Chicago Tribune: Peregrine CEO Wasendorf gets maximum
"Disgraced financier Russell Wasendorf will be at least 107 years old by
the time he’s eligible for release from prison under the 50-year
sentence handed down Thursday in Cedar Rapids. The former head of
the defunct Peregrine Financial Group futures and commodities brokerage
stole $215 million from more than 13,000 customers over a 20-year
period. The 64-year-old Marion native pilfered customer funds to live a
lavish lifestyle and expand the business, which prosecutors said was
never profitable on its own...Federal sentences are only reduced by a maximum of 15 percent for good
behavior, which means that Wasendorf must serve a minimum of 42.5 years
before being eligible for release. "
We originally wrote about this story here. In case you did not get the reference - one of Peregrine's divisions was called PFG Best.
Thursday, January 31, 2013
Is our children learning?
Contrary to what a Math PhD told me in an interview yesterday, the Law of Large Numbers does NOT say that if you have a sample from a population then the sample mean equals the population mean. The Law of Large Numbers DOES say that as the sample size grows the sample mean will converge (in probability or almost surely) to the population mean. To show that what the Math PhD said is obviously false imagine you have a sample of size one from a normal distribution. It would be very surprising if your one sample point had a value equal to 0. But that is what he told me. I even probed him on his answer to see if he would revise it but he stuck to his definition.
I have been asking this question to prospective quants who say they have advanced degrees in Math or Stats. So far I have two who answered correctly. Two who confused the Law of Large Numbers with the Central Limit Theorem. One who confused the Law of Large Numbers with the Central Limit Theorem and then stated the result of the CLT incorrectly anyways. And then there was the above guy.
So "Is our children learning probability?" Apparently no.
I have been asking this question to prospective quants who say they have advanced degrees in Math or Stats. So far I have two who answered correctly. Two who confused the Law of Large Numbers with the Central Limit Theorem. One who confused the Law of Large Numbers with the Central Limit Theorem and then stated the result of the CLT incorrectly anyways. And then there was the above guy.
So "Is our children learning probability?" Apparently no.
Wednesday, January 30, 2013
Aaron Sele and the FOMC
Once a year the members of the Baseball Writers Association vote on who should be inducted into the Baseball Hall of Fame in Cooperstown. Along with votes for the greats, the near greats, and the pretty goods inevitably some mediocre players get votes. For example this year Aaron Sele and Reggie Sanders each got 1 vote (see here). Now as a diehard Red Sox fan I would love to see Aaron Sele in the Baseball Hall of Fame, but a baseball fan I realize that he is nowhere near worthy.
Sele (see here) had a career record of 148-112 and an ERA of 4.61. ERA+ is a measure which attempts to normalize pitchers across time and home ballpark. 100 is league average. Sele's lifetime ERA+ was 100. He never led the league in any statistical category, he made the All Star team two times. In 1999 he came in 5th in the voting for the American League Cy Young Award. That was his only top 10 finish. So he had a respectable career but certainly nowhere near Hall of Fame standards. Yet some writer did give him a vote.
If a writer does not take his job seriously then he should not be voting. To enforce this I suggest that Major League Baseball should establish a review panel whose job it would be to investigate questionable Hall of Fame votes. Any writer who casts a ballot for a player of questionable merit - for example Aaron Sele - should be required to appear before the panel and defend his vote. The writer would not have to convince the panel that the player he voted for should be in the Hall of Fame but he would have to present a reasonable argument for it. (I would really like to hear the argument for Aaron Sele. And to be fair, Sele is nowhere near the worst player to ever get votes.) If the writer fails to convince the panel that there is some reasonable justification for his vote then that writer would lose his voting privileges. After all if a writer is unable to distinguish truly great players from mediocre players then that writer is not competent to vote on Hall of Fame induction and should not be voting. And if a writer is able to separate the greats from the mediocre and yet continues to place votes for mediocre players then he does not take his job seriously and that writer should not be voting.
Which brings us to today's FOMC policy statement
"To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations."
Perhaps we need a review panel for FOMC votes as well.
Sele (see here) had a career record of 148-112 and an ERA of 4.61. ERA+ is a measure which attempts to normalize pitchers across time and home ballpark. 100 is league average. Sele's lifetime ERA+ was 100. He never led the league in any statistical category, he made the All Star team two times. In 1999 he came in 5th in the voting for the American League Cy Young Award. That was his only top 10 finish. So he had a respectable career but certainly nowhere near Hall of Fame standards. Yet some writer did give him a vote.
If a writer does not take his job seriously then he should not be voting. To enforce this I suggest that Major League Baseball should establish a review panel whose job it would be to investigate questionable Hall of Fame votes. Any writer who casts a ballot for a player of questionable merit - for example Aaron Sele - should be required to appear before the panel and defend his vote. The writer would not have to convince the panel that the player he voted for should be in the Hall of Fame but he would have to present a reasonable argument for it. (I would really like to hear the argument for Aaron Sele. And to be fair, Sele is nowhere near the worst player to ever get votes.) If the writer fails to convince the panel that there is some reasonable justification for his vote then that writer would lose his voting privileges. After all if a writer is unable to distinguish truly great players from mediocre players then that writer is not competent to vote on Hall of Fame induction and should not be voting. And if a writer is able to separate the greats from the mediocre and yet continues to place votes for mediocre players then he does not take his job seriously and that writer should not be voting.
Which brings us to today's FOMC policy statement
"To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations."
Perhaps we need a review panel for FOMC votes as well.
More on the Iran non-explosions
UPI: IAEA says no explosion at Iranian plant
"VIENNA, Jan. 30 (UPI) -- The International Atomic Energy Agency said Wednesday it was able to confirm Iranian accounts there was no incident at the Fordow nuclear facility."
however World Net Daily doubles down
WND: U.N. won't deny explosions at Iran nuke plant
"Responding to WND, the United Nations’ nuclear watchdog, the International Atomic Energy Agency, refused to deny that Iran’s nuclear facility at Fordow has been rocked by several explosions...In a statement to Reuters, IAEA spokeswoman Gill Tudor implied the U.N. agency had inspected the site after the reported explosions and affirmed Tehran’s insistence that the report was false. But when asked by WND, Tudor would not confirm or deny the incident. “The agency does not evaluate matters in Iran other than those directly relating to its nuclear verification work, so although we’re aware of these media reports, we are not in a position either to confirm or deny them,” Tudor said in an email to WND. “That said,” she continued, “I’m sure you are aware that agency inspectors regularly visit Iranian nuclear facilities under the IAEA’s safeguards agreement with that country...We understand Iran has denied that there has been an incident at Fordow, and this is consistent with our observations,” Tudor said."
That looks like a denial to me. WND is full of crap.
"VIENNA, Jan. 30 (UPI) -- The International Atomic Energy Agency said Wednesday it was able to confirm Iranian accounts there was no incident at the Fordow nuclear facility."
however World Net Daily doubles down
WND: U.N. won't deny explosions at Iran nuke plant
"Responding to WND, the United Nations’ nuclear watchdog, the International Atomic Energy Agency, refused to deny that Iran’s nuclear facility at Fordow has been rocked by several explosions...In a statement to Reuters, IAEA spokeswoman Gill Tudor implied the U.N. agency had inspected the site after the reported explosions and affirmed Tehran’s insistence that the report was false. But when asked by WND, Tudor would not confirm or deny the incident. “The agency does not evaluate matters in Iran other than those directly relating to its nuclear verification work, so although we’re aware of these media reports, we are not in a position either to confirm or deny them,” Tudor said in an email to WND. “That said,” she continued, “I’m sure you are aware that agency inspectors regularly visit Iranian nuclear facilities under the IAEA’s safeguards agreement with that country...We understand Iran has denied that there has been an incident at Fordow, and this is consistent with our observations,” Tudor said."
That looks like a denial to me. WND is full of crap.
Not stopping at 6.5
Ahram Online: Egypt's pound devaluation has not reached an end
"The Egyptian pound slipped further against the dollar at the Central Bank of Egypt's (CBE) USD 50 million currency auction for local banks on Tuesday...On Wednesday, the official exchange rate reached 6.7 pounds per dollar...Experts estimate that the dollar will reach LE7.5 this year, but their forecast might be modified according to the political situation...The dollar has already exceeded LE7.15 in the black market...Hani Guenena, head of research in Pharos Investment Bank, expects the dollar to reach LE7.5 or even LE8 in the period ahead."
Recall on December 30th Pharos was predicting a devaluation to 6.50 to the USD (see here). That appeared somewhat optimistic at the time. With the pound now at 6.70, Pharos is now targeting 7.50 or 8.
"The Egyptian pound slipped further against the dollar at the Central Bank of Egypt's (CBE) USD 50 million currency auction for local banks on Tuesday...On Wednesday, the official exchange rate reached 6.7 pounds per dollar...Experts estimate that the dollar will reach LE7.5 this year, but their forecast might be modified according to the political situation...The dollar has already exceeded LE7.15 in the black market...Hani Guenena, head of research in Pharos Investment Bank, expects the dollar to reach LE7.5 or even LE8 in the period ahead."
Recall on December 30th Pharos was predicting a devaluation to 6.50 to the USD (see here). That appeared somewhat optimistic at the time. With the pound now at 6.70, Pharos is now targeting 7.50 or 8.
Yes it is true...cats like to hunt
NYT: That Cuddly Kitty Is Deadlier Than You Think
" In a report that scaled up local surveys and pilot studies to national dimensions, scientists from the Smithsonian Conservation Biology Institute and the Fish and Wildlife Service estimated that domestic cats in the United States — both the pet Fluffies that spend part of the day outdoors and the unnamed strays and ferals that never leave it — kill a median of 2.4 billion birds and 12.3 billion mammals a year, most of them native mammals like shrews, chipmunks and voles rather than introduced pests like the Norway rat...The estimated kill rates are two to four times higher than mortality figures previously bandied about,..Peter Marra of the Smithsonian Conservation Biology Institute and an author of the report, said the mortality figures that emerge from the new model “are shockingly high.” "
Am I shocked? No. Am I shocked that someone finds this result shocking? Yes. They are cats! Cats are hunters...extremely effective hunters. Here is more
"All concur that pet cats should not be allowed to prowl around the neighborhood at will, any more than should a pet dog, horse or potbellied pig, and that cat owners who insist their felines “deserve” a bit of freedom are being irresponsible and ultimately not very cat friendly."
Not being cat friendly? Does the author have some unique insight into the utility function of a cat? If you asked a cat if s/he would rather live 15 years going outdoors at will or live 16 years staying inside only - which one do you think it would choose? If a cats utility function looks something like this $U_t=(\frac {1}{1-\beta})* \sum\limits_{s=0}^{\infty} \beta ^s u(hunting_{t+s}, eating_{t+s}, sleeping_{t+s}, snuggling_{t+s})$ I strongly suspect that $\beta$ is very small. It is people who value the future not cats. And no... cats are not the same as dogs and horses and potbellied pigs.
" In a report that scaled up local surveys and pilot studies to national dimensions, scientists from the Smithsonian Conservation Biology Institute and the Fish and Wildlife Service estimated that domestic cats in the United States — both the pet Fluffies that spend part of the day outdoors and the unnamed strays and ferals that never leave it — kill a median of 2.4 billion birds and 12.3 billion mammals a year, most of them native mammals like shrews, chipmunks and voles rather than introduced pests like the Norway rat...The estimated kill rates are two to four times higher than mortality figures previously bandied about,..Peter Marra of the Smithsonian Conservation Biology Institute and an author of the report, said the mortality figures that emerge from the new model “are shockingly high.” "
Am I shocked? No. Am I shocked that someone finds this result shocking? Yes. They are cats! Cats are hunters...extremely effective hunters. Here is more
"All concur that pet cats should not be allowed to prowl around the neighborhood at will, any more than should a pet dog, horse or potbellied pig, and that cat owners who insist their felines “deserve” a bit of freedom are being irresponsible and ultimately not very cat friendly."
Not being cat friendly? Does the author have some unique insight into the utility function of a cat? If you asked a cat if s/he would rather live 15 years going outdoors at will or live 16 years staying inside only - which one do you think it would choose? If a cats utility function looks something like this $U_t=(\frac {1}{1-\beta})* \sum\limits_{s=0}^{\infty} \beta ^s u(hunting_{t+s}, eating_{t+s}, sleeping_{t+s}, snuggling_{t+s})$ I strongly suspect that $\beta$ is very small. It is people who value the future not cats. And no... cats are not the same as dogs and horses and potbellied pigs.
I assume that Grover Norquist and the WSJ editorial page support this policy
Dawn: Tax exemption surpasses IMF loans
"ISLAMABAD, Jan 29: Over the past 54 months, the PPP-led coalition government has given tax exemptions to certain influential lobbies and the elites which amount to more than the loans acquired from the International Monetary Fund to correct the balance of payment...Between 2008 and Dec 2012, the government took loans of Rs604 billion from the IMF and granted tax exemptions to the tune of about Rs719bn, the Federal Board of Revenue informed the Senate on Tuesday...Less than 0.6 per cent of the 190 million people in the country pay taxes. The National Database and Registration Authority has identified 3.8 million people who are not paying taxes."
Wow from this story I have to assume that Pakistan must be a robust and thriving economy... since as we know from the WSJ editorial page nothing spurs economic growth like reducing taxes on the wealthiest members of society...right?
"ISLAMABAD, Jan 29: Over the past 54 months, the PPP-led coalition government has given tax exemptions to certain influential lobbies and the elites which amount to more than the loans acquired from the International Monetary Fund to correct the balance of payment...Between 2008 and Dec 2012, the government took loans of Rs604 billion from the IMF and granted tax exemptions to the tune of about Rs719bn, the Federal Board of Revenue informed the Senate on Tuesday...Less than 0.6 per cent of the 190 million people in the country pay taxes. The National Database and Registration Authority has identified 3.8 million people who are not paying taxes."
Wow from this story I have to assume that Pakistan must be a robust and thriving economy... since as we know from the WSJ editorial page nothing spurs economic growth like reducing taxes on the wealthiest members of society...right?
Tuesday, January 29, 2013
Don't we have some sort of technology to confirm this?
World Net Daily: Sabotage! Key Iranian nuclear facility hit? Source: Explosion destroys much of underground installation
"According to a source in the security forces protecting Fordow, an explosion on Monday at 11:30 a.m. Tehran time rocked the site, which is buried deep under a mountain and immune not only to airstrikes but to most bunker-buster bombs. The report of the blast came via Hamidreza Zakeri, formerly with the Islamic regime’s Ministry of Intelligence and National Security,"
Sunday Times: Iranian uranium-enriching facility ‘is damaged by explosion’
"An explosion is believed to have damaged Iran’s Fordow nuclear facility, which is being used to enrich uranium, Israeli intelligence officials have told The Times. Sources in Tel Aviv said yesterday that they thought the explosion happened last week. The Israeli Government is investigating reports that it led to extensive structural damage and 200 workers had been trapped inside."
Jerusalem Post: Ex-CIA man: Iran blast largest sabotage in decades
"Although it has not yet been verified, a report by Iranian dissident-turned CIA operative Reza Kahlili, which said a massive blast rocked Iran’s key Fordow nuclear installation last week, continued to spread on Monday."
BBC: Iran denies reports of explosion at Fordo nuclear site
"Iran has denied foreign media reports of a major explosion at one of its underground uranium enrichment sites."
Jerusalem Post: Ya'alon: 'I read about Iran blast in the paper'
Strategic Affairs Minister and Vice Premier Moshe Ya'alon said Monday that he had read in the newspaper about the alleged explosion at Iran's Fordow Iranian nuclear facility...In an interview with Army Radio, Ya'alon refused to comment specifically on reports of a mysterious blast at the underground bunker, only commenting that "in the past we heard about worms and viruses and explosions. Every incident like this delays Iran's nuclear program...According to the original report of the mysterious blast, penned by former Iranian Revolutionary Guard, Reza Kahlili, for the WND.com website, the explosion “destroyed much of the installation and trapped about 240 personnel deep underground."
Die Welt: Expert reports severe explosion at nuclear plant
"Now, the "Welt am Sonntag", however, has received from an Iranian intelligence service contacts with experts confirmed that the explosion had actually happened. After this information is not 240, but was nevertheless completed about 190 workers at the nuclear plant from the outside world."
World Net Daily: New details surface on Iran nuclear explosion
Lots of new details here.
Reuters: U.S. does not believe media reports about blast at Iranian enrichment plant
"We have no information to confirm the allegations in the report and we do not believe the report is credible," [White House spokesman Jay] Carney said. "We don't believe those are credible reports."
So did the explosion occur or not? The evidence..
"According to a source in the security forces protecting Fordow, an explosion on Monday at 11:30 a.m. Tehran time rocked the site, which is buried deep under a mountain and immune not only to airstrikes but to most bunker-buster bombs. The report of the blast came via Hamidreza Zakeri, formerly with the Islamic regime’s Ministry of Intelligence and National Security,"
Sunday Times: Iranian uranium-enriching facility ‘is damaged by explosion’
"An explosion is believed to have damaged Iran’s Fordow nuclear facility, which is being used to enrich uranium, Israeli intelligence officials have told The Times. Sources in Tel Aviv said yesterday that they thought the explosion happened last week. The Israeli Government is investigating reports that it led to extensive structural damage and 200 workers had been trapped inside."
Jerusalem Post: Ex-CIA man: Iran blast largest sabotage in decades
"Although it has not yet been verified, a report by Iranian dissident-turned CIA operative Reza Kahlili, which said a massive blast rocked Iran’s key Fordow nuclear installation last week, continued to spread on Monday."
BBC: Iran denies reports of explosion at Fordo nuclear site
"Iran has denied foreign media reports of a major explosion at one of its underground uranium enrichment sites."
Jerusalem Post: Ya'alon: 'I read about Iran blast in the paper'
Strategic Affairs Minister and Vice Premier Moshe Ya'alon said Monday that he had read in the newspaper about the alleged explosion at Iran's Fordow Iranian nuclear facility...In an interview with Army Radio, Ya'alon refused to comment specifically on reports of a mysterious blast at the underground bunker, only commenting that "in the past we heard about worms and viruses and explosions. Every incident like this delays Iran's nuclear program...According to the original report of the mysterious blast, penned by former Iranian Revolutionary Guard, Reza Kahlili, for the WND.com website, the explosion “destroyed much of the installation and trapped about 240 personnel deep underground."
Die Welt: Expert reports severe explosion at nuclear plant
"Now, the "Welt am Sonntag", however, has received from an Iranian intelligence service contacts with experts confirmed that the explosion had actually happened. After this information is not 240, but was nevertheless completed about 190 workers at the nuclear plant from the outside world."
World Net Daily: New details surface on Iran nuclear explosion
Lots of new details here.
Reuters: U.S. does not believe media reports about blast at Iranian enrichment plant
"We have no information to confirm the allegations in the report and we do not believe the report is credible," [White House spokesman Jay] Carney said. "We don't believe those are credible reports."
So did the explosion occur or not? The evidence..
- "No comment" from Israel generally means they were involved.
- The fact that the story was reported in World Net Daily generally means the story is bullshit.
Sunday, January 27, 2013
Are We Overfinanced (Part II)?
Uneasy Money: The Social Cost of Finance
It seems like I have not been the only one to question the social usefulness of adding more resources to the financial sector. Greenwood and Sharfstein (see here) have argued that much of the resources consumed by the finance industry are directed toward finding information and trading on it before others do. This information will eventually be revealed by someone else anyways. Hence how much social value is really created by finding it slightly earlier? John Cochrane (see here) countered that there is a public value from getting to the socially optimal set of prices, and trading on information does move us in that direction. Glasner (see here) responds that there must be diminishing returns to scale from getting market prices correct. Eventually the social gains from getting prices more correct must be overtaken by the social loss due to the resources expended from finding the new information. Glasner thinks we are probably past that point where social losses overtake social gains.
My point here was slightly different. Finance creates private gains. Basic scientific research creates public gains due to the positive externalities of increased knowledge. By migrating so many people from the hard sciences to finance we are giving up the positive externalities of new scientific discoveries. I did not consider the possibility that getting market prices correct should also be considered a public good. I will have to think about that.
It seems like I have not been the only one to question the social usefulness of adding more resources to the financial sector. Greenwood and Sharfstein (see here) have argued that much of the resources consumed by the finance industry are directed toward finding information and trading on it before others do. This information will eventually be revealed by someone else anyways. Hence how much social value is really created by finding it slightly earlier? John Cochrane (see here) countered that there is a public value from getting to the socially optimal set of prices, and trading on information does move us in that direction. Glasner (see here) responds that there must be diminishing returns to scale from getting market prices correct. Eventually the social gains from getting prices more correct must be overtaken by the social loss due to the resources expended from finding the new information. Glasner thinks we are probably past that point where social losses overtake social gains.
My point here was slightly different. Finance creates private gains. Basic scientific research creates public gains due to the positive externalities of increased knowledge. By migrating so many people from the hard sciences to finance we are giving up the positive externalities of new scientific discoveries. I did not consider the possibility that getting market prices correct should also be considered a public good. I will have to think about that.
Latest Statement From the Pointless Pain Caucus
AFP: Chancellor of the Exchequer rejects IMF call to ease austerity
"British Chancellor of the Exchequer George Osborne on Thursday rejected suggestions by the International Monetary Fund that he should lessen the pace of his government's austerity programme...The IMF's chief economist Olivier Blanchard said earlier Thursday that with Britain at risk of falling back into recession, the annual budget due in March would be a good time for Osborne to take stock of the measures...But Osborne said at the World Economic Forum in Davos that he was committed to cuts through 2017 in order to reduce Britain's record deficit, and said it was necessary to keep the country's credit rating high."
"British Chancellor of the Exchequer George Osborne on Thursday rejected suggestions by the International Monetary Fund that he should lessen the pace of his government's austerity programme...The IMF's chief economist Olivier Blanchard said earlier Thursday that with Britain at risk of falling back into recession, the annual budget due in March would be a good time for Osborne to take stock of the measures...But Osborne said at the World Economic Forum in Davos that he was committed to cuts through 2017 in order to reduce Britain's record deficit, and said it was necessary to keep the country's credit rating high."
What Went Wrong (Part I)
In 2008 Paul Krugman wrote this piece in
the New York Times How
Did Economist Get it So Wrong? asking
how the vast majority of economists had missed the buildup to the 2007 financial meltdown - perhaps the greatest macroeconomic event since the Great Depression. Krugman’s answer was that the prevailing economic models –
particularly those favored by “freshwater” economists – assumed perfectly
competitive markets and rational expectations – thus ruling out the possibility
of both bubbles and sustained recessions driven by lack of aggregate
demand. His story is convincing so far
as it goes but the situation is actually worse than he suggests. There are two problems (1) deficiencies in
the sorts of models that academic economists were working with (2) a wide gap between
the models that economists work with, what they teach, and what is commonly discussed in the public sphere. The first problem may be the
more academically interesting issue but the second problem likely has had a
more negative impact. I am going to
focus on the latter issue.
Say you were a relatively smart person, college educated, but you had never taken an economics course. Following the 2007 financial meltdown and subsequent economic slowdown you wanted to better understand how the macro-economy functioned. How would you go about doing so? One method would be to turn on CNBC or Bloomberg TV and listen to what the talking heads are saying. A second alternative would be to search around on the internet. A third method would be to walk over to your local Barnes and Noble and find an appropriate book from the Economics section. I actually did the latter and it shocked me.
Barnes & Noble also carried a few recent books
which covered cutting edge topics such as
Finally Barnes & Noble also has a number of good books on history of the world economy including
So assume for a minute that I found a copy of Mankiw’s Macroeconomics on the shelf – would that make me happy? No that is not the point. The point is that the version of macroeconomics which is taught to undergraduates (and graduate students) is not really used as a basis for any of the popular books on the topic. It would be like going to the Medicine section and getting to choose from the latest issue of JAMA's Archives of Neurology or books debating whether leeching or bleeding is the best method to banish the bad humors. Neither is really that helpful to a novice.
Let’s go back again to my original question. Say you were a relatively smart person, college educated, but you had never taken an economics course. Following the 2007 financial meltdown and subsequent economic slowdown you wanted to better understand how the macro-economy functioned. How would you go about doing so? Well other than going to Barnes and Noble one could turn on CNBC or Bloomberg TV and listen to what the talking heads are saying. But have you ever heard them speaking about short run aggregate supply curves, or whether the Phillips curve relation should include lags of inflation or only expectations of future inflation? No. They report the new macroeconomic announcements and earnings numbers, how the financial markets are reacting to them, and periodically insert their own crappy editorial analysis like this. Or how about the internet? There is a lot of really bad economic analysis on the internet. There is also some good analysis - but how does one separate the bad from the good?
If we assume that what is taught to undergraduates reflects to some degree the views of the professors then based on the texts used there is really not that much difference of opinion among professors. Furthermore the University of Chicago Booth School of Business surveys noted economists on a variety of economic and public policy topics (see here). What is most surprising is how much unanimity of opinion there is among them. But somehow it is not getting into the public sphere. Instead we get the economic equivalent of a choice between JAMA or leeching and bleeding.
Say you were a relatively smart person, college educated, but you had never taken an economics course. Following the 2007 financial meltdown and subsequent economic slowdown you wanted to better understand how the macro-economy functioned. How would you go about doing so? One method would be to turn on CNBC or Bloomberg TV and listen to what the talking heads are saying. A second alternative would be to search around on the internet. A third method would be to walk over to your local Barnes and Noble and find an appropriate book from the Economics section. I actually did the latter and it shocked me.
First step back a minute.
There is a canonical program in economics that is taught at almost every
university. In order to be an economics
major you need to take Introduction to Economics, Microeconomics, Macroeconomics, some sort
of Math or Statistics course, and then some number of electives which focus on
more specific topics (Public Finance, Finance, Money & Banking, Game
Theory, Industrial Organization, Health Economics, International Trade,
Advanced Micro, Advanced Macro, etc…). Sometimes
there is a single Introduction class and sometimes there is an Introduction to Micro and an
Introduction to Macro. But that is the general
game plan.
The macroeconomics that is taught to most undergraduates is
pretty standard. Here is the table
of contents from Gregory Mankiw’s bestselling Macroeconomics textbook. Lest I be accused of biasing my choice toward
a left winger – Mankiw was Chairman of the Council of Economic Advisors under President
Bush and a primary advisor to Gov. Romney.
Interestingly his textbook is not that different from noted liberal Paul
Krugman’s Macroeconomics text. There
are half a dozen different basic to intermediate macroeconomics texts currently
in use for undergraduates including (1) Abel
Bernanke Croushore (2) Robert
Gordon (3) Blanchard
& Johnson (4) Charles
Jones They all cover similar topics
in fairly similar manners.
They start by defining basic economic aggregates (GDP, consumption,
investment etc) and explain how they are computed. They define what money is and the various monetary
aggregates; M0, M1, M2. They explain how
price indices like CPI are created and what inflation / deflation is. Then the modeling starts. Long run output is explained using some
variant of the Solow growth model. Long
run aggregate supply results from the Solow model with some adjustment for
labor market frictions and matching. Short
run fluctuations are explained using an aggregate supply / aggregate demand (AS-AD) model. Short
run aggregate supply is motivated by some variant of a Phillips curve
relationship. Short run aggregate demand is
derived from the intersection of IS-LM. The intersection of aggregate supply and
aggregate demand then generate the aggregate price level for the economy. Alternately they may choose to use David Romer's IS-MP / AS-IA construction. Most books spend some time explaining the
components of the IS curve; consumption, investment, government spending. If they employ an LM curve then that comes
from a discussion of money demand. If they
use an MP curve then that is motivated by a Taylor rule. Most books also include an open economy
version of the model. It is pretty
standard.
So back to my story.
I walk into the local Barnes and Noble and find the Economics
section. They have 295 different books
in this section spanning all sorts of topics within economics. However there is not a single book (not one)
which explains macroeconomics in the way that it is taught to undergraduates. The closest books that I could find were Economics for Dummies and
The Complete Idiots Guide to
Economics. But both seemed targeted
at high schoolers. Neither had a substantial
discussion of aggregate demand and aggregate supply like it appears in undergraduate
textbooks. I repeat 295 books! I am not saying that there were no good books on
economics. They had a few historical classics of
economics such as
- An Inquiry into the Nature and Causes of the Wealth of Nation – Adam Smith
- The Communist Manifesto – Marx & Engels
- Capitalism, Socialism, and Democracy – Joseph Schumpeter
- The General Theory of Employment, Prices, & Money – John Maynard Keynes
- Risk, Uncertainty and Profit – Frank Knight
- The Road to Serfdom - F.A. Hayek
- A Monetary History of the United States, 1867-1960 – Friedman & Schwarz
While these books made significant contributions to the history of economic thought
they are neither modern treatments, nor are they very accessible, and in some cases of questionable validity (Marx and
Hayek).
- General Equilibrium Theories of Value – Yves Balasko
- Lectures on Behavioral Macroeconomics – Paul De Grauwe
- Yield Curve Modeling and Forecasting – Diebold & Rudebusch
Finally Barnes & Noble also has a number of good books on history of the world economy including
- Lords of Finance - Liaquat Ahmed
- A Monetary History of the United States, 1867-1960 – Friedman & Schwarz
- Trade Policy Disaster: Lessons from the 1930s (Ohlin Lectures) – Douglas Irwin
- A History of the Federal Reserve, Volume 1: 1913-1951 – Allen Meltzer
- This Time Is Different: Eight Centuries of Financial Folly – Reinhart & Rogoff
- In FED We Trust: Ben Bernanke's War on the Great Panic – David Wessel
So assume for a minute that I found a copy of Mankiw’s Macroeconomics on the shelf – would that make me happy? No that is not the point. The point is that the version of macroeconomics which is taught to undergraduates (and graduate students) is not really used as a basis for any of the popular books on the topic. It would be like going to the Medicine section and getting to choose from the latest issue of JAMA's Archives of Neurology or books debating whether leeching or bleeding is the best method to banish the bad humors. Neither is really that helpful to a novice.
Let’s go back again to my original question. Say you were a relatively smart person, college educated, but you had never taken an economics course. Following the 2007 financial meltdown and subsequent economic slowdown you wanted to better understand how the macro-economy functioned. How would you go about doing so? Well other than going to Barnes and Noble one could turn on CNBC or Bloomberg TV and listen to what the talking heads are saying. But have you ever heard them speaking about short run aggregate supply curves, or whether the Phillips curve relation should include lags of inflation or only expectations of future inflation? No. They report the new macroeconomic announcements and earnings numbers, how the financial markets are reacting to them, and periodically insert their own crappy editorial analysis like this. Or how about the internet? There is a lot of really bad economic analysis on the internet. There is also some good analysis - but how does one separate the bad from the good?
If we assume that what is taught to undergraduates reflects to some degree the views of the professors then based on the texts used there is really not that much difference of opinion among professors. Furthermore the University of Chicago Booth School of Business surveys noted economists on a variety of economic and public policy topics (see here). What is most surprising is how much unanimity of opinion there is among them. But somehow it is not getting into the public sphere. Instead we get the economic equivalent of a choice between JAMA or leeching and bleeding.
Explain this one to me political scientists (update)
New Yorker: Let's Talk. The move to reform the filibuster
Ezra Klein has a new piece discussing the history of the filibuster and possible reform efforts. One interesting statistic to show how broken the system has become "From 1917 to 1970, the majority sought cloture fifty-eight times. Since the start of President Obama’s first term, it has sought cloture more than two hundred and fifty times."
As one extreme example of how ludicrous the R's behavior has become Klein cites Senate Minority Leader Mitch McConnell filibustering his own debt ceiling proposal (see here).
Toward the end of the article Klein quotes Thomas Mann of the Brooking's Institution. Mann "worries that Democrats will reform the filibuster in a way that will infuriate Republicans but will do little to change the everyday workings of the Senate, leading to less cooperation and more gridlock than exists right now "You won't have fixed the Senate, but you will have further poisoned the environment," he says. For the Democrats' short term interests, insufficient reform could be worse than no reform at all, since angry Republicans would use every procedural trick at their disposal to block the President's agenda."
As I discussed here the typical mean voter model has difficulty explaining McConnell's behavior. Perhaps a different model would have voters make their choice of party based on that parties success in passing bills when they are in the majority. Hence the minority party always has an incentive to prevent any bills for passing. I really don't think that is how voters behave but frankly I don't have a better explanation for McConnell's behavior.
Ezra Klein has a new piece discussing the history of the filibuster and possible reform efforts. One interesting statistic to show how broken the system has become "From 1917 to 1970, the majority sought cloture fifty-eight times. Since the start of President Obama’s first term, it has sought cloture more than two hundred and fifty times."
As one extreme example of how ludicrous the R's behavior has become Klein cites Senate Minority Leader Mitch McConnell filibustering his own debt ceiling proposal (see here).
Toward the end of the article Klein quotes Thomas Mann of the Brooking's Institution. Mann "worries that Democrats will reform the filibuster in a way that will infuriate Republicans but will do little to change the everyday workings of the Senate, leading to less cooperation and more gridlock than exists right now "You won't have fixed the Senate, but you will have further poisoned the environment," he says. For the Democrats' short term interests, insufficient reform could be worse than no reform at all, since angry Republicans would use every procedural trick at their disposal to block the President's agenda."
As I discussed here the typical mean voter model has difficulty explaining McConnell's behavior. Perhaps a different model would have voters make their choice of party based on that parties success in passing bills when they are in the majority. Hence the minority party always has an incentive to prevent any bills for passing. I really don't think that is how voters behave but frankly I don't have a better explanation for McConnell's behavior.
Saturday, January 26, 2013
Michael Barone - a biased estimator (in a statistical sense)
A statistical estimator is a rule or formula - which you can apply to a sample of data and using the estimator infer the properties of the whole population from which the sample was drawn. For example imagine I have a huge box filled with an infinite number of red and black ping pong balls. I want to know know what percentage of all the balls in the box are red. One estimator might be I draw $N$ balls out of the box, count the number of these that are red and divide that number by $N$. In this case $\frac{NumberOfRed}{N}$ would be my estimator of the percent of all the balls in the box that are red. A second estimator of the percent of the balls in the box that is red might be to draw $N$ balls out of the box, count the number that are red, subtract 2, and then divide by $N$. So that estimator would be $\frac{NumberOfRed-2}{N}$. Perhaps that latter estimator is not a good estimator but it is still an estimator.
Typically the quality of an estimator is judged by two criteria (1) consistency and (2) bias. An estimator is said to be consistent if as the size of my sample $N$ increases the estimator will converge to the true population value, So if $N=1$ my first estimator $\frac{NumberOfRed}{N}$ may be very inaccurate. With $N=30$ my first estimator should be fairly representative of the percentage of red balls in the box. With $N=1000$ my first estimator should be extremely close to the true percentage of red balls in the box. Interestingly my second estimator $\frac{NumberOfRed-2}{N}$ is also consistent - in the sense that as $N$ increases we expect it will do a better and better job of inferring the true percentage of red balls in the box. Now the second estimator will always infer slightly low (because we subtracted 2) but it will still get more an more accurate as $N$ increases.
Bias refers to whether an estimator systematically mis-infers. In the example above the first estimator $\frac{NumberOfRed}{N}$ is unbiased in the sense that we do not expect it to over or under estimate the percentage of balls that are red. Now it is possible that the first estimator produces a poor result (say we set $N=1$ and our first draw is black) but the first estimator has no tendency to systematically over or underestimate the percentage of red balls in the box. In contrast we would expect the second estimator $\frac{NumberOfRed-2}{N}$ to slightly underestimate the percentage of balls in the box that are red (because we subtracted 2 in the numerator). Now as $N$ gets large this underestimation will have less and less impact but for any $N$ we still expect to slightly underestimate the percentage of red balls in the box.
It is possible that you may have two different estimators one which converges faster (ie is more consistent) but it is biased - whereas the other estimator may be unbiased but converge very slowly. Choosing which estimator is better under which conditions is what statistics is about.
Which brings us to this.
Washington Examiner: Barone: Going out on a limb: Romney beats Obama, handily November 2, 2012
I always thought that Michael Barone was a bit of a Republican shill but for some reason he gets respect among some serious people. He is the editor of the annual Almanac of American Politics so you would think that he has some reputation to lose by making extremely bad predictions. Here are his November 2nd predictions followed by the actual results.
Typically the quality of an estimator is judged by two criteria (1) consistency and (2) bias. An estimator is said to be consistent if as the size of my sample $N$ increases the estimator will converge to the true population value, So if $N=1$ my first estimator $\frac{NumberOfRed}{N}$ may be very inaccurate. With $N=30$ my first estimator should be fairly representative of the percentage of red balls in the box. With $N=1000$ my first estimator should be extremely close to the true percentage of red balls in the box. Interestingly my second estimator $\frac{NumberOfRed-2}{N}$ is also consistent - in the sense that as $N$ increases we expect it will do a better and better job of inferring the true percentage of red balls in the box. Now the second estimator will always infer slightly low (because we subtracted 2) but it will still get more an more accurate as $N$ increases.
Bias refers to whether an estimator systematically mis-infers. In the example above the first estimator $\frac{NumberOfRed}{N}$ is unbiased in the sense that we do not expect it to over or under estimate the percentage of balls that are red. Now it is possible that the first estimator produces a poor result (say we set $N=1$ and our first draw is black) but the first estimator has no tendency to systematically over or underestimate the percentage of red balls in the box. In contrast we would expect the second estimator $\frac{NumberOfRed-2}{N}$ to slightly underestimate the percentage of balls in the box that are red (because we subtracted 2 in the numerator). Now as $N$ gets large this underestimation will have less and less impact but for any $N$ we still expect to slightly underestimate the percentage of red balls in the box.
It is possible that you may have two different estimators one which converges faster (ie is more consistent) but it is biased - whereas the other estimator may be unbiased but converge very slowly. Choosing which estimator is better under which conditions is what statistics is about.
Which brings us to this.
Washington Examiner: Barone: Going out on a limb: Romney beats Obama, handily November 2, 2012
I always thought that Michael Barone was a bit of a Republican shill but for some reason he gets respect among some serious people. He is the editor of the annual Almanac of American Politics so you would think that he has some reputation to lose by making extremely bad predictions. Here are his November 2nd predictions followed by the actual results.
- Indiana - Romney. Romney 54-44.
- Florida - Romney. Obama 50-49.
- Ohio - Romney. Obama 50-47
- Virginia - Romney. Obama 51-47.
- Colorado - Romney. Obama 51-46.
- Iowa - Romney. Obama 52-46.
- Minnesota - Obama. Obama 53-45
- New Hampshire - Romney. Obama 52-46.
- Pennsylvania - Romney. Obama 52-46.
- Nevada - Obama. Obama 52-46.
- Wisconsin - Romney. Obama 53-46.
- Oregon / New Mexico / New Jersey - Obama. Obama 54-42 / 53-43 / 58-41.
- Michigan - Obama. Obama 54-45
Thursday, January 24, 2013
China's oil consumption
24/7 Wall Street: China’s Oil Demand at All-Time High in December
"Oil industry information firm Platts reported today that Chinese demand for crude oil rose 7.7% in December 2012 to an average of 10.58 million barrels a day, the highest on record. The Platts analyst attributed the sharp rise to refinery expansions and higher seasonal demand for products. Crude oil demand reached 10.5 million barrels a day in November...The rise in demand is linked to the pickup in China’s economy, which grew at a rate of 7.8% in the fourth quarter. And with higher growth forecast for 2013, demand for oil is expected to rise again this year."
WSJ: China Aims to Import 61% of Crude-Oil Needs by 2015
"BEIJING--China plans to cap its dependence on foreign crude oil to 61% and its electricity consumption to 6.15 trillion kilowatt-hours by 2015, the State Council said Wednesday. The limits, published in the State Council's 12th five-year plan for energy development, are increases from 2012, when China imported 57% of its crude-oil needs and used 4.9591 trillion kilowatt-hours of electricity. China bought 271.02 million metric tons of crude oil from foreign sources in 2012, according to the General Administration of Customs...The State Council said it would raise the share of natural-gas consumption as part of its energy mix to 7.5% and non-fossil fuel consumption to 11.4% by 2015. Crude-oil-refining capacity would be raised to 620 million tons and output of refined oil products to 330 million tons by 2015, the State Council said.""
Call me skeptical. When China's decision makers are faced with deciding whether to slow industrial production or increase crude oil imports I suspect they will choose to increase imports. Just a guess. As an aside - the most under-reported economic story of the last few years has certainly been the Chinese migration from rural areas to cities
"Oil industry information firm Platts reported today that Chinese demand for crude oil rose 7.7% in December 2012 to an average of 10.58 million barrels a day, the highest on record. The Platts analyst attributed the sharp rise to refinery expansions and higher seasonal demand for products. Crude oil demand reached 10.5 million barrels a day in November...The rise in demand is linked to the pickup in China’s economy, which grew at a rate of 7.8% in the fourth quarter. And with higher growth forecast for 2013, demand for oil is expected to rise again this year."
WSJ: China Aims to Import 61% of Crude-Oil Needs by 2015
"BEIJING--China plans to cap its dependence on foreign crude oil to 61% and its electricity consumption to 6.15 trillion kilowatt-hours by 2015, the State Council said Wednesday. The limits, published in the State Council's 12th five-year plan for energy development, are increases from 2012, when China imported 57% of its crude-oil needs and used 4.9591 trillion kilowatt-hours of electricity. China bought 271.02 million metric tons of crude oil from foreign sources in 2012, according to the General Administration of Customs...The State Council said it would raise the share of natural-gas consumption as part of its energy mix to 7.5% and non-fossil fuel consumption to 11.4% by 2015. Crude-oil-refining capacity would be raised to 620 million tons and output of refined oil products to 330 million tons by 2015, the State Council said.""
Call me skeptical. When China's decision makers are faced with deciding whether to slow industrial production or increase crude oil imports I suspect they will choose to increase imports. Just a guess. As an aside - the most under-reported economic story of the last few years has certainly been the Chinese migration from rural areas to cities
Egyptian currency crisis update
Reuters: Gulf cash buying Egypt's pound respite - for now
"Officially traded between banks at 6.6350 to the U.S. dollar on Tuesday...While licensed exchange houses are quoting weaker rates for the pound than banks do, the gap is moderate. A big, unlicensed black market in dollars does not appear to have developed, though one became a feature of business life during Egypt's last economic crisis about a decade ago..."One of the key things has been aid that Qatar is providing," said William Jackson, emerging markets economist at London's Capital Economics, referring to about USD 5 billion in aid which Qatar has provided Egypt since Mubarak's departure. Saudi Arabia has provided USD 4 billion more...For now, many investors seem willing to give Egypt the benefit of the doubt. The average yield on 182 T-day bills issued by the central bank on Tuesday was 13.725 percent, down from 13.970 percent a week earlier and 14.104 percent two weeks ago. Last August, it was well above 15.0 percent. "There is no shortage of dollars," said one teller at a foreign exchange house in central Cairo. He added that he was offering the dollar for 7.0 Egyptian pounds...Turkey transferred USD 500 million to Egypt earlier this month, while the finance ministry may offer more issues of dollar-denominated, one-year bills to sop up some of the private sector's hard currency holdings. Jackson said the pound was expected to fall to 7.50 in an orderly manner."
"Officially traded between banks at 6.6350 to the U.S. dollar on Tuesday...While licensed exchange houses are quoting weaker rates for the pound than banks do, the gap is moderate. A big, unlicensed black market in dollars does not appear to have developed, though one became a feature of business life during Egypt's last economic crisis about a decade ago..."One of the key things has been aid that Qatar is providing," said William Jackson, emerging markets economist at London's Capital Economics, referring to about USD 5 billion in aid which Qatar has provided Egypt since Mubarak's departure. Saudi Arabia has provided USD 4 billion more...For now, many investors seem willing to give Egypt the benefit of the doubt. The average yield on 182 T-day bills issued by the central bank on Tuesday was 13.725 percent, down from 13.970 percent a week earlier and 14.104 percent two weeks ago. Last August, it was well above 15.0 percent. "There is no shortage of dollars," said one teller at a foreign exchange house in central Cairo. He added that he was offering the dollar for 7.0 Egyptian pounds...Turkey transferred USD 500 million to Egypt earlier this month, while the finance ministry may offer more issues of dollar-denominated, one-year bills to sop up some of the private sector's hard currency holdings. Jackson said the pound was expected to fall to 7.50 in an orderly manner."
Tuesday, January 22, 2013
When will our nightmare of debasement end?
"With extreme inflationary and deflationary
forces at work, markets have oscillated between related panics. Guy
Wolf, global head of market analytics at Marex Spectron, a commodities
broker, said that with hyper-inflation, it does not matter whether it is
a bushel of corn or a barrel of oil – prices will rise in nominal
terms.
He said: “What you will find is that
everything moves simultaneously intraday, particularly in the indexed
commodities. In that sense, some are becoming more equity-like. Examples
of this would be energy and metals products such as oil and copper."
umm yeah...ya know its ...all this "hyperinflation" that we have been experiencing
Since January 2000 the average inflation rate in the CPI (annualized) has been ...drum roll...2.42%. Since January 2009 when Barak Obama and Ben Bernanke began their conspiracy to debase the greenback the average inflation rate in the CPI (annualized) has been...louder drum roll...2.21%. And in case you are wondering - over the last year the average inflation rate in the CPI (annualized) has been 1.73% See here for data.
Btw what is the requirement to become a global head of market analytics?
Sunday, January 20, 2013
Good advice from Alan Blinder
NYT: Financial Collapse: A 10-Step Recovery Plan
Blinder's 10 step program
Blinder's 10 step program
- Remember that people forget
- Do not rely on self regulation
- Honor thy shareholders
- Elevate risk management
- Use less leverage
- Keep it simple stupid
- Standardize derivatives and keep them on exchanges
- Keep things on balance sheet
- Fix perverse compensation
- Watch out for consumers
- Government insurance for anything which acts like money. Stopping bank runs before they start saves money in the long run (see Gorton)
What's In a Name: The Western Center for Journalism
Ok granted the Western Center for Journalism is a goofy right wing organization but with a name like that the least they could do is try to get their facts correct
WCJ: Did Obama Steal The Election With Hagel’s Help?
"In 1992, Hagel was CEO of Election Systems & Software, maker of computerized voting machines.
On March 15, 1995, Hagel resigned as CEO but kept millions in stock options and declared that he was going to run for the U.S. Senate in Nebraska. Although he was a virtually unknown candidate; although he ran against a former governor, Ben Nelson, who was hugely popular; and although all the polls prior to the election indicated Ben Nelson would win the election, oddly Hagel won by a landslide with 83% of the vote."
umm no. In 1996 Hagel beat Gov. Nelson 56-41. In 2002 Hagel beat Charlie Matulka 83-17 (see here). According to the NY Times Matulka was a construction worker who "did not raise enough money or have enough name recognition to pose a serious threat". Matulka did try to make an issue of Hagel's part ownership in ESS (see here) but the story didn't go anywhere. However in 2004 Matulka ran for the Democratic nomination for Nebraska's 1st House district and got less than 10% of the vote in that primary (see here) so maybe he was not the "strongest" candidate. But just think about it for a second... if you were going to fix an election by rigging the voting machines would you do it in a way that makes you look like a 3rd world despot or do in a way to engineer a reasonable but decisive victory...say 60-40.
I presume the rest of this story holds up to the WCJ's rigorous journalistic standards as well.
WCJ: Did Obama Steal The Election With Hagel’s Help?
"In 1992, Hagel was CEO of Election Systems & Software, maker of computerized voting machines.
On March 15, 1995, Hagel resigned as CEO but kept millions in stock options and declared that he was going to run for the U.S. Senate in Nebraska. Although he was a virtually unknown candidate; although he ran against a former governor, Ben Nelson, who was hugely popular; and although all the polls prior to the election indicated Ben Nelson would win the election, oddly Hagel won by a landslide with 83% of the vote."
umm no. In 1996 Hagel beat Gov. Nelson 56-41. In 2002 Hagel beat Charlie Matulka 83-17 (see here). According to the NY Times Matulka was a construction worker who "did not raise enough money or have enough name recognition to pose a serious threat". Matulka did try to make an issue of Hagel's part ownership in ESS (see here) but the story didn't go anywhere. However in 2004 Matulka ran for the Democratic nomination for Nebraska's 1st House district and got less than 10% of the vote in that primary (see here) so maybe he was not the "strongest" candidate. But just think about it for a second... if you were going to fix an election by rigging the voting machines would you do it in a way that makes you look like a 3rd world despot or do in a way to engineer a reasonable but decisive victory...say 60-40.
I presume the rest of this story holds up to the WCJ's rigorous journalistic standards as well.
Saturday, January 19, 2013
Ok explain this to me political scientists
The Median Voter Theorem is an explanation of how politicians choose to position themselves with respect the preferences of the public and how policy outcomes are then generated. MVT assumes that voters are spaced along a continuous interval with respect to a specific policy. So for example if you were to poll voters on what should be the maximum marginal tax rate there will be a distribution of voters from a 0% tax rate to a 100% tax rate. Maybe the distribution looks like a bell curve, or maybe it has two humps, or maybe it looks like a chi square distribution. In any case MVT then posits two politicians (or parties) who are each attempting to capture the votes of 50+% of the population or in this case 50+% of the area under the distribution. Each politician chooses a policy value (for example a 20% marginal tax rate). We assume that a voter will vote for the politician who positions his policy choice closest to the voters preference. So if a politician A is at 20% and politician B is at 21% and the voter prefers 30% then that voter will vote for politician B. The result of this is that the two politicians will push their policy choices toward the median voter (ie the voter who gives them 50+% of the distribution). Hence policy outcomes end up reflecting the preferences of the median voter.
So how do we explain this? The Republican strategy was not to only stop bills that are philosophically objectionable to the right but stop every bill possible. That is what we have seen over the last few years as President Obama has repeatedly adopted Republican proposals only have the originator of the proposal oppose the policy once the President signals his approval of it. There are many examples of this; Gov. Romney opposing Romneycare, Sen. McCain opposing cap and trade, a summary of some such proposals, this one, this one, this one, and this one is funny.
How does this behavior square with the median voter theory? Party R initially chose a policy point on the distribution. If party D moves towards R's policy point then party R moves back toward the right side of the distribution. Under the basic MVT this movement by R would necessarily result in them getting a reduced share of the area under the distribution.
Perhaps an augmented version of the MVT would instead assume a two humped distribution and if a party chooses a policy too far from a voter then he loses that voter's votes even if his policy position is more favorable to the voter than is the policy position of the other party. This could potentially mean that the two parties would not converge on the median voter. Something like the drawing below. Party R gets the red area and Party D gets the blue area. In this case Party R moved too close to the center and hence lost the far right side of the distribution - even though those voters should prefer R to D. Hence R's optimal strategy should be to move further right as they would gain more from the right hand side of the distribution than they would lose in the center.
However from the story that does not really appear to be the strategy consideration going on.... Whatever is the case this is certainly not vanilla MVT.
So how do we explain this? The Republican strategy was not to only stop bills that are philosophically objectionable to the right but stop every bill possible. That is what we have seen over the last few years as President Obama has repeatedly adopted Republican proposals only have the originator of the proposal oppose the policy once the President signals his approval of it. There are many examples of this; Gov. Romney opposing Romneycare, Sen. McCain opposing cap and trade, a summary of some such proposals, this one, this one, this one, and this one is funny.
How does this behavior square with the median voter theory? Party R initially chose a policy point on the distribution. If party D moves towards R's policy point then party R moves back toward the right side of the distribution. Under the basic MVT this movement by R would necessarily result in them getting a reduced share of the area under the distribution.
Perhaps an augmented version of the MVT would instead assume a two humped distribution and if a party chooses a policy too far from a voter then he loses that voter's votes even if his policy position is more favorable to the voter than is the policy position of the other party. This could potentially mean that the two parties would not converge on the median voter. Something like the drawing below. Party R gets the red area and Party D gets the blue area. In this case Party R moved too close to the center and hence lost the far right side of the distribution - even though those voters should prefer R to D. Hence R's optimal strategy should be to move further right as they would gain more from the right hand side of the distribution than they would lose in the center.
However from the story that does not really appear to be the strategy consideration going on.... Whatever is the case this is certainly not vanilla MVT.
Are we overfinanced?
Two weeks back I started a job search to hire a new quant. I was looking for a C++/C#/.NET programmer with a good understanding of financial models to work on risk models. We put a single advertisement out on a finance website and within a week I had over 60 candidates to choose from. While I am happy that I have so many candidates to choose from, I began thinking if this was really socially optimal.
Almost all of the candidates had undergraduate degrees in the hard sciences (applied math, physics, electrical engineering, mechanical engineering, computer science) a few had economics degrees. Over half of them had advanced degrees (MA, MS, PhD) in hard sciences. Over 75% of them had recently completed or were about to complete Masters in Financial Engineering programs. MFE is a relatively new degree but already a number of very good schools have offerings (see here). They probably turn out 1000+ such graduates per year. The focus of such programs is derivatives modeling.
So my question is - is it really socially optimal to turn out so many graduates focused on financial engineering? Certainly finance serves a social good in allocating capital from savers to investors but it is not clear to me that we need an army of financial engineers to do this. The vast majority of them have moved from hard sciences into finance. I speculate that you would be hard pressed to find anyone who has moved from studying financial engineering into one of the hard sciences - say physics.
One would assume that such flows should eventually be equilibrated by wage rates but that does not seem to happen. If there is an army of people moving from hard sciences to finance that should in theory drive down the wages in finance and drive up the wages in the hard sciences. But there still seem to be people migrating in the direction of hard science to finance - so maybe not. Is the problem that it is difficult to monetize discoveries in basic science while it is easy to do so in finance? Still I would think that the wage equilization argument should hold at some level.
Does this migration have negative social consequences? I suggest that it may. Basic hard science research has positive externalities in expanding society's overall store of scientific knowledge. Additional financial engineers may add to the profits of one particular firm's trading department but do they really contribute to society's overall knowledge base? Perhaps those persons who are migrating would never have made meaningful scientific contributions anyways. Still it is something to think about.
In the meantime I have a bunch of interviews to conduct.
Almost all of the candidates had undergraduate degrees in the hard sciences (applied math, physics, electrical engineering, mechanical engineering, computer science) a few had economics degrees. Over half of them had advanced degrees (MA, MS, PhD) in hard sciences. Over 75% of them had recently completed or were about to complete Masters in Financial Engineering programs. MFE is a relatively new degree but already a number of very good schools have offerings (see here). They probably turn out 1000+ such graduates per year. The focus of such programs is derivatives modeling.
So my question is - is it really socially optimal to turn out so many graduates focused on financial engineering? Certainly finance serves a social good in allocating capital from savers to investors but it is not clear to me that we need an army of financial engineers to do this. The vast majority of them have moved from hard sciences into finance. I speculate that you would be hard pressed to find anyone who has moved from studying financial engineering into one of the hard sciences - say physics.
One would assume that such flows should eventually be equilibrated by wage rates but that does not seem to happen. If there is an army of people moving from hard sciences to finance that should in theory drive down the wages in finance and drive up the wages in the hard sciences. But there still seem to be people migrating in the direction of hard science to finance - so maybe not. Is the problem that it is difficult to monetize discoveries in basic science while it is easy to do so in finance? Still I would think that the wage equilization argument should hold at some level.
Does this migration have negative social consequences? I suggest that it may. Basic hard science research has positive externalities in expanding society's overall store of scientific knowledge. Additional financial engineers may add to the profits of one particular firm's trading department but do they really contribute to society's overall knowledge base? Perhaps those persons who are migrating would never have made meaningful scientific contributions anyways. Still it is something to think about.
In the meantime I have a bunch of interviews to conduct.
Notes on JPM Whale Watch from Alphaville
Financial Times Alphaville had poured through the JPM Whale Watch Report. Some new revelations
- At the end of 2011 the JPM higher ups wanted to reduce the Risk Weighted Assets (RWA) of the CIO from USD 43 BB to USD 25 BB in the upcoming year. Management had a generally positive view of the economy so it was thought they could do without some default protection.
- Initially JPM's traders started reducing positions but after that undertaking proved expensive JPM Chief Investment Officer Ina Drew told the traders to be more sensitive to profits. The head trader told his underlings to focus on PnL.
- Mid January the head trader was told to make sure they were well positioned for future credit events. Alphaville speculates that this directive may have been the result of Kodak's January filing for bankruptcy.
- The traders decided to hedge their purchases of insurance on high yield names by selling protection on investment grade names (that was previously speculated here and here). Throughout February the JPM traders sold protection on investment grade and increased their purchases of protection on high yield names.
- There may have also been a curve trade in which they sold USD 20 BB in investment grade (IG-9) protection for 10 years and purchased USD 12 BB of investment grade (IG-9) protection for 5 years. This trade may have been unbalanced for two reasons (see below).
- They hoped this combination of transactions would
- reduce RWA (the two trades are somewhat correlated)
- position them well for further defaults
- earn profits (ok that didn't quite work)
- By late March / early April management became concerned about both negative PnL and the integrity of the marks being used to calculate that PnL.
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