Ooo, Scary

It's official: the U.S. government is proposing to fine Toyota $16.4 million for waiting four months before notifying our safety officials about defects in its vehicles that may be responsible for episodes of unintended acceleration. Apparently that's the maximum fine that can be imposed.

It sounds like a big amount, but I expect Toyota isn't especially scared. It already spent $900 million on its recall of affected vehicles, not to mention experiencing lost sales of $155 million per week. Compared to what this fiasco has already cost the company, $16 million isn't even like adding a tip to your restaurant bill.

I guess we might as well go ahead and impose such fine as we can, but really, what is needed at Toyota, and at AIG, and was needed at Lehman Brothers, and other companies, is a culture that appropriately considers risks in giving rewards. I expect someone at Toyota decided to save a few million by not worrying about this problem, even though it posed a risk of costing the company billions. It's the same blind spot that caused far too many executives at American banks and other companies to pump up their annual numbers -- and their own bonuses -- by taking on risks that ended up bankrupting the whole firm. Somehow we need to encourage companies, in calculating how they reward executives, to consider, not only how much the company made that year, but how much risk it took on as well.

More Snow Economics

It's a beautiful day outside and I would say we definitely could have held school today, no big deal. Maybe we would have needed a delayed start, but canceling classes altogether was a mistake. We're going to have to work harder down the road to make it up.

What about other businesses? Are they really hard hit by this week's snow? I would say some yes, some no. The key is whether customers will do extra business later to make up for this week's loss.

The little luncheonette in my school building will definitely suffer. It's lost a week's sales and people aren't going to be buying extra lunch next week to make up for it. On the other hand, grocery stores did extra business ahead of the storm and will do extra business afterwards. In fact, probably groceries get a net plus because more people stayed home and cooked instead of eating in restaurants. And I would think durable goods sales would hardly be affected at all. If you were in the market for a couch, you didn't buy one this week, but you're not any less in the market for it as a result.

So sellers of something that you either use immediately or go without are hurt. But sellers of lots of kinds of goods and services will be fine, I would imagine -- they'll have a slack week but get extra business next week.

Big Media v. Big Auto

Enough with the snow posts, I'm tired of it.

I was at the gym yesterday (today the gym closed at 10:00 am, of course, even though the Rite-Aid on the same block is open), and while there, I saw a CNN report on the Toyota recall. The thrust of it was that experts consulted by CNN question whether Toyota really understands what is causing the unwanted acceleration problem with its vehicles. CNN suggests that the problem stems from electronic devices causing interference with the engines' electronic controls. Toyota insists that the problem is mechanical and that they know how to fix it.

Watching the report, I got a sad sense of overhyping by CNN (the print version linked above is slightly more guarded than the video version I saw). It's difficult to know whom to trust. Toyota has an obvious incentive to say that it has solved the problem. So I appreciate that its statements have to be regarded with some suspicion, as CNN copiously pointed out. But what CNN didn't point out is that CNN itself also has distorting incentives. The story "Toyota doesn't really know what's wrong with its cars and is lying about it" attracts a lot more viewers than the story "Toyota has everything fixed -- just take your car in as per the recall and everything will be fine." So CNN has an incentive to promote those experts it can find who will say bad things about Toyota.

Watching the report, I got the sense that while the experts portrayed are skeptical of Toyota's statements, CNN was positively goading them into saying more than they really believed based on their expertise. It would have been more balanced if CNN had commented on its own incentives as well as Toyota's. It would have been nice if CNN made a statement about how many experts it consulted and whether their views were conflicting. Did every expert consulted by CNN think the electronic interefence theory was more probable than the mechanical pedal problem theory? Or did CNN cherry pick and only show those experts who had that view, ignoring those who thought Toyota had things right?

It's hard to know whom to believe, but I can't say for sure that I would trust CNN more than Toyota. CNN could have helped its own credibility with some added perspective on the trust issue.

Snow Economics

NPR had a weather economist on the other day. Here's a bit of weather economics for you: have you ever noticed that the first business to shut down in a snowstorm is your gym?

Economics explains why. Other businesses make money by staying open. They have an economic incentive to tough it out if they can.

But your gym? It's got your money already. Staying open just costs the gym money. I don't know if the gym actually saves on salaries by shutting down -- perhaps not -- but it must save on heat, electricity, and wear and tear on the machines by keeping the place shuttered.

I know my gym is the wimpiest business in the neighborhood. Sure, they say it's a matter of safety when they close early in the snow. But I'm guessing there's a big dose of economics in there too.

More Smart People Being Stupid

The Consumer Product Safety Commission is thinking of fining Toyota for reacting too slowly to complaints of accelerator problems, but the maximum fine it can impose is $15 million. Former administrator Joan Claybrook would like to see that amount increased to $100 million.

Even that amount would hardly make a difference. Toyota is likely to spend about $900 million on its recall, its lost sales are costing it $155 million per week, and the damage to the company's reputation will surely add billions more over the coming years. If those kinds of numbers weren't already a sufficient incentive to avoid this mess, I don't think the prospect of an extra $100 million fine would really have made much difference, although it would always be nice for the U.S. government to get the revenue.

The problem is cultural. I'm sure Toyota saved a few million here and there by not being careful enough in its design and testing phases to avoid the problem it's now having, and no one listened to the people who said wait a minute, we're saving a million now but we're running a risk that could cost us billions. It's the same business spirit that encouraged making money through mortgage-backed securities, which looked great until the risks almost destroyed the entire economy, or that encourages newspapers to rush stories into print to make a quick splash without sufficiently considering the tremendous harm that can be caused by reputational damage, or that encourages development that makes money now by not caring about wetlands erosion but risks disasters like Katrina.

There's a place for bold risk-taking in the world of business, but there's also a place for caution. The smart people who run these companies need to create incentives that don't just measure how much money the company made this year, but how much risk it took on too.

More Conservative Pundit Economics

As I have previously observed, conservative pundits seem to think they can fob us off with columns that contain the most elementary errors in economic analysis. I don't know whether they are fools, or whether they assume that we are fools.

The latest absurd column is from Amity Shales ("senior fellow in economic history at the Council on Foreign Relations"). Shales argues against pending legislative proposals that would regulate corporate executive pay. She claims that corporate pay shouldn't be any more subject to regulation than the pay of baseball players. Baseball players can make piles of money -- sometimes even when their team is doing badly as a whole -- and no one seems to mind. So, Shales argues, no one should mind when a corporate executive makes a pile of money, even if the company as a whole is doing badly.

Oh, for heaven's sake. This is an absurd analogy. A baseball player's salary is set in an arms-length negotiation with the team's management, and the team has every incentive to pay the player as little as possible. Most baseball teams are closely held (i.e., owned by one person or a small group), and the owners therefore have direct, personal, substantial incentives to hold salaries down as much as possible. So when a player gets what seems like a ridiculous salary (to someone earning ordinary amounts), we know at least that that salary was set in a real negotiation.

Corporate executive pay is different. It is subject to the vast "agency problem" that exists when ownership and control are separated. Public corporations are owned by huge numbers of shareholders, each of whom typically has only a small interest in the overall corporation. If the CEO puts his hand in the cookie jar and pays himself $10 million more than he really deserves, each shareholder might lose only a dollar or two. So the owners don't have the right incentives. It's not worth kicking up a big fuss to save yourself a dollar.

Of course, CEO pay has to be approved by a company's board of directors, and the directors of most public companies have delegated this task to a compensation committee that is supposed to protect the shareholders' interests. Probably this works well at some companies and not so well at others.

The point here is not that the legislative proposals for regulating corporate pay are a good idea. Maybe they are and maybe they aren't. Maybe the market for executive pay works well enough, despite the important agency problem, that regulating it would do more harm than good. Maybe it doesn't and we need legal regulation. I don't know. (For a good CRS study on the question, see here.)

But what I do know is that comparing executive pay to baseball players' pay while ignoring the agency problem that attaches to the former is a cheap and irresponsible debating trick. It's not an appropriate analogy.

Sheesh. First conservative pundits think we don't know about externalities and now they think we don't know about agency costs. And they bill themselves as economic experts!

Failures of the Capitalist System

I'm a big fan of capitalism -- my travels in communist countries showed that they just can't deliver the goods. That's why I get particularly frustrated when capitalism doesn't deliver the goods either.

I'm redoing my kitchen. The new appliances arrived, and I tested them all out excitedly, and get this -- whenever you switch on the oven in my new range, a fan comes on. No, it's not the convection fan. It's a separate fan that exists solely to cool the electronic control panel. And it's very noisy. I mean really noisy. It makes more noise than the dishwasher.

What's up with that? I'm sensitive to noise. I investigated in great detail how much noise the refrigerator and dishwasher would make. And they're great. But it didn't occur to me that an oven would make noise. My old oven was silent. Not quiet, silent.

The new design is so dumb. First of all, there's no need for the electronic control panel. I was happy with knobs. So first they put in this souped-up control panel that you don't need, and then they add a fan to cool it, so it doesn't overheat.

And here's the real problem. My dealer offered to take back the range and exchange it for another, but it turns out all ranges have this fan nowadays! Because they all have the control panel!

And as if that weren't bad enough, you can't even find out which ranges are quieter than others! Because you can't turn them on in a store! Stores don't have them connected up, because they run on a different power supply than a normal outlet.

So pretty much all new ranges have this problem, but you can't discover how bad it is until you've shelled out $1000-$2000 bucks for one and gotten it home. And believe me, I've tried everything to find out.

What's up with these manufacturers? Do they think no one cares? They know we care about noise from the dishwasher -- the new dishwasher is so quiet you can't even tell that you've turned it on. But are we not supposed to care about noise from the oven? That's even worse. You can at least run the dishwasher when you're asleep or not home. But you're definitely there for the oven.

C'mon, capitalists! Doesn't anyone want to exploit the market advantage of making the quiet range? I can't be the only customer who cares. There's money to be made!

Sheesh.

Supreme Bailout

The Supremes did their bit to push along the Chrysler bailout, denying the application for a stay filed by some of the company's secured creditors. Now the planned sale of the company to Fiat can go through and the company can emerge from bankruptcy.

I don't know that much about bankruptcy, but the plan does seem a little radical, inasmuch as it gives -- or at least is said to give -- unsecured creditors a better deal than secured creditors. I don't understand how that can happen. The complaining creditors do seem to have a point.

At the same time, there is one useful indicator of why the Supreme Court might have declined to get involved: the creditors seeking the stay held just $42.5 million of the total of $6.9 billion of Chrysler's secured debt. That's about 2/3 of 1%.

If 99.33% of the secured creditors are satisfied with the plan, there must be something good about it. As I say, I don't know enough bankruptcy law to have a truly informed opinion, but this objective indicator suggests that the plan can't be all that unfair to the secured creditors.

Madoff Followup

A couple of fascinating articles on the Madoff fund implosion point out some really bad news for investors: if you were invested in the Madoff fund, but you smelled something fishy about it and sold your shares before the big fraud was revealed, you may be compelled to give back your profits. So even those who got out safely, didn't get out safely.

Why? Because bankruptcy law permits the bankruptcy trustee to "avoid" (i.e. get back) transfers of money that was transferred by the bankrupt party at a time when the party was insolvent if the bankrupt party did not receive reasonably equivalent value in exchange and the transfer was made to hinder, delay, or defraud any creditor. In a similar, recent case involving the Bayou Fund, a court held that every redemption (i.e. sale of shares) met these criteria: the fund's share price was, like the Madoff Fund's, imaginary -- the fund managers were just making it up to preserve the appearance of good returns. So when shareholders redeemed their money, the fund was transferring out more money than the value of the shares it was getting back. And the fund was insolvent. And the fund did this to preserve its big fraud. So the criteria for avoiding the transfer were met. The court held that an investor could defend against the claim for return of the money by showing that the redemption was made in "good faith" -- that the investor had no inkling anything was wrong with the fund -- but this was a defense, it would be up to the investor to show it, and it wouldn't apply if the investor saw some red flags before getting out.

One of the articles linked above states that there is no time limit on these avoidable transfers. That seems, based on my quick research, to be mistaken: the bankruptcy law section linked above sets a time limit of 2 years. But I'm not a bankruptcy expert and there could be some other section that looks back even further.

But certainly resolving the Madoff fund's problems is going to be a big, big mess for investors, even those who thought they'd gotten out.

To Catch a Thief

Now that Bernard Madoff has been arrested for pulling off a $50 billion Ponzi scheme, editorialists are naturally wondering what to do, and the Wall Street Journal is taking the opportunity to warn against using the incident as an excuse for more regulation. With the hard-nosed, clear-eyed thinking for which the free market's champions are famous, the WSJ tells us that "The reality is that it is impossible for the SEC or any regulator to prevent every financial fraud, just as it is impossible for city police to prevent every burglary." So I guess the message is that we should just accept that every now and then someone will steal $50 billion and not expect government to prevent it. The last thing we want is for "every enforcement failure [to] become an excuse for more enforcement."

Sorry, but what the WSJ analysis overlooks is that at least some smart people did detect the Madoff fraud. Aksia LLC, which advises clients about which hedge funds to invest in, warned against investing in Madoff as early as last year. How did they spot the potential fraud? As they recounted in a recent letter to their clients, they just did the basic due diligence. They noted many suspicious things: Madoff's vast fund was audited by a 3-person audit firm (and only one of the three employees seemed really active); the market in which Madoff traded was too small to support the huge sums he claimed to trade; he didn't have enough actual holdings; and so on. And with their suspicions heightened, the Aksia LLC people checked up: they actually visited Madoff's offices to check up on his vaunted technology, but found only paper tickets and no apparent electronic access to his holdings.

So it seems that what was really necessary to catch this thief was some due diligence. Not taking everything on faith, but actually checking up on some basic details.

Now, why couldn't the government have done that? The WSJ may be right that the SEC doesn't need any new enforcement powers as a result of this incident, but it sure does seem like we could use some more actual exercise of the powers the SEC already has. It seems like they were just asleep at the switch, doing a "heckuva job" doing nothing while the crisis was building. I don't know how related this is to the fundamental problems we've seen in the Bush Administration all along, but it does seem thematically related to the attitude that the government should mostly do nothing and let us all take care of ourselves, whether there's a real or an economic hurricane coming in.

Credit Crisis

Best explanation I've heard of why the credit crisis is wreaking such havoc on the economy, on This American Life, of all things.

Companies don't like to keep a lot of cash on hand -- if you have cash sitting in the bank, it's not invested in your business earning money. So each day, the company treasurer tots up the company's income and expenses and determines whether the company has extra cash or needs some cash. If it needs cash, it goes to the commercial paper market and borrows the money for a very short time -- perhaps just overnight. That's what commercial paper is: very short term borrowing by companies.

But for the last couple of weeks, there's been no money to borrow or lend in the commercial paper market, because money-market funds, which are big investors in commercial paper, are going crazy because one of them "broke the buck" -- it lost money -- because it had too much invested in Lehman Brothers commercial paper. So lots of people are trying to get out of money market funds, to the point where the government had to guarantee them. And then another fund broke the buck, and then money market fund managers decided to stop lending in the commercial paper market and just buy government bonds instead.

So there's no money to lend. Companies from small businesses to General Electric are having trouble borrowing money, even short term.

The whole economy runs on credit. People deliver the goods and settle up at the end of the month. If you can't do that, it's a crisis.

Whoo Hoo!

While you were asleep last night, federal regulators seized Washington Mutual Savings & Loan. Then they sold it off to J.P. Morgan Chase. Whoo hoo!

Of course, you alreadly knew Washington Mutual was in trouble from its puzzlingly stupid ads. Apparently its target customers are people who go into daytime fantasies and scream at the thought of signing up for free checking online in just 7 minutes or being able to pay bills online securely. That's got to be a pretty small market. It certainly wasn't enough to keep the armies of the night from swooping in and shutting everything down in the largest bank failure in American history.

Good thing that selfless patriot John McCain showed up for the meeting that scuttled the tentative agreement on the rescue plan.

Sold everything yet?

Biggest Agency Ever

Is anyone thinking about the bailout from an administrative law perspective? Policymakers are saying we need quick action on the bailout, but before we blow away $700 billion in taxpayer money and create an enormous new government agency, let's just take a moment to think about the administrative implications.

This agency is going to buy up millions of mortgages. The reason for buying them is that they're in trouble, so naturally we would expect a high rate of default on these mortgages.

What exactly is going to happen when these government-owned mortgages go into default? Someone at the new agency is going to have to handle the foreclosure or the work-out. And how exactly will that happen? Can a new agency really be up and running and ready to handle millions of troubled mortgages overnight?

Even assuming the agency outsources much of the work, I would predict that everything will come to a screeching halt for at least a year. No one will know what to do -- from a very basic, practical, nuts-and-bolts perspective -- when these mortgages go into default.

Mortgage-backed securities have already led to trouble in foreclosure actions because they're so complicated that plaintiffs find themselves unable to prove that they really own the mortgage. If a new agency comes in and buys up millions of these things, there's going to be chaos for quite a while before anyone figures out what to do.

Time to Sell Everthing -- Or Buy More?

While I was away over the weekend, the greatest financial convulsion of our lifetime continued, with markets gyrating, century-old firms disappearing, others changing into fundamentally different companies, and the government buying up the biggest allegedly private companies in the country. As if that wasn't enough, Treasury Secretary Paulson has now suggested the greatest government bailout in history -- one that will make the 1980s S&L bailout look like chicken feed.

What's an individual investor to do? Last week, at the exact market trough, I moved some cash into my index fund (just a law professor amount, of course, not a financial wizard amount) -- I'd been meaning to do that for a while and this seemed like an opportunity. It went up 7% in the next two days. Brilliant. But not so brilliant if the crash is coming.

Now I am torn between conflicting impulses:

1. Sell Everything. When I see that the Republicans think that we haven't had enough government intervention -- after we've already had the biggest government intervention in a generation -- and now we need to have the taxpayers kick in $700 billion, what I see is that they think we're in big, big trouble. Secretary Paulson, who I at least hope knows a whole lot more about this stuff than I do, thinks we're really teetering on the brink. The whole thing could collapse. And remember, our fate is now in the hands of a bunch of politicians who are mostly lawyers and who have no clue about finance. It doesn't look good. If you lived through the '87 crash (I wasn't in the market in those days), you know that your portfolio can lose 22% in a single day. Of course that means that if you sold everything the day before and bought back the day after, you'd effectively have gained 22% in a single day. So maybe this is the time to sell everything. Get out of the market, the crash is coming.

2. Buy More. On the other hand, maybe this is the big opportunity to stay in. If this bailout plan goes through, it'll be the biggest taxpayer giveaway ever. Sure, the taxpayers will allegedly just be buying up questionable paper at its heavily discounted market value, but you know they'll actually end up paying far too much. Wall Street is going to have its greatest party ever and we're paying the bill. Maybe that's the whole point. Maybe what's really happening is that the Bush Administration sees this as its last, great opportunity to steal the taxpayers blind and shovel huge piles of money at its stockbroker friends. Maybe it's the financial equivalent of the Iraq war buildup -- selling the country a bucket of nonsense based on complete lies. It's certainly going to be the financial equivalent of the Iraq war in terms of the price tag. Even if there's no lying involved, it's still a big financial boost for rich stockbrokers at taxpayer expense. Your portfolio is your chance to get your small piece of the action. Buy more.

Not so easy to know what to do. I'm a buy-and-hold investor -- I hardly ever sell anything. I'm still young enough that I can weather most storms over time. So I'm unlikely to go with the first stragety, even though this might be the biggest storm of our lives. But this could really be the time for a bold, unusual decision.

One thing's for certain -- don't take your financial advice from law professors.

Intrade Arbitrage Opportunity

While wasting time surfing the election prediction websites (see my earlier post), I noticed that according to the most recent trades, the Intrade odds of the Democratic nominee winning Ohio is 53.9% and the odds of the Republican nominee winning is 55.0% (probably different, of course, by the time you click the link).

Hmm. Apart from what this says about the usefulness of Intrade, it's an obvious arbitrage opportunity. If you could sell $1,000,000 worth of contracts predicting Obama will win Ohio for $539,000 and $1,000,000 worth of contracts that McCain will win for $550,000, you'd pocket $1,089,000 and only have to pay out $1,000,000 to the winner, for a profit of a cool $89,000 (less commissions). And if by some miracle Barr or Nader wins Ohio, you get to keep the whole thing.

Well, I would leap to it, but I presume it wouldn't actually work in any amounts large enough to make it worth the effort. You might manage to sell two $100 contracts at the most recent prices for $53.90 and $55, yielding you a whopping $8.90 (less commissions), but I presume the prices would change pretty dramatically if you tried to make this work in larger amounts. Still, in case you thought Intrade prices were rational, they clearly aren't.

Moral Hazard

Goodness, I just lent $283 to a private insurance company. And so do you and so did 299,999,998 other people, for a total of $85 billion.

"Moral hazard" is the economists' term for the force that causes the strange behavior that people may exhibit when they know that they are shielded from risk. If you're the CEO of a giant company, and you're thinking about making a risky investment, it's one thing if you think, "if this goes well, we make a lot of money, and if it goes badly we could lose the whole company," whereas it's another thing if you think, "if this goes well, we make a lot of money, and if it goes badly, the taxpayers will bail us out." Obviously, you're a lot more likely to take the plunge if you can count on the latter scenario.

So the government needs to be careful before it bails out big companies that have made bad decisions. It just encourages more and riskier behavior in the future.

As usual, I can't pretend to know whether bailing out A.I.G. was a good idea. I'm guessing most people, including those who did it, don't really know either. Perhaps A.I.G. was "too big to fail," perhaps not. But if taxpayer money is implicitly on the hook every time a really big company makes a risky investment decision, then CEOs are just going to take more and more risk.

Oops

The Dow lost a mere 504 points yesterday. That's almost exactly the same amount it dropped on Black Monday in 1987, but it's actually much less serious. The Black Monday drop represented 22% of the Dow's value; yesterday's drop was less than 5%.

What's interesting is the trend of stocks over the whole Bush administration. The Dow closed at at 10,917 yesterday. On January 20, 2001, it closed at 10,587. It's up a whopping 3.1% over the 7.66 years of the Bush administration. Remember, the historical average is for the index to go up about 10.5% per year. If you put $100 in an index fund, it should have slightly more than doubled over this period -- you should have about $215. Instead, you're stuck at $103.10.

Actually, it's worse than that. Your money probably isn't in the Dow -- I don't know of a lot of Dow Index funds. Probably it's in an S&P index fund. The S&P closed at 1192.69 yesterday. That's down 11.2% from the close of 1342.54 on January 20, 2001. And the NASDAQ is down 21.3% over the same period.

Thank goodness for those business-friendly, economy-promoting Republicans! Do you know what happened to the indexes during the Clinton administration? The Dow was up a mere 225%, the S&P 208%, the NASDAQ, 297%. And that's after the tech bubble burst (remember, the burst occurred in March, 2000, while Clinton was still in office).

Oh, I know the President doesn't really deserve full blame or credit for what happens in the markets. But you know the Republicans would be touting their economic policies to the skies if things were going well, so they have to get some blame for what's going badly. And the failure of regulation bears some blame for the credit crisis.

Here are those numbers again in a convenient table:

Markets during the Bush Administration, 1/20/01 to date:

Dow +3.1%

S&P -11.2%

NASDAQ -21.3%

Markets during the Clinton Administration, 1/20/93 - 1/20/01:

Dow +225.2%

S&P +208.5%

NASDAQ +297.6%

Smart People Being Stupid

How could so many smart people be so stupid? Let's see, Bear Stearns went up in smoke months ago, now Lehman Brothers is gone, Merril Lynch is selling itself to Bank of America, and insurance giant A.I.G. is on the brink of disaster.

These guys were supposed to be smart. They get paid sums that make my salary look like a rounding error, because they supposedly understand money. And here they are betting their companies on pools of mortgages made to borrowers who couldn't really be expected to pay them back. The wheel's come up on double zero, and I guess they're not bullish on America anymore.

I don't pretend to really understand what's happened. I have my own area of expertise and this isn't it. But I do think that if your annual income has two commas in it, you should be capable of not bankrupting your company.

We went through a crisis in junk bonds in the 1980s. We tried out the idea of putting a lot of high-risk debt into a bigger vehicle on the theory that it would somehow be lower risk. That didn't work out too well. So now we've tried the same thing with mortgage debt -- pooling together bad mortgages on the theory that a sufficient percentage of the high-risk borrowers would be able to pay, so that on the whole the debt vehicle wouldn't be too risky.

Didn't it occur to anyone that if there were an economic downturn a whole bunch of those high-risk debtors might be unable to pay at the same time? Apparently not.

As I say, I don't really understand the crisis (the above is about as close as I get), but somehow I wonder if people were thinking, don't worry, if it gets really bad, the government will have to bail us out, and we'll just pass the bill on to the taxpayers. Moral hazard.

Or maybe they were just smart people being stupid.

Farewell to Bear

My father worked at Bear, Stearns for ten years, so I took more than a casual interest in the news that J.P. Morgan will buy the 85-year-old Wall Street firm for $2 a share -- that's about 7% of the firm's market value as of the close of business on Friday, and about 3% of the firms' value as of a week ago today.

In case anyone was still wondering whether the economy is in trouble, I think the answer is now officially yes. When an investment banking firm previously worth billions, that withstood the Great Depression and a dozen recessions since, dissolves in a puff of smoke, something is wrong.

How many other titanic firms are just waiting to lose 97% of their value in a week? Has anyone else bet the farm on some allegedly safe but astoundingly complicated twenty-first century investment vehicle?

Thank goodness we have a President and an administration that understand these matters and are acting prudently to avert further disasters.

Wall Street Review

Sorry for the lack of blogging last week; I was away at the AALS Conference of law professors.

As the trading year begins for 2008, I thought I'd do a brief check-in on Wall Street. Our illustrious president, you will recall, has spent years promoting the "ownership society," featuring, among other things, "Expanding Ownership of Retirement Assets." The message, I take it, is that we're all supposed to keep an eye on our investment portfolios and thank the Republicans for their business-friendly policies that will pump up our returns.

The result? Well, as I write, the S&P 500 index is at 1414 and the Nasdaq Composite index is at 2498. On the day President Bush took office, they were at 1342 and 2770, respectively. Thus, under our business-friendly, owernship-society, Republican President, the S&P is up 5.3% over seven years and the Nasdaq is down 9.8%.

Meanwhile, under the presidency of those left-wing, business-hating, over-regulating, squash-the-economy Democrats, the S&P 500 went up 208.5% and the Nasdaq went up 297.6%, from 1993-2001. And yes, there was some tech bubble in those figures, but, if you will recall, the bubble burst in March 2000, so those are really the post-bubble totals.

Sheesh. All that work by Republicans to make the rich richer, and those of us in S&P 500 index funds would have done far better with T-bills. And that's over seven years. Seven years of investments going nowhere, and we haven't even seen the full fallout of the housing bubble burst. Could we bring back the Democrats, please?