A Glib Interview With Eugene Fama
Oh man, I think we need to come up with our version of Cass Sunstein and pay Eugene Fama to stop defending the free market. He warmed up by the second half, but I think Fama started off this interview horribly. (HT2CP) I’ve seen progressive bloggers laughing themselves silly over it, and I don’t blame them.
I am going to do a Mises Daily on this, after I calm down and regain perspective. But in the meantime, do any Free Advice readers know enough about the Modigliani-Miller theorem to evaluate this portion of the interview?
[Cassidy:] So what is the solution that problem [of moral hazard from government bailouts]?
[Fama:] The simple solution is to make sure these firms have a lot more equity capital—not a little more, but a lot more, so they are not playing with other people’s money. There are other people here who think that leverage is an important part of they system. I am not sure I agree with them. You talk to Doug Diamond or Raghu Rajan, and they have theories for why leverage in financial institutions has real uses. I just don’t think that those effects are as important as they think they are.
[Cassidy:] Let’s say the government did what you recommend, and forced banks to hold a lot more equity capital. Would it then also have to restructure the industry, say splitting up the big banks, as some other experts have recommended?
[Fama:] No. If you think about it…I’m a student of Merton Miller, after all. In the Modigliani-Miller view of the world, it’s only the assets that count. The way you finance them doesn’t matter. If you decide that this type of activity should be financed more with equity than debt, that doesn’t particularly have adverse effects on the level of activity in that sector. It is just splitting the risk differently.
[Cassidy:] Some people might say one of the big lessons of the crisis is that the Modigliani-Miller theory doesn’t hold. In this case, the way that things were financed did matter. People and firms had too much debt.
[Fama:] Well, in the Modigliani-Miller world there are zero transaction costs. But big bankruptcies have big transaction costs, whereas if you’ve got a less levered capital structure you don’t go into bankruptcy. Leverage is a problem…
OK so help me out here. Isn’t the whole point of the MM theory that a firm’s leverage is irrelevant? So on the one hand, it seems Fama is contradicting himself–saying “yes let’s limit leverage because I believe in a theory that says leverage is irrelevant to finance.”
On the other hand, maybe Fama is saying, “Since leverage doesn’t gain a firm anything, in the presence of implicit government bailouts, let’s limit it.”
Someone who knows MM please help me out. Fama said so many other absurd things that I don’t want to unfairly pick on him for this one, if it’s fine.
Glenn Greenwald Slays Paul Krugman
Paul Krugman failed to learn from my example and foolishly kept up an argument with Glenn Greenwald, who just obliterated him:
Nobody suggests that there’s anything wrong with hiring Gruber to perform modeling analyses and paying him to do so. That’s all perfectly appropriate; I’m all in favor of the Government’s retaining genuine experts (as Gruber is) for analysis. Nor has anyone claimed that Gruber changed his views because of these payments. The issue is the non-disclosure, and — most serious of all — the misleading attempts by the White House and others to depict him as being “objective” and independent rather than disclosing that he was being paid a significant amount of money by the very party whose interests his advocacy was advancing…
Then Greenwald quotes from Krugman’s blog post and responds:
[Krugman:] And here’s the thing: by claiming that there’s a huge scandal when nothing worse happened than insufficient care about disclosure, Greenwald and the people at FDL are actually reducing our ability to call foul on real corruption. After all, if everything is a scandal, nothing is a scandal. One of these days, perhaps soon, we’ll have a genuinely corrupt administration again — but when whistleblowers try to call attention to the misdeeds, you can be sure that there will be claims that “even liberals said that Obama did things just as bad or worse.” The crusade against Gruber is getting really destructive.
[Glenn Greenald:] For me, this is the nub of the matter. I couldn’t disagree more with Krugman’s claim here, as he as it exactly backwards. What will make it impossible to effectively call out wrongdoing by future corrupt administrations (by which Krugman seems to mean: Republican administrations) is the willingness of some people to tolerate and defend corruption when done by “their side.” The next time we have what Krugman calls a “genuinely corruption administration” which, say, secretly pays people they’re holding out as “independent” experts, the administration’s defenders will say: “how can you possibly object to our doing this when Obama did it, and not only did you fail to object then, but you defended it?”
Incidentally, I recently wrote a post “In Defense of Harry Reid and Jonathan Gruber.” What had happened was that I was listening to Rush Limbaugh when I went to the bank, and Rush was going nuts on the racist comment of “dingy Harry.” He took a break with a “and and now listen to this breaking scandal, folks,” quoted someone mentioning the payments to Gruber and said something like, “Can you believe it? These ‘experts’ are just saying what they’re paid to say; this is a hoax too like global warming. And do you people remember how mad the Left got when [some conservative] took money…?”
So that’s why I was defending Gruber; I thought the only issue was, he was doing consulting work and didn’t always announce that fact before commenting. I didn’t realize that Senator Kerry, for example, expressly read from Gruber’s work during hearings and led people to believe Kerry had no idea who Gruber was.
Ironically, when Rush attacked Gruber it was so sloppy I didn’t see the big deal, and it took Glenn Greenwald to convince me of how slimy the Democrats were on this one.
Uh Oh On Glenn Greenwald
[UPDATE below.]
Oh come on, don’t tell me another of my budding heroes has let me down! No doubt acting on orders from Cass Sunstein, commenter Blackadder recently brought to my attention this post which apparently wields damning evidence that Glenn Greenwald posts as other people to defend himself on blogs.
I don’t know enough about the intertubes to evaluate the charge, but I have to say Greenwald’s own response leaves me feeling queasy:
A new accusation is that I’ve been engaging in so-called “sock puppetry” by leaving comments in response to posts that attack me under other names., i.e., that I use multiple names to comment and the same comment was left at several blogs by the same IP address under different names.
Not frequently, I leave comments at blogs which criticize or respond to something I have written. I always, in every single instance, use my own name when doing so. I have never left a single comment at any other blog using any name other than my own, at least not since I began blogging. IP addresses signify the Internet account one uses, not any one individual. Those in the same household have the same IP address. In response to the personal attacks that have been oozing forth these last couple of weeks, others have left comments responding to them and correcting the factual inaccuracies, as have I. In each case when I did, I have used my own name.
Soooo, if I’m interpreting him correctly, Greenwald is saying that somebody else who lives at his house could have left all the comments coming from the same IP address and yet being signed by names other than “Glenn Greenwald.” So that raises some questions:
(1) Just how many people live in GG’s house? Is he in a co ed dorm?
(2) Instead of being abstract about it, couldn’t GG have asked the other people in his house, “Hey, Ella, were you the Ella who posted from this IP, or was that somebody else like at a party we threw, named Ella, who snuck in here to use the computer to defend me on the internet?”
(3) Why would people in Greenwald’s house have needed to email him about matters, and then post his email response in blogs defending his honor? Couldn’t Greenwald’s housemates have asked him during the commercial breaks of Must-See TV whether those scurrilous internet charges were true, and then typed up his verbal response on the blogs to defend his honor?
This really ruins my night.
UPDATE: Read the comments to learn why this isn’t nearly as bad as I first thought. My faith in GG is restored, though I am now wiser.
Calling a Foul in the GMU / JMK Grudge Match
As longtime observers of the Geeconosphere League well know, in college hoops Team GMU has an old rivalry with Team JMK. On Team GMU we have starters Bryan Caplan, Russ Roberts, and Arnold Kling (who just transferred from another school in a weaker division), while on Team JMK we have Paul Krugman, Brad DeLong, and Matt Yglesias (who just got pulled up from the freshman team).
(At this point some of you are wondering about Tyler Cowen, the sportswriters’ favorite GMU player. He actually decided to run track this year. And what team do I play for? Alas, I spend each game sitting on the bleachers behind the GMU bench, yelling to Coach Boettke: “Put me in! I got mad skills! I’ll strip the ball from Yglesias, drive past DeLong, and dunk in Krugman’s face!” Then Roberts always turns to Caplan and asks, “Who is that guy? Does he even go to our school?”)
Anyway, Team GMU has been high fivin’ each other over two consecutive turnovers they forced on Team JMK. The first involved a fast break by DeLong, when he was discussing Soviet growth rates, in which Caplan came out of nowhere and knocked the ball out of bounds off DeLong’s knee. As the announcers explained during the replay, DeLong’s mistake was that he naively assumed a socialist country would have the same production function and be able to match the growth rates of a market economy.
Then in another play that brought the GMU bench to their feet, a rookie and foreign exchange student intercepted a pass from Krugman to Yglesias. During the timeout, the commentators explained that Krugman and Yglesias, in their analysis of European growth rates, had idiotically (and deceptively) failed to note the well-known fact that poorer and more socialist countries would be expected to have higher growth rates.
So I’m calling a foul.
But again, I’m not a ref, just some guy in the bleachers. Don’t let me spoil the game if you’re a passionate GMU fan.
(And also, I bet against JMK, so I hope they still lose.)
Fed Balance Sheet Breaks Record
According to Reuters:
NEW YORK, Jan 14 (Reuters) – The U.S. Federal Reserve’s balance sheet rose to a record in the latest week, boosted by its ongoing efforts to support the mortgage market, Fed data released on Thursday showed.
The Fed’s balance sheet — a broad gauge of its lending to the financial system — rose to $2.274 trillion in the week ended Jan. 13 from 2.216 trillion in the prior week.
After declining early last year, the balance sheet generally has been accumulating mass amid the Fed’s asset-buying program, in which the central bank’s holdings of agency debt and mortgage-backed securities have grown to more than $1 trillion.
The latest rise in the balance sheet came on the back of a jump in its holdings of agency mortgage-backed securities, which rose to $968.59 billion in the week ended Jan. 13 from $908.74 billion in the previous week.
The Fed’s holdings of agency debt totaled $160.83 billion in the week ended Jan. 13 versus $159.88 billion the previous week.
By the end of March, the Fed plans to have bought $1.25 trillion worth of mortgage-backed securities and about $175 billion worth of agency debt.
So That’s Why Cass Sunstein Has Been Donating to Free Advice
Ralph Raico draws our attention to this very disturbing story. I’ll let Glenn Greenwald explain (emphasis mine, and I corrected two typos):
Cass Sunstein has long been one of Barack Obama’s closest confidants. Often mentioned as a likely Obama nominee to the Supreme Court, Sunstein is currently Obama’s head of the Office of Information and Regulatory Affairs where, among other things, he is responsible for “overseeing policies relating to privacy, information quality, and statistical programs.” In 2008, while at Harvard Law School, Sunstein co-wrote a truly pernicious paper proposing that the U.S. Government employ teams of covert agents and pseudo-“independent” advocates to “cognitively infiltrate” online groups and websites — as well as other activist groups — which advocate views that Sunstein deems “false conspiracy theories” about the Government. This would be designed to increase citizens’ faith in government officials and undermine the credibility of conspiracists. The paper’s abstract can be read, and the full paper downloaded, here.
Sunstein advocates that the Government’s stealth infiltration should be accomplished by sending covert agents into “chat rooms, online social networks, or even real-space groups.” He also proposes that the Government make secret payments to so-called “independent” credible voices to bolster the Government’s messaging (on the ground that those who don’t believe government sources will be more inclined to listen to those who appear independent while secretly acting on behalf of the Government). This program would target those advocating false “conspiracy theories,” which they define to mean: “an attempt to explain an event or practice by reference to the machinations of powerful people, who have also managed to conceal their role.”…
There’s no evidence that the Obama administration has actually implemented a program exactly of the type advocated by Sunstein…Regardless, Sunstein’s closeness to the President, as well as the highly influential position he occupies, merits an examination of the mentality behind what he wrote. This isn’t an instance where some government official wrote a bizarre paper in college 30 years ago about matters unrelated to his official powers; this was written 18 months ago, at a time when the ascendancy of Sunstein’s close friend to the Presidency looked likely, in exactly the area he now oversees.
Seriously guys, isn’t this all getting just a little too “out in the open” for you? We have pictures of Americans sexually torturing prisoners of war; the NYT has stories matter-of-factly talking about a worldwide network of CIA-run prisons; the government is steadily taking over the housing market, energy sector, financial industry, and health care; we are installing full body scanners at airports; we have occupying troops in I-don’t-even-remember-now how many Middle Eastern countries and are considering an attack on Iran…and now this. If we went back to, say, 1983 and you watched a Tom Clancy movie in which the Soviet Union did all of the above, what would you think? “Man, those are some altruistic commies, spreading their way of life all over the world with their own blood, sweat, and money.”
Wake up, people. This is how it happens. This is what it feels like when it’s happening in real-time.
Inflation Numbers Out
The CNBC report was fairly neutral, though the headline says, “Inflation Stays Tame.” If we trust my early morning math, I calculated that from Dec 2008 through Dec 2009:
* Actual CPI rose 2.7%, and
* “Core” CPI (less food and energy) rose 1.8%.
These are not “liquidity trap” numbers (though technically Krugman et al. could say they are consistent with an optimal interest rate that is constrained by the lower bound of 0%). The Fed’s ostensible target for core inflation is 1.5% – 2.0%. So the inflation the BLS says we just had in 2009, is exactly in the sweet spot according to the Fed’s desires.
In other words, it’s not as if we are still experiencing very low “price pressures.” You could try to be very fair to the financial press and interpret them to be saying, “Wow, it’s amazing how tame inflation is, given the extraordinary Fed interventions.”
But I don’t think that’s how they’re framing it, especially in cases like this.
I’ll be watching the money supply figures closely to see if the banks begin moving out the excess reserves. I think as bond yields begin rising (and they already have), it will be less and less attractive for banks to keep their excess reserves parked at the Fed.
George Carlin: The Game Is Rigged
Wow. I made an offhand remark in this post saying that I thought Carlin was hilarious, but that his condemnations of capitalism could sometimes be absurd. Well some people called me out in the comments, and in retrospect I was not nearly as cynical back then as I am in more recent years. So it’s possible that the things which struck me as ridiculous back in high school, would meet with my approval today.
The below clip shows how radical Carlin could be. Be careful there are a few F-bombs in here, but his diagnosis of American society is pretty accurate I have to say.
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