Saturday, May 22, 2010

Follow Up Thoughts from Thomas

Here is an interesting graph based on CBO estimates that shows how we got into this deficit problem in the first place. By far, the biggest one is all the tax cuts, which I think were ill-advised, especially with two wars and an unfunded expansion of medicare in the form of prescription drugs. I'm not advocating raising taxes at this juncture. The economy is just starting to find its feet again, and it doesn't make a lot of sense to increase taxes during a recession. But as far as dealing with the deficit in the future, I think increased revenue is an important option to consider. As you know, I'm not part of the anti-tax crowd, nor do I think we are over-taxed. (side note: our current income tax under Obama is at a historical low, 9.2%.) Anyway, along with spending cuts (and here I would advocate cuts in subsidies to big business, like the nearly 40 billion that goes to the oil and gas industry) I think increased revenue in the future would be a good approach to the deficit issue.

If may be so bold as to use an analogy (because analogies can be slippery sometimes), it's like an average person in debt trouble whose only going to solve the problem by cutting spending without even considering the option of also earning more money, like a second job, to get out of debt. It's a like financial planner telling you the only way of your debt is to cut out that pesky third meal a day, move your family into a one room apartment, and put off that tumor removal, but by all means don't work more and make more money and if fact take a few days off. That last one is a bit facetious, but I think you get the point.

Anyway, to get back to the graph, one partial solution would be phase out the tax cuts or let them expire. That way we'll have a more manageable problem on our hands. Personally, I don't mind paying a bit more money if it means putting our economy on a sturdier foundation. In the long run, it not only benefits me, but it also benefits society at large and future generations.

Sunday, January 31, 2010

Cassidy - Not the Partridge

My Brother Thomas forwarded me an article from the New Yorker on the financial crisis and below are my reflections. (The New Yorker, January 11, 2010, John Cassidy, "After the Blow Up", pp 28-33)

I might have too high of expectations about what can be done in a journalistic piece when dealing with thorny and complex scientific issues like this one. My basic fundamental response is he short armed it. That is, it is a little light. It is basically a report on how different economists and people who are pretending to be economists (Posner) "feel" about the current state of economics. I realize I'm overstating it and many of the economists (Fama) don't do themselves any favors by apparently not taking the questions or issues seriously but I really feel like I'd rather chase down some of these questions and really dig down to the root and this article does not get there. I heard something similar on NPR the other day where they did a report of the "climate change community" post reports on e-mail leaks. They just talked to different scientist about how they felt about things. They didn't actually talk about the science. But perhaps that is what journalism is supposed to do. Just report on "important" people's opinions. It just does not feel like we are being fully served and empowered to develop truly worthwhile opinions and make effective decisions if that is all journalism is going to do. We'll need more than journalism. That's just my initial gut reaction. Hope I'm not being too harsh.

Now for some more detailed but much more random thoughts.

Fama: As I noted above he seems to not take the issues to seriously. In that sense he seems to fit the stereotype of the tenured ivory tower professor who can't be bothered with his communities/societies real issues when he has much more important academic and scientific things to think about. (If this sounds sarcastic, it is. I really try not to do this but its Saturday morning so I'm being lax.) That being said I do appreciate his perspective that we have been very sloppy with much of the analysis I have seen on this issue using metaphors to describe things we don't understand in the first place like the term bubble. I remember some "experts" being interviewed a while back, again on NPR, and they said that we were facing economic catastrophe. (Referring to our recent financial crisis) The reporter, attempting to be a good reporter, asked what they meant by that? What does that mean? They responded by saying it would be a complete financial melt down. I will now refrain myself from sarcasm and simply say that both of those expert explanations say only something really bad would have happened with no explanation of what that really bad something is. Very sloppy. Unfortunately, the reporter dropped the ball and did not follow up again. I found this type of coverage of the crisis typical and I'm sure this is what Fama is referring to.

Posnar: I'm sure that Alfred Posnar is a great and brilliant guy and I'm sure that these comments will come off to people in the know as the ramblings of an unstudied bumpkin (at least I hope they do because that’s how my ramblings come off to me) but I was completely under whelmed with Posner and didn't really take anything Cassidy represented from him seriously. Again I will slide remorsefully into sarcasm. First, he is not an economist and while I am a firm believer in being self taught and that we should go looking for things that don't come out the "system" it is a strike against him. However, to continue the metaphor many home runs are hit after the first strike. So, on to the next pitch. Dude, seriously! Dude claims to be an economics expert and had never read Keynes's General Theory?!?! Dude's an amateur. Second strike is a broken bat foul ball. Since he is an amateur he probably only brought one bat which is now broken. So, game over. Not reading the General Theory is like someone who claims to be a Modern American Literature expert who has never read the "The Great Gatsby" or someone who claims to be an expert in Greek mythology never having read any Homer. Give me a break. For my thinking if you have not read Smith, Keynes, Freidman and probably Marx there is no way you should be able to pass yourself off as anything more than a hobbyist and certainly doesn't warrant you being interviewed as an expert by anybody except maybe your small home town paper.

Becker: First a comment on Cassidy's reporting: He presents as shocking regarding Becker "-he has gone so far as to suggest that having children is driven partly by financial considerations." This makes Cassidy sound like a novice and very non worldly. With the exception of unplanned teenage pregnancies I can't imagine a couple or a person not considering finances in the thought process on whether or not to have a baby. This makes Cassidy sound like he just fell off the turnip truck. (Sorry for being mean spirited. I'm sure I would enjoy sharing a beer of coffee with Mr. Cassidy. So, if he reads this I hope he does not take it personally.) However the Becker quote "Yeah, markets aren't fully efficient, but the general thrust that markets are more efficient than any alternative - that aspect I don't think is going to change" is in my opinion the key point for free marketeers. I completely agree with this statement.

Rajan: Cassidy's presentation left me most intrigued and interested with Raghuram Rajan (and not just because we are the same age). I definitely would like to read his book when it comes out.

My perspective: Some day I would like to read a fairly comprehensive history of the banking system. Until I do I think all of this will still be a little mysterious to me. However, my impression is that the U. S. banking system has never operated in a truly lassie-fare manner. So, it is impossible to say with certainty whether a truly free market financial system would work efficiently and effectively without the occasional debilitating crash. So, I am still of the belief that it might. The most recent crises occurred in very (though somewhat de-) regulated environment. There seems to be a consensus that two things contributed to this crisis. 1) low interest rates driven by the fed that fueled lending and 2) loose lending practices which fueled sub-prime loans. I watched part of a Ben Bernake speech on CSPAN in which he analyzed this. I found his presentation much more credible than this article and Bernake basically concluded that item 1 was not the primary culprit. Which leaves us with item 2. Cassidy's presentation of Fama depicted a very "sloppy" presentation on the part of Fama but I think he was on the right track. But if Cassidy is to be trusted (which I'm sure he is) Fama did a pathetic job of defending his position. I think the biggest issue was distorted signals about the lending and housing market driven primarily by the governmental push for sub prime loans precipitated primarily by the implementation of government policy by Fannie and Freddie. Cassidy challenged this by saying that at the peak Freddie and Fannie were buying less 1/3 of the sub prime loans. However, the question is what percent where they buying when the sub prime ball go rolling. Because Freddie and Fannie compete in the market with non-government sponsored entities everyone has to deal with Fannie and Freddie. If Fannie and Freddie are doing it, the "private" entities have to follow suit or risk loosing market share which is very challenging for CEOs to pass by. Especially, when their share holders are screaming to make money. Because the Federal Government is considered to be the safest investment in the world it creates the impression whatever they endorse is probably safe as well (Fannie and Freddie). The pressure for private entities to join the party is no doubt overwhelming and Fannie and Freddie have an inordinate influence in this way. Hence Fama's sloppy comment "How much does it take?" Some banks stayed disciplined like U. S. Bank. I talked to a guy who works there and he said a few years ago they were the laughing stock of the financial industry. Now of course they look very smart. In a market environment distorted by government action it is likely that most private players will get sucked in when bad policy or unintended consequences distort the market.

Finally, I believe that "bubbles", when societies put too many resources into one part of the economy, or "anti-bubbles", when a society does not put enough resources into one part of the economy, are real. Humans are not perfect and can make bad decisions and collectively can make really bad decisions. Bubbles are just a reflection of a society making really bad decisions until it eventually comes back to bite them. I think that is what has happened in the housing/financial crises.

Comments welcome.