Boldly rushing in

A journalism student at my college asked me for some comments regarding the ongoing Waterfall of Misery in the financial markets. I'm pretty busy, and pretty lazy, so I'll just cut and paste my e-mailed response to her.
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Banks and investors had bought a lot of a new type of asset comprised of chopped-up mortages. The value of the asset was based upon the monthly payments made by the homeowners who took out the mortgages. But once it became apparent that a lot of those mortgages were higher-risk than advertised, it was clear that the value of the chopped up mortgages was really lower than had been believed. Everyone tried to sell, so the price fell to nearly nothing. That hurt the mortgage lenders, and the investment banks that had bought lots of the chopped-up mortgages, and everyday investors who had bought investment bank stocks, thinking they were safe.

As their inflows of cash from mortgage payments had fallen, and with their chopped-up mortgage assets now near-worthless stacks of paper, banks found themselves short of the cash reserves they need to keep on hand to do day-to-day business. In some cases, they became so short of cash that their customers in good standing panicked and started pulling their accounts. The classic "run on the bank" used up their remaining reserves, and several investment banks either went broke or were bought up just before they went broke.

The surviving banks responded by no longer providing money to mortgage lenders, or pretty much anyone else. Consequently, funds for investments and routine purchases, for both businesses and households, became expensive (in terms of interest rates charged) even when one was "lucky" enough to find someone willing to lend money.

This isn't a problem that is contained to Wall Street, or even to business owners. The "capital crunch" means it's harder to get a loan to buy a new car, or to fix an old one, or to pay college tuition, or to keep food on the table and a roof over one's head while one is out of work and looking for one of the very scarce jobs available.

Because the collapse is due to lenders making bad loans and finding ways to disguise their riskiness, I understand and sympathize with the popular urge to "punish" the bankers by denying them a taxpayer-funded life preserver. After hearing of the first House defeat last Monday, my first reaction was to mis-quote a song, "The roof, the roof, the roof is on fire/ We don't need no water, let the [Nutter-butters?] burn/ Burn, [Nutter-butters?], burn". But of course, there's a problem with revenge: if Wall Street burns, our businesses and offices and homes that rely on their capital will burn along with them. To complete the metaphor, we need to put out the fire, and then rebuild in a way that we don't have to go through this [mess] again.
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I was quite proud of myself for keeping the cuss words to the minimum. Depending upon my energy level on a given day, I'm either depressed or angered by the complete gutting of the governmental oversight functions necessary for the foundation of functioning markets.

A quick reminder for the Econ 101 vets out there: a competitive market for a good needs at least
-- many buyers
-- many sellers
-- similar products
-- free entry and exit
-- full information. This is the one to get a good discussion/argument started over beers at the pub. Does it just mean that prices contain full social cost information and marginal willingness to pay, or is there more to it?

I reckon it doesn't matter tonight. No one in the current administration seems interested.

What good is social science if those in position to implement sciences' discoveries actively avoid acknowledging the discoveries. A lot of economists and political science researchers can empathize with the anthropogenic global warming scientists of the 1980s and 1990s ( ... and 2000s) this month.

Ping

It's been quite a while since I've posted. That's not from a lack of news, opinions, etc., and not even (really) from a lack of time, as I would have had enough if I'd made it a priority to log on and type.

This fall sees me sorting through job postings again, window shopping for a new position. In the meantime, I'm working on a paper to maintain "forward progress" in my present job. I'll make more of an effort to get back here once in a while now and make use of this space, but probably not until Thanksgiving or so, after the SEA meetings in Washington.

Well, back to my day job, which has me preparing for a campus visit by Bill McKibben next week, and a discussion of one of his works, Deep Economy, in my class tomorrow.

Until then,

ESPN and Jackie Robinson Day

I'm very glad baseball integrated. I know and appreciate Jackie Robinson and all the players who made the jump from the Negro Leagues to the majors, and appreciate their courage in the face of much hostility. Leroy "Satchel" Paige is my favorite pitcher, and I consider Branch Rickey a role model and a hero.

But in the midst of the tributes ESPN worked into its Sunday night telecast, I ended up feeling shortchanged. The interviews the network lined up were very distinguished persons: Rachel Robinson, Henry Aaron, Don Newcombe, Frank Robinson, and Dave Winfield. And some of the things they said in between the expected platitudes were worth saying. The timing, however, was lousy.

It upset me very much that they frequently forgot that THERE WAS A BALLGAME GOING ON!!! In one instance, the broadcasters' ignorance of the goings on on the field was so strong that John Miller asked Frank Robinson to repeat a story many viewers (but admittedly not all) had heard just two weeks before during the Civil Rights Game. Frank actually had to rein in John and point out that there were two outs in the inning, and two strikes on the batter -- not a great time to start telling a story.

My objection to the telecast matches my ambivalence regarding all the games and restaurants surrounding the concourse/mezzanine of the newer parks: they're nice in themselves, but are the customers really there to watch a ballgame? If not, it's no longer a ballpark, it's a theme park. Last night had the feel of a documentary with a lonely ballgame off somewhere in the background, like a band on stage at a street fair: watch a couple of batters, and then wander off to listen to Dave Winfield plug his book...

... or Joe Morgan play the Big Shot and namedrop all his connections with that first generation of black major leaguers through stories that sometimes were relevant, and other times not so much.

Ya know, if there was a black major leaguer for every time Joe and John said "Jackie Robinson" last night, there wouldn't be so much hand-wringing over an imagined shortage. Any college kids who tried a drinking game where they chugged upon each utterance of "Jackie Robinson" didn't make their classes Monday. They're lucky if they didn't end up in the emergency room. I know I feel as I've been overdosed with too much of a good thing.

ESPN let their pretensions show and acted as if the ballplayers were children they told to go outside and play so the grownups could sit in the press box and talk about serious matters. The older folks would look out the window and make sure everything was alright every once in a while, and then picked up their conversation wherever it had left off. I found myself wondering if John and Joe could even remember today (without checking the score books the staff assistants were keeping for them) which pitcher picked up the win.

Next time - and I'm sure there will be a next time - I hope ESPN tries to work the celebration into the rhythm of the ballgame instead of letting it drive the game into the background.

Errors End a Good Run

Yesterday saw the Detroit Tigers throw away the World Series. They had a great run; no one picked them to even contend for the playoffs. As late as Memorial Day, I was still hoping that they'd manage to win half their games. Yet they humbled the Yankees, and swept the Athletics to win the American League pennant. I'll spend the winter thinking about that, not the five errors in five games by Detroit pitchers during the World Series (after fifteen the entire regular season), and three more by Brandon Inge. They got through the regular season by winning a bunch of close, low-scoring contests due to solid pitching and defense, and the five cold, wet games at the end are the exceptions that proved the rule established over the first 170.

Yesterday also saw the last Ford Taurus roll off the assembly line at an assembly plant near Atlanta, GA. Ford Motor Company, of course, has been suffering financially for much of the past three decades. Along with fellow automakers General Motors and the former Chrysler Corporation (now Daimler-Chrysler) have served as a symbol for the deterioration of both American heavy industry in general and Detroit in particular. Ford's woes have mounted in the past five years. Part of this is due to demographics, as the increasing ratio of retirees to current workers places large burdens of overhead cost on the company. This is usually expressed in average cost terms, but good economists know that you maximize profits by setting MR = MC. If operating profit doesn't cover fixed costs, that's a problem, and that's just where Ford is right now.

Ford makes some good vehicles. The F-150 is a great pickup (disclaimer: I own one, albeit a 1999 model), the Five Hundred has won Car of the Year awards, and the Mustang has been a huge small-run hit. Yet the Company has been hurt by the Explorer tire problems of a few years back and the on-going problems with Crown Victorias (remember when nearly every police car in the US was a Vic?). Those problems stick in peoples' memory and influences perceptions even after quality has improved. With perceptions suppressing demand, once they've sold the profit maximizing numbers of these cars, the cash pile still ends up short of what's needed to pay off the overhead.

That desperation, plus bad advice from financiers on Wall Street and in the press, has led the company to make some hasty decisions: to pursue E85 vehicles (only of interest in the US market, and only if gas climbs over $3.50 again, and then only until people do the math and find out ethanol isn't the answer); to dive into, then pull out of hybrid and electric car research; to buy up a pile of luxury and Eurpoean brands, and then run them into the ground.

By removing the Taurus, Ford is showing its faith in the Fusion. I'm a little skeptical, as it is a bit smaller than the Taurus (although still officially mid-size), while Americans are getting bigger. It's a nice car for young folks just out of college, but I think they'll want to trade in once the kids come. The Five Hundred can't help out much there either, as it's a bit too pricey to be a working class family car. I fear that Ford's mid-size market might fall through the crack between the vehicles, and end up driving a Camry or a Malibu.

Still though, it was a pretty good run.

Musn't Break the Chain

Failing to pass along chain letters is supposed to bring bad luck. I wouldn't want that, so I'll go ahead and post one I got today. Hopefully, the supernatural forces which punish chain-breakers will accept a blog post as the equivalent of ten e-mails (what is the exchange rate on such things?)

Begins the chain letter: "GAS WAR - an idea that WILL work"

This was originally sent by a retired Coca Cola executive. It came from one of his engineer buddies who retired from Halliburton. It's worth your consideration.

Join the resistance!!!! I hear we are going to hit close to $4.00 a gallon by next summer and it might go higher!! Want gasoline prices to come down?

We need to take some intelligent, united action. Phillip Hollsworth offered this good idea. This makes MUCH MORE SENSE than the "don't buy gas on a certain day" campaign that was going around last April or May! The oil companies just laughed at that because they knew we wouldn't continue to "hurt" ourselves by refusing to buy gas. It was more of an inconvenience to us than it was a problem for them.

BUT, whoever thought of this idea, has come up with a plan that can really work. Please read on and join with us! By now you're probably thinking gasoline priced at about $1.50 is super cheap. Me too! It is currently $2.79 for regular unleaded in my town. Now that the oil companies and the OPEC nations have conditioned us to think that the cost of a gallon of gas is CHEAP at $1.50 - $1.75, we need to take aggressive action to teach them that BUYERS control the marketplace..... not sellers. With the price of gasoline going up more each day, we consumers need to take action. The only way we are going to see the price of gas come down is if we hit someone in the pocketbook by not purchasing their gas! And, we can do that WITHOUT hurting ourselves.

How? Since we all rely on our cars, we can't just stop buying gas. But we CAN have an impact on gas prices if we all act together to force a price war.

Here's the idea:

For the rest of this year, DON'T purchase ANY gasoline from the two biggest companies (which now are one), EXXON and MOBIL. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit.

But to have an impact, we need to reach literally millions of Exxon and Mobil gas buyers. It's really simple to do! Now, don't wimp out at this point.... keep reading and I'll explain how simple it is to reach millions of people.

I am sending this note to 30 people. If each of us sends it to at least ten more (30 x 10 = 300) ... and those 300 send it to at least ten more (300 x 10 = 3,000)...and so on, by the time the message reaches the sixth group of people, we will have reached over THREE MILLION consumers. If those three million get excited and pass this on to ten friends each, then 30 million people will have been contacted! If it goes one level further, you guessed it..... THREE HUNDRED MILLION PEOPLE!!!

Again, all you have to do is send this to 10 people. That's all.

How long would all that take? If each of us sends this e-mail out to ten more people within one day of receipt, all 300 MILLION people could conceivably be contacted within the next 8 days!!!

I'll bet you didn't think you and I had that much potential, did you?

Acting together we can make a difference. If this makes sense to you, please pass this message on. I suggest that we not buy from EXXON/MOBIL UNTIL THEY LOWER THEIR PRICES TO THE $1.30 RANGE AND KEEP THEM DOWN.

THIS CAN REALLY WORK. Anything is worth a try!!

My reply:

By boycotting ExxonMobil stations, two things happen. First is the intended effect: demand for gas at the ExxonMobil Stations goes down. The problem is that at the retail level, gas stations aren't the oligopolies you see in the extraction and refining industries. The gas stations aren't owned or managed by E/M. In fact, they're often small businesses who have contractual arrangements to the corporation to sell E/M gas, oil, and other products. Some of these businesses, in fact, don't even use the Exxon or Mobil logos, but instead are local chains of convenience stores using the local brand while selling gas from the E/M wholesaler because that wholesaler happened to offer the best contract.

Since they are thereafter required to buy from the E/M wholesaler in their region, while the wholesaler has no such exclusive dealing restriction, the retailers have no bargaining power whatsoever. The Tiger has *them* by the tail, if you will. Their normal operations are such that due to competition among retailers and collection of rents by wholesalers, retailers typically make no economic profits -- just enough accounting profit to cover the opportunity cost of their equity.

When demand is reduced at the local E/M retailers, prices and sales do, of course, drop. Their cost structures, however, remain unchanged. Marginal and average costs are just what they were before. In the short run, retailers may continue to operate at a loss, hoping the boycott will "blow over." They'll close shop, however, if the boycott is effective enough to drop prices below average variable cost (or, in other words, if their revenue doesn't even cover operating expenses). If the boycott continues long enough to affect long-run planning, they'll close then.

The retail station doesn't have the option of forcing the wholesaler to drop their prices. This is because of the second effect:

The chain-letter author didn't say anything about reducing consumption, just diverting it away from E/M. When consumers take their business elsewhere, it *increases* demand for gasoline at the other stations. As with the E/M retailers, retailers for the competition will have the same supply arrangements and cost structures as before the boycotts, so the effect of the demand increase will be to *RAISE* prices, as quantity sold increases and the marginal cost of supplying a gallon of gas at a now-more-busy location has higher opportunity costs (more cashiers, more congestion, more deliveries). The competition's wholesalers, to keep up with rising demand, will raise their wholesale prices to siphon the extra revenue away from the local retailer. They can do this because of their oligopoly power, exercised through their exclusive-dealing contracts with retailers.

To come up with the extra gas, the competitors could try to make more on their own, which would be very costly, as refineries are running very close to full capacity now. But there would be a cheaper solution. Since the refineries which formerly sold to E/M wholesalers are having a hard time moving their product, the competition's wholesalers could buy their gasoline from the refineries who traditionally sell to E/M wholesalers. The differences in the formulas (detergent additives, etc.), despite all the marketing to the contrary, are so minor it would take a professional chemist to tell the difference -- otherwise switching brands would wreck your engine.

All that's been accomplished in the "big picture" is that supply chains to E/M retailers have been diverted to the retailers to which the customers moved. This can happen because gasoline of a particular grade is a homogeneous commodity, hence, fungible.

Shuffling demand from one retailer to another accomplishes nothing. The only ways to reduce the price of gasoline are (1) antitrust action, which won't happen, or (2) REDUCE DEMAND.

The only financial effects from the boycott plan are that some local gasoline retailers, unfortunate enough to be flying the Exxon or Mobil brands, will be driven out of business. The reduced competition is likely to *RAISE* gas prices in the short-term, and have little-to-no effect in the long-term. The extra short-term revenues and profits will we collected by the refiners. As the refiners tend to be vertically integrated with (that is, owned by) the major oil companies, the big oil companies will make more money, not less (including ExxonMobil to the extent that they are able to dextrously work arrangements to divert their gas to other-branded wholesalers).

The local guys lose out, the big oil companies make more money. People get to feel like they're doing something, but they're playing right into the hands of the fat cats. This sounds like a plan cooked up by ... a guy from Halliburton.

Renaissance

Now past midsummer, the days grow shorter once more.
The afternoons no longer stifle with their heat and are filled
with inviting warmth,
Tempting outside those who desire everlasting lemony sun,
aqua skies, and verdant fields,
But know that decay and cold desolation tarry not,
And despite pressing obligations, opportunities such as these
must not be forsaken,
As the harvest draws near and reapers appear on the horizon.

While one cycle traverses apex and slowly starts to slide,
Another past nadir ascends with flowery debut.
The barren and despairing winter two months since broken,
Landscape altered past recognition by time, distance,
and thawed attitude,
Tempermental composition richly budded with hope
for new life, loves, lessons,
Petals peel as a bell peals,
Nurtured by dewy mornings, encouraging warmth, and
surrounding freshness about.
Bounty is promised for some distant day,
Should diligence be done during the dreary days to come.
As the last chime echoes off neighboring homes,
Bees near the blossom, seeking sustenance.

I'm not dead yet!

Some sites revoke a person's rights if they don't update their page every so often. I don't know if Blogger falls into this category or not, but this should stave off destruction for a bit.

Someone asked for a story

Once upon a time, not so very long ago, there was a writer who was very sad. He was sad because he had just read a very sad letter. The letter had been sent to him by an Editor, who is a Very Important Person. This particular Editor was an especially Important Person, though, because he was an Editor at the AER, which is a Very Important Journal. As for what a Journal is, that is a story for another day. Let us just say that journals are something like books, except that different parts of it are written by different people, who all send their parts to the Editor. The reason Editors are Very Important is because they choose which parts to put in the book and which to throw away.

The sad letter was short, because an Editor's time is very valuable, especially when the Editor is an Editor of a Very Important Journal, and the letter was one of very many the Editor had to write. On watermarked letterhead, the sad letter read,

"Dear Professor H~: [for this was the writer's title and name]

"Enclosed are two referee reports on the paper you submitted to the American Economic Review. As you can see, both referees think the paper is interesting but they differ on whether the paper belongs in the AER. I look at the paper and I regret to say that I side more with referee 1. Thus, I have decided to reject the paper. It seems to me that a revised version of the paper would have a good chance at a more specialized journal. You could try […]

Despite this outcome, I hope you find the referee reports of value, and thank you for allowing us to consider your work. Good luck with the paper.

Sincerely, [signed by the Editor]"

The writer read the sad letter one more time, and wondered what he had done wrong. He had spent weeks writing and re-writing the paper so that it would be interesting and easy to read. The paper told a nice story that had not been told before, and in it he and his friend had answered a question that other writers had not been able to answer before, although several had tried. The writer thought that maybe the referee reports would explain why the sad letter had been written. If you were wondering, a referee is person who is not very good at something who tells other people that they aren’t very good at it either.

Behind the sad letter were two referee reports. "Ref #1" was on a single page of paper, and the writer read it quickly, his eyes jumping past the half page of "overview", which is where the referee proves he has read the paper by rewriting the abstract. Below the overview, there were only three comments. The writer inspected them:

1. The setup of the paper, while simple and convenient, is not very general. […]
2. It is unclear how to evaluate the models for the various [goods].
3. Even ignoring the issues in comments 1-2, it is not clear whether the paper makes a big enough contribution for the AER.

Overall assessment: This is an interesting paper that would make a very nice contribution in the [Not Very Important Journal]

The other referee report was two pages long, and asked the Editor to put the paper in the Journal, and included several small helpful comments that would make the paper better. But the writer was still sad, because he had not made the first referee happy. He read the first referee report again and again, until he knew it nearly every word of it by heart. And the more he re-read it, the more he realized what he needed to do.

Perhaps the referee was right, the sad writer thought. For despite all of the writer's efforts, the referee had not understood the writer's treatment of the good, although the writer had shown that thinking of the good as one good or as three changed nothing [Perhaps the referee was a Trinitarian?]

When he re-wrote his paper, the writer would disguise the good he had studied by renaming it a "widget" or "consumption good X." In the paper that made the Editor write the sad letter, the writer had mentioned the good he had studied and several other goods in the paper by name. He had also written that the method he used should work for them as well, and explained why. But the referee was afraid that people who read the Journal might not understand that the method the writer used might also work for other goods if the good he had studied was still mentioned by name. If there was doubt that the method was usable as a general Model, it certainly would not be a big enough contribution to be put in a Very Important Journal. [A Model is made when writers assume away the problems from a problem so that the numbers will add up. Some Models are Very Important, and can show clearly how the things we read about in newspapers don't happen.]

Although he now knew what he had to do, the writer was still sad, and went to bed that night thinking sad thoughts. He thought back to when he first decided to become a writer, so that he could write papers like those he had read when he was younger. Those had been written to be interesting, and occasionally even whimsical. The ones he remembered best very rarely included more than a small handful of equations, and sometimes had not had any.

Of course, things were different now. Many more children went to college than in the past, and so more teachers were needed. Colleges had their teachers begin to teach more teachers, and some colleges that had not taught teachers before began to teach teachers too. It was very exciting, with all that teaching taking place, but it was troublesome too. It was harder to remember who the good teachers were, and who the not-so-good teachers were. When there were fewer teachers, it seemed like everyone knew someone who would know who one wanted to know about. But now, sometimes one did not know anyone who knew.

Luckily, computers came along to help. With computers, one could count things easily that had taken a long time to count before, like the number of papers a writer had written in journals. One could also count how many papers in a journal were written by the writers who had written the most papers. Since a good writer was a good teacher [a Model said it was so], the computers could count which colleges had teachers who had written the most, and therefore were the best teachers, and the best teachers of teachers. Because students wanted the best teachers, and teachers-to-be wanted the best teachers of teachers, it was very important to the colleges that the computers could count them as the best college.

So the colleges had their teachers write and write and write, so that the computers could count and count and count. But the computers cannot count the papers as they are written, but only when they are put in a journal, and then the computers can only count them when they are put in a journal that only the best writers write in. So the writers who were teachers, and the writers who were teachers of teachers, and some writers who were only writers all wrote for the best journals, which became Very Important indeed.

Because the AER was such a Very Important Journal, many many people wanted to write parts of it. Every year, it seemed to the Editor that he had to write more sad letters than the last, while the number of happy letters stayed about the same, as every happy letter costs the Journal money. Because the Editor's time is very valuable, and he had so many letters to write, his letters were very short. And because he had so many papers from which to choose, and he wanted his Journal to remain Very Important, he chose the papers that were likely from the very best writers, who had been hired by the very best colleges and been taught by the best teachers of teachers at the very best colleges.

To appear to be fair, some Editors chose referees to choose for them. Those referees don’t want to upset the best writers, as most writers are referees at other times. So the referees look for clues as to whether the paper is by one of the best writers. The best clue that the writer is one of the best writers is if the writer used math that a writer who had not been to the best colleges would not know. The very best papers used math that even the referee might not know. If a paper used just simple math, it might have been written by any simpleton, and that simply would not do. So the referees chose the articles with the trickiest math, and the Editor was content that he had found the best papers from the best writers from the best colleges in his Very Important Journal.

The writers wrote a little differently than they had before, as they needed to show that they were from the best colleges. And the teachers, and the teachers of teachers -- when they taught -- taught a little differently than they had before, as they needed to show their students how to show that they were from the best colleges. And the colleges hired a little differently than they had before, as they had to have the best writers from the best colleges to remain (or hope to become) one of the best colleges. And the Very Important Journal looked a little different than it had before the computers could count the papers published by the competing colleges, but it had to so it could remain a Very Important Journal.

This is what the writer thought as he cried himself to sleep.

False start. Loss of 5 yards, replay 1st down.

Okay, I confess. I went through Blogger's signup wizard just now with hopes of finding the blog of a friend who had invited me to participate on his site, and ended up with a blog of my own. As the reason for the snipe hunt was that I had initially turned down the invite for lack of time and a desire for continued anonymity of my thoughts, one might arrive at the conclusion that I might not be posting a great deal here for the forseeable future. If you so concluded, allow me to be the first to congratulate you on the soundness of your deductive reasoning!

That said, I do feel a need to ramble and vent from time to time, so perhaps something will pop up here and there. Just don't hold your breath.

Cheers,