Behavioral Bubbles and the Business Cycle

Writing at the Project Syndicate, Yale professor of economics and author of Irrational Exuberance Robert Shiller sees bubbles in Columbia and many parts of the world.  (hat tip Zero Hedge) [all bold mine]

From the world of rational expectations and efficient market hypothesis, Mr. Shiller points out that bubbles do not exist

This raises the question: just what is a speculative bubble? The Oxford English Dictionary defines a bubble as “anything fragile, unsubstantial, empty, or worthless; a deceptive show. From 17th c. onwards often applied to delusive commercial or financial schemes.” The problem is that words like “show” and “scheme” suggest a deliberate creation, rather than a widespread social phenomenon that is not directed by any impresario.

Maybe the word bubble is used too carelessly.

Eugene Fama certainly thinks so. Fama, the most important proponent of the “efficient markets hypothesis,” denies that bubbles exist. As he put it in a 2010 interview with John Cassidy for The New Yorker, “I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.”

Contra EMH, Mr. Shiller says that bubbles are not rational

In the second edition of my book Irrational Exuberance, I tried to give a better definition of a bubble. A “speculative bubble,” I wrote then, is “a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase.” This attracts “a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”

That seems to be the core of the meaning of the word as it is most consistently used. Implicit in this definition is a suggestion about why it is so difficult for “smart money” to profit by betting against bubbles: the psychological contagion promotes a mindset that justifies the price increases, so that participation in the bubble might be called almost rational. But it is not rational.

The story in every country is different, reflecting its own news, which does not always jibe with news in other countries. For example, the current story in Colombia appears to be that the country’s government, now under the well-regarded management of President Juan Manuel Santos, has brought down inflation and interest rates to developed-country levels, while all but eliminating the threat posed by the FARC rebels, thereby injecting new vitality into the Colombian economy. That is a good enough story to drive a housing bubble.

Because bubbles are essentially social-psychological phenomena, they are, by their very nature, difficult to control. Regulatory action since the financial crisis might diminish bubbles in the future. But public fear of bubbles may also enhance psychological contagion, fueling even more self-fulfilling prophecies.

And bubbles eventually pop…

One problem with the word bubble is that it creates a mental picture of an expanding soap bubble, which is destined to pop suddenly and irrevocably. But speculative bubbles are not so easily ended; indeed, they may deflate somewhat, as the story changes, and then reflate.

It would seem more accurate to refer to these episodes as speculative epidemics. We know from influenza that a new epidemic can suddenly appear just as an older one is fading, if a new form of the virus appears, or if some environmental factor increases the contagion rate. Similarly, a new speculative bubble can appear anywhere if a new story about the economy appears, and if it has enough narrative strength to spark a new contagion of investor thinking.

This is what happened in the bull market of the 1920’s in the US, with the peak in 1929. We have distorted that history by thinking of bubbles as a period of dramatic price growth, followed by a sudden turning point and a major and definitive crash. In fact, a major boom in real stock prices in the US after “Black Tuesday” brought them halfway back to 1929 levels by 1930. This was followed by a second crash, another boom from 1932 to 1937, and a third crash.

Speculative bubbles do not end like a short story, novel, or play. There is no final denouement that brings all the strands of a narrative into an impressive final conclusion. In the real world, we never know when the story is over.

In the real world, speculative bubbles operate on cycles. A boom is followed by a crash. Why there seems to be “no final denouement” on these episodes has been that policy responses to bubble crashes has been to “reflate” unsustainable bubbles, ergo the repetition, the cycles. Social policies have essentially been designed to prevent the market clearing process.

The other reality is that the “social-psychological” phenomenon of every bubble is a symptom rather than a cause, since peoples actions does not emerge from a vacuum. The behavioral aspect represents a narrative of people’s reactions to a largely “unseen” stimulus which prompts the “herding or lemming effect” and thus resulting to “irrational exuberance” or speculative bubbles.  

Yield chasing actions, thus are “rational” from an individual’s ex-ante point of view and “irrational” from an “ex-post” (hindsight is 20/20) perspective or from a third party interpretation of an evolving bubble, similar to me or to Professor Shiller.

In other words, "rationality" represents the time inconsistent dilemma on the individuals and on the markets. And that the yield chasing dynamic attendant to these events signify as the immediacy effect or temporary discounting.  

Another reality is that grand bubbles will hardly exist WITHOUT resources fueling them.

Thus the limitations of people’s highly exuberant behavior and actions or “speculative bubbles” will ultimately depend on the limits of resources that enables and facilitates such activiites. 

As Austrian economist Roger W. Garrison explained, first "you can’t just spend expectations" and importantly, (bold mine)

individuals who are in possession of increased money balances and who have correct, or rational, expectations still may not spend in a pattern consistent with the New Classicist view. A spending pattern that is internally inconsistent on an economywide basis does not necessarily imply inconsistency for the individual. That is, macroeconomic irrationality does not imply individual irrationality. An individual can rationally choose to initiate or perpetuate a chain letter—sending one dollar to the person on the top of the list, adding his name to the bottom, and mailing the letter to a dozen other individuals—even though he knows that the pyramiding is ultimately unsustainable. Similarly, it is possible for the individual to profit by his participation in a market process that is—and is known by that individual to be—an ill-fated process. So long as it is possible to buy in and sell out before the process reverses itself, rational expectations may exacerbate rather than ameliorate the misallocation of resources induced by monetary expansion.

To repeat, people’s actions doesn’t operate on a vacuum. 

Social policies are hardly neutral, they shape people's incentives and action. Monetary policies via credit expansion serve as the fuel for every bubble.

The Anatomy of the Cyprus’ Bubble Cycle

The following article from the Reuters has a concise chronicle of the boom bust cycle which today has been plaguing Cyprus via a banking crisis and which I dissect.

(all bold highlights mine, occasional side comments of mine in italics)

1. The Pre-EU setting.

Before joining the euro, the Central Bank of Cyprus only allowed banks to use up to 30 percent of their foreign deposits to support local lending, a measure designed to prevent sizeable deposits from Greeks and Russians fuelling a bubble.

2. The Moral Hazard from EU’s economic convergence policies

When Cyprus joined the single European currency, Greek and other euro area deposits were reclassified as domestic, leading to billions more local lending, Pambos Papageorgiou, a member of Cyprus's parliament and a former central bank board member said.

"In terms of regulation we were not prepared for such a credit bubble," he told Reuters.

Banks' loan books expanded almost 32 percent in 2008 as its newly gained euro zone status made Cyprus a more attractive destination for banking and business generally, but Cypriot banks maintained the unusual position of funding almost all their lending from deposits.

3. How bubble policies reshaped the public’s behavior.

"The banks were considered super conservative," said Alexander Apostolides an economic historian at Cyprus' European University, a private university on the outskirts of Nicosia.

When Lehman Brothers collapsed in the summer of 2008, most of the world's banks suffered in the fallout, but not Cyprus's.

"Everyone here was sitting pretty," said Fiona Mullen, a Nicosia-based economist, reflecting on the fact Cypriot banks did not depend on capital markets for funding and did not invest in complex financial products that felled other institutions.

Note of the "this time is different" mentality and the attitudes of "invincibility".

4. Overconfidence and Mania

Marios Mavrides, a finance lecturer and government politician, says his warnings about the detrimental impact on the economy of so much extra lending fell on deaf ears.

"I was talking about the (property) bubble but nobody wanted to listen, because everyone was making money," he said. (sounds strikingly familiar today—Prudent Investor)

The fact that the main Cyprus property taxes are payable on sale made people hold onto property, further fuelling prices, Papageorgiou added…

Michael Olympios, chairman of the Cyprus Investor Association that represents 27,000 individual stock market investors, said he too criticized the central bank for "lax" regulation that facilitated excessive risk taking.

Ex-post, people always look for someone to pass the blame on. They forget the responsibility comes from within.

The Cyprus General Index from Tradingeconomics.com

Notice: The losses from the bust had been more brutal than the gains from the boom

5. The yield chasing dynamic fueled by monetary-credit expansion

A depositor would have earned 31,000 euros on a 100,000 euros deposit held for the last five year in Cyprus, compared to the 15,000 to 18,000 euros the same deposit would have made in Italy and Spain, and the 8,000 interest it would have earned in Germany, according to figures from UniCredit.

Bulging deposit books not only fuelled lending expansion at home, it also drove Cypriot banks overseas. Greece, where many Cypriots claim heritage, was the destination of choice for the island's two biggest lenders, Cyprus Popular Bank -- formerly called Laiki -- and Bank of Cyprus.

6. The Knowledge problem: Regulators didn’t see the crisis coming. Also the transmission mechanism: From the periphery (Greek crisis) to the core (Cyprus crisis)

The extent of this exposure was laid bare in the European Banking Authority's 2011 "stress tests", which were published that July, as the European Union and International Monetary Fund (IMF) were battling to come up with a fresh rescue deal to save Greece. (reveals how bank stress tests can’t be relied on—Prudent Investor)

The EBA figures showed 30 percent (11 billion euros) of Bank of Cyprus' total loan book was wrapped up in Greece by December 2010, as was 43 percent (or 19 billion euros) of Laiki's, which was then known as Marfin Popular.

More striking was the bank's exposure to Greek debt.

At the time, Bank of Cyprus's 2.4 billion euros of Greek debt was enough to wipe out 75 percent of the bank's total capital, while Laiki's 3.4 billion euros exposure outstripped its 3.2 billion euros of total capital.

The close ties between Greece and Cyprus meant the Cypriot banks did not listen to warnings about this exposure…

Artificial booms are often interpreted as validating the policies of the incumbent political authorities. It's only during fait accompli where people recognize of the failures of politics. This is an example of time inconsistency dilemma

Yet the blame will always be pinned on the victims (private sector, e.g. depositors, the speculators) rather than the promoters of the bubble.

 

7. More regulatory failure.

Whatever the motive, the Greek exposure defied country risk standards typically applied by central banks; a clause in Cyprus' EU/IMF December memorandum of understanding explicitly requires the banks to have more diversified portfolios of higher credit quality.

"That (the way the exposures were allowed to build) was a problem of supervision," said Papageorgiou, who was a member of the six-man board of directors of the central bank at the time.

The board, which met less than once a month, never knew how much Greek debt the banks were holding, both Papageorgiou and another person with direct knowledge of the situation told Reuters.

Note that imbalances accrued swiftly and where hardly anyone saw the imminence of today's crisis.  What used to be "Conservative" banks suddenly transformed into aggressive banks.

Yet another interesting point is that the events in Cyprus proves my thesis that crisis are essentially "unique". There is no definitive line in the sand for credit events. Cyprus had its own distinctive thumbprint or identity, particularly her "unusual position" of reliance on deposits, compared to their peers.

 

Wonderful learning experience

Flooding from Heavy Monsoon Rains Exposes Central Planning Failure

From the Manila Bulletin,

Malabon City government officials are criticizing the Camanava Area Flood Control and Drainage System Improvement Project for “failing to meet the expectations of the residents.“

After the meeting with Engr. Carla Bartolo, head of the project, Acting Malabon City Mayor Antolin Oreta III said the Camanava flood control project, “did nothing as regards to the perennial flooding particularly in Malabon.“

The Php 5.2 billion project also covered nearby areas in Caloocan, Navotas and Valenzuela, but a big bulk of the amount was purportedly utilized for constructing pumping stations, navigation gates and polder dikes in Malabon, according to Malabon City Engineer Edgar Yanga.

Two pumping stations were supposed to serve Caloocan, Malabon and Navotas areas, Yanga said.

The city officials noted some “flaws“ in the construction. Yanga said, “Ang expected na gagawin ay hindi ginagawa, paunti-unti. No target completion.“

He added: “The project is very much delayed. Five years na delayed.“

The project was started in 2003 and was supposed to be fully operational by 2007.

In the meetings with city officials, including 21 barangay chairmen, Bartolo attributed the delay of the project to the presence of some informal settlers covered by the project and changes in the conditions of the locations.

Oreta said the city continues to experience floods, citing some barangays which were affected by the heavy rains spawned by typhoon “Gener“ and recent tropical storms.

First of all, the nature of politics has all been about the blame game, where political agents benefit from stepping on someone’s shoes. Critics make the cavalier presumptions that under their guidance such problems will unlikely emerge.

Second, censures become the mechanical reaction once an event has already taken place. The usual culprit has been the private sector, but in one of the unusual case above, one government agency excoriates another.

But since politics has mainly been about the fetish for short term problems and fixes, fleeting popular concerns leads to intuitive shifts in policy directions.

This known as the time inconsistency dilemma, as per Wikipedia.com,

situation where a decision-maker's preferences change over time in such a way that what is preferred at one point in time is inconsistent with what is preferred at another point in time

Yet since experts cannot predict on the precise dislocations from weather disturbances, social policies result from “whack the mole” dynamics or from “fighting the last war” or to shifting priorities. So there will never be an end to central planning failures on reactionary based populist social policies.

Third, finger pointing will always be about mismanagement, deficiency of funding and or the lack of regulatory oversight.

In reality, since government treats the symptoms than the problem, the outcome will always be a gamut of unintended consequences.

Paradoxically, failures and inefficiencies (and corruption) will be rewarded through demands for more taxpayer expenditures.

Yet the biggest fundamental flaw emanates from the public’s mysticism over the infallibility of the nanny state.

Ironically many, if not most, have been jaded to the reality of serial failures of central planning, as I previously wrote:

Two more important things to drive at:

The first is the KNOWLEDGE problem.

The fact is that while there are instruments to help predict the changes in the weather, that knowledge is limited. This means that policy responses will ALWAYS be insufficient, no matter what they do.

The second point is that these has been all about the HOT POTATO problem—everyone seems to toss the responsibility to another party.

Everyone has been HARDWIRED to EXPECT that the government must and shall deliver us from environmental disruptions and disasters.

Yet no matter the horrible track record, we maintain this illusion of infallibility.

People cannot seem to accept that government are composed by people, and like everyone else, has limitations in the possession of knowledge.

Most of the dogmatic belief on the ascendancy of the state emanates from economic ignorance and mass indoctrination.

As the great Professor Ludwig von Mises warned

What makes many people blind to the essential features of any socialist or totalitarian system is the illusion that this system will be operated precisely in the way that they themselves consider as desirable. In supporting socialism, they take it for granted that the "state" will always do what they themselves want it to do.

Euro: Geopolitics Over Economics

Austrian economist Dr. Antony Mueller writes, (bold highlights mine)

“the fact that the euro is more a political than an economic project. Even more: the euro is an instrument to (re)gain geopolitical power for the Europeans. In other words: the euro is an imperial tool. In this respect bad economics is a given. The euro does have moral hazard effects...Yet the main point is that the euro project itself is hazardous game. Bad economics would no longer matter if the gamble will succeed. Current losses would be recouped a thousandfold just if oil were traded in euros or partly in euros. As of now it is already a fact that no far-reaching decision concerning the international monetary order can be taken against the will of the leaders of the eurozone. On a net basis, and even with the costs of the current sovereign debt crisis included, the euro has been beneficial for the whole region and beyond.”

Global foreign currency reserve from wikipedia

The time consistency dilemma of money that has been engineered for geopolitical incentives has limits. True, the euro has been gaining market share at the expense of the US dollar in terms of foreign currency reserves but the gains will always be relative.

Yet any political environment that thrives under bad economics will have interim benefits but eventually suffer from the recoil of the imbalances borne out of such bad policies. The euro or the yen or the yuan or the Philippine peso will not escape this basic economic laws at work. There is no free lunch.

To add, the perspective of politics over economics has been the path dependent policy approach employed by current crop of policymakers globally. In other words, interpreting actions by policymakers to address economic problems may not entirely be valid. Economics may just be a front or a cover for other ulterior political motivations that drives the decision making process of the political authorities as the Euro.

To quote economist Thomas Sowell,

Economists are often asked to predict what the economy is going to do. But economic predictions require predicting what politicians are going to do-- and nothing is more unpredictable.

How Valid is The Concept of American Exceptionalism?

A comment prompted me to share my insight on the so-called American exceptionalism

American exceptionalism, according to Wikipedia.org, refers to the theory that the United States is qualitatively different from other nations.

America is allegedly “qualitatively different” in two ways (from Wikipedia.org):

-via Alexis de Tocqueville, “emergence from a revolution, becoming "the first new nation", and developing a uniquely American ideology, based on liberty, egalitarianism, individualism, populism and laissez-faire”

-via American Communist Party (1920s), their belief that "thanks to its natural resources, industrial capacity, and absence of rigid class distinctions, the United States of America might for a long while avoid the crisis that must eventually befall every capitalist society.

Wikipedia further adds, ``Although the term does not imply superiority, some writers have used it in that sense.”

I would reckon that every nation’s history is in many ways unique or implies exceptionality, except that to quote Winston Churchill, “History is written by the victors”.

This means that the string of America’s successes may have prompted many writers to overconfidently believe that America’s successes represent a permanent state of order.

In my view, this could be analogized to the famous but worrisome Wall Street maxim “This time is different”.

Also the thought of America’s “exceptionalism” seems guilty of what is called as the survivorship bias or to quote the Wikipedia, “the logical error of concentrating on the people or things that "survived" some process and inadvertently overlooking those that didn't because of their lack of visibility”

Moreover, there is a time consistency problem with both assertions: the ideology of liberty, egalitarianism, individualism, populism and laissez-faire can’t be seen as exclusively unique to the American race, since these can be learned and assimilated by other nations. The world does not operate on a vacuum. People learn and adapt.

Alternatively, if these traits represent the core of exceptionalism, then any significant erosion would also risk reducing such perceived ‘exceptionality’.

Thus, exceptionalism largely depends on how the US struggles to maintain this “uniquely American ideology”, and similarly, how other nations respond to incorporate on such success model as their own.

I am less inclined to respond to the American Communist Party view: industrial capacity is simply an output of this “unique American ideology” while natural resources depends on the economic value assigned to it by the market, while the absence of class distinction seems like an opaque premise—all forms of government have ‘rigid’ class distinctions.

Also in response to implications that America had been endowed with wealth by birthright, it must be remembered that the essence of the annual Thanksgiving Day celebration emanates from a painful chapter of US history, where the Pilgrims experimented with and suffered from the collectivist state which eventually prompted them to espouse the “unique American ideology”.

Writes Heritage Foundation Conn Carroll, (bold emphasis mine)

When the first Pilgrims founded the Plymouth Colony, all property was taken away from families and transferred to a “comone wealth.” In other words, the Pilgrims tried to do away with private property. The results were disastrous. According to Bradford, the stronger and younger men resented working for other men’s wives and children “without any recompence.” And the women forced to cook and clean for other men saw their uncompensated service as “a kind of slavery.” The system as a whole bred “confusion and discontent” and “retarded much employment that would have been to [the Pilgrims’] benefit and comfort.” Unable to produce their own food, some settlers “became servants to the Indians,” cutting wood and fetching water in exchange for “a capful of corn.” Others tragically perished.

It was not until private property rights were restored and every man was allowed to “set corn for his own particular” that prosperity came to the colony. Bradford reported, “This had very good success for it made all hands very industrious. … [M]uch more corn was planted than otherwise would have been. … Women went willingly into the field, and took their little ones with them to set corn.”

More, American exceptionalism does not imply that other countries have been accursed to suffer from ‘codified poverty’. This perspective unjustly sees Americans as in a state of permanent entitlement.

There are reasons why society suffers from impoverishment, but the least of which is that people volunteer to be poor.

The principal cause why many are poor is due to economic repression or policies that interdict people to trade, inhibit the exchange of ideas that leads to innovation and importantly suffer from lack of capital.

As Ludwig von Mises once wrote, [bold highlights mine]

What distinguishes contemporary life in the countries of Western civilization from conditions as they prevailed in earlier ages, and still exist for the greater number of those living today, is not the changes in the supply of labor and the skill of the workers and not the familiarity with the exploits of pure science and their utilization by the applied sciences, by technology. It is the amount of capital accumulated. The issue has been intentionally obscured by the verbiage employed by the international and national government agencies dealing with what is called foreign aid for the underdeveloped countries. What these poor countries need in order to adopt the Western methods of mass production for the satisfaction of the wants of the masses is not information about a "know how." There is no secrecy about technological methods. They are taught at the technological schools and they are accurately described in textbooks, manuals, and periodical magazines. There are many experienced specialists available for the execution of every project that one may find practicable for these backward countries. What prevents a country like India from adopting the American methods of industry is the paucity of its supply of capital goods. As the Indian government's confiscatory policies are deterring foreign capitalists from investing in India and as its prosocialist bigotry sabotages domestic accumulation of capital, their country depends on the alms that Western nations are giving to it.

Finally American exceptionalism can be represented by the state of US dollar functioning as the world’s premier currency reserve or forex anchor.

From Google

Looking at the above, I’d say that American exceptionalism has been on a decline and will likely suffer from a further loss of competitiveness, in the condition that her government continues to implement policies that corrodes her “unique American ideology”.

Will Traffic Cameras Bring Discipline To Philippine Motorists?

Philippine authorities and the local media think that they’ve found the antidote against erring motorists-traffic cameras!

From the Philippine Star,

The MMDA said its enforcers, armed with cameras and speed tracking guns, will man strategic portions of the highway to make sure motorists observe the speed limit. Violators caught on camera and tracked by speed guns will be sent notices within seven days, following the agency’s “no contact” policy.

Unfortunately, as always they are likely to be wrong. That’s because the relationship between speed cameras and accidents have been ambiguous.

This from the Economist, (bold emphasis mine)

TRAFFIC cameras are always controversial. Proponents maintain that an increase in their number results in fewer deaths on the roads. Opponents grumble that they are merely money spinners for local governments at the motorist’s expense. Drivers in Edmonton, Canada, will be refunded for speeding fines issued since November 2009 because of a technical glitch with a particular camera. In Britain, the government’s claims over improved safety were rebuffed by the British Medical Journal, and local councils have begun to turn off cameras. Research carried out recently in Australia by Queensland University points the other way, showing cameras do reduce accidents. The arguments will continue. Our chart shows that the effectiveness of traffic cameras is inconclusive, perhaps because many other factors contribute to road safety, such as population density, the condition of vehicles and roads, and other pedestrian-protection measures.

Authorities are likely to underestimate people’s reaction towards new rules and overestimate on their power to control or regulate people’s behavior.

Yet such “do something” attitude would likely succumb to the ningas cogon trap (enthusiasm only at the start of the project) brought about time consistency problem (popular policies are put in place due to the public’s fickle demand for it) and political grandstanding by the authorities that would lead to inconsistent and arbitrary implementation (in pursuit of popularity, new policies and its implementation will be redirected towards issues or flavors of the day).

Bottom line: Government use of taxpayer resources on these “fashionable” policies will likely end up wasted, the government will fail to accomplish its goal, and at worst, such new policies risks unforeseen consequences.

The Politics of The Rice Scam

This from today’s Inquirer

An NFA audit found that 8 of the 10 awardees of the rice importation quotas in Luzon were all cooperatives with offices in Pangasinan province, said a source privy to a Malacañang probe of the previous administration’s massive rice importation program that the NFA said was overpriced....

In his report to Mr. Aquino last week, Banayo said the private importation deals were given to favored contractors supposedly through a questionable first-come-first-served scheme.

“Among the findings were: fictitious cooperatives and corporations were given the quotas, and qualifications standards were extremely liberal,” Banayo said in his executive summary submitted to the President.

Some comments...

In politics, the basic objective for the politicians is to grab credit (aimed at attaining high approval rating for election purposes) at the expense of another. This is usually coursed through the virtuosity (I am clean, the other is dirty) route. It represents crab mentality at its finest.

This issue is actually a revival. We dealt with this here: Government Failure: Imported Surplus Rice

The above news account exemplifies-special access or political privileges, privatizing gains while socializing losses or importantly the fundamental symptoms of the maladies of political distribution empowered or enabled by arbitrary laws. This maybe called either crony capitalism or rent seeking (state capitalism) or both.

Since it is the state who determines “who gets what” or the politically picking winners and losers (and not via the market forces through the price mechanism), the obvious result is inefficiencies, distortions, wastages (overpricing), and corruption. And who pays for all these? Obviously, the taxpayers.

Once politics is involved, economic calculation is set aside, as politics become the driver of the attendant actions by the leadership to redistribute resources. “Overpricing” thus becomes a politically subjective factor. (Based on which price level? As determined by whom? And when?)

This of course, is related to the problems of time consistency or the political sustainability of the policy over changing circumstances. The rice scam was an urgent issue during the Typhoon days of Pepeng and Ondoy. Today, with the urgency lost, wrong and questionable political decisions become a fodder for politicking.

This also represents as the knowledge problem, where the political leadership don’t know the costs and consequences of their actions (since they are just human) and the where unintended consequences of politically based actions extrapolate to a huge negative externality (side effect) on the populace.

The point is the problem isn’t mainly based on the virtues of the political leadership, but on the system that encourages such errant actions and malfeasances. Personality based politics won't solve the problem.

Lastly when the political leadership says “Let us reform the NFA. Let us reform its mandate so it will be much better”, the answer shouldn’t be in the direction of more political concentration and distribution of resources, but economic liberalization from the clutches of power hungry politicians.

In short, let the markets decide!

Government Failure: Imported Surplus Rice

Looking at the headlines we observe that the Philippines seem to jump from one crisis to another.

I’d say such crisis is a lucid manifestation of the failure of government interventionism or government meddling.

Of course, many would make other insinuations (corruption) mostly emphasizing on the devious intent of the previous administration.

But I would argue that these are the effects and not the cause of the present problems.

The latest hullabaloo is that government imported too many rice says the headline. This from the Inquirer.net,

The group was reacting to a report on Tuesday by Banayo that the country was “swimming in rice” because the Arroyo administration had imported seven times more than the country’s needs.

Banayo said that the NFA under Arroyo had authorized the importation of some 20,000 metric tons of rice estimated at P100 million in late April or May despite the oversupply in the local market. He said that the shipment had started to arrive at Poro Point in La Union.

Mr. Aquino on Monday said that rice was rotting in warehouses while the NFA had accumulated debts totaling P177 billion.

This seems to be a wonderful example of time inconsistency or the sustainability of a policy given the changes of the circumstances over time.

Back in the October 2009, post Typhoon Ondoy and Typhoon Pepeng, headlines yelled fire! These typhoons wrought devastation on our rice production!

'Ondoy', 'Pepeng' hit areas producing 56% of RP's rice, bannered the ABS-CBN headline. And this article accompanied the table, as shown above, which depicted on the estimated scale of damages.

And because of this, the Arroyo government reacted to the calamity by...you guessed it...importing the problematic rice of today.

Below was media’s sentiment immediately during the post Typhoon days, according to GMA news,

Estoperez, however, said that while the damage caused by Ondoy and Pepeng would definitely have a negative effect on local rice farmers, a rice crisis in the coming year is a remote possibility.

“We have enough rice supply for the remainder of the year, and the DA is taking steps to mitigate the effects of the damage so we could have enough rice for next year," he said.

He said the prices of NFA rice will remain stable, including the subsidized P18.25/kilogram for qualified poor families, and the P25/kg rice.

He also said that the DA, on orders of President Gloria Macapagal Arroyo, is planning to import rice earlier than scheduled this year to prevent a possible rice supply crunch in 2010.

The article even cited an NGO study who said that the government ‘downplayed’ the impact of the typhoon on the rice fields which lent a sense of urgency to the missive.

The Arroyo Administration even tried to dramatize the impact of the calamity by declaring price controls, which I argued, could have used been as justification to declare martial law and a postponement of elections.

Yet, then, NOBODY averred that imported rice would pose as a problem because the POPULAR issue of the day was the looming risk of a RICE CRISIS.

Now, since NO rice crisis have emerged, the Arroyo government gets slammed for what is seen as an improvident or even perverted action.

To put in perspective, in 2009 importing rice was deemed as politically correct, today it is politically wrong. The change in circumstances results to a corresponding change in the political climate. So a time inconsistent policy.

I’d further add that such policy faux pas represents as government’s knowledge problem.

In other words, government simply DOES NOT know the future and the specific needs of the society enough to justify repeated interventionism.

Obviously, the miscalculation resulted to massive wastages and economic distortion which presently adversely impacts the local farmers. Hence, the crisis.

One could add icing on the cake by saying that the previous administration used the incident as political cover to profit.

Whether this is true or not, it is the nature of politics to attain credit by attributing sensationalism and discrediting foes.

In short, instead of analyzing the genuine cause of the failure, just blame the personality involved as this would be the fashionable thing. Nevertheless, the offspring of interventionism is corruption.

Yet all these three factors combine to reveal why government interventionism is not only wrong, but immoral and a waste of capital.

Of course if you listen to politicians, their solution is more of the same.