The Weekend's Must Reading

I nominate Jacob Weisberg. (Yes, that Weisberg.)

From What Else Are We Wrong About? The danger of nuclear proliferation and other possible fallacies:

A lot of our premises have turned out to be wrong lately. I'm talking not about evanescent bits of conventional wisdom that have shifted but about overarching assumptions that were widely shared across the political spectrum—big things that experts and nonexperts agreed about—until they were proved false.

Read the whole thing. It's dynamite, and probably the best thing I've read anywhere in months (and to think, this morning I probably would have nominated Bryan's post on Palestine for that honor!)

The solution Tyler proposes seems clever but seems very easy to game. American firms have proven very ingenious about structuring compensation in ways that avoid rules restricting them. I suspect that if Tyler's proposal became law, we would see a lot more country club memberships, company-paid-for housing, tuition reimbursements or "scholarships" for execs' kids, etc.

Let me add that those in the private sector who did NOT do a good job of managing risk should find their jobs in jeopardy. For an especially egregious example, see: http://www.eclectecon.net/2009/04/stupid-dumb-financial-management.html

This discussion brings me to the article below.

Araujo, Aloisio Pessoa de & Funchal, Bruno, 2005 "Past and Future of the Bankruptcy Law in Brazil and Latin America"

http://ideas.repec.org/p/fgv/epgewp/599.html#provider

"A good design of bankruptcy law’s procedures may influence in different ways the establishment of a healthy business environment. From an ex-post efficiency perspective, a bankruptcy law should maximize the total value of the company and consequently, the pay-off that creditors receive from insolvent firms. The positive effect comes over the cost of capital that is reduced since the expectation of recovery by creditors is higher in case of bankruptcy. As important as the ex-post efficiency is the ex-ante efficiency. At this perspective what matters is not the total value of the failed firm, but the division of its value among the participants. An ex-ante efficient bankruptcy law is capable to produce rights incentives over managers’ decisions, in both the initial period of firm’s life and after the firm goes to financial distress. Bankruptcy procedures should penalize managers adequately in bankruptcy states. Without any adverse consequence at all there is very little incentive to work hard in the early stage of a firm’s life to pay its debts. This incentive has implications in the portion of insolvent firms and it is reduced when well provided. In the post insolvency period, the management will tend to give rise to two inefficient bankruptcy decisions: first, undertaking excessively risky investments as a means of avoiding bankruptcy; second, delaying filing for bankruptcy aiming at extracting pecuniary gains as much as possible. A good insolvency system reserves some portion of value in bankruptcy for managers and shareholders to motivate actions in favor of efficient investment and timely decisions."

The government is not making a technical mistake. It isn't creating a moral hazard because it arranged things this way instead of that way without consulting an economist.

Congress discovered that it could borrow, direct, and spend more money through GSE's and surrogate banks, who will return some of that money as legal campaign contributions. The whole idea is to "effectively neutralize creditors as a force for financial safety."

Politicians do not want financial safety as a primary concern; they want the money. They have arranged guarantees so that they can get the money and the creditors don't have to worry about lending it. Beautifully, it is off-budget.

We Guarantee It

The government is guaranteeing us into poverty.