On The Margins

Sunday February 24, 2008

[ Economics ] Microsoft and Open Source Software

As the news of Microsoft's moves last week unfolds, strategists might find it useful to review "Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows," by Ramon Casadesus-Masanell and Pankaj Ghemawat of Harvard Business School.

Working Knowledge carries an interview with the authors.

2008-02-24 15:46:41.0 -- Comments [1] ; Permalink ; Trackback.
economics linux opensource software technology

Tuesday November 13, 2007

[ Economics ] Wars' Cost

Josh White of The Washington Post summarizes the findings of "The Hidden Costs of the Iraq War," a report issued by the Democratic staff of U.S. Congress's Joint Economic Committee. I do not believe the cost analysis takes account of the immeasurable human toll involved.

If, instead of a dogged focus on imperial goals powered by fear, people demanded that this money be spent, prudently, on making U.S. economy more competitive, i.e. if they demanded that government-driven investments be focused on people, institutions, facilities and technologies that help people get on with their lives, work and play, the U.S. would not be facing the economic problems it is facing now and will be in a much better economic, political and social position globally.

2007-11-13 18:17:33.0 -- Comments [1] ; Permalink ; Trackback.
cost economics finance war

Tuesday September 18, 2007

[ Economics ] UK Bank Run or the Advantage of Reading Two Papers

I subscribe to two papers that are delivered every morning at my doorstep: The Wall Street Journal and Financial Times. 

For three days now, Financial Times has carried stories and pictures of a bank run in the UK, involving Northern Rock, a financial institution focused on savings and loans geared to the mortgage market. (Some have argued that if there's only a single bank run, we do not have a bank run. However, financial crisis have their own way of diffusing to neighbors.) This morning, FT carries, above the fold, a 1/4 page picture of a crowd waiting to withdraw their savings from a Northern Rock branch. 

No two industrial economies or countries are as intertwined as the UK and the US. Yet, if you read The Wall Street Journal this morning, you would hardly notice anything going amiss in the UK. On the front page, the news of the bank run is reflected only in a two-sentence paragraph falling on the fold, making it hardly visible, with a jump to page 3 of section C ("Money & Investing"), a section which bills an educational piece on yield curves on top of its own fold. On page C3, two short columns summarize the least salient parts of story, with no mention of a bank run.

I should end this by noting that the electronic version of FT, accessible here in California, has no images like the ones in the print edition on its front "page" today. However, one can find relevant images on Flickr -- like the one I've posted here.

2007-09-18 06:33:55.0 -- Comments [1] ; Permalink ; Trackback.
economics finance media news

Wednesday August 29, 2007

[ Economics ] Diffusion of Financial Crisis among Economic Neighbors

In the last several months, as the credit crisis has rippled from the U.S. to Europe and back, I'm reminder of other historical examples:

Princes, abbots, bishops, even the Holy Roman Emperor debased the subsidiary coinage used in daily transactions (but not gold and silver coin of large denominations) by raising the denomination of existing monies, substituting baser for good metal, or reducing its weight, in order to extract more seignorage in the absence of effective tax systems and capital markets--this to prepare for the Thirty Years' War, which broke out in 1618. Debasement was limited at first to one's own territory. It was then found that one could do better by taking bad coins across the border of neighboring principalities and exchanging them for good with ignorant common people, bringing back the good coins and debasing them again. The territorial unit on which the original injury had been inflicted would debase its own coins in defense and turn to other neighbors to make good its losses and build its war chest. More and more mints were established. Debasement accelerated in hyper-fashion until a halt was called after the subsidiary coins became practically worthless, and children played with them in the street, much as recounted in Leo Tolstoy's short story, "Ivan the Fool."

Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crisis, 4th edition, p. 121, John Wiley and Sons, Inc., New York (2000) 

 

2007-08-29 13:08:22.0 -- ; Permalink ; Trackback.
currencies finance international

Tuesday August 21, 2007

[ Economics ] Car Insurance and Game Theory

Car insurance companies seem to use a lot of game theory, and "safe guards,"  to set up the process of assessment and pay-backs in cases of actual accidents such that they can prevent many kinds of fraud and protect their assets and revenue stream. Of course, the process is not optimized for delivering any kind of justice but only to ensure that "rational" decision makers make decisions that are least damaging to the revenue accrued to the insurance companies as insurance bets are "auctioned" by the various parties involved. (The cooperative insurance models of 600 years ago are certainly not operative in the 20th and 21st centuries.)

Last week, my C230 Kompressor  was rear-ended by a 17-year-old who, apparently, is not listed as a named driver on his parents' insurance. While his parents' insurance adjuster is "investigating" whether he was driving his parents' Jeep Wrangler with their permission, I had to deal with my own lack of transportation, rent a car,  find a suitable body shop, have my car towed to that body shop, call the two adjusters multiple times, follow up on the work of the assessor at the body shop, and do all this, despite the fact that I carry a "comprehensive" insurance on my car, and despite the fact that I've been rear-ended by a car carrying a 17 and a 16 year-old. 

Finally, this  afternoon I was told that the car is totaled. Tomorrow, I will have to call my adjuster again to discover what my "comprehensive" coverage, which I've maintained since I bought the car, really means. The assessor says if I decide to fix the car, there will be a deduction equal to salvage price of the car, which is an encouragement to not fixt the car although its value to me is higher than the "bluebook" value. (The assessor might have been unaware of my comprehensive coverage, which I myself discovered after having read the fine print in my car insurance policy.)

It is funny how the set up of these various transaction limits, force "rational" agents to make choices that are irrational to them, from a judicial point of view, but that which are the only choices left from an "economic" point of view, and which end up protecting the insurance companies' assets and revenue stream from gaming by potential fraud.

Insurance at its bottom is not about protection against unpleasant accidents. Instead, it is merely about creating a new economics at the time of accident which force certain choices on the parties.

2007-08-21 23:34:47.0 -- Comments [2] ; Permalink ; Trackback.
economics game-theory insurance

Sunday August 12, 2007

[ Economics ] Lender of Last Resort

Charles P. Kindleberger describes the concept of "lender of last resort," in great detail in his Manias, Panics, and Crashes: A History of Financial Crisis. 

As of late last week, central banks in the EU, the US, Japan and Canada have begun claiming their mantle as lender of last resort within their economies, pumping lubricating liquidity into financial markets (at least some $120B of it) to put a break on an impending credit crunch. The coming weeks will reveal more. (John Authers speaks about it here. He calls it "very dangerous times" and speaks of a potential "melt-down" and hopes that this injection of liquidity can push back the tide of "bad news.")

2007-08-12 01:22:52.0 -- ; Permalink ; Trackback.
capital currencies financial-instutitions government liquidity markets

Thursday June 14, 2007

[ Economics ] Money Supply

Despite the recent correction to the falling prices and rising yields of U.S. treasuries, I've been wondering how the Federal Reserve might react in the coming months as the bond market remains jittery. The talk to beat inflation was tough when the new chair took his place. However, if money is tightened to reduce inflation, interest rates will have to rise even more, furthering the slump in the housing market already suffering from the recent subprime melt-down. This course of action will lead to serious unhappiness among those owning property. If the Fed decides on merely talking about beating the inflation while letting money loose, interest rates will remain less volatile and inflation will rise but perhaps at a slower rate than would cause a shock. If I were to bet, I would bet that the Fed will choose the latter coure of action. It is the politically "prudent" course although many who earn wages and have little property to own may suffer more than others.

2007-06-14 01:07:28.0 -- Comments [3] ; Permalink ; Trackback.
banking bonds economics finance money

Wednesday May 23, 2007

[ Economics ] Throwing 'Resources' at Problems

I wrote about strategizing vs. economizing attitudes in my first ever entry on this blog. The problems associated with variations in these attitudes keep surfacing again and again.

In short, there are two modes of thinking when it comes to organized group or individual activity: the strategizing one and the economizing one. 

Throwing troops, tanks and dollars into fighting unwinnable battles for ill-conceived aims, throwing resources into implementing badly conceived business propositions, and other such activities --- all stem from strategizing thinking.

Creating an environment that improves complementarity of people's activities engaged in commerce, improving broad and varied commerce in goods and services at all economic scales, and reducing transaction costs (including security costs, transportation costs, etc.) --- all stem from the economizing attitude.

The strategizing calculations end with calling for more resources to gain leverage against one's opponents.

The economizing attitude focuses on a strategy of greater resourcefulness to accomplish global aims geared towards mutually rewarding commerce.

2007-05-23 11:35:14.0 -- Comments [3] ; Permalink ; Trackback.
economics strategy

Monday May 21, 2007

[ Economics ] London is Greener

Financial Times' Weekend columnist and author of Undercover Economist, Tim Harford, confirms my earlier claim that urban planning with good transportation systems can provide better energy security, where security can also come in the form of being greener.

I wrote my note lamenting the lack of energy security and urban planning with adequte public transportation in California, one of the largest economies in the world and one of the poorest places when it comes to good public transportation, and yet one of the places that has the greatest ambition to have cities as green as its environ. The only trouble is that you cannot be green with so many cars and so many roads and so few efficient (and nonexistent) public transportation networks.

This is what Harford writes (FT, May 18, 2007): 

The Office for National Statistics reports that Londoners produce much less household waste than anywhere else in the UK. From the same source I learn that London’s households are the most likely to have no cars, and the least likely to have two or more cars. Even before the congestion charge came into force few Londoners commuted by car.

London’s Mayor’s office informs me that London emits 40 per cent less carbon dioxide a person than the national average - which would be less than half the rate of ”carbon neutral” Ashton Hayes. All this from a city that is hugely dynamic, innovative and, frankly, disgustingly rich.

It is true that these figures do not include the environmental cost of producing products elsewhere and shipping them to London. That would be a more telling omission if the rest of the country was growing its food in the back garden, but the truth is that most UK citizens fill their houses with products produced elsewhere. They just have bigger houses to fill.

London, like other big, dense cities, is good for the planet. That fact seems to surprise people. After all, cities are polluted places.

...London’s environmental performance comes naturally. My in-laws live in the Lake District in a house that is twice as large as mine with half as many occupants; they drive into town to pick up the morning paper. We travel around by bicycle or walk pushing our kids in a baby buggy because a car is impractical. We are enormously greener than they, but not because we’re more virtuous nor because we’re poorer. We’d like a bigger house, but that costs too much in London. A fancy car would be a waste of money because we’d rarely use it. Economic necessity, rather than deeply held principles, compels us to be green. 

Addendum: Tony Raven of Herts, UK, recently wrote a letter to Financial Times' editors, noting that "As London has demonstrated in recent years, if you get more cyclists on the roads, other road users will both expect them and learn to interact safely with them. The number of cyclists in London has grown by 83 per cent since 2000, according to Mayor Ken Livingstone, while the number of serious or fatal cycle accidents has fallen by 28 per cent in the same period." London is also known for its diversity.

2007-05-21 22:40:33.0 -- ; Permalink ; Trackback.
green london

Tuesday May 15, 2007

[ Economics ] Transaction Cost Economics and Open Source Software

It is good to see someone who has a relatively good understanding of Transaction Cost Economics write about the topic of open source software or software in general:

There was a time when a single determined individual could write the core of a single operating system for a primitive computer. But given the demands of computer applications and the capabilities of hardware technology at present, that is no longer conceivable. The task needs to be divided somehow. This immediately raises a ... core political economy question, about coordination of a division of labor within a centralized, hierarchical structure--that is, a firm. Within the firm an authority can make decisions about the division of labor and set up systems that transfer needed information back and forth between the individuals or teams that are working on particular chunks of the project. The boundaries of the firm are determined by make-or-buy decisions that follow from the logic of transaction cost economics. The system manages complexity through formal organization and explicit authority to make decisions within the firm as well as price coordination within markets between firms.

That's from Steven Weber's The Success of Open Source.

2007-05-15 18:01:26.0 -- ; Permalink ; Trackback.
economics software

Saturday May 12, 2007

[ Economics ] Security Consequences of Urban Planning

Modern urban planning in the U.S., as it has been conceived and implemented in the urban sprawl since WWII, poses serious security concerns that arise from its economic vulnerabilities. The vulnerabilities are both explicit, in terms of direct transaction costs such as transportation to work, and more implicit, in terms of aggregate and individual worker productivity. Thus, did The Economist ("In a Jam," May 5, 2007, p. 38) describe the situation in the area where I live:

[The] Bay Area is not set up like a European metropolis. Most suburbanites have quite a drive just to get to an underground station, and must then win a vicious struggle for parking to make it onto a train.

The description fits well with my family's experience here.

In major American cities, workers have to drive long distances (of the order of 80 - 200 km / day) from home to work and back, and a significant increase in gas prices, without a similar increase in better communications technologies (that allow people to reduce trips to work to compensate for other losses) or a similar increase in energy efficiency of automobiles (at the same unit price) can cause perturbations towards lower growth rates.

Lack of adequate and efficient public transportation is not limited to major cities. One in eight who live in the U.S. live in California, just as I do. The state by itself has consistently accounted for one of the top 10 largest GDPs in the world for multiple decades, and it drives the U.S. economy with its vast consumption, tax base, farming and real estate, not to mention high technology. And yet, there are no super fast trains connecting any of its major metropolitan areas together: Los Angeles, Orange County, San Francisco Bay Area, Sacramento Valley, etc.

The economic inflexibility of urban sprawl leads not only to higher overall transaction costs throughout the economy but also to instabilities in various sectors. For example, The Wall Street Journal recently reported that 51 leading retail store chains have reported a collective 2.3% decline in same-store sales. Michael Niemira, chief economist of the New York-based International Council of Shopping Centers says this is the weakest showing since he began tracking the closely watched industry measure of performance in 1970. People have blamed this on a soft housing market, bad wheather in March, a fast Easter or fuel prices. Fuel prices and a soft housing market seem to be the most likely explanations for why this drop has been as large as it has been. While the real estate industry benefits from generally cheap gas prices (which lead to better possibilities for greater urban sprawl) and may be willing to go to war for it (observe how the representatives of American economic power offered almost universal support, in 2002-2003, for aggression against and occupation of Iraq), the spending for war might come back to bite the real-estate and other industries in the form of rampant deficits and inflation, higher interest rates, higher fuel prices and general asset attrition. One would expect that the economic elites and political leaders of a super power to comprehend that peace, justice, stability and truly open commerce (of course, not in commerce of aggressive war machinary) remain the solid base and the best guarantors of mutual understanding and development, economic vitality and growth. However, "stability" is often confused with the extension of imperial rule. In the meantime, a rampant political jargon and an infected moral language equates mass aggression with liberation, injustice with natural rights, murder with "collatoral damange," etc. Such infection of moral language, publicly spread, will always fog people's minds and provide a kind of self-belief among the elites to perpetuate the rule of what becomes a militaristic economy unashamedly pursuing its ends until it exhausts all resources at its disposal (and reaches its own end) at a huge toll in human life and well-being.

2007-05-12 08:16:40.0 -- Comments [2] ; Permalink ; Trackback.
america economics planning urban war

Sunday April 08, 2007

[ Economics ] More on Trust

[Earlier, I have written about the concept of "trust," including trust in the cyberspace. I have also shared a paper and pointed to Oliver Williamson's analysis of the concept of trust and to his papers on credible commitments, comparing it to the analysis Thomas Schelling offers in his work on conflict and strategy.]

Michelle Dennedy, Sun Microsystems' Chief Privacy Officer, has written a note about "trust" in which she gives the formula: "GOOD MANNERS x STANDARDS x TRANSPARENCY x TIME = T R U S T...maybe."

Here is my analysis of this formula which I think is a bit different from Dennedy's. 

The time element has to do with repeated transactions and/or long-term relationships.  Through repeated transactions with a particular party we gradually become familiar. An element of "reputation" is introduced. In long-term relationships (of business or other kind), parties to the transaction often make relationship-specific investment, through which they come to "trust" each other more because they have mutual stakes that will be lost if the relationship is broken.

The transparency element has to do with an openness which again produces mutual stakes. Each party knows valuable information about the other party to the transaction. This alleviates some of the information asymmetries which often lead to a lack of "trust."

With standards, we can define or at least bound the rules of the game. Laws contain standards and permitted mechanisms for their application. Knowing the rules of the game to be the same for both parties leads the transacting parties to understand how the other party will react under certain circumstances. Standards, like transparency, also help with reducing information asymmetries.

We can think of good manners as an adequate implementation of standards. If one does not exercise good manners, one will most probably have broken the standards, one may then find no choice out the quagmire but to become less transparent, which often will lead one to be less worthy of long-term relationships through time. Thus, one becomes less trust-worthy.

Addendum: 

By way of extracting a few paragraphs from one of my comments on this entry, I'd like to share another formula.

First, note that good manners, consistency of behavior and standards all can be categorized under the same element, perhaps "consistency" ...

On the other hand, transparency has a lot to do with information exchange and asymmetries. Such mutual "hostages" (a la Thomas Schelling and Oliver Williamson) in the form of valuable information on one's transacting partner can actually cement "trust" by creating mutuality of vulnerabilities.

Transparency and information sharing is only one way to cement "trust" relationships through mutual vulnerabilities. Here are some other examples: Employees working for a firm often learn firm-specific skills. They are also often protected by the firm against market ups and downs and receive special benefits for remaining with the firm. Many other examples have to do with mutual investments that could lost in case a "trust" relationship is broken. (Relationships are broken when "trust" is lost.) The "trust" relationships between the U.S. and Europe and between the U.S. and Japan are as much based on tremendous and large mutual investments as on anything else. (See also Hubert Dreyfus' discussion of "trust" in his On the Internet. He describes and gives some real-life examples of how mutual vulnerabilities lead to trust.)

Finally "time" has often more to do with reputation than with "trust." In fact, one may argue that "time" only plays into trust when it leads to greater mutual vulnerabilities in the relationships because of some relationships-specific investment by both parties.

So, an alternate, simpler formula could then be

CONSISTENCY x MUTUAL VULNERABILITIES = TRUST

Some have also argued "consistency" out of the formula because they believe that consistency in relationships grow out of "mutual vulnerabilities" that demand consistent behavior. In this sense, "consistency" multiplier applies to both sides of the equation and can be eliminated from both sides.

2007-04-08 00:09:27.0 -- Comments [8] ; Permalink ; Trackback.
trust

Tuesday April 03, 2007

[ Economics ] Political Economy of Open Source Communities

Lots of people have said lots of things about open source communities.

Among the books I have seen on shelves and articles in books and online, I've been wanting to read Steven Weber's 2004 book The Success of Open Source but time has never allowed.

Finally, I've been able to start and finish the first 15 pages of Weber's book, and I can tell you that it has all the right elements and sources for its analysis of the political economy of open source communities. Mancur Olson's work, transaction cost economists', Chester Barnard's and others' are weaved together beautifully in those pages.

I look forward to reading more of it as time allows, and I'll be quoting from Weber, here.

2007-04-03 16:23:35.0 -- ; Permalink ; Trackback.
economics open-source politics programming software

Thursday March 29, 2007

[ Economics ] Inducement and Growth

Douglass North, a Nobel Prize winning economist, writes: 

A stationary state will result when there is no inducement for individuals in a society to undertake those activities that lead to economic growth. Granted that individuals in the society may choose to ignore such positive incentives, and that in all societies some are content with their present situation; yet casual empiricism suggests that most people prefer more goods to fewer goods and act accordingly. Economic growth requires only that some part of the populace be acquisitive.

It seems to me that acquisitiveness does not embody the only sufficient condition for economic growth. Other models of growth involve social growth for social purposes which create a more living environment, leading to greater productivity and growth through the modified activities of members of a society. Here, no acquisition may have happened. Only changes in the environment of activity has transformed the quality and quantity of it.

2007-03-29 08:11:02.0 -- Comments [3] ; Permalink ; Trackback.
economics growth

Monday March 26, 2007

[ Economics ] Open Source and Property Rights

Open Source development—whether it is OpenOffice, Apache, Open Solaris, Linux (Debian), Sun Studio, Open JDK, Apache Derby (Java DB), PostgreSQL, Glassfish or Netbeans—engages communities in production of value governed by a revolutionary model for property rights, emphasizing open distribution of software rather than the traditional "exclusive-rights" notion of property.

The new property model finds its grounding in the use of the Internet as the backbone for parallel development of relatively complex systems of value generated by (non-idyllic) communities of developers—large quantities of value being generated for little, direct financial compensation. 

In the exclusive-rights model of property ownership, the state uses force (or the threat of force) to prevent "unlawful" use, in order to "secure" those rights and encourage their development. 

In the open-source model of property ownership, the width of distribution and availability represents the only "security" that needs to be provided.

The state's role must be vastly different, and it must be focused on rights of distribution and use, and of mixing. Being a vastly different model of ownership, open source has often confronted a state which wants to apply its traditional understanding of property and its "security." We have witnessed this with property "rights" over content because general content in the digital-distribution world possesses many characteristics similar to software.

2007-03-26 11:19:44.0 -- ; Permalink ; Trackback.
community content economics ownership property society software

Sunday March 25, 2007

[ Economics ] Risky Loans Story Surfaces more Fully

Several weeks earlier, in mid February 2007, The Wall Street Journal first reported on the risky subprime loans' defaults and subsequent mortgage-backed securities losses. The news gradually broke into the more popular press. A couple of weeks ago, BusinessWeek, carried a cover story about the subsequent volatility in the stock market, and now, The Economist carries a "briefing" on the subprime defaults. (Subscription may be required for viewing.) According to The Economist, of the $40 tillion debt market (including the $10 trillion mortage market), only $650 billion relates to the adjustable-rate subprime loans. This has some optimists believing that the economy will avoid a credit crunch. Others, like Stephen Roach of Morgan Stanley, have "called subprime mortgages the new dot coms," according to The Economist.

Of the $10 trillion mortgage loans, some 75% are repackaged as mortgage-backed securities (or bonds). Some two thirds of borrowers have good credit and fixed interest rates. However, a growing number have weak credit and adjustable rates, and "little, or no, cushion of home equity."

When the housing market began to slow, lenders pepped up the pace of sales by dramatically loosening credit standards, lending more against each property and cutting the need for documentation. Wall Street cheered them on. Investors were hungry for high-yielding assets and banks and brokers could earn fat fees by pooling and slicing the risks in these loans.

Standards fell furthest at the bottom of the credit ladder: subprime mortgages and those one rung higher, known as Alt-As. A recent report by analysts at Credit Suisse estimates that 80% of subprime loans made in 2006 included low “teaser” rates; almost eight out of ten Alt-A loans were “liar loans”, based on little or no documentation; loan-to-value ratios were often over 90% with a second piggy-bank loan routinely thrown in. America's weakest borrowers, in short, were often able to buy a house without handing over a penny.

... A new study by Christopher Cagan, an economist at First American CoreLogic, based on his firm's database of most American mortgages, calculates that 60% of all adjustable-rate loans made since 2004 will be reset to payments that will be 25% higher or more. A fifth will see monthly payments soar by 50% or more.

... Mr Cagan marries the statistics and concludes that—going by today's prices—some 1.1m mortgages (or 13% of all adjustable-rate mortgages originated between 2004 and 2006), worth $326 billion, are heading for repossession in the next few years. The suffering will be concentrated: only 7% of mainstream adjustable mortgages will be affected, whereas one in three of the recent “teaser” loans will end in default. The harshest year will be 2008, when many mortgages will be reset and few borrowers will have much equity.

Mr Cagan's study considers only the effect of higher payments (ignoring defaults from job loss, divorce, and so on).... Mr Cagan's work suggests that every percentage point drop in house prices would bring 70,000 extra repossessions.

The financial markets should be able to whether these losses, The Economist observes. Mr. Cagan's estimate of losses, $112 billion, compare with the $600 billion "wiped out on the stockmarkets as share prices fell on February 27^th." However, loss of confidence will affect the collateralized debt orbligations (CDOs) markets and may lead to demand for higher spreads and a classic credit crunch.

Finally, a historical dictum: A loose monetary policy instituted to save the economy from the disasters of one bubble can only lead to another bubble, perhaps of a larger impact.

The bursting of the stock-market bubble in 2000 led to a plunge in investment at American firms. To stave off recession, the Federal Reserve loosened monetary policy. Short-term interest rates fell to historic lows, propping up consumer spending, but also fuelling the housing bubble and sowing the seeds of today's upheaval.

Only disciplined frugality, savings and attention to real assets, and not more legislated regulatory burdens, can help rein in break-neck speculative swings.

In the meantime ...

Nancy Trejos of The Washington Post reports the most recent housing statistics released by U.S. Department of Commerce on March 26. The statistics speaks of a sharp drop in new home sales in February and it has pulled down all three major indexes on the Wall Street on its release. There is quite a bit of regional variation, Trejos reports:

The supply of new homes for sale increased by 1.5 percent in February to 546,000. At the current sales pace, it would take 8.1 months to get through that supply, up from 7.3 months in January and 6.4 months a year ago.

By region, the Northeast had a 26.8 percent drop in home sales, the steepest decline in the country. The Midwest had a 20 percent drop. The South, which includes the Washington region, was down 7 percent.

The West was the only part of the country to have an increase in sales, up 24.6 percent from January.

2007-03-25 00:43:21.0 -- ; Permalink ; Trackback.
economics loans mortgage risky

Saturday March 03, 2007

[ Economics ] Protracted Wars and Asset Attrition

Much earlier, I've written about the use of war spending as a quick-and-dirty means to apply a consumptive forcing function in an economic cycle. (On the issue of economic time scales and the dynamics involved, I have also written an earlier note.)

When aggressive wars are waged with the purpose of acquiring resources (geopolitical bases, currency values, people, mines, energy resources, transportation resources, land, etc.), besides the moral bankruptcy of such a behaviour, the utilitarian calculation that takes the aggressor into war also stems from the "positive" consumptive impact on its economy. The "positive" nature of the impact shows up in the hope of the application and execution of war in a short time scale in order to solve a specific problem in a specific economic cycle. The impact of war spending on the cycle will always prove more dramatic than any long-term investment, whose impact will be faced and felt in a term longer than of interest to the executioners of "national interest."

However, matters of war and peace, and life and death, have always proved to be more complex than what simple utilitarian calculations tend to reveal.

Despites rosy predictions and enthusiastic promises pundits of the war party give, the aggressive war itself drags on when it faces resistance, which it often does. Note that historians have found it odd and unusual when an aggressive war has encountered no resistance. While the planners of aggression always do what they can to dismantle resistance, the aggressor should always bet on encountering resistance to its aggression. (Even little Melos resisted the Athenian armada.) Occasionally, the aggressor perpetrates extreme violence in order to prove resistance futile. As a consequence, those who resist fold temporarily but only as a means to survive for a better day.

So, as a historical experience, all aggressive wars in history have bred resistance in various forms, scales and stages. Often the aggressor is quite well-versed in history and knows this fact of history full well. So, the aggressor takes care only to attack those who cannot be expected to defend themselves or only targets which have been "softened" through years of brutal but calculated preparation. Of course, not always do such preparations and campaigns succeed. History is littered with their failures more than with their successes. However, the successes occur with enough frequency to salivate the aggressor's appetite.

With the stretching of the war beyond expected scope, larger chunks of hard-to-renew resources continue to be wasted on it. Even as such wasteful spending may be advocated to drive further consumption, in reality, it generates no added value to supplement existing asset values. Hence, a general asset attrition sets in, and by extension, inflation takes hold, and soft and hard landings beset various asset-based sectors of the economy. Note that all sectors of the economy ultimately prove to be asset-based if we are daring enough to include, also, non-physical assets in our utilitarian calculations. We can think of various types of assets -- for example, national currency value (determining the value of various forms of savings and investments), stock values, real-estate values, expertise, know-how, skills and knowledge -- these are all assets, the latter few examples of which, by themselves, are non-physical assets even if they may have physical representations. Note that the most important assets are the human beings. This makes a mockery of aggressive war as one waged "for the hearts and minds" of the targets of aggression.

As war drags on, a grinding attrition grips all national assets. Resources that should have been invested to improve such assets are wasted, and the negative long-term economic impact draws itself near. (I refer the reader to a note elsewhere which extracts one of Nobel Prize economist Joseph Stiglitz' relevant observations on the cost of war.)

In conclusion, we should note that asset attrition has a multiplicative effect at a macroeconomic level. The value of assets deployed in a value network depend on the value of other asssets. So, as a particular group of assets lose value due to a lack of proper and long-term investment, they depress value of other, related assets.

2007-03-03 00:14:47.0 -- Comments [7] ; Permalink ; Trackback.
assets economics wars

Thursday February 22, 2007

[ Economics ] Commerce and Development

In his commentary, "Competitive Cooperation" written to honor the 50th anniversary of the Treaty of Rome, the 2004 Economics Nobelist Edward C. Prescott reminds the readers of the importance of commerce in mutual economic development and growth.  

Let's review some historical facts. With the signing of the Treaty of Rome in 1957, France, Italy, Belgium, West Germany, Luxembourg and the Netherlands formed what would eventually become the European Union. For six decades prior to the treaty, those countries were about 55% as productive as the U.S. But over the following 25 years, those countries essentially caught up to the U.S. in terms of productivity.

When that historic economic treaty was signed, three countries were roughly on par with those original six -- Denmark, Ireland and the United Kingdom. However, a funny thing happened in subsequent years -- those three countries started falling behind their former peers. So in 1973 they joined the original group and their economic fortunes improved. It took time, but the U.K. now is as productive as Germany.

...And what of Latin America? Unfortunately, the region provides a case study in the perils of protectionism. Recent research by my Minneapolis Fed colleagues, Lee Ohanian and Jim Schmitz, and two co-authors, shows that from 1950 to 2001, per capita GDP for Europe increased 68% relative to the U.S.; Asia increased by 244%, while Latin America decreased by 21%. This is all the more striking when we realize that Latin America's per capita GDP actually exceeded Asia's by 75% in 1950.

Perhaps, it is time for a Latin American Union.

Some nations use trade policies to punish others. Whether politically motivated or otherwise, policies that raise barriers to potentially beneficial trade or create trade zones or alliances that exclude others are ultimately doomed to lead both groups worse off. Of course, the exclusionists, when powerful, come to believe they represent the house with infinite resources in the trade gamble.

Note: In his Getting it Right: Markets and Choices in a Free Society, Robert J. Barro advances points similar to Dr. Prescott's.

2007-02-22 18:38:31.0 -- ; Permalink ; Trackback.
commerce development economics international trade

Sunday February 18, 2007

[ Economics ] CDOs and Default Risk

Elsewhere, I follow the recent instabilities in the collateralized debt obligations market, and in particular, the segment involving mortgage-backed securities.

2007-02-18 23:40:47.0 -- ; Permalink ; Trackback.
economics finance real-estate

Saturday February 17, 2007

[ Economics ] Driving To Work

Consider the table below, originally published by The Wall Street Journal.

It shows the growth in traffic costs (fuel and lost personal time) in various urban areas in the U.S. from 1983 to 2003.  The actual and aggregate "cost" of a transportation system that relies, primarily, on individuals driving themselves to places goes well beyond that of fuel and lost personal time. One must also include other costs such as health care, insurance, repairs, etc., which arise when people have no reliable public transportation choice and have to drive themselves to work and other places over long distances.

Table from the WSJ.

When active producers in an economy spend large parts of their time and resources driving back and forth to work, they are contributing to the aggregate transaction costs of that economy, making it less "competitive" than economies that make better use of time and resources ("Bush Plays Traffic Cup in Budget Request," WSJ, Feb. 5, 2007). Witness, as examples, public transportation systems in Tokyo and Berlin.

Travel congestion is "increasingly troubling," Transportation Secretary Mary Peters said in an interview. "It's a cost to business and probably affects our ability to be competitive on the global market. But it's also something that just drives people crazy."

It would be misleading to think that work-from-home in the Internet age will solve the problem. A quick analysis of the social life of information would make it clear that work from home has its own significant transaction costs for corporations. So, while by working from home we reduce some aggregate transaction costs, we add others.

2007-02-17 00:08:45.0 -- Comments [2] ; Permalink ; Trackback.
costs traffic transaction