09 May 2010
28 April 2010
finance bill discussion
many people are adamantly espousing the need for greater financial regulation as included in the finance bill in order to prevent systemic meltdowns such as the one we are just trying to crawl out of.
i am not perfectly current on the specifics of the bill, as i believe there have been some concessions from the Democrats to the Republicans within the last hours to garner sufficient support to pass the bill in the Senate.
overall, i hear the cries for greater government oversight in the industry as only a half thought out solution.
everyone agrees there were bad investments that hurt a lot of people, but controlling every investment is a very costly, difficult, and not an assured way to prevent pandemics such as the recession of 2008.
a cooler solution is to stop the source (which may even stop itself) and definitely curtail the amplification mechanism that made the situation so severe.
i may have told this story before, but i'll tell it again because it's this simple. investment banks insure corporations cheaply by providing them hedge funds. they take a company's stock, and return a customized (like a trimmed hedge) fund that will pay the company back a smoother stream of profits than the original stock. cheap insurance, a hedge against a company's specific risk.
with so many companies (including home loan banks and even more standard insurance companies like AIG) now so well insured, there was moral hazard; these companies took riskier business practices than usual. Washington Mutual would lend to people they normally wouldn't. Why not, they were insured against losses?
not only were there some bad investments made by the moral hazard of cheap insurance, but they were made en masse because of a depressed fed interest rate that allowed the banks to borrow cheaply and leverage (amplify)these bad investments ~100x what they normally would have.
to me, there's a simpler and more desirable solution.
1) don't bailout investment banks that failed to recognize the moral hazard imparted by the insurance they provided, nor the companies that were not discriminating in their investments in the companies engaging in moral hazard. it was a costly mistake, and the lessons will be learned naturally, and the actions not repeated.
2) the greater problem is the momentum this somewhat minor problem was able to achieve via leverage. "systemic risk," the ability for this one problem to putrify the whole economy, was possible because of an artificially depressed fed-set interest rate. The artificially low rates that allowed the borrowing en masse (leveraging) turned a reasonable mistake (under-estimating moral hazard from proliferation of investment banks' hedge funds) into a systemic pandemic. Without fed depressed interest rates, money wouldn't have been as cheap to borrow and invest, investors would have been more discriminating, and there wouldn't have been such rampant and leveraged mal-investment.
what's kind of crazy is that the investment banks that were greedy (made the risky loans) lost big and went under. the investment banks that were smart/conservative and didn't make the risky investments and shorted the market, even though they may be despicable individuals, are now the ones being used (because of their character) to persuade the public to invoke change in the industry: regulation over investment practice specifics.
the solution i propose herein is simpler than the current proposed legislation, attacks the source of the meltdown, is less costly to implement, doesn't hamstring players in the banking industry, and doesn't hamper the overall finance market. essentially, it would be more effective and preserve a greater set of choices (liberty) in finance.
i am not perfectly current on the specifics of the bill, as i believe there have been some concessions from the Democrats to the Republicans within the last hours to garner sufficient support to pass the bill in the Senate.
overall, i hear the cries for greater government oversight in the industry as only a half thought out solution.
everyone agrees there were bad investments that hurt a lot of people, but controlling every investment is a very costly, difficult, and not an assured way to prevent pandemics such as the recession of 2008.
a cooler solution is to stop the source (which may even stop itself) and definitely curtail the amplification mechanism that made the situation so severe.
i may have told this story before, but i'll tell it again because it's this simple. investment banks insure corporations cheaply by providing them hedge funds. they take a company's stock, and return a customized (like a trimmed hedge) fund that will pay the company back a smoother stream of profits than the original stock. cheap insurance, a hedge against a company's specific risk.
with so many companies (including home loan banks and even more standard insurance companies like AIG) now so well insured, there was moral hazard; these companies took riskier business practices than usual. Washington Mutual would lend to people they normally wouldn't. Why not, they were insured against losses?
not only were there some bad investments made by the moral hazard of cheap insurance, but they were made en masse because of a depressed fed interest rate that allowed the banks to borrow cheaply and leverage (amplify)these bad investments ~100x what they normally would have.
to me, there's a simpler and more desirable solution.
1) don't bailout investment banks that failed to recognize the moral hazard imparted by the insurance they provided, nor the companies that were not discriminating in their investments in the companies engaging in moral hazard. it was a costly mistake, and the lessons will be learned naturally, and the actions not repeated.
2) the greater problem is the momentum this somewhat minor problem was able to achieve via leverage. "systemic risk," the ability for this one problem to putrify the whole economy, was possible because of an artificially depressed fed-set interest rate. The artificially low rates that allowed the borrowing en masse (leveraging) turned a reasonable mistake (under-estimating moral hazard from proliferation of investment banks' hedge funds) into a systemic pandemic. Without fed depressed interest rates, money wouldn't have been as cheap to borrow and invest, investors would have been more discriminating, and there wouldn't have been such rampant and leveraged mal-investment.
what's kind of crazy is that the investment banks that were greedy (made the risky loans) lost big and went under. the investment banks that were smart/conservative and didn't make the risky investments and shorted the market, even though they may be despicable individuals, are now the ones being used (because of their character) to persuade the public to invoke change in the industry: regulation over investment practice specifics.
the solution i propose herein is simpler than the current proposed legislation, attacks the source of the meltdown, is less costly to implement, doesn't hamstring players in the banking industry, and doesn't hamper the overall finance market. essentially, it would be more effective and preserve a greater set of choices (liberty) in finance.
26 February 2010
things getting a little crazy
my buddy pointed this link out to me
it discusses how Fannie is still in trouble, and needs a lot more bailout money.
here's what i think about this Fannie Mae request and if it were to awarded.
say what you want about healthcare, but at least there are some weak arguments for government intervention in that market.
but the arguments for government intervention in the money/credit market are even weaker and the government involvement in that market through fannie and the fed is much larger.
don't get me wrong, i'm not supporting any govt healthcare proposals, but the money market is much more of a concern.
get ready for some serious inflation.
and currency devaluation hurts savers the worst (the new money is not distributed proportionately, so their money is worth less). in reality, it is a real form of taxation (seignorage tax) on savers.
there are serious long term consequences of inflation on our real gdp per capita growth.
less savings means less investment which means less long run productivity.
definitely not the legacy we should be leaving our future generations.
make your tax sheltered investments, but this is not the time for padding your savings.
moral of the story, perfect time for some house remodeling (or any other consumption of commodities that will hold and/or appreciate commensurate with the inflation rates, cpi).
22 February 2010
health care debate, what's the deal?
i've been getting asked by many people, "what is the justification of government involvement in the health care market." this answer is very important when trying to craft the best possible health care policy.
those in favor of having the government get involved in the health care market cite 4justifications that make health care different from the auto care market, or the banana market, or most anything else and thus worthy of govt involvement.
1a) health care costs might be too high because the sick disproportionately apply for health care (adverse selection) and it is tough to comprehensively screen all applicants.
1b) the same asymmetric information is present in many markets. in health care, we have informed buyers (potential insurees who know their status) and uninformed sellers (insurers selling their insurance services that don't know whether your hiding a lurking condition).
used car markets have informed sellers, and uninformed buyers. not a big deal. this argument doesn't mandate government intervention. this asymmetric problem is often solved without the government by introducing a new market to inform the uninformed agent.
essentially what car max does, demonstrates car quality to uninformed buyer by guarantee, reputation, and third party validation.
insurance companies could just hire better competitive screening companies to resolve this cause of high costs better assess when folks just want insurance because they are gonna be sick.
2a) health care costs can also be high because once a person gets insurance, they engage in behavior they wouldn't otherwise (moral hazard). if you have good dental insurance, you'll be more prone to get that cosmetic operation you 'need.' if you have insurance, you'll be more prone to go for treatments at fancy facilities offering alluring (and expensive) perks.
2b) the only way the government can mitigate this cost is to place controls on persons' behaviors; ie dictate which hospital you go to, dictate how hospitals operate (disallow quality perks to all those on government insurance programs), or dictate how you live. if the government is paying for your health insurance, it will want you to go to the gym (use tax payer money to subsidize gyms) and not eat candy (tax candy). maybe this sounds nice, but if you are somebody who feels that you make pretty good decisions for yourself it doesn't sound that good. just sounds cleaner when people are responsible for themselves, and realize the costs and benefits of their own decisions.
my own analysis of health care data for a class showed that moral hazard is the real problem among those poor people on medicaid. the story behind the statistical phenomenon is that medicaid costs skyrocket because poor people with insurance check into the hospital too frequently controlling for factors. why not, it's warm and you get a meal. this is hard to deal with. can't really turn folks away. maybe increasing house calls is an option of decreasing the overhead costs of too frequent check-ins.
moral hazard and adverse selection are real problems for any kind of insurance. makes you almost not want to have any insurance. but catastrophes are always possible, and you don't want it to wipe you out (economists, you want to smooth consumption across states of the world), so it's reasonable to buy insurance until your marginal benefit from equalizing consumption across states of the world, equals marginal costs arising from mh and as.
3a) another way health care costs could be lower is if the government insured more people. if the government was buying everyone's medication, then it could negotiate lower prices on medications. it would be only buyer (monopsonist) from many sellers.
3b) the government already insures a lot of people and buys a lot of medications and has pretty good bargaining power. also, the government is the source of high medication costs, and rarely do two wrongs don't make a right.
medication prices are high because the government grants patents to pharma companies protecting them from competition. sure, dissolving these protections reduces the incentive for pharmas to innovate new drugs, but most economic analysis shows that optimal patent protection levels are far lower than current levels. current protection levels probably have to do with the strength of the pharma lobby.
to me a better way to reduce medication costs is to reduce patents and introduce more competition among suppliers and reduce the medication sellers' bargaining power.
4a) the last justification folks use to advocate government involvement in the health care market is expanding coverage. its inhumane and reflects poorly on our society to let those who choose no coverage just die when it's possible to treat them.
4b) many might argue that, if that's what people want, that's what they chose, then they should get that. even if that's too harsh, there is a much more minor government solution instead of government run health care. it's similar to the car insurance market. just as the govt mandates ownership of coverage for an emergency, problem 4a can be handled by requiring (and assisting those unable) to have emergency coverage. now we won't have to leave those uncovered dying folks on the street, when they are treatable and a hospitable er is available.
[this policy has a minor benefit in that once everyone must have this baseline coverage, adverse selection (screening applicants) is not a problem. insurance companies don't have to be fearful that those in gravest danger are those buying insurance because now everyone has to have it. nonetheless, the screening verification service markets and data show that adverse selection isn't a major cost anyway].
in conclusion, the justifications for government involvement in the health care market to reduce costs are weak at best; and a simple policy (already implemented in car insurance markets) can handle the coverage concern.
to add to that, consider these thoughts.
health care costs haven't increased that much considering the amazing increase in health care quality (mri,...). and, now that people are living longer, those extra years at the end of life are the most care intensive.
granted, many goods (think electronics) even though quality increases, prices still drop.
but, recent govt-out solutions have been successful in dropping costs. in particular, hmos have been successful by reducing moral hazard through more effective innovative cost-sharing operations.
do any of these justifications for government involvement in health care substantiate a large government health care solution in your mind?
13 February 2010
10 February 2010
why i research politico-econ
we know how to efficiently allocate private goods: markets.
[private goods = rival (one's consumption prevents another) and excludable (the seller can exclude non-paying consumers, free-riders). example = chewing gum].
we know how to efficiently allocated common goods; ascribe property rights and they can also be efficiently allocated by markets (coase thm).
[common goods = rival, but non-excludable. ie, boston commons. these are goods generally susceptible to externalities, hence the application of coase's thm].
the jury is still out on club goods (goods susceptible to market power, p>mc).
becker is confident that the costs of govt intervention are larger than the benefits because dynamic competition on that good brings p closer to mc without the dwl of govt intervention.
also, was just watching one of milton friedman's last interviews, and he said his biggest mistake was being such a proponent of anti-trust regulation in his younger years.
[club goods = non-rival, excludable. roads, golf course, cable networks].
thus, the last type of good, public goods, are the only type of goods that all economists, except for the extreme anarcho-capitalists, trust should be allocated by the government, and can be done so efficiently through a vcg mechanism.
[public goods = nonrival, nonexcludable. ie national defense. protecting one does not prevent the protection of another. if someone doesn't pay taxes, we can not prevent their protection. think missile defense].
other market failures, ie asymmetric info, can be handled by markets too. introduction of a new information resolving service market. how carmax is making money in the lemon market.
macro-economists are probably pointing at the potential of curing inefficiencies in dynamic environments or by manipulating aggregates.
with dynamics there as some additional games you could play like Shell and passing forward a generation to make the old better and hurt no one else because of infinity, but that's kind of lame.
manipulating aggregates, let's not go there. see any hayek vs. keynes discussion.
point is, we're at a time, when the standard econ game might be closing down.
thus, the last type of good, public goods, are the only type of goods that all economists, except for the extreme anarcho-capitalists, trust should be allocated by the government, and can be done so efficiently through a vcg mechanism.
[public goods = nonrival, nonexcludable. ie national defense. protecting one does not prevent the protection of another. if someone doesn't pay taxes, we can not prevent their protection. think missile defense].
other market failures, ie asymmetric info, can be handled by markets too. introduction of a new information resolving service market. how carmax is making money in the lemon market.
macro-economists are probably pointing at the potential of curing inefficiencies in dynamic environments or by manipulating aggregates.
with dynamics there as some additional games you could play like Shell and passing forward a generation to make the old better and hurt no one else because of infinity, but that's kind of lame.
manipulating aggregates, let's not go there. see any hayek vs. keynes discussion.
point is, we're at a time, when the standard econ game might be closing down.
overall this is good because it means we know how to efficiently allocate many things.
to me, the questions with the biggest remaining welfare implications have to do with positively characterizing inefficiencies in our political process. the efficiency of current political resource allocations in our grab bag system.
to me, the questions with the biggest remaining welfare implications have to do with positively characterizing inefficiencies in our political process. the efficiency of current political resource allocations in our grab bag system.
many facets of our system are very good and have lasted a long time, but are they optimal? are there welfare gains that could be had from minor modifications?
i keep my research at
(but it is in need of some maintenance and paper version updates)
14 July 2009
Remembering McNamara
As we struggle to find the best avenue out of our current recession, a Robert McNamara quotation always seems to percolate in the back of my head. In rememberance of his recent death, I'll take this opportunity to share.
"The government is not in the business of putting small business out of business."
A good way to intepret this quoatation is the following. In every industry and every market that the government participates (either the government provides a good or service, purchases a good or service, or regulates non-government to non-government transactions of goods or services), its participation influences the market, generally making it more difficult for small businesses to survive.
When the government provides a good or service it is very hard for private industry small businesses to compete with them. The government does not have to be profitable and is financed by a large and captive audience.
Less directly, consider the market effect when the government regulates a market. OSHA, the government office that tries to regulate labor markets to make working conditions better, may at first glance appear to do no wrong. in reality however it can be a very subtle and very manipulated agency by large business victimizing small business. Large businesses give politicians campaign funds. One way politicians may reward such businesses is to make code overly protective and convoluted so that the entry of a new small business competitor is prevented by compliance costs. They are repaying the business by eliminating competition, and to the unaware citizen, these policies can seem glorious. In public finance terms, government regulation can act as a significant and highly regressive corporate tax.
As an alternative, if we simply allowed the worker to choose for himself if he were willing to work a particular job for a given wage, two competing firms would have to ultimately compete to lure workers by providing them higher wages and safer work environments on their own. Suddenly government safety regulations no longer appear as necessary or innocuous.
A bad way to interpret this quotation is as i was instructed during my military acquisitions training. sometimes when the government hires private defense contractors to provide goods or services the government knowingly provides them a profit. i suggested that the government could save taxpayers money by not paying that profit, to which the instructor quoted McNamara "the government is not in the business of putting small business out of business." But, as long as the government isn't requiring a firm to provide a good or service, they should never take a contract that's not in their interest anyway.
in conclusion, for those large-government command & control democrats who want lots of government interaction in a variety of markets, remember the impact on free enterprise encapsulated in this McNamara quotation. "the government is not in the business of putting small business out of business"
For sell-out Republicans who espouse policy that favors the big businesses that wine and dine them, remember you are just as guilty of creating an environment unfriendly toward American small business free enterprise. i offer a parallel quoatation "the government is not in the business of making big business bigger"
the business of the government is simple, and was simply identified by Arrow in the 1950s. The government is in the business of simply correcting market failures.
thanks to mcnamara for inspring today's conversation.
"The government is not in the business of putting small business out of business."
A good way to intepret this quoatation is the following. In every industry and every market that the government participates (either the government provides a good or service, purchases a good or service, or regulates non-government to non-government transactions of goods or services), its participation influences the market, generally making it more difficult for small businesses to survive.
When the government provides a good or service it is very hard for private industry small businesses to compete with them. The government does not have to be profitable and is financed by a large and captive audience.
Less directly, consider the market effect when the government regulates a market. OSHA, the government office that tries to regulate labor markets to make working conditions better, may at first glance appear to do no wrong. in reality however it can be a very subtle and very manipulated agency by large business victimizing small business. Large businesses give politicians campaign funds. One way politicians may reward such businesses is to make code overly protective and convoluted so that the entry of a new small business competitor is prevented by compliance costs. They are repaying the business by eliminating competition, and to the unaware citizen, these policies can seem glorious. In public finance terms, government regulation can act as a significant and highly regressive corporate tax.
As an alternative, if we simply allowed the worker to choose for himself if he were willing to work a particular job for a given wage, two competing firms would have to ultimately compete to lure workers by providing them higher wages and safer work environments on their own. Suddenly government safety regulations no longer appear as necessary or innocuous.
A bad way to interpret this quotation is as i was instructed during my military acquisitions training. sometimes when the government hires private defense contractors to provide goods or services the government knowingly provides them a profit. i suggested that the government could save taxpayers money by not paying that profit, to which the instructor quoted McNamara "the government is not in the business of putting small business out of business." But, as long as the government isn't requiring a firm to provide a good or service, they should never take a contract that's not in their interest anyway.
in conclusion, for those large-government command & control democrats who want lots of government interaction in a variety of markets, remember the impact on free enterprise encapsulated in this McNamara quotation. "the government is not in the business of putting small business out of business"
For sell-out Republicans who espouse policy that favors the big businesses that wine and dine them, remember you are just as guilty of creating an environment unfriendly toward American small business free enterprise. i offer a parallel quoatation "the government is not in the business of making big business bigger"
the business of the government is simple, and was simply identified by Arrow in the 1950s. The government is in the business of simply correcting market failures.
thanks to mcnamara for inspring today's conversation.
01 July 2009
econosseur
A couple of buddies of mine from econ grad school at UT, Jason DeBacker and Rick Evans, have a very successful blog with good insight and a running compilation of the best econ jokes available. their blog was recently cited as an officially sanctioned AEA blog, and perhaps more importantly referenced by Mankiw's blog (see ad hominem post).
blog
http://www.econosseur.com/
jokes
http://www.econosseur.com/economic-jokes.html
btw, if you check out Rick's professor page
http://econ.byu.edu/Faculty/Evans/
he has a link to UT econ intramural sports recaps.
http://econ.byu.edu/Faculty/Evans/other.dhtml
(i was the first receiver on that hook and ladder.
rick to me to Debacker for a TD!)
blog
http://www.econosseur.com/
jokes
http://www.econosseur.com/economic-jokes.html
btw, if you check out Rick's professor page
http://econ.byu.edu/Faculty/Evans/
he has a link to UT econ intramural sports recaps.
http://econ.byu.edu/Faculty/Evans/other.dhtml
(i was the first receiver on that hook and ladder.
rick to me to Debacker for a TD!)
22 April 2009
21 April 2009
Bandwidth Limitations
It was recently announced in local news (Austin Statesman) that Time Warner Cable was considering imposing customer bandwidth limitations. When customers use more than a specific amount of bandwidth, Time Warner would begin to charge extra fees. This means that if you watch just a little streaming video, use YouTube or Pandora a lot, you would probably be paying some fees. Time Warner argues that they are experiencing more bandwidth demand than they had previously anticipated.
Below is my comment to the Austin Statesman article. Maybe you agree.
"
If Time Warner is having bandwidth demand it can't handle, it needs to re-assess it's bandwidth supply. Everything but live or real-time events should be accessible on demand only. This would free up tons of bandwidth, no need to continually broadcast thousands of channels no one is watching. We know time-warner is a regulated industry, but still try to provide service like a competitive industry. when you have problems, don't just charge the user more and decrease consumer surplus.
this will unnecessarily blemish Austin's tech reputation, and Texas's efficient markets reputation.
"
Below is my comment to the Austin Statesman article. Maybe you agree.
"
If Time Warner is having bandwidth demand it can't handle, it needs to re-assess it's bandwidth supply. Everything but live or real-time events should be accessible on demand only. This would free up tons of bandwidth, no need to continually broadcast thousands of channels no one is watching. We know time-warner is a regulated industry, but still try to provide service like a competitive industry. when you have problems, don't just charge the user more and decrease consumer surplus.
this will unnecessarily blemish Austin's tech reputation, and Texas's efficient markets reputation.
"
08 April 2009
academic final stretch
well folks, a chapter in my life is drawing to a close.
i have scheduled my dissertation defense for 5 May 2009 (yes, Cinco de Mayo).
Last week was a pretty busy week preparing for 3 presentations and 3 conference submissions, but the oncoming weeks will be even more intense.
Even so, i don't view it as stressful, i enjoy the research
http://mastroresearch.googlepages.com/
The official graduation is 24 May 2009.
But as chapters draw to a close, new ones open. Even though i thoroughly enjoyed learning how to do professional economic research here at UT graduate school, i am excited about the new unfolding chapters. Hopefully it will have much to do with application of learned tools, implementation of conclusions drawn from research, and participation in the American free-enterprise system. However it turns out exactly, i look forward to tackling it with enthusiasm, passion and vigor with my wife Bobbie.
i have scheduled my dissertation defense for 5 May 2009 (yes, Cinco de Mayo).
Last week was a pretty busy week preparing for 3 presentations and 3 conference submissions, but the oncoming weeks will be even more intense.
Even so, i don't view it as stressful, i enjoy the research
http://mastroresearch.googlepages.com/
The official graduation is 24 May 2009.
But as chapters draw to a close, new ones open. Even though i thoroughly enjoyed learning how to do professional economic research here at UT graduate school, i am excited about the new unfolding chapters. Hopefully it will have much to do with application of learned tools, implementation of conclusions drawn from research, and participation in the American free-enterprise system. However it turns out exactly, i look forward to tackling it with enthusiasm, passion and vigor with my wife Bobbie.
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