at unwired America, however, reveals just how complicated getting people online can be. That’s partly because there are so many reasons people still don’t have high-speed Internet access at home.

I’m sure it’s complicated but somehow, almost 2/3 of the American people have managed it. And it must be tough in rural Oklahoma to get broadband so no wonder this story illustrates the need for a national broadband effort, right?

Some, like Fields, don’t have money for the connections, or they live in parts of the country where broadband hookups are not available. Fields lives outside of Catoosa, Oklahoma. Neighbors less than a mile away have high-speed Internet access, but the fiber-optic cables that connect homes and apartments to the high-speed Web haven’t reached her house.

Yes, it would be nice to get broadband via a fiber optic cable. And so close. Less than a mile away. Is there another way to get broadband? Yes there is:

She could install a satellite and connect to the high-speed Internet, but the installation fee is $300, and she said she can’t afford that right now. She’s been waiting for wired broadband to come to her home for five years, and she holds out some hope that the network will get to her eventually.

She’s awfully patient. And poor, I guess. For a mere $300 she can make her son happy and she can have broadband for herself. But she doesn’t have the money. Keep reading:

About 4 percent to 5 percent of American households similarly are in places that aren’t reached by broadband cables. And 36 percent of the unwired population cites cost as the main reason for not connecting to the Web, according to the FCC survey.

Other unwired people are afraid of the Internet, or they simply don’t understand why it might be important to bring broadband into their lives.

Cue the violins:

Florence Pearson, a 62-year-old from New York City, said she was afraid of computers. If she touched one, she thought she would break it. “I was embarrassed, not knowing anything at all about computers and not having an e-mail address,” she said during a presentation at an FCC event last week.

Wish I’d have been there. Dogs and ponies everywhere.

“I knew I was missing out on so much, but I could not get over this fear.”

Pearson’s daughter convinced her to take a computer class, she said, and that helped her realize that she could work more efficiently with the help of computers and the Internet.

“It was like an entirely new world for me,” she said at the event.

OK. Her daughter took care of her. So why do we need a national program?

It will take more than an improved broadband infrastructure to get people who aren’t familiar with computers to go online, said John Horrigan, director of consumer research at the FCC. The federal government on Tuesday will propose programs to help educate people about the Internet and increase Web access in public libraries, he said, but he cautioned that none of those will be a quick fix.

“Nonadoption [of broadband] is not the kind of problem that lends itself to overnight solutions,” he said, “because you’re trying to train people. You’re trying to get them to change their behavior.”

In the recent FCC survey, which Horrigan authored, 22 percent of people without broadband access said fears of the Internet and a lack of understanding of computers were the main reasons they didn’t have broadband at home. Nineteen percent said they viewed the Internet as a “waste of time” or didn’t see its relevance to their lives.

And a 2009 survey, from the Pew Internet & American Life Project, found the majority of Americans who don’t have broadband at home don’t want it.

But broadband is becoming essential for modern life, Horrigan said.

Ah, he knows best. Some people think the internet is a waste of time or not worth the money. We’ll give it to them anyway.

Many job applications, for instance, are not available on paper anymore. And health records and information are increasingly moving online. Those who don’t have access are at increasing risk of being left behind.

“Giving its growing importance as a necessity, that creates an even more isolating effect for those who are offline,” he said.

The FCC’s chairman, Julius Genachowski, has written online that the nation’s broadband plan will include programs aimed at “making sure that every child in America is digitally literate by the time he or she leaves high school.” The idea is to teach kids why they need the Internet.

Funny, I just have a feeling kids are pretty on top of that one. But let’s get an ad campaign going.

At first, it may be easy to write off Fields’ situation in Oklahoma as insignificant because she does have dial-up Internet access at home.

Oh, right, she does have internet. It’s just slow. That’s like so 1996.

But the speed difference between dial-up connections, which use telephone wires to transmit signals, and those that travel through fiber-optic broadband cables is significant, Horrigan said.

That’s because the Web is increasingly designed for broadband connections. Photos and videos are everywhere. So are Flash animations. The result is that dial-up connections have actually gotten slower over time, according to Horrigan.

“If you were a contented dial-up user five years ago because you liked to check e-mail and get some headlines, that’s probably a slower process today, given that sites are optimized for broadband,” he said.

Fields says her slow connection at home is particularly a problem for her kids, who need fast Web connections to keep up in school.

Her daughter, for example, sends text messages to her mom while she’s in the office, asking her to conduct Google searches that she’s required to complete for her homework.

Get it? It’s for the children. Those poor kids aren’t going to get a good education. The next thing you know, the Chinese are going to pass us. Gotta have a broadband plan. Top-down, baby. For the children! We’ve got to keep America competitive!

The slow connection may affect family finances. Fields said she has turned down Web development projects because she simply couldn’t do them from home.

“It would just take me forever,” she said.

We need broadband to keep America prosperous!

Her dial-up connection also has caused some issues with her current job as the webmaster for Rogers State University, in Claremore, Oklahoma.

When classes are canceled because of bad weather, for instance, Fields has to ask another employee to update the Web site to tell students not to come to class. She can’t do so from home.

“It is ironic,” she said of the fact that she’s a Web site manager who doesn’t have high-speed Web access. “It’s very strange, and people like you are like, ‘What? I don’t understand?’ They kind of laugh at it.”

Fields is considering scraping together the money to get satellite Internet at her house.

It does seem like a good idea. Her job is suffering, she’s losing money, and her kid is falling behind in school. But I guess she just can’t afford it. Who wouldn’t want to help her?

But she doesn’t want to give up services like TV to free up money for an expensive Internet connection.

We’re about 1000 words into the article at this point. There really is not story here. And no national crisis. Evidently Kelli Fields thinks TV is more important than broadband. Evidently watching TV is more important than doing her job well, finding outside income opportunities and keeping her kid current with homework. Or maybe, just maybe, the hardship of a life without broadband is being exaggerated for the story. And the country.

The weirdest thing is that if we really think this is a problem we don’t need a national plan. We could just subsidize rural folks purchases of satellites. But that wouldn’t help whoever the bootleggers are in the national plan.

The story concludes:

She realizes that without broadband, her family is missing out on a lot.

“It really has just become a way of life, like you have to be connected all the time,” she said. “And I don’t feel that need to be connected through Facebook or news stories. I don’t feel that need to be connected all the time, but when I need [Internet access,] it would be nice to have it.”

Yes it would be nice. It’s especially nice when someone else pays for it. Government thrives by handing out free lunches. The problem is that the bills keep coming and we don’t have enough money to give out all that free food. Someone needs to make choices and trade0ffs. Kelli Fields made her choice. Maybe that tells us something about the relative urgency of the problem.

Tuesday, March 16, 2010

Statistical Scaremongering based on faulty interpretations

Possibly the biggest hole in N.Z. media reporting and editorial skills is in the ability to make sense of statistics – or more conspiratorially – their penchant to substitute melodramatic rubbish for immaterial fact in pursuit of the “big” story.

The ODT of 15 March carried banner headlines in about 28 pt font about the shocking level of child crime we are now experiencing. In fact 719 children under 9 had been “apprehended” and dealt with in one way or another (not a kick in the pants and a big telling off you may rest assured). Some of these children were as young as four – I suppose to be fair, in the interests of balance the paper ran a story in the same edition (different story) about the oldest offender (97).

So 719 offenders. As of the 2006 census there were 567,897 persons aged nine years old or younger in N.Z. thus we have the stunning “problem” of  0.13% of under nine year olds offending – insofar as that can be measured by apprehension. Even given poor apprehension rates this number has to be eight times higher to even hit 1% – and 1% is hardly worth a story let alone a front page headline.

Pickings are clearly slim on the story front at the ODT! Is this new? Well we are not given any historical data – there probably isn’t much so fair enough. The Police spokesman though expressed “grave concern”. A Mandy statement – he would say that wouldn’t he – I suppose he has to, but it is no surprise that kids, lots of the little blighters are frequently toe rags, minor vandals, violent and into a spot of experimental petty theft.

The compulsory “sex abuse” cases were reported – some sort of kiddie porn fights back – I struggle to conceive of what this stuff involves, but that too is likely a function age – my old age.

A first lesson in statistics is to think about context and materiality. Much of the statistics discipline is concerned with figuring out what is and is not “significant”. The easiest tool for doing this is to apply the brain in thinking about the proportionality of what is involved.

Journalists should try it sometime.

Sunday, March 14, 2010

Banal expressions banned on radio….

Here, without further ado, is Randy Michaels’ complete list of unacceptable expressions on the Tribune Co.’s flagship radio station:

  • “Flee” meaning “run away”
  • “Good” or “bad” news
  • “Laud” meaning “praise”
  • “Seek” meaning “look for”
  • “Some” meaning “about”
  • “Two to one margin” . . . “Two to one” is a ratio, not a margin. A margin is measured in points. It’s not a ratio.
  • “Yesterday” in a lead sentence
  • “Youth” meaning “child”
  • 5 a.m. in the morning
  • After the break
  • After these commercial messages
  • Aftermath
  • All of you
  • Allegations
  • Alleged
  • Area residents
  • As expected
  • At risk
  • At this point in time
  • Authorities
  • Auto accident
  • Bare naked
  • Behind bars
  • Behind closed doors
  • Behind the podium (you mean lecturn) [sic]
  • Best kept secret
  • Campaign trail
  • Clash with police
  • Close proximity
  • Complete surprise
  • Completely destroyed, completely abolished, completely finished or any other completely redundant use
  • Death toll
  • Definitely possible
  • Diva
  • Down in (location)
  • Down there
  • Dubbaya when you mean double you
  • Everybody (when referring to the audience)
  • Eye Rack or Eye Ran
  • False pretenses
  • Famed
  • Fatal death
  • Fled on foot
  • Folks
  • Giving 110%
  • Going forward
  • Gunman, especially lone gunman
  • Guys
  • Hunnert when you mean hundred
  • Icon
  • In a surprise move
  • In harm’s way
  • In other news
  • In the wake of (unless it’s a boating story)
  • Incarcerated
  • Informed sources say . . .
  • Killing spree
  • Legendary
  • Lend a helping hand
  • Literally
  • Lucky to be alive
  • Manhunt
  • Marred
  • Medical hospital
  • Mother of all (anything)
  • Motorist
  • Mute point. (It’s moot point, but don’t say that either)
  • Near miss
  • No brainer
  • Officials
  • Our top story tonight
  • Out in (location)
  • Out there
  • Over in
  • Pedestrian
  • Perfect storm
  • Perished
  • Perpetrator
  • Plagued
  • Really
  • Reeling
  • Reportedly
  • Seek
  • Senseless murder
  • Shots rang out
  • Shower activity
  • Sketchy details
  • Some (meaning about)
  • Some of you
  • Sources say . . .
  • Speaking out
  • Stay tuned
  • The fact of the matter
  • Those of you
  • Thus
  • Time for a break
  • To be fair
  • Torrential rain
  • Touch base
  • Under fire
  • Under siege
  • Underwent surgery
  • Undisclosed
  • Undocumented alien
  • Unrest
  • Untimely death
  • Up in (location)
  • Up there
  • Utilize (you mean use)
  • Vehicle
  • We’ll be right back
  • Welcome back
  • Welcome back everybody
  • We’ll be back
  • Went terribly wrong
  • We’re back
  • White stuff
  • World class
  • You folks

Saturday, March 13, 2010

“I paid tax all my life….” so I’m entitled - you also consumed them and then some – so forget it

In respect of the famous “Gold Card” – discounts for old people in exchange for votes for Winston Peters - it is common to hear people make statements along the lines of “I’ve paid taxes all my life so why shouldn’t I be entitled to a break”.

Not just the gold card either…. the argument is in common use in respect of numerous other things old people consider “I’ve always paid my taxes” gives them some right to.

The logic of this is faulty. At the time these people paid their taxes they consumed government services – education for their children, health care for themselves, a Police Force…. and myriad other things.

They consumed their “taxes worth” back then – more in fact – which is why we have run up various deficits at various times.

If we want to give old people money for being old – fine. But let’s not pretend that its because tax is some kind of saving scheme to be cashed in when you are over 65. If we stopped thinking like this we might see bribes like the gold card for what they are. Cheap vote grabbing  schemes which penalise people who are still working and still paying tax.

Friday, March 12, 2010

Hello the economy is recovering… better flatten it

In the latest OCR comments release the Governor of the RB tells us that he expects to move interest rates up toward the middle of the year as the economy recovers. His job remains that of targeting price stability – real price stability, i.e. net of inflation.

Unless he plans to print money it’s difficult to see why there should be inflation. Yes prices will move up if some resources become more scarce than they are now – which is what should happen and is what we want so as to signal the need for more supply.

Providing the amount of money in circulation matches the amount needed for the transactions there can be no inflation, only relative price changes – which are neither harmful nor  cause for a central bank to lift interest rates.

Why on earth then one would announce in advance that interest rates will be going up mid year is beyond me – unless one likes the idea that one holds the levers and has a mandate to “control” the growth rate in the economy. It’s that fear that should keep us awake.

Tuesday, March 9, 2010

Why weren’t there Housing Bubbles Everywhere?

Thomas Sowell, as ever, brings simple logic to common nonsense….

During bad times, the blame game is the biggest game in Washington. Wall Street "greed" or "predatory" lenders seem to be favorite targets to blame for our current economic woes.

When government policy is mentioned at all in handing out blame, it is usually blamed for not imposing enough regulation on the private sector. But there is still the question whether any of these explanations can stand up under scrutiny.

Take Wall Street "greed." Is there any evidence that people in Wall Street were any less interested in making money during all the decades and generations when investments in housing were among the safest investments around? If their greed did not bring on an economic disaster before, why would it bring it on now?

As for lenders, how could they have expected to satisfy their greed by lending to people who were not likely to repay them?

From unionleader.com via NZBR

Monday, March 8, 2010

Killing whales with cuddles

It would seem that as the policy makers move closer to developing a type of quota management system capable of protecting endangered whale species, those who purport to want to save the species most pose the greatest threat to its continued existence.

Recognition that whales are hunted and prized by some is a critical first step. It allows limits to be set, enforced and adjusted to ensure survival for the species. Trade in the rights would work even better in this regard just as it has for the once endangered orange roughy.

Iceland and Japan can tough it out over the quota with the Whaling Commission taking a fee to fund management of the entire species.

Whales are going to continue to be hunted whether legally or illegally. Setting an explicit quota for hunting offers – just as such quota systems have for endangered species in parts of Africa – the chance to manage total numbers and ensure their survival.

Trying to “stop” hunting on so called “moral grounds” (the same grounds that presumably allow sheep or chickens or vegetables to be put to the knife) by rejecting transparent and accountable hunting and continuing with the current politically driven games based on the cultural values of some but not others has every chance of ensuring a disorderly collapse of the fishery in an uncontrolled race – just as such rejection  has led to species collapse in parts of Africa.

Being blinded by emotion or politically driven agendas is a genuine threat. A non judgmental recognition of reality coupled with a little learning from many other examples of what quota management can bring offers strong hopes for preserving the species.

Friday, March 5, 2010

Jews and the burden of money

Understanding the misguided thinking which has driven this centuries old bigotry goes a long way to understanding much of today's bitter envies…. and resulting poor policy.

CAPITALISM AND THE JEWS

By Jerry Z. Muller

267 pp. Princeton University Press. $24.95

The question of why so many Jews have been so good at making money is a touchy one. For hundreds of years, it has been fraught with suspicion, denial, resentment, guilt, self-hatred and violence. No wonder Jews and gentiles alike are so uncomfortable confronting Jewish capitalistic competence. Still, in his slim essay collection “Capitalism and the Jews,” Jerry Z. Muller presents a provocative and accessible survey of how Jewish culture and historical accident ripened Jews for commercial success and why that success has earned them so much misfortune.

As Muller, a history professor at the Catholic University of America, explains it, much anti-Semitism can be attributed to a misunderstanding of basic economics. From Aristotle through the Renaissance (and then again in the 19th century, thanks to that Jew-baiting former Jew Karl Marx), thinkers believed that money should be considered sterile, a mere means of exchange incapable of producing additional value. Only labor could be truly productive, it was thought, and anyone who extracted money from money alone — that is, through interest — must surely be a parasite, or at the very least a fraud. The Bible also contended that charging interest was sinful, inspiring Dante to consign usurers to the seventh circle of hell (alongside sodomites and murderers). In other words, 500 years ago, the phrase “predatory lending” would have been considered redundant.

Lending at interest was thus forbidden across Christian Europe — for Christians. Jews, however, were permitted by the Roman Catholic Church to charge interest; since they were going to hell anyway, why not let them help growing economies function more efficiently? (According to Halakha, or Jewish law, Jews were not allowed to charge interest to one another, just to gentiles.) And so it was, Muller explains, that Judaism became forever fused in the popular mind with finance. In fact, Christian moneylenders were sometimes legally designated as temporary Jews when they lent money to English and French kings.

As Europe’s official money­lenders, Jews became both necessary and despised. The exorbitant interest rates they charged — sometimes as high as 60 percent — only fed the fury. But considering the economic climate, such rates probably made good business sense: capital was scarce, and lenders frequently risked having their debtors’ obligations cancelled or their own assets arbitrarily seized by the crown.

This early, semi-exclusive exposure to finance, coupled with a culture that valued literacy, abstract thinking, trade and specialization (the Babylonian Talmud amazingly presaged Adam Smith’s paradigmatic pin factory), gave Jews the human capital necessary to succeed in modern capitalism. It also helped that Judaism, unlike many strains of Christianity, did not consider poverty particularly ennobling.

Most of Muller’s strongest arguments are in his first essay, which draws on everyone from Voltaire to Osama bin Laden to illustrate how the world came to conflate the negative stereotypes of Jews with those of capitalism’s excesses. The book’s remaining three essays deal somewhat unevenly with the fallout of the Jews’ economic success, and in particular the resentment it inspired among history’s economic also-rans. Muller explores, for example, how Jews improbably became associated with both abhorred poles of political economy: hypercapitalism and ­Communism.

Some Jews had indeed sought refuge from anti-Semitism in the seamless brotherhood imagined by Communism (as others did in the nationalist rebirth promised by Zionism). But in a mostly perfunctory history of socialism in Eastern Europe, Muller argues that “Judeo-Bolshevism” was a myth, promoted perhaps to malign the Communist movement.

Of course, just as often this stigma-by-association has run in the opposite direction: from economic phenomena that commentators have found distasteful, to the Jews (see “Hitler”). But such smears and scapegoating stuck largely because Jews had, for centuries, been thoroughly identified with other capitalist-conspiracy theories.

While this book is ostensibly about “the Jews,” Muller’s most chilling insights are about their enemies, and the creative, almost supernatural, malleability of anti-Semitism itself. For centuries, poverty, paranoia and financial illiteracy have combined into a dangerous brew — one that has made economic virtuosity look suspiciously like social vice.

Catherine Rampell is the economics editor at NYTimes.com.