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Monthly Archives: April 2010

Much of the economics news today is tied to the Senate panel hearing with Goldman-Sachs. If you don’t know already, Goldman-Sachs (and other financial firms) are being accused of contributing to–maybe causing–the current recession in the US. And the real sin, Goldman-Sachs made money while their clients were losing.

“The idea that Wall Street came out of this thing just fine, thank you, is just something that just grates on people,” said Senator Edward E. Kaufman Jr., a Democrat from Delaware, said. “They think you didn’t just come out fine because it was luck. They think you guys just really gamed this thing real well.”

I agree that new regulations need to be put in place, but why is anyone upset that financial firms are to blame? Their job is to make money, and they did that.

But throughout a subcommittee hearing lasting more than 10 hours, current and former Goldman officials insisted that they had done nothing to mislead their clients.

Yes, they were selling mortgages and short selling them at the same time. Do they have the resposibility to share their own pessimism with their buyers? I think a good analogy is someone selling a used car.

You have got an old car that you think will decline in value. Do you have a resposibility to tell the buyer that the car will be worthless after a couple of years? That is probably why you are selling. It is the buyer’s resposibility to decide if the car is worth the cost or not.

Of course it is difficult for the average person to know the markets well enough to say the value will go up or down, but is that the responsibilty of the seller?

If so, the US Congress can reinstate regulations on the market, probably a good idea, but with the deregulated market, who can find fault with the companies involved?


Surprise, surprise–the Republicans are getting away with a filibuster of the financial oversight bill. Democrats have not been able to get enough votes to fight the filibuster, and manyAmerican companies have lobbyists devoted to fighting the bill.

Far afield from Wall Street, the intense debate over the overhaul of financial regulations by Congress is attracting some unlikely but powerful players. More than 130 companies from the manufacturing, retail and service sectors have retained high-powered lobbyists to weigh in on, and often oppose, the regulatory system being debated this week in Washington, according to an analysis of lobbying records by The New York Times.

Many of the lobbyist come from companies that are not from Goldman Sachs and other financial companies who’s behaviors are responsible for the popular support of the bill. The problem is that the legislation–so far–is so loosely defined that many companies are afraid the final bill could include limits to how they finance what they do.

Examples–Harley Davidson does not want restrictions on how they arrange loans for the purchase of their motorbikes. Mars does not want to lose its ability to dabble in the derivatives markets for cheap sugar and chocolate.

Economically, it is probably best if there is some intervention early on, leading to a better defined bill and the restrictions that will be imposed. Politically, this is very visible evidence of the power big business has over the legislative process in the US capital.

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Alpha Inventions Ranking

Chinese manufacturers are already making rough copies of Apple’s iPad.

The 10-inch entertainment device, on which one can read books, play music and videos and surf the Internet, sold more than 500,000 in its first week alone, and continued strong U.S. demand has led Apple to delay the product’s international launch to the end of April.

Chinese counterfeiters have rushed to fill the iPad gap.

Taobao, China’s largest online marketplace, contains hundreds of listings for the coveted product, many real but some dubiously labeled as “China goods”, with claims to have even better features than the real deal.

While the producers are referred to as counterfeiters and pirates, the iPad, like other copies, are not perfect copies and they are not sold as Apple products. Sure, the technology is copied, and sometimes the logo, but sellers are honest about products being copies rather than the real thing.

Prices for the Chinese iPads are only a small bit cheaper than the real thing. Prices will surely drop when Apple starts selling internationally.

A great example of non-price competition comes out of New York today. The Wall Street Journal is introducing a metro section about New York City, explicitly to draw new readers away form the New York Times. News Corp., run by Rupert Murdoch, owns the Journal these days, as well as the New York Post.

As owner of The New York Post, Murdoch has been willing to cut newsstand prices and lose tens of millions of dollars in his bid to outsell the New York Daily News. In 2000, the Post sold about 435,000 copies on an average weekday, compared with 714,000 for the Daily News. By 2009, the Post was up to roughly 530,000 copies while the Daily News had sunk to 570,000.

And Murdoch’s underlings have been accused of using rougher tactics than just price cutting or promotions.

Challenging the Times for revenues will also include reduced advertising rates by both the Journal and the Post.

While the competition in the market has included discount pricing, the focus now seems to be with content.

But he has been open about his goal of using his media properties to challenge what he considers a left-leaning news establishment in the U.S.And he took a swipe at the Times in a speech to New York real estate executives last month. “We believe that in its pursuit of journalism prizes and a national reputation, a certain other New York daily has essentially stopped covering the city the way it once did,” he said.

The real differentiation really seems to be political, and apparantly Murdof believes New York is turning conservative. I am not sure how that is justified, but this market works as another good example of competition giving consumers more diversity and choice.

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Alpha Inventions Ranking

In the U.S., new enquiries are being made into financial ratings agencies, adding a new twist to the debacle of finance failure that lead to the long-lasting recession.

One employee warned in internal e-mail that the company would lose business if it failed to give high enough ratings to collateralized debt obligations, the investments that later emerged at the heart of the financial crisis.

That story came out of Standard and Poors who–despite contrary warnings from other employees–went on to ignore negative reports in their attempt to expand business.

The companies failed to assign adequate staff to examine new and exotic investments, and neglected to take mortgage fraud, lax underwriting and “unsustainable home price appreciation” into account in their models, the inquiry found.

Ironically, the new restrictions being considered may give the agencies even more power in future financial deals.

The House bill calls for removing references to the rating agencies in federal law, and both bills would require a study of how existing laws and regulations refer to the companies.

The addition of new regulations might inadvertently serve to empower the agencies, Mr. White said. “Making the incumbent guys even more important can’t be good, and yet that’s the track that we’re on right now,” he said.

The real lesson is that the deregulation of the 80’s and 90’s–especially during the Clinton administration–was a mistake. Now the question is–Is Congress free enough from the influence of financial lobbyists to reinstate the regulation?

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Challenging China in Rare Earth Mining first attracted my attention because I did not know what rare earth mining is. The story begins with a description of a mine in the US that Molycorp Minerals wants to reopen.

Rare earth elements include neodymium, europium, and cerium and are important for the production of many high-tech applications for military hardware, wind turbines, color televisions, and hybrid cars. Demand has risen for these elements over the last few years, and China–with their low-cost labor and low concern over environmental damage–has absorbed most of the market, but–

China raised concerns by reducing its export quotas for raw rare earth elements from 2005 through 2009, forcing foreign companies to buy more Chinese-made products containing or manufactured from rare earth elements. A year ago, the Chinese government caused further alarm for Western corporations and governments by proposing a ban on the export of 5 of the 17 rare earth elements, although no ban has actually been imposed.

This has driven prices higher and governments are promising subsidies for new mines. China’s strategy may backfire eventually, but I believe they have gained market share in some of this high-tech production, like the high-speed trains and wind turbines that we have written about before.

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Lately, the biggest story in the news is about the volcanic eruption in Iceland. The costs to Iceland are significant enough, but the real story is about the disruption of air flights in Europe.

The social cost of the flight disruption is phenominal. The cost of stranded travelers is enough, but there are also huge costs from the stranded cargo, like fresh fruit that can not get into northen Europe.

At least one industry is benefiting. In Europe, rental cars are in great demand now, and companies like Hertz are enjoying greater demand for their services. This is a clear example of a substitute good–obviously–but the real challenge of the economics here is how to measure the costs and benefits of the volcano.

It seems to me that the costs must outweigh any benefits by a great amount. Money costs lost by the airlines may be made-up by the gains from car rentals and other transportation, but the costs to delayed travelers and delayed delivery of goods is huge.

Some of the news lately has been out of Kyrgistan, where the president has been driven out of the capital and shunned in his home town. Not far from Almaty, I once visited Bishkek for a three day weekend. The place seemed very stable then (2000) but the new president is seen as being corrupt and preventing the development of the country.

One issue that may or may not be part of the corruption, the US has opened a military base there. That is one of the reasons for the protests, and–knowing the culture a bit–I think it is likely that the president is pocketing the rent for the US base.

Much of Central Asian culture is currupt by Western standards, and bribery is a commonly accepted method for getting just about anything to happen. Last time I was in Kazakhstan, I had to bribe a local official so that my wife and I could get marrried during the time I was there. Last time my wife got a job there, she had to pay her boss about 10 months’ salary. They are not ashamed nor shy about it, just part of the culture.

Of course that environment allows the wealthy to do just about whatever they want. It also frightens off foreign investment because the demands of government can change overnight and the cost of doing business is unpredictable.

Sad for a culture with an interesting history and many talented people, it is not likely ever to develop into a modern economy.

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A new post on the environmental economics blog tries to link environment with economics. Like explained there, many environmentalists believe economics is somehow driven by concerns that are contrary to environmental goals.

The article argues that many current economists are very much concerned with environmental issues, even if they might have different approaches.

Of course economists don’t agree on everything, and there is always some economist hack at one of the rightwing “think tanks” who will put forth an outlandish idea—but by and large the most well-respected mainstream economists are squarely on the side of environmentalists.

Something I would like to add to the conversation, the origin of economics is actually founded in environmental concerns. Adam Smith was a professor of ethics, and the main argument of The Wealth of Nations was that free markets can maximize the productive use of resources. What is more environmental than that?

Over time, I have become more and more convinced that much of Keynes’ teaching has distracted the world from the true goals of economics. Keynes’ teachings tell us we should direct policy toward maximizing economic growth and employment.  As a primary goal, that distracts policy makers from the true goals of economics, the efficient use of resources for producing what we need and want.

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From the New York Times, more on China’s Internet censorship. While the title–China’s Censors Tackle and Trip Over the Internet–suggests a rather random approach to the censorship, the real point is that there is not a great amount of central control from the Chinese government.

As I suggested here a few weeks ago, the censorship is more local, and everyone running a server seems to be encouraged to block whatever they want.

The metaphor of the Great Wall continues to be appropriate here, as the Great Wall was built during different periods and by different leaders, only later joined as a single wall.

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