01 Sep 2009

Has the Government Made Money on TARP?

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One of the ideas (btw I refuse on principle to ever use the word “meme”) bouncing around the geeconosphere is that the government has made money on TARP. For example, Brad DeLong says his prediction on this looks to be coming true (though in fairness he has not yet claimed victory), and I know I’ve seen other people talking about it. (It would not stun me if one of them were Tyler Cowen, but I don’t feel like wading through all his pro-TARP stuff again right now to look.)

But if you go and read the details to see what the buzz is about, you realize it’s not a slum dunk at all. The Capital Purchase Program (CPP) arm of TARP made $204.4 billion of “investments.” It’s true, the CPP earned great returns on some of these choices. “For the 22 companies that have bought back shares and warrants, the taxpayer received an annualized return of 17.5 percent—better than most hedge funds have done lately.” But then the article goes on to say:

Since many of the largest financial institutions have left the program, the 37 “exits” represent 34 percent of the total cash initially disbursed. The bottom line: taxpayers have received $70.3 billion in principal, plus about $10 billion in dividends and warrant payments.

Thus, even on its own terms, the pro-TARP case can say that the strongest 34% of the initial portfolio has earned a locked-in return of 17.5%. (Note that I believe this figure ignores the paper gain the government made on its Citi common stocks.)

OK, that’s pretty good, but what about the other 66% of the original portfolio of loans? To its credit, the Newsweek article notes this problem of “adverse selection,” wherein we obviously would see the healthiest companies paying back their TARP loans. In addition to that problem, there are other aspects of TARP falling outside the CPP:

Some components, like the $22 billion pledged to help banks modify mortgages, weren’t intended to produce a financial return. Other efforts, like $79 billion in loans to automakers, and nearly $70 billion made available to AIG, are less likely to yield returns.

But for those of us who initially predicted that the TARP would be a big money-loser, we really shouldn’t feel embarrassed even if this thing ends up making money, or if (far more plausible) the CPP component turns a profit. There are two main reasons:

(1) The Fed bailouts indirectly helped some of the TARP recipients, which we didn’t know at the time (or at least, we didn’t have all the details at the time). For example, of the $85 billion that the Fed injected into AIG on the day of its takeover, AIG turned around and wrote checks to Goldman for $13 billion. (Goldman paid back its TARP money early on, as soon as the government began using TARP as a means of limiting executive pay.) See EPJ for a similar take on the government’s profits from TARP.

(2) The strongest recipients of the TARP loans were forced to take them. When I predicted that the government would lose money on TARP, it was because I foolishly believed the program would be, well, a Troubled Asset Relief Program. So my reasoning went like this: If private buyers think an asset (such as a mortgage-backed security) is worth $x billion, and the government pays $y billion for it, where y > x, then the government is probably going to lose money on it.

Now if instead, private investors were given the option of forcing any big bank of their choosing, to (a) take a loan, (b) give preferred stock and warrants for it, and (c) allow the lender to dictate whether the banks’ executives could fly private jets and how much their bonuses could be, until the “loan” were paid back at a very healthy rate of return, then I think plenty of private investors would have been able to cook up a few “profitable” loans under these conditions.

Nobody says the IRS turned a profit last year, even though it took in a heckuva lot more revenue than it paid out to employees and utility companies. In many respects, that’s just how Paulson and Bernanke made their money.

01 Sep 2009

More Free Market Evangelism From Larry Kudlow

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Long-time readers know that Larry Kudlow is not on my A-team for free market economics. (It pains me that this is so; I seriously used to love him when he worked for Bear Stearns and I was just getting into this stuff, reading Walter Williams and such.) I went ballistic over his flip-flopping endorsement of TARP, and then I was flabbergasted by his support for “cash for clunkers.”

But now he has outdone himself. Bill R. emailed me this piece at NRO, and said that Kudlow mentioned Mises and Hayek. So I said to Bill, “thanks I’ll give Kudlow a chance to redeem himself. :)

Well, did Kudlow restore my faith? You tell me:

While so-called spending-and-deficit stimulus may be an economic depressant, Friedmanite monetary stimulus — which has been substantial — is gradually exerting a powerful impact on economic growth. At the same time, businesses have become lean and mean, with radical cost-cutting of inventories, employment, and hours worked. That’s setting up a big profits surge, which is the biggest economic stimulus of all.

Consumers also have retrenched, as is appropriate with falling home prices, a rough stock market correction, and a slowdown of incomes. But from the ashes of recession, these corrective forces lead to the next recovery.

In Hayekian and Misesean terms, bad investment and spending decisions are being remedied through the free-market corrective process. And, greased by easy money, today’s market correctives may produce a much stronger V-shaped recovery than the stock-market consensus expects.

Note that there are no ellipses in the above block quotation. I wanted you to see it in its full glory. That is in context, my friends.

01 Sep 2009

Are We All Utilitarians Now?

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Besides my disagreement with their conclusions, there is something similar in Tyler Cowen’s recent defense of the Paulson Plan, and Roger Koppl’s defense of Ted Kennedy. Both eschew arguments from natural rights or principles, and justify particular instances of the growth of the federal government by speculating on its possible net benefits. As I say, I disagree with them that their utilitarian calculus is correct, but my point here is to underscore that they don’t even acknowledge the big philosophical move they’re making.

For example, here’s Tyler on the efficacy of the bailouts, and why the TARP should have been more pleasing to libertarians than non-TARP:

For insolvent banks…the alternative to those bailouts is calling in deposit insurance and the bankruptcy courts, both of which are, for better or worse, forms of government intervention. In particular today’s bankruptcy procedures are ill-suited for disposing of a large financial institution in a timely manner and this can be considered a form of gross government failure.

So if you’re “opposed to financial bailouts,” as a libertarian, you’re not for the market. You’re saying that one scheme for governmental disposition is better than another. [Bold by RPM]

Other people have done a good job rebutting this claim; see Pete Boettke and Steve Horwitz. (Also David R. Henderson sets the record straight regarding Tyler’s questionable assertions about Milton Friedman’s position on bank bailouts.) But I want to focus on Tyler’s assertion that I’ve put in bold above.

Even if Tyler’s predictions about FDIC etc. were correct, it doesn’t automatically follow that he gets to tell bailout opponents that they are “not for the market.” That step involves a very dubious philosophical commitment that goes far beyond one’s economic theories.

Let’s change the context. Anyone who took an intro to philosophy class probably heard the thought experiment (apparently based on a true story) of the American tourists getting captured by South American guerrillas. The rebel leader lines up a bunch of villagers who are opposed to his group’s criminal activities, and then the leader puts a gun in the hands of one of the terrified Americans. “It’s your lucky day,” the rebel leader says. “You get to shoot these traitors to the cause. But if you don’t, I will order my men to shoot not only them, but also their wives and children. Your choice.”

Now this is a very complicated problem, and of course everybody tries to weasel out of it by saying, “I’d shoot the rebel leader!” etc. But when it comes down to it–what if you have to choose between shooting some innocent people, or allowing them plus even more people to die?–a lot of people say they wouldn’t pull the trigger. And you know what? I think many philosophers think that’s a dandy answer.

So notice in his discussion, not only does Tyler say you should pull the trigger (or at least, you should root for the American to pull the trigger), but he spends all his time focusing on what happens if you don’t. He doesn’t even feel the need to discuss the philosophical point that it’s correct to support a violation of rights if you think doing so will prevent an even greater violation of rights.


Roger Koppl does a very similar thing when praising Ted Kennedy for supporting the Civil Rights Act. When in the comments I pointed out that a lot of libertarians don’t endorse the Act because it involved an expansion of federal power, he answered:
Anyway, I’m not a libertarian, so I guess you and I won’t have the same opinion about which bits of civil rights legislation were and which were not infringements on liberty. Fair enough. Still, I would have thought the restrictions on liberty caused by Jim Crow were so huge, deeply unfair and inequitable, and of such great material importance to black Southerners that killing Jim Crow alone outweighed the negatives, before we even get to stuff like women’s rights or the conditions of blacks in the rest of the country. OTOH you seem to doubt…I confess, I don’t quite “get” that. I don’t quite see where the doubtful points are in assigning relative weights here even when I defer to you on what bits are pro-liberty and what bits are anti-liberty.

One issue you raise is centralizing power in Washington. That’s an issue for me too. But in my mind you’ve got to trade it off against the risk of arbitrary local authority. Local authority was arbitrary and discretionary for black folks and the civil rights movement improved that situation greatly. (Didn’t fix it by long stretch, but that’s a separate matter.) Hayek teaches (rightly IMHO) that the big enemy is arbitrary authority rather than, say, size of government. Liberalism is against power. Well, black folks under Jim Crow were subject to lots of arbitrary authority. Harper Lee’s “To Kill a Mockingbird” was a pretty fair representation of how it really worked under the old system. Actually, it was worse than her story represented as whites might literally get away with murder if the victim was black.

Thus, we’re talking about life and death stuff, basic raw arbitrary power, and similar core issues. I’m not getting the intuition for why stuff like obliging restauranteurs to serve all races or shifting some power from state to federal government overwhelms that. [Bold by RPM]

Again, I don’t here want to argue whether the Act “on balance” contributed to more or fewer rights violations. I’m just pointing out that Koppl doesn’t even “get” the notion that someone could be opposed to an admitted, systematic violation of rights, even if the object is to prevent other people from having their rights violated.

Is it a little weird that even among very philosophical, classical liberals, we are so casually assuming that the ends justify the means? Can we at least talk about this? I’m pretty sure the philosophers aren’t settled on the matter, and in fact, I think a lot of them say the answer is a resounding, “No!”

31 Aug 2009

Reflections on the San Fran Mises Circle

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Over the weekend I was in San Fransisco for a Mises Circle. (Next stop: Seattle.) We had a surprisingly large crowd of around 175 (not an exact count), in an area that you would think would be slim pickings. A special surprise was that Edward Gonzalez showed up. I also met “Lilburne” (his secret identity will remain a secret, at least until you show me a power drill), Robert Blumen, and some Google guys who thought I was wrong in my debate with Mish. (Is it a debate if Mish ignores me?)

I won’t dwell too much on the official proceedings, since the audio is already posted at Mises.org, and I think even the video may be at some point. (?) Anyway, here are the talks, in order, and note these links are all mp3s: Walter Block, Tom DiLorenzo, Doug French, Bob Murphy, and all of us on a panel. If you’re not sure whether to click on them, let me say that I had some pretty good jokes in my talk, and we were very anal about repeating the questions during the Q&A of the panel.

I flew in the day before (Friday) and hung out for several hours with Robert Wenzel (the man, the myth, the legend). He refers to the proceedings here, and perhaps he will grace us with more thoughts as he is so moved.

But the humorous event occurred Friday night. I’m ordering another round of gin and tonics (gins and tonic?) when Wenzel goes up to these two girls sitting at the end of the bar. I can hear him referring to me as “famous” and tells me to come over. This is really bad, because you would think I should be super confident since I’m married and no longer trying to pick up girls in bars, but actually it’s even worse: Now I get the pleasure of being rejected when I’m not even trying to hit on girls, and to boot they think I’m a real scumbag for “hitting on them” while brazenly wearing a wedding ring. Suh-weet.

Anyway, Wenzel motions for me to swoop in as the wingman but here’s how it went down:

Girl #1 [who looks like she actually doesn't hate men]: So why are you famous?

Bob: [inaudible]

Wenzel: He’s a famous economist. He’s been on Fox.

Girl #2 [who definitely hates anything that pees standing up]: You’re on FOX?!

Bob: I don’t work for Fox, I’ve just been on it.

Girl #2, informing Girl #1: He’s been on Fox. (!!)

Girl #1 [who apparently spends more time trying to socialize with others rather than hating men and Sean Hannity in particular]: ??

Girl #2: FOX News, they like, defend the Evil Empire. [Telling Wenzel and Bob, without really looking at us.] You know, people in San Fransisco are really liberal, so that’s not something to brag about around here.

At this point I went back to get the drinks that the bartender had mercifully poured by now. I was going to tell Girl #2 that I had probably done more to criticize the Iraq invasion than she had, but decided I didn’t need to prove anything to her. I am not sure if this decision was based on self-esteem or humiliation.

Psychoanalysts, let me let you in on a little secret: I was no ladies’ man when I was single. Are you surprised?

31 Aug 2009

The Downside of Talk Radio

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In a previous post, I praised Glenn Beck for getting the word out about what’s going on regarding the open praise for communism by members of the federal government. On the other hand, let me relate a particularly ridiculous statement by Mark Davis–today’s guest-host for Rush Limbaugh–that shows talk radio is only afraid of Democratic Big Brother.

Davis was talking about the recent allegations of interrogator abuse of detainees and said something like, “Give me a break, are these people serious? Now it’s torture just to use the sound of a drill? V-v-v-v-v-v-v-v-v, did I just torture the audience?”

Something I’ve never heard when Limbaugh et al. defend torture–or should I say “enhanced interrogation techniques”–is that the government concedes that some people died during this hardball treatment. Such an admission wouldn’t really play in with their “these ACLU types are a bunch of sissies” refrain.

31 Aug 2009

Rep. Diane Watson (D-Ca) Praises Che Guevara, Fidel Castro, and Cuban Revolution That "Kicked Out the Wealthy"

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Despite his flaws, Glenn Beck is doing a great job alerting Americans to the Marxist takeover of the federal government. You say, “Give me a break, Bob, just because someone wants everyone to have access to health care, doesn’t make him a communist.” That’s true, but look at how many people in the federal government are now openly praising actual communism.

Beck played the following clip starting from about the 1:45 mark. This isn’t mere, “Hey let’s reform some of the abuses of naked capitalism.”

31 Aug 2009

Subjective Value Pricing Theory in the NBA

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Based on this favorable review (and funny anecdote) by Robert Wenzel, I got David Falk’s The Bald Truth a few months ago. It makes for great bathroom reading.

Falk is a sports agent, whose most famous client was Michael Jordan. (Jordan’s ghostwriter did the foreword for the book.) This book is good because it shows exactly how Falk was able to negotiate such lucrative contracts for his clients; it doesn’t just say, “And so then I went in there, and really drove a hard bargain.” No no, Falk explains the back-and-forth, and how he got the teams to pony up what seemed at the time to be ludicrous sums of money.

Falk actually has a very good intuition about economics and game theory. When I hit the following passage, I knew that I had to stop reading and blog it, since I doubt there will be a better illustration of what I mean:

I was presented with extraordinary opportunities like these starting with James Worthy in 1982…then Patrick Ewing in 1985 and Danny Ferry in 1989. There were unique situations in the marketplace that demanded a unique response. I think the Ewing and Ferry deals, along with Michael’s Nike deal, cemented my reputation not so much for being a hard-driving negotiator, but for being someone with a creative vision, or perspective on the value of players and where those valuations were going. Nobody ever believed Danny would be Larry Bird, and nobody believed Patrick would be Kareem, but Danny and Patrick made more as rookies than either Bird or Kareem was making at the time. And that’s what was demanded in those situations.

A talented player on one team may not be worth as much as a less talented player on another team. James Worthy was a good example. He was a great player, one of the fifty greatest of all time, according to the league’s experts. He was the first player selected in the 1982 draft, a remarkable performer in the playoffs, an all-star, a great teammate, and an extremely hard worker. Yet he was the third-best player on his team behind Magic Johnson and Kareem Abdul-Jabbar. James was probably one of the ten best players in the league. Another player, let’s say the twenty-fifth best player in the league, might have been the best player on his team. Even though that player wasn’t as good as James Worthy, without him his team would be in the lottery. On the other hand, the Lakers were going to be a great team with or without Worthy. Worthy’s incremental impact wasn’t as great on the Lakers as that of a lesser player on another team. As a result, the twenty-fifth-best player might have had a greater value to his team than Worthy did to the Lakers. (pp. 120-121)

31 Aug 2009

Another Scott Sumner Money Illusion

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I pick on monetary maverick Scott Sumner a lot, but only because I care. (In fact, Scott himself gets this; see the opening paragraph of this post.)

So it is merely in the spirit of loving correction that I bring to your attention a recent profundity from Scott. The context is (a very interesting) discussion of the difference between the quantity theory of money and the equation of exchange, which are often conflated.

The equation of exchange is the familiar MV = PQ, which is just the accounting tautology that the total money stock times the “velocity of circulation” must equal the “average price level” times the quantity of real output. Some people use different letters, and people like Rothbard get mad over the nonsense placeholders like “V” which only serve to complete the equation. But if we put aside such complaints, the equation is an identity and so has to be true.

In contrast, the quantity theory of money is just that, a theory, and so could be falsified in principle. Scott says that different people mean different things by the theory, and he lists four popular contenders:

1. The ratio of P and M is relatively stable.

2. The ratio of P*Y and M is relatively stable.

3. An exogenous, one time, permanent increase in M causes a proportional rise in P*Y

4. In the long run an exogenous, one time, permanent increase in M causes a proportional increase in P.

Does everyone see the difference? Just to give you an example, when Friedman famously said that price “inflation is always and everywhere a monetary phenomenon,” he wasn’t just relying on the equation of exchange. Yes, MV = PQ must always be true–it’s an identity–but it doesn’t mean that increases in M correspond to increases in P, or that a big jump in P must be due to a big increase in M. (For example, many economists right now believe that a big jump in M would cause a big jump in Q–this would also keep the equation in balance.)

So finally we can review Scott’s illustration of the problem:

But I also think the quantity equation can get in the way of clear thinking. For instance, people worried that current Fed policy will lead to much higher future inflation sometimes cite the quantity theory. But this is a misuse of the theory. It does not imply that any increase in the money supply is inflationary, but rather that permanent, exogenous increases are inflationary. For instance, suppose the Fed adopted a policy of targeting the expected inflation rate at 2%. Assuming their policy was efficient, i.e. the errors were unforecastable, then there should be zero correlation between the money supply and inflation. Of course the Fed doesn’t have a precise 2% inflation target, but they certainly have some inflation target in mind. If so, then changes in the money supply are partly endogenous, and the [quantity theory] does not predict much correlation between the money supply and inflation.

I think Scott has here performed the classic economist trick of assuming his conclusion, but doing it in a such a jargon-laden way that few can see where the rabbit gets put into the hat. The easiest way for me to demonstrate is a physics analogy. So suppose a physicist at Bentley College started a blog called The Gassy Illusion and wrote:

We’re all familiar with Boyle’s law of gases, which states that for a gas at a fixed temperature, Pressure and Volume are inversely proportional. Now many people assume that if we started shrinking the size of this airtight room, that the air pressure inside would increase. However, what if Ben Bernanke could perfectly anticipate the rate at which the room’s volume were decreasing, and cooled the room accordingly? Why, then there would be no observed correlation at all between Pressure and Volume. So people worried about the shrinking room need to be more careful when invoking Boyle’s law.

So yes, Scott is right that if the Fed could commit itself to 2% inflation, and could do so without systematic errors, then…we would get on average 2% inflation, regardless of what happened to the money supply. But does that really help us? Note that Scott is NOT merely saying, “If the Fed commits to 2% inflation, then we’ll get it.” Because the Fed could commit and then be horribly wrong, year after year. So the real rabbit is where Scott innocently says, “Assuming their policy was efficient…”

By the same token, assuming central planning could work, then Lange whupped Mises in the socialist calculation debate.