Archive for September, 2008

More on the financial crisis

September 30, 2008

I am not a regular on the Freakonomics* blog, but I surf by every now and then. Nowadays the financial crisis in the US and Europe is of course in focus. This piece by Erik Hurst has an interesting discussion of why a vibrant banking sector is necessary and a review of the history of bank regulations in the US. He pinpoints that earlier deregulations reduced interest rates and gave more people access to credit. The demands for more regulation that has surfaced during the current crisis concerns Hurst as he is afraid that the (social) costs these regulations may impose would not get the appropriate attention.

On my part, I wonder what kind of regulations people have in mind. Laws against subprime lending? I think that would lead to overly complicated regulations impossible to enforce. But somehow putting a ceiling on the risks a bank is permitted to take do make sense. As the government insure deposits there is risk of moral hazard.

There is more interesting stuff on the Freakonomics blog. Here is a discussion of an alternative plan for the proposed bailout. The idea, conceived by Lucian Bebchuck, is as brilliant as it is simple and straightforward. One of the problems with the bailout plan that was voted down by congress last night is that the price paid for assets is ‘unfair.’ A solution is to divide the money to be injected between different managers and let them compete:

Suppose that the economy has illiquid mortgage assets with a face value of $1,000 billion, and that the Treasury believes that the introduction of buyers armed with $100 billion could bring the necessary liquidity to this market.

The Treasury could divide the $100 billion into, say, 20 funds of $5 billion and place each fund under a manager verified to have no conflicting interests. Each manager could be promised a fee equal to, say, 5 percent of the profit its fund generates — that is, the excess of the fund’s final value down the road over the $5 billion of initial investment. The competition among these 20 funds would prevent the price paid for the mortgage assets from falling below fair value, and the fund managers’ profit incentives would prevent the price from exceeding fair value.

* Freakonomics is a blog based on the same ideas as the book by the same name (that is, a blog developed from a book, oposit to the recent trend of books based on popular blogs). The book is a demonstration of both the power of microeconomic theory (combined with statistics) and the talent of Steven D. Levitt. I recommend the book to anyone sligthly interested (in economics, or, more extraordinary, Levitt himself for that matter) or just generally curious.

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John Whitehead on the bailout

September 30, 2008

From a post by John Whitehead on the Environmental Economics blog:

The […] problem is that the bailout reveals that free markets don’t really work well, at least in the sense that free markets won’t lead to an avoidance of booms and busts. If unregulated free markets don’t really work in the one place where they might, finance, then how are they expected to work well to solve environmental problems and allocate health care efficiently? My opinion is that financial, environmental and health care markets can be nudged toward efficiency with a little bit of regulation.

Of course, such a statement stirs discussion; the comment section to the post is quite interesting and even funny. John Whitehead is a professor of economics at the Appalachian State University. He is also one of the people behind the Environmental Economics blog.

Complexification

September 29, 2008

I discovered Jared Tarbell through the now obsolete Quiet Feather blog (a great blog, I am sorry they have put it to rest). Jared Tarbell is a visual artist, and seemingly he uses complex, mathematical algorithms to produce fantastic images. For some, he definetly uses fractals, an intruiging mathematical concept everyone should know a little about. I will probably write more on fractals later. In the meantime you can enjoy Tarbell’s art on his homepage Complexification.

Recipes for Disaster

September 28, 2008

I just saw the documentary Recipes for Disaster on NRK, the Norwegian broadcasting company. It’s a film about climate change and a family who tries to do something about it. The family decides to live a year on a carbon diet. They sell their car, they try to avoid plastic wrappers (which is a though one; think about what is NOT wrapped in plastic the next time you visit the mall), they start to row their motor boat, and they do a lot of other adjustments in their lifestyle. The adjustments are not always easy to deal with. Their homemade toothpaste, for example, tastes terrible according to the children. It is the father in the family who is the idealist; his wife is more skeptical of the whole project. This leads to tensions that are hard to deal with, and we get glimpses from some of the many arguments they must have had.

Their challenges are maybe made harder by the fact that they live in a suburb in Finland, a country with a semi-arctic climate. It is, for example, not very attractive to wait for the bus outside on a cold winter day instead of cruising away in a heated car. (They actually end up buying a car that runs on bio-fuel.) Most of the time, it does not look like fun to be on a carbon diet. They do have some positive experiences, however. The least surprising, maybe, is that they have more time for the kids. This is partly because they take the bus all the time, and, I guess, because they have to put fewer activities into each day.

After a year on the carbon diet, they conclude that people can do something with their oil consumption, but first people has to overcome themselves. It’s an interesting film. See it if you can!

Why Blog?

September 25, 2008

There seems to be good reasons to blog. Here are some of mine: When I read great books, in particular non-fictional books, I have an urge to tell people and discuss it. I often come off as quite nerdy when I do that, however, and already being a PhD-student does not help. On a blog, however, I can push these books in spectacular fashion and it won’t look as bad, I hope. So, I’ve been thinking about a blog for quite a while. Also, the blog is supposed to be a place where I can discuss stuff with myself over time. (And for that to happen, I need to put down my opinion at a point in time such that I can return to it later and discuss it. Unless I just keep my opinions in mind and they might change without me even knowing. It is then harder to recognize old opinions. It is about being critical to myself, both who I am now and who I was; I think it is nice to discuss stuff with yourself. It is sometimes nice to discuss stuff with other people too, but often I don’t get the opinion or answer I want, or the discussion don’t take the direction I want it to take, and, well, you know, I never know where to take a sentence after the ‘well, you know’ part; suggestions? You didn’t see that question mark comming, did you?) The point is, I have a lot of ongoing discussions in my head, and sometimes I think they are good, but most times they are crap. The goal must be to try to capture the good parts, and my plan is that the blog will help me with that. I have tried to keep notes, but that does not really work for me. When I look back at notes, I seldom find anything good. So, ‘publishing’ my thoughts and ideas on a blog will hopefully help me capture the good moments. I just need to be critical to what I put there (here). (Looking back, it has not started working yet.)

It is hard to be critical to yourself, particularly when it comes to thinking and writing. Thus, an audience can help me, and that is exactly what I want. I want readers to comment on the stuff I put up here, and honestly, I want them to show no mercy. And while I’m on the thinking stuff, I am currently a PhD-student in economics, which means that I’m supposed to become a scientist. And science is a lot about thinking, obviously, and also a lot about writing (less obvious to many, to me a couple of years ago, for example). To become a good thinker, you need to think, and you need to be critical about your own thinking. That is hard. To become a good writer, you need to think well (you know, be clear and all that), but you also need to write. This is where the blog comes in. I mean to train myself in writing on this blog. A secondary, but still important point is to keep the blog in english. Most science is done in english, and I need all the training I can get. I will never become mothertounge-fluent in english, but I can always get better.

I’ve been talking about books. I also enjoy to listen to music. I try to keep an open mind and listen broadly. As most music lovers, I tend to tell all my friends about all the (good) music I’ve been listening to lately. When my friends are not all that exited, it becomes boring for both me and my friends. Here, however, I can push all the music I want and it does not necessarily need to become boring for me (and my friends can row their own boats). A second point is this: There is a catch to the PhD-student thing. You don’t see your friends all that much, and if all you do when you see them is to talk about (non-fictional) books and obscure music, well, you know, there I did it again.
Of course, there are other forces in me that drives me to blog. I am a narcisisst (I mean, who are not? I almost find it irrational not to think highly of yourself. It is important to (try to) be critical to yourself of course, and think highly of yourself because you are critical to yourself.) and like to have the spotlight on me and my stuff. Here, I will keep the spotlight on me and my stuff. Also, I get angry sometimes, and it can help to write. And all PhD-students are desperate for distractions, and now I have one more. This is of course a big danger with this blog: It will take away my focus from my disertation. If I am good (and a  bit lucky, maybe) it will help me keep the focus.

What I will put on my blog? I’ve told you already; thoughts and ideas about books and music. I will also discuss some current events. I will link to stuff I think is important or interesting (important stuff is unfortunately not always interesting). It is unavoidable that I will link to stuff I find funny. I will probably also put personal stuff on the blog. It is about me, remember. And I think a blog with a personal flavour often is more interesting and makes me return more often than those more sterile ones. I will try to keep a collection of links to pages which are relevant to me. I also hope to keep you updated on the wheather in Bergen, my hometown (to non-Norwegian readers: Preoccupation with the wheather may be a Norwegian thing, we have quite a lot of it, but it is boring also!).

Zeitgeist, the movie

September 24, 2008

Actually, I just recently saw this movie. I took some notes and thought about it a little bit. The movie consists of three parts. It takes almost 15 minutes, however, before the first part starts, and the part before part one (the zeroth part) is not really about much. Beautiful, maybe, and maybe too long. Part I parallells Christianity with ancient religions, and claims that ‘the Christian religion is a parody on the worship of the sun.’ Even though I sympathize with the filmmakers, no sources are cited in the movie (there are some sources on the webpage, but these leads are hard to follow). I understand that artisitcal considerations have to be taken into account when such a movie is made, but the lack of references makes the claims harder to check, and harder to believe. I cannot help but to think that the filmmakers have left references out for a reason. (There is even a webpage that gives money prizes to proofs of different claims from the first part of the movie. I assume this is propaganda from Christian people, but still. Don’t remember the address, google it!)

Part II of the movie attacks the offical story behind the 9/11 events (or the ‘myth’ about 9/11, as the movie calls it). I find this part better documented, however less interesting. I don’t know why, maybe because 9/11 is ahelluva lot more recent than Christianity and has, so far, required a lot fewer casualties. If the Americans, with the Bush familiy at the wheel, wants to fuck themselves up, I’m not too interested in the details, I guess. A selfish attitude, I know. Part II concludes that 9/11 was an inside job and has some interesting claims toward this end.

Part III is crazy stuff on how central banks work. The movie basically claims that ‘international bankers’, who are behind the Fed (I’ll call them the ‘Fedders’; the Fed is supposedly at the root of all major events in modern history), were responsible for the American engagement in WWI & II, the Vietnam war and more recently the engagements in Afganhistan and Iraq.

Towards the end the movie claims that the aim of the Fedders is to form a world government and let, as I understand it, ‘intellectuals’ rule. Actually an idea I don’t find all that repulsive. Maybe future generations could benefit from a superclass rule, given that it is responsible and ethical and all that? (Isn’t for example Catholism built on this principle?) The filmmakers claim that history has shown us that power corrupts. I am not convinced. The right people at the right place may well be incorruptible because it is in their own best interest to be so. What the history has shown us is that democracy, self-governed national states and so on are not all that successfull in providing people safe and stable lives.

There is a certain Darwinistic flavour to the idea of an emergence of a superclass of world rulers. I believe in Darwin. The promises towards the end of the movie that the power of love can rescue us all from evil is really cheesy, and downgrades my impression of the movie a whole lot. On a different note, after living a year in America, there is no doubt in my mind that the American people is not in control of their own government. I am afraid, however, that the same goes for most governments.

A big problem with movies like Zeitgeist is that it is as secretive and uninformative about its sources as the institutions it tries to criticize. This takes away a lot of the impact and places it in the category of movies not to take too seriously.

By the way: What links the first part to the last two parts? Is it simply demonstration of argument and convincing presentation of ‘evidence’ so the audience is less skeptical to the latter parts?

By the way 2: How does these conspiracy theories connect with the recent financial crisis, seemingly threatening to ruin most people in the western world? Is it just a new staged event designed to let the Fedders gain even more control over global companies and systems?

Dagbladet reviews TV on the Radio

September 23, 2008

The Dagbladet reviews (Dagbladet is a Norwegian daily newspaper) the latest ‘TV on the Radio’ record. The review is entitled ‘When are they gonna make the bad record?’ (translated by me of course) . How stupid are these reviewers? It is the band’s third record. Music history is full of bands and artists capable of pleasing the same person with three consecutive albums (which is the core issue here). I won’t name examples. Guess why? I see this as a demonstration of the use-and-throw mentality of our times and the narrow mindedness of the reviewer. Crap, dude, crap.

Taleb on the crisis

September 22, 2008

In this essay, Nassim Nicholas Taleb writes on the recent turmoil on Wall Street. He writes in an entertaining way and makes sure to mock a few financial ‘celebrities’. His basic message is that most people does not understand statistics. What he has in mind may seem like minor subtleties, but I trust him they are important. Here are a few quotes to tease your curiosity:

Are we using models of uncertainty to produce certainties?

I have nothing against economists: you should let them entertain each others with their theories and elegant mathematics, and help keep college students inside buildings. But beware: they can be plain wrong, yet frame things in a way to make you feel stupid arguing with them. So make sure you do not give any of them risk-management responsibilities.
Taleb on the crisisI find it interesting that he puts things like climate- and environmental problems in a category of problems that are predictable enough to have a ‘linear payoff’. The same category contains terrorism, casinos, political economy, and finance. In the category of problems with ‘nonlinear payoffs’ are calibration of nonlinear problems, dynamically hedged portfolios, volatility trading, and societal consequences of pandemics. Regarding certain environmental problems, I beg to differ.

In the latter half of the essay, Taleb discusses the inverse problem (the greatest epistemological difficulty he knows) and his way of getting to grips with it. This involves fractal power laws and is very superficially described. He repeats that the details are spelled out in the appendix, and I am sure they are. Unfortunately, however, parts of the essay presents itself as half-scientific nonsense to me.

Taleb ends his essay with nine ‘phronetic’ rules, a dos and don’ts in ‘the Fourth Quadrant’ (the part of real life that involves nonlinear payoffs). (Phronetic is from greek and can be translated into ‘practical wisdom’ or ‘prudence’.) The first: ‘Avoid Optimization, Learn to Love Redundancy.’ Another: ‘Do not confuse absence of volatility with absence of risks.’ And from the rule on metrics:

Conventional metrics based on type 1 randomness [random walk, I presume] don’t work. Words like “standard deviation” are not stable and does not measure anything in the Fourth Quadrant. So does “linear regression” (the errors are in the fourth quadrant), “Sharpe ratio”, Markowitz optimal portfolio, ANOVA shmnamova, Least square, etc.

Great stuff, I love this guy! Here is his homepage, check it out.

An F.A.Q. to the financial crisis

September 22, 2008

Here is an F.A.Q. to the financial crisis that currently unfolds in the US and the rest of the world. It was posted on the Freakonomics Blog. The authors explain the recent events, for example why the Federal Reserve chose to save Bear Sterns but not Lehman Brothers. They also discuss how Freddie Mac and Fannie May not exactly did what they were supposed to do (reduce mortgage costs to homeowners), but rather glazed their own pie. An interesting read, check it out.

Bank of America: Stone Age Banking

September 18, 2008

Bank of America cannot make international wire transfers unless I meet up in person. Can. Not. Make. Transfer. Since I am already abroad, they cannot help me. No way. We are in 2008, in the electronic age. But no. I even informed the bank of my plans before I left, but they did not warn me that their online banking service is a joke. Their online banking service is a joke. What can I do with the online service? Watch my balance? Ooo! Fancy. Not. One would maybe expect that their personal service was good, since they want you to meet up all the time. But no, it is bad. They are lazy, they hate you and they cannot accept coins! You cannot deposit coins! I cannot believe this is the biggest bank in America. It sucks.

As a friend of me with the same problem said, “The Americans can send a tin can to Mars, but cannot wire money abroad…”

PS: I am not the only one having problems with this bank. Just google.

UPDATE: Obviously, I wrote this post in the heat of the moment. Take it into account.

Umberto Eco on conspiracies and 9/11

September 17, 2008

In the September issue (vol. 4, 2008) of the Norwegian magazine Aftenposten Innsikt, the Italian writer Umberto Eco comments on the conspiracy theories surrounding the terrorist attack on New York in 2001. The article is translated from French and was first printed in a magazine called L’Esresso in 2007.

Eco claims that 9/11 was what it appeared to be, and that all the different conspiracy theories that surround it are wrong. His argument is that people (in general) are too stupid to come up with a plan regarding keeping something secret that would hold water. He thinks this, of course; the statement is hard to prove and even harder to disprove. The conspiracy theories are thus disproven since noone involved has talked yet. (Funny this proof, what if someone talks tomorrow?)

He elaborates his statement a little bit. He claims that from experience we know that if a secret exists, even though only one person knows, someone will talk at some point. In particular, there is always someone willing to talk for money.

I actually picked up this magazine in part because of the Eco article which looked interesting. I must admit; ‘Eco’ sounded famous and I assumed he had something sensible to say. I was disappointed. I find his statement to be utter rubbish, and I find some of his rhetoric to be tasteless. We, as he says, have no way of knowing whether there exist people, or groups of people for that matter, that are able to keep a secret. I am positively sure that such people exist, but we cannot prove it. Money? To some, (any amount of) money has less value than certain other things, I am sure. Let me refine this point: We talk about keeping a secret here, and not selling your kid or something, which hopefully very few would do. That some people cannot be bought may be hard to understand for people from the western world (even though it does not require all that much imagination), were we are taught to put money values on most things. Finally, when it comes to his rhetorical ‘tricks’, I will only comment on one of them: His use of the royal ‘we’. The form is common in science and mathematics and is meant to include or engage the reader. Here the effect is that Eco is extrapolating his experience onto the reader, which basically has to accept the statement (at least for the sake of argument) to be able to move on. This is cheap, and I don’t like it.

Let me add that I do not mean to defend any particular conspiracy theory about 9/11. I believe that 9/11 mainly was what it appeared to be, even though some of the facts may not seem to add up. But maybe I am wrong.

My own blog (Mind – Locomotives)

September 16, 2008

Finally. My own blog. I have been thinking about starting my own blog for a long time, and I have a long list of things I want to write about. I will keep the blog in english. Why I blog and why I in english blog want I return to will. But this first post I want to spend on an old favourite band of mine.

The Norwegian band Locomotives was the band that opened my eyes to a different way of appreciating music. They caught my attention with the hit single ‘Mind’.  ‘Mind’ is a great rock song; brilliant for creating havoc at parties (which is one criteria great rock songs should be measured against). More important (to me) than ‘Mind’, however, is the fourth and last track on the single; ‘Sugar’. On ‘Sugar’, Locomotives demonstrate their potential to make truly great music. What is great music? I have to return to that question. The point here is that ‘Sugar’ left a lasting impression on me, and I can still listen to the track and appreciate it on a different level than I do when listening to much other music, ‘Mind’ for example.  Locomotives continued to make a lot of great music throughout their career (in particular, check out their debut album ‘Locomotives’ and ‘Life is Beautiful’ from the EP ‘Universe’), which ended when their record company in the US went bankrupt. Most of the members later formed the band ‘Amundsen’ which released one self-titled album. ‘Amundsen’ is currently inactive. Among the creative forces in both bands, Kaare Vestrheim have been very successful as a producer and, if I’m not mistaken, was recently mentioned between the most powerful people in Norway. Impressive.

Another thing that I found attractive with Locomotives was their approach to the creative process. Listed on their fan mailinglist as I was, I got some glimpses and hints on how they made their music. Isolation was key, and I find much music made in isolation to be great. It is often of a different quality. Maybe because they know that they won’t ‘get out’ before they are satisfied and strech their abilities a little longer. And maybe they subconsciously lower their built-in standard and end up with something that is not a perfect mirror of their original idea. I tend to like things that are not perfect. It somehow gives room for your own ideas. Or maybe I’m wrong.