A Want Ad for God

The press is still abuzz over Tim Geithner’s behind-closed-doors tirade against critics of the Obama administration plan to tighten financial regulation. As Mark Calabria writes below, Geithner offered a simple message to Fed chair Ben Bernanke, FDIC chair Sheila Bair, and others: “[Y]ou’ve been heard, so you were ‘included,’ now shut up.”

But while Bernanke, Bair, et al. quibble over details of the Obama plan, Geithner should be more concerned about the glaring flaw at its center: the idea that government can conjure up a “systemic risk monitor” that will identify and avoid future market bubbles.

Many of the great bubbles in financial history grew out of some belief that “everyone” (including financiers, politicians, and regulators) was confident was true, yet it turned out to be wrong (either because it was always wrong, or conditions changed in some unforseen way). Some examples:

  • The supply of Dutch admiral tulip bulbs was constrained though they were in heavy demand, so the 17th-century tulip mania was good investing.
  • The supply of land in the South Seas and the Mississippi Valley was fixed, so the 18th-century land-buying mania was good investing.  
  • The emergence of a nationwide U.S. marketplace in the early 20th century was a watershed event, so the post-WWI stock frenzy was good investing.
  • The emergence of the Internet marketplace, combined with path dependency and network effects, was another watershed event, so buying “dotcom” stock was good investing.
  • And of course, until the last few years,”everyone knew” that investing in real estate and mortgages was “safe as houses.”

That last bullet wasn’t just the belief of “greedy investment banks,” but also of government officials and regulators. My colleagues Peter Van Doren and Jagadeesh Gokhale have a forthcoming paper that notes, in part, that despite the populist rhetoric now being bandied around, banking is heavily regulated under international rules. However, those rules assume that investment in mortgages and mortgage-backed securities is low-risk (and indeed the rules push money toward those investments).

The paper also quotes numerous top-tier economists who claimed the soaring house prices of the past decade were supported by “the fundamentals,” or that a bubble wouldn’t threaten the broader economy. (Their paper doesn’t mention — but could — that Fannie Mae and Freddie Mac, along with their bureaucratic and congressional overseers, believed those firms’ investments in riskier mortgages were “safe as houses.”)

Everyone “knew” housing was a sound investment. It just turned out that everyone was wrong.

Hence the problem with a “systemic risk monitor:” Such a monitor would have to know when everyone is wrong — including financial experts and government analysts. And the monitor would need the power to force everyone to act contrary to their beliefs and instead obey the monitor’s judgment — and not fall prey to public and political demand that the monitor be replaced because “everyone knows” his judgment is flawed.

It seems the Obama administration is creating a position for God. But I doubt that God will leave his current job.

Someone might object: We wouldn’t have needed God to realize that there was a housing bubble over the past decade. But the problem with bubbles is that they only become apparent — and policies against them only become politically defensible — once they collapse.

And even then they might not be recognized. Consider another asset that experienced a dramatic price spike and collapse in the last decade: oil. Ah, someone might argue, there wasn’t really an oil bubble; we’re just experiencing a temporary decrease in demand. Oil is a scarce commodity with strong price inelasticities, and its price will soar over the long term. But the same was said of admiral tulip bulbs, and South Seas and Mississippi Valley land, and housing in high-demand areas.

What would happen if a systemic risk monitor were to come to Washington and immediately mandate that we abandon ”energy sustainability” policies because they’re premised on a bubble? Would he be right? Who would believe him? And would politicians and the public stand behind this judgment?

Tauzin on the $80-Billion PhRMA-Obama Deal

This post by my friend Ben Zycher, at NRO’s The Corner, reminds me that we still don’t know if the drugmakers are going to be net losers or net winners under the secretive deal that PhRMA made with President Obama.  To wit…

A week or so ago, I was at a National Journal salon dinner, which assembled a bunch of Nearly Important People to discuss health reform.  The dinner was “on the record,” so you can imagine how frank and interesting the conversation was.

So after dinner, I asked PhRMA head Billy Tauzin how much his member companies would make in excess of their $80 billion contribution to health care reform.  Tauzin said they would make less than $80 billion.  (PhRMA is volunteering to make less money!  A net contribution to health reform!  How civic-minded!)

If that’s true, I asked, then why isn’t he being replaced with a better lobbyist?  Tauzin said the reason is that this deal prevents a much worse deal, which might allow reimportation, or apply Medicaid’s price controls to dual eligibles in Medicare Part D, etc.

Since his member companies would be losing money on the deal, I continued, why not release the data so we could see each company’s net contribution?  Tauzin said he can’t do that for his member companies.  Why not encourage them to do it?  Can’t do that, he said.  Besides, all the data are publicly available, so anyone could crunch the numbers themselves.  Not as well as the member companies can, I observed.  “Awww, sure you could!” he smiled.

So I should just trust the head of the pharmaceutical lobby that his members won’t be making money on this deal, I asked?  All the data are publicly available, he replied.

A reporter friend commented, “In Tauzin We Trust?  Seems like a stretch.”

That’s Edutainment

I recently watched the Pacific Research Institute’s documentary “Not as Good as You Think,” about the woes of a middle-class suburban public school district, the myth of universally good middle class public schools, and the Swedish alternative of private school choice.

As with all of PRI’s policy products, the viewer gleans a lot of important information. It’s a quality piece. What’s really great about it, though, is how entertaining it is to watch. Putting myself in the place of someone not working in education policy, I can still imagine watching this flick purely to follow the story it tells. It’s definitely worth a look.

Barney Frank Endorses Regulatory Protectionism

When a government increases the burden of taxes, spending, and/or regulation, this makes it more likely that productive resources - on the margin - will gravitate to jurisdictions with better economic policy. Crafty politicians understand that the freedom to cross borders is a threat to statist policies, which is why international bureaucracies dominated by high-tax nations, such as the Organization for Economic Cooperation and Development, are trying to undermine tax competition between nations by imposing fiscal protectionism. The same is true for regulation. The Chairman of a key House committee wants to impose regulatory protectionism to restrict the ability of Americans to patronize banks and other financial services companies based in jurisdictions with more laissez-faire policies. The Financial Times has the unsavory details:

Barney Frank, chairman of the House financial services committee, said he was concerned the new U.S. push to regulate banks and brokers more rigorously could put it at a competitive disadvantage if other countries did not follow suit. As a result, he would like to ban U.S. banks from doing business with countries not subject to similarly tough standards on everything from leverage limits and capital requirements to rules on transparency and clearing of derivatives. “Once we have rules  . . . we will say to anybody who wants to be an outlier, ‘you forfeit your right to participate in the American system’,” Mr Frank told the Financial Times. “We will instruct the [Securities and Exchange Commission] and Treasury and the Fed to deny access to the American financial system to any country that holds itself out as a haven to escape our financial regulation.” …“It is absolutely the wrong approach,” said a top industry lawyer, who did not want to be identified criticising Mr Frank. “The assumption is that everybody has to do business in the U.S. and we can set global standards. That is absolute nonsense. There are alternatives, including Hong Kong,” the lawyer added. …Tim Ryan, president of the Securities Industry and Financial Markets Association, said that U.S. regulations should not be imposed on other countries. …Mr Frank’s interest in banning groups from non-co-operating countries stems in part from the U.S. experience after it adopted the Sarbanes-Oxley corporate accountability law. Many overseas companies opted to list outside the U.S. rather than comply with Sarbox requirements.

Debating the Future of Shool Choice

I have blogged repeatedly of my concern that charter schools are likely to succumb to the same heavy burden of rules and regulations that beset traditional public schools. And that, in doing so, they will expand rather than contract the existing state monopoly – first assimilating independent private schools into their fold, and then homogenizing them as the regulatory burden mounts.

This does not appear to be one of the concerns that will be represented at a forthcoming Fordham Foundation event on charter schools and the future of school choice. Instead, Fordham staff and their guests will discuss whether the current administration’s desire to expand the number of charter schools has doomed the voucher movement to irrelevancy.

It’s an interesting enough topic by itself, and suitably provocative, but it also excludes from consideration a far larger segment of the private school choice policy spectrum: education tax credits. Perhaps to their occasional advantage, tax credits seem to garner far less attention among education technocrats than do vouchers. Yet scholarship donation and personal use credits are benefitting more than 5 times as many students as vouchers, though the benefit is generally smaller. Credit programs are growing faster than vouchers, on average, and seem to enjoy more bi-partisan support – certainly when it comes to programs not limited to special-needs students.

I’m sure the upcoming Fordham event will be interesting, almost as much for what it will omit as what it will include.

Using Twitter to Confront an Anti-Semitic Attack in Chile’s Paper of Record

After a morning workout and attending Mass this Sunday, I read El Mercurio (Chile’s paper of record) online. Although I seldom read Chilean newspapers blogs (too many attacks and too much dirt), I did so that morning because I was impressed by the indignation expressed by my friend Luis Larraín in his Sunday blog (titled “Canallas” – Shameless). I had named Larraín Superintendent of Social Security when he was 25 years old. At that time I was 30 and Secretary of Labor and Social Security.

With astonishment I discovered that a certain “Mr. Murillo”, in the comment number 10 on the blog (which I copied immediately, and backed up electronically), explicitly attacked another commenter, Mr. José Fregoso Edelstein, by saying that his previous comment was due to the fact that he is from a “bad race” because he is Jewish.

I immediately logged in to Twitter and posted a ‘tweet’ demanding El Mercurio delete the blog comment, because it is a terrible insult directed at a group of people that have suffered indescribable horrors, not only in the 20th Century, but throughout history. I would have done the same thing if the insult was directed at Palestinians, Lebanese, Croatians, or any other racial/religious/national group.

However, I found an unexpected surprise. Instead of receiving immediate support for an action I thought just and reasonable, several people on Twitter attacked Jews, and me for defending them (one wrote, “You have used your enormous prestige in Chile to become “a shield for the Jews”). They also accused me of “encouraging censorship”, suggesting a “media dictatorship”, etc… . I replied inmediately in Twitter to the least offensive ones. Fifteen minutes later I received a ‘tweet’ from an editor at El Mercurio, saying that they had seen my complaint in Twitter and that they were studying the situation. With another tweet I insisted on immediate deletion of the comment. Twenty minutes later the newspaper editors deleted the offensive comment number 10. I want to emphasize that the editorial mistake, even this grievous one, does not compromise the newspaper El Mercurio as a whole, and its fast action in regard to the issue speaks to the newspaper’s chief editor’s integrity. It was an extraordinary triumph of the fast boat Twitter over the “media carrier” in Chile, another demonstration of the liberating potential of the wonderful new technologies being developed in the land of the free and the brave.

What left me very worried, and the reason I wrote this, is having detected a worrisome anti-Semitic sentiment among my fellow countrymen. Is this unjust anti-Semitic sentiment widespread, though hidden, in Chile, or was this only a “black swan?” I declare myself in a state of alert. We are building a free and good country. There should be no place whatsoever for the language of hate and the discrimination of minorities. As the great Albert Einstein said: “The world is a dangerous place, not because of those who do evil, but because of those who look on and do nothing.”