My Feelings about the Election

These could change between now and November.

1. Voting for Gary Johnson, the libertarian camdidate, is obviously right. Both in terms of policy views and temperament/experience, he is clearly the best person on the ballot.

2. The fact that top Republicans are not endorsing Johnson makes me angry.

3. Let’s assume Johnson has no chance. I still will vote for him, but I will hope that Trump wins. If Trump wins, then people on the left will, at least temporarily, be thinking in terms of restraining Presidential power. If Clinton wins, they will be thinking in terms of maximizing Presidential power.

Question from a Reader

Are there one or two books you would recommend to understand the current state of the economy?

1. I am tempted to answer “no” and stop there.

2. Depends on what you want to understand. I think that Kindleberger’s Manias, Panics, and Crashes is probably good for understanding the way that financial bubbles show up and affect things. I think that McAfee and Brynjolfsson’s The Second Machine Age is good on contemporary structural change. Probably McCloskey’s Bourgeois Equality is good on the deep causes of what she calls “the great enrichment” (note, however, that I have yet to plow through the book).

3. When Specialization and Trade comes out, I am going to wish that a lot more people would read it than actually will do so.

Sound Banking or Shadow Banking?

John Cochrane enthuses,

SoFi started by making student loans to Stanford MBAs, after figuring out that the default rate on such loans is basically zero. It

has since expanded to student loans more generally and added mortgages, personal loans and wealth management. Mr. Cagney says SoFi has done 150,000 loans totaling $10 billion and is currently at a $1 billion monthly loan-origination rate.

Where does the money come from?

SoFi doesn’t take deposits, so it’s FDIC-free. … Instead, SoFi raises money for its loans, most recently $1 billion from SoftBank and the hedge fund Third Point, in exchange for about a quarter of the company. SoFi uses this expanded balance sheet to make loans and then securitize many of them to sell them off to investors so it can make more loans

He quotes from a WSJ profile of the founder of SoFi. Cochrane sees this as a form of safe banking, because it relies entirely on long-term funds. But it could turn out otherwise. Suppose that an insurance company puts up the long-term funds for these loans, but the insurance company finances its investment with short-term commercial paper. Then this becomes shadow banking. The next step is for the commercial paper to be bought by too-big-to-fail banks.

My point is not that I think that this is how it will play out, or that SoFi ought to be regulated out of existence. My own guess is that it will not turn out to be sufficiently scalable and profitable for its investors, and it will die a natural death.

My point is that when it comes to financial intermediation, be careful what you wish for. What may appear to be a robust form of financing can be readily transformed into something else entirely.

Anti-Trump Protesters

In the Columbia Journalism Review, Bill Wyman writes,

there’s one complicated Media vs. Trump story playing out that’s been overlooked. I speak of the media coverage of the Trump protests that have disrupted many of his appearances and, somewhat regrettably, they leave me having to stand up for Donald Trump. Why? Because the First Amendment does not take sides, not even against pumpkin-haired, nonsense-spewing, bloviating demagogues.

I got into a rare heated discussion with a lefty friend about this a couple of weeks ago. He was reciting the then-current left-wing talking points that the Republican Party was reaping what it has sowed with Trump and Trump was interfering with the right of people to protest. I said that the role of protest varies by context and by type of protest.

The context concerns what alternatives you have. In the case of Trump, you have many alternatives to getting to the face of his supporters and yelling at them. You can vote for someone else, you can contribute to someone else’s campaign, you can express your views about Trump in various media. In a context where you have no right to engage in other forms of political expression, I can be much more sympathetic to staging protests.

If you still choose to exercise voice at a Trump rally rather than rely on the other available alternatives, then I think that the less polite you are the less legitimate your “protest.” You can politely and quietly hold up signs. But it is wrong to scream at his supporters or try to keep Trump from being heard. We do not need to instill a culture of political violence in this country.

I do not think that my friend was persuaded to be less than completely sympathetic with the so-called protesters. So I am glad to see that someone who is disturbed by the Trump phenomenon (as am I) is still willing to criticize the anti-Trump protest phenomenon.

What Paul Ryan Represents

To me, he is a conservative intellectual. As such, he is hated by most intellectuals for being conservative. And he is hated by populists for being establishment.

I empathize with his plight. What are the choices for conservative intellectuals?

1. Try to win back the Trump supporters. This would make conservatism even more alienated from intellectuals. It would replace principled conservatism with divisive class warfare.

2. Try to win over intellectuals to liberaltarianism. I fear that this is an escapist fantasy. The left neither wants nor needs people who value liberty in the classical sense of the term. I am reading Kim R. Holmes’ book on the closing of the liberal mind, which makes this point forcefully.

3. Accept one’s place on an irrelevant fringe of American politics.

I go with number 3. Political environments can change. Maybe things will suddenly get better for conservative intellectuals. Or maybe the opposite.

Have a nice day.

Interpret These Data

The WaPo reports,

In 2000, about 14 percent of young New Yorkers worked in finance, earning about 77 percent more than average for their age group. Now they make about 115 percent more than average, and their numbers have shrunk to about 10 percent of their cohort.

Pointer from Tyler Cowen.

I am sure that there are many possible interpretations. The one that comes to my mind is that NYC financial firms are hiring fewer mediocre/marginal young workers. This reduces the proportion of young workers in the financial industry but raises the average incomes of those who do work in that industry.

Smugness in Politics

Emmitt Rensin writes,

There is a smug style in American liberalism. It has been growing these past decades. It is a way of conducting politics, predicated on the belief that American life is not divided by moral difference or policy divergence — not really —but by the failure of half the country to know what’s good for them.

If a conservative writer had said this, it would be dog bites man. Instead, I gather that Rensin himself leans left. Hence I quoted it.

Somehow, although this smugness clearly has spawned widespread resentment, 2016 looks as though it will be a golden year for the political left, and a dismal year for conservatives and libertarians. So there is no reason for anyone to feel smug.

Ed Pinto Takes on Mom and Apple Pie

He writes,

The 30-year fixed rate mortgage should be retired — for good. Despite continued proof that it fails to build up wealth for the most disadvantaged Americans, and that mortgage debt should not be a burden as homeowners approach their 50s and 60s, misguided advocates maintain that the 30-year fixed rate mortgage should be at the core of the U.S. housing finance system.

I have been telling friends that the tragedy of this year’s election is that in my opinion this is a time when we need to change course in many ways, and the Trump phenomenon reduces the probability of that happening. One example is housing finance policy, where Democrats are always looking for an excuse for government to intervene, and I think any reasonable evaluation of history would say that it would be better to go in the opposite direction.

I am willing to claim that the whole financial crisis of 2008 could have been prevented with just one innocuous reform: take away any government subsidies for investor loans.

Subsequent research has confirmed that in the regions with the most pronounced price cycles, significant shares of home purchases were by non-owner-occupants. Their mortgages were eligible for purchase by Freddie and Fannie. They were eligible to receive favorable capital treatment when packaged into securities that were rated as safe by rating agencies.

Investor loans do nothing to promote the goal of home ownership. They are riskier than loans to owner-occupants. Why did regulators allow Freddie and Fannie to buy them, and why did they allow them to be eligible for favorable capital treatment? Probably because the powerful mortgage lobby was at work behind the scenes.

Speaking of the mortgage lobby, Pinto is probably correct that we do not need the 30-year fixed-rate mortgage. Canada does fine without it. But don’t hold your breath waiting for any reform that might be guided by his point of view. That is one example of what the Trumplosion of the Republican Party has made impossible.

Another Theory of the Trump Phenomenon

Someone writes,

Girard discovered the answer. Society has survived because it has developed a mechanism for concentrating violence on a limited number of victims. This he called the “scapegoating mechanism”. In fact the scapegoating mechanism exploits the very mimetic mechanisms that render it necessary for society’s survival. People who fall into violent, obsessive desire quickly lose their grip on reality. It is easy to convince them that the source of their frustration – their inability to satisfy their mimetic desires without running into violent conflict – is the fault of some group of scapegoats. It is important for the scapegoats to be a disenfranchised minority, so that the violence of society can be turned upon them without fear that they will be avenged. Here, again, Girard’s theory renders unsurprising that which economists and political scientists are at a loss to explain: for instance how the favoured ‘cure’ for economic depression is to visit structural violence upon low-paid immigrants, racial minorities, the homeless, the unemployed and the disabled.

Pointer from Tyler Cowen.

In summary, there is this:

the most historically common form of spontaneous order is that of a human community tacitly agreeing to vent all of its violent frustration upon a defenceless subgroup.

I have some doubts about Girard’s core hypothesis, which is that we all want the same few goods. It seems to me that there are all sorts of things that other people want which interest me not at all. By the same token, many of my most favorite pastimes seem to be shared by only a few others.

The theory that our tastes are modeled on the tastes of others may be right, but I am not sure that its implications are as dire as Girard would have it. When I go to a folk dance session, it is true that I will like a dance more when there are others who also like the same dance. But I don’t want to kill them so that I can “possess” the dance. Quite the contrary.

In fact, I think that this is generally true. Nobody wants to be the only person who owns an i-Phone. Even with status goods, we all want others to own them, in order to validate our tastes.

I am sure that in some sense we sometimes desire that others have less than they do. But I am not ready to sign on to the idea that this is a major driver of a lot of our behavior.

What did Dodd-Frank Reform?

In this book compiled by the Heritage Foundation (long PDF), Ed Pinto writes (p. 33),

a home-purchase loan that qualifies under QM could have a 580 FICO credit score, no down payment, and a 43 percent DTI. A loan with these characteristics acquired by Freddie in 2007 had a 42 percent failure rate under the adverse conditions that prevailed between 2007 and 2012.

In case anyone thought that having the government set credit standards for mortgages would allow one to sleep at night.

At this point, I am completely pessimistic about the future of housing finance in America. There is a powerful lobby at work to maintain policies that subsidize demand and mortgage indebtedness. And the prospects for electing someone with ideological opposition to government involvement in housing finance are quite dim.

Overall, I find the book painful to read. It shows the extent to which Dodd-Frank produced costly, counterproductive policies, based on misguided diagnoses.