Words of Wisdom

This from Allan Meltzer in today's WSJ,
"If the government underwrites all the risks, call it socialism. If it underwrites only the failures, call it foolishness."

Behavioral Economics for Business People

Economists argue that opportunity costs are the relevant metric when it comes to making decisions. However, individuals sometime appear to weigh money costs and implicit opportunity costs differently. The result is often characterized as "loss aversion," where the disutility of giving up an object is greater than the utility associated with acquiring it. For instance,
people are often reluctant to sell a stock that has performed poorly until it is back to the price it was originally bought at. A consequence of loss aversion is that these same people become risk averse for gains, but risk-takers for losses.

I was reading V.S. Naipaul's A Bend in the River when I came across this passage that helps fix the idea. The narrator is in the process of buying a business from an owner wishing to sell and receives this advice from the owner of the business.

"You must always know when to pull out. A businessman isn't a mathematician. Remember that. Never become hypnotized by the beauty of numbers. A businessman is someone who buys at ten and is happy to get out at twelve. The other kind of man buys at ten, sees it rise to eighteen and does nothing. He is waiting for it to get to twenty. The beauty of numbers. When it drops to ten again he waits for it to get back to eighteen. When it drops to two he waits for it to get back to ten. Well, it gets back there. But he has wasted a quarter of his life. And all he's got out of his money is a little mathematical excitement."

Savers of the World, Unite!

The Fed is at it again, pumping another $200 billion into the nation's supply of liquidity in an effort to undo the housing mess and credit crunch that it created. It is doubtful this will have much of an impact on the housing market except to delay the inevitable write-offs and losses that are still to come in that sector.
But it is likely that the Fed is sowing the seeds of further inflation. Pumping liquidity into the system to fix what is primarily a sector problem (excess supply and weak demand in the housing sector) never has made sense, and still doesn't. The Fed tried that in the 1970s when oil first zoomed in price and all we got was stagflation. It is beginning to look as if we may have a repeat of that era. Is it any wonder that the price of oil has gotten so high today (over $110) as the dollar has slumped to record lows?
There is no doubt that the Fed's current policies are anathema to anyone in our economy with savings. The combination of low interest rates (banks seem to be playing a game of how low can you go with the interest rates that they pay) and accelerating price increases means negative returns for anyone with money in the bank. In addition, the faltering stock market eats away at people's retirement accounts, many of whom are Baby Boomers who might like to retire soon. Where's the incentive to save in such an environment?
It might be argued that savers need to tolerate lower returns for a while for the greater good: improving the economy's performance. I could accept that argument if the Fed were actually trying to do that; but its current mix of policies seem unlikely to improve anything.

Rams for Official Missouri NFL Team!

Representative Curt Dougherty has recently proposed that Budweiser be named the official state beer of Missouri. Some citizens have scoffed at the outrageous proposal and have argued that our legislature has more important things to do. Ah, contraire. The rubbish policy proposals coming out of Jefferson City have included mandates for ethanol use and recently, another mandate for biodiesel use. Both alternative fuels cause increased CO2 emissions and require that consumers pay more at the pump. I applaud Representative Dougherty and urge other Missouri senators and representatives to come up with their own proposals for official products. I propose that debate should begin on whether the Chiefs or the Rams would be best representative of an official Missouri NFL team. The ensuing debate would take much time and keep the policy-makers from "solving" any other problems.