Wednesday, September 10, 2014

Optimal quantity of money, achieved?

Here are three graphs, presenting inflation, long-term interest rates and short-term interest rates in the US, Germany and Japan.

Capital and Language

The Fed Scrutinizes Bank Capital, in the Popular Imagination
Fed Governor Dan Tarullo gave important testimony on financial regulation September 9. It got widespread media coverage, for example Wall Street Journal and Bloomberg View.

The good news. The Fed wants more capital. Banks should absorb their own risks, rather than all of us to count on the Fed to stand over their shoulders and make sure they never lose money again.

Confusing language has long been a roadblock in this effort, along with red herrings passed along thoughtlessly.



"Costly"

The WSJ writes
The Federal Reserve plans to hit the biggest U.S. banks with a costly new requirement 
Mr. Tarullo's testimony does not contain any mention of the idea that higher capital requirements will be "costly."  My view, expressed nicely by Admanti and Hellwig's book, is that there is zero social cost to lots more bank equity.  Disagree if you will, but source it please, don't just pass it on as if the source said it or as if this is a fact like the sun coming up tomorrow.

"Hold"

Friday, September 5, 2014

The $20,000 bruise

The $20,000 bruise story in the Wall Street Journal makes good reading. All of these health care disasters make good reading.
 I let the billing supervisor speak for a moment, and then cut him off using the ammo I had acquired from billing-coders' blogs. "You billed a G0390 for trauma-team activation. But chapters 4 and 25 of the MCPM require there be EMS or outside hospital activation if you are billing a G0390. There was no such activation here. So here is what I need you to do: Remove that $10,000 charge and reissue the bill."
He was silent for a moment. And then he said, " Let me talk to my supervisor."
...To the hospital's immense credit, they sent a refund to our insurance company and reissued the bill without the $10,000 trauma activation. They could have refused. What would my recourse have been? To hire a lawyer? Try to interest my insurer in fighting over a measly $10,000 charge? That is a tiny line item in their book of business.
All of us have experienced or know people who have experienced similar nightmares.

A question for any experts who read this blog. Surely there is a business opportunity here, no? "We negotiate your medical bill."  It is a huge waste of resources for Mr. David a "co-founder and chief strategy officer of Organovo Inc., a biotech company in California" to spend hours on the phone and more hours on the internet learning about medicare coding procedures. And all his acquired knowledge  is now wasted. Surely such a business could operate, like many lawyers, on a contingency fee basis, and take a fraction of money saved.

Yes, as Mr. David points out, this is what insurance companies are supposed to do. But copays are going up, and more people are gong to be paying out of pocket anyway.

Are there businesses like this that I, and Mr. David, simply don't know about?

Update: I knew that were there is demand there must be supply! A correspondent sends me a link to copatient.com, which looks like this:


Promotion


Once upon a time, in the Krugman pantheon, I was only "stupid." Then I made it to "mendacious idiot." I've been promoted again, to "Evil!"  And, better, corrupt, since "vested interests can buy the ideas they want to hear," and I am listed a seller.

All under the once-authoritative imprimatur of that impressive logo, reproduced above.  All the news that's fit to print. And then some.

Break out the champagne.  I wonder what I can aspire to next. I do have a Ph.D. Perhaps, dare I hope,...



Actually, I am flattered to be listed in the company of Alesina, Ardagna, Reinhart, Rogoff, and Lucas.  In other contexts, Fama, Prescott, Ferguson.

OK, enough Krugman blogging. It's just gotten to the point of humorous, in a pathetic sort of way.

Wednesday, September 3, 2014

Cool video



Nightingale and Canary from Andy Thomas on Vimeo.
Using 3D visualization software and other programs, Thomas breaks down photos of insects, orchids, and birds into their composite parts. He then reassembles the images in a sort of collage and builds trippy animations that react, based on rules he's set, to sound – in this case, archival bird song.
Source: This is Your Bird on Drugs, post by Julia Lowrie Henderson. Video by Andy Thomas

This has absolutely nothing to do with economics, or grumpiness. I just thought it was cool.

Krugman on the attack

In the New York Times, rehashing ancient calumnies. It must be a slow day.

Dear Paul, let me introduce you to parts of the distribution other than the mean. Inflation risk is a tail event.  I am in California now. There is a danger of big earthquakes. That the big one has not happened in the last 5 years does not mean the ground will be still forever, nor that geologists are mendacious idiots ignorant of Bayes' theorem.

My worries about inflation do not come from monetary policy. I've been as outspoken on the view that monetary policy is ineffective at the zero bound as the most solid Keynesian.  In the WSJ,  "Reserves that pay market interest are not inflationary. Period." If you bothered to read anything before venting, you'd know that.

My worries stem from the western world at 100% debt to GDP ratio, larger unfunded commitments to ageing populations, slow growth, and no solid plan to pay it back. I've been pretty clear that this is a self inflicted wound -- our governments can let economies grow and pay it back, but may choose not to.  If bond investors decide they don't want to be the ones holding the bag, inflation will come no matter what central banks do about it.

This mechanism remains a proper fault sitting underneath us. But one that can sit a long time. Just like, I hope, the San Andreas.  But the fact that sovereign debt must eventually be repaid, defaulted on, or inflated away, remains an accounting identity valid even in the most rabid Keynesian worldview.

For fun, I spent a few minutes googling Krugman and deflation (sometimes "spiral", sometimes "vortex"), which also did not happen, and in my view cannot happen.  But I will resist. It's just too easy to play this game. Economics is not soothsaying, and descending further into the pit dignifies it unneccessarily.


Monday, September 1, 2014

Italian deflation?

Giulio Zanella has a nice post on noisefromamerika, dissecting the sources of Italian deflation. (In Italian, but Google translate does a pretty good job.)  Deflation can come from lack of "demand," or from technical innovation and increases in supply. What do the data suggest?

Friday, August 29, 2014

After Dodd-Frank



(Youtube link) A talk given at the Mercatus Center / CATO conference "After Dodd-Frank: The Future of Financial Markets." (The link has videos of the whole conference.) The talk is taken from the paper "Towards a Run-Free Financial System," which answers many objections you may have to claims in the talk. (Yes, I have plugged it before on the blog and will likely do again.)

The more I read about it, the more I think it's important to define what is not a problem, and can be left alone. If we have to solve housing subsidies, Fannie and Freddie, global imbalances, Wall Street greed, compensation, inequality, savings gluts, predatory lending, financial utilities, bankruptcy law, behavioral biases of equity managers, living wills, stress tests, capital ratios, Basel regulation, macroprudential bubble-detection and pricking, complexity of derivatives, exchange vs. otc trading, and so on and so on just to save ourselves from the next crisis, we might as well give up now.

Thursday, August 28, 2014

Liquidity and IOR

Re: the big balance sheet and how it improves financial stability.

Rodney Garratt, Antoine Martin, and James McAndrews at the New York Fed have a very nice post, Turnover in Fedwire Funds Has Dropped Considerably since the Crisis, but It’s Okay.

Before the crisis, banks held about $50 billion of reserves at the Fed. That's not a lot of money. When banks want to pay each other -- say you write a check to me, so my bank has to get money from your bank -- they do it by transferring reserves through the Fedwire.  So, that's why banks keep some reserves there.

But $50 billion is tiny compared to $10 trillion of M2, and banks use reserves to clear financial transactions too. A huge amount must flow by passing around these tiny reserves. How did banks do it? What happens if bank B says to bank A, "send us $10 million" and bank A didn't have $10 million left at that second in reserves?

Answer: "intraday overdrafts." The Fed would lend bank A the $10 million -- just flip a switch and put $10 million in their reserve account, and call the loan an asset corresponding to this liability. A then pays B, and works hard to make sure that it collects $10 million from C and D by the end of the day.

Source: Rodney Garratt, Antoine Martin, and James McAndrews at the New York Federal Reserve


Wednesday, August 27, 2014

Krugman on housing

I generally don't read Paul Krugman -- bad for the blood pressure -- and I even less often respond -- don't dignify the insults or feed the trolls. But I took a long plane flight yesterday, and the Times was all I had to read, so I stumbled across his column on housing.

After getting through the customary political barbs at Republicans (Rick Perry in this case), and snarky insults ("the habit economists pushing this line have of getting their facts wrong"), I found something almost sensible.

People, especially "middle class" people,  are moving away from New York and to California, and to Texas and Georgia. Nominal wages in Texas and Georgia are not higher. So why do they move? Answer: Real wages are a lot higher, because the cost of living is so much less. It's practically like moving to a foreign country (in  many ways!). You are earning $100,000 in the un-hip part of Brooklyn, they offer you 80,000 zingbats to move to Truckgunistan. Is it a good deal? Well, you get two dollars per zingbat, so sure!

IOR caused the recession!

Apparently saying something nice about the Fed last week stepped over some bright line somewhere.
Lois Woodhill, writing at Forbes.com, wrote one of the most unintentionally hilarious rebukes here.

Source: Louis Woodhill at Forbes.com


The above chart
...shows what happened the last time the Fed raised the IOR rate [to 0.25%] (remember, it was zero for 95 years). 
The plunge in velocity overwhelmed the Fed’s frantic money creation during the period immediately after it started paying IOR.  NGDP tanked, taking RGDP and employment with it. 
Look, something caused the economic collapse of 2008-2009.  Given the evidence, IOR looks a lot like a man caught at a murder scene with a smoking gun in his hand.
Interesting.  Interest on reserves caused the recession!

Monday, August 25, 2014

Musgrave on 100% reserves

In a comment on an earlier post, Ralph Musgrave pointed to his interesting new paper on 100% reserve banking.

I haven't read the paper yet, but I love the Table of contents, reproduced partially below.

The name "narrow Banking" or "full reserve banking" needs improvement. It's really very wide banking -- so long as the banking is funded by equity or long-term debt. To say "narrow" is almost a fallacy in itself, and perpetuates the fallacy that bank lending will dry up. Maybe "Equity financed banking" or "full reserve deposit taking" would be better. Can anyone think of a name that is both sexy and accurate?

Musgrave's Fourty-four fallacies regarding full reserves:

Section 2: Flawed arguments against FR. .............................. 36
1. FR limits the availability of credit? ................................................................. 36
2. Central bank money is not debt free?............................................................ 38
3. Bank capital is expensive for tax reasons?.................................................... 38

Thursday, August 21, 2014

A Few Things the Fed Has Done Right

WSJ Oped, here.
As Federal Reserve officials lay the groundwork for raising interest rates, they are doing a few things right. They need a little cheering, and a bit more courage of their convictions  ...
I like the large balance sheet and market interest on reserves. I just want them to be permanent, not additional tools for Fed discretionary policy.

I'll post the whole thing in 30 days.

The Oped builds on a new paper, Monetary Policy with Interest on Reserves, and on Toward a Run-Free Financial System. In the latter, I advance the idea that the Fed and Treasury should first offer interest-paying money, and then stamp out private substitutes, just as the US first offered banknotes and then stamped out run-prone substitutes in the 19th century. Interest on reserves, a big balance sheet,  and opening reserves to all are a first step.

Wednesday, August 20, 2014

Lazear on Labor

Ed Lazear has a very nice short column, Job Turnover Data Show Lots Of Churning, Little Job Creation on Investor's Business Daily.

Modern labor economists see employment and unemployment as a search and matching process with a lot of churn. The popular impression, echoed in most media discussion, is that there is a fixed number of jobs, and people just wait around for more jobs to be "created." That's what it may feel like to an individual, but that's not how the economy works. Lazear's column puts in one very short space some of the better ways to think about unemployment.

The central fact of labor markets is huge churn, not a fixed number of lifelong jobs:

Tuesday, August 12, 2014

CON at it again.

An intriguing news item, University of Chicago's Plan to Add 43 Hospital Beds Quashed by the State by Sam Cholke about the University of Chicago's attempt to expand its hospital. And one more of today's costs-of-regulations anectodes.

In researching "After the ACA" about supply-side restrictions in medicine and health insurance, I became aware of CON ("certificate of need") laws. Yes, to expand or build a new hospital, in many states, you need state approval, and those proceedings are predictably hijacked politically. For once, they came up with an unintentionally appropriate acronym.

Immigration reading

Does Economics 101 Apply to Immigration? by Robert VerBruggen, a review of George Borjas' new book Immigration Economics.

The question is central to the immigration debate. If new people come in, do they depress the wages of competing workers here, and if so how much? "But it's 'suprisingly difficult' to demonstrate that this actually happens, according to the famed Harvard labor economist George Borjas. Very good review, need to read the book.

Of course, protectionism 101 still applies. If cheap Chinese sneakers come in, do they depress the profits of competing sneaker producers here? Yes. Does that mean we wall off trade? No, but neither ignore its distributional consequences.

FDA and the costs of regulation

The Wall Street Journal has had two recent articles on the FDA, "Why your phone isn't as smart as it could be" by Scott Gottlieb and Coleen Klasmeier on how FDA regulation is stopping health apps on your iphone, and Alex Tabarrok's review of "Innovation breakdown," the sad story of MelaFind, a device that takes pictures of your skin and a computer then flags potential cancers. The FAA's ban on commercial use of drones is another good current example.

One of our constant debates is how much regulation or the threat of regulation is slowing economic growth.  Over the weekend, for example, Paul Krugman, finding the New York Times itself too soft on libertarians,

Sunday, August 10, 2014

Anat Admati profile in the New York Times

Source: New York Times
When she talks, banks shudder. A very nice profile of Anat Admati by Binyamin Applebaum in the New York Times.

The article got most of the big points right. Banks don't "hold" capital, they issue it.
“The industry has benefited from, and sometimes encouraged, public confusion. Banks are often described as “holding” capital, and capital is often described as a cushion or a rainy-day fund. “Every dollar of capital is one less dollar working in the economy,” the Financial Services Roundtable, a trade association representing big banks and financial firms, said in 2011. But capital, like debt, is just a kind of funding. It does the same work as borrowed money. The special value of capital is that companies are under no obligation to repay their shareholders, whereas a company that cannot repay its creditors is out of business."
Look for the usage "banks hold capital" in the vast majority of financial press, including newspapers that should know better, for a sense of how pervasive this fallacy is.

The article mentioned the argument that equity costs more than debt, got right that much of that is due to debt subsidies and the difference between private and social cost:

Friday, August 8, 2014

S&P economists and inequality


The article starts with interesting comments about business economists
...you have to know a little bit about the many tribes within the world of economics. There are the academic economists...many labor in the halls of academia for decades writing carefully vetted articles for academic journals that are rigorous as can be but are read by, to a first approximation, no one. 
Ouch!

Wednesday, August 6, 2014

QE and interest rates

Source: Wall Street Journal
In an August 3 article, the Wall Street Journal made the graph at left.

The US and UK have done a lot of "Quantitative easing," buying up long-term government bonds and mortgage-backed securities, to the end of driving down long-term interest rates. Europe, not so much, and the WSJ article quotes lots of people imploring the ECB to get on the bandwagon.

It's a curious experiment, as standard theory makes a pretty clear prediction about its effects: zero.  OK, then we dream up "frictions," and "segmentation," and "price pressure" or other stories. Empirical work seems to show that the announcement of QE lowers rates a bit.  But those theories only give transitory effects, and there is no correlation between actual purchases and interest rates. (p.2 here for example.)

So back to the graph.