Monday, September 29, 2008

More statistics

In times of crisis, cash is king. People flee from risk and try to buy risk-free assets. Treasury bills (T-bills) are considered as safe as cash, but pay interest. As people have fled risk, they have demanded more T-bills, driving up their price and driving the interest rates down.

The U.S. Treasury reports the daily interests rates on its debt, and the drop in the interest rates on the short-term debt is quite remarkable. In the early part of September, the interest rate on 1 month debt was very low but still above 1%. Since September 12, it has been below 1%, dropping all the way to .07% on September 17. If you invest $1000 at .07%, for a year, you will earn 70 cents interest. On September 19 it was up to .76, but today it was back down to .16%.

You can see the drop in interest rates in the maturities through the 7-year mark, but it is pretty hard to see anything in the 10-year securities.

The data are currently here, but will be moved here in a few days, and in a few months it will probably be here.

Academics make a difference

The Chronicle of Higher Education has an article about a letter drafted by five academics at Northwestern and the University of Chicago opposing the bailout bill that seems to have had an impact.

Thursday, September 25, 2008

The Fed's Balance Sheet II

I noted a few days ago that the bank's deposits at the Federal Reserve had exploded. In the latest report (Sept 25, 2008) these deposits have more than doubled from the high levels of last week, to $104,506 billion. When that number gets back down to levels that it was at prior to September, we will know that the financial panic is over.

Certainly the Fed has been aggressive in trying to meet the demands for liquidity. There were also some notes on the report announcing several new ways that the Fed is trying to deal with the crisis.

Tuesday, September 23, 2008

Greg Mankiw's links to commentary on the financial mess

Greg Mankiw has a variety of links to various economists giving their explanations of the financial mess.

The Bailout

Three posts arguing the proposed bailout is a bad idea:

There are a lot of good items about the bailout at

Here is an article from Winter 2000 on the Community Reinvestment Act (CRA):

update: Here is a long list of links to articles exploring the current mess:

Monday, September 22, 2008

The Federal Reserve Balance Sheet

When I wrote my Ph.D. dissertation, I spent a lot of time looking at the Federal Reserve balance sheet. Since then my interests in economics have expanded, but I still maintain a bit of interest in monetary policy and monetary history. Because I have not seen anyone write about it, I decided to take a look at what the Fed has been up to, as revealed by its balance sheet, as a result of the current financial panic.

The balance sheet certainly shows some very strange things happening. The reserve balances with Federal Reserve Banks have exploded in past week. They were a mere $5.561 billion in the week ending Sept 19, 2007 but were a huge $46.996 in the week ending Sept 17, 2008. This increase is almost entirely the result of the financial panic because data for the week earlier show reserve balances of only $7.978 billion.

Banks normally do not hold much in their accounts at the Fed. They mostly meet reserve requirements with the cash they have in the ATM machines. (I once had a student who worked for a bank, and I asked her how much was in an ATM because she said she knew. She replied that if she told me the answer, she would have to kill me, so I still do not know how much cash is in an average ATM.) It may be that banks are holding these large amounts because in times of panic, cash is king. It may be that they do not want to loan excess reserves to other banks because trust has broken down. But that is a guess. I really do not know what banks are doing with such large reserve balances.

Another oddity is the huge decline in U.S. securities held outright by the Federal Reserve, which fell from $780 billion for the week ending Sept 17, 2007 to $480 billion for the week ending Sept 17, 2008. The big increases over the year were in repurchase agreements (in which the Fed buys U.S. government securities with the agreement to resell them in a few days, a way to temporarily inject funds into the financial markets), and in an item called Term Auction Credit. This last time is the account showing how much of nontraditional debt the Fed is holding as it attempts to help financial institutions. It is a new thing that has appeared as the Fed has tried to help the financial institutions recover from their huge holdings of rotten mortgage-backed securities.

Another interesting table shows the breakdown of reserves. For the two weeks ending September 10th banks held $47.112 billion in total reserves, of which $169.480 billion was borrowed. (Total Reserves minus non-borrowed reserves, or 47112-(-122368).) The banks are borrowing more than they have in reserves, which happens because the Fed sells securities to offset some of the borrowing. I have to say that I do not understand some of these numbers. Too much has changed at the Fed since the time I was paying attention to what they were doing.

Update: Megan McArdle has a post on how close we came to a financial meltdown.

Sunday, September 21, 2008

Religion, superstition, and evolution

In her article "Look Who's Irrational Now" in September 19, 2008 edition of The Wall Street Journal, Mollie Ziegler Hemingway argues that people who belong to traditional religions are less likely to believe in the paranormal and in pseudoscience than are the irreligious.

And in an August 29, 2008 blog post David Friedman argues that although those on the left are critical of the religious right for dismissing evolution, many of them often ignore obvious implications of evolutionary logic.

Friday, September 19, 2008

The Death of the Newspaper

Earlier this week my colleague Michael stopped by to show me the front page of Monday's The Wall Street Journal. It had big headlines about the turmoil roiling the financial markets and a story that Lehman might soon be bankrupt. His comment was that it was all old news, and that it illustrated why the printed newspaper was obsolete. (By the time he read it, Lehman had decided to seek bankruptcy protection.) I think he is right. I used to spend an hour or two a day in the library reading magazines and newspapers. Now I almost never visit the library. I spend that time visiting magazines and newspapers and blogs on-line. By the time it is printed and distributed, the news in print is no longer news. Further, print does not allow the extensive linking that is a major attraction of on-line material.

Property Rights and Fisheries

Here is an article that argues something most economists have long known, that the solution to the problem of the commons is private ownership:

Thursday, September 18, 2008

Lehman, Freddie, Fannie, and AIG

Freakonomics has an analysis of the financial upheaval.

Tuesday, September 16, 2008

Bush Doctrine and the Luck of Sarah

When Charles Gibson asked Sarah Palin about the Bush Doctrine, I had two reactions. One was, "I do not know what the Bush Doctrine is, though the term sounds familiar." The other was, "Sarah Palin does not know what the Bush Doctrine is either, but she is trying to finesse it." Gibson would not help her--he wanted to embarrass her.

But Palin was lucky, because it turns out that there is controversy about what the Bush Doctrine really is. Or at least the Conservative side of the argument thinks there is controversy. Joe Klein of Time would have nothing of that message. He wrote:
There is a right-wing smokescreen emerging in an attempt to camouflage Sarah Palin’s utter unfamiliarity with the Bush Doctrine. The new line, assayed by Charles Krauthammer and Peter Feaver among others, is that there were many Bush Doctrines. That is untrue.

There was only one Bush Doctrine. It was enunciated in this speech, delivered by the President, at the West Point graduation in 2002. It was a conscious effort to step beyond the Cold War doctrine of containment and announce a new strategic posture appropriate for the War on Terrorism.
He then goes on to quote a Bush speech that argues that containment is not enough in some cases, and that preemption can be the appropriate policy. And he finishes by saying:
That is the Bush Doctrine. Sarah Palin had no idea that it even existed. Any attempts to divert attention from her ignorance should be rejected for what they are--disinformation.
Mr. Klein has no support for his assertion that there is only one meaning for the Bush Doctrine—he wants us to take his assertion based on his credibility. Unfortunately for Mr. Klein, he had mentioned the Bush Doctrine several years before:
One can only imagine the Republican wrath and utter ridicule-the Rush Limbaugh fulminations-if, say, John Kerry had proposed a similar policy: Let’s pin our Middle East hopes on the statesmanship of Hizballah and Hamas. But that is where the democratic idealism of the Bush Doctrine has led us. If the President turns out to be right-and let’s hope he is-a century’s worth of woolly-headed liberal dreamers will be vindicated. And he will surely deserve that woolliest of all peace prizes, the Nobel.
It must have been a bit embarrassing for Mr. Klein to have someone threw his old words back at him. It certainly makes it hard to take him seriously when he asserts that the meaning of the Bush Doctrine is clearly established.

MarketWatch Columnist Jon Friedman is less assertive, arguing that Sarah Palin will fade away once the media stops paying attention. He also takes a shot at Palin, writing:
Specifically, Palin seemed to have little idea about the Bush Doctrine, in which the U.S must spread democracy around the world to halt terrorist acts. When Gibson put it to her and asked if she agreed with the doctrine, she answered, "In what respect, Charlie?"

Some analysts have suggested that Gibson knew more about the Bush Doctrine than the vice-presidential candidate.
However, according to Gibson the Bush Doctrine was not about spreading democracy, but about preemption:
The Bush doctrine, as I understand it, is that we have the right of anticipatory self-defense, that we have the right to a preemptive strike against any other country that we think is going to attack us. Do you agree with that?
One wonders if Friedman bothered to watch the interview or read the transcript before penning his piece. You cannot effectively criticize someone for not understanding an issue when your writing shows that you do not understand that issue.

So Palin did not know what the Bush doctrine was, but maybe no one else really does either. If you are trying to impress the public, you are lucky when your critics stumble all over themselves.

Risky business

Hurricane Ike visited us a couple days after it smashed Texas. We got rain, lots and lots of rain. The little river near us came up and overflowed its banks, flooding a soybean field a block from my house. The soybeans were only a few weeks away from harvest, so I am sure the farmer is quite upset. Farming is a risky business, something that people who are not farmers often do not recognize. However, the farmer does know that planting this field, which is available inside the city limits only because it is on the flood plain, is risky because the crop has been destroyed by water many times in the past. The constant flooding makes the soil very fertile, and the low level of the field results in a better-than-average crop in dry years.
We got five or six inches of rain from Ike, but people to our north and west got a lot more. The interstate that bypasses us (I-65) was closed, apparently because of flooding to the north. The Chicago area also got a lot more rain than we did. So the damage of Ike was not limited to the coastal areas.

Monday, September 15, 2008

Tolerance and Diversity

It is a truism among many on the Left that intolerance is the norm for those on the right. I stumbled upon a piece about the dangers of having McCain/Palin bumper stickers if you live in the tolerant regions of the country. The article itself is not all that noteworthy, but the number and content of the comments are.

The right-wing blogs have coined the term PDS--Palin Derangement Syndrome--for over-the-top reactions to Sarah Palin. One of their favorite examples is this calm and collected piece by Wendy Doniger, Professor of the History of Religions, University of Chicago’s Divinity School. It is entitled "All Beliefs Welcome, Unless They are Forced on Others" and as of this morning had gathered 800 comments, some of them very rude, which I hate seeing.

Death of mainstream Protestantism

First Things has a long article that probes the significance of the decline of mainstream Protestantism. It argues that the United States was once a Protestant nation, but is no longer.

Friday, September 12, 2008

Diversifying your portfolio

The subject of finance argues that by diversifying your portfolio, you can reduce risk but keep the same expected return. Thus, suppose you have a choice between these options, a 50% chance of getting $1000 and a fifty percent chance of getting nothing, or a certainty of getting $500. Most people would prefer the second, the certain $500. Both have the same expected value, but the first has more risk. Or if you could buy many different chances of the first option, you would get something close to the second option; this is the logic of diversification.

The intrade markets offer an interesting way to diversify your portfolio of happiness. When the election takes place, one side will be happy and one side will be unhappy. The expected value of happiness right now for both sides is about zero since the election looks like pretty much a toss up. To protect against the danger of emotional despair, each side should bet that the other side will win. Thus, if you want Obama to win, you should bet that McCain will win. Then if McCain does win, you will not feel so upset about it because you will be winning money. Of course, if Obama wins, you will not be so happy about it as you would have been if you had not placed the bet on McCain. But the risk is reduced. I wonder if anyone is actually doing this kind of diversification of the portfolio.

Alternatively, you might reflect on a lesson of life, that sometimes things that seem initially to be really bad turn out to be good, and things that initially seem to be really bad turn out to be really good. I always worry about young people who suddenly come into a large sum of money. Will it be good for them, or will it encourage them into decisions that in the long run will be unfortunate? Or consider a couple of workers, one of whom is let go and the other retained because a business has to cut back. Initially the one let go will be upset, but it may turn out that as a result he or she will find something that is far better than what they had, and they will look back at that misfortune as a blessing.

The same is true of politics. Sometimes you will be happy with the way an election turns out, but a few years later you will deeply regret the consequences. And other times you will be unhappy, but the end results may turn out to be very good.

As the saying goes, watch out what you wish for.

Thursday, September 11, 2008

Two writers I respect

Megan McArdle comments on an article by Sandra Tsing-Loh about education and school choice. Unlike the comments on a lot of posts I have read lately, the comments here are polite and thoughtful.

The dangers of humor

Suppose someone made up some fake quotes from Sarah Palin that were funny because they were so absurd. What would happen? Would anyone really believe them? The experiment has been run:
(See the comments at the end.)

And see the quotes posted by someone who does not seem to know that they are fake and see the comments that follow:

Humor can be a dangerous thing.

More intrade

The intrade market ( now has a market for whether Joe Biden will withdraw from the race. Its last price (as of 9:11 on 9-11) was 7.5, meaning that the market says there is a 7.5% chance it will happen. They also have a market on whether Sarah Palin will withdraw. The price there was 5.8. So suddenly the bettors think there is a higher probability that Joe Biden will withdraw than Sarah Palin. The Bidden market seems to have been added after the Palin market.

And as of this morning, the intrade market thought that John McCain was more likely to win the election, pricing him at 50.6 and Barack Obama at 49.0. Prior to the conventions, the market was giving Obama a 60% chance of winning, and even a few days ago it still gave a narrow edge to Obama. Maybe the lipstick thing moved the market?

Looking at how the various prediction markets at intrade make big moves over time indicates that the future really is hard to predict. The market did not see Sarah Palin's nomination coming. The bettors were pretty sure early on that Hillary Clinton would win the Democratic nomination, but they were wrong. (Maybe--there is still trading in the market that predicts that Hillary Clinton will be the next president, and the market gives that a 3.4% chance of happening.) I think the prediction markets are interesting for giving us an unbiased view of what is coming and that is important in politics because it is too easy to let what we want to have happen cloud our judgment about what is going to happen, something I learned back in the elections of the 1960s. But so much of the future just cannot be predicted.

Update: Intrade has a new contract, betting that Hillary Clinton will be on the Democratic ticket on election day.

Price for Hillary Clinton to be on Democratic ticket on Election Day at

Wednesday, September 10, 2008

Senator Obama made a reference to lipstick and pigs yesterday. It is interesting how different audiences responded. Read the comments from the left

the right

and the center/right.

Monday, September 8, 2008

Mankiw on Freddie and Fannie

Greg Mankiw gives his insights. (He probably was one of those who wanted to make substantial changes when he was head of the Council of Economic Advisors, so views the current mess as a validation of his position back then.)

Prediction Market

This morning the intrade prediction market has the presidental election almost a dead heat. Obama was selling at 50.8 and McCain at 48,0. A week ago it was about 60 for Obama and 40 for McCain.

The probability that the U.S. will be in recession has risen according the market. It is up to 17.5 from about ten last time I mentioned it.

Sunday, September 7, 2008

Bailouts, takeovers, and liquidations

The news reports say that the federal government will soon "bail out" Freddie Mac and Fannie Mae. However, reading them it is not clear that there is any bailout involved. A bailout means that the government gives aid to a company so that it can continue to survive with stockholders and perhaps management intact. The alternative would be a failed company with shareholders losing everything. With the bailout they continue to own the company, and their shares are worth whatever the company is worth. In the late 1970s the government bailed out Chrysler by guaranteeing its loans.

With a government takeover the government assumes control and ownership of the firm. The stock of the shareholders becomes worthless and almost always the management is replaced. We see government takeovers when banks fail. The FDIC will then quickly merge the bank with another, taking a loss on the transaction.

The government, at least in the form of the Federal Reserve, has also forced liquidations of companies. It did this in the case of Long Term Capital Management (LTCM) in the 1990s. There were no government funds used. The Fed help organize an injection of new money into LTCM from banks that would have been seriously injured if LTCM had failed to meet its obligations. With the additional funds, it was able to proceed to an orderly shut down.

It will be interesting to see what will happen with Freddie Mac and Fannie Mae. My guess is that it will not be a bailout, but a takeover. The government needs to protect the debt holders, but not the stockholders. But to the press it seems to be all the same--they use the term bail out when they mean takeover or forced liquidation.

(Greg Mankiw had an interesting post on these agencies recently.)

Saturday, September 6, 2008

A really dumb editorial

I have been reading a lot of election stories lately, and last night I found one that was exceptionally stupid: Revere Ronald Reagan? Then respect Barack Obama. The author argues that just like like Barack Obama, Ronald Reagan was inexperienced when he ran for his first big political office, the governorship of California. Wow. Talk about comparing apples and oranges! A few of the comments note that Reagan had been governor of California for eight years before he ran for president. If you think about it, you realize that everyone is inexperienced when they run for their first major office, and some are inexperienced even when they run for the second major office. It is just that the major office is not usually the presidency of the United States.

Thursday, September 4, 2008


Megan McArdle on abstinence-only programs.

Sarah Palin

The human mind abhors randomness. It finds order even when there is none. We instinctively try to make sense of the world we see around us.

Investigating police and prosecuting attorneys come to a conclusion, often on a hunch, about who committed a crime, and then they try to fit together a convincing story to demonstrate that conclusion. In the process, they do not seek out evidence that conflicts with their story, and when they stumble on such evidence, they downplay it or explain it away. The defense attorney’s job is to construct a contradictory story, and will proceed with similar biases.

Journalism works in the same way. A journalist must have some kind of organizing theme in order to decide which facts are worth reporting and which are not. Without such a theme, one would just have randomness, like the selection of photographs in the movie Rain Man that the autistic character took on his trip across America.

Journalists must guard against becoming too committed to their themes, to the point where they cannot see contradictory evidence. Dan Rather’s demise illustrates this danger. He became so convinced that Bush had gotten special treatment in the National Guard that he could not see that documents given him were obvious forgeries. (That they were forgeries is obvious to me, but perhaps not to others. However, I spent about ten years designing typefaces, and I especially enjoyed working on monospaced typefaces, they sort of typefaces that a typewriter produces.)

In the past few days many in the mainstream media have sold themselves on a theme that Sarah Palin is too inexperienced to be Vice President, and that McCain improperly vetted her. In the process of trying to tell this story, they seem to have not noticed what was obvious to many of us hicks in the hinterland, that this woman has a natural gift of charisma. Most of the delegates knew that they were going to witness one of the greatest performances ever delivered at a Republican convention. I suspect that very few of the mainstream media expected it.

Tuesday, September 2, 2008

That was fast

In my last post I linked to a piece at the Daily Kos about Sarah Palin that can only be described as odious. Now that the story has been shot down, they seem to have finally realized that it was odious (or perhaps they were finally embarrassed by what they were doing) and have deleted it. I found the cached version at It deserved to be saved. (I am not sure that all the comments are in cached version--it seems to end half way through a comment.)

Monday, September 1, 2008


The 2008 election has been an exceptionally interesting campaign so far, and it promises to continue being exceptionally interesting. One of the things I find fascinating in any campaign is how each side believes only the good about its candidates and only the bad about the candidates of the other side. I dislike good-vs-bad thinking and try to avoid it, but it is almost impossible to avoid if you get emotionally invested in a campaign. There is probably some psychological explanation for this, but I do not know what it is. It is easier to look back at past presidencies without that emotional investment, and to see that in all of them there were good decisions and bad decisions. None were totally bad and none were totally good.

I have also been fascinated by the role of charisma, probably because I have none at all and do not understand why some people have it and others do not. John Kennedy had a lot but Lyndon Johnson and Richard Nixon had little. Ronald Reagan had it, and the Bushes were charisma challenged. Bill Clinton, the most gifted politician in my lifetime, had immense amounts of it, but his wife Hillary has little. John Edwards must have had quite a bit because he did not have anything else. Barack Obama has it, and maybe Sarah Palin does too. The left blogosphere has gone nuts in the past few days in an orgy of personal attack that makes sense if they subconsciously fear that she may have this gift. If she were the disaster that they claim she is, they should sit back and wait, which is what the right seems to be doing with Joe Biden. In the next two months we will learn if she is the real thing or just another uncharismatic politician.