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Econ 101

More and more recently, I get the feeling that our national conversation on the economic crisis would be so much better served, if the journalists take an introductory Economics class.   For example, just a few nights ago, “60 Minutes” ran a program on Oil Prices.   In its typical folksy fashion, it excoriated speculators for driving up oil prices in 2008.   According to the program, “ prices seemed to disconnect from the basic fundamentals of supply and demand .”    Such dramatic gyration of prices in such a short period of time easily suggests manipulation.   The program’s designated culprit: “Wall Street Speculation.”  However, something fundamental seems to be missing in this diagnosis.   If profits were the motives of the speculators, and it was only speculators who drove up the prices, then how do they make money when there is no real demand to buy the oil from these speculators at such artificially high prices?   After all, if 60% to 70% of the oil futures contracts are held by ...
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Regulating Greed?

A common refrain one often hears today is that the whole subprime mess was caused by Wall Street greed.   Unscrupulous mortgage brokers got homeowners into bad mortgages.   Bankers packaged them into structured products no one could understand and sold them off in pieces.   Rating agencies are only too eager to make fees to rate the mortgages and CDOs correctly.   What we need, it is argued, is to regulate the greed and dishonesty that is so prevalent in the financial industry.   We can start by cutting off their bonuses and cap executive pay.   Simple enough, and it gets the job done.   Right? The problem with this picture, is that the alleged victim - the subprime borrower, probably got the better deal of the two.   He bought a house he could not otherwise afford, paid almost nothing down, and lived in it by paying minimal payments.   Now all he has to do is to just leave the house he should not have lived in anyway.   Under the new Durbin’s proposal, he may not even have to move o...
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What Kind of Fiscal Stimulus Package Do We Need?

It is now a given that the Obama government will have a large fiscal stimulus package.   Even the staunchest supply-siders are succumbing to the temptation of Keynesianism.   The question is how that package will be spent.   There are several ideas floating around. The idea with the most traction so far is infrastructure spending.   The potential projects have mostly already been identified and can be spent right away.   However, the problem with infrastructure spending is potential for graft and rent seeking.   How the money will be spent will be subject to heavy lobbying by states, in a process that will likely be opaque, unfair, subject to backroom dealings and political favors.   When the money is allocated, then the various federal and state agencies will further involve lobby, rent seeking, and paybacks down to the state / agency level.   All of this then gets repeated at each level all the way down to the individual contractor.   It is not hard to imagine how inefficient and w...
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Unintended Consequences

As the US economy continues to slide, the pressure for the government to take charge becomes ever bigger.   The consensus seems to be throwing the kitchen sink at the problem.   We are now talking about a $1 trillion stimulus package, fed funds rate at 0%, complete regulatory overhaul of the financial industry, and a healthcare system reboot, among other less dramatic measures.   With such drastic increase of the role of the government, the opportunity to make mistakes is proportionally larger.   Somewhere in this frenzy, some of these well-intentioned policies will go wrong, perhaps terribly wrong.   We can already see signs of this.   Take, for example, a couple of points from the Obama economic plan.   A. “Foreclosure Moratorium:” Obama’s plan has called for prohibiting banks that receive federal bailout money from foreclosing on homeowners who are making “good-faith” efforts on their mortgage payments.   The theory is that to arrest the decline of the economy, we have to save h...
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The Myth of Home Ownership

This is my very first blog, so where do I begin?   Well, the economy is first and foremost on everyone’s mind.   Perhaps befitting to an inaugural blog, I will talk about what many think brought us here – housing.  I’ve been known to be a housing bear amongst my friends.   To me, there always seems to be something weird about the fascination about home ownership.   It is only recently that I figured out what that something is – it is essentially a religion.   Or more precisely, a founding myth deeply embedded in the American psyche.  Why do I say that?   Well, you can easily tack the housing at the end of any typical phrases that represent America , and it will rhyme so well that no one will notice you changed anything.   Try it:   “Motherhood, apple pie, and a roof deck”, “2 cars and a garage”, or the Herbert Hoover version: “a chicken in every pot and a car in every garage (or house)”   And lastly, “Mickey Mouse, Coca Cola and a balcony”, Or was that McDonalds?   I forget, you ge...
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