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

I Hate It When My Cynicism is the OPTIMISTIC Version

I wisecracked yesterday chez DeLong that, given the current political climate, I wouldn’t invest in a company without political connections using his money, let alone my own.

What I didn’t realize at the time was that the Supreme Court already had decided earlier yesterday that investing in mutual funds should be a hazardous activity:

Janus Capital Group Inc (JNS.N) and a subsidiary cannot be held liable in a lawsuit by shareholders over allegedly false statements in prospectuses for several Janus mutual funds, the U.S. Supreme Court ruled on Monday….

Janus, in appealing to the Supreme Court, argued that the funds were separate legal entities and that neither the parent company nor its subsidiary was responsible for the prospectuses and could not be held liable.

Janus, being the two-faced G-d of Theatre, would approve of his namesake’s claim: “Well, we own the company, we paid for the prospectus, we marketed the prospectus, we made assurances to investors based on our Due Diligence about the prospectus—why would you blame us if something goes wrong?”

Or, for the positive spin,

Mark Perry, the attorney who represented Janus, said he was delighted the Supreme Court agreed with the company’s position that only the party ultimately responsible for a statement can be sued for fraud in such private investor lawsuits.

“The court’s clarification of the scope of primary liability under the securities laws is important not just for the parties to this case, but for all participants in the securities markets, including bankers, lawyers, accountants, and investment advisers,” he said.

We knew nothing. We always Know Nothing. You are paying us for our “expertise,” but We Know Nothing.

Gresham’s Law will follow:

William Birdthistle, an associate professor at the Chicago-Kent College of Law who had written an amicus brief on behalf of First Derivative Traders…said the ruling’s most dramatic impact could be to encourage other industries to adopt the split management structure of the mutual funds sector as a way to avoid liability.

“What this ruling says is that as long as there are separate legal entities, even if management totally dominates all aspects, there’s no liability,” Birdthistle said. “This is going to open the eyes of those not in the funds industry who are going to say: ‘Wow, those guys are bulletproof’,” he said.

“Bulletproof” is not something you want in someone who is supposedly representing your interest.

Anyone stupid enough to invest in the U.S. mutual fund industry after this ruling must be someone who believes they’re “managing my 401(k) to take control of my future,” even though the company only offers three options, one of which is Company Stock.

The next time someone tells you about the evils of Moral Hazard, assure them that the Supreme Court doesn’t believe in it.

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Health Care thoughts: Reality is Ugly

by Tom aka Rusty Rustbelt

Health Care: Reality is Ugly

An Indiana baby with an extremely rare condition will not be receiving $500,000 experimental surgery at Duke because the State of Indiana cannot afford to pay the bill for the surgery.

The immediate howls of protest are directed at the Republican governor, but there are bigger issues here, and a comparative effectiveness program designed by Democrats could easily come to the same decision.

Stipulated, no one wants to see a baby die. No one. However…..

No system has infinite resources, and if the money was spent it would be care taken away from some other Indiana residents. Even if the economy were better.

On the other hand (as an economist might say) many common procedures were once experimental, that is how new surgeries and new cures are developed.

Fifty years ago this was easier, medicine was relatively primitive and babies died (including my infant cousins) because nothing could be done. Now, we have difficult, terrible decisions to make.

HT: Yahoo News

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Steve Randy Waldman Explains It All to You

Not certain this link will work, but at Interfluidity, SRW replies to Karl Smith, closing with a sentiment with which I am very much in sympathy:

It is not technocratic economists who will win the day and pull us out of our cul-de-sac, but angry Irishmen and Spaniards who challenge, on moral terms, the right of German bankers to impose vast deadweight costs on current activity because they lent greedily into what might easily have been recognized as a property and credit bubble.

Read the whole thing, even if this link doesn’t work.

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Should Potential Employers have Access to Credit Scores ?

Robert Waldmann

Oh good, Kevin Drum and Matthew Yglesias disagree. This is bound to be interesting.

Drum remembers the good old days when liberals had less respect for the standard results of simple neoclassical economic models.

The specific issue is that firms are using credit scores to decide who to hire. This can trap some people as they can’t improve their credit score without a job and can’t get a job with their current credit score. Kevin Drum thinks the practice should be banned. Matthew Yglesias isn’t sure.

Yglesias wrote

But at the same time I try to adhere to the principle I outlined here and resist the urge to call for regulating the business practices of private firms when the issue isn’t pollution or some other case where the externalities are clear. After all, it seems like either this credit check business is a sound business practice (in which case allowing it is making the economy more efficient and ultimately building a more prosperous tomorrow) or else it’s an unsound business practice (in which case competition should drive it out).

That is actually a pretty radical position. I wonder what clear externality the 64 civil rights act addressed. I’m quite sure Yglesias doesn’t think what he seemed to assert, but I want to figure out what he had in mind.

Drum responds “More important is the fact that we liberals shouldn’t view the relationship between businesses and individuals as solely economic transactions” and gives an example

Here’s an example. Back in 1968, Congress passed the Truth in Lending Act. Among other things, it made credit card companies liable for charges on stolen credit cards over $50. In a purely economic sense, there’s really no excuse for this.

Ah how naïve. There is always an excuse based on economic theory (with the assumption of full rationality) for any policy. I view any assertion to the contrary as a personal challenge. This one is easy. Drum argues that the regulation creates a moral hazard problem as we are more careless with our wallets. I see his moral hazard and raise him an adverse selection (Hint: adverse selection is a great tool for justifying regulations as market outcomes are inefficient if there is adverse selection).

So let’s say everyone is better off with the regulation so the most wallet guarding yet not risk averse person is willing to pay extra to the bank in exchange for this protection. That doesn’t mean that this will be the market outcome. Let’s say a credit card company introduces a new card with the $50 limit. It will attract all the people who can’t keep track of their wallets. It will also attract people who commit a rare kind of fraud giving their card to an accomplice, having the accomplice buy stuff and then reporting it lost. There aren’t many of those, but there are enough that the extra interest (or other fees) that the company would have to charge would drive away everyone but the fraudsters and the most absent minded yet risk averse (I raise my hand). So the new product would enter the adverse selection death spiral.

The only solution is to force everyone to buy the protection which everyone wants if the fee is the actuarially fair fee for 100% coverage. Oh look, that’s the current law. That was easy. No sweat, no equations.

I mean Kevin you consider the health care reform debate and recall how forcing people to buy insurance, whether they want it or not, can be Pareto improving in a standard economic model.

Now on the original topic, I side with Drum. I think there is an externality. If people are rendered unemployable, maybe because of their fecklessness maybe because of their unluckiness there are externalities. For one thing the standard argument for laissez faire assumes we are totally selfish and absolutely needs that assumption to get the result. If desperate unemployable people cause others pain, then there is an externality. Another simpler externality is crime. People who are excluding from employment have little to lose from turning to crime. That’s an externality.

I’m pretty sure Yglesias’s idea is that both of these are arguments for redistribution from rich to poor and that such redistribution is more efficiently obtained by taxing and transferring. First, self esteem can’t be transferred. Good examples for the children can’t be transferred either. More importantly, there is no way that the feckless poor are getting much in the USA. You make policy with the electorate you have not the electorate you want. US voters are very willing to regulate business. They are totally unwilling to transfer money to people who firms don’t want to employ, because they seem to be irresponsible.

Assuming a social planner who taxes and transfers optimally is like assuming regulators can’t be captured or assuming that CO2 doesn’t cause global warming. That’s not the world we live it. I think we have to transfer however we can and that includes hiding information from potential employers. The loss in efficiency is a social loss only if one assumes that income distribution doesn’t matter (or assumes that there are optimal lump sum taxes and transfers which is an oxymoron). The link clicking reader will notice that my arguments are pretty much orthogonal to Drum’s.

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Crooked Timber notes from the FT

First, go read Henry on the lambasting of, especially, Turkey by U.S. idiots. Apparently, any U.N. vote is wholly the responsibility of everyone except the people who presented the resolution.

Note also that the editorial page has a much more interesting piece on economics than all those Zogby myths. Maybe more about that later, but for now, let’s pull the appropriate (in more ways than one) quote:

In reality, conflicts of interest abound – between buyers and sellers, short and long terms, equity and debt, taxpayers and shareholders. Context is all-important – the idiosyncrasies of age, financial circumstances and geography. How do we provide a “neutral” framework for such crooked timber?

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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?

 FairlyStandard

 

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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Hoisted from Comments (thought not here)

UPDATE: D-Squared chimes in, saying in less than 100 words what took me a couple of thousand (though with no quotes):

After the “first hundred days” in the term of a new Democratic President comes the next stage; the almost impreceptible transition among his supporters from saying

“of course, he’s been hampered by all sorts of obstacles to date, but he’s about to start delivering on all those promises he made to his supporters on the left”

to saying

“well, he never really promised anything and it’s terribly naive to think he was ever going to deliver anything to his supporters on the left”

Apparently we’ve reached it.

That’s why he gets the big bucks, folks.

Brad DeLong attempts to attack Matt Taibbi’s facts. Tao Jonesing replies in comments (DeLong starts; Jonesing in bold) :

  1. The financial reform bill that just passed the House is not nearly as strong a bill as the Treasury wanted. The reason is not that Obama and Geithner did not push for a stronger bill, but rather that the members of congress balked at a stronger bill. What financial did Obama and Geithner “push for,” exactly? And don’t point us to speeches. What did they push for, i.e., actually apply the pressure of the bully pulpit? Unless there’s some way to establish that they brought pressure to bear, I think this fact is an opinion.
  2. Citigroup did not receive a $306 billion bailout as the first major act of Obama’s presidency. First, where does the $306 billion number come from? The number I associate with Citigroup is $45 billion of TARP money. Certainly Citigroup would be bust and gone if not for government aid extended to it during George W. Bush’s presidency–aid that Obama endorsed–but it now looks as though Citigroup will pay everything back: that the government will profit from the aid it extended to Citigroup.Clearly, Taibbi is including the backstop in his number, which you realize in 8.*
  3. James P. Rubin is not James S. Rubin.
  4. The James Rubin whom Mike Froman brought in to staff the economic policy search was not Bob Rubin’s son. 3-4. Taibbi admits this error.**
  5. The Obama economic policy inner circle–Tim Geithner, Gene Sperling, Larry Summers, Christie Romer, Peter Orszag–is not “a group of Wall Street bankers.” It is only 5% Wall Street banker–only 1/4 of Larry Summers can possibly count as a Wall Street banker.You misread what Taibbi said, which was that two people in Obama’s economic policy inner circle–Goolsbee and Kornbluh– were replaced with a group of Wall Stret bankers. Taibbi did not say that the all of the inner circle were Wall Street bankers. So, your fifth “fact” is actually a strawman. Perhaps you are focused on the subtitle? I can’t lay the subtitle at his feet because editorial staff make that decision. Note from Ken: Brad is incredibly generous in the case of Geithner, whose dinner plans while at the NY Fed were consistently at the homes of Wall Street bankers, and Summers, whose work since attempting to destroy Harvard’s endowment has been with Goldman, D. E. Shaw, and other paragons of Wall Street. Summers may have worked for years without being on Wall Street, but it has been his primary source of income since his divorce.
  6. Mike Froman staffed the economic policy search. Mike Froman–a very smart and capable man–did not lead the economic policy search. He was not some corrupt Svengali who foisted advisors who would whisper evil in the innocent Obama’s ear. Obama led the economic policy search. Come now, Obama led the search? Really? What did that leadership entail, delegating the day-to-day responsibilities to somebody else? Froman, maybe? Since you seem to know, what did Froman actually do? And Taibbi never said or implied Froman was a corrupt evil Svengali. His point was that Froman was a Citi insider. Overall, this fact seems more like opinion.
  7. Austan Goolsbee’s absence from the transition staff was not notable. Austan Goolsbee does have a senior subcabinet appointment. And Austan Goolsbee is not a voice on the economic left–this is the man who told the Canadians not to take Barack Obama’s claims that he wanted to renegotiate NAFTA seriously. I don’t know the story of Karen Kornbluh.Your opinion of Goolsbee’s departure is an opinion, not a fact. I don’t know whose opinion is correct, although I’d bet on yours.
  8. Ah. Taibbi says: “the government also agrees to charge taxpayers for up to $277 billion in losses on troubled Citi assets.” First of all, $277 + $45 = $322, not $306. But a guarantee is not money at risk and money at risk is not money lost. As I said, it looks like the government is going to make money off of its support of Citi. (Albeit not off its support of AIG.) Clearly, Taibbi is including the backstop in his number, which you realize in 8. Note from Ken: This is, by the way, bullshit, since it’s actually another example of the Rubinesque “contracts are only valid if they favor Wall Street firms.” What is being counted as “profits” are deeply-discounted equity options that have value because of the mass amount of subsidization and drug money that has gone into the banking system without in the least being passed on to the consumer who is footing the bill.
  9. Tim Geithner was not hired as Treasury Secretary by Mike Froman. Tim Geithner was hired as Treasury Secretary by Barack Obama. You are correct that Obama hired Geithner. Nobody else could have, at least in the end. But who proposed Geithner? And what weight did Obama give the opinion of the people who proposed him? Did Obama just rubber stamp the recommendation after meeting Geithner? Who else was on the list? While there’s no doubt that Taibbi was making a lot of assumptions about Froman’s role and level of influence to jump to the obviously false conclusion that Froman hired Geithner, the fact that the conclusion was obviously false does not detract from ugly optics that Taibbi was attempting to magnify.
  10. According to CBO, the ARRA so far is not worth 640,000 extra jobs as of September 2009 but rather 1.1 million plus or minus 500,000–and that number will grow.You got your number from the CBO, but Taibbi says he got his number from the White House. There is a website managed by an executive branch agency that proclaims the 640,329 job number used by Taibbi.

So that scores as 5 (or 6, since I’m inclined to count [2] in the Taibbi column) to 3 (3, 4, and arguably 7) against DeLong, with (8) called a draw (I would give it to Taibbi—the guarantee covers $306B in “assets” without cherry-picking, so potential buyers are seeing “support”-level offers for the entire $306B. But there is a specific issue in using the $306B number, and Dr. DeLong correctly notes that the actual backstopping was greater than Taibbi reports. Whether this makes his interpretation here preferable is left as an exercise.)

Hint for the future: if you’re going to claim you’ve got fifty corrections, lead with your ten best.

*From the comments later, Our Own Rusty lays out the details:

Wall Street Journal 11/24/2008…Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. — will take on any additional losses, though Citigroup could have to share a small portion of additional losses…In addition, the Treasury Department also will inject $20 billion of fresh capital into Citigroup. That comes on top of the $25 billion infusion.

So it didn’t happen during Obama’s presidency, but it did happen post-election, and during the time that the Obama Administration was—by its own declarations—actively holding discussions with the parties.

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How to Explain Moral Hazard

It took me many years to understand the phrase “moral hazard.” It’s a fundamental tenet of economics, usually used to explain that, since consumers are untrustworthy, businesses need to charge them more.*

It was finally cleared up for me in the midst of a presentation last year about how it’s a “moral hazard” issue that divorce rates go up as more women work outside of the house/family business. So I asked the presenter, “You mean it’s a moral hazard issue that women who have an independent income can now get out of an abusive relationship?”

Fortunately, one of the best Labor Economists in the world was in the room. He just looked up and said, “Or guys start leaving their wives because the wife can go to work now.”

Aha! The light dawns: moral hazard is, indeed, about power relationships: it allows arseholes to be even greater arseholes. (One step further, and you start spouting Ayn Rand.)

Preceding is preamble to correcting an error made by a worker in today’s Phialdelphia Daily News (h/t Dr. Black, of course):

Yesterday, Local 234 President Willie Brown said that the wage package was acceptable but that he was worried about the underfunded pension fund, funded only 52 percent. He said he believed that SEPTA had not contributed to it for 10 to 12 years….

“We could wake up and our pension could be completely gone,” [Brown] said. “We don’t want to end up like AIG,” referring to the international insurance giant who got $173 billion since last fall in a U.S. government bailout.

Mr. Brown should not worry about that. AIG’s creditors (e.g., The Great Vampire Squid) were paid in full, because Tim Geithner and Larry Summers want a veto-proof Republican majority by 2012, if not 2010.**

Pensioners, otoh, are subject to “moral hazard.” Believing their contracts were viable, reasonable, and negotiated by people who were working in the best interest of the firm—that is, people who were not writing a check with their mouth that their pockets couldn’t cash—clearly causes them not to do enough to save. Because they don’t understand that mismanagement of their pension is their fault, and that the Pension Benefit Guaranty Corporation will only ensure that their pensions will be paid “up to certain limits,” no matter how much extra Roger Smith or Michael Eisner or Jack Welch took from the company for performing almost as well as the rest of the stock market.

So, let us say to Mr. Brown and the rest of the workers who depend on their pensions being funded: Don’t worry about being treated the way AIG was. You’re going to be dealt with as a “moral hazard” problem for believing that the contract you negotiated will be enforced.

Why, if those workers were at all sensible, they would have taken the money upfront the way those Captains of Industry did, instead of gotten a false sense of security (“moral hazard”) from contractual negotiations about future payments.

As noted by Dr. Black, while management claims that they are fulfilling their legal obligations, management’s pension fund is almost 25% better funded than the workers fund (53% v 65%).

This is, of course, A Good Thing. After all, we wouldn’t want workers to believe that what they think of as Contractual Obligations is anything other than a case of “moral hazard.”

UPDATE: I see, via David Wessel’s Twitter feed, that Ricardo Caballero puts forth standard Economics Reasoning:

His idea is likely to give heartburn to many economists and policy makers, who worry about “moral hazard” — the idea that if financial institutions know they’ll be saved in an emergency, they’ll take even greater risks that will inevitably lead to greater disasters.

Don’t fret, says Mr. Caballero: “this moral hazard perspective is the equivalent of discouraging the placement of defibrillators in public places because of the concern that, upon seeing them, people would have a sudden urge to consume cheeseburgers.”

After all, we just have to acknowledge that “moral hazard” exemptions are the rule, not the exception, for mismanaged businesses. After all, paying out more in bonuses than you make in a year is a Perfectly Reasonable Business Strategy.

*Seriously. The standard example is that people “don’t tell the whole truth” on health insurance applications, so companies need to charge them more. The logical extension of this is that people who tell the whole truth are leaving money on the table, since no insurance company would ever take an ex poste action against people who omit or forget that sprained ankle from thirty years ago. For an alternate view, see Malcolm Gladwell.

**There may be an alternate explanation, but this one requires the fewest outlandish assumptions.

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This is What a Giant Vampire Squid Looks Like

Via Greg Mitchell’s Twitter feed, lying isn’t just for the IB branch any more:

Goldman declined for three years to confirm their suspicions that it had bought their mortgages from a subprime lender, even after they wrote to Goldman’s then-Chief Executive Henry Paulson — later U.S. Treasury secretary — in 2003.

Unable to identify a lender, the couple could neither capitalize on a mortgage hardship provision that would allow them to defer some payments, nor on a state law enabling them to offset their debt against separate, investment-related claims against Goldman.

This one has something of a happy ending:

In July, the Beckers won a David-and-Goliath struggle when Goldman subsidiary MTGLQ Investors dropped its bid to seize their house. By then, the college-educated couple had been reduced to shopping for canned goods at flea markets and selling used ceramic glass.

But it required a judge who is more sane than Gretchen Morgenson of the NYT, and therefore knew to ignore false equivalencies:

“In bankruptcy court, they tried to portray us as incompetent or deadbeats,” said Celia Fabos-Becker, blinking back tears as she sat with her husband in their living room, with boxes of mortgage-related documents surrounding them….

As the months dragged on, Fabos-Becker finally found a filing with the Securities and Exchange Commission confirming that Goldman had bought the mortgages. Then, when a lawyer for MTGLQ showed up at a June 2007 court hearing on the stock battle, U.S. District Judge William Alsup of the Northern District of California demanded to know the firm’s relationship to Goldman, telling the attorney that he hates “spin.”

The lawyer acknowledged that MTGLQ was a Goldman affiliate.

That was an understatement. MTGLQ, a limited partnership, is a wholly owned subsidiary of Goldman that’s housed at the company’s headquarters at 85 Broad Street in New York, public records show.

In July, after U.S. Bankruptcy Judge Roger Efremsky of the Northern District of California threatened to impose “significant sanctions” if the firm failed to complete a promised settlement with the Beckers, Goldman dropped its claims for $626,000, far more than the couple’s original $356,000 in mortgages and $70,000 in missed payments. The firm gave the Beckers a new, 30-year mortgage at 5 percent interest.

If anyone in ObamaNation wonders why the voters hate the bailouts, go read the whole thing.

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More on Dubner and Levitt II

It has long been a standard claim of economics—iirc, Robert Lucas was the first to say it aloud, though it may have been Gary Becker*—that a man who marries his housekeeper lowers GDP.

Apparently, Dubner and Levitt have taken this claim—along with their Rick James title**—to heart. Echidne has the details. A short sample:

There is one labour market women have always dominated: prostitution. Its business model is built upon a simple premise. Since time immemorial and all over the world, men have wanted more sex than they could get for free. So what inevitably emerges is a supply of women who, for the right price, are willing to satisfy this demand. But what is the right price?…

It turns out that the typical street prostitute in Chicago works 13 hours a week, performing 10 sex acts during that period, and earns an hourly wage of approximately $27. So her weekly take-home pay is roughly $350. This includes an average of $20 that a prostitute steals from her customers and drugs accepted in lieu of cash.

If I didn’t know that Levitt has done some research on prostitution, I would think he left this section solely to Dubner. As it is, the skewed perspective (supply-side only) wouldn’t even pass muster in a basic neoclassical labor market model, and that the authors are trying to sell this as “economics” is, to extend a recent note from Brad DeLong that “Levitt and Dubner today appear to no longer be thinking like economists”, going to do Levitt much more harm than good.

Perhaps the difference between prostitutes and economists is that only the former have to worry about their reputation.

*Google indicates that the source is Pigou (1932). Does this explain the popularity of the Pigou Club?

**At this point, I’m betting they chose the title because of Abigail Breslin.

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