In October 2012, I first reported that Iran had experienced hyperinflation. My diagnosis of Iran’s inflation woes has since drawn the ire of Prof. Djavad Salehi-Isfahani, who has written a series of blogs and articles disputing my analysis. Prof. Salehi-Isfahani, an economist at Virginia Tech, has employed a confused (and confusing) mix of half-baked methodologies and selected data to yield unfounded, preposterous claims. Specifically, he claims that Iran never experienced a brief bout of hyperinflation and that Iran’s inflation rate is much lower than the estimates reported by virtually everyone except Iran’s Central Bank. To borrow Jeremy Bentham’s phrase, Prof. Salehi-Isfahani’s claims constitute a series of “vulgar errors.”

What has puzzled me for the past few months is why Prof. Salehi-Isfahani has been so hell-bent on denying Iran’s inflation problems. But finally, in his most recent article in Al Monitor, he showed his hand, revealing his underlying thesis – the same claim propagated by the Iranian regime – that the sanctions imposed by the West have not inflicted economic damage on Iran to the extent that has been reported.

In his most recent blog, Prof. Salehi-Isfahani finally abandons his own confused attempts to calculate Iran’s inflation rate. For his readers, this is a relief, as the variety of methods with which he attempted to calculate inflation in Iran amount to nonsense – and not even good nonsense.

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Earlier this week the Inspector General (IG) of the Federal Housing Finance Agency released a report documenting the current pay levels of mid-level executives at Fannie Mae and Freddie Mac, those mortgage giants which contributed to the financial crisis and have so far cost the taxpayer over $180 billion.   Despite the bail-outs, it seems the GSEs are still a comfortable place to work, all at the taxpayers’ expense.

This chart, reproduced from the IG report, illustrates that the GSEs’ over 300 Vice Presidents actually got paid more in 2011 than 2010, with a median compensation of $388,000.  Those poor directors, of which there are over 1,650, had to make due on a median compensation of only $205,300.  For running two companies into the ground, these executives seems pretty well paid to me.

One of the arguments against cutting pay at Fannie and Freddie is that all the good employees will leave, ultimately costing the taxpayer even more.  First I question whether we want the same people running these companies that ran them into the ground.  Shouldn’t we be cleaning house at Fannie and Freddie?  Secondly, voluntary employee attrition rates since the GSEs have been taken over aren’t all that much higher than before their bail-outs.  If anything these rates are too low.  Again given their role in the companies’ failures, we should encouraging long-time Fannie/Freddie employees to leave, not stay.

I have long proposed that since the taxpayer now outright owns Fannie and Freddie, their employees should be paid like federal government employees (who are already over-paid).   To continue to allow the same people who stuck the taxpayer with a $180 billion bill to be paid lavishly, is to add insult to injury.

When the December issue of the Journal of Finance landed on my desk, it was almost like Christmas had come early.   Among the articles was an interesting examination of banks which failed (or were rescued) during the recent financial crisis (for a non-pay-wall working paper version see here).  The authors set out to ask a simple question:  how well does the performance of individual banks in 1998 predict their performance in the recent crisis? 

Recall in 1998 Russia defaulted on some of its debts.  It was generally believed (erroneously) that nuclear powers did not default.  Market participants did not take the news well, with a resulting flight to quality and spike in lending spreads.  Then Treasury Secretary Robert Rubin called it “the worst financial crisis in the last 50 years” (sounds a little familiar).

While the authors find that other factors, such as leverage and reliance on short-term funding, were significant predictors of failure, 1998 performance predicted well which banks got in trouble this past crisis.  This effect is likely capturing a variety of bank specific characteristics, such a firm culture, risk tolerance and management style. 

One of the central debates about financial crises is to what extent are shocks contagious, like a disease that spreads from one bank to another, or rather do shocks, such as recessions, separate weak firms from strong firms?  If the former then broad-based Geithner-Bernanke style rescues might be appropriate.  If however failures are limited to weak firms, then rescues keep these weak firms, with their dysfunctional cultures around. 

The results of this paper suggest to me the importance of allowing firms to fail, rather than resorting to bailouts.  One of the fundamental problems of our current bank regulatory regime is that it is subject to its own flawed theory of intelligent design.  If only enlightened regulators are given sufficient power, they can design the best system.  I believe reality is quite different.  Only by allowing the evolutionary sorting of banks, and their firm cultures, can we improve the stability and efficiency of our financial system.