EclectEcon

Stress Tests, Risk, and Insurance

Why all the gubmnt intervention in the markets now? Why haven't the regimes of the past been sufficient for today's market conditions?

Stress tests for banks are a case in point. Surely we should expect that people who lend to banks would do a modicum of due diligence to make sure the probability the bank will go under would be miniscule. Shouldn't we?

Oops. I lend to banks all the time by depositing my money with them and I NEVER do a stress test. I never even consider the possibility that my bank might default on my demand deposits or my notice deposits. The banks have deposit insurance, and deposit insurance means I don't have to waste my time doing a stress test of every bank with which I might have dealings. Furthermore, due diligence by a deposit insurance company means that each depositor doesn't have to do its own due diligence: the insurer can capture some important economies of scale on behalf of all depositors.

Okay, so my deposits (i.e. my loans to banks) are insured (whether I like it or not). Then surely the insurance company is doing its own due diligence, making sure the banks remain sound and able to repay their depositors.

Oops again. Most bank deposits are insured by the FDIC in the US, a quasi-gubmnt institution, which ultimately means it is the taxpayers who are on the hook for risky decisions made by bankers. And even if the deposits were insured by private corporations (AIG's credit default swaps were a type of private insurance after all), then what happens if the private insurers take on too many risks? Once again the taxpayers are on the hook.

Cute, isn't it: if the banks and their insurers take risks and make money, they (and their stockholders) earn a lot of money. But if the banks and insurers take risks and lose money, it is ultimately the taxpayers who bear the downside risk.

And it is this asymmetrical reward-to-risk structure that induces (and in many people's minds justifies) gubmnt intervention in the form of stress tests for banks.

My own preference would be for lenders and insurance companies to bear the downside risk that accompanies their decisions. If they knew the taxpayers were not prepared to bail them out, they would be forward-looking and we would not have nearly so massive clean-up operations. But politically this probably isn't going to happen.

And I guess that is why we need diligent oversight on behalf of taxpayers. As a libertarian, I must say this rankles. I would prefer less gubmnt, but at the same time I understand our unwillingness politically to let small depositors suffer when bankers screw up.

But maybe if the bankers and insurers who screw up risked losing everything they own, they, themselves, might be more concerned about downside risks. And herein lies one possible solution for the future:

Stockholders and bond holders must be required to lose big from the current financial crisis. If they do, then in the future, they will work carefully to design incentive compatible reward structures for the executives of their firms so that the executives will face enormous losses if they screw up. This is at least a partial market solution to the insurance and risk problems that have evolved.

Changing Times

Two years ago during a final exam I was administering, I surreptitiously checked the e-mail on my laptop once while the grad TAs kept watch to try to minimize cheating.

Yesterday, we all had iPhones, Blackberries, and iTouches and we were all checking our e-mail and favourite sites throughout the exam we were administering.

"The times, they are a-changin'..."

Didn't stop us from catching some flagrant cheating, though.

So how do you construct a meaningful price index with all this new technology? It seems to me the best technique would be to use a rolling market basket instead of using market baskets that change only infrequently.

Summers, Sleep, and the Economy

Jack says this came from Glenn Beck, but I am unable to find the precise link (many very similar things here):

"One of Obama's top economic advisors, Larry Summers, fell asleep during a meeting on credit card companies. Must be tough to stay awake when all the meetings are the same -- new day, new industry to socialize. Not sure how Larry could be tired -- it's not like he's up all night thinking of new inventive economic strategies. All they ever do is 'how much does that cost? Ok sure, spend it. Don't have it? Ok sure, print it then spend it.' "

Serious Questions about Wind Turbines

A recent C.D.Howe Institute release, authored by Michael Trebilcock, raises serious questions about the efficacy and efficiency of wind turbines. His five major objections are:

1. Industrial Wind Turbines Have Minimal Impact on Carbon Emissions
2. Industrial Wind Turbines Are Uneconomic
3. Industrial Wind Turbines Cause Insufficiently Researched Health Effects
4. Industrial Wind Turbines Have Adverse Effects on Adjacent Property Values
5. The Decision-making Process is Undemocratic and Will Undermine Efficient Regulation

Trebilcock raises important questrions in his explanations, but I especially like his conclusion, in which he emphasizes how bad politicians are at picking winners:

Good Politics, Bad Policy
In debates over climate change, and in particular subsidies to renewable energy, there are two kinds of green. First there are some environmental greens who view the problem as so urgent that all measures that may have some impact on greenhouse gas emissions should be undertaken immediately, whatever their cost or their impact on the economy and employment.16 Then there are the fiscal greens, who being cool to carbon taxes and cap-and-trade systems that make polluters pay, favour massive public subsidies to themselves for renewable energy projects, whatever their relative impact on greenhouse gas emissions. These two groups are motivated by different kinds of green. The only point of convergence between them is their support for massive subsidies to renewable energy (such as wind turbines). This unholy alliance of these two kinds of greens (doomsdayers and rent seekers) – a classic Baptist-Bootlegger coalition, harking back to the Prohibition era – makes for very effective, if opportunistic, politics (as reflected in the Ontario government’s Green Energy Act), just as it makes for lousy public policy: politicians attempt to pick winners at our expense in a rapidly-moving technological landscape, instead of creating a socially efficient set of incentives to which we can all respond. (emphasis added)

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Not a Completely Ringing Endorsement

Mountain Equipment Co-op, a Canadian retailer of equipment for mountaineering, camping, hiking, etc, has been under considerable pressure to stop carrying merchandise provided or manufactured in Israel. In its most recent statement, MEC has refused to bow to this pressure. So far so good. But read the entire text of the MEC statement. It is not all that strong a rebuke of the anti-Israel letter-writers. Here is an excerpt, courtesy of a regular EclectEcon reader:

MEC is neither a political activist group nor a human rights body.  Nonetheless, we believe business can and should improve the human condition behind manufacturing.   To this end, MEC takes a Canadian and international view of our global supply chain. Just as creed and country are not barriers to being an MEC member, we do not divide our supply chain along political lines. In short, we will not take sides in the Israeli-Palestinian conflict. Our human rights efforts are squarely focused on our supply chain—on working to improve the factory conditions and treatment of the workers that make MEC-brand products. As much as this is cowardice to some or a sell out to others, it is our conviction and our intent is to not veer from this belief.

I must say, though, that I like the economics of their position: increasing the demand for products from a country tends to make the lives of people working there better off than they would be without the business. I have been a member of MEC for nearly 20 years. I am delighted that they didn't cave in to the anti-Israel campaign, but I wish they had taken an even stronger stand.

Major Brands Expected to Disappear Soon

Jack recently sent me this article that predicts the following 12 major brands will disappear soon due to economic conditions or mismanagement that cannot be covered up in a recession:

1. Avis/Budget (CAR)
2. Borders (BGP)
3. Crocs (CROX)
4. Saturn (GM)
5. Esquire Magazine (Hearst)
6. At least one of Gap (GAP) Old Navy and Banana Republic (all owned by GAP)
7. Architectural Digest Magazine (Conde Nast)
8. Chrysler (Chrysler LLC)
9. Eddie Bauer (EBHI)
10. Palm (PALM)
11. AIG (AIG)
12. There is almost no question that two of the large US flag carriers will have to merge to avoid the bankruptcy of another American airline. United Airlines (UAUA) is among the three weakest carriers in the US. AMR (AMR) and US Air (LCC) complete the list.

The explanations are both amusing and illuminating.

McDonald: (verb) to take children to McDonalds

I had not realized when I took on my most recent nanny-temp job with my granddaughter last week that she was a McDonalds virgin. But given that she can walk and sort of talk a bit at only 11months old, I figured it was time for her to learn the joys of eating at McDonalds.

So last Saturday, I encouraged her Mom and Dad (Adam Smith Palmer) to sleep in while I took their daughter to McDonalds for breakfast. We had two egg mcmuffins and a large coffee.

The large coffee was for me. My granddaughter ate the eggs from both egg mcmuffins and the bottoms (with the neato processed cheese) from one and a half of them. She loved them, as you can see from the photo.

And she also loved watching the other children there who were being McDonalded by a parent or grandparent.

David Ricardo

David Ricardo was born on or about this day in 1772. In my own training, I learned the most about Ricardo for his work in international trade and his development of the theory of comparative advantage (which really helps us understand all exchange, not just international trade). But his earlier work also discussed basic monetarism, pointing out that the higher prices in England were a result of the Bank of England's printing (and circulating) more bank notes and extending more credit. For more, see this.

And let us not forget the recently popularized concept of Ricardian Equivalence, according to which, when the gubmnt debt increases, so does personal saving as people save for the anticipated higher taxes in the future to cover the increased debt. Ricardo rejected the idea after suggesting it, and surely the US experience of the past decade must cast serious doubt on this concept as both the US gubmnt debt rose and personal savings fell (I know, one reason might have been the housing bubble, but that cannot possible have explained the lack of a perfect correlation between gubmnt debt and personal savings over the past several decades). As usual, there is a good summary and review at Wikipaedia.

Back when Ricardian Equivalence was the rage in economics, several colleagues asked me, "When the government debt increases, don't you save more in anticipation of having to pay higher taxes in the future?"

My flip response was, "No. I spend more so I won't have anything left for the gubmnt to tax in the future, but you go right ahead and save a bunch so you can cover all the taxes that will be collected from the savers, and I'll enjoy all my spending now while taxes are lower."

Note: I think so highly of David Ricardo's contributions to economics that I named one of my blog-sons after him....

This Is GOOD News: US to Boycott Durban II

From Huffington Post (h/t to Jack):

The Obama administration will boycott "with regret" a U.N. conference on racism next week over objectionable language in the meeting's final document that could single out Israel for criticism and restrict free speech, the State Department said Saturday.

The decision follows weeks of furious internal debate and will likely please Israel and Jewish groups that lobbied against U.S. participation. ...

The administration had wanted to attend the April 20-25 meeting in Geneva, although it warned in late February it would not go unless significant changes were made to the draft text.

Some revisions _ including the removal of specific critical references to Israel and problematic passages about the defamation of religion _ were negotiated for which State Department spokesman Robert Wood said the administration was "deeply grateful."

But he said the text retains troubling elements that suggest support for restrictions on free speech and an affirmation of the findings of the first World Conference Against Racism, held in Durban, South Africa, in 2001 that the U.S cannot endorse.

"Unfortunately, it now seems certain these remaining concerns will not be addressed in the document to be adopted by the conference next week," Wood said in a statement. ...

Concern is high that the meeting may descend into heated debate over Israel that marred the last such gathering eight years ago, especially since Iran's hardline president _ who has called for Israel's destruction _ will attend.

When there are so many countries leading this committee who, themselves, tolerate and/or promote such flagrant human rights atrocities, I never could imagine that the US could have any impact on the outcome of Durban II. At first, it distressed me that the Obama regime did not see this. But maybe this late-date pull-out may have some desired it impact. It says, "We gave it a fresh attempt, and we're still upset with the conference," and that might have some impact in the rest of the world. Might.

Update #1: I have the headlines from the NYTimes and the Washington Post both sent to me via e-mail each day. Both newspapers covered this story, but I am puzzled and disappointed that this development was not among the top features in an otherwise comparatively slow news day for either of these major US news sources.

Update #2: And now Australia and The Netherlands have also announced they will not attend Durban II. For more, see this from CNN (h/t to Clive). Whether it was planned or not, it looks as if Obama's apparently naive strategy is having a very desirable impact. Let's hope others follow the lead of Canada, who announced long ago that it would not participate in this travesty.

29 Years Ago Today

Zimbabwe obtained its independence from England. What a tragedy that has evolved into.

But just because Mugabe and his thugs ruined the lives of millions of people, and just because by most  ex post reckonings the people of Zimbabwe would have been much better off under continued colonial rule by the Brits, that does not mean that ex ante it was a bad idea for the country to receive its independence.

Incentives and Adjustments:Subsidies and Black Liquor

The US, in its misguided attempt to encourage more use of bio-mass for fuel, has provided a (probably unintended) subsidy for the pulp and paper mills that use their "black liquor" (what is left after the pulp is extracted) for fuel. Here is just one article on the subject (h/t to Emirates Economist).

The issue  centres on black liquor, a biofuel byproduct of the papermaking process. At kraft pulp mills, wood is boiled in caustic chemicals, causing the pulp to separate from the various combustible chemicals in the wood. What is left after the pulp is removed is black liquor, which is refined and burned as a biofuel energy source in most kraft pulp mills.

While pulp mills have been burning black liquor for decades, American paper companies have begun receiving large tax rebates from the U.S. government, which Canadian papermakers complain puts them at a distinct disadvantage.

Here are some of the bizarre and not-so-bizarre effects of the policy:

• In order to qualify for the subsidy, firms in the US must burn a blend of petroleum-based fuels and bio-mass based fuels. So while the pulp mills had been merrily using purely bio-mass based fuel for decades, they now blend it with diesel fuel to qualify for the subsidy, thus increasing the demand for diesel fuel.
• The subsidy amounts to a cost reduction of nearly 25% of average costs for US firms. Understandably, this subsidy has Canadian pulp mills hurting and upset.

We tend to teach our students that if another country wants to subsidize production of something, then we should let them, gladly. It's as if they're giving us stuff cheaper than we can produce it ourselves AND they allow us to free up our scarce resources to produce something else.

It's a nice theory, assuming that capital, resources, and labour are all completely fungible and freely mobile. Then, sure, the capital and labour being used in Canadian pulp mills can just find alternative uses in Canada, and we'll all be better off in Canada if the US wants to subsidize pulp production, right?

How likely is it that the capital of a pulp mill will find an alternative use? How long will it take labour, located where the pulp mills are, to find new jobs? And what kind of jobs will these be?

We cannot teach trade theory and policy using two-by-two-by-two models (two inputs, two outputs, two countries) and expect them to make sense to real people in the real world who understand that adjustment is painful and has costs.

These adjustment costs are dealt with, to some minor extent, in Canada with various transitional adjustment programmes as well as our higher social safety net than exists in the US. But at the same time, this type of subsidy in the US (which I suspect policy makers did not anticipate) must be fought via NAFTA and the WTO. I don't know that much progress can be made in these fights, but at the same time, it makes little sense for Canada to offer countervailing subsidies.

Man, this bio-mass energy kick sure created some weird and awful distortions.

Surely, Printing Wallpaper Is Cheaper Than This

What to do with Zimbabwe's paper currency [h/t to Monica]. Use it for art?

AntiWar, AntiWest, or Anti-Israel?

It seems to me that many (probably most) of the alleged anti-war protesters these days are not opposed to the war that Hamas is waging against Israel. If that is the case, then these folks are not anti-war. They are anti-Israel (and generally speaking, anti-west). Naomi Lakritz says it well (h/t to AlanP):

The Toronto Coalition to Stop the War had invited Galloway to speak on March 30, but Immigration Minister Jason Kenney rightly refused to exempt Galloway under the law. The coalition's website says: "Our mandate is simple. We oppose war and occupation in Iraq and Afghanistan. We oppose Islamophobia, anti-Arab bigotry and all forms of racism." The phrase "all forms of racism" doesn't appear to include the Jews in Israel. Genuine antiwar sentiment would deplore the actions of someone who gives money to a group that advocates genocide. The coalition's hyperbole about pursuing "a strong co-ordinated voice for peace and justice" leaves some other people out of the equation, too--the girls of Afghanistan who had acid thrown in their faces by the Taliban for daring to go to school. The selectivity of these faux peaceniks boggles the mind--yes, let's just stop the war this minute and let the Taliban take the women of Afghanistan right back to the Stone Age. Just whom are "peace and justice" really for?

Too bad (extremely disappointing and off-putting) that the current Afghan gubmnt recently passed a Taliban-like, sharia-type law that drastically restricts women's rights.

When the Other Shoe Drops

Unemployment rates have risen rapidly in North America. And yet consumer spending and confidence haven't plummetted as far as one might otherwise expect. My surmise is that the height of the social safety net is keeping many people from scaling back their spending and expectations considerably.

One person I know was a well-paid employee at a high-tech firm. He lost his job and was quite confident that he would find something else paying at least in the neighbourhood of what he had been earning in the past. He drew EI (employment insurance, the current term in Canada) for nearly a year and finally had to accept a much worse-paying job. He still hopes and expects to find another job like the one he lost.

A second person I know lost a job in the auto sector. He looked around and realized he wasn't going to find another job like that one right away and so, drawing on EI and other programmes, has returned to school to train for another trade in a different industry.

A third person I know who has been out of work in the construction industry for several months says there is work out there, but not within 50 miles of where he lives and so for now, because he can draw EI, he isn't willing to commute to jobs that far away.

The reason for the title of this posting: what happens when the EI entitlements are gone? How many people are using the time as the second person did, to retrain and move on? How many will be forced to re-assess their expectations as the first one did? How many will drift, waiting for something to turn up, and be shocked into serious belt-tightening?

If a lot of people who have lost their jobs are drifting along, what will happen when their EI runs out? Will jobs at Tim Horton's and McDonald's suddenly not sound so bad after all? How much of a realignment will people have to make in their own plans?

An Appropriate Video for Easter

for the secular celebration, anyway. A really fun Rube Goldbergism (h/t to MA):

Has Facebook Peaked?

When I first joined Facebook about a year and a half ago (thanks to Jason's forming a group to support my joining), I was the only person from both my high school and my college graduation classes who was listed in Facebook.

Now there are over 40 people (out of a graduation class of 574) from my high school class who are Facebook members (I fondly remember many of them). There are also now 30 Facebook members from my class at Carleton College (a couple of whom might actually remember who I am).

With all us old folks rushing to join Facebook, is that a sign of its imminent demise?

Twitter-isms from EclectEcon

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University of Guelph Axes Women's Studies,reduces "sociology creep"

Brian Ferguson sent me this from the local newspaper:

Following a marathon meeting, the University's Senate Tuesday night voted to ratify an earlier decision made by its Board of Undergraduate Studies (BUGS) to cancel the women's studies and five other majors and two degree programs.

Probably not a bad move for several reasons. As Sue said about the situation in an e-mail,

I have observed “sociology creep”  in secondary schools, to the point where Society Challenge and Change (junior sociology), history, geography, physical education (health), all had virtually the same curriculum. That curriculum usually ended up as a version of women’s studies issues and poverty issues, all of which could be explained by an oppressive and discriminatory male dominated society. I was one of the hold outs in the study of English who refused to replace Shakespeare with a “socially relevant” novel. Education has been reduced to brainwashing.

When I mentioned to Professor Ferguson that it must have taken a lot of "nerve" to scrap the women's studies programme, he responded

Never let a good crisis go to waste.

Perhaps that is how others at UWO feel about what they are doing and have done to the economics department here.

Twitter-isms from EclectEcon

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• 23:23 Did TSN lie about its Curling coverage plans? tinyurl.com/df9ptu #

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EclectEcon Named One of theTop 50 Economics Blogs

See this. For what it's worth, that's a higher ranking than the UWO economics department....(see the previous posting, just below this one).

The Demise of the UWO Economics Department

As I posted earlier, the University of Western Ontario Department of Economics has slipped in various rankings over the past 25 years, and the decline has been substantial. In the early 1980s, we were one of 30 departments claiming to be in the top 20. These days we seem to be one of 60 or 70 departments claiming to be in the top 50 (note to some commenters: I know the most recent ranking that I cited earlier is flawed due to its self-reporting nature; nevertheless, it captures the point I'm trying to make that UWO econ is nowhere near what it used to be).

What is truly sad and disappointing is that the department is likely to deteriorate considerably more in the future. Here is a summary of the situation, based on information provided by some colleagues:

Just to be really clear, it is the Dean of the Faculty of Social Sciences, which houses the economics department, that is killing us; he is 99% responsible for our problems.  

Other departments grew considerably in size in recent years while we shrank (despite the fact that we were adding a lot of students and they weren't).   We were in the worst shape in Social Science before the budget crisis and now are taking the biggest hits. A few years ago, we had commitments in place that we could expand, and now that the crunch has hit, we are being  told we must cut back from our current position, not from our larger, promised position. 

The dean spent a lot of short-term money on other departments.  Then, when he woke up one day and realized he had no way to meet future obligations, he instituted a policy of no replacements, no growth, and essentially 100% tax on any other money raised in a department.  Surprise, surprise, it has been our department that is generating most of this money, and we have been told we cannot keep any of it.

The university isn't much better, but if the university got its act together and sent some money to this faculty, none of that money would help us in economics anyway.  It would be sent to other departments....

The dean has now appointed an "interim ... acting ...  chair" who will try to hold things together; i.e., the department has gone into receivership for now. Apparently the better-qualified members of the dept who would have (and have in the past) made good temporary chairs either would not take on the task this time or were not approached by the dean.

Earlier this week, everyone in the faculty of Social Sciences received letters from the Dean, asking us to donate a portion of our salary increases to the Faculty (hah! --- close friends find the request both appalling and laughable). The letter blames the unanticipated monetary shortfalls on the fact that with the abolition of mandatory retirement, too many old people are hanging on with high salaries. That sounds like even more bad financial planning to me. I hope the admins are not saying they were too short-sighted to anticipate that some of our older colleagues would hang around for an extra few years.

I have seen things like this happen in economics departments at other universities. Once a funding crunch like this hits the department, the best people leave [UWO cashed in on this phenomenon several times in the past, most notably hiring David Laidler and Michael Parkin in the mid-1970s and John Whalley after that]. Then other really good people leave. Eventually, the only ones left are those who have personal reasons for not leaving (e.g. couples who find relocation difficult and costly) or old fogeys like me who are locked in contractually for other reasons. Finding replacements who are as good as those who leave proves to be very difficult.

Unless the funding is restored and rebuilt for the department soon, we will sink even farther in the rankings, as those who are most mobile will surely leave. Even though many other universities and economics departments are hurting, some will find a way to pick off our best young talent.

It is all very sad and very painful.

And very deserved.

Update: for more, see the article and letters in today's Western News.

Bacon Sandwich: The Perfect Cure for a Hangover

From the Telegraph (h/t to MA):

A bacon sandwich really does cure a hangover - by boosting the level of amines which clear the head, scientists have found.
Researchers claim food also speeds up the metabolism helping the body get rid of the booze more quickly.

Elin Roberts, of Newcastle University's Centre for Life said: "Food doesn't soak up the alcohol but it does increase your metabolism helping you deal with the after-effects of over indulgence. So food will often help you feel better.

"Bread is high in carbohydrates and bacon is full of protein, which breaks down into amino acids. Your body needs these amino acids, so eating them will make you feel good."

Ms Roberts told The Mirror: "Bingeing on alcohol depletes neurotransmitters too, but bacon contains a high level of aminos which tops these up, giving you a clearer head."

Apartheid in Jerusalem: Who is Restricting Whom from What?

And people blame Israelis for alleged apartheid? I don't understand the charge when I read that Palestinians face death threats if they sell land to Jews.

The Palestinian Authority has issued yet another warning to Palestinians against selling their homes or properties to Jews, saying those who violate the order would be accused of "high treason" - a charge that carries the death penalty.

The latest warning was issued on Wednesday by the Chief [Islamic] Judge of the Palestinian Authority, Sheikh Tayseer Rajab Tamimi, who reminded the Palestinians of an existing fatwa [religious decree] than bans them from selling property to Jews.

Sheikh Tamimi's warning came in response to reports that Jewish businessmen from the US had purchased 20 dunams of land from Palestinians on the Mount of Olives in Jerusalem.

Warning the Palestinians against engaging in "suspicious real estate deeds," the religious leader said that according to Islamic teachings it was a "grave sin" to sell houses and lands to Jews.

He said that the ban also applies to real estate agents or middlemen who are involved in such transactions.

Sheikh Tamimi also issued a ban on renting out property to Jewish individuals and organizations under the pretext that they would spread moral, political and security corruption there.

...

Scores of Palestinians have been murdered over the past three decades for allegedly selling their property to Jews or for acting as intermediaries in real estate deeds involving Jews.

Several fatwas issued by PA Islamic clerics have ruled that any Palestinian who sells his property to Jews would face the death sentence. [emphasis added].

Could people and businesses in the oil-rich Arab and Muslim countries` buy up increasing amounts of land and other real estate in Jerusalem and Israel if they wanted to?

Update: This is not quite what I had in mind.... but it might qualify in a general sense.

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Fin-admin Mistakes: UWO Wasn't the Only One

I posted earlier about how the financial administrators at The University of Western Ontario mismanaged funds by treating the high returns of the past as something normal, to be expected every year, and did not adequately provide for the contingency that markets might turn downward.

They weren't the only ones.

The University of Toronto lost $1.3 billion.

The news comes at a time when campuses across the country are cutting budgets, in part because of investment losses. The University of Toronto, which boasts the country's largest endowment fund, also is shaping up to become a casualty on this front. At the University of British Columbia and McGill University, home to the second- and third-largest endowment funds in the country, leaders have said losses are running about 20 per cent. U of T's losses also are greater than the benchmark for large Canadian pension funds, which suffered an average decline of more than 18 per cent in 2008.

The justification from their fin-admins:

Your article U Of T Reports $1.3-Billion Loss On Investments (April 1) deals with a one-year period. Prudent investors take a long-run view. Our interest in long-term growth led U of T in 2000 to break with the usual Canadian model for managing endowment and pension funds because their overexposure to bonds could not ensure enough gains when markets were strong to outpace inevitable losses when markets deteriorate. As markets weakened, U of T anticipated the short-term drop and communicated four months ago we expected to withhold payments from our endowment this year. We also expect to resume payouts next year.

Translation: We gambled with the rent money and can't pay the rent this year, but we hope we can pay the rent next year. You'll have to do without in the meantime, but we're certainly not taking any personal responsibility for the losses.

Not Just in Canada

Of course a shining example of the problem comes from Harvard University [h/t to MA]. The details are amazing and even appalling.

For a long while, Harvard's daring investment style was the envy of the endowment world. It made light bets in plain old stocks and bonds and went hell-for-leather into exotic and illiquid holdings: commodities, timberland, hedge funds, emerging-market equities and private equity partnerships. The risky strategy paid off with market-beating results as long as the market was going up. But risk brings pain in a market crash. Although the full extent of the damage won't be known until Harvard releases the endowment numbers for June 30, 2009, the university is already working on the assumption that the portfolio will be down 30%, or $11 billion.

It turns out Harvard had considerable advance warning, too.

Followup: it turns out that the specific problems facing the UWO economics department are due to more than just financial mismanagement at the university. More on this soon.

April Snow

Several inches of snow.
Snowsquall Warnings.
High winds.

Winter jumps up and bites us nearly every April.

Shopping carts at the grocery store yesterday:

An Old French Saying

This old French saying applies to Israel:

Cet animal est très méchant. Quand on l'attaque il se défend
[h/t to David Henderson and JJ]

Translation (loose):

What a wicked animal; when attacked, he defends himself.

Sounds like the tone of many criticisms of Israel, especially from anti-Western leftists.

The Poison of Protectionism

An excellent summary from Peter Hall:

Without a doubt, trade policies put in place, together with the unprecedented explosion of computing power and communication technology, have brought an historical shift in global trade linkages. Trade now accounts for 65% of global GDP, up from 40% just 25 years ago. Moreover, global productivity growth has shifted upward over the same timeframe, a testament to today’s more efficient global distribution of production. Many countries, both industrialized and emerging, have experienced these productivity gains.

Given this backdrop, the words ‘Buy American’ in US fiscal stimulus legislation sent shockwaves around the world, kindling fears of a global relapse into protectionism. France joined the fray, advocating a ‘France-first’ industrial policy that would require multinationals to begin their layoffs offshore. More recently, Mexico announced retaliatory trade measures against certain US goods. In addition, the nationalisation or near-nationalisation of Western banks has led to allegations of covert protectionism, in which domestic deals would receive favourable treatment.

The rhetoric alone is troubling. Protectionism is an instinctive defence mechanism that sells well. It might even yield temporary benefits, but in the end, hurts its perpetrators and everyone else, too. Even more discouraging, one action leads to a sequence of retaliatory actions that snowball, magnifying the damage and, especially in today’s integrated economy, ensures that the effects are felt almost universally.

Will the wish for a quick win carry the day? We can all hope that reason will prevail, and that rhetoric will remain just that. Multinational corporations understand that their competitive position depends critically on maintenance and enhancement of the current system. And it’s quite likely that the average worker gets it too, perhaps more than ever before.

... The case for continued globalisation remains strong. Reverting to protectionism would increase costs worldwide, lower overall welfare, and prolong the recovery. No one wants that. With economic conditions as bad as they are, the last thing needed is additional bad news.

Twitter-isms from EclectEcon

• 10:32 10 solar yard lamps, rechargeable batteries included, for $30Cdn! Aren't globalization and trade wonderful?! #

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