The benefits of hindsight

The current financial crisis has its roots in Greenspan's decision to keep interest rates very low in 2002 and 2003 to head off the danger of a deflation-induced double-dip recession, and his subsequent decision that the costs of cleaning up after a housing bubble were likely to be less than the costs of the high unemployment that would be generated by a preemptive attempt to pop a housing-speculation bubble. Two years ago, I would have said that Greenspan's judgment here was correct. Six months ago, I would have said that his judgment was probably correct. Today -- in the middle of the largest nationalizations in history -- I can no longer state that Greenspan made the right calls with respect to the level of interest rates and the housing bubble in the 2000s. (emphasis mine)

From Brad DeLong.

This is the nice thing about economics (and blogging) being a spectator sport - we get to be right all the time.

Regulating banks

1. New financial products are like new drugs and should be treated as such. New financial products have to undergo "trials" and data collected extensively before being offered to the general public.

Unlike new drugs, financial products need only be safe and not necessarily effective.

2. MR comments on the Volcker banking plan that regulates bank size and limits proprietary trading. As has been mentioned previously here, and here that limits on bank size is in effect a limit on profits. Perhaps the best way to go is to treat all financial institutions as public service companies such as water companies. Hearings are held as to whether new products can be launched, how much pay top management should receive and how much products should be charged. (No, seriously!)

The public service commission approach will answer most (if not all but #7) in a positive manner:

1. Do its restrictions apply to subsidaries, affiliates, and holding companies in a meaningful way? Can they apply?

2. How do the restrictions apply to off-balance sheet activities, if at all? Keep in mind the various lessons about the construction of synthetic asset positions.

3. How will Congressional oversight committees apply and interpret the plan? This is a big one.

4. Can a financial institution avoid or sidestep the restrictions by changing its status as a commercial bank, legally speaking?

5. If you cap bank size, are the new and smaller banks still "too big to fail" by prevailing standards?

6. How does the proposal treat bank leverage, including implicit forms of leverage through off-balance sheet activities? Does leverage get redistributed elsewhere?

7. How does it affect the political economy of bank lobbying?

The above most thoughtful questions are from MR.

Quantum economics

No doubt in my mind that there are parallels between quantum physics (many dimension worlds) and economic modeling. These excerpts are from The Great Beyond by Paul Halpern which was a great read until I had to struggle to understand tensor calculus and SU(3) symmetry and the such. I'd be surprised if I can find an accessible (read: idiot's guide) to these concepts.

Now that mathematicians had taken over relativity, he [Einstein] bemoaned, he could barely understand it himself. (pg. 79)

A main problem for us theoreticians rather resembles that represented Charybdis and Scylla between which Odysseus was forced to steer. ... Speculation is certainly a necessary part of the theoretical work, just as much as building on experimental facts. Still, it drags many of us into a mental whirlpool not unlike the hydrodynamical one of Charybdis, from which the escape feels like a miracle. On the other hand, sticking too closely to the facts - Scylla had six hard ones - may be equally deadly when using them as building stones for theory. - OSKAR KLEIN, From My Life of Physics (pg. 114)

I was surprised how dogmatic Einstein's view could be - on page 171:

As he [Einstein] guided his assistants during their exhibitions into unknown territories, it became clear to them that he had very fixed ideas about what features should or should not become part of a unified theory. ... Knowing his taste, they would strive hard to make their models more "virtuous" and less "sinful." One of the cardinal sins, for example, was bringing any notion of probability into the theories.

Supersymmetry is one of the most audacious proposals in the history of modern scientific thought. Year after year since it was postulated, experiments have failed to demonstrate its existence. Accelerators have smashed countless particles, producing not a single supersymmetric companion in their debris. Yet many theorists find it so compelling that they can scarcely believe the world could survive without it. ... No other physical theory has won so many supporters with so little experimental support, surviving instead on the basis of its own mathematical beauty and internal consistency. (pg 231, emphasis mine)

... [physicist, Steinhardt] sees considerable danger in relying on one particular model. "When you get down only to a single competitor it's not always a healthy situation," he advises. "It's much better to have two or more competing models, forcing you to think more carefully about your theories, your predictions and the observations." (pg. 284)

Replicating experiments with propensity score matching

I've been trying to learn some propensity score matching and consequently have been perusing some papers. The Smith-Todd paper "Does Matching Overcome Lalonde's Critique of Nonexperimental Estimators?" was a good useful starting point for me. I was a little perplexed by the desire of the authors to "hit" the experimental estimate though. Presumably, if the experiement were repeated, it would not achieve the same treatment effect as the original - the treatment effect has a standard error or confidence interval around it.

Agodini and Dynarski's paper "Are Experiments the Only Option? A Look at Dropout Prevention Programs" was also interesting. The authors don't try to match the experimental effects but ask if the direction of the experimental effect can be concluded based on propensity score methods. Also interesting was the whole question surrounding the standard error of the propensity score estimate - whether the simple random sample estimate is "close" to the bootstrapped estimate or not since there have been claims that the standard error from the propensity score estimator is from an estimate based on nonlinear methods and hence not reliable. They find that the bootstrapped estimates are similar to an SRS standard error.

Replicating Econbrowser's replication of CEA analysis

There was an interesting post on Econbrowser where the impact of the fiscal stimulus done by the CEA was replicated.

options nocenter;
filename gdp 'C:\ReplicateCEA\GDPC1.txt';
/* File downloaded from FRED St. Louis */
data GDP;
infile gdp firstobs = 14;
/* Read two variables: date and GDP */
input date value;
informat date yymmdd10.;
format date yymmdd10.;
lngdp = log(value);
y=lngdp;
/* Calculate the first difference of y */
diffy = dif(y);
run;

data gdp4q;
set GDP end=last;
output;
if last then do;
date = '01Oct2009'd;
value = value * 1.04;
lngdp = log(value);
y=lngdp;
output;
end;
run;

data gdp4q;
set gdp4q;
dateq = put(date,yyq6.);
run;

filename nfp 'C:SVAR\ReplicateCEA\PAYEMS.txt';
/* File downloaded from FRED St. Louis */
data NFP;
infile nfp firstobs = 16;
/* Read two variables: date and GDP */
input date value;
informat date yymmdd10.;
format date yymmdd10.;
lnnfp = log(value);
e=lnnfp;
/* Calculate the first difference of y */
diffnfp = dif(e);
dateq = put(date,yyq6.);
run;

data nfp2;
set nfp; by dateq date;

if last.dateq then output;
run;

data gdp_nfp(drop = ln: diff:);
merge gdp4q(in=a rename = (value = gdp)) nfp2(in=b rename = (value = nfp));

by dateq;
if a and b;
run;

proc print data = gdp_nfp noobs;
where year(date)>=2007;
run;

ods output ParameterEstimates=pe;
proc varmax data = gdp_nfp;
where 1990<=year(date)<=2007;
id date interval = qtr;
model y e /p=4 ;
output lead=12 out = for;
run;

proc transpose data = pe out = pe_ty;
where equation = 'y';
var estimate;
id parameter;
run;

data pe_ty;
set pe_ty(rename = (const1 = intercept) drop = _name_);
_type_ = 'PARMS';
_model_ = 'Baseline';
_depvar_ = 'y';
y = -1;
RUN;

proc transpose data = pe out = pe_te;
where equation = 'e';
var estimate;
id parameter;
run;

data pe_te;
set pe_te(rename = (const2 = intercept) drop = _name_);
_type_ = 'PARMS';
_model_ = 'Baseline';
_depvar_ = 'e';
e = -1;
RUN;

%macro genar(lag=,eq1=,eq2=,var1=,var2=);
%do i=1 %to &lag;
%do e=1 %to &eq2;
ar&i._&eq1._&e=lag&i(&&var&e);
%end;
%end;
%mend genar;

options mprint;
data gdp2;
set gdp_nfp;
%genar(lag=4,eq1=1,eq2=2,var1=y,var2=e);
run;

data e2;
set gdp_nfp;
%genar(lag=4,eq1=2,eq2=2,var1=y,var2=e);
run;

proc score data = gdp2 score = pe_ty out=gdp2_score type=parms;
var ar1_1_1 ar1_1_2 ar2_1_1 ar2_1_2 ar3_1_1 ar3_1_2 ar4_1_1 ar4_1_2;
run;

proc score data = e2 score = pe_te out=e2_score type=parms;
var ar1_2_1 ar1_2_2 ar2_2_1 ar2_2_2 ar3_2_1 ar3_2_2 ar4_2_1 ar4_2_2;
run;

symbol1 value=none i=join;
symbol2 value=none i=join;
proc gplot data = gdp2_Score;
where year(date)>=2008;
plot (baseline y) * date / overlay;
run;
quit;

proc gplot data = e2_score;
where year(date)>=2008;
plot (baseline e) * date / overlay;
run;
quit;

What I've been reading

1. Three Scientists and their Gods: Looking for Meaning in an Age of Information by Robert Wright: Was more interesting than I expected. One review is here. The book features (1) computer scientist Ed Fredkin who believes that the universe IS a computer, (2) sociobiologist E. O. Wilson, and (3) Quaker economist Kenneth Boulding. The book presents their views on how they view their world and what shaped their views.

2. Swoosh: The Unauthorized Story of Nike and the Men Who Played There by JB Strasser and Laurie Becklund. Another book which was more interesting than I had expected. It was NOT a story of Phil Knight who declined to be interviewed for the book. What is interesting about the book is the absence of Knight after Nike went public and plunged into a product crisis lurching from apparel to uninspired shoe after uninspired shoe (except for the success of Air Jordan) and how it was overtaken by Reebok. This seems to be a story of another company with 'founderitis' -the inability of its founders to deal with the changing marketplace perhaps as a direct result of the wealth brought on by the IPO.

Interesting titbit: None of the original people of Nike liked the Swoosh logo and none (except for Jeff Johnson who came up with the name) liked calling the company Nike. Missing from the book is probably a good description of the shoe making process. This is discussed mainly toward the latter part of the book as Nike was foundering and unable to come up with innovative products and the extremem difficulties they encountered when trying to put sacs filled with air in the soles.

3. Two Park Street: A Publishing Memoir by Robert Brooks about his time as editor-in-chief of the Trade department at Houghton Mifflin. He recounts the role he played in bringing to publication the Peterson Field Guides, Rachel Carson's Silent Spring and Winston Churchills 6 volume work on World War 2 among others (Lord of the Rings was published in the UK and Houghton Mifflin bough the rights for U.S.). The memoirs paint a romantic view of book publishing during his tenure (from the 1930s to 60s).

Average monthly condo fees in the U.S.

Data source:

Steven Ruggles, Matthew Sobek, Trent Alexander, Catherine A. Fitch, Ronald Goeken, Patricia Kelly Hall, Miriam King, and Chad Ronnander. Integrated Public Use Microdata Series: Version 4.0 [Machine-readable database]. Minneapolis, MN: Minnesota Population Center [producer and distributor], 2008.

We've been looking at condos around the DC area and it got me wondering as to what the average condo fees were like around the country. The above is a chart of the average condo fees tabulated from IPUMS. Because of topcoding the average is below the true average. The mean and max are labeled at the end of the bars. Unfortunately, I'm unable to improve on the resolution of the jpeg.

The SAS code for this is:

proc means data = cf.hh2008 N mean std min max;
where year = 2008 and condofee > 0;
class stateicp;
var condofee;
weight hhwt;
output out = summ mean = meancondofee min = mincondofee max=maxcondofee;
run;

data summ2;
set summ;
proc sort; by descending meancondofee;
run;

data annosum;
set summ2;
%annomac;
%dclanno;
%system(2,2,3);
midpoint = stateicp;
x = round(meancondofee,1);
lbl = compress(put(meancondofee, 8.)"/"put(maxcondofee, 8.));
%label(x,.,lbl,black,0,0,1.8,swissb,6);
run;

filename grafout 'chart1.jpeg';
goptions device = jpeg targetdevice = jpeg ftext="Verdana" gsfname = grafout xmax=8 in ymax=6 in xpixels=4000 ypixels=3000 vpos=40 hpos=40 lfactor=1 ;
axis1 label = none;
title1 h=1 'Average monthly condominium fees in 2008: U.S. States';
proc gchart data=summ2;
where _type_ ^=0;
hbar stateicp / sumvar=meancondofee maxis=axis1 discrete descending nostat anno=annosum(where=(_type_^=0));
run;
quit;