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Brad Setser Asks a Question

From Brad Setser:

RGE - A little too late ...: China's premier,  Wen Jiabao, has joined the chorus voicing concern about the dollar's recent weakness.   Cheng Siwei comments two weeks ago seem to reflect rather widespread worries among China's top leadership.  The FT reports:

Premier Wen Jiabao told a business audience in Singapore it was becoming difficult to manage China’s $1,430bn foreign exchange reserves, saying that their value was under unprecedented pressure. “We have never been experiencing such big pressure,” Mr Wen said, according to Reuters. “We are worried about how to preserve the value of our reserves.” China keeps the currency composition of its reserves a state secret, but some analysts believe that more than two-thirds are probably still held in dollars.

Wen certainly has reason to worry.   No one has made a bigger bet on the dollar that China's government.   I personally suspect that China's state -- counting the assets of the State Administration of Foreign Exchange, the China investment corporation, China's big state banks and the national social security fund -- hold around $1.2 trillion in fairly long-term dollar-denominated debt.... The capital loss on those dollars could be considerable.   The dollar hasn't held its purchasing power relative to the euro, or relative to oil.  But what should really worry China's leadership is that the dollar is very unlikely to hold its value relative to the RMB.   After all, China's government has financed its dollar purchases by issuing RMB debt.... Moreover, the Hu/ Wen policy of only allowing gradual RMB appreciation -- out of fear that fast appreciation would be disruptive -- largely explains why China now holds so many dollars.   Back at the end of 2004, China's total reserves were only around $600b ($650b counting Huiijin) and the state banks held a lot less long-term dollar debt.  China's total dollar holdings were more like $450-550b.  

The majority of China's dollar exposure comes from intervention over the last three years.

That puts Wen in a bit of a bind.  

His comments were no doubt intended to tell Washington that it need to start paying more attention to the value of the dollar. Yet domestic US conditions likely call for the Fed to cut rates to support the US economy, not raise them to defend the dollar.... [T]he "arithmetic" doesn't suggest that dollar weakness will contribute that much to inflation.... Wen cannot force the US to direct its policy at defending the dollar's external value anymore than the US can force China to stop intervening in the foreign exchange market. He could, of course, conclude that China can no longer take the risk of holding so much of its wealth in dollars, and stop adding to China's dollar portfolio. But doing so would truly cause the dollar's value to tumble....

Willem Buiter is worried about a scenario where foreign demand for all US bonds -- not just demand for CDOs and riskier bonds -- disappears. He writes: "all the ingredients for a bond-run are in place, and at some point in the near future, the gradual sale of dollar-denominated securities will become a flood." And, as Menzie Chinn notes, the US hasn't locked in low interest rates in dollars forever.  What if the US turns out to be borrowing at what amounts to a low initial teaser rate?...

The answer to Brad Setser's question is: as long as the U.S.'s external liabilities are still denominated in dollars--as long as New York hasn't sold lots of dollar puts--it is our currency, but it is their problem.


Michael Pettis: China's CPI numbers look bad

Michael Pettis wrote:

RGE - China's CPI numbers look bad: China’s CPI was up 6.5% in October, up from 6.2% in September.  This matches CPI inflation for August and, with that exception, is the highest monthly CPI inflation number since the 7.0% recorded in December 1996. On the one hand October inflation slightly exceeded the consensus forecast of 6.3-6.4%, but on the other hand it is below the 6.8-7.0% that some people (including me) were worrying about. (However you can read my own blog to see why I think October inflation may actually be over 7 %.)  This is the third month of inflation over 6%, and I think that given the recent cut in fuel subsidies it is hard to see what can drive CPI inflation below 6% for the rest of the year. 

I think by now it is pretty clear that this is no longer just a food thing, although some analysts continue to say that it is.  For example they argue that the non-food component rose just 1.1% last month from a year earlier, the same pace as it did in September, whereas food prices were up 17.6%. 

That suggests that food is still the primary force driving prices upward, although in a poor country where one-third of the CPI basket is food, I would think that rising food prices must affect wages and, through wages, the rest of the economy.  More to the point today we were also told that PPI was up 3.2% in October, compared to 2.7% in September (and 2.6% in August, 2.4% in July, and 2.5% in June).  Food prices were a big part of that, but oil and raw materials were up 4.8% and mining was up 5.4%, (4.5% and 1.2% in September), and this doesn’t fully take into account the 8-10% increase in gasoline and diesel prices that was passed late last month...


The Economist Is Shrill

Also schizophrenic: it denounces both George W. Bush and itself:

The Annapolis peace summit: Much to be modest about: The pious hope of this newspaper that America's president might fill the gap was confounded too.... Had Mr Bush wanted to signal what sort of deal America wanted, this was his chance. Yet his own speech was almost miraculously content-free....

So Mahmoud Abbas, the Palestinian president Annapolis was intended to strengthen against the rejectionists of Hamas, returns to Ramallah with little to show except the promise of a year of bi-weekly meetings with Ehud Olmert.... Mr Olmert may feel that he came out better from Annapolis. But what a barren victory: how can he or any other Israeli centrist persuade Israel's religious hawks to accept the need to give ground on Jerusalem, for example, while America has a president who is not willing to make such a demand?

It is of course better that the two sides talk.... Talks might also prepare the ground for the day when America does have a president who is genuinely willing to spend political capital on Palestine....

In the White House, Mr Bush's speechwriters are no doubt congratulating him on a good week's work. They appear to think that simply attracting a big crowd of Arabs to Annapolis and talking loftily about an independent Palestine strengthens the region's moderates against the extremists of Hamas and Hizbullah, and the Iranians behind them. But in asking Mr Abbas to lead his exhausted and sceptical people back into the tunnel of negotiations, and neglecting to switch on a light at the end of it, Mr Bush is asking a lot of the Palestinian moderates. If they fail, he will deserve a big share of the blame.


Slate Incompetence and Mendacity Watch

Outsourced to Matthew Yglesias:

Matthew Yglesias: Racists Polluting My Race Science!: I'm a little bit confused by Will Saletan's mea culpa here:

For the past five years, J. Philippe Rushton has been president of the Pioneer Fund, an organization dedicated to "the scientific study of heredity and human differences." During this time, the fund has awarded at least $70,000 to the New Century Foundation. To get a flavor of what New Century stands for, check out its publications on crime ("Everyone knows that blacks are dangerous") and heresy ("Unless whites shake off the teachings of racial orthodoxy they will cease to be a distinct people"). New Century publishes a magazine called American Renaissance, which preaches segregation. Rushton routinely speaks at its conferences.

I was negligent in failing to research and report this. I'm sorry. I owe you better than that.

Saletan, basically, is apologizing for having cited a racist's work in penning his column. Which would be a reasonable thing to do, except that the thesis of Saletan's column was that one of the key empirical claims of white supremacism is true. In particular, calling on whites to "shake off the teachings of racial orthodoxy" is exactly what Saletan was doing in his own article. Similarly on the crime front. It's well known that African-Americans commit violent crimes at a higher rate than do white Americans. And if the Saletan Thesis of intrinsic African-American genetic intellectual inferiority is true, extending the analysis to explain the observed gap in violent crime rates seems like an obvious move.

Saletan was busy trying to have his cake and eat it, to, and when confronted with Rushton's rhetoric suddenly finds himself choking on it. But of course the research "proving" blacks' genetic inferiority to whites is shot through with racism; what else would the race-science paradigm possibly be infused with? Somehow, Saletan was so busy with his counterintuitive pirouettes that he didn't notice what side he'd landed on.


Hoisted from Comments: Perry Bacon's Fecklessness

Bruce Bartlett writes:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: Bacon sounds like a complete idiot. But Matt compunds the error by assuming that the Obama lie is being perpetrated by right-wingers. There is zero evidence to support this. It is far more liklely that the Obama lie is being perpetrated by one of his opponents for the Democratic presidential nomination.

I would say that it's more likely, not much more likely. I do suspect that Perry Bacon and his bosses are doing a favor for somebody. It is not clear for whom.


Republican Chuck Hagel: Bush White House ‘Most Arrogant, Incompetent’ Ever « Think On These Things

From "Think on These Things":

Republican Chuck Hagel: Bush White House ‘Most Arrogant, Incompetent’ Ever « Think On These Things: Think Progress has a quote from Republican Chuck Hagel in a recent speech.

Hagel, who considered running for the GOP presidential nomination as an antiwar candidate, told the foreign policy experts that he would give the Bush administration “the lowest grade of any I’ve known.”

“I have to say this is one of the most arrogant, incompetent administrations I’ve ever seen or ever read about,” Hagel said, according to our colleague Robert Kaiser, who attended the speech. In case his audience didn’t get the point, Hagel also said: “They have failed the country.”


Tom Toles Is a real Journalist!

Tom Toles gives his opinion of the ethics, competence, and goodwill of his Washington Post colleague Perry Bacon and their boss Len Downie:

Opinions: Tom Toles Cartoons - (washingtonpost.com): Obama's Eating of Vegetables Fuels Rumors About Him: Barack Obama doesn't hide his enjoyment of peas and beans, fueling Internet rumors that he's a jihadist vegetarian who will take the oath of office with his hand on a slab of damp tofu. He denies the rumors, but he sure does eat a lot of vegetables, including tofu at times, and the real significance of the rumors is how they will hurt him if they get repeated enough.

Inside: Are the rumors true? More discussion of them first.


More on Perry Bacon Jr.:

CJR: Is Perry Bacon Serious?: Paul McLeary: In The Washington Post this morning, reporter Perry Bacon Jr. wrote what may be the single worst campaign ‘08 piece to appear in any American newspaper so far this election cycle. In the front-page piece, Bacon muses over how the chances of Barack Obama getting elected president might be affected by the fact that he’s not Muslim. Seriously. To build his case, Bacon stumbles artlessly through all manner of rumor, innuendo, and xenophobic smear—never bothering to refute any of it, even though there is plenty of well-documented evidence to knock down much of this stuff.... Further down in the piece, we’re given the evidence for Bacon’s assertion: selected quotes from a variety of right-wing nut jobs.... Problem is, none of this is true, though Bacon never gets around to telling us that...


One Million Strong:: Washington Post Slammed for Giving Platform to Smear Campaign: The Washington Post tried to defend itself yesterday.  The author, Perry Bacon, sent out this email:

I thought the facts that 1. these falsehoods persist and 2. Obama make mentions of his time living in a Muslim country on the campaign trail as part of his foreign policy were both worth remarking. I think the story makes clear, including in the candidate's own words, he is a Christian.

This is precisely the problem.  Nowhere in the Washington Post story, of course, are these stories called false. The Post quotes the "candidate's own words" and nothing but the candidate's own words.  It does absolutely no reporting as to whether one side or the other is speaking the truth, even implying through its quoting of multiple sources of the smear that the charge has some basis.  And the Post calls Obama's words "denials," as Steve Benen puts it, "as if the attacks might have some merit." Second, Bacon essentially blames Obama for the smear campaign against him, citing Obama's mentions of his childhood in Indonesia, as if they provoked and justified the response.


WaPo lends credence to ridiculous Obama-Muslim nonsense - The Carpetbagger Report: As the presidential campaign has unfolded, there have been a handful of Washington Post articles about Democratic candidates that were so awful, I felt genuinely sorry for the newspaper. An odd front-page piece on John Edwards selling his house, a bizarre front-page expose on Hillary Clinton’s charitable donations, and the 1,300-word hit-job on the “controversy” surrounding Edwards’ haircut come to mind. But today’s lengthy front-page piece on “rumors” about Barack Obama’s non-existent Muslim background may be the worst, most irresponsible piece of journalism I’ve seen from any respectable news outlet this year. I’ve gone through it a couple of times, and I can’t quite figure out what the Post’s editors were thinking publishing the piece at all, better yet on the front page.


The SideTrack: Fried Bacon, Jr.: Under critical blow-back, Bacon has issued a statement defending the article. But with further trespass against factual reporting, his statement itself is more clear than the front page article itself. TPM reports: 'WaPo reporter Lois Romano addressed the controversy over the story. She observed that Obama has denied being a Muslim, adding that "airing some of this and giving him a chance to deny its accuracy could be viewed as setting the record straight." Right, but the problem here is that WaPo, and not just Obama, should have "denied the accuracy" of the Obama-is-a-Muslim nonsense. The Obama Muslim smear is based on lies, not "rumors." Bacon in his statement above calls the Obama Muslim smears "falsehoods." But they aren't identified as such in the piece.' Without delving into the depravity of paranoia that would disqualify a Muslim in the first place, it is at least worth asking what the point of this article was. In it's vague rhetoric of "rumors" and implications, it does nothing to illuminated the previously verified fallacies of the smear campaign. This now passes for journalism? This is being a "watchdog of democracy?" Would it kill today's media to ask themselves "how will what I am writing better inform the public?" In not doing so, they leave it up to us to ask how we will be better informed by reading what passes for content in many of today's newspapers, and support only those who offer us more.

As I have said before, every day that the Washington Post prints another newsprint edition, an angel loses its wings.


The "Balls in the Hat" Game

Ranjan Bhaduri writes:

allaboutalpha.com: Welcome to AllAboutAlpha.com: By: Ranjan Bhaduri, special to AllAboutAlpha.com: The word “liquidity” gets bandied about quite a lot, but it is surprising how many portfolio managers take a naïve approach to liquidity. It is well known that one should be compensated for investing in less liquid instruments (liquidity premium), but how much? What is the value of liquidity? It is dangerous in merely trust one’s intuition on the value of liquidity. Consider the following one-person game: 

The “Balls in the Hat Game”

The game consists of a hat that contains 6 black balls and 4 white balls. The player picks balls from the hat and gains $1 for each white ball, and loses $1 for each black ball.  The selection is done without replacement. At the end of each pick, the player may choose to stop or continue. The player has the right to refuse to play (i.e. not pick any balls at all). Given these rules, and a hat containing 6 black balls and 4 white balls, would you play? (Why?)

Mathematically one can prove that there is a POSITIVE expected value (of 1/15) in playing this game, so one SHOULD play! The ability to stop any time is analogous to perfect liquidity (i.e. being able to pull out of an investment at any time without the action having an impact on the value of the investment). This value of liquidity helps overcome the imbalance between the black and white balls, and thus makes this game profitable. This is interesting from a behavioral finance point of view, since it seems to suggest that humans are wired such that they will tend to underestimate the value of liquidity.

The mathematics behind calculating the value of liquidity can be complex as there can be subtle nuances. Niall Whelan of Scotia Capital and I wrote a pair of papers coming out which tackles the above game in the asymptotic case (i.e. hats of infinite size) and connect the value of liquidity to option pricing. Niall is one of the best quants north of the South Pole and much of these papers were hammered out in an all-night bus ride that we were forced to take from NY to Toronto (our flight from La Guardia got cancelled but we both needed to be back in Toronto in the morning for important meetings)...

I suspect that this is wrong. What is going on here, I think, is not so much liquidity as mean reversion: if you sample with replacement the effect goes away. The reason that it makes sense to play even though one might at first glance think the odds are unfavorable is that if you lose in the early stages the chances of winning in the later stages go up--that the ability to keep playing provides a degree of insurance in the cases in which things break badly. (Of course, "liquidity" does play a role: if you could never stop playing that would be offset by the fact that if you won in the early stages the odds would then move away from you.)

In order to see what is going on here, let us write down the value function: V(m,n) is the expected value of playing the game (and dropping out at the optimal point) when there are m white balls and n black balls in the hat. To begin with:

V(1,0) = 1; if there is one white ball left in the hat, the value of the game is 1--you play, and collect the white ball.

V(0,1) = 0; if there is one black ball left in the hat, the value of the game is 0--you don't play at all.

What is the value of V(1,1)? If you do play, then half the time you will draw a black ball--and be down 1--but then you will be playing the game V(1,0), which is worth one, so if you draw a black ball next, you are even. And if you do play, then half the time you will draw a white ball--and be up one--and then you will be playing the game V(0,1), and so you stop and that is worth zero. The value of V(1,1) is therefore:

V(1,1) = (1/2)(-1+V(1,0)) + (1/2)(1 + V(0,1)) = (1/2)0 + 1/2(1) = 1/2

This is interesting: you might initially think that this is a fair game--there is, after all, one white and one black ball, so you have a 50-50 chance of being up after the first draw. But it is rigged in your favor.

More generally:

V(m,n) = max[0, (m/(m+n))(1+V(m-1,n)) + (n/(m+n))*(-1+V(m,n-1))]

http://spreadsheets.google.com/pub?key=p_zylRhg4tozt6QuTHcKPVw&output=html&gid=0&single=true


Hoisted from Comments: jerry on Perry Bacon

Hoisted from Comments: jerry points out that the Washington Post's Perry Bacon has even fewer ethics than I had believed:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: If I were snopes.com, I would sue the Washington Post and Perry Bacon. Here is what Perry Bacon wrote about Snopes:

Another e-mail, on a site called Snopes.com that tracks Internet rumors, starts, "Be careful, be very careful." It notes that "Obama takes great care to conceal the fact that he is a Muslim," and that "since it is politically expedient to be a Christian when you are seeking political office in the United States, Obama joined the United Church of Christ to help purge any notion that he is still a Muslim."

What did Bacon leave out?

A) That Snopes clearly wrote in a big red font: FALSE

B) That Snopes clearly debunked this email.

The Perry Bacon account would have you believe that snopes "tracks internet rumors" but gives no context that snopes bunks or debunks the rumors, in this case debunking it throughly.

I think it's time to advance the Washington Post dissolution clock a year. Without radical, radical reforms, I give it four more years in newsprint.


Washington Post Reporter Perry Bacon Needs to Find Another Line of Work, Pronto

Why oh why can't we have a better press corps? Outsourced to Matt Duss:

TAPPED Archive | The American Prospect: YOU MAKE A VERY ADULTEROUS POINT. Last week, Chris Hayes had a great story in the Nation about the phenomenon of the right wing email forward, and how this new form of "folk media" serves to keep various rumors and urban legends alive. One of the most notorious of these is the notion that Barack Obama is secretly a Muslim extremist who plans to throw a burkha over the Statue of Liberty and institute shari'a law after taking his oath of office on the Qur'an while munching on falafel, or something. Today, the Washington Post demonstrates how "respectable" news outlets keep these rumors moving in the media bloodstream:

Since declaring his candidacy for president in February, Obama, a member of a congregation of the United Church of Christ in Chicago, has had to address assertions that he is a Muslim or that he had received training in Islam in Indonesia, where he lived from ages 6 to 10. While his father was an atheist and his mother did not practice religion, Obama's stepfather did occasionally attend services at a mosque there.

Despite his denials, rumors and e-mails circulating on the Internet continue to allege that Obama (D-Ill.) is a Muslim, a "Muslim plant" in a conspiracy against America, and that, if elected president, he would take the oath of office using a Koran, rather than a Bible, as did Rep. Keith Ellison (D-Minn.), the only Muslim in Congress, when he was sworn in earlier this year.

We are then treated to a clown parade of right-wing operatives, pseudo-scholars, Limbaughs, and Savages, who continue to float these stories like so much stale gas.

At no point in the article is there any indication that these rumors, which are nothing more than lies designed to stoke base cultural prejudices, have been exhaustively investigated and disproven. Astonishingly, the article even references an email rumor featured on Snopes.com without bothering to mention that Snopes then debunks the rumor.

Of course, we also get the requisite denials from Obama's defenders, all of which creates (and is designed to create) the impression that there is "controversy" where there is only gossip, "questions" where there is only innuendo.

Stay classy, Post.

I don't think Perry Bacon has a future in journalism.


Let's Have a Daniel Davies Day! ("Liberal College Students Are Not Boddhisatvas" Department)

Hypocrisy is a very small vice:

D-squared Digest -- FOR bigger pies and shorter hours and AGAINST more or less everything else: In my post below, I suggested that the difference between the progressivity of the tax systems students suggested for income versus for their own grades "might serve as a useful index of the hypocrisy of leftist students". When I use the word "hypocrisy" here, what do we actually mean? Well, the combination of the following two qualities:

  1. A moral belief that (some loosely defined concept of) equality is (an actual or instrumental) good.
  2. A personal desire to accumulate more, even at the expense of others.

The first is simply a baseline definition of what it means to have left wing politics. The second ... well put it this way, Buddhist monks spend twenty years living ascetically and meditating for hours at a time before they presume to believe that they have conquered all selfish desires. If you're talking about "leftist hypocrisy"... you're just talking about "leftists who happen to be humans"....

[T]he test of someone's politics is simple; if their political aim is to advance all of humanity, they're on our side, while if they have an overriding constraint that the current owners of property must always be satisfied first, they're playing for the opposition. Hypocrisy doesn't really enter into the equation with rightwing politics; you don't (or shouldn't) get any extra points for being sincere about being selfish.

So where does that leave our students? Well, they're young. They're most likely insecure. They don't actually have a lot, and it's hardly surprising that they're a bit precious about what they have (a close runner for the most sensible thing said in political philosophy in the twentieth century was Michael Oakeshott's remark that "a conservative is a man with something to lose", and the genius of this remark is its ambiguity). One shouldn't blame them for not being Boddhisattvas....

So anyway, hypocrisy in people is not a vice, particularly when the alternative is to be sincerely horrible. In political parties, it's much worse; people who presume to take control of the state's monopoly on the use of ppowerhave to be held to a much higher standard of honesty, because they are explicitly asking for us to trust them on matters important to our lives. A double standard? Perhaps. But I just told you that I don't care about hypocrisy...


Let's Have a Daniel Davies Day! ("Tricky Cases Where the Rightwingers Happen to Be Right" Department)

The three classes of rightwingers:

D-squared Digest -- FOR bigger pies and shorter hours and AGAINST more or less everything else: [T]he single most sensible thing said in political philosophy in the twentieth century was JK Galbraith's aphorism that the quest of conservative thought throughout the ages has been "the search for a higher moral justification for selfishness". Some rightwingers are not hypocrites because they admit that their basic moral principle is "what I have, I keep". Some rightwingers are hypocrites because they pretend that "what I have, I keep" is always and everywhere the best way to express a general unparticularised love for all sentient things. Then there are the tricky cases where the rightwingers happen to be on the right side because we haven't yet discovered a better form of social organisation than private property for solving several important classes of optimisation problems...


Why Oh Why Can't We Be a Better Press Corps? (William Saletan/Slate Edition)

Perhaps the most amazing thing about America's press corps is how easily they are pwn3d: how shoddy their research is, how narrow their knowledge is, how mentally inept they are at what is supposed to be their job: understanding and evaluating sources. It must be a trained incapacity: nobody could be this stupid without long practice.

Robert Farley of Lawyers, Guns, and Money on William Saletan, who may at last have come to a dim form of self-knowledge:

Lawyers, Guns and Money: Apology Not Accepted, Bill: Saletan:

I missed something I could have picked up from a simple glance at Wikipedia.

For the past five years, J. Philippe Rushton has been president of the Pioneer Fund, an organization dedicated to "the scientific study of heredity and human differences." During this time, the fund has awarded at least $70,000 to the New Century Foundation. To get a flavor of what New Century stands for, check out its publications on crime ("Everyone knows that blacks are dangerous") and heresy ("Unless whites shake off the teachings of racial orthodoxy they will cease to be a distinct people"). New Century publishes a magazine called American Renaissance, which preaches segregation. Rushton routinely speaks at its conferences.

I was negligent in failing to research and report this. I'm sorry. I owe you better than that.

"Hack" doesn't really begin to cover it. Saletan sallied forth with the argument that the evidence for inherent intellectual inequality between races was so compelling that liberals who questioned the science were equivalent to creationists. Now we find that, in addition to not understanding most of the science he was trying to talk about, he didn't even bother to do basic research into the compelling work he was citing.

More Bill:

I wanted to discuss whether egalitarianism could survive if this scenario, raised last month by James Watson, turned out to be true. I thought it was important to lay out the scenario's plausibility. In doing so, I short-circuited the conversation. Most of the reaction to what I wrote has been over whether the genetic hypothesis is true, with me as an expert witness.

I don't want this role. I'm not an expert.

Huh. So I guess that's why Bill devoted two columns to stressing how strong the science was and how reluctant to accept the truth liberals were, and one column to a few half-assed ruminations about the political implications. And I guess that's why he felt the need to write this missive to the liberal masses:

Evolution forced Christians to bend or break. They could insist on the Bible's literal truth and deny the facts, as Bryan did. Or they could seek a subtler account of creation and human dignity. Today, the dilemma is yours. You can try to reconcile evidence of racial differences with a more sophisticated understanding of equality and opportunity. Or you can fight the evidence and hope it doesn't break your faith.

I'm for reconciliation.

Yeah; I'm pretty strongly against reconciliation with someone who thought taunting liberals for not believing shoddy racist science was more important than doing basic journalistic research.

Seriously, what does somebody have to do to get fired from Slate?


A Good Question from Duncan Black

I say the answer is "no":

Eschaton: Howler Monkeys: If one of the "base" interest groups the GOP candidates had to pander to were tribes of meth-addled howler monkeys, could they have looked any more demented than they did during that debate?

Discuss.


RSS Feed Please!

From D-squared Digest:

D-squared Digest -- FOR bigger pies and shorter hours and AGAINST more or less everything else: It is a strange fact about organisations that although we can put men on the moon and grow human ears on the backs of mice, there is no force on earth that can stop people from double-booking rooms. One of the most unrealistic things about Star Wars is that Darth Vader never swept into a conference room ready to do something dramatic and evil, only to find a bunch of IT people with sandwiches having their monthly planning meeting...

Could somebody please tell Daniel Davies to turn on his blogger RSS feed?


PE 101 Section Teaching

First Section:

  • Ben is off looking for a job, so you have me... * China: The Three Gorges project * Stiglitz on China: develop more of a consumer market. * Stiglitz: Enforcement mechanisms for international trade. * Stiglitz: intellectual property rights. * Suzanne Scotchmer on IP. * Stiglitz: Weblogs--comparisons of Scott and Stiglitz... * Stiglitz: market access proposal... * Stiglitz: 50th anniversary EU address...

Second Section:

  • Neoliberalism: its discontents * 4 grand strategies for post-WWII * Stiglitz as reaction to the fourth unsuccessful strategy * No grand ideologies: local knowledge * Stiglitz reacting to our past readings--or to things like our readings * In the modern world, hard Grover Cleveland-like neoliberalism simply
    won't work * Stiglitz: local knowlege * Governments as inept, NGOs as information sharers * Stiglitz on China: crossing the river by feeling for the stones * Local autonomy does not necessarily mean let national elites run
    things * National elites are better than international elites--they speak
    your language * ETA terrorist hunger strike * Anti-development local elites * Internahional pressure as pointing the road * Support investigative journalism * What to do in Darfur--Egyptian solution * Dilemmas of intellectual property once again

DeLong Smackdown Watch: From D-Squared Digest

The unique Daniel Davies writes:

D-squared Digest -- FOR bigger pies and shorter hours and AGAINST more or less everything else: This is such a big heap of partisan right-wing bullshit that there must be a pony in there somewhere! Just before this slips down the grating; Brad DeLong waves the waggy finger of disapproval at anyone who slurs Milton Friedman's name by suggesting that the US PATRIOT Act is of a piece with the shmibertarian tendency to turn a blind eye to authoritarianism as long as it cuts the rate of capital gains tax.

One would imagine from this that Milton Friedman approved of the Un-Patriot Act--which he most definitely did not. Unlike Hayek, Friedman believed in individual liberty and autonomy first, and order and hierarchy second if at all.

tsk those liberals and their always poisoning the debate! Why can't they leave principled old Uncle Milton alone.

But hang on ... what did Friedman actually say about the US PATRIOT Act?

DA: In a time of war, how do we maintain our freedom?

MF: We don’t. We invariably reduce our freedom. But that doesn’t mean it’s a permanent reduction. As long as we really keep in mind what we’re doing, that we keep it temporary, we need not destroy our freedom.

DA: Are you concerned that some of the measures we’re taking now to fight the war, like the Patriot Act, may be more than just temporary?

MF: It’s not clear. The Patriot Act is a very complicated issue, and I’m not going to get involved in that. But I think that on the whole, this war is small enough relative to our economy that it is not going to be a serious impediment to our freedom. But the sooner we can get rid of it and out of it, the better.

DA: Do you agree with President Bush that the actions in Iraq were necessary as a part of our war on terrorism?

MF: I think you can argue either side of that. Where I do feel strongly, is that having gone into it, whether we should have or not, we must see it through.

DA: Even if it costs some of our freedoms?

MF: There’s no way to avoid a burden on your freedom. The costs themselves are a burden on your freedom. The restrictions that are necessary in order to get rid of the terrorists are a burden to your freedom. So there’s no way in the short run to avoid a restriction on your freedom. But if we’re going to avoid a permanent reduction in freedom, we have to see this war through

In other words, he was in fact for it, and if that bit about "the sooner we get rid of it, the better" fooled you, then I've got a second hand bridge k% monetary policy rule for you to buy.

They're always hacks, Brad. Always. Yes even Milton Friedman. The more independent-minded ones will occasionally come up with a liberalish or fair-minded idea or two, but this is purely for display, not for ever doing anything about if to do so would run the risk of a higher rate of capital gains tax. The ideological core of Chicago-style libertarianism has two planks.

  1. Vote Republican.
  2. That's it.

Why are American liberals so damnably obsessed with extending intellectual charity to right wing hacks which is never reciprocated? It reaches parodic form in the case of those tiresome "centrists" who left wing American bloggers are always playing the Lucy-holds-the-football game with. Oh, but their politics are sooo centrist! They're practically 50% of the way between Republicans and Democrats! Yeah, specifically they're right-wing Democrats in non-election years and party line Republicans any time it might conceivably matter (note that here, two years after the White House ceremony at which Friedman apparently "spent most of his 90th birthday lunch telling Bush that his fiscal policy was a disaster", here he is signing a letter in support of more of the same).

I wouldn't mind, but it's clearly not intellectual honesty that makes American liberals act pretend that Milton Friedman wasn't a party line Republican hack (which he was; he was also an excellent economist, which is why he won the Nobel Prize for Economics, not the Nobel Prize for Making A Sincere and Productive Contribution To The National Political Debate, which he would not have won if there was one). If it was just pure scholarly decency that made Yank liberals so keen on recognising the good qualities even in their political opponents, then you'd expect that they would also be quick to recognise the good qualities, analytical insights and so on in prominent Communist intellectuals. And do they? Do they fuck. I won't link to the Paul Sweezy obituary, because I think everyone involved agrees that this wasn't Brad's finest hour, but it certainly wasn't atypical.

Of course the explanation's quite sensible. American liberals kiss up to Friedmanites and kick down on Reds because they're still, twenty years after the fall of the Berlin Wall, scared of being red-baited. One of the enduring reasons why I regard JK Galbraith as a hero is that practically alone among mainstream commentators of the era, he by and large refused to play this game.


Menzie Chinn and Knzn on Multipliers

Menzie Chinn writes:

Econbrowser: A Pocketful of Multipliers: knzn... had an interesting post the other day on "The Indirect Effects of Export Demand"... he notes:

Today let us be thankful for multiplier and accelerator effects. And in any case let us at least be aware of multiplier and accelerator effects. In particular, if you want to talk about the potential role of export demand in preventing a US recession, the story you tell should mostly be about multiplier and accelerator effects rather than direct effects. If you tell the story without mentioning multiplier and accelerator effects, the prospect looks pretty dismal...

He continues with a nice discussion of the basics of the Keynesian multiplier in an economy without taxes (approximately) and without a financial sector (or one at least with a flat LM curve).

A little quick Keynesian arithmetic should make the point. Let's suppose that the marginal propensity to consume is 0.7.... The total effect of that hypothesized 1 percentage point contribution from export growth becomes 3.3 percentage points. Suddenly I'm glad the actual export contribution is unlikely to be that high: I wouldn't want the Fed to have to raise interest rates dramatically to prevent overheating.

I think it's very useful to have these rules-of-thumb handy to cross-check the many assertions that fly around. At the same time, one often wishes for rules-of-thumb that control for other effects... transactions based crowding out... leakage [pdf] due to the fact that the marginal propensity to import is probably around 0.10... repercussion effects... accelerator effect.... A lot of stuff to keep in mind, even for back of the envelope calculations.

So in the spirit of better informing our debates on what is likely to happen, I invite people to contribute their estimates of multipliers (or where they've found listings of multiplers). I'll start off the process with the ones I've found useful: from the OECD's Interlink model (documented in this working paper by Dalsgaard, Andre and Richardson (2001)).

5305B66B-5308-40FB-9434-E052B5177F6E.jpg

DA0A0317-C088-492C-9FCD-4FC9CAECD015.jpg

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[...]

If you work out the units in which this is measured in, it's sort of analogous to the simple real dollar for real dollar change multipliers....

A couple of caveats. As PGL pointed out in a previous post on multipliers, the Interlink model has a few odd assumptions built in (or at least built into the simulations used to generate the implied multipliers). So the implied multipliers from Macroeconomic Advisers, and the other econometric models, would be welcome. (And if anybody's got a credit crunch multiplier, well that would be very interesting...

Disclaimer: I know that for anybody who's received an economics PhD in the past 20 years, this post is hopelessly old-fashioned. But, even those who learned the econometric policy evaluation critique (a.k.a., "the Lucas critique") in their first year of studies remember that if the policy changes are not drastic, then the multipliers (convolutions of the correlations) will still be informative. For those schooled in the last ten years, they are even more likely to dismiss the entire discussion. But to the extent the DSGEs in use now are calibrated to mimic the dynamics of these macroeconometric models, well, think of these multipliers as super-ad hoc approximations.


November 29 Finance Seminar: Dynamics of Mergers and Acquisitions with Exernalities: The Coalitional Bargaining Approach

Armando Gomes (Washington University, St. Louis), "Valuations and Dynamics of Negotiations":

Abstract: This paper analyzes three-party negotiations in the presence of externalities, deriving a close form solution for the stationary subgame perfect Nash equilibrium of a standard non-cooperative bargaining model. Players’ values are monotonically increasing (or decreasing) in the amount of negative (or positive) externalities that they impose on others. Moreover, players’ values are continuous and piecewise linear on the worth of bilateral coalitions, and are inextricably related to their negotiation strategies: the equilibrium value is the Nash bargaining solution when no bilateral coalitions form; the Shapley value when all bilateral coalitions form; or the nucleolus, when either one bilateral coalition among ‘natural partners’ or two bilateral coalitions including a ‘pivotal player’ form.


December 3 Economic History Seminar: The Sustainable Debts of Philip II

Mauricio Drelichman and Hans-Joachim Voth, The Sustainable Debts of Philip II: A Reconstruction of Spain's Fiscal Position, 1560-1598:

The defaults of Philip II have attained mythical status as the origin of sovereign debt crises. The king failed to honor his debts four times during his reign. In this paper, we reassess the fiscal position of Habsburg Spain. New archival evidence allows us to derive comprehensive estimates of debt and revenue. These show that primary surpluses were sufficient to make the king's debt sustainable for most of his reign. Spain's debt burden was manageable up to the 1580s, and its fiscal position only deteriorated for good after the defeat of the 'Invincible Armada.' We also estimate fiscal policy reaction functions, and show that Spain under the Habsburgs was at least as responsible as the US in the 20th century or as Britain in the 18th century. Our results suggest that the outcome of uncertain events such as wars may have more influence on a history of default than strict adherence to fiscal rules.


Zimbabwe Inflation 'Incalculable'

Marginal Revolution sends us to:

BBC NEWS | Africa | Zimbabwe inflation 'incalculable': Zimbabwe's chief statistician has said it is impossible to work out the country's latest inflation rate because of the lack of goods in shops. "There are too many data gaps," the Central Statistical Office's Moffat Nyoni told state media. Many staple goods are often absent from shop shelves after the government ordered prices to be halved or frozen in a bid to stem galloping inflation. September's inflation rate was put at almost 8,000%, the world's highest. Other reports suggest the rate could be at near 15,000% and the International Monetary Fund had warned it could reach 100,000% by the end of the year....

Maize meal, bread, meat, cooking oil, sugar and other basic goods used to measure inflation largely disappeared from shops after Robert Mugabe's government ordered prices to be slashed. Manufacturers have said they cannot afford to sell goods at below the cost of producing them. Most basics are intermittently available on the black market at well over the official prices...

Why Thabo Mbeki has not deposed Mugabe remains a mystery to me.


Why Oh Why Can't We Have a Better Press Corps? (Yet Another Ruth Marcus/Washington Post Edition)

This morning Ruth Marcus writes:

Social Security: Five Myths and a Slur: [The claim that] "Social Security is only a big deal to people who hate the program and want to see it destroyed -- or to their ignorant dupes"... is worse than a myth. It's a slur -- on responsible people, Democrats and Republicans, who may differ about the Social Security cure but agree on the diagnosis and on the need for treatment.

This reads like a lame reply to what Clive Crook wrote last week at the Atlantic:

On an important point, [Democrats] are right: no great fiscal crisis lies in wait for social security... tweaks will be enough to deal with it.... A fiscal crisis is indeed looming over the next few decades – but its cause is Medicare, not social security. For the US, the real fiscal enemy is not the ageing of the population, but the relentless rise in healthcare costs.... [Any exclusive] focus on social security reform [is] both ill-conceived and, no doubt, deliberately misleading...

Indeed, today Ruth Marcus gives a lot of ground, no longer hiding from her readers the fact that:

The [Social Security] shortfall is small, and it's a lot smaller than the Medicare shortfall.... Social Security isn't the biggest budgetary challenge...

Indeed, by my count Social Security needs to take a number and get in line, being only the fifth-most serious budgetary shortfall, behind:

  • Medicare hospitalization
  • Medicaid
  • Medicare drug benefit
  • The Bush 2001 and 2003 tax cuts

But because Ruth Marcus lacks the ovaries to state that Social Security is only fifth in magnitude of our budgetary shortfalls, Dean Baker is still unhappy:

Beat the Press Archive | The American Prospect: A couple of quick points are in order. To claim unanimity of forecasts agree with SS trustees is simply false. The trustees assume that productivity growth will be markedly slower over the longterm horizon than its post-war average. They also assume that immigration will slow sharply from its rate over the last decade. Both assumptions make the projections for the program look considerably worse. One need only step over to the non-partisan Congressional Budget Office's website to find more positive projections on these variables...

The second key point to keep in mind is that the idea that taking steps earlier rather than later makes things easier means that it is better to either raise taxes on a cohort that has seen 30 years of wage stagnation or to cut their retirement benefits, even though most have accumulated little for retirement other than their SS.... Only the Post would argue that it's better to raise taxes and/or cut benefits on much poorer workers today than to risk the possibility that we may have to raise taxes or cut benefits on the much wealthier workers of the future...

And Paul Krugman is still--rightly--contemptuous:

The Social Security obsession, again: By any reasonable standard, Social Security is at most a second-tier policy issue.... The Social Security trustees estimate the 75-year financial shortfall of the program at 0.7% of GDP. That compares with a general fund deficit – the federal deficit outside of Social Security – of 3.3% of GDP last year (that is, not even taking into account future demands on Medicare and Medicaid.) Social Security, in other words, is in much better financial shape than the rest of the government.

Another illuminating comparison is to look at the sources of projected growth in entitlements spending. The last Congressional Budget Office long-term budget projection had Social Security spending rising from 4.2 percent of GDP now to 6.4 percent by 2050, a 2.2 percentage point increase – and Social Security, remember, is currently running a surplus to prepare for that eventuality. Meanwhile, Medicare and Medicaid spending are projected to rise from 4.5 percent of GDP to 12.6 percent, three times the Social Security increase – with negligible pre-funding. As a result, Social Security fades to insignificance in any realistic discussion of entitlements problems....

If you’re seriously worried about America’s long-run fiscal prospects, then, you should talk a lot about the general fund deficit and the problem of rising health care costs, and hardly at all about Social Security. But that’s not how it works in DC these days.

How obsessed are Beltway types with what is really a minor problem? Here are two snapshots:

First, from commenter “Low-Tech Cyclist” at Brad DeLong’s place:

The WaPo has a subset of its unsigned editorials where it comments on what it calls “the ideas primary.”

Five of the last seven Ideas Primary editorials have been on the Social Security ‘crisis.’ There have been 15 editorials in this series. One has been on global warming - the greatest crisis of our era - and two have been on our greatest domestic crisis, the lack of universal health care and the upcoming crisis in the Medicare trust fund.

Second, from Jon Chait:

One of the oddities of the entitlement hysterics is that they are far more obsessed with the minor problems of Social Security than with the massive problems of Medicare. Indeed, if you look closely at their dire proclamations, they inevitably follow the same pattern: They begin with an ominous summation about entitlements–thus lumping together Medicare with Social Security–then swiftly proceed to demand that Social Security be shored up forthwith.

Russert’s recent harangue at the Democratic presidential debate was a classic example. He began by warning of the crisis faced by “Social Security and Medicare” but proceeded to ask no fewer than 14 questions about Social Security, and zero about Medicare. It’s as if he began fulminating against crime in the greater New York area and then immediately began demanding a large new police deployment in Chappaqua.

Look, I know this is very embarrassing to those who have been walking around thinking that hyping the Social Security issue makes them Very Serious People. But the facts are the facts – and the Beltway obsession with Social Security reflects ideology and fashion, not the real problems facing America.


Notes to Self: Econ 101b Spring 2008 Fast-Track Intermediate Macroeconomics

Graphs I should put up the first ten minutes of class:

Long run:

  • Real GDP * Real GDP per workhour * Employment-to-population * Unemployment rate * Inflation rate

Short run:

  • Short-term safe interest rate * Long-term safe interest rate * Long-term risky interest rate * Stock market * Exchange rate * Housing price index * Investment * Exports

Employment Act of 1946 (as amended)

Federal Reserve communiques...


Herb Gintis Reviews Paul Krugman's "The Conscience of a Liberal"

Herb Gintis reveals that his years on the left have transformed him into a man who buys the substantive argument of how the world works made by the right. Herb writes that more progressive income taxes are bad for the middle class in the long run:

Krugman should know that if the wealth were redistributed to the middle class, the US investment rate would fall, since the rich save their money and it is translated into investment, whereas the middle classes would spend their gains on consumption, thus driving out investment. A "soak the rich" policy simply cannot work to the advantage of the middle classes...

Marty Feldstein could not put it better.

Here is the whole review, on Amazon:

Amazon.com: H. Gintis' review of The Conscience of a Liberal: "Being progressive,'' says Paul Krugman in the concluding pages of The Conscience of a Liberal, "means being partisan." Like Krugman, my training lies in economics, but unlike Krugman, I am not partisan. Rather, I take a policy orientation to social issues: there are problems to be solved in order to enhance the lives of citizens, and it is our job to discover and publicize solutions to these problems.

Krugman's partisan stance only clouds the issues. For Krugman there is a "union movement" rather than a "bureaucratic labor aristocracy," critics of the welfare states want to "turn back the clock," rather than streamline and curb the inequities of the welfare state, conservatives have won by "exploiting cultural backlash" rather than by mounting a principled opposition to the explosion of crime, drug abuse, and single-headed households in a manner that resonates with the voting public. Critics of the wealth tax are "financed by a handful of [super-rich] families," with the public being ignorant dupes of the slick politicians.

This book epitomizes what is wrong with American liberalism. Krugman was a fine, perceptive international trade theorist, but he is a political hack, with nothing new to offer. There is one problem as far as Krugman is concerned: inequality. But inequality is an intellectual abstraction, not a politically motivating issue. People hated the Robber Barons because they were robbers and barons, not because they were rich. Oprah Winfrey and Bill Gates do not send the Pinkerton men out to protect their ill-gotten gains; nor to the other super-rich.

Socialists' ringing political slogans dealt with fairness, social progress, and power to the people, not "inequality." Moreover, a truly progressive movement must built on technical progress that is impeded by the reigning powers that be (Sam Bowles and I call this efficiency-enhancing egalitarian redistribution), not the beggar-thy-neighbor, zero-sum-game sort of redistribution favored by Krugman.

I suspect Krugman is correct in saying that the degree of inequality in the USA today is the product of politics, not economic necessity. This is because some advanced industrial countries have more equal distributions of income and wealth that the USA (e.g., France, Germany). But, these countries are plagued by bureaucratic inefficiency and deeply threatened by the "lean and mean" up-and-coming countries like Poland, the Baltic States, Romania, India, et al. The USA has purchased a thriving economy and full employment at the cost of having a bunch of super-rich families. Not a bad deal, after all.

Krugman's vision for the future has three key premises, all wrong.

First, he believes progressives can win on a platform of redistributing from the rich. However, no one cares about inequality. People care about injustice, unfairness, poverty, sexual predators, family values, gay marriage, terrorism, and many other problems of everyday life. People don't care about Gini distributions and other abstractions. Moreover, Krugman should know that if the wealth were redistributed to the middle class, the US investment rate would fall, since the rich save their money and it is translated into investment, whereas the middle classes would spend their gains on consumption, thus driving out investment. A "soak the rich" policy simply cannot work to the advantage of the middle classes.

Second, Krugman would strengthen the labor unions, which he credits for their egalitarian effects. However, unions were strong only when industry was highly non-competitive in such areas as automobiles and steel. The oligopolistic character of mid-twentieth century industry, with a few countries in the lead, made fighting over the excess profits highly rewarding. With globalization, there are no excess profits to be fought over. Thus, it is not surprising that most successful unions in the USA are public service, not private (e.g., teachers, government employees). There is no future in unionism, period.

Third, Krugman believes that liberalism can be restored to its 1950's health without the need for any new policies. However, 1950's liberalism was based on southern white racism and solid support from the unions, neither of which exists any more. There is no future in pure redistributional policies in the USA for this reason. Indeed, if one looks at other social democratic countries, almost all are moving from corporate liberalism to embrace new options, such as Sarkozy in France (French socialists have the same pathetic political sense as American liberals, and will share the same fate).

I am sorry that we can't do better than Krugman. There are very serious social problems to be addressed, but the poor, pathetic, liberals simply haven't a clue. Conservatives, on the other, are politically sophisticated and hold clear visions of what they want. It is too bad that what they want does not include caring about the poor and the otherwise afflicted, or dealing with our natural environment. Politics in the USA is no longer Elephants and Donkeys; it is now conservative Pigs and liberal Bonobos. The pigs are smart but only care about what's in their trough. The Bonobos are polymorphous perverse and great lovers, but will be extinct in short order.

One final comment. Herb "conservatives... are politically sophisticated and hold clear visions of what they want... too bad that what they want does not include caring about the poor and the otherwise afflicted, or dealing with our natural environment... conservative pigs... are smart but only care about what's in their trough" claims that he is non-partisan?


Citigroup Replenishes Its Capital

Steve Goldstein and Greg Morcroft write:

Citigroup gets $7.5 billion infusion from Abu Dhabi investors: Citigroup said it has received a $7.5 billion injection from the Abu Dhabi Investment Authority, a much-needed shot in the arm as the financial-services giant weighs massive job cuts and slashing the value of debt securities on its balance sheet. "This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business," said Win Bischoff, acting chief executive of the Dow Jones Industrial Average component. Citigroup's shares rose 2% Tuesday morning, adding 59 cents to $30.39. The stock, which had dropped below $30 for the first time in more than five years on Monday, has lost 40% of its value this year.

Citigroup, in a statement issued late Monday, said the "long-term" investor will receive no more than 4.9% of its capital and won't get a seat on the board. This holding would exceed the 3.6% controlled by Prince Alwaleed bin Talal bin Abdul Aziz al Saud of Saudi Arabia. Abu Dhabi is getting bonds that must be converted and will yield 11% annually. They'll convert into stock priced at $31.83 to $37.24 a share, with the conversion to occur between March 2010 and September 2011. Stefan-Michael Stalmann, analyst at Dresdner Kleinwort, said that while the coupon rate of 11% looks high, the after-tax cost of funding is equivalent to Citi's current dividend yield of about 7.25%. Stalmann called the deal "relatively attractive" and said Citi is issuing delayed equity at a premium of 8% to 25% to the current share price -- thus avoiding the discount that a current rights issue would have required. "In exchange for being able to issue equity at a guaranteed premium, Citi only gives up the opportunity to issue straight equity at a higher share price in the future," he said...


Australian Actresses Are Plagiarizing Scott Aaronson's Quantum Mechanics Lecture to Sell Printers

I am not sure that "plagiarizing" is the right word here. But it is a remarkable situation--and there ought to be a way for Robin Hanson's friend Scott Aaronson's to get a printer out of it:

Shtetl-Optimized » Blog Archive » Australian actresses are plagiarizing my quantum mechanics lecture to sell printers: I tried to think of a witty, ironic title for this post, but in the end, I simply couldn’t. The above title is a literal statement of fact...

http://www.youtube.com/watch?v=saWCyZupO4U


Why Oh Why Can't We Have a Better Press Corps? (Time Magazine Edition)

Glenn Greenwald:

Joe Klein digs Time's hole deeper still: Joe Klein has just posted yet again about his FISA confusion, and it has now moved well beyond farce into an almost pity-inducing realm. If Time has any dignity at all, someone there will intervene and put a stop to this. It's actually difficult to watch.

In the last five days alone, Klein has now written five separate times about his FISA debacle... first was the column itself; second was the Swampland post the same day in which he emphatically defended the accuracy of what he wrote... third was the post yesterday in which Klein said he "may have made a mistake in [his] column this week about the FISA legislation"... fourth was an Update he added to that post this morning claiming that he did speak to a Democrat but "may have misinterpreted a Democratic source's point"... his fifth effort... in which he still professes confusion after "spen[ding] the past few days nosing around in the ongoing dispute about what the House FISA Reform bill actually says." The result of all this "nosing around": "I've reached no conclusions." And he then unleashes this: "I have neither the time nor legal background to figure out who's right."

That's been the point all along.... I now know who Klein's editor for this piece was and I will have much more to say about all of this tomorrow.... I just want to ask that everyone ponder the extreme lack of professionalism and corruption required for someone like Klein to write the article that he did accusing Democrats of wanting to give Terrorists the same rights as Americans (therefore showing, as always, that Democrats can't be trusted on national security), and then -- once he is exposed for having spewed outright falsehoods -- he announces that he really isn't interested in bothering to find out (and isn't even capable of determining) if anything he wrote was accurate....

Doesn't it go without saying: if Klein doesn't have the time or background to understand what he's writing about, then he ought not to write about it? Doesn't anyone at Time agree with that?...


links for 2007-11-27


The ATM on Turtle Ridge, Irvine, California

Felix Salmon sends us to Irvine Housing Blog:

Rudolph the Red-Nosed Reindeer: Address: 24 Shady Lane, Irvine, CA 92603. Beds: 3. Baths: 3.5. Sq. Ft.: 2,629. Lot Size: 5,053 sq. ft. Area: Turtle Ridge. County: Orange. MLS#: S512996: From Redfin:

Best deal around. Great plan 1 in private cul de sac location in the prestige Ledges at Turtle Ridge. Home shows as new very clean private location and great value for the Ledges estate. Nice rear yard area and great street appeal. Truly great deal here priced below most homes in area...

Let’s look at the loan history on this property.... The property was purchased in January 2005 for $1,157,000. The combined first and second mortgages totalled $1,156,730 leaving a downpayment of $270. Let’s just call it 100% financing. By April, they owners were able to find refinancing through Countrywide with a $999,999 first mortgage... Option ARM with a 1% teaser rate... a simultaneous second mortgage for $215,000 pulling out their first $58,000. So look at their situation: They are living in a million dollar plus home in Turtle Ridge making payments less than those renting, and they “made” $58,000 in their first 4 months of ownership.

Apparently, these owners liked how hard their house was working for them, so they opened a revolving line of credit (HELOC) in August 2005 for $293,000. Did they spend it all?... In December of 2005, they extended their HELOC to $397,990. In June of 2006, they extended their HELOC to $485,000. In April of 2007, the well ran dry as they did their final HELOC of $491,000. I bet they were pissed when they couldn’t get more money.

So by April 2007, they have a first mortgage (Option ARM with a 1% teaser rate) for $999,999, and a HELOC for $491,000. These owners pulled $333,000 in HELOC money to fuel consumer spending. Assuming they spent the entire HELOC (does anyone think they didn’t?), and assuming... negative amortization... the total debt on the property exceeds $1,500,000. The asking price of $1,249,000 does not look like a rollback, but if the property actually sells at this price, the lender on the HELOC (Washington Mutual) will lose over $300,000.

These owners will probably just walk away. I doubt they have any assets. They never put any money into the deal, they pulled out $333,000 in cash, and they got to live in Turtle Ridge for 3 years. Not a bad deal — for them...

Needless to say, this is not a typical case.


Economic History Seminar: Jonathan Rose: "Hoover's Truce: Nominal Wage Rigidity in the Onset of the Great Depression"

ECONOMIC HISTORY SEMINAR: Jonathan Rose, UC Berkeley: "Hoover's Truce: Nominal Wage Rigidity in the Onset of the Great Depression": November 26, 2-4 p.m., 597 Evans.

  • The sluggishness of wage declines during the Great Contraction
  • Data from International Harvester
  • David Romer: "Keynes's Keynesian model does not do too badly..."
  • Hoover's conferences
    • Were they significant?
    • Did anybody comply with Hoover's pleas to firms not to cut wages?
    • Wage cuts in 1930-31 as compared to 1920-21
    • Herbert Hoover as corporatist crypto-socialist triangulating b------

American Economic History: Paper Topic 3: Dean Baker's "The United States since 1980"

Dean Baker writes the economic history of the United States since 1980 from a rather strident and somewhat shrill left-wing point of view. Do you buy it? That is, decide whether you are more in agreement or disagreement with the political views that Dean Baker uses as an interpretive lens to understand U.S. economic history since 1980. Then, in 1000-2000 words, either:

  1. argue--with examples and illustrations--that Dean Baker convincingly makes the case for his interpretation.
  2. argue--with examples and illustrations--that Dean Baker's political interpretive lens is hopelessly flawed because it omits or misrepresents absolutely key factors and phenomena.

No hedging please! Pick a side!

Due at lecture on December 5.


Scott Aaronson: PHYS771: Quantum Computing Since Democritus

A course I would like to take:

PHYS771: Quantum Computing Since Democritus:

PHYS771 Lecture 1: Atoms and the Void; PHYS771 Lecture 10: Quantum Computing; PHYS771 Lecture 10.5: Penrose; PHYS771 Lecture 11: Decoherence and Hidden Variables.


http://www.cs.princeton.edu/theory/complexity/; http://www.amazon.com/Emperor-New-Mind-Concerning-Computers/dp/0192861980/sr=8-1/qid=1158134107/ref=pd_bbs_1/103-6440007-3621459?ie=UTF8&s=books; http://www.springerlink.com/content/w236774414114626/.


Scott Aaronson: PHYS771: Lecture 10.5: Penrose

Aha!: Scott Aaronson on Roger Penrose: "if we can only approach mathematical truth with the same unreliable, savannah-optimized tools that we use for doing the laundry, ordering Chinese takeout, etc. -- then it seems we ought to grant computers the same liberty of being fallible. But in that case, the claimed distinction between humans and machines would seem to evaporate...":

PHYS771 Lecture 10.5: Penrose: So, you guys finally finished reading Roger Penrose's The Emperor's New Mind? What did you think of it? (Since I forgot to record this lecture, the class responses are tragically lost to history. But if I recall correctly, the entire class turned out to consist of -- YAWN -- straitlaced, clear-thinking materialistic reductionists who correctly pointed out the glaring holes in Penrose's arguments. No one took Penrose's side, even just for sport.)

Alright, so let me try a new tack: who can summarize Penrose's argument (or more correctly, a half-century-old argument adapted by Penrose) in a few sentences? How about this: Gödel's First Incompleteness Theorem tells us that no computer, working within a fixed formal system F such as Zermelo-Fraenkel set theory, can prove the sentence: G(F) = "This sentence cannot be proved in F." But we humans can just "see" the truth of G(F) -- since if G(F) were false, then it would be provable, which is absurd! Therefore the human mind can do something that no present-day computer can do. Therefore consciousness can't be reducible to computation.

Alright, class: problems with this argument?

Yeah, there are two rather immediate ones:

Why does the computer have to work within a fixed formal system F?

Can humans "see" the truth of G(F)?

Actually, the response I prefer encapsulates both of the above responses as "limiting cases." Recall from Lecture 3 that, by the Second Incompleteness Theorem, G(F) is equivalent to Con(F): the statement that F is consistent. Furthermore, this equivalence can be proved in F itself for any reasonable F. This has two important implications.

First, it means that when Penrose claims that humans can "see" the truth of G(F), really he's just claiming that humans can see the consistency of F! When you put it that way, the problems become more apparent: how can humans see the consistency of F? Exactly which F's are we talking about: Peano Arithmetic? ZF? ZFC? ZFC with large cardinal axioms? Can all humans see the consistency of all these systems, or do you have to be a Penrose-caliber mathematician to see the consistency of the stronger ones? What about the systems that people thought were consistent, but that turned out not to be? And even if you did see the consistency of (say) ZF, how would you convince someone else that you'd seen it? How would the other person know you weren't just pretending? (Models of Zermelo-Fraenkel set theory are like those 3D dot pictures: sometimes you really have to squint...)

The second implication is that, if we grant a computer the same freedom that Penrose effectively grants to humans -- namely, the freedom to assume the consistency of the underlying formal system -- then the computer can prove G(F). So the question boils down to this: can the human mind somehow peer into the Platonic heavens, in order to directly perceive (let's say) the consistency of ZF set theory? If the answer is no -- if we can only approach mathematical truth with the same unreliable, savannah-optimized tools that we use for doing the laundry, ordering Chinese takeout, etc. -- then it seems we ought to grant computers the same liberty of being fallible. But in that case, the claimed distinction between humans and machines would seem to evaporate. (Perhaps Turing himself said it best: "If we want a machine to be intelligent, it can't also be infallible. There are theorems that say almost exactly that.")

In my opinion, then, Penrose doesn't need to be talking about Gödel's theorem at all. The Gödel argument turns out to be just a mathematical restatement of the oldest argument against reductionism in the book: "sure a computer could say it perceives G(F), but it'd just be shuffling symbols around! When I say I perceive G(F), I really mean it! There's something it feels like to be me!" The obvious response is equally old: "what makes you so sure that it doesn't feel like anything to be a computer?"...

Opening the Black Box:

Alright, look: Roger Penrose is one of the greatest mathematical physicists on Earth. Is it possible that we've misconstrued his thinking? To my mind, the most plausible-ish versions of Penrose's argument are the ones based on an "asymmetry of understanding": namely that, while we know the internal workings of a computer, we don't yet know the internal workings of the brain. How can one exploit this asymmetry? Well, given any known Turing machine M, it's certainly possible to construct a sentence that stumps M: S(M) = "Machine M will never output this sentence." There are two cases: either M outputs S(M), in which case it utters a falsehood, or else M doesn't output S(M), in which case there's a mathematical truth to which it can never assent.

The obvious response is, why can't we play the same game with humans? "Roger Penrose will never output this sentence." Well, conceivably there's an answer: because we can formalize what it means for M to output something, by examining its inner workings. (Indeed, "M" is really just shorthand for the appropriate Turing machine state diagram.) But can we formalize what it means for Penrose to output something? The answer depends on what we believe about the internal workings of the brain (or more precisely, Penrose's brain)! And this leads to Penrose's view of the brain as "non-computational." A common misconception is that Penrose thinks the brain is a quantum computer. In reality, a quantum computer would be much weaker than he wants! As we saw before, quantum computers don't even seem able to solve NP-complete problems in polynomial time. Penrose, by contrast, wants the brain to solve uncomputable problems, by exploiting hypothetical collapse effects from a yet-to-be-discovered quantum theory of gravity....

In Shadows, Penrose offers the following classification of views on consciousness:

Consciousness is reducible to computation (the view of strong-AI proponents)

Sure, consciousness can be simulated by a computer, but the simulation couldn't produce "real understanding" (John Searle's view)

Consciousness can't even be simulated by computer, but nevertheless has a scientific explanation (Penrose's own view, according to Shadows)

Consciousness doesn't have a scientific explanation at all (the view of 99% of everyone who ever lived)

Now it seems to me that... Penrose is retreating from view C to view B. For as soon as we say that passing the Turing Test isn't good enough -- that one needs to "pry open the box" and examine a machine's internal workings to know whether it thinks or not -- what could possibly be the content of view C that would distinguish it from view B?... I want to bend over backwards to see if I can figure out what Penrose might be saying. In science, you can always cook up a theory to "explain" the data you've seen so far: just list all the data you've got, and call that your "theory"! The obvious problem here is overfitting. Since your theory doesn't achieve any compression of the original data -- i.e., since it takes as many bits to write down your theory as to write down the data itself -- there's no reason to expect your theory to predict future data. In other words, your theory is a useless piece of shit....

Now, here's the point I keep coming back to: if this is what Penrose means, then he's left the world of Gödel and Turing far behind, and entered my stomping grounds -- the Kingdom of Computational Complexity. How does Penrose, or anyone else, know that there's no small Boolean circuit to simulate Winston Churchill? Presumably we wouldn't be able to prove such a thing, even supposing (for the sake of argument) that we knew what a Churchill simulator meant! All ye who would claim the intractability of finite problems: that way lieth the P versus NP beast, from whose 2n jaws no mortal hath yet escaped....

Let's set aside the specifics of Penrose's ideas, and ask a more general question. Should quantum mechanics have any affect on how we think about the brain?... When people try to make the question more concrete, they often end up asking: "is the brain a quantum computer?" Well, it might be, but I can think of at least four good arguments against this possibility:

The problems for which quantum computers are believed to offer dramatic speedups -- factoring integers, solving Pell's equation, simulating quark-gluon plasmas, approximating the Jones polynomial, etc. -- just don't seem like the sorts of things that would have increased Oog the Caveman's reproductive success relative to his fellow cavemen.

Even if humans could benefit from quantum computing speedups, I don't see any evidence that they're actually doing so. (It's said that Gauss could immediately factor large integers in his head -- but if so, that only proves that Gauss's brain was a quantum computer, not that anyone else's is!)

The brain is a hot, wet environment, and it's hard to understand how long-range coherence could be maintained there. (With today's understanding of quantum error-correction, this is no longer a knock-down argument, but it's still an extremely strong one.)

As I mentioned earlier, even if we suppose the brain is a quantum computer, it doesn't seem to get us anywhere in explaining consciousness, which is the usual problem that these sorts of speculations are invoked to solve!...


A Leukocyte Goes About Its Business...

Ah. Here this is with its narration:

In some ways, I think it is better without the narration--without the dry description of what is going on. It is in a sense more marvelous when it is incomprehensible, or rather uncomprehended.

See also:

http://delong.typepad.com/sdj/2006/10/yet_more_on_ins.html

http://delong.typepad.com/sdj/2006/10/biologists_weep.html

http://sparkleberrysprings.com/v-web/b2/index.php?p=737&c=1

http://cosmicvariance.com/2006/09/29/the-cell-is-like-tron/

http://www.studiodaily.com/main/searchlist/6850.html


Why Oh Why Can't We Have a Better Press Corps? (Yet Another IQ and Heredity Edition)

Hoisted from the Archives: August 17, 2005:


Brad DeLong's Website: Why Oh Why Can't We Have a Better Press Corps? (Michael Barone: Intellectual Garbage Scow Edition): Mark Thoma does intellectual garbage pickup on the overrated Michael Barone.

He tackle's Barone's claim that "maybe" the fall in social mobility in America is due to the fact that a high IQ genetic elite has risen to the top of the fair meritocracy that is our society. And Mark's head explodes:

Economist's View: Does Michael Barone Believe the Poor Lack the Genetic Intelligence and Drive Needed to Compete in the Emerging U.S. Meritocracy?: Am I reading this column by Michael Barone correctly? Does it blame being poor on lack of intelligence? Do you believe, as he does, that if you are poor it is most likely because your parents were unintelligent?... Read it yourself....

Michael Barone: [P]olls show that Americans think their chances of moving up are better than a generation ago. Statistics tell a different story: There is a higher correlation today between parents' and children's income than in the 1980s, and the income gap between college graduates and non-graduated doubled between 1979 and 1997.

"America," concludes Parker, "is becoming a stratified society based on education: a meritocracy."... [This] is exactly what Richard Herrnstein and Charles Murray predicted for America in their controversial book The Bell Curve, published 11 years ago. Herrnstein and Murray noted that intelligence is both measurable and in some large but unquantifiable part hereditary, an unexceptionable finding for experimental psychologists but maddening to social engineers. As college education becomes open to all with the requisite intelligence, graduates will tend to marry graduates and produce children with similar intelligence, while others will tend to produce children without it.

"Unchecked, these trends," Herrnstein and Murray wrote, "will lead the U.S. toward something resembling a caste society, with the underclass mired ever more firmly at the bottom and the cognitive elite ever more firmly anchored at the top."... Are we there yet?... [M]aybe so.

Yet should we be so gloomy?... Not everyone has an emotional need to be on top: How many people, if they thought seriously about it, would really want the burdens of a CEO, however lavish the pay?... As Murray has written, all you need to do to avoid poverty in this country is to graduate from high school, get and stay married, and take any job. The intelligence needed to get a place in the cognitive elite may become more concentrated in a fair meritocratic society, but the personal behaviors needed to find a valued place in society are available to everyone. Meritocracy may mean less mobility, but that is bearable if, as Brooks says, "America is becoming more virtuous."...

The inheritance of inequality is strikingly large in America today: if the father's lifetime was 100% above the American average for his day, the son's lifetime income will on average be 65% above the American average for his day. That's a lot of inherited inequality. Is this unequal distribution of wealth, income, and status in the United States today the result of the fact that a genetic elite has risen to the top in a "fair" IQ-driven meritocracy?

No.

This high degree of inherited inequality isn't because high IQ genetic eliteness genes are being passed down from fathers to sons. As Samuel Bowles and Herbert Gintis (2002), "The Inheritance of Inequality," report:

The direct effect of IQ on earnings... presented in Bowles, Gintis, and Osborne (2002a)... is 0.15, indicating that a [one] standard deviation change in the cognitive score, holding constant... remaining variables... changes... earnings by about one-seventh of a standard deviation.... An estimate of the causal impact of childhood IQ on years of schooling... is 0.53 (Winship and Korenman 1999). A rough estimate of the direct and indirect effect of IQ on earnings... is then... 0.15+(0.53)(0.22) = 0.266....

h is the heritability of IQ.... The value cannot be higher than 1, and most recent estimates are substantially lower, possibly more like a half or less.... [C]ouples tend to be more similar in IQ than would occur by random mate choice.... [The] genetic correlation of parent and offspring [is] (1 + m)/2....

Using the values estimated above, we see that the contribution of genetic inheritance of IQ to the intergenerational transmission of income is (h2(1+m)/2)(0.266)2 = .035(1 + m)h2. If the heritability of IQ were 0.5 and the degree of assortation, m, were 0.2 (both reasonable, if only ball park estimates) and the genetic inheritance of IQ were the only mechanism accounting for intergenerational income transmission, then the intergenerational correlation [of lifetime income] would be 0.01, or roughly two percent the observed intergenerational correlation [of lifetime income between parents and children].

Two percent is simply not a large number. Factors that currently account for two percent of lifetime earnings inequality are simply not yet a big deal, and cannot be responsible for the fall in social mobility.

If there is ever to be a genetic elite, its members will surely exhibit two behavioral traits: a facility with math, and a near-intinctive tendency to do back-of-the-envelope quantitative checks of assertions. We can conclude only one thing from Barone's column: neither he nor his descendents (unless they get really lucky in their mates) are plausible candidates for membership in any "genetic elite".

It is worth pointing out that neither Richard Herrnstein nor Charles Murray are plausible candidates for membership in any "genetic elite" either. Let me turn the microphone over to impeccably right-wing Jim Heckman, who comments on The Bell Curve:

The Book fails for five main reasons. 1. The central premise of this book is the empirically incorrect claim that a single factor - g or IQ - that explains linear correlations among test scores is primarily responsible for differences in individual performance in society at large.... There is much evidence that more than one factor -- as conventionally measured -- is required to explain conventional correlation matrices among test scores.... They do not emphasize how little of the variation in social outcomes is explained by AFQT or g. There is considerable room for factors other than their measure of ability to explain wages and other social outcomes. 2. In their empirical work, the authors assume that AFQT is a measure of immutable native intelligence. In fact, AFQT is an achievement test that can be manipulated by educational interventions. 3. The authors[']... implicit assumption of an immutable g that is all-powerful in determining social outcomes leads them to disregard a lot of evidence that a variety of relevant labor market and social skills can be improved. 4. The authors present no new evidence on the heritability of IQ or other socially productive characteristics.... [T]hey... [compare] IQ... [to] a crude measure of parental environmental influences. This comparison is misleading. It fails to recognize the crudity of their environmental measures and the environmental component that is built into their measure of IQ, which biases the evidence in favor of their position. Moreover, the comparison as they present it is intrinsically meaningless. 5. Finally, the authors' forecast of social trends is pure speculation... the social policy recommendations have an ad hoc flavor to them.... The appeal to Murray's version of communitarianism as a solution to the emerging problem of inequality among persons is a deus ex machina flight of fancy that is not credibly justified.

And take a look at http://www.j-bradford-delong.net/movable_type/2003_archives/001975.html as well.


Matthew Yglesias Falls into a Trap...

Matthew Yglesias writes:

Matthew Yglesias: Horatio Alger's IQ: One thing that always occurs to me when these race/IQ blowups occur is that this issue is kind of in the neighborhood of a different point that doesn't merely recapitulate the race science of yore, does seem to me to have real policy implications, and is really well-supported by the data. This is the fact that IQ test results are meaningfully predictive of various indicators of success in the United States and the main factors that influence how people score on these tests all happen in childhood or earlier (in the fetal environment, in the genes, etc.).

This then becomes one of several available lines of argument that the image of the United States as a magical place where hard work always pays off and the rewards go to those willing to put in the effort is wrong. What's more, the imagine of the United States as a fallen version of that magical place — a country that could become magical if we just improved urban high schools or adopted a better student loan system — is also wrong. Better high schools and better student loan systems are things worth doing on their own terms, but absolutely nothing one can do changes the fact that where people end up is substantially out of their hands...

This seems to me to be substantially wrong. The inheritance of inequality is strikingly large in America today: if the father's lifetime was 100% above the American average for his day, the son's lifetime income will on average be 65% above the American average for his day. That's a lot of inherited inequality. Is this unequal distribution of wealth, income, and status in the United States today the result of the fact that a genetic elite has risen to the top in an IQ-driven meritocracy?

No.

This high degree of inherited inequality isn't because high IQ genetic eliteness genes are being passed down from fathers to sons. As Samuel Bowles and Herbert Gintis (2002), "The Inheritance of Inequality," report:

The direct effect of IQ on earnings... presented in Bowles, Gintis, and Osborne (2002a)... is 0.15, indicating that a [one] standard deviation change in the cognitive score, holding constant... remaining variables... changes... earnings by about one-seventh of a standard deviation.... An estimate of the causal impact of childhood IQ on years of schooling... is 0.53 (Winship and Korenman 1999). A rough estimate of the direct and indirect effect of IQ on earnings... is then... 0.15+(0.53)(0.22) = 0.266....

h is the heritability of IQ.... The value cannot be higher than 1, and most recent estimates are substantially lower, possibly more like a half or less.... [C]ouples tend to be more similar in IQ than would occur by random mate choice.... [The] genetic correlation of parent and offspring [is] (1 + m)/2....

Using the values estimated above, we see that the contribution of genetic inheritance of IQ to the intergenerational transmission of income is (h2(1+m)/2)(0.266)2 = .035(1 + m)h2. If the heritability of IQ were 0.5 and the degree of assortation, m, were 0.2 (both reasonable, if only ball park estimates) and the genetic inheritance of IQ were the only mechanism accounting for intergenerational income transmission, then the intergenerational correlation [of lifetime income] would be 0.01, or roughly two percent the observed intergenerational correlation [of lifetime income between parents and children]...

If inherited genetically-based IQ were the source of the extra edge that the children of the rich get in our society, than we would expect a parent with 4 times average lifetime full-time earnings--say $200,000 a year--to have a kid with a lifetime average income of $51,500 instead of the average of $50,000. But it is not $51,500. It is $150,000.

I agree with Matt that "where people end up [in our society] is substantially out of their hands" (although not by any means completely): luck and inheritance of many kinds of things are incredibly important. But this does not mean that equality of opportunity is a mirage. For most of the things that are out of the hands of the individual are not out of our collective hands at all. Genetic influence on IQ is one of the big things that are out of our collective hands--and it turns out it is really not that big a thing at all.


Bernanke Effectively Brings Inflation Targeting to the Fed

Willem Buiter writes:

FT.com | Willem Buiter's Maverecon: It has taken a while, just under two years since Ben Bernanke took over from Alan Greenspan as Chairman of the Fed, but the deed now is done: the Fed has moved to de-facto inflation targeting... inside the twin Trojan horses of improved communications and greater transparency. An indeed, these proposals are likely to improve the clarity of the Fed’s communications to the market and the public at large and to enhance its transparency. But there is more....

The Fed’s modus operandi under Greenspan could be described as formally symmetric but in fact biased towards low unemployment, extremely flexible inflation targeting without a firm, let alone a numerical, inflation target.... There can be no doubt, however, about another asymmetry in the reaction function of the Greenspan Fed. With unemployment at or near the best guestimate of the natural rate, when faced with the choice between a rate cut that would reduce the likelihood of an increase in the unemployment rate at the expense of a higher risk of excessive inflation, or tighter monetary policy that would increase the likelihood of higher unemployment but would lower the risk of excessive inflation, the Greenspan Fed would opt for lower unemployment. 

This is no longer true for the Bernanke Fed.... [T]he new three-year horizon for the forecasts will provide the equivalent of a numerical point inflation target.... The Fed will no doubt continue to pay lip service to what is deemed (both by the Fed itself and by Congress) to be its official, legal dual mandate - maximum employment and stable prices. Congress will continue to insist on parity for these two objectives, and Fed officials and Governors will nod and agree....

During the 32-year period 1965-2007, the headline CPI increased 24 percent more than the headline PCE index, an average annual difference in inflation rates of around 0.67 percent.  the core CPI increased 28 percent more than the core PCE index, an average annual inflation rate difference of 0.77 percent. A core PCE target of 1.75 percent therefore would correspond to a core CPI target of 2.5 percent...


Leveraged Super Senior Trades and the Liquidity Put - Portfolio.com

Felix Salmon writes:

Market Movers: Today we're learning a lot about something known as leveraged super senior trades, or LSS.... In an LSS, investors made a leveraged bet on the super-senior tranches of mortgage-backed securities. But the leverage wasn't the kind of leverage that the Bear Stearns hedge funds used. The Bear Stearns funds simply went to their banks (or "prime brokers", as they're known in the hedge-fund world) and borrowed the money against the value of their portfolios. When those portfolios dropped in value, the prime brokers started making margin calls, forcing the funds to sell their paper at a loss.

An LSS, by contrast... borrowed the money to create its leverage by issuing asset-backed commercial paper, or ABCP... at very short maturities... [backed by] the assets of the LSS. And those investors had two reasons to be sure that they would get repaid in full. The first was that the assets of the LSS, being super-senior, were therefore super-safe... The second was that the banks which created these structures, like Citigroup, promised that they would step up and buy the ABCP if no one else would. That is the famous liquidity put...

Now the ABCP is asset-backed, so Citi could and presumably did take possession of the super-senior paper which was held by the LSS vehicle. The original investors in the LSS will have been wiped out, left with nothing. But the value of that super-senior paper as now fallen so far that it's worth much less than Citigroup paid for the ABCP...


links for 2007-11-26


Teresa Nielsen Hayden Moderates BoingBoing!

Don't try this at home, kids. Watch a skilled professional at work:

Fox News Porn - the prurience of prigs - Boing Boing: #37 POSTED BY TERESA NIELSEN HAYDEN / MODERATOR , NOVEMBER 19, 2007 8:03 AM: Yo, Moonbat: If you're so smart, how come you can't remember who takes the vowels out of rude comments?

Nelson.C: These days, Realcatholicman, BB's comments sections are filled with twits trying to prove how politically-motivated every post that mentions Fox, or copyright, or voting machines, etc. In other words, the same stuff that BB has always been interested in.

Yes!

Boing Boing's a high-visibility weblog. There are a lot of sullen, disappointed right-wingers out there who miss the old days, when they had jolly times smashing the shop windows of the early liberal blogosphere. Some of them are fixated on Boing Boing as the uppity liberal enemy that must be suppressed.

This is middling bizarre of them, seeing as how Boing Boing isn't primarily a political weblog. It's very effective at focusing on the political issues it does pursue, but it isn't all politics all the time. I suspect that's what actually brings in the wingnuts: unlike weblogs like Firedoglake or Hullabaloo or Daily Kos, Boing Boing's entries can be understood (more or less) by someone who isn't up on current events, and who never learned the song about how a bill becomes a law.

(I think that's why we have so much trouble with commenters who misunderstand Cory's take on the realities of copyright law. As a rule of thumb, just about everyone thinks they're an expert on art, sex, traffic laws, popular music, and copyrights, and just about everyone is mistaken. I can't vouch for their adherence to the rest of the rule, but when it comes to copyrights, these guys are definitely not an exception.)

If you want to see how much they distort the local discourse, look at the difference between a thread on global warming and one on some other complex scientific subject. These guys get their talking points dished out to them by the source feed right-wing weblogs. This means that if global warming comes up, they swarm the comment thread because they know something they can say. But if an entry's about some scientific development that isn't covered in their spoon-fed talking points, they're at a loss, and so that thread will instead be full of science buffs discussing the actual entry.

And what kind of insult is "politically-motivated" anyway? Is it illegal in Bush's America to have a political opinion? If the politics here offend you so much... go somewhere else.

You'd think, eh? But they don't find it contradictory. They don't even find it funny. I think what they mean by "politically motivated" is "You are pushing your agenda, not our agenda." They're not real clear on this democracy thing.

I wish that being politically offended made them go away. Unfortunately, it's a lot of the reason they're here. I very much appreciate having commenters call them on their larger errors of fact, as has happened in this thread. It clears the air.

JakeTheSnake:

I'm sick of the comments being a forum for people to either bitch about what is being posted or bitch about being "censored."

Bless you. I don't know why people feel impelled to write comments about how some entry bores them. As I keep saying, it's a big internet out there, and everyone else seems to have got the knack of moving on to something new if they're bored.

Personally, I think it's mere attitudinizing: they can't think of anything interesting to say, so they accuse Boing Boing of being boring.

The alternative to moderated comments is mind-bogglingly ugly. Remember usenet? Without moderation, trolls take over. And cries of "hypocrisy" ignore the fact that this a private site that has been kind enough to allow us to leave our comments on. Until BB tries to take down sites they don't like, they're in the clear on that charge.

I've done my time and then some on Usenet. If learning to moderate online forums is like studying trolls and demons, then hanging out on Usenet is like living in Sunnydale: if you survive long enough, you'll eventually come up against one of every kind of monster -- and after a while, your reaction will change to "Bored now."

Not enough people seem to remember that the main reason Boing Boing's first set of forums got shut down was that the Boingers didn't have time to moderate them, and they went septic. Every large general-interest web forum that's worth reading is moderated, many of them far more strictly than Boing Boing.

The "come and see the violence inherent in the system, help help I'm being repressed" crew are less of a puzzle than they initially seem. Their own online activity tends to be dull and disruptive, but they think they're entitled to the kind of large audience for their behavior you can only get by being interesting. This is why they don't actually want free speech. All that would give them is the freedom to call the shots on their own websites. What they really want is someone else's audience.


I Think Clive Crook Is Right and Wrong...

Clive Crook comes to Paul Krugman's defense, apropos of Paul Krugman's rebuttal of Ruth Marcus's shameful Washington Post op-ed column:

Clive Crook: Krugman and Krugman and Social Security: I think Paul's rebuttal is correct, so far as the "circumstances" [i.e., the economics of Social Security] are concerned...

I think so too.

He then moves on to other issues, where I think Clive Crook goes astray. I think that Clive Crook stays on the right track here:

...But the circumstances [i.e., the economics of Social Security] are of course not the only thing to have changed since he opined on this topic in the past. [Paul Krugman's] modes of analysis and expression have changed too, and radically, in ways that often seem calculated to obscure the fact that he is one of the four or five most brilliant economists of his generation. This is not incompetence or inadvertence on his part; it appears to be a conscientious choice...

But then he goes badly astray. This is simply wrong:

...[Paul Krugman] wants to fuel the rage of the administration's opponents more than he wants to help people think through the arguments. He feels that this now serves the greater good. Bush and his people are too wicked for dispassionate analysis, he believes; there will be time for Seriousness later...

Here Clive Crook is 180 degrees wrong. "Dispassionate analysis" begins with the observation that Bush lies, those on Bush's payroll lie, and Bush's other mouthpieces lie. By beginning his analyses with the presumption that Bush and company (including people like Ruth Marcus) are informed public-spirited people making serious arguments in good faith, Clive Crook is misinforming his readers. Indeed, by paragraph 11 of this very post Clive Crook is writing that "the Bush administration’s focus on social security reform was... deliberately misleading"--a conclusion that belongs much higher up in the article.

Here, however, Clive Crook is right:

...In my view, for what little it may be worth, this is a disservice to Paul's own remarkable talents...

In an ideal counterfactual world, Paul could indeed be using his remarkable talents more productively. But we do not live in the Republic of Plato, we live in the Sewer of Romulus. So here and now Clive is wrong when he writes:

...this is a disservice... as well as to the greater good...

If somebody else were holding down the reality-based slot on the New York Times op-ed page, that would be one thing. But nobody is--hence I don't see that Paul as a moral agent has a choice: he has to keep doing what he is doing.

And here Clive is right:

...But this is a complaint which, by now, he has heard a thousand times...

There follow some smart observations about Social Security, like:

On an important point, [Democrats] are right: no great fiscal crisis lies in wait for social security. On present policies, the retirement of the baby boomers is going to push the programme into a gently increasing deficit over the next few decades, but tweaks will be enough to deal with it.... A fiscal crisis is indeed looming over the next few decades – but its cause is Medicare, not social security. For the US, the real fiscal enemy is not the ageing of the population, but the relentless rise in healthcare costs.... [T]he Bush administration’s focus on social security reform was both ill-conceived and, no doubt, deliberately misleading....

And:

The case for [Social Security reform] has little to do with fiscal arithmetic.... Private saving in the US is roughly zero.... households have... relied on house-price inflation to provide capital to support them in retirement. Those bets are going bad at the moment. Many Americans, especially the least well off, are going to be much more tightly squeezed after they retire than they expect. Social security gives them a base that should not be jeopardised – but for many of the not-rich, with few other resources to draw down, it is not enough.

Politicians should be asking themselves how best to encourage more saving – and Democrats should co-opt “the ownership society” as a slogan of their own. So simple: just rebrand it “ownership for all”.

A big theme of Democratic thinking is the need to spread the benefits of capitalism more broadly. Middle-class anxiety is real. Support for liberal trade is collapsing. The answer, Democrats say, is shared prosperity: the rewards of globalisation should go not just to the shareholder class, but to workers too. Quite right. But does this spreading have to be mediated exclusively through higher taxes and higher spending on welfare programmes? Is there not a good liberal case for widening the shareholder class as well?

For genuine social security reformers, that is the real prize. Shore up the system for the least well-off, to be sure, and make the safety net more secure. Then add a new layer, through partial privatisation, of wider participation in equity ownership...

And one not-so-smart observation about Social Security:

Properly conceived, this is a programme for empowering the less well-off, supporting their financial independence and widening access to the benefits of capitalism. No doubt, Republicans have a self-interested tactical reason to support the idea: more shareholders might nudge the electorate their way. But is the Democrats’ equal and opposite reason for denouncing the idea any more noble or public-spirited?

I think Clive Crook has forgotten his recent history. Bush's Social Security "reform" plan was emphatically not "shore up the system for the least well-off" and "add a new layer... of wider participation in equity ownership." Remember Gene Sperling's slogan: "personal accounts as an add-on, not a carve-out"? That was a Democratic program (originally Ned Gramlich's)--not Bush's. It would be a good program. But it is not a program that you can get to if you start rom the idea--as Ruth Marcus and company do--that Social Security faces an imminent crisis.


I May Have to Regard Arnold Schwarzenegger Not as an Empty Suit but as a Man

Given the history I have lived through during the past five decades, it goes against the grain to regard any Republican at all as a sophont possessing functional organs of generation. But I may have to regard Arnold Schwarzenegger not as an overpromising empty suit but as a man. This looks well done--if it holds together. Matthew Garrahan and Krishna Guha report in the world's best newspaper, the Financial Times:

FT.com / In depth - California homes deal to avert defaults: Arnold Schwarzenegger is once again leading US states to action on policy reform ahead of lawmakers on Capitol Hill. The California governor... has now moved to slow the rate of home loan defaults brought on by the collapse in the subprime mortgage market. Mr Schwarzenegger’s deal with four of the state’s biggest mortgage lenders – Countrywide Financial, GMAC, Litton and HomeEq – is “nothing less than jaw-dropping in its ambition and implications.”... Under the scheme, the four lenders will extend for a “sustainable” period their low introductory rates on adjustable subprime loans to homeowners at risk of foreclosure. That would address a serious headache for policymakers – the large number of adjustable-rate home loans taken out at low introductory rates and due to reset at higher rates in the next few years.

Adjustable rate mortgages (ARMs) make up about 30 per cent of all US home loans and are more prevalent in the low-quality subprime market. More than $350bn (£170bn,€236bn) in ARMS will reset to higher rates in the next 18 months. Analysts and ratings agencies alike say these resets will increase the frequency of loan defaults as falling house prices leave borrowers with negative equity and no chance of refinancing. That could hit consumer spending, with knock-on effects on the US and world economies.

Attempts to avert such a scenario by encouraging mortgage lenders and servicers to renegotiate home loans have not gone as far as policymakers would hope. While investors generally agree that in many cases everyone is better off if a loan is restructured rather than going into default, there is great resistance to standardised work-outs based on simple criteria such as type of loan and status of borrower. Many investors feel such standardised solutions will benefit borrowers who can afford to make higher payments, and want to proceed instead on a case-by-case basis, albeit with the aid of standardised systems....

California has not promised any financial or legislative incentives to the lenders, says a spokeswoman for Mr Schwarzenegger. “This is a public-private partnership that does not involve public dollars.” Instead, the agreement is backed by “safety in numbers”. “If only one of these companies was modifying its loans . . . they would lose out to the competition and [house] prices would keep falling. It would be a double whammy,” she said. However, with four mortgage lenders representing 25 per cent of subprime mortgages signing up to the plan, the risk to the lenders has been minimised. The agreement with the lenders will cover only those homeowners “making timely payments”. Beneficiaries will also need to prove they cannot afford a rate rise.


A U.S. Recession Is Now Probable (but Not Yet Inevitable)

A U.S. recession is probable because sentiment now believes that a U.S. recession is probable. Gillian Tett, Jennifer Hughes, and Krishna Guha writing in the world's best newspaper, the Financial Times:

FT.com / World - Investors fear new round of turmoil: Investors fear the financial system is moving into new credit turmoil, which could create further losses for financial institutions – and potentially hurt sentiment in the “real” economy. Credit markets are trading at levels which imply that investors assume that the US is heading for a recession, bank analysts and economists have warned. “Recession is getting priced in,” said Jan Loeys, economist at JPMorgan, adding that markets went into “virtual panic mode” last week. “Pressure is building for central banks to become a lot more active and vocal [this] week if they want to avert a collapse in credit markets.” Swaps spreads rose sharply in UK gilts and US Treasuries, amid a flight to quality and fear of bank defaults. Spreads on high-yield corporate bonds and the yen-dollar exchange rate also leapt dramatically, while liquidity evaporated in many corners of the credit markets.

Peter Sutherland, chairman of both Goldman Sachs International and BP, joined those voicing concern. “The US economy is in a mess,” he told TV3, an Irish TV channel, yesterday. “There is a whole big issue...which has not fully played out in regard to providing credit and liquidity to institutions, so I think it is a dangerous period for the world. I think we are going to go through next year, certainly the first half of next year, with considerable traumas.” Rising market tension prompted the European Central Bank to announce on Friday that it would provide fresh emergency injections of liquidity from this week. In recent days, liquidity has evaporated in parts of the European credit markets, as banks have become nervous about trading with each other. Investors are watching to see whether the US Federal Reserve will also provide additional liquidity into the US system. Analysts speculate that the Fed could extend the scale or duration of long-term open market operations, lower the discount rate at which it lends directly to banks, or even announce more radical steps.

Ben Bernanke, Fed chairman, is also likely to reassure the market that the US central bank recognises the threat to growth posed by the relapse.

One factor undermining investor confidence is that the projected size of this year’s credit shock is now rising rapidly. The US government initially forecast $50bn losses on subprime securities. However, investment banks now expect $200bn-$500bn subprime losses – and additional massive losses in other debt markets, such as credit card loans. Lawrence Summers, former US Treasury secretary, writing in today’s Financial Times, says: “The odds now favour a US recession that slows growth significantly on a global basis.” A second problem is continued deep uncertainty about which institutions hold these losses...


The Glamour of Technology: Subnotebook Department

Gordon's Notes sends us to Charlie Stross, who promptly succumbs to the Glamour of Technology:

Charlie's Diary: Commoditizing our future: I've spouted off previously in this blog about my lamentable poor saving throw versus shiny! — not to mention my irritation at the refusal of the consumer electronics industry to render me bankrupt by actually giving me what I want. Trouble is, at long last they've turned around and done it. I have in my possession an Asus Eee subnotebook... £220... right now there's a certain scarcity value attached, and they haven't yet sunk to their real price, somewhere around thruppence ha'penny. But the process is becoming clear.

Back in 1998, I bought a notebook... Hewlett-Packard... 166MHz processor, 80Mb of RAM, a 4Gb hard disk, an external CDROM drive (reader, not writer), and a docking station... full-whack £1900 that bundle was going for a few months earlier.... Compare with the Eee. On processor and memory... 900MHz and 512Mb respectively. The disk space is the same, except the Eee uses solid state memory rather than a spinning mechanical thingy.... For an extra £80, I bought the Eee 8Gb of additional storage media (an SDHC card), an upgrade to 1Gb of RAM, and an external CD/DVD rewriter....

Moore's Law suggests that every component of a PC halves in price on a roughly 18-month cycle. A desktop PC today should be roughly 100 times as powerful as a desktop PC of similar price 10 years ago.... A naive soul with no prior experience of consumer capitalism might ask why, instead of doubling in power, the manufacturers don't concentrate on cutting prices? But that's not how the industry worked. Until now....

A couple of years ago Nicholas Negroponte of the MIT Media Lab launched the idea of a $100 laptop for education in the developing world. Well, the OLPC XO-1 is now out.... Intel's reaction was the Classmate reference design, their own purported rival to the XO-1; the Asus Eee is what you get when a large far eastern OEM thinks "hang on, can we commoditize this and sell it in bulk?" Microsoft... failed to make it onto the Eee bandwagon because they wanted $40 for a Windows XP license — on a machine that starts at $250 for the stripped-down version. Mine runs Linux perfectly well, thank you, and comes with the basic stuff you need to be productive; OpenOffice, Thunderbird for email, Firefox as a web browser, and some other gadgets (like Skype and a webcam).

The Eee... is close to an order of magnitude cheaper than previous ultra-lightweight subnotebooks. And I think I'm going to use it as a pointer to a future trend.... The Eee is about 8 times as powerful as that 1998 Omnibook, at a quarter the price.... The dirty little fact everybody in the consumer computer trade have been trying to ignore... is that the computer biz is overdue for commoditization. There is no intrinsic reason why a kilogram of plastic and metal with a couple of silicon chips in it should sell for more than its weight in silver.... Apple have staked out a boutique territory for themselves, and more power to them for noticing that they needed to do that in order to survive: but that's a small lifeboat, and not everyone can market themselves on being cooler than everyone else.

The Eee isn't quite the disposable computing resource I've been wanting — they'll have to shave a zero off the price tag for that — but it's close enough for now. It does the basics I need, runs portable cross-platform applications and editing open file formats, and if I leave it on a train or sit on it or something my immediate reaction will be to swear, check my backups, and buy another one, rather than to whimper and go talk to my bank manager...


Hoisted from Comments: Cranky Observer on Corporate Nationality

Apropos of:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: Manufacturing does not add much value any more.

Cranky Observer writes:

That's what people who work in or for New York financial services entities tend to think, anyway. Those of us who still work in US-based manufacturing tend to see things a bit differently. Knowledge comes from doing, not from viewing on a computer screen - and certainly not from viewing financial statements on a computer screen. When that knowledge is gone (or transferred to others) the capabilities follow very shortly. And, I and many others (including many German policy analysts) would argue, the underlying economy some time thereafter.

Seriously - when all the value-adding work is moved to China and India what exactly is the US going to do? England is a cute tourist destination - perhaps we will do the same?

I would suggest reading (1) the history of Hewlett-Packard's calculator division, including the decision to outsell the whole thing to China and what happened when they tried to bring it back in-house (2) Boeing's recent experience and statements with super-outsourcing major structural components of the 787.

ERP Expert


Paul Krugman on George W. Bush and Mark Halperin Sitting in a Tree, K-I-S-S-I-N-G

Paul Krugman writes:

On coming across: Why I’m not a proper political journalist:: In his op-ed today, Mark Halperin describes George W. Bush during the 2000 campaign as follows:

He came across as a man of principle who did not lust for the White House; he was surrounded by disciplined loyalists who created a cheerful cult of personality about their candidate.

Meanwhile, I didn’t do the up-close-and-personal stuff; I looked at what he actually said about policy. And from my point of view he “came across” as someone who lied, systematically and consistently, about taxes and Social Security. I did notice the cult of personality — but it scared me:

This suggests a terrible prospect. Soon we may have a president who lost the popular vote, who won the electoral vote only after bitter controversy, who needs to act with unprecedented humility and discretion to avoid ripping the country apart. But he will have surrounded himself with obsequious courtiers.

But you see, I’m just a shrill Bush-basher; we should leave judgments about character up to the professionals who thought Bush was a bluff, honest guy you’d like to have a beer with.

Ph'nglui Mglw'nafh Krugman R'lyeh Wagn'nagl Fhtagn!! Krugman Fhtagn!! KRUGMAN FHTAGN!!!!


One thing worthy of note. Carlyle Group CEO David Rubenstein's reaction to George W. Bush:

David Rubenstein: you know if you said to me, name 25 million people who would maybe be President of the United States, he wouldn't have been in that category...

That was the reaction of everybody not on Bush's payroll who has met Bush I have talked to--everybody except our elite Beltway press, that is.