tag:blogger.com,1999:blog-79994790959075534712023-11-15T10:56:27.845-05:00Blackstone in AmericaThoughts on law, economics, and politicsJayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.comBlogger90125tag:blogger.com,1999:blog-7999479095907553471.post-15929889782615897872009-05-17T11:31:00.002-04:002009-05-17T11:40:52.120-04:00<strong><em>New York Times</em> Reviews Judge Posner's <em>Failure of Capitalism</em></strong><br /><br />The <em>New York Times</em> has published <a href="http://www.nytimes.com/2009/05/17/books/review/Rauch-t.html?_r=1&ref=books">an excellent review</a>, by Jonathan Rauch, of <em><a href="http://www.amazon.com/Failure-Capitalism-Crisis-Descent-Depression/dp/0674035143/ref=sr_1_1?ie=UTF8&s=books&qid=1240841240&sr=1-1">A Failure of Capitalism</a></em>. This is the best review of the book I've seen so far, and also the best short summary of the book's contents. (It's much better than, for example, Nobelist Robert Solow's <a href="http://www.nybooks.com/articles/22655">cranky, condescending review</a> in the <em>New York Review of Books</em>.)<br /><br />Highly recommended.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-41632357804850291152009-05-14T09:00:00.002-04:002009-05-14T09:03:54.320-04:00<strong>Reactions to Judge Posner on U.S. Conservatism</strong><br /><br />"Cervantes" has posted an <a href="http://abluteau.wordpress.com/2009/05/14/not-so-bright-right/#comment-3699">excellent summary</a> of various responses to Judge Posner's critique of the recent course of conservatism in the United States, which I blogged about on Tuesday.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-78846649817511986952009-05-13T12:49:00.003-04:002009-05-13T18:31:38.002-04:00<strong>How Much Do We Know about the Phenomena That Economics Purports to Explain?</strong><br /><br />As I've pointed out elsewhere in this blog, Judge Posner argues in <em><a href="http://www.amazon.com/Failure-Capitalism-Crisis-Descent-Depression/dp/0674035143/ref=sr_1_1?ie=UTF8&s=books&qid=1240841240&sr=1-1">A Failure of Capitalism</a> </em>that depressions are poorly understood, and that where hard data is in short supply, preconceptions will fill the void.<br /><br />That argument came to mind today when I read Judge Posner's latest post on his <a href="http://correspondents.theatlantic.com/richard_posner/">"Failure of Capitalism" blog</a>. He is describing the causes of possible "aftershocks" of a depression:<br /><br /><blockquote>The government has created a great deal of money, and borrowed a great deal of money, to finance the bailouts and the stimulus package and increase the amount of money in circulation (to help push down interest rates). If when demand rises the banks lend their $800-plus billion in excess reserves, the ratio of money in circulation to the output of goods and services is likely to rise--and this will mean inflation. The ratio will rise further if the government decides to finance some of the huge additional debt that it is incurring as a result of its anti-depression expenditures by increasing the money supply, that is, by inflation, which is a form of taxation--taxation of cash balances. A low rate of inflation is manageable and does little economic harm, but a high rate is very harmful, and can be broken usually only at the cost of a sharp recession (consequent upon a sharp rise in interest rates in order to reduce the amount of lending and hence the amount of money in circulation). And the recession might (as in 1937) disrupt a recovery from the depression. These costs have to [be] balanced against the benefits of the anti-depression programs; unfortunately only guesses are possible.<br /></blockquote><br />The last point -- "only guesses are possible" -- leads one to wonder how we should choose between the "guesses" of Keynesian economists and the "guesses" of "conservative" economists. Both sides make plausible arguments that rely partly on hard research but also partly (largely?) on naked reasoning. What would be worse -- a deflationary spiral (assuming the absence of bailouts and stimulus spending would have resulted in one), or post-depression inflation, or a double-dip depression? Not to mention permanent growth in the scope of government. Whose bogey is more likely to be real? Whose would be worse if real?<br /><br />UPDATE: After posting this, I noticed that economist <a href="http://econlog.econlib.org/archives/2009/05/the_third_iron.html">Arnold Kling has a post today</a> touching on what appears to be the same uncertainty. He passes along the Three Iron Laws of Social Science: (1) "Sometimes it's this way and sometimes it's that way." (2) "The data are insufficient." And (3) "The methodology is flawed."Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com2tag:blogger.com,1999:blog-7999479095907553471.post-53072647192275720252009-05-12T11:59:00.002-04:002009-05-12T12:24:59.549-04:00<strong>The Decline of "Intellectual" Conservatism</strong><br /><br />Judge Posner -- at his <a href="http://www.becker-posner-blog.com/index.html"><em>other</em> blog</a> -- has a <a href="http://www.becker-posner-blog.com/archives/2009/05/is_the_conserva.html">fascinating post</a> on the recent history of conservatism in the United States. He argues that, today, the intellectual underpinnings of conservatism are "weak." Conservatism now has no one filling roles comparable to those of William F. Buckley, Milton Friedman, et al. It has grown "strident and populist." <br /><br />Judge Posner puts this in autobiographical terms:<br /><br /><blockquote>By the end of the Clinton administration, I was content to celebrate the triumph of conservatism as I understood it, and had no desire for other than incremental changes in the economic and social structure of the United States. I saw no need for the estate tax to be abolished, marginal personal-income tax rates further reduced, the government shrunk, pragmatism in constitutional law jettisoned in favor of "originalism," the rights of gun owners enlarged, our military posture strengthened, the rise of homosexual rights resisted, or the role of religion in the public sphere expanded. All these became causes embraced by the new conservatism that crested with the reelection of Bush in 2004.<br /><br />* * *<br /><br />By the fall of 2008, the face of the Republican Party had become Sarah Palin and Joe the Plumber. Conservative intellectuals had no party.<br /></blockquote><br /><br />The reactions to Judge Posner's <em><a href="http://www.amazon.com/Failure-Capitalism-Crisis-Descent-Depression/dp/0674035143/ref=sr_1_1?ie=UTF8&s=books&qid=1240841240&sr=1-1">A Failure of Capitalism</a> </em>demonstrate his point. So far, no one on the right, as far as I know, has engaged the book's arguments regarding market failure and re-regulation. Conservative magazines seem not even to have acknowledged that the book exists. It does not fit the conservative conventional wisdom and therefore must be either ignored or <a href="http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_baum&sid=aHEie5ri2clo">shouted down</a>.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-30690956459914436162009-05-07T12:18:00.002-04:002009-05-07T12:40:49.306-04:00<strong>Book and Blog Combo</strong><br /><br />Richard Posner continues to, in effect, revise and enlarge his latest book, <em><a href="http://www.amazon.com/Failure-Capitalism-Crisis-Descent-Depression/dp/0674035143/ref=sr_1_1?ie=UTF8&s=books&qid=1240841240&sr=1-1">A Failure of Capitalism</a></em>, by posting timely short essays on <a href="http://correspondents.theatlantic.com/richard_posner/">his blog of the same name</a>. His most recent entry, posted last night, evaluates the government's various responses to the depression so far. I'm pleased that, among other things, he takes the President to task for "leading the attack on the resistance of Chysler's secured creditors (whom he referred to unhelpfully as 'speculators,' when the government is desperate to encourage lending, including by lenders who will not lend without collateral that gives them a favored position should the borrower go broke)...."<br /><br />This is the first time I've made intensive use of a book-blog combination. It works especially well here, because the book appeared in the midst of a crisis that is not yet ended and will have ramifications far into the future. Hearing Judge Posner's views on the changing situation is fascinating. They enhance the usefulness of having read the book, by causing me to employ what I picked up from the it. And the background knowledge provided by the book enables me to fit the blog updates into a larger argument.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-58578290605341216732009-05-06T11:57:00.002-04:002009-05-06T12:22:05.590-04:00<strong>Auto Bailouts and Bankruptcies</strong><br /><br />Today's post (really, late last night's post) on Judge Posner's <a href="http://correspondents.theatlantic.com/richard_posner/2009/05/policy_responses_to_the_depression--february_2-may_1_2009--part_ii.php"><em>Failure of Capitalism</em> blog</a> discusses the auto bailouts, the second stimulus package (which was passed after he finished the book), and bank stress tests.<br /><br />In <a href="http://www.amazon.com/Failure-Capitalism-Crisis-Descent-Depression/dp/0674035143/ref=sr_1_1?ie=UTF8&s=books&qid=1240841240&sr=1-1">the book</a>, Judge Posner argued that the auto bailouts were necessary simply to keep the major auto companies from collapsing when uncertainty about the course of the depression was highest. Their utility lay in delaying bankruptcy, not in making the companies viable again. <br /><br />Today, some five months later, Judge Posner observes that the bailouts "worked." They kept the companies from failing at the height of public fear, when there was the greatest risk of a deflationary spiral. But by the end of March, the generalized, public fear had largely subsided. Thus, the bankruptcy of Chrysler and likely bankruptcy of GM do not raise the same concerns they did in December. <br /><br />Although Judge Posner does not say this, it would therefore appear that there is now no emergency that could justify the administration's efforts <a href="http://www.businessinsider.com/new-allegations-of-white-house-threats-over-chysler-2009-5">to strong-arm Chrylser's bondholders</a>.<br /><br />Hat tips to Volokh Conspirator <a href="http://www.volokh.com/posts/1241564094.shtml">David Bernstein</a> and to <a href="http://pajamasmedia.com/instapundit/">Instapundit</a>.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-21510532511591458582009-05-05T20:30:00.002-04:002009-05-05T20:35:13.174-04:00<strong>Blasts from the Bully Pulpit</strong><br /><br />In an <a href="http://volokh.com/posts/1241564094.shtml">short, amusing post</a>, law professor David Bernstein dramatically compares the cynical rhetoric of Presidents Obama and George W. Bush.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-79938794662351530642009-05-05T09:27:00.002-04:002009-05-05T09:39:16.622-04:00<strong>Update to Judge Posner's <em>Failure </em>Blog</strong><br /><br />The second post on Richard Posner's <a href="http://correspondents.theatlantic.com/richard_posner/">new blog</a> about <em>A Failure of Capitalism</em> is now up. It is the first of three promised posts on the federal government's responses to the current depression. Today's post looks at the Fed's "easy money" response, Treasury's effort to partner with private investors to buy mortgage-related assets from banks, and planned legal changes to give relief to underwater mortgagors.<br /><br />Of particular interest to me is the paragraph explaining why nationalization of "bad banks" would be a wrong step. Nationalization would be much more complicated, time-consuming, and unpredictable than it at first sounds: Because the bad banks are not worthless, their current owners would need to be compensated in any takeover. And then the government would face the question of what to do with the banks it would now own.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-57838838504009444612009-05-04T17:38:00.002-04:002009-05-04T17:51:15.442-04:00<strong>Richard Posner's New Blog Is Up & Running</strong><br /><br />As promised in his latest book, <em><a href="http://www.amazon.com/Failure-Capitalism-Crisis-Descent-Depression/dp/0674035143/ref=sr_1_1?ie=UTF8&s=books&qid=1240841240&sr=1-1">A Failure of Capitalism</a></em>, Judge Posner has launched a <a href="http://correspondents.theatlantic.com/richard_posner/">new blog</a> in which he will expand upon the book's argument as events unfold. The first post appeared today. <br /><br />He observes that events since February, when he finished the book, have not "alter[ed] the basic analysis and conclusions in my book." He cites data showing that the economy is continuing to decline, "but there is evidence that the <em>rate </em>of the decline has slowed" (his emphasis).<br /><br />He refuses to speculate on whether we have hit bottom. My own (very impressionistic) sense is that we have, and that we're seeing more and more signs of impending recovery. I hope I'm right about that.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-13316539738390348732009-05-04T12:25:00.002-04:002009-05-04T12:36:20.712-04:00<strong>The <em>Wall Street Journal</em> on <em>A Failure of Capitalism</em></strong><br /><br />The <em>WSJ</em> today has a positive <a href="http://online.wsj.com/article/SB124139557611981725.html#mod=todays_us_opinion">opinion piece</a> on Richard Posner's <em><a href="http://www.amazon.com/Failure-Capitalism-Crisis-Descent-Depression/dp/0674035143/ref=sr_1_1?ie=UTF8&s=books&qid=1240841240&sr=1-1">Failure of Capitalism</a></em> (may be gated). The author appears to agree with the book's argument and concludes:<br /><br /><blockquote><p>Even capitalism's staunchest supporters recognize that it cannot function unless government plays its proper part. If all the players, including regulators and bankers, can accept their rightful share of blame and responsibility, we can begin to prevent future failures.</p></blockquote><br />New regulations will inevitably come out of the current economic crisis. And they will inevitably be bad regulations if "capitalism's staunchest supporters," especially those with finance-industry know-how, do not participate in the process with a good attitude.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-23558861396736022712009-05-01T09:26:00.002-04:002009-05-01T10:06:49.538-04:00<strong>Posner's <em>A Failure of Capitalism </em>-- XIII</strong><br /><strong></strong><br />This post concludes my ongoing review <em>Failure</em>, which I finished reading last night. The last chapter of the book, "The Future of Conservatism," is followed by a "Conclusion" that is (by design) nothing more than a summary of the entire argument.<br /><br />Judge Posner's hope is that both conservative and liberal preconceptions can be sufficiently loosened that "pragmatic, apolitical, nonideological solutions to economic crises" can be considered. The Republican "coalition" of economic, security, and social conservatives has been shaken by recent events, each component pulling away from the others. The Democratic Party, meanwhile, came out on the winning side of the "competence gap" during the presidential campaign. But both conservatism and liberalism have "substantial" histories of failures. <br /><br />Judge Posner realizes that politics cannot be banished from economic policymaking. ("There are conflicts within society that can be resolved only by political competition.") The current crisis, however, has given rise to a spirit of pragmatism among economists that with luck will result in better policy-making once the current crisis has passed.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-66731792006987807672009-05-01T08:22:00.002-04:002009-05-01T09:24:46.326-04:00<strong>Posner's <em>A Failure of Capitalism </em>-- XII</strong><br /><br />Chapter twelve of <em>Failure</em> (entitled "The Way Forward") discusses measures that could be taken to help prevent future depressions. In keeping with his view that systemic reforms should not be attempted or even devised until after the depression has ended, Judge Posner here offers an open-ended array of changes to consider, not a fully worked out program. Among other things, we need to see first what "the new, bound-to-be activist regulatory regime . . . can do within the existing regulatory framework."<br /><br />Almost nothing is off the table. Possible (but not necessarily recommended) changes include consolidating the various federal and state financial regulatory bodies; forming an "international regulatory authority"; capping credit-card and mortgage debt; further restricting the extent to which debt can be discharged in bankruptcy; changing compensation arrangements for credit-rating agencies, to reduce conflicts of interest; "forbidding proprietary trading by banks (that is, trading of their equity capital, which puts that capital at risk)"; changing bank reserve requirements; regulating hedge funds more like banks and credit-default swaps more like stocks; "and even resurrecting usury laws." Controlling executive compensation through income taxation, and increasing income taxes generally to finance the anti-depression programs, are other suggestions that will surprise readers accustomed to thinking of Judge Posner as a libertarian.<br /><br />Judge Posner devotes several pages to the difficulties that will be faced in trying to regulate well. We could, he notes, return to the regulatory framework of the 1960s, but we don't know how much value on net is added by having a deregulated financial industry. Consequently, we're unable to compare the costs and benefits that would be associated with various forms of re-regulation. (Judge Posner's description of everything that will need to be taken into account for regulations to be of benefit left me wondering where we can find the Solons capable of meeting the challenge.)Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-14474966381042192492009-04-30T09:36:00.003-04:002009-04-30T13:01:53.800-04:00<strong>Posner's <em>A Failure of Capitalism</em> -- XI</strong><br /><br />In chapter nine of <em>Failure</em> (entitled "Apportioning Blame"), Judge Posner explains that his thesis -- viewing the current depression as a market failure -- "doesn't let the government off the hook." This chapter thus overlaps to a considerable extent with chapter seven, "What We Are Learning about Capitalism and Government."<br /><br />The argument here focuses on the government's failure to keep a recession from devolving into a depression. Recessions are frequent, and it's "unrealistic" to expect the government to prevent them. But the government should be able to prevent depressions, especially given our experience with the Great Depression "and the tools forged then and later to prevent a repetition."<br /><br />The "seeds" were sown and nurtured in the gradual deregulation of banking and credit, which began in the 1970s. This process included repeal of the Glass-Steagall Act and the decision not to regulate credit-default swaps and other innovative financial products. The experts in charge in the '90s -- Greenspan, Rubin, and Summers -- "allowed the head of steam to build up." <br /><br />But a depression might still have been avoided were it not for "the Bush Administration's mismanagement of the economy." Judge Posner notes that Paulson's predecessors as Secretary of the Treasury weren't "financial experts." President Bush also erred in "firing" Lawrence Lindsey as chair of the National Economic Council in December 2002. None of Lindsey's successors as chair (until President Obama's appointment of Larry Summers) was an economist. <br /><br />Other mistakes under President Bush were the budget deficits and increase in the national debt, and a philosophy of lax enforcement of financial regulations. Judge Posner also spends several pages helpfully explaining why, in his view, the decision to let Lehman Brothers fail in September 2008 is "the single biggest blunder to date in the response to the gathering storm." Aside from the financial fallout, the episode and its aftermath shattered confidence by making it "increasingly obvious that the government had no game plan." This was exacerbated by President Bush's apparent lack of engagement with the crisis and abdication of leadership to Bernanke and Paulson, "neither of whom has the communication skills that the emergency required." <br /><br />Congress is likewise to blame, for its "squabbling and grandstanding and demagoguery" in an effort to use the crisis to advance political agendas, such as its "eagerness to promote unionization in a depression." <br /><br />Greenspan and, to a lesser extent, Bernanke are also culpable for their actions as chairmen of the Fed. Greenspan did not use the opportunity afforded by his "tremendous prestige" to arrest the housing bubble's growth. Bernanke shared Greenspan's misapprehension that any recession caused by the eventual bursting of the housing bubble could be "neutralized by lowering interest rates."<br /><br />Finally, Judge Posner explains why he is not being harder on private actors: Although private actors are "responsible" for the depression in the sense that their rational market behavior primarily caused it, they (unlike the government) are not morally culpable "any more than one can blame a lion for eating a zebra." Judge Posner therefore criticizes journalists and politicians "and some who should know better, like . . . Paul Krugman," for directing their ire at Wall Street. "They have the wrong target."Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-22212642815007375262009-04-29T19:36:00.002-04:002009-04-29T20:59:32.561-04:00<strong>Posner's <em>A Failure of Capitalism</em> -- X</strong><br /><br />Chapter eight of <em>Failure</em> tries to answer the question why economists did not anticipate trouble. Aside from a few outliers (Judge Posner mentions Nouriel Roubini, Raghuram Rajan, Paul Krugman, Martin Feldstein, and Robert Shiller), economists "whether in academia, the government, or business" gave warnings too late or not at all. <br /><br />In Judge Posner's opinion, this failure to see what was approaching arose not from "obtuseness" (he acknowledges that "the leading macroeconomists and finance theorists are brilliant people"), but from "disbelief" that we were facing anything more than another manageable recession. Likewise, the failure to warn did not result from over-reliance on "abstract mathematical models." Many of the economists under consideration had real-world experience with financial markets. <br /><br />One cause that Judge Posner offers is something he has mentioned before: "an overinvestment . . . in a free-market ideology that opposes aggressive governmental interventions in the operation of the economy." Yet he is quick to add that free-market leanings are not confined to conservatives -- "economists can be liberal in the sense of being egalitarian and favoring redistributive policies without wanting to regulate corporate practices." <br /><br />He also notes that depressions are not well understood; they're hard to model and occur rarely, in disparate settings that are not readily comparable. Consequently, a preference for one theory over another will be more than usually influenced by "preconceptions." The public and politicians have no basis for crediting one position or another -- they "wander in an untracked wilderness." <br /><br />Nonetheless, current experiences add to our stock of data. Judge Posner offers Ben Bernanke as an example of a "conservative economist" who has "come to doubt that a depression can be averted or cured by monetary policy alone." Unspoken is that Judge Posner himself, while not by profession an economist, could be added to the list of those who have altered their views based on events.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-58601105582820389672009-04-29T12:26:00.003-04:002009-04-29T13:12:38.939-04:00<strong>Posner's <em>A Failure of Capitalism</em> -- IX</strong><br /><br />Chapter seven addresses "What We Are Learning about Capitalism and Government" from the current depression. Here, Judge Posner revisits his claim that the depression was not caused by government action. Rather,<br /><br /><blockquote>As far as one can judge on the basis of what is known today (obviously an important qualification), the depression is the result of normal business activity in a laissez-faire economic regime -- more precisely, it is an event consistent with the normal operation of economic markets.<br /></blockquote><br />He obliquely supports this claim by examining the government's conduct in the years leading up to the depression. The government's role in the rise of risky mortgage lending, he finds, "was one of permission rather than of encouragement." In other words, government <em>allowed </em>the rational self-interest of private actors to pursue, in the aggregate, a course that was harmful. <br /><br />The government's permissivenes, or inaction, is exemplified in the SEC's failure to investigate the Madoff scheme, notwithstanding Harry Markopolos's repeated efforts over several years to alert the SEC to what was going on. Judge Posner rejects "conservatives'" interpretation of this episode as an example of government incompetence. Instead, he proposes, "the emphatically pro-business philosophy of the Bush Administration made the SEC too trusting of the securities industry." <br /><br />He concludes that "there undoubtedly was a grave government failure as well as a market failure" in the run-up to the depression. He predicts that the government's response will be, as usual, "regulation and reorganization." Reorganization is the easier move and the less effective. Regulation or reregulation is more likely to do good, but it should not be attempted until the depression is at an end.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-3365901292324044252009-04-29T11:52:00.002-04:002009-04-29T12:26:16.456-04:00<strong>Posner's <em>A Failure of Capitalism </em>-- VIII</strong><br /><br />Chapter six of <em><a href="http://www.amazon.com/Failure-Capitalism-Crisis-Descent-Depression/dp/0674035143/ref=sr_1_1?ie=UTF8&s=books&qid=1240841240&sr=1-1">A Failure of Capitalism</a></em> -- entitled "A Silver Lining?" -- somewhat quickly reviews possible beneficial effects of the current depression. <br /><br />These include: The bursting of the housing bubble, which had to happen eventually, and having it happen when it did is preferable to having it happen, say, a year later, when it would be that much bigger. The exposure of fraudsters such as Bernard Madoff, who, again, would have done still more damage the longer the bubble lasted. Increasing the efficiency of business enterprises' use of labor and capital, since the drop in revenues requires that "slack" be taken up. Inducing federal, state, and local governments to increase their efficiency, since tax revenues drop. (But, on the other hand, the depression will also likely cause government to grow in size.) <br /><br />More beneficial effects: "The depression may give the Administration and Congress pause concerning measures to strengthen unions, such as the proposed Employee Free Choice Act[,]" since unions can cause "an increase in wages, and a reduction in the efficiency with which labor is utilized." An increase in taxes (once the depression is over) will not "necessarily" be a bad thing. Increased unemployment will lead to an increase in the general level of education, since the opportunity costs associated with spending more time in school have been temporarily lowered. The depression has taught the banking industry "a great deal . . . about the risks of leverage and the downside of complex financial instruments intended to reduce the risk of default more cheaply than by traditional means." The public has learned "about the dangers of speculating on housing prices and investing the rest of one's savings in the stock market." <br /><br />Still more: "The depression has shown that privatizing social security -- that is, allowing recipients to invest in the stock market some or all of the money in their social security retirement accounts -- would have been calamitous." The depression has caused commodity prices to drop, especially with oil. The level of carbon emissions has fallen as business activity has slowed. Lower oil prices have reduced the wealth of many nations that are "either hostile to the United States . . . or politically unstable." The depression will free up to pursue other work a lot of "brilliant people" who were formely employed in the financial industry. "The depression is a wake-up call to the economics profession." And the depression may lead to "a durable increase in the personal savings rate."Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-44400682746832794252009-04-28T17:44:00.002-04:002009-04-28T18:44:12.033-04:00<strong>Posner's <em>A Failure of Capitalism</em> -- VII</strong><br /><br />This is the second of two posts on chapter five of <em>Failure</em>.<br /><br />As I noted in the preceding post, Judge Posner asks, after reviewing the stimulus program, whether it is "an $800 billion mistake?" He answers this question in a roundabout way.<br /><br />He acknowledges that much of the "stimulus" will not be aimed primarily at stimulating economic activity but will instead be an enactment of President Obama's legislative agenda. Judge Posner then proceeds through a lengthy discussion of the "monetarist" and "Keynesian" views of the Great Depression and of solutions to depressions generally. The monetarist solution (in which the Fed increases the money supply through the banking system in order to stimulate economic activity) is problematic because, as previously mentioned, the current situation is so bad that banks are mainly "hoarding" the additional money in order to build their reserves, not lending it. To get beyond this hoarding, the Fed would have to pump so much new money into the banks that, when the depression finally ends and the Fed starts to contract the money supply (as will be necessary to prevent wild inflation), "a severe recession will be unavoidable." Thus, Judge Posner concludes, the monetarist solution alone will not remedy the depression "at a tolerable cost."<br /><br />The fear in the background, as he explains in this chapter, is that the economy will enter a deflationary spiral. Deflation is a situation in which the general level of prices persistently <em>decreases</em>. This frightens economists because deflation makes it economically rational <em>not</em> to spend money. Since prices are dropping generally, money gains in value simply by being stuffed in a mattress for a few months. People don't need to put their money to work in order to earn a return. Accordingly, the economy contracts and contracts.<br /><br />After painting this bleak picture, Judge Posner observes that "[e]ventually deflation will bottom out. As income shrinks, consumers will cease to be able to hoard cash; they will have to start spending everything they have." This will start a "virtuous cycle" of increased spending, increased production, and increased employment. "But the progress of recovery will be protracted because it will begin from a very low level."<br /><br />Judge Posner now comes back to his question whether the stimulus is a mistake. He has concluded that the monetarist solution is not likely to prevent a deflationary spiral "at a tolerable cost." As a result, Keynesian deficit spending (i.e., the stimulus program) is also needed to prompt economic activity. Although he doesn't use these words, he in effect says that we have no choice.<br /><br />He further points out that, even if the stimulus "will do nothing to speed recovery from the depression, there would still be a compelling argument for it. . . . "<br /><br /><blockquote>Suppose that President Obama were to tell the American public: "We're trying to avert or ameliorate a depression by pumping up the money supply, but it may not work, in which event we'll find ourselves in a deflationary spiral that may resemble what happened to the United States in the 1930s and Japan in the 1990s. And then we'll just have to tough it out because our toolbox will be empty." (This is what, in effect, some conservative economists would like him to say.) His statement would guarantee a severe depression, because people would react by curtailing their consumption further, accelerating a deflationary spiral that would carry the economy to a lower level and keep it there for years.<br /></blockquote><br />The government must instead, for psychological reasons, express optimism and be seen to be doing something.<br /><br />I don't have the time to review other interesting passages in this chapter, other than to mention them. Judge Posner argues that the monetarist solution "is potentially more socialistic" than the Keynesian one, because under the former, the Fed has found itself needing to buy stakes in businesses. He also looks at Congress's attempt to reduce the number of residential foreclosures by amending the bankruptcy code. In his view, that is not a good plan. Instead, while his preference would be no mortgage relief at all, he suggests a moratorium on foreclosures or a Columbia-devised plan in which certain lien-holders would be compensated with government funds for consenting to modification of mortgage terms.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-74586875996924000252009-04-28T08:21:00.006-04:002009-04-28T12:49:34.038-04:00<strong>Posner's <em>A Failure of Capitalism</em> -- VI</strong><br /><br />In chapter five -- by far the longest chapter in the book -- Judge Posner examines the efforts the federal government has made so far to combat the current depression.<br /><br />I will blog this chapter in two parts, this being part one.<br /><br />By this point, his arguments will already have alienated libertarian and conservative readers. This chapter will now alienate readers on the left. Judge Posner has no illusions about the political nature of what the Obama administration is undertaking. At one point he suggests that the stimulus program perhaps "should be called the 'half stimulus-half New Deal' program," and notes that "[t]here is a legitimate concern that Keynesian depression-fighting theory is being used as a fig leaf to disguise a program of massive government expenditures based on a liberal ideology that a majority of Americans may not subscribe to -- at least not yet." (That closing "at least not yet" is apparently a reference to an argument earlier in the chapter that wealth-transferring programs are very hard to remove once they have been put in place, because they create their own constituencies of supporters/dependents.)<br /><br />He identifies five phases that the government's response has so far moved through or into, not necessarily in sequence. The first three phases together form the "bailout": (1) the attempt to use TARP funds to buy "sick" mortgage-related assets from banks, (2) direct government investment in large banks in exchange for preferred stock, and (3) loans to GM and Chrysler in December '08 "to head off the bankruptcy of these companies or at least defer it." The fourth phase Judge Posner calls "easy money" -- the Fed's purchase of $800 billion of private debt (as opposed to buying back debt issued by the federal government). The fifth phase is the stimulus program, which had not become law at the time Judge Posner completed the book, in February '09, though he correctly assumed that it would be enacted.<br /><br />Judge Posner explains the economic rationale behind each of the above phases, the political complications associated with them, and their likelihood of being effective on balance. The first phase, as he discussed in a previous chapter, failed because it was based on the faulty premise that the illiquidity of the "sick" assets resulted from uncertainty as to their value. (It turns out that they're just not worth much.) The second phase did help stabilize banks, but it did not have much immediate effect on the depression because banks needed funds so badly that they added much of the invested money to their reserves rather than loaning it out and thereby boosting economic activity.<br /><br />The third phase (the second shoe of which is dropping now) was, in Judge Posner's view, more successful than is generally allowed. There was never any chance that the government could remake those companies or the auto industry as a whole. But, he argues, the main benefit of the loans to GM and Chrysler was simply to help them survive until the depression is over. In "normal" times, their bankruptcies would not be a problem. But the failure of such large firms "just as the nation was sliding into a depression" would have dangerously accelerated the cycle of lowered spending / lowered production / increased unemployment / lowered spending / etc. <br /><br />After discussing the above, Judge Posner turns his attention to the stimulus program. The stimulus was planned (at the time he was writing) to consist of three elements: tax cuts, transfer payments and "other social-welfare expenditures," and public works. Conservatives prefer the tax-cut solution because, of the three, it's the only one that promises to make government smaller instead of larger. Tax cuts alone, however, are unlikely to increase economic activity much, because most people view tax cuts as temporary and therefore tend to save, not spend, the additional money they get to withhold from Uncle Sam. (And people who are so poor that they <em>must</em> spend all the money they have are also so poor that they pay little, if any, income tax in the first place.)<br /><br />As for transfer payments and social programs, that "component of the proposed stimulus is also questionable, though politically irresistible." On the plus side, this component puts money directly into the hands of the poor, who are the ones most likely to spend it soon -- what we want a stimulus program to accomplish. On the negative side, this component is most likely to create permanent new "drains" on the federal government.<br /><br />In that regard, the public-works component of the stimulus is superior, because public-works projects are, by their nature, more likely to be temporary. They are also more likely to result in real benefits to society aside from the benefit of helping to end the depression. To an extent, they also accomplish the same thing as the second component, since some of the money spent on public works finds its way to individuals who also spend it. (Relatedly, Judge Posner mentions the Keynesian "multiplier" that is supposed to capture the extent to which government spending results in additional spending down the road. He acknowledges that some estimates put the multiplier at 1.4, but "this is one of the roughest of rough estimates and some economists think the multiplier is less than [1.0].")<br /><br />The problem with public-works spending is that public-works projects need a long lead time. Judge Posner's solution is to focus the spending on infrastructure repairs, and on projects (whether state or federal) that have already been started but have stalled for lack of funds.<br /><br />At this point, Judge Posner ask if the stimulus program is "an $800 billion mistake, as the economist Martin Feldstein has called it?"Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-30841233464804907052009-04-26T19:09:00.002-04:002009-04-26T20:04:48.973-04:00<strong>Posner's <em>A Failure of Capitalism</em> -- V</strong><br /><br />Chapter four of <em>Failure</em> focuses on why government did not pay attention to warning signs that the housing market was hugely inflated and that the inevitable bursting of the housing bubble would trigger widespread bank failures. Judge Posner reviews the warnings that were given by Nouriel Roubini, <em>The Economist</em>, and others during the 2000s, along with the collapse of several mortgage hedge funds in 2007. He also discusses possible reasons why the warnings were ignored or underappreciated, and why governing officials in general lack incentives to take precautions against low-probability catastrophic events. "Until the biggest financial ninepins started falling in September 2008, the magnitude of the crisis was largely invisible to government, the business community, and most economists, even specialists in financial economics and macroeconomics."<br /><br />Among the reasons Judge Posner offers for this lack of comprehension are a reliance on faulty pro-non-interference preconceptions when facing uncertainty, the political costs associated with using Fed policy to preemptively pop the bubble, the uncertainty of whether the social costs of preemptive action will be less than the costs of letting things run their course, and the sheer size of the mass of data from which one would have had to sift out reliable warnings. <br /><br />Notwithstanding his recognition of those countervailing forces, Judge Posner feels that the Fed and Treasury should have known to take action after the Bear Stearns collapse:<br /><br /><blockquote>It is the passivity of the Federal Reserve between Bear Stearns' collapse in March 2008 and the calamitous collapses in September, and the failure (for which the Fed was jointly responsible with the Treasury Department) to avert Lehman Brothers' bankruptcy, that merit strong criticism.<br /></blockquote>Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-42263933654096673452009-04-26T13:32:00.002-04:002009-04-26T13:57:24.907-04:00<strong>Posner's <em>A Failure of Capitalism </em>-- IV</strong><br /><br />Judge Posner devotes chapter three to a fuller explanation of a point he made briefly in chapter one: that systemic forces led bankers and others to take risks -- notwithstanding some perceived threat of catastrophic failure -- that were excessive. This is a key component of his argument that the current depression resulted from market failure. I.e., if people were for the most part acting rationally in the run-up to the depression, then we cannot expect market forces alone to prevent depressions.<br /><br />As Judge Posner explains, executives, private investors, and home buyers were acting in their rational self-interests in making the decisions they did over the past nine years. The depression was not the result of irrational exuberance or bad motives "such as 'greed' (whatever that means)." He lays out the various circumstances (including some conflicts of interest in the financial world) that caused the rational course of action to be largely what people did. <br /><br />The problem -- and the reason why this was a market failure -- was that decisions that were rational on an individual basis were irrational, and harmful, for the economy as a whole. Government action is therefore needed to prevent actions that are harmful in the aggregate:<br /><br /><blockquote>Rational indifference to the indirect consequences of one's business and consumption behavior is the reason the government has a duty, in regulating financial behavior, to do more than prevent fraud, theft, and other infringements of property and contract rights, which is the only duty that libertarians believe government has. Without stronger financial regulation than that, the rational behavior of law-abiding financiers and consumers can precipitate an economic disaster.<br /></blockquote><br />Judge Posner acknowledges that not all market failures should be prevented. If the regulations needed to do so would cost more than the "social cost" of the failure, then trying to prevent it would be a net waste of resources. But depressions, he argues, are not of this type. The Great Depression "inflicted horrendous costs," including "the excesses of the New Deal," and possibly Nazi Germany and World War II. The current depression could likewise result in far-reaching costs, such as over-regulation, dependence of business on government handouts, etc.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-50943159458810986282009-04-26T10:10:00.002-04:002009-04-26T10:51:26.212-04:00<strong>Posner's <em>A Failure of Capitalism</em> -- III</strong><br /><br />In the second chapter of <em>Failure</em>, Judge Posner enlarges upon his discussion in chapter one about how the current depression particularly involved the financial industry. Throughout the book, he uses "banks" to refer to all financial-intermediary firms, because by the 2000s, the regulatory restrictions on what non-bank intermediaries could do had been so eroded that they were all involved in "banking." <br /><br />He recounts the rise of securitization of mortgage obligations -- how interests in baskets of mortgages were sold far and wide -- although he believes that securitization may not have been integral to this depression. He also explains (i) credit default swaps, which banks entered into in a (not irrational) effort to insure against losses on their mortgage and mortgage-securities holdings, and (ii) that insurers and credit-rating agencies lacked the history of dealing with these products in order to realistically calculate their riskiness.<br /><br />When the housing bubble burst and credit froze, the Fed initially believed that banks were afraid to lend because their mortgage-related assets were illiquid. They were illiquid (not readily salable) because, it was thought, no one was confident of their precise value. The Fed's initial plan was therefore to buy the illiquid assets. However, it soon became evident that the problem was not merely <em>uncertainty</em> about the assets' value, but an absolute lack of value in such assets. In other words, the value of the mortgage-related assets was in fact very low. <br /><br />The Fed then changed its plan. Instead of buying the mortgage-related assets, it would invest directly in the banks in exchange for preferred stock. The hope was that the cash invested by the Fed would then be loaned out, unfreezing credit. However, banks were so overleveraged, that a lot of the invested cash had to be retained simply to get the banks solvent (in banking terms), before any thought could be given to loaning some of it out. The Fed tried to persuade banks to lend rather than "hoard" the invested cash, but banks' problems were simply too great at that point.<br /><br />Along the way, Judge Posner explains the policy behind some of the older banking regulations. Put very simply, banks stay in business by loaning out a large portion of the funds deposited with them. Thus, if all of a bank's depositors simultaneously decided to withdraw their deposits, the bank would fail -- it could not meet all such demands at once. Federal deposit insurance (under the FDIC) was created by the federal government in order to assure depositors that their deposits, up to a certain amount, would be safe even if the bank failed. This removed the incentive of despositors to "run" on the bank in order to get first dibs on the limited funds whenever a bank was rumored to be in trouble. <br /><br />Next, in order to keep the now-insured banks from taking excessive risks with depositors' money on the Fed's dime (a "moral hazard" problem), regulations were imposed on the banks. Such regulations required that banks not make as risky loans -- and so offer as high interest rates -- as non-bank intermediaries could. Therefore, non-bank intermediaries had to be kept from taking advantage of the limits on banks and thereby drawing deposits into uninsured accounts. Accordingly, additional regulations put in place to prevent non-bank intermediaries from encroaching on the functions of banks.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-58903808754935335772009-04-25T20:00:00.003-04:002009-04-26T08:00:20.618-04:00<strong>Posner's <em>A Failure of Capitalism</em> -- II </strong><br /><br />The first chapter of <em>Failure</em> lays out the standard theory of what causes depressions and how governments should normally respond, and then discusses what about our financial industry makes the current depression unusual.<br /><br />Judge Posner's explanation of depressions seems (to me) to be basically Keynesian: A "shock" to the economy causes the value of individual savings to drop, which causes people to reduce their spending in an effort to rebuild their savings, which causes demand to drop, which causes producers to produce less, which results in layoffs, which makes individuals still more nervous and more inclined to spend less, which causes the pattern of contraction to continue. If banks were overextended when the shock occurred, "cascading" failures will make it harder for the pattern to be broken.<br /><br />The government's tools for dealing with this situation are increasing the money supply through the banking system and, if that fails, to increase spending by spending more itself or by cutting taxes.<br /><br />The shock to economy in this instance, as in the 1930s and in the late 1990s, was the bursting of an investment bubble. The bubble started in the housing industry and spread to the financial industry as a result of "low interest rates, aggressive and imaginative marketing of home mortgages, auto loans, and credit cards, diminishing regulation of the banking industry, and perhaps the rise of a speculative culture[.]"<br /><br />Judge Posner then discusses how banking has changed in a way that helped bring about the depression. "[T]he regulatory barriers separating the different types of financial intermediary have eroded to the point where [for present purposes] all financial intermediaries can be regarded as 'banks.'" Restrictions on risky lending were eroded, and subprime lending increased.<br /><br />Banks do not have enough incentive to avoid the risk because the rewards outweigh their exposure to a disaster that (they think) is of low probability. "A depression is too remote an event to influence business behavior." Hence government regulation is needed to prevent excessively risky lending.<br /><br />Moreover, Americans' saving rate was so low in the 2000s that many now have little set aside to enable them to keep spending at the pre-downturn levels. The Fed's easy money policy in the 2000s (as it attempted to correct for the bursting of the dot-com bubble) enabled lending to continue even as people saved less.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-73475676106166044922009-04-25T07:53:00.003-04:002009-04-25T19:59:58.487-04:00<strong>Posner's <em>A Failure of Capitalism</em> -- I</strong><br /><br />Yesterday I received my copy of Richard Posner's new book, <em><a href="http://www.amazon.com/Failure-Capitalism-Crisis-Descent-Depression/dp/0674035143/ref=sr_1_1?ie=UTF8&s=books&qid=1240660923&sr=1-1">A Failure of Capitalism: The Crisis of '08 and the Descent into Depression</a></em>. My plan is to blog the book here as I read it.<br /><br />Last night I just had time to read the preface (completed in Feb. '09) and the first half of Chapter 1. Judge Posner begins by arguing that we are in a depression, not just a recession. It's not a "Great" depression like that of the 1930s -- the current indicators are nowhere near what was seen then -- but this is more than a recession, "especially if, as may well happen in the present instance, a 'successful' effort to avoid a repetition of the Great Depression will impose enormous long-term costs on the economy."<br /><br />He then states his thesis, which was unexpected from someone with Judge Posner's reputation as a libertarian:<br /><br /><blockquote>Some conservatives believe that the depression is the result of unwise government policies. I believe it is a market failure. The government's myopia, passivity, and blunders played a critical role in <em>allowing</em> the recession to balloon into a depression, and so have several fortuitous factors. But without any government regulation of the financial industry, the economy would still, in all likelihood, be in a depression. We are learning from it that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails. The movement to deregulate the financial industry went too far by exaggerating the resilience -- the self-healing powers -- of laissez-faire capitalism.</blockquote><br />This is strong stuff, almost shocking, in view of who's written it. Many libertarians believe that there is, or very nearly is, no such thing as market failure. In other words, they believe that market forces, if left to themselves, will (almost) always bring about the optimal situation. <br /><br />Even those who agree that market failures can <em>sometimes</em> occur nonetheless deny that regulation, especially federal regulation, is needed for the financial industry. Judge Posner clearly has rejected that view (if he ever held it). "Our model of a capitalist economy" needs regulation.<br /><br />Judge Posner also explains that this book is divided into two main parts: the first five chapters deal with how the depression came about and what the government is doing to try to remedy it, and the remaining six chapters deal with the lessons we can learn.<br /><br />He acknowledges that it may seem "premature" to write about this depression, since it may not even have bottomed out. (I think it has.) He thinks his effort is useful <em>now </em>because "hindsight will rewrite history" once the depression ends. In addition, he promises to launch a blog one week after the book's publication to provide weekly updates to the book. I have not yet checked to see whether this blog -- to be called "The Posner Economic Crisis Blog" -- is up.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-13641079200476772242009-04-24T13:13:00.002-04:002009-04-24T13:36:05.631-04:00<strong>Where Do Thriving Businesses Come From?</strong><br /><br />When progressives talk about business, I often get the feeling that they think successful enterprises just pop up naturally, like weeds in a vacant lot. They forget (or were never aware of) the talent, energy, and risk exposure that are entailed in creating and maintaining a thriving business, whether it's a mom-and-pop store or a publicly traded corporation.<br /><br />Vice Chancellor Leo Strine, of the Delaware Court of Chancery, understands the challenges that entrepreneurs must overcome in trying to build the businesses that we all rely on for providing goods and services we need, as well as our livelihoods. In an opinion that Vice Chancellor Strine issued yesterday, he held that a company will not be judicially dissolved "merely because [it] has not experienced a smooth glide to profitability or because events have not turned out exactly as [its] owners originally envisioned[.]" We have to assume that many businesses will face financial trouble:<br /><br /><blockquote>[S]uch events are, of course, common in the risk-laden process of birthing new entities in the hope that they will become mature, profitable ventures.</blockquote><br /><br />I love the metaphor he uses here -- comparing the creation of a business to childbirth and child rearing. The process is risk laden. Dedicated, intelligent nurturing is needed for the new entity to become a mature venture that creates value.<br /><br />(The case is <em>In re Arrow Investment Advisors, LLC</em>, C.A. No. 4091-VCS, slip op. at 6 (Del. Ch. April 23, 2009).)Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0tag:blogger.com,1999:blog-7999479095907553471.post-10568497348792835772009-04-23T20:13:00.002-04:002009-04-23T20:41:32.561-04:00<strong>"Civilization without Instrumentalities!"</strong><br /><br />Over the past year, I've seen a number of things that have amazed me -- the Treasury Department buying stakes in private corporations, the president pressuring the CEO of a car company to resign, Congress authorizing $700+ billion in spending to bail out companies nearing insolvency, etc.<br /><br />Today I saw something that is amazing in a <em>good </em>way.<br /><br /><a href="http://www.washingtonpost.com/wp-dyn/content/article/2009/04/22/AR2009042204036.html?hpid=topnews&sid=ST2009042204139">According to the </a><em><a href="http://www.washingtonpost.com/wp-dyn/content/article/2009/04/22/AR2009042204036.html?hpid=topnews&sid=ST2009042204139">Washington Post</a> </em>(may require registration), two toy companies -- Mattel and Uncle Milton -- are preparing to release in the fall games that use brain waves to move objects. Yes, just like a science-fiction story:<br /><br /><blockquote>You slip the wireless headset on. It looks like something a telemarketer would wear, except the earpieces are actually sensors, and what looks like a microphone is a brain wave detector. You place its tip against your forehead, above your left eyebrow.<br /><br />A few feet away is a ping-pong ball in a clear tube called the Force Trainer. The idea is to use your thoughts alone, as recognized by the wand on your forehead, to lift the ball. Your brain's electrical activity is translated into a signal understood by a little computer that controls a fan that blows the ball up the tube. Levitates it. As if by magic. It's mind over matter.<br /><br />All you have to do is concentrate.<br /></blockquote><br />The <em>Post</em> website also has a video in which different <em>Post</em> personnel successfully use the device. I have to admit, I found it thrilling. I'm planning to buy one.<br /><br />I can imagine games being devised in which multiple players try to gain control of a ball or something similar, with the "strongest" brain winning. I could also imagine the technology being developed into silent communication devices. And into devices to test intelligence or to test certain types of mental aptitudes (attention to detail, flexibility, etc.). Very, very exciting.<br /><br />Hat tip to <a href="http://www.reason.com/blog/show/133051.html">Hit & Run</a>.Jayhttp://www.blogger.com/profile/00033043661384218786noreply@blogger.com0