EclectEcon

Temporary Break

As regular readers of the EclectEcon have undoubtedly noticed, I'm taking a temporary break from blogging. I have a photo show to get ready to hang on Friday [Cherryhill Library in London, November 1 - December 2]. Also, after a three-year absence from acting, I am now working diligently to learn and develop the role of David Stafford in the Clinton Community Players' production of My Darling Judith by Norm Foster, November 28 - 30 (review of a performance by a different group here).

There are lots of things I want to write about, but I'm just not finding the time to do everything I want to do these days. I expect this break to last only a few days or so, but I really must concentrate on other things right now.

Monetary Roots of the Current Economic Downturns

An editorial in the WSJ nails it.

It lays the blame for the housing bubble at the feet of the US Fed.

The original bubble was in housing prices and mortgage-related assets, which the Federal Reserve helped to create with its negative real interest rates from 2002 into 2005. This was Alan Greenspan's tragic mistake, not that the former Fed chief will acknowledge it.

If the Fed practices "inflation-targetting", the index it uses to measure the rate of inflation should perhaps include a stronger dollop of assets to capture these effects in the future.

But then the editorial severely criticizes the Fed for re-inflating the monetary base beginning in August 2007 as the housing bubble began to burst. This re-inflation led to a secondary bubble in the commodities markets:

As for the second bubble, this one began in August 2007 with the onset of the credit panic. This is Ben Bernanke's creation. The Fed chose to confront the credit crunch as if it were mainly a problem of too little liquidity, not fear of insolvency. To that end it flooded the economy with money, while taking short-term interest rates down to 2% from 5.25% in seven months. The panic only got worse, and this September's stampede finally led the Treasury and Fed to address the solvency problem by supplying public capital and numerous guarantees to the financial system.

...

The Fed's liquidity burst nonetheless sent markets for a 14-month loop ... The Fed created a commodity bubble of record proportions, with oil doing a round trip in a single year from $70 up to $147 and back down to $69 ...

As Congress plumbs the causes of our current mess, the main one is hiding in plain sight: Reckless monetary policy that did so much to create the credit mania and then compounded the felony with a commodity bubble and run on the dollar whose damage is now becoming apparent. The American people intuitively understand what's been done to them, which is why they are so angry. If the next President ignores the monetary roots of our troubles, he is courting the same fate as George W. Bush.

Economics Forecasting:You Haven't Come Very Far at All, Baby

Greg Mankiw, writing in today's NYTimes about parallels between the Great Depression and the current economic situation, said,

... the leading economists at the time, at competing forecasting services run by Harvard and Yale, were caught completely by surprise by the severity and length of the Great Depression. What’s worse, despite many advances in the tools of economic analysis, modern economists armed with the data from the time would not have forecast much better. In other words, even if another Depression were around the corner, you shouldn’t expect much advance warning from the economics profession.

This statement belongs at the beginning of every macroeconomics and econometrics course! Believe me, I'll be using it a lot!

Watching the NFL

I used to be fanatic about watching NFL football games on television every weekend.

Nowadays, I still enjoy watching NFL games on television, but I don't care all that much if I miss seeing some games now and then.

The point of this posting? I have discovered over the past year that it does not matter as much to me which game I watch as whether the game is on a channel we receive in high definition. Lopsided match-up? Teams I know little-to-nothing about? Teams with bad records? It doesn't matter to me: it turns out that inevitably, I end up watching games with those teams on Hi-def rather than watch games on non-hi-def channels.

Loos with Views

I'm not sure why, but perhaps because of all my postings about men's urinals, Craig Newmark sent me this link.

Let me add, though, that even though an Aircast is fairly comfortable, as casts go, it is still not fun walking seven miles to the nearest men's washroom because the one in the economics department is still closed for repairs! It's only been, what? Two months now?

Do you think, maybe, the university admins are trying to tell the economists something? If so, perhaps a good analogy is the movie Major League. And if that's the case all we have to do is, every time someone gets an article accepted in a major journal.....

Impending Doom? The Signals Were There

Here is a piece I wrote over a year and a half ago. If people saw these problems back then, why did it take so long for the market "correction"?

MONDAY, FEBRUARY 26, 2007 AT 12:52PM

Time to Cash Out?

I've been pessimistic about the equity markets for a long time. If you had followed my advice from last year, you'd have partially missed out on a long rise in stock prices. :-(

At this point, Irwin Yamamoto agrees. He has many reasons, listed here, but the best is this:

With all the frenzy, mania and froth, Wall Street failed to take note of how corporate insider selling has increased to its highest pace in 20 years.

He recommends going all cash (plus maybe shorting the market), but I don't think I'll go that far.

Also, see this in The Economist, which points out that margin borrowing is at its highest ratio since the 1920s.

Stratfor on The Jewel of Medina

I posted on this topic last month. Here is a summary from Stratfor, and at the link to their article, you can read their full analysis.

“The Jewel of Medina,” a controversial work of historical fiction by American author Sherry Jones, was supposed to have gone on sale Oct. 15 in the United Kingdom. A series of events, however, have delayed its British release indefinitely. The book, which went on sale in the United States on Oct. 6, describes the life of Aisha, the young girl who became the Prophet Mohammed’s third — and according to many sources, favorite — wife.

Some Muslims have labeled the book blasphemous and have branded the author an enemy of Islam. An associate professor of Islamic history at the University of Texas at Austin said Muslims would find the book very offensive and, in an August interview in The Wall Street Journal, likened it to soft-core pornography.

While the author and publisher have argued that the book respectfully portrays Mohammed and his relationship with Aisha — in stark contrast to the Danish cartoons that have sparked so much protest and violence — the tone of the book is not the real issue. To many Muslims, not only is it offensive to ridicule Mohammed but it is forbidden and considered a dire insult to portray the prophet in any way outside the context of Islamic writings. This insult is magnified when Mohammed is depicted having intimate relations with his wife, a revered figure in Islam who is referred to in many Islamic writings as “Um ul Mumineen” (Arabic for “Mother of the Believers”). Because of this, in all probability many Muslims — not just a few radicals — will find the book offensive.

“The Jewel of Medina” is scheduled to be released in 15 other countries in 2008, including major European markets, Russia and Brazil. There have been no known fatwas, or religious opinions, issued by Muslim leaders calling for action against Jones or any of the book’s publishers at this time. Likewise, a spokesman for the U.S. publisher notes that Jones has not personally received any threats related to the book. The book already has prompted one amateurish attack against the home of its British publisher, however, and we believe that as the issue percolates, we will see more violence in the United Kingdom and elsewhere in connection with the book. [emphasis added]

          

A Case for the Human Rights Tribunals in Canada?

If I were a student from a former-soviet-union country or from the middle east, I might feel upset, humiliated, and psychologically harmed by this:

The prevailing assumption in Canadian culture is that rules are
reasonable and should be followed. By contrast, students
from post-communist societies and countries with
totalitarian regimes will rarely take program regulations
at face value. They are more likely to challenge rules
because they came from an environment where
unreasonable rules controlled every aspect of life and they
could only survive by breaking the rules at least some of
the time. These students are likely to regard rules as
guidelines to be followed when necessary, but ignored
when possible.

Similarly, in Middle Eastern cultures the rules are often
negotiable, and exceptions to rules are frequently made
based on consideration of individual cases. So declaring
that “the class is full” basically opens the door for students
to negotiate getting into the class, because in their culture
“no” is rarely absolute and there is often room for bargaining.

The above quotation is from the lead article in Reflections, a newsletter put out by the UWO teaching support centre. Is the article really saying we shouldn't trust foreign students from certain cultures? The article is replete with these and other stereotypical statements about people from non-North-American cultures.

Profiling, negative characterizations, etc. Sounds like a strong prima facie case of human rights abuse to me.

Addendum #1: Oh no! If Maclean's was taken before the tribunal merely for republishing a portion something Mark Steyn wrote, does that mean I'm in trouble for posting the above quotation on my blog??

Addendum #2: There is some additional discussion about this item, and its parallels with the Maclean's case, here.

Things That Make It All Worthwhile

Despite not liking some things about my job (setting and marking exams, fielding whiny complaints, administrivia, etc.), I still love teaching. And here is a major reason: a student who really gets "opportunity costs" and lets me know:

[W]hen I signed up for the course it was literally my very last choice, I remember thinking I’ll just simply get through this and hopefully it won’t be too boring.  I never once expected it to be as fun as it has been. You make learning economics not only funny but also memorable.

I was reading a blog on [a media] website [recently], and the blogger was talking about whether he should write more blog entries or more editorial pieces and the cost of doing either and all I remember thinking was: “THAT’S THE OPPORTUNITY COST!! THAT’S THE OPPORTUNITY COST!! THAT’S THE OPPORTUNITY COST!!”

And then I thought: “Why am I so excited about this?” I think it may have been because it was the first time economics kind of hit me in the face; since then I now see economic things (for lack of a better term) everywhere and every time I do, I think of you and what we’ve learnt in class (and your appearance in the One Thing video). I’m very glad that my “last resort” course selection turned out to be so entertaining while remaining informative.

I think I'll Wait

Ms. Eclectic has an iPhone. She loves it, but it looks to me as if learning to use even most of its features will require a time investment I do not wish to make, at least not yet.

When I read about the Google G1 competitor to the iPhone, I thought maybe I'd look into it. I did, enough to read this, which means I will be waiting for something different:

It also can't synchronize any data at all directly with a PC or Mac. For instance, it can't sync with Microsoft Outlook or Windows Media Player on a PC, with Apple's iCal or Address Book programs on a Mac, or with iTunes on either Windows or the Mac.

I'll pass, for now.

Just Call Me "Thumper"

Over two months ago, I injured my foot while out hiking with my son and his daughters. The x-rays were negative, and I was told it was a sprain. However, the injury has returned with little provocation several times since then.

Finally I asked Jack (a retired physician) about it, and he pointed out that stress fractures of the foot do not usually show up on an x-ray; he also said that if it was a sprain, the injury would not likely seem to be recurring.

So yesterday I went to see my family physician (what a way to spend one's 87th birthday, eh? -- oh, and thanks to everyone here and on Facebook who sent their greetings!). He agreed that it sounds as if I have a stress fracture. He said that we'd have to do a bone scan to make sure.

Yeah, sure. By the time I get scheduled to have that done in this amazing Canadian medical system, I'll have re-injured my foot several more times. So we (he's a good, collaborative sort of guy) decided to treat it presumptively. He prescribed an Aircast:

It's a neat sort of cast that I can easily remove at night, when showering, and other times, if necessary, and it should help immobilize the foot while it heals. It has little air things on each side that I can inflate to adjust the fit. This is the closest I will ever come to wearing "Air" Nikes.

Meanwhile, getting around with it is quite easy. .... except it thumps a bit on the hardwood floors.

With Friends Like These, Who Needs Enemies?

Some friends, noting that according to Facebook I turned 87 years old today (that McCain guy is just a pup!), gave me this birthday card:

Teaching "The Efficient Markets Hypothesis" with a Straight Face

One of the central concepts in Finance Theory is "the efficient markets hypothesis" which says, in a nutshell, that if there is money to be made doing something, resources will flock to that something with the result that pretty much all investment opportunities will yield the same rate of return after an adjustment for risk. Further wrinkles of the hypothesis show that the risk adjustment is linear: i.e. as the risk (measured as variability) of an asset changes, market forces will adjust asset prices  so that the expected return adjusts by some constant amount.

Put differently (from Wikipedia):

In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient", or that prices on traded assets, e.g., stocks, bonds, or property, already reflect all known information. The efficient-market hypothesis states that it is impossible to consistently outperform the market by using any information that the market already knows, except through luck. Information or news in the EMH is defined as anything that may affect prices that is unknowable in the present and thus appears randomly in the future.

I have taught courses in corporate finance twice in my life, both while visiting The University of Guelph: once in 1984 and again last fall (2007). Given my general feelings of bare adequacy in the area, I am delighted and relieved that I am not teaching the course now. It would be very difficult to cover this material with a straight face.

If the efficient markets hypothesis holds, and if investors are generally rational maximizers with rational expectations, then how did the current financial situation evolve? Why was there so much systematic error or bias for so long in investors' assessments of assets? Why were there not more smart people betting against the trend and the euphoria of the markets?And why didn't these contrary bets play the auto-correction role normally expected in financial markets?

Nearly four years ago, Barry Ritholtz tried to answer these questions on his blog as he criticized EMH. At that time I was unconvinced by his arguments, and to be honest, I still am somewhat skeptical the explanations offered in "behavioural finance"; I find it really hard to understand why so many investors might leave so much money lying on the table for any length of time without realizing it is there. To personalize it, why didn't more people, like me or like JD, move a sizable bunch of their retirement assets out of equities and into less risky assets?

It is really hard to preach and teach EMH and rational expectations when so few people bet so little against the market, especially after the Northern Rock debacle over a year before the market meltdown.Why did it take so long for stock indices to drop and for the housing derivatives market to be exposed as the modern-day equivalent of the emperor's new clothes? Posner and Becker attempt to answer these questions, but even they are not sure (still, their thoughts on this topic are still worth reading).

Even if prior to the summer of 2007, people did not see the housing crisis coming and did not raise their eyebrows about all the NINJA mortgages, the weird derivatives, and the alleged insurance schemes backing them, why didn't the Northern Rock episode set off more alarm bells?

Is there a chance that the episode did, indeed, ring alarms loudly but that decision makers continued to gamble, hoping to get out of the market before the others did? After all, stock market indices continued to rise until October, 2007, indicating that most people seemed unconcerned about the possibility of imminent collapse of the house of cards.

Or is it possible that people saw the meltdown coming but expected that, as has happened, the gubmnt would bail out the major mortgage and derivative insurers (and many but not all of the holders of this wacko paper)? Perhaps the EMH is still a pretty decent theory unless the gubmnt is involved in some major fashion.

At any rate, I sure am glad I'm not teaching a finance course this term. It would be a case of the blind leading the blind.

Note: I pretty much learned finance by teaching the course back in 1984. I had done some research before then that relied on many principles in finance theory, but I had never had a formal course in financial theory. But that's no big deal. I have never had a course in The Economics of Sports or in Economic Analysis of Law, either, and those are the main courses I have been teaching over the past decade or so. One nice thing about a lengthy academic career is the flexibility to change fields as one's interests change.

Good News or Just Wishful Thinking?The Effect of Falling Oil Prices in Venezuela

The recent precipitous decline in oil prices (relative to their highs in July) will surely require Hugo Chavez to scale back his spending in (and out of!) Venezuela. But how serious will the effect be? From the WaPo,

The price of a barrel of oil has fallen from $147 in July to less than $70, and analysts say the drop is a blow to Chávez's free-spending administration, which depends on oil for 50 percent of government revenue and 95 percent of its export earnings. ...

Venezuela could be particularly exposed if the worldwide financial meltdown continues. That would slow economic growth, reduce the need for petroleum products and further drive down oil prices.

Venezuela exports about 1.4 million barrels daily to the United States, about 10 percent of U.S. oil imports. The dire predictions come as the inflation rate in Venezuela has surpassed 36 percent and the black market rate for dollars has shot well beyond the fixed government rate. ...

PFC Energy said in a report that oil must be at least $94 a barrel to ensure Venezuela's macroeconomic stability this year and generate enough money to pay for imports. ....

Nigeria needs the barrel to be at least $68 to cover its imports, while two Persian Gulf states -- Saudi Arabia and Iran -- need the price to remain above $55. ...

"Venezuelan fiscal profligacy and its huge off-budget populist programs has left it very little room for error," the PFC report said.

My prediction: if the price of oil stays under $75/barrel for long, look for even more price controls and other gubmnt restrictions in Venezuela. Further, the price controls, etc., will be enforced more strenuously (perhaps even more ferociously). And anticipating popular unrest, Chavez will tighten his reins on the police and military. Things will not be nice for the Venezuelan version of Joe, the plumber.

Maybe it will be good for most of us in the rest of the world if Chavez is eventually deposed, but the process will not be pretty, I fear.

More: The Emirates Economist has much more on the effect of declining oil prices on oil-producing economies.

The Aviv String Quartet Does Shostakovich

Last evening I attended a concert by the Aviv String Quartet, hosted by the Kitchener-Waterloo Chamber Music Society. It was superb.

In this first concert of their doing the full series of Shostakovich's String Quartets, they played his first, fourth, and fourteenth. That was quite a mix. The first started out as a music school assignment, the fourth was written during a period when Shostakovich was out of favour with the Soviet oligarchs, and the fourteenth was written during a personally dark time in the later part of his career.

The Aviv Quartet did an excellent job. I was especially impressed with their performance of the first quartet, which I clearly preferred to the other two. Their playing was precise, yet not rigid; passionate when appropriate, yet never over-the-top emotive. And their sense of intonation was superb, especially given the temperature changes in the concert venue.

[Addendum: Let me insert here that the printed programme notes provided were superb, as was the introduction to the evening presented by the first violinist.]

They will be doing the remainder of Shostakovich's string quartets over the next week.

20  mon Quartets Nos. 7, 13, 2

21 tues Quartets  Nos. 6, 9, 3 

23  thu Quartets Nos. 10, 12, 5 

24 fri Quartets Nos. 8, 11, 15

Each concert:  $30 (sr $25; st $20)

For more information, visit the website of the Kitchener-Waterloo Chamber Music Society. I'm told that there are still a few tickets available for the concerts, but the last two are likely to be sold out in the next day or so. Last night's concert was sold out, and for good reason. The group is worth hearing.

Alleged IQ Test

Actually, much of it strikes me more as a knowledge test, not a reasoning or thinking test. Anyway, I scored 28 out of 30, but guessed on two of the questions I got right.
The test is here [h/t to Jack].

A Zinger from Melanie Phillips

If, like me, you are becoming disillusioned with John McCain for his anti-freedom and erratic interventionist views, and you are beginning to think, with some trepidation, "Well, Obama does seem to have some pretty decent economic advisors, and maybe he wouldn't be so bad," and if you are voting in the US election, read this! Near the end of documenting Obama's guilt-by-association-participation, Melanie Phillips says,

Please don’t get me wrong. I am not a particular fan of John McCain. I think he is indeed erratic, and has run a lousy campaign. And the exhausted Republicans deserve to lose. But the prospect of Obama in the White House as America’s first far-Left radical president is deeply worrying.

Frosty for Shosty:The Shostakovich String Quartets

I have always liked about 2/3 of the music of Shostakovich. Over the years, though, the composition of that 2/3 has changed as my experience, knowledge, and tastes have changed. Oddly, I still like his First, Fifth, and Ninth Symphonies, but I am no longer at all enamoured of the Seventh Symphony. And his cello concerto is great, too.

Beginning tomorrow evening, I will be attending a series of concerts in Waterloo, Ontario, featuring the Aviv String Quartet performing all of Shostakovich's String Quartets.

18  sat Quartets Nos. 1, 4, 14  

20  mon Quartets Nos. 7, 13, 2

21 tues Quartets  Nos. 6, 9, 3 

23  thu Quartets Nos. 10, 12, 5 

24 fri Quartets Nos. 8, 11, 15

Each concert:  $30 (sr $25; st $20)

For more information, visit the website of the Kitchener-Waterloo Chamber Music Society.

   .   

Margaret Wente on Heather Malice Mallick

My friend, Robert, refers to CBC columnist Heather Mallick as "Heather Malice". Last month Heather Mallick wrote a scurrilous on-line column for the CBC, trashing Sarah Palin.

Last week, the CBC removed the column from its website, with apologies [some details are in the link, below, or click here for the NYTimes version].

Margaret Wente observes,

It's fun to bash Sarah Palin. I should know. I've been doing it for weeks. But nobody has bashed her quite as viciously as a semi-obscure columnist named Heather Mallick....

The CBC's online commentary arm is not exactly the flagship of the network. It is a backwater that has served as a sort of semi-retirement home for aging lefties (think Judy Rebick) who could no longer find an outlet in the mainstream media and, one suspects, supplied copy cheap....

I'm not feeling too sorry for Ms. Mallick. She is a sour, narrow-minded writer - the kind of who makes Michael Moore look like a world-class wit. Her reflexive anti-Americanism is heavy-handed and stale, to say nothing of casually racist. There are many, many ways of dissing Sarah Palin. But Ms. Mallick's naughty, coarse puerility is not among them.

meow.

Crude Oil Prices and Economic Policy

Now that crude oil prices are roughly half of what they were six months ago, I want everyone who favoured a windfall profits tax back then to pony up for a subsidy to the oil companies now.

Oh? It isn't symmetrical? Why not?

My All-Time Favourite Cover of The Economist

Back in September of 1994, the North American version of The Economist arrived with this cover:

I immediately called the offices of The Economist in England and begged them for a poster-sized copy of the cover. They were non-plussed and had no way to refer me to the photographer or anything. They did, however, send me a slightly enlarged colour photocopy of the cover, and it still graces the wall of my home office.

They told me then that the cover had generated a lot of controversy, that many of their readers were quite amused by it, but that others thought it was in poor taste.

[My strong interest in this cover stemmed from a long-running series of jokes and practical jokes exchanged between my father-in-law and me, not from beastiality voyeurism.]

More on Global Cooling and Arctic Ice Growth

Yesterday, shortly after my posting about Arctic Ice, Eva sent me a link to this story. The essence is that this past summer in Alaska has been among the coldest on record, leading to less melting and more cumulative snow build-up. Some excerpts:

Two hundred years of glacial shrinkage in Alaska, and then came the winter and summer of 2007-2008.

Unusually large amounts of winter snow were followed by unusually chill temperatures in June, July and August. ...

Never before in the history of a research project dating back to 1946 had the Juneau Icefield witnessed the kind of snow buildup that came this year. It was similar on a lot of other glaciers too. ...

[quoting US Geological Survey glaciologist Bruce Molnia] "What we're talking about to (change) most of Alaska's glaciers is a small temperature change; just a small fraction-of-a-degree change makes a big difference. It's the mean annual temperature that's the big thing.

"All it  takes is a warm summer to have a really dramatic effect on the melting.''

Or a cool summer to shift that mass balance the other way.

One cool summer that leaves 20 feet of new snow still sitting atop glaciers come the start of the next winter is no big deal, Molnia said.

Ten summers like that?

Well, that might mark the start of something like the Little Ice Age.

During the Little Ice Age -- roughly the 16th century to the 19th -- Muir Glacier filled Glacier Bay and the people of Europe struggled to survive because of difficult conditions for agriculture. Some of them fled for America in the first wave of white immigration.

In response to this article, our colleague Chris Essex has written (via e-mail):

I have issues with this story. It suggests two things that are wrong:

            1. Glaciers are thermometers. They are not. Unfortunately, this is a common mode of argument, even for people who should know better.  Snowfall can increase or decrease independently of small increments in temperature averages or even temperature unaveraged, hence glaciers can grow or decline independently of the such increments. This is not even considering the subtleties of cloud cover, and seasonal timing of snowfall, and more.

            2. It suggests that all glaciers are doing the same thing. They are not. There have been glaciers that have been growing during the gw scare. And I am sure that some even shrank during the last ice age. There has been lots of cherry picking on everything to do with ice. I was told a story about how a certain presidential candidate, who shall remain nameless, was taken to a retreating Alaskan glacier. He became quite exercised about global warming as a result. This was less than a few kilometers from glaciers that had been growing all along.

Chris is surely right about the cherry-picking of data by the major media. We read and hear there frequently about isolated data consistent with the global-warming hypothesis but rarely do we see news reports with information like that in the above quotation or in yesterday's posting. As Chris and Eva both agreed in later messages, if the glaciers in Alaska had shrunk that much last summer, it would have been a major media story.

For more of the insights from Chris Essex and Ross McKitrick, see Taken by Storm, their prize-winning book which takes a critical look at global warming issues.

Warm Fuzzies from Captain Capitalism

[I]f you want your assets to have value, heck if you want the country to have value, you have to (I'm sorry) PRODUCE SOMETHING OF VALUE!

Never mind, nobody listens to me. Heck, how about instead of being a cold-hearted, reality spewing economist, I capitulate, become a politician, and tell people what they want to hear?

I promise warm fuzzies for everyone as we major in peace studies and vote for hope and change! If we care, social security will solve itself! Yea for us! We exist! YEA!!!!!!

Macroeconomics: A Travesty; All Gobbledy-Gook

For years I have opened any macro-economics course I have taught with a series of disclaimers, citing the old joke as if it actually once happened to me:

Former Student (visiting me in my office and looking down at my desk): Professor, I see you're still giving the same old macro-economics exam questions you gave us thirty years ago.

Me: Yes, but the answers are different now.

I then encourage healthy skepticism on the part of the students. Arnold Kling captured much of own skepticism last weekend:

If you stacked up everything written by the leading macro folks of my generation and later (actually, starting a few years earlier also), you would have nothing but an enormous baloney sandwich. Ordinarily, I don't dwell on the fact that these people who were no smarter than me back-scratched each other into the best journals, the prestigious professorships, the important conferences, etc. But sometimes, especially now, I think about how badly they have failed intellectually. They are the precise academic equivalent of Wall Street executives who enjoyed golden parachutes while bankrupting their firms.

Not that I think all macro is voodoo. Some concepts that have been important might include:

• the importance of money
• the changing determinants of money and velocity
• the importance of the role of expectations in both micro and macro
• the aggregate-demand/aggregate-supply models
• reasonable attempts to distinguish between rational, adaptive, and instantaneous expectations.

But so much of what disguises itself as macroeconomics these days is just plain gobbledy-gook.

Global Warming and Arctic Ice

More evidence of global cooling from Nature magazine,

Arctic ice shrinks less this year than last

Sea-ice cover in the Arctic has reached its annual low — and not broken last year’s record of the smallest ice extent since satellite records began, says the US National Snow and Ice Data Center in Boulder, Colorado. Ice cover began to grow again from 10 to 14 September after bottoming out at 4.52 million square kilometres, the centre says. That’s 9.4% more ice than last summer’s minimum. Contributing factors include the fact that there were fewer warm days in the Arctic region this year than last, and also that winds blew in different directions instead of packing the ice together into a small area. The International Arctic Research Center in Fairbanks, Alaska, also recorded a minimum last week: 4.71 million square kilometres on 9 September. [emphasis added]

On a related theme, noted environment writer Bjorn Lomborg doesn't question the threat or existence of global warming (despite serious questions raised above and elsewhere) but doubts whether the major economies can or should try to do anything about it.

Marxists, Capitalism, and the Plummeting Stockmarket

At The University of Western Ontario, we have a defined contribution pension system, which means each person can choose from a menu of options to decide how his/her money is invested; and how much is received post-retirement depends on how much has been contributed to the plan and how well our investments have done.

I have no first-hand knowledge of this, but I'm told that a number of otherwise Marxists or quasi-Marxists here (in other departments, of course) have left all of their pension funds invested 100% in equities over the past few years.

As a result of the recent stock market decline, these folks lost as much as 40% of their pension funds during the past year. Wow!

Of course it is not their fault for having taken on the extra risk of holding equities; and it's not their fault for having naively expected stock markets to rise forever. Rather, their losses are clearly the result of the evils of capitalism and the flaws in the market economy.

Funny Money Market Funds: Beware of Wolves in Sheeps' Clothing

I have a friend who recently retired. Because his pension plan is a defined benefits plan, and because he is skeptical about whether his former employer will be able to meet its pension obligations, he has been saving considerably for retirement on his own as well. Last weekend, in response to some e-mails we have been exchanging, he sent me this (reprinted with permission):

Twelve months ago, as the s began to hit the f, I converted the entire portfolio of XXX and Associate International Risk Management and Fun Fund into money market funds.  I mean, what could be safer?

As it turns out, plenty!  Here's the story.

About four months ago, I heard tell of some money market funds that took the very rare step of lowering their unit prices to take account of some losses.  Oh, oh!

So, I called a broker at one of my funds and asked of what exactly the fund assets consisted.  After the usual garbled wool that made it clear he had no idea but needed to sound like he did, I decided to check this out for myself.

It turned out that much of what, say, Fund A holds is not just short term debt but also units of Funds B, C, D, etc.  Likewise Fund B holds lots of units of Funds A, C, etc.  You get the picture: everybody holds everybody else's units as assets, which is the equivalent of fractional reserve banking--without the protection (psychological, at least) of deposit insurance.

Therefore, I moved everything again, this time into guaranteed investment certificates (GICs) that are covered by the Canadian Deposit Insurance Corporation (CDIC).  It's worth noting that, in the U.S., insurance was very recently extended to deposits in money market funds, and I think I know why.

Ohhhh very scary, and it's not even Halloween yet.

He later added,

I think it's important that people understand what many of these money market funds have been up to.  Talk about moral hazard!

And we all thought that money market funds would be immune from the vagaries and risks of holding stock.

Paul Krugman, Nobel Laureate in Economics

My younger son, Adam Smith Palmer, wrote to ask me what I thought of the award to Paul Krugman since Krugman had not been at the top of my list nor at the top of many others (though some did, indeed, have him right up near the top). Here, somewhat expirgated, is my reply, which is a bit different from many:

I guess he’s deserving. I don’t much care for his editorials, though, because he has gone off the deep end in the past five or so years with his vitriolic hatred of George W. Bush. In his NYTimes columns he has said some pretty amazingly stupid things. It used to be great sport to read a NYTimes column and then find things he had written only five years earlier in academic journals that were in direct contradiction to his political diatribes.

I had thought that if they were going to give it to someone in international trade, they’d either give it to Bhagwati (as I said on the blog) or at least include him as a co-winner. With this award to Krugman, I would guess the odds of Bhagwati's winning anytime in the next five years just plummeted.

Here is my take about what happened:
The Swedish committee has always been pretty left-wing, so I shouldn’t have been surprised by this award. Anytime they give it to someone who is not near the head of most people’s lists, the person turns out to be a European unknown and/or someone who is slightly to the left of the rest of the profession. Also, that they gave it to Paul Samuelson nearly ten years before they gave it to Milton Friedman was a pretty good indicator of their biases way back then.

Two excellent summaries are at Marginal Revolution:

1. http://www.marginalrevolution.com/marginalrevolution/2008/10/what-is-new-tra.html
   That piece is a superb summary of what Krugman did for trade theory.


2. http://www.marginalrevolution.com/marginalrevolution/2008/10/paul-krugman-wi.html
   This second piece is a very good summary of everything about Krugman’s career.

I must say, Krugman was concerned about the derivative explosion as long as five or more years ago. Unfortunately, his concern was so heavily laden with polemics that too many of us wrote him off. Fortunately, he wasn’t the only person who was concerned, and at least some of us listened to the others. Too bad more people weren’t concerned, eh?

Update: Russ Roberts' assessment of the prize says it all very well.

Who Is Next? Will the Federal Gubmnt Bail Out the States?

With banks actually being induced to hold excess reserves on deposit at the Fed rather than place them in the money markets, and with nearly all investors being very wary of lending to just about anyone, many of the US state gubmnts are in grave danger of not being able to re-fund (i.e. re-borrow as their i.o.u.'s come due) their debt -- they fear they will not be able to borrow enough to meet their operating expenses.

Of course what they really mean is that they fear they will not be able to borrow at the once-low interest rates and that they do not wish to pay a risk premium to borrow on the open market.

And so they are going to the federal gubmnt, hat-in-hand and glib-gruesome-dire-consequences-story-at-the-ready, to get the federal gubmnt to buy their debt.... temporarily.

From Business Week [h/t to Jack]:

California is going to Washington, D.C., to ask for $7 billion to cover its budget shortfall. Otherwise it won't be able to pay for its teachers, cops, firemen, and other essential services. Unfortunately, California won't be alone. A number of other states are experiencing a huge dive in tax revenue and could be going cap in hand to Uncle Sam alarmingly soon. How bad could it get? The potential cost for all the 31 states facing both major and minor shortfalls could be as much as $53.4 billion.

And it is not just California, even though the NYTimes seems to imply it is.

So as I see the situation, the residents of those states which practiced poor risk management in their funding decisions are now expecting all taxpayers, including those in states which did practice sound risk management, to assume some of the risk attached to the riskier states' debt issues.

What's another $53.4 billion? It looks as if the US might have taken another step toward the slippery slope of increased elitist interventionism and rent-seeking. Why should any state practice fiscal prudence if the primary result is that the taxpayers of other states end up having to bear the risk of financial imprudence?

Happy Thanksgiving

Today is Thanksgiving in Canada*. We all have a three-day weekend to celebrate, but many people take Friday off, too, and end up with a four-day weekend.

The first year I taught in Canada, I had a class that met at 3pm on MWF. I naively did not cancel class the Friday afternoon before the Thanksgiving weekend, and only 10 out of 75 students showed up.

I've learned my lesson -- no more Friday classes before long weekends.

Now to see what happens with my late Thursday afternoon classes....

*In one place, Wikipedia says (incorrectly [Update: said. It has now been corrected]) Canadian Thanksgiving was on Sunday, October 12th, this year. In a text box, it has the correct date.