Papua New Guinea fact of the day
An analysis of this ancient DNA, published on Wednesday in Nature, reveals that the genomes of people from New Guinea contain 4.8 percent Denisovan DNA.
And who are they?
An international team of scientists has identified a previously shadowy human group known as the Denisovans as cousins to Neanderthals who lived in Asia from roughly 400,000 to 50,000 years ago…
Here is the article. It is suggested that the Denisovans are quite distant from both humans and Neanderthals. Here is the first cut take from Gene Expression. Here is more, from John Hawks. And more here. Ongoing updates here.
How effective will Basel be?
Not very:
The Basel committee adopted a 3 percent leverage rule in July, meaning that for every $3 of capital, a bank can borrow no more than $97. While the percentage is tentative and subject to review before it goes into effect, it has since come under attack by banks in Europe and Asia, which say it will restrict their borrowing capacity and inhibit lending.
The EU may exclude the leverage ratio when it converts Basel rules into law next year. Several member nations have advocated dropping the rule, people close to the discussions said last month. A majority of the 27 EU countries oppose adopting the ratio, these people said.
The article offers much more detail on other questions of interest.
Assorted links
1. More on why it is hard to get tough on bank creditors.
2. Scott Sumner: "It's complicated."
3. Active Duty Army Ranger named #3 pastry chef in the world.
4. Roger Garrison's Powerpoints for macroeconomics.
5. How women want to be wanted.
6. U.S. will resume deportations to Haiti.
7. Economic History blog is back.
8. al-Qaeda in Iraq, 2005-2006, turned a profit but paid low wages.
9. The hazards of nerd supremacy; some observations on Wikileaks.
Ahead of their tenure clock
This is the conclusion of a new paper published in Biology Letters, a high-powered journal from the UK’s prestigious Royal Society. If its tone seems unusual, that’s because its authors are children from Blackawton Primary School in Devon, England. Aged between 8 and 10, the 25 children have just become the youngest scientists to ever be published in a Royal Society journal.
Their paper, based on fieldwork carried out in a local churchyard, describes how bumblebees can learn which flowers to forage from with more flexibility than anyone had thought. It’s the culmination of a project called ‘i, scientist‘, designed to get students to actually carry out scientific research themselves. The kids received some support from Beau Lotto, a neuroscientist at UCL, and David Strudwick, Blackawton’s head teacher. But the work is all their own.
The class (including Lotto’s son, Misha) came up with their own questions, devised hypotheses, designed experiments, and analysed data. They wrote the paper themselves (except for the abstract), and they drew all the figures with colouring pencils.
One version of the story is here, which offers an excellent account and lots of background detail. The experiment had not been done before. The abstract was the one part of the paper they could not write on their own.
The paper is here. There are no statistics and no references to previous literature. The first paragraph of the introduction is this:
People think that humans are the smartest of animals, and most people do not think about other animals as being smart, or at least think that they are not as smart as humans. Knowing that other animals are as smart as us means we can appreciate them more, which could also help us to help them.
What economics project could you imagine eight-year-olds doing and publishing?
For the pointer I thank numerous sources on Twitter.
Eric Falkenstein on leverage regulation
What about leverage as a proxy for this unmeasurable risk? As Proshares is showing with the Ultra (2x leverage), UltraPro (3x leverage), and short products, a security can have double or triple leverage behind it, have positive or negative exposure, and still called a 'stock'. Similarly, a bank with 10:1 ratio but plenty of ninja loans had a lot more risk than a bank with 20:1 leverage but all their mortgages had 20% down (the bad old days per Alicia Munnell). Facility risk (eg, loan-to-value) is part of the problem, so too is obligor risk (eg, credit and bureau scores), and so the multiheaded beast grows, with risk hiding from any one metric that can be applied across any large financial institution.
There is more at the link. I agree with him too. Overall, I am not very optimistic about our ability to regulate the financial sector successfully. Leverage regulation is simply the best idea of a bad lot, of what I've seen. It addresses one problem, but only one problem. There is the related question of how off-balance sheet risk rises, to compensate for the restrictions on the balance sheet. Still, the bottom line question is whether you wish for a LLR without any leverage restriction and I believe the answer is no.
Addendum: Arnold Kling comments.
What I’ve been reading
1. The Half-Made World, by Felix Gilman. I very much enjoyed this mix of dystopian steampunk and speculative science fiction, reviewed by Henry here.
2. Vassily Grossman, Everything Flows. I found this more fluent and compelling than his longer Life and Fate; it's the story of a man who returns home from a concentration camp. Recommended.
3. Richard Overy, 1939: Countdown to War. I didn't think a book so short on this topic could be good. I was wrong. Overy has a strong overall track record as an author.
4. Samuel Moyn, The Last Utopia: Human Rights in History. I don't have any objections to this much-touted book, but I expected to learn more from it than I did. It didn't feel like 352 pp.
5. Nicholas Ostler, The Last Lingua Franca: English Until the Return of Babel. A provocative book on the forthcoming decline of English as a globally dominant language. I'm not (yet?) convinced, but I'm less unconvinced than I thought I would be. One main point is that more and more business will be done without English at all, often through the BRICS countries. It is interesting to see that fewer people in South Africa are learning English.
Is there an ancestor effect?
An initial study involved 80 undergrads spending five minutes thinking about either their fifteenth century ancestors, their great-grandparents or a recent shopping trip. Afterwards, those students in the two ancestor conditions were more confident about their likely performance in future exams, an effect that seemed to be mediated by their feeling more in control of their lives.
Three further studies showed that thinking or writing about their recent or distant ancestors led students to actually perform better on a range of intelligence tests, including verbal and spatial tasks (in one test, students who thought about their distant ancestors scored an average of 14 out of 16, compared with an average of 10 out of 16 among controls). The ancestor benefit was mediated partly by students attempting more answers – what the researchers called having a 'promotion orientation'.
The full account is here. I would like to see this replicated, and subject to more variation, but in the meantime it's an interesting idea.
Words of wisdom, from Kevin Drum
I agree with this:
It's not practical to micromanage risk-taking in the financial sector, nor is it feasible to eliminate bubbles and bank crises entirely. But I really do believe that we could very substantially reduce the risk of bank crises without affecting the efficiency of legitimate banking operations. The way to do it is with very simple, very blunt leverage restrictions that apply to all financial actors over a certain size: banks, insurance companies, hedge funds, private equity, you name it. If you have assets over, say, $10 billion, then the rules kick in. Strict leverage limits (say, 10:1 or maybe 15:1) based on conservative notions of both assets and capital would be a pretty effective bulwark against excessive risk taking but wouldn't seriously interfere with the basic asset allocation function of the financial industry.
It wouldn't be perfect. Nothing is perfect. But if we got obsessed with leverage the same way that, say, the Fed is obsessed with inflation, we could all sleep a lot easier at night.
I would add, however, that obsessing over leverage is likely to prove an electoral disaster. It means limiting credit growth, money supply growth, raising the cost of consumer borrowing, and putting the housing market at a further disadvantage. It also means staring down financial interest groups.
The interventionist dynamic, health care installment #2,074
The Obama administration said on Tuesday that it would require health insurance companies to disclose and justify any increases of 10 percent or more in the premiums they charge next year.
State or federal officials will review the increases to determine if they are unreasonable, the administration said in proposing regulations to enforce the requirement.
The article is here. How long ago was it that we were told the health care reform would a) control costs, b) take care of adverse selection, and c) make the insurance market workable again. Yet somehow such a policy is necessary.
Remind me again, what will happen to the quality of coverage and reimbursement, all factors included, following price controls?
Assorted links
1. The rooftops and the rich, from Kevin Drum.
2. Speculative claims about the Haitian earthquake.
3. Bankruptcies in the U.S. vs. bankruptcies in Mass., since Romneycare.
5. Old and new: a photo essay of Mongolia.
6. Via Chris F. Masse, top ten CEO wealth creators, and destroyers, from 2010.
Mandatory Minimums and Drug Quality
A per unit tax tends to increase product quality as consumers and manufacturers substitute away from the taxed margin (quantity) towards the untaxed margin (quality) (see here for evidence on cigarettes, beer, and grapes and lobsters). The principle is quite general. Teenagers, for example, drink less often than adults but when they do drink they tend more often to get drunk. Similarly, Ronald Davies finds that mandatory minimums increased drug purity.
As of 1987, the US’s Anti-Drug Abuse Act (ADAA) has imposed mandatory minimum sentences for drug traffickers based on the quantity of the drug involved irrespective of purity. Using the STRIDE dataset and a differences-in-differences approach, I find that this led to increases in cocaine and heroin purity of 52 per cent and 27 per cent respectively.
Lesson two of economics is think on the margin. Lesson nineteen, which we don't always get to in Econ 101, is to remember that there are many margins.
Hat tip to Geary Behavioural Economics Blog.
Can vigilant creditors limit excess bank risk-taking?
I had promised to address that question. Ideally, enforceable bond covenants should limit bank risk-taking, and ensure major bank solvency, but is that feasible? I see a few problems with the idea:
1. It is very hard for a government or central bank to precommit to a "no bailout" policy. This is partly because of powerful special interests, but most of all because political time horizons are short. Most bailouts do patch things up in the short run, whether or not you like their longer-run consequences. Bondholders know this, and they are less vigilant ex ante.
2. Bondholders don't and can't have much idea what is going on inside the trading book of a bank. It doesn't matter how financially sophisticated the bondholders are; the point is that the trading book must remain fairly confidential and a lot of risk can be put in the trading book.
3. Some of the creditors — the short-term creditors — may be in on the deal. They lend money to the banks, under the premise that risky strategies will be executed. The short-term, collateralized creditors may not themselves be bearing much risk, given their superior "flight" capabilities and they also may be receiving a slight premium for such lending.
4. The net risk of a bank position is not determined solely by the bank's portfolio. Say a bank lends money to homeowners and then those homeowners increase their leverage. The bank is now in a riskier position, and de facto a more leveraged position, althoug it's measured leverage hasn't gone up a whit.
5. Experience with the ICE clearinghouse — one form of bank creditor — so far suggests that it serves bank interests, and indeed is largely controlled by the banks, rather than restraining them.
6. Let's say a no-bailout policy was credible, as indeed it was in the 19th century (there were no bailout facilities). What does the equilibrium look like? Is there less long-term lending to banks and more short-term lending? Would that make banks more or less stable? Few people think this is a positive development for countries. Would banks be more subject to "capital flight" risk?
We also could expect greater mutualization of banks, as was the case before deposit insurance, and we could expect experimentation with corporate forms other than limited liability. My view is this is what would be required to limit excess bank risk-taking. Yet I believe that, for better or worse, it is politically impossible. In a nutshell, big government needs big finance (or much higher taxes).
One reason that bailouts are so politically popular (not in rhetoric, but in their practice and in their effects) is that they make financial crises less common but, when they come, more severe because more leverage has built up. That change in the structure of returns is usually a political winner, call it "Ticking Time Bomb."
Social Security prediction
Here is a related Paul Krugman post. In my view, Obama may propose slowing the rate of benefit increase, but he won't propose an actual cut in Social Security benefits. Use of the word "cuts" is thus likely to prove misleading. I've already argued it is better to cut Medicare than Social Security (in-kind vs. cash), but it shouldn't come as a shock if reindexing benefits is part of a bipartisan budget deal. It's an easier policy "to do" than fixing Medicare, though again I prefer the latter.
It's a common argument that we need not cut benefits now, simply to prevent benefit cuts in the future. The reality is that the long-term budget (don't look at SS alone) is way out of whack, and reindexing now is one way to get larger spending cuts in the future than could be done on a one-time basis. Unless you do reindexing of something, at some point in time, it is very very hard to institute large spending cuts on a dime.
Reindexing is one signal of a longer-term political time horizon.
Assorted links
1. The culture that is California.
2. Markets in everything: doctor paid to diagnose fantasy jocks.
Love song for (Friedrich) Hayek
View it here, I like the rhyme with "kayak." For the pointer I thank Bob Cottrell.