Iceland: what does the endgame look like?

by  Tyler Cowen in

Thrainn Eggertsson writes to the FT:

The government of Iceland has now been offered foreign loans that roughly equal the country’s gross domestic product.  The annual interest payments, say 3-4 per cent, approximately correspond to the country’s annual economic growth.  Additionally the loans must be paid up.

I believe Thrainn is being generous with that growth estimate.  Then he compares Iceland to Germany in 1919 and predicts similar consequences (I don’t think he means that as a threat, however).  Instead, I wonder what it is like for a country to be truly, permanently bankrupt.  And a further difficulty lies on the horizon.  Circa 2000, fish accounted for 70 percent of the country’s export earnings.  Here are many articles on dwindling cod stocks, the number one item sold by Icelandic fishermen.

I genuinely cannot imagine what the endgame looks like.

Against multiple choice exams

by  Tyler Cowen in

All of the reasons I am opposed to multiple choice exams are predicated on the assumption that I understand the material and that multiple choice exams hinder me from demonstrating what I know. If, however, I didn’t know the material, or didn’t know it well, then I might be led to believe that I’d be better off with a multiple choice exam. After all, with multiple choice exams, at least there would be a chance I could "recognize" something and at least I have something to pick from. On a short answer exam, if I don’t know the material I’ll end up sitting there staring at blank sheets of paper for the entire exam period. Psychologically I think being able to pick an answer to a bunch of questions (even if the answers are wrong) is more comforting than having a bunch a bunch of blank spaces. A 50% is a 50%, regardless of whether you filled in all the bubbles and missed half or if you had a bunch of blank space on a short answer test. But while taking the test, the student will feel more confident filling in the bubbles than anything else.

Here is much more, from this blog, via Andrew Sullivan.  The piece could use a longer discussion of the law of large numbers, but it makes many points of interest.

Can the Fed in fact pop bubbles?

by  Tyler Cowen in

Megan McArdle wonders:

Prospectively, if you want to do it effectively, you probably need to intervene in the very early stages.  The Fed raised interest rates in the late 1920s, to no effect–indeed, it encouraged foreign capital to flow in.  Iceland’s central bank, too, tried to quiet its financial bubble, but borrowers simply ignored them–borrowed at the higher rate, or stupidly took on currency risk by getting auto loans and mortgages from abroad.  Meanwhile, more lenders were attracted by the higher rates.  If you think house prices will go up 10% every year, a 1% increase in mortgage interest rates is not really that worrying.

Do you know any good pieces on this topic?  Daniel Gross also says it is hard to do.  Here is one article on Bernanke’s bubble laboratory.

Sentences of persuasion

by  Tyler Cowen in

Are you picking Philly to make the Eastern finals?  Think again:

In a league in which you need a proven crunch-time guy to battle the
other proven crunch-time guys in the last three minutes of close games,
they don’t have a proven crunch-time guy. (And don’t tell me it’s
[Elton] Brand. I watched him for four years on the Clippers; he’s not that type
of player.) Fundamentally, this can’t work for anything beyond 45-47
wins and maybe a second-round appearance … and that’s before you factor
in the skewed level of expectations already in place, or the fact that,
again, they just spent $83 million to reunite the best two guys on a
27-win Clippers team from 2003. I just don’t see it.

I’m picking the Wizards to tank and making no other predictions.  The interesting question is whether Cleveland will deal for Allen Iverson.  Here is much more.  You’ll also find this excellent sentence:

Jamaal Tinsley is a sunk cost.

What does a credit crunch look like?

by  Tyler Cowen in

Maybe Alex is tired of this topic, if so I apologize.  But Isaac Sorkin sent me notice of this:

What does a global credit crunch look like when it comes down to raw numbers? A 3% quarterly decline in international banking activity. It doesn’t sound like much, but it represents $1.1 trillion–and that was just a snapshot taken at the end of June, before the Lehman Bros. collapse worsened the crisis in interbank lending.

It is also three times bigger than the largest contractions of the past three decades–as long as such records have been kept. After the demise of hedge fund Long-Term Capital Management in 1998, international banking activity fell by 1.2% in the fourth quarter of that year. After the dot-com bubble burst, the contraction was 1%, or $125 billion–chump change compared with today’s banking volumes.

The numbers come from the provisional international banking statistics for the second quarter of this year, released Thursday by the Bank for International Settlements, the Basel, Switzerland-based organization that acts as a lender for central banks.  BIS says most of the decline was accounted for by "short-term interbank credits in U.S. dollars," i.e., banks not lending to each other overnight–the logjam…we have heard so much about being at the heart of the credit crunch.

Note that is only from the second quarter; we’ll see what the third quarter statistics look like.  Here is the BIS link.  Note that second quarter lending was as robust as it was in part because of continued lending from Europe to Eastern Europe and also to Iceland.  That’s more reason to worry, not less.

Porsche and Volkswagen

by  Tyler Cowen in

In a time when many odd economic events are taking place, this saga nonetheless deserves comment:

Volkswagen’s shares more than doubled on Monday after Porsche moved to cement its control of Europe’s biggest carmaker and hedge funds, rushing to cover short positions, were forced to buy stock from a shrinking pool of shares in free float.

VW shares rose 147 per cent after Porsche unexpectedly disclosed that through the use of derivatives it had increased its stake in VW from 35 to 74.1 per cent, sparking outcry among investors, analysts and corporate governance experts.

This seesaw has been going on for some time and German regulators haven’t done much about it, despite complaints from hedge funds.  Today the share price rose by a factor of nearly five (!).  So for a brief while Volkswagen became the world’s largest company in terms of capitalization.  Who needs Exxon and WalMart?

I thank Ben, a loyal MR reader, for the pointer to this episode.

High interest rates

by  Tyler Cowen in

From the UK:

A consumer borrowing £100 on the card would be charged £35 in interest
on repayments of £5 a week over 27 weeks, giving an APR of 222.7%.

Is this for people who already have borrowed from the loan shark and must repay immediately or else?  Or do the borrowers simply not understand annualized interest repayments?  Of course micro-credit also involves high interest rates (in the 50-100 percent range, usually) but I can see two immediate differences.  First, micro-credit is often used to take the kid to the doctor when otherwise the outcome would be grim.  Second, micro-credit is usually marketed to the higher-IQ element in the village, not the lower-IQ element.

Addendum: Here is Virginia Postrel, defending consumer credit.

Botox makes us happy

by  Alex Tabarrok in

It’s long been known that simply smiling makes people feel better and making an angry face can make people feel more angry.  Thus some cosmetic surgeons speculated:

People with Botox may be less vulnerable to the angry emotions of other people
because they themselves can’t make angry or unhappy faces as easily. And because
people with Botox can’t spread bad feelings to others via their expressions,
people without Botox may be happier too.

Amazingly, a recent experiment in the journal Cerebral Cortex supports this theory, although the abstract is a mouthful.  You can read a summary here.

We show that, during imitation of angry facial expressions, reduced
feedback due to BTX treatment attenuates activation of the left
amygdala and its functional coupling with brain stem regions
implicated in autonomic manifestations of emotional states. These
findings demonstrate that facial feedback modulates neural activity
within central circuitries of emotion during intentional imitation of
facial expressions. Given that people tend to mimic the emotional
expressions of others, this could provide a potential physiological
basis for the social transfer of emotion.