Archive for October, 2008

Political Origins of the Financial Crisis

| Dick Langlois |

Okay, so maybe I’ll write about the financial crisis after all.

Stan Liebowitz has been pointing for a long time to the political origins of lowered lending standards — pressure on Fannie Mae to increase “affordable housing” — and to the role of those lowered standards in the mortgage bubble. “[I]n an attempt to increase homeownership, particularly by minorities and the less affluent, an attack on underwriting standards was undertaken by virtually every branch of the government since the early 1990s. The decline in mortgage underwriting standards was universally praised as an ‘innovation’ in mortgage lending by regulators, academic specialists, GSEs, and housing activists. This weakening of underwriting standards succeeded in increasing home ownership and also the price of housing, helping to lead to a housing price bubble.”

Today the AEI has posted a nice piece by Peter Wallison and Charles Calomiris saying much the same thing. Even more interesting, however, is a long article in Saturday’s New York Times that chronicles the process in great detail.

Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.

“When homes are doubling in price in every six years and incomes are increasing by a mere one percent per year, Fannie’s mission is of paramount importance,” Senator Jack Reed, a Rhode Island Democrat, lectured Mr. Mudd at a Congressional hearing in 2006. “In fact, Fannie and Freddie can do more, a lot more.” (more…)

6 October 2008 at 11:47 am 6 comments

Amethyst and Public Choice

| Dick Langlois |

Many of you have heard of the Amethyst Initiative, a petition signed (at this writing) by 130 American college and university presidents in favor of lowering the drinking age from 21 back down to 18. As the website puts it, prohibition is not working. The college presidents are hoping that, by removing the black-market character of college drinking in the U.S., lowering the drinking age might be part of a solution to the problem of binge drinking on campus. (Although American 18-year-olds may not buy alcohol because such an activity is unsafe and unhealthy, it is quite alright for the same 18-year-olds to join the military and be posted to Iraq or Afghanistan.) Needless to say, this proposal has generated an enormous amount of controversy, and is vociferously opposed by politically powerful groups like Mothers Against Drunk Driving. The authoritarian response, typified by this column in Slate, is to point to the many studies that show that a higher drinking age reduces driving fatalities, although the Slate article does come around at the very end to the point that economists would make: taxes are more efficient at regulating behavior than is prohibition. (This would also include binge drinking. A student of mine, recently returned from a semester abroad, reports that there is no binge drinking at the National University of Singapore despite a drinking age of 18 — not because of that government’s well-known authoritarianism but because alcohol is highly taxed.) Not, of course, that I would personally like to see higher taxes on my pinot grigio.

My point here is not to engage the debate but to raise a Public Choice point I haven’t seen raised elsewhere. A quick reading of the list of university presidents who have signed suggests that many of them are from private schools. Among the most prominent of these are Dartmouth, Duke, and Johns Hopkins. Public Choice theory might suggest that presidents of state universities are much less likely to sign, since they depend on politicians for funding, and are much less willing to take positions that groups like MADD would oppose. The president of my university is certainly not about to sign it. The six Connecticut schools that have signed are all private, including Trinity College but not including Connecticut College, Wesleyan, or Yale. (Of course, Rick Levin at Yale may be just as reluctant to take unpopular positions given the hungry eye the government has been casting at his endowment.) On the other hand, there are a number of public colleges among the signatories, notably Maryland, UMass, and Ohio State. Are the signatories really biased in favor of private schools? Or are people actually taking moral positions despite possible consequences? That would be interesting. Do we have enough data to tell? Might be an good project for someone talented in the relevant econometrics.

I hesitated at first to post this, since I didn’t see its relevance to the current financial crisis. On reflection, however, it occurred to me that there is an important connection, since the best possible response to the financial crisis might well be binge drinking.

5 October 2008 at 11:24 am 5 comments

Protesting Against and Sanctioning Bad Reviewers

| Nicolai Foss |

Keynes famously complained (whined) that Hayek, in his review of A Treatise of Money, hadn’t treated the book with the measure of relative goodwill that an author is entitled to expect from a reviewer. He also equally famously informed Hayek that he (Keynes) had changed his mind, so that Hayek’s two-part, article-length review was irrelevant anyway. Hayek later explained that this was the main reason why he had chosen not to review Keynes’ General Theory (the story is a bit more complex, see this paper).

While Keynes was no doubt whining — those who care can check Hayek’s very careful and balanced review — he does have a point: Aren’t authors entitled to a certain measure of goodwill in the sense that they can reasonably expect that the reviewer has tried to understand what the author is talking about, doesn’t misinterpret and misrepresent him too badly, doesn’t kill a paper because of very minor problems, etc. etc.? While I trust that most people would agree with this, we also know that we may occasionally get reviewers (whether anonymous or, in the case, of published reviews, usually non-anonymous) who are not at all inclined to show such goodwill. (more…)

5 October 2008 at 8:50 am 3 comments

Call for Papers: Org Economics and Org Capabilities

| Nicolai Foss |

The relation between organizational economics (agency theory, TCE, property rights theory, team theory) and the organizational capabilities view has often been debated on O&M. Perhaps not surprising, as at least three out of the four current O&M bloggers have frequently covered this theme in their research, Dick Langlois writing about the relation between these ideas at least as early as 1984 (here), my first publication on the subject appearing in 1993 (here), and Peter’s first paper on it appearing in 1996 (here). I think we hold different views on the nature of the relation between organizational economics and capabilities ideas. I increasingly think of ideas on transaction costs, property rights etc. as primary to, and more fundamental than, notions of capabilities (e.g., see this paper, forthcoming in Strategic Entrepreneurship Journal). Dick, on the other hand, seems to hold the opposite view.

Such differences are even more pronounced in the strategy and organization fields. Some scholars reject organizational economic altogether (Sid Winter seems close to that position). Others argue that organizational economics and the organizational economics view are complementary in an additive sense: They deal with different, yet complementary issues, so that, for example, the organizational capabilities view tells us which assets/resources we need, organizational economics providing insight in the actual organization of those assets/resources (this seems to be the current mainstream view). Some scholars go further, and argue that there is a real scope for integrating, for example, ideas on localized knowledge and learning from the capabilities view with transaction cost economics (e.g., this paper). In fact, overall there seems to have been some movement from the i initial polarized positions of 10-15 years to today’s more integrative stance. 

In order to report advances in research on the relation between organizational economics and the organizational capabilities view, Nick Argyres, Teppo Felin, Todd Zenger and I will edit a special issue of Organization Science on “Organizational Economics and Organizational Capabilities: From Opposition and Complementarity to Real Integration.” Papers which can be both theoretical (or, for the US audience, “conceptual”) and empirical, must be submitted between Oct. 1 and Oct. 30 2009. The Call for Papers is here (scroll down a bit). The Call contains a long list of possible themes for papers, but feel free to mail me at njf.smg@cbs.dk (or any of the other editors) if you are in doubt whether your paper may make a fit with the SI.

5 October 2008 at 8:26 am 1 comment

Nobel Pickin’ Time

| Peter Klein |

The econommics Nobel chatter has already begun (1, 2, 3, probably many more). I’ll just borrow from last year’s post for those who follow such things:

How about a prize for organizational economics? Coase, of course, whose 1937 paper is foundational to the field, has already won, as have Akerlof, Spence, Stiglitz, Mirrlees, Vickrey, Hayek, and others whose work has greatly informed the study of organizations. But, for a prize recognizing organizational economics per se, whom would you pick? Williamson, Holmström, Milgrom, Roberts, Hart, Tirole, Aghion? Perhaps Alchian, Demsetz, or Jensen. Maybe a personnel economist (Lazear) or someone in corporate finance or accounting (Bill Schwert, Stewart Myers, René Stulz, Raghuram Rajan, Cliff Smith, Milton Harris, Artur Raviv)? Suggestions?

An entrepreneurship Nobel for, say, Baumol and Kirzner isn’t out of the question, but seems unlikely. What do you think?

3 October 2008 at 4:44 pm 3 comments

Self-Fulfilling Prophecy?

| Peter Klein |

Commentators seem to take it for granted that this week’s crazy stock-market performance, particularly Monday’s 700-point drop in the Dow, proves the reality of the financial crisis. But in today’s Fed-watching age, in which even the most cryptic pronouncements of Federal Reserve officials send traders rushing to their keyboards, do you think the repeated statements by the Fed chair, Treasury secretary, and other insiders that the economy is on the verge of total collapse might just have a teensy, weensy effect on financial markets?

“Henry, banks are still lending. Hurry, say ‘credit crunch’ again and maybe we can scare ’em off!”

BTW isn’t it interesting that the phrase “not lending” has become a synonym for “lending less”? The Paulson plan “could channel enough money to enough banks to get them to resume lending,” says Knowledge@Wharton. So banks are currently making zero loans? Wow. I sense a profit opportunity. Hmmm, Don Boudreaux points to a Christian Science Monitor piece revealing that “only 63 percent of consumers applying for a car loan are being approved compared with 83 percent a year ago.” Yep, sounds like zero lending to me.

3 October 2008 at 1:06 pm 3 comments

More Bailout Humor

| Peter Klein |

In dark times, sometimes all you can do is laugh.

StrategeryCapital Management LLC
“Putting your money where our mouth is.”

About Strategery

Strategery is a unique hedge fund.

It is the largest in the world, with expected initial capital of $700 billion. It has a free and unlimited credit line should it need more. It has no fixed mandate, though it is expected to initially focus on mortgage-backed securities. And it is the only fund backed by the full faith and credit of the U.S. Government.

Strategery is a way for you to be more patriotic. Supporting this fund is an American duty. Many people have already taken to wearing a green, red, and blue ribbon to symbolize and broadcast their support for this newest American institution.

3 October 2008 at 9:09 am 8 comments

Ig Nobel

| Lasse Lien |

The Ig Nobel for economics has been awarded for 2008. The winners are:

Geoffrey Miller, Joshua Tybur, and Brent Jordan of the University of New Mexico, USA, for discovering that a professional lap dancer’s ovulatory cycle affects her tip earnings.

It’s tempting to pose the classic question: Could the direction of causality be an issure here?

Reference: “Ovulatory Cycle Effects on Tip Earnings by Lap Dancers: Economic Evidence for Human Estrus?” Geoffrey Miller, Joshua M. Tybur, Brent D. Jordan, Evolution and Human Behavior, vol. 28, 2007, pp. 375-81.

3 October 2008 at 5:40 am 1 comment

Strange Bedfellows

| Peter Klein |

One of the interesting aspects of this week’s House vote on the Paulson plan was the coalitions it generated. The Treasury Secretary, the Fed Chair, and leaders of both the Democratic and Republican sides stood hand-in-hand to urge lawmakers to support the bailout. Conservative Republican and liberal Democratic members joined forces to defeat it. What gives? Larry White points to ideology: “Republicans who voted no didn’t like the fact that $700 billion would be taken from taxpayers. . . . Democrats who voted no didn’t like the fact that it would be going to Wall Street.” Maybe, but I prefer Gordon Smith’s suggestion:

Anthony Ha uses the data at MapLight.org (a website dedicated to “illuminating the connection” between money and politics) to tell another familiar political story. Looking at this page, Anthony observes:

Overall, bailout supporters received an average of 54 percent more in campaign contributions from banks and securities than bailout opponents over the last five years. The disparity also held true if you look at individual parties. In fact, the 140 Democrats who voted for the bailout received almost twice as much money from banks and securities as the 95 Democrats who voted against it. (The difference was closer to 50 percent for Republicans.)

Does anybody have data that would permit some quick-and-dirty analysis, say a logistic regression of the House votes as a function of legislator and district characteristics, contributions from the commercial and investment banking industries, and other interest-group variables?

2 October 2008 at 2:09 pm 1 comment

I’m From the Government, and I’m Here to Make You Some Money

| Peter Klein |

I’ve noted before how most commentators on the financial crisis are ignoring political economy. Virtually everyone, with the exception of the good folks at Mises.orgThe Beacon, and a few other sites, treats Paulson, Bernanke, bank regulators, members of Congress, and other principals as the benevolent dictators of neoclassical welfare economics. (This is true even of people you’d think might know something about public choice.) But it’s impossible to analyze the current situation without reference to special interests — not only those whose actions are responsible for the current mess, but also those taking advantage of the situation to rewrite the rules and increase their authority.

One example: A particularly foolish (and dangerous) meme working its way through Washington and the surrounding punditocracy is the idea that the Paulson or modified Paulson plan isn’t really a $700 billion bailout. It’s an asset purchase, the argument goes, not a transfer payment; the Treasury buys $700 billion of bad securities, holds them, and sells them later, once market conditions improve. Maybe the Treasury can sell these assets for, say, $500 billion, so the net cost to the taxpayer is only $200 billion. Heck, if prices rise enough, taxpayers may even make money on the deal! (That’s what the junior senator from Missouri said today. Plenty of clever-silly people are saying this kind of thing too.)

The scenario is pure fantasy. Think of it this way. Treasury gets the $700 billion by borrowing (say, from the Chinese) or through increased tax revenue. Suppose the value of these assets really does rise to $500 billion, and the Treasury sells them back to investors. What will the US government do then — return the 500 billion to taxpayers? Does anyone seriously think Congress would cut taxes or offer rebates to give that money back? Not on your life. Congress will simply take that $500 billion and spend it on new programs. The Paulson plan represents an increase in government expenditures of $700 billion, period. Joe and Jane taxpayer will never get a penny of that $700 billion back, no matter what happens to asset prices.

1 October 2008 at 11:30 pm 4 comments

Teaching Economics through Cinema

| Peter Klein |

I wrote something a while back on the entrepreneur in film. Here’s a working paper on the use of cinema in economics education more generally. Gherardo Girardi experiments with movies in the clasroom and reports the results, summarized by this (perhaps unintentionally) droll remark: “The results from the student surveys show that the students strongly wish to see the proposed module introduced.” No kidding.

Girardi’s recommendions include some surprises along with familiar items:

  1. Death of a Salesman (Arthur Miller, 1949, US) – Choice of profession, sense of self worth based on economic performance;
  2. Grapes of Wrath (John Steinbeck, 1939, US) – Property rights, migration, trade unions;
  3. Oliver Twist (Charles Dickens, 1838, UK) – Economics of crime, economics of charities;
  4. Rogue Trader (James Dearden, 1999, US) / Wall Street (Oliver Stone, 1987, US; C) – Psychology of financial markets, business ethics;
  5. Balkanizateur (Sotiris Goritsas, 1998, Greece; C) – Efficiency of capital markets;
  6. La Terra Trema (Luchino Visconti, 1948, Italy) – Poverty and the risks of entrepreneurship;
  7. St. Francis (Michele Soavi, 2002, Italy) / Francis, God’s Jester (Rossellini, 1950, Italy) – Choice between wealth and poverty
  8. Mother India (Mehboob Khan, 1957, India; C) – Rural financial markets in poor countries;
  9. Pride and Prejudice (Jane Austin, 1813, UK) – Dowries, economics of inheritance;
  10. Ashani Sanket (a.k.a. Distant Thunder, Satyajit Ray, 1973, India) – Economics of famines;
  11. Robin Hood (author unknown, 1973 Walt Disney production recommended) – Morality of stealing from the rich/the state

See also From ABBA to Zeppelin, Led: Using Music to Teach Economics.

1 October 2008 at 10:45 pm 9 comments

Karl’s Revenge

| Peter Klein |

I closed my first post on the bailout mess with “Capitalism, requiescat in pace.” Here’s Martin Masse with the details. (Thanks to Mark Thornton.)

1 October 2008 at 9:49 am Leave a comment

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Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).