You are currently browsing the monthly archive for April 2009.
- The music of H1N1
- Justice Souter retiring?
- Hobbits.
- DOJ investigating Google Books settlement.
First of all, in case there is any misconception, trading in pork bellies really means trading in the bellies, and only the bellies, of pigs. Bacon (Sandeep’s vegetarian-exception) is cut from pork bellies. Pork bellies futures, like all futures contracts, are agreements on delivery, at some pre-specified date in the future, of freshly-butchered pork bellies. They have been traded for decades on the Chicago Mercantile Exchange. Futures contracts are generally used to manage risk from volatile prices by securing in advance a price for future delivery at some premium.
Now, the question. Why pork bellies futures? Are pork bellies prices so volatile? Surely they cannot be more volatile that than the rest of the pig’s parts since supply must move together. More volatile than other meat products? Since we can always just count the number of pigs alive today we can get a good forecast of the supply of butchered pigs in the future so any volatility must be explained by demand fluctuations. But what is so volatile about the demand for bacon? I can’t imagine it is any more volatile than the demand, say for sushi-grade tuna. But there are no tuna futures as far as I can tell. This is a genuine mystery. Please share your pork belly knowledge in the comments section.
(dinner conversation with Dilip, Tomek, Stephen and Sylvain acknowledged.)
For a long time in the US, processed foods have featured high-fructose corn syrup as a sweetener rather than cane or beet sugar. This is largely because of subsidies for domestically produced corn and tariffs on imported sugar. There now seems to be a backlash developing against HFCS and in favor of “natural” sugar (HFCS is processed by converting the glucose in corn syrup into fructose.) This Slate article takes a critical look at the case against HFCS and clarifies a few misconceptions. For one, while fructose is probably worse for you than glucose, HCFS has no more fructose than, for example, table sugar. Also, there is mixed evidence whether there is any difference in taste.
In a street survey conducted by the Toronto Star, most passers-by preferred regular Coke to the Passover version; several folks described the latter as tasting like aspartame. A similar confusion beset the Snapple testers at Fast Company: One described the HFCS version as tasting “more natural” while another dismissed the all-natural version for its “chemical taste.
Here is the ad for Pepsi Throwback with “natural sugar.” What model of consumer behavior rationalizes introducing a limited-time product that raises questions about the main product line?
Jeff already wrote an interesting blog about Specter switching parties. Specter seems to have switched because he stands a better chance winning in re-election as a Democrat than a Republican, Jeff’s point 4. The Democrats seem ecstatic and I’m trying to deduce why this is the case.
If Specter had not been accepted into the Democratic fold, he would have lost in the Republican primary. The Republican candidate, presumably someone very right wing, would then face a Democratic challenger. This Democrat would be someone other than Specter as Specter would have tried to run as a Republican. Maybe Specter would run as an Independent in this scenario – though I’m not sure if Pennsylvania allows this. If the Democrats think that having Specter run as a Democrat means a higher probability of a Democratic win than this messy scenario, I can see some rationale for their happiness.
Their payoff is affected by the quality of Specter as a Democrat as well as his probability of winning. Specter was pretty independent as a Republican and, for example, voted for the stimulus bill. So, he is a net gain to the Democrats if he is more likely to vote Democrat than Republican with a “D” label attached to him rather than a “R”. But he has just shown his lack of loyalty to party by switching sides and was always independent anyway. His move is very much a rational move made by a calculating politician. Hence, I believe he is only of use till he is re-elected (or not) in 2010. Obama has promised to campaign with him and help him raise money. This is useful till 2010. After that, Specter will go his own way. Obama has to get as much Specter-friendly legislation as possible passed in the next two years. I’m not sure where Specter stands on healthcare reform. He had cancer and is emotional about health issues. Maybe this is a point of common value.
The chef Bobby Flay is ubiquitous on the Food Network. I usually see him in two shows, Iron Chef America and Throwdown with Bobby Flay. Both are competitive shows. Flay usually loses on Throwdown and wins on Iron Chef.
On Throwdown, Bobby Flay makes one dish and competes with an expert . For example, recently there was a show where he made a deep dish pizza against Chicago native Lou Malnati. The two dishes are judged by two experts side by side with a partisan local audience watching. Flay lost.
On Iron Chef America, the format is different. There is a secret ingredient (though I bet both contestants have a fair idea of what it will be!). In this format, Flay and his fellow Iron Chefs are matched against a gourmet chef. Last week the secret ingredient was butter. The entrant was Koren Grieveson of avec in Chicago. Koren picked Cat Cora to compete against. And the competition was tied. As I said, this is a rare event in Iron Chef because the incumbent usually wins. Why?
I think it’s all in the judging. On Iron Chef, the chefs get to present their dishes to the judges so there is no anonymity. On Throwdown, they do not identify who cooked which dish.
I wish they would adopt the same format for Iron Chef. The judges are biased towards the incumbent. For example, while Cat Cora’s food looked good, she won more points in the category of “originality”. One of her dishes was bread and butter, another was gnocchi in a butter sage sauce. These are original only if one adopts an ironic definition of the word “original”. But then everything is original and the category makes no sense! Frankly, I went to avec last night and I just find it hard to believe Cat Cora’s food is better. Maybe I am expressing the bias manifested on Throwdown: the bias of the local audience towards the local contestant. This can also be fixed by making the judges judge in a different room. Similarly, on Iron Chef, a third party, say Alton Brown, could present the dishes. If the judges have questions, the show can set up speakers in a separate room where the chef is standing nervously. S/he can answer the questions into an earpiece worn by Alton Brown. He can relay the answers to the judges. This can be done in a theatrical way to add more drama and tension.
A basketball game where one team is vastly superior to the other is boring to watch. By leveling the playing field, Food Network can add more uncertainty to the competition and get more viewers.
Writing and studying for an exam is a game played between Professor and student. In this game the Professor has to pick which questions to ask and the student has to pick which topics to study. The game has the flavor of rock-scissors-paper in that the Professor would like to be unpredictable. That way the students will have to devote studying time to all topics rather than focus on just one that they know the Professor will ask about.
But the Professor might not want the students to spend too much time memorizing concepts from the book. Instead he may want them to spend their time thinking about how to apply those concepts to new problems. How can the Professor be unpredictable and still deter the students from trying to memorize the book? The solution is to use an open book exam. This way the Professor is committing not to ask rote questions which would turn the exam into nothing more than a contest to see which students are the fastest to search through the book and find the topic.
With an open-book exam, the students can predict that the Professor will not ask such questions and they will not bother studying for them. They bring their books to the exam and never have to open them. And they still cannot predict which questions (apart from the mundane ones) the Professor will ask.
Keep in mind that this means students should dislike open-book exams. Many students don’t understand this and are always asking for open-book.
Also, the worst possible format is the common practice of allowing students to write out crib notes on one sheet of paper. This turns studying into pure rent-seeking. All students will predict which are the essential concepts from the book and will write them down and, predicting this, the Professor will not ask questions about those topics. In the end the outcome is just like open-book except the poor students lose valuable studying time while they squeeze the book onto a sheet of paper.
(To my PhD students and undergrads taking exams today: aren’t you glad the exams are closed book? Oh and good luck!)
“Even when used as an expletive, the F-word’s power to insult and offend derives from its sexual meaning,” Scalia said.
No, it derives from the fact that they can’t say it on television. Thank you Justice Scalia for preserving its power and reserving it for the little guy.
From a bargaining point of view, the move reveals that the majority values reaching 60 more than the minority values preventing it. But this is a puzzle. Why is it not zero sum? A few reasons, some generic, some specific to this situation.
- In fact, other things equal, the minority should be able to muster more goodies because, due to the smaller numbers, each senator internalizes more of the cost of losing the fillibuster. So there is even more of a puzzle.
- But the majority controls committee chairmanships which is a more efficient way to transfer value as opposed to bill-by-bill sweeteners.
- In the current climate the cost of losing the fillibuster is lower than usual because Republicans are lacking leadership and are generally adrift. Their best chance to rise again is to give Democrats enough rope to hang themselves.
- As pointed out by Tyler Cowen, Specter already had some private motivation to switch. He is among the most liberal of Republicans and his prospects for re-election are better as a Democrat than as a Republican given that he nearly lost the Republican Primary in 2004.
I previously speculated on what it means when you don’t like your friends’ friends. Now to take it one step further, what does it mean when you belong to a Twitter cycle? Unlike facebook and other social-networking sites, Twitter is a directed graph: you follow your friends but they don’t have to follow you. A cycle is a chain of Twitters that loops back on itself: i.e. 1 follows 2, 2 follows 3,…,n-1 follows n, n follows 1.
What does it say about you and your friends if you follow Jane, who doesn’t folow you but instead follows her friend Jack, who doesnt follow Jane but instead follows you?
Anyone belong to a Twitter cycle? What is the largest Twitter cycle?
If we start with an arbitrary Twitter user and “move up” the graph from followers to leaders (follow-ees?) we must eventually either hit a cycle or a single user who sits on top of his domain. Who are these people?
What do you get when you combine GPS and GSR (Galvanic Skin Response: a measure of emotional arousal) and an artist‘s inspiration? You get emotional maps, that’s what. Think of a topographical map where the vertical dimension at a location measures the emotional excitement of the people passing through there. Here’s San Francisco. Here’s more information. (via MindHacks)
Representatives of Taiwan’s semiofficial Straits Exchange Foundation and its Chinese counterpart, the Association for Relations Across the Taiwan Straits, or ARATS, reached the agreements on Sunday in the third round of formal negotiations since Ma Ying-jeou became Taiwan’s president in May 2008, elected on a pledge to improve the island’s flagging economy through better relations with China.
It is looking more and more likely that China and Taiwan will soon realize de facto (if not formal) re-unification. And the irony is that the driving force stems from China’s markets softening Taiwan’s political opposition. Wasn’t it supposed to be the other way around? Read the article from the Wall Street Journal.
Psychologists, and especially magicians, know that a lot escapes our attention, even things happening right under our noses. The most impressive example I have seen of this comes out of an experiment in which unwitting subjects are asked for directions by a stranger. In the middle of giving the directions, an obstruction briefly allows the stranger to swap places with another stranger. When the new stranger comes back into view the subject doesn’t notice that he is talking to someone completely different.
Its not just that we don’t notice. Instead, our minds often prefer to explain away the unexpected rather than investigate. A new series of experiments show just how far this can go and they raise deep questions about how we make decisions. In these experiments, subjects were shown photos of two strangers and asked to pick the more attractive photo. Then they were handed the photo they chose and asked to explain why they picked it. But by a sleight-of-hand, the subjects were actually handed the other photo, the one they deemed less attractive.
Not noticing the switcheroo, these subjects went on to point to the photo and give detailed reasons why they prefer the one that they in fact did not prefer.
Here is an article from the New Scientist about this and related experiments. (thanks to Toomas Hinnosaar for the pointer.)
Here is a video of the swapped stranger experiment.
There has been a resurgence of suicide bombings in Iraq. Why, when we’re going to leave?
This is the first shot in a potential civil war between Shiites and Sunnis. Al Qaeda in Mesopotamia is Sunni and the suicide attacks, which are their hallmark, are aimed at Shiites. Al Qaeda is hoping to provoke a crackdown on the Sunnis by the Shiites. This, they hope, radicalizes the Sunni population which then joins them in the civil war.
But there is a bigger picture. Al Qaeda wants the US to stay in Iraq, not leave. They hope to drag America in and get the population to see Americans as the common enemy. War with America is a bigger aim than civil war in Iraq. Unfortunately, if Al Qaeda in Iraq is powerful then it might be in best interests of the US to stay in. A civil war in Iraq would draw in Iran and then who knows what happens in the region further along.
I listen to Pandora most of the time I am in my office. Pandora is a free internet radio that personalizes musical selections based on feedback you give it. For example, you can specify a song by an artist and it will find other songs that have similar qualities. I thought it would be fun to listen for a little bit and write down my thoughts about the music that Pandora suggests.
I recently discovered (on Pandora!) the music of Patrick Moraz and Bill Bruford, a drum and piano duo that plays something between jazz and prog-rock. I decided to use them as my starting point. Here is what I heard: (you can listen to the same “station” by using this link. the tune selection is not deterministic so you will hear different music than i did, but in my experience it won’t take long before there is duplication.)
Omjhonz by Satoko Fujii and Tatsuya Yoshida.
this is my kind of music. improvising the form and not just within the form. its hard to coordinate this with more than two musicians. given my choice of two, i go for piano and drums. it works here because the pianist leans toward classical rather than “free jazz” which in settings like this usually skates off into dissonance. I am thinking Cecil Taylor here.
Bekei by Dewey Redman/Cecil Taylor/Elvin Jones
Speak of the devil! But this one was just a drum solo by Elvin Jones. A nice one, typical Elvin Jones, but still just a drum solo. Never knew these three played together. Have to bookmark this album for later Pandora fun.
Windy Mountain by Charles Lloyd and Billy Higgins
Duet of sax and drums. More grounded in Jazz than any of the previous. Charles Lloyd is good at this. His work with Zakir Hussain is very similar. Here Billy Higgins is playing very standard jazz rhythms. A bass would fit in here.
The Drum Also Waltzes. Patrick Moraz and Bill Buford.
Another drum solo. Short. I like it better than the Elvin Jones.
Double Image. Joe Zawinul.
Whoa, how did this get here? This is essentially Miles Davis’ Bitches Brew carried on through Zawinul, Wayne Shorter and Miroslav Vitous who also went on to form Weather Report. I like this much better than Weather Report. Wait, Herbie Hancock too? And I love the Vitous bowing on this tune. Cool, but hard to see how it fits with the theme here. Wondering about Pandora.
Ran Blake “Thursday”
Never heard of Ran Blake. Looking at the above link I see I am probably not alone. But this is nice. Solo piano. A little Monk, a little Chick Corea. And although that sounds like a recipe for disaster, it works for me.
Bottom line: no keepers on this round. I like Ran Blake, but its generic enough that I don’t imagine ever having a real craving for it. I was glad to learn that Zawinul had some outings between Miles Davis and Weather Report. The Japanese duo were the most interesting. I will check them out again. (on Pandora!)
“As if there wasn’t enough to worry about already.” It seems that every day there is something new to worry about. And some big ones have come along in recent days. When the really big new worries hit, its important to remember that to some extent at least, worries are substitutes. Big worries imply that small worries matter less and so they offer the small consolation of dispensing with those. And while the consolation is small, we should take what we can get when the worries are big.
So think through all of the little worries that have been hanging around enjoy the feeling of letting them go.
More and more economists are disavowing the conventional view that patents are essential for providing incentives to innovate. A radical proposal is to eliminate patents for pharmaceuticals and to promote research and development through government funding rather than the promise of monopoly. This article by Dean Baker (via The Browser) discusses the variety of lobbying and rent-seeking strategies pharaceutical companies use to secure and maintain monopolies. Economic theory suggests that all of the value that monopoly offers may be dissapated wastefully through rent-seeking, undermining much of the benefits of patents. Baker argues that once we recognize that the patent system is just one of many potential second-best solutions, government funding of research and elimination of monopoly is not necessarily any less efficient.
Public funding obviously involves the government in the research process, but demand for medical care is already determined in large part through the political process. The vast majority of health care costs are paid by third parties, either insurance companies or the government; costs are not distributed according to individuals’ willingness to pay. If the government and insurance companies cannot be forced to pay for a drug, the industry will not develop it. Since politics inevitably decide which drugs are developed, government and insurance companies should determine whether they will pay for a drug before it is developed.
After my Cafe Milano post yesterday, I got some great comments that took me north of the Berkeley campus. (First, I stopped at Peet’s on Telegraph so I had the requisite amount of caffeine to be able to walk from the south of campus to the north.)
One comment suggested Nefeli Caffe. Comment 7/33 on yelp offered up the blandishment of seeing sexy Europeans sipping coffee after a hard night of posing. I was not sure I would fit in but thought I would enjoy it anyway. In typical European fashion, Nefeli was closed. Europeans don’t like getting up too early on a Saturday, or speaking for myself as a pseudo-European, any other day. Brewed Awakenings, on the other hand, seems to be run by hard-working Middle Eastern immigrants and is open. It has free wifi. Quiet classical music in the background. Very few people. Good coffee and good almond croissant. And a great place to hang out and BS. Ideal for research I would say. This is my first stop on future visits to Berkeley. Ariel Rubinstein and Shachar Kariv have great taste.
Surly staff, gives you that NYC feel. Good cappuccino. Slightly bitter aftertaste. Decent croissant. Classical radio in the background. Free wifi. Not too loud (at 8 am!) so it is possible to work/blog.
Fairly generic but I would come back.
It’s on Bancroft and Telegraph.
Female orgasm eludes evolutionary explanation. Most candidate explanations have a hard time reconciling the observation that a large fraction of women do not have orgasm during intercourse and among those that do it is not a consistent occurrence. Here is a fun paper surveying a variety of just-so stories that “explain” female orgasm. The authors dispense with
- Its a non-adaptive vestige of male orgasm.
- It encourages females to have more sex. (then why not always?)
- It encourages females to have sex with multiple partners (thus the asymmetry in “arrival times” between males and females.)
- It improves chances of fertilization. (empirically false)
and they leave us with an intriguing, relatively new one, the Evaluation Hypothesis.
When Barash was a graduate student more than ten years earlier, he observed that when subordinate male grizzly bears copulate, their heads are constantly swiveling about on the lookout for a dominant male, who, should he encounter a couple in flagrante, will likely dislodge his lesser rival and take its place. Not surprisingly, subordinate males ejaculate very quickly, whereas dominants take their time. If female grizzly bears were to experience orgasm, with which partner would you expect it to be more likely? And is it surprising that premature ejaculation is a common problem of young, inexperienced men lacking in status and self-confidence? Moreover, is it surprising that women paired with such men are unlikely to be orgasmic?
So it doesn’t encourage more sex uniformly, it encourages more sex with the right mate. And it is inconsistent and slow to arrive, not by accident, as in the vestigal hypothesis, but by design. And the sorting of men according to, let’s call it patience, seems to be a stable equilibrium as it requires either an exogenous characteristic correlated with “good genes” as in the case of dominant grizzlies, or perhaps in its social incarnation where it requires
sufficient access to resources to orchestrate interactions that are private, safe, and gratifying—in a word, romantic—and thus appealing to women’s evolved evaluation mechanisms.
From the book How Women Got Their Curves and Other Just-So Stories: Evolutionary Enigmas by David Barash and Judith Lipton. (Cloche Click: Bookslut.)
In that state of mind, San Francisco is an easy, friendly city to live in. There’s no traffic and you get over the Bay Bridge very quickly on your way to Berkeley. There’s no ten car crash you drive past on your way from the airport. Your cab driver does not listen to his Ipod while driving and concentrates on the road. And you switch on the T.V. in your hotel just in time to see the Chicago Bulls beat the Celtics.
Unfortunately, that is all a state of mind.
The NBA will not draft players who are under 19 or who are not at least one year past high school graduation. Most players opt for at least one year of NCAA basketball where they are unpaid and (at least nominally) full-time students. The first step toward the unraveling of this system has occurred as Jeremy Tyler has left San Diego High School and will skip his senior year to play professional basketball in Europe. After two years he will be eligible for the NBA draft at which point he is a likely number 1 pick.
“It’s significant because it shows the curiosity for the American player just refusing to accept what he’s told he has to do,” Vaccaro said. “We’re getting closer to the European reality of a professional at a young age. Basically, Jeremy Tyler is saying, ‘Why do I have to go to high school?’ ”
William J. Fell, the parking meter repairman in Alexandria VA, skimmed $170,000 worth of coins from parking meters over the course of one year.
The 61-year-old city employee did it, police say, by going to work at 3 a.m., well before his shift started. He would jump in his city truck and, under the cover of darkness, empty into bags the contents of coin canisters from parking meters all over Old Town, according to court documents.
Done carefully, taking a constant percentage, this would be hard to detect based purely on tracking total revenue. However, at some point the city raised the parking rate to $1 per hour. How do you adjust your skimming rate to avoid detection?
Last year, the city took in just over $1 million in revenue from its 1,040 parking meters, officials said. But they realized something was amiss. They had raised the rates to $1 an hour but weren’t getting as much money as they expected.
Oops. If Mr. Fell thinks that the city knows the correct elasticity of demand, then he should keep the same skim rate as before. That way the city sees exactly the percentage change in revenue they were expecting. Apparently Mr. Fell thought that the city had overestimated demand elasticity and therefore was expecting a smaller increase in revenue than they were actually getting so he raised his skim rate to compensate.
Of course, alternative explanation is that Mr. Fell is not motivated by standard economic incentives:
That much money in quarters, dimes and nickels would weigh at least four tons. If it was all in nickels, it would weigh nearly 19 tons.
Police were perplexed after they subpoenaed Fell’s bank accounts but did not see any of the money there. That was when they decided that it might be in his home and executed a search warrant April 15 — tax day.
Police say Fell, who lives alone, did not appear to use the money for anything specific and mostly just kept it in his home.
According to a recent study, those who illegally download music are also significantly more likely to purchase music online legally via services such as iTunes. It follows that the record labels should fight even harder to stop pirated music. Explain.
I’m always hoping that Rogers Park yields some benefits so I don’t have to shlep downtown from Evanston for a good meal and a drink. Somehow managed to hear about Morseland. They can’t quite decide what they are – a bar, a restaurant or a club. It still seems to work. Couple of guys were playing pool, a few were watching a NBA playoff game at the bar. Eclectic mix of people eating. The types who spend hours making sure the goatee is just right but not much time at work. (What I aspire to be?)
Food was good and the beer list was great. Definitely going here again. Maybe, I’ll check out the music. Wish it was open for lunch.
I see 
this:
This proves it is over a urinal:
I wonder if this is the wave of the future. You can Tivo through the commercials on TV. You’re pretty trapped when you’re peeing whether you are a man or a woman. Someone is going to come up with paid ads to put in these places, you mark my words.
Anyway, at Kellogg, this form of advertising is mainly used for lectures and parties. As urinals provide such a convenient location I was wondering if and how my talk was being advertised in the women’s restrooms. Having left my dress and wig at home, I recruited a surprised female helper. She guarded the door while I went into one restroom. As I suspected, my talk as not advertised near the wash basins. My helper told me to look in the stall. She was right – there was a p0ster but it was this one:
I was advertised in another restroom though. I chickened out and my female helper (she wants to be anonymous but her name begins with P), went in and saw some posters.
With this sample of advertising, I believed that norming for Kellogg student intake, there would be more men than women at my talk. Also, P said she thought there were fewer women’s restrooms than men’s. P said I should take a photo at the talk too, too verify my hypothesis. I was too nervous and I forgot. My memory is that my simple theory was right.
By the time students here wield their scalpels, they will know the dead intimately, composing poems and slide shows to them, writing their biographies and sometimes lighting incense in their honor. When they are finished, the students will carry the donors’ coffins to the crematory, mourning them as their “silent mentors” who taught them with their bodies.
Read about how a Buddhist nun in Taiwan has used religious teachings to change a long-standing aversion to cadaver donation. Maybe ideas like this can be used to promote organ donation by the living.
The Baseline Scenario has a nice overview of the political issues around the estate tax. The estate tax, politely referred to as The Death Tax, is motivated both by principles of fairness and principles of economics. The fairness motivation is obvious. And death seems like a focal moment for redistributing wealth.
The economic motivation also points toward the moment of death as a natural timing for taxation. The economic cost of taxation is the distortion of freely made choices that it induces. Sales taxes reduce the gains from trade, income taxes reduce the incentive to work, etc. On the other hand, activities and resources that are in fixed supply can be taxed without distortion. Well, death is in fixed supply, we all get exactly one. And while the timing can be controlled to some extent, the effect of income after death on its timing is surely second-order.
However, economic arguments against estate taxation point out that it distorts behavior before death increasing consumption over investment. The estate tax translates into a tax on investment because, in the event of death, a fraction of the payoff will be confiscated. Provided that a bequest is a normal good, this reduces investment.
There is a simple way to amend the estate tax to undo this distortion and increase tax revenue. The government can offer a tax shelter in the form of a life-insurance policy where the household pays c in cash to the government in return for shielding a fraction q of wealth from estate taxation. The effect is to capture some of what would have been extra expenditure on consumption in the form of a direct transfer to the government, and compensate the estate by reducing taxes after death.
Phillip Swagel was the Assistant Secretary for Economic Policy at the Treasury from December 2006 to January 2009, the peak of the financial crisis. He has written a post-mortem of Treasury’s anticipation of, and response to, the financial crisis. This includes the decision to support the buyout of Bear Stearns, to allow Lehman Brothers to fail, to bail out AIG (the very next day) and the proposal and later abandonmnet of the use of TARP funds to buy toxic assets.
This is absolutely essential reading. Swagel has been very thorough and very honest. Here are the highlights of this 52 page retrospective. (Helmet Hoist: the Baseline Scenario.)
Anticipation of the Crisis Henry Paulson was organizing economists at the Treasury to prepare for stress to the financial system as early as Summer 2006 when he was appointed Treasury Secretary.
Secretary Paulson also talked regularly about the need for financial institutions to prepare for an end to abnormally loose financial conditions.
They recognized that recent financial innovation and increased international integration would pose novel challenges if there were a shock to the system. Nevertheless, Swagel acknowledges that they significantly underestimated the threat of the housing downturn as a potential shock. Here is an eye-opener.
What we missed was that the regressions did not use information on the quality of the underwriting of subprime mortgages in 2005, 2006, and 2007. This was something pointed out by staff from the Federal Deposit Insurance Corporation (FDIC), who had already (correctly) pointed out that the situation in housing was bad and getting worse and would have important implications for the banking system and the broader economy.
Initial Reactions to the Developing Crisis The first two major policy proposals emerged in August 2007. One was focused on increasing transparency of the quality of mortgages underlying asset-backed securities.
The paradox was that this database did not exist already—that investors in mortgage-backed securities had not demanded the information from the beginning.
The second was an early incarnation of what was eventually TARP. The MLEC was a kind of “bad bank” intended to hold toxic assets off bank balance-sheets while the market adjusted and re-priced them. This was the earliest expression of the Treasury stance that the assets are underpriced by the market and what was needed was patience for the turmoil in the markets to cool down. The banks didn’t go for it:
While banks dealt with the problem on their own, the MLEC episode looked to the world and to many within Treasury like a basketball player going up in the air to pass without an open teammate in mind—a rough and awkward situation.
Neither of these plans “came to fruition.” In the case of MLEC, the reason is implicit in the above quote, but Swagel is silent on what happened to the database idea.
Addressing the Housing Crisis Directly There is a long discussion in the article about various policies to intervene directly in the housing market. The general theme here is that Treasury, and especially White House Staff, were resistant to any policy that would appear to help out “irresponsible homeowners.” While Congress enacted some policies aimed at mortgage modifications, the White House would not go farther than removing red tape to streamline the modification process for mortgage servicers. The effects of all of these policies were limited:
As a practical matter, servicers told us that considerations of moral hazard meant that they did not write down principal on a loan when the borrower had the resources to pay—never. They would rather take the loss in foreclosure when an underwater borrower walked away than have to take multiple losses when entire neighborhoods of homeowners asked for similar write downs of loan principal.
(By the way, a game theorist would call this “reputation effects” rather than moral hazard, but that’s beside the point…)
Bear Stearns, Lehman, AIG There is not much explanation for why the Fed decided to make loans to JPMorgan to help them buy out Bear Stearns. Essentially, Swagel is saying they were caught off-guard, saw serious problems with a Bear-Stearns failure, and had to act quickly.
At Treasury, two additional lessons were learned: (1) we had better get to work on plans in case things got worse, and (2) many people in Washington, DC did not understand the implications of non-recourse lending from the Fed. This latter lesson was somewhat fortuitous, in that it took some time before the political class realized that the Fed had not just lent JP Morgan money to buy Bear Stearns, but in effect now owned the downside of a portfolio of $29 billion of possibly dodgy assets.
Why did they bail out AIG but not Lehman?
In sum, AIG was larger, more interconnected, and more “consumer facing” than Lehman. There was little time to prepare for anything but pumping in money—and at the time only the Fed had the ability to do so for AIG. Eventually the AIG deal was restructured with TARP funds being used to replace Fed lending in order to give AIG a more sustainable capital structure and avoid a rating agency downgrade that would have triggered collateral calls.
But there are regrets.
As time went on, it became clear that AIG was a black hole for taxpayer money and perhaps a retrospective analysis will demonstrate that the cost-benefit analysis of the action to save AIG came out on the other side. But this was not apparent at the time.
Fannie and Freddie Interestingly, the debate about whether to take ownership of the GSEs centered not around moral hazard, but whether making explicit the already implicit government guarantees of their debt would threaten to downgrade Treasuries.
putting the GSEs into conservatorship raised questions about whether their $5 trillion in liabilities would be added to the public balance sheet. This did not seem to Treasury economists to be a meaningful issue, since the liabilities had always been implicitly on the US government balance sheet—and in any case were matched by about the same amount of assets. But the prospect that rating agencies might downgrade U.S. sovereign debt was unappealing.
TARP and its Abandoment The econ-blogosphere’s favorite topic. What was Treasury’s rationale for proposing to use reverse auctions to buy “toxic assets.” Swagel vociferously denies that the intention was to inject capital by overpaying for assets. Instead, they had a multiple-equilibrium view. Committing to buy enough of the assets would restore confidence in their value and would unstick the markets. But he has a difficult time explaining this without it sounding like overpaying for assets.
if Treasury were to get the asset prices exactly right in the reverse auctions, those prices will be higher than the prices that would have obtained before the program was announced. That difference means that by paying the correct price, Treasury would be injecting capital relative to the situation ex-ante. And the taxpayer could still see gains—say if the announcement and enactment of the TARP removes some uncertainty about the economy and asset performance, but not all. Then prices could rise further over time. But the main point is that it is not necessary to overpay to add capital.
Surprisingly, Swagel says that Treasury had reverse auctions “ready to go” in October 2008. Why were they never started?
A concern of many at Treasury was that the reverse auctions would indicate prices for MBS that were so low they would make other companies appear to be insolvent if their balance sheets were revalued to the auction results.
Swagel suggests that their auction consultants (Ausubel and Cramton) had a way to deal with this but,
to some at Treasury the whole auction setup looked like a big science project.
Parting Shot He concludes with the following.
An honest appraisal is that the Treasury in 2007 and 2008 took important and difficult steps to stabilize the financial system but did not succeed in explaining them to a skeptical public. An alternative approach to this challenging necessity is to use populist rhetoric and symbolic actions to create the political space under which the implicit subsidies involved in resolving the uncertainty of legacy assets can be undertaken. It remains to be seen whether this approach will be successful in 2009.
There is a great article in the New Yorker (via The Browser) about drugs that sharpen mental facilities and the generation of over-achievers they are creating. It is definitely worth reading the whole article but here are some choice passages.
In 2003, a doctor gave him a diagnosis of A.D.H.D., and he began taking Adderall. Within six months, he had won $1.6 million at poker events—far more than he’d won in the previous four years. Adderall not only helped him concentrate; it also helped him resist the impulse to keep playing losing hands out of boredom. In 2004, Phillips asked his doctor to give him a prescription for Provigil, which he added to his Adderall regimen. He took between two hundred and three hundred milligrams of Provigil a day, which, he felt, helped him settle into an even more serene and objective state of mindfulness; as he put it, he felt “less like a participant than an observer—and a very effective one.” Though Phillips sees neuroenhancers as essentially steroids for the brain, they haven’t yet been banned from poker competitions.
Somehow I doubt that this kind of performance enhancer will be viewed with the same scorn as steroids. Perhaps this is because poker players are not placed on the same pedestal as, say, baseball players. Anyway, eventually the guy got bored of poker and moved on to Scrabble, which he also gave up but only after memorizing every 5-letter word in the dictionary.
The article also touches on the distinction between creativity, which some take to require passive concentration, and the kind of focused, active thinking that these drugs facilitate.
Jimi Hendrix reported that the inspiration for “Purple Haze” came to him in a dream; the chemist Friedrich August Kekule claimed that he discovered the ring structure of benzene during a reverie in which he saw the image of a snake biting its tail. Farah told me, “Cognitive psychologists have found that there is a trade-off between attentional focus and creativity. And there is some evidence that suggests that individuals who are better able to focus on one thing and filter out distractions tend to be less creative.”
Many of thee users interviewed for the article seemed to understand this distinction and integrated the drug use into their workflow accordingly. First they would develop the main idea without the drug, then they would use the drug when it was time to do the focused work of developing the idea into a finished product. They learned to do this the hard way:
“The number of times I’ve taken Adderall late at night and decided that, rather than starting my paper, hey, I’ll organize my entire music library! I’ve seen people obsessively cleaning their rooms on it.”
This video would be identical if played backwards. That by itself is not so impressive (just make a video and play it first forwards and then backwards) but the way it was done here is clever and funny (via BoingBoing.)
