A Tragedy of the Commons in a Motel Parking Lot

My ain’t-no-private-property-around-here blues

I used to advise high school and junior college teachers on what to teach their economics students, with an emphasis on free-enterprise. Sometimes I forgot to include private property rights on my list. Never again.

I’ve been stranded for two days, with another day to go, by the mid-Atlantic snowstorm. I’m in a motel north of the Baltimore beltway. Unfortunately, the airport is south of the beltway, not that either the airport or the beltway are doing anybody any good right now. My rental car was totally buried the first night.

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Warning: In terms of the title, I’m about to bury my lead. Either be patient, or jump ahead.

Yesterday my dentist asked me if there was a short and sweet book I could recommend to him that would help him establish a framework for his thinking on matters economic. He thought he had good instincts about the major topics of the day—which I can confirm—but he needed a theory or theme for structure to organize his thinking. I said I would think about it.

Actually, I’ve given a lot of thought to such questions, but I still don’t have a short and sweet answer. I once took a stab at discussing what high school economics teachers should teach, one version of which I posted here in December 2008. Maybe I can update that some day.

The question made me think first of Henry Hazlett’s classic, Economics in One Lesson. That, in turn, reminded me of Frederic Bastiat, on which some of Hazlett’s book was based. But Bastiat’s nuggets of wisdom are spread out over more than one book. My dentist had current events and issues in mind; so that places his request in the macro rather than micro realm, which takes much of the fun out of it.

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During former Treasury Secretary Paulson’s interview with Larry Kudlow last night, Larry asked him about the role of mark to market accounting in the financial crisis. Secretary Paulson defended mark to market accounting.

However, his context and his examples came from his many years of investment banking at Goldman Sachs where assets are traded daily and, obviously, should be marked daily. Those of us who railed against the rigid application or mark to market accounting, or fair value accounting, during the crisis were talking specifically about commercial banks, not investment banks.

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According to Senator Reid, his support for Chairman Bernanke means the Chairman would have to:

“redouble his efforts to ensure families can access the credit they need to buy or keep their home, send their children to college or start a small business.”

Such a scandal!

Imagine that! (Like, Elaine, am I using too many exclamation points?)

I’m no fan of Senator Reid, but I will take him at his word as to what he had Chairman Bernanke agree to. So?

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First, we see our government low-balling the expected returns for the Tarp investments in banks so that an additional tax on banks can be justified—including banks that never receive the investments and excluding nonbanks that did. Now proprietary trading is verboten even though there is no evidence that it had anything to do with the crisis. The same goes for hedge fund and private equity. Have we totally forgotten about the making and securitization of subprime mortgage loans? I would say the war on banks is getting curiouser and curiouser, but I’ve already used that line to describe this new wonderland.

Every politician wants to be perceived as a populist these days. They want to be perceived as anti-establishment, and I guess nothing is more identified with the establishment than the Federal Reserve. So, throwing Ben Bernanke—the guy who, along with Henry Paulson and Tim Geithner, saved the country from a second great depression—under the bus will be perceived to be good politics. I guess Geithner will be next. Taking irresponsible actions to atone for responsible actions is apparently the new norm for our leaders. Have they no shame?

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A favorite game at my school was “lets you and him fight” whereby A would tell B that C had been talking trash about him and would often tell C the same thing about B. It was hard for B and C to avoid getting sucked in.

I sat beside Gentle Ben Bernanke at the FOMC table until I retired from the Fed in November 2004. He was a gentleman and a scholar. I can’t imagine him deliberately picking a fight with anyone—certainly not John Taylor over the Taylor Rule.

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Getting Curiouser and Curiouser

Many mistakes were made during the Great Depression of the 1930s, and we seem determined to repeat all of them. They include starting a trade war with Smoot-Hawley, raising marginal tax rates in the middle of the depression, tightening monetary policy through misinterpretation of the meaning of excess bank reserves, and, of interest here, the demonizing of bankers and businessmen for political advantage.

The proposed new tax can only be understood as pandering to uninformed or misinformed populism  after their pound of flesh from “the bankers.” Support of the banking system through the TARP program has been successful, and it is proving to be profitable from the Treasury/taxpayer point of view. The Treasury is earning about 18 percent on the preferred stock and warrants of the big commercial and investment banks that have repaid.

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In case you want to look a topic up, here is a list of my blog postings in 2009

www.bob-mcteer-blog.com

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Because I believe in comparative advantage, I blog about the few things I know something about and leave other topics in more capable hands. On those other topics I feel free to use shortcuts to form my tentative opinions since I won’t be inflicting them on others. Over the years, for example, WWFT (what would Friedman think) has been a useful timesaver.

One area of absolute and comparative disadvantage for me is health-care economics. That’s okay because the National Center for Policy Analysis for whom I work has several experts on health care economics. John Goodman, the founder and president, for example, is considered by many to be the father of Health Savings Accounts. He and Jeanette Goodman recently conducted an online petition drive against a government takeover of health care that collected a record 1.3 million signatures. My only contribution to that was to sign the petition. 

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Regarding the title above, I know it won’t attract many Google searches, but what the hell? This is the last day of the year. So, on a weighted average basis, how much could it hurt?

Worrying about hits and visits takes the fun out of “posting.” So does that word. Why can’t we call it “blogging”? Bloggers should blog, not post.

Another thing: did I put that question mark in the right place? I remember to put periods inside the quotation marks, but an inside job on question mark doesn’t look right. And what about the one ending the first sentence? Is that right? I’ve lost my little book. 

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My doctor is cooler than most. He carries a blackberry and answers e-mails. Even so, I always dread my annual visits. My treadmill performance keeps slipping, my glucose keeps rising, and our alcohol conversation keeps stretching my veracity. 

Our relationship has always been strictly doctor/patient, but recently he invited me to his book club to discuss Alan Greenspan’s memoir. After a couple of drinks, we got down to business. I hadn’t fully digested the Maestro’s masterpiece, but I knew I could fill in the blanks.

I was soon waxing eloquent from the end of the dining room table with a glass of red wine supporting my memory and elocution. When my half-full glass mysteriously became half-empty, I saw a hand out of the corner of my eye whisk it away and replace it with a glass of water. I knew then that I had witnessed my first miracle. My doctor had turned wine into water.

Time Magazine quoted its Man of the Year, Chairman Bernanke, regarding his boyhood interest in the Great Depression. He had heard his family discuss a town full of shoe factories that closed during the depression leaving the community so poor that its children went barefoot. He said he kept asking why they didn’t just open the factories and make kids shoes. Good question.

A depression does seem paradoxical. People can’t spend because they don’t have the income. They don’t have the income because they aren’t spending. Around and around it goes with the gears not engaging. Looking ahead, there is no supply because there is no demand and no demand because there is no supply.

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In “Hard Money Populism” I mentioned Congressman Ron Paul’s coming to Texas A&M University a few years ago to speak to the Young Republican Club and that the attendance was embarrassingly small. I said that he was a good sport about it and nevertheless gave them “the whole load.”

I don’t know how many readers may have misunderstood what I meant by the whole load, but I know of one, which is one too many. It came from the following story, which I heard many years ago. I don’t know the origin of the story.  

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The first and so-far the only person I’ve heard call himself a “hard money populist” was my friend, Wayne Angell. That was several years ago when he was a member of the Board of Governors of the Federal Reserve and we served together on the FOMC. I wanted to give Wayne credit for the expression before someone else adopts it as something new and original.

Populism in U.S. monetary history was usually associated with opposition to the harsh discipline imposed by adherence to the gold standard. Gold money—hard money—was seen to favor creditors over debtors, especially evil bankers over worthy farmers. Going off gold was unthinkable, so the populists wanted to use more plentiful and cheaper silver as the basis or at least a basis for our currency. The battle cry came from William Jennings Bryan’s “thou shall not crucify mankind on a cross of gold” in his cross of gold speech in the 1896 presidential campaign.

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Do you agree with me that inflation has not been a problem lately? Or, do you agree with those who say it has? It depends on what you mean by lately. The difference between inflation in recent months and inflation year to date has been wider than usual this past year, but that’s changing.

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 A couple of people have mentioned to me that the TARP repayments are all over the news and suggested that I write about it. My response has been that I didn’t know how to avoid saying I told you so. I’ve written and said often that TARP would produce a profit for taxpayers, or only a small loss. However, I could always feel eyes rolling.

While I never bought the idea that TARP purchases of preferred stock was only from banks ALREADY in good condition, I do think it was limited to banks that WOULD BE expected to be in good condition AFTER the purchase. In many cases the government investment was conditional on the raising of private capital as well.

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I ended my previous post, Jobless Recoveries: A Look Back, by raising a question; how does the same monetary policy that fosters disinflation in the general economy foster an inflationary bubble in only one sector? By easing monetary policy, the Fed intended to address a very weak labor market, a jobless recovery that threatened to turn back into recession and disinflation that threatened to morph into deflation. But, if the Fed was creating too much money, why was the money spent only on housing?

It is taken as given these days that the Fed created the housing bubble. If this is true, then it must follow that the Fed is responsible for the bursting housing bubble, the ensuing financial crisis and subsequent recession. But, as I recall, the Fed did not create the housing bubble. It was the collateralized subprime loans, not a reversal of home prices, that caused the problems. Maybe there were too many loans, but, if so many had not been bad loans, air could have come out of the bubble without devestation.

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“Turning to the nation, we’re in the midst of the slowest expansion in post-World War II history, as measured by employment. In the previous nine expansions, it took an average of eleven months for employment to regain its pre-recession peak; the high was twenty-three months in the so-called jobless expansion that began in 1991. At twenty months into our current expansion, jobs are still down 2.6 million from the level in February 2001. So we’re certain to set a new high for the number of months it takes to get all the jobs back.”

This quote is from my opening statement at the FOMC meeting on August 12, 2003. According to the Business Cycle Dating Committee of the NBER, the recession had officially ended in November 2001. There were a few months of job growth after that November, but they turned negative again in 2002 and remained weak in 2003.

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The other day a top-notch interviewer on financial radio was paying more than his usual deference to his distinguished guest on the subject of health care. The guest summed things up with an analogy. He said the case for requiring young people who don’t want health insurance to purchase it anyway was the same as the case for requiring automobile owners to have car insurance.

I waited for the interviewer to point out that the required automobile insurance is liability insurance–in case he has an accident that hurts someone else–whereas the required health insurance would be insurance for the purchaser’s own benefit. He didn’t. Required bicycle helmets would have been a more honest analogy.

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We had a couple of bullies in my small high school, but I’m told that they grew up into pretty good citizens. Time seems to cure that ugly disease in most people. The main exception is our elected representatives. Something happens to them when they climb up on the dias and see the red light on the TV cameras. Senator Jeckle becomes senator Hyde. They get to show their constituents how tough they are. I don’t watch bull fights, dog fights, or rooster fights, and it’s getting harder to watch congressional hearings.

What I don’t understand is why politicians think their deviant behavior is so appealing back home. They apparently don’t have a very high regard for the home folks, especially those in Kentucky and Vermont. My guess is that those folks are better than their Senators give them credit for. Surely blue grass and autumn leaves have some calming effect.

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