Recently I wrote a post entitled "Izabella Kaminska, Why Do You Think Arbitrage is a Bad Thing?" in which I defended the concept of arbitrage. That post was especially a response to what seemed like a negative reaction to arbitrage in general, which I could not understand - not to mention the fact that arbitrage makes the difference between gain and loss at multiple levels. But today, Arnold Kling "shoots from the hip" with good snark (I know - where's the civility) in a response to school corruption as a response to mandated standards, with this quip:
In other news, the way banks are being held to risk-based capital standards can corrupt how banks seek to achieve the standards, according to a new paper from researchers at the department of education.What made this observation stand out for me was the title of his post: Schools Suffer From Regulatory Arbitrage. While many would doubtless go "duh"! (As one commenter noted - this just in: incentives matter) I hadn't quite made the connection as to why arbitrage had gotten its bad reputation. Just the same, when we have true believers in a "better world" such as Izabella Kaminska thinking that arbitrage should not even be a part of it, I believe it's time to rescue the true wealth creation aspect of arbitrage from the special interests who have hijacked it for their own ends - ends which subvert countless innovations and a world of personal effort in the process, just to create forms of wealth that look good "from the road" and in a few pocketbooks, but not on the aggregate balance of per capita destinies.
(A brief side tour - that Kaminska post was one of the more popular thus far, and one of the interesting things about blogging in real time is the fact that my (brief comment) reaction to Kling about arbitrage - before starting this post - apparently routed more people to the Kaminska post before I could complete this one.)
For all the monetary lifestyle illusions which negative forms of wealth capture can create, one thing is apparent because of such ongoing activity which is no illusion at all: reversals in family formation from earlier decades. People get that when they don't always have the necessary means to tend to their own realities, they aren't necessarily equipped to assist with the realities of others and such knowing is not as irresponsible as one might think. In fact, at times such knowing proves to be more responsible than trying to pretend one can uphold such familial responsibilities, only to bail or otherwise come up short when the going gets too tough - in spite of what some conservatives may believe as to individual failure and responsibility. Note to conservatives: want more family formation? Create innovative mass produced housing that any income level can afford without help from our tax base and Uncle Sam. No you're not being unfairly picked on...liberals caught my ire yesterday.
The problem for me is when people of any ideological stripe set up impossible goalposts for a sizable part of the population, and then self righteously deride the "losers" among one's population when - in fact - many cannot actually meet the impossible yet profitable demands as inefficiently, unimaginatively structured (and often end up blaming themselves for not being able to do so). The icing on the cake, of course, is when those same powerful interests get the government, the Fed, Wall Street or who the heck ever to financially back all those unreasonable and often stupid goalposts in the first place. How does one even pick a point in all these processes to lay the blame?
Still, the vast real estate black hole of wealth capture is where I especially empathize with Arnold Kling, in regards to the out of control expectations of entire vampire industries that coalesce around building and construction, and the co-dependent relationship between government and business in this regard. Of course, unlike myself, Arnold isn't quite convinced the Fed can regain a better balance through nominal targeting, even though he was the one who introduced me to Scott Sumner's blog back in 2009. I must admit: getting Arnold "on board" with the Market Monetarists seems to mean making him more optimistic as to outcomes in general!
None of this means I don't think the Fed shouldn't be backing asset values for housing in the present, because I believe doing so is highly preferable to letting them slide into oblivion, along with every other kind of wealth valuation. This is a one-two step process: first support what is, then create something more sustainable. Apparently people are getting stuck on the first part of the process, and who knows what about the second...However NGDP level targeting gives us a bit of a clue, as to the present flaws. Nominal targeting opens our eyes as to what actually occupies the economic commons which we partake of, and how those elements currently exist in the space itself. NGDPLT could assist with important shifts in asset formation and holdings, so that the most basic needs in any highly variable population can be readily taken into account. Nominal targeting hasn't become monetary policy rule yet in part because special interests keep getting their way, by insisting that everyone live as though most incomes are essentially the same, and then capping monetary policy arbitrarily to fit their own made up reality.
Not only is that a dangerous way to structure our daily economic lives, it makes people clamor for ever higher minimum wages, which in turn makes the rents go up again... Is there a tit for tat mechanism in which vested interests simply react to one another by upping the ante and then trying to deny the money necessary for the other side to react? People lose faith in monetary policy in part because too little coordination exists to point out where purposely inefficient wealth creation distorts the process. Whatever the rationale, it is one that needs to be tended to sooner rather than later, so that wealth creation and arbitrage can once again be associated with positive gain for all.
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