Research Economist at the Bank of England
The last 20 minutes of the last episode of the last season were the only 20 minutes I watched.
Conclusion: Americans are so f’ing religious.
The last 20 minutes of the last episode of the last season were the only 20 minutes I watched. Conclusion: Americans are so f'ing religious.
In the light of the recent passage by the U.S. House of Represenatives of the Senate’s version of healthcare reform and the ensuing wailing, gnashing of teeth and smearing of soot in the hair by opponents of said reform, let me give my view – as an outsider – on the matter:
It’s a question of morality.
It astounds me — and, frankly, every other non-American USA-watcher in the developed world — that the richest nation on earth, whose very constitution proclaims the pursuit of life, liberty and happiness to be it’s highest ideals, whose citizenry so loudly profess to live by Christian virtues, would not guarantee that some form of basic, minimum healthcare be available to all of its citizens independently of their ability to pay. It utterly astounds me. If I were American, it would disgust me that this had not happened 50 years ago.
If my income and my wealth is above average for my society, I have an ethical duty to subsidise the health care of those who are, for whatever reason, at the lower end of the spectrum. Yes, there are issues of free riders and of personal responsibility, but they simply do not matter when answering the basic question. The government of a country, acting on behalf of that country’s people, has a moral imperative to provide a minimum level of care to all of its citizens.
I am not saying this as a screaming socialist. I freaking hate socialism. I love the market (when it’s allowed to function properly with full transparancy). I support (at least partially, and possibly fully) privitised social security. I like the idea of small government. I rage against the nanny-state in Australia and in the UK. I worry about encouraging dependency and a sence of entitlement in those people assisted by the government. But those concerns take a back seat on this issue.
So, yes, the second question (a two-for) is to ask what the minimum level should be and how to pay for it. But first question should have been a no-brainer.
If all the country can afford is a polio shot and a packet of aspirin, then that’s what they should provide (hopefully a charity or two might help out, too). But if the country is the richest in the history of the planet, they should be able to stump up for a bit more.
And, yes, for the next criticism, this particular reform by the U.S. Congress is nominally promising more than it will reallly provide when it comes to the fiscal deficit. Yes, again, given America’s political structure, U.S. government spending won’t be truely corrected until there is a real crisis approaching (as opposed to the make-believe crises being proclaimed by people opposed to the bailouts and stimulus package(s)).
I don’t care. The child of an unemployed, drug-taking high-school dropout should not be deprived of basic access to a doctor just because we’re angry at their parents. Nor should their parents, come to that.
I happened to be listening when Radio 4’s “Today Show” had a little debate about the probability of getting a pack of six double-yolk eggs. Tim Harford, who they called to help them sort it out, relates the story here.
So there are two thinking styles here. One is to solve the probability problem as posed. The other is to apply some common sense to figure out whether the probability problem makes any sense. We need both. Common sense can be misleading, but so can precise-sounding misspecifications of real world problems.
There are lessons here for the credit crunch. When the quants calculate that Goldman Sachs had seen 25 standard deviation events, several days in a row, we must conclude not that Goldman Sachs was unlucky, but that the models weren’t accurate depictions of reality.
One listener later solved the two-yolk problem. Apparently workers in egg-packing plants sort out twin-yolk eggs for themselves. If there are too many, they pack the leftovers into cartons. In other words, twin-yolk eggs cluster together. No wonder so many Today listeners have experienced bountiful cartons.
Mortgage backed securities experienced clustered losses in much the same unexpected way. If only more bankers had pondered the fable of the eggs.
The link Tim gives in the middle of my quote is to this piece, also by Tim, at the FT. Here’s the bit that Tim is referring to (emphasis at the end is mine):
What really screws up a forecast is a “structural break”, which means that some underlying parameter has changed in a way that wasn’t anticipated in the forecaster’s model.
These breaks happen with alarming frequency, but the real problem is that conventional forecasting approaches do not recognise them even after they have happened. [Snip some examples]
In all these cases, the forecasts were wrong because they had an inbuilt view of the “equilibrium” … In each case, the equilibrium changed to something new, and in each case, the forecasters wrongly predicted a return to business as usual, again and again. The lesson is that a forecasting technique that cannot deal with structural breaks is a forecasting technique that can misfire almost indefinitely.
Hendry’s ultimate goal is to forecast structural breaks. That is almost impossible: it requires a parallel model (or models) of external forces – anything from a technological breakthrough to a legislative change to a war.
Some of these structural breaks will never be predictable, although Hendry believes forecasters can and should do more to try to anticipate them.
But even if structural breaks cannot be predicted, that is no excuse for nihilism. Hendry’s methodology has already produced something worth having: the ability to spot structural breaks as they are happening. Even if Hendry cannot predict when the world will change, his computer-automated techniques can quickly spot the change after the fact.
That might sound pointless.
In fact, given that traditional economic forecasts miss structural breaks all the time, it is both difficult to achieve and useful.
Talking to Hendry, I was reminded of one of the most famous laments to be heard when the credit crisis broke in the summer. “We were seeing things that were 25-standard deviation moves, several days in a row,” said Goldman Sachs’ chief financial officer. One day should have been enough to realise that the world had changed.
That’s pretty hard-core. Imagine if under your maintained hypothesis, what just happened was a 25-standard deviation event. That’s a “holy fuck” moment. David Viniar, the GS CFO, then suggests that they occurred for several days in a row. A variety of people (for example, Brad DeLong, Felix Salmon and Chris Dillow) have pointed out that a 25-standard deviation event is so staggeringly unlikely that the universe isn’t old enough for us to seriously believe that one has ever occurred. It is therefore absurd to propose that even a single such event occurred. The idea that several of them happened in the space of a few days is beyond imagining.
Which is why Tim Harford pointed out that even after the first day where, according to their models, it appeared as though a 25-standard deviation event had just occurred, it should have been obvious to anyone with the slightest understanding of probability and statistics that they were staring at a structural break.
In particular, as we now know, asset returns have thicker tails than previously thought and, possibly more importantly, the correlation of asset returns varies with the magnitude of that return. For exceptionally bad outcomes, asset returns are significantly correlated.
Inspired by this post by Cam Riley … Any observer of U.S. politics could not have failed to notice the incredible level of party discipline that the Republicans, particularly in the Senate, have achieved over the last year or six. This may be something new to Americans, but it’s rather common to Britons and Australians, who generally get more excited when somebody — anybody! — breaks the party line. The party discipline of the Australian Labor Party, in particular, is phenomenal.
I understand that the generally accepted explanation for the differences between the USA and Australia in this regard focuses on the sources of funding for campaigns. In Australia, all campaign funds come from the party — individual candidates cannot raise money directly — where as in the US, there’s a combination of party-supplied and individually-raised funding.
That then suggests two possible reasons for the new-found Republican discipline:
If it is the second reason, then that is a tactical error, and a foolish one, on the part of those advocacy groups.
Back in June of 1987 (!), the New York Times interviewed Edward W. Kelley Jr. just as he joined the Federal Reserve’s board of governors. How’s this for a quote?:
Q. Mr. Volcker has been considered something of a foot-dragger on bank deregulation. Where do you stand?
A. I’m philosophically in favor. The deregulation we’ve had over the last few years has been highly beneficial and I would favor further deregulation of the financial services industry. But there’s an overriding public interest in making sure the integrity of those types of institutions is maintained. I really do not want to run any meaningful risks that we deregulate at a speed or in a way that would imperil that.
Brilliant!
[Hat tip to my new favourite blog (ok, so I’m two years behind the times), Economics of Contempt]
Those of us who aren’t American but still follow U.S. politics were quietly giggling (okay, openly guffawing) into our latte’s last week when Scott Brown won the special election to replace the late Ted Kennedy. The Daily Show’s take on the whole affair (I think it was broadcast the night before the election day) was spot on and I urge anyone with the capability to hunt down that episode. In short, the Democrat’s handling of the event is a classic example of why the word clusterfuck was invented. What in blazes they now intend to do in passing any reasonable kind of reform in health-care (and the ideas on the table weren’t really all that reasonable to start with) is beyond me.
Anyway. I tip my hat to the newest federal Senator in the United States for an expertly handled campaign.
I was then surprised to (finally) see some equally smart politics from the White House in the form of Obama publically supporting the banking regulation ideas of former Fed chair and octogenarian, Paul Volcker.
The White House had already been making noises about imposing a fee on financial institutions to recoup any losses in TARP. TARP, if you remember, is the US$700 billion officially set aside under president Bush Jr. to help the finance industry weather the storm. Of course, a large fraction of TARP was diverted to help the car (that’s “auto” for any Americans in the audience) industry and not all assistance to the financial industry was included in TARP. Still, it’s the closest thing to an easy target with a pronounceable name. If you care, you can read my incredibly brief thoughts on the levy here and, more importantly, here.
But the Volcker plan is an entirely different kettle of fish and can be boiled down to a simple and beautiful phrase: “Too big to fail is just too big.”
It calls for constraints on the scope and the size of US banks. It seeks to ban proprietary trading at institutions that hold retail deposits. It’s an armchair commentator’s wet dream come true! It’s also, unfortunately, staggeringly unlikely to ever become reality. There are two reasons for this.
First, as expertly described by the Economics of Contempt, the White House has no intention of pushing this through anyway. Instead, it was …
… a fairly transparent political stunt — the White House needed to do something to take the media’s focus off of health care 24/7, so they flew in Volcker and announced some proposals that sound good to the media. The two Senate staffers I talk to regularly both said their offices were basically ignoring Obama’s proposals, because even if the White House fights for them (which they won’t), Chris Dodd has no intention of inserting them into his committee’s bill. I like how some people think Obama’s proposals represent a fundamental turning point on financial reform, because….well, clearly this is their first rodeo. (Hence the uber-quixotic language they use to describe financial reform.)
[Update: Just to clarify, when I said Obama’s announcement was a “fairly transparent political stunt,” I wasn’t criticizing the Obama administration. We live in a political world, and political stunts are often useful. If I were Rahm Emanuel, I’d be a dick have done the same thing. I think it was probably a savvy move, and if health care reform ends up passing, then it was worth it.]
Second, the U.S. Supreme Court, in the second move in the space of a week to leave the America-watchers of the world chuckling, decided to reverse decades of precedent and assert that when it came to political speech, corporations, unions and other groups of individuals have more power than individuals. Not only can corporations, unions and the like directly fund political campaigns, but unlike individuals, they are subject to no limit on their donations. It’s great. You’re going to end up seeing major political events sponsored by Pepsi. You’re going to have unlimited funding available to opponents of any politician that does anything that runs contrary to a company that employs people in his or her district or state. In short, you will never, ever again see anything serious passed in an election year in the United States unless it has not just bipartisan, but unanimous support.
So, no, as much as I like what Obama said, I don’t think it’ll ever become law. It certainly won’t in 2010.
The NY Times has a nice piece summarising the clues that were not put together prior to the attempted Christmas Day attack on the Northwestern flight to Detroit. All of those clues are presented in this graphic:
The article speaks of poorly designed computer systems, phrases mentioned in speeches (which, frankly, would be incredibly difficult to automatically include in your analysis) and general stories of the left hand not knowing what the right hand is doing within the US intelligence community. To my mind, though, it really comes down to just a few simple points:
I firmly believe that most airport security is theatre, but the combination of just those three points should surely have warranted an individual pat-down.
Further to my last post, Greg Mankiw — who is not a man to lightly advocate an increase in taxes on anything, but who understands very well the problems of negative externalities and implicit guarantees — has written a good post on the matter:
One thing we have learned over the past couple years is that Washington is not going to let large financial institutions fail. The bailouts of the past will surely lead people to expect bailouts in the future. Bailouts are a specific type of subsidy–a contingent subsidy, but a subsidy nonetheless.
In the presence of a government subsidy, firms tend to over-expand beyond the point of economic efficiency. In particular, the expectation of a bailout when things go wrong will lead large financial institutions to grow too much and take on too much risk.
[…]
What to do? We could promise never to bail out financial institutions again. Yet nobody would ever believe us. And when the next financial crisis hits, our past promises would not deter us from doing what seemed expedient at the time.Alternatively, we can offset the effects of the subsidy with a tax. If well written, the new tax law would counteract the effects of the implicit subsidies from expected future bailouts.
My desire for a convex (i.e. increasing marginal rate of) tax derives from the fact that the larger financial institutions are on the receiving end of larger implicit guarantees, even after taking their size into account.
Update: Megan McArdle writes, entirely sensibly (emphasis mine):
That implicit guarantee is very valuable, and the taxpayer should get something in return. But more important is making sure that the federal government is prepared for the possibility that we may have to make good on those guarantees. If we’re going to levy a special tax on TBTF banks, let it be a stiff one, and let it fund a really sizeable insurance pool that can be tapped in emergencies. Like the FDIC, the existance of such a pool would make runs less likely in the shadow banking system, but it would also protect taxpayers. Otherwise, with our mounting entitlement liabilities, we run the risk of offering guarantees we can’t really make good on.
I agree with the idea, but — unlike Megan — I would allow some of it to be collected directly as a tax now on the basis that the initial drawing-down of the pool came before any of the levies were collected (frustration at the political diversion of TARP funds to pay for the Detroit bailout aside).
Via Felix Salmon, I see the basic idea for the US bank tax has emerged:
The official declined to name the firms that would be subject to the tax aside from A.I.G. But the 50-odd firms, which include 10 to 15 American subsidiaries of foreign institutions, would include Goldman Sachs, JPMorgan Chase, General Electric’s GE Capital unit, HSBC, Deutsche Bank, Morgan Stanley, Citigroup and Bank of America.
The tax, which would be collected by the Internal Revenue Service, would amount to about $1.5 million for every $1 billion in bank assets subject to the fee.
According to the official, the taxable assets would exclude what is known as a bank’s tier one capital — its core finances, which include common and preferred stock, disclosed reserves and retained earnings. The tax also would not apply to a bank’s insured deposits from savers, for which banks already pay a fee to the Federal Deposit Insurance Corporation.
i.e. 0.15%. It’s certainly simple and that counts for a lot. It’s difficult to argue against something like this.
I would still have liked to see it as a convex function so that, for example, it might be 0.1% for the first 50 billion of qualifying assets, 0.2% for the next 50 billion and 0.3% thereafter.
Better yet, pick a size that represents too big to fail (yes, it would be somewhat arbitrary), then set it at 0% below, and increasing convexly above, that limit.
The author of The Black Swan doesn’t approve of the looming reappointment of Ben Bernanke as chairman of the US Federal Reserve. Writing in the Huffington Post, he says:
What I am seeing and hearing on the news — the reappointment of Bernanke — is too hard for me to bear. I cannot believe that we, in the 21st century, can accept living in such a society. I am not blaming Bernanke (he doesn’t even know he doesn’t understand how things work or that the tools he uses are not empirical); it is the Senators appointing him who are totally irresponsible — as if we promoted every doctor who caused malpractice. The world has never, never been as fragile. Economics make[sic] homeopath and alternative healers look empirical and scientific.
No news, no press, no Davos, no suit-and-tie fraudsters, no fools. I need to withdraw as immediately as possible into the Platonic quiet of my library, work on my next book, find solace in science and philosophy, and mull the next step. I will also structure trades with my Universa friends to bet on the next mistake by Bernanke, Summers, and Geithner. I will only (briefly) emerge from my hiatus when the publishers force me to do so upon the publication of the paperback edition of The Black Swan.
Bye,
Nassim
That’s quite a god complex Taleb’s got going on there (“he doesn’t even know he doesn’t understand how things work”).