Monday, February 22, 2010

AEI Paper On The Credit Crisis

It is called A Silver Lining to the Financial Crisis: A More Realistic View of Capitalism By Jeffrey Friedman and Wladimir Kraus. Here is the abstract followed by the key exerpts:
"There is little evidence that deregulation or banks’ compensation practices caused the financial crisis. What did seem to cause it were capital regulations imposed on banks across the world. These regulations explain why bankers who are commonly seen as having recklessly bought risky mortgage-backed bonds in order to boost earnings—and bonuses—actually bought the least-risky, least-lucrative bonds available: those that were guaranteed by Fannie Mae or Freddie Mac or were rated AAA. These securities were decisively favored by capital regulations, raising the question of whether regulation actually increases systemic risk. By definition, regulations aim to homogenize the otherwise heterogeneous behavior of competing enterprises. Since one set of regulations has the force of law, it homogenizes the entire economy in that jurisdiction. But regulators are fallible, and if their ideas turn out to be wrong—as they appear to have been in the case of capital regulations—the entire system is put at risk."

"First, the Gramm-Leach-Bliley Act of 1999, which amended the Glass-Steagall Act of 1933, did not erase the distinction between commercial banks, which take deposits and make loans and investments, and (the somewhat confusingly labeled) investment banks, which underwrite and trade securities. The 1999 act merely allowed both commercial and investment banks to be subsidiaries of a common holding company, but they remained subject to the same restrictions on the nature of their activities as before. These restrictions were loose in the case of investment banks but tight for commercial banks—and as we shall see, the crisis took place within the commercial banks."

" default swaps did not mysteriously “interconnect” banks and increase systemic risk. In essence, a credit default swap is a loss-protection insurance contract. This risk is swapped (for a fee) by the lender to a “counterparty”; the amount of the risk remains the same but has merely been transferred from the lender to the counterparty. This transfer no more increases overall risk levels than does a car insurance policy, which transfers risk from the driver to the insurance company."

"...past counterparties do not remain on the hook when they pass a policy to a new counterparty. There remain only two meaningfully connected parties—the ultimate insurer and the insured."

"...starting in the 1930s, regulations issued by the Securities and Exchange Commission (SEC) made the close supervision of corporations by “insiders” who financed these companies—the dominant practice before the SEC regulations—impossible. Since the 1930s, therefore, equity investors in most corporations have, by definition, been “outsiders” who have had to use publicly reported information to infer what is going on inside. In making these inferences, they rely on short-term, legally mandated heuristics for long-term performance, such as quarterly earnings reports."

"To date, there have been only two studies of the matter [on the role of executive compensation], the first of which found that the banks whose executives held the most stock in the bank lost the most money in the crisis—indicating that the executives did not engage in deliberate risk taking motivated by a quest for higher bonuses..."

"...most of the risk taking found by the authors was among insurance companies, not banks."

"there is decisive evidence against the thesis that incentives to take risks caused the financial crisis. The evidence is this: 93 percent of all the mortgage backed securities held by American banks either were issued by Fannie Mae or Freddie Mac, and were thus implicitly guaranteed by the U.S. Congress (as the American taxpayer soon found out), or were issued by investment banks and rated AAA by one of the three rating agencies: Moody’s, Standard and Poor’s, or Fitch."

"...these three private corporations had had a legally protected oligopoly since 1975, thanks to another SEC regulation."

" is true of all bonds, AAA-rated bonds paid less than lower-rated (AA, A, BBB, etc.), supposedly riskier bonds."

"If bankers were being lured by their banks’ compensation systems into acquiring risky but lucrative assets—on the basis of which the bankers would have gotten bigger bonuses—then they should never have bought AAA bonds. Instead, they should always have bought higher-paying AA-, A-, or BBB-rated bonds, but they did so only percent of the time."

[the crisis was] "...caused by a sharp drop, in September 2008, in the market price of mortgage-backed bonds, in anticipation of their declining value as the bubble deflated. The first victims of the falling price of mortgage-backed bonds were Fannie and Freddie; in quick succession came the investment bank Lehman Brothers; and finally came the commercial banks—because they held so many mortgage-backed bonds, not mortgages."

[an important cause is]" obscure regulation called the recourse rule. The recourse rule was enacted by the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, and the Office of Thrift Supervision in 2001."

"...the after-tax cost of equity capital, say 12 to 15 percent, is substantially greater than the aftertax cost of debt, which is generally in the 3 to 5 percent range."

"By reducing their capital holdings, banks can, at least in principle, increase their profitability. But under the recourse rule, “well-capitalized” American commercial banks were required to spend 80 percent more capital on commercial loans, 80 percent more capital on corporate bonds, and 60 percent more capital on individual mortgages than they had to spend on asset-backed securities, including mortgage-backed bonds, as long as these bonds were rated AA or AAA or were issued by a government-sponsored enterprise (GSE), such as Fannie or Freddie. Specifically, $2 in capital was required for every $100 in mortgage-backed bonds, compared to $5 for the same amount in mortgage loans and $10 for the same amount in commercial loans. One can readily see that the recourse rule was designed to steer banks’ funds into “safe” assets, such as AAA mortgage-backed bonds."

"Unfortunately, these bonds turned out not to be so safe. Without the recourse rule, however, there is no reason for portfolios of American banks to have been so heavily concentrated in mortgage-backed bonds."

"...the recourse rule covered commercial banks, not hedge funds or anyone else. If not for the recourse rule’s privileging of mortgage-backed bonds, the burst housing bubble almost certainly would not have caused a banking crisis."

"Was there a connection between the recourse rule and the housing bubble?"

"The artificial demand for mortgage-backed bonds created by the recourse rule may therefore explain why, as the decade wore on and the pool of credit-worthy borrowers who made traditional down payments dried up, banks and mortgage specialists lowered their lending standards and made the terms of their mortgages more generous."

"Between the middle of 2001 and the beginning of 2002, mortgage securitization jumped from about $20 billion to $50 billion per quarter, peaking at nearly $150 billion per quarter in 2006."

"Citi jumped into mortgage-backed bonds with both feet, putting them on its balance sheet through the recourse rule but also buying them off-balance-sheet through SIVs (structured investment vehicles)..."

"...JP Morgan lost billions of dollars in potential revenue for years in order to avoid mortgage securitization. JP Morgan’s Jamie Dimon was among those who recognized the danger..."

"What explains this diverse behavior is that the individual bankers in question had different perceptions of the magnitude of the risk. In unregulated markets, that kind of diversity of viewpoints is precisely what makes capitalism work."

"The recourse rule, Basel I, and Basel II loaded the dice in favor of the regulators’ ideas about prudent banking. These regulations imposed a new profitability gradient over all bankers’ risk/return calculations, conferring 80 percent capital relief on banks that bought GSE-issued or highly rated mortgage backed bonds rather than commercial loans or corporate bonds, and 60 percent relief for banks that traded their individual mortgages for those “safe” mortgage-backed bonds."

"Bank-capital regulations inadvertently made the banking system more vulnerable to the regulators’ errors. But this is what all regulations do."

It Is Hard And Costly To Protect The Environment, Even In Liberal Cities

The article is Even Boulder Finds It Isn't Easy Going Green from the 2-13/14-2010 WSJ, page A1. Here are the key experts:
"But Boulder has found that financial incentives and an intense publicity campaign aren't enough to spur most homeowners to action, even in a city so environmentally conscious that the college football stadium won't sell potato chips because the packaging isn't recyclable."

"Since 2006, Boulder has subsidized about 750 home energy audits. Even after the subsidy, the audits cost each homeowner up to $200, so only the most committed signed up. Still, follow-up surveys found half didn't implement even the simplest recommendations, despite incentives such as discounts on energy-efficient bulbs and rebates for attic insulation.

About 75 businesses got free audits; they made so few changes that they collectively saved just one-fifth of the energy auditors estimated they were wasting."

"In 2006, Boulder voters approved the nation's first "carbon tax," now $21 a year per household, to fund energy-conservation programs. The city took out print ads, bought radio time, sent email alerts and promoted the campaign in city newsletters.

But Boulder's carbon emissions edged down less than 1% from 2006 through 2008, the most recent data available."

"But there are signs Boulder's efforts are starting to lose favor. Voters county-wide last fall rejected a measure that would have doubled a public fund set up to give homeowners low-interest loans for efficiency upgrades, such as a new furnace.

In the same November election, city voters elected to the council several newcomers eager to moderate Boulder's aggressive environmentalism."

[a consultant] "...suggests the city measure every home's carbon footprint and publicize the results.

City officials aren't willing to go that far. But they are hoping to leverage peer pressure."

"'s extremely difficult to reduce emissions without a wholesale switch to renewable energy sources. Boulder depends almost entirely for energy on a coal-powered plant."

Policy Lags And The Stimulus

The post below this one explains the policy lag problem. The article here is Bulk of Stimulus Spending Yet to Come: Most Cash So Far Has Gone to Services, Government Jobs; Infrastructure Surge Unlikely to Put Big Dent in Unemployment. The recession began in December 2007 in 2010 we get the bulk of the stimulus. The article was in the WSJ 2-17-2010, page A2. The key exerpts are:
"Most of the money allocated to specific projects hasn't been paid out yet, and there are still an additional $195 billion in tax cuts on the way."

"But the bulk of the money proposed for projects like new rail lines and water projects—about $180 billion in all—is likely to be spent this year at the earliest. During year one of the stimulus, only about $20 billion of money was handed out for infrastructure projects."

"The "shovel ready" projects administration officials pointed to as a source of new jobs have taken months to get organized."

"In some cases, federal agencies have had to set up entirely new programs.

Many signature projects—including $20 billion for doctors to create electronic medical records, $4.5 billion for an energy Smart Grid and $7.2 billion for broadband networks—are still in their very early stages."

"Government data indicate that most of the jobs supported by stimulus spending belonged to public employees at the state and local level, including about 325,000 teachers and school staff."

"Government data indicate that most of the jobs supported by stimulus spending belonged to public employees at the state and local level, including about 325,000 teachers and school staff.

Subsidizing those jobs avoided layoffs, or state and local tax increases that could have further undermined the economy. But they didn't result in substantial hiring of people who had lost private-sector jobs."

"Of the $179 billion in stimulus funds paid out last year, $112 billion has gone out in the form of large checks to state governments to plug holes in school, Medicaid and unemployment-benefits budgets, or to increase funding for established programs, such as food stamps, according to a Wall Street Journal analysis."

Policy Lags Hit Housing Policies

One problem in government macro problems is the policy lag problem. It takes time to recognize that we are in a recession, time to decide a policy and then it takes time for that policy to have an effect. I think this problem came up the article Housing crisis reality sets in. It is an AP article that I saw in the San Antonio Express-News on 2-18-2010, page 4C. It is about the government plan to help people keep their houses that began about a year ago. The key exerpts are:
"The plan, Obama told a cheering audience of high school students, would keep as many as 9 million people in their homes by lowering their monthly mortgage payments."

"The numbers show a program that failed to deliver. About 116,000 homeowners have had their loans modified to reduce their monthly payments, the Treasury Department said Wednesday. Only about $15 million in incentive money has been paid to more than 100 participating mortgage companies. That's 0.02 percent of the $75 billion available."

"Interviews with officials in the Obama and Bush administrations, bank executives and housing experts show the government launched the effort without thinking through many of the details of such a complex program. Banks were ill-prepared, as well. To implement the program, it took months to hire and train thousands of workers — many of whom had no experience in the mortgage industry."

"Since March:

•1 million people have entered the modification program, and almost 12 percent, or 116,000, have completed the process.

•A third of homeowners who made the three monthly trial payments on time now have fallen behind.

•More than 61,000 homeowners have dropped out, and hundreds of thousands more are expected to do so in the coming months."

•About 220,000 homeowners whose homes have plummeted in value have refinanced."
Notice that an unforseen consequence arose, that alot of workers had to be trained to handle the program so it took longer than expected to get things going. That is the policy lag problem. It can take too long for government programs to work and they might end up being the wrong thing at the wrong time.

Incentives, Choices Matter In The Health Care Debate

The article is Reviving the Health-Care Debate. From the WSJ, 2-19-2010, page A15. It is By JEFFREY S. FLIER AND DAVID GOLDHILL. "Dr. Flier is dean of the faculty of Medicine at Harvard. Mr. Goldhill is president and CEO of GSN, a media and technology company." The key exerpts are:
"First, health and health care must not be conflated. Health is shaped by genetics, diet and lifestyle choices, social factors and chance as much as it is shaped by medical care. And all too often, expenditures on medical treatments fail to promote health.

Second, health care should be distinguished from health insurance. Insurance doesn't guarantee appropriate or equitable care."

"Our system favors treatment—especially costly treatment—at the expense of other options."

"...we need to recognize that over the past 50 years we created incentives that have encouraged more expensive—rather than better—care.

The two most important incentives are the tax advantage conferred on employer-based and low-deductible insurance and the administrative structure of Medicare and Medicaid."

"The government's willingness to meet rising costs with ever greater spending and subsidies has also undermined efforts to discipline costs or to seek alternative approaches to organizing care."

"A successful approach would aim to reform misplaced incentives. Giving individuals the same health-care tax deductions businesses get would be a good start."

[we should] "...encourage the purchase of high-deductible insurance coupled with putting money aside in health savings accounts, including a shift to HSAs of some of the funds now paid to insurance premiums."

Complex Loans Didn't Cause the Financial Crisis

That is the title of a WSJ article from 2-19-1010, page A15, that you can read by clicking here. It was by Todd Zywicki who "is a law professor at George Mason University and a senior scholar at the Mercatus Center. This op-ed is based in part on a Mercatus working paper, "The Housing Market Crash."" Here are the key exerpts:
"But there is no evidence, as Elizabeth Warren (a champion of CFPA and chair of the TARP Congressional Oversight Panel) recently asserted on these pages, that lender fraud was the overriding cause of the crisis."

"There were three distinct stages of the housing crisis. In the first, the Federal Reserve's extremely low interest rates from 2001-2004 induced consumers to switch from fixed to adjustable rate mortgages and drew short-term speculators and house-flippers into the market in certain cities."

"My own research confirms the analysis provided by University of Texas economist Stan Leibowitz on these pages last July: The initial onset of the foreclosure crisis was a problem of adjustable-rate mortgages, whether prime or subprime. It was not initially a subprime problem."

"None of this analysis has anything to do with fraud or consumer protection problems. Consumers rationally switched to adjustable-rate mortgages when their prices fell relative to fixed-rate mortgages—a pattern that has repeated itself numerous times since the 1980s. And when housing prices fell, underwater homeowners rationally responded by walking away from their houses. The proliferation of mortgages with minimal downpayments, interest-only or even negative amoritzation terms, and cash-out refinances meant that many consumers fell into negative equity territory much more rapidly than they would have otherwise."

"So the problem isn't consumer gullibility or ignorance. Borrowers have shown they understand, and act on, the incentives they face all too well."

What Will Price Controls On Insurance Do?

President Obama suggested that regulations limit the size of increases in insurance premiums. Tyler Cowen at Marginal Revolution points out that "If current proposals fail to pass, insurance companies can still just dump people. Forcing them to lower their prices will induce them to dump even more people and to have a tighter definition of preexisting conditions."

At Regulating a Natural Monopoly I show that marginal cost price regulation and a subsidy is the best policy using the concept of social welfare. So there is a case where regulations work. But I don't think that the insurance industry fits the definition of a natural monopoly. It would have to have big economies of scale, meaning that their average cost falls with each additional customer. I have never heard that that is true. Usually price ceilings cause shortages.

Sunday, February 21, 2010

Unintended Consequences-Credit Card Regulations

This is from a Coordination Problem post called "Unintended Consequences of the New Credit Card Regulations." Here it is:
"This CNN Money (Watch out for new credit card traps) piece does a nice job in laying out all of the negative unintended consequences of the new credit card regulations, including:

1. New kinds of fees and higher annual fees.

2. Higher interest rates.

3. Less credit being offered.

4. More stringent and costly financial requirements of borrowers.

5. Fewer associated benefits, such as airline miles.

Most of these will disproportionately affect the poor and the young who need the unsecured, if high rate, credit that credit cards offer. It will also hurt those who have had a more spotty credit history, but who could still get cards under the prior regulatory regime. Once again the intent of regulation is far different from its actual consequences.

To re-ask the question Tom Palmer recently asked in a different context: “Does loudly professing concern for the poor translate into actually benefiting them?”

And here's my follow-up: Why is it that the same people who think government is captured by the rich and powerful also believe that government intervention into the market is the best way to help the poor?

Posted by Steve Horwitz on February 20, 2010 at 10:15 PM"
I also wonder that people might turn to criminals to get loans if they have harder time getting credit.

How many people die from lack of health insurance?

This was a post at Marginal Revolution
"Megan McArdle has an excellent post on that question and here is her column. Here is one startling bit:
To my mind probably the single most solid piece of evidence is this: turning 65--i.e., going on Medicare--doesn't reduce your risk of dying. If lack of insurance leads to death, then that should show up as a discontinuity in the mortality rate around the age of 65. It doesn't. There are some caveats--if the effects are sufficiently long term, then it's hard to measure, because of course as elderly people age, their mortality rate starts rising dramatically. But still, there should be some kink in the curve, and in the best data we have, it just isn't there.
And this:
The possibility that no one risks death by going without health insurance may be startling, but some research supports it. Richard Kronick of the University of California at San Diego’s Department of Family and Preventive Medicine, an adviser to the Clinton administration, recently published the results of what may be the largest and most comprehensive analysis yet done of the effect of insurance on mortality. He used a sample of more than 600,000, and controlled not only for the standard factors, but for how long the subjects went without insurance, whether their disease was particularly amenable to early intervention, and even whether they lived in a mobile home. In test after test, he found no significantly elevated risk of death among the uninsured.
I agree with her conclusion:
Intuitively, I feel as if there should be some effect. But if the results are this messy, I would guess that the effect is not very big.
Posted by Tyler Cowen on February 12, 2010 at 07:10 AM"

Here are the links to the pieces by Megan McArdle:

How Many People Die From Lack of Health Insurance?

Myth Diagnosis

World may not be warming, say scientists

This was posted at Division of Labor as Measurement error and temperature records:
"For what it's worth, the Times UK runs this story, "World may not be warming, say scientists," which piles a further and even more interesting layer of doubt atop the Intergovernmental Panel on Climate Change.

The IPCC faces similar criticisms from Ross McKitrick, professor of economics at the University of Guelph, Canada, who was invited by the panel to review its last report.
The experience turned him into a strong critic and he has since published a research paper questioning its methods.

“We concluded, with overwhelming statistical significance, that the IPCC’s climate data are contaminated with surface effects from industrialisation and data quality problems. These add up to a large warming bias,” he said.

Such warnings are supported by a study of US weather stations co-written by Anthony Watts, an American meteorologist and climate change sceptic.

His study, which has not been peer reviewed, is illustrated with photographs of weather stations in locations where their readings are distorted by heat-generating equipment.

Some are next to air- conditioning units or are on waste treatment plants. One of the most infamous shows a weather station next to a waste incinerator.

Watts has also found examples overseas, such as the weather station at Rome airport, which catches the hot exhaust fumes emitted by taxiing jets.

Posted by Edward J. Lopez at 01:48 PM in Economics"

Here is the link to the article from the Times Online:
World may not be warming, say scientists

Wednesday, February 17, 2010

The U.S. Ranks High In Some Health Care Measures

See Where U.S. Health Care Ranks Number One: Isn't 'responsiveness' what medicine is all about? by MARK B. CONSTANTIAN in the WSJ, 1-8-2010 page A15.
"The scale is heavily subjective: The WHO believes that we could have done better because we do not have universal coverage. What apparently does not matter is that our population has universal access because most physicians treat indigent patients without charge and accept Medicare and Medicaid payments, which do not even cover overhead expenses. The WHO does rank the U.S. No. 1 of 191 countries for "responsiveness to the needs and choices of the individual patient.""

"...cardiac deaths in the U.S. have fallen by two-thirds over the past 50 years. Polio has been virtually eradicated. Childhood leukemia has a high cure rate. Eight of the top 10 medical advances in the past 20 years were developed or had roots in the U.S."

"Eight of the 10 top-selling drugs in the world were developed by U.S. companies. The U.S. has some of the highest breast, colon and prostate cancer survival rates in the world."

"We have the shortest waiting time for nonemergency surgery in the world; England has one of the longest. In Canada, a country of 35 million citizens, 1 million patients now wait for surgery and another million wait to see specialists."

"Actually, health-care spending now increases more moderately than it has in previous decades. Food, energy, housing and health care consume the same share of American spending today (55%) that they did in 1960 (53%)."

Did The Stimulus Place A Burden On The States?

The WSJ had an editorial titled The States and the Stimulus
How a supposed boon has become a fiscal burden
"...stimulus dollars came with strings attached that are now causing enormous budget headaches. Many environmental grants have matching requirements, so to get a federal dollar, states and cities had to spend a dollar even when they were facing huge deficits. The new construction projects built with federal funds also have federal Davis-Bacon wage requirements that raise state building costs to pay inflated union salaries.

Worst of all, at the behest of the public employee unions, Congress imposed "maintenance of effort" spending requirements on states. These federal laws prohibit state legislatures from cutting spending on 15 programs, from road building to welfare, if the state took even a dollar of stimulus cash for these purposes."

"A study by the Evergreen Freedom Foundation in Seattle found that "because Washington state lawmakers accepted $820 million in education stimulus dollars, only 9 percent of the state's $6.8 billion K-12 budget is eligible for reductions in fiscal year 2010 or 2011." More than 85% of Washington state's Medicaid budget is exempt from cuts and nearly 75% of college funding is off the table. It's bad enough that Congress can't balance its own budget, but now it is making it nearly impossible for states to balance theirs."

Hugo Chavez Turns To Capitalists For Help

See Chávez Seeks to Reassure Investors on Venezuela from the WSJ 1-26-2010. They have not been producing as much oil as they can.
"Speaking at a ceremony for the launch of a joint venture between Petróleos de Venezuela SA, Venezuela's state oil monopoly, and Italian energy company Eni SpA, Mr. Chávez said foreign investors have nothing to fear from his government."

"Mr. Chávez said at the ceremony that "investment and experience from foreign oil firms is necessary in Venezuela.

"We need it," confessed the president, in a rare concession to critics who charge that his rough tactics with foreign producers, combined with a lack of investment in PdVSA, have undermined the country's ability to further develop its vast reserves and allowed rivals to eat away at its share of the global demand for oil."

Is The FED Doing Enough To Fight Inflation?

That is the question raised in an article by ALLAN H. MELTZER called The Fed's Anti-Inflation Exit Strategy Will Fail: Sooner or later the pressure to lend out excess bank reserves will be unstoppable.
"When will inflation start? The date is uncertain. But the triggering event will be either a sustained increase in bank lending or a large increase in Fed purchases of government debt."

"With the exception of the early years after Paul Volcker became Fed chairman in 1979, the Fed has paid no attention to money growth."

"The Federal Reserve has a well-known dual mandate to prevent both inflation and unemployment. It chooses to act on only one part of its mandate at a time. That cannot be the best way to achieve both targets, and it has failed repeatedly to bring low inflation and low unemployment."

"But the Fed abandoned its success by keeping interest rates too low after 2003."

"...the Fed should announce a policy for preventing inflation that reduces the enormous stock of excess reserves, such as by selling securities."

What Happened At AIG?

The story has been changing over time. This is from a WSJ editorial on 1-28-2010, page A18 called The Latest AIG Story: Regulators can't agree on what the real systemic threat was. The key exerpts are:
"At yesterday's House hearing, Secretary of the Treasury Timothy Geithner and predecessor Hank Paulson said they didn't bail out AIG to save its derivatives counterparties. Instead, said Mr. Geithner, the now-famous 100-cents-on-the-dollar buyouts of credit default swap contracts were necessary to prevent a further downgrade of AIG by credit-ratings agencies."

"the Federal Reserve Bank of New York, where Mr. Geithner was president, had by that time already seized AIG. We're guessing that a ratings agency is pretty comfortable with the creditworthiness of a firm 79.9%-owned by Uncle Sam."

"... the hearing showed that the story of why AIG could not be allowed to fail continues to change,..."

"The original Beltway line was that the systemic risk was caused by AIG's inability to back up the credit default swap contracts it sold..."

"Yesterday, however, Messrs. Geithner and Paulson went further than ever in stating that the real systemic risk was to AIG's heavily regulated insurance businesses. Their testimony directly contradicts that offered to Congress by former New York Insurance Superintendent Eric Dinallo, who was AIG's principal insurance regulator at the time."

"The Geithner and Paulson story now is essentially that the system of heavy state insurance regulation was a sham. When push came to shove, policyholders were not protected from a default by the parent company."

"This also makes us wonder about all of the political and media chatter over the last year that derivatives were the doomsday machine that caused the meltdown. If this testimony is correct, then the systemic risk wasn't that if AIG collapsed it would infect Goldman and other financial companies like falling dominoes across the world."

"But if bad bets on derivatives would only have ruined AIG and its subsidiaries, that's not the same kind of danger to the entire financial system."

Do Proposed Policies Efficiently Fight Global Warming?

Maybe not. That is the gist of an article in the WSJ, 1-28-2010 called Time for a Rethink on Global Warming: Mandated carbon cuts won't work by BJøRN LOMBORG. Here are the key exerpts:
"All the major climate economic models show that to achieve the much-discussed goal of keeping temperature rises under two degrees Celsius, we would have to impose a global tax on carbon emissions that, by the end of the century, would cost the world a phenomenal $40 trillion a year. Even the wealthiest of nations would have trouble paying that price."

"An expert panel including three Nobel Laureate economists concluded that devoting just 0.2% of global GDP—roughly $100 billion a year—to green-energy R&D could produce the kind of breakthroughs needed to fuel a carbon-free future. Not only would this be a much less expensive fix than trying to cut carbon emissions, it would also reduce global warming far more quickly."

Do Alcohol Regulations Work?

Maybe not. Here is an interesting letter that was in the WSJ on 1-13-2010, page A22.
"...more government regulation either fails to achieve the intended result or actually achieves the opposite result. We find that people living in states with greater controls on liquor sales consume alcohol (on a per-capita basis) at the same rate as do people living in states with lesser controls."

Antony Davies
John Pulito

Duquesne University
Click here to see the letter.

Did Interest Rates Play A Role In The Credit Crisis?

From the WSJ, 1-13-2010, page A2 Bernanke Challenged on Rates' Role in Bust. Some economists think that low interest rates, as set by the FED, were part of the problem:
"In a monthly survey of mainly Wall Street and other business economists, 42 said low interest rates were partly to blame for the housing boom while 12 sided with Mr. Bernanke and said they weren't. Academic economists who specialize in monetary policy were split in a separate survey: 13 said low interest rates helped cause the housing bubble; 14 said they didn't."

"The "basic problem" was "the mistake" of raising short-term interest rates too slowly from 2004 through 2006, said Miles Kimball of the University of Michigan. "Going up quicker would have been better.""

"Some noted that low rates encouraged banks to write the riskier loans that Mr. Bernanke puts at the center of the crisis."

""There is plenty of blame to go all around," said Martin Eichenbaum of Northwestern University, expressing a commonly expressed view. "Loose monetary policy certainly contributed to easy financing, which was one element of the bubble.""

Monday, February 8, 2010

State Tax Incentives May Not Boost Economy

The article is Pennsylvania Tax Incentives Questioned (WSJ, 1-13-10, P. A3). Here is the intro:
"Pennsylvania's attempts to lure high-tech companies by offering big tax incentives have brought only marginal gains, according to a new study.

The state had a net gain of 43 high-tech employers between 1990 and 2006, but a net loss of 2,850 jobs, according to the study, funded by the Pittsburgh nonprofit Heinz Endowments and conducted by the Washington nonprofit Good Jobs First."

"The study contends that the job losses show the tax incentives aren't enough to offset other factors like globalization. It said Pennsylvania's tax and incentive codes provided "little appreciable advantage or disadvantage"..."

"Richard Florida, director of the Martin Prosperity Institute at the University of Toronto, said he thinks competition among states has calmed down amid the recession because there is less to fight over. He said that while many economic-development policy makers want to use the same incentives as competing states, many academics are finding that "at best they don't work, and at worst they're counterproductive and wasteful.""

[tax incentives] have " sum across all states."

"...companies could game the system by firing workers before using a credit to rehire more workers..."

"...more jobs were lost to other countries than to other states by a 30-to-1 ratio. It also found that job creation is driven more by factors in the state, such as expansion of pre-existing companies, than by interstate relocations."

Economic Policy Changes May Be Causing The Uncertainty That Is Slowing The Recession

That is what University of Chicago professors GARY S. BECKER, STEVEN J. DAVIS AND KEVIN M. MURPHY said in the WSJ article titled Uncertainty and the Slow Recovery: A recession is a terrible time to make major changes in the economic rules of the game (1-4-2010, P. A17). Here are the key exerpts:
"...the overall package (the stimulus) was not well designed to foster a speedy recovery or set the stage for long-term growth. Instead, the "stimulus" was oriented to sectors that liberal Democrats believe are deserving of much greater federal help."

"...other government proposals created greater uncertainty and risk for businesses and investors. These include plans to increase greatly marginal tax rates for higher incomes."

"The separate bills passed by the House and Senate worry small businesses, in particular. They fear their labor costs will increase because of mandates to spend much more on health insurance for their employees."

"... there is a potential for the money supply to grow rapidly, possibly producing a substantial inflation. How hard the Fed will fight inflationary pressures through open market sales and other actions that raise interest rates is a significant source of uncertainty about future inflation..."

" Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending—despite their huge excess reserves—reluctance by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases."

"A regular survey by the National Federation of Independent Businesses (NFIB) shows that recent capital expenditures and near-term plans for new capital investments remain stuck at 35-year lows."

"The weak economy is far and away the most prevalent reason given for why the next few months is "not a good time" to expand, but "political climate" is the next most frequently cited reason,..."

"The authors of the NFIB December 2009 report on Small Business Economic Trends state: "the other major concern is the level of uncertainty being created by government, the usually [sic] source of uncertainty for the economy."

"Business investment in the third quarter of 2009 is down 20% from the low levels a year earlier."

Poverty May Not Be The Cause Of Crime

The article is A Crime Theory Demolished: If poverty is the root cause of lawlessness, why did crime rates fall when joblessness increased? (WSJ, 1-5-2010, P. A17). Here are the key exerpts:
"The 1960s themselves offered a challenge to the poverty-causes-crime thesis. Homicides rose 43%, despite an expanding economy and a surge in government jobs for inner-city residents. The Great Depression also contradicted the idea that need breeds predation, since crime rates dropped during that prolonged crisis."

"According to the FBI's Uniform Crime Reports, homicide dropped 10% nationwide in the first six months of 2009; violent crime dropped 4.4% and property crime dropped 6.1%. Car thefts are down nearly 19%. The crime plunge is sharpest in many areas that have been hit the hardest by the housing collapse. Unemployment in California is 12.3%, but homicides in Los Angeles County, the Los Angeles Times reported recently, dropped 25% over the course of 2009. Car thefts there are down nearly 20%."

" increase in the number of people incarcerated had a large effect on crime in the last decade and continues to affect crime rates today..."

"The spread of data-driven policing has also contributed to the 2000s' crime drop."

"As New York Police Commissioner in the mid-1990s, Mr. [William] Bratton pioneered the intensive use of crime data to determine policing strategies and to hold precinct commanders accountable—a process known as Compstat. Commissioner Kelly has continued Mr. Bratton's revolutionary policies, leading to New York's stunning 16-year 77% crime drop."

"In 1990s New York, crime did not drop because the economy improved; rather, the city's economy revived because crime was cut in half."

Glaring errors found in report on climate

You can read that article by clicking here. My original source was the San Antonio Express-News (p. 9A, 1-21-2010). Here are the key exerpts:
"• The paragraph starts, "Glaciers in the Himalayas are receding faster than in any other part of the world." Cogley and Michael Zemp of the World Glacier Monitoring System said Himalayan glaciers are melting at about the same rate as other glaciers.

• It says that if the Earth continues to warm, the "likelihood of them disappearing by the 2035 and perhaps sooner is very high." Nowhere in peer-reviewed science literature is 2035 mentioned. However, there is a study from Russia that says glaciers could come close to disappearing by 2350. Probably the numbers in the date were transposed, Cogley said.

• The paragraph says: "Its total area will likely shrink from the present 500,000 to 100,000 square kilometers by the year 2035." Cogley said there are only 33,000 square kilometers of glaciers in the Himalayas.

• The entire paragraph is attributed to the World Wildlife Fund, when only one sentence came from the WWF, Cogley said. And further, the IPCC likes to brag that it is based on peer-reviewed science, not advocacy group reports. Cogley said the WWF cited the popular science press as its source.

• A table says that between 1845 and 1965, the Pindari Glacier shrank by 2,840 meters. Then comes a math mistake: It says that's a rate of 135.2 meters a year, when it really is only 23.5 meters a year."

The Great Money Binge

That is the name of a new book on the credit crisis that was recently reviewed in the WSJ. The book is by George Melloan. The review was called Crisis Management: We need less government intervention in the economy, not more (P. A17, 1-22-2010). Here are some key exerpts:
"Mr. Melloan writes that "seeing the problem clearly will be the first step" toward restoring the economy, and "The Great Money Binge" greatly assists with this task by laying out the real reasons for a crisis that has been wrongly blamed on free markets. Mr. Melloan notes that the housing bubble was turbo-charged by Fannie Mae and Freddie Mac, government-sponsored enterprises that—by buying, bundling and reselling housing debt—gave banks a ready market for reckless loans. Fannie and Freddie operated with an implicit government subsidy that became explicit when they went into conservatorship in September 2008, leaving taxpayers on the hook for billions of dollars. Relatedly, the Community Reinvestment Act, hugely expanded by the Clinton administration in the 1990s, encouraged banks to make loans to less-than-creditworthy borrowers."

"...the accounting mandates of the Sarbanes-Oxley Act, rushed through after Enron and WorldCom imploded in 2002, stifled entrepreneurial dynamism by increasing the costs of initial public offerings."

"Mr. Melloan argues that Mr. Spitzer's crusade against American International Group—involving charges now dropped or yet to be proved—made the 2008 crisis worse, by forcing out longtime CEO Maurice "Hank" Greenberg."

"Mr. Melloan also fingers the mark-to-market accounting rules promulgated by the Financial Accounting Standards Board in 2007. They added gasoline to the fire of the crisis, he says, by requiring companies to adjust their books every time an asset changed value. The result was often paper losses that had a cascading effect, forcing companies to sell assets that they had intended to hold and thereby lowering prices further. "Since uncertainty had locked up the market for [mortgage-backed securities], the mark-to-market rule exacerbated the problem. How do you mark something to market if there is no market?""

Report: 40 percent of cancers are preventable

To read the article click here. Here is the intro:
"About 40 percent of cancers could be prevented if people stopped smoking and overeating, limited their alcohol, exercised regularly and got vaccines targeting cancer-causing infections, experts say.

To mark World Cancer day on Thursday, officials at the International Union Against Cancer released a report focused on steps that governments and the public can take to avoid the disease.

According to the World Health Organization, cancer is responsible for one out of every eight deaths worldwide — more than AIDS, tuberculosis and malaria combined."
So it looks like individual behavior and individual responsibility are the key. Also, the report said:
"In Western nations, experts said many of the top cancers — like those in the lungs, breasts and colon — might be avoided if people changed their lifestyle habits. To reduce their risk, the agency recommended that people stop smoking, limit their alcohol consumption, avoid too much sun, and maintain a healthy weight through diet and exercise."
The report was from International Union Against Cancer. But I reported something just like this over a year ago. Click here to read that post.