Friday, October 31, 2008

"Too big to fail"

We've heard this phrase a few times, most recently with Fannie Mae, Freddie Mac, and AIG: it is "Too big to fail." I heard it yesterday on a financial show talking about how important the banking sector is to the economy - the commentator said that if a shoe factory fails, it fails and someone else will make shoes, but if the banking sector fails (as the credit freeze demonstrates) then it creates a lot of collateral damage.

I don't have a problem with logic that declares something "too big to fail" as such, but it occurs to me that anytime we use this phrase, there are two implications which we cannot ignore.

The first is that if something is too big too fail, that it must be regulated. I'm not a fan of excessive regulation, and I believe in markets, but markets only work because the risk of failure keeps investors and businesses prudent. I.e., excessive speculation and risk taking are curbed by the possibility of losses. Take away the possibility of failure, and you are creating incentives for reckless behavior - writing bad insurance policies, loaning to people who are not creditworthy, etc. So if we are going to label an entity as being too big to fail, we must compensate for this by replacing the market-based constraints on risk taking with formal regulatory constraints. Otherwise, nothing will prevent the conditions that led to the near-failure in the first place.

The second implication is that if something is too big to fail, then there has been a marketplace breakdown that has concentrated too much market share in that entity. One of the great things about a marketplace is that their distributed nature make them resilient to individual failures - in fact, those failures are a necessary and integral part of the functioning of a marketplace. Risk taking is rewarded when wisely taken; innovation necessarily involves risks. And failure checks excessive risk taking and weeds out bad ideas and weak execution. Without failure, there can be no innovation, no learning. A marketplace that does not have enough diversity of players to suffer a periodic failure of one or more of those players is therefore not a functioning one.

A concentrated market may not rise to the level of illegal monopoly, but I would argue that it's effects can be just as bad. Therefore, per my regulatory argument above, we have a choice in these situations. We can fix the marketplace by finding mechanisms to create the distributed failure-tolerant environment I describe above that is an integral aspect of a functioning market. Or we can decide for one reason or another that we are OK with the market concentration and instead choose to replace the risk of failure with a regulatory regime.

What is not a viable option, though, is to choose not to choose. If something is too big to fail, we cannot rescue it and then do nothing to either fix the market concentration or regulate it. Otherwise, we are simply inviting more of the same problems.

Income Gap

There was a story in this morning's paper about Obama's and McCain's plans to reduce the income gap in this country. In particular, it referred to the income gap as a "problem." That word choice struck me as the problem.

In particular: is the income gap a "problem?" And if so, is it something that is a proper goal of government to fix?

I would assert that the income gap is decidedly not a problem per se. After all, if it is a problem, then eliminating it would be a good thing. But if we think about a world where there is no income gap, it is a world where everyone - by definition - earns the same amount; anything else means that there is some sort of gap. Even ignoring the socialist/communist overtones of that "utopia," it clearly flies in the face of the obvious fact that different people with different skills bring different values to the table. There is a reason that some people are paid more in some jobs than others are paid, and that's simply not a problem. And there is certainly something very disturbing about the notion that upside for innovation, entrepreneurship, or investment should be capped.

No, I think the right way to look at the income gap is that it is a symptom, an indicator of something else, which may or may not itself be a problem.

For example, I'd argue that the greater concentration of wealth in society over the past 10 years or so is indicative of a failure to invest in opportunities for broad-based wealth generation at the lower levels. When the wealthiest Americans are seeing 10% growth in earnings while the average earnings for the rest are small or stagnant, the problem is not that the wealthy are making money; it's that the rest aren't.

Is this something for government to fix? To some degree, yes: government is responsible for education, for ensuring a proper regulatory environment for jobs and growth, etc. If this leads to increased economic growth and opportunities, that's terrific. But here's the thing: that may or may not narrow the income gap, and that's OK. The most important things are total growth and that the opportunities for growth are fairly distributed; it is NOT a goal that the growth itself be evenly distributed. If the richest Americans are grow (say) 10% over some period of time while the rest of America is grows 8%, then we should be thrilled at the overall growth rather than worrying about the fact that the rich outperformed the poor.

I should also note that the financial crisis is undoubtedly affecting the richest Americans more than average Americans if only because the richest Americans have the highest percentage of their wealth in stocks and real-estate. So I predict that in the current 1-3 year period, the income gap will actually decrease. Nobody is feeling sorry for the rich because of this (nor should they), but if one is going to complain about the rich getting ahead of the rest during good times, one should in fairness acknowledge the hit when bad times arrive.

Thursday, October 30, 2008

Colorado Initiative 48

Voters in Colorado next week will be voting on Initiative 48, which defines a person as beginning at the moment of conception.

I think this is terrific to get this on the ballot. Not because of the merits of the question, but because I think that this question is precisely the elephant in the room in the abortion debate (see my previous commentary on this issue). The abortion debate will continue to consist of people talking past each other so long as either side refuses to recognize that this very question is the core of the debate: nobody advocates murder or infanticide, not even the most ardent pro-choice advocate. The pro-choice argument boils down to an argument about triage (in the case of the life of the mother/incest/rape), or a personal choice unencumbered by "murder" issues precisely because the fetus is, in the mind of a pro-choice advocate, not yet a person.

So this initiative finally puts the key issue front and center. We define a moment of personhood, and from that all else will follow.

Now, of course, I think this is a case of "be careful what you ask for, you just might get it." If one defines a person - with all of the legal implications that entails - as beginning at the moment of conception, then I think there will be a raft of unintended consequences. Of course, the abortion question does indeed get somewhat settled (to the degree that it follows from the definition, even if many people do not believe it to be a wise decision), which I presume is the motivation for Initiative 48. But conferring upon a fertilized egg all of the rights of a person also necessarily means that the embryo must be protected: miscarriages, some forms of birth control, in-vitro fertilization, etc. could all very likely generate criminal scenarios where none exists today (and for which there is no controversy today).

For these reasons (and those of my earlier post), I do not believe that this is a good amendment. The definition of when personhood begins is essentially arbitrary. Frankly, I'd ask why conception as the point is a matter of religious faith for so many people when I'm not aware that any holy text address this point specifically.

Personally, I think that it's a "person" from a moral point of view sometime in the middle of the gestation (and that's about as specific as I know how to be), and from a legal point of view at birth. But I cannot defend that opinion as "fact"; it's essentially a judgment call, and a matter of consensus.

At least this ballot measure will decide what that consensus is - or what it is not.

Saturday, October 18, 2008

A tale of two monuments

OK, so this isn't terribly political, but it involves Washington DC so I figure it's fair game.

I happened to be in DC this past week on business, and had some time to wander around the National Mall. It's been years since I was last able to do anything tourist-like in Washington, and therefore had not previously made it to the Vietnam memorial or the World War II memorial.

I'm not enough of an architectural critic or a monument person to offer intelligent commentary on the architecture or the symbolism or other lofty things deserving of pithy impenetrable drivel, so I won't except to say that they're both very compelling monuments.

I also thought it very touching that gifts of beer, cigarettes, and gum were left for fallen soldiers at various points along the Vietnam memorial's wall. And I think this highlights what was for me the key noteworthy difference between the memorials: the WWII memorial seems to me to be for the country, while the Vietnam memorial seems to be for Vietnam veterans and survivors. I know no Vietnam veterans or families who lost members in that conflict. As a result, by focusing so heavily on the names of the fallen, I felt no connection to it - like this monument wasn't meant for me.

I know no World War II veterans either (and certainly nobody who fell in the war), yet because this memorial focused on the group struggle - highlighting the contributions of the states and territories, the gold stars that symbolized fallen soldiers without naming them - I actually felt a much greater connection to this war which is so much further in our history. This was a memorial about the nation's sacrifice, rather than individual sacrifices.

Monday, October 13, 2008

Book Report: Hot, Flat, and Crowded

I just finished Thomas Friedman's Hot, Flat, and Crowded. I've read earlier books of his, including the Lexus and the Olive Tree and The World is Flat, so I already knew much of what to expect. I believe that Friedman has a very clear-headed approach to the problems that we face and a great way of explaining the phenomena that affect us all. Here he talks about the convergence of overpopulation, global warming, and energy, which he claims (and I agree) are the biggest long-term challenges the world currently faces.

The short summary for me is that he was basically preaching to the choir - I'm already a true believer in most of the points that he makes, he just makes them far more coherently than I am able to do. I will quibble a bit with his view of the role of government: while he's definitely a free-market advocate, he believes in a somewhat more government-directed and unified approach to solving our long-term energy needs than makes me comfortable, but I think he's got the right ideas.

This was much more of a policy book and a "frame the problem" book than Earth: The Sequel was. What I liked about Earth: The Sequel was that it almost read as an investor's guide or business school case study of clean energy; it was much less about policy (beyond the assumed axiom that a price on carbon is a must-have) and more about solutions than Hot Flat and Crowded.

I think both books, frankly, should be required reading for all politicians.

Thursday, October 09, 2008

Where is Bush?

Paulson and Bernanke are all over the news - that's no surprise. But where is President Bush?

I understand that a legitimate argument could be made that in a free market system it's not proper to look to the president to solve things. I'm a pretty free-market kind of guy myself, but I think this falls flat for at least three reasons:
  • His deputies are clearly improvising as fast an furuiously as they can, they certainly view it as their problem to solve.
  • He's the leader of the country - he should be showing leadership here. Either policy leadership if he feels it's his role (which he must, per Paulson/Bernanke's fast and furious actions), or else morale leadership a la FDR.
  • The lack of regulatory oversight with respect to mortgage lending standards and disclosure, investment bank leverage, accounting rules, etc., seems to me to be the single biggest factor leading to our current mess, and that regulation is the responsibility of the executive branch, which he runs. (Greed isn't the problem per se - runaway greed and competitive pressure to do stupid things is. But that's the subject for another post.) This was deliberate laxness on the part of the administration due to it's anti-regulatory bias. I understand not wanting burdensome regulation, but clearly there is a balance between two much and two little regulation, and it's pretty clear that for the past few years we've erred on the side of too little.
But no, he's been invisible. I can't see any grounds to give him any credit for any positive action here. Economies have cycles; I can't blame him for the fact that we're having a down cycle. But I think he deserves a lot of blame for allowing the conditions that allowed it to get this bad this fast.