Rated F for Fail

This Financial Times article by Sam Jones seems to tell an important part of the financial crisis story (HT webgrrl). As I wrote in a comment at the previous link:

It seems like a major problem was that too many were reliant on the software of an agency to rate securities that were too complex for the rating to be verified independently. That, coupled with corporate
political fear of delivering massive bad news as soon as it was discovered led to catastrophe. It was a giant system with a single point of failure that failed.

It doesn’t seem like a failure of regulation or of deregulation. Just human error, bad judgment, and people who didn’t know how to directly value what they were trading.

I don’t think more upfront regulation would have avoided much of this, though.

Regulators and rigid rules wouldn’t have been any smarter than the interested parties.

It’s always tempting to point fingers of blame. We’re all biased towards finding vindication for our prior convictions in complex crises.

But, it would be pretty amazing if this whole problem could have been averted by better software testing.

A Sad Day

While I’m not at all surprised, I’m still pretty upset by the passage of the bailout bill today.

I’m with Arnold Kling on this (please follow the link and read his thoughts and two recent articles about it).

I’m also with Steve Horwitz that this was a problem of bad regulation rather than under-regulation.

I’m trying to find a silver lining, though.

Perhaps we can finally put to rest Naomi Klein’s idiotic Shock Doctrine theory that crises are exploited to foist free-markets on people. The truth is that they’re almost always used to further attack free markets.

I hope this attack isn’t fatal.

The Bailout

Every smart blogger I read, and a lot of economists, are convinced that passing the Paulson/Bernanke bailout, as proposed, would be a big mistake. That’s what I thought.

I tend to favor proposals like Arnold Kling’s to address it by easing some regulatory constraints on banks (and, yes, the federal government would still back up deposits at greater risk than before), rather than having the government buy bad loans and cause an open-ended string of unintended terrible consequences.

Is there much chance that what comes out of Congress will be sensible?

I wonder if McCain and Obama are reconsidering how much they actually want to be the next president…

Out of the Frying Pan

In case anybody is wondering, I’m against the proposed government actions to address the current financial sector problems.

Like most people I don’t really understand exactly what has happened, which people and factors are to blame, and what will happen if no actions are taken.

But, I’m highly skeptical that the best action is one that’s so expensive, and so much of an expansion of federal involvement in the markets.

I’m sure that at least part of the problem stems from existing regulatory factors that have encouraged poor lending practices, complex and exotic financial instruments, and the lack of concern about assuming excessive risk because the federal government could be expected to absorb the losses to avoid a crisis.

I don’t oppose all regulation. I’m sure that many things can and should be done to increase transparency and make the value of assets easier to determine. And, if the problem is really severe, there’s probably a much more modest action that could go most of the way towards instilling confidence in the system without committing us to so much additional debt, socialization of risk, and direct involvement in the markets.

I hope that cooler heads prevail, and we don’t rush into really bad actions out of fear.

American Liberal Prayer

Ok, this video is just creepy.

People say I exaggerate when I claim that many channel the same impulse to irrationally devote themselves to a cause “greater than themselves” that would usually be reserved for religion into causes like politics or environmentalism.

But, there it is.

Maybe there’s a demographic that will be inspired by this. But to me, it makes all of the participants look like imbeciles.

I don’t expect much from most of these celebrities. But, somehow, I’m really disappointed in Jason Alexander.

China and the Olympics

I didn’t watch very much of the Olympics. I caught some of the opening ceremony, and a few of the events, and watched some highlights.

But, I’m reading of people who view the beautiful ceremonies, and the organization, and the gold medal count with fear. They see China’s growth and ability to put on such a spectacular show as a sign that we should be worried.

But, as I recall, the Soviet Union invested a lot in Olympic success; but, that didn’t indicate an underlying strength. In fact, I think it was a desperate attempt to portray more strength and success than the underlying society had.

I’m not afraid of Chinese economic success. I welcome it, and hope that it will lead to more political liberty for the people of China, and more wealth for people there and for all its trading partners.

I find myself in complete agreement with Russell Roberts, responding to this idiotic Frank Rich op-ed, that:

Yes, China is growing quickly. Yes, they have mobilized a lot of resources to win gold medals in gymnastics and diving.

But they are a desperately poor country that represses their people too often, has filthy air, and has a massive problem dealing with an exploding urban population. Their mobilization of resources to win medals in gymnastics and diving is a scandal for such a poor country, not a triumph. Meanwhile, in the United States, we are suffering through a mild something, maybe a recession with unemployment at 5.7%. Our debt problem is minor. The fact that a lot of US debt has been purchased by the Chinese government that will be repaid in dollars that buy a lot less than they used to is tough on the Chinese not us.

And, mostly with this:

Finally, Chinese growth is good for the United States. The economic race is not like the Olympic race. It is not zero-sum. In the Olympics, if
you win the gold medal, I can’t. In economics, both countries can grow together.

“Morale Boosting” Human Sacrifices

I liked this post by Daniel J. Mitchell of the Cato Institute, responding to a story that a UK cabinet minister urged a “morale boosting” tax increase on the rich:

The UK Health Minister wants a big tax increase on the rich in order to boost morale and demonstrate that Labour Party officials “understand what it is like to cope with rising food, fuel, and utility bills.” But if punishing Britain’s most productive residents actually is a way to boost morale for the rest of population, why not build a big coliseum and feed them to lions instead? Wouldn’t that be an even bigger “morale booster”?

Unfortunately, I think that there are quite a few people who really do want to see successful people punished. One of the greatest obstacles to economic liberty seems to be that so many people have a sense of justice that prefers that outcomes be equal (or close) over being better for all.

I really hope that the vast majority of us can get past this mistake, but I’m not sure if it’s the sort of belief that’s amenable to reason and change. It might be just too deeply held. I know that I’ve never had much luck talking someone out of the feeling that it’s just wrong for some to prosper much more than others, or that the others lacked the moral right to redistribute the loot.

A Gassy Economic Plan

Barack Obama has lost any credibility (with me) that he had gained by opposing the gimmicky gas tax holiday proposals by Clinton and McCain with his new incoherent economic proposals.

He claims to feel the pain of consumers who have been hit with higher gas prices and wants to respond by:

a) Subsidizing demand by sending additional $500/$1000 rebate checks

b) Inhibiting supply by punishing oil companies with a new windfall profits tax

c) Co-sponsoring a greenhouse gas bill that would add even more gas taxes

d) Opposing new domestic oil production virtually everywhere (he may be softening on this after seeing polls indicating popular support for more drilling)

Anybody who thinks these policies will lower gas prices or help the economy is an idiot.

Obama is not an idiot.

He likes high gas prices but isn’t honest enough to admit it.

The Last Lecture

As many people know by now, Randy Pausch, a computer science professor at Carnegie Mellon University, died yesterday of pancreatic cancer at age 47.

If you haven’t watched his Last Lecture yet, you really should. It’s fun and inspiring and, for me, emotional (in a good way).

It’s difficult to know how we will face the knowledge of our imminent death. I like to think that I will face mine with a similar sense of fun and positive focus. I’m sure that having witnessed his very graceful handling of it will make that more likely for a lot of people.