Extend and pretend

It is bad when the most pertinent of commentaries gets no response. What is ironic here is that at the micro level banks are telling their public stop pretending we are not extending even though they face near zero costs or in the case of the US negative costs.

You leave out an important scenario: in a zero interest rate environment, no bank is bad. This is why otherwise insolvent banks like Bank of America or Citi can stay solvent. It doesn’t matter the proportion of non-performing loans on the asset side as long as its cost of funds is minimal. Banks are thus engaged in a race with time to capture a positive return to recapitalize before interest rates rise.

Posted by: Guillaume | November 08, 2010 at 10:48 PM

Yep extend and pretend. That is the future but it is not as yet the present.

Mankiw was right, incentives do matter

It turns out that Greg Mankiw perhaps was *mostly* right: incentives do matter. To understand to what extent and how far my dear readers you will have to do three things.

First you will have to read Mankiws original article here. Then you will have to watch this 10 minute long animated lecture here (h/t Marc Lee) and then you will have to read Iglika’s post over at the Progressive economics blog. I know that is about 30 minutes of your time dear reader but I promise you will be rewarded for doing your homework and be equipped to make a difference.

My take away from the three homework assignments is this. If we combine Iglika’s post with Marc’s video link and reflect back on Mankiw’s now infamous article in the NYT we are left with one of three conclusions.

A) Mankiw is wrong.

B) The type of intellectual work he does is akin to basic mechanical manipulation of say moving a mountain of manure from spot X to spot Y.

C) A & B are correct if, and only if, Mankiw does not generalize from what he does for work to what real professionals do for work.

Take away is that both incentives and the type of work being done matter.

When youth and enthusiasm defeats old age and tyranny

It was a calm evening. The youth were looking for revenge after untold years of humiliation at the hands of their betters. They assembled on mass with all their gear: ready to go to war. They had thought long and hard about what they hoped would be their night. The professors were given 48 hours notice that the match would take place Monday evening on the hollowed grounds of the Rouge et Or. When the professors took to the field it was clear that their inferiors had out-foxed them. 24 students stood on the opposing side and the professors only numbered 8. The rules of engagement were established: there would be no half time and unlimited substitutions.

The whistle blew and the battle was on. Initially the professors would take the initiate running up the score 4-1 in their favour but as the evening wore on and one relenting wave of fresh legged students replaced the other every 15 minutes youth and enthusiasm would slowly start to dominate old age and tyranny. Psychologically the professors were quite unprepared for the evening: how does one face down one relenting wave after another of fresh legged undergraduates? When the facts set in; namely that you are rock and the opposition is all the natural forces of erosion all one can do is try to absorb force.

After an hour and a half of play the professors would lay fallen 6-5.

Personally I was proud of our students. Knowingly or not, they had finally figured out that inferiors when superior in number and with solidarity can win.

That is when youth and enthusiasm defeats old age and tyranny