It’s time (on time for once) for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.
Terror attacks in Mumbai
The news from Mumbai is still unclear, but extremely grim. Scores of people are dead, and hundreds wounded in yet another murderous terror attack.
As the cycle of war and terror has gone on, it’s become increasingly clear that the kind of easy evasion involved in slogans like “one man’s terrorist is another man’s freedom fighter” is no more tenable than the bogus arguments for war put forward by Bush and his followers. Terror attacks like this one are always crimes regardless of the purported cause, regardless of whether the terrorists deal death hand to hand or with bomber planes, and regardless of whether they are individual criminals, political or religious groups, or national governments.Phenomenon movie full
This sounds scary
I haven’t had time to digest the implications of this story which has been around for at least a month, but only now seems to be attracting attention (I’ve seen it in a few different places today). Apparently, short sellers in the US Treasury bond market are failing to deliver the securities they’ve sold. As long ago as 1 October, the shortfall was more than $2 trillion by one report. Via Felix Salmon, here’s Helen Avery in Euromoney.
I’m not an expert on this stuff, but it seems to raise the question of whether bond markets can and should continue to exist in their current form. Maybe the US and other Treasuries should be selling bonds directly, and offering repurchase options to provide liquidity, perhaps using the banks they’ve already part-nationalised to handle the mechanics.
Victoria's PPP that lost two of its Ps
I couldn’t go past this neat headline on a piece by Michael West in the Age . The central point is that the impending failure of both financier Babcock and Brown and bond insurer FGIC will leave the Vic government holding the risk on a PPP hospital project. Money quote
Maybe the Government ought to have issued its own bonds, with a state guarantee and consequent cheap funding cost, because this now looks like a PPP that lost two of its Ps.
That’s what I thought at the time.
Risk premiums for equity: the puzzle and the bezzle
Another note to myself post: an idea I thought I’d blog quickly rather than trying to work through in detail.
One of the big unsolved problems in economics is to explain the risk premium for equity, that is, the fact that the historical average rate of return to equity investment (shares) is much higher (about 6 percentage points) than the average rate of interest on high grade (government or genuinely AAA corporate) bonds, whereas the standard economic model of these things (the consumption-based capital asset pricing model or CCAPM) suggests that the premium should be no more than 0.5 percentage points. The basic idea is that the reason for the premium is that the market portfolio of equity represents a claim on aggregate consumption, so the risk premium must arise from the variability of the growth rate of aggregate consumption and this is small (the growth rate ranges from about 4 per cent in a boom to -3 per cent in a moderately severe recession).
One possible explanation for the puzzle is that equity investment has its own special risks in addition to the riskiness of aggregate consumption. But not any kind of risk will do: the risk has to be correlated with fluctuations in aggregate consumption, that is with the business cycle.
A reminder to myself on terminology
I’ve done a few posts here on the implications of the financial crisis for the ideological/political viewpoint often referred to as “neoliberalism”. Various people have objected to this as pejorative, but usually without offering a satisfactory alternative. I’m just starting a paper on the topic and looking over my old files, realised that I’ve previously used “economic liberalism” which seems much more satisfactory.
The crucial point it conveys is that economic liberals may or may not be liberal in the more general political sense – Pinochet is the most extreme example, but the extensive support he got from the Mont Pelerin society and from authoritarian economic liberals like Thatcher illustrates the point. Locally, the range of possibilities consistent with economic liberalism includes authoritarians like Howard and Downer as well as more broadly liberal positions such as those of John Hewson, Malcolm Turnbull and, to some extent, Peter Costello.
Monday Message Board
It’s time once again for the Monday Message Board. I’m still interested to learn if readers are finding the site more responsive following the migration to an accelerated server (of course, feel free to post on any topic, but a brief comment on this point much appreciated). As usual civilised discussion and no coarse language.
Print, pixels and prescriptivism
This post on a question-begging argument in favour of carbon taxes and against an emissions trading scheme, naturally raised (!) the question of whether the correct interpretation of a phrase like “begging the question” is determined by the predominant usage or by its original derivation as a technical term in logic or maybe by some other criterion such as the efficiency of communication.
That set me thinking and I turned to the usual research tools Wikipedia and Google to look at how this phrase and a couple of other standard items for debate (“aggravate” and “methodology”) are actually used.
And now we return you to coverage of the financial crisis
The failure of Citigroup, which looks increasingly likely to happen in the near future, would mark the end of the beginning of the financial crisis. Until now, the prevailing view has been that the crisis and recession will pass in a year or so, after which things will go back, more or less, to the way they were, with a few less financial institutions, and a bit more regulation. A Citigroup failure would put paid to that idea.
Begging the question
Longtime reader Jack Strocchi sent me this piece from the Times, reprinted in the Oz, with the headline “Carbon crash hits Europe’s emission trading scheme”. The main point is that, with the economic downturn, the price of carbon permits has fallen. The author concludes that this proves the need for a carbon tax rather than an emissions trading scheme.
This is a fine example of the fallacy of “petitio principii” or, in English, begging the question. This does not (yet) mean what TV commentators seem to think, namely “begging me to raise the question”.* Rather it refers to an argument in support of a proposition which assumes the truth of the proposition in advance. Clearly, if price instability is, in itself, evidence that a program has failed, then you need a program with fixed prices, that is a tax.
The main argument for a carbon tax rather than a trading scheme is that, if there is a lot of uncertainty about the cost of reducing emissions, and not much uncertainty about the damage caused by climate change, a fixed price for emissions (that is, a tax) will get closer to the optimal outcome than a fixed quantity.
But what’s happening here is completely different. The demand for emissions has fallen due to the economic slowdown. The reduction in price offsets the adverse impact of the trading scheme on firms that are already facing hard times. Equally, if the economy booms, the price of permits will rise. This is a clear case when a fixed quantity trading scheme performs better than a tax.
* Of course, meaning is defined by usage, so if a word or phrase is used in a particular way long enough, that becomes the meaning. But “begging the question” in its traditional sense is a useful phrase for which we have no good substitute. For the TV usage, “raising the question” is perfectly adequate.
John Quiggin 