The perils of Posner

US Federal judge, bestselling author and highly-cited economist Richard Posner has been taking a hammering in the Oz blogworld lately. First there was a discussion of his book on public intellectuals, where the reaction ranged from lukewarm (me) to scathing (Don Arthur). Along the way, Tim Dunlop and Ken Parish weighed in with some acute observations. Now his contribution to law and economics in general is up for debate, with Ken panning him again and Jason Soon offering a very qualified defence.
I’ve read a fair bit of Posner’s stuff over the years, and I can see why he elicits this kind of reaction. He’s very bright, but tends to be glib and superficial, and takes too much delight in being deliberately shocking. (Actually, I’ve got a fair bit in common with him, and have tried hard to train myself out of these kinds of faults).
More fundamentally, I think he’s focused on the least convincing ideas in Coase, namely that judges and the common law should make judgements in line with efficiency. I’m not a big fan of judicial legislation, though I dislike even more the kind of spurious literalism that allowed people like Garfield Barwick to impose their own political views while posing as conservatives. I prefer an ‘original intent’ approach to the interpretation of the law, with sensible modification in the light of changing social and technological conditions.
I find a lot more interest in the other great interpreter of Coase, James Buchanan, though I think he is also fundamentally wrong in trying to find an unchallengeable base for property rights in some sort of contractarian myth.
What does all this mean for the tortious liability of ski-lift operators? I’ll tell you next time.

Banking's Future Lies in its Past

On of the big problems of policy debate, particularly on the “left”, is that it’s considered unthinkable to advocate a return to the institutions of the past, even when they performed demonstrably better than those that replaced them. That’s why it’s encouraging to read Martin Mayer, a guest scholar at the Brookings Institution, saying that Banking’s Future Lies in its Past, that is, that it was a mistake to repeal the Depression-era Glass-Steagall act which required complete separation between commercial and investment banking. Of course, Mayer doesn’t advocate a return to the exact policies of the past, but a modernised version taking advantage of the controls made possible by new technology.

What I'm reading this week

Barchester Towers, one of Anthony Trollope’s ‘clerical novels’. As the bishop is reported to have said, there’s nothing better on a Sunday afternoon than to curl up in bed with a good Trollope.
By the way, did anyone watch the adaptation of Trollope’s The Way we Live Now. I don’t have a copy, so I couldn’t check it the BBC had updated some of Melmotte’s rhetoric to make it even more uncannily familiar, but the obvious lesson in relation to financial speculation is plus ca change, plus c’est la meme chose.


I just installed Mac OS 10.2, and put on the T-shirt. Since the worldwide release started today at midnight, Australasian Mac-heads were the first to get access to the new OS. I didn’t bother going out at midnight – I figured a few hundred Kiwis would be ahead of me anyway, and there’s no point going out in a Canberra winter night to be #314 in the world. So far, there’s a definite improvement in graphics and a subjective improvement in speed. I’ll be interested to see what MacFixIt and others have to say.

Scary stories #3

One of least-known disaster scenarios for the US economy arises from the peculiar structure of US mortgage contracts. Unlike Australian mortgages which have either a variable interest rate or a fixed rate and fixed term, US contracts typically have a fixed rate, but allow early repayment without penalty. In effect, this means interest rates are variable but only downward, since householders can refinance whenever rates fall. They are doing this in droves right now for 30-year and 15-year terms, producing A New Refinancing Boom in Mortgages
For those who like the jargon of finance markets, US mortgages are like fixed-rate contracts with a bundled put option – comparing the terms with Australian mortgages this option appears to be free, but it’s very valuable to the borrower and potentially very costly to the lender.
If US long-term interest rates rise significantly, lenders will be stuck with a lot of long-term mortgages at low rates while they have to finance their activities at the high rates. They will have to bear the difference. Thanks to the securitisation of mortgages it’s unclear who will bear this loss, but the loss is potentially massive. It was precisely this feature of US mortgage arrangements that generated the S&L crisis two decades ago, but no lessons seem to have been learned. Although interest rates aren’t likely to vary as much as they did in the 1980s, the ease of refinancing means that the volume of the problem could be huge even for a rise of a few percentage points in the longterm bond rate.

Don't react, it only encourages them

Bright Cold Day  links to this version of the archetypal modern art hoax story. You can read my take on this, first published in 1999, here

A short sample, with an apposite link I just found:

It is still possible to outrage US Senators and New York City Mayors with such ‘artworks’ as chocolate-smeared performance artists and Madonnas rendered in elephant dung, especially when their production and exhibition is paid for by taxpayers. But for the mass public, the game of epater le bourgeois (shocking the middle class) has been played out. Hardly anyone nowadays is really shocked by anything as petty as modern art. Rather, most people accept incomprehensible, trivial and ‘confrontational’ art as one of the facts of modern life, much like the operations of financial markets. Just as with markets in financial derivatives, they give their passive assent to the experts who assure them that modern art is a Good Thing, while retaining an underlying conviction that it is really a gigantic con game. Stories of paintings by ducks or monkeys being hailed as masterpieces are standard filler items in the tabloid press, greeted with the same mild schadenfreude as exposures of failed financial manipulations.