Friday, April 30, 2010
... the architects of the euro assumed that it would foster political unity, in much the same way as some couples think that having a baby will help to save their marriage.--Felix Salmon
... the coffeemaker or entertainment system of a commercial aircraft is not supposed to bring down the plane, but both have done so in the past. An airliner is a perfect example of what Ben calls a complex system: a large mass containing explosive fuel, flying at high speeds and operating along a fine boundary between stability and instability. Small forces can upset the system, causing a chain of events that results in the destructive release of the large amount of energy stored in the system. Interestingly, sometimes efforts to make those systems safer can make the systems more complex and therefore more prone to accidents. It does not take too much imagination to adapt this analogy to the world of finance, does it? ... Banks ... were and are the most heavily regulated industry on the planet. You might as well blame bank regulation. A couple of years ago there was the joke that the traders occupied the large trading floor and the compliance officers occupy the small corner office and that soon the two would switch offices. It stopped being a joke.--Alexander Ineichen
Thursday, April 29, 2010
Have you ever bought a Facebook ad? I have. I have talked to many, many people who have. We have spent hundreds, many have spent thousands or even more, experimenting with Facebook ads. They are worthless. Nobody ever looks at them, and nobody ever clicks on them. I just talked to someone who was trying to promote a book. He found it cost him over $100 in ads to sell one book. Moreover, as you increase your ad spending, people get used to the ads and just ignore them. So, your already low click-through rate goes down even further. People go to Facebook to interact with their friends. It is fundamentally different from the ad platform that is Google. People go to Google to find something they need, which a good percentage of the time can in fact be solved by someone's ad. Facebook ads, on the other hand, annoy users. They yield no real profits.--Joseph Javier Perla
If you delay marriage too long, the men your age will find it easy to find a spouse; you will not. And unless you're a very rare sort of person, even if you're a feminist who has a fully actualized identity that needs no man to complete it . . . you will still want to get married eventually, especially if you want to have kids. She's urging an ugly sort of game-theoretic calculation on younger women still in the prime of their attractiveness. And she's absolutely right that some of those young women who reject her advice will eventually regret it. This is a slightly sensitive topic for me to write about, of course--I'm a woman in her 30s who will, barring tragic accident, get married in six weeks. I guarantee that no matter what I write, someone will take issue with it. If I support [Lori] Gottlieb, feminists will say that I'm somehow cozying up to the patriarchy; if I take issue, conservatives will accuse me of downplaying the dangers of playing the field too long. ... Gottlieb offers some pretty persuasive evidence that unless you're in a desperately unhappy marriage, you are better off being married, even if it's not to your soul mate . . . and that marriage is hard, even if your spouse is your soul mate. Yet [Emily] Gould just sort of airily ignores this argument, even though it's really quite strong, and goes on an extended rant about Gottlieb's poor grasp of feminist principles. ... For all Gould's equally anecdotal evidence that women "aren't picky enough", Gottlieb is simply mathematically correct; the dating pool shrinks faster for women than men, which means fewer high quality fish left in the sea. Gottlieb's also right that the women who ended up alone in their 40s are, in my experience, mostly pretty unhappy about it. (So are the men in the same position. But the dating math isn't so cruel.) ... Feminists are no less prone than other women to resist thinking of romantic choices as pragmatic. Maybe more so, even, because relationships are supposed to be about self-actualization, not the prosaic projects of economic security and diaper-changing. Gottlieb's straying a little too close to Jane Austen territory . . . and even for her own time, Austen was overly brutal.--Megan McArdle
Wednesday, April 28, 2010
... when the London Sun says it has pictures that are too shocking to publish, you can take it to the bank that it is shocking.
And so it will not publish photos of the final hours of Clara Stokes, 84, as she lay dying in a National Health service hospital following her stroke in December.
In 2008, British Prime Minister Gordon Brown honored Mrs. Stokes for her work as a Land Girl during World War II. The Women’s Land Army was a civilian organization that helped on the homefront.
The vet died in conditions that were “not fit for dogs,” her daughter said. She said her mother was “ignored by overworked nurses who left her dehydrated, hungry and lying in her own feces for up to six hours. She took a series of sickening pictures to record the neglect on the ward — but they are too disturbing to publish. Clara is pictured lying helpless and confused in filth with her foot trapped in the bedstead. Elle and her daughter Michelle Plaford, 37, also found water placed out of her reach and said no staff had helped her drink for up to 16 hours.”
... [the Obama] administration ... can imagine the world without the internal combustion engine but not the world without the Chrysler corporation ...--George Will
I hope Dr. ["Hide The Decline" Michael] Mann does sue us. The legal discovery process would give us an opportunity to expose Dr. Mann’s research – or lack thereof to public and legal scrutiny.--Jeff Davis, of Minnesotans 4 Global Warming
Never Hire Job Hoppers. Never. They Make Terrible Employees. ... It’s like a woman who is dating a man who has had 6 wives and cheated on all of them before divorcing them but she somehow thinks SHE will be different.--Mark Suster
Hire the best. Hire people that can leave your startup at any minute if they wanted to because they're so kick ass that they're constantly getting contacted by interested parties. Then it becomes your job to ensure that you're creating an environment that is equally as good as your people. Create a company that gives your people the most room for growth, creativity, a sense of ownership, and fun. And if you can't hire the best then hire people with any level of experience (novice, intermediate, advanced) that have promise. Then help them become the best so that they can leave any time they want. Hint: they won't. They'll be loyal because you helped them become the best. Your goal should be to help every single employee get to the point where they're the best in their field and are constantly getting job offers. And what if they aren't loyal once you've helped them become the best? People will eventually leave no matter what you do. Don't view it as a character flaw on their part. Just know that you can pick up more people because you've created a work environment that breeds the best and the word will spread. And as any job hopper can tell you, there are plenty of companies where your skill, ambition, and talent can go to die, but there are very few that help you become the best and give you real reasons to be loyal.--Paul Dix
Your parents loved you, and they did their best. But they created a false reality. Everyone isn’t above average in all they do. And in real life, only the winner gets the trophy. It’s important you understand this before we award that diploma, as there’s a good chance your boss will be just like me. Scary thought, huh?--Bill Sledzik
... children’s gender role stereotypes were more restrictive for males, than for females.--Sex Roles, DOI
Men indicate a higher interest in high-status products (study 1) and more readily noticed high-status products (study 2) after exposure to sexily, rather than plainly, dressed women. The effects are restricted to single men, suggesting that the acquisition or consumption of a luxurious product functions as a mate attraction mechanism.--Universiteit Gent working paper, March 2009
Goldman didn't do a good job defending themselves. You have to be a 'bright young thing' to get a job there, but I think their brand name and massive connections, make them appear much smarter than they really are. ... Blankfein is a crony capitalist, begging for more 'regulation' because he knows that a 1300 page bill basically only helps those with connections and extant massive legal infrastructure, and hurts potential competitors who merely have good ideas. I'd miss them as much as I'd miss Drexel, a giant which died with much schadenfreude.--Eric Falkenstein
Basically, the McCarthy era never ended. The objective of every Congressperson at every hearing is to get on the evening news by bullying a witness. The only question I have is whether McCarthy is the one who started it, or whether he happened to be the one guy who got called out on it. Too bad somebody at Goldman could not have called out a Senator. It must have been tempting to say, "Look. You can't make a market by bending over backwards giving buyers every reason not to buy and sellers every reason not to sell. Sophisticated investors understand how we operate. Just like everybody who goes to play blackjack understands that some of the cards are dealt face down. You can complain that you think all the cards should be face up, but that would totally change the game. Do you hold to such high standards in your election campaigns? Do you think your disclosure of the consequences of your votes is honest? Do you disclose how lobbyists told you to vote? Do you go out of the way in your campaigns to give people all the possible reasons not to vote for you? You want to tell me about my responsibility to my clients? How would you like to hear my opinion about your responsibility to your constituents?" Blame deflection. That is what this whole financial "reform" theater is all about.--Arnold Kling
The second big event in Washington this week is the jostling over a financial reform bill. One might have thought that one of the lessons of this episode was that establishments are prone to groupthink, and that it would be smart to decentralize authority in order to head off future bubbles. Both N. Gregory Mankiw of Harvard and Sebastian Mallaby of the Council on Foreign Relations have been promoting a way to do this: Force the big financial institutions to issue bonds that would be converted into equity when a regulator deems them to have insufficient capital. Thousands of traders would buy and sell these bonds as a way to measure and reinforce the stability of the firms. But, alas, we are living in the great age of centralization. Some Democrats regard federal commissions with the same sort of awe and wonder that I feel while watching LeBron James and Alex Ovechkin. The premise of the current financial regulatory reform is that the establishment missed the last bubble and, therefore, more power should be vested in the establishment to foresee and prevent the next one.--David Brooks
Tuesday, April 27, 2010
Who audits the auditors (again)? Ironic that the subcommittee is talking about conflict of interest, and they are agents, too.
It will be interesting to see how this plays out.
Might need to move to Australia, eventually.
UPDATE: Here's what Jon Faust has to say:
What is striking is that caveat emptor arises as a legal principle mainly because of the tangle the courts would get into if they tried to enforce a more ambitious standard of right and wrong.
Chief Justice Marshall’s logic surely applies with even greater force to modern deals between investment banks and sophisticated qualified investors, both of which will be simultaneously working on many deals, each involving sensitive proprietary information.
Caveat emptor makes good sense as a practical limitation on what courts might reasonably be expected to sort out.
So should shareholders of Goldman Sachs be concerned? About the suit, I don’t know. More generally, perhaps so.
As I reminded my undergraduates the other day, caveat emptor is a legal principle, not a business plan.
UPDATE: I feel badly for Goldman, even though they are the Yankees of investment banking (and I'm a Red Sox fan). I feel like their players are on the hot seat because they were throwing changeups, and now Congress is unhappy with changeups because they are deceptive.
UPDATE: Bethany McLean says:
... the transaction at the heart of the S.E.C.’s complaint is a microcosm of the entire credit crisis. That is, there are no good guys here. It’s dishonest and ultimately dangerous to pretend that Goldman is the only bad actor. And the worst actor of all is the one leading the charge against Goldman: our government. Each of the supposed victims here was, at best, a willing accomplice.
Monday, April 26, 2010
On Friday morning, July 3, 2009 [Sarah] Palin called her cameraman to her house in Wasilla and asked him to be on hand to record a prepared speech. Around noon, in front of a throng of national reporters, she announced that she was stepping down as governor. To many, it seemed a mysterious move, defying the logic of a potential presidential candidate, and possibly reflecting some hidden scandal—but in fact the choice may have been as easy as balancing a checkbook.This reminds me of this*:
Over the past year, Palin has amassed a $12 million fortune and shows no sign of slowing down.
But it’s not yet been shown that Palin needs any specifically political organization, or that she has to kowtow to any gatekeeper to get where she wants to go. In fact, she and her new network have themselves become the gatekeepers. It’s very hard to get anywhere in Republican politics without going past them. And the gate also happens to be a tollbooth.
Palin’s torrid book sales are the single biggest reason HarperCollins returned to profitability last year. When Palin sat down to promote Going Rogue with Oprah in November, she boosted Oprah’s ratings to the highest level in two years.
From Buffalo Bill to the Marlboro Man, the self-reliant frontiersman has always been an image with mass appeal. Palin has managed to graft this rugged Western myth onto a beauty-pageant face and a counterpunching, don’t-tread-on-me verbal style—a new kind of character, and a remarkably compelling one.
*I should take a crack at a Predicted Similarities Between Obama and Palin List. (I did the Bush-Obama List was done on Election Day 2008 here, and more than half have been fulfilled).
In April 1999, [Barack and Michelle Obama] purchased a Chicago condo and obtained a mortgage for $159,250. In May 1999, they took out a line of credit for $20,750. Then, in 2002, they refinanced the condo with a $210,000 mortgage, which means they took out about $50,000 in equity. Finally, in 2004, they took out another line of credit for $100,000 on top of the mortgage.
Tax returns for 2004 reveal $14,395 in mortgage deductions. If we assume an effective interest rate of 6%, then they owed about $240,000 on a home they purchased for about $159,250.
This means they spent perhaps $80,000 beyond their income from 1999 to 2004.
But in 2005, Obama's book sales soared and the royalties poured in. Michelle explained, "It was like Jack and his magic beans." Without those magic beans, the Obama family would have eventually suffered the consequences of too much debt.
Having bets on both sides is called “hedging” and is Finance 101. Goldman Sachs is on the hook for a lot of possible sins, of which it may be indeed guilty. Hedging is not one of them. That the media and politicians can’t even understand hedging is not reassuring when the largest financial reform in a generation is underway.--William Easterly
In this [New England Patriots] draft class, Michigan punter Zoltan Mesko, Florida defenders Jermaine Cunningham and Brandon Spikes, Ohio receiver Taylor Price, and first-round pick from Rutgers CB Devin McCourty were all captains. That’s a good thing.--Ian Rapaport
... a large portion [of Harvard liberal arts graduates] are intrigued by these [Goldman Sachs] ... I think that's a majority, at least at Harvard. And the same goes for consulting jobs or even Teach for America. It's this limited-time commitment, the ability to get new skills. These aren't the types of things you grow up dreaming of doing, but you wear a business suit, you meet clients. It's a way of growing up very quickly. And investment banking has the added advantage that you can make money very quickly and afford a great apartment in New York, which is very expensive. ... There's this notion of the accidental banker, people who get caught up in that world and get more and more pay and find it harder to justify leaving. But the cultural effect of all of this -- and even with regulatory reform, we need to think about that -- is that a lot of people decide to sacrifice much more time than they normally would because the money is so good, and then they believe they deserve extremely high pay because they're giving up so much time. It's not malicious. But there are a lot of unhappy people who end up in that situation.--anonymous Harvard graduate
... notice that most of the gain in freedom started in the late 1960s and concluded by the mid-1980s. Since then, most of the changes have been toward less freedom. Think of the increasing bureaucratization of life, most of which is due to government. If I want to cut off a tree branch that is more than four inches in diameter–even in my own yard–I must get the city government’s permission and pay for that permission. In the city of Monterey, California, someone who wants to install a new dishwasher must get government permission to do so.--David Henderson
That some groups respond in unexpected ways to well-meaning nudges is a lesson that the architects of "behaviorally informed" policy and regulation should keep in mind in drafting their messages. Costa and Kahn's findings suggest that you shouldn't try to prod Republicans into conserving energy through this type of social pressure. But perhaps there is a nudge that would resonate with Opower's conservative customers.* Future messages could be tailored to the market—what works in San Francisco might backfire in San Diego—or even to individual households based on their political leanings, ties to environmental organizations, or enrollment in renewable-energy programs. But this starts to sound an awful lot like fine-tuned social engineering, which gets us away from the original vision of simple nudges making a better world. And it starts to sound exactly like the type of heavy-handed governing that Republicans may be quietly rebelling against by turning up their thermostats.--Ray Fisman
The historians John Thornton and Linda Heywood of Boston University estimate that 90 percent of those shipped to the New World were enslaved by Africans and then sold to European traders. The sad truth is that without complex business partnerships between African elites and European traders and commercial agents, the slave trade to the New World would have been impossible, at least on the scale it occurred. Advocates of reparations for the descendants of those slaves generally ignore this untidy problem of the significant role that Africans played in the trade, choosing to believe the romanticized version that our ancestors were all kidnapped unawares by evil white men, like Kunta Kinte was in “Roots.” The truth, however, is much more complex: slavery was a business, highly organized and lucrative for European buyers and African sellers alike. ... Fortunately, in President Obama, the child of an African and an American, we finally have a leader who is uniquely positioned to bridge the great reparations divide. He is uniquely placed to publicly attribute responsibility and culpability where they truly belong, to white people and black people, on both sides of the Atlantic, complicit alike in one of the greatest evils in the history of civilization. And reaching that understanding is a vital precursor to any just and lasting agreement on the divisive issue of slavery reparations.--Henry Louis Gates
So the greater efficiency of a VAT and its easy of collection is a two-edged sword. On the one hand, it would raise a given amount of tax revenue efficiently and cheaply. Since economists usually evaluate different types of taxes by their efficiency and easy of collecting a given amount of tax revenue, economists typically like value added taxes. The error in this method of evaluating taxes is that it does not consider the political economy determinants of the level of taxes. From this political economy perspective, the value added tax does not look so attractive, at least to those of us who worry that governments would spend and tax at higher levels than is economically and socially desirable. ... the problem is that a VAT would be introduced not as a partial or full substitute for personal and corporate income taxes, but rather as an additional tax. This would make it much easier to close the fiscal gap by maintaining or increasing government spending and overall tax levels. Since high taxes and high levels of government spending would discourage economic growth and raise rather than lower the overall distortions in an economy, I am highly dubious about introducing a VAT into the federal tax system unless accompanied by a major overall of this system.--Gary Becker
In a feudal world where high transaction costs confounded the Coase theorem, I argue that trial by battle allocated disputed property rights efficiently. It did this by allocating contested property to the higher bidder in an all-pay auction. Trial by battle's 'auctions' permitted rent seeking. But they encouraged less rent seeking than the obvious alternative: a fi…rst-price ascending-bid auction.--Peter Leeson
Even the pagans understood, in other words, that the approach to God is bound up in blood and mystery.--Tony Woodlief
You want the truth? You can’t handle the truth. Son, we live in a country with an investment gap. And that gap needs to be filled by men with money. Who’s gonna do it? You? You, Middle Class Consumer? Goldman Sachs has a greater responsibility than you can possibly fathom. You weep for Lehman and you curse derivatives. You have that luxury. You have the luxury of not knowing what we know: that Lehman’s death, while tragic, probably saved the financial system. And that Goldman’s existence, while grotesque and incomprehensible to you, saves pension funds. You don’t want the truth. Because deep down, in places you don’t talk about at parties, you want us to fill that investment gap. You need us to fill that gap.
We use words like credit default swaps, collateralized debt obligation, and securitization? We use these words as the backbone of a life spent investing in something. You use them as a punchline. We have neither the time nor the inclination to explain ourselves to a commoner who rises and sleeps under the blanket of the very credit we provide, and then questions the manner in which we provide it! We’d rather you just said thank you and paid your taxes on time. Otherwise, we suggest you get an account and start trading. Either way, we don’t give a damn what you think you’re entitled to!?
His evidence includes the S&L Crisis (Altman's conclusion that BBB- paper yielded greater returns for the same risk as A bonds), Long Term Capital (Nobel Award to Merton and Scholes), and CDOs (Li's Gaussian copula).
Democrats took a step toward their goal of overhauling financial regulation, reaching a tentative deal to set restrictions on trading in exotic financial instruments known as derivatives. Among the considerations still in the balance: A big provision being sought by Warren Buffett in recent weeks. A key Senate committee had changed its proposed overhaul of derivatives regulation after lobbying by Mr. Buffett's Berkshire Hathaway Inc., potentially helping the famed investor avoid a financial hit, congressional aides say. ...
The provision, sought by Berkshire and pushed by Nebraska Sen. Ben Nelson in the Senate Agriculture Committee, would largely exempt existing derivatives contracts from the proposed rules. Previously, the legislation could have allowed regulators to require that companies such as Nebraska-based Berkshire put aside large sums to cover potential losses. The change thus would aid Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.
Who said this, again:
The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Friday, April 23, 2010
My fellow Patriots fans do not seem thrilled about first round pick Devin McCourty. Here's the comment I left at Christopher Price's place:
I'd bet good money that the Patriots really didn't want to pick a first rounder, because they could have saved $9 million in guaranteed money (that's from 2008 NFL Player's Association data) between an average first round vs. second round pick. But I think it's harder for teams to take the other side of Belichick's trades (just like it's hard for anyone to take the opposite side of Goldman/Paulson). So, Belichick took the best value in the market--just like he did with the Cassel/Vrabel trade.
Anyone who's followed the Patriots draft data knows that we like to draft in the second round. And frankly, since Asante left--and he tackles like Jeter plays defense--our secondary could actually use a first round CB. The fact that McCourty values special teams shows that he is probably a better fit for the Pats than the typical DB meathead.
... I called my friendly investment banker and said, hey, I'd like to buy protection on a decline in value of a reference pool of equity securities of 20% or more of their present value. Actually, I'd like it to be a pool of 200 of the 500 of the largest stocks in the US by market capitalization. I liked researching these 500 stocks in detail, and felt that 200 was the right number. What could you do for me, mister banker?
So my banker went out and spoke to an assembler of reference pools of securities. As it happens, they knew an outfit called Standard and Poor's, and they had a handy list of 500 stocks which they had previously selected into a pool. They already sponsored this pool of securities so all was good, and they happily agreed to arbitrate the performance of my 200 stocks.
My banker, not wanting to assume my risk in the reference pool, decided to look for someone else to lay the risk off to. Lo, there were takers for this sort of risk. Embedding the risk into a bond issued by my bank's offshore conduit that if the securities fell by more than 20%, principal would not be fully repaid, this bond paid nicely above-market interest rates. Many investors wanted to bear this risk, but my bank did not tell them that I had an opposite view. Had they done, investors would not have cared, as the securities were market priced at the time of striking the deal and they were happy to bear the risk on offer. They bought the bonds, and I bought my protection. My banker called it a cash settled put option, but you know, whatever.
As luck would have it, the reference pool fell by 50%. The first 20% fall didn't do anyone any harm, as no-one had a side bet on this risk. Investors in my bankers' bonds lost 30% though, and that was paid to me.
Should my friendly banker or I be nervous about an SEC law suit for this despicably complex transaction?
Because our intellectual knowledge of God is so small and obscure, we can sometimes gain considerable advantage in our struggle to understand what God is like by the simple expedient of thinking what He is not like.--A.W. Tozer
... most economists opining on policy just figure, 'I can make it better, ergo, the government should be given power to make it better'. Useful idiot-savants are they.--Eric Falkenstein
... you imply that if your favored [political] party wins the election, the world would be entirely to your liking. I can assure you that this possibility is remote.--Tim Harford
The introduction of the income tax made Prohibition fiscally feasible. Women's suffrage made it politically feasible. World War I created a surfeit of patriotism, a willingness to sacrifice, and an embrace of the expansion of federal power. By 1920 everything was in place for a bold new government intrusion into everyday life. ... The lesson to be found amid the scofflaws and scoundrels and anecdotes is that, even if they were ultimately on the wrong side of history, temperance forces were far more sensible than we have come to believe.--Tyler Cowen
... there is both the expected value of one’s income (measured by what it does for you in practical terms) and the uncertainty surrounding it. As the means from one person to the next converge, the uncertainty takes on increasing significance. As the “how you spend your time” differential shrinks, a reduction in uncertainty through an improvement in the safety net becomes of increasing importance. Indeed, in the limit, if everyone is typically spending their time doing the same things, reducing this uncertainty is all that matters.--Rick Brookstaber
... one catches a glimpse of the enigma of the Christian event, which Nietzsche understood and [A.C.] Grayling does not: the lightning bolt that broke from the cloudless sky of pagan antiquity, the long revolution that overturned the hierarchies of heaven and earth alike. One does not have to believe any of it, of course—the Christian story, its moral claims, its metaphysical systems, and so forth. But anyone who chooses to lament that event should also be willing, first, to see this image of the God-man, broken at the foot of the cross, for what it is, in the full mystery of its historical contingency, spiritual pathos, and moral novelty: that tender agony of the soul that finds the glory of God in the most abject and defeated of human forms. Only if one has succeeded in doing this can it be of any significance if one still, then, elects to turn away.--David Bentley Hart
Thursday, April 22, 2010
In the past dozen years, nearly every woman to win the Academy Award for Best Actress has broken up with her husband, boyfriend or lover -- some just months after thanking them from the award show stage.--Todd Venezia
The reality is that the economic meltdown began with federal government policies which kept interest rates artificially low and forced banks to abandon traditional lending practices in the name of home ownership for all. These policies started under the Clinton administration, and continued under the Bush administration. Democrats, including people like Barney Frank and Chris Dodd, fought hard to avoid Bush administration attempts to reign in Fannie Mae and Freddie Mac. I have spent most of my professional life suing Wall Street firms, so I have no sympathy for the many bad practices which have ripped off investors. But just because Wall Street has engaged in some bad practices does not mean Wall Street is responsible for everything that goes wrong in the economy. Wall Street was an accomplice in the housing bubble in the sense that the securitization of the mortgages provided a cash flow which allowed the bubble to grow. But honesty requires the acknowledgement that Wall Street did not create the housing bubble or cause it to burst. No bad mortgage lending practices, no housing bubble. No bad mortgage lending practices, no economic meltdown. No bad mortgage lending practices, no bad bets on the housing markets. It was the bad mortgage lending practices, stupid. The economic meltdown started with the people in government -- including many of the Democrats who now are pushing for "reform" -- who corrupted the credit practices of banks and other lenders in the name of progressive policies. The same policies which will cause our heath care system to collapse.--William Jacobson
And, via Jacobson, here are eight minutes of congressional quotes from past decade on government programs that were too big to fail; some real history:
Here's the skinny: I found out yesterday that my 5 year old won't be able to go to my 9 year old's elementary school (city wide, rigorous testing). She is also not able to go her local zoned school 2 blocks away (overpopulation since 9/11 downtown, wait-listed). But she does qualify for several good programs 20-100 blocks away (the borders of Brooklyn and New Jersey are closer than many of these locations). So I've got 5 business days to tour these schools (not to mention hold my job down, and shepherd some major bylaws changes for the nonprofit on whose board I sit).
And I get to pay about 12-14% in state and city income taxes for this privilege (on top of moderate property and pretty high sales taxes).
Connecticut, you're looking better every day.
Wednesday, April 21, 2010
It’s not your fault -- yet.--President Obama to CEA chief Christy Romer
Capping [health insurance] premiums without recognizing the forces that are driving up costs would be like tightening the lid on a pressure cooker while the heat is being turned up.--Grace-Marie Turner
Canada’s budget was balanced because a right-of-center party passed a V.A.T., whose massive unpopularity helped elect a large left-of-center majority, which then used its newfound power to make drastic spending cuts. To have an equivalent sequence of events in American politics, you would need Barack Obama and the Democrats to pass dramatic cuts to Medicare and Social Security in 2014 or so, followed by a 2016 campaign in which Bobby Jindal and his running mate, Paul Ryan, swept to victory by promising to repeal the entitlement cuts, but then broke their promise once in office and starting raising taxes instead. Stranger things have happened. But not many.--Ross Douthat
... one of the prime motives for healthcare reform had nothing to do with health per se but rather was a desire by those on the left for greater redistribution of income. The Tax Foundation has now put some numbers to that proposition for the recently passed bill. Roughly speaking, the top 1 percent of the population pays an additional $50,000 in taxes because of this legislation, and each of the bottom 50 percent gets about $1000 in benefits.--Greg Mankiw
While hedge fund managers might be presumed to be eager to help the GOP beat back Wall Street reform, the reality is that the biggest of the big-time spenders funneled their donations primarily to Democrats, the party that holds Congress and the White House. According to an analysis done by the Center for Responsive Politics for ABC News, the five biggest hedge fund donors all gave almost all their donations to Democrats.--Rich Blake
If I shorted synthetic oil via a synthetic CDO, do I effectively alchemise the real stuff & solve peak oil?--Andrew Clavell
Most astronomers today believe that one of the plausible reasons we have yet to detect intelligent life in the universe is due to the deadly effects of local supernova explosions that wipe out all life in a given region of a galaxy.--Luke McKinney with Casey Kazan
I bet all of the major investment banks are facilitating debt issuance by the State of California and its various agencies, counties, and municipalities. I bet also there is a small but spirited set of shorts, trying to make money off of the inevitable bankruptcy. With hindsight it will be obvious, and everyone currently buying California-related debt will develop amnesia and claim they never liked California debt, and were hoodwinked by greedy bankers. At that point, should all the investment banks be liable? If so, is every bank facilitating California debt issuance committing fraud right now?--Eric Falkenstein
I was talking to a risk manager recently, and he excitedly mentioned they just hired a PhD in physics from CountryWide to model RMBS--sort of like saying we just got the Madoff's operational risk manager. When investors lose money individual managers are pretty effective at avoiding blame, consequences are mainly apportioned to firms via their assets under management and share price, and then indirectly to individuals. I'm sure not everyone at ACA is a clueless hack, but the key players were, and its good to remember that more bad things happen because of ignorant bureaucrats like the people at ACA, as opposed to schemers like Fab Tourre and Goldman. After all, the world is full of sharks wanting to take your money, so a money manager susceptible to these pitches is a time bomb waiting to go off; if it wasn't Fab & Goldman, it would have been someone else.--Eric Falkenstein
Zipf’s Law is one of the great curiosities of urban research. The law claims that the number of people in a city is inversely proportional to the city’s rank among all cities. In other words, the biggest city is about twice the size of the second biggest city, three times the size of the third biggest city, and so forth. ... Population growth rates are independent of initial population, and this is commonly called Gibrat’s Law, so Professor Gabaix seems to have illuminated the dynamic underpinnings of Zipf’s Law. But Professor Gabaix’s contribution only pushes the puzzle back one step further. Why should population growth rates be independent of initial levels? Why shouldn’t big cities grow more slowly or small cities catch up? My own view is that Zipf’s Law is really about the operation of agglomeration — the attraction of people to more people — and sprawl. An initial population attracts more people who live nearby. As long as each person attracts about the same number of new people, then Gibrat’s Law will follow and that gives us Zipf’s Law. At its heart, this strange mathematical regularity is really once again pointing to the power of agglomeration — the enormous value that human beings place on being near one another.--Edward Glaeser
It turns out you are 12 times more likely to get married this year if you don't subscribe to Match.com. ... of the 89 million people who don't subscribe to Match.com, 4 million get married. That's 4.5%. Of the 1.4 million people who do subscribe, 5,000 get married. That's 0.36%.--Christian
Matthew Gentzkow and Jesse M. Shapiro, both of the University of Chicago Booth School of Business, have measured ideological segregation on the Internet. They took methodologies that have been used to identify racial segregation, and they tracked how people of different political views move around the Web. ... This study suggests that Internet users are a bunch of ideological Jack Kerouacs. They’re not burrowing down into comforting nests. They’re cruising far and wide looking for adventure, information, combat and arousal. This does not mean they are not polarized. Looking at a site says nothing about how you process it or the character of attention you bring to it. It could be people spend a lot of time at their home sites and then go off on forays looking for things to hate. But it probably does mean they are not insecure and they are not sheltered. If this study is correct, the Internet will not produce a cocooned public square, but a free-wheeling multilayered Mad Max public square. The study also suggests that if there is increased polarization (and there is), it’s probably not the Internet that’s causing it.--David Brooks
I wonder why this wasn't a concern when he was talking about the stimulus package. For example, I would say that certain jobs involving public school administration--where the administrators now outnumber the teachers--would also be a concern.
Of course, they got $42 billion.
Even I can do that. I think my 7-month-old could do that. He's practically crawling.
So why are we talking about banks that are too big to fail? Shouldn't we be talking about government programs?
U.S. regulators on Tuesday gave the thumbs up for a second market that would give people a way to bet on expected movie box office receipts, but again withheld a decision on the contracts that would allow trading to begin.
The U.S. Commodity Futures Trading Commission’s ruling on the Cantor Futures Exchange follows a similar decision it made last week approving Variana Networks’ Trend Exchange, The Associated Press reported.
Let's have some follow through on the contracts.
Paolo Pellegrini, a former top executive at hedge-fund Paulson & Co., told investigators at the Securities and Exchange Commission that he had informed ACA Management LLC that his firm was betting against the transaction at the center of a lawsuit the SEC brought against Goldman Sachs Group Inc., according to a person familiar with the matter.
The testimony, in late 2008, could undermine the government's case against Goldman, which is accused of misleading ACA, the deal manager, about Paulson's bearish position on the deal. Mr. Pellegrini and the Paulson team worked with both Goldman Sachs and ACA to structure the deal.
Tuesday, April 20, 2010
The best longer-term solution to the inequality problem is to reduce the fraction of Americans who dropout of high school, a theme I have continued to emphasize in various postings on our blog. This drop out fraction has been stagnant for the past several decades at about 30% for males, and a somewhat lower but still high percent for females. This is almost surely the highest fraction of high school dropouts among rich countries, and is heavily concentrated among children from African-Americans and Hispanic families. In large cities, often less than half of all the children enrolled in public schools end up graduating. ... Probably the most fundamental cause of the continuing high drop out rates has been the large deterioration in family stability during the past 50 years. This has led, among other things, to the growth of low-income single parent families that contain about ¼ of all young children, and to the absence of the influence of fathers on the discipline and motivation of children in these households. Family stability is difficult to improve, particularly in the shorter run (although see my blog post of April 4). However, schools can be improved relatively quickly by holding teachers and administrators up to higher standards. President Bush took important steps in this direction, and President Obama has been adding to and improving these changes by requiring even better school performance. In addition, studies have shown that charter schools, vouchers, and other ways to raise competition among schools that cater to children from poorer families contribute in important ways to better achievement scores of these children. That is why the caps placed by many states and localities on the number of charter schools-mainly under pressure from teachers unions- should be removed, as some cities are doing.--Gary Becker
The peasants must get rich, and some will get richer than others.--Deng Xiaoping
There are a few prerequisites to inventing.... You have to be willing to fail. You have to be willing to think long term. You have to be willing to be misunderstood for long periods of time. If you can't do those three things, you need to limit yourself to sustaining innovation.... You typically don't get misunderstood for sustaining innovation.--Jeff Bezos
Get market share, and when you get far ahead it is hard to catch up. [Amazon's Jeff] Bezos’s game, like [Apple's Steve] Jobs’s before him, is to get the device and get eighty-to-ninety-per-cent distribution on the device, and you own the game.--Books publisher
Sorry, Bean Counters. Numbers do lie. Sometimes pathologically so…--Hugh MacLeod
What do you get when you cross a Godfather with an investment banker? Someone who makes you an offer you can’t understand.--Paul Krugman
Wall Street has gotten a lot of mileage out of the accusation that the political system simply doesn't understand how Wall Street works. And that's, well, correct. The problem is that Wall Street also doesn't understand how Wall Street works.--Ezra Klein
So, was Paulson's involvement material? Was it really different than your not knowing who is selling stocks to you on a daily basis (again, Warren Buffett may be on the other side of those trades, he may think you're stupid, and he may be right).--Henry Blodget
ACA used proprietary models and methods of analysis to develop its own independent view of the relative riskiness of each security. To that point, ACA rejected more than half of the securities suggested by Paulson [for the Abacus vehicle].--Greg Palm, Goldman general counsel
Goldman, the SEC alleges, disclosed neither its nor Paulson's role in shorting the same bonds its was selling. Was that lack of disclosure material? I don't know. But, if some Goldman trader called me and in the process of pitching these bonds to me let it drop that one of Goldman's most important institutional investors was shorting the same bonds that they were trying to sell me and that Goldman had arranged the short, I probably wouldn't invest. But, hey, that's just me.--Brian JM Quinn
Goldman’s attempts to justify what occurred, rather than dispute the facts or apologize, could be the firm’s death warrant. The brilliant can be so blind.--Steve Randy Waldman
The question of how to study baseball has been settled, although no one has tried to replace scouts with robots—every team now evaluates players with a combination of statistical analysis and firsthand observation. But there is still much to be determined. Can statistical analysis and video breakdown of throwing form help figure out which flamethrowing college pitchers are less likely to get injured after they’re drafted? Can it tell you exactly which players on your team should hit and run in the seventh inning of a one-run game? What proportion of its budget should a mid-market team spend on minor-league coaching relative to high-school scouting in order to maximize profits? There are a million questions to choose from, but right now the most cutting-edge research is in the mysterious, ethereal, and, most maddeningly, subjective world of defense. And that quest to objectify the subjective has opened a new front in the battle between the Yankees and their eternal enemies, the Red Sox.--Will Leitch
... the search for a replacement for the retiring Justice John Paul Stevens is centered on finding a justice who will not just replicate his liberal votes but also bring intellectual heft and powers of persuasion to the court to win the swing vote of Justice Anthony M. Kennedy, according to people close to the search who insisted on anonymity to discuss it. While activists on the left often say they want a liberal Antonin Scalia, the fiery conservative justice, Mr. Obama is looking for a liberal John Roberts, who can forge a five-vote majority rather than write satisfying but ultimately meaningless dissents. ... Conflict between the executive and judicial branches, of course, traces its roots to the early days of the republic. Thomas Jefferson and John Marshall wrestled over states’ rights versus federal power. Abraham Lincoln and Roger B. Taney struggled over the extent of the president’s wartime power. Theodore Roosevelt, angry at the position taken by his own appointee, Oliver Wendell Holmes Jr., snapped that “I could carve out of a banana a judge with more backbone than that.” And then, of course, there was Franklin D. Roosevelt’s open war with the Supreme Court in the 1930s. After it invalidated much of his New Deal program, Roosevelt mounted a frontal assault by proposing to expand the court with new justices — all appointed by him, of course — only to have the so-called court-packing scheme backfire amid bipartisan opposition. Still, Roosevelt argued that he had lost the battle but won the war, as turnover and evolving positions led to a court more disposed to his measures. --Peter Baker
There is no general-purpose answer to this question: it is always a matter of what it means to be Jewish for me—something quite distinct from what it means for my fellow Jews. To outsiders, such concerns are mysterious. A Protestant who does not believe in the Scriptures, a Catholic who abjures the authority of the Pope in Rome, or a Muslim for whom Muhammad is not the Prophet: these are incoherent categories. But a Jew who rejects the authority of the rabbis is still Jewish (even if only by the rabbis’ own matrilineal definition): who is to tell him otherwise? ... Jews in America are more successful, integrated, respected, and influential than at any place or time in the history of the community. Why then is contemporary Jewish identity in the US so obsessively attached to the recollection—and anticipation—of its own disappearance? ... American Jews are instinctively correct to indulge their Holocaust obsession: it provides reference, liturgy, example, and moral instruction—as well as historical proximity. And yet they are making a terrible mistake: they have confused a means of remembering with a reason to do so. Are we really Jews for no better reason than that Hitler sought to exterminate our grandparents? If we fail to rise above this consideration, our grandchildren will have little cause to identify with us. ... It is not enough to stand at a tangent to other peoples’ conventions; we should also be the most unforgiving critics of our own. I feel a debt of responsibility to this past. It is why I am Jewish. Toni Avegael was transported to Auschwitz in 1942 and gassed to death there as a Jew. I am named after her. --Tony Judt
What we didn't have with past recessions that we have now is an 'entitlement explosion' around the corner
Monday, April 19, 2010
You would expect people who score high on the SAT to earn more than those who score low.
They don't. As it turns out, the highest wages belong to the white men with the lowest SAT scores at the most prestigious colleges. ... Opponents of affirmative action like to talk about academic merit, and overall, black and Hispanic applicants to selective colleges benefit from an admissions handicap of about 0.67 GPA points and 400 SAT points. But Table 5.1 suggests that on the margins, where the white would-have-been-admitteds confront the black wouldn't-have-been-admitteds, the disparity in academic standards is dwarfed by the disparity in future earned income.
Via Eric Barker.
I think [Robert Rubin and Larry Summers] were wrong and I think I was wrong to take [their advice]--Bill Clinton
In its defense against the fraud charges the SEC just clobbered it with, Goldman pointed out that it had lost $90 million on the collapse of the Abacus CDO because it had retained a "substantial long position" in the transaction. So that means... Goldman was betting against Paulson & Co.--Henry Blodget
Alan S. Rosenman took over ACA Capital as president and CEO in 2004 - because -- wait for it -- his predecessor Michael Satz had "personal income tax issues" -- (how murky is this story going to get you must be asking?) According to a Business Week article dated April 3 by David Henry and Matthew Goldstein, Rosenman "immediately began to push ACA into CDO insurance, an area his predecessor, Satz, had only begun to explore." Rosenman's wife, or at least partner -- they are listed as sharing a house together for which they paid $6.1 million in 2005 in New York -- is Frances "Fran" R. Bermanzohn, who is managing director and deputy general counsel at ... Goldman Sachs.--Vicky Ward
Baywatch convinces people that there is a certain level of ordinary materialism that everyone can have. "This is what it $20,000 a year looks like." That's what's going to destroy America. ... the characters in the new crop of 20 something TV have access to material goods way outside their pay range, but they are made so ordinary you never think to question it. We know very well how Pamela Anderson affords it. But it's made axiomatic that CJ can. ... In twenty years, Pamela Anderson probably won't look like she does now, but she'll still have her money. But what's going to happen to the 20 somethings who expect a certain basic level of luxury? Baywatch is popular all over the world, so this won't be limited to Americans. What's coming is a worldwide generation of future 40 year olds who will not be able to afford what they are now being conditioned to expect.--The Last Psychiatrist
[Susan] Pinker does more than dryly discuss the biology; she provides example after example of women who have succeeded in this “man’s world” and found it wanting. As Pinker explains, let’s move on past the idea that a woman can’t do the same work as a man, and discuss why she may not want to.--Rebecca Burch
According to researchers at the University of North Carolina at Chapel Hill, 39.8% of boys with an average IQ score have had sex, while only 29.2% of boys with an IQ above 110 have done the deed.--K. Manning
One theory suggests that creative output obeys a predictable pattern over time, which is best represented by an "inverted U curve." The shape of the curve captures the steep rise and slow fall of individual creativity, with performance peaking after a few years of work before it starts to decline in middle age. By the time scientists are eminent and well-funded—this tends to happen in the final years of their careers—they are probably long past their creative prime. The inverted U curve was first documented by Adolphe Quetelet, a 19th-century French mathematician and sociologist. Mr. Quetelet's study was simple: He plotted the number of plays produced by French and English playwrights over the course of their life spans. He soon discovered that creativity had a sweet spot, which seemed to always occur between the ages of 25 and 50. ... differences in peak age appear to be cultural universals, with poets peaking before novelists in every major literary tradition, according to his research.--Jonah Lehrer
Friday, April 16, 2010
Of course, I'm the dumbest of all, as I've been short Goldman in the personal account for many months, and it has outpaced my BAC/JPM/PFF hedge against it.Maybe not so dumb after all.
UPDATE: Here's the NY Times breaking story.
LIVEBLOG of the SEC call:
11:10a SEC spokesman says that GS' prospectus claimed an independent company chose the mortgages for the Abacus vehicle. Clear fraud here--Paulson & Co. cannot be an independent company as it is positioning trade for itself.
ET TU, BRUTE: Paolo Pellegrini, John Paulson's former right hand man who left to start his own shop, is SEC's source, according to CNBC's Steve Liesman.
- Sabutai (1172-1245)
- Marchel de Saxe (1696-1750)
- Gustavus Adolphus (1594-1632)
- Wallenstein (1583-1634)
- James Wolfe (1727-1759)
Thursday, April 15, 2010
Lehman’s equity-derivatives positions were worth $4.9 million. And Goldman, in bidding for those positions, didn’t bid a single penny — instead, it demanded a whopping $445 million from Lehman’s margin accounts in order to take them over. So it got the positions for free, and another $445 million as gravy, on top. You can almost see the money being sucked up the Goldman blood funnel, no?--Felix Salmon
... perceived job insecurity ranks as one of the most important factors in employees' well-being and can be even more harmful than actual job loss with subsequent unemployment.--German Socio-Economic Panel Study (SOEP)
This is a standard problem whenever the damage from undertaking a risky activity is reduced: Offer a life raft and more people will jump off a sinking ship. Many will be saved, but some will drown off the life raft. Mandatory seat belts do this—lives are saved, but people also drive faster and more accidents occur. Sex education does this—there are fewer pregnancies per sexual encounter, but more sexual encounters are undertaken. Unemployment insurance does this—it is a life raft for the working, but it attracts people into the workforce who are more likely than others to be unemployed.--Daniel Hamermesh
When the music videos were high in sex, or high in materialism, women were more likely to have smaller body sizes. In contrast, when the videos were high in political awareness, women were more likely to have larger body sizes.--Sex Roles journal
Most married women gain 33–34 min of leisure each weekday when compared to single women. While marriage does not lead to more leisure for husbands, it allows them to allocate time away from home and towards market work. Lower-income couples work more at home and for pay, and spend less time in leisure than their single counterparts. The temporal and financial gains from marriage for most people are inconsistent with its declining prevalence.--Review of Economics of the Household
Wednesday, April 14, 2010
My theory, in a nutshell, is that it isn’t business that Hollywood doesn’t like (after all, Hollywood is a business) but capitalists. Filmmakers resent the capitalists for forcing them to make artistic tradeoffs for the sake of the bottom line, and this resentment comes out in the films. My paper shows the many ways this resentment is displayed in films. ... As I discuss in my article, one of the ways capitalist-resentment creeps into film is in the big role luck plays in the filmmakers’ version of business. After all, as I explain, “if financial success or failure depends on luck, or worse, it makes no sense for capitalists to force filmmakers to compromise their art to attract an audience. And when films fail financially, this cannot be the artists’ fault.” ... I note in the paper that “filmmakers might do better if they made more use of markets such as the Hollywood Stock Exchange,” citing Saul Levmore’s article, Simply Efficient Markets and the Role of Regulation: Lessons from the Iowa Electronic Markets and the Hollywood Stock Exchange, 28 J. CORP. L. 589 (2003). But one would expect this development to actually heighten filmmakers’ resentment: what could be worse than to show that you could actually predict which films would succeed and which would fail? So you can imagine filmmakers’ horror at the possible advent of new film futures markets ...--Larry Ribstein
Face it, most [Supreme Court] Justices know almost nothing about economics beyond an Econ 101 class they had as a college freshman three, four, five decades ago. And these are the people who decide what the commerce clause means ... the ones who made it illegal for a man to grow his own tomatoes without federal approval? Today we enjoy a Court that said it was peachy keen for the federal government to take ownership of General Motors on behalf of taxpayers who wouldn't touch GM stock of their own free will. To that, we can all say: "Thanks for less than nothing."--Tim Kane
Some people think George Bush’s biggest miscalculation was misjudging the intentions of Saddam Hussein. I think he got those exactly right, and it was Putin’s intentions that he sorely misjudged.--Jules Crittenden
Tuesday, April 13, 2010
The only unemployment you find in Haiti is in the graveyard.--Tyler Cowen
Has anyone else noticed that many of the same progressives who insist that we copy the European public health insurance model also tell us that the successful European voucher programs wouldn’t work here, because we are just too different?--Scott Sumner
Results demonstrate that the proportions of IQ variance attributable to genes and environment vary nonlinearly with SES. The models suggest that in impoverished families, 60% of the variance in IQ is accounted for by the shared environment, and the contribution of genes is close to zero; in affluent families, the result is almost exactly the reverse.--Psychological Science
By my count, about 14 percent of the people in Parade's sample earn more than $1 million a year. In the real world, the actual percentage is about 0.2 percent. So, in a truly representative sample of a hundred people, you would most likely have zero, or perhaps one, person with a million dollar income. Finding two would be highly unlikely. 14 would be nearly impossible. Does this matter? I think it might. There is a common perception in some circles that we can solve all our fiscal problems if only we were willing to tax the rich some more. Yet, in reality, there are not enough rich for this to work. By presenting such a skewed cross-section of incomes, Parade inadvertently feeds an all-too-common misperception.--Greg Mankiw
[Supreme Court Justice John Paul] Stevens’s retirement means a Supreme Court nomination this summer, which once again allows us to observe the civility and decorum that has put Washington, D.C. on par with a seventh-grade lunchroom.--Tony Woodlief
Synthetic indignation being the first refuge of political featherweights, [Charlie] Crist's campaign announced that he believes [Marco] Rubio's suggestions are "cruel, unusual and unfair to seniors living on a fixed income." They are indeed unusual, because flinching from the facts of the coming entitlements crisis is the default position of all but a responsible few, such as Wisconsin's Rep. Paul Ryan, who has endorsed Rubio. What is ultimately cruel is Crist's unserious pretense that America faces only palatable choices and that improvident promises can be fully funded with money currently lost to waste and fraud. By the time the baby boomers have retired in 2030, the median age of the American population will be close to that of today's population of Florida, the retirees' haven that is Heaven's antechamber. The 38-year-old Rubio's responsible answer to a serious question gives the nation a glimpse of a rarity -- a brave approach to the welfare state's inevitable politics of gerontocracy.--George Will
It is important to remember that government legislators and regulators were encouraging reckless subprime lending the whole way down. Maybe they didn't cause the crisis, or they were not even one of the larger of several causes, but they were not arguing for stricter underwriting standards during the height of subprime lunacy. Even today, the only place you can get a home loan with only 3.5% down payment is from the government's FHA program.--Eric Falkenstein
... the Shanxi banks were unique. Their dual class shares let owners vote only on insiders’ retention and compensation every three or four years. Insiders shares had the same dividend plus votes in meetings advising the general manager on lending or other business decisions, and were swapped upon death or retirement for a third inheritable non-voting equity class, dead shares, with a fixed expiry date. Augmented by contracts permitting the enslavement of insiders’ wives and children, and their relative’s services as hostages, these governance mechanisms prevented insider fraud and propelled the banks to empire-wide dominance.--Randall Morck, Fan Yang
Colleges want to expand the heterogeneity of the selection criteria so they can pick who they want. If it's a top college or university, mostly this means limiting the number of Asians and maximizing the number of future donors and by the way those two goals tend to move in tandem.--Tyler Cowen
If future Chinese consumption growth also slows, as it did in Japan, because households are forced to foot the new bad-debt bill, we may see the real cost of the current explosion in bad loans – several years of sub-par growth. It turns out that banking crises might not be costless, even if they don’t lead to banking collapses. In the case of China they may instead lead to a collapse in consumption growth. As part of the trade dispute that China is facing with the rest of the world, this should give some indication of how little room China has for its adjustment. Anyone who is too impatient with the glacial pace of Chinese adjustment must recognize just how difficult it will be for China quickly to reorient its economy towards household consumption. The risk is that China, like Japan in the 1990s, will rebalance in the form of a sharp contraction in GDP growth as households struggle to pay for the misallocated lending boom.--Michael Pettis
Conventional economics makes much use of the phrase, "In equilibrium, ..." We say that "we know that in equilibrium, X has to happen." We do not talk much about the process of getting from disequilibrium to equilibrium. We talk even less about the things that go on while we are out of equilibrium. What makes Recalculation different, and awkward, is that it is explicitly not an equilibrium concept. In that sense, it has an affinity with other heterodox economic views that scorn equilibrium. Austrians who focus on dynamics and creative destruction are in that camp. But so are post-Keynesians who insist that Keynesian economics is a disequilibrium theory.--Arnold Kling
Douglass North famously said that when the institutions of a society reward piracy, ambitious people become pirates. When the institutions reward wealth creation, people create wealth. In finance, our institutions did much to reward piracy in the past decade.--Arnold Kling
Monday, April 12, 2010
Even the high unemployment rate may be less important politically than you’d think. Seth Masket, a political scientist at the University of Denver, has found that, in midterm elections since 1950, there’s been no correlation between the unemployment rate and election outcomes. The key economic variable for voters, other studies show, has been income growth, or, more specifically, how fast per-capita G.D.P. is rising.--James Surowiecki
Napoleon had lost not only most of the men he had led to Russia but 175,000 horses as well. The men could be replaced, as indeed they largely were before the next year’s fighting, but the horses could not. In 1813, despite scouring the French Empire, only 29,000 could be procured, and most of them were not of top quality. This would cripple the French in the campaign of 1813 and be a considerable factor in Napoleon’s reverses of the summer and autumn of that year.--John Steele Gordon
But most experts are overlooking America's true competitive advantages. The tale of the economy's remarkable turnaround is largely the story of swift reaction, a willingness to write off bad debts and restructure, and an embrace of efficiency—disciplines largely invented in the U.S. and at which it still excels. America still leads the world at processing failure, at latching on to new innovations and building them to scale quickly and profitably. ... Of course, the declinists were often wrong—Rockefeller Center and Pebble Beach returned to U.S. ownership within a decade. Just as exuberant projections are generally made precisely at the top (remember Dow 36,000?), prophecies of long-term decline usually gain traction after we've suffered a catastrophic fall. ... In August 2009, not even the most cockeyed optimists could have projected that within four months, Bank of America, Citi, and Wells Fargo would return $100 billion in borrowed funds to the taxpayers. But they did. --Daniel Gross
The burden of entitlements and other government spending depends very much on the growth of GDP since it is the ratio of government spending to GDP that determine the real tax burden. If GDP could grow by ½ percent per year faster than it would otherwise, the effects on GDP and the tax burden of given government spending in twenty and thirty years would be enormous. To achieve such a higher growth rate would require lower, not higher, taxes on both physical and human capital, more, not less, encouragement to entrepreneurial activities, and greater emphasis on competition in labor and product markets instead of bailouts of companies like GM, Chrysler, and Citibank that were badly managed. All of my suggestions would be met by strong political opposition from entrenched interest groups, such as the elderly, government unions, and poorly managed companies. Yet without these changes, or something comparable, the entitlement and debt burden at all levels of government will grow during the next couple of decades to levels that will become a serious drag on the performance of the American economy. And as I indicated at the beginning, similar, if not larger, problems are confronting Western Europe and Japan.--Gary Becker
... the research also shows how we might become better market timers. The key is to do the opposite of what the average mutual fund investor is doing — in other words, to become a contrarian.--Mark Hulbert
Three Hasids and 120 cyclists walk into a bar.--Michael Idov
What would happen if the greatest athlete alive put as much effort into his training as he does his video games?--Luke Dittrich
So, if there is no extra return, why take risk? Roy Baumeister makes an interesting argument. He notes that historically 80% of females have reproduced, while only 40% of males passed on their genes. The rest of the males, historically, have been genetic dead ends. Historically a female could play it safe because there were always men willing to impregnate them, whereas a male who remained meek was elbowed out of sexual trysts. Males have to beat out other men to get access to females. Thus, men built ships and traveled to far-off lands because those were the guys who had more children, whereas a bunch of women could bear children just as easily staying put. Everyone's male ancestors have been disproportionately bold risk takers; not taking risk, over generations, is certain doom. We take risk, therefore, because not taking risk is genetic suicide, at least for the gender that generally takes such risks. ... Risk takers dominate our lives via their disproportionate effect on our genes, and their influence on our technology and culture. They did not become successful, however, merely by taking some abstract 'risk' that is the same for everyone, and then enjoy the higher rewards that come with it. They instead took the right risks, those consistent with their unique strengths, and reaped rewards consistent with mastery of something important. Like a golfer with a long drive, you can shoot at the green as opposed to laying up, and that risk is a good one for you, but only because you can hit the ball farther than average. Modern finance is profoundly misleading when it suggests that reward is merely a function of our ability to withstand some abstruse risk (ie, the covariance with the as-yet-unidentified stochastic discount factor), and chance. Skill, effort, and learning play no part in this sterile world. In contrast, people should see risk taking as a process of self-discovery, of becoming the best you can be, and that playing it safe is, for males at least, a path of oblivion. The payoffs to risk-taking are partially chance, but if you want to take risks intelligently you will gravitate towards risks consistent with your skills, and get better and better at them.--Eric Falkenstein
Friday, April 09, 2010
... the highly indebted government doesn’t pay a penalty for its profligacy, as long as growth keeps up and interest rates stay low, Breakingviews says. Greece, led by George Papandreou, and other heavily indebted countries benefited from such a happy environment for years. But the equilibrium is fragile. It can be disturbed in three ways, Breakingviews says: nominal G.D.P. growth can decline, interest rates can go up, or the country can start running a primary deficit. The pain is much worse for highly indebted countries like Greece, which has managed all three at once, the publication notes.--Hugo Dixon
Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York. A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.--Kate Kelly, Tom McGinty and Dan Fitzpatrick
Gayborhoods were born in the second-half of the 20th century in relatively run-down, forsaken parts of cities, away from the establishment that could give a damn about man-on-man P.D.A., and side-by-side with others who found themselves similarly sidelined: the poor, drug addicts, ethnic minorities. Sometimes referred to with the euphemism “artists,” gays became the Marines of gentrification, storming and conquering destitute places. Then, unencumbered with the financial burden of Huggie’s, ballet classes and lunch boxes, they dropped cash. Disposable incomes turned vacant factories into lofts and abandoned lots into community gardens. They brought a live-and-let-live attitude, a sense of style, and several places to eat sushi.--Matt Katz
Thursday, April 08, 2010
2005: Mini coup for Intel - Apple announces it will abandon PowerPC and adopts Intel across its entire MacBook line. This will go down as the apex of Intel’s reign in computing, as x86 processors own almost every server, desktop, and laptop.
2006: Intel exhibits a level of hubris that is shocking in hindsight—they exit the mobile phone market entirely, selling off a successful ARM processor business (called XScale) to Marvell Semiconductor. XScale had mindshare, scale and design wins, but Intel gave up. Why focus on these PDA/toys when we can win computers?
2007: The iPhone dawns a new age in mobile computing. Following its startling success, Intel restarts a ‘low-power’ (mobile) device strategy, only this time they take laptop technology (x86), strip it down, and design ‘Atom’. Atom has since come to dominate Netbooks. But Atom has zero market share in cell phones. Once again for emphasis. Zero.
If you had to choose, would you rather live in a country with a department of labor and even an income tax or a Dred Scott decision and a Fugitive Slave Act?--David Boaz
We are once again approaching the point at which the Faustian bargain will be made: simply use our facilities, and the complexity will go away. And much as happened during the 1980s, there is more than one company making that promise. We're entering a modern version of "the Great Game", the rivalry to control the narrow passes to the promised future of computing.--Tim O'Reilly
Suppose we decide to stop spending money so our children will have lots of money for themselves. That would be generous of us, right? I don't think so. I think future generations might like to have most of the things we're investing in, such as infrastructure, healthcare, schools, a clean environment, energy sources, and freedom, to name just a few. No one wants to inherit a country full of sickly, uneducated hobos, on the verge of being conquered by Cuba.--Scott Adams
We are against military coups of any kind. We believe in a democracy where the military does not play a political role. However, we also believe that the cause of democracy and human rights is not well served by vendettas and witch hunts. Tragically, Turkish democracy and its supporters will take the biggest hit once the full story comes out. The eventual unraveling of the case will discredit the judiciary, make the AKP government appear complicit in the debacle, shake the faith of the liberal intelligentsia, and set back the demilitarization of Turkish politics. In the interest of Turkish democracy, cooler heads must prevail.--PINAR DOĞAN, DANI RODRIK
The pension plans at General Motors and Chrysler are underfunded by a total of $17 billion and could fail if the automakers do not return to profitability, according to a government report released Tuesday. Both companies need to make large payments into the plans within the next five years — $12.3 billion by G.M. and $2.6 billion by Chrysler — to reach minimum funding levels, according to the report, prepared by the Government Accountability Office. Whether the companies will be able to make the payments is uncertain, the report concluded, though Treasury officials expect the automakers will become profitable enough to do so. If either company’s plan must be terminated, the government would become liable for paying benefits to hundreds of thousands of retirees. The effect on the government’s pension insurer, the Pension Benefit Guaranty Corporation, would be “unprecedented,” the report said. The agency manages plans with assets totaling $68.7 billion, less than the $84.5 billion in G.M.’s plan alone. --Nick Buntley
[President Obama] is a bit of a chameleon or shape-shifter, but he does not come across as insincere — that is the importance of his famous “cool.” He does not have the hot eagerness of the con man. Though his own background is out of the ordinary, he has the skill to submerge it in other people’s narratives, even those that seem distant from his own. ... Obama’s strategy everywhere before entering the White House was one of omnidirectional placation. It had always worked. Why should he abandon, at this point, a method of such proved effectiveness? Yet success at winning acceptance may not be what is called for in a leader moving through a time of peril. ... continuity easily turns into inertia, as we found when Obama wasted the first year of his term, the optimum time for getting things done. He may have drunk his own Kool-Aid — believing that his election could of itself usher in a post-racial, post-partisan, post-red-state and blue-state era. That is a change no one should ever have believed in. The price of winningness can be losing; and that, in this scary time, is enough to break the heart of hope. --Garry Willis
Either way, the proper interpretation of Summers' comment is not that the world is full of idiots, but that it's full of human beings. Relying on perfect regulators or more responsible bankers will eventually fail. The work of financial regulation is to create a system that anticipates that inevitable failure and limits the damage it can do.Which non-human beings (or idiots) are we going to ship in to create that system?!? This problem goes back to Aesop, around 600 B.C.
Wednesday, April 07, 2010
[Larry] Summers doesn't do "dispassionate" and he didn't want to limit himself to fielding others' advice--he had plenty of his own to offer. In other words, he was supposed to be the referee, but he also wanted to play power forward. This rankled other members of the economic team, including Austan Goolsbee, Christina Romer, and Peter Orszag, enough that they're widely presumed to be the sources of many of the leaks. Summers's tendency toward bureaucratic infighting was another problem. As Jonathan Alter lays out in his forthcoming book, "The Promise," Summers maneuvered to sideline people like Paul Volcker, Joe Stiglitz, and even Orszag, behavior more characteristic of the Clinton administration than the Obama administration.--Joshua Green
At a recent White House lunch with President Barack Obama and a handful of other executives, Mr. Dimon, 54 years old, complained to the president that the administration's anti-bank rhetoric "isn't helpful," because it demoralizes businesses and employees, according to a person familiar with his comments. Mr. Dimon's disdain for the process has been crescendoing for some time. Last spring, he showed his irritation over the Treasury's requirement that banks raise fresh funds before they quit TARP. Speaking at a June hospitality industry conference in New York, Mr. Dimon read aloud a fictitious letter to Treasury Secretary Timothy Geithner. "Dear Timmy, we are happy to be able to pay back the $25 billion you lent us. We hope you enjoyed the experience as much as we did." ... With the crisis in full bloom, he also publicly backed TARP, accepting $25 billion in federal funds in October 2008 even though he insisted J.P. Morgan didn't need or ask for the capital. The TARP program was "good for the system, which means it's also good for J.P. Morgan. And we didn't think that J.P. Morgan should be selfish or parochial and stand in the way of doing something that's good for the system," Mr. Dimon explained to investors in November that year. But Mr. Dimon's patience with Washington soon wore thin as political leaders tried to force banks that had taken TARP funds to lend more and slash executive compensation. He was particularly rankled by a new rule putting visa restrictions on TARP recipients who wanted to hire skilled foreign workers. Although the curbs didn't affect many J.P. Morgan employees, Mr. Dimon was infuriated, telling his colleagues the move was "un-American," say people who heard his remarks. On a conference call to discuss the bank's earnings, Mr. Dimon referred to the TARP program as a "scarlet letter." --Robin Sidel and Damian Paletta
At a certain point this season, my Cornell teammates and I realized we weren't being led by your typical college basketball coach. Steve Donahue, formally known as Coach D, came to be known as "Captain D" as the season wore on. It started as an inside joke within the team because of his propensity to stand on top of a rollaway basket on our side courts overseeing practice (like a sea captain posts himself atop his vessel's perch and gazes intently out at sea and the boat's course). Coach's new name gained further steam when he continued to use the phrase "stay the course" at every possible moment: before practice, after practice, after a win, after a loss, etc. It was all to make sure we knew we wouldn't achieve any of our goals if we weren't the hardest-working team in the country that day. And even though the name's still funny, I realized - maybe during our Sweet 16 run this March - the persona of Captain D is what separates him from other college basketball coaches. A coach has to know his Xs and Os, be able to motivate his players, manage game strategy and recruit. While Coach D excels in all of these areas, Captain D inspires extreme self-confidence in his players. Even if we weren't one of the best 16 teams in the country this season, each member of our team was 100 percent certain we were. ... For those who don't know what Cornell basketball was like before Steve Donahue got here, picture the New Jersey Nets trying to compete with the Lakers (Penn) and the Cavs (Princeton) without the promise of free agency and NBA lottery picks (scholarships). Starting from the cellar, he had to shatter the seemingly bulletproof monopoly that the P schools had on the Ivy League.--Jon Jacques