… I have a lot of T-shirts, almost none of them bought in clothes shops. They celebrate or advertise defunct sporting teams, (mostly) unsuccessful political campaigns, obsolete versions of operating systems and long-gone folk music festivals. What’s in your wardrobe?
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John Q
I haven’t had time to digest the implications of this story which has been around for at least a month, but only now seems to be attracting attention (I’ve seen it in a few different places today). Apparently, short sellers in the US Treasury bond market are failing to deliver the securities they’ve sold. As long ago as 1 October, the shortfall was more than $2 trillion by one report. Via Felix Salmon, here’s Helen Avery in Euromoney.
I’m not an expert on this stuff, but it seems to raise the question of whether bond markets can or should continue to exist in their current form. Maybe the US and other Treasuries should be selling bonds directly, and offering repurchase options to provide liquidity, perhaps using the banks they’ve already part-nationalised to handle the mechanics.
This post on a question-begging argument in favour of carbon taxes and against an emissions trading scheme, naturally raised (!) the question of whether the correct interpretation of a phrase like “begging the question” is determined by the predominant usage or by its original derivation as a technical term in logic or maybe by some other criterion such as the efficiency of communication.
That set me thinking and I turned to the usual research tools Wikipedia and Google to look at how this phrase and a couple of other standard items for debate (“aggravate” and “metholodogy”) are actually used.
The failure of Citigroup, which looks increasingly likely to happen in the near future, would mark the end of the beginning of the financial crisis. Until now, the prevailing view has been that the crisis and recession will pass in a year or so, after which things will go back, more or less, to the way they were, with a few less financial institutions, and a bit more regulation. A Citigroup failure would put paid to that idea.
It’s an analysis familiar to most on the Left. Support for laissez-faire is a hypocritical pretence, typified by Republicans who denounce a universal health care scheme as “socialist” while backing huge handouts for wealthy sugar producers.
For cultural and historical reasons, the United States has never had a proper socialist party of any significance[1]. Instead
the socialism we do have is the surreptitious socialism of the strong, e.g. sugar producers represented by their Washington hirelings.
In America, socialism is un-American. Instead, Americans merely do rent-seeking — bending government for the benefit of private factions.
As I say, familiar stuff. But it’s mildly surprising to see it coming from George Will.
Back when I was a high school debater, my team once had to take the negative position on the topic ‘Australian democracy is dying’. With the Vietnam war at its worst, conscription of 18-year olds (old enough to die, but in those days too young to vote) a big issue, and a conservative government that had been in office since before my classmates and I were born, it didn’t seem likely that we were going to carry the audience with Panglossian rhetoric. So, we decided to argue instead that Australian democracy couldn’t be dying because it was already dead. The resulting debate was somewhat farcical, as we rushed to agree with every piece of gloomy evidence raised by the affirmative side, and pile on with our own. We won easily, but I gave up debating not too long after that.
I’m reminded of this episode by a piece by Robert Kagan, criticising the idea that American power is declining. In effect, Kagan argues that, while things might seem bad for American power just now, they’ve actually been terrible for decades. Unchallenged economic dominance had already been lost by 1960, when the US share of the world economy (around half in the immediate aftermath of WWII) had fallen to 24 per cent. The international image of the US was trashed by Vietnam and other disasters of the 1960s. Military failures are nothing new. So, those who, decade after decade, proclaim that America is in decline have simply forgotten how bad things were in the past.
It’s 90 years today since the Armistice that brought a temporary halt to fighting on the Western Front of the Great War. The War had already brought forth the horrors of Bolshevism and fighting in Russia continued well beyond the Armistice. Within a few years, Fascism and Nazism were also on the march. Full-scale war resumed in the 1930s, first in Spain, Abyssinia and the Far East and then throughout the world. The War brought nothing but evil, and its evil has persisted through almost a century since it began.
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The idea that bad mathematical models used to evaluate investments are at least partially to blame for the financial crisis has plenty of appeal, and perhaps some validity, but it doesn’t justify a lot of the anti-intellectual responses we are seeing. That includes this NY Times headline In Modeling Risk, the Human Factor Was Left Out . What becomes clear from the story is that a model that left human factors out would have worked quite well. The elements of the required model are
(i) in the long run, house prices move in line with employment, incomes and migration patterns
(ii) if prices move more than 20 per cent out of line with long run value they will in due course fall at least 20 per cent
(iii) when this happens, large classes of financial assets will go into default either directly or because they are derived from assets that can’t pay out if house prices fall
It was not the disregard of human factors but the attempt to second-guess human behavioral responses to a period of rising prices, so as to reproduce the behavior of housing markets in the bubble period, that led many to disaster. A more naive version of the same error is to assume that particular observed behavior (say, not defaulting on home loans) will be sustained even when the conditions that made that behavior sensible no longer apply.
Over the fold is my piece from today’s Australian Financial Review on the task facing Obama. The original version started “Following his convincing election victory, Barack Obama can look forward to taking office under the most challenging conditions facing any incoming president since Franklin Roosevelt’s inauguration in 1933,”, but another columnist came in with an almost identical lead, so I changed mine. But the great thing about a blog is that you can choose which version you like best (or dislike least). The original opening paras are at the end of the post.
With the networks calling Ohio for Obama, the only question remaining for today is the size of the win. I’m rushing to write a column (for the Australian Financial Review) but I thought I’d open up a post for anyone who wanted to comment.
While the global financial crisis and the US election have monopolised attention for the last couple of months, the climate change crisis hasn’t got away, and most of the news has been bad. It’s now pretty widely agreed that any global policy that doesn’t stabilise atmospheric greenhouse gas concentrations around 450 parts per million (CO2 equivalent) runs a real risk of environmental disaster. The only plausible policy of that kind This is a contract and converge scenario where all countries accept a common emissions entitlement per person, to be reached over coming decades. That in turn means big reductions in emissions entitlements for people in developed countries.
The Australian Treasury has just released estimates of the cost of an measures to reduce greenhouse gas emissions, most importantly an emissions trading scheme. Of course, there have been quite a few exercises of this kind, but what’s striking about this one is that it looks at a much wider (and more realistic, if we want to save the planet) range of options, going all the way to a 90 per cent reduction in emissions relative to 2000 levels, achieved by 2050.
Treasury estimates that, under this scenario, GNP per person in Australia will average $78 000 in 2050 compared to $50 000 at present. By contrast in the reference scenario which has an 88 per cent increase in emissions, 2050 GNP is estimated at $83 000, or about 6 per cent higher (I don’t think this takes account of environmental and other damage costs avoided through climate mitigation, which will much more than offset the cost of mitigation in the long run).
When I get a bit of time, I’ll report more on the details and assumptions. But the quibbles coming from predictable rentseekers, and their tame consultants, look like just that, quibbles. It’s striking how many supposed advocates of the free market think we’ll all be rooned unless we continue to subsidise industry (and households) by allowing them to dump their garbage into the atmosphere free of charge.
Treasury’s estimates are, not surprisingly, quite consistent with the arguments I’ve made for a long time. That’s because any competent economist doing the analysis must come up with estimates of a comparable order of magnitude. If you want to make the case that saving the planet requires reducing living standards, or even a big reduction in the rate of growth of living standards, you need either to invent a whole new economics or wave your hands vigorously enough to conceal the fact that you don’t have any economic analysis to support you.
This story about the IMF rescue package for Ukraine (second of many to come, after Iceland) quotes Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London as saying
`The money is only half of the issue, conditionality is key. We hope the fund is maintaining its push for a more flexible exchange rate, far- reaching reforms in the banking sector and more privatization.”
Mr Ash, just returned from a six-week holiday on Mars, was reading from his prepared boilerplate script and had yet not been advised of the recent nationalisation of the Royal Bank of Scotland.
(found in today’s AFR)
There’s been a bit of discussion about what Alan Greenspan really conceded in his recent testimony. Although Greenspan was less opaque than usual, I won’t try to second-guess him any further, and will instead ask again what the crisis means for the way we think about economics and the economy. There are two big economic ideas that look substantially less appealing in the light of the current crisis.
The first is the macroeconomic hypothesis, often called the Great Moderation which combines the empirical observation that the frequency and severity of recessions declined greatly from 1990 to the recent past with the explanation that “the deregulation of financial markets over the Anglo-Saxon world in the 1980s had a damping effect on the fluctuations of the business cycle”.
The second is the microeconomic idea, central to much of modern finance theory called the Efficient Markets Hypothesis. In its most relevant form, the EMH states that prices observed in asset markets (for stocks, bonds, foreign exchange and so on), reflect all known information, and provide the best possible estimate of the value of earnings that assets will generate.
There’s been a fair bit of debate about what, if anything, the current crisis means for economic policy and political philosophy more generally. A lot of this has been hung up on issues of terminology, which I will do my best to avoid here and in future.
Coming to substance, quite a few people have argued that the crisis doesn’t really signify very much, and that, once it is resolved, things will return to pretty much the way they were a couple of years ago. I disagree.
This concession of error by Alan Greenspan is, I think, pretty strong evidence against the view that the crisis is not so significant, in policy or ideological terms.
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Since I’ve started blogging, I’ve been very interested in the relationship between technical and cultural innovation. Among other things, I make the point that this is now a two-way street: the development of the Internet is driven as much by cultural innovations, like the manifold uses of blogs, as by technical innovation, and in many cases it’s hard to distinguish between the two.
I gave a presentation on this at the Centre of Excellence for Creative Industries and Innovation (CCi) Conference a few months ago, and was invited to turn it into a paper for a special issue of a new journal, Cultural Science.
I was very favorably impressed by the issue when it came out, and also by the interval between submission and publication, which was quite a bit shorter than I’ve experienced in the past. To be precise …