http://www.boston.com/news/local/massachusetts/articles/2009/11/23/nonprofit_stocks_labs_worldwide_with_boston_area_throwaways?mode=PF
Seeding labs in Africa with old lab equipment from the US. A great cause, and congratulations to Paul and the others for getting some much-deserved recognition.
Monday, November 30, 2009
A concise list of problems with the proposed healthcare reform
Cowen lists the incentive problems with health reform:
"The biggest problems with the proposed reforms have to do with the incentives created by the mandates. That includes the incentives for would-be purchasers (better to just pay the fine and remain outside the pool), the incentives for the subsidized (very high implicit marginal tax rates), the incentives for employers (look for illegal aliens), the incentive for doctors to stop treating Medicare and especially Medicaid patients, and the incentives for the insurance companies (there's probably a way to scare off high-risk customers or otherwise game the customer carry requirements)."
The public option is a separate debate from this.
Is it better for workers to have no retirement advice at all, or retirement advice from someone who stands to benefit? My instinct would be the latter, because there are certain things advisers will talk about (like asset allocation) that are far more important than the specific products for 99% of people.
The problem with a conciliatory foreign policy is that people are hard to pacify
China still mistreats its citizens; it's important not to forget that
Krugman's jobs program would be ok, but it would need to come with 2 things: it would need to replace welfare beyond a certain short period of time for those able to work, and it would need to pay lower than minimum wage. In that sense, it would employ unemployed people without keeping people on the government dole. Becker's program is much more conventional, and much more likely to work, but the timing is hard to see.
Damodaran and Mankiw point out that a financial-transactions tax is hard to do because financial transactions can just move offshore
Friday, November 27, 2009
The Problem with High Frequency Trading
There are a lot of really bad ideas about there about how banks and financial markets work that seem to be working their way into financial reform. The notion that "Too Big To Fail" is preventable by breaking up large firms is one reasonably stupid set of ideas, as outlined in a prior post (here: http://tfideas.blogspot.com/2009/11/too-big-to-fail-stupid-concept.html). This post is about high frequency trading.
There is a large contingent of people, Wall Streeters and otherwise, who claim that high frequency trading is a good thing for the market because it increases market liquidity. They use this argument to claim that HFT shouldn't be regulated or taxed.
The problem with this claim is that high frequency traders buy and sell stocks that were posted for trading anyway.
Think of it this way:
Say I have 10 shares of Microsoft, and I'm willing to sell it for $80 (my "ask"). If high frequency traders came in and bought my $80 shares, set them at $80.02, and then flip them moments later to someone who came into the market at $80.02, they didn't add liquidity to the market. All they did was take $.02 from someone who would have been able to buy it at $80 anyway - my shares were already there. This has big implications.
For liquidity to truly be added, there must be a deep pool of equity from which I can transact. Microsoft is a large company, so there is lots of equity to transact - If I'm in at $80, there are probably a thousand other sellers willing to come in for $80, $80.01, $80.02, $80.03, etc. at any given time, and a thousand buyers on the other side of that willing to buy for $79.98, $79.97, etc. A small company, (call it Mini-Microsoft) however, probably won't have that many people or shares selling at a given time - if I'm willing to sell my 10 shares for $80, there may not be anyone else willing to sell til 10 more shares at $82. To buy more shares than I have to offer, you have to pay a lot more ($2) for the next batch of shares. They have an illiquid market for their shares.
Thus, more liquidity requires more people willing to participate in the markets to buy or sell the shares and stick with the decision - in other words, something that increases liquidity actively adds shares to the market that wouldn't have been sold otherwise. The small company needs new shares at $80.01, $80.02, etc.
The problem is that high frequency traders don't add any additional shares to the market - they serve as a pool of shares that had already been posted. So for the small company above, a high frequency trader comes in and buys my 10 at $80, sells at $80.02 and pockets profit. Someone else comes in and buys that 10 at $80.02 and sells for $80.05. So the process goes. The buy price follows from $79.98 upward because high frequency traders know they can buy for that price and then repost a few cents higher. The whole process stops whenever you hit enough liquidity that you can't keep marking your prices up a few cents and reselling, so in this case, if there were more shares at $82, then you can only keep going until my 10 shares hit $82. If you try and post at $82.01, you won't sell because $82 is available. In order to amass a position larger than the original $80 amount, you'd still need to jump up to the $82 price - you just pay more for the first batch of shares.*
So in the small company example, if you're a buyer of Mini-Microsoft and you want to buy 20 shares, if there's no high frequency trading, you can buy 10 at $80 and then you buy 10 at $82. You paid an average of $81 per share and got your shares. If there is high frequency trading, and you can't act as quickly, then you have to buy all 20 at $82 - you paid an average of $82. All 20 shares are gone in both cases. The HFT algorithm pocketed $20 for the bankers that came out of the pocket of real investors. There are no more shares out there than there were... HFT algorithms just vultured what you would have had.
*Two points. Firstly, this exact process can work on the short end too - I can short a stock downwards to the buy price. Either way, the original spread is artificially narrowed without any additional shares. The other point is that if new shares come in below my original 10, say at $79.99, because something bad happened and the value of the company dropped, then the HFT people would have to mark down to the new price... but the HFT people haven't added any shares, they've only flipped them at a loss that I would have taken. Empirically, losses for good HFT algorithms happen less often than gains, which is why they do it at all. The net gains made by HFT come straight out of the pockets of investors.)
Did Krugman just have three good articles in a month?
A reasonably measured look at Obama's problems
Immigration reform needs to loosen restrictions, not toughen them.
Federal ethics laws prohibiting the use of corporate lobbyist aircraft should not be circumvented
Krugman argues for a financial transactions tax. It would need to be low - you don't want to discourage investment for longer periods of time - but if it successfully reduced high frequency trading, that'd be a very good outcome.
why obama isnt changing washington
education reform loses its teeth
This healthcare bill needs to die
Iran is a disaster
How to reduce turkey intake on Thanksgiving!:
"Move to chopsticks!" he exclaimed, making bites smaller and harder to take. If the chopsticks are a bit extreme, smaller plates and utensils might work the same way. Study after study shows that people eat more when they have more in front of them. It's one of our predictable irrationalities: We judge portions by how much is left rather than how full we feel. Smaller portions lead us to eat less, even if we can refill the plate.
Speaking of which, Ariely suggests placing the food "far away." In this case, serve from the kitchen rather than the table. If people have to get up to add another scoop of mashed potatoes, they're less likely to take their fifth serving than if they simply have to reach in front of them.
"Start with a soup course," he says. That is what economists refer to as a default: Rather than putting everything on the table for people to choose, you begin by making the choice for your guests. If the first course is relatively filling and relatively low in calories, everyone will eat less during the rest of the meal.
Indeed, it's not a bad idea to limit the total number of courses. Variety stimulates appetite. As evidence, Ariely brings up a study conducted on mice. A male mouse and a female mouse will soon tire of mating with each other. But put new partners into the cage, and it turns out they weren't tired at all. They were just bored. So, too, with food. "Imagine you only had one dish," he says. "How much could you eat?"
What you eat, of course, is also important. Studies show that people aren't very consistent in the amount of calories they eat each day, but they're very consistent in the volume of food they eat each day. Thanksgiving is an exception to that consistency, but probably not to the underlying rule. Satisfaction doesn't depend on caloric intake; low-calorie, high-fiber foods and foods high in water content are filling. Thus, the more broccoli rabe there is at the table, the better.
Some cool wikipedia articles:
Wednesday, November 25, 2009
Microfinance, nutrition and framing
A tip from a friend, John: you could replicate all of the welfare benefits ever achieved through microfinance by letting 3,000 more unskilled Bangladeshis into the US to work. 3,000 is nothing, by the way. Another indication that our immigration restrictions a) leave colossal amounts of money on the table for the US and b) are far more antihumanitarian than anything else we do. Does anyone know where the study can be found?
"What caught the attention of Michele Belot and Jonathan James, though, was the way Oliver's project had been implemented. Belot and James – economists at Nuffield College, Oxford, and at the University of Essex respectively – noted that the campaign had created a near-perfect experiment. The chef had convinced Greenwich's council and schools to change menus to fit his scheme; he mobilised resources, provided equipment and trained dinner ladies. Other London boroughs with similar demographics received none of these advantages – and indeed, because the programme wasn't broadcast until after the project was well under way, probably knew little about it. The result was a credible pilot project. It wasn't quite up to the gold standard of a randomised trial, but it wasn't far off.
Thanks to the UK's exhaustive school testing regime, Belot and James were able to track pupils' performance in some detail. They concentrated on primary schools, figuring that secondary school pupils could (and probably would) avoid eating school lunches that were too worthy. (This is surely correct. My own habitual sixth-form lunch was four bars of chocolate – a pound a day well spent.)
Their answer – a provisional one, since they are still refining the research – is that feeding primary school kids less fat, sugar and salt, and more fruit and vegetables, has a surprisingly large effect. Authorised absences, the best available proxy for illness, fell by 15 per cent in Greenwich, relative to schools in similar London boroughs. And relative to other boroughs, the proportion of children reaching Level Four in English rose by four and a half percentage points (more than six per cent), while the proportion of children achieving Level Five in Science rose by six points, or almost 20 per cent. There is some uncertainty about these numbers: they could be substantially smaller or larger. There is not much that can be said with confidence about scores in other subjects, or other achievement levels – although the academic benefits of the Greenwich lunches appear to be positive, if tentatively so, in almost every case."
http://news.bbc.co.uk/2/hi/uk_news/magazine/8319307.stm
Politicians should talk about the cost of things as a % of GDP, not in millions and billions.
Logically questioning some of the conclusions of choice theory.
choice theory, privacy, and Obama's staffers
Choice is less demotivating than believed. Also correctly points out that competition increases quality - so choosing between 2 trivially different things can only happen because there ARE 2 trivially different things - if there were only one, it would suck far worse than either of those 2 things.
Interesting. I've always got the sense that's how Obama treats foreign policy - keeping our allies at arm's length (and sometimes insulting them) while trying to engage opponents. The fact that he does it with his staff also is telling.
Agreed - personal data needs to be safeguarded
From mankiw's blog... i definitely laughed...
No Child Left Behind improved math scores but not reading scores.
It's the economy, stupid
One big difference between Washington and private markets is that politicians think everything they do is free-standing. Markets, however, combine all the potential costs of Washington's policies and then decide whether to invest, or not. Consider what private decision-makers see in their future:
A 2,074-page, trillion-dollar health-care bill to redesign 17% of the U.S. economy. A carbon tax—cap and trade—that remains an Obama priority ahead of the Copenhagen climate summit next month. A falling dollar and gyrating commodity prices, with no idea where those prices will go next.
Democratic liberals are talking about an income tax surcharge to pay for any commitment in Afghanistan. Card check, to expand unionization of the private economy, remains a priority. Domestic discretionary spending in fiscal 2010 is set to rise at 12.1%, with inflation near zero.
Agreed - the administration's "Race to the Top" program is a step in the right direction, and it should resist pressure to dilute it.
My response? Geithner's done a solid, if imperfect, job. I haven't seen Summers behind the scenes but I'd bet he's not the reason for the economic craziness that's been coming out of the government. If anything, we need a new Congress.
Tuesday, November 24, 2009
Buffett on inflation
"The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation, or pays no income taxes during years of 5 percent inflation."
Lieberman takes a stand, foreign policy, financial reform and the deficit, homebuyers, criminalization...
Joe Lieberman, one of the few Congressmen I like and can't fault much, takes a principled stand.
Forcing bankers to finance the deficit
Comparing Carter's foreign policy with Obama's. It's not flattering.
The homebuyer's tax credit could bankrupt the FHA and worsen the crisis
Overcriminalization is a problem
Turkey granting rights to minority Kurds
Obama's foreign policy- calculated openings without a middlegame
This is messed up
Monday, November 23, 2009
A useful inflation framework re: TIPS and gold
TIPS are a reasonably new creation (last decade or decade and a half) by the US government to sell bonds that are protected against inflation.
TIPS are basically yielding 0 right now, which has made the spread between TIPS and normal bonds actually seem to be pretty small.
In isolation, TIPS don't really face the 0 lower bound that normal bonds do, because I may be willing to pay a small fee in real terms to avoid getting smashed by inflation.
The problem is that gold is nominally a vehicle which allows you to earn 0 but not get smashed by inflation, so the existence of gold provides a 0 lower bound on TIPS.
Now, this is imperfect, because gold is currently in a bubble, but people don't necessarily realize that.
I will say that I'd rather have TIPS at 0 interest rates than gold at 1100. Inflation's almost inevitable (that or another recession) but 1100 gold is really, really expensive.
Btw, the fact that so many people are willing to buy gold at the price it's at makes parts of Krugman's "phantom menace" article (http://krugman.blogs.nytimes.com/2009/11/20/interest-rates-the-phantom-menace/) seem silly.
Strategy - political, military, theoretical...
A chart that should terrify progressives and liberals. The last section was particularly interesting.
Saddam's strategic thinking, and the difficulties with assessing the motives of rogue regimes
another reason I hate unions. They're considering filing a grievance against a boy scout who cleaned up trails.
New research by Alesina and Ardagna suggests that reducing spending is better than increasing taxes for reducing debt loads and spurring GDP.
Debt and Conservatism
A 1% interest rate hike would cost Americans in gvt debt payments the equivalent of the combined annual budgets of the departments of energy and education.
Conservatism has some thinkers but no politicians to champion them.
Friday, November 20, 2009
Krugman writes ANOTHER good article! WOW!
http://online.wsj.com/article/SB10001424052748704204304574543971792524530.html
The UN is a joke. It's hard to see why anyone takes it seriously anymore.
http://www.nytimes.com/2009/11/20/opinion/20krugman.html?_r=1&ref=opinion
Krugman writes ANOTHER good article! WOW! This time, it's about the stupidity of buying AIG's commitments at 100% on the dollar. (Of course, buying them at fair value actually means AIG's creditors end up in trouble, because their balance sheets required the 100% of face value in order to stay afloat, but at least then you spend less money and can use what you save to bail out those of AIG's creditors who need it more without paying off the banks who are in good shape anyway- in effect a more targeted approach, and one that doesn't reward banks just for contracting with the weakest link, AIG)
http://www.nytimes.com/2009/11/20/opinion/20brooks.html?adxnnl=1&ref=opinion&adxnnlx=1258736688-0KlNDf9DXS8BzuhmaiV1Fw
and then Brooks reminds us why Krugman has the growingly poor reputation among other economists that he does. Krugman was pushing for bank nationalization because he didn't like bankers, and the way things have borne out, that would have been an awful, awful idea.
http://www.nytimes.com/2009/11/20/opinion/20marshall.html?ref=opinion
Do it. Build a settlement on the moon. Every other major NASA program has returned ~800% in investment and a countless amount in quality-of-life improvement due to scientific discovery. This one should be no different - we have no idea what, but it will be something. One major question will be of power, because transporting nuclear fuel from earth to the moon is hard. Clean energy actually could end up a focus, unintentionally. So will sustainable agriculture.
The UN is a joke. It's hard to see why anyone takes it seriously anymore.
http://www.nytimes.com/2009/11/20/opinion/20krugman.html?_r=1&ref=opinion
Krugman writes ANOTHER good article! WOW! This time, it's about the stupidity of buying AIG's commitments at 100% on the dollar. (Of course, buying them at fair value actually means AIG's creditors end up in trouble, because their balance sheets required the 100% of face value in order to stay afloat, but at least then you spend less money and can use what you save to bail out those of AIG's creditors who need it more without paying off the banks who are in good shape anyway- in effect a more targeted approach, and one that doesn't reward banks just for contracting with the weakest link, AIG)
http://www.nytimes.com/2009/11/20/opinion/20brooks.html?adxnnl=1&ref=opinion&adxnnlx=1258736688-0KlNDf9DXS8BzuhmaiV1Fw
and then Brooks reminds us why Krugman has the growingly poor reputation among other economists that he does. Krugman was pushing for bank nationalization because he didn't like bankers, and the way things have borne out, that would have been an awful, awful idea.
http://www.nytimes.com/2009/11/20/opinion/20marshall.html?ref=opinion
Do it. Build a settlement on the moon. Every other major NASA program has returned ~800% in investment and a countless amount in quality-of-life improvement due to scientific discovery. This one should be no different - we have no idea what, but it will be something. One major question will be of power, because transporting nuclear fuel from earth to the moon is hard. Clean energy actually could end up a focus, unintentionally. So will sustainable agriculture.
Thursday, November 19, 2009
Texas bans... marriage?
oops...
http://www.examiner.com/x-4107-International-LGBT-Issues-Examiner~y2009m11d18-Texas-AG-candidate--Gay-marriage-ban-eliminates-all-marriages-in-state
it'll never get interpreted that way, but it's still pretty funny. That's what you get for homophobia - humiliated by the rest of us.
it'll never get interpreted that way, but it's still pretty funny. That's what you get for homophobia - humiliated by the rest of us.
The Healthcare Reform Bill will Kill R+D, and one solution to that.
Note the quote from the McKinsey report on health reform:
"Big Pharma faces the largest potential revenue risk," the document predicts. Partly that's because of existing trends in the drug industry. But it's also because studies of comparative effectiveness are sure to reduce the sale of drugs that don't work as well. McKinsey suggests that the drug industry can survive and even thrive in this environment "by focusing on 'productive' innovation (supported by strong evidence), collaborating with payors and providers in new ways, and revamping commercial and R&D models to significantly improve effectiveness and efficiency."
Good, you say?
Here's the problem.
Researchers rarely know what R+D is going to be good, ex=ante. The best research is often accidental - things useful for small issues become useful for much bigger problems (if I recall correctly, penicillin, digitalis and botox are great examples of this). If drug companies "focus" on what looks most promising, they will be focusing on what looks most derivative, because derivative things are easy to make calls on. Truly groundbreaking research requires the ability to risk failure, and tanking companies' potential revenues from a drug crushes any incentive to take on very risky projects to begin with.
A requirement of X% to basic research would be good, but unenforceable.
Another solution presents itself, though: capitalizing R+D and making the amortization 75% tax deductible could be awesome... you'd basically increase medical research by drug companies by an entire order of magnitude (also depriving the government of billions in taxes, but that's probably a worthy expenditure).
Tax writeoffs would have to be able to be carried forward to ensure that little companies can still compete when they don't earn revenue. Would this create situations where big companies buy little companies with no real drugs but lots of tax writeoffs? Yes, but that's not a bad thing... it still encouraged past research, and just cuz it failed doesn't really matter. It can't be 100% deductible, or biotech startups would basically be riskless for VCs, encouraging stupid startups that indirectly waste government money. 75% still leaves the company and its investors on the hook for 25% of the costs, which means that selling your tax writeoffs is an exit strategy for good startups while still not palatable to bad startups. It'd encourage possible-blockbuster-but-likely-to-fail startups, which is a plus, not a minus.
In any case, which drug company wouldn't prefer to dedicate a high % of revenues to research that can increase revenues in the future, instead of slightly less (20% less, if you use 75% writeoffs) revenues to the government in a manner that can't increase future revenues?
In any case, unless you decrease risk by a massive amount (which that measure does by making R+D up to a certain point a costless tax-replacement), the healthcare bill will tank meaningful R+D.
Immigrants don't "steal" jobs
In this study, immigration didn't reduce the number of jobs available to non-immigrants. They created new jobs and stimulated the productivity of the regions they entered.
The health bill WILL increase the deficit
This has been a persistent problem of every bill - the health bills are all just barely deficit neutral... despite collecting premiums immediately and not starting benefits for 4 years. 6 years of payouts equaling 10 years of premiums is definitely NOT deficit neutral.
The public option lives, and why that's bad
I've been asked if I prefer the Senate's version of the "public option" (one which states can opt out of) to the House's.
The answer is not really.
The problem with an "opt-out" principle is that even if you don't think ANYONE should have a public option, you'd be stupid not to take the public option if everyone else is taking the public option, because your state's taxpayers are paying for part of it either way.
Thus, even if you oppose a public option, it is completely irrational to opt-out. You'd be better off if nobody (not you or anyone else) had a public option, but if you can only control your own state, and other states have the public option, you are better off having it than not having it. Thus, an "opt-out" public option is no better than a true public option.
The reason why it may be a little bit better is that voters aren't always rational, so if they shoot down the public option on principle, we'd be marginally better off for a while (until the state decides to opt-in, which is almost inevitable eventually). The other problem is that enrolling 70% of the country in one health plan run by politicians seeking reelection, not good and fair medical care and medical progress, is that the market power issue is not appreciably better than if 100% of the country were enrolled. This poses an existential threat to things like medical R+D and other medical research, abortion and quality and quantity of doctors.
(and yes, a public option will eventually capture 100% of the country... it may take a while, but it's also almost inevitable. If taxpayers are going to be supporting the public option, why would I pay partial medical premiums to the public option through taxes and full premiums to my private insurance when I can receive insurance from the public option for just one full set of medical premiums? Another example of "I'm better off if I don't have it and nobody else has it, but once everyone else has it, I basically don't have a choice")
Accounting, the judiciary, and travel/work visas
A really lousy judge is being appointed to the Federal District Court
One of the dumber arguments I've seen in a long time, trying to say that the Fed should be directly accountable to Congress.
The importance of strong, independent accounting standards
America should adopt the working holiday
Wednesday, November 18, 2009
What makes nations rich? What makes men live longer? How do you earn from life insurance?
Free elections, more than any endowment, seems to make the biggest difference in poverty. See Nogales or N. Korea/S. Korea or Botswana.
on using your life insurance money to preserve you cryogenically and save for your revival
a strange piece on why men who marry smart women live longer - smart women nag men to be healthy. Haven't read the study, so I don't know if it identifies intelligent women well, address correlation vs causation, or anything else.
Environment, Iran and Immigration
Cash for Caulkers! Federally funded weatherization?
A good reason to support clean energy even if you (wrongly) don't believe in global warming or (rationally) aren't quite sure how to balance the economy, international trade, national security and climate change with a climate-change bill
Iran does not act in good faith, so its foolish to expect them to
http://online.wsj.com/article/SB10001424052748703683804574533612324601766.html
The US makes it unnecessarily and stupidly difficult for immigrants to work here, including the high skill immigrants we desperately need.
The US makes it unnecessarily and stupidly difficult for immigrants to work here, including the high skill immigrants we desperately need.
Tuesday, November 17, 2009
Flier on the Health Reform Bill
he believes reform is necessary, and still believes this bill deserves an F:
http://online.wsj.com/article/SB10001424052748704431804574539581994054014.html
http://online.wsj.com/article/SB10001424052748704431804574539581994054014.html
how to identify someone giving you bad advice
The worst career advice I ever gave was to my brother's college roommate, Robert Buckley. He was one year out of college when he asked me if he should quit healthcare consulting to become an actor.
I said, No, that's the dumbest idea I ever heard.
He told me he thought he had talent, and then (like I wasn't against the idea enough) he told me he was dating some girl he met in Vegas, and she is going to be an actress, and she said that he had talent.
I actually questioned how my brother could be such good friends with someone who was so stupid. I tried to be patient, but mostly I told Rob that everyone in LA has a girlfriend who thinks he has acting talent. I thought maybe his best career move might be to find a girlfriend who was impressed with his healthcare consulting talent.
But really, he did not think he had any future in healthcare consulting. So I became a largely useless advisor to him. And then my brother forwarded me a trailer to Lipstick Jungle and there was Rob: naked, with Kim Raver. And he looked so good. Who knew? And more importantly, who knew I could give such poor career advice?
I think the reason that I gave such poor advice is that I had such strong preconceived notions about the acting career. But I actually don't know anything about making it big as an actor. I only know that when I played professional beach volleyball in LA we were constantly surrounded by casting agents and entertainment industry types. And I learned that the competition to get anywhere in acting is so tough that you should buy lottery tickets instead.
It's ironic, though, because I'm a writer, where the odds are not much better. And both actors and writers generally ply their trade because they love it, not because they think the odds are great. If someone asks me if they should become a writer, I repeat the advice I received in graduate school: No. Try anything else first. Writing is too hard.
And I was thinking the same thing with acting: No. Big no. But I needed to adjust my advice. I needed to be able to see when I was looking at someone who could not feel fulfilled if they did not do this type of work.
So every week I watched Lipstick Jungle (I loved it, by the way—for the writing, of course) and I thought about how I could have given such misguided career advice. And I figured out that the hallmark of a bad advisor is to not understand where she is coming from, what preconceived notions she brings to the table.
I didn't think much more about this until I was in Menlo Park last week for the roundtable organized by Ben Casnocha and Chris Yeh. They posed questions to the group of entrepreneurial types: What makes good advice? What makes bad advice?
The answers were interesting, and each shed more light on why I gave Rob such bad advice. Here are some ideas that came from the group:
1. A good advisor asks good questions. Mostly in order to understand the goals of the advisee. No advice is given in a vacuum. Understand that an advisor can probably give you great tips on how to get to your goals, but really, the hardest part of making any decision in life is understanding your goals in the first place.
So your advisor needs to be very attuned to your goals and where you are in your life. This is why the best advisors ask questions rather than make proclamations. Often a good advisor is more sounding board and less Magic-8 ball.
2. A good advisor is a good listener. Advice is so much about understanding the particular situation that if she is not listening most of the time, then you are probably receiving advice based on incorrect assumptions that actually apply to a different circumstance. But it's hard to listen when you are a subject matter expert.
In general, all situations sound the same when you give advice to the same types of people all the time. The trick for the advisor is to stop focusing on the similarities, which make her job easier, but to focus instead on the differences, which is more challenging—but makes for better advice.
3. Good advice is not fly-by-night. Advisors are best when they really know you, and they really know the arena where the issues live. So cultivate a relationship with someone who is a subject matter expert, and then he can give you ongoing advice that is relevant to your particular circumstances based on both what you are telling him, and on the relationship that provides a context for your questions.
Wondering how you are going to attract this kind of advisor? Be one yourself. Giving good advice is the same thing as giving a good kiss. You attract what you deserve. Not in a Secret sort of way, but in a way where if you are practicing good behavior then you will attract good behavior.
And, while I hesitate to give advice at the end of the piece about how advice should not be in a vacuum: You usually get in life what you expect to get. So expect good advice. And good kisses. And they will come.
On how to seek and take advice and mentorship
I have found that the best way to manage myself is by asking for a lot of help. The question is, how do you know who to take advice from?
The answer is not always intuitive. For example, you'd think that if Bill Gates wants to give you career advice, you should take it, right? I mean, the guy's had a pretty decent career. The problem is that if he doesn't care about your career, he's going to give you generic advice.
Here are five other counter-intuitive principles I have used to figure out who to listen to when it comes to my own career:
Listen to people who hate you. People ask me all the time how I put up with the level of criticism this blog draws. The interesting thing about taking advice from people who don't like me is that sometimes, they'll say things that other people wouldn't say because it would hurt me. I rely on my gut in terms of whose criticism comes from caring and understanding and whose criticism comes from an obsessive need to take me down, but after I figure that out, I still pay attention to my critics.
Stop thinking your issues are especially difficult. The most important piece of self-knowledge is that our problems are not unique. If you had problems no one else has, then no one will understand you enough to help you. But the truth is that it's pretty easy to see what someone else should be doing if you have distance from a problem. So don't be a snob about who to take advice from. You don't need a "career expert." You don't have the world's most sophisticated problems. If you are articulate about framing your problem, most of your friends can give articulate, useful guidance for solving the problem.
Less experience often means better advice. When it comes to finding a mentor, the most effective mentors are 3-5 years ahead of you in the workplace. Those are the people who have the best memory of what it was like to be where you are. In today's workplace this is especially true. The rules are changing so quickly, that many times someone who has a lot more experience than you do will also be out of touch with what the workplace is like today. I find that this is a big problem when people rely on their parents for advice.
Be wary of people whose lives look perfect. Happiness researchers have known for a long time that if you ask people directly if they are happy in their career, most of the time they'll lie. This makes sense becuase if someone has invested tons of time in getting to where they are, it's a really tough thing to say they're unhappy; then they'd have to take action to change. So you're often better off just watching people. Many people hide their lives – they want you to think things are going perfectly, and they're always making great decisions, so they don't tell you the parts that are a mess. But sometimes, you come across people who are willing to show you the messy parts, and you can learn the most from these people. This is why I like reading about celebrities. They can't hide as much as non-celebrities, so I can learn more about what works and what doesn't.
Stick with people who give you bad advice. If you're getting advice from someone who has never steered you wrong, then you're not asking this person enough questions. After a while, someone who has given you a lot of advice will falter. Because no one is perfect, and no one can do as well at running your life as you can. So if you find someone who is giving good advice, push harder, until you get to their limit. Everyone gives bad advice sometimes, even me.
In some respects, bad advice might be better than good advice. Because what you really want is advice that makes you think in new ways about possibilities for yourself. So when it comes to taking advice, you still have to have your inner compass. You can't blame anyone else for where you end up. But, in a way, that's good news. Because if you are responsible for where you are, if you don't like it, you can get yourself to a new spot. This means that you should gather lots of advice, but be aware that sometimes, you need to ignore it. After all, what is the fun of life if we can't make our own mistakes?
Developing a Comprehensive Economic Strategy
A generally phenomenal article by Michael Porter. I don't agree with every prescription, but I agree with most of it.
"With the U.S. Election just days away, it has never been more important to consider what the next President must do to keep America competitive. In this time of crisis, Washington has focused on the immediate and the short term. Lost are the more basic questions we really need to worry about: What is the fundamental competitive position of the U.S. in the global economy? And what must we do to remain strong when other nations are making rapid progress?
The stark truth is that the U.S. has no long-term economic strategy—no coherent set of policies to ensure competitiveness over the long haul. Strategy embodies clear priorities, based on understanding the strengths we need to preserve and the weaknesses that threaten our prosperity the most. Strategy addresses what to do, but also what not to do. In dealing with a crisis, experience teaches us that steps to address the immediate problem must support a long-term strategy. Yet it is far from clear that we are taking the steps most important to America's long-term economic prosperity.
America's political system, especially as it has evolved in recent times, almost guarantees an absence of strategic thinking at the federal level. Government leaders react to current events piecemeal, rather than developing a strategy that unfolds over years. Congress and the Executive Branch are organized around discrete policy areas, not around the overall goal of improving competitiveness. Neither candidate has put forward anything close to a strategy; rather, each has presented a set of disconnected policy proposals with political appeal. Both parties contribute to the problem by approaching the economy with long-held ideologies and policy positions, many of which no longer fit with today's reality.
Now is the moment when the U.S. needs to break this cycle. The American economy has performed remarkably well, but our continued competitiveness has become fragile. Over the last two decades the U.S. has accounted for an incredible one-third of world economic growth. As the financial crisis hit, the rest of the American economy remained quite competitive, with many companies performing strongly in international markets. U.S. productivity growth has continued to be faster than in most other advanced economies, and exports have been the growth driver in the overall economy.
THE AGE OF ANXIETY
Yet our success has come with deep insecurities for many Americans, even before the crisis. The emergence of China and India as global players has sparked deep fears for U.S. jobs and wages, despite unemployment rates that have been low by historical standards. While the U.S. economy has been a stronger net job creator than most advanced countries, the high level of job churn (restructuring destroys about 30 million jobs per year) makes many Americans fear for their future, their pensions, and their health care. While the standard of living has risen over the last several decades for all income groups, especially when properly adjusted for family size, and while the U.S. remains the land where lower-income citizens have the best chance of moving up the economic ladder, inequality has risen. This has caused many Americans to question globalization.
To reconcile these conflicting perspectives, it's necessary to assess where America really stands. The U.S. has prospered because it has enjoyed a set of unique competitive strengths. First, the U.S. has an unparalleled environment for entrepreneurship and starting new companies.
Second, U.S. entrepreneurship has been fed by a science, technology, and innovation machine that remains by far the best in the world. While other countries increase their spending on research and development, the U.S. remains uniquely good at coaxing innovation out of its research and translating those innovations into commercial products. In 2007, American inventors registered about 80,000 patents in the U.S. patent system, where virtually all important technologies developed in any nation are patented. That's more than the rest of the world combined.
Third, the U.S. has the world's best institutions for higher learning, and they are getting stronger. They equip students with highly advanced skills and act as magnets for global talent, while playing a critical role in innovation and spinning off new businesses.
Fourth, America has been the country with the strongest commitment to competition and free markets. This belief has driven the remarkable level of restructuring, renewal, and productivity growth in the U.S.
Fifth, the task of forming economic policy and putting it into practice is highly decentralized across states and regions. There really is not a single U.S. economy, but a collection of specialized regional economies—think of the entertainment complex in Hollywood or life sciences in Boston. Each region has its own industry clusters, with specialized skills and assets. Each state and region takes responsibility for competitiveness and addresses its own problems rather than waiting for the central government. This decentralization is arguably America's greatest hidden competitive strength.
Sixth, the U.S. has benefited historically from the deepest and most efficient capital markets of any nation, especially for risk capital. Only in America can young people raise millions, lose it all, and return to start another company.
Finally, the U.S. continues to enjoy remarkable dynamism and resilience. Our willingness to restructure, take our losses, and move on will allow the U.S. to weather the current crisis better than most countries.
Yet what has driven America's success is starting to erode. A series of policy failures has offset and even nullified its strengths just as other nations are becoming more competitive. The problem is not so much that other nations are threatening the U.S. but that the U.S. lacks a coherent strategy for addressing its own challenges.
An inadequate rate of reinvestment in science and technology is hampering America's feeder system for entrepreneurship. Research and development as a share of GDP has actually declined, while it has risen in many other countries. Federal policymakers recognize this problem but have failed to act.
America's belief in competition is waning. A creeping relaxation of antitrust enforcement has allowed mergers to dominate markets. Ironically, these mergers are often justified by "free market" rhetoric. The U.S. is seeing more intervention in competition, with protectionism and favoritism on the rise. Few Americans know that the U.S. ranks only 20th among countries in openness to capital flows, 21st on low trade barriers, and 35th on absence of distortions from taxes and subsidies, according to the 2008 Global Competitiveness Report. We are fast becoming the kind of distorted economy we have long criticized.
Lack of regulatory oversight and capital requirements, in the name of liberalization and well-meaning efforts to extend credit to lower-income citizens, has undermined our financial markets. America underregulates in some areas while it overregulates in others.
U.S. colleges and universities are precious assets, but we have no serious plan to improve access to them by our citizens. America now ranks 12th in tertiary (college or higher) educational attainment for 25- to 34-year-olds. We have made no progress in this vital area over the past 30 years, unlike almost every other country. This is an ominous trend in an economy that must have the skills to justify its high wages. Instead of mounting a serious program to provide access to higher education, like the G.I. Bill and National Science Foundation programs of earlier years, Congress grandstands over the rate of endowment spending in our best universities.
The federal government has also failed to recognize and support the decentralization and regional specialization that drive our economy. Washington still acts as if the federal level is where the action is. Beltway bureaucrats spend many billions of dollars on top-down, highly fragmented federal economic development programs. Yet these programs are not designed to support regional clusters, nor do they send money where it will have the greatest impact in each region. For example, distressed urban communities, where poverty in America is concentrated, are starved of the infrastructure spending needed for job development. Again, no strategic thinking.
At a time when insecurity and job turnover are higher than ever, the U.S. also has abdicated its responsibility to provide a credible transitional safety net for Americans. It is no wonder Americans are becoming more populist, more protectionist, and more tolerant of harmful intervention in the economy. The job training system is ineffective and receives less and less funding each year. Pension security is eroding, and the most obvious step required to strengthen Social Security—slowly adjusting upward the retirement age—has not been taken. Improving access to affordable health insurance is a major worry for all Americans. Washington could take basic steps such as equalizing the tax deductibility of individually purchased insurance to assist those not covered by their employers. Yet the government has failed to do so.
HIGH COSTS, BIG HASSLES
Federal polices have hobbled America's entrepreneurial strength by needlessly driving up the cost and complexity of doing business, especially for smaller companies. Cumbersome regulation of employment, the environment, and product liability needs to give way to better approaches involving less cost and litigation, yet special interests block reform. The U.S. has become a high-tax country not only in terms of rates but also administrative hassle. Infrastructure bottlenecks, due to neglect and poorly directed spending, are driving up costs in an economy increasingly dependent on logistics. The U.S. is energy-inefficient, but public policies fail to promote energy conservation. Health-care costs are too high, but there is no serious effort to provide more integrated and efficient care.
Collectively, these unnecessary costs of doing business, coupled with skill gaps, are becoming significant enough to drive investments out of the country, including investments by American companies. Instead of addressing the real reasons for offshore investment, the parties spar over closing tax "loopholes," even though U.S. corporate rates are among the highest in the world. Where is the strategic thinking?
Trade and foreign investment are fundamental to the success of the U.S. economy, but America has lost its focus and credibility in shaping the international trading system. Our economy today depends on advanced services and selling intellectual property—our ideas, our software, our media. Yet rampant intellectual property theft and high barriers to competition in services tilt the world trading system against a knowledge-based economy.
With no strategy, the U.S. has failed to work effectively with other advanced countries to address these issues and has failed to assist poorer countries so they feel more confident about opening markets and internal reform. The U.S. has abdicated its strategic role in developing Latin America, our most natural trading partner. We have failed to engage meaningfully in Africa, the Middle East, and Asia to help countries improve the lot of their citizens. Our foreign aid is still tied to the purchase of U.S. goods and services, rather than the actual needs of countries. Congress fails to pass trade agreements with countries highly committed to our economic principles, such as Colombia.
A final strategic failure is in many ways the most disconcerting. All Americans know that the public education system is a serious weakness. Fewer may realize that citizens retiring today are better educated than the young people entering the workforce. In the global economy, just being an American is no longer enough to guarantee a good job at a good wage. Without world-class education and skills, Americans must compete with workers in other countries for jobs that could be moved anywhere. Unless we significantly improve the performance of our public schools, there is no scenario in which many Americans will escape continued pressure on their standard of living. And legal and illegal immigration of low-skilled workers cannot help but make the problem worse for less-skilled Americans.
The problem is not money—America spends a great deal on public education, just as we do on health care. The real problem is the structure of our education system. The states, for example, need to consolidate some of the 14,000 local school districts whose existence almost guarantees inefficiency and inequality of education across communities. Instead, government leaders haggle over incremental changes.
SAME OLD ARGUMENTS
We need a strategy supported by the majority to secure America's economic future. Yet Americans hear the same old divisive arguments. Republicans keep repeating simplistic free-market thinking, even though the absence of all regulation makes no sense. Self-reliance is preached as if no transitional safety net is needed. Some Republicans even argue passionately that the country should have no strategy because that would be "industrial policy." Yet the real issue is not picking industry winners and losers but improving the business environment for all American companies, something we cannot do without identifying our top priorities. Overall, Republicans seem to think business can thrive without healthy social conditions.
Democrats, meanwhile, keep talking as if they want to penalize investment and economic success. They defend unions obstructing change in areas like education, cling to cumbersome regulatory approaches, and resist ways to get litigation costs for business in line with other countries. Democrats equivocate on trade in an irreversibly global economy. They seem to think social progress can be achieved only at the expense of business.
To make America competitive, we have to get beyond this thinking. Political leaders, business leaders, and civil society must begin a respectful, fact-based dialogue about our challenges. We need to focus on competitive reality, not defending past policies.
A strategy would address each of the areas I have discussed. If we are honest with ourselves, we would admit the U.S. is not making real progress on any of them today. Efforts under way by both parties are largely canceling each other out. A strategy would direct our spending to priority investments that also put money into the economy, such as educational assistance and logistical infrastructure, rather than tax rebates. With a strategy, we would stop counterproductive and expensive practices such as farm subsidies and spending earmarks.
Is such strategic thinking possible, given America's political system? It happens in other countries—Denmark and South Korea are just two where I have participated in serious efforts by national leaders, both public and private, to come together and chart a long-term plan. This almost never occurs in the U.S., except around single issues.
We will need some new structures to govern strategically. I served on the last public-private President's Commission on Industrial Competitiveness—in 1983! This time we need one that is less politically motivated. Congress would benefit from a bipartisan joint planning group to coordinate an overall set of priorities. More up or down votes on comprehensive legislative programs are needed to allow a shift to a coherent set of policies and away from lots of separate bills.
The new Administration will have an historic opportunity to adopt a strategic approach to the U.S.'s economic future, something that would bring the parties together. America is at its best when it recognizes problems and accepts collective responsibility for dealing with them. All Americans should hope that the next President and Congress rise to the challenge. "
Patent reform, education, prisons, court, apple tablet, immigration and healthcare... whew!
Pozen on patent reform
How to waste $100m allocated to education
An interesting article on the incentives Al Qaeda has to attack US Soldiers vs US Civilians, based on how we treat them at trial. I still don't know what I think about the KSM trial, btw, so no major stances there quite yet. Need to learn more about it.
unsurprisingly, jails breed radicals. Imprisonment for more minor crimes (some applications of three strikes laws, imprisonment for use of drugs but no distribution, etc) is counterproductive.
rumors of an apple tablet. I generally hate apple products but this could be awesome
Another reason to open up immigration - make it a qualification, not a quota! If you can hold a job, you and your family can stay.
18 million people, at least, will be worse off under healthcare reform.
Cowen's healthcare plan
An excellent law banning inappropriate genetic testing
Monday, November 16, 2009
A smart article by Krugman!
Over the last year and a half, Krugman has written a lot of bad articles. This, however, is a very fair (if somewhat obvious) article. Of course, Krugman's specialty is international trade, so I suppose that shouldn't be a surprise.
The next move in stabilizing Iraq - making it private-sector-friendly
Sunday, November 15, 2009
An exampe of why the Austrians had decent ideas.
http://www.youtube.com/watch?v=0h7V3Twb-Qk
one of the most incredible videos i've ever seen. The Chinese government built an entire city, Ordos, designed for 1 million people, in order to make GDP numbers look high. The city is almost entirely empty. This is akin to the "if you throw a brick through somebody's window then you stimulate the economy as they spend money to fix their window" parable the Austrians derided as stupid.
http://economicsofcontempt.blogspot.com/2009/11/yes-we-need-big-banks.html
more on why we need big banks, and too big to fail is a dumb idea
one of the most incredible videos i've ever seen. The Chinese government built an entire city, Ordos, designed for 1 million people, in order to make GDP numbers look high. The city is almost entirely empty. This is akin to the "if you throw a brick through somebody's window then you stimulate the economy as they spend money to fix their window" parable the Austrians derided as stupid.
http://economicsofcontempt.blogspot.com/2009/11/yes-we-need-big-banks.html
more on why we need big banks, and too big to fail is a dumb idea
Friday, November 13, 2009
On Afghanistan
Fascinating look at the debate on Afghanistan troop levels. Here's what it looks like to me:
1) Increasing troop levels there would stabilize the region and help us create a better Afghanistan
2) If we do stabilize it, we have to focus on building a police force, an army and an infrastructure to ensure it's stable when we leave, which will hopefully be sooner rather than later
3) Whether those outcomes above are better than the opportunity costs (in lives, geopolitical stability and economic progress) of the money spent on the war is highly arguable, and I'm not sure there's a simple answer. There's also a moral issue - can we just pull out of a country we invaded that really wants us to stay? Finally, there's a precedent issue - who will help us again when we actually need to invade if we gave up in Afghanistan halfway?
Credit Ratings Agencies and how they work
In my opinion, Congress doesn't really understand how credit rating works, fundamentally.
The role of credit raters is to analyze all the information they know about a company and give their best estimate of how safe the security is. They're obligated to try their best to get it right, but risk is nefarious and it's impossible for everyone to always get it right. What makes the ratings companies different from normal security analysis is two things: 1) their estimates are used in Federally-mandated formulae for determining safety of a security, and 2) companies pay raters to have their issues rated, instead of consumers. Ratings are free to consumers.
Thus, ratings are a combination of facts and opinion - in effect, a combination of journalism and opinion.
You cannot hold the raters responsible for unknowingly issuing a bad rating (certainly, if they knowingly misrepresent what they know, that's a different issue, but it has to be an issue of fraud, not judgment - securities analysis is hard, and nobody can or should be certain). If they were held responsible, I'm guessing they'd probably just stop issuing ratings, and instead issue a "facts and opinions" bulletin. While there's a role for that, it's already available through any number of free or inexpensive services; it's far more valuable to the public to have a credit rating as a frame of reference, even when it's wrong.
Far more legitimate is the idea that the raters can't be held to be journalists. Analyzing facts is not the same as reporting them, so it would not be unfair to hold the ratings agencies to the same Reg FD standard that private companies are held to. However, fundamentally, there's societal value in ratings which everyone can consume equally. The fact that consumers don't pay means that in a sense, a company telling a ratings agency something confidential is a way of releasing it, because it'll no longer be confidential. Even if the ratings agency has to keep it confidential, the rating on the issue, available to everyone, will reflect the information.
What WOULD help reform the ratings agency is eliminating the "company pays the rater directly" standard. Much fairer would be a pooling mechanism, the way the FASB (Federal Accounting Standards Board) works - All companies pay into a nondiscretionary pool, which compensates the ratings agencies. You'd have to hammer down how much the ratings agencies are paid (too much and it's wasteful, too little and all the good talent will leave), but this way, the ratings agencies wouldn't have an incentive to appease companies by issuing high ratings because they'll be paid identically for high and low ratings.
links on financial reform, gold, healthcare and intel antitrust,
Incentive distortion in the healthcare bill
The Federal role in the housing crisis
The problem with applying anti-trust law to what Intel did
Can you sue a company for a falling stock price? How bout for doing business with a company that commits fraud (but not committing fraud yourself)? In the new Dodd bill, you can...
Types of insurance the new reform will kill, including hospitalization plans
Fascinating article on how many cheap medicines that prevent a lot of cancer aren't taken, and also how a lot of effects attributed to supplements and vitamins may actually be spurious or even negative
An awesome look at why gold is as much a fiat currency as anything else.
an interesting look at a potential Republican candidate, and also a novel outlook on how Obama will rehabilitate his public image
Why the abortion fiasco isn't surprising, and the Federal Government isn't really up to the task of running healthcare
Thursday, November 12, 2009
miscellany on healthcare and finance reform
A stealth capital gains tax... not a good idea
The healthcare bill explicitly discourages tort reform
The Bear fund managers were very reasonably acquitted.
More on the 100% marginal tax rate that disincentivizes class mobility
skim milk with real cocoa acts like a weaker version of red wine on your heart
incentive and inequality problems within healthcare reform
Wednesday, November 11, 2009
Frank supported lower mortgage standards, balance the budget, and more links
One of my favorite new sites on the internet! Can you balance the federal budget?
free trade
"I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing."
—Representative Barney Frank, September 25, 2003
It was six years ago that Mr. Frank announced his famous dice roll on Fannie Mae and Freddie Mac in the name of affordable housing. Mr. Frank got his wish, and the losses keep rolling in, with no end in sight as Washington finds new ways for the companies to serve political purposes.
The importance of an individual mandate
Strongly disagree with the idea of a Fed for health, but some of the other ideas aren't bad.
Antipoverty programs create no incentive to work for poor people
"To say that antipoverty programs in the United States are perverted may be an understatement. When you take into account the loss of means-tested benefits (e.g., cash assistance, food stamps, housing subsidies, and health insurance), and the taxes that people pay on earned income, the return to working is essentially zero for those in the lower two quintiles of the income distribution.
For many of the working poor, the implicit marginal tax rate is greater than 100 percent. The long-run consequence of undermining the positive incentive to work is, of course, the creation of an underclass acclimated to not working; the supplement of cash and noncash benefits with income from crime and the underground economy; and the government resorting to negative incentives such as mandatory work programs."
Tuesday, November 10, 2009
too big to fail: a stupid concept
Let's go through a thought exercise.
Let's say there are 6 American conglomerate banks remaining after this financial crisis: Citigroup, Bank of America, JP Morgan Chase, Morgan Stanley, Goldman Sachs and Wells Fargo. There are more big, important banks, but for simplicity and name recognition, let's stick with these.
In a world with no restriction on too-big-to-fail:
Let's say Citigroup, because it's dumb, takes on a whole bunch of risks that all go kaput at the same time as the result of a systematic shock. It fails. The FDIC, funded by the US taxpayer, needs to bail out all of Citigroup's depositors. Citigroup's failure casts doubt upon its ability to pay down its derivatives and loan obligations. Holders of these obligations - the other 5 banks - need to write them down, sending them into a liquidity crisis as they struggle to raise more capital to fill the holes in their books. If they can't raise the capital, they fail, sending their own derivatives and loan obligations into question, and further burdening the survivors. Eventually, everyone dies.
In a world where too-big-to-fail is regulated:
Each of these 6 banks is split into 2 smaller banks. Any one of the new banks is not big enough to take down the financial system; none of them are "too big to fail".
However, everyone still has loans outstanding, and generally there's quite a bit of overlap as to the groups they're lending to. If the loans of the original big banks are split among the small companies, then systematic shock happens, and then instead of Citigroup failing, Citigroup A and Citigroup B both fail (or Citigroup A and Bank of America B, or whatever). You're in the same situation, then, because the same number of loans failed, they were just split among two banks who could only handle half the size of failure as the original big bank - the other 10 banks scramble to find liquidity and the process happens.
In other words, if banks need a 2:1 ratio of capital to loans, it doesn't matter if there's one bank with 40 in loans, 20 in capital who loses 6 in capital and needs to find 6 vs two banks with 20 in loans, 10 in capital who each lose 3 in capital and need to find 3 each. Systematically, small banks and big banks pose the same collective risk.
There's an argument that opening the prospect of an individual bank failing will prevent stupid risks to begin with because each individual bank can't be sure of a bailout. This has two problems. Firstly, in the above scenario, every small bank except the very first one or two to fail needs a bailout, also. So you don't really help the system that much.
Secondly, it ignores the fact that firms are not living, breathing entities; they're run by humans who get fired. Maybe everyone knew the government would bail out the banks and let them live. Most of the chief executives, however, have left in disgrace (the exceptions being the ones who did a good job - Blankfein, Dimon, etc). Say what you like about contractual compensation commitments (and ignoring the fact that the government has been abrogating them) - all of them would rather be doing their job than not doing it. Does it soften the blow and make risk more palatable? Probably, but it's not as if they thought it'd be consequence-free. Certainly there's something to be said for toughening the Boards of Directors at public firms to make them act with some teeth towards CEOs - both strategy and compensationwise. Done by a privately elected board of directors, this can actually work in the shareholder's interest. Regulation isn't going to solve that very well, though - it's too "one size fits all".
An alternate "split up" method is to separate the different financial activities that happen within a bank - for example, commercial banks and investment banks and insurers couldn't be under the same roof. Splitting commercial banks and investment banks would exchange frequency of bailouts for severity. You'll still have "too-big-to-fail" institutions within each sphere. What that ends up doing is creating more frequent crises that are less severe. If the investment banking industry has a crisis, then the investment banks need to be bailed out. If they're linked to commercial banks, however, the commercial bank may provide the diversification necessary to make regular equity capital or debt capital work, without a bailout. Thus, large and diversified banks fail less often. Of course, as we've seen, when they do fail, they fail spectacularly because there are so many moving parts that fail all together. Would more frequent but less severe crises be better? Possibly, because they'd derail the economy less often. However, given that the US underinvests so badly, sustained periods of good times actually aren't a bad thing if they prompt actual investment, whereas more frequent crises may undermine investment further. Without actual research, this isn't an easy question to answer.
What's the real solution to "too big to fail"? Create an orderly system of quickly dismantling failed banks so you don't send banks that haven't failed scrambling for liquidity. That'll help, but not solve the problem, by lessening the level of required writedown to the amount by which the failed bank fell short instead of some prospect of more.
A better idea would be to stop politicizing loans; if Fannie and Freddie hadn't started buying up mortgage assets at the order of Congress, the bubble would never have been as big in the first place. The same goes for small-business loans.
However, ultimately, while good practice (by government and individual firms, as well as consumers) can lessen the risk, you can't legislate it away. It's fundamental to fractional reserve banking, and unless you wanna take that away (and send us back to the 1840's, stunting American growth forevermore), it will always be a risk. We're better off creating a method for dealing with it next time than trying to eliminate it altogether.
Let's say there are 6 American conglomerate banks remaining after this financial crisis: Citigroup, Bank of America, JP Morgan Chase, Morgan Stanley, Goldman Sachs and Wells Fargo. There are more big, important banks, but for simplicity and name recognition, let's stick with these.
In a world with no restriction on too-big-to-fail:
Let's say Citigroup, because it's dumb, takes on a whole bunch of risks that all go kaput at the same time as the result of a systematic shock. It fails. The FDIC, funded by the US taxpayer, needs to bail out all of Citigroup's depositors. Citigroup's failure casts doubt upon its ability to pay down its derivatives and loan obligations. Holders of these obligations - the other 5 banks - need to write them down, sending them into a liquidity crisis as they struggle to raise more capital to fill the holes in their books. If they can't raise the capital, they fail, sending their own derivatives and loan obligations into question, and further burdening the survivors. Eventually, everyone dies.
In a world where too-big-to-fail is regulated:
Each of these 6 banks is split into 2 smaller banks. Any one of the new banks is not big enough to take down the financial system; none of them are "too big to fail".
However, everyone still has loans outstanding, and generally there's quite a bit of overlap as to the groups they're lending to. If the loans of the original big banks are split among the small companies, then systematic shock happens, and then instead of Citigroup failing, Citigroup A and Citigroup B both fail (or Citigroup A and Bank of America B, or whatever). You're in the same situation, then, because the same number of loans failed, they were just split among two banks who could only handle half the size of failure as the original big bank - the other 10 banks scramble to find liquidity and the process happens.
In other words, if banks need a 2:1 ratio of capital to loans, it doesn't matter if there's one bank with 40 in loans, 20 in capital who loses 6 in capital and needs to find 6 vs two banks with 20 in loans, 10 in capital who each lose 3 in capital and need to find 3 each. Systematically, small banks and big banks pose the same collective risk.
There's an argument that opening the prospect of an individual bank failing will prevent stupid risks to begin with because each individual bank can't be sure of a bailout. This has two problems. Firstly, in the above scenario, every small bank except the very first one or two to fail needs a bailout, also. So you don't really help the system that much.
Secondly, it ignores the fact that firms are not living, breathing entities; they're run by humans who get fired. Maybe everyone knew the government would bail out the banks and let them live. Most of the chief executives, however, have left in disgrace (the exceptions being the ones who did a good job - Blankfein, Dimon, etc). Say what you like about contractual compensation commitments (and ignoring the fact that the government has been abrogating them) - all of them would rather be doing their job than not doing it. Does it soften the blow and make risk more palatable? Probably, but it's not as if they thought it'd be consequence-free. Certainly there's something to be said for toughening the Boards of Directors at public firms to make them act with some teeth towards CEOs - both strategy and compensationwise. Done by a privately elected board of directors, this can actually work in the shareholder's interest. Regulation isn't going to solve that very well, though - it's too "one size fits all".
An alternate "split up" method is to separate the different financial activities that happen within a bank - for example, commercial banks and investment banks and insurers couldn't be under the same roof. Splitting commercial banks and investment banks would exchange frequency of bailouts for severity. You'll still have "too-big-to-fail" institutions within each sphere. What that ends up doing is creating more frequent crises that are less severe. If the investment banking industry has a crisis, then the investment banks need to be bailed out. If they're linked to commercial banks, however, the commercial bank may provide the diversification necessary to make regular equity capital or debt capital work, without a bailout. Thus, large and diversified banks fail less often. Of course, as we've seen, when they do fail, they fail spectacularly because there are so many moving parts that fail all together. Would more frequent but less severe crises be better? Possibly, because they'd derail the economy less often. However, given that the US underinvests so badly, sustained periods of good times actually aren't a bad thing if they prompt actual investment, whereas more frequent crises may undermine investment further. Without actual research, this isn't an easy question to answer.
What's the real solution to "too big to fail"? Create an orderly system of quickly dismantling failed banks so you don't send banks that haven't failed scrambling for liquidity. That'll help, but not solve the problem, by lessening the level of required writedown to the amount by which the failed bank fell short instead of some prospect of more.
A better idea would be to stop politicizing loans; if Fannie and Freddie hadn't started buying up mortgage assets at the order of Congress, the bubble would never have been as big in the first place. The same goes for small-business loans.
However, ultimately, while good practice (by government and individual firms, as well as consumers) can lessen the risk, you can't legislate it away. It's fundamental to fractional reserve banking, and unless you wanna take that away (and send us back to the 1840's, stunting American growth forevermore), it will always be a risk. We're better off creating a method for dealing with it next time than trying to eliminate it altogether.
A totally different set of stuff today
Brooks on the Ft. Hood Murderer and how the evil of his act is being downplayed
What does a "free estimate", "free quote" or "free service charge" signal? What's the difference in the firms?
Shooting free throws optimally! First, the engineers say that shooters should launch the shot with about three hertz of back spin. That translates to the ball making three complete backspinning revolutions before reaching the hoop. Back spin deadens the ball when it bounces off the rim or backboard, the engineers assert, giving the ball a better chance of settling through the net.
Where to aim? Tran and Silverberg say you should aim for the back of the rim, leaving close to 5 centimeters – about 2 inches – between the ball and the back of the rim. According to the simulations, aiming for the center of the basket decreases the probabilities of a successful shot by almost 3 percent.
The engineers say that the ball should be launched at 52 degrees to the horizontal. If you don't have a protractor in your jersey, that means that the shot should, at the highest point in its arc to the basket, be less than 2 inches below the top of the backboard.
Free-throw shooters should also release the ball as high above the ground as possible, without adversely affecting the consistency of the shot; release the ball so it follows the imaginary line joining the player and the basket; and release the ball with a smooth body motion to get a consistent release speed.
"Our recommendations might make even the worst free-throw shooters – you know who you are, Shaquille O'Neal and Ben Wallace – break 60 percent from the free-throw line," Silverberg says with tongue firmly in cheek. "A little bit of physics and a lot of practice can make everyone a better shooter from the free-throw line."
The engineers used a men's basketball for the study; it is heavier and a bit larger than basketballs used in women's games. They also assumed that the basketball player doing the shooting was 6 feet 6 inches tall, and that he released the ball 6 inches above his head, so the "release height" was set to 7 feet. The free-throw line is 15 feet from the backboard, a cylinder-shaped opening that is 10 feet off the ground. Though it looks smaller, the diameter of a regulation basketball hoop is 18 inches; the diameter of a men's basketball is a bit more than 9 inches.
Monday, November 9, 2009
two very interesting health resources
Compare hospitals to see which have better performance statistics
A breathing technique to help with asthma
"Ordinarily, during an asthma attack, people panic and breathe quickly and as deeply as they can, blowing off more and more carbon dioxide. Breathing rate is controlled not by the amount of oxygen in the blood but by the amount of carbon dioxide, the gas that regulates the acid-base level of the blood.
Dr. Buteyko concluded that hyperventilation — breathing too fast and too deeply — could be the underlying cause of asthma, making it worse by lowering the level of carbon dioxide in the blood so much that the airways constrict to conserve it.
This technique may seem counterintuitive: when short of breath or overly stressed, instead of taking a deep breath, the Buteyko method instructs people to breathe shallowly and slowly through the nose, breaking the vicious cycle of rapid, gasping breaths, airway constriction and increased wheezing.
The shallow breathing aspect intrigued me because I had discovered its benefits during my daily lap swims. I noticed that swimmers who had to stop to catch their breath after a few lengths of the pool were taking deep breaths every other stroke, whereas I take in small puffs of air after several strokes and can go indefinitely without becoming winded. .....
In an interview, Mrs. Yakovlev-Fredricksen said: "People don't realize that too much air can be harmful to health. Almost every asthmatic breathes through his mouth and takes deep, forceful inhalations that trigger a bronchospasm," the hallmark of asthma.
"We teach them to inhale through the nose, even when they speak and when they sleep, so they don't lose too much carbon dioxide," she added. "
Saturday, November 7, 2009
health bill bans coverage for abortion on both public and private insurance
http://www.cnn.com/2009/POLITICS/11/07/health.care/index.html
Health bill bans coverage for abortion on both public and private insurance offered on the to-be-created insurance exchange. Abortion coverage can be purchased as a separate supplemental policy, but how many of the people who really need that (teens, etc) are going to feel comfortable buying it?
EDIT: After posting, realized the incredible adverse selection problem with an abortion rider. The people who get an abortion rider are the ones who are very likely to get an abortion. The cost will be prohibitive for most even when they ARE someone who is willing and able to buy an abortion rider because the probability of getting an abortion would be so high for people who take the rider.
Health bill bans coverage for abortion on both public and private insurance offered on the to-be-created insurance exchange. Abortion coverage can be purchased as a separate supplemental policy, but how many of the people who really need that (teens, etc) are going to feel comfortable buying it?
EDIT: After posting, realized the incredible adverse selection problem with an abortion rider. The people who get an abortion rider are the ones who are very likely to get an abortion. The cost will be prohibitive for most even when they ARE someone who is willing and able to buy an abortion rider because the probability of getting an abortion would be so high for people who take the rider.
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