It’s the time of year when I teach Plato’s Meno. As I wisely explain to my students, there are two things that they are going to find off-putting and even incomprehensible about the dialogue. [click to continue…]

At a time when anyone on the cutting edge is talking quadrillions, it seems a bit petty to worry about a $50 billion component of the latest bailout (only $500 per US household!). Modest as it is, the insurance scheme offered to money market funds by the US Treasury provides the opportunity to explain a little bit more about the theory of insurance.

By now, everyone has heard about moral hazard, that is the encouragement to take risky or reckless action that arises when your losses are insured by someone else. Now it’s time meet moral hazard’s evil twin, adverse selection. That’s what happens when the people you are offering to insure already have a pretty good idea whether they are going to collect or not.

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While reviewing this post from 2002, foreshadowing a derivatives crisis like the current one, I found the following:

“At the end of 2002’s first quarter, the notional value of derivatives contracts involving U.S. commercial banks and trust companies was $45.9 trillion, according to the Office of the Comptroller of the Currency’s bank derivatives report. ”

The bulk of the exposure is in interest rate swaps, which are fairly well understood and seem to pose only modest risks in themselves. But there’s still around $1 trillion in more recent derivatives involving securitisation of various kinds of debts. This securitisation is sound only if the credit rating agencies have got their risk assessments right, which in turn requires that the accounts on which those assessments are based should be valid. A few years ago, when the market in debt derivatives was starting up, this assumption seemed safe enough, but now it looks a lot more dubious. The big danger is that defaults in the debt derivatives market could spread to the much larger interest rate derivatives markets.

As an update, the $1 trillion in credit derivatives has exploded to around $50 trillion. While less dramatic in proportional terms, the growth in interest rate swaps is actually more alarming, having reached around $300 trillion in notional values.[1]

It now seems pretty well certain that, as the quote above suggests, the chaos in debt derivatives will shortly spread to interest rate swaps.

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Via Leiter: the NEH is offering substantial grants for faculty to develop courses on “Enduring Questions”:

The [new grant] program, which goes public today, will grant up to $25,000 each for “pre-disciplinary” pilot courses designed to tackle “the most fundamental concerns of the humanities.”

Among the “enduring questions” the endowment hopes the courses will ask: What is the good life? What is justice? Is there such a thing as right and wrong? Is there a human nature and, if so, what is it?

The endowment expects to make up to 20 awards, and $15,000 of each $25,000 grant will be a stipend for the faculty member who designs and teaches the course.

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Leiter says this is “quite bizarre”; being less expressive I’d just say that it’s distinctly odd.

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“Tyler Cowen”:http://www.marginalrevolution.com/marginalrevolution/2008/09/ive-always-want.html points to this “NYT article”:http://www.nytimes.com/2008/09/18/business/worldbusiness/18rescue.html on the international fallout from the current market crisis in the US.

Is the United States no longer the global beacon of unfettered, free-market capitalism? In extending a last-minute $85 billion lifeline to American International Group, the troubled insurer, Washington has not only turned away from decades of rhetoric about the virtues of the free market and the dangers of government intervention, but it has also probably undercut future American efforts to promote such policies abroad. [click to continue…]

So it looks as though the PDs, Ireland’s neo-liberal party, are on the “way to the chopping block”:http://www.irishtimes.com/newspaper/frontpage/2008/0917/1221599424850.html?via=mr. While I disagreed vigorously with most of their policies, I have mildly mixed feelings about this, if only because an uncle of mine was a founding member (and the person who led them up until the disastrous election that precipitated their current state of disrepair). But mostly, I’m posting so that I can link to this wonderful extract from the current leader’s public statement on their future.

Mr Cannon said it was “far from me to pre-empt what that decision might be”. In his opinion, the party had two choices. It could “limp on” into an uncertain future, while elected members were “picked off the edge of the herd like wounded animals”. The other choice was to dissolve so that the party could say: “We have triumphed and in our triumph we are leaving the field with a degree of grace and dignity.”

Far from pre-empting, indeed …

This blog post is a shameless plug for a friend’s book. But I wouldn’t be writing it if I didn’t believe that the book is a tremendous achievement, as well as being a very moving personal document. “Havi Carel’s Illness: The Cry of the Flesh”:http://www.amazon.com/exec/obidos/ASIN/1844651525/junius-20 (“UK link “:http://www.amazon.co.uk/exec/obidos/ASIN/1844651525/junius-21) is published tomorrow by Acumen. It is a philosophical meditation on the nature of and social meaning illness, disease and death. It discusses philosophical and psychological literature, Epicurus, Heidegger and Merleau-Ponty. But it is also a personal memoir, it is about Havi’s experience of being diagnosed with a life-threatening illness, about what that meant for her presence in the world, about how she appeared in the eyes of others, and how she felt she appeared. It is about the encounter with medical professionals and their detached and external perspective on another’s catastrophe; it is about the varied reactions of friends, some of whom couldn’t maintain friendship. It is about how to confront the fact that all your assumptions about how your life is going to go: career, relationships, family, old age, can just be taken away. Havi was diagnosed with lymphangioleiomyomatosis (LAM), a rare disease that affects young women, and for which the progosis is about 10 years from the onset of symptoms. The sufferer experiences a progressive decline in lung-function over that time. Life may be extended by a heart-lung transplant, but that’s, obviously, a difficult business.
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Michael Reiss “has been forced to resign as Director of Education of the Royal Society”:http://www.guardian.co.uk/science/2008/sep/17/evolution.controversiesinscience . Absolutely shocking, in my view. Several of those calling for his head, such as Sir Richard Roberts, made much of the fact that he is an ordained minister. But since at least two FRSs — John Polkinghorne and Bernard Silverman — are also priests, that’s hardly a reason for the Society not to employ him. The RS statement says:

bq. “Some of Professor Michael Reiss’s recent comments, on the issue of creationism in schools, while speaking as the Royal Society’s director of education, were open to misinterpretation. While it was not his intention, this has led to damage to the society’s reputation. As a result, Professor Reiss and the Royal Society have agreed that, in the best interests of the society, he will step down immediately as director of education.”

Well, no, they weren’t “open to misinterpretation”, they were wilfully misinterpreted by those who were always going to be determined to do so, and it shows real spinelessness on the part of the RS that they didn’t back him. As “I blogged a few days ago”:https://crookedtimber.org/2008/09/12/dealing-with-creationism/ , Reiss didn’t call for creationism to be part of the science curriculum, he said (absolutely clearly, _in his original statement_ of his view) that teachers should, as a matter of good pedagogical practice, be willing to engage with students they encounter who come to the class with creationist views. That seems to me to be a perfectly legitimate position for someone concerned with science pedagogy to take. Others may disagree with the substance of his view. That’s fair enough. But to push him out for saying it? Dreadful.

(A list of issues where partisans are only willing to tolerate a simple straightforward and unequivocal expression of the party line (on either side) and will seek to punish deviants: anything touching on religion and education (including this issue); Israel/Palestine; abortion/right to life, ….etc. )

Update: see also James Wimberley “here”:http://www.samefacts.com/archives/britain_/2008/09/fundamentalists.php .

Two days after the US authorities made much of standing firm against calls for a bailout of Lehman, the Fed has announced an $85 billion rescue of insurance company (and large-scale counterparty in all kinds of derivative markets) AIG. There’s none of the ambiguity surrounding Fannie and Freddie in this deal. AIG is not a federally regulated entity, and the insurance subsidiaries are regulated at the state level to ensure their ability to pay out on claims. This is, purely and simply, a case of a speculative financial enterprise that’s too big to fail.

Having reached this point, it’s hard to see how the US can turn back from a massive extension of financial regulation, starting with the derivative markets where AIG got into so much trouble, notably those for credit default swaps (CDS). Along with winding up the affairs of AIG, Lehman and others, the authorities will need to oversee an orderly unwinding of the transactions in these markets which they are now effectively guaranteeing. More generally, it’s time for a partial or complete reversal of the financialisation of the economy that took place after the breakdown of the Bretton Woods system back in the 1970s.

BTW, if you have cash parked in a money market fund, you might want to read this. (Insert disclaimer about financial advice)

UpdateBrad Setser has the same reaction.

A while ago I asked for picture suggestions to advertise a talk I would be giving at the Humanities Center in Madison, and a couple of people asked that I post the text of the talk here. I apologise for the delay, which is not, for once, due to my laziness, but my reluctance to be seen to be breaking the anonymity of peer review. Absurd, really, because it is hard for me to believe that the referees had no inkling of the authors of the relevant manuscript, which manuscript anyway bears a very tangential relationship to the talk, but there you are. That’s all done with (so, I don’t have to feel so guilty about Ingrid’s complaint!), so here it is. I’ve tried to incorporate some aspects of the powerpoint presentation through judicious use of links. Also, bear in mind that it was an informal talk, and it is for the most part written that way. It’s long (4000 words), so it’s all below the fold. It was given in December, hence the two or three seasonal references.

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Finally and “long overdue”:https://crookedtimber.org/2008/05/20/care-talk-blog/, here is my book review of Valuing Children, Nancy Folbre’s latest book. The overall goal of this book is to show how and why children matter for economic life, to provide estimates of the economic value of family (nonmarket) childcare and parental expenditures in the USA, and to raise critical questions about the size and kinds of public spending on children in the USA.

Folbre formulates four questions which she sets out to answer: (1) Why should we care about spending on the children? (2) How much money and time do parents devote to children? (3) How much money do taxpayers spend on children? And (4) who should pay for the kids (in other words, which share of the costs of children should be borne by parents and by the government)?
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Now that Lehman Bros and Merrill Lynch are gone, attention is turning to insurance company AIG. When the first big failure, that of Bear Stearns was coming up, the initial offer of $2 a share suggested that the company was worth less than the building it operated it (the deal was subsequently sweetened, courtesy of the US taxpayer[1]). Looking at AIG, this WSJ story says that, as of last quarter, assets exceeded liabilities by $78 billion, a number that has almost certainly declined since then, given that the $1 trillion asset book includes lots of toxic sludge. But the story also notes that the company’s aircraft leasing subsidiary (where did they get this?) owns planes worth more than $50 billion. So, it looks clear that, apart from the planes, AIG is worth little, nothing or (most likely) a large negative value.

Update Commenters object, correctly, that it isn’t legit to value the planes without taking account of the associated debt. However, after today’s debacles, it doesn’t matter too much. AIG is toast, the only question being whether the Fed will treat it as another Bear or another Lehman. Next cabs off the rank appear to be Washington Mutual and Wachovia, taking the FDIC with them. I even saw GE mentioned somewhere, but it seems too soon for that.

[1] Despite the tough talk and the refusal to bail out Lehman, the Fed has given yet further ground to the banks this time around, agreeing to lend public money against subprime trash.

In the comments to my last post, reader Peter Schaeffer provides exactly what I asked for: a breakdown of the discrepancy between 30 per cent growth in US household income over the last 40 years and 117 per cent growth in income per person. In addition to the factors I’d mentioned (falling household size and growing inequality) Schaeffer notes two more: the fact that GDP has grown faster than national income and the fact that prices faced by households (the CPI-U-RS) have risen faster than the GDP deflator. He provides the details to show that this fully explains the discrepancy.

What should we make of this. As far as the situation of the average American is concerned, the only correction we need to make to the household income figures is to correct for changes in household size. That makes the increase over the last 40 years about 63 per cent, or an annual growth rate of 1.2 per cent. By contrast, the 117 per cent growth in GDP per person implies a rate of just under 2.0 per cent. So, changes in GDP per person (let alone changes in total GDP) are essentially irrelevant as a guide to how the average household is doing.

And of course, the poor have done much worse. Household incomes for the bottom quintile have barely moved for decades. Growth in consumption has been driven largely by increasing access to debt, a process that now looks to have run out of road. That would seem to indicate a looming social crisis. But the coming election will still turn on whether Obama called Palin a pig.

I’m on leave this year and enjoying catching up with old colleagues and meeting new ones. I was at a reception the other day and was graciously introduced by a famous senior sociologist to a visiting senior sociologist as an “[insert some very kind words] scholar who studies the social aspects of Internet use”. The visitor laughed. No one else laughed though so quickly, smile wiped from his face, he said: “oh, you’re serious.”

Yup, seriously, there is this Internets thing and there are some interesting and important social science questions one can – and * gasp * I will even claim should – ask about it. As shocking as this may be, some places might go so far as to give you tenure if you do it well enough.

So a shoutout to all of my amazingly wonderful mentors and colleagues over the years who’ve supported me in this endeavor, I certainly don’t take that for granted.