Freedom, Justice, and Economics

• Elizabeth Warren originally promulgated the idea with a Summer, 2007, essay in Democracy: A Journal of Ideas titled “Unsafe at Any Rate”.
• A bill establishing a Financial Product Safety Commission has been introduced in Congress as H.R.1705 and S.566, and referred to committee in both House and Senate.
• Contemporaneously, the Consumer Financial Protection Agency Act of 2009 has been proposed by the Obama administration, with this main document, and this Fact Sheet, both presented — and celebrated centrally — as part of the administration’s broader financial regulatory reform platform.

A recent few with varying degrees of promise and accomplishment, but all of interest:

• http://resource.org/ — and especially the PACER data in connection with http://www.recapthelaw.org/
• http://www.wolframalpha.com/ — swank on science, and I look forward to more social science data.  The contents of the various editions of the Statistical Abstract of the United States would be a good next place to beef up coverage.
• http://www.data.gov/ — brilliant idea; more to realize.
• http://usaspending.gov/ —  a public-friendly front-end for the authoritative Federal Procurement Data System (FPDS).  FPDS data is available to the public as well at http://www.fpds.gov/

… is the often art of the prophet and the fool.  Nevertheless, I’ll dare to go ahead and describe what I expect will be, a decade hence, two consensus views about economic policy during the past tumultuous year.

First, people will believe that on balance Ben Bernanke and the Fed did a spectacular job at averting depression.  The risk of even more extreme collapse was real, and abundant provision of liquidity was stabilizing.  Doing too little would have been the far greater risk, and the designation of Bernanke as hero will have stuck.

Second, people will conclude that the greatest policy failure was providing too much direct support to banks rather than to homeowners.  Let me elaborate.  First, many banks lent to anyone with a pulse during the boom, in the form of residential mortgages, credit cards, and commercial loans.  When the bubble burst, so did these banks’ balance sheets.  Some of the wave of bank failures was inevitable.

But consider the ailing institutions (including some of those deemed too big to fail) that were in trouble largely because of their residential mortgages.  Many of these received lines of credit, support for being acquired, or direct infusions of resources (see this useful rundown of these steps as of 7/22/2009).  Suppose that instead of most of the steps in that rundown, the Making Home Affordable program had been vastly more aggressive:  larger in size by an order of magnitude, implemented within months rather than years, and more generous to individual homeowners in amounts and eligibility.  (Treasury celebrates the accomplishments of MHA, but capacity constraints and foot-dragging by lenders and servicers have prevented it from living up to expectations even at the actual–modest–$75B scale).  These would have been the advantages:

• Banks still would have gotten bailed out.  If a bigger MHA paid for principal reductions on mortgages, bringing borrowers back above water, banks’ assets would have looked much better and direct infusions would have been less necessary.
• The moral hazard problem for consumers is smaller than for mortgage lenders. The Great Crash tells us that in the Roaring ’20s, “The bankers were also a source of encouragement to those who wished to believe in the permanence of the boom. A great many of them abandoned their historic role as the guardians of the nation’s fiscal pessimism and enjoyed a brief respite of optimism,” and recent times have reminded us all of the healthiness of bankers’ pessimism.  Bailing out banks only via bailouts of their borrowers keeps the banks more honest and more responsible for their follies.
• Banks are more easily able to organize and lobby than consumers, suggesting that more of the money distributed to banks would be rents from captured officials.
• On fairness grounds, recent transfers to banks have been abhorrent.  Many bankers ditched their sensible pessimism, rode the wave to fantastic returns (sometimes by taking advantage of borrowers who they should have anticipated would not be able to pay), and have now been carried gently to shore.  Transfers to imperiled homeowners instead would have left the banks more on the hook.
• Foreclosures are extremely socially costly, and current foreclosure rates are at historic levels.  Large direct transfers to homeowners, to pay mortgages down to the levels of current realistic appraisals, would have prevented many more foreclosures than the actual policies we’ve seen.

Sheila Bair was a prescient early proponent of large transfers to homeowners via mortgage loan modification.   Marty Feldstein has just recently signed on.  Populist outrage against the banks has not been in short supply.  These views and others may be enough to coalesce into consensus over time.

The biggest surprise to me in this article in Sunday’s Times, about how lenders use meticulous information about purchasing patterns to forecast default, is that the article treats this as a surprise.  Data on what we do is valuable to firms, and we should all expect that much of that data is being used for individual-level forecasting.

But I was also interested that I could find only this one source online (unrelated to the Times article) that discusses what Martin did at Canadian Tire, and it and the Times article are comparably vague.  I’d be curious for other sources and technical details.

I work with big, complicated databases all day, and I find it incomprehensible that any so critical as the voter registration databases could be managed so incompetently, in a way that encompasses so much belief in unreliable records and so much disbelief of human beings.

Massive federal allocations to the states, conditioned on massive upgrades and improvemets in voter registration technology and election-day voting technology, seem like no-brainers, even if more states adopt Oregon’s brilliant– and brilliantly successful– strategy of conducting all elections by mail.

• Original draft proposal
• Draft bill sent to the House of Representatives yesterday (M 9/29/2008)
• Final bill?
• Like usual, the BBC has great overview material, in addition to their up-to-the-minute news coverage.
• Series of the crucial statistics, ie, interest rate spreads and volumes in the short-term commercial credit markets?

“You fight your superficiality, your shallowness, so as to try to come at people without unreal expectations, without an overload of bias or hope or arrogance, as untanklike as you can be, sans cannon and machine guns and steel plating half a foot thick; you come at them unmenacingly on your own ten toes instead of tearing up the turf with your caterpillar treads, take them on with an open mind, as equals, man to man, as we used to say, and yet you never fail to get them wrong. You might as well have the brain of a tank. You get them wrong before you meet them, while you’re anticipating meeting them; you get them wrong while you’re with them; and then you go home to tell somebody else about the meeting and you get them all wrong again….. The fact remains that getting people right is not what living is all about anyway. It’s getting them wrong that is living, getting them wrong and wrong and wrong and then, on careful reconsideration, getting them wrong again. That’s how we know we’re alive: we’re wrong. Maybe the best thing would be to forget being right or wrong about people and just go along for the ride. But if you can do that–well, lucky you.

Early in American Pastoral, Philip Roth’s stand-in Nathan Zuckerman reflects thus in the midst of recounting his dinner encounter with The Swede. I think Roth/Zuckerman are right that it’s common to undertake this kind of presumption about people, and common to feel all too alive as a result. No doubt people are free to presume like this….

But what’s most interesting to me are the last two sentences, the idea that (i) people might be better off not to presume like this, and (ii) we might have a choice about it (not to mention (iii) that getting people badly wrong might do them injustice). It would be no surprise to me if Roth himself can’t help his long flights of speculation, if upon seeing someone he immediately begins constructing a narrative about him or her, full of family, inner life, and childhood sources of persistent angst. Roth’s objective in doing so is presumably to entertain, either to entertain a present or future audience, or just to entertain himself. If I were to launch into such a flight of speculation about, say, a professional acquaintance, I could be detrimentally distracted from the substantive content of our interactions. It would be better for me to concentrate on the equilibrium we’re discussing than to imagine whether his parents made his favorite baked ziti often enough when he was a kid.

… So to react to Roth’s last sentence above, I guess I think many of us are “lucky”– but lucky in a deliberate way, lucky to be able to concentrate on what matters to us about other people, lucky to be able to concentrate on the substance and character they choose to put forth. And if “unlucky,” we have a choice about how to speculate, too. I most often choose to speculate sympathetically– and if wrong, sure, plenty content to be alive.

For three reasons I was struck by the ads preceding a showing of Indiana Jones and the Kingdom of the Crystal Skull at the George St Odeon in Oxford exactly one week ago. First, they began at exactly the time the show was listed to begin. I’m used to theaters that pitch to and entertain early arrivals, at least with a bit of movie trivia.

Second, the ads were abysmal. A week later I still feel the twisting in my stomach that I mostly had associated with Full House reruns. Most of the ads were bookended by an acknowledgment to some agency that had presumably bid for the right to the screen time and compiled the ads to show. If I were Odeon, I wouldn’t want to immiserate my consumers like that– I would want to keep control of the content.

Third, the ads went on for a full half hour despite (here’s the kicker) the fact that all tickets were for reserved seats. US theaters typically induce moviegoers to watch pre-movie ads by dangling the carrot of a better seat for the main feature. If you dare to try to arrive late and skip the ads, you may find yourself craning your neck from the front row. But next time I’ll know to buy my reserved seat ahead of time and confidently show up half an hour late.

All of this does provoke a question. I made the mistake of showing up on time because I don’t go to the movies all that often (though slightly more often than Professor Jones appears!). But how can this advertising structure persist?

• If typical moviegoers like the ads more than me, one would expect the ads to start before the film’s scheduled start time.
• Perhaps the ads are intended to be so bad as to cause people to wait in the lobby, where temptations of course abound. But then I don’t see why people with reserved seats would arrive on time.
• Or, more hopefully, perhaps the awful ads make the movies themselves seem better. Then with small costs for running the projector, the ads might begin only at the scheduled time, and people might come on time to watch them.

The third bullet is the only explanation that sticks for me so far– and it requires that British moviegoers prefer Indiana Jones preceded by half an hour of drivel to Indiana Jones alone.  Plausible?  Not impossible…

I was impressed to discover today that a decade-old paper by Richard Blundell and Steve Bond, “Initial conditions and moment restrictions in dynamic panel data models,” has 1503 cites on Google Scholar. The paper discusses the validity of panel data estimation approaches using particular selections of GMM identification restrictions. Techniques validated by the paper have become ubiquitous for their generality.

Saltwater empiricists in the US, however, tend to expect clean experimental variation. And freshwater empiricists in the US also generally pursue a different approach, relying on identifying restrictions that come from models with more structure. The Blundell-Bond paper and the related literature suggest a generically valid approach conditional on certain lags and lagged changes of error terms and dependent variables being uncorrelated.  I am led to the question: which real-world settings reliably satisfy the required conditions?

As the horror caused by Cyclone Nargis comes into sharper focus, I realized I had the nagging feeling that this storm was largely ignored by the press even as the enormity of its threat grew apparent. To assess the press’s attention, at 9:09pm GMT on Tuesday, May 6, I conducted this Google News search, using the Advanced news search tool, for all mentions of the pair of words “Myanmar” and “cyclone” over the past month.

Credit goes to the Hindu Business Line for the first journalistic mention of the cyclone, the only news story on April 27 to fit my search criteria. Bangladesh’s The Daily Star was the only publication to report on Nargis on April 28. Five hits match from April 29, of which two are irrelevant to Nargis. The three relevant hits came from the two sources already on the story and the Howrah News Service.

On April 30 the AFP, Thaindian.com, and Hindu Business Line had stories. Only six stories were published on May 1. My Google News search turned up 17 hits, finally including major Western sources like IHT and AP, on May 2. However, those stories blandly describe power outages and cancellations of plane flights in Yangon.

Little surprise, you might say: This New York Times graphic charts the time path of the storm along the Myanmar coast, and shows that the eye of the storm was not set to pass Yangon until 6:30am on May 3.

On August 27, 2005, 249 stories in the Google News archive came up in a search for Hurricane Katrina, which made landfall in the early morning hours of August 29. On Saturday the 27th, the CNN Live Saturday transcript reads in part, “We begin with a nerve-racking wait along the central gulf coast. Just a couple of days from now a monster of a storm is expected to pound the region. Right now, hurricane Katrina is swirling in the warm gulf water as a Category 3 and it’s getting better[sic] and stronger.”

Yangon’s population of 6 million dwarfs New Orleans’; a disproportionate share of Myanmar’s population of 60 million live near the shore, in the Irrawady Delta, directly in Nargis’ path; Nargis was a Category 4 storm while Katrina (at the time of landfall) had weakened to Category 3; poorer construction standards meant scant protection for already much-embattled residents of Myanmar.

I do not mean to minimize the tragedy of Hurricane Katrina, but rather to highlight most of the press’ blindness to the impending catastrophe of Cyclone Nargis. For the Burmese, cut off by a repressive regime, an outside clamor might have led to additional, live-saving precautions.

(Data, continued:   May 3, 40 hits; May 4, 140 hits; the most recent four hours, >1000 hits.)