Sunday, December 30, 2007

Types of Government Intervention into Private Markets

There are three types of government intervention in private markets: 1) to make sure the market works correctly (ie weights and measures rules: 2) to fix market failures after they have occurred; 3) to address injustices or inequalities of perfectly functioning markets.
Economist's View: Increased Calls for Government Intervention into Private Markets

Thursday, December 27, 2007

Math Magic

Math Magic - What Jamie Found

'nough said.

The World is not Flat

Charles Kenny looks at the differences between states and shows there is still a lot left to explain why development happens at different paces in different places. Buffalo County South Dakota has a per capita income of $5,213 and Marin County California has one of $44,962.

A One-Size-Fits-All Solution - New York Times

"A clean way to regulate mortgages going forward: the "opt out" solution for simple mortgages: A One-Size-Fits-All Solution - New York Times

Sunday, December 23, 2007

Exporting Pollution

One of the reason Europe and the US can feel good about reduced carbon usage is that they have exported polluting industries to China. It is hardly fair that Europe now turns around and blames China for increased use of coal.

Stocking coal | Free exchange |

Thursday, December 13, 2007

The best excuse ever written

The root of the crisis.. was the fall of the Berlin Wall....

OpinionJournal - Featured Article

Greg Mankiw's Blog: How do the right and left differ?

Economics is not a hard science. Why do rational people look at the same facts in different ways? Economics cannot provide one answer. There are important normative questions.

Greg Mankiw's Blog: How do the right and left differ?

Mark Thoma responds.

Wednesday, December 05, 2007

Monday, November 26, 2007

Saturday, November 17, 2007

Enough said Nixon White House tapes: the gift that keeps on giving

The Fed on: The Rise and Fall of Subprime Mortgages - Economic Letter, Nov. 2007 - FRB Dallas

A good history of the rise and fall of mortgages.

Also can add a comment on the size of the losses.

Some estimates of the size of the sub-prime damages appear to us to be double-counting the losses. They add loan defaults to CDO and MBS write-downs and financial institution write-offs. In our view, there’s only one economic loss among these the foreclosure minus the recovery. The rest are timing decisions in which some are realizing their losses in zero-sum financial calculations, while others will realize gains later.

  • On a broader scale, the realized mortgage losses (a foreclosure minus a recovery) are a subset of unrealized losses (over the last couple of years as real estate prices declined). Those followed largely-unrealized gains (the seven-year boom from 1998-2005). From the standpoint of the economic outlook, we think the still-large net real estate gains over the last decade, by adding to household net worth, act as a cushion against a recession.
From Malpass at Bear.

The Rise and Fall of Subprime Mortgages - Economic Letter, Nov. 2007 - FRB Dallas

Monday, November 05, 2007

Monday, October 29, 2007

The Weakness of Quant Funds -

Quant funds are just about systematic investing using clearly identifiable factors. Why do people think that this type of investing should go away and people should return to throwing darts.

Finance Blog - Market Movers by Felix Salmon: The Weakness of Quant Funds -

Tuesday, October 09, 2007

The Nature versus Nuture Debate on Development: Farewell to Alms

A review of speech by Gregory Clark on Farewell to Alms.
Clark comes down on cultural explanation. A little more optimistic because cultures can change.

Goodbye Lusaka, Farewell to Alms | Free exchange |

A "Minsky Moment"

Why stability is destabilizing.
Three types of borrowers:
Hedge Financing: Can pay both principal and interest out of cash flows.
Speculative Financing: Can pay interest but must cover principal by new financing.
Ponzi Financing: Cash flow covers neither interest nor principal. Must sell assets or borrow more to cover interest payments.

When the crash comes

Monday, October 08, 2007

The Mentally Ill, Behind Bars - New York Times

The rate of institutionalization has not changed much. But the rate of incarceration has changed.
The law of unintended consequences for closing large institutions for the mentally impaired.

The Mentally Ill, Behind Bars - New York Times

Where is the Wealth of Nations?

A review of a not so recent World Bank Paper on the source of growth and wealth.

Angry Bear

Friday, October 05, 2007

A better way to organise securities markets

This will not happen because in normal markets it is in Wall Street's favor when there is less transparency. And normal times are more common than times of crisis. / Comment & analysis / Comment - A better way to organise securities markets

Paul Volker at the Japan Society

Paul Volker and Alan Blinder spoke yesterday at the Japan Society.

Role of the Fed.
The Fed must protect the economy. Even if the market brought a problem upon itself the Fed must protect the market to save the economy.

There is not always a clear policy. There is only one clear instrument - interest rates.

New markets and regulation

The myth: Derivatives and securitization diversifies risk so that individual firms will not be harmed.

Proved untrue: see Merrill Lynch 5.4 billion writedown, DB 4 billion writedown etc.

Tradeoff between supervision & regulation. and protection.

Banks want want protection but not regulation.

Securitization's problem is that if banks immediately resell loans they will not care about credit.

At the second or third derivative nobody knows who the originator is.

No regulator was aware how big the problem was.

Did not know how big subprime mortgage business was 1.25 trillion.

Thought it was 100 200 billion.


Big institutions provide stabillity

Small institutions at risk

What happens if problem comes when economy is not strong.

Need more regulation bt not clear what.

On Japan

Growth is not as bad as top line numbers might suggest.

Since population is not growing and is aging growth should not be as fast

But real damage occurred: Real estate, stock down 75 percent. US real estate at this point is only down a couple of percent.

Price Deflation did not harm spending.

Cpi at -1. 1 does not change how Ms Watanabe buys and sells.

Asset deflation harmed spending

Asset deflation is a big worry.

What to do about bubbles.

Why is it not a worry

Disinflation from services still to come from India

Inflation low everywhere

Inflation targeting

All central banks are targeting inflation.

Anyting that can be imported from china has not gone up in 10 years Other half of cpi is made up.

Monday, October 01, 2007

Gotta love corporate America

Skype owners, like CEO's, still get paid..

Finance Blog - Market Movers by Felix Salmon: Cognitive Dissonance at Skype -

More on the Core CPI

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal The Pmarca Guide to Career Planning, part 2: Skills and education The Pmarca Guide to Career Planning, part 2: Skills and education

Careers The Pmarca Guide to Career Planning, part 1: Opportunity

Google Reader (1000+)

Google Reader (1000+)

Shocking Data on prisons

More young blacks in prison than in college etc.

Life sentence - The Boston Globe

Why the Fed uses the concept of Core Inflation

It does not want "to hit the economy over the head with a brick."

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal

Friday, September 21, 2007

On Securitization

Recent market turmoil has some people rethinking securitization. Leaving aside the fact that the genie cannot be put back in the bottle, it is also true that no large institution has suffered major losses and the losses were spread out.

The Independent differs. And the Economist is cynical as well.

More schadenfreude

Hedge Funds | HedgeWorld | The Definitive Hedge Fund Community

Tuesday, September 18, 2007

Work versus Leisure

So this is what I am thinking about...

YouNotSneaky!: Do Americans work more because of status concerns? Maybe, but in all honesty, it's hard to tell

China's Pollution is a problem

I lived in Pittsburgh in the early sixties. I have seen the cycle that Becker refers to.
The current chapter in my chinese textbook, which is printed in China, discusses the issues of
保护环境 (protecting the environment). The Chinese domestically care very much about this.

The Becker-Posner Blog: China's Air Pollution-Becker

Sunday, August 19, 2007


The problem is at this point still quite isolated. Default rates are increasing only in the variable part of sub prime. And even there 85 percent of the loans are paid on time. What will this chart look like in 6 months?

Ezra Klein: Today's Housing Chart

Monday, August 06, 2007

The downside of diversity -

Robert Putnam, the author of Bowling Alone, finds that diversity in a neighborhood makes weaker ties. My visit to Altoona last weekend confirmed that.

The downside of diversity - The Boston Globe

Thursday, August 02, 2007

Tuesday, July 03, 2007

Is Voting Rational ?

And does it matter? Louis Menand reviews "The Myth of the Rational Voter" by Byran Caplan.

Negotiating the tension between “rational” policy choices and “irrational” preferences and anxieties—between the desirability of more productivity and the desire to preserve a way of life—is what democratic politics is all about. It is a messy negotiation. Having the franchise be universal makes it even messier. If all policy decisions were straightforward economic calculations, it might be simpler and better for everyone if only people who had a grasp of economics participated in the political process. But many policy decisions don’t have an optimal answer. They involve values that are deeply contested: when life begins, whether liberty is more important than equality, how racial integration is best achieved (and what would count as genuine integration).

In the end, the group that loses these contests must abide by the outcome, must regard the wishes of the majority as legitimate. The only way it can be expected to do so is if it has been made to feel that it had a voice in the process, even if that voice is, in practical terms, symbolic. A great virtue of democratic polities is stability. The toleration of silly opinions is (to speak like an economist) a small price to pay for it.

The Energy Future

The Peak Oil Theory predicts we must look for a change in supply in energy. What can replace oil? Lots of things and nothing seems to be the answer.

Monday, June 18, 2007

Intellegence, Management and Government

The Becker-Posner Blog: Intelligence and Leadership--Posner
talks about the limited " versatility of combined general-specific human capital that a lateral entrant brings to a high level government job of a managerial or advisory rather than technical character." In other words smart people might just be bad managers for three reasons: 1) intelligent people often neglect other traits of good management and rely only on intelligence, 2) logical reasoning does not always provide the best way to solve political problems, 3) smart people often don't listen to staff who are not as smart as they are but might know more about a specific problem.

Thursday, June 07, 2007

Graphical display of Information

This is an interesting speech in regards both to its content (development) and presentation. Hans Rosling on stats and third world myths. Here is the site to play with the data yourself.

Tuesday, June 05, 2007

Long Short Equtiy secrets revealed

Many are really long only funds that lose money on shorts. As shorting is so difficult, a number of managers are shorting etfs.

Wednesday, May 30, 2007

China Stocks

No short term trading for now. The 30 bp tax is the same as Japan in the old days. But Japan's was only for foreigners on sales. This is for all and on both sides. Stock loan is also hard, if not impossible.

Thursday, May 24, 2007

Understanding Poll Results

The Pew Research poll that showed the number of American Muslims that liked Al Queda, favored suicide bombing etc was a non-negative number got lots of play. However it is just as scary what the rest of us believe.

Do we really want to remember Everything?

An interesting essay on the future of computing.
Gorden Bell of Microsoft, one of the original Digital Computer guys who drove the establishment of the net., thinks about what we will do when we have information about everything.

Wednesday, May 23, 2007

Thursday, May 17, 2007

Tuesday, May 15, 2007

Art Hedge Fund

A new offering in alternatives space.

Alpha may be beta in disguise.

This is an old Vanguard paper looking at the recent false debate between separating alpha and beta. It all depends on how you define the risk factors.

Thursday, May 03, 2007

Stop CEO Whining

SOX while bothersome, is not causing the decline of American capital markets says a new paper. CEO's should look inward.

Tuesday, April 17, 2007

Saturday, April 14, 2007

Nothing to do with Succession Plans.

Nothing to do with succession plans. Who was the genius at the WSJ to call Purcell to ask for his opinion on Pandit?

"Vikram is a brilliant guy and he's got a real sense for markets and risk and an ability to lead people to the right place," says Philip Purcell, the former Morgan Stanley chief executive. "He'd be a net plus for Citi."

Wish he'd said that in April 2005.

Friday, April 13, 2007

Markets vs Government Solutions

This is one of many in in the never ending debate. But not a bad summary with Global Warming as the topic.

Wednesday, April 11, 2007


The real problem is much deeper: its not just Imus.

Who loses from Subprime

Not the big banks. The tranches and individual bonds were sold off to investors looking for high yields. What do Americas do when their crazy investments don't turn out: lawsuits.

Tuesday, April 10, 2007


My favorite movie chase scene is explained somewhat by the phenomena of parkour, which is highlighted in No Obstacles.

Wednesday, April 04, 2007

Subprime Victims

Who are the subprime victims? The borrower or the lenders? There will be alot of press and regulatory efforts to address both sides.

Thursday, March 29, 2007

Truth hurts

The non-pc editorial from the Boston Globe on how to improve return on social programs: cut out the bottom decile.

Free Trade

I am glad I waited a day to post on the Blinder article on the front page WSJ. Mankiw's response sums up my feelings. But the comments should be read as well. As it is often said "reasonable people can disagree" are American jobs more important than foreign jobs?

Saturday, March 17, 2007

Perma bear

One of these years Steve Roach will be right again.

American Foreign Policy After Iraq

Nye, like Brzezinski, sees the world in a more complex way than the administration, congress or pundits. Power is the ability to get the outcome one wants. The distribution is three dimensional: military relations (unipolar, economic relations (multipolar) and transnational issues (climate change, pandemics, terrorism) where power is chaotically distributed. Clearly most see only the first and misunderstand the latter two

Friday, March 16, 2007

Second Chance

I remember wondering while reading Zbigniew Brzezinski's " The Fragile Blosom:crisis and change in Japan", how Brzezinski could have so many insights about an area which is admittedly not part of his expertise. He was able to do this because of his sophisticated and complete world view. It remains to me one of the best books on Japan's role in the world and has stood the test of time.

His new book the Second Chance confirms his place as one of the best thinkers on foreign policy that we have. He sees the biggest danger now is that America has a notion that we are the forcesof good against evil and our moral superiority justifies immoral acts. Bush has squandered credibility, legitimacy and respect for our power.

It also confirms John Stewart's place as one of the more insightful book reviewers that we have.

Thursday, March 15, 2007


Some self promotion by Mohamed El-Erian in the NYT and FT adds little to insights given during private talks. But he has a different attitude towards market timing than either Meyer or Swenson: he thinks he has an edge.

Monday, March 12, 2007

Learning from history

A great article about trade and baseball, Japan and China.

Sub prime

NEW lost financing today. Interested to see the impact on MS earnings. Lots of views on the subprime: bearish from CS and more sanguine from of course the WSJ.

FT on Yen Carry Trade

The FT supports my view that the yen carry trade is not all that important except to pundits.

Sunday, March 11, 2007

Guns, Germs and Steel

Jared Diamond in Gun Germs and Steel writes to a more popular audience than Karl A. Wittfogel did in Oriental Despotism: A Comparative Study of Total Power but comes to the same conclusions. Environment makes societies. Jared says that the availability of crops and animals and the orientation of the continent (east west versus north south) led to development of some cultures faster than others. I didn't buy the environment idea when I read Wittfogel and I don't buy it in the infinitely more entertaining Diamond. There is more to the development of cultures than the accident of geography. People and peoples make choices and individuals do matter.

Chinese Herbal Medicines

Will the FDA change its approach to herbal medicines? It has established a botanical review team and is looking at 250 drugs in clinical trials.

The end of the Beginning?

Mortgage market has made the front page of the NYT. Will Time and Newsweek be far behind? Is that a sign of the end of the selloff? There are signs that there will be pain in the higher end as well.

Friday, March 09, 2007


Did a sell off in China cause the correction last week. If so, why did a bigger sell off in February not cause the market to sell off then? And who has the yen carry trade on hedge funds or Japanese individuals?

Tuesday, March 06, 2007

The politics of Alternative Energy

The simplest answer to reducing the use of oil is a straight forward tax on oil. Which is why it will never happen.

New Data Feeds

Always looking for new sources of data. One like this Dow Jones offering which has news has been on my request list for a long time.It is called Dow Jones Elementized News Feed" today. The feed delivers news items, such as economic indicators and corporate earnings

Friday, March 02, 2007

Wednesday, February 28, 2007

Monday, February 26, 2007

Look at Recent History with Japan to Understand China

Larry Summers was the under secretary to the Treasury and negotiated trade and market opening with Japan in the early 90's.

Friday, February 23, 2007

The Fed Looking at Hedge Funds

The Bush administration has rejected more oversight of hedge funds but the regional Fed Branches are increasing their understanding.

Room to Read

Room to read gets a big boost.

Japanese Shareholder Activism

Local boy Scott Callon leads a Japanese shareholder fight to victory. Tokyo Kohtetsu is up more than 30% since Ichigo began buying.

The articles are also revealing about press relations. The WSJ journalists are good and sympathetic friends while the NYT (Reuters story) gets the bio all wrong.

Thursday, February 22, 2007

For Yale

Yale's Swenson continues to shine.

Yellen on Housing

SF Fed's Yellen on the housing problem:

"The bottom line for housing is that the concerns we used to hear about the possibility of a devastating collapse—one that might be big enough to cause a recession in the U.S. economy—while not fully allayed have diminished. Moreover, while the future for housing activity remains uncertain, I think there is a reasonable chance that housing is in the process of stabilizing, which would mean that it would put a considerably smaller drag on the economy going forward."

Tuesday, February 13, 2007

Friday, February 09, 2007

Christmas Presents for Hedge Fund Managers

What else can explain the year end effect?

What Inequality Matters?

The Economist points out that sibling inequality accounts for three quarters of all US inequality and inequality among nations is high

Harvard Management

Mohamed El-Erian spoke at the Harvard Club of New York yesterday.

Why do Endowments outperform?
1) Simplicity of Mission
Enhance and preserve the purchasing power of the endowment
Endowment pays for 30% of the running costs of the university.
Pays 15% of the financial aid - but the absolute dollar amount has doubled over last five years.
2) Permanent Capital
Long investment horizon
AAA rating.
3) Right asset allocation versus the right amount of return and risk.
Right Vehicles
Right risk management

What is Changing
1) Vehicles are changing
What are the borders among geographies and instruments?
Derivative products have reduced barrier to entry (exotic mortgages make home buying easy)
ETF's have made international investing cheap
2) Risk factors are evolving
What are the new risk factors
Sovereign risk has decreased - how to measure emerging market risk?
As sovereign risk has decreased bottom up opportunities are available in many markets.
3) Asset allocations are changing

The Environment is Different
1) Huge imbalances
Trade and capital flows
2) Realignment of the global economy
Huge wealth transfer
Commodity prices and cheap labor have moved wealth to the poor but
"the irony of our times is that the poor countries are using surpluses to fund rich countries"

The hybrid model of management
Internal versus external.
AAA rating
permanent capital
Capacity of managers
Cannot play catch up
Cannot pay thru distribution of equity
Nor can the enterprise value of the organization be realized.

Tuesday, February 06, 2007

Former Treasury Secretaries Sounding More Reasonable

Snow is the voice of reason on SS and SOX now that he is out of office. Just raise the cap on ss. SOX is not that bad; "You do not want to (weaken) corporate governance reform in the face of corporate scandals."

Why aren't companies like the NBA?

I thought it would be more efficient if all salaries were revealed. Here the economist tells why it might never happen.

Monday, February 05, 2007

Globalization and Inequality

Tim Worstall sums up the two "problems "of Globalization and Inequality.

"Yet in this particular instance I find that my own answer is quite simple. Those poor who are getting richer in other countries are not moving from one level of luxury to a slightly higher one. They are moving from destitution, from not knowing where the next meal is coming from, to something close to a middle class income. They are doing this in their hundreds of millions, across the globe, and that has to be a good thing."

Brad Delong agrees with this but still outlines "an unequal society cannot help but be an unjust society" because of the fact the some are able to capture more than they deserve.
And the Angry Bear thinks it is too simple an explanation.

Greg Mankiw adds
To what extent is inequality of outcomes a source for concern in and of itself?

And Bernake
adds the point in his speech "The Level and Distribution of Economic Well-Being" that inequality has increased in all professions, including professional sports.
Therefore something more subtle is going on than rich CEO's paying themselves.

Sunday, February 04, 2007

Saturday, February 03, 2007

Headline: Politician Speaks the truth

Chirac speaks the truth about Iran, and then is force to retract it. At this point only containment will work. The only other recent example of this kind of straightforwardness is Gavin Newsom.