Bryan Caplan and David Henderson

Finance

A Category Archive (92 entries)

Maskin's Failure

Finance
David Henderson
UPDATE BELOW In particular, if I'm a bank and I'm making risky loans, I have an incentive, if I can, to make those loans using other people's money, in other words to make highly leveraged loans. But when I do... MORE

A certain laxity in word choice

Finance
Scott Sumner
Matt Yglesias is normally my favorite progressive blogger, but today I have two bones to pick. The first is perhaps a bit picky, as I object to a single word: On the other hand, one can make the case that... MORE

I learned from my finance colleagues that there apparently aren't very liquid markets in which I could short-sell or buy put options on municipal bonds. Birmingham has been going around and around about expanding the Convention Center and building a... MORE

Still no free lunch

Monetary Policy
Scott Sumner
Here's Matt Yglesias: Here's the thing about the federal government -- it can print dollars, a highly profitable activity. You can't print dollars. I can't print dollars. Vox Media can't print dollars. The state of Tennessee can't print dollars. These... MORE

Vanguard's Strange Assumption

Finance
David Henderson
I'm a big fan of Vanguard. All of my IRA-type assets are in Vanguard funds. And when I mistakenly claimed in a Wall Street Journal that John (Jack) Bogle, who started Vanguard, had learned from work by Eugene Fama, Bogle... MORE

That terrible people do terrible things does not mean that good people can stop them without ultimately making matters worse. I think Bryan's "Common-Sense Case for Pacifism" is relevant to the President's claim that we will "degrade and ultimately destroy"... MORE

Predicting bubbles

Finance
Scott Sumner
MaynardGKeynes recently left this comment: Simple fact is that Shiller correctly predicted 3 of the last 3 bubbles (2000, housing, 2007). That's a widely held view, but is it correct? This is from Eugene Fama's Nobel Prize lecture (in the... MORE

McArdle on 15-Year Mortgages

Finance
David Henderson
Megan McArdle has a good post on why it can make sense to switch from a 30-year to a 15-year mortgage. I agree with most of her reasoning. Her point that I think is most important for most people, based... MORE

Philip Booth on Thomas Piketty

Wealth distribution
Scott Sumner
I recently did a post where I expressed skepticism about this claim by Thomas Piketty: In my view, there is absolutely no doubt that the increase of inequality in United States contributed to the nation's financial instability. The reason... MORE

People on the left like Paul Krugman sometimes suggest that 1934-80 was a sort of golden age of stable banking---after the New Deal regulatory reforms and before the deregulation of the 1980s. I'm not convinced that regulation has much to... MORE

Great Moments in Federal Government Retirement

Cost-benefit Analysis
David Henderson
On Tuesday, I spent all day at a retirement planning seminar with more than 100 other federal government workers. Talking to a few of my colleagues around my same age (63), I jokingly referred to it as an AARP event.... MORE

Farewell, James Schneider

Behavioral Economics and Rationality
David Henderson
Our guest blogger James Schneider will post his last entry tomorrow. Because his friend Bryan Caplan posted the welcome, I have asked for--and have been granted--the honor of writing his farewell. I met James at a Liberty Fund seminar on... MORE

Quantum finance

Finance
Scott Sumner
The New York Review of Books has a very interesting interview of George Soros. At one point he is asked about the recent revolution in the Ukraine. Here is part of his response, and then a follow-up question: [Soros] Contrary... MORE

I've Won My TARP Bet

Economic Methods
Bryan Caplan
Back in 2008, I noted an obscure TARP provision: SEC. 134. RECOUPMENT.Upon the expiration of the 5-year period beginning upon the date of the enactment of this Act, the Director of the Office of Management and Budget, in consultation with... MORE

A forthcoming AER paper examines whether professionals in the mortgage securitization industry foresaw the housing crash. If these professionals knew that they were buying and selling toxic assets, they would betray this knowledge by their personal housing decisions. For... MORE

Jeremy Stein gave a speech that advocated adding financial risk to the Fed's traditional dual mandate. Or at least targeting risk in the hope that it makes it easier to fulfill its traditional mandate. I see lots of potential problems,... MORE

The 2008 transcripts: The real issues

Monetary Policy
Scott Sumner
The Fed releases the detailed minutes of its meetings with a 5 year lag. Bloggers that follow monetary policy closely have been eagerly awaiting the 2008 minutes, expecting all sorts of revealing (and perhaps embarrassing) quotes. Although I haven't yet... MORE

Henderson on Jonathan Macey

Finance
David Henderson
Advocates of free markets and deregulation are often accused of being apologists for big business. The main reason for this seems to be that we defend the rights and accomplishments of big businesses that achieve great things under economic freedom.... MORE

Do barriers create "bubbles?"

Finance
Scott Sumner
Ryan Avent discusses a recent speech by Larry Summers:The basic set-up of his narrative remained unchanged from last year. Imagine a world, he said, in which resources are increasingly concentrated in the hands of those with high propensities to save and... MORE

Economics and The Rapture

Behavioral Economics and Rationality
Art Carden
Economists are fond of calling environmental doomsayers' bluffs by challenging them to invest in oil futures if they're really afraid we're going to run out of oil within the next few years. I've done this before (here, for example, is... MORE

David Henderson's "A Nobel for the Random Walk of Stock Prices" (op-ed, Oct. 15) describes me as "one high-profile beneficiary of Mr. Fama's insight," allegedly inspiring my founding of the Vanguard 500 Index Fund in 1975. This is untrue. Perhaps... MORE

Henderson on the Three Nobels

Finance
David Henderson
"Today, Apple announced a bigger dividend than stock market analysts predicted. So I should buy Apple stock, right?" I sometimes get this kind of question from people who know I'm an economist. My answer: "No, you should have bought Apple... MORE

Henderson on Fama, Shiller, and Hansen

Finance
David Henderson
Sometimes the Nobel committee seems to make a partly political statement in choosing winners of the prize in economics. Not this year. On Monday, the Royal Swedish Academy of Sciences awarded the 2013 Nobel to three deserving American economists: Eugene... MORE

Galbraith Bests Henderson: AEA Edition

Finance
David Henderson
Note: Because it's hard to get on line at my cottage, I'm not as responsive to comments on my posts as I normally am. I will say, though, that I thought Mike Davis's comment yesterday was excellent. I said in... MORE

Krugman on "Unproductive Finance"

Finance
David Henderson
In the last couple of weeks, Paul Krugman's blog has been a target-rich environment. In the next few days, I'll have one or two more posts on recent Krugman posts, but one this morning caught me eye. I'll quote almost... MORE

"Get Married and Stay Married"

Cost-benefit Analysis
David Henderson
I'm glad that co-blogger Bryan Caplan raised the issue of the marriage premium. When I was writing a review of Dwight Lee's and Richard McKenzie's excellent book, Getting Rich in America: 8 Simple Rules for Building a Fortune and a... MORE

Alan S. Blinder is one of America's leading economists. One of the few economists who write really well, he is also a master storyteller. In "After the Music Stopped," Mr. Blinder, previously a vice chairman of the Federal Reserve Board... MORE

In that order: 1.  U.S. and UK regulators are trying to find a workable way to shut down big international banks.  If they find a solution it would remove one of the the big barriers to ending Too Big To Fail.... MORE

Hummel on Moss on Limited Liability

Finance
David Henderson
San Jose State University economist Jeffrey Rogers Hummel sent the following capsule review of David A. Moss, When All Else Fails: Government as the Ultimate Risk Manager (Cambridge: Harvard University Press, 2000). Jeff writes: Limited liability remains a subject of... MORE

Payday for Behavioral Economics

Behavioral Economics and Rationality
David Henderson
Do retirement savings policies--such as tax subsidies or employer-provided pension plans--increase total saving for retirement or simply induce shifting across accounts? We revisit this classic question using 45 million observations on savings for the population of Denmark. We find that... MORE

Expanding Megabanks: Is Impatience the Cause?

Public Choice Theory
Garett Jones
From Tuesday's Wall Street Journal:Some, like Citigroup Inc. and Bank of America Corp. have embarked on diets of their own.  On the whole, though, the financial system is more concentrated than before the crisis. And Santander, the largest Euro-area bank with... MORE

Henderson on Zingales

Books: Reviews and Suggested Readings
David Henderson
My review of Luigi Zingales's book, A Capitalism for the People, has been published in the latest issue of Policy Review. One of the best parts of his book is the content on cronyism. In case you think this review... MORE

How Many Bad Loans Did Fannie and Freddie Originate?

Efficient Markets Hypothesis
Garett Jones
Trick question: None, zero, zilch.  By law, Fannie and Freddie can't originate loans--they can only buy or guarantee loans that have already been made by actors in the private sector.  This is no small point, but it's a point that... MORE

Reviewing Mark Zandi's Newest Book

Finance
Garett Jones
My latest book review for Barron's is here ($, probably).  Zandi's Paying the Price adds some value; this post excerpts some positive parts of the review:"Regulatory, legal, and policy uncertainty was holding business back." That's author Mark Zandi, Moody's Analytics chief... MORE

TARP: A Gift for the Bondholders

Finance
Garett Jones
When the federal government bought shares in the biggest banks, who benefited most: Shareholders or bondholders?  According to co-blogger Luigi Zingales and U Chicago professor Pietro Veronesi, the answer is clear: bondholders. They estimate the total benefit to banks at $131... MORE

Bloomberg's Moshinsky and Brunsden report: The shadow banking industry has grown to about $67 trillion, $6 trillion bigger than previously thought...The [Financial Stability Board, FSB], a global financial policy group comprised of regulators and central bankers, found that shadow banking grew... MORE

One advantage the United States has that Canada didn't is low interest rates. Interest rates today are much lower than when the Canadian government altered course. The yield on the ten-year Treasury bond in late June 2010, for example, was... MORE

China's Empty Cities: A Family Affair?

Public Choice Theory
Garett Jones
This week I returned from a trip to Shanghai and Nanchang; the latter is in Jiangxi province, and as a GMU aside, the food in Jiangxi was stunning.  I was in Nanchang to give some lectures at Jiangxi University of... MORE

Housing Bubble and Fraud

Behavioral Economics and Rationality
Luigi Zingales
Preet Bharara, Manhattan's U.S. attorney, is a man on a mission. Not satisfied with the historical conviction of former McKinsey managing director Raja Gupta for insider trading, he quickly moved to investigate mortgage fraud. Earlier this month he sued Wells... MORE

Bain Capital and the Decline of Galbraithianism

Economic History
Garett Jones
Today most serious economic observers take it for granted that creative destruction is the norm.  The rise of internet firms, the overnight demise of Enron and Arthur Andersen a decade ago, and especially the rapid turnover of the Fortune 500... MORE

As always, I enjoyed the hour.  Hope you do as well.I suspect it was this post that led to the invitation.  I really do believe Fisher's 1933 Econometrica article offers a more complete model of the entire business cycle process... MORE

Bailouts are for Bondholders

Public Choice Theory
Garett Jones
During the worst days of 2008, something strange happened.  During the Eight Days of Terror, the S&P 500 fell by 23% but there were no loud calls for the government to guarantee the value of stocks (Aside: TARP was signed... MORE

The Wisdom of Commenter Greg G

Finance
Garett Jones
On Speed Bankruptcy: Of course this would raise capital costs. That is a feature, not a bug. We have seen the results of underpricing credit risk.... MORE

Tim seemed to view his job as protecting Citigroup from me, when he should have been worried about protecting the taxpayers from Citi....That's from her new book, profiled in the Financial Times. You already know that countries whose banking sectors... MORE

How to bet on bad futures

Finance
Garett Jones
Some people think the world will end this year, some think the US is bound to default or inflate its way out of debt, some suspect the Singularity will end in a John Connor scenario.  How can these prophets of... MORE

I'm still shocked at the speed with which bipartisan elites coalesced around TARP.  A key reason: The proffered alternatives were incredibly painful. No bailouts would have meant bankruptcies much bigger and more complicated than Lehman--and that bankruptcy ostensibly threatened short... MORE

Bubbles: Who to blame?

Finance
Garett Jones
I believe in bubbles.  They turn up in theory, in the lab, in history. We are a bubbly species, prone to waves of enthusiasm that crash upon the shore.Our financial crisis is often told as a story of a housing... MORE

Getting Rich in America

Finance
David Henderson
Sometimes, when the person beside me on an airplane finds out that I'm an economist, he/she will ask, "What's going to happen to the economy?" I answer, "I don't know." If the person is somewhat more sophisticated, he will ask... MORE

Joffe on LIBOR

Finance
David Henderson
As many readers probably know, there has been a huge scandal recently about the setting of the London InterBank Offer Rate (LIBOR). This is the rate used around the world on literally trillions of dollars in loans, including many mortgages.... MORE

Henderson on Shiller

Finance
David Henderson
My review [scroll down] of Robert Shiller's Finance and the Good Society is out in the latest issue of Regulation. A highlight about the finance portion: On the issue of crises, the main financial crisis in our future is likely... MORE

Andrew Lo, JP Morgan, and PBR Audits

Regulation and Subsidies
Arnold Kling
In an interview, Andrew Lo says, There is one very simple question that you can ask -- which has a definitive answer -- about the small number of individuals who were responsible for managing this group at JP Morgan and... MORE

More Comments on Principles-Based Regulation

Regulation and Subsidies
Arnold Kling
1. I think that many people are missing an important feature of principles-based regulation, which is the role of audits in producing compliance. I will explain that in the next post on the topic. 2. One principle I want to... MORE

PBR, once again

Regulation and Subsidies
Arnold Kling
Kyle writes, Kling's line is very simple: 1. Ideal regulatory systems can be modeled as games. 2. Regulators *try* to solve problem by creating regulations. 3. The regulated participants *try* to circumvent regulations by following the letter of the law,... MORE

Financial Advisor

Finance
David Henderson
NOTE: This post is NOT financial advice. Rather, it's my relating of some interesting stories that my tax accountant told me. Every March I have my annual meeting with my tax accountant. The meeting lasts 30 minutes. In the first... MORE

Robin Hanson reports on a popular article based on a paper by law and economics professors Eric Posner and Glen Weyl in which they advocate a kind of Food and Drug Administration for financial instruments. The paper is titled "An... MORE

A Perverse Incentive for Graduate School

Economics of Education
David Henderson
On a flight from Rochester, New York to Washington Dulles last Friday, I sat beside a young woman who had recently graduated from Penn State and had just started a new job. We got talking about student debt. She told... MORE

Break the Buck!

Finance
David Henderson
Regulators are completing a controversial proposal to shore up the $2.7 trillion money-market fund industry, more than three years after the collapse of Lehman Brothers Holdings Inc. sparked a panic that threatened the savings of millions of investors and forced... MORE

Arnold Kling's Paradox of Thrift

Finance
David Henderson
On my list of potential topics to blog about in the last few days was Megan McArdle's excellent post in which she advises people to save more. I've gone after her here, here, and here and so I like to... MORE

Greenspan on Dodd-Frank: Start Over

Finance
David Henderson
As I noted yesterday, in his Friday talk at the Hoover Institution, Alan Greenspan advocated two policies. The second is to scrap the Dodd-Frank financial regulation law and start over. The law, said Greenspan, "is unimplementable." He went on to... MORE

Most of the Devils Are Here

Finance
David Henderson
How did Fannie Mae get such political clout? This is one of the best-told stories in the book. McLean and Nocera tell how a well-connected Democrat named Jim Johnson made Fannie Mae almost invulnerable politically. Johnson, who had been Vice... MORE

Basel III's Deadly Cocktail

Finance
David Henderson
The global sovereign debt crises, and the Greek fiscal crisis, are bad enough on their own. Basel III is just making things worse. If I may summarize past comments, under the purview of Basel III banks in the United States... MORE

Incentives Matter Christopher J. Mayer, Edward Morrison, Tomasz Pikorski, and Arpit Gupta of Columbia University (variously Business School and Law School) find that a mortgage modification program that Countrywide Financial agreed to implement as part of a settlement with U.S.... MORE

My review of Jeff Friedman's edited book, What Caused the Financial Crisis?, was published in Policy Review last week. Some excerpts from my review: The most important chapter is the first. This 66-page segment is editor Jeff Friedman's overview of... MORE

Last week, NPR did a great interview with Gretchen Morgenson of the New York Times in which she discusses highlights of her recent book, Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon. It's co-authored with Joshua... MORE

Greider's Ad Hominem

Finance
David Henderson
Examples of clearcut ad hominems, I've found, are rarer than I thought before I started looking for them. On closer inspection, most ad hominem arguments have a trace of logic or reason, however weak, that accompany them. But William Greider's... MORE

In his post yesterday, Arnold stated, "I want to know what his [Greenspan's] great deregulatory accomplishments were." He also sees Brooksley Born as "a typical bureaucratic empire-builder." Greenspan did deregulate something--more on that in a minute--but on the issue Arnold... MORE

Summarizing an IMF conference, Olivier Blanchard lists nine points. I will make extended comments below the fold. Here is a crucial sentence: Monetary policy has to go beyond inflation stability, adding output and financial stability to the list of targets,... MORE

Maymin on Financial Regulation

Regulation
David Henderson
One might think that the ideal regulations would be those that find the right numbers for these portfolios, not too small and not too large--the Goldilocks of risk. Surprisingly enough, it is not possible. It turns out that no algorithm... MORE

Comparing Mortgages

Finance
David Henderson
I'm in the midst of a refinance of my mortgage, a very straightforward one because our equity in the house is over 80 percent of even a low-ball estimate of value. I was talking to the bank representative early in... MORE

Bank Regulation Boosts Payday Lending

Finance
David Henderson
Payday lenders like Advance America are pushing hard to lure away customers from traditional banks. The effort is getting a boost from the industry's loan crunch, especially for borrowers with blemished credit, and toughened regulation of fees and interest rates... MORE

My Reviews of Rajan and Kotlikoff

Finance
David Henderson
The latest issue of Regulation magazine carries my joint review of Fault Lines by Raghuram Rajan and Jimmy Stewart is Dead by Larry Kotlikoff. Excerpts from the section on Rajan's Fault Lines: When he sticks to what he knows best--international... MORE

Bubble Deniers: Name Names

Finance
Bryan Caplan
Scott Sumner's posted a striking challenge: Name the famous bubble deniers.In economics people notice bubbles bursting, but fail to pay much attention to bubbles not bursting.  But I admit I might be wrong, so I'll give my opponents one more... MORE

Why Hold Reserves?

Finance
Bryan Caplan
Suppose you see an individual, a bank, or a corporation sitting on a big pile of money.  What should you conclude?Theory #1: The actor has nothing good to spend it on.  The individual is satiated, at least relative to existing... MORE

Too Small to Succeed?

Finance
David Henderson
Indeed, one of the major contributors to bank failures during the Great Depression was the National Banking Act of 1864. That law, according to monetary historian Jeff Hummel, an economist at San Jose State University, banned any branching (interstate or... MORE

Last week, I blasted CBS's show 60 Minutes. This week I've come to praise it. 60 Minutes's long segment was with referee Tim Donaghy. I thought it would be a standard story about a guy betting on one side and... MORE

Calomiris on the Financial Crisis

Finance
David Henderson
I posted last month on one part of Russ Roberts' interview with Charles Calomiris. Some of the commenters highly recommended the whole podcast and I agree. I've listened to it twice all the way through and taken notes. Calomiris often... MORE

Bob Murphy on EMH

Finance
David Henderson
Ever since I was an assistant professor at the University of Rochester's B-school (now called the Simon School) in the late 1970s, I have believed in the Efficient Markets Hypothesis. The basic idea is that market prices reflect all available... MORE

Stiglitz and Orszags on Fannie Mae

Finance
David Henderson
The paper concludes that the probability of default by the GSEs is extremely small. Given this, the expected monetary costs of exposure to GSE insolvency are relatively small -- even given very large levels of outstanding GSE debt and even... MORE

Outsiders

Books: Reviews and Suggested Readings
Arnold Kling
Am I too weak to resist financial crisis porn? The latest example of my shameful indulgence is The Greatest Trade Ever, by Gregory Zuckerman. As with Andrew Ross Sorkin's Too Big to Fail, I could not put it down. Even... MORE

Solvency is No Free Lunch

Finance
Arnold Kling
Bryan writes, Suppose for example that you've got $100,000 in assets. You know with virtual certainty that the market will eventually fall from its present level of 100 down to its fundamental value of 50. The catch: You don't know... MORE

How often have you heard the quip, "The market can stay irrational longer than you can stay solvent"?  The idea: Even if the market is ridiculously overvalued, you won't make money by shorting it.  You'll probably go bankrupt instead of... MORE

Zywicki on Chrysler

Finance
David Henderson
In today's Wall Street Journal, Todd Zywicki lays out how President Obama attacked holders of Chrysler debt. A key paragraph: The Obama administration's behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors --... MORE

Last week, Arnold approvingly quoted Tyler's one-sentence explanation of "systemic risk": If your banks are less risky, often something else is more risky, and vice versa. This morning it just occured to me that this is precisely the opposite of... MORE

J.P. Morgan v. Obama

Central Planning vs. Local Knowledge
David Henderson
It isn't that common any more to find evidence of one of the bailed-out banks making a good decision with its money in the face of government pressure. But the weekend Wall Street Journal reported on such a case. J.P.... MORE

Taylor Rules

Finance
David Henderson
My book review of John Taylor's latest book, Getting Off Track, appeared on Forbes.com yesterday. Two excerpts from my review: Throughout 2007 and 2008, Fed Chairman Ben Bernanke and others in policy-making positions assumed that the problem was that the... MORE

Obama on Leno

Finance
David Henderson
I just finished watching my DVR of President Obama on NBC's "The Tonight Show with Jay Leno." There were some interesting highlights. Of course, Obama was charming: he does that very well. If I judged him only by looks, tone,... MORE

Buffett on Mark to Market

Finance
David Henderson
My favorite Wall Street Journal writer, Holman W. Jenkins, Jr., has an excellent piece today on Buffett's views of Mark-to-Market. It seconds what I quoted Less Antman saying last week and what commenter Patrick Sullivan pointed out. Sullivan linked to... MORE

Mark to Market

Finance
David Henderson
Economist Jeff Hummel sent out the following to a large e-mail list. I'm reprinting the whole thing here and appending my comments. Jeff's e-mail: Mark-to-market accounting has received a lot of criticism during the current financial crisis. But a recent... MORE

Black Swans

Behavioral Economics and Rationality
David Henderson
Joe Nocera has a nice piece on risk management in last Sunday's New York Times magazine. A great line: "The old adage, 'garbage in, garbage out' certainly applies," Groz said. "When you realize that VaR is using tame historical data... MORE

Insider Trading

Finance
David Henderson
The news that the feds are charging Mark Cuban with "insider trading" raises an interesting issue: what's wrong with insider trading? You might think it's obvious. If so, read the articles on insider trading in the 1st and 2nd editions... MORE

Bailout Watch

Finance
David Henderson
"Rescue Plan Faces Delay in Hiring Asset Managers." So reads the headline of a news story in today's Wall Street Journal. The story goes on to say: Treasury won congressional approval for the program on Oct. 3. It said at... MORE

My First EconLog Blog

Finance
David Henderson
First, thank you, Bryan, for your warm welcome. And thank you also to the commenters. Before I get to my first topic, I want to appreciate Bryan back. I'm a big fan of his work. My favorite is his piece... MORE

Return to top