I’m sure this ad seemed like a good idea at the time, but then the rate kept getting higher and higher until this Portland bank said “screw it” and just ripped down the numbers entirely.
Home equity loans aren’t doing so well either.
Tyler Cowen points to a paper [pdf] about what economics majors think of their studies. The most interesting conclusion is that having an unrestricted business program increases satisfaction in the econ department:
A much higher percentage of students were very satisfied with the economics major at schools with unrestricted-entry business programs as compared with schools with a restricted-entry business program. This is logical because many students at restricted-entry business program schools may have taken the economics major as an alternative to the business program as an alternative to the business program they could not get into, and therefore would not be as satisfied because it is not the track they would have chosen ideally…
This data suggests that the presence of an unrestricted-entry business program has a positive impact on the satisfaction levels of economics majors. When such programs exist, the economics major is not forced to balance both the goals of students who would rather be in business programs with the goals of students who would study economics either way; therefore the economics major can more easily suit all of its students’ demands.
This tracks my experience at Vanderbilt, which doesn’t offer an undergraduate business major. The economics major is the largest in the College of Arts and Science and that’s not because Vandy students happen to be particularly curious about economics. It’s because they want to make money in business or law after college and studying econ seems like the thing to do until then. As a result the classes are large and dumbed-down, exercises in mathematical problem solving disconnected from real world application or a tradition of inquiry. (One of my philosophy professors once asked a Vanderbilt economics professor for advice about how to teach the Coase Theorem; his response was that he shouldn’t be trying to teach it to undergrads anyway!)
A few years ago Vandy introduced a minor in managerial studies. According to an article in The Torch, it’s become immensely popular: 350 students were bumped from classes in one semester last year. There’s clearly demand for an undergraduate business program, but the university refuses to offer one on the grounds that it would do harm to the school’s integrity as a liberal arts institution. That may be true, but the cost is an academically weakened economics department. Students who are genuinely interested in economics are done a disservice by having to share their major with so many disinterested peers. The university might be better off shunting business students off into their own interdisciplinary program of some kind.
Catherine Rampell writes:
What is the relationship between economic downturns and the traditional vices? … A quick (and by no means comprehensive) search of economic studies suggests that recessions generally promote healthier behavior. Economic downturns typically…
…reduce both drinking and drunken-driving. According to one paper: “A one percentage point increase in the state unemployment rate lowers the predicted consumption of spirits by over 1.1 percent, compared to just 0.4 percent for beer or wine.”
Aw, man, I thought tending bar was a counter-cyclical career. This may not have been the best summer to quit my job, drive cross country, and hope to find a new one two months later.
At the Freakonomics blog, Justin Wolfers invites Erik Hurst to offer a much-needed counterpoint to calls for re-regulation of the financial sector:
The past decade saw enormous financial innovation and the development of a liquid market to sell mortgage securities for unconventional mortgages (Fannie Mae and Freddie Mac had been securitizing “conventional” mortgages for a long time). Some of these new loans were issued to subprime borrowers: folks with little equity in their homes and lower credit scores.
Yet even as we recognize the costs of the subprime meltdown, we need to recognize the benefits of this innovation.
The homeownership rate in the U.S. increased by 3 percentage points over the past decade — a clear break from the two previous decades of stagnation. Around one-third of these households may ultimately default on their mortgages, but this also means that two-thirds of those who were previously excluded from mortgage markets now own a home.
Access to credit for this historically denied group is a clear benefit of financial innovation. Likewise, even if excessive lending landed us in this mess, the extra investment projects that were funded contributed heavily to economic growth over the past decade and supported the economy during the technology “bust.”
Where to Next?
Knowing what we know now, what is the optimal approach to regulating the subprime sector? Some argue that we should outlaw subprime lending completely. But do we really want to return to the world where the well-off have access to credit, but the historically denied (the poor, the young, African-Americans) can’t access the housing market or other credit markets? Is it really O.K. for only some households to use credit to help them ride out bad times, while others must just do without?
It’s a strange reversal of the usual ideologies, but those of us who care deeply about the poor must care deeply about cultivating a vibrant financial sector to service the subprime market. Otherwise, we truly risk two Americas: the credit-worthy who enjoy the benefits of the capitalist system and a highly developed financial system, and the less credit-worthy, who must live with a level of financial development that we suspect keeps so many third-world nations poor.
I don’t claim to know the best response to the current financial problems, but ten minutes into tonight’s debate it’s clear that we need economists like Hurst keeping regulation in check.
“Fiscal conservatives declare free market dead.” There are 31 of them in the House objecting to the bailouts. They’re unhappy and unheard.
A post last week touched on assigning property rights to overcome the tragedy of the commons issue that threatens to destroy world fisheries. Today’s New York Times reports on a new study explaining how this can work. John Tierney comments:
A global survey of more than 11,000 fisheries points to a profitable system to protect fisheries from collapsing. The bad news is that this system, called catch shares, is used in only 1 percent of the world’s fisheries and is still controversial, but the researchers hope the new evidence of its success will win over some opponents — a group has included both local fishermen and some environmentalists.
Under this system, a fisherman owns the right to a certain percentage of the annual allowable catch in a fishery. These shares, sometimes called Individual Transferable Quotas, can be bought and sold on the market, and their price goes down if the fish population declines. So fishermen have a direct incentive to protect the fishery along with their investment: that way their share will be worth more when they retire and sell it to someone else.
Neither of the articles mentions how valuable these shares can be or how big an effect they have on fishermen’s willingness to enforce rules against each other. They do have other positive side effects though:
One of the authors, Steven Gaines, a marine biologist at U.C. Santa Barbara, noted that after the system went into effect for sablefish in Alaska, the fishermen used many fewer hooks and therefore reduced the “bycatch” — the incidental killing of fish of other species. The traditional system, in which the catch was limited only by the legal length of the season, had encouraged a “race to fish” as fishermen flung down as many hooks to catch as many fish as fast as they could. But the catch-share system enabled them to work at a slower, more efficient pace until they reached their guaranteed quota.
Tierney has reported previously on research suggesting that the profit-maximizing fish population under private ownership is greater than that needed for sustainability for many species of fish, giving fishermen an incentive to restrict catches.
Forbes.com launched a new column this week called “The Libertarian” featuring Richard Epstein. I’d rather see libertarian ideas mainstreamed than walled off into their own cage at the ideological zoo, but I’m glad that Epstein is contributing regularly. He’s a fascinating scholar and his book Skepticism and Freedom is one of the most rigorous defenses of classical liberalism there is. The introduction to the column is light but the coming articles about labor markets promise to be interesting.
[Via the University of Chicago Faculty Blog.]
I wouldn’t mind a blog post about the current economic meltdown (I can see Lehman Brothers employees shuffling out of their offices from my window!) and … any rationalization you may have for why this proves that government regulation over the financial sector needs to be reduced.
If I better understood the workings of the financial sector there’s a decent chance I’d have spent the past few years earning six figures in New York rather than making coffee and writing articles about raw milk. I’m not going to make a vague case for generalized deregulation, but it is clear that government policies have contributed significantly to the current crisis. Here are a few things to keep in mind.
1. The current crisis is in large part the result of misguided policies from the past. Even many libertarians concede that dealing with the fallout from those mistakes may justify some of the recent bailouts, despite the risk that this creates an expectation of future rescues. Policy changes should focus on avoiding a repeat of these mistakes and getting the Fed and Treasury to make a credible commitment to letting firms fail. In that sense, it’s something of a relief that they turned Lehman away when it came by with cap in hand.
2. Fannie Mae and Freddie Mac are obvious examples of federal policy contributing to the meltdown. Congress created a massive duopoly in the mortgage market in which these two firms were able to crowd out private lenders and make risky loans with the expectation that the government would cover any major defaults. Profits are privatized, losses covered by taxpayers. The current response hasn’t done anything to address this problem. See Arnold Kling for more [pdf].
3. For the rest, I’ll punt to Tyler Cowen:
In short, there was plenty of regulation — yet much of it made the problem worse. These laws and institutions should have reined in bank risk while encouraging financial transparency, but did not. This deficiency — not a conscientious laissez-faire policy — is where the Bush administration went wrong.
It would be unfair, however, to blame the Republicans alone for these regulatory failures. The Democrats have a long history of uncritically favoring expansion of homeownership, which contributed to the excesses at Fannie Mae and Freddie Mac, the humbled mortgage giants…
In other words, financial regulation has produced a lot of laws and a lot of spending but poor priorities and little success in using the most important laws to head off a disaster. The pattern is reminiscent of how legislators often seem more interested in building new highways — which are highly visible projects — than in maintaining old ones.
The biggest financial deregulation in recent times has been an implicit one — namely, that hedge funds and many new exotic financial instruments have grown in importance but have remained largely unregulated. To be sure, these institutions contributed to the severity of the Bear Stearns crisis and to the related global credit crisis. But it’s not obvious that the less regulated financial sector performed any worse than the highly regulated housing and bank mortgage lending sectors, including, of course, the government-sponsored mortgage agencies…
…regulators will never be in a position to accurately evaluate or second-guess many of the most important market transactions. In finance, trillions of dollars change hands, market players are very sophisticated, and much of the activity takes place outside the United States — or easily could.
Under these circumstances, the real issue is setting strong regulatory priorities to prevent outright fraud and to encourage market transparency, given that government scrutiny will never be universal or even close to it. Identifying underregulated sectors in hindsight isn’t a useful guide for what to do the next time.
Both presidential candidates have endorsed regulatory reform, but they have yet to signal that it will become a priority. That isn’t surprising. Fixing these problems may seem a very abstract way of helping the average citizen, and it will certainly require taking on special interests. It’s easier to tell voters that the regulators have taken care of last year’s problem, even if that accomplishes nothing for the future.
In the meantime, if you hear a call for more regulation, without a clear explanation of why regulation failed in the past, beware. The odds are that we’ll get additional regulation but with even less accountability and even less focus on solving our very real economic problems.
Richard Posner makes an interesting point about a court’s refusal to honor Leona Helmsley’s bequest of a full $12 million* to her dog, Trouble:
As I said, a bequest for a specified animal that greatly exceeds any conceivable estimate of what the animal needs to be as happy as it can be cannot be rationally altruistic, so perhaps the authority that the Uniform Trust Act confers on trustees to cut back such bequests to reasonable limits is justifiable–and for the additional reason that excessive wealth actually endangers an animal, since once it dies the money will go to residuary legatees; and killing an animal is not considered murder (though it can be a lesser crime) and is easier to arrange and conceal than killing a human being. Expensive security precautions have in fact been taken for the protection of Mrs. Helmsley’s dog. These concerns do not attend a bequest for a large class of animals.
On that note, here’s a few photos for Sunday dog blogging, an event I rarely get to participate in. The first two were taken by my sister, Casey, of our tennis ball-loving dog, Peekay, both of whom left Michigan just before I got here:
… and the leap!
And here’s Chance the golden retriever entreating for less blogging, more playtime.
* $12 million. Not $12. Thanks, Ben!
The blue dots represent cities with a surplus of single women. Tan dots are cities with a surplus of single men. Here’s the map. Richard Florida says I’m moving in the wrong direction:
By far, the best places for single men are the large cities and metro areas of the East Coast and Midwest. The extreme is greater New York, where single women outnumber single men by more than 210,000. In the Philadelphia area and greater Washington, D.C., single women outnumber single men by 50,000. I met my wife outside Detroit, where the odds were greatly stacked in my favor – single women outnumber single men by some 20,000 there.
In fact, single women outnumber single men in many large cities around the world, even though men outearn women at all ages, according to Lena C. Edlund, a Columbia University economist. One reason young women in the prime marriage years – the 25-44 age range – flock to big cities is to compete for the most eligible men. And smart women who gravitate to vibrant cities are more likely to stay single – for longer, at least – because they rightly refuse to settle for someone who can’t keep up with them intellectually or otherwise.
But women do have an advantage in the American West and Southwest. In greater Los Angeles, for example, there are 90,000 more single men than women. In Phoenix and the San Francisco Bay Area, single men outnumber single women by roughly 65,000. There are considerably more single men than women in San Diego, Dallas, and Seattle, too. Each of these regions has grown substantially over the past two or three decades, offering jobs in everything from high tech to construction and services. As numerous studies of migration show, men – especially those in regions with declining economies – are initially more likely to move long distances for economic opportunity, while women are more likely to stay closer to home and family.
At least Portland’s got distilleries. And hey, gin never turns you down and goes home with the guy who has the bigger blog.
Relatedly, here’s Tim Harford explaining Edlund’s economic theory about why big, successful cities tend to be home to more single women than men.
[Thanks to Zack for the link.]
An amusing story from the Chicago Tribune:
Few names are more associated with the University of Chicago than Milton Friedman’s.
But that’s exactly the problem, say some faculty who want to put the brakes on a plan to name a new research center after the Nobel Prize-winning economist.
In a letter to U. of C. President Robert Zimmer, 101 professors—about 8 percent of the university’s full-time faculty—said they feared that having a center named after the conservative, free-market economist could “reinforce among the public a perception that the university’s faculty lacks intellectual and ideological diversity.”
Aside from his achievements as an advocate for free markets and individual liberty, Friedman was an unquestionably brilliant economist with contributions to the field that were not limited to any particular political views. There are far worse names to have associated with one’s university.
[Hat tip: Newmark’s Door.]
In today’s edition of Dust-Up, Paul Roberts predicts the end of food and I call for tearing down export restrictions. Read it here.
Today in Dust-Up, Paul Roberts and I discuss whether or not the FDA has enough regulatory power. You can guess where I come down, but Paul doubts the agency’s efforts too.
On a related note, Peter Van Doren lays down some skepticism about food safety regulation in this Cato Daily Podcast.
Update: Also, whoever writes the headlines at LATimes.com deserves a raise.