Tuesday, August 25, 2009

I knew it!

This just in from the Sydney Morning Herald:
SYDNEY commuters are paying the second-highest public transport fares in the world.
It is nice to have a gut instinct confirmed without having to do any of the research myself. The comparisons appear to be made on a metric that Sydney transport actually does reasonably well at too: the cost of one 10K ride.

There are two really big problems that I see with Sydney pricing schedules that this doesn't capture: (1) there are no free transfers and the system is on a hub-and-spoke, for the most part, so unless you want to go to the CBD (which is a pretty boring place!) you get to pay the full fare all over again, as well as spending lots of time to-ing and fro-ing and waiting for your second or third ride; (2) fees rise quickly as you go further. Sydney is a sprawling city. I live in one of the closest residential 'hoods to downtown, and yet, that is 3 bus zones away from where I can catch a bus/ferry to other parts of the city. Now, I cheat (too much of the system is on-your-honor!) and use a 2 zone pass most of the time. I plan on using my thickest Southern drawl if I ever get caught. But to purchase a ticket that will legally allow me travel that third zone (an extra couple of stops!) is almost twice the cost.

Furthermore, in general, the system isn't particularly well integrated. While it is possible to buy an unlimited card that can be used on all modes of public transport, there are no other cross-transport options. Unlimited is great if you are a heavy user, but since I walk almost everywhere I go, I would do better buying multiple ride tickets -- which I do for the bus and the ferry (separately). But I can't buy a multiple ride train ticket, and I can't buy a multiple ride ticket that doesn't care about the mode. So I have to carry lots of paper tickets (easy to lose in a large purse!) and I have to spend a lot on the expensive single ride tickets to take the train anywhere.

Now that is all complaining about me, but it does mean that Sydney makes it harder for two important classes of people to use public transport: those who would use it regularly but not as intensively as a daily commuter and poor people who live far away from the center. So the pricing is regressive, when it should be progressive, and it makes the trade-off between using a car versus public transport less obviously in favor of public transport.

I expect that this is one of those situations where if the city were smart about pricing, mostly lowering the marginal costs, and maybe adding some non-spoke routes, usage would increase dramatically, and congestion on the roads would ease some. All good reason to stop spending government money on roads and spending it on transport instead! (Of course, Sydney is currently doing the opposite--when will people learn that increasing road capacity almost never reduces congestion???)

Saturday, August 15, 2009

Fun with death statistics

Two somewhat related points about thinking about death rates. One fun, one slightly more serious.

1. I was in the chiropractor's waiting room today, reading some health magazine. They had an article about various habits that are potentially lethal: smoking, drinking, obesity, driving, sex, etc. I'm sorry I forget which blurb had this little gem, but they were talking about some risk group (obese people? heavy drinkers? But definitely not an age group) : "Group X is 44% more likely to die by any cause than Group Y." So watch out fat/drinking/whatever people: you have a 144% chance of dying some day!!!!

2. Did a silly and wandered over to Megan McArdle's page and read her most recent piece on healthcare. I've been following her writings via John Halbo's rebuttals at Crooked Timber and guess I thought I might see what comes from the horse's mouth. As far as I can figure, her argument is that national healthcare will kill all medical innovation, so by covering the uninsured today, we are killing untold millions into the future by preventing the discovery of whatever medicine or technique would have saved their lives had we only seen the light and not reformed the US healthcare system. Her evidence was that:
If the innovation spurred by the private sector could save 1% of the people who currently die each year, the number of people we'd be killing along with the private sector would necessarily be hugely larger than the number of people we'd save by implementing such insurance, since the most grotesquely exaggerated estimates released by interest groups pin the latter figure at around 0.8% of deaths in America (a much smaller number than the number who are estimated to be killed by access to the system--nosocomial infections and treatment side effects). That's even before you consider the people in other countries who would be saved by these advances.
But there are all sorts of logical mistakes contained in this argument. Starting with that 0.8% figure: according to National Coalition on Health Care (yes, one of those interest groups), in 22,000 "excess deaths" can be attributable to lack of insurance in the 25-64 age group. If one takes the CDC's estimates of total deaths in the US and do the math, you do indeed come up with 0.8% (or a bit more, but I may be comparing the wrong years). But is this the right statistic? Some portion of those deaths are those who, like my dearly departed grandfather, lived to 100+ and died well and happy. A big part of the moral offense of the uninsured is that these are young people dying unnecessarily. Less than 25% of the deaths in the US in 2006 were in the age group 25-64. None of this is to say that deaths after 64 don't matter, but I think it is important to keep the scale consistent. These 22,000 deaths are 3.7% of their age group's mortality. So even if you were to be very pessimistic about the number's accuracy, and were to cut it in half, you still have 1.5% of this younger age group dying prematurely due to lack of insurance. And this is just the uninsured, not the underinsured who die unnecessarily sometimes as well.

The comparison statistic of 1% of lives saved (deaths postponed) is, as far as I can tell, delivered directly from McArdle's butt. (pe-ew!) So there is no way on thinking properly about the best statistic to use: number of life-years saved versus life-years lost. You'd have to kill a lot of 99 year olds with lost innovation to make preventing the deaths of this group amoral from a utilitarian perspective.

Then, of course, is the notion that all innovation would come to a screeching halt. I find it bizarre to think that we are that inept at problem solving, and further that the current R&D system is so fabulous. Money drives lots of choice for erectile dysfunction and cholesterol drugs, not so much rapid rates of brand new life savers. I expect that the bulk of medical research that is really adding significant life-years to the US is done in the research labs of universities and the NIH. Megan sneers, but I sneer back.

And then, finally, she commits the sin of partial equilibrium analysis. Yes, research on pharmaceuticals in the US might just decline some. And yes, currently the rest of the world free-rides on our research, funded by our paying far more for our drugs than anyone else (though, as an expat, I should say YOU are paying more for your drugs--mine are quite cheap, thank you!) But, if the US money train stops, do you think Australia and France will just say "darn it! I guess we'll never see another medical advance again!"? Really? Maybe something good, like getting the rest of the world to chip in some, would come of our finally refusing to put up with it all.

Tuesday, August 11, 2009

To do

I really must write that paper on reputation-reliant oligopolies.... Went to a lovely seminar today on banks that reminded me all over again about how relevant a paper this will be!

Saturday, August 8, 2009

Data porn

"Data porn" is the presentation of meaningful data in a visually interesting and absorbing way. The New York Times has a great example. The only problem is that as far as I could figure there was no way to embed it directly here.

Tuesday, August 4, 2009

Laughing at Laffer

This is making the rounds of the intertubes today, but I cannot resist piling on, if only to help illustrate the knee-jerkiness of resistance to all things government by econo-ideologues:
If you like the Post Office and the Department of Motor Vehicles and you think they’re run well, just wait till you see Medicare, Medicaid and health care done by the government.
This said by Art Laffer of the Laffer curve, the knee-jerk bit of econ theory used by said knee-jerkers to taxes...

I really wish there were an intellectually honest opponent. It would be so much more interesting.

UPDATE: Just in case it isn't obvious to all already, Medicare and Medicaid are already "done" by the government. And the Post Office is a weird hybrid government sponsored corporation, so not entirely government. And the DMV is a state responsibility, so it isn't entirely obvious that state government and federal government should be lumped together. Just sayin'.

Monday, August 3, 2009

The public servant tax

What is in a name?

I was listening to NPR this morning and again hearing about some state or other that is trying to furlough its workers because the legislature refuses to raise taxes on anyone, because as anyone with half an econ brain knows that taxes hurt the economy ... right? But of course, a furlough is really just a surtax on public servants. Sorry for the lack of precision, but I think the story I was half-listening to was talking about 12 days of furlough, presumably spread over the year. That is equivalent to approximately a 5% tax on pay.

And while some particulary uncompassionate out there may take satisfaction in the idea of their DMV workers paying for needed revenue, we are also taxing "good guys" like teachers and firefighters. All of whom can little afford a tax hike of 5%. You may not like the DMV worker, but he or she buys stuff with her pay check, and one way or the other his or her purchasing habits stimulates whatever private sector job the anti-tax folks work at.

This kind of tax is both unfair and a bad idea for the economy.

Tuesday, July 28, 2009

Why I'm not a Libertarian

I feel like I have been reading and hearing a lot from Libertarians recently. I guess they proxy for the intellectually (more) honest opposition in the health care debate, and I suppose there are a few friends I love dearly who are of the persuasion, so I get exposed to the arguments more than I would otherwise.

There is absolutely no daylight between me and Libertarians on social issues (legalize drugs--though I might regulate more than the most ardent Lib; government absolutely stays out of the bedroom and the body; individuals decide for themselves what constitutes a family, etc.). I also really believe in many of the economic insights generated by neoclassical economics. So why is it that the GMU crowd drives me so utterly crazy?

Somewhere along the way, and I blame the Reagan era for a lot of this, a myth developed that government was by definition incompetent and free enterprise is by definition infallable. There is no empirical evidence for either claim and plenty of counter-examples. Most importantly, private enterprise is often utterly incompentent, mendacious, and willing to trample liberties far more quickly than any government bureaucrat. And occasionally, when those government bureaucrats are given respect, resources and a functional institutional structure, they can do fabulous and great things. Health care is a great example of this, but by far not the only one.

As a result, I believe that when the assumptions of the fundamental theorems of economics are met: well-defined and -defended property rights, symmetric information, and large numbers of parties on both sides of the potential transactions, there is no good reason for government interferrence. On the other hand, those assumptions are almost never met, and when they are not, there is potential for constructive collective intervention--i.e. the government could play a useful role.

The Libertarian ideology cuts off the search for constructive answers to difficult problems by excluding out of hand a host of possible solutions, and all too often the argument devolves into denegrating government workers and ignoring evidence that doesn't fit. I'd really rather have the conversation focus on where collective action is necessary and appropriate and how best to structure the government's involvement in facilitating such action so that it protects our liberty and social welfare to the extent achievable by mere humans.

I'd also like to be able to talk about the very real problems in dysfunctional competitive environments without having to wade through silly ideological objections to the existence of the problems.

Saturday, July 25, 2009

The utter insanity of US health care

I saw this quote from David Cutler's paper on insurance premiums via Matthew Yglesias:

This analysis shows that without health reform, average family premiums will grow to more than $22,000 by 2019, up from $13,100 today.
In contrast, here in Australia I have to purchase health insurance privately, since I do not qualify for their national health care plan, Medicare, nor does work offer it (health insurance isn't tied to employment here). I have the cadillac plan, chock full of bells and whistles--it pays for 100% of my acupuncture up to a very generous limit, for example--designed for people on my type of work visa. For the privilege, I pay a whopping AU$2500 a YEAR. Granted the comparison is not perfect, since this is an individual cover, not a family one (the family costs $5000). But I am quite confident that the coverage is also far better and more reliable than the average US plan that currently costs $13,100.

I think if people in the US realized the magnitude of the excess expense they are paying today, not even the flood of insurance and PhRMA money could stop reform.


I know that the very worst way to encourage people to become regular readers of a new blog is to not post for a coon's age. To help make up for the long silence, I have added an RSS option over on the right, so that for those of you who use RSS feeds, you don't have to check in here directly.

I don't actually use RSS, so I have no clue how it works.

Wednesday, June 17, 2009


I've started to ruminate on whistle-blowers. I think it would be interesting to study them, though I am not sure how. What is it about a very small segment of the population that causes them to speak up when it is so obviously against their interests in every dimension?

I'm curious in part because one reason I don't work in industry is because I am afraid I would be one, and yet I still don't understand the impulse. (I suppose I am a whistle-blower of sorts already: every semester here I catch a few cheaters/plagarists AND report them, paperwork and angry emails and unsupportive admin be damned.)

Plus ca change...

You could be talking about the auditors circa 2002....

I started a new paper today on the effect of oligopoly market structure on reputation-based industries. In other words, the auditors and the credit raters. I'm not looking forward to doing the analysis (I had sort of hoped to move away from doing straight-up micro theory, since I'm just not trained well enough to do it efficiently) and had fantasized about finding a co-author to do all the work, but this morning on my walk to work I decided it might not be all that hard, and it is a paper that just needs to be written. Tonight's Rachel Maddow is, I guess, a sign from the powers that be that I should follow through.

Friday, May 29, 2009

Enough already with greed!

A short rant.

I think the adjective, greedy, and its related noun, greed, should forthwith be banned from all discussions of the economic and financial crisis.

It is a pejorative term for a universal force (people trying to do as well as they can for themselves), sort of like calling gravity a depressant. Okay, that is a bad metaphor, but I can't think of a better one.

I'm not ranting because I feel sorry for bankers who keep getting called names (I'm not, and I think that their toys should be taken away), but because talking about greed inevitably derails constructive conversation. Its like calling nations an axis of evil: once you have labeled someone as evil, you can no longer have a constructive conversation with them. It is appropriate in some contexts (i.e. serial killers are evil) but that means that you have only two options remaining: life in prison or execution. It is silly to do that with an entire country, and it is similarly silly to blame someone's greed for any problems. What do I mean by that? Maybe a better example is to say that if your answer to social problems is abstinence-only sex ed, you are building a policy edifice on a foundation that denies basic humanity. If your policy is directed at humans, it is bound to fail.

Let's think instead about institutions that are good at harnessing "greed" to productive ends, and robust against its excesses. Let's acknowledge the humanity of everyone involved (not just the executives but the watchdogs too) and try to the best of our ability to give them an environment where their own desires can be met by meeting society's desires.

Monday, May 25, 2009

Wonderful news

This is wonderful news:
In the first sign that the Rees Government is looking for immediate solutions to inner Sydney's congestion crisis, the Transport Minister, David Campbell, today will take a proposal to extend the light rail line to a key cabinet committee.

The low-cost proposal would extend the line from Lilyfield through Leichhardt, Haberfield and Summer Hill to Dulwich Hill railway station.

It would link the light rail to the inner-west and Bankstown lines, could be running within a year and cost less than $70 million.
They go on to say that the link to Summer Hill could be finished within months, also that the light rail will be integrated with the rest of the bus/train system (to the extent that there is integration of anything). Particularly if that means fee integration--I keep forgetting how much the light rail costs for a single ride, but it is in the neighborhood of $5--buses and trains, while expensive, cost much less.

And the loveliest thing of all is that a yoga school that I love is in Summer Hill. I can't figure a way to go there regularly now, since the transportation options are pretty crappy (late evening long waits for a bus on a particularly uninviting stretch of Paramatta Road), but if the light rail went where I can't easily walk but would like to go.... the possibilities are revolutionary.

Yay to the consumer utility increasing nature of public transportation. Now on to getting better pedestrian policies in place (a post for another day)!

Sunday, May 24, 2009

More Warren-related video

Really this blog isn't all about Elizabeth Warren, I promise. And I'm actually posting this not because of Warren but because I got a better sense of Timothy Geithner from this hearing than I have before. Perhaps that is because I mostly only encounter people talking about Geithner after small sound bites rather than actually seeing the man speak for himself for extended periods. There are some dodges and some sound bites, but overall I got a sense that Geithner really believes that Treasury is doing what it can. I don't think he is very happy with the choice set, and his beliefs may be wrong, but I have a clearer sense that he is acting in good faith and with honesty than I had before. Maybe this is the equivalent of Bush "looking him in the eyes" but there ya have it. At least I am not the leader of the free world.

Thursday, May 14, 2009

The full interview

with Warren is finally posted. Listen to it. I love Elizabeth, much less impressed by Adam. He doesn't listen, he doesn't get it.

Tuesday, May 12, 2009

Recognizing wrongs the right way

I have been intending to post about last Friday's Planet Money podcast since it was released, but I am now glad I waited.

In a nutshell, PM's Adam Davidson interviewed Elizabeth Warren (my favorite person, as you should know by now) last week for, according to Adam, an hour and a half. On the podcast, however, he posted only a very heavily edit clip of a couple of minutes of the exchange where he and Warren were arguing over how she was using her role in the TARP oversight panel. He interspersed the clips (which were either of him or the two talking over each other) with commentary about how weird and uncomfortable it was to get into a fight with Elizabeth Warren. Okay. Weird that you are sharing.

Then he made matters much, much worse by explaining afterward that what he is really unhappy about is not Elizabeth Warren and how she is using her role (he says she is too political or too focused on her own long standing concerns about the middle class) but that she was appointed to the committee at all. Instead, he wants some serious people, economists (Warren is a lawyer), men (he didn't bring up gender explicitly, but it was lurking through out) to be coming up with apolitical, uncontroversial and serious solutions. Jaw on floor.

I was not the only person horrified by this podcast, and it turns out to be the most heavily commented podcast on the blog, and none of the comments I have read (and last I checked in and read what was there it was around the 150 mark) were taking Adam's side. The consensus sins were:

1. His complaints are silly
2. His evidence that Warren is out of line is that no one serious he has talked with thinks that the middle class is very important
3. Where is the rest of the 90 minutes?
4. We didn't get to hear the part of the interview that made him upset, only his upset reaction
5. There were weird gender implications

To Planet Money's great credit, however, today's podcast starts out by an extensive acknowledgment that they had done a bad job. They were not defensive, admitted mistake, acknowledged that the commenters had been, to an extraordinary degree, civil and thoughtful (in marked contrast to the original podcast). They recorded a short comment from one of the commenters, a female pastor, with her take on why the podcast was so bad. She raised the gender point in particular, and made the very good point that Adam had been incredibly deferential to Tim Geithner in an earlier interview despite ample opportunities to get upset for far more justified reasons. Adam in response simply said that he saw in retrospect her point and that while the difference was unintentional it was still his bad.

My one remaining beef is that there is still no news as to when the full interview will be aired.

But most importantly of all, it seems like in the last 8+ years, we as a society have forgotten how to admit fault. Kudos to Planet Money for offering such a gracious example, and let's hear it for them not having any more cause in the future.

Friday, May 1, 2009

Monday, April 27, 2009

Sunday, April 26, 2009

The great push-down of risk

I just watched this wonderful speech by one of my favorite people, Elizabeth Warren. This is from January 2008, before the crash and her becoming the top TARP Cop, and presents her research on the instability of the middle class. In addition to wanting to pass on this great video, it also reminds me of one of the aspects of our current situation that relates to, but is broader than, the current crisis that I have heard almost no one talk about, though here Warren does it beautifully. And that is how risk has been distributed in our society.

The generic theory about risk is that it is best, most cheaply held by the biggest possible entity. Companies deal with risk better than people, and governments deal with risk better than companies. This has to do with both their size and their longevity. And in general (and I say this in a hand-wavey and un-researched way) one mark of a society progressing in wealth and general civilization is that there are big institutions with sufficiently legitimate and stable governance that risk does get passed up the chain, allowing individuals to worry less and get on with their lives, accumulating wealth as they go. Except, it seems that in recent years (and again this is similarly gut-driven) in the US, that tide has changed direction. There is an increase in employment risk (Warren shows this in her lecture) which also translates into a health care risk. We have shifted more retirement risk onto individuals. I suppose you could say that increases in mobility coupled with increases in divorce and other non-traditional family structures has caused an increase risk in social networks.

I think that this, ironically, might drive people to take bigger gambles with their homes. If you think you are going to be screwed one way or another, it makes sense to throw a Hail Mary pass to try to lock in some wealth through real estate.

Anyway, I highly recommend this lecture.

Friday, April 24, 2009

Proposal done

Phew. I always feel silly when I have writer's block. I know that there is no real obstacle to putting words on the page and yet they still don't get on the page. But deadlines have a clarifying effect.

I did have a substantive breakthrough, which helped. (I'm not sure that much of the breakthrough is actually in the proposal, but it helped me see where I am going better.) Let me see if I can articulate it here.

Some of my current research is about how reporting fraud screws with competitors--they think that the fraudulent firm is doing better than it is, which sets the bar higher for the returns needed at a competitor for that competitor to believe that their work is...competitive. The excellent Simon Angus and I have built a cool NetLogo model that shows that the dynamics created by fraudsters put down amongst credulous competitors are wacky and a bit scary. Wacky, because our measure of the economy's health veers around wildly, in non-monotonic ways, and scary because it spends time in very bad territory. Sometimes it equilibrates there.

The basic take-away is that put a large pinch of misinformation in a system without a fast discipline source, and all hell breaks loose. And because (as I say in my proposal) fantasy can easily out-compete reality, you can get a quick convergence on whatever the fantasy is pushing.

Now to the current crisis.

Think of "the market" as a vast complicated machine full of intersecting cogs. Each cog is a market for a particular thing or suite of things. There are at least 3 or 4 cogs worth focusing on: the market for "safe" investments writ large, the market for structured finance instruments (an overlapping set with the safe investments), the market for credit ratings, and the market for banks (and insurance companies, and other big, important financial hubs). Each of these suffered from the misreporting dynamic we have modeled in my current work. Note that I am not accusing anyone of criminal fraud--that isn't necessary for this metaphor to work, only that there was systematic misreporting occurring due to bad models, poor accounting standards, etc.

Start with the narrowest market, that for structured finance instruments. Coval et al in their article in the current edition of Journal of Economic Perspectives demonstrate that comparatively small errors in estimating default risk of the underlying assets get amplified significantly in estimating the risk of a CDO. This amplification of error doesn't happen with traditional pass-through instruments--ones that, while they package large numbers of mortgages or other debt, don't have complicated orders of payoffs but instead just give you the right of a certain fraction of the cash flow--so CDO's risk estimates will systematically be much further off the mark (in one direction or the other) than those of other instruments. Within the universe of possible CDOs, some bundles of debts will appear much riskier than they really are, because the error estimating the risk of the underlying asset is off in same direction by a little bit, and others will appear much safer than they really are, again due to the error in estimating the risk. But take two potential types of debt one could bundle, one that gets estimated as riskier than it is and one that gets estimated as safer than it is--in all likelihood only the one that appears safer will get bundled, because it looks like such a great deal. So if there were a type of debt that had performed badly in the years for which we have data, but would for some sort of structural reason start performing better more recently, this debt will not get bundled. It will look really risky! Those instruments that are being misestimated in an optimistic direction are going to be the instruments that become the most popular, because they look so good.

Why doesn't the market self-correct? Well, it is ... right now. And that self-correction isn't much fun. Market discipline only kicks in when the mistake is laid bare, and when you are talking about a mistake that only becomes obvious in a severe downturn, you have to wait for that downturn for the market to work its magic. And in the interim, you get the kind of market convergence on the mistake that my fraud model predicts.

The same dynamic that pits different types of CDOs against each other happens in the next market--the market for AAA-rated investments. Since the type of risk that CDOs face is not addressed by the ratings agencies (and they are committing those estimation errors), CDOs look great--they turn shit into gold and there is money left over for higher returns than T-bills. The same market correction problem occurs, because a lot of people make a lot of decisions before any information about the mistake being made comes to light. So we get a market of AAA-rated stuff that gets dominated by unsafe CDOs.

Now turn to the ratings agencies. Estimating the risk of CDOs is really hard. When CDOs were first created, the agencies used pretty different models to estimate their risk, and therefore, the same product might get widely divergent ratings from different agencies. Now, a word about how agencies compete. They make money by charging the companies they rate, so they want to do as many ratings as possible (comparable to selling lots of stuff in a more traditional retail business) but the price they can charge is related to the reliability of their ratings. The reason I can't go up to Moody's and pay them to stamp AAA on my forehead is because people would stop taking a Moody's AAA very seriously, and therefore the value of having that AAA goes down, and therefore the price Moody's could charge for the priviledge would also go down. So reputation acts as a constraint on their behavior.

So back to CDOs. Assuming all three agencies have comparable credibility, the packager of a CDO is going to buy the rating from the company that is willing to give the CDO the highest rating. So the model that produces the most AAA ratings is going to get a lot of business. And since none of those CDOs were performing badly in the boom years, the model that was saying AAA was maintaining its credibility. So those models that weren't turning out AAA were just losing their agency money, but to no credibility gains. So the models the agencies use converged on models that gave AAA. (And there is another paper I want to write about reputation-dependent oligopolies. If one cartel-izes quality, not quantity, the reputation constraint stops maintaining high quality products....)

So that is another, inevitable market effect that puts us in the worst possible place.

Finally, there is the market for bank stocks. Banks have to hold a lot of their capital in AAA-rated stuff so that they can leverage their capital as much as possible. And a bank that chooses to buy lots of CDO AAA crap is going to earn much higher returns on that crap than a bank that holds their AAA stuff in T-bills. So the bank that is taking the risky, ultimately bankrupting stuff is going to appear to be doing much better than the smart, safe bank. And so the smart safe bank is very likely to copy the strategy of the stupid bank.

And here we are in 2009 with the economy down the toilet.

Now I just have to find a way to prove all of this, and then write it up sans bathroom vocabulary....

Sunday, April 19, 2009

Proposal writer's block

I have been banging my head against a proposal for the last week. I hate that I can't write fluidly about what I want to do!

It is a 3-pager for a paper relating to the financial crisis: I want to turn my cost-of-fraud work to the financial crisis. I am having a hard time translating that fuzzy, hand-waving gut sense that this is a really productive path to walk down to a concrete proposal. I think in part because I don't understand the market for CDS and CDOs well enough. Well, that and generalized anxiety over producing a document that will be judged....

Wednesday, April 8, 2009


I didn't post about this when it came out, and now I don't feel like tracking it down, but recently someone in the Obama administration (Gibbs? Geitner?) called Krugman "naive" for calling for restructuring the big banks. It may be true that Krugman is naive--I highly doubt it--but this is one of those words that is a big red flag for our dear emperor's nekkid-ness.

I think it is an effective taunt for halting needed policy overhauls: politicians are terrified of naivete--probably because they really are naive about so many of the areas overwhich they have power. But they do seem to turn to jelly if you just look down your nose a bit and dismiss calls for your resignation/regulation/general removal from power as "naive" and say that everyone in the know just knows that the world would end if we took this uncomfortable policy action....


I feel really stupid--it turns out that one only submits abstracts to AEA. The trials of being an outsider and the silly mistakes we make.

Tuesday, March 24, 2009

Holed up in the tower

I haven't been following the news the last 24 or 48 hours. It is kind of nice. Instead working my arse off to prepare my paper for AEA submission....

Friday, March 20, 2009

My tax fantasies

It seems that the consensus is that the punitive tax passed today is not the right response to AIG. I don't know the details of the bill and I don't have strong feelings about it. It isn't what I have been dreaming about, when my dreams turn to taxes.

For a host of complicated reasons, reasons that I have instincts about but haven't thought very carefully about yet, it seems that our economy has gotten off kilter. And I don't mean the financial crises--though that is a consequence of the imbalance. But even prior, way too much of our productive energies were going into finance. The idea that the financial sector hired more physicists than other sectors is crazy. Finance is important, but only because it facilitates the really important business of providing the goods and services that allow us to live our modern lives. Too much energy in finance acts as a drain on the really productive energies of our life (not to mention becoming a political economy nightmare).

So one way to help nudge us back to a better distribution of talents is using the tax code. I have been thoroughly convinced that Dean Baker's idea of a 0.1% transaction tax on trades makes lots of sense, and would slow the worst types of trades (i.e. speculation). But on top of that tax, lets have a much smaller than the 90% bonus tax but still significant surtax on gross income exceeding some threshold ($100,000? $250,000? Who knows?) when that income is earned in the finance sector. Let's be agnostic about the reason for that pay (bonus versus salary--congress has a bad trackrecord when it comes to legislating the proper form of compensation), but something on the order of an additional 5% or 10% on earnings above the threshold. Perhaps adding several high brackets with progressive increases.

I want it to be less attractive to be a supernova in finance than it is to be one in another, more productive field. And let's be explicit that the surtax is in place until Treasury is repaid for all of the costs of the bailout. (Let the transaction tax on trades go towards covering the stimulus.) I think that if such a tax were enacted simultaneously with additional bailouts (assuming those bailouts are needed to avoid more catastrophes) I think that the politics will go down much more smoothly. Not to mention that it would be fair and maybe even good policy....

Thursday, March 19, 2009

Quick thoughts about AIG and John Stewart

There is a lot I want to say and it is all fairly inchoate. Maybe this blog will help me grow in my ability to be articulate about the cultural/emotional side of corporate fraud and misdoings as well as the policy wonk stuff.

But I have been watching with interest the AIG blow up over the last few days (mostly via TPM), and am very upset by the Obama administration and Geithner, along with the usual suspects. I had hoped (still hold some hope) that Obama would get on a visceral level some of the "emperor's clothes" aspect of the problems with the modern corporate world, but so far he (through his support of Geithner) is not expressing it. Let me see if I can explain.

John Stewart's interview with Jim Cramer struck such a chord, because Stewart finally articulated the essence of what has been so wrong for so long. He said "you all knew. You knew." (I am writing this from memory, and yes, too lazy to check a transcript.) Every scandal the people at the center play dumb. "How could anyone have known?" But they just can't be. Not down deep in the recesses of their brain. Their justification for their existence rests on a fundamental cognitive dissonance: they are important and smart and better, but they do not bear commensurate responsibility.

It is the same at root as the auditor's "expectations gap" (which I am sure I will rant about lots in the future). Auditors all know, because they are more sophisticated than you or me, that they are simultaneously critical to the functioning of the capital markets but not responsible for finding fraud. It has been a hundred year headache that they can't get through the public's thick skill that it is unfair to expect anything of one's auditors.

Similarly, AIG executives are the best and the brightest and AIG cannot contribute to the wellbeing of the American economy without these particular people, and it is impossible to find people this good for anything south of several million a year. BUT how could they possibly be expected to understand systemic risk? Or think about the possibility of house prices falling? How could they--anyone--ever have known?

The rest of us work very hard for much less. And a big chunk of what we work hard for goes to pay these people their fees. We pay in our 401 k plans, we pay in bank fees and mortgage rate. We pay and pay and pay. And now we are paying in our taxes too.

And yet, since we don't grant them their full due, we are unsophisticated. I think that using attitudes towards corporate executives as a measure of sophistication is what is deadly and is the trap that Obama and particularly Geithner are falling into. And why this blog has the title it does. Until Obama in no uncertain terms is able to come out and say, these people are silly piggish crooks, no matter their nice manners, he is going to fail to reign in the oligarchs. (I wish I were half as articulate as Simon Johnson on this matter.)

More on the infrastructure pyramids

This is from the intro to the Risk Metrics Group white paper on the subject linked in the earlier post:
As an extreme example, Babcock & Brown Wind Partners (‘BBW’) had operating cash flow of $14.2 million in the 2006 financial year, but paid distributions totaling $48 million in relation to that year. The distributions were equivalent to 54 per cent of the total cash receipts from customers during the year. Even the most mature infrastructure fund of all, Macquarie Infrastructure Group (‘MIG’), is no exception. It had operating cash flow of $306.9 million in the 2006 financial year, but paid distributions totaling $512.9 million in relation to that year. Furthermore, the distributions were equivalent to 116 per cent of the total toll revenue received during the year.
It makes me ill.

And worst of all, these schemes are built on critical infrastructure, which one can be fairly confident that Macquarie and B&B don't give a rat's ass about. Some of the infrastructure includes London's water and sewage services, along with Spain's emergency radio network. What happens to them when this all blows up?

Tuesday, March 17, 2009

Aussie optimism

Australia is not suffering to the same extent as the US or Europe in today's economy, but man, these guys' optimism is a little scary. I was just browsing through the neighborhood circular, and saw a story about a house being sold in Stanmore, a nice, up-and-coming inner west area:

View Larger Map

But get this: the selling price was AUD620,000 and the description of the two-bedroom house includes
the property has polished floors and period features, but needs a lot of work, particularly as its only toilet is outside.
An okay 2 bedroom in an okay neighborhood with no inside plumbing!!!! 620K!!!!!

(Not to mention the idea of no plumbing in Sydney 2009 is a little mind blowing, if you haven't spent time looking at real estate here.)

(cross posted at Yankee Sydneysider)

My favorite ongoing Ponzi scheme

Bernie Madoff is small potatoes and oh so yesterday. The biggest and best Ponzi scheme began life Down Under and is still flourishing. Where else, after all, can you get steady high returns in this bear market?

Not to mention that this scheme (schemes?) has the world's infrastructure as hostage.

These Ponzi schemes are masked as the safest possible type of investments: the infrastructure fund, particularly those sponsored by Macquarie Bank. Infrastructure (tolls, bridges, airports) are safe, steady streams of revenue, right? So why wouldn't my returns also be safe and steady?? Well, in a good world, they would be safe, steady and very low. In our world, they are steady, ridiculously high, and, I am afraid, not safe at all.

I learned about these funds back in April 2007 at the Global Finance Conference, hosted by LaTrobe University in Melbourne. So this has been at least semi-public for a long time (as was, apparently, the Madoff scheme). Apparently, the reason they are so problematic is that the funds have: an opaque governance structure, management fees that on occasion exceed the revenue stream from the underlying assets, and dividend payouts that come, in part, from new investors...

And it is all documented here, though you have to log in to get the report. And a very scary thing: Australia's superannuation funds are apparently very invested in these buggers. Low volatility and all. So when it all comes tumbling down, the Aussie privatized pension scheme could well come down (even further) with it.

Saturday, March 14, 2009

Why the title?

I came to the world of financial services very naively. Prior to getting my PhD, I was a singer and had no serious experience with the corporate world (though one learns a lot of a particular sort of thing as evening receptionist for Skadden Arps). I stumbled into a project on auditors post-Enron and did not expect to have earth shattering insights into the problems of the world.

I don't think I ever did, either. I just didn't have enough credibility to worry about defending it, and therefore didn't worry too much if I was asking stupid questions. And it seemed to me, when I went to a dog and pony show that the Big 4 put on for us, that there were a lot of naked emperors walking around. And when I asked, people didn't come up with some terribly impressive or brilliant explanation for why the emporer was naked. Instead, they said, "hush, dear. Don't say anything about that. It just shows you don't understand."

And when I didn't stop asking, they started lying to me in silly ways or calling me names (arrogant, naive, silly). I have a stubborn streak (I am a stubborn streak) and so here I am, 5 years or so into asking silly arrogant and naive questions about the financial world. And I am starting to think I am right. The emperor is naked, and that big old closet of his is empty.

I would love to be proven wrong. I would love to learn that the adults are adults and serious and sensible. But I am not so optimistic anymore.

Friday, March 13, 2009

Hello world

Welcome to "The Emperor's Wardrobe," which I hope will become a repository of my reactions to and thoughts about the financial meltdown, regulation, economics, and whatever else seems appropriate to post to a "professional" blog.

I am currently a post-doc in a school of finance and economics in Australia. I'm an American and my PhD is in Policy Analysis, so I sometimes chafe at the industry friendliness of a finance department and at the remoteness of Australia at the most exciting time to be a policy person who cares about the financial services world.

But blogging is geography-free and I get to say what I want. So here I am.