Econ 2009

[__HRB__]

Originally Posted by xilman

And in the mean time?

Paul

What about the mean time?

You cannot have your cake and eat it. If you make an investment that pays off in the future, you will have less to consume in the mean time, so it really depends on how you strongly you discount future wealth.

If you stop taking drugs, there will be withdrawal symptoms. Even if this means temporary pain and suffering, it doesn't mean that this is worse than OD'ing and being permanently dead.

Your answer also reminds me of instances where people nod their heads forward, look at you from below and say in a patronizing manor: "But, what if it happens to you?", as if that would somehow change the odds of some rare event of happening, like getting mugged or murdered, getting HIV through a transfusion, or winning the lottery.

But under the condition that your physician tells you that you have cancer but chemotherapy will cure it with 80% chance, you simply take the bleeding pills and don't worry about losing your pubic hair 'in the mean time'.

[Prime95]

Originally Posted by __HRB__

...evolutionary optimization in markets will eventually weed out sham companies of type B...

That's explains why Ponzi schemes have disappeared -- evolutionary optimization got rid of them. That also explains why shady car dealers, charitable fund raisers that pocket 99% of the take, shoddy homebuilders are all gone.

You present some of the most ill-conceived, least-thoughtful ideas anyone has ever posted here. You seem to think if you present them with enough bluster that will make up for their obvious holes.

So please educate this moron on how we consumers benefit when a bank using sham insurance company B goes belly up leaving thousands of depositors with a loss. Oh, we learned company B is bogus. So it disbands, creates a few shell corporations and reconstitutes itself as sham insurance company C so that thousands more depositors are shafted when the next bank goes under. In fact, your precious economic Darwinism theory pretty much guarantees that any bank that goes under will be buying the cheapest (riskiest) deposit insurance it can find. I guess that's OK -- Americans will learn not to use banks at all. That will be good for economic growth.

[ewmayer]

Bernanke Warns Long-Term U.S. Budget Deficits Threaten Financial Stability: Federal Reserve Chairman Ben S. Bernanke said large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” Bernanke said in testimony to lawmakers today. “Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.”

Bernanke’s comments signal that the central bank sees risks of a relapse into financial turmoil even as credit markets show signs of stability. He warned the financial industry remains under stress and the credit crunch continues to limit spending.

The Fed chief said in his prepared remarks to the House Budget Committee that deficit concerns are already influencing the prices of long-term Treasuries.

Yields on 10-year notes have climbed about 1 percentage point since the Fed announced plans in March to buy $300 billion of long-term government bonds. The notes yielded 3.57 percent at 11:37 a.m. in New York, down from 3.61 percent late yesterday.

Rise in Yields

“In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen,” Bernanke said. “These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows and technical factors related to the hedging of mortgage holdings.”

The budget deficit this year is projected to reach $1.85 trillion, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

“Either cuts in spending or increases in taxes will be necessary to stabilize the fiscal situation,” Bernanke said in response to a question. “The Federal Reserve will not monetize the debt.”

My Comment: For once I agree with Bernanke - I figured that recent spike in Treasury yields would get his attention. The last bit about not monetizing the debt could well read "cannot monetize the debt", because after this recent warning shot from the "bond vigilantes" Bernanke knows that attempting to print a couple trillion $ more or issue a similar amount in T-bills without any sign of serious fiscal belt-tightening in DC risks a crisis in the market for U.S. debt, and if the U.S. government`s credit card has its interest rate raised (by way of would-by-buyers of Treasuries demanding much-higher rates) in similar fashion as bailed-out banks are doing to consumers all over the country, the whole scheme to try to quantitatively-ease our way out of the crisis blows sky high.

And as I mentioned a few days ago, the "misbehavior" of bond yields is having more-immediate effects as well:

Home Refinancing in U.S. Tumbles as Rate Window Closes: Chart of the Day: Applications to refinance mortgages have tumbled since fixed, 30-year mortgage rates began moving up from a historic low at the end of April as the recession showed signs of easing.

“The window was there, and it’s closed,” said John Herrmann, chief economist at Herrmann Forecasting in Summit, New Jersey. “Rates won’t be an incentive for refinancing for the rest of the year.”

The CHART OF THE DAY shows a four-week moving average of the Mortgage Bankers Association’s index of applications to refinance fell 37 percent to 4056.75 in the week ended May 29 from the week ended April 10, while fixed 30-year loan rates rose to 5.36 percent yesterday from a low of 4.85 percent at the end of April, according to data from Bankrate.com.

Mortgage rates have followed Treasury yields lower since the government announced in November it would begin purchases of mortgage-backed debt, followed by massive purchases of Treasury debt in a bid to lower rates and spur demand in a housing market in its third year of a recession.

My Comment: This also will make it harder for would-be sellers, as the following story shows:

Even Tim Geithner can't sell his house: Treasury Secretary is renting out his home in a tony New York suburb after the property went unsold for months.

NEW YORK (CNNMoney.com) -- Treasury Secretary Tim Geithner is struggling to unload his million-dollar manse located in a posh New York City suburb. And like so many other Americans, he'll probably lose money on it when he does.

Geithner and his wife Carole put their 5-bedroom Tudor-style home in Larchmont, New York on the market for $1.635 million in February, just days after he was tapped by the Obama administration to help lead the nation out of the worst economic crisis in a century.

The Geithners paid a premium for the house when they bought it in 2004, plunking down $1.601 million after a bidding war. The "exquisitely renovated" home was originally built in 1931, according to a listing for the 0.2 acre property.

"When the house first went on sale it was very evident that he was not going to get what he paid for it," said Scott Stiefvater of Stiefvater Real Estate in Pelham, N.Y. "He was [bound] to lose some money."
0:00 /6:08Real estate: A buyer's market

It's a familiar story as the housing crisis unfolds across the country. Indeed, after Geithner's house sat unsold for nearly 3 months, the price dropped to $1.575 million. Still there were no takers, so Geithner listed it as a rental for $7,500 a month, and has since found a tenant.

My Comment: Maybe Timmy can get his bubble-priced home listed as a "distressed asset" and bail himself out with some TARP money.

[__HRB__]

Originally Posted by Prime95

So please educate this moron on how we consumers benefit when a bank using sham insurance company B goes belly up leaving thousands of depositors with a loss.

Because the depositors who have chosen banks insured by company A have not lost their deposits. If government C insures the deposits with a martingale strategy, the alternative is that everybody suffers the maximum possible loss.

Government C's deposit insurance is actually an illusion: you get some cash, but the net present day value of your income is reduced by at least the same amount, since C borrowed the money, for which you have to pay the interest in form of higher taxes.

If you think there is something wrong with the theory of optimal stopping, then please enlighten me.

Originally Posted by Prime95

Oh, we learned company B is bogus. So it disbands, creates a few shell corporations and reconstitutes itself as sham insurance company C so that thousands more depositors are shafted when the next bank goes under.

That Company A has been in business longer than company C, signals credibility. This is one of the reasons companies advertise with "Making Stuff Since 1859, family owned" and why people ceteris paribus are usually willing to pay more for a brand.

Originally Posted by Prime95

In fact, your precious economic Darwinism theory pretty much guarantees that any bank that goes under will be buying the cheapest (riskiest) deposit insurance it can find. I guess that's OK -- Americans will learn not to use banks at all. That will be good for economic growth.

Causality is reverse: a Bank with a practically non-existent deposit insurance, is forced to offer high interest rates to attract depositors, which means that they are forced to adversely select borrowers, which will make them go under.

In the days when there was no deposit insurance, banks used different methods to signal that deposits were safe, so the existence of a deposit insurance is not required for financial intermediaries to exist.

The earlierst evidence of money-changing activity is depicted on a silver drachm coin from ancient hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350-325 BC, presented in the British Museum in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city.

Originally Posted by Prime95

That's explains why Ponzi schemes have disappeared -- evolutionary optimization got rid of them. That also explains why shady car dealers, charitable fund raisers that pocket 99% of the take, shoddy homebuilders are all gone.

No stupid, Ponzi schemes have disappeared, because the SEC stops them before they get big, shady car dealers will disappear as soon as the gummint manufactures cars, and shoddy homebuilders have never existed because Freddie & Fannie made sure that they gave loans to people who excel at that real-estate thingy-doozey.

[Fusion_power]

hrb really earns his avatar. oh what a stink.


Your 'martingale' logic fails hrb. Markets are not efficient. The economy is NOT a genetic algorithm. It might be a Poisson process, but even that can be argued. If you go to your local bank and they decide you are a bad risk and refuse to lend you money, it is probably because your credit score is low because of all the credit cards you carry.

Look around for really good deals on Chrysler vehicles. There are places selling them for 3/5 of invoice price and soon they will be below 1/2 of invoice.

DarJones

[Prime95]

Originally Posted by __HRB__

the alternative is that everybody suffers the maximum possible loss.

No, the alternative is that millions suffer a small loss, rather than a few suffering large losses. That is the whole point of insurance.

That Company A has been in business longer than company C, signals credibility.

Tell that to Lehman Brothers investors. 158 years of credibility there.

In the days when there was no deposit insurance, banks used different methods to signal that deposits were safe, so the existence of a deposit insurance is not required

That's why no one lost any deposits in the Great Depression. The good ol' days before government insurance.


Can FDIC be run better? Certainly. Would we better off without FDIC? Certainly not.

[__HRB__]

Originally Posted by Prime95

No, the alternative is that millions suffer a small loss, rather than a few suffering large losses. That is the whole point of insurance.

Some things cannot be insured because of adverse selection phenomena. This is the main reason why there is no insurance against poverty, as it is more likely that you will be insuring people who will become poor, or will take grater risks because of the insurance. The term 'Moral Hazard' doesn't mean what most people think it means.

Typically you end up with a trade-off between distributing risk and creating risk. The higher the deductible, the lower the moral hazard, but the less diversified the risk.

Any feasible deposit insurance can therefore realistically only cover a fraction of the deposits, and this fraction would need to be adjusted according to systematic risk, and if you could do this you'd be a billionaire.

Originally Posted by Prime95

Can FDIC be run better? Certainly. Would we better off without FDIC? Certainly not.

I suggest you read a couple of papers on the subject, before you make up your mind. Under the assumption of rational expectations a deposit insurance always leads to inefficient allocations of risk, so the whole thing can only work if all actors are sufficiently irrational, which can only be true for the management of the FDIC, using standard adverse selection arguments: if you are good at what you are doing, a profit maximizing bank will pay you much more than the FDIC.

[fivemack]

Originally Posted by __HRB__

Some things cannot be insured because of adverse selection phenomena. This is the main reason why there is no insurance against poverty, as it is more likely that you will be insuring people who will become poor, or will take grater risks because of the insurance. The term 'Moral Hazard' doesn't mean what most people think it means.

No, all that means is that there are things that you can't insure against in a model which allows people to opt out.

For example, I would be in the highest degree uneasy about depositing money in a bank that had opted out from the deposit insurance scheme, because I can think of no honest reason for a bank to do so and a dozen reasons why a dishonest bank might find it helpful, and dishonest banks have in practice been indistinguishable from honest banks until they close and the money goes away.

I live in a country which has insurance against poverty. My employer pays about 12% of my net income as 'national insurance', as does everybody else's employer, and as a side-effect everyone gets free medical care, a small state pension when they retire, housing at the end of a long waiting list and not-terribly-generous benefits when unable to work.

It is possible to buy private unemployment insurance, but it's very expensive; it's generally lumped in with offers of credit that it would be unwise to accept.

[__HRB__]

Originally Posted by fivemack

No, all that means is that there are things that you can't insure against in a model which allows people to opt out.

The issue is that the presence of insurance changes your behavior. Taking away the possibility of opting out makes it worse.

Originally Posted by fivemack

For example, I would be in the highest degree uneasy about depositing money in a bank that had opted out from the deposit insurance scheme, because I can think of no honest reason for a bank to do so and a dozen reasons why a dishonest bank might find it helpful, and dishonest banks have in practice been indistinguishable from honest banks until they close and the money goes away.

See?

You are in collusion with the dishonest bank, as they can afford to pay you a higher interest rate, offer better service, etc, because they know their business is not sustainable.

Because of the insurance you simply don't care whether the bank is dishonest or not, and you happily give it money it can gamble with. 'Moral Hazard' applies both to the bank and you.

Banks as financial intermediaries have a purpose. Collecting cash and going to a casino because the antes are insured isn't it.

Originally Posted by fivemack

I live in a country which has insurance against poverty. My employer pays about 12% of my net income as 'national insurance', as does everybody else's employer, and as a side-effect everyone gets free medical care, a small state pension when they retire, housing at the end of a long waiting list and not-terribly-generous benefits when unable to work.

That system is not sustainable.

Originally Posted by fivemack

It is possible to buy private unemployment insurance, but it's very expensive; it's generally lumped in with offers of credit that it would be unwise to accept.

This is a scam targeted a people who can't handle money.

[ewmayer]

Originally Posted by Fusion_power

Your 'martingale' logic fails hrb. Markets are not efficient.

I would argue that open non-centrally-controlled markets with reasonable common-sense regulation and (this is by far the most important) where inefficiency and deception, when they come to light, are actually allowed to be punished at least have a reasonable chance of being efficient. Here at self-proclaimed "Capitalism Central" (the USA) we have now managed to achieve just the opposite on most of those fronts:

- The markets are not open in the sense that they are dominated by a few favored too-big-to-fail insiders who have also managed to capture most of the supposed regulators;

- The markets are becoming more centrally controlled all the time, as the government nationalizes one failed company after another, pours trillions into propping up the Walking Dead, and the Fed and Treasury continue their unprecedented power grab. (Do you think they're just gonna relinquish all that new-found juice when the current crisis abates? Dream on...)

- Lying, lack of transparency, active obfuscation and fraud are nearly always rewarded (and when the schemes blow up, bailed out), aside from a tiny handful of highly-publicized scapegoats like Madoff. (A genuinely guilty scapegoat in that case, but a small Ponzi in the face of the ongoing giant Ponzi that is Wall Street, Fractional Reserve Lending and Central-Bank money-printing).

-------------------------

But on to the really big news of the day, which not surprisingly is AIG-related:

Manchester United dumps AIG: The British soccer team inks deal with Aon Corporation, severing ties with its long-time sponsor.

Manchester United will soon shed the AIG logo, the British soccer team announced Wednesday, officially ending its association with the fallen insurance giant next year.

The team, which has one of the most recognizable sports brands in the world, said it reached a new sponsorship agreement with global risk management company Aon Corporation.

Aon will replace American International Group Inc., the massive insurance group that was taken over by the government last year, as the team's sponsor.

My Comment: Well, after Man U`s failed attempt to obtain some TARP money by way of a "AIG-sponsored distressed 11-meter assets" argument, they really did have little choice but to make a move on the major-sponsor front.

[__HRB__]

Originally Posted by ewmayer

I would argue that open non-centrally-controlled markets with reasonable common-sense regulation [...] at least have a reasonable chance of being efficient.

And by what magic do we get 'reasonable common-sense regulation'? The key to understanding why free markets are efficient (and not reasonably efficient), is that market-failure guarantees regulation-impossibility or at best regulation-inefficiency, which is why every single regulation that has a positive trade-off deals with public goods.

Credit, Cars, Drugs, Sexual Contracts, Education, Health-care are not public goods and therefore all suffer from regulation-failure, as predicted by theory and confirmed by observation. Just because it went 'click' for a couple of years doesn't mean that it has become safer to pull the trigger again.

All effort to 'reasonable common-sense regulate' should be used to examine the regulation of public goods, since you can mess that up even more, if you get it wrong. In the US there is such an over-supply of public defense, that the US is *ahem* giving it away for free *ahem* to countries that don't even want it.