Friday, September 26, 2008

Should an equity position be an important part of the bailout?

Greg Mankiw quotes an anonymous "smart friend" to give a witheringly condescending dismissal of the popular idea that the taxpayers should get equity stakes in the firms they are helping to bail out. Here's an excerpt from Greg's "lil friend":

2. "Taxpayers will be better off if Treasury gets warrants."

"This is essentially the assertion made in David Leonhart's column in the NY Times on Wednesday. And it again illustrates that we would all be better off if high schools taught the Modigliani-Miller theorem. MM implies that the price of the asset (again,assuming the auction gets it right) will adjust to offset the value of any warrants Treasury receives."

not surprisingly Mr. Leonhardt took exception to the idea that he needs remedial training (probably didn't like the misspelling of his name much either):

Jonah Gelbach also takes issue here.

Modigliani-Miller (MM) is explained here.

My own view is the MM is a mighty thin reed on which to base an argument in this current situation (or perhaps even in any real world situation). I am not an expert on the capital structure literature, but the empirical evidence testing whether capital structure is irrelevant is far from being conclusive in MM's favor (check the introduction to this paper for example).

I actually think we'd all be at least slightly worse off if the MM theorem was taught in high school.

Here is a picture of my lil friend.

Thursday, September 25, 2008

"Free Market Economists" Rage Against the Machine

Bob Higgs, Bryan Caplan, and others, and...well, me, on the bailout, over at Reason On Line

D'OH!

At the debate, I claimed that each voter was wasting his / her vote, unless:

1. Your vote determines the outcome
or
2. You vote your heart, your dreams, for the sake of sending a message.

Vote the LoTE (lesser of two evils) makes no sense.

Then, I tried to answer the usual, "But what if EVERYONE thought that way?"

My claim was this: unless you are a Jedi, and can control OTHER people's weaker minds, then you only get one vote.

Jollyman, and N&O maven RTB was reminded of the following picture, which amused me greatly:

Video of Debate

Enjoy....When the link below comes up, there are TWO images. Click on the one on the RIGHT.

And thanks to WUNC-TV

Say it with cake!

Cake is awesome, and thanks to my latest favorite blog, Cake Wrecks, I've learned that there is no message that you can't send with cake.

Has your child passed a developmental milestone?



Or has a loved one completed a big project?



Maybe someone has done you a big favor?




Or maybe they just made the world a better place for all of us?

Mixing to the IPOD claims anothor victim

Holy Crap people, I have blogged before about how optimizing recordings for IPOD playback is making for bad sounding music, but now even Metallica fans have noticed. In today's WSJ the general trend of loud brittle recordings with little dynamic range is discussed along with the specifics of Metallica's new album and the fan mini revolt that has ensued.

Here is a sad snippet from the article:

Music released today typically has a dynamic range only a fourth to an eighth as wide as that of the 1990s. That means if you play a newly released CD right after one that's 15 years old, leaving the volume knob untouched, the new one is likely to sound four to eight times as loud.

Sound engineers say artists who insist on loudness paradoxically give people less to hear, because they end up wiping away nuances and details. Everything from a gently strummed guitar to a pounding snare drum is equally loud, leading to what some call "ear fatigue." If the listener turns down the volume knob, the music loses even more of its punc
h.

But many musicians, producers and record-company executives "think that having a louder record is going to translate into greater sales," says Chris Athens, Mr. Jensen's business partner and a fellow engineer. "Nobody really wants to have a record that's not as loud as everybody else's" in an iTunes playlist, he adds.

In other words: All your bass are belong to us!

N&O Article on Debate

Blush. I went after Bev a little, I'm afraid.

N&O piece.

Wednesday, September 24, 2008

The Bishop Angles for the Environment

The Bishop's op ed in the SLC Tribune.

Excerpt:

The great conservationist Aldo Leopold explained it this way: "Conservation will ultimately boil down to rewarding the private landowner who conserves the public interest."
I visited the kind of landowner Leopold extolled. He owns 1,800 acres of rural Utah land that includes 1.8 miles of stream. When he purchased the property seven years ago, the banks of the creek had been grazed down to the point where there were no river birches, willows or cottonwoods. Stream banks were eroded and there was little stream complexity, a necessary ingredient for a fruitful fishery.
This landowner spent thousands of dollars and hours restoring the creek to create a productive trout fishery. He fenced the cows away from the stream. He sought expert advice on how to help the stream heal itself. He made stream barbs of rocks that stick out from the banks to create eddies, protect banks from erosion, and change water depth and velocity.
Today river birches, willows, cottonwoods and tall grasses are growing along the banks, a gravel bed suitable for spawning has emerged, and the fish love it.
The landowner's son planned to buy the adjoining property and over time, double the amount of restored creek. Now, all plans are off. If he and his father cannot protect the habitat they create and the fish that thrive there, they are not going to spend anything at all.
Instead of doing back flips over the court's decision, anglers should be asking the Legislature to change the state code on which the decision was based so that landowners will once again have an incentive to restore and enhance streams on their properties.
Otherwise, who is going to fence cows away from the water? Who is going to pay for stream barbs and planting willows? Governments may help on portions of major waterways like the Provo River, but what about all the little creeks that could be as productive as the one I saw?
Many anglers understand the value and potential of private conservation and want to encourage it. The stream-access court decision does the opposite. Productive streams crossing private property will be quickly fished out, as has already happened a few miles below the property I described.

Tuesday, September 23, 2008

Something to take your mind of the Crisis

Why can't Hank roller skate??

Op Ed in Durham Herald

A policy piece / op ed I wrote for the Durham Herald Sun yesterday. Hasn't shown up on-line yet....

Here it is, in text, tho:

The Drought is Over; Long Live the Drought

Michael Munger

The drought is over; let's move on to some other policy problem.

No feeling could be more natural. We're all sick of dry lawns, and dry lectures about wasting water. Now, there are puddles everywhere. Hey, tree-hugger: splash THIS!

But no feeling could be more wrong. There are two droughts in North Carolina: a shortage of water, and the lack of any coherent vision of how we can solve the problem of water allocation. Rain has solved the first, temporarily. We can't expect the vision to come from the clouds, though. It has to come from us.

We live in a climate where droughts happen, but only rarely, because most years we get more than forty-five inches of rain. Water "management" has always meant handling runoff, and even that is managed locally. In cities, water is captured in storm drains; in rural watersheds, runoff drains into creeks and rivers. Until now, the focus has been on erosion, contamination by farm chemicals, and flooding of riverbanks. Even for our reservoirs, the key question has been about release rates, not sufficiency.

No more. The "only runoff, only local" approach has ended, probably forever. The drought of the past two years may have eased, but the next one is only a matter of time. There are two reasons: population growth and increased variance in weather patterns.

The population of North Carolina's cities has doubled since 1980. By 2030, our state may well have a population of 12.5 million or more, if current trends continue. And the variability in rainfall totals over the last two decades is the highest we have ever measured. These climate changes may or may not have been humanly caused; it hardly matters. My point is that we must somehow connect the steady population increase with the wild gyrations of drought and deluge.

What does this mean, in practical terms? Three things, none of them easy or cheap. But if we wait, the problems will grow worse, and the solutions will cost even more. The answer is reservoirs, metering/pricing, and regional integration.

The reservoir systems for many of our cities (but particularly for Durham and Raleigh) were never adequate and have recently fallen far short of our needs. But expansion of reservoirs means buying lots of land, and building new dams for containment. The costs would be immediate, and enormous; the benefits decades away and hard to measure. Only a really clear-eyed leader is going to be able to persuade our legislature to defer short-term electoral goals for the good of the state. At this point, no one is even trying.

Mention metering and pricing, and everyone's eyes glaze over. But property rights are at the heart of the problem. The current system is based on riparian rights, and antiquated meters that do not allow taxpayers even to learn, much less change, their consumption choices. The problem with the way we define rights is that they are nearly always "use or lose." If a riparian owner lets water flow downstream, he gives up all rights to that water, without compensation. A decision by a homeowner to forego watering his lawn may be complimented by neighbors, but the impact on the water bill is negligible. In fact, given the way that many utilities meter and bill, the homeowner may not even be able to tell the difference.

The solution is, once again, much more easily described than implemented. We need to create a system of tradable rights, capturing water's true costs. We need to replace hundreds of thousands of antique meters, with immediate feedback on efforts to conserve. And we need to adopt a tiered pricing structure, with sharply increasing costs for heavy users. The current practice of keeping prices low but shaming violators, and closing down small businesses such as car washes or landscapers, makes no sense. Charging more means that most people will conserve, while preserving the possibility of continued use for high-value users who have no alternative.

Finally, we will need top-down facilitation of bottom-up cooperation across regions of the state. What I mean is that North Carolina, as every schoolchild knows, has three distinct regions: coastal plain, piedmont, and mountains. It is possible that drought will afflict all three, but conditions are different enough that solutions need to be adaptable. Further, redundancy in water supply systems, including pipelines, means that excess reservoir capacity anywhere can ensure water adequacy everywhere.

I'm skeptical of the idea of a state-wide plan, created by state agencies. Local variations in supply, need, and conditions are just too pervasive. But the state is the logical place to start. The 2001 Water Supply Plan, created by the Department of Energy and Natural Resources, is a good start. But it is only a start. Our population has increased by more than 10% since 2000, and the now-dead drought got everyone's attention. Let's not look back from a dry future, ten years from now, and think about what we might have done.

Each, All, and the Bailout

A little squib of an op ed in the Charlotte Observer this a.m., for your reading pleasure.

The text:

From Mike Munger, a Duke University professor of economics and political science, and the Libertarian candidate for governor.

“The state is the great fiction by which each of us seeks to live at the expense of all of us.” The 19th French economist Frederic Bastiat recognized something that seems to be eluding our wise men in Washington, and Wall Street.

If Bastiat were alive, I can guess his reaction to the bailout: First, we don't know what we are doing, and we are as likely to do harm as help. The desperate hurry comes from electoral politics, and not from any real economic necessity.

Second, we aren't creating value. Government can't create value in financial markets. All we are doing is shifting costs from one group (Wall Street bankers, and mortgage sellers who took enormous and unsupportable risks) and transferring them to another group (taxpayers, who don't know any better).

When you hear someone say “The government bailout of Wall Street,” make a mental substitution: “The taxpayer-funded bailout of Wall Street.” And then remember that we have a federal debt bigger than Jupiter.

Deficits are future taxes. The bailout is simply a way of allowing irresponsible lenders to escape unharmed. If you have a mortgage, and can't pay, then you are responsible. If AIG has debts and can't pay, our leaders want to soak taxpayers for the bill.

The point is that you can't take money away from taxpayers who earned it, give it to the financiers who squandered it, and call that a good policy. There is no danger of another Depression, which was caused by a deflationary monetary policy. We are facing a temporary credit crunch, and it will sort itself out if we leave it alone. Things aren't so bad that a panicked bunch of politicians can't make it much, much worse.

Each can't live at the expense of all. Not even if you are a rich banker.


And....it made "THE CORNER"

All hail skeptical economists!

Anil Kashyap & Jeremy Stein have some thoughts and reservations about Hank 'n Ben's plan.

After outlining a couple of relatively benign options for the bailout (buying bargains and restructuring and repackaging some types of debt) , they get down to the nitty gritty of whether, and if so in what form, there will be direct subsidies to the financial sector:

"These first two tasks are probably the easiest for skeptics of government intervention to embrace — or at least tolerate. Unfortunately, they may not be enough. The financial sector is now seriously undercapitalized — struggling institutions simply don’t have enough equity to absorb potential losses — and normal lending within the financial system will not resume until this changes.

Consider Merrill Lynch. It found itself in dire straits because it was having difficulty borrowing to finance its holdings of mortgages and other investments. With options running out, it agreed to merge with Bank of America. Upon the announcement of the merger, the borrowing money problem disappeared, even though Merrill was going to use the borrowed money in exactly the same way as before. What was new was that Bank of America had put its substantial capital base on the line.

Accordingly, a third job for the new agency might be to directly subsidize financial firms to increase their capital. One way to accomplish this would be the agency’s purposefully overpaying — relative to underlying fundamental values — for the mortgages it acquires. Mr. Paulson initially said he wanted to buy mortgages only from American companies; although he apparently changed his mind about foreign banks over the weekend, his original thinking seemed to suggest that he envisions some sort of a subsidy program.

While injecting more money into the financial sector is clearly necessary, doing it this way raises several concerns. For one thing, overpaying for the mortgages would help the banks’ current debt and stock holders. This kind of gift to existing investors (with no upside for the taxpayers providing the money) sets a terrible precedent, surpassing the Bear Stearns and American International Group bailouts, where at least shareholders saw their stakes largely wiped out.

In addition, there would be considerable scope for corruption in distributing the subsidies. Which types of mortgages would get the sweetest deals? What if some banks own disproportionately more of these high-subsidy mortgages? Designing a coherent mission and organizational structure for the agency to minimize these problems will be challenging, to say the least.

If the agency is to get into the direct subsidy business, which may be inevitable, we prefer that it also take on the role of a bankruptcy judge. The government should refuse to buy any toxic mortgage assets from a bank unless it first reaches an agreement with its long-term debt holders to erase some of the debt it owes, perhaps in exchange for stock.

Beyond the principle involved, eliminating some of the existing debt in this way would help to strengthen the bank’s balance sheet. If, in addition, the government received some preferred shares of the bailed-out bank as part of the process (as it did in the A.I.G. rescue), taxpayers might eventually share in some of the gains. Together, these steps would at least partly limit the gift element of the program.

For now, all we can do is make educated guesses at what Mr. Paulson has in mind. But Congress, which has to sign that check for him, should demand some clear answers."

Keep pedaling that bike!

Hank 'n Ben are now out trumpeting the dire consequences that will follow if Congress does not speedily enact their master plan. This very much reminds me of how trade negotiations often go. The in crowd puts the package together in the green room and then pressures the outsiders to go along using increasingly apocalyptic language when resistance is encountered. I only hope that some block of legislators will stand up and play the role of India here and scupper this deal.

Update: The rhetoric has escalated even further. Check this dandy, where a "former federal reserve official" opines about what will happen without the plan:

“The alternative is complete financial Armageddon and a great depression”.

Holy Crap. So either you're with Hank 'n Ben or you are in favor of another depression?

Yikes, put me down for none of the above.

Monday, September 22, 2008

Land of Oz

Some incidents in my trip to Oz earlier this month.

1. The trip over was supposed to be 38 hours. RDU - JFK - LAX - Sydney - Perth - Fremantle. It was, in fact, 46 hours. We ran out of fuel. 250k/hr headwinds, extremely rough. Had to land in Auckland, NZ. Waited on the tarmac three hours for fuel. Couldn't leave plane, because of customs non-permission. Missed connection in Sydney, had to wait until evening. I was somewhat tired, b/c I can't sleep on planes.

2. Got up, went down to the beach, looking for coffee. There was (I'm ashamed to admit) a McDonald's, right on the beach overlooking the old "Long Jetty." I ordered a coffee. Now, I could see the pot of coffee sitting there, and "coffee" was listed on the menu. The cashier kid seemed confused. Said, "Coffee? You mean, filtered coffee? Black coffee? What are you asking for?"

Me: "Um....coffee...yes....black coffee."

Kid: "Okay." Pour coffee into cup, then fills the cup last 1/4 with milk.

Me: "Um....the milk is fine....but didn't I say 'Black'?"

Kid: "Oh, black coffee comes with milk. That's how we make it."

3. My keynote speech. Great fun. My thesis was this: Mandatory recycling violates the separation of church and state, since it has no economic justification, and in fact wastes resources. In an economic activity, saving cost is the goal. But in a religious activity, increasing cost is the goal, as a sign of devotion. Since the crowd was largely people employed in the recycling industry, this message was not universally received with joy.


4. A bit of lunch, out in the display area, with Bernie and Becky. Put a couple of drinks in these folks, and they were fair dinkum mates to anyone. I really enjoyed my time with these two. Great people.

Oil Kerfuffle

I could just spit.

Here is the article in today's Duke Chronicle. Key quote:

"It's an election year, which means that it is silly season for politicians," Michael Munger, the Libertarian candidate in the North Carolina Gubernatorial race and chair of the department of political science at Duke University, said in a press release. "The supporters of new drilling are promising miracles, and the opponents are predicting disaster.... They are both exaggerating for their own political purposes."

Munger's plan takes a hands-off approach, asserting that "the increased price of oil and gas will solve this problem for us, if we let it" by driving down demand and opening up new supplies. His plan does not address environmental concerns.


My response, just sent in as an LTE. We'll see if it gets published.

Dear Editor:

I appreciate your front page piece on the issue of "off shore" drilling.

But your claim that my "plan does not address environmental concerns" is a bit inaccurate.

Look, the reason we waste so much, and pollute so much, is that the price of oil is artificially low. It is subsidized by tax breaks to oil companies, and huge payments for unjustified foreign wars. If we had to pay the full cost of oil, two things would happen.

1. We would use less, a "demand side" response to high prices. (Environmental concern #1: Reduces pollution!)

2. We would focus on alternative, and likely less-polluting, energy sources. (Environmental concern #2: Make green energy profitable, and it would flourish.)

Both of my opponents want to use tax money to bring the price down. I say, charge the REAL price of gas, and let those prices produce the positive environmental effects. That's my plan. It is my opponents who refuse to address "environmental concerns."

Mike Munger
Libertarian Candidate for Governor

I like lattes so much almost bought a beret!

But then I found out they serve fancy coffee at McDonalds (hat tip to Dan Drezner)?

Hoping for reverse gridlock: special bailout edition

I cannot believe that I sit here today hoping for a Democratic Congress to somehow stop a Republican administration from effectively fully nationalizing our financial services industry.

Holy Crap, if we are going to nationalize something, lets at least be as smart as Chavez and Morales and pick stuff that is profitable! Lets nationalize Google and Microsoft!

For what it's worth, I think this plan is a hasty, ill-considered overreaction to recent events. If it's a cure, then the cure is worse than the disease. Once a bailout like this happens it will be (1) very hard to say no to anyone down the line and (2) very hard to deny politicians a much increased voice in the everyday activities of firms if taxpayers are going to be the ultimate owners when things go bad.

Here are words of wisdom from Luigi Zingales. Greg Mankiw provides this link that is well worth reading. Here is a bunch of people more famous than me chattering on the topic.

This is a very bad business.

Sunday, September 21, 2008

I've been working on the railroad...

but I wouldn't be if I worked for the Long Island Railroad, where you can retire with a pension at age 50, and then file a disability claim for the job you just quit, secure in the knowledge that your claim will then be considered by the Railroad Retirement Board which "almost never says no to a disability claim". They even get free golf somehow! Perhaps not surprisingly given this strange convolution of perverse incentives, last year 94% of LIRR employees that retired after age 50 received disability benefits (again, on TOP of their retirement benefits).

As the NY Times puts it "The L.I.R.R.’s disability rate suggests it is one of the nation’s most dangerous places to work. Yet in four of the last five years, the railroad has won national awards for improving worker safety."

HA!

This truly is a great country


Tiger Who?

With elder statesmen Eldrick out of the way and only elderly boat anchor Phil Mickelson left to drag us down, the US managed to finally win a Ryder Cup. Ladies and gentlemen, I give you Hunter Mahan (3.5 points), Boo Weekley (2.5 points and no I am not making that name up), J.B Holmes (could it possibly be Johnny? 2.5), and OU's very own Anthony Kim (2.5 points) who absolutely disrespected and vivesected Sergio in singles today.

Well played sirs, kudos. And kudos to Zinger for his picking Mahan and Holmes to be on the team.