So in addition to this blog, Awesomeopolis, BurgerMap Philly, and a couple guest posts on Urban Direction, I'm also a financial blogger now:

http://kanjoh.com/2010/02/18/hank-paulsons-ideas-for-financial-reform/

I'm a regular renaissance man. Like Leonardo da Vinci...except I'm terrible at art and I don't have a ninja turtle named after me. Also, I'm pretty sure I have more blogging experience than he did.

(Incidentally, the BurgerMap's up to 70 burgers...)

Would Jesus Be A Capitalist?

Michael Moore, as part of his anti-capitalism campaign, is sending around an e-mail asking if Jesus were alive today, would he be a capitalist, or would he be opposed to capitalism? Here's my response:

Name an economic system that would be better for the poor than capitalism. Seriously.

Sure, it creates big gaps between rich and poor, but would Jesus want you comparing your life's worth to the life of your neighbor? The poor in America have a better standard of living than the poor in most non-capitalist countries, with more opportunities for social mobility as well. A poor person in capitalist America is better off than both a poor person pretty much anywhere in non-capitalist Africa and a poor person anywhere in the world during the time of Jesus. Heck, they're better off than most rich people in both those situations (certainly most middle-class people). Better access to healthcare, education, resources, the tools for self-improvement, travel opportunities, social and socioeconomic advancement and development...

And to those who make the argument that those are trappings of modern society and not of capitalism itself, which economies invented all that stuff? Communist and socialist countries lagged behind the societies which lavishly rewarded those who brought tremendous value to those societies. Not everyone's a genius and a saint like Norman Borlaug. We're human, by and large, and respond to incentive structures. Life saving medicine is invented by pharmaceutical companies who expect patents on their $50 pills which save the taker a $10,000 operation (which itself was once not that big a price to pay for 20 more years on Earth). The best way to make money in a well-run capitalist economy is to provide things people want, that make their lives better. Sure, we've got regulatory gaps, but to abandon the system entirely? I don't buy it.

To those who say "OK, fine, capitalism was good, but now it's run its course. Let's go another direction," I reply: "What about tomorrow's poor?" Do we want to freeze the state of poverty, redistribute the wealth, and squelch innovation? Crawl along in a dangerous world not giving people strong incentives to better everyone? Capitalism was worse a hundred years ago than it is now...the current crisis highlighted some steps back, but we're still far ahead of where we were. We're making progress within capitalism, and the capitalists are making more progress than others.

What's the alternative? Non-capitalist countries are quickly adopting capitalist activities and policies, but the reverse isn't happening. Even successful "socialist" countries are really capitalist countries with socialism-inspired domestic policies. And they wouldn't be where they are today without the help of capitalist friends and trading partners.

Yes, we need a better safety net. Yes, we need to regulate markets and correct for market failures. But the dirty little secret is America won't really fail because capitalism will tumble...the Visigoths at our gate are not socialists, communists, or anything else. They're capitalists, who will beat us at our own game, the only game in town among superpowers, nations on the rise, and great societies. They'll better regulate, better incentivize, better innovate, better create...solar panels are coming from China and Germany; wireless innovations are coming from developing nations without legacy systems and inflexible out-of-date policies like India and Israel; we're being out-manufactured by places that can do it cheaply--and in doing so take the poor out of the streets and put them in bad jobs, but jobs nonetheless. Jobs where there were none before. And all these countries are coming around to capitalism.

Would Jesus be a capitalist? Would he find jobs and dignity for the poor? Would he help invent life-saving drugs or safer cars or cleaner energy? Would he sell software to help us make better decisions, and donate the money to a big foundation to level the educational playing field? Would he still walk around the countryside talking to people dozens at a time, or would he go with a book, a blog, a podcast, a TV segment, an Op-Ed? Almost 7 billion people, can't save them one at a time anymore.

He might not speculate in the derivatives market, because it's more or less a zero-sum game...but would he frown upon a farmer buying a weather derivative that pays off in case of an extra-dry season, giving him enough money to get by and replant next season? Would he tell Merck to close up shop? Would he disapprove of accessing capital markets to raise funds to build a hospital? Darn right Jesus would be a capitalist were he alive today. Just like the rest of the Jews.

My Question

My favorite blog on the internet published an interview today with Tim Harford, the "Undercover Economist." The way Freakonomics interviews work is that readers submit questions, and the interviewee picks a few of his or her favorites to answer. Well, I got a question in this time (the 5th of 8 in the interview). I was excited to see it there, and appreciated the response. I have my own comments, but I thought I'd share it with my readers and see what you guys think first.

Consumer Marketing Question

The more choices a person is faced with, the less likely they are to make a choice at all. People are almost 10 times more likely to buy jam if they have to choose from 6 jams than if they have to choose from 24. For every 10 extra funds in a 401k program, participation goes down 2%. People don't like having too many choices, unless the choices is fun to make and variety adds real value (like choosing sundae toppings, or in nerdy cases, configuring a new computer).

OK, keep that in mind. Now consider marketing tactics: multiple brand names is often a dominant strategy. If there are 6 laundry detergents on the shelf, and people randomly select, Company A has a 17% market share. But by coming out with 4 new brands, all pretty much the same thing, they now have 5/10 instead of 1/6. 50% market share. And that strategy also works with just about everything else in the grocery store.

Now combine these, and you have a real prisoner's dilemma in consumer goods marketing. More brands and choices means a bigger slice of the pie for a company. But more brands and choices also means a smaller overall pie for non-essential products.

How do companies balance out these interests? There's clearly a rational limit on the number of choices you can offer in a grocery store, but that number--and the number of choices many consumers are given--is almost certainly larger than the number that would maximize the size of the pie. And there's another cost--as producer sales and producer surplus rise, consumer surplus also rises, because individuals won't feel incentivized to skip a first choice product for a substitute that's easier to navigate. At the very least, it lowers transaction costs (choosing costs, including effort and time), which is a gain for consumers.

How does this tug of war dynamic play out in marketplaces? Would it even be legal for companies to agree to limit branding diversity, even if it's for everyone's benefit? Is there a simple strategy, like in a prisoner's dilemma problem, that's clearly dominant? Or even a simple strategy that's clearly good?

Healthcare, Stick Figures and Analogies

This YouTube video (found by Lilly) not only spells out the case for universal healthcare, including a public option, but ends with a great analogy that will help people struggling with the complexities of the current system.

http://www.youtube.com/watch?v=Jng4TnKqy6A

(I had it embedded, but the dimensions of the video exceed the space allotted and I'm too lazy to recode the main page. It's 4:37, well worth it, amusing, and not a Rick-Roll.)

This may be my very first Not Safe For Work (NSFW) link, but if this isn't an economic indicator, I don't know what is. Again, it's NSFW.

My Neighbors

In lieu of hearing my opinions, read this (Too Poor to Make the News), or even just part of it. If you're too lazy, it's a New York Times guest piece written about how invisible the poorest Americans have become.

The media is flushed with stories of rich and middle class people who have fallen from grace, but the working poor are losing their jobs and homes in disproportionately greater numbers as they crowd into trailers and tiny apartments and sleep on the streets. They're hard to count, hard to see, and are becoming invisible, but there's almost 40 million of them, more than 1 out of every 10 Americans, and when designing policy or making donations or arguing around the watercooler, it's important not to forget them. The gap between the middle class and the uber-rich may be shrinking a bit, but the gap between the middle class and the poorest certainly isn't as their standard of living falls to third-world levels. Unharnessed economic potential and millions of families hang in the balance as we argue about Main Street and Wall Street...but the streets aren't just places of business. They're homes and beds to far too many.

[Incidentally, this kind of makes me mad at John Edwards...he was in a prime position to help these people and do something about it--more than just handouts and stopgaps--and he had great ideas and energy, and then he screwed it all up...it's not just his own life and marriage on his shoulders. Am I crazy, or do others feel like he let a lot of people down too?]

The Safer Side of Bonds?

I had an idea today, and the logic goes as follows:
America's massive debt to China makes us safer. Why? There's reasonably high correlation between the following: really evil people, people who hate America, people who rely on China's economic engagement and/or tacit political support.

During the Korean War, China got involved solidly on the side of North Korea. Since then, a lot of our problems with North Korea are compounded by China's lack of willingness to play ball. But now that we owe China hundreds of billions of dollars, they can't really take sides against us in an armed conflict, and today, the Wall Street Journal reported that China may be willing to consider sanctions as North Korea pursues nuclear weapons. I think China is waking up to their new incentive structure, and we'll be seeing them take steps, if necessary, to safeguard what is essentially their investment in our future.

Alexander Hamilton said "a national debt is a national blessing," and I think we're going to start seeing it in action.

(That said, this huge debt burden may prove crippling, lead to high interest rates, rampant inflation, increased rates of corporate bankruptcy, and rollbacks in services and government programs. But at least China will help keep the nukes away.)

More Credit Card Law Analysis

So I did a little more research, here's an update on a few specific provisions relating to students:

PROVISION: Students may not be offered gifts in exchange for completing credit card applications.
RATING: Don't like it, but probably a net gain.
ANALYSIS: This seems like it hurts the responsible people and helps the irresponsible people. There are probably a lot more irresponsible students than knowledgeable and fiscally responsible students, so I think it might be a net societal gain by making it harder to get the irresponsible students addicted to debt, as they say. That said, I don't like the idea of punishing the responsible at the expense of the irresponsible. Just as it's easier for a credit card company to take advantage of a student, it's also easier for a responsible and cunning student to take advantage of credit card companies--by getting free stuff in exchange for what they were going to do anyway (that is, get a credit card and be responsible about it). It also restricts freedom and limits consumer choice. So from a philosophical standpoint I'm opposed to it, and it does hurt people like me, but I think I have to admit that even I expect this provision to produce some slight net benefit for the country.

PROVISION: Universities will now be required to disclose marketing agreements made with credit card issuers. Credit card companies will likewise be required to report donations and other financial transactions with universities and alumni associations.
RATING: Good
ANALYSIS: If a student's school is in a business relationship with the company offering credit cards on campus, disclosing that may take away what a student sees as an implicit endorsement. It reveals conflicts of interest, does nothing to restrict freedom or choice, and provides information to consumers. I think there are great principles involved here, and the only reason I didn't rate it higher than "Good" is because I'm not sure how big a difference this will make. But there's no downside, so it's worth a shot.

PROVISION: "Calls on" the Government Accountability Office to conduct a review of the impact of university/credit card company business relationships on student credit card debt.
RATING: Good
ANALYSIS: No "thou shalt not..." regulation in this part. It just asks the GAO to look into how big a factor these currently unseen deals are when it comes to helping and hurting students with credit, credit cards and debt. The disclosure requirements should make the studies easier to do, and it might provide some insights that make future regulation and legislation better. I'll upgrade this to a "Great" if we also use the opportunity to learn about financial education needs and how to improve that education in this country.

My Credit Card Law Analysis

So Congress is passing new credit card legislation. Some of the ideas in it are good, and some of them are bad. Some of them will help lots of people. Some won't. A few provisions will help some poor people and hurt some rich people. Other provisions will protect some poor people and hurt some other poor people. Here's PiFry's Guide to Congress's Credit Card Legislation Rush Job. Whether you're trying to form your own opinions or sound impressive at the watercooler, this primer of a few salient points should help. Feel free to add your own ideas in the comments.

PROVISION: Banks must send out credit card bills no later than 21 days before payment is due.
RATING: Pretty Good
ANALYSIS: This prevents the old trick of mailing a bill late in the hopes of being able to charge late fee. That trick is unethical and abusive, and 21 days builds in enough time to account for two envelopes making their way through the postal system, plus ample time for the bill payer to get the money together to pay it. Ideally Congress would just outlaw the unethical tactics, but intent is so hard to prove and even harder to monitor, so a day count is the best way to go. I'm not crazy about such a stiff and inflexible regulation, but I honestly can't think of a better way to do it.

PROVISION: Banks generally must wait until a payment is 60 days late before charging the higher penalty rate on outstanding balances.
RATING: Unnecessary, annoying, and too restrictive
ANALYSIS: Why 60 days? Why not 2 months, which would be anywhere from 59 to 62 days? Why not 59 days? Why not 49 days? This is an arbitrary and unnecessary cutoff. If a payment is late, the previous provision kind of ensures the person is actually delinquent and not caught in some trick. I understand allowing some grace period for something like a medical emergency or being stuck in an airport someplace, but 60 days seems excessive. A 30 day limit might help people who need it, but a long 60 limit just lends a helping hand not to the poor, but to the irresponsible. Credit card companies may try to make up the profits elsewhere at the expense of more creditworthy customers, which violates a fairness principle I think most Americans hold when it comes to markets. (As an aside, this regulation could also be bypassed by a penalty scheme that's still legal and yet more complicated and esoteric--kind of the exact opposite of the direction in which this bill is trying to push things.)

PROVISION: 45 days mandatory notice for an interest rate change
RATING: Often good, sometimes annoying
ANALYSIS: It makes sense to require enough notice of changing rates to allow them to plan accordingly. This prevents some abuse. That said, it also rules out cards for consumers who might WANT a frequently-changing rate. If a bank wants to issue a card with a fluctuating but lower-on-average variable rate (or a consumer is willing to trade a fluctuating rate for something more important to them about the card), this will restrict consumer choice. I don't like that, and it potentially costs society some real value. I think there should be some exceptions in the final draft of the bill (I'm not sure if they're talking about it or not).

PROVISION: If a consumer's payment is received by 5PM on the due date, the payment is on time.
RATING: Awesome
ANALYSIS: The only thing this does is prevent a company from screwing with customers by putting a mid-day or early-morning deadline in the fine print. No more charging late fees for having a payment arrive with an afternoon mail delivery, and no more late fees for the postman getting caught in traffic.

PROVISION: Banks will now require customer permission before charging that customer a fee for exceeding their credit limit.
RATING: Very good
ANALYSIS: Currently, a bank can automatically charge a high fee every time a consumer goes over his or her limit (accepting the new charge). From now on, the default will be for limits to be actual limits, and charges will be declined unless the customer gives the bank permission to charge an outrageous fee for a temporary bump of the credit limit. Only downside is for the consumers who don't know they're at their limit, haven't authorized such a fee, and really really really need to charge whatever they're trying to put on their card. But you can't have your cake and eat it too.

PROVISION: When carrying multiple types of balances on the same card (with different rates), banks must apply payments to the highest interest portion of the balance first.
RATING: Very good
ANALYSIS: It was an old trick to say "0% interest for balance transfers!" and let someone put $6,000 on a new card that had a 24.99% rate for everything else. Then even if the customer was responsible and spent $100 the first month while paying $200 on the bill, the credit card company would say "OK, you now have $5,800 outstanding on the balance transfer and $100 outstanding on which you owe 24.99% interest." It was basically a trap to roll all the new spending into a very high interest loan until they paid for the balance transfer. There were tons of these tricks, and now they'll be illegal. Good for consumers--especially less savvy ones--and bad for credit card companies (who will probably take it out on customers like me who always pay off everything). The downside to this comes up when a consumer would want to pay the lower-rate balance off first, though such situations are hard to think of outside of contrived examples.

PROVISION: Promotional rates must last at least 6 months.
RATING: Terrible
ANALYSIS: Promotional rates are marketing. As long as the duration of the promotional rate is made clear from the beginning, we shouldn't force companies into using specific types of marketing offers. This kind of invasive micromanaging helps very little and bans (or makes more difficult to provide) all sorts of offers which could, if used correctly, be very beneficial to consumers. A plain-English disclosure requirement would work much better here.

PROVISION: Issuers can't raise the base (non-promotional non-penalty rate) for a year after issuance.
RATING: Meh, whatever
ANALYSIS: This one probably isn't a big deal in the long run; it does offer some protection; and the above regulation allows the effective rate to change once (promotional to non-promotional), but seriously, let the market decide this kind of thing. If we're requiring 45 days written notice for a rate change, how necessary is this? On the other hand, it could prevent someone from having to change credit cards a lot, which would reflect negatively on their credit rating...in analyzing this I reach an indifference point.

PROVISION: Certain pieces of information will have to be disclosed in plain English and written in 10-point font or bigger.
RATING: Awesome
ANALYSIS: Disclosure regulations are good. Disclosure regulations which mandate important information be presented in a legible and understandable format are even better. These kinds of information include everything from expiration dates on gift cards (and similar devices) to how much it would cost to pay off a balance making the minimum payments. Useful information for consumers presented clearly. Fantastic. Nine thumbs up.

Finally:
PROVISIONS: Young people and students are going to see a very different landscape in a lot of ways. I'm getting conflicting information on what this will entail.
RATING: Hard to say right now, but it's looking worriesome
ANALYSIS: I've heard a lot of reports floating around, but generally it seems like the little ideas are good and the big ideas are bad. Little ideas include more disclosure on relationships between colleges and card issuers and banning certain marketing practices like a university-endorsed booth offering frat boys a free slice of pizza if they sign up for a credit card. Big ideas include forcing parental cosigners for young people, and parental consent for increases in credit limit. My big problem with this: how are young people supposed to develop good credit on their own? Having a credit card was very helpful to me in college in developing a credit history, and it's saved me a lot of money over the years. Those who have their own income can apply for a waiver, but the cutoff age being talked about is 21. This means for 3 years a full American citizen who isn't a minor will be treated like a second class citizen. 21 is a rare age limit, and we use it for things like drinking due to all the extra drunk driving deaths. Is a credit card really that dangerous? Some would argue yes, but they'd be equivocating, and this doesn't sit right with me. This could help protect some, but also hurt and inconvenience a lot of people.

That's the end of my primer; I have to go do other things now. Hope it helped. One last note: I'm hearing a lot of talk about how the credit card companies will jack up fees and cut benefits for responsible card holders to make up the difference...I'm not sure how true that is though. I'm sure we'll see a little bit of that, but at the same time, if credit card companies have to make more money on regular business and less on fees, they may be competing even more vigorously for the big-spenders (after all, the companies do get a percentage of EVERY TRANSACTION that takes place on the credit card as well). I think the effects may cancel each other out, by and large.

This political cartoon comes from Max Power. It does beg an interesting question: how much difference does there have to be between a successful government program and a ponzi scheme?

My Bag Tax?

The City Council in Philadelphia is proposing a 25 cent charge per-plastic-bag used at a store...small businesses would get to keep the revenue for themselves, larger ones would have to give some of it back to the city as taxes. I'm not sure how I feel about it, but I've been asked by a few readers to share some thoughts, so here's my first-cut analysis.

Some people are asking "why not just ban it?" On principle, government should intervene and ban really harmful stuff, but there's a whole category of other things which provide value, but which people tend to over-consume due to a market failure (a negative externality). This occurs when someone gets most or all of the benefit of an action, but only incurs a small portion (or none) of the cost of that action. The government doesn't want to ban a helpful activity altogether, but it needs a way to keep it in check, lest people hurt society for their own benefit. Governments cap emissions on cars, for example (if cars could pollute more, they'd be cheaper, and drivers would get all the benefit while passing most of the cost onto everyone else who has an equal stake in having clean air). Taxation is a powerful market-adjusting tool if applied correctly...one of the greatest public health measures of the century in this country has been the cigarette tax.

A tax also makes sense because it helps generate money that can be used to help offset the harm caused by the thing being taxed...helping to negate the initial wrongdoing. If Philadelphia put the revenue towards city beautification, cleanup projects, and creating green jobs, it may be better than a ban, which would eliminate consumer choice. I'd rather have the option of bringing my own bag or paying 25 cents for one as opposed to being forced to bring my own bag. A tax is no WORSE than a ban from an individual consumer's perspective...unless a store under a ban would switch to free paper bags and under the tax will just charge for the bags...and now I'll get into the real problem I have with the tax:

It's extremely regressive. Poor people will end up paying a higher percentage of their income, and generally be more shafted, for several reasons. One, they'll be less well prepared for the switch, as they don't read my blog (and other factors). Two, avoiding the charge is an expense and hassle more easily managed by wealthier people: buying good reusable bags would be a substantial one-time expense, and it's a lot easier to use such bags once acquired if you have a car and don't have to take a bus (they'll be bulkier, and must be carried both ways). Third, and most importantly, it's a flat fee tax, that is, everyone pays the same. It won't rise or fall with income or even the value of the items purchased, making it more regressive than even a sales tax, which at least goes down as you buy cheaper stuff. This tax is proportional to the amount of stuff bought, and when it comes to groceries, poor people buy cheaper, but they still need to eat the same amount of food as anyone else. If passed, this may be one of the most necessarily regressive taxes in history. (I say "necessarily regressive" because there are more regressive taxes that target products preferred by poor people, like the cigarette tax actually. But poor people at least have a choice not to smoke; they don't have a choice not to buy groceries, making it necessary to choose between paying the charge or paying to avoid it.)

(OK, now that I've made some good points, I'll go back to being wishy-washy.) The only thing I can think of to mitigate the regressive problem is to require that any place offering plastic bags also offer paper ones, which won't be subject to a city-mandated charge. It's not a perfect solution, and I generally hate the idea of government micromanaging business like that. The whole thing doesn't sit right with me...that said, it is a step in the right direction environmentally speaking and people will adapt to it. On a macro-level, though, I think a national gasoline tax would be a lot better than widespread plastic bag bans or taxes, and I do love my Wawa bags.

Now I want a Wawa sandwich. Who's surprised?

Just posted on my new blogging project. Though it might appeal to readers here as well. It has graphs!

Not sure what to make of this, but I can't say I disagree with the sentiment one bit.

My Bonus Policy

Companies are currently coming under fire for giving out bonuses while laying people off, and the ones who are giving out big bonuses while laying people off and accepting public money to stay afloat are downright reviled. In most cases, rightfully so, but I want to make a brief argument IN FAVOR of giving out bonuses to certain kinds of people, and those people are the ones who helped company performance by predicting the downturn, the bursting of the real estate bubble, and the credit crunch and the people who took steps to mitigate the risk. If companies don’t reward those people, or aren’t allowed to, then it creates a massive disincentive in the future for people to tell the truth, especially when it’s bad news. People already don’t like making bad predictions or giving bad news to superiors, but we’re on the verge of creating an incentive structure in which people ONLY make money by predicting good things and then having them happen.

•If an analyst predicts good things and he’s wrong, low compensation, less job security.

•If an analyst predicts bad things and he’s wrong, low compensation, seen as a pessimist/downer/disloyal.

•If an analyst predicts good things and he’s right, big bonus for being right and helping the company prepare.

•If an analyst predicts bad things and he’s right…low compensation and less job security? Really?

OK, now pretend you’re an analyst and the CEO says “Hey, we’ve got all these subprime mortgage loans on the books. Do you think we should buy more?” If you say yes, your fortunes are tied to those loans. But if you say no, even if you’re right you’re screwed because the company’s so heavily exposed to them anyway, the bad year causes you to get a crappy bonus anyway! So less risk for you means more risk for the financial system.

We should find a way to reward those most prescient, and send a message to future generations of economists, bankers, financiers and analysts that good work will be rewarded, because the difference between getting good analysis and having people game the system for their own benefit is exponentially greater than the hit companies and taxpayers take giving out bonuses even in the worst of times.

I’m not saying we should be paying for multi-million dollar office redecorations, but some people actually deserve bonuses, and for the sake of our future economy, they should get them.

Courtesy of Chuck, a 60 second tutorial on credit scores (in video form, otherwise, how would I know it's 60 seconds? That said the video is longer than 60 seconds because there's an intro).

Sorry about the paucity of posting of late, I'm working on a new blogging project with a few friends. I'll be sure to let my loyal readership know about it as soon as it's up and running.

My "Rush Limbaugh is a Big Fat Idiot"

So a big deal has been made about Rush Limbaugh lately. I never really paid the guy much attention--there hasn't been anything I could get from him that I don't already get from at least one of the three homeless people I pass on my way to work (the religious nut, the mean lady, and the crazy bird-man). Together those three beggars really are like listening to Rush on a drive to work...except I get to walk.

But lately he's been getting a lot of press, mostly about the Democrats painting him as the new face of the Republican party and his being stupid enough to accept that (or smart enough if he doesn't actually care about his party and just wants to cash in). So I thought I'd listen to a few of his comments from that famous speech he gave recently.

I didn't last very long.

At one point in his diatribe against President Obama, he decried our intrepid leader and attacked him for the TARP (Troubled Asset Relief Program), which he unequivocally described as unconstitutional.

OK, now I'm no historian, but wasn't the TARP plan created, enacted, and pushed through Congress by George W. Bush, Dick Cheney, and Henry Paulson? Wasn't half the TARP money spent or committed before Obama's inauguration?

Heckuva job with that speech, Rushie.

Gambling Addicts and Economic Theory

With a headline like this, everyone probably can guess where I'm going. Why play games with a negative expected return? Over the long run, you're almost guaranteed to lose money. A rational consumer wouldn't repeatedly do something like that. But I've found another defiance of economic theory, even when you look at gambling as a valuable good (consumed by gamblers).

Temporarily look at gambling as an entertainment expense. Sure, it costs money, but so does a movie, and people enjoy gambling a lot. Even if you do it too much, a little bit still makes sense in your life if you enjoy the activity enough (just like shopaholics need to stop impulse buying, but don't need to stop purchasing things from stores entirely).

OK, now let's switch gears for a minute. A fundamental tenant of financial and economic theory is that optionality has value. It's always better to have the option to do something than to not have the option, because if you DO have the option, you're never worse off, and in some potential future states of the world, you are demonstrably better off. Higher expected value, higher present value. It's why stock options are valuable (very valuable in this high-volatility market), and part of the explanation why an American call on a stock is worth the same as a European call on a stock (if you don't know what that means, don't worry about it).

Now combine those two points with this report from the Philadelphia Inquirer: New Jersey, home of Atlantic City, just added their one-thousandth (1,000th) name to a special list of persons banned from entering casinos. What makes this list so special is that it's voluntary. 1,000 individuals have gone out of their way to ask to have the option to enter a casino and gamble taken away from them.

At the core, I do very much understand and appreciate the impulse. It's the same logic that causes many people to avoid being in the presence of unhealthful foods. Remove the temptation, remove the possibility, and you can assist your better self in a mind-over-matter struggle for identity and self determination. Sure the option to have a donut has value, just as the option to gamble, since both goods are capable of producing great joy. But they're both bad for people in excess, and some people can't even trust themselves not to over-consume the good until their marginal return is negative.

What can we infer from this? Are there any lessons, or is it just an interesting oddity? I have a few thoughts:

When markets become inefficient, when the decisions of one person can impact the outcome of a system, or when human psychology--even financial psychology--is a major factor...don't count on rationality. This may be obvious, but what most people don't consider is that if you're counting on irrationality, it may be easy to predict what type of irrationality you're dealing with. The way I see it, there are two types of overriding irrationality: Overreaction and Inflated Discount Rates.

Overreaction is fairly easy to understand. People need to cut back on gambling, so they slam on the breaks and ban themselves from casinos (in some cases it may be the only way to avoid under-reacting, which carries with it worse consequences, but in some cases it may be to the forfeiture of consumer surplus, or value). We see it in less dire straights. My brother wants to be healthy, so he now eats nothing but egg-white omelets, steamed chicken, and vegetables. A little bit of bad economic news comes out, so the markets crash 4% only to bounce back 3% the next day.

Inflating a discount rate is a little harder to understand and see in every day life, but basically what it means is that people increase the impact time has on diminishing the value or detriment associated with a future gain or loss. A dollar today is worth more than a dollar a year from now (because even if you don't want to spend the dollar for a year, you could still put it in the bank and wind up with more than you started--also you have the option of spending it now or later, while the dollar a year from now only lets you spend it later, and optionality has value). But a dollar today is only worth maybe a dollar and a penny a year from now, or a dollar and four cents...certainly not more than a dollar and a quarter. But when people are being irrational, they place immediate value disproportionately above future value, and make bad decisions. A donut now tastes good, and diabetes is a long way off, even if the pain it causes is thousands of times greater than the enjoyment reaped from the donuts (people also inflate discount rates when the connection isn't abundantly clear). But when people are scared or are being irrational, they often focus on the present at the expense of the future. In my experience, recognizing this tendancy can help to understand irrational behavior (such as the gambling addiction itself).

Ideally a person aware of these tendancies can balance them out, and the business student inside me suggests playing poker with people who can't.

My Banking System

I think policy makers are currently making the same mistakes about banking that the bankers who got us into this mess made.

No, I don't think Rahm and Larry are writing bad mortgages, but I DO think they're getting so deep in theory and math, nuance and ideology, that they're missing the fundamentals. Here's how I see it:

1) Many big banks are currently being called "Zombie banks" accurately. As awesome as a Zombie Bank would be to blog about, what the term means is that they're still standing--albeit on crutches--but lack the capital to extend credit very far into the economy. They're big, but they can't act like a big bank.

2) Any recapitalization of the banks that would allow them to achieve their former prowess (And I'm thinking of banks like Citi and Bank of America right now) would not only be so large as to be impossible without public assistance for the time being, but the sum of money would also be larger than the net worth of the banks themselves, a net worth which, mind you, is being pushed up right now (talking about market capitalization, the price per share times outstanding shares) by some probability that the government will give a huge gift to the current shareholders, bringing me to point three:

3) Any rescue plan that allows the banks to lubricate our economy the way they once did and facilitate a recovery would either (A) have to come with SOME public ownership of a bank or (B) give a HUGE gift to shareholders and allow them to enjoy most of the upside potential while the taxpayers are left with most of the downside risk.

So I see three options: (1) Don't help the banks (2) Give a huge gift to shareholders and in the process mess up economic incentive structures even more or (3) Have some public ownership of banks.

People are fighting against #1 saying we need to do something, that we're capitalists and we need our banks. People are fighting against #2 saying in capitalism, the losers die out and it is SUPREMELY unfair to lay what might be a ticking time bomb at the taxpayer's feet when any good capitalist would allow for "creative destruction" right about now. And people are fighting against #3 by saying that amounts to communism and nationalization, which isn't very capitalist and any red blooded American should be against it.

Well, they're all right, but they're all wrong. Capitalism screwed up. Ask about the causes and you get everything from poor regulation and greed to messed up incentive structures and lack of understanding of man-made systems and devices. We're going to have to do something that appears at least a little "uncapitalistic" (I'm coining the phrase).

Personally I think from a political fairness principle, Option 3 is the best, though every criticism against it is pretty accurate. But we can't do nothing, and we can't take the risk associated with Option 2. The question should be how to manage public ownership and get it back to private as soon as possible, but we need our banks. To fund innovation, new businesses, infrastructure investment, and put investors and creators together. Without our banks, recovery will be a lot slower, so instead of coming up with half-measures that won't work (odd and sophisticated loan structures, caps on pay which will just send the smartest people fleeing to other industries, "bad banks" and "stress tests"...to name a few), let's start thinking about how to fix the big problems. Let's focus on using taxpayer money and the money we borrow from our children to invest in their future; let's figure out an exit strategy for public bank ownership (there are plenty of good ones); let's figure out how to let the people who take on the risk share in the rewards; and let's stop with the small-potatoes finger pointing, half-measures and PhD level minutiae that's standing in our way.

My Sandwich, and an Economics Question

I want to eat this (scroll down for the double, the true object of my desire).

Also, does anyone think that tax cuts are going to be as government effective as spending in an economy where people are frightened, confused, uncertain, and facing next-to-zero interest rates which cripples the fed's ability to close the gap between capacity and output?

(Usually lowering interest rates incentivizes investment today over investment tomorrow, and in any reasonably normal credit market companies start requiring more services/goods/materials from each other...but the fed controlled rate is now in a band between 0 and 0.25%, and credit spreads, or risk premiums, are only now starting to come down from apocalyptic to huge.)