Arnold Kling writes about evidence of the misfeasance of the ratings agencies (Standard and Poors and Moody's) that rated the risk of debt securities. Arnold attributes this to a divide between the "suits and the geeks." Perhaps, but that doesn't explain why the divide persisted in the face of market incentives to bridge it.

I find the failure of the ratings agencies to be pretty hard to explain. As private market actors unconstrained by regulatory dictates on how they did ratings, I would have thought that a more sophisticated system for rating risk would have evolved. Apparently it did not and the ratings agencies were effectively captured by the rated entities.

I would have thought that such capture would have seriously degraded their value to the market-- perhaps being used only to check a box with respect to a rating required by other financial regulations (e.g., with respect to assets held by a bank). However, from what I have read, unregulated investors actually relied on the substance of the ratings.

Why they did so in the face of evidence of capture is mysterious. Do we just chalk it up to a bubble mentality?

"Of course, Rove is a student of history, and those who don't ignore history are condemned to think it will be repeated."

Although it looks like there will be many welcome features for Media Center in Windows 7 "out-of-the-box", Charlie Owen hints that there will be significant new capabilities in the Media Center API that enable developers to host MCML application on a web site.

What does this mean? To me, it increases the chances that we will be able to see providers of media and information make that information available to all users of Windows 7 Media Center without users having to download and install separate applications on their PCs. Because a number of the new API features are geared toward MCML, such applications can be reliably used on extenders.

Much like the Internet TV feature was added to Vista Media Center without users having to do anything, sites like Google maps might design a Media Center page making them easily used within Media Center without as many compromises and kludges as are necessary today when accessing web based applications from within Media Center.

Besides the presumptive next President of the United States.

I previously took shots at answering that question here and here.

However, the best analysis I have read comes from Jim Lindgren, when he wrote:

People should not confuse Obama's personality with his political orientation: by personality, Obama is the most reasonable, thoughtful, moderate person on either national ticket. He is definitely NOT an ideologue. Yet by political orientation, Obama is the most liberal or progressive candidate to be a party nominee for president in at least a half century — probably ever. That explains why he is in essence a radical incrementalist.

Since he wrote that sentence at the beginning of September, I have observed that it seems to fit well with the the Barack Obama I have observed.

I recently posted that the price for the Iraq war worth paying because of poor state the world would be in today had we not gone to war. This case is seldom made (although many will defend the prospect of staying in Iraq now that we are there), but Christopher Hitchens does an excellent job of making that case on BloggingHeads in a diavlog with Eric Alterman.

Two additional notes:

• Hitchens doesn't really adhere to any principle of radical uncertainty!
• This is an excellent diavlog. Hitchens and Alterman disagree strongly about almost everything discussed, but the discussion remains both civil and highly substantive. Why doesn't anything like this appear on television.

Arnold Kling has an interesting post with additional data to back up his earlier observations that regulatory arbitrage is responsible for excessive mortgage securitization and ultimately some significant portion of the financial meltdown.

His implicit point (why not add a sentence or two and make it explicit!) is that regulators underestimated the risk of rated mortgage securities and overestimated the risk of normal mortgage loans held in a bank's portfolio with the result being that banks were encourgaged by regulation to increase the risk in their mortgage portfolios.

This isn't just an issue of poor regulation that better regulation could have addressed, but one that is inherent in these sorts of bright line regulations-- because even if an omnicient regulator set the bright lines, there will always be marginal cases not correctly dealt with by the bright line rules. Of course, regulators aren't omnicient so the odds of getting setting up optimal rules are pretty small (the degree of suboptimality may vary of course).

These aren't dispositive arguments against ANY regulation because the moral hazard associated with deposit insurance makes regulation necessary. (Someone needs to watch the credit risk of financial institutions because insured depositors won't.)

In theory the ratings agencies should have acted as a superior private alternative to government regulation and analysis of risk. I would be interested in knowing more about why the ratings agencies weren't able to perform this function very well.

Lastly missing in this analysis is any discussion of the magnitude of the effects I describe above because I don't know much about it. Does anyone?

Characteristically, my thoughts about Iraq have been pretty consistently contrarian throughout the course of he war. With almost six years since the runup to the Iraq war I can now evaluate how accurate my views have been along the way.

It is a decidedly mixed bag. I supported the war, thinking several things: (i) this was the best way for the United States to go on offense against the terrorist threat after the attacks of September 11 in that this was a chance to install a democratic government in the center of the Middle East which would hopefully provide a transformational example to surrounding countries (the actions in Afghanistan seemed to have been fitting retaliation, but only that); (ii) the war winning capabilities of the US military were underestimated by most of the press and others; (iii) most people overestimated Iraqi resistance to a US installed elected government; (iv) at the time, the seemingly successful war in Afghanistan seemed to bear out points (ii) and (iii).

In retrospect, I think I was correct about point (i) but far less rights about points (ii), (iii) and (iv), which points go to the ease of achieving the goal set forth in point (i). My skepticism about analysis of how difficult the initial invasion would be proved to be justified, but my skepticism of reports of accelerating violence after the invasion proved to to be mostly unjustified. Recently there appears to have been has been real progress in decreasing violence and political reconciliation, but it has certainly be much harder than I anticipated and had the US strategy not proven effective that success might never have come. Much like McPherson's analysis of the Union victory in the Civil war, US success in Iraq appears to have been highly contingent. Unlike what I originally thought, there was not a good reason to believe success in Iraq was highly probably at the time of the invasion.

Why do I think I was correct about (i)? Analyses bemoaning all the multifaceted costs of the war in Iraq ignore the large downsides of not going to war: (i) the US would be fighting a defensive war on terror, lacking strategic initiative; (ii) Sadaam Hussein would still be a thorn in our side, keeping US forces in Saudi Arabia, continuing to buy world influence through the oil for food program; (iii) starting up its WMD program which the Kay report revealed to have been mothballed rather than dismantled for good; and (iv) the US would continue to be perceived as either muscle bound or a paper tiger. These are not true today as a direct result of the war.

So I am left with the somewhat paradoxical position that I believe the war in Iraq was in the best interest of the United States, but because I now believe that success was highly contingent and much harder that I anticipated I would not support even a substantially similar endeavor today. More glibly put, the war was successful, but in retrospect I would not have supported it.

I have no particular expertise on foreign or military policy other than that from being an avid follower of many different reports of the Iraq war, but I have not seen anyone else take this position which I though made these ideas worthy of a blog post. [Links for some key ideas to be added later]

Internet Connection Sharing in Windows Mobile 6 allows a user to connect a USB cable between a phone running Windows Mobile 6 and have the PC use the phone's Internet connection. This came in really handy for the first time this week during our family vacation at a condo without an Internet connection for the laptop I brought along.

I used Internet Connection Sharing on my HTC Mogul (ROM version 3.35.651.2) to allow our laptop running Vista Business to connect using the phones EVDO Rev A connection to the Sprint network. All I did was connect the phone by USB cable to the laptop, make sure ActiveSync wasn't running, setup the Internet Sharing application (setting the PC Connection setting to "USB" and the Network Connection setting to "Sprint PCS") and hit Connect within the Internet Sharing application on the phone. Viola! Vista running on the laptop reported an Internet connection.

A couple of additional notes: first, I tried using the Bluetooth personal area network to get the same functionality without success; second, the connection speed was fast enough for web surfing and remote Outlook access via Citrix and Remote Web Workplace, but not for playing NBC.com video clips; and third, when connected this way the laptop charges the phone using the USB cable.

Arnold Kling thinks it should, but I am not yet persuaded. As mentioned previously I have his posts incredibly illuminating and his appearance on BloggingHeads.tv discussing the same subject was excellent as well.

However, I think he needs to better explain why you think the mortgage securitization market would not exist absent government favors. Absent that explanation I would think such a market would allow finacial firms to pursue what they are best at, e.g. firms that are great at originating loans (including evaluating default risk) could do that and firms that are best at aggregating investment funds or deposits could focus on that. I would think that sort of specialization would be made possible by a market for mortgage securitization and would normally be a good thing.

Arnold makes a strong case that government favors created the market and indeed crowded out the alternatives, I just don't see why the market would so clearly not exist (albeit in a lesser form) absent those favors.

With less than 24 hours to go before the House of Representatives is supposed to vote on the version of the Paulson rescue/bailout plan adopted by the US Senate, I thought I would say a few things which I have not heard elsewhere.

The potential financial meltdown strikes me as a very interesting and complicated story. The quality of the information available in blogs has been far superior to anything available in the mainstream press. In part this is probably because there is so much relevant information that it is impossible for the mainstream press to present it all within the space constraints that they face. In part it is due to the fact that the mainstream press is populated by journalists not economists and understanding and presenting this story requires analytical skills that most members of the press don't possess. In contrast, there are many great economics blogs written by people who do possess such skills.

I am sure there are others, but here are some of the blogs I have found particularly helpful in understanding what is going on and possible steps to ameliorate the problem:

• Will Wilkinson's interview with Arnold Kling on BloggingHeads.tv. (I find Will's interviews really good, perhaps because I find myself thinking like Will with somewhat disturbing frequency!)
• Arnold Kling's blog posts at EconLog.
• Tyler Cowen's blog posts at Marginal Revolution.
• NakedCapitalism also passes on some pretty interesting information.

Here are some of the reasons I am skeptical:

1. $700 billion is a lot of money.
2. Under the Paulson plan, this money is to be spent to acquire so-called "toxic" assets consisting of various varieties or mortgages and mortgage backed securities. If the government pays more than fair market value (i.e. what one would pay in a well functioning market, not the lockup we have now) then this is a direct transfer of wealth from the US taxpayers to the holders of those mortgage assets. If these were loans of preferred stock investments, at least the Treasury would get its money back if the firm survived. With asset purchases there is a big chance that the government will be taken to the cleaners by holders of these assets.
3. The "plan" that passed the US Senate is festooned with a collection of market-distorting tax breaks and other programs that are bad for the country.
4. In the shadow of the bailout, $25 billion in loan guarantees for US automakers sailed through Congress and will be signed into law by the President. No tell me again about how the Paulson Plan does not create any bad precedents for future actions.
5. I believe that the credit markets are more resilient and faster moving than Hank Paulson. I believe that participants in those markets will be able to organize around new market realities faster than ever before. Just as information technology has made other economic adjustments faster, it will do the same for the credit markets.
6. I am not convinced that everyone should have seen the housing bubble for what it was. Bubbles are only bubbles in retrospect. Sometimes there really are extraordinary changes which are not bubbles. Was the runup in the price of oil a bubble, or the Canadian dollar, or Dell stock?
7. I fear a successful Paulson Plan would just prolong the pain of making some big adjustments in the way the credit markets work. Attempts to preserve many existing players would just prolong those changes. Given the amount of liquidity the Fed is putting into the system (circa $600 billion) doesn't the credit lockup in the face of that suggest that the problem is one of (i) too little capital at financial institutions for the system to continue as it was, and (ii) maybe that is a good thing if there was too much credit available before.
8. The possibility of the Paulson Plan passing (or other government responses to high mortgage default rates) may be what is preventing markets from being able to price mortgage backed securities, leading those market to freeze up.
9. If there were more transparency about financial firms, parties to transactions could do a better job of addressing counterparty risks, including those associated with leverage. The Paulson Plan does nothing to address this.
10. Couldn't some form of accelerated bankruptcy work better?
11. Would net worth certificates for financial institutions be better?

Here are some doubts about my positions above:

1. I don't know as much about financial markets as Hank Paulson and Ben Bernanke.
2. I don't have a good explanation of why mortgage backed securities are not trading. Markets price uncertainties all the time, why would uncertainly prevent this market from working?
3. There may be technical aspects of the regulations and laws that govern credit markets and their players that would make some of my alternatives counterproductive and my observations incorrect.
4. Most financial crises are the result of people suddenly realizing that a society's assets were not efficiently allocated. (After all, financial assets ultimately represent claims on tangible assets.) Beyond the deployment of too many assets into residential real estate, are there other misallocations that need to be corrected? I don't know.