Tuesday, December 30, 2008

Book Review (#24 of 2008)

Long drives on the holidays are good for knocking out books.

Revolutionary Characters: What Made the Founders Different by Gordon Wood is a great history of several of our Founding Fathers. Pulitzer prize winner Wood has compiled a lot of information from essays and other sources over the years and condensed them into neatly packaged chapters on each founder.

I enjoyed the explanation of what it meant to be a "gentleman" in the 1700s, and how public service was something seen as a voluntary burden to bear on behalf of the people (ie: the foresaking of private wealth for an impoverished life as a public servant).

The most intriguing biographies for me were those of James Madison and Alexander Hamilton. Madison was once a proponent of a strong federal government until he saw what that was meaning in the new U.S. and later became a staunch advocate of states' rights.

Alexander Hamilton envisioned an America with a larger land mass, large government with large debts, large military force, and a modern economy with a prominent central bank. Hamilton is likely the only Founder who would be at home in America today.

This book would have been perfect without the Epilogue. I find introductions and epilogues to be ways that authors slide their own personal sermons in.

4.5 stars out of 5.

Thursday, December 25, 2008

Book Review (#23 of 2008)

Nixon and Mao: The Week that Changed the World by Margaret MacMillan.

This was one of my $1 garage sale audiobook purchases, it has taken me a long time to get through all 13 CDs because my commute to work is only about 7 minutes. You might ask how a 1-week event fills 19 chapters and 13 CDS. It's because the author provides all the necessary background information--mini biographies of all the key players involved, the historical context, a brief history of U.S. involvements in East Asia (namely Korea, Vietnam, and the support of Taiwan), a brief history of Communist China under Mao, stories of Kissinger's secret trips and the diplomatic backchannels over the years that made the trip possible, the details of every part of the week-long trip, the world's reaction, etc.

If you're looking for a book that will give you all of the above, you've found it. It's quite readable. The only dry parts are the biographical information about the various government ministry folks from both countries, but even those are sometimes intriguing.

I read this book because I wanted to know more about China, and particularly Mao. This book gives excellent insights into what can be known of The Chairman. I enjoyed the author's attention to detail, often quoting from memoirs, collected letters, Nixon's secret tapes, etc. A fascinating look at diplomacy.

I give it 4 out of 5 stars.

Wednesday, December 24, 2008

Merry Christmas!

One year ago today we were flying back from Moldova (via a night in Vienna). Praise God, a lot's changed since then. This Christmas season, thus far, has been very low-key and I'm glad.


Here's Elias enjoying some of his early Christmas gifts from my side of the family. He'll see his mom's side of the family the next couple weeks and learn what it's like to be in the car for a whole two days. :-\

Hope everyone has a safe and happy holiday season!

For fun, here's a NY Times' reading list of Christmas economics.

Tuesday, December 23, 2008

Book Review (#22 of 2008)

I just finished The Soul of the American University: From Protestant Establishment to Established Disbelief by George M. Marsden.

I won't lie-- I was required to read this book. It's a comprehensive history of religion in American universities since the establishment of the U.S. Marsden does a good job of being comprehensive. Thus, the book is long and rather dry. While I read a lot of history, I didn't enjoy this book much. The person who assigned it to me had to read it for a class in his doctorate.

I found a few things interesting-- the early influence of Scottish thinkers like Adam Smith on early curriculum, Protestants' eager embrace of the quest for scientific knowledge in the belief that new discoveries would always jive with Scripture (which eventually led to the downfall of religion in universities), and the parallels of the 1920's "lost" youth culture with today's postmodern youth culture. I also found some of the individual universities' histories interesting.

Marsden's "unscientific conclusion" is that today's universities are hypocritical in their espousement of tolerance while refusing to tolerate pluralistic views in academia-- namely the viewpoints of various religions. Marsden is an oft-cited voice on how many Christians have bought the lie that to be Christian means you must chuck your higher academic thinking at the door.

That's about it. Two stars out of five.

Monday, December 22, 2008

New Protectionism and Game Theory

The World Bank's Crisis Talk blog has a post today on the rise of protectionism in the midst of the crisis. Fears of Hawley-Smoot. The post is worth checking out more for the links to this The Economist article discussing the issue and this link to the stories of Russian protesters being arrested and beaten for demonstrating against new tariffs on foreign imported cars. (If you've ever been forced to drive a Russian car, you'd know why they're protesting).

It brought me to think about something Dani Rodrik wrote few weeks ago. When you design a fiscal stimulus package, like the Obama team is currently designing, you use some Keynesian multipliers to calculate how much of an increase in GDP you expect to see given an increase in government spending. One thing you have to factor in is the Marginal Propensity to Import. Because some of the new cash Americans get will end up buying foreign goods and "leak" from our economy.

You stop the "leaks" in two ways:
1. Decrease the marginal propensity to import by raising import prices through tariffs & quotas (or subsidize domestic industry to lower domestic prices or devalue the currency).
2. Get other nations to pass stimulus packages together, so that all of the "leaks" cancel out. As we buy more from the EU, they're buying more from us as well. Coordinated fiscal and monetary policy is very difficult.

Rodrik doesn't mention it, but both are classic game examples. Option #1 is a game with first-mover advantage. The first person to raise tariffs wins in the short run by stimulating the domestic economy. In the long run, all other countries will retaliate and we'll end up at a Nash equilibrium and lose out on gains from trade. All players have a time-inconsistency problem because they're faced with an incentive to cheat for short-run gain.

Option #2 is a game of first-mover disadvantage. For example, the EU might agree to a stimulus package, but reneg after the U.S. passes one. The EU economy gets stimulated at no cost through Americans with new cash buying European imports. Knowing that this would be the European response would make Congress less likely to pass a stimulus. We end up in another Nash equilibrium--no one passes a stimulus.

Option #1 is easy to do, and politically popular with interest groups. Option #2 is difficult to do for many reasons (including the above reason), and developing economies don't have the money to boost spending and/or cut taxes.

So, assuming a stimulus is absolutely necessary, Option #2 is impossible for the reasons mentioned and we can convince Congress not to be time-inconsistent on Option #1, the package has to be big enough to overcome the "leakage" that will occur as some of the stimulus money is spent on imports.
So, maybe this a reason why the projected dollar figure has grown over the past month.

Right now, the U.S. isn't raising its tariffs, but Russia and other developing countries are quickly throwing up trade barriers. China is pursuing an equivalent beggar-thy-neighbor approach by devaluing its currency. So, Option #1 is very difficult to resist and appears to be winning.

Friday, December 19, 2008

We live in weird times

The sky must be falling because I'm linking to another liberal Democrat's words for the second time today. Former Clinton Secretary of Labor Robert Reich is upset that after Congress denied Detroit money, the President told Hank Paulson to use the TARP funds to bail them out:

If TARP is a slush fund, everything's arbitrary. We're no longer a nation of laws; we're a nation of Treasury and White House officials with hundreds of billions of dollars of taxpayer money to dispense as they see fit. Why rescue autos and not, say, the newspaper industry, which is heading for oblivion. Better yet, why not rescue state and local governments? They're running short about $100 billion this year and as a result are slashing public services, including the nation's schools... an economic crisis is no excuse to turn our backs on democracy.


Reich is right. One of the most conservative Presidents in history is trying hard to hand us over to Socialism. As one of the commenters pointed out, it's as if we've declared war on the economic crisis, and the President is using his expanded war-time executive powers to again circumvent the democratic process.

I think I agree...

Wow, Paul Krugman is usually so far out in left field that conservatives hate reading his stuff. He's been accused recently of being "intellectually dishonest" in several places.

But, as a Christian who teaches economics/finance, I find his column today spot-on. It's about how Bernard Madoff is a symptom:

How much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.

Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? How, for example, could Alan Greenspan have declared, just a few years ago, that “the financial system as a whole has become more resilient” — thanks to derivatives, no less? The answer, I believe, is that there’s an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they’re doing.

After all, that’s why so many people trusted Mr. Madoff.

The column echoes Nicholas Nassim Taleb in a few ways. A lot of major banks and investors put their money with Madoff because he seemed to have a secret formula to beat the market. Really, he was just ripping them off. But, it's not any different than all the fund managers that get lauded for their success at beating the market when the success is due to randomness and their luck is about to run out, at which point they're canned and someone else becomes the shooting star.

Tuesday, December 16, 2008

The Shoe...

The Bush vs. Shoe incident in Iraq led me to check some Iraq blog feeds that I haven't read in a long while. The demonstrations in the streets of some cities yesterday in support of the journalist are telling. The more reserved "This was impolite, Bush was a guest" responses are also interesting.

The NY Times had a blog detailing reactions from various cities.

Inside Iraq, a McClatchy Newspapers blog hosted on the Washington Post's website, has a couple posts relating the "man on the street's view," (the authors are all Iraqi).

"Oh my God! It was astounding! I couldn't believe my eyes! I don't know whether I would call him a hero, but he certainly did what no one else has dared to do: He stood up strait and told the whole world his opinion about this shameful occupation. They may hurt him, behind closed doors – they may even kill him – but they can never take back that shoe. In history, Bush's term ends with flying "shoes"."

Iraqis are clearly amused; Americans are probably just confused. But Americans have had their head in the sand for a while. A new 513 page Federal report on the Iraq reconstruction, and its many blunders, began circulating last weekend. The summaries of the report I've read say: "Failure." We were lied to going into it, we were lied to all through the reconstruction-- how much money was being spent, how big the Iraqi police forces were, how quickly utilities were coming back online, etc.

I was also struck by an ABC interview with Dick Cheney last night that showed just how much power he had in making decisions (and Bush seemingly so little). Other recent reports about the White House approving CIA interrogation methods through secret memos seem to indicate that Bush was rarely present when decisions were made:

"In interviews, the officials recounted a series of private briefings about the program with members of the administration's security team, including Rice and Cheney, followed by more formal meetings before a larger group including then-Attorney General John D. Ashcroft, then-White House counsel Alberto R. Gonzales and then-Defense Secretary Donald H. Rumsfeld. None of the officials recalled President Bush being present at any of the discussions."


(The implication here is that people are covering for him so that he can't be prosecuted for decisions he didn't make, but maybe he really just wasn't party to some of the discussions).

Bush's "so what?" answers about Al Qaeda not existing in Iraq before the invasion (CBS last night) would have been "shocking" 2 years ago, but now we're just tired of hearing it. Will history really reflect more favorably upon Mr. Bush than our current complacency does?

Our leaders are laughing off the incident or saying "what a great example of freedom and democracy!" I think the incident shows that Iraqis have been asking "what price, freedom?"

Iraqis are still dying by the hundreds every month. There is still a lot of ethnic fighting and the government may not be functional for very long. Infrastructure is still slowly being rebuilt, and being blown up at the same time. It seems that many Iraqis have felt they haven't had a good voice to complain, which is why the journalist who chucked his shoes is being hailed as a "hero" by many.

Sunday, December 14, 2008

Are people more likely to attend church during a recession?

The NY Times has an article on this subject today, namely how Evangelical churches are booming during this recession. They are examining the work of David Beckworth, a macroeconomist whose blog I've been following for a while. Here is a pretty clear explanation of his published work in his own words. He writes about the income vs. substitution vs. wealth effects.

Several studies have been done on church attendance, I've mentioned a few on this blog over the years. Beckworth's conclusions conform with many others, namely that church attendance is a function of income.

Evangelicals tend to be found in the lower-income quintiles moreso than mainline protestants (Lutheran, Episcopalian, etc.). Hence, evangelicals' opportunity cost of attending church is lower, and their church services longer, than their mainstream brethren. As Beckworth illustrates, whether they attend church at all also depends on the opportunity cost of foregone income.

Substitution, to work or to attend church:
The opportunity cost for you to attend church is your foregone wages-- you could be earning $X.XX working instead of sitting in church for 2 hours. The higher those possible wages, the higher the opportunity cost of going to church and the less likely you are to attend. Beckworth finds that economic expansions mean more opportunities to earn income, so Evangelical church attendance falls during expansions. The opposite occurs during a recession-- the opportunity cost of attending church is much smaller today than a year ago.

Mainline protestants, however, are wealthier and the substitution effect is smaller for them-- an economic expansion may not lead to that much more marginal income from working a couple additional hours on Sunday to make it worth it, so they'd rather be in church. Beckworth found that mainline protestant attendance rises slightly during economic expansions.

However, there is also an income effect that countervails against the substitution effect:
If you're used to the benefits of making $XX,XXX per year and suddenly you're making less because your boss cut your hours, you might want to find a second job on weekends to keep your income level constant, and hence you'd skip church.

It appears that for Evangelicals, however, the income effect is outweighed by the substitution effect.

Similar to the desire to keep their income stream constant, people also like to be able to consume the same amounts of goods/services at all times. During an economic contraction, many will turn to churches for (cheaper) daycare, food items, entertainment, clothing, etc. Wealthier mainline protestants may not need to substitute for cheaper services, so they are less likely to turn to the church during an economic downturn.

Beckworth also notes something else of interest:
Individuals may also turn to churches for less tangible consumption needs such as a sense of certainty and divine guidance in a job search...In addition, mainline Protestant denominations often place less emphasis on absolute truths than evangelical ones and, as a result, are not able to create the same sense of certainty or appeal to an all powerful, job-providing God. Individuals, therefore, may choose to join an evangelical Protestant denomination rather a mainline one during a recession.[1] Consequently, the consumption smoothing ability of churches also points to a stronger countercyclical component for evangelical Protestants.

[1] Conversely, these same individuals may find a mainline Protestant denomination more appealing than an evangelical one during an economic upturn when the need for certainty and employment are less pressing concerns.

Friday, December 12, 2008

Too Much Reader...

I use Google Reader to keep track of my blogs. Unfortunately, there are limitations to what it can do. I'm considering switching to the highly acclaimed Feed Demon. I've installed it but have not played with it much.

Feed Demon alerts me when updated posts contain certain keywords of my choosing. That's nice. Otherwise, I have to sift through all the updated posts on Google Reader just to find which posts cover topics that I want to read, kind of like thumbing through a very large newspaper. And manually keyword searching every time just gets silly because there are several keywords that I look for. Why can't Reader have a feature like this?

On the positive side, Google Reader now has an automatic translation feature. You can subscribe to a non-English blog and it will automatically translate it into English for you (or something close to English... somewhat readable, anyway). This would come in handy during the next war that I decide to track. As it is, I subscribe to about 30 foreign feeds but mostly in English.

My biggest problem is clutter... information overload... trying to find a way to organize that. And I'm not big on organization. My Desktop looks just like my desk at work-- cluttered and disorganized. Currently, I just mark posts I find valuable with a Star, and occasionally use Google Notebook to record posts and categorize them.

I don't know how many feeds I subscribe to. There are almost 40 in my Economics section alone, most of which I follow regularly for information on the crisis. It's important, right? One nice thing about the profession is that everyone who is anyone has a blog, or will soon. Hopefully the market will soon deliver us the perfect feed reader.

8 Predictions

Not many people ask my opinions on the current recession and financial crisis. Things change every day as new data arrive, so people's opinions often change as the facts change.

Predicting and forecasting is just a waste. The people who have been right in the past year may have just been lucky. The people who have been wrong this year might get lucky next year. The people who were wrong this year might have made sound predictions, there were just too many unknown unknowns. Our hindsight bias discounts them as "obviously wrong," and so the few people who went against the grain are "obviously right."

Worse, many people making predictions in the news have vested interests. Financial economists want to shore up confidence in the market to boost investment in their firms, academic economists tend to be much more pessimistic. The pessimistic predictions have been the most accurate in the past year, so maybe there's a pessimism bias in academia right now.

Fortune Magazine has compiled what they call "8 really, really scary predictions"from eight different players. From Nouriel Roubini to a guy who's been managing funds on Wall Street for over 50 years. The contrasts are interesting; some predictions are not that scary.

Sticking with the 8s, The NY Times' Economix Blog has 8 different economists' answers to the question: "How would you design the ideal $500 billion stimulus package?"

Wednesday, December 10, 2008

On the Big 3

David Leonhardt on point today. Shows how the $73/hour in labor costs figure has been misconstrued in the media. A good part of that $73/hour comes from the costs the Big 3 incur because of payments to their large number of retirees. But, he sums up:

It’s a sad story, in many ways. But it can’t really be undone at this point. If we had wanted to preserve the Big Three, we would have bought more of their cars.

Tuesday, December 09, 2008

This day in history...

It wasn't on the news tonight, but the yield (interest rate) on the 3-month Treasury bill went negative today for the first time in history. This is like paying someone to borrow your money.

Various explanations abound. John Jansen writes:

What is going on in the front end? Central banks have flooded the system with money and the system is awash in a surfeit of liquidity. That money is searching for a home.

I also think that very large chunks of money which left the stock market and money funds when Lehman crumbled is in government-only funds and that creates a tremendous demand for bills.

December is always a month with bill demand as the process of sanitizing balance sheets for year end examination is always a concern. With the trials and tribulations in the financial markets this year that demand will be orders of magnitude larger than normal.

These are interesting times.

A guy in the NY Times article linked above says:

''There's a price for safety,'' said Peter Crane, president of money market mutual fund information company Crane Data LLC. ''Down slightly is the new up.''

Monday, December 08, 2008

BCS Controversy- Don't blame the "computers!"

It's official, Oklahoma and Florida will play for the BCS Championship.
I've heard a lot of gripes in the past few weeks from Big 12 folks about "the stupid computers!" (They're not computers but mathematical formulas put together by some individuals).

In front of me is a spreadsheet of the inputs that go into the BCS formula. I do this so I can see exactly how close it was. I didn't hear anyone talking about this on Fox last night.

I calculate that if Texas had gotten about 20 more points in both the Coaches' Poll and the Harris Poll (or some distribution of 40 points taken away from Florida and given to Texas in both polls holding all else constant), then Oklahoma and Texas would be playing for the BCS title.
That means that if just 40 voters had moved Texas up a spot and Florida down a spot, we'd have a different championship game. There are 114 voters in the Harris Poll and 61 in the Coaches' Poll (175 total).
*update*- it appears Alabama is the real spoiler. Many voters ranked Alabama ahead of Texas. Had Florida blown out Alabama resoundingly, would the polls have been different? Probably.

The "computers" ranked Texas ahead of Florida by a clear margin. The average rank among the 6 ratings the BCS uses was:
Texas: 2.5
Florida: 3.75
(Oklahoma was ranked #1 by all 6 "computers.")

The BCS drops the lowest and the highest rank. It considers a #1 ranking worth 25 points, #2 worth 24 points, etc. Since by dropping 2 "computers" you have 100 points possible, Texas ends up with 94 points, Florida with 89. This is turned into a percentage (94%, 89%) and is the number used by the BCS, and makes up 1/3 of the formula.

It came down to the polls, where Florida beat Texas in resounding fashion. The Harris Poll makes the biggest difference, Florida finished #1 and got 97.4% of a possible 2850 points. The Harris Poll is made up of
"former players, coaches, administrators and current and former media who are committed to ranking the college teams each week during the 2008 college football season"
You can see individual votes here. (Let me know if you find anything suspect).

The Coaches' Poll is the other one. Texas received some first place votes in that one, but Florida was only 1 point away from finishing #1 in the Coaches' Poll. It was 73 votes ahead of Texas. That made the difference 97.1% for Florida vs. 92.3% for Texas (out of a possible 1525 points).

So, it was the pollsters, primarily those in the Harris Poll that made the difference. If the "computers" had their way, we'd see Texas and OU squaring off again for the title.

That said, I hope Florida beats Oklahoma 56-14.

Friday, December 05, 2008

Ringing the Bell

Today I volunteered to ring the bell for the Salvation Army. SBU is assigned various days for employees to ring the bell, usually in hour shifts, and they desperately needed someone for today.

I found it to be a very rewarding way to volunteer my time. It's interesting to see the effect, walking by the bell-ringer just makes people feel guilty, particularly the elderly. Several made a comment like "You're really hitting me hard." I only just smiled and said "Mornin'!" to people walking by but many would say "Oh, I promise I'll give on the way out!" Little kids like the bell and want to put money in. I enjoyed the chance it gives to speak blessings into someone's life, I took that rather seriously.

My bell fell apart twice. Once the doohickey inside fell out, another time the handle became unscrewed and the entire bell fell apart (it almost flew and hit some lady in the head...nice). Several people said "I rang the bell yesterday," or "I'll ring the bell tomorrow!" (small town).

I'd bet at least $100 worth was put in the bucket in my hour. Makes me sad for the hours that someone doesn't stand there, that's $100 not raised for a great cause. The Salvation Army's commercials are pretty dramatic and moving, they make you want to give immediately.

It reminded me of how generous we are as a country, people give so much to charities (even though one can easily argue we don't give enough!) even during the worst economic times since the Great Depression.

My wife suggested I sing Christmas carols while I rang the bell. Not gonna happen. But, in my head I was singing a song I learned at a summer day camp I attended when I was 7 or 8. The Salvation Army song. Do you know it? It's probably at least 100 years old, I didn't understand most of it when I was 7 and my mom forbade me to sing it. It makes fun of the Salvation Army and had some pretty lewd verses (can't find many of those online, though... why would you teach little kids to sing filth they don't understand? Ah, because it's summer camp.)

Anyway, volunteering time feels pretty good.

Thursday, December 04, 2008

Priorities?

This week, governors of the United States met with President-elect Obama to ask for some federal aid. Many states are running budget deficits (which for some is unconstitutional) and are making dramatic spending cuts.

One example of a state with a budget crunch is Tennessee, which has begun cuts to its university system:

Recent cuts of $6 million to the UT campus, part of $17 million in budget reductions in the UT system, will mean fewer upper-division classes, reduction in faculty research support and additional reductions in the number of faculty, funding for admissions and in the ability to modernize teaching and classrooms through the use of technology.

State Finance Commissioner Dave Goetz said higher-education spending at all schools statewide must be reduced by $42 million. The UT system already trimmed $21.1 million from its budget earlier this year, with $11.1 million of that from the Knoxville campus.


In light of this, the University of Tennessee announced the hiring of Lane Kiffin as its new football coach.

Kiffin agreed to a six-year contract that will pay him $2 million, plus incentives, in 2009.

I don't fault Lane Kiffin. And UT isn't the only school whose athletics department is shelling out additional millions of dollars for a new coach in light of massive budget cuts and layoffs by the rest of the university. It's supply and demand, and the market demand for a coach over education comes from seriously messed up priorities, IMO.

I wonder if the same private donors/boosters that raised the $2 million+ for Kiffin would have been willing to give the money instead to keep admission spots open for students, or keep faculty in their jobs, or keep certain classes/departments open. It's sad there wasn't an outcry of "Let's not hire a football coach until more of the $11.1 million shortfall for the Knoxville campus is made up."

I'm seriously, painfully starting to wonder if I should consider boycotting NCAA athletics.

Wednesday, December 03, 2008

Art (and coffee)

Here's an innovative blog made up completely of the author's artwork. This set is about coffee.

I relate to several of the napkins, particularly the first few and then the line graph showing love for types of coffee over time.

I currently am drinking individual-brew Folgers (the ones that are like tea bags). They're pretty quick and easy and taste better than if I brewed it myself in a coffee maker. Ingenious invention. Unlike my colleagues, I'm not embarrassed to have a hot mug of coffee on my desk (everyone else drinks in the privacy of their home or not at all).

I drink only one cup a day if I'm paying for it. But I still tend to go wherever I can get "free" coffee.

BTW-- I had breakfast at a Subway the other day and enjoyed their French vanilla as well as regular brew. If you're ever stuck in a Wal-Mart for 2 hours beyond your control, you might check out the Subway's coffee.

Sunday, November 30, 2008

Advent Conspiracy



http://www.adventconspiracy.org/

Powerful video, and I agree with the idea. My wife and I are working on how we want to do Christmas, especially now that we have a son. We're coming up with some ideas.

Note: Someone from a church in NY contacted me about the $450 billion figure, asking if it's correct. It's misleading. $450 billion is roughly the retail & food sales in the U.S. during the month of December (2007, it was actually $429 billion). Americans spend $350-400 billion in a given month anyway. How much of that is spent at Christmas that wouldn't be spent otherwise? My rough estimate is about $51 billion. That would be the difference between the seasonally adjusted retail sales and the raw figure.
(*update*: The numbers they use come from the National Retail Federation's website in 2006.
"NRF defines 'holiday retail sales; as retail industry sales which occur in the months of November and December. Retail industry sales include most traditional retail categories including discounters, department stores, grocery stores, and specialty stores, and exclude sales at automotive dealers, gas stations, and restaurants."
The NRF is estimating that $41 billion was spent this past weekend.)

While Christians using misleading statistics to advance their causes is a pet peeve of mine, my own estimate of $51 billion is still a hefty sum compared to the estimated $10 billion needed to provide clean water to all of Africa.

Tuesday, November 25, 2008

Just plain cool

So, just outside Lexington, KY there is a castle. It's a famous landmark there, set among the rolling hills and nearby horse farms. It was built by an eccentric rich guy for his wife; they later divorced. A few years ago, the inside (house part) of the castle burned to the ground.

Recently, a developer bought it and turned it into a 16-room hotel. Construction just finished. Here is a picture slideshow of the inside, it looks amazing. $1,000 a night.

http://www.heraldleaderphoto.com/2008/11/24/castlepost-media-tour/

Monday, November 24, 2008

Betting the House

$7.76 trillion. Think about that number. Let's write it out:

$7,760,000,000,000.

Roughly half of U.S. GDP last year.

$7.76 trillion is what the government has put on the table so far in this financial crisis in the form of loans, guarantees, capital injections, etc. The latest being the Citigroup bailout.

The government will now pick up the tab in the form of equity injection if Citigroup's assets lose enough value. Citigroup is only one of the largest bank holding companies in the world.

They're betting the house on this one. Who's they? Basically: Paulson, Bernanke, and now Sheila Bair. (HT: Rebecca Wilder).

I've been spending a bit of time on Estonia's economic websites the past few days, wondering if/how I can hasten our move there. Did you know that most Estonians sing in local choirs? My wife will really love that.

Thursday, November 20, 2008

Bad days...

Well, Americans are finally starting to figure out that we're in a really bad recession. Deflation, which only a few were predicting a while back (remember?), is now a bandwagon pick.

Some of the economics/finance-related blogs I follow read like this tonight:
On the bond market's swings, Across the Curve:
"I have done this for nearly 30 years. I have never witnessed this before."

On "deeply troubling" news that all the Fed actions have not succeeded in bringing down long-term real interest rates, Mankiw says:
"What is the Fed to do (other than pray)?"

Brad Setser on the overall picture:
"There is now little doubt this is the worst financial crisis since the Great Depression."

I'm thankful I have next week off.

Wednesday, November 19, 2008

Collusion

We've been talking about oligopolies and collusive agreements in Micro. How an individual firm in a cartel always has an incentive to cheat and, almost always, finds that incentive difficult to resist. For example, say some producers (like OPEC) get together and agree to reduce output and fix a high price to increase their revenues. After the agreement is reached, each producer faces a highly elastic demand curve for his product. If he reduces price just a little bit, he can win customers from the other producers and make even more revenue. The other firms, learning of his cheating, will have to follow suit and competition will ensue.
The outcome is a Nash Equilibrium, and I've talked about this subject before-- specifically why companies threaten to match prices of their competitors. Back to the OPEC example, if you're Argentina, you know Russia has the same incentive to cheat that you do, so you expect him to cheat and so you do the same to beat him to it.

So, I posed my classes the following challenge:
If NO ONE shows up for Thursday's exam, then they will all get a 90%. But, if any one student shows up, then they will be awarded a grade based on their exam performance and anyone not showing up will get a ZERO.

(I'm pretty confident of the outcome--that all will come. Although, a 90% provided a very high incentive to maintain the collusive agreement as few students are likely to get an A. Had I set the bar to 85%, I'd be more confident right now).

On Tuesday, they behaved like a perfect cartel. Plotting, imploring, begging, bribing, threatening to punish (which will lead to a great opportunity to integrate faith into the lesson). Sounds like there might be a couple of holdouts in the morning section, but the afternoon (which is smaller) reached their collusive agreement rather quickly. My department chair expressed some concern since she was copied on some of the mass emails of negotiating students. We'll see.

*Update 1*- It's 9:40am and no one from the class has yet shown. Looks like they have succeeded in their quest. We'll see if anyone gets curious to know if anyone is cheating.
They formulated a plan to all meet in the Student Union at 9:30 and take attendance there. If anyone didn't show, they'd know someone was taking the exam. I half expected some of the holdouts just to not go to the Student Union but not come to class, either. That would create panic among the group as they run across campus to take the exam.


*Update 2*- Both the 9:30 and 2:00 classes succeeded in their collusion. The 2:00 class even sent an unknown spy to make sure I was the only one in the classroom. All nervously dropped by my office later in the day to see if they had succeeded. They spent most of the day in a paranoid state. Many of them learned the lesson of the difficulties of collusion, even if it didn't work out quite as I had intended.

A very surreal moment...

Last night I was in the lounge on campus watching Kentucky get embarrassed by UNC. Then, Dick Vitale started going on and on about how tiny Division II Southwest Baptist University upset Utah in Salt Lake City. "Where is Southwest Baptist? I had to look it up! It's in Bolivar, Missouri baby!" he screamed, mispronouncing "Bolivar."

It was one of the most surreal moments in my life. I'm sitting on Southwest Baptist's campus, listening to them be praised by Dick Vitale, while my home team is getting stomped at the same time.

God has a sense of humor that can't be described or fathomed.

Tuesday, November 18, 2008

It's a basketball school

The big story on campus this week is that our basketball team, a decent D-II team, upset Utah, a decent D-I team with an NBA prospect, in Utah. Our team had narrowly lost to a good Southern Illinois team the previous weekend.

Dick Vitale picked our coach as Coach of the Week.

The first home game is tonight, everyone is going. Except me. I'll be watching UNC-UK.

What everyone is reading

This Dick Cavett article has been #1 on the NY Times' daily "most emailed" article list since last week. I don't think I've ever seen a column do that well for so long, especially not a Dick Cavett one. It's about Sarah Palin, and it is a classic. Mostly because I wish she'd go away (and I suspect 74% of Americans now agree with me). Here's an excerpt:

What on earth are our underpaid teachers, laboring in the vineyards of education, supposed to tell students about the following sentence, committed by the serial syntax-killer from Wasilla High and gleaned by my colleague Maureen Dowd for preservation for those who ask, “How was it she talked?”

My concern has been the atrocities there in Darfur and the relevance to me with that issue as we spoke about Africa and some of the countries there that were kind of the people succumbing to the dictators and the corruption of some collapsed governments on the continent, the relevance was Alaska’s investment in Darfur with some of our permanent fund dollars.

And, she concluded, “never, ever did I talk about, well, gee, is it a country or a continent, I just don’t know about this issue.”

It’s admittedly a rare gift to produce a paragraph in which whole clumps of words could be removed without noticeably affecting the sense, if any.

Sunday, November 16, 2008

Wow. Just wow.

This 10 minute video is well worth your watching. What "experts" (like Ben Stein!?) were predicting on FoxNews a year ago. Notice how they ridicule Peter Schiff for predicting a housing bubble bust, stock market crash, financial crisis and more. Notice the praise for Lehman Brothers and Washington Mutual.



It would be really funny if it weren't so tragic. Dow 16,000, for example. Never get your news or financial advice from any cable TV channel. HT: Alea.

Dominance!

Jimmie Johnson becomes the second man in history to win 3 straight Sprint Cup Championships.*
He's truly one of the most dominant sportsmen of our time. Chad Knauss becomes the first crew chief to threepeat. 8 championships for Hendrick Motorsports.

The final race was just exciting enough to keep you watching. Carl Edwards won yet again but fell just short of a championship, lucky he didn't run out of gas at the end.

When I started watching NASCAR at the beginning of last season, I wasn't sure which driver or team to pull for. Hendrick was dominating and all their drivers were winning. I liked how they just seemed smarter than all the other teams. I initially pulled for Kyle Busch but then realized he was a rude punk. I thought about rooting for Casey Mears but realized that he didn't seem to have the guts to finish well. I couldn't root for Jeff Gordon because I already knew who he was and where's the fun in that? That left Jimmie, he defending champ, who always seemed to finish well. He was a nice enough guy, had wholesome sponsors (Lowes and Kobalt Tools), and his crew chief was who I wanted to be in life. I decided that #48 team would be my choice.

Jimmie and Chad are consistently good when they have to be. Their worse finish in The Chase was 15th. Chad outsmarts the other chiefs, and Jimmie outdrives the other drivers.

Next season will look different, as the financial crisis affects NASCAR more than any other sport. So, it's a bittersweet ending to the season.
We've proudly dressed Elias in one of his #48 onesies just about every Sunday. We need to get him some more Kentucky basketball gear now so he can be their good luck charm too.

*(for you non-NASCAR folk, you always call the championship by its current sponsor. So, Cale Yarborough won 3 straight Sprint Cup championships from '76-78 even though it was called the Winston Cup back then, and the Nextel Cup last year).

Saturday, November 15, 2008

Our government is protecting us

In case you had worries that the gift card you bought your mom for Christmas wouldn't be usable because the store went bankrupt, then here's some good news:
The FDIC is insuring gift cards up to $250,000. HT: FT Alphaville.

Gonna be a greatly scaled down Christmas this year, folks. (Thank God).

Friday, November 14, 2008

Not ready for basketball

A few people I graduated with and know love of UK basketball have asked me: "Are you fired up for basketball season?"

The answer is: "No." or "Not yet."

Especially as I got online tonight to follow the play-by-play and find that Kentucky lost 111-103 to VMI. I wasn't ready for that.

Time constraints are pretty huge in my life right now. I have a list of priorities, and the only truly free time I have is on Saturdays and Sundays. I watch college football (which I'm still enjoying) and NASCAR (which ends this week). So, with NASCAR out of the way, Sundays will be freed up... maybe for basketball. Or, more properly, for calculus. Yes, that's a pressing priority right now. And not a fair trade!

And it's hard to focus on any sport when we have a potentially world-changing G20 meeting happening to address a global financial crisis that has repercussions every day for how I teach my classes and how we might live for the next generation or so.

The bad thing about basketball is that most games are on weeknights and on ESPN. My weeknights aren't that free, I go to bed at 9pm, and we don't get ESPN. I haven't had time to check the Lexington paper much to get basketball hype. My parents sent me a DVD of this year's Big Blue Madness.

If you're a new reader to this blog, March becomes the most important time of my year as I collect massive amounts of basketball-related data in order to do regression analysis and forecast team performance in the tourny. After March, I'm kind of exhausted. Last year was one of the most compelling Final Fours ever.
This March, I hopefully will still be passing Calc II. I wonder if I'll have time to even think about filling out a bracket.

So, I'm not ready now. But, come January 4, the Louisville game, I'll be ready to go I'm sure. Until then, I still have my HD dynasty that is apparently more important to me than real-life basketball.

Thursday, November 13, 2008

Hmmm...troubling

On Tuesday the Fed announced it was increasing the interest rate it pays on bank's excess reserves to 1%, equal to the Federal Funds target rate. Dr. James Hamilton, who runs the very educational/helpful Econbrowser blog had a great post last month on why the Fed is encouraging banks to lend to the Fed instead of, say, each other or other entities. This fit nicely into our textbook material today, which allowed me to share it (although I spent a long time making sure I understood it well enough to teach it).

The Fed's balance sheet is expanding, it's projected to be $3 trillion very soon (it was only $800 billion a year ago). This is beginning to draw some attention.

The Fed is making huge emergency loans to AIG, buying up commercial paper, acquiring a lot of assets. It doesn't have the means to do that like it wants on its own, so it is having Treasury supply it with cash via the sale of new Treasury securities, and banks increasing their reserves (ie: lending to the Fed).

The fact that they're raising the interest rate paid to banks in order to provide even more incentive to lend money to the Fed means that the Fed needs even more money to buy even more assets. $2 trillion hasn't been enough! (Note: I was wrong in my post yesterday about why the Fed wants banks to hold excess reserves).

(Geek note: I spent a good 15 minutes giving my class my bogus info [didn't know it at the time] from the aforementioned Econbrowser page on why there wasn't an arbitrage opportunity for banks to borrow at .27% from GSEs and then lend to the Fed at a 1% rate. One heartening thing for me is that PhD economists are trying to figure out why the no-arbitrage assumption doesn't apply to the Fed funds market right now. Oh well).

In a slightly related note, I saw Treasury Secretary Henry Paulson on NewsHour tonight and was a little disgusted. (Jim Lehrer was a poor choice for an interviewer, he knows nothing about finance/economics). He talked out of both sides of his mouth. Would have been nice if he'd said:
"You know, we knew there was a big problem but we didn't know how to handle it correctly. We thought buying troubled assets was the way to go, but later listened to economists who said we weren't thinking it through well enough. They were right. We're making this up as we go."

Instead it was: "We should have passed the TARP sooner. Things are better now than they would have been. Everything is under control, except the general economy. That's a mess that we can't fix. I never said I could fix that mess, but maybe I'm a bad communicator. We've addressed the housing issue by not really addressing it. It will bottom out sometime, and until then we're in a mess. Oops, I didn't say that either."

There's this assumption that he knows what he's doing. So far, doesn't look like it.

Wednesday, November 12, 2008

The other shoe is about to drop?

Credit card losses hit new highs. (HT: Across the Curve)
"Credit card companies have been setting aside money to cover credit losses, but analysts estimated the lenders would still need higher provisions."

American Express is now a nationally chartered bank holding company, allowing it to get access to loans from the Fed. This is a sign that American Express would have been in trouble otherwise. One possible reason the Fed is encouraging banks to hold more excess reserves: further asset depreciation, including nonsecured loans (ie: credit cards).

I just sent an email to my Money and Banking class that is typical of the last two months. Fed policy changes dramatically faster than we can cover the topics in class. What was true in class yesterday is no longer true today. The textbook, published last year, is now obsolete. I should have just called the class "Financial Crises and Monetary Policy" and taught topics around the latest news of the week.

*UPDATE!:* The Treasury Department now wants to subsidize the credit card (and auto loan) industry. I agree with Tyler Cowen: Bad idea.

Tuesday, November 11, 2008

Book Review (#21 of 2008)

Shameful that I've not finished a book in a couple months. This is mostly because I'm not driving as much so I can't listen to audio books as much. I'm also spending most of my "free" time reading textbooks, have gone through several of those. I'm also reading required texts that take up my time.

But, our trip to St. Louis afforded me to finish one book I started long ago:

An Army at Dawn- The War in North Africa 1942-1943, by Rick Atkinson (Part I of his Liberation Trilogy).
Atkinson is considered the foremost military historical writer of our time. I read his book on the 101 Airborne in Iraq, where Gen. David Petraeus first became a star.

This book is a very detailed look at how war is hell. How all operations are disorganized chaos. There are horrors of war and then there are the horrors of day-to-day survival in that war. Survivors are just lucky.

Was the North Africa campaign necessary? It trained a large number of Allied soldiers, prepared them for the invasion of Europe. But, wouldn't it have just been better to invade Europe and avoid the circuitous route taken by invading Africa and then Sicily? Probably.

This book is a great historical documentary. No one tells the soldiers' stories like Atkinson.
I give it 3.5 stars of 5.

Monday, November 10, 2008

Eager to Teach Macro

There will be no better time to take Principles of Macroeconomics than next semester. I'm happy to be teaching the only two sections here. I've gotten the textbook I want and the classes should be quite full.
Why will it be interesting? Because every day there is a new article out about the need for a fiscal stimulus-- an increase in government spending meant to offset the downturn in the business cycle. Paul Krugman is advocating a $600 billion stimulus today. China just announced a $586 billion stimulus package (which may not mean anything... they might spend that much anyway).

This is pure Keynesian economics, and the history debates on the blogosphere over the past week have been interesting. That will make the class more interesting.

The Fed is taking "historically unprecedented" actions in the realm of monetary policy. This makes for some wonderful graphs and interesting discussion.

Plus, I've just gotten armed with a bunch of new curriculum, videos, games, etc. from my weekend at the Fed. It will be good.

I'm also teaching Personal Finance which will also be great. No better time to figure out how to budget, save, and plan ahead than during an economic downturn.

Almost there!


Jimmie Johnson and Chad Knaus put on another dominating performance yesterday in Phoenix. Jimmie is now almost to his 3rd consecutive championship, something done only once before in the 50+ years NASCAR has been around. He has to finish at least 36th in the next race to clinch the title.

I watched most of last night's race but switched over to to the end of the KC Chiefs game while the race was red flagged after a wreck. I switched back over later only to see ABC playing America's Funniest Home Videos, and thought I must have just missed the end.

I didn't. ABC didn't show the end of the race. It's now known as the "Heidi Game" of NASCAR. Apparently, they decided enough was enough.

"To go to 'America's Funniest Home Videos,' that hurts," Johnson said.

Dan Wetzel writes that Johnson is "Tiger good," but not "Tiger popular."

Maybe if I wasn't a #48 fan I'd be bored. But I freakin' love NASCAR. Might makes right in sports-- other teams should go out and find a driver as good as Jimmie and a crew chief as smart as Chad Knaus. Otherwise, he might just go for 6 in a row.

With the potential bankruptcies of Ford, GM, and Chrysler, NASCAR is facing some peril. That makes me sad, but I don't believe in giving them another multi-billion dollar bailout just to keep my preferred race team supported.

Sunday, November 09, 2008

Extreme Makeover

I usually don't watch Extreme Makeover: Home Edition because I don't like tear-jerker exploitations and often feel the resources could be put to better use in another country.

I watched tonight's episode because I heard it described as offensively over-the-top because of the many disabled people doing the construction work.
It was over-the-top, but extremely humbling. In fact, I recommend watching it. The story of Sam Malek, the physically challenged coffee shop owner, is incredible. Googling found this St. Louis Magazine article about him from 2007. I spend at least half my days feeling sorry for myself or wishing I could change things about myself or situation. And then I see an episode like tonight and realize how blessed and selfish I am.
So, if you want a humbling experience and a reality check watch this week's episode. Warning: It's over-the-top emotional.

Notes from the Fed Conference

I learned a good bit at the conference and had a great time. The St. Louis Fed has a beautiful new conference facility. It's like walking into a palace. And not a dime from taxpayers, the Fed independently funds itself (they make the money, duh).

The auditorium was like the United Nations' auditorium. Plush chairs, great technology. They gave everyone (60+ people) a laptop to play with for one demonstration.
Very nice meals provided and an open bar. I abstained and kept the professors from other Baptist schools accountable (much to their chagrin, I imagine).

It was great to meet other eco/finance professors like myself and hear their words of encouragement about how the first semester of teaching is always the worst. I learned about other college's curriculum and what other instructors were finding effective in the classroom. The Fed is constantly putting out curriculum, games, study helps, etc. for students so that was great to learn about.

The first day of the conference was mostly spent listening to officials talk about the current financial crisis and the Fed's response. Since I spend hours a day reading the latest articles and economist blog discussions, I was very up to speed. I could tell the forecaster who presented reads the same blogs that I do. Nice. Myself and a couple other nerds asked some questions to try and glean information we're not going to see published in the newspaper. I didn't get to ask as many as I'd have liked, of course, but I enjoyed every minute of the discussions.

Here are a few notes I made that I think are most important:
Kevin Kliesen, Associate Economist in the Research Division. Forecaster.
Long term:
Real GDP growth rate will begin a steady 25-year decline starting in 7-8 years when baby boomers begin to retire.
Short term:
CPI expected to be at 3-4% annual growth in 4th quarter of '08.
TIPS rate not a good indicator of inflation, other than Nouriel Roubini no one is predicting deflation.
200,000 jobs expected to be lost in October.
Fed is concerned about volatility in the stock market. "Incredible; startling."
Fed is concerned about volatility in investment driven by uncertainty and adverse selection problems.
Credit crunch: "Lending is not contracting. Certain parts of the credit market are frozen [commercial paper]."
Bank lending is going way up, but CP way down. Banks becoming more important part of external fund sourcing for firms.
36% increase in the Monetary Base in the last year. "No historical precedent."

Consensus forecast:
Short, shallow recession (with increasing probablity of a long, protracted recession).
Indicators point to severity (citing OECD paper from August '08)
Risks:
1. Equity prices falling more (maybe housing recovers by end of '09?)
2. A lot more money is in the pipeline now... how will the Fed contract it?
3. FY 2009 deficit: $1 trillion. Can we sell T-bills at the same interest rate?

Another economist presented the history of the housing bubble and its aftermath. Not much new there.

Q&A session:
Fed is engaging in quantitative easing. So much liquidity in the market that it's hard for them to hit their Fed Funds target rate.
Great concern over the Fed's "exit strategy." How do you contract the money supply now without a major recession?

James Bullard, the new St. Louis Fed President, spoke at a dinner the first evening. He expressed his concern for the loss of independence for the Fed as it's now being "blurred" with Treasury in the minds of many Americans. He disliked the bank recapitalization scheme and liked the TARP plan. He wanted to the government to be as hands-off as possible and let it run its course. He saw the look on Ben Bernanke's face when he was told AIG was in trouble and "it wasn't pretty." He said it was crucial that Obama assemble his economics team ASAP and that the transition be "seamless." Regulatory reform isn't sensible right now, wait until clearer heads prevail. We won't know the crisis is over until it's over.

Wednesday, November 05, 2008

Turmoil vs. Stability: The Fed's Response



That is the title of the conference I'll be attending in St. Louis this weekend, hosted by the St. Louis Fed. It's free of charge to university educators and there will be some sessions on improving classroom instruction. I'm pretty pumped.

How to pronounce "Missouri"

One thing you may have caught last night were all the political pundits saying "Missour-ee" in one sentence and then correcting it with "Missour-uh" the next.
Jim Lehrer on PBS explained this very early on in the evening. The Western half of Missouri says "Missour-uh," and people at the University of Missouri in Columbia swear that's the only way to pronounce it. The eastern half (including St. Louis) say "Missour-ee."

This played out in the gubernatorial election here. Jay Nixon, a Democrat, made sure that he said "Missour-uh" in all of his ads. Ken Hulshof, a Republican congressman who got blown out last night, said "Missour-ee" in his (relatively few) ads. To people on this side of the state, the difference was clear. Nixon was making the point that he was from here, while Hulshof was "out of touch" from spending too much time in Washington.

I say "Missour-ee" when I speak, but I'm always self-conscious about it wondering if people hear that and immediately think "outsider!" If my non-midwestern accent doesn't give me away (I tend to lay a Western Kentucky accent pretty heavily on purpose...sometimes I'll turn it into an East Tennessee one just to annoy people) the way I pronounce Missouri probably tells people all they want to know about me.

Monday, November 03, 2008

When marginal cost > marginal revenue, you should stop production

If you haven't heard, Starbucks is giving out a free tall coffee to everyone who shows up at their stores on Tuesday and just says "I voted." I imagine that's going to be a lot of coffee handed out.

Let's see, Starbucks' stock has lost over 50% of its value in the last 12 months, they've closed hundreds of stores, and consumers are buying less of everything. I know what will turn things around-- giving out millions of freebies! Well, they might as well be patriotic on their way out of business. (I'm just sad we live a long way from the nearest store).

Sunnier skies

For a markedly rosier outlook on the economy and the financial crisis (and the spectre of deflation), check out Dr. Casey Mulligan's blog. It's very textbook and very helpful.

"Shouldn't a housing bust have the opposite effects of the housing boom? The party line about the economy is that the housing boom was a time of inefficient excess. Shouldn't a period of low housing investment bring efficient prodigality: that is, MORE GROWTH FOR GDP AND EMPLOYMENT and less growth for consumption? Why then does the party line feature gloomy predictions for real GDP and employment growth going forward?"
This is a good point. The increase in saving (due to less consumption) should result in lower interest rates, greater investment, and greater future economic growth. He proves the point that non-residential investment is on the rise. Holding all else constant it should also result in a decrease of selling U.S. assets to foreigners and an "improvement" in the trade balance (more exports relative to imports).

However, all else isn't held constant. Public (ie: government) dis-saving should offset (crowd out) much of the private saving. An exogenous increase in demand for dollars abroad to buy risk-free Treasury assets has contributed to a dollar depreciation, potentially worsening the trade deficit and hampering export growth.

Anyway, Dr. Mulligan projects no deflationary problems and greater economic growth than other economists are predicting.

Friday, October 31, 2008

Deflation

From Nouriel Roubini to economists at Credit Suisse, everyone projects deflation over the next several months. Part of that is the decrease in aggregate demand part of that is the rapid appreciation of the dollar as people flee risk by buying U.S. Treasury bills that is making imports cheaper, and some of both of those have contributed to the collapse of oil prices.

As with inflation, there are winners and losers. Losers are people who are paying back loans and seeing the value of those payments rise in real terms. Winners are the people who made those loans. When the losers default on their now more-expensive loans, everyone loses.
(Roubini link and picture above HT: Greg Mankiw).

Wednesday, October 29, 2008

Stocks higher, no wait...

(Warning, Taleb-like rant ahead).
Newspapers are ridiculously dumb with their headlines. Last night the headlines read:
"Dow up 900 points on news of expected Fed rate cut."
This morning they read:
"Stocks open lower ahead of Fed rate decision."

So, which is it? Neither! Correlation does not equal causality! It's about as dumb as when they say "Dow up 2 points on news of XYZ company merger." The market does what it does, there are a lot of reasons for its volatility, pinning one reason to a headline is bad journalism.

The Fed just lowered their target for the Federal Funds Rate last week to 1.5%. There was no huge market surge then.

And, in fact, the Fed has ALREADY lowered the Fed Funds Rate to 1% (HT: Carpe Diem). They never really kept it at 1.5%, looks like they ordered their traders to go ahead and make it 1% unannounced last week.

The market has already taken this information into account. So, the volatility in the market doesn't depend on the Fed's announcement later today.

Monday, October 27, 2008

I'm cursed to not watch NFL football

You know how in the cartoons a storm cloud will often follow an unlucky character, raining only on him? That's how I feel about NFL football.
I grew up in central Kentucky where the Cincinnati Bengals were the "local" team and they were awful. After 1988 it was all downhill. NBC would always televise the Bengals game and the reprieve came only on the bye week... during which they would play the Browns game. The Browns were equally awful. Once Fox got the NFC that helped things a bit-- some variety.

I actually grew up a Chicago Bears fan. I began to be aware of sports about the time the Super Bowl Shuffle was popular and Walter Payton was on the original Tecmo Bowl. The Bears at least contended in the playoffs-- but always underachieved and later stank like the Bengals.

Now, I live in SW Missouri where most people support the Chiefs. CBS airs the Chiefs every week, while Fox airs the Rams. The Chiefs recently broke an 11 game losing streak but sit at 1-6 on the season, horrifying to watch. The Rams are at 2-5 and aren't much more fun. So, watching the NFL here is like watching paint dry.

I've given up on the NFL and only watch college football. The NFL is truly the No Fun League due to the parity. Brian Burke's analysis also ruins the NFL for me because I see coaches making sub-optimal decisions and commentators on TV not making any probability calculations in their analyses. His in-game win probability stuff is truly amazing, you should follow it if you watch NFL games on TV.

I enjoy the variety of offenses/defenses in college more, I enjoy the much larger crowds and the deeper rivalries. Every week is a playoff game. The Big 12 isn't bad, and I get to watch my beloved SEC every week. ABC's Saturday night game is truly special. Our rabbit ears don't pick up NBC, so I can't get the Sunday night NFL game.

The NFL also competes with NASCAR and I find NASCAR much more intriguing-- especially watching Carl Edwards, the local boy, get frustrated trying to catch "magic" Jimmie Johnson.

Sunday, October 26, 2008

Is there such a thing as pragmatic ideology?

David Brooks, as always, raises thought-provoking points.


McCain would be an outstanding president. In government, he has almost always had an instinct for the right cause. He has become an experienced legislative craftsman. He is stalwart against the country’s foes and cooperative with its friends. But he never escaped the straitjacket of a party that is ailing and a conservatism that is behind the times. And that’s what makes the final weeks of this campaign so unspeakably sad.

Should John McCain try to reform his party into a more centrist platform and away from the free-market fundamentalism that it's currently based on?
The Hamiltonian reach that Brooks describes in his column is one recently pursued by some moderate Democrat economists, including Barack Obama's senior advisor-- which means the idea is anathema to "the base" of the Republican party.

The problem with Republicans isn't conservative ideology in the sense of Barry Goldwater, Milton Friedman, William F. Buckley, Frederik Von Hayek, etc. it is their fundamentalism. This is when you draw some lines around an ideology-- even if you can't explain the reasoning behind that ideology very well -- and refuse to budge from it. Then it gets reduced and parceled in mantras like "tax cuts pay for themselves, drill baby drill, government is evil," etc.

As an economics instructor I teach the beautiful efficiencies of the free market. How government intervention usually hurts more than it helps-- if it ever helps. There's some nuanced ideology there. Any deviation from that is considered suspect. Didn't the 1960s and 1970s teach us that Keynes was wrong? Didn't the 20th century prove that, since Socialism was proven a failed system, that government intervention is harmful at every point? Didn't we learn that in a free-market Democracy the right choices will always be made in the end?

The recent financial crisis hasn't shaken my faith in the free market-- it has only reminded me of the sinful depravity of those who make up the market. See tonight's 60 Minutes piece on how using instruments like Credit Default Swaps to bet on failures was considered illegal for 100 years. The gambling was legalized in 2000 at the nadir of pro-market forces, and here we are in a global recession partly as a result.

But, the current crisis has shown me (and Alan Greenspan) that traditional economic models do not tell us as much as we thought. Taleb was right. The "heterodox" behavioral economists are also right: People don't always make decisions rationally. Traditional models have inherent flaws. And this is huge for economists because the neoclassical model is taught in 99% of schools and textbooks. So, it's a paradigm shift similar to a Church Reformation.

Brooks understands this, he said so on Friday's NewsHour. He is advocating a similar paradigm shift for the Republican Party. Teddy Roosevelt instead of Barry Goldwater-- McCain idolizes both, so he's in a lurch. And I'm in a lurch, since any move toward Hamilton or Roosevelt would be seen by my employer as a compromise on the "Truth" of free-market ideology, particularly Austrian economics.

The problem that Brooks often misses (maybe because he's Jewish?) is that the Republican base is also made up of religious fundamentalists. McCain was the reluctant candidate of the vast majority of the party until Palin came on the ticket. At that point, the money and support rolled in in droves because she was so clearly pro-life. (I've written on this before).

The marriage between the two parties has huge consequences. One my students remarked that since Republicans are getting blamed for financial crisis, maybe Christians will be scapegoated (as Jews were in the Panic of 1873) since so many of them are Republicans. An evangelical Christian is seen by non-Christians as someone who is pro-life and pro tax cuts. In other words, a Republican.

Above are the issues I'm wrestling with. While I wish the Republican party would remove its "straitjacket," I realize that many people think that the material of the straitjacket are basically the truths that God blesses. I'm a type of heretic for questioning that.

Thursday, October 23, 2008

On Waco

I can pretty much guarantee that we'll never move back to Waco. When the police are paying to advertise the high crime rate on billboards, you know something is messed up.

Sarah Palin loves Bass Pro Shops

Gov. Sarah Palin is coming to Springfield tomorrow. Missouri has members of both tickets visit weekly, Biden was in Springfield last week. Initially Palin was slated to speak in the arena at Missouri State, but they have moved it to the parking lot of the original Bass Pro Shop because of the mass of people expected to attend.

I have several students that are going to see her. I have several colleagues who think she's great. I don't. The Economist said this recently in regards to what McCain needs to do to win:
"(McCain) needs to dump the dumb populism (even though it seems to be too late, alas, to dump the dumb populist-in-chief, Sarah Palin.)"


Other intellectuals have bemoaned having her on the ticket. I got to thinking "What is Sarah Palin's profession outside of politics? What would she be doing if not Governor or Mayor? What exactly did she study in college and where?"
Wikipedia:

Palin attended several colleges and universities. In 1982, she enrolled at Hawaii Pacific College but left after her first semester. She transferred to North Idaho community college, where she spent two semesters as a general studies major. From there, she transferred to the University of Idaho for two semesters.[10][11] During this time Palin won the Miss Wasilla Pageant,[12][13] then finished third in the 1984 Miss Alaska pageant,[14][15] at which she won a college scholarship and the "Miss Congeniality" award.[16] She then attended the Matanuska-Susitna community college in Alaska for one term. The next year she returned to the University of Idaho where she spent three semesters completing her Bachelor of Science degree in communications-journalism, graduating in 1987.[10][11]

In 1988, she worked as a sports reporter for KTUU-TV and KTVA-TV in Anchorage, Alaska,[17] and for the Mat-Su Valley Frontiersman as a sports reporter.[18] She also helped in her husband’s commercial fishing family business.[19"]
Unbelievably disappointing. I think about the hokey local news people that I make fun of on TV. Those are the people I tell my students "they don't know anything."

I won't be canceling class for students to attend the rally.

Wednesday, October 22, 2008

Nassim Nicholas Taleb changed my life...

Last night on PBS Newshour, economics correspondent Paul Solman interviewed Nassim Nicholas Taleb and his mentor Benoit Mandelbrot (link to interview transcript). It was timely.

Taleb's second book (Fooled by Randomness) was the seventh book that I read this year, I got it last year for Christmas. I wrote back in March of how it changed my life and way of thinking. So, mark it down as one of the best Christmas gifts ever gotten.

In the book, Taleb railed at the financial economists and math wizards on Wall Street who said everything they were doing was risk free. Here's an interview with him back in April. His point was partly that the probabilities simply can't be properly determined. He has his "turkey" analogy-- a turkey is raised on a farm and fed large meals for 100 days. The turkey gets used to the routine and estimates a 100% probability of him being fed a big meal the next day. Then, on the 101st day he gets his head chopped off. It doesn't surprise anyone but the turkey.
Taleb was, of course, right.

I found this clip on YouTube of Taleb on a BBC Newsnight broadcast where he is clearly angry and quite worried about how bad the financial crisis will eventually get. Ken Rogoff, a hero of mine, was also on the show that night but unfortunately the clip edits him out (and there is no transcript or full video on the BBC site). Taleb and Rogoff together on the same show, my head would explode!!

Taleb's interview last night was equally intense as he's worried about hedge funds deleveraging. He considers this to be the worst crisis for the U.S. since the American Revolution! But, he is first to admit he doesn't know.

He got my attention.

In the fall I have to teach Risk Management, which means Portfolio Theory and things that Taleb calls unscientific bunk. I read his op-ed in the Financial Times here and cringe.

Mathematicians often hate economists for being quacks and trying to pretend to do things with mathematics that can't actually be done. Economists hate journalists and politicians. The journalists on NewsHour are the only ones I would say have a right to be called journalists, I'm definitely thankful for them.