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Wiggle Room

By Noni Mausa

Wiggle Room

In a claustrophobic economy where the lions share of the fruit of citizens’ efforts is funneled to a small number of beneficiaries, where institutions intended to intervene on their behalf have been rejigged to work backwards, what can the little guy do to gain some wiggle room?

The poorest Americans have many strategies that provide small amounts of wiggle room, like working off-the-books, juggling several bank accounts or using payday lenders, locking kids in a closet so they can go to work, and stiffing landlords and various debtors when and as they can. Some are chosen strategies, some are just the result of not having enough tokens to satisfy all the turnstiles.

And these skills are ancient. Being dirt poor is a venerable world sport, and the tactics have been practiced since before written records.

But in the past century we seem to have entered a new situation, where the great majority of people are in a closed system with very little wiggle room, and most wiggle choices leading to less, not greater freedom and prosperity.

The bumper sticker used to say, “If you are not angry, you’re not paying attention.” But now it should read “If you are not claustrophobic, you don’t understand the situation.”

In my city, a man went missing a few years ago, and was finally found dead in a basement space behind a false wall – a space that was narrower at the bottom than the top. He hadn’t been shot or stabbed – in fact, he had fallen prey to his own efforts to escape. Every wiggle wedged him lower, and made it harder for him to breathe, until he suffocated.

The great question facing ordinary Americans is not how to find further wiggle strategies, to make do with less, to work harder to try to tread water under increasing burdens. That way lies less freedom.

In a way, Americans do understand this. Otherwise, why would they have disdain for the model of the immigrant many Americans scorn? – living ten to a room, on rice and beans, sleeping in shifts to make use of scarce bedspace, and all for wages that a babysitter would refuse? Americans scorn these living arrangements, but that’s where they’re heading.

And many of the wiggle strategies in use even 80 years ago (raising chickens, cutting firewood for heat) are impossible now. Urging the majority to do more with less, (“austerity”) while the 1% do less with far more, is not the solution. But what is?

Going Galt isn’t an option. The poor are their own hostages, and dropping out of the labour market in large numbers is what’s happening now, anyway. But would it be possible to move into the “rice and beans” model while concurrently building solid economic walls to provide breathing space and room for more effective wiggling?

Could the model of the Beguines show us a direction?

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The National Health

I wasn’t going to mention Melissa Mia Hall’s death here—this is economics and politics, not sf—but now it is clear that, as usual, there is an overlap:

If she had seen the doctor, most likely he would have suspected more than a pulled muscle and would have ordered a life-saving EKG.

As Texas lawyer, writer and Melissa’s friend, Laurie Moore, wrote to me, “She would’ve had a huge doctor bill she couldn’t pay, and would probably have lost her house over it, but she would be alive instead of taking pain pills and dying in the night. “

In the end, Melissa didn’t die from an overdose, not even an accidental one; Melissa died of the very heart attack she feared….

Melissa worked hard. She owned a home. She paid her taxes. She was trying to live a dream – the American Dream – that supposedly we as citizens are promised – the right to pursue life, liberty and happiness. For her, that couldn’t be achieved in a traditional job that came with the perks of health care.

This is the quintessential “hard-working American” who gets talked about by The Teabaggers as if nothing ever goes wrong and they never need “government help.” (link h/t Dr. Black) This is the woman of whom Peter Cannon (via Rose Fox)* said:

Melissa contributed hundreds of reviews to PW, in all different genres, as well as dozens of Q&As. In recent years, ever reliable and diligent, she was reviewing three books a week for me…

This isn’t someone who was getting “fails to perform” ratings or “stealing” a house. This is someone whose every effort was aimed at making money and paying bills to keep what little she had gained. She used her skills—human capital, painfully developed—and made rational decisions.

And the rational ex ante decision not to use the medicines she needed or to have to pay out of pocket for an exam that may well lead to more expenses that are beyond her liquidity constraints are, well, exactly what we teach as “correct” in Ph.D. micro- and macro- Economics courses.

So this isn’t a science fiction post, because no one who reads and writes science fiction would believe that a hard-working, conscientious person with great skills, a positive personality, and diligent attention to opportunities would die because they couldn’t afford to live.

It’s an economics and politics post, one I wish I hadn’t had to write.

*Full disclosure: I’ve known Peter Cannon for years; he edited both myself and my wife at PW. (Full, full disclosure: he fired me, after having previously turned down my request to quit for a while. Both were good decisions on his part.) I’ve met Rose Fox several times and she edited my wife for a while when PW still paid something resembling minimum wage for the effort required.

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A Look at the Evidence: Predatory Lending, Borrowing, and Jack Cashill

The opening chapter of Jack Cashill’s Popes and Bankers relates his version of the tale of Melonie Griffith-Evans, a woman who in 2004 borrowed her way to losing her house.  Ms. Griffith-Evans accepted loans in order to buy a house priced at $470,000 that resulted in her having to pay “roughly $3,500 a month.”  Of course, she ends up not being able to pay those loans, and—since ex post is ex ante—the result must be All Her Fault.  Mr. Cashill allows as to how a “traditionalist” might “if feeling churlish, talk of  Griffith-Evans as a ‘predatory borrower.’ ”

Working solely from the information as provided by Mr. Cashill, let us test the validity of his hypothesis, assuming the “traditionalist” were sane.

Taking Mr. Cashill at his word on that “roughly $3,500 a month” and assuming that the ancillary loan is described correctly, Ms. Griffith-Evans would have to have taken out the following loans to buy the house for $470,000:

  1. A $  94,000 (20% of the price of the house, an amount Ms. Griffith-Evans did not have in savings) loan.  This loan—which I’m guessing was for 30 years was offered at the rate of 12.5%.  (Mr. Cashill stipulates this.) Presumably, it was not secured by the property itself.
    1. This would produce a payment due of approximately $1,000 per month.
  2. A $376,000 (80% of the price of the house) 30-year fixed-rate mortgage, securitized by the property, at 7.00%
    1. This is the only way to total $3,500 per month if we assume Ms. Griffith-Evans borrowed the entire 20%, which seems to be Mr. Cashill’s contention.  Otherwise, she only borrowed around $57,000 and made a down payment of around $35,000—certainly not the actions of a “predatory borrower.”

All of this excludes the closing costs or title searches or inspections or any of the other minutiae that is required before such loans are approved. But the process is transparent in Mr. Cashill’s tale, so we should assume that is the way he wants it to be.

Strangely, the details Mr. Cashill offers do not jibe with that. He claims that Ms. Griffith-Evans “took out a fairly standard 8.5% loan on 80% of the purchase price.” And—in a case of poor writing that betraying poor thought—he collaterally notes that the $3,500 payment due was “increasing as the loan was adjusted.”  This would lead to an initial combined payment of approximately $3,900 a month—more than 10% higher than “about $3,500,” though still significantly below the rental costs of “about $5,000 to $6,000 per month” for apartments that, per Mr. Cashill, “suited her fancy.”

Mr. Cashill is determined to argue that the loan Ms. Griffith-Evans took out was not “predatory,” but was an 8.5% mortgage rate “fairly standard” in 2004?



It doesn’t seem to be. Even the highest rate for conventional mortgages in 2004—6.29%—is  more than 220 basis points (2.20%) below the rate of Ms. Griffith-Evans’s loan, and that is excluding whether her rate was itself adjustable.  (It is unclear from Mr. Cashill’s account whether the 8.50% mortgage, the 12.5% additional loan, or both were adjustable.)  Or, to put it simply, the lender was charging Ms. Griffith-Evans more than a 35% premium for her loan.  Quite a premium to accept if one wants to be a “predatory borrower,”

One might fairly wonder why she was not offered a loan for the entire amount at a fixed rate that would produce a loan payment due of about $3,500 a month, eliminate the risk to the second, unsecured lender, and leave the primary mortgage lender with a less encumbered “owner.” (That rate would be 8.10% for a $3,500 per month payment, or—given Mr. Cashill’s figures—a loan of 9.30% for the entire amount.) Certainly, if the primary lender honestly believed the property was worth $470,000, they would have been willing to offer a loan for such an amount, with the attendant Mortgage Insurance.

Mr. Cashill wonders about none of those actors, either, however. Tis Ms. Griffith-Evans who is wholly at fault, from the Very Christian perspective presented.  Somehow, it was venal of her to elect to pay $3,500 a month for a house for her family, instead of half again more for an apartment.

I raise the possibility that the primary lender didn’t believe the house was worth $470,000—or even anything beyond $375,000—solely because the evidence runs that way.  There is first the fact that the lender was not willing to loan Ms. Griffith-Evans the entire amount—or even within 20% of  it—against the value of the property. (We can safely conclude this because the alternative is to believe that she, given the choice between paying 8.5% and paying 12.5%, honestly preferred the latter.)  The second piece of evidence comes from Mr. Cashill, who declares that the lender was “embarrassed” into allowing Ms. Griffith-Evans and her children to stay in the house—“presumably free of charge” (quite the presumption, that)—“while she tried to find a buyer.”  (Those of us who do not understand this behavior from a “predatory borrower” probably don’t understand Christianity either.)

Do I need to note that she failed to find a buyer? And that the lender clearly didn’t have one either, for—as Mr. Cashill continues—“When she failed to find one, the lender gave her still more time to find an apartment.”  The benevolence of lenders is legendary, to be certain, but this one is clearly destined for sainthood.

The world in which I live—clearly one with a different color sun than that of Mr. Cashill in this chapter—is one in which businesses make decisions based on revenue and cash flows.  So when the seller of the house accepted Ms. Griffith-Evans’s original bid, even with its dodgy financing, during the peak of the housing market, we must presume that they did so because they expected to receive more net money, easier, from that sale than from any other bid.  And we must presume the lender was fully aware of what they were doing—and charged usurious interest rates (compared to the market) accordingly.

So we have a situation in which, ex ante, all parties got the best deal they could, given the information they had.  Ms. Griffith-Evans paid around $1,000 a month less than she would have paid in rent, even  before any tax benefits.  The seller received a price to which they agreed, and which they represented as fair market at the time—with a lawyer doing a title search, a home inspector, and a home appraiser all corroborating that the property and the structure were as represented, and that the price was reasonably on the market (even if it wasn’t, or soon thereafter was not), all of whom were paid for their expertise and conclusion.  The lender received a significantly higher interest rate than they would have from another buyer, which presumably compensated them for their additional risk—and they had the property in reserve.

In the world in which the sun is yellow and Ms. Griffith-Evans is a single mother—not General Zod—economic agreements were reached consensually among the parties and of whom except Ms. Griffith-Evans were compensated professionals. Strangely, in the “traditionalist” world of Mr. Cashill, the one person in the entire series of transactions who is most likely to have been deprived of information is the one who should be described as “predatory.”

After a start like this, I can’t wait to read the rest of the book.

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Seasonal Posting: NYTFail, Part 2

First, David Leonhardt argued that this recession was good for workers.

Now, Floyd Norris apparently has decided to mix and match data. (I wonder if the fact many NYT employees who are looking at their 45-day severance offers is having an effect on its economic coverage.)

One of the standard “economist jokes” is about the one who died because he forgot to “seasonally adjust” his pool. In that tradition, Norris declares:

The adjustments are for seasonality. For some reason, October is the month with the largest seasonal adjustment down in jobs. So the increase in the unemployment rate does not reflect people actually losing jobs. It reflects the belief that seasonal factors should have added more jobs than they did.

All this may be very reasonable, and there is no way I can think of to test whether the seasonal adjustments are reliable. [emphases mine]

Gosh, I wonder why October would have a larger seasonal adjustment, and whether there is any BLS data to support that adjustment?

Apparently, employers traditionally hire a lot of people in October for “the Holiday Season.” And while it’s possible that they will be doing all that hiring in November this year, it hasn’t been the way to bet during this millennium.

Norris continues:

But I suspect seasonal factors are less important this year, when the economy may be changing directions, than they normally are.

It was with such optimism that Napoleon went to Russia, people bought VA Linux at $100 a share, and the Bush/Cheney/Rumsfeld axis decided to run a two-front war in Afghanistan and Iraq. With statements similar to Norris’s:

In reality, the government report says unemployment rates remained steady at 9.5 percent. And the number of jobs actually rose, by 80,000. And the number of jobs for college-educated Americans rose more than in any month in the last six years.

Well, the number of jobs rose (as one would expect, given the Holiday Sales push) but Table B-1 is closer to 40,000 than 80,000:

Where we do see an 80,000 job increase is in the private sector, which is more than 500,000 workers lower than it was in August. If you want to play a non-seasonally adjusted, private-sector only game with the data, you should at least be honest about it.

More vitriol and data below the break.

The details of that 80,000 look even worse: declines in all Goods-producing areas (except about 200 new jobs in primary metals, 300 in “miscellaneous manufacturing,” and 1,100 in motor vehicles and parts; cash for clunkers, anyone?) which are balanced by the Service sector, most notably the 63,500 new Retail jobs. Can you say “seasonal employment”? Floyd Norris apparently cannot.

The rest of the Non-Seasonally Adjusted figures are even less encouraging. Table A-8 of the report shows more than 100,000 people added to “not on temporary layoff”:

while Table A-9 is depressing: a larger number of unemployed at all durations, with the median duration of unemployment increased by more than one month (in a month):

And while the BLS has not updated their Job Openings data for October, the graphic through September isn’t exactly pointing to a decline in that median (or a robust recovery):

Is there a recovery in process? Maybe, though I’m not convinced, since most of the positive data seems, as Paul Krugman noted, “unrepresentative.”

But things are not so good as Floyd Norris wants to pretend, even (or especially) using the data he chooses to highlight.

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One of These Things is Not Like the Others

I try to like the NYTimes Economics Reporting. I really do. Heck, any place that publishes Uwe Reinhardt can’t be all bad.

But David Leonhardt, as he does often enough that I hesitate to read his work, again goes beyond the pale today, and clearly does so deliberately. The offending paragraph:

Twenty-two months after the start of the mid-1970s recession, real weekly pay was down 7 percent. For the early 1980s recession, the decline was 4 percent. Today, thanks to moderate pay growth and scant inflation, pay is 1 percent higher than when the Great Recession began in December 2007.

Let’s (1) remember that wages are sticky and (2) look at this declaration.

Both of the previous recessions are cited as being about 16 months. The current one probably ran 18 for economists’s purposes, and is in its 23rd month for the rest of us. But let’s give him a pass on that.

Note, however, the careful phrasing at the end of the paragraph: “thanks to moderate pay growth and scant inflation.” What does that mean? Well, let’s look at the Annual inflation Rate (CPI) for the actual recessions under discussion:

Gosh; quite a difference! I wonder if Leonhardt is aware of it.

A finger exercise below the fold.

Just for fun, let’s look at the wage changes over those periods. Now, unlike Leonhardt, I’m not going to use real wages. Let’s see if we can figure out what the nominal change in wages is for each of those periods.*

1973-1975 Average Inflation Rate: 10.75. Real wage loss: 7% Wage increase in period: 3.75% (including the residual effects of wage and price controls)

1980-1982: Average Inflation Rate: 7.5% Real wage loss: 4% Wage increase in period: 3.5%

2007-present: Average Inflation Rate: 1.8% Real wage gain: 1% Wage increase in period: 2.8%

I don’t know about anyone else, but I wouldn’t be celebrating the wage “gains” of the current era. (And let’s not even talk about actual wages received, since Barry Ritholz has that territory well-covered and then some).

*If you want to make the case that I should be using real wages, as Leonhardt does, please demonstrate (a) that all wages are renegotiated during a period of inflation, (b) that all parties are able to estimate inflation—even when at relatively unprecedented levels—accurately, and (c) that such negotiations were legally and commercially allowed during the period.

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Why didn’t CDO purchasers just pool for themselves ?

Robert Waldmann

One brief question about structured finance and a possible answer. Why did investors need financial operators to make pools for them ? Now it is easier to make sense of financial intermediaries which pool than of those which pool and tranche. The obvious explanation is that an investor investing a small amount of money can’t buy a diversified portfolio without paying absurd amounts in odd lot fees.

However, this doesn’t seem to fit the CDO market. Correct me in comments if I’m wrong, but I thought the final investors were entities with a good bit of money to invest — pension funds, endowments, insurance companies etc. Importantly one can achieve almost as good a risk return portfolio buying only assets in a randomly chosen subset of say 10% of all assets. The variance of a portfolio is a sum of say the market variance plus … plus idiosyncratic variance on single assets. So a term which can’t be diversified away plus stuff plus terms which are proportional to the inverse of the number of assets in the portfolio.

I have an idea. People investing other people’s money in fixed income instruments do not like to pool, because it is too easy ex post to find a better portfolio of fixed income instruments. Some will default. The principal is likely to note one bond that defaulted and ask the manager why he bought that bond not the similar one which didn’t default.

Letting someone else pool means you get an asset which pays a fairly high fairly safe return and those ugly but unimportant specific underlying assets which defaulted are hiden from the principal’s eyes.

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General Equilibrium Theory by Popular Demand

Robert Waldmann

I’m not kidding. Someone in some thread said that he or she thought it would be great if I could give a simple intuitive explanation of Geanakoplos and Polemarchakis (1985). Also I would get an interesting perspective on the crisis if I could fly to the moon.

I will try after the jump. The G&P result is that, if markets are incomplete, unless there is an amazing coincidence, there exists a regulation of financial markets which makes everyone better off than laissez faire.

This does not mean we should decide to regulate. The fact that such a regulation exists, doesn’t mean that it will be implemented if we just convince people that laissez faire is not optimal. It doesn’t even mean that economists can figure out a Pareto improving regulation and the problem is that those rotten politicians won’t implement it. Thus the result has only one practical application. If someone says that econmic theory or common sense tell us that free interactions of rational people must be in the interests of those rational people — that person has just said that he doesn’t know what he is talking about. This is not a judgment call. There is a mathematical proof.

Before the jump, I will just notice that there are many reasons why free market outcomes are presumably not Pareto efficient. The list of sufficient conditions in the most general description of economies with Pareto efficient market outcomes is very long, and for each sufficient condition for optimality it is easy to construct examples where, if the condition doesn’t hold, regulation can be good for everyone.

The requirements are rational expectations, well defined property rights, price taking behavior (which is really stronger than saying no agent has market power), no nonpecuniary externalities which implies, among other things, that people have no sense of pity and don’t mind knowing that others are starving, symmetric information and, finally, complete markets.

After the jump I will consider only the implications of incomplete markets as the assumption of complete markets — that for every distinguishable state of the world there is an asset which pays a positive return in that state and only in that state — is so absurdly false that no one claims it is a good approximation.

OK so the problem is to explain how rational choice by price taking agents with well defined property rights and symmetric information whose happiness depends only on their consumption leisure and whose actions don’t cause externalities except via prices (from now on RCBPTETC)can make all these agents worse off than they would be if the rational choices were constrained by a regulator who knows know more than they do and who can’t introduce new assets (like social insurance) which weren’t available to the private agents (from now on a RWKNETC).

The problem is that the proof really is based on an argument like “we have N inequalities and more than N variables so, generically, we can find variables such that all N inequalities are satisfied.” This is not intuitive. I was asked for examples, but I won’t get to them in this post. I will try to give examples in the next post.

I will define my terms (search for EOD to skip this part)

1. Price Taking: Agents decide what to do given prices, including prices of financial assets and their exactly accurate forecasts of future prices as a function of the state of nature. They assume that they can buy or sell any amount at current prices and ignore any effect that their buying and selling might have on prices. The bolded passage is necessary for Pareto efficiency in a one period model without uncertainty (a model without financial markets). It is also key to proving that equilibrium with financial markets is almost certainly inefficient. Oh note this is describing free markets. If goods are rationed by the regulator, agents know that they are.

2. Symmetric information: agents may not know much but they have the same information. This, along with rationality means that they have the same accurate belief about the probability that something will happen. With asymmetric information, insurance markets which are good for everyone can fail to exist due to the adverse selection death spiral. Forcing all people to participate in such markets can be good for everyone.

3. Well defined property rights: IIRC An assumption in all proofs that the market outcome is inefficient is that agents have an endowment and can choose to consume exactly that endowment neither buying nor selling. This is related to externalities. If anyone is free to pollute the air, then the good “clean air” doesn’t belong to anyone in particular. If fish in the sea belong to no one in particular, there will be overfishing — that is all people including fisherman might be helped by restrictions on catches.

4. Externalities include envy, shame at one’s unearned good fortune and pity. If people mind knowing that other people are starving, a world without starvation is a public good. I help you if I give food to the starving. Even if I care as much about you as I do about the starving person, if I care more about myself, then we can all be made happier by taxing each other to end starvation (and the formerly starving would be much happier). The sort of externality that is assumed not to exist in proofs of the Pareto efficiency of the market outcome is any interest in anything except my own consumption and leisure. Note not that people aren’t selfless but that we are completely totally absolutely selfish.

Becker showed that the results can be generalized if people are divided into non overlapping sets (called “families”) where people only care about other people in their own set and someone in each set cares enough that if you take from someone else in the set and give to them, they will choose to give it back. This is still very strong. He assumed that families don’t overlap (wonder if Becker explained that to his in-laws).

5. The regulator doesn’t know anything that the private agents don’t know. This seems clear. If the regulator knows better, then she can force people to do things which are in their interests but they don’t know it. This result will interest no one who observes the actual senate actually legislating.

6. This corresponds to the “constrained” in Geanokoplos and Polemarchakis title. The point is that, if there are incomplete markets, except for an amazing coincidence, making the markets complete *and* lump sum taxes and transfers can make everyone better off. It makes the challenge of finding a Pareto improvement harder in an important way as one way in which public intervention is widely believed to have made us better off is by introducing new kinds of insurance such as unemployment insurance. That’s too easy for G and P.

7. Pareto efficient: Look this is a very weak claim. It doesn’t mean efficient in any normal sense of the word. A Pareto improvement (making everyone better off) is interesting. The result that no Pareto improvement is possible (Pareto efficiency) isn’t interesting at all.

8: except for amazing coincidences. This is an effort at an Egnlish translation for “generically” which means “for an open and dense set of economies.” The claim is be ” if for some set of tastes technology and endowments the market outcome(s) isn’t (aren’t) constrained Pareto efficient, then there is a change in endowments so tiny that, after the change in endowments, the new economy has a market outcome which isn’t constrained Pareto efficient (or many outcomes which aren’t).” That means the set of economies with constrained Pareto inefficient outcomes is open. Also if there is an economy with a constrained Pareto efficient outcome, there is a tiny change (as tiny as you want) in endowments so that with the new endowments the outcome of the new economy is constrained Pareto inefficient (that’s the dense part).


OK the idea of the G&P result. First the model is a general equilibrium market with financial assets. The idea is that there are 2 periods, period 0 and period 1. IN period 0 agents trade financial assets which are all in zero net supply. The state the world will be in in period 1 is not known but everyone knows the probability of any possible state. Assets have payouts which depend on the state of the world. After the uncertainty is resolved (that is in period 1) agents buy and sell goods on ordinary spot markets, then they consume, then the universe ends. General equilibrium theorists claim that theis simple structure isn’t really as restrictive as it seems.

The point is that trades in the financial assets in period 0 will generally affect the prices in period 1 except in the case of amazing coincidences. One such amazing coincidence if if everyone has identical homothetic preferences so aggregate excess demand is a function of the aggregate endowment and relative prices (so demand can be represented as demand by a representative consumer). In this case only transfering wealth from one person to another (what financial assets do) can have no effect on spot prices in period 1.

So generically decisions made in period 0 will affect spot market prices in period 1. This is a pecuniary externality.

Now if we just look at one state of the world in period 1, there will be no way to make everyone better off by messing around with trade on the spot market in period 1. By then the economy has become a one period Walrasian economy with a Pareto efficient market outcome.

If the regulator messes with trade in financial assets in period 0 then some people iwll be richer and some poorer in some realizations (say one called s) of the state of the world in period 1. If these people have different tastes or if the distribution of wealth affects demand (as in some goods are luxuries) then this will affect spot prices in those states. The change in spot prices will help people who are selling goods whose relative price goes up and hurt people whose are buying those goods. That effect, the change in spot prices due to changes in trade in financial assets in period 1, will move the state s outcome from one Pareto efficient outcome to another. It will help some people and hurt others.

As always, it might increase the happiness of the people it helps by a tiny number of utils and hurt the people it hurts by a huge number of utils. That is Pareto efficient is a very weak result. To be more exact, choose one good and call it the numeraire. the market outcome in state s will maximize the weighted sum of utility of all the agents with weights equal to the inverse of that agents marginal utility of consumption of the numeraire good in state s.

This means in each state a weighted sum of utility will be maximized but the weights will, in general, be different for different states (with low weight in state s on the utility of an agent who is poor in state s)

The key point is that we know that the indirect effects on utility of messing with financial markets through spot prices will be of different signs for different agents in each state, but we don’t know anything about the effect on expected utility. Each agent knows that she will be helped some times and hurt some times, but knows nothing about the probability weighted average effect on utility.

OK so to get to the result that messing with what people buy and sell on the financial market (making them hold different amounts of financial assets than they want to) can make them all better off it is necessary to have 2 things.

1. The relative weights on different agents are different in different states. If there are complete markets, then the relative weights will always be the same (the weights are constants all multiplied by the same state specific factor for each agent). So the market outcome is Pareto efficient.

2. There have to be enough assets that the arbitrary vectors of changes in welfare do to messing around with portfolios are numerous enough that a linear combination of such changes adds up to a vector with all positive elements — that is a Pareto improvement.

The theorem requires an assumption about the number of assets compared to the number of different types of agents. Dimensions of messing with portfolios will be something like number of assets times number of agents minus 1 (because the assets are in zero net supply). There are as many inequalities to satisfy to get a Pareto improvement as there are agents.

Except for amazing coincidences, you can satisfy N inequalities if you have N unknowns so basically it is needed that the numbers of dimensions of meddling with portfolios is greater than the number of different types of agents.

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Fed Stonewalling details

Yves Smith at Naked Capitalism has a topic we should be keeping an eye on over time, as does CR.

Bloomberg now suing in court under the Freedom of Information Act for aggregate information concerning types of collateral being used for collateral with the $1.5 trillion authorized by Congress. The books from Treasury are being kept by the Fed, so regular rules of FOIA are in a deeply grey area.

Does the President have any control over disclosure rules??

[Update from Ken: Am I the only one who thinks that if Tim Geithner goes along with the Administration’s “no aggregates” postion,* combined with his hiring of Michael Alix to help supervise banks, it would disqualify him from being a reasonable candidate for Treasury Secretary?]

Update: used for collateral replaces bought in second paragraph

Update II: clarification of what Geithner should not be advocating, as noted by Walker in comments.

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