Newmark's Door

Economist Steven Horwitz posted "An Open Letter to My Friends on the Left".

One of the biggest confusions in the current mess is the claim that it is the result of greed. The problem with that explanation is that greed is always a feature of human interaction. It always has been. Why, all of a sudden, has greed produced so much harm? And why only in one sector of the economy? After all, isn't there plenty of greed elsewhere? Firms are indeed profit seekers. And they will seek after profit where the institutional incentives are such that profit is available. In a free market, firms profit by providing the goods that consumers want at prices they are willing to pay. (My friends, don't stop reading there even if you disagree - now you know how I feel when you claim this mess is a failure of free markets - at least finish this paragraph.) However, regulations and policies and even the rhetoric of powerful political actors can change the incentives to profit. Regulations can make it harder for firms to minimize their risk by requiring that they make loans to marginal borrowers. Government institutions can encourage banks to take on extra risk by offering an implicit government guarantee if those risks fail. Policies can direct self-interest into activities that only serve corporate profits, not the public.

Many of you have rightly criticized the ethanol mandate, which made it profitable for corn growers to switch from growing corn for food to corn for fuel, leading to higher food prices worldwide. What's interesting is that you rightly blamed the policy and did not blame greed and the profit motive! The current financial mess is precisely analogous. . . .

As much as corporate interests were relevant, they were aided and abetted, if unintentionally, by well-meaning attempts by basically good people to do good things.The problem is that there were a large number of undesirable unintended consequences, most of which were predictable and predicted. It doesn't matter which party is captaining the ship: regulations come with unintended consequences and will always tend to be captured by the private interests with the most at stake. And history is full of cases where those with a moral or ideological agenda find themselves in political fellowship with those whose material interests are on the line, even if the two groups are usually on opposite sides. This is the famous "Baptists and Bootleggers" phenomenon.

Finally, a worthy competitor for Primary Colors.

I don't believe in Peak Oil, but I do believe in Peak Rock.

"Sha Na Na: Founders of the Modern Conservative Movement".

So move over, Hayek, Goldwater, and Buckley. Your contributions to conservative thought were helpful, but it was Sha Na Na that put Reagan in the White House.

(Latter link courtesy of Michael Greenspan.)

There's arrogance, there's damn arrogance, and then there's this:

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

— Joseph J. Cassano, a former A.I.G. executive, August 2007

And as noted here previously, the failure of the ratings agencies seems to be an important part of the mess:

Because the underlying debt securities — mostly corporate issues and a smattering of mortgage securities — carried blue-chip ratings, A.I.G. Financial Products was happy to book income in exchange for providing insurance. After all, Mr. Cassano and his colleagues apparently assumed, they would never have to pay any claims.

Eli Zabar tried it and it doesn't seem to be working. (Well, it is the Upper East Side.)

"Why Does Joe Biden Keep Remembering Things That Didn't Happen?"'

But it's O.K. "In an incredibly unique spin, this report claims Biden's gaffes don't matter because he makes so many of them."

. . . it's no contest.

The first rule was "Never, ever put anything from this class into your mouth." The second rule was "Remember the first rule."

Apparently, times have changed.

Richard Epstein on the current mess.

None better.

. . . is suggested by this article. (See also "Hedge funds suffer mass redemptions" and the "Hedge Fund Implode-O-Meter".)

The last time hedge funds allegedly had to raise cash quickly, in June and July, we saw weird--at the low price, the dividend yield for BAC common was nominally 13.9%, while the CEO was announcing he didn't think any cut in the dividend would be necessary--results like this: