CAPITALISM AND MORAL HAZARD

I am beginning to feel fear because of this "crisis". We have just seen the biggest state intervention in the economy made by the USA. After the Lehman Brothers storm or Merril Lynchl adverse winds, it was believed that such actions would bring calm to the financial sector, whose starting point could not be better with this "catch up" that it was lived on the stock markets last Friday. But I think we also have come to an evil precedent, which translates into a potential threat to the "laisse-afaire": moral hazard.

To understand it easily, think for a moment like a manager: it is time for lean cows; your company, one of the most important of the country seems to be addressing difficulties. The Government, to avoid bankruptcy, acts to save it. Once that the situation returns to its natural channel: are you going to take more precautions to avoid situations like above? Surely not. You know you can run more risk and earn a bigger sum of money, because if the business goes wrong there is a government intervention to save your company.

This is not something new. oral hazard problems had brought more serious difficulties to some countries (for example, the crisis in South Korea in 1992). I think that a more cautious option would have been a "back door" action plan of financial assets, cleaning "junk" mortgages. In this way the financial markets were not only able to recover confidence, but also would have avoided much of the previous effect. In fact, something similar has been raised by the Bank of England for the Northern Rock case. It is a pity that the U.S. economy is thirty times more influential to the world that the English one.

Incentives to Speed vs. Sanctions: A Theoretical Analysis (summary)

Road accidents are one of the biggest problems faced by contemporary society; this is prooved by the wide regulation that is emerging in our days around this issue in order to prevent them. However, in many occasions, the legislature does not give right incentives which should be taken into account if politicians really want to achieve a more cautious behavior by drivers. Through theoretical modeling, under the assumptions that pose a few doctrines, to seek the appropriate stimuli for this purpose becomes a complex task, more typical for the interdisciplinary field of economic analysis of Law.

This time it proposes a model of the driver through the classical theory (micro-) economic, under the assumptions of full rationality and perfect information, which will be later modified by deviations from these assumptions, in order to approach a little more to a real driver.

The results confirm what had been claimed for much of the doctrine (especially criminalists) against the excess of regulation in the field of road safety; alternatives are also proposed to this whole mess by implementing new theories like the agency behavior theory, so regulators could benefit remove the deviations proposed by these theories: Assimetric information and the existence of moral incentives.

Download here the working paper: Incentives to Speed vs. Sanctions: A Theoretical Analysis

ON BASIC´S CPI

At the end where the economy is best seen is in everyday life. Yesterday I was speaking with my father, when I asked him how much he had paid for the mobile phone that he purchased for Christmas: a new generation phone with mp4, support for watching movies, wifi, etc... For my surprise, the price was the same as he paid one years ago for his old mobile phone, whose benefits were just camera and mp3. In real terms today´s mobile is cheaper than yesterday´s, because for the same price the current phone has more advantages. However, we know that this technological progress is something that CPI ignores.

Although there are so simple arguments like the lack technological progress record on the CPI, it seems that Mr Pedro Solbes has just found absurd and meaningless arguments that the only thing they achieved was to divert attention from a problem that, in my view, should not be taken as a joke.By the way, one effect that is also not reflected on the CPI is the replacement of short-term consumption of an asset by another (because there are fixed weights for each item that are not modified in one year or more). I bring this up because of the latest proposal that the Minister has left for this Christmas to replace the consumption of chicken for the rabbit. It seems that the Minister should check his introduction to the economics notes this holidays.

ECONOMICS FOR EVERYONE

The ECB (European Central Bank) is starting a campaign of economic education. In order to promote it, a few days ago the bank launched the first planned teaching materials: a video about the effects of inflation and the importance of prices stability. The video, despite looks so childlike, shows in a very simple way basic concepts related to this issue, including the importance for the euro zone to maintain a non-inflationary growth over 2%.

I think this kind of initiative deserves widespread support from the education sector. As it is emphasized the importance for young people´education a minimum knowledge about Math, English or first aid, I believe that in this world of business, money and globalization, it is increasingly important for young people to know some basic economics concepts. They should not be lost tomorrow when they will request a credit or hear about inflation or GDP to politicians. Many times, excessive technicalities in the economic language added to the general ignorance of basic issues, makes people to take the economy as something entirely strange for them when, in fact, they are the first to be affected by it

RENTALS AND ECONOMICS

It is on the news these days the controversial 210€ subsidy that help cerain groups of populatiton for rent a flat. I will not enter into discussion whether the measure is an unfulfilled promise of 2004 or if it is a new policy. I think that the issue deserves to be analyzed fram an economic ponit of view, in order to know if this is really a reight answer or not.

The first thing to note is that both the unpopular taxes as well as the popular subsidies, in spite of sometimes are really necessary, usually generate a loss of efficiency in the markets. So politicians have to take care before establish them.

Provide a grant to rents could generate, apart from an increase in public expenditure, an increase on the demand, which inevitably rise the price, especially if the supply is not growing (making useless this public expenditure).

The economist should try to find a more efficient solution, in othe worlds, that situation in which (at least) one part be better off, without worsening the other. I propose to Minister Chacón, with the same money they had intended to employ to that extent (and after negotiations with the major companies in the real estate sector) to finance the establishment of a Housing Institute depending on the Ministry, directed by good advisors and creating sites in different provinces. Thus the owners as well as potential buyers and tenants can register both local supply and demand, that help them to sign contracts.

This is not a kind of statal monopoly of real estate. Is rather a kind housing ´INEM, where the sellers (or renters) impose their conditions of contract to the demand that, by this way, has a much clearer picture that the thousands of newspaper advertisements that they could cut.

This will channel all the market movements, which would facilitate further agreements between the two groups, thereby helping to lower prices and avoiding the much hated paperwork, something that discourages many people to put a house on rent, preferring expect the best time to sell and forget about it (the institute could facilitate the rental of these empty buildings to their future purchases, for example).