Abolish the Penny!

I would guess that virtually everyone living in the US has at one point or another been annoyed with the penny - a coin that is worth virtually nothing, hard to get rid of, and that tends to somehow accumulate in one's wallet rather quickly. Greg Mankiw has been arguing for abolishing the penny for a while and several stores in Concord, MA have recently been trying the idea. While this is obviously not a very serious issue I do think that it's a very sensible one and I think it would change things for the (ever so slightly) better:

“Being right across from the train station, we have long lines before trains leave and pennies make it worse,” said Fersch. “Further, there is a lot of lugging them from the bank, dropping them, not being able to reconcile register receipts and so on. Plus, mining zinc is an environmental nightmare, and it costs the government more to make pennies than they are worth. Finally, they have minted thousands for every man, woman and child. Where do they all go? If they were truly worth anything they wouldn’t end up in coffee cans, vacuum cleaners or sofas. It is simply a tax, which raises no revenue.”

Finland (a country generally very open to innovative ideas) followed by the Netherlands have already abolished both the 1 and 2 Euro cent coins with great success:

A survey in 2004 found a majority of citizens wanting the one and two cent coins to be withdrawn across the eurozone, support being highest for the withdrawal of the one cent coin. However, citizens in Germany were most vocal in the support of keeping the coin. At present, the three copper coins together represent 80% of all new coins minted in the eurozone.

Having visited Finland twice I have to agree that this was extremely convenient, except when trying to get 1 and 2 Euro cents for a collector friend and having to spend 10 Euro on a set of coins worth less than 4 Euro because the 2 coins are now so hard to find.

When Genius Failed - The Rise and Fall of Long Term Capital Management

I just finished When Genius Failed - The Rise and Fall of Long Term Capital Management by Roger Lowenstein and as someone who was not following financial news back then it is very interesting to read it now given the events of recent months. The risks of excessive leverage, the increasing appetite for risk taking during prolonged economic upswings, and the lack of understanding of complex derivatives all played a major role in both the collapse of Long Term Capital Management and the current crisis:

The system of disclosure that worked so well with regard to traditional securities has not been able to do the job with respect to derivative contracts to put it plainly, investors have a pretty good idea about balance sheet risks, they are completely befuddled with regard to derivative risks.

Another common element has been Alan Greenspan's refusal to step up regulation, even after witnessing several failures that could have destabilized the entire financial system:

Greenspan's more serious and longer-running error has been to consistently shrug off the need for regulation and better disclosure with regard to derivative products. Deluded as to the banks' ability to police themselves before the crisis, Greenspan called for a less burdensome regulatory regime barely six months after it.

His recent admission that he found a "flaw" in his system was widely talked about but even know Greenspan is unsure of how "significant or permanent" this flaw is. His argument that the investors financing LTCM were putting their own money at risk and would therefore implicitly regulate it by only lending to it if it were credible is patently absurd - thinking that a market will adequately price a particular asset is one thing, thinking that a relatively small number of investors will always be able to assess the risk of a complex (and in the case of LCTM secretive) counterparty is quite another. Furthermore, it should also be clear that tolerance of risk increases when investors have not suffered major losses for a number of years and that this has historically led to excessive risk taking. LTCM itself believed that the markets were not rational in the short term and nobody should believe that individual financial institutions will be rational in their lending. As Warren Buffet points out Meriweather, Haghani, Hilibrand, and the crew had all invested almost all of their own money and still made a colossal misjudgment.