I have none but others have so I thought I'd put them here. In my spare time I think I'd like to follow up on how the enacted reforms reflect what lawmakers (or lobbyists) think are the most important causes of the financial crisis:
1. Mark Thoma's roundup: I'd summarize his thoughts as that the law doesn't go far enough.
a) Consumer protection agency addresses the fraud issue, I think.
b) Exchange for derivatives addresses the lack of transparency/securitization issue.
c) Resolution authority doesn't really address a cause but just allows a better clean-up procedure.
d) TBTF isn't addressed at all though Mark thinks it should.
e) Proprietary trading, capital requirements, leverage limits are not really addressed or are too weak. (i.e. the compromise version of the Volcker rule)
f) Credit rating agencies appear to have been given a pass.
g) Executive pay is also not addressed. A clawback would have been interesting.
2. This article (HT: MR) on the derivatives exchange was interesting:
As the U.S. Senate recently debated a major financial reform bill in which the credit default swap, a kind of derivative, played a significant part, Senators Carl Levin (D-MI) and Jeff Merkley (D-OR) proposed an amendment to that bill that would have banned banks from proprietary trading. There were a lot of high-rolling bankers who did not want that amendment to pass, because it would have messed up their plans to repatriate foreign profits into the United States, untaxed, by trading in derivatives on their own accounts. The clearinghouse ICE Trust U.S. forms a central part of these plans.
What is ICE Trust U.S., and who owns it? ICE US Holding Co., which was established in 2008 as the parent of ICE Trust U.S., is located in the Cayman Islands. Yet none of the owners of ICE US Holding Co. are based in the Caymans. IntercontinentalExchange, Inc., which owns 50 percent of ICE US Holding, is headquartered in Atlanta, Georgia. Among the other owners of the Caymans company are Citigroup, Goldman Sachs, J.P. Morgan, Merrill Lynch and Morgan Stanley, which are headquartered in New York. Bank of America, which now owns Merrill Lynch, is based in Charlotte, North Carolina. Deutsche Bank (Frankfurt) and both UBS and Credit Suisse (Zurich) are also part owners.
... ICE US Holding Company L.P., Cayman Islands, which owns ICE Trust U.S., is “a blocking company” used to prevent the foreign subsidiary from being deemed as loaning margin to a “U.S. person” (namely, ICE Trust U.S.). “They are loaning the money to a Cayman Islands person”, he said. This means that banks can keep their profits abroad and untaxed, but still use them to trade on a U.S. exchange, making investments in U.S. credit default swaps while not paying tax on the collateral placed on the exchange. It’s precisely what Section 956 was designed to prevent.
... University of Michigan Law School professor Reuven Avi-Yonah, who frequently testifies as an expert witness on tax issues in congressional hearings, said the ICE structure ought to be examined by the public, even if it is legal. “Not only do we have an entity in a tax haven, but it’s also an entity with no substance, which is really a killer combination.” A former corporate lawyer, Avi-Yonah told me, “I am not sure the IRS would reject it, but that doesn’t mean it’s okay; Congress should take a look.”
This whole thing strikes me as hypocritical (approved by the Fed! no less - they're not going to win any friends here, me thinks), especially since there are all these proposals to prevent tax abuses.
3. John Cassidy on the evolution of the Volcker Rule (which led to the watered down version):
“There is a great amount of ambiguity about how the bill will evolve in practice,” Raghuram Rajan, a University of Chicago professor who was one of the few economists to warn about the risks of a financial blowup, told me. “It has tremendous promise, but also tremendous scope for disappointment.”
... Many independent analysts agreed, arguing that Bear and Lehman had been destroyed by excessive borrowing and by their sunny view of the subprime-mortgage market. Their proprietary-trading desks had not been the problem. Benn Steil, an economist at the Council on Foreign Relations, told me that, if bank deposit insurance didn’t exist, he would consider an investment with Goldman’s prop-trading desk safer than one with a Midwestern bank that would turn around and lend it to local businesses. If Volcker’s recommendations had been in effect before 2008, Steil said, “the crisis would have unfolded precisely as it did.”
Volcker countered that the Treasury’s approach risked exacerbating the likelihood of future bailouts. In proposing to grant the biggest financial firms special legal status as “Tier 1 financial holding companies,” the Treasury came close to designating them as too big to fail, thereby encouraging them to take more risks.
... Yet a larger question remains: Will the reform package be sufficient to prevent future bailouts? Among economists, there is considerable skepticism about the Volcker rule. “If you have the incentive to take risks, there are so many ways that you can do it, and banning one specific activity is not very useful,” Raghuram Rajan said. “If I am a bank and I want to load up on risk, I can give loans to walking wrecks, and that will give me all the risk I want.” In fact, prohibiting banks from proprietary trading could “give you false confidence that they are not taking risks when they are.”
... Volcker may have won the intellectual debate, but, as he readily concedes, the practical challenge lies ahead. Two years from now, when the Volcker rule goes into effect, some firms may well try to skirt it, by, for example, placing big proprietary bets and trying to define them as something else. Without the legislative purity that Volcker was hoping for, enforcing his rule will be difficult, and will rely on many of the same regulators who did such a poor job the last time around, particularly those at the Fed. If the Obama Administration had been able to force the banks to hold a lot more capital in perpetuity, this would not matter very much: a financial system with low leverage can survive the occasional implosion. But international negotiations on a new set of capital requirements are going slowly, and there is no assurance that they will yield meaningful results. If they don’t, once the next credit boom gets going, leverage ratios will start rising again.
In this area, as in many others, the Dodd-Frank Bill is at most a useful beginning. As Volcker told me, it doesn’t really deal with a number of issues that contributed to the crisis, such as extravagant Wall Street compensation practices, misleading accounting, and incompetent credit rating. Ultimately, it also leaves open the question of what would happen if one of the biggest financial firms got into the same sort of trouble that brought down Bear Stearns and A.I.G. As a legal matter, the federal government could now euthanize such a firm instead of bailing it out. But is the threat of closure credible? If in five years Goldman, say, were to suffer a catastrophic trading loss, then, regardless of whether it had given up its banking license, the Treasury and the Fed would come under great pressure to save the firm.
Friday, July 23, 2010
Is utility unbounded from below
This assumption is usually made in game theoretic versions of contract theory. If utility is unbounded from below agents play a game repeatedly then there is some path in which behavior can be enforced so that incentive compatibility holds. I may have phrased this incorrectly - it's been a while since I've looked at game theory.
Basically, all it says is that we can enforce good behavior with sufficient threats. On the flip side, one would also think that if faced with the possibility of dying, we would make a decision to preserve our lives. In equilibrium, with perfect knowledge and perfect rationality then workplace safety would not be an issue. Of course, we don't have perfect knowledge or perfect rationality so regulation is required. But can regulation perform better than a worker's private knowledge of workplace issues?
This post is basically in response to this NYT article on workers' concerns aboard the Deepwater Horizon before it blew up:
A confidential survey of workers on the Deepwater Horizon in the weeks before the oil rig exploded showed that many of them were concerned about safety practices and feared reprisals if they reported mistakes or other problems.
In the survey, commissioned by the rig’s owner, Transocean, workers said that company plans were not carried out properly and that they “often saw unsafe behaviors on the rig.”
Some workers also voiced concerns about poor equipment reliability, “which they believed was as a result of drilling priorities taking precedence over planned maintenance,” according to the survey, one of two Transocean reports obtained by The New York Times.
Basically, all it says is that we can enforce good behavior with sufficient threats. On the flip side, one would also think that if faced with the possibility of dying, we would make a decision to preserve our lives. In equilibrium, with perfect knowledge and perfect rationality then workplace safety would not be an issue. Of course, we don't have perfect knowledge or perfect rationality so regulation is required. But can regulation perform better than a worker's private knowledge of workplace issues?
This post is basically in response to this NYT article on workers' concerns aboard the Deepwater Horizon before it blew up:
A confidential survey of workers on the Deepwater Horizon in the weeks before the oil rig exploded showed that many of them were concerned about safety practices and feared reprisals if they reported mistakes or other problems.
In the survey, commissioned by the rig’s owner, Transocean, workers said that company plans were not carried out properly and that they “often saw unsafe behaviors on the rig.”
Some workers also voiced concerns about poor equipment reliability, “which they believed was as a result of drilling priorities taking precedence over planned maintenance,” according to the survey, one of two Transocean reports obtained by The New York Times.
Tuesday, July 20, 2010
Children, marriage and divorce
Again from the New York Magazine:
... couples probably pay the dearest price of all. Healthy relationships definitely make people happier. But children adversely affect relationships. As Thomas Bradbury, a father of two and professor of psychology at UCLA, likes to say: “Being in a good relationship is a risk factor for becoming a parent.” He directs me to one of the more inspired studies in the field, by psychologists Lauren Papp and E. Mark Cummings. They asked 100 long-married couples to spend two weeks meticulously documenting their disagreements. Nearly 40 percent of them were about their kids.
If wanting children causes marriage, does having children cause divorce?
... couples probably pay the dearest price of all. Healthy relationships definitely make people happier. But children adversely affect relationships. As Thomas Bradbury, a father of two and professor of psychology at UCLA, likes to say: “Being in a good relationship is a risk factor for becoming a parent.” He directs me to one of the more inspired studies in the field, by psychologists Lauren Papp and E. Mark Cummings. They asked 100 long-married couples to spend two weeks meticulously documenting their disagreements. Nearly 40 percent of them were about their kids.
If wanting children causes marriage, does having children cause divorce?
Sovereign defaults
In a post of what happens if things go really badly, I was surprised to see that the Asian economies that have a 5-year cumulative default probability (whatever this is supposed to be) of 10 percent or greater: Indonesia, Thailand, South Korea.
What I dislike about the graph is the following: Is there really a difference between 11 and 11.4 percent probability? Assuming that the model is estimated, where are the standard errors?
Another "feature" of these default models is the timing. When stuff happens we always wonder, why now? Why not last month? Why not yesterday? In many cases, it is the case that really nothing much has happened between the time economists say that these countries are in danger of defaulting and when it happens, e.g. Greece.
My guess is that there is some inattention or lack of focus by "people". You know the ones I'm talking about - they're constantly in crisis mode, switching their attention from one to another. When all is well, they're really not doing much. Then something is due e.g. a loan payment and they switch their attention to it and suddenly things aren't all that rosy and boom! Then when they're done fanning that one fire they decide to see what else they can torch and before you can say contagion, you're right smack in the middle of it.
I'd guess that if we looked at all the crises in history, very few have happened on holidays or during the summer vacations.
What I dislike about the graph is the following: Is there really a difference between 11 and 11.4 percent probability? Assuming that the model is estimated, where are the standard errors?
Another "feature" of these default models is the timing. When stuff happens we always wonder, why now? Why not last month? Why not yesterday? In many cases, it is the case that really nothing much has happened between the time economists say that these countries are in danger of defaulting and when it happens, e.g. Greece.
My guess is that there is some inattention or lack of focus by "people". You know the ones I'm talking about - they're constantly in crisis mode, switching their attention from one to another. When all is well, they're really not doing much. Then something is due e.g. a loan payment and they switch their attention to it and suddenly things aren't all that rosy and boom! Then when they're done fanning that one fire they decide to see what else they can torch and before you can say contagion, you're right smack in the middle of it.
I'd guess that if we looked at all the crises in history, very few have happened on holidays or during the summer vacations.
Unintended consequences?
1. I've never been a big believer of this but I can't make up my mind after this article:
In the surrounding steep valleys, hundreds of defunct silver and gold mines pock the slopes with log-framed portals and piles of waste rock. When water flows over the exposed, mineral-laden rock in and around the mines, it dissolves zinc, cadmium, lead, and other metals. The contaminated water, sometimes becoming acidic enough to burn skin, then dumps into nearby streams. So-called acid mine drainage, most of it from abandoned boom-time relics, pollutes an estimated 12,000 miles of streams throughout the West—about 40 percent of western waterways. ...
... But as these volunteers prepare to tackle the main source of the pollution, the mines themselves, they face an unexpected obstacle—the Clean Water Act. Under federal law, anyone wanting to clean up water flowing from a hard-rock mine must bring it up to the act’s stringent water-quality standards and take responsibility for containing the pollution—forever. Would-be do-gooders become the legal “operators” of abandoned mines like those near Silverton, and therefore liable for their condition.
2. Should FOIA apply to journalists?
... does the press always get to decide whose secrets trump? What bothers me most about the cult of the source is the press’s insistence on its right to ignore due process of law and refuse to reveal sources even after the issue has been fully litigated. Fine: appeal it up to the Supreme Court if you want, but in a democracy with an (all but) uncorrupted judiciary, if you ultimately lose, you should obey the law as it is, not as you would like it to be.
In the surrounding steep valleys, hundreds of defunct silver and gold mines pock the slopes with log-framed portals and piles of waste rock. When water flows over the exposed, mineral-laden rock in and around the mines, it dissolves zinc, cadmium, lead, and other metals. The contaminated water, sometimes becoming acidic enough to burn skin, then dumps into nearby streams. So-called acid mine drainage, most of it from abandoned boom-time relics, pollutes an estimated 12,000 miles of streams throughout the West—about 40 percent of western waterways. ...
... But as these volunteers prepare to tackle the main source of the pollution, the mines themselves, they face an unexpected obstacle—the Clean Water Act. Under federal law, anyone wanting to clean up water flowing from a hard-rock mine must bring it up to the act’s stringent water-quality standards and take responsibility for containing the pollution—forever. Would-be do-gooders become the legal “operators” of abandoned mines like those near Silverton, and therefore liable for their condition.
2. Should FOIA apply to journalists?
... does the press always get to decide whose secrets trump? What bothers me most about the cult of the source is the press’s insistence on its right to ignore due process of law and refuse to reveal sources even after the issue has been fully litigated. Fine: appeal it up to the Supreme Court if you want, but in a democracy with an (all but) uncorrupted judiciary, if you ultimately lose, you should obey the law as it is, not as you would like it to be.
The Malaysian Connection
I had known about the letter from Malaysia in the anthrax case, recounted very well here and about Stephen Hatfill. What I hadn't known was this titbit:
His girlfriend was Malaysian-born—and a hoax package had been sent from Malaysia to a Microsoft office in Nevada.
The article does not explain how the subsequent suspect Bruce Edward Ivins managed to mail a package from Malaysia though I suspect these kinds of things are easily done.
The article was enjoyable though it was hard not to see why the FBI considered Hatfill a suspect (unless he was being set-up - I may be watching too much TV). In the end, this is a tale of how we can all buckle when the weight of one organization (not just the government) comes down on us.
His girlfriend was Malaysian-born—and a hoax package had been sent from Malaysia to a Microsoft office in Nevada.
The article does not explain how the subsequent suspect Bruce Edward Ivins managed to mail a package from Malaysia though I suspect these kinds of things are easily done.
The article was enjoyable though it was hard not to see why the FBI considered Hatfill a suspect (unless he was being set-up - I may be watching too much TV). In the end, this is a tale of how we can all buckle when the weight of one organization (not just the government) comes down on us.
China and Africa
A preface excerpted from The Atlantic:
“Statistics are hard to come by, but China is probably the biggest single investor in Africa,” said Martyn Davies, the director of the China Africa Network at the University of Pretoria. “They are the biggest builders of infrastructure. They are the biggest lenders to Africa, and China-Africa trade has just pushed past $100 billion annually.”
Davies calls the Chinese boom “a phenomenal success story for Africa,” and sees it continuing indefinitely. “Africa is the source of at least one-third of the world’s commodities”—commodities China will need, as its manufacturing economy continues to grow—“and once you’ve understood that, you understand China’s determination to build roads, ports, and railroads all over Africa.”
Davies is not alone in his enthusiasm. “No country has made as big an impact on the political, economic and social fabric of Africa as China has since the turn of the millennium,” writes Dambisa Moyo, a London-based economist, in her influential book, Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa. Moyo, a 40-year-old Zambian who has worked as an investment banker for Goldman Sachs and as a consultant for the World Bank, believes that foreign aid is a curse that has crippled and corrupted Africa—and that China offers a way out of the mess the West has made.
Some additional links:
1. Via Chris Blattman
2. Foreign Affairs:
Why would the Chinese government push some of its labor- and energy-intensive industries to move to special economic zones in Africa, even as the U.S. Congress bans the U.S. Agency for International Development from financing any activities that could relocate the jobs of Americans overseas? Because Chinese planners want industrialists at home to move up the value chain. Polluting industries such as leather tanneries and metal smelters are no longer tolerated in many Chinese cities.
3. The Atlantic (interesting throughout):
Many Chinese agricultural initiatives are shrouded in mystery. In 2006, for instance, China offered a $2 billion soft loan to Mozambique for a project to dam the Zambezi River Valley, amid some of the continent’s most fertile soils. The following year, Chinese and Mozambican officials reportedly signed a memorandum of understanding allowing 3,000 Chinese settlers to begin farming in the area. But following a local uproar, Mozambique’s government denied all reports of the plan, and little has been heard of it since. ...
... The stop-and-go quality of major Chinese farming deals and the strong feelings that they’ve produced suggest that the honeymoon between the Chinese and Africans may not last long. During the course of my trip, land issues seemed to bring out the ugliest biases in the people I spoke to. “If you gave this land to Chinese people to work it, this place would be rich overnight,” said one Chinese woman immigrant, a middle-aged trader in southern Congo: “They’re too lazy, these Africans.” Many Africans, for their part, were intensely wary of Chinese immigration; Daniel told me that this was a particularly raw issue among many of his friends. Conspiracy theories echoed frequently. In Dar, for instance, rumors had spread that the new national sports stadium was part of a secret deal to grant land to Chinese farmers in Tanzania.
... Many Chinese fortune seekers had hired African work gangs to dig for copper, sometimes even in Lubumbashi’s red-clay streets. “They were profiteers and speculators,” said one local businessman. “Congo got nothing from them.” Most of them dug “no more than 20 feet deep, which requires no investment at all.” The government belatedly tried to reassert control, requiring all those who mined copper to smelt it as well, and to make more-substantial investments in equipment, in order to generate more jobs and tax revenue and to make the industry more sustainable. In response, small operators scrambled to build small, inefficient furnaces. In 2008, as prices tumbled from $9,000 a ton to a low of $3,500, the makeshift smelters closed down and the Chinese owners fled, leaving their Congolese workers unpaid and the landscape littered with industrial refuse.
“Statistics are hard to come by, but China is probably the biggest single investor in Africa,” said Martyn Davies, the director of the China Africa Network at the University of Pretoria. “They are the biggest builders of infrastructure. They are the biggest lenders to Africa, and China-Africa trade has just pushed past $100 billion annually.”
Davies calls the Chinese boom “a phenomenal success story for Africa,” and sees it continuing indefinitely. “Africa is the source of at least one-third of the world’s commodities”—commodities China will need, as its manufacturing economy continues to grow—“and once you’ve understood that, you understand China’s determination to build roads, ports, and railroads all over Africa.”
Davies is not alone in his enthusiasm. “No country has made as big an impact on the political, economic and social fabric of Africa as China has since the turn of the millennium,” writes Dambisa Moyo, a London-based economist, in her influential book, Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa. Moyo, a 40-year-old Zambian who has worked as an investment banker for Goldman Sachs and as a consultant for the World Bank, believes that foreign aid is a curse that has crippled and corrupted Africa—and that China offers a way out of the mess the West has made.
Some additional links:
1. Via Chris Blattman
2. Foreign Affairs:
Why would the Chinese government push some of its labor- and energy-intensive industries to move to special economic zones in Africa, even as the U.S. Congress bans the U.S. Agency for International Development from financing any activities that could relocate the jobs of Americans overseas? Because Chinese planners want industrialists at home to move up the value chain. Polluting industries such as leather tanneries and metal smelters are no longer tolerated in many Chinese cities.
3. The Atlantic (interesting throughout):
Many Chinese agricultural initiatives are shrouded in mystery. In 2006, for instance, China offered a $2 billion soft loan to Mozambique for a project to dam the Zambezi River Valley, amid some of the continent’s most fertile soils. The following year, Chinese and Mozambican officials reportedly signed a memorandum of understanding allowing 3,000 Chinese settlers to begin farming in the area. But following a local uproar, Mozambique’s government denied all reports of the plan, and little has been heard of it since. ...
... The stop-and-go quality of major Chinese farming deals and the strong feelings that they’ve produced suggest that the honeymoon between the Chinese and Africans may not last long. During the course of my trip, land issues seemed to bring out the ugliest biases in the people I spoke to. “If you gave this land to Chinese people to work it, this place would be rich overnight,” said one Chinese woman immigrant, a middle-aged trader in southern Congo: “They’re too lazy, these Africans.” Many Africans, for their part, were intensely wary of Chinese immigration; Daniel told me that this was a particularly raw issue among many of his friends. Conspiracy theories echoed frequently. In Dar, for instance, rumors had spread that the new national sports stadium was part of a secret deal to grant land to Chinese farmers in Tanzania.
... Many Chinese fortune seekers had hired African work gangs to dig for copper, sometimes even in Lubumbashi’s red-clay streets. “They were profiteers and speculators,” said one local businessman. “Congo got nothing from them.” Most of them dug “no more than 20 feet deep, which requires no investment at all.” The government belatedly tried to reassert control, requiring all those who mined copper to smelt it as well, and to make more-substantial investments in equipment, in order to generate more jobs and tax revenue and to make the industry more sustainable. In response, small operators scrambled to build small, inefficient furnaces. In 2008, as prices tumbled from $9,000 a ton to a low of $3,500, the makeshift smelters closed down and the Chinese owners fled, leaving their Congolese workers unpaid and the landscape littered with industrial refuse.
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