Political Futures Tied to Cash - American Civics Exchange
Decisions being made in Washington are increasingly consequential for the future of private industry. Two Internet entrepreneurs sense an opportunity in giving businesses and individuals a chance to hedge their financial risk when it comes to changes in public policy.
The American Civics Exchange is the country’s first commercial market for political futures. The Web-based market allows individuals to trade contracts that are priced based on the expected financial impact of certain policy decisions. Current contracts available for trading include those based on an increase in the capital gains or dividend income tax rate, enactment of a “card check” labor organizing bill and enactment of “cap and trade” climate legislation.
The market’s initial version allows only “play money” trades. Trading for cash will begin shortly.
Source: CQ Weekly, April 6, 2009, by Emily Cadei
If you need to learn how policy is made in Washington, TheCapitol.Net offers a definitive three-day overview of how Congress works, “Capitol Hill Workshop: Politics, Policy, and Process.” In this engaging workshop, Washington-based experts discuss the 3 P’s and help you understand the complete policy-making process. See www.CapitolHillWorkshop.com for more details.
Tyler Cowen: The Free Market and Morality
Tyler Cowen: The Free Market and Morality
A single red deer is worth fifty thousand oysters
It's a history of Europe which blends economic geography and economic archaeology. The underlying question is how Europe became so innovative and the answer has much to do with trade and migration.
. . .
The photography and the color plates of the art are lovely. You can learn how to view the Roman Empire as an "interlude" and as a break from the major story and how to understand 800-1000 A.D. as a period of rebalancing. And you get passages like this:
...the actual return in calorific value for the effort expended in collecting [shellfish] is comparatively small. A single red deer would be worth fifty thousand oysters! That said, the value of shellfish is that they are always available and can be substituted when other food sources run short.
If you enjoy early economic history, this is a must, noting that it does not have the titillating feel of a popular science book.
"wild greed and market failure"
Many believe that wild greed and market failure led us into this sorry mess. According to that narrative, investors in search of higher yields bought novel securities that bundled loans made to high-risk borrowers. Banks issued these loans because they could sell them to hungry investors. It was a giant Ponzi scheme that only worked as long as housing prices were on the rise. But housing prices were the result of a speculative mania. Once the bubble burst, too many borrowers had negative equity, and the system collapsed.
Part of this story is true. The fall in housing prices did lead to a sudden increase in defaults that reduced the value of mortgage-backed securities. What's missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets.
"How Government Stoked the Mania: Housing prices would never have risen so high without multiple Washington mistakes." By Russell Roberts, The Wall Street Journal, October 3, 2008
The consensus among economists is now clear, the best strategy for dealing with the financial crisis is to recapitalize the banks that need recapitalization.
"The Economic Consensus v. Politics," by Alex Tabarrok, Marginal Revolution, October 3, 2008
"Economics Does Not Lie"
If economics is finally a science, what, exactly, does it teach? With the help of Columbia University economist Pierre-André Chiappori, I have synthesized its findings into ten propositions. Almost all top economists--those who are recognized as such by their peers and who publish in the leading scientific journals--would endorse them (the exceptions are those like Joseph Stiglitz and Jeffrey Sachs, whose public pronouncements are more political than scientific). The more the public understands and embraces these propositions, the more prosperous the world will become.
1. The market economy is the most efficient of all economic systems.
2. Free trade helps economic development.
3. Good institutions help development.
4. The best measure of a good economy is its growth.
5. Creative destruction is the engine of economic growth.
6. Monetary stability, too, is necessary for growth; inflation is always harmful.
7. Unemployment among unskilled workers is largely determined by how much labor costs.
8. While the welfare state is necessary in some form, it isn't always effective.
9. The creation of complex financial markets has brought about economic progress.
10. Competition is usually desirable.
The best of all possible economic systems is indeed imperfect. Whatever the truths uncovered by economic science, the free market is finally only the reflection of human nature, itself hardly perfectible.
"Economics Does Not Lie: The dismal science is at last a science--and the world is the beneficiary." By Guy Sorman, City Journal, Summer 2008
Globalization and Its Discontents
"Country Boys Can Survive: The Boys of Red State Update have Risen from Murfreesboro Obscurity to National Fame," by Jim Ridley, The Nashville Scene, September 20, 2007
Bubbles: Housing and the next bubble
"In the future, scientists will learn how to convert stupidity into clean fuel."Prediction 16, "The Dilbert Future: Thriving on Business Stupidity in the 21st Century," by Scott Adams (1998).
A financial bubble is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression.
. . .
Because all asset hyperinflations revert to the mean, we can expect housing prices to decline roughly 38 percent from their peak as they return to something closer to the historical rate of monetary inflation. If the rate of decline stabilizes at between 6 and 7 percent each year, the correction has about six years to go before things stabilize, leaving the FIRE economy in need of $12 trillion.
. . .
There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom--under the rubric “Web 2.0”--is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.
. . .
The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations: the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology--and the infrastructure to support it--is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion. In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq. Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry. FIRE, meanwhile, will already be engineering its next opportunity. Given the current state of our economy, the only thing worse than a new bubble would be its absence.
There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water. Indeed, the next bubble is already being branded. Wired magazine, returning to its roots in boosterism, put ethanol on the cover of its October 2007 issue, advising its readers to forget oil; NBC had a “Green Week” in November 2007, with themed shows beating away at an ecological message and Al Gore making a guest appearance on the sitcom 30 Rock. Improbably, Gore threatens to become the poster boy for the new new new economy: he has joined the legendary venture-capital firm Kleiner Perkins Caufield & Byers, which assisted at the births of Amazon.com and Google, to oversee the “climate change solutions group,” thus providing a massive dose of Nobel Prize–winning credibility that will be most useful when its first alternative-energy investments are taken public before a credulous mob. Other ventures--Lazard Capital Markets, Generation Investment Management, Nth Power, EnerTech Capital, and Battery Ventures--are funding an array of startups working on improvements to solar cells, to biofuels production, to batteries, to “energy management” software, and so on.
"The next bubble: Priming the markets for tomorrow's big crash," by Eric Janszen, Harper's, February 2008 (footnotes omitted)
- Web 2.0 - wikipedia
- "Oil Price Bubble? Supply is up, demand is down, yet the price is soaring. Here's why." By Ronald Bailey, reasononline, March 12, 2008
- "Those who do not know history..." by Tyler Cowen, Marginal Revolution, March 11, 2008
- "The Energy Future: Scenarios," by Arnold Kling, TCS Daily, March 6, 2008
- "Was there a Housing Bubble?" by Alex Tabarrok, Marginal Revolution, February 13, 2008
- "Leaks in the alternative-energy bubble," by Adam Lashinsky, Fortune, January 3, 2008
- "Bubble Energy?" by Mark Mills, Forbes, October 2007
- "Venture Capital Rushes Into Alternative Energy," by Matthew Wald, The New York Times, April 30, 2007
- "The Dot-Com Energy Boost," by Daniel Gross, The Washington Post, July 23, 2006
- "Bubble Schmubble," by Alex Tabarrok, Marginal Revolution, June 26, 2005
Margin and leverage
Love this line by Steve Yuen commenting on margin and leverage, the securitization of debt, and sub-prime delinquencies:
[T]he lever on the way up is the screw on the way down.
"Bernard Guerrero, from the comments," by Tyler Cowen, Marginal Revolution, August 17, 2007
Another good one from Steve Yuen:
Q. How do you borrow 100% of the value of your house?
A. Buy it with 20% down...
"This Party's Over," Views by the Bay, August 7, 2007
And don't miss the link to the YouTube video of a VW Beetle being shredded....
Design for the Other 90%
On view in the Arthur Ross Terrace and Garden, this exhibition highlights the growing trend among designers to create affordable and socially responsible objects for the vast majority of the world's population (90 percent) not traditionally serviced by professional designers. Organized by exhibition curator Cynthia E. Smith, along with an eight-member advisory council, the exhibition is divided into sections focusing on water, shelter, health and sanitation, education, energy and transportation and highlights objects developed to empower global populations surviving under the poverty level or recovering from a natural disaster.
Design for the Other 90% is an exhibition at the Cooper-Hewitt, National Design Museum.
"The real stars of the show, though, are the stories behind the designs." microscopiq, May 17, 2007
They don't need a handout. What they need is an opportunity.
. . .
A poor person actually only cares about one thing: making more money. If they have more money, they can get ahead, take their family out of poverty.
-- Martin Fischer, Kickstart International
The introductory video also provided an opportunity to explore an additional range of themes that may not be as apparent, running through the exhibition and this area of design: open source options, leapfrog technology, economic impacts, community building, testing and end-user research, low-cost innovations, social enterprise, humanitarian entrepreneurship, improved democracies and multiple calls to action.
"In Their Own Words," Design for the Other 90% blog, May 14, 2007
Design for the Other 90% (web site), an exhibition at the Cooper-Hewitt, National Design Museum through September 23, 2007. Cooper-Hewitt, web site, 2 East 91st Street, New York, NY, M-Th 10 am - 5 pm, F 10 am - 9 pm, Sat 10 am - 6 pm, Sun Noon - 6 pm. $ Admission fee.
- "Design for the other 90%: A review of the Cooper-Hewitt exhibition," by Natalia Allen, Core77, May 2007
- Design for the Other 90%, FastCompany, May 10, 2007
- "Alice Rawsthorn on design for the unwealthiest 90 percent," The International Herald Tribune, April 29, 2007
It can't happen here ... mortgage fraud
Not irrelevantly, my wife and I are going to look at a bank-owned foreclosure property tomorrow night, selling for 100K less than both its county assessment and the most recent (100%) refinance. The house next door, I've discovered from the public records, which had a different owner, has also been foreclosed upon. Bank-owned properties are suddenly popping up in the MLS all over Northern Virginia. [Note: This is not a recommendation to buy now if you're looking for a "good deal." It's way too early in the cycle for that.]
"The Housing Bubble--A Credit Bubble," by David Bernstein, The Volokh Conspiracy, April 10, 2007
In national surveys, Georgia has been identified as a fraud hot spot. But Fulmer says that is because people there have become so aggressive about identifying the problem. She says she wonders how many homeowners across the country bought in neighborhoods where values were driven up by fraud but don't know it yet.
"It happens everywhere and anywhere," said Fulmer, who is now vice president of Interthinx, an anti-mortgage-fraud company. "If the true scope was discovered, I think it would cause a major crisis."
"Housing Boom Tied To Sham Mortgages: Lax Lending Aided Real Estate Fraud," by David Cho, The Washington Post, April 10, 2007
- "Subprime Mortgages: Primer on Current Lending and Foreclosure Issues," by Edward Vincent Murphy, CRS Report, RL33930, March 19, 2007 (12-page pdf )
- "Alternative Mortgages: Risks to Consumers and Lenders in the Current Housing Cycle," by Edward Vincent Murphy, CRS Report, RL33775, December 27, 2006 (26-page pdf )
- Mortgage Fraud Blog
- FlippingFrenzy.com, Articles about Real Estate and Mortgage Fraud
- "Mortgage fraud growing," by Chris Bagley, The Californian, March 10, 2007
- "Valley fighting mortgage fraud wave," by Catherine Reagor, The Arizona Republic, January 20, 2007
- "Mortgage Loan Fraud," Financial Crimes Enforcement Network, November 2006 (21-page pdf )
- Mortgage Fraud - FBI report: "Financial Crimes Report to the Public Fiscal Year 2006"
- Mortgage Fraud - FBI report: "Financial Crimes Report to the Public," May 2005
- StopMortgageFraud.com - from the Mortgage Bankers Association
- "The Bonnie and Clyde of mortgage fraud: A master con artist and his partner went on a six-state crime spree, ripping off homeowners, stealing identities and defrauding lenders," by Marcia Vickers, Fortune, November 4, 2006
- "Mortgage fraud -- the worst crime no one's heard of," by Carol Lloyd, San Francisco Chronicle, October 29, 2006
- "Fraud booms with mortgage market," by Edward Iwata, USA Today, October 4, 2005
Leonard Read's delightful story, "I, Pencil," has become a classic, and deservedly so. I know of no other piece of literature that so succinctly, persuasively, and effectively illustrates the meaning of both Adam Smith's invisible hand--the possibility of cooperation without coercion--and Friedrich Hayek's emphasis on the importance of dispersed knowledge and the role of the price system in communicating information that "will make the individuals do the desirable things without anyone having to tell them what to do."
"I, Pencil: My Family Tree as told to Leonard E. Read," by Leonard Read, December, 1958, from the Introduction, by Milton Friedman
Correlation and causality
On the first day of class, I tell my undergraduates that if they only learn one thing in my course, I hope that it will be to recognize and appreciate the difference between correlation and causality. Most of the students laugh smugly, thinking they already know the difference. It never ceases to amaze me, however, when a cleverly designed exam question reveals how easily they can be tricked into forgetting the distinction.
Even among people who know the difference between correlation and causality, there is a lack of appreciation of the fact that when it comes to making public policy, only causal relationships are relevant. I’ve even attended lectures given by tenured professors at Harvard who fail to understand this simple point.
The example I often use to demonstrate why we don’t want to make public policy based on correlations is particularly relevant today in light of the Chicago Bears playing in the Super Bowl. In my example, Chicago’s beloved Mayor Daley is trying to think of ways to increase the likelihood that the Bears win the game. He’s noticed that whenever the Bears win, people in Chicago are happy. Which sparks a great idea: decree that all Bears fans have to be happy on Super Bowl Sunday. It has always been true in the past that winning games and being happy go together, so by demanding the Bears’ fans are happy, it will cause the Bears to win the Super Bowl.
Of course, Mayor Daley is smarter than that. Hopefully you are too and you understand why such a decree would be ludicrous. If not, I encourage you to start over at the beginning of this blog entry and try again.
"Should Mayor Daley decree that all Chicago Bears fans be happy tomorrow?" by Steven D. Levitt, Freakonomics blog, February 3, 2007
A basic proposition of economics is that talk is cheap.
Dear Economist, by Tim Harford, Financial Times, February 2, 2007
Geographically based Economic data (G-Econ)
The G-Econ research project is devoted to developing a geophysically based data set on economic activity for the world. The current data set (GEcon 1.3) is now publicly available and covers "gross cell product" for all regions for 1990, which includes 27,500 terrestrial observations. The basic metric is the regional equivalent of gross domestic product. Gross cell product (GCP) is measured at a 1-degree longitude by 1-degree latitude resolution at a global scale. Updates will be posted as they become available. The project director is Professor William Nordhaus, Yale University.
click for animated version (requires Flash)
Geographically based Economic data (G-Econ), Yale University
Thanks to Tyler Cown for the pointer
Best quote I read last weekend
"The cash register did more for human morality than the congregational church."
"Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs," by Charles Munger, at the Herb Kay Undergraduate Lecture, University of California at Santa Barbara, Economics Department, October 3, 2003 (25-page pdf)
Thanks to John Jay for the link ("Educated Beyond our Intelligence," Chicago Boyz, December 4, 2006)
I met Charles Munger once at a business meeting in 1995, where representatives of two publishing companies were discussing a potential relationship. Within the first ten minutes, the impact of online delivery on publishing came up. I was the only one in the room who did not know who Mr. Munger was, and I peppered him with questions for the better part of the rest of the meeting. Afterwards, I told my boss, "That guys gets it. He really gets it." My boss laughed and told me he was Warren Buffet's partner.... Charles Munger is not only one of the smartest business people I have ever met, he was gracious to boot.
"Health insurance premiums for federal employees will increase by an average of 1.8 percent next year" - "Amazing" is right
Health insurance premiums for federal employees will increase by an average of 1.8 percent next year, the lowest annual increase in the government's employee program since 1997.
Officials said they substantially slowed the rise in 2007 insurance rates by dipping into excess financial reserves of the Federal Employees Health Benefits Program, which provides about $33 billion in health-care benefits annually. They said the reserves had increased in recent months because insurance claims and other expenses had not grown as fast as estimated.
Next year, 63 percent of FEHBP enrollees "will see no increase in their premium," said Linda M. Springer , director of the Office of Personnel Management, which administers the program. "That is amazing."
"Excess Reserves Help Slow the Rise in Health-Care Costs," by Stephen Barr, The Washington Post, September 20, 2006
Doha collapses - did you notice?
You probably missed it, but this very story was in the news this week. The Washington Post had a report about it, and judged it unworthy of the front page. It ran on page one of the business section, where it was given less prominence than a profile of a well-known expert on conserving energy. (He owns an interesting fuel-efficient house in Colorado.)
How could this happen? How could it come about that anybody who blinked would have missed the news that the Doha Round of trade talks had collapsed -- and that even the people who noticed it mostly just shrugged and moved on? One reason is that the talks have indeed dragged on and on, and tracking the deviations of this epic of bureaucratic procedure would test the zeal of the most monomaniacal trade-policy wonk. But another reason, you might think, is that I am grossly exaggerating the whole thing, that the tale is not a clear-cut case of outrageous government incompetence, verging on criminality, as I am suggesting. But this would be incorrect. I am not hyping the evil and the idiocy of what has just happened. If anything, I am playing it down.
Liberal trade works exactly like a resource-saving technology. So, it makes exactly as much sense for a country to deny itself the advantages of open borders to trade as it would to deny itself the use of personal computers -- another disruptive technology that shares its gains unequally within and among nations. Where my analogy goes wrong is that each government has its own liberal-trade machine, which it can switch on independently if it chooses. No international agreement is needed for a country to unilaterally lower its tariffs or cut its farm subsidies. If it does this, most of the gains (lower prices, lower taxes) flow to its own citizens -- but there are benefits for foreigners, too. For the past five years, each government has been refusing to switch on its own machine unless other governments switch on theirs first. Why should the United States help Europe and Asia, if Europe and Asia won't help the United States? And vice versa. In the end, this week, the governments agreed that the easiest thing was to forget the whole idea. When you put it like that, it just sounds crazy. It is crazy. Nonetheless, this is precisely what happened.
- Who is to blame for the Doha collapse? - Marginal Revolution, July 29, 2006
- "Doha collapse could have major repercussions," by Alf Young, The (Glasgow, Scotland) Herald, July 25, 2006
- "Africa ’to feel brunt of Doha collapse’," by Andrew Quinn, Reuters, July 25, 2006
- "Cheers and Fears Follow Doha Collapse," by Emad Mekay, Inter Press Service News Agency, July 25, 2006
- "U.S. Farm-Subsidy Cuts A Long Shot as Doha Falters," by Scott Kilman and Roger Thurow, The Wall Street Journal, July 26, 2006
- CRS Reports
- "World Trade Organization Negotiations: The Doha Development Agenda," by Ian F. Ferguson, CRS Report RL32060, July 10, 2006 (21-page pdf)
- "Trade Agreements: Impact on U.S. Economy," by James K. Jackson, CRS Report RL31932, June 1, 2006 (25-page pdf)
- "Trade, Trade Barriers, and Trade Deficits: Implications for U.S. Economic Welfare," by Craig Elwell, RL32059, May 22, 2006 (28-page pdf)
- "WTO Doha Round: Agricultural Negotiating Proposals," by Charles Hanrahan and Randy Schnepf, CRS Report RL33144, November 9, 2005 (38-page pdf)
The gas “crisis” reappears for the summer driving season, right on cue. Washington is naturally “shocked” at the obvious market manipulation and price gouging, and politicians stand in line for photo-ops at local gas stations, venting their righteous indignation and ignoring the fact that America has gone out of its way in the past to allow domestic drilling or the building of new oil refineries, so voila! Now they’re going to fix it with a rebate or some showy hearings where oil execs are lined up with their right hands raised (the ultimate photo-op).
It is all just too pathetically predictable to warrant serious comment. Our crisis is nothing more than the piling up of our consumer choices over the past several decades, our willingness to make investments within our own country (especially in refining), and this weird public sense we have that cheap gas is an American right.
So now the market corrects many of those assumptions with the same level of indifference we've long displayed on the subject. And politicians are going to make this process better somehow? Or are they just likely to confuse the issue, as they so often do?
"The gas 'crisis' won’t be solved by politicians," Thomas P.M. Barnett :: Weblog, May 5, 2006