In contrast to my militaristic account, we have Nick Szabo:

Local but extremely valuable trade was, this essay argues, made possible among many cultures by the advent of collectibles, by the time of the Upper Paleolithic. Collectibles substituted for otherwise necessary but non-existent trusting long term relationships. If there had existed a high degree of sustained interaction and trust between tribes, or individuals of different tribes, so that they gave each other unsecured credit, this would have stimulated time-lagged barter trade. However, such a high degree of trust then is highly implausible

Read the whole thing.

Richard Green writes,

depositories are not capable of holding long-term fixed-rate mortgages, because it subjects them to too much duration risk: mortgages are assets with long duration (i.e., have values that are sensitive to changes in interest rates), while deposits are liabilities with short duration.

...the basic MBS [mortgage-backed security] was and remains an ingenious product, and will continue to be an important instrument of housing finance in the years to come.

We are not exactly in agreement here. Some quick points.

1. The mortgage security does not make duration mismatching go away. To the extent that mortgage securities wind up held by banks (where they get a generous risk rating from regulators), the duration problem is right back where it started.

2. If Freddie and Fannie hold the securities (which they increasingly were doing), then you get a highly leveraged, highly concentrated pile of mortgage securities. This was a financial land mine waiting to be stepped on, and this summer it blew up.

3. If there are natural holders of long-term assets (pension funds or insurance companies), then there is nothing stopping banks from issuing long-term debt. Then banks can more safely fund long-term mortgages.

The financial system I want to see around mortgages is many banks, holding loans that they originated themselves, with decent-sized down payments (you don't get such big housing bubbles when people put down 20 percent), and with sufficient capital to ensure that shareholders and not taxpayers are the biggest losers if the bank messes up. This is pretty much the system that existed in 1968, prior to securitization. It blew up in large part because inflation got out of control, so that long-term interest rates rose, destroying the value of fixed-rate mortgages. So part of my ideal system of mortgage finance is that the Fed doesn't lose control of the inflation rate again. I think that's a lot easier to orchestrate than a system to try to put back together the Humpty-Dumpty of the mortgage-backed securities market.

negative interest rates; FDIC thoughts on the housing bubble in 2004; Cecilia Rouse over Austan Goolsbee?; Greg Mankiw's Macro Quiz

Just received one of the first Orbis ring flash adapters to make into this part of the world. Since I will not have time to shoot with it for a couple of weeks I am putting up a quick unboxing vid (and Ray Flash comparison) video for those of you thinking about taking the plunge.

(If you are watching this via RSS or Email feed, you may have to click through on the title of this post to watch the vids.)

My schedule is such that I will not get to really work with it until after Thanksgiving, which has me feeling like the kid in A Christmas Story pining after the Red Rider BB gun. Argh.

Oh well. After the jump, an additional (Orbis-produced) video.




From the "Episode 001" title on the Orbis video, it looks as if they are going to be uploading a series of tutorial videos in the future, too. Glad to see it.

More info at Orbisflash.com.

Bruce Handy wonders what might have been.

Forget hanging chads, 9/11, and those missing W.M.D.'s. A massive new conspiracy book proves that the original unanswerable question is still the juiciest: who shot J.F.K.?

Muchas gracias to whoever nominated Strobist for a 2008 Weblog award in the Photo category. (Apparently, they didn't have a DIY black-straw snoot category.)

The gesture is much appreciated. If you want to second (or third) the nomination, you can do so by clicking the little green "+" button on this comment right here. Thanks!

-30-

Suppose that the Federal Funds rate falls to zero. Does that mean that we are in the infamous liquidity trap, in which the Fed is powerless to use open market operations to affect the economy?

I think not, and I'm pretty sure that only Paul Krugman or someone too awed by Krugman to think for himself would suggest otherwise.

The Fed Funds rate competes with the rate on short-term Treasuries. The rate on short-term Treasuries these days is being determined by their value as collateral. Every financial institution is saying "asset-backed securities bad collateral, Treasuries good collateral." So the demand for Treasuries is through the roof, and when the price of a bond is high, its interest rate is low. So you get ridiculously low short-term interest rates on Treasuries, and also on Fed Funds.

If this safe-collateral mania keeps up, zero might not be the lower bound. Somebody might be so desperate to put up a Treasury security as collateral that the would be willing to pay interest to the Treasury for the privilege. That would mean a negative interest rate.

Now, I don't really believe that's very likely. The main reason I don't believe in the liquidity trap is that I recognize that there are multiple interest rates. If it gets to the point where the Fed cannot trade money for Treasuries, then it can trade money for Freddie Mac debt, which is still trading at a high risk premium over Treasuries.

So if anybody tries telling you that we are in a liquidity trap, tell him to shut his trap.

I don't think it's as complicated as Greg Mankiw makes it sound.

Also, I think that the spread between inflation-indexed Treasuries and regular Treasuries right now reflects the collateral squeeze more than it reflects expected deflation.

As someone who has taught economics for 28 of the last 33 years, I thought I had pretty much seen everything a student could come up with in an introductory course in which the issue was rent control. What I'm about to share is not a new concept or a new analytic result, but simply an inspired way of saying an old result.

In response to a question about rent control, one of my students, Preston Rackauskas, referred to a rent ceiling as an "incentive ceiling." Sweet.

With this lecture, I start to look at the second great puzzle of macroeconomics. How does the financial sector affect the real economy? Before one can answer that question one needs to examine the fundamental role of money and credit. In this lecture, I suggest that they are closely linked to government power.