The authors of SuperFreakonomics, Steven Levitt and Stephen Dubner, make what is, at face, a straightforward economic claim: Faced with a serious problem (global warming) and given the option of two sorts of solutions, one (geoengineering) which costs an order of magnitude less then the other (carbon emission reduction), why spend more?
Some argue that there are not really two sorts of solutions, that geoengineering is unlikely to practically work. With admitted ignorance of the technology, I think -- at this point -- its fair to observe that changing the behavior of billions of people, and against many of their narrow, short-term, interests is not entirely practical itself.
The scientist most relied on by L&D, Ken Caldeira, doesn't share their conclusion, in part, for a different reason: he apparently believes carbon emission is "essentially immoral" just like "mugging little old ladies". L&D view this moralistic, as opposed to analytical, approach to be, in some form, religious.
While L&D do take perverse joy in challenging traditional moral assumptions -- eg: pimps up -- their analysis is not simply amoral. Their claim is ultimately Machiavellian: better, more moral, outcomes, can be realized through cold-hearted, amoral, analysis than by adherence to pious orthodoxies.
The traditional, religious, understanding, shunned by all sides in this debate, is that people generally act moral less out of analytical, or empathetic, judgments of right and wrong, than out of force of habit guided by the weight of culture and tradition. Where this weight is removed, people have a frightening tendency to, for example, murder little old ladies and mug defenseless children.
It is hard, then, to imagine that the behavior of billions of people will be peacefully changed to meaningfully reduce their carbon footprint without harnessing the weight of culture and tradition to attach a notion of something like sin to carbon emission.
Thursday, October 29, 2009
Tuesday, October 27, 2009
Behind the Numbers
Of all the numbers trending in the GOP's favor perhaps the most signifigant this: In April 2008, 75% of Independents believed there was solid evidence for Global Warming. Today only 53% do.
One of the important emerging political trends is increasing Democratic competitiveness in the Mountain West: Three 2004 Mountain Red States turned Blue for Obama, and a fourth was friggin close. In April 2008, the region polled 75%-21% believing in global warming. Today the region -- at 44% - 42% -- is the most skeptical in the nation.
Another, similar trend involved college graduates. In 2004, their vote was split, in 2008 they went 53% - 45% for Obama. In April 2008, 75% of Independent college graduates believed in Global Warming, today only 56% do.
In both cases, a strong contributor to increasing Democratic support was the perception that the Republican Party, personified by W & Sarah Palin, stood, blinded by, or hostage to, ideology and theology, increasingly anti-science and even anti-thought. The Democrats with increasing success portrayed themselves as the thinking person's alternative. The success of this perception was reflected in the public trust for Global Warming science vouched strongly for by Democrats and questioned, with equal fervor, by Republicans.
Republicans have done precious little in the past year and a half to counter the perception that they couldn't think less. In these numbers lies rapidly falling public faith in the reasonableness of Democrats.
One of the important emerging political trends is increasing Democratic competitiveness in the Mountain West: Three 2004 Mountain Red States turned Blue for Obama, and a fourth was friggin close. In April 2008, the region polled 75%-21% believing in global warming. Today the region -- at 44% - 42% -- is the most skeptical in the nation.
Another, similar trend involved college graduates. In 2004, their vote was split, in 2008 they went 53% - 45% for Obama. In April 2008, 75% of Independent college graduates believed in Global Warming, today only 56% do.
In both cases, a strong contributor to increasing Democratic support was the perception that the Republican Party, personified by W & Sarah Palin, stood, blinded by, or hostage to, ideology and theology, increasingly anti-science and even anti-thought. The Democrats with increasing success portrayed themselves as the thinking person's alternative. The success of this perception was reflected in the public trust for Global Warming science vouched strongly for by Democrats and questioned, with equal fervor, by Republicans.
Republicans have done precious little in the past year and a half to counter the perception that they couldn't think less. In these numbers lies rapidly falling public faith in the reasonableness of Democrats.
Wednesday, October 21, 2009
Kwame Anthony Appiah
In his most recent column, David Brooks quotes Princeton professor Kwame Anthony Appiah (leaving some ambiguity as to whether he shares the opinion) as distinguishing between the "philosopher's" view of possessing character and virtue and the "psychologist's" view of being a "community of competing selves" which "are continually popping in and out of existence... have different desires, and they fight for control - bargaining with, deceiving, and plotting against one another." This latter view is propped up by "a century's worth of experiments" which show people often behave differently in different contexts.
Arguing against a straw man is one tell tale sign of a weak claim. Classical thinkers, of course, even without the benefit of psychological "experiments", understood well our divided and competing natures (after all, they were people too!). They taught stories of heroes with character and virtue, not to raise awareness of our true, or fixed, nature but to encourage our better angels. Their central insight was that behavior is largely habitual and habits can, largely, be developed.
Stripped, then, of its scientific pretense, this "psychologist" critique is merely functional. It offers -- actually, sells -- greater self-satisfaction. The traditional teaching promotes better behavior.
From a societal perspective, the classical view is obviously more beneficial. Which is, in the end, to be expected of a teaching that has passed the test of time.
Arguing against a straw man is one tell tale sign of a weak claim. Classical thinkers, of course, even without the benefit of psychological "experiments", understood well our divided and competing natures (after all, they were people too!). They taught stories of heroes with character and virtue, not to raise awareness of our true, or fixed, nature but to encourage our better angels. Their central insight was that behavior is largely habitual and habits can, largely, be developed.
Stripped, then, of its scientific pretense, this "psychologist" critique is merely functional. It offers -- actually, sells -- greater self-satisfaction. The traditional teaching promotes better behavior.
From a societal perspective, the classical view is obviously more beneficial. Which is, in the end, to be expected of a teaching that has passed the test of time.
Monday, October 19, 2009
Babies with Candy
In his latest NYTimes column, Nobel Laureate, Paul Krugman is in (recycled) whining mode. Highlights:
The truth of the matter is more complicated than Krugman would like you to think. This deep into the credit crisis, even Nobel winning, NYTimes column writing, Princeton professors ought to understand the manner in which bank lending is tied to fixed income security markets (where the bulk of Goldman's reported profits came from).
Main Street, was not, as Krugman pretends, an innocent victim of Wall Street's misdeeds. Main Street, hand in hand with Wall Street, borrowed far more money than it was able to pay back, leading up to the crash.
To spur any recovery, of course, businesses require funding. Krugman's apparent view that this best comes from a return to not-entirely-responsible lending seems perverse. More obviously sensible would be tax cuts and reduced regulatory burdens.
Finally, the notion that financial reform will decrease risk taking is something other than evidence-based. Consider a recent Journal column detailing the Government's hand in almost 2/3s of all bad mortgages.
Krugman is right, of course, to be concerned about the agency costs embedded in our financial system. But legislators and regulators, as much as bankers, play games with other people's money. Was Krugman more honestly concerned he would be more in favor (de-)regulatory policies that gave people more control over their own money.
...Goldman Sachs is making record profits... banks that are actually in the business of lending, as opposed to trading, are still in trouble...
while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not...
In the first phase of the crisis, Main Street was punished for Wall Street’s misdeeds; now broad economic distress, especially persistent high unemployment, is leading to big losses on mortgage loans and credit cards.
And here’s the thing: The continuing weakness of many banks is helping to perpetuate that economic distress. Banks remain reluctant to lend, and tight credit, especially for small businesses, stands in the way of the strong recovery we need...
we desperately need to pass effective financial reform. For if we don't, bankers will soon be taking even bigger risks than they did in the run-up to this crisis... When bankers gamble with other people's money, it's heads they win, tails the rest of us lose.
The truth of the matter is more complicated than Krugman would like you to think. This deep into the credit crisis, even Nobel winning, NYTimes column writing, Princeton professors ought to understand the manner in which bank lending is tied to fixed income security markets (where the bulk of Goldman's reported profits came from).
Main Street, was not, as Krugman pretends, an innocent victim of Wall Street's misdeeds. Main Street, hand in hand with Wall Street, borrowed far more money than it was able to pay back, leading up to the crash.
To spur any recovery, of course, businesses require funding. Krugman's apparent view that this best comes from a return to not-entirely-responsible lending seems perverse. More obviously sensible would be tax cuts and reduced regulatory burdens.
Finally, the notion that financial reform will decrease risk taking is something other than evidence-based. Consider a recent Journal column detailing the Government's hand in almost 2/3s of all bad mortgages.
Krugman is right, of course, to be concerned about the agency costs embedded in our financial system. But legislators and regulators, as much as bankers, play games with other people's money. Was Krugman more honestly concerned he would be more in favor (de-)regulatory policies that gave people more control over their own money.
Saturday, October 17, 2009
A Radical Proposal
As noted here previously, one of the true causes of systemic risk in our financial system is the FDIC. A bank account is, simply, an unsecured loan to the bank. Because accounts are "insured" by the FDIC, account holders are not as concerned about banks engaging in risky behavior as unsecured lenders would otherwise be. In theory, the FDIC should be so concerned and could set appropriate terms. In practice, of course, well, here we are.
On the other hand, without FDIC insurance we face an increase risk of bank runs, which can cause liquidity crises, and so threaten the economy. Even without FDIC insurance people seeking return on their savings would still put their money in banks, it would simply be less "sticky" and therefore more systemic-ly risky.
Finally, our Government is a massive borrower, largely from foreign sources. At this point, realistically, we carry debt that can only be rolled, not -- ever -- be payed back.
Given all this, the sensible thing -- to me -- would seem to be the Government acting, itself, as a retail bank. Instead of holding accounts that are, in effect, loans to Chase, subsidized by the government, individuals should be able to open accounts that are, in effect, loans to the Government. Private banks could play a customer-facing/administrative role as a DMV-style customer interface would kill the project. Better, I think, to finance as much of our debt in this manner as possible, than borrowing more from abroad. Once this system is set up, FDIC insurance could be wound down in a reasonable manner (eg: lowering the amount covered by a certain percentage annually).
The main public-interest negative I can see in this is that it in its structure acknowledges the permanence of our national debt. But that is simply facing reality.
Facing a different sort of reality: Too many vested interests make too much money off of FDIC insured accounts for this sort of reform to ever have a chance.
On the other hand, without FDIC insurance we face an increase risk of bank runs, which can cause liquidity crises, and so threaten the economy. Even without FDIC insurance people seeking return on their savings would still put their money in banks, it would simply be less "sticky" and therefore more systemic-ly risky.
Finally, our Government is a massive borrower, largely from foreign sources. At this point, realistically, we carry debt that can only be rolled, not -- ever -- be payed back.
Given all this, the sensible thing -- to me -- would seem to be the Government acting, itself, as a retail bank. Instead of holding accounts that are, in effect, loans to Chase, subsidized by the government, individuals should be able to open accounts that are, in effect, loans to the Government. Private banks could play a customer-facing/administrative role as a DMV-style customer interface would kill the project. Better, I think, to finance as much of our debt in this manner as possible, than borrowing more from abroad. Once this system is set up, FDIC insurance could be wound down in a reasonable manner (eg: lowering the amount covered by a certain percentage annually).
The main public-interest negative I can see in this is that it in its structure acknowledges the permanence of our national debt. But that is simply facing reality.
Facing a different sort of reality: Too many vested interests make too much money off of FDIC insured accounts for this sort of reform to ever have a chance.
Wednesday, October 14, 2009
Of Predators
Thomas Frank writing in the Journal argues that Republicans misunderstand, and therefore misuse, when they -- borrowing James K. Galbraith's construct -- identify the Government as a Predator. To Frank and Galbraith the Government is only a Predator when it serves evil corporate, as opposed to public, interests.
Last week, I criticized Sheila Bair for her transparent attempt to preserve the solvency of her agency by stealing from secured creditors. In fairness to her, she merely wanted to get in on the scam the administration has already facilitated for the UAW and JP Morgan.
Sensible people, including the President, understand that one of the core problems with the our health-care system is its employer centric-ness. While Democrats have mostly ignored the sensible conservative proposal to extend to individuals the tax advantages that privilege corporate provided coverage, Sen Ron Wyden (D, Oregon) did propose a reasonable, if convoluted, bi-partisan ammendment, that in some circumstances would have given some employees more control of their coverage. Big Business and Big Labor joined hands, were blessed by the President, and the offending proposal was (shamefully) killed.
These sorts of policy choices are the rule, not the exception. As noted previously, Republicans are, for the time being, without power in Washington and, so, if Government is now acting the Predator, it is doing so without their corrupting influence.
The classical, which is to say conservative, teaching on the subject is "power tends to corrupt and absolute power corrupts absolutely." In this view, it is Frank and Galbraith who are hopelessly unable to appreciate the predator gene in the DNA of our leviathan state.
Last week, I criticized Sheila Bair for her transparent attempt to preserve the solvency of her agency by stealing from secured creditors. In fairness to her, she merely wanted to get in on the scam the administration has already facilitated for the UAW and JP Morgan.
Sensible people, including the President, understand that one of the core problems with the our health-care system is its employer centric-ness. While Democrats have mostly ignored the sensible conservative proposal to extend to individuals the tax advantages that privilege corporate provided coverage, Sen Ron Wyden (D, Oregon) did propose a reasonable, if convoluted, bi-partisan ammendment, that in some circumstances would have given some employees more control of their coverage. Big Business and Big Labor joined hands, were blessed by the President, and the offending proposal was (shamefully) killed.
These sorts of policy choices are the rule, not the exception. As noted previously, Republicans are, for the time being, without power in Washington and, so, if Government is now acting the Predator, it is doing so without their corrupting influence.
The classical, which is to say conservative, teaching on the subject is "power tends to corrupt and absolute power corrupts absolutely." In this view, it is Frank and Galbraith who are hopelessly unable to appreciate the predator gene in the DNA of our leviathan state.
Tuesday, October 13, 2009
Sustainable Growth Rate
Conservative critics who reject the notion of that you can reduce deficits by spending trillions miss, in part, the boat. As discussed previously, the driving force behind Health Care Reform is the curve by which Medicare promises to bankrupt the country. The logic is sound, if solipstic. Medicare contains a straight-foward, if uncreative, cost containment mechanism: legislative fiat. Unsurprisingly, overly aggressive limits cause doctors to leave the program. To maintain doctor participation, Congress has had to repeatedly override mandated caps. The proposed reform addresses this with equal uncreative straight-fowardness: If there is no market paying higher prices, doctors will be forced to accept the capped price.
The basic laws of supply and demand teach that this is not a long-term solution. Pushing down price in this manner will, inevitably, push down supply. Not only that, but the goal is, of course, to dramatically increase demand.
The apparent plan for this is a bit more creative. The idea is to privilege primary care physicians at the expense of more skilled, more expensive specialists. Considering that the current crop of primary care physicians functionally failed out of Med School, there will then be little reason not to lower standards. If Med School is made easier, more like, for example, Nursing School, you can expect to have enough primary care physicians, at lower cost, to handle the expanded demand.
There will, of course, sooner than later, be a dramatic shortage of specialists (with one notable exception). For that, the President and Congressional Democrats do have a straight forward, if somewhat copycat, plan: IBGYBG.
The basic laws of supply and demand teach that this is not a long-term solution. Pushing down price in this manner will, inevitably, push down supply. Not only that, but the goal is, of course, to dramatically increase demand.
The apparent plan for this is a bit more creative. The idea is to privilege primary care physicians at the expense of more skilled, more expensive specialists. Considering that the current crop of primary care physicians functionally failed out of Med School, there will then be little reason not to lower standards. If Med School is made easier, more like, for example, Nursing School, you can expect to have enough primary care physicians, at lower cost, to handle the expanded demand.
There will, of course, sooner than later, be a dramatic shortage of specialists (with one notable exception). For that, the President and Congressional Democrats do have a straight forward, if somewhat copycat, plan: IBGYBG.
Sunday, October 11, 2009
The Nobel Prize
Yoni Brenner comments in the Times about the silliness of the award.
It seems to me that the politics would argue for Obama turning the award down. Let him say "I very much appreciate that you appreciate what I am trying to do, but I haven't done it yet and there are many deserving alternatives. Why don't we circle back in three years and see how I am doing?" Even his political opponents would have to credit him. By accepting the award he strengthens the narrative that sees him as seeing himself as the Obamessiah.
More distasteful than what Obama has not done and the deserving candidates passed over is Obama's track record. James Woolsey, CIA director under President Clinton, writes in the Journal, of the ugly premise underlying Obama's central Israel initiative: the ban on expanding kitchens in Gush Etsyon. Lanny Davis, former special counsel to President Clinton, recently observed in the Journal Obama's apparent intent to not "recognize free and fair elections in Honduras... at the same time it is about to recognize the president of Afghanistan, who was elected in what is now seen as a fraudulent electoral process." Add to that calibrated response to the violence in iran and his rebuff of the Dalai Lama and it seems that we have a president quite willing to trade freedom for stability.
The President, and his policy makers, argue that they are just being realistic; that their policies offer better outcomes. Which may prove out. But it does accentuate the perversity of extending this award to a man doggedly justifying means with ends, before the results are in.
It seems to me that the politics would argue for Obama turning the award down. Let him say "I very much appreciate that you appreciate what I am trying to do, but I haven't done it yet and there are many deserving alternatives. Why don't we circle back in three years and see how I am doing?" Even his political opponents would have to credit him. By accepting the award he strengthens the narrative that sees him as seeing himself as the Obamessiah.
More distasteful than what Obama has not done and the deserving candidates passed over is Obama's track record. James Woolsey, CIA director under President Clinton, writes in the Journal, of the ugly premise underlying Obama's central Israel initiative: the ban on expanding kitchens in Gush Etsyon. Lanny Davis, former special counsel to President Clinton, recently observed in the Journal Obama's apparent intent to not "recognize free and fair elections in Honduras... at the same time it is about to recognize the president of Afghanistan, who was elected in what is now seen as a fraudulent electoral process." Add to that calibrated response to the violence in iran and his rebuff of the Dalai Lama and it seems that we have a president quite willing to trade freedom for stability.
The President, and his policy makers, argue that they are just being realistic; that their policies offer better outcomes. Which may prove out. But it does accentuate the perversity of extending this award to a man doggedly justifying means with ends, before the results are in.
Thursday, October 8, 2009
Afghanistan
A few easy Afghan observations: Biden's proposed strategy for Afganistan sounds an awful lot like Rumsfeld's for Iraq. The Military, being protective of its institutional reputation, and more importantly, the lives of its soldiers, is less likely now, than it was then, to go more or less quietly along with a strategy it feels is dangerously wrong-headed. The administration, in claiming that military leaders who publicly express independent opinions are circumventing the chain of command, is, rather blatantly, attempting to circumvent its own chain of command by keeping key information -- professional military opinions -- from the public it, nominally, serves.
Listening to Candidate Obama, one sure got the impression that there was no meaningful difference between the Taliban and Al-Quaida. While Biden may well be correct that there still is, to the degree that Al-Quaida is primarily operating out of Pakistan, how helpful can focusing on Al-Quaida can be, without either Pakistani co-operation or disregard for Pakistani sovereignty? As the Taliban have been reported to be an extension of Pakistan's internal security service, the administration's sudden, and surprising, willingness to include the Taliban in the future of Afghanistan appears a carrot offered in the hopes of that co-operation.
Given the relative strategic priority, one imagines that the debate over Afghanistan policy is part of the larger effort regarding neighboring Iran. Iran, presumably, would strongly prefer the Biden plan. The administration might view this public airing as a useful support to its diplomacy (playing Good Cop to McChrystal's Bad Cop).
What ever the case, the Administration has, best one can tell, tried very hard to maintain a sophisticated, multi-faceted, diplomatic engagement with Iran. Since Reagan, Conservatives question the general effectiveness of that sort of approach. Obama, now, has a golden opportunity to prove them wrong.
Listening to Candidate Obama, one sure got the impression that there was no meaningful difference between the Taliban and Al-Quaida. While Biden may well be correct that there still is, to the degree that Al-Quaida is primarily operating out of Pakistan, how helpful can focusing on Al-Quaida can be, without either Pakistani co-operation or disregard for Pakistani sovereignty? As the Taliban have been reported to be an extension of Pakistan's internal security service, the administration's sudden, and surprising, willingness to include the Taliban in the future of Afghanistan appears a carrot offered in the hopes of that co-operation.
Given the relative strategic priority, one imagines that the debate over Afghanistan policy is part of the larger effort regarding neighboring Iran. Iran, presumably, would strongly prefer the Biden plan. The administration might view this public airing as a useful support to its diplomacy (playing Good Cop to McChrystal's Bad Cop).
What ever the case, the Administration has, best one can tell, tried very hard to maintain a sophisticated, multi-faceted, diplomatic engagement with Iran. Since Reagan, Conservatives question the general effectiveness of that sort of approach. Obama, now, has a golden opportunity to prove them wrong.
Wednesday, October 7, 2009
Serving the FDIC's Interest
In a recent speech, FDIC chair, Sheila Bair laid our her vision for financial services regulatory reform.
She starts from the common-sense premise that "we need an end to the too big to fail doctrine". She proposes a "mechanism for the orderly resolution of these institutions similar to that used for FDIC-insured banks." She argues for extending this mechanism beyond the large bank holding companies to smaller bank holding companies, hedge funds and insurance companies. She expressed support for the international initiative towards the development of wind down plans providing they "be developed in cooperation with the resolution authority". Finally, she also proposes considering "limiting the claims of secured creditors to encourage them to monitor the riskiness of the financial firm." She believes that short term secured borrowing "may encourage greater fragility in the financial markets" and that taking money from secured creditors and giving it to general creditors would serve "to stem any systemic risks."
The most striking feature of her analysis is that, to her, the "too big to fail doctrine" is false. That with a structured resolution process no firm is too big to fail. As noted previously, an FDIC-style resolution process works well when disposing a relatively tiny amount of assets into a large market. It can not be reasonably expected to work as well disposing a more meaningful proportion of assets in market.
That large and/or interconnected companies should maintain "living wills" is an almost inescapable take-away from the Lehman bankruptcy. Mandating that any such company (including non-financials) maintain active shareholder and creditor approved pre-packaged bankrupcy plans appears a no-brainer. Bair, rightfully, notes that such plans can improve systematic resilience by highlighting risks and dependencies. More questionable is her insistence on regulatory agency participation in, or rather -- let's not kid ourselves -- control of, developing these plans. Without regulator intervention, this sort of rule would create structural pressure against firms too big or complex to fail. The bigger and more complex a firm is, the more difficult it will be for shareholders and creditors, by themselves, to reach agreement.
Demanding that smaller firms that could be otherwise be reasonably wound down through existing mechanisms maintain "living wills", as Bair appears to support, is the sort of regulation-as-barrier-to-entry that larger firms love.
At first glance, her argument to mandate haircuts for secured creditors is unequivocally idiotic. If shareholders, regulators and unsecured creditors cannot together adequately monitor the riskiness of a firm, how could secured creditors? How does taking money from secured creditors and giving it to unsecured creditors stem any systemic risk?
Most risible is the suggestion that secured lending "encourages more risky behavior." Bair surely knows this is false: Systemic risk is primarily caused by unsecured rather than secured lending; A firm's secured borrowing cannot get out of hand, as a firm has finite assets to borrow against. If one only lends securely, one is not put at risk by a borrower defaulting. In truth, unsecured borrowing is also, generally, a check on excessively risky behavior as lenders demand higher rates from firms perceived as more risky. The financial system did not work this way because the government subsidized unsecured lending: In the first instance via the implicit "too-big-to-fail" guarantee, but also via the FDIC itself -- a bank account is nothing more then a unsecured loan to the bank.
Her true motivation appears clearer when one considers that the FDIC is running out of money. It would sure benefit from being able to seize 20% from secured creditors of banks it takes over. Similarly, to argue for an FDIC-like resolution process to be expansively applied is, between the lines, to argue for a dramatic expansion of FDIC authority. It should be no surprise that Bair argues as forcefully for regulation in her agency's interest as she opposed regulation against her agencies interest. It is unfortunate that the regulator cannot be relied on to, instead, defend the public interest.
She starts from the common-sense premise that "we need an end to the too big to fail doctrine". She proposes a "mechanism for the orderly resolution of these institutions similar to that used for FDIC-insured banks." She argues for extending this mechanism beyond the large bank holding companies to smaller bank holding companies, hedge funds and insurance companies. She expressed support for the international initiative towards the development of wind down plans providing they "be developed in cooperation with the resolution authority". Finally, she also proposes considering "limiting the claims of secured creditors to encourage them to monitor the riskiness of the financial firm." She believes that short term secured borrowing "may encourage greater fragility in the financial markets" and that taking money from secured creditors and giving it to general creditors would serve "to stem any systemic risks."
The most striking feature of her analysis is that, to her, the "too big to fail doctrine" is false. That with a structured resolution process no firm is too big to fail. As noted previously, an FDIC-style resolution process works well when disposing a relatively tiny amount of assets into a large market. It can not be reasonably expected to work as well disposing a more meaningful proportion of assets in market.
That large and/or interconnected companies should maintain "living wills" is an almost inescapable take-away from the Lehman bankruptcy. Mandating that any such company (including non-financials) maintain active shareholder and creditor approved pre-packaged bankrupcy plans appears a no-brainer. Bair, rightfully, notes that such plans can improve systematic resilience by highlighting risks and dependencies. More questionable is her insistence on regulatory agency participation in, or rather -- let's not kid ourselves -- control of, developing these plans. Without regulator intervention, this sort of rule would create structural pressure against firms too big or complex to fail. The bigger and more complex a firm is, the more difficult it will be for shareholders and creditors, by themselves, to reach agreement.
Demanding that smaller firms that could be otherwise be reasonably wound down through existing mechanisms maintain "living wills", as Bair appears to support, is the sort of regulation-as-barrier-to-entry that larger firms love.
At first glance, her argument to mandate haircuts for secured creditors is unequivocally idiotic. If shareholders, regulators and unsecured creditors cannot together adequately monitor the riskiness of a firm, how could secured creditors? How does taking money from secured creditors and giving it to unsecured creditors stem any systemic risk?
Most risible is the suggestion that secured lending "encourages more risky behavior." Bair surely knows this is false: Systemic risk is primarily caused by unsecured rather than secured lending; A firm's secured borrowing cannot get out of hand, as a firm has finite assets to borrow against. If one only lends securely, one is not put at risk by a borrower defaulting. In truth, unsecured borrowing is also, generally, a check on excessively risky behavior as lenders demand higher rates from firms perceived as more risky. The financial system did not work this way because the government subsidized unsecured lending: In the first instance via the implicit "too-big-to-fail" guarantee, but also via the FDIC itself -- a bank account is nothing more then a unsecured loan to the bank.
Her true motivation appears clearer when one considers that the FDIC is running out of money. It would sure benefit from being able to seize 20% from secured creditors of banks it takes over. Similarly, to argue for an FDIC-like resolution process to be expansively applied is, between the lines, to argue for a dramatic expansion of FDIC authority. It should be no surprise that Bair argues as forcefully for regulation in her agency's interest as she opposed regulation against her agencies interest. It is unfortunate that the regulator cannot be relied on to, instead, defend the public interest.
Tuesday, October 6, 2009
The Pursuit Of Ignorance
One of the not-enough-discussed culprits at the heart of our economic melt-down is a portfolio theory which promises that, through the miracle of diversification, smart investors need not trouble themselves with the messy details of any potential investment. This has quantitative problems that any competent investor would have tried to address. For example: correlations in bull markets can not be expected, with any certainty, to hold in bear markets, but given that our political and economic watchmen feel obliged to restrain bear markets, there is limited data available to derive more meaningful correlations. There is, however, no getting around the fundamental qualitative issue: So long as somebody is minding the store, diversification-investors can piggyback. The more investors adopt this approach, the fewer investors there are minding the store and the more executive decisions are made to benefit management or short term, vulture, investors.
This is, I think, an instance of a general pattern. Central Bankers, and their would-bes, looking mostly at coarse grained economic indicators feel comfortable directing whole economies. Regulators and Legislators -- not to speak of Journalists! -- are heroically unrestrained by an often for-dummies (if that) understanding of the industries they oversee. Our President has apparently adopted that theory of foreign relations which argues we need not bother understanding the internal political dynamic of other nations. In the middle of it all is a culture of management, in which everyone's highest professional aspiration is to take credit -- and be paid -- for other people's work.
In the end, the strength of an economy boils down to the aggregate willingness and ability of people to do things valued by other people. And underneath all the awful decisions made by all sorts of economic actors, lies a culture that increasingly devalues the painstaking work that goes with ordinary productivity.
This is, I think, an instance of a general pattern. Central Bankers, and their would-bes, looking mostly at coarse grained economic indicators feel comfortable directing whole economies. Regulators and Legislators -- not to speak of Journalists! -- are heroically unrestrained by an often for-dummies (if that) understanding of the industries they oversee. Our President has apparently adopted that theory of foreign relations which argues we need not bother understanding the internal political dynamic of other nations. In the middle of it all is a culture of management, in which everyone's highest professional aspiration is to take credit -- and be paid -- for other people's work.
In the end, the strength of an economy boils down to the aggregate willingness and ability of people to do things valued by other people. And underneath all the awful decisions made by all sorts of economic actors, lies a culture that increasingly devalues the painstaking work that goes with ordinary productivity.
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