A default by any other name…

Among the things they didn’t teach me in grad school: for markets to work, we need to know (1) what the object is and (2) who owns it. Too obvious? Well, not in the real world. Credit default swaps were designed to provide insurance against bond defaults, but investors found out the hard way that European bonds could lose a lot of value without triggering a CDS “default event.” Some European actions seemed intended to produce precisely this result.

Kim Schoenholtz passes on this WSJ piece suggesting that the International Swap Dealers Association is trying to close the loophole. From the article: “the [proposed] newly imposed credit event would include any action taken by a governmental authority leading to a write-down; expropriation; conversion, exchange or transfer of debt obligations; or any action that otherwise affects creditors’ rights in a way that reduces what they are owed.” Well, duh!

News flashes

First: The Onion is hiring. If you think, as we do, that the world needs more humor, here’s your chance. From Stan Zin, who may be your competition: All candidates must fulfill the following requirements:

1. A viewing of our new pilot, Onion News Empire
2. A review posted on Amazon (linked to in application)
3. Three (3) reasons why the candidate is qualified for the position (either on resume, cover letter, or attached as a separate document)

If interested, please apply here: http://bit.ly/12jfFLA

Second: Billie Sol Estes has died. His connection to Global Economy fans and survivors: he collected millions in bogus cotton subsidies. I’m sure he’d laugh at the deal the US struck to pay off Brazilian cotton growers, too. If them, why not him?

“The point is to protect the consumer”

A good one from Kim Ruhl: Tesla Motors sells high-end electric cars direct to the consumer. But North Carolina’s car dealers have proposed a law prohibiting sales except through — wait for it — car dealers. Robert Glaser, president of the N.C. Automobile Dealers Association, comments, apparently without irony: “The whole point of the system is to protect the consumer.” Quote from here, more here.

Sanctioning Iran

One of the things we do as academics is try to figure out how things work, and then report what we find in academic journals.  To take examples close to home, we might look into the causes of international capital flows, explore the impact of anti-dumping laws, examine regulations about financial disclosure, and so on.  Some of this has practical long-term value, but the short-term goal is to engage in a discussion with other experts, which we hope will lead to deeper understanding of the topics. By design, the target audience is small.  Here are a couple examples.

NYU students raise deficit awareness

One of the great things about teaching is that there’s always something new going on.  The latest example:  several of our students are doing videos about fiscal issues.  They’ve joined “Up to Us,” a competition among student groups to spread the word about debt and deficits — and highlight the quality and initiative of NYU students at the same time.

Peter Henry in the Times

There’s a nice interview with Peter in Sunday’s Times.  I especially liked this line:  ”Emerging markets are driving global growth, and 3.5 billion people are moving to cities. That’s $20 trillion of infrastructure to lay down. It’s either a big problem or an opportunity.”

Education and healthcare

Friends have passed along two great pieces.  David Warsh suggests that the best place to start on education reform is with the very young:

US GDP fell in fourth quarter

The advance estimate of US real GDP for the fourth quarter of 2012 came in slightly below the previous quarter. The BEA reports that GDP declined by 0.1% from the third quarter, measured at an annual rate (meaning we multiplied the actual rate by four). Some thoughts:

The fiscal cliff “deal”

The following comments seem pretty much right to me:

• Steve Landsburg:  ”This deal does absolutely nothing to control entitlement spending, which means it’s 100% fiscally irresponsible.” (Come on, Steve, tell us what you really think.)
• Greg Mankiw:  ”After all the public discussion over the past couple years of what a good fiscal reform would [look] like, it is hard to imagine a deal that would be less responsive to the ideas of bipartisan policy wonks.”
• David Brooks:  ”[T]he proposal is not a balance of taxes and spending cuts. It doesn’t involve a single hard decision. It does little to control spending. It abandons all of the entitlement reform ideas that have been thrown around.” 
• Bruce Bartlett:  ”[G]etting Congress to act [is] … what economists call a time-inconsistency problem. The Congress that raises taxes and cuts benefits will suffer politically, while the benefits of lower deficits will accrue to future Congresses.” (This one is for Kim Schoenholtz.)
• Stan Zin:  ”Using “quotes” around random “words” is a cheap ploy used “by” people who don’t “really” know how to write.”

Which is to say, lots of drama, but absolutely no movement on long-term budget issues. The good news? New episodes of Psych due February 23.

Healthcare costs

From Kim Ruhl, a really striking chart of health care spending per person in the US, UK, Germany, France, and Japan — by age. The link comes from Dan Munro, who got it from Mary Meeker. I don’t know the underlying data, so can only take it at face value. Lots of others have piled on, including some who suggest the chart is misleading; see the comments to Austin Frakt’s post. I’d start here (esp Fig 1) and here.

However that turns out, the consensus is that health care costs are far and away the biggest fiscal issue facing the country.  Unless I missed something, there’s been no mention of that during the recent drama surrounding the fiscal cliff. Andy Borowitz reminds us of the good news: the Senate has had to work over the weekend.

Happy New Year to all.