Melamine and the Republican Belief

Chinese farmers slaughtered their chickens for people have realized how widely melamine is used as a supplement in feeding their chickens. This market failure of providing safe food supply is a good example why effective government oversight is needed for the market to operate. Markets cannot provide good solutions from time to time. According to my father, the Chinese Communist Party started the nationalization process after they found that the military supply provided by Shanghai capitalists were of perverse quality that the dirty raw materials led to the death of wounded soldiers in the battle fields in Korea.

It is possible that market can work if trusted quality check can be purchased. However, when the Republicans simply propagate the idea that market works like magic and people simply believe that idea, there may be no demand for quality checking service and then the markets fail. This Republican belief is like Melamine for food as to the market economy. The second Bush administration also abolished many needed services provided by the government for preventing market failure (Midnight Regulations on the Diane Rehm Show). To some extend, the lack of a well-functioning government will lead to the lack of a well-functioning market.

The last spokesmen

Obama: Collin Powell and Bill Clinton.
McCain: Joe the Plumber and Reverend Wright.

Why the Democrats and Republicans (mavericks) are so different? Does the Naval Academy ever teach anything about positive thinking?

Time to let the Detroit 3 go

I don't see any reason to keep the Detroit 3. They don't care about drivers, why should drivers care about them? The U.S. economy will be better off without them. The pension holders of the Detroit 3 should have demand the management to formulate a long-term plan for the survivorship of their employers. They should learn more about consumer education than consumer indulging and they should stop self-indulging. The quality of this post matches the quality of their cars.

Reviving the housing market, the supply side

I have given my take on the demand side policies.

Mankiw noted some supply side plans:

• the shared appreciation mortgage, or SAM, in which the homeowners who get a mortgage relief will have to forfeit the future appreciation on their house.
• Zingales's Plan B, which is essentially an equity-for-debt swap.

The problem, it is hard to renegotiate the mortgage contract as we have noted before. Then it is still easier to implement the demand side policies.

Reviving the housing market

Since the existing mortgage is hard to renegotiate due to complicated structure of the financial product, I suggest the government design policies to encourage new home buyers to jump in and buy. Possible choices are:

1. low fixed rate mortgage on the purchase of nearly foreclosed homes;
2. tax incentives on first time home buyers;
3. give mortgage insurance as promised in the bailout plan.

In this way, the demand side can help to boost the housing market price and people who should not have get a subprime loan and investors who should not have hold so much subprime loans will not benefit from tax payers' money.

Even though the recent home sales went up but the prices are lower, which can drag the housing market into an even lower level. With help from the demand side, the housing market may be stabilized as soon as possible.

21 ECONOMIC MODELS EXPLAINED WITH COWS

funny stuff on the web: Economic Models/Financial Markets explained with Cows
SOCIALISM

You have 2 cows.
You give one to your neighbour.

COMMUNISM
You have 2 cows.
The State takes both and gives you some milk.

FASCISM
You have 2 cows.
The State takes both and sells you some milk.

NAZISM
You have 2 cows.
The State takes both and shoots you.

BUREAUCRATISM
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the milk away…

TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.

SURREALISM
You have two giraffes.
The government requires you to take harmonica lessons.

AN AMERICAN CORPORATION
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyse why the cow has dropped dead.

ENRON VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet provided with the release. The public then buys your bull.

A FRENCH CORPORATION
You have two cows.
You go on strike, organise a riot, and block the roads, because you want three cows.

A JAPANESE CORPORATION
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce twenty times the milk. You then create a clever cow cartoon image called ‘Cowkimon’ and market it worldwide.

A GERMAN CORPORATION
You have two cows.
You re-engineer them so they live for 100 years, eat once a month, and milk themselves.

AN ITALIAN CORPORATION
You have two cows, but you don’t know where they are.
You decide to have lunch.

A RUSSIAN CORPORATION
You have two cows.
You count them and learn you have five cows.
You count them again and learn you have 42 cows.
You count them again and learn you have 2 cows.
You stop counting cows and open another bottle of vodka.

A SWISS CORPORATION
You have 5000 cows. None of them belong to you.
You charge the owners for storing them.

A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment, and high bovine productivity.
You arrest the newsman who reported the real situation.

AN INDIAN CORPORATION
You have two cows.
You worship them.

A BRITISH CORPORATION
You have two cows.
Both are mad.

AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
No-one believes you, so they bomb the shit out of you and invade your country.
You still have no cows, but at least now you are part of a Democracy…

AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers to celebrate.

A NEW ZEALAND CORPORATION
You have two cows.
The one on the left looks very attractive…

Financial Market Cow Models Commentary by Mark Gilbert Feb. 9 (Bloomberg)

If Hedge Funds Kept Cows, Your Milk Would Go Sour: Mark Gilbert

A famous series of jokes attempts to define political systems. In communism, for example, you have two cows, your commune seizes them and charges you for milk. In a democracy, you have two cows, the cows outvote you 2-1 to ban all meat and dairy products, and you go bankrupt and starve to death.

Similar thinking can be applied to financial markets. Here, then, is the world of money recast in bovine terms.

Leveraged Buyouts

You have two cows. You come home from the fields one day to find Henry Kravis chatting to your spouse at the dining-room table. Two days later, you have no spouse, no farm, and no table. Two guys the size of sumo wrestlers have saddled up the cows and are riding them around the farmyard.

Currency Market

You have two cows. China has 1 trillion cows. Guess who sets the price of milk?

Bond Market

You have two cows. One is Brazilian, one is Australian. They yield 25 quarts of milk per day. That's half as much as three years ago, when you traded your less-lactiferous German and U.S. cows for them. You are thinking of swapping for a pair of Namibian cows. They only have three legs but, hey, they produce 26 quarts per day.

Derivatives

You have two cows. You repackage five of them into a Collateralized Lactating Obligation, pay for a AAA credit rating, slice the CLO into 10 pieces and sell it to investors, skimming the cream from the milk for yourself. Three of the cows fall ill, and the credit rating plummets. You get to keep the cream.

Hedge Funds

You have two cows. A guy in an open-necked shirt drives up in his Bentley and offers to take care of them for you in return for a year's supply of steak and 50 percent of their milk. They won't be allowed to leave his compound for two years.

Six months later, you have half a cow, producing sour milk. ``You have to be willing to lose rump today to get rib-eye tomorrow,'' the hedge-fund guy mumbles through a mouthful of sirloin and champagne.

Economics

Assume two cows.

Carbon-Emissions Trading

You have two cows. They produce 1.2 tons of methane gas per day. After a hefty donation to the re-election campaign of your local representative, the government gives you enough emission permits for six cows. You sell three permits, buy another cow, and apply for a European Commission grant to build a methane-gas power station.

Microsoft Corp.

You have one old, tired cow. A recent heart transplant may have come too late to save the beast.

Google Inc.

You have no cows. You slap advertisements on everyone else's cows. The milk floods in. You use the proceeds to reinvent the cow.

Apple Inc.

Nobody wants your cows. You design the cutest little milk bottle. Now, everybody wants your cows.

Goldman Sachs Group Inc.

You have 26,467 cows. They are strapped into the milking machines 24/7. Some of them have more hay than they could ever hope to eat. Others aspire to one day having more hay than they could ever hope to eat. The cows with the most hay end up with big government jobs.

Pension-Fund Management

You have two cows. How boring is that? You pay a month's supply of milk to a consultant, who advises you to sell one cow and buy two aardvarks instead. The aardvarks die. The consultant charges you four months of your (now reduced) milk supply and advises you to sell half of your remaining cow and buy a wombat. The wombat dies. The consultant charges eight months of milk for a copy of his new report, ``Two-Cow Strategies for Alleviating the Impending Pensions Crisis.''

Russian Energy

You have two cows. Comrade, those cows are an environmental hazard. We suggest you hand one of them over to us.

Credit-Default Swaps

You have two cows. You buy insurance against them dying, and tuck the contracts into the middle of that tottering pile of documentation on your desk. One dark night, Henry Kravis sneaks off with your cows. By the time you track down the paperwork, your now worthless contracts have expired.

Interest-Rate Swaps

You have two cows. You pledge one of them to me as collateral in a swap for some of my pigs. I pledge the cow to my neighbor as collateral in a swap for some of his sheep. He pledges the cow to his cousin as collateral in a swap for some of his cousin's goats. Better pray the livestock market doesn't crash and we have to try and round up that cow.

Commodities

You have lots of stocks and bonds, but no cows. Are you crazy? Cows are the hot new market. Here, buy this exchange- traded cow futures contract. It can't lose. It gained 40 percent in the past six months.

Gold

You have two cows. You wear a cap you made out of tin foil so that the tiny black helicopters can't read your thoughts. You spend your days blogging about how the government's decision to abandon the cattle standard in 1933 was part of a global conspiracy by the world's central banks to destroy the value of your herd.

(Mark Gilbert is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this article: &cls;Mark Gilbert&cle; in London at magilbert@bloomberg.net

Anna Schwartz missing the aborted new world

It is hard to figure out what Greg Mankiw think about what Ms. Schwartz has said in "An Interview with Anna", but it is easy to see what Brad DeLong thinks about it. It sounds like that Ms. Schwartz wants the market economy to work and she would like to see the garbage cleaned out in the system and a newly established economic order. For that to happen, the economy will have to work into the long run, in which we are all dead, said by Keynes and recalled by Paul Krugman recently. I also have to say that Ms. Schwartz may be too harsh on Bernanke, since we basically gave Ben some knives/axes for dealing with a nuclear bomb and even he didn't hesitate to make his own tools, we still don't know whether he will achieve the ultimate success. After all, Friedman and Schwarts only told us what monetary policy did not work in dealing with a depression but nobody has outlined a set of policies that are guaranteed to work in preventing a imploding economy falling into a recession/depression.

The basic point is still that the American people should trust neither market economy or the government, and the economy need oversight, the government need check and balance, and the national need to do some serious long-term planning, before it turns its focus back on to the celebrities. For that to happen, we probably need a reform in the regulation of the media industry first to encourage competition and free speech.

As the turn of the administrative branch approaches closer, a really important thing to do is to send both candidates' choice of secretary of the Treasury to Washington to start their on-the-job training now. The crisis is not over yet.