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Arnold Kling: December 2008

An Author Archive by Month (58 entries)

Downgraded into Bankruptcy?

Finance: stocks, options, etc.
Arnold Kling
The final chapter in the Washington Post's telling of the AIG saga is the most exciting--and the most frustrating. In the end, it is still not clear whether there was anything fundamentally wrong with AIG's portfolio. After all their research,... MORE

AIG, CDS, Suits, and Geeks

Finance: stocks, options, etc.
Arnold Kling
The Washington Post is in the middle of a three-part series on AIG and credit default swaps. A lot of the focus is on corporate infighting. A Brooklyn College graduate, the 42-year-old [Joseph] Cassano was not one of the "quants"... MORE

Bailout Rage

Finance: stocks, options, etc.
Arnold Kling
Reason TV has a video of a panel discussion that really articulates the frustration that libertarians feel about the financial bailout. As Tim Cavanaugh points out, the bailout redistributes from the prudent to the profligate. As Veronique de Rugy points... MORE

Inclined to Liberty

Political Economy
Arnold Kling
Louis E. Carabini writes, There are those inclined to liberty--freedom of the individual to live his or her life in any peaceful way. And there are those who are inclined to mastery--permitting others to live their lives only as another... MORE

Larry Summers, Neo-Galbraithian

Fiscal Policy
Arnold Kling
He sets out criteria for a stimulus package. Investments in an array of areas -- including energy, education, infrastructure and health care -- offer the potential of extraordinarily high social returns while allowing our country to address some long-standing national... MORE

Mark Thoma on the Risk Premium

Finance: stocks, options, etc.
Arnold Kling
He writes, Tyler Cowen focuses on the misallocation of risk due to government induced moral hazard. My own view is that misallocation of risk did play a role, but I think risk misallocation due to market failures, i.e. the failure... MORE

Gullibility, Madoff, and Fiscal Stimulus

Behavioral Economics and Rationality
Arnold Kling
Stephen Greenspan, a psychiatrist who lost money in the Bernard Madoff scam, writes, Gullibility is a sub-type of foolish action, which might be termed "induced-social." It is induced because it always occurs in the presence of pressure or deception by... MORE

Lectures on Macroeconomics, No. 11

Macroeconomics
Arnold Kling
This lecture discusses what I think of as the Leijonhufvud interpretation of macroeconomics as an attempt to characterize an economy that is far from classical equilibrium.... MORE

Banana Republic Economics, Continued

Finance: stocks, options, etc.
Arnold Kling
Carmen Reinhart and Ken Rogoff write, We find that banking crises almost invariably lead to sharp declines in tax revenues as well significant increases in government spending (a share of which is presumably dissipative). On average, government debt rises by... MORE

Theory, Explanation, and Policy

Macroeconomics
Arnold Kling
Josh Hendrickson writes, there are many so-called Keynesians who have been out there promoting policies that are quite the opposite. They have been promoting the re-capitalization of banks, forcing banks to lend, automotive bailouts, and a push toward developing "green"... MORE

Which Sector Should Lead?

Macroeconomics
Arnold Kling
Tyler Cowen writes, I think markets are failing to solve an economic calculation problem. The economy needs some new things to do but another bubble will not work, much of finance is frozen or contracting, and economic and political uncertainty... MORE

A Microfinance Skeptic

Growth: Causal Factors
Arnold Kling
A reader points me to this letter from Milford Bateman about the impact of microfinance. first, a serious shortage of funds for small and medium-sized enterprises, which is deeply damaging because SMEs have by far the most sustainable growth and... MORE

Holiday Reading

Books: Reviews and Suggested Readings
Arnold Kling
During this season of good cheer, I am reading A World Undone, G.J. Meyer's history of the first World War. Men with the power to decide the fate of Europe did the things that brought the war on and failed... MORE

Subsidizing Mortgages

Finance: stocks, options, etc.
Arnold Kling
One prominent proposal comes from Glenn Hubbard and Christopher Mayer. In support of their mortgage subsidy idea, Brad DeLong writes, I am, however, gobsmacked to see Glenn Hubbard proposing it. What has me gobsmacked is that DeLong, who usually has... MORE

Health Care Policy Update

Economics of Health Care
Arnold Kling
Ezekiel Emanuel with a solution based on vouchers. I think we have to head in that direction. With vouchers, you can put a finite budget on government health care subsidies. With service reimbursement programs, like Medicare, you have an open-ended... MORE

Madoff as Metaphor

Fiscal Policy
Arnold Kling
Paul Krugman writes, How different, really, is Mr. Madoff's tale from the story of the investment industry as a whole? Meanwhile, I've been thinking that Madoff is a perfect analogy for the public sector. The government gives people money, which... MORE

Patterns of Financial Crises

Finance: stocks, options, etc.
Arnold Kling
Michael Bordo writes, A well known tradition in monetary economics which goes back to the nineteenth century and in the twentieth century was fostered by Wesley Mitchell ( 1913), Irving Fisher (1933), Hyman Minsky( 1977), Charles Kindleberger and others. It... MORE

DeLong vs. Kling

Macroeconomics
Arnold Kling
He writes, The only answer I can think of is for the U.S. to then become the world's largest private-equity fund: they lend us their money, and we then invest the money back in their economies--in industries and companies that... MORE

Lectures on Macroeconomics, No. 10

Macroeconomics
Arnold Kling
A long-standing controversy in monetary theory and macroeconomics involves the question, "Is it money, or is it credit?" In most of the macro theory of the past thirty years, the focus is on money. This is nice because you get... MORE

What's Wrong with Deleveraging?

Finance: stocks, options, etc.
Arnold Kling
In a previous post, a commenter asked a good question about what bothers me about deleveraging. Deleveraging in the nonfinancial sector means that consumers buy less on credit and firms use less debt financing. That is obviously necessary, because we... MORE

I Believe in Quantitative Easing

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, Will [purchases of mortgage securities and other assets by the Fed] succeed if we just do it on a sufficiently large scale? I'm not at all convinced that it would. Our standard finance models treat interest rate... MORE

The Parrot Shows Signs of Life

Finance: stocks, options, etc.
Arnold Kling
Bloomberg reports, The difference between yields on Fannie's two-year debt and two-year Treasuries narrowed 18 basis points to 75 basis points, the lowest since Sept. 19, data compiled by Bloomberg show. The article says that Fannie mortgage-backed securities are trading... MORE

Janeway on McArdle's Law

Finance: stocks, options, etc.
Arnold Kling
In an interview, William Janeway says, When I was a kid growing up in this business in the 1970s, we thought of illiquidity and insolvency as two fundamentally different conditions. You were illiquid if the expected net present value of... MORE

Deleveraging

Finance: stocks, options, etc.
Arnold Kling
The Washington Post has one of its better stories on the rise and fall of mortgage securitization. My favorite anecdote in the story is on the last page, concerning the head of a firm that evidently sold a credit default... MORE

Today's Theme: Regime Uncertainty

Business Economics
Arnold Kling
Russ Roberts and Bob Higgs discuss the concept on this week's econtalk. Nassim Taleb tells Charlie Rose that we are headed for Capitalism 2.0, in which stock prices are much lower, and banks are treated like public utilities--their job is... MORE

Banana Republic Economics

Finance: stocks, options, etc.
Arnold Kling
A reader emails, what is a sustainable level of US debt % to GDP? I usually think of our debt as government debt. But adding up total private and public debt, we have something like 350 percent for a debt-GDP... MORE

The Zorn Effect

Business Economics
Arnold Kling
Management systems degrade. As a manager or a regulator, if you stand still you fall behind. This year, the Washington Redskins hired a new coach, Jim Zorn. They started out 6-2, but they have since lost 5 out of 6... MORE

Financial Panic

Finance: stocks, options, etc.
Arnold Kling
Felix Salmon writes, In times of turmoil, we start worrying less about not having enough money in 20 years, and more about not having enough money in 20 weeks. (What if I lose my job? What if my investments fall... MORE

John Taylor: The Fed Done It

Macroeconomics
Arnold Kling
He is a leading macroeconomist, and he is out with a serious paper, in which he blames the Fed for excessively low interest rates from 2002-2004. Pointer from James Hamilton, who does not agree. Hamilton writes, I feel he overstates... MORE

Why I Think the Multiplier is Large

Macroeconomics
Arnold Kling
Mark Zandi says A payroll tax holiday and a permanent payroll tax credit would be effective tax cuts, particularly if designed to help harder-pressed lower- and middle-income households and smaller businesses. Tyler Cowen also favors payroll tax cuts. I like... MORE

The CDS Debate Continues

Finance: stocks, options, etc.
Arnold Kling
John Dizard takes my side. Felix Salmon doesn't. He writes, If you buy a bond, you get a steady income stream, while running the risk that you might lose substantially all your money. If you sell default protection, you get... MORE

The Economic Outlook

Macroeconomics
Arnold Kling
I'm trying to sort through my thoughts on the economic outlook.... MORE

Alternative History

Finance: stocks, options, etc.
Arnold Kling
The Congressional committee at which I appeared the other day got a lot of documents from Freddie Mac and Fannie Mae, many of which they leaked. The Wall Street Journal writes, One Fannie Mae document from March 2005 notes dryly,... MORE

Mortgage Loan Restructuring

Finance: stocks, options, etc.
Arnold Kling
Thomas Cooley writes, The most important role for public policy is to provide incentives for servicers to restructure and modify loans, to make certain that shared appreciation contracts are part of the policy mix, and to address the legal barriers... MORE

No Further Questions, Your Honor

Finance: stocks, options, etc.
Arnold Kling
Felix Salmon testifies in defense of credit default swaps. I just had a long conversation with Kai Gilkes of CreditSights, who confirmed for me that it's pretty much impossible, in this market, to back out implied default rates from CDS... MORE

An AP Stats Lecture

Statistical theory and methods
Arnold Kling
Because yesterday's hearing ran so late, I missed my AP stats class. Here is the way I would explain what went on to my students.... MORE

Hearing Post

Finance: stocks, options, etc.
Arnold Kling
After the hearing on Freddie and Fannie, my wife said, "You know, after I was finished with jury duty, I was feeling pretty patriotic. I wasn't feeling patriotic after this." C-span took this photo. The hearing covers two c-span videos,... MORE

The written testimony is over 9000 words, which I calculate would take about 75 minutes to read out loud. Below is what I planned to say in my five minutes. [UPDATE: My written remarks are here. Other folks' written remarks... MORE

Brad DeLong on the Crisis

Finance: stocks, options, etc.
Arnold Kling
He writes, In normal times, our models predict, with the ability to diversify portfolios that exists today the risk discount on assets like corporate equities should be around 1% per year. It is more like 5% per year in normal... MORE

Management without Responsibility

Business Economics
Arnold Kling
In his latest podcast, Russ Roberts interviews Steven Lipstein the CEO of the large hospital that shunted my father around to 8 different units over a two-week period. What strikes me about Lipstein is how little responsibility he wants to... MORE

A Rating Agency Example

Finance: stocks, options, etc.
Arnold Kling
Gretchen Morgenson writes, The safest slice of the security held $165 million in loans. When it was issued on Aug. 17, 2006, Moody's and S.& P. rated it triple-A. Just eight months later, Moody's alerted investors that it might downgrade... MORE

Lectures on Macroeconomics, No. 9

Macroeconomics
Arnold Kling
The nonfinancial sector wants to hold risk-free short-term assets and issue risky long-term liabilities. To accommodate this, the financial sector does the opposite. If the financial sector suddenly contracts, the nonfinancial sector gets stuck with an asset mix that is... MORE

Health Care, Education, Spending, and Outcomes

Economics of Education
Arnold Kling
I attended a Cato event at which Glen Whitman and Ezra Klein discussed health care spending. The main stylized fact is that those who spend more on health care do not necessarily get more. As Ezra puts it The evidence... MORE

Another Elite Blog

Economic Methods
Arnold Kling
It comes from Eric Drexler, the nanotech visionary. Pointer from Robin Hanson who I'm sure understands much more of what Drexler says than I do. My guess is that at the margin, scientific communication would benefit from more blogging and... MORE

Thoughts on the Employment Situation

Labor Market
Arnold Kling
Bloomberg reports, Factory payrolls fell 85,000 after decreasing 104,000 in October. The return of 27,000 striking machinists at Boeing Co. last month helped limit the drop, economists said... Payrolls at builders dropped 82,000 after decreasing 64,000. Financial firms decreased payrolls... MORE

Ponzi Finance

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts writes, the traditional investors in this market who had demanded insurance or other forms of protection from credit risk, stepped to the sidelines and were replaced by investors who didn't care. Very interesting. Something changed. What was it... MORE

Another Stake in the Taxpayers' Heart

Finance: stocks, options, etc.
Arnold Kling
Don Boudreaux writes, Detroit auto executives advocate "government getting a stake in the auto companies that would allow taxpayers to share in future gains if they recover" ... I remind these executives that each American is already perfectly free and... MORE

Subprime Lenders Still Soaking Taxpayers

Finance: stocks, options, etc.
Arnold Kling
Business Week reports (I can't find the article on line, but they do have a podcast), [UPDATE: story here. Thanks to the first commenter.] But Premier didn't just close down. Since it declared bankruptcy, federal records show, it has issued... MORE

The Financial Crisis in One Sentence

Finance: stocks, options, etc.
Arnold Kling
Justin Fox writes, the vast securities-manufacturing business that evolved over the past three decades and went into overdrive after 2000 may never recover. This is my view. I think of securitization as like the dead parrot in the famous Monty... MORE

In Praise of Tobin's q

Finance: stocks, options, etc.
Arnold Kling
Felix Salmon writes, In Tobin's Q, you don't want to know what those assets cost, you want to know what their replacement value -- their current cost --is. He is picking a nit with analysis by PIMCO's Bill Gross. Gross... MORE

John Baden Joins the Pigou Club

Energy, Environment, Resources
Arnold Kling
He writes, Rather than a bailout, free the Big Three. Dump CAFE altogether and replace it with an honest and surely more efficient energy tax. Mr. Obama could transcend stalemates and end the 30-year-old fraud of our CAFE fuel-economy rules.... MORE

Inflation as Generic Debt Forgiveness

Finance: stocks, options, etc.
Arnold Kling
Ken Rogoff writes, Price inflation forces creditors to accept repayment in debased currency. Yes, in principle, there should be a way to fix the ills of the financial system without resorting to inflation. Unfortunately, the closer one examines the alternatives,... MORE

Tuesday, December 9 on Capitol Hill

Upcoming Events
Arnold Kling
I received this from Congressman Henry Waxman: Dear Dr. Kling: I am writing to request your testimony at a hearing on December 9,2008, at 10:00 a.m. before the Committee on Oversight and Government Reform. The hearing will examine the financial... MORE

Crowding Out or Crowding In?

Macroeconomics
Arnold Kling
Greg Mankiw writes, I am not sure how convinced I am by these findings. And even if they are correct, I am not sure what model I should use to explain them and to what extent that model would apply... MORE

State GovernmentPensions

Fiscal Policy
Arnold Kling
Robert Novy-Marx and Joshua D. Rauh write, The true extent of public pension underfunding has been obscured by governmental accounting rules, which allow pension liabilities to be discounted at expected rates of return on pension assets. This paper takes stock... MORE

One-paragraph Macro

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong writes, In normal times, when one investor wants more liquidity or safety, another will be willing to take on duration and risk, and they will simply swap portfolios at current market prices. But in abnormal times, they cannot:... MORE

Two Bad Ideas

Economics of Education
Arnold Kling
Louis Gerstner writes Abolish all local school districts, save 70 (50 states; 20 largest cities). Some states may choose to leave some of the rest as community service organizations, but they would have no direct involvement in the critical task... MORE

I will miss Doris "Tanta" Dungey

Finance: stocks, options, etc.
Arnold Kling
The New York Times offers an obituary. Until I read it, I did not realize that Bill McBride, not Tanta, was the main blogger at Calculated Risk. In July, I made extensive comments on one of her posts. She had... MORE

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