Three Links from Mark Thoma
By Arnold Kling
Chosen from among those here.
authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them
Where are the customers’ yachts? I can think of some ways in which financial innovation differs from other forms of innovation. One difference is that financial innovation often serves the purpose of regulatory arbitrage–devising an instrument to comply with the letter of regulation while evading its spirit. Another difference is that financial innovation often is used by clever Wall Street bankers to separate less sophisticated investors from their money. In that sense, it is sort of like innovation in stealing credit card information. In the case of bankers outsmarting their clients, you can blame the victims for failing to be wary or to protect themselves.
I guess people have little choice but to place at least some trust in investment bankers, even though that trust can easily be violated. Kind of like government.
2. Mark DeWeaver thinks that some of China’s industrial capacity is not so impressive.
Consider cement production, where, according to the China Cement Association, 38% of capacity consists of “shaft” kilns. These have been obsolete in most of the rest of the world for over a century, and accounted for less than 3% of production even in 1957, when most of China’s cement plants were imports from Eastern Europe. Nowadays, however, shaft kilns are a favorite of local governments because they can be built cheaply and quickly and generate growth and employment. Achieving economies of scale and lessening environmental impacts simply are not priorities.
Read the whole thing.
3. Matt Yglesias meditates on elites and masses.
we’ve outsources primary responsibility for macroeconomic stability to a quasi-independent technocratic institution that’s primarily influenced by elite opinion rather than mass sentiments. This model is problematic in some ways, but in principle one of its advantages should be an ability to do the right thing at a time when the public may be confused by analogistic reasoning. Unfortunately, the same skew in favor of elite opinion also seems to me to give the Fed a skew in favor of elite interests and joblessness is primarily a problem at the moment for the sort of people who aren’t likely to be invited to any FOMC members’ Christmas parties.
From the Wall Street and Washington perspective, the banking system is the key to the whole economy. It makes sense to transfer wealth to the banks, and that money has to come from ordinary people. Ordinary people will not make that transfer voluntarily (in Unchecked and Unbalanced I offer the thought-experiment of having Henry Paulson fund TARP with donations). So you have to take wealth from ordinary people for their own good. Who is Matt Yglesias to question that?
See also Peter Boone and Simon Johnson on why Ben Bernanke should not be reconfirmed.