One of the questions I get when I am in Penang is whether I feel "more Malaysian" or "more American". My first reaction was that this was a nonsensical question. How can one "feel" a country? My defensive reaction is the following:
If by "feeling American" does it mean that I am more comfortable driving around in America? Grocery shopping? Finding things that I want or need or knowing where to look?
By this definition then, yes of course, I "feel American". Come to think of it, I'd feel uncomfortable in a city that I've never been for instance, Atlanta. So this definition, which is the only definition that I would accept, means that I "feel Washingtonian" as well. Put me in St Louis and I'd feel lost right away.
But this question has a deeper connotation as well. After travelling for a long time, travellers may "feel good to be home" be it America or some other place. Likewise, defectors from the former Soviet Union may profess to feel "freedom" when arriving in America.
Does or can one feel different when one enters American airspace (or American shores)? "We're now in America, folks," said the pilot over the intercom. "Can you feel it? Feel it now? Feel it, feel it?"
So perhaps it's not such a crazy question. On the political front, can a conquered country feel the spirit of its conquerors? Do the borders of a country define how one feels about the country and if so what does the break up of the former Soviet Union, Czechoslovakia and Yugoslavia mean? Did the citizens of the original nations not feel what it was like to be defined by the borders of the nation? Ultimately, what does it mean to feel American or Malaysia or British or Irish?
Wednesday, July 29, 2009
Tuesday, July 28, 2009
Bechtel and its friends in high places
Reading Laton McCartney's Friends in High Places The Bechtel Story served as a reminder that despite economists pleas that free markets are most efficient, they continue to fail to recognize that as firms grow they begin to recognize that politics are an important component to their growth and hence begin to engage in regulatory capture. Added to this, as a company grows, its competitors begin to cry foul seeking antitrust regulation against it which results in the company lobbying against regulations. (For a parable see here.)
The hue and cry about how Bechtel officials (George Schultz, Caspar Weinberger, Philip Habib among others) are intricately linked to the government and the company is a familiar refrain being heard today about how Goldman Sachs and the U.S. Treasury and government are too cozy.
The hue and cry about how Bechtel officials (George Schultz, Caspar Weinberger, Philip Habib among others) are intricately linked to the government and the company is a familiar refrain being heard today about how Goldman Sachs and the U.S. Treasury and government are too cozy.
The future state of EMH
In a related article the Economist also discusses the state of efficient markets hypothesis. My view is that EMH is "usually" right - there are forces that push prices to its fundamental value. While behavioral economists have been trying to knock down the pillar of EMH, it would be fair to say that a convergence of views has now been accepted.
If there is any progress to be made it is in the transition of (asset) prices from its non-fundamental value to its fundamental values: How long does it take and why does the length of time vary? When asset prices do not represent fundamental values (bubbles) how can we know it? What policy responses are there to force the prices back to its fundamental value (before an ever growing bubble pops)?
If there is any progress to be made it is in the transition of (asset) prices from its non-fundamental value to its fundamental values: How long does it take and why does the length of time vary? When asset prices do not represent fundamental values (bubbles) how can we know it? What policy responses are there to force the prices back to its fundamental value (before an ever growing bubble pops)?
DSGE frustrations
This is a follow-up on an earlier post on DSGE models. The Economist while less shrill than Willem Buiter they portray an somewhat accurate picture of the state of many DSGE models:
In many macroeconomic models, therefore, insolvencies cannot occur. Financial intermediaries, like banks, often don’t exist. And whether firms finance themselves with equity or debt is a matter of indifference. The Bank of England’s DSGE model, for example, does not even try to incorporate financial middlemen, such as banks. “The model is not, therefore, directly useful for issues where financial intermediation is of first-order importance,” its designers admit. The present crisis is, unfortunately, one of those issues.
The bank’s modellers go on to say that they prefer to study finance with specialised models designed for that purpose. One of the most prominent was, in fact, pioneered by Mr Bernanke, with Mark Gertler of New York University. Unfortunately, models that include such financial-market complications “can be very difficult to handle,” according to Markus Brunnermeier of Princeton, who has handled more of these difficulties than most. Convenience, not conviction, often dictates the choices economists make.
Convenience, however, is addictive. Economists can become seduced by their models, fooling themselves that what the model leaves out does not matter. It is, for example, often convenient to assume that markets are “complete”—that a price exists today, for every good, at every date, in every contingency. In this world, you can always borrow as much as you want at the going rate, and you can always sell as much as you want at the going rate.
Some points however:
1. DSGE macro models with financial intermediation are not trivial to build. If they were we would see more of them. Bernanke-Gertler type models while useful in looking at the financial accelerator channel have not been featured at all (?) in the current crisis.
2. In general, DSGE models are hard to extend hence the statement: "they prefer to study finance with specialised models designed for that purpose" reflects this situation.
3. Complete markets and all that are assumed yes, but even 10 years ago when I was an graduate student, economists were beginning to build incomplete markets models with heterogeneity (e.g. Huggett, Aiyagari, Krusell, etc.). Unfortunately, these economists prefer to use these models to "explain stylized facts" (mainly income distribution) rather than to build a full blown macro model.
The article further goes on to quote David Colander who thinks the future is in agent based models. I am partial to this but I think in the medium term the return might be into medium scale econometrics models that fell out of vogue due to the Lucas critique which while devastating remains merely a theoretical argument without real empirical foundations especially in short and medium run models.
In many macroeconomic models, therefore, insolvencies cannot occur. Financial intermediaries, like banks, often don’t exist. And whether firms finance themselves with equity or debt is a matter of indifference. The Bank of England’s DSGE model, for example, does not even try to incorporate financial middlemen, such as banks. “The model is not, therefore, directly useful for issues where financial intermediation is of first-order importance,” its designers admit. The present crisis is, unfortunately, one of those issues.
The bank’s modellers go on to say that they prefer to study finance with specialised models designed for that purpose. One of the most prominent was, in fact, pioneered by Mr Bernanke, with Mark Gertler of New York University. Unfortunately, models that include such financial-market complications “can be very difficult to handle,” according to Markus Brunnermeier of Princeton, who has handled more of these difficulties than most. Convenience, not conviction, often dictates the choices economists make.
Convenience, however, is addictive. Economists can become seduced by their models, fooling themselves that what the model leaves out does not matter. It is, for example, often convenient to assume that markets are “complete”—that a price exists today, for every good, at every date, in every contingency. In this world, you can always borrow as much as you want at the going rate, and you can always sell as much as you want at the going rate.
Some points however:
1. DSGE macro models with financial intermediation are not trivial to build. If they were we would see more of them. Bernanke-Gertler type models while useful in looking at the financial accelerator channel have not been featured at all (?) in the current crisis.
2. In general, DSGE models are hard to extend hence the statement: "they prefer to study finance with specialised models designed for that purpose" reflects this situation.
3. Complete markets and all that are assumed yes, but even 10 years ago when I was an graduate student, economists were beginning to build incomplete markets models with heterogeneity (e.g. Huggett, Aiyagari, Krusell, etc.). Unfortunately, these economists prefer to use these models to "explain stylized facts" (mainly income distribution) rather than to build a full blown macro model.
The article further goes on to quote David Colander who thinks the future is in agent based models. I am partial to this but I think in the medium term the return might be into medium scale econometrics models that fell out of vogue due to the Lucas critique which while devastating remains merely a theoretical argument without real empirical foundations especially in short and medium run models.
Wednesday, July 22, 2009
Housing and wealth
A common perception for buying a house is that it represents built up equity and a source of funds for retirement. The very idea that home ownership promotes saving and wealth accumulation is almost unassailable until recently. This idea is being challenged by Glaeser and Shapiro.
Widespread homeownership, the theory goes, benefits the nation because homeowners—literally invested in their communities—make better citizens. A few years ago, the economists Edward Glaeser and Jesse Shapiro looked at the evidence and concluded that, by and large, this is true: Even allowing for confounding factors such as income, family size, age, and so forth, owners spend more on maintaining their homes, vote more, play a more active part in local politics, and work harder to improve their neighborhoods.
But there are drawbacks, too. Andrew Oswald, an economist at the University of Warwick, found that homeownership makes workers less mobile, which brakes economic growth and worsens unemployment, especially in areas blighted by the decline of locally dominant industries. ... Glaeser and Shapiro point to other social costs. Communities of homeowners tend to act as cartels—calling for zoning rules, for instance, that suppress new development. At a minimum, the wider benefits of homeownership are not clear-cut.
Interestingly, no one (as far as I can tell) has looked at the effects of home ownership on retirement wealth. The true measure of the causal effects of home ownership on wealth is a randomized trial. Randomize citizens into renters and owners and look at retirement wealth. This is because those who rent may be very different than those who own. It has been argued (somewhere) that those who buy a home use it as a commitment device to increase saving. If this is true thent he question is whether there are other more efficient commitment devices or weather saving in an alternative investment might have yielded higher returns. As the article states, homeowners tend to spend to maintain their home values and whether this spending is the best use of the homeowner's funds.
Widespread homeownership, the theory goes, benefits the nation because homeowners—literally invested in their communities—make better citizens. A few years ago, the economists Edward Glaeser and Jesse Shapiro looked at the evidence and concluded that, by and large, this is true: Even allowing for confounding factors such as income, family size, age, and so forth, owners spend more on maintaining their homes, vote more, play a more active part in local politics, and work harder to improve their neighborhoods.
But there are drawbacks, too. Andrew Oswald, an economist at the University of Warwick, found that homeownership makes workers less mobile, which brakes economic growth and worsens unemployment, especially in areas blighted by the decline of locally dominant industries. ... Glaeser and Shapiro point to other social costs. Communities of homeowners tend to act as cartels—calling for zoning rules, for instance, that suppress new development. At a minimum, the wider benefits of homeownership are not clear-cut.
Interestingly, no one (as far as I can tell) has looked at the effects of home ownership on retirement wealth. The true measure of the causal effects of home ownership on wealth is a randomized trial. Randomize citizens into renters and owners and look at retirement wealth. This is because those who rent may be very different than those who own. It has been argued (somewhere) that those who buy a home use it as a commitment device to increase saving. If this is true thent he question is whether there are other more efficient commitment devices or weather saving in an alternative investment might have yielded higher returns. As the article states, homeowners tend to spend to maintain their home values and whether this spending is the best use of the homeowner's funds.
Failure of microeconomics
Much ink has been spilled and many keys have have been banged on in the blogosphere and elsewhere that the financial crisis in some ways reflects a crisis in macroeconomics and macroeconomic modeling in general. A recap here.
These posts have tangentially also pointed out the failures of regulation (or deregulation) as well as the short term compensation structures that promoted risk taking by the investment bankers. Yet few have attacked the failure of microeconomics. Despite research in principal agent theory and contract theory, economists have failed to put this knowledge into practical use. Likewise the entire premise of pay for performance should be put under closer scrutiny as this represents one of the main reasons for oversized bonuses of investment bankers. All the more reason as advocates of pay for performance have been trying to advance this idea into the field of education and elsewhere.
These posts have tangentially also pointed out the failures of regulation (or deregulation) as well as the short term compensation structures that promoted risk taking by the investment bankers. Yet few have attacked the failure of microeconomics. Despite research in principal agent theory and contract theory, economists have failed to put this knowledge into practical use. Likewise the entire premise of pay for performance should be put under closer scrutiny as this represents one of the main reasons for oversized bonuses of investment bankers. All the more reason as advocates of pay for performance have been trying to advance this idea into the field of education and elsewhere.
Tuesday, July 21, 2009
A software writer's perspective on the financial crisis
Not just any software writer[emphasis mine]:
I wrote the software that turned mortgages into bonds. ... The packaging of heterogeneous home mortgages into uniform securities that can be accurately priced and exchanged has been singled out by many critics as one of the root causes of the mess we’re in. I don’t completely disagree. But in my view, and of course I’m inescapably biased, there’s nothing inherently flawed about securitization. Done correctly and conservatively, it increases the efficiency with which banks can loan money and tailor risks to the needs of investors. Once upon a time, this seemed like a very good idea, and it might well again, provided banks don’t resume writing mortgages to people who can’t afford them. Here’s one thing that’s definitely true: The software proved to be more sophisticated than the people who used it, and that has caused the whole world a lot of problems.
... I was told to rewrite the entire system. Make it all push-button. Flexible and faster. Traders told us what they wanted, and we wrote the software code to make it possible. We were on the cutting edge. ... Working with another programmer, I wrote a new mortgage-backed system that enabled investors to choose the specific combinations of yield and risk that they wanted by slicing and dicing bonds to create new bonds. It was endlessly versatile and flexible. It was the proverbial money tree.
... Our software was rolled out to ride the latest wave. Traders loved it. What had taken days before now took minutes. They could design bonds out of bonds, to provide the precise rate of return that an investor wanted. I used to go to the trading floor and watch my software in use amid the sea of screens. A programmer doesn’t admire his creation so much for what it does but for how it does it. This stuff was beautiful and elegant.
The aim of software is, in a sense, to create an alternative reality. After all, when you use your cell phone, you simply want to push the fewest buttons possible and call, text, purchase, listen, download, e-mail, or browse. The power we all hold in our hands is shocking, yet it’s controlled by a few swipes of a finger. The drive to simplify the user’s contact with the machine has an inherent side effect of disguising the complexity of a given task. Over time, the users of any software are inured to the intricate nature of what they are doing. Also, as the software does more of the “thinking,” the user does less.
And in a scene that could have come out from Liar's Poker:
Now that I was spending more time on the floor, I wondered why the men’s room always stank. Then one afternoon at three, when I was in there taking a leak, I discovered the hideous truth. Traders had a contest. Coming in at eight, they never left their desks all day, eating and drinking while working. Then, at three o’clock, they marched into the men’s room and stood at the wall opposite the urinals. Dropping their pants, they bet $100 on who could train his stream the longest on the urinals across the lavatory. As their hydraulic pressure waned, the three traders waddled, pants at their ankles, across the floor, desperately trying to keep their pee on target. This is what $2 million of bonus can do to grown men.
I wrote the software that turned mortgages into bonds. ... The packaging of heterogeneous home mortgages into uniform securities that can be accurately priced and exchanged has been singled out by many critics as one of the root causes of the mess we’re in. I don’t completely disagree. But in my view, and of course I’m inescapably biased, there’s nothing inherently flawed about securitization. Done correctly and conservatively, it increases the efficiency with which banks can loan money and tailor risks to the needs of investors. Once upon a time, this seemed like a very good idea, and it might well again, provided banks don’t resume writing mortgages to people who can’t afford them. Here’s one thing that’s definitely true: The software proved to be more sophisticated than the people who used it, and that has caused the whole world a lot of problems.
... I was told to rewrite the entire system. Make it all push-button. Flexible and faster. Traders told us what they wanted, and we wrote the software code to make it possible. We were on the cutting edge. ... Working with another programmer, I wrote a new mortgage-backed system that enabled investors to choose the specific combinations of yield and risk that they wanted by slicing and dicing bonds to create new bonds. It was endlessly versatile and flexible. It was the proverbial money tree.
... Our software was rolled out to ride the latest wave. Traders loved it. What had taken days before now took minutes. They could design bonds out of bonds, to provide the precise rate of return that an investor wanted. I used to go to the trading floor and watch my software in use amid the sea of screens. A programmer doesn’t admire his creation so much for what it does but for how it does it. This stuff was beautiful and elegant.
The aim of software is, in a sense, to create an alternative reality. After all, when you use your cell phone, you simply want to push the fewest buttons possible and call, text, purchase, listen, download, e-mail, or browse. The power we all hold in our hands is shocking, yet it’s controlled by a few swipes of a finger. The drive to simplify the user’s contact with the machine has an inherent side effect of disguising the complexity of a given task. Over time, the users of any software are inured to the intricate nature of what they are doing. Also, as the software does more of the “thinking,” the user does less.
And in a scene that could have come out from Liar's Poker:
Now that I was spending more time on the floor, I wondered why the men’s room always stank. Then one afternoon at three, when I was in there taking a leak, I discovered the hideous truth. Traders had a contest. Coming in at eight, they never left their desks all day, eating and drinking while working. Then, at three o’clock, they marched into the men’s room and stood at the wall opposite the urinals. Dropping their pants, they bet $100 on who could train his stream the longest on the urinals across the lavatory. As their hydraulic pressure waned, the three traders waddled, pants at their ankles, across the floor, desperately trying to keep their pee on target. This is what $2 million of bonus can do to grown men.
Leverage or concentration
A previous post suggested that leverage was a contributory factor to the current crisis but Ricardo Caballero via Economists View has suggested that it was concentration of risk. Michael Lewis on AIG has indicated that it could well be concentration of risk as well:
A.I.G. F.P. was already insuring these big, diversified, AAA-rated piles of consumer loans; to get it to insure subprime mortgages was only a matter of pouring more and more of the things into the amorphous, unexamined piles. They went from being 2 percent subprime mortgages to being 95 percent subprime mortgages. And yet no one at A.I.G. said anything about it—not C.E.O. Martin Sullivan, not Joe Cassano, not Al Frost, the guy in A.I.G. F.P.’s Connecticut office in charge of selling his firm’s credit-default-swap services to the big Wall Street firms. The deals, by all accounts, were simply rubber-stamped by Cassano and then again by A.I.G. brass—and, on the theory that this was just more of the same, no one paid them special attention. It’s hard to know what Joe Cassano thought and when he thought it, but the traders inside A.I.G. F.P. are certain that neither Cassano nor the four or five people overseen directly by him, who worked in the unit that made the trades, realized how completely these piles of consumer loans had become, almost exclusively, composed of subprime mortgages.
... Toward the end of 2005, Cassano promoted Al Frost, then went looking for someone to replace him as the ambassador to Wall Street’s subprime-mortgage-bond desks. As a smart quant who understood abstruse securities, Gene Park was a likely candidate. That’s when Park decided to examine more closely the loans that A.I.G. F.P. had insured. He suspected Joe Cassano didn’t understand what he had done, but even so Park was shocked by the magnitude of the misunderstanding: these piles of consumer loans were now 95 percent U.S. subprime mortgages. Park then conducted a little survey, asking the people around A.I.G. F.P. most directly involved in insuring them how much subprime was in them. He asked Gary Gorton, a Yale professor who had helped build the model Cassano used to price the credit-default swaps. Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. He asked Al Frost, who had no clue, but then, his job was to sell, not to trade. “None of them knew,” says one trader. Which sounds, in retrospect, incredible. But an entire financial system was premised on their not knowing—and paying them for their talent!
By the time Joe Cassano invited Gene Park to London for the meeting in which he would be “promoted” to the job of creating even more of these ticking time bombs, Park knew he wanted no part of it. He announced that, if he was made to take the job, he’d quit. (Had he taken it he would now be a magazine cover.)
A.I.G. F.P. was already insuring these big, diversified, AAA-rated piles of consumer loans; to get it to insure subprime mortgages was only a matter of pouring more and more of the things into the amorphous, unexamined piles. They went from being 2 percent subprime mortgages to being 95 percent subprime mortgages. And yet no one at A.I.G. said anything about it—not C.E.O. Martin Sullivan, not Joe Cassano, not Al Frost, the guy in A.I.G. F.P.’s Connecticut office in charge of selling his firm’s credit-default-swap services to the big Wall Street firms. The deals, by all accounts, were simply rubber-stamped by Cassano and then again by A.I.G. brass—and, on the theory that this was just more of the same, no one paid them special attention. It’s hard to know what Joe Cassano thought and when he thought it, but the traders inside A.I.G. F.P. are certain that neither Cassano nor the four or five people overseen directly by him, who worked in the unit that made the trades, realized how completely these piles of consumer loans had become, almost exclusively, composed of subprime mortgages.
... Toward the end of 2005, Cassano promoted Al Frost, then went looking for someone to replace him as the ambassador to Wall Street’s subprime-mortgage-bond desks. As a smart quant who understood abstruse securities, Gene Park was a likely candidate. That’s when Park decided to examine more closely the loans that A.I.G. F.P. had insured. He suspected Joe Cassano didn’t understand what he had done, but even so Park was shocked by the magnitude of the misunderstanding: these piles of consumer loans were now 95 percent U.S. subprime mortgages. Park then conducted a little survey, asking the people around A.I.G. F.P. most directly involved in insuring them how much subprime was in them. He asked Gary Gorton, a Yale professor who had helped build the model Cassano used to price the credit-default swaps. Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. He asked Al Frost, who had no clue, but then, his job was to sell, not to trade. “None of them knew,” says one trader. Which sounds, in retrospect, incredible. But an entire financial system was premised on their not knowing—and paying them for their talent!
By the time Joe Cassano invited Gene Park to London for the meeting in which he would be “promoted” to the job of creating even more of these ticking time bombs, Park knew he wanted no part of it. He announced that, if he was made to take the job, he’d quit. (Had he taken it he would now be a magazine cover.)
DSGE, the state of macroeconomics and let's wring our hands
William Buiter was perhaps one of the ones who fired the early shots as summarized here. Recently, the Economist magazine has revived this with its cover story which Econbrowser reflects on here. While I am sympathetic to Buiter's frustrations my view is closer to that in Econbrowser (although I have never learned how to build or calibrate DSGE models).
For instance, Buiter takes to task the building and modeling of DSGE models:
Linearize and trivialize
If one were to hold one’s nose and agree to play with the New Classical or New Keynesian complete markets toolkit, it would soon become clear that any potentially policy-relevant model would be highly non-linear, and that the interaction of these non-linearities and uncertainty makes for deep conceptual and technical problems. Macroeconomists are brave, but not that brave.; So they took these non-linear stochastic dynamic general equilibrium models into the basement and beat them with a rubber hose until they behaved.; This was achieved by completely stripping the model of its non-linearities and by ... mappings into well-behaved additive stochastic disturbances.
Those of us who have marvelled at the non-linear feedback loops between asset prices in illiquid markets and the funding illiquidity of financial institutions exposed to these asset prices through mark-to-market accounting, margin requirements, calls for additional collateral etc.; will appreciate what is lost...; Threshold effects, non-linear accelerators - they are all out of the window.; Those of us who worry about endogenous uncertainty arising from the interactions of boundedly rational market participants cannot but scratch our heads at the insistence of the mainline models that all uncertainty is exogenous and additive.
Technically, the non-linear stochastic dynamic models were linearised (often log-linearised) at a deterministic (non-stochastic) steady state.; The analysis was further restricted by only considering forms of randomness that would become trivially small in the neigbourhood of the deterministic steady state.; Linear models with additive random shocks we can handle - almost !
Even this was not quite enough...; When you linearize a model, and shock it with additive random disturbances, an unfortunate by-product is that the resulting linearised model behaves either in a very strongly stabilising fashion or in a relentlessly explosive manner.; ... The dynamic stochastic general equilibrium (DSGE) crowd saw that the economy had not exploded without bound in the past, and concluded from this that it made sense to rule out ... the explosive solution trajectories.; What they were left with was something that, following an exogenous; random disturbance, would return to the deterministic steady state pretty smartly.; No L-shaped recessions.; No processes of cumulative causation and bounded but persistent decline or expansion.; Just nice V-shaped recessions.
When I was in graduate school I remember being excited about learning DSGE models but as is described accurately by Buiter the process takes away all the most interesting parts - dynamics and stochastics and focuses on the steady state. It is unfortunate but is perhaps unavoidable due to limitations in computational ability (of economists and computers). (Those more knowledgeable would know better than I.) However, this criticism is not just limited to macroeconomics. In microeconomics almost all policy analysis assumes that markets are in equilibrium (of demand and supply), the counterpart to the macroeconomics steady state. Calculation of welfare losses or effects of price ceilings and all other rigidities considered in economics texts assume that the markets are in equilibrium. Why has microeconomics escaped the wrath of the popular press?
There is in some sense that after the rational expectations devastation created by Robert Lucas, economists began to look elsewhere - mainly the micro foundation based macro models that underlie all DSGE models. This period also coincided with the Great Moderation and almost all DSGE models that I was exposed to in graduate schools virtually sought to "explain stylized facts" rather than to make policy recommendations or for forecasting. Policy recommendations are for politicians - economists (armed with DSGE models) only make positive statements of policy effects based on simulations. The results of these simulations (policy oriented or not) depended on many underlying assumptions and competing models with different assumptions could change these results resulting in a great deal of confusion (to me - especially when as a graduate student I was trying to synthesize some of these results). Moreover, the models were so complicated with feedback effects that in general it was impossible to tell what was driving the results and the discussion of most of the impulse responses (model simulations) became more of rhetoric or story telling. (Never mind that the complications made coding and calculations difficult and getting economists to give up their code to be examined was non-trivial - even today.)
Unfortunately, in order to make progress, the basics of DSGE models need to be taught (and learned). From Econbrowser:
I won't deny that in the past 20 years, I haven't seen more than a few models that struck me as pretty irrelevant for analysis of real world issues. But I think that some mathematical training, and the use of models, is essential to economic analysis. After all, one can think of completely irrelevant frameworks for looking at the world even without a model, just as one can with a model.
Unfortunately, because many DSGE models only tried to explain "stylized facts" they are practically useless for the current financial crisis. Some DSGE models came out of the Asian Crisis but again, these only explained stylized facts related to that particular crisis. And if there is a valid criticism of DSGE models it is that they are too specific and not easily generalizable. In the verbiage of randomized control trials that are so in vogue today: they are internally valid but have little external validity. Economists slap each other on the back for being smart enough to come up with a (complicated) model that can explain something ex post and as such can never be prepared to make any general policy recommendation such as whether a fiscal stimulus can work or whether high interest rates can defend a peg. They will tell you this in specific terms specific to their model and blather on as only economists can about whether the shocks are persistent enough or whether there are nominal rigidities that are large enough to propagate the shock to their system. In other words, many economists lack the initiative or ability to look deeper into their model to discover what's inside their black box of equations. As long as their story telling is convincing enough there is no need to look inside.
Simon Johnson states this failure of macroeconomics as follows:
We also had a situation where falling values for collateral triggered more asset sales (either for accounting reasons or due to market pressure of various kinds), and this led to further lowering of collateral. ... More broadly, there was also some kind of bad expectations trap, in which everyone expected everyone else to default and that kind of fear of counterparty risk is obviously self-fulfilling. ... In other words, this view is that we can retrofit our favorite mainstream models to accommodate what happened, at least at a fairly high level of abstraction. There is no crisis for macroeconomic thinking, let alone for economics. ... Unfortunately, we know relatively little about how to stop today's process of falling credit around the world, known as "global deleveraging."
In other words, today's models while overly complicated (with equations requiring market clearing) are actually not complicated enough and in my view over reliant on stories based on impulse responses rather than looking at actual causal mechanisms inside the model.
One possibility is to examine the financial crisis from the perspective of microeconomic concepts and do without complicated DSGE models that can deliver almost any result the model builder wants to deliver. Barry Eichengreen:
The late twentieth century was the heyday of deductive economics. Talented and facile theorists set the intellectual agenda. Their very facility enabled them to build models with virtually any implication, which meant that policy makers could pick and choose at their convenience. Theory turned out to be too malleable, in other words, to provide reliable guidance for policy.
His article also seems to make the point that given all the micro structure inherent in the financial markets the financial crisis should have been foreseen. (I think most economists agree that that a financial crisis was coming but they seemed to be more focused on the current account imbalance and the dollar rather than in the domestic sector.)
What got us into this mess, in other words, were not the limits of scholarly imagination. It was not the failure or inability of economists to model conflicts of interest, incentives to take excessive risk and information problems that can give rise to bubbles, panics and crises. It was not that economists failed to recognize the role of social and psychological factors in decision making or that they lacked the tools needed to draw out the implications. In fact, these observations and others had been imaginatively elaborated by contributors to the literatures on agency theory, information economics and behavioral finance. Rather, the problem was a partial and blinkered reading of that literature. The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object. It is in this light that we must understand how it was that the vast majority of the economics profession remained so blissfully silent and indeed unaware of the risk of financial disaster.
For instance, Buiter takes to task the building and modeling of DSGE models:
Linearize and trivialize
If one were to hold one’s nose and agree to play with the New Classical or New Keynesian complete markets toolkit, it would soon become clear that any potentially policy-relevant model would be highly non-linear, and that the interaction of these non-linearities and uncertainty makes for deep conceptual and technical problems. Macroeconomists are brave, but not that brave.; So they took these non-linear stochastic dynamic general equilibrium models into the basement and beat them with a rubber hose until they behaved.; This was achieved by completely stripping the model of its non-linearities and by ... mappings into well-behaved additive stochastic disturbances.
Those of us who have marvelled at the non-linear feedback loops between asset prices in illiquid markets and the funding illiquidity of financial institutions exposed to these asset prices through mark-to-market accounting, margin requirements, calls for additional collateral etc.; will appreciate what is lost...; Threshold effects, non-linear accelerators - they are all out of the window.; Those of us who worry about endogenous uncertainty arising from the interactions of boundedly rational market participants cannot but scratch our heads at the insistence of the mainline models that all uncertainty is exogenous and additive.
Technically, the non-linear stochastic dynamic models were linearised (often log-linearised) at a deterministic (non-stochastic) steady state.; The analysis was further restricted by only considering forms of randomness that would become trivially small in the neigbourhood of the deterministic steady state.; Linear models with additive random shocks we can handle - almost !
Even this was not quite enough...; When you linearize a model, and shock it with additive random disturbances, an unfortunate by-product is that the resulting linearised model behaves either in a very strongly stabilising fashion or in a relentlessly explosive manner.; ... The dynamic stochastic general equilibrium (DSGE) crowd saw that the economy had not exploded without bound in the past, and concluded from this that it made sense to rule out ... the explosive solution trajectories.; What they were left with was something that, following an exogenous; random disturbance, would return to the deterministic steady state pretty smartly.; No L-shaped recessions.; No processes of cumulative causation and bounded but persistent decline or expansion.; Just nice V-shaped recessions.
When I was in graduate school I remember being excited about learning DSGE models but as is described accurately by Buiter the process takes away all the most interesting parts - dynamics and stochastics and focuses on the steady state. It is unfortunate but is perhaps unavoidable due to limitations in computational ability (of economists and computers). (Those more knowledgeable would know better than I.) However, this criticism is not just limited to macroeconomics. In microeconomics almost all policy analysis assumes that markets are in equilibrium (of demand and supply), the counterpart to the macroeconomics steady state. Calculation of welfare losses or effects of price ceilings and all other rigidities considered in economics texts assume that the markets are in equilibrium. Why has microeconomics escaped the wrath of the popular press?
There is in some sense that after the rational expectations devastation created by Robert Lucas, economists began to look elsewhere - mainly the micro foundation based macro models that underlie all DSGE models. This period also coincided with the Great Moderation and almost all DSGE models that I was exposed to in graduate schools virtually sought to "explain stylized facts" rather than to make policy recommendations or for forecasting. Policy recommendations are for politicians - economists (armed with DSGE models) only make positive statements of policy effects based on simulations. The results of these simulations (policy oriented or not) depended on many underlying assumptions and competing models with different assumptions could change these results resulting in a great deal of confusion (to me - especially when as a graduate student I was trying to synthesize some of these results). Moreover, the models were so complicated with feedback effects that in general it was impossible to tell what was driving the results and the discussion of most of the impulse responses (model simulations) became more of rhetoric or story telling. (Never mind that the complications made coding and calculations difficult and getting economists to give up their code to be examined was non-trivial - even today.)
Unfortunately, in order to make progress, the basics of DSGE models need to be taught (and learned). From Econbrowser:
I won't deny that in the past 20 years, I haven't seen more than a few models that struck me as pretty irrelevant for analysis of real world issues. But I think that some mathematical training, and the use of models, is essential to economic analysis. After all, one can think of completely irrelevant frameworks for looking at the world even without a model, just as one can with a model.
Unfortunately, because many DSGE models only tried to explain "stylized facts" they are practically useless for the current financial crisis. Some DSGE models came out of the Asian Crisis but again, these only explained stylized facts related to that particular crisis. And if there is a valid criticism of DSGE models it is that they are too specific and not easily generalizable. In the verbiage of randomized control trials that are so in vogue today: they are internally valid but have little external validity. Economists slap each other on the back for being smart enough to come up with a (complicated) model that can explain something ex post and as such can never be prepared to make any general policy recommendation such as whether a fiscal stimulus can work or whether high interest rates can defend a peg. They will tell you this in specific terms specific to their model and blather on as only economists can about whether the shocks are persistent enough or whether there are nominal rigidities that are large enough to propagate the shock to their system. In other words, many economists lack the initiative or ability to look deeper into their model to discover what's inside their black box of equations. As long as their story telling is convincing enough there is no need to look inside.
Simon Johnson states this failure of macroeconomics as follows:
We also had a situation where falling values for collateral triggered more asset sales (either for accounting reasons or due to market pressure of various kinds), and this led to further lowering of collateral. ... More broadly, there was also some kind of bad expectations trap, in which everyone expected everyone else to default and that kind of fear of counterparty risk is obviously self-fulfilling. ... In other words, this view is that we can retrofit our favorite mainstream models to accommodate what happened, at least at a fairly high level of abstraction. There is no crisis for macroeconomic thinking, let alone for economics. ... Unfortunately, we know relatively little about how to stop today's process of falling credit around the world, known as "global deleveraging."
In other words, today's models while overly complicated (with equations requiring market clearing) are actually not complicated enough and in my view over reliant on stories based on impulse responses rather than looking at actual causal mechanisms inside the model.
One possibility is to examine the financial crisis from the perspective of microeconomic concepts and do without complicated DSGE models that can deliver almost any result the model builder wants to deliver. Barry Eichengreen:
The late twentieth century was the heyday of deductive economics. Talented and facile theorists set the intellectual agenda. Their very facility enabled them to build models with virtually any implication, which meant that policy makers could pick and choose at their convenience. Theory turned out to be too malleable, in other words, to provide reliable guidance for policy.
His article also seems to make the point that given all the micro structure inherent in the financial markets the financial crisis should have been foreseen. (I think most economists agree that that a financial crisis was coming but they seemed to be more focused on the current account imbalance and the dollar rather than in the domestic sector.)
What got us into this mess, in other words, were not the limits of scholarly imagination. It was not the failure or inability of economists to model conflicts of interest, incentives to take excessive risk and information problems that can give rise to bubbles, panics and crises. It was not that economists failed to recognize the role of social and psychological factors in decision making or that they lacked the tools needed to draw out the implications. In fact, these observations and others had been imaginatively elaborated by contributors to the literatures on agency theory, information economics and behavioral finance. Rather, the problem was a partial and blinkered reading of that literature. The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object. It is in this light that we must understand how it was that the vast majority of the economics profession remained so blissfully silent and indeed unaware of the risk of financial disaster.
Reading Intel & Bankers
Just finished Tim Jackson's Inside Intel: Andy Grove and the Rise of the World's Most Powerful Chip Company and can't help but feel that this was a hatchet job on Intel. I enjoyed it and found it an easy read but it did not tell me how Intel became so successful. The stories/dirt that Jackson discusses seems to to contradict Intel's success, i.e. how could Intel have become so successful by behaving so badly? In other words, Intel succeeded despite Andy Grove. Not quite what I expected.
I was actually also interested in the chapters on Penang - one on theft of chips and another about a fire in a plant that he claims was caused by unauthorized changes to equipment. This latter almost makes the charge that Intel participated in insurance fraud by burying the evidence that the plant made these changes.
Roy Smith's Global Bankers was written during the ascent of Japanese banking and in retrospect seems dated. I found it rather dry - the only highlights being personal experiences that he relates. The cautionary tale here seems to be that when an observer is in the midst of a seeming revoluation (in this case Japanese banks are about to take over the world) it is hard to be objective. Where are the Japanese banks now? They fell prey to a real estate bubble that is not too different than one currently experienced by the US financial system.
I was actually also interested in the chapters on Penang - one on theft of chips and another about a fire in a plant that he claims was caused by unauthorized changes to equipment. This latter almost makes the charge that Intel participated in insurance fraud by burying the evidence that the plant made these changes.
Roy Smith's Global Bankers was written during the ascent of Japanese banking and in retrospect seems dated. I found it rather dry - the only highlights being personal experiences that he relates. The cautionary tale here seems to be that when an observer is in the midst of a seeming revoluation (in this case Japanese banks are about to take over the world) it is hard to be objective. Where are the Japanese banks now? They fell prey to a real estate bubble that is not too different than one currently experienced by the US financial system.
What's insurance for
A few weeks after my dislocated shoulder incident, I received a letter from our insurance seeking to determine how the injury was sustained. Natural I suppose, but I was a little disappointed. The tone of the form letter suggested a desire to apportion blame (and hence recover costs of treatment).
Any insurance company whose function has devolved into blame assignment instead of risk management seems to have lost its usefulness in society.
Any insurance company whose function has devolved into blame assignment instead of risk management seems to have lost its usefulness in society.
On the beach again
After almost 20 years of not being at any beach, being on Hua Hin beach reminded me...
The feel of the fine sand under my feet, between my toes,
The sound of the waves, gently coming to shore,
The low tide graciously revealing the wide beach,
The intricate carvings on the sand,
Made by the multitude of crabs, throwing out the sand they burrow,
The gentle, undulating, seemingly never ending terraces in the sand created by the slow waves
The feel of the fine sand under my feet, between my toes,
The sound of the waves, gently coming to shore,
The low tide graciously revealing the wide beach,
The intricate carvings on the sand,
Made by the multitude of crabs, throwing out the sand they burrow,
The gentle, undulating, seemingly never ending terraces in the sand created by the slow waves
Friday, July 17, 2009
Why solar power and hybrids have a long way to go
1. With its stop and go traffic, Bangkok and Penang would be ideal for hybrids that rely on braking to recharge the batteries, yet there are hardly any on the road.
2. With its abundant sunshine, rooftop solar panels should be ubiquitous, yet the prices for PV seem to still be too high for developing countries.
2. With its abundant sunshine, rooftop solar panels should be ubiquitous, yet the prices for PV seem to still be too high for developing countries.
Thursday, July 16, 2009
Why learning history can be dangerous
It has been said that we need to learn from history or we will be doomed to repeat it. Yet it is just as true that learning history can deepen hatred and divisions as Robert Kaplan's article on India reminds us (emphasis mine):
Gujarat’s post on a frontier zone of the subcontinent exposed the state to repeated Muslim invasions. Some of the worst depredations came at the hands of the Turco-Persian ruler Mahmud of Ghazni, who swept down from eastern Afghanistan and in 1025 destroyed the seaside Hindu temple of Somnath. During a trip to India last fall, whenever I mentioned the events of 2002 to Hindu nationalists, they would lecture me about the crimes of Mahmud of Ghazni. For these Hindus, the past is alive, as if it happened yesterday.
Information technology enabled standardized and ideologized versions of Hinduism and Islam to emerge: just as Shiites became united across the Middle East, Hindus became united across India, and the same for Sunni Muslims. Meanwhile, the spread of education made people aware of their own histories, supplying them with grievances that they never had before. “The Hindu poor are blissfully ignorant of Mahmud of Ghazni. It is the middle class that now knows this history,” explained one local human-rights worker. That is why Hindu nationalism is strongest not among the poor and uneducated, but among the professional classes: scientists, software engineers, lawyers, and so on. In the eyes of this new, right-wing cadre of middle- and upper-middle-class Hindus, India was a civilization before it was a state, and while the state has had to compromise with minorities, the civilization originally was unpolluted (purely Hindu, that is)—even if the truth is far more complex.
And Gandhi's legacy:
Gandhi’s identification with the poor was intrinsic to his universalist philosophy. As he put it:
I do not believe in the doctrine of the greatest good of the greatest number. It means in its nakedness that in order to achieve the supposed good of 51 per cent the interests of 49 per cent may be, or rather, should be sacrificed. It is a heartless doctrine and has done harm to humanity. The only real dignified human doctrine is the greatest good of all.
To protect the poor against the ravages of capitalism, which benefits only the majority rather than everyone, India would adopt socialism after independence. More to the point, although the Hindus would numerically dominate, they could not ignore or trample the rights of tens of millions of Muslims.
Update: From Travel & Leisure:
... Elif Shafak, the young Turkish author of The Bastard of Istanbul, which has sold more than 120,000 copies in Turkey and more than 20,000 copies in hardback in the United States, which is quite a feat. The novel is the story of two young women, both 19: Asya, who lives in Istanbul with her mother and three batty aunts, and Armanoush, who splits her time between Arizona and San Francisco with her divorced father's family, who are Armenian. "... she, pregnant with her first child, had been charged with violating a Turkish law that prohibits writers from denigrating their Turkishness. She was acquitted, as Pamuk had been on a similar charge. Just why her fiction was causing such a brouhaha in Istanbul is very much worth trying to understand, for it may not be simply that her characters accuse the Ottoman Turks of the genocide of the Armenians in 1915—she uses the "g-word" explosively—it may also be about memory and amnesia, or as Shafak asks, "Was it really better for human beings to discover more of their past?And then more and more…? Or was it simply better to know as little of the past as possible and even to forget what small amount was remembered?"
Gujarat’s post on a frontier zone of the subcontinent exposed the state to repeated Muslim invasions. Some of the worst depredations came at the hands of the Turco-Persian ruler Mahmud of Ghazni, who swept down from eastern Afghanistan and in 1025 destroyed the seaside Hindu temple of Somnath. During a trip to India last fall, whenever I mentioned the events of 2002 to Hindu nationalists, they would lecture me about the crimes of Mahmud of Ghazni. For these Hindus, the past is alive, as if it happened yesterday.
Information technology enabled standardized and ideologized versions of Hinduism and Islam to emerge: just as Shiites became united across the Middle East, Hindus became united across India, and the same for Sunni Muslims. Meanwhile, the spread of education made people aware of their own histories, supplying them with grievances that they never had before. “The Hindu poor are blissfully ignorant of Mahmud of Ghazni. It is the middle class that now knows this history,” explained one local human-rights worker. That is why Hindu nationalism is strongest not among the poor and uneducated, but among the professional classes: scientists, software engineers, lawyers, and so on. In the eyes of this new, right-wing cadre of middle- and upper-middle-class Hindus, India was a civilization before it was a state, and while the state has had to compromise with minorities, the civilization originally was unpolluted (purely Hindu, that is)—even if the truth is far more complex.
And Gandhi's legacy:
Gandhi’s identification with the poor was intrinsic to his universalist philosophy. As he put it:
I do not believe in the doctrine of the greatest good of the greatest number. It means in its nakedness that in order to achieve the supposed good of 51 per cent the interests of 49 per cent may be, or rather, should be sacrificed. It is a heartless doctrine and has done harm to humanity. The only real dignified human doctrine is the greatest good of all.
To protect the poor against the ravages of capitalism, which benefits only the majority rather than everyone, India would adopt socialism after independence. More to the point, although the Hindus would numerically dominate, they could not ignore or trample the rights of tens of millions of Muslims.
Update: From Travel & Leisure:
... Elif Shafak, the young Turkish author of The Bastard of Istanbul, which has sold more than 120,000 copies in Turkey and more than 20,000 copies in hardback in the United States, which is quite a feat. The novel is the story of two young women, both 19: Asya, who lives in Istanbul with her mother and three batty aunts, and Armanoush, who splits her time between Arizona and San Francisco with her divorced father's family, who are Armenian. "... she, pregnant with her first child, had been charged with violating a Turkish law that prohibits writers from denigrating their Turkishness. She was acquitted, as Pamuk had been on a similar charge. Just why her fiction was causing such a brouhaha in Istanbul is very much worth trying to understand, for it may not be simply that her characters accuse the Ottoman Turks of the genocide of the Armenians in 1915—she uses the "g-word" explosively—it may also be about memory and amnesia, or as Shafak asks, "Was it really better for human beings to discover more of their past?And then more and more…? Or was it simply better to know as little of the past as possible and even to forget what small amount was remembered?"
Airports & Incheon
Our recent trip took us to BKK via Incheon airport in Korea. Was struck by the awesome landscape along the coast as we were coming in for a landing.
As with many new airports these days (including BKK), Incheon airport is a lot like a mall in the inside. We never ventured out but it also struck me that airport designs are very predictable in that the arrivals are in the lower level and the departures are in the upper level. Aside from the architecture airports are still what they are: Places to spin our wheels while waiting for our flights. There does not seem to have been any real innovation in design of airports.
The Rest and Relax area in Incheon was really nice. This was where the transit hotel was also located. Future airports need to think more in terms of the traveller - which means less shopping and more rest and relaxation. What about possibly a swimming pool or gym? Perhaps even a laundromat? K1 threw up on the flight and we couldn't even find affordable replacement clothes for her. Nothing against the restaurants as they are currently adequate - not quite expecting much anyway but buffets may also be nicer than a la carte.
As with many new airports these days (including BKK), Incheon airport is a lot like a mall in the inside. We never ventured out but it also struck me that airport designs are very predictable in that the arrivals are in the lower level and the departures are in the upper level. Aside from the architecture airports are still what they are: Places to spin our wheels while waiting for our flights. There does not seem to have been any real innovation in design of airports.
The Rest and Relax area in Incheon was really nice. This was where the transit hotel was also located. Future airports need to think more in terms of the traveller - which means less shopping and more rest and relaxation. What about possibly a swimming pool or gym? Perhaps even a laundromat? K1 threw up on the flight and we couldn't even find affordable replacement clothes for her. Nothing against the restaurants as they are currently adequate - not quite expecting much anyway but buffets may also be nicer than a la carte.
Wednesday, July 15, 2009
The public option in health care
Brad Delong has one view of this debate. There appear to be some contentiousness regarding what the public option is trying to achieve: Is it equality of access to health care or equality of health care?
Virginia Postrel illustrates the difficulties of the latter (also here):
For breast cancer that hasn’t spread elsewhere in the body, Herceptin offers the possibility of a cure. It enhances chemotherapy, encourages the immune system to attack cancer cells, and hinders those cells from reproducing. A year of the drug, with one dose every three weeks (or, for some patients, along with weekly chemotherapy), is now the international standard of care for patients with cancers like mine. So, along with chemotherapy, another round of surgery, and seven and a half weeks of daily radiation, that’s what I got. The Herceptin treatments cost my insurer about $60,000. A year later, I have no evidence of disease and, though it’s still early, I have hope of staying that way indefinitely.
Not everyone in similarly rich countries is so lucky—something to remember the next time you hear a call to “tame runaway medical spending.” Consider New Zealand. There, a government agency called Pharmac evaluates the efficacy of new drugs, decides which drugs are cost-effective, and negotiates the prices to be paid by the national health-care system. These functions are separate in most countries, but thanks to this integrated approach, Pharmac has indeed tamed the national drug budget. New Zealand spent $303 per capita on drugs in 2006, compared with $843 in the United States. Unfortunately for patients, Pharmac gets those impressive results by saying no to new treatments. New Zealand “is a good tourist destination, but options for cancer treatment are not so attractive there right now,” Richard Isaacs, an oncologist in Palmerston North, on New Zealand’s North Island, told me in October.
The concerns of those opposing the public option - that it might not save any money and would create a large and inefficient bureacracy - are real. Those without insurance are already imposing a cost on the rest of society by using emergency medical care so perhaps doing nothing wastes less money than establishing a public option.
Which one is more inefficient we don't really know but the evidence from countries with some form of public insurance or those that promote equal access is that there will be a divergence in care. Those who are rich and can afford the drugs/treatment that are not available via a public option will find it while those who cannot will be denied the treatment.
Virginia Postrel illustrates the difficulties of the latter (also here):
For breast cancer that hasn’t spread elsewhere in the body, Herceptin offers the possibility of a cure. It enhances chemotherapy, encourages the immune system to attack cancer cells, and hinders those cells from reproducing. A year of the drug, with one dose every three weeks (or, for some patients, along with weekly chemotherapy), is now the international standard of care for patients with cancers like mine. So, along with chemotherapy, another round of surgery, and seven and a half weeks of daily radiation, that’s what I got. The Herceptin treatments cost my insurer about $60,000. A year later, I have no evidence of disease and, though it’s still early, I have hope of staying that way indefinitely.
Not everyone in similarly rich countries is so lucky—something to remember the next time you hear a call to “tame runaway medical spending.” Consider New Zealand. There, a government agency called Pharmac evaluates the efficacy of new drugs, decides which drugs are cost-effective, and negotiates the prices to be paid by the national health-care system. These functions are separate in most countries, but thanks to this integrated approach, Pharmac has indeed tamed the national drug budget. New Zealand spent $303 per capita on drugs in 2006, compared with $843 in the United States. Unfortunately for patients, Pharmac gets those impressive results by saying no to new treatments. New Zealand “is a good tourist destination, but options for cancer treatment are not so attractive there right now,” Richard Isaacs, an oncologist in Palmerston North, on New Zealand’s North Island, told me in October.
The concerns of those opposing the public option - that it might not save any money and would create a large and inefficient bureacracy - are real. Those without insurance are already imposing a cost on the rest of society by using emergency medical care so perhaps doing nothing wastes less money than establishing a public option.
Which one is more inefficient we don't really know but the evidence from countries with some form of public insurance or those that promote equal access is that there will be a divergence in care. Those who are rich and can afford the drugs/treatment that are not available via a public option will find it while those who cannot will be denied the treatment.
An article I wished I had written
By Joseph Stiglitz no less, whom I had disregarded for a while after he became loud and shrill during the Asian financial crisis:
While there may be no winners in the current economic crisis, there are losers, and among the big losers is support for American-style capitalism. This has consequences we’ll be living with for a long time to come. ... I worry that, as they see more clearly the flaws in America’s economic and social system, many in the developing world will draw the wrong conclusions. A few countries—and maybe America itself—will learn the right lessons. They will realize that what is required for success is a regime where the roles of market and government are in balance, and where a strong state administers effective regulations. They will realize that the power of special interests must be curbed. ...
Old-style Communism won’t be back, but a variety of forms of excessive market intervention will return. And these will fail. The poor suffered under market fundamentalism—we had trickle-up economics, not trickle-down economics. But the poor will suffer again under these new regimes, which will not deliver growth. Without growth there cannot be sustainable poverty reduction. There has been no successful economy that has not relied heavily on markets. Poverty feeds disaffection. The inevitable downturns, hard to manage in any case, but especially so by governments brought to power on the basis of rage against American-style capitalism, will lead to more poverty.
Of course, he does not disappoint by making the following stab at the IMF and the Washington Concensus:
... the way that America has responded to the current economic crisis has been the last straw. During the East Asia crisis, just a decade ago, America and the I.M.F. demanded that the affected countries cut their deficits by cutting back expenditures—even if, as in Thailand, this contributed to a resurgence of the aids epidemic, or even if, as in Indonesia, this meant curtailing food subsidies for the starving. America and the I.M.F. forced countries to raise interest rates, in some cases to more than 50 percent. They lectured Indonesia about being tough on its banks—and demanded that the government not bail them out. What a terrible precedent this would set, they said, and what a terrible intervention in the Swiss-clock mechanisms of the free market.
The only quibble I have at this time is that currently the United States does not have to defend a peg which was what the Asian countries were faced with - hence higher interest rates.
While there may be no winners in the current economic crisis, there are losers, and among the big losers is support for American-style capitalism. This has consequences we’ll be living with for a long time to come. ... I worry that, as they see more clearly the flaws in America’s economic and social system, many in the developing world will draw the wrong conclusions. A few countries—and maybe America itself—will learn the right lessons. They will realize that what is required for success is a regime where the roles of market and government are in balance, and where a strong state administers effective regulations. They will realize that the power of special interests must be curbed. ...
Old-style Communism won’t be back, but a variety of forms of excessive market intervention will return. And these will fail. The poor suffered under market fundamentalism—we had trickle-up economics, not trickle-down economics. But the poor will suffer again under these new regimes, which will not deliver growth. Without growth there cannot be sustainable poverty reduction. There has been no successful economy that has not relied heavily on markets. Poverty feeds disaffection. The inevitable downturns, hard to manage in any case, but especially so by governments brought to power on the basis of rage against American-style capitalism, will lead to more poverty.
Of course, he does not disappoint by making the following stab at the IMF and the Washington Concensus:
... the way that America has responded to the current economic crisis has been the last straw. During the East Asia crisis, just a decade ago, America and the I.M.F. demanded that the affected countries cut their deficits by cutting back expenditures—even if, as in Thailand, this contributed to a resurgence of the aids epidemic, or even if, as in Indonesia, this meant curtailing food subsidies for the starving. America and the I.M.F. forced countries to raise interest rates, in some cases to more than 50 percent. They lectured Indonesia about being tough on its banks—and demanded that the government not bail them out. What a terrible precedent this would set, they said, and what a terrible intervention in the Swiss-clock mechanisms of the free market.
The only quibble I have at this time is that currently the United States does not have to defend a peg which was what the Asian countries were faced with - hence higher interest rates.
Breastfeeding
Hanna Rosin's Case Against Breastfeeding brought back some rather unpleasant memories of M's struggles with K1. We did not go to formula until it was clear that K1 was not getting enough milk in large part because of the propaganda of the breast feeding fascists. The face of the fascist is still clear to me: When told that we could not get enough milk, there was a slight smile on her face which read that we were not doing it right.
This was one aspect of breastfeeding that I wished she had covered - do all mothers universally produce enough milk for their babies?
This was one aspect of breastfeeding that I wished she had covered - do all mothers universally produce enough milk for their babies?
When there is a crisis do nothing
Jeff Miron argues a good but not compelling case (although I am sympathetic to it):
When people try to pin the blame for the financial crisis on the introduction of derivatives, or the increase in securitization, or the failure of ratings agencies, it's important to remember that the magnitude of both boom and bust was increased exponentially because of the notion in the back of everyone's mind that if things went badly, the government would bail us out. And in fact, that is what the federal government has done. But before critiquing this series of interventions, perhaps we should ask what the alternative was. Lots of people talk as if there was no option other than bailing out financial institutions. But you always have a choice. You may not like the other choices, but you always have a choice. We could have, for example, done nothing.
Reading Phil Swagel's account of the Treasury's response it almost sounds as though the Treasury did in fact do nothing. There was a lot of action and the most effective response (IMO) - nationalization - was ruled out by the fact that America is a democracy that must abide by the rule of law and respect for property rights.
What is interesting about Swagel's account is that one cannot help but wonder if the crisis would have been resolved more efficiently if America were a dictatorship. Where is the George W Bush of financial crisis when one is needed? The bottom line of the story from Swagel is that in a democracy we cannot really expect anything definitive, forceful or decisive from the government.
At the same time, the flurry of activity while may not have had much content may have affected the psychology of participants enough that it did eventually bring calm to the markets (albeit in an inefficient manner) but without first sowing a lot of confusion and uncertainty (and in fact may have initially made things worse). Thus, while my sympathies are with Prof. Miron I cannot draw the same conclusion as he does, which is the Fed should have done nothing.
When people try to pin the blame for the financial crisis on the introduction of derivatives, or the increase in securitization, or the failure of ratings agencies, it's important to remember that the magnitude of both boom and bust was increased exponentially because of the notion in the back of everyone's mind that if things went badly, the government would bail us out. And in fact, that is what the federal government has done. But before critiquing this series of interventions, perhaps we should ask what the alternative was. Lots of people talk as if there was no option other than bailing out financial institutions. But you always have a choice. You may not like the other choices, but you always have a choice. We could have, for example, done nothing.
Reading Phil Swagel's account of the Treasury's response it almost sounds as though the Treasury did in fact do nothing. There was a lot of action and the most effective response (IMO) - nationalization - was ruled out by the fact that America is a democracy that must abide by the rule of law and respect for property rights.
What is interesting about Swagel's account is that one cannot help but wonder if the crisis would have been resolved more efficiently if America were a dictatorship. Where is the George W Bush of financial crisis when one is needed? The bottom line of the story from Swagel is that in a democracy we cannot really expect anything definitive, forceful or decisive from the government.
At the same time, the flurry of activity while may not have had much content may have affected the psychology of participants enough that it did eventually bring calm to the markets (albeit in an inefficient manner) but without first sowing a lot of confusion and uncertainty (and in fact may have initially made things worse). Thus, while my sympathies are with Prof. Miron I cannot draw the same conclusion as he does, which is the Fed should have done nothing.
Was the Fed fooled by randomness?
By this I mean, did it attribute too much of the moderation of the economic activity to its abilities to "guide the economy" using interest rate management?
Virginia Postrel argues a good case in Macroegonomics:
... what is striking about Romer’s lecture is not the chastened tone of its opening but the celebratory nature of its conclusions. “Better policy, particularly on the part of the Federal Reserve, is directly responsible for the low inflation and the virtual disappearance of the business cycle in the last 25 years,” she said (emphasis added). “In this area, the policy mistakes of the 1960s were a painful, but not permanent, detour on the road to excellent economic performance.” ... But containing inflation and eliminating, or noticeably dampening, economic downturns are two entirely different things. Congratulating policy makers for “the virtual disappearance of the business cycle” oversteps the evidence and encourages the hubris that fostered the current crisis and could make recovery more difficult. The conventional explanation for the Great Moderation gives too much credit to easily identifiable economic policy makers—“I feel the contribution of good policy cannot be overstated,” said Romer—and too little to all those anonymous managers and workers whose everyday actions get summarized in the aggregate statistics that Fed economists watch so closely.
But then this is not quite as audacious as:
The founder of the rational expectations revolution, Robert Lucas, is endlessly quoted as having stated in 2003 in his presidential address to the American Economic Association that the "central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades."
Source: http://economistsview.typepad.com/economistsview/2009/06/the-culture-of-blame-game.html
Virginia Postrel argues a good case in Macroegonomics:
... what is striking about Romer’s lecture is not the chastened tone of its opening but the celebratory nature of its conclusions. “Better policy, particularly on the part of the Federal Reserve, is directly responsible for the low inflation and the virtual disappearance of the business cycle in the last 25 years,” she said (emphasis added). “In this area, the policy mistakes of the 1960s were a painful, but not permanent, detour on the road to excellent economic performance.” ... But containing inflation and eliminating, or noticeably dampening, economic downturns are two entirely different things. Congratulating policy makers for “the virtual disappearance of the business cycle” oversteps the evidence and encourages the hubris that fostered the current crisis and could make recovery more difficult. The conventional explanation for the Great Moderation gives too much credit to easily identifiable economic policy makers—“I feel the contribution of good policy cannot be overstated,” said Romer—and too little to all those anonymous managers and workers whose everyday actions get summarized in the aggregate statistics that Fed economists watch so closely.
But then this is not quite as audacious as:
The founder of the rational expectations revolution, Robert Lucas, is endlessly quoted as having stated in 2003 in his presidential address to the American Economic Association that the "central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades."
Source: http://economistsview.typepad.com/economistsview/2009/06/the-culture-of-blame-game.html
Tuesday, July 14, 2009
Why are these considered SciFi
Following up on an earlier post - finished Cryptonomicon and Years of Rice and Salt but can't quite understand why these are considered science fiction. Also, it seemed like there was a loose end in Cryptonomicon - how did the gold that Douglas Macarthur Shaftoe and Randy Waterhouse found after trekking to coordinates given by a woman get there in the first place?
Hua Hin
We managed to take a side trip this time round to Hua Hin. It took about 4 hours to get there from Bangkok (normally 1 1/2-2 hours) because traffic was constantly being stopped to let royalty and VIPs through. Downtown Hua Hin was also a nightmare and we did not arrive until well after dark around 8pm.
Stayed at the Hua Hin Mantra which opened March 2009 for 3 nights. We got two adjoining rooms and so with 4 beds in 2 rooms we each got to have one! Since the resort was new the rooms were all very nice. The bathrooms had a rain shower and the balconies overlooked the pool. The hotel looked much nicer in the dark with the lights on though. During the day I saw that some of the wood on the walkways were already faded and some tiles on the floor of the pool were coming off.
The extensive use of wood in the rooms makes me wonder if they will age well. The hotel does not have any see views and there is a road that runs between it and another hotel called Let's Sea that takes you down to Hua Hin beach. Let's Sea also does not look to have aged well since they have wood on the outside which fades quickly. However, they do extend all the way down to the beach although the beach front of Let's Sea is taken up by the restaurant and a garden so I don't think that they have a sea view from the rooms either.
The breakfast which was included did not vary much and so got stale rather quickly. Likewise the food at Mantra was only so-so (we had dinner there twice) and the staff was not quite as friendly/gushy as the staff at Somerset if gushiness is possible in Thailand (where in the U.S. gushiness can be the norm in some places).
Hua Hin struck me as sometimes contradictory with its mix of hotels and sometimes abandoned (looking) construction projects by the beach. It seems such a waste to let projects die out like that but then again maybe they were not working since it was a long weekend -- Asala Puja.
There is only one mall at Hua Hin called Market Village which also has a Tesco. For a town this size it is quite all right although the weekend we were there it was madness especially with traffic being stopped for VIPs.
We had one meal at Sailom Hotel and another at the Sam Rai Yod National Park. It poured the day we were at the park so we did not get to see the caves. We also drove around the Pranburi estuary which has a very nice wide beach.
Stayed at the Hua Hin Mantra which opened March 2009 for 3 nights. We got two adjoining rooms and so with 4 beds in 2 rooms we each got to have one! Since the resort was new the rooms were all very nice. The bathrooms had a rain shower and the balconies overlooked the pool. The hotel looked much nicer in the dark with the lights on though. During the day I saw that some of the wood on the walkways were already faded and some tiles on the floor of the pool were coming off.
The extensive use of wood in the rooms makes me wonder if they will age well. The hotel does not have any see views and there is a road that runs between it and another hotel called Let's Sea that takes you down to Hua Hin beach. Let's Sea also does not look to have aged well since they have wood on the outside which fades quickly. However, they do extend all the way down to the beach although the beach front of Let's Sea is taken up by the restaurant and a garden so I don't think that they have a sea view from the rooms either.
The breakfast which was included did not vary much and so got stale rather quickly. Likewise the food at Mantra was only so-so (we had dinner there twice) and the staff was not quite as friendly/gushy as the staff at Somerset if gushiness is possible in Thailand (where in the U.S. gushiness can be the norm in some places).
Hua Hin struck me as sometimes contradictory with its mix of hotels and sometimes abandoned (looking) construction projects by the beach. It seems such a waste to let projects die out like that but then again maybe they were not working since it was a long weekend -- Asala Puja.
There is only one mall at Hua Hin called Market Village which also has a Tesco. For a town this size it is quite all right although the weekend we were there it was madness especially with traffic being stopped for VIPs.
We had one meal at Sailom Hotel and another at the Sam Rai Yod National Park. It poured the day we were at the park so we did not get to see the caves. We also drove around the Pranburi estuary which has a very nice wide beach.
Quiet stay and meeting cousins
This recent trip to Penang and Bangkok has been one of the quieter vacations in the sense that there were very little sounds from other vacationers/people around us - sounds of doors slamming in the morning or water running, etc. Except for Penang, the sound of Bangkok traffic barely reached us. Perhaps it is a quiet season.
Traffic in Bangkok was madness as usual. It took an hour to get from Suanplu to Chamchuri Square one rainy afternoon around 4 pm. Under "normal" traffic conditions, it probably would have taken 15 minutes.
K1 and K2 also took very easily to meeting my cousin's kids. They seem to love the notion of meeting "long lost relatives" or something since this is their first meeting. Would this make them second cousins?
Traffic in Bangkok was madness as usual. It took an hour to get from Suanplu to Chamchuri Square one rainy afternoon around 4 pm. Under "normal" traffic conditions, it probably would have taken 15 minutes.
K1 and K2 also took very easily to meeting my cousin's kids. They seem to love the notion of meeting "long lost relatives" or something since this is their first meeting. Would this make them second cousins?
Spotted
In a soi near Silom - Testicle Massage. We walked by too quickly for me to see how much they were charging. The Internet allows the curious to try it at home.
Open borders
1. No more having to fill in those dratted arrival and departure forms. This was more painful because we went IAD-BKK-PEN-BKK-IAD which means 6 rounds of forms instead of the usual 4 rounds.
2. No more roaming charges. It sure would have been nice if we could have used our U.S. phones in Penang without incurring roaming.
3. Free Internet. I know - this has nothing to do with open borders.
2. No more roaming charges. It sure would have been nice if we could have used our U.S. phones in Penang without incurring roaming.
3. Free Internet. I know - this has nothing to do with open borders.
Bangkok stay
On our two night layover in Bangkok on the way to Penang we stayed at Pantip Court. We took a 2-bedroom apartment which was much larger than expected. Overall this was a comfortable place with a nice pool and breakfast although the buffet lunch was not very good. The orange and guava juices tasted fresh (no added sugar or preserves) and K2 liked them. The a al carte menu/room service food was good. As expected we spent the afternoon mostly sleeping. Was a little disappointed that I did not take the time to explore the soi a little more.
A large chunk of the time in Bangkok was at the Somerset Park Suanplu where we stayed at a 3-bedroom apartment. The breakfast was quite varied and having an egg station was good. I alternated between noodles/rice and eggs. The room service food alas was not very good. The apartment had 2 Internet connections which was extremely useful. The speed of the Internet was 512K for free or 4MB if we wanted to pay. We chose the free option and it was frustratingly slow at times though I'm not sure whether it was the site or the connection. Some of the floor tiles felt loose and a toilet and sink had some problems draining. The DVD player was an older model that could not play JPG files nor the movie I made of K1's Spring Celebration. The bathrooms were also well kept (and perhaps even updated) which was great for me since I hate tired (even worse, moldy) bathrooms.
The drawback of this place which we sort of knew going in was that it is on the "wrong" side of Sathorn. Having to cross Sathorn to get to Silom is a pain even with the tuk-tuk service. We'd really like to be on the other side next time although there aren't any 3-bedroom places in Saladaeng that we've seen so far. There weren't also any large hawker centers that makes getting meals easier although there are a lot of small restaurants and road side stalls. (There are a few hawker centers on the other side of Sathorn.) Navigating or crossing Suanplu can be quite a challenge as well.
We left after about a week to go to Hua Hin and when we came back we were given not the same apartment but a corresponding one two floors up (27th) which only had one Internet connection. There also seemed to be something amiss with the ducts because we all started sneezing and coming down with sore throats. Fortunately we were only there for 2 nights.
All in all this Somerset was better than the last one we stayed at (Park View) - the kitchen at Suanplu was better equipped and the dining table and place settings were for 6 or more people. At Park View (although we also had a 3-bedroom) there were only settings for 4 people and a very small round table. The size of the 3-bedroom was also much smaller than the one in Suanplu.
We had also contemplated staying at the Vista Sathorn which was just down the road from the Somerset but they were going to charge 500Thb for Internet access per day!
A large chunk of the time in Bangkok was at the Somerset Park Suanplu where we stayed at a 3-bedroom apartment. The breakfast was quite varied and having an egg station was good. I alternated between noodles/rice and eggs. The room service food alas was not very good. The apartment had 2 Internet connections which was extremely useful. The speed of the Internet was 512K for free or 4MB if we wanted to pay. We chose the free option and it was frustratingly slow at times though I'm not sure whether it was the site or the connection. Some of the floor tiles felt loose and a toilet and sink had some problems draining. The DVD player was an older model that could not play JPG files nor the movie I made of K1's Spring Celebration. The bathrooms were also well kept (and perhaps even updated) which was great for me since I hate tired (even worse, moldy) bathrooms.
The drawback of this place which we sort of knew going in was that it is on the "wrong" side of Sathorn. Having to cross Sathorn to get to Silom is a pain even with the tuk-tuk service. We'd really like to be on the other side next time although there aren't any 3-bedroom places in Saladaeng that we've seen so far. There weren't also any large hawker centers that makes getting meals easier although there are a lot of small restaurants and road side stalls. (There are a few hawker centers on the other side of Sathorn.) Navigating or crossing Suanplu can be quite a challenge as well.
We left after about a week to go to Hua Hin and when we came back we were given not the same apartment but a corresponding one two floors up (27th) which only had one Internet connection. There also seemed to be something amiss with the ducts because we all started sneezing and coming down with sore throats. Fortunately we were only there for 2 nights.
All in all this Somerset was better than the last one we stayed at (Park View) - the kitchen at Suanplu was better equipped and the dining table and place settings were for 6 or more people. At Park View (although we also had a 3-bedroom) there were only settings for 4 people and a very small round table. The size of the 3-bedroom was also much smaller than the one in Suanplu.
We had also contemplated staying at the Vista Sathorn which was just down the road from the Somerset but they were going to charge 500Thb for Internet access per day!
Wednesday, July 1, 2009
Google around the world
Now that I am in Thailand, the Google toolbar defaults to the Thai Google so a lot of my searches are in Thai which I can't read. It has its frustrating moments but at the same time when we were looking for take out food from S&P last night, my search fro S&P returned the restaurant as the top hit rather than the S&P 500.
Driving around in Penang
Traffic was even more horrible than the last time we were in Penang which was 4 years ago. Fortunately, we managed a trip to the Mengkuang Dam to feed fishes. The dam itself was pretty nice - lots of joggers and runners but was pleased that during the actual drive there over the Penang Bridge and on to Kulim/Bukit Mertajam the kids got to see some tropical scenery: paddy fields, and various fruit trees (papaya, rambutan, durian, coconut and oil palm). I remember these to be pretty boring whenever we drove to KL but K1 and K2 were thrilled, calling them out as they spotted them.
Then there was what I would consider the quintessential tropical scenery of rice paddies with the lone limestone hill rising up in the distance.
Then there was what I would consider the quintessential tropical scenery of rice paddies with the lone limestone hill rising up in the distance.
Face masks
There were a non-trivial number of people wearing these in the Incheon, Bangkok, and Penang airports though none from the Dulles to Incheon flight. (Does this say something about the (ir)rationality of Asians?) My mom almost made us get some in Penang until she found out that they were sold in packs of 100. My only real concern was trying to keep the kids from touching their faces (noses, mouths) with their hands after touching all kinds of things in the plane and the airport.
Thankfully, no mishaps so far.
Thankfully, no mishaps so far.
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