Robert Rubin's obstruction and inaction as factors in the current credit crisis

I don’t agree with Rubin on everything, but on the genius of Fischer Black and strong dollar policy, we are unified. Timothy Noah gives us some pause in looking at Rubin’s Treasury Secretary tenure:

In 1998, Brooksley Born, chair of the Commodity Futures Trading Commission, proposed bringing derivatives under her jurisdiction. Rubin joined forces with Greenspan and Arthur Levitt Jr., then chairman of the Securities and Exchange Commission, to successfully derail the proposal in Congress. Rubin shared Born's worry about the derivative market's unregulated growth, and in his 2003 memoir, In an Uncertain World (co-authored by Jacob Weisberg, editor-in-chief of the Washington Post Co. unit that includes Slate), Rubin would later write that derivatives "should be subject to comprehensive and higher margin limits." So why did he oppose Born? Rubin doesn't discuss the episode in In an Uncertain World, but according to an Oct. 15 article by Anthony Faiola, Ellen Nakashima, and Jill Drew in the Washington Post, Rubin fought Born's plan for essentially political reasons: So "strident" a power grab by the CFTC, Rubin believed, would invite legal challenge, which in turn would create havoc in the derivatives market. Unfortunately, after killing off Born's proposal, Rubin never developed a less "strident" regulatory alternative—even after the September 1998 collapse of the Long Term Capital Management hedge fund, attributed in large part to its extensive investment in derivatives, demonstrated that concerns about these unregulated financial instruments were extremely well-founded. As a consequence of Rubin's obstruction and inaction, the market for one particular derivative—credit-default swaps—grew like a noxious weed. The credit-default swaps were unregulated insurance contracts on securities derived partly from subprime mortgages. If indiscriminate subprime mortgages were the vehicle that brought about the market meltdown, credit-default swaps were the fuel.

Freedom is not a mistake

Great question

Mr. Obama pledges to clean up our nation's politics and outpolls John McCain on honesty and ethics. Yet in Chicago, he moved with the Tony Rezkos and endorsed pols like Mayor Daley and Cook County Board President Todd Stroger. Can a politician so steeped in his hometown's ways really be an agent of change in Washington?

Graph of the day

Via Mark Perry, comparing federal income taxes paid by residents of 6 states, versus Exxon’s corporate taxes.

McCain-acons exist, too

Here is Wendy Button, speechwriter for Barack and Michelle Obama, Hillary Clinton, John Edwards, and Joe Biden:

We can talk about the wardrobe and make-up even though most people don’t understand the details about Senator Obama’s plan with Iraq. When he says, “all combat troops,” he’s not talking about all troops—it leaves a residual force of as large as 55,000 indefinitely. That’s not ending the war; that’s half a war.

I was dead wrong about the surge and thought it would be a disaster. Senator John McCain led when many of us were ready to quit. Yet we march on as if nothing has changed, wedded to an old plan, and that too is a long way from the Democratic Party.

I can no longer justify what this party has done and can’t dismiss the treatment of women and working people as just part of the new kind of politics. It’s wrong and someone has to say that. And also say that the Democratic Party’s talking points—that Senator John McCain is just four more years of the same and that he’s President Bush—are now just hooker lines that fit a very effective and perhaps wave-winning political argument…doesn’t mean they’re true. After all, he is the only one who’s worked in a bipartisan way on big challenges.

Before I cast my vote, I will correct my party affiliation and change it to No Party or Independent. Then, in the spirit of election 2008, I’ll get a manicure, pedicure, and my hair done. Might as well look pretty when I am unemployed in a city swimming with “D’s.”

Whatever inspiration I had in Chapel Hill two years ago is gone. When people say how excited they are about this election, I can now say, “Maybe for you. But I lost my home.”

Glenn Reynolds with a timely policy reminder

Remember, no matter what we do, half the households in America will be below the median income.

Has my confidence in Bernanke

been vindicated now?

 

(I am sure commenter Harold Hecuba will find something that’s been missed).

Todd Zywicki's take on libertarian voting trends

Including his own:

Maybe I'm just slower at this than others, but it really took a long for it to sink in to me exactly how far left Obama really is. On every single issue that I am aware of, he seems to be at the far left end of the Democratic Party spectrum. I mean really out there.

I think that my slowness to really pick up on this was due to several factors. First, Obama's demeanor is essentially moderate--he doesn't come across as a Howard Dean crazy type. I think this leads one to assume his policies are moderate. Second, my resistance to McCain was really quite strong--I've criticized him here before, especially for the way it seems that he approaches problems. Third, until recently McCain has really run a terrible campaign in terms of explaining the differences between himself and Obama in terms of illustrating exactly how far left Obama is. Fourth, because of media bias, the media has tended to reinforce the idea that Obama is a moderate and not to highlight the embarrassing parts of his message.

Perhaps most fundamentally, given the history of the world over the past 25 years I think I just had assumed that no serious politician or thinker would in this day and age hold the sorts of views that Obama seems to hold. Raising taxes in a recession, protectionism, abolition of the secret ballot for union elections, big spending increases, nationalized health care, and most appallingly (to my mind) the potential reimposition of the "Fairness Doctrine"--I mean this is pretty serious stuff. And when combined with a Democratic Congress, I think we may be talking about (to use Thomas Sowell's recent phrase) a "point of no return." I guess I just assumed that Obama would be sort of Bill Clintonish--"the era of big government is over" and all that stuff. That he would have absorbed the basic insights of recent decades on taxes, trade, regulation, etc.

I experience similar “slowness”.  But, judicial activism and foreign policy risks aside, I’m not sure things would be different under either candidate.  Sure, division of power and gridlock will dampen legislative uncertainty and unintended consequences, but perhaps a few years of wilderness will bring the electorate closer to reality.

Markets in everything: teeth and shoes

Sean Masaki Flynn says:

Good shoes and nice teeth are costly signals of reproductive fitness.

A signal is only credible if it is costly. A person telling you they are honest is one thing. Watching that person later stick to being honest even though it costs him his job is another thing. Such an action shows a much higher level of credibility that he will be honest in all situations.

In the same way, a person telling you that he has good genes that would produce lots of descendants is one thing, while providing you with costly evidence to that effect is much more credible. To the extent that a person has nice teeth, they either have good genes or could afford braces growing up. Both may be taken as signs indicative of being able to provide either good genes or plenty of resources to help make a lot of descendants.

And the same is true for good shoes. A person with good shoes must be both fashion conscious and able to afford good shoes. Being fashion conscious indicates a level of social skills that might help one’s descendants to survive and do well in our very social species, while the ability to afford good shoes indicates the capability of marshaling resources that could also be useful for descendants and thereby increase their evolutionary fitness.

He also says:

Entrepreneurs make new jobs and new industries and new products. The question from a public-policy perspective is how to best encourage them. My personal view is that the government does a really bad job choosing whom to support — either through direct subsidies, protection against foreign competition, the provision of tax incentives, or any sort of industrial policy that favors some entrepreneurs over others.

Worse yet, the possibility of successfully lobbying for subsidies, tax incentives, or protection from competitors means that it is often more profitable to direct one’s entrepreneurial efforts not toward developing new products or better methods, but rather toward figuring out better ways to game the system; better ways to lobby Congress, get increased corporate welfare, get higher tax subsidies, and so on.

And

I went through the Los Angeles public schools, and I can tell you from firsthand experience that they are poorly managed, incredibly wasteful of money, and produce pathetic results. As a result, I would be the last one to put economic education as a top priority.

 

And

For example, do you want more spending on Head Start programs for preschool children? O.K., but remember that any increased spending for Head Start has an opportunity cost. Every dollar spent on Head Start means giving up a dollar of spending on feeding starving children in poor countries, efforts to decrease pollution, helping poor people get affordable housing, etc. Once a person starts thinking in terms of opportunity costs, they start making much more serious decisions about how to spend both their own money as well as taxpayer money.

And

The most important philosopher of science of the 20th century, Karl Popper, argued that economics was the only social science that had turned into a real science. To him, economics was the queen of the social sciences just as physics was the king of the physical sciences.

But why did he think this? Because economics was, to him, the only social science that engaged in systematically testing hypotheses about how the world works. Doing so is actually much easier if you engage in a lot of mathematical modeling. Why? Because in a ath model it is crystal clear what your assumptions are, and also what implications follow from those assumptions …

Economics was the social science that most early on embraced math modeling and therefore was the social science that led the way in terms of making very precise, testable predictions that could be compared with the real world to see if they held up. That is why economics got the reputation of being more of a real science than psychology.

To see what I mean, think about any of the Sigmund Freud’s writings. Is it at all clear what his assumptions are? What are his X, Y, and Z? And then, is the logic that he uses to get from his vague assumptions to his often-vague conclusions totally air tight? Not really. And then, are his predictions about human behavior in a given situation very precise? No. So, if we went out to test his “model” against what happens in an actual situation would we be able to? Not at all.

But before I get slammed by sociologists, anthropologists, psychologists, and others, let me say that much has changed. All the social sciences are now very much more mathematical and precise and thus very much more able to produce models that make precise, testable predictions. So, these days, I can’t really say that economics is more of a real science than many of the others. But I would say that we were first, and that we led the way, and that that was a very good thing.

Smart, articulate, honest guy.  Probably my favorite Freakonomics interview to date.

Global cooling cannot be stopped, despite hot air

Via Glenn Reynolds, Great Britain’s House of Commons holds a global warming debate and is blanketed with snow for the first time since 1922.

 

I remain short Intrade’s 2008.GLOBAL.TEMP.TOP5 contract.

Calvin Woodward checking Barack Obama's healthcare math

Via Don Surber, Woodward figures:

Obama's assertion that "I've offered spending cuts above and beyond" the expense of his promises is accepted only by his partisans. His vow to save money by "eliminating programs that don't work" masks his failure throughout the campaign to specify what those programs are—beyond the withdrawal of troops from Iraq.

A sampling of what voters heard in the ad, and what he didn't tell them:

THE SPIN: "That's why my health care plan includes improving information technology, requires coverage for preventive care and pre-existing conditions and lowers health care costs for the typical family by $2,500 a year."

THE FACTS: His plan does not lower premiums by $2,500, or any set amount. Obama hopes that by spending $50 billion over five years on electronic medical records and by improving access to proven disease management programs, among other steps, consumers will end up saving money. He uses an optimistic analysis to suggest cost reductions in national health care spending could amount to the equivalent of $2,500 for a family of four. Many economists are skeptical those savings can be achieved, but even if they are, it's not a certainty that every dollar would be passed on to consumers in the form of lower premiums.

THE SPIN: "I've offered spending cuts above and beyond their cost."

THE FACTS: Independent analysts say both Obama and Republican John McCain would deepen the deficit. The nonpartisan Committee for a Responsible Federal Budget estimates Obama's policy proposals would add a net $428 billion to the deficit over four years—and that analysis accepts the savings he claims from spending cuts. The nonpartisan Tax Policy Center, whose other findings have been quoted approvingly by the Obama campaign, says: "Both John McCain and Barack Obama have proposed tax plans that would substantially increase the national debt over the next 10 years." The analysis goes on to say: "Neither candidate's plan would significantly increase economic growth unless offset by spending cuts or tax increases that the campaigns have not specified."

THE SPIN: "Here's what I'll do. Cut taxes for every working family making less than $200,000 a year. Give businesses a tax credit for every new employee that they hire right here in the U.S. over the next two years and eliminate tax breaks for companies that ship jobs overseas. Help homeowners who are making a good faith effort to pay their mortgages, by freezing foreclosures for 90 days. And just like after 9-11, we'll provide low-cost loans to help small businesses pay their workers and keep their doors open. "

THE FACTS: His proposals—the tax cuts, the low-cost loans, the $15 billion a year he promises for alternative energy, and more—cost money, and the country could be facing a record $1 trillion deficit next year. Indeed, Obama recently acknowledged—although not in his commercial—that: "The next president will have to scale back his agenda and some of his proposals."

Tim Kane is thinking about job creation

and he is worried.

Quote of the day

[Socialism] was the tragic failure of the twentieth century. Born of a commitment to remedy the economic and moral defects of capitalism, it has far surpassed capitalism in both economic malfunction and moral cruelty.—Robert Heilbroner

Intrade 2008 Recession contracts spike

from 70 to 85, due to the -0.3% 3^rd quarter GDP announcement this morning.

 

I flattened my short position.

David Broder on John McCain

Really excellent:

We suspected, and soon confirmed, that he had limited interest in, and capacity for, organization and management of large enterprises. His first effort at building a structure for the 2008 presidential race collapsed in near-bankruptcy, costing him the service of many longtime aides. From beginning to end, the campaign that followed has been plagued by internal feuds and by McCain's inability to resolve them.

The shortcoming was intellectual as well as bureaucratic. Like Jimmy Carter, the only Naval Academy graduate to reach the Oval Office, McCain had an engineer's approach to policymaking. He had no large principles that he could apply to specific problems; each fresh question set off a search for a "practical" solution. He instinctively looked back to Theodore Roosevelt and the Progressive era, with its high-mindedness and disdain for the politics of doling out favors to interest groups. But those instincts coexisted uneasily with his adherence to traditional, Reagan-era conservatism -- a muscular foreign policy, a penchant for tax-cutting and a fondness for business …

His vice presidential choice, his best opportunity to put his stamp on the future, was made, typically, more on instinct than careful appraisal. McCain saw Sarah Palin as reinforcing his own reformer credentials. The convention embraced her, not as a reformer but as the embodiment of beliefs precious to the religious right. And the mass of voters questioned her credentials for national leadership.

The campaign has been costly in terms of McCain's reputation. He has been condemned for small-minded partisanship, not praised for his generous and important suggestion that the major party candidates stump the country together, conducting weekly joint town hall meetings -- an innovation Obama turned down.

The frustration for McCain and his closest associates is their belief that he is ready to practice the kind of post-partisan politics the country wants -- which they believe Obama only talks about.

Should McCain still win the election, it will demonstrate even more vividly than the earlier episodes in his life the survival instincts and capacity for overcoming the odds of this remarkably engaging man. If he becomes president, the country would have to hope this campaign has honed his leadership skills.

A government and press in bed togther

can intrude much more than any agency under the PATRIOT Act.

Capitulation soon?

Finally, a journalist ashamed at the media bias of our time.

Quote of the day

The power to tax is the power to destroy.—Chief Justice John Marshall

Even the government is guilty of insider trading

Ray Fisman’s account of the CIA coup in Guatemala and price movements of United Food Co. (now Chiquita).

Even Bryan Caplan sounds morose

these days.

You may have the rest of the media in the tank

but Fox News reports it straight (and Ms. Kelly is articulate, tough and rather beautiful):

Scary

But likely true:

And yesterday Biden let slip that he and Obama apparently have a sliding scale to determine who's "super-rich."

Obama, after all, has been promising a tax cut for the "middle class" - those making $200,000 a year or less.

Biden yesterday lowered that bar.

"What we're saying," he told a Pennsylvania TV interviewer, "is that [our] tax break doesn't need to go to people making . . . $1.4 million. It should go to [people] making under $150,000 a year."

Oops. That's a 25 percent downward redefinition of "middle class."

An Obama mouthpiece quickly dismissed the discrepancy as just another one of Joe the Senator's gaffes.

But consider: The campaign has a new TV commercial out declaring that families - not individuals - earning $200,000 or less would qualify for a tax cut. Two incomes - not one.

And, as most middle-class wage-earners know, that's a huge difference.

As Sen. John McCain said yesterday: "At this rate, it won't be long before Sen. Obama is right back to his vote that Americans making just $42,000 should get a tax increase."

We wouldn't be surprised - what with leading congressional Democrats like Rep. Barney Frank licking their chops at the chance to raise taxes.

"We'll have to raise taxes, ultimately," Frank declared over the weekend.

Juan Enriquez's Ten Proposals for the next President & Congress

here.  I think all of them have substantial merit:

1. We have to save the dollar (AAA rating in jeopardy)

2. We have to fundamentally and brutally restructure debt

3. All entitlements are fair game. To begin with...

a. If you are 60 to 65 you probably just lost a big chunk of your nest egg.

(we don't want anything from you)

b. If you are 55 to 60, we need two more years' work from you

c. 55 and under, we need three or four more years from you

4. Cut back military by 2% per year for ten years

5. Cap medical costs at 18% GNP (going to be a cat fight, but we need to have it)

6. We have to triage our support for companies (don't attempt to save dying whales)

7. The program has to be bipartisan. It has to make both Dems and Repubs unhappy

8. Simplify and broadly apply Sarbanes Oxley - apply it to government, apply it to hedge funds

9. We will invest in growing start up companies (which create the most jobs - this is where the economy is growing)

10. We will treat education as a varsity sport (and continue to recruit foreign PhDs)

Andrew Napolitano on presidents pushing beyond the limits

of the Constitution:

Remember that FDR had taken -- and either Mr. Obama or Mr. McCain will soon take -- the oath to uphold that old-fashioned document, the one from which all presidential powers come.

Unfortunately, these presidential attitudes about the Constitution are par for the course. Beginning with John Adams, and proceeding to Abraham Lincoln, Woodrow Wilson and George W. Bush, Congress has enacted and the president has signed laws that criminalized political speech, suspended habeas corpus, compelled support for war, forbade freedom of contract, allowed the government to spy on Americans without a search warrant, and used taxpayer dollars to shore up failing private banks.

All of this legislation -- merely tips of an unconstitutional Big Government iceberg -- is so obviously in conflict with the plain words of the Constitution that one wonders how Congress gets away with it.

In virtually every generation and during virtually every presidency (Jefferson, Jackson and Cleveland are exceptions that come to mind) the popular branches of government have expanded their power. The air you breathe, the water you drink, the size of your toilet tank, the water pressure in your shower, the words you can speak under oath and in private, how your physician treats your illness, what your children study in grade school, how fast you can drive your car, and what you can drink before you drive it are all regulated by federal law. Congress has enacted over 4,000 federal crimes and written or authorized over one million pages of laws and regulations. Worse, we are expected by law to understand all of it.

The truth is that the Constitution grants Congress 17 specific (or "delegated") powers. And it commands in the Ninth and 10th Amendments that the powers not articulated and thus not delegated by the Constitution to Congress be reserved to the states and the people.

What's more, Congress can only use its delegated powers to legislate for the general welfare, meaning it cannot spend tax dollars on individuals or selected entities, but only for all of us. That is, it must spend in such a manner -- a post office, a military installation, a courthouse, for example -- that directly enhances everyone's welfare within the 17 delegated areas of congressional authority.

And Congress cannot deny the equal protection of the laws. Thus, it must treat similarly situated persons or entities in a similar manner. It cannot write laws that favor its political friends and burden its political enemies.

 

Is a man defined by his friends?

John McCain's presidential campaign Tuesday accused the Los Angeles Times of "intentionally suppressing" a videotape it obtained of a 2003 banquet where then-state Sen. Barack Obama spoke of his friendship with Rashid Khalidi, a leading Palestinian scholar and activist.

 

http://www.latimes.com/news/nationworld/nation/la-na-video29-2008oct29,0,5458024.story

 

Quote of the day

On the question of public funding of presidential campaigns, we Democrats who strongly support Sen. Barack Obama's candidacy and who previously supported limits on campaign spending and who haven't objected to Obama's opting out of the presidential funding system face an awkward fact: Either we are hypocrites, or we were wrong to support such limitations in the first place.--Bob Kerrey

Apologies for the light blogging

Could not access blogger from work. Hopefully it is a temporary predicament.

Would Paul Krugman write this letter to himself

and reject the Nobel prize:

First of all, it's just not fair that only you should get this prize this year when there are hundreds of thousands of other economists in this world. Honoring only one person in this way is a totally non-egalitarian thing to do.

Second of all, a white man like you getting the prize — again! — is racist and sexist to the max. I just checked out the list of laureates in economics since 1969 and almost all of them are white men!!

Third of all, the amount of money — $1.4 million — that Riksbank is offering is obscene. Who deserves that kind of money anyway, when coal miners in third world countries — many of them barely 14 years old — don't make even $30 per month — and they are the ones risking their lives every day! As you have pointed out in your writings, the gap between the rich and the poor is rapidly widening.

Fourth of all, the selection process employed by Riksbank was neither transparent nor democratic.

Fifth of all, the prize sends a wrong message to the society. We agree that you worked hard all your life. You went to MIT, you got your Ph.D. ... You were studying your ass off while others were partying like crazy. Now you got the Nobel Prize and they don't. That's just not fair. Do you know what message it sends? That if you work hard in life, you can achieve things that others can't! That's a nasty and brutish message to send. Conservatives say things like that, not liberals like you!

Sixth of all, the prize perpetuates the shameful legacy of colonization and imperialism. Almost all of the laureates have been from the first-world countries.

Seventh of all, you accepting this prize will lead to global warming. You and your loved ones will be traveling to Stockholm in an airplane that will be consuming hydrocarbons — yes the same hydrocarbons that pollute the environment and prop up the dictatorial regimes.

Read the whole thing.

Barbara West, a journalist who is doing her job

Freeman Hunt says:

Unsurprisingly, Biden lies about the campaigns affiliation with ACORN. Yes, ACORN has received money from the Obama campaign. And Biden's spin on his recent bizarre comments depended on the viewer not knowing what it was that he said ...

It is beside the point to characterize that as saying Obama will be tested like any other President and is ready. His quote mentioned "a generated crisis," alluded to known "scenarios," and indicated that Obama's response would be unpopular. Those are the parts of the statement that people want clarification on.

I loved the questions about Marxism and Sweden. Biden says that the top one percent of earners make a large percentage of income, but he leaves out that they pay nearly double that share in taxes already.

As for me, I don't mind aggressive questioning in either direction. There's nothing tawdry in this interview. She's not asking him ridiculous, crazy-town questions like "Is Barack Obama a Muslim?" She's tough. That's good. She should be. You're running for the highest office in the land, and you'd better be able to take the heat and explain what you mean. As President you'll be facing people a lot tougher, a lot more hostile, and a lot more consequential than local news reporters.

Manhattanites for the Second Amendment

Partial list:

Carlos Delgado (Mets outfielder)
Robert DeNiro (actor)
Alexis Stewart (Martha's daughter)
Donald Trump (billionare poser)
David Wright (Mets infielder)

A tale of two cities: Dallas and Detroit

One-way 26-foot U-Haul truck rental quotes for 11/1/2008:

1. Detroit to Dallas: $1850

2. Dallas to Detroit: $521

Art Laffer shoots and scores

Yes, the Laffer Curve is a partial miss. But his column today is all good:

No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

But here's the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street.

Barack Obama's economic advisers

support John McCain's health care reforms:

"The fact that the tax subsidy, which supports the employer-sponsored system, is better than nothing is a feeble excuse for resisting any changes to the status quo." That's not John McCain's judgment. It's a quote from Jason Furman, who happens to be Mr. Obama's economic policy director. In a cri de coeur published in the journal Democracy in 2006, Mr. Furman implored fellow Democrats and other progressives to confront "a critical missing link" in their health ideology -- the same link his boss now spends most of his time demagoguing.

Mr. Furman used to portray the current system as regressive, inequitable and a subsidy for health plans that insulate consumers from the cost of their care, thus inflating health spending. When he was director of the Brooking Institution's Hamilton Project, Mr. Furman outlined a health reform -- again using tax credits -- that took the "sensible approach" of "exposing individuals to the price of health care through greater cost sharing."

When President Bush unveiled a health reform similar to Mr. McCain's in 2007, Mr. Furman co-authored a Tax Policy Center paper that called it "innovative and a step in the right direction." As recently as May, he published a long article in Health Affairs on the possibilities of health-care tax reform.

What a difference an election makes. "The choice you'll have," Mr. Obama warned of the McCain plan during one of the debates, "is having your employer no longer provide you health care." Sounds terrible. But wait, let's consult another one of Mr. Obama's advisers. David Cutler, the Otto Eckstein Professor of Applied Economics at Harvard, put it this way: "Health insurance is not something that is made better by tying it to employment. As a result, essentially all economists believe that universal coverage should be done outside of employment."

That passage comes from Mr. Cutler's 2004 book, "Your Money or Your Life," which outlined a strategy for universal health care. Not surprisingly, Professor Cutler's plan, like Mr. McCain's, also applied subsidies such as "tax credits -- people get a lower tax bill, or a refund from the government, to be used to purchase insurance." In this he was echoing many other liberal health experts such as MIT's Jonathan Gruber, another Democratic policy star.

These advisers know that Mr. Obama's claim that Mr. McCain will tax health benefits "for the first time in history" is particularly disingenuous. For people who stick with employer coverage under the McCain plan, the money employers take out of wages to pay for insurance would be taxed, but the new credit more than covers the bill. The people who decide to buy coverage on their own would see their wages rise. And everyone who joins the individual market -- many of them uninsured now -- would be equipped with new health dollars, instead of paying with after-tax income.

Obviously neither Mr. Furman nor Mr. Cutler would endorse the McCain plan outright. They are, after all, Democrats. Liberals who support rearranging the tax code for health care think it must be accompanied by other insurance reforms to protect families in the individual market that Mr. McCain doesn't include. Even so, speaking on a Tax Policy Center panel on taxes and health insurance in February of this year, Mr. Furman said that "I think we should be cheerleading" the emphasis on tax reform, "not writing it off."

He even prefaced his remarks by joking, "this talk might actually sound like a John McCain rally." Maybe Mr. Obama should be running attack ads against his own economic guru.

Howard Stern already discovered similar phenomena.

Free markets reduce discrimination

David Henderson says:

... notice what McCain is saying: Even countries that hate us want to sell us oil. To paraphrase Adam Smith, it is not from the benevolence of the Saudi Arabian or Venezuelan producers that we fill our gas tanks, but from their regard for their own self-interest. Indeed, this statement of McCain goes further than Adam Smith. In Adam Smith's world, the butcher, baker, or brewer might have been indifferent to you or only mildly liked you. But McCain's statement illustrates Gary Becker's point that free markets break down discrimination: you might hate that guy who wants your product, but you love yourself and your family, and so you sell it to him.

I would conclude that if one abhors violence, one should also celebrate freedom and free markets.

Greg Mankiw on taxes reducing his incentive to work

He observes:

... one dollar I earn today will yield my kids:

(1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4).

For my illustrative calculations, let me take r to be 10 percent and my remaining life expectancy T to be 35 years.

If there were no taxes, so t1=t2=t3=t4=0, then $1 earned today would yield my kids $28. That is simply the miracle of compounding.

Under the McCain plan ... a dollar earned today yields my kids $4.81. That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.

Under the Obama plan ... a dollar earned today yields my kids $1.85. That is, Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario.

The bottom line: If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.

Quotes of the day

It looks like we've gone from a world where only Harvard grads could vote, to one where all you need is passing grades in kindergarten.--Bryan Caplan

Colleges trumpet the statistic that, over their lifetimes, college graduates earn more than nongraduates, but that's terribly misleading. You could lock the collegebound in a closet for four years, and they'd still go on to earn more than the pool of non-collegebound — they're brighter, more motivated, and have better family connections.--Mark Nemko

Remember that "problem" of an increasing share of income going to the superrich? Most likely, it has been solved.--Greg Mankiw

... after adjusting the Census Bureau data for three key factors — inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006.--Terry Fitzgerald

I mean no disrespect toward Obama and McCain. But I'm sure I wasn't the only one who watched the candidates debate and thought, "Out of a nation of 300 million, this is the best we can do?"--Glenn Reynolds

25 years ago today

241 Americans lost their lives in Beirut

Lives saved through deregulation

as the excellent Jon Henke points out:

This must be those harmful consequences of deregulation.

The rate of workplace injuries and illnesses in private industry declined in 2007 for the sixth consecutive year, the U.S. Department of Labor's Bureau of Labor Statistics (BLS) reported today. Nonfatal workplace injuries and illnesses reported by private industry employers declined from 4.4 cases per 100 workers in 2006 to 4.2 cases in 2007.

And since miners are often invoked as a symbol of workplace safety problems, the record on mine safety for the past few decades...

If you havin’ Church problems then don’t blame God, son…

I got ninety-five theses but the Pope ain’t one.

BCWUW4: illustration of popular microeconomics

via Don Luskin:

Today on my way to lunch I passed a homeless guy with a sign that read "Vote Obama, I need the money." I laughed.

Once in the restaurant my server had on an "Obama 08" tie, again I laughed as he had given away his political preference--just imagine the coincidence.

When the bill came I decided not to tip the server and explained to him that I was exploring the Obama redistribution of wealth concept. He stood there in disbelief while I told him that I was going to redistribute his tip to someone who I deemed more in need--the homeless guy outside. The server angrily stormed from my sight.

I went outside, gave the homeless guy $10 and told him to thank the server inside as I've decided he could use the money more. The homeless guy was grateful.

At the end of my rather unscientific redistribution experiment I realized the homeless guy was grateful for the money he did not earn, but the waiter was pretty angry that I gave away the money he did earn, even though the actual recipient deserved money more.

I guess redistribution of wealth is an easier thing to swallow in concept than in practical application.

Be careful what you wish for.

When you're in the voting booth, remember this face

Guess the quarterbacks after each of their first 5 starts

W-L: 3-2 vs. 3-2
Pass Yds/G: 204.6 vs. 188.6
Comp pct: 62.3% vs. 65.5%
TD-Int: 7-4 vs. 5-4
Passer rating: 85 vs. 83.2

It's Tom Brady vs. Matt Cassel. Closer than I thought it would be.

The markets may have yet to capitulate

but Alan Greenspan did yesterday.

Caught in the throes of history

Index futures are limit down, which means trading has been halted in them. S&P 500 futures halted since 4:35am EST.

UPDATE: Paul Kedrosky's graph, demarcating BusinessWeek's "Death of Equities" cover may suggest an exaggeration on my part:

Quotes of the day

Morituri te salutamus--gladiators of Rome (We who are about to die salute you)

I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.--Alan Greenspan

And the alternative? What should protect the shareholders? The altruism of regulators?--Russell Roberts

... a ¥3 million car was worth £19,500 in the morning and £21,600 a few hours later, thanks only to currency fluctuations. I'm not sure what this kind of FX volatility means for international trade, but hedging costs are going through the roof, which can't help one bit.--Felix Salmon

... if regulation is so great, how come one guy, or one fairly minor bill, can apparently single-handedly destroy the most heavily regulated industry in America that doesn't actively involve radioactive material? If your preferred system is really that fragile, then maybe we should be looking into alternatives.--Megan McArdle

The monetary base jumped by over $300B. Excess reserves jumped by less than $60B. Contrary to the liquidity trap, the new money is not flying straight into bank vaults and locking the vault door behind it. Not even close.--Bryan Caplan

When the stock market crashed, Franklin D. Roosevelt got on the television and didn't just talk about the, you know, the princes of greed. He said, 'Look, here's what happened.'--Joe Biden's television anachronism

A brain drain is great!

Not at all terrible.

More regulation won't save the New York Times

anymore than it will save a flailing bank.

Most Democrats think spreading the wealth is a good idea (66 percent)

and most Republicans think it is a bad idea (72 percent).

Personally, I think spreading the wealth is a great idea, but done without compromising freedom or privacy. Which is why I have no political party; both major parties have left me independent.

The main reasons why government is a poor intermediary between the wealthy and the poor is that

1) it disintermediates any direct connection between individuals (which increases deadweight loss and decreases accountability), and
2) it maximizes rent-seeking and free-riding

Supreme Court Justices

Another reason I am girding my loins:

Presidents come and go. Even our worst ex-president, Jimmy Carter, lasted only one term, so the damage he could do, while grievous, was finite. People could act on their buyer's remorse at the next election.

Supreme Court justices are a different story. They are appointed for life, and the damage they can do to our nation is infinite and usually irreversible. Who appoints them matters.

Tax uncertainty

coming from the Obama & McCain camps:

Sen. McCain, who proposes a "refundable tax credit" as the cornerstone of his health-care plan, has described Sen. Obama's proposal to offer a series of refundable tax credits as similar to offering "welfare." The Illinois senator has said 95% of Americans would benefit from some form of tax relief under his economic plan.

Sen. McCain has said his opponent's plan would give tax relief to the 38% of Americans who do not pay any federal income taxes. The Obama campaign says beneficiaries pay payroll taxes.

The McCain campaign said Mr. Goolsbee's comment reflected Sen. Obama's "willingness to say whatever is necessary in the moment." Sen. McCain on Wednesday said Sen. Obama had indicated his preference for redistributing wealth over promoting economic growth.

"It raises a question: What is their philosophy of taxation?" said senior McCain adviser Douglas Holtz-Eakin. "No one would design a tax policy about mortgage interest, but say, 'If you're laid off, you're not going to become eligible anymore.'"

President-Media-Elect Obama, you are a smart man, right? What is the opposite of stimulus? Taxes! So how about lower taxes and spending?

Quotes of the day

I may be estranged from my former thesis adviser, Robert Solow, in other ways, but here I agree with him that: (a) you probably need sociology to explain sticky wages and unemployment; but (b) it's not an economist's comparative advantage to pursue it.--Arnold Kling

Markets are complicated things that rest on a mixture of law, custom, and individual action. There is no libertarian state of nature in which human beings survived without some form of coercively enforced rules. All libertarianism can do is maximize the scope for individual action within that framework.--Megan McArdle

Beware any politician who promises to create new jobs.--Jacob Sullum

No. I'm trying to save the system, and the main thing we need is less reckless lending. Your position is that we need more credit to solve problems of debt.--John Carney, to Felix Salmon

I have no idea where you get this idea that the market has a clear idea of how solvent banks are. It doesn't. It does, however, have a clear idea of what any given bank's borrowing costs are. That's a liquidity issue, but it's used as a proxy for solvency, precisely because no one knows what the real solvency situation is.--Felix Salmon, back at John Carney

The richest vein I have seen is two guys/gals who want to create a tool that they themselves want to use. This describes, for example, Google, Yahoo and Apple. I have come to believe that almost everyone has the entrepreneurial gene — it’s been necessary for survival for thousands of years. ... The issue is whether that gene is expressed, and the only way to really “know” is with retroactive, after-the-fact analysis. Unfortunately, venture capital doesn’t work this way. You take your best shot and pray — then you thank God if you’re right a few times.--Guy Kawasaki

That someone in [Erwin] Chemerinsky's position would pre-emptively react with personal attacks on a judge who has kicked off such a debate suggests he knows that the advocates of politicized pro bono will have much to be defensive about.--Walter Olson

Dear everyone who’s ever thought of starting an NGO: Don’t do it. You’re not going to think of a solution no one else has, your approach is not as innovative as you think it is, and raising money is going to be impossible. You will have no economy of scale, your overhead will be disproportionately high, and adding one more tiny NGO to the overburdened international system may well make things worse instead of better.--Alanna Shaikh

I play her bubble-headed too when I imitate her.--Sarah Palin, on Tina Fey

It gives us an opportunity to actually see the ball on the ground, kick the ball and have another shot at it.--Adam Vinatieri, on icing the kicker

Obviously, a lot of those sacks aren’t on [the offensive line], they’re on me. That’s just something I’m getting a little more used to as I go forward.--Matt Cassell

I regret the fact that after one misstep, I let them pile on. They don't have a reason to stop if you don't correct them.--Darryl Strawberry

The case for global cooling mounts

as the merits of the CO2 warming hypothesis wane:

2008 global surface temperatures average 0.379 Celsius over GISS baseline. This means that, unless Sep-Dec 2008 temperatures average 1.10 over baseline (and the single month record, since 1880 when the data collection begins, is 0.85 in Jan 2007), this contract will expire at 0.0:

I remain short the Intrade global warming contracts.

UPDATE: The Gore Effect, in full effect.

UPDATE: Via Don Surber, Lorne Gunter has more.

I never would have guessed Howard Stern to be so much like John Stossel

I don't think Howard Stern has been published in a peer-reviewed journal, but this piece was pretty well done. He had one of his guys interview Harlem voters asking first who they were voting for. They would say Obama. Then, the interviewer mentioned McCain's policies, pretended they were Obama's, and the interviewees thought these were great ideas. That is, they would ask questions like this: "Are you more for Obama's policy because he's pro-life, or because he thinks he our troops should stay in Iraq and finish this war?" And they would say something like, 'because he's keeping the troops in Iraq'.

ACORN and the Catholic Church

working together, and then not.

Is this the best birthday gift ever?

I think a case can be made.

I tip my cap to these 2 Mikes

Nolan and Singletary.

A proven way to reduce inequality

is to increase poverty. Inequality might be bad, but isn't poverty much worse?

Forbes Richest 10

posted by Natalie:

Which candidate for President pays men and women similar wages

and which candidate pays women 28% less than men? The answer may surprise you.

UPDATE: More surprises.

Rhode Island beats Michigan in the dubious honor

for the highest state unemployment award.

I remember speaking to a family friend who worked in healthcare, and was so proud that healthcare was the state's largest industry.

It's amazing I even know how to write or do simple arithmetic, growing up there ...

Robert Murphy has a strong response to Tyler Cowen and Paul Krugman

Austrian business cycle theory, specifically capital consumption effects.

And Tyler Cowen has the integrity and self-esteem to post it. Bob Murphy even comments on Tyler's post (scroll down). Here are some excerpts from Murphy's thought-provoking piece:

The basic Austrian story is that during the artificial boom, workers' labor and other resources get channeled into investment projects that aren't compatible with the overall level of real savings. Sooner or later, reality rears its ugly head, and the unsustainable projects have to be abandoned before completion. Entrepreneurs realize they were horribly mistaken during the boom, everybody feels poorer and slashes consumption, and many workers get thrown out of jobs until the production structure can be reconfigured in light of the revelation.

For Krugman, his argument relies on a static conception of income and spending. Just using that accounting tautology — without indexing for time — Krugman could also argue that real income can never change in an economy, even if the government announced that the most productive 10% of workers in every firm would be shot. (After all, total income would still equal total spending.)

As for Cowen, he seems to be assuming that "real income" is equivalent to "real consumption." I don't know what to say except, "No it isn't." If a worker gets a job in a silver mine and gets paid in ounces of silver that he stores in his basement, he can have very high "real wages" even if his consumption is very low.

Without further ado, let's examine a hypothetical island economy composed of 100 people, where the only consumption good is rolls of sushi. ... But alas, one day Paul Krugman washes onto the beach. After being revived, he surveys the humble economy and starts advising the islanders on how to raise their standard of living to American levels. He shows them the outboard motor (still full of gas) from his shipwreck, and they are intrigued. Being untrained in economics, they find his arguments irresistible and agree to follow his recommendations. ... (If the reader is curious, Krugman doesn't work in sushi production. He spends his days in a hammock, penning essays that blame the islanders' poverty on the stinginess of the coconut trees.)

Finally, we predict that during the period of transition, some islanders will have nothing to do. After all, there will already be the maximum needed for catching fish with the usable boats and nets, and there will already be the corresponding number of islanders devoted to rice collection and sushi rolling, given the small daily catch of fish.

People in grad school would sometimes ask me why I bothered with an "obsolete" school of thought. I didn't bother citing subjectivism, monetary theory, or even entrepreneurship, though those are all areas where the Austrian school is superior to the neoclassical mainstream. Nope, I would always say, "Their capital theory and business-cycle theory are the best I have found." Our current economic crisis — and the fact that Nobel laureates don't even understand what is happening — shows that I chose wisely.

The Economist offers some great advice to the McCain campaign

I think that the campaign may be too maverick-y to synthesize the recommendations:

First, Mr McCain should point out that his opponent is one of the least business-friendly Democratic candidates in a generation.

Second, Mr McCain should hammer away at the dangers of single-party rule in Washington, DC.

Third, Mr McCain should point out that his opponent has never once in his career said boo to a Democratic goose.

Has Sarah Palin been submitting illegitimate travel expenses back to Alaska?

The AP claims so.

If true, that's not very maverick-y, but something I'd expect a Charles Rangel to practice.

The US Dollar is risky

but safer than other currencies:

Quotes of the day

[Joe] Biden is trying to put lipstick on the Bay of Pigs.--Tom Maguire

What happens when the voter in the exact middle of the earnings spectrum receives more in benefits from Washington than he pays in taxes? Economists Allan Meltzer and Scott Richard posed this question 27 years ago. We may soon enough know the answer.--Paul L. Caron

If Lehman had been saved, a cataclysmic month might have been avoided. But there would still have been a series of minibanking crises. Such death by a thousand cuts — similar to the one suffered by Japan in the 1990s after its bubble burst — would have been less dramatic but might, ultimately, have been more debilitating.--HUGO DIXON and DWIGHT CASS

Economists ought to admit that we do not know much about what is going on today. Neither do the Fed Chairman and the Treasury Secretary. Of course, the market demand is for "strong" leaders and for "strong" economists, who can fool the public into believing that they have great knowledge. The ones who do this best are those who have fooled themselves.--Arnold Kling

Lady, I know I'm in jeans and you're all throwing that scarf around over your suit, but two years of blogging has left me pretty confident that my thought is rigorous. I like being a sleeper, having people underrate me because I dress like a grad student and use small words.--Megan

I never realized this was going to blow up and hurt so many people.--Jose Canseco, on his outing of steroid users

If you played for the Red Sox, you wouldn't be sitting here.--Joba Chamberlain heckler

When small men begin to cast big shadows, it means that the sun is about to set.--Lin Yutang

Arnold Kling draws the limits to Fischer Black

and complains about the bastardizations beyond. Great piece.

Quotes of the day

[Hank Paulson] was more Santa Claus than Vito Corleone: the agreement allowed the banks to continue paying dividends to common shareholders.--DAVID S. SCHARFSTEIN and JEREMY C. STEIN

You cannot simply say, "We must have transparency." Requiring transparency means requiring people to disclose information that is costly to acquire. But that undermines their incentive to acquire information.--Arnold Kling

Ben Bernanke apparently wants four more years as Federal Reserve Chairman. At least that's a reasonable conclusion after Mr. Bernanke all but submitted his job application to Barack Obama yesterday by endorsing the Democratic version of fiscal "stimulus."--WSJ Editorial Board

Of the presidents he worked with, [Alan] Greenspan reserves his highest praise for Bill Clinton, whom he described in his book as a sponge for economic data who maintained "a consistent, disciplined focus on long-term economic growth."--Orin Kerr

Barack Obama is one of the most liberal members of the Senate. His reaction to the financial crisis is to blame deregulation. He even leverages fear of deregulation onto other issues. For example, Sen. John McCain wants to allow consumers to buy health insurance across state lines. Mr. Obama likens this to the financial deregulation that he alleges got us into the current mess. ... Unlike FDR, Mr. Obama will not have to create the mechanisms government uses to interfere with the economy before imposing his policies. FDR had to get the Supreme Court to overturn a century's worth of precedents limiting the power of government before he could use the Constitution's commerce clause, among other things, to increase government control of the economy. Mr. Obama will have no such problem.--Paul Rubin

I wasn't surprised about Colin Powell joining Barack Obama

But I was surprised about Paul Volcker. I think it's a good thing, though. I hope Obama heeds the advice of Volcker and Austan Goolsbee over the cacaphony of priests of Big Government who surround him.

Unfortunately, the track record is not good.

Not much of a hip-hop fan here

but lovin' me dis:

i’m jeremiah wright cause tonight i’m the preacha
i got a bookish look and you’re all hot for teacha
todd lookin fine on his snow machine
so hot boy gonna need a go between
in wasilla we just chill baby chilla
but when i see oil lets drill baby drill

my country tis a thee
from my porch i can see
russia and such

all the mavericks in the house put your hands up

Truman may not have helped the Nationlists in China

but rather, embargoed them.

Intrade responds to charges of manipulation in the contracts for US President

here:

As a result of our investigations we would like to advise the following.

The trading that caused the unusual price movements and discrepancies was principally due to a single "institutional" member on Intrade. We have been in contact with the firm on a number of occasions. I have spoken to those involved personally.

We are satisfied that they are using our markets in good faith and in the ordinary course of their business and that there has been no contravention of our Exchange Rules. Our investigations lead us to believe that the member is using increased depth in these markets to manage certain risks.

Further, it is apparent that the cost of time in accumulating the desired positions by those "institutional" members responsible for moving the McCain market up and the Obama market down differs fundamentally to loyal "retail" members that Intrade relies on.

The Exchange views this unusual activity as an indication of the increased relevance and traction of Intrade markets as risk management tools coupled with the yet maturing state of the prediction market industry as a whole.

As our markets gain further fluency and are more broadly used to help manage risk, we expect to see other cases where single, well-financed parties accumulate large positions in short periods of time in our markets and possibly distort prices away from prices on other platforms. As funds flow between platforms gets easier, arbitrage opportunities will last for far shorter periods that is currently the case.

UPDATE: Jason Ruspini with some great analysis.

Hawaii abandons only universal healthcare program

It was limited to kids, but it still failed to work.

Senator Chuck Schumer waxes idiotic about retail gasoline prices

He seems to think if crude prices fall by half, then consumer prices should fall by half as well. I guess he likes to ignore the realities of refining, transport, insurance, property and inventory costs.

As well as taxes.

John Tierney doesn't see a shortage of scientists or engineers

anymore than I did this past spring. He observes:

If the United States really has a critical shortage of scientists and engineers, why didn’t this year’s graduates get showered with lucrative job offers and signing bonuses?

... employers don’t have to throw around that kind of money because there’s no shortage of workers — and they won’t be increasing their offers if the federal government artificially inflates the labor supply with an extra 100,000 graduates. As Daniel S. Greenberg wrote in the Scientist magazine in 2003: “Despite the alarms, no current or impending shortage exists, and never did. Instead, we’re glutted with scientists and engineers in many fields, as numerous job seekers with respectable credentials can attest.”

Sarah "Caribou Barbie" Palin delivers highest Saturday Night Live ratings

in 14 years.

The last blog post of fallen soldier Stephen Fortunato

(via Stephen Green). Fortunato writes:

I am not a robot. i am not blind or ignorant to the state of the world or the implications of the "war on terrorism." i know that our leaders have made mistakes in the handling of a very sensitive situation, but do not for one second think that you can make me lose faith in what we, meaning America's sons, daughters, fathers, and mothers in uniform are doing.

I am doing my part in fighting a very real enemy of the United States, i.e. Taliban, Al Qaida, and various other radical sects of Islam that have declared war on our way of life. Unless you believe the events of 9/11 were the result of a government conspiracy, which by the way would make you a MORON, there is no reasonable argument you can make against there being a true and dangerous threat that needs to be dealt with. i don't care if there are corporations leaching off the war effort to make money, and i don't care if you don't think our freedom within America's borders is actually at stake. i just want to kill those who would harm my family and friends. it is that simple. Even if this is just a war for profit or to assert America's power, so what? Someone has to be on top and I want it to be us. There's nothing wrong with wishing prosperity for your side.

Mark Perry suggests hedging your own psyche

with Intrade contracts.

"Gird Your Loins"

Exactly what I'm expecting and worried about:

"Mark my words," the Democratic vice presidential nominee warned at the second of his two Seattle fundraisers Sunday. "It will not be six months before the world tests Barack Obama like they did John Kennedy. The world is looking. We're about to elect a brilliant 47-year-old senator president of the United States of America. Remember I said it standing here if you don't remember anything else I said. Watch, we're gonna have an international crisis, a generated crisis, to test the mettle of this guy."

But don't worry - just a little warning on all the change about to come:

"...I promise you, you all are gonna be sitting here a year from now going, 'Oh my God, why are they there in the polls? Why is the polling so down? Why is this thing so tough?' We're gonna have to make some incredibly tough decisions in the first two years. So I'm asking you now, I'm asking you now, be prepared to stick with us. Remember the faith you had at this point because you're going to have to reinforce us."

"There are gonna be a lot of you who want to go, 'Whoa, wait a minute, yo, whoa, whoa, I don't know about that decision'," Biden continued. "Because if you think the decision is sound when they're made, which I believe you will when they're made, they're not likely to be as popular as they are sound. Because if they're popular, they're probably not sound."

Quotes of the day

The truth must dazzle gradually, or every man be blind.--Emily Dickinson

My 401(k) is now a 201(k).--Governor David Paterson

The economic situation is apparently so grim that some experts fear we may be in for a stretch as bad as the mid seventies. When Microsoft and Apple were founded.--Paul Graham

I'm not sure why the media never calls out politicians when they talk about fiscal responsibility. Lucy always pulls the football away. You would think they would have enough pride to stop playing the part of Charlie Brown.--Jon Henke

I’ve never seen a political campaign as hostile to free speech as that of Obama. It’s not hard to read between the lines and think he’s itching to reinstate the Fairness Doctrine.--Steve Bainbridge

The media needs a narrative of villains, victims, and heroes. That is why the dominant narrative has greedy executives and right-wing deregulators (villains), even though capital requirements were what drove securitization. That is why the dominant narrative has homeowners burdened by mortgages, when in fact more than 15 percent of mortgage loans in recent years were for non-own-occupied homes. Moreover, even the owner-occupants were speculators, in the sense that they put almost nothing down. Trying to paint as a victim someone who put nothing down and got a big house to live in as a result is really stretching things. Finally, the media wants Henry Paulson and Ben Bernanke to be heroes. In fact, they are increasing the discrepancy between concentrated power and dispersed knowledge.--Arnold Kling

The claim that this crisis was caused by "deregulation" is a claim that government needs to exercise more power. Right now, that is the conventional wisdom of the establishment. There is no mainstream newspaper or politician raising any doubts about the wisdom of increasing government power. The free market is now a fringe phenomenon, and those of us who support it are irrelevant.--Arnold Kling

Daniel Davies on why blaming banker stupidity doesn't get to the heart of the credit crisis

but looking at policy does:

Look, my basic point here is not to exonerate anyone or vice versa (apart from anything, that would stray into writing about the crisis itself, which I’m still not going to do). I am sure that at the levels of individual institutions, stupid things were done and irresponsible risks were taken. But likewise, I would also dare say that during the Great Depression, a lot of the workers who were made redundant were probably a little bit lazier and not quite as skilled or conscientious as the ones who kept their jobs. But if you were going to have your main comment about the Great Depression that it was the time when lots of lazy shirkers got the sackings they deserved, then I think everyone[6] would agree that you’d kind of missed the big picture. The analysis that blames it on stupid bankers, is of a piece with the kind of analysis that regards the 1930s as being the decade when the working class of the world took it upon itself to have a great big shirk.

Markets are amazing if you let them work

John Stossel:

Imagine you had never seen a skating rink. I tell you, "I'm going to invite 100 people down to strap blades to their feet and race around as they like." You say, "That's insane! Someone must coordinate all those people."

Yet we know that the skaters' actions are coordinated, though not through central planning. There are predictable and understandable rules, but within them, people are free. In promoting my interest in avoiding a collision with you, I also promote your interest in avoiding a collision with me.

Economics Nobel Laureate Friedrich Hayek called it spontaneous order. The market system is the leading example. In promoting my interest in gaining through a voluntary exchange with you, I also promote your interest in gaining through voluntary exchange with me.

Like skaters at an ice rink, we trace our way in the economy making decisions for ourselves. It works out pretty darned well. Prices help guide our way.

Most of life works by spontaneous order. It characterizes how we choose our jobs, hobbies, associates, recreation, etc. When politicians try to regulate the process, they usually make life worse.

* * *

Freedom is a good reason not to interfere. Still, we're told that the government must regulate the economy. Barack Obama says today's economic problems are "a stark reminder of the failures of . . . an economic philosophy that sees any regulation at all as unwise and unnecessary."

But governments have regulated and subsidized the housing and financial industries for years. Fannie Mae and Freddie Mac were created to interfere in those markets. Had actual private companies invested in those mortgages, they would have been subject to market checks. But they were not. The results were predictable.

Now we will get a new onslaught of regulation. This intervention will fail and stifle innovation because, as Adam Smith and Friedrich Hayek taught, markets are too complex to manipulate beneficially. Life works best when decisions are bottom up. But pundits have no clue about spontaneous order. Instead, they talk about who will "run America."

This faith in political solutions thrives in the face of repeated government failure. Big farm bills have raised the price of food and squeezed out small farms. Campaign finance reform made it harder to challenge incumbents. FEMA couldn't deliver water to hurricane-ravaged New Orleans as well as Wal-Mart did. Medicare has a $35 trillion unfunded liability over the next 75 years.

Yet the media and political class call for more government control. What puzzles me is why citizens don't act like the skaters we tried to boss around. The skaters wanted freedom. Citizens might desire this too, but the political class assumes they want and need direction.

Andrew Lahde's "I've made my $10-90 million, so goodbye" letter

here.

I posted on his recession call over a year ago, here. Fortunately, my Intrade RECESSION contracts trading is still profitable, with 2007 and 2008 gains outweighing 2009 unrealized losses.

Freakonomics looks at outlaws

If _______ are outlawed, only outlaws will have _______.

Are investments in education as questionable as investments in mortgage securities?

Possibly yes, unless the dropout rate is tiny compared to the foreclosure rate.

Does democracy work with an uneducated public?

Instead of "Rock the Vote", the excellent John Stossel suggests "Rock or Vote".

Quotes of the day

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. ... What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over. ... In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497. ... The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.--Warren Buffett

It's clear that the government would like us to use the capital. If you are a bank that is filling a hole, you obviously can't do that.--Jamie Dimon

... it sounds like Senator Obama wants to close the projected gap between taxes and spending entirely by raising taxes.--Greg Mankiw

The Bush administration, having entered office as social conservatives, leaves office as conservative socialists ...--Brad DeLong

The media not reporting on the Tim Mahoney scandal

Perhaps because of his party affiliation?

Hayek's Revenge

described by Larry Ribstein.

Christopher Dodd should testify under oath himself today

In February 2004, while Republican colleagues warned of the systemic risks posed by Fannie Mae and Freddie Mac, Mr. Dodd pronounced the mortgage market "one of the great success stories of all time." A year later, the Connecticut Democrat voted against a reform that would have limited the size of Fan and Fred's mortgage portfolios. Now that Fan and Fred have collapsed at a cost to taxpayers that could run to $200 billion or more, Mr. Dodd is also under fire for accepting sweetheart loans from Countrywide Financial, the subprime mortgage factory.

At today's hearing, his mission is to weave a tale that somehow manages to avoid mentioning his own role in this debacle. That won't be easy, but Mr. Dodd has shrewdly selected a series of witnesses who, like him, contributed to the mess, and have every incentive to point fingers elsewhere.

The witness we'd like to see Mr. Dodd call is former Countrywide Financial loan officer Robert Feinberg. Last week Mr. Feinberg told us that Mr. Dodd knowingly saved thousands of dollars refinancing two properties, thanks to his status as a "friend" of former Countrywide CEO Angelo Mozilo. Or perhaps he could subpoena House counterpart Barney Frank to explain what he meant when he said in 2003 that he wanted to "roll the dice" with Fannie and Freddie's mortgage businesses. Finally, Mr. Dodd could put himself on the stand, and let the poor, beleaguered taxpayers question him -- under oath.

Wasn't Barack Obama a practicing attorney and law professor?

This implies to me that he wasn't very good in the legal profession:

Mr. Obama apparently wants the feds to unilaterally rewrite contracts based on something as undefinable as "good faith." At the same time, he is repeating his proposal to change the bankruptcy code so judges can unilaterally rewrite mortgage contracts as well. All of this would make credit less available to working families in the future.

Quotes of the day

My understanding is that Stalin, Hitler, Pol Pot and Mao Tse Tung were not motivated by profits.--Fred Smith

Hank Paulson and his team at Treasury are really incredible public servants. I wish the public could see how smart, focused, practical and creative they are behind the scenes, working under enormous pressure. It’s been impressive to watch. There’s no political agendas there, they’re just leveraging all of their experience and training to do whatever they can to stabilize the markets and financial system.--Ed Herlihy

Two readers wrote in this morning to suggest “Joe the Plumber” knows more about economics than do most VCs (many of whom are predisposed to Obama). I’m not in sync with their larger political point, but will grant this: A lot more plumbers have turned a profit in the past five years than have venture capitalists.--Dan Primack

Getting China to cooperate with "The West" to do anything is a tricky affair. After the whole "Those fireworks are absolutely not CGI" thing, and the "She's 18 17 15 14 13 years old. Wait, what's the age of consent again?" debacle, well, seeing them act in a concerted way with the West to preserve capitalism, well, that scares me quite a bit. Plus, it just plain looks bad.--Equity Private

In terms of sheer political talent, Obama is among the best candidates we have seen during the last half-century; he ranks, in my estimation, with JFK, Reagan, and Clinton. At times one could feel McCain’s frustration at his inability to land a direct shot against Obama; it reminds me in some respects of the frustration Republicans felt when doing political battle against President Clinton.--Peter Wehner

To be honest with you, that infuriates me. It's not right for someone to decide you made too much---that you've done too good and now we're going to take some of it back. That's just completely wrong. If you worked for it, if it was your idea, and you implemented it, it's not right for someone to decide you made too much.--Joe Wurzelbacher, on Barack Obama's tax plan

By the way, when Senator Obama said he would unilaterally renegotiate the North American Free Trade Agreement, the Canadians said, 'Yeah, and we'll sell our oil to China.' You don't tell countries you're going to unilaterally renegotiate agreements with them.--John McCain

If there is any class of people who have a higher opinion of themselves than Wall Streeters, it's probably teachers. We've never met a teacher who didn't think teachers were underpaid and underappreciated. The truth is that education is overrated, teachers are overpaid and much of what passes for schooling is time-wasting warehousing of the young, with a bit of brain washing mixed in.--John Carney

Barack Obama may actually believe, as he stated yesterday, that Roe v. Wade "was rightly decided." But it may be very lucky for him, as the son born of that woman, that it hadn't been decided a dozen or so years earlier. That Obama may owe his very life to a pre-Roe legal regime that banned abortion is, to be sure, not necessarily a reason that he should favor that regime (though I can't help noting that Justice Thomas's critics recklessly accuse him of hypocrisy for opposing racial-preference plans that they say he benefited from). But it ought to lead Obama and others to think more carefully about the valuable role that protective abortion laws play.--Ed Whelan

Internet Memes

Peter Wallison spanks Barack Obama on his deregulation meme

and good:

If Sen. Obama were truly looking for a kind of deregulation that might be responsible for the current financial crisis, he need only look back to 1998, when the Clinton administration ruled that Fannie Mae and Freddie Mac could satisfy their affordable housing obligations by purchasing subprime mortgages. This ultimately made it possible for Fannie and Freddie to add a trillion dollars in junk loans to their balance sheets. This led to their own collapse, and to the development of a market in these mortgages that is the source of the financial crisis we are wrestling with today.

Finally, on the matter of deregulation and the financial crisis, Sen. Obama should consider his own complicity in the failure of Congress to adopt legislation that might have prevented the subprime meltdown.

In the summer of 2005, a bill emerged from the Senate Banking Committee that considerably tightened regulations on Fannie and Freddie, including controls over their capital and their ability to hold portfolios of mortgages or mortgage-backed securities. All the Republicans voted for the bill in committee; all the Democrats voted against it. To get the bill to a vote in the Senate, a few Democratic votes were necessary to limit debate. This was a time for the leadership Sen. Obama says he can offer, but neither he nor any other Democrat stepped forward.

Instead, by his own account, Mr. Obama wrote a letter to the Treasury Secretary, allegedly putting himself on record that subprime loans were dangerous and had to be dealt with. This is revealing; if true, it indicates Sen. Obama knew there was a problem with subprime lending -- but was unwilling to confront his own party by pressing for legislation to control it. As a demonstration of character and leadership capacity, it bears a strong resemblance to something else in Sen. Obama's past: voting present.

Levels of 'rich', varied by city

at USNWR (via WSJ):

To estimate household incomes for a "rich couple" and a "rich family," we divided average income in each quintile by the average size of a U.S. household—2.54 people, according to the census. Then we multiplied that number by two, for a childless couple, and by four, for a family.

Colorado Springs, Colo.–Couple, $207,472. Family, $414,943.

New York–Couple, $359,494. Family of four, $718,989.

Manhattan housing and parking costs are easily double the other four boroughs. And Felix Salmon was giddy enough to start this "Middle Class in Manhattan" debate with me (and not finish it).

Why can’t the private market solve the credit crisis? Why should the taxpayers have to pay for the mistakes that the banks made?

One reason the private market will not inject equity now is out of the same concern that makes banks reluctant to lend to each other: fears that some banks have undisclosed bad assets (which are hard to value because they are not trading now) and may become insolvent.

This makes investors fear that they may choose a bank that will soon fail. Moreover, if investors fear that many banks will soon fail, there will be runs on many others. These runs would wipe out the value of the private-equity injection. During a crisis, it is safe to provide capital to a given bank only if all banks become well capitalized (either by raising new capital or being acquired by well-capitalized banks). This makes outside investors hesitate to provide new equity.

Correlation between party in White House and stock market returns

is zero.

Jamie Dimon and Meredith Whitney

on a conference call earlier today:

But Mr. Dimon was also quick to state that his bank is not cutting back significantly and said he sees the loan market returning to normal in the future.

Ms. Whitney, who has a “perform” rating on JPMorgan’s stock, then asked: “If you really believed that, you would be gunning credit card lines, right?”

“We are not speculators,” Mr. Dimon shot back. (No one on the call challenged him on this point, or at least not audibly.) “We are buying slightly more risky assets and we are growing our business, so we are not panicking.”

Mr. Dimon continued: “Obviously we are trying to modify what is going on — we are not going to say ‘Yahoo, this is over,’ and go extend credit — like we did — without fear. If you are not fearful, you are crazy.”

Then from Ms. Whitney: “I’m fearful, thanks.”

“We know you are,” Mr. Dimon replied, his smile coming through the conference call. “We are waiting for you to reverse your position.”

Quotes of the day

We refused to touch credit default swaps. It would be like buying insurance on the Titanic from someone on the Titanic.--Nassim Taleb

It is all very entertaining, but at the end of the day, an organized derivatives exchange would not have prevented the crisis. If anything, it would have facilitated the use of derivatives to securitize more mortgages, and securitization was the main cause of the crisis. Counterparty risk in derivatives was simply not the main issue here.--Arnold Kling

Mahoney, according to ABC News, ran for Congress in 2006 promising "a world that is safer, more moral." His "campaign ads featured a picture of him with his wife, Terry, with the line, 'Restoring America's Values Begins at Home.' " And of course the Democrats have always been the party of traditional family values. Think Barack Obama, his lovely wife and adorable daughters. Or Hillary Clinton standing by her man. Or John Edwards valiantly protecting his ailing wife. Well, OK, maybe those last two examples aren't the very best ones we could come up with. Even so, we really thought the Democrats were going to be different!--James Taranto

Economists have all been to school, so they think they know everything about education. And they’ve all been to the doctor, so they think they know everything about health. And now they’ve all been to the therapist, so they think they know everything about mental health.--Don Bundy

Hank Paulson, CEO of CEOs

WSJ reports on the meeting between the government and the CEOs of the nation's nine largest banks:

For an hour, the nine executives drank coffee and water and listened to the two men paint a dire portrait of the U.S. economy and the unfolding financial crisis. As the meeting neared a close, each banker was handed a term sheet detailing how the government would take stakes valued at a combined $125 billion in their banks, and impose new restrictions on executive pay and dividend policies.

The participants, among the nation's best deal makers, were in a peculiar position. They weren't allowed to negotiate. Mr. Paulson requested that each of them sign. It was for their own good and the good of the country, he said, according to a person in the room.

During the discussion, the most animated response came from Wells Fargo Chairman Richard Kovacevich, say people present. Why was this necessary? he asked. Why did the government need to buy stakes in these banks?

Morgan Stanley Chief Executive John Mack, whose company was among the most vulnerable in the group to the swirling financial crisis, quickly signed.

Bank of America's Kenneth Lewis acknowledged the obvious, that everyone at the table would participate. "Any one of us who doesn't have a healthy fear of the unknown isn't paying attention," he said.

* * *

After Mr. Kovacevich voiced his concerns, Mr. Paulson described the deal starkly. He told the Wells Fargo chairman he could accept the government's money or risk going without the infusion. If the company found it needed capital later and Mr. Kovacevich couldn't raise money privately, Mr. Paulson promised the government wouldn't be so generous the second time around.

Mr. Bernanke said the situation was the worst the country had endured since the Great Depression. He said action was for the collective good, an understated appeal. The room was silent as he described the economy's fragile condition.

The CEOs shot off questions, peppering officials for details about how the share purchases would be structured and how it might constrain them. At one tense moment, Mr. Bernanke jumped in to calm nerves. The meeting didn't need to be confrontational, he said, describing paralysis in the market and the threat that posed to everyone in the room.

U.S. officials argued the plan represented a good deal for the banks: The government would be buying preferred shares, and thus wouldn't dilute their common shareholders. And the banks would pay a relatively modest 5% in annual dividend payments.

As unhappy as I am about the nationalization of private concerns that ideally should stay privatized, I'm not sure that John McCain and Barack Obama can bring the caliber of leadership that we currently see in the Treasury and the Fed. To be sure, Dubya made many mistakes (e.g. Paul O'Neil as his first SecTreas), but he did have daddy's GOP rolodex. McCain may not have the smarts for talent that younger Bush & Co. have; Obama will not have the connections to get even a Bob Rubin, will he?

UPDATE: Arnold Kling calls Paulson the American Mussolini. Who will ascend to Paulson's warm chair, Arnold? Be careful what you wish for!

Ouch

Jessica Hagy, assassin:

Justin Fox on Greg Mankiw on Paul Krugman

Interesting stuff:

I read one of Paul Krugman's New York Times columns, and he said something like, "Hubbard said he was leaving to be with his family, but you could see the knives sticking out of his back." The suggestion was that he's being kicked out. I knew that wasn't true. I knew I got the job in large part because Glenn recommended me. So here we have Krugman sitting in some office in New Jersey making a supposition about what's going on in Washington and then writing for the New York Times, with readers presuming that he knew something.

I had Paul as a teacher at MIT. And when I was at CEA in '82 and '83, he was there as well. I was a junior staffer in the Reagan administration ... At that time he was a brilliant economist. I thought he'd win a Nobel prize. I think there's a good chance he still will. His early work on international trade theory deserves it. It's strange what's happened since then. When he became a New York Times columnist, he decided to abandon writing about economics as an economist does. He's very liberal, which is fine--most of my friends at Harvard are liberal--but whenever someone disagrees with him, his first inclination is to think that person is either a liar or a fool. It's amazing to me that an academic would behave that way. The one thing that I value about academia is open-mindedness, the premise that all ideas and different points of view should be considered. No one has a monopoly on the truth. The one defining characteristic of a good professor is to be open to all viewpoints.

The Gillespie Plan insures over 22 milliion uninsured Americans

Details here (via Glenn Reynolds).

Rahm Emanuel exposes some liars, and covers up for others

I guess it all depends.

It seems to follow the ethics of "The president kept all the campaign promises he intended to keep".

I'm posting my comment

There's something about Mary:

I don't think McCain will be much better than Obama as President. What scares me is that Obama will replace Bernanke & Paulson with Krugman and Buffett (or worse).

Guess what? You just gave the banks $2,000

Arnold King on the Bank Telethon.

Of course, your net worth is $550,000, so you won't miss it.

Steve Levitt remembers his son, Andrew

here.

This is how Treasury will be capping executive compensation for banks participating in TARP

via John Carney. For mortgage asset sellers:

As prescribed by the Act, any financial institution that sells more than $300 million of troubled assets to the Treasury via an auction would be prohibited from entering into new executive employment contracts that include golden parachutes for the term of the program. Treasury is releasing Treasury Notice 2008-TAAP regarding this restriction. Furthermore, under the Act,

(1) the financial institution may not deduct for tax purposes executive compensation in excess of $500,000 for each senior executive,

(2) the financial institution may not deduct certain golden parachute payments to its senior executives and

(3) a 20-percent excise tax will be imposed on the senior executive for these golden parachute payments.

For equity capital participants:

The financial institution must meet certain standards, including:

(1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution;

(2) required clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate;

(3) prohibition on the financial institution from making any golden parachute payment to a senior executive based on the Internal Revenue Code provision; and

(4) agreement not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.

More Change Coming

The Illinois senator might be one of the shrewdest presidential candidates ever, but he does slip. For instance, he promises to end capital gains taxes on investments for small businesses and start-ups.

But on a campaign stop in Toledo, he couldn't assure self-employed 34-year-old plumber Joe Wurzelbacher to his face that he would get a tax cut. Poised to buy a $250,000-a-year firm, the working-class plumber of 15 years confronted Obama.

"Your new tax plan is going to tax me more, isn't it?" he asked.

Obama responded with the promise of a 50% tax credit for health care, but the senator conceded that Wurzelbacher's income taxes would indeed rise.

"It's not that I want to punish your success," Obama told him. "I just want to make sure that everybody who is behind you — that they've got a chance at success too."

Wurzelbacher, who would shoulder all the responsibility and risk of such an investment, did not look impressed. Obama then let the cat out of the bag, saying:

"I think when you spread the wealth around, it's good for everybody."

Richard Baker tried to prevent this crisis 12 years ago

He says today:

Everyone writes as though there were just one hearing or one piece of legislation. I think I must have had eight bills and maybe 40 hearings going back to 1996.

My background was in real estate and home building. At the time I ran for Congress, we were dealing with the S&L problem -- lax lending standards, and the American taxpayer on the hook for risks other people were taking. I saw how destructive that was to the personal wealth and businesses of many of my friends and associates. And when I looked into Fannie Mae and Freddie Mac, I saw the same problems -- only a lot bigger and a lot more dangerous.

My starting principle is this: The closer an enterprise is to the taxpayer's wallet, the more congressional oversight it requires. The further away you get from that wallet, the more freedom you should give people, because they are risking their own money, not the taxpayers'.

School choice improving education in Los Angeles

The demand for more educational choice in predominantly minority South Los Angeles is pronounced. The waitlist for existing ICEF schools has at times exceeded 6,000 kids. And no wonder. Like KIPP, Green Dot and other charter school networks that aren't constrained by union rules on staffing and curriculum, ICEF has an excellent track record, particularly with black and Hispanic students. In reading and math tests, ICEF charters regularly outperform surrounding traditional public schools as well as other Los Angeles public schools.

ICEF has been operating since 1994, and its flagship school has now graduated two classes, with 100% of the students accepted to college. By contrast, a state study released in July reported that one in three students in the L.A. public school system -- including 42% of black students -- quits before graduating, a number that has grown by 80% in the past five years.

Despite this success, powerful unions like the California Teachers Association and its political backers continue to oppose school choice for disadvantaged families. Last year, Democratic state lawmakers, led by Assembly Speaker Fabian Núñez, tried to force Governor Arnold Schwarzenegger to sign a bill that would have made opening a new charter school in the state next to impossible. Mr. Nunez backed down after loud protests from parents in poorer neighborhoods.

Even More on Obama and ACORN

Obama appreciates ACORN's work so much, and vice versa, that Obama last December promised to implement ACORN's agenda as president. On Dec. 1, 2007, Obama spoke at the Heartland Democratic Presidential Forum organized by Deepak Bhargava, executive director of the Center for Community Change. When asked if Obama would sit down with community organizers in the first 100 days of his presidency, Obama said, "Yes, but let me even say before I even get inaugurated, during the transition we'll be calling all of you (community organizers) in to help us shape the agenda."

Obama pledged before leaders of community organizing groups including Gamaliel and ACORN: "We're gonna be having meetings all across the country with community organizations so that you have input into the agenda for the next presidency of the United States of America."

Not really the change I'm looking for.

Quotes of the day

So if a junk mortgage originator can pool loans with down payments of less than 5 percent, carve them into tranches, and get a rating agency to rate some of the tranches as AA or higher, it can make those more attractive to a bank than originating a relatively safe loan. If you want to know why securitization dominated the mortgage market, this explains it. Regulatory arbitrage, pure and simple.--Arnold Kling

History teaches us that government engagement in times of severe financial crisis often arrives very late, usually at a point at which most financial institutions are insolvent or nearly so. In these conditions, the consequences and costs of inertia and inaction can be staggering. Fortunately, that is not the situation we face today.--Ben Bernanke

Communism is socialism that has metastasized.--pywll

Everything from comparative advantage to the Coase Theorem makes you slap your head with the inescapable logic of it, and wonder how it can have escaped the human race for so long. And still, it takes a genius to reveal these obvious truths to the rest of us poor slobs. Krugman's math is far too impenetrable for this English major, but the conclusions are as clear and lovely as a bell.--Megan McArdle

And just like in high school, it's always easier to hate the math nerds. No doubt they should get some of the blame for making the weapons, but they usually weren't the ones who pulled the trigger.--Kevin Maney

But when the tide laps at Gulliver's waistline, it usually means the Lilliputians are already 10 feet under. Before yesterday's surge, the Dow had dropped 25% in three months. But that only means it had outperformed nearly every single major foreign stock exchange, including Germany's XETRADAX (down 28%) China's Shanghai exchange (down 30%), Japan's NIKK225 (down 37%), Brazil's BOVESPA (down 41%) and Russia RTSI (down 61%). These contrasts are a useful demonstration that America's financial woes are nobody else's gain.--Bret Stephens

In his never-ending quest to be everything to nobody, John McCain has switched tactics again. He ran against Washington insiders, then he ran against the media, then he ran against Wall Street, then he ran against (different?) Washington insiders, and now McCain is running against his own tax plan.--Stephen Green

The simple but startling truth is that the major conflict of our time, democracy versus Marxist-Leninist totalitarianism--what The New York Times recently called "the holy war of the 20th century"--is almost entirely missing from American cinema. It is as though since 1945, Hollywood had produced little or nothing about the victory of the Allies and the crimes of National Socialism. This void is all the stranger since the major conflict of our time would seem to be a natural draw for Hollywood. --Kenneth Lloyd Billingsley

More on Barack Obama's numerous ties to ACORN

In 1992 he led voter registration efforts as the director of Project Vote, which included Acorn. This past November, he lauded Acorn's leaders for being "smack dab in the middle" of that effort. Mr. Obama also served as a lawyer for Acorn in 1995, in a case against Illinois to increase access to the polls.

During his tenure on the board of Chicago's Woods Fund, that body funneled more than $200,000 to Acorn. More recently, the Obama campaign paid $832,000 to an Acorn affiliate. The campaign initially told the Federal Election Commission this money was for "staging, sound, lighting." It later admitted the cash was to get out the vote.

The Obama campaign is now distancing itself from Acorn, claiming Mr. Obama never organized with it and has nothing to do with illegal voter registration. Yet it's disingenuous to channel cash into an operation with a history of fraud and then claim you're shocked to discover reports of fraud. As with Rev. Jeremiah Wright and William Ayers, Mr. Obama was happy to associate with Acorn when it suited his purposes. But now that he's on the brink of the Presidency, he wants to disavow his ties.

The problems with ACORN:

Acorn uses various affiliated groups to agitate for "a living wage," for "affordable housing," for "tax justice" and union and environmental goals, as well as against school choice and welfare reform. It was a major contributor to the subprime meltdown by pushing lenders to make home loans on easy terms, conducting "strikes" against banks so they'd lower credit standards.

But the organization's real genius is getting American taxpayers to foot the bill. According to a 2006 report from the Employment Policies Institute (EPI), Acorn has been on the federal take since 1977 ...

All this money gives Acorn the ability to pursue its other great hobby: electing liberals. Acorn is spending $16 million this year to register new Democrats and is already boasting it has put 1.3 million new voters on the rolls. The big question is how many of these registrations are real.

The Michigan Secretary of State told the press in September that Acorn had submitted "a sizeable number of duplicate and fraudulent applications." Earlier this month, Nevada's Democratic Secretary of State Ross Miller requested a raid on Acorn's offices, following complaints of false names and fictional addresses (including the starting lineup of the Dallas Cowboys). Nevada's Clark County Registrar of Voters Larry Lomax said he saw rampant fraud in 2,000 to 3,000 applications Acorn submitted weekly.

Officials in Ohio are investigating voter fraud connected with Acorn, and Florida's Seminole County is withholding Acorn registrations that appear fraudulent. New Mexico, North Carolina and Missouri are looking into hundreds of dubious Acorn registrations. Wisconsin is investigating Acorn employees for, according to an election official, "making people up or registering people that were still in prison."

Then there's Lake County, Indiana, which has already found more than 2,100 bogus applications among the 5,000 Acorn dumped right before the deadline. "All the signatures looked exactly the same," said Ruthann Hoagland, of the county election board. Bridgeport, Connecticut estimates about 20% of Acorn's registrations were faulty. As of July, the city of Houston had rejected or put on hold about 40% of the 27,000 registration cards submitted by Acorn.

That's just this year. In 2004, four Acorn employees were indicted in Ohio for submitting false voter registrations. In 2005, two Colorado Acorn workers were found to have submitted false registrations. Four Acorn Missouri employees were indicted in 2006; five were found guilty in Washington state in 2007 for filling out registration forms with names from a phone book.

Soteria Trader first posted on this a couple of weeks ago.

John McCain pays for his idiocy

in bashing Wall Street, he's lost a chunk of his donor base.

Private gun ownership may correlate

with freedom:

Erosion in China's gun controls reflects the Communist Party's slow retreat from most people's daily lives. Chinese increasingly spend their free time as they want. The Party also has less power to control the supply of guns at a time when the wealthy are looking for protection and recreation, and criminals are searching for an advantage.

I don't own any guns, but I think we should respect the Constitution. Otherwise, from where would Americans' rights be derived?

Income growth for the middle class

demystified by Mark Perry, who explains that the four bottom quintiles of income earners have seen 3.6% gains since 1994.

Mark Perry fisks critics of Intrade election predictions

And good.

I will feel more certain about this rally

if the VIX crashes.

Quotes of the day

If you stacked up everything written by the leading macro folks of my generation and later (actually, starting a few years earlier also), you would have nothing but an enormous baloney sandwich.--Arnold Kling

But candidates will still need to demagogue to win. If policy positions didn't matter, why would politicians spend so much time trying to figure out what the public wants - and wants to hear?--Bryan Caplan

Before I studied public opinion, I wondered why our policies were so bad. After I studied public opinion, I started wondering why our policies weren't worse. An important part of the answer is that the people who know less are less likely to vote.--Bryan Caplan

And I guess [Oliver] Stone “don’t sleep with no whore,” either. --Larry Ribstein

From homeless to self-sufficient in less than a year

Adam Shepherd's experiment:

I have 365 days to become free of the realities of homelessness and become a "regular" member of society. After one year, for my project to be considered successful, I have to possess an operable automobile, live in a furnished apartment..., have $2500 in cash, and, most importantly, I have to be in a position in which I can continue to improve my circumstances by either going to school or starting my own business.

On paper, my previous life doesn't exist for this one year. I cannot use any of my previous contacts, my college education, or my credit history... I cannot beg for money or use services that others are not at liberty to use.

Are we at a bottom?

Paul Krugman wins the economics Nobel prize. The temperature in hell may have briefly dipped below 0 degrees Celsius. Alex Tabarrok nicely summarizes Krugman's New Trade Theory.

Russell Roberts is disappointed.

Bryan Caplan makes a prediction:

When Obama wins, Krugman will quickly drop his partisan hackery. He's unfair to his enemies, but he does not suffer fools gladly. And it's safe to say that a year into Obama's presidency, there will be plenty of folly for Krugman to decry.

Tom Firey affirms Bryan's call, in juxtaposing Krugman's treatment of Jimmy Carter and Ronald Reagan.

Former New York Times ombudsman Daniel Okrent captured it best:

Op-Ed columnist Paul Krugman has the disturbing habit of shaping, slicing and selectively citing numbers in a fashion that pleases his acolytes but leaves him open to substantive assaults.

Megan McArdle once said:

Paul Krugman is voting for doom. It's worth keeping in mind, however, that Paul Krugman has predicted eight of the last none recessions under the Bush administration.

Jon Henke rounded up Krugman's recession predictions during the Bush Administration. People who would have sold stock at the newly minted Nobel laureate's doomsday prediction would still be underwater, given the Dow was trading around 8,000 from 2001-2003 and it paid out a couple of percentage points annually in dividend yield.

Don Luskin says:

Krugman's New York Times column drawing on economics is the equivalent of 2006's Nobelists in Physics, astronomers Mather and Smoot, doing a column on astrology -- and then, in that column, telling lies about astronomy.

Earlier prediction market prices and observations here.

Effective ways of achieving poverty

here. My favorites:

You feel entitlement

You don't like to learn

You buy things you don't use

A stress test from John Tierney

over at John Tierney's place:

Do you see an object in each blurred image?

If you see an object in the left image, you may be stressed. There is an actual image of Saturn and its rings in the right image.

World income inequalities

at the Global Rich List.

If you make $850/year, you are the median earner out of 6 billion people.

$1,840/year puts you in the top quintile

$26,000/year gets you in the top 10%

$48,000/year pushes you into the top 1%

$186,000/year ranks you in the top 0.1%

This is a good way to slice at things, but household income per household member might be better.

Projected tax rates under Barack Obama and John McCain

at TaxProf Blog.

This is not change I can believe in.

Stephen Green wonders why Barack Obama is not investigated

for violating the Logan Act.

UPDATE: WSJ wants to know why Christopher Dodd is not testifying for his Countrywide Financial history.

David Merkel allocates blame for the credit crisis

Here are some of his targets:

1) The Federal Reserve, especially Alan Greenspan.
2) Congress and the Presidency
3) Lenders

4) Borrowers
5) Appraisers
6) Those that originated MBS

8) Realtors
9) Mortgage insurers and financial guarantee insurers
10) Hedge funds, investment banks and their investors

11) Regulators
12) America
16) Academics

The US banking system now lags Namibia

as well as Germany, Barbados, and Estonia, in 40th place according to the World Economic Forum.

Canada is #1, followed by Sweden and Luxembourg.

Quotes of the day

... we partied like it was 1929--Stephen Green

It can be very difficult to hedge against several big market moves happening at the same time, which, when counterparties are going bankrupt, is usually happening ... Ultimately, you try to hedge what you can hedge; what you can't hedge, you try to quantify; what you can't quantify, you try to understand; and what you can't understand, you keep small enough not to sink the firm.--Anonymous credit derivatives trader

We now have the $700 billion package to prop up the mortgage security market -- just like [Jim] Cramer said we needed. We have interest rates down to 1.5% -- just like Cramer said we needed. On top of that we have the Fed stepping in to buy billions in commercial paper. These structural changes provide a rebuilt foundation upon which our financials can actually reap the benefits of capitalism. Capitalism doesn't work without a market. Now we have a market. And Cramer decides to bail! Over the ensuing months he must be held accountable for this one.--Jason Schwarz

Oh, thank you, thank you for this wheel chair! By tasting hell in this life, I’ve been driven to think seriously about what faces me in the next. This paralysis is my greatest mercy.--Joni Erickson Tada

I wonder why Intrade is not doing the Nobel Economics contracts this year

Probably too little liquidity. Here is Steve Levitt on what's happening at Pinnacle:

Here are the odds they are offering as of my writing this post:

101 Martin Feldstein +751
102 Thomas Sargent +1181
103 Robert Barro +1341
104 Paul Romer +1344
105 Jagdish Bhagwati +1359
106 Paul Krugman +1617
107 N. Gregory Mankiw +4310
108 Any other person -136

My hunch is that the bargain here is “any other person.” There is plenty of randomness in the choices each year, and this list excludes a number of people who I would think would be on the short list, e.g. Gene Fama, Peter Diamond, Oliver Hart, and Richard Posner, just to name a few.

I can't believe Krugman is pricing over Mankiw. I guess the stock market is not the only apparently insane market out there.

Neel Kashkari: The $700 Billion Dollar Man

Nice bio up at WSJ:

Kashkari is smart, dutiful, detail-oriented, and takes orders well. In the parlance of investment banking, he is a good “execution guy”: He leaves strategy to the bigwigs. But if you give him a project, he will prioritize, delegate and finish it.

These people report he has an amiable manner and is a good, intent listener. He doesn’t make waves and never dominates a discussion; he thinks before he speaks and he lets people express themselves. He is particularly good at presenting complicated ideas and leading team projects that depend on gaining cooperation from others. Those include the Sunrayce project to build a solar car as well as his work on the James Webb space telescope.

Goldman’s investment bankers were most impressed by Kashkari’s science background. His experience working on the James Webb Space Telescope for NASA contractor TRW gave him a comfort with technological jargon that would help Kashkari communicate with technology-company executives. Kashkari also spoke passionately of his entry in a car competition, the 1997 Sunrayce event in which Kashkari’s team built and race a solar-powered car. His team didn’t win, but it did earn kudos. While other bankers at Goldman would often discuss their project du jour or details of a presentation even in their off-time, Kashkari often discussed cars and the Sunrayce experience.

UPDATE: The New York Times has a Neil "Cash & Carry" Kashkari piece as well.

Might as well face it

Inspiration from Robert Palmer.

Your lights turn off, when you're at home
Your Fed Funds Rate, is not your own
Your heart sweats, your body shakes
Another cut, is what it takes (Not!)

You can't sleep, you can't eat
There's no doubt, you're in deep
Your throat is tight, you can't breathe
Another ease, is all you need

Whoa, you might think it's all a known unknown
Oh yeah

It's closer to the truth that you're leveraged to the bone

You know you're gonna have to face it you're addicted to loans

Graph of the day: Top 1% of earners pay more taxes than the Bottom 95%

via Mark Perry:

Obama's tax plan will make this inequality even worse. And I'm not sure that McCain, on the slight chance he took the White House, would be very different.

Resource should not be the only candidate for redistribution

Don Boudreaux recommends that political power be redistributed.

National Debt Clock update

here, up over the $10 trillion mark.

Why it doesn't really matter, here.

UPDATE: Household net worth has dropped from $59 trillion in the third quarter of 2007 to $56 trillion in the second quarter of 2008.

YOUR Family share $550,000. (See, it doesn't really matter).

Quotes of the day

No wonder Obama is against making it legal to wiretap terrorists. If it had been in 1979, who would have helped him launch his political career?--James Taranto

Someday, Labour will win an election. Our job is to hold on until they are sane.--Margaret Thatcher

There’s nothing wrong with being a socialist. I called myself one for the better part of twenty years. Millions of people have and many still do. But there is something very wrong with hiding who you are or who you were from the electorate—especially if you want to be President of the United States. Yet that seems to be a habit of Mr. Obama’s, with the collusion of the press.--Roger Simon

You know that postulate, the one where if you placed a million monkeys in a room for a million years, one of them would eventually type out Hamlet? I think the rest of them would be banging out film reviews.--Glenn Perreira

Why more regulation just doesn't work

Congressman Barney Frank, who oversees Fannie Mae, sleeping with one of it's executives from 1987-1998.

We told you so.

Where your federal tax dollars go

On top of this, you have the privilege of paying state and local taxes, taxes to corporations and utilities and other institutions (e.g. airports). Unless you are in the bottom quartile of income, in which you can pay negative taxes, i.e. get money back from the government.