Month: December 2008
Investors may have been duped because Mr. Madoff sent detailed
brokerage statements to investors whose money he managed, sometimes
reporting hundreds of individual stock trades per month. Investors who
asked for their money back could have it returned within days. And
while typical Ponzi schemes promise very high returns, Mr. Madoff’s
promised returns were relatively realistic – about 10 percent a year –
though they were unrealistically steady.
It seems this scheme went on for "years or even decades," which means it lasted longer than many legitimate concerns. Nomura had been searching out international clients for him. Checks and balances were weak:
…because he had his own securities firm, Mr. Madoff kept custody
over his clients’ accounts and processed all their stock trades
himself. His only check appears to have been Friehling & Horowitz,
a tiny auditing firm based in New City, N.Y. Wealthy individuals and
other money managers entrusted billions of dollars to funds that in
turn invested in his firm, based on his reputation and reported
In reality the "fund" simply was not there and now grandmothers have been fleeced. That is a scary lesson about the financial sector as a whole (and prudential regulation) but if it is any comfort an unregulated hedge fund could not have done the same. Those funds hold their portfolios at banks and thus you can check as to whether they actually "exist."
Jason Shafrin, the Healthcare Economist, has a nice post explaining how a statistical illusion can make early screening for disease appear much more effective than it really is.
Here is an example using the dreaded disease economicitis. Let us
divide people into 3 groups.
- Healthy: You live forever.
- 1st stage economicitis is asymptomatic. Life
expectancy when 1st stage economicitis begins is 10 years. One half of
economicisits cases are 1st stage.
- 2nd stage economicitis appears when individuals
mysteriously grow a third or possibly fourth hand. Life expectancy with second
stage economicitis is 2 years. One half of economicitis cases
are 2nd stage.
Before any screening was developed, individuals would learn they had
economicitis when they started growing extra hands. Thus, documented
life expectancy for those with economicitis was 2 years, since all
individuals who were recorded as having economicitis were in the 2nd
Let us assume that a screening technique is now available. If the screening
device is able to detect 100% of stage 1 and stage 2 economicitis
cases, then we will see that life expectancy will increased to 6 years
(10/2+2/2=6). Statisticians looking at the data may claim the following: “The
economicitis screening test has increased life expectancy after
diagnosis from 2 to 6 years!”
This claim, however, is false since there is no effective treatment for
economicitis. The increase in average life expectancy is not due to
any improvement in health care, but only because the relatively healthier
individuals with 1st stage economicitis are now being detected by the
Many years ago, David Plotkin had a article in The Atlantic dealing with this issue and others with respect to breast cancer. The statistics are somewhat out of date but the article remains of real value.
Here is a NYT symposium of economists, including yours truly. I very much like Andrew Samwick’s point:
If I had my druthers, the word ‘stimulus’ would be expunged from
public discussion, along with ‘bailout’ and ‘rescue.’ These words
convey the idea that, because we have so mismanaged our economic and
financial affairs, we are somehow able or entitled to conjure up
additional funds out of thin air to fix our problems.
Elsewhere, here is a passage from Megan McArdle:
Is the government going to guarantee approximately 70 million
owner-occupied homes in America against a 25% price drop? No, because
that’s $3.5 trillion dollars, if my mental arithmetic serves. Or is it
only going to give the money to the least responsible homeowners: the
ones with small (or no) downpayments, houses they could only afford at
short-term teaser rates, and a long string of missed payments? The
numbers, and the political arithmetic, don’t add up. Indeed, any such
program would positively encourage people to default, in order to get
the government to cram down their loans.
In other words, don’t spend the stimulus on the housing market. From another angle, Angus reports:
I guess I’d rather give my money to people who are going to use it to
try to make more money (i.e. save/spend it in the market system) than
give it to people who are going to use it to try and get re-elected.
And here’s more from Greg Mankiw.
Wearable air bags for the elderly (click on "Start Reading" to get through).
Can you guess in which country?
If you keep on clicking on that link, you’ll go through the NYT’s Year in Ideas 2008, always worth reading. I found at least half of them worthwhile (a very good way to spend your Friday night) but sadly they do not have a separate link for each bit. Under "B" you will find an interesting discussion of the Bus-Wait Problem, namely when you should stop waiting for that bus and start walking. The advice is that usually you should wait.
Here is separate information on "the glass cliff," a fascinating phenomenon.
On Thursday the Kauffman Foundation will announce that it is making
$10 million in initial contributions to found an initiative aimed at
reinvigorating, and, to some extent redirecting, the exceedingly influential
school of thought that has come to be known as “law and economics.”…Kauffman’s new “Law, Innovation and Growth” initiative seeks to refocus the
law-and-economics debate to center on the promotion of entrepreneurship [law and growth, dynamic efficiency etc., AT]…
Robert Litan will direct.
Litan’s role model here, he acknowledges, is Henry Manne, a dean emeritus at
George Mason University School of Law in Arlington, Vir., who was
law-and-economics’ chief proselytizer and salesman.
Trudie chuckled when she read these two sentences from Prudie:
I can’t tell if your husband’s fantasies are sweetly pathetic or disturbingly delusional.
You don’t need to crush your husband—you’re right, the marketplace will take care of that task…
The highly egalitarian Trudie believes that everyone deserves a chance. What would Immanuel Kant’s wife (it is no accident he didn’t have one) have said about his draft of Critique of Pure Reason? Trudie offers the husband — if he can be located — the following deal, maintaining his anonymity if he so wishes. I’ll read the manuscript, or at least try to, and tell everyone what I really think.
Of 51 countries that have received reward payments since 1999, six
overestimated their immunization gains by a factor of four, 10
overestimated them by a factor of two, and 23 by less than two. Eight
underestimated their progress.
Here is the article, interesting throughout. The bottom line is this:
Since 1986, progress in childhood immunization in the developing world
has been about half that officially reported by governments in the
developing world. Not only are year-to-year improvements overstated,
but the total percentage of children immunized is far lower than
publicly acknowledged, the study found.
You may have heard about the recent study by Mark Kishiyama et.al. described by USA Today as follows:
A new study finds that certain brain functions of some low-income 9-
and 10-year-olds pale in comparison with those of wealthy children and
that the difference is almost equivalent to the damage from a stroke.
Here is more detail:
…[they] rigged up the noggins of 26 kids — with an average age of 9.5 years —
with probes that sense the ebb and flow of electrical current in
different regions of the brain. Then, they put them through a battery
of neuropsychological tests. Half of the kids came from families with
annual incomes that averaged just over $27,000 and generally had low
levels of parental education; the other half came from families where a
primary caregiver had completed at least four years of college and in
which annual household income averaged a little more than $97,000.
I read the poor vs rich
kids brains study (Kishiyama et al.). It’s a very small study (13 in
each group) and the groups aren’t matched on ethnicity. In the major
task (the one which got media attention), where the authors looked at
ERPs [TC: here is a link on ERP], the performance of the two groups was the same. The performance
of the two groups on a Stroop task, a classic test of what the poor
kids are said to be incapable of, was also the same. The major
performance difference between groups was on vocabulary (the WISC-III
vocabulary test), but only a few tests were used. There was no attempt
to match the groups on IQ.
Just to repeat two key points: a) the observed difference in electrical current patterns may depend on IQ differences, not poverty, and b) on the actual major task the poor kids did just as well. There are tasks where the poor children do less well but this is hardly news.
Popular science reporting on neuro issues is very often not to be trusted.
Addendum: There is more from Michelle Dawson in the comments.
An ill-timed increase in the regulatory burden is on the way. Kathleen Fasanella writes:
In the Wall Street Journal, Rick Woldenberg was quoted as describing February 10, 2009 as National Bankruptcy Day because that’s the day when many of us will go out of business due to the implementation of the CPSIA Regulations… Come
February 10th, a lot of people will be hit hard by reality when their
products are returned or their financing is declined.
To recap, this law was passed (424 votes to 1) to protect children from unsafe toys after last year’s widely publicized recalls (by the way, recalls have actually decreased by 46%). What few consumers realize is this legislation affects more than toys.
What few clothing manufacturers realize is this also affects them. Of
the ones who do know, most of them think it only applies to children’s
clothes. Other than apparel the law includes diapers, blankets
(housewares), books, videos, computer and electronic products,
strollers, cribs, car seats, and anything humans come in contact with
in their environment. Our objections are not higher standards for
product safety or even the costs involved per se. The problem is Congress wrote the law and forced the CPSC to implement it before the regulations were written. These regulations are not written by people who are familiar with manufacturing and thus, impose unnecessary burdens.
If I understand this correctly, all sorts of small manufacturers have to vouch that their products do not contain much lead, yet such a claim is not easy to know or verify (does your product have paint?). You can follow the story at Kathleen’s blog. Here is video testimony.
As Eric H. points out to me: "It is "I, Pencil" meets "I, illegal paperclip" (yeah, really)."
The best place to start is his Sonata for Cello and Piano, the Double Concerto for Harpischord and Piano, and the Sonata for Flute, Oboe, Cello, and Harpischord, all collected here. The string quartets and the sonata for violin and piano are also important, plus the short late works for solo instruments or small ensembles or voice; choose by which instruments you like best.
Here is Q&A with Elliott Carter, interesting throughout. It ends with this:
What are the things that people say to you that are meaningful?
People say they like my music very much, but I’m 100 years old.
The Federal Reserve explored the idea
of issuing its own debt in discussions with Congress as the
central bank sought ways of coping with a balance sheet that has
more than doubled in the past year.
Here is much more. I don’t think this is intended as an application of Neil Wallace’s legal restrictions theory of money. Rather the goal is to give the Fed a new funding option at a time when excess reserves are not always a desirable means of balance sheet expansion.
I wonder if such securities would trade at a discount or premium to Treasury securities or if it’s even a good idea to find out.
I too would like the ability to borrow large sums at a zero rate of interest, which right now I can do only from Natasha. But you know, it’s funny: if I had the right to print my own money, I’d actually be plenty happy with that. I guess not everyone is so easily satisfied.
This chapter may seem cryptic but the key is the tiny footnote to Hayek; this chapter is Keynes obsessing over capital theory and the Austrians.
Hayek argued that an economic downturn should be understood as a discombobulation of the capital structure and here is Keynes arguing against that approach. When you cut through the terminology, Keynes says that capital
heterogeneity isn’t needed to generate aggregate demand analysis and that
his core mechanisms will operate in any case.
Keynes admits that with economic development labor gets very specialized, or very closely connected to particular capital goods, so yes there are capital complementarities of the Austrian kind. But Keynes thinks such fragilities will only help his argument, while rendering the analytics too messy. He declares his intention to proceed with homogeneous magnitudes of capital and labor.
This chapter often fails to receive its proper due; it is very important for understanding the location of Keynes in the history of economic thought.
With this one chapter, Austrian capital theory falls off the map.
The material on Say’s Law is good but J.S. Mill understood similar points as early as the 1840s.
In section ii Keynes wrote: "This particular relationship, which corresponds to the
assumptions of the classical theory, is in a sense an optimum
relationship. But it can only exist when, by accident or design,
current investment provides an amount of demand just equal to the
excess of the aggregate supply price of the output resulting from full
employment over what the community will choose to spend on consumption
when it is fully employed."
That is one of the most important passages in the book. Consumption
is stable and investment is the volatile variable. For equilibrium to
obtain, C + I (forget about G for now) must absorb Y. But "I" is ruled
by fickle forces and there is no guarantee it will play its required
role. Consider this one of Keynes’s basic models.
Garett Jones suggested to me that Keynes is postulating a vertical
curve in this chapter. The question is why Say’s Law doesn’t
have more force, namely why supply increases don’t translate into
aggregate demand. Keynes thought it was the liquidity trap –receipts
get soaked up in hoards rather than spent — but I think the key
problem has to be a broken banking system. Holdings of currency just
aren’t large enough and otherwise the held money
would end up being invested through intermediation. In the model
Keynes is often looking for ways to "break the circular flow" but he
didn’t always succeed.
Section iii has some lovely prose.