Contracts –Waiver of liability for fraud (bar review note) – repost

[originally posted in July, 2009]

Here comes a “movement” that proclaims itself to be “apolitical, inclusive … based on the principle of volunteerism.”  It calls itself AKO MISMO, and it vows the greatest of intentions (to promote “positive change”), but it is run by an advertising agency, DDB Philippines.  A number of celebrities have lent their names and images as supporters of this movement, among them Arnel Pineda (a vocalist), Ely Buendia (a musician), and Maxene Magalona (an actress).

Continue reading “Contracts –Waiver of liability for fraud (bar review note) – repost”


Senior Citizens of Makati – Know Your Rights in Traffic

[Blast from the past: April 25, 2013 at 1:29am]

The traffic law has since been re-written (see below).  But a bit of this post is still relevant.

This is almost a tongue-in-cheek note.

On April 23, 2013, I was stopped by a traffic enforcer on Buendia in Makati. He claimed that my car was “smoke belching.” Quietly, I argued that I maintained my car in good shape and smoke belching is not an issue. He asked for my license and car registration, which I politely and promptly gave him to inspect.

He then talked about a “manual test” of my exhaust, and informed me that if the car failed the test he would confiscate my car’s license plate. I protested that as far as I knew there was no authority for him to confiscate my car’s license plate.

After a little bit of hemming and hawing by the enforcer, I gave him my senior citizen ID, and informed him that I am a resident of Makati. His response was to consult with another traffic enforcer. His tone of voice changed from one of threat to one of exasperation. Finally, he said he would let me go because, according to him, senior citizens were “exempted” from traffic violations.

In my mind I hadn’t heard of such a rule, but I simply thanked him for letting me go. I don’t know whether what the enforcer told me was true or correct.

Still, I have the following suspicions:

One, the smoke-belching story is just another ruse to extort money. It may work against public use buses and jeepneys, but an informed motorist should resist such an extortion attempt (politely, of course).

Two, the enforcer did not have any authority to apprehend a private car on smoke belching. (Subsequently, from the MMDA website, I learned that as a motorist, I have the right to ask for the enforcer’s mission order, and the scope of his authority in this regard.)

Three, the idea that senior citizens are exempt from traffic rules is ridiculous. But let it be. Perhaps this was just the enforcer’s way of saving face because by then he decided that I would not offer him a bribe.

Four, the traffic enforcer was abusing his position. A reading of official pronouncements from the MMDA suggests that the authority of an enforcer to issue a TVR while confiscating a driver’s license is limited to instances of a crime, accident, or certain administrative violations by the motorist, such as a tampered taxi meter in the case of a taxi. Outside these circumstances, the enforcer may not confiscate a driver’s license. The official rules also state that under certain conditions, the enforcer may detach the car’s license plate. One such condition is when the motorist refuses to surrender his driver’s license. (I am not sure what other conditions will allow a traffic enforcer to confiscate a car’s license plate.)


NB.  The new traffic law of 2014 has changed some of the rules of traffic enforcement.

New Rules for 2014

The new rules do not allow the confiscation of license plates, but allow the impoundment of vehicles if they operate with smoke belching (determined by observation), or have modified equipment (presumably, illegal modifications).  The penalties are the same for cars, trucks, and motorcycles, which means that those with motorcycles are vulnerable for impoundment for even very minor equipment violations, such as those pertaining to mirrors, mufflers, and lights. A motorcycle owner with three equipment violations faces a fine of P15,000 and impoundment on the spot.

(Whether this is an unreasonable deprivation of property without due process seems a proper constitutional challenge, as well as a violation of equal protection since the fine for a truck with faulty brakes or unsafe tires is P5,000, the same as for a motorcycle with ‘modified’ wheels or tires.  Also, the determination of what is street-legal for equipment seems to be vulnerable to abuse of discretion on the part of the enforcement officer.)

The old traffic violation receipt (TVR) is back, even for minor violations, but now called TOP (temporary operator’s permit).  The penalties are lesser for driving without carrying the driver’s license, relative to driving without any license at all.  This means that  the old TVR/TOP extortion schemes won’t work so well if you carry only a copy of the original license with you.  You may show the enforcing officer the copy of your driver’s license, so he can charge you with not carrying the ‘real’ license, but he can’t inconvenience you with having to go to LTO to retrieve your license.  You now have 30 days to pay the fine, after which the LTO can suspend the license, whereas the TOP (if the enforcement officer has ‘confiscated’ your license) is valid for only 3 days.

The LTO is in charge of collecting fines, and allows a motorist five days to file a written contest of the charges.  After that period, the motorist is deemed to have admitted the violations on the traffic ticket. The five-day period seems to be there to provide a kind of due process protection, and test cases of contests raised on appeal to a higher authority than the LTO can be raised by concerned citizens.


Economics in disarray

Economics has problems. Because of Samuelson, it got a half-century case of physics envy. Then people read Schumpeter and McCloskey, and realized economics can’t predict a whit. Economics became useful (ex post) stories, a bit like archaeology or geology.

Then came The End of History (1989) and The Great Recession (2008), and weirdos still talk of evolving economics, but into what they can’t explain. Like Marx redux, they blame ‘capitalism’ or neoliberals, though they can’t go whole hog back to old-style apparatchik economics. Some think that the missing link is a co-equal infant science called psychology.

What to do? At one point, one way out was to study ‘institutions.’ But this seemed like hard work — too much scholarly pain for little gain. But gains there were if you read Coase or Ostrom, or (if you want Keynes to shudder) Hayek.

Perhaps that’s just the way it is. Economists are more like chickens with no heads but imaginarily pecking away at crumbs of intellectual progress. Some toil away at saving the world from falling over a cliff, much like Salinger’s Catcher in the Rye. That’s at least humanitarian if mostly unheralded.

Keynes did say that economists should be more like dentists. Dentists are good guys who help people prevent cavities and enable them to smile. The economist can then go home after a day’s work knowing the economy will still do its wayward thing but not die.

What next, after 2008? A book review

Mervyn King (The End of Alchemy, W. W. Norton, 2016) has a message. We are not safe. The economics profession has failed us. So have the economic policy makers of the US, Germany, China, and Europe. The banks still play a game that King calls ‘alchemy.’ Central banks won’t or can’t escape the infamous Keynesian liquidity trap. And we are prisoners facing dilemmas, macroeconomic policy is a paradox, sovereign debts are unbearable, and the world is full of ‘radical’ uncertainty.

In short, what we have today is pretty much a lull before the end of the world; 2008 was just the preview trailer. Alternatively, the world may not end but it will take a long while for robust economic growth to re-emerge, and there is very little that can be done about the matter. Either way, it’s a sobering conclusion.

Is the book worth reading? Yes, if only to get a handle on how central banks thought as they dealt with 2008 and its immediate aftermath. In addition, the curious but uninitiated reader gets introduced to the concepts of Prisoners’ Dilemma, the Keynesian Liquidity trap, liquidity transformation by banks, and the difference between risk and uncertainty.

King’s book also contains a longish but bureaucratic take on why 2008 happened. King gets to it on pp. 26-39 and pp. 317-328. Going by his view, as well as that of others in the fields of central banking and macroeconomics, the ‘conventional wisdom’ on 2008 might be summarized as follows.

It began with the fall of the Wall in 1989, also known as The End of History, that ushered in the Great Stability, an era of low inflation and robust economic growth all around. The main central banks finally imbibed the religion of the Quantity Theory in the 1990s and early 2000s, making themselves accountable to the public through pledges to abide by (low) inflation targets. King calls this period The Great Stability. (Never mind the hiccups of the 1997 Asian crisis or the bubble-crash of dotcoms in 1997-2001.)

Beneath the gloss of prosperity were gathering problems. Banks were raising their leverage in the hunt for profit. Prices in stock and real estate markets outpaced inflation of everyday goods, and central banks felt that paper wealth was not a worrisome thing (after all, one cannot eat stocks or houses), and the US Fed actually thought it would boost consumer spending. Some countries pushed their luck with foreign borrowings, notably Greece, Italy, Ireland, Portugal, and Argentina.

The failure of Lehman Brothers in September 2008 is considered the trigger of the crisis. It was, with hindsight, the outcome of the unexpected fall of real estate prices in the summer of 2007 and associated mortgage defaults in the US. The failure exposed the extreme leverage in the US financial system, and with banks unwilling to recognize their paper losses in the derivatives market for sub-prime mortgages, a run for liquidity, called The Great Panic, ensued. The panic was arrested only by official rescues. Consequently, in 2008-2009, the financial crisis affected real economies, with world trade falling and global GDP decelerating into The Great Recession.

King, as do other observers such as Edwin Truman, believes that underlying macroeconomic imbalances were also to blame. The extreme example often cited was the ‘savings glut’ in China that fueled ‘overconsumption’ in the US. Supposedly, the excess saving in China was intermediated by the banking systems of both countries. The theory is that without such imbalances, there would have been no resources that could fuel the asset price inflation in the US and in other countries.

So far so good. King then ends up suggesting that the re-capitalization of major banks since 2008 is a good thing but probably not enough.

As to the book’s shortcomings, they are:

King seemingly ignores the work of Charles Kindleberger (Manias, Panics, and Crashes, 2005) where Kindleberger had formulated an economic model of financial crises, based on the work of Hyman Minsky. King does mention Minsky but in a somewhat negative light.

King nonetheless cites (on p. 34), with some tongue in cheek, two ‘laws’ on financial crises, which he attributes to Dornbusch. One is that ‘an unsustainable position can continue for far longer than you would believe possible.’ The other is: ‘When an unsustainable position ends it happens faster than you could imagine.’ It is of course almost vintage Minsky.

And yet, to date, the economics profession’s best ever model of financial crises still seems to be the Kindleberger-Minsky model. That model cannot be used to make precise predictions, but it does give the best explanation, ex post, of how a financial crisis plays out. The major central banks had been using, in 2008, something called DSGE (‘dynamic stochastic general equilibrium’) macro models. These models were not at all designed to incorporate Keynes’ deus ex machina of ‘animal spirits,’ except as ‘shocks’ external to the structure of DSGE models, which meant that the central banks had essentially no inkling of the crisis before it hit. The IMF insiders called it ‘group think.’

If we could ask Kindleberger or Minsky today on their views on 2008, most likely they would say that it fits their model that sees a financial crisis in three parts — mania, panic, crash. The story is not much different from King’s, except that Minsky would give greater emphasis on the trigger of 2008 as one rooted in overconfidence, what Greenspan had called ‘irrational exuberance.’ That there had to be other villains is a given. In 2008, they included the toxification of bank balance sheets (with inexplicable financial derivatives) that was an outcome of a ‘deregulation’ tilt that allowed subprime debts to be brazenly sold by lenders as ‘almost prime.’ Since King doesn’t like the fractional reserve nature of modern banking, he gives more emphasis to the alchemy-like leveraging that modern banks practice. In effect, King would not disagree with Minsky that it was a kind of Ponzi game that allowed banks to trap themselves into a corner that would eventually ‘blow up.’

This comparison of models means that King’s main proposal — his view that central banks should act like a ‘pawnbroker for all seasons’ — to narrow monetary base creation to ‘safe’ banks, while widening the securitization of other lending by bank-like institutions, is just another way of allowing excessive exuberance to be seen as a can to be kicked down the (future) road of ‘fundamental uncertainty.’ In short, since King has set up the medium and long term as a problem of fundamental uncertainty, there isn’t much that central banks or governments can do to tame business cycles. That is not different from Minsky and his ‘moments.’ There is an inexorable underlying tension between free capital markets and macroeconomic management by governments and central banks, something Robert Shiller and others had more or less also observed (see Shiller and Akerlof’s Animal Spirits, 2009).

King does not quite succeed in explaining the arcana of modern economics in the areas of: (a) how Keynes was co-opted into the ‘neoclassical synthesis’ (King merely says that Keynes was at odds with ‘neoclassical economics,’ a basic lesson from an introductory economics class); (b) the ‘paradox of policy,’ where he asserts that the short-run need to overcome the liquidity trap is inconsistent with the need in the long run to let the private sector decide how to correct ‘structural imbalances’ in the economy; and (c) how ‘fixed’ exchange rates and differences in saving rates across countries lead to ‘imbalances’ that in the long run need to be addressed.

It appears that it is up to others to try to make better sense of what King wants to recommend as a way out of the economic doldrums post-2008. Perhaps this explains why the book blurbs on the outside back cover hint of mystery amid faint praise from the usual suspects.

Bitcoins are forever

This is a story of mania, panic, and crash. It’s not new. 

Today’s market cap is roughly $150 billion. Averaged over, say, 3 million holders, that’s $50,000 each. Peanuts, if you belong to the 1%.

The trick is to kite the price to anywhere from 5 to 20 times the current level of $4,000.

The sales are essentially wash sales, as coins just go round and round. That’s why they’re coins, see.

Spectators – the victims – then want in, and the insiders pump and dump swimmingly, until the 3 million can get out with huge profits, at the expense of the latecomers.

The end is a classic Minsky Moment, when the latecomers try to sell. The algorithms in the trading platforms would ask: ‘To whom?’ And the price spirals to nothing.

Question for economists: Can the end trigger a financial or economic crisis? A dire scenario is that the latecomers’ loss results in bankruptcies and loan defaults, a retrenchment in purchases of housing and consumer durables, or in a general malaise in business and consumer confidence. Banks may fail if they finance bitcoin purchases.

With the benefit of foresight, monetary authorities will likely institute safeguards. Trading platforms are like banks, and will need adequate capital in case of an epidemic of ‘fails,’ which can happen if traders engage in short sales, or in margin trading. The Know Your Customer rule will have to be integrated into the block chain data base, and imposed by banks on customers operating trading platforms. 

Of course, theoretically, since virtual currencies can function as money, all trading can take place outside the banking system. If that were the case, the ponzi won’t work: How would the victims’ money enter into the bitcoin system? The price would go up and down forever, but that’s all. It’s funny money after all.

Virtual currencies and their institutions

Or why Bitcoin and its variants are risky assets.

It’s fair to say that virtual currencies need block chain. Block chain is an essential or necessary innovation behind such currencies. That block chain is not sufficient becomes obvious when we consider the question of how many virtual currencies can exist.

This is pretty much a question in institutional economics. It would be like asking which fiat currency would dominate global transactions.

Ronald Coase’s transaction-cost theory of the firm probably has the answer.

The dominant virtual currency is the one with the least transactions cost. While trust is an unmeasurable element that reduces transactions cost, transaction cost can itself be measured.

There are other factors along with trust that augur well for the dominant virtual currency. Among these factors are:

It should have ‘standing’ with central banks if only because they issue legal tender, whereas virtual currencies are not.

Its value in terms of the dominant fiat currencies must be reasonably stable. For now, the leading virtual currency, Bitcoin, fails.

Also equally important is transparency in its creation and modification. It seems that users of a virtual currency will need at least an unwritten constitution that lays out the fundamental laws of the community of users, even if they wish to be as ‘decentralized’ as possible. Again, here, Bitcoin fails, as can be seen with the ongoing ‘fork’ controversy over Segwit2.

CONCLUSION. It’s too soon right now to say that Bitcoin is here to stay.