The Pope Reflects On The Economic System And The Culture Of Prosperity

The Pope argues that we have sacralized our current market system.  It has become sacred even as it deadens our spirituality.  It has produced a culture of prosperity that is spiritless.  That is why we pay no attention to the death of a homeless person who does not have access to healthcare and we pay excessive attention to a two point drop in the stock market.  The Pope's comments provide a good lead into a post below on inequality. It summarizes a speech in a place of worship for the current economic system.  It makes the case for a culture of prosperity that is enabled by the free market economy.  It also ridicules the liberal devils who would destroy our prosperity in order to reduce inequality that it does not regard as a problem.

Betting On Interest Rates Can Be Bad For One's Career

Bill Gross was the CEO of the largest bond fund in America.  He did well when he was bullish on bonds but he decided that interest rates would spike when the Fed ended QE2.  He was wrong and that was not good for his career at Pimco.  An article was written in sympathy for Bill Gross.  The point of the article was Gross was a victim of quixotic behavior at the Fed which has interfered in the bond market.  Paul Krugman, does not understand everything that was happening at Pimco which cost Gross his job, but he argues that there is a good reason why interest rates have not risen in response to government borrowing.  Conventional wisdom suggests that government borrowing will crowd out private borrowing and drive up interest rates.  That is, there will be excessive demand for limited savings.  That cannot happen when our problem is that private demand for savings is well below the supply of savings.  Government borrowing simply absorbs the savings that are not demanded by the private sector.  Interest rates won't spike until the private sector, which has been deleveraging, decides to lever up.

Why We Should Stop Worrying About Inequality

John Cochran spoke at the conservative Hoover Institute as part of a program to honor the memory of one his colleagues at the University of Chicago.  Most of the speeches were in reaction the current discussions about the rise in inequality in most developed economies.  Cochran's speech reinforces some the points made by other presenters.  His speech provides a good summary of conservative reaction to the problem of growing inequality.   He argues that government is part of the problem and should not be part of the solution.  In particular, he is concerned about all of the attention that is being focused on the super rich.  He can't understand why we should be concerned about hedge fund managers earning billions.  If they earned less the poor would still be poor.  Making the tax system more progressive and confiscating the property of the rich would make us worse off.  That would encourage government to develop more programs that don't help the poor. 

I'm sure that many of Cochran's talking points got a rise out of the Hoover audience.  Its worth reading his speech to gain a better perspective on conservative reaction.  We should focus less on inequality and devote more of our attention to the factors that promote prosperity.  They are very simple.  Government should have a minimum role in the economy.  Economic freedom is the key to prosperity.  We have some problems that we need to address but reducing income inequality is not one of them.

Why Did EBay Spin Off Pay Pal?

E-Bay has decided to spin off Pay Pal into a separate company.  This article raises questions about the motivation for that decision.  Carl Icahn, a major shareholder in E-Bay, pushed E-Bay to make the spin off.  The CEO of E-Bay argued that the synergy between E-Bay and Pay Pal had strategic importance.  The board ultimately sided with Carl Icahn and the CEO will step down after the two businesses are separated.

There are two motivations for spinning off Pay Pal from E-Bay:  The strategic question is whether the two businesses are better off operating independent from each other.  Only time will provide the answer to that question.  The other question is whether the combined market capitalization of the independent firms will exceed the market cap of the combined firm.  That will depend upon how investors value the separate firms.  It is likely that the current E-Bay shareholders, like Carl Icahn, will benefit immediately from the spin off.  So will the Wall Street banks that are involved in the process. They have less interest in the long term viability of the firm than they do in what happens to the combined capitalization of the separated firms.  The decision to separate the firms is consistent with the mission of the corporation to place primary emphasis on promoting the interests of their shareholders.  Large investors, like Carl Icahn, and the Wall Street banks are very happy with the single focus of publically traded firms on increasing shareholder value.

Why Did The Fed Let Lehman Fail?

New documents have been made public which raise questions about the decision to let Lehman fail.  They indicate that the issue of Lehman's solvency depended upon the value of Lehman's assets.  A bank is insolvent if the value of its liabilities exceed the value of its assets.  Two teams at the NY Federal Reserve made an effort to place a value on Lehman's assets.  One team determined that Lehman's assets were greater than its liabilities.  Another team determined that Lehman was insolvent.  Private banks were also asked to determine the value of Lehman's assets.  They placed a low value on Lehman's assets.

The principle players in the decision to let Lehman fail were the US Treasury Secretary, the Chairman of the Fed and the President of the NY Fed.  They decided to let Lehman go into bankruptcy.  That decision accelerated the run on the global banking system and led to the Great Recession.  Each of them claimed that they did not have the legal authority to rescue Lehman.

Several questions were raised about the decision to let Lehman fail.  If the Fed decided to rescue Lehman, the value of its assets would have risen.  The decision not to rescue Lehman caused the value of its assets to decrease in value.  Some argue that the Fed had the legal authority to rescue to rescue Lehman but it chose not to use that authority.  The Treasury Secretary made it clear that he did not want to be known as "Mr. Bailout" and that he was not prepared to use public funds to rescue Lehman.  The decision to let Lehman fail may have been made for reasons beyond the legal authorities of the Fed and the Treasury to provide the necessary support to the bank.

Seven Bad Ideas In Economics

Paul Krugman reviews a book that places a lot of our economic problems on the economics profession.  It does so by criticizing seven ideas that are central to mainstream economics.  Krugman does claim that any of these ideas are good ideas.  He argues that they are held by a fringe group within the profession.  They were used as part of a decades long attack on Keynesian ideas, which has been somewhat successful, and politicians have used them to reduce the influence of government in the economy, but the majority of economists supported the use of federal spending to stimulate the economy. 

Krugman realizes that many of the economists who are associated with the seven bad ideas have won Nobel prizes in economics.  He may be going a bit too far in claiming that those ideas are held only by outliers in the profession. 

HBR Explains Why The Fed Is A Weak Regulator

This article offers an explanation for the NY Fed's weak response to some of the issues between it and Goldman Sachs that are described below.  It makes two comments that are worthwhile.  Goldman has no conflict of interest policy because its business model depends upon advising two parties on different sides of the same deal.  That is how it makes large profits.  The point is that we should not accept regulatory capture because we believe that nothing can be done about.