Month: August 2011

Assorted links

1. Can a woman lobby a guy she has already rejected?

2. The Baltimore Poe house might be closing.

3. What should Obama have done in 2009?

4. Are the Chinese liberals in decline? (link now fixed)

5. Scott Adams: “A lack of creativity always looks like some other problem. If no one invents the next great thing, it will seem as if the problem
is tax rates or government red tape or whatever we’re blaming this week.”

The tipping point

Suppose that of the N member-states, F (e.g. 3, as is the case at the moment of writing) have ‘fallen’ out of the money markets and into the EFSF’s bosom. The EFSF must then finance their debts entirely until the Crisis ends. To do so it must seek loan guarantees from the N-F still solvent member-states. It is extremely easy to show that the contribution (as a portion of their GDP) of the N-F solvent member-states to the ‘fallen’ member-states, let’s call it αF (where the subscript indicates the number of ‘fallen’ states that must be supported) equals some newfangled debt-to-GDP ratio: The numerator is the total debt of the ‘fallen’ and the denominator is the total GDP of the still solvent member-states. (See here for a brief proof.)  The reason I choose to call αF a toxic ratio is that, with every member-state that ‘falls’, this ratio rises even if GDP and debts remain the same. Moreover, every new casualty boosts the toxic ratio αand guarantees that yet another member-state will join the rank of the ‘fallen’. And as if this were not enough, nothing can stop this process while everything else remains the same. Including the potential size of the EFSF.

Here is more.  Thus enter the ECB and its bond-buying.  Do Italy and Spain now count as belonging to “the fallen”?  Or have they just returned from “the fallen”?  Or maybe a bit of both?

The ECB bond-buying plan

“The ECB is once again intervening as the last line of defense,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London. “The intervention will put a halt to the bond market crash that some member states faced. However, the ECB is now in for the long haul and will potentially have to buy up to half of the Italian and Spanish traded debt, the biggest risk-pulling effort ever engineered in Europe.”

Here is the articleThis analysis by Paul Krugman probably won’t be beaten, and more here.

Arguably it’s now a question of who stares down whom.  If you do not doubt German resolve, bet on the ECB and lend money to Italy fairly cheaply.  If you fear that Italy suffers from its own version of the great stagnation, and doesn’t have good enough political institutions to make decent reforms (and now the hammer of the private capital markets is partially removed), maybe the ECB will cry uncle at some point and give up.  Knowing that, confidence will not return and the speculators will continue to pounce.  We’ll see soon enough what the markets think.

As I am posting this, Dow futures are off about 250 points, although that bad news could be traced to numerous causes.

Speculative attack games can be hard to predict for the marginal cases (personally I am skeptical), but the general uncertainty resulting from the U.S. debt fight, and the resultant “flight to safety” isn’t helping matters.  It’s another way in which our fiscal nonsense brings some very real costs, and quickly.  Have you seen that France might suffer a downgrade from AAA?  In the abstract, that makes sense.  Why should they be safer than the US?  Again, our stupidity makes the European mess harder to resolve by shifting the focal equilibrium from a good outcome to a bad, scary outcome.

Not ready for the rain, in northern Chile

The past weekend’s precipitation blocked highways, forced the cancellation of a top Chilean football match and damaged the homes of 1,800 people, said Vicente Nunez, chief of the Interior Ministry’s national emergency office.

A similarly wet stretch in early July dumped four years’ worth of rain in one day on coastal Antofogasta. That was just a quarter of an inch (more than 6.3 millimeters) but it was still enough to cause collapsed or leaking roofs in homes and businesses that usually have no reason to protect themselves against even minimal precipitation.

…Average annual rainfall in the northern city of Arica is so low that it would take 50 years to accumulate an inch. This July, the city was swamped twice by what would be considered mild showers almost anywhere else on the planet. So far this year, Arica has had 0.13 inch (3.4 millimeters) of rain, more than six times its yearly average during 30 years of record keeping.

Here is more, interesting throughout.  Of course it reminds me of David Friedman’s famous piece.

Assorted links

The Coming Education Revolution

From Metafilter:

Stanford’s ‘Introduction to Artificial Intelligence’ course will be offered free to anyone online this fall. The course will be taught by SebastianThrun (Stanford) and PeterNorvig (Google, Director of Research), who expect to deal with the historically large course size using tools like Google Moderator.

There will two 75 min lectures per week, weekly graded homework assignments and quizzes, and the course is expected to require roughly 10 hours per week. Over 10,000 students have already signed up.

In 2003, I argued that professors were becoming obsolete, giving a 10 to 20 year time for a big move to online education. Later, I pointed out that the market was moving towards superstar teachers, who teach hundreds at a time or even thousands online. Today, we have the Khan Academy, a huge increase in online education, electronic textbooks and peer grading systems and highly successful superstar teachers with Michael Sandel and his popular course Justice, serving as example number one.

One of the last remaining items holding back online education is a credible system to credential and compare student achievement across universities. Arnold Kling has that covered with a new business model.

For superstars and strong researchers, life in the ivory tower remains good. But for most teachers the cushy life is gone; tenure is just a dream for a majority of university teachers, salaries are low and teaching requirements have risen.

As in other fields what we are seeing is an increase in teaching inequality, at the top are high-salary superstars surrounded by apprentices who work long hours at low pay for a lottery ticket that for most will not payoff and at the bottom are lots of mid-skill adjuncts who do the drudge work of teaching remedial English and math.

Addendum: Tim Worstall points to the UK’s University of London as a model for the future.

State-contingent markets in at least a few things

MF Global Holdings Ltd. (MF) took the cult of the Wall Street chief executive officer to a new level with its sale of bonds that pay a higher rate if Chairman and CEO Jon Corzine quits to take a job from the U.S. president.

The futures broker sold $325 million of five-year unsecured notes, the company said today in a statement. The notes will pay an extra percentage point of interest if Corzine is named to a federal post and confirmed by the Senate before July 2013, New York-based MF Global said yesterday in a regulatory filing.

Here is more.

Sad sentences

“Europe’s plan was to have growth fix the problem. America’s plan was to have growth fix the problem. And that’s not going to work,” said Kenneth Rogoff, an economics professor at Harvard. “I think it’s really starting to sink in that we’re not anywhere near an endgame.”

Here is more, though most of the article is well-known.  Brad DeLong had a very good post:

You Know, If You Had Told Me a Year Ago That on August 5, 2011 S&P Would Downgrade the U.S, and the 10-Yr Treasury Would Yield 2.5%…

… I would have laughed at you. I would have said that while there were possible futures in which each of those things happened, they were disjoint futures.

One way to solve that conundrum is to think about what expected real rate of return fits into both facts.

What I’ve been reading

1. Jo Nesbø, The Redbreast.  These days it’s odd to read a fictional book about neo-Nazi cults in Norway, including a murderous villain who leaves behind a manuscript explaining his ideas and purpose.  I didn’t love it, but I liked it and I never considered putting it down; I will likely try another book by Nesbø.  The author, by the way, graduated from the Norwegian School of Economics.

2. Félix J. Palma, The Map of Time.  Spanish speculative fiction, now in English.  It never feels deep, but finally we have a time travel novel chock full of new (and good) ideas.  Recommended to all those who find that sufficient, but not for those who don’t.

3. Tim Congdon, Money in a Free Society.  Neo-monetarist tract!  With plenty on all the different notions of the liquidity trap out there, which are often confused.

4. Kate Christensen, The Astral: A Novel.  About marriage, self-deception, and general decay and destruction.  Her best book so far.

5. Isaac Asimov, Franchise.  Only a short story, but available in stand-alone form.  Asimov considers a future world where AI is so advanced that elections can be settled by asking a few questions to a computer-identified “typical” voter and adding that input to the calculations of the computer.  One of his deepest works, recommended for all students of public choice.

Sentences to ponder markets in everything

Only children’s books or specialist scuba diving titles currently boast to be fully water-resistant.

A waterproof paperback book will be hitting the market next year, hat tip goes to Bookslut, who knows of one other waterproof title.

And here is another Markets in Everything, hat tip to TW.

By the way, the (possible) salt water flows on Mars were in part discovered by a 21-year-old Nepalese undergraduate, and it seems he had the key contribution.

A few quick thoughts on the likely pending S&P downgrade

1. The Republican Party made a big, big mistake passing up a chance for a “grand bargain” with Obama.  It’s time to be a realist about revenue increases, rather than signaling ideological purity.  And let’s get a better rather than a worse version of revenue increases, combined of course with significant spending cuts and a good, credible long-term fiscal plan, enforced by tough triggers.  A lot of Republican or conservative intellectuals know better on revenue increases, and have said as such, but corruption, intellectual and otherwise, prevented their voices from being heeded in the larger political context.

2. Democrats need to choose on entitlements.  Ross Douthat nails it.  It’s time for Obama to lead.

3. I don’t expect anyone to change their mind at this point, but the “we should have had a much bigger stimulus” argument is unlikely to go down in intellectual history as the correct view.  Instead, Ken Rogoff and Scott Sumner are likely to go down as the prophets of our times.  We needed a big dose of inflation, promptly, right after the downturn.  Repeat and rinse as necessary.  But voters hate inflation and, collectively, we proved to be cowards.  Too bad.

4. As a simple rule of thumb, if at this point, in response to this news, a commentator attacks the ratings agencies for their previous mistakes and stupid, corrupt behavior, it’s a sign the commentator is trying to muddy the broader issues at stake.  Such commentators may well be correct in their criticisms, but probably they are not facing up to their recent mistakes and seeking to shift the blame.  Watch out for this.

5. I’m not sure how markets will respond, and I don’t think that an alarmist reaction about the market would be appropriate.  A letter grade is a letter grade and the facts on the ground did not change today.  It may or may not lead to a major sell-off.  Still, years from now today may well be seen as a turning point of significance.

6. If this really does happen, let’s hope it serves as the needed wake-up call.  If it doesn’t, well, back to…