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One of the great downsides of monopoly is a mathematical result known as Jensen's inequality that says that a lot of small mistakes aren't as bad as a single big mistake. One of the bad things about monopoly is that a mistake by a monopolist much worse than a bunch of smaller mistakes by competitors. At the moment there is a financial panic. Unfortunately the panic seems most widespread in the biggest entity of all, the U.S. government. As a result they are about to be stampeded into making an enormous mistake. The level of insanity defies the imagination. Rumors fly, each more absurd than the last - and are seized upon and repeated by supposedly responsible Senators and high ranking officials of the executive branch as a rationale for panicked approval of a nonsense plan. Reading the blogs - often quoting supposedly knowledgeable and trustworthy people - we find utter nonsense. If we don't approve the plan right away you won't be able to get money from your ATM. Firms won't be able to meet their payrolls. And on and on and on. To debunk the obvious: Washington Mutual failed Thursday night. Washington Mutual ATM cards (of which I own several) function as usual. Individual bank accounts are federally insured up to $100,000 per bank. The normal process of bank closure does not prevent bank customers from accessing their funds. As to payroll: I do not doubt that some firms of various sizes are going to fail to meet payroll and go bankrupt next week. It is likely that a few of them would have been able to survive if credit was more widely available at the moment, and a small subset of those might be able to survive if the bailout is passed by Monday morning. But most firms do not meet payroll by short-term borrowing; the fact that banks are reluctant to lend to each other does not have much impact on their ability to make short term loans to customers, and so on.
Yes: there can be cascading bank failures and that is a bad thing. But it does not happen instantly, not tomorrow, not next week, not next month. Here is a graph of bank failures during the Great Depression which we supposedly face again if we don't approve this ridiculous plan immediately.
I got this from a publication of the Federal Reserve Board. The point of the graph is simple: the banking system didn't fail all at once during at the beginning of the Great Depression: there was a continuing series of bank failures stretching over years. Meaning that there was plenty of time to think through a policy response. And it bears emphasis: at the beginning of the Great Depression the Federal Reserve did exactly the wrong thing: it failed to provide liquidity to the system and allowed the money supply to contract. It is the documentation of this in the Monetary History of the United States for which Milton Friedman and Anna J. Schwartz are justly famed. At the moment the Federal Reserve has been carefully, and largely quietly, doing exactly what it is supposed to do - namely exactly the opposite of what it did at the beginning of the Great Depression.
Let's be clear: the only casualty of having a sensible and rational debate about how big the problem is and what needs to be done will be the Congressional vacation - and only for members of the relevant committees at that. Maybe if they think this is a $700 billion dollar problem and a possible Great Depression they should consider canceling that? I really can't think of a worse reason for a policy blunder of this magnitude than Congress was eager to take a break.
Greg Mankiw has posted a careful email from Rob Shimer explaining why the bailout plan (whether 700 or 350 billion) is a bad idea. Note that Rob does not argue against any government action. Nor would I. He echoes the thoughtful idea that beyond the obvious moves that the Fed and other agencies have been making to prevent bank runs, banks should be forced to recapitalize (they could also be forced to stop paying dividends, although he does not mention this). By making them all do this, this solves the lemons problem that is freezing financial markets, and may also force the truly insolvent banks out into the open.
In a nutshell the problem is that the decline in assets (mortgages) that banks hold means that they are now undercapitalized. The banks willing to offer the best deal to investors to raise more capital are those in the greatest trouble. This means that any attempt by any bank, no matter how solvent, to raise capital serves as a red flag to the market. If all banks are required by the government to raise more capital, then it is no longer the case that raising capital means a bad balance sheet, so it becomes possible for good banks to raise capital.
I want to add on other thing to the "Ben had more information than anybody who signed the anti-bailout letter." Ben is certainly a smart guy. And he certainly has more information than we do. But: if he has information that the situation is catastrophic then now is the time to tell us what it is. There was another letter writer on Greg's blog who seemed to argue that without a bailout firms weren't going to be able to meet their payroll come Tuesday. That shows such an abysmal level of ignorance that I can't fathom why Greg published it. Of course everyone who signed the anti-bailout letter wants firms to meet their payroll on Tuesday or any other day. And every single one of us knows that whether or not that happens has nothing to do with whether or not the bailout plan is approved. The only smart thing about that letter write is that he chose to remain anonymous.
So America is not content to be the World's supercop in military matters. It's bad enough we extend our anti-trust and tax and drug laws extraterritorially. Senate Moves To Protect U.S. IP Overseas reports:
Senate Finance Committee Chairman Max Baucus (D-MT) and Sen. Orrin Hatch (R-Utah) introduced the International Intellectual Property Protection and Enforcement Act of 2008, legislation meant to crack down on the theft of U.S. intellectual property around the world.
The bill would compel the U.S. Trade Representative to develop action plans for countries on the piracy "Priority Watch List," and empower the president with enforcement tools if corrective actions are not taken. It would also ensure the placement of officials at foreign embassies tasked with enforcing American IP rights.
No, unfortunately, the patent system is not dying. The title refers to deaths caused by the patent system. According to the BBC News science report, Patent system 'stifling science', findings by the Canada-based Innovation Partnership indicate that "Life-saving scientific research is being stifled by a 'broken' patent system". "'Blocking patents' are delaying advances in cancer medicine and food crops," according to the report.
While "[t]he traditional view is that strong patent protection stimulates innovation, reassuring companies that it is safe to invest in research without fear of being stung by rivals," this strategy "deters grass roots research in universities." As an example, "Work on the BRCA1 and BRCA2 genes that can cause breast cancer has been held up by legal disputes over patents held on the genes by Myriad Genetics, a biotech firm based in Utah, US. ... Meanwhile, patients in European countries were denied access to the cancer screening kits, because national health services were unwilling to meet the cost."
The Senate Jucidiary committee has reported a bill that will assign the Department of Justice the obligation of enforcing copyright. In an unusual outbreak of common sense, the Department of Justice opposes the bill arguing that it is for the private sector to enforce intellectual property through civil law.
It is interesting and little known that history is repeating itself. From chapter 2 of our book:
At the turn of nineteenth, the music industry was
different from the one we are familiar with today. No CDs, no mass
concerts, and no radio and TV rights. The core source of revenue
was the sale of printed sheet music, which was carried out
worldwide and on a very large scale. We learn, for example, that in
Britain alone about twenty million copies were printed annually.
The firms carrying out this business were not large multinationals as
today, but family owned companies, such as Ricordi in Milano,
which, nevertheless, managed to reach also foreign countries.
Apparently these "majors" managed to collude quite efficiently
among themselves. The records show that the average script sold in
the U.K. for about a fourteen pence. Then piracy arrived, as a
consequence of two changes: the development of photolithography,
and the spread of "piano mania", which increased the demand for
musical scripts by orders of magnitude. Pirated copies were sold at
two pence each.
Naturally the "authorized publishers" had a hard time
defending their monopoly power against the pirates, enforcement
costs were high and the demand for cheap music books was large
and hard to monitor. Music publishers reacted by organizing raids
on pirate houses aimed at seizing and destroying the pirated copies.
This started a systematic and illegal "hit and destroy" private war,
which lead, in 1902, to the approval of a new copyright law. The
latter, surprise, surprise, made violation of copyrights a matter for
the penal code, putting the police in charge of enforcing what, until
then, was protected only by the civil code.
...
But the police campaign did not work either. After a few
months, police stations were filled with tons of paper on which
various musical pieces were printed. Being unable to bring to court
what was a de-facto army of "illegal" music reproducers, the police
itself stopped enforcing the copyright law.
The eventual outcome? The fight continued for a while, with
"regular" music producers keen on defending their monopoly and
restricted sales strategy, and "pirates" printing and distributing
cheap music at low prices and very large quantities. Eventually, in
1905, the king of the pirates, James Frederick Willett, was
convicted for conspiracy. The very same leader of one of the music
publishers associations, and the man who had invented the raids,
launched the Francis, Day & Hunter's new sixpenny music series.
Expensive sheet music never returned
After all, it was already well known that existing windshield wipers were problematic--for example, "the blades often scraped across a windshield that was nearly dry. The resultant friction made an annoying sound and tore up the blades' edges." The solution was also obvious: "A solution that occurred to a number of inventors was an intermittent system one that would wipe, pause for a few seconds, then wipe again."
In 1963, Kearns came up with one way to do this, patented it, and eventually sued Ford and Chrysler for using a similar design. "Ford's legal team argued that Kearns's patents were overly broad and therefore invalid. As Ted Daykin, a former Ford engineer, told The New Yorker in a 1993 article, 'An electronic timing device was an obvious thing to try next. How can you patent something that is in the natural evolution of technology?' The intermittent wiper, according to Daykin, was really the work of dozens of anonymous engineers at Ford, Trico, and other firms." Kearns won anyway--"$10.2 million from Ford in 1990 and $18.7 million from Chrysler in 1995, though both juries determined that the companies had not intentionally infringed on his patents."
This movie is sure to annoy. It's no wonder Hollywood likes it: it's pro-IP and anti-capitalism. But Randians have a dilemma--it pits one hero (innovator, patent holder) against another (industry)!
Great piece by Frank Shostak, chief economist of M.F. Global and one of the best Austrian economists around: Can the Rescue Plan Fix the US Economy?, on LewRockwell.com.
