The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side — the entire financial system, essentially — had gambled with the odds against them. Up to this point, the story of the big short could not be simpler. What’s strange and complicated about it, however, is that pretty much all the important people on both sides of the gamble left the table rich. . . . The CEOs of every major Wall Street firm were also on the wrong end of the gamble. All of them, without exception, either ran their public corporations into bankruptcy or were saved from bankruptcy by the United States government. They all got rich, too.
What are the odds that people will make smart decisions about money if they don’t need to make smart decisions — if they can get rich making dumb decisions?
Notes from the Golden Orange
EppsNet Archive: Economics
I have a very difficult time imagining the economic ‘theory’ that motivates proposals such as this one by Pres. Obama [to "streamline" the Fair Labor Standards Act so that more white-collar employees would be eligible for overtime pay]. The best that I can do is to imagine how a two-year-old child would respond if asked to propose a way to raise workers incomes.
The arguments for regulation of the market for goods and the regulation of the market for ideas are essentially the same, except that they’re perhaps stronger in the area of ideas if you assume consumer ignorance. It’s easier for people to discover that they have a bad can of peaches than it is for them to discover that they have a bad idea.
Fast food workers staged a one-day strike for “living wages.” More specifically, they want the federal minimum wage to be raised from $7.25 an hour to $15.
You want to make a living wage? I’ll tell you how to make a living wage. I’ve had a lot of jobs and this method has never failed me.
Here it is: Before accepting a job offer, you always ask yourself, “Does this job pay enough for me to live on?” And if the answer is no, then you don’t take that job.
If you want to earn $15 an hour, do what I do: get a job that pays $15 an hour. Who’s stopping you?
If no one’s willing to pay you $15 an hour, it’s because the skills, intelligence and motivation that you bring to the table don’t allow you to do anything that’s worth $15 an hour. You need to do something about that. You need to be able to deliver $15 of value to an employer. Figure that out.
Setting the minimum wage at $15 is not going to help you. If you set the price of something at more than it’s worth, people are not going to buy it.
Imagine this: My friend Paul Epps is a programmer. Let’s say we passed a Minimum Wage for Programmers law that says that programmers must be paid at least $200,000 a year. Is that good news for Epps?
No, it isn’t.
His boss calls all the programmers into a meeting and says, “Well, according to the new Minimum Wage for Programmers law, I can’t hire any of you for less than $200,000 per year. You know what that means?”
“We all get a big raise?” Epps suggests hopefully.
“No, it means you’re all fired. Get out of here.”
Or imagine this: We pass a Minimum Price for Restaurants law that says you can’t get a meal in restaurant unless you pay at least $15 for it. What will that do to sales of Quarter Pounders and Jumbo Jacks?
People will stop buying those things. Many restaurants serve meals for which customers are willing to pay $15, but a fast food burger isn’t worth $15, even with fries and a drink, so people will stop buying those things.
- Some Minimum-Wage Links (cafehayek.com)
- Obama and the Evidence on Minimum-Wage Legislation (cafehayek.com)
- Minimum Insight (thebigquestions.com)
- Maximum Insight on Minimum Wages (cafehayek.com)
- Good Thoughts on the Bad Policy of Pricing People Out of Jobs (cafehayek.com)
- More Questions for Proponents of Pricing Low-Skilled Workers Out of Jobs (cafehayek.com)
- Scott Sumner Has Some Empirical Data on Minimum-Wage Legislation (cafehayek.com)
- Krugman Concludes That the Evidence for Minimum-Wage Legislation Is Strong If the Evidence Against Minimum-Wage Legislalation Is Ignored (cafehayek.com)
I worked in the information technology department of a mortgage bank in the run-up to the 2007 implosion of the subprime mortgage market . . .
Given that it was fairly evident at the time that complicated financial instruments were being dreamed up for the sole purpose of lending money to people who could never repay it, it’s remarkable that very few people foresaw the catastrophe and that even fewer actually had the nerve to bet on it to happen.
Long story short, the major rating agencies — Standard and Poor’s and Moody’s — were incompetent in their rating of subprime mortgage bonds, giving investment-grade and, in some cases, triple-A ratings to high-risk instruments. A lot of people took the ratings — which implied that subprime mortgage derivatives were no riskier than U.S. Treasury bonds — at face value and acted accordingly.
But there were also some interesting psychological factors in play, not specific to the investment arena:
- Nothing really bad had ever happened in the subprime mortgage market. Every tiny panic was followed by a robust boom. Since nothing really bad had ever happened (albeit over a short and statistically insignificant period of time), nothing really bad ever would happen.
- The collapse of the subprime mortgage market would be a national catastrophe, and was unlikely precisely because it would be such a catastrophe. Nothing that bad could ever actually happen.
Well, there are fewer limits on what you can promise than on what you can deliver. — Milton Friedman
To ignore the government’s poor performance of its present duties when deciding on whether it should or should not take on new duties is obviously wrong.
If female employment rates matched male rates in the U.S., the GDP would rise by 5%. This stat & more: http://t.co/XsBVJW1xtE
— Harvard Biz Review (@HarvardBiz) August 25, 2013
Okay . . . but who would be raising our kids? Or is that not important?
I took a Computational Finance midterm over the weekend on Coursera. I’ve taken a few Coursera classes before — they had quizzes, problem sets, programming assignments, essays — but none of them had a midterm or final exam.
It’s the first academic exam I’ve taken in at least a couple of decades, and the first exam ever in which — because it was online — I was able to enjoy the company of my life partner, Wild Turkey.
Here’s my result:
I lost the one point on this question right here:
If you understand the question, it’s obvious which one of the four I missed, but it may not be obvious what the right answer is. It wasn’t to me, anyway.
My wife asks, “Did you see the grading curve?”
“No, but when you score 149 out of 150, you leave it to others to worry about the curve.”
First of all, it’s a great class. Rangel has a real passion for the material and he’s provided extra resources to accomodate online students, many of whom probably don’t have the math background of the average Cal Tech student.
He’s from Madrid, so his pronunciations and mannerisms are different, like the gesture below, which I captured from one of the video lectures.
He was explaining how something or other would increase our understanding of economics and he punctuated the word “understanding” by pointing at his head with two fingers. I don’t know what this gesture means in Spain, or if it means anything at all. Probably he knows what it means in America, but as I said, he’s passionate about the material and I think he loses himself in what he’s saying.
He’s also one of the only two people I know who pronounce the word “subsequent” as sub-SEEK-went, the other being one of my work colleagues, who’s actually from this country and therefore has no excuse . . .
Health insurance companies across the country are seeking and winning double-digit increases in premiums for some customers, even though one of the biggest objectives of the Obama administration’s health care law was to stem the rapid rise in insurance costs for consumers.
That headline should not read “DESPITE new health law,” it should read “BECAUSE OF new health law.”
But we were going to get things for free! We were promised better things at a lower cost!
In my day, most of the citizens were farmers or merchants or tradesmen. They lived by their hands and their wits. They had horse sense and they knew when they were being sold a bill of goods.
Of course, that was before television.
Americans today are unfortunately rather stupid. Most of them don’t know anything about economics, science, history, government . . . as George Carlin says, “Think of how stupid the average person is, and realize half of them are stupider than that.” George is here in heaven now. He breaks me up, he really does.
Your president and Congress have decreed that every American will have health insurance whether they want it or not. They have further decreed that a lot of Americans will not have to pay for their own health insurance, which means that the cost of their health insurance has to be paid by the rest of you. That’s one reason why your health insurance premium is going up.
Another reason your premium is going up is the “guaranteed issue” provision. “Guaranteed issue” means that no one can be denied health insurance because of pre-existing conditions.
Funny story: My friend Paul Epps, his wife has an insurance agency in Southern California. It’s an area that’s susceptible to wildfires in the summer months. When a fire breaks out, people who live near the fire actually call this woman wanting to buy a homeowners policy.
Of course, she doesn’t sell it to them. Insurance companies are a little bit smarter than that.
Buying a homeowners policy when your house is already on fire is analogous to “guaranteed issue” health insurance: Hello, I’d like to buy some health insurance. Oh by the way, I have cancer, but the doctors think that with lengthy and expensive treatment, I have a chance to pull through.
This is not even insurance anymore. Insurance is something you pay for now to protect against the risk of having to pay a lot more later. In these cases, there IS no risk. The bad news has already happened. It’s a dead loss for the insurance company and they have to spread the cost of that loss to other policyholders. That’s another reason your premium is going up.
This isn’t even economics, folks, it’s just common sense.
In an op-ed for the New York Times, Warren Buffett argues that higher taxes won’t keep the super-rich from trying to make money:
Suppose that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”
Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.
Really, Warren? It’s an investment, right? It’s not a sure thing. It’s not a giveaway. I’m being asked to put money at risk. That’s the difference between an investment and a savings account.
So the number one thing that I want to understand before making the investment is what kind of a net return can I expect — worst case, best case, most likely case. Then I can decide if I’m being adequately compensated for the risk that I’m taking on.
And by net return, I mean after taxes, after commissions, after everything. How much money will I actually get to keep? And if I don’t think I’m being adequately compensated for the risk, then yeah, I’ll leave the money in my savings account.
Assuming a tax rate of, say, 35 percent, why does it not make sense to say, “I would take that risk for an expected return of $X, but not for an expected return of 35 percent less than $X?”
Almost everything appertaining to the circumstances of a nation, has been absorbed and confounded under the general and mysterious word government. Though it avoids taking to its account the errors it commits, and the mischiefs it occasions, it fails not to arrogate to itself whatever has the appearance of prosperity. It robs industry of its honours, by pedantically making itself the cause of its effects; and purloins from the general character of man, the merits that appertain to him as a social being.
My fellow Americans –
You see how my friend Tom Paine, 220 years ago, perfectly anticipated — and rejected — your President Obama’s “You didn’t build that” quote.
Oh yes, we were aware of the “progressive” philosophy — that everything good comes from government — even then and we wanted no part of it.
By the way, I notice that liberals are now calling themselves “progressives.”
That’s good. The word “liberal” has lost its true meaning. Classical liberalism was based on “liberty” — from kings, churches and aristocracies.
Did you know that the great economist Milton Friedman did not call himself a conservative or a libertarian? He called himself a liberal, in the original sense of that word.
Progressives don’t believe in liberty. They believe in government as the new church and politicians as the new aristocracy.
What the market does is to reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity. It is, in political terms, a system of proportional representation. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color-the majority wants and then, if he is in the minority, submit.
It is this feature of the market that we refer to when we say that the market provides economic freedom. But this characteristic also has implications that go far beyond the narrowly economic. Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to freedom is power to coerce, be it in the hands of a monarch, a dictator, an oligarchy, or a momentary majority. The preservation of freedom requires the elimination of such concentration of power to the fullest possible extent and the dispersal and distribution of whatever power cannot be eliminated – a system of checks and balances. By removing the organization of economic activity from the control of political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.
In his latest book, The Price of Inequality, Columbia Professor and Nobel laureate Joseph Stiglitz examines the causes of income inequality and offers some remedies. In between, he reaches some startling conclusions, including that America is “no longer the land of opportunity” and “the ‘American dream’ is a myth.”
“If there is anybody at all who has a dream, then they can definitely make it happen,” she told WBTV. “There are no excuses. It depends on you and no one else.”
The second link above goes to a story about Dawn Loggins, an 18-year-old girl from Lawndale, NC, who, after her mother and stepfather left the state without her and she was dropped by her grandmother at a local homeless shelter, “just made a decision that I was not going to end up like my parents.” She did well enough in high school to be accepted at Harvard University.
I’m not a Nobel laureate but I can tell you that income correlates to things like education, skills and motivation. If you’re concerned about the inequality of your income, take the time you spend keeping up with fantasy football and reality television and invest it in learning and maintaining marketable skills, and see if your income doesn’t go up.
If you’re complaining about income inequality, and you have any idea who was voted off any reality television program in the last week, you need to pipe down and reexamine your priorities. Watch your programs if you want to, but keep in mind that you’re competing in the job market with people who are more serious than you are.