Marginal Revolution

Growth and the real exchange rate

Dani Rodrik, who is back at blogging, also has a new paper.  Here is the abstract:

I provide evidence that undervaluation of the currency (a high real exchange rate) stimulates economic growth. This is true particularly for developing countries. There is also some evidence that the operative channel is the size of the tradable sector (especially industry). These …findings suggest that tradable goods suffer disproportionately from the government or market failures that keep poor countries from converging towards higher-income levels. I present two categories of explanations as to why this may be so, focusing on (a) institutional weaknesses, and (b) product-market failures. A formal model elucidates the linkages between the level of the real exchange rate and the rate of economic growth.

No, mercantilism has not made a comeback.  Public choice economics has.  The most plausible mechanism is that most poor countries have dysfunctional interest groups.  Exporters are a relatively growth-enhancing set of interest groups.  So if your policies favor exporters, the quality of your interest groups will increase over time.  Your policy will stay good or get better and your growth will go up.  In other words, what Toyota wants is pretty good for Japan.  China's hope is that its new businessmen want to keep some modicum of freedom, and so on.

Of course low real exchange rates trickle away over time, as domestic prices rise and markets restore the real exchange rate of their choice.  But low real exchange rates are probably a good proxy for other export-friendly policies, such as predictable regulation and investment in infrastructure.  And so low real exchange rates are only doing part of the work in driving growth and probably not even the biggest part.  If we had an index of "export friendliness" for the countries in this sample, maybe the power of the low real exchange rate would go away.  This explains why wealthier countries, who don't have dysfunctional interest groups to the same degree, also don't see comparable growth benefits from low real exchange rates.  Rodrik even points out on pp.14-15 that the countries with the worst governance indices see the biggest growth gain from low real exchange rates.  (By the way, in the public choice story the improvements in the quality of your interest groups and in your policy don't come until later and thus they are not captured in the current level of the quality of governance index.)

Brad DeLong comments here and here and here.

Can you trust a man who doesn't trust his wife?

I owe that line to Robin Hanson.  Here is the latest:

Six weeks after Bruce E. Ivins killed himself, the cremated remains of Mr. Ivins, the Army scientist and anthrax suspect, are stored at a funeral home here, awaiting the outcome of an unusual probate court proceeding.

...Dr. Ivins wrote of his wish to be cremated and have his ashes scattered. But fearing that his wife, Diane, and their two children might not honor the request, he came up with a novel way to enforce his demand: threatening to make a bequest to an organization he knew his wife opposed, Planned Parenthood.

“If my remains are not cremated and my ashes are not scattered or spread on the ground, I give to Planned Parenthood of Maryland” $50,000, Dr. Ivins wrote in the will. Court records value the estate at $143,000.

Ms. Ivins is a former president of Frederick County Right to Life, according to F.B.I. records.

The NYT article concludes (do they ever write contingent contracts?):

The will adds another stroke to the portrait that has emerged from F.B.I. records of Dr. Ivins, an anthrax specialist at the Army’s biodefense laboratory at Fort Detrick, in Maryland, as quirky and mentally troubled.

His wife, at least, says he is innocent.  What would you think of a man who wrote such a contract? 

The bottom line

...off the top of my head, I cannot come up with any reason to subsidize mortgage indebtedness. How does your having a mortgage loan benefit me? Does anyone have an answer for that? Bueller?

I think that mortgage subsidies emerged pretty much by accident. The income tax deductibility began when hardly anyone paid income tax, and it has been grandfathered in ever since. In the 1930's, government decided to reshape the mortgage market, and that effort evolved into government agencies, such as Fannie Mae, FHA, and Freddie Mac. Fannie and Freddie were subsequently spun out to private shareholders as government-sponsored enterprises, but Congress never let the GSE's forget that they had a "mission" to provide subsidies to low-income borrowers.

That's Arnold Kling.  I'll add two complementary points.  First, higher investment in homes may bring negative externalities through climate change.  Second, home ownership apparently makes a laborer less geographically mobile and increases the severity of business cycles and real shocks.

Will the informal sector drive third world growth?

No:

The overall picture of economic development that emerges from this analysis is in some ways very similar to the traditional pre‐growth‐theory development economics, although it is related to the modern reformulations of economic growth through the lens of development economics (Banerjee and Dulfo 2005). The recipe for productivity growth is the formation of official firms, the larger and the more productive, the better. Such formation must perhaps be promoted through tax, human capital, infrastructure, and capital markets policies, very much along the lines of traditional dual economy theories. From the perspective of economic growth, we should not expect much from the unofficial economy, and its millions of entrepreneurs, except to hope that it disappears over time. This “Walmart” theory of economic development receives quite a bit of support from firm level data.

That's from a recent La Porta and Shleifer paper, just presented at Brookings.  I find this very convincing.  The pointer comes from Greg Mankiw.

Assorted links

1. How to judge a popular book in 90 seconds or less.  It usually takes me less than five.

2. Does InTrade have a Republican bias?

3. The most overpaid actors and actresses?

4. Douglas Holtz-Eakin on taxes: the truth.

5. My colleague Dan Rothschild has a new blog covering Ike and Houston.

6. An awful Op-Ed.

Sentence of the Day

It is through exchange that difference becomes a blessing, not a curse.

Chief Rabbi of Great Britain, Jonathan Sacks quoted in McCloskey's The Bourgeois Virtues.

Hat tip to Steve Horowitz at The Austrian Economists who rightly says "Have the benefits of specialization and exchange ever been presented more concisely and beautifully than in that one sentence?"  Maybe this should be sentence of the year.

Intelligent Design and Evolution

A few years ago I wrote (follow up here):

Suppose that you find a watch in the forest.  If you know there is no watchmaker then the theory of evolution is a brilliant and compelling explanation for the presence of complexity without design. But suppose that you know a watchmaker exists then surely the simplest and most compelling explanation is that the watchmaker made the watch. Any other explanation, particularly one so improbable as evolution would seem to be preposterous and beside the point.

Thus for someone who knows, really knows, that god(s) exists (and there are many people who claim to know that god(s) exists) then some form of creationism follows as a rational deduction from the premises.  It's no point telling these people that creationism is unscientific because given the premise that god(s) exists creationism is scientific. If god(s) exists then evolution is almost certainly false, if not in every particular then surely in the grand claims of a undesigned nature.

Not surprisingly the argument created a firestorm of opposition (see the many nasty comments on the two original posts).  Thus, I am quite pleased to see that renowned philosopher Thomas Nagel writing in Philosophy and Public Affairs has recently made the same argument.  Nagel writes:

What [Intelligent Design] does depend on is the assumption that the hypothesis of a designer makes sense and cannot be ruled out as impossible or assigned a vanishingly small probability in advance. Once it is assigned a significant prior probability, it becomes a serious candidate for support by empirical evidence, in particular empirical evidence against the sufficiency of standard evolutionary theory to account for the observational data...

...Judge Jones cited as a decisive reason for denying ID the status of science that Michael Behe, the chief scientific witness for the defense, acknowledged that the theory would be more plausible to someone who believed in God than to someone who did not. This is just common sense, however, and the opposite is just as true: evolutionary theory as a complete explanation of the development of life is more plausible to someone who does not believe in God than to someone who does.

Nagel has much more of interest to say about teaching science given that ID is scientific if one accepts belief in god. 

Hat tip to Robin Hanson's post, Intelligent Design Honesty, at Overcoming Bias.

Sentences to scare you

The government is looking for an agreement that would not involve public money.

That's about Lehman Brothers.

The economics of the two Koreas

The official told FOX News there are no signs of instability in North Korea now, but the likelihood of a smooth transition of power in that country is not high.

Here is the story, fully speculative throughout.  Many people think Kim is in very bad shape.  Apparently the U.S. and China are drawing up contingency plans for what comes next, financed in part by those interest payments on the agency debt.

One topic at today's lunch was to guess the chance that the North Korean communist regime might collapse forever in the next few years.  I said p = 0.3, which others found to be a high estimate.  A second topic was, if reunification of the Koreas occurred (itself an open question), how long it would take for the South to grow again, given the amount of reconstruction it would have to finance in the North.  I said twenty years, though upon reflection I'll revise that downwards a bit.

It's hard to say much about these topics with any grounding, but since no one else in the econ blogosphere is talking about them, I will.  It's by far the most important drama going on in the world right now.

Katha Pollit has some questions for Sarah Palin

I know this is serious stuff and it shouldn't cause me to snort.  But it does.  I loved this dual question:

What is the European Union, and how does it function?

Not quite as good is:

What is the function of the Federal Reserve?

The link is from Ezra Klein.  Bear Stearns, Ireland, Georgia, and Denmark are invited to submit their answers as well.  How about Lehman Brothers and Turkey?

Addendum: On this list, questions #2, 4, 6 and 17 bear some pondering too.  Nor is #3 as simple as many people think.

Sentences to ponder

Recent research by economists Amy Finkelstein, Erzo Luttmer, and Matthew Notowidigdo suggests that you'll get a bigger bang for your consumer buck by spending while you're healthy, before old age starts to take the fun out of life's indulgences.

Here is more.  I worry about the asymmetry between gaining happiness and avoiding pain.  Surely money for the young is better for the former but how about the latter?

New rankings of economics blogs

Via Econbrowser, but of course such rankings are not very scientific.

Customer relations

Treasury tried to head off such concerns by having David McCormick, the undersecretary for international affairs, call foreign central banks and other overseas buyers of the companies' securities or debt to reassure them of the instruments' creditworthiness. Over the weekend, Treasury officials called sovereign-wealth funds in Abu Dhabi and elsewhere in the Middle East, assuring them that they were working on financial issues involving Fannie and Freddie, says an individual apprised of the conversations.

Here is much more, interesting throughout.  Read this too.  But no, the buyers forced the hand of our government by essentially threatening, through inaction, to induce a massive run on the uninsured U.S. financial institutions.  One response is to insure all of those institutions, as the dominoes continue to fall.  Another response is to believe that runs on unprotected financial institutions are not very dangerous.  The third, correct response is...?

What are our personal obligations toward the environment?

From the hum of the city, while pondering fossil fuel consumption, Megan McArdle writes:

I understand that people's desires for large houses in leafy suburbs are every bit as valid as my ardent desire to live near the peaceful hum of traffic.  Unfortunately, there is no such thing as a policy that effects everyone equally, and the painful job of being an adult is doing things we don't like because they're the morally right thing to do.

From my mid-sized house in a leafy suburb, I will assume that a) environmental concerns are real, b) we will fall short of fixing those problems through public policy (Megan uses the word policy but mostly her post is about personal obligation), and c) we do in fact have personal obligations to limit consumption.  The question remains how much fun we can have.  Fossil fuel consumption isn't necessarily the area of optimal sacrifice.  For instance here are two other options:

1. Send money and other forms of aid to the victims and future victims.

2. Have fewer children than otherwise, if only in the stochastic sense (e.g., don't move to Alaska at a young age).  Climate change is not the last environmental burden we will place on the world and probably not even the biggest such burden, but fewer people does mean less human pressure along many environmental dimensions, present and future.

Assuming that restriction is indeed called for, either of those might be more personally imperative than:

3. Fly and drive less and buy a smaller house.

Most people focus on #3 because lower energy consumption makes them feel less affiliated with the particular problem at hand.  But instrumentally speaking at a low discount rate #2 is more potent and at any discount rate #1 can be a more effective form of aid to the victims.

In this setting, I can see a few theories of our duties:

a. Do that which yields the highest net social return if only you do it.

b. Do that which yields the highest net social return if many people were to do it.

c. Cut back on your activities which most closely resemble aggressive interference into the lives of others.

d. Perform the action most likely to influence the behavior of others.

Belief in "a" favors sending money.  Belief in "b" favors having fewer children.  Belief in "c" favors restricting your driving and flying.  I am not sure which course of action follows from belief in "d."

You might think that you should do some mix of 1, 2, and 3,  But if your MU schedules are sufficiently flat, an argument from Steven Landsburg implies it is optimal to concentrate your sacrifice in a single "best returns" project.  So it may suffice to pick either 1, 2, or 3 and do it very well.

The bottom line: Perhaps I should call this blog post An Apology for Me.

Glen Whitman update

The economist and blogger.  He is now a screenwriter for Fringe.  But not just; he remains an excellent economist.  Thanks to several MR readers for the pointer.

Did we *really* need that bail-out?

The highly-praiseworthy-but-ever-so-occasionally-totally-wrong Bryan Caplan suggests that Paulson should have simply let the debt securities of the mortgage agencies go.  In addition to the fact that he favors The End of the World, Bryan is underestimating at least two points:

1. The current operation of the money market requires ongoing faith in a variety of assets and commitments.  Just try tracing through the consequences of a general "run" on money market funds, which "promise" a redemption ratio of $1 a share but on the other hand really don't make such a promise.  How quickly would Merrill Lynch cry Uncle, how quickly would the Fed's balance sheet be exhausted, and how many commitments would they have made in the meantime and how many people would have to sell stocks to find cash and make margin calls?  Or think about what would happen if FASB ruled that Frannie debt securities did not qualify as "ready cash" for accounting purposes.  (As a general tendency I find that economists vastly underrate the importance of accounting as an economic force.  I might add that many market advocates are unaware of how quickly liquidity can vanish in these markets; just look at auction-rate securities.)  And those aren't even the biggest potential problems arising from a default.

2. In essence we already agreed to the bail out some time ago.  Have you ever spent $17,000 on a car and asked the dealer what the warranty for the car "really meant"?  Well, the Chinese spent $340 billion on agency debt and probably asked the same question at least once or twice.  They live in a world of secret agreements with leaders, not transparent democratic arrangements.  So when it comes to the U.S government decision, we're not just starting from scratch here.  How many phone calls do you think Hank Paulson has received from the Chinese central bank since August 2007?

"Are you *sure* that paper is safe enough for us to keep on buying?"

We'll never know exactly what kind of verbal dance Paulson concocted in response, but just look at the resulting flow of purchases and the relatively slight mark-up over Treasuries over that period of time.  The Chinese (among others) thought we were standing behind the securities, at least in any world-state short of federal government quasi-bankruptcy.  (In fact Paulson is in a total bind once that phone call comes in.  He doesn't have much incentive to just say "tough luck" and precipitate a crisis when otherwise no crisis is on the horizon.)

So should we try this: "Oh, is that what you thought?  Guaranteed?  Did we use that word? Sorry, try reading our signals better next time.  We love you.  Great job with those Olympics.  And when it comes to those Treasury Bills, we really do still mean it.  And don't forget to support us on Iran and North Korea."

The libertarian critique of the mortgage agencies is, in my view, very much on the mark.  But still the error has been made and we must pay up.  As Steve Chapman points out, the bailout is a necessary evil, but with emphasis on the word "evil."

Wal-Mart and obesity

Here's Charles Courtemanche and Art Carden:

We estimate the impacts of Wal-Mart and warehouse club retailers on height-adjusted body weight and overweight and obesity status, finding robust evidence that non-grocery selling Wal-Marts reduce weight while grocery-selling Wal-Marts and warehouse clubs either reduce weight or have no effect. The effects appear strongest for women, minorities, urban residents, and the poor. We then examine the effects of these retailers on exercise, food and alcohol consumption, smoking, and eating out at restaurants in order to explain the results for weight. Most notably, the evidence suggests that all three types of stores increase consumption of fruits and vegetables while reducing consumption of foods high in fat. This is consistent with the thesis that Wal-Mart increases real incomes through its policy of "Every Day Low Prices," making healthy food more affordable, as opposed to the thesis that cheap food prices make us eat more.

Of course, not everyone likes Wal-Mart.

Assorted links

1. Via Craig Newmark, a short class on behavioral economics (are the speakers or the audience more impressive?)

2. List of very good contemporary TV shows

3. Diasyrmus

4. The first Haitian opera (to buy it, right click on "shop" and then click on the Dutch phrase at the bottom of the page)

5. Nursing home reform I can favor.

6. Which three Senators receive the most Fannie Mae money?

Brazil fact of the day

In Brazil, they segregate their prisons according to gang membership. No exceptions. Not even for individuals who in fact are not members of any gang.

How does that work?  Easy.  Upon being admitted to the prison system, unaffiliated prisoners are required to join a gang.

Here is more, from Amanda Taub.  Here is her blog.  Here is another new economics blog, on models and agents.

The benefits of a winning sports team?

The consistently interesting Drake Bennett writes:

...a few scholars have started to suggest that there may indeed be another kind of benefit from big-time sports. There's a catch, though: the team has to be good. In a forthcoming paper, economist Michael Davis and the psychologist Christian End say that having a winning NFL football team increases the incomes of the people who live and work in its hometown by as much as $120 a year. And while the study doesn't identify exactly what causes the boost, the authors point to psychological literature suggesting that winning fans are at once harder workers and bigger spenders. In short, buoyed by the team's success, we work longer hours, take bigger risks, and shop more avidly, all of which helps the local economy.

I have a simple hypothesis.  Winning sports team cause local fans to feel better and thus to spend more money.  Most importantly, consumption tends to be local and thus the spending shows up in the city of the winning sports team.  Saved funds, in contrast, are invested but banks and securitization make these funds mobile.  Savings will help the national or international economy but not the local economy so much.

Since more savings would be desirable, the best outcome is if no team wins, if a small city team wins, or if the victory is uninspiring.  Detroit vs. San Antonio, anybody?  That's what the American economy needs.

Alternatively, you might think that the economic boost comes from greater confidence, higher labor supply, and other supply-side effects.  Then you should root for the teams from the largest cities (Los Angeles, New York, Philadelphia) and most of all you should root against the Washington Wizards.

P(tax hike / McCain) = 0.74

Greg Mankiw has run the numbers and "according to the Intrade betting, we are likely to see a significant hike in the top income tax rate even if McCain is elected President." As Greg notes this is actually a lower bound.

Anathem, by Neil Stephenson

Here are a few reviews and a few more and more.  Here is the Amazon listing.  A partial read and a browse put me in (temporary?) agreement with this Amazon review:

The story, when it gets going, is exciting and relatively fast-paced and all that. But it takes some 600-700 pages to get there, during which time you are immersed in the world of Arbre and its native culture. The first few pages are chock-full of in-world jargon à la A Clockwork Orange, and it will be difficult to read. (Not to worry-- there is a glossary, and selections from the Arbran dictionary appear throughout the text)...Anathem takes eight thousand years of fictional history and makes it as relevant and meaningful as anything from the Cycle.

In case you've been living under a rock, Cryptonomicon is the place to start.  It's one of my favorite popular fictions from the last twenty years and you don't even need to like "that sort of thing."

Insect politics

In case you had forgotten:

"Have you ever heard of insect politics? Neither have I! Insects don't have politics.... they're very brutal. No compassion.... no compromise. We can't trust the insect. I'd like to become the first insect politician. I'd like to, but.... I'm an insect.... who dreamed he was a man, and loved it. But now the dream is over, and the insect is awake."

That's from David Cronenberg's The Fly.  I was reminded of the scene by this post.  Best of all, the YouTube of that scene is here.  I will genuinely be glad when this campaign is over.

Addendum: The new operatic version of The Fly is receiving negative reviews.

Sentences of interest

It looks as if personality differences between men and women are smaller in traditional cultures like India’s or Zimbabwe’s than in the Netherlands or the United States.

That is John Tierney, here is more.

Why Libertarians Should Vote for Obama (1)

First, war.  War is the antithesis of the libertarian philosophy of consent, voluntarism and trade.  With every war in American history Leviathan has grown larger and our liberties have withered.  War is the health of the state. And now, fulfilling the dreams of Big Brother, we are in a perpetual war.

A country cannot long combine unlimited government abroad and limited government at home. The Republican party has become the party of war and thus the party of unlimited government.

With war has come FEAR, magnified many times over by the governing party. Fear is pulling Americans into the arms of the state. If only we were better at resisting. Alas, we Americans say that we love liberty but we are fair-weather lovers.  Liberty will flourish only with peace. 

Have libertarians gained on other margins in the past eight years? Not at all. Under the Republicans we have been sailing due South-West on the Nolan Chart – fewer civil liberties and more government, including the largest new government program in a generation, the Medicare prescription drug plan, and the biggest nationalization since the Great Depression. Tax cuts, the summum bonum of Republican economic policy, are a sham. The only way to cut taxes is to cut spending and that has not happened.

The libertarian voice has not been listened to in Republican politics for a long time. The Republicans take the libertarian wing of the party for granted and with phony rhetoric and empty phrases have bought our support on the cheap. Thus - since voice has failed - it is  time for exit.  Remember that if a political party can count on you then you cannot count on it.

Exit is the right strategy because if there is any hope for reform it is by casting the Republicans out of power and into the wilderness where they may relearn virtue. Libertarians understand better than anyone that power corrupts. The Republican party illustrates. Lack of power is no guarantee of virtue but Republicans are a far better - more libertarian - party out-of-power than they are in power. When in the wilderness, Republicans turn naturally to a critique of power and they ratchet up libertarian rhetoric about free trade, free enterprise, abuse of government power and even the defense of civil liberties.  We can hope that new leaders will arise in this libertarian milieu.

Sports figures favor Republicans

Or so it seems (original source here):

• “Professional athletes and executives have given $445,334 to the two nominees — 55.8 percent to McCain and 44.2 percent to Obama, according to ESPN analysis of figures from the Center for Responsive Politics, a nonpartisan research group.”
• “The difference this election is that pro sports donors are more divided. In the past two presidential elections, the Democratic nominee has struggled to muster at most 16 percent of pro sports donations.”...
• “McCain has lots of friends in the dugout, but his biggest fans are in football. Six of McCain’s top 10 pro sports donors are with NFL teams, led by the San Diego Chargers, Dallas Cowboys and Houston Texans.”
• “NBA staff topped Obama’s list of pro sports donors at $24,360.”

I can think of a few hypotheses to explain these results:

1. Sports figures don't want high marginal tax rates for the upper income brackets.

2. Currently the disproportionate representation of African-Americans in sports is throwing more support to Obama than a Democratic candidate normally would receive.

3. Perhaps athletes are less likely to come from coastal elites, who are becoming increasingly Democratic.

4. Republicans have historically shown less interest in regulating professional sports than have Democrats.

5. The sport of football most embodies the ethic of martial virtue and so football players and executives are especially drawn to McCain.

Is there more?

Markets in everything, China edition

Stir Fried Wikipedia.

Or so the translation goes.  Here is the explanation (with photos):

It's not entirely clear how this error came about but it seems likely that someone did a search for the Chinese word for a type of edible fungus and its translation into English. The most relevant and accurate page very well might have been an article on the fungus on Wikipedia. Unfamiliar with Wikipedia, the user then confused the name of the article with the name of the website. There have been several distinct citings of "wikipedia" on Chinese menus.

That's from the Revealing Errors blog and I thank Kat for the pointer.  The blog is very good; here is an interesting post on "the Cupertino effect."

China incentive of the day

A handsome teacher in China is offering pupils autographed photos of himself to encourage them to work harder.

Ji Feng, also vice principal of Zhiyuan Foreign Language Elementary School, is so popular among students that a lot of them were asking him for pictures.

"I came up with the idea of giving them my signed pictures as a reward," he told the Nanjing Morning Post.

Students who put in exemplary work can now pose for a picture with Ji who then signs the printed photograph.

Ji added: "It absolutely is not narcissism, but a way of encouragement. And only the students who perform the best can get such a reward."

Here is the story, the pointer is from Allison Kasic.

The paradox of deleveraging

As Paul McCulley of Pimco, the bond investor, put it in a recent essay titled “The Paradox of Deleveraging,” lately just about every financial institution has been trying to reduce its leverage — but the plunge in asset values has nonetheless left these institutions with more debt relative to their assets than before.

That's from Paul Krugman, who cites Irving Fisher as well.  Arnold Kling asks for 20 percent down.  Here is Arnold's exit strategy.  Here is John McCain, up to 48.5 on InTrade or is that just because of the recent Gallup poll?

Alaskan state politics, circa 1976

"You were against statehood?"

"Oh, sure.  Oh, sure.  Before then, three-quarters of the people here weren't here.  Eight or nine hundred people ran the Territory.  Ten thousand now run the state.  Where it used to take one person to investigate you, it now takes two to four.  The state spends too much.  If a tree blows down, two guys from the state come with a chain saw.  The state has sold the state out.  To the unions.  To the oil companies.  The oil companies have more power than the legislature.  The capital move [away from Juneau] is a lot of talk.  That's all it is, a lot of talk.  What we need is not a new capital but better legislators than we have.  I'd say leave the capital where it's at.  The state can't afford it.  There is no economy.  They're dreaming about all this oil money.

That is from John McPhee's excellent Coming into the Country, a study of Alaska recommended to me by several MR readers.  Here is a short 2002 piece on switching the capital of Alaska and the oddity of putting it in Juneau.  Here is a useful map.  Here is a picture of Juneau and from the air.  Googling "Juneau traffic report" does not in fact bring up any traffic reports.

The Fall Season

1. The new Pamuk novel, right now in German and Turkish only.

2. The new Miyazaki movie: Ponyo on the Cliff by the Sea.  Trailer (sort of) here.  It's at film festivals now, the full U.S. release date is 2009.

3. The next Malcolm Gladwell book.

4. Jose Saramago, Death at Intervals (the other title is Death With Interruptions).  I snagged an advance copy from the UK; sadly he is past his vital powers.

5. Here is a broader fall books preview.

6. The Clash Live at Shea Stadium, coming on disc.  I am lucky enough to have seen them at the Passaic Theatre before they became truly famous.

7. Ashes of Time Redux, due out October 10th.  Maybe the re-edited version of this classic (but in my view unwatchable) Wong Kar-Wai film will finally make sense.

What am I missing?

The median voter theorem

John A. Courson, chief operating officer of the Mortgage Bankers Association, a trade group, also pointed with relief to the statement by the Treasury secretary, Henry M. Paulson Jr. on Sunday morning that Fannie and Freddie would examine the fees they charge banks for loan securitization services, “with an eye toward mortgage affordability.”

Don't they...um..."need the money"?  And:

“The government doesn’t have a great deal of interest in foreclosing on a ton of homes,” said Kurt Eggert, a law professor at Chapman University in Orange, Calif., and a former member of the Federal Reserve Board’s Consumer Advisory Council.

And:

While it is not yet clear whether stockholders in Fannie Mae and Freddie Mac will be wiped out entirely, Mr. Paulson did say on Sunday that the entities “will no longer be managed with a strategy to maximize common shareholder returns.”

That's some theorem.  Here is the article.

World's biggest bail-out: update

Arnold Kling wonders: what is the exit plan?  Brad DeLong and John Hempton think the Bush Administration showed some courage.  Brad thinks the preferred stock can do OK.  Here's what forced Paulson's hand.  All lobbying from the agencies has been eliminated.  WSJ reports: "House Financial Services Committee Chairman Barney Frank (D., Mass.) said in an interview that the near-term effects of the conservatorship will be to "strengthen the public mission of what they do" to prop up the housing market."  Preferred shareholders lose dividends.  CalculatedRisk has the clearest bottom line so far.

What if we didn't bail out the creditors?

"Could you clarify just how far on the hook I should be for someone else's frauds?"

That's MR commentator CK and the answer is "lots."  Here's more detail on the bail out, by the way.  Not good.

But let's say that the Treasury did not support the debt of the mortgage agencies.  The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless.  The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly.  The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value.  Most of the U.S. banking system would be insolvent.  Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot.  The rate of unemployment would climb into double digits and stay there.  Many Americans would not have access to their savings.  The future supply of foreign investment would be noticeably lower.  The Federal government would lose its AAA rating and we would pay much more in borrowing costs.  The deficit would skyrocket.

And I haven't even mentioned the credit default swaps market.  Well, I have now.

But for another point of view, try Jeff Rogers Hummel.

Conservatorship for the mortgage agencies

...the government would place the two companies under "conservatorship," a legal status akin to Chapter 11 bankruptcy. Their boards and chief executives would be fired and a government agency, the Federal Housing Finance Agency, would appoint new chief executives.

Instead of making a one-time cash infusion to keep the companies [the mortgage agencies] afloat, the government will make quarterly investments, to the degree that market conditions require. That way, in Treasury officials' view, investors can have confidence of a ready source of cash if the firms need it, but taxpayers need not be put on the hook anymore than necessary.

Here is the article.  Here is further analysis.  Here is Brad DeLong.  CalculatedRisk has lots and they note that the details on the status of the preferred stock -- held by many U.S. banks -- remain vague.

Overall it reminds me of how they treat misbehaving academic departments and I do not take that to be a good sign.  There is no expectation that things will get better soon.  The deal also seems to recognize that any one-off "solution" (e.g., a once-and-for-all recapitalization with a new and more senior class of stock) would recreate moral hazard problems and thus is unacceptable.  Or is it Paulson saying he is done and he wants either Obama or Palin to have to worry about this?  Or is this really about protecting the dollar rather than choosing the best institutional structure for the agencies?  I believe that at least forthcoming home buyers will be better off, as Congress will not want to look responsible for higher mortgage costs.

Addendum: Here are some of the details.  They are saying that preferred stock will take losses and that this won't hurt too many banks.  That would seem to represent the ascendancy of Paulson's view over the Fed.  Here is good commentary on that.

And Max says: "Here's the real bailout. Taxpayers will now directly support the housing market."  The coming series of events could end up as the biggest bailout in the history of the world.

What I've been reading

1. The Future of the Internet -- and How to Stop It, by Jonathan Zittrain.  The main claim is that everything will be sterile, tethered appliances.  The opening up of the iPhone would seem to bely this message plus competition usually works in giving consumers what they want.  A smart book (that is rare for internet books, oddly) but I suspect it will prove to be wrong.

2. Paul Auster, Man in the Dark.  Reviews for this work have a bimodal distribution.  I like most of Auster's books but I vote no.

3. The Gargoyle, by Andrew Davidson.  So far this is excellent junk reading.

4. Epilogue, by Anne Roiphe.  Ideally this book deserves its own post but it is difficult to excerpt.  It's about why the author, now a widow, finds it hard to fall in love again.  Definitely recommended.

5. The Boy with Two Belly Buttons, by Stephen Dubner.  It's a children's book.  I haven't read so many of these since Mr. Pines Paints a Purple House -- my favorite as a tot -- but to me it seemed very good.  Ages 4-8.

Big Mac Attack

No country with a McDonald's outlet, the theory contends, has ever gone to war with another....

Thomas Friedman, who invented the theory in 1996, said people in McDonald's countries "don't like to fight wars. They like to wait in line for burgers."...

The Russia-Georgia conflict has finally blown this theory out of the water.

From the Guardian.  Clearly the theory was over-identified.  Perhaps no two countries with Taco Bell's every go to war with one another.

Hat tip to Chris Blattman.