While we were in Phuket, Washington was in the midst of another power outage caused by thunderstorms. Need I say more?
By coincidence, one night when we were day, we lost power at the hotel, albeit for only about an hour. Apparently, a transformer down the road blew. According to M, when she was at the front desk asking about the power, a lady came by and said 'I heard an almighty bang and then the lights went out!'
Update:
As I wrote this I read that Washington has been beset by three more thunderstorms accompanied by widespread power outages. (See here for the storm the day after we left, here for the second storm, and here for the storm after. Or here for a roundup.)
It's great that I have been in 3rd world countries with no power interruptions! Looks like we left DC just in the nick of time. While this is may be an indicator of poor investment in the power grid, it is by no means the only infrastructure suffering from lack of maintenance – the Metro is having problems and water mains need to be fixed instead of the water authorities waiting for them to break before attending to them.
The usual things will happen – Pepco will be called to account for its handling of the power outages. After some apologies and how this summer has been 'unprecedented' and the county officials have had their outbursts and photo-ops things will go back to the way they were before. The problem lies in our willingness to accept things as they are before. This attitude can result in catastrophes such as poor responses to Katrina and the Gulf oil spill. We call these events unprecedented and excuse ourselves because we cannot perform any better. To say that we will try to perform better is not enough (nor is it enough to just learn from the past and hope the mistakes do not repeat.)
Deming calls this effort continuous quality improvement. (Note that Lexus calls it a relentless pursuit of perfection but did nothing much about it which accounts for the recalls this summer.) Yet, it is hard to get companies to continually invest in maintenance, repairs and upgrades. Economists will call this an incentive problem. One way to solve this would be to allow maintenance and repairs to be tax deductible, say 10 cents for every dollar and for upgrades say 50 cents for every dollar.
Deming would be against this however, if I read his philosophy correctly. Pick an area to improve on – for instance, for every storm the number of outages have to be lower and lower every year until it falls to zero. His philosophy would imply that the costs of fixing power lines from storms would in the long run more than pay for itself.
So is the problem short-termism (especially of the stock market) and long term? More on this in another post.
Monday, August 30, 2010
Phuket
We were in Phuket July 26 – July 30 and stayed at the Pacific Club. I had expected Phuket to be fairly developed with high rise condos dotting the coast but was pleasantly surprised that it was not. Like M says, the atmosphere is very saabai saabai. Most of the time, we spent trying to overcome jet lag which was part of the plan. The hotel was not able to provide the 2-bedroom unit we wanted saying that the AC was broken but it turned out fine since we didn't really need all that space and it saved us some money. They also threw in one airport transfer for free which saved us an additional 1000 Thb.
We drove up to the Big Buddha and went to Nai Harn beach. The waves were bigger than I was accustomed to (perhaps because of the monsoon season) and it was great to see most of the farang tourists thrown themselves with abandon with each coming wave. The beaches were also extremely clean – apparently the Thais have learned something that Penangites have not.
We also managed to squeeze in a show – Fantasea which was part Vegas and part Circque du Soleil with animals (elephants, hens, pigeons, sheep, water buffalo) thrown in for good measure. K1 and K2 enjoyed this and the place was teeming with tourists – busloads (us included) were being disgorged prior to show time. Skip the buffet – to say that it was average would be generous. The best part were the baby elephants standing in the grand entryway ready to be stroked and touched as we file into the auditorium. After the show, they were also outside for photo-ops.
This being the monsoon season, it was no surprise to us that it rained daily and was incredibly humid even though it did clear up enough for us to venture out to the beach and the show. We also managed a walk into Karon town from the hotel. The town is small and caters mainly to tourists – laundry services, various food & drink establishments (which we did not try), and other smaller hotels. We mostly ate at the hotel – the breakfast was good (go for the Thai food) and also a restaurant up on one of Phuket's many hills as well as lunch by the beach
We drove up to the Big Buddha and went to Nai Harn beach. The waves were bigger than I was accustomed to (perhaps because of the monsoon season) and it was great to see most of the farang tourists thrown themselves with abandon with each coming wave. The beaches were also extremely clean – apparently the Thais have learned something that Penangites have not.
We also managed to squeeze in a show – Fantasea which was part Vegas and part Circque du Soleil with animals (elephants, hens, pigeons, sheep, water buffalo) thrown in for good measure. K1 and K2 enjoyed this and the place was teeming with tourists – busloads (us included) were being disgorged prior to show time. Skip the buffet – to say that it was average would be generous. The best part were the baby elephants standing in the grand entryway ready to be stroked and touched as we file into the auditorium. After the show, they were also outside for photo-ops.
This being the monsoon season, it was no surprise to us that it rained daily and was incredibly humid even though it did clear up enough for us to venture out to the beach and the show. We also managed a walk into Karon town from the hotel. The town is small and caters mainly to tourists – laundry services, various food & drink establishments (which we did not try), and other smaller hotels. We mostly ate at the hotel – the breakfast was good (go for the Thai food) and also a restaurant up on one of Phuket's many hills as well as lunch by the beach
Sunday, August 29, 2010
Spontaneous order
This post on spontaneous order impressed MR:
Here's a video of a small town in Britain that turned its traffic lights off. Order ensued.
The major qualification here is small town. I'd like to see the lights turned off and order ensuing on Dupont Circle and Ward Circle before being impressed.
Here's a video of a small town in Britain that turned its traffic lights off. Order ensued.
The major qualification here is small town. I'd like to see the lights turned off and order ensuing on Dupont Circle and Ward Circle before being impressed.
Why I'm (not) blogging
Left for three weeks to Thailand and Malaysia - with intermittent and slow Internet connections all throughout and then back with incredible jet lag. Thought I had devised a way by writing off line and then copying and pasting when I got a reliable connection but I just got lazy. The blogging was supposed to be a disciplining device to get me to write every day but it has not worked well and worked even worse while we were away.
I'll be posting the drafts that I half-wrote up while away but they need some clean up first.
I'll be posting the drafts that I half-wrote up while away but they need some clean up first.
Friday, July 23, 2010
Financial reform thoughts
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.
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.
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?
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