Bryan Caplan and David Henderson

Arnold Kling: October 2008

An Author Archive by Month (70 entries)

Health Care Free Lunch

Economics of Health Care
Arnold Kling
Brad DeLong and David Cutler promise one, on behalf of Barack Obama. As the reforms take hold, costs will drop. As costs drop, insurance will become more affordable. Millions previously priced out of the market will be able to buy... MORE

Bernanke Could Use a Clue

Finance: stocks, options, etc.
Arnold Kling
Lots of big names at a Berkeley symposium on housing finance, including Ben Bernanke. Reportedly, Bernanke focused on the need to rework the government guarantee of mortgage securities. I really believe that is wrong. Moreover, he knows less about it... MORE

Anti-Democratic Lunch with Me

Econlog Administrative Issues
Arnold Kling
Reader George Paci suggested that I attempt to convene a lunch where locals can join me in batting around ideas, or I suppose just bat me around. Fellow DC-area bloggers as well as readers are welcome to attend. In the... MORE

Difficult Facts About Housing

Finance: stocks, options, etc.
Arnold Kling
It is interesting to go back and read of the papers delivered at a Fed conference in Jackson Hole in 2007. Tanta was on top of them.... MORE

The Wonders of Democracy

Political Economy
Arnold Kling
Some random thoughts. 1. In my county, and in many locations in the U.S., we have had one-party government for longer than the Communists had control of Eastern Europe. 2. In spite of the fact that Congressional approval ratings are... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
The New York Times has a story about borrowers who worry that they are hurting themselves by paying their mortgages and perhaps missing out on a bailout. "If the government says, 'Prove that you can't afford your house and we'll... MORE

From The Tax Foundation The Treasury action invalidating SILO depreciation deductions encouraged the banks to look for any opportunity to get out of the contracts. The situation is exacerbated by an IRS settlement offer to banks that lets them keep... MORE

Politics and Identity

Behavioral Economics and Rationality
Arnold Kling
I recommend this lecture from Bill Bishop. By the way, I am finding an incredible amount of interesting videos these days. I think that somebody who is motivated to learn and has some good sources of recommendations could get do... MORE

Could a Libertarian Buy Iceland?

Political Economy
Arnold Kling
Tyler Cowen writes, I wonder what it is like for a country to be truly, permanently bankrupt. And a further difficulty lies on the horizon. Circa 2000, fish accounted for 70 percent of the country's export earnings. Here are many... MORE

The Security Rating Game

Finance: stocks, options, etc.
Arnold Kling
Joshua D. Coval, Jakob W. Jurek, and Erik Stafford write, First, the securities' credit ratings provided a downward biased view of their actual default risks, since they were based on the credit ratings agencies' naïve extrapolation of the favorable economic... MORE

The S Word

Finance: stocks, options, etc.
Arnold Kling
One word I never see in the press coverage of the housing crisis is "speculator." Whether it is yet another silly economist's op-ed* or a front-page story, the press talks about distressed homeowners, not the people with second and third... MORE

Subtle Wisdom

Political Economy
Arnold Kling
From Don Boudreaux. The fact that each of us depends upon the efforts of millions of others does not mean that some "society" transcending individuals produces our prosperity. Rather, it means that the vast system of voluntary market exchange coordinates... MORE

What Next?

Fiscal Policy
Arnold Kling
John Baden writes, there is diminishing support for institutions that generate wealth rather than redistribute it...both positive and negative values increasingly converge and agglutinate. This promotes substantial class differences. If one is blessed with responsible parents, intelligence, favorable genetics, health,... MORE

Greenspan, Bernanke, and Bubbles

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong says I am wrong about his views of Greenspan. I now think he was wrong not to move aggressively to curb the housing bubble of the 2000s. But I think all in all he did a very good... MORE

The Camden Bobos Proposal

Politics and Economics
Arnold Kling
Below is a list of Ten Proposals for the next Administration, which came from a talk by Juan Enriquez. I thought that the main point of the talk is that politicians are dealing in unreality. Certainly, in the debates, every... MORE

A sort-of Blog to Follow

Finance: stocks, options, etc.
Arnold Kling
The Kellogg School (Northwestern University's Business School) has a sort of blog, featuring several professors there. One of them, my former grad school classmate Bob McDonald, is the author of a definitive textbook on derivatives. In one post, he writes,... MORE

Central Bankers and History

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong writes, The current financial crisis has its roots in Greenspan's decision to keep interest rates very low in 2002 and 2003 to head off the danger of a deflation-induced double-dip recession, and his subsequent decision that the costs... MORE

The Tallest Pygmy

Finance: stocks, options, etc.
Arnold Kling
Why is the U.S. dollar strengthening, given the crisis that is taking place here? I remember that Steve Roach once used the metaphor of the tallest pygmy to explain how the strength of the dollar. Maybe once again we are... MORE

Narratives of Knowledge and Arrogance

Finance: stocks, options, etc.
Arnold Kling
Megan McArdle has written about the evil man theory (also here). The key to a narrative of evil is that someone knew. Early in the crisis, we were hearing that banks knew that the loans they were making were headed... MORE

In Which Winnie-the-Pooh Uses a Bank

Finance: stocks, options, etc.
Arnold Kling
In an ongoing dialog with Mencius Moldbug, I changed from my favorite fruit tree metaphor.... MORE

Mark Thoma's Question

Finance: stocks, options, etc.
Arnold Kling
He writes, I always wonder if the people making the decisions actually had these thoughts, i.e. if they explicitly made decisions based upon the assumption that there was a large possibility of a bailout if they blew things up. Do... MORE

The Call for a Commission

Finance: stocks, options, etc.
Arnold Kling
The Hill Reports, An independent financial oversight committee should be established to examine what led to the economic meltdown, House Republicans on the Oversight and Government Reform Committee said Wednesday. The National Journal's Congress Daily (subscription required) reports, Democratic leadership... MORE

A Pat on the Back for Macro

Macroeconomics
Arnold Kling
It comes from Olivier Blanchard. a largely shared vision both of fluctuations and of methodology has emerged. Not everything is fine. Like all revolutions, this one has come with the destruction of some knowledge, and suffers from extremism, herding, and... MORE

Work-Safe Readings for Macro

Austrian Economics
Arnold Kling
In response to my post on the porn that is modern macro, readers naturally asked me for alternatives.... MORE

Economists with Pseudo-Knowledge

Finance: stocks, options, etc.
Arnold Kling
I am shocked at the behavior of my fellow economists during this crisis. They are claiming to know much more than they do about causes and solutions. Rather than trying to understand and explain what is going on, they are... MORE

Thoughts on Banking: An Example

Finance: stocks, options, etc.
Arnold Kling
My earlier post left people confused. Let me give an example to clarify my model of financial intermediation with no information asymmetries.... MORE

What Are Good Financial Institutions?

Finance: stocks, options, etc.
Arnold Kling
An interesting dialog between Dani Rodrik and Steve Randy Waldman. Some excerpts from the latter: The purpose of a financial system is to solve a collective optimization problem whose solution we cannot guess a priori. If we are very sure... MORE

Thoughts on Banking

Finance: stocks, options, etc.
Arnold Kling
This post returns to the deep topic of banking theory. I am very unhappy with the state of banking theory in economics. People make very strong empirical claims about what they call the risk-taking process based on shallow thinking about... MORE

Too Many Bad Banks to Fail?

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen has a new variation of the too-big-to-fail story. He quotes Anna Schwartz to the effect that insolvent banks need to be shut down. Tyler replies This is almost certainly true if the number of "problem banks" is sufficiently... MORE

Clay Shirky Podcast

Information Goods, Intellectual Property
Arnold Kling
Great Interview with Russ Roberts and Clay Shirky. I find lots of the interview fascinating. One of Shirky's comment on Wikipedia is that it is low-cost to remove vandalism, and that helps to drive out vandalism. I hope he is... MORE

The Original Sinn

Finance: stocks, options, etc.
Arnold Kling
Hans-Werner Sinn writes, The lack of equity resulted largely from the concept of "limited liability," which provided an incentive for excessive leveraging. Earnings left inside a financial institution can easily be lost in turbulent times. Only earnings taken out in... MORE

An Interesting Editorial

Finance: stocks, options, etc.
Arnold Kling
In The Washington Post. when government favors a particular economic activity, however validly, it must seek countervailing control to ensure the sustainable use of public resources. This is why banks must meet capital requirements in return for federal deposit insurance.... MORE

Fundamental Causes

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen invokes Fischer Black. in his 1991 book, "Business Cycles and Equilibrium," and his 1995 work, "Exploring General Equilibrium," he argued that major business downturns could be caused by a combination of excess risk-taking and simple bad luck. If... MORE

The CBO Offers Hansonian Charts

Economics of Health Care
Arnold Kling
Ezra Klein highlights them. They show little difference in outcomes between genuine treatments and placebos. The implication of course is that it's far cheaper to give someone a chest incision than an angina, and far cheaper to give them a... MORE

Mussolini and World Equity Markets

Finance: stocks, options, etc.
Arnold Kling
It's not a good idea to try to interpret stock market moves as if they were rational. It's also not a good idea to refer to the U.S. Treasury Secretary as "Mussolini." I'll consolidate both of these ideas in this... MORE

The Political Economy of the Bailout

Finance: stocks, options, etc.
Arnold Kling
Tyler keeps wondering whether the bailout (or "bank recapitalization") is going to work. He is asking the wrong questions. Whether the economy needs a "plan," or whether the plan will help the markets, is beside the point. The plan serves... MORE

Misleading Story

Finance: stocks, options, etc.
Arnold Kling
Today's Washington Post gives us the inside story of how some regulators sought to put derivatives under and exchange. They met with resistance from other regulators. It is all very entertaining, but at the end of the day, an organized... MORE

The Fantasy Testimony Continues

Finance: stocks, options, etc.
Arnold Kling
Below is the longest blog post ever. It contains the "written remarks" that extend my fantasy testimony. Update: I will have to revise this to take a more conservative view of the proportion of investor loans. A reader sent me... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
The amazing Mark Thoma has already read everything in the links below. The rest of you could benefit from reading my excerpts and commentary.... MORE

Bank Telethon

Finance: stocks, options, etc.
Arnold Kling
Imagine an announcer came on TV and said, "Welcome to the 2008 Bank Telethon. You've heard all the horror stories. Now, with the holiday season approaching, I know you'll want to reach deep into your pockets to lend a hand."... MORE

Questions I Would Like to See Asked

Energy, Environment, Resources
Arnold Kling
I would love to see this question asked at a Presidential debate: If half of the troubled mortgage loans are for non-owner-occupied homes, that is for houses owned by speculators, do your proposals still make sense? My understanding is that... MORE

Congratulations, Paul Krugman

International Trade
Arnold Kling
He wins this year's Nobel in economics. Tyler Cowen has an excellent commentary and links. Before Krugman, the only explanatory variable in international trade was factor endowments. You produced stuff because you happened to have the right type of land,... MORE

Derivative Exchanges and Systemic Risk

Finance: stocks, options, etc.
Arnold Kling
One suggestion that often crops up is to create an exchange for derivatives, such as credit default swaps. In my view, this probably would solve the problem of counterparty risk. However, the more important problem, systemic risk, would be left... MORE

More Fantasy Testimony

Finance: stocks, options, etc.
Arnold Kling
I am in the process of writing expanded fantasy testimony. Below are what I call "oral remarks." I am also working on some support material that I call "written remarks." My goal in writing this is primarily therapeutic. There is... MORE

The Duelling Guarantee

Finance: stocks, options, etc.
Arnold Kling
The myth is that mortgage securitization reflects the genius of Wall Street. The reality is that it reflects the stupidity of the way that regulatory capital requirements are calculated. The market for low-risk loans is dominated by Freddie and Fannie... MORE

Oh, No!

Arnold Kling
The Wall Street Journal reports, The government's plan to buy equity in financial institutions, announced Friday by Treasury Secretary Henry Paulson, is an idea that many academic economists have championed from the start of the crisis. The Paulson plan was... MORE

He writes, During a bubble buyers are everywhere. Then, suddenly, they disappear, waiting, watching, delaying, reluctant to buy assets that others might not. That buyers will disappear in a bubble is predictable, what is never predictable is the timing. In... MORE

It is natural to look at the collapse of stock prices and say, "See? Social Security privatization would be a disaster." But consider two possibilities: 1. The market is down because future U.S. wealth is down. In that case, government-provided... MORE

Futarchy in Camden, Maine

Game Theory
Arnold Kling
Do you like prediction markets as much as Bryan and Robin? Then try Pop!Tech prediction market.... MORE

1. An FDIC document on the risk weights of different bank assets. The higher the weight, the more capital the bank has to hold against that asset. As I read table 1 and table 3, if you originate a loan... MORE

Joe Stiglitz. Word!

Arnold Kling
I probably am misusing the teenage slang. I mean to say that I agree with what Stiglitz says here. (Fast-forward until you get to the first seated panelist speaking.) 1. He says that macroeconomics of the past 30 years has... MORE

Continuing this thread, which had some very interesting comments. The reason that this is important is that when this financial crisis is over, we want to know what might work to prevent another one. We know how to prevent another... MORE

Morning Commentary

Arnold Kling
1. The debate was truly awful. The financial crisis was caused by greed (McCain) and deregulation (Obama). We need energy independence. Our priority is to do everything at once (McCain). We will cut spending by spending more (Obama). We can... MORE

Who is a Realist?

Finance: stocks, options, etc.
Arnold Kling
I did not care for Paul Romer's claim that realists support the Paulson plan, while model-addicted fundamentalists oppose it. In my view, there are realistic reasons to oppose the Paulson plan. First, many "realists" say that we need to boost... MORE

Monetary Institutions

Austrian Economics
Arnold Kling
Mencius Moldbug sent an email asking me to comment on this post, and we have been corresponding back and forth. I should say that monetary theory gives me a headache.... MORE

My Fantasy Testimony

Arnold Kling
This weekend I typed up "draft testimony" on what caused the mortgage/financial crisis. Like anyone wants to hear it. Anyway, I'll paste it in below the fold. UPDATE: If you follow the links in James Hamilton's post, during his talk... MORE

An Education Debate

Arnold Kling
It starts with Charles Murray, but we already know what he thinks. And although Kevin Carey's essay will appear later, we know what he thinks, too. I'm curious how Bryan Caplan will weigh in. We know he's a big fan... MORE

Megan McArdle quotes Richard Feynman's analysis of the Challenger disaster. I was drawn to this paragraph in particular: why do we find such an enormous disparity between the management estimate and the judgment of the engineers? It would appear that,... MORE

Other People's Money

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen puts a lot of the blame for the financial crisis on leverage. He links to Robert Frank, who writes, In financial markets, asset bubbles cause real trouble when investors can borrow freely to expand their holdings. To... MORE

The Lamps Are Going Out

Finance: stocks, options, etc.
Arnold Kling
No major newspaper would run any op-ed from me. I gave up and sent one to American.com, which you can see here. The bottom line: The financial bailout isn't as bad as Main Street thinks. It's worse. I think... MORE

Credit Default Swaps

Finance: stocks, options, etc.
Arnold Kling
The Washington Post tries to explain them. So far, I think that I am the only commentator who has offered a theory of how credit default swaps create systemic risk. I'm not saying that I'm the only person with... MORE

How Government Used Fannie and Freddie

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts writes, Congress designed Fannie and Freddie to serve both their investors and the political class. Demanding that Fannie and Freddie do more to increase home ownership among poor people allowed Congress and the White House to subsidize... MORE

The International Angle

Finance: stocks, options, etc.
Arnold Kling
The Daily Telegraph reports, We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that... MORE

Cochrane and Rogoff on the PBS News Hour

Finance: stocks, options, etc.
Arnold Kling
I'll try liveblogging.  Here is a transcript.  For what Rogoff was thinking the other day, see this op-ed.  (We exchanged emails briefly on Saturday.  He mentioned he was writing something, and it sounds like he's shifted a bit between then... MORE

He says, In light of the dramatic events that have occurred in global financial markets, the Oversight Committee will hold five hearings in October to examine the regulatory mistakes and financial excesses that led to the market breakdowns on... MORE

Browse it here. It is also what is behind the tab "encycopedia" on the header of this blog. It's a great resource. If you need to look up an economic term, chance are that you will find it in... MORE

Radio Commentary

Arnold Kling
I am one of two guests who appeared live on this program. They really put it up on their web site quickly. It's mostly about the financial crisis, but as a bonus you get to hear me correct the other... MORE

Explaining Inequality

Income Distribution
Arnold Kling
Nick Schulz and I write, It might seem natural to pin the blame for the disappointing rate of high school graduation and college training on America's education system. However, Heckman and others find little evidence that education can reduce differences... MORE

My Views on the Crisis -- A Summary Statement

Finance: stocks, options, etc.
Arnold Kling
First, read Tyler Cowen's post of the same title. 1. Causes In hindsight, I think that the crisis was caused by a) creation of the secondary mortgage market (50 percent) b) low down payment mortgages (30 percent) c) the "suits... MORE

Net Worth Certificates

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen endorses the idea of recapitalizing banks using government-issued "net worth certificates." He has links to more explanation. Steven Pearlstein disagrees. Many academic economists argue that if taxpayers are going to rescue the financial system, their money should be... MORE

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