The Pin Factory Blog

In case you missed it, we will be holding our first Independent Seminar on the Open Society (ISOS) of 2009 on the 24th February at the Emmanuel Centre in Westminster. We have a strong lineup of speakers that includes Douglas Carswell MP and Jeremy Browne MP. There are places still available. Please click here for more information on how you can join us.

Michael Moore has a new documentary out, titled. "Capitalism: A Love Story". An investigation into the failings of the economic system that is a central tenet of American life in light of the recent financial crisis. At the premiere in Washington, DC, Michael Moore responded to a question about his supposed earnings to date, "[you have] amassed a fortune of over $50 million, some have said and -" Moore interrupted, “Really? Are you kidding me? Seriously? Wow. Where did it go?..Well, capitalism did nothing for me, starting with my first film.."

Mr Moore never had it handed to him on a plate. He had to work hard to get to the level he has. He despises capitalism because that's what it means. Working hard to make a living. The system he wants to replace it with is one that is founded on theft, violence, a regal liberal elite that subjugates the masses, state authorised freedom and massive subsidized sectors of society.

Michael Moore's films are the only reason why illegal downloading should exist.(Some would probably want to include Michael Bay films on there as well). It is the only way his films should be distributed. He should be made to sit down and perhaps think about his wealth and what he would have been rewarded with had he made films in communist Russia or North Korea. Indeed imagine if he had made films criticizing those regimes. Mr Moore should be grateful he lives in a free country and is somehow rewarded for his dross documentary films. Freedom and free exchange has granted him untold wealth, but he fails to see it. It is doubtful he ever will if his films are a reflection of his intelligence.

President Bush’s plans to bail out subprime loans by freezing interest payments for adjustable mortgages is ill conceived enough. But did you know that it was another government intervention that goaded these people into making those mistakes in the first place? That is exactly what George Mason University Economist Walter E. Williams is saying in an interesting commentary for the Washington Post:

As with most economic problems, we find the hand of government. The Community Reinvestment Act of 1977, whose provisions were strengthened during the Clinton administration, is a federal law that mandates lenders to offer credit throughout their entire market and discourages them from restricting their credit services to high-income markets, a practice known as redlining. In other words, the Community Reinvestment Act encourages banks and thrifts to make loans to riskier customers.

However, 96 per cent of mortgages are being paid in time. It is only 2 or 3 percent of homeowners who have to face foreclosures. The Bush bailout will help only few people at a huge cost for the rest of the economy. Above all it is a gross violation of contract rights in a free market (and could even be a Fifth Amendment violation) as Williams rightly states:

If a contractual agreement is willingly entered into and agreed upon by a borrower and lender, it is binding and if broken by one party or the other, harsh penalties should ensue.

Since it was government intervention that got us into the mess more of the same does not make sense at all.

This is from an NBER working paper () by Betsey Stevenson and Justin Wolfers, using data from Gallup's World Poll. From the Economist:

"Gallup asked respondents around the world to imagine a "satisfaction ladder" in which the top step represents a respondent's best possible life. Those being polled are then asked where on the ladder they stand (from zero to a maximum of 10), and how much they earn. Though some countries seem happier than others, people everywhere report more satisfaction as they grow richer. Even more striking, the relationship between income and happiness hardly changes as incomes rise. Moving from rich to richer seems to raise happiness just as much as moving from poor to less poor. One never really grows tired of earning more."

Greed or common sense? I call common sense. There are a lot of things that make people happy, but affluence seems to be the strongest factor. And by far the largest accumulation of wealth in human history was done after the first Industrial Revolution at the onset of capitalism. Affluence made people happier, more innovative and more inclined towards further progress. It's all about incentives people have, and reaching a higher level of income seems to be the best one. This is what drives modern societies; a desire to innovate, to produce, to fight scarcity and to achieve progress. And no one can do this better than the individual entrepreneurs themselves. 

It's the cry of the day: the financial system was brought to its knees by the greed of he bankers! This leads to the simple thought that if we stop the bankers from being able to be greedy then we'll have solved the problem.

The problem with this simple thought is, well, apart from the fact that it is simple minded, is that there appears to be no empirical evidence whatsoever that it is in fact true. Jeffrey Friedman pointed this out last week. Given that Richard Fulds of Lehman lost a billion dollars (yes, $1,000,000,000) when the firm went belly up it's difficult to accuse him of risking the shareholders' gelt for his own gain by knowingly taking excessive risk. In fact, the research shows that those banks where the senior executives held more stock did worse than those where they held less.

Further, about those toxic assets: the banks were holding the higher rated (and thus less profitable) AAA tranches rather than the AA ones. They were deliberately, at least as far as they understood matters, eschewing both risk and potential profit.

These studies suggest that bank executives were simply ignorant of the risks their institutions were taking—not that they were deliberately courting disaster because of their pay packages.

If that is true (and no one has as yet offered any proof that it isn't: nothing beyond the "well, everyone knows, don't they?" level at least) then the concentration upon bankers' pay and bonuses is simply Naomi Klein's "Shock Doctrine" as it usually works rather than as she described it. A crisis is when those who would extend State power extend it: when the politicians gather more power to themselves rather than dispersing it to you and I in the markets.

But much more importantly, if that is true then changing the mode of bankers' remuneration will not reduce the risk of it all happening again for it was not the cause this time around. That's much more dangerous than any shortfall at a Chelsea Bentley dealership: the thought that by misidentifying the causes of the problem we assuage populist anger than actually solving the problem itself.

Perhaps instead of the bankers' pay it was indeed cock-eyed regulation? Shouldn't it be more important to fix that, perhaps the real cause of the problem, than please the baying mob?

Why are 1 in 8 girls pregnant At Robeson High?

It's been a common enough trope, that it was the Efficient Markets Hypothesis (EMH) that led to the crash. Usually put forward by those who don't understand what is being claimed, true. What it actually says is that markets are efficient at processing information about what prices should be in markets. What some seem to think it says is that "markets are efficient". Which may even be true but that's not what is being claimed by the EMH. However, there are those slightly more clued up who do know what EMH means and blame it for the finanacial woes. Because everyone thought that markets were efficiently processing information no one was doing their own processing to see if they were right.

Thus dodgy mortgage bonds got rated AAA, everyone bought too many of them and thus we had collapse. However, via Tyler Cowen, we've a new paper which makes a very interesting point.

The first statement (ie, that the EMH is to blame-Tim)is at odds with the fact that prior to 2007,collateralized debt obligations (CDOs),3 the mortgage-related bonds at the
center of the financial crisis, were offering much higher yields than straight corporate bonds with identical ratings, apparently for good reason.4 Disciples of efficient markets were less
likely to have been misled than those investors who flocked to these instruments because they thought they had identified an undervalued security.

Those bonds were more risky, those bonds were lower priced (had higher yields) to reflect that risk. Those who actually believed the EMH would therefore not have been mislead as to the calculating value of the EMH. It was those who did not believe the EMH who got biffed then.

There are a couple of other excellent insights like this in the paper and I recommend reading it all. For over and above those specific points, it really is an excellent over view of the various explanations that are being bandied about.

Public outrage has been expressed at a US cop who pulled a gun during a friendly Washington snowball fight. The detective, who was calmed down by uniformed police called to the scene, has been suspended pending disciplinary action.

This could not possibly happen in the UK. In Britain five or six squad cars would have pulled up and disgorged police officers in full body armour and brandishing automatic weapons. A couple of dozen of them would have quickly contained and penned in the crowd of snowballers and detained them under the Prevention of Terrorism laws. They would have been cautioned, and their DNA samples taken and kept on record. Any who objected, or tried to otherwise interfere with the police carrying out their duties would have been sectioned under the Mental Health acts. We're lucky we live in a free country rather than in gun-crazy America…

One little point that all too few seem to appreciate. In Gordon Brown's speech on how we're going to make ourselves poorer reduce carbon emissions he let drop this little comment :

There would be "hard choices and tough decisions" but he said a new low carbon economy could bring thousands of jobs.

That's how we know that it's going to make us poorer of course. Now it still might be a wise idea, might not be as well, but my point is rather that everyone seems to insist that "creating jobs" via such schemes is a good idea. It isn't. It is most certainly not a benefit of such schemes, it is a cost. 

For of course if all those busy little workers were not installing tofu machines to light the yurt growing communes, they'd be off doing something else, curing AIDS, planting turnips or hanging politicians, all things which would arguably increase human happiness more. We are therefore poorer by those things which they will not be doing.

This is a blog post, so I'm not going to try and work out whether what they're going to do in their new green jobs increases human happiness more or less than the alternatives they would do without the government intervention: I just want to insist that we should regard this creation of jobs as something to put on the costs side of our analysis, not the benefits.