Tyler Cowen's Blog, page 576

Germany fact of the day (not about the euro, or is it?)

Germany, passengers cars per thousand: 544

United States, passenger cars per thousand: 409

I was surprised.  The source is here and for the pointer I thank Axayacatl Maqueda.

Addendum: The "fact" seems to be wrong, see the comments, see also Kevin Drum.

Request for requests

Do please leave your requests for topics, questions, and the like in the comments.  I will try to cover some of them in the year to come or who knows maybe even tomorrow.

GiveWell

GiveWell, by far the best charity evaluator working today, has a new top ranked charity, the Against Malaria Foundation. Why is VillageReach, their best ranked charity for several years, no longer at the top? First, GiveWell is ranking more charities and charities are now more willing to provide GiveWell the kind of detailed information on outcomes that GiveWell demands. Thus, more charities are vying for the top spot. Even more important is this:

VillageReach was our top-rated organization for 2009, 2010 and much of 2011 and it has now received over $2 million due to GiveWell's recommendation. We do not believe that VillageReach has short-term funding needs…

When was the last time that a charity or evaluator told you that due to successful fund-raising there are now more urgent needs elsewhere? Impressive. As I have for several years, I will be following GiveWell's advice and donating to the Against Malaria Foundation and several of GiveWell's other top charities.

A meeting with the politeness expert?

From the always-excellent Laura Miller:

I confess that I have met Alford briefly and have found him polite, though not extraordinarily so. However, he reports that he volunteers as a New York City tour guide for visiting foreigners, always tries to strike up conversations with people standing alone at parties and considers himself responsible for the cleanliness of the toilet seat in any "single-stall facility" he emerges from, whether or not he splashed it himself. Such behavior does indeed seem above and beyond the ordinary call of manners and sets a standard worthy of a role model.

Yet all these points for gallantry are nearly wiped out in my book by Alford's account of a game he is fond of playing in restaurants, called "Touch the Waiter." The goal is to "see who at your table can touch the waiter the greatest number of times without the waiter's figuring out you're doing so." Although he stipulates that this touching should never be lecherous or "directed at the sullen or the insecure" (the preferred target is an overly attentive or effusive waiter) it is nevertheless a creepy activity, a prank aimed at people whose livelihood depends on making themselves agreeable to patrons. Would it kill him to stop doing that?

Assorted links

1. Various sentences to ponder.

2. How Singapore Air plans its meals.

3. The man who liquidates Dutch churches; the organs are hard to sell and "demolition" is sometimes an option.

4. Andres Marroquin picks the ten best economics papers of 2011.

5. Is Hannukah responsive to Christmas?

6. More on the former Chinese real estate bubble.

Andrew Lo reviews 21 books on the financial crisis

The paper and abstract are here:

Abstract:

The recent financial crisis has generated many distinct perspectives from various quarters. In this article, I review a diverse set of 21 books on the crisis, 11 written by academics, and 10 written by journalists and one former Treasury Secretary. No single narrative emerges from this broad and often contradictory collection of interpretations, but the sheer variety of conclusions is informative, and underscores the desperate need for the economics profession to establish a single set of facts from which more accurate inferences and narratives can be constructed.

It is an instructive look at how bad we are at discovering the truth and talking about it.  Here is part of his beginning:

To illustrate just how complicated it can get, consider the following "facts" that have become part of the folk wisdom of the crisis:

1. The devotion to the Efficient Markets Hypothesis led investors astray, causing them to ignore the possibility that securitized debt2 was mispriced and that the real-estate bubble could burst.

2. Wall Street compensation contracts were too focused on short-term trading profits rather than longer-term incentives. Also, there was excessive risk-taking because these CEOs were betting with other people's money, not their own.

3. Investment banks greatly increased their leverage in the years leading up to the crisis, thanks to a rule change by the U.S. Securities and Exchange Commission (SEC).

While each of these claims seems perfectly plausible, especially in light of the events of 2007–2009, the empirical evidence isn't as clear.

Starting on p.35, you can find an absolutely devastating revisionist take on the myth of the 2004 SEC change to Rule 15c3–1, relating to the supposed increase in leverage requirements from 12-1 to 33-1:

…it turns out that the 2004 SEC amendment to Rule 15c3–1 did nothing to change the leverage restrictions of these financial institutions. In a speech given by the SEC's director of the Division of Markets and Trading on April 9, 2009 (Sirri, 2009), Dr. Erik Sirri stated clearly and unequivocally that "First, and most importantly, the Commission did not undo any leverage restrictions in 2004". He cites several documented and verifiable facts to support this surprising conclusion, and this correction was reiterated in a letter from Michael Macchiaroli, Associate Director of the SEC's Division of Markets and Trading to the General Accountability Office (GAO) on July 17, 2009, and reproduced in the GAO Report GAO–09–739 (2009, p. 117).

It is also shown that the higher leverage was common in the late 1990s.  There is more to the discussion, but it is time to reconsider this point.

Is the Fed our savior in financial regulation?

It seems odd to put up an actual substantive post on Christmas day, nonetheless here is my New York Times column on financial regulation.

Despite these problems, the United States may oddly enough be facing this new financial turmoil in a relatively safe position, though whether it's safe enough remains to be seen. The Federal Reserve took the lead on future capital requirements just last week, but for the shorter run there is a more important Fed policy move. Starting in late 2008, as a response to our financial crisis, the Fed bought government and mortgage securities from banks on a very large scale.

Bank reserves at the Fed rose from virtually nothing to more than $1.6 trillion. Then the Fed paid interest on those reserves to help keep them on bank balance sheets.

It is estimated by Moody's that America's biggest banks now have liquid assets that are 3 to 11 times their short-term borrowings. In other words, it's the cushion we've been seeking. Furthermore, a lot of those reserves sit in the American subsidiaries of large foreign-owned banks, protecting the European system, too.

This new safety comes not from regulatory micromanagement but rather from the creation of additional safe interest-bearing assets. While European economies have been losing safe assets through debt downgrades, the United States financial system has been gaining them.

Here is a relevant link from The Economist.  Here are links to Brad DeLong, David Wessel, and others, on related points.  Here is David Beckworth on safe assets.  The scarcity of safe assets is a critical theme today, and still we lack a satisfactory theory of collateral.  For instance, how many macroeconomists are well equipped to answer how "putting OTC derivatives on exchanges" will affect interest rates and output?

Here is another bit, which shows I have been changing my mind on interest on reserves:

The Fed's stockpiled liquid reserves have met some heavy criticism. Hard-money advocates contend that they are a prelude to hyperinflation — although market forecasts and bond yields don't bear this out — while proponents of monetary expansion have wished that banks would more actively lend out those reserves to stimulate the economy. That second view assumes that the financial crisis is essentially over, but maybe it's not. As the euro zone crisis continues, it seems that Ben S. Bernanke has been a smarter central banker than we had realized.

Here is my earlier blog post, T-Bills as a substitute for financial regulation.  Here is my earlier post on monetary policy and bank recapitalization.  I view these as one piece, trying to explain why Bernanke has not been more aggressive with monetary policy along some dimensions.

The Fed (possibly) has foreseen that a scarcity of safe assets is a major macroeconomic problem — most of all in Europe — and has acted to limit this problem in the United States, even at the cost of having tighter money.  That means interest on reserves as a kind of synthetic T-Bills policy.  The interest induces demand to hold liquid reserves, which increases the buffer against a European financial implosion.  You can think of this policy as a substitute for the failure of regulators to get capital requirements right.

Overall, that means a monetary policy having to play the role of fiscal policy and regulatory policy, all at the same time.  No wonder so few people are happy with the outcome.

Through this lens, the Fed looks better, Congress, Dodd-Frank and the financial regulators look worse.  That dysfunctional government prevents an effective fiscal policy response — good and also politically sustainable projects — looks worse too.

Addendum: Arnold Kling comments.

Merry Christmas!

Happy Holidays to All!

Copyright Christmas Circus 2011

Larry Ribstein has passed away

Larry was a well-known legal scholar, and blogger on law, economics, and also film, with a focus on how commerce was portrayed in the movies.  He was a former colleague of mine at George Mason.  Ilya Somin offers some remarks here, here is Geoffrey Manne, here is Bainbridge, here is Ted Frank.  There are more remembrances here.  Sad to hear of course.