Consulting by RPM || Free Advice Blog

Is Financial Risk Aversion Rational?

As the markets whipsaw about, displacing portfolios, government and industry officials say some fund managers have made a macabre calculation: to split up their investments among various teams, with each group seeking refuge in different asset classes. If one part of the fund loses money, others will earn profits and keep the portfolio alive.

But most funds, officials say, still invest in highly correlated assets as a source of strength and comfort. Some are now merging with other funds, further increasing their size, while others have taken shelter in tax-free municipal bonds and other refuges.

From Albus Dumbledore, there is more here. Note that if there is a “single (cost-adjusted) safest perceived investment,” splitting up the fund into two or more assets is increasing the net expected loss to some investments, without making any other investments safer.

[P.S. I’m guessing you will consider my post here to be rather silly. Now read this.]

Thank Goodness the Government Insures Our Checking Accounts

I’m going to write up a longer discussion later, but for right now take a look at this snapshot from page 116 the 2013 FDIC Annual Report:

Notice that in 2009 and 2010, the FDIC fund was negative, meaning it had to borrow money from the Treasury just to make whole the depositors of failed banks. As of 2013, FDIC has a fund of about $47 billion, with which it insures commercial deposits of more than $6 trillion–a coverage ratio of 0.79%.

So remind me why our money is safe in the commercial banks?

A Satisfied Customer

This is an actual message I got from a reader of this blog. I should probably mention that when I asked him for permission to reprint it, he admitted he had been drunk when he wrote it. But still.

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Message: Bob,
I just wanted to acknowledge you for your contributions to my understanding of economics.
I turned off the TV a few years ago in my little saddle making shop and turned on the interweb. The change in my perspective during that time could not have been more profound if I had been taking acid.
Thanks to Mises, reason, Cato, the I.J. and other organizations, my world is a much different place and much more understandable. You and others have given me some tools that I do use to better my life and subtly influence others in a positive direction. My brilliant teenage daughter is now building her economic understanding on a solid foundation of Missean reasoning. This is having a profound impact on her schooling, her friends, and her world view about very important issues.
After listening to another of your lectures, I had to stop to find your address so that I could praise you for your outstanding contribution. An outstanding teacher must have an empathy with those they instruct, and your personality, wit, and delivery are having a meaningful impact on many more than just my family.

Last week a soldier was awarded the Congressional Medal of Honor for jumping on a grenade to save his fellow soldiers. When I heard this I immediately thought of you because I cannot watch a lecture without this feeling of immense pride in your contributions to our country. I salute you, owe you a drink, and will be one of many in the crowd cheering wildly when you are finally feted in a manner worthy of your contributions.

There must be tens of thousands of others like me that you have no knowledge of, but we are out here, and we, like you, can make a big difference in the direction our country and the world travels.
Thanks
My next lecture is up so I gotta go. So much to learn.
Know that before I hit send, I bow….deeply to you.

Potpourri

==> Someone decides to take this “private law” stuff into his own (costumed) hands. A lawyer explains the government’s interest in maintaining its monopoly. Comedy ensues. (HT2 Sam T.)

==> Noam Chomsky on what’s wrong with libertarians. That could be a book! But probably not for the reasons he cites.

==> In light of the ObamaCare ruling, Alex Tabarrok reminds us of Arrow’s Impossibility Theorem. And no, he doesn’t use a Lemma to prove that Obama must be declared dictator.

==> Jon Gruber has seriously painted himself into a corner. That’s way worse than losing a bet to David R. Henderson.

==> If you want to freak yourself out, look at Nick Rowe discussing the views of Scott Sumner.

Christian Doctrines Hang Together

One of the best insights I drew from a Bible study series I once attended was that you can’t pick and choose from the doctrines of Christianity. If you do, the whole thing collapses.

In the present post, I’ll walk through four elements of Christianity, at least as it is practiced in my church. Each element, viewed in isolation, understandably looks suspicious or even awful to a cynic. But when you put all four together, it makes possible a synthesis that is beautiful and awe-inspiring.

(1) Christians dwell on the omnipotence of God. They sing songs praising His mighty power. (When people literally worship power in other contexts, it is abominable.)

(2) If you have to rely on your own merit, you cannot escape hell. The doctrine of original sin says that you don’t even have a chance. (That sounds horrible.)

(3) God wanted the innocent Jesus to be punished for others’ crimes. (That sounds awful.)

(4) What God does is good, period. We might not understand why, and we might agree that if a human did comparable things–like ordering the slaughter of infants–it would be monstrous, but if God does something, it is good. (This sounds like moral relativism, which is monstrous.)

But now let’s put them together:

God effectively says, “To spend paradise with Me, you must be perfect as I am.” This is impossible, because you cannot help but sin. But Jesus led a perfect life, and volunteers to absorb your sins such that you are now blameless. Thus by Jesus’ sacrifice made out of infinite love, all of us can enjoy eternal bliss.

This bargain sounds very attractive, but is it just? It feels like we’re cheating. No need to worry, of course it’s just: It’s God’s plan, and He only takes actions that are good.

But c’mon, can God really set up a system like this, which defies our intuition? Yes, of course He can: He’s God. If He says this is the arrangement, then He’s right, it is.

What motivated my thoughts above was the consideration that a psychological function (perhaps one of several) of going to church and singing “Praise & Worship” songs–which stress the four points above–is to make a person really believe it.

I realize this might be hard for atheists/agnostics to understand, but even honest-to-goodness Bible-believing Christians often have doubts, and I don’t just mean things like, “Hmm, do I really think a guy came back from the dead?” No, I also mean doubts like, “I don’t care what the Bible says, I don’t think God could possibly forgive me for that.”

And so, for people with that fear, it offers indescribable relief to remember that God can do anything, and that if He decides your past sin is no longer a strike against you, then it isn’t. Period. You can move on with your life, and dedicate it to His glory.

Distinguishing “Land” from “Capital Goods”

I answer Gene Callahan’s interesting question. An excerpt:

For a fanciful example, if Superman went and got an asteroid full of precious metals and brought it to the surface of the Earth, and then died in a sneak attack from Lex Luthor, the pile of metals would have the same economic status as a gold mine newly discovered by prospectors. The fact that a (super) man had moved the asteroid wouldn’t make it a capital good. But, if Superman were still alive and capable of repeating the operation on additional asteroids, then the asteroid brought to Earth would be a capital good.

Potpourri

==> Are there Mulligans in climate policy? I say yes.

==> An interesting interview on investors and Austrian economics.

==> David Stockman agrees that the stock market is poised to fall. By the way, come hear him in Nashville!

=> I write about gold as an inflation hedge. (And by “inflation” I mean “banana.”)

==> I had words of wisdom for the young radicals at Mises U last night. Everyone agreed that my conclusion was the best part.

On Mises’ Use of the Term “Inflation”

Since there have been attempts lately to argue that modern-day Misesians are incorrectly stating the master’s position, I thought it helpful to clarify.