Greece as a Danger to Euro Stability

by Andreas Hoffmann*

Entering the Eurozone, Greece handed over monetary policy to the European Central Bank and introduced the euro. In a formerly unstable economy, without the danger of depreciation, the risk premium on Greek interest rates shrank to less than half a percent above that of Germany. This brought about convergence of the Greek interest rates. Thus investment and debt could be financed at lower rates. But the advantages from entering the eurozone also have a price.

Beating Bonuses into Risk Controls

by Chidem Kurdas

Deferred vesting of stock options is not a new idea—it gained currency amid the corporate scandals that emerged in the aftermath of the late 1990s stock bubble. It appears to be making more inroads at present, in the aftermath of the twin credit and property bubbles.

This growing practice is not confined to Wall Street, but financial firms are the forefront.  Given that bonuses, and hence stock awards, tend to be by far the largest portion of managers’ pay in the financial industry, the restrictions have the potential for curbing bad behavior in the future.

This may be the one useful result of public anger over outsize compensation and the political grandstanding it has occasioned. It could go some way to reduce the perverse incentive created by the government safety net and cheap federal loans, which are in effect an invitation to put the money to use in lucrative but hazardous ways.

What? No, It Is Not The Onion

by Mario Rizzo

The Wall Street Journal print edition has a headline today: Budget Freeze is Proposed. At first I thought it was going to be about some Republican plan. But the first sentence said: “President Obama intends to propose a three-year freeze in spending …” What?  Did The Onion take over the WSJ? Is it April Fools Day?

The Price of the Mega-State

by Mario Rizzo  

The recent Supreme Court decision that “ruled that the government may not ban political spending by corporations in candidate elections” is a true victory for freedom of speech.   

What many people do not realize, however, is that both sides in this dispute had important and valid points. The terrible truth of the matter is that a large complex government is incompatible with political and personal freedom. It is not just the economic freedom in various sectors that is threatened by a large welfare and regulatory state. (Most classical liberal-oriented economists well understand the effect on economic liberty.) However, those other freedoms that modern-day social democrats (aka “liberals”) value are also threatened.  

Bubbles, Fraud, Government and Short Sellers

by Chidem Kurdas

The new issue of the Freeman contains an excellent article on short selling by Warren C. Gibson.  This investment method – selling borrowed stocks in the expectation of  buying them later at lower prices – is always controversial. Regulators temporarily banned it for financial stocks during the credit crisis of 2008 and now look to place other restrictions, about which Mr. Gibson provides a lucid discussion.

Short sellers seek to identify companies that are over-valued. Studies indicate that they tend to be correct in their analysis of businesses and the stocks they pick tend to go down. Many corporate frauds were first uncovered by these traders. James Chanos, probably the best known short-seller, figured out Enron a long time before any regulator did.

Short selling can limit bubbles in asset prices. In the past 15 years, we’ve had a stock bubble, real estate bubble and credit bubble. Given this dangerous bubble-proneness, short selling is a particularly valuable market mechanism. Regulators pay lip service to its benefits, but have proposed rules to inhibit this type of trading.

Why they do so says a lot about how the government operates. It also says a lot about how political action skews markets.

The Rule of Law Kneels Before the Welfare State

by Mario Rizzo

The rule of law always suffers before the political exigencies of welfare state legislation. This is because, contrary to its name, the welfare state has little to do with the general welfare. It is essentially a vehicle by which some groups benefit at the expense of others. 

The latest is the sweetheart deal struck with labor unions and government workers to exempt them until 2018 from the 40% taxation of so-called Cadillac healthcare plans.

Epistemic monopoly is still a bad thing

by Roger Koppl

McClatchy-Tribune Information Services has been distributing my op ed with Dan Krane on “Science rules the FBI should obey.”  We discuss an example of epistemic monopoly in action, namely, the FBI’s failure so far to release anonymized data from its vast NDIS (National DNA Index System) data set.  The NDIS data set contains the genetic profiles of more than 7 million people, most of whom have been convicted of serious crimes, such as rape.  It contains information on whether the practice of forensic DNA profiling aligns with DNA facts, but that information can be extracted only if scientists are allowed to study the data.  Why isn’t the FBI playing by the usual science rules requiring openness and data sharing? 

New Paternalism on the Slippery Slopes, Part 8: Hyperbolic Discounting in Public Policy

by Glen Whitman

As discussed in a previous post in this series, the new paternalists often use the concept of hyperbolic discounting (roughly, excessive impatience) to show that people make systematic errors that could, in principle, be corrected by government intervention. But what if policymakers, too, are prone to hyperbolic discounting? That is the question raised in the next section of the paper (p. 724-725):

Policymakers can have short time horizons for various reasons. They might no longer hold office when future costs and benefits of their policies occur. Insofar as voters have imperfect memories, they might fail to fault policymakers for the ill effects (or credit them with the good effects) of policies they supported. Both of these effects give fully rational policymakers an incentive to discount future consequences.If policymakers are hyperbolic discounters, there is yet another reason they will tend to discount the future: because they apply especially high rates of discount when some costs or benefits are in the present (or near future).

Bonuses: An Annoyed Analysis

by Mario Rizzo  

I understand why many people feel it is unfair for bailed-out banks to pay big bonuses. But the simple truth is the banks were bailed out on the grounds that their possible failure was an issue of systemic risk. The collapse of the financial system was threatened. So the bailouts, as the story goes, prevented that. 

Thus the “American people” benefitted to the extent that the financial system was saved. And that, if accurate, is an enormous benefit to us all.  

How Mathematical Economists Overreach

by Mario Rizzo

In recent months there has been a discussion both in the traditional media and in the blogosphere about why orthodox macroeconomics failed to predict or explain the financial crisis and the subsequent Great Recession. Some of that discussion focused around Paul Krugman’s criticism that economics mistook  (mathematical) beauty for truth. Subsequently, there was a further discussion about the role of mathematics in economics.

Of course, this is a big topic. My task here is only to investigate, by means of a simple example, three claims made for the superiority of mathematics over ordinary (natural) language.