Arnold Kling  

Some Morning Links

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Tyler Cowen, Milton Friedman, ... Greg Mankiw's Problem...

Profit from bank bailouts--so far. The profits come from banks that have paid back the government, and recall that some banks were forced to take bailout funds in the first place. We will see what happens to the full sample.

Suppose in the end that the government makes a profit of $50 billion on banks, but loses $100 billion on Freddie and Fannie. How should we count that? I would be inclined to count it as a loss on bank bailouts, because the subsidies to Freddie and Fannie end up bailout banks, which were creditors of those institutions.

David Warsh on the origins of money. I think of money as originating as a way of paying soldiers. This raises for me the question of how conquerors funded large armies before the invention of money, which Warsh says took place around 600 BC. The problem is this: you are an emperor who wants to go marauding. You want your soldiers to remain loyal for months, during which you may not win much loot. How do you provide credible promises to the soldiers that they will get a fair share of loot?

Lee Ohanion claiming that Herbert Hoover encouraged wage stickiness, making the Depression worse. Lots of adverse reaction to Ohanion, for example here.

Without rendering my own opinion on Ohanion's work, I find it interesting that the New Deal narrative is defended so ferociously. I fear that the same thing will happen with the current episode. The mainstream narrative is that it was caused by bankers acting without sufficient adult supervision, and that Paulson and Bernanke saved us from having a much worse fire. My narrative would be that it was caused at least in part by the adult supervisors encouraging too much housing and too much leverage. Moreover, I think that the size of the recession was determined primarily by the size of the adjustment needed in home construction (down from 2 million units at an annual rate to 0.5 million units at an annual rate) needed to correct the imbalance. That is, the magnitude of the recession had little or nothing to do with the travails of the bankers.

In any case, the narrative may be the most important long-term effect of the crisis. If the mainstream narrative holds, we will have much more government intervention and much less economic liberty for generations to come. If alternative narratives compete successfully, we will have more liberty and less intervention.


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COMMENTS (10 to date)
E. Barandiaran writes:

Arnold, information about government programs to help banks and other financial institutions is still incomplete. To determine whether the programs were to solve a liquidity problem or to bailout insolvent institutions you need to know the impact of ALL the programs on each of the 10 or 20 largest institutions as well as on the Fed, the Treasury, FDIC and any other government agency that has disbursed funds.
This is work for the next five years. Unfortunately politicians and bureaucrats will release partial information from time to time to give the impression that the government has earned money from its intervention. And unfortunately you will see many economists that will go along with this practice.

BlackSheep writes:

How do you provide credible promises to the soldiers that they will get a fair share of loot?

Reputation? You start out engaging in timid conquests and escalate from there.

Matt C writes:

From the NYT article:

"The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually"

4 billion in profits, 15% return. TARP has been running about a year. So we are being invited to look at the at profits on about 27 billion of principal. Out of hundreds of billions or trillions in total bailouts and guarantees.

Read the headline of the NYT article again. This is dishonest journalism.

I'd like to read an analysis of these "profits" from a less corrupt source. Anyone got one?

dWj writes:

The banks that have repaid TARP funds are disproportionately the healthy ones.

E. Barandiaran writes:

A comment on your reference and question on money. Regarding your question, given that the soldiers were in charge of looting, the relevant one was how the emperor could get a fair share of the loot. This is a question of incentives and contract enforcement rather than money per se.
You refer to Warsh's post. I found it useless to understand the financial crisis. He starts with the typical confusion between money and credit to explain what Seaford said and to conclude: Yet many of us, perhaps most of us, haven’t given up thinking about how some degree of limitation might be re-imposed on what Seaford calls “our hyper-monetized, atomized and self-destructive culture of the unlimited.” This is nonsense regardless of how profound it sounds.
In the final part of his post Warsh refers to Persaud's column on the Tobin tax, but fails to highlight that it's a simple way to raise revenue (Persaud recognizes it and Argentina did it 10 years ago).

Acton. writes:

what do you think of brad delong's critique of Ohanian?

Sarge writes:

I read Andrew Leonard's critisism of Lee Ohanian, and I have to say he came across as extremely sloppy. For one, he says "And never mind that the definitive conservative economic treatment of the Great Depression, Milton Friedman and Anna J. Schwartz's 'A Monetary History of the United States,' pinpoints monetary policy mistakes by the Federal Reserve as the crucial catalyst that turned a stock market crash and recession into a Depression." Leonard's right that Friedman and Schwartz blamed the Fed for turning a garden variety recession into the Great Depression, but that's completely beside the point that Ohanian was arguing. Ohanian's paper doesn't contradict the Monetary History; quite to the contrary Ohanian explicitly states (pages 48-49) that it provides a theory which supports and explains Friedman's conclusions. His paper is supplamental, not contrary, to Friedman's findings. (Did Leonard even read the paper? He only quotes the press release and then declares that he will search for other economists who disagree. Almost as though he's already reached a conclusion and is now in search of evidence to confirm what he already believes...)

Andy writes:

I was under the impression that the real beneficiaries of the F/F bailout were the foreign central banks which had loaded up on agency bonds. Domestic banks didn't have that much in the way of loans to F/F, but they did own the preferred stock, which they took a bath on. Of course, F/F/FHA are 90% of the mortgage market now, so it's bailing out homeowners as well. But I don't think it was really a bank bailout.

RL writes:

Dr. Kling says, "I think of money as originating as a way of paying soldiers. This raises for me the question of how conquerors funded large armies before the invention of money".

This is confusing. Arnold makes it sound like speculating about the origin of money is something like speculating about the number of angels that can dance on the head of a pin. He makes it sound as if this is all open to clever conjecture since there's been no actual historical or anthropological studies on the topic.

I had thought, though I'm not an economist, that much has been written about this topic. Does the preponderance of the literature say "money arose to pay soldiers"? That seems simplistic. Why not artisans? Why not to make tithes to the church? Not to be harsh, but what historical/anthropological/economic evidence does Dr. Kling have for this in-no-way-self-evident claim?

Koromo writes:

Wow, this Andrew Leonard guy is funny. Instead of looking if the paper has its merits (like him I didn't read it, so I don't know if it has), he reaches the conclusion that it is wrong because he didn't liked the conclusion.

And the first thing he does is... Ask for people from his "team" (he even called Delong a "fierce warrior hailing from FDR's camp") to prove the guy wrong.

Again, I don't know if the paper is "good" or not, but this Leonard guy does not sounds exactly intellectually honest.

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