Don’t Hate Bernanke, Hate the Game
Von Pepe sends me this hilarious simulation on the SF Fed’s website. As von Pepe notes in his email, this is basically the Phillips curve with sound effects.
I got fired after my first term as Fed chief. At the first opportunity, I jacked the fed funds target up to 19.0% (the highest setting) and just let it ride. Unemployment had risen to something like 19.4% by the time my term expired (and I was not reappointed). I was expecting the ants in my colony to get used to the 3% deflation (I think that’s the floor), at least after two straight years of it. But nope, unemployment just kept going up and up and up.
This game is really hilarious. You have to click the link above.
"We hold that all men are endowed by their state representatives with certain alienable privileges…"
I’m doing research for the next installment in PRI’s California Prosperity Project, and came across this rather ominous statement on page C-3 in a report [.pdf] from New Jersey’s Treasury:
The Corporation Business Tax imposes a franchise tax for the privilege of having or exercising a corporate charter or doing business, employing or owning capital or property, or maintaining an office in New Jersey.
I grant that maybe this is only related to the special legal privileges that come with incorporation, but they seem to be making a distinction between having a corporate charter versus the other stuff. In any event, it’s a bit disturbing that they are talking about the privilege of owning property in the State of New Jersey.
Throwing in the Towel on Tyler Cowen and Milton Friedman
I just sent Tyler an email saying I was dropping this, because I don’t want to be a stubborn jerk in case I’m just missing something. So I hope it was understood that by “dropping it” I meant, “After I zing you one last time on my blog.”
For the record, I have no idea how Tyler’s posts on Milton Friedman and the Great Depression are consistent (let alone correct). In his first one, he wrote:
(By the way, some libertarians like to pretend that Milton Friedman blames the Fed for “contracting” the money supply by one-third in that period but in reality Friedman blames the Fed for having let the money supply fall by one-third and not having run a bank bailout.)
Now that surprised me; I didn’t remember Friedman ever saying the government (or the Fed) should have bailed out insolvent banks during the early 1930s. Of course, everybody and his brother–possibly even San Fransisco cab drivers [.mp3]–knows that Milton Friedman thought the Fed should have acted aggressively to prevent M1 from collapsing. But Tyler obviously is above saying that libertarians are wrong for thinking he merely said that. OK, good to know. Tyler reads a lot more than I do, so he must know.
But then David R. Henderson had the gumption to call Tyler out on this point, saying that it’s not at all clear that Friedman actually favored bailing out insolvent banks (as opposed to providing a general environment of abundant credit such that the solvent but illiquid banks could slog through). You know what? Let’s quote David just to make sure I’m not seeing what I want to see:
David R. Henderson: [Tyler’s] correct that Friedman wanted the Fed to increase the money supply. I don’t think I’m pretending when I say that I don’t think Friedman advocated bailing out banks during the Depression. As I think Friedman would have, last fall I advocated an increase in the money supply while opposing a bailout. Those two, contra Cowen, are separable.
There were some other back-and-forth posts, and Tyler at some point in the comments apologized to David. (I think he was apologizing for his use of “pretend” to describe what libertarians think about Friedman’s position.) Yet today Tyler tells us:
Tyler Cowen: When I perused Friedman’s writings lately, I found that, as far as I could tell, he never discussed how to deal with widespread bank insolvency. I interpret him as believing that [lender of last resort] and loose money and the FDIC could deal with banking crises; furthermore over time his mix of this recipe became successively more libertarian and less interventionist, as David mentioned. But I also think that perhaps he, like I, hadn’t imagined that the insolvency problem would take on the breadth and depth it did.
Now this made me flip out, because here it seems Tyler is saying that Friedman’s views were precisely what the knee-jerk libertarians “pretended” they were, namely that Friedman favored easy money and credit but not actual bailouts of insolvent banks.
So I posted the very first question on the thread, saying: “So did you really mean to write [in your original post], ‘Some libertarians like to pretend that Friedman explicitly denied the efficacy of a bank bailout, when in reality he didn’t say anything about it’? :)” (Note the smiley face; we’re all in a big free market lovefest here, kids.)
Then Tyler comes back and says:
Bob, Friedman favored bank bailouts for the GD, he just didn’t consider the exact details of the current environment because he never lived to see it. He never repudiated his support for a vigorous Fed in the GD. That doesn’t *prove* any counterfactual about Friedman, if he had lived longer and seen 2007-8, but it is a piece of evidence.
I have to stop now before I go insane. Why in the world would Friedman have favored bank bailouts–and to this day I don’t think Tyler has ever shown where Friedman did so–if, per Tyler, Friedman never considered the problem of widespread bank insolvency? How could Friedman have ever written the words, “And so the Fed should have injected capital into particular banks” without a discussion of the effects of widespread insolvency?
And moreover, is Tyler saying that we did NOT have widespread bank insolvency during the early 1930s, whereas we have it today?
Is everybody taking crazy pills?!
Going Cross-Eyed Thinking About TARP
I started thinking about this last night and had to reboot my mind. After writing this post, I realized that I had left out a huge consideration: risk. Even if the government ends up making an accounting profit on the Capital Purchase Program component of TARP, that doesn’t really prove that it was a good use of taxpayer funds. This is because private investors were afraid of the huge risk involved. (Don’t worry, when I predicted that TARP would lose money, I didn’t mean it in this tautologous/vacuous sense–I meant the government would pay $700 billion for toxic assets that it would end up selling for less than $700 billion down the road.)
To illustrate with a ridiculous example: Suppose Henry Paulson took $100 billion of taxpayer money down to Vegas, and placed it on Black (following Wesley Snipes’ advice). There’s a 47.37% probability of winning, and so it wouldn’t be that unusual for Paulson to walk away with a profit for the taxpayers. But we still wouldn’t say he did a wise thing.
By the same token, investing in the teetering banks last October was a risky move. People weren’t sure–and Paulson and Bernanke couldn’t be, either–what would happen with the financial sector. Yes, everybody knew that the bank stocks (and more particularly, the prices of “toxic” assets) were heavily discounted in the event that things quickly stabilized, but the point was, nobody was sure if the financial market would be stabilized. So buying toxic assets, or more generally investing in US financial stocks, was a high-risk, high-return wager when Paulson decided to go for broke (ha ha).
Anyway, I am just making sure you understand the academic point; I understand that the proponents of TARP would say that was the whole point, that the huge discounts and risk were a self-fulfilling prophecy, and that Paulson’s moves were a primary reason that things stabilized. OK fine, let’s not argue over that right now.
What I want to focus on is this: If you wanted to demonstrate the different risk/return options available, you would normally say, “Well, instead of plunking $700 billion [or $204.4 billion] in financial stocks and warrants, Paulson instead could have parked it in something really safe, like Treasurys.”
But what would that mean? Is it really true that the federal government itself could make a “very safe” investment in its own debt? (This is what made me go cross-eyed.) Obviously, what it would mean in practice is borrowing less from the private sector. So does it all work out to be equivalent?
If so, it’s not obvious to me how. The reason private investors view the US government as very safe, is that the government can just tax the entire class of productive Americans to make its interest payments. So, how does that figure in here? Paulson shouldn’t have put so much money at risk in one sector, when he instead could have reduced the borrowing strain now, thus letting the economy grow stronger for future fleecing?
Has the Government Made Money on TARP?
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.
More Free Market Evangelism From Larry Kudlow
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.
Are We All Utilitarians Now?
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!”
Reflections on the San Fran Mises Circle
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?
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