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Month: April 2013

Can You Tell The Difference Between Economics And Politics? (@EconTalker, @EconLib, #economics, #politics)

Can You Tell The Difference Between Economics And Politics? (@EconTalker, @EconLib, #economics, #politics)

These days, it is trendy to practice political punditry under the guise of a thoughtful economist handing out enlightened “economic policy” suggestions.

A recent case in point is the interview with Harvard’s Ed Glaeser with EconTalk’s Russ Roberts, wherein Glaeser shared the following ideas about reforming city governance with respect to “historic preservation districts”:

In the case of the city historic preservation districts I would probably replace the ever-increasing swatch of territories–15% of the land area in Manhattan south, in the bottom half of Manhattan excluding Central Park as an historic preservation district right now–and areas go into historic preservation districts but they rarely come out of them. So, it seems like it’s going to be an ever-increasing swath of the city. I don’t much like the idea of cities being museum pieces. There are a few which are appropriate, like Bruges, but I think it’s good that cities change and that they develop new space, combination of new activities and people. So, I would in terms of preservation–my father was an architectural historian so I do really believe in the value of preserving some old, beautiful buildings–but I would have a fixed number of the total number of buildings that they are able to set aside as being preserved rather than allow them to just keep on getting new areas for preservation districts.

Here is what an economist would say:

Land and property use should be conditioned on “most highly valued use”, as evidenced by voluntary exchanges agreed to by participants in the property market. For some, purchasing historic properties for the purposes of preserving them, perhaps for commercial exploitation as a tourist attraction or simply to be kept out of the hands of the public or those who might privately redevelop them, might be the “most highly valued use” for which a person would exchange their wealth to control these properties. For others, tearing the historic buildings down or otherwise modifying them from their original, historic state, may be the “most highly valued use”, perhaps for the purpose of providing new housing or areas of commerce and industry.

There is no moral reason why future generations should be beholden to the land-use decisions of ancient generations, and even if there was, it is not an economist’s place to discuss such topics.

Notice– Glaeser said none of this, and in fact violated the statement at the end while complementing it all with a bit of arbitrary personal psychological projection, the idea that because his father was an architectural historian he has some kind of special need or special knowledge into the value of preserving historic properties that necessitate the violence of the State to protect such value impositions.

In fact, the closest Glaeser came to say anything “economic” about the subject was his attempt to calculate a “fixed number of total buildings” which would be available for historic preservation. But even here, his theorizing falls flat on its face, for Glaeser does not explain how his arbitrary calculus would be superior to the outcomes of voluntary exchanges between market participants.

How many is a “fixed number”? What constitutes a “building” for purposes of this policy? Which “buildings” shall be a part of this “fixed number” and which shall remain outside it, and how are such decisions evaluated in an objective way?

Such policies are an invitation for gross, arbitrary and wild government intervention and special interest group politicking that Glaeser claims earlier in the interview he is strongly against. Yet, he opens the intellectual door to them in moments like these when he places his economist costume over his political self and attempts to perpetrate a theoretical deception.

More Banking Confusion: Liquidity Versus Solvency (@EconTalker, #banking, #liquidity)

More Banking Confusion: Liquidity Versus Solvency (@EconTalker, #banking, #liquidity)

Here is a choice quote from the recent EconTalk podcast with Anat Admati of Stanford University:

Well, they have fancy ways to talk about banks, and we try to unpack those. They talk about maturity transformation, liquidity transformation. What that means is really that the depositor, the people who lend to the banks, often time want their money quickly, especially demand deposits. But when they invest it, they kind of invest it longer term and in less liquid things. So there is a sort of imbalance between the money that they use to fund and their investment in the sense of the length of time until something has to happen and also the speed with which they have to pay versus get paid. And so that mismatch creates fragility by itself, which also means for example if all of us run to the bank at the same time then the bank may not be able to cover all of that. Even if it technically would be solvent, it has everything, that’s kind of an inefficient run that you could have, in principle. So basically the banks tend to run a little bit more than other people into liquidity problems. You could say that, just, I have the money but I didn’t go to the ATM kind of thing–I can pay you back but we’re going to have to find a liquidity solution, sort of a rolling back my debt. Their funding is kind of fragile almost by definition because of the way it comes and the way people can come back for their money on short notice or any time they want. So that’s part of the funding. And the investments are not as liquid or longer term than that. (emphasis added)

This is an utter confusion. This is not a “liquidity problem”, it’s a solvency problem.

Money-in-an-ATM is not the same economic good as money-in-my-hand. That is, money-five-minutes-from-now is not the same as money-right-now.

They are separate economic goods due to the time value of money. What Admati has done is create an arbitrary distinction between a future money good and a present money good, by projecting her preference/judgment onto an exchange involving two other parties of which she is not one.

If party A demanding “liquidity” from the bank B truly saw no difference between money-right-now and money-a-few-days-from-now, for example, then a bank run would never happen and these items would trade at the same price, which they do not.

This is a fundamental error of economic reasoning. I expect a professor of finance and economics to understand something like this and as a result I find myself disappointed to see that she does not.

Economists and politicians only let banks get away with this. If anyone else were to be so arbitrary and haughty toward contracts they’d be thrown in prison, but for banks insolvency never comes so long as you can contort logic to the point that you convince yourself that all that’s missing is a bit of liquidity.

This is more free lunch thinking.

6 Pieces Of Immortal Financial Wisdom (@CreditBubbleStocks, #wisdom, #quotes)

6 Pieces Of Immortal Financial Wisdom (@CreditBubbleStocks, #wisdom, #quotes)

I was digging around in my old notes on my GDrive just now and came across these 6 juicy peaches from an old friend at I’m deleting the note as I am reorganizing my GDrive, but I still wanted to hold on to stuff like this.

All observations are, in their own way, profound. Here they are:

  1. There’s two ways to learn things– the easy way, and the hard way. And surprisingly, most people pick the hard way.
  2. Stocks are for selling, bonds are for buying.
  3. As I always say, “You can’t fix stupid.”
  4. Real men don’t hedge; they know.
  5. I only “Texas Hedge”.
  6. What a world we live in.
Observations On Expectations (#publicschool, #expectations, #psychology)

Observations On Expectations (#publicschool, #expectations, #psychology)

A story of expectations met and unmet, in two parts.

Part the first. I spoke in front of a group of students at a local continuation high school this morning. The original topic was my career (what do I do? what do I like/dislike about it? etc.) and my career path (what’s my background? education? how’d I get to where I am?) but I never quite got there. I mostly ended up talking about economics as I was speaking to an economics class, nominally, and the program coordinator kept prompting me on that subject.

I introduced two economic concepts to the assembled: TNSTAAFL/opportunity cost, and subjective value theory. I tried to apply them to “real life” to make them tangible and interesting to the audience. I talked about how everyone got suckered into the Housing Bubble, which cost a lot of people their homes, their personal finances, their jobs and sometimes more. I suggested that a person who understood that TNSTAAFL wouldn’t have gotten suckered in because he would’ve recognized the bubble for what it was and played it safe as he could. Subjective value theory I used to explain why we have an economy and why people work jobs, to serve each other’s subjective needs. I encouraged the class to think about their own values and to pursue them, and recognize that when people tell them what to do they’re simply telling them they should follow subjective values other than their own. I tried to highlight the role opportunity cost plays in pursuing subjective values, for example, people often get into traps such as pursuing money to provide for their families in such a way that they don’t get to spend time with their families. This opportunity cost is forgotten or ignored.

I also covered time value of money and the function of credit during a brief tangent, prompted by the program coordinator emphasizing the importance of personal finance principles.

The instructor goaded the students into applauding me before I had even spoke, as some kind of polite welcome for someone who had taken the time to stand before them and pontificate on a subject they cared little about. I said, “We’ll see if you still feel like applauding me at the end” and then began my talk. At the end of it, as the students rose to leave at the sound of the Pavlovian bell, one of the young men closest to me in the front of the room turned to his classmate and said in a quite intentionally audible way, “Thank GOD that is over!”

The morning’s events completely met my expectations and as a result, I was satisfied with myself when I myself left. I had entered a prison, whose inmates were being held against their will, by force of law, who had been assembled before me because they had no other choice save punishment and who had little to no interest in the subjects I had been invited to speak about before them. You certainly can’t blame a person in such circumstances for being disengaged, melodramatic and at times downright hostile.

If you put me in a cage I’d be uncomfortable and not in a friendly mood, either.

I didn’t expect to touch anyone, change a life or spark a fire or interest in anyone for the subjects I spoke about (economics, careers, my career, me) and if I happened to do that despite my intentions, that’s fine. I expected to go in there, treat the poor beasts with respect and maybe a bit of sympathy, having once been caged in a similar manner myself, and deliver my thoughts as articulately and coherently as I could. I expected to get practice speaking before an audience and trying, not necessarily succeeding, at making a foreign subject engaging or relatable for them.

In this, I met my expectations and so I believe I succeeded and thus I felt satisfied.

Part the second. For some time now I have watched in despair as a previously favorite blog of mine has gone into seemingly terminal decline. What was once a source of original thinking, unique coverage and respectable ideological consistency has in time become a haven for hacks and simpletons, its content hollowed-out and refocused on a few topics I just don’t have much interest in. The purveyor of the site has taken numerous opportunities, on his blog and his new webcast radio show, to demonstrate qualities of his personality I’ve found surprising, disappointing and at times reprehensible.

My distress with this reached a fever pitch early this week when a long-awaited debate on the subject of “intellectual property” was joined by the purveyor and another popular blogger on the subject. While the purveyor’s behavior leading up to the discussion gave me no reason to believe it’d be an intelligent, objective attempt at sussing out the truth by the two parties, but rather much evidence that it would be a battle of wills and ego characterized by willful blindness of reason and savage emotional assaults on each respective victim, the final product was so shockingly extreme in terms of all the undesirable qualities I suspected it would contain that I almost couldn’t believe these two adults had allowed themselves to be recorded, their outrage to be shared in front of a public audience of strangers.

I found myself so disappointed with the whole thing. It was anti-intellectual and truly uncivilized, the kind of stuff blood feuds at made of (gusto about sacred honor and the like that can never be satiated by way of reasonable argument). I knew both men were capable of a bit of underhandedness, but at least in the past the underhandedness seemed to have some kind of productive point. This time, after I finished sitting through two and a half hours of two middle-aged men calling each other names and screaming at one another, waiting for a point, I realized too late that there was none beyond sharing pure hate and distrust.

Who was to blame for my dissatisfaction in this instance? Initially, I found myself disgusted with these two people for subjecting me to this idiocy. “How dare they!” Then I thought about it some more. They are who they are. Their current skills and capabilities with regards to interpersonal communication and intellectual reasoning are aspects of their identity that exist as they do, whether I find them appealing or satisfying or not. I expected them to work hard to please me in their debating efforts (despite, I should add, much evidence that they were capable of no such thing) and when they didn’t live up to my expectations, I was disappointed.

Not by them, but by myself. For expecting people to live to serve my intellectual and emotional needs.

In the first part, I participated in something that could easily be seen as a disastrous waste of everybody’s time. Yet, I walked away from it in a positive state of mind. In the second part, I witnessed a true social tragedy and felt depressed and upset. Both circumstances were undesirable, but my reaction was different each time because my expectations were different.

Expectations can glorify our existence or cast the light of our lives down a dark abyss. I hope to remind myself of this fact more often.