In a post on PEN-L, Michael Perelman wrote:

Dean Baker reminded me at the meetings that Mankiw and Hubbard used to do decent work. There is a problem that as you ascend the ranks, your critical facilities decline.

My response:

In case you have been seeking (as I have) some lucid presentation of the ongoing financial meltdown triggered by the “sub-prime mortgage crisis”, I recommend the below from the LRB which starts with explaining the basics (not in the quoted text below) and goes on to describe the current problem:

LRB · John Lanchester: Cityphilia

[…]

The Northern Rock crisis saw all these factors being brought together. The Rock is a bank with roots in the North-East. It had grown to be the fifth biggest mortgage lender in the UK by offering an attractive package of loans, many of them via accounts that are managed over the internet. Its rates are competitive and it used to have a good reputation in its dealings with customers, unlike the four main high street banks which are, as James Buchan once wrote, ‘mere burdens on the earth’. Not one saver in ten thousand would have been aware that the reason the Rock’s interest rates were so competitive was that it dealt on the global markets to fund itself. Only 27 per cent of its funds were ‘retail’, i.e. money deposited by savers: fully 70 per cent of the Rock’s funding was ‘wholesale’, i.e. came from international markets. So the Rock is lending long-term, in 25-year mortgages, but borrowing short-term to fund itself. That is a well-known recipe for trouble. In addition, the Rock uses offshore trusts to package its mortgages together into ‘asset-based securities’ – bundles of debt that could be sold on to other investment institutions. One thing worth bearing in mind is that in terms of its underlying assets, the Rock seems fine; there is no reason for thinking that its mortgage-payers are failing to cough up.

The Rock’s problem was that this business model depends on liquidity. Because it gets 70 per cent funding on the wholesale markets, if those markets aren’t working, it is instantly in deep shit. Over the summer, those markets seized up, and banks became reluctant to lend money to each other – and especially reluctant to lend money to anyone with an exposure to high-yield mortgages. Remember the interlocking nature of bank deposits, and how the system relies on liquidity? Over the summer, that liquidity dried up. The Rock had to turn to the Bank of England, ‘the lender of last resort’, to borrow the money to stay in business; when news got out, savers wanted their money back, but the bank’s website crashed, so they began turning up in person to withdraw their deposits, and lo and behold we had a genuine bank run. On 14 September, so many people turned up in person to withdraw money that the bank ended up paying out 5 per cent of its total assets, a cool £1 billion in cash.

The guilty party was the usual baroque financial instrument: in this case, a Collateralised Debt Obligation, or CDO. During boom times, banks lend money more and more freely, and begin to look for growth in places where they hadn’t before. In this case, the growth area for American financial institutions was in lending money to poor people whom they wouldn’t previously touch. The banks didn’t exactly go skipping around trailer parks handing out leaflets offering Buy One Get One Free mortgages – except that they did, sort of. The great thing about these poor people was that because their credit history was poor to non-existent they could be charged extravagantly high rates of interest.

There was a huge demand for these new mortgages, which in many cases allowed people to own their homes for the first time. By 2005, one in five American mortgages was of this new kind. The mortgages were then bundled together and turned into CDOs. These were packages of debt: some of it beautifully high-yielding, high-interest ‘sub-prime’ debt. (‘Prime’ debt refers to the people you’re sure will pay it back; with ‘sub-prime’ debt, you’re less sure, so you charge the borrower more for the privilege of borrowing.) The packages were structured to pay out different rates of interest based on different levels of risk; some of the debt rated AAA, the safest available, and some of it riskier and more lucrative. These were then sold as bonds on the international markets – this being a huge growth area in recent years. The market in mortgage-backed bonds currently stands at $6.8 trillion. It is the biggest component of the $27 trillion US bond market, bigger even than US Treasury bonds: $1.3 trillion of that is ‘sub-prime’ lending.

Then trouble struck. The problem was that interest rates in America went up, just as many of the sub-prime borrowers were coming off their first two years of fixed-rate mortgages, so their rates zoomed up, and many of them couldn’t afford to pay. The result has been a wave of home repossessions. A BBC report made a study of Cleveland, Ohio, where the banks lent heavily in poor black areas. It found that in Cleveland, one home in ten has now been repossessed, and the biggest landlord in the city is Deutsche Bank Trust.

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[ Link ]

From Paul Krugman’s blog, after-tax income changes by quintile (and break-down of the top 10%):

Bush boom bah

Here’s what the numbers say about percentage gains in after-tax income from 2003 to 2005:

Bottom quintile: 2%
Next quintile: 2.4%
Middle quintile: 3.9%
Fourth quintile: 3.7%
Top quintile: 16%

Top 10%: 20.9%
Top 5%: 27.7%
Top 1%: 43.5%

It was a boom, all right — but only for a few people.

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The April 2007 issue of Business Week laments about the cautious Chinese consumer: In China private consumption is less than 40% of the GDP which BW compares to India at about 60% of the GDP. Leaving the worrying about China to BW, I wish to wonder instead what this says about Indian personal spending trends. Especially in light of private consumption in developed nations: India beats out both Japan and Germany and gets scarily close to the consumption king, the USA at about 70%.

If I am reading this right, and its probable I am not (a query to the masters on PEN-L should ascertain that; expect an update shortly), Indians are on a merry spending binge, cheered on by the “flattening” world which they consider themselves an inhabitant of, impervious to the existence of a security net for the residents of the welfare states whose league they are playing in. Let us hope they do not fall off the edge!

PBS’s [wide angle] covered the Indian farmer suicide issue in their episode today. The good news is that all that sad news and sorrow is alleviated towards the end by the wisdom of Jagdish Bhagwati, globalisation’s brown knight, who offered such gems as:

India specialises in poverty

The link to the interview transcript (PDF) is currently broken, but let that not prevent you from enjoying Bhagwati elsewhere.

EPI has released a study that sheds some light on the right’s “worry” that minimum wage hikes would have an overall negative impact due to reduced hiring and so on. EPI looked at the data for the states that raised the minimum wage on their own, given the federal government’s reluctance to do so, and here is what they found (summarised here, follow link for the detailed analysis):

State minimum wages: A policy that works

Have these state actions had any effect? Are wages higher than they would have otherwise been, i.e., are these higher minimums reaching their intended beneficiaries? Is employment worse than it would have otherwise been? The evidence presented here suggests that the answers are, respectively, yes, yes, and no.

[ Link ]

The EPI takes a look at bogeyman claims about tort costs:

Tort costs and the economy: Myths, exaggerations, and propaganda

[…]

Conclusion

It is hard to find any evidence that increased tort costs have harmed the U.S. economy. The economic case made by tort system critics to justify changes in the system is remarkably weak. The costs of the tort system have been grossly exaggerated, and its supposed impact on job creation, R&D, productivity, and profits has been exaggerated or simply invented. With respect to job creation in particular, significant tort law change would be more likely to slow employment growth than to promote it. There is no reason to believe that the kinds of tort law change the Bush administration advocates will have significant positive effects on the economy.

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Amartya Sen has pointed out before that liberalism isn't uniquely Western and now he addresses the issue of globalisation in the same vein. Of note, here is Noam Chomsky on the term globalisation:

"Anti-globalization" is a propaganda term devised by the advocates of a particular investor-rights version of international integration. No sane person is opposed to globalization, surely not the left or the workers movements, which were founded on the commitment to international solidarity — that is, a form of globalization that is concerned with the rights and needs of people, not private capital.

And here is Sen:

TAP: Vol 13, Iss. 1. How to Judge Globalism. Amartya Sen.
Globalization is often seen as global Westernization. On this point, there is substantial agreement among many proponents and opponents. Those who take an upbeat view of globalization see it as a marvelous contribution of Western civilization to the world. There is a nicely stylized history in which the great developments happened in Europe: First came the Renaissance, then the Enlightenment and the Industrial Revolution, and these led to a massive increase in living standards in the West. And now the great achievements of the West are spreading to the world. In this view, globalization is not only good, it is also a gift from the West to the world. The champions of this reading of history tend to feel upset not just because this great benefaction is seen as a curse but also because it is undervalued and castigated by an ungrateful world.

From the opposite perspective, Western dominance–sometimes seen as a continuation of Western imperialism–is the devil of the piece. In this view, contemporary capitalism, driven and led by greedy and grabby Western countries in Europe and North America, has established rules of trade and business relations that do not serve the interests of the poorer people in the world. The celebration of various non-Western identities–defined by religion (as in Islamic fundamentalism), region (as in the championing of Asian values), or culture (as in the glorification of Confucian ethics)–can add fuel to the fire of confrontation with the West.

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I am a member of a few "left" mailing lists, which are typically dominated by Western Orthodox Leftists (typically Marxists) and even tentative mention of open source, by me (an admitted amateur in left theory), is dismissed as irrelevant to left goals, actions, etc. I never quite understood why not. Open source development seems to provide an interesting and successful example of communal effort and production, underpinned by certain ideals (from each according to his abilities and to each according to his need! ;-)) that should warm the heart of leftists.

Not all of the free software / open source movement's principles and functioning is leftist of course. There is a strong libertarian streak running through open source development and certain larger issues (participation within a capitalist system) are poorly addressed. These differences are known within the community, however, and are the subject of ongoing debate. Richard Stallman, the father of what we call today Open Source, goes to great length to stress the political considerations of his movement, and defends his precepts successfully against the newer school (Cathedral/Bazaar types). It seemed strange to me, therefore, that all of this would be so easily dismissed by the entrenched left.

Today, I came across a couple of texts that do seem to take open source a bit more seriously.

One of them is Yochai Benkler's (Yale Law School) book The Wealth of Networks (PDF), the Introduction of which I quote from below:

[A]dvanced economies have shifted from an economy based on production of physical goods and services (e.g., automobiles and textiles, mining and construction) to an economy centered on the production of information goods and services (e.g., cinema and software, legal representation and financial planning).

Second, advanced economies have shifted from a communications
environment relies on an expensive centralized communicator that
broadcasts to a wide audience (e.g., radio, television) to an
environment that relies on a multitude of cheap processors with high computing capacity that are interconnected with one another (i.e., the Internet).

These two shifts make it possible to lessen the market’s
influence over political values. The second shift allows decentralized, non-market production. The first shift means that this new form of production will play a central, rather than peripheral role, in advanced economies.

The first part of this book explores in detail the economic
implications of these two parallel shifts. The central thesis is that a new stage of the information economy is emerging. The industrial information economy of the mid nineteenth and twentieth centuries is now being displaced by the “networked information economy.” The networked information economy is characterized by decentralized individual action carried out through willed distributed, nonmarket means that do not depend on market strategies.

I haven't read the entire book yet, but it promises to be an interesting read. Another book in a similar vein (which Benkler refers to also) is Steven Weber's The Success of Open Source which funnily enough begins:

Several years ago when I began thinking about open source software, I had to convince just about everyone I talked to, outside of a narrow technology community, that this was a real phenomenon and something worth studying in a serious way. I no longer have to make that case.

Clearly, Weber can speak more intelligently of the matter than I can ;-). In the Preface, he goes on to say:

I became interested in open source as an emerging technological community that seemed to solve what I see as very tricky but basically familiar governance problems, in a very unfamiliar and intriguing way. In the end I’ve decided, and I argue in this book, that the open source community has done something even more important. By experimenting with fundamental notions of what constitutes property, this community has reframed and recast some of the most basic problems of governance. At the same time, it is remaking the politics and economics of the software world. If you believe (as I do) that software constitutes at once some of the core tools and core rules for the future of how human beings work together to create wealth, beauty, new ideas, and solutions to problems, then understanding how open source can change those processes is very important.

Now, why couldn't I have put it that way, when arguing for the importance of examining open source! Below is a bit more from the Introduction, followed by a link:

This is a book about property and how it underpins the social organization of cooperation and production in a digital era. I mean “property” in a broad sense—not only who owns what, but what it means to own something, what rights and responsibilities property confers, and where those ideas come from and how they spread. It is a story of how social organization can change the meaning of property, and conversely, how shifting notions of property can alter the possibilities of social organization. I explain the creation of a particular kind of software—open source software—as an experiment in social organization around a distinctive notion of property. The conventional notion of property is, of course, the right to exclude you from using something that belongs to me. Property in open source is configured fundamentally around the right to distribute, not the right to exclude. If that sentence feels awkward on first reading, that is a testimony to just how deeply embedded in our intuitions and institutions the exclusion view of property really is. Open source is an experiment in building a political economy—that is, a system of sustainable value creation and a set of governance mechanisms. In this case it is a governance system that holds together a community of producers around this counterintuitive notion of property rights as distribution. It is also a political economy that taps into a broad range of human motivations and relies on a creative and evolving set of organizational structures to coordinate behavior.

There is an excerpt in PDF from the book available for download from Harvard University Press.

Over at Business Week, wunderkind gets all radical and suggests we throw open the border. Funny thing with liberal ideas that sit around long enough… they get picked up by conservatives and neo-liberals ;-). We have been calling for action against Saddam for a few decades. Bush thinks of the same thing, for the first time ever, and decimates the country. We have been talking about the environment for ages. Now the evangelicals adopting the platform but from the funny perspective of stewardship. And now we have Mandel:

BW: Bordering on Absurdity

Cars can move more easily from country to country than people, and that is crimping both human potential and economic growth

What's the best long-term immigration policy for the global economy? Right now we have an international system where goods and services move easily across national borders, but flows of people are strictly regulated. The 149 countries that belong to the World Trade Organization are committed, by treaty, to a "substantial reduction of tariffs and other barriers to trade." No such organization or commitment exists for global immigration reform.
I think that's wrong. It should not be the case that toys and cars can move from country to country more easily than people do. Instead, pulling down the barriers that impede immigration should be our long-term goal. Immigration policy should facilitate the movement of people, just as trade policy facilitates the movement of goods.

From an economic perspective, this is a no-brainer.

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