Monetary Policy

As I mentioned about the difficulties of governing Economies and Greenspan’s disclosure on his workings on a paper in defence of his policies, The Economist recently wrote in their column about Greenspan’s recent defence of himself. Those interested might want to access his paper here.

In general, The Economist adopts a rather sarcastic tone when discussing Alan Greenspan’s role in the build up to the Subprime Mortgage Crisis in 2007. They are arguing that central bankers are around to ensure macroeconomic stability and therefore are expected to ‘play safe’ and manage the economy. That is, if reducing short-term interests rates could rein in the housing boom, that should have been applied. Even if Greenspan couldn’t have identified the bubble, and that the house prices are not related to the interest rates that central bankers could influence, the leverage growth in securitised markets might be worth managing:

By looking only at the effect of monetary policy on house prices, Messrs Bernanke and Greenspan also take too narrow a view of the potential effect of low policy rates. Several economists have argued convincingly, for instance, that low policy rates fuelled broader leverage growth in securitised markets.

Of course, having just read Dot.con and Lord of Finance, I do realise that central bankers’ attempts at interfering with specific market booms have often been ineffective or with rather disastrous results and thus choose to focus only on economic fundamentals like price inflation. Greenspan does have a point when he suggests that the central bankers are unable to deal with a global force that are changing the conditions of the economy. Very often, these efforts may create further imbalances that merely postpones a crisis.

Like I say, no one claims monetary policy is easy to conduct – it’s too often more of an art than a science.

Governing Economics

Many have attributed the housing bubble that eventually resulted in the Subprime Mortgage Crisis to the previous, one of the longest serving Federal Reserve Chairman, Alan Greenspan. We are pretty familiar with Greenspan, who have written Age of Turbulence. In his book, he highlighted his general argument against anyone who would finger-point him as allowing a bubble to inflate. He pronounce that it is impossible for anyone, whether the regulatory body or not, to accurately identify a bubble.

As for the Subprime Mortgage Crisis, politicians in the United States still blames it somewhat on Alan Greenspan and now that everything is cooling down, Greenspan offers his own defence. Although Greenspan was nicknamed ‘the Maestro’, he subtly attributes the period of great prosperity and low inflation to the globalization forces and technological advancement more than his skills at handling the monetary policy of US. In any case, he outlines his job at the Federal Reserve as an observer trying his best to keep to fundamentals of the economy and the crisis therefore comes as a surprise both because of how the economic agents have basically defied market assumptions namely on the issue of counter-party surveillance. Essentially the government cannot possibly provide the ‘self-interest’ that is supposed to drive the free market.

No one says that managing the economy is an easy job. Sound economics decisions by governments often turns out to be political disasters anyways so sometimes politicians stop heeding economists altogether. The recent issues that confront Tim Geithner is essentially similar; the economy is picking up thanks to his plans but people are unhappy with him. Figures on employment are not helping him anyways since the recovery is ‘jobless’ so to speak. Management of the economy is a huge balancing act for the government.

The idea of government has gone really far since the days of Locke’s conception of the social contract. The philosophy of governance in the modern world is just getting more complicated.

Taxing Criminals

Stamp Duty
Want to commit a crime? Pay taxes first...

The Economist ran an interesting story about “a government-issued stamp that is expected to remain unpurchased, but which users of illegal goods must, by law, affix to substances they are not allowed to possess”. Essentially, the government is creating another layer of crime above a crime. It’s as good as saying you should not be stealing people’s money, but if you do really steal, then you’ve to pay taxes on your loot. If you avoid the taxes, you’re committing tax evasion plus theft.

Authorities seem to believe that the tax helps to further punish people who are arrested for a crime (since the inability to discover the original crime would make the taxes lame anyways) and thus serve a higher level of deterrence to the crime. I wonder if criminals would bother to discover that they would be penalized twice for a single crime.

The Marijuana Tax Act of 1937 was cited as an early conception of taxing illegal drugs. It is interesting that old bureaucracies sometimes like to make an act inconvenient rather than ban it outright. Maybe it just happens to drugs; Singapore could actually try applying extremely steep taxes on Chewing Gums rather than ban it outright.

Blended Value

House Money
Into the Blender!

Just when people are lambasting financial institutions and entities like hedge funds, Jed Emerson who coined the concept of ‘Blended Value‘, suggests that these financial entities can play a positive social role. Fast Company had an interview with him about this in 60 seconds.

As reported on Economist Online, Jed thinks that hedge funds which focuses on fundamentals mirrors sustainably investing, meaning that they would act to move capital to places where they are used properly and for good of the society.

Trading according to rigorous fundamental research can often mirror sustainable investing, which seeks to profit by taking into account social and environmental factors, he says. Fundamental hedge funds are far more likely than other investors to try to identify a firm’s off-balance-sheet exposures, of which a growing proportion may be “environmental or social liabilities present in a market or company but not explicitly accounted for in traditional numeric valuation or mainstream investor analysis”.

He makes an important point about ‘Shorting’, which The Economist goes on to discuss. As a matter of fact, the market is kind of biased towards growth and that should be the case since the economy is usually growing but then if people are not rational enough to sell, then there has to be short-sellers who are rational enough to sell but don’t have the shares in the first place. This way, buying and selling would reflect a more fundamental value. This is of course, an ideal – prices hardly reflect any reality in moments. But at least we know that the bulls and the bears are almost right the same number of times (half of the time each; which reflects dynamism of the market). And so there’s no way we should have anything against them.

Automated Eyes

I stumbled upon Tineye, a ‘reverse image search engine’. It basically allows you to upload an image and then perform a search for pictures that are similar to the image. This is the beginning of answering a question my friend have posted me a couple of years back when he asked if the Internet can help us find out the name of a person from a photo of him/her. Alternatively, if you have a picture of a place, you might want to upload the image to search for where exactly it is. Alas, Tineye is not yet capable of all that, to quote from the Wiki article:

A user uploads an image to the Web application search engine or provides a URL for an image (or for a page containing the image). The search engine will look up other usage of the image in the internet including their time of appearance and including modified images based upon that image. Tineye does not recognise objects or persons in an image, it recognises the entire image, and some altered versions of that image. This includes differently sized versions of the image.

The search engine is provided by Idée, Inc., a Canadian firm that also produces other image-matching technology products, like PixID. A demonstration of the power of this product is shown in this video that follows:

It purportedly helps client tracks usage of their photographs or images online and print publications to manage image license and also to ‘uncover unauthorized image usage’, and it kind of reminds me how it makes patent trolls’ job easier, reflecting a worsened state of gridlock. In other words, while the software may help to raise the opportunity for transactions and thus contribute value to creators, it might potentially discourage mashups in the area of graphic designs. Of course, it has a potential for good as well; scanning through a film can help the production crew find out whether they have obtained permission for all the images or clips used and would thus know what to filter out if they are unable to identify the owners.

The potential of such technology always works both ways and eventually it will be up to Economics to resolve the issues.

Game Theory & Politics

Chess
Well, it's a game...

Christopher Beam on Slate.com framed the Senate (or any democratic deliberative body) as “the world’s greatest collective-action problem“. In a way, it is. Debating on issues and surfacing potential problems stakeholders might face and arguing on the different consequences on different parties is one thing about parliaments and national assemblies but then decision-making is another.

In democracies, debates and discussions are known to hold up decision-making and the same is reflected in bureaucratic bodies where power is shared across several individuals. This dispersion of power calls for coordination to get anything done and thus allow game theoretical analysis to dissect the dynamics involved in any of those coordination outcomes (ie the final decision).

In some sense, this is a trade-off; deliberation this way that involves the coordination game ensures that the outcome cannot be entirely fair though it might provide an illusion of it. In the first place, reality includes a spectrum or even several dimension of opinions and no system can be designed to capture and aggregate this complexity. The authors of Thinking Strategically mentions this in one of the chapters on elections. As a result, we are left with the political game that is manipulating the legislative structure although everyone hates to admit it. In some sense, Singapore’s structure might churn out better results in terms of efficiency and do ‘the right thing’. The idea then, is to move the game away from the ballot box in the first place, to somewhere further and higher.

Gridlocked

Gridlock Economy
Trapped in Fragments

A couple of months back I stumbled upon this book by Michael Heller (a lawyer), Gridlock Economy. It raised a very interesting question in the introduction and convinced me to borrow the book. The book went on to look into different parts of the modern economy where hurdles to economic activities are created because of structures built within the modern economy used to spur economic activities in the first place. It’s an irony we can’t ignore. The author framed them as a ‘Tragedy of the anticommons‘; this idea is from Michael Heller himself so the book is more or less a vehicle to get greater audience exposed to it.

Anyways, it started this way;

A few years ago, a drug company executive presented me with an unsettling puzzle. His scientists had found a treatment for Alzheimer’s disease, but they couldn’t bring it to the market unless the company bought access to a dozen patents. Any single patent owner could demand a huge payoff; some blocked the whole deal. This story does not have a happy ending. The drug sits on the shelf though it might have saved millions of lives and earned billions of dollars.

I thought this is exactly the sort of problem that is going to plague the field of microeconomics in the modern world. The world’s complexity naturally mean that the mesh of technological advancement, legislative hurdles and logistical difficulties in the market would introduce new problems for us to solve. I didn’t quite manage to read much of the book but I’ll try to spend some time researching stuff in this area soon. Meanwhile, USA still probably going to continue being the hot bed for patent disputes.

State & Markets

Bihar
Now for political enlightenment...

While reading about Bihar’s Recovery, it dawned on me the importance of basic government structures in an economy. This sort of realisation had come to me while I was reading about the Haiti crisis and I really think all students of Economics should remind ourselves of the government structures working in the background implied in what we call a ‘Free Market’.

As observed from the article on Bihar, which interestingly is where the Buddha gained enlightenment (according to historical records), the state’s investment in infrastructure, maintaining order, a culture that respect the rights of all citizens (that can only be created from top down) often influenced very much by the enforcement of laws, as well as giving people freedom to pursue the market activities.

When we argue about the importance of not having government interventions in markets, and that state presence should only emerge in the case of market failures, we often neglect the notion that a government is in place in the background to honour the legal tender and anarchy is not the ruling ideology of the day. Trust in the free market is also important and it is upheld by law and order, which once again, falls on the government. As we’ve seen from the earthquake in Haiti, more room for market and less state is not always a good thing. Yet after acknowledging the need for a state we want to combat its advancement into various aspects of society that are usually governed by culture or self-organizing.

Maybe working on the margins of that would help Bihar discover this balance of state and market spaces.

Aliens & Laws

Jumping Fish
Jumping Ship

The Lexington of the latest The Economist made an important point about the indirect impact of terrorism on America. Migration of brains into America has slowed, tourist has become rather fed-up with security checks that comes with a vacation in America and even conferences have moved away from there as a result of the hassle brought about by security restrictions. Perhaps improving the ‘service quality’ of border customs would improve the situation.

The interesting phenomena raised in the article is that giving illegal workers legal status will help reduce their competition with the American workers.

American blue-collar workers fear that Mexican immigrants will undercut their wages. Mr Hinojosa-Ojeda says they won’t if they are legal. The fear of deportation makes illegal workers accept worse conditions, he finds. Once legal, they demand higher wages, and no longer drag down those of the native-born.

The report on the economic benefits of immigration reform is available from Center for American Progress. The idea fits into conventional wisdom about making choices between alternatives. Removing the option of getting deported would naturally help raise the expectations of the foreign workers and make it harder for them to compete with those native-born.

Free Market Madness

Free Market Madness
Market for Sanity

I was looking for George Arkelof and Robert Shiller’s Animal Spirits in the library but it was on loan so I decided to look for something else in the Call Number 330 (which some library-goers might note is the ‘Economics’ section) area. I stumbled on ‘Free Market Madness‘ by Peter Ubel.

Ubel’s book is a pretty simple and short one, I took only one and a half day of on-and-off reading to finish it, one of my fastest timing for a non-fiction. Admittedly, the text and paragraph spacings are pretty wide and the book is thin for a hard-cover one. It is largely about behavioural economics, a topic which I hardly have a hard time understanding so the speed by which I finished the book didn’t really surprise me. Nevertheless, I hardly consider Ubel’s Free Market Madness to be that good a book.

For a start, I understand that Ubel is trying to make a case for government intervention in the economy for markets where consumers are ill-placed to make wise choices and where market imperfections like the inadequacy of useful information and the apparent misalignment of producer’s interests and consumer’s interests are significant. He focuses on the case of junk food causing obesity though he touched on other cases such as insufficient retirement funding and overspending on branded drugs. Unfortunately, while he makes a good case for the fact that humans are not entirely rational (something we all know at least implicitly), based mainly on the study of other behavioural scientists and economists, he didn’t give very outstanding or original proposals on how to get around this problems. Even then, he fails to make a good connection with how the conflict between the short-term-self and long-term-self can be resolved by the governments; the question of what sort of happiness/well-being (long term or short term) the ‘Big Brother’ he is advocating should maximize it left to speculation by the reader.

The little technical issues in the examples he cited in his book is by and large criticized by David Gordon, senior fellow of the Mises Institute. Austrian School economists probably think that no one can be innocently obese; it takes two hands to clap and producers and consumers must agree on the transaction for it to take place. In other words, people are obese through a process of attempting to maximize utility within their own accounting. On the other hand, Ubel thinks that the faculty accounting on the part of the consumers need to be rectified – in other words, internalities need to be addressed. The problem is we cannot exactly agree on which accounting is correct; after all, if one’s belief in the goodness of a product can provide additional positive experience in consuming it, the faculty accounting can have such a self-fulfilling effect. I believe I have the tendency to agree with the ordinary economists that humans would have a fair degree of foresight and self-control and in an event where they lack such discipline and ability, the market punishes them very much in the way evolution eliminates those who lack the fitness.

His proposals are rather unoriginal, citing stuff like fat taxes once mentioned in The Economist, default options, persuasion campaigns (largely moral suasion) and possibly outright ban. He did discuss implications on liberty and such but doesn’t dwell much on it – often it seems to me like he’s saying ‘I just want everything to be good and right, I don’t care how’.

I do agree with Ubel, that humans in our age needs more self-control and the public’s awareness of the ills of the markets, the ills of different products that are so ubiquitous in our world today needs to be improved. This self-improvement in discipline and improvement of public knowledge can come from bottom-up rather than top-down. After all, given the circumstances today, it is likely that the group with better knowledge of the markets, those making wiser market decisions and the ones who have better self-control is going to thrive. Parents will have to recognize that and respond accordingly (not too much to hope for given the limited rationality of humans I hope) when educating their children and developing them. And I must have to say that in markets like healthcare and pharmaceutical products, doctors like Ubel himself will have to take the responsibility of protecting their patients from the ills of the market/industry. The imperfect information is really too serious in this market and Ubel is right to say that doctors are practically making decisions for patients – doctors’ recommendations are almost equals to patients’ choice (doctors can’t possibly give their diagnosis to patients and get them to choose medicine for themselves). The government can only do so much to protect the doctors from manipulation by the industry and thus defend the interests of the patients. Physicians themselves will have to take the big step to be responsible doctors.

On the whole, Free Market Madness gives us good idea of how behavioural economics came into being and how traditional economic analysis of indifference is difficult to apply in today’s complex world. As a result, rationality of human beings becomes undermined today. Beyond that, it makes a good alert on the problems humans might have with markets that makes us poor economic agents – in long run we will get exploited somehow. We will need to exploit back by becoming producers of certain exploitive products ourselves or try to defend ourselves through self-restraint and aggressive self-education. Otherwise, if the book is hoping to inspire any sort of action, it might need to be much more.