Thursday, September 27, 2007

How to cut the price of gasoline by 30 cents

Import our ethanol from Brazil! Says President Lula:
I believe that it is a mistake to try to produce ethanol from corn. I believe it's a mistake. Why so? Because corn is the basic animal food for many animals that are being raised by human beings, and it could make it very expensive, the price of the corn for all the rest of the world. The corn prices could go up, and above all, it could make unfeasible the purchase of meat, because of the corn price, especially for those countries like Mexico and from Central America that eat a lot of tortillas. And so they're going to suffer the consequences.... And then, another important thing is that ethanol produced from sugarcane, it's cheaper than the ethanol that is produced from corn.
I guess whoever voted for those corn ethanol subsidies and ethanol tariffs prefers us to pay more for gas. Or thinks that some agricultural special interests are more important than working families (and unemployed families, who need cheap gas and the jobs cheaper gas would create).

Successful hedge fund manager predicts 100% chance of recession

So says Andrew Lahde, who is up 8% for August, and 410% for the year.

Meanwhile, I've been selling RECESSION.08 all the way. I'm slightly underwater, but have greater profits on shorting the RECESSION.07.

Uh oh, another horrible expiration

Chris Masse says, over at Intrade.

Wednesday, September 26, 2007

Environmental recommendations can accelerate global warming

Glen Whitman on the fallacy of hand dryers.

Penn & Teller on the fallacies of recycling and pseudo-science.

Go get your $5,000 in Inkling currency (it's free, not including the time to create an account), and trade at the Global Warming Exchange.

UPDATE: Scott Adams on Salman Rushdie and Bill Maher's cognitive dissonance (inability to process alternate explanations) on global warming.

Tuesday, September 25, 2007

Bayesian Superbowl & POTUS outlooks

Tradesports provides probability markets in Super Bowl and Conference victories. It logically follows that a team can only win the Super Bowl if it wins its conference, i.e. p (B | A) = 1. Bayes’ Theorem provides the probablity of a team winning the Super Bowl upon winning its conference, i.e. p (A | B).

As of 1245pm Tue Sep 25 2007, here’s what p (A | B) looked like:

57% JETS

Notice anything interesting? Yep, they are all AFC teams. The Jaguars and NY Giants are both the highest, at 50%. (NB: Liquidity is still building up, and these are calculated using mid-market, which may be at varying levels of freshness).

UPDATE: Eddy Elfenbein does the same thing for 2008 candidates for President:
65% GORE
35% PAUL

The Dems look to be the AFC of the election cycle.

Global Warming prediction exchange is set up

Here, courtesy of Inkling Markets. It's only $5,000 of play money per trader. But that's still a start, so please sign up and let's see if we can make the world a better place (i.e. do we invest more in this issue or other issues).

Let me know if you have improvement suggestions. Thanks in advance!

Friday, September 21, 2007

Peggy Noonan calls Greenspan the weakling (and Bush the bully)

I think she gets it exactly right:
[Greenspan] feared the budget surpluses enjoyed in 2000 would be transformed into long-term deficits. He worried that entitlement spending would leave "a very large hole in future budgets." Not facing this was "a failure." He disdains the Great Pork Spree of the '00s. The unifying idea that governed Bush White House economic thinking--"deficits don't matter"--was, simply, wrong. Mr. Greenspan found it a "struggle" to accept that this is what the Republican Party had come to. Scrambling for political dominance became the party's great goal. "The reality was even uglier": They would spend and spend "to add a few more seats to the Republican majority."

This is all strongly, and clearly, stated.

But when the tax cuts, and the impact of spending, were being debated, Mr. Greenspan allowed his congressional testimony to be interpreted as supportive of the Bush plan. And he did this even though he had been warned in advance by those who'd seen his testimony that it would be seen as an endorsement of the tax plan.

Indeed his testimony--airy vaporizing about long-term trends--was quickly seized on by the White House and its congressional supporters as support for their approach. Mr. Greenspan describes himself--literally, in an aside he seems to find witty--as "shocked, shocked" that politics is going on in Washington, and his words are being twisted.

But he never quite cleared it up, not at the time. He does it now, with the book, and after the advance. As a writer I am in passionate support of large advances, but $8.5 million to tell the American people what he should have told them when his views might have had an impact?

When Gen. Eric Shinseki told Congress, before the Iraq war, that postinvasion troop levels should be "something in the order of several hundred thousand soldiers," his views were called "outlandish" by administration officials. He was bureaucratically undercut, and he limped to retirement. When economic adviser Larry Lindsay told this newspaper the war would likely cost up to four times what the administration asserted, he was sacked.

Early and brutal examples were made of those who did not echo the party line. Perhaps Mr. Greenspan was watching, or rather observing certain trends.

The deeper story is not that those who've been silenced have often come forward to speak in harsh terms. The deeper story is that the Bush White House hurt itself by using muscle to squelch alternative thinking--creative thinking, independent judgments--that would, in retrospect, have benefited them. Big spending became a scandal. So did not enough troops, and the financial cost of the war. It was this tendency that led to the administration's gym-rat reputation, all muscle and no brains.

Thursday, September 20, 2007

Why we can't believe a lot of what we read

from Alex Tabarrok, who says:
Suppose there are 1000 possible hypotheses to be tested. There are an infinite number of false hypotheses about the world and only a finite number of true hypotheses so we should expect that most hypotheses are false. Let us assume that of every 1000 hypotheses 200 are true and 800 false.

It is inevitable in a statistical study that some false hypotheses are accepted as true. In fact, standard statistical practice guarantees that at least 5% of false hypotheses are accepted as true. Thus, out of the 800 false hypotheses 40 will be accepted as "true," i.e. statistically significant.

It is also inevitable in a statistical study that we will fail to accept some true hypotheses (Yes, I do know that a proper statistician would say "fail to reject the null when the null is in fact false," but that is ugly). It's hard to say what the probability is of not finding evidence for a true hypothesis because it depends on a variety of factors such as the sample size but let's say that of every 200 true hypotheses we will correctly identify 120 or 60%. Putting this together we find that of every 160 (120+40) hypotheses for which there is statistically significant evidence only 120 will in fact be true or a rate of 75% true.

Hillary calls Cheney "Darth Vader"

Way ahead of ya', Hill (via Drudge).

Wednesday, September 19, 2007

Meaning from Story

How about the story of a life well lived? (Via Stephen Dubner):

When he was a boy, Dr. Pausch said, he had a concrete set of dreams: He wanted to experience the weightlessness of zero gravity; he wanted to play football in the NFL; he wanted to write an article for the World Book Encyclopedia ("You can tell the nerds early on," he joked); he wanted to be Captain Kirk from "Star Trek"; and he wanted to work for the Disney Co.

In the end, he got to tackle all of them, he said -- even if his football accomplishments fell somewhere short of the NFL.

And even though his football career ended in high school, he said, he probably learned more from that experience than all the other childhood goals he did achieve.

Among other things, he learned the value of the coach yelling at him for his mistakes, because an assistant coach told him after one particularly brutal practice: "When you're screwing up and nobody's saying anything to you anymore, that means they've given up on you."

"I find that I am completely positive," he wrote. "The only times I cry are when I think about the kids -- and it's not so much the 'Gee, I'll miss seeing their first bicycle ride' type of stuff as it is a sense of unfulfilled duty -- that I will not be there to help raise them, and that I have left a very heavy burden for my wife."

He is concentrating now on creating videos for his children. With his oldest son, 5-year-old Dylan, Dr. Pausch went on a recent trip to Disney World and to swim with dolphins, thinking Dylan may be the only child who will have strong direct memories of him.

His wife and children, he said, "mean everything to me. They give a purpose to life and a depth of joy that no job [and I've had some of the most awesome jobs in the world] can begin to provide.

"I hope my wife is able to remarry down the line. And I hope they will remember me as a man who loved them, and did everything he could for them."

As I always tell my 5-year-old, it's not 'unfair' when you don't get what you want. We all run the risk of getting hit by the cancer dart."

My oldest won't even be in high school when I turn 46. Give that cancer hell, Dr. Pausch.

The Cheney Strikes Back

at Greenspan:

Alan tells of his first meeting with then President-elect Bush on Dec. 18, 2000, at the Madison Hotel in Washington. I recall this breakfast meeting very well, especially Alan's comments on the state of the economy. The Fed chairman told the president-elect and our team that America faced the real possibility of a recession in the wake of the collapse of the late 1990s technology sector bubble. Alan's prediction proved correct: In the final months of the Clinton administration, the nation began an economic slowdown that turned into a recession.

The combined effects of recession and national emergency could have been devastating for America's economy. Yet President Bush's tax cuts -- following through on a promise he had made to the voters -- resulted in a shallower recession, a faster recovery, and a platform for growth that remains sturdy to this day. The fact is that in a time of unprecedented challenge, the United States has experienced nearly six years of uninterrupted economic growth and added more than eight million new jobs since August 2003 -- more than all other major industrialized nations combined.

The economic growth encouraged by the president's tax cuts is now producing sharply increased federal tax receipts -- up by nearly 15% in fiscal year 2005 alone, nearly 12% in fiscal year 2006, and projected to rise nearly 7% in the fiscal year that will end this month. That is the highest growth in tax receipts in consecutive years since 1981. As a result, tax revenue as a percentage of our economy is now above the 40-year historical average. Under the circumstances, it's pretty hard for anyone to argue that the American people are under-taxed. Even at a lower rate of taxation, the hard work and productivity of Americans is generating more tax dollars than ever before.

On the spending side of the ledger, I can't dispute Alan's general notion that the federal government is too big and spends too much money -- we've agreed on that point since we both worked in the Ford administration more than 30 years ago. President Bush feels the same way, and that's why he has steadily reduced the annual rate of growth in non-security discretionary spending. In contrast, the last budget enacted during the Clinton/Gore administration increased that category of spending by a staggering 15%. President Bush has pressed hard to keep that spending under control -- and this year's increase will actually be lower than the rate of inflation for the third year in a row.

It's worth noting, as well, that President Bush has committed significant resources to rebuilding our military after the draw-downs of the 1990s. In addition, this new era has also demanded far larger support for intelligence, law enforcement and homeland security. Our administration has met those urgent priorities. Yet we've also managed to bring this year's projected deficit down to 1.5% of GDP -- well below its historical average over the past four decades.

Alan has long argued, correctly, that fiscal discipline is a long-term obligation requiring honesty and a willingness to make tough choices. Here again, we agree. And on this measure, President Bush's record is superb. He has proposed reforms in Medicare and Medicaid -- and has repeatedly asked Congress to reform Social Security and place it on firm financial ground. Though Congress has failed to act, no other president has spent more time or political capital trying to avert a fiscal disaster that everyone knows is coming.

I've enjoyed Alan Greenspan's company, and benefited from his wisdom, for most of my career. For his part, Alan credits me in his book for my "intensity" and "sphinxlike calm" -- and it's in a spirit of friendship that I offer him these gentle reminders of the Bush record.

Tuesday, September 18, 2007

Yanks World Series contract: 3 bagger over the last 2 months

Yankees are surging.

Red Sox are still steady.

On the subject of economists, more right than wrong

Here is Deidre McCloskey on Joseph Schumpeter (via Greg Mankiw), following Robert Solow's take here.

I realize that this blog has been densely packed with economics posts (and not enough trading and sports) lately. Well, economics--as it pertains to healthy markets--matters to acolytes of trading and sports, even. I hope you can celebrate the goodness of true economics and free markets, as they provide you your profit opportunities.

McCloskey writes:

Galbraith, like many other economists of his generation, worried about private monopoly, though embracing public monopolies. Schumpeter never had such worries. Creative destruction, he argued, would take care of the trusts and pools and over-big corporations. In truth the list of companies that Galbraith held in awe as great forces in 1967 looks quaint now. U.S. Steel, AT&T, and General Motors belie his assertion “of great stability in [a great corporation’s] position in the planning system.” Eight years after the first publication of The New Industrial State, Bill Gates founded Microsoft. Let creative destruction rip.

McCraw himself italicizes a very unripping assertion of his own that “the two pillars that support all successful business systems [are] a modern concept of private property and a framework for the rule of law.” That’s nothing like Schumpeter’s idea. Laws are necessary, of course, but so are road mending and brick making. Private property and a framework for the rule of law have existed in written form since ancient Mesopotamia, and in every substantial civilization from third-century B.C. China to 12th-century A.D. Timbuktu. Roman law, with its detailed concept of private property, was worshipped in Europe for two millennia. Yet those civilizations, Schumpeter emphasized, never reached the standard of economic production and progress the modern West has. Not even close.

What was missing was the thing Schumpeter emphasized and Galbraith attacked, a thing unique about Europe since the Netherlands in 1600 and England in 1715: a business-dominated civilization. “Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans,” Schumpeter wrote in his swan song, a 1950 essay grimly entitled “The March Into Socialism.” Capitalism also “means a scheme of values, an attitude toward life, a civilization—the civilization of inequality and of the family fortune.” The last touch, incidentally, is pure Schumpeter: “The civilization of inequality” makes the socialists’ case by adopting their words, yet Schumpeter politely disagrees on how we should judge the outcome.

What’s finally missing in both Schumpeter and Galbraith’s grim prognoses is a theory of language. Human beings swim in words. We’re just realizing this, after a long, long enchantment with Marxist or Freudian or behaviorist claims that secret or not-so-secret material interests rule everything, that the makers of the U.S. Constitution were driven by their property values, or that slavery was abolished to strengthen manufacturing. One quarter of national income is earned from sweet talk—that is, the persuasion a manager or teacher or salesperson or foreman exercises on the job.

“About the end of the seventeenth century,” Schumpeter wrote in his great 1939 tome Business Cycles, the English political world “dropped all systematic hostility to invention. So did public opinion and the scribes.” That’s exactly right. And it’s what is wrong with the materialist conviction since Marx that ideas are froth on deeper currents. Ideas, words, rhetoric, “reason”: the world is governed, another economist said, by little else.

McCraw argues that Schumpeter invented what business schools now call “strategy,” “an attempt by firms to keep on their feet,” as Schumpeter put it, “on ground that is slipping away under them.” It’s practical business stuff. And of what is the “attempt” constituted? Plans, words, sweet talk. An economics that doesn’t acknowledge talk and its creativity may be in some pointless sense “exact,” but it doesn’t illuminate the world we have, the world admired by Schumpeter and zinged by Galbraith, of entrepreneurs—in the market, the corporation, the government, the laboratory, the street. Capitalism, like democracy, is talk, talk, talk all the way down.

Fed cuts rate by 50 basis points

S&P 500 up 2% after the announcement.

Given the inflationary trends of food, energy, and commodity prices, it seems to me that a 25 bp increase would be more appropriate here.

However, if the psychology of the credit markets continues to be mired in panic, then that could possibly destabilize markets even more than inflation.

I'm making a prediction here--people will look back a year and more from now, and wish that Fed held steady here, as they see the creep of inflation rocking their world.

Why economists are sometimes more right about science than scientists

John Tierney. (Debate hosted by Scientific America here).

I'd like to make some money; where are those global warming contracts?

Greenspanish Primer

(Via Eddy Elfenbein) Elizabeth Spiers looks at the Maestro:
Americans have a long history of confusing inscrutability with genius. The less you say, the conventional wisdom goes, the smarter people will think you are. Alan Greenspan, the most powerful Fed chairman in history, built his storied career on this simple, if shaky, premise. His memoir, The Age of Turbulence, will be published this month, and it will be interesting to see how he stretches this rhetorical formula across 640 pages. Greenspan's particular style has always been to offer a short restating of the facts that are obvious to most economic observers, peppered with a few original insights that can be interpreted as black, white, or a blackish-whitish shade of gray, depending on who's listening. In Greenspanish, two and two may equal four. But it may also equal two discrete sets of two that shall never become four. And that assumes we all agree on how four should be defined. (If you find that analogy impenetrable, just make like a Greenspan acolyte and assume that it's brilliant.)

Monday, September 17, 2007

FOMC rate decision, Tuesday 2:15pm (Eastern)

I'll see you all on the other side.

I think the best thing for Bernanke to do here is increase the rate by 25bps. When enough time passes, I suspect more people will agree with me. Inflation still looks like the greater threat.

Until August, it was a foregone conclusion that the target rate would remain above 5%. Shows what a lot of angst in the market can do. But like this piece says, I also think that the Fed needs to look in the mirror to see the biggest contributor to this current circumstance:

With that in mind, it's hardly reassuring that both Messrs. Bernanke and Greenspan are now offering their own defenses of Fed policy. They take different forms, but they are both in essence alibis for the Fed's current predicament.

Mr. Bernanke made his attempt in a speech last week on the "global savings glut," which seems to be his full-field explanation for just about everything. The rise of excess savings in China, the Mideast and elsewhere in the early part of this decade made them net exporters of capital, which proceeded to flow into the U.S. The Fed chief argues that this propelled the U.S. current account deficit and also explains why American long-term interest rates have stayed so low. Translation: The Fed didn't cause the housing bubble; frugal foreigners did it!

As an oil importer, China is a little different case. But as Mr. Bernanke noted in his speech, "with consumer credit not readily available and precautionary motives for saving remaining strong," China's domestic consumption was also restrained. So its capital also flowed abroad -- again often into U.S. financial instruments. Mr. Bernanke is right about these flows of capital and their contribution to low U.S. interest rates, but he's more than a bit slippery in ignoring the Fed's role in this global wealth transfer.

Meanwhile, Mr. Greenspan has emerged from the six-figure speaking circuit with his memoir, "The Age of Turbulence." The headlines are focusing on his criticism of Republicans for their spending excesses, and President Bush for his failure to use his veto pen. He'll get no argument from us on those, though we'd note that his claim that deficits produce higher interest rates simply hasn't proved true.

The "Maestro" is far less persuasive in his explanation for why the Fed kept money so easy for so long. He says it was to "shut down the possibility of corrosive deflation." But fear of deflation was long gone by the third quarter of 2003, after the second round of Bush tax cuts had passed and GDP growth clocked in at 7.2% on an annual basis (later revised to 7.5%). The Fed nonetheless maintained negative real interest rates for many more months to come. This has proven to be the great policy blunder of Mr. Greenspan's tenure, with ramifications that are making life difficult for Mr. Bernanke today.

Friday, September 14, 2007

Kling on the Spontaneous Order of Markets

Another beautifully written piece, chock full of truths, such as:

When spontaneous order exists, we take it for granted and make little effort to understand it. If your body is healthy, you do not need to think about how your muscles work, how your heart and brain function, or how your metabolic processes operate. You only notice it when order breaks down, and you are sick or in pain.

Similarly, when the economy is functioning properly, we do not notice all the behaviors that are required to make it work. We go to the supermarket and find grapes available, and we do not wonder why or how.

Those of us who lived through the gasoline crisis of 1974-1975 will never forget the frustration, perverse incentives, and absurdity of the disorder caused by price controls. That is why very few experienced politicians argued for price controls after Hurricane Katrina shut down many oil refineries.

We saw an example of Soviet-style economics in the United States in the mid-1970's, when we maintained price controls on gasoline. This was in response to the Arab oil embargo.

In Oil Econ 101, I explained that because "oil is oil," it is not really possible to boycott Saudi oil. If we do not use Saudi oil, someone else will. The oil we use will come from country X, and Saudi oil replace the oil of country X somewhere else.

The same logic says that the Saudis cannot boycott us. If they stop selling to the United States, but they continue to supply their oil to the market, then we will get more oil from other countries instead.

If markets had been allowed to operate in 1974 and 1975, the effects of the oil embargo almost surely would have been minor and temporary. Instead, price controls created a massive disorder.

Because gasoline prices could not rise, there was no natural incentive to increase supply or to curtail demand. The result was a shortage.

The minimum wage is another example of a government policy that fosters disorder. Harvard economist Greg Mankiw aptly describes the minimum wage as:

  1. A wage subsidy for unskilled workers, paid for by
  2. A tax on employers who hire unskilled workers.
Other economists, including recent Nobel Laureate Edmund Phelps, prefer the idea of a pure wage subsidy for unskilled workers, paid for out of general income taxes. A minimum wage lowers the demand for unskilled workers. A pure wage subsidy does not.

How Dilbert cartoon characters approximate Chess Pieces

Every trader should understand his or her own game theory formation (or lack thereof). I think my biggest influences have been Conway's Game of Life and Parker Brothers' Monopoly. Oh, and dodgeball (which resembles Game of Life) and football (which resembles Monopoly).

Thursday, September 13, 2007

Last Superbowl I rooted for Dungy

Many of my fellow Patriots fans thought that was silly, as the Colts are one of our biggest rivals. I'm not saying I like him better than Bill, or he's done more or deserved any more. But I thought Tony was a man of integrity.

I think some of my fellow fans think I'm less silly now.

And I'm feeling bad for Bill. He may have jeopardized his Hall of Fame run.

UPDATE: Just got this in the mail

John Stossel fisks universal healthcare

Gov. Schwarzenegger should read this (via Don Boudreaux):

When government is in charge of health care, the result is not that everyone gets access to experimental treatments, but that people get less of the care that is absolutely necessary. At any given time, just under a million Canadians are on waiting lists to receive care, and one in eight British patients must wait more than a year for hospital treatment. Canadian Karen Jepp, who gave birth to quadruplets last month, had to fly to Montana for the delivery: neonatal units in her own country had no room.

Rationing in Britain is so severe that one hospital recently tried saving money by not changing bed-sheets between patients. Instead of washing sheets, the staff was encouraged to just turn them over, British papers report. The wait for an appointment with a dentist is so long that people are using pliers to pull out their own rotting teeth.

Patients in countries with government-run health care can't get timely access to many basic medical treatments, never mind experimental treatments. That's why, if you suffer from cancer, you're better off in the U.S., which is home to the newest treatments and where patients have access to the best diagnostic equipment. People diagnosed with cancer in America have a better chance of living a full life than people in countries with socialized systems. Among women diagnosed with breast cancer, only one-quarter die in the U.S., compared to one-third in France and nearly half in the United Kingdom.

Wednesday, September 12, 2007

Remembering 9/11

It's tough, having lived so close to it (7 blocks, actually). But I remember feeling a lot better after some time passed, and this was a good moment in that process:

Sleep, sleep tonight, and may your dreams be realized. If the thunder cloud passes rain, so let it rain, let it rain, rain on me. {Bono & Edge}

O Lord, open my lips; and my mouth shall shew forth thy praise. {Psalm 51:15}

Let them hear you! {Bono}

Let the healing continue, Amen.

Bill Belichick, esquire

At this morning's press conference:
"Earlier this week, I spoke with Commissioner Goodell about a videotaping procedure during last Sunday's game and my interpretation of the rules. At this point, we have not been notified of the league's ruling. Although it remains a league matter, I want to apologize to everyone who has been affected, most of all ownership, staff and players. Following the league’s decision, I will have further comment."

I thought he studied economics at Wesleyan, not pre-law. Not much impact on these contracts:

Tuesday, September 11, 2007

What Americans Want

Basically, freedom. In terms of tax policy, here are some general conclusions from Grover Nordquist over at Conspiracy to Keep You Poor and Stupid:
Asked if they would be willing to pay their share of the $340 billion deficit--or $2470 per individual tax return, only nine percent said yes; 79 percent said no and 12 percent were unsure.

Of those 9 percent willing to pay, fully 63 percent of those said if Congress got the additional cash they would "mostly increase spending and not pay off the deficit." Only 17 percent believed Congress would use the money to fully pay down the deficit.

Or maybe hate and envy can come into play. Tax the rich to pay for everything. Asked in 2006 what the maximum percentage of a person's income is that should go to all taxes--federal, state and local ... one percent said 50-59%, one percent said 40-49%, six percent said 30-39%, 22 percent said 20-29%, 43 percent said 10-19%, 24 percent said 1-9 %, and the guys I really want to meet, those suggesting that "zero" was the right amount came in at one percent. The mean percentage Americans feel should be paid is 15%. That, by the way, is my stated goal--reducing the cost of government to half its present percentage of the economy. I am willing to go to the people with the argument that free people should pay less than European serfs in the Middle Ages.

We want freedom. The left cries for envy and leveling. ...we are a movement dedicated to liberty... We worked with and for Reagan because he shared our goal of liberty and limited government. Not the other way around. He was not a great communicator. He communicated great things: liberty and its partner, limited government.
We want freedom. We want freedom. We want freedom.

Giuliani fades slightly

but it's not due to Thompson.

Monday, September 10, 2007

SATs do matter, at least as a signal for successful traders

I was watching Erin on CNBC, and she was interviewing Prof. Haitoa Li, who is faculty at the University of Michigan. He studied hedge fund manager performance, and found that SAT scores are a significant predictor of performance. He even mentioned my alma mater as graduating some "really smart people", which must mean his results are suspect! The paper can be found here--let me know when you discredit it.

As a person who did well on the SAT, but pretty mediocre in trading and many other life dimensions, I never thought SATs predicted much of anything. But at least I'm not negative for the year, like some hedge fund geniuses (who probably edged me in the SATs, too).

Not yet.

Will Bernanke Blink?

The markets say yes, and perhaps by as much as 50 basis points.

I see the same cut, but I don't think that it is necessary. In fact, I would say that 5% fed funds is more priced to perfection than the rates were under the last 20 years of Greenspan's term. The strains we see in the market, mostly in underpricing default risk, have very little to do with the rate being where it is now, but instead, trading under 4% for more than 5 years.

The Fed's stated objective is price stability. But on hindsight (which, granted, none of us think is fair when applied to our own decisions), the Fed could have done better.

UPDATE: C'mon Alan!

UPDATE: Don't cry for us* Main Streeters! (*Wall Streeters).

UPDATE: Excellent rates roundup by James Hamilton.

UPDATE: Caplan misunderstands Glaeser and comes up with high british comedy.

Thursday, September 06, 2007

Scott Adams reports on his NYC subway experience

and gets it 100% right.

UPDATE: I couldn't find a nice pic, but here's this, if you are ever planning to run with the toughest mass transit commuters on the planet (a system which somehow supports the capitol of the capital markets)

Barone on America's Three Regimes, by Morton Keller

Barone's take:
The Civil War, the imposition of New England Yankee mores in the way described by Morton Keller, and the creation of national business and professional organizations described by Robert Wiebe in The Search for Order 1877-1910 reversed the extreme decentralization of the 1850s. The cultural rebellions, to the left and the right, described recently in neat form by Brink Lindsey's The Age of Abundance reversed the extreme centralization of the 1950s.

For those of us who grew up in the backwash of the 1950s, this decentralization seemed like an abandonment of American tradition. In the long line of history, I think it is more like a reversion to norm. The seeming inconsistency of currently prevailing attitudes on marriage and divorce, gambling and drinking, cigarette smoking and marijuana smoking, is part of the continuing turmoil of a decentralized society. The results don't cohere, but perhaps that is to be expected in a society like ours.
Cav's take: This is why we need prediction markets to inform policy decisions and priorities, as societal mores look like a random walk, but have significant policy influence.

Wednesday, September 05, 2007

Arnold Kling believes only 10% of housing appreciation is irrational

since 1995. He cites the 90% rational parts as:

1. The decline in the inflation premium in interest rates. When nominal interest rates are high, payments on mortgages are high, making it hard to buy homes.

2. A general decline in real interest rates. For a long time, real interest rates were high, as realized inflation was low relative to the expectations that were built into nominal rates. Finally, over the past ten years, real rates have come down.

3. A decline in the risk premium for housing. The secondary mortgage market has become more efficient. Moreover, with the use of credit scoring in mortgage underwriting, credit decisions became more accurate (I consider this my personal contribution to social welfare--I pushed very hard for this innovation when I was at Freddie Mac).

4. Transaction costs have fallen. With the use of credit scoring, property valuation databases, and other innovations, the cost of obtaining a mortgage or refinancing a mortgage has fallen sharply. This in turn makes housing a more liquid asset, which lowers the risk premium involved in buying a home.