Friday, September 14, 2007

Is Armageddon at Hand?

Lew Rockwell notes what has to be a sure sign of a coming apocalypse:

BTW: About 200 enthusiatic, sign-carrying young people accompanied Ron [Paul] on a walk from his breakfast fundraiser to his luncheon event. I never thought I'd be part of Republican parade on the streets of San Francisco chanting antiwar slogans!

UPDATE: Now with video!

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So, What Does a Bank Run Look Like?

Despite backing by the Bank of England, customers of Northern Rock PLC are flocking to withdraw their funds:

Northern Rock has 76 bank branches, according to Hunter. By 11 a.m., dozens of people formed queues on the sidewalk outside the Moorgate office, the Maddox Street branch in the West End shopping district, and the Kingston Upon Thames outlet in southwest London.

The Bank of England is stepping up to the plate, what's the issue here?

The issue is that financial markets are doing exactly what they are supposed to do. Savings is low, demand for funds is high, so the interest rate rises both encouraging savings and lowering demand. It should be a great time for the average wage-earner to toss his extra quid in a savings account and let his money work for him.

But, Northern Rock was fully loaned out. Not content to quit making more loans until their customer deposits increased, the bank went to the Bank of England and complained about the "liquidity crunch." They wanted a lower discount rate (the rate at which the Bank of England loans money to commercial banks). The problem is, a lower interest rate is a signal to consumers to save less and entrepreneurs to borrow more, thus exacerbating the "liquidity crunch."

So, Northern Rock's customers did what depositors do when their bank starts making noises about needing funds; they rushed to pull out their deposits.

"It's scary,'' said Peter Pye, 60, a retired university lecturer standing in a line of about 30 people outside the Moorgate branch in the financial district. "I have my life's savings in Northern Rock.'' He said he would withdraw a "six- figure'' sum and leave 5,000 pounds in the account.
"Why leave your money in a bank that obviously has some major problems?'' said Michael Ribotham, 74. "I'm not young and don't have a chance to make it back again.'' Ribotham was waiting at Moorgate for about 40 minutes.

What does "backed" by the Bank of England really mean? Well, at the end of the day, Northern Rock compares the total amount of funds they have loaned out and the total reserves they have deposited with the Bank of England. If their reserves are below the required reserve ratio, they write an IOU to the Bank of England, and the Bank of England increases their reserve account in the computer.

However, the Bank of England doesn't have a pile of money sitting there to make the loan. It increases Northern Rock's reserve account without making a corresponding decrease in another account. So, in other words, the money it loans to Northern Rock is created out of thin air.

Now, if you happen to have a few pounds in your wallet or bank account, those funds are now competing with the newly-created funds for the goods on the grocery store shelf. Through the magic of central banking, the Bank of England stole a bit of your purchasing power right out of your wallet and handed it to Northern Rock.

Keep in mind, there is no law that says Northern Rock has to be fully loaned out. There is also no law that says the Bank of England has to create new money to bail them out. But, there are things called legal tender laws which say that if someone presents you with this fiat money (which is now worth less than it was this morning) to pay a debt, you have to take it.

Meanwhile, the Bank of England is richer to the tune of the interest they charge for the loan to Northern Rock.

Is anyone concerned about the failure of this Ponzi scheme?

"There is no risk,'' said James Hamilton, an analyst at Numis Securities in London. "The Bank of England said Northern Rock is solvent.'' Hamilton said that "as credit turmoil will return to normal, Northern Rock's business will.'' The British Bankers' Association said there's "no reason for either mortgage customers or savers to worry.'' The group provides London interbank offered rates, or Libor, a benchmark for money- market rates in the dollar, the euro and 11 other currencies.

Guess not.

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Wednesday, September 12, 2007

Something Fun for Once

Patrick Rishe takes on pro sports salaries on his ProfCorner Blog. It's always dangerous to criticize a professor, but I've got a few nits to pick with his methodology.

Rishe starts out strong, noting that nobody holds a gun to your head forcing you to consume mass quantities of pro sports entertainment:

No one puts a gun to my head when I sit on my BLEEP for 6 hours at a sports bar to watch the opening day of the NFL season.

No one is twisting my arm to shell out marked-up prices for sporting events on Stubhub.

Free's a BLEEP sometimes isn't it.

Pro athletes, no different from highly paid movie stars and music icons, entertain the masses, and possess the rare attributes to do it or not.

If I had a body like Matthew McConaughey and taught my econ courses shirtless and simulcast to an audience of millions worldwide that expected to gain Alan Greenspan-like wisdom from merely watching me speak, I'd be a millionaire to.[sic]
Then Rishe derails. If the customers are buying entertainment, what does Rishe say the players are producing? could argue that NBA players deserve more compensation because one player's marginal contributions to production (i.e. wins) is more significant.
Oops. I've got news for the professor: in every game, there is a winner and a loser. You can't have one without the other; the losing team is just as productive as the winning team in producing a "win".

The true product is the one that the customer consumes: entertainment. While Rishe may contend that the losing team's product is inferior to a winning team's, in doing so he would deny the existence of the "die hard fan." In other words, the quality (and value) of the entertainment product is purely in the eye of the beholder.

In fact, an individual consumer of pro sports entertainment could very well be ambivalent about the winner or loser of a specific game and still place a very high value on the entertainment. Additionally, if the consumer doesn't particularly care for a rival team, an individual consumer may place a higher value on a loss by that team.

Given that, the only accurate value judgments one could make about an individual customer are that, assuming the consumer is a fan of the team in question:

1) that customer values the entertainment of a winning season over a losing season;
2) that customer values the entertainment of specific superstars over other superstars, and;
3) that customer therefore values the entertainment of a winning season with the preferred superstars over a losing season with or without the other superstars.

The method one would use to aggregate individual consumers into a market demand necessarily varies from one market to another. Due to a whole host of variances from market to market, you can not determine aggregate demand in Milwaukee the same way as in Los Angeles or even Charlotte. Those markets demand entirely different equations.

Which leads to another problem with Rishe's analysis:

The Biggest Misnomer in Sports

Higher ticket prices are not caused by higher salaries.


Truth is, teams raise prices either because they feel they can or they feel they must. If a team believes that demand for their product is sufficiently high and that raising prices will not cost the team lost attendance, then prices will increase...irrespective of team payroll.
First, the revenue equation is price times attendance, not price plus attendance. Revenue maximization depends on the elasticity of demand not (necessarily) filling the bleachers. Second, this is a sure case where, due to locality effects, a rising tide floats all boats.

If, by raising the amount they are willing to bid for contracts (salaries), Anaheim is able to attract the talent with a broad enough appeal to decrease the elasticity of demand for Angel's tickets, then indeed the higher salaries cause an increase in ticket prices. Even if Anaheim is not revenue-maximizing, scalpers sure will be. Additionally, if Padres and Dodgers tickets are the next best use of entertainment dollars, ticket prices will also go up in San Diego and LA (otherwise there will, again, be a demand surplus that scalpers will fill).

Note, those are both "if"s. Another "if" is that if the salaries are raised and the elasticity of demand is unaffected or increased, then raising ticket prices will decrease attendance and revenue. The point to be made is not that higher salaries have to cause increases in ticket prices, it's that they may.


Practically speaking, many teams have set their ticket prices for the upcoming season before knowing what their payroll for that season will be. So again, this fact partially debunks the myth.
There is no way to set ticket prices without at least a, wait for it, ballpark payroll figure. That's why, I'm sure, that owners employ a small army of accountants, economists, and market research firms like Sportsimpacts to prognosticate.

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Thursday, September 06, 2007

A Parable on the Use of the US Armed Forces

Imagine you and I live on a farm, with separate houses on either side of a pond. As part of our contractual arrangement for living on the same farm, you are to do the fishing for both of us, and I'm to tend to the fields.

Now, the area we live in is fertile and normally receives more than enough rainfall to keep the crops healthy. Being wise planners, however, we install an irrigation system that draws water from the pond in case there is a drought. Since use of the irrigation system will affect your fishing, we decide that I will hold the key to the pump motor, but that you are the one to determine that there is, in actuality, a drought.

For years, our arrangement works nicely, and we survive a few tough summers with both fish and crops aplenty. At some point, however, you notice that I've been doing some irrigating when there is no drought and confront me on what you see as an overstep.

"It's simple," I explain, "sometimes the crops need a little extra water even though there is no drought. Since I'm the one in charge of the pump motor, it's my call to use it when I need to."

"No," you reply. "By the intent of our agreement, I'm the only one who can authorize the use of the pump motor whether or not there is a drought. I'm reasonable and know that emergencies may crop up where you can't get my authorization beforehand, but in those cases you need to get ahold of me as soon as possible and let me make the decision to keep the irrigation system on or turn it off."

Well, we never really come to a meeting of the minds on this. I maintain that, since I have the key to the pump, I determine when it gets used and you maintain that I need your authorization. Instead of arguing about it, though, I just declare every use as an emergency and back-brief you on the situation. That keeps the peace, but the pond is slowly being drained until it seriously threatens your ability to fish.

You check with your lawyer to see what you can do to restrict my use of the irrigation system without destroying the crops. Your lawyer tells you, "unfortunately, the original agreement made only contemplates use of the irrigation system during a drought. Since you didn't mod the original agreeement to include non-drought use, whether or not you provide authorization is irrelevent."

My advisor acknowledges the same circumstances, but comes up with a different read. "It's true that the original agreement only contemplates a drought and hasn't been modded. Therefore, non-drought use is purely by your discretion. Besides, even if the 'non-drought authorization' garbage were binding, he has given you open-ended authorization to use the system."

This parable has no end or moral, it is just meant to bypass impassioned rhetoric to show the two reads on the use of the US Armed Forces. You are the US Congress, I am the President, our original agreement is the US Constitution, the irrigation system is the armed forces, drought is war, and the "non-drought use authorization" is the War Powers Resolution of 1973, vetoed by President Nixon, overridden by the congress, and considered unconstitutional by every President since.

After the second GOP debate, my adviser was Sean Hannity and your lawyer was Presidential candidate Ron Paul (who is not a lawyer but a strong constitutionalist). At the end of this clip is the quick exchange about declaration of war:

Who is right? Well, it's certainly not cut-and-dried (as the parable shows), but Dr. Paul has every President from Nixon to the current President Bush on his side that the War Powers Resolution is unconstitutional (although I doubt any would agree with him that the use of the armed forces is constitutionally limited to declared wars). Hannity, who rarely expresses any rationale beyond gut instinct, seems to accept that the War Powers Resolution IS constitutional, although he is contradicted on this point in the book Let Freedom Ring by...Sean Hannity.

Last night, Hannity was more civil toward Congressman Paul. I get the feeling that Hannity knows he's going to be dealing with Dr. Paul for a long while, but also that, as he mentions at the very end of the clip, "it's always good to spar with you":

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