A very useful hour

http://krugman.blogs.nytimes.com/2008/09/26/crisis-at-princeton/

Unless you already feel you have a good handle on everything happening in the financial markets and the general economy right now, this is worth watching. If you only have 15 minutes, Krugman starts at minute 38 and discusses the bailout specifically - but the first 38 minutes provide an important background.

(I guess you may also have totally thrown in the towel and moved to an entirely self sufficient farm in Oregon and thus not care anymore).

I continue to think that this is going to cause a significant retreat in the level / increase in price of leverage across the board and that this will flow through to create a decrease in the pricing of assets in all asset classes. (Except maybe gold). Even with a "bail-out", there has been a destruction of confidence in the effectiveness of the risk mitigation measures that made lending profitable at the price / leverage balance that existed 2 years ago. I would guess that this will move back up over time - but I would also guess that the initial (and now inevitable in my view) retreat will cause meaningful declines in earnings on assets first.

My interpretation of the first 25 minutes of the video is that NONE of the institutions that had made a business of lending have any room on their balance sheets to make additional loans right now. In fact, they are holding their collective breath waiting for additional losses on assets to cause their capital to further decline. I don't see this as likely to suddenly change even with the bailout plan. I also see significant likelihood of additional regulations on capital requirements that restrict the old way of doing business. Again - this means less leverage which means lower earnings on assets which means lower prices.

On Fairness

Well - it's hard to look at the whole bail out thing and not talk your own book. I don't like the idea of an additional 25% or more decline in equity values. I don't like the idea that home prices need to fall more. I own that stuff.

But I do question the fairness of supporting decisions that should not have been made. I find the housing side is more tangible than the finance side so I'll make my point (again) relative to housing.

If a meaningful portion of the populace has been "overborrowing" to purchase houses, they cause prices for those houses to be higher than they otherwise would be. They also cause house building efforts to go in a particular direction (maybe big, fancy houses). If this is sustainable - so be it. If it fundamentally is not, then the fair thing with regard to those people who had previously been priced out of a particular market is to let prices fall. The priority of "keeping people in their homes" expressed by politicians the last few years has always seemed strange to me - because keeping person A in their home necessarily means keeping person B out, right? So fair would seem to be keeping the rules constant. It is rough for the status quo but it is good for some people - they just aren't as visible.

The situation would seem similar in the financial markets. I'm sure there are other people who would like to have the business opportunities currently held by potentially failing entities. By propping up a given entity, we deny new entrants an opportunity they may otherwise have had.
(I will grant that the possibility that the destruction of the organizations that had previously provided capital could - would likely - have a negative net welfare effect on the populace. It would take many years for the system to rebuild.)


It's interesting to think about what exactly fiat money (or even gold) actually is (a store of value). I will save that for a later post since I have to go now.

Year Round School

So... having just attended classes all summer for the first time in my life, I can attest to the fact that you forget a whole lot less with a 2 week break then with a 12 week break.

Given this fact and given that from what I read in the newspapers, parents will do close to anything to get their kids into a good college these days I have a question:
Where are the year-round charter schools?

It would seem an obvious competitive advantage. It's not for everyone - but it seems like it should be for at least a large minority of students. Even if it didn't result in additional total days of schooling, the efficiency gain from not needing to reteach everything lost over the summer has to be worth at least a year or two of academic progress by the time a child is through high school.

Further, for families with two working parents or just one parent, it would alleviate the need to find daycare from memorial to labor day each year.

I'm sure there are some out there but why not more? It's not like there's work to do in the fields anymore.

An article for the election season and a question

http://www.edge.org/3rd_culture/haidt08/haidt08_index.html



Though many of us are feeling poorer today than we were 6 months ago, I think this question is still relevant. Having achieved (for most of us) secure shelter and food and some measure of security, what else should we want? Towards what should we strive? In most of history people (excluding very small elites) used up all their time in the quest for basic needs. Now what?

Should we be making sure the same is true for everyone?

Should we be saving up to buy a bigger house and another car?

Should we be trying to increase our threshold power output on the bike?

I've been devoting a lot of time to learning new things. To the extent I am able to apply that knowledge either to the creation of new knowledge or as a productive participant in the economy it will have had some measure of merit beyond pure entertainment. Otherwise maybe it's a matter of preference to hold it in higher regard to spending time on my bike.

What to do with the incredible good fortune to have been born here in this time?

(Hint - I think answer B is wrong. Be assured that if you don't have an answer to this question, an army of marketing executives is working tirelessly to supply you with one.)

Times like these

I'm sure the last month has been unpleasant for most people with any meaningful investments in the stock market. It has been for me. I keep trying to think of the silver lining, which is the fact that returns to capital are likely to be a lot higher once we get through this so the money you invest over the next several years should have decent returns. (That isn't a declaration that we've reached a bottom yet. Who knows. But in a slightly longer time frame, if your peak earning years are still ahead of you, the current decline in valuations may be to your benefit).

The other "flip side of the coin" concept I wanted to quickly mention in the context of all of the debate of saving this company and protecting that homeowner is that one need always keep the "parable of the broken window" http://en.wikipedia.org/wiki/Parable_of_the_broken_window in mind. Briefly, one's reaction to a window breaking is instinctively that it is bad for everyone. That isn't true because the glazier likes the business. Now.... clearly it would be better for the glazier to put a new window in a new house for someone - depreciation of capital is a loss. But it is worth thinking about fairness whenever we change rules of the game after the fact.

With regard to AIG - if they fail, that probably means better profits for their remaining competitors. With regard to mortgage foreclosures, a family that had otherwise been priced out of a market may now have an opportunity to buy the home they want. Almost everything has secondary consequences.

This is not to say that additional uncertainty is not generally costly (though the people selling hedges profit therefrom). It is not to say that the market completely freezing up isn't something to be avoided if possible. I would just note that it's easy to sympathize with those people who were "winning" and suddenly have problems - but there are frequently others who were waiting for an opportunity and this may create one for them.

If you only read one 8000+ word blogpost today

May I recommend the one below:

http://www.theoildrum.com/node/4240

An interesting article

http://www.voxeu.org/index.php?q=node/1244

Recommended by Tyler Cowen on Marginal Revolution

http://www.marginalrevolution.com/marginalrevolution/2008/06/high-commodity.html