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  • New Yorker Out Loud: Reconsidering Chicago School Economics.

    John Cassidy has a fascinating article in the latest New Yorker . In an effort to see how the Chicago School of economics is faring in the wake of the Global Economic Crisis, Cassidy talks to free-market economists about their core theories. The article isn't available online yet, but you can listen to an interview with Cassidy on The New Yorker's 'Out Loud' podcast. Click here .

  • Surowiecki: Price Wars are 'the retail version of the doomsday machine'

    James Surowiecki 's Financial Page column in this week's New Yorker is a keen look at price wars as a high stakes game of chicken. He goes back to the airline industry's destructive price wars of the early 90s to shed light on the current Amazon-WalMart showdown . Surowiecki writes that there is only one way to win a price war: don't play. Instead, you can compete in other areas: customer service or quality. Or you can collude with your putative competitors: that’s why cartels like OPEC exist. Or—since overt collusion is usually illegal—you can employ subtler tactics (which economists call “signalling”), like making public statements about the importance of “stable pricing.” The idea is to let your competitors know that you’re not eager to slash prices—but that, if a price war does start, you’ll fight to the bitter end. One way to establish that peace-preserving threat of mutual assured destruction is to commit yourself beforehand, which helps explain why so many retailers promise to match any competitor’s advertised price. Consumers view these guarantees as conducive to lower prices. But in fact offering a price-matching guarantee should make it less likely that competitors will slash prices, since they know that any cuts they make will immediately be matched. It’s the retail version of the doomsday machine. Read Priced to Go here .

  • The Case for More Direct Action to Reduce Foreclosures

    James Surowiecki of The New Yorker 's The Financial Page , writes that the Obama Administration "has managed the effects of the housing crisis reasonably well." But, he goes on, it has not been able to resolve the crisis itself quite as well, "with nearly two million foreclosure filings already this year." One major stumbling block has been a general ineffectiveness of programs designed to help homeowners who are in danger of defaulting. He points to this paper from the Federal Reserve Bank of Boston , which shows that banks can often make more money by foreclosing than by renegotiating. Surowiecki: First, about thirty per cent of delinquent borrowers “self-cure”—after missing a payment or two, they get back on track without any help from the bank. Second, between thirty and forty-five per cent of people who do have their mortgages modified end up defaulting eventually anyway. In both cases, modification leaves the bank worse off. Reluctance to modify mortgages isn’t always a matter of obstinacy or ineptitude. It’s a matter of profit: banks are doing what makes sense for their bottom line. The answer then, according to Surowiecki, might be to stop trying to create incentives for lenders and borrowers to negotiate a way to avoid foreclosure, and to take a more aggressive route: If we really want to keep people in their homes, then, nudges and renegotiations probably aren’t going to do it. We need more direct action. One option, which the banking lobby killed earlier this year, would be to allow “cramdowns”: let bankruptcy judges reduce the principal on homeowners’ mortgages. Another, even more direct option is simply to give aid to homeowners: one proposal would have the government make low-interest loans, or even grants, to people who have suffered a steep decline in income and have negative equity in their homes. That would target the aid at the people who need it most: as another Boston Fed paper shows, defaults are most likely to happen not just because interest payments are set too high but because of income shocks (usually after the loss of a job) and plummeting house prices. Read Not Home Yet here .