Econ
It's odd how I've been reading a lot of news about the global economy lately; I know that it's been all over the news, but it's still remarkable how fresh the recent stories about the topic have been. Here's some that I liked in particular, promise they won't make you guys fall asleep:
- The maestro Michael Lewis is back with an in-depth look at the financial troubles of Iceland. Usually, 10,000-word features about financial systems aren't really recommended reading, but remember that opening narration in Elizabethtown about failures and fiascos?
"As somebody once said there's a difference between a failure and a fiasco. A failure is simply the non-presence of success. Any fool can accomplish failure. But a fiasco...A fiasco is a disaster of mythic proportions. A fiasco is a folktale told to others that makes other people feel more alive because it didn't happened to them."
Well, this is a total fiasco, and Iceland might as well be renamed Shitland. The economy is a total clusterfuck (the country's debt is 85 times its GDP), and Lewis gets to the bottom of it while painting a funny picture of the typical quirky Icelandic people (and the unpleasant Icelandic men). It's such a caricature that it couldn't possibly be true, could it?
Because Iceland is really just one big family, it’s simply annoying to go around asking Icelanders if they’ve met Björk. Of course they’ve met Björk; who hasn’t met Björk? Who, for that matter, didn’t know Björk when she was two? “Yes, I know Björk,” a professor of finance at the University of Iceland says in reply to my question, in a weary tone. “She can’t sing, and I know her mother from childhood, and they were both crazy. That she is so well known outside of Iceland tells me more about the world than it does about Björk.”
- A Wired Magazine feature titled Recipe for Disaster: The Formula That Killed Wall Street takes a look at the research of David X. Li, a Wall Street actuary who came up with a way to model correlation between securities.
It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.
The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.
We all know how it all turned out, right? Then from later in the article:
No one knew all of this better than David X. Li: "Very few people understand the essence of the model," he told The Wall Street Journal way back in fall 2005.
"Li can't be blamed," says Gilkes of CreditSights. After all, he just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust."
- A couple of weeks ago, CNBC analyst Rick Santelli went on a rant against Barack Obama's housing plan, saying that it rewarded "losers" who took on more debt than they could afford. The whole sentiment carries on a theme in the rich people wing of the American right about going back to Ayn Rand and her writing.
Back in college, some friends of mine were into Ayn Rand, but I never really got into all that. Some of it was because I wasn't really comfortable with Rand' philosophy, but most of it was because I found her writing style to be garbage. But that's just me.
Anyway, it's funny to note that former Federal Reserve Chairman Alan Greenspan (along with other, uh, architects of this economic collapse) are huge Ayn Rand fans.
That's about the second worst thing to come out of Ayn Rand's career; in 1999, there was this awkward sex scene between Helen Mirren's title character and Eric Stoltz from The Passion of Ayn Rand.
- Here's a more pleasant video: Jon Stewart rips another asshole into Santelli and CNBC for their history of fuck-ups, after Santelli cancelled on going on The Daily Show.
- On the other side of the intellectual spectrum, you really ought to be reading New York Times columnist and Nobel Prize-winning economist Paul Krugman these days. Krugman named his blog after his book, "The Conscience of a Liberal", and his work deals with the "politics and economics of inequality". His columns don't go over the head of the regular reader (regular readers of NY Times, at least) while he saves his nerd shit over on his blog.
Krugman isn't a very big fan of Obama; unlike most of Obama's critics, Krugman though feels that Obama doesn't go far enough, and his criticism of Obama's stimulus legislation drew a reaction from Obama Chief of Staff Rahm Emmanuel.
Anyway, Krugman was pleasantly surprised over budget proposal, and in his most glowing piece about the new administration yet, explained why there's so much to be excited about, and how excited he is about the transparency of the document.
[Budget priorities] are laid out in a document whose clarity and plausibility seem almost incredible to those of us who grew accustomed to reading Bush-era budgets, which insulted our intelligence on every page. This is budgeting we can believe in.
But can Obama deliver on his promise to reduce the deficit? "Yes, he can!" writes Krugman:
Right now the deficit is huge thanks to temporary factors (at least we hope they’re temporary): a severe economic slump is depressing revenues and large sums have to be allocated both to fiscal stimulus and to financial rescues.
But if and when the crisis passes, the budget picture should improve dramatically. Bear in mind that from 2005 to 2007, that is, in the three years before the crisis, the federal deficit averaged only $243 billion a year. Now, during those years, revenues were inflated, to some degree, by the housing bubble. But it’s also true that we were spending more than $100 billion a year in Iraq.
So if Mr. Obama gets us out of Iraq (without bogging us down in an equally expensive Afghan quagmire) and manages to engineer a solid economic recovery — two big ifs, to be sure — getting the deficit down to around $500 billionby 2013 shouldn’t be at all difficult.
- Now that he's in office, it's great to look back at this feature about Obama's economic philosophy (I linked to it back in August). The article predicts and predates all of Obama's moves so far, including his plans for large-scale spending, his commitment to deficit-reduction, and even his reluctance to go ahead and nationalize American banks. Awesome.
Labels: barack obama, economics, politics
