Bank or cracker box?

A few days ago a story hit the wires about someone who found $10000 in a box of crackers. It turned out that an elderly woman had put the money there, and then in a mix up somehow the crackers had been returned to the store and put back on the shelves. The line that struck me was this:

The Lake Forest woman, whose identity was not released, had lost faith in her bank and decided the box would be a safer place for the money.

Everyone knows that a box of crackers is a much safer place to keep money than in a bank, right?

The story reminds me of another incident, but one that did not have a happy ending. In the little town that I called home half a century ago, there was an poor old lady noted for her holiness. After we moved away, she became ill and had to go to the hospital. Her fellow parishioners thought they could do a good deed by cleaning out her tiny house and buying her a new bed, which they did. When she came home, she got very agitated when she saw what they had done. It took a while for the do-gooders to come to the conclusion that the little old lady had put her life savings in the old mattress which they had burned.

Religion and self control

An article in the New York Times yesterday says that two psychologists have reviewed eight decades of research and concluded that religion is good for self control.

The rituals that religions have been encouraging for thousands of years seem to be a kind of anaerobic workout for self-control.”

Religious people have been arguing that for a long time, but now there is some science to back it up.

Benjamin Franklin was not religious but supported organized religion because he thought it socially useful. I wonder if he also had the insight that religion contributed to self control.

The Minneapolis Fed

Under strange and unexpected circumstances I met a VP from the Federal Reserve Bank of Minneapolis two days after Christmas, and I asked him why the Fed Bank of Minneapolis had abandoned the building it had built in the 1970s. The building had received praise for its unique architecture. The feature that attracted the most attention was its use of the principle of a suspension bridge to support the structure. Despite its striking architecture, the Fed occupied the building for less than thirty years before moving to a new facility.

He said that although the building looked great, it was not people friendly. For example, the corridors were on the outside along the windows, so there were no offices with windows except for those of the top officials. Further, the building was long and narrow (like a bridge), which did not give it a good flow for people.

There were also some serious design problems with the building. It had used asbestos as insulation for the steel beams, but the windows were not watertight. (I think the suspension bridge architecture had something to do with this.) Asbestos insulation is not supposed to get wet, but this did. So after twenty years, the Fed was faced with a choice, to build a new building or to renovate the old one. The estimated cost of each was roughly the same, but the risk of the renovation option was larger because of the possibility of serious cost overruns.

The Fed sold the building and the entire city lot for a mere $500,000. However, the appraised value of the property was negative $15 million, so the Fed did pretty well in disposing of the property.

The buyer totally renovated the building, gutting the interior down to the I-beams. The process may have bankrupted the original buyer--my source was not sure. Then the developer widened the tower so that the suspension bridge construction is no longer visible from the front of the building.

The 1970 building was designed with the assumption that checks would soon be obsolete, but they continued. The newer building was designed with the assumption that people would continue to write checks, and checks are now a rapidly declining way of making payments.

I checked the Internet to see how much of this account I could verify. I found that what Wikipedia has is consistent with it.

Economics and college presidents

My colleague Michael sent me a link to an article by an economist who is now a college president explaining how economics shapes the way he does his job. He argues that it is important to understand economic concepts such as comparative advantage, incentives, price discrimination, and sunk costs to make good decisions.

Update: I finally read the whole article with care. The part that interested me most was his discussion of price discrimination. The author writes:

Strategically, the findings suggest that more-selective institutions will be better able to price tuition and grants at relatively high levels. Less-selective colleges would be better off with a low tuition and grant strategy.

I work at a less-selective college that tries to do a high-tuition, high-grant strategy and is frustrated with the results, so his statement makes sense to me. (I once told a director of financial aid that what he was doing was what economists call price discrimination. He was horrified and denied it. I knew then that we would be having problems with admissions for a long time.)

Fiscal stimulus skeptics

Greg Mankiw had a post a while back that quoted part of an AP story identifying him as the only skeptic of a planned massive Obama stimulus package. He then followed up with a couple of other posts. There are, of course, many more skeptics than Mankiw. Skepticism seems in order partly because the evidence is that the Keynesian multiplier is low, and even more because of public-choice considerations, some of which are discussed in a Wall Street Journal commentary. For me the highlight of this commentary was its discussion of feedback, the possibility that bad economic results lead to bad policy, leading to even worse results.

Something free

From my e-mail:

If any of you still need/want a TV converter box, the last day to apply for the government coupon is Dec 31 https://www.dtv2009.gov/. You can redeem it for a free box (including free shipping and no taxes) at https://secure.freetvsignal.com/viewAll.php.

Lucas on the Fed

Robert Lucas approves the Fed's monetary policy in The Wall Street Journal.

a creek circle

Here is a very strange natural phenomenon, a creek circle. Check out the youtube video.

Death of creative destruction?

Is entrepreneurship dying? This opinion piece in The Wall Street Journal by Michael Malone says it is being strangled with government regulation and new accounting rules.

Rent seeking

Donald Boudreaux writes about the size of government, Blagojevich, and rent seeking. His commentary is in the Christian Science Monitor, but he blogs frequently at Cafe Hayek. Speaking of which, Russell Roberts had a couple of good posts there: a good piece on the source of the housing bubble, and a link to a video from 1933 arguing that inflation was a way to cure the Depression.

A better way to write essays

" The essay you have just seen is completely meaningless and was randomly generated by the Postmodernism Generator."

I just hope my students do not find it--though it probably only works for English classes.

http://www.elsewhere.org/pomo/

(Go down to the bottom and there is a link to click. If you click it, it gives you another random essay.)

I wonder if they could alter this so it would generate the sorts of comments that politicians make.)

Elevation

I mentioned that I did not understand celebrity, But maybe it can be measured. A recent piece in Slate talks about the feeling of elevation that some people get from Obama, who research now shows can make some nursing mothers lactate. This article helps make sense of a lot of what I have seen recently in politics.

Fed Balance sheet

I have not written anything about the Fed Balance sheet lately, but at least one other blogger has.

The big three

Megan McArdle writes about the auto bailout and why the big three are the disasters that they are, and also about the potential mess of the Madoff fraud.

Bank owned

Today as I was jogging around town looking at the results of our ice storm, I saw this.
Is it fallout from the financial crisis hitting small town America?

I've been busy

I have been too busy with other matters to post here lately, or to keep up with things I should be reading, such as this and this and this. I am not sure what to think of this or of this. Plus, my Internet connection was gone for 30 hours due to an ice storm.

Meanwhile, I am working on suggestions for further reading on Cybereconomics

A nasty auction?

I found this post describing an auction site that seems to be a bit like the entrapment game.

I missed this one

I found a story on a blog that a tiny bank in Goodland was acquired by an insurance company so it could qualify for government TARP assistance.
newstalk.ibj.com/content/?p=244
I had not heard anything about this before.

Here is the story from CNN. The government certainly creates strange incentives.

Biggest Ponzi scheme ever?

Today there were reports of an arrest of a legendary Wall Street trader for fraud.

"It appears that at least $15 billion of wealth, much of which was concentrated in Southern Florida and New York City, has gone to 'money heaven.''

Bernard L. Madoff is accused of running a Ponzi scheme, in which he used money of later investors to pay off earlier investors. It appears that many hedge funds had entrusted money to him. Small investors will be hurt by this only indirectly since his investors were either wealthy or were institutions. Hedge funds are an investment opportunity for the rich, not for ordinary people.

Periods of market stress are the times when fraudulent firms and schemes often come to light. It is easier to hide fraud in bull markets. Perhaps this is another element of feedback in downturns.

Update 1: Here is an AP article on the range of people affected

Stories of the panic

Steven Landsburg wrote, "Most of economics can be summed up in four words: 'People respond to incentives.' The rest is commentary."

Peter J Walliston has been doing commentary, arguing that the incentives created by the government in its attempt to use markets to pursue social aims are the source of the current financial meltdown.

...U.S. housing policies are the root cause of the current financial crisis. Other players...played a part, but they were only following the economic incentives that government policy laid out for them.

Does it matter how we interpret events such as the current financial mess? Interpretation certainly mattered in the 1930s, when the predominant story was that the Great Depression was a failure of the market. That interpretation justified a many government programs and created a generation of socialist intellectuals. After World War II when decolonization took place, that interpretation led to many of the new nations pursuing socialist policies, with disastrous results.

The story that the current financial mess is the result of deregulation, which is popular in some parts of the press, is also a story that the market failed, and it logically leads to larger government. A story that government involvement led to the current crisis has completely different implications.

A major achievement of Milton Friedman was a convincing argument that the Great Depression represented a failure of government policy. The Federal Reserve pursued a procyclical rather than a countercyclical monetary policy. Without this reinterpretation of the Great Depression, the Ronald Reagan presidency would not have been possible. Keynes was right about the power of ideas.

Shoe repair

I have used shoe repair as an example of an inferior good, a good that people purchase less as their incomes rise. Now a recent Associated Press article, with a dateline of Highland Indiana, re-enforces my contention that shoe repair is a good example of an inferior good.

Previous economic downturns have also brought about an increase in business, he said. There was a period when Jimmy Carter was president that the store had appointments for shoes backed up for at least two weeks, Forster said.

The report ends with this observation:

The economy may not be the only reason cobblers are seeing an increase in business.

Thomas Buck of Buck's Shoes in Valparaiso speculates that it's partly because many cobblers are older and retiring and aren't being replaced, resulting in less competition.

"It's something that's dying out," he said.

Why are they not being replaced? Because if shoe repair is an inferior good, it will decline as incomes rise, and incomes have risen during the past 60 years.

Environmentalists who do not know much

From OK:

GREEN campaigners called police after discovering an illegal logging site in a nature reserve – only to find the culprits were a gang of beavers.

Environmentalists found 20 neatly stacked tree trunks and others marked with notches for felling at a beauty-spot in Subkowy, northern Poland.

But when officers followed a trail left by a tree which had been dragged away, they found a beaver dam right across the river, as reported by the Austrian Times.

A police spokesman said: "The campaigners are feeling pretty stupid. There's nothing more natural than a beaver."

Almost-zero interest rate

NPR had a piece saying that interest rate on Treasury four-week bills was zero percent. I checked the Treasury website to see what numbers they gave. They did not say zero; they said the interest rate was .01%, which is lower than the last time I mentioned interest rates.

At the end of November, the one-month T-bill rate was .02%, the three-month rate was .01%, and the two-year rate was 1%. So far in December, the lowest rate for the one month bill has been .01% on 12-04-08 and 12-08-08. The lowest rate on the three-month bill has been .02% from 12-03 until 12-05. The lowest rate on the one-year was .49% on 12-09 and on the the two year, .82% on 12-04. The three-year rate has not yet dropped below 1%, but it got to 1.02% on 12-04-08.

These rates are astonishing and astounding. I get better rates on my checking account that these short-term rates. Why don't people just hold cash? They probably do, but the large institutions cannot do that as easily. For them, the short-term treasury debt is cash. These rates speak volumes about trust and confidence.

Markets in everything

Purdue is raising money by auctioning naming rights to new species of bats and turtles. It is the gift to give to someone who has everything.

Market failure or government failure?

From a Bloomberg report:

Dec. 8 (Bloomberg) -- Illinois Governor Rod Blagojevich said the state will suspend business with Bank of America Corp. until the lender restores credit to the shuttered Republic Windows & Doors company in Chicago where workers are staging a sit-in.

Republic Windows told the bank on Oct. 16 it planned to cease manufacturing in January after losing $5.7 million during the first nine months of this year and a total of $12.7 million in 2007 and 2006, according to a Business Wire press release issued by the company. The bank last month turned down Republic’s request to issue vacation pay to its employees, the release said.

We are in the worst financial meltdown since the 1930s due not to illiquidity but insolvency. The root cause of the problems is that the banks made too many bad loans, and government encouraged them to make some of those bad loans. If I did not have contempt for politicians, it would strike me as bizarre that politicians want to force banks to make loans that are even more unsound than the loans that got us into this mess.

Update: Even before I posted this, the federal government had arrested the good governor of Illinois on numerous charges, including the charge of trying to sell the Senate seat vacated by Barack Obama. How many of the last five Illinois governors have been arrested and tried for corruption?

Illinois has a Governors State University. Maybe it should also have a Governors State Prison.

J. P. Morgan duing the panic of 1907

I have been reading The Panic of 1907: Lessons Learned from the Market's Perfect Storm by Bruner and Carr. They published it at an opportune time because there are parallels between what happened 101 years ago and what is happening today. There are also significant differences.

They start each chapter with a quotation or two. J. P. Morgan was the central figure in stopping the panic, and one of their chapter quotes is from him:

"I do not know what to do myself, but sometime, soneone will come in with a plan that I know will work; and then I will tell them what to do."

This quotation sums up a lot of what we want in leaders. They do not have to know what to do, but they have to be willing to listen and to have the judgment to distinguish good ideas from bad ideas. And then they have to be able to get other people to act on those ideas.

The unemployment numbers

The Bureau of Labor Statistics released the unemployment report for November this morning (December 5, 2008). It is a pretty gloomy report, with just about all categories or workers and jobs showing less employment. There was, though, at least one category that showed gains; "Health care employment grew by 34,000 in November. Over the past 12 months, health care has added 369,000 jobs." The population is aging, and old people need more care.

Despite a huge reduction in the number of employed (673,000), the unemployment rate was up only a bit, from 6.5 to 6.7 percent, and despite being in what seems to be a severe recession (that may get a lot worse), the unemployment rate over the past year has risen only two percent, from 4.7 to 6.7%. Why has the rise not been more?

The civilian noninstitutional population has increased by 1.889 million over the past year. I am not sure if that is larger than average, smaller than average, or about average. However, the group "not in the labor force" has increased by 1.101 million, which means that the labor force has increased by only .788 million, which is small.

The number employed has decreased by 2.362 million from November of 2007 to November of 2008. If we add this to the .788 million, we get the increase in unemployed, which is 3.150 million. That sounds big, but it would be much larger if either the civilian noninstitutional population had increased more or if there had been fewer dropping out of the labor force.

There are a couple of potential shock absorbers that may lesson the impact of the recession on the unemployment numbers. First, higher unemployment could decrease immigration. This would show up in the noninstitutional population. Second, we can outsource unemployment just as we can outsource employment. If people spend less on toys or clothes or electronics, the impact may be felt in other countries more than it is felt here. When the U.S. catches cold, China may get pneumonia.

There are always lots of unanswered questions in these reports.

New home construction

The first house is now under construction in the new Sunset Ridge subdivision in Rensselaer. The developers began constructing the streets and storm sewers and all the other infrastructure before the bursting of the housing bubble, and for a while there was not much activity. Late in the summer activity again picked up as they paved the roads. Still, given all the reports of how severely depressed new home construction is, I was a bit surprised to see a house under construction here. Several other planned subdivisions have gone nowhere.
My hands got very cold in just a few minutes as I was taking several pictures. I wonder how much extra people earn for being willing to work under such unpleasant conditions. It seems to me to be a good example of where the concept of compensating differentials should apply.

Harvard's Endowment

I have been wondering how the colleges with the big endowments have been doing, and in today's The Wall Street Journal, there is a bit of an answer. Harvard's endowment lost at least 22% of its value, or about $8 billion from the beginning of July to the end of October. My reaction is that that is not really all that bad given what the stock market has done.
Update: An article at the Huffington Post suggests that the true value, using mark to market, is much higher, maybe 50%

The Beige Book reminds me of the spiritual

The Federal Reserve released its eighth and final Beige Book for 2008, and it paints a gloomy picture of the national economy. The Beige Book is one of three briefing documents that the Federal Open Market Committee (FOMC) uses in its meetings for background information. (The other two are the Green Book and the Blue Book, which are prepared by the professional staff of the Federal Reserve and are not, as far as I know, available to the public.) The Beige Book (the copies that are distributed to the FOMC members have beige covers) is a summary of economic and financial conditions in the twelve Federal Reserve districts.

The December 3rd edition was bleak. I read only a bit, but credit is tight, retail sales are weak, manufacturing activity and construction are falling, and unemployment is rising. "Almost all Districts noted reductions in exports." There were few bright spots. Demand for some skilled workers remained strong, and "Minneapolis and Dallas reported growing demand for bankruptcy services." Another is that there is no upward pressure on prices. And the farmers in the Chicago district had done well on the futures markets: "Much of this year's corn and soybean harvest had already been sold ahead at profitable prices, with most of the rest going into storage instead of being sold at today's lower prices."

I was struck by the repeated references to the tight credit. Credit is not tight because of a low amount of reserves--the Fed has poured reserves into the system. The source of this tightness seems to be something new--a problem with capitalization and trust. There are plenty of reserves, but apparently because the interbank markets are not working properly (a lack of trust), banks need a lot more reserves than they need when the system is functioning properly.

Which reminds me: the Marxists were wrong when they said that economics was about materialism. Economics is in fact a spiritual study because most of what is important is not material. Trust and confidence are not material, and neither are expectations, preferences, value, liability, and ownership. They are the foundations of economics and they are as spiritual as faith, hope, and good intentions.

Fiscal stimulus

The National Bureau of Economic Research (NBER) has decided that a recession began in December of 2007. That date means that the fiscal stimulus of the past summer was properly timed--it occurred early in the recession--which raises the question, "If fiscal policy works the way the textbooks say it does, why have things gotten so much worse?"

The current recession seems linked to two major shocks. The primary one is the bursting of the housing bubble and the mess of bad debt left in its wake. The housing bubble itself was encouraged by lending that made sense only by assuming that housing prices would continue to rise, such as zero-percent-down loans, interest-only loans, and the array of sub-prime and near sub-prime lending. Further, large banks and financial institutions thought that they were managing risk, but most of the risk management techniques assumed that the markets would function smoothly. However, when a financial panic hits, markets never function smoothly. Things that work without problems in normal times can fail to function in abnormal times. After episodes such as the stock market crash in October, 1987 and the demise of Long Term Capital Management in 1998, one would think that people running big financial institutions and the regulatory agencies would have been very aware of that problem.

The second and secondary shock was the oil-price run-up, which has now receded.

Some commentators point to the mark-to-market rules not as a source of a financial shock but as an amplifier of the downturn. I do not fully understand their argument, but it seems to be a feedback argument similar to Irving Fisher's debt-deflation theory of depression. A decline in the value of securities causes distress in some financial institutions that have to mark down the value of assets. Because their net worth is affected, they rearrange portfolios trying to flee risk, which causes a further decline in the price of securities.

Fiscal and monetary policy were designed to offset demand shocks, which is what the Keynesian economics that emerged from the Great Depression saw as the source of almost all instability. But is the source of our present recession a demand shock, or is it something else? And if it is something else, why should we expect any stimulus package, no matter how large, to fix the problem?

Addendum: Here is marginalrevolution.com on monetary policy.

Waste water plant breeds salmon

Here is a weird story: Chinook salmon breed in a waste water treatment plant in East Chicago and have been doing it for 20 years. It is not clear how they got there, but they have to swim up a shallow stream to the drainage pipe and then 200 feet in the drainage pipe to get inside the plant.

The salmon began spawning in East Chicago after the city built a new plant and switched from using chlorine to purify the water to using banks of ultraviolet light bulbs. The open channel behind the plant that runs into the Grand Calumet was a murky brown stream with a faint chemical smell from the chlorine before the change, but turned into a natural haven afterward.

When the fish returned, so did herons, kingfishers, then foxes and a colony of beavers. Naturalists from the Shedd Aquarium in Chicago and environmental groups have identified dozens of fish species outside the plant in numbers common only to the cleanest freshwater streams: rainbow trout, crayfish and largemouth and smallmouth bass.