Writing in the National Interest

They at least have a balanced approach to Crooked Timber. The same issue with the Quiggin byline has an article titled “Henry Farrell Should Know Better.”

My impression is that The National Interest is mainly about ‘Realism’ as that term is used in International Relations Theory. So economic growth is important, since you need it to support miltary might. But manufacturing matters more than banks. Keynes is good, he’s the man who wrote How To Pay For the War. Small wars are usually bad, it’s the likes of China you should worry about, not Iraq or Iran.

I’d say reach out to that audience by all means. But don’t be surprised if your calls for fiscal expansion are cited in support of more aircraft carriers.

Historically in the US support for Israel has been a liberal and even leftist cause. The TNR fits in on the liberal side of the US spectrum. Up until recently critics of Israel in the US tended to be conservatives. They were people like Patrick Buchanan, Robert Novak and Joseph Sobran. The neo-conservative movement with its radical Zionism only came about in the late 1970s and was really represented by Commentary Magazine. One still sees a lot of liberal and leftist support of Israeli colonialism in the US, particularly among academics, journalists, and elected officials. I suspect that the triumph of identity politics over all other modes of thought among the US left plays a big role in the continued maximalist support of Israel demonstrated by many American liberals.

most of the foreign policy stuff was anti-war

And so it shall remain, until there’s a Republican back in the White House.

Uncle Kvetch, AFAICR articles in The National Interest on the invasion of Iraq were mostly anti. (Or maybe they were the articles I was most likely to notice.)

I’m with Barry. The New Republic mostly features Joe Lieberman-type center-right opinions. On occasion, it finds common ground with the far-right.

The National Interest should not be confused with The American Interest[1], though at this point I don’t know whether the differences between them are that significant (since I don’t read either regularly enough to say). Kevin, above, is I think correct that NI originally self-identified as “realist”. E.g., the Winter 1992/93 issue of NI, which happens to be on my shelf, contained a piece by Zakaria called “Is Realism Finished?”. His answer, of course, was ‘no’.

1. From Wikipedia: “In 2005, 10 of the 14 members of NI’s editorial board, led by Fukuyama and upset by the Nixon Center’s changes to editorial policy, decided to leave the journal and create a rival publication, The American Interest.”

Uncle Kvetch: “I’d say [TNR] represents a broad swath of the current Democratic Party, including Obama and the Clintons.”

As shown by the publication of “The Bell Curve” essay in 1995?

“I don’t want to end up in some glossy publication that turns out to be funded by LaRouche.”

Why not? You agree with him:

“the rating agencies…are attacking the U.S. government without providing any proof of their assessment, in a totally arbitrary way”

http://www.larouchepac.com/node/18941

I am totally going to adapt this excuse to my work situation !

Depending on what you do for a living I’m pretty sure you already do.

Actually roac, let’s try and use the right analogy. In this case it would be like a company that says that among certain type of ships only X% would sink over a certain period. You know, like what insurance companies do to price their policies?

“As shown by the publication of “The Bell Curve” essay in 1995?”

That’s the “contrarian” image they like to project, related to the “Even the New Republic” catchphrase (as in “Even the New Republic supports the contras and the MX missile.”) It showed their feisty independence of the dogmatism of the anti-racist left. People are forever showing their feisty independence of the left–I wish the left had enough power to make this sort of posturing indicative of true courage, but it doesn’t.

Slate used to do the same thing, back when I read them.

Ed and John, The ratings of little fish, in normal times, has probably been fine. Of course, little fish have limited influence and cash flow with which to grease better ratings. Whales, however, are another matter entirely.

Didn’t ratings agencies up to the turn of the Century mostly concern themselves with rating corporate bonds? And didn’t the trouble start wshen, after that, and for various reasons, they got into rating mortgage-backed securities? (Where the incentives were all wrong for accuracy and reliability?)

It would be a good thing if there were reference works showing which publications are non-whacko. If you’re from a different country it can be quite hard to tell on the basis of just a couple of issues.

(I concur with the others who have said the National Interest is definitely sane).

On the New Republic: the catchphrase, in my experience, is normally rendered ““Even the liberal New Republic” [supports some neoconservative position].

A important part of the failure of rating agencies when it came to mortgage backed securities might have been the seeming implicit belief that the Credit Defaults Swaps were valid and not, in fact, worthless if there was a significant downward movement (or even holding pattern) in house prices. Unlike the highly regulated insurance industry, those issuing the CDSs didn’t have anywhere near the reserves necessary to back them up. Also, they massively underpriced them. That is why the triple AAA bundles the finance industry synthetically created were ‘cheap’ and hence brought by ‘astute’ buyers all around the world, thus funding more sub-prime mortgages. Not unlike a Ponzi scheme; seemly, everyone was getting something for nothing. In fact, they were paying something for nothing as it turned out.

As the insurance industry could have provided the same insurance that CDSs provided, the only reason for creating CDSs was a legal one, to avoid the regulation and scrutiny the insurance industry is subject to. Also, risks are assessed by actuaries in the insurance industry, rather than cowboys, cowboys being the preferred assessors in the finance industry.

However, maybe, as the latest evidence seems to indicate, some of those assessors actually correctly assessed the risks of mortgage backed securities but were overridden by their ‘managers’. Bad ratings were bad for business; good ratings were good.

Ed: The only way to check is to look at all the people with the same credit and see how they fared

Which should be extremely easy to do. But first, let’s be clear about probability. If Enron and WorldCom were rated at, say, the 90th percentile in the rankings (assuming 100 to be perfectly safe and creditworthy), then firms at, say, the 10th percentile ought to have failed as spectacularly around 9 times as often, if the ratings were sound. Is that correct?

And if that is correct, are you actually suggesting that that’s what happened?

And if that is correct, are you actually suggesting that that’s what happened?

More or less, yes. Companies which enjoyed about equivalent hypothical rankings to Enron and WorldCom failed quite a bit less than companies which enjoyed substantially lower rankings. There’s nothing wrong with this. Indeed, logic dictates that there had to be failures at that level (e.g. Enron and WorldCom), because 10% still have to fail.

If you have a high credit score and then default spectacularly on your bills, doesn’t that mean that whoever gave you the high credit score missed something important when rating you highly?

Absolutely not. Credit ratings reflect expected outcomes, not actual outcomes. The first thing one is taught in statistics is that actual outcomes, in discrete cases (and especially in individual cases), rarely, if ever, reflect the expected outcome.

For example, if you have a 25% chance of winning a million dollars, your expected outcome is $250,000. But of course, you won’t actually get that sum, because you’ll get either zero or $1-million. But the expected outcome isn’t wrong; it’s just the expected outcome. It’s an useful statistical output for aggregated risk analysis.

As usual, dear Myles, you’re completely, charmingly wrong. In the case you cite, of a random drawing for $1 million, there are no qualifications that will influence your probability of winning the prize. It’s sheerly a matter of chance. In the case of credit ratings, however, the ratings do indeed have to be earned. What a 90th percentile rating means is that all the firms rated have been investigated, and that 9 times as many firms at the 10th percentile will fail as at the 90th percentile, in your judgment, because of what you have found out in the course of your investigation. There is nothing random about it.

I’d have to agree that the rating agencies failed with the dot coms. The rating agencies successes have been where assessment has not be very difficult – small entities, where there are a lot of similar entities, and during times that are relatively normal. Success where their has been little merit in their success.

Where the task was harder, their record is not good. The problem with dot coms was that they were new, of a type they were not familiar with, and the times, especially for those entities, were not ‘normal’, as times never are at the beginning of rapid innovations.

my statement that the agencies failed in the dotcom crisis (not as much as the peddlers of equity, but still spectacularly) is consistent with the evidence

No John, it is not. You have provided no evidence. I already explained you don ‘t disprove probabilities with single events.

@LFC: So Fukuyama wanted to use a designated hitter and Nixon wanted to let pitchers hit?

Ed,

(1) Still waiting on your evidence,
(2) ‘nonlinearity’ only goes so far, or it becomes an excuse for failure. And unless Enron and WorldCom were rated the most likely to fail among large companies, nonlinearity wouldn’t even apply.

It’s fun to watch you just assert and assert and assert, when it’s clear that you don’t have proof for sh*t, and you don’t even have logic on your side.

I would hope that you are getting paid for this, but I think that you’re a standard right-winger, always ready to do some free pro richo work for your betters.

In the case of credit ratings, however, the ratings do indeed have to be earned. What a 90th percentile rating means is that all the firms rated have been investigated, and that 9 times as many firms at the 10th percentile will fail as at the 90th percentile, in your judgment, because of what you have found out in the course of your investigation.

Au contraire, credit ratings are almost a perfect case of conditional probability. There’s a pretty good probability that you won’t default on your credit card debt given a 650 credit score, but there is no guarantee. It merely indicates that given the constraint of a high credit score the peak in the probability function is located at a region where, if default = 1 and non-default = 0, it’s located somewhere in the vicinity of 0. But the tail of that function might well extend into 1. If (hypothetically) say, a person with a credit score of 650 has a 5% of default, that means 5% of people of 650 credit scores will still default, if the statistical model is any good.

What your credit score indicates is the expected outcome of all people with a similar credit score. It has no predictive capabilities whatsoever beyond this. So if a bank has 1000 customers with 650 credit scores, the averaged behaviour of the 1000 customers will equate to exactly as one would expect from a credit score of 650, plus or minus the margin of error. But the credit score of 650 says absolutely nothing about the discrete outcome of each of the those 1000 cases, although it does do a pretty good job of indicating the confidence interval of behaviour being concordant with what one expects from a credit score of 650.

Good try, Myles, but once again you’re conflating a random happening like the probability of winning a drawing with an earned ranking, which of course is only approximately precise but is not random. To calculate the probability of someone winning a drawing, you don’t need to know anything about the person, only the size of the pool. A rating, on the other hand, is a prediction — supposedly based on careful comparative investigation of the structure, finances, personnel, etc. of various companies — that those companies with, say, a 90 rating are roughly 9 times more likely to survive an unforeseeable adverse event of a given magnitude (eg, an economy-wide rise in interest rates) than companies with a 10 percent rating. The kind of careful comparative evaluation needed to responsibly make such a judgment clearly was not done in the cases of Enron and WorldCom, or it would likely have been discovered that their corporate finances were a shell game.

I see. Thanks.

If all one is aiming to do is segment borrowers into an ordinal ranking of groups depending on how likely they are to default, that shouldn’t be very difficult.

In that case it will be easy for others to compete then, no?

Good try, Myles, but once again you’re conflating a random happening like the probability of winning a drawing with an earned ranking, which of course is only approximately precise but is not random.

It is not a earned ranking. It is not an earned ranking. It is not an earned ranking. You cannot rank something in a way where the number of parties receiving each particularly rank is entirely within discretion. Even your credit score isn’t really much of an earned ranking. In any case, there are no objective way to actually rank countries and corporate entities; you can sort them into broad registers.

A rating, on the other hand, is a prediction—supposedly based on careful comparative investigation of the structure, finances, personnel, etc. of various companies—that those companies with, say, a 90 rating are roughly 9 times more likely to survive an unforeseeable adverse event of a given magnitude (eg, an economy-wide rise in interest rates) than companies with a 10 percent rating.

As others have observed, first of all, that linearity condition is not presumed. Second, this still means that of the companies (hypothetically) rated 90, some will catastrophically fail. This is in the nature of the very rating given. This is why a 90 rating isn’t a 100 rating. The debate is whether Enron and WorldCom are within the confidence interval of expected failures for 90-ratings. I really say they aren’t too out of the ordinary.

The kind of careful comparative evaluation needed to responsibly make such a judgment clearly was not done in the cases of Enron and WorldCom, or it would likely have been discovered that their corporate finances were a shell game.

If they were cooking their books, then by definition the books were cooked, and the responsibility falls not on the people cheated by cooked books but by people who cooked the books. The ratings agencies can only rely on the information which is available to them. The ratings agencies are not superhuman.

The whole question turns on what the ratings were based on: ie, whether the agencies had any responsibility to do anything other than evaluate the information provided them by the companies rated, taking their accuracy for granted.

If the ratings agencies are liable to evaluate information not officially and upfrontly provided to them, then you would have opened up a whole can of worms where they become liable not just for the interpretation of financial and industrial data but meta-analysis of reliability thereof and the discounting following therefrom. This isn’t what the credit ratings agencies are for; heck, you’d have to pay them a lot more for them to sign up for that kind of thing.

I understand and sympathize with your desire to see ratings agencies provide ratings that are in fact more useful and realistic for the purpose of allocating investments and economic resources, but I do think there are intrinsic constraints on how something like alphanumeric categorization can be made useful in this context, and that the more we infantilize investors in this manner the worse the shocks when they come. (For example, the Germans lost money to Wall Street largely because they were incompetents looking to squeeze an easy buck from high-yielding yet purportedly highly rated safe assets, without doing their due diligence. The solution is not to provide them with even more due diligence-avoiding ratings, but for them to actually buckle up and do their homework.)