Monday, December 31, 2007

Correlation between household income and home prices


Burns, Miller, Volcker, ...ah, Ah, AH, Greenspan (bless you) Bernanke

Forget about happiness research

just read Tom Smith (or like me, look at the pictures):

Kevin Hassett sees bullishness looking back at 2007

I'll summarize his points, and provide a typical retort from a bitter bear:
1) Equity markets posted solid gains and price multiples are still low. How can you trust corporate earnings reports? It's all rigged!

2) Households are wealthier. My household is poorer than it's ever been!

3) Congress did nothing. Congress should get us back on the gold standard!

4) The Federal Reserve did something. The Fed is just creating hyperinflation, like it's been doing for decades!

5) The world economy had another blow-out year. Foreign economic statistics are even more suspect than ours!

6) The trade deficit declined. All government statistics cannot be trusted; only my conspiracy theories are worthy of your trust!

7) Even in the face of the housing-market bust, economic growth was solid. (See .2.)

8) Job creation was robust. (See .6.)

9) The federal budget deficit declined. (See .6.)

10) Inflation risk is low. (See .4. and .6.)
I agree with the bears that government statistics are full of known and unknown errors. But they can never point me to a more accurate source of data. Therein lies the problem with me ever being a long-term bear. Being bearish 2 months a year and 2 years a decade is fine, but foolish in perpetuity.

Quote of the day

A good wife will re-load for you, a great one will take up a knife and slit your enemies' throats.--Celia Hayes (via Glenn Reynolds)
I have a great wife. Sometimes I am my own worst enemy (implying my wife threatening to slit my throat).

Sector returns

from Paul Kedroksy:

The latest installment of "Bearish, And Wrong"

by Peter Bernstein:

A LOT of people have been wrong about the markets and the economy in recent months. But how could so many people have been so wrong at the same time and in the same ways?

The question reminds me of the biggest and most embarrassing goof in my own career. This sad story happens to date back 50 years, to New Year’s Day of 1958. In looking back, I can now see the source of my error: I was postcasting — extrapolating past experience instead of seeking change in future experience. The aftermath was embarrassing, but it taught me never to postcast again.

I had been invited to make a presentation on the outlook for 1958 at a symposium at the Harmonie Club in New York. The program was to take the form of a debate with another economist whose view was diametrically opposed to mine. Although I was extremely bearish and would look mighty silly within six months of the debate, I was the one who swayed the audience. It voted overwhelmingly for my position and scorned the wisdom of my opponent.

There was no doubt that the new year was dawning at a dark moment. The stock market had peaked in August and was already down 13 percent. The Christmas season had been a clear disappointment. Industrial production had fallen 6 percent from its August high. Unemployment had jumped to nearly 6 percent from 4 percent the previous summer.

We could all agree that a recession was in the making. The issue was how deep the downturn would go and how long it would last, and this was where my opponent and I parted ways.

He expected the recession to be short and sweet, with a revival in the economy by summer at the latest. I saw no sign of light anywhere. A child of the Great Depression, I had been well schooled by my college professors in economics in the late 1930s to believe that the American economy had lost its long-run dynamic. So, in the downturn of 1957, I was convinced that the dreaded moment had arrived when we would sink back into the stagnation of production and employment that I had remembered so well.

But how could I have failed to notice how many things had changed? The dynamic power of the American economy was visible everywhere. The population had grown 19 percent since 1947, compared with growth of only 7 percent from 1929 to 1939. Houses were sprouting up all over; there were new kinds of cars, new kinds of airplanes, and new kinds of radios, and, above all, television was a reality. All of Europe was coming to our shores to find what it needed to rebuild after the destruction of the war; in real terms, our surplus of exports over imports had quadrupled since 1929. The United States sat on a huge pile of gold, and liquidity and consumer credit were easy to come by.

Another installment by Joel Kotkin here. Robert Shiller is not so sanguine.

Earlier installment here. I am short these (but have reduced my position):

Justin Wolfers in the WSJ on prediction markets

He writes:

In a truly efficient prediction market, the price will come to reflect the influence of all available information. For instance, those discouraged by Hillary Clinton’s recent polling in New Hampshire are probably selling, while those who believe endorsements by the Iowa Register are crucial are buying. If this market operates efficiently, it will appropriately summarize all of this information and the price will become the most statistically accurate forecast of the election outcome.

Two other characteristics also distinguish prediction markets. First, they respond to all sorts of news beyond shifts in public opinion, including changes in campaign staff, political re-positioning, and performance on the trail. Second, prediction markets are forward-looking, while polls are often backward-looking. Read the full article.

Saturday, December 29, 2007

Tariq Ali's mini-bio on Benazir Bhutto

written just before her assassination (via Mickey Kaus). It's long, but provides an in-depth context to what is happening in Pakistan, that sound bites from the American media could never achieve.

Ali and I probably have quite a few differences over policy, but we both agree that democracies are superior to military dictatorships.

Friday, December 28, 2007

History made on Saturday night?

Here is the ESPN page dedicated to "Perfection".

I'm long the Patriots game contracts (outrights as well as point spreads). I am short the 16-0 contracts, and was able to sell a few more higher than I bought the outrights.

While I knew the Pats had the best offense this season (37 points scored per game), I didn't realize that their defense is also the best (16 points allowed per game).

Joe Gibbs for Coach of the Year?

Matt Mosley has a good case.

Kim Strassel and Peggy Noonan see Obama differently

Noonan says:

Barack Obama? He has earned the attention of the country with a classy campaign, with a disciplined and dignified staff, and with passionate supporters such as JFK hand Ted Sorensen, who has told me he sees in Obama's mind and temperament the kind of gifts Kennedy displayed during the Cuban missile crisis. Mr. Obama is thoughtful, and it would be a pleasure to have a president who is highly literate and a writer of books.

Is he experienced enough? No. He's not old enough either. Men in their 40s love drama too much. Young politicians on fire over this issue or that tend to see politics as a stage on which they can act out their greatness. And we don't need more theatrics, more comedies or tragedies. But Mr. Obama doesn't seem on fire. He seems like a calm liberal with a certain moderating ambivalence. The great plus of his candidacy: More than anyone else he turns the page. If he rises he is something new in history, good or bad, and a new era begins.

On the other hand, Strassel writes:

Mr. Obama has offered reforms. He has proposed requiring employers to enroll workers in retirement accounts; he has suggested linking teacher pay to performance; and he has agreed that health-care reform should include insurance and drug companies. But he's already backtracked in the face of interest group opposition, telling school union members that pay shouldn't be linked to test scores. Much of his American Dream agenda--refundable tax credits for college tuition, more after-school programs, annual minimum wage hikes--is an extension of the increasingly standard Democratic play off "income inequality," and would result in a bigger federal government. Most would also be paid for by rolling back the Bush tax cuts. Tax and spend; this is pretty standard Democratic stuff.

So what is his plan? He may have let it slip in a recent interview, when he explained that a big reason he should be the Democratic nominee is that he could carry his party to a sweeping congressional victory that would provide a "mandate for change." "I mean, if we have a 50-plus-one election, we cannot get a serious health-care bill done. We can't have a serious agenda on climate change," he said.

That doesn't sound like a man who wants to work with Republicans toward a bipartisan era. It sounds like a man who wants to crush his opponents at the polls, and then bulldoze his agenda through an enfeebled opposition. There isn't anything necessarily wrong with that; it's what politicians have been trying to do for decades. But it's certainly nothing new.


Thursday, December 27, 2007

For want of some white paint

the accurate global warming data was lost.

Quote of the nineteenth century

No man's life, liberty, or property is safe while the legislature is in session--Gideon Tucker, New York State Surrogate Court Justice

Quote of the day

Advertising is the tax you pay for being unremarkable--Robert Stephens, of Geek Squad

NFL Playoff Scenarios

by Mike Sando:

He notes:
Tennessee and Washington are the only teams controlling their playoff destinty. Win and they're in, lose and they need help. Cleveland, Minnesota and New Orleans need help no matter what. Note: The charts, provided by the NFL, do not take tie scores into account.

Some thoughts on the persistence of war

Arnold Kling (today):

Premise 1: There will always be individuals and groups whose comparative advantage is plunder and extortion. Call them pirates.

Premise 2: Private property ultimately depends on the willingness and ability to use force to defend it. Capitalism that is not backed by the force of arms cannot survive. Peace only prevails where and when the absolute military advantage of the armed capitalists is sufficient to suppress the pirates.

Premise 3: Pirates will always find places, circumstances, and methods with which to challenge armed capitalists.

Conclusion: War is not going to disappear.

WSJ (today):

Before the F-15's problems became so glaring, it was plausible to argue that the plane was adequate to meet current defense needs until the F-35 Joint Strike Fighter -- still in its testing phase -- comes into service sometime in the next decade. But while the Air Force will surely engineer whatever patch the grounded Eagles need to make them airworthy again, it cannot patch the fact that it may be six months or longer before the fleet is back to full operational readiness. This is hardly trivial for a force already strained by wars in Afghanistan and Iraq and threats that stretch from the Korean Peninsula to the Horn of Africa.

Nor is there any getting over the fact that the F-15 first flew in 1972 -- long before many of the current crop of pilots were born -- and that the plane is now outclassed by its competitors in the export market. In 2005, a British Eurofighter reportedly defeated two F-15Es in a mock dogfight. Simulated dogfights have also shown that the F-15s are somewhat inferior to Russia's more modern Su-35s.

The issue, then, is whether the U.S needs the best plane in the sky. For all the talk of the F-22 being a legacy of the Cold War, we are far from convinced that the U.S. will forevermore be faced with only Taliban-like adversaries incapable of fielding air forces of their own, or that the era of great power military rivalries is over. Judging by the expensive weapons systems currently being developed in China and Russia (which on Tuesday successfully tested a new ICBM, apparently Vladimir Putin's idea of the Christmas spirit), it seems that neither country has reached that conclusion either.

We cannot predict what kind of adversaries the U.S. will face in the coming decades, but we do know that part of the responsibility of being the world's "sole remaining superpower" is to be prepared for as many contingencies as possible. One prudent way of reducing the threat is to discourage potential adversaries from trying to match America's advantages in numbers and technology. Replacing our faltering Eagles with additional Raptors may be expensive, but allowing our neglect to be exploited by those who wish us harm would be ruinous.

A historical teacher (a couple millenia ago):

You will hear of wars and rumors of wars, but see to it that you are not alarmed. Such things must happen, but the end is still to come.

McDonald's: Millionaire Factory

(via Don Boudreaux) :
McDonald's exemplifies the role of small businesses in Americans' upward mobility. The company is largely a confederation of small businesses: 85 percent of its U.S. restaurants -- average annual sales, $2.2 million -- are owned by franchisees. McDonald's has made more millionaires, and especially black and Hispanic millionaires, than any other economic entity ever, anywhere.--George Will
McDonald's operates more than 31,000 franchises worldwide

Ron Paul seems more anti-Fed than pro-Freedom

James Taranto has some very interesting analysis:

To be sure, it is a principled libertarian position (which is not to say we endorse it) that if a private business wants to discriminate on whatever basis, the government ought not to interfere. It would be defensible to say that the Civil Rights Act went too far in intervening in private transactions.

But it seems to have escaped Paul's notice that segregation was not merely a matter of private preference. It rested in large part on government power, chiefly at the state and local levels, and it deprived millions of people of liberty on account of the color of their skin. By forcing an end to Jim Crow, the federal government was siding with liberty against government-enforced oppression. Yet Paul allows that the federal government had a legitimate role in combating segregation only at "a federal lunch counter" and in the military. Apparently he favors "states' rights" over individual freedom.

If you think this is too uncharitable an interpretation of Paul's views, wait till you see which side he takes in the Civil War:

Russert: I was intrigued by your comments about Abe Lincoln. "According to Paul, Abe Lincoln should never have gone to war; there were better ways of getting rid of slavery."

Paul: Absolutely. Six hundred thousand Americans died in a senseless civil war. No, he shouldn't have gone, gone to war. He did this just to enhance and get rid of the original intent of the republic. I mean, it was the--that iron, iron fist--

Russert: We'd still have slavery.

Paul: Oh, come on, Tim. Slavery was phased out in every other country of the world. And the way I'm advising that it should have been done is do like the British empire did. You, you buy the slaves and release them. How much would that cost compared to killing 600,000 Americans and where it lingered for 100 years? I mean, the hatred and all that existed. So every other major country in the world got rid of slavery without a civil war. I mean, that doesn't sound too radical to me. That sounds like a pretty reasonable approach.

It's an intriguing counterfactual, but what is most telling is that Paul blames Lincoln for the Civil War rather than blaming the South for starting a war to preserve slavery. Does he love liberty? Or does he merely loathe the federal government?

DISCLOSURE: I have no position in this contract, but do have a short position in the 2008.GOP.NOM.PAUL.

Wednesday, December 26, 2007

Greg Mankiw declares

Let The Fed Work.

I agree.

A graph of Hibbs' "Bread and Peace" election forecasting model


(via Bryan Caplan)

I am short Ron Paul and taking profits

Some posts on why I'm a seller.

UPDATE: Arnold Kling agrees.

John Snow makes some sense

He writes:

The American economy is now threatened by two different but interrelated problems. The first is the declining value of housing, and the second is the seizing up of the credit markets. Together, they pose the risk of a serious economic downturn; some even predict recession.

Policy makers are now understandably reacting in the short term with steps aimed at blunting a spike in mortgage payments and calming credit markets. But beyond palliatives, we must come to grips with the underlying economic forces at play. The more quickly we deal with them, the shorter and less severe the eventual economic fallout will be.

I'm concerned that the pendulum has swung too far the other way, and that today even good credit risks are being frozen out. Credit markets simply are not working well, as evidenced by the widening spread between the London interbank offered rate and the fed-funds rate.

This choking off of credit poses the single biggest threat to the long economic expansion we have enjoyed. Addressing the problem needs to be a priority for policy makers -- and the challenge they face is to manage the political pressures to alleviate pain, while allowing the necessary market adjustment process to occur. Let me offer some suggestions.

First, while these adjustments occur, good monetary policy is critical to sustaining growth, maintaining employment levels and bolstering consumer and investor confidence.

Second, good fiscal policy needs to complement good monetary policy. In 2001-2003, we saw this occur as the U.S. economy faced strong headwinds. Rarely in postwar history has a fiscal policy response been as well-timed as those tax reductions.

Third, to do that, our financial sector, the real lifeblood of the economy, needs a good dose of "R and R." The first "R" involves a significant restructuring. Losses must get recognized, put on balance sheets and written down, as we saw at HSBC. Total write-downs are likely to be a multiple of what's been seen so far. Purging the bad assets is an essential step to restoring the credit markets.

The second "R" involves recapitalizing bank balance sheets to replace capital loses from restructuring. Lost capital must be replaced before we will get back to anything close to normal lending patterns.

Fourth, the credit situation indicates that we need a more coordinated and less fragmented approach to financial regulation. Today, no one regulator has a comprehensive view of credit market conditions and the stresses in financial markets. One strong national regulator with broad oversight of financial markets would put us in a much better position to avoid the kind of financial market turmoil we see today, and to respond to stress in the financial system when it arises.

Fifth, banks should be required to stay on the hook after making an asset-backed loan. While securitization has clearly been an important cost-saving financial innovation, an important source of discipline is lost when a loan originator simply sells off a loan to an unwitting investor without any continuing stake.

Sixth, the rating agencies' performance in assessing structured financial instruments clearly shows the need for greater oversight. To restore a sense of integrity, regulators need to examine the many conflicts of interest that exist in the current system.

With good policies in place, predictions of a recession need not become a self-fulfilling prophecy. By recognizing and adapting to inevitable and necessary market adjustments, such an unfortunate outcome can and should be avoided.

I agree more with the first three. The first three are "let's do more of what worked". The last three are "let's do more of what failed".

Friday, December 21, 2007

Thursday, December 20, 2007

The funniest thing I read today

And also, God, please, send me unique visitors. Send me links from Marginal Revolution and Freakonomics. With your help, Midas Oracle can beat the evil Caveat Bettor and become the most popular market blog on Earth.--Chris Masse
I'm quite happy that this blog has gained a couple hundred semi-regular readers. We few, we happy few. (Hopefully more profitable few, too, in 2008; it's been a relatively tough year for most of us working in banks. I don't see the liquidity or have the cajones to trade like some of the big swingers at Intrade and Tradesports).

Feel free to leave some more comments, so I can keep improving the content. Thanks!

Reasons why the gold standard is substandard

by Megan McArdle:
In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg). Meanwhile, the limitations on the government's ability to respond to fiscal crises, the necessity of defending against speculative attacks in times of crises, and the possibility of independent changes in the relative price of gold, make your economy more unstable. It's a terrible idea, which is why there are so few economists willing to raise their voices in support of it.
She goes onto the 7 Fisks of Ron Paul's speech; here are the first two:

1. The Federal Reserve destabilizes the economy with its "boom and bust" monetary policy. This is hard to square with the fact that the longer the Federal Reserve has been in existance, the more stable the economy has been. Dr. Paul's words strongly imply that he believes that there was no business cycle in the 19th century, which is untrue; as best we can tell, recessions were much longer and deeper before America had a central bank.

2. Americans don't save because they're afraid inflation will erode their savings. This is daft. Moderate inflationary expectations are built into the interest rates that banks offer. After thirty years of stable monetary policy, a good portion of the population doesn't even remember high inflation, and the ones that do are mostly retired and spending down their savings. Americans don't save because . . . well, have you tried the Wii? It's awesome.

Some of my previous posts on the subject.

Tyler (and Megan) on Ron Paul

The monetary economics of Ron Paul : Here, here, and here.
I haven't followed Ron Paul closely, and while I like many of his libertarian ideas, I am discomforted by his overall anti-intellectual demeanor. He strikes me as the kind of person who has a natural attraction to conspiracy theories. However he is only allowed to believe the ones that coincide with his libertarian ideology. Which isn't so many (most of those theories are dreamt up by non-libertarians and thus have anti-libertarian elements), and that means he ends up sounding more somewhat sensible than he really is.

There's what a politician believes, and how a politician believes. As I get older I put increasing weight on the latter. As a protest vote, Ron Paul seems fine, but hearing him or reading about him just makes me depressed. A good rule of thumb is not to get too excited about any candidate whose actual election would make the Dow lose thousands of points.
Some earlier Paul concerns here.


The U.S. Government as Robin Hood

Except it's "legal", of course. Here is Alex Tabarrok's accounting:

In a generous accounting the rich get 26% of the benefits of federal spending and pay 68.7% of the costs. In percentage terms the rich get about 37 cents on the dollar.

Alternatively stated about 63 cents of every dollar in taxes paid by the rich is transferred down. Given that the median voter is a taxeater not a taxpayer we should not be too surprised, although this is a smaller number than I would have guessed before I did the calculation. From an efficiency point of view we should be happy that the rich don't get too much - transferring resources creates a lot of waste but transferring resources from the rich to the rich is especially wasteful.

Metaphor of the day

The message is that the Fed's ability to fight this credit-market battle is limited. It can leave financial markets flush with cash. But lenders and investors look reluctant to use the cash because of worries about the bad loans they have already made.

Think of a bicycle with a broken chain. You can use lots of oil to grease the chain, but you can't make the bicycle move again until the chain is repaired. The chain that links borrowers and lenders in the mortgage market looks broken. And it's probably going to take a lot more than the grease of easier money to fix it.--John Hilsenrath

The Bankers' Prayer

God, grant me the capital to accept the things I cannot change; the reserves to change the things I can; and the Fed Auction when all that blows up. Amen.--Tanta

Austan Goolsbee advises for low/middle income tax relief

He says:
But if subprime housing morphs into a credit crunch, it’s not clear that just lowering rates will address the problem.
If you can move quickly enough, I think tax relief for low/middle income mortgage holders would certainly be in order as a way to lessen the credit crunch damage of the housing market–the benefits would multiply up because of the leverage in the same way the losses are getting magnified now. If the economy continues to slow and the housing troubles actually morph into a crisis of consumer confidence, and direct tax relief for middle and working class folks would be the order of the day.
How much more relieved can we get?

Wednesday, December 19, 2007

Folks who think the Boston Celtics are a "white team"

don't know their history:
The Celtics were the first NBA franchise to draft an African-American player -- Chuck Cooper in 1950. They became the first NBA team to send an all-black starting lineup onto the floor. The man responsible was the same guy who put together the Celtics teams of the 1980s: Red Auerbach.

"I wasn't even aware of it," Auerbach once said about his historical lineup breakthrough in 1964. "They brought it to my attention later on. All we were trying to do here, all the time, is play the guys that, in our opinion, whether I'm coaching or someone else is coaching, is going to win the ballgame. That's all."

The Celtics made Russell the league's first black head coach. To date, only four black coaches have won a championship, and two of them were Celtics: Russell and K.C. Jones.

In college I had an African-American studies professor who used to check out the pickup basketball games at the rec center after he finished his workouts. After watching my push-it-up-and-dish-it style he told me I'd be a good fit for the Boston Celtics. I felt insulted, as if he'd told me my singing style would make me suited for the Partridge Family. But to older heads, the Celtics were innovative racial groundbreakers and pioneers of the up-tempo game (in 1960 they averaged 124.5 points).

The Celtics didn't just plug their African-American players into the lineup haphazardly. As Nelson George detailed in the book "Elevating the Game: The History and Aesthetics of Black Men in Basketball," the Celtics utilized African-Americans in ways that defied the stereotype of black players as flashy, athletic scorers. Starting with Russell, the black Celtics players were renowned for their defense, the aspect of the game associated with determination and hard work. That even carried on into the 1980s, with Dennis Johnson's playing the role of perimeter defensive stopper on the Celtics' last two championship teams.

In the ultimate irony, the lineage of John Thompson's Georgetown Hoyas -- who emerged as Black America's team at the same time the Celtics were at their palest -- could be traced back to Boston. Thompson learned his defense-first mind-set while playing for the Celtics in the 1960s.

This includes you, Spike Lee. I've been feeling badly about the Isaiah Era of your beloved team, but not so much today.

Nice longer term oil supply outlook

by James Hamilton:

This may be the reason America's students are falling behind

our teachers weren't good students, according to Walter Williams (via Mark Perry):

Let's delve a bit, asking whether higher educational expenditures explain why secondary school students in 32 industrialized countries are better at math and science than ours. In 2004, the U.S. spent about $9,938 per secondary school student. More money might explain why Swiss and Norwegian students do better than ours because they, respectively, spent $12,176 and $11,109 per student. But what about Finland ($7,441) and South Korea ($6,761), which scored first and second in math literacy? What about the Slovak Republic ($2,744) and Hungary ($3,692), as well as other nations whose education expenditures are a fraction of ours and whose students have greater math and science literacy than ours?

American education will never be improved until we address one of the problems seen as too delicate to discuss. That problem is the overall quality of people teaching our children. Students who have chosen education as their major have the lowest SAT scores of any other major. Students who have graduated with an education degree earn lower scores than any other major on graduate school admissions tests such as the GRE, MCAT or LSAT. Schools of education, either graduate or undergraduate, represent the academic slums of most any university. As such, they are home to the least able students and professors with the lowest academic respect. Were we serious about efforts to improve public education, one of the first things we would do is eliminate schools of education.

UPDATE: Mark posts a chart here of 10 typical college majors, with education majors finishing last in the "power rankings". It also confirms my suspicion that undergraduate business majors are not that bright, either.

DISCLOSURE: I was an engineering major at Cornell, and am still bitter about all the extra work I had to do all while being graded to a B-/C+ bell curve. I was vindicated when 3.9 students--from Boston University and Cornell's School of Arts and Sciences--had to drop freshman engineering requisites because they could not hack them. I did marry an Arts grad in the end, but she outsources most of the math to me. And there were a lot more pretty co-eds in that school than mine.

J. Kyle Bass cleans up on the housing slump

Timing, especially in trading, is everything:

Home prices had been on a five-year tear, rising more than 10 percent annually. Bass conceived a hedge fund that bet on a crash for residential real estate by trading securities based on subprime mortgages to the least credit-worthy borrowers. The investment bank, which Bass declines to identify, owned billions of dollars in mortgage-backed securities.

``Interesting presentation,'' Bass says the firm's chief risk officer said into his ear, his arm draped across Bass's shoulders. ``God, I hope you're wrong.''

Within six months, Bass was right. Delinquencies of home loans made to people with poor credit reached record levels, and prices for the securities backed by these subprime mortgages plunged. The world's biggest financial institutions would write off more than $80 billion in subprime losses, while Bass, his allies and a handful of Wall Street proprietary trading desks racked up billions in profits.

Bass and investors like him saw opportunity in a range of new investment tools that banks created to sell subprime securities worldwide. These included mortgage bond derivatives, contracts whose values were tied to packages of home loans. The vehicles allowed hedge funds like Bass's to bet against particular pools of mortgages.

Bass, a former salesman for Bear Stearns Cos. and Legg Mason Inc., had struck out on his own in early 2006. He started Hayman Capital Partners, specializing in corporate turnarounds, restructurings and mortgages. Bass isn't related to the Texas billionaire Robert Bass.

Bass named Hayman for the private island off Australia where he spent his honeymoon. He drove a $200,000 500-horsepower Porsche Ruf RTurbo with a built-in racecar-style crash cage.

A former competitive diver who had put himself through Texas Christian University in Fort Worth partly on an athletic scholarship, Bass was about to take his most ambitious plunge yet: betting home values would decline for the first time since the Great Depression.

``We were saying that there were going to be $1 trillion in loans in trouble,'' Bass says. ``That had really never happened before. You had to have an imagination to believe us.''

U.S. settles some internet gaming disputes

Radley Balko reports that EU, Japan, and Canada have settled (via Midas Oracle). His parting thoughts:
So the tens of billions the U.S. government is paying to settle the trade dispute is not only to preserve the gambling ban, it's to preserve the congressionally-granted monopoly on online wagering for interests with more political clout than poker players.

Finally, U.S. Trade Office flack Gretchen Hamel apparently told Reuters she "isn't going to get into" the terms of the settlement. Pardon? Is the settlement not being paid with public funds? Aren't the people who negotiated the settlement employees of the U.S. government? On what grounds does the U.S. Trade Office feel it's entitled to withhold this information?

Tuesday, December 18, 2007

Inaccurate, useless hurricane forecasts

still get a lot of press coverage. Should I be skeptical of climate change forecasters or journalists?

(Or both?)

Let's replace Congress with Steve Conover

for the next two year term:
"How will you pay for it?" That's a tough question for anyone on the receiving end. It's a good bet we'll hear it from one side or the other on any given talk show featuring any politician talking about fiscal matters, especially within 18 months of a national election.

The person on the receiving end of that snappy question typically stutters like Porky Pig for a while, until the talk show host runs out of time and has to cut to a commercial. It's a great "gotcha" question. But there's a subtle fallacy embedded in it: the false premise that everything the government buys must be paid for right now with tax receipts or spending cuts, or else we shouldn't do it.


1. How did we "pay for" the Louisiana Purchase in 1803, without which we wouldn't be the United States of America today?

2. How did we "pay for" winning WW2, then rebuilding Europe?


1. We borrowed money from foreigners for the Louisiana Territory, and subsequently serviced that debt via generations of economic-growth-driven tax receipts.

2. We borrowed money from ourselves to win WW2 and rebuild Europe, and subsequently serviced the debt via generations of economic-growth-driven tax receipts.

The point: Not everything needs to be "pay-go" because some things are good investments in the future—one of the best of those being war prevention (according to John Stuart Mill). Good investments eventually (by definition) pay for themselves, and then some. Borrowing money for good investments is sound financial practice; ask any banker. Statesmen of the past who stuck by their convictions against the odds (Jefferson, FDR, Reagan) knew that in their hearts.

NFL Undefeated "16-0" Tradesports contract

traded off quite a bit during the Jets @ Pats game:

I'm still short, but had a chance to take some profit during the game.

The very progressive federal tax collection

by Alex Tabarrok:

My good friend Buc asked me about the Dow today

in the Pit. Here's what I said:
2iron: hi is set to bottom in the next 1 week to 1 month imo.
caveatbettor: i agree, but if the central banks keep doin stuff, it will be hard to touch bottom
caveatbettor: taf, siv, fed funds, discount ...
caveatbettor: it's like the market has to deliver the stillborn baby, but the anesthesiologist dopes the market up so she can't push
which is actually a horrible and tragic metaphor. Instead, I wish all of you healthy babies and safe deliveries.

UPDATE: The ever brilliant Megan McArdle agrees that the Fed is quite silly.

UPDATE: My doping illustration is matched at FT Alphaville, half a day later.

The coolest thing I saw today

is a 3D global GDP chart, by William Nordhaus, featuring a GDP bar for every longitude/latitude intersect (via Arnold Kling)

More evidence of rising household wealth

from Mark Perry:

I see this trend in my parents homes. They bought a 1,200 sq.ft. cape for $14,000 back in 1970.

Around 1982, they traded up to a 2,400 sq.ft. colonial for $80,000. They finished paying it off around 2000 (after a second mortgage for college tuition payments, followed by refinancing).

I think the house is worth about $300,000 now.

I think it's amazing, especially because my parents never made more than $50,000 in a single year.

Why Ed Gramlich is also smarter than Al Greenspan

Gramlich called the MBS crisis (via Calculated Risk):

Edward M. Gramlich, a Federal Reserve governor who died in September, warned nearly seven years ago that a fast-growing new breed of lenders was luring many people into risky mortgages they could not afford.

But when Mr. Gramlich privately urged Fed examiners to investigate mortgage lenders affiliated with national banks, he was rebuffed by Alan Greenspan, the Fed chairman.

Here's a post on why Ben is also smarter than Al.

Monday, December 17, 2007

Tim Lynch reviews the Bill of Rights

and finds that only the Third (of the Ten) has not been compromised. Here are the first Two:

The First Amendment says that Congress “shall make no law … abridging the freedom of speech.” Government officials, however, insist that they can make it a crime to mention the name of a political candidate in an ad in the weeks preceding an election.

The Second Amendment says the people have the right “to keep and bear arms.” Government officials, however, insist that they can make it a crime to keep and bear arms.

Markets in everything

Beauty is as beauty does, according to Tim Harford:

Your boyfriend’s disturbing personal-grooming habit offers you financial as well as aesthetic benefits. Economists have known for some time that better-looking people are paid more. This is probably due to a combination of discrimination against the ugly, the fact that some beautiful people have jobs where beauty is an obvious advantage, and the likelihood that better-looking people are more confident.

More recently, economists have discovered evidence that endogenous beauty (make-up, hair-styling) is as important as exogenous beauty (having Bond girl Eva Green’s eyes).

Economists Daniel Hamermesh, Xin Meng and Junsen Zhang have found that spending money on clothes and make-up slightly raises the earnings of Shanghai workers. More recently Jayoti Das and Stephen DeLoach, of Elon University’s economics department, have shown that time spent on grooming substantially improves wages, especially for men.

They estimate that each extra 10 minutes a man spends in front of the mirror will raise his wages by 6 per cent. (Women would have to spend two or three hours to get the same effect.) So if you prefer your boyfriend to be rich, don’t stand between him and his mirror.

Falling inequality

according to today's WSJ:

Every Democrat running for President wants to raise taxes on "the rich," but they will have to do something miraculous to outtax President Bush. Based on the latest available tax data, no Administration in modern history has done more to pry tax revenue from the wealthy.

Last week the Congressional Budget Office joined the IRS in releasing tax numbers for 2005, and part of the news is that the richest 1% paid about 39% of all income taxes that year. The richest 5% paid a tad less than 60%, and the richest 10% paid 70%. These tax shares are all up substantially since 1990, and even somewhat since 2000. Meanwhile, Americans with an income below the median -- half of all households -- paid a mere 3% of all income taxes in 2005. The richest 1.3 million tax-filers -- those Americans with adjusted gross incomes of more than $365,000 in 2005 -- paid more income tax than all of the 66 million American tax filers below the median in income. Ten times more.


For the political left and most of the media, this means only that the rich are getting richer, so of course they're paying more taxes. And it is true that the top earners have increased their share of total income. Yet, as the nearby table shows, the rich showed more rapid gains in reported income shares in the 1990s than in the first half of this decade. The share of the richest 1% jumped to 20.8% of total income in 2000, from 14% in 1990, but increased only slightly to 21.2% in 2005. This makes it hard to pin their claim of "rising inequality" on the Bush tax cuts, though the income redistributionists are trying. By this measure, the Clinton years were far worse for "inequality."

Notably, however, the share of taxes paid by the top 1% has kept climbing this decade -- to 39.4% in 2005, from 37.4% in 2000. The share paid by the top 5% has increased even more rapidly. In other words, despite the tax reductions of 2001 and 2003, the rich saw their share of taxes paid rise at a faster rate than their share of income. How could this be?

One explanation is that the Bush tax cuts reduced the income tax liability of middle and lower income households by more proportionately than the rich. The average family of four with an income of $40,000 saw its income tax liability fall by about $2,052 a year from the 2001 and 2003 tax cuts.

UPDATE: In other good news, the last four years of consecutive monthly job growth have set a record since the Great Depression. Paul Krugman should write a column about how Bush is a genius. No, it doesn't surprise me he wrote this instead.

Friday, December 14, 2007

Ray Fair's March 2007 paper on MLB age effects

predicts some of the same players in the Mitchell Report (via Tyler Cowen), listed by descending "standard errors":
Barry Bonds
Mark McGwire
Rafael Palmiero
Sammy Sosa
Larry Walker
Ken Caminiti
Those in Fair's paper, but not named in the Mitchell Report (listed alphabetically, after Luis Gonzalez, who Fair found had one of the largest standard errors):
Luis Gonzalez

Albert Belle
Chili Davis
Dwight Evans
Julio Franco
Gary Gaetti
Andres Gallaraga
Paul Molitor
The entire paper can be found here. A final note from Fair:
Even star players like Babe Ruth, Ted Williams, Rogers Hornsby, and Lou Gehrig do not show systematic patterns. In this sense the model works well, with only a few key exceptions.

Federal tax burden becomes more progressive in last 25 years

according to Greg Mankiw's analysis of CBO data:
Format is { Household income: 2005 rate (1979 rate) }:
Lowest quintile: 4.3 (7.2)
Second quintile: 9.9 (13.2)
Middle quintile: 14.2 (17.1)
Fourth quintile: 17.4 (20.1)
Highest quintile: 25.5 (26.1)

Top 10 percent: 27.4 (27.6)
Top 5 percent: 28.9 (29.0)
Top 1 percent: 31.2 (31.7)

Notice that all groups are paying lower tax rates than the historical average. But in contrast to some popular perceptions, the change is not concentrated among the upper income groups. In fact, the opposite is true.

Jets @ Patriots outrights trading around 93%

UPDATE: Mike Philbrick interprets Belichick's notable handshakes for us.

Al Gore, apostle of Gaia

by Don Surber:

OVER the years, the Nobel Peace Prize has honored many religious leaders.

This year the prize was shared by Al Gore, an apostle of the Gaia religion, which worships the Earth.

It is an apocalyptic religion that preaches that the world will be destroyed by man's materialism. Only if we give up our SUVs and everything else that gives us life's pleasures can we be saved.

I do not mean to make fun of another man's religion. I like religions. Usually they come with nice songs, tranquil chapels and colorfully garbed priests. Religion is a good way of reminding the lofty that they are puny, as well as telling the lonely they are not alone.

Which brings me to Al Gore. It is difficult to take his sermons on the coming doom seriously when his mansion in Tennessee consumes 10 times the electricity of an ordinary home.

The irony is that President Bush's ranch in Crawford, Texas, uses 25 percent less electricity than normal thanks to its environmentally friendly design. At 4,000 square feet, the Bush home is hardly small.

Rather than lead by example, Gore and other millionaire celebrities engage in carbon offsets. They pay for the planting of a tree and presto, the carbon dioxide from their jets is forgiven.

In medieval times, the Catholic church issued letters of indulgence that mitigated the punishment for sins. A sinner had to show remorse, pray, and perform what we would now call community service, which could be as simple as giving alms to the church.

The wages of sin were not just a metaphor.

I am not mocking Al Gore. His religion is between him and God.

But I am amused by how religion is being invented again.

It is generally harmless. As long as they don't proselytize too strenuously and avoid serving Kool-Aid, they will do just fine - no matter how lousy their science is.

Still time for 2007 global warming arbitrage here.

Why market bears have the better sounding arguments

by Paul Kedrosky:
  1. Things fail more often than they succeed. Pace availability heuristics, it is easier to think of examples of things failing than succeeding, so it gives bears more fodder.
  2. Bears have the past, and bulls have the future. Bears get to argue from data, while bulls argue from what might happen.
  3. Apocalypse is seductive. There is something about the thought of imminent mass ruin that really gets people's attention, as has happened with the overdone coverage (hello, Matt Drudge!) of the current credit problems in the market.
  4. There is a Puritanical urge in America wherein people want to believe they (or better yet, their neighbors) will be punished for their prior success, etc., so it stands to reason that stocks will punish people after they make them a lot of money.
  5. Bears have been generally wrong for so long that they have to know how to tell better stories.
I don't agree that strongly with .1. (there's a lot of success--who wants to go back to the past), .2. (there have been more bull runs than crashes, which is why you would be a bizillionaire if you put a chunk into the market a century ago), .3. (i enjoyed Mad Max, but would not want to live there).

My good friend BUC in the Tradesports pit like to hear my market outlook. Well, it hasn't changed from this.

This zero revenue blog has greater journalistic standards than WNBC

The Smoking Gun:
Shortly after ESPN broke the news yesterday that Roger Clemens and Andy Pettitte would be nailed in the Mitchell Report, WNBC-TV, the NBC affiliate in New York, blew the story wide open. "Newschannel 4's Jonathan Dienst has obtained the expected list of current and former major league players linked to steroids, according to George Mitchell's investigation," reported the station's web site at 11:23 AM. The WNBC story then unspooled a list of 75 purported juicers, including Albert Pujols, Johnny Damon, Jason Varitek, Nomar Garciaparra, Ivan Rodriguez, Jeff Bagwell, Milton Bradley, Kerry Wood, Mark Prior, Trot Nixon, Mike Cameron, Brady Anderson, Albert Belle, Kyle Farnsworth, and Wally Joyner. The WNBC exclusive, which is reprinted below, was posted seven minutes after an identical list of names was published by the sports blog Deadspin, which reported that it had been forwarded the names by "about 25 different people" during the preceding hour. The list, which was whipping around via e-mail, "could very likely be one of those Web urban legends that somehow got around," Deadspin cautioned. WNBC, though, showed no such reserve. The station reported that it had received the list from "two separate sources" (which was still 23 "sources" fewer than Deadspin). But after WNBC posted the list, baseball officials began refuting the story, with the station reporting that Major League Baseball brass said there were "several discrepancies between the list posted and Mitchell's list." As it turned out, it was several dozen "discrepancies," with nearly half the names in WNBC's story not appearing in Mitchell's report. In fact, every name above--from Pujols to Joyner--can not be found in the Mitchell Report.
Smoking Gun has a reprint of the WNBC post.

My 2:03pm EST post is here, although I only had about 15 of the names at that time, and updated the post as I blitzed through the report.

I think may have one-upped the Smoking Gun, too; Wally Joyner is actually listed on the Mitchell Report, page 73.

UPDATE: Let's add Deadspin to the list of one-upped by Cav.

Howard Fineman wonders if Hillary is no longer the frontrunner

He sees her possibly losing the first four primaries (via Drudge).

DISCLOSURE: I am long 2008DEM.NOM.CLINTON and short 2008.PRES.CLINTON(H).

Markets In Marriage

from today's WSJ:

According to a survey by Prince & Associates, a Connecticut-based wealth-research firm, the average "price" that men and women demand to marry for money these days is $1.5 million.

The survey polled 1,134 people nationwide with incomes ranging between $30,000 to $60,000 (squarely in the median range for nationwide incomes). The survey asked: "How willing are you to marry an average-looking person that you liked, if they had money?"

Fully two-thirds of women and half of the men said they were "very" or "extremely" willing to marry for money. The answers varied by age: Women in their 30s were the most likely to say they would marry for money (74%) while men in their 20s were the least likely (41%).

Inflation Watch

From a Tony Crescenzi email this morning:

There were a number of factors that drove the consumer price index to gain 0.8% overall and 0.3% minus food and energy:

Housing +0.3% (fewer people buying = higher rents)
Drugs +0.8% (BLS analyst told Market News it may have been because of new Medicare payments)
Airfares +2.6% (fuel prices)
Hospitals +0.6%
Apparel +0.8% (early holiday, mens and infants clothes, footwear)

The most worrisome of those components to me is the drugs and hospitals inflation. While energy inflation is not desired by global warming skeptics who are concerned with world hunger and disease, it should be preferred by alternative energy advocates.

But we lose twice on the health care side. First, we are taxed to subsidize Medicare and Medicaid. Then, the subsidies drive up prices, as the hospitals and drug companies respond to the subsidies opportunistically.

Thursday, December 13, 2007

Regulation and protectionism can be a deathly combination

or at least prolonged headache (via Alex Tabarrok):
But the government has fallen once and threatens to fall again at every difficult vote. Small proposals bring protesters to the streets, one hurdle to making changes as protected interests seek to preserve themselves. Pharmacists shut their doors this year when the government threatened to allow supermarkets to sell aspirin. The cost for just 20 aspirin tablets at a pharmacy is $5.75.
I can't believe that there are educated folks in America that want similar health care "solutions" that Europe has.

Oh wait, they were educated in American universities. Never mind.

Alleged MLB steroid users from the Mitchell Report

Complete report here (300 pages). 85 players named. (This was hastily assembled, as it's a busy day in the markets for me; corrections appreciated).

Chad Allen
Manny Alexander
Mike Bell
Gary Bennett, Jr
Marvin Bernard
Larry Bigbie
Barry Bonds
Kevin Brown
Alex Cabrera
Ken Caminiti
Mark Carreon
Jose Canseco
Jason Christiansen
Howie Clark
Roger Clemens
Paxton Crawford
Jack Cust
Brendan Donnelly
Chris Donnels
Lenny Dykstra
Bobby Estalella
Matt Franco
Ryan Franklin
Eric Gagne
Jason Giambi
Jeremy Giambi
Juan Gonzalez
Matt Herges
Phil Hiatt
Glenallen Hill
Todd Hundley
Wally Joyner
David Justice
Chuck Knoblauch
Tim Laker
Mike Lansing
Paul Lo Duca
Exavier Logan
Josias Manzanillo
Mark McGwire
Cody McKay
Kent Mercker
Bart Miadich
Hal Morris
Daniel Naulty
Denny Neagle
Rafael Palmiero
Jim Parque
Andy Pettitte
Adam Piatt
Todd Pratt
Stephen Randolph
Armondo Rios
Brian Roberts
F.P. Santangelo
Benito Santiago
David Segui
Sammy Sosa
Gary Sheffield
Mike Stanton
Miguel Tejada
Mo Vaughn
Randy Velarde
Ron Villone
Fernando Vina
Rondell White
Jeff Williams
Todd Williams
Kevin Young
Greg Zaun

Internet Purchasers
Rick Ankiel
David Bell
Paul Byrd
Jose Canseco
Jay Gibbons
Troy Glaus
Jason Grimsley
Jose Guillen
Jerry Hairston, Jr
Darren Homes
Gary Matthews, Jr
John Rocker
Scott Schoeneweis
Ismael Valdez
Matt Williams
Steve Woodard

Greg Mankiw contrasts left vs. right economic perspectives


My view is that good policy is all about maximizing freedom and opportunity, while minimizing poverty and suffering. And I agree with Mankiw, a lot of the differences of opinion can be captured in his question:
Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it?
I'm a big fan of negative taxes (for food, housing, and health insurance; requires means testing) and vouchers (for education; does not require means testing). I believe that negative taxes are better suited for homogeneous needs, and vouchers for more individualized preferences.

But I'm willing to put any support program into either negative taxes or vouchers. Why? Because it still increases freedom and opportunity for individuals and their families over what we have today. Not just that, but institutions--whether profit or not-for-profit--will naturally be more responsive and accountable to those individuals and families than what we have today.

As bad as CEO pay can get

some analysts' pay is even less justified (via Felix Salmon).

One of my brokers just broke this rumor about Roger Clemens

He's named on the Mitchell Report for taking steroids.

I'm one of the Bosox fans who has no love for the Rocket. The highest paid pitcher in the league should not go 40-39 from 1993-96, show up overweight in spring training regularly, and then flip off his team and fans.

If he's out of the Hall of Fame, I won't be crying.

Wednesday, December 12, 2007

An exception to Cav's blonde muting policy

is Franziska Michor, the "Isaac Newton of Biology" (via Steve Levitt)

Term Auction Facility is a bailout

according to Steve Randy Waldman (via Felix Salmon):
I agree with several commentators (Felix Salmon, Calculated Risk) that the Bair/Paulson Plan, whatever it is, is not a bailout. But this, this is a bailout,. Nearly all government bailouts take the form of subsidized loans, extending credit at low rates to counterparties or against collateral for which the market would have demanded a high premium. That is precisely what the TAF will do. The Fed's press release claims, of course, that loans will only be available to "sound" banks, and that they will be "fully collateralized". But no one who can get the same deal from private markets will use this facility. The need for the program arises because private markets are skeptical about the soundness of counterparties and the quality of the assets they have to offer as collateral. The Fed hints at this when it mentions the "wide variety of collateral" that can be used to secure loans. You can bet that whatever it is private lenders are eschewing will be pledged as collateral to the Fed under TAF. The Fed is going to bear private risk that market refuses to. That is a bailout.

Iowa Caucus: predicted Win and Place candidates

Who would have thought Hillary would have crashed from 70% to 35% in a month? Or Huckabee would have soared from 20% to 75% in that same time.

Here's a brief retrospective on the Iowa Caucuses, since 1972 by Ken Rudin (via Don Surber).

Quote of the day

With markets, "trial and error" works, because error gets killed off. With politics, error often survives.--Arnold Kling
He also writes:

For example, suppose we want doctors to have incentive pay. That means that we want them to change their behavior in response to bonus criteria. An effective system would create a large change in behavior at relatively low cost.

Politically, however, the survival of a system is likely to be related inversely to its effectiveness. If a system does not cost much and yet it pressures doctors to change their behavior, they will lobby to kill it. On the other hand, in the UK, a new incentive system generates large pay increases for doctors with little change in behavior. In that case, doctors will lobby to keep it.

Tuesday, December 11, 2007

Vice versa: global warming causes CO2 increases

not the other way around (via Arnold Kling):
We found that temperature changes preceded CO2 changes by an average of 800 years. So temperature caused the CO2 levels, and not the other way around as previously assumed. The world should have started backpedaling away from blaming carbon emissions in 2003.

...As of August 2007, we've measured where the warming is occurring in a fair bit of detail, using satellites and balloons. The observed signature is nothing like the greenhouse signature. The distinct greenhouse signature is entirely missing:

There is no hotspot in the tropics at 10 km up, so now we know that greenhouse warming is not the (main) cause of global warming — so we know that carbon emissions are not the (main) cause of global warming.

...Doubling atmospheric CO2 from the pre-industrial level of 280ppm up to 560ppm (which is roughly were the IPCC says we will be in 2100) is calculated to raise the world's air temperature by 1.2C in the absence of feedbacks such as convection and clouds. This is what you would get if the air was in a flask in a laboratory. Everyone roughly agrees with that calculated result.

But the modelers assumed (bad assumption #2) that increased warming would cause more rainfall, which would cause more clouds high up in the atmosphere — and since high clouds have a net warming effect, this would cause more warming and thus more rainfall and so on. It is this positive feedback that causes the UN climate models to predict a temperature rise due to a rise in CO2 to 560ppm to be 2.5C - 4.7C (of which we have already experienced 0.7C).

But in September 2007, Spencer, who spent a few years observing the temperatures, clouds, and rainfall, reported that warming is actually associated with fewer high clouds. So the observed feedback is actually negative, so we won't even get the full 1.2C of greenhouse warming even if carbon levels double!