Consulting by RPM || Free Advice Blog

Freeman Article on Fannie & Freddie Seizure Now Online

The December issue of the Freeman is up, and it has my article on the F&F seizure. I don’t remember the exact date, but I think I submitted this piece in October. I confess that I was somewhat nervous to read it just now, because so much has changed since I wrote it. Fortunately, I only saw two statements that I now think are a bit off:

* “What should have been a large hit to real estate and a few institutional investors has now spread and is currently threatening the global financial system itself.”

This shows how naively I bought the Paulson hype. Even though things were (and are) bad, I don’t think the global financial system itself was at stake. And now the second claim I regret:

* “Although he is very smart and understands financial markets, Henry Paulson cannot centrally plan the mortgage market to improve on the spontaneous outcome of voluntary interactions among millions of professionals in the private sector.”

I will leave it to the reader to guess with which portion of the above sentence I now disagree.

Oops, Base Growth Was Probably Higher in 2001 Than in 2002

In my latest mises.org piece, I argue that the monetary base grew more rapidly in 2002 than in 2001, whereas Henderson and Hummel give the opposite impression.

After further review, I think they are probably right.

The problem is that the base whipsawed around due to Y2K and the 9/11 attacks. Look at the levels:

Now the Fed gives us the data by month. So when trying to figure out which year had the highest rate of growth, I first went through and took the annual average for every year. In other words, I got “the base level” for 2000 by averaging the Jan 00 through Dec 00 monthly base figures, and I got “the base level” for 2001 by averaging the monthly figures of Jan 01 through Dec 01. Then, I computed “2001 growth rate” by seeing how much bigger the 2001 average was, compared to the 2000 average.

Well, I’m sure Free Advice readers can see the pitfall in my approach. (Too bad I didn’t catch it until now.) If the base grew very rapidly at the end of 2001 (which it did because of September 11th), then my technique could allow some of that growth to spill over into the official growth rate for 2002. After all, even if the monetary base had stayed flat from December 01 through December 02, the average level in 2002 would be higher than the average level in 2001, and hence my method would (erroneously) indicate growth in 02.

So using my method, we find that base growth in 2001 was 5.6%, while growth in 2002 was 8.7%. However, if we do the year/year rate in December (which still isn’t perfect, but it’s a lot better than my method), then we get the Dec 01/Dec 00 growth rate at 8.6%, while the Dec 02/Dec 01 growth rate is a smaller 7.3%.

What’s ironic is that this correction both helps and hurts my case. On the one hand, it makes more sense that the base expanded more rapidly in 2001, when Greenspan did most of the rate cutting–the fed funds rate fell from 6.5% down to 1.75% in 2001 alone. On the other hand, the correction places that much more time between the ludicrous phase of the housing boom, and the “reckless” injection of base.

One last thing: What threw me with Henderson and Hummel’s claim was that they referred to the “year to year annual growth rate” in the base (my emphasis). So I thought they were referring to taking some kind of annual average, since otherwise the word “annual” is redundant. I.e., I think what they are referring to is that the Sept 01 / Sept 00 growth rate is 10.x%. But again, adding the word “annual” is redundant; I would normally just say that was the yr/yr growth rate in Sept 01, or “in 01.”

Notwithstanding that, it’s better for them to be redundant and right, rather than me being precise but wrong. To repeat, I correctly described how I got my numbers, but I said base growth in 2002 was higher than in 2001, and under any reasonable definition this claim is wrong. Oops, sorry guys.*

* Greenspan is still a fink.

IER Comments on Scoping Plan for California’s AB 32

Here (pdf) are the comments I submitted on behalf of IER to California’s Air Resources Board regarding the economic analysis contained in the Scoping Plan for AB 32, aka “The Global Warming Solutions Act of 2006.” It would force California greenhouse gas emissions back to 1990 levels by 2020, which would be about a 25% reduction under business-as-usual projections.

What was funny in this episode is that I didn’t have to deploy cynical Public Choice analysis; even the peer reviewers were stunned by CARB’s economic analysis. The CARB analysis was claiming that the cap-and-trade plan (as well as other mandates such as efficiency targets) would boost California’s economy.

Some excerpts:

IER appreciates the opportunity to provide comments on the California Air Resources Board’s (CARB) “Climate Change Proposed Scoping Plan: A Framework For Change.” We have serious reservations relating to the economic analysis underpinning the Scoping Plan. (The Economic Analysis Supplement was originally released in September 2008, and an updated version is included as Appendix G in the current Scoping Plan.1) We echo the concerns raised by such respected parties as the Legislative Analyst’s Office, which concluded that CARB “failed to demonstrate the analytical rigor of its findings” and that “economic analysis played a limited role in the development of [the] scoping plan.”
…
In the same vein, Director of the Harvard Environmental Economics Program Robert Stavins writes: “I have come to the inescapable conclusion that the economic analysis is terribly deficient in critical ways and should not be used by the state government or the public for the purpose of assessing the likely costs of CARB’s plans.”
…
With or without AB 32, businesses in California already have the option of reducing their greenhouse gas emissions, and households already have the option of installing energy-efficient windows, new installation, solar panels, etc. If it really were the case that the measures of AB 32 would, on net, make California businesses more profitable, it raises the question of why the legislature needs to use the force of law to implement the changes. CARB should simply fax its economic analysis to the owners of the major businesses, and they would make the changes voluntarily. By the same token, if households really do stand to save so much money from the efficiency measures contained in AB 32 that it is clearly worth their effort to implement the renovations, then the state should focus on educational efforts, rather than mandates.

What’s interesting in these things is that I think any Joe Schmoe is allowed to post comments for all the world to see. I will give a heads-up the next time something like this opens up, in case any of Free Advice’s eloquent readers wish to tell their employees (i.e. politicians) how to do their job.

Evidence That the Fed Caused the Housing Boom

At mises.org today, I have an article taking on some of the empirical arguments that try to exonerate Greenspan. I take on Megan McArdle, Henderson and Hummel, Brad DeLong, and Casey Mulligan. (In short, I do my best to alienate as many groups as possible from Austrian economics.) An excerpt:

I realize that these disputes may just further convince some readers that economics is not a science but rather an ideological contest in which each side throws its own set of lying statistics at the other. But even so, I will now use the same underlying data as the writers above, to reach the opposite conclusion: Greenspan allowed the monetary base to grow quite rapidly precisely when the housing boom shifted into high gear, and precisely when interest rates collapsed.

Before proceeding, I want to remind readers that my story is the textbook explanation of how the Fed operates. It is the writers above who are downplaying the Fed’s ability to push down interest rates or to “stimulate” (however temporarily and artificially) the economy. During the boom years, Greenspan and his fans wanted to take credit for his “merciful” low rates which allowed the United States to avoid a painful recession, but now Greenspan and his defenders want to claim that he was an innocent bystander in the face of Asian thrift and shortsighted bankers. In any event, on to the data, this time presented by the “prosecution” as it were.

George Bush Is Not an Idiot

I think George W. Bush is one of the worst presidents in modern times, because of his lip service to free markets while allowing an outrageous growth of government power. Still, I think his critics are wrong when they lampoon him as a bumbling idiot. (Just the other day, I was talking with a guy and I said, “His critics like to paint him as such, but you don’t become the most powerful person in world history if you’re a complete buffoon.” The other guy said, “You can if your dad used to run the CIA.”)

My opinion of Bush’s wits went way up during one of the debates with Kerry. The details are a bit fuzzy at this point, but it was something like this: Bush called for medical tort reform, Kerry explained that the true problem with health care was insurance costs, and then Bush came back and explained that his proposed reform would deal with what Kerry had brought up. And there was just something about the way Bush quickly handled the point, that made me think, “Whoa, his deer-in-the-headlights look is an act. That’s a sharp guy.”

Now we have more evidence. Given the Al Franken opinion of the clueless bumbler, you would think Bush would get smacked in the face. But look at this guy (HT2 James Ostrowski):

Nash Supports Gold Standard

Nobel Laureate and game theorist John Nash recently gave a talk at Fordham explaining the need for a hard money, such as was provided by the gold standard. (HT2EPJ) From the Fordham account:

Nash told the audience that such financial crises would be less likely to occur if there was some international monetary standard, such as the gold standard or competition among worldwide currencies, to curb inflation and prevent the rise of mortgage abuses. He expressed some skepticism about a government bailout as a solution.

“I get the impression that the government is not ready to do anything that is really beyond a short-term basis,” said Nash, a senior research mathematician at Princeton. “[But] we need a natural stability of value.”

Nash said that various interest groups that subscribe to Keynesian, or short-term, economic theories have sold the public on the notion that inflation is acceptable or that “bad money is better than good money.” Such a notion, he said, led to the dangerous proliferation of bad mortgage loans—loans made on the gamble that house values would continue to rise and eventually turn a profit.

“A fixed-rate 30-year mortgage would be reasonable under the gold standard,” Nash said. “Now, there are variable rates, and adjustables, and convertibles, and it is very complicated” for homeowners to figure out what they are getting into. In fact, Nash said, nobody really knows the depth of the financial crisis.

Having an internationally oriented money standard would promote better quality currencies and less inflation, he added.

The announcement then starts talking about “A Beautiful Mind,” which was a good movie but a terrible introduction to the life of Nash and his work. For one thing, Nash was a lot “crazier” (in quotes because I think that word really just means, “unusual”) in real life than the movie portrayed. Apparently he walked into faculty meetings and would throw the New York Times (or some other paper) on the desk and say, “You guys see that headline? That’s aliens communicating with me.” Another time he turned down a job offer (I’m pretty sure in writing) by explaining that he had just become the ruler of Antarctica. (BTW I’m relying on my recollection of the book A Beautiful Mind, and so I might be botching the specifics. But the spirit is right.)

And in the movie, they depicted his wife as supportive, when in reality she had him committed, and arguably what pushed her over the edge was her learning that his productive powers might be compromised if he wasn’t treated. (I remember writing something like, “He was her slave” in the margins.) Last thing: You know the bar scene, where Russell Crowe drawls, “Adam Smith needs updating!” and he goes through the analysis of how he and his buddies should pick up girls? Well that is THE EXACT OPPOSITE of a Nash equilibrium. It would be akin to Ron Howard making a movie about the young Einstein, and having him declare, “Isaac Newton was wrong! Light travels at different speeds, depending on the observer.”

BTW if you enjoyed the above rant, you may like my dissection of a Hal Varian op ed that had boiled down game theory for the unwashed masses, and declared everyone irrational for not playing subgame perfect Nash equilibria in experimental settings.

A Stern But Sobering Lecture from Lew Rockwell

Lew Rockwell, president of the Mises Institute, has an amazing article at his website today, imploring libertarian intellectuals to stick to their principles even now when things are scary. A taste:

If you write and follow politics enough, you eventually realize that most evil in this world is brought about by those seeking a lesser of two evils. And those who assist in this very much resent it when you point out that they are promoting evil.

…

To bail [the Big Three] out with tax dollars is an amazing insult to American consumers. What Americans have chosen not to buy, the government is now effectively forcing them to buy. You want a Toyota and paid for it with your money but your government is now saying that you should have bought a Pontiac, so it is tapping into your bank account to make it happen – and then not even giving you a car for your money!

But let’s return to the problem of those who have caved in. I’m getting messages from people who believe in free markets saying that we have to do this bailout anyway, otherwise we will face worse consequences. The unions will strike back. There will be massive protectionism to prop up the industry. Free market people will get a bad name for not supporting the little guy. Our industrial base will further erode. Unemployment will soar and then the masses will riot and we’ll get Bolshevism. And so on.

…

I grant that all the predicted results of failing to pass it would be bad. They might even be worse than a bailout, who is to say? But these are speculations about the future. What we face right now is a terrible evil of a bailout, and great good comes from its failure to pass. What’s more, if free market people can’t bring themselves to oppose that, what good are they anyway?

…

If a dystopian nightmare of the totalitarian state finally arrives in the United States, it will be a result of a compromise, and there will be people around until the very end who will insist that we should be grateful because it could be much worse.

This kind of strategizing also works as a cover for selling your soul. The temptation to do this is very great indeed. The state loves nothing more than a seeming libertarian who weighs in from time to time with a pro-state position. This allows the state and its minions to justify their oppression even from the standpoint of libertarian intellectuals. When you sell out, this is the role you are playing (and this is the role that some D.C. organizations have been appointed to play).

There is only one sure way that you can know that you are on the right side of history, and that is by saying what is true and defending what is right, without exception. It is not left to intellectuals to play political games. Intellectuals are supposed to tell the truth, regardless of the moment. That means, in these days, completely opposing all increases in state power under the cover of “countercyclical policy.”

Subjects Are Like Little Children

…in the mind of a politician. The easiest way for me to get across the point of this post, is to recreate how I happened on the idea:

So I was trying to get my 4-year-old to go to the bathroom since we had just driven home from somewhere. He wanted a drink, and I said, “OK let’s go on the potty and then we’ll get some juice!” (and I was really chipper about it).

Clark got mad of course, since wouldn’t you get mad if every time you suggested something to this really tall guy who was always in your face, he would try to amend the plan to suit his whims–and if you didn’t agree, he would physically overpower you? What the heck?!

But I’ve noticed lately that if I just wait out the tantrum (instead of trying to reason with him), he gets over it in literally 8 seconds and then suggests the very thing that I proposed one minute earlier (and which, 60 seconds previously, had triggered Clark’s crying).

So I don’t think it’s that he’s a pushover or weak-willed, it’s that my wife and I basically mold 80% of how Clark even interprets the world. I mean, he now divides his day up into play times, meal times, potty breaks, naptime, bath and bedtime with story. Where did all those concepts come from? Clark certainly didn’t get a menu of ways to categorize his experiences and then picked; no, he is basically copying my framework.

So since I get to frame the issues, naturally he is going to be steered in the direction I want him to behave.

It occurs to me that this is how the government operates. Take the “Troubled Asset Relief Plan.” Just the very name of that thing makes it hard to oppose. And the acronym is catchy, too. They wouldn’t have named it the Credit Reset and Assist Plan.

Of course, what’s great is that the resistance can come up with terms like “bailout.” No matter how you spin that, it’s dirty.