Bryan Caplan and David Henderson

Finance: stocks, options, etc.

A Category Archive (899 entries)

Endless bubbles?

Finance: stocks, options, etc.
Scott Sumner
I distinctly recall that Robert Shiller did not recommend that people buy stocks in 2009. That made me wonder when Robert Shiller did say it was a good time to buy stocks. Stephen Kirchner pointed me to an Alan Reynolds... MORE

Illusory Bubbles

Behavioral Economics and Rationality
Bryan Caplan
Scott Sumner succinctly explains how illusory bubbles can appear in a world ruled by the Efficient Markets Hypothesis:How should Bitcoin be priced?  If there is a 95% chance that it will soon be worthless and a 5% chance that it... 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

Would Buy-and-Hold Cut Finance Down to Size?

Behavioral Economics and Rationality
Bryan Caplan
The U.S. financial sector is now 8.4% of GDP.  It grew from about 2% of GDP in the late 1940s to about 8% in 2000; it's been roughly flat since.  From the Wall St. Journal:My question: Suppose buy-and-hold investment strategies... 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 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

Abrams on Investing

Finance: stocks, options, etc.
David Henderson
I was introduced to the stock market when I was 13. I had a bar mitzvah and my father bought me ten shares of something called Bayuk Cigar. I was outside playing stickball, came in for dinner, and my father... MORE

Intelligence, Common Sense, and Subprime

Behavioral Economics and Rationality
Bryan Caplan
Conjecture: Financial experts' strange combination of astute calculation and elementary error on subprime lending is one of history's most important examples of the contrast between intelligence and common sense.Discuss.... MORE

Shorting Housing

Behavioral Economics and Rationality
David Henderson
Thanks to Bryan Caplan for his excellent post this morning. In the Comments section, people discussed the difficulty of shorting housing even if you thought it was overpriced. I'll tell two stories of two friends who saw what was happening.... MORE

Conditional Insight, Unconditional Disaster

Behavioral Economics and Rationality
Bryan Caplan
I just read Foote, Gerardi, and Willen's subprime facts manifesto.  Twice.  In the process, I learned more about the subprime crisis than I learned in the last five years put together.  If you're going to read one piece on this... MORE

The Feds' Suit of S&P

Finance: stocks, options, etc.
David Henderson
I found two pieces on the federal government's suit of S&P particularly interesting because both make important points I hadn't thought of. First, the Wall Street Journal's editorial page take, which is titled "Payback for a Downgrade?" It's dec line... MORE

Roth Conversion Bleg

Finance: stocks, options, etc.
Bryan Caplan
Greg Mankiw's rarely-offered financial advice has put me in a mild panic: [I]n light of the fiscal situation we are facing, I will pass along one tidbit.  Consider converting some of your retirement savings into a Roth IRA. Over the past few years, I... MORE

On Speculation: BEST LETTER EVER

Finance: stocks, options, etc.
David Henderson
This is from a letter that Don Boudreaux wrote to the Washington Post: Have you noticed the enormous increase in greedy speculation in the northeast over the past two days? It's quite something! In advance of hurricane Sandy, consumers are... MORE

Speaking of Foreign Languages

Eurozone crisis
Arnold Kling
How do you say "Have a nice day" in Japanese or French?... MORE

Randal O'Toole on Housing

Books: Reviews and Suggested Readings
Arnold Kling
The book is American Nightmare, and it is iconoclastic. Some excerpts: Glaeser and Avent each profess to oppose coercive policies aimed at forcing people to live in higher densities than they wish. Yet their often-erroneous arguments lend credence to those... MORE

Why Repo Exists

Finance: stocks, options, etc.
Arnold Kling
Nick Rowe asks the question. My answer is based on Marcia Stigum's Money Market, a book that more economists need to read. Securities dealers are dealers, sort of like auto dealers. If you go to an auto dealer, you expect... MORE

Stocks: the Long-Term Outlook

Finance: stocks, options, etc.
Arnold Kling
Michael Mandel writes, an investment in the stock market becomes a bet on innovation. Do you think that the U.S. or the global economy has another wave of disruptive innovation coming? Then buy stocks. But if you think that we... MORE

Gary Gorton's forthcoming book

Finance: stocks, options, etc.
Arnold Kling
It is called Misunderstanding Financial Crises, a title that may be unintentionally ironic. As you probably know, Gorton is famous for treating the crisis as a "run on the shadow banking system" that had very little real basis. The deterioration... MORE

Capital One's Actuals

Behavioral Economics and Rationality
Arnold Kling
Bryan writes, Was Capital One's sales pitch fraudulent in this sense? No; at minimum, they're missing element #3 (falsity). As commenter Thomas DeMeo pointed out, the actual allegation may differ from Bryan's hypothetical. consumers were: Misled about the benefits of... MORE

What Could Go Wrong?

Finance: stocks, options, etc.
Arnold Kling
From Bloomberg News. The Federal Reserve Bank of New York said money-market fund investors should be prohibited from withdrawing all their assets at once as a way to make the $2.5 trillion industry "safer and more fair." I do not... MORE

Good for the consumer financial protection board

Finance: stocks, options, etc.
Arnold Kling
CNN money reports, Cardholders who enrolled in a payment protection or credit monitoring product -- or who tried to cancel one of these products but were persuaded by a call center representative to keep it -- on or after August... MORE

Local Knowledge and Mortgage Lending

Finance: stocks, options, etc.
Arnold Kling
Kristle Romero Cortes writes (abstract) This paper shows that mortgage lenders with a physical branch near the property being financed have better information about home-price fundamentals than non-local lenders. During the real estate run-up from 2002-06, home price growth negatively... MORE

The Drop in Home Equity

Macroeconomics
Arnold Kling
Timothy Taylor has written one of his bests posts. He writes, Through much of the 1990s, the ratio of owner's equity to GDP fell, but in the early 1990s, that was partly a result of depressed regional real estate markets... MORE

I Come Cheap

Books: Reviews and Suggested Readings
Arnold Kling
1. via 99-cent e-book: Not What They Had in Mind. I am still proud of this analysis of the financial crisis. Of course, if you want to get it even cheaper, you can download it from SSRN. 2. as part... MORE

Awaiting Comments from Scott Sumner

Monetary Policy
Arnold Kling
Two papers on Milton Friedman's monetarism (both in the same pdf), one from Jerry Jordan and one from Allan Meltzer. They come from a 2010 symposium sponsored by the LIberty Fund and the Pacific Research Institute, and they are reproduced... MORE

The Anti-Mandel

Books: Reviews and Suggested Readings
Arnold Kling
I am reading Edward Conard's Unintended Consequences, because Tyler Cowen wrote, I find parts of this book brilliant and other parts dead wrong. In any case it is full of substance, it is one of the must-read books of the... MORE

Principles-Based Regulation

Regulation and Subsidies
Arnold Kling
In my latest essay, I argue for principles-based regulation. With PBR, legislation would lay out broad but well-defined principles that businesses are expected to follow. Administrative agencies would audit businesses to identify strengths and weaknesses in their systems for applying... MORE

I Do Not Like Big Banks and Government

Finance: stocks, options, etc.
Arnold Kling
In NRO, I write, When large banks have resources, politicians will be tempted to treat them as piñatas, taking whacks at them in order to extract money to distribute to constituents (see the recent "foreclosure settlement," or the pressure being... MORE

David Andolfatto Questions the Narrative

Finance: stocks, options, etc.
Arnold Kling
He writes, This couple bought their Reno home in June 1988 for $127,000. Their home is currently valued at $100,000. They currently have a mortgage worth $168,000. At first blush, this seems strange. Assuming a normal down payment and paying... MORE

What I'm Saying

Finance: stocks, options, etc.
Arnold Kling
At a Mercatus event on the future of housing finance. 1. In recent decades, the U.S. housing finance system took the "ownership" out of home ownership. Instead of starting out with equity in the form of a 20 percent down... MORE

Helping Mortgage Borrowers, Revisited

Finance: stocks, options, etc.
Arnold Kling
Timothy Taylor takes the wrong side of this issue. it seems to me that a modest share of the trillions in federal borrowing in the last few years, along with the trillions of assets that the Federal Reserve has accumulated... MORE

Watch Your Ratios

Finance: stocks, options, etc.
Arnold Kling
Timothy Taylor writes, The horizontal axis shows total assets of banks as a share of the economy of their home country. The four largest U.S. banks by assets are JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo. The vertical... MORE

Interest Rates: The Strange Interlude

Macroeconomics
Arnold Kling
Russ Roberts pointed me to an essay from last year, by Edmund Phelps. The bond market will see that, in the long run, the pile-up of government debt - and any pile-up of entitlements - will make things much worse... MORE

The Crisis Response Worked Wonderfully

Finance: stocks, options, etc.
Arnold Kling
So says the Treasury. Below is the chart that proclaims that lending markets were unclogged. Pointer from the indispensable Mark Thoma. A few curmudgeonly remarks: 1. The indicator is the percentage of banks reporting easing or tightening of lending standards.... MORE

Questions at a Conference on Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
Mark Thoma links to a conference at the Princeton club, taking place as I write this. I have skimmed the papers, and they raise interesting questions. Foote, Girardi, and Willen ask whether, given expectations for ever-rising house prices, the institutional... MORE

My New Hero and New Villain

Finance: stocks, options, etc.
Arnold Kling
The hero is Edward J. DeMarco, the acting regulator of Freddie and Fannie, who has tried to resist pressure for principal reduction on mortgages. For example, Annie Lowrey reports, Mr. DeMarco warned that allowing principal reduction might encourage some homeowners... MORE

Confidently Uncertain

Finance: stocks, options, etc.
Arnold Kling
The latest IGM forum question asks renowned economists to guess whether, prior to the crisis, Freddie and Fannie passed many benefits through to mortgage borrowers. The economists are also asked to rate their confidence in their answers, on a scale... MORE

The Liquidity Crisis Story

Finance: stocks, options, etc.
Arnold Kling
It keeps coming up. Mark Thoma points to Perry Mehrling, who invokes Fischer Black but also cites his own paper. A market-based credit system, however, relies on market liquidity and hence ultimately on dealer of last resort to ensure the... MORE

Britain in the 1840s

Economic History
Arnold Kling
Andrew Odlyzko sees parallels with the U.S. today. Britain managed its huge national debt by relying on debt instruments ("consols" and similar bonds) that were perpetual yet callable. That meant that sudden spikes in interest rates, associated with wars or... MORE

The Speculator of Last Resort

Finance: stocks, options, etc.
Arnold Kling
Business Week reports, The Treasury purchased $225 billion in government- sponsored-enterprise bonds and made a profit of $25 billion from principal, interest and the sale. Treasury announced in March 2011 it would begin winding down the program through sales of... MORE

Crosstalk on Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
This is a program on Russian television, talking about a proposal to require pre-approval for financial products. The Capitol in the background was photo-shopped in. I had no visual feedback whatsoever--there was not even a monitor where I could see... MORE

The Predatory Lending Fallacy

Finance: stocks, options, etc.
Arnold Kling
Matthew O'Brien writes, I think we owe Greenspan a happy (belated) birthday. He's gotten a bad rap the past few years for his failings as a central banker, and that's just unfair. It should be about his failings as a... MORE

The Bailouts and the Economy

Macroeconomics
Arnold Kling
A Panel of Expert Economists was asked whether they agreed with: Because the U.S. Treasury bailed out and backstopped banks (by injecting equity into them in late 2008, and later committing to provide public capital to any banks that failed... MORE

Timing the End of the Liquidity Crisis

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen writes, By the time the three years is up, a lot of these institutions will have been nationalized, if only de facto. He offers this as one possible scenario for resolving the liquidity issues of European banks. (Bear... MORE

Various

Economics of Education
Arnold Kling
1. Kevin Carey writes, Not everyone is willing or able to get a bachelor's degree. But everyone should at least have the chance to try. After all, well-off students from upper-middle-class suburbs are going to college one way or another.... MORE

The Latest Literature

Finance: stocks, options, etc.
Arnold Kling
The first three articles in the February 2012 issue of the American Economic Review are: "Optimal Interventions in Markets with Adverse Selection." "Overcoming Adverse Selection: How Public Intervention Can Restore Market Functioning" "Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts"... MORE

Is Repo Lending Inherently Unstable?

Finance: stocks, options, etc.
Arnold Kling
The blogger at Synthetic Assets (Carolyn Sissoko, I assume) writes, Liquid assets are supposedly "safe" - but for the problem that liquidity itself is inherently ephemeral. How precisely do the regulators imagine that collateral posted by a systemically important financial... MORE

Foreclosure Paperwork

Finance: stocks, options, etc.
Arnold Kling
Lifted from the comments: If the shoe were on the other foot, if people who had obviously paid their mortgages were being thrown out of their homes because of some trivial defect in the loan documentation, would these same commenters... MORE

Maladjustment

Finance: stocks, options, etc.
Arnold Kling
1. Todd Zywicki writes, the average home in foreclosure has been delinquent for 674 days--a delay that has doubled since the exposure of the robo-signing scandal ground the foreclosure process to a halt. In Florida, the time from default to... MORE

Adaptation and Economics

Books: Reviews and Suggested Readings
Arnold Kling
Jason Collins reviews Tim Harford's Adapt. The concept of "normal accidents", taken from a book of that title by Charles Perrow, is compelling. If a system is complex, things will go wrong. Safety measures that increase complexity can increase the... MORE

Limited Liability and Banking

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen says that they do not go well together. If a shareholder invests a dollar in a big bank, why not make that shareholder liable for the first $1.50 -- or more -- of losses as insolvency approaches? In... MORE

What is Bernanke Saying About Housing?

Finance: stocks, options, etc.
Arnold Kling
Ben Bernanke says, the housing sector continues to suffer from serious imbalances--a marked excess supply for owner-occupied housing accompanied by a stronger rental markets. If this is true, then there must be some institutional barriers to converting housing stock from... MORE

Freddie Mac and Inverse Floaters

Finance: stocks, options, etc.
Arnold Kling
A new scandal from reporters for ProPublica and NPR. In 2010 and '11, Freddie purchased $3.4 billion worth of inverse floater portions -- their value based mostly on interest payments on $19.5 billion in mortgage-backed securities, according to prospectuses for... MORE

Financial Regulation: Three Confirmations

Finance: stocks, options, etc.
Arnold Kling
First, Paul Romer confirms some of my views when I wrote "The Chess Game of Financial Regulation." That is, eventually, all fixed rules will be gamed. He calls this "Myron's law" in deference to Myron Scholes. Second, Sheila Bair says... MORE

A Shortage of Safe Assets?

Finance: stocks, options, etc.
Arnold Kling
Timothy Taylor discusses this hypothesis. He quotes from a paper by Gary Gorton and others. Over the past sixty years, the total amount of assets in the United States economy has exploded, growing from approximately four times GDP in 1952... MORE

Why Derivatives?

Finance: stocks, options, etc.
Arnold Kling
A reader asks. why would one consider hedging/derivative strategies, e.g., longs and shorts, collars and arbitrage? Stated differently (I think), a long term buy and hold of this assumed portfolio would seem to maximize its return without these hedging strategies.... MORE

What Banks are (not) Doing

Finance: stocks, options, etc.
Arnold Kling
Eric Falkenstein writes, A friend shares with me the following anecdote. He thinks real estate is cheap, and wants to buy houses, and make money renting them. Ultimately, he would sell out of the homes when they recover in value.... MORE

Why Foreclosure Prevention is Not Helpful

Finance: stocks, options, etc.
Arnold Kling
Bruce Judson writes, the fear of a continuing loss of wealth (which is a cushion against job loss or other economic emergencies), the fear of job loss itself, the negative effects of underwater homes, lack of forbearance for unemployment (a... MORE

Worth Reading

Finance: stocks, options, etc.
Arnold Kling
The latest issue of National Affairs has a number of interesting articles. Scott Winship challenges the claim that economic life has become more risky. Note that this is separate from Winship's article on income mobility, which also is worth a... MORE

Is Bank Regulation This Easy?

Finance: stocks, options, etc.
Arnold Kling
Amar Bhide writes, governments should fully guarantee all bank deposits ­ and impose much tighter restrictions on risk-taking by banks. I emailed him to say that I thought that this assumed that regulators would know when banks are taking risks.... MORE

Sentences to Ponder

Finance: stocks, options, etc.
Arnold Kling
Let's start the new year with a quote from April of 2010. If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take. And,... MORE

Reihan Salam on Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
He writes, it is not just craven financial elites that clamor for stabilization policies that invariably benefit craven financial elites: it is virtually everyone in the crisis-plagued societies, as financialization gives everyone a stake, direct or indirect, in the fate... MORE

Today on the Eurozone Crisis

Finance: stocks, options, etc.
Arnold Kling
Johnn Cochrane makes the case that bank regulators are not up to the job. The last generation of smart MBAs got around capital requirements by pooling risky assets into "AAA" securities that had lower risk weights, and then putting those... MORE

Eurobanking

Finance: stocks, options, etc.
Arnold Kling
Hyun Song Shin writes, My recent research suggests that the 'global banking glut' may have been more culpable for the crisis than the 'global savings glut' I reported on his paper when I first read it (I believe Tyler Cowen... MORE

An Institutional Check on Financial Regulators?

Finance: stocks, options, etc.
Arnold Kling
Ross Levine writes, [We] propose a new institution, which I label the "Sentinel," to act as the public's sentry over financial policies and to help compel financial regulators to act in the public interest, regardless of their private interests. The... MORE

Valuing Financial Services

Finance: stocks, options, etc.
Arnold Kling
Christina Wang writes, Making conservative assumptions, we show that the current official method overestimates the service output of the commercial banking industry by at least 21% (amounting to $116.8 billion in 2007:Q4 for example) and GDP by 0.3% ($52.9 billion... MORE

Shock Me, Shock Me

Finance: stocks, options, etc.
Arnold Kling
From a new study by Andrew Haughwout and others, At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house. In the four... MORE

Nick Rowe Asks About Debt Growth

Finance: stocks, options, etc.
Arnold Kling
He writes, I'm talking about the debt of households and firms. And I'm talking long run, not just the last few years. Over the last several decades, the ratio of debt to GDP has increased a lot. Not just in... MORE

Simon Johnson on Econtalk

Finance: stocks, options, etc.
Arnold Kling
Self-recommending, as Tyler would say. The lawyer-blogger at Capitalism without Failure comments, Prof. Johnson says he is a follower of George Stigler, who made the point that when you regulate industry, industry will attempt to capture the regulators. Bankers are... MORE

Why is it Life Insurance?

Finance: stocks, options, etc.
Arnold Kling
I claimed that if an event is very likely to happen, then it is not insurable. Some commenters responded that we have life insurance, and yet everybody dies. The reason that we can have life insurance is that the timing... MORE

A High-Yielding Investment?

Finance: stocks, options, etc.
Arnold Kling
A real estate agent told a young couple that I know that their house could sell for about $100,000 in today's market, even though it could rent for about $1500 a month. That would make the annual rent equal to... MORE

Ed Yardeni's Proposal for the Housing Market

Finance: stocks, options, etc.
Arnold Kling
He writes, the Homestead Act that Carl Goldsmith and I proposed this past summer. It would provide a matching down payment subsidy of up to $20,000 for anyone purchasing a home as their principal residence for two million houses. It... MORE

Clarity on Clearing Houses

Finance: stocks, options, etc.
Arnold Kling
Mark Roe writes, as many trades move from the banks to the clearinghouse, the clearinghouse itself will become a systemically vital institution. It will be too big to fail. Thanks to Mark Thoma for the pointer. Often I do not... MORE

Is This the Cure or the Disease?

Finance: stocks, options, etc.
Arnold Kling
From an article on Ricardo Caballero. Because this "insatiable demand for safe debt instruments," as Caballero has called it, was not wholly absorbed by the traditional safe haven of U.S. Treasury notes, it helped spur the growth of the mortgage-backed... MORE

Freddie, Fannie, and Risky Mortgage Lending

Finance: stocks, options, etc.
Arnold Kling
Charles Calomiris uses internal emails to tell the story of what happened between 2004 and 2008. The turning point was the spring and summer of 2004. Fannie and Freddie had kept their exposures low to loans made with little or... MORE

Another Post on EFC

Books: Reviews and Suggested Readings
Arnold Kling
I finished reading Engineering the Financial Crisis fairly quickly. In part, it is because it is only 156 pages. In part, it is because I found the analysis so congenial. Actually, if you did not follow the issues closely back... MORE

Engineering the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
That is the title of the new book by Jeffrey Friedman and Wladimir Klaus. I have just started to read it. Their view is very close to mine in several ways. First, they emphasize the role of capital regulations in... MORE

Financial Dysfunction: Who Shares the Blame?

Finance: stocks, options, etc.
Bryan Caplan
When people eat and drink too much, most of us blame the consumer.  Businesses don't force anyone to become obese alcoholics; they're just responding to consumer demand.  If people started spending their money more wisely, business would uncomplainingly cater to... MORE

Indicators of the New Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
1. Risk spreads are elevated again. 2. Correlations are elevated again. Pointer from Tyler Cowen. In the end, I think this will have a bigger effect than any stimulus package.... MORE

Old-time Religion?

Macroeconomics
Arnold Kling
Paul Krugman writes, You often hear people saying that the crisis has revealed the need for new economic thinking, for new ideas about macroeconomics. Yet the first priority seems to be to resuscitate old ideas. Brad DeLong describes an interview... MORE

Gold and Treasuries

Finance: stocks, options, etc.
Arnold Kling
Paul Krugman writes, What effect should a lower real interest rate have on the Hotelling path? The answer is that it should get flatter: investors need less price appreciation to have an incentive to hold gold. Yesterday, in my high... MORE

Capital Mis-Regulation

Finance: stocks, options, etc.
Arnold Kling
Kevin Dowd and others have written a lengthy, important paper on the flaws in the Basel capital regulations. They write, The Basel system provides a textbook example of the dangers of regulatory empire building and regulatory capture, and the underlying... MORE

Housing Finance in Other Countries

Finance: stocks, options, etc.
Arnold Kling
In the Richmond Fed bulletin, Renee Haltom writes, The United States finds itself on the far end of the spectrum in many aspects of housing. At the funding level, the United States has the most government support of owner-occupied housing... MORE

Shaky Banks

Finance: stocks, options, etc.
Arnold Kling
Tyler Durden writes, if one were to be told that a bank has a Tangible Common Equity ratio of under 2%, the logical response would be that said bank is a goner. Yet both Credit Agricole and Deutsche Bank are... MORE

How Capital Regulation Creates Systemic Risk

Finance: stocks, options, etc.
Arnold Kling
Philip Maymin writes, any set of regulations that attempts to assign risk to all securities in the same way for all banks would necessarily create some regulatorily-favored group of securities because the objective algorithm assigned too low an amount of... MORE

Kipper- Und Wipperzeit Update, August 9

Finance: stocks, options, etc.
Arnold Kling
Livio Di Matteo writes In essence, resolving the crisis in confidence needs the current ad hoc approach to be replaced with the structure of a more formal mechanism that will generate the confidence in the world financial system needed to... MORE

Ken Rogoff on the Current Situation

Finance: stocks, options, etc.
Arnold Kling
He writes, Too many decisions, for example the recent withdrawal of monetary stimulus by the European Central Bank and the US Federal Reserve have been predicated on overly rosy growth projections. Read the whole thing. Rogoff and co-author Carmen Reinhart... MORE

The Markets React, and so do I

Finance: stocks, options, etc.
Arnold Kling
In the New York Daily News. When it comes to estimating the probability of a default by the U.S. government, credit rating agencies have no special claim to expertise. The risk of sovereign debt cannot be determined through analysis of... MORE

Kipper- Und Wipperzeit Update

Finance: stocks, options, etc.
Arnold Kling
Apparently, the resolution of the debt ceiling restored the dollar's status as a safe haven in the eyes of the world's investors. That accelerated the flight from European sovereign debt and European banks. That in turn raised fears in financial... MORE

A Fragile Financial Order

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen writes Of the world's share of AAA sovereign debt, we issue 59 percent of it. (Next is Germany with ten percent and then France with nine percent of the total.) You can read this a few ways: 1.... MORE

Resolving Financial Crises

Finance: stocks, options, etc.
Arnold Kling
Isabel Schnabel and Hyun Song Shin write (the same paper is also here), Shortly after the beginning of the Thirty Years War (1618-1648), the small German states and neighboring principalities that comprised the Holy Roman Empire experienced one of the... MORE

More Wisdom from CPK

Books: Reviews and Suggested Readings
Arnold Kling
I've finished Manias, Panics, and Crashes, 5th edition. Some thoughts in addition to my previous ones (here and here). p. 55: The Kipper- und Wipperzeit [according to Wikipedia, translates to tipper and see-saw time] of 1619-1623...got its name from the... MORE

The Wisdom of CPK

Books: Reviews and Suggested Readings
Arnold Kling
If I were writing a blurb for the fifth edition of Charles P. Kindleberger's classic Manias, Panics, and Crashes, I would say that "This is the best narrative that has been written about the 2008 financial crisis, and it was... MORE

Narrating the Mortgage Crisis

Finance: stocks, options, etc.
Arnold Kling
Christopher S. Foote and Paul S. Willen write, Specifically, the problem with the 2006 loans was not that this vintage included more loans with adjustable rates, zero down payments and reduced documentation (though it did). The problem with the 2006... MORE

Manias, Panics, and Crashes

Books: Reviews and Suggested Readings
Arnold Kling
About the time the first edition came out, in 1978, I read it and also took a course from Charles Kindleberger. At the time, he was in his late 60s, and with his quavering voiced seemed even older. I wanted... MORE

My Bias on High-Risk Mortgage Loans

Finance: stocks, options, etc.
Arnold Kling
In a comment on this post, David Min writes, So if you want to say that Fannie and Freddie need major reforms because they took on an unacceptably high level of risk, particularly for taxpayer backed entities, welcome to the... MORE

What is a High Mortgage Default Rate?

Finance: stocks, options, etc.
Arnold Kling
Some further points. 1. This article says OFHEO has identified as a benchmark the 30- year, fixed-rate mortgages originated in Arkansas, Louisiana, Mississippi and Oklahoma in 1983 and 1984, just before oil prices collapsed. During the first five to six... MORE

Swagel on Mortgage Finance

Finance: stocks, options, etc.
Arnold Kling
Phillip Swagel writes, The longer Fannie and Freddie stay in government hands, the more likely they will become permanent wards of the state. This would be the worst of possibilities, yet it becomes more likely as conservatives push for a... MORE

A Question for Brad DeLong

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen links to Brad DeLong who writes, Arnold Kling's response is simply not good. It is silly enough to make me think he has not thought the issues through. a 7% delinquency rate on a mortgage portfolio is horrible... MORE

Re-Leveraging, Not De-Leveraging

Fiscal Policy
Arnold Kling
Tracy Alloway writes, The turmoil of 2008 shunted some investors from ABS into safer sovereign debt, it's true. But you also had a plethora of incoming bank regulation to purposefully herd investors towards holding more government bonds, plus a glut... MORE

Mea Culpa

Finance: stocks, options, etc.
Arnold Kling
So, in this debate with commenters over stock returns vs. GDP growth, I may have to concede. The ratio of stock prices to GDP is P/Y. Assuming no dividends, that means that P/Y has to increase for stock returns to... MORE

Mortgage Loans with Low and High Risk

Finance: stocks, options, etc.
Arnold Kling
David Min criticizes the analysis of Peter Wallison and Ed Pinto of the role played by Freddie Mac and Fannie Mae in the housing bubble. (Pointer from Mark Thoma.) The centerpiece of Min's critique is a chart that shows the... MORE

I Told You So

Finance: stocks, options, etc.
Arnold Kling
Les Christie puts together a scorecard for foreclosure prevention programs under the Obama Administration. The programs are all either huge disappointments or "too soon to tell." In December 2008, after Mr. Obama had won the election but before he took... MORE

Stocks and the Economy, Again

Finance: stocks, options, etc.
Arnold Kling
Every few years, I have this argument with a new round of commenters. The ratio of stock prices to earnings is P/E. The ratio of earnings to GDP is E/Y. The ratio of stock prices to GDP is P/Y, which... MORE

Amar Bhide on Bank Regulation

Finance: stocks, options, etc.
Arnold Kling
He writes, Regulators then shifted to edicts requiring banks to maintain a specified capital cushion, thick enough to cover potential losses. This approach presupposes that bank assets and exposures can be accurately measured. In fact, the financial statements of mega-banks... MORE

Advantages of Mortgage Loans with Recourse

Finance: stocks, options, etc.
Arnold Kling
The Washington Post has a long piece on foreclosure backlogs. For a solution, I favor the Canadian system, in which mortgage loans are recourse loans. That is, if the lender cannot recover the mortgage amount by selling the house, the... MORE

Best Ezra Klein Post Ever

Finance: stocks, options, etc.
Bryan Caplan
Here's the best Ezra Klein post ever.  And here's the best sentence of the best Ezra Klein post ever:What's remarkable about the financial crisis isn't just how many people got it wrong, but how many people who got it wrong... MORE

Loss of Risk-Free Status

Fiscal Policy
Arnold Kling
Maury Harris and Drew T. Matus write, Even a temporary default would eliminate the safe and liquid nature of the U.S. Treasury market, harming this country's ability to exercise its power, to the detriment of the U.S. and the global... MORE

Market Discipline vs. Regulation in Finance

Finance: stocks, options, etc.
Arnold Kling
Ask a lefty what caused the financial crisis, and the answer will be that there was too little regulation and too much reliance on market discipline, which did not work. Ask a righty the same question, and the answer will... MORE

What's Different About Banks?

Finance: stocks, options, etc.
Arnold Kling
I've been at a seminar discussing "too big to fail," so bank regulation issues are top of mind. I think that the most important thing that differentiates banks or bank-like firms from other firms is that it is easy for... MORE

Banks, Government, and Modigliani-Miller

Finance: stocks, options, etc.
Arnold Kling
Perry Mehrling writes, The key point is that money market funding is at lower rates than capital market funding. Society is apparently willing to pay a premium (lower yield) to hold money claims rather than capital claims. Why is that?... MORE

Divided on Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
In an interview, Ricardo Caballero says, it's ludicrous to suggest that anticipation of support (a "bailout") in an extreme systemic event is one of the most significant sources of moral hazard. Pointer from Mark Thoma. Caballero represents one end of... MORE

Random Mortgage News

Finance: stocks, options, etc.
Arnold Kling
This story requires a correction. An unprecedented alliance of organizations from the real estate industry, new home builders, mortgage companies, banks, civil rights groups and other lobbyists have descended on Washington, D.C. lawmakers to push against legislation that would require... MORE

Government and the Financial Sector

Finance: stocks, options, etc.
Arnold Kling
Perry Mehrling writes, The important point is that, to the extent the market-centered credit system is here to stay, the institutions that support the liquidity of that market system are also here to stay. Even more, to that extent we... MORE

Timothy Taylor Does Have a Blog

Finance: stocks, options, etc.
Arnold Kling
He started it a while ago. Two weeks ago (his first post?), he wrote, This graph needs a short explanation of what net lending is (that is, new lending minus repayments and charge-offs). But seeing a graph that goes up... MORE

Bubble, Bailout, and Cover-Up

Finance: stocks, options, etc.
Arnold Kling
John Taylor writes, it is very hard to imagine that heavily regulated banks could have engaged in such extreme risk-taking without the support of regulators. Nobel prize-winning economist George Stigler warned long ago about "regulatory capture" -- the tendency for... MORE

How a Sovereign Default Plays Out

Fiscal Policy
Arnold Kling
Andrew Lilico writes, What happens when Greece defaults. Here are a few things: - Every bank in Greece will instantly go insolvent. - The Greek government will nationalise every bank in Greece. - The Greek government will forbid withdrawals from... MORE

I Suspect Options Writers

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, Count me among those who maintain that buying high and selling low is unlikely to be a successful trading strategy. But if enough people believe otherwise, they can wreak a bit of havoc on the rest of... MORE

Thoughts on Accounting

Finance: stocks, options, etc.
Arnold Kling
From Liberty Fund's Daniel Austin Green. This scientific idealization also disregards the deeply political and decidedly non-scientific nature of many aspects of accounting and stands at odds with the emphasis on experience, judgment, and artistry used to justify CPAs' role... MORE

A Bet I Will Make

Finance: stocks, options, etc.
Arnold Kling
Some comments on my post on Social Security challenged me to bet. Here is a bet I am willing to make. It concerns the following proof. 1. national output = national income (note that is true by definition in a... MORE

Martin Feldstein writes, With a 3% payroll deduction, someone with $50,000 of real annual earnings during his working years could accumulate enough to fund an annual payout of about $22,000 after age 67, essentially doubling the current Social Security benefit.... MORE

Accounting and Financial Crises

Finance: stocks, options, etc.
Arnold Kling
Hernando de Soto writes, Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: "economic facts."... MORE

A Misconception Worth Emphasizing

Finance: stocks, options, etc.
Arnold Kling
Charles Hugh Smith writes, Back at the top of the bubble, the middle class had $6 trillion more assets on the books. Considering the Mortgaged Middle Class now owns about $6 trillion in net assets, then the bursting of the... MORE

Housing Policy

Political Economy
Arnold Kling
I spoke at a forum on housing finance reform. I have low energy these days, but viewing the talk it is not bad. It starts about minute 3 and goes to about minute 26. One of my themes is that... MORE

Random Recommendations

Income Distribution
Arnold Kling
1. Robin Hanson writes, We humans are much better at coming up with reasons for opinions than at choosing coherent sets of opinions He shows a video of students asked about a proposal to redistribute grade-point averages by forcing the... MORE

Break Up the Banks

Finance: stocks, options, etc.
Arnold Kling
James Kwak writes, There is no inconsistency between this proposal and Macey's general skepticism about regulation. What he is skeptical about is the government's ability to precisely engineer desired market outcomes. Instead, what he prefers is a simple rule that... MORE

Big-Picture Finance Questions

Finance: stocks, options, etc.
Arnold Kling
John Cochrane writes, Most of macroeconomics focuses on variation in a single intertemporal price, "the" interest rate, which intermediates saving and investment. Yet in the recent recession...interest rates paid by borrowers (and received by any investors willing to lend) spiked... MORE

Stanley Fischer on Moral Hazard

Finance: stocks, options, etc.
Arnold Kling
He says, in a variety of financial crises, I have arrived at the following guide to conduct: if you find yourself on the verge of imposing massive costs on an economy - that is on the people of a country... MORE

Tyler Cowen on the Euro

Finance: stocks, options, etc.
Arnold Kling
His NYT column is a must-read. The bottom line: the euro, in retrospect, appears to have been a misguided attempt to equalize the values for some very unequal assets, namely the bank deposits of strong countries and those of weak... MORE

Greenspan the Deregulator

Finance: stocks, options, etc.
Arnold Kling
John Cassidy writes, Anatole Kaletsky, an economic commentator for the Times of London, made a pertinent point: it was Brown himself who had given an honorary knighthood to Alan Greenspan, the great deregulator. I have a question. If you do... MORE

What I'm Reading

Economic Methods
Arnold Kling
A review copy of Markets on Trial: The Economic Sociology of the US Financial Crisis, edited by Michael Lounsbury and Paul M. Hirsch. One of the essays, by Ezra Zuckerman, says, sociologists' opposition to neoclassical economics generally, and to the... MORE

Progressive Nudges for Household Savings

Behavioral Economics and Rationality
Arnold Kling
If I were a card-carrying progressive, I would not stoop to being a lapdog for Wall Street and the real estate industry, playing the violin for "affordable housing" and low-down-payment mortgages. True, if somebody buys a house with little money... MORE

It's Gambling, and it's Wrong

Finance: stocks, options, etc.
Arnold Kling
With those words, I believe I shifted the debate at yesterday's hearing. I was referring to buying a home with a low down payment. The example I used was a $200,000 home with $5000 down. I received a lot of... MORE

I Thought I was Being Civil

Finance: stocks, options, etc.
Arnold Kling
Strongly worded, perhaps, but civil. You can decide. I find that the video takes a long time to load. My prepared remarks begin around 25 minutes in. Right after I finish, the Committee Chairman mentions this blog. The Q&A starts... MORE

Some History of Deposit Insurance

Finance: stocks, options, etc.
Arnold Kling
Arpit Gupta writes, federal insurance had the benefit of further entrenching the power of small banks, which would otherwise be a competitive disadvantage relative to their larger banking peers. We adopted the FDIC not as a part of a well-thought... MORE

Asset Price Swings, Revisited

Finance: stocks, options, etc.
Arnold Kling
Since writing on Frydman and Goldberg, I have had some email correspondence with one of the authors. I think I should do more to say where I agree with the authors. 1. I think that the rational expectations hypothesis in... MORE

Deposit Insurance Revisionism

Finance: stocks, options, etc.
Arnold Kling
This post is based on discussions with George Selgin and correspondence with William Melick. Melick sent a copy of a paper he wrote with Randall Kroszner, called "Lessons from the U.S. Experience with Deposit Insurance," in which they write, the... MORE

Deposit Insurance

Finance: stocks, options, etc.
Arnold Kling
What is the state of the art in understanding deposit insurance? I am interested in survey articles that cover thinking in the last twenty years or so. Suppose we start with a distinction between a solvency problem and a liquidity... MORE

Roman Frydman and Michael D. Goldberg

Books: Reviews and Suggested Readings
Arnold Kling
The book is Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State, and I have written an essay about it. Frydman and Goldberg say that the existence of asset price swings contradicts previous theories of financial... MORE

Vincent Reinhart on Bear Stearns

Finance: stocks, options, etc.
Arnold Kling
He writes, the form of the Bear Stearns resolution actually invited another form of speculative attack. The official playbook appeared to protect creditors fully and to wipe out shareholders. This expectation made it profitable to identify the next financial firm... MORE

Hope Vs. Experience

Finance: stocks, options, etc.
Arnold Kling
I think that is what is on display at the Room for Debate discussion of housing finance reform. The hopers say that we need a housing policy, ignoring the experience. I say otherwise. Concerning Freddie Mac and Fannie Mae, I... MORE

Ken Rogoff and Others

Finance: stocks, options, etc.
Arnold Kling
As usual, Mark Thoma has interesting links for today. 1. Ken Rogoff writes, Many countries' tax systems hugely favor debt over equity. The housing boom in the United States might never have reached the proportions that it did if homeowners... MORE

My Paper on Housing Finance Reform

Finance: stocks, options, etc.
Arnold Kling
I write, Any attempt to reengineer a housing-finance system with a new set of government-guaranteed entities would entail all of the risks of restoring the existing GSEs, plus more. The taxpayers would be exposed to similar potential hazards, but with... MORE

Education vs. Money Management

Economic Methods
Arnold Kling
Consider the following two propositions, one in education (E) and one in finance (F). (E) One way to improve education would be to get rid of the bottom 10 percent of teachers and to try to replicate more widely the... MORE

Mubarak, Freddie, and Fannie

Finance: stocks, options, etc.
Arnold Kling
I write in the latest Weekly Standard, Like Mubarak, the GSEs have seen their once formidable political position reduced to one of helpless isolation, abandoned by all former supporters. However, as in Egypt, deposing former leaders does not by itself... MORE

The Bernank on What Caused the Bubble

Finance: stocks, options, etc.
Arnold Kling
Ben S. Bernanke, Carol Bertaut, Laurie Pounder DeMarco, and Steven Kamin write, Europe did not run a current account surplus as did the GSG countries [Global Savings Glut countries, such as China], and thus was not a net exporter of... MORE

The Author of the Administration's Housing Finance Report

Finance: stocks, options, etc.
Arnold Kling
As reporters ask me about the report, I in turn ask them where the real report is. I mean, I cannot believe that such a sketchy, half-baked proposal was given an official seal (two of them, one each from HUD... MORE

Housing Finance Reform: My Most Cynical Take

Finance: stocks, options, etc.
Arnold Kling
If you know your Murray Edelman, then you know that politics is a game in which insiders divide up the goodies while giving the broader public symbolic reassurance. That framework can be used for housing finance. In housing finance, the... MORE

The Obama Administration on Housing Finance

Finance: stocks, options, etc.
Arnold Kling
The long-awaited report has been released. I will have extended comments below the fold. Overall, I was disappointed to see that the report is heavily waited toward strategy and tactics, without adequate consideration of objectives. Nobody seems to want to... MORE

Housing Finance Reform

Finance: stocks, options, etc.
Arnold Kling
While I await the release later today of the Administration's white paper, I have received from Princeton University Press an advance copy of Guaranteed to Fail, a new book by Viral Acharya, Matthew Richardson, Stijn Van Nieuwerbergurgh, and Lawrence J.... MORE

Compensation of Bank Executives

Business Economics
Arnold Kling
Simon Johnson writes, New evidence in favor of the second interpretation [that bank executives were evil] has just become available, thanks to the efforts of Sanjai Bhagat and Brian Bolton. These researchers went carefully through the compensation structure of executives... MORE

Foreclosures and House Prices

Finance: stocks, options, etc.
Arnold Kling
Atif R. Mian, Amir Sufi, and Francesco Trebbi write, We show that states that require judicial process for a foreclosure sale have significantly lower rates of foreclosures relative to states that have no such requirement. Using state laws requiring a... MORE

GSE Reform and Tail Risk

Finance: stocks, options, etc.
Arnold Kling
The Wall Street Journal reports that the Administration is going to release its overdue white paper on Friday. The administration's proposal to Congress is likely to assess the merits and drawbacks of each of the three options. The most conservative... MORE

The Wallison Dissent

Finance: stocks, options, etc.
Arnold Kling
In his dissent from the Financial Crisis Inquiry Commission majority report, Peter Wallison writes, in other developed countries--many of which also had large bubbles during the 1997-2007 period--the losses associated with mortgage delinquencies and defaults when these bubbles deflated were... MORE

A Thought to Ponder

Finance: stocks, options, etc.
Arnold Kling
From Jeremy Siegel: The major reason for the dramatic drop in these real yields is the unprecedented - and in my opinion unwarranted - level of pessimism and risk aversion that has gripped investors since the financial crisis. Siegel argues... MORE

The Housing Market

Finance: stocks, options, etc.
Arnold Kling
Tim Cavanaugh writes, So what will this mean when the last moratorium is lifted, the last show-me-the-note lawsuit gets thrown out of court, and the last loan modification has failed? Well by that time you'll probably be able to buy... MORE

Two Good Sentences

Finance: stocks, options, etc.
Arnold Kling
Via email, from John Hempton: Frannie is a terribly inefficient way to generate subsidies for people in the 60th income percentile (ie very marginal home buyers). I am sure I could do better with cash and a helicopter and some... MORE

Correcting James Kwak

Finance: stocks, options, etc.
Arnold Kling
This post about Freddie Mac and Fannie Mae does not reach a fundamentally unsound conclusion. However, along the way, I think he gets a number of things wrong. First, a minor correction. He writes, Although they had been private, profit-seeking... MORE

Financial Crisis Inquiry Commission

Finance: stocks, options, etc.
Arnold Kling
Does anyone care about the report of the Financial Crisis Inquiry Commission? Keith Hennessey, Bill Thomas, and Douglas Holtz-Eakin write, Brookings Institution economists Martin Baily and Douglas Elliott describe the three common narratives about the financial crisis. The first argues... MORE

House Price Behavior

Books: Reviews and Suggested Readings
Arnold Kling
I am going to react to three things: Nick Rowe talks about the fact that housing transaction volume is higher when prices are rising; Scott Sumner's latest attempted swindle; and the paper by Steven Gjerstad and Vernon L. Smith in... MORE

Housing Finance Reform

Finance: stocks, options, etc.
Arnold Kling
Peter J. Wallison, Alex J. Pollock, and Edward J. Pinto write, Our alternative approach is to ensure that only prime quality mortgages, which comprise the vast majority of US mortgages, are allowed into the securitization system. The very low delinquency... MORE

Paul Seabright on Free-Market Ideology

Finance: stocks, options, etc.
Arnold Kling
He writes, The reason why it was so easy to sell securities rated triple-A -- like the higher tranches of the now notorious collateralized debt obligations -- was not that every potential buyer was a true believer in the theory... MORE

Falkenstein vs. Sumner

Finance: stocks, options, etc.
Arnold Kling
Scott Sumner writes, I define "finance" as the business of allocating capital, which is a bit different from how it shows up in the national accounts. For instance, I believe the CEOs of major non-financial companies are being paid (in... MORE

An Assignment for Progressives

Finance: stocks, options, etc.
Arnold Kling
First, read Peter Wallison's op-ed. Congress should assure that housing does not again make itself a ward of the government. Then, write an essay that consists of something other than ad hominem attacks on Wallison. Instead, write an essay that... MORE

Financial Regulation Questions

Finance: stocks, options, etc.
Arnold Kling
Both from readers. 1. Is it more dangerous for TARP to succeed or to fail? Interesting question. Think of four possibilities, based on perceptions and reality 1. TARP is perceived as a success, and it really was a success. 2.... MORE

CBO on GSE Reform

Finance: stocks, options, etc.
Arnold Kling
I am currently drafting something on the same general topic, so I will add comments based on my current thinking. The folks at CBO discuss three options--purely public, purely private, and a hybrid. They find drawbacks to every option. They... MORE

Combining Stupid and Clever Bank Regulation

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen and Eric Falkenstein raised doubts about the efficacy of leverage regulation of banks. Here is how I think about it. 1. We assume that banks have a government backstop that is either explicit or implicit. the object of... MORE

Inevitable Bank Risk

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen writes, Bondholders don't and can't have much idea what is going on inside the trading book of a bank. It doesn't matter how financially sophisticated the bondholders are; the point is that the trading book must remain fairly... MORE

Russ Roberts and Joe Nocera

Finance: stocks, options, etc.
Arnold Kling
In this podcast, they get into a number of interesting issues regarding the financial crisis. Among the things that struck me was Nocera's negative take on the bailout of Bear Stearns, which Nocera evidently thinks was not too big or... MORE

Picking up Nickels

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen writes, In part the financial sector does the equivalent of writing "naked puts," namely taking risks which usually yield extra income but occasionally blow up and bring large losses, part of which are socialized. He is trying to... MORE

An Indispensable Book

Money
Arnold Kling
I've read through Perry Mehrling's The New Lombard Street, and I need to read it again. Meanwhile, some thoughts. 1. Mehrling is an outstanding and engaging intellectual historian, but he fails to appreciate financial crisis porn. I'll explain below. 2.Tyler... MORE

Amar Bhide Responds

Books: Reviews and Suggested Readings
Arnold Kling
To my earlier posts. You will see below that Bhide expresses some nostalgia for the regulatory regime of the 1950's and 1960's, as he did in his book. However, that period included interest rate ceilings on deposits and banks and... MORE

Thoughts on Finance

Finance: stocks, options, etc.
Arnold Kling
Reading Amar Bhide's new book made me wish that more people shared my outlook on banking, finance, and financial regulation. I think it helps to keep in mind the following (continued below). 1. In the nonfinancial sector, people want to... MORE

A Call for Judgment

Books: Reviews and Suggested Readings
Arnold Kling
That is the title of Amar Bhide's new book. In the end (p.290), he writes I propose we reinstate old-fashioned banking, where bankers know their borrowers, by tightly limiting what banks can do: nothing besides making loans to individuals and... MORE

Reflections on Freddie Mac

Finance: stocks, options, etc.
Arnold Kling
This morning, I was interviewed for background about Freddie Mac. Two interesting questions that were asked: 1. Given that I now believe that Freddie and Fannie should be phased out, how did I feel about working for Freddie? At the... MORE

Symposium on Bank Size

Finance: stocks, options, etc.
Arnold Kling
at the New York Times. Several interesting contributions. Jeremy Stein offers a reasonable technocratic approach, consisting largely of higher capital requirements for large banks. My problem with this is that any time you have a regime in which government guarantees... MORE

What is a Bubble?

Finance: stocks, options, etc.
Arnold Kling
Scott Sumner writes, if the term "bubble" is to mean anything useful, it must contain an implied prediction of the future course of asset prices. I read this as saying that a bubble is when someone can correctly predict that... MORE

Morning Mark

Finance: stocks, options, etc.
Arnold Kling
Not atypically, I start the morning with links from the indispensable Mark Thoma. 1. Steven Randy Waldman waxes Austro-Keynesian. Read the whole thing. His peroration: It is not technocratic economists who will win the day and pull us out of... MORE

Housing Finance Reform

Finance: stocks, options, etc.
Arnold Kling
Kevin Villani writes, The systemic failure of 2008 reflects the accumulated distortions of the political response to past failures with political causes. Portfolio lending savings and loan associations, the traditional backbone of the US housing finance system, were forced to... MORE

The Non-TARP Bailout

Finance: stocks, options, etc.
Arnold Kling
Peter Wallison and Ed Pinto write, While everyone has been watching Fannie and Freddie, the administration has quietly shifted most federal high-risk mortgage credit initiatives to FHA, the government's original subprime lender. Along with two other federal agencies, FHA now... MORE

The Suffering of Mortgage Borrowers

Finance: stocks, options, etc.
Arnold Kling
The Wall Street Journal reports, The average borrower in the foreclosure process hadn't made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of... MORE

All the Devils are Here

Books: Reviews and Suggested Readings
Arnold Kling
Alex Tabarrok likes the book. My review was also very favorable.... MORE

Rare Agreement?

Finance: stocks, options, etc.
Arnold Kling
one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace... MORE

My Sexism

Behavioral Economics and Rationality
Arnold Kling
David points to an example in which Madeleine Albright is willing to see Iraqi children die, presumably because of American policy. That may be cruel, but it is not an example of the pathology that I was describing. What Angelo... MORE

Meet the Suits

Books: Reviews and Suggested Readings
Arnold Kling
You simply must make room on your financial crisis porn bookshelf for the forthcoming All the Devils are Here, by Bethany McLean and Joe Nocera. The worst financial crisis books, such as David Wessel's undeservedly popular tripe, focus their narrative... MORE

A Subtitle to Ponder

Finance: stocks, options, etc.
Arnold Kling
A Home Without Equity Is Just a Rental With Debt. It comes from an analysis written in 2001 (!) by Wall Street economist Josh Rosner. Read the whole thing, but keep in mind that many of us believe that the... MORE

Morning Commentary

Politics and Economics
Arnold Kling
First, on the political situation. This poll claims that Back in 1974 - shortly after Richard Nixon's resignation in the Watergate scandal - 55 percent of Americans were optimistic about "our system of government and how well it works." Today,... MORE

Scary Paragraph

Finance: stocks, options, etc.
Arnold Kling
Business Week reports, Laurie Goodman, a mortgage analyst at Amherst Securities Group, said in an Oct. 1 report that if government doesn't step up its intervention, over 11 million borrowers are in danger of losing their homes. That's one in... MORE

Time to Re-think Securitization?

Finance: stocks, options, etc.
Arnold Kling
The New York Times reports, On Wall Street and in bank boardrooms, the question of whether investors can force banks to buy back, or "put-back," the bad mortgages to the banks that sold them is dominating the debate and worrying... MORE

Foreclosure "scandal" again

Finance: stocks, options, etc.
Arnold Kling
I am starting to get angry with some of the pundits. I probably should just chill for a few days. A few random points. 1. I opposed TARP from day one. I wanted to see the insolvent banks put into... MORE

A Few More Thoughts on the Foreclosure Scandal

Finance: stocks, options, etc.
Arnold Kling
I am not a lawyer, so treat the following as an amateur's view. When you obtain a mortgage on a home, two documents get recorded. One is a mortgage, which as I understand it is just a piece of paper... MORE

My Essay on the Foreclosure Scandal

Finance: stocks, options, etc.
Arnold Kling
In The Washington Times. What has emerged in recent weeks as "the foreclosure scandal" represents the collision of this 21st-century computerized, global financial system with an 18th-century legal process for obtaining ownership rights to buildings and land. Indeed, the United... MORE

Why TARP was wrong

Finance: stocks, options, etc.
Arnold Kling
Timothy Geithner defends TARP. Financial crises matter not because they hurt banks and bankers. They matter because they kill jobs, businesses and the value of retirement savings. To protect Main Street from the damage caused by a financial crisis, you... MORE

The Real Foreclosure Scandal

Finance: stocks, options, etc.
Arnold Kling
The Washington Post is filled with the story again. Once again, they get it wrong, in my opinion. If mortgage servicers were foreclosing on the wrong borrowers, that would be a scandal. That would be if they send the foreclosure... MORE

Murphy on the Stock Market

Finance: stocks, options, etc.
David Henderson
In this month's Econlib Feature Article, which posted a few minutes ago, Robert Murphy lays out the basics of the stock market. A key paragraph: Despite its importance, the stock market remains a bit of a mystery, even to many... MORE

Finance, TARP, and the Great Recession

Finance: stocks, options, etc.
Arnold Kling
At the unpleasant session yesterday, I did learn something interesting from Doyne Farmer of the Santa Fe Institute, while he was ranting against the state of the art in macroeconomic models. He said that in 2006, the Fed simulated a... MORE

The Bernanke View

Finance: stocks, options, etc.
Arnold Kling
Ben Bernanke says, The notion that financial assets can always be sold at prices close to their fundamental values is built into most economic analysis, and before the crisis, the liquidity of major markets was often taken for granted by... MORE

I, Super-Senior CDO Tranche?

Finance: stocks, options, etc.
Arnold Kling
We know Leonard Read's famous "I, Pencil" essay, where he says that nobody knows how to make a pencil. Somehow, the market arranges it so that wood, graphite, dyes, cutting tools, and other inputs come together to make a pencil.... MORE

When Did House Prices Get Out of Hand?

Finance: stocks, options, etc.
Arnold Kling
One of the talking points among those who deny that Freddie and Fannie played a large role in the housing bubble is that the agencies lost market share in 2003 and 2004, and that is when house prices took off.... MORE

Gary Gorton's Latest

Finance: stocks, options, etc.
Arnold Kling
Gary B. Gorton and Andrew Metrick write, If the growth of shadow banking was facilitated by regulatory changes, then why not just reverse all these changes? Would such reversals bring us back to a safer system dominated by traditional banks?... MORE

The Future of Finance

Books: Reviews and Suggested Readings
Arnold Kling
That is the title of a new book that resulted from this symposium sponsored by the London School of Economics. Chapters can be downloaded individually here. They do not add up to a coherent whole, and some appeal to me... MORE

Morning Reading

Economic Education
Arnold Kling
Ed Pinto writes, Here's my proposal to bring Congress's penchant for imprudent lending to a quick end: All congressional pension assets should be invested in funds backed solely by the high- risk loans mandated by federal housing legislation. I have... MORE

Buying a House With 20/20 Hindsight

Finance: stocks, options, etc.
Bryan Caplan
Knowing what you now know, suppose that you could pick one year between 1987 and 2010 to buy a house in the U.S.  The catch: It's a one-time deal, and you have to hold the house until 2010.  When you're... MORE

Government in the Mortgage Business

Finance: stocks, options, etc.
Arnold Kling
The New York Times reports, "This is subprime lending done right," said John Taylor, president of the National Community Reinvestment Coalition, an umbrella group for 600 community organizations, and a staunch critic of the lending industry. He is talking about... MORE

Mortgage Credit and the Housing Bubble

Finance: stocks, options, etc.
Arnold Kling
Adam J. Levitin and Susan M. Wachter write, the bubble was a supply-side phenomenon, attributable to an excess of mispriced mortgage finance: mortgage finance spreads declined and volume increased, even as risk increased, a confluence attributable only to an oversupply... MORE

Technocratic Fundamentalism

Finance: stocks, options, etc.
Arnold Kling
Barry Eichengreen writes, Those root causes were an ideology of market fundamentalism and the policies flowing from it. The idea that markets get it right and governments only get in the way, what I refer to here as market fundamentalism,... MORE

Oil Bubble Talk is Back

Energy, Environment, Resources
Arnold Kling
CNBC quotes Peter Beutel, I honestly think that if there were no investors using oil as an asset that the price of oil right now would be $10 or $15 or $18, but it wouldn't be anywhere near where it... MORE

Exchanging Nickels for Dimes?

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, Suppose that the Federal Reserve were to sell off all its Treasury securities of less than one-year maturity, and use the proceeds to buy up all the longer term Treasury debt it could. For example, in December... MORE

Dodd-Frank-Enron

Finance: stocks, options, etc.
Arnold Kling
Peter Wallison writes, The dominant theme of the 2,300-page Dodd-Frank Wall Street Reform and Consumer Protection Act is fear of instability and change...Where [non-bank] financial firms once focused on beating their competitors, they will now focus on currying favor with... MORE

Two Tyler Retweets

Finance: stocks, options, etc.
Arnold Kling
The sole purpose of this post is to retweet two of Tyler Cowen's assorted links. 1. How to tell when a CEO is lying. I was expecting to click through and read, "His lips are moving," but in fact it... MORE

Where I Believe that I was Most Wrong

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong started this one, and Tyler Cowen picked up on it. Megan McArdle has the longest list (which by no means implies that she was the most often wrong.) 1. My way of thinking about the price/rent ratio for... MORE

A Consensus to Question

Finance: stocks, options, etc.
Arnold Kling
Felix Salmon writes, the main message from the big conference on Fannie and Freddie is that there's a broad-based consensus, Rick Santelli rants notwithstanding, that large-scale government participation in the housing market is necessary to prevent further house-price declines. Old... MORE

More Bond Bubble Talk

Finance: stocks, options, etc.
Arnold Kling
At The Economist, pointer from Tyler Cowen. Laurence Kotlikoff writes, current bondholders will get hurt in two ways. The prices of their bonds will fall due to concern about future money creation and the current price level will jump due... MORE

Gender and the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
Anthropologist Lionel Tiger says, in general I think it's the case that females don't go for that kind of money because they don't want to. I have said on a number of occasions that if someone put me in charge... MORE

Macroeconomic Puzzles

Finance: stocks, options, etc.
Arnold Kling
Paul Krugman writes, Right now, the Mankiw indicator is -8.5 -- core inflation at about 1, unemployment at 9.5. As you can see, that implies a majorly negative interest rate; what we actually get is zero. He suggests that the... MORE

In the Name of "Affordable Housing"

Public Choice Theory
Arnold Kling
Greg Mankiw prints some notes from Philip Swagel from last week's conference on the future of housing finance. Conference participants from industries involved with the financing and construction of homes assert that no American will ever buy a home again... MORE

Ed Pinto on Mortgages

Finance: stocks, options, etc.
Arnold Kling
The short version, in the Wall Street Journal (subscriber-only). The long version, which is the definitive work on how housing policy affected mortgage lending. Pinto has access to good data. He has the institutional knowledge. He doesn't have an address... MORE

The Government Mortgage Subsidy

Finance: stocks, options, etc.
Arnold Kling
ABC News quotes PIMCO's Bill Gross. "Without government guarantees, mortgage rates would be hundreds -- hundreds of basis points higher, resulting in a moribund housing market for years." Is he just talking his book, or is he serious? The standard... MORE

Computer Models as Autocrats

Finance: stocks, options, etc.
Arnold Kling
Amar Bhide writes, In recent times, though, a new form of centralized control has taken root--one that is the work not of old-fashioned autocrats, committees, or rule books but of statistical models and algorithms. These mechanistic decision-making technologies have value... MORE

Nobody Invited Me

Finance: stocks, options, etc.
Arnold Kling
To the Administration's Panel on Housing Policy. Off hand, here is what I would say. 1. Government support of secondary mortgage markets is the worst form of trickle-down economic policy. Many very wealthy people profit from it, and the benefits... MORE

Strange Question from Ed Glaeser

Finance: stocks, options, etc.
Arnold Kling
He writes, In the case of the housing boom, we can't even answer the basic question of how much approval rates or loan-to-value ratios changed over time for a person with fixed characteristics. The loan approval rate that Glaeser discusses... MORE

Various Links

Finance: stocks, options, etc.
Arnold Kling
Kevin Villani enters the dispute over what caused the financial crisis on the side of those of us who see misguided policy as a major factor. Philip Greenspun worries about what happens when the marginal product of a worker falls... MORE

Two from the New York Times

Macroeconomics
Arnold Kling
1. Nobel Laureate Edmund Phelps writes, One reform would be to create a First National Bank of Innovation -- a state-sponsored network of merchant banks that invest in and lend to innovative projects. Another would be to improve corporate governance... MORE

Banks, Private Benefits, and Social Benefits

Finance: stocks, options, etc.
Arnold Kling
Samuel Hanson, Anil K. Kashyap, and Jeremy C. Stein write, If significant increases in capital ratios have only small consequences for the rates that banks charge their customers, why do banks generally feel compelled to operate in such a highly-leveraged... MORE

This Mimic is Different

Finance: stocks, options, etc.
Arnold Kling
Eric Falkenstein offers a theory of financial manias. Sometimes, the investors (dupes) think a certain set of key characteristics are sufficient statistics of a quality investment because historically they were. Mimic investors seize upon these key characteristics that will allow... MORE

Expectations, Once Again

Macroeconomics
Arnold Kling
Nick Rowe writes, That's the real dichotomy. Habits never change, vs habits instantly change to be consistent with the new world. And most reasonable economists would want to go somewhere in between those two extremes. If you expect the new... MORE

Why We Have Freddie and Fannie

Public Choice Theory
Arnold Kling
The Wall Street Journal reports, The Securities Industry and Financial Markets Association, Wall Street's main lobbying group, said in a proposal submitted to the Obama administration on Wednesday that the government couldn't completely exit the mortgage market without sending costs... MORE

The Macro Doubtbook, Installment 7

Macroeconomics
Arnold Kling
Previous installment is here. The new installment below discusses finance theory. I happen to think that the relationship between macroeconomics and finance is more problematic than the relationship between macro and any other branch of economics. John Hicks writing in... MORE

Financial Reform: A Brief Take

Finance: stocks, options, etc.
Arnold Kling
Mark Thoma gives his view, then asks his readers, What's your view of the bill? What offends me about the bill is that it serves to raise the status of those who least deserve it. Start with the name, "Dodd-Frank... MORE

Futures Market Exposition

Finance: stocks, options, etc.
David Henderson
When I teach why futures markets are so neat--they help people hedge against risk--I lay out numerical examples with oil or corn. Some of the students always wonder a little about how the actual transactions are made and I tell... MORE

Modern Finance vs. Portfolio Balance Theory

Finance: stocks, options, etc.
Arnold Kling
The first chapter of the Macro Doubtbook definitely needs a section on the relationship between finance theory and macroeconomics. I think that relationship is an uneasy one. Macroeconomists use what is called "portfolio balance theory" to argue that changes of... MORE

The Portfolio Separation Theorem

Finance: stocks, options, etc.
Arnold Kling
This is about a theorem in finance. I will put it below the fold.... MORE

Help Me Understand

Finance: stocks, options, etc.
Arnold Kling
this story: What killed AIG was much more likely the financial and managerial collapse within AIG Global Investment Corporation's securities lending program... It was the pure economic loss of capital in its most natural state. It represented the decline in... MORE

Moral Failure?

Finance: stocks, options, etc.
Arnold Kling
The Spring Issue of the Harvard Journal of Law and Public Policy is now on line, with a focus on the economic crisis. You will find many familiar names among the authors. This is also the place where I have... MORE

Policy Focus

Macroeconomics
Arnold Kling
Scott Sumner is worried about little things like unemployment and fiscal sustainability. Fortunately, our political leaders are not distracted by such trivialities. The Treasury, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the 12 Federal Reserve regional banks,... MORE

Michael Pettis on Financial Fragility

Books: Reviews and Suggested Readings
Arnold Kling
A while back, I mentioned that I was going to get his book. It arrived yesterday, and I have some excerpts below the fold. Meanwhile, James Hamilton asks whether risky assets were undervalued in February of 2009. When the price... MORE

Paging Hyman Minsky

Finance: stocks, options, etc.
Arnold Kling
Why Are Firms Saving So Much?, asks The Economist. A number of economists offer thoughts, including Hal Varian, Brad DeLong, and Mark Thoma. Andrew Smithers points to some data. despite the rise in US corporate cash flow, non-financial corporate balance... MORE

The Dodd-Frank Bill

Finance: stocks, options, etc.
Arnold Kling
If you don't have anything nice to say, then keep quiet. That's why I have not been commenting on the Dodd-Frank bill. I like what Tyler Cowen wrote, particularly his sentence about the credit rating agencies. THE BEST EQUILIBRIUM IS... MORE

What Do Mortgage Lenders Want?

Finance: stocks, options, etc.
Arnold Kling
Mike Konczal writes, I think further deregulation would see something similar to what we see in the credit card market, where everyone's mortgage looks like whatever the laws of North Dakota say, and that the poorest homeowners (or "inept", if... MORE

30-Year Fixed-Rate Mortgage Debate

Finance: stocks, options, etc.
Arnold Kling
Richard Green likes them. Nick Rowe does not. I can understand Green's antipathy toward the most common forms of adjustable-rate mortgages in the United States. However, I think that a mortgage that amortizes over 30 years, with an interest-rate adjustment... MORE

From the AER

Economic History
Arnold Kling
The regular issues of the American Economic Review rarely interest me, but the papers and proceedings issue is often better. This year, covering the meetings held in January and arranged by Robert Hall, is particularly good. It seems as though... MORE

Mortgage Lending and Discrimination

Finance: stocks, options, etc.
Arnold Kling
Felix Salmon writes If you're a high-income Latino with a mortgage, you're almost twice as likely to be facing foreclosure than a high-income non-Hispanic white person. And in general, the foreclosure crisis is hitting blacks and Latinos much harder than... MORE

John Taylor's Counter-narrative

Finance: stocks, options, etc.
Arnold Kling
He writes, You may not have heard much about the Great Deviation. I define it as the recent period during which macroeconomic policy became more interventionist, less rules-based, and less predictable. It is a period during which policy deviated from... MORE

Zingales Joins the Swamp

Finance: stocks, options, etc.
Arnold Kling
Yesterday, in Squam Lake or Swamp, I noted that four economists on the faculty at the University of Chicago signed on to a report on financial reform that treats this as a Keynesian moment and ignores Hayekian issues. Today, thanks... MORE

The State of the European Crisis

International Macroeconomics: Exchange Rates, International Debt, etc.
Arnold Kling
Richard Baldwin and Daniel Gros introduce a set of essays on the crisis in the eurozone. The authors unanimously believe that the crisis is not over, and that the Eurozone rescue is not finished. More needs to be done. I... MORE

Squam Lake or Swamp?

Books: Reviews and Suggested Readings
Arnold Kling
What happens when you bring leading academic experts in economics and finance together to come up with ideas to prevent future financial crises? You get The Squam Lake report, enthusiastically greeted by Ben Bernanke. I am not impressed. The report... MORE

What is Massive Financial Fraud?

Finance: stocks, options, etc.
Arnold Kling
This story says that the government has decided to prosecute one Lee Bentley Farkas for financial fraud. As a non-lawyer, and seeing only the description in this and related stories, it is very difficult for me to discern the difference... MORE

Rajan and Reinhart

International Macroeconomics: Exchange Rates, International Debt, etc.
Arnold Kling
Raghu Rajan spoke at Cato about his new book, Fault Lines. One of the discussants was Carmen Reinhart, of Reinhart and Rogoff fame. I found it interesting, and it might be worth checking out when Cato puts up a recording,... MORE

Catching Up

Books: Reviews and Suggested Readings
Arnold Kling
Various things that came up while I was traveling are discussed below.... MORE

Returned From Europe

Political Economy
Arnold Kling
I just returned from Europe, where I participated in two conferences sponsored by market-oriented think tanks. Some impressions below. (Note: Tyler Cowen has some interesting things to say, blogging from Germany--Tyler and I failed to meet in Berlin, primarily because... MORE

Peltzman on the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
Last night, I heard Sam Peltzman talk on the financial crisis. He is known for the Peltzman effect, in which safety regulations (in cars for example) induce offsetting behaviors that increase risk. He described the history of financial regulation in... MORE

Matching Narrative to Policy

Finance: stocks, options, etc.
Arnold Kling
Mark Thoma writes, Regulators certainly made mistakes, and there is plenty of room for improvement, but does that mean we should abandon attempts to regulate? Of course not. It is hard to argue against the proposition that better regulation would... MORE

Underwriting Errors Outlawed

Finance: stocks, options, etc.
Arnold Kling
The WSJ reports The thrust of the mortgage section would require lenders to make sure that borrowers can repay any home loans they are sold. It puts limits on the ability of lenders to offer loans without documentation from borrowers,... MORE

If I Had More Time

Finance: stocks, options, etc.
Arnold Kling
I would comment more on these: 1. Charles Goodhart writes, Let me start by recalling that this is the third version of a quasi-automatic market mechanism for limiting bank losses and facilitating bank resolution that has been proposed in the... MORE

Roberts and Kling on the Crisis

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts is summarized in the NYT Dealbook. My paper in the Harvard Journal of Law and Public Policy is now available. Other papers on the financial crisis are here. For now, since I am mostly on vacation, they are... MORE

Rajan Joins the Blogosphere

Finance: stocks, options, etc.
Arnold Kling
He writes, Paul [Krugman] is, of course, a great theoretical Nobel-prize-winning economist, so his attacks must be taken seriously (and I did take his trade theory classes at MIT, in the interest of full disclosure). Unfortunately, much of the "Fannie... MORE

What is a NINJA loan?

Finance: stocks, options, etc.
Arnold Kling
The acronym NINJA stands for no income, no job, and no assets. Often, I hear this described as lenders willing to make mortgage loans to borrowers with no income, no jobs, or no assets. Technically, this is not correct. NINJA... MORE

More on the 30-year Fixed Rate Mortgage

Finance: stocks, options, etc.
Arnold Kling
Mark Perry writes, It wouldn't take much of an increase in inflation and short-term interest rates before many banks/thrifts could see their interest margins squeezed, and short-term rates could conceivably even rise above 5% sometime in the next 30 years,... MORE

What Financial Re-Regulation?

Finance: stocks, options, etc.
Arnold Kling
In two weeks, I am supposed to speak on a panel entitled "Financial Re-regulation." My question is, what re-regulation? To me, re-regulation means you would reverse some step that you took toward deregulation. But the new financial reform bill does... MORE

Remarks on U.S. Mortgage Finance

Finance: stocks, options, etc.
Arnold Kling
At a conference yesterday on mortgage finance, I managed to turn a discussion of the future of securitization into a discussion of the 30-year fixed-rate mortgage. I think that the 30-year fixed-rate mortgage is an artifact of government intervention, and... MORE

Kling Interviewed

Macroeconomics
Arnold Kling
by Rob McClendon. The two segments are each less than ten minutes. They cover a range of topics, from what Nick Schulz and I call Economics 2.0 to bank bailouts to the outlook for employment. Part one. Followed by Part... MORE

Better Regulation Fails To Strengthen Banks

Finance: stocks, options, etc.
Arnold Kling
That is the conclusion of Asli Demirgüç-Kunt and Enrica Detragiache, two economists with the International Monetary Fund. All in all, we do not find support for the hypothesis that better compliance with BCPs [Basel Core Principles] results in sounder banks... MORE

Some Bailout Commentary

Finance: stocks, options, etc.
Arnold Kling
James DeLong wonders what the business model is for Wall Street. Or, "We borrow from the government at low rates and lend back to the government at a premium, and for that we get paid a lot." (From the investment... MORE

Cognitive Failure or Moral Failure

Finance: stocks, options, etc.
Arnold Kling
Claire A. Hill writes, many brilliant and sophisticated market participants with considerable amounts of money at stake and considerable access to information about the securities and about markets generally made the same mistake the rating agencies did. These instruments were... MORE

Europe's TARP

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen writes, 6. Basically the ECB is monetizing bad government debt claims. His other 11 short points also are interesting. Peter Boone and Simon Johnson write, This is a whole new level of global moral hazard - the result... MORE

The Voice of the Outsider

Behavioral Economics and Rationality
Arnold Kling
Russ Roberts interviews Nassim Taleb in a fast-paced discussion. They kick around a number of interesting ideas. One of them is that leverage is linked to overconfidence. When you believe you can predict the future, you borrow a lot. When... MORE

Rogoff vs. Kling

Finance: stocks, options, etc.
Arnold Kling
Tim Carney likes my financial reform ideas, but Ken Rogoff does not. Rogoff writes, A surprising number of pundits seem to think that if one could only break up the big banks, governments would be far more resilient to bailouts,... MORE

The Simplest Narrative

Finance: stocks, options, etc.
Bryan Caplan
Arnold ably identifies two main narratives about the 2008 financial crisis.  But he neglects the simplest narrative of all: Once in a century, a once-in-a-century mistake happens.  The end.I know the simplest narrative is unsatisfying.  Nevertheless, it's less unsatisfying than... MORE

Chipping Away at the Narrative

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts has a long narrative of the financial crisis. One excerpt: An unpleasant but unavoidable conclusion of this paper is that Wall Street was (and remains) a giant government-sanctioned Ponzi scheme. Homebuyers borrowed money from lenders who got their... MORE

Unassorted Links

Economic Methods
Arnold Kling
Denationalize Housing Finance is a slogan I could get behind. The essay, by David Oedel and Ed Pinto, is timely and important. An update on the sovereign debt crisis in Europe. I know that the Senate and the mainstream media... MORE

How Rude

Finance: stocks, options, etc.
Arnold Kling
Charlie Rose interviews Michael Lewis, and the interview just gets better and better as it goes along. Here are some of the phrases that are used to describe the Outsiders, the money managers who were right about the subprime bubble:... MORE

Self-Promotion

Finance: stocks, options, etc.
Arnold Kling
The New York Times hosts me and two other participants discussing the social value, or lack thereof, of financial innovation. I like what I wrote, although it was hard to fit what I wanted to say within the suggested length.... MORE

Self-Defense on Predatory Lending

Finance: stocks, options, etc.
Arnold Kling
I don't do well in back-and-forth blog spats, but I want to reply to the anonymous blogger at The Economist, who is jumping to the conclusion that I am ignorant, when I believe I know what I am talking about.... MORE

Insiders vs. Outsiders

Finance: stocks, options, etc.
Arnold Kling
Republicans are filibustering for this? Anyone who underwrites a mortgage which doesn't meet minimum underwriting rules would have to retain at least 5% economic interest in the trust. All of their proposals are variations on the ideas in the Democratic... MORE

Russ Roberts Follows the Money

Finance: stocks, options, etc.
Arnold Kling
He writes, John Paulson expected housing prices to go down. The ABACUS vehicle at the heart of the transaction allowed him to profit when they did go down. Who was on the other side of the transaction? Who lost the... MORE

The Credibility of the Roth IRA

Finance: stocks, options, etc.
Bryan Caplan
What is your probability that assets in Roth IRAs remain untaxed by the federal government through 2050?  Why?... MORE

Morning Commentary

Business Economics
Arnold Kling
1. Richard Epstein on the SEC suit against Goldman. the SEC complaint makes no mention that Goldman actually took the same side of the deal as ACA, which puts it in the unique position of defrauding itself. Read the whole... MORE

My Ideal Financial Reform Bill

Finance: stocks, options, etc.
Arnold Kling
A reader asked me for this. 1. Extricate the government from the mortgage market as soon as is practical. I foresee reducing the maximum mortgage amounts that of Freddie and Fannie to zero in stages over a period of three... MORE

Why Did We Save the Financial System?

Finance: stocks, options, etc.
Arnold Kling
Steven Randy Waldman explains the infamous Goldman transaction. the notional CDO forms the basis for a thought experiment: Given any performance scenario for debt in the reference portfolio, we can compute the loss that would have been experienced by holders... MORE

If Fish Had Wings

Finance: stocks, options, etc.
Arnold Kling
Kevin Drum writes, From a systemic point of view, the real issue is that predatory lending on a large scale helped to massively inflate the housing/credit bubble of the aughts. If the home loan market had been regulated stringently enough... MORE

Minsky vs. Krugman

Finance: stocks, options, etc.
Arnold Kling
Paul Krugman writes, So I'd suggest that what we did between 1980 and 2008 was to replace a financial system in which profits were created by lack of competition with a system in which profits were created by misinformation and... MORE

I Talk

Finance: stocks, options, etc.
Arnold Kling
But my lips don't move, in this interview. I don't have software on my computer to do web-cam-chat stuff. Anyway, it's five minutes of me talking about what breaking up banks would and would not accomplish.... MORE

What I Think About Financial Reform

Finance: stocks, options, etc.
Arnold Kling
My instinct is to call the proposed legislation a "blame deflection bill" rather than financial reform. But I admit that I have not read the whole bill. Has anyone? My impression is that the following things are not in it.... MORE

The SEC-Goldman Flap

Finance: stocks, options, etc.
Arnold Kling
Steven Randy Waldman writes, A CDO, synthetic or otherwise, is a newly formed investment company. Typically there is no identifiable "seller". The investment company takes positions with an intermediary, which then hedges its exposure in transactions with a variety of... MORE

The Cash Nexus

Political Economy
Arnold Kling
Tyler Cowen writes, There's a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep... MORE

If I Had More Time

Finance: stocks, options, etc.
Arnold Kling
I would comment more on the following links: WSJ blog post about a warning that the average ratio of government debt to GDP could top 100 percent in Europe in the near future. That's ok. They can fix the problem... MORE

What I Said

Finance: stocks, options, etc.
Arnold Kling
Nick Timiraos writes, "If we modify loans and we have not yet reached a bottom, what we are doing is setting up borrowers and lenders to fail once again," said Arnold Kling It was late in the day when my... MORE

Is Transparency the Answer?

Finance: stocks, options, etc.
Arnold Kling
Responding to my break up the banks piece, Andrew Redleaf and Richard Vigilante write, The credit system -- not surprisingly, given its name -- operates on trust. The government's bizarre position has been that this trust rests more securely on... MORE

The Difficulty of Measuring Bank Capital

Finance: stocks, options, etc.
Arnold Kling
Steven Randy Waldman writes, he capital positions reported by "large complex financial institutions" are so difficult to compute that the confidence interval surrounding those estimates is greater than 100% even for a bank "conservatively" levered at 11× tier one capital.... MORE

The Case Against Big Banks

Finance: stocks, options, etc.
Arnold Kling
My National Review article is now online. I've been getting some love from leftwing blogs and some pushback from right-wing blogs. A few points 1. I don't want to bring back the 1920's, or even the 1950's, with all of... MORE

The Ugly Side of Financial Reform

Finance: stocks, options, etc.
Arnold Kling
Venture Beat reports, Dodd's bill would require startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the SEC to review their filing. A second provision raises the wealth requirements for an "accredited... MORE

House Prices Are Regional

Finance: stocks, options, etc.
Arnold Kling
Phil Izzo of the Wall Street Journal's blog mentions a study showing that much of the country was insulated from the housing boom and bust. We like to mock the finance industry folks who said that a nationwide housing bust... MORE

Preventing Foreclosures

Finance: stocks, options, etc.
Arnold Kling
I have written, As difficult and painful it may seem in the short run, it probably would be better to work through the foreclosure process and let prices adjust to levels that bring supply and demand into balance in the... MORE

Time Consistency in Bank Regulation

Finance: stocks, options, etc.
Arnold Kling
David Leonhardt writes By definition, the next period of financial excess will appear to have recent history on its side. Asset prices will have been rising, and whatever new financial instrument that comes along will look as if it is... MORE

What I'm Writing

Finance: stocks, options, etc.
Arnold Kling
I have an article in National Review (April 5 edition) on financial regulation. Notwithstanding the good intentions of policymakers, who no doubt plan to create a stronger regulatory apparatus going forward, large banks will inevitably have too much power for... MORE

Banks and Modigliani-Miller

Finance: stocks, options, etc.
Arnold Kling
Greg Mankiw writes, What about the Modigliani-Miller Theorem? Recall that this famous theorem says that a firm's value as a business enterprise is independent of how it is financed. The debt-equity ratio determines how the risky cash flow from operations... MORE

David Brooks Provokes

Finance: stocks, options, etc.
Arnold Kling
with this: The free-market revolution didn't create the pluralistic decentralized economy. It created a centralized financial monoculture, which requires a gigantic government to audit its activities. Yesterday, during my talk at Campbell University, I also used the term monoculture to... MORE

Accounting Standards

Finance: stocks, options, etc.
Arnold Kling
I have been following, but not writing about the Lehman accounting scandal. Simon Johnson brings up a past scandal (Enron) and a future scandal (Greece). He points out the role of investment banks in designing and/or executing transactions that are... MORE

Baseline Scenario: The Book

Books: Reviews and Suggested Readings
Arnold Kling
Simon Johnson and James Kwak call it 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. It is one of the most valuable contributions to the literature on the financial crisis. Of all the economists, journalists, and pundits... MORE

Did the Financial Crisis Matter?

Finance: stocks, options, etc.
Arnold Kling
Dean Baker says no. Spain is noteworthy because it now has an unemployment rate of more than 19%, the highest rate in any of the wealthy countries. Spain did not have a financial crisis. In fact, its well-regulated financial system... MORE

Fannie and Freddie and Friends

Finance: stocks, options, etc.
Arnold Kling
Mark Thoma points to a series of presentations from the Roosevelt Institute, a left-oriented think tank. What struck me was Raj Date arguing for the elimination of Freddie Mac and Fannie Mae. He is quite firm on the point. He... MORE

Canada Wins

Finance: stocks, options, etc.
Arnold Kling
According to Mark Perry, this recent financial crisis isn't the first time that Canada's banking system showed greater signs of stability and less exposure to stress than U.S. banks. In the 1930s, when 9,000 U.S. banks failed during the Great... MORE

With All Due Respect, 2

Finance: stocks, options, etc.
Arnold Kling
My views have been influenced by Gary Gorton, well before his latest paper, but I nonetheless disagree with him on important matters. I view the financial crisis as having four components: Bad Bets Excessive leverage Domino effects 21st-century bank runs... MORE

With All Due Respect

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen writes, You might wish to go back to "old banking" but according to Gorton that stopped being profitable during the 1980s. There's always an uninsured place to put your money, regulation can't stop that, and such money can... MORE

Recommended

Behavioral Economics and Rationality
Arnold Kling
These are posts that I recommend, without providing excerpts. Robin Hanson offers an illustration of the theory that prestige-status is less threatening to people than dominance-status. So do people perceive the wealth of Bill Gates as conferring prestige-status (not so... MORE

Jeffrey Friedman on the Greek Tragedy

Finance: stocks, options, etc.
Arnold Kling
He writes, Today's FT brings the news that "European financial institutions have $235 billion worth of claims on Greek debt, most of which is thought to be in government bonds." Why do they hold so much Greek government debt? Because... MORE

More Jeffrey Friedman

Finance: stocks, options, etc.
Arnold Kling
Here, he writes, Competition puts capitalists' different motives, like their different ideas, to the acid test of consumer satisfaction. This tends to give consumers what they want--or at least what they think they want--and it diversifies a capitalist society's investment... MORE

The True Sources of Risk

Finance: stocks, options, etc.
Arnold Kling
Avinash Persaud writes, Credit risk is best hedged through diversification across uncorrelated credits. Liquidity risk is best hedged through diversification across time. Market risk is best hedged through a combination of diversification across assets and time (having time to decide... MORE

The PIIGS Crisis

Finance: stocks, options, etc.
Arnold Kling
Peter Boone, Simon Johnson,, and James Kwak discuss the current financial situation, focusing on the PIIGS crisis. Their bottom line translates into: have a nice day. The PIIGS crisis seems a bit like the subprime crisis. That is the PIIGS... MORE

Knowledge-Power Discrepancy

Finance: stocks, options, etc.
Arnold Kling
Jeffrey Friedman writes, What I am calling social democracy is, in its form, very different from socialism. Under social democracy, laws and regulations are issued piecemeal, as flexible responses to the side effects of progress -- social and economic problems... MORE

Financial Crisis, Phase Two

Finance: stocks, options, etc.
Arnold Kling
Carmen Reinhart talks to the WSJ. historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we're in for a period where... MORE

Anti-EMH and Antitrust

Finance: stocks, options, etc.
Bryan Caplan
Sumner amusingly analogizes opponents of the Efficient Market Hypothesis to proponents of antitrust laws:You have to be impressed by the resourcefulness of the anti-EMH, crowd.  If LTCM and its merry band of Nobel-Prize winning economists had actually beat the market,... MORE

Housing Policy: What Would Reagan Do?

Finance: stocks, options, etc.
Arnold Kling
Tracy Alloway finds a reportthat one of TARP's goals is propping up house prices I remember 1980, when holding down consumer energy prices was the main goal of energy policy. Then Ronald Reagan was elected President, and one of the... MORE

Barney Frank's Surprising Answer

Finance: stocks, options, etc.
Arnold Kling
I submitted a question to his interview with Bigthink. The relevant segment is here, a bit more than 18 minutes in. I asked about equating affordable housing with mortgage subsidies. He said he never did that. For him, affordable housing... MORE

Increasing Liability of Bank Executives

Finance: stocks, options, etc.
Arnold Kling
Axel Leijonhuvfud writes, In the early days of fractional reserve banking, bank owners were subject to unlimited liability. In the US, double liability for bank shareholders was common up to the Great Depression. All American investment banks were partnerships into... MORE

The Quants

Books: Reviews and Suggested Readings
Arnold Kling
The Quants, by Scott Patterson, is the latest indulgence in my taste for financial crisis porn. It reminds me a lot of Roger Lowenstein's When Genius Failed. Lowenstein's book, which narrates the rise and fall of the infamous hedge fund... MORE

Big Banks

Political Economy
Arnold Kling
Tyler Cowen writes, Obama proposes a new banking plan and everyone is commenting for instance here is Simon Johnson. The plan seems to involve limits on bank size and limits on proprietary trading. In principle, I am against attempts by... MORE

Various

Cross-country Comparisons
Arnold Kling
John Taylor is interviewed. I recommend clicking on "interview transcript," since it is faster to skim and read than to watch an interview. At one point, the interviewer poses a question from Scott Sumner on whether the Fed was too... MORE

Why the Fed is Buying Mortgage Securities

Finance: stocks, options, etc.
Arnold Kling
According to James Hamilton, the difference between what the Fed has been doing in 2009 and true quantitative easing is that under the latter strategy, the Fed would be funding the MBS purchases with zero-interest money, with the intent of... MORE

The Credit Crunch Story

Finance: stocks, options, etc.
Arnold Kling
John Cochrane tells it, and he says, Now that the short-termcredit crunch is over, the recession seems likely to be followed by a quick recovery, at least if the government does not get in the way with too many counterproductive... MORE

EMH and Bubbles

Finance: stocks, options, etc.
Arnold Kling
John Cassidy interviews John Cochrane. Cochrane says, I think most people mean by a "bubble" just, "Prices were high and I wish I sold yesterday." The efficient markets (hypothesis) never told you that wasn't going to happen. What efficient markets... MORE

Crisis Commentary

Finance: stocks, options, etc.
Arnold Kling
Ricardo Caballero writes, By 2001, as the demand for safe assets began to rise above what the U.S. corporate world and safe mortgage‐borrowers naturally could provide, financial institutions began to search for mechanisms to generate triple-A assets from previously untapped... MORE

Commercial Real Estate Prices: What Inference to Draw?

Finance: stocks, options, etc.
Arnold Kling
Megan McArdle writes, My latest column for the Atlantic looks at the commercial real estate crash and comes to the conclusion that it effectively undermines the major narratives that many people have adopted to explain the residential bubble. Though the... MORE

Interview with Raghuram Rajan

Finance: stocks, options, etc.
Arnold Kling
Interesting throughout. Thanks to Mark Thoma for the pointer. I agree with much of Rajan says, so I want to highlight the sentence with which I agree the least. On the role of government in the housing market, he says... MORE

What If

Finance: stocks, options, etc.
Arnold Kling
A reader asks, With regard to the recent financial crisis and current economic recession - if you were given the power to go back in time and change only one thing in an effort to prevent the crisis and recession,... MORE

Thinking Outside the House

Finance: stocks, options, etc.
Arnold Kling
Free Exchange agrees with Ben Bernanke (and me that stopping the housing bubble was more of regulatory issue than a monetary policy issue. the Fed didn't act because there is something institutionally the matter with it, which prevented effective regulatory... MORE

Bernanke's Speech to the AEA

Finance: stocks, options, etc.
Arnold Kling
He says, Slide 4 shows that the version of the Taylor rule based on forecast inflation (in green dots) explains both the course of monetary policy earlier in the past decade as well as the decision not to respond aggressively... MORE

Sumner, the Stock Market, and Price Controls

Finance: stocks, options, etc.
Bryan Caplan
Sumner replies at length to my question, "Why did financial markets like Nixon's price controls so much?"  His easiest answer is that Nixon's infamous August 15 speech did a lot more than impose price controls.  It also devalued gold by... MORE

The Perpetual Foreclosure Crisis, Continued

Finance: stocks, options, etc.
Arnold Kling
Peter J. Wallison writes, On Christmas Eve, when most Americans' minds were on other things, the Treasury Department announced that it was removing the $400 billion cap from what the administration believes will be necessary to keep Fannie Mae and... MORE

Question for Sumner

Finance: stocks, options, etc.
Bryan Caplan
Forbes provokes Sumner to don the robes of hanging judge for the hypocritical right:If Forbes is right, and the markets are made up by a bunch of fools, then why not go with socialism?Here's what I think is really going... MORE

A Dedicated User of the Harvard-Goldman Filter

Finance: stocks, options, etc.
Arnold Kling
The latest edition of What Went Wrong is up. This is a series of video Q&A's with various experts on the financial crisis. So far, I have been generally disappointed. In the recent episodes, Glenn Hubbard says nothing shocking. Bill... MORE

Three Links from Mark Thoma

Finance: stocks, options, etc.
Arnold Kling
Chosen from among those here. 1. Gretchen Morgenson and Louise Story write, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then... MORE

Menzie Chinn's Course on the Crisis

Finance: stocks, options, etc.
Arnold Kling
The syllabus looks interesting, but I think there are two topics that I would emphasize more if I were teaching it. 1. How did we get here? Most people seem to start their history of the crisis in about 2007... MORE

Banana Republic Watch

Finance: stocks, options, etc.
Arnold Kling
A commenter points to an essay by Rob Arnott. The lion's share of the debt reduction may well be accomplished through reflation. We can eliminate half of our debt in 15 years if our inflation runs 5% higher than our... MORE

Unchecked and Unbalanced Podcast

Books: Reviews and Suggested Readings
Arnold Kling
Tom Keene interviews me. He likes the fact that Unchecked and Unbalanced is short--only 116 pages.... MORE

The Regulators' Cognitive Failure

Finance: stocks, options, etc.
Arnold Kling
The Washington Post reports, The Fed's failure to foresee the crisis or to require adequate safeguards happened in part because it did not understand the risks that banks were taking, according to documents and interviews with more than three dozen... MORE

Sumner on Allison

Finance: stocks, options, etc.
Arnold Kling
I should have outsourced my comments on John Allison's interview to Scott Sumner.... MORE

The Harvard-Goldman Filter

Finance: stocks, options, etc.
Arnold Kling
My position on breaking up banks generates questions from two groups. Libertarians ask, how can I justify breaking up private sector institutions? Naive liberals ask, why is this policy not embraced by our political leaders? My answer to both relates... MORE

Bank Regulation is a Political Economy Problem

Finance: stocks, options, etc.
Arnold Kling
Paul Volcker says financial innovation has not been a good thing. Now, I have no doubts that it moves around the rents in the financial system, but not only this, as it seems to have vastly increased them. You cannot... MORE

Corrigan's Contradiction

Finance: stocks, options, etc.
Arnold Kling
Simon Johnson writes, E. Gerald Corrigan in his Dolan Lecture at Fairfield University. Corrigan, former President of the New York Fed and a senior executive at Goldman Sachs for more than a decade, makes three main points. 1. "Large Integrated... MORE

Jeffrey Friedman on Competition vs. Planning

Institutional Economics
Arnold Kling
Self-recommending, but here is an excerpt: In a complex world where nobody really knows what will succeed until it is tried, competition that pits people's ideas against each other is the only way to test these ideas. Competition among capitalists... MORE

Scott Sumner Back to Normal

Macroeconomics
Arnold Kling
That is, he is saying things I disagree with. 1. Between July and November 2008 the Fed adopted an ultra-tight monetary policy. 2. Real interest rates on indexed 5 year T-bonds rose from 0.5% to 4.2% 3. The tight money... MORE

David Wessel on the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
Here, he answers some questions posed by bloggers, including a couple from me. The organizers solicited the questions by email, and they asked us to promote the videos on our blogs. I am not getting paid, and right now I... MORE

Preview of Book 2

Books: Reviews and Suggested Readings
Arnold Kling
Policy Review publishes a preview of Book 2. Executives had too much confidence in their risk management strategies. Regulators, too, had excessive confidence in the measures that they had in place to ensure safety and soundness of banks and other... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
Bill Easterly is not of fan of military nation-building in Afghanistan. He writes, critics of top-down state plans for economic development are also not fans of top-down state plans for military development. If the Left likes the first, and the... MORE

Falkenstein on Book 1

Books: Reviews and Suggested Readings
Arnold Kling
In Book 1, otherwise favorably, Eric Falkenstein writes, I found their general description of finance to have a misleading emphasis. There was an exposition where assets have risk characteristics that are obscured as they are passed up a food chain,... MORE

The Perpetual Foreclosure Crisis

Finance: stocks, options, etc.
Arnold Kling
This story reports, The Obama administration, battling a foreclosure crisis that shows no signs of relenting, will step up pressure on mortgage companies to do more to help people remain in their homes, officials said Saturday. This story was predictable.... MORE

The Financial Crisis Narrative

Finance: stocks, options, etc.
Arnold Kling
Douglas J. Elliott and Martin Neil Baily write, Risk taking, after all, is part of a dynamic market economy and drives economic growth, so we discourage risk taking at our peril. Am I the only one who sees the irony... MORE

Are Markets Efficient? Krugman vs. Kling

Finance: stocks, options, etc.
Arnold Kling
He says they are: Now, you could and should be worried if this thing looked like a great bubble -- if long-term rates looked unreasonably low given the fundamentals. But do they? Long rates fluctuated between 4.5 and 5 percent... MORE

Dominating the Narrative

Economic History
Arnold Kling
Will Wilkinson writes, Ygesias says, "I believe that absent the [TARP] bailout, we'd be looking at even higher unemployment today." I think this is a plausible claim. But I don't know of a satisfactory way to evaluate it. It's plausible... MORE

Was TARP Necessary?

Finance: stocks, options, etc.
Arnold Kling
Simon Johnson writes, There is no question that passing the TARP was the right thing to do. In some countries, the government has the authority to provide fiscal resources directly to the banking system on a huge scale, but in... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
Paul DeGrauwe writes, My contention is that the rational expectations models are the intellectual heirs of these central planning models. Not in the sense that individuals in these rational expectations models aim at planning the whole, but in the sense... MORE

The Financial Regulatory Chess Game

Finance: stocks, options, etc.
Arnold Kling
Edward J. Kane writes, Regulation is best understood as a dynamic game of action and response, in which either regulators or regulatees may make a move at any time. In this game, regulatees tend to make more moves than regulators... MORE

An Insider and and Outsider

Finance: stocks, options, etc.
Arnold Kling
The alternate universes inhabited by insiders and outsiders are evident in two links from Mark Thoma. First, Bill Dudley gives us the insider view. Liquidity risk will never be eliminated, nor should it. The preferences of borrowers to borrow long... MORE

Cap Creditors' Bailouts?

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts tucks an interesting suggestion into his diatribe against the arrogance of financial regulators. A ceiling of 50 cents on the dollar for creditors and lenders when the institutions they fund become insolvent is a natural place to start... MORE

Lessons from Banking History

Finance: stocks, options, etc.
Arnold Kling
Piergiorgio Alessandri and Andrew G. Haldane write, Historically, the link between the state and the banking system has been umbilical. Starting with the first Italian banking houses in the 13th century, banks were financiers of the sovereign. Sovereign need was... MORE

Two Links

Behavioral Economics and Rationality
Arnold Kling
Both feature Tyler Cowen. Here (or perhaps you should start here), he talks about stories. It is classic Tyler, playing cat and mouse games with your head. Basically, he is saying that stories have an advantage in that they serve... MORE

R & R

Finance: stocks, options, etc.
Arnold Kling
Meaning Ken Rogoff and Carmen Reinhart, of course, both of whom appeared on the PBS New Hour November 2 (fast forward to about minute 27), talking about our financial crisis in the context of historical crises. Rogoff's first sentence is... MORE

Financial Markets vs. Kling

Finance: stocks, options, etc.
Arnold Kling
Paul McCulley writes, a bull flattening bias of the Treasury curve, with longer-dated rates falling toward the near-zero Fed policy rate, can be viewed as a consensus view that the level of the output/unemployment gap plumbed during the recession is... MORE

Did the Lehman Failure Do It?

Finance: stocks, options, etc.
Arnold Kling
William Sterling writes, In contrast to the analysis of Lehman skeptics such as John Taylor (2008, 2009) and John Cochrane and Luigi Zingales (2009), the evidence we present supports the view of many practitioners that the decision not to rescue... MORE

This Time is Different in Concert

Books: Reviews and Suggested Readings
Arnold Kling
I've talked before about the new book by Ken Rogoff and Carmen Reinhart, titled This Time is Different, which is about how financial crises have been around a long time and have a lot in common with one another. (You... MORE

Calomiris on the Crisis

Finance: stocks, options, etc.
Arnold Kling
Charles Calomiris talks with Russ Roberts. It is a long podcast, and it is perhaps the best ever. I hope that it gets transcribed, published, and widely disseminated. Consider the following statement: Deposit insurance is the _____ for banking crises.... MORE

Political Economy, Banking, and Capitalism

Finance: stocks, options, etc.
Arnold Kling
Luigi Zingales writes, The real effect of Gramm-Leach-Bliley was political, not directly economic. Under the old regime, commercial banks, investment banks, and insurance companies had different agendas, and so their lobbying efforts tended to offset one another. But after the... MORE

Chauffered America, Strip Mall America

Books: Reviews and Suggested Readings
Arnold Kling
"Hold on, hold on," [Ruth] Porat said in disbelief. "You're calling me on a Sunday night saying that we just spent the entire weekend on Lehman and now we have this [AIG]? How the [foul language] did we spend... MORE

Turning Back the Financial Clock

Finance: stocks, options, etc.
Arnold Kling
Yves Smith writes, Now you could in theory go back to having much more on balance sheet intermediation (finance speak for "dial the clock back 35 years and have banks keep pretty much all their loans"). Conceptually, that is a... MORE

The M Word

Finance: stocks, options, etc.
Arnold Kling
I have a new statistic to track--the use of the word "mortgage" in discussions of causes of the financial crisis. See, for example, my statistical report on Ben Bernanke's arm-breaking speech. I predict the following: The use of the M... MORE

Populism, Left and Right

Finance: stocks, options, etc.
Arnold Kling
Shane Greenstein writes, Russ Roberts is normally a free market economist, but in his essay he sounds like an old fashioned populist. When a firm does something to turn Russell Roberts into a populist then -- perhaps -- something is... MORE

Suits vs. Geeks Watch

Business Economics
Arnold Kling
Calvin Trillin interviews a Wall Street old-timer. When the smart guys started this business of securitizing things that didn't even exist in the first place, who was running the firms they worked for? Our guys! The lower third of the... MORE

The Kool-Aid Factor

Finance: stocks, options, etc.
Arnold Kling
Nobel Laureate Eric Maskin says, I think most of the pieces for understanding the current financial mess were in place well before the crisis occurred. If only they hadn't been ignored. We're not going to eliminate financial crises altogether, but... MORE

Economic Models, the Bond Market, and Monetary Policy

Finance: stocks, options, etc.
Arnold Kling
In a comment on this post, Bryan asked whether I should not be betting on treasury-indexed securities. I'll answer that one below the fold. What I have been thinking about is this. 1. In general, I do not think that... MORE

R&R: It's the Leverage, Stupid

Finance: stocks, options, etc.
Arnold Kling
Reinhart and Rogoff are interviewed. Rogoff says, This idea that we'll get rid of too-big to fail banks and we'll be OK -- that's nuts because a really big bank is only going to fail if there's a systemic crisis.... MORE

Government Failure

Finance: stocks, options, etc.
Arnold Kling
In Washington, "affordable housing" equates to cheap, lenient mortgage credit. Ed Pinto keeps trying to explain the consequences of this to Congress. His September 16 testimony is on the Community Reinvestment Act and affordable housing goals for Freddie and Fannie.... MORE

Afternoon Commentary

Finance: stocks, options, etc.
Arnold Kling
1.Paul Krugman ask another question. why does it have to be a return to shadow banking? The banks don't need to sell securitized debt to make loans -- they could start lending out of all those excess reserves they currently... MORE

What Did the Regulators Know, and When?

Finance: stocks, options, etc.
Arnold Kling
I say Plenty, and long before most people had heard of CDS, CDO, or SIV. a review of the history of the past few decades shows that regulators were aware of these innovations. They approved of these innovations. They collaborated... MORE

Big Finance and Big Government

Finance: stocks, options, etc.
Arnold Kling
Andrew Ross tells us what the big boys were doing during the crisis. Neil Barofsky says that the government was playing a confidence game. The fact that there is some populist anger in the country these days is not a... MORE

Moral Hazard and Bank Policy

Finance: stocks, options, etc.
Arnold Kling
These issues are discussed by Russ Roberts and Gary Stern. There are two issues that they keep circling around. One is the effect on capital structure of policies and practices that routinely protect creditors and counterparties. The other is what... MORE

Glass-Steagall 2.0?

Finance: stocks, options, etc.
Arnold Kling
Bruce Judson writes, this post is linked to a petition asking the Financial Crisis Inquiry Commission and the Treasury Secretary to explain in detail their reasons for recommending, or not, a system that relies on a highly concentrated, limited number... MORE

Risk-averse Risk Takers

Finance: stocks, options, etc.
Arnold Kling
Felix Salmon writes, Financial complexity and innovation, on this view, are essentially tools of obfuscation. And it's easy to hide risks when risk-averse investors want debt-like products which retain their face value: such instruments tend to have very low volatility,... MORE

Morning Commentary

Fiscal Policy
Arnold Kling
Most of these are links in posts by Mark Thoma. Richard Robb says that letting Lehman fail really did cause big problems. However, he concedes, There is plenty of room to debate the larger counterfactual: if the government had never... MORE

Securitization and Credit Default Swaps

Finance: stocks, options, etc.
Arnold Kling
The latest issue of FinReg21 looks at them. First, Charles Davi makes a big deal out of the fact that credit default swaps are derivatives, which allow institutions that do not own securities to make side bets on the value... MORE

Questions About Financial Crises

Finance: stocks, options, etc.
Arnold Kling
Neither a borrower nor a lender be. That's the way I feel after reading This Time is Different, by Carmen M. Reinhart and Kenneth S. Rogoff. This is certainly one of the must-read books of the year. Some thoughts after... MORE

Caught My Eye

Finance: stocks, options, etc.
Arnold Kling
Esther (genius grant) Duflo and Abhijit Banerjee are interviewed. They are known for doing experimental tests of anti-poverty tactics. In one project we gave away a kilo of lentils for each immunization given to a child, and it had a... MORE

Why Not Restore Glass-Steagall?

Finance: stocks, options, etc.
Arnold Kling
David Moss writes, The fifty years of relative financial calm that followed the Glass-Steagall Act of 1933, the Securities Exchange Act of 1934, and the Banking Act of 1935 strongly suggest that sound public risk management can make a positive... MORE

Felix Salmon vs. Olivier Blanchard

Finance: stocks, options, etc.
Arnold Kling
Salmon writes, At heart, it all comes down to information: loans are stronger and more desirable than bonds, because a bank intends to hold its loan to maturity and does a lot of underwriting, shoring it up with covenants. Bonds,... MORE

Kling vs. the International Monetary Fund

Finance: stocks, options, etc.
Arnold Kling
They write, Current reservations about securitization do not invalidate its economic rationale, arguing instead for repairing the flaws exposed by the recent crisis. Securitization alleviates credit constraints and places asset exposures with entities that are more willing to accept and... MORE

Audio on the Crisis

Finance: stocks, options, etc.
Arnold Kling
It's here. I start about 7-1/2 minutes in, and Russ Roberts starts about 33 minutes in. Russ sounds great. Mine probably reads better than it sounds. You can read a decent approximation of what I said here. Then listen to... MORE

Suits, Geeks, and Lehman

Finance: stocks, options, etc.
Arnold Kling
From a New York Times story: He recalls vividly the days in early 2007 at Lehman when his financial models began to throw up more warnings showing delinquencies and defaults, and he remembers colleagues on his desk raising questions about... MORE

The Moral Hazard Story

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts told it with great passion today. I'm hoping an audio will be available tomorrow. But he should not feel lonely. Simon Johnson and James Kwak write, creditors had only limited incentives to watch over major banks. Ordinarily, creditors... MORE

What I'm Saying

Finance: stocks, options, etc.
Arnold Kling
If all goes according to schedule (unlikely), then about the time that this is posted, I should be in the middle of saying something along these lines:... MORE

The Historical Roots of the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
My paper has been released.... MORE

Me On KQED-FM

Upcoming Events
David Henderson
On Tuesday, September 15, at 9:00 a.m. PDT (noon, EDT), I'll be on KQED-FM (88.5) Forum out of San Francisco, talking about the first anniversary of the Lehman Brothers collapse. The other guests will be Joe Grundfest of Stanford Law... MORE

The View from Outside

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen lets loose with both barrels in today's New York Times. we're still at the point where the medical sector is enshrined as "too big to take a pay cut," which is not so far removed from the banking... MORE

What if Lehman had been Bailed Out?

Finance: stocks, options, etc.
Arnold Kling
Joe Nocera speculates, In truth, a Merrill or A.I.G. default would have created something akin to a financial nuclear bomb -- much worse than Lehman's filing for bankruptcy. Merrill was a much bigger firm, with deep roots on Main Street... MORE

Moral Hazard and Capital Structure

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts is working on a paper suggesting that the fragility of our financial system could be the result of past bailouts, in which unsecured creditors and counterparties of financial institutions were always made whole. In some sense, the fact... MORE

Friday Afternoon Miscellany

Political Economy
Arnold Kling
Keith Hennessey has an interesting question. What thought leader most clearly and effectively presents points of view with which you frequently strongly disagree? He proposes that awards be given. Would Tyrone be considered eligible? Presumably, my nominees have to be... MORE

9-15 anniversary event

Upcoming Events
Arnold Kling
I will be speaking at an event on Capitol Hill on Tuesday, September 15. This is an anniversary of sorts for the financial crisis, and that is the topic for the event. I am planning a really hard-hitting talk. I... MORE

When a Fund Bet on a Bailout

Finance: stocks, options, etc.
Arnold Kling
Bloomberg reports, From July 2007 to July 2008, the commercial-paper portion of Reserve Primary's holdings jumped to almost 60 percent from 1 percent, according to the trade association. The fund's yield rose to 0.4 percentage point above the average among... MORE

The Narrative of the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
In this essay, I write, The dramatic structural changes that took place in the financial industry were not noticed by the general public, and received little coverage even in the financial press. However, it is a myth that financial regulators... MORE

Banana Republic Watch

Political Economy
Arnold Kling
Who wrote this? Answer below the fold. The mystery author writes, The finance sector's increasing concentration and growing political muscle have undermined the traditional American understanding of the difference between free markets and big business. This means not only that... MORE

Mortgage Markets: The Public Option

Finance: stocks, options, etc.
Arnold Kling
The Washington Post reports, Only one lender of consequence remains: the federal government...nearly 90 percent of all new home loans are funded or guaranteed by taxpayers...Government officials generally agree that it would be better for private lenders to resume their... MORE

The G 20 Speaks

Finance: stocks, options, etc.
Arnold Kling
They say, Consistent and coordinated implementation of international standards, including Basel II, to prevent the emergence of new risks and regulatory arbitrage, particularly with regard to Central Counterparties for credit derivatives, oversight of credit ratings agencies and hedge funds, and... MORE

Tyler Cowen on Bank Bailouts (Again)

Finance: stocks, options, etc.
Arnold Kling
He writes, Two years ago, my view was this: if there is a banking crisis, the Fed should be loose with money and let the market sort out which banks deserve support and which do not. And stop there. When... MORE

Could Freddie Come Baaaack?

Finance: stocks, options, etc.
Arnold Kling
John Hempton writes, Pre-tax, pre-provision operating profits of Freddie Mac are running at over $15 billion. If the government were not demanding 10 percent on its preference shares the companies would be sufficiently well capitalised to repay their interest in... MORE

Some Morning Links

Economic History
Arnold Kling
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.... MORE

Pile on James Kwak Day

Finance: stocks, options, etc.
Arnold Kling
Many of these links come from the indispensable Mark Thoma. First, we have Gender and banking: Are women better loan officers? by Thorsten Beck and others. And yes, it does strengthen my priors. The Fed's profits are turning higher. Perhaps... MORE

Random Financial Commentary

Finance: stocks, options, etc.
Arnold Kling
Razib points to a paper that supports my hormone-based approach to regulating financial risk. Rocco Huang and Lev Ratnovski say that Canadian banks did relatively well because they relied more on deposits. To me, this says that securitization is not... MORE

Bagehot vs. Bernanke/Paulson

Finance: stocks, options, etc.
Arnold Kling
David Warsh links to an interesting letter sent by the British Academy Forum on why economists did not predict the financial crisis. They write, A generation of bankers and financiers deceived themselves and those who thought that they were the... MORE

Elizabeth Warren

Finance: stocks, options, etc.
Arnold Kling
talks for ten minutes without saying much that I disagree with. Quite remarkable. Note particularly at the very end, when she suggests that her gut feeling is that the "dinosaurs" helped by Paulson's bailout may not have been as critical... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
Richard Posner writes, The efficient markets theory, when understood not as teaching merely that markets are hard to beat even for experts and therefore passive management of a diversified portfolio of assets is likely to outperform a strategy of picking... MORE

Flubs

Finance: stocks, options, etc.
Arnold Kling
Here is a fact about the financial crisis that I had missed: the Federal Home Loan banks supplied almost half the funding for two large private lenders, Countrywide and Indy Mac, that later failed. This is from Allan H. Meltzer's... MORE

One Ply Look-Ahead

Finance: stocks, options, etc.
Arnold Kling
Jacopo Carmassi, et al write, the key to avoiding repeating this crisis is setting adequate capital requirements that cannot be circumvented for all intermediaries able to raise funds redeemable on demand at par. The simple way of doing it is... MORE

I Agree With

Economics of Health Care
Arnold Kling
John Mackey on free-market health care reform; Alex Tabarrok on consumer-driven health plans; and Ken Rogoff that the financial crisis was more than just a loss of confidence.... MORE

Banana Republic Watch

Political Economy
Arnold Kling
William D. Cohan gives the play-by-play of the Merrill-BofA-government saga. Lewis said Bernanke told him, "We view you as strong and having acted appropriately in difficult circumstances ... We'll make sure you continue that way ... We want to do... MORE

Financial Regulation and Public Choice Theory

Finance: stocks, options, etc.
Arnold Kling
An outstanding guest post by "bond girl" at Baseline Scenario. I would argue that the fundamental flaw in financial regulation is that it is based on the assumption that regulators are not self-interested individuals like the rest of us. We... MORE

Readings on the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
From the Stern Business School. Strongly recommended. One excerpt: The whole purpose of securitization is to lay risks off the economic balance-sheet of financial institutions. But the way securitization was achieved, especially during 2003-2Q 2007, was more for arbitraging regulation... MORE

The Home as ATM

Finance: stocks, options, etc.
Arnold Kling
From Mark Thoma, who in turn saw it on Richard Green, a study by Michael Lacour-Little, Eric Rosenblatt, and Vincent Yao. Here we use public record data to study Southern California borrowers facing foreclosure in late 2006 and 2007. We... MORE

The Financial Crisis: A Different Approach

Finance: stocks, options, etc.
Arnold Kling
I was asked to give a presentation on the financial crisis. I didn't want to just do the same old song and dance, so I came up with....... MORE

What Should Mortgage Finance Look Like?

Finance: stocks, options, etc.
Arnold Kling
Mark Thoma writes, John Taylor and Kenneth Scott argue that "sheer complexity" is at the heart of the financial crisis: We believe their sheer complexity is the core problem and that only increased transparency will unleash the market mechanisms needed... MORE

The Insider Narrative

Books: Reviews and Suggested Readings
Arnold Kling
Michiko Kakitani reviews David Wessel's new book, In Fed We Trust. She likes it more than I do. I think it is too much of an insider's narrative. There are two dimensions on which people differ about the financial crisis.... MORE

Neil Barofsky's Dog Whistle

Fiscal Policy
Arnold Kling
Apparently, humans cannot hear what the TARP whistleblower is saying, which is that the government bailouts could wind up costing taxpayers $23.7 trillion. Barofsky's estimates include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in... MORE

Should the Fed be Audited?

Finance: stocks, options, etc.
Arnold Kling
I want to make a few comments on this issue, which David has touched on On balance, I think I would support auditing the Fed. 1. The conservative case against auditing the Fed is that it will reduce the Fed's... MORE

Reactions to the Treasury Financial Reform Proposals

Finance: stocks, options, etc.
Arnold Kling
Four of us give our reactions: Robert Litan Lawrence J. White Richard Posner and yours truly. I offer eight "audit findings" on the report, including 1. The Report does not offer a comprehensive analysis of the causes of the financial... MORE

Impossible Mission Commission

Finance: stocks, options, etc.
Arnold Kling
Keith Hennessey writes Yesterday Senate Minority Leader Mitch McConnell (R-KY) appointed me to be a member of a new Financial Crisis Inquiry Commission...The purpose of the Commission is "to examine the causes, domestic and global, of the current financial and... MORE

The Worst Solution to the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
Daniel Indiviglio reports on a chart from the Wall Street Journal that shows more than one quarter of mortgage loan modifications are redefaulting. He comments, Re-default is a huge problem, because it means those homes should have just undergone foreclosure... MORE

Return to Panic

Finance: stocks, options, etc.
Bryan Caplan
Scott Sumner just replied to a piece I wrote back in April on the crash of 2008.  Having lived through the crash - and lost a ton of money - it seems like a big part of the explanation has... MORE

The Financial Crisis: A Matrix

Finance: stocks, options, etc.
Arnold Kling
Nassim Nicholas Taleb and Mark Spitznagel write, The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s. This... MORE

The Shadow Banking System

Finance: stocks, options, etc.
Arnold Kling
Perry Mehrling says, The idea of the shadow banking system was in some way, not only tolerated by regulators, but encouraged by regulators. They thought, "Let's get some of these risks off the balance sheet of the traditional banking system.... MORE

Justin Fox on Efficient Financial Markets

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts interviews Justin Fox. Fox became an expert in the process of writing a book on the history of modern financial theory.... MORE

Michael Lewis on AIG

Finance: stocks, options, etc.
Arnold Kling
Compelling, as usual. I'll post some excerpts below the fold, but I recommend reading Lewis' whole piece. Lewis writes it very much as a suits-vs.-geeks story. He portrays the head of AIG financial products, Joseph Cassano, as a suit who... MORE

Jeffrey Friedman on the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
Critical Review is publishing a special issue on the financial crisis. I have uploaded Jeffrey Friedman's introduction. I strongly recommend the entire issue. The paper by Acharya and Richardson is the one that most closely reflects my own views. Friedman's... MORE

A Regulatory History Lesson

Finance: stocks, options, etc.
Arnold Kling
The Obama Administration's 89-page report on financial regulatory reform says on page 3, Market discipline broke down as investors relied excessively on credit rating agencies. To me, attributing the use of credit rating agencies to a breakdown in market discipline... MORE

Posner and Kling on Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
Concerning the Obama Administration's white paper, Richard Posner writes, The report is scathing about the financial incontinence of bankers and consumers but complacent about regulatory failures. UPDATE: As a commenter notes, my volume is very low relative to the moderator's.... MORE

Fool's Gold

Finance: stocks, options, etc.
Arnold Kling
Gillian Tett's book on the financial crisis is the one that I would recommend at this point. Some notes and excerpts below. This may reflect my biases, but what I took away from the book was the co-ordination between regulators... MORE

Regulation that Encouraged Herding

Finance: stocks, options, etc.
Arnold Kling
Avinash Persaud writes, During booms, asset prices rise and measured risks fall. Acting prudently, financial firms will feel it is safe to expand lending. All financial firms expanding together will lead to a scramble for assets that will lead to... MORE

Financial Reform, 2

Finance: stocks, options, etc.
Arnold Kling
This is the promised follow-up to Friday's post. These are further notes from the conference on financial regulatory reform.... MORE

Bad Bets or Co-ordination Failure?

Finance: stocks, options, etc.
Arnold Kling
James Kwak discusses an issue that has been dogging the analysis of the financial crisis since the beginning, and which has resurfaced now that people are looking at what steps to take to reform the financial system. I put the... MORE

Financial Reform

Upcoming Events
Arnold Kling
I will be interviewed on June 25th at 2 PM eastern time in a "webinar," which means that if you participate live then you can ask questions. You can register here. I have attended a couple of these as a... MORE

The Financial White Paper: A Fabulous Tale

Finance: stocks, options, etc.
Arnold Kling
Once upon a time, there was a summer camp. To entertain the kids, the counselors handed out matches1, lighter fluid2, and newspapers3. The camp burned down. Afterwards, a white paper was written, proposing more supervision by counselors. It called for... MORE

What's Wrong with the Financial Regulation White Paper

Finance: stocks, options, etc.
Arnold Kling
I am reading this draft. Also of interest is this interview with President Obama.... MORE

Simon Johnson on Geithner and Summers

Finance: stocks, options, etc.
Arnold Kling
He is not happy with the "foundation" for regulatory reform proposed by the current and former Treasury Secretaries. Their view: Regulation is overly focused on safety and soundness of individual banks. Reality: There was a complete failure of safety and... MORE

Financial Regulation in Hindsight

Finance: stocks, options, etc.
Arnold Kling
My views are here. I am also skeptical about the claim that we needed a "systemic risk regulator" to prevent the crisis. This would be true if most of the financial damage could not have been prevented by any individual... MORE

More on the Fischer Black Model

Finance: stocks, options, etc.
Arnold Kling
Some more thoughts on Fischer Black's model of business cycles, following up on my earlier post on Tyler Cowen's piece. 1. Black thinks of us as living in a CAPM world. There is no reward for idiosyncratic risk (risk that... MORE

Justin Fox, Fischer Black, Tyler Cowen

Finance: stocks, options, etc.
Arnold Kling
Fox, The Curious Capitalist, has a new book, called The Myth of the Rational Market. He spent a lot of time trying to piece together the history of the theory of efficient financial markets--random walks, capital asset pricing model, option... MORE

So Many Narratives

Books: Reviews and Suggested Readings
Arnold Kling
Eric Falkenstein summarizes many books on the financial crisis, concluding For me, the best explanation comes from two parts. Stan Liebowitz's account on how we slowly eroded mortgage standards with the best intentions, led by academia, regulators, legislators, and investment... MORE

Can Risk Buckets Work?

Finance: stocks, options, etc.
Arnold Kling
James Kwak writes, In short, we need a system for risk weighting that is harder to "game" than the current one - and a set of regulators who will enforce it. Given how long Basel II has been going on,... MORE

Two Disagreeable Questions for Ben Bernanke

Finance: stocks, options, etc.
Arnold Kling
Because it was my daughter's law school graduation, I heard this speech. I am surprised that a couple of bloggers linked to it, since Bernanke gave a personal talk, not a financial one. There was a large news media presence.... MORE

Memo to Krugman and DeLong: Start a Little Differently

Finance: stocks, options, etc.
Arnold Kling
Paul Krugman writes, Brad DeLong offers a neat little model of speculative fluctuations in asset prices, based on the idea that investors gradually switch strategies based on what seems to work for other people: if people buying stocks seem to... MORE

Making Capital Disappear

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen points to a terse summary of an idea of Matt King. The only other reference to this idea that I can find is here. In the expansion of the credit bubble, U.S. banks strove to keep their tangible... MORE

Today's Financial Reading

Finance: stocks, options, etc.
Arnold Kling
Two suggestions from Mark Thoma. First, Anne Sibert writes, There is a substantial economics literature on the effect of gender on attitudes toward risk and most of it appears to support the idea that men are less risk averse than... MORE

Paging Simon Johnson and James Kwak

Finance: stocks, options, etc.
Arnold Kling
One of the themes of their baseline scenario blog is that banking regulators have been captured by large banks. In researching the history of capital regulation, I came across this paper by David Jones, of the Federal Reserve Board. It... MORE

Woodward and Hall on Current Policy

Finance: stocks, options, etc.
Arnold Kling
Interesting throughout. They join the rest of what I call the peanut gallery (those of us, left and right, who cannot understand the bank bailouts). The effect of the government's current policy is to pay off all claimants on financial... MORE

Canadian Banks and their Regulators

Finance: stocks, options, etc.
Arnold Kling
Tara Perkins writes, OSFI [Canada's bank regulator] ranks Canadian financial institutions on a ladder according to its perception of how much trouble they might be. Those at the top--that list typically includes the Big Five banks--are the good kids who... MORE

Let 'em Fail

Finance: stocks, options, etc.
Arnold Kling
Peter Wallison writes, it is my view that only the failure of a large commercial bank can create a systemic breakdown, and that nonbank financial firms--even large ones--are no more likely than GM to have this effect. For that reason,... MORE

Regulatory Dilemmas

Finance: stocks, options, etc.
Arnold Kling
I wrote this for the Mercatus Center. The case for accentuating regulatory differences. We want to provide consumers with bank deposits that are insured. To protect taxpayers, we want to prevent insured banks from taking significant risks. Therefore, banks should... MORE

George Selgin on Free Banking

Money
Arnold Kling
He says in an interview, Free banks compete, as it were, on an even playing field in issuing paper IOUs, which are basically what banknotes are. They have to redeem those IOUs on a regular basis: The competition among different... MORE

Gillian Tett on the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
The talk is here. Near the end, in response to a question about the Lehman Brothers failure, she explains something that I did not really understand before. My working hypothesis has been that the faliure of securitization was no big... MORE

The Three S's of Finance

Finance: stocks, options, etc.
Arnold Kling
Think of financial intermediation as consisting of three S's: Spreading (that is, using diversification of risk) Selecting (that is, choosing the right risks to take) Signaling (that is, convincing people that the intermediary is sound) In my favorite example of... MORE

Finance as a Network

Finance: stocks, options, etc.
Arnold Kling
Andrew G. Haldane recommends using an ecology/network metaphor to understand the financial system. An external event strikes. Fear grips the system which, in consequence, seizes. The resulting collateral damage is wide and deep. Yet the triggering event is, with hindsight,... MORE

Obama Doesn't Heart Glass-Steagall

Finance: stocks, options, etc.
Arnold Kling
In this interview, he says, But when it comes to something like investment banking versus commercial banking, the experience in a country like Canada would indicate that good, strong regulation that focuses less on the legal form of the institution... MORE

Recommended Article on the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
I would nominate Corine Hegland's piece in the National Journal as the most informative piece I have read on the financial crisis. A few excerpts: Careful regulatory alterations take years, but financial institutions adapt within months. In other words, if... MORE

Barry Eichengreen's Theya Culpa

Finance: stocks, options, etc.
Arnold Kling
Everywhere I go, I see links to this article by Barry Eichengreen. I was expecting to find something good. Instead, it is a classic Theya Culpa, a one-sided exercise in finger-pointing, which educates no one, least of all the people... MORE

Scott Sumner's False Dichotomy

Finance: stocks, options, etc.
Arnold Kling
Bryan likes what Scott says here. Read Scott's whole post yourself, so that you do not necessarily take my reading of it. Anyway, he comes close to saying that you either have to believe in efficient markets or you ought... MORE

Henry Kaufman's Narrative of the Crisis

Finance: stocks, options, etc.
Arnold Kling
He blames libertarianism at the Fed. But his history is a bit selective. For example, he writes the Fed was highly supportive of securitisation. Actually, the Fed was quite worried about Freddie Mac and Fannie Mae. In general, I think... MORE

Financial Crises, Debt Finance, and Emerging Economies

Finance: stocks, options, etc.
Arnold Kling
Ravi Balakrishnan and others write, Evidence from past systemic banking crises in advanced economies (the US in the 1980s and Japan in the 1990s) shows that the decline in capital flows to emerging economies tends to be sizeable. Since then,... MORE

What I Have Not Been Blogging

Behavioral Economics and Rationality
Arnold Kling
I was on travel, including my health care debate in Vermont (Robert Kuttner was sick, and David Corn filled in). Now, I have galleys of two books to go over. One is something I wrote quite a while ago with... MORE

Short Papers on the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
From the Cato Journal. Some excerpts below. [update: Also, read an interview with Richard Posner on his new book. Thanks to Tyler Cowen for the pointer. Posner writes, The riskiness of banking can be reduced by regulation. But as a... MORE

Merton on the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
A great lecture. Found by Steven Hsu. Pointer from the indispensable Mark Thoma. I enjoyed his comments on asset valuation. He wonders whether the issue is that the assets cannot be valued or that key players (bankers, regulators) don't want... MORE

Geanakoplos on Leverage Cycles

Finance: stocks, options, etc.
Arnold Kling
David Warsh points to this lecture. variation in leverage has a huge impact on the price of assets, contributing to economic bubbles and busts. This is because for many assets there is a class of buyer for whom the asset... MORE

Predicting Mortgage Defaults

Finance: stocks, options, etc.
Arnold Kling
In what Tyler Cowen says is a must-read post, Calculated Risk writes, I think it is important to understand that loans with high DTI were an enabler for speculation during the housing bubble, and this speculation pushed up house prices.... MORE

Linkfest

Finance: stocks, options, etc.
Arnold Kling
The seasteading discussion. Patri Friedman gives a good presentation. My comments start about half way through, at about the 45 minute mark. Some of my jokes went over well. A reminder that Raghu Rajan understood the fragility of the financial... MORE

Financial Regulation Links

Finance: stocks, options, etc.
Arnold Kling
The Economist has a roundtable on Raghuram Rajan's analysis suggesting that regulatory policy should be countercyclical rather than procyclical. I contributed to the discussion, writing I think that Mr Rajan is off base when he suggests trying to make the... MORE

Taleb's Solution

Finance: stocks, options, etc.
Arnold Kling
Mark Thoma points to an op-ed by Nassim Taleb. He and I are on the same page in many ways. However, I wish that Taleb would dial back on the colorful rhetoric in order to focus on substance. More detailed... MORE

Linkfest

Macroeconomics
Arnold Kling
Tyler Cowen is everywhere. Here he gives what I call (borrowing the term from Steve Roach) the tallest pygmy theory of America in the world economy. The major Austrian banks, for instance, have loans to eastern Europe equal to as... MORE

The Chess Game of Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
I lay out the ideas here. Let me know what you think.... MORE

This Morning's Must Read

Finance: stocks, options, etc.
Arnold Kling
Steven Gjerstad and Vernon Smith on the housing bubble. How can one crash that wipes out $10 trillion in assets cause no damage to the financial system and another that causes $3 trillion in losses devastate the financial system? The... MORE

Outline for Talk on Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
To some folks at Treasury (not Tim Geithner). I'm inclined to try to structure it as a discussion, since I may know less than many of the other attendees. Here is what I might contribute. 1. I predict that in... MORE

The Weekend's Must Reading

Finance: stocks, options, etc.
Arnold Kling
I nominate Tyler Cowen. What the banking system needs is creditors who monitor risk and cut their exposure when that risk is too high. Unlike regulators, creditors and counterparties know the details of a deal and have their own money... MORE

Tyler Cowen Explains Systemic Risk

Finance: stocks, options, etc.
Arnold Kling
in one sentence. If your banks are less risky, often something else is more risky, and vice versa.... MORE

A Useful Narrative of the Crisis

Finance: stocks, options, etc.
Arnold Kling
Matt Taibbi writes, What had brought us to the brink of collapse in the first place was this relentless instinct for building ever-larger megacompanies, passing deregulatory measures to gradually feed all the little fish in the sea to an ever-shrinking... MORE

Weekend Commentary

Finance: stocks, options, etc.
Arnold Kling
John Reed stresses the same issue that I do on the financial crisis: capital requirements, and their perverse encouragement of banks to hold securities instead of the underlying mortgages. One point that he makes that is new to me is... MORE

Should Banks be kept Small?

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen does not see much help in keeping banks small. I agree with Simon Johnson, who thinks that big banks are too powerful politically. I think that the issue does pretty much boil down to political economy. Big banks... MORE

A Letter to the Washington Post

Finance: stocks, options, etc.
Arnold Kling
They printed it (to read my letter, scroll down after you follow the link). Their front-page story on Geithner's regulatory proposal made me lose my Cheerios when I read it. What they printed is a mild effort to correct their... MORE

Simon Johnson on Money and Power

Finance: stocks, options, etc.
Arnold Kling
He writes Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people. But there's a deeper and more... MORE

Paging Felix Salmon

Finance: stocks, options, etc.
Arnold Kling
Or someone else who is equally on top of the bond market. [UPDATE: an anonymous commenter quickly backed some market values out of the swaptions market. Bravo! I've added the commenter's calculations to the table below, which only had the... MORE

Meeting on Financial Regulation

Economic Methods
Arnold Kling
Last night I gave my talk at a meeting on financial regulation. The meeting was organized by David Evans. I gather that his goal is to put together a group of practitioners in the field of finance and regulation to... MORE

CDS Paper

Finance: stocks, options, etc.
Arnold Kling
Houman Shadab's working paper on credit default swaps is now available. In a previous blog post, I quoted from a draft version. I haven't yet read this latest version, but my guess is that it is even better.... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
All pointers courtesy of the indispensable Mark Thoma. First, Hernando de Soto writes, These derivatives are the root of the credit crunch. Why? Unlike all other property paper, derivatives are not required by law to be recorded, continually tracked and... MORE

My Talk on Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
It's tonight, to a private audience. I only have ten minutes, which is good, because many of the guests are more knowledgeable and distinguished than I am. What I plan to say: 1. If you look at the sequence of... MORE

Investing Wisdom from a Wise Guy

Finance: stocks, options, etc.
David Henderson
Not that kind of wise guy; actually a wise man. Take a look at this extended interview of investment adviser Less Antman, whom I've occasionally quoted on this blog. Apart from his advocacy of diversifying by investing in commodity futures,... MORE

The Toxic NCAA Bracket

Finance: stocks, options, etc.
Arnold Kling
Suppose that a week ago I had entered a March Madness pool, paid $10, and filled out a bracket. Suppose that right now my bracket is looking weak, with only about half the teams I picked to make the sweet... MORE

Taleb and Empiricism

Economic Methods
Arnold Kling
Russ Roberts talks with Nassim Taleb. I was most interested in the latter third of the conversation, where Taleb talks about his radical empiricism. For example, he argues that medicine makes more progress with trial-and-error than with knowledge of biological... MORE

Regulatory Arbitrage, AIG Edition

Finance: stocks, options, etc.
Arnold Kling
In an email, Houman Shadab writes, AIGFP was treated as a bank for its counterparties' risk-weighting purposes, but AIGFP was not regulated as a bank (or an insurance company) for its own CDS credit exposures (had it been, it would've... MORE

The Financial Regulation Problem

Finance: stocks, options, etc.
Arnold Kling
The beloved Henry Paulson writes, In March 2008, after conducting a year-long process of study, I put forward a series of comprehensive recommendations to modernise our regulatory architecture in the Treasury's Blueprint for a Modern Financial Regulatory Framework. The blueprint... MORE

Some Morning Links

Finance: stocks, options, etc.
Arnold Kling
On AIG, you might wish to read James Kwak. You should definitely read James Hamilton. But more shocking yet, at least if we measure these things in dollars and cents, is the amount of taxpayer funds that have gone to... MORE

Waldman on Financial Intermediation

Finance: stocks, options, etc.
Arnold Kling
Read the whole thing. I am proud that he claims to have been inspired by my Future of Macroeconomics post, but he obviously has been thinking about this stuff for quite some time.... MORE

William Isaac is Wrong on Market Value Accounting

Finance: stocks, options, etc.
Arnold Kling
David Henderson quotes Isaac to the effect that we would have had thousands of bank failures under market value accounting in the 1980's. That is wrong. If market value accounting had been in place in the 1970's, we would not... MORE

Keynes, Probability, and Economics

Economic Methods
Arnold Kling
How one thinks about probability affects how one thinks about economics. Consider the use of the word "probability" in each of the following sentences:... MORE

James Hamilton on AIG

Finance: stocks, options, etc.
Arnold Kling
He doesn't like the distribution of pain. I accept the argument that a complete failure of AIG would have unacceptable consequences. The relevant question then is, what combination of parties is going to absorb the loss? The concern I wish... MORE

Recommended Reading

Finance: stocks, options, etc.
Arnold Kling
Ben Bernanke on the future of bank regulation. there is some evidence that capital standards, accounting rules, and other regulations have made the financial sector excessively procyclical--that is, they lead financial institutions to ease credit in booms and tighten credit... MORE

bloggingheads

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts and I discuss current events. I felt awkward, and so I didn't feel particularly good about it afterward. The bloggingheads folks think that the best clip is here. Constructive suggestions welcome.... MORE

Systemic Risk, Seen and Unseen

Finance: stocks, options, etc.
Arnold Kling
James Kwak writes, Once investors figure out that bank debt is not safe, they will refuse to lend to any banks, and we are back in September all over again. Nonetheless, I think that zombie banks are create more unseen... MORE

Bob Shiller's Finance Course

Finance: stocks, options, etc.
Arnold Kling
is on line. My inclination would be to read the transcripts, but if you prefer you may either listen or watch.... MORE

Banana Republic Economics, Again

Finance: stocks, options, etc.
Arnold Kling
Read the latest from Simon Johnson. Read it now.... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
Tim Duy: For Bernanke and Geithner, there are no bad assets. Only misunderstood assets. Read the whole thing, and follow the link to Yves Smith. Thanks to Mark Thoma for the pointer. Tyler Cowen: No one wants to say it,... MORE

Jim Hamilton Says He's Happy Owning Stocks

Finance: stocks, options, etc.
Arnold Kling
The argument is here. I don't think that the future is going to resemble the past. That doesn't mean I'm out of stocks, but I'm not going to buy an index fund the way I used to. I think a... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
Two links from the indispensable Mark Thoma. First, Tyler Cowen writes, A newbank rescue plan may be more crucial right now than the fiscal stimulus package enacted last month. Yet we don't seem capable of finding a clear path toward... MORE

A Few Links

Finance: stocks, options, etc.
Arnold Kling
Bill Gross writes, The U.S. and global financial systems require credit creation and foreclosure prevention, not bank nationalization as currently contemplated by some. As you know, I differ. I want foreclosures and bank shutdowns. Nick Schulz points me to Chistopher... MORE

Another Tale of Suits and Geeks

Finance: stocks, options, etc.
Arnold Kling
Felix Salmon writes, because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a... MORE

Bank Strategy: Nothing New?

Finance: stocks, options, etc.
Arnold Kling
The Wall Street Journal quotes a joint statement by U.S. bank regulators. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing... MORE

Failing Banks

Finance: stocks, options, etc.
Arnold Kling
[update: see Woodward and Hall for an idea for handling Citicorp. I assume they mean to deal with the parent company, Citigroup.] See Simon Johnson and Tyler Cowen. Tyler argues that shutting down failing banks could be really ugly, because... MORE

Determining Bank Solvency

Finance: stocks, options, etc.
Arnold Kling
John Hempton has a must-read post in which he says that determining bank solvency is difficult. I think he understates the difficulty, because he does not get into the issue of valuing short put options that once were way out... MORE

Misplaced Priorities

Finance: stocks, options, etc.
Arnold Kling
Consider the following list of candidates for government assistance, via financial bailout or stimulus: a) banks and other financial institutions b) the nonfinancial business sector c) underwater homebuyers d) other consumers e) state and local governments In my view, (b)... MORE

Evening Commentary

Fiscal Policy
Arnold Kling
Tyler Cowen writes, In my opinion the sophisticated Keynesian view is still that the stimulus won't work. Great, great sentence. Has Jeff Frankel joined the ranks of the deranged? What he writes strikes me as not terribly different from what... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
Amar Bhide writes, Regulators apparently succumbed to the idea, peddled by financiers and modern theorists, that if a little financial innovation was good, a lot must be great--even if it was far outside their capacity to monitor. Thanks to Reihan... MORE

Causes of the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
Mark Jickling of the Congressional Research Service produced a handy chart of causal factors for the financial crisis. I think there are at least twenty, and I personally would probably endorse at least two-thirds of them as playing some role.... MORE

Geithner Lays an Egg

Central Planning vs. Local Knowledge
Arnold Kling
I outsource my comments to Tyler Cowen.... MORE

Confidence and the Wrong Map

Finance: stocks, options, etc.
Arnold Kling
Over at econtalk, Russ Roberts interviews Daron Acemoglu. Self-recommending, as Tyler would say. Also, here is a video featuring Daniel Kahneman and Nassim Taleb. Taleb, like me, wants to get rid of risk-taking by banks, and leave non-insured institutions free... MORE

Getting to Recovery

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, I have in my research instead stressed technological frictions. For example, when spending on cars abruptly falls, there is a physical, technological challenge with getting the specialized labor and capital formerly employed in manufacturing cars into some... MORE

Regulatory Arbitrage

Finance: stocks, options, etc.
Arnold Kling
Viral Acharya and Matthew Richardson write, for years, regulation - capital requirement in particular - has targeted individual bank risk, when the justification for its existence resides primarily in managing systemic risk. It is to be expected that financial institutions... MORE

Who is Advising these Guys?

Finance: stocks, options, etc.
Arnold Kling
Ed Glaeser does not like the Republican mortgage plan any more than I do. I am not sure that plan is still alive. It may have been superceded by another ill-conceived idea, a tax break for home buyers. See Tyler... MORE

Morning Commentary (Feeling Angry)

Finance: stocks, options, etc.
Arnold Kling
Three things to be angry about this morning. 1. The Obama Administration's plans to save banks. I outsource my comments to Yves Smith. Thanks to Mark Thoma for the pointer. 2. Alan Blinder and David Leonhardt confusing stimulus with class... MORE

Morning Reading (Somewhat Depressing)

Finance: stocks, options, etc.
Arnold Kling
Compare this: Officials said the GOP was coalescing behind a proposal designed to give banks an incentive to make loans at rates currently estimated at 4 percent to 4.5 percent. Fannie Mae and Freddie Mac, which were seized by the... MORE

Violent Agreement

Finance: stocks, options, etc.
Arnold Kling
I guess I was supposed to debate Simon Johnson in this NPR web chat. Simon blogs at Baseline Scenario and is a major star in the economics profession. I don't feel particularly good about the chat. 1. The format seemed... MORE

Glaeser on Housing Policy

Finance: stocks, options, etc.
Arnold Kling
Ed Glaeser writes, Ellickson's analysis suggests that this is just about the worst of all possible policy responses. By drawing out the foreclosure process, these moratoria increase the time during which homes are no-man's-land. During such periods, homes and neighborhoods... MORE

Reply to Robert Waldmann

Macroeconomics
Arnold Kling
He writes a long post that agrees with some of what I write and disagrees with some of my views.... MORE

Good Luck, Jeremy Stein

Finance: stocks, options, etc.
Arnold Kling
The Wall Street Journal blog (Justin Lahart) reports, He advocated aggressive government audits of banks, aimed at separating solvent ones from insolvent ones. Once that was done, insolvent banks would be forced into closure or sale while solvent ones would... MORE

Should Freddie and Fannie Come Back?

Finance: stocks, options, etc.
Arnold Kling
Susan Woodward and Robert Hall say "yes." Their history of the mortgage market is correct. Their analysis of the nature of the competition between banks, thrifts, and the GSE's (what some of us call the "duelling guarantee" model) is correct.... MORE

Forum Today on Financial Crisis

Upcoming Events
David Henderson
Here's an announcement from the Naval Postgraduate School, where I teach. Bottom line: it live streams this afternoon. The times are PDT. It will go in the order below; I will be last. Each of us will present for 15... MORE

A Great Sentence

Finance: stocks, options, etc.
Arnold Kling
From James Hamilton if everybody and their grandmother is lining up for a bailout, and pulling political strings ([1], [2]) to make sure they get it, I read that as prima facie evidence that the taxpayers' interests are not being... MORE

Two Good Links from Megan

Fiscal Policy
Arnold Kling
1. A panel at The University of Chicago, featuring John Huizinga (my former classmate at MIT), Kevin Murphy, and Robert Lucas. Huizinga makes three points. First, we are hearing a lot of Keynesian macro being tossed around now, and it's... MORE

Morning Reading

Finance: stocks, options, etc.
Arnold Kling
The Wall Street Journal reports on how TARP funds went to politically-connected banks. Barney Frank does a cameo. Andy Harless might agree with what I wrote here (but he might not). Pointer from Mark Thoma. Robert Barro draws an apt... MORE

The Oil Cycle

Energy, Environment, Resources
Arnold Kling
In Catherine Rampell's list of sectors that had the greatest sales growth last year, I was struck by how many of them are energy-related. Assuming that farming was driven by ethanol, the top four sectors were essentially oil plays. Oil... MORE

The Best Policy Regarding Banks

Finance: stocks, options, etc.
Arnold Kling
John M. Berry writes, At some point, politicians are going to have to stop pandering to their constituents and show leadership by explaining why the economy can't survive without a banking system. Hear we go again. We hear a rising... MORE

Make it a Crime

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, I believe there was an unfortunate interaction between financial innovations and lack of regulatory oversight, which allowed the construction of new financial instruments with essentially any risk-reward profile desired and the ability to leverage one's way into... MORE

Healthy Banks or Healthy Markets?

Finance: stocks, options, etc.
Arnold Kling
John Hempton writes, If the bank runs for three years it will again be solvent. If it runs for less than six years it will be fully and adequately capitalised. This is in fact how the Japanese mega-banks recapitalised. I... MORE

The Pattern

Finance: stocks, options, etc.
Arnold Kling
ActorThe PromiseThe Reality Financial ExecutivesBrilliant Risk ManagementCatastrophic Losses Eliot SpitzerMr. Clean, Financial ReformerCelebrity Prosecutions, Real Abuses Untouched, and Not So Clean Sarbanes-OxleyFinancial ResponsibilityLarge Costs, No Apparent Benefits Basel Capital StandardsInternational Coordination, Sound BanksWorldwide Banking Collapse Fannie, FreddieStable Mortgage CreditFed the... MORE

Collected Macro Lectures

Macroeconomics
Arnold Kling
I have collected my series of fourteen macro lectures, previously delivered as blogs posts, in one place, called Lectures on Macroeconomics. Also, you can listen to Steve Fazzari and Russ Roberts explain Keynesian economics.... MORE

The Smart Way to Do Nothing

Finance: stocks, options, etc.
Bryan Caplan
Here's a fair challenge from Surowiecki and The Economist's mystery blogger:And as The Economist's mystery blogger noted yesterday, anyone's who's paying attention to the stock market knows what would happen if Obama announced today that he was abandoning his plans... MORE

Two Quick Points on Kling v. Surowiecki

Finance: stocks, options, etc.
Bryan Caplan
1. Financial markets' support for the Paulson plan is hardly evidence that the plan was good for the overall economy.  After all, its essence was a massive transfer from taxpayers to financial markets.  This is just a bigger-scale version of... MORE

Why is the Economy Doing Poorly?

Fiscal Policy
Arnold Kling
Tyler Cowen gives eight reasons, and then concludes First, a large fiscal stimulus addresses factor #8 but fares poorly in alleviating the other problems. Of course it may give a band-aid for #5 or #6 and you can tell other... MORE

James Surowiecki Makes Libertarianism Impossible

Finance: stocks, options, etc.
Arnold Kling
He writes, among the biggest supporters of both [the bailout and the stimulus] have been the world's investors, at least insofar as their collective judgment is reflected in market prices. As I showed yesterday, investors overwhelmingly supported the Paulson plan:... MORE

Acemoglu on the Economy and Economics

Finance: stocks, options, etc.
Arnold Kling
Daron Acemoglu has written an essay on what the financial crisis means for economics. Highly recommended. I will excerpt and comment extensively. Thanks to Acemoglu's frequent collaborator Simon Johnson for the pointer, which I picked up from Mark Thoma. In... MORE

Managing Retirement Accounts

Finance: stocks, options, etc.
Arnold Kling
The Wall Street Journal reports that recent events have raised doubts about the ability of people to manage their own retirement accounts. The most obvious pitfall is that 401(k) plans shift all retirement-planning risks -- not saving enough, making poor... MORE

The Stimulus and the Somme

Fiscal Policy
Arnold Kling
Mark Thoma gives us Joseph Stiglitz and Martin Feldstein being interviewed by Charlie Rose. I listened to it last night, and I found it so chilling that it adversely affected my sleep. Two issues stand out. 1. Both of them... MORE

Ken Rogoff Interview

Finance: stocks, options, etc.
Arnold Kling
Doug Clement interviews Ken Rogoff. Rogoff says, I've taught for years in my class that many types of money funds and asset classes outside the traditional regulatory system are subject to the same kind of runs as the conventional banking... MORE

Today's Reading List

Finance: stocks, options, etc.
Arnold Kling
All from Mark Thoma. The shortest read is from Robert Waldmann. A sudden decline in the liquidity of assets can create problems as firms can't unwind leveraged positions without extreme market disruption. If the assets had always been illiquid, those... MORE

Capital Requirements and Bond Ratings

Finance: stocks, options, etc.
Arnold Kling
Robert Rosenkranz writes, in effect, the regulatory reliance on ratings makes the rating agencies the de facto allocators of capital in our system. And every actor in the financial system has every incentive to group and slice assets in ways... MORE

Bubble Seers

Finance: stocks, options, etc.
Arnold Kling
Two stories look at early warnings of the housing bubble. Bruce Bartlett points to A Forbes piece from September 2001--way too early, in my opinion. Prices in most markets at that time were too low, not too high. He points... MORE

Another Perspective on LTCM

Finance: stocks, options, etc.
Arnold Kling
Concerning the 1998 resolution of troubled hedge fund Long Term Capital Management, Brad Setser writes, The big banks called to the New York Fed were the creditors of LTCM and they were in some sense "bailed-in." To avoid taking losses... MORE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Should We Penalize Liquidity Preference?

Finance: stocks, options, etc.
Arnold Kling
Greg Mankiw says that it is time to re-read Keynes, and Tyler Cowen is ready to take him up on it. One important Keynesian idea is liquidity preference. In textbooks, an increase in liquidity preference means that people want to... MORE

Why I Was Wrong

Finance: stocks, options, etc.
Arnold Kling
Did I fail to foresee the financial crisis? Absolutely. Brad DeLong gives some reasons that also go for me. I was "expecting," in the sense of anticipating that it was they were both likely enough and serious enough that public... MORE

Emperor, Clothes, etc.

Finance: stocks, options, etc.
Arnold Kling
Richard Dale writes, thousands of finance research papers are published each year, and yet there have been few if any warnings from the academic community of the incendiary potential of global financial markets. Is it too harsh to conclude that... MORE

Letter of Law, Spirit of Law

Finance: stocks, options, etc.
Arnold Kling
George Packer writes, The moral code of these Wall Street executives corresponds to stage one of Lawrence Kohlberg's famous stages of morality: "The concern is with what authorities permit and punish." Morally, they are very young children. The Swiss bankers... MORE

Notes on McArdle's Law

Finance: stocks, options, etc.
Arnold Kling
The theory that in a financial panic people demand too much risk protection is one possible explanation of what I like to call McArdle's Law, namely "Money is weird. Finance is weird." In contrast, I quoted Hall and Woodward to... MORE

A Theory of Financial Panic

Finance: stocks, options, etc.
Arnold Kling
Ricardo Caballero and Arvind Krishnamurthy write, Knightian uncertainty generates a sort of double- (or more) counting problem, where scarce capital is wasted insuring against impossible events. Read the whole thing. Of course, Mark Thoma found it. The article provides a... MORE

Do I Get a Prize?

Finance: stocks, options, etc.
Arnold Kling
Yesterday, I wrote, The [government] should also buy debt from Freddie Mac and Fannie Mae, because that debt still trades at a risk premium relative to Treasuries, even though taxpayers are already on the hook for it. Today, the Federal... MORE

Talking Points on the Obama Economic Team

Finance: stocks, options, etc.
Arnold Kling
For a possible appearance on a Richmond radio program this morning. --best academic credentials of any economic team in history. Focused on economic growth, not redistribution, suggesting that Obama shares that focus and takes economic policy very seriously --Larry Summers... MORE

Recommended Reading on the Financial Crisis

Finance: stocks, options, etc.
Arnold Kling
Just for fun, Felix Salmon's take on Citicorp management. I would make a similar criticism of the Freddie Mac CEO during the 2003-2008 period. But from the larger systemic perspective, is bad management really an exogenous variable? Or is it... MORE

Heretical Thoughts

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes The Fed has been trying to sop up the illiquid assets that nobody else wants. But I think what the Fed should be doing is instead acquiring assets of a type that would allow it to quickly... MORE

My Understanding of TIPS

Finance: stocks, options, etc.
Arnold Kling
There has been a lot of commentary concerning Treasury Inflation-Protected Securities. One alleged anomaly is that the 10-year bond that expires on January 15 is reported to have a double-digit yield. How can that happen? The overall return on a... MORE

Depression Mania

Finance: stocks, options, etc.
Arnold Kling
Mark Thoma has a roundup of commentary on the Citigroup bailout. I'll add a few thoughts. 1. For all of the Depression Mania, there is a lot of the U.S. economy that does not have to shrink. Manufacturing is pretty... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
A lot of these pointers come from Mark Thoma. Problems in the UK, Uncertainty caused by regulators, another breathless WaPo expose of deregulation.... MORE

Fight!

Finance: stocks, options, etc.
Arnold Kling
Richard Green writes, depositories are not capable of holding long-term fixed-rate mortgages, because it subjects them to too much duration risk: mortgages are assets with long duration (i.e., have values that are sensitive to changes in interest rates), while deposits... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
negative interest rates; FDIC thoughts on the housing bubble in 2004; Cecilia Rouse over Austan Goolsbee?; Greg Mankiw's Macro Quiz... MORE

Do Financial CEO's Have Enough Down Side?

Finance: stocks, options, etc.
Arnold Kling
Megan McArdle says yes. If all people cared about was avoiding the possibility of outright starvation, then Sweden would be a country of wild risk-takers and epic slackers. And indeed, on the margin, there are people who don't bother to... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
Start with Markus K. Brunnermeier. While the overall mortgage losses are large on an absolute scale, they are still relatively modest compared to the destruction of about $8 trillion in stock market wealth that occurred in the period from October... MORE

Off the Record

Finance: stocks, options, etc.
Arnold Kling
Yesterday evening, I attended a panel discussion on the financial crisis. The ground rules were that the discussion was off the record, which I will interpret as allowing me to comment on the content of the discussion, without disclosing who... MORE

Housing Bubble: Who Knew?

Finance: stocks, options, etc.
Arnold Kling
According to the Wall Street Journal real-time economics blog, A Factiva search of the top 50 newspapers in the U.S. returns 268 stories referring to a housing or real-estate bubble in 2003. In 2004 that number increases to 369 and... MORE

Thoughts on Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
from Andrew Lo. The functional approach to studying financial institutions and regulation begins with the observation that there are six functions of the financial system--a payments system, a pooling mechanism for undertaking large-scale investments, resource transfer across time and space,... MORE

George Selgin on Free Banking

Finance: stocks, options, etc.
Arnold Kling
He talks with Russ Roberts, who asks skeptical questions. Selgin thinks that one can have sound unregulated, uninsured banking without reserve requirements of 100 percent. He thinks that bank owners need to have significant capital at risk. Once upon a... MORE

Metaphors for Financial Reform

Finance: stocks, options, etc.
Arnold Kling
It occurs to me that one way to think of people's views on financial regulatory reform is to treat people as using one or more of the following three metaphors: 1. Machismo Those who are driven by this metaphor think... MORE

Department of Financial Security

Finance: stocks, options, etc.
Arnold Kling
The Washington Post gives a generous portion of its Sunday editorial section to Eliot Spitzer. Today's balkanized regulatory framework for financial services no longer matches in any way the needs of a fully integrated global financial system. The divisions of... MORE

Why Credit Default Swaps?

Finance: stocks, options, etc.
Arnold Kling
I have argued that credit default swaps are fatally flawed because there is no natural seller. One commenter on this post asked, then, Has Arnold gone into detail on why CDSs exist? I understand his point that they have no... MORE

Ten Minutes, Eleven Questions

Finance: stocks, options, etc.
Arnold Kling
I have been invited to speak for ten minutes on the financial crisis. As you will see below, I do not agree so much with President Bush (via Mankiw). Unlike the President, I see no benefit in putting credit default... MORE

Finance is Weird

Finance: stocks, options, etc.
Arnold Kling
James Kwak of Baseline Scenario wrote, The problems in the U.S. housing market were not themselves big enough to generate the current financial crisis... without any fundamental changes, the markets decided that AIG might be at risk, and the fear... MORE

How Are Stocks Like Bonds?

Finance: stocks, options, etc.
Bryan Caplan
From John Cochrane:The standard portfolio rule says that your stock percentage should rise with the expected return (stocks and bonds) divided by squared return volatility. So, if you were happy with a 50/50 portfolio with an expected return of 7%... MORE

Truth and Narrative

Finance: stocks, options, etc.
Arnold Kling
Consider two propositions: 1. Market failure is inevitable. 2. Government failure is inevitable. In talking about the financial crisis, I believe that to speak the truth one has to accept both propositions. Most people prefer narrative, which either explicitly or... MORE

Your Defined Benefits = My Obligations?

Finance: stocks, options, etc.
Arnold Kling
The Associated Press reports, Under the law, companies facing shortfalls must bring their plans up to full funding over the next seven years. Those that fall short will be forced to take steps such as freezing the accrual of new... MORE

Must-Read from Michael Lewis

Finance: stocks, options, etc.
Arnold Kling
Self-recommending, as Tyler would say. Lewis profiles someone who bet against subprime loans. Although you really must drop everything to go read the whole thing, here is one tidbit: Next, the baby nurse he'd hired back in 1997 to take... MORE

For Future Reference

Finance: stocks, options, etc.
Arnold Kling
Megan McArdle writes Money is weird. Finance is weird. There is no other industry that is, first, so tightly coupled, and second, severely affects every other industry in the country. She Is trying to ward off cognitive dissonance over the... MORE

Notes From the Bailout

Finance: stocks, options, etc.
Arnold Kling
Below are various links, including some that pertain to AIG. The government is eventually planning to sell the normal insurance lines of AIG. The proceeds from those sales then can be used to fund losses on the credit default swaps... MORE

What If I Were Dr. Doom?

Finance: stocks, options, etc.
Bryan Caplan
Nouriel Roubini says the market will fall another 20-25%, and advocates a bailout for U.S. automakers.  In fact, while he recognizes a line-drawing problem, he seems to favor a bailout for any firm that involves "systemic" risk.I wonder: If I... MORE

A Mortgage Fact Pack

Finance: stocks, options, etc.
Arnold Kling
From Freddie Mac. Lots of interesting stuff there, including a breakdown that says that over 15 percent of some of their riskiest loans are non-owner-occupied. See pl. 30. However, it is not clear that they have all of the risk... MORE

Kling on Financial Markets

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts and I talk. We start with credit default swaps, and that may be a bit hard to follow. Then we get into broader issues of what I call the housing industrial policy and the purpose of the various... MORE

A Plea for Facts

Finance: stocks, options, etc.
Arnold Kling
One of the reasons that I am worried about the economy is that I am seeing such a high ratio of sweeping proposals to hard facts. [UPDATE: At this discussion of the role of the Community Reinvestment Act in the... MORE

Life in a Banana Republic

Finance: stocks, options, etc.
Arnold Kling
A banana republic is a country where government obligations swamp total wealth. In a typical banana republic, wealthy individuals race to move their savings overseas to safe havens. Those who fail to do so will suffer from taxation, inflation, and... MORE

Those Wild and Crazy Markets

Finance: stocks, options, etc.
Arnold Kling
Uwe Reinhardt writes, Iceland's problem, like that of the rest of the world, is rooted in the unquestioned belief in the free market doctrine that swept the world during the past two decades...Iceland's liberal government thought it was safe to... MORE

Walter Block, arguing against Bryan, says that fractional reserve banking is fraudulent. There is some chance that when you make your deposit you will not get your money back, and instead someone else will have taken title to it. Therefore,... MORE

Another Academic Panel on the Crisis

Finance: stocks, options, etc.
Arnold Kling
So many teach-ins. The one at Yale School of Management builds up to an interesting argument in the last half hour over mark-to-market accounting. In all of the teach-ins I've seen, this one generates the most actual debate. The link... MORE

Future Scenarios for Economics

Economic Education
Arnold Kling
Tyler Cowen writes, The consulting incomes of finance economists will fall and fewer talented people will go into finance. Speaking fees will fall since fewer economists will give talks at hedge funds. The relative status of macroeconomists will rise and... MORE

Mortgage Securities and Porn Videos

Finance: stocks, options, etc.
Arnold Kling
Robert Shiller complains about groupthink among policymakers. He means that they didn't heed his warnings of a housing bubble. My complaint is about the groupthink that says we really, really must revive the mortgage securities industry. Instead, I suggest thinking... 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

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

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

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

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

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

Tabarrok Truth-Tracker

Finance: stocks, options, etc.
Bryan Caplan
Tyler has often said that his co-blogger Alex Tabarrok is the best truth-tracker in our lunch posse.  Alas, Tyler fails to take his own assessment seriously.  See their exchange on the myths of the credit "crisis":Phase 1. Alex summarizes the... 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

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

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

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

Bet Update

Finance: stocks, options, etc.
Bryan Caplan
It looks like I have two takers in the comments: Michael K and Steve Roth.  To seal the deal, I just need you guys to email me and give me enough info so I can identify you "in real life"... MORE

The Bailout Will Lose Money, and I'm Ready to Bet On It

Finance: stocks, options, etc.
Bryan Caplan
I'm locked and loaded to bet on the bailout.  My muse is none another than H.R. 1424, section 134:SEC. 134. RECOUPMENT.Upon the expiration of the 5-year period beginning upon the date of the enactment of this Act, the Director of... 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

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

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

Paulson as a High-Pressure Telemarketer

Finance: stocks, options, etc.
Bryan Caplan
A few years ago, I was tormented by an aggressive broker who kept calling me at 6 AM to sell me stocks. I always hung up on him; but even when I was slamming down the phone, I could still... MORE

My Current Feelings on the Bailout

Finance: stocks, options, etc.
Arnold Kling
1. During the crash of 1929, the gossip sheet Variety ran a famous headline, "Wall Street Lays an Egg." In those days, that was what you said about a show that the audience hated. If things keep going the way... MORE

What Warren Buffett Wants

Finance: stocks, options, etc.
Arnold Kling
He favors the bailout. Without in any way impugning his motives, let me state the impact on Warren Buffett personally if the bailout is enacted. Think of the mortgage securities market as the World Series of Poker. In fact, a... MORE

I'm a Media Star

Finance: stocks, options, etc.
Arnold Kling
I look like a cornered criminal, but this episode of Free Will gives me good exposure to explain how we got where we are today. Find out why Will Wilkinson considers Arnold Kling "The most sober crackhead I've ever met."... MORE

Two Thoughts

Finance: stocks, options, etc.
Arnold Kling
1. I read in the paper that Nancy Pelosi said they were going to post the legislation on the Web 24 hours before they voted on it. That means it should be up by now, right? Anyone know where to... MORE

What if it's a Wealth Shock?

Finance: stocks, options, etc.
Arnold Kling
For a different and important perspective on the financial crisis, I want to draw your attention to Robert Merton's remarks at Thursday's Harvard forum, linked to here. The Nobel Laureate begins with a back-of-the-envelope calculation. Data suggest that between June... MORE

Mankiw, Rogoff, and Merton

Finance: stocks, options, etc.
Arnold Kling
Harvard put together a faculty roundtable on the financial crisis. Thanks to Alex Tabarrok for the pointer. I skipped over much of it to listen to the three last panelists. Greg Mankiw (starts about minute 44) said that chapter 26... MORE

Where are the Macro Theorists? Help Me Out

Economic Education
Arnold Kling
What macroeconomic theory says that we run the risk of a Depression if we don't have a bailout? Try to come up with an argument that is either already in a textbook or that you would put in a textbook.... MORE

Too Clever

Finance: stocks, options, etc.
Arnold Kling
Five B-school professors from the University of Chicago write, we believe that it might be even better if the Treasury plan was divided into two components -- a plan to "liquify" certain moribund markets, thus allowing financial institutions to sell... MORE

How Progressive Corporatism Works

Finance: stocks, options, etc.
Arnold Kling
Greg Mankiw gets an email from Robert Shimer, who writes, looking back over the last 13 months, it should be clear that the Fed and Treasury have repeatedly underestimated the extent of the problem. In such an environment, the distributed... MORE

The Profit Opportunity

Finance: stocks, options, etc.
Arnold Kling
William R. Cline writes, The challenge is for the Federal Reserve and Treasury to develop internal reference prices applicable to each rating class and vintage of mortgage-backed securities that reflects reasonable medium-term values. These should be based on default probabilities... MORE

Hold a Hearing

Finance: stocks, options, etc.
Arnold Kling
With so much riding on the pending bailout, I would ask Congress to hold a hearing this weekend, with two people testifying: Ben Bernanke and Roger Cole. Cole is head of the Federal Reserve's Division of Bank Supervision and Regulation,... MORE

The House Republicans

Finance: stocks, options, etc.
Arnold Kling
They propose that all holders of private mortgage securities get together and form an insurance fund to guarantee their values. Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance. As... MORE

Why Did Financial Markets Like Nixon's Price Controls?

Finance: stocks, options, etc.
Bryan Caplan
It's easy to explain why financial markets like the bail-out - it's a big transfer from tax-payers to investors. But Arnold points out that the market liked Nixon's price controls, too: "In 1971, the market gave a huge thumbs-up to... MORE

Ben and Me

Finance: stocks, options, etc.
Arnold Kling
Ben Bernanke and I went to the same graduate school. We're on opposite sides of the bailout issue. My joke is that one of us is on crack, and it's probably me. My more serious answer is in this Cato... MORE

My Talking Points

Finance: stocks, options, etc.
Arnold Kling
For not doing a bailout: 1. We don't need to bail out Wall Street to protect Main Street. All we have to do is make sure that sound borrowers, especially small businesses, have access to credit. Banks can do the... MORE

It's Small Business, Stupid

Finance: stocks, options, etc.
Arnold Kling
As I continue to be in demand in obscure alternative media, I appeared on another radio program this morning. I was asked to comment on the proposal by the Congressional Republicans to create an insurance fund for mortgage securities. My... MORE

Reduce Bank Capital Requirements

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen joins the club calling for lower capital requirements. At least, that is what I think he is doing by referring to a paper by Kashyap, Rajan, and Stein. Tyler writes, Their phrase "recapitalization as a public good" should... MORE

The Hold-to-Maturity Nonsense

Finance: stocks, options, etc.
Arnold Kling
This morning, I realized why people think you can make money holding mortgage securities to maturity. They think that these securities are bonds. In reality, they are (or include) short option positions.... MORE

My Attempts to Stop the Stampede

Finance: stocks, options, etc.
Arnold Kling
Hear I am on the radio. I start at about minute 5:30. There is a little back and forth including other guests before they finish with me near the end. Late this afternoon, Bill Niskanen of Cato and I met... MORE

Dodd, Frank apply lipstick to Paulson's Pig

Finance: stocks, options, etc.
Arnold Kling
I found this story too depressing to finish. It says that we have a bipartisan agreement on a bailout, and I read only as far as the proud quotes from Chris Dodd and Barney Frank. The unemployment rate is 6.1... MORE

Is the Bail-Out Based on Debt Illusion?

Finance: stocks, options, etc.
Bryan Caplan
My conjecture: If Paulson's bail-out were funded by a permanent tax increase sufficient to raise $700B in present value terms, it wouldn't stand a chance. The minimal public outcry, therefore, hinges on "debt illusion" - the mistaken view that debts,... MORE

The Case Against the Bailout

Finance: stocks, options, etc.
Arnold Kling
I will elaborate on the following points. 1. Today's economy differs from that of the 1930's. Then, it may be that the financial sector may have contributed to the downturn elsewhere. Today, the financial sector is the downturn. 2. The... MORE

Are Credit Markets Locked Up?

Finance: stocks, options, etc.
Arnold Kling
Depends who you ask. Robert Higgs says no. Commercial and industrial loans of all commercial banks, which are reported monthly, have grown rapidly. The most recent report, for August 2008, shows outstanding loans of $1,514 billion, an all-time high. This... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
I will update this post as new items merit attention. First, my latest essay opens, I am concerned that the bailout might be the cause of the problem that it purports to solve. I am re-using Karl Kraus' famous quip... MORE

The Ignorance Behind the Paulson Plan

Finance: stocks, options, etc.
Arnold Kling
From The PBS News Hour on September 23: JEFFREY BROWN: Let me ask you, stay with you. One of the issues that we heard raised in the hearing was the question of whether anybody can fairly value the bad assets... MORE

More Experts

Finance: stocks, options, etc.
Arnold Kling
A long list. Thanks to Alex Tabarrok for the pointer. UPDATE: two more, one pro and one con... MORE

The Experts Strike Back

Finance: stocks, options, etc.
Bryan Caplan
Just when I was starting to feel disillusioned in my profession, the Stiglitz/DeLong/Edlin edited Economists' Voice lashes out against the Paulson bail-out. Just let me add: If we've learned anything from the Iraq War, it's that it's a good idea... MORE

Hold-to-Maturity Pricing

Finance: stocks, options, etc.
Arnold Kling
Mark Thoma writes, Now I just have to figure out how the "hold to maturity" price is to be determined, and how purchasing at that price minimizes losses. Suppose that you owe $110,000 on your mortgage, due in one payment... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
The Wall Street Journal has the prepared testimony of Ben Bernanke and Henry Paulson. Neither one spells out exactly what sorts of financial institutions are in difficulty and how that difficulty translates into problems elsewhere in the economy. Neither prepared... MORE

Good Question

Finance: stocks, options, etc.
Arnold Kling
Anil Kashyap and Jeremy Stein ask whether the purpose of the Paulson plan is to buy good assets cheap or buy bad assets dear. When a strong leader offers a solution to a crisis, you're not supposed to ask those... MORE

Delusions on Both Sides

Finance: stocks, options, etc.
Arnold Kling
Many people, including Mark Thoma (also here) are interested in the question of whether it was private markets or government regulators who got us into this mess. My answer is, "yes." There were delusions on both sides. In the private... MORE

A Simpler Solution

Finance: stocks, options, etc.
Arnold Kling
On many occasions, including my Cato paper, I have suggested that we can solve the problem by reducing capital requirements for banks on an interim basis. Nobody seems to be listening to this idea, or even discussing it. It has... MORE

Wishful Thinking

Finance: stocks, options, etc.
Arnold Kling
Concerning the $700 billion bailout proposal, Brad DeLong writes, I beg the Democrats in congress: write a bill that makes sense. I probably should have warned you to put your coffee down first. Now that you're finished guffawing, here's my... MORE

An Open Letter to Ben Bernanke

Finance: stocks, options, etc.
Arnold Kling
Dear Ben, The Wall Street Journal reports, "If it doesn't pass, then heaven help us all," responded Mr. Paulson He is referring to legislation to authorize the next round of bailout activity by the Treasury, with rules, methods and accountability... MORE

Modern Financial Systemic Risk: A Primer

Finance: stocks, options, etc.
Arnold Kling
What is financial systemic risk? How do derivatives and leverage figure in? What should be done about it?... MORE

Morning Reading

Finance: stocks, options, etc.
Arnold Kling
Who was asleep while financial markets ran amok? On Freddie and Fannie, the Bush Administration says, not us. Read the whole timeline. Greg Mankiw, who is mentioned in the statement, provided the pointer. Is Henry Paulson a hero? Not to... MORE

Chief Financial Plumber

Finance: stocks, options, etc.
Arnold Kling
A Treasury Department press release offers a statement from Secretary Paulson. The underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. These illiquid assets are choking off... MORE

SEC Demagoguery

Finance: stocks, options, etc.
Bryan Caplan
When someone predicts imminent financial doom, economists almost always taunt him, "If you're right, why don't you sell short?" If recent events prove anything, it's that short-selling is easier said than done. If we wanted advance warning of financial troubles,... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
A bunch of thoughts: 1. On the new Resolution Trust Corporation, several people agree with me that it is nothing like the old RTC, echoing what I wrote ages ago Wednesday. The old RTC got handed to it the assets... MORE

Rumor: Government to Buy Bad Mortgage Securities

Finance: stocks, options, etc.
Arnold Kling
According to this story: One way the agency reportedly under discussion could work is by setting up bulk auctions to buy mortgage debt from financial institutions. The auctions would be for set dollar amount purchases. Companies that want to offload... MORE

Instructive Commentary

Finance: stocks, options, etc.
Arnold Kling
From Doug Diamond and Anil Kashyap. Self-recommending, as Tyler would say. Diamond's paper "Financial intermediation and delegated monitoring," is the technical version of what I tried to describe earlier today. They point out that financial firms are tightening up. One... MORE

Thoughts on Short-Selling

Finance: stocks, options, etc.
Arnold Kling
What is short-selling? How can short-selling destroy a good company?... MORE

What do Financial Intermediaries Do?

Finance: stocks, options, etc.
Arnold Kling
When I wrote that financial intermediation inherently replaces transparency with trust some people found that comment enigmatic. So I'll elaborate. Suppose I have some savings, and I would like to invest them. I would like a nice return, but I... MORE

Leaning Against the Wind

Finance: stocks, options, etc.
Arnold Kling
Edmund L. Andrews writes, As recently as last summer, the central bank’s entire vault of reserves — about $800 billion at the time — was in Treasury securities. By last week, the Fed’s holdings of unencumbered Treasuries had dwindled to... MORE

Afternoon Commentary

Finance: stocks, options, etc.
Arnold Kling
Bloomberg interviews William Poole. Bloomberg doesn't permalink their video interviews, so I just linked to the page where I found it. It's not necessarily worth watching the whole thing. The essential message is that he doesn't like leverage. He even... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
Lawrence B. Lindsey writes, Many assets are highly illiquid and the institutions that hold them, such as banks, are in the business of providing liquidity to the economy and holding such assets as collateral. Making those assets "mark to market"... MORE

More Commentary

Finance: stocks, options, etc.
Arnold Kling
I'll get to current events in a moment. First, Bob Shiller writes, Consider investors in Fannie and Freddie bonds. While the US government never officially promised to bail them out, it did create a special agency, the Office of Federal... MORE

What Should Government Guarantee?

Finance: stocks, options, etc.
Arnold Kling
Megan McArdle writes, our regulatory model still works on the assumption that the technocrats can figure out what is safe, and then let the public buy it, and nothing will ever go wrong. Oh, maybe it's not working that way... MORE

Quote of the Day, II and III

Finance: stocks, options, etc.
Arnold Kling
The highly quotable Nassim Taleb has a new essay. In some situations, you can be extremely wrong and be fine, in others you can be slightly wrong and explode. If you are leveraged, errors blow you up; if you are... MORE

Hurricane Lehman Update 4:30 EST

Finance: stocks, options, etc.
Arnold Kling
Kind of a mixed day on Wall Street. Dow down 500. Indexes down about 4-1/2 percent. The market stayed open. Right now, it feels to me like the second round of our fantasy baseball auction.... MORE

The Shadow Knows

Finance: stocks, options, etc.
Arnold Kling
The Shadow Financial Regulatory Committee, that is. They meet quarterly, under the auspices of the American Enterprise Institute, and their latest meeting took place while the real financial regulators were deciding to let Lehman walk the plank. Today, shortly after... MORE

Hurricane Lehman Update, 10 AM EST

Finance: stocks, options, etc.
Arnold Kling
Floyd Norris writes (see the 10:10 AM post), It may sound foolish to see an encouraging sign in the fact financial stocks are only down about 3.5 percent so far today. But it is encouraging. I don't think he's foolish... MORE

Russ Roberts and Bob Shiller

Finance: stocks, options, etc.
Arnold Kling
The latest econtalk podcast. The housing bubble and the subprime crisis are the theme. Around minute 40, Roberts asks if this really is a crisis. Shiller starts to answer, and he sort of explains why he thinks the Bear Stearns... MORE

Hurricane Lehman Update, 7 AM EST

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong writes, If the Federal Reserve thought that Wall Street would have a big impact on Main Street--a bigger impact than they thought it would have last week--they would have cut interest rates tonight rather than just agreed to... MORE

Bryan Takes Over the Treasury

Finance: stocks, options, etc.
Arnold Kling
Bloomberg reports, ``The collapse of this deal casts a dark cloud over Wall Street,'' said Frederic Dickson, who helps oversee $25 billion as chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon. ``It also sends a message... MORE

Today's Freddie-Fannie Commentary

Finance: stocks, options, etc.
Arnold Kling
Mark Thoma writes, if someone without a life-preserver who is struggling in the water grabs someone who is wearing one, and in the process takes them both down, that doesn't mean that the life-preserver failed to do its job. What... MORE

Thoughts on Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
1. I think that financial markets are inherently imperfectly transparent. The reason that we have financial intermediaries is to save the final investor the work of evaluating the risk of the ultimate borrower. Markets promote a phenomenal division of labor.... MORE

Thoughts on Housing Policy

Finance: stocks, options, etc.
Arnold Kling
I am getting my thoughts together for a piece on what to do in the long term about financial markets and housing policy. Here are a couple of thoughts on housing policy. 1. Why subsidize home ownership among people who... MORE

The Financial Invasion Continues

Finance: stocks, options, etc.
Arnold Kling
The next redoubt to fall is Lehman. Steven Pearlstein writes, the government now finds itself hip-deep in the direct management of the financial system, rescuing four of the country's biggest financial institutions -- Bear Stearns, Fannie Mae, Freddie Mac and... MORE

The No-Bailout Option

Finance: stocks, options, etc.
Arnold Kling
Bryan writes, The U.S. has just missed a golden opportunity to credibly signal to the world for decades to come that "no guarantee" means "no guarantee." Suppose that we describe a miniature Fannie Mae as follows. One year from now,... MORE

Mankiw, Tyler, and Me

Finance: stocks, options, etc.
Bryan Caplan
Mankiw has some wise observations on the GSE takeover. Here's a particularly excellent parethetical:(And before anyone emails me that the GSE equity holders are not exactly getting a good deal here, let me point out that the debt holders are.... MORE

Who Fails to Comprehend?

Finance: stocks, options, etc.
Arnold Kling
Menzie Chinn writes, I would have hoped to have more comprehension from a candidate at a time when the estimate of a resulting $300 billion taxpayer liability is viewed as plausible. He is referring to Republican VP candidate Sarah Palin's... MORE

What's the Legal Basis for the Freddie/Fannie Takeover?

Finance: stocks, options, etc.
Bryan Caplan
Could someone who knows the law explain the legal basis for the Treasury's takeover announcement? The Wall Street Journal simply describes it as a "seizure." But the last time I checked, the legal procedure for the U.S. government taking stuff... MORE

Beating the Dead Horses

Finance: stocks, options, etc.
Arnold Kling
A while ago, Cato asked me to explain Freddie Mac, Fannie Mae, and what to do about them. In this briefing paper, I will suggest ways that Congress could gradually extricate housing policy from its dependence on the GSEs. While... MORE

If I Were Mortgage Czar

Finance: stocks, options, etc.
Arnold Kling
If I were the czar of the mortgage market, I would attempt to bring back the 30-year amortizing fixed-rate mortgage with a 20 percent down payment. As recently as fifteen years ago, this was the workhorse of the housing market.... MORE

Freddie, Fannie: No Exit?

Finance: stocks, options, etc.
Arnold Kling
We now have the latest plan. The real legacy of the Bush Administration may turn out to be Washington's invasion of financial markets. Five years from now, we could find ourselves with no exit strategy. My guess is that we'll... MORE

Stiglitz the Omniscient

Finance: stocks, options, etc.
Arnold Kling
Joseph Stiglitz writes, there have been more than one hundred financial crises worldwide in the last 30 years or so. Here in the United States alone, we have had the S&L crisis in 1989, the dot-com/WorldCom/Enron problems of the early... MORE

More on the Freddie Mac Risk Management Culture

Finance: stocks, options, etc.
Arnold Kling
From the comments on my chapter.... MORE

The Risk Animal

Finance: stocks, options, etc.
Arnold Kling
Nassim Taleb discusses financial markets and our inability to avoid crises. He describes risk as like a predatory animal that always succeeds in finding the weakest quarry on which to prey. That's the same idea that I try to get... MORE

The Right Reaction to Bubbles: Easy Come, Easy Go

Finance: stocks, options, etc.
Bryan Caplan
First it was the dot-com bubble. Now it's real estate. In ten years, it will be something else. In each case, the price of a major asset goes way up for no good reason, then comes back down. In each... MORE

Freddie Mac: The Book

Finance: stocks, options, etc.
Arnold Kling
The Washington Post reports, Rep. Henry A. Waxman (D-Calif.), chairman of the House Oversight and Government Reform Committee, has asked the mortgage finance giants Fannie Mae and Freddie Mac whether they know of any White House involvement in the recent... MORE

Today's Tylerisms

Economics of Health Care
Arnold Kling
He quotes a comment from David R. Henderson. I'm reluctantly coming to the conclusion, after having read his site almost daily for over a year, that Tyler is not a free-market crusader. Henderson is referring to the Freddie-Fannie bailout, which... MORE

The End of the World

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen writes, When it comes to the mortgage agencies, there is no real choice but to bail out the debt holders. The alternative is a run on the dollar and collapse of faith in U.S. government securities and the... MORE

I Wish Larry Summers Had a Blog

Finance: stocks, options, etc.
Arnold Kling
Over at the Creative Capitalism site, Larry gets to the nub of the Freddie-Fannie issue. What went wrong? The illusion that the companies were doing virtuous work made it impossible to build a political case for serious regulation. When there... MORE

The Risk Disclosure Problem, Revisited

Finance: stocks, options, etc.
Arnold Kling
Ricardo Caballero writes no institution is immune to panics, as long as it is providing its socially useful liquidity transformation and intermediation role. Thanks to Tyler Cowen for the pointer. This is very consistent with the view I put forth... MORE

Perspective on Freddie and Fannie

Finance: stocks, options, etc.
Arnold Kling
The other essay I have out today offers background on Fannie Mae and Freddie Mac. As of the late 1970s, most of the mortgage credit in the United States was supplied by savings and loan associations (S&Ls), which are very... MORE

Good Post on Fannie, Freddie

Finance: stocks, options, etc.
Arnold Kling
From Tanta at Calculated Risk. Read the whole thing. I'll comment on some excerpts. One of the issues that's being bandied about is whether Freddie and Fannie can/should be allowed to fail. I think it's a moot point. I think... MORE

I Need Talking Points on Fannie, Freddie

Finance: stocks, options, etc.
Arnold Kling
The Washington Post writes, As the housing market boomed in recent years, Fannie and Freddie, like many lenders, took riskier loans. Freddie Mac executives have said they loosened lending standards to avoid losing market share. This supports my version of... MORE

Bailed it Shall Be

Finance: stocks, options, etc.
Arnold Kling
The New York Times reports it. Officials said that after talking to senior lawmakers through the weekend, they expected that Congress would attach the proposals to a housing bill that could be completed and sent to the White House for... MORE

Too Big to Bail?

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, The overriding concern in dealing with the current mess is that the process of rapid and radical deleveraging would so impede the flow of new credit that the housing price declines, foreclosures, and bankruptcies significantly overshoot the... MORE

Fannie, Freddie, and Doomsday

Finance: stocks, options, etc.
Arnold Kling
In this morning's news, Shares of Fannie Mae and Freddie Mac tumbled again Thursday on a report that government officials have begun planning for a possible collapse of the mortgage finance giants. As an investor, could you make a profit... MORE

Scary Housing Data

Finance: stocks, options, etc.
Arnold Kling
A few weeks ago, Lawrence B. Lindsey wrote, There are 129 million housing units in the United States, comprising owner-occupied, rented, and vacant units. Of these, 18.5 million are empty. This vacancy rate is 2.5 percentage points higher than it... MORE

If I Thought Oil Prices Would Eventually Fall

Finance: stocks, options, etc.
Arnold Kling
Bryan asks if it is possible to profit from unique knowledge that oil prices will start to fall in three years, given that futures markets only go out three years. I would not call it a sure bet, but if... MORE

Oil: Some Tentative Conclusions and Open Issues

Energy, Environment, Resources
Arnold Kling
James Hamilton writes, The "fundamentals" price of oil depends on a number of factors that cannot be perfectly foreseen. Among these are (1) will the world enter a deep and prolonged recession in 2007, and (2) will global oil production... MORE

A Question for Paul Krugman

Finance: stocks, options, etc.
Arnold Kling
Early in 2007, the price of oil was $60 a barrel. Recently, it has been above $130 a barrel. Which of the following does Paul Krugman believe: (a) market fundamentals justified $60 a barrel then, and they justify $130 a... MORE

Mark Thoma's Question

Finance: stocks, options, etc.
Arnold Kling
He asks, how do you explain the large run up in, say, agricultural commodities which cannot be left "in the ground" until later? Interesting question. Some off-the-cuff observations. 1. The point about the run-up in other commodities raises questions about... MORE

My Question for James Hamilton

Finance: stocks, options, etc.
Arnold Kling
The go-to guy on energy markets writes, A key reason why oil prices have been going up is that Asia and the oil producing countries are consuming more while global oil production has stagnated. That means Europe and America had... MORE

My Model of the Oil Market: Option Value

Energy, Environment, Resources
Arnold Kling
Near the end of a "tiny theoretical paper," Paul Krugman writes, the actual data we have on crude oil don’t show the signatures of a market driven by speculative demand. Inventory data don’t show a big accumulation; and the market... MORE

Oil Speculation: Paul Krugman Mis-speaks

Finance: stocks, options, etc.
Arnold Kling
Paul Krugman writes, Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. He can't mean that. Think of the foreign currency market. If speculators bid up the... MORE

Discussion Topics

Finance: stocks, options, etc.
Arnold Kling
Megan McArdle brings up two. First, she writes, Probably the best way to avoid the problem is to keep financial professionals in the game longer. The money and stress of banking means that its titans tend to retire early. Bubbles... MORE

More on Taleb

Finance: stocks, options, etc.
Arnold Kling
From the London Times the good investment strategy is to put 90% of your money in the safest possible government securities and the remaining 10% in a large number of high-risk ventures. This insulates you from bad black swans and... MORE

Timothy Carney writes, Julian Robertson, the legendary hedge fund manager, has placed a big bet on the long-term decline of the U.S. economy. Additionally, Robertson is invested in the nuclear energy industry and in Chinese biofuels. He’s also launched an... MORE

Bubbles vs. Non-Bubbles

Finance: stocks, options, etc.
Arnold Kling
From an interesting Wall Street Journal item: Bubbles emerge at times when investors profoundly disagree about the significance of a big economic development, such as the birth of the Internet. Because it's so much harder to bet on prices going... MORE

Financial Flows and Regulation

Regulation and Subsidies
Arnold Kling
James Hamilton writes, Now, there is nothing inherently wrong in making financial investments in the form of derivative contracts rather than outright loans. You're doing something similar whenever you buy or sell an option rather than the stock itself. But,... MORE

My Model of the Oil Market

Finance: stocks, options, etc.
Arnold Kling
My model of the oil market does not predict a relationship between speculation and inventories. Paul Krugman must have a different model in mind. My guess is that it is a reasonable model, and that he will explain it at... MORE

Loose Mortgage Credit

Finance: stocks, options, etc.
Arnold Kling
Atif R. Mian and Amir Sufi write, We demonstrate that high 1996 latent demand zip codes experience a dramatic relative reduction in mortgage denial rates during this time period. Simultaneous with the reduction in denial rates, high 1996 latent demand... MORE

Credit Spreads and the Fed

Finance: stocks, options, etc.
Arnold Kling
John B. Taylor and John C. Williams write, the spread on August 9 was 25 basis points above the pre-August 9, 2007 average. That is 7 times the standard deviation before August 9—more than a 6-sigma event. The mean through... MORE

Behavioral Economics Ready for (Sub) Prime Time?

Regulation and Subsidies
Arnold Kling
Richard H. Thaler and Cass R. Sunstein write, government would achieve simplified transparency by requiring all lenders to provide borrowers with an electronic file that contains, in standardized form, information on every feature of the contract. Instead of fine print,... MORE

Make them take Basis Risk

Finance: stocks, options, etc.
Arnold Kling
Eric Falkenstein writes, because financial contracts have virtually zero marginal costs, sometimes an inflated 'face value' arises because it is easier to keep adding offsetting ones, rather than extinguishing some and starting over, the way a futures open interest works.... MORE

Finally, a Pure Bailout

Finance: stocks, options, etc.
Arnold Kling
The Washington Post headline reads Housing Accord Puts Builders First but waits until the last paragraph to explain. Both parties wanted to help home builders and other businesses. Under the agreement, corporations that lose money in 2008 and 2009 would... MORE

You Do the Math: Goolsbee on Retirement Investing

Finance: stocks, options, etc.
Bryan Caplan
After I do my taxes, I often start thinking about retirement planning. Here's an old NYT column where Austen Goolsbee gives some sage advice:You probably have not given much thought to political tax risk, however, or perhaps have even heard... MORE

Meltzer on Financial Regulation

Finance: stocks, options, etc.
Arnold Kling
Allan Meltzer writes, Regulators and most politicians are good at developing rules and restrictions, but poor at thinking about the incentives that the market will face. If the incentives are strong, the market circumvents the regulation. The Basel regulation encouraged... MORE

Is "Contagion" the Result of Statistical Discrimination?

Finance: stocks, options, etc.
Bryan Caplan
Yes or no: Is financial "contagion" the result of statistical discrimination? I.e., is it just a case where all financial institutions of a given type get judged by the average quality of their type?... MORE

Defending Market-Value Accounting

Finance: stocks, options, etc.
Arnold Kling
Felix Salmon writes, Krugman's saying they're all wrong, and that Bear Stearns, along with other financial institutions, actually has a negative book value. He's not giving any reasons why he's right and they're wrong, he's just asserting it. And so... MORE

Financial Turmoil

Finance: stocks, options, etc.
Arnold Kling
It's the topic du jour. Start with Alex Tabarrok. In 1997, inflation-adjusted house prices were close to their average levels over the previous half-century. Only four years later, the price of the average home nationwide exceeded anything ever seen before... MORE

A Historical Anecdote

Finance: stocks, options, etc.
Arnold Kling
From Supermoney, by 'Adam Smith' (George Goodman), p. 31 - 49: In a Crunch, the country runs very dry of money...... MORE

Not Fannie Mae!

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong writes, If I were Treasury Secretary Hank Paulson, I would spend the weekend building a legislative vehicle to introduce Monday morning on an emergency basis to give Fannie Mae the resources and the mission to undertake this mortgage... MORE

Speculator of Last Resort?

Finance: stocks, options, etc.
Arnold Kling
In an unusual move, The Fed is lending to Bear Stearns. My view of what is going on starts with The Risk Disclosure Problem. When times are good, a firm like Bear Stearns keeps its risks under its kimono, and... MORE

Where are the Hedge Funds?

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen asks, Is/was the subprime crisis simply a mask for a more general revaluation of the meaning and extent of liquidity? Are such revaluations always so bumpy and so lacking in locally stable iterative processes? Earlier, he wrote, we... MORE

Feldstein's Lender Bailout Proposal

Finance: stocks, options, etc.
Arnold Kling
Martin Feldstein writes, The federal government would lend each participant 20% of that individual's current mortgage, with a 15-year payback period and an adjustable interest rate based on what the government pays on two-year Treasury debt (now just 1.6%). The... MORE

How People in the Biz Explain the Subprime Crisis to Their Families

Finance: stocks, options, etc.
Bryan Caplan
The world's gone topsy-turvy: Last night my wife read me this graphic novel. It's funny, informative, honest, and rated R. Enjoy.... MORE

The Housing Market

Finance: stocks, options, etc.
Arnold Kling
I've written a lot about the housing market over the years. I thought I would put together a coherent story for what I think has transpired.... MORE

Bailie Mae

Finance: stocks, options, etc.
Arnold Kling
According to Felix Salmon, take a borrower who's underwater, with a mortgage for more than their house is worth. Refinance the mortgage so that it comes down to the value of the house, and then give the lender a tradeable... MORE

Contemporary Tulip Bulbs

Finance: stocks, options, etc.
Arnold Kling
The Wall Street Journal reports, Profitable sports franchises may be priced at 20 times annual cash flow, at least double the valuation of a mundane company with similar prospects. Weaker teams can sustain operating losses of $10 million a year... MORE

The Real Subprime Story

Finance: stocks, options, etc.
Arnold Kling
Kristopher Gerardi, Adam Hale Shapiro, and Paul S. Willen write, We attribute most of the dramatic rise in foreclosures in 2006 and 2007 in Massachusetts to the decline in house prices that began in the summer of 2005. Subprime lending... MORE

The Fallacy of Time Diversification: Mea Culpa?

Finance: stocks, options, etc.
Bryan Caplan
How many times have I made this argument:"At your young age, you have enough time to recover from any dips in the market, so you can safely ignore bonds and go with an all stock retirement portfolio." This kind of... MORE

Subprime Daily Briefing, Dec. 27

Finance: stocks, options, etc.
Arnold Kling
A Contrarian Op-ed... MORE

Subprime Daily Briefing, Dec. 26

Finance: stocks, options, etc.
Arnold Kling
Just one lame op-ed.... MORE

Subprime Daily Briefing, Dec. 24

Finance: stocks, options, etc.
Arnold Kling
Becker and Posner.... MORE

Subprime Daily Briefing, Dec. 21

Finance: stocks, options, etc.
Arnold Kling
How I think it will all play out...... MORE

Subprime Daily Briefing, Dec. 20

Finance: stocks, options, etc.
Arnold Kling
Larry Summers and Sen. Charles Schumer spoke at Brookings yesterday.... MORE

What Nick is Reading

Finance: stocks, options, etc.
Arnold Kling
Nick Schulz sends me three interesting links. 1. A shining example of what I call a bogus mortgage lender. In 2004, Bohan Group, a due diligence underwriting company, was hired by a bank to double-check the suitability of mortgages written... MORE

Subprime Daily Briefing, Dec. 19

Finance: stocks, options, etc.
Arnold Kling
Predatory borrowing, Samuelson, Krugman...... MORE

Subprime Daily Briefing, Dec. 18

Finance: stocks, options, etc.
Arnold Kling
Early warnings...or hindsight bias?... MORE

Subprime Daily Briefing, Dec. 17

Finance: stocks, options, etc.
Arnold Kling
Greenspan, Hamilton, Bordo...... MORE

Mr. Efficient Markets

Finance: stocks, options, etc.
Arnold Kling
Eugene Fama is interviewed by the Minneapolis regional Fed. Region: How do you explain the equity premium puzzle [the idea that stocks should in theory provide only a 1 percent higher annual return than bonds, but have historically returned nearly... MORE

California is another country

Finance: stocks, options, etc.
Arnold Kling
Commenter Jim M. points to Housing Tracker as a source for data on house price to income ratios. Here is a list of the top cities in terms of median house price relative to median income. 1. Los Angeles, Ca.... MORE

Subprime Daily Briefing, Dec. 14

Finance: stocks, options, etc.
Arnold Kling
Just a couple of remarks on housing market equilibrium.... MORE

Subprime Daily Briefing, Dec. 13

Finance: stocks, options, etc.
Arnold Kling
The Fed tests a new tool.... MORE

Efficient Markets vs. Mortgage Leverage

Finance: stocks, options, etc.
Arnold Kling
Patri and Mike want to argue that taking out a big mortgage to invest in the stock market is really clever. Here is the counter-argument. Think of this transaction as two transactions: 1. First, you take out a 6 percent... MORE

Efficient Markets Theory

Finance: stocks, options, etc.
Arnold Kling
Megan McArdle writes, It doesn't matter which version of the EMH is correct. It doesn't matter if the behavioral finance guys are correct. You--adorable, clever, hardworking little you--are mathematically just as likely to underperform the market as outperform it. You... MORE

Subprime Daily Briefing, Dec. 12

Finance: stocks, options, etc.
Arnold Kling
Greenspan, Leonhardt, plus... MORE

Subprime Daily Update, Dec. 11

Finance: stocks, options, etc.
Arnold Kling
Today's focus is bank capital. More added at 1 PM EST, including comments on widespread fraud.... MORE

Subprime Daily Briefing, Dec. 10

Finance: stocks, options, etc.
Arnold Kling
Let's start with my new essay. Over the past few years, the housing market became riddled with bogus lenders funneling mortgage money to bogus owners of houses with bogus prices. Attempting to prop up this phony baloney is a pointless... MORE

Leveraged to the Eyeballs

Finance: stocks, options, etc.
Arnold Kling
Herb Greenberg quotes from Mark Hanson, who works in the mortgage industry. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the... MORE

Subprime Daily Briefing, Dec. 7

Finance: stocks, options, etc.
Arnold Kling
There is a lot to digest this Pearl Harbor day. I'll save the President's plan for the end.... MORE

The Subprime Mess, Daily Briefing, Dec. 5, 2007

Finance: stocks, options, etc.
Arnold Kling
Actually, I will not post on this daily, but I think it deserves frequent comment.... MORE

Random Thoughts on the Subprime Mess

Finance: stocks, options, etc.
Arnold Kling
First, I really enjoyed the Youtube posted on Greg Mankiw's blog. Warning: contains a racial reference that is unnecessary and, in my opinion, offensive. The story is all over today's Washington Post. Citing a source called the Center for Responsible... MORE

Freddie Mac--victim, villain, or savior?

Finance: stocks, options, etc.
Arnold Kling
The New York Times reports, Freddie Mac, the big mortgage finance company, posted a $2 billion loss for the third quarter and warned that it might not have enough capital on hand to cover the mandatory reserves for its mortgage... MORE

ESPNomics

Finance: stocks, options, etc.
Arnold Kling
From Gregg Easterbrook (scroll down past all the NFL BS) When you buy a home using a mortgage, you don't own the home: The lender is the owner until the loan is satisfied. You can't lose something that does not... MORE

Free Economic Advice for Joe Matt?

Finance: stocks, options, etc.
Bryan Caplan
Seth: You should try working for a living! I've got six illustration jobs waiting at home for me and they're all due by the end of the week! Joe: Yeah, well... maybe if you tried saving your money like me,... MORE

Home Prices and Rents

Finance: stocks, options, etc.
Arnold Kling
Fortune Magazine writes, From 2000 to 2007 the nationwide P/R jumped from 15 to 24, an increase of 60%. The figure went from 12 to 21 in Tampa, 11 to 26 in Washington, D.C., and 28 to 51 in California's... MORE

Gregory Clark, Aubrey de Grey, and Warren Buffett

Finance: stocks, options, etc.
Arnold Kling
have little in common, but all were mentioned in today's Washington Post. Robert J. Samuelson writes on Clark. Clark's theory is controversial and, at best, needs to be qualified. Scholars do not universally accept his explanation of the Industrial Revolution.... MORE

Expressing Economic Ideas

Economic Education
Arnold Kling
Although it's a painful download, Tyler Cowen's talk on economics blogging is really outstanding. It runs quite counter to the angst that seems to be showing up lately on Greg Mankiw's blog. One question that Tyler addresses is, "Why economics?"... MORE

Mortgage Fraud

Finance: stocks, options, etc.
Arnold Kling
Moody's plotted the rate at which recent mortgages are going into default within the first 9 months of issuance, and it is quite high. Look at the graph at Calculated Risk, reproduced by James Hamilton. When I was at Freddie... MORE

A Theory of Financial Intermediation

Finance: stocks, options, etc.
Arnold Kling
I write, Fundamentally, financial intermediation is about enticing investors to buy securities backed by investments whose risks the investors cannot fully evaluate. The intermediary, such as a bank, hedge fund, or ordinary corporation, specializes in evaluating risk. The investor who... MORE

An Important Point Concerning Mortgage Bailouts

Finance: stocks, options, etc.
Arnold Kling
Ed Glaeser writes, A perpetual moratorium on foreclosures, for example, would be a foolish repudiation of the rights of lenders. Who would lend after that precedent? A lot of people want to punish the lenders. So if you follow Dean... MORE

My Mortgage Plan, Continued

Finance: stocks, options, etc.
Arnold Kling
My latest essay elaborates on my debt-equity swap idea. The swap is in some ways a compromise between two other mortgage relief plans. Dean Baker would have homeowners give up all of their equity and become renters. Steven Pearlstein would... MORE

Two Stories of House Prices

Finance: stocks, options, etc.
Arnold Kling
Robert Shiller tells a bubble story. Real rent has been extremely stable when compared with price. Real rent increased only 4 % from the 1996-IV to 2006-I. The rent figures indicate that there has been virtually no change in the... MORE

The Kling Plan for Mortgage Forbearance

Finance: stocks, options, etc.
Arnold Kling
Steven Pearlstein writes, The Pearlstein workout process starts where things should have started in the first place -- with the household income of the borrower. Using standard formulas, figure out how much they can afford to pay each month toward... MORE

Turmoil in Financial Markets

Finance: stocks, options, etc.
Arnold Kling
I offer my perspective. What seems to have happened over the past year is that the hide-and-seek process in the financial intermediation process for mortgage loans to risky borrowers got out of hand. Some institutions wound up with more default... MORE

Mortgages, Securities, and Bailouts

Finance: stocks, options, etc.
Arnold Kling
Paul Krugman writes, In the past, as Gretchen Morgenson recently pointed out in The Times, the bank that made the loan would often have been willing to offer a workout, modifying the loan’s terms to make it affordable, because what... MORE

Housing Market Uncertainties

Finance: stocks, options, etc.
Arnold Kling
From an analysis by J.P. Morgan: We expect that home prices, as measured by the Case-Shiller 10-city composite index, will decline as much as 15-20% from the June 2006 peak before this cycle hits bottom, potentially two or three years... MORE

Amateur Bank Lending

Finance: stocks, options, etc.
Arnold Kling
The Wall Street Journal reports, About $100 million in new person-to-person loans will be issued this year, and that will increase to as much as $1 billion in new loans in 2010, according to a recent study by Online Banking... MORE

Investor Returns, Stock Returns, and My Intuition

Finance: stocks, options, etc.
Arnold Kling
Hal Varian writes, An investor who bought a value-weighted portfolio of stocks in the New York Stock Exchange and American Stock Exchange in 1926 and held them until 2002 would have earned an average annual return of about 10 percent.... MORE

The Efficient Markets Hypothesis: Act As If It's True

Finance: stocks, options, etc.
Bryan Caplan
DeLong also links to an excellent piece by Justin Fox. Bottom line: The Efficient Markets Hypothesis has its problems, but even so, low-cost index funds remain your best bet: The message that the behavioral finance guys have for investors is... MORE

House Prices and Transaction Costs

Finance: stocks, options, etc.
Arnold Kling
The New York Times offers a nifty rent-vs.-buy calculator to go with a David Leonhardt piece on whether or not is a good time to buy a home. Under the "advanced settings," I eliminated the transaction costs from buying a... MORE

Subprime Mortgage Loans

Finance: stocks, options, etc.
Arnold Kling
Megan McArdle passes along a question from Dave Schuler. My intuition is that the phenomenon of the subprime loan is related to the rapid rise in housing prices that haven't been matched by comparable rises in money wages. The implication... MORE

Ponzi Schemes: What's the Big Deal?

Finance: stocks, options, etc.
Bryan Caplan
At last night's paternalism debate, David Balan repeatedly returned to the example of the Ponzi scheme. Later, I found myself reflecting: What's so bad about Ponzi schemes? By definition, Ponzi schemes have an expected rate of return of 0% minus... MORE

Public-sector Enron

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, When I heard about the disastrously irresponsible investments made by the Amaranth hedge fund, my first reaction was, who would be so stupid to have put up the margin requirements for such a scheme? The answer turned... MORE

Betting on Longevity

Finance: stocks, options, etc.
Arnold Kling
The Financial Times reports, While someone in the 1840s lived, on average, to 40, today's generation can expect to hit 80, "and for our grandchildren, it could be 160," says [pension economist David] Blake, stabbing a pale green corner of... MORE

Saving for Retirement

Finance: stocks, options, etc.
Arnold Kling
John Karl Scholz, Ananth Seshardi, and Surachai Khiatrakun write, We find that over 80 percent of HRS households [a sample of households aged 51-62 in 1992] have accumulated more wealth than their optimal targets. These targets indicate the amounts of... MORE

Sticky-Priced, Illiquid Asset

Finance: stocks, options, etc.
Arnold Kling
Chip Case and Bob Shiller write, New home sales in July are 22% below July 2005. The decrease is 43% for the Northeast over that same period, and the inventory of unsold new homes is up 22%. Existing home sales... MORE

A scam Elliot Spitzer Won't Touch

Finance: stocks, options, etc.
Arnold Kling
The New York Times reports on the New York City pension fund. Ms. Stark said that she was sure of the pension funds’ health because the city was contributing responsibly to them every year, and because she was confident that... MORE

Stock Indexing Empire Strikes Back

Finance: stocks, options, etc.
Arnold Kling
John C. Bogle and Burton G. Malkiel write, We concede that there is some evidence, based on numbers compiled by Ibbotson Associates, that long-run excess returns have been earned from dividend-paying, "value" and small-cap stocks -- albeit returns that are... MORE

A Simple but Revolutionary Investment Idea

Finance: stocks, options, etc.
Arnold Kling
Jeremy Siegel writes, Fundamental indexation means that each stock in a portfolio is weighted not by its market capitalization, but by some fundamental metric, such as aggregate sales or aggregate dividends. Like capitalization-weighted indexes, fundamental indexes involve no security analysis... MORE

What's Wrong With the SEC?

Finance: stocks, options, etc.
Bryan Caplan
Greg Mankiw's not impressed by Jeff Miron's argument for abolishing the SEC. In his response, Miron gets closer to my position, but I still don't think he hits the nail on the head. My view: The essence of SEC regulation... MORE

Perry Mehrling, Fischer Black, and Finance

Finance: stocks, options, etc.
Arnold Kling
I crossed the river yesterday to listen to Perry Merhling give a talk based on his book on Fischer Black and on this paper. Warning: what follows is pretty geeky.... MORE

Housing Bubble Revisited

Finance: stocks, options, etc.
Arnold Kling
The New York Times reports, Gary and Margaret Hwang Smith spend a lot of time musing about real estate... In a paper the two presented at the Brookings Institution this week, "Bubble, Bubble, Where's the Housing Bubble?" they said that... MORE

Curious Brad

Finance: stocks, options, etc.
Bryan Caplan
Brad DeLong seems pleased that I believe in and act upon the equity premium and home bias puzzles. Now he wants to know more: But has he mortgaged his house to the gills and invested the proceeds in international equities?... MORE

Watch the Horizon

Finance: stocks, options, etc.
Bryan Caplan
Check out Brad DeLong's elegant explanation of the equity premium puzzle. If you look at the 1-year stock vs. bond return spread, it's easy to see why people don't buy more stocks. But if you look at the 20-year stock... MORE

Free Responsibility, Con't

Finance: stocks, options, etc.
Arnold Kling
In response to Jane Galt's post on personal finance, let me add a few words. 1. Living within your means is the key, and it can be done at a fairly low income level. You have to be willing to... MORE

Free Responsibility

Finance: stocks, options, etc.
Bryan Caplan
Jane Galt is giving free lessons in financial responsibility. Will you accept the charges? Personally, I'd rather work a little harder and live more luxuriously. But that's probably because I love my work. If I had a boring job, I... MORE

Pension Bagholders

Public Choice Theory
Arnold Kling
Roger Lowenstein writes The drawback to 401(k)'s, remember, is that people are imperfect savers. They don't save enough, they don't invest wisely what they do save and they don't know what to do with their money once they are free... MORE

Why Inherited Wealth is Getting More Important

Finance: stocks, options, etc.
Bryan Caplan
Arnold asks me: Which would be more valuable to Bryan's children--all his physical possessions, all his financial assets, or a large investment in their human capital? Probably 90 percent of his physical possessions will be obsolete by the time his... MORE

Faith-based Investing?

Finance: stocks, options, etc.
Arnold Kling
Nassim Nicholas Taleb argues that people who reject blind faith in religion are nonetheless guilty of blind faith with respect to the stock market. He believes in the stock market because he is told to do so. — automatically allocating... MORE

Housing Rents and Bubbles

Finance: stocks, options, etc.
Arnold Kling
David Leonhardt of the New York Times writes, Rents are rising again across the country, squeezing tenants who are already coping with high gasoline prices and improving returns to landlords after a deep five-year slump. The turnaround appears to be... MORE

James Miller's Challenge Bet

Growth: Consequences
Arnold Kling
In my latest essay, I wrote, In my opinion, James Miller is making a bad bet. If you want to bet against Ray Kurzweil, you should look for patterns of prediction errors. As this essay will show, Kurzweil has been... MORE

Financial Innovation and Regulation

Finance: stocks, options, etc.
Arnold Kling
While I was at the beach, the last two essays in my series on finance came out. The first one discussed financial innovation. (note: URL corrected 8-14) The previous essay described how the Capital Asset Pricing Model (CAPM) says that... MORE

CAPM

Finance: stocks, options, etc.
Arnold Kling
Can the Capital Asset Pricing Model be explained without using math? I don't really think so, but I try in this essay. Now, suppose another recipe-development project opportunity comes along. By shifting a portion of your portfolio into this new... MORE

Correction to Modigliani-Miller essay

Finance: stocks, options, etc.
Arnold Kling
Thanks to commenter Daniel Davies, I have changed an incorrect word in my Modigliani-Miller essay. It now reads Before MM, the conventional wisdom was that highly-levered firms (firms that issue a lot of debt relative to equity) offered their investors... MORE

Modigliani-Miller

Finance: stocks, options, etc.
Arnold Kling
I describe the famous theorem here. Before MM, the conventional wisdom was that highly-levered firms (firms that issue a lot of debt relative to equity) offered their investors higher risks and higher expected returns than less-levered firms. MM said that... MORE

Good Reading Recommendation from Tyler Cowen

Books: Reviews and Suggested Readings
Arnold Kling
A while back, Tyler Cowen recommended Perry Mehrling's book on finance theorist Fischer Black. I read it while on vacation this past week. I strongly endorse Tyler's recommendation. Black co-developed a formula for option pricing which garnered a Nobel Prize,... MORE

Hamilton on Bernanke on Bubbles

Finance: stocks, options, etc.
Bryan Caplan
James Hamilton leaps to defend Ben Bernanke's skepticism about housing bubbles. As a guy who bought a Northern Virginia home in 2000, I sure hope they're right.... MORE

Housing Bubbles? A Fact and a Thought

Finance: stocks, options, etc.
Bryan Caplan
James Hamilton's got my attention on housing bubbles. One of his many interesting observations is that population growth may explain a lot of the variation in real estate appreciation: It's noteworthy that over the last 5 years, the three states... MORE

Rent Vs. Buy Calculation

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, Let's look at a particular property in such a community whose rental income nets the owner $4,000 per year after expenses. If the property price is determined by the condition that the owner must earn a 3%... MORE

Savings, Capital Gains, and Income

Finance: stocks, options, etc.
Arnold Kling
Tyler asks many commentators argue that capital gains on homes and equities, as well as expenditures on education, should count toward the national savings rate. But are those savings "as good" -- from a macroeconomic point of view -- as... MORE

Past Performance and Probability

Finance: stocks, options, etc.
Bryan Caplan
Half-Sigma has an interesting comment on my "Four Bad Role Models." Merely looking at past performance of stocks is not a sufficient basis for saying that stocks will outperform Social Security. One of the basic mantras of investing is that... MORE

Four Bad Role Models

Finance: stocks, options, etc.
Bryan Caplan
Some Nobel prize-winning economists keep investing foolishly even though they know better, according to a recent L.A. Times article. Here are their statements, ordered from bad to worse: Harry Markowitz, father of modern portfolio theory, put half of his assets... MORE

Siegel for the Long Run

Growth: Causal Factors
Arnold Kling
An interesting interview with Jeremy Siegel. In 50 years the United States will be more aged than all of Florida is today, but we will be, existing in a younger world. So, what I see is exactly the same pattern.... MORE

What's the Real Interest Rate?

Finance: stocks, options, etc.
Arnold Kling
A Treasury Department paper says This paper has developed alternative approaches for projecting the long-term Social Security real interest rate, including an examination of historical data and estimation of yield curves for the Treasury inflation-indexed market. The examination of historical... MORE

Bubble Talk

Finance: stocks, options, etc.
Arnold Kling
Steven Pearlstein writes, nearly every asset market you can think of is showing signs of bubblelike behavior. The reason is pretty clear: The global economy is awash in free cash. The article makes a number of interesting allegations, not all... MORE

Manne More Than Ever

Finance: stocks, options, etc.
Bryan Caplan
Stiglitz’s The Roaring Nineties partially blames the big accounting scandals on market fundamentalism. But I’m inclined to agree with Henry Manne that one of the best cures for fishy accounting is to legalize insider trading. Here’s an excerpt from an... MORE

Housing Bubble?

Finance: stocks, options, etc.
Arnold Kling
Jonathan McCarthy and Richard W. Peach, two economists at the New York Fed, agree with me that there is no housing bubble. we see that the adjusted rent-to-price ratio is not at a level that suggests a home price bubble... MORE

Pension Guarantee Hazards

Finance: stocks, options, etc.
Arnold Kling
A Wall Street Journal editorial notes, Congress and the White House produced a big, fat bailout for the most financially shaky companies, and some of those same companies are now joining the queue to dump their liabilities on the feds.... MORE

Fama vs. Thaler

Efficient Markets Hypothesis
Arnold Kling
Stephen Bainbridge judges the contest. As for regulators, because the ECMH [Efficient Capital Markets Hypothesis] is often brought to bear as a justification for deregulation in politically charged policy disputes, such as mandatory corporate disclosure and insider trading, those who... MORE

Oil Bubble?

Efficient Markets Hypothesis
Arnold Kling
Any time a price increases rapidly, somebody argues that there is a bubble (although I have not heard anyone proclaim a health care bubble). Here is Frank P. Leuffer on oil. IEA figures for the first half of the year... MORE

Arithmetic and Google's IPO

Finance: stocks, options, etc.
Arnold Kling
Allan Sloan warns investors away from Google's IPO. A price of $135 a share would give Google a stock market value in the neighborhood of $36 billion...Google's profit and revenue have been exploding -- from $7 million on $86 million... MORE

Housing Bubble?

Finance: stocks, options, etc.
Arnold Kling
I still contend that we are not in a housing bubble. The drop in the real interest rate of one percentage point from 3 percent should have raised the intrinsic value on stocks and houses by 33 percent! So, if... MORE

Housing P/E's

Finance: stocks, options, etc.
Arnold Kling
Ed Leamer's analysis of home prices in the San Francisco Bay area is summarized. His findings: In the Bay Area, the average P/E for a house shot up to 13. 8 in the first quarter of 2004, compared with 7.2... MORE

Oil Reserves and Backwardation

Energy, Environment, Resources
Arnold Kling
I summarize my thinking about the Strategic Petroleum Reserve in an essay. I am not persuaded that the "convenience yield" of the SPR justifies its costs. However, even if it does, I believe it makes sense to have a rule... MORE

Backwardation

Efficient Markets Hypothesis
Arnold Kling
As of May 20th, the June 2004 futures contract for light crude oil was at $41.66, while the June 2005 futures contract was at $35.58. When futures prices are below spot prices, this is known as "backwardation." I believe that... MORE

Uncovered Interest Parity

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong wonders, U.S. interest rates are low relative to those of other major countries (save Japan). Where is my uncovered interest parity? Here is what Brad is thinking. If I own dollars today and want to invest in bonds... MORE

Housing Bubble, Again

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong links to this scare piece, although I don't know why. The article is not particularly well researched. For example, the author writes, What makes the current frenzy especially dangerous is that every relevant institution has an incentive to... MORE

House Prices

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong says that in the housing market, one person's capital gain is another person's capital loss. Yes, many people who have refinanced have now boosted their own consumption spending because they feel (and are) richer. But why haven't those... MORE

Greenspan's Concerns

Social Security
Arnold Kling
Federal Reserve Chairman Alan Greenspan tries taking on some sacred cows. In a logical assessment of the Social Security's future financial condition, he suggested ways to curtail the growth in future benefits. The response was predictable Sen. Arlen Specter, R-Pa.,... MORE

Finance and Macroeconomics

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen recommends two articles by Perry Mehrling on the relationship between the theory of finance and monetary theory/macroeconomics. One of the articles is a nice summary of the work of Fischer Black. What Black did was to conceive of... MORE

Bond Market

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong wonders why the bond market isn't punishing the Bush Administration harder for its fiscal sins. He lists a number of possible explanations, including 1. The people who matter in financial markets are expecting either (a) that there will... MORE

The 1990's Bubble Economy

Finance: stocks, options, etc.
Arnold Kling
William Nordhaus reviews two books on the economy of the 1990's. One of the books, by Janet Yellen and Alan Blinder, apparently finds little evidence that economic policy was a major factor in the rapid economic growth of that era.... MORE

Financial Crime

Finance: stocks, options, etc.
Arnold Kling
Michael Lewis writes, The millions of dollars that mutual funds have, in effect, stolen from their small customers are dwarfed by the billions they have wasted for them. In his just-published book, ``A Random Walk Guide to Investing,'' Burton Malkiel... MORE

Stock Options as Tax Deferral

Human Capital: Returns to entrepreneurs, skills, etc.
Arnold Kling
Kevin Hassett thinks that stock options are used because they are a form of tax-deferred compensation. It is sensible that the tax code encourages equity compensation. Shareholders benefit when management has a significant stake in the appreciation of a firm's... MORE

Stock Options

Finance: stocks, options, etc.
Arnold Kling
In response to my earlier post on executive compensation, Jonathan Wilde wrote, First, to answer Arnold's question - since all economic values are subjective, there is no question of there being a 'correct' valuation. All voluntary economic exchanges depend on... MORE

Mortgage Depreciation

Finance: stocks, options, etc.
Arnold Kling
With Freddie Mac, a major mortgage lender (and once my employer) gripped by scandal, it might be useful to go over some basic economics of the mortgage business. In particular, I want so describe how mortgages are a depreciating asset.... MORE

High-Beta Houses

Finance: stocks, options, etc.
Arnold Kling
Kenneth Harney reports that prices for condominiums rising have shot up. whereas the nationwide median price of single family resale homes was up by 7.4 percent during the past year (to $169,900 at the end of the second quarter), the... MORE

Safe Investing

Finance: stocks, options, etc.
Arnold Kling
What is a safe investment nowadays? Zvi Bodie argues for inflation-indexed government securities. The probability that stocks will perform worse than risk-free investments, such as TIPS or I-Bonds, gets smaller the longer you hold them. After 30 years, there is... MORE

Are Small Investors Irrational?

Finance: stocks, options, etc.
Arnold Kling
Hal Varian's column cites research on the irrationality of small investors during the dotcom bubble. First, there were significant differences of opinion about the value of Internet stocks, with retail investors tending to be much more optimistic than insiders or... MORE

Housing's P/E Ratio

Finance: stocks, options, etc.
Arnold Kling
Should you rent or buy your house? I've always answered this question using an arbitrage relationship that should obtain between a house's rental rate and the real rate of interest. The rental rate is the ratio of the annual cost... MORE

Bond Market Bubble?

Finance: stocks, options, etc.
Arnold Kling
Followers of the market for U.S. government bonds have started tossing around the term "bond bubble" with increasing frequency. The concern is that interest rates on long-term Treasuries have gotten so low that investors face high risk (if interest rates... MORE

Resisting Efficient Markets

Efficient Markets Hypothesis
Arnold Kling
Columnist James Glassman discusses the Efficient Markets Hypothesis with John Allen Paolos, author of A Mathematician Plays the Stock Market. If you believe in the EMH, you understand that highly successful stock selections are really just lucky guesses... But, to... MORE

Social Security Privatization

Social Security
Arnold Kling
Peter Ferrara claims that Social Security could be gradually privatized and the future deficit eliminated without reducing benefits. This is a free lunch of staggering dimensions. Among other things, it relies on the following assumption. The long-term real rate of... MORE

History of Option Pricing

Finance: stocks, options, etc.
Arnold Kling
The development of the Black-Scholes option pricing formula is a fascinating story. It is well told in this article by sociologist Donald MacKenzie. The Black-Scholes-Merton analysis provided a range of intellectual resources for those tackling problems of pricing derivatives of... MORE

Stock Market Regulation

Finance: stocks, options, etc.
Arnold Kling
'Jane Galt' casts doubt on the deterrence value of the settlement in which Wall Street investment firms agreed to pay a large fine. I don't want this to be the opening act in some morality play, directed by Spitzer, in... MORE

Employees as Owners

Microeconomics
Arnold Kling
Charles Duhigg, a student at Harvard's Business School, reviews some disadvantages of employee stock ownership. A 2000 study by economists at the University of South Alabama found that when the amount of stock held in an ESOP increases, ''management will... MORE

Inefficient Market?

Efficient Markets Hypothesis
Arnold Kling
If you believe in efficient markets, then you should be very skeptical of the rest of this post. Ohio State's J. Huston McCulloch, a leading authority on bond pricing, said on 2003-01-31, Frankly, stocks are so reasonably priced relative to... MORE

Stock Prices and Scandals

Finance: stocks, options, etc.
Arnold Kling
Jeff Madrick describes disparate economic views on whether stock prices should guide managers. The modern theory typically depends on the idealized efficient-markets theory, which asserts that at any given moment the stock price is not only the best measure we... MORE

The Risk Premium

Finance: stocks, options, etc.
Arnold Kling
Surfing while snowbound, somehow I started with this post on Asymmetrical Information and wound up reading this article by Robert D. Arnott and Peter L. Bernstein on the equity risk premium. It is an exhaustive study that covers many fundamental... MORE

Risk Spreads Widen

Finance: stocks, options, etc.
Arnold Kling
The Economic Report of the President notes that after September 11, all measures of risk spreads widened. the uniformity of stock market movements around the world suggests that a key driver of U.S. stock prices in 2002 was a worldwide... MORE

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