Don't just stand there, regulate!

Okay, so the novice left-wing attempt at single-factor explanation of our recent crisis might be that de-regulation caused it (the equally wrong novice right-wing attempt would probably blame the CRA or something).

The smarter kids, they'll say we just didn't have the RIGHT regulation. Well, yeah. So... what would that look like? Depends on what you think went wrong...

There are basically two things that had to happen for the melt down to occur:

1. Investors had to model risk improperly
2. Those modeling mistakes had to be leveraged, i.e., amplified.

All the focus on (1) is a red herring. Fighting the last war. Arguing about loan fraud enforcement or the CRA is great, but those are the WHAT, not the HOW. The "what" was tulips once, another time it was dot com stocks, another time it was sub-prime mortgages. It's going to be something else next time. I don't see why regulators would be any more likely to see the next bubble coming before the investors. They sure didn't this time around.

Leverage, that second one, that's where the fight should be. There were trillions of leveraged assets involved in the most recent crash. The troubled banks held leveraged obligations measuring huge multiples of their actual assets. Mess up in the millions and the feds probably won't ever notice. Mess up in the trillions and now we're talking about real money.

One way to take prevent excessive leverage is to change accounting rules. Of course it's just such a group of rules that the whole collateralization thing was designed to circumvent. Investors are too clever for their own good, so new regulations will need to avoid actually promoting riskier behavior as investors attempt to engage in creative arbitrage. That might not be impossible, but it will be hard.

Another way to prevent excessive leverage is to take away the money. If your kids keep getting an ice cream headache by scarfing down the chunky-monkey... well, what would you do? Yes, this is the Ron Paul argument (i.e., the Austrian School argument). Banks were taking advantage of low interest rates, borrowing the money that they were investing in this crap. It's never good to have too much money chasing too few solid investments.

Forget ice cream. Easy money is like a flame thrower If you're kids have been operating one of those willy-nilly around the house, do you come up with a complicated set of rules for where they should point it, and when, and at what power, and at what times of day and all that? Or do you just take it away? The Fed and Congress have been falling over themselves to give the kids in the financial sector more propellant than ever before. For the last year or so, the kids have just been hoarding it. For now...

As noted elsewhere, Krugman and his friends worry that if the money isn't easy enough, we'll run into a deflationary liquidity trap. How do we avoid AND avoid blowing another bubble?

Doctoring the Doctrine

Given:

• one percent doctrine
• global climate change might have some yucky side effects
• Bush "un-signed" Kyoto
  

It follows that:

• p (global warming is real, in Bush administration's eyes) < 0.01
  

Really?

Seriously guys, this is a serious problem... or it isn't. Is Waxman-Markey (cap-and-trade carbon permits bill) a serious response?

Bonus question: does it matter if the permits are initially given away or sold, provided that they can be re-sold in either case? EMH + Coase says no, right? Or do one or more fail to apply in super-regulated "markets" like energy?

Helicopter to nowhere

The new bridge to nowhere is apparently a helicopter. Congresscritter from NY funds a new 834 million dollar chopper for Obama. Obama, attempting to convince the innumerate that he's making a good faith effort to respond to looming deficits by shoring up spending, ommits the chopper from his budget proposal. Hilarity, politics, and rent-seeking ensue.

Spending 834 million on a chopper that isn't needed is, of course, what one might call a misallocation of resources. Sure, we'll use the chopper, and sure there were some side benefits like whatever Lockheed learned in building it, but the opportunity cost is the issue here. What else could have been done with that money and that labor? Just paying the 834 million in ransom to Hinchley and his lobbyists would have been a superior alternative. The cost is wasted production from the taxpayers who foot the bill, but why double the folly by wasting the labor of the chopper manufacturers? Maybe that labor could produce something that people actually want. Or maybe the workers would just take the money and retire, spending it on leisure, which is something that they probably prefer to building helicopters.

This is just one more example of kicking the structural employment can down the road. In economic terms, if what you're making isn't something that anybody wants... STOP MAKING IT. MAKE SOMETHING THAT PEOPLE... DO... WANT. You don't get that lost labor back, ever.

Still, lest we get carried away, I've made a little chart to put things in perspective. In the likely event that you can't read the legend, the costs going left to right are: AIG Bonuses (the Financial Services ones that I posted about earlier), the chopper, the overall AIG bailout, the 2008 regular defense spending (not including wartime supplements), the overall cost of the bailout (AIG included), and the overall cost of the Iraq war (aggregate, not annual).

If you look really closely, you'll notice that the AIG bonuses and the helicopter don't seem to have bars. That's not a mistake. Actually, it's the point of the exercise. They're so small that you can't even see them. For more on this, see this video.

If companies are too big to fail, that means we're in a spot where we're privatizing profit and socializing risk. That kind of spot is a great place to be if you're a stock holder (although, as we've learned recently not THAT great a place), but it's a crappy place to be if you're a taxpayer.

We learend recently that AIG was too big to fail, and AIG wasn't even the biggest corporation around. If it's bad for a company to be that big, what can we do to encourage companies to be smaller?

We also mentioned around here that marginal costs are better for smaller companies, and fixed costs favor larger companies. So, if we want companies to be smaller, we should look to reduce the fixed costs associated with being a company.

What are some of those costs?

Well, compliance with regulation is one. Lobbying the government (a.k.a. "rent seeking") is another.

If we really decide that economies of scale aren't enough to make up for the instability that comes from super-complicated mega-conglomarates, we should do whatever it takes to make compliance and lobbying costs stay high for big corps while reducing or eliminating them for smaller companies.

Low cost of entry is what made Silicon Valley possible. Granted, that industry crashed too, but it was nowhere near this bad.

Now, look around. Does it seem like we're doing all we can to reduce corporate rent-seeking, too-big-to-failness, and fixed compliance costs for smaller firms? If not, why not?

If you could listen to a fractal, what would it sound like?

Programming and music are cousins, I suppose. Two different sub-fields within the greater domain that is applied mathematics. While I'd prefer other means than an FFT when describing my enjoyment of, e.g., a Pink Floyd solo, stuff like this has always intrigued me.



Day of the Triffords from Andrew Sorensen on Vimeo.


Now, this isn't exactly the most user-friendly interface in the world. I'm pretty sure that crown is held by "stick + something that sounds cool when you hit it wit a stick." Even so, hackers in general and LISPers in particular can rejoice in the satisfaction that comes from reading the matrix...

Is that a stimulus, or are you just happy to see me?

A little over a year ago, I wrote this:

A stimulus package therefore is a suckers game. The market crashed when everyone realized that selling dogfood online wasn't the revolution it was cracked up to be. Bush, Congress and the Fed threw money at the problem, literally. Consumers took the money, avoided the stock market (won't be fooled again) and blew a big real estate bubble (okay, they will be fooled again). What happens when the real estate bubble pops? The powers that are loosen the purse strings...

Now, there's a TON of money that's been ejected into the economy in the last year. TARP was more than half a trillion. The stimulus bill that recently passed was closer to a trillion than half of one. Low interest rates courtesy of the Fed, government-financed troubled-asset buyback plans, and warranty guaranties for GM (okay, that last one isn't really significant relative to the others, but it is pretty wild)?

1.5 trillion? 2 trillion? More? Depends on whose numbers you're using, but any way you slice it, that's a lot of money. Where is it all going to go? Well, some will go straight to inflation. We'll buy the same stuff as before, made by the same people as before, but we'll be paying more since we'll have more money chasing the same goods.

Hopefully though, some of it will go to employing our currently unemployed resources. That's the whole point. Unemployed workers, entrepreneurs with ideas but no funding... these are the things that, when employed and funded, prompt economic growth and recovery.

What, though, will the unemployed workers get jobs doing? What ideas, though, do the entrepreneurs have? In our last bubble, cheap money chased housing, so resources and labor were deployed there. In the bubble before that, cheap money chased internet startups, so the entrepreneurs in that space got literally more funding than they knew what to do with.

Are we to believe that there won't be overshoot this time? Of course not! We'll be fooled again, and the cheap money will chase something that will seem weird this year, revolutionary next year, proven the year after that, and hopelessly retarded the year after that. Retarded like these guys, or like a subdivision of multi-million dollar houses 40 miles outside of Phoenix.

How to spot the next bubble? Hard to say. We can assume that there will be Zeitgeist clues like Time magazine covers, explanatory documentaries on network television, and a whole section of the bookstore dedicated to books on the subject. Another clue: previously rather non-wealthy individuals making a ton of money at some trade that wasn't popular last year, or maybe didn't even exist yet. Another clue: whatever it is, Warren Buffett won't be investing in it.

Will this bubble be as bad as the last one? Well, there's WAY more money looking for a place to go, so that doesn't look good. On the other hand, firms might have learned their lesson on leveraging (and if they haven't, the government might try to impose that lesson anyhow), so maybe there won't be a huge multiplier from derivative investments like there was this time.

Any guesses? Well, some folks have been throwing around the idea of a Green Revolution. Lots of legitimate opportunity there, but also an opportunity for over-investment in good-sounding but bad-in-practice ideas. That's just a wild guess though, it can be anything. There have been bubbles in tulips and beanie babies, so it's not like there's any guarantee that it's going to make the least bit of sense.

I want my emteevee

What do you think would happen if all TV shows were to be magically rendered unavailable to viewers (i.e., no cable, no satellite, no hulu.com, no Netflix season DVDs, etc) for an entire year?

Nielson says that individuals average 4 hours, 35 minutes a day of television viewing. That doesn't include internet and TV-on-DVD watching. Even still, back-of-the-envelope calculation says that's 500 billion hours.

What on earth would the citizenry do with 500 billion hours of free time? Would we see giant churches? A shift to movies? An explosion in live entertainment? An explosion in the restaurant industry? Riots? Revolution (aka, an explosion in the pipe-bomb industry)? People... in... libraries?

A link posted by twifkak recently noted that TV is to the information age as gin was to the industrial age - a means through which society copes with a structure to which it hasn't quite figured out how to adapt yet. Normal people are producing and sharing more content than ever before due to the internet. Would TVs temporary hiatus push that revolution over the edge, or are we not there yet? Or perhaps we're placing a little too much faith in teleology here, perhaps that's not where we're going at all...

If you have a TV, what would you do with your time? Is your alternative method for allocating free time superior to your current, TV-based one? If so, why are you behaving the way you are presently?

If you don't have a TV, think about people that you know who do. What do you think they would do? What do you do with the time you could be spending TV? Do you think your free time choices are superior, or even that you yourself are superior to your TV viewing friends?