Banks and Bucket Shops

There are basically four ways people hand over money to financial institutions: 1. Bank deposit accounts. You deposit your money and the return of principal and interest is guaranteed. Banks are required to hold enough capital to deliver on that promise. 2. Insurance. If you suffer a loss, you are guaranteed recovery. Insurance companies are required to hold capital to meet that guarantee. 3. Gambling. If your bet wins, you are guaranteed your winnings. Casinos and racetracks are required to hold enough funds to ensure payouts. 4. Investment. There are no guarantees when you invest in a stock or a bond. You could lose everything. Appropriately, investment bank capital requirements are much lower. The first three categories contain guaranteed payments against future events; the fourth is merely aspirational.

via FT.com / Comment / Opinion – We modernised ourselves into this ice age.

That’s a very nice way of summing up the financial options in this world. The article provides other insights such as why the credit default swaps were like the bucket shops at the beginning of the 20th century. A financial blowout was more or less inevitable. When insurance products (credit default swaps) are treated like investment products as regards capitalization, the ultimate outcome is hard to doubt.

Opera – First Impressions

I finally decided to try the Opera Web browser, Mac version. My first impressions are favorable: it’s small, fast, and full of neat features. Opera’s extensive keyboard shortcuts are especially appealing. But Opera is rather strict about HTML interpretation and some Web sites don’t work correctly with Opera. Others don’t work at all and others issue dire warnings. Is it worth going to the trouble? I haven’t decided, but I do love the keyboard shortcuts. For now, I’m running Opera for one set of things and then firing up Firefox when I need it. I’ll report more later.

Stocks & Bonds

This week we look at a brilliantly done paper examining
whether or not investors have gotten better returns from stocks over the really long run and not just the last ten years, when stocks have wandered in the wilderness. This will not sit well with the buy and hope crowd, but the data is what the data is. Then we look at how bulls are spinning bad news into good and, if we have time, look at how you should analyze GDP numbers. Are we really down 6%? (Short answer: no.) It should make for a very interesting letter.

The Big Picture has an interesting read!

Obamanomics

Under Reaganomics, government was the problem. It can still be a problem. But a central tenet of Obamanomics is that there are even bigger problems out there which cannot be solved without government. By building the economy from the bottom up, enhancing public investment, and instituting reasonable regulation, Obamanomics marks a reversal of the economic philosophy that has dominated America since 1981.

via Robert Reich Says Barack Obama’s Obamanomics Isn’t About Big Government – WSJ.com.

Reich articulates the theory behind Obamanomics very well. He doesn’t, however, address the big question: will the attempts to solve “bigger problems” result in even worse problems? History is not encouraging.

The Basics of Economics

Unfortunately, economists sometimes forget these basic principles and often get caught up in the details of esoteric model-building, high theory, academic research, and mathematics.

via Economics in One Page.

What are the basic principles of economics? Mark Skousen makes a valiant effort to reduce the key principles to a short list. He’s done an admirable job.

You might want to see another look at the subject.

The Death of Economics

Smith, Keynes, Hayek, Schumpeter and all the other truly great economists were interested in economic reality. They studied real human behaviour in markets that actually existed. Their insights came from historical knowledge, psychological intuition and political understanding. Their analytical tools were words, not mathematics. They persuaded with eloquence, not just formal logic. One can see why many of today’s academics may fear such a return of economics to its roots.

via Features: ‘Goodbye, homo economicus’ by Anatole Kaletsky | Prospect Magazine April 2009 issue 157.

The referenced article is a stinging indictment of mainstream economics as it is currently practiced. The indictment is well deserved. IMHO, a central error of contemporary economics is that it has lost sight of the fact that all value is subjective. The mathematics of modern economics assumes that values are uniformly shared (at least in a statistical sense). This might even be true at certain times and certain places, but it is a dangerous and wrong bedrock assumption.

Progressive Agenda

This article got me thinking. Of course, I have no idea what President Obama (or anyone else) is actually thinking, but it’s fair to say the best way to judge what people think is based on their actions. I find it plausible to think that the President thinks that we need more equality and less economic growth. That seems to be a common view in the “progressive” community. It’s not black and white as in “equality is more important than growth”, but more about shades of gray.

A way of posing the question is this: would you prefer for everyone to have two slices of bread for dinner or would you prefer most people to have three, with a few having none and a few having ten? That’s the black and white question of pure capitalism. The more gray question is this: would you prefer everyone to have one slice with a few people having four? That, I think, more correctly captures the progressive agenda.

A Message to Business and Workers

Specifically the House did the following:

1. They licensed the abrogation of contracts. Their message is simply that it makes no difference what rules we put into effect now; we can and will change them so you cannot depend on them. Global businesses take heed: Your previous judgment about the sanctity of US law has been rendered faulty by our political leadership.

2. They passed retroactive taxation. Their message is that, whatever you plan with regard to the federal tax code, do not assume consistency and do not build any reliability about your government into your decision making. We, in Congress, can reverse our laws and confiscate your results.

3. They made the tax punitive. A 90% tax on something is like taking all of it. The chairman (Rangel) of the House taxation committee actually admitted that by taxing the 90% he was leaving the remainder for the states. In other words, states are now encouraged to engage in the same form of behavior.

via A Lynch Mob! | The Big Picture.

This sends an important message to businesses. If you do business in the United States, you might want to rethink any expansion plans you have. In fact, you might want to consider shrinking your ongoing operations.

This also sends an important message to employees: prepare for the worst. If you thought your job was at risk before, it’s really at risk now.

You might want to send a thank you note to your Congressman. You might also want to thank President Obama, who has shown zero leadership by not opposing this outrageous behavior.

Papered Over

The general thinking (to the extent people have thought about it at all) about the gold standard for money is that it is a theory held be cranks and other marginal characters. After all, the world has worked pretty well with paper money. Or maybe not. The arguments for a gold standard are pretty straightforward. Of course, there are arguments against it as well. To support the gold standard, you need to have convincing counter arguments to the anti-gold arguments. You can find the here. (There is also a good argument within as to why bankruptcy is a good thing).

Despite the strength of the arguments, we are unlikely to change until our paper money situation resembles Zimbabwe.

Ideology

What appears to be a sensible idea to turn our problems into purely technical ones is, on the contrary, profoundly unscientific and, more generally, anti-intellectual.

In Defense of Reasonable Ideology

In case you’ve fogotten (or never knew), ideology serves an important purpose.