Haiti links

I've been traveling, so posting has been lighter than expected.

Nonetheless, Tyler Cowen at Marginal Revolution (a must-read!) has had some brilliant and original thinking on the path forward on Haiti, including:

-- thoughts on how to help Haiti,

-- the role that Haiti will play in American policy and its consequences for the Obama presidency,

-- an early call to grant temporary protected status to Haitians in the U.S.,

-- a bold statement about the severity of this crisis on Haiti's geopolitical future,

-- thoughts on why Haiti is so poor, and

-- an eerie and poignant comment hours before the earthquake, on what was shaping up to be a very good year, relatively, for Haiti's economy.

Among aid organizations, Partners in Health stands out -- Paul Farmer has been working in Haiti for two decades.

Glass-Steagall II

President Obama announced his plan for bank reform on Thursday.

Some initial thoughts:

(1) The timing, two days after Scott Brown's victory in the Massachusetts Senate race, seemed awkward and reactionary.

(2) If, as it seems today, Congressional Democrats can't pass a market-friendly health care reform that puts guaranteed profits in the hands of insurance companies, I'm skeptical about their resolve in the face of almost certain fierce lobbying from JP Morgan, Goldman and others.

(3) I'm not sure how, in reality, you can limit exposure to under 10% in every conceivable area that may be problematic, but I'm very interested in seeing more details. If actually enforced, it would very likely limit the risk of another LTCM or AIG or Bear Stearns moment of pure systemic panic. I doubt it would limit the risks of, say, the dot-com bubble or the real estate bubbles. When everyone's long on an asset that later turns out to be overvalued, it doesn't matter that the risk is spread out among all of us. But it would reduce the risk of "LTCM moments," for sure, which would be a net plus.

(4) The other part of the plan, make no mistake, is nothing short of a return to Glass-Steagall rules, abandoned with bipartisan support in 1999 at the apex of deregulation and the Greenspan era. Again, in reality, I'm not sure how you distinguish the use of deposits for single-family loans on the one hand, and the use of deposits for more exotic securities, on the other. I'm not sure I see a bright line as between prop trading and "traditional" banking activity. Regional banks are failing all over the country and they made conservative (or so they thought) investments in traditional banking investments. I'd prefer perhaps a revision of the capital ratios, or regulations that place mortgages and mortgage-backed securities on equal footing vis-a-vis capital ratios (One of the regulatory nudges that caused the panic was the banking rule that banks could have much more leverage, in terms of capital, if they invested in mortgage-backed securities rather than underlying mortgages, thereby creating an incentive towards the former).

(5) Also make no mistake that this really could mean a dismantling of Wall Street -- get ready for banking to flow to Hong Kong, Dubai, and (maybe) London -- and all the tax revenue that's been fueling the renaissance of New York City.

(6) Alternatively, having lived in an era without Glass-Steagall, it may be difficult to put the genie back in the bottle. Talent will flow out, our capital markets could become less dynamic, or we'll end up with odd international joint ventures that are flexible enough to avoid full regulation by any one national authority. Furthermore, although it's an unpopular argument, financial innovation can be a good thing -- there are valid uses for credit default swaps. They make markets more efficient in some cases -- for example, total return swaps are a tool to separate ownership and the beneficial incidents of ownership. On the other hand, there's validity in the notion that the financial/securities industry may have become too juiced, and that there are better uses, in terms of comparative advantage, of the best and brightest talent out of U.S. universities than a beeline to Wall Street.

(7) To the extent investment banking talent does remain in NYC, that talent will flow to other as-yet unregulated shops like hedge funds and private equity. I'm not optimistic that the Congressional package of regulation shepherded by Barney Frank will really clip the wings on those unregulated groups sufficiently to tame capital markets in the way that these new "Obama/Volcker" reforms are designed.

(8) It's great to see Paul Volcker being taken seriously by the Obama administration.

54-40 or Coase?

Economics scholars (as well as students in property law in US law school programs) are familiar with the Coase Theorem.

The Coase Theorem states that in a world of zero transactions costs and clearly defined property rights (i.e., that you can buy property with relative administrative ease and you can be certain that the property is yours after you've bought it), the efficient allocation of resources is independent of the distribution of property rights.

The Coase theorem, as one of the lynchpin ideas of the law-and-economics schools, essentially says that it doesn't matter how the legal authority -- say, a judge -- allocates the ownership of the property, only that the ownership is clearly defined. At such point, the actors, who will know definitively how property right are assigned, will be able to negotiate and bargain for rights.

Driving recently from Washington state to British Canada, I wondered if perhaps nations act under a somewhat similar principle. Specifically, I began to wonder if the 1849 settlement of the Oregon Country (during the single term of James K. Polk, perhaps the most under-appreciated antebellum US president) served as the "legal allocation" allowing American and Canadian actors to settle in earnest what would become Seattle and Vancouver. Seattle's creation dates to 1851; Vancouver's incorporation was in 1866.

To be sure, there are other contemporary historical elements propelling the growth of Pacific Northwest cities -- various gold rushes, beginning with California's 1848 gold rush, as well as the general westward expansionary push. Certainly the inception of transcontinental railroads in the 1870s in both the US and Canada were a factor in the growth of Seattle and Vancouver.

Perhaps Dominion in Canada in 1867 could be identified as a secondary "Coase" moment, which, more than any other point in evolutionary Canadian history, marks the moment that Canada transformed from colony into nation-state.

An interesting question with implications for game theorists, political scientists, legal scholars and historians alike.