Rhymes With Cars & Girls

I am very pleased to join in with the boycott of Elsevier academic journals. It’s about time! My pledge: I shall not be submitting to or refereeing any Elsevier journals, until they change their ways.

Actually, come to think of it, I’m going to boycott ALL academic journals. Screw you journals! Journals suck. Besides, I’ve got a blog.

Frustrated with the current slate of options faced by our country, and after zero lengthy discussions with my family or soul-searching, I have decided to do the right and responsible thing by my country and throw my hat into the ring to be the evil (R) party’s nominee for President of the United States. Please vote for me, like by writing in “Sonic Charmer”, or (if you’re a broker at the convention) please broker the convention for me. Or however you call it, I’m not sure how that part works.

Key facts about me, Sonic Charmer, and why I am qualified to be the next President of the United States:

• Spent a great deal of time in academics, thereby safely insulated from the real world.
• I have never worked for or been associated a private equity fund. I barely even know what they do.
• Wife count: < 2 (strict inequality).
• Would be cool with Warren Buffet’s secretary’s tax rate being lowered by special Act of Congress. (I’d overhaul the tax code to be flatter for the rest of us, but Warren Buffet’s secretary, she’s a special case, we’re all very concerned about her)
• Visionary. I think we should build a giant space station next to a wormhole. An AMERICAN space station.
• Can read aloud printed words placed in my field of vision into an amplifying device (aka speech-giving). I also bet I’d be adept at rotating my head left and right and back again in a creepily-robotic and regular-periodic manner to simulate looking at individual audience members, while doing so.
• Tall. (VERY important)
• Will pledge to close Guantanamo Bay, just like my predecessor pledged, if that’ll help.
• I believe the children are the future. (I really do.)
• Have implemented zero (0) state-level Obamacares so would lack Mitt Romney’s baggage vs. Obama in the general election.
• Willing to pretend to have a pet cat and/or dog who is very important in my life, and then have a ghost-writer write a “book” on his/her/its behalf, once in the White House.
• Have not participated in any debates, so the Obama campaign will have no clips of me saying something silly/reckless/’scary’ for their negative campaigning
• Finally: I am a natural-born citizen of the United States, which you will know solely on my say-so. (It would be racist to ask me to prove it)

There’s more where that came from, but I don’t want to spoil the surprise. You have to vote me into the Presidency to find out what I’ll do there.

But that’s why they call it DECISION ’12!

Over to you, Newt:

“Does that mean I’m visionary? You betcha,” he said.

I think it’s terrific that he has finally admitted how visionary he (Newt) is. Must have been difficult. But hey, facts are facts. Good on him for acknowledging his visionaryness.

In this case, his visionary vision reveals itself in the form of saying he’ll make there be a ‘permanent base on the moon’ within 8 years (but only if we make him be the President. I bet he could still do it without being the President though, like if we gave him some grants).

So that would be around 2020, which hey, you know, only 21 years later than I had been anticipating…

After that, Newt wants to go to Mars, back where the red-cold sun is sinking to the Channels of A’DAAR.

Yikes, sorry, my references are all over the place here.

Nicely summarizes many of the idiocies and internal contradictions of Obamonomics in one handy place:

Thoughts On The SOTU from Clark Judge

by the Hi-Fives

P.S. RIP Lookout! Records

By annual tradition – per IMDB, looks like these are the 2011 movies I’ve seen in rough order from best to worst. Interestingly, I don’t see a truly great movie there. A lot of interchangeably-very-goods.

Only the last 1-2 would really get a thumbs-down.

Side note: At this rate, I have to assume that by the year 2017 or so, the only movies I’ll ever watch will all be connected or derived from Marvel Comics in some way.

1. Super 8
2. Midnight In Paris
3. Moneyball
4. Harry Potter the last
5. Captain America: The First Avenger
6. Unknown
7. Source Code
8. Thor
9. X-Men First Class
10. The Lincoln Lawyer
11. Cars 2
12. Battle Los Angeles
13. Bad Teacher
14. Limitless
15. Rio
16. The Adjustment Bureau
17. Kung Fu Panda 2
18. Margin Call
19. Sucker Punch

How many times and in how many ways are we going to have to prove definitively that Mitt Romney is unfit for the Presidency?

First, we all realized that he used to work for a private-equity firm (gasp). Private-equity firms, as everyone knows or at least figured out a couple weeks ago, are not ok. Not ok at all. Yes, technically it’s legal to work for one. They’re allowed to exist. I suppose. Grudgingly. But they’re just not ok things. And anyone associated with one at any time is henceforth disqualified from any role in society. (Unless they have a (D) after their name, then it’s ok)

But to add insult to injury, we have just recently learned that Mitt Romney paid the amount of taxes he was lawfully required to pay. That is just too much to bear. I was assuming, conservatively, that his tax return would show him to have paid 3x the amount, at least. Imagine my shock and horror to discover that he paid only 1x what he legally owed! Who does this guy think he is.

Just not Presidential material, that’s for sure. We Smart People have standards, and we apply them uniformly. (To (R)s)

She must be really scraping by. If only she knew a wealthy benefactor of some sort who could help to alleviate her extreme poverty. But, no. You see, she’s a lowly secretary.

Seriously, though, I’m learning that some people actually watched the State of the Union address voluntarily, ‘for fun’ (?) or leisure, not out of any professional obligation (i.e. not journalists/commentators/pundits, not even bloggers who decided to “live-blog” it). Some people on Facebook for example seem to have done this, and are advertising it.

Not that I can fully explain why, but I’m kinda embarrassed for them all. It’s like being at the Homecoming Dance and actually actively wanting to hear the Homecoming King’s acceptance speech, and then cheering wildly for it. Like those extras you see at the periphery of various school-dance or lunchtime-table scenes out of Sixteen Candles or Can’t Buy Me Love. Just why would you want to voluntarily make yourself into That Person? Does not the center of your life lie elsewhere? Even if not, isn’t there like a ton of better stuff to watch on TV than the yearly President Show? It’s not like you can’t read (later) what the guy said if you really care and think these prepared speeches actually mean anything. Do something at least more entertaining with that time. You all have cable and on-demand up the wazoo. Justified, Episode 2 should have been tonight. Temple Run on your iPad. Something, anything besides the annual laundry-list-of-reality-proof-applause-lines-and-oh-yeah-here’s-why-I’m-so-great from the President.

I did not watch, listen to, read or otherwise observe the State of the Union (and, in my memory, never have). As you’ll recall from your undergrad quantum mechanics, this means that the Union remains in a quantum superposition of eigenstates.

In one of those eigenstates, presumably – i.e., with nonzero quantum probability – the Union is actually a constitutional republic whose government abides by its founding document in accordance with the social compact between her and her citizenry, whose enumerated and unenumerated rights and liberties it respects. Perhaps the reason I refrain from observing the State of the Union is that I don’t want to risk collapsing the State Vector of the Union into some other eigenstate.

I present a Table (click to enlarge).

This Table helpfully partitions humanity into four (4) quadrants, represented as a 2 x 2 distribution matrix. It is easily observed that this matrix is strongly anti-diagonal, meaning that most of humanity can be found in either quadrants II or III (we have denoted these using green highlighting).

It is an active area of research to identify diagonal humans. The author (Quadrant IV) is a rare known example. The existence of others, however, is largely speculative.

Special multi-Youtube-embed edition

• Sh*t People in DC Say:

• “Sustainable” is Unsustainable
• Seeing an LP for the first time:

• I really enjoyed David Wooderson’s new video:

• Dear Internet, you can download a16-song mid-90s Mr. T Experience on KZSU at the link in comments here
• “You’re not allowed to say that homosexuality is a choice, you bigot!” yells the homosexual-activist communist community (sorry for typo) at a well-known lesbian
• Paper saying that economists need to be more humble (PDF). I disagree, I think it’s perfectly right and proper for Paul Krugman to boast that he has fully modeled the economy of human civilization and knows in detail as a factual matter which political-economic policies are good (answer: the ones put forth by (D)s) and which are bad (answer: (R)s) based on having done a thought experiment about yuppies who need babysitters some 35 years ago.
• Tim Price, making another appearance in my link-purge: “this is not a crisis of capitalism, but of state-controlled capital”. RTWT

HTs: lots of people who have more traffic than me anyway

BONUS LINK: Some great sociopolitical analysis on who is ‘electable’ by Rusty Shackleford. Well worth the read.

*of the nominees that I have actually seen

Best Picture: Midnight in Paris, which was great. (Also seen: Moneyball, which was also very good, though I became disoriented when the credits informed me that Royce Clayton played Miguel Tejada (!))

Best Actress/Supporting Actress: Dunno. Seen none of those.

Best Actor: Brad Pitt by default. (I do think he was good.)

Best Supporting Actor: Jonah Hill by default. (LOL)

Best Director: Woody Allen by default. (Ugh)

Animated Feature: Kung Fu Panda 2

Nope, I don’t get out to the theaters that often….

I’ve blogged before about how I usually know whether I’ll like a movie before watching it, which is why it was so disorienting not to like Margin Call.

Margin Call gets one thing sorta right (everyone has Bloomberg screens up the entire film, almost as a crutch to get away with painstakingly avoiding showing a single spreadsheet) and a lot of other things just ‘off’. I could nitpick about them all but the biggest issue for the film is that what’s apparently supposed to be its central dilemma – should this firm liquidate its portfolio once they see its likely downside risks as too huge to absorb – just never seemed like a dilemma at all to me. Of course they should, and what’s the problem?

These things are apparently imagined by the screenwriter and the audience is meant or assumed to believe them all too:

• If the bank starts a fire sale, dumping assets into the market, they’ll be seen as ‘causing’/instigating the crisis and blamed somehow, rather than as making a smart decision
• If the bank sells off their portfolio to their clients at fire-sale prices, the clients will be mad at them (later, presumably?). In this view clients are uniformly dumb and have no control over what they’re buying; if you call them up, and offer them a security, they have to buy.
• Thus the bank’s sin is that it (suddenly, supposedly) ‘knows the securities are worthless’, so such a sale is a form of fraud or intentionally stuffing clients with crap.

None of these struck me as actually true, or even consistent with the other things we are told in the film.

• There’s clearly already a crisis going on. The film opens with the firm firing 80% of their trading floor. This bank clearly isn’t ‘starting’ anything or upending any kind of gravy train that could have just kept on chugging.
• In the ‘fire sale’ sequence, they don’t even seem to be selling primarily to clients. They’re selling, in large size at heavy discount (prices of the whatever-they’re-selling are portrayed as diving from 94 to 65), to other dealers (I recall them calling up Citi and Deutsche, for example).
• Obviously maybe this was for screenwriter convenience but the result is that the film doesn’t actually portray any perceivable ‘clients getting ripped off’ like it seems to believe it does. It portrays these other dealers, confused by what’s going on and probably worried about getting run over, but who in context would probably think they were getting stupid bargains. If anything, we might infer it’s got to be those other dealers, who after buying at 65 are presumably turning around to sell at 67, who are ‘ripping off their clients’.

As for ‘knowing the securities are worthless’, the film doesn’t even really establish that consistently. We are supposed to understand from the first 20 minutes establish that a risk guy has discovered, through looking at their VaR model (which they all hilariously spell out “V-A-R”), that their mortgage portfolio (which they later speak of as if it consists entirely of a CDO warehouse line) is in big trouble. Why? Because the “volatility index” (VIX?) has been breaching levels attained in the VaR scenarios. I won’t bore you with why none of that really makes any sense. The point is even if we pretend it does, the most that shows is that the MBS they are dumping are soon going to be worth a lot less than they have them marked, and left on their balance sheet that way (because the CDOs will presumably fail).

But guess what? In response to that realization, they sell them for a lot less than they have them marked. One scene has a trader selling (something) which must have had a current face around $400mm like 30 points under the mark, for a $130mm loss. (What on earth kind of CDO was this going to be?) It’s not like the bank makes out like a bandit in what they’re doing. It’s called cutting losses.

In other words, objectively Margin Call portrays a bank

• realizing they have a portfolio of securities grossly mismarked (and/or under-reserved), and
• neither their price-testing nor their their risk metrics had alerted them to this exposure, thus
• they decide to take their medicine and eat the resulting loss ASAP by selling out at market prices.

The problem (for me) was that in my view there is absolutely nothing wrong with that decision. In context it is entirely appropriate. So, yeah, the central drama of Margin Call was kinda lost on me. It’s a well-enough made, shot, and lit film, though.

P.S. One more unrealistic aspect that bugged me about the film is the part where the floor’s sales & traders are told they’ll each receive (if my math is correct) a $2.7mm bonus if they collectively successfully unwind 93% of their portfolio that day. Maybe that actually happened somewhere, but oh, how I wish that were industry practice!

Addendum to the below post on defining-the-problem in financial regulation:

Many readers will instinctively react to my question by saying the problem that needs fixing is obvious: there was a mortgage market crash which made banks lose a lot of money which required a taxpayer bailout.

I deny that this, per se, is a good ‘problem’ to cite and focus on fixing. To people who disagree with me, I can say only this:

Anyone who thinks the mortgage-crash/banks-lost-money scenario was a big problem that needs fixing, AND who bought-and-then-sold a house in (say) sometime during the ~15-year period leading up to 2007, ought to be required to give back all the capital gains they made on that house. Either that, or do a bit more thinking on the subject.

You either wanted that bubble to happen or you didn’t.

Aretae is curious what I’d think about this brief paper by Paul Romer on financial regulation (PDF). I tried to leave a comment there but either something’s wrong with using OpenID in his comments section, with my OpenID in particular, or I’m just failing captcha 101. (Similarly, when Aretae asked for an example of a deliberate mondegreen I was, alas, unable to grab the glory of being first to yell out Britney Spears’s “If You Seek Amy”)

So I quickly read the Romer paper. Not quite sure how to review/react to this kind of thing because I feel like I don’t share the tacit premises of the writer or audience. But for the sake of discussion let’s presume we all concede: there is a Big Problem with finance, and it needs to be Better Regulated, for reasons rooted in something akin to Public Safety.

With that backdrop Romer puts forth examples of three different styles of implementing a regulation to achieve some end state:

1. the Army, fixing internal racial politics (top-down commands, autonomy for local commanders)
2. the FAA, keeping airplanes safe (setting a broad standard without dictating how to get there, letting experts judge compliance)
3. OSHA, regulating height of handrails in workplace staircases or something (dumb, seemingly arbitrary, historically-contingent and randomly-evolved, often inconsistent detailed-micromanaged regulations)

I’ll give you one guess as to which of the three approaches, in this framework, is meant to be analogous to our financial regulations. And he’s not necessarily wrong about that. But it’s worth noting the loaded analogy here, before we move on to the implied conclusion, which is (of course) that financial regulation perhaps oughta maybe be more like how things work in the Army or the FAA.

What do I think about that conclusion? Let’s take them in turn:

1. Regulate banks like the Army regulates stuff! The Army, of course, is not civilian society. Armed forces members do not share the same rights as civilians. It is not a democracy. It is a hierarchical autocracy. So you’ll forgive me if I don’t immediately jump at the idea of applying its methods to some alleged problem in civilian society.

Banks are civilian institutions. The purported problems with banks are not problems of literal national security or life and death. The people who work for banks are private citizens, with Constitutional rights. If the idea is to ‘militarize’ banks, to turn them into a National Banking Corps subject to a command-and-control structure with military justice, why not come out and say so and defend that concept on its merits. Failing that I’d have to consider this idle musing ‘hey why not do it like the Army does it?’ as sinister if it weren’t so ill-thought-out.

2. Regulate banks like the FAA regulates airplanes. On reflection, this seems to be the real suggestion of the piece. The example given is that the FAA purportedly requires airplanes to be ‘airworthy’, without defining exactly what that means. The supposed advantage of this approach is that it (a) lets airplane manufacturers figure out how to get there, and (b) gives FAA experts wide leeway in judging whether they did indeed get there.

On the surface this seems fine. But what would it actually mean? Translated to finance I gather the idea is supposed to be that banks will have to ‘prove their products are safe’ (or something) to a government panel of experts, without ‘safe’ (or whatever the standard, let’s call it ‘invest-worthy’) being precisely defined, before those products are allowed to fly.

Um, I just don’t see that as workable. How do you ever define the ‘invest-worthy’ concept you come up with? What would that even mean when there are different types of investors in the world? (For the FAA’s mandate there’s really only one type of airplane-passenger; one who doesn’t want to crash.) What experts are you going to get on the Federal Banking Administration to judge such a thing? On what basis would or could they even make such a judgment, without having (I know this is boring) hard numerical criteria?

I’m not even sure that’s how it really works in airplanes. I was skeptical of the whole ‘airworthiness’ story so I wiki’ed it. Turns out to be airworthy, a plane must

… conforms to a type design approved under a type certificate or a supplemental type certificate and to applicable Airworthiness Directives; (2) The aircraft (except an experimentally certificated aircraft that previously had been issued a different airworthiness certificate under this section) has been inspected in accordance with the performance rules for 100-hour inspections set forth in part 43.15 of this chapter and

Well, I got bored from there. But let’s just say that between getting the certificates, undergoing the ’100-hour inspections’ (why not 105 or 95?), and so on, it’s not so obvious to me that in detail the criteria for airworthiness doesn’t boil down to something OSHA-like after all. In other words, hard and fast criteria and checklists that someone could say are too rigid and arbitrary, but which have evolved over time.

Another point, it’s not so obvious to me that the FAA’s airworthiness criteria, whatever it is, is the optimal way to go even in its own context. Are there decent efficient and/or cheap and/or fast plane designs that have been stifled and unfairly withheld from the public by the FAA’s process? I don’t really know, but I see no reason to believe Paul Romer does, because no such discussion is present in his paper – he basically assumes the FAA’s method works well, without defining what that means or establishing as much. But if we don’t know that, how are we to know the FAA is anything to emulate?

Back to finance and its OSHA-like method of regulation that (Romer frets) is too easily gamed due to finance’s rewards and quickness of innovation. I am certainly sympathetic to the charge that the current financial regulations are dumb, arbitrary, rigid, slow to adapt, addressed to last year’s problem, and too easily gamed. Fine. But what I wanted to focus on was Romer’s specific analogy itself, because it is revealing:

The OSHA regulates the height of handrails in stairways.

Is this even a thing that needs to be regulated at all? What problem is it solving?

The reason I bring this up is that this question needs to be asked. Of course in finance, everyone is now sure it wasn’t regulated enough, whatever that means. Lots of people – like Romer – are also sure that was is needed is more power for government experts to do the Regulating they imagine-but-can’t-define. What few can quite define, to my satisfaction anyway, is why. At best they point at a thing-that-occurred-in-finance (Romer is especially concerned with electronic trading and the ‘flash crash’, for reasons unclear to me – for it is not obvious the ‘flash crash’ caused any lasting problems whatever) and then say more regulation, QED. But if what you’re doing is the equivalent of regulating the height-of-handrails, I really do have to ask: Why bother?

In today’s climate, people are receptive to cries for more regulation because of the Financial Crisis™. But there is no evidence the Financial Crisis™ had anything to do with electronic trading or the ‘flash crash’ (which came later) or whatever caused the flash crash. Similarly there is no evidence the Financial Crisis™ had anything to do with banks doing ‘prop trading’, as addressed by the Volcker Rule. So from where I’m sitting, while it’s hard for me to deny the Financial Crisis™ was a problem, it’s easy for me to see that all these more-regulation proposals are not solutions to that problem. What problem, exactly, do these regulations solve?

Answer that and you may have an argument for something. Don’t answer that and I have to wonder what you’re talking about, and why.

And when it’s dry and ready, oh iPad I shall play.

You know things are getting slow at work when my Google Reader unread count is hitting 0 daily, and I have time to star a whole bunch of stuff.

• Rick Bookstaber says the middle class is going away but at least conspicuous consumption is going by the wayside. I disagree. Conspicuous consumption isn’t going anywhere (the upper class still wants it), it’s just going to have to take different forms, many of which will require more social-class connections and leisure time than money: applying to & interviewing for fancy preschools for your kids, ostentatious leftist politics, being a knowledgeable ‘foodie’, etc.
• Uncharacteristically, I only agree with Arnold Kling, say, 70% when he says this:
  

  However, it is my view that if you look closely enough, you will see derivatives used primarily either to reduce transaction costs (as in stock index futures, which allow you to trade a basket of stocks more cheaply) or for regulatory arbitrage. One of the big mistakes that regulators made during the mortgage securities boom was to view derivatives as creating a new world of risk management. The novelty was in evading capital requirements, not in making banks fundamentally safer.

  Yes and no. Reducing transaction costs and expanding risk-management possibilities are not mutually exclusive. Since derivatives reduce transaction costs, it’s possible their existence gives you a risk-management tool that simply wouldn’t be cost-effective, and thus, wouldn’t work, were you to try to hedge using the underlying directly. If instead of shorting S&P futures, you had to go out and short each constituent individually (and pay bid-offer), and then pay bid-offer on the way out to monetize each of those shorts, you would be less managing risk than bleeding bid-offer. But if you can short S&P futures relatively cheaply, suddenly you have a way to hedge macro risk. This is not to say derivatives such as ABS CDOs weren’t mechanisms for regulatory arbitrage (they were), but on the flip side the pain was tempered a bit by having the ability to short other derivatives like ABX. So, it depends. People just need to resist the urge to tell a one-dimensional story about ‘derivatives’ and the like.

• Kling on econ grad school at MIT, vs business:
  

  In an actual business, you are not given a demand curve and a cost function; instead, you grope. The internal alignment of an organization cannot be taken for granted; instead, a lot of time and effort goes into just trying to keep people focused on common goals. Day-to-day life in a organization is a soap opera, with individuals and departments often working at cross-purposes. No one, including the CEO, has full knowledge or control.
  [...]
  MIT’s contribution to producing technocrats was what it did not teach. It did not teach humility. It did not teach that the world is too complex for technocrats to control.

• Funny Daily Show bit (but why did she play along?)
• Needed: A New Laffer Curve. But everyone knows that the Laffer Curve is ‘wrong’ and ‘debunked’!
• Like you, I had been assuming that Mitt Romney is the only human in existence who has worked for the worst sort of organization in human history (a private-equity firm). So imagine my shock to learn that a deputy Obama campaign manager worked for one too!
• I think it’s sad that there are fewer Puerto Ricans playing baseball. Apparently baseball not been berry, berry good to them lately.
• If the ‘Volcker Rule’ Is So Great, Why Exempt Treasuries and Agencies? But you all already know how I feel about the ‘Volcker Rule’. Right?
• Matt Levine on the Volcker Rule, making many of the same exact points I’ve been making. Here’s his explanation why (as I’ve been saying) there’s no sharp dividing line between ‘market-making’ and ‘prop trading’. You should just go ahead and consider Matt Levine required supplemental reading for my financial/econ posts in fact.
• Adam Carolla on poverty. I remember him back from his days on ‘Loveline’ with Dr. Drew. Hilarious.
• Tim Price on Europe and the sovereign debt extend-and-pretend game: The Final Countdown: “There is a terrible hubris at the heart of mankind…”
• Ezra Klein says Obama’s not really the food stamp President because, golly, it’s just that lots of people have been getting and staying poor under Obama: “But that’s mainly because there’s been record poverty levels”. Great defense Ezra! We all stand corrected! The Obama 2012 campaign slogan practically writes itself.