Quotulatiousness

November 9, 2011

Under attack by overwhelming economic forces, French and Germans consider retreat to citadel

Filed under: Economics, Europe, France, Germany — Tags: , — Nicholas @ 14:42

If they’re floating ideas like this, the Euro is done:

German and French officials have discussed plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone, EU sources say.

French President Nicolas Sarkozy gave some flavor of his thinking during an address to students in the eastern French city of Strasbourg on Tuesday, when he said a two-speed Europe — the euro zone moving ahead more rapidly than all 27 countries in the EU — was the only model for the future.

The discussions among senior policymakers in Paris, Berlin and Brussels go further, raising the possibility of one or more countries leaving the euro zone, while the remaining core pushes on toward deeper economic integration, including on tax and fiscal policy.

As in any retreat, some outlying forces (countries) will have to be sacrificed to save the main body (France and Germany). A small retreat may not be enough — but Greece, Italy, Spain, and Portugal are likely to be left outside the walls.

November 8, 2011

The difference between economic models and theories

Filed under: Economics, Media — Tags: , , — Nicholas @ 09:34

Emanuel Derman looks at the “physics of an economic crisis” and explains the difference between economic theories and economic models. I had originally quoted a few passages from the article, but the site forbids re-use without written permission.

November 3, 2011

The “Euro-elites now see democracy not so much as a distraction, more as a disaster or even a death-threat”

Filed under: Europe, Greece, Politics — Tags: , , — Nicholas @ 12:12

With the agonized screaming coming from the various offices of the European Union, you’d think Greek Prime Minister George Papandreou’s announcement of a referendum was the next-best thing to the emergence of the Antichrist. Mick Hume explains that the reason the Eurocrats took it so badly is that, from their point of view, democracy is Kryptonite:

‘If voting changed anything, they would make it illegal.’ So goes the famous old slogan, attributed to the anarchist Emma Goldman, expressing radical cynicism about the capitalist elites’ traditionally contemptuous attitude to political democracy.

In the current Euro-crisis, however, it appears that matters have gone further still. Europe’s political, media and economic elites are now so insecure, isolated and fearful of any hint of popular opposition that even the suggestion of giving Greeks a vote seemed to change everything for them — and some of them would clearly like to make such referendums illegal if they could.

No sooner had Greek premier George Papandreou announced his plan for a referendum on the latest Euro bailout and austerity package than, in two shakes of an imaginary ballot paper, all that the elites hold dear had apparently been destroyed: the ‘historic’ deal to save Europe agreed days earlier was now reportedly ‘in ruins’, the financial markets were sinking like stones, there were warnings that the Euro itself was now in mortal danger and even that the world was heading for a global depression. All this panic and chaos, apparently, because somebody suggested the outrageous idea of giving the Greek people a say on their future? No wonder that many in authority talk as if they really would like to ban voting today.

[. . .]

Papandreou’s announcement of a referendum, described even by the sober BBC as a ‘nightmare’ for Europe, could hardly have caused more shock, anger and revulsion in high places if somebody had placed a bomb under this week’s G20 summit in Cannes. The mood of Europe’s rulers was captured by President Sarkozy’s French regime, which described the Greek prime minister’s dalliance with democratic politics as ‘irrational and dangerous’. Trying to square this disdain for public opinion with his own need to seek re-election by the French people, Sarkozy himself has generously conceded that ‘giving people a voice is always legitimate’ before adding the obligatory ‘but…’: ‘the solidarity of all Eurozone countries is not possible unless each one agrees to measures deemed necessary’. In other words, whatever the Greek or any other electorate wants, their government will have to adopt those ‘measures deemed necessary’ by the Euro-elite, primarily the Germans and the French, if they want to remain members of the club.

November 2, 2011

Going to university isn’t enough: you need to take the right program

Filed under: Economics, Education, USA — Tags: , — Nicholas @ 12:04

Alex Tabarrok points out that the widely reported student debt problem is made much worse because students are taking courses that don’t lead to higher-paying jobs:

Over the past 25 years the total number of students in college has increased by about 50 percent. But the number of students graduating with degrees in science, technology, engineering and math (the so-called STEM fields) has remained more or less constant. Moreover, many of today’s STEM graduates are foreign born and are taking their knowledge and skills back to their native countries.

Consider computer technology. In 2009 the U.S. graduated 37,994 students with bachelor’s degrees in computer and information science. This is not bad, but we graduated more students with computer science degrees 25 years ago! The story is the same in other technology fields such as chemical engineering, math and statistics. Few fields have changed as much in recent years as microbiology, but in 2009 we graduated just 2,480 students with bachelor’s degrees in microbiology — about the same number as 25 years ago. Who will solve the problem of antibiotic resistance?

If students aren’t studying science, technology, engineering and math, what are they studying?

In 2009 the U.S. graduated 89,140 students in the visual and performing arts, more than in computer science, math and chemical engineering combined and more than double the number of visual and performing arts graduates in 1985.

It’s still true that students who graduate from university will tend to have higher lifetime earnings than their peers who do not get degrees, but there’s a huge difference between the expected earnings from an engineering degree than from a “studies” degree.

October 24, 2011

The next financial bubble: student loans

Filed under: Economics, Education, Government — Tags: , — Nicholas @ 12:08

Coyote Blog explains why student loans are the next big financial bubble and why student loans are fundamentally different from ordinary loans:

When you mess with pricing signals and resource allocation, you get bubbles. And one could easily argue that OWS is as much about the student loan bubble bursting as about Wall Street.

I must say that I never had a ton of sympathy for home buyers who were supposedly “lured” into taking on loans they could not afford. The ultimate cost for most of them was the loss of a home that, if the credit had not been extended, they would never have had anyway. US law protects our other assets from home purchase failures, and while we have to sit in the credit penalty box for a while after mortgage default or bankruptcy, most people are able to recover in a few years.

Student loans are entirely different. In large part because the government is the largest lender via Sallie Mae, student loans cannot be discharged via bankruptcy. You can be 80 years old and still have your social security checks garnished to pay back your student loans. You can more easily discharge credit card debt run up buying lap dances in topless bars than you can student loans. There is absolutely no way to escape a mistake, which is all the more draconian given that most folks who are borrowing are in their early twenties or even their teens.

I can see it now, the pious folks in power trying to foist this bubble off on some nameless loan originators. Well, this is a problem we all caused. The government, as a long-standing policy, has pushed college and student lending. Private lenders have marketed these loans aggressively. Colleges have jacked costs up into the stratosphere, in large part because student loans disconnected consumers from the immediate true costs. And nearly everyone in any leadership position have pushed kids to go to college, irregardless of whether their course of study made even a lick of sense vis a vis their ability to earn back the costs later in the job market.

October 15, 2011

It’s not as stirring a rallying cry to say that the 99% earn 80% of the income

Filed under: Economics, Government, Politics — Tags: , , , , — Nicholas @ 12:32

Lorne Gunter can, if he holds his mouth right, kind of agree with the “Occupy Wall Street” protesters, but he says they do themselves no favours by mixing in fake “facts”:

The protesters’ main point also is obscured by all the lefty, social justice, union-financed trash they have heaped on it. The Occupy movement has proclaimed itself in favour of animal rights, a guaranteed living wage, free health care and education, and an end to the “poisoning” of the food supply.

Nor can the protesters help repeating a lot of class-warfare myths, such the “fact” that 1% of the population controls almost all of the wealth. According to Internal Revenue Service statistics in the United States, the “99 per centers” — as OWS types like to call themselves — earn about 80% of all income and control over two-thirds of the personal wealth (both percentages are slightly higher in Canada), while the “one per centers” earn about 20% of income and control about 32% of wealth.

It’s true that the top 1% of earners are taking a greater share of the pie than at any time since the 1950s, when reliable family income figures first became available. But it is also true that even the bottom 20% of earners are better off than they were then — not as much better off than the top 1%, but better off than they were in the mid-20th century.

[. . .]

But the biggest problem with the OWS movement is what they want to do about the problems they see. Because they view most corporate activity as bad and most government programs as good, the Occupiers have convinced themselves the only way to a fairer society lies through bigger government, more public spending and much higher taxes, all of which would only make our economic problems worse, while alleviating none of the disparity protesters believe is so corrosive to democracy.

Conrad Black on “Occupy Wall Street” and its targets

Filed under: Economics, Government, Media, USA — Tags: , , , , — Nicholas @ 11:50

Conrad Black looks at the “Occupy Wall Street” movement:

The Wall Street protesters denounce government bail-outs, the political and economic short-shrifting of students and young workers, the high cost of post-secondary education, various forms of discrimination, U.S. foreign policy, union-busting, outsourcing, the oil industry, media misinformation and (more generally) capitalism and globalization.

Of course, this is a pretty hackneyed scatter-gun indictment by people who haven’t really thought it through, but their anger and frustration are largely justified nonetheless: In the past decade, many prominent financial houses joined in the process of issuing consolidated debt obligations (CDOs), consisting of unfathomable patchworks of mortgages on packages of residential real estate, unsupported by any real base of invested equity in the underlying assets by their ostensible owners, and covered by diaphanous fig-leaves of default insurance. These instruments were made deceptively presentable by certifications from the main rating agencies that they were investment-grade, as if issued by serous entities and secured by unquestionable assets.

[. . .]

As for the Wall Street protesters, their largely justified complaints can’t be addressed by the wild methods they suggest. (A proposed list of demands posted at OccupyWallSt.org includes “free college education,” “bring the fossil fuel economy to an end” and “Immediate across the board debt forgiveness for all.”) The prestige of the U.S. financial leadership, the country’s political class and its economic academics and financial media have all collapsed at once and together, like a soufflé. Except for the military and the pure sciences, the country’s elites have been utterly discredited, and no one believes anything they say. Even if they wanted to, they could not impose on Americans the sort of radical anti-capitalist reforms the protestors urge.

October 12, 2011

So, if it wasn’t Wall Street, then who inflated the US housing bubble anyway?

Filed under: Economics, Government, USA — Tags: , , , , , — Nicholas @ 12:03

Peter Wallison has the answer:

Beginning in 1992, the government required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to borrowers who were at or below the median income in their communities. The original legislative quota was 30%. But the Department of Housing and Urban Development was given authority to adjust it, and through the Bill Clinton and George W. Bush administrations HUD raised the quota to 50% by 2000 and 55% by 2007.

It is certainly possible to find prime borrowers among people with incomes below the median. But when more than half of the mortgages Fannie and Freddie were required to buy were required to have that characteristic, these two government-sponsored enterprises had to significantly reduce their underwriting standards.

Fannie and Freddie were not the only government-backed or government-controlled organizations that were enlisted in this process. The Federal Housing Administration was competing with Fannie and Freddie for the same mortgages. And thanks to rules adopted in 1995 under the Community Reinvestment Act, regulated banks as well as savings and loan associations had to make a certain number of loans to borrowers who were at or below 80% of the median income in the areas they served.

October 11, 2011

What the “Occupy #LOCATION” folks should really be protesting

Filed under: Economics, Liberty, Politics, USA — Tags: , , , , , , — Nicholas @ 12:09

Caroline Baum puts her finger on the real looming crisis that the folks out in all the various Occupy Wall Street/Bay Street/Seattle/Edmonton gatherings should really be agitating about:

Oh, sure, some protesters have posted lists of pie-in-the-sky demands. (The occupywallst.org website insists there is no official list of demands.) One of these includes a $20 minimum wage regardless of employment, tariffs on all imports, trillions of dollars in new spending on alternative energy and infrastructure, and debt forgiveness — all debt “on the entire planet.”

In other words, lots of benefits and no consideration of the cost. You’d think one of these kids — and that’s how they come across — would have taken an economics course along the way. Where do they think the government gets the money for its largesse? Imposing usurious taxes on the top 1 percent of earners won’t yield enough money to provide for the other 99 percent. (One of the protesters’ slogans is, “We are the 99 percent that will no longer tolerate the greed and corruption of the 1 percent.”)

It’s not as if young adults couldn’t find good targets for their anger. If these protesters are looking for something to get exercised about, they might want to wander into Chris McHugh’s Monetary Economics class at Tufts University in Medford, Massachusetts, and learn about “generational economics,” the idea that government is going to stick the younger generation with the bill for supporting the retiring baby boomers. McHugh asked his students to identify grass-roots youth groups that are agitating about this, but all they found were a couple of minor groups that tended to be Tea Party and Ron Paul spinoffs.

Talk about haves and have-nots. The debt burden that the younger generation is staring at almost guarantees it will have a reduced standard of living. After all, if more dollars are directed at keeping Granny alive until age 102, that means fewer dollars for productivity-enhancing investments.

This idea clearly hasn’t resonated with today’s youth.

Maybe that’s because the numbers — tens of trillions of dollars in unfunded Social Security liabilities, for example — are hard to fathom. It’s much easier to vent their anger at bank bailouts and preferential treatment for corporate interests, much of which is justified. They seem to be ignoring Capitol Hill, where the rules are made by our bought-and-paid-for government.

October 2, 2011

Tyler Cowen on why “no new taxes” won’t work this time

Filed under: Economics, Government, USA — Tags: , , , , — Nicholas @ 11:03

Almost everyone (except Warren Buffett) agrees that higher taxes are a bad thing, and the GOP candidates are all singing from the same hymn book about not imposing higher tax rates. Under normal circumstances, this might work. Tyler Cowen explains why these aren’t normal times and how “no new taxes” isn’t a serious way to deal with America’s financial problems:

Consider the example more closely. Cutting $10 in spending for every $1 in tax increases would result in $9 in net tax reduction. That’s because lower spending today means lower taxes tomorrow, and limiting the future path of government spending does limit future taxes, as Milton Friedman, the late Nobel laureate and conservative icon, so clearly explained. Promising never to raise taxes, without reaching a deal on spending, really means a high and rising commitment to future taxes.

Furthermore, this refusal to contemplate a tax increase — which I’d characterize as an extreme Republican stance — has brought what seems to be an extreme Democratic response: President Obama’s latest budget plan is moving away from entitlement reform and embracing multiple tax increases on the wealthy. We may be left with no good fiscal options.

The problems with a no-new-taxes stance run deeper. Because it’s unlikely that spending cuts alone can balance the budget, politicians who espouse extreme antitax views often end up denying the scope of our long-run fiscal problems.

[. . .]

The more cynical interpretation of the Republican candidates’ stance on taxes is that they are signaling loyalty to a cause, or simply marketing themselves to voters, rather than acting in good faith. It could be that candidates are more worried about having to publicly endorse tax increases than they are about the tax increases themselves. If that’s true, it is all the more reason to watch out for our pocketbooks; it means that the candidates are protecting themselves rather than the taxpayers.

The final lesson is this: Many professed fiscal conservatives still find it necessary to pander to voter illusions that only a modicum of fiscal adjustment is needed. That’s an indication of how far we are from true fiscal conservatism, but also a sign of how much it is needed.

September 29, 2011

“The euro isn’t just a failed currency, but a language unto itself”

Filed under: Bureaucracy, Economics, Europe, Humour — Tags: , , — Nicholas @ 09:01

Jonathan Weil provides a sampling of Euro terms and their real-world meanings:

It’s bad enough for average Americans that most European leaders speak English with heavy accents. What’s worse, even when we can make out the words they utter, it’s almost always impossible to figure out what these officials are really saying. That’s because they’re speaking in Euro-ese.

Fortunately, there is an answer to their endless riddles: a Euro-to-English dictionary, excerpts of which I have included below. To truly see the meaning of the seismic events rapidly reshaping Europe, you must know what the following 10 Euro terms of art mean in plain American English:

1. Finance ministry: A house of worship where government leaders go to pray for bailouts, economic miracles, panaceas and other forms of divine intervention.

How to use in a sentence: Officials at the Greek Finance Ministry said they remain hopeful the country will receive its next batch of rescue loans in time to avoid a cataclysmic default.

2. Coordinated: Chaotic, unfocused, brain-dead, paralyzed to the point of nonexistence; even in its best moments resembling a hopeless klutz.

Example: Finance ministers from the Group of 20 nations last week said they were “committed to a strong and coordinated international response to address the renewed challenges facing the global economy.”

September 26, 2011

Mark Steyn: It really is the end of the world as we know it

Filed under: Economics, Media, USA — Tags: , , — Nicholas @ 12:05

Feeling too optimistic? Mark Steyn has a solution for that:

Headline from CNBC: “Global Meltdown: Investors Are Dumping Nearly Everything.” I assumed “Nearly Everything” was the cute name of a bankrupt, worthless, planet-saving green-jobs start-up backed by Obama bundlers and funded with a gazillion dollars of stimulus payback. But apparently it’s “Nearly Everything” in the sense of the entire global economy. Headline from the Daily Telegraph of London: “David Cameron: Euro Debt ‘Threatens World Stability.’” But, if you’re not in the general vicinity of the world, you should be okay. Headline from the Wall Street Journal: “World Bank’s Zoellick: World In ‘Danger Zone.’” But, if you’re not in the general vicinity of . . . no, wait, I did that gag with the last headline.

I mentioned in this space a few weeks ago the IMF’s calculation that China will become the planet’s leading economic power by the year 2016. And I added that, if that proves correct, it means the fellow elected next November will be the last president of the United States to preside over the world’s dominant economy. I thought that line might catch on. After all, we’re always told that every election is the most critical consequential watershed election of all time, but this one actually would be: For the first time since Grover Cleveland’s first term, America would be electing a global also-ran. But there’s not a lot of sense of America’s looming date with destiny in these presidential debates. I don’t mean so much from the candidates as from their media interrogators — which is more revealing of where the meter on our political conversation is likely to be during the general election. On Thursday night, there was a question on gays in the military but none on the accelerating European debt crisis. It is certainly important to establish whether a would-be president is sufficiently non-homophobic to authorize a crack team of lesbian paratroopers to rappel into the Chinese treasury, break the safe, and burn all our IOUs. But the curious complacency about the bigger questions is disturbing.

September 20, 2011

China’s local and regional governments may be sitting on massive hidden debts

Filed under: China, Economics, Government, Law — Tags: , , — Nicholas @ 12:13

As with the US or Canadian government’s debt, not all debt is held at the federal level. It may take some digging to discover what the actual debt levels might be, but it’s possible. In China, however, as local governments are forbidden to issue bonds or to borrow from banks, they’ve had to become extremely creative in finding ways to borrow money for their pet projects. Not just creative — at least in some cases — legally dubious:

About 85% of Liaoning province’s 184 financing companies defaulted on debt service payments in 2010 according to a report from the province’s Audit Office. The report also noted that 120 of these borrowers, de facto government agencies, operated at a loss last year.

Since 1994, provinces and lower-tier governments have not been permitted to issue bonds or borrow from banks. Despite the strict prohibition, their debt has skyrocketed as local officials incurred obligations through LGFVs, local government finance vehicles. The central government’s National Audit Office said these companies, at the end of last year, had taken on 10.7 trillion yuan of debt. No one, however, knows the true amount of LGFV indebtedness, and some have calculated the real amount to be more than double the official figure.

Why the disagreement as to the amount of debt? Local governments have gone out of their way to hide borrowings, perhaps in part because of their doubtful legality. As famed economic journalist Hu Shuli points out, new local officials sometimes do not know the extent of obligations left by their predecessors. There have been a number of stratagems employed, from the issuance of illegal government guarantees to the transfer of funds in roundabout routes.

H/T to Jon, my former virtual landlord, for the link.

September 12, 2011

What is “the biggest European policy mistake since Britain and France let Hitler have the Sudetenland”?

Filed under: Economics, Europe, Government, Greece — Tags: , — Nicholas @ 12:09

For the record, I don’t actually think Europe would be better off with a single federal government, but Walter Russell Mead thinks the big mistake was attempting an economic union without a political union to match:

What is worrying investors worldwide is the evident intellectual and political bankruptcy of Europe. The Europeans are not stupider than other people, but they face deep structural economic and political problems that their institutions are hopelessly inadequate to solve. Creating a monetary union without a true federal government is looking more and more like the biggest European policy mistake since Britain and France let Hitler have the Sudetenland.

The current crisis is the result of a decade of policy failure. Greece should never have been allowed into the euro; prudent leaders would have checked its statistics, discovered the blatant frauds with which the Greeks sought to conceal the true state of their affairs, and told the country politely but firmly to come back when it was ready. Following that initial blunder, Europe failed to take note in any serious way of the serious distortions that were caused by suddenly reducing interest rates in Greece and other peripherals to near-German levels. Beyond that, alarm bells should have been ringing as it became clear that Greece and a number of other countries were treating their suddenly lower interest costs as found money. They were spending the windfall rather than taking advantage of the once in a lifetime opportunity to reform their economies in preparation for life under a monetary union with countries like Germany. If Europe’s institutions were up to the job, the warning signs would have been noticed and corrective steps taken years ago.

September 2, 2011

US flood insurance is “a veritable bucket of fail”

Filed under: Economics, Government, Politics, USA — Tags: , , , , , — Nicholas @ 12:12

Felix Salmon on the state of US flood insurance:

Ben Berkowitz has a big report on the the National Flood Insurance Program — something which is a veritable bucket of fail. In a nutshell, it undercuts private insurers and therefore is the only game in town; it insures only a small minority of homeowners; and it loses gobs of money. In September 2005, the NFIP was $1.5 billion in hock to the federal government; that number has now ballooned to $21 billion, and is certain to rise further.

There’s a simple answer to all these problems: let the NFIP raise its rates. And I don’t understand why it’s not being allowed to do so. If the rates rose, then that might allow private insurers into the flood-insurance game, giving consumers a choice and helping to get the word out about how insuring your home against flood damage is a really good idea. The NFIP could become profitable, and thereby start paying back all the money it owes. And while homeowners are quite price sensitive when it comes to flood insurance, the fact is that so few homeowners take out flood insurance right now that the number would be unlikely to fall dramatically if rates went up to a reasonable level.

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