Caroline Porter joins the ASI

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Hello – My name is Caroline Porter and I have just started my eight week internship at Adam Smith Institute.

I am currently a junior at Fordham University in New York City, but am studying abroad for the fall semester in London through Boston University. I am working towards a Bachelors degree in Economics, but also have interests in Politics and Sociology. My plan for what to do after college remains undeterminded, but I am looking forward to learning more about my field of study as well as British policy formation through this internship.

Besides school, I am greatly interested in music and travel, and I am a major fan of Law and Order reruns.

Blog Review 747

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blog-review-747

Not the way that many will think about it, but markets have positive externalities and they are public  goods. They will therefore be undersupplied by the market itself. Our task is thus to both create and aid markets, so that we can enjoy more of those externalities.

An interesting book about how you can start from the bottom and get on in the US. Unfortunately, the fact that millions of immigrants, legal and otherwise, manage the same thing every year makes the need for the book and the experiment somewhat moot.

The fact that the expert opinion changes so often should make us somewhat wary of experts' opinions.

More on why the unwinding of the Lehmann CDS positions is better news than some think.

A brave new world of banking is being ushered in. Let's hope it's not back to the 1970s.

Yes, there really was a goal in the US to get more homeowners, more people with low downpayments, more people who were marginally capable of paying a mortgage to do so.

And finally, the joys of the division of labour, or round pegs for round holes.

Depository Trust and Clearing Corporation

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This is something I didn't know: and it appears that most writers for the financial press didn't know this either. The credit default swap market is not some vast swamp of toxic unknowns, rather, it does indeed have a clearing house and tabs are indeed kept on who holds what and owes to whom. This is done by the Deposit Trust and Clearing Corporation and their straightening out of some misconceptions is here.

Since it was set up in November 2006 the vast majority of CDS contracts have been registered: and the major players have back registered those contracts they wrote before this date as well. The number of such swaps that relate directly to mortgages are under 1% of the outstanding market and that market has a nominal value of $35 trillion or so, down $10 trillion from earlier this year.

But the two most important things I take away from their statement is that, firstly, we do know (or, rather, someone knows, which is good enough) who owes what, where. Secondly, that net exposure is a great deal less than gross (as of course we would expect it to be).

The payment calculations so far performed by the DTCC Trade Information Warehouse relating to the Lehman Brothers bankruptcy indicate that the net funds transfers from net sellers of protection to net buyers of protection are expected to be in the $6 billion range (in U.S. dollar equivalents).

That $6 billion compares to the gross contracts outstanding on the same CDS contracts of some $440 billion. If we run the same percentage against the total market we'd have net payments of some $750 billion.

It's an interesting measure of how things have changed in the past couple of weeks that I originally wrote "only $750 billion" and was quite relieved. Actually, about the only thing that I know about that number is that it's wrong in detail but it seems to be correct in order of magnitude.

No, of course this doesn't mean that everything is going to be peachy, most certainly not. But it is a sum that can actually be dealt with, it's of the order of 1-2% of world GDP for example. Oddly, about the same percentage that the climate change worriers tell us we need to spend to avoid disaster in 2100 and beyond.

You can call me selfish if you wish but I think I'd rather we sorted out the banking system first: after all, we can always start on the CO2 next year and that'll be a great deal easier if we do still have a banking system, won't it?

Free education

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free-education

It is rare that one can agree with any views of the modern trade union movement. So when they talk a semblance of sense it is worth mentioning. This rare concurrence of views comes in the teaching union's response to news that schools in England are to be held to account on a wide range of measures of pupil 'well-being'.

Schools will have to provide information on how well they promote healthy eating and a healthy lifestyle, how well they give good guidance on sex and relationships and discourage smoking, alcohol consumption and drug use. This will be taken in the form of surveys of parent and pupil opinion.

Children's minister Baroness Delyth Morgan said: "School-level indicators will help schools to assess how well they are promoting the well-being of their pupils. They will build on data about pupils' attainment and progress, so that wider aspects of children's lives can be benchmarked nationally."

Head of education at the NUT, John Bangs, rightly responded saying: "The danger is we get into a mechanistic evaluation but with highly subjective information on pupils' perceptions"; going on to call the plans "the height of absurdity - the logical end of an absurd evaluation structure." Quite right, but let's not forget that the teaching unions are just trying to cover their teacher’s backs, their primary concern is not for pupils and parents.

More centralization, more standardization and more testing have not rescued (nor ever will) state run education. The much-publicized Conservative policy to 'free' education goes some of the way, but in truth the poisonous ties politics holds over education will need to be further cut. And it is not enough to devolve power to local politicians as some demand; freedom requires that parents are free to set up and send their children to schools completely outside of the state system, with no interference from the politicians.

Blog Review 746

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Not everything we're being told about the credit markets freezing up happens to be quite true. Certainly, the commercial paper market still seems to exist.

On the other hand, if letters of credit become hard to get then we might as well reinstate the Corn Laws.

Worth remembering for those insisting upon "regulation". It's often a spur to those who would do an end run around said regulation. No, really, it is.

Instead of a bail out how about a bail in? Those currently making a mint from the taxpayers share the pain say?

The vagaries of tax law and corporate structure mean that US inequality of income may well be not quite what people think it is.

How much you tax the rich isn't really the same as how much you help the poor.

And finally, essentially English.

In thrall to some long dead economist

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As Keynes suggested, most practical men are indeed in thrall to the ideas of some long dead economist and current events are proving him nearly correct. For the economist all are currently looking to is Milton Friedman. The scramble is to stop the financial system imploding and the reason why we want to do that is laid out in this republished chapter of one of his academic works. It wasn't the collapse of Wall Street in 1929 that led to the Great Depression, it was the collapse of the banking system in 1931 and 2 that did. That collapsing financial system led to a credit crunch in the real economy, a fall in the money supply and so the deflation that followed.

If you look around at a hard core monetarist like Tim Congdon, or a more Keynsian Democrat like Brad DeLong, or perhaps here, or half the Guardian (that half not calling for the end of capitalism) all are saying very much the same thing. Either we get the banks back on their feet and lending to each other again or we cut interest rates strongly or we start to suffer from deflation. The reasoning being that all are working from Friedman's script: that just as inflation is always and everywhere a monetary phenomenon, so is deflation.

It has to be said that there's something amusing about those Guardianistas and the cries for immediate sweeping cuts in interest rates. They're all calling this the end of neoliberalism and yet they're following the advice that would have been given by the economist they anathematise as the High Priest of that very creed. Following indeed perhaps his most contentious point, that the Depression wasn't caused by a lack of demand and thus wasn't solved by Keynes and his measures.

In fact, what the proposed solutions all seem to be saying is that we are all monetarists now.

Plane thinking

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The decision to allow the expansion of Stansted and London City Airports makes good economic sense in the current climate. Granted, there will be some costs, mainly environmental, but these will be outweighed by the benefits on a much greater scale. It would have been foolish to stop this expansion.

The current overcrowding and delays at airports acts as an indication that they are inefficient and need improving. The market should be left to satisfy this consumer demand.

The expansion of the airports will facilitate economic growth (or at least help slow the decline of growth) by increasing the UK’s international competitiveness. Protestors are underestimating the significance of local multiplier effects from the expansions. With forecasts of large unemployment growth in the next two years, allowing airports to expand to meet demand is one thing that would would create sustainable jobs in the long term, and may also local businesses will benefit.

There is no ideal solution to this dilemma but the costs and benefits of this project are clear. If the local area is already blighted by noise and air pollution then there will be diminishing marginal costs to it from an expansion. Over time the market should enable the enterprise of greener and cleaner flight technologies to satisfy societies needs.

Drinkers unite!

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drinkers-unite

Here's a guest blog from our friends at The Drinker's Alliance:

So the latest edict from politicians in London and Edinburgh is that they should decide how much alcohol should cost to try to control how much we all drink.  Despite all the legislation already out there to deal with shops that sell to the underage, or bars and clubs that contribute to anti-social behaviour, politicians seem to think that writing even more laws that punish everyone is the solution.
 
Like so many Government-led debates, the average punter who enjoys a pint or a bottle of wine with friends, continues to be ignored.
The Drinkers Alliance, is a new platform recently launched to give everyone a chance to make their views heard on the debate on alcohol. 
While opinion polls show that the public oppose higher taxes and support action to deal with problem drinking, politicians in London and Edinburgh are proposing measures that will punish everyone.  And all this when the Government’s own statistics show alcohol consumption is actually going down!  Some of the ideas currently being debated are:

• Increasing the age of sale of alcohol in shops from 18 to 21
• Introducing a minimum price for alcohol
• Restricting where alcohol can be positioned within shops
• Introducing separate check-out queues for alcohol
• Banning under 18s from serving alcohol at all in shops

These won’t make any difference to problem drinkers and will just be a massive hassle for everyone else.  And they won’t do anything to actually enforce the laws we have or try to teach young people about the dangers of alcohol.

The Drinker's Alliance encourages ordinary people to get involved in the public debate on alcohol by providing tools to make their voices heard to politicians and the media. It’s really easy to sign up and you’ll be kept up to date on the campaign with regular emails and blogs. The Drinker's Alliance is here to give you a voice in the debate so sign up now and take a few minutes to invite your friends.

Make sure your voice is heard and don’t let the politicians ignore the ordinary drinker.
 

Quote of the week

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Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.

Ludwig von Mises

Blog Review 745

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There is evidence that regulation was indeed resonsible for this mortgage mess: or at least, the response to the regulation, the regulatory arbitrage.

It would appear that at least one Minister has said in the past that depositors in Icelandic banks would indeed be covered.

A reading list to help you understand current events. Netsmith strongly supports the first one.

This could be a vaulable addition to websites for the coming week.

Something a little different, why can't the British be more like the French?

Something for the weekend. On the new discoveries about the origins of HIV.

And finally, yes, there are jokes to be made.