Wednesday, April 30, 2008
We now have two precedents. If the Federal Reserve judges that a major financial institution:
1) is too big to fail in that its failure will generate systemic risk
2) has followed portfolio strategies that have produced inappropriate and excessive leverage
3) requires immediate action
then the Federal Reserve will intervene to structure and support a deal that leaves principals and investors in the offending systemic risk-creating institution with effectively zero entity. Counterparties will be rescued. Principals and investors will not--even if normal more lengthy legal and bargaining processes would give principals and investors a share of the equity value on the table.
This is not the arms-length equal-treatment impersonal-rule-of-law ideal to which a government should aspire. This does, however, seem to get the incentives about right. ...
These two precedents suggest that the Federal Reserve is evolving a case-law-of-twenty-first-financial-crisis that is somewhat different: in a crisis the lender-of-last-resort will always show up, but investors and principals in individual institutions that need to be specially rescued will discover that the lender of last resort is not their friend.
Contrast DeLong's view with Victor Reinhart:
The Federal Reserve's rescue of Bear Stearns Cos. will come to be seen as its "worst policy mistake in a generation," a former top Fed staffer said. ... The episode will be seen as comparable to "the great contraction" of the 1930s and "the great inflation" of the 1970s, Vincent Reinhart said Monday at a panel organized by the American Enterprise Institute, a conservative-leaning think tank where he is now a scholar. Until mid-2007, Mr. Reinhart was director of monetary affairs at the Fed and secretary of its policy-making panel ...
When I saw the following linked post - If half of the people who start a course pass it why can't I conclude that 100 people started the course if I know that 50 passed? - I thought it might have some application to TBTF but I was wrong. It just led me astray for awhile but it was interesting nevertheless. I've come round to the point of view that TBTF rescues are analogous to the 'peso problem'. In the peso problem a stock/currency trades at a premium because there is a small risk of a very large loss. In TBTF, regulators fear that there is a small risk of a large and systemic disruption in the market. This is where the analogy ends.
This would lead regulators perhaps to intervene "more often than they should". Regulators observe x number of failures. Of this, a small proportion, p would lead to a systemic crisis. Unfortunately, we do not know what the true value of p is.
1. Can we estimate p?
2. Is it useful to estimate p?
If regulators were risk-averse, even if we had an unbiased estimate of p, would regulators intervene more often than they should?
Tuesday, April 29, 2008
Log in to your PayPal account.
Click the Send Money tab.
Enter payment information and click Continue.
Review the details of the payment and click Send Money.
Question : Can I use a credit card with PayPal?
Answer : Yes, you can use Visa, MasterCard, Discover, and American Express with PayPal. Plus, when you pay with PayPal, you do not expose your credit card number to the merchant.
My experience was very different. I created an account, entered my credit card information and tried to pay by following the above instructions, but:
You cannot use this credit card for this transaction. Please use another funding source.
You will need to add and confirm your bank account. Once your bank account has been added and confirmed, you can continue this payment. Add your bank account information below.
I tried another credit card - no dice. I figured I needed to get verified but I did not want to give Paypal my bank information so I signed up for the Paypal Plus Credit Card. After going through all the steps to get a new card, I reentered my original credit card information. Still no dice. I had to use the Paypal credit card instead. The credit card I wanted to use was greyed out when I tried to change funding source. Thank goodness I did not give Paypal my bank information. They might have sucked away my account - well, not really, but I had trust issues with Paypal even before this and it hasn't improved.
In a word, Paypal sucks. As soon as this transaction is completed, I'm closing the account and cancelling the credit card. I just lost an hour of my life that I'll never get back just from messing around with sending money. Argh!
Here is where it gets a little tricky. The first group concluded that most people’s exposure to the chemical was well below the Environmental Protection Agency’s standard. ... Nonetheless, the panel expressed “some concern” that the chemical could cause behavioral and neurological problems in developing fetuses and young children. For more information, go to www. niehs.nih.gov. ... But Professor vom Saal, the lead author of the scientists’ report, said their findings were far less benign. “There is a very high level of concern about the potential harm caused by bisphenol A in animals,” he said, including potential for diabetes, cancer and obesity. “The prediction by this panel is that we can expect similar harm in people.”
“If I was to use plastic, I would stay with No. 2 and No. 5,” Professor vom Saal said. No. 2 is high-density polyethylene; No. 5 is polypropylene. Both are used in margarine tubs and yogurt containers for example. ... But, he warned, do not heat anything in any type of plastic in the microwave.
Oh, oh - I heat food in plastic containers all the time. They say microwaveable and we also do a lot of takeout. (I did look around our house for No. 7 bottles but didn't find any.) From another report:
Although many plastic products claim to be microwave safe, some scientists warn against putting any plastic in the microwave. “There is such a wide variety now, from disposable containers to actual Tupperware,” says Dr. Anila Jacob, a senior scientist for the Environmental Working Group, a Washington-based advocacy group. “I don’t know of anyone who has done definitive testing of all these different types of plastic containers to see what is leaching into food.”
In the same report:
How much BPA are we exposed to?
BPA migrates into food from polycarbonate plastic bottles or the epoxy resin coatings that line canned food. The typical adult ingests an estimated 1 microgram of BPA for every kilogram (2.2 pounds) of body weight. Babies who use polycarbonate bottles and formula from cans get more, an estimated 10 micrograms per kilogram of body weight. A microgram represents a trace amount. Consider this: a single M&M is about a gram. If you cut it into 100,000 slices, one slice would equal about 10 micrograms.
On another note, this NYT article:
ALMOST without exception, scientists and policy makers agree that hybrid vehicles are good for the planet. To a small but insistent group of skeptics, however, there is another, more immediate question: Are hybrids healthy for drivers?
There is a legitimate scientific reason for raising the issue. The flow of electrical current to the motor that moves a hybrid vehicle at low speeds (and assists the gasoline engine on the highway) produces magnetic fields, which some studies have associated with serious health matters, including a possible risk of leukemia among children.
With the batteries and power cables in hybrids often placed close to the driver and passengers, some exposure to electromagnetic fields is unavoidable. Moreover, the exposure will be prolonged — unlike, say, using a hair dryer or electric shaver — for drivers who spend hours each day at the wheel.
CNN Money April 21, 2008 notes (using an AP release):
U.S. registrations of new hybrid vehicles rose 38% in 2007 to a record 350,289, according to data to be released Monday by R.L. Polk & Co., a Southfield-based automotive marketing and research company.
Here is a chance for a data collection effort (not as good as a randomized trial):
With a population of 350,000 and a random sample of about 8,000 - 10,000 (I'm not sure what's a good sample size here but 8-10K is probably more than enough) and with controls (non-hybrid) and treatment (hybrid drivers) equally divided this would make a good experiment.
1. It is possible that hybrid drivers and somehow different (in terms of health) than gasoline car drivers but I'm thinking not.
2. There is probably going to be some need to stratify in terms of region, race and age groups but again not being sampling statistician I would not know for sure.
3. Car manufacturers would pay for the health exam (perhaps with some subsidy from the government). I would think that they might be self interested enough to fund this.
4. The exam would probably require blood draws.
5. The exam will probably take place when drivers bring in their cars for routine maintenance.
6. Drivers may be amenable since they get a free checkup.
7. I'm thinking of this as a national survey across all manufacturers but even with just Toyota it might be sufficient. (We would then have a smaller sample.)
8. This study is probably going to be longitudinal - perhaps 2-3 years.
How does it sound? Not bloody likely. Perhaps NHANES investigators will tack on hybrid car ownership and driving habits onto its next wave of data collection.
"They have enough now certainly to remain solvent and remain ... well above their minimum capital levels. But I am concerned that banks will be pulling back and not making new loans and providing the credit which is the lifeblood of the economy. In order to be able to do that ... in some cases at least, they need to get more capital," Bernanke added.
Bernanke Does Not Understand The Problem
Banks have every reason to decrease lending. There is rampant overcapacity in housing, commercial real estate, and the service sector. In addition there is over-leverage in hedge funds and over concentration of bank loans tied to real estate.
Bernanke wants banks to lend more, but all that will do is increase losses. The man clearly does not understand what the basic problem is. Yes, banks should be raising capital, but not to increase lending. Banks need to raise capital in advance of the approaching tsunamis in commercial real estate and credit card writeoffs, and the continuing tsunami in residential housing, all of which are going to further impair bank balance sheets.
Things We Don't Need
We do not need more Steak n Shakes (SNS), Pizza Huts (YUM), McDonald's (MCD), Panera Breads (PNRA), Starbucks (SBUX) or any other restaurants for that matter.
We do not need more Wal-Mart (WMT), Target (TGT), Lowes (LOW), Home Depot (HD), Best Buy (BBY), or Bed Bath and Beyond (BBBY) stores.
We do not need more Toyota (TM) dealers, GM dealers, or Ford (F) dealers).
We do not need more nail salons, dry cleaners, movie rental places, storage facilities, etc.
We do not need more houses from Toll Brothers (TOLL), Beazer (BZH), Hovnanian (HOV), Lennar (LEN), Pulte (PHM), Centex (CTX) or Ryland (RYL) . Inventory of houses is at an all time high.
Bernanke wants banks to raise more capital so they can do more lending. He never bothered to ask this simple question: For What?
It's always tempting to think that banks can grow out of the problem by making more loans. Certainly my reading of Bank of America's history suggests that BA tried to do this - they entered new markets - too late unfortunately. Citibank beat them in Latin America and by the time they got in they were stuck with making loans that were less profitable and those became non-performing very shortly afterward.
Certainly, the right question is for what - certainly not more real estate loans as Mish says but then isn't one of the roles of financial intermediaries to direct lending to profitable sectors whatever they may be. Some economists note that banks hold the key to growth by taking risks by lending to growth sectors. It is this risk taking that I think Bernanke wants to continue.
So do banks really know that they "cause" growth as in the financial intermediation and growth literature implies? Do they consciously seek out these "growth" sectors? I don't believe they do. Like all businesses, they experiment and good outcomes in one loan provides further information on future loans. It is this experimentation that Bernake wants continued, in other words, for banks to continue in their intermediation role. Hopefully, this will allow for a mean outcome over all banks that is positive allowing some banks to grow out of the problem. As Bernanke notes in the above post - not all of them will be able to do that.
Update: From Avinash Persaud A good bank is one that lends to a borrower that other banks would not lend to because of their superior knowledge of the borrower or one that would not lend to a borrower to which everyone lends because of their superior knowledge of the borrower.
1. The therapies being worked on (gene therapy specifically) might eventually lead to a breakthrough - innovations are uncertain but proceed in small steps. If it leads to a breakthrough then it has the potential to be disruptive to current treatments. No new insight here. Just thinking out loud.
2. Current treatments treat only the symptoms. Allergy shots try to build up resistance. There is not certainty that it will be successful either.
3. If we compare the income streams between a new (and successful) innovation and the current regime: The innovation would have an S-curve adoption process. Not all people can be treated with the new innovation so the income stream would gradually increase (potentially higher than the current regime) and then stabilize (again possibly at a higher level then that of the current regime but also possibly lower). The current regime would have a constant (but possibly growing as more people develop allergies) stream of income. The difference in PV of the income streams would be the gross benefit of the innovation. (I haven't considered the costs of innovation.) Again, just thinking out loud.
The article points to the interesting fact that more people are developing allergies. It must be global warming. (I am sympathetic to the changing environment as a cause.)
"Harvard researchers say that higher levels of the greenhouse gas will also boost pollen
production, causing allergy sufferers to suffer even more in the future."
"There's growing scientific evidence that global climate change is linked to the dramatic rise in allergies and asthma in the Western world."
This was one highlight that I took away:
Another key culprit: environmental pollutants. Exactly what pollutants and in what quantities are a source of heated debate. One of dozens of examples: Epidemiological studies show that children who are raised near major highways and are exposed to diesel fumes from trucks have an increased sensitivity to allergens they already react to.
Ironically it's not just the pollutants that are doing us in. It may be too much cleanliness--or rather, cleanliness of a certain sort. A prevalent theory among allergists is known as the hygiene hypothesis. The theory has its complexities and contradictions, but the basic idea is this: If the Liflanders had wanted to prevent Cameron's allergies, they should have moved a cow into their living room. People who live with farm animals almost never have allergies.
"The hygiene hypothesis has been on the scene since people first started looking at allergies," says Andrew Liu, associate professor of pediatric allergy and clinical immunology at National Jewish. "John Bostock, the guy who first identified hay fever, noted that it was a condition of the educated. He couldn't report any cases among poor people."
Hygiene theorists say that while it's true that industrialization brings with it better health care and fewer serious childhood infections, it also brings an obsession with cleanliness. We are not exposed to dirt at a young enough age to give our immune systems a good workout. Also, because of the high cost of energy, more homes are built with an eye toward energy conservation, with better insulation--insulation that seals in mold and dust, enemies of allergy sufferers.
But if dirt is a good thing, why are allergies and asthma so prevalent in poor, inner-city neighborhoods? "It's not just a question of exposure to dirt that reduces allergies--it has to be the right kind of dirt," says Liu. "We're talking about exposure to endotoxin and good microbes in soil and animal waste."
Reams of research bear out the hygiene hypothesis. "There was a famous study," says National Jewish's Nelson, "where one of the protective factors for asthma was having a pig in the house."
It would be helpful if immunologists and epidemiologists were able to tease out each factor contributing to the escalation of allergies and say, J'accuse! That's probably not going to happen. Instead, researchers are attacking the problem on all fronts. Their unspoken attitude? We've made a mess of this planet, and we may not be able to fix it. The best science can do is help us fix ourselves.
Since most of us are unable to room with a pig, we have to come up with a plan. Can we avoid allergies altogether? Can we get rid of allergies we already have? Can we desensitize our immune systems?
"We still don't know exactly how to prevent allergies," says Andrew Liu. "We know the immune response is supposed to be a helpful one, that it's not supposed to be the cause of disease. We know that the immune system of someone with allergies needs to be reeducated. But how? It's not always clear."
Leung agrees, adding, "If you are exposed to endotoxin or other microbial products early in life, it may prevent allergies. But later in life the early exposure may actually make things worse." There are those who argue that to prevent allergies, we should reduce or eliminate exposure to harmful allergens at an early age. Others believe allergens should be administered in large quantities at an early age. Many believe it depends on the specific allergen. And food allergies may work on an altogether different principle. Confused? So are the allergists.
The NG article is not so much about ANWR but about the rest of the North Slope -- the NPRA or the National Petroleum Reserve-Alaska where it claims that the oil industry is more optimistic about finding oil than in ANWR. There is also some historical recounting of the politics of oil drilling in The Specter Haunting Alaska (2005). Tourism cannot replace oil in terms of revenue for Alaska, so while an outfit like A&K can bring luxury travel to places like Serengeti and now even ANWR, it cannot do much to refill the state's treasury.
The main argument for drilling is also the same argument for not drilling -- let's call it the "last great wilderness" argument. Oil companies may try to depict the North Slope as barren and isolated and ease of access/travel to this area may help the public decide whether it is what it is (as former President Clinton might say). See this article here for one depiction, e.g.:
"You may have seen pictures of this pristine refuge--“pristine” being a word so cleverly used by critics of ANWR drilling--showing beautifully flowing streams and herd after herd of free-roaming caribou against a backdrop of purple mountains. .... There’s one problem, though: These are not accurate representations of the coastal plain region. .... But what actually exists in the area that is being considered for possible development? Well, in the winter there’s a large sheet of ice covering everything, and when that melts or shifts, there are puddles, mud holes, marshland and mosquitoes. In fact, as columnist Jonah Goldberg points out, this sterile region is the only place in the U.S. that the government recognizes as both desert and wasteland. Doesn’t sound much like those pictures I’ve been seeing in the media."
(Note: Jonah Goldberg's article is here).
Unfortunately, there are also environmental effects to tourism -- think summer crowds in Yosemite. I found this abstract for a thesis "The North Slope of Alaska and Tourism: Potential Impacts on the Arctic National Wildlife Refuge (ANWR)" by LR Everett (2004) on a Google search but no full text unfortunately:
"The hydrocarbon industry of Alaska is currently the leading producer of revenue for the Alaskan state economy. Second only to hydrocarbons is the tourism industry. Tourism has been a viable industry since the 1890's when cruises touted the beauty of glaciers and icebergs along the Alaskan coastline. This industry has seen a steady growth for the past few decades throughout the state. The North Slope of Alaska, particularly Prudhoe Bay and the National Petroleum Reserve, has long been associated with hydrocarbon development and today displays a landscape dotted with gravel drill pads, gas and oil pipelines and housing for the oil workers. While tourism is not usually considered hand in hand with the hydrocarbon industry, it has mimicked the development of hydrocarbons almost since the beginning. Today one not only sees the effects of the oil industry on the North Slope, but also the tourist industry as planes unload dozens of tourists, or tour buses and private vehicles arrive daily via the Dalton Highway. In Deadhorse, hotels that once only housed the oil workers now welcome the tourist, offering tours of the oil fields and adjacent areas and have become jumping off sites for wilderness trips. Tourism will create jobs as well as revenue. However, at present, there are few restrictions or guidelines in place that will deal with the potential impacts of increased tourism. Because of this there are many concerns about the possible impacts tourism and the infrastructure development will have on the North Slope. To list several concerns: (1) What are the impacts of increased tourism and the infrastructure development? (2) What will the impacts be on the Arctic National Wildlife Refuge (ANWR), which sits a mere 60 miles to the east of Deadhorse? (3) Will hydrocarbon development in ANWR and the associated infrastructure exacerbate potential impact by encouraging greater use of the Refuge by tourists? (4) Will tourism itself have a negative impact on this fragile environment? Safeguarding the fragile environment of ANWR and for that matter all of the North Slope for future generations will require that all types of environmental impacts are carefully considered. The majority of this region is underlain by permafrost and is at risk because of possible global warming coupled with infrastructure development, tourism and potential hydrocarbon development."
It would have been nice to see the results/analysis.
Even though drilling can be limited to a small area, pipelines and other potentially environmentally destabilizing infrastructure will still have to be put in to support new drilling. Still, it's hard not to justify some expanded drilling for oil and perhaps even tap into the vast gas fields (that are currently untapped). How much of Alaska's North Slope should be devoted to nature and how much to extraction? Ignoring all the difficulties, here is one undated proposal.
"This plan recommends two large wilderness areas (wilderness definition 2) coinciding with the two largest caribou herd migration areas, 80,000 for the west Arctic herd and 80,000 for the Porcupine herd; these sizes should be adequate to preserve the associated predator populations as well. ... The plan [also] recommends 80,000 for a reserve (wilderness definition 3) for the operation of traditional Inupiat culture; this area would overlap about 50% of the two herd wilderness areas (Figure 3)."
The map accompanying the NG article shows the locations of Porcupine and Arctic herds. Not surprisingly, this is also where oil companies may want to drill. Here is another blog entry by the Skeptical Optimist.
"The bus is starting to roll down the rutted dirt road in Dongfa village, carrying the young worker and his wife away from this ghost town near the Russian border. ... Twenty-six years ago, his parents named him Wang Tieren, or Iron Man Wang. It was a tribute to the communist icon whose selfless toil symbolized the industrial muscle of China's Northeast, a region whose state-run factories and furnaces fueled the communist dreams of the People's Republic. The new Iron Man on the bus—silent, gaunt, a look of worry wrinkling his freckled brow—embodies the same region but in a challenging new era: Even as other parts of China flourish in the mad rush toward a market economy, once proud Manchuria (as the area is known abroad) has fallen on hard times; it, like Iron Man Wang himself, is desperately searching for salvation."
As an unfair comparison, here is the abstract from "Income Inequality During China’s Economic Transition" by Dwayne Benjamin, Loren Brandt, John Giles, and Sangui Wang (2005):
"This paper provides an overview of the evolution of income inequality in China from 1987 to 2002, employing three series of data sets. Our focus is on both urban and rural inequality, as well as the urban-rural gap, with the objective of summarizing several “first-order” empirical patterns concerning the trajectory of inequality through the reform period. We document significant increases of inequality within China’s urban and rural populations. In rural areas, increased inequality is primarily related to the dis-equalizing role of non-agricultural self-employment income and slow growth in agricultural income from the mid-1990s onward. Poverty persists, and tied in part to slow growth in agricultural commodity prices. In urban areas, the declining role of subsidies and entitlements, the increase in wage inequality and the layoffs during restructuring, have fueled the growth in inequality within urban areas. Poverty levels, however, are very low. We find that spatial (regional) dimensions of inequality are significant, but are much less important than commonly believed for both the urban and rural populations, and for differences between urban and rural areas. Accounting for urban-rural reclassification, which otherwise exaggerates the rising urban-rural gap, we find a relatively stable ratio of urban to rural incomes. This hides some geographical variation, however: The urban-rural gap is increasing more rapidly in interior provinces, where SOE’s had a more dominant role in economic activity in urban areas, than in coastal provinces where the non-state sector was more important earlier in the reform period."
"As always, Paradise has its snakes. Provence is filled with the evidence of both settled and unfinished quarrels: the feudal family struggles that continued even after the region was incorporated into the French kingdom in 1481; the wars of religion between Protestants and Catholics; the mortal battles between the French throne and the Knights Templar, the Christian military order whose wealth the French king coveted; the disputes between monarchists and republicans during the Revolution; the hydra-headed conflicts of the Second World War; and the ongoing spats between village and village, vineyard and vineyard, neighbor and neighbor, over water."
"The exquisite illusion of peace along this route [the road to Cabrières d'Aigues] is in conflict with the remains of the plague wall to the north of the village, a wishful safeguard against the eighteenth-century epidemic that terrorized the countryside. It is also at odds with the brutal history outlined at Cabrières's Protestant church. For centuries, the Provençal mountains have been a refuge for resisters and dissidents of various kinds, and the sweet valleys have seen atrocities perpetrated on the pre-Protestant Vaudois sect, Catholics, royalists, republicans, Protestants, Jews, and anti-Fascists."
Haven't been to Provence - yet.
Monday, April 28, 2008
[referring to earlier booms in stock markets e.g. euphoria about conglomerates, "energy darlings",1990s biotech boom] ... Excess flows of credit produced by a similar kind of mind-set were at the heart of the Asian financial crisis. ... But people involved in markets don't seem to learn from past episodes. They always think, This time it's different, and here are the reasons why. Often those reasons are based on genuinely constructive developments, but investors extrapolate too much from the developments and provoke a market overreaction. And that overreaction can endanger the strength of the underlying economy. ... I didn't say that I thought that stocks were overvalued. I said that risk premiums were at historic lows and that discipline tends to get lost in good times. (p. 324)
The two papers are:
1. Is The 2007 U.S. Subprime Financial Crisis So Different?, ungated versions here and here for now.
2. This Time is Different: A Panoramic View of Eight Centuries of Financial Crises. See VoxEU for a summary. Ungated version here for now. Looking forward to the data if the authors release them.
I particularly like all the graphs that show the correlations since it allowed me to flip through most of the articles while skimming the text.
Their recommendations are multi-pronged. They acknowledge that there is no silver bullet and that their policies will not totally eliminate TBTF expectations but should reduce them somewhat. Here are some of what I took away from reading the book. They are listed in order of how I perceived their importance to be:
1. Increase creditor monitoring by using market discipline by using the market to price the risk of banks correctly. (Appendix D goes through with some detail how they hope to achieve this.)
2. Decrease spillovers among banks. (Chapter 12 addresses payments spillovers explicityly.)
3. Reduce policy maker uncertainty over spillovers with increased supervision and regulation. The authors don't classify this as S&R but I would. There is a need for banks to increase their transparency and reporting of their positions to the authorities to allow them to perform scenario analysis and contingency planning.
4. Clarifying legal boundaries of creditors.
5. Appointing skeptical (to TBTF) policymakers.
While this is a valiant attempt to address the situation, their policy recommendations are more or less a mish mash of unrealistic recommendations or policies that are already under consideration by the Fed, Treasury, G10 and BIS. I consider increased creditor monitoring to be the most unrealistic - the principal agent literature indicates that this is a hard problem - and without addressing the underlying capital structure of the bank/financial institutions the recommendation glosses over these difficulties.
I am probably unfair in making the claim that the authors consider this to be the most important recommendation. They don't actually say so in the book and to be fair they acknowledge that there are limitations to this method which is why it needs to be considered in total with all the other policies. In other words, they are listing a set of necessary (but not sufficient) policies to address TBTF.
Some passages that struck me as I was reading:
1. In light of the recent sub-prime events, page 51:
... we consider the discount window and possiby open market operations, as potentially effective tools for managing the threat from a failing bank. Nonetheless, on several occassions in the past, policymakers did bit avail themselves of such tools, ...
[I would think that the authors would thus be at least encouraged that the Fed did try these tools recently]
2. Figure 6-1 on page 62 was surprising to me. In 1998/1999, the share of bank assets held by the 10 largest banks in the US (approx 40%) was surpassed by Canada, Australia, Belgium, France, Netherlands, and Sweden (approx 90%), Japan, Italy, Spain, UK (approx 60%). The source of this chart was a Group of 10 report "Report of Consolidation in the Financial Sector" (2001).
Finally, some thoughts on TBTF from William Poole via Mish's Global Economic Analysis.
Friday, April 25, 2008
One measure of inflation expectation is the University of Michigan's Survey of Consumers. This is seen as unreliable although it is trending upward (the overall series is rather volatile), so trending upward here is a very, very loose use of the word trend. You can plot this and other series at the Cleveland Fed. This site also introduces another way to extract inflation expectations using Treasury Inflation Protected Securities (TIPS) which is also showing some upward movement. It's hard to judge how well this series performs without being able to overlay actual inflation on to the chart.
knzn is skeptical of the Cleveland Fed method of calculating inflation expectations and likewise, James Hamilton is likewise cautious. See also here.
What is "Seasteading"?
Seasteading means to create permanent dwellings on the ocean - homesteading the high seas. A seastead, like in the picture above, is a structure meant for permanent occupation on the ocean.
I've been reading it's online book. It's an interesting website and like all interesting websites it led me to different things:
1. Monolithic Dome Institute (MDI)
2. IMF (no, not that IMF)
The founders take this concept seriously although it sounds like the main reason they are pursuing this is idealogical/political rather than technological. They believe the technology is there and have already decided on the technology (and now need funding - what else is new). They haven't convinced me that they have all the non-political issues ironed out - mainly waste disposal. I buy into wind, current and solar as their power source but their solution to waste disposal is multi-pronged - recycle, reuse, incinerate, compost and ship to land. They discuss the pros and cons of all these but I think that the only real solution unfortunately is ship to land for most products.
We visited the Maldives once (and when I think of this proposal, I think of the problems that small island economies face -- everything needs to be shipped!) and they had designated one atoll for garbage which sounded like it was reaching its capacity.
I found the MDI site really interesting. I've always wanted to live in a dome! There is one near us that uses some of the MDI concepts of inflatable airform and polyurethane. See http://en.wikipedia.org/wiki/Roy_Mason_(architect) for a description and here and here for pictures. It claims that it is more energy efficient than a conventional home but isn't polyurethane petroleum based?
More interesting was the home they built to withstand hurricanes on Sullivans Island, SC. Why do I buy into the dome concept? I buy into its energy efficiency and living on a busy road, the insulation in these domes sound great. They can also be buried which moderates the temperatures. Unfortunately, solar panels don't seem like a good option for these houses - perhaps with nanotechnology this will become more feasible.
Will seasteading be successful? Perhaps. I think ...
1. It will probably start out in Europe - and perhaps even in the Netherlands.
2. It will probably start by clustering around off shore wind farms.
Thursday, April 24, 2008
"... having grown up in a small-town in one of the poorest counties in California, a town where the inequality was stark, it seems to me that we are missing something with this type of analysis (in the town I grew up in, there were very few people in the upper middle class, there were wealthy rice farmers and others with wealth derived from other sources, there were a few doctors, dentists, insurance brokers, etc., but mostly the upper middle was absent, e.g. median household income in 2000 was $35,062). I tried to express some of what I think we are missing here in terms of perceptions of fairness, but I'm not sure that does a very good job of expressing what middle and lower class residents of small towns are frustrated about."
But what was more interesting was this:
"Maybe Bartels is correct, Democrats will never capture this demographic [small town] beyond breaking nearly even in vote shares, but I'd like to have a better understanding of what the problem is. It's not that this group is, from my experience, socially conservative (though this is Northern California), so I agree with Bartels on that point. Identity is big part of it I think, the Republicans have done a better job of tapping into the pickups with gun racks, duck and pheasant hunting, beer drinking, go to church on Easter, type of demographic (I no longer hunt, but I took my first hunter safety course at age 11, most of us did - I should write more about guns because rural residents view the issue very differently from urban residents, at least that's my experience)." (emphasis mine)
His posting on guns is personal and moving and can be found here. Some excerpts:
"[Recalling about duck hunting.] My uncle and cousin had extensive knowledge of ducks, I was always surprised by how much they knew. They'd see a duck flying pretty far away and could tell you if it was a wood duck, pintail, teal, widgeon, etc. ... In high school, we'd party until early into the morning, then a lot of my classmates would get up before dawn, go to the blind, set out the decoys if they weren't out already, then sit there in the cold, rain, and fog waiting for ducks and geese to fly by so they could call them in with their duck calls ..."
"If you shot a dove out of a tree instead of in flight, that was considered to be unfair and you’d be ostracized. As I said, there were rules, and you followed them."
"I followed the usual progression: Lots of exposure to guns, my own BB gun at age seven or eight, gun lessons and a shotgun by age 12. One thing, though, that I want to emphasize is how much respect for guns and gun safety was drilled into my head from day one. There were things you did, things you didn’t do, and it started from the very first time you tagged along just to watch. I won’t even try to detail all the rules, but anyone who knows them also knows that Vice-President Cheney did not have this kind of training "
"Maybe if I’d spent more time in a big city and observed first-hand the troubles that handguns can cause I’d feel different about the whole gun issue, but anything that might force me to have to register the guns I have, give them up, anything approximating that I would resist. ... hose are wonderful memories, and having the guns is somehow connected back to all of that, to my family history, to time as a kid with my dad, grandfather, uncles, and cousins. It recalls a way of life I no longer live, but it will always be with me. I can’t exactly explain how guns fit into all that, but I know that they do."
"There’s something about getting up early, trudging in the cold through wet fields until you and the dogs are dead tired, often coming up empty-handed but somehow that didn’t matter, generations of family together sharing stories from the past, and creating new ones to be told in the future. Because of all this, I think, I resist restrictions on guns. I guess it’s my history but I can’t logically explain why I resist more control over guns other than what I’ve said above."
"I have no emotional connection to the problems guns create in major cities. I see it on the news, read about it, but it’s not real. "
Tuesday, April 22, 2008
"We should raise the tax on gasoline. Not quickly, but substantially. I would like to see Congress increase the gas tax by $1 per gallon, phased in gradually by 10 cents per year over the next decade."
Gas prices have risen by more than 10 cents per year this year and I see no change in our driving behavior:
I've often thought that a higher tax would be needed to change behavior and as far as I can tell right now even with a 50 cents tax I don't see us (personally with all our errands and kids activities) changing our driving habits in the short run (at least for the next 2-3 years). We've got to go where we've got to go. See Matthew Kahn's "The Environmental Impact of Suburbanization" in Journal of Policy Analysis and Management (2000). However, here's a story that contradicts my point:
The high cost of gasoline has helped fuel a sharp increase in MBTA riders over the first two months of the year and a decrease in the number and length of traffic jams, according to T officials and traffic specialists. The number of T trips rose from 27 million in February 2007 to nearly 30 million in February 2008, up more than 11 percent for the month, Massachusetts Bay Transportation Authority officials said. The numbers were up about 5 percent for January. Combined, the average increase is 8.3 percent.
I don't see a similar story for the Washington region however with its Metro system chronically underfunded and overstretched.
Studies of the price elasticity of gasoline are inconclusive. For instance, Thomas Sterner's
"Fuel taxes: An important instrument for climate policy" published in Energy Policy (2006) finds the elasticity to be high but only in the long run but does not address how long the long run is. Jonathan E. Hughes, Christopher R. Knittel, and Daniel Sperling's "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand", UCEI WP (2006) finds "that gasoline taxes would need to be significantly larger today in order to achieve an equivalent reduction in gasoline consumption."
Lastly, a cautionary tale from Monica Prasad:
"But a carbon tax isn’t a new idea. Denmark, Finland, Norway and Sweden have had carbon taxes in place since the 1990s, but the tax has not led to large declines in emissions in most of these countries — in the case of Norway, emissions have actually increased by 43 percent per capita. An economist might say this is fine; as long as the cost of the environmental damage is being internalized, the tax is working — and emissions might have been even higher without the tax. But what environmentalist would be happy with a 43 percent increase in emissions?"
1. They were held simultaneously at the state and more commonly at the nationwide level.
2. Teachers were randomly assigned to different schools to administer the tests so that no teacher administered the school from which they were in (from). They called themselves "invigilators".
Perhaps such a system would avoid stories such as this (from PBS Online Newshour in 2000):
"Moscowitz feels she betrayed the kids because she cheated. She gave her students the correct answers on New York City exams, which boosted their scores as well as her school's academic standing. The tests that Moscowitz and other teachers P.S. 90 in the South Bronx cheated on are called high-stakes tests because their results are used to make students and teachers accountable for their performance".
Or more from NYT:
"A seventh-grade teacher was accused of leaving a sheet of answers to a citywide math test near a pencil sharpener, then urging the class to sharpen their pencils and leaving the room. More than half the students marked the answers correctly."
Perhaps the logistics of having simultaneous testing does not pass the cost benefit test. The NYT article reports:
"The eight schools affected are about 1 percent of the city's 675 elementary and 197 middle schools. No high schools were implicated."
Or perhaps, in Malaysia, the Education Ministry does not trust its teachers while in the US the school administration does. Again, from the NYT:
"Ms. Weingarten said she was heartened that in six of the nine cases, educators were turned in by their own colleagues, suggesting, she said, that most teachers have no tolerance for cheating."
But more soberly, Reason reports:
"From underreporting violence to inflating graduation rates to fudging testscores, educators are lying to the American public.
Forty-seven states and the District of Columbia proudly reported that they were home to not a single unsafe school. That would be news to the parents of James Richardson, a 17-year-old football player at Ballou Senior High in Southeast Washington, D.C., who was shot inside the school that very year. It would be news to quite a few people: The D.C. Office of the Inspector General reports that during that school year there were more than 1,700 "serious security incidents" in city schools, including 464 weapons offenses."
Unfortunately, with the advent of high-stakes testing used to evaluate teachers and to tie pay to performance, incidents of cheating will likely more increase. Or perhaps what is best is that economists should stop advocating pay for performance -- is there more evidence that awarding stocks and options have resulted in better run companies or is there more evidence that this kind of pay for performance have resulted in accounting irregularities and stock manipulation?
Friday, April 18, 2008
My 2 cents: Issues are too complex in that there are too many issues for voters to think about - voters have to summarize what is essentially a multidimensional space into a point estimate and use that point estimate to guide them on who is a better candidate based on issues. Voters may be smarter in the sense that they tend to follow the "character" questions more closely because it allows them a way to identify with the candidate. This is the Popkin argument in the "Reasoning Voter". They are waiting for the "always shuck your tamales" moment when everything suddenly crystalizes for them:
"Popkin begins his well-regarded book on the subject, “The Reasoning Voter,” with an example from Gerald Ford’s primary campaign against Ronald Reagan in 1976. Visiting a Mexican-American community in Texas, Ford (never a gaffe-free politician) made the mistake of trying to eat a tamale with the corn husk, in which it is traditionally served, still on it. This ethnic misprision made the papers, and when he was asked, after losing to Jimmy Carter in the general election, what the lesson of his defeat was, Ford answered, “Always shuck your tamales.” Popkin argues that although familiarity with Mexican-American cuisine is not a prerequisite for favoring policies friendly to Mexican-Americans, Mexican-Americans were justified in concluding that a man who did not know how to eat a tamale was not a man predisposed to put their needs high on his list. The reasoning is illogical: Ford was not running for chef, and it was possible to extrapolate, from his positions, the real difference it would make for Mexican-Americans if he were President rather than Reagan or Carter. But Mexican-Americans, and their sympathizers, felt “in their gut” that Ford was not their man, and that was enough."
The candidates are too well coached these days to fall into such a gaffe but it explains why the media fixates on character issues -- because they feel that the readers/viewers/voters want to know these things.
Update: From MR,
Mark Thoma has an An Open Letter to ABC about the Presidential Debate signed by Brad DeLong, Kevin Drum, Henry Farrell, Eric Alterman and many others.
"The debate was a revolting descent into tabloid journalism and a gross disservice to Americans concerned about the great issues facing the nation and the world.... For 53 minutes, we heard no question about public policy from either moderator. ABC seemed less interested in provoking serious discussion than in trying to generate cheap shot sound-bites for later rebroadcast. The questions asked by Mr. Stephanopoulos and Mr. Gibson were a disgrace..."
I agree. The only thing the signatories got wrong was where to send the letter. The letter should have been addressed to the American public. After all, this debate, which came in the flurry of all the tabloid journalism of the past several weeks, was the most-watched of the 2008 presidential campaign. The public got what it wanted.
Thursday, April 17, 2008
" ... analysts are wondering whether the new Nordic Tiger will end up, instead, as “the Bear Stearns of the North Atlantic.” ... So how did Iceland get in so much trouble? That’s the odd part of the story: it isn’t because its banks gambled on the worthless subprime securities that helped undo Bear Stearns and so many others. Iceland’s banks prudently avoided the subprime market, even as they embarked on a lending boom at home and expanded abroad. What got Iceland in trouble was something more subtle: its banks got their money primarily from international investors, making the Icelandic miracle heavily dependent on foreign capital."
Without knowing anything about Iceland's problems, this sounds like duration mismatch. Of course, this statement is vacuous since the function of the bank is to take short term deposits and lend long term. However, there are degrees of mismatches and banks are aware of how badly they can be mismatched. This was true in the case of Bank of America as documented by Moira Johnston in "Roller Coaster" and Gary Hector's "Breaking the Bank" where bank executives realized that they were in trouble when looking at the numbers, the degree of mismatch and the loan loss provisions were insufficient.
This was surprising:
"Further, the country’s troubles have made it a potential target for speculators seeking to drive down the value of its currency and perhaps cause a run on the banks. In 1998, hedge funds purportedly worked together to attack Hong Kong’s currency and its stock market, an attack that was foiled only when the government bought up a sizable chunk of the stock market. It’s not clear that a similar cabal is gunning for Iceland—the governor of its central bank insists that one is—but the notion is certainly plausible: with a population the size of Pittsburgh and a central bank whose total reserves are less than five billion dollars, the country makes an easy target for hedge funds flush with cash."
And the nugget of wisdom?
"Homeowners default on mortgages in San Diego, and suddenly people in Reykjavík are paying more for gasoline and wondering if their bank deposits are safe. That doesn’t mean that Iceland is an innocent victim. The country went overboard with spending and borrowing—between 2000 and 2007, domestic credit in the Icelandic banking system more than quadrupled as a share of G.D.P. And relying on foreign money to fuel that kind of frenzy is foolish, since it puts you at the mercy of fickle foreign investors. But Icelanders can be forgiven for wondering if they’ve really been any more reckless than many other countries—most obviously the U.S., which relies heavily on foreign capital to fund home buying and profligate consumption, and whose banking system is rife with reckless lending."
Update (October 5, 2008):
Iceland has indeed bailed out Glitnir. But here's the thing: Iceland's credit default swaps are now suggesting that the sovereign itself is a distressed credit.
Contracts on Iceland's debt jumped to 17.5 percent upfront and 5 percent a year to protect 10 million euros ($13.8 million) of bonds.
This is not how triple-A sovereigns behave. It's as though the analysts at Moody's were only able to see one step ahead, and not two: they could anticipate that Iceland would bail out its banks, but they couldn't anticipate that when a tiny country bails out a bank whose assets vastly exceed the country's own GDP, then the sovereign itself loses much creditworthiness. One scary datapoint: the assets of Kaupthing Bank amount to 623% of Iceland's GDP, which is possibly why its own credit default swaps are trading somewhere over 2500bp.
Tuesday, April 15, 2008
Incidentally, this was the second book in a row (coming after X President) that speculated about a possible US-China war. Coming on the heels of the Olympic protests against China, I wonder about the odds in the future. These events are sure to leave a bitter feeling in the Chinese against the West in general.
Monday, April 7, 2008
Sal Hayden, Bill Clinton's biographer in the year 2055 travels back in time with NSC agents coded named "George Stephanapoulos", "James Carville" and "Virginia" (BC's mother's name) to change the unintended consquences as the United States finds itself losing a war with China and Russia.
I thought the book was even more interesting now with the resurgence of Russia. It does make me think twice about what I had said about unintended consequences.
Friday, April 4, 2008
With perfect hindsight, both underestimated the effects of deregulation, the bad loans of the 1980s, Volcker disinflation, and the changing environment just as much as the banks themselves did in that era. Both hold Wells Fargo, Security Pacific Bank and First Interstate and relatively more successful of the western models than Bank of America. Both books were published in 1990 but did not forsee that by 1992 Bank of America had over come its problems (or perhaps grew out of its problems).
By 1992, Security Pacific would merge with Bank of America and lose its identity. First Interstate was acquired by Wells Fargo in 1995, and which in turn was acquired by Norwest in 1998 which took the Wells Fargo's name. Only in 1998, was Bank of America acquired by NationsBank, so Bank of America survived almost a decade after its predicted demise.
"Sometime in the 1970s Penang became justly famous for its beaches, and as a result, a great number of resorts and hotels now clutter its shores. But it was the old city, Georgetown, with its fabulous mix of ethnic and national names, that drew me in. It has all the fragrant foreign density of an Asian city but without the overpowering press that can sometimes have one going back to hide in an air-conditioned room. If the waterfront hotels are mostly in the gruesome international style, in the city one can find, as in very few other places, gorgeous streets of old south Chinese shophouses, distinguished here by those five-foot-wide colonnades ("five-foot ways") that Stamford Raffles ruled should provide shade and shelter from the monsoon, as well as an impressive array of south Indian Muslim buildings (mosques, shrines, domestic structures) and mansions reflecting an energetic and charming eclecticism."
Alas, Penang beaches are no more due to rampant overdevelopment, erosian and pollution. Most tourists don't even stop there any more -- if they want beaches they would probably go to Langkawi. Not surprisingly, CN recommends The Eastern & Oriental Hotel - one of these days we might be able to afford it. For an overview of our most recent hotel stay in Penang, see here.
1. Grey Poupon Dijon mustard may look like a French import, but it's actually made near Allentown, Pennsylvania. Le Sueur peas, with the French fleur-de-lis on the can, come from Le Sueur, Minnesota.
2. California has 500,000 more milk cows than Wisconsin, and it produces 15 times more fresh peaches than Georgia, the Peach State. More than half of the country's mushrooms come from around the little Pennsylvania town of Kennett Square, southwest of Philadelphia. We now import more garlic from China than we buy from growers in California. Only a quarter of the blue crabs harvested in the United States come from the Chesapeake Bay.
3. More than 90 percent of Florida's oranges go into juice.
4. About half the grapes are made into wine, just under 40 percent are marketed in dried form as raisins, and only about 12 percent are sold as table grapes.
5. The unfortunately named rape plant, whose seeds had been pressed into an industrial-quality oil for years, is grown in the Canadian provinces of Alberta and Saskatchewan. Since the 1970s, after scientists made genetic adjustments to reduce a fatty acid in the seed, the oil has been marketed for cooking under the made-up name "canola oil."
6. The fuzzy brown fruits were originally called "Chinese gooseberries," but importers were worried that Americans would shun them because the name suggested a link to a communist country. In fact, the fruit was mostly grown in New Zealand, so they changed the name to kiwi, after New Zealand's national bird.
7. About half our peanuts go into peanut butter, which is fine, because lots of fruit goes into jelly.
Much, much more in the fascinating article.
Thursday, April 3, 2008
1. In Italy, pasta rarely serves as a main course. The exceptions are spaghetti alla carbonara and lasagna di carnevale.
2. The union of a pasta with certain meats, or the use of a tomato-sauced pasta as a garnish to veal pizzaiola or shrimp fra diavolo , is an invention of Italian-American restaurants.
3. Fettuccine all’Alfredo is a product of Hollywood: In 1920, Douglas Fairbanks and Mary Pickford, the greatest film stars of their time, celebrated their honeymoon in Rome. There they fell in love with a dish of fresh noodles tossed with butter and Parmesan by Alfredo di Lelio at his namesake restaurant. They returned for the dish every day they were there. Back home in Hollywood, the stars raved about Fettuccine all’Alfredo. Recipes for it soon were appearing in print.
The problem was that the butter widely available in this country was not rich enough in fat to produce the creamy sauce of a true Fettuccine all’Alfredo. Whipping cream made its way into the formula, then hucksters began using flour to stretch the cream. In time, cookbooks spread the notion that Fettuccine all’Alfredo was a dish of fresh noodles awash in cream.
4. Today you will not find authentic Fettuccine all’Alfredo on the set menu of any of Washington’s Italian restaurants.
Wednesday, April 2, 2008
1. Closing of non-performing charter schools will introduce survivorship bias into the data on school performance.
2. If the charter school board is quick to close non-performing charters and think that this is the best way to approach it, why do they not do this with public schools (or try to introduce more accountability)? Possible reasons? Unions, bureaucracy?
3. The story doesn't go into what happens to the kids in charter schools that were closed.
4. Most charter schools are small and perhaps this is another "small school" theory. See here, here, and here. The Gates Foundation has sponsored some studies on small schools. See here. Unfortunately, the evidence does not seem compelling for small schools. It's work on charter schools is through the NewSchools Venture Fund but so far I don't see any studies it has done on charter schools.
5. MR summarizes Caroline Hoxby's work on charter schools.
6. An archive of some charter school studies along with ratings of the studies are here.