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Economics

Wizards in Pork Pie Hats

Are the wizards of Wall Street smarter than the average bear?

The most visible symbol of financial problems seems to be the falling stock market. But all those companies in those indexes are the same ones that were there a month ago, and are still healthy and making money. The fall in the markets does not represent and change in the current health of industrial America. The lower prices reflect a changing expectation about those company's future prospects, but the folks driving the market are just guessing, and really, their guesses aren't really any better than yours or mine.

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Bank Failure Accounting 101

Let's return to the basic balance sheet of a typical financial company before the writedowns:

FRED’S BANK & TRUST
BALANCE SHEET

Good Assets: $95
Questionable Assets: $5
TOTAL ASSETS: $100

Liabilities to Customers: $80
Debt to Bondholders: $17
Shareholder Equity: $3
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $100

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It’s Fascism

Congress has passed the bailout/rescue bill, and the current President scurried right over and signed it into law.

Pundits speaking for the huge popular majority opposed to the plan seem to have decided to call it socialism, or a nationalization of banking and real estate. There is a political philosophy which combines those terms. National Socialism. Or, in a word, fascism.

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Who Will the Sky Land On?

All the headlines seem to be telling us the sky is falling. Economically, this time. I can accept that the sky might have come down a bit. But I'm not yet seeing anyone clobbered by chunks of heaven.

The Chorus of Doom is riffing on various forms of a “credit crunch”. A StarTribune story on troubles at Twin Cities auto dealerships sheds some light on the current availability of consumer credit:

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Hayek’s Serenity Prayer

God, please grant me the ability to learn the things I don't know, the serenity to accept that there are things I can't know, and the wisdom to know the difference.

Quoted from: Art Carden at Division of Labor

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What’s the Hurry?

The current President is urging Congress to act immediately. A crisis of catastrophic proportion can be averted if we are united in quick and decisive action. Essentially everyone in Congress has reviewed the available facts, and agrees with a dour assessment.

The President has consulted with his top advisors. There is a plan to avert the crisis. It will be hugely expensive. We do not know how long the US forces must remain involved. Details are sketchy, but the measure before Congress can be fairly described as a “blank check”.

Iraq? Nope.

Wall Street.

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Can’t We Get a Loan?

Yesterday and today I’ve heard news “experts” tell me people can’t get loans these days. But yesterday’s mail included two credit-card offers. And today’s post brought me a home-equity loan offer.

These events seem contradictory. Which means somebody is lying, or at least overlooking something. Let’s apply some basic economic principles.

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Mirroring Futility

Crisis is a Cost of Growth

Megan McArdle summarizes my resistance to one tenet of the Austrian School’s economic philosophy. The Austrians prefer “sound money”, with currency tied to gold and no fractional-reserve banking.

Picking Losers

A phrase used by libertarian-leaning thinkers is, “government should not pick winners.” It descends from the calculation problem.

An agency or bureau cannot possibly consider all the knowledge embodied in a market, and thus acts with at least partial blindness. They may get it right anyway, but more by luck than by smarts. Any errors are compounded and made persistent by bureaucratic inertia, politics, and rent seeking.

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Raising Taxes

Tax Rates vs. Tax Revenue:
Tax rates are the percentage of wealth paid to the government. That percentage is can be an income tax or a property tax. Tax revenue is the total amount the government collects when everyone’s individual payments—determined by tax rate percentages—are added together. Tax rates influence individual choices, while tax revenue influences the government’s ability to fund its activities. Some argue that total tax revenue may be raised even while individual tax rates are lowered.

Shorts are Heroes

Al Jazeera asked five prominent economists - Does the [2009 bank liquidity] crisis signal the end of US-style capitalism?

Of the five, John Berlau, of the Competitive Enterprise Institute (CEI), is the contrarian. In his reply, Berlau says:

everyone is bashing the short sellers but they are heroes—they were right and we should have been listening to them years ago.

Bingo!

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Caffeinate Corporately

A daring adventure beyond the limits of the “Think Globally–Caffeinate Locally” mindset reveals surprising vistas. Corporate Coffee and Crazy Aunt Coffee are competitors, but they need not be enemies. It was, after all, Starbucks which moved the latté into our daily consciousness. CoffeeCorp made all those artsy-activist mocha mills possible.

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There is Wisdom in TJICistan

As usual, I'm with Travis:

Q: Yes, but can we assume that Travis, as a libertarian / anarchist, is against government intervention?

A: Surprisingly, no, my stance isn’t that simple. The first point I have to make is that despite the above, I don’t understand squat about all of this. Which is much less than most of the folks involved, even if what we have in common is that none of us knows enough to really know all the details.

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Kling on Overconfidence

At odd intervals I've been shown snapshots from a land presided over (or 1/2 presided over) by Arnold Kling. I think the NRR may need to build a permanent spur to EconLog. Here’s a quick glimpse:

Holy Crap.

Preliminary and unresearched, but seemingly a bit more than plausible…

Uncertainty about asset valuation has investors buying Treasury securities rather than stock equity or bonds. The Fed is taking that investor wealth and buying bonds and equity in companies holding un-valuable assets derived from mortgage loans.

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Introducing the Distinctionary

A few years back, your Conductor had his mental locomotive overhauled and upgraded at CoachU. One of the tools CoachU used was called the Distinctionary (pdf). It was designed to highlight sometimes subtle but important differences between words and ideas.

Failure Without Context

Will history make much of the financial volatility we’re seeing? Will September 15th, 2008, achieve a legendary nickname, like Black Monday, or Black Thursday?

I don’t know. And, despite the huge amount of opining facilitated by the internet, nobody else knows, either.

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Time Horizons

Scarcity today, tomorrow abundance.

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Being a Grown-up Can Suck

In choosing, the wise consider both the seen and unseen consequences. It makes life seem harder. Art Carden, reacting to a hurricane-induced spike in the price of gasoline, gives an example:

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