Monday, March 31, 2008

What to do about Expelled

by Ken Houghton

Not what I promised (that will be post midterm), but instead a quick idea.

There is much discussion (most of the best at Pharyngula) about Expelled, the Creation Science Intelligent Design Biblically-Inaccurate film about the origins of life or somesuch.

And Wisconsin is at the center of it (h/t this comment at Pharyngula).

I have an easy solution.
  1. Go to where the film is playing.
  2. Take photographs of everyone who buys a ticket.
  3. Post same on the Internet.

Now, this is no law-breaking: if the people really believe they are doing nothing wrong, they should have no problem having their photos taken and posted. (Indeed, they should mention it proudly to their friends, keeping bloggers from having to do things such as this.*)

And if they have a problem, well, shame is a tactic that has been tried in similar circumstances before.

*Fewer cat pictures on the Internet would be A Good Thing. Are you listening, Scott on Fridays?

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The WSJ discovers Moral Hazard, and it involves choosing to sleep under bridges

by Ken Houghton

First, there's was Buyer's Remorse. Now, the WSJ gives us Buyer's Revenge:
Mr. Buompensiero, a gray-bearded inspector for REO Asset Services-1st Realty Group, rang the bell. When no one answered, he taped a letter to the door offering the occupants $1,000 to move out. The catch: They won't get a cent if they trash the house before they leave.

"If it was me, I'd take the money," Mr. Buompensiero said as he drove away. Either way, they're "going to get thrown out in a couple of weeks."

And this is not only A Good Thing, it's a Standard, if unadvertised, Business Practice:
No one tracks how frequently such payoffs are made. In Las Vegas, agents hired by the banks to handle foreclosed properties say the "cash for keys" approach, as it's known in the industry, is a regular part of the job. After all, formal eviction proceedings can take months and cost potentially much more than a payoff.

Strangely, all of the evidence comes from people with a clear principal-agent problem:
About 95% of the auctioned properties, however, go unsold and revert to banks eager to get the properties off their books. Some owners just walk away peacefully. But agents say a significant number take what they can carry and take revenge on the rest.

There's no data, apparently, so there's really no economic solution. So why is the WSJ discussing it?

Because some people are at least "haggling over the price":
The owner, a 43-year-old man with two children who spoke on the condition that his name not be used, says he bought the property in 1993 for $140,000. Three years ago, he says he had the house appraised for $440,000 and took out a $207,000 home-equity loan to pay off credit-card bills and buy his wife a new van. His initial payments were an affordable $1,800 a month.

He fell behind, however, after he went through a divorce and his landscaping business faltered, just as his interest rate was rising. The man worked out a payment plan with the bank and borrowed heavily from his father, but, including penalties, his monthly payments rose to $4,000, he says. After two months, he says, he ran out of money, and the bank foreclosed.

He called Mr. Carver after receiving the cash-for-keys note, but was left cold by the bank's initial $500 offer to leave the house soon, intact and broom-swept. "If I stay here it will cost them a lot more money," both men remember the former owner saying....

Mr. Carver consulted with the bank and upped the offer to $2,800.

"Better than nothing," the owner responded.

Last week, Mr. Carver went to the house, found it clean and whole, and handed the man a check. "Everybody walks away somewhat happy," Mr. Carver said. "I guess."

There's a doctoral thesis in this. However...

(more in next post)

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Friday, March 28, 2008

The Perfect Negative Indicator?

by Ken Houghton

Jim Cramer's column in Metro this morning was singing the praises of Toll Brothers and Ryland, another homebuilder. So it is probably only right that CR finds this:
The little bit of good news was KB Home's cancellation rate improved slightly (similar to other builders):

The Company’s cancellation rate improved to 53% in the first quarter of 2008 compared to 58% in the fourth quarter of 2007.

After his BSC call, I didn't think there was anywhere else for him to go. But clearly he's "Workin' in a Coal Mine":

Workin' in a coal mine
Goin' down down down
Workin' in a coal mine
Whop! about to slip down

Added: A Yahoo! Finance graphic for the optimists who think there may be more to Residential Housing than the general market:

Just for giggles, here's the three builders, over the past year, vs. the S&P500 Index:

UPDATE: My Loyal Reader, whose sense of time comes from a Mark Thoma link, recommends "the original" video.

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Baseball Quote of the past few months

by Ken Houghton

At the end of a series of e-mails that were deliberately segued from football to baseball (or perhaps vice versa), I sent:

Did the Cardinals play the Bengals? I'll be David Eckstein ran for at least 100 yards.

The response was brilliant, warming the cockles of hearts everywhere, but especially over at Fire Joe Morgan:

Yes. He over-ran 1st base by 210 feet, trying to hustle out a bunt.

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Why I Expect I Won't Be Able to Vote for Obama in November

by Ken Houghton

It's not that I want to ignore Hillary's advice.

But let's look at this from a Sports point of view. My undergraduate alma mater broke the Division I record for a football team's losing streak (though, in fairness, the streak began the year after I graduated).

And while the MBA school has pretensions of being a football powerhouse (they are in the SEC, after all), they're rather more accomplished on the national level in swimming.

And no one will confuse the current campus—the most diverse college in the country—with the main branch, which goes to bowl games and manages to lose money.

So, since I have a chance to do graduate work at the school that just won its country's National Women's Hockey Team Championship, the opportunity for the sports culture shock alone is not to be passed up.

But it probably will make casting a ballot difficult. Advice/suggestions welcome.

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A Cortisone Shot is a Wonderful Thing

by Ken Houghton

The nicest words I heard yesterday: "I'm not impressed by what they called a labral tear."

A few months of "no pain, no gain" physical therapy is preferable to four weeks or so with an immobilized shoulder.


It's De-Lurking Day!

by Tom Bozzo

The commenter on this post wondered if I was fishing for early "happy birthday" messages at the time; I was not. Today's the big day — yes, folks, I'm now 40 — and that's still not what I'm fishing for. Rather, I'd like to hear a little about you, the Marginal Utility reader who's loyal enough to be reading this post. So please click on that comment link and say hello. Thanks in advance!

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Thursday, March 27, 2008

Jimmy Cayne Cashes Out

by Tom Bozzo

...for $61.3 million, sez the AP. (That's 5.66M shares at $10.84 each.) Nice work if you can get it.


Not Even Wrong

by Tom Bozzo

Hullaballoo's dday recommends an L.A. Times article by Ricardo Alonso-Zaldivar, "Presidential hopefuls are mum on Medicare and Social Security woes," as a "dumb article" And indeed it is.

As dday notes, Social Security is not a particularly urgent problem (though more on that in a moment), and there might just be a problem or two or three that's more urgent than the need to come up with money to plug a gap between payroll taxes and Social Security benefits in the 2040s. On Medicare, the Democratic candidates would deal with the issue in large part through more comprehensive health care reforms. So they are not so much mum.

In fact, one of the first (if passing) waves of Obama disillusionment resulted from his talking about Social Security using what might be viewed as be Republican frames. Moreover, while Alonso-Zaldivar remarks that
The two programs on which millions of elderly Americans depend are apparently just too hot to handle -- especially since any realistic solution is likely to involve a politically unpalatable mix of higher taxes and lower benefits.
this esoteric Intertubal resource called contains a Web page containing the following words, quoted verbatim:
Obama believes that the first place to look for ways to strengthen Social Security is the payroll tax system. Currently, the Social Security payroll tax applies to only the first $97,500 a worker makes. Obama supports increasing the maximum amount of earnings covered by Social Security and he will work with Congress and the American people to choose a payroll tax reform package that will keep Social Security solvent for at least the next half century.
So, exactly contrary to the article, Social Security is not too hot for Obama to propose a "realistic solution." By the way, this solution is what put me back on the bandwagon, as the very smart Robert Waldmann reminded me some time back that raising taxes on the well-to-do isn't exactly the Republican way of dealing with this sort of thing. (The real Social Security funding issue is that the Bush tax cuts took the money that would repay the bonds held in the Lockbox and gave it to upper-income taxpayers via the tax "cuts." While in a world of magic ponies, I'd prefer to address the issue through the income tax system rather than the payroll tax system — since it's through the latter that IMHO needless tax preferences for capital income can be ended — the bottom line is that money is fungible and removing the cap on the Social Security tax is a big step to extracting the needed funds from the right people.)

And where would we be without the obligatory fluffing of Saint John McCain for a seemingly sensible position he doesn't actually hold? Writes Alonso-Zalvidar:
Of the three candidates, McCain is running as the most fiscally conservative. He criticized the Medicare prescription benefit when it was created in 2003, saying that Congress and President Bush failed to provide for the long-term cost.
Now, what does Candidate McCain say? Again, turning to the Internets:
Lower Medicare Premiums: Seniors face a growing threat from higher Medicare premiums that tax away their Social Security and retirement savings. [emphasis in original]
This is styled as a "retirement tax cut." By taking money out of the system, McCain would make the funding problem worse in exactly the sort of pander that Alonso-Zalvidar is supposed to be criticizing. Moreover, what about the rest of the "fiscally conservative" McCain platform? We have promises to:
which he would offset by
In short, the "fiscal conservative" McCain would reduce federal government revenues by trillions of dollars over the infinite horizon, spend trillions more on the war and Social Security bamboozlement, and save a few billion here and there via the trivial Waste, Fraud and Abuse play. Evidently, fiscal conservatism doesn't mean what it used to. (Over at Media Matters, they were thinking much the same thing.)

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Wednesday, March 26, 2008

Does Anyone Really Believe This?

by Tom Bozzo

Headline to Lou Uchitelle's story in the NYT: "A Political Comeback: Supply-Side Economics."

There are a couple of almost useful pieces of information in the story. One is that Arthur Laffer is a "special adviser" on John McCain's crack economics team, otherwise populated by such luminaries as Phil "even his friends don't like him" Gramm and Kevin "Dow 36,000" Hassett. Who's next, Donald Luskin?

The other is that Martin Feldstein, also a McCainiac, is wildly overoptimistic about the supply-side benefits of tax cuts, suggesting that they might offset 50 to 70 percent of the static revenue loss. The real figure is no more than 10 percent.

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Tuesday, March 25, 2008

The Price Increase: a BS violation, but maybe with a purpose

by Ken Houghton

I've been trying to figure out the Bailout Stock Offer Increase. And I think I have a theory that makes as much sense as any other.

As Carney notes, many of us who said nothing at the $2 level are screaming Bailout at the four-fold increase.* (Tom and cactus, as I noted yesterday, were ahead of the curve—I still think they were wrong, but let's go with prescient.) And, to give him credit, he also notes that this (1) may have been necessary for the market and (2) the shareholders could still make a lot of trouble (if they're as stupidstubborn as Yves, for one, believes they are).

Let us think for a minute about Black-Scholes. One of the key elements of the model is that square root of time thing: the longer you have to expiry, the higher the time value of the option.**

JPMC just went from having a lock-in until March of 2009 to needing things to be done on 8 April 2008. And they're paying more.

But, to reference another former firm,*** there was a period of time—around mid-2000, iirc—where Carly Fiorina (whose leadership and management skills are legendary) got it into her head to buy the consulting arm of PwC for about $18 billion. And negotiations went on and on. Others from the HP side talked it down to about $11 billion, and then HP decided that the employee turnover rate (the best of the Big Five, but still twice what HP was used to seeing) was too high. So the deal was called off.

For the six or seven months of that roundelay, though, the senior partners of PwC did virtually no Business Development. (Exceptions noted, but they were exceptions.) They were, as it were, counting their money.

So by the time the deal fell apart, the pipeline was dry. And along came a recession, and then 11 Sep 2001, and finally the business was sold to IBM in mid-to-late 2002 for, iirc, $3 billion.**** (HP went out and found a company with a low turnover ratio—Compaq—and the synergies created there made it a powerhouse that has only added to Ms. Fiorina's reputation.*****)

Now, I'm not saying that the time spent on the failed HP merger drained between 75 and 83% of the value of the company—but there's a reasonable argument that the market did, and it is certainly true that distracted partners don't generate the revenue stream that dedicated ones do.******

Now think about that in the context of an investment bank, where the cash flows are larger, quicker, and more fleeting. A business idea that is six months old still has value. A trading algorithm that gets delayed six months is likely to lead to losses.

So I suspect believe that Jamie Dimon has just played the last trump: "You want another $1 billion for the equity holders? All right, but you've got to finalize the agreement on this deal in the next two weeks, or I'm taking your building. And, by the way, if the deal fails, the market has already smelled blood twice. So Bring It On, if you want. But be careful what you wish for; you may get it."

Whether he finished with "Do you feel lucky, punk?" is left as an exercise to the reader. But with the value of the assets declining daily, Dimon probably realised that Black-Scholes wasn't the model to use for valuation.

It's still a bailout, but it appear to have a working logic to it.

*Yes, I said four- not five-, fold. Round figures, the swap went from 0.05 JPMC shares per BSC share to 0.21 shares, which is just over a four-fold increase (ca. 320%). The rest of the appreciation came from the rise in JPMC's stock.

**It's also one of the reasons no one would ever use the standard model to price a long-dated option. But that's a sidebar, not relevant to the example at hand.

***I've got a million of them. Well, sometimes it feels that way.

****None of these numbers or dates is necessarily accurate, but I believe they're close. You can look them up.

*****This you can definitely look up.

******It was legend at Bear that one of the then-current Compensation Committee members had maneuvered his nearest rival out of the job when the latter was tending to his cancer-stricken wife. But again I digress.

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My E-Mail Wants Me to Join the Straight Talk Express

by Ken Houghton

Here are some current members.

Click link here.

UPDATE: Oops. I see Dr. Black posted this Saturday night. So I'm not going to keep it embedded it here.

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by Tom Bozzo

Spencer Ackerman:
I recommend a two-pronged strategy. First, begin drinking heavily. Second, withdraw immediately from Iraq.
...via DeLong, who adds:
I still haven't wrapped my mind around the fact that we are providing air support to a group called "The Supreme Council of the Islamic Revolution [in Iraq]"
(Though Wikipedia says that they now prefer "Supreme Islamic Iraqi Council.")


The Moral Hazard Contagion Spreads

by Ken Houghton

Tanta notes that Wells Fargo is begging, which they weren't doing when the BSC price was $2/share.

Yes, the plural of anecdote is not data, but the timing here is not coincident.

More later.

UPDATE: I see cactus at AngryBear is thinking the same way, though rather more like an economist than a taxpayer.

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Roots of the Crisis

by Tom Bozzo

(Note, this post has been expanded and edited from the original version posted over the weekend, and bumped. -Ed.)

The question arose as to what my problem with Adam Davidson's analysis on NPR [*]was, exactly. Davidson fielded a listener question asking how a seemingly small problem like subprime mortgage defaults could lead to a widespread financial crisis. Much of Davidson's answer discussed the role of leverage in amplifying losses, which clearly is part of the story.

The offending part was an introduction that ran with the premise of the question — small cause, big effect — leading Davidson to suggest that the situation was akin to having a failure in the rubber-band industry torpedo the whole economy. That, no doubt, was exaggeration for comic purposes. But the entire underlying premise is questionable at best.

The housing industry may be just one sector of the economy (if one, along with finance, that was strongly leading the growth out of the 2001 recession), but more relevant is that the
housing boom or bubble created what's looking like several trillion dollars' worth of now-vanished "equity" on household balance sheets. Thanks to lax lending and borrowing practices, a lot of mortgages were thus collateralized by assets valued at bubble prices. That makes for a large hit to households' finances and to the holders of mortgages and MBS; a big deal. Of course we've seen hundreds of billions of dollars in asset write-downs so far — with quite a bit more to come if the Nouriel Roubinis of the world continue to be right.

That leads us to the next big cause, which after Dr. Hypercube's coinage is the "matryoshka lemons" problem. That is, all the slicing and dicing of mortgages for MBS and MBS-derivative securities left the market not only unsure who was holding bad (or potentially bad) debts, but in fact all but unable to determine the actual quality of the securities. Hence, once large and liquid markets dried up overnight. The first casualties here were some lenders who relied on the ability to borrow short, lend long, and quickly pack securitized loans off to investors. This is also a big deal, since securitization is the linchpin of postmodern mortgage lending.

Having borrowed lots of money to make bad bets in illiquid markets then is a follow-on consequence of the big systemic problems.

In short, I think a better answer would have been that the triggering events — deflating the housing boom in general, and the securitization market failures — are big and not small. Subprime was maybe the likeliest starting point because so many of those loan contracts were structured to fail in response to the least shock, but ultimately the subprime failures were symptomatic of the general overvaluation of real-estate assets rather than causal.

In effect, Davidson's account (especially in the summary of the response linked above) is that leverage took a small problem in the housing market — i.e., subprime — and made it big. Correctly accounting for the roles of the housing bubble and the MBS market failures suggests that leverage took a big problem and made it fast.

Why does the distinction matter? The lessons and eventual remedies could well vary a lot depending on whether we've been seeing an amplification of problems created in rogue elements of the financial system, or whether the "shadow banking system" is fundamentally broken. I think the evidence points toward the latter situation.

[*] The NPR page now has a summary, but not a full transcript of the proceedings.


Monday, March 24, 2008

Not An Actual Statement of My Investments

by Tom Bozzo

I am now short Kimberly-Clark Corp. Julia is potty-trained!!!!11!1One!


Insert Punch Line Here

by Ken Houghton

IOC's Rogge employing 'silent diplomacy' with China-Tibet protests

King Kaufman at Salon, of all people, gives the lie to that claim, while Richard Sandomir of the NYT proves that there are still signs of life there.

But why is it the sports beats that deal with the international issues, with others discussing the situation only when French Prime Minister Sarkozy threatens to boycott the Opening Ceremonies?

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A Buyout is a Buyout, No Matter How Small

by Ken Houghton

UPDATE: Well, that was quick. A Bailout is a Bailout, No Matter How Small.

UPDATE II (via Dr. Black): There is a reason to renegotiate the contract from the JPMC side, but it should hardly be worth 4x the price of the firm, unless the stuff really is pure shite. Which would make this a true textbook case of Moral Hazard. Anyone taking bets whether Mankiw or Varian or any of the other intro or intermediate texts ever cites it? UPDATE V: John Carney gives the lie to that claim.

UPDATE III: The pity party thrown last week by the WSJ for Bear's senior, er, management appears to have omitted some data:
Insiders at Bear sold a total of 715,000 shares last year worth more than $75 million, up from 2006 but down considerably from 2004, when sales of more than 1.5 million shares worth $147.9 million took place, the data show.
Since 2000, Cayne has sold 2.37 million shares worth about $182.7 million, while Schwartz has sold more than one million shares for roughly $67.2 million.

UPDATE IV: And it becomes official:
JPMorgan Chase & Co. (NYSE: JPM) and The Bear Stearns Companies Inc. (NYSE: BSC) announced an amended merger agreement regarding JPMorgan Chase's acquisition of Bear Stearns.

Under the revised terms, each share of Bear Stearns common stock would be exchanged for 0.21753 shares of JPMorgan Chase common stock (up from 0.05473 shares), reflecting an implied value of approximately $10 per share of Bear Stearns common stock based on the closing price of JPMorgan Chase common stock on the New York Stock Exchange on March 20, 2008.

The Old Firm is projected to open trading today between 9.87 and 9.88 per share. Since its current takeover offer is slightly over $2/share ($2.41 last I looked, based on the then-current JPMChase price), and it was around $6.39 Thursday night, there is clearly a different type of Resurrection on the market's mind.

If the market turns out to be correct, then[It was; see Updates above] I will change my mind and agree with Tom and Cactus that the actions last weekend were a bail-out, even if the Fed didn't intend them to be.

Until then, the severance offer* alone strongly suggests that most of the employees will vote their shares in favor of the takeover.

*Three weeks per year of service for the first five years, two weeks for each year after that, and last year's bonus paid for this year. This is only slightly worse** than what the people who were severed in November got.

**November was three weeks per year, regardless of service time.

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Sunday, March 23, 2008

Foreign Policy, Political Economy, and Sovereign Investment, or Why'd You Say Burma II?

by Ken Houghton

Catching up from a week ago, this CSM story on the failure to achieve a global boycott of Myanmar/Burma dovetails into multiple issues. The CSM places an interesting emphasis on its story:
Who's buying? China, India, Singapore, and Thailand are scooping up Burma's stones. US first lady Laura Bush's efforts at a global boycott of Burma's gems seem to have done little to reduce China's appetite for Burmese jade to make trinkets and souvenirs to sell at the Summer Olympics.

At this recent auction, 281 foreigners attended, leaving behind much-needed foreign currency and generally turning the auction into a resounding success, according to the state-run New Light of Myanmar newspaper.

Mrs. Bush – and human rights campaigners – would not be pleased.

The first lady has taken on the military regime in Burma (Myanmar), urging jewelers not to buy gems from a country where the undemocratic rulers and their cronies amass fortunes selling off the country's stones, as well as many of the county's other natural resources – such as minerals, timber, gold, oil, and gas – but keep Burma's citizens in abject poverty.

She has urged UN Secretary General Ban Ki Moon to act more forcibly on Burma and stood beside President Bush on several occasions recently as he announced the growing list of US sanctions on the country. And, on International Human Right's Day this past December, Mrs. Bush added her voice to those seeking a global boycott on gems from Burma.

"Consumers throughout the world should consider the implications of their purchase of Burmese gems," she said in a statement from the White House. "Every Burmese stone bought, cut, polished, and sold sustains an illegitimate, repressive regime."

Now we might just assume this is because the First Lady always talks about "women's and children's issues" (h/t Lance), but clearly the CSM believes that a lot of Laura Bush's political capital is centered on the issue. And since she's the smart one—the ex-librarian, not the failed businessman—and (as Brad DeLong noted) "even a weak very powerful in foreign affairs," so her husband's popularity (or lack of same) shouldn't in itself have much of an effect. If Laura wants it done, and their marriage is the true partnership it is portrayed as being, then we should be able to assume that the aim of the United States is to limit such trade.*

And if we again stipulate that the United States is the one remaining superpower, then the Office of the President should be able to use its influence to keep countries from bidding. At least, our major trading partners, such as, say, "China, India, Singapore, and Thailand." After all, political capital is only useful if it can be used for the things about which a country cares, no?
At this January's auction in Rangoon, according to the New Light of Myanmar, 600 lots of jade were sold – a third more than at the last auction held in November. By some estimates, jade alone now accounts for about 10 percent of Burma's yearly export earnings.

Cutting off 10% of their export earnings should have a significant effect, no? Especially when most of that money is not getting to the people whose labor creates it, but rather to those who would control them.
Why haven't Western sanctions on Burma's gems – and the country's other products – been more effective, even after so many years?

"The only sanctions that would work would be Chinese," asserts Robert Rotberg, a professor of public policy at Harvard University's Kennedy School. "The Chinese ... supply all the weapons and much of the investment [to Burma]."

But the Chinese are our friends, and 10% of Myanmar's exports probably doesn't cover the profits from the sales of China-made New York Yankee apparel. There must be something else...
"The role of gems is not huge ... compared with oil and gas, and opium smuggling," he says. Overall, China, Thailand, and India reportedly spend about $2 billion a year here on electricity, natural gas, oil and timber.

"China is the culprit here," explains Thai social critic and frequent Burma commentator Acharn Sulak Sivaraksa. "Burma is supported by China. End of story. We need to liberate that country not only from its own military junta but also from the imperialist Chinese."

The limits to growth are the limits to negotiating, or the use of political, power. And even if Operation Iraqi Liberation** had worked, $2 billion a year of valuable imports apparently buys a blind eye or two, even from our alleged allies.

Someone needs to figure out what the Elasticity of Demand for political capital is.

*This is also consistent with George W. Bush's public statements, example cited here. (Sarcastically, but it's my post, so what would you expect?)
**Tom Friedman originally liked this, until the fortieth or fiftieth e-mail suggesting it clued him in to the acronym. I'm thinking about calling it Operation Exogenous Democracy, but fear that the people in Oxford might object.

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Saturday, March 22, 2008

Paul Romer's Dad Dances with The Devil

by Ken Houghton

The last time around, this may have worked. Can doubling-down pay off?
Former Democratic National Committee Chairman and Colorado Governor Roy Romer and former Republican National Committee Chairman and Bush White House political affairs director Ken Mehlman were the guests at Thursday's Monitor breakfast. Mr. Romer is chairman and Mr. Mehlman is a trustee of Strong American Schools. The organization describes itself as a nonpartisan campaign to make education a top national priority by making the subject a centerpiece of the 2008 election.

"This nation has been drifting back in comparison with the rest of the world for the last 20 years in education," Romer said. After serving as governor, Romer was superintendent of the Los Angeles Unified School District from 2001 to 2006. "Where we used to be No. 1 or No. 2, we are now, if you compare 15-year-olds," 21st among 30 industrial nations in science, he said. "The rest of the world has advanced very rapidly in education, and we have been making some advances but not nearly at the same pace," he argued.

Mehlman gets the history correct: the rise of the high school graduate, the G. I. Bill (which more than met the political goal of keeping the post-war unemployment rate lower), and the subsequent National Defense Education Act pretty much cover the pre-OPEC productivity booms. Romer pere puts it in terms even Congress can understand:
The US would profit economically if our educational system improved, Romer said. "There is an entirely different economic future that we are going to be living in and education is the key to that future," he said. If US students improved to where their test scores matched the midpoint of European student achievement, the US gross domestic product would grow an additional 5 percent over the next 30 years, producing trillions of dollars of added resources for the US, he said.

Is it more important than improving the health care system? I don't know, but it may just help to do that too.

More tomorrow.

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Friday, March 21, 2008

A Fate Worse Than A Fate Worse Than Death

by Tom Bozzo

Cheers to Angry Bear's Cactus for pushing back against the meme that the near-wipeout of Bear Stearns shareholders means that there wasn't a bailout on. (For an example, hear Laurence Meyer in this NPR segment, which for the record starts with possibly the worst explanation ever of the origins of the present crisis from reporter Adam Davidson. [*])

On a maybe related note, I was scratching my head over the NYT editorial board's observation that:
[I]f the objective is to encourage prudent banking and keep Wall Street’s wizards from periodically driving financial markets over the cliff, it is imperative to devise a remuneration system for bankers that puts more of their skin in the game.
Oh really? Whether or not it was enough, Jimmy Cayne experienced a 9-figure paper loss last weekend. The LTCM partners' large share of the fund's equity didn't stop them from almost blowing up the markets.

*] See here for explanation. Also please keep in mind the cultural subtext of the "worst X ever" formulation.

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One of These Things is not Like the Other, or Ouch!

by Ken Houghton

From David Warsh's Knowledge and the Wealth of Nations:
During the administration of the first President Bush, [Larry] Summers became chief economist at the World Bank, then, after Bill Clinton was elected, rose steadily through the Treasury Department ranks, eventually becoming the youngest treasury secretary since Alexander Hamilton, and finally president of Harvard University. His old friend Andrei Shleifer moved to Harvard from the University of Chicago in 1992 to lead a U.S. mission to Moscow on behalf of the U.S. Agency for International Development. His deputy, J. Bradford Delong, moved to Berkeley, wrote a textbook, and started a widely-read blog.

After finishing the book, I'm not certain that Warsh doesn't believe that DeLong didn't make the best choices of the three. (Nor would I be inclined to argue with that conclusion.)

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Sherry Glied has been a Busy Writer/Researcher

by Ken Houghton

First she caught Tyler Cowen (and, through him, Brad DeLong's) attention with this paper (NBER; gated).

Today, Ben Muse looks two papers earlier and finds "The Economic Value of Teeth."

I haven't seen anyone go four papers forward to discuss this one yet, but I haven't hit the Health Care blogs yet today.

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Thursday, March 20, 2008

Something I Need to go through More Carefully

by Ken Houghton

A marvelous post from Andrew at Statistical Modeling etc. which evolves in the comments into a discussion of Willingness to Pay (WTP) vs. QALYs.

For some reason, economists seems to prefer the former to the latter. Which is strange, because it is intuitively easier to build a realistic Health Economics model using QALYs and treating insurance premia as an investment than the current standard of treating insurance premia as a "sunk cost" and declaring Moral Hazard at all turns.

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Belatedly, Once more, On Cuba

by Ken Houghton

UPDATE: De Long responds, accurately, here. Though I'm still inclined to believe that, at best, the U.S. fallout would have been even worse, his scenario is at least plausible from the Cuban perspective.

Catching up on my skimming (in preparation for having a while with time for reading), I find this Adam Clymer op-ed on the Panama Canal:
THIRTY years ago tomorrow, the conservative movement lost a major battle on the way to winning a larger war. On March 16, 1978, the Senate approved — 68 to 32, with just a single vote to spare — the first of two treaties that transferred the Panama Canal to Panama. Conservatives lamented the result, saying it threatened national security and might put the canal in Communist hands.

But losing the canal led to important victories for conservatives. The transfer of the canal to Panama provided the margins for defeat of five Democratic senators in 1978 and 1980, enough to give Ronald Reagan a Republican majority when he took office in 1981. That majority was essential to Mr. Reagan’s legislative successes.

And I am reminded once again of Cuba, and Brad De Long's reply to Jessica (#5) when she noted that "once that die was cast, I don't see where Castro ever had a chance to switch directions without risking not only US invasion, but vindictive and brutal US invasion":
As to when Fidel could have switched to a eurocommunist or social-democratic model without immediately losing his head--well, 1968 with Dubcek, or 1975 with Sadat, or anytime in the Carter administration, certainly.

The man who barely had enough political capital to get rid of an aging, increasingly less valuable resource does not seem likely to have been able to repel the Cuban Mafia's Calls for a Takeover.

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When You're Being Sued by Detroit...

by Ken Houghton

Without further comment.

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And You, Sir, Are No Genius

by Tom Bozzo

The last few nights, I've been enjoying Roger Lowenstein's When Genius Failed: The Rise and Fall of Long-Term Capital Management. At least, I've been marveling at its parallels with the present crisis — not principally because of JM's latest round — in-between thinking that I might sleep better were I reading "Call of Cthulhu" as a chaser to a late-night screening of Alien.

The density of Famous Last Words and Unheeded Cautionary Lessons is too high as to make a comprehensive review possible (yet 'nobody' saw the current crisis coming), but here are a few favorites:
Removal of these financing constraints [margin rules] would promote the safety and soundness of broker-dealers by permitting more financing alternatives and hence more effective liquidity management... In the case of broker-dealers, the Federal Reserve Board sees no public policy purpose in overseeing their securities credit.
That's Alan Greenspan, testifying to Congress in 1995.

[Fama] argued that Black Monday had been a rational adjustment to a (one-day?) change in underlying corporate values. On the other hand, Lawrence Summers... told the Wall Street Journal after the crash, "The efficient market hypothesis is the most remarkable error in the history of economic theory." (p. 74)
And that's saying something?!

Almost imperceptibly, the Street had bought into a massive faith game, in which each bank had become knitted to its neighbor through a web of contractual obligations requiring little or no down payment... "Credit limits for customers are an essential tool for credit risk management," [The New York Fed] warned. [emphasis in original]
Shockingly, the warning was in a letter to Wall Street banks, not business undergrads.

Writing in the prestigious Journal of Finance, Andrei Shleifer of Harvard and Robert W. Vishny of Chicago presciently warned that an arbitrage firm of Long-Term's type could be overwhelmed if "noise traders" pushed prices away from true value... [T]hey predicted that, in such a case, arbitrageurs would "experience an adverse price shock" and be forced to liquidate at market lows. Merton... pooh-poohed the notion that markets could be overwhelmed. (p. 111)

Merrill's willingness to finance its client was part of a pervasive climate of financial laxity, palpable in Wall Street's eagerness to underwrite emerging markets. (p. 130)
Let's play "substitute the asset category!

The comforting notion that global financial cops would always be there to put matters right was now exposed as a fallacy. This time, there was no rescue by the IMF, no hurried bailout by Robert Rubin or the Group of Seven Western powers... It "punctured a moral hazard bubble" that had been inflating expectations... Investors, at first singly and then en masse, concluded that no emerging market was safe. In seventy years, Russia's Communists had not succeeded in dealing markets such a telling blow as did its deadbeat capitalists. (p. 144)

Most of us survived 1998, but we'll see if our deadbeat capitalists can one-up their Russian counterparts...

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A Month Ago, I had not heard this word

by Ken Houghton

What do Anibal Sanchez (pitcher for the Marlins) and I have in common (and maybe Curt Schilling as well)?

We all now know what the word labrum means.

Image courtesy of the real Gray's Anatomy, as posted by Yahoo!

Seeing the surgeon next Thursday. But at least now we know why the Patches aren't working, and why we haven't gone skiing again this season.


Wednesday, March 19, 2008

In Case You Missed It

by Ken Houghton

Tom tends not to update the time of his posts at the end, and I've thrown a couple of cans of paint at the wall today, so go thee hither for a discussion of the other "upside-down" market: automobile financing.

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A Most Peculiar Comment

by Ken Houghton

In the Christian Science Monitor's piece today, "How will the Iraq war end?"* comes the most peculiar comment:
At least one US ally in the region remains grateful he is gone.

"Any Iraq will be better than Iraq under Saddam, because the Iraq of Saddam had the ability to threaten Israel," says Shlomo Brom, a senior fellow at Tel Aviv University's Institute for National Security Studies and former head of the Israeli Defense Force's Strategic Planning Division.

Besides the revelation that we have more than one ally in the region, I was amazed to discover that Iraq was a direct threat to Israel. Indeed, the Holt, Rinehart, Winston world atlas confirms that "the ability to threaten Israel" would depend on going through Syria and/or Jordan.

The piece ends with this cheery thought:

Taking all these factors into account, success in Iraq at this point might be defined as a unified country that does not offer sanctuary to Islamic militants and is governed by a stable regime that is not under the influence of a hostile foreign power, such as Iran.

That, for example, is the bottom line of Andrew Krepinevich, a veteran Army planner and now president of the Center for Strategic and Budgetary Assessments.

Reaching this relatively stable state could take another three to five years – if it can be reached at all. Even then, the US might need to keep a substantial number of troops in the country – to keep Iraq's internal factions from going after one another and to protect the nation from its external enemies.

"A reasonable outcome would find something like 30,000 to 40,000 troops in Iraq for 25 to 50 years," says Dr. Krepinevich in an e-mail.

After all, the US has deployed troops in Germany and Japan for 63 years, and Korea for 57. Might Iraq, in the end, require a commensurate commitment?

I'm certain the troops in those three states are constantly on alert status as well. But at least Dr. Krepinevich is more optimistic than John McCain.

*Didn't it end on May 1st of 2003, with the "Mission Accomplished"/"I don't know how to wear a flight suit" speech? I'm so confused...

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Bear Investors bet that Moral Hazard Doesn't Exist for Them

by Ken Houghton

The Wall Street Journal has several articles today on the death of The Old Firm. Most interesting is "Heard on the Street" (link requires sub), where investors appear to have decided to play a game of Chicken with both Jamie Dimon and the Federal Reserve.

There will be a lot of noise about this over the next few months, and someone (not me) will get a nice dissertation out of the results.

Most interesting, though, from an asymmetrical information point of view, is this one, which notes that the inept Christopher Cox-led (but I repeat myself) SEC:
issued a written statement suggesting it has expanded an inquiry into Bear Stearns Cos. to include what was or wasn't said in the two months leading up to the brokerage firm's unraveling.

The SEC, which is usually mum about investigations, said its enforcement division wrote a letter as J.P. Morgan Chase & Co. was negotiating to take over Bear. The letter addressed to J.P. Morgan concerned "investigations and potential future inquiries into conduct and statements by Bear Stearns before the public announcement of the transaction with J.P. Morgan."

The Bear speculators are treating the stock as if it were SCO, which for a few years was basically a gamble on a successful lawsuit. That effort has not been pretty.

Strangely, their greatest hope may also be their greatest weakness, renowned bridge player and former CEO Jimmy Cayne. As the New York Post notes:
Cayne, who is a member of Bear's board of directors and voted for the JPMorgan deal, could risk further embarrassment if he threatens to vote against the deal, sources said.

The "I was for it before I was against it" strategy is not something I want to gamble $4/share on. Your taste for lawsuits may vary—just be certain they are suits in your favor, not against you.

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Signs the Automobile Recovery Isn't Nigh

by Tom Bozzo

AutoWeek has a window on the stressed consumer with a report that the automobile financing mix is moving towards leasing. This is because buyers are having a hard time affording car payments on conventional loans, even with the extremely long financing terms that are becoming more prevalent:
"These 84-month loans--the percentage is rising dramatically and it's just unhealthy," [California dealer Dave] Conant told Automotive News. "It's horrible for the buyer and it's not good for the industry."
The level of 7-year loans isn't high — at Toyota's financing arm, it's reportedly 4% of business (up from zero at the start of 2007, though) — but the mean is 64 months, up from 61 in 2003. The W$J's periodic info graphic on fast-selling cars (sorry, no link) recently indicated that six years is the mode even for such vehicles as the Nissan Rogue, an entry-level small-car-based crossover priced in the low twenties.

You'd normally expect the current free-money environment to be relatively good for loan financing over leasing. That makes it relatively cheap for the manufacturers' captive financing companies to offer those low rate deals to move metal. Buyers who expect to hold onto their cars for a good part of their useful lives should prefer to buy. [*] Even luxury makes accustomed to leasing much or most of their output saw big shifts towards conventional purchases in 2003-04, as a graphic accompanying the AW article shows for the case of BMW.

The catch is that the last few years' sales efforts have put a great many people into new cars with upside-down loans. Hence this sort of solution:
a hypothetical customer could roll $150 or $200 a month of negative equity from a previous vehicle loan into the lease and still have an affordable monthly payment.
Maybe it beats a visit from the repo man, but yikes. Assuming a 36-month lease term, the dealer would be looking at someone coming in with several thousand dollars' negative equity on some MOR car. Considering their resale values, this would include just about anyone who financed a domestic-make car with little down and an average term or longer. In any event, add that to the conventional payment on the average new car, and you're looking at the lease payment on a 5'er or thereabouts, which most of the motoring public can't actually afford.

This sort of workout may put some people in cars now, and back on the market in 3-4 years, but even so it puts the manufacturers in the position of assuming the risk that the leased cars will be worth their contracted residual values at turn-in time. [**] I was under the impression that a contributing factor to the lower emphasis on leasing was because some lessors did a bad job forecasting the wholesale market and got burnt. Right now, my impression is that the U.S. automobile product mix is badly out of line with a reasonable expectation of future fuel prices, not to mention the possibility that crazy libruls might try to regulate greenhouse gas emissions, raising more than a little possibility, in my eyes, that nobody in the used-car market in '11 or '12 will actually want a 20-mpg small crossover.

[*] There's nothing wrong with leasing per se; indeed, as someone who's tended to switch cars at relatively high frequency, I lease my current car. [***] At market-rate terms (i.e., without incentives towards one mode or the other), you'd normally expect a lease for a given term to have about the same cost to the buyer as a loan-financed purchase with a trade in at the end of the hypothetical lease term.

[**] If the car happens to be worth sufficiently more than the residual value to cover transaction costs, the lessee should exercise the (standard) purchase option and pocket the gains from resale.

[***] This was, in no small part, intended to keep me out of car dealerships for 3 years. The only problem is that my bike-commuting experiment was too successful, and I'd have been willing to downsize earlier.

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Tuesday, March 18, 2008

Arthur C. Clarke, Premier Science Fiction Writer, Dies at 90 - New York Times

by Ken Houghton

Discovered via one of Jessica Hagy's more brilliant creations:

Gerald Jonas on the late Arthur C. Clarke

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What I Get for Trusting the NYTimes

by Ken Houghton

UPDATE: I see Tom embedded the video. (It really was a year or two in blogsphere time.) So I'm just going to repeat his link to the text here.)

So, several hours later (probably a year or two in blogsphere time), I finally find the actual text of the speech described below. And the "not only wrong but divisive" come very early in a very long speech* that continues as:
  1. Obama makes clear his long-term relationship with Rev. Wright**:
    In my first book, Dreams From My Father, I described the experience of my first service at Trinity:

    "People began to shout, to rise from their seats and clap and cry out, a forceful wind carrying the reverend's voice up into the rafters....And in that single note - hope! - I heard something else; at the foot of that cross, inside the thousands of churches across the city, I imagined the stories of ordinary black people merging with the stories of David and Goliath, Moses and Pharaoh, the Christians in the lion's den, Ezekiel's field of dry bones. Those stories - of survival, and freedom, and hope - became our story, my story; the blood that had spilled was our blood, the tears our tears; until this black church, on this bright day, seemed once more a vessel carrying the story of a people into future generations and into a larger world. Our trials and triumphs became at once unique and universal, black and more than black; in chronicling our journey, the stories and songs gave us a means to reclaim memories that we didn't need to feel shame about...memories that all people might study and cherish - and with which we could start to rebuild."

    That has been my experience at Trinity. Like other predominantly black churches across the country, Trinity embodies the black community in its entirety - the doctor and the welfare mom, the model student and the former gang-banger. Like other black churches, Trinity's services are full of raucous laughter and sometimes bawdy humor. They are full of dancing, clapping, screaming and shouting that may seem jarring to the untrained ear. The church contains in full the kindness and cruelty, the fierce intelligence and the shocking ignorance, the struggles and successes, the love and yes, the bitterness and bias that make up the black experience in America.

    And this helps explain, perhaps, my relationship with Reverend Wright. As imperfect as he may be, he has been like family to me. He strengthened my faith, officiated my wedding, and baptized my children. Not once in my conversations with him have I heard him talk about any ethnic group in derogatory terms, or treat whites with whom he interacted with anything but courtesy and respect. He contains within him the contradictions - the good and the bad - of the community that he has served diligently for so many years.

  2. He follows immediately by affirming his relationship with the Reverend
    I can no more disown him than I can disown the black community. I can no more disown him than I can my white grandmother - a woman who helped raise me, a woman who sacrificed again and again for me, a woman who loves me as much as she loves anything in this world, but a woman who once confessed her fear of black men who passed by her on the street, and who on more than one occasion has uttered racial or ethnic stereotypes that made me cringe.

    These people are a part of me. And they are a part of America, this country that I love.

  3. He gives the speech I was hoping for, and that was only hinted at in the NYT article:
    But race is an issue that I believe this nation cannot afford to ignore right now. We would be making the same mistake that Reverend Wright made in his offending sermons about America - to simplify and stereotype and amplify the negative to the point that it distorts reality.

    The fact is that the comments that have been made and the issues that have surfaced over the last few weeks reflect the complexities of race in this country that we've never really worked through - a part of our union that we have yet to perfect. And if we walk away now, if we simply retreat into our respective corners, we will never be able to come together and solve challenges like health care, or education, or the need to find good jobs for every American....

    [W]e do need to remind ourselves that so many of the disparities that exist in the African-American community today can be directly traced to inequalities passed on from an earlier generation that suffered under the brutal legacy of slavery and Jim Crow.

    Segregated schools were, and are, inferior schools; we still haven't fixed them, fifty years after Brown v. Board of Education, and the inferior education they provided, then and now, helps explain the pervasive achievement gap between today's black and white students.

    Legalized discrimination...meant that black families could not amass any meaningful wealth to bequeath to future generations. That history helps explain the wealth and income gap between black and white, and the concentrated pockets of poverty that persists in so many of today's urban and rural communities.

    A lack of economic opportunity among black men, and the shame and frustration that came from not being able to provide for one's family, contributed to the erosion of black families - a problem that welfare policies for many years may have worsened. And the lack of basic services in so many urban black neighborhoods - parks for kids to play in, police walking the beat, regular garbage pick-up and building code enforcement - all helped create a cycle of violence, blight and neglect that continue to haunt us.

  4. And puts it into a context:
    What's remarkable is not how many failed in the face of discrimination, but rather how many men and women overcame the odds; how many were able to make a way out of no way for those like me who would come after them.

    But for all those who scratched and clawed their way to get a piece of the American Dream, there were many who didn't make it - those who were ultimately defeated, in one way or another, by discrimination. That legacy of defeat was passed on to future generations....Even for those blacks who did make it, questions of race, and racism, continue to define their worldview in fundamental ways. For the men and women of Reverend Wright's generation, the memories of humiliation and doubt and fear have not gone away; nor has the anger and the bitterness of those years. That anger may not get expressed in public, in front of white co-workers or white friends. But it does find voice in the barbershop or around the kitchen table. At times, that anger is exploited by politicians, to gin up votes along racial lines, or to make up for a politician's own failings.

  5. Where I might wish he had cited white examples—G-d knows there are enough of them—he stays the course of discussing Black churches:
    And occasionally it finds voice in the church on Sunday morning, in the pulpit and in the pews. The fact that so many people are surprised to hear that anger in some of Reverend Wright's sermons simply reminds us of the old truism that the most segregated hour in American life occurs on Sunday morning.*** That anger is not always productive; indeed, all too often it distracts attention from solving real problems; it keeps us from squarely facing our own complicity in our condition, and prevents the African-American community from forging the alliances it needs to bring about real change. But the anger is real; it is powerful; and to simply wish it away, to condemn it without understanding its roots, only serves to widen the chasm of misunderstanding that exists between the races.

    In fact, a similar anger exists within segments of the white community.

The rest is a run-of-the-mill speech, with a large dosage of "a pox on both houses" and closing with the Obligatory Anecdote. But it was in its essence the same speech he gave on the 14th, not a repudiation of the man who has been central to his life for those twenty years.

*William Jefferson Clinton haters: if and when this man is inaugurated, go back to expecting 90+ minute States of the Union, as if that were a bad thing.
**Note to Tom: this is how I "professed to know" their relationship
***Most of the extant research shows, in fact, that whites go to Church for social networking reasons, while black church attendees are there to worship: different reasons lead to different structures.

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See For Yourself

by Tom Bozzo

'Cause David Plouffe told me to show you.

Text here.


Obama Throws Pastor Under Bus; Reaffirms Faith

by Ken Houghton

UPDATE II: This post is superseded, to a large extent, by this one.

UPDATE: d at LG&M notes that it has begun.

After twenty years of attendance:
For nearly a week, Mr. Obama has struggled to distance himself from a series of controversial statements by his former pastor, the Rev. Jeremiah A. Wright Jr., who characterized the United States as fundamentally racist and the government as corrupt and murderous. Mr. Obama concluded over the weekend that he had failed to resolve the questions, aides said, and told advisers he wanted to address the firestorm in a speech.

In his address here, delivered in an auditorium to an audience of about 200 elected officials and members of the clergy, Mr. Obama disavowed the remarks by Mr. Wright as “not only wrong, but divisive, divisive at a time when we need unity.” But he did not wholly distance himself from his pastor or the church, Trinity United Church of Christ, on Chicago’s South Side.

Credit where due, he spreads the blame around:
“For some, nagging questions remain,” Mr. Obama said. “Did I know him to be an occasionally fierce critic of American domestic and foreign policy? Of course. Did I ever hear him make remarks that could be considered controversial while I sat in church? Yes. Did I strongly disagree with many of his political views? Absolutely — just as I’m sure many of you have heard remarks from your pastors, priests or rabbis with which you strongly disagreed.” [emphasis mine]

Up until now, the case could be reasonably made—and it has been—that Obama was being singled-out. That no one knows or cares who Hillary's or John McCain's pastor is, and that this was either equivalent to a witch hunt or trivial at best.

And the case was correct, not matter how much Bill Kristol and/or Newsmax wanted it not to be.

And how the original response was enough. (Also correct.)

Now, Obama has declared that he spent twenty years going to a church and a pastor when he "strongly disagree[d] with with many of his political views."

I suspect what comes next will be ugly; uglier than it would have been, even, if Obama had stood up and supported his friend of twenty years instead of declaring him "not only wrong, but divisive, divisive at a time when we need unity."

Obama still has his faith:
“It’s a racial stalemate we’ve been stuck in for years,” Mr. Obama said. “Contrary to the claims of some of my critics, black and white, I have never been so naïve as to believe that we can get beyond our racial divisions in a single election cycle, or with a single candidacy — particularly a candidacy as imperfect as my own.”

but he just cast its rock adrift. And, unlike Samantha Power (with due respects, such as they are, to Brad De Long and Mark Lynch), Wright is not likely to be able to return after the general election.

And we have gone from being able to say that Obama was being singled out to making it legitimate to ask, "Why didn't you find another church, one more in keeping with what you say your beliefs are?"

It's a question that should never have been fair game, but Obama himself has made it so.

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Meanwhile, All of the World's Other Problems Turn Out to Have Been Solved!

by Tom Bozzo

I conclude that, because NPR was expending its scarce time telling me that I should care what some guy named Jeremiah Wright was telling his congregation five years ago.

It does seem that the DFHs have other perspectives on our situation.


Monday, March 17, 2008

"15 years investment in a place lost in a blink of an eye"

by Ken Houghton

There are bodies—generally decapitated, but occasionally CNBC is showing heads as well; familiar people from the company cafeteria or the elevators or the floors—walking out of 383 Madison.

The assets are leaving the building, with bags, binders, and other manners of carrying personal memorabilia.

It's probably a good time to sell all my old Koalas and Dalmatians with "Bear Stearns" attire on eBay. But I rarely time the market perfectly, so let's just make this a Day of Mourning.

Happy St. Patrick's Day: from all the snakes out of Ireland to all the Bear Faithful out of 383. Requiescat in pace.


Sunday, March 16, 2008

Profit Sharing -- Not even at 1992 prices

by Ken Houghton

Iirc, and I probably don't, the first time I got BSC stock options was during my first go-round there. They were around $50/share, which was a minor premium when issued and a discount by the next year.

This time, for once, it appears the Fed did its job: tried to save the market, not the malfeasant firm.

But $2 a share is brutal. At that level, even Jamie Dimon and the crack Manny Hanny Chemical Chase JPMChase JPMChaseBankOne takeover team might be able to make a profit on this.

It's always been especially true at BSC that the assets walk out the door at the end of the day. The question now is how many of them will bother to walk in the door on Monday.

The counterpoint, somewhat, is offered by Steven Randy Waldmann, citing the always worth reading jck of Alea, while Mish suggests that derivatives may be a major issue, which is possible but unlikely, save in the balance between long- and short-term assets.

But after Carlyle got squeezed, and now BSC has fallen, it seems fair to ask exactly what the purpose of the TSLF is.

Unless, of course, you assume that market participants are using the three weeks (now 11 days) before it starts to kill of some competition. And no one in the financial services industry would do that, would they?

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UC Berkeley Gets "Saved"?

by Ken Houghton

In comments at DeLongville, save_the_rustbelt notes:
The University of California at Berkeley has accumulated a $1.1-billion “war chest” to fend off Ivy League poachers, the Bloomberg news service reported today.

Berkeley administrators hope the money, which will go toward endowed chairs for 100 professors, will dissuade faculty members from defecting to wealthier competitors like Harvard and Yale, where salary offers are significantly higher.

For the 2006 fiscal year, full professors at Berkeley earned an average of $134,672 and associate professors $88,576 — about 15 percent less than peers at private institutions. And, since 2003, the California university has lost at least 30 faculty members to its eight main competitors, chief among them Harvard.

This appears to be in reaction to rumors summarized concisely by David Warsh a few weeks ago:
Private universities raise tuitions at will and keep enrollments small while public universities, constrained by legislatures, must keep fees down while increasing their enrollments.

Something of a test of the balance of power may come this spring at the University of California at Berkeley, where professors in the economics department, one of the top half-dozen in the nation, are targets of ten outside offers. Every spring departments all over the country seek to improve their standing by hiring from their rivals, a little like free agent season in big league sports. Bids are always out. But the suspense at Berkeley this year is unusually intense.

Development economist Chang-Tai Hsieh already has preferred an offer from the Graduate School of Business at the University of Chicago to one from Stanford. Other targets of multiple offers include applied microeconomist David Card, a [John Bates] Clark medalist who is a department unto himself; husband-and-wife macroeconomists Christina and David Romer; growth economist Charles Jones; public finance specialist Raj Chetty; not to mention several members of Berkeley’s remarkable junior faculty, led by wunderkind theorist Yuliy Sannikoff and international economist Pierre-Olivier Gourinchas. Meanwhile, star information economist Hal Varian has gone off to be chief economist for Google (to whom he consulted for many years, growing wealthy from his options grants), and Nobel laureate George Akerlof, a youthful presence in Evans Hall, is retiring.

Akerlof turns 68 this year. Varian got a once-in-a-lifetime opportunity (and got rich from the options he had received before; maybe not Mankiw-rich, but rich enough). Card (Class of 1950) and Christina Romer (Class of 1957) already have endowed chairs, as does David Romer (Herman Royer Professor of Political Economy).

On the other hand, Chetty is an Associate Professor and is on leave, as are Professor Jones and Assistant Professor Sannikov. Gournichas is an Assistant Professor, a rung lower than Chetty.

And the institution will still have a host of riches:
Its behavioral economists are led by Nobel laureate Daniel McFadden, Oliver Williamson and Clark Medalist Matthew Rabin. The presence of Joseph Farrell, Michael Katz, Enrico Moretti, Daniel Rubinfeld and Carl Shapiro give it a lock on a certain kind of applied industrial organization. Maurice Obstfeld, Alan Auerbach, J. Bradford DeLong and Emmanuel Saez assure that Berkeley macroeconomics won’t wink out altogether.

Only after bemoaning all of this does Warsh note that UC-Berkeley isn't exactly just being taken in this roundelay:
The department has its own offers out, too, naturally, including one to James Hines of the University of Michigan. What Berkeley economics desperately needs is a faculty entrepreneur to serve as department chair, someone to wheel and deal for it the way John Dunlop did for Harvard economics in the 1960s. But the next chair has yet to be chosen.

There are some things Warsh seems to get wrong. His overall frame suggests that UCLA, not the obvious choice, would [have] supplant[ed] Berkeley before that $1.1 Billion came in. And the mere fact that Cal can raise a $1.1B "war chest" strongly suggests that its not exactly going to be the loser in these battles.

The losers are going to be the "land-grant schools," such as Minnesota, and the other schools whose budgets are being slashed and that don't have access to the type of war chest that Cal does.

But David Warsh won't write about those, and they'll only raise large sums of money if it's for a new football stadium.

Maybe I should change the title of this post.

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Am I Missing Something?

by Tom Bozzo

A theme that's going around (for good reason) is that the serial Fed bailouts are a form of covert nationalization of the financial system. It strikes me that an important distinction between the current goings-on and a canonical nationalization is that the Fed's term lending facilities allow the taxpayer to take on risk via the possibly radioactive assets move to the Fed's balance sheet without capturing any proceeds of re-privatization. Indeed, it doesn't even seem that the public even stands to collect a moral hazard-compensating penalty interest rate. (To be clear, my concern here is with how the public is compensated for the bailout, not with the bailout per se.)

Since the Republicans presiding over what otherwise looks like the demise of postmodern financial capitalism are trying hard to forestall what may be less friendly public interventions — witness the WPE warning about overcorrection — this seems to be considered a feature rather than a bug.

So what am I missing?


Saturday, March 15, 2008

Helicopter Ben vs. the Black Swan

by Tom Bozzo

Ken probably should write this post from the perspective of someone who isn't necessarily just playing armchair analyst. But here goes anyway.

Brad DeLong figured that the assumption that the Fed wasn't going to allow BSC to fail would be a buy signal: a play on the Fed's willingness to accommodate moral hazard. "Mr. Market" disagreed.

My guess is that Brad is right that there's a moral hazard premium, but that it was swamped by the discount for Mr. Market having failed to put a price on BSC that appropriately reflected the possibility that but for yesterday's intervention it would have collapsed if not yesterday then imminently.

As Dean Baker repeatedly tells us, elite opinion has been busy soft-pedaling the crisis all along. The possibility can't be eliminated that elite opinion believes its own bullshit, at least to some extent. (Just about every recent rally seems to have been on news [i.e., large unconventional Fed interventions] that has had at least a subtext of "things are much worse than they seem, even after accounting for the fact that things are much worse than they seem," to borrow a DeLong-ism.) That would make things rife for Wile E. Coyote past the cliff edge corrections.


Friday, March 14, 2008

It Really IS time to move my 401(k)

by Ken Houghton

Via Felix, a short, sharp shock:
With the support of the Federal Reserve Bank of New York, JPMorgan said in a statement that it had “agreed to provide secured funding to Bear Stearns, as necessary, for an initial period of up to 28 days.”

For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price.

“JPMorgan Chase is working closely with Bear Stearns on securing permanent financing or other alternatives for the company,” JPMorgan said in its statement.

And that's the good news.

Now, let us translate:
In a statement issued on Friday, [Bear’s chief executive, Alan Schwartz] said: “Bear Stearns has been the subject of a multitude of market rumors regarding our liquidity.

People have noticed that our CDS spreads are higher than Argentine debt ca. 2001.
We have tried to confront and dispel these rumors and parse fact from fiction.

To do this, we enlisted Margaret Seltzer, who came highly recommended by James Frey.
Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.

Nobody believed me on CNBC yesterday; my e-mail has been filled with "The truth will set you free."
We took this important step

We threw ourselves on the mercy of the Fed and JPMC, which may do for us what BofA's support has done for Countrywide.*
to restore confidence in us in the marketplace, strengthen our liquidity and allow us to continue normal operations.”

In the desperate hope that, since Jimmy's gone, the people who remember that we kept all the LTCM collateral for ourselves will be nicer to us than he was to them.

*Insert your own Eliot Spitzer/Jessica Cutler joke here

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Actual Economics Post: Why 'Shadow Government Statistics' Is Untrustworthy

by Tom Bozzo

Yves Smith finds Wolfgang Münchau of Eurointelligence wondering if U.S. official statistics massively understate inflation. Münchau buries his lede:
There is a website called Shadow Government Statistics, for whose accuracy I cannot vouch, which claims that the pre-Clinton era inflation index shows current inflation at close to 8%, while opposed official CPI inflation is only half that level. [link in original]
Let's forget for the moment about the accuracy of SGS. (Münchau is suspicious that the alternative inflation series is just an upward shift of the official series.) What of their methodology?

SGS's primer on CPI focuses on the supposed evils of accounting for substitution of goods in CPI, versus the supposedly "simple and straightforward concept" of measuring price changes using a fixed basket of goods, and to a lesser extent quality adjustments of price changes, or "hedonics." This is not promising. Why takes some explanation, so bear with me (I'd have installed a jump, but that's bloggered for the moment).

To set some bounds here, I'm not going to discuss the tendencies of policymakers to (sometimes) over-focus on "core" CPI (stripping out major expenditure categories) versus headline CPI. I sometimes sympathize with the inflation-ex-inflation crowd and sometimes don't. Nor will I get much into actual or incipient injustices in how CPI statistics are applied in the real world; count me as opposed, for instance, to indexing Social Security initial benefit levels to prices instead of wages.

With that out of the way, it has to be recognized that there is a fair amount of sausage-making in the compilation of statistics like CPI, but a great deal of it occurs because the "simple and straightforward" is not so easy in practice.

Take the idea of measuring price changes with the same basket of goods over long periods of time. This would be fine up to a point if all people consumed were commodities that are marketed in essentially the same form over long periods of time, but that just ain't so. If I were to make a comparison of prices between now and, say, 1980, how do I account for things in my field of vision (MacBook Pro, iPhone, organic blue corn tortilla chips, no-iron dress shirts, Gillette Fusion Power razor) that weren't marketed back then? How do you deal with existence of products called the "Chevrolet Monte Carlo" (our family car in 1980) existing in both periods but not being the same thing? The unavailabilty now of gasoline with added tetraethyl lead? Not so simple now, eh?

Yves picks up the substitution theme and puts the objection more succinctly than SGS:
What did the Boskin Commission think was out of line? According to Wikipedia:
The report highlighted four sources of possible bias:
Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change.

Outlet substitution bias occurs when shifts to lower price outlets are not properly handled.

Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all.

New product bias occurs when new products are not introduced in the market basket, or included only with a long lag.

So the Boskin report would have us believe that if I switch from steak to hamburger because beef prices are up, we should only capture the change in how I consume (ie, inflation is new hamburger/old steak price, not new steak/old steak). That is patently bogus. Similarly, the outlet substitution seems rife for abuse ("Ooh, the number is going to be really bad this month! Can we find anywhere selling X cheaper so we can put that in the model instead?").

To give Yves some credit, we could have a deep philosophical discussion of what constitutes inflation. Some simple macroeconomic models avoid the question by positing a composite consumption good whose price change is trivially inflation. In reality, there is an enormous menu of goods whose prices change in different directions and magnitudes, and not all of those changes represent macro inflation (or deflation) phenomena. Otherwise, she's on shaky ground at best.

I'm an economist, so my inclination is to consider inflation in terms of the price of maintaining a level of welfare. This is not the same as maintaining consumption of any given set of goods. One thing people should get from such economics training as they may have (but often don't) is that no pattern of consumption is uniquely privileged. Usually, failures to recognize that (e.g., "Americans will never get out of their hulking SUVs") confuse preferences ("more of everything!") with the realities of choices under expenditure constraints, or the inability to remember that demand curves for consumer goods generally do slope downwards.

Yves and SGS both commit a foul by blaming the substitution bias concept on Boskin (and, at SGS, Greenspan) and implying that taking into account substitutions necessarily ratifies a lower standard of living. In fact, the substitution falls out of elementary economics of consumer choice and there's no reason why CPI changes incorporating substituion need imply a reduction in living standards.

Suppose there are only two goods in the economy, let's say chicken and beef, and a representative utility-maximizing consumer chooses to buy two pounds of each given today's prices and budget B0, giving the consumer utility of U0. Then the price of beef increases, while the price of chicken and the budget stay the same. The consumer can no longer afford to buy two pounds of each; instead, consumption of beef will fall, consmption of chicken will rise relative to beef (maybe, or maybe not, in absolute terms), and the consumer will get a lower level of utility U1.

Now let's say that we want to calculate an inflation index for this situation. One approach — my preference, from above — is to figure out by how much the consumer's budget would need to be expanded (to B1) to get back to utility U0. This amount, by definition, could not be said to make the consumer worse off. The candidate inflation measure here is (B1/B0)-1. What we can say about this amount of money is that (1) with it, the consumer still will buy more chicken relative to beef, and (2) the consumer will not be able to afford the original two pounds of each. In accord with my welfare-centric concept from above, this preserves the original welfare level here, not the consumption levels. As far as calculating a hypothetical CPI consistent with this concept, to get an equivalent of (B1/B0)-1 from the price changes, we have to change the weights on chicken and beef.

(Added in response to Ken's comment.) This is shown graphically below — this is cut-and-pasted from Deaton and Muellbauer's Economics and Consumer Behavior (Cambridge, 1980).
Income and substitution effects, graphically
The original equilibrium is at point A (on indifference curve U0), then moves to B when the price of beef (q1) increases. The new equilibrium with compensation to return to U0 is at point C; note that A is outside the associated budget constraint leading to C (dashed line). The graphical representation of pushing the new-price budget constraint back through A is left as an exercise for the reader.

It follows that we'd need to add even more money (to B2>B1) to the previous scenario for the consumer to again be able to afford the original two pounds of both chicken and beef. Obviously, (B2/B0)-1 will give a higher "inflation" measure. What would happen if the consumer had B2 to spend? Put simply, the consumer wouldn't choose the original mix of two pounds each of chicken and beef. At the higher price of beef, the last bites don't provide marginal utility (!) in excess of the price, and the consumer still will consume relatively more chicken. The consumer will also get more utility, U2, than U0 from the re-optimized choice.

I'm not opposed in principle to making people better off, but if the goal of an inflation measure is to tell us what people need to be made whole given some set of price changes, then this measure overshoots its goal. In any case, far from being "patently bogus," reweighting of the price changes is necessary to properly capture the welfare consequences of price changes for h. economicus. I grant that H. sapiens may think that change is bad per se and thus be made (at least temporarily) unhappy, but whether (let alone how much) to compensate people for that is no simple matter.

Outlet substitution is more straightforward. Partly there's a technical issue regarding how changes in points of purchase are incorporated in CPI, the upshot of which is that to the extent consumers do switch to lower-price outlets, CPI doesn't reflect the savings (see here). Unreality can't be claimed here, since real consumers actually search for low-price outlets for the goods they purchase, at least to some extent. But "hey, let's look for a low-priced outlet to deliver sufficiently low CPI" isn't how the measurement is done.

SGS takes on the quality bias issue, misrepresenting how the "hedonic" quality adjustments work:
Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from them. That new washing machine you bought did not cost you 20% more than it would have cost you last year, because you got an offsetting 20% increase in the pleasure you derive from pushing its new electronic control buttons instead of turning that old noisy dial, according to the BLS.
The notion that the quality improvements directly offset — or, in the case of goods like computers with rapidly improving quantitative specs, even proportionally offset — price increases is simply wrong. If anything, some of the adjustments could be said to be conservative.

For instance, as I'd noted back in '05, my then-new computer's specs were in the ballpark of 20x or more better than those of one of its predecessors, while the corresponding deflation factor over roughly a decade was only 10x. A remaining objection is that someone who bought a $3,000 computer 10 years ago isn't buying a $300 computer now. But, conversely, the $3000 computer of 10 years ago probably isn't marketable for $300 now, even in mint condition.

A better objection, to which there may even be some substance, is that quality adjustments are unevenly applied, and in particular are less likely to be applied to areas of quality deterioration (say, air travel). I don't happen to think that an outbreak of quality deterioration fairly characterizes personal consumption as a whole, though.

In summary, then, there's no reason to think that bringing CPI methods back to the dark ages would conceptually improve CPI as an inflation measure. Nostalgia for those methods is misplaced.

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