Sunday, August 2, 2015

Embedding a Tweet

The idea here concerns blockchain use cases. I could write up something about it quickly.

Friday, May 15, 2015

Quick Course: 140 Years of Panic and Policy

I originally wrote the following three years ago, for the financial blog AllAboutAlpha. The 140 years reference then worked well enough if one was dating from the publication of Bagehot's work. Next year, on May 2016, the financial world will mark an even 150 years since the Overend Gurney crisis itself.

In London, in May 1866, a banking panic began at 65 Lombard Street, the address of a discount bank, Overend Gurney. Overend (an ominous-sounding name for a financial institution to begin with!) had only just transformed itself from a partnership to a joint-stock company, making its books public in the process.

At the time of the panic, Overend had been pursuing litigation for the recovery of a £60,000 debt. On May 9, a court held against it. The public discovered that the firm would have to write off that debt, and this datum proved the catalyst for a run.  On the afternoon of May 10, Overend suspended payments.

This panic spread on May 11 to other banks and to the stock market. Further, it was not limited to London: spreading to Bristol, Derby, and the other great cities of Britain. But this particular panic, not especially unique out of all of history’s bank panics, is remembered not only for its city of origin but for its street address, and is remembered because it was the Overend Gurney crisis that stimulated Walter Bagehot to write a classic on finance, a book called simply Lombard Street: A Description of the Money Market (1873).

Stiff Upper Lip

In the Appendices to this book you may find the minutes of a meeting of the proprietors of the Bank of England that September, by which time matters had settled down a bit. At this meeting, the bank’s Governor, Launcelot Holland, addressed the proprietors thus: “[That] the banking establishments generally of London met the demands made upon them during the greater portion of the past half-year affords a most satisfactory proof of the soundness of the principles on which their business is conducted. This house exerted itself to the utmost – and exerted itself most successfully – to meet the crisis. We did not flinch from our post.”

You have to love that attitude. That’s why the Victorians ran the world.  They never ‘flinched.’
In the text proper, one of Bagehot’s key points is that the banking world in his day was reaching a threshold, beyond which it would become impossible for families to manage banks. They would become “very rotten” as control passed from one generation to the next, because of the enormous amount of detail work modern banking requires, the need for professional management.

“We have had as yet in London, happily, no example of this [a great private bank becoming ‘very rotten’]; indeed, we have hardly as yet had the opportunity. Till now private banks have been small; small as we now reckon banks.” Small enough to fail, one might fairly add.

But that dynamic, the superiority of professional over amateurs as managers, is what led to the Overend crisis by pressing the firm to change its own status. “The richest partners had least concern in the management; and when they found that incredible losses were ruining them, they stopped the concern and turned it into a company.”

A Continuing Conversation

That is a profound historical point, made no less so by the fact that it wasn’t yet ‘history;’ when Bagehot made it. Indeed, it provokes thoughts of the work of Alfred Chandler, and other institutional economists, to whom the development of professional managements, and the ‘scale and scope’ professionals can deploy, is still a crucial consideration in understanding contemporary capitalism.
Even more provocative, though, are Bagehot’s policy ideas. How should a central bank, a lender of last resort, respond to a banking crisis? Should it lower interest rates to near zero in the hope that liquidity will drown systemic sorrows?

Bagehot argues for a contrary approach. The interest rates for loans made to desperate borrowers should be high. “This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. The rate should be raised early in the panic, so that the fine may be paid early….”

Nonetheless, though the interest rate should include a punishment as a check on what in our day is called ‘moral hazard,’ still such crisis loans should be made, if solid collateral exists for them, “wherever the security is good” as Bagehot says.

In terms of the crisis of 2008, one can make a case that Bagehot would have supported TARP in its original significance (where it was supposed to involve purchase of the assets of the troubled entities). He would likely see this as lending where the “security is good.” But I doubt one can make the case on Bagehotian terms for the actual implementation of TARP as a TERP, that is, through the purchase of equities.

At any rate, as we look forward in contemplation of crises yet unborn, Bagehot continues to have a voice in contemporary discussions. As well he should.

Tuesday, April 23, 2013

A Bad Case of Magical Thinking

A FB friend shared something from an outfit called "Americans Against the Tea Party."

It was something that was written/prepared in response to the disaster at the fertilizer plant in Texas recently. But there is always something. I have to presume that this post is aimed at a federal initiative to improve safety inspectors, that it isn't aimed at the state government in Texas. After all, the state government can't print money, and may be limited by scruples against running deficits and borrowing money from the Chinese.

But I'm going to ignore a lot here in order to sharpen my focus. I'll ignore federal/state questions, philosophical taxation-as-theft arguments, arguments about the folly of printing money, etc. Sometimes you have to pick your targets. My target at the moment is a certain magical two-goals-at-once thinking that goes with many such appeals.

Here is a bit of what the FB "share" said,' "Don't support deregulation. Hiring inspectors in numbers enough to make a difference would put a small dent in unemployment. And we'd be safer...."

Wow. Those are presented as two separate arguments, and the first one is a prelude to the second: put a dent in unemployment and be safer.

How much of a dent in unemployment is desired from the creation of new safety inspector positions?

However many inspectors you deem the right number, "enough to make a difference" in safety, ask yourself: why not twice that many? Why not three times? Wouldn't that make twice as big a dent? Three times as big a dent? I suspect the phrase  "enough to make a difference" is meant to indicate some level of modesty in the plan. Not too many, just enough for a specific purpose. or even only enough to make a "dent" in a specific purpose.

But if you -- and I address the actual author of this silliness -- if you really believe that hiring inspectors is an unmitigated good thing, why be modest about it? Why not abolish unemployment overnight by declaring every unemployed adult an inspector of fertilizer plants so you can start sending out the checks?

Because you sense a practicality issue with that?  Ah ... we're getting somewhere then.

There is always a tension between two different reasons for doing X, when it comes to the specifics of X. If you want to hire more safety inspectors for a certain industrial process because (a) you want to make that process more safe and (b) you want to put a dent in unemployment, there will come times when those goals pull in opposite directions. What if a heavily automated process turns out to be the best way of making the process safer? Are we supposed to favor a labor-intensive process anyway, because of our high-employment goal?

Here's a not-at-all-farfetched scenario: suppose the best way to make fertilizing plants safer involves the hiring of a small group of human inspectors, assisted by robots, and involves giving advice to the management of those plants that leads to the plants' themselves becoming more automated and less labor intensive than they are.

Suppose that after a month or two of such inspections and re-structuring, there is more unemployment than when we started, because the loss of jobs in the newly re-designed plants exceeds the initial "dent" made by hiring the inspectors. Yet (by hypothesis) the neighborhoods are all safer.

Good plan ... or bad plan?

There is a certain sort of social welfare policy that consists chiefly in refusing to ask one's self such questions. But among those who do ask those questions, safety-as-jobs-policy doesn't find may defenders. Safety for safety is one thing, jobs policy is another, and only a bad argument confuses the two.

Perhaps safety can be best served by a vigorous tort law system. If businesses see the bottom-line costs of safety lapses through an effective litigation system, those costs are internalized, and they'll hire the optimal number of inspectors themselves. But in no case should we think of that as a jobs policy: even then, they might well decide the best way to lower their liability costs is to automate, and should they not be free to make that call?

Thursday, April 4, 2013

A quote from Mises

"The expressions solvency and liquidity are not always used correctly when they are applied to the circumstances of a bank. They are sometimes regarded as synonymous; but orthodox opinion understands them to refer to two different states....A bank may be said to be solvent when its assets are so constituted that a liquidation would necessarily result at least in complete satisfaction of all its creditors. Liquidity [on the other hand] is that condition of the bank's assets which will enable it to meet all of its liabilities, not merely in full, but also in time, i.e. without being obliged to ask for anything in the nature of a moratorium from its creditors."

- The Theory of Money and Credit.

Tuesday, January 1, 2013

Happy New Year 2013

Okay, help me out here, informed readers.

The 112th Congress formally comes to an end on January 3, when the new session's members will be sworn in.

Whatever the Senate has done, if the House hasn't done likewise, won't count once the 112th session expires.

So ... the possibility of the big 'compromise' every one is talking about turns on a 2 day difference between two different deadlines.

We've already gone off the 'cliff.' The Bush tax cuts have expired, we are living in 2013 with the pre-Bush tax rates formally back in force.

So, the Senators, by acting on Dec. 31, before the cliff, were able -- and will always be able -- to describe their action as raising taxes on 'those fat cats' (relative to 2012 law).

But members of the House, by acting on the 1st or 2d of 2013, will be able to describe their actions as a tax cut, relative to the new/resurrected/Clinton-era rates, if they pass the same bill. So of course they haven't violated any pledge they may have signed not to raise taxes, because the tax increase took place automatically, not by their vote, and they will then have voted to lessen it slightly, i.e. to decrease taxes.

Is that it?

If it isn't brilliant, it is insane. I can't decide which.

Monday, April 30, 2012

Working on Caro Review

Robert Caro has been working on a multi-volume life of the 36th President, called The Years of Lyndon Johnson, for more than forty of his and our years now. The first volume of the set, The Path to Power, appeared in 1982, when Caro’s professional reputation as historian and biographer turned on his work on the New York parks-and-highways maven Robert Moses. Important as Moses was for that metro area: this was bigger game.
The Path to Power related the first thirty-three years of Johnson’s life, including his first election to the House of Representatives in 1937. In that period, Johnson was at least on the surface a devotee of the New Deal, and was in particular associated with rural electrification. But Caro sees all of Johnson’s devotions during the Roosevelt years through the lens of his protagonist's overweening ambition. In this 1982 volume, Caro stressed that a close tie to the REA gave Johnson an instrument, one that he could and did use to build his own political machine in Texas.

The second volume, Means of Ascent (1990), focused on Johnson’s elevation to the U.S. Senate in 1948. The key votes, in the Texas of that time, were those cast in the Democratic primary, since the defeat of the Republican was a mere formality. Johnson’s primary election opponent in 1948 was former Governor Coke Stevenson. Caro argues that Johnson’s defeat of Stevenson was blatant theft. Nonetheless, the Democratic state convention upheld Johnson’s victory, and he prevailed in the resulting litigation with some help from attorney Abe Fortas, a man he would in the fullness of time put on the U.S. Supreme Court.

TESTING:  DO I HAVE THE SAME TROUBLES here as with the other blog?  If not, one plausible hypothesis is that there is just too much in the other blog, and it may make sense to start from scratch.


The IRS Code permits the owner of mineral rights to account for the reduction of the available value as reserves are brought to the surface and exploited. This is not on its face a glaring “loophole;” it is closely analogous to the depreciation of the value of machinery.

Whatever the factual rate of depletion might be, the statutory (?) rate of depletion in the case of oil and gas is 15 percent of the gross income from the property, based on average daily production, up to the depletable quantity.   

The review in the form in which I sent it to Henry did not contain any material about Johnson's role in depletion allowance controversy.  Hey. This is neat.  I can type at will in this blog. So the problem must be overcrowding.


LBJ told Weisl that "your folks (his clients in the securities business, presumably) should take the hint that"this thing ... this assassin may ... have a lot more complications that you know about....It may lie deeper than you think."

The message clearly was that Wall Street should show its own faith in and solidarity with Johnson, because he was going to save the system from the shadowy forces represented by the assassin.

Thursday, April 12, 2012


That is my own clumsy graphing, assisted by and an educational website.

The subject of the graph is the fluctuations of the euro against the dollar over the last crisis-ridden year.

I've used an arbitrary date in the middle of each covered month (the 12th) as that month's data point.

How does this correlate with some of the events of the unfolding crises regarding Euro sovereign debt during this period?

Last May and June, when the euro was circa .70, saw German politicians in particular taking a hard stand against assistance for Greece. That stance began to soften a bit in late June, when Merkel agreed to work with the ECB to line up the participation on private investors in a restructuring. It appears that this helped the euro's value, which reached .73 that September.

The markets' attentions shifted to Italy by September, though. That month S&P downgraded seven Italian banks, and there was some fall-back. Then in November, the Italians managed to rid themselves of Silvio Berlusconi and  Mario Monti became the new PM there. Europe's bankers have confidence in Monti, who has a reputation as a competent, boring, technocrat, a good reputation to have at such times, and the value of the euro climbed through December and into January of this year.

The most recent fall-off, since the January peak, may represent more a strengthening of the US dollar than a weakening of the euro.