Reconnecting with Economics

I haven’t spent as much time thinking about economics since college, when my second major was the subject now on every mind these days. I have dedicated the last 15 years primarily to my first major, computer science, and my first love, entrepreneurship. But that has changed in the last six months.

I was invited by Tim Kane and Bob Litan of the Ewing Marion Kauffman Foundation, the world’s largest foundation dedicated exclusively to the cause of promoting and fostering entrepreneurship, last week, to a small conference of economics bloggers in Kansas City.

About 30 of us spent a stimulating day, and two dinners, discussing the current crisis, cause, effect, path forward, policy issues, and a variety of other topics, including one that is currently on many minds: the future of media.

I am going to try to synthesize some of the ideas that I thought were particularly interesting and constructive; seen through the lens of my own personal bias, of course.

Chief among the questions I have been wrestling with is the concept of bail-outs. We’re bailing out banks that behaved very badly. We’re bailing out homeowners who should never have bought homes in the first place. It seems like we’re rewarding bad behavior and irresponsibility on a grand scale.

Experts like Ben Bernanke tell us it needs to be so.

I have been listening. Studying. Trying to bridge the gaps in my understanding, while also listening to my own instinctive negative response to the decisions President Obama is making.

To that quest, the Kauffman conference added a couple of interesting points. Brian Carney of The Wall Street Journal asked the question that resonated with me the most: Why don’t we let the big banks fail, and reward the smaller ones, perhaps some of the regional banks, that have been performing well, and can, in fact, attract private investment, instead of the TARP money?

This morning I read Maria Bartiromo’s wonderful interview of Jim Rogers on the crisis and the business of bail out in Business Week. Rogers validates every single instinct I’ve had at the raw intuitive level. He also underscores one of my main concerns about Obama - the complete lack of business experience, and consequently, a colossal lack of business instinct. The other concern, for the record, is Obama’s basic philosophy of socialism and welfare economics, something else that drives HIS instincts, in radical opposition to mine.

Rogers asks the same question: Why are we rewarding bad behavior?

Business Week’s Michael Mandel says that the reason we’re bailing out banks is because the creditors who would really be in trouble if we didn’t are the Europeans. Brian asked, “Why is that our problem?”

I’m not totally clear about this issue, and don’t know enough to be able to assess. But it certainly provided some good pointers for research.

Tyler Cowen has a good piece in the NY Times today on the banking and regulation issue. Mark Thoma, professor at the University of Oregon, a monetary policy expert, provides links on a regular basis to related writings - one of the best-edited sets of additional pointers to economics writings on the web.

Bob Litan tried to assess the issue of regulation: more? less? desirable? undesirable? effective? ineffective? The consensus was, that more effective regulation is desirable, but the likelihood of what the government will be coming up with being effective is nominal.

To this, I had a suggestion: When we design a system - software or hardware - we tend to put it through thorough testing. We explore all the corner cases. Why don’t we follow a ’system design and stress testing’ approach to designing the future financial system? Why don’t we systematically debug?

The answer was, It ain’t going to happen.

Why not?

Don Boudreaux who writes Cafe Hayek, and chairs the economics department at the George Mason University, is another person who shares my instincts. His More Unalloyed Arrogance is a must-read post from Saturday.

As the government tries to assess what might stimulate entrepreneurship, I don’t see many “practitioners” of true entrepreneurship - the entrepreneurs - represented in President Obama’s advisory counsel. You are very familiar with my Bootstrapping: Weapon for Mass Reconstruction thesis. Who represents the voice of the bootstrapped entrepreneur in the government? Who understands the extreme cash-strapped conditions under which (s)he operates? Without understanding, how can they design an effective system?

Arnold Kling, a fellow MIT alum, shares my observation on bootstrapping, as do some others. Yet, we’re constantly wrapped around the axle of venture capital as the primary driver for entrepreneurial growth. Very, very frustrating!

I will write an additional piece on the Future of Journalism discussion, which I thought was very interesting. Stay tuned.

But before that, a big thanks for Tim and Bob for organizing this excellent forum. I generally dislike conferences, unless they’re very small, and are structurally designed for brainstorming. This format, thus, was just perfect!

Comments

[Steven Hansen:]

good commentary and questions.

obama is pretending he knows the answers and is ignoring conflicting ideas. as you say he is not testing or debugging - just acting.

the only thing that runs through my mind is that at this stage there is little to do but stand back and watch the carnage - and get ready to step back in when things get better.

Mar 02 03:38 AM

[Laxman.R:]

Interesting thoughts. On the bail-out(s), I am inclined to agree with you. Bad behavior is amply being rewarded - sadly. Look at AIG's situation today, a colossal $62B (projected) loss, but a nice parachute of $30B of TARP money softens their landing. The TARP is a big joke and an utter waste of public funds. Companies that literally gambled away shareholder money are being propped up. Confidence and trust has been lost. I hope that at the very least the government is working to indict some of the folks who got us into this mess in the first place. It is tall order - but I think it will instill two vital intangibles that have been seriously eroded - "confidence and trust".

Mar 02 03:40 AM

[Ferdinand E...:]

Hmm, too bad you were not one of my economics students, Sramana. I would have taught you how to think. If you believe that the US has big troubles now, just consider how it would have looked if on the front page of newspapers in the rest of the world - and the US - the headlines read 'OBAMA HAS CONSIGNED THE US BANKING SYSTEM TO THE CAN'. Beautiful, wouldn't you say.

I'm surprised though that Michael Mandel wasn't hip. Well, it's Fortune and Forbes for me in the future,

I noticed that you mentioned Arnold Kling. He's the guy who thought that speculation was behind the oil price escalation, isn't he? The next time you see him inform him that he should stay away from energy economics. Amazing, isn't it, that the economics department at MIT that once had people in it like Paul Samuelsson and Bob Solow could have gone to ....somewhere..

Mar 02 09:14 AM

[ArtfulDodger:]

SM wrote: "The other concern, for the record, is Obama’s basic philosophy of socialism and welfare economics..."

And SM also wrote: "I don’t see many “practitioners” of true entrepreneurship - the entrepreneurs - represented in President Obama’s advisory counsel."

These two statements I agree with wholly, and they're what drives fear through me regarding our investments in America and our freedoms.

You can make money under socialism, but the more of it you have the more freedoms you lose.

Clearly, the nation is in a precarious situation—one that we can only sit back and watch and wait to see which profit-making entity the government will attack next.

What's worse is there are now no restraints on how far the most leftist Congress and Administration can go toward socializing the nation and restricting freedoms.

Really frightening!

Thank you very much for the article.

Mar 02 10:06 AM

[Robert Mcdo...:]

Sramana,
Don't discount Obama or his team - this is not about business sense but economic sense - the two are not aligned and should not be - the economy is not the sum-total of business, but much bigger than that. The moral hazard idea: rewarding big banks for failure - this is not what's happening. Big banks are a public service at the heart of all of the economy, not like any other business sector. The failures have been in the markets, regulatory system, government, among borrowers, in the culture and silo-mentality of banking & finance, in shadow-banking i.e. the failings are widely shared and very widespread. They also go to the extreme trade imbalances and how these have been financed through selling net financial assets to trade surplus countries. As for the bankers - they will all have to pay; very few of the pre-crisis board members will still be at the top tables by the end of the crisis.

Mar 02 12:04 PM

[firstproman:]

Earlier on in 2008 the current meltdown was regarded by some as mainly as a problem for Wall Street. Since then we’ve all learnt that indeed it’s also a problem for Main Street. Layoffs, tougher credit, a slowdown in economic activity etc are now hammering small and large businesses alike. At its core the current economic blow-up is due to a loss of confidence among lenders and businesses and for good reason. As many have been saying for a while the U.S. consumer has been driving the economy largely through debt. Part of what we are going through now is a contraction back to reality.
The current administration is not responsible for the current crisis, REPUBLICAN rabid laissez-faire and Negative Liberty philosophies brought the WHOLE World down into this mess. Yes, the Obamaniks are doing some pretty radical stuff but then nobody has been through this kind of meltdown before. I also am aghast at the size of some of the expenditures (money we don’t have by the way), talk about spending like a drunken sailor; we’re currently spending like a drunken navy!
We may end up discovering that the Keynesian strategy the current administration is pursuing is the right one. If you know better let us know and before you say anything study the Japanese experience in the 1990s for a little while.

Re: rewarding bad behaviour. Not quite. Yes, the U.S. , U.K. and other governments around the world have pumped in public money into "banks" but at a cost to bank’s equity holders. We're actually wiping out old shareholders (through dilution and outright elimination as with Fannie and Freddie). In some cases (Morgan, JP) public funds are going in as preferred shares with greater than 8% coupons. We can argue about the wisdom of investing public funds into what should be private enterprise (banking) but that’s another argument. Bottom line: for the worst off banks the public funds they are getting is a poison pill for existing shareholders.

Mar 02 03:42 PM

[Phil Trupp:]

Robert Mcdowell has it right: business and economics are not the same. The "too big to fail" banks are no longer in a position to be private, shareholder-financed concerns. They have become public utilities propped up by public equity, and as such they are now beholden to their new shareholders--the taxpayers.

No one is especially happy about the situation. Yet the i-banks, through a series of almost unimaginable blunders, enabled by an inept administration in Washington, have driven themselves out of the private sector and placed an enormous and unfair burden on the rest of us.

Meanwhile, Ms. Mitra's fears over Obama's lack of "business experience" may be a bit naive, if not discouraging. Not many presidents have come to office with hands-on business experience. Harry Truman was an unsuccessful haberdasher. Jimmy Carter lost his shirt in the peanut business. Their collective grasp of fundamental economics was practically invisible, save for Truman's union-busting crusades. On the other hand, Ike had no business experience at all; and yet, in partnership with G.M. and a melding of economic teams public and private, he managed to create one of the biggest money makers of all time: the Interstate Highway System. G.H.W. Bush had limited business experience and no meaningful economic sense and left us with a deficit. His son was (is) the Mastermind behind the current financial calamity, and W. did have business experience. He used other people's money to fail. Did FDR have business experience? No, but he understood the metrics of emergency economic policy, a rare quality in any American president.

Perhaps Ms. Mitra is caught up in party politics, which is a vote-getting game and far from policy decisions. Obama is dealing with policy while at the same time juggling the irrelevant political nonsense tossed about by high minded philosophers such as Rush Limbaugh. At a time like this, political games are a waste of time and energy--or worse. Politics makes zombies of otherwise intelligent people.

Talk of new entrepreneurship is all well and good. However, it is made possible by conditions of abundant, balanced wealth and course-corrected fiscal/monetary policy. How much entrepreneurship can we expect when banks refuse to lend money and new fiscal policies are still on the drawing board?

I may be wrong, but my guess is that the Ewing Marion Kauffman event provided a well-meaning outlet for frustration and opinion, touching lightly on serious matters and giving the participants a sense of pitching in to the great debate. Sounds like fun. Alas, am I wrong to believe that fun isn't the best way to find solutions to dire problems?

Mar 02 04:41 PM

[firstproman:]

Well put. Time for us all to get serious.


On Mar 02 04:41 PM Phil Trupp wrote:

> Robert Mcdowell has it right: business and economics are not the
> same. The "too big to fail" banks are no longer in a position to
> be private, shareholder-financed concerns. They have become public
> utilities propped up by public equity, and as such they are now beholden
> to their new shareholders--the taxpayers.
>
> No one is especially happy about the situation. Yet the i-banks,
> through a series of almost unimaginable blunders, enabled by an inept
> administration in Washington, have driven themselves out of the private
> sector and placed an enormous and unfair burden on the rest of us.
>
>
> Meanwhile, Ms. Mitra's fears over Obama's lack of "business experience"
> may be a bit naive, if not discouraging. Not many presidents have
> come to office with hands-on business experience. Harry Truman was
> an unsuccessful haberdasher. Jimmy Carter lost his shirt in the peanut
> business. Their collective grasp of fundamental economics was practically
> invisible, save for Truman's union-busting crusades. On the other
> hand, Ike had no business experience at all; and yet, in partnership
> with G.M. and a melding of economic teams public and private, he
> managed to create one of the biggest money makers of all time: the
> Interstate Highway System. G.H.W. Bush had limited business experience
> and no meaningful economic sense and left us with a deficit. His
> son was (is) the Mastermind behind the current financial calamity,
> and W. did have business experience. He used other people's money
> to fail. Did FDR have business experience? No, but he understood
> the metrics of emergency economic policy, a rare quality in any American
> president.
>
> Perhaps Ms. Mitra is caught up in party politics, which is a vote-getting
> game and far from policy decisions. Obama is dealing with policy
> while at the same time juggling the irrelevant political nonsense
> tossed about by high minded philosophers such as Rush Limbaugh. At
> a time like this, political games are a waste of time and energy--or
> worse. Politics makes zombies of otherwise intelligent people.<br/>
>
> Talk of new entrepreneurship is all well and good. However, it is
> made possible by conditions of abundant, balanced wealth and course-corrected
> fiscal/monetary policy. How much entrepreneurship can we expect when
> banks refuse to lend money and new fiscal policies are still on the
> drawing board?
>
> I may be wrong, but my guess is that the Ewing Marion Kauffman event
> provided a well-meaning outlet for frustration and opinion, touching
> lightly on serious matters and giving the participants a sense of
> pitching in to the great debate. Sounds like fun. Alas, am I wrong
> to believe that fun isn't the best way to find solutions to dire
> problems?

Mar 02 04:50 PM