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Daniel

Meet Marion and Herb Sandler. They’re good people, you’ll like them. As two of the most prolific and committed philanthropists currently supporting progressive causes, they are currently major funders of ProPublica (investigative journalism), the Centre for American Progress (activism), the Centre for Responsible Lending (anti- payday loans, financial fairness) and the American Asthma Foundation. The contribution of US$1.3bn that they gave to the Sandler Foundation was the second largest charitable contribution of 2006, according to Wikipedia. They are a bit too keen on testing and measurement in education for my taste but you can’t have everything, and they are at least advocates of “multiple measures”.

Meet the Pick-A-Pay Option ARM. This was a lending product that, among other features, allowed for “negative amortization” – a feature under which the principal was not repaid but rather rolled up, meaning that the borrower was effectively dependent on future refinancing. It was not a subprime product, but it allowed people to take on huge amounts of mortgage debt, and contributed to the “payment shock” which sent so many of them into repossession and bankruptcy. As the link above shows, the Pick-A-Pay mortgage product was the subject of a number of compensation settlements with affected borrowers.

What’s the connection? Well, as founders of Golden West Financial, a mortgage lender which was sold to Wachovia Bank in 2006 (the proceeds of which financed that very large charitable contribution), Herb and Marion Sandler were responsible for introducing the Pick-A-Pay mortgage to the market.

Ah.

Read on, there’s two or three more twists before the end of this story …
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Joris Luyendijk’s new project up at the Guardian is aiming to apply the methods of social anthropology to the financial sector in the City of London. He’s carrying out interviews in pubs and coffee bars with people at all levels and in different roles in financial services industry, to get a proper picture of how the social roles all fit together. So far, he has made at least one major discovery:

I know, I was just as surprised. I’ve been doing my own amateur social anthropology exercise too. By which I mean that I’ve got a Twitter account and some spare time, and as a result, have been collecting[1] prime specimens of banker abuse. So far, I’ve gathered that I, personally, have stolen from every single benefits claimant in England, and that Sir Fred Goodwin (crime: got a big pension, managed a bank poorly) is clearly a bigger criminal than Sir Anthony Blunt (crime: betrayed dozens of serving agents to Stalinist Russia). And, of course, during the recent London riots, dozens of variations on “who is the real criminal – the man who smashes a shop window and steals an iPod, or the man who gets paid a bonus?”

Because, at the end of the day, Dr Harold Shipman murdered 52 infirm old women in order to steal money from their wills, but bankers, get bonuses. Who is the real criminal, eh??

It is without any anticipation of popularity or agreement (or even any real hope of not being called an asshole on my own blog, although I must say that would be jolly nice if you were in the mood) that I tell you that I think this is all rather a pack of bollocks.

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… is a question that might be asked of Professor AC Grayling, the media don and pundit who has launched the “New College Of The Humanities, and who is proposing to charge undergraduates £18,000 per year for three years (by way of comparison, an MBA from the London Business School will set you back £49,900 for the full two year course). Further thoughts on whether this represents simple value-for-money, let alone a brand new direction for the world, below the fold.
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Scoring the pundits

by Daniel on May 3, 2011

A working paper by students at Hamilton College out yesterday has the laudable aim of auditing the predictions made by political pundits in order to see whether they are any use or not. Unsurprisingly, it finds that Paul Krugman is the most useful columnist and that a bunch of hacks I’ve never heard of are the worst (it also, wonderfully, gives the success formula for prognostication as “avoid law school and adopt a liberal philosophy). Below the fold, a few points on a subject which many readers will know is dear to my heart.

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… It was pretty silly when Standard & Poor’s started wagging the finger at the UK and expecting to be taken seriously. Trying to do the same thing with respect to the USA is pretty much the definition of tugging on Superman’s cape.

At least one economist burst out laughing on hearing about the S&P announcement. “They did what?” exclaimed James Galbraith, a professor of economics at the University of Texas in Austin, who formerly served as executive director of the Congressional Joint Economic Committee. “This is remarkable! It certainly will confirm the suspicions of those who have questioned S&P’s competence after its performance on the mortgage debacle.”

I can confirm that although it was “at least one” economist that burst out laughing, it was not “at most one”.

The ECJ has ruled that it is illegal discrimination for the insurance industry to treat men and women differently.

This is currently mainly being covered as an excuse to do larf-o-larf items about “weren’t people funny about women drivers in the 1970s! But actually women are safer drivers! Imagine!”. In actual fact the car insurance thing is not that big of a deal since the no-claims bonus swamps any gender effect within a couple of years; all it really means is that nobody will insure teenagers at all, which I count as not necessarily an unmitigated cost. The real issue is pensions.

Women live longer than men. That’s one of the few actuarially reliable things you can say about life expectancy[1]. And so it requires more resources to provide a given level of life expectancy for women than it does for men. (NB: it is easy to get confused about this – remember that “risk” in context always means “financial risk to the insurer” rather than “health outcome or mortality risk to the insured”, and that living for a long time is bad news for the person who’s agreed to pay you an annuity).

Because it costs more to give women a retirement income, you can basically choose two options from the following three:

1) Equal retirement incomes for women and men
2) Equal commitment of society’s resources to providing retirement savings for women and men
3) A functioning pension annuity industry

There are a load of interesting questions about the nature of equality which might be considered relevant to the choice between 1) and 2) (although they might be considered a lot more practically relevant in a society where there was a greater degree of equality in lifetime earnings). I’m just interested to see that for the first time, a major society has decided that 3) is potentially the one to give up on. Edit: Just realised I probably ought to give my own favoured solution – I think it’s fairly obvious that 2) is the one to give up on and we just have to accept that the biological facts of the matter are that society needs to arrange things so that a given woman has a larger pool of retirement savings allocated to each other than an otherwise qualitatively identical man[2]. It’s rather like the number of social and economic consequences that we accept as flowing from the biological fact that women give birth and men don’t. Historically, capitalist economies have implicitly given up on 1), by allowing retirement incomes to be determined by savings out of lifetime labour income.

[1] by the way, don’t hold out too much hope for genetic testing as a silver bullet solution that will give us all individualised life expectancies and annuity rates. And even if it does, those rates will still be better for men as a group than women as a group, so the discrimination problem will still be there).

[2] the concept of “a woman and man who are identical in all properties except gender” perhaps not being terribly firmly anchored in reality, but as an actuarial construct I can probably save it.

JQ OK

by Daniel on January 11, 2011

Just a quick post for CT readers who don’t also subscribe to John’s blog: he’s on the road and many miles from Brisbane at the moment (and so not flooded) and his family are OK, but apparently there’s property damage and flood damage is in my experience a real bugger to sort out, so probably not much blogging for a while. In the interim and because he hasn’t apparently posted about here (I found out when we met up for a pint on the Zombie Economics book tour), I will boast on his behalf that John has been elected a Fellow of the Econometric Society. That is a big deal. If you are not impressed by this, take my word for it that if you knew more about the professional structure of the economics profession you would be. Best of luck John.

The Christmas sermon

by Daniel on December 22, 2010

Another year over, and what have we done? Once more, I muse philosophically on matters of risk and return, at annoying length (at least I cut out the footnotes this year). But first, perhaps, a little quasi-seasonal story:

The Great Homeopathic Cocktail Bar
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On not being obliged to vote Democrat …

by Daniel on November 1, 2010

As the US goes to the polls, there is not exactly a shortage of commentary telling people how important it is that they vote, and so it’s been almost traditional (by which I mean, I did it at least once) for me to provide a small voice for the forces of apathy. This year, though, I want to address a particular and in my view rather pernicious species of electoral wowserism – the belief on the part of the Democratic Party that it has something approaching property rights over the vote of anyone to the left of, say, the New York Times opinion page.

The argument I want to establish here is that the decision about whether or not to vote Demcrat (versus the alternative of abstaining or voting for a minor party) is a serious one, which is up to the conscience of the individual voter to make, and which deserves respect from other people whether they agree with it or not. Obviously in making that argument, I’m going to have to venture into a number of unpalatable home truths about the Democrats as they are currently organised (abstract: ineffectual, cowardly, surprisingly warlike, soft-right, generally an obstacle to the development of social democratic politics), but let’s get this clear right up front – voting Democrat might often be the right thing to do in any given case, depending on local conditions; it might even usually be the right thing to do. What I’m not going to accept, however, is that it is always or definitionally the right thing to do.
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Thanks very much to Nick S for this news – Diageo plc is going to be dealing with its pension fund deficit by making a contribution of up to 2.5m barrels of whisky. Back in the dawn of CT[1], we addressed some of the financial aspects of this sort of thing …
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Via Andrew Anthony, some collateral damage from the Times paywall:

Oliver Kamm has commented that his blog at The Times will also be behind the pay wall. The comments section to his post on the matter is full of those who have said that this decision means that they will no longer read his blog, and these comments include those made by many long term readers. His blog will also not be read by the majority of users of the Internet around the world, even for those using Google to search for information. If they have to pay, they will not bother and try and read something else. […]

No doubt Oliver will continue writing his blog, and the next time Noam Chomsky writes something silly, he will expose him. But this will not assist an average Internet user around the world confronted with a Chomsky argument in an on line debate. For them, the day that The Times starts charging for content will be the day that Oliver Kamm ceases to exist.

Oliver Kamm’s bit of the blogosphere conversation, RIP. If only someone were able to write a suitable obituary.

Further thoughts on “Ship of Fools” by Fintan O’Toole …

In so far as these things matter, I totes claim bragging rights over calling the end of the bubble in Ireland, in writing in October 2006 and my only regret is that I changed jobs and started doing something else before I had time to milk it[1]. My basic point at the time was that the rental yield on Irish property at the time was estimated at 3.25% (Daft.ie had begun to calculate a rental yield index, tragically too late – I believe unless someone knows different that at the time I was in possession of the only even acceptably accurate time series of data on Irish rental yields), and that with the most recent ECB rate rise to 3.75%, the logic of the myopic-expectations buy-or-rent model[2] was about to start working in reverse. As it did. I’ve mentioned on a number of occasions that in actual fact, this was a policy-caused bubble, and that’s true in Ireland as well. But of course, the actual mechanisms by which a bubble is inflated, since they are based on a combination of the winner’s curse and limited liability, tend to involve the sorts of tales of sharp elbows, social capital and low risk aversion which can be made to look absolutely awful with the benefit of hindsight and/or in a court of law. So let the games begin …
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Squeaky bum time

by Daniel on April 30, 2010

In the immortal words of Sir Alex Ferguson, the Premier League is reaching the crucial last two weeks. Manchester United and Chelsea are separated by a single point – Chelski have the advantage, but have a tougher game against Liverpool tomorrow, while Man U face Sunderland. Arsenal lost hope last week, but Fulham are going to appear in the Europa League final after thrilling wins against Juventus and Hamburg. Meanwhile, having beaten one of the most astonishing teams in history with a virtuoso tactical display, Jose Mourhino’s Inter Milan face Bayern Munich in the Bernabeu for the Champions’ League.

Of course, any passing Americans are welcome to explain why this is all terribly boring because Everton never really had a chance.

“False Profits” by Dean Baker

by Daniel on April 3, 2010

Making a change from the usual run of the genre (ie, books about the “financial crisis” by people who didn’t tell you that there was a bubble while it was going on, but who nevertheless expect you to be interested in what they have to say about it now that it’s been and gone). A book about the bubble in the US, written by someone who was absolutely right about it, provably, ahead of time and in writing, and who is a lot more angry about the whole mess than those authors who just regard it as a great big game in which some entertaining characters made money at the expense of their dumb counterparties. Despite the comparatively microscopic size of his promotional budgets, I think Baker might have caught the spirit of the times a bit better than Andrew Ross Sorkin or Michael Lewis[1].
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Crisis is the normal state

by Daniel on March 23, 2010

I find myself disagreeing with Paul Krugman, though not about anything important.

” I’m reading Gary Gorton’s Slapped by the Invisible Hand, which tells us that there were bank panics — systemic crises — in 1873, 1884, 1890, 1893, 1896, 1907, and 1914.

On the other hand, there were no systemic crises from 1934 to 2007.

The problem, as Gorton makes clear, is that the Quiet Period reflected a combination of deposit insurance and strong regulation — undermined by the rise of shadow banking.

I don’t think this is right. If we’re going to include things like the First Baring Crisis and the Panic of 1893 (which were big news at the time, but by no means earth-shattering), then I can give you a list. Even using a selective criterion of only crises with significant US involvement (ruling out the Nordic, French, Spanish and Japanese banking crises), we have the following list …

2007 – current crisis
2002 – Enron/Worldcom/Global Crossing crises
2000 – dot com bust
1998 – Asia/Russia/LTCM crisis
1994 – Tequila crisis
1991 – commercial real estate crisis
1987 – Black Wednesday
1985 – Savings & Loans crisis
1982 – LDC debt crisis
1975 – New York City bankruptcy
1971 – Collapse of Bretton Woods
1970 – Penn Central commercial paper crisis

As far as I can see, things were pretty stable between 1934 and 1970 (give or take the odd war), but that in the era of floating exchange rates it’s been very unusual to go seven years without a crisis and the modal gap looks closer to three years than four.