Archive for the ‘Economics’ category

Bush Administration Subprime Mortgage Freeze — A Virtual Symposium


Treasury Secretary Henry Paulson’s idea for rescuing subprime borrowers from foreclosure was announced in a speech today:

The freeze would apply to adjustable-rate mortgages originated between Jan. 1, 2005, and July 31, 2007, which would reset between Jan. 1, 2008, and July 31, 2010. The program is designed to help those with two-year or three-year low teaser rates on their mortgages.

It would only affect borrowers living in their homes, not those who purchased housing for investment purposes. According to the source briefed on the plan, those who have a 3 percent equity stake or more in their property also would not be eligible for the freeze.

Under the reasoning of federal officials, those who currently have financial wherewithal to make their payments but would struggle to pay a higher reset rate could qualify for refinancing.

The Bush administration is expected to seek authority to enable state and local governments to use tax-exempt bonds to fund these refinancings, an idea floated by Treasury Secretary Henry Paulson in a speech on Monday.

So what did everybody think? (more…)


Idaho Puzzler: Liberating Liquor Licenses Without Bankrupting Pubs*


cocktail.jpgThis story is happening in Idaho, but it could apply to any jurisdiction where government licenses to do a certain kind of business are made scarce by an artificial limit. According to Rick Carpenter of Idaho Business Review’s Biz Blog, Gov. Butch Otter wants to reform his state’s Alcohol Beverage Control and how it allocates liquor licenses.

Liquor consumers might like where this is going, but the consequences of any major change would be huge for pubkeepers in the spud state:

There is currently a 20-year waiting list with more than 300 people/vendors wanting to purchase a license. The ABC has been granted unprecedented power in determining how to enforce policies, based more on the enforcer’s suspicion of applicants than consistent policy.

In a meeting at the Boise Metro Chamber’s State & Federal Committee on Friday, a panel of guests discussed the issues with the committee. Currently, there are about 800 licenses in the state. Unless you want to wait the 20 years, you have to pay an unrealistically high price to get one from a license owner, not the state. Kevin Settles, owner of Bardenay, said he paid more than $300,000 for three licenses. And if you want one in Ketchum, you can pay more than $400,000 for one license. The state charges less than $1,000 for a license, but gets 10 percent of the sale of the license from one owner to the next.

Governor Otter wants to put some common sense into the process and make more licenses available. The problem is, many of the license owners are treating the licenses as assets. And there are stories floating around of people getting loans based on those assets, something Brian Ballard, of Hawley Troxell Ennis and Hawley, told the Chamber committee is illegal.

So, governor. Who you going to send to tell Mr. Settles that the state is going to sell his competitor something for $1,000 that you paid $300,000 for? Wyatt, one of Biz Blog’s commenters delves into the issue:

This is one of those odd situations where correcting poor policy further harms those who were initially harmed by the policy. Current license holders had to shell out absurd amounts of money to start their business. And now that the poor policy is being corrected, their balance sheets take the hit, giving them weakened leverage with lenders and leaving them paying loans on a dead asset. Not only this, but existing license holders will now see a barrier to entry removed from their competition. They will be financially handicapped by their initial investment in their license while their young competition can flourish at lower cash flow levels in the increasingly competitive environment. We may see some well-liked watering holes go under from this correction.

That being said, correcting the poor policy is the right move to make.

Now that Gov. Otter has climbed onto this limb, what does he do next?

* CORRECTED to reflect Rick Carpenter posted the item on IBR Biz Blog.

Why They Won the Nobel for Economics


The Nobel Prize in economics goes to Americans Leonid Hurwicz, Eric Maskin and Roger Myerson for their work on Mechanism Design Theory, an offshoot of game theory which is used to make imperfect markets work more efficiently.

(Technically, it’s the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. It was not mentioned in Alfred Nobel’s will, and has only been awarded since 1969.)

Hurwicz, 90, a professor emeritus at the University of Minnesota, is the oldest Nobel Prize winner, ever. His work on the theory began in the 1960s, when his baby-boom generation co-winners were barely in their teens. Myerson is from the University of Chicago, which brings its Nobel-in-economics total to 24, more than a third of all winners. Maskin is a professor of social science at the Institute of Advanced Study and a “Visiting Lecturer in Economics with the Rank of Professor” at Princeton University.

It’s beyond my capabilities to explain the winning theory. However, here is a good illustration of the problem it is designed to address, from blogger (and econ prof) Alex Tabarrok, who writes at Marginal Revolution.

Suppose that you are selling a rare painting for which you want to raise the maximum revenue. There are two potential buyers, Tyler, who values the painting at $100,000, and Alex who values it at $20,000. The problem would be simple if you knew this information – you would then set the price at $99,999 and Tyler would buy maximizing your revenue. But how much Tyler and Alex value the painting is their own private information. How then should sell the painting?

One possibility that springs quickly to mind is an auction. In a standard English open-cry auction Alex and Tyler will bid for the painting and the bids will keep rising until Alex is forced to drop out at $20,001. Thus the auction earns you $20,001. Not bad but is this the maximum revenue possible? Remember that Tyler values the painting at $100,000 so you could be leaving a lot of money on the table.

What else can you do?

Now, go read the post if you want to find out, and good luck.

Very helpfully, at the end of his post, Tabarrok lists some of real-world applications of the theory, such as…

How to raise taxes, regulate a monopolist, fund a public good…, allocate organs, assign interns to hospitals, split common costs, allocate electricity across a grid – all can be thought of as mechanism design problems. The tools that Hurwicz, Maskin and Myerson developed…(help) us to design, at least in principle, the best solutions to all of these problems.

For another explanation, go here. Or here. And here is a post about an economist who believes mechanism design theory is “the only coherent approach to figuring out what the economic role of banks or other financial intermediaries is.”