Life, Liberty & The Pursuit of Happiness

We can't get reform with backroom deals

by Rakinder Grover

This post in Mish Shedlog's blog is quite revealing.  Do we think we'll get real change/reform if the government cuts such deals and lines the pockets of the existing players? Liberals like Arianna Huffington are getting quite upset about this. And this is certainly not the free market working.  In a few years after the excitement of "doing something" dies down and when people start to realize that things have not really changed (and likely have gotten worse), see insurance and pharma companies still making profits - they'll blame the free market and capitalists.  The problem is the "reformers", even those with "good intentions", are not working to cause real reform.  That requires breaking the cozy relationship of government and business and they are not going to bite the hand that feeds them.

Double Double Speak: Socialism Is Capitalism Is Socialism

by AW

Long observed by the defenders of liberty, a common bi-partisan pattern among politicians is this: use free market rhetoric to practice socialist policies. More precisely, blaim market "failure" to put in place statist policies that increase government control of economic & social activities. Bush did it without apology (steel tariffs, no-child-left-behind, etc.) and Obama does it with impunity (GM takeover, saving favored banks, etc). 

African Dead Aid

by AW

There is a new voice speaking clearly on an old issue. The African ex-investment banker Dambisa Moyo makes a strong case against foreign aid to Africa in her new book Dead Aid.

In her WSJ article, Moyo nails the development economics issue...

Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population -- over 350 million people -- live on less than a dollar a day, a figure that has nearly doubled in two decades.

And one of its major causes: aid-propped corrupt governments.

Enticing private capital? Call it a rescue effort, not a bailout.

by Rakinder Grover

Some information on the "toxic assets plan" expected to be announced by the Treasury next week has begun to surface.  It includes a lot of enticements to get private capital to participate in the purchase of "troubled mortgages".  One of the biggest potential obstacles in getting this all to "work" is politics.  An excerpt from an article in the NY Times:

"Still, the Treasury Department’s biggest obstacle may be the current political environment in Washington, where Democratic lawmakers are furious about the pay packages and bonuses received by executives at companies being rescued by taxpayers.

Many investment executives said they were worried that participating in any bailout program would expose them to political wrath and potentially steep new restrictions on their own pay.

Treasury and Fed officials have remained firmly against imposing any restrictions on pay for companies investing money in the rescue effort rather than receiving money from it."

Is there much of a difference between highly subsidized "investing" and just receiving money?  I expect some polished sales talk from the Treasury and the Administration to try and prevent the populist anger from rising as it did this last week. Oh, the sad circus continues....  if only the government would just stay out ...

A Lynch Mob! ... and the disengagement of private enterprise

by Rakinder Grover

A good article by David R. Kotok in The Big Picture compares the recent action in the House of Representatives with that of a lynch mob.  Besides the issues of the violation of the rule of law, the abrogation of contracts and property rights, that have been raised by some over the last few days, he also highlights the real and immediate risk of businesses becoming extremely cautious.  Careful, lest their profit seeking activity attract the ire of a populist lynch mob, private enterprise is likely to try and stay as far as it can from government. With the expanding scope of government, that is becoming increasingly harder to do, so the risk translates to a retrenchment of private enterprise unsure of the rules, risks and rewards.  This does not portend well for economic recovery, innovation and freedom in general.

"The Illusionary Magic of The Marketplace"

by AW

As expected, Alan Greenspan's apology is exacting a cultural price. In his recent excoriation by the Congress, he confessed: “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as they were best capable of protecting their own shareholders and their equity in the firms. . . . I found a flaw . . . in the model that I perceived is the critical functioning structure that defines how the world works.”

Long seen by the left as a bastion of free market, Greenspan is now the very stick with which they are beating the free markets. His mea culpa was the perfect foil for a recent Harvard conference titled  "The Free Market Mindset: History, Psychology, and Consequences". At the conference, tenured professors, never having made a day's living in the marketplace, found that "the magic of the marketplace is partially an illusion based on faulty assumptions and outmoded approaches."

As a rebuttal, Thomas Woods Jr., the author of Meltdown, writes in his eloquent blog post how common sense has long ago left the academia.

"How We Got Into This Frackin' Mess" Chart

by Anurag Wadehra

Stephen Hicks has a conceptually elegant but simple chart explaining the pathologies of a mixed economy - when free market is "mixed" with government intervention. For fancier titles of the chart, Dr. Hicks suggests...

Academic title: “The Sociology of Dysfunctional Nonstandard Political-Economic Systems.”

Public Intellectual title: “The Evolution of the Mixed Economy.”

I wonder if there is a similar attempt by the Socialists to explain their worldview. At least their arguments - good, bad and ugly - could be laid bare.

AIG: Moral Hazard and Corporate Looting

by AW

AIG is the mother of all TBTF ("too big to fail") institutions; it has already received 180 billion dollars of taxpayer money so far. This bailout is larger than that for any other financial institution, and it is widely expected to go higher. How could a staid insurance company be in the center of this?

James Hamilton in his EconBrowser blog explains the moral morass of "selling insurance" like snake oil. Here is an interesting story line that is emerging.

Ice-fishing Bankers: How Iceland Skated Off The Edge

by Anurag Wadehra

Michael Lewis has a rollicking article on Iceland's misadventures in high finance.

From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. Reykjavík real-estate prices tripled. By 2006 the average Icelandic family was three times as wealthy as it had been in 2003, and virtually all of this new wealth was one way or another tied to the new investment-banking industry.

“Everyone was learning Black-Scholes” (the option-pricing model), says Ragnar Arnason, a professor of fishing economics at the University of Iceland, who watched students flee the economics of fishing for the economics of money. “The schools of engineering and math were offering courses on financial engineering. We had hundreds and hundreds of people studying finance.”

When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child.

The entire article is worth the read. I was most amused by the reference above: the rush to slavishly learn the Black-Sholes pricing formula. This is the very formula derided by Nassim Taleb in his book the Black Swan for underestimating the probability of the large shocks to financial system.

Gaithner & the Dollhouse Bank

by Anurag Wadehra

I never thought I'd write these words: I love NPR!

I am only referring to the podcasts spearheaded by Planet Money team. Adam Davidson is one of the best journalist writing and speaking on financial issues today. He asks piercing, jargon-free questions and does a lot of homework to make complex simple: no mean task. In the podcast The Bad Bank, produced in collaboration with Ira Glass of This American Life, Adam explains in brilliantly lucid terms the balance sheet of a hypothetical bank. He goes further to explain what choices we face when we "bailout" a bank whose asset has gone "toxic" - in this case a dollhouse.