Surprised? Regulators in bed with Regulated!

The DOJ’s inspector general’s office, run by Glenn Fine, has had one heckuva busy summer, throwing much of its resources at investigations into the legacy of political meddling at the Department. But the Interior Department’s inspector general, Earl Devaney (pictured), has been busy too. The big news today, via the WSJ: Employees of the federal agency that last year collected more than $11 billion in royalties from oil and gas companies broke government rules and created a “culture of ethical failure” by allegedly accepting gifts from and having sex with industry representatives.

A report by Devaney describes a party atmosphere at the Denver office of the Minerals Management Service, a bureau of the Interior Department. Some employees of the office, which houses the department’s royalty-in-kind program, “frequently consumed alcohol at industry functions, had used cocaine and marijuana, and had sexual relations with oil and gas company representatives,” the report says, adding that “sexual relationships with prohibited sources cannot, by definition, be arms-length.”

The report also says that between 2002 and 2006, 19 employees in the agency’s royalty-in-kind program, roughly a third of the program’s total staff, had “socialized with and had received a wide array of gifts from oil and gas companies with whom the employees were conducting official business.” Devaney’s report said: “We discovered a culture of substance abuse and promiscuity.”

We know what you’re thinking: What’s the Minerals Management Service? As the WSJ notes, it oversees the nation’s natural-gas, oil and other mineral resources on the outer continental shelf. Its duties include drawing up leases for drilling in offshore waters. Through the royalty-in-kind, or RIK, program, the government receives oil instead of cash payments from energy companies in exchange for drilling rights.

-Report: ‘A Culture of Substance Abuse, Promiscuity’ at Oil & Gas Agency

Ownership Congestion? Tragedy of Anticommons?

A former World Banker;

Well, I’ve been finding ownership puzzles in a host of disparate places, like waiting around in airports and wondering why we don’t build more runways. Just 25 new runways at our busiest airports would solve most air travel delays. Why don’t we build them? In Europe, for instance, I started thinking about why cell phones work so much better there than here. The answer, in part, is that over 90 percent of our prime spectrum is dead air. Talking to research scientists I asked why we have so many pharmaceutical patents today but so few new drugs that actually help people. My students clued me in to another puzzle: why has African-American farm ownership dropped 98 percent in the last century? And why are so many old television shows, like China Beach and WKRP in Cincinnati, still not available on DVD? Turns out, all of these problems are really the same problem. Private ownership usually creates wealth. But too much ownership has the opposite effect – it creates gridlock. Once people see this free market paradox, once we have a shared language for gridlock, we can begin to talk about it and then to fix it...

A drug company executive tells me he may have a better Alzheimer’s treatment. But to get FDA approval and bring it to market, he has to license dozens and dozens of patents relevant to testing for safety and side effects. So negotiations fail and the Alzheimer’s drug sits on a shelf, even though my informant is confident it could save countless lives and earn billions of dollars.

Very few people or organizations are speaking out against this – against the underuse of property rights. Whom do you lobby for drugs that don’t yet exist or for cures that people can’t yet see? Gridlock, that is, resource underuse, is invisible in comparison with overuse – everyone can see the dramatic results of fisheries being depleted or air being polluted. But with wasteful underuse, the effects are almost always hidden. So when drugs, wireless services, DVDs, and runways go missing, we don’t really have champions ready to set it right. The flip side of gridlock is that it’s one of the great entrepreneurial and political opportunities of our era....

The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives, Michael Heller

Related;
The legal framework for private sector development in a transitional economy : the case of Poland

The Liberal Commons

Can Patents Deter Innovation? The Anticommons in Biomedical Research

Eminent Domain and the New York Times

Symmetric Tragedies: Commons and Anticommons
James M. Buchanan and Yong J. Yoon

Georgia the Model?

World Bank's Doing Business blog seems to have more posts on Georgia than any other country. For example;

Top Reformer Wins Election in Georgia

The new mandate will allow further reforms. Mr Saakashvili vows to increase Georgia's GDP from $10 billion to $30 billion and use the new wealth to help the poorest third of the population.

The Next Singapore?

Silly regulation?

Bmi, Britain's third largest airline, will fly near-empty "ghost flights" in order to keep valuable take-off and landing slots at Heathrow.

The company admitted it would continue flights, despite an expected slump in passenger numbers, in order to avoid losing the multimillion-pound slots.

Government "use-it-or-lose-it" rules mean airlines must use 80 per cent of their scheduled slots, or forfeit them.

The rise in fuel prices and an expected slump in passengers after the summer break will force many airlines to cancel flights. However, bmi said it will go to extreme lengths to ensure it does not lose any of its coveted slots.

Tim Bye, deputy chief executive of bmi, said the airline would prefer to cancel uneconomic flights, especially midday flights from London to Scotland and northern England, but were forced to fly the routes eight of ten times to avoid losing the slots.

"We have to keep flying to preserve our slots," he said. "What might have been a marginal service in most winters will become even worse, partly because of the price of fuel and partly because of the drop-off in demand that the general economic cycle will bring. Economic pressures will drive the demand down even more than airlines would normally expect."

NY Fact of the Day

“The city should not be in the business of deciding what goes on, whether there is dancing or not dancing,” Mayor Michael R. Bloomberg said in 2004. “We have dance police. This is craziness.'’

The mayor was referring to the city’s 1926 cabaret law, which forbids dancing by three or more people in any establishment that does not have a valid cabaret license — even if the business serves alcohol and plays music. In the past, bars have been padlocked when a few patrons were caught swaying to music, and the Giuliani administration often used the law as a tool against clubs deemed nuisances.

-A New Effort to End the ‘Dance Police’

Dutch Fact of the Day

In January 2007, the Dutch Ministry of Agriculture issued a report in which it took 29 pages to explain "quality standards for onions," complete with 43 photographs

-Europe Debates Perfection It Demands of Its Produce

Fire on Ice

Iceland’s current woes teach a useful lesson about the interconnectedness of global markets: trouble can come from anywhere. Homeowners default on mortgages in San Diego, and suddenly people in Reykjavík are paying more for gasoline and wondering if their bank deposits are safe. That doesn’t mean that Iceland is an innocent victim. The country went overboard with spending and borrowing—between 2000 and 2007, domestic credit in the Icelandic banking system more than quadrupled as a share of G.D.P. And relying on foreign money to fuel that kind of frenzy is foolish, since it puts you at the mercy of fickle foreign investors. But Icelanders can be forgiven for wondering if they’ve really been any more reckless than many other countries—most obviously the U.S., which relies heavily on foreign capital to fund home buying and profligate consumption, and whose banking system is rife with reckless lending.

And that’s the second lesson of Iceland’s plight: even in a flat world, there are different rules for different players. In order to prop up the króna, and keep foreign capital from fleeing, Iceland’s central bank has had to raise interest rates to an astounding fifteen per cent, a move that will slow the economy to a crawl. By contrast, the dollar, while weak, has evaded the króna’s precipitous fall; the Federal Reserve, far from raising interest rates, has slashed them; and Congress is borrowing a hundred and fifty-two billion dollars to hand out tax rebates. Iceland’s government has been forced to inflict pain; the U.S. is doing everything possible to avoid it. If Iceland were to attempt to emulate America’s approach, its currency would be demolished, and foreign investors would almost certainly head for the exits. The U.S., by contrast, remains the beneficiary of the world’s generosity—no matter how bad our financial situation looks, countries like China and Japan keep pouring hundreds of billions of dollars into U.S. securities. They’re doing this not out of kindness, of course, but because the U.S. is a colossal market and they need us to keep buying stuff. The world can’t afford to have the U.S. fail, and so we are able to get away with behavior that would wreck smaller countries. Great for us, but when we look at Iceland’s predicament we should say that there but for the grace of China go we.

-Iceland’s Deep Freeze

Oral Justice

Oral Justice

Econ Talks- Hayek for Africa

Hayekian Insights on Economic Development
Featuring William Easterly, Professor of Economics, New York University, with comments by Arvind Subramanian, Senior Fellow, Peterson Institute for International Economics. Moderator Ian Vásquez, Cato Institute.

Let Failing African Governments Collapse: A Radical Solution to Underdevelopment
Featuring: Edward N. Luttwak, Senior Associate, Center for International and Strategic Studies; George Ayittey, Professor of Economics, American University; and Mauro De Lorenzo, Resident Fellow, American Enterprise Institute. Moderated by Marian Tupy, Policy Analyst, Cato Institute

Economic Collapse and Political Repression in Robert Mugabe's Zimbabwe
Featuring: Walter H. Kansteiner, Principal, Scowcroft Group Former Assistant Secretary of State for African Affairs; Carol Thompson, Deputy Assistant Secretary, Bureau of African Affairs, Department of State; and Richard Tren, Director, Africa Fighting Malaria. Moderated by Marian Tupy, Cato Institute.

Three models of financial regulation

Sharks circle Paulson's Aussie plan;

To simplify heroically, there are three main models of financial regulation in operation around the globe. The first is functional regulation, whereby separate regulators oversee different types of financial company. Most countries have moved away from that model, on the solid grounds that financial markets themselves have become more interlinked and companies more promiscuous. The US is a prominent exception. Americans have remained as committed to a highly complex form of functional regulation as they are to suit trousers that ride above the ankle.

The second model is unitary regulation, with a single institution covering most if not all of the financial sector. Although this model is often associated with London and the Financial Services Authority, the Scandinavians started the trend on the back of the banking crises there in the early 1990s. Following the UK switch a number of other countries, including Japan, South Korea and Germany, did the same. Now more than 50 countries operate something similar, although no two models are precisely the same. Time was - way back in August 2007 - when the unitary authority strategy was carrying all before it. In the ANR era (After Northern Rock) some of the gilt has gone off that brand, although the underlying logic remains strong.

The third scheme is known in the trade as Twin Peaks - a long-forgotten US television series not adorned by Kylie - whereby two regulators are established: one for prudence, focusing on capital soundness, and one to monitor the general conduct of business standards. So far only two countries have followed this prescription, originally devised by UK academics: Australia and the Netherlands. They have done so in subtly but importantly different ways. In Amsterdam the central bank is the prudential regulator. In Sydney there is a separate authority, leaving the Reserve Bank withscrutiny of the payments system and responsibility for financial stability.

After a brief global tour the US Treasury has come to rest near Sydney Harbour, a very agreeable location, one must admit. The Paulson plan would strip the Fed of its direct role in supervising bank holding companies and give it instead a broad remit to look for trouble across the financial system. In an important sentence in his speech Mr Paulson gave a hint of his reasoning, and a clear warning to the investment banks. "It would be premature to assume," he said, "these institutions should have permanent access to the discount window and permanent supervision by the Fed." The Treasury is clearly nervous about the growing assumption in the markets that brokers will continue to be able to deposit mortgage securities, food stamps and dead mice at the discount window in return for hard cash. I suspect this will be a hard proposition to sell to Congress, however logical it may be.

Doing Business in Small Islands

Interesting post from World Bank's Doing Business blog;

In Mauritius, it takes only 7 days. Mauritius, the best performing SIDS economy, ranks 27th on the ease of doing business, while Guinea Bissau is at 176 out of 178 countries.

The government that took office in July 2005 embarked on a bold economic reform program aimed at moving Mauritius from reliance on trade preferences to global competitiveness. Over the last two years Mauritius has reformed in 7 of the 10 areas Doing Business measures—one of the most dedicated government reform efforts that the project has seen worldwide. Out of 18 reforms affecting business regulations in SIDS introduced between April 2006 and June 2007, 6 were implemented by Mauritius.

Reforms pays off. Over the past two years, Mauritius's economy has enjoyed a steady increase in the annual growth rate – from 2.2% in 2005 to 5.4% in 2007. This is consistent with Doing Business research finding - a hypothetical improvement on all aspects of the Doing Business indicators to reach the level of the top quartile of countries is associated with an estimated 1.4 to 2.2 percentage points in annual economic growth. This is after controlling for other factors, such as income, government expenditure, investment, education, inflation, conflict, and geographic regions.

Reforms are also associated with faster job creation. In Mauritius, overall the unemployment rate dropped by 1.1% from 9.6% in 2005 to 8.5% in 2007. Doing Business research also shows that women and young workers benefit the most from reforms. Mauritius is no exception. Female unemployment was reduced by 2% from 16.4% in 2005 to 14.4% in 2007.

Italy Reforms

It's Old Insolvency Regime

Quote of the Day

If the government underwrites all the risks, call it socialism. If it underwrites only the failures, call it foolishness.

- Allan Meltzer

A reminder- the Mercatus Center Master's Fellowship Program

The deadline for applications for the Fall 2008 semester is April 18, 2008.

The Mercatus Center Master's Fellowship Program is a competitive fellowship program for students in George Mason University's MA economics program (thesis option) who are interested in pursuing an advanced degree in applied economics in preparation for a career in business or public policy. Our master's fellows take specialized courses which provide analytic training in applying economic ideas to solve problems in the world.

The Mercatus Center Master's Fellowship program is targeted toward students with an interest in gaining advanced training in economics, but who do not anticipate a career in academia. Students who anticipate working in public policy or in a decision making position in business are ideal candidates for this fellowship.

Another of Don's Letters

One of Don Boudreaux's recent letters;

David Brooks notes that "behavioral economists demonstrate every day [that] human beings are powerfully and unconsciously influenced by ... ideas and assumptions" that cause them sometimss to make systematic mistakes ("Not a good time to trust the market," March 20). True. But Mr. Brooks himself mistakenly draws the conclusion that this fact justifies government regulation.

The undeniable truth that each of us frequently makes foolish decisions does not justify overriding our freedoms, especially if (as is likely) the same "powerful and unconscious ideas and assumptions" that cause us to err when acting privately will cause us to err when acting politically -- and will cause also those persons in political office to err when exercising their power.

For all of their insights, behavioral economists have never demonstrated that political power cures its holders of any of the cognitive ailments that afflict the general lot of humankind.

Sincerely,
Donald J. Boudreaux

Paul Volcker the practical monetarist

FT coverage of the Volcker interview;

He told CBS Charlie Rose show: “We have seen the Federal Reserve take more extreme measures in some respects than any that have been taken in the past to deal with a financial crisis.”

He said the decision to lend cash to Bear Stearns and make emergency fin-ance available to other primary dealers was “understandable” but raised “real questions” as to the appropriate division of labour between US authorities.

The former Fed chief said the US central bank had not been thought of as a place “where you put in bad assets, possibly bad assets” – an apparent reference to the collateral backing the $30bn credit line extended by the Fed as part of the Bear rescue takeover deal.

“At some point the government, in my view, ought to be taking responsibility for that kind of action, not the Federal Reserve,” Mr Volcker said.

He added that the Fed’s latest move “stretches their authority to the limit”. The problem of what to do with bad housing loans was “basically a governmental responsibility”.

He urged the government to channel funds into the market through Fannie Mae and Freddie Mac, the government-sponsored agencies – possibly by activating a longstanding Treasury credit line to these institutions.

Echoing the message from the Fed this week, which cut interest rates by less than the market had expected and highlighted concern about inflation, Mr Volcker said “there are limits to how much you can reduce interest rates”.

He warned that the threat of resurgent inflation was “lurking not very far in the background”. That would be “the ultimate destructive result of this”, he said. “We just must not let that happen.”

The former Fed chief also said the administration’s strong dollar rhetoric had “become meaningless”.

He said a weak dollar allowed the US to increase exports and reduce its reliance on foreign savings but “begins to raise questions” as to its role as a world currency.

In addition to above Volcker raised the issue compensation packages of investment bankers that may be providing incentives to take greater risks.

Related;
Former Fed chair Volcker: financial crisis not over

The realignment of the regulatory powers

Second, the more commitments made by the Fed, the more we lose the (quasi) independence of our central bank; for a large commitment Treasury sign-off is needed. The realignment of the regulatory universe will eventually emerge as a big story from the current crisis, though it is hardly commanding much attention right now.

How to deal with banking crises;

One lesson is that trouble is all too common. Most members of the IMF have undergone at least some distress since the late 1970s. Crises in poorer countries tend to be deeper and more costly, often because they are twinned with collapsing currencies. According to a 1996 survey of insolvencies by economists at the World Bank, the bail-out of Argentina's banking system in the early 1980s cost a stunning 55% of GDP to fix.

The rich world's banking troubles have not been cheap either. The bill for bolstering Finland's banks in the early 1990s came to 8% of GDP; Sweden's bail-out was scarcely less dear. America spent more than 3% of GDP cleaning up the savings-and-loan crisis, its priciest to date. That suggests that the possible cost of today's troubles, though alarming, is not off the charts. The best, though still highly uncertain, estimate of prospective lending losses is around $1.1 billion, less than half of which would be borne in America by banks, investors and in forgone taxes: $460 billion is equivalent to about 3% of last year's GDP.

History shows wide-ranging reasons for recessions

How Paul Volcker became a practical monetarist;

It always seemed to me that there is a kind of commonsense view that inflation is too much money chasing too few goods. You could oversimplify it and say that inflation is just a monetary phenomenon. There are decades, hundreds of years, of economic thinking relating the money supply to inflation, and people to some extent have that in their bones. So I think we could explain what we had to do to stop inflation better that way than simply by saying that we've got to raise interest rates. It was also true that we had no other good benchmark for how much to raise interest rates in the midst of a volatile inflationary situation.

At least as important was the idea to discipline ourselves. People in the Federal Reserve don't like to raise interest rates. So the danger is you're always too little too late. I think that would apply to the current situation [April 2000]. So, when inflation really had the upper hand, it was, I think, very important to put something out there so you could discipline yourself. For that kind of a commitment, you've got to know what's at stake, and it does make some broad sense if you have that much inflation [pp. 178-179].

What really propelled me to make the change was when we raised the discount rate for the second time, when I was first down there. The vote was 4-3. I thought it was a reasonably strong move and we'd get a favorable reaction in the market, but we didn't. The response was, "Well, gee, the Federal Reserve is behind the curve anyway, the vote was 4-3, and that's the last increase of the discount rate we'll see." So the market reacted very badly, which surprised me. I guess I was a little naive. I remember very clearly, I didn't bend over backwards to try to twist the arms of the three people who voted the other way. I knew I had four votes. If we had to increase the discount rate again, we'd have another 4-3 vote. But that's not the way the market read it. Then I realized that we had this credibility problem worse than I thought. That got me off and really thinking operationally about the other approach [basing policy on target growth for the monetary aggregates]. But when it was sprung on them, everybody was very much in favor, even those who were voting against the increases in interest rates [pp. 178-179].

Fannie and Freddie: The End of the Punishment is Nigh

Cost of insuring bank debt falls after Bear bail-out

The cost of protecting the senior debt of the 25 European banks in the iTraxx Financials index has fallen 44bp this week, or about 28 per cent. It now costs an average of €114,000 per year to insure €10m of the banks' debt against default over five years, €44,000 less than it did on Friday.

Defending Market-Value Accounting

The Prisoner of Wall Street

So central banks, including the Fed, should stand ready to act as market maker of last resort, accepting a wide range of private securities as collateral in repos (or purchasing such securities outright) from a wide range of counterparties at a wide range of maturities. Likewise, individual systemically important financial institutions should have recourse to lender of last resort facilities, including the discount window.

The Fed has recently extended access to its discount window to the 20 (or is that now 19?) primary dealers. Other non-deposit-taking institutions will no doubt be granted the same privilige before long. The restriction of the new PDCF to overnight finance only should also be lifted. The same terms as those available to deposit-taking institutions (up to 90 days) should be available. Provided the collateral is priced appropriately (which means the prompt abandonment of the approach outlined on the Fed’s website that “…the pledged collateral will be valued by the clearing banks used by the primary dealers to access the new facility, based on a range of pricing services.” - an invitation to stuff the Fed with fools’ gold priced as bullion), this will stop the unavoidable and fundamentally warranted solvency problems of a number of households and financial institutions from triggering a system-wide liquidity crisis and a system-wide fundamentally unwarranted solvency problem, and will do so with minimal damage in terms of moral hazard.

Seeing Red at the Fed

Home Sweet Investment

Can’t Grasp Credit Crisis? Join the Club

“If anything goes awry, these dominos fall very fast,” said Charles R. Morris, a former banker who tells the story of the crisis in a new book, “The Trillion Dollar Meltdown.”

This toxic combination — the ubiquity of bad investments and their potential to mushroom — has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns.

Bear Economists Snipe at Bernanke
But in their most recent economics report released Wednesday — titled “Apart From That, Mrs. Lincoln, How Was the Play?” — Bear Stearns economists detail their sometimes sarcastic critiques of Mr. Bernanke, and lay their firm’s inescapable demise squarely on his shoulders.

Post-Bailout Punditry

Dept. of Crazy Laws

Your Ph.D. Isn't from the EU? Then You're Not a 'Doktor'

Britain Reverses Ban on Bloody Video Game

Court Says OK for Gere to Visit India

Touch your privates in private, court tells Italian men

Blind economists

Massimo Morelli

James Gwartney

Yet their productivity will put all of us to shame.

Related; James Gwartney talk at Cato

Doing in Business in Middle East

Fadi Ghandour, founder of Aramex

So where do you think he learned the art of entrepreneurship? You guessed it right- in USA.

Related;
Delivery companies are consolidating

“WE ARE competing with giants,” says Fadi Ghandour. The Jordanian businessman has first-hand experience of consolidation in the logistics business. He is chief executive of ARAMEX International, which began life as the Middle East partner of a number of American delivery companies. Partnerships and alliances allow operators to link with others to provide services in places where they have no operations of their own. All went well until 2003, when DHL bought Airborne Express, ARAMEX's chief partner in America. The deal gave DHL a way to compete in the backyard of UPS and FedEx. But for ARAMEX it meant its link to the crucial American market was cut.

To restore it, Mr Ghandour set out his own strategy of alliances and acquisitions, replicating what his big rivals were doing. ARAMEX now offers a delivery service to more than 190 countries. Last year it was listed on the Dubai stock exchange. The company is continuing to buy local operators, and recent acquisitions include logistics firms in Ireland, Britain and Egypt. “There are always entrepreneurs out there,” says Mr Ghandour. “We are never going to be left without a real partner.”

ARAMEX illustrates how local markets present their own, often unique opportunities for logistics companies. ARAMEX's services range from the secure delivery of credit cards and legal documents to delivering goods and accepting payments for users of souq.com, an Arab version of eBay. The company also offers a “shop and ship” service for people buying things in America, especially online. Although international deliveries have become easy, some American companies and traders on eBay will not ship goods overseas. ARAMEX helps out Middle East shopaholics by providing them with addresses in America to which goods can be shipped. It then couriers the items to the buyers.

Foreign Direct Investment in South Asia

A recent publication from ADB- South Asia Economic Report-Foreign Direct Investment in South Asia