The Capital Letter

Bubbles, GameStop, and Political Opportunism

An employee talks with a customer at a GameStop shop in New York City, January 30, 2021. (Nick Zieminski/Reuters)
The week of February 1: Bubbles, regulators, GameStop, Biden’s green agenda and much, much more, including the latest in our new podcast series, the Capital Record.

GameStop’s trip to the moon has run into what members of a more laconic generation would have described as a “problem,” but the “rational bubble” that was the almost inevitable result of the way that the Fed has helped suppress interest rates (meaning that investors are forced to look somewhere, anywhere for return) looks less and less rational as the weeks go by. Meme stocks! Electric vehicles! SPACs! Junk bonds! Dogecoin! And there are many more bubbles to choose from.

Sooner or later, most or of all of them are likely to burst. If that happens, the situation will be made much more treacherous by the increase in direct investment in equities (or, more perilous still, derivatives) by retail investors during the current bull run, both financially (people will get wiped out) and, in the angry aftermath, politically. Although much “institutional” money is, in reality, retail (as it is an aggregation of individual savings or retirement funds), the fact that it is lodged in a fund creates a certain psychological cushion for investors (I wouldn’t overestimate this, however: There were plenty of bitter jokes about “201ks” after the dot-com crash, the financial crisis, or both), at least for those who are not too close to retirement age. After all, don’t “all” funds go up in the end? Answer: no, or, possibly not for a very long time. Nevertheless, this happy illusion can dull some of the pain that comes with a market crash.

By contrast, the individual investor who loses money in a particular stock is much more likely to understand that what is lost is lost for good. Perhaps the company in question has gone bust or been saved in a restructuring that has left the old shareholders with next to nothing. Or perhaps the realization will dawn that the madness of crowds rarely strikes in exactly the same place twice. As Michael Mackenzie notes in an article for the Financial Times on speculative bubbles, “buyers of Intel and Cisco at the peak in 2000 are still waiting to see a new high.” Or look at Nokia, which managed to reach over $53 in June 2000, but now, despite (briefly?) achieving stonk status (it soared to $6.55 on January 26) is languishing at around $4.20 at the time of writing, 20 cents above where it was at the beginning of the year.

Then there’s Tesla, another name with a strong retail following.


[Tesla’s] shares have risen tenfold since March last year to value the company at $830bn, a market capitalisation beyond its future earnings prospects and one that towers over established giants including Toyota, Volkswagen, Ford among others.

Electric vehicles may well be what is coming our way, but, however disruptive a technology EVs will turn out to be, and however much of a force in promoting that technology Tesla has been, that looks to me a lot like a valuation that assumes a dominant position in an uncompetitive market. Those are two big bets.


Another bubbly note resounds via a Goldman Sachs index of technology sector shares that do not produce profits. This basket has surged by nearly 400 per cent from March, having largely muddled along since its inception in 2014.

Mackenzie quotes Charles Kindleberger, the author of Manias, Panics, and Crashes: A History of Financial Crises: “There is nothing as disturbing to one’s wellbeing and judgment as to see a friend get rich.” That, and the fear of missing out, can drag retail investors in, and, for that matter, not only retail investors. I have never forgotten being told, sometime in 1999, by a hugely successful (value-oriented) hedge-fund manager that he was scrabbling around for the “least bad” dot-com stocks to buy. His institutional clients were making it very clear that they too did not want to miss out.

Making matters more dangerous still is, as mentioned above, the effect of distorted interest rates and — as has been made very clear by the GameStop saga — the ease and cheapness of direct access to the markets, not to speak of swollen saving rates, boredom among the stuck-at-home and, yes, some technical savvy.


Technology provides retail investors with plenty of market information and the ability to trade up a storm through online brokerage accounts. Among their ranks are former and current professionals with personal trading accounts. They are also emulating what Wall Street has long done. Squeezing hedge funds such as Melvin Capital which committed the cardinal error of being stuck in a very crowded trade, has a long history among professional traders.

How bad could the crash-to-come be? Mackenzie includes a link to some commentary by John Hussman of the Hussman Investment Trust, which makes for some depressing reading (#understatement) even if the gloom is alleviated by lines such as these:

It’s fitting that amid the conversion of the financial markets into a speculative online casino, the most extreme short squeeze has involved a company that sells video games.

Anyone long the market, which one way or another, is a large portion of the U.S. population, should only click on the link after they have consumed one stiff drink and prepared another. Before passing through that grim portal, however, click on this link, which will lead you to a chart (prepared by Jesse Felder) showing a spike in the ratio of margin loans to GDP, and as spikes go . . .

Just in case anyone fails to get the message, the chart is accompanied by a quote from John Kenneth Galbraith’s The Great Crash 1929. Galbraith was frequently wrong, but not when he wrote this:

Even the most circumspect friend of the market would concede that the volume of brokers’ loans — of loans collateraled by the securities purchased on margin — is a good index of the volume of speculation.

In his commentary, Hussman quotes James Grant:

The way to wealth in a bull market is debt. The way to oblivion in a bear market is also debt, and nobody rings a bell.

That’s worth remembering.

Mackenzie warns that “the growing prominence of retail investors means any big drop in equity values will resonate deeply across the broader economy.” That’s true, but the trouble is unlikely to stop there. As I alluded to above, to think that there won’t also be ugly political and/or ill-crafted regulatory consequences from a sell-off that endures is to have learned nothing from the aftermath of both the dot-com crash and the financial crisis.

As it is, politicians are already circling. It is not a good sign that an early focus of their ire was against Robinhood for doing (so far as we know, so far) the prudent thing when it decided to restrict trading in GameStop and other meme stocks for a brief period.

Naturally, Elizabeth Warren (a recent and unwelcome addition to the Senate’s finance committee) has been on the case.


In a letter obtained by CNN Business, the Massachusetts Democrat called out Robinhood for “abruptly changing the rules” on individual investors last week by temporarily banning purchases of GameStop (GME), AMC (AMC) and other stocks backed by traders on Reddit.

Sadly, Warren does not appear to be a reader of the Capital Note as, in two pieces, Daniel Tenreiro has explained what seems to have happened. That explanation has evolved as more has been revealed, but one key point has not. For now, it seems that those trading restrictions still appear (in Daniel’s words) to have been “halted out of caution rather than corruption.”

Here is how Daniel explained last week what was going on:

Robinhood makes money by routing trades from its platform to large brokers, who compensate the company for its order flow. The larger the trading volume, the better for Robinhood. But Robinhood also makes money through various forms of lending, primarily margin lending to customers.

Robinhood customers can borrow up to two times the value of the cash they’ve deposited. A $2,000 deposit gets you $4,000 in stock-buying power. Because of the risk posed to Robinhood by margin lending, the company has “margin maintenance requirements” — a minimum amount of equity that customers must hold in each investment (usually 25 percent). If you use your $2,000 to buy $4,000 of stock, and the stock falls by 50 percent, you’ve lost your entire $2,000, but you still hold the shares in your account. In this event, Robinhood would issue a “margin call” requiring you either to sell the stock or deposit enough cash to ensure you don’t end up in the red . . .

From Robinhood’s perspective, the GameStop rally is beneficial insofar as it generates revenue from increased trading activity, but it is also extremely risky, because the brokerage platform is lending millions of dollars to retail investors buying a world-historically volatile stock. As more and more buyers have flocked to GameStop, Robinhood has lent out more and more money.

Separately, Robinhood also lends to short sellers. When a hedge fund wants to bet against GameStop, it borrows shares in the company from a broker such as Robinhood and then sells them. If the stock falls, the hedge fund buys back the shares at a lower price, pays the broker back, and pockets the difference. Considering GameStop has long been a Robinhood favorite, it’s reasonable to assume a sizeable chunk of the $5 billion in GameStop short interest was borrowed from Robinhood Securities, which reported $674 million in securities loaned in 2019. It’s unclear how much GameStop stock Robinhood has lent to hedge funds, but whatever the amount, they’ve been lucrative, commanding as much as 80 percent in interest due to the massive amount of money betting against the stock.

Not only did the short squeeze cut off Robinhood’s revenue from lending to short sellers, it may even have wiped out some of the principal. And if it had continued, it would have hit harder.

In the face of all these risks, a broker would typically increase margin requirements — reducing the amount of leverage allowed to its customers. Robinhood had already done so repeatedly, raising the margin requirement on GameStop first to 80 percent, then to 100 percent. Customers who did not meet those required amounts had their accounts locked. But GameStop is so volatile and so obviously overvalued that Robinhood presumably saw the risk of waiting for customers to deposit as unacceptable. And a meaningful increase in margin requirements would likely trigger a fire sale and effect the outcome Robinhood was trying to avoid.

So the decision to halt trading in GameStop is like a margin call on steroids . . .

But in the course of a Capital Note this week on Robinhood’s economics, Daniel discussed an extra twist.

First some background:

Robinhood is much more like a social network than a financial institution. Just as Facebook leverages its massive user base to sell ads, Robinhood leverages its user base to sell order flow. This is essentially risk-free arbitrage, because the risk embedded in those trades is immediately offloaded to market makers. If Robinhood executed the orders itself, it would have to hold stocks and options on its balance sheet to transact with its customers. Instead, Robinhood lets the army of PhDs at Citadel Securities handle the plumbing. The high-frequency traders minimize risk by executing orders as quickly as possible and hedging their market exposure.

And then:

Although market makers execute Robinhood’s order flow, the brokerage is still a counterparty to its customers’ transactions. When Robinhood users buy stocks, market makers find someone to sell it to them. Those transactions end up going to the National Securities Clearing Corporation, a clearinghouse where member brokerages settle trades between their customers. If Robinhood customers were net buyers from Fidelity customers, Robinhood transfers funds to and receives stocks from Fidelity two days after the trades were executed.

Clearinghouses are useful because, among other things, they reduce transaction costs and counterparty risk. Rather than having to exchange cash and securities for every single transaction, brokerage firms only transfer the difference between their customers’ purchases and sales, a process called “netting.” If Robinhood users purchase $1 billion in stocks on a given day, the brokerage will typically only have to send a small fraction of that amount in cash to other institutions. And thanks to deposit requirements, clearinghouse members don’t have to worry about the brokerages they do business with failing to meet their obligations. If a brokerage fails, their counterparties know that they will be entitled to its clearinghouse deposits.

Naturally, when a brokerage is at greater risk (e.g., when a critical mass of its customers pile into a meme stock overvalued by approximately 700 percent), its clearinghouse-deposit requirements increase. According to Robinhood’s CEO, the NSCC asked Robinhood to put up $3 billion in cash last week, at least ten times as much as its typical deposit. Unwilling or unable to risk its own cash, Robinhood halted trading in GameStop, AMC, and other stocks favored by retail investors . . .

Whether the decision to restrict trading in these stocks was triggered by Robinhood’s own innate caution or at least accelerated by the NSCC, the verdict (again based on what we know to date) is the same. What happened was driven by caution rather than a desire to favor Wall Street’s interests over those of the little guy.

This would not, of course, fit an updated version of the narrative that Warren has been peddling for years. Warren being Warren, she scented a wicked Wall Street conspiracy (or pretended to):

“The public deserves a clear accounting of Robinhood’s relationships with large financial firms and the extent to which those relationships may be undermining its obligations to its customers,” Warren wrote in the letter to [Robinhood CEO] Vlad Tenev.

Robinhood has repeatedly said that its controversial trading restrictions were caused by surging financial requirements, not at the behest of Wall Street firms getting hurt by the rally in GameStop, AMC and other stocks popular among short-sellers.

“We didn’t want to stop people from buying stocks and we certainly weren’t trying to help hedge funds,” Robinhood said in an email to users Monday night.

Still, Warren said Robinhood’s trading limits on small investors “raises troubling concerns about its relationships with large financial institutions that execute its trades.”

Specifically, she pointed to Robinhood’s ties to Citadel Securities, a market maker owned by billionaire Ken Griffin. Like other brokerages, Robinhood gets paid to route orders to market makers, a controversial practice known as payment for orderflow. Citadel Securities is a major source of revenue for Robinhood . . .

You can see Warren’s letter here.

Bloomberg’s Matt Levine took a characteristically sharp look at this “controversial” practice in his column today (Friday). It is a technical (but very worthwhile) read. To understand how payment for order flow works, these paragraphs are key:

Retail brokers send their customer orders to wholesalers. The wholesalers fill the orders at a price better than the “national best bid and offer” on the stock exchange: If the stock is quoted at $58 bid, $58.25 offered on the exchange, the wholesaler might pay $58.10 to buy it and charge $58.15 to sell it. This is called “price improvement.” The wholesaler pockets the rest of the spread (the 5 cents), but it also writes a check to the broker for the broker’s trouble (the 2 cents in my example). This is called “payment for order flow,” …The numbers I am using here are fake, and the breakdown will depend on the stock involved, the brokerage, etc. But we can very roughly assume that, of the value that the wholesaler provides, about 80% is paid to customers in the form of price improvement and about 20% is paid to the broker in the form of payment for order flow . . .

I feel like most of what I read about payment for order flow is insane? Otherwise normal people will start out mainstream explainer articles by saying, like, “Robinhood sells your order to Citadel so Citadel can front-run it.” No! First of all, it is illegal to front-run your order, and the Securities and Exchange Commission does, you know, keep an eye on this stuff. Second, the wholesaler is ordinarily filling your order at a price that is better than what’s available in the public market, so “front-running”—going out and buying on the stock exchange and then turning around and selling to you at a profit—doesn’t work. Third, because retail orders are generally uninformative, the wholesaler is not rubbing its hands together being like “bwahahaha now I know that Matt Levine is buying GameStop, it will definitely go up, I must buy a ton of it before he gets any!”  The whole story is widely accepted but also completely transparent nonsense . . .

It may be a little optimistic to hope that Warren will be checking up on the Capital Note every day, but I do hope she sees that Levine column. It could deflate a lot of conspiratorial thinking. Then again, maybe that is not what she wants.

Meanwhile Treasury secretary Yellen is on the scene.


Treasury Secretary Janet Yellen pledged to examine the recent frenzy in financial markets in an effort to ensure investors are protected, signaling the new administration’s focus on consumer financial interests after years of emphasis on deregulation.

“We really need to make sure that our financial markets are functioning properly, efficiently and that investors are protected,” Yellen said in an interview Thursday on ABC television’s “Good Morning America” . . .

If that is the case, she might want to have a word with the Fed.

The Capital Record
We launched our new series of podcasts, the Capital Record last week. Follow the link to see how to subscribe (it’s free!). The Capital Record, which will appear weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the third episode, David discussed the relationship between Christianity and socialism with Jerry Bowyer, the president of Bowyer Research and editor of Townhall Financial.

And this was the Capital Matters week that was . . .

It began early on Sunday — with Kevin Williamson taking a not entirely friendly look at taxing and spending:

One way of getting some context for the federal government’s financial footprint is cost per household. Here, I’ll rely on pre-pandemic figures, from 2019.

The money the federal government raises from the federal income tax is about $28,000 per household — meaning that that is the figure you’d arrive at if you divided the total federal income-tax take evenly among every U.S. household. Because federal income taxes are borne disproportionately by the wealthy — disproportionate not only to their total numbers but to their share of income — the amount that the median family in the middle income quintile pays in federal income tax is a lot less than that, about $9,000. Add in state and local taxes and it’s about $16,000 — you can buy a new Nissan for less money.

But the federal income tax is not the only federal tax you pay. You also pay the payroll tax, which is an income tax that sometimes in the past has pretended to be an insurance premium or a “contribution” to Social Security. (When men with guns come to collect the money, it is not a “contribution.”) The payroll tax adds about another $10,000 in expense per year per household. That’s a little less than a year’s rent on the average apartment in cheap and sunny Las Vegas or Fresno — or Columbus, Ohio, or Arlington, Texas.

You may think you don’t pay the corporate income tax, but you do — you pay it in the form of lower wages and higher prices, and in other indirect ways. It is a relatively light burden compared to the income tax and payroll tax, only $1,870 per household per year.

Other federal taxes (excise taxes, estate taxes, etc.) come to about $2,300 per household per year.

Altogether — and not counting state and local taxes — that comes to about $42,000 and change per household per year. That’s the basic cost of maintaining the federal government as is — not counting public-health emergency measures or the Brobdingnagian expansion of the federal government dreamt of by Joe Biden et al.

Then Kevin turns his attention to the spending . . .

Robert VerBruggen praised (sort of) a counteroffer by GOP senators to Joe Biden with regard to his stimulus (or whatever you want to call it) plan:

The proposal basically downgrades the Biden plan from “holy cow is that insane” to “I guess it wouldn’t be the end of the world.”

The plans have one good thing in common: They’d direct $160 billion to directly fighting the virus, for example by speeding up vaccination. Beyond that they’re quite different. The Republican plan strips out measures that have nothing to do with the pandemic (including a $15 minimum wage) and scales back the COVID relief to a more defensible level . . .

For her part, Veronique de Rugy was not exactly overwhelmed by the original CARES Act:

It was the right thing to help those who lost their jobs due to the pandemic or the lockdown. It couldn’t have been stimulative, since the economy was shut down. And sure enough, the Congressional Budget Office (CBO) found that the multiplier for the CARES Act was 0.58, meaning that for every dollar spent by Uncle Sam, the economy grew by 58 cents.

This is in part due to the fact that when people received money from the government, they saved a lot of it. So the money was not stimulative, but it was a way to alleviate pain. That’s if you ignore the over-the-top size of the relief and all the cronyism in the CARES Act — such as the airline bailout — and the many non-COVID-related items.

The size of the COVID-relief bill is another issue . . .

And George Leef seems close to despairing that things are going to change anytime soon:

I’m old enough to remember that there used to be quite a few Republicans and even some sober Democrats who said that the federal government needed to live within its means. Apropos of the Vietnam war, they told LBJ that we couldn’t afford both guns and butter.

Sadly, voices of fiscal sanity have become rare among Republicans, and they have completely vanished among Democrats. In Washington, the theory seems to be that the government can spend as much as politicians want without any adverse effects. To be against “stimulus” spending is to declare yourself a cold-hearted enemy of the public welfare.

But the truth is that wild federal spending, with Biden’s new $1.9 trillion package being Exhibit A for the prosecution, does have adverse effects . . .

Somehow, I think that Kevin Williamson might agree. Here he is on the federal mask giveaway:

There’s a glut of PPE on the market and a lot of slack capacity, and so politically connected firms are leaning on the Biden administration to soak it up through large public purchases, preferably directly from manufacturers.

As Senator Sherrod Brown (D., Procter & Gamble) and Representative Kathy Manning (D., Honeywell) put it in a letter to Joe Biden, “We have too many manufacturers in our states and across the nation that have capacity but no orders.”

If only there were some convenient way of dealing with oversupply!

Once again, Washington must act to defend Americans from the scourge of low prices and abundance.

Alexander Salter praised the business end (don’t forget Space Force, whatever Jen Psaki might say) of President Trump’s extraterrestrial legacy:

Decades from now, we may look back on the Trump administration’s innovations as having laid the groundwork for celestial capitalism.

Few have been as optimistic about the prospects for private enterprise in space as I have. But even I must admit that this is a long-term goal. The global space economy currently totals only about $366 billion. For comparison, global GDP is over $80 trillion. Furthermore, 76 percent of the space economy comes from satellites and satellite services. The remainder is almost entirely government spending. In other words, the space economy is still barely a drop in the sea of the global economy, and the public sector is still the biggest player.

But there are signs things are changing. Superstar launch-provider SpaceX, a private company, is now the go-to source for rides to low-earth orbit. And SpaceX’s CEO, Elon Musk, has ambitions to travel much deeper into space: Initial tests of his Starship super-heavy rocket have been far more promising than the over-budget, underperforming NASA equivalent.

In addition, NASA announced that it’s paying for moon rocks, establishing a precedent for harvesting and transferring ownership of space resources. And the Artemis Accords explicitly allow for “the extraction and utilization of space resources,” an important step for securing international buy-in to a property rights regime . . .

Jarrett Skorup wondered whether those pushing for minimum-wage hikes had thought through the implications for entry-level jobs:

It seems to me that policymakers have forgotten the importance of entry-level jobs. How else can I interpret the growing calls for minimum-wage hikes? Whatever else those policies do, they always cut off the lowest rungs of the ladder of opportunity. It’s almost like our elected leaders don’t want entry-level jobs . . .

Only about 15 percent of low-wage workers are from poor households. The rest are second earners — like my wife, who makes close to minimum wage — and teenagers and young adults from wealthier households. Half of minimum-wage earners are under the age of 25, most of them just getting their foot in the door. That door may get slammed shut when the minimum wage gets hiked . . .

Mario Loyola wasn’t too impressed by the proposed increase either:

Americans don’t fully understand how the minimum wage works, or the many ways it hurts the very people it’s supposed to help. As the National Bureau of Economic Research (NBER) notes in a new review of the relevant academic studies, the economic consensus on minimum-wage laws is much clearer, and much more clearly negative, than the press often makes it out to be: The data show that increasing the minimum wage results in a significant net increase in unemployment. The increase is particularly pronounced among young adults — and most pronounced of all among low-skilled workers.

After an exhaustive review of studies on state-level minimum-wage increases enacted since the early 1990s, the authors conclude that “there are far more negative than positive studies, and that there is a very large number of negative and [statistically] significant estimates.” In particular, nearly 80 percent of the studies show negative employment impacts, and more than 55 percent show negative impacts with higher than 90 percent statistical confidence. On the other side, only 20 percent of studies show any positive impact, and barely 5 percent show positive impact with greater than 90 percent statistical confidence . . .

Anticipating (somewhat) my comments above, I worried about what the regulatory implications of the GameStop drama might be, and also considered what the “correct” price for a security really is:

Beyond a certain point, however, adults must be free to make mistakes, even severe ones, in their investing. That is an integral part of the hubbub of ideas, often extraordinarily stupid ones, that make up a properly functioning market.

Somewhere beneath rules intended to constrain the ability of people to invest in honestly sold (an essential precondition) securities lurks the conceit that for any given security there is a right price, or, at least, an appropriate price range. Eventually that might (in a way) be true, but in the short term the right price for a security (or almost any asset), however seemingly absurd, is located within the spread for which it can be bought or sold at that instant. A few minutes, or even seconds, later that price might change, and when it does that new price is then the right one — until it is not. Were stocks mispriced on October 16, 1987, or were they mispriced at the close the next Monday (my first crash)?

Manipulating a stock price is (as it should be) illegal in most cases, but the faintly premodern notion that there is a “correct” price for a stock haunts rather too much of the discussion around GameStop. Whether a stock is rationally priced or not is an infinitely more sensible question, even if the answer (or answers) will not satisfy those who, whether they acknowledge it or not, are still trying to find that elusive right price . . .

Andy Pudzer highlighted the contribution of capitalism to the extraordinary vaccine success story:

Just last March, experts thought Dr. Fauci’s timeline of “at least” 12-18 months for vaccine development was, at best, ambitious. Paul Offit, the co-inventor of the rotavirus vaccine in the late 1990s, thought it was “ridiculously optimistic.” Judging by the history of vaccine development (five to ten years for most vaccines), it was hard to disagree.

Thanks to capitalism and the Trump administration’s Operation Warp Speed, it took less than 12 months for the CDC to give emergency-use authorization for two vaccines. The first was developed by Pfizer Inc., an American pharmaceutical corporation, in conjunction BioNTech, a German biotechnology company. The second was developed by Moderna Inc., an American biotechnology company…

That Pfizer and Moderna were able to develop, produce, test, and begin administering such effective vaccines in less than a year is a testament to what profit-driven corporations can accomplish when government cooperates . . .

But when it came to the contribution of central planning to the vaccine roll-out, in this case in the EU, Jorge González-Gallarza had a rather unhappier tale to tell:

On the eve of the EU’s first antigen-type vaccine clearance, its rollout of COVID shots already had the look of a train wreck.

On January 29, the Oxford-AstraZeneca vaccine, a type known as “viral vector,” received a “conditional marketing authorization” for use in the EU on the recommendation of the Union’s European Medicines Agency (EMA). But a week earlier, the company’s expected lead role in vaccinating the EU’s population of 450 million had begun to run into trouble. The next few weeks may determine whether the EU’s response to the pandemic manages to become, if belatedly, an adequate one or whether the EU’s citizens will keep dying at high rates, with policy failure exacerbating the pandemic’s natural toll. The EU is home to around 5.74 percent of the global population, but its cumulative COVID-19 deaths will soon reach a full 19 percent of the world’s total.

The new vaccine uses a tweaked version of SARS-CoV-2 triggering antibodies. The EMA, the EU’s equivalent of the FDA, had issued approvals for the Pfizer-BioNTech vaccine (under the brand name Comirnaty) in late December and the Moderna vaccine in early January, but the steeper delivery costs of this competing genre of vaccine, termed “mRNA,” and general concerns about the unknowns of a new type of vaccine, had persuaded several EU members to stake virtually their entire national plans for vaccine delivery on Oxford-AstraZeneca. As the bloc’s vaccination rate lags far behind that of comparable Western countries — a meager 2.6 doses per 100 people, as opposed to 60 in Israel and nine in the U.S. — this gambit looks increasingly misguided. The Commission had to bring all member states into agreement on a single procurement plan, and they settled on one that relied heavily on AstraZeneca. Ultimately, the Commission procures the vaccines but the countries deliver them to their citizens, so now that AstraZeneca’s role in the supply chain is compromised, all 27 countries are seeing their delivery plans upset . . .

Christopher Russo had some questions about the extent of the risk that the Fed was taking on:

On October 3, 2020, I filed a records request with the Fed under the Freedom of Information Act (FOIA), with the goal of understanding the Fed’s own risk management in making these loans. I wanted greater transparency as to why the Fed expects that each facility “will not result in losses,” as its board of governors stated to Congress in a periodic report. Four months later, the Fed has failed to provide any records.


Understandably, the Fed has a culture of caution around the publication of sensitive records. During the Great Depression, the unexpected publication of a list of borrowers from the Reconstruction Finance Corporation, which at the time served as an emergency lender, sparked a panic among depositors who questioned the banks’ solvency. Ever since, the resulting “stigma” of emergency borrowing has made these programs less effective. But if the Fed is concerned about the harms of disclosures, it can indicate as much in response to my FOIA request. Their failure to respond indicates that officials may be concerned that the publication of negative information could lead to a reduction of the Fed’s discretion.

In the past, Fed chair Jay Powell has opposed reductions to the Fed’s discretion under 13(3). In his words, the Fed needs to “be able to respond flexibly and nimbly to future emergencies.” Fair point. Tolstoy once wrote, “All happy families are alike; each unhappy family is unhappy in its own way.” Applying his principle here, it might be unwise to predetermine the Fed’s response to future crises, which are all unique. Even so, the Fed is still required to protect the taxpayer from losses and answer FOIA requests.

From the information available, I believe the Fed should charge penalty rates to reduce moral hazard and properly compensate taxpayers. The practice of charging penalty rates, famously advocated by Walter Bagehot in his 1873 book Lombard Street: A Description of the Money Market, is supported by the history of hundreds of years of financial crises. I also believe that the MLF and PDCF cannot be broad-based, as required by law, if in practice their loans are only to politically favored governments and investment banks. Broad-based emergency lending is necessary to insulate the Fed from short-term political pressures and threats to its independence.

This month, Powell will testify to Congress about the Fed’s semiannual Monetary Policy Report. All members of Congress should ask Chairman Powell for greater transparency. What risks has the Fed taken on public credit, and why won’t the Fed answer a FOIA request about those risks?

Tate Watkins had his doubts about the Biden administration’s plans for offshore wind energy:

Doubling offshore wind production would mean advancing our current capacity of powering 0.0143 percent of 140 million American homes to a new capacity of powering 0.0286 percent of them. There are currently no utility-scale wind farms in operation in the U.S. The five turbines of the pilot project Block Island Wind Farm, actually in state waters off Rhode Island, came online in 2016 and generate 30 megawatts, enough energy to power 17,000 homes. The two-turbine Coastal Virginia Offshore Wind project, with 12 megawatts of capacity, was completed last year and can power up to 3,000 homes.

Nearly a full decade should be plenty of time to double the current 42 megawatts, but given regulatory and logistical barriers, setting such a low bar was likely purposeful. The new administration’s offshore wind approach highlights how it’s pushing a few policies that may be good politics but make little economic sense — and at times conflict with each other.

For starters, Congress recently clarified that the Jones Act applies to offshore wind projects, a regulatory answer that some in the industry had been awaiting for years. The Act, originally signed in 1920, compels ships traveling between U.S. ports to be American built, owned, registered, and crewed. It garnered headlines in 2017 when it made the U.S.’ hurricane response in Puerto Rico slower and more costly than it should have been. It is also the reason that the island and some states have begun importing Russian energy in recent years — there are no liquefied natural gas tankers that meet the Act’s requirements.

According to a December report from the Government Accountability Office, the wind sector faces a similar problem. There are no Jones Act-compliant vessels capable of installing the jumbo turbines needed for the many wind projects already planned in the Atlantic . . .

To repeat myself, oh.

Iain Murray saw no chance of a shift toward more free trade under the Biden administration. In fact, he anticipated the reverse:

So far, it seems that Biden’s trade policy will be determined by two issues seemingly more important to the president than the welfare of American consumers: labor and the environment, or more precisely the demands of labor unions and environmental lobbyists. Both issues have been growing in importance since the North American Free Trade Agreement (NAFTA) included side agreements on them in the 1990s. These days, trade agreements such as NAFTA’s replacement, the United States–Mexico–Canada Agreement, incorporate them fully into the text. The European Union’s (EU) trade agreement with Japan last year was touted as being primarily about the environment.

Labor unions, it should be noted, were often in favor of Donald Trump’s trade policy, even when it caused trade wars with allies. Thus, while the European Union has called on President Biden to end the Trump administration’s damaging steel and aluminum tariffs, the United Steel Workers have called upon him to keep them in place. One of the president’s first major acts was to issue a new “Buy American” executive order, requiring government-procurement services to buy not just American-made goods, but goods made by union workers. Traditionally, such orders allowed some exemptions to Canada, America’s closest trading partner, but the new order significantly curtailed them. Prime Minister Trudeau has expressed displeasure at this.

Canada got hit by another early Biden trade decision, this time on environmental grounds. The cancellation of the Keystone XL pipeline will make it more difficult for Canada to export its oil, and the more-costly alternatives to the pipeline, such as train or barge, will probably lead to more emissions. For an administration that was supposed to rebuild international bridges, hitting Canada twice in a week isn’t a terribly auspicious start . . .

The Capital Note, our “Daily” (well, Monday–Thursday, anyway) was far from that this week, but in one issue, Daniel, as we have seen above, discussed the economics of Robinhood, a “lesson in risk management” as he put it, as well as Robinhood’s potential IPO, the end of Bezos’s tenure as Amazon CEO, and a 1920 short squeeze. Meanwhile in the other, I focused on Biden’s green agenda, changing the way regulations are made (for the worse), inflation, and Australia’s solar rooftops.

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