Marginal Revolution

Roger Congleton's notes on the credit crisis

They are a good outline to many events behind the current crisis; many of you have been writing to me and asking for background reading.

Another of my colleagues, David Levy, just published this short piece (with Sandra Peart) on the ratings agencies and the idea of experts.

The best parenthetical statement I read today

(The fictional 18th century heroine, Moll Flanders, recognized that a high self-regard can be dangerous, arguing that women who believe themselves beautiful are easier to seduce: “If a young woman once thinks herself handsome, she never doubts the truth of any man that tells her he is in love with her; for she believes herself charming enough to captivate him, ’tis natural to expect the effects of it.”)

Here is the link.

Heard in the Halls at GMU

R: "I'm quite pessimistic about the current financial system.  I've been buying gold."

A: "Gold?  That's not pessimistic enough.  I've been buying rice."

The Snowball

The subtitle is Warren Buffett and the Business of Life.  Is it massive?  Yes.  Does it contain numerous revelations about his childhood, his "slight obsession" with trains, his love of collecting, and his sex life?  Yes.  Is it well written and well researched?  Yes.  Does it cover many financial episodes (most of all Salomon Brothers) and famous characters?  Yes.  Is it number one on Amazon?  Yes.  Does it contain analytic depth?  No.  Did I like it?  Yes, but for a return which is mostly biographical in nature, it's a lot of detail to wade through.

My views on the crisis -- a summary statement

A few inattentive malcontents are complaining that I haven't stated my views.  I have, but if you want them, or some of them, in one neat place, devoid of subtlety or explanation, here they are:

1. Glass-Steagall repeal was not a major cause of the financial crisis, nor was government-induced "minority lending."

2. We should use regulation to move more of the currently unregulated derivatives markets to the clearinghouse model.

3. The crisis represents a massive conjunction of both market and governmental failure.

4. I would not nationalize banks as ongoing concerns, at least not short of a far more extreme emergency than the current status quo.

5. The modified Paulson plan was better than nothing -- especially after the market had been scared -- but far from my first choice.  In any case the plan would have been revised almost immediately.  The Paulson and Dodd plans were never that far apart.

6. My first choice is to induce and if need be to force more information revelation, identify the insolvent banks, close them up, and give the battle-tested FDIC a much greater role in the whole process.

7. In the meantime the Fed should not worry much about inflation.

8. The critical deregulatory mistake was allowing excess leverage.  Many deregulations get blamed but in fact contributed little to the problem.

9. Everyone says that letting Lehman die was a big mistake but I'm not yet convinced.  Maybe a bracingly high TED spread is what we need.

10. Libertarians are overrating the moral hazard argument, as many equity holders have been wiped out.

11. If someone is pushing conclusions and not identifying the potential weak points in his or her arguments, be suspicious.  Also beware of anyone pretending to offer you simple answers.

12. I have a long and complicated view on the relevance of Austrian Business Cycle Theory which resists easy summation, but markets could have and should have been more cautious in response to Greenspan's easy money policies.

13. Insolvent hedge funds and the commercial paper market remain outstanding issues which are not easy to address.

14. I agree with Arnold Kling about relaxing capital requirements though at this point I don't expect it to help much.

15. The crisis is complex and has many causes; there won't be a simple or quick solution.

If you wish you can google to the details.  Also, I don't believe I had offered #9 before on this blog.

The countercyclical asset, a continuing series, revisited

Many of you like this series and I am no longer puzzled as to why.  The countercyclical assets in recent times are A and B and best of all C.