Matt Nolan

Prior moral hazard and the credit crisis

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Were inextricably linked.  A quote that illustrates this to me strongly came from a Bloomberg article today.  The ECB decided to tell the countries that have high soverign debts to go to hell, and now that they aren’t going to take on the risk themselves private investors aren’t willing to and are selling.

This makes sense, previously people purchased the junk on the basis that someone else would pay for it – high return low risk!  Now that they have to face the real risk profile they are like “f**k that”.  However, Bloomberg (or at least David Kovacs) stated:

The reason the market is horrified now is Trichet said it’s not even being discussed. Smart investors are basically selling risk(y) assets

No s**t.  An asset appeared low risk, and now it is high risk, and the expected return is (at most) unchanged – so the risk adjusted return is lower.  No wonder they want to sell.

Now we are in a crisis, and if there is a run on good quality debt because of concerns we have to do strange things – sure.  But we need to come up with a system that rips this moral hazard out of the system.  It is the moral hazard that helps to drive crisis after crisis ultimately.

goonix

A novel solution to the student loan ‘problem’

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In the 2005 election the Labour Government found itself in a very tight battle to retain power. In order to mobilise the student vote, Labour promised interest free student loans. The bribe assisted Labour in returning to Government for their third consecutive term.

At the time National called the interest free loan scheme “irresponsible”. Since coming to power in 2008, however, they have maintained the policy, presumably for similarly cynical political reasons as led to the policy being introduced in the first instance.

As a result of the policy, students have been encouraged to borrow more and pay back less. Debt has ballooned. There are obviously other factors to take into account, such as increasing student numbers during the economic downturn. Nonetheless, it is clear that when given the option of borrowing interest free money, those with student loans have limited incentive to pay anymore than the minimum from their loan, for which they might as well borrow the maximum.

What is National’s response to the perceived student loan problem? The introduction of a $50 administrative fee that student loan borrowers must pay annually. Note that National have also provided an incentive for students to voluntarily pay back their loans through a 10% discount on their loans.

I propose a rather simpler solution. Abolish the half measures currently in place and start charging interest on student loans again. Only then will the correct incentives be instilled.

Will Taylor

Binge Drinking and Risky Sex among College Students

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Hot off the press from NBER, I was particularily interested in one of the main conclusions from the abstract:

Results from a rudimentary instrumental variables strategy and accounting for whether sex is immediately preceded by alcohol use suggest that binge drinking directly leads to risky sex. Some binge drinking-induced promiscuity seems to occur among students, especially males, involved in long-term relationships

I could have told you that without doing any econometrics!

Note: I have read nothing but the abstract so can’t comment on the actual econometrics carried out!

Matt Nolan

Universal healthcare and superannuation, and the cost of thinking ahead

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If doing actions that reward a future self is perceived as costly could we justify these actions.  If thinking about our wealth, human capital, or ability to live in 10 years time is inconceivable, will me over consume now?

In essence this sort of discussion is saying that we discount our future selves TOO steeply (compared to whatever the underlying presumption of a “fair discount factor” is).  Is this a fair value judgment to make in policy?  It is not one I would make, but it appears to be the basis of some overaching policies such as universal healthcare and superannuation.

In this case, we don’t need to worry about a “moral hazard problem” even though (empirically) the actions of moral hazard will appear.  Why?  Because the actors aren’t thinking about the future selves and so these “inefficient” outcomes would have occurred in the first place!  Policy helps to correct this by transfering resources to our future selves to improve outcomes relative to the REAL counterfactual (rather than the idealized one where agents choose on the basis of our subjectively fair discount rate).

I think it is important to keep this issue in mind, because it is a closet behavioural assumption behind most policy.  If we buy this value judgment, then we will believe in a larger role for government then if we didn’t.

Matt Nolan

GST and food. Why I’m against exempting the tax

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Via Dim Post, No Right Turn mentions an article from Werewolf.co.nz by Gordon Campbell.  The article supports the idea of exempting GST on food. There were a number of interesting facts, I definitely enjoyed the articles.

However, even if all the premises are correct and even given significant social justice goals, I think we have to be clear regarding why we think an exemption is the way to go – and in the end I still disagree regarding any exemption.

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Matt Nolan

Fat is normal, but it still involves choice.

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I was impressed by the title of a NZ Herald article today “Fat is normal“.  I was like, yes it is perfectly rational for an individual to put on weight, contrary to what we are often told.  I began to think that if policy wonks would treat the idea of putting on weight sensibly we could avoid weird “anti-fat” policies.

However, then inside the article I saw it was written by a nutritionist – the worst of the prescriptive disciplines in my opinion.  Furthermore, they decided to take an entirely holistic approach to weight gain, removing any individual responsibility and blame the environment.  Namely:

Professor James said that in countries such as Britain and New Zealand, the reason for many people’s obesity was a genetic predisposition in an environment which allowed it to happen with an “out-of-control” food industry and the constant use of cars

What is this.

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