Relevant and even prescient commentary on news, politics and the economy.

Two Things Someone Else Needs to Discuss

Since I’m trying to cut a 24-page paper down closer to 15 today, I’ll leave the Heavy Lifting to other. But two things probably should be discussed (or at least noted) here:

  1. Brad DeLong appears (to me) to confuse perceiving a move from Democratic Republic to Empire—and therefore away from any Competitive Advantage for the past 100-ish years—with conspiracy theory. But I may just be reacting to his headline.
  2. Tim Duy (at Mark Thoma’s place) refuses to jump into the briar patch:

    Increasingly, society views the purchase of a home as primarily an investment, not for the service it provides (don’t even get me started on this topic).

    Someone needs to get him started. Or continue from Tom’s previous AB post.

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Price Discovery (First of a Series)

I want to talk about something of which I know nothing: Wireless Internet Access.

We spent the weekend in pgl-land (NYC), at a friend’s apartment. Since he’s a rather prominent computer graphics designer, I assumed, incorrectly, that he would have some form of Internet access at home.*

So I did what I always do: opened the laptop and searched for an available wireless access point.

At no time were there less than 15 indicated. And while most of these were “Security-Enabled,” I get the impression that either (1) that has become the default setting for service in the past few years or (2) enough people have been persuaded by the FUD campaigns of MSFT and others that they read that part of the instruction manual.**

I had kids to distract, so access to or dailynoggin was important. That is, I would have been willing to pay a few dollars for a weekend’s worth of access, or some equivalent thereof. If there were a market available.

And, probably, at least a few of those 15 or so router-owners—badger or linksys or 5AMews—would have been willing to make a few dollars providing some of their excess capacity to my 54.0Mbps laptop. If there were a market available.

But there wasn’t.

Or, more likely, there was, but the effort wasn’t worth it. One of the key aspects of economic analysis is the assumption that markets (1) clear [both buyer and seller voluntarily agree on a price] and (2) are efficient [everyone involved in the market has all the information they need to make a rational decision on what the clearing price is/will be].

In the real world, investment banks spend millions of dollars to attain that “efficiency.”*** Nor is anyone of the illusion that the terms of all transactions are completely voluntary on both sides. But those are variations on the model, and the markets created from or supported by them, while not an economic ideal, can be analyzed as variations.

What happens when there just is not a market?

In the case here, I have no way of knowing who the local providers are or, more importantly, where they are. Badger could be my next-door neighbor, or two floors away and at the other end of the building. So I would have to spend time

  1. knocking on doors, interrupting people (including some who have no capability themselves; there are many more than 15 apartments in the building),
  2. having discussions with some people who might have non-economic reasons not to agree to permit me access (including FUD),
  3. (c) finding people who really do use all of their capacity,****
  4. finding people who could provide access but with whom I cannot agree on a clearing price, and
  5. either
    1. finally, finding someone with whom I can come to a market agreement or
    2. giving up and depending either on unguarded WAPs or finding an alternative.

In all scenarios, even 5(2), I have spent some portion of time, possibly significant, that must be included in the Full Cost of the Search.

Which is probably why there is not an active secondary market in Wireless Internet Access in the United States.

The consequences of this specific example are left as an exercise. The consequences of the problems with Price Discovery are To Be Continued.

UPDATE: Felix Salmon wonders about the need for price discovery in commercial WiFi:

If I’m looking for a wi-fi network, it’s easy to see which ones are encrypted and which are open. But of the open networks, it’s impossible to see which ones are genuinely open and which ones will take you only to a sign-on page which asks for a credit card number and which often doesn’t work….A network which purports to offer free wi-fi should do just that: firewalled wi-fi should look different somehow.

*No DVD player, VCR, or television, either; not a keeping-the-kids-busy-without-touching-things place.

**I am convinced that it’s not out of actual knowledge because several of the “secure” networks were still named linksys, Apple Network ######, or similar. It may not be true, but it is the way to bet.

***As cactus noted, the EMH is of dubious value if there is a significant disconnect between the alignments of the financial markets and those of “main street.” But let’s pretend it works for the normal “markets” model.

****Highly unlikely, for reasons to be discussed in another post.

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A Quick One: Inflationary Credit Recession Strategies

Tom’s doing some heavy lifting, PGL is in form, Bruce has started SocSec 101, and the entire economics blogsphere is having so many conniptions over Hillary that you’d think the CEA was actually the Shadow Government.

So I just want start easy, and take a look at three easy-to-compare data points:
First, the Federal Funds target rate since 2007 (I include the last change in 2006 since it was the rate for the first 8.5 months of 2007):

If you make money easier to get, standard theory says that people will get it. While this raises the “threat” of inflation, it makes credit easier to get as well. So the theory goes.

Steven J. Balassi (h/t Aaron Schiff for bringing his blog to my attention) notes that this isn’t happening. Pull quote:

Friends in the mortgage industry are telling me you have to be “rich” just to get a home loan now.

Even granting I have a vested interest right now in peole being able to get mortgages, this is keeping the market from clearing and expanding the housing crisis. Again, contrary to the theory that easier money means, well, easier to get money.

So we have easier money and tighter credit. The implication is that the banks are keeping that money, no circulating it. No wonder they want to be paid interest on reserve requirements.*

But what about the inflation fears of easier money? Surely, if the money is not circulating, that shouldn’t be a fear?

Not so fast, says Kansas City Fed President Thomas Hoenig (h/t Mark Thoma):

Hoenig said rising inflationary pressures are “troublesome” and a “serious” matter. “The bigger concern is that these increases are beginning to generate an inflation psychology to an extent that I have not seen since the 1970s and early 1980s,” he said. Hoenig added that “there is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it.” He tied rising prices primarily to overseas factors, including a “sizable decline” in the U.S. dollar’s value.

Welcome to the Global Economy. But Hoenig is sanguine about the Fed Funds rate, even if he is willing to use the R word:

Hoenig’s views on the economy were relatively upbeat, even as he described the nation as being “at the brink of a recession.” He suggested interest rates were close to where they needed to be.

“The current accommodative stance should be sufficient to cushion the economy
from a deeper slowdown and the risks that financial disruptions could spill over to the broader economy,” he said. As the economy and markets improve “it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner.”

Citing “room for optimism,” Hoenig said “financial markets appear to have stabilized somewhat, and the economy should pick up in the second half of the year as fiscal and monetary stimulus take hold.” The official said he believe markets’ role in the current turmoil has been overstated, and that higher energy prices and housing woes have exacted the greater toll. He also said he believes the “credit crunch” hasn’t proved as damaging as some had feared.

So there we have it. We have inflation, but cutting rates was the right thing. And the credit crunch isn’t too bad, even if only the rich can buy a house. And that 325 basis points of easing in the past eight months just hasn’t gotten into the economy yet; give the banks another six months or so.

I feel better; how about you?

*Meanwhile, I am reliably informed that Bank of America just cut the rates on their (currently in place) contracts with consultants by 5-15%, depending on length of service (greater for longer).

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