## Ten Pieces Worth Seeing (Mostly Economics): February 2, 2010

1) Courtesy of Don the Libertarian Democrat, Adam Smith on Financial Regulation:

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them, or to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which it is the proper business of law not to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments, of the most free as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty exactly of the same kind with the regulations of the banking trade which are here proposed...

It would be overly simplistic, but partially accurate, to ascribe the current crisis at Harper’s to the fact that its website is mostly hidden behind a paywall. I can’t even remember when I let my subscription lapse, but the magazine simply isn’t on my radar screen these days: with the exception of its current highly controversial Guantanamo story (which, notably, Harper’s put outside the paywall), pieces from Harper’s simply don’t get talked about.

A magazine’s website can and should be a force multiplier, extending the reach of the magazine from its historical place in subscribers’ homes. No one has ever subscribed to Harper’s because of something they read on its website, and as public discourse moves increasingly online, any public-interest magazine with a high paywall will be doomed to irrelevance.

What’s clear in the case of Harper’s is that its paywall — just like its editor’s decision to remove himself from the office voicemail directory — is a clear sign of how stodgy and old-fashioned it is. Newspapers flirting with the idea of erecting such a wall should remember that, and realize that it’s a big step backwards. You can coast on an existing store of momentum for a while, but eventually and inevitably that momentum will fizzle out. If you want to build a franchise which can thrive over the long term, you need to pick up new readers to replace those who drop out. And in order to do that, you need an exciting >and vibrant website.

We need to learn from those countries that evidently did it right. And leading that list is our neighbor to the north.... [W]hen things fell apart... [i]n the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently? It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis. Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene.

On the other hand, Canada’s experience does seem to support the views of people like Elizabeth Warren... who place much of the blame for the crisis on failure to protect consumers from deceptive lending.... Above all, Canada’s experience seems to support those who say that the way to keep banking safe is to keep it boring — that is, to limit the extent to which banks can take on risk.... Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization.... There’s no question that in recent years these restrictions meant fewer opportunities for bankers to come up with clever ideas than would have been available if Canada had emulated America’s deregulatory zeal. But that, it turns out, was all to the good.

So what are the chances that the United States will learn from Canada’s success?... [T]he Senate.... Republicans are clearly dead set against any significant financial reform — not a single Republican voted for the House bill — and some Democrats are ambivalent, too. So there’s a good chance that we’ll do nothing, or nothing much, to prevent future banking crises. But it won’t be because we don’t know what to do: we’ve got a clear example of how to keep banking safe sitting right next door.

A proposal by former Federal Reserve Chairman Paul Volcker to limit bank’s proprietary trading will be either be dropped or significantly modified in the Senate, lawmakers and staffers told dealReporter. Senate Banking Committee ranking member Richard Shelby (R-AL) said he opposes the so-called Volcker rule and the Obama administration’s call to levy a USD 90bn tax on banks. His comments come as House Financial Services Committee Chairman Barney Frank (D-MA) predicted the proposals outlined by President Obama could be law within six months. Speaking to this news service on Thursday, Shelby said if Democrats push forward with the proposals they risk unravelling much of the bipartisan support already reached regarding the passage of financial regulatory reform in the Senate. Shelby said that the Obama administration risks losing Republican support for the bill if they begin to “politicise” the issue.

I start from the observation that, despite the phenomenal increase in number and complexity of financial transactions, it is possible and necessary to endow systemic risk managers with the informational advantage over financial market participants that they need to assess the weaknesses in the financial system as they develop. This will require a wide-ranging reform, in which all market actors who are – or maybe – involved in liquidity transformation disclose to supervisors the full extent of their activities. Another pillar of the reform strategy is a redesign to regulations pertaining to banks (client servicers) and investment managers (capital managers). It is generally agreed that these two functions are characterised by very different risks: hence a clearer institutional identification and separation of them is needed, as well as a uniform treatment of the different organisations within each function.

6) GRAPH OF THE DAY:

7) BEST NON-ECONOMICS THING I HAVE READ TODAY: Maria Farrell on the Pile of Toxic Sludge That Is the Washington Post:

The WaPo online has been given a good tongue-lashing by – so far – every single commenter on their ‘Is Elizabeth Edwards Right to Drop John?’ discussion. The forum set-up goes; ‘Elizabeth Edwards and her longtime husband, former senator and Presidential hopeful John Edwards, have separated, according to People magazine, via Reliable Source. … Is Elizabeth Edwards, who is battling incurable cancer, doing the right thing by separating from John? Should she file for divorce? Weigh in below.” Responses range from to “how in the world would I know whether two people I never met should stay together? Why would the Post have such an incredibly stupid discussion?” all the way to “When The Post would offer such an idiotic, shallow, voyeuristic question for discussion, it should surprise no one that the institution of the fourth estate has failed.” The obvious question, ‘is this TMZ?’, is asked along the way.

Shame on WaPo. This is cheap journalism in both senses of the word. Once more the newspaper is called on the carpet by readers who have no difficulty seeing the difference between public interest and voyeurism. How has WaPo fallen so low? Any of us who’ve been around the block a few times work-wise know how strong the toxic effect of a few key people can be. A whole organisational culture can shift with shocking ease from collegiality to zero sum games.... The nasty effect of ‘a few bad apples’ is nothing new.... I’ve no particular insight to what’s happened in the Washington Post.... They should listen to their readers to whom that bright line is very clear.

8) STUPIDEST THING I HAVE NOT READ TODAY: But Bruce Bartlett has. He covers Republican Governor Tim Pawlenty (Idiot-MN):

Pawlenty wants to have it every possible way: complain about the deficit while ignoring everything his party did to create it (Medicare Part D, two unfunded wars, TARP, earmarks galore, tax cuts up the wazoo, irresponsible regulatory and monetary policies that created the recession that created the deficit, etc.), illogically insisting that tax cuts are a necessary part of deficit reduction, and never proposing any specific spending cuts. The only specific thing Mr. Pawlenty is capable of proposing is a balanced budget amendment to the Constitution. It’s hard to know where to begin in explaining why this is such an irresponsible idea, but I will try: 1. It will take forever.... 2. The simplistic amendment Pawlenty proposes... was rejected by most Republicans in the 1980s on the grounds that it would likely force tax increases.... 3. It’s one thing to require a balanced budget when starting from a position of balance.... It’s quite another when we are running deficits of over $1 trillion per year.... 4. It’s doubtful that Mr. Pawlenty has any clue as to the composition of federal spending.... 5. Pawlenty says not a word about how a balanced budget amendment would be enforced.... 6. Finally... the exceptions Mr. Pawlenty would provide are loopholes big enough for a blind man to drive through.... Tim Pawlenty is not ready for prime time. He may think he has found a clever way of appealing to the right wing tea party/Fox News crowd without having to propose any actual cuts in spending, but it isn’t going to work. It’s too transparently phony even for them. 9) STUPIDEST THING I HAVE NOT SEEN TODAY: Democratic Senator Evan Bayh (Idiot-IN). Outsourced to Jason Linkins: Hyper-timid incrementalist Senator Evan Bayh (D-Ind.) gave his budget peacock legs a strut this past Sunday, accusing "far left-wing blogs" of criticizing the administration's proposed spending freeze. But this is a tidy talking point that obscures the fact that plenty of economists don't think the spending freeze is a good idea, and plenty of liberals don't think the freeze is austere enough. BAYH: If you look, I suspect [Representative Paul Ryan (R-Wisc.)] does not, but if you look at the far left-wing blogs and that kind of thing they're severely criticizing the president for being too fiscally austere. My own take on this, Paul is right. Domestic discretionary spending increased last year. I voted against the omnibus, I voted against the "minibus" and that's last year. the question is where do we go now? The freeze is important. He identified$20 billion if you aggregate over the next ten years is \$250 billion less spending. Does it solve all our problems? No. But it's a step in the right direction.

10) HOISTED FROM THE ARCHIVES: DeLong (May 2003): Let's Get Even More Depressed About Cuba:

Just because people begin their papers with quotes from Ludwig von Mises does not automatically mean that they are wrong: http://lanic.utexas.edu/la/cb/cuba/asce/cuba8/30smith.pdf http://lanic.utexas.edu/project/asce/pdfs/volume12/perezlopez.pdf The hideously depressing thing is that Cuba under Battista--Cuba in 1957--was a developed country. Cuba in 1957 had lower infant mortality than France, Belgium, West Germany, Israel, Japan, Austria, Italy, Spain, and Portugal. Cuba in 1957 had doctors and nurses: as many doctors and nurses per capita as the Netherlands, and more than Britain or Finland. Cuba in 1957 had as many vehicles per capita as Uruguay, Italy, or Portugal. Cuba in 1957 had 45 TVs per 1000 people--fifth highest in the world. Cuba today has fewer telephones per capita than it had TVs in 1957.

You take a look at the standard Human Development Indicator variables--GDP per capita, infant mortality, education--and you try to throw together an HDI for Cuba in the late 1950s, and you come out in the range of Japan, Ireland, Italy, Spain, Israel. Today? Today the UN puts Cuba's HDI in the range of Lithuania, Trinidad, and Mexico. (And Carmelo Mesa-Lago thinks the UN's calculations are seriously flawed: that Cuba's right HDI peers today are places like China, Tunisia, Iran, and South Africa.)

Thus I don't understand lefties who talk about the achievements of the Cuban Revolution: "...to have better health care, housing, education, and general social relations than virtually all other comparably developed countries." Yes, Cuba today has a GDP per capita level roughly that of--is "comparably developed"--Bolivia or Honduras or Zimbabwe, but given where Cuba was in 1957--we ought to be talking now about how it is as prosperous a place as Italy or Spain.