Let Them Try to Eat Cake!

A story of fibs and justice....from the LMM.

Alice Grayson was to bake a cake for the Baptist Church Ladies' Group in Tuscaloosa, but forgot to do it until the last minute. 

She remembered it the morning of the bake sale and after rummaging through cabinets, found an angel food cake mix & quickly made it while drying her hair, dressing, and helping her son pack for scout camp. When she took the cake from the oven, the center had dropped flat and the cake was horribly disfigured and she exclaimed, "Oh dear, there is not time to bake another cake!" 

So, being inventive, she looked around the house for something to build up the center of the cake. She found it in the bathroom - a roll of toilet Paper. She plunked it in and then covered it with icing. Not only did the finished product look beautiful, it looked perfectly delicious.  (MORE AFTER THE JUMP)

Lagarde unguarded in the Guardian

Mister Burns, er, a freakishly tan IMF chief Christine Lagarde gave a fascinating interview on, among other things, her views about the Greek debt crisis.

Here's a great excerpt:

So when she studies the Greek balance sheet and demands measures she knows may mean women won't have access to a midwife when they give birth, and patients won't get life-saving drugs, and the elderly will die alone for lack of care – does she block all of that out and just look at the sums?

 "No, I think more of the little kids from a school in a little village in Niger who get teaching two hours a day, sharing one chair for three of them, and who are very keen to get an education. I have them in my mind all the time. Because I think they need even more help than the people in Athens." 


She breaks off for a pointedly meaningful pause, before leaning forward. "Do you know what? As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax." 


 Even more than she thinks about all those now struggling to survive without jobs or public services? "I think of them equally. And I think they should also help themselves collectively." How? "By all paying their tax. Yeah." 


 It sounds as if she's essentially saying to the Greeks and others in Europe, you've had a nice time and now it's payback time. "That's right." She nods calmly. "Yeah." 


And what about their children, who can't conceivably be held responsible? "Well, hey, parents are responsible, right? So parents have to pay their tax."

Wow, ok. So taxes fix every thing eh, Christine?

And, while the sentiment on poor children in Niger is quite noble, the IMF doesn't do squat about education in Niger. A restructuring/forgiveness of Greek debt is not going to cut aid to Niger.

The IMF was asleep at the wheel as Greece loaded up on debt and became totally uncompetitive. The IMF was asleep at the wheel as the Eurozone drifted into untenability. Now its head is blaming the Greek people and implying that if they'd just do the right thing and pay their taxes, there would not be a problem.

And that's pretty much a pile of horsesh*t.

Nero and Caligula are a' feudin'!

Well, OK, it's actually Sarkozy and Berlusconi, but that's more than close enough. Sarky is really worked up about the ECB, which is good, except what he's worked up about is that there might be two Italians and (gasp) no Frenchmen on its board come November.

Really.

Yeah, Nicky, that's really the problem that you should be focussed on. Well done. At least you are proving that you play a mean fiddle.

At the latest rescue summit, these two giants of statecraft managed to feud over the future of one, Lorenzo Bini Smagi (aka the Lusitania?):

Sarkozy has made clear that France wouldn't accept a situation under which Italy would have two of its nationals on the board and France none, when Frenchman Jean-Claude Trichet is replaced at the helm of the Frankfurt-based bank by Draghi in November.

After repeating in piqued diplomatic language Friday that it expected Bini to quit the ECB board to honor a commitment he made this summer to step down by year-end and clear the way for a French official to join the ECB board, the French government appeared to be losing its patience.

But Berlusconi argued it was none of its responsibility. "We offered him prestigious posts, but Bini Smaghi declined them all," Berlusconi said, adding that he bore no responsibility in the spat. "At a certain point, I asked [ Sarkozy]: What should I do? Kill him?"

Are firms acting irrationally by not investing more?

In an amazingly hubristic NY Times opinion piece, Richard Thaler tries to nudge American companies into doing the right thing:

Corporations are hoarding cash at record rates. The Federal Reserve recently reported that nonfinancial companies in the United States were holding more than $2 trillion in cash and other liquid assets — money that is earning next to nothing. A considerable amount of that cash has been accumulated in the last two years — and the totals exclude the substantial sums the companies hold abroad in foreign subsidiaries. Of course, it can be sensible for businesses to have a source of emergency cash, but many appear to be stockpiling so much that it’s hard to imagine what emergency they fear. To cite just one example, Google is holding more than $39 billion in cash...

Yet is such caution rational? As a shareholder, I would worry about a company that says it can’t find investments that can reasonably be expected to earn well above the tiny return of its cash.

Investment does not necessarily have to involve increasing capacity. Are there no plants or equipment that need upgrading? No promising research-and-development opportunities to be explored? Not even any parking lots that need to be repaved and painted?

I also do not buy the idea that companies need all this cash for acquisitions. If they really want to buy another business, they can issue stock to do so.

It's pretty hard to unpack all the errors/hubris in this quote, but let's try.

The biggest error Thaler makes is that he implies that the idea that firms are acting irrationally by delaying investment can be confirmed by the fact that positive NPV projects are not being done.

"Yet is such caution rational? As a shareholder, I would worry about a company that says it can’t find investments that can reasonably be expected to earn well above the tiny return of its cash."

The problem with this "logic" is that it is contradicted by the entire body of modern economic literature on investment. The literature shows that there is an option value to waiting to invest until conditions are favorable.

See for example "The Value of Waiting to Invest" by McDonald & Siegal (QJE 1987 cited over 2000 times according to Google Scholar) or "Waiting to Invest: Investment & Uncertainty", by Ingersoll & Ross (Journal of Business 1992 cited over 350 times according to Google Scholar).

Here's a crucial sentence in the Ingersoll & Ross abstract:

"The ability to delay a project means that almost every project competes with itself postponed"

The second mistake Thaler makes is downright embarrassing. He seems to assume that investment by firms is actually zero!

Are there no plants or equipment that need upgrading? No promising research-and-development opportunities to be explored? Not even any parking lots that need to be repaved and painted?

Umm, what evidence does Thaler show that these routine tasks are not being undertaken? Firms are sitting on a lot of cash, but firms are also currently investing over $1.5 trillion dollars (in 2005 dollars) this year. That should be enough to pave a few parking lots.

Finally, Thaler informs us that: "I also do not buy the idea that companies need all this cash for acquisitions. If they really want to buy another business, they can issue stock to do so."

Amazing! This is true just because he says so? The horrible condition of the stock market, the problems in the IPO market (which is different but clearly related) are apparently irrelevant; just issue stock, you bungling morons!

This is really one of the worst editorials I've ever seen by a respected economist.