Moving to ManagerialEcon.Blogspot.com

In preparation for the 2009 September 15 release of the second edition of Managerial Economics: A problem-solving approach, (Amazon, Barnes & Noble, publisher)we are moving the blog to ManagerialEcon.Blogspot.com.

We will keep this site online until we have completed the move.

Unintended consequences

John Makin blames the government:

But the housing bubble only burst after government subsidies pushed house prices up so fast that marginal buyers could no longer afford to chase prices even higher. A bubble created by rigged financial markets and a government-sponsored obsession with home ownership is not a result of market failure, but rather, a result of bad public policy. The belief that home ownership, per se, is such a benefit that no amount of government support could be too great and no pace at which home prices rise could be too fast is the root of the crisis.

What's the point?

Without the cooperation of the poorer countries, reducing carbon consumption in rich countriies, e.g., by raising the price of carbon emissions, will simply move industry and production to poorer countries. This used to be derisively called "exporting pollution," but now it seems like offical government policy.

’AQUILA, Italy — The world’s biggest developing nations, led by China and India, refused Wednesday to commit to specific goals for slashing heat-trapping gases by 2050, undercutting the drive to build a global consensus by the end of this year to reverse the threat of climate change.

Peter Huber predicted as much:

By pouring money into anything-but-carbon fuels, we will lower demand for carbon, making it even cheaper for the rest of the world to buy and burn. The rest will use cheaper energy to accelerate their own economic growth. Jobs will go where energy is cheap, just as they go where labor is cheap. Manufacturing and heavy industry require a great deal of energy, and in a global economy, no competitor can survive while paying substantially more for an essential input. The carbon police acknowledge the problem and talk vaguely of using tariffs and such to address it. But carbon is far too deeply embedded in the global economy, and materials, goods, and services move and intermingle far too freely, for the customs agents to track.

But as these poor countries get richer, they will demand less pollution.

Voluntary transactions create wealth...

and the new Financial Products Safety Commission will make them harder to consummate. Former colleague Todd Zywicki says that the proposed regulation is based on a flawed analogy:

An unsafe toaster is a hazard to anyone who buys it. That's not true for loans.

Virtually every credit product is valuable to some consumers. Low-documentation loans are a boon for homeowners with a lot of equity who want to refinance their mortgages (even as they are a dangerous thing to offer speculators).

And unlike toasters, borrowers have substantial say over whether their loan "explodes." Foreclosures have risen throughout the country, but an epidemic exists only in a handful of areas -- Las Vegas, Phoenix, Miami and the Inland Empire region of California are all places where foreclosure rates are five to 10 times higher than the national average. These areas saw price bubbles that have now popped, giving many homeowners who owe more than their house is worth strong incentives to walk away from their loans.

When the going gets tough, blame the speculators

Telling hostility to markets

In Washington, the Commodity Futures Trading Commission, the main U.S. futures-market regulator, said it is considering tougher regulation of oil-futures markets. The proposed rules, which drew immediate criticism from traders, would seek to curb the influence of speculative investors such as hedge funds and investment banks by limiting how much money any single trader can bet on any one commodity at a time.

Max out your credit cards, then borrow from friends and family

The double whammy of tightening credit markets and falling housing values are making it more difficult for small business owners to finance their businesses. Venture capital investments aren't a realistic source of capital for the great majority of new businesses, so they often rely on debt financing. A fairly common source is equity tied up in real estate; however, drops in housing values mean less equity to draw upon.

As home equity lines vanish, other avenues of small business financing are also running dry. More than 40% of small business owners polled in April by the National Small Business Association said the limits on their credit cards had been cut in the past year, and 63% said their interest rates went up. Bank lending is in freefall. Even with stimulus incentives, the SBA backed 30% fewer bank loans to small businesses last quarter than it did a year earlier. The agency's lending volume has dropped to less than half what it was before the recession set in at the end of 2007.

The other shoe

Wait until next year:

Many economists fret about an unpleasant scenario in 2011, when the stream of stimulus money will ebb, reserves will have been drained and revenues will still be meagre. Medicaid enrolment may still be swollen by recession. Promises to retired workers, including pensions and health care, will weigh more heavily than they do now. This year was painful, but those to come may be even worse.

Once upon a time...

Colleague Bob Driskill tells the story of the financial crisis without invoking bubbles. In particular, the relatively small subprime mortgage sector started a run on Investment Banks who were borrowing short (in commercial paper) and lending long (by buying Mortgage Backed Securities) because it exposed a flaw in the financial engineering. In particular, instead of re-working the defaulted mortgages, as would have been efficient, the lenders began fighting among themselves.

...higher-than-expected default rates led to "tranche warfare:" the mortgage servicers and the various tranche-holders had di¤erent incentives to preserve the overall value of the MBS in the face of higher-than-expected defaults. Furthermore, tax issues complicated any effort to get to Pareto improvements among the different tranche-holders. This seems a little like what happened with railroad bonds and bankruptcy in the late 1800’s: the early bond covenants seemed to be incomplete and poorly designed to stop liquidation of railroads that had value as an operating entity.

HELP WANTED: creative accountants

The Montana Public Employees' Retirement Board and the Montana Teachers' Retirement System declare in a recent solicitation for actuarial services that

If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration.

Homer Economicus

In the second edition of our textbook (available 2009 Sept. 15) we include material on asset bubbles and psychological pricing, departures from the classic rational actor paradigm. Richard Thaler writes about regulation for not-quite-rational humans:

...lenders could be required to offer some mortgages they call “plain vanilla,” with uniform terms. There might be one vanilla 30-year, fixed-rate mortgage and one five-year, adjustable-rate mortgage. The features of these plain mortgages would be uniform, much as in a standard lease used in most rental agreements.

Lenders would also be free to offer other exotic mortgages ... , but these offerings would receive more intense scrutiny from regulators. ...

But did all of those home buyers, who are now getting their mortgages re-set, really act irrationally?

Bubble in Higher Education?

Our friends over at Organizations and Markets are having an interesting discussion on whether we are in the midst of a higher education bubble that's going to burst sometime soon.

Got Milk?

Milk prices have been dramatically falling over the past year:

Through much of last year, the average milk price hovered around $17 per 100 pounds -- although consumers purchase milk by the gallon, the industry measures by pounds. The bottom fell out of the market when the economy tanked last fall. Prices now hover around $10, according to the California Department of Food and Agriculture. Farmers generally need at least $16, and often more, per 100 pounds to break even, depending on their debt, feed requirements and other factors.

What I haven't seen anywhere is a particularly good explanation for the volatility in prices.

Hulu vs. TV Advertising Rates

Looks like the marginal benefit of advertising during programs shown on Hulu must be higher than that of the same program shown on TV.

Marketers typically pay $20 to $40 per thousand viewers for a prime-time ad. On Hulu, which began offering shows to the public in March 2008, an ad on the animated series “The Simpsons” costs $60 per thousand viewers, Michael Nathanson, an analyst at Sanford C. Bernstein & Co. wrote in a June 18 report.

Why bother?

Oh, yeah, to give us a reason to make political donations:

The cap-and-trade bill is a travesty. ... It gives emission permits away, and tells utilities to rebate the windfall to consumers, so their electricity bills do not go up. It creates a vastly complicated apparatus, a playground for special interests and rent-seekers, a minefield of unintended consequences – and the bottom line for all that is business as usual.

Insure this

Where there is demand...:

...on the first play from scrimmage against LSU on Oct. 10, 1998, a gruesome knee injury ended Florida senior defensive tackle Ed Chester's career. Fortunately for Chester, he had bought an insurance policy from Gainesville agent Keith Lerner after deciding against entering the 1998 NFL draft. Lloyd's of London, the venerable firm that insured Bruce Springsteen's voice and Angie Dickinson's legs, underwrote the policy. Thirteen months later, Chester walked out of Lerner's office with a $1 million check. Chester never played in the NFL, but if he handled his finances correctly, he never had to worry about money again.