Kevin Drum

Blowing Bubbles

| Wed Jul. 29, 2009 12:46 PM EDT

How do we pop financial bubbles before they get out of hand?  Alex Tabarrok surveys the literature and comes away pessimistic that it can be done:

Bubbles occur even as uncertainty about the fundamental value diminishes.  We also know that once a bubble starts it's difficult to stop.  Circuit breakers and brokerage fees (transaction taxes), for example, don't do much to stop bubbles....Investor education doesn't help (for example telling participants about previous bubbles doesn't help). Even increasing interest rates doesn't do much to stop a bubble already in progress and may increase volatility on net.

So what's the answer?  Once a bubble gets going, maybe there isn't one.  However, some lab experiments suggest that having lots of cash sloshing around is instrumental in getting bubbles going in the first place:

[These] experiments are consistent with the Fed having a significant role in bubble inflation (a theory I have not pushed).  In other words, rather than identifying and popping bubbles already on the rise, not blowing bubbles in the first place may be easier and more productive.

That would be a start, anyway.  More research, please.

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Financing Solar

| Wed Jul. 29, 2009 12:12 PM EDT

My homeowners association would go ballistic if I tried to install solar panels on my roof, but if you live in a less benighted area it's an attractive option.  The problem is that the upfront cost is too high for some people, and if you take out a conventional loan you run the risk having to keep making payments even if you sell your house.  One option is an outfit like SolarCity, which leases the installation for a set monthly cost.  If you sell the house, the lease goes with it, so your risk is minimal.  Brad Plumer passes along news of another alternative:

Two years ago, however, the city of Berkeley figured out an easy financing trick to get around this problem — the city itself just issues a bond to pay for the upfront costs of installing the panels, and the homeowner then repays the government over the course of 20 years via a small line item on the property-tax bill. (This way, if the home is sold, the costs of the panels get passed on to the new owner getting the benefits.)

It's a small policy tweak, but quite sensible. No mandates, no regulations, just offering homeowners an extra option if they choose. So it's not surprising to hear that, as Kate Galbraith reports today, the idea's been proliferating like crazy: This year alone, eight states have followed California's lead by giving their municipalities permission for this sort of financing, including Colorado, New Mexico, Ohio, Oklahoma, Texas, Vermont, Virginia, Wisconsin. (Apparently, a lot of cities need permission from the states before they can mess with property-tax bills.)

Another benefit of this is that cities can generally borrow at lower rates than private homeowners, so the economics of the panels work out better.  It makes a lot of sense, especially in sunny areas like California and the southwest.

UPDATE:

Getting Out of Iraq

| Wed Jul. 29, 2009 11:51 AM EDT

Things are going so swimmingly in Iraq that we might speed up our exit plans:

Defense Secretary Robert M. Gates said Wednesday that the relatively low levels of violence in Iraq and improved cooperation of late between U.S. and Iraqi forces have raised the possibility that commanders might be able to "modestly accelerate" the reduction of U.S. forces this year.

....Gates said if trends throughout Iraq remain generally positive, the United States could withdraw three combat brigades, each consisting of about 5,000 soldiers, from Iraq this year. The existing plans call for two brigades to be withdrawn.

The expedited schedule might also have something to do with the tensions Ernesto Londoño reported a few days ago following the American response to an insurgent attack in Baghdad:

When the shooting subsided, another confrontation began. A senior Iraqi army commander who arrived at the scene concluded that the Americans had fired indiscriminately at civilians and ordered his men to take the U.S. soldiers into custody. The U.S. military said the soldiers had acted in self-defense and had sought to avoid civilian casualties; U.S. commanders at the scene persuaded the Iraqis to back down.

....Word of the incident quickly spread among U.S. soldiers in Baghdad. Several said it heightened concerns that the split-second decisions they make now have the potential to draw a sharp rebuke from Iraq's increasingly assertive security forces. And reaction from Iraqi military officials seemed to confirm those fears.

These things might be entirely unrelated.  Gates himself implicitly dismissed the incident by saying, "There clearly will be the occasional hiccup by someone who doesn't get the word."  Still, if violence is generally under control and Iraqi commanders are starting to harass American troops, that might make quick withdrawal into a more welcome option than it would be otherwise.  Just a thought.

Who Loves Medicare?

| Wed Jul. 29, 2009 11:15 AM EDT

Matt Yglesias points out today that socialistic single-payer healthcare is actually quite popular in the United States.  It's called Medicare.  The chart below, from a Mark Blumenthal column last month, shows that Medicare users are far more satisfied with their healthcare than users of private insurance.  So why is it so hard to persuade Americans to simply expand the program?  Blumenthal explains:

The higher scores for Medicare are based on perceptions of better access to care. More than two thirds (70 percent) of traditional Medicare enrollees say they "always" get access to needed care (appointments with specialists or other necessary tests and treatment), compared with 63 percent in Medicare managed care plans and only 51 percent of those with private insurance.

....If the Medicare experience is so positive, why are people so easily talked out of expanding on it? First, younger Americans not enrolled in Medicare do not share the enthusiasm of seniors for the program. Six years ago, the Kaiser Foundation asked a national sample of adults to rate the Medicare program. Medicare was hugely popular among those aged 65 or greater....Those under 65, however, had very different views. Only 45 percent rated Medicare favorably. Only 36 percent considered it well run, as compared to 47 percent who said the same about private health plans. While 73 percent of those over 65 said Medicare allowed patients to choose any doctor, only 28 percent of those under 65 agreed.

There's a pretty obvious political dynamic that's responsible for this.  Seniors, who actually use Medicare, know perfectly well that it's a good program.  They can see any doctor they want, they get care when they need it, and the quality of service is high.  So why do younger Americans have such a negative attitude toward Medicare?

Answer: because conservative politicians have been bellowing for years about what a terrible program it is.  And since younger workers don't actually use it themselves, the bellowing works.  They figure it must suck.

In reality, Medicare works fine.  Not perfectly, but fine.  It offers service at least as good as private insurance despite serving the highest-risk population there is, and it does at least as good a job of reining in costs — slightly better, in fact.  Sure, it could be improved, but it's already probably better than the employer insurance that you have right now.  I'd switch in a second if I could.

But I can't, and neither can you.  And nothing like it will be offered to you anytime soon.  After all, if you actually used it, you'd probably like it.  Which is exactly what conservative politicians are afraid of.

Cui Bono?

| Wed Jul. 29, 2009 10:27 AM EDT

Mike Konczal has a nice primer over at the Atlantic about high frequency trading.  You're likely to hear a lot more about this subject in days to come, so it's worth a few minutes to head on over and read it.

There are two aspects of HFT that are drawing attention.  The first is just the basic effect of ultra-fast, high-volume trading on equity markets in the first place.  The second is "front running," the allegation that big players are able to gain access to stock prices a few milliseconds before the rest of us via flash orders, thus allowing them to enter orders early and make guaranteed profits.  Konczal's conclusion:

As the debate unfolds, remember to ask yourself, (1) whose information is being exploited by whom and how, (2) does this make financial markets stronger and more efficient — say by providing liquidity — during a downturn when markets need them the most, and (3) what is this doing to the price mechanism — is it helping prices converge to fundamental values or driving them further away? The evidence currently looks like HFT is doing bad things on all three accounts.

As Konczal points out, if you ask the HFT community what benefit HFT provides, the answer is usually "liquidity."  But this is an answer that should be treated very skeptically indeed.  Major stock exchanges are not notably illiquid except under very specific, limited circumstances, and HFT traders aren't obligated to provide liquidity under these circumstances anyway.  And they won't.  They'll just flee, like everyone else.

So: cui bono?  As near as I can tell, HFT is just a pure, artificial money spinning machine with no value at all to the wider financial community.  In fact, as Konczal points out, it's quite likely to make markets weaker and less driven by fundamentals.  This is worth keeping your eyes on.

Community Rating

| Tue Jul. 28, 2009 7:35 PM EDT

Scott Lemieux isn't happy with the compromise healthcare bill being put together in the Senate:

The normal justification for passing a compromise bill is that once a new system is entrenched it can be tweaked later. But I don't think it applies in this case. The public option is the core of the reform; a Blue Dog bill isn't so much half a loaf as a few meaningless crumbs. And far from making a public option more viable in the future, if anything, passing something that could be called health-care reform will reduce the impetus to pass actual reform. And, worse, a bill with no public option will further entrench the insurance industry and make it easier for them to block actual reform in the future.

Ezra Klein disagrees.  Partly this is because a public option would cover only a small fraction of the currently uninsured ("That's not a gamechanger, it's a tweak"), but mostly because he thinks what really matters isn't how they're covered, but merely that they're covered:

What has kept health-care reform at the forefront of liberal politics for decades is moral outrage that 47 million of our friends and neighbors are uninsured. That medical costs are one of the leading causes of bankruptcy in the United States. That an unemployed machinist gets screwed by fly-by-night insurance schemes while a comfortably employed banker need never worry. That the working class ends up in emergency rooms with crushing chest pains because they didn't have health insurance and didn't get prescribed cheap blood pressure medications five years before.

One of these days I need to think this through more rigorously, but I have a slightly more idiosyncratic view that's closer to Ezra's than Scott's.  Both coverage and a public option are important, but I think what's more important than either one is a simple change that — to my surprise — hasn't attracted any real opposition: community rating on a national scale.  Basically, this means that insurance companies have to take all comers at the same price.  They're allowed to adjust premiums for things like age and gender, but they can't refuse you due to preexisting conditions.  If your blood pressure is high or you have a family history of breast cancer, they still have to accept your business.

This hardly solves every problem.  In particular, it doesn't do much to rein in costs.  But if you combine (a) Medicare, (b) our current employer-based insurance regime, and (c) community rating along with subsidies for low-income families, you've essentially institutionalized universal healthcare insurance.  Not everyone will take advantage of it — there will always be a few people who go without coverage even if it's affordable — and you still a need a few other things like out-of-pocket caps.  Still, it's basically a statement that everyone in the country can and should be covered.  And once that becomes a cultural norm, it will never go away.

It will also, I suspect, eventually turn the private healthcare insurance industry on its head.  But maybe not.  That's the part I haven't thought through completely.  But if there's any single thing that's critical, it's moving public opinion in the direction of viewing healthcare as a universal prerogative.  Community rating plus low-income subsidies doesn't get us 100% there, but it gets us pretty far along.

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Quote of the Day

| Tue Jul. 28, 2009 1:37 PM EDT

From Bill O'Reilly, responding on the air to Canadian viewer Peter Gillies, who noted that Canadians have higher life expectancies under their healthcare system than we do under ours:

Well that's to be expected, Peter, because we have ten times as many people as you do. That translates to ten times as many accidents, crimes, down the line.

Note that this wasn't just an off-the-cuff howler.  O'Reilly chose to air Gillies' letter and had his response all teed up on the prompter.  Here are the alternatives for how this happened: (a) Not a single person on his staff noticed that this was nonsensical.  (b) Someone noticed but didn't have guts to tell O'Reilly he was wrong.  (c) Someone noticed, told O'Reilly, but was unable to convince him that he'd flubbed his fourth grade arithmetic.  (d) O'Reilly does this stuff all by himself and doesn't show it to anyone before airtime.  I'm going with (b).

Selling Your Kidney

| Tue Jul. 28, 2009 12:24 PM EDT

Oddly enough, a persistently popular topic of conversation in the blogosphere concerns the ethics of paying people to donate kidneys.  It just goes to show the power of Virginia Postrel, who donated one of her kidneys to a friend and has written about it frequently since then.

The idea, frankly, makes me very, very queasy.  Offering large sums of money to people in desperate straits to sell a kidney?  I'm just not there.  But today, Ilya Somin takes on three common objections to "exploiting the poor" in an effort to persuade doubters like me:

I. Poor People Are Allowed to Take Much Greater Risks for Pay. Many organ market critics may be unaware of the fact that the risks of donating a kidney (the main proposed organ market) are actually very small....If it is somehow wrong to allow poor people to assume these very minor risks in exchange for pay, why should they be allowed to brave vastly greater dangers for money? Military personnel, firefighters, police officers, and others accept far greater risks to life and limb than kidney donors do.

....II. Is Preventing "Exploitation" Important enough to Justify Killing Thousands of People?....80,000 lives per year in the US alone could be saved by legalizing kidney markets. Even if you find the "exploitation" of poor people in organ markets morally repugnant, you have to ask whether following that moral intuition is so important that it justifies sacrificing all those lives.

....III. Organ Sales are Actually Good for Poor Donors. Given the minimal risks of organ donation, it is highly likely that kidney markets will actually benefit poor donors far more than they could conceivably harm them. The logic isn't complicated. After all, one of the main problems that poor people face is lack of money....If the poor person reasonably believes that the risk is worth it, I don't see why the government should force her to choose otherwise.

This is all very logical, as libertarian arguments tend to be, and the fact that my instincts scream that this is a bad idea is hardly a persuasive counterargument.  But I'll make a few others as well.

First: entering a generally risky profession is different than being coerced to do a specific act because you're feeling specifically desperate at a specific time.  At least, it feels quite different to me.  The other two arguments, baldly utilitarian though they are, strike me as more persuasive.

Second: Would this would be a global market?  My discomfort with the idea is doubled or tripled at the idea of luring the poor in Bangladesh or Liberia into donating kidneys.  Am I right to feel this way?

Third: I'll admit that my moral sense is affected by how much a kidney is worth.  (I'm taking Somin's word for the fact that the risk involved is actually fairly small.)  If the going price were $10,000, that seems like a bad deal.  If it were $100,000 — well, that really could make a difference to a poor family.  Hmmm.

Fourth: This one is by far my most important objection: right now both the law and the taboo against selling organs applies to all organs.  But if we make an exception for kidneys, does that weaken the taboo and make it more likely that markets will develop in other organs?  Obviously it wouldn't for donations that would kill you, but how about corneas?  You've got two of 'em, after all.  Or maybe a piece of one lung?  Or a chunk of something else.  And then another chunk.  Would venture capitalists start insisting on organ donations from entrepreneurs to prove their seriousness before they put up money of their own?  Could a bank ask a bankruptcy judge to demand a kidney donation in order to pay off a loan?

I'm not generally a big fan of slippery slope arguments, but they do have their place.  History suggests that once the rich and powerful figure out a way to exploit the poor in one way, they'll pretty quickly start pushing the envelope in related directions as well.  So, yeah, this makes me pretty nervous.

But it's not as if my mind is made up.  Mainly, things are kind of slow today so I thought I'd toss in a post on an offbeat topic and let everyone talk about it.  Obviously, for example, you might feel quite differently about the whole thing depending on what kind of regulatory regime was put in place.  Comments?

The 18½ Minute Gap

| Tue Jul. 28, 2009 11:27 AM EDT

Analysts have tried for years to recover the famous 18½ minute gap from Richard Nixon's taped conversation with Bob Haldeman a few days after the Watergate break-in.  No dice.  So far, it just doesn't look possible.

But Haldeman also took notes of that conversation.  The pages that correspond to the gap appear to have been deep-sixed at the same time the tape was erased, but a Watergate buff named Phil Mellinger, a former NSA systems analyst, has proposed a way to recover the notes anyway.  David Corn has the news:

Mellinger had an idea: electrostatic detection analysis. That's a proven forensic technique used to capture indentations and impressions on a piece of paper—such as the marks made on a page in a pad by a pen writing on the pages above it.

....Days after his eureka moment, Mellinger emailed David Paynter, the archivist in charge of the Watergate records, requesting that the Archives submit the two pages of Haldeman notes to this procedure....After he filed his request, a document forensics expert at the Archives examined the Haldeman notes, found indented writing on the second page, and concluded that electrostatic detection analysis could work on this document, according to Paynter. So Paynter recommended to higher-ups at the Archives that the Haldeman notes be tested. At press time, Paynter was awaiting the green light from his superiors. "The reason we're going forward with this," Paynter says, "is that we've already tried with the tape itself. Here's another avenue to shed light on an important episode in history. It's very exciting."

If they successfully recover the notes, maybe we can turn them back into tapes by having William Shatner do a dramatic reading?

Red Star Rising....In Arabic

| Tue Jul. 28, 2009 11:03 AM EDT

Marc Lynch reports:

China officially announced the launch of its long-rumored Arabic TV station CCTV the other day.  It thus joins the United States, the UK, France, Germany, Russia and Iran — and possibly soon India — in having a state-backed satellite television station broadcasting in Arabic.   Why, given that none of them are likely to ever capture much of a market share or have much impact on Arab public opinion?

Good question!  As it turns out, Marc doesn't really have a clue himself.  But hey — if the United States can sponsor a useless, expensive media sinkhole, then I guess the Chinese figure they can do it even better.  Or something.

Or maybe it's just an example of that famous long-term Chinese thinking.  Maybe they don't really need an Arabic-language propaganda outlet now, but they might need one in 2050.  And if they do, they'll be prepared.