08
Jul
10

Yes, I’m still reading about econ

First, Scott Sumner gives an impressive overview of Russ Roberts’ paper on the credit crisis:

The insightful commentary starts early:

1.  Reading Russ’s paper makes me realize just how much our system is biased toward debt.  And by the way, it isn’t just moral hazard; our tax system is also biased toward debt and against equity.  People talk about Americans borrowing too much, but given all these distortions it’s surprising that we don’t have even more debt.  Why didn’t I take out some mortgages and buy Florida condos?  I’d like to think it was civic virtue, but I suppose it was just laziness.

2.  This also made me realize the importance of Lehman’s failure.  It wasn’t just an isolated bankruptcy; it was a regime change that made enormous quantities of debt appear to be far riskier than just a few days earlier.  And the change was made just as the US was entering a severe recession.  I’m all for cracking down on moral hazard—but September 2008 was not the best time to do so.

It gets better from there.  RTWT, but first here’s some particularly good stuff on the relationship between banking regulation, government deposit insurance, and zOMG teh socializm

What does “increased regulation” mean?  Does it mean more government involvement in banking, or less?  Consider our current banking system in America, where we essentially nationalized all bank liabilities in 1934.  When you deposit $100 in the bank, you are loaning it to the Treasury, which re-loans it at the same rate to the bank.  Those are insured deposits.  Now consider a “regulation” that said banks could only lend out money from insured deposits on mortgages with more than 20% down-payments.  While this proposal would increase “regulation,” it would also reduce the role of government in our banking system.  Instead of the government being liable for deposits in any bank failure, they would only be liable for those where banks were engaged in relatively safe behavior.

The Hayekian notion of markets as ridiculously complex things that are impossible for one person to understand also applies to… well, people like me who get on a soapbox with a keyboard and write about economic policy.  I wouldn’t be shocked to discover that I’m less ignorant about economics than most of the House of Commons — the janitorial staff perhaps excepted — but that doesn’t mean I know what to do with the whole damn economy.

Second, here’s a fantastic bitchslap by Tyler Cowen:

To the wailing about corporations building up cash surpluses, Cowen replies:

Overall I am puzzled at the nature of the worry here.  Corporations with cash surpluses are not destroying real resources, nor are they stuffing cash in their mattresses.  They are investing in financial assets.

Take a financially conservative corporation, which holds its surplus in the form of T-Bills.  If it bought the T-Bills fresh at auction, that’s lending money out to the government and the capital is still deployed.  Isn’t that called…in some circles…stimulus?  (I’ve even heard the multiplier might be 1.4!  Or does only the borrower get credit and not the lender?)

Read that whole thing, too.


1 Response to “Yes, I’m still reading about econ”


  1. July 10, 2010 at 19:32

    Husband I were just talking about corporate cash surpluses today. We both agree that this won’t change until the a**holes in Washington stop being wildly irrational and unpredictable. Based on what we’ve been seeing – it could be a while…

    But – as a commercial lender he loves it. Lending money to people holding lots of assets is smart business in a time of low interest rates when low returns should be offset by decreased risk.


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