Tyler Cowen's Blog, page 507

Markets in Everything: Torturer

At left is an ad that ran in the Guardian newspaper. “The government of a Middle Eastern state is recruiting a senior torturer to work in a well-equipped prison. Our ideal candidate would be prepared to inflict extreme pain and suffering… Candidates will be expected to inspire a small but enthusiastic team.”

No, I don’t think the ad is real. Alas, I am sure the job is real.

Hat tip: Boing Boing.

*Birdseye: The Adventures of a Curious Man*

That is the new and oddly underreported book by Mark Kurlansky, about Clarence Birdseye and the early history of frozen food.  I found it consistently good and enjoyable, here is one excerpt:

Birdseye asked himself many questions about food and survival in the subarctic.  Why, he wondered, did people in Labrador eat lean food in the summer but a tremendous amount of fat in the winter?  The ultimate winter survival dish was something he called bruise, which is sometimes known as brewis, a combination of dried and salted food mixed with a tremendous amount of fat.  Usually it was salt cod, hardtack, flour, and water, baked hard and mixed with cubed salt pork, and then boiled and served like a hash with huge globs of melted pork fat.  Bowls of melted fat were often served on the table to spoon onto food.  Birdseye laughed when heard a host say, “Have some more grease on your bruise,” but everyone then took a few spoonfuls.  It was a Sunday morning breakfast favorite.  He remembered that people also ate a great deal of grease in the Southwest, where it was hot in the summer.  They would open a can of corn and eat it with pork fat.

Here is one picture of fish and brewis.  I found this book especially interesting on the early history of European-settled Labrador.

Capital flight in the Eurozone

In a fascinating research note*, Matt King of Citigroup calculates the outflows of capital from various euro zone nations, in particular Italy and Spain. He concludes that Italy saw 160 billion euros exit in 2011, while Spain lost 100 billion euros, in a mixture of bank withdrawals and sales of government and corporate bonds. He thinks a further 200 billion euros could follow.

…Foreign bank deposits have fallen 64% in Greece, 55% in Ireland and 37% in Portugal; in Italy, the fall is 34% and Spain 13%. Foreign government bond holdings have dropped 56% in Greece, 18% in Ireland and 25% in Portugal; in Italy the fall is 12% and Spain 18%. So if Italy and Spain were to move to the average for the other three, a further 200 billion euros would flow out.

A final thought. This is another example of the nationalisation of markets, in which official flows are steadily replacing private sector capital. It is a trend that seems unstoppable.

Here is a bit more.

The Father of Microcredit

You’ve heard how microcredit was born. In a nation long shackled by British rule and wracked by famine, a brilliant man was seized with a desire to strike a blow against the poverty all about him. Defying common sense and the skepticism of his colleagues, he began lending tiny sums out of his own pocket to poor people, which they were to invest in tiny businesses. He demanded no collateral, only the vouchsafe of the borrowers’ peers. The borrowers rewarded his faith with punctual repayment. In time, his experiment spawned a national movement that delivered millions of loans to poor men and women and broke the power of money lenders.

The hero of this story is…Jonathan Swift, author of Gulliver’s Travels.

Swift developed the main ideas of microcredit–small sums, co-signers on the loan who knew the recipient, loans to women–in the 1730s.  Although the system did not grow large in his lifetime, by the 1840s Irish microcredit institutions served a fifth of the population of Ireland.

The quote and information are from David Roodman’s excellent book Due Diligence: An Impertinent Inquiry into Microfinance. Roodman is a  remarkable scholar, equally at ease collecting information in the slums of Bangladesh as writing complex computer code, and Due Diligence is a very good book not just on microcredit but on development more generally.

(Loyal readers may recall that Tyler also noted Swift’s connection to  microcredit in a post from 2006.)

Assorted links

1. Marc Gunther’s blog on food, sustainability, economics, and related matters.  It is analytical, not just the usual rhetoric on these topics.

2. Does Hayek’s welfare state lead to serfdom?  And how to unfold a rhino (short video).

3. Summary of the No-sterity debate.

4. Have we been underestimating the extent of the growth of the middle class in developing nations?

5. More on genes and economics.

It would be premature to use the words “free fall”

Nonetheless those are the words which come to mind, to me, in my safe Fairfax home, far from China and European bank jogs:

Chinese consumers of thermal coal and iron ore are asking traders to defer cargos and – in some cases – defaulting on their contracts, in the clearest sign yet of the impact of the country’s economic slowdown on the global raw materials markets.

The deferrals and defaults have only emerged in the last few days, traders said, and have contributed to a drop in iron ore and coal prices.

“We have some clients in China asking us this week to defer volumes,” said a senior executive with a global commodities trading house, who warned that consumers were cautious. “China is hand to mouth at the moment.”

A senior executive at another large trading house also confirmed there had been defaults and deferrals in both thermal coal and iron ore.

Here is more, and here is a bit more detail.

The reshoring of U.S. (and Mexican) manufacturing

Some 65 per cent of the senior executives questioned by Accenture said they had moved their manufacturing operations in the past 24 months, with two-fifths saying the facilities had been relocated to the US. China was the second destination for relocated factories, with 28 per cent, followed by Mexico with 21 per cent.

Here is more.

Amazon vs. expert reviews of a book

…experts and consumers agreed in aggregate about the quality of a book.

Amazon reviewers were more likely to give a favourable review to a debut author, which the Harvard academics said suggested that “one drawback of expert reviews is that they may be slower to learn about new and unknown books”.

Professional critics were more positive about prizewinning authors, and “more favourable to authors who have garnered other attention in the press (as measured by number of media mentions outside of the review)”.

Discovering that an author’s connection to a media outlet increased their chances of being reviewed by roughly 25%, and that the resulting review was 5% more favourable on average, the academics then investigated whether this was down to collusion.

They concluded that the bias was down to the media outlets aiming their reviews at their audience, “who have a preference for books written by their own journalists”, rather than collusion.

Here is more, written up by The Guardian.  The research paper, by Michael Luca, is here.  It is not his first published paper, and he teaches at Harvard Business School.

More from Edward Conard, on proprietary trading

Rather than demanding an end to default-prone subprime lending funded with hair-triggered short-term debt, bank critics have, ironically, demanded an end to proprietary trading, which they view as unnecessarily risky, but which was inconsequential to the cause of the Crisis.  In a world where banks underwrite and trade risk, what constitutes proprietary trading?  When a bank takes credit-default risk by making aloan, is it taking proprietary risk?  It is, without a doubt.  But loaning money is what banks do.  When a bank like Goldman Sachs seeks to unwind that risk by shorting mortgages prior to the downturn, is that proprietary trading?  Yes.  So is borrowing short and lending long.  With banks now primarily underwriting, pricing, and trading risk rather than merely funding loans, restrictions on proprietary trading unnecessarily imperil banks and distort capital markets to restrict banks to only the long side of the trade.  restricting banks to long-only positions substantially increases withdrawals in the event of a panic.

I would stress that the real problems come when the overwhelming majority of banks go heavily long on some fairly simple assets — usually real estate — in an overly optimistic way.  Think Ireland, Iceland and the United States during the last crisis, among many other instances.  Once the short-term debt behind those banks starts to unravel, all hell breaks loose and the central bank can at best limit but not stop the carnage.  That is the main problem financial regulation should be trying to address and it isn’t easy.

I am much less worried about “rogue trades” or “rogue investments” at individual banks (or non-banks), even very large ones.  Such trades surely exist: think LTCM or even Continental Illinois.  Ex post, there is usually a way to plug the gap, if only by having the Fed backstop a deal.  After all, the rest of the banking system is sound in these scenarios.  Prop trading may increase the chance of this second problem, but arguably it decreases the chance of the first and larger problem.

You can buy Conard’s stimulating book, Unintended Consequences, here.  Conard, by the way, does object to how the government implicitly subsidizes the short-term debt of the major U.S. banks and he views that as the root of the problem behind proprietary trading, not the trading itself.

Ezra and Tom Coburn on Sweden

EK: To go back to Krugman, if he were sitting here, he’d say in this crisis there’s been no evidence anywhere that cutting deficits leads to growth. We’ve not seen it in the euro zone or the UK. And he’d say the Reinhart/Rogoff story is a correlation story. It doesn’t prove that high debt always and everywhere hurts growth.

TC: Go look at Sweden. Here’s what Sweden did. They cut their spending and their taxes. They have the best growth rate in Europe. They had a surplus this year. They had growth at six-plus percent. They actually did a Reagan style approach to their problem by cutting spending and cutting taxes. And they’re the fastest growing with a decline in their debt-to-GDP ratio.

EK: But correct me if I’m wrong, but if I recall, Sweden’s monetary policy went towards a very sharp devaluation, they’ve been driven by export growth, and alongside Israel, they’ve been more aggressive than any other central bank in the world. They’ve done stuff that if we did it here, people would lose their minds.

TC: I think there are monetary parts to that. But their finance minister put in place tough stuff. They had people who left Sweden because of the tax ratio. Now they’ve moved back. And it’s not a perfect example, but it’s an exception to the Krugman story.

The entire dialogue is interesting, noting that, as Ezra points out, Coburn is more worried about inflation than he needs to be.