Apparently it happened on Dec. 14, 2009, but his memorial service was only held at Columbia University on April 11, and I only just became aware of it through a posting by Peter Boettke. There are various links there, including to an obit in the Boston Globe. He was 97 years old, and not well known by the time of his death, although quite prominent in an earlier era. He was a specialist in public finance and land use, among many other topics, serving on the board of directors of the Lincoln Institute of Land Policy for many years, where he expressed sympathy with Georgist views and broader tax simplification, while declaring that he did not like the term "land value taxation."
He was not easy to classify. Nominally a Republican and a member of the Mont Pelerin Society, he nevertheless was a close friend of the late William Vickrey, whom he was with when I first met him at an Eastern Economic Association meeting back in the early 1990s. Vickrey was very much on a push for policies to guarantee full employment, and I heard Harriss agreeing with him on this. When Vickrey died three days after receiving the Nobel Prize in economics in 1996, it was Harriss who spoke in his place at the Nobel ceremony in Stockholm and forcefully presented his friend's arguments for vigorous policies to achieve full employment, something that would make both of them very relevant today.
From what I saw and what I have read elsewhere, Lowell Harriss was kind and wise and polite to all he met, a gentleman scholar of the old school, and one who will be missed.
Sunday, April 18, 2010
The Logic of Monitoring Workers
Juan Gonzalez published a fascinating article about New York's over-priced, dysfunctional computer system that pointed to a number of problems with the world we live in.
First of all, the system, like many complex computer systems, does not work.
Second, 230 consultants are getting an average salary of $400,000.
Finally, one of the great ironies is that the system is supposed to keep track of ordinary workers to make sure that they are not overpaid.
Gonzalez, Juan. 2010. "'Consultants' getting $722M from city for doomed CityTime computer project." New York Daily News (26 March).
First of all, the system, like many complex computer systems, does not work.
Second, 230 consultants are getting an average salary of $400,000.
Finally, one of the great ironies is that the system is supposed to keep track of ordinary workers to make sure that they are not overpaid.
Gonzalez, Juan. 2010. "'Consultants' getting $722M from city for doomed CityTime computer project." New York Daily News (26 March).
The city is paying some 230 "consultants" an average salary of $400,000 a year for a computer project that is seven years behind schedule and vastly over budget. The payments continue despite Mayor Bloomberg's admission the computerized timekeeping and payroll system -- called CityTime -- is "a disaster"." Eleven CityTime consultants rake in more than $600,000 annually, with three of them making as much as $676,000, city records obtained under a Freedom of Information request show.
The 40 highest-paid people on the project bill taxpayers at least $500,000 a year. These enormous salaries are coming out of a $139 million extension to the CityTime contract that began July 1 and runs to September 30. Some of the consultants have been working at these rates for as long as a decade. Take, for example, Brian Fallon, a CityTime "project manager." The Science Applications International Corp., which employs Fallon and supplies the consultants, charged $653,554 for his services in 2009. When the Daily News approached Fallon, 40, this week outside his home in Belle Mead, N.J., he declined to say what he does to merit such a fat check.
Then there is Constantin Stanca, a "development manager" for CityTime for 10 years. He made $524,000 in 2009. "It's a difficult project," the 43-year-old Stanca said, as he left his New Hyde Park, L.I., home yesterday for work. "Look at this white hair here," he added, pointing to his salt and pepper goatee.
Gerard Denault, 48, of Darien, Conn., has been a "project director" for several years. He got $543,698 from the city last year -- for less than 30 hours a week of work on CityTime. The actual amounts individual SAIC employees took home are most likely lower than their stated rates, since computer firms typically take a cut of each consultant's charges. Nonetheless, these are breathtaking numbers. "In my three decades in the business, I've never seen salary levels like these," said a veteran technology manager who once worked on CityTime.
CityTime's installation started in 1998 and was supposed to take five years. Officials promised that biometric scanners and automatic timeclocks on all personal computers would eliminate the age-old abuse of city workers punching clocks for their friends and save up to $60 million a year. Defense contractor SAIC took over the original contract in 2000, but the firm has managed to roll out the system to only a third of the 145,000 city employees who were supposed to use it.
Costs have skyrocketed. City Controller John Liu said the price tag has reached $722 million -- more than 10 times the original projection. SAIC, by the way, is the company the FBI threw off the job a few years ago after charging the agency $170 million for a virtual file system that never worked.
Bloomberg conceded three weeks ago CityTime is "a disaster," but offered no plans to fix it. He acknowledged the problem only after the Daily News exposed CityTime's spiraling costs and after the paper revealed that more that a dozen consultants supplied by Spherion -- a second firm hired to monitor CityTime's costs -- were racking up salaries of more than $300,000 each.
Several former CityTime workers have told The News city officials have ignored their complaints about questionable consultant timesheets, defective software and possible conflicts of interest between key CityTime managers and subcontractors. In January, Liu rejected an extension of Spherion's contract and began the first-ever audit of the entire project. Liu has since labeled CityTime a "money pit." He urged Bloomberg to suspend payments until the audit is finished. "People who worked on this aren't stupid and aren't lazy," Bloomberg said. "Some projects are so big and the world changes so fast while you're building them, [you realize] maybe that's not a good way to do anything." That cavalier excuse is unacceptable. Our city is facing its biggest financial crisis in years and Bloomberg has decreed major cuts in jobs and basic services.
Last fall, City Hall laid off 510 public school aides to save $12 million. At the same time, the mayor's aides were adding more than $24 million to the operating budget of the office of payroll administration just to help pay for CityTime's consultants. How can anyone justify firing $18,000-a-year school aides while hiring half-a-million-dollar computer geeks who can't even deliver a good product?
Joel Bondy, head of the city's office of payroll and the man in charge of CityTime, told a City Council hearing in December the project would be completed by September. Yet, the fine print in the new CityTime contract shows Bondy plans to keep as many as 100 of the SAIC consultants employed for another four years. There will be "a need for minimal continued consulting support after the implementation of CityTime," an OPA official confirmed. The existing contract, the official said, does "not accurately reflect the level of such support".
It's time to speak plainly. CityTime is a new-age version of feeding at the government trough. It's a luxury employment project for computer geeks with friends and connections in high places. The mayor should fire everyone in charge of it. He should pull the plug on this boondoggle now.
Gates Agrees Iran Only Pursuing Nuclear Latency; Khamenei Repeats Anti-Nuclear Weapons Fatwa
Once again Juan Cole is pointing out important things, http://www.juancole.com. Defense Secretary Robert Gates has given a speech in which he worries that the US will not know what to do if/when Iran achieves the ability to make a nuclear weapon, known as "nuclear latency." While he clearly believes they are pursuing such latency, this is very different from saying that they have an active program of constructing nuclear weapons, which many allege despite longstanding US intel findings that they are not doing so. Cole points out that as long as IAEA inspectors are accessing their sites, this will be extremely unlikely.
OTOH, Iranian Supreme Jurisprudent and Commander-in-Chief, Ali Khamenei, has just made a major speech that Cole provides a translation from in which he reiterates his fatwa against obtaining and particularly using nuclear weapons. He denounces the US for being the only nation in the world to have done so, mentioning Hiroshima. Clearly he is replying to the focus on Iran at the nuclear security summit in Washington organized by Obama, even though Charles Krauthammer has been running around declaring that there was no focus on Iran there.
I support the recently signed treaty with Russia and also most of what went on in Washington, such as securing loose nuclear materials. But the focus on going after the currently-compliant Iran remains a bit mysterious. Actually, it is not so much so. The real object of this exercise is Israel, with its reported 200 or so nuclear bombs, who refused to attend the summit in a fit of pique at Obama's efforts to get it to stop building West Bank settlements and to get back into negotiations with the Palestinians. The Israelis view Iran as an existential threat, clearly viewing Khameini as either lying or powerless. Anyway, it would appear that the US is using up lots of its scarce political capital with China because of this problem of trying to convince the Israelis that "something is being done about about Iran."
OTOH, Iranian Supreme Jurisprudent and Commander-in-Chief, Ali Khamenei, has just made a major speech that Cole provides a translation from in which he reiterates his fatwa against obtaining and particularly using nuclear weapons. He denounces the US for being the only nation in the world to have done so, mentioning Hiroshima. Clearly he is replying to the focus on Iran at the nuclear security summit in Washington organized by Obama, even though Charles Krauthammer has been running around declaring that there was no focus on Iran there.
I support the recently signed treaty with Russia and also most of what went on in Washington, such as securing loose nuclear materials. But the focus on going after the currently-compliant Iran remains a bit mysterious. Actually, it is not so much so. The real object of this exercise is Israel, with its reported 200 or so nuclear bombs, who refused to attend the summit in a fit of pique at Obama's efforts to get it to stop building West Bank settlements and to get back into negotiations with the Palestinians. The Israelis view Iran as an existential threat, clearly viewing Khameini as either lying or powerless. Anyway, it would appear that the US is using up lots of its scarce political capital with China because of this problem of trying to convince the Israelis that "something is being done about about Iran."
Saturday, April 17, 2010
Greek Economic Corruption
Today's Wall Street Journal reports on the large burden of corruption in the Greek economy. I posted a brief comment on the Journal website.
I am appalled by the reports of Greek corruption. A civilized country, such as the US, manages to keep corruption in check by redefining it as lobbying.
Wednesday, April 14, 2010
The Disposition to truck and barter
I have been thinking about Smith's claim in the opening arguments of the Wealth of Nations that the source of the Division of Labor is "the disposition to truck and barter." This has always puzzled me. He makes it clear that what he has in mind is disposition to truck and barter for its own sake. Why is such a disposition necessary in order for self-interested individuals to see the advantage of specialization and trade?
I have a suggested answer. In many potted histories of economic thought you may see a comparison of Smith and Ricardo on trade which says something like, " Smith focused on absolute advantage while Ricardo pointed to comparative advantage as the source of gains from trade." This seems to me to miss the point. What is distinctive about Smith on trade is that he makes the the differing advantages, absolute or comparative, that people have a consequence, instead of a cause, of specialization. By specializing we become differently skilled, though prior to specialization we are identical. This in turn reflects the fact that "the division of labor is limited by the extent of the market." A Portugal and England with identical resource endowments and identical increasing return technologies for producing wine and textiles can gain from specializing and trading. And it doesn't matter who makes the wine and who makes the textiles.
So here's my suggestion. If, prior to specialization, we are all pretty much alike, a disposition to truck and barter for its own sake, even where apparent gains from trade are negligible to non-existent, could get the specialization ball rolling.
I have a suggested answer. In many potted histories of economic thought you may see a comparison of Smith and Ricardo on trade which says something like, " Smith focused on absolute advantage while Ricardo pointed to comparative advantage as the source of gains from trade." This seems to me to miss the point. What is distinctive about Smith on trade is that he makes the the differing advantages, absolute or comparative, that people have a consequence, instead of a cause, of specialization. By specializing we become differently skilled, though prior to specialization we are identical. This in turn reflects the fact that "the division of labor is limited by the extent of the market." A Portugal and England with identical resource endowments and identical increasing return technologies for producing wine and textiles can gain from specializing and trading. And it doesn't matter who makes the wine and who makes the textiles.
So here's my suggestion. If, prior to specialization, we are all pretty much alike, a disposition to truck and barter for its own sake, even where apparent gains from trade are negligible to non-existent, could get the specialization ball rolling.
3.5 Million New Jobs is Not Nearly Enough
CNNMoney and the Vice President must think this is excellent news:
Job growth is better than job losses and this does seem to be sufficient to lower the unemployment rate by a modest amount. But let’s assume that simply keeping pace with a rising population and labor force means we have to create 100,000 new jobs per month. With the civilian non-institutional population being near 237 million, the projected increase in the employment to population ratio for 2010 seems to be a mere 1 percent. This ratio was 58.2% as of December 2009 and has risen to 58.6% as of March 2010. If it rises to 59.2% by the end of the year, we will still have a very weak labor market.
The government's Recovery Act is responsible for between 2.2 and 2.8 million jobs through the first quarter of 2010, according to the latest stimulus report from President Obama's chief economic adviser. The report, from the Council of Economic Advisers, says the economic stimulus is on track to create or save 3.5 million jobs by the end of the year. "From tax cuts to construction projects, the Recovery Act is firing on all cylinders when it comes to creating jobs and putting Americans back to work." Vice President Joe Biden said in a statement.
Job growth is better than job losses and this does seem to be sufficient to lower the unemployment rate by a modest amount. But let’s assume that simply keeping pace with a rising population and labor force means we have to create 100,000 new jobs per month. With the civilian non-institutional population being near 237 million, the projected increase in the employment to population ratio for 2010 seems to be a mere 1 percent. This ratio was 58.2% as of December 2009 and has risen to 58.6% as of March 2010. If it rises to 59.2% by the end of the year, we will still have a very weak labor market.
Tuesday, April 13, 2010
What Letter Defines The Shape of the Great Recession: L, U, V, or W?
And the answer is: None of the above. Maybe somewhere between an L and a V, although the disjuncture between the turning around of GDP growth last summer and the apparent (keep those fingers crossed) turning around of employment last month, could make a sort of argument for a U, except that we have not seen a fast enough upswing on the back end to justify it any more than a V.
Of course, there have been some V's in other countries, especially in East Asia, where some of the former tigers, such as Taiwan and South Korea had among the sharpest GDP declines in the world, but bounced hard and are booming again, probably being dragged along by the hyper growth of China.
Of course, there have been some V's in other countries, especially in East Asia, where some of the former tigers, such as Taiwan and South Korea had among the sharpest GDP declines in the world, but bounced hard and are booming again, probably being dragged along by the hyper growth of China.
Saturday, April 10, 2010
Will More Immigration Save Social Security?
Robert Reich says so, "Why More Immigrants Are An Answer to the Coming Boomer Entitlement Mess", which is also linked to by Mark Thoma. He has been on the Social Security Advisory board and has heard all the tales of coming Demographic Doom due to the impending wave of boomer retirements, even though the adjustments due to the Greenspan Commission in the early 80s were supposed to pay for the boomers' retirements. This year the fund is running a (small) deficit, and so out of all the sources of the broader federal budget deficit (of which rising medical care costs, not to mention high defense budgets) it is social security that is the Big Problem that Something Must Be Done About (along with Medicare). I would agree that more immigrants will help in the short run, but demography is not the main problem here.
I and Bruce Webb have posted only about a million times in the past here and elsewhere on how if the "optimistic" projection of the SSA were to hold, the system would never run a deficit. In many recent years the economy beat that projection. However, in the last few it has plunged far below the pessimistic forecast with fica revenues collapsing as employment has collapsed in the Great Recession. This is the problem, and the simple solution is to get the economy and employment growing again at something like the optimistic forecast rate. Then the system will go back into surplus, possibly even mostly staying there, without any fiddling with or opening the doors to massive immigration (and, no, I am not anti-immigrant at all here, just trying to be clear about what is what).
Indeed, the fallaciousness of this general demographic hysteria is seen in that the US has among the best demographics for this even with low immigration compared with other OECD economies. Germany (and others) have the age distributions the US will have in 2030 when we hear Doom will hit, and they are paying their pensions all right, with Germany's even higher than the ones here. Really, folks, higher immigration may be an OK thing, but it is relatively peripheral to the condition of the Social Security system. Growing the economy and particularly employment is the key to saving the system.
I and Bruce Webb have posted only about a million times in the past here and elsewhere on how if the "optimistic" projection of the SSA were to hold, the system would never run a deficit. In many recent years the economy beat that projection. However, in the last few it has plunged far below the pessimistic forecast with fica revenues collapsing as employment has collapsed in the Great Recession. This is the problem, and the simple solution is to get the economy and employment growing again at something like the optimistic forecast rate. Then the system will go back into surplus, possibly even mostly staying there, without any fiddling with or opening the doors to massive immigration (and, no, I am not anti-immigrant at all here, just trying to be clear about what is what).
Indeed, the fallaciousness of this general demographic hysteria is seen in that the US has among the best demographics for this even with low immigration compared with other OECD economies. Germany (and others) have the age distributions the US will have in 2030 when we hear Doom will hit, and they are paying their pensions all right, with Germany's even higher than the ones here. Really, folks, higher immigration may be an OK thing, but it is relatively peripheral to the condition of the Social Security system. Growing the economy and particularly employment is the key to saving the system.
Friday, April 9, 2010
Will DeMint And Inhofe Apologize To Al Gore?
After the biggest of the snowstorms hit Washington this winter, Senators DeMint (R-SC) and Inhofe (R-OK) were mocking Al Gore (and many others) over the supposed end of global warming, hah hah hah! Well, it is cooler today, but this week has seen record high temperatures in the Washington area, and where I am two hours away by car in Virginia, the first time ever that temperatures have topped 90 degrees F in early April. Will we hear them apologize and change their tunes?
Now, of course I do not buy into that this week's temperatures around here show doodley-squat about long-run global temperature trends, just as they should have recognized the same regarding the colder temperatures than seen for quite a few years in this area (but hardly record levels) and the record-setting snowfall levels (actually consistent with global warming due to the greater amounts of water vapor in the air). Oh, and just for the record, the latest report is that January 2010 was #5 in all time recorded global average temperature, Feb 10 was #3, and March 10 was #4, with NASA now predicting that 2010 is likely to beat the all time record for a 12-month period, although I think we'll have to wait on that one and see. In any case again, DeMint and Inhofe are looking pretty silly, but I shall not be holding my breath for their acknowledgement of same or any apologies to anybody.
Now, of course I do not buy into that this week's temperatures around here show doodley-squat about long-run global temperature trends, just as they should have recognized the same regarding the colder temperatures than seen for quite a few years in this area (but hardly record levels) and the record-setting snowfall levels (actually consistent with global warming due to the greater amounts of water vapor in the air). Oh, and just for the record, the latest report is that January 2010 was #5 in all time recorded global average temperature, Feb 10 was #3, and March 10 was #4, with NASA now predicting that 2010 is likely to beat the all time record for a 12-month period, although I think we'll have to wait on that one and see. In any case again, DeMint and Inhofe are looking pretty silly, but I shall not be holding my breath for their acknowledgement of same or any apologies to anybody.
Tuesday, April 6, 2010
WaPo Worries That The End May Be Near!
Today the Washington Post had a story all worried about ten year interest rates going from around 3.5% on March 4 to nearly 4.0% yesterday. They note that this might reflect expectations of growth, but also worry that it might reflect expectations of rising inflation and dangers of collapse due to rising indebtedness. They did not bring up the earlier worrying that this was due to the Chinese not buying US bonds to punish us since they ran a trade deficit in March and did not have much money to buy foreign bonds with. They also worried about associated increases in housing mortgage interest rates, which tend to track the ten-year bond rate.
Curiously WaPo failed to note that most of this interest rate increase occurred during only a few days after March 22. This did correspond with the "weak" bond sale, but it also corresponded with the final ending of the Fed's support for the MBS market, which in turn had been propping up pretty much the entire secondary market in housing mortgages for well over a year. The winding down of this has been gradual, but in fact the real story here has been that the dropping of this final shoe had many on tenterhooks that there might not be anybody there at all to pick up the slack in the MBS market. If that had been the case, we would have seen mortgage rate increases far in excess of what happened, which was in line with the ten-year bond rate increase. This is one of those stories about how a dog did not bark, and in this case, to really mix my metaphors, we have apparently missed a dangerous bullet that could have thoroughly derailed the nascent recovery.
Curiously WaPo failed to note that most of this interest rate increase occurred during only a few days after March 22. This did correspond with the "weak" bond sale, but it also corresponded with the final ending of the Fed's support for the MBS market, which in turn had been propping up pretty much the entire secondary market in housing mortgages for well over a year. The winding down of this has been gradual, but in fact the real story here has been that the dropping of this final shoe had many on tenterhooks that there might not be anybody there at all to pick up the slack in the MBS market. If that had been the case, we would have seen mortgage rate increases far in excess of what happened, which was in line with the ten-year bond rate increase. This is one of those stories about how a dog did not bark, and in this case, to really mix my metaphors, we have apparently missed a dangerous bullet that could have thoroughly derailed the nascent recovery.
Friday, April 2, 2010
Another Incremental Improvement of a Bad Labor Market
BLS reports that the economy added just over 160 thousand news jobs during March but the reported unemployment rate remained at 9.7%. This 160 thousand plus new jobs showed up in both the payroll survey and the household survey reporting but we should also note that the labor force participation rate also inched upwards so when the employment-population ratio also inched upwards, the unemployment rate remained the same.
Our graph shows that we have had very modest improvements in the employment-population ratio for the last 3 months – from 58.2% to 58.6% - as we have also seen the labor force participation rate rise – from 64.6% to 64.9%. Note also the tremendous decline in the employment-population ratio from December 2006 to December 2009. The rise in the unemployment during this period understated the decline in the employment-population ratio as labor force participation also declined. While we are making small progress, we are very far away from a healthy labor market.
Thursday, April 1, 2010
Term Structure and Default: April Fool’s
Paul Krugman does a nice job discussing the recent term structure and the competing hypothesis of why it is so steep:
As many people have noticed, the term spread — the difference between short-term and long-term interest rates — is very high. The last time I wrote about this, people were taking this as proof that the economy would recover soon. Now they’re taking it as bad news — as somehow suggesting fears of default. But there’s a reason for a high term spread that has nothing to do with either explanation. As I tried to explain last time, to a first approximation you can think of the long term rate as reflecting an average of expected future short-term rates. Short-term rates, in turn, tend to reflect the state of the economy: if the economy improves, the Fed will raise short-term rates, if the economy worsens, the Fed will cut. So long-term rates can be either above or below short rates. Except that now they can’t. If the economy improves, short rates will rise; but if it worsens, well, they’re already zero, so there’s nowhere to go but up. This implies that there has to be a positive term spread.
Paul continues by noting that the fear of default hypothesis would be reflected in higher inflationary expectations. Our graph, which reflects government bond rates for March 31, 2010, shows the term structure for nominal rates (blue) as well as for real rates (red). The difference (green) reflects the term structure with respect to expected inflation. Not only is expected inflation quite modest even as measured by the 30-year bond rates, the upward tilt of our green line is not as pronounced as the term structure for real rates.
Wednesday, March 31, 2010
The Shadow Knows
Gary Gorton has a piece floating around - I would link to if I weren't so inept - arguing that the financial crisis amounts to a classic bank run in the unregulated shadow banking sector. I found the description of the liquidity transformation that goes on in this sector fascinating, but at first I couldn't quite wrap my head around it. The more I thought about it the more it seemed to me a good example of the core idea of the classic Diamond/Dybvig article on bank runs. Let me explain.
The chief action in the shadow banking sector, Gorton says, looks something like this. Corporate treasurers flush with liquid funds buy securities from investment banks under repurchase agreements. My initial question was: where do the funds to repurchase the securities come from? I think the answer must be: from liquidating the securities. Which raises the further question: why don't the corporate treasurers hold the securities directly and liquidate them themselves? This is where Diamond/Dybvig comes in, I think. (Someone who knows what's really going on out there, I'm happy to be corrected. I'm begging to be, but indulge me a little longer!)
The idea in the article is that there is one asset available which is illiquid. If held for one period it yields a gross return of 1 upon liquidation; if held until maturity (for 2 periods) it yields a gross return of 2. Savers prefer a more liquid asset - one with a higher return if liquidated even at the cost of a smaller return if held for 2 periods. Savers may be of two types. One type wants to consume only in one period; the other type only values consumption in 2 periods. They learn their type only after one period. Each has the same probability of being a type 1 and my chance of being type 1 is independent of yours. With a large enough number of us, there is no uncertainty about the proportion who will be type 1's. So say all of us would maximize expected utility with an asset which gave us 1.28 if we turn out to be type 1's and 1.813 if we turn out to be type 2's. And suppose the probability of being type 1 is 1/4. There are 100 of us endowed with one unit, which is the cost of the asset. A "bank" pools the deposits and buys 100 units of the asset. After 1 period, they liquidate 32 units of the asset for one unit each, allowing them to pay each of the 25 type 1's 1.28 each. The remaining 68 units of the asset mature next year, paying 2 each, allowing them to pay 136/75 = 1.813 to each of the 75 type 2's, as promised. So the "bank" doesn't hold liquid reserves at all - like Gorton's shadow banks as I understand them. Mutatis mutandis: think one-period repos. 75 of the corporate treasurers are happy to renew their purchases after one period, so what the bank owes them is exactly offset by what they owe the bank and no funds move in either direction. The other 25 do not want to renew, so the shadow bank liquidates 32 of the assets.
Does this sound remotely plausible?
The chief action in the shadow banking sector, Gorton says, looks something like this. Corporate treasurers flush with liquid funds buy securities from investment banks under repurchase agreements. My initial question was: where do the funds to repurchase the securities come from? I think the answer must be: from liquidating the securities. Which raises the further question: why don't the corporate treasurers hold the securities directly and liquidate them themselves? This is where Diamond/Dybvig comes in, I think. (Someone who knows what's really going on out there, I'm happy to be corrected. I'm begging to be, but indulge me a little longer!)
The idea in the article is that there is one asset available which is illiquid. If held for one period it yields a gross return of 1 upon liquidation; if held until maturity (for 2 periods) it yields a gross return of 2. Savers prefer a more liquid asset - one with a higher return if liquidated even at the cost of a smaller return if held for 2 periods. Savers may be of two types. One type wants to consume only in one period; the other type only values consumption in 2 periods. They learn their type only after one period. Each has the same probability of being a type 1 and my chance of being type 1 is independent of yours. With a large enough number of us, there is no uncertainty about the proportion who will be type 1's. So say all of us would maximize expected utility with an asset which gave us 1.28 if we turn out to be type 1's and 1.813 if we turn out to be type 2's. And suppose the probability of being type 1 is 1/4. There are 100 of us endowed with one unit, which is the cost of the asset. A "bank" pools the deposits and buys 100 units of the asset. After 1 period, they liquidate 32 units of the asset for one unit each, allowing them to pay each of the 25 type 1's 1.28 each. The remaining 68 units of the asset mature next year, paying 2 each, allowing them to pay 136/75 = 1.813 to each of the 75 type 2's, as promised. So the "bank" doesn't hold liquid reserves at all - like Gorton's shadow banks as I understand them. Mutatis mutandis: think one-period repos. 75 of the corporate treasurers are happy to renew their purchases after one period, so what the bank owes them is exactly offset by what they owe the bank and no funds move in either direction. The other 25 do not want to renew, so the shadow bank liquidates 32 of the assets.
Does this sound remotely plausible?
Monday, March 29, 2010
Is China Punishing The US for Google and Exchange Rate Bashing?
Maybe a little bit, but probably not much. The spike in interest rates on ten year US bonds accompanying a "weak" sale last week from 3.67% to 3.91% has the WSJ and numerous commentators freaking out about US national debt crisis and collapse and also noting that China bought little to nothing, leading some to speculate that China is punishing the US either for Google standing up to them or to the US for Obama pressuring them to appreciate the yuan/renmimbi, with Krugman and others howling for a 25% import tariff on their goods to make them do so. Jim Hamilton at econbrowser provides a good summary of much of this with some excellent comments.
Anyway, there are several reasons not to panic and even to think that while the Chinese are clearly annoyed, their weak buying is probably not due to some massive vendetta/collective punishment. One fact is that last month the Chinese actually ran a trade deficit, suggesting that their currency may not be all that undervalued after all, even if their bilateral surplus with the US remains large. This situation would mean that they are probably buying few foreign securities at all as they do not have the current account inflow to do so. Even if their currency is still undervalued, their high growth rate compared to other countries suggests one would expect their imports to be rising more rapidly than their exports.
Another aspect of this was pointed out by a commenter at econbrowser named Tom, who noted that the Fed has just turned a policy corner towards a more restrictive stance, having just brought to a final end its policy of propping up the housing market with MBS purchases. Many of us had been pointing for some time to March 23-25 as a point when there might be a spike in interest rates as this policy finally came to an end. So, the spike has happened, and we should probably be glad that it has not been worse, especially given the weak buying by the Chinese due to the change in their balance of payments situation, as this could have led to a renewed collapse of the US housing market and a fall into a definite double dip of the recession.
Anyway, there are several reasons not to panic and even to think that while the Chinese are clearly annoyed, their weak buying is probably not due to some massive vendetta/collective punishment. One fact is that last month the Chinese actually ran a trade deficit, suggesting that their currency may not be all that undervalued after all, even if their bilateral surplus with the US remains large. This situation would mean that they are probably buying few foreign securities at all as they do not have the current account inflow to do so. Even if their currency is still undervalued, their high growth rate compared to other countries suggests one would expect their imports to be rising more rapidly than their exports.
Another aspect of this was pointed out by a commenter at econbrowser named Tom, who noted that the Fed has just turned a policy corner towards a more restrictive stance, having just brought to a final end its policy of propping up the housing market with MBS purchases. Many of us had been pointing for some time to March 23-25 as a point when there might be a spike in interest rates as this policy finally came to an end. So, the spike has happened, and we should probably be glad that it has not been worse, especially given the weak buying by the Chinese due to the change in their balance of payments situation, as this could have led to a renewed collapse of the US housing market and a fall into a definite double dip of the recession.
Friday, March 26, 2010
New Frontiers of Corporate Synergy
The buyout shops are purchasing hospitals, no doubt in a charitable effort to make health care more available. Cerberus Capital Management went one step further striking a deal to acquire Caritas Christi Health Care, a large Massachusetts hospital chain. To ensure that the hospital chain will have an opportunity to treat more people, Cerberus also owns Freedom Group Inc., one of the world’s largest makers of firearms and ammunition.
Way to go, capitalism!
Way to go, capitalism!
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