Krugman on What Makes a Recession

I like Paul Krugman. He writes with clarity. Sure he's an academic and can write the math-laden, math model economics that has been so popular for the last 50 years, but at the same time, he can write something that communicates to a broader audience without the math.

Here's a blog entry by Paul Krugman that talks about what makes a modern recession "different" without all the slogging through minutiae and mathematics.

... the economy is only considered to be in a recession when everything is going down. Historically, that hasn’t been a problem, since most recessions have been “V-shaped”: everything plunges, and then everything springs back, so there isn’t much ambiguity about whether the economy is worsening or not.

But since the mid-1980s we have been having “U-shaped” recessions in which the upturn is slow and weak. As a result, things that matter to a lot of people — like the unemployment rate, shown above — keep getting worse long after the official recession period, indicated by the shaded areas. Officially, the recession of 1990-91 was long over by the 1992 election, but people were still very worried about the economy, stupid. The 2001 recession officially ended in November of that year, but the job situation kept getting worse until the middle of 2003.

The point is that the official definition of recession has become delinked from peoples’ actual experience.

What's "Modern" in a Modern Recession?

Robert E. Hall of Stanford has written "How Much Do We Understand about the Modern
Recession?" which identifies some interesting facts about modern recessions:

• A modern recession is one occurring in an economy with well-executed monetary policy and a low fraction of the labor force on the factory floor. ...
• The first important fact is that modern recessions are about as severe in terms of employment as earlier ones, leaving aside the Great Depression. ...
  
• The second important fact is that the decline in employment and rise in unemployment during a modern recession occurs without any important increase in job loss. ...
• ... third important fact: unemployment rises in a modern recession because new jobs are hard to find, not because workers have lost jobs. ...
  
• One of the most important facts about the modern recession is at all sectors of the labor market slacken at the same time.
• If unemployment in a recession were the natural, efficient result of reallocation of workers from shrinking to growing sectors, the growing sectors would open their doors wide to absorb the flow of workers leaving the shrinking sectors. Vacancies would be high in the growing sectors and low in the shrinking ones. The facts shown in Figure 6 refute that view of the most recent recession. Some force made all sectors cut back their recruiting.
• What exogenous forces cause recessions? Three forces are prominent in the accounts of the various schools of macroeconomic thought: productivity, government purchases, and monetary shocks.
• The two modern recessions occurred in the setting of fully modern monetary policy making. In that setting, the central bank responds to outside influences, with the objective of keeping inflation low in the longer run and offsetting booms and recessions in the shorter run. The central bank is not a source of disturbances to the economy.

The heart of the paper discusses esoterica of Nash equilibria and why theory of wages, productivity, and employment levels don't fit the facts. I appreciated the honesty: "We have no idea how to generate a modern recession from the MP model."

Overall the paper is interesting, but you don't walk away feeling satisfied. OK, a modern recession is different, but why do we still have them? It just isn't clear. In my ignorance, I still like the old theory of "animal spirits".

The Political Beast

Alexander Linklater writes an interesting piece about Christopher Hitchens in Prospect. I found it interesting because it provides some biographical details that shed some light on Hitchen's views and evolution. Theorists say you should be "pure" and separate the art from the artist, or in this case the politics from the incendiarist, but I don't find that to be true. Insight into a person helps in understanding the person's work.

For most of his 40-year career, Christopher Hitchens's notoriety has been confined to highbrow journalistic, literary and political circles. In the last 15 years, he has been familiar to readers of Vanity Fair and the Atlantic, and to viewers of the American current affairs shows that invite him on to say outrageous things in stylish phrases. His aptitude for the iconoclastic flourish—describing Princess Diana and Mother Teresa at their deaths, for example, as, respectively, "a simpering Bambi narcissist and a thieving fanatical Albanian dwarf"—sustained his currency as an intellectual shock troop of the left. Then, with his support for the invasions of Afghanistan and Iraq, and for George W Bush's re-election in 2004, the left itself became a target of his polemics. But whichever side he took, he continued to file what were essentially minority reports to a specialist audience. Only God was able to promote him beyond such factional interests by providing the subject of a bestseller. While Hitchens has authored 16 books, including works on Henry Kissinger, Bill Clinton, the Elgin marbles, George Orwell, Thomas Paine and Thomas Jefferson, his assault on religion in God is not Great was the first occasion for which a publisher had arranged a serious US book tour.

Drinking the Kool-Aid of the 'New' New Political Left

Bill Clinton's former US Secretary of the Treasury Lawrence Summers continues to make the case for globalization. But he now tries to present it in a way that is sensitive to the concerns of the left who are anti-trade, anti-immigration, and increasingly isolationist.

... the US is better off with than without trade agreements and that the world will be a richer, safer place with increasing economic integration. ...

But I suspect that the policy debate in the US, and probably in some other countries as well, will need to confront a deeper and broader issue: the gnawing suspicion of many that the very object of internationalist economic policy – the growing prosperity of the global economy – may not be in their interests. ...

... there are reasons to think that economic success abroad will be more problematic for American workers in the future.

First, developing countries increasingly export goods such as computers that the US produces on a significant scale, putting pressure on wages. ...

Second, the growth of countries such as China raises competition for energy and environmental resources, raising the price for Americans.

Third and most fundamentally, growth in the global economy encourages the development of stateless elites whose allegiance is to global economic success and their own prosperity rather than the interests of the nation where they are headquartered. ...

In a world where Americans can legitimately doubt whether the success of the global economy is good for them, it will be increasingly difficult to mobilise support for economic internationalism. The focus must shift from supporting internationalism as traditionally defined to designing an internationalism that more successfully aligns the interests of working people and the middle class in rich countries with the success of the global economy. This will be the subject of my next column...

The justification for free trade is sound, but many on the left decided it is a good issue to push because it is a populist appeal to nationalism, an "us versus them" view of the world, that can effectively mobilize political action. But it is a cynical, manipulative left that does this.
Traditionally the left was internationalist. The idea that free trade maximizes wealth should be a no-brainer for the left. But the "new" new left has decided to cynically ride this issue.

I, for one, and looking forward to the next column by Summers.

How to Lose an Election

The following video shows how a politician can cut his own throat...



Everybody knows that you win elections by pandering to people's greed, to the lowest common denominator. So why is Barack Obama giving a thoughtful speech? Why is he speaking about BIG IDEAS? Obviously this guy wants to throw away the election. He is obviously an "elitist" who doesn't understand his audience, the American voter, who has an attention span of thirty seconds and a vocabulary limited to a fifth grade reader. He obviously doesn't understand that nobody cares about ideas and policies and goals and calls for a "moral vision". No wonder the American voters are showing their wisdom and turning away from this in favour of an old geezer who can't distinguish Sunni from Shiite and a driven middle-aged woman who throws back a whiskey at a bar to show how "non-elitist" she really is.

I warn you... don't watch the above video. It is a waste of your time. It will demand too much from you. It will appeal to something that you don't have in you. Save your time. Instead, turn on Fox News to get a truly "fair and balanced" accounting of the day's news. Fox will make sure that you know that the "real" Obama hates America, clings to Rev. Wright, and refuses to get down on all fours with his fellow citizens!

Country & Western, Quebec Style

Annie Blanchard pleases my taste for folk music. She does a nice job on classics. I really enjoy her rendition of Evangeline, very moving.

Here's her singing "Aide-moi à passer la nuit" ("Help Me Make it Through the Night" by kris kristofferson). Very nice...

Bubble Bubble Toil and Trouble

Doug Henwood is a well-known left-wing observer of Wall Street and business. He has written a couple of articles on the financial crisis that are worth looking at.

In the first article, written in August 2007, was written just as the current crisis began to blossom. At this point Henwood was willing to downplay it:

Later in the decade, there was the 1987 stock market crash, which occurred just after LBO’s first birthday. Young and naïve, the newsletter delivered prophecies of gloom that never materialized. ... The Internet left is getting all heated up—this is the Big One, the End of the World, the Death Agony of Capitalism. Maybe; that’s always possible. But it’s not likely.

He gets all the elements right, but he -- like the Federal Reserve -- doesn't foresee the double whammy of the CDO collapse in the wake of scandals about mis-rating of AAA bonds and the malfeasance of all the actors in the mortgage market from the NINJA borrower, the mortgage broker, the banks, Wall Street wizards of tranchery, and the rating agencies.

In his second article, written in April 2008, he now has the wisdom granted by observing the scandal unfold. He discusses the turmoil in the market:


And wonders at the alacrity that the US Federal Reserve has run to the rescue:

That latest cut brought the real fed funds rate—the interest rate at which banks lend each other money overnight, the most sensitive indicator of Fed policy, less the inflation rate—firmly below 0. As the graph below shows, sub-zero funds rates are unusual, especially so early in what is presumably a recession.

So far, all the interest rate cuts and extraordinary lending facilities and the rest haven’t turned things around. Although it’s not falling apart, the U.S. economy looks to be weakening steadily. Leading indicators so far do not suggest that it’s going down the drain, but there’s still no bottom in sight either.

His analysis of the problem is conventional despite his left-leaning politics:

All the financial melodrama discussed above is a reflection of the fundamental underlying problem that people took on mortgages that they couldn’t afford to buy houses that are now declining in value. All the Fed’s gyrations cannot really resolve that fundamental problem. And it’s very unlikely that there’s much of anything that the government could do to change that either.

What's really worrying him now is that the ECRI leading indicators are all pointing down and historically that means a severe recession:

As for growth, the leading indicators aren’t looking so good. The Conference Board’s venerable leading index is down five months running and its yearly rate of change is in the neighbhorhood it was in several months before the onset of the recessions of 1990 and 2001. It’s nowhere near as bad as it was, however, in the run-up to the nasty recessions of 1974–75 and 1981–82. A less well known leading index produced by the Economic Cycles Research Institute is telling a similar story, as the nearby graph shows. So while many pundits are forecasting a deep recession, that’s not yet visible in the stats. Who knows; we may get there yet.

Tavris & Aronson's "Mistakes Were Made (but not by me)"

This book walks you through how "cognitive dissonance" plays a role in making mistakes and persisting in mistakes, and making our mistakes truly horrible.


The book is not all gloom and doom. For me, the high point of the book is captured in this quote:

The last American president to tell the country he had made a terrible mistake was John F. Kennedy in 1961. He had believed the claims and faulty intelligence reports of his top military advisors, who assured him that once Americans invaded Cuba at the Bay of Pigs, the people would rise up in relief and joy and overthrow Castro. The invasion was a disaster, but Kennedy learned from it. He reorganized his intelligence systems and determined that he would no longer accept uncritically the claims of his military advisers, a change that helped him steer the country successfully through the subsequent Cuban missile crisis. After the Bay of Pigs fiasco, Kennedy spoke to newspaper publishers and said: "This administration intends to be candid about its errors. For as a Wise man once said, 'An error does not become a mistake until you refuse to correct it.' ... Without debate without criticism, no administration and no country can succeed -- an no republic can survive." The final responsibility for the failure of the Bay of Pigs invasion was, he said "mine, and mine alone." Kennedy's popularity soared.

We want to hear, we long to hear, "I screwed up. I will do my best to ensure that it will not happen again." Most of us are not impressed when a leader offers the form of Kennedy's admission without its essence, as in Ronald Reagan's response to the Iran-Contra scandal, which may be summarized as "I didn't do anything worng myself, but it happened on my watch, so, well, I guess I'll take responsibility." That doesn't cut it.

This book is not focused on politics, but of course it has discussions of George Bush as a classic example of a person who resolves cognitive dissonance by refusing to admit mistakes and, instead, blaming things and people around him for any problems. These authors explain just how a person falls prey to the self-justificiations required to resolve cognitive dissonance. They show just how the refusal to admit mistakes reinforce and deepen the mistakes and errors and problems.

One of the discoveries of research is that once you do something that is dissonant with your image of yourself (e.g. as a "good guy" or a "smart guy" or whatever) then rather than admit a mistake, we dig ourself into a hole by refusing to admit to not be good or smart or whatever. Instead we find excuses. And as we do this, we become ever more committed to our justification or rationalization. The authors show how this lead cults to take bizarre stands. For example, if they predict the "end of days" and it doesn't come to pass. They don't admit an error. Instead they seize on this as "proof" that, for example, their prayers of intercession have worked and deepens their commitment to the cult. This is an example of "confirmation bias", a mental trick we use to reinterpret evidence in a way to justify and confirm our image of ourselves as good or smart or whatever.

There is an excellent section on the "recovered memories" movement and how it destroyed lives. Our memories are patchy and fade over time, other memories, other stories, and even suggestions by others can help "fill in" our memories. If we are confronted about their authenticity, we can either admit to fallibility or cover over the cognitive dissonance by seizing a story, no matter how incredible, and running with it. That's how many "victims" of the recovered memory movement came to accuse fathers and mothers of incest and torture. And the courts went along. Despite the fact that we know that memories are fallible and that really horrible events haunt us and are not usually "repressed". This movement grew on the myth of "recovered memories" that had been repressed. Court cases ensued. Families were torn apart. All on the basis of a faddish idea that swept the US in the 1980s.

Similarly the idea that "children cannot lie" and that sex therapists can work with a child an elicit stories of sex abuse that "must be true" because they come from the mouths of innocent babes. In reality, experiments can show how easy it is to plant an idea in a young child's mind.

The book is full of little psychological insights and delightful little tales of foibles and the mechanisms we use to dig ourselves deeper into the holes of self-deception that we've created to cover up our mistakes, to cover up those errors that we refuse to admit and instead find ways to rationalize away. In the late 1980s and early 1990s a number daycare operators were accused of satanic cult child abuse based on therapists eliciting "evidence" from the kids. No matter how absurd these stories were, once parents, police, and prosecutors became committed to this view, they could not admit mistakes and followed the "leads" despite more and more unreal "revelations". Sadly people were imprisoned over this modern day Salem witchhunt. As the authors of this book point out, these supposely responsible adults were driven by cognitive dissonance to cling more tenaciously to these absurd tales of satanic acts even as the details became more absurd. The book explains the mechanism. And it documents many tragedies committed because authorities were ignorant of this basic pscyohological predisposition to which we all fall prey.

The book is full of tradegies that our faulty psychology leads us into. The one that strikes me hardest is the fact that prosecutors will do almost anything to avoid ever admiting to participating in convicting an innocent person. Similarly cops will justify lies and horrible abuse in an interrogation because they will interpret any and all behaviour by a suspect as confirmation of their guilt. All this is completely irrational, but it lies at the heart of our justice system but little or nothing is done to identify and rectify it. Similarly the medical community has a long history of refusing to admitting that their practices can lead to harm rather than healing. People blind themselves to their failings because of our quirky psychological make-up. You would think that those in responsible positions would strive hard to eliminate these errors. But as the authors point out, it is those who are low on the pecking order who find it easiest to admit mistakes and change course when evidence is presented. The higher your social standing the more likely you will persist in an error and rationalize it away. It creates a tragedy for society because it means that the worst outrages are committed and covered up at the very top of society!

There is an excellent section in the book dealing with marriage and relationships. The advice is really simple. Fighting doesn't cause breakups and divorces. No. It is when you no longer can separate the issue/problem from the person. Once a couple starts to see the problem as the other person and not an act of the other person, the split becomes irreconcilable. Healthy couples find a way to find a way to fault the issue/problem while giving credit to the other person as not intending the issue/problem. So long as both can retain this distinction, the relationship is healthy. The book is full of wonderful examples that put flesh on these ideas. Just this section alone makes the book worthwhile because this section gets down to where we all live and the problems we all face.

In good marriages, a confrontation, difference of opinion, clashing habits, and even angry quarrels can bring the couple closer, by helping each partner learn something new and by forcing them to examine their assumptions about their abilities or limitations. It isn't always easy to do this. Letting go of the self-justifications that cover up our mistakes, that protect our desires to do things just the way we want to, and that minimize the hurts we inflict on those we love can be embarrassing and painful. Without self-justification, we might be left standing emotionally naked, unprotected, in a pool or regrets and losses.

Yet, in the final analysis, we believe it is worth it, because no matter how painful it can be to let go of self-justification, the result teaches us something deeply important about ourselves and can bring the peace of insight and self-acceptance.

The book is an excellent antidote to cynicism because it gives hope through using science to understand our human situation, the dilemmas we create for ourselves, and the muddles we make worse through the simple -- but dangerous -- mechanism of self-justification in covering up cognitive dissonance.

Errors are inherent in baseball, as they are in medicine, business, science, law, love, and life. In the final analysis, the test of a nation's character, and of an individual's integrity, does not depend on being error free. It depends on what we do after making the error.

What's the Matter with Bitterness?

Here is an article by Thomas Frank of "What's the Matter with Kansas?" fame on the "bitter" controversy between Hillary and Barak:

Consider, for example, the one fateful charge ... fastened upon Mr. Obama – "elitism." No one means ... Mr. Obama is a wealthy person... What they mean is that he has committed a crime of attitude, and revealed his disdain for the common folk.

It is a stereotype you have heard many times before: Besotted with latte-fueled arrogance, the liberal looks down on average people... He scoffs at religion because he finds it to be a form of false consciousness. He believes in regulation because he thinks he knows better than the market. ...

Mr. Obama reminds columnist George Will of Adlai Stevenson, rolled together with the sinister historian Richard Hofstadter and the diabolical economist J.K. Galbraith, contemptuous eggheads all. Mr. Obama strikes Bill Kristol as some kind of "supercilious" Marxist. ...

Ah, but Hillary Clinton: Here's a woman who drinks shots of Crown Royal... And when the former first lady talks about her marksmanship as a youth, who cares about the cool hundred million she and her husband have mysteriously piled up...? Or her years of loyal service to Sam Walton, that crusher of small towns and enemy of workers' organizations? ... Didn't he have a funky Southern accent...? Surely such a mellifluous drawl cancels any possibility of elitism.

It is by this familiar maneuver that the people who have ... brought the class divide back to America – the people who have actually, really transformed our society from an egalitarian into an elitist one – perfume themselves with the essence of honest toil, like a cologne distilled from the sweat of laid-off workers. Likewise do their retainers in the wider world – the conservative politicians and the pundits who lovingly curate all this phony authenticity – become jes' folks, the most populist fellows of them all.

Topsy-Turvy in the World of Wages

Peter Temin's paper "Inequality and Institutions in 20th Century America" dissects the story of labour and wages from the 1940s to the early 2000s. It discusses factors behind rising wages and income equality in the "golden age" of 1945-1980. It then argues that a "Washington Consensus" in the wake of the stagnation of the 1970s turned the tables on labour and led to the past 25+ years of wage stagnation and growing inequality:

A central feature of post-World War II America was mass upward mobility: individuals seeing sharply rising incomes through much of their careers and each generation living better than the last. The engine of that mobility – John Kennedy’s rising tide – was increased labor productivity.

It therefore is problematic that recent productivity gains have not significantly raised incomes for most American workers.2 In the quarter century between 1980 and 2005, business sector productivity increased by 71 percent. Over the same quarter century, median weekly earnings of full-time workers rose from $613 to $705, a gain of only 14 percent (figures in 2000 dollars3). Median weekly compensation - earnings plus estimated fringe benefits - rose from $736 to $876, a gain of 19 percent. Detailed analysis of this period shows that college-educated women are the only large labor force group for whom median compensation grew in line with labor productivity.

...

We have argued in this paper that the current trend toward greater inequality in America is primarily the result of a change in economic policy that took place in the late 1970s and early 1980s. The stability in income equality where wages rose with national productivity for a generation after the Second World War was the result of policies that began in the Great Depression with the New Deal and were amplified by both public and private actions after the war. This stability was not the result of a natural economy alone: it was also the result of policies designed to promote it. We have termed this set of policies the Treaty of Detroit.

The new policies, which we have grouped under the title of the Washington Consensus, also originated in a time of economic distress, albeit nowhere near the distress of the 1930s. In a process similar to the experience of the Great Depression, policy makers—unable to comprehend the macroeconomic causes of distress—instituted microeconomic changes in an attempt to ameliorate the macroeconomic problems. In both cases, the measures taken were only partially successful, and recovery came from diverse influences. The microeconomic changes, however, had durable impacts on the distribution of economic production.

Psychology 101

Here's a commercial using a well known psychological phenomenon. I guarantee you that you will fail the test. You can prove me wrong by taking the test...

The Rating Agency Fiasco

There is an article entitled "Triple-A Failure" by Roger Lowenstein in the NY Times Magazine that gives some insight into how the financial crisis in the US happened. This article discusses the overall crisis, but the most interesting part for me is where the article walks through an example of how a AAA mortgage backed security was created and handled by the Moody's rating agency:

The business of assigning a rating to a mortgage security is a complicated affair, and Moody’s recently was willing to walk me through an actual mortgage-backed security step by step. I was led down a carpeted hallway to a well-appointed conference room to meet with three specialists in mortgage-backed paper. Moody’s was fair-minded in choosing an example; the case they showed me, which they masked with the name “Subprime XYZ,” was a pool of 2,393 mortgages with a total face value of $430 million.

Subprime XYZ typified the exuberance of the age. All the mortgages in the pool were subprime — that is, they had been extended to borrowers with checkered credit histories. In an earlier era, such people would have been restricted from borrowing more than 75 percent or so of the value of their homes, but during the great bubble, no such limits applied.

Moody’s did not have access to the individual loan files, much less did it communicate with the borrowers or try to verify the information they provided in their loan applications. “We aren’t loan officers,” Claire Robinson, a 20-year veteran who is in charge of asset-backed finance for Moody’s, told me. “Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?”

The loans in Subprime XYZ were issued in early spring 2006 — what would turn out to be the peak of the boom. They were originated by a West Coast company that Moody’s identified as a “nonbank lender.” Traditionally, people have gotten their mortgages from banks, but in recent years, new types of lenders peddling sexier products grabbed an increasing share of the market. This particular lender took the loans it made to a New York investment bank; the bank designed an investment vehicle and brought the package to Moody’s.

Moody’s assigned an analyst to evaluate the package, subject to review by a committee. The investment bank provided an enormous spreadsheet chock with data on the borrowers’ credit histories and much else that might, at very least, have given Moody’s pause. Three-quarters of the borrowers had adjustable-rate mortgages, or ARMs — “teaser” loans on which the interest rate could be raised in short order. Since subprime borrowers cannot afford higher rates, they would need to refinance soon. This is a classic sign of a bubble — lending on the belief, or the hope, that new money will bail out the old.

Moody’s learned that almost half of these borrowers — 43 percent — did not provide written verification of their incomes. The data also showed that 12 percent of the mortgages were for properties in Southern California, including a half-percent in a single ZIP code, in Riverside. That suggested a risky degree of concentration.

On the plus side, Moody’s noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. “That was a comfort feeling,” Robinson said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, “You’ll give up your ski chalet first.”

Another factor giving Moody’s comfort was that all of the ARM loans in the pool were first mortgages (as distinct from, say, home-equity loans). Nearly half of the borrowers, however, took out a simultaneous second loan. Most often, their two loans added up to all of their property’s presumed resale value, which meant the borrowers had not a cent of equity.

In the frenetic, deal-happy climate of 2006, the Moody’s analyst had only a single day to process the credit data from the bank. The analyst wasn’t evaluating the mortgages but, rather, the bonds issued by the investment vehicle created to house them. A so-called special-purpose vehicle — a ghost corporation with no people or furniture and no assets either until the deal was struck — would purchase the mortgages. Thereafter, monthly payments from the homeowners would go to the S.P.V. The S.P.V. would finance itself by selling bonds. The question for Moody’s was whether the inflow of mortgage checks would cover the outgoing payments to bondholders. From the investment bank’s point of view, the key to the deal was obtaining a triple-A rating — without which the deal wouldn’t be profitable. That a vehicle backed by subprime mortgages could borrow at triple-A rates seems like a trick of finance. “People say, ‘How can you create triple-A out of B-rated paper?’ ” notes Arturo Cifuentes, a former Moody’s credit analyst who now designs credit instruments. It may seem like a scam, but it’s not.

The secret sauce is that the S.P.V. would float 12 classes of bonds, from triple-A to a lowly Ba1. The highest-rated bonds would have first priority on the cash received from mortgage holders until they were fully paid, then the next tier of bonds, then the next and so on. The bonds at the bottom of the pile got the highest interest rate, but if homeowners defaulted, they would absorb the first losses.

It was this segregation of payments that protected the bonds at the top of the structure and enabled Moody’s to classify them as triple-A. ...

XYZ now became the responsibility of a Moody’s team that monitors securities and changes the ratings if need be (the analyst moved on to rate a new deal). Almost immediately, the team noticed a problem. Usually, people who finance a home stay current on their payments for at least a while. But a sliver of folks in XYZ fell behind within 90 days of signing their papers. After six months, an alarming 6 percent of the mortgages were seriously delinquent. (Historically, it is rare for more than 1 percent of mortgages at that stage to be delinquent.)

Moody’s monitors began to make inquiries with the lender and were shocked by what they heard. Some properties lacked sod or landscaping, and keys remained in the mailbox; the buyers had never moved in. The implication was that people had bought homes on spec: as the housing market turned, the buyers walked.

By the spring of 2007, 13 percent of Subprime XYZ was delinquent — and it was worsening by the month. XYZ was hardly atypical; the entire class of 2006 was performing terribly. (The class of 2007 would turn out to be even worse.) ...

By early this year, when I met with Moody’s, an astonishing 27 percent of the mortgage holders in Subprime XYZ were delinquent. Losses on the pool were now estimated at 14 percent to 16 percent — three times the original estimate. Seemingly high-quality bonds rated A3 by Moody’s had been downgraded five notches to Ba2, as had the other bonds in the pool aside from its triple-A’s.

You need to read the whole article to really appreciate what a mess has been created. The above is just an example of how one structured investment vehicle could go bad. The article looks at how the rating industry was corrupted by a conflict of interest and how the SEC (and other government regulators) failed by letting private companies like Moody's de-facto regulate an industry through ratings rather than through independent government regulation.

Ronald Reagan's "deregulation" birds have come home to roost, just as they did with the energy industry deregulation and the Enron collapse.

Beauty is in the Eye of the Contextual Beholder

I think it is funny how pretentious "serious" art is. Presumably great art is great because its beauty is intrinsic and there for everybody to appreciate. But a lot of "serious" art doesn't speak to ordinary people. Instead of seeing this as a problem, the art world treats this as a validation of just how wonderfully "serious" the art is since it isn't sullied by appreciation by those lower beings who obviously don't "get it".

The following video show an example of taking a world class painter, Luc Tuymans, and putting his art on the street to see the public "reaction". I love the quote by Amy Cappellazzo, head of Contemporary Art for Christie's, in the following video (at time 3:40): "... art is usually defined by the intention to be a work of art and the context in which you see it..."



So no longer is it "beauty is in the eye of the beholder" or "beauty is concrete". Nope. Beauty only appears in the "right" context. If you take pigeon droppings and put it on a pedestal it is art, but if you see it on the street we are required to be contemptuous of its "vulgarity". Hmm...

Well, is that just a problem for the the visual arts? What about the musical arts?

Here's a Washington Post article about world-class violinist trying his hand at busking in the street (if you go to the web site you can watch video clips of the performance). Serious music lovers predict that he will be mobbed by admirers:

Leonard Slatkin, music director of the National Symphony Orchestra, was asked the same question. What did he think would occur, hypothetically, if one of the world's great violinists had performed incognito before a traveling rush-hour audience of 1,000-odd people?

"Let's assume," Slatkin said, "that he is not recognized and just taken for granted as a street musician . . . Still, I don't think that if he's really good, he's going to go unnoticed. He'd get a larger audience in Europe . . . but, okay, out of 1,000 people, my guess is there might be 35 or 40 who will recognize the quality for what it is. Maybe 75 to 100 will stop and spend some time listening."

So, a crowd would gather?

"Oh, yes."

And how much will he make?

"About $150."

Thanks, Maestro. As it happens, this is not hypothetical. It really happened.

"How'd I do?"

We'll tell you in a minute.

"Well, who was the musician?"

Joshua Bell.

"NO!!!"

A onetime child prodigy, at 39 Joshua Bell has arrived as an internationally acclaimed virtuoso. Three days before he appeared at the Metro station, Bell had filled the house at Boston's stately Symphony Hall, where merely pretty good seats went for $100. Two weeks later, at the Music Center at Strathmore, in North Bethesda, he would play to a standing-room-only audience so respectful of his artistry that they stifled their coughs until the silence between movements.

...

As it happens, exactly one person recognized Bell, and she didn't arrive until near the very end. For Stacy Furukawa, a demographer at the Commerce Department, there was no doubt. She doesn't know much about classical music, but she had been in the audience three weeks earlier, at Bell's free concert at the Library of Congress. And here he was, the international virtuoso, sawing away, begging for money. She had no idea what the heck was going on, but whatever it was, she wasn't about to miss it. ...

When it was over, Furukawa introduced herself to Bell, and tossed in a twenty. Not counting that -- it was tainted by recognition -- the final haul for his 43 minutes of playing was $32.17. Yes, some people gave pennies.

"Actually," Bell said with a laugh, "that's not so bad, considering. That's 40 bucks an hour. I could make an okay living doing this, and I wouldn't have to pay an agent."

OK, now I'm going to show that I'm a cultural slob. Personally I think art is out of contact with the public. That's OK for the really avant garde stuff, but "serious" art needs to keep one foot in the public arena doing publicly accessible art. I don't say that because I'm anti-elitist, but because I believe that memorable art is a cultural expression and you lose the heart of the art when an elite detaches itself from the broader public. We live in a world of private art. Really dynamic culturally rich societies support and relish a public art. Because our art has big ticket prices, people here are convinced we have really "fine" fine art. I dunno. I think the big bucks are a bubble like tulips in Holland in the early 17th century, or the real estate bubble at the beginning of this century.

Your Tax Dollars at Work!

The following video reminds me of my attempts to alert the local police to a car that was wandering all over the road, crossing the yellow line, and entering the oncoming lanes of traffic. I got a lot of interest from the local police until I "mentioned" that the car I was following was a police car. Then suddenly they lost interest. Odd. But if you watch this video you can see this isn't completely extraordinary:



In the interest of journalistic balance, here a "man bites dog" story to go with the above. An article in the Portland Mercury newspaper reports of a citizen giving a parking ticket to a cop.

A Little "Kitchen Experiment"

Here's something fun to treat your "inner scientist" with a little pseudo table top "experiment" that's a whole lot of fun even if it isn't clear that it teaches anything useful. The good news is that it is simple to do and you get a lot of "bang for the buck" with this experimental setup:

Tim Harford's "The Logic of Life"

Over the past decade there have been a number of enjoyable, popular economics books. The Logic of Life is in fact Tim Harford's second. It's even better than his first book, The Undercover Economist.



The argument of this book is that behavioural economics, while interesting, is not as ground-shaking as it is presented to be. He argues that the classical "rational economics" model still has a lot of life left in it to explain a lot of behaviour that on the surface seems to require some special insight from behavioural economics.

"If you've read some of the criticisms of economics, you may be starting to fear that you're reading a book about an infamous character by the name of Homo economicus, or "economic man." ... Homo economicus doesn't understand human emotions like love, friendship, or charity, or even envy, hate, or anger -- only selfishness and greed. He knows his own mind, never makes mistakes, and has unlimited willpower. And he's capable of performing impossibly complex financial calculations instantaneously and infallibly. Homo economicus is the kind of guy who would strangle his own grandmother for a dollar -- assuming it didn't take more than a dollar's worth of time, of course. ...

But because Homo economicus lies behind many criticisms of economists and rational choice theory, I need to set out how this crude caricature differs from what I mean when I talk about people being rational. ...

Does this mean that rational choice theory is as much as a flat earth theory? No. It's more like a perfectly-spherical-Earth theory. The Earth isn't a perfect sphere... But it's nearly a sphere, and for many purposes the simplification that the Earth is spherical will do nicely."

I love the example he opens with of the rise of oral sex among teenagers. He argues that it is a rational response to a perception of risk and goes through how an economist can find data sets that help unravel this story. He also examines data on Mexican prostitutes and shows that their decisions about safe sex are fundamentally rational and economic.

He has a wonderful bit about "rational ignorance" and why we rationally choose to be ignorant in some situations and how in fact it does allow experienced economic agents to make money off our ignorance. He shows that previous economic experiments failed to pick this out because the toy environments didn't allow for real returns to those with skills and knowledge that could be extracted at the expense of those who don't.

He has a delightful chapter looking at how game theory has made some progress in complex games like poker while the real poker experts continue to maintain an edge established by knowledge and experience. You get to meet the mathematician von Neumann, the poker champion Chris "Jesus" Ferguson, and nuclear strategist Thomas Schelling.

He explains why the appearance of The Pill in the early 1960s was the equivalent of imprisoning a significant portion of the male population and that promiscuity was a rational response. On the other hand, the rise of no-fault divorce in the 1970s forced men to behave better within a marriage because it gave women a credible threat to walk out. Consequently "... Domestic violence fell by almost a third, and the number of women murdered by their partners fell by 10 percent. Female suicide rates also fell. It is a reminder that the binding commitment of marriage has costs as well as benefits."

He explains how "tournament theory" explains why bosses are overpaid and why it is not rational for a large business to pay you what you are worth if you are more productive than your co-workers. As Harford sums up these sad facts of economic life he says:

Some problems cannot be easily solved. After all, I never promised that rational meant "wonderful." Rational choices lock us in situations where your boss will always be overpiad, and the CEO of your company even more so. They also doom you to paying too much when you eat out with twenty other people. But at least you now understand the logic behind it."

He also discusses "rational racism", i.e. how minor prejudices can produce segregation and reinforce racism.

There is also a discussion of why the Internet does not mean the end of cities. And a discussion of how Americans are willing to bid up house prices in desirable suburbs since the price is not just for a house but for the "better schools" that the suburbs offer. At the same time there is a new blooming of urban centers as childless couples make the rational calculation that the amenities of an urban setting outweigh problems with urban crime. He points out how rural areas can exploit urban areas because of the phenomenon of small groups of people using politics to their advantage when they have an obvious benefit and the group can't be swamped by newcomers when the technique to exploit the majority is discovered. Consequently, a sugar subsidy works in the US because you have to own a big farm, i.e. belong to a recognizable group that others can't pile into when a law to subsidize sugar is enacted.

As can be seen by the above, a lot of aspects of life can be explicated by applying economic models to understand the underlying behavior. The idea that fundamentally we are rational and that incentives can motivate us helps explain a great deal that on the surface seems mysterious or puzzling. It makes for a great read. I alway enjoy walking away from a book knowing that I learned something. Of course a book like this is only dipping your toe into a major area of expertise, but it does open your eyes and acts as an inducement to spend more time learning more by dipping more deeply into the available technical literature. Even if you are not an academic, there is something useful to be learned.

A. C. Grayling's "Russell: A Very Short Introduction"

If you want a whirlwind tour of Russell's life and a brief, but very good, overview of his contributions to logic and philosophy, then A. C. Grayling delivers.



I remember vividly wrestling with Russell's The Problems of Philosophy in college in 1967. The book was very accessible, it sounded right, but it was "understandable". Something that most of the "classics" of philosophy weren't. Russell was marvelous because he wrote philosophy intelligibly. And he set the problems up and analyzed them in ways that made them accessible, interesting, and enlightening.

I loved Russell's A History of Western Philosophy. It was interesting an entertaining. His account of the murder of Hypatia at the hands of the Christians was, and remains, etched into my memory. He had a way with words. He had a viewpoint. And, he got you engaged. As Grayling points out, this is a "spotty" history of philosophy, but:

"... it is a standing wonder in the philosophical profession that his most successful and widely read book, A History of Western Philosophy, arguably the source of most peoples knowledge of philosophy, is -- despite its many virtues -- in a number of places woefully inadequate as philosophical discussion."

I've read the three volume The Autobiography of Bertrand Russell and enjoyed it, but you can get a reasonable understanding of Russell's scandal-filled but surprisingly moral life in one-fifth the number of pages by reading Grayling, and as a bonus you actually get a very good discussion of Russell's philosophy which isn't covered in the autobiography.

In short, Grayling's book is an excellent crib to read first to orient yourself before you read Russell, and it's even a pretty good crib to read while studying Russell to make sure that you understand what you're studying.

I very much enjoy Grayling's assessment of Russell:

If you wish to see Russell's monument, look around you at mainstream philosophy in the English language as it has been practised since the years between the two world wars. Look also at logic, the the philosophy of mathematics, at the changed moral climate of the twentieth-century Western world...

... in Philsophy his place so pivotal that ... he is practically wallpaper. His philosophical inheritors carry on their philosophical work in his style, addressing the problems he identified or to which he gave contemporary shape, using tools and techniques he developed, and all in large agreement with the aims and assumptions he adopted.

Bush Aministration War Criminals

The Guardian has a report pointing out that Bush Administration officials tricked the US Army into using torture at Guantanamo:

America's most senior general was "hoodwinked" by top Bush administration officials determined to push through aggressive interrogation techniques of terror suspects held at Guantánamo Bay, leading to the US military abandoning its age-old ban on the cruel and inhumane treatment of prisoners... General Richard Myers, chairman of the US joint chiefs of staff from 2001 to 2005, wrongly believed that inmates at Guantánamo and other prisons were protected by the Geneva conventions and from abuse tantamount to torture.

Myers believes he was a victim of "intrigue" by top lawyers at the department of justice, the office of vice-president Dick Cheney, and at Donald Rumsfeld's defence department.

The 1970s Redux

Paul Krugman has an essay in the NY Times that looks at the similarities between now and the 1970s given a spike in oil price, food costs, and commodity prices. Here's his take on three possible theories to explain today:

The first is that it’s mainly speculation — that investors, looking for high returns at a time of low interest rates, have piled into commodity futures, driving up prices. On this view, someday soon the bubble will burst and high resource prices will go the way of Pets.com.

The second view is that soaring resource prices do, in fact, have a basis in fundamentals — especially rapidly growing demand from newly meat-eating, car-driving Chinese — but that given time we’ll drill more wells, plant more acres, and increased supply will push prices right back down again.

The third view is that the era of cheap resources is over for good — that we’re running out of oil, running out of land to expand food production and generally running out of planet to exploit.

I find myself somewhere between the second and third views.

Nightmare on Main Street

Here is a video interview with Nouriel Roubini trying his best to meet the high standards of horror established by Wes Craven. I can't say that Nouriel achieves the cinematic effects of Freddy Krueger, but her sure the heck scares me!

Here is his scary forecast for recession edging on depression for the US. In the third video he gets around to giving his grim forebodings for the Canadian economy.

For you ghouls out there... enjoy!

Economic Voyeurism

The NY Times has an interactive graphic "Executive Pay: The Bottom Line for Those at the Top" The that lets you peer into the pockets of the top 200 corporate executives in America. It lets you see how much they earned in 2007, how it is broken down, how they compare to their peers, how much they have accumulated, as well as rankings for salary and wealth. For somebody who wants to play economic voyeur it is a treasure trove of info.

I find it an interesting "test" to run down the list seeing how the pay raise/decline tracks the stock rise/decline. Answer: not very accurately.

Funny, I find it interesting that some of the wealthiest guys are at the very bottom. They don't take much in pay, but a surprising number have created real wealth, e.g. Warren Buffet and Steve Jobs.

But the real joy comes from the horror stories:

• On the flip side, some of they guys with the biggest pay have destroyed their company's equity, e.g. John Thain of Merrill Lynch is "tops" in pay, the #1 guy at $83.79M, but he creamed his company. Its stock plunged 41%.
• A guy like Steve Odland of Office Depot saw his salary go up by 85% as he managed to wipe out 64% of the shareholder equity. Does that make any sense?
• Kerry K. Killinger (love that name!) was 112th on executive pay with a take home of $14.36M while blowing away (I can't resist, "killing") 65% of shareholder value. Do you think they felt they got their money's worth?
  

The Sage of Omaha

There's an interesting interview with Warren Buffet on CNN by Nicholas Varchaver. Here are some highlights:

On why the financial crunch is so murky and it is so difficult for banks to report their lossses:

Q: Do you find it striking that banks keep looking into their investments and not knowing what they have?

A: I read a few prospectuses for residential-mortgage-backed securities - mortgages, thousands of mortgages backing them, and then those all tranched into maybe 30 slices. You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you're going to understand that CDO, you've got 50-times-300 pages to read, it's 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you're now up to 750,000 pages to read to understand one security. I mean, it can't be done. When you start buying tranches of other instruments, nobody knows what the hell they're doing. It's ridiculous. And of course, you took a lower tranche of a mortgage-backed security and did 100 of those and thought you were diversifying risk. Hell, they're all subject to the same thing. I mean, it may be a little different whether they're in California or Nebraska, but the idea that this is uncorrelated risk and therefore you can take the CDO and call the top 50% of it super-senior - it isn't super-senior or anything. It's a bunch of juniors all put together. And the juniors all correlate.

Here Warren Buffet gives the best example of why the "efficient market" hypothesis is simply not true:

It may have some meaning to you if you're still being taught efficient-market theory, which was standard procedure 25 years ago. But we've had a recent illustration of why the theory is misguided. In the past seven or eight or nine weeks, Berkshire has built up a position in auction-rate securities [bonds whose interest rates are periodically reset at auction...] of about $4 billion. And what we have seen there is really quite phenomenal. Every day we get bid lists. The fascinating thing is that on these bid lists, frequently the same credit will appear more than once.

Here's one from yesterday. We bid on this particular issue - this happens to be Citizens Insurance, which is a creature of the state of Florida. It was set up to take care of hurricane insurance, and it's backed by premium taxes, and if they have a big hurricane and the fund becomes inadequate, they raise the premium taxes. There's nothing wrong with the credit. So we bid on three different Citizens securities that day. We got one bid at an 11.33% interest rate. One that we didn't buy went for 9.87%, and one went for 6.0%. It's the same bond, the same time, the same dealer. And a big issue. This is not some little anomaly, as they like to say in academic circles every time they find something that disagrees with their theory.

And here is the very best investing advice that any amount of money can buy:

Q: What should we say to investors now?

A: The answer is you don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time. There's only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. But they could buy a cross section of American industry, and if a cross section of American industry doesn't work, certainly trying to pick the little beauties here and there isn't going to work either. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.

Would you Like that Poached or Deep Fried?

This brings memories back of my youth. Nothing like having your memory seared with mushroom clouds. Here is a US military video of "testing" a nuclear weapon on its own troops. These lucky fellows got to stand under the fallout and then march in and inspect the bomb blast effects while soaking up radioactivity. The "inquiring minds" of the military were wanting data on how troops could operate in a battle theatre with nuclear weapons. It is thought this was filmed at Operation Tumbler-Snapper, a series of test in Nevada in 1952. Among the interesting things to watch are the slogans the military used such as "Talk Means Trouble, Don't Talk".



This is from the Web Archive's Prelinger Collection.

Here's another video from this collection, this is the famous "Duck and Cover" film that "educated" my generation to "seek cover" from a nuclear explosion. I remember being the idiot who questioned why my class in high school was assigned to huddle against a wall right across from a big glass window. I kept picturing all the glass shards created by an explosion turning me into mush. This questioning of the wiseness of this place as "cover" was met with little acceptance from the administration. I thereby learned one of the most important lessons of my life: leaders only want you to conform, not think.

Dr. Freeman, or How I Learned to Stop Worrying and Love Globalization (kudos to Kubrick)

Richard B. Freeman, a Harvard economist, gave a talk on "The Challenges of Inequality and Global Capitalism to U.S. Democracy" at UC Berkeley on February 11, 2008. He notes that US inequality is well document, extreme (worst that other developed countries, roughly the same as China!), and growing. The good news is that the level of inequality around the world is shrinking, but paradoxically within most countries the level of inequality is increasing. He is not an opponent of globalization. He likes that it is helping to lift the world's poor up out of poverty. But, he points out that globalization is behind the phenomenon of falling wages because of a very simple fact: since China and India have joined the global capitalist system this has doubled the number of workers while keeping the amount of capital the same, so it has by the laws of supply and demand, given an edge to capital, so the returns to capital have gone up while wages have dropped in the developed world.

His talk is interesting. He is a quirky guy (oddball cartoons) which some will find distracting and others will see as part of his "charm". His mumbling and mannerism do detract from the quality of the delivery of his lecture. But, once you get past these and focus on his talk, you will find a lot of interesting facts and thoughtful ideas. The hour lecture is well worth spending the time:

The Vanishing Middle Class

Elizabeth Warren, a law professor at Harvard, gave this talk "The Coming Collapse of the Middle Class" at UC Berkeley on March 8, 2007. She lays out in detail just how the middle class has fallen into debt and runs much higher risks of bankruptcy. Her lecture focuses on data sets for 1970 and 2003 and look at a "typical" two parent, two child family and tracks the changing composition of their expenses. The surprising result in not that people are buying more "stuff" and falling into debt. Instead, the trap comes from higher housing (she explains how), higher medical costs, higher transportation costs (you need two cars if you have two workers in 2003 compared to the one in 1970), and child care costs (that did not exist with a one earner family in 1970), and higher taxes (since the second income raises the family income which means that all the added income is taxed at the highest marginal rate). She also discusses why middle class families are on the verge of bankruptcy. It is a sad tale. A full generation later (2003) and people are worse off than their parent's generation (1970):

Evolution, Schmevolution!

Everybody has heard of the knock-down drag-out battle between religion and science, the evolutionists and the fundamentalists. Boring! But...

Here is a nice series of videos of a lecture given by Ken Miller, professor of biology at Brown University. It gives an excellent account of how the "intelligent design" theory has tried to pawn itself off as an alternative "scientific theory" and get its books placed into American schools. This lecture is especially interesting because:

1. he is a professor of biology who "knows his stuff";
2. he delivers the goods and succeeds brilliantly in knocking down "intelligent design" despite the fact that he is a religious guy;
3. he provides an "exposé" on how ID is just "scientific creationism" by another name;
4. he provides a several good examples of how science answers issues like "missing link" and "irreducible complexity" are phony arguments from the ID/"scientific" creationists;
   
5. he has a delightful style and excellent presentation, so it is entertaining as well as educational.

There are two more videos in this series but #7 goes into boring details about Texas textbook selection and #8 has been corrupted by some jackass who put an obscene picture of himself at the very end of that video. So I've not included these two here.

The Gee Whiz Economics of Innovation

There is a science report on the falling price of sequencing the 3 billion base pairs of human DNA:

• The Human Genome Project (HGP), a consortium of public-sector scientists, spent $437M and 13 years to complete the first sequencing of the genome, in 2003.
  
• Craig Venter, who developed a fast-track sequencing method, completed a sequencing of Venter's own genome last September, for a cost around $100M.
• The next-generation technique, led by the Rothberg Institute for Childhood Diseases Research in Connecticut, sequenced a sample given by James Watson, the Nobel laureate who co-discovered the DNA double helix. In all, Watson's genome took less than $1M and a mere two months to produce, the study says.

There is an interesting book by Ray Kurzweil called "The Singularity is Near" which discusses the acceleration of invention and technology:

A nice preview of what was in this book is available from Kurzweil's site in an article called "The Law of Accelerating Returns".

A Slap in the Face of God

Here's a story that is bound to outrage the fundamentalist Christians in the US. It is the story of a "woman" who has shown no regard for the sacred vows of marriage. This "woman" has pled for a divorce. Yes, everybody knows that "what God has put together, let no one put asunder". So how dare this "woman" break the covenant? Well, maybe because she was 8 years old and forced into marriage. But for a good, honest, solid fundamentalist, "family values" must come first. Your vow to God overrides all else. So how dare this "woman" seek a divorce!

A Yemeni court has annulled an eight-year-old girl's marriage to a man in his 20s, after she filed for divorce. The girl, Nojoud Mohammed Ali, took a taxi to a judge’s office on her own, after running away from her husband. ... Nojoud told the court she had signed the marriage contract two-and-a-half months ago on the understanding she would stay in her parents' house until she was 18. "But a week after signing, my mother and father forced me to go and live with him." Her former husband, Faez Ali Thameur, told the court the marriage was consummated, but he denied Nojoud's claims that he beat her.

Now, let's all pray that in the US the religious right can get a Constitutional amendment which will recognize the sanctity of marriage and prevent these heinous divorces and annulments. As every God-fearing person knows, a covenant is forever! And that applies even if you are sold off against your will, when you are eight years old, to a man who beats you. As well all know, God loves us all and looks after us, so this fate for this little "woman" was obviously part of God's "plan" for her. How dare she bolt from the "duty" that God has laid out for her. It is an insult to God! It's a slap in the face of God!

Buddy, Can You Spare a Dime?

As economic doom settles in, it is good to see that at least some people have managed to eke out a living in these hard times:


A report by Jenny Anderson in the NY Times discusses these "titans of finance" and the meagre earnings they make by the sweat of their brow. Not all are happy. For example:

Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.”

And Mr. Gross, the fund manager, warned that the widening divide among the richest and everyone else is cause for worry.

“Like at the end of the Gilded Age and the Roaring Twenties, we are going the other way,” Mr. Gross said. “We are clearly in a period of excess, and we have to swing back to the middle or the center cannot hold."

Barry Ritholtz argues that the above guys are not the mugs you should hate. He argues they earned their billions. He wants us -- the crowd with the pitchforks and torches -- to mob at the doorstep of what he calls the "crony capitalists":

On the other hand, there are plenty of bad actors they should be truly upset about instead. Stan O'Neal of Merrill Lynch (MER), Chuck Prince of Citigroup (C), Robert Nardelli of Home Depot -- any many, many more undeserving cads -- are value destroyers. And they got paid an absurd amount of money to help destroy the very companies they were brought into run. If you have a retirement account (IRA, 401k, Pension plan) then they took money from you. That is unconscionable to me. ...

The short answer is Crony capitalism. They have (had) do-nothing-boards who failed to watch out for the shareholders' interest.

Money Matters

In both senses of the term!

The NY Times has an article by David Leonhardt that takes on the conclusions of a 1974 study by Richard Easterlin that concluded that beyond the initial happiness that a modest income rise to cover basic needs, additional money does not buy additional happiness.

People in poor countries, not surprisingly, did become happier once they could afford basic necessities. But beyond that, further gains simply seemed to reset the bar. ... Relative income — how much you make compared with others around you — mattered far more than absolute income, Mr. Easterlin wrote.

But new research undercuts the Easterlin conclusions:

Betsey Stevenson and Justin Wolfers argue that money indeed tends to bring happiness, even if it doesn’t guarantee it. They point out that in the 34 years since Mr. Easterlin published his paper, an explosion of public opinion surveys has allowed for a better look at the question. “The central message,” Ms. Stevenson said, “is that income does matter.” ...

If anything, Ms. Stevenson and Mr. Wolfers say, absolute income seems to matter more than relative income. In the United States, about 90 percent of people in households making at least $250,000 a year called themselves “very happy” in a recent Gallup Poll. In households with income below $30,000, only 42 percent of people gave that answer.

Here's a graphic (larger size) from the Stevenson and Wolfers report as presented on the NY Times site:



In his article, Leonhardt, notes that he talked to both parties as well as Nobel Laureate Daniel Kahneman to try and understand the apparantly inconsistent results. The bottom line:

Economic growth, by itself, certainly isn’t enough to guarantee people’s well-being — which is Mr. Easterlin’s great contribution to economics. In this country, for instance, some big health care problems, like poor basic treatment of heart disease, don’t stem from a lack of sufficient resources. Recent research has also found that some of the things that make people happiest — short commutes, time spent with friends — have little to do with higher incomes.

But it would be a mistake to take this argument too far. The fact remains that economic growth doesn’t just make countries richer in superficially materialistic ways.

If you want an account of this research from -- so to speak -- the "horses's mouth", then here is a blog entry by Justin Wolfers on the Freakonomics web site that explains the research. Wolfers give two reasons why his new study corrects the results of the earlier Easterlin study. First:

What explains these new findings? The key turns out to be an accumulation of data over recent decades. Thirty years ago it was difficult to make convincing international comparisons because there were few datasets comparing rich and poor countries. Instead, researchers were forced to make comparisons based on a handful of moderately-rich and very-rich countries. These data just didn’t lend themselves to strong conclusions.

Moreover, repeated happiness surveys around the world have allowed us to observe the evolution of G.D.P. and happiness through time — both over a longer period, and for more countries. On balance, G.D.P. and happiness have tended to move together.

And second:

There is a second issue here that has led to mistaken inferences: a tendency to confuse absence of evidence for a proposition as evidence of its absence. Thus, when early researchers could not isolate a statistically reliable association between G.D.P. and happiness, they inferred that this meant the two were unrelated, and a paradox was born.

Justin Wolfers followed this up with another blog entry and provided the following graphic:


He makes the point about the data underlying this graphic:

There is an incredibly high correlation between average levels of happiness and average incomes — greater than 0.8. ... Thus, a 10 percent rise in income in the United States appears to increase happiness by about as much as a 10 perecent rise in income in Burundi.

And from a fourth installment of the Wolfers blog, there is this graphic which nicely sums up how happiness increases with income:

What's Free about Free Markets?

There has been nearly 30 years of "free market" ascendancy. But a global polling organization, World Public Opinion, has put out a report showing that the support for free markets is waning in the wake of scandals and failed markets:

The report notes that supports of free market strongly recognize that successful "free" markets require strong regulation to help them work effectively:

Interestingly, supporters of the free market show more enthusiasm for a strongly regulated free market system than critics. Among those who agree that the free market system is the best system, three-quarters also agree that it works best with strong government regulation.

Those who are not enthusiastic about the free market system are divided as to whether it works best with government regulation. ...

Interestingly, three countries that in 2005 were among the four highest in support for the free market system--China, the Philippines, and South Korea--showed substantial increases in agreement with the idea that the market works best with regulation.

It is interesting that Canada comes out near the top on both support for free markets and regulation (at least in comparison to the US):

It is a bit surprising to see countries like Mexico, Italy, China, and the Phillipines come out so strongly for regulation. I wonder if it shows a trust of centralized government, or a distrust of free markets. (I would argue that in Canada it shows a trust of centralized government along with the realization that unregulated free markets tend to be chaotic. The Americans obviously are more accepting of chaotic markets, or at least this poll would suggest that.)

Why Didn't Anybody Whisper "Plastics" in My Ear?

If I had the following graph back 40+ years ago, I might have taken a different track in life. Instead, blissfully ignorant, I got a Liberal Arts education with a degree in philosophy. As you can see from the following chart, that was a bad mistake. Philosophy majors come in dead last in starting salaries:

The good news is that I ended up working with computer software (which was a young field and open to non-degreed people), so I was saved from own foolishness.

For those not around in the 1960s, the title for this entry relates to the film "The Graduate" where Dustin Hoffman is pulled aside and given the career advice "plastics". I was into philosophy, but at least with somebody whispering "plastics", I might have had second thoughts about my ill-informed life choice.

Still, the question I have asked many times: Why do high schools spend so much effort teaching academic subjects and spend so little time preparing kids for the "real world". The sex education course I got was a joke, taught by a coach who didn't even stay in the room and certainly wasn't prepared for the material. There was nothing on career choice. Nothing on college choice. Even a short course of maybe 10 hours would have made a vast difference by giving me perspective and facts, but schools don't teach that kind of useful life skills and general "street smarts" material. It is a puzzle to me why they don't.

The schools did have civics and vocational courses, so they did recognize the need for non-academic topics. But there was nothing on love, marriage, college, life-long education, resume-writing, dealing with the social dynamics of a workplace, climbing the corporate ladder, etc. They taught nothing about skills for the workaday world. Odd. You would think there would be a recognition that you could get a lot of "bang for the buck" by providing education in an area where the average kid has no great clue how to cope, let along succeed.

Do You Know What's Happening in Our Own Backyard?

We know that galaxies have a black hole at that centre. But what else do you know? It comes as a surprise to me that he have a "quiescent" black hole at the centre of our galaxy, the Milky Way. And it is also a surprise that our black hole recently "acted up" with a bit of a belch. Here's an article summarizing recent research on our local black hole:

... why is the Milky Way’s black hole so quiescent? The black hole, known as Sagittarius A* (pronounced "A-star"), is a certified monster, containing about 4 million times the mass of our Sun. Yet the energy radiated from its surroundings is billions of times weaker than the radiation emitted from central black holes in other galaxies. ...

... clouds of gas near the central black hole brightened and faded quickly in X-ray light as they responded to X-ray pulses emanating from just outside the black hole. When gas spirals inward toward the black hole, it heats up to millions of degrees and emits X-rays. As more and more matter piles up near the black hole, the greater the X-ray output.

These X-ray pulses take 300 years to traverse the distance between the central black hole and a large cloud known as Sagittarius B2, so the cloud responds to events that occurred 300 years earlier. ...

"By observing how this cloud lit up and faded over 10 years, we could trace back the black hole’s activity 300 years ago," says team member Katsuji Koyama of Kyoto University. "The black hole was a million times brighter three centuries ago. It must have unleashed an incredibly powerful flare." ...

The galactic center is about 26,000 light-years from Earth, meaning we see events as they occurred 26,000 years ago. Astronomers still lack a detailed understanding of why Sagittarius A* varies so much in its activity. One possibility, says Koyama, is that a supernova a few centuries ago plowed up gas and swept it into the black hole, leading to a temporary feeding frenzy that awoke the black hole from its slumber and produced the giant flare.