The symposium on Thomas Sowell’s work went very well. A great group of people from whom I learned a lot. Here are more of my favorite quotes from Sowell. The first three are from his 2009 book Intellectuals and Society. Why the transfer of decisions from those with personal experience and a stake in the outcome to those with neither can be expected to lead to better decisions is a question seldom asked, much less answered. On payday loans: As for the low-income borrower, supposedly the reason for the concern of the moral elites, denying the borrower the $100 needed to meet some exigency must be weighed against the $15 paid to meet that exigency. Why that trade-off decision should be forcibly removed by law from the person most knowledgeable about the situation, as well as most affected by it, and transferred to third-parties [sic] far removed in specific knowledge and general circumstances, is a question that is seldom answered or even asked. The difference between decision makers in the market and in government: The fundamental difference between decision makers in the market and decision makers in government is that the former are subject to continuous and consequential feedback which can force them to adjust to what others prefer and are willing to pay for, while those who make decisions in the political arena face no such inescapable feedback to force them to adjust to other people’s desires and preferences. By the way, I reviewed Sowell’s book here. You’ll see that I had a fair number of criticisms but the parts I was most critical of were not in the readings. From The Economics and Politics of Race: An International Perspective. I like this because of its simplicity, clarity, and implicit passion: The most ghastly example of racial fanaticism in history was the Nazi extermination of millions of defenseless, men, women, and children who were so similar to themselves in appearance that insignia, tattoos, or documents had to be used to tell the victims from their murderers.   (0 COMMENTS)

Participating in a mob carries a risk similar to that of reveling in being part of the majority (or “the people,” or the righteous). The risk is that the mob or the majority can turn against you. It happened to some Red Guards in Mao’s time, and it is occasionally happening in America too, arguably more and more often on the left as on the right, among the Trumpians and the woke. Consider the story of Ray Epps (“A Trump Backer’s Downfall as the Target of a Jan. 6 Conspiracy Theory,” New York Times, July 13, 2022) and its latest twist. Mr. Epps was a business owner in Arizona and a fan of Donald Trump, whose self-serving lies about the stolen election he believed. At the last minute, he decided to travel to the January 6, 2021 demonstration at the Capitol. During a pro-Trump rally the preceding night , he was videotaped encouraging people to peacefully march to the Capitol the next day. It is reported that some in the mob already accused him of being a federal agent. He did go to the Capitol on January 6, also showing  the direction to some demonstrators. He interposed between the police and a demonstrator, telling him that the cops were only doing their job. He left before the violence started. After January 6, Trump’s followers tried to shift the blame for the violence on antifa demonstrators, and then on federal agents provocateurs. They saw the videotape of January 5. The New York Times explained what followed: The problems began for Mr. Epps almost as soon as Revolver News published its first article about him in October. Suddenly, there were emailed death threats; trespassers on his property demanding “answers” about Jan. 6; and acquaintances, fellow members of his church, even family members who disowned him, he said. NBC (“Pro-Trump Protester Ray Epps Seeks Retractation of Conspiracy Theory from Tucker Carlson,” NBC News, March 23, 2023) further explains: The video gained significant attention among some prominent conservatives in Congress. In addition to being spread by Fox News, the Epps conspiracy theory was featured in right-wing outlets such as One America News and Carlson’s Jan. 6 documentary series “Patriot Purge.” At some point, Mr. Trump joined the fray, mentioning Mr. Epps at one of his political rallies and lending fuel to a viral Twitter hashtag, #WhoIsRayEpps. Epps was being witch-hunted by his own mob. Under threats and intimidation, banned from righteous populist company, Mr. Epps and his wife sold their house and the family business, and fled incognito to a mobile home in the foothills of the Rockies. The latest twist is that Epps is threatening to sue Fox News and Tucker Carlson if the latter does not publicly retract his “false and defamatory statements.” I don’t personally condone antidefamation laws, which make some people scared to speak and others more gullible (if he has not sued, it must be true!). But it is easy to understand Mr. Epps’s anger at being betrayed by the political mob he followed; and to sympathize with his plight. A related fact illustrates the dismal state of politics, the gullibility of large part of the public, and the immorality of media enablers. Former Playboy model Karen McDougal had previously sued Fox News after host Tucker Carlson opined that she had extorted presidential candidate Trump into indirectly paying $150,000 to prevent her from revealing an affair between them. In September 2020, U.S. District Judge Mary Kay Vyskocil ruled in favor of Fox News by accepting the argument that Carlson should not be known for reporting facts, as her decision suggests: Fox News first argues that, viewed in context, Mr. Carlson cannot be understood to have been stating facts, but instead that he was delivering an opinion using hyperbole for effect. … This “general tenor” of the show should then inform a viewer that he is not “stating actual facts” about the topics he discusses and is instead engaging in “exaggeration” and “non-literal commentary.” … Fox persuasively argues … that given Mr. Carlson’s reputation, any reasonable viewer “arrive[s] with an appropriate amount of skepticism” about the statements he makes. … Whether the Court frames Mr. Carlson’s statements as “exaggeration,” “non-literal commentary,” or simply bloviating for his audience, the conclusion remains the same—the statements are not actionable. One could claim that all this only proves the existence of a conspiracy to hide Mr. Epps’s status as a FBI agent provocateur. This is not totally impossible, but very unlikely. Which illustrates again the poor epistemological status of conspiracy theorizing. (0 COMMENTS)

What is the worst of President Biden’s latest proposed tax increases? It’s hard to say. There are many strong candidates. So rather than choose the worst, I’ll choose what I think are the two worst: the increase in the corporate income tax rate from 21 percent to 28 percent and the increased tax rates on capital gains. Consider first the corporate tax rate. Seventy years ago, economists believed that the burden of the corporate income tax fell largely on corporations. But the increasing globalization of capital in the last 40 years has changed that. Because people can set up corporations in other countries, they have an incentive to choose countries where their income is taxed lightly or even not at all. The late Walter Wriston, former chairman and CEO of Citicorp, put it well: “Capital goes where it’s welcome and stays where it’s well treated.” One main way to treat capital well is not to expropriate it; another is not to tax it heavily. These are the opening two paragraphs of David R. Henderson, “The Worst of the Biden Tax Increases,” IPI TaxBytes, March  23, 2023. Also: Biden also proposes to increase capital gains tax rates. Under the current law, the top federal and state tax rate on capital gains is 29.1 percent, which, the Tax Foundation points out, is already well above the 18.9 percent average for OECD countries excluding the United States. Biden would raise that top rate to a whopping 49.8 percent making it 163 percent higher than the non-US OECD average. That would also discourage investment in capital. Read the whole thing. (0 COMMENTS)

Photographer, author, and visionary Kevin Kelly talks about his book Excellent Advice for Living with EconTalk’s Russ Roberts. His advice includes how to have a deep conversation, why it’s better to control time than money–and whether, in the end, we should give advice in the first place. Other topics of discussion include the right object of our […] The post Kevin Kelly on Advice, AI, and Technology appeared first on Econlib.

The horrible treatment of a speaker at Stanford Law School by some law students and a dean a couple of weeks ago reminded me of something that happened over 50 years ago. In November 1971, when I was attending the University of Western Ontario in London, Ontario, my newfound friend Harry Watson (who, sadly, died last Sunday) and I drove down to New York City to attend a libertarian conference at Columbia University. The speakers I remember were Milton Friedman, Murray Rothbard, and David Friedman and, in my mind, both ex ante and ex post, the star was Milton. First up was Milton who said that he wouldn’t be making a speech but would take questions that we wrote out and sent to the front. The emcee was Gary Greenberg, who sorted through the questions and read them out. There were about 150 people in the auditorium and about 5 to 10 of them were in the back wearing all black. Some of them carried copies of Murray Rothbard’s Man, Economy, and State. They stood and held their copies in one hand and made a fist with the other. (One of them, I think, was my fellow Canadian Sam Konkin.) That was annoying enough but, hey, they had the right to dress and hold themselves however they wanted. But then when Milton started speaking, they interrupted by booing and shouting out hostile comments and questions. Milton ignored them at first but they kept it up. So finally, Milton stopped and said, “Is that any way for people to behave?” Harry and I were in front and, along with many others in the audience, we shouted “No.” Then all but a few stopped heckling, but one or two shouted out something. A guy behind us yelled, “I came to here him, not you.” Then it stopped. But as Milton started to answer the first question, a few people in the back hissed long and hard. Milton stopped what he was saying and then said, “Well, in that case, sssssss.” The audience, including Harry and me, roared with laughter. The hissing stopped and the event proceeded. The reason I remember this so well is that I taped the talk and played it a number of times. Also, I think I taped over it because cassette tapes were pricy relative to my wealth. (That was a mistake, even ex ante.) I’m not comparing the awful actions of 5 to 10 people in an audience of 150 to the awful and persistent actions of dozens of people in an audience of 100 or so. So the judge probably would not have been able to use Milton’s technique effectively.   (0 COMMENTS)

Matt Yglesias has a new Substack on money and banking, with the following title and subtitle: How banks create money out of nothingThe Fed’s two missions are intimately linked Given that most colleges have a course on “Money and Banking”, the claim in his subtitle is not particularly controversial (although I don’t entirely agree.)  But first let’s consider the concept of banks “creating money”. If you define money to include bank deposits (as most people do), then obviously banks do have some role in the process of money creation.  Because arguments about “banks creating money out of thin air” involve a great deal of confusion, let’s start there first.  I’ll begin with an analogy using the restaurant industry.  What determines growth in the nominal size of the restaurant industry? 1. Growth in nominal GDP. 2. Growth in the share of NGDP comprised by the profit-maximizing restaurant industry. 3. Non-profit maximizing growth in the restaurant industry. Suppose that in 2000, restaurant comprised 5% of GDP.  If GDP were $10 trillion, then the restaurant industry would be $500 billion.  Now assume that NGDP doubles to $20 trillion in 2020.  Other things equal, the restaurant industry will double to $1 trillion. Other factors (both supply and demand side) may impact restaurants as a share of GDP.  Immigration might add to the supply of restaurants with tasty new menus.  More women working and rising real incomes might lead to people eating out more often.  Suppose these factors push the restaurant industry up to 6% of GDP.  In that case, the industry would increase to $1.2 trillion in 2020.  And finally, a restaurant might decide to grow larger even though it reduced profits.  They could offer larger portions to induce more customers, selling meals at a loss.  I don’t think this factor is all that important in the aggregate, but it’s a theoretical possibility. Banking is similar, with three factors determining the nominal size of bank deposits (i.e. bank “money”): 1. Growth in nominal GDP. 2. Growth in the ratio of deposits to NGDP in the profit-maximizing banking industry. 3. Non-profit maximizing growth in bank deposits. The first factor is easy to explain.  In the US, the Fed determines NGDP.  If NGDP doubles over time, that will tend to double the equilibrium quantity of bank money.  This is related to the concept of “velocity”. We all know that velocity is not a constant, as the ratio of deposits to NGDP changes over time.  Lots of factors cause that ratio to change, but the only ones worth spending much time thinking about are the factors that influence the profit-maximizing ratio of bank deposits to NGDP. Yglesias provides a typical thought experiment: Alternatively, you can ask a bank for a loan that’s secured by the equity in your home. The way that works is the bank will put down in a spreadsheet “John owes us $X, with the loan secured by his home.” Then in another spreadsheet, they’ll put X additional dollars in John’s bank account. When you get a loan like that from the bank, they don’t tell you “hang on for a couple of hours, we need to scrounge up some extra deposits before we can lend you the money.” In part because just like the deposits “in” the bank are, for the most part, not physically located anywhere, the expectation is that you’re not going to be getting your loan in the form of physical cash. These are all just spreadsheet entries. The bank goes from having no entries about you on their spreadsheets to having one entry about the money in your bank account and another entry about the money you owe them. The act of lending you the money created the bank deposits. And by taking out the loan, you transform yourself from being someone who has a lot of home equity but no money into someone who has a bunch of money but less home equity. You and the bank worked together to create money. I don’t find that sort of thought experiment to be particularly helpful, as it isn’t clear whether this transaction is assumed to be profitable. When I think about factors that affect the ratio of deposits to NGDP, I focus on those that impact the equilibrium size of the banking industry.  Consider the following example: An economic boom leads banks to spot more opportunities for making profitable loans.  When the loans are made, the borrowers are given a bank deposit in the fashion discussed by Yglesias.  But then the borrowers withdraw the money to pursue their goals.  Here there are several possibilities.  One possibility is that the same shock that caused more equilibrium lending also causes people to wish to hold proportionately more bank deposits in aggregate, even at the same interest rate.  If that is not the case, it’s possible that interest rates rise during the boom.  Increasingly profitable firms are willing to pay higher borrowing rates, and banks can then offer depositors higher rates to induce them to keep the money in banks rather than moving to alternatives such as mutual funds. In that case, you can think of new loans leading to new deposits.  But one can also envision a shock where people become more inclined to deposit money in the bank (perhaps due to more generous deposit insurance.) That inflow of funds into banks depresses interest rates, which increases the number of profitable lending opportunities.  As Paul Krugman once said when exasperated tedious MMT arguments, “it’s a simultaneous system”. If there is no economic “shock” that affects the equilibrium size of the banking industry as a share of GDP, is it still possible for a banker to create money out of thin air?  Yes, if they are willing to lose money.  A banker could suddenly decide to make a loan to someone with a bad credit risk, thereby “creating money”.  But why would they do this? To summarize, when thinking about banks creating money, I’d focus on two primary factors.  First, the Fed determines NGDP, and money neutrality implies that a monetary policy that causes NGDP to rise will have a proportional effect on all other nominal aggregates in the economy, including the nominal size of the restaurant industry and the nominal size of bank deposits.  In addition, specific economic shocks can cause the profit-maximizing ratio of bank deposits to NGDP to change over time, and this is probably what most people mean when they speak of banks “creating money”.   In general, booms tend to lead to positive money creation, and vice versa.  Deregulation can also lead to money creation, whereas a financial crisis can reduce the money supply.  So far, there’s nothing strange or different about banking.  The same sorts of factors that determine the nominal size of the restaurant industry also determine the nominal size of the banking industry.  So why does Yglesias think banking is special and that the Fed should control both monetary policy and banking regulation? Under the gold standard, banking shocks often had a big impact on NGDP, whereas restaurant industry shocks have relatively little impact on NGDP.  The central bank might want to regulate banking to prevent a banking crisis from reducing the money supply and NGDP.   Yglesias worries that this issue might even arise under a fiat money regime: A lot of people made a lot of ignorant criticisms of the 2007-2008 bailouts. As bailout defenders have always argued, if we’d let more banks fail, we would have had a stronger pullback of lending activity and an even larger contraction in aggregate demand — more unemployment, a deeper recession, and so forth. Dean Baker always offered the non-ignorant counter that whatever contraction arose from bank failures, you could have just done more stimulus to compensate. I think the counter-counter is that sure you “could have,” but nobody was in fact going to. We had some bank bailouts and some interest rate cuts and some fiscal stimulus and it was all pulling in the same direction, and the problem was that it wasn’t enough. I’m not convinced the Fed would not have offset a more severe banking crisis, but it’s a defensible argument.  I’m also not convinced that the Fed needed to be involved in the bailout, but I suppose there are also arguments that the Treasury could not or would not have done as effective a job without Fed assistance. As I said at the top, I don’t think acknowledging the reality of endogenous money necessarily leads to any radical policy conclusions. “People put deposits into the bank, and then the bank lends the deposits out” is a decent approximation of how things work for most purposes, even if the reality is more complicated. One thing that does follow, though, is that central banks’ roles as bank regulators and as macroeconomic stability agencies necessarily get muddled together. I’m not sure it’s necessary, but perhaps it’s inevitable. In any case, Yglesias gets to the core issue in his Substack post, without all the nonsense you often see in “endogenous money” debates.  From a certain perspective, everything is endogenous.  But waving around the term “endogenous” like a magic wand doesn’t resolve any interesting monetary questions. Here’s a Buffalo bank from the golden age of bank architecture: (0 COMMENTS)

Savannah Smith and Art Carden At a marina in the Florida Keys, Rec-90 boat fuel was $5.16 per gallon in December. At a gas station just up the road from the marina, it was $4.20 per gallon. Why does boat fuel cost about a dollar more per gallon at the marina than at a nearby gas station? Boat fuel at the gas station and the marina are chemically indistinguishable. Shouldn’t the same fuel have the same price everywhere? Are consumers being cheated? At first, it might seem like it. However, when viewed in light of the economic way of thinking, there’s a more benign explanation. One of the nine Economic Essentials says every choice has a cost. If you find yourself in the water and wanting gasoline, you have to weigh the costs and benefits of getting gas at the marina versus getting it at the gas station. If you choose to gas up at the marina, it will cost you a dollar more per gallon, but you will be in and out in less than fifteen minutes. A dockhand will even pump the gas for you. If you go to the gas station down the road, however, you might save a dollar a gallon on gas, but you will spend two hours getting your boat out of the water, hauling it to the gas station, hauling it back, and then putting it back in the water. For example, consider a 200-gallon tank on dead empty. It would cost $1,032 to fill up at the marina but only $840 at the gas station. You could save $192 by going to the gas station down the street but at the cost of two hours. That’s time you’re not spending fishing, scuba diving, or enjoying the water, plus the frustration of moving a boat.  One of the Economic Errors claims that profit is exploitation. Someone might feel like they are getting ripped off when they hand a credit card to a dockhand knowing they’ll pay $1,032 for “the same” gas they would get for $840 down the street. However, they are not exploited: the marina is not just providing fuel. They’re providing service and convenience. Marinas “get away with” charging people an extra dollar per gallon because people are willing to pay for the additional service and convenience. Marinas, therefore, are not earning profits by “exploiting” boaters. In this example, they make an additional $192 by providing boaters with service and convenience for which they are willing to pay. That $192 is a reward for finding a way to cooperate with boaters in a way they find advantageous. Of course, every boater would rather pay less for fuel, just like every shopper would rather pay less for groceries, and every renter would rather pay less for an apartment. Marinas, however, stand ready to sell fuel at a slight markup because it makes them and their customers better off. Marinas get rewarded with an extra $192. Boaters get a quick, easy trip to fuel up, giving them that much more time to enjoy the open ocean and everything else the gorgeous Florida Keys offers.    Savannah Smith is a student, and Art Carden is an economics professor at Samford University. (0 COMMENTS)

There are two core questions when it comes to thinking about women in the classical liberal tradition. First, what have women contributed to classical liberalism as a body of thought? Second, what does classical liberalism as a set of ideas have to say about the question of women’s rights? I recently received an email asking where an interested undergraduate might start reading up on these issues, so I decided to put together a short, easy reading list for anybody looking to get started thinking about women’s rights in the classical liberal tradition. First, start off easy and inexpensive with the Fraser Institute’s The Essential Women of Liberty. I’m a little biased because I contributed the chapter on Elinor Ostrom, but overall the volume is well-written, well-researched, and informative. Further, the fact that the whole book clocks in at under 150 pages and the chapters can be individually downloaded make this an excellent resource both in the classroom and for those seeking a broad overview to start filling in their own gaps. The beginning chapters of the book are an excellent introduction to “the woman question” in classical liberal thought: do we owe equal rights and consideration to these creatures who seem so different than ‘us’ (i.e., male intellectuals)? Sylvana Tomaselli’s chapter on Mary Wollstonecraft and David Levy and Sandra Peart’s chapter on Harriet Martineau are particularly valuable given the importance of Wollstonecraft and Martineau’s contributions relative to the amount of attention they’ve received. Similarly, the chapters on Mary Paley Marshall, Rose Director Friedman, Isabel Paterson, and Anna Schwartz do a superb job educating on the sometimes forgotten contributions of women to 20th century economic thought. Second, although there are many important and rich original texts on these questions, there are two absolutely essential (says me) pre-20th century classical liberal texts on women’s rights. The first of these is Mary Wollstonecraft’s Vindication of the Rights of Women. A key theme to read for in Wollstonecraft’s text is the question of how it shapes and changes a person to live under conditions of subjection and unfreedom, how it dulls the potential for that person to contribute to the world and to really be her best. In addition to her classical liberal perspective, Wollstonecraft is considered something of a mother of modern liberal feminism in general. As such her work suggests that there is a strong argument to be made for women’s liberation having a strong grounding in classical liberal theory. The second essential early text is John Stuart Mill’s The Subjection of Women. Although it is not often labeled as such, I consider this to be important as an early institutionalist approach to questions of women’s rights. Mill focuses on the idea that women and men have often been governed by alternative sets of rules and laws, and that this has naturally—but often for the worse—shaped the choices and potential of people of both sexes. After those foundations are covered, there are a number of directions one could go to carry this inquiry about women and classical liberalism through the 20th and into the 21st century. In addition to the chapters in Essential Women of Liberty on more recent contributors like Jane Jacobs, Elinor Ostrom, and Deirdre McCloskey, Wendy McElroy compiled a 2002 volume titled Liberty for Women: Freedom and Feminism in the Twenty-First Century that connects the classical liberal foundations of women’s rights to a wide range of contemporary applied topics. In addition, there has been a more recent resurgence of interest in questions related to the relationship between economic freedom and women’s well-being from Rosie Fike, Chelsea Follett, myself, and an ever-increasing number of others. Who else would you add to this list of places to start reading about women in the classical liberal tradition?   [Editor’s Note: We also suggest the current Liberty Matters Forum at the Online Library of Liberty, Why Do We Need Feminist Economics? to which Lemke contributes.]   Jayme Lemke is a Senior Research Fellow and Associate Director of Academic and Student Programs at the Mercatus Center at George Mason University and a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics.   (0 COMMENTS)

(Photo by: Patti Perret/Hulu) Here’s the whole article I wrote with Phil Magness, published in the Wall Street Journal on February 20 (February 21 print edition.) ‘The 1619 Project’ on Hulu Vindicates Capitalism Its examples of racism are all the result of actions by governments. Hulu’s series “The 1619 Project” blames economic inequality between blacks and whites on “racial capitalism.” But almost every example presented is the result of government policies that, in purpose or effect, discriminated against African Americans. “The 1619 Project” makes an unintentional case for capitalism. The series gives many examples of government interventions that undercut free markets and property rights. Eminent domain, racial red lining of mortgages, and government support and enforcement of union monopolies figure prominently. The final episode opens by telling how the federal government forcibly evicted black residents of Harris Neck, Ga., during World War II to build a military base. The Army gave residents three weeks to relocate before the bulldozers moved in, paying below-market rates through eminent domain. After the war, the government refused to let the former residents return. Violation of property rights is the opposite of capitalism. The series also highlights the noxious role of the Federal Housing Administration in red lining. The FHA discriminated against minority neighborhoods by classifying them as too “hazardous” for lending. The writers could have strengthened their case by citing Richard Rothstein’s 2017 book, “The Color of Law.” Mr. Rothstein quotes the FHA’s statement in the 1930s that “no loans will be given to colored developments.” This policy lasted into the 1970s, leaving a legacy of economic segregation. Capitalism wasn’t the culprit; the government was. Economic historians have long known about discrimination by all-white labor unions. Jimmy Carter’s labor secretary, Ray Marshall, a labor economist, chronicled this discrimination in his academic work. The Wagner Act of 1935 gave white unions privileged bargaining positions under federal law. This government-sanctioned cartelization of labor allowed entire industries to exclude black workers. “The 1619 Project” asserts that labor unions advance the cause of civil rights, though the historical record says otherwise. The series recognizes the discriminatory effects of Franklin D. Roosevelt’s legislative agenda, which depended on the Democratic machines of the Jim Crow South. The narrator states that “the New Deal represented the first affirmative-action policy for white people.” We couldn’t have put it better. These and other government policies caused immense economic harm to African Americans. But they aren’t capitalism. They’re interventions into markets, state-sanctioned theft, and political payoffs to segregationists. The answer to these problems isn’t to place the burden on the market through reparations. It’s to root out bad government policies that continue, sometimes unintentionally, the long legacy of state-sponsored racial discrimination. That would be a worthy 2023 project. Mr. Henderson is a research fellow with Stanford University’s Hoover Institution and editor of The Concise Encyclopedia of Economics. Mr. Magness is director of research at the American Institute for Economic Research and author of “The 1619 Project: A Critique.” (0 COMMENTS)

What does it mean to say something is risky? How would we know? Would a failure confirm the view that a particular activity was risky?Consider two people gambling at roulette. Joe puts $100 on each number from 1 to 35. Jane puts $3500 on number 36. Both have bet $3500, and both bets have negative expected values (assuming a 36-1 payoff on the winning number, and 38 total numbers.)To me, Joe’s bet looks less risky. There’s more than a 90% chance he’ll win $100, although the expected value of the bet is still negative due to the fact that he loses $3500 if number 36, 0 or 00 comes up. Jane has more than a 90% chance of losing all $3500, but will win very big if number 36 comes up. That seems riskier. Now let’s assume that both people make their bets, and the little ball lands on number 36.  Does that improbable outcome mean that Jane’s bet was actually less risky than Joe’s.  I’d say no; she just got lucky. When I speak with people, I often get the impression that they conflate “risky” with “failure”.  That’s not how I interpret the term.  Consider two banks: 1. Silicon Valley Bank (SVB) takes deposits and invests them in Treasury bonds.  It is a fast growing bank. 2. Bank OZK (formerly Ozark) rapidly grows from a small Arkansas bank to a major lender for real estate projects in America’s largest cities. Which bank’s assets seem risker?  Based on this evidence, I would say that Bank OZK was far riskier. Now assume that SVB goes bankrupt, while Bank OZK is doing great.  Does that impact your view as to which bank engaged in a riskier strategy?  Should that fact influence your view as to which bank engaged in a riskier strategy?  If failure is evidence of riskiness, what does that imply about the roulette example discussed above. In 2018, I did a post on Bank OZK, citing it as an example of the sort of risk-taking bank encouraged by the moral hazard in our banking regime.  In retrospect, it looks like SVB would have been a better example.  But is that true?  Was SVB actually a riskier bank?  Or did number 36 come up on the roulette wheel? My failure to spot the bank that actually failed illustrates a problem faced by regulators.  In 2018, I was presumably looking back at the banking crises of the 1980s and 2007-10, and noticing that real estate lending often led to banking distress.  At that time, Treasuries had been in a bull market from almost 4 decades.  We tend to estimate risk based on past performance, especially the recent past.  Regulators are unlikely to spot risk that comes from an area that was not previously a major problem.  (Recall that in 2006, MBS investors were lulled by the fact that the US had never experienced a large nationwide decline in house prices.) In recent years, real estate has done surprising well, as inflation tends to boost the value of hard assets like land and buildings.  On the other hand, inflation reduces the value of T-bonds.  It’s quite possible that, ex ante, SVB’s approach was less risky (perhaps even profit-maximizing!), but these unpredictable macro trends hurt SVB and helped Bank OZK.  (To be clear, I suspect that there were other differences as well, perhaps Bank OZK has superior management.) I don’t believe we’ll ever be able to fix the banking system through regulation.  Regulators will always be like generals fighting the pervious war.  Instead, we need to remove the underlying problems—moral hazard and a lack of diversification.  Trump likes to talk about “Making America Great Again”.  How about “Make America’s banking system more Canada’s”? PS.  David Beckworth has an excellent piece in Barron’s discussing how the rise in interest rates has helped long-term borrowers (including the Treasury) while hurting bondholders.   (0 COMMENTS)