Best Characterization of the Crisis I have seen

The Financial Crisis of 2008: What Went Wrong, talk by David Marshall, Senior VP, Federal Reserve Bank of Chicago. Marshall blames crisis on Mis-priced risk and Mis-priced housing. Goes into causes of each. Highly recommended.

Iowa still has the first primary caucus, but...

...the election is four years away. Is it time to end the ethanol subsidy?

WASHINGTON (AP) -- President Barack Obama's commitment to take on climate change and put science over politics is about to be tested as his administration faces a politically sensitive question about the widespread use of ethanol: Does it help or hurt the fight against global warming?...

Environmentalists, citing various studies and scientific papers, say the agency must factor in more than just the direct, heat-trapping pollution from ethanol and its production. They also point to "indirect" impacts on global warming from worldwide changes in land use, including climate-threatening deforestation, as land is cleared to plant corn or other ethanol crops.

Latest from Nashville's own Merle Hazard

See Merle's conversation with John Taylor that inspired the song.

Shame

Dawn of a new investment era?

Pimco thinks so:

If the cannons fired at Ft. Sumter marked the beginning of the war against the Union, then clearly these words [against Chrysler's bondholders] marked the beginning of a war against publicly perceived financial terror.

What does this mean for investors?

Risk will not likely be rewarded until the global economy stabilizes and the Obama rules of order are more clearly define

Enforce my contracts, please.

One of the things that distinguishes the successful countries (in terms of longevity, clean water, and income) is the rule of law. Specifically, the ability of private parties to write and enforce contracts facilitates the movement of assets to higher valued uses.

Democrats in congress and President Obama have proposed re-writing existing contracts in two instances: for underwater mortgages and for Chrysler's bondholders.

Typically, lenders who make money available to a company in return for a first claim on the company's assets get about 80 cents back for every dollar they lend should it hit the rocks. Others to whom the company owes money, but who have no claim on the assets -- workers, suppliers, junior lenders -- get much less.

Yet Obama forced the senior lenders to take something like 30 cents for every dollar they'd lent Chrysler. Many lenders -- the big banks who'd taken federal bailout money -- rolled over. But some hedge-fund managers pointed out that they have a legal, fiduciary responsibility to do the best they can for their investors (which include pension funds) and decided to take their chances with a bankruptcy judge.

If the bankruptcy judge decides in favor of President Obama, it is easy to predict an increase in the rates at which creditors will lend to borrowers in unionized industries.

Pirate Economics

Here's a really interesting article from NPR on the business model of Somali pirates.

But the issues of criminality and the potential for violence aside, a closer look at the "business model" of piracy reveals that the plan makes economic sense.

"You'll need some speedboats; you'll need some weapons; you also need some intelligence because you can't troll the Indian Ocean, a million square miles, looking for merchant vessels," says Pham, adding that the pirates also need food for the voyage — "a caterer."

Help make Nashville more efficient

Taxi demand has fallen dramatically in Nashville. The most reliable source of demand is from travelers arriving on planes and drivers will wait 3-4 hours at the airport for a fare. There are five taxicab companies in Nashville, and each company is allowed to have five cabs in the airport queue. So when one of their taxis picks up a fare, the dispatcher sends another company cab to the airport to get into the queue.

So here's a simple policy proposal to reduce the what economists call the "deadweight loss" of waiting in the taxi queue (because no one benefits from this kind of competition). Have each company take turns dispatching cabs from the airport. If a single company had control of the queue, they would not want their drivers waiting four hours for a fare. Instead the drivers would be sent to higher valued uses, costs would be reduced, and perhaps fares would come down.

If you think that this is a good solution, help our city become more efficient. Call Brian McQuistion, Commission Director, and ask him to make the change.
(615) 862-6777 FAX Line(615) 862-6765

Also, if you can think of problems with this proposal, post a comment.

UPDATE: I called the taxi commission and they insisted it was an airport problem; called the aiport, and no one would answer.

How does Starbucks respond to increased competition and falling incomes?

By cutting price:

As it reported a 77% drop in quarterly profit, the company on Wednesday also said it will adjust its pricing in some markets, raising prices of some of the more complicated drinks, while lowering those on basic drinks. For example, Starbucks will offer a "grande" size iced coffee for less than $2, shaving as much as 45 cents off the price, depending on the market.

The moves come as Starbucks is struggling to attract and retain consumers in a recession. Starbucks said U.S. comparable-store sales fell 8% in its latest quarter as traffic fell 5%, and average transaction totals fell 3%.

Maryland Bans Minimum Pricing Agreements

As we have discussed before, minimum pricing agreements help control the incentive conflict between retailers and manufacturers. In 2007, the Supreme Court ruled that such agreements were not automatically illegal under federal law. In response, states like Maryland have started passing laws to prohibit the practice.

Under the new state law, retailers doing business in Maryland -- as well as state officials -- can sue manufacturers that impose minimum-pricing agreements. The law also covers transactions in which consumers in Maryland buy goods on the Internet, even when the retailer is based out of state. That could potentially affect manufacturers throughout the country.