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Finance: stocks, options, etc.
A Category Archive (551 entries)
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November 20, 2009
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
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
November 19, 2009
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
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
November 18, 2009
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
November 14, 2009
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
November 13, 2009
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
November 12, 2009
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
November 6, 2009
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
November 4, 2009
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
November 2, 2009
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
October 31, 2009
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
October 29, 2009
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
October 26, 2009
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
October 25, 2009
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
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
October 21, 2009
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
October 20, 2009
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
October 19, 2009
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
October 14, 2009
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
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
October 12, 2009
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
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
October 7, 2009
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
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
October 5, 2009
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
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
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
October 2, 2009
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
October 1, 2009
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
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
September 29, 2009
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
September 28, 2009
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
September 26, 2009
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
September 25, 2009
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
September 24, 2009
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
September 21, 2009
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
September 16, 2009
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
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
September 15, 2009
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
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
Finance: stocks, options, etc.
Arnold Kling
My paper has been released.... MORE
September 14, 2009
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
September 13, 2009
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
September 12, 2009
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
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
September 11, 2009
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
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
September 10, 2009
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
September 9, 2009
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
September 8, 2009
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
September 7, 2009
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
September 5, 2009
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
September 2, 2009
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
September 1, 2009
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
August 31, 2009
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
August 28, 2009
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
August 25, 2009
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
August 24, 2009
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
August 18, 2009
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
August 17, 2009
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
August 16, 2009
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
August 14, 2009
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
August 12, 2009
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
August 11, 2009
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
August 9, 2009
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
August 5, 2009
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
July 31, 2009
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
July 24, 2009
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
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
July 21, 2009
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
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
July 20, 2009
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
July 19, 2009
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
July 17, 2009
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
July 16, 2009
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
July 14, 2009
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
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
July 13, 2009
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
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
July 8, 2009
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
July 2, 2009
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
June 26, 2009
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
June 25, 2009
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
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
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
June 21, 2009
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
June 20, 2009
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
June 19, 2009
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
June 18, 2009
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
June 17, 2009
Finance: stocks, options, etc.
Arnold Kling
I am reading this draft. Also of interest is this interview with President Obama.... MORE
June 15, 2009
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
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
June 9, 2009
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
June 8, 2009
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
June 5, 2009
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
May 31, 2009
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
May 23, 2009
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
May 19, 2009
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
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
May 18, 2009
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
May 14, 2009
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
May 11, 2009
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
May 8, 2009
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
May 6, 2009
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
May 5, 2009
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
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
May 3, 2009
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
May 2, 2009
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
May 1, 2009
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
April 29, 2009
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
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
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
April 28, 2009
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
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
April 27, 2009
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
April 26, 2009
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
April 15, 2009
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
April 14, 2009
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
April 13, 2009
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
April 11, 2009
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
April 10, 2009
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
April 8, 2009
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
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
April 7, 2009
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
April 6, 2009
Finance: stocks, options, etc.
Arnold Kling
I lay out the ideas here. Let me know what you think.... MORE
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
April 5, 2009
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
April 4, 2009
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
March 31, 2009
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
March 30, 2009
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
March 29, 2009
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
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
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
March 27, 2009
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
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
March 26, 2009
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
March 25, 2009
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
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
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
March 24, 2009
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
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
March 23, 2009
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
March 18, 2009
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
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
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
March 13, 2009
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
March 11, 2009
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
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
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
March 10, 2009
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
March 9, 2009
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
March 7, 2009
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
March 5, 2009
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
Finance: stocks, options, etc.
Arnold Kling
Read the latest from Simon Johnson. Read it now.... MORE
March 2, 2009
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
March 1, 2009
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
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
February 24, 2009
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
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
February 23, 2009
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
February 22, 2009
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
February 18, 2009
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
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
February 14, 2009
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
February 13, 2009
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
February 11, 2009
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
February 10, 2009
Central Planning vs. Local Knowledge
Arnold Kling
I outsource my comments to Tyler Cowen.... MORE
February 9, 2009
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
February 8, 2009
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
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
February 5, 2009
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
February 4, 2009
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
February 3, 2009
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
February 2, 2009
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
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
January 30, 2009
Macroeconomics
Arnold Kling
He writes a long post that agrees with some of what I write and disagrees with some of my views.... MORE
January 29, 2009
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
January 27, 2009
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
January 26, 2009
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
January 25, 2009
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
January 22, 2009
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
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
January 21, 2009
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
January 20, 2009
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
January 19, 2009
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
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
January 14, 2009
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
January 12, 2009
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
January 11, 2009
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
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
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
January 10, 2009
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
January 9, 2009
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
January 8, 2009
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
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
January 6, 2009
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
January 3, 2009
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
January 2, 2009
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
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
January 1, 2009
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
December 31, 2008
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
December 30, 2008
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
December 29, 2008
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
December 28, 2008
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
December 23, 2008
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
December 22, 2008
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
December 19, 2008
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
December 18, 2008
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
December 17, 2008
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
December 16, 2008
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
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
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
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
December 15, 2008
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
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
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
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
December 12, 2008
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
December 11, 2008
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
December 10, 2008
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
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
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
December 9, 2008
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
December 8, 2008
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
December 7, 2008
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
December 4, 2008
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
December 3, 2008
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
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
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
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
December 2, 2008
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
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
December 1, 2008
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
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
November 30, 2008
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
November 29, 2008
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
November 27, 2008
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
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
November 26, 2008
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
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
November 25, 2008
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
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
November 24, 2008
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
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
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
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
November 23, 2008
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
November 21, 2008
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
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
November 20, 2008
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
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
November 19, 2008
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
November 18, 2008
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
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
November 17, 2008
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
November 16, 2008
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
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
November 15, 2008
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
November 14, 2008
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
November 13, 2008
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
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
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
November 12, 2008
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
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
November 11, 2008
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
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
November 10, 2008
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
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
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
November 7, 2008
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
November 5, 2008
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
November 4, 2008
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
November 3, 2008
Austrian Economics
Arnold Kling
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
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
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
November 1, 2008
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
October 31, 2008
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
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
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
October 30, 2008
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
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
October 29, 2008
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
October 28, 2008
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
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
October 26, 2008
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
October 24, 2008
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
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
October 23, 2008
Finance: stocks, options, etc.
Arnold Kling
In an ongoing dialog with Mencius Moldbug, I changed from my favorite fruit tree metaphor.... MORE
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
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
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
October 22, 2008
Austrian Economics
Arnold Kling
In response to my post on the porn that is modern macro, readers naturally asked me for alternatives.... MORE
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
October 21, 2008
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
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
October 20, 2008
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
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
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
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
October 19, 2008
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
October 16, 2008
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
October 15, 2008
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
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
October 14, 2008
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
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
October 13, 2008
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
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
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
October 12, 2008
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
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
October 9, 2008
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
October 7, 2008
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
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
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
October 6, 2008
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
October 3, 2008
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
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
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
October 2, 2008
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
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
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
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
September 30, 2008
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
September 29, 2008
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
September 28, 2008
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
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
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
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
September 27, 2008
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
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
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
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
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
September 26, 2008
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
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
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
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
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
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
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
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
September 25, 2008
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
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
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
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
September 24, 2008
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
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
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
September 23, 2008
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
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
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
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
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
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
September 22, 2008
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
September 21, 2008
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
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
September 20, 2008
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
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
September 19, 2008
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
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
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
September 18, 2008
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
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
Finance: stocks, options, etc.
Arnold Kling
What is short-selling? How can short-selling destroy a good company?... MORE
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
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
September 17, 2008
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
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
September 16, 2008
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
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
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
September 15, 2008
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
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
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
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
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
September 14, 2008
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
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
September 12, 2008
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
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
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
September 9, 2008
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
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
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
September 8, 2008
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
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
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
September 7, 2008
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
September 3, 2008
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
August 20, 2008
Finance: stocks, options, etc.
Arnold Kling
From the comments on my chapter.... MORE
August 17, 2008
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
August 8, 2008
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
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
July 31, 2008
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
July 28, 2008
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
July 16, 2008
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
July 15, 2008
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
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
July 14, 2008
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
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
July 13, 2008
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
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
July 10, 2008
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
July 3, 2008
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
June 27, 2008
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
June 26, 2008
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
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
June 25, 2008
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
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
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
June 24, 2008
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
June 18, 2008
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
June 11, 2008
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
June 5, 2008
Finance: stocks, options, etc.
Arnold Kling
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
May 16, 2008
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
May 14, 2008
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
May 13, 2008
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
April 24, 2008
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
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
April 17, 2008
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
April 4, 2008
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
April 3, 2008
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
March 27, 2008
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
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
March 19, 2008
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
March 18, 2008
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
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
March 17, 2008
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
March 15, 2008
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
March 14, 2008
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
March 10, 2008
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
March 7, 2008
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
March 1, 2008
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
February 26, 2008
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
February 21, 2008
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
February 13, 2008
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
February 10, 2008
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
January 24, 2008
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
December 27, 2007
Finance: stocks, options, etc.
Arnold Kling
A Contrarian Op-ed... MORE
December 26, 2007
Finance: stocks, options, etc.
Arnold Kling
Just one lame op-ed.... MORE
December 24, 2007
Finance: stocks, options, etc.
Arnold Kling
Becker and Posner.... MORE
December 21, 2007
Finance: stocks, options, etc.
Arnold Kling
How I think it will all play out...... MORE
December 20, 2007
Finance: stocks, options, etc.
Arnold Kling
Larry Summers and Sen. Charles Schumer spoke at Brookings yesterday.... MORE
December 19, 2007
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
Finance: stocks, options, etc.
Arnold Kling
Predatory borrowing, Samuelson, Krugman...... MORE
December 18, 2007
Finance: stocks, options, etc.
Arnold Kling
Early warnings...or hindsight bias?... MORE
December 17, 2007
Finance: stocks, options, etc.
Arnold Kling
Greenspan, Hamilton, Bordo...... MORE
December 15, 2007
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
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
December 14, 2007
Finance: stocks, options, etc.
Arnold Kling
Just a couple of remarks on housing market equilibrium.... MORE
December 13, 2007
Finance: stocks, options, etc.
Arnold Kling
The Fed tests a new tool.... MORE
December 12, 2007
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
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
Finance: stocks, options, etc.
Arnold Kling
Greenspan, Leonhardt, plus... MORE
December 11, 2007
Finance: stocks, options, etc.
Arnold Kling
Today's focus is bank capital. More added at 1 PM EST, including comments on widespread fraud.... MORE
December 10, 2007
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
December 7, 2007
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
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
December 5, 2007
Finance: stocks, options, etc.
Arnold Kling
Actually, I will not post on this daily, but I think it deserves frequent comment.... MORE
December 4, 2007
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
November 21, 2007
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
November 14, 2007
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
November 12, 2007
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
November 8, 2007
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
October 31, 2007
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
October 29, 2007
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
October 22, 2007
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
October 15, 2007
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
September 7, 2007
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
September 5, 2007
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
September 4, 2007
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
August 31, 2007
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
August 21, 2007
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
August 17, 2007
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
August 2, 2007
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
July 18, 2007
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
May 3, 2007
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
April 25, 2007
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
April 13, 2007
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
March 11, 2007
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
March 8, 2007
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
February 26, 2007
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
February 24, 2007
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
September 10, 2006
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
August 30, 2006
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
August 20, 2006
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
June 27, 2006
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
June 14, 2006
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
May 9, 2006
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
April 11, 2006
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
April 3, 2006
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
March 6, 2006
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
March 3, 2006
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
December 13, 2005
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
December 12, 2005
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
October 30, 2005
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
October 25, 2005
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
October 3, 2005
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
August 25, 2005
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
August 17, 2005
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
August 13, 2005
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
August 3, 2005
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
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
August 1, 2005
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
July 20, 2005
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
July 19, 2005
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
June 25, 2005
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
June 19, 2005
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
June 10, 2005
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
May 14, 2005
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
May 12, 2005
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
May 5, 2005
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
May 4, 2005
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
March 23, 2005
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
January 31, 2005
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
December 10, 2004
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
November 22, 2004
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
October 20, 2004
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
October 1, 2004
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
August 3, 2004
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
June 29, 2004
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
June 21, 2004
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
May 24, 2004
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
May 20, 2004
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
April 30, 2004
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
April 8, 2004
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
March 15, 2004
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
February 26, 2004
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
January 28, 2004
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
January 17, 2004
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
January 2, 2004
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
November 24, 2003
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
October 20, 2003
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
September 25, 2003
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
September 7, 2003
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
August 31, 2003
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
July 28, 2003
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
July 3, 2003
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
June 24, 2003
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
June 16, 2003
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
June 15, 2003
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
June 12, 2003
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
May 29, 2003
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
April 29, 2003
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
March 17, 2003
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
March 2, 2003
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
February 20, 2003
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
February 19, 2003
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
February 16, 2003
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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