Well, tonight our Kauffman Economics Bloggers Forum started with a huge barbecue dinner, and now three of us are sitting around talking about what an amazing group of people have gathered. Tomorrow is the full day event, and we will be releasing a 40-page collection of partipants thoughts on kauffman.org. I might actually be too busy with the day to blog much, but look out for the other 25 bloggers' blogs for news & updates!
By the way, I think it is fair to say that hosting an event in Kansas City in late February is NOT a boondoggle. It's like the opposite end of the doggle spectrum. The Undoggle. Bloggers are coming here, I'd like to believe, for the quality of the conversation. And maybe the barbecue.
Question for the day: what's the best e-lance development site these days? I used guru.com heavily a couple years, and will go back to it unless I see something better. Bo Fishback recommended something yesterday that is twice is good, but I forgot to write it down (and he's driving to Nebraska right now, so out of reach). Thanks in advance.
"What kind of long run is this mess going to produce? . . . Can capitalism remain a 'going concern' [quoting Bill Gross] after an extended period characterised by massive government intervention into the economy--and bail-outs of firms that would otherwise have failed? . . . Will our society and economy emerge so risk-averse after these experiences that years will have to pass before we return to a system naturally generating vibrant economic growth and a renewed willingness to both borrow and lend? Or will we head in the opposite direction, where faith in ultimate bail-outs will justify the wildest kind of risk-taking? Or will the entire structure collapse from government debts and deficits that turn out to be so unmanageable that chaos is the ultimate result?"
Spend a little time reading about entrepreneurship, and you soon tire of the phrase "creative destruction." Yes, Schumpeter had a brilliant idea and phrase to describe it, but it can seem like nothing new under the sun has happened since. No wonder entrepreneurship studies are not as prominent as macro stabilization! Surely, that's not a fair summary, but it's fair enough to make one appreciate analyses of technology that tickle at the notion of non-destructive creation (Amar Bhide's phrase, I believe).
The point everyone is missing is that in Technoland, nothing ever replaces anything. E-book readers won’t replace books. The iPhone won’t replace e-book readers. Everything just splinters. They will all thrive, serving their respective audiences.
So is he right? Or am was I write to view this as a classic phenomenon of creative destruction, when I predicted the book will be dead in 7 years? I'll admit that paper books will still exist, per se, but that within 15 years the market will be under 10% of current sales, and that this collapse will be halfway along (and universally acknowledged) in 2016. Anybody want to take that bet?
Our good friend Gene Wilson alerted me to an article in the Cal Tech magazine Engineering & Science, which provides a succinct look at the current financial crisis, its historical antecedents, and some modest recommendations. Many readers won't find much new information, but two things stood out.
"Financial firms relied upon data series that are merely a couple of decades long, or at best stretching back to World War II . . . it's as if we only relied on the earthquake record of the Los Angeles basin over the past 25 years to calculate the likelihood of the Big One." (Cal Tech)
"Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared . . . an ingenious way to model default correlation without even looking at historical default data." (Felix)
The City of Boston won't let Erroll Tyler operate his business in city limits. Watch this video to find out why. It's an issue that's relevant for all small business owners and would be entrepreneurs.
Tom Friedman's op-ed yesterday could have been written by a Kauffman scholar. It's tremendous. He writes,
When it comes to helping companies, precious public money should focus on start-ups, not bailouts.
You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners — university endowments and pension funds — are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way.
Friedman believes more in government's ability to push innovation than I do, but let's not quibble. The debates about the sources of innovation and optimal ways to enhance its production are not nearly as important as the debate we are losing, which is whether old companies and jobs should be saved, protected, and subsidized. Rewarding bad choices by banks, mortgage holders, or old car companies is a sure-fire way to undermine good capitalism with bad.
This time, on mosquitoes and hedge funds.
Holman Jenkins, the prolific and provocative opinion writer for the Wall Street Journal, has been writing lately that the entire bank bailout mess could have been avoided had our bank regulators, the Paulson Treasury and the Bernanke Fed, decided to forbear from enforcing bank capital standards for troubled banks. By looking the other way at the mounting bank losses, but still guaranteeing bank deposits to prevent a run, policy makers could have avoided asking Congress for the $700 billion in TARP monies. We then could avoided the large (but presumably temporary) bump up in the deficit (putting aside the bump due to the stimulus package), while Members of Congress in both parties need not have angered the public with lots of bailout talk (though there still would have been some of that with the federal rescues of AIG, the housing GSEs, and the auto companies).
This is a line of argument that should be taken seriously – although more for historical purposes than anything else. Given the creation of the TARP and widespread acknowledgement now of the need for more transparency and appropriate asset valuation on bank balance sheets, it is too late to implement anything like what Jenkins recommends.
Nonetheless, it must be acknowledged that there is ample precedent in our recent history for his recommended approach. In the 1980s, our bank regulators did not force the money center banks to mark their LDC loans anywhere close to market, which very likely could have pushed many or even all of them into insolvency – and thus government ownership, as happened with Continental Illinois (which was not re-privatized until the early 1990s). By letting these banks stay in business, policymakers essentially gambled on their resurrection, which indeed happened as the economy later recovered.
The overwhelming consensus of policy makers and financial policy specialists at the time, however, was that we were lucky with this episode of regulatory forbearance, and that it should be not repeated. The problem with forbearance is that when it is combined with deposit insurance, banks that gamble for resurrection can dig themselves – and thus potentially taxpayers – into deeper graves. Indeed, some of the money centers did exactly that, using the breathing room they were given by regulators to make what turned out to be bad commercial real estate loans and loans to support leveraged buyouts. The savings and loans were much worse, gambling away roughly $150 billion in new losses that eventually had to be absorbed by taxpayers. I know $150 billion looks cheap by today’s bailout standards, but trust me as one who commented on that experience at the time, most people then thought $150 billion was a lot of money.
To keep all this from happening again, Congress passed a law in 1991 requiring regulators to take “prompt corrective action” to cure capital shortfalls in banks. This means that as a bank’s capital dwindles below the regulatory minimum, its activities are subject to an increasingly stiff regulatory regime, including suspension of dividends, salary restrictions, and a mandate to raise more capital. If all else fails, bank regulators are required to take control of the bank just short of insolvency (when capital falls to less than 2% of assets), and either operate it, sell it to other banks or investors, or liquidate, whichever is the least cost way of handling the situation.
In advocating forbearance this time around, Jenkins is essentially arguing that regulators should have effectively ignored the 1991 law (called by its acronym, FDICIA) and operated the way they did in the 1980s. But to be fair to Jenkins, presumably he would have had the regulators also clamping down on the banks’ further risk-taking – in other words, keeping them in business, but marking time until the economic recovery enabled them to make enough money to restore their capital positions (Maybe he would have had the regulators encouraging the banks to raise more capital, too, but this would have been a public acknowledgement of the banks’ weakness, something that presumably Jenkins would not want to have happened). And, although I presume Jenkins would not endorse the idea, if the Treasury back in the fall instead had backed a large publicly funded plan to help troubled homeowners – roughly the size of what President Obama has now proposed, though not necessarily with the same details – then this would have reduced the banks’ losses, and thus would have reduced the amount of forbearance that regulators would have to give.
Could have all this worked – and avoided the mess we are now in? One objection is that the U.S. couldn’t have pulled it off given all of the criticism we had leveled against Japan for practicing forbearance in the 1990s. Again and again our policy makers told Japan to face the music, and spend whatever it took and quickly to clean up its banks’ balance sheets. With the shoe on the other foot, and the whole world watching, could U.S. regulators, our Treasury Secretary and our Fed Chairman have faced the public and Wall Street and effectively have said either that the banks were really solvent on a long-term basis, or that if they weren’t it needn’t have mattered? I doubt it, but am certainly open to hearing a counter-argument.
Then there is the problem of the frozen inter-bank lending market in September, especially after Washington chose not to rescue Lehman. Had regulators openly practiced forbearance, rather than poured TARP money into the breach, would interbank lending rates have come down? Here, Jenkins has a plausible answer: the Fed could simply have guaranteed all inter-bank loans, and this would have had the same calming effect, but without the immediate expenditure of funds. To be sure, guarantees have moral hazard effects, but presumably regulators could have clamped down on bank lending to constrain it.
But this brings us to a third objection to the forbearance idea: that, to prevent a rerun of the gambling for resurrection we saw in the thrift crisis of the 1980s but with more zeros at the end, regulators would have had to tighten their oversight of bank lending. This would have resulted in the same outcome we have now – with seemingly everyone beating on the banks to loan more money, but unable to do so because of regulatory limitations, or because of fears by bank management of lending more during a sharply deteriorating economy.
Jenkins’ come-back to this is that even with this same dismal outcome we still wouldn’t have shelled out $700B and thus avoided the messy and increasingly politicized debate over the bank bailout. But I suspect we still would then have had a different debate over “where are the regulators?” I also suspect that historians and economists will be arguing about all this for years to come. Jenkins’ provocative thesis may at some point become a central topic in this debate.
I’ve got another great read for our readers – Super Crunchers by Ian Ayres, of Yale Law School. Ian is one of the best and more original “law and economics” scholars in the country, and indeed the world. And, it just so happens, he’s a native of Kansas City, the home of the Kauffman Foundation. But that’s not the reason I’m plugging his book. This book is a real treat: an explanation of how data mining is transforming business, social policy, and Internet, all largely in a positive way.
But Ayres is also even-handed, highlighting the potential dangers to personal privacy through all this data mining. It’s not clear much can or will be done about it, however. Few people appear so far to value their privacy, if one looks at market transactions. That could change, however, with more data breaches and revelations of how data are used.
Another downside to all this data crunching is the erosion of discretion. As data crunchers find that formula-driven decision making beats intuition and personal judgment, the nature of jobs and those who fill them change. With formula-based rules, many more people can teach, approve loans, handle customers, and even provide medical care than ever before. The current holders of these jobs naturally feel threatened and may do their best to oppose change. But just as the word processor has changed the job of secretary into “personal assistant,” the continued rise of super crunching will change the nature of many jobs throughout our economy.
Some readers will see these changes as disturbing; others as inevitable. The smart ones among us will realize what is happening and get ahead of the curve. The really smart ones – the entrepreneurs among us – will find ways of making fortunes from the continued march of technology, and the ever expanding ways that the digital revolution is changing our lives.
Carl Schramm, Kauffman's president, discussed FASTTRAC Launchpad yesterday on Fox Business News. Here's the link, courtesy of Real Clear Politics. The runtime is about 7 minutes.
Universities have long been cited as an important source of innovation and, more recently, a key cog in the American entrepreneurial ecosystem. Much of the attention has focused on intellectual property that a university licenses, including to start-up companies that take technology out of the university and into the marketplace. (Hence the moniker, technology transfer.)
"Rather than any single or narrow set of influences, the overall MIT entrepreneurial ecosystem, consisting of multiple education, research, and social network institutions and phenomena, contributes to this outstanding and growing entrepreneurial output. This ecosystem rests upon a long MIT history since its 1861 founding and its evolved culture of 'Mens et Manus,' or ' mind and hand' . . . [a] tradition of valuing useful work."
What a day for sad, zany news. I'm not even sure which one is the worst. Help me out here:
1. Auto bailout tab could top $130 billion - These car companies are getting paid billions in taxpayer dollars so they can fire workers? Here's a thought: let them do it for free!
2. 2 Investigations Into Burris Are Begun - The new Senator from Illinois, the one Democrats promised they would not seat, was seated, and is apparently a bad apple.
3. Something about somebody named Caylee's Mom. I don't know a thing about this story, other than it's been everywhere recently. I like to check on CNN.com to check the public pulse, but I see stories like this as a sure sign of the End Times.
4. Drunk man run over by train awarded $2.3 million - Don't worry, since the court said he was 1/3 at fault, he doesn't get to keep all the money. With that logic, you could be 99.9% at fault for a $5 billion dollar damages suit, and only get to keep a mere $5 million. I don't blame lawyers. I blame judges! An economics master's should be required for judges, not a JD.
So what's your pick?
Last Thursday marked the 200th anniversay of Charles Darwin's birth, and this year marks the 150th anniversary of the publication of his most famous work, On the Origin of Species. There have been plenty of books and articles commemorating the occasions, and there will undoubtedly be more throughout the year. But even on a blog dedicated to economic growth, we shouldn't let this pass unremarked.
These arguments are by now familiar, but thank you, Robert Reich.
In which Harold Bradley, using only a chart, terrifies us all.
I've always felt Economics departments at U.S. universities got the short end of the stick. Extremely high demand for the product, but limited capacity, resulting in an overburdened staff. Why? Greg Mankiw takes a look.
It is true that student satisfaction is lower in economics than in most other departments at the university and that student-faculty ratios are higher. I have been told, however, that if you do a regression of a department's student satisfaction on its student-faculty ratio, the economics department is right on the regression line. This fact suggests that our student satisfaction is low precisely because the student-faculty ratio is high.