Tuesday, September 30, 2008

Did Economist Hyman Minsky Predict The Financial Crisis?

You can read about it at

Financial meltdown: Hyman Minsky warned us this would happen

Here is a key exerpt:

"At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. 'This is likely to lead to a collapse of asset values,' Mr. Minsky wrote.

"When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived."

According to one expert:

""We are in the midst of a Minsky moment, bordering on a Minsky meltdown," says Paul McCulley, an economist and fund manager at Pacific Investment Management Co., the world's largest bond-fund manager, in an email exchange."

I don't think that the economics profession has taken much interest in this over the years. The book Modern Macroeconomics: Its Origins, Development And Current State does not even mention his name. An earlier edition of the book from 1995 did list three of Minsky's works in the bibliography. But apparently the authors no longer thought he was worth mentioning.

One more thing, I had a post last year about another theory on why we see such great volatility in the market. It reminds me of Minksy's theories. The post was Interesting Theory on Stock Market Fluctuations. Here is the post:

"Nicholas Barberis of the University of Chicago Business School has an interesting article called Search for the Holy Grail: Demystifying the Stock Market. This is clearly written for a general audience. The basic idea seems to be that when the market is up, people feel like they are good investors and that they are playing with the "house's money." So they will keep buying, making the market go up even more. But when things are down, people get pessimistic and want to sell (also because of "loss aversion," the idea that people have a bigger drop in utility from losing a dollar than the gain from finding a dollar). So people sell more quickly since they don't want to lose anything. Then the market goes down even more. So the ups and downs are bigger than you might expect."

Sunday, September 28, 2008

Is The Economy A Bathtub? Are The Patient's Arteries Clogged? Welcome To The World Of Economic Metaphors

The Wall Street Journal had an article recently called In Financial Crisis, Metaphors Fly Like Bad Analogies. I guess that when times are uncertain and situations are complex, people turn to methaphors (you know instead of saying someone is fast you say "he's a deer"). Maybe this comforts us. The invisible hand is a metaphor. But if you read this article judge for yourself if these new ones work as well as the one that Adam Smith used.

Here is an exerpt from the article, a quote from the famous investor, Warren Buffett

""Unfortunately, the economy, it's a little like a bathtub," billionaire investor Warren Buffett, the Oracle of Omaha, told CNBC this week, explaining why the average American suffers when investment banks collapse. "You can't have cold water in the front and hot water in the back.""

Other metaphors invoked in the article include meltdowns, hurricanes and even Little Orphan Annie!

Thursday, September 25, 2008

Is Barack Obama "Too University Of Chicago?"

That was a question asked on MSNBC’s Hardball by Chris Matthews earlier this year. I guess that since Obama taught law at the University Of Chicago and he liked talking to all the other professors there (including economists), that makes him some kind of egghead. Since I got my BA at U of C, there may be some truth to this.

So the University Of Chicago alumni magazine had an article about this. You can read it at

Elemental Obama

Here are a couple of exerpts:

"One thing is unmistakable, though: the University of Chicago is where he has drawn many crucial members of his political team. Graduate School of Business professor Austan Goolsbee is a key economic strategist."

"Many of Obama’s economic ideas, however, can be traced to Chicago. Cass Sunstein, who’s starting a new job at Harvard University this fall (he’ll maintain a visiting position at Chicago), makes the case: “Though he’s not a dogmatic follower of Milton Friedman, Obama is someone who is fully appreciative of the virtues of markets and how regulation can be counterproductive.” Sunstein points to specific proposals that originated with Chicago thinkers, including resonances from Nudge, the 2008 book on “libertarian paternalism” that Sunstein coauthored with GSB economist Richard Thaler. On health care: “It’s noteworthy,” Sunstein says, “that his approach is not a mandate; he didn’t want to coerce any adult to buy health insurance.” On the housing mortgage crisis: “His policies are oriented toward transparency and disclosure—measures that are market-improving rather than market-eliminating.” Climate change: “His solution is a market system that allows trading in greenhouse-gas emissions rights, and an auction to buy those rights.” Many Chicago economists, however, find more merit in McCain’s economic plan."

Wednesday, September 24, 2008

More On The Financial Crisis

Normally I would have waited until Thursday or Friday to post, but there is alot going on.

This link at Yahoo Finance has a good basic set of questions and answers about what is going on and is pretty clear.

The Wall Street Bailout Plan, Explained.

There is also more at Freakonomics (links below). The first one is about a letter to Congress signed by over 100 economists, urging Congress to be careful and deliberate on whatever they do. Then Steven Levitt questions how the government can make a profit buying these assets if the private sector does not want them. The only thing I can guess is that by buying these mortgage assets and restoring things to normal and restoring confidence, their prices will go back up and the government will make a profit. The alternative is not doing anything and see the financial system shut down (at least that is what Fed chair Bernanke and Treasury secretary Paulson say). But no one has stated how much doing nothing will cost while we know the cost of the bailout is $700 billion.

Economists on the Bailout

Bargain Prices?

Tuesday, September 23, 2008

It Pays To Be A Male Chauvinist Pig

Here is a link to the news article

Sexist Men Earn More Money: Study

The full study is at

Click here for the full study.

Below are exerpts from the news story.

"According to a new study, published by the Journal of Applied Psychology, men who hold traditional views of women earn more than men with more egalitarian views — a lot more.

Researchers looked at this data as a predictor of earnings and found that men who said they had more traditional gender role attitudes made on average $11,930 more annually than men in comparable jobs who had less traditional attitudes.

If the data controls for variables such as occupation, location, education, religion and hours worked, how can the gap be explained? The study did not research this specifically, but Judge says one possible explanation is salary negotiation.

"Men who see themselves as the primary wage earner, who tend to identify themselves as the wage earner in the family, they may be particularly aggressive in how they negotiate," said Judge. He added the reverse may be true for women with traditional views on gender."

Friday, September 19, 2008

Freakonomics Has A Good Explanation Of The Financial Crisis

I usually don't just pass on what I saw at other blogs, especially since I have links to some goods ones. But this is such a big story that I thought it makes sense now. University of Chicago professors Doug Diamond and Anil Kashyap were the guest bloggers. The post was called

Diamond and Kashyap on the Recent Financial Upheavals.

Here some exerptss:

"The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.

Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt."

Robert Samuelson of Newsweek argues that this is all the result of what he calls
The Homeownership Obsession.

Here is an exerpt from his article:

"The real lessons of the housing crisis have gotten lost. It's routinely portrayed as the financial system run amok; the housing market became a casino. The remedy, we're told, is to enact rules that prevent a repetition. All this is partly true. But it ignores a larger truth: Our infatuation with homeownership, embedded in dozens of government policies, has turned housing -- once a justifiable symbol of the American dream -- into something of a national nightmare.

As a society, we're overinvesting in real estate. We build too many McMansions. They use too much energy, and their carrying costs, including mortgage payments, absorb too much of Americans' incomes. We think everyone should become a homeowner, when many families can't or shouldn't. The result is to encourage lending to weak borrowers who are likely to default. "

Tuesday, September 16, 2008

Fewer Want To Become U.S. Citizens Due To Higher Price

This may be a good example of the law of demand. Both of my macro (ECON 2301) sections recently read the chapter on immigration in the book The Economics of Macroissues. One of the things that chapter deals with are the costs and benefits immigrants face. My guess is that only one cost or benefit has changed significantly recently, the citizenship fees.

"Following a 69 percent increase last summer in citizenship fees, about 281,000 immigrants have applied to become U.S. citizens in the first half of 2008 — less than half the number of applicants in the same period last year, according to the U.S. Citizenship and Immigration Services."

To read more, go to:

Citizenship filings decline after fee hike

Sunday, September 14, 2008

What if we legalized all drugs?

That is the title of an article from MSN. Here is the link: What if we legalized all drugs?. (Hat Tip: Cliff Perez, a student in one of my classes).

The article does a good job of presenting different views. The research of some economists is mentioned. We discussed issues like this in my ECON 1301 class this past week. One objection I do have to the article is that it suggests that if we legalized drugs the tax revenue the government would collect would be a benefit. No, a tax is just a transfer. Citizens have less money and the government has more. Now if the benefits from the programs those taxes fund outweigh the costs, that is good. But that may not be true for everything government does.

I was interviewed last year for the Ranger (the San Antonio College newspaper) on this issue. Here is the link: Legalization needs analysis, economics professor says. Kinky Friedman, a candidate for Governor, had suggested legalizing marijuana. I talked about the issues that needed to be addressed on that. WARNING: when you click on this link, you may see a picture of me!

Thursday, September 11, 2008

Government Employees Trade Favors To The Oil Industry For Sex (and they got an ethics award from the government)

"the Interior Department agency that collects oil and gas royalties has been caught up in a wide-ranging ethics scandal - including allegations of financial self-dealing, accepting gifts from energy companies, cocaine use and sexual misconduct.

In three reports delivered to Congress on Wednesday, the department's inspector general, Earl Devaney, found wrongdoing by a dozen current and former employees of the Minerals Management Service, which collects about $10 billion in royalties annually and is one of the government's largest sources of revenue other than taxes."

That is from: Sex, drug use and graft alleged in U.S. Interior Department

(see below for the link about their ethics award)

The article also says:

"The report alleges that eight officials in the royalty program accepted gifts from energy companies whose value exceeded limits set by ethics rules. These included golf and ski outings; meals and drinks; and tickets to a Toby Keith concert, a Houston Texans football game and a Colorado Rockies baseball game.

The investigation also concluded that several of the officials "frequently consumed alcohol at industry functions, had used cocaine and marijuana, and had sexual relationships with oil and gas company representatives.""

Here is another article on this: Federal oil lease employees had sex with industry reps

In my 1301 class, we just read a chapter called "Sex, Booze and Drugs" (from the book The Economics of Public Issues), so this is a timely story!

But this story points out two important economic concepts. One is The capture theory of regulation. The idea is that although the government agencies are supposed to make sure companies follow the rules to benefit society, those companies can influence or control the regulators. They do this by lobbying (and giving perks like in these artilces). Also, the industry has the interest and incentive to influence these agencies while the rest of us are too busy to keep tabs on it. And sometimes the regulators are former industry employees.

The other concept it illustrates is The law of unintended consequences. We may have well-meaning laws that should benefit society but people react to those laws and change their behavior sometimes in unexpected and undesirable ways. We see this here in these articles. Another example would be rent controls. If you legally keep down the price of rent, landlords have less incentive to keep their buildings or construct new apartments. So the rental market (and renters) suffer even though that was not the intended result.

Days Before Scandal, Interior Got Ethics Award

Wednesday, September 10, 2008

America's Most Affordable Places to Retire

Are they kidding? As soon as more people start moving to these places, costs go up and they won't be so affordable any more. I posted something like this recently and discussed an economic concept called "the indifference principle." That was about affordable housing markets in general. Now these places for retirees might specialize in goods and services that retirees like, so maybe the older folks should move there. But this is like saying that if you like to surf, move to California and then saying "here are the cheapest places for surfers." They won't stay cheap for long.

I was not planning to post today but this came up. My next planned post was tomorrow and it will be something sexy.

America's Most Affordable Places to Retire

Tuesday, September 09, 2008

Economists Discover That Watching Television Is Not All Bad

This was recently reported in the Wall Street Journal. Here is the link:

A New View On TV

One of the big issues is what you stop doing or what you do less of when you watch TV. If it replaces something "bad," then TV can have benefits. For example:

"The economists found that television was especially positive for children in households where English wasn't the primary language and parents' education level was lower. "We don't exactly know why that is, but a plausible interpretation is that the effect of television on cognitive development depends on what other kinds of activity television is substituting for," says Mr. Shapiro, 28.

Growing up in the 1950s, Sonia Manzano, who plays Maria on "Sesame Street," was part of the first generation of children who watched television. Born in the South Bronx to Spanish-speaking Puerto Rican parents, she says that television "gave me a view of the world -- it gave me sort of a sense of what it was to be an American and what that was about.""

This describes the methods:

"The variation Mr. Gentzkow and Mr. Shapiro exploited was the timing of the introduction of TV into different cities. Television began taking off in the U.S. in 1946, after a wartime ban on TV production was lifted. But the Federal Communications Commission stopped granting new commercial television licenses from September 1948 to April 1952 while it made changes in allocating broadcast spectrum. There was a long lag between when some cities got television and when others did.

The economists then looked at results of a survey of 800 U.S. schools that administered tests to 346,662 sixth-grade, ninth-grade and 12th-grade students in 1965. Their finding: Adjusting for differences in household income, parents' educational background and other factors, children who lived in cities that gave them more exposure to television in early childhood performed better on the tests than those with less exposure."

Sunday, September 07, 2008

The 10 Most Affordable Housing Markets

You can find out where they are by reading the following article:

The 10 Most Affordable Housing Markets

But if more people move to these cities, prices in those cities will rise and they won't be very affordable anymore. This illustrates what economist Steven Landsburg calls the "Indifference Principle."

"Except when people have unusual tastes or unusual talents, all activities must be equally desirable."

So unless you really like where you live or you have no interest in moving to these "affordable places," they will not stay very affordable for long. All the people who don't care about where they live and only want to minimize cost will start moving there. But that will drive up costs. If people don't move there because they don't want to move to those cities (like Youngstown, OH or Indianapolis, IN), finding out that they are "affordable" won't have any effect on them.

Thursday, September 04, 2008

Texas economy stronger than most

That is what a current government report says. It does not say, but most likely Texas is doing better than the rest of the country because of higher oil prices. Here is the article:

Fed survey shows Texas economy stronger than most

Tuesday, September 02, 2008

High Gas Prices Spur Sales Of Electric Bikes

This is what economic theory predicts. With higher gas prices, people will seek a better deal somewhere. Here is the link to the article. Electric bikes selling briskly as gas prices climb. Here is a brief exerpt:

"Official sales figures are hard to pin down, but the Gluskin-Townley Group, which does market research for the National Bicycle Dealers Association, estimates 10,000 electric bikes were sold in the U.S. in 2007, up from 6,000 in 2006. Bert Cebular, who owns the electric bike and scooter dealership NYCeWheels in New York, said his sales are up about 50 percent so far this year over last. Amazon.com Inc. says sales of electric bikes surged more than 6,000 percent in July from a year earlier, in part because of its expanded offerings."