Economic regulation

I am loath to have an opinion about why the recent market crisis happened, as I know little about markets or crises. But it seems to me that the problem does not lie in the fact that the market was too regulated or too unregulated, but rather poorly regulated. I suspect that Richard A. Epstein seems to have gotten it right. In his defense of libertarianism, he suggests something like this (and I may be getting this very wrong): when government subsidizes some loans and guarantees others, who wouldn't want to be a lender or own such a loan? The return is almost guaranteed. And as the law of supply and demand has it, when everyone can now afford to borrow money for homes, the prices will go up. But this is not sustainable for long. How high can prices go, and how many subsidies can be issued? And how long can people live beyond their means? So too many people start defaulting on their loans, the price drops for everyone, and now homes that were bought on the assumption that there was a high demand (and so at a high price) are now worth less because there is now a lower demand. And since the people who buy and sell things like loans are able to spread this risk throughout the system in diversified portfolios, when the mortgage market went bad, lots of portfolios started faltering. When lots of portfolios dip, everyone is scared and pulls their money out of the market. The rest is familiar. Less money in the market, the less business have to work with, and thus the poorer our country and hence investors, become. (How the libertarians get blamed for a problem the government started is beyond me.)

But anyway, it seems to me that the government is not doing a bad job regulating the credit markets, but rather it was undermining the credit markets when it found a way to artificially increase the price of houses temporarily, by making the money used to buy them cheaper and easier to get. So people who could afford less were buying more, and it didn't dawn on too many people that this can only hold up so long because the government seemed to be keeping the money cheap.

Look, we have all had to make sacrifices to get what we want. Modernity generally implies finding ways to do more with fewer sacrifices. The government seemed to think it found a route to home ownership without the sacrifice. It didn't. The government's plan needs work. I hope that we learned a valuable lesson in what sorts of economic policies do not work, so maybe we can get it right next time.

Review of Wheelan's Naked Economics

Charles Wheelan's Naked Economics is pretty good as popular books on economics go. It is a very clear basic discussion of a number of the more important economic issues that effect individuals, countries, and the world. The basic lessons, as one would expect are about markets, and incentives. But there are also great discussions about inflation, deflation, interest rates, globalization, the IMF, the World Bank and a whole host of other things.

I thought the discussion of demystifying the fed was great, as I never really knew what exactly the fed does, and how it controls interest rates or the money supply? Wheelan really clears a lot up.

The book has no math, and no graphs or charts, but it manages to get it's point across pretty well. It is peppered with anecdotes about interesting economic thingies, and has a spate of good examples. I enjoyed the book.

Review of Leavitt and Dubner's Freakonomics

Freakonomics is the work of Steven Leavitt and the writing of Stephen Dubner. Leavitt, as many of you may recall demonstrated a bunch of months ago that the main cause of lowered crime in the mid-90s in the US was that it was the time when all the babies who were aborted because of Roe v. Wade were not mugging people as teenagers.

Naturally this makes him an ingenuous thinker and so I got the book. Who would have thought of that? The book is actually pretty good. It starts off with a brief explanation of incentives and just runs from there. The book shows how you can catch school teachers when they are cheating in order to inflate their students' grades. It shows how the venerable institution of Sumo wrestling in Japan is rife with fixed matches. The economics of drug dealing are discussed, as are some of the factors that goes in to making for successful child-rearing. There is a nice discussion of the economics of real estate (hint: the agent is not your friend). And a favorite topic of mine is discussed: names. Apparently poor people eventually take the names of rich people.

The contents of the book are good. What I really did not like about the book is that it was really quick. There was way too little packed in to the book to make it worth it. This is one of those books where you go in expecting it to take you a few weeks to read and have it so jam-packed with stuff that you are wishing you could remember it all, but know you cant. What you get instead is a few well-written bits. The bits are nice and valuable, but one hopes for more, and you can finish the book in a day if you have patience.

Leavitt is really bright, and an intriguing thinker. Let's hope he has a long career.

Added 5/2/05:In addition to being the object of reviews in every newspaper I have read, Leavitt is excerpted in this month's Wired, and also in The Week, Interviewed in New York Magazine, and the subject of a particularly moronic editorial in Time Out New York.