Pater Familias » Economics

“VAPORIZING” OVER A BILLION DOLLARS.

Philip — Thu, 02 Feb 2012 21:01:19 +0000

“VAPORIZING” OVER A BILLION DOLLARS. It’s now three months since the MF Global bankruptcy. I posted earlier that, as with the Lehman bankruptcy, it seemed to be amazingly hard to locate the assets. It seems that most Lehman assets were eventually found after a long delay. As for MF Global, this post on Zero Hedge quotes a January 30 Wall Street Journal article by Scott Paterson and Aaron Luchetti. Instead of finding the assets (including customer accounts which were required to be segregated), after three months, the preliminary investigation seems to have determined that about $1.2 billion of assets could have “vaporized” during the week before the bankruptcy filing. The source for the quote is “a person close to the investigation.”

GREECE’S ADVANTAGE IN THE CHICKEN GAME.

Philip — Wed, 01 Feb 2012 21:00:18 +0000

GREECE’S ADVANTAGE IN THE CHICKEN GAME. One advantage that Greece has in the negotiations with respect to a possible Greek default is that Greece’s moves will not be required until after the deadline. The deadline for the funding from other insitutions that is needed to prevent a default on Greek debt is in March. The spending and other economic reforms that Greece is being asked to make would be made in the future. Thus far, in previous bailout negotiations, the Greeks have promised reforms, but haven’t made them. Now, with very little time to go before the deadline, as this AP article reports, Germany is asking Greece to “temporarily cede sovereignty over tax and spending decisions to a powerful eurozone budget commissioner before it can secure further bailouts, an official in Berlin said Saturday.” The impetus for the German demand is that: “During every verification mission last year, the troika found huge implementation shortfalls….”

BANK PREPARATIONS FOR A EURO DEFAULT.

Philip — Tue, 31 Jan 2012 21:06:56 +0000

BANK PREPARATIONS FOR A EURO DEFAULT. Gillian Tett says that banks are apparently making some secret contingency plans to deal with a euro breakup—plans that are kept secret just as the plans to deal with a U.S default were kept secret last year. Although there is an estimated 20% to 25% probability of a default event for the Euro, and although the default would be more serious than the “technical default” that the U.S. was facing (and may yet face again), Gillian Tett reports that apparently the preparations by European banks for a Euro default are less extensive than they were for the possible U.S. default. She thinks that European leaders would do well to study the planning that was made for the dollar.

HOW BANKS PREPARED FOR A U.S. DEFAULT.

Philip — Tue, 31 Jan 2012 21:01:56 +0000

HOW BANKS PREPARED FOR A U.S. DEFAULT. Gillian Tett describes how large banks in the United States made preparations in 2001 for a possible United States technical default which might have resulted from the Congressional impasse over whether to raise the debt ceiling. Banks stocked their cash machines with as much currency as they could. The largest banks were supposed to have spent about $50 million rewriting contracts to take account of a possible default. There were detailed discussions at senior levels about the problems both with other banks and with federal regulators.

MORE LOOKING AT THE FUTURE IN TERMS OF PROBABILITIES.

Philip — Mon, 30 Jan 2012 19:26:03 +0000

MORE LOOKING AT THE FUTURE IN TERMS OF PROBABILITIES. I was of course pleased to see a report by a good journalist which expressed the opinions of informed professionals. The article gives a useful idea of the range of uncertainty about what will happen with the euro. The same week, as this article in the Economist reports, the Federal Reserve Bank began publishing the predictions of all the members of the Federal Open Market Committee (the main policy making body of the Fed). The accompanying chart shows the great divergence of the 17 policymakers. For 2014, 5 of them think the appropriate federal funds rate will be greater or equal to 2%; 9 think it will be less than 1%. In the context of extremely low interest rates, the predictions reflect considerable uncertainty as to the course of the next three years.

A 25 % CHANCE OF A EURO DEFAULT?

Philip — Mon, 30 Jan 2012 19:24:19 +0000

A 25% CHANCE OF A EURO DEFAULT? In the Financial Times for January 27, Gillian Tett had the kind of article that I would like to see more of. She apparently talked to a number of senior bankers in Davos Switzerland for the big meeting and asked for their probability estimates for the breakup of the euro. The estimates are in the 20% to 25% range. The chance of the eurozone “muddling through” is thought to be about 70%. Kids, when I posted here almost two years ago about the possibility of the euro being threatened, the idea was startling enough to me that I reminded you (and myself) that we had had euros in our wallets.

A DECISION SCIENTIST USES A DECISION TREE.

Philip — Mon, 23 Jan 2012 03:10:49 +0000

A DECISION SCIENTIST USES A DECISION TREE. Memory from forty years ago says that Howard Raiffa, one of the giants of decision science, once said in class that he had asked Kenneth Arrow, a future Nobel Prize winner, whether he had used a decision tree when he had accepted a position at a different university. Arrow had not. Raiffa said that before taking a different position, he had in fact used a decision tree. And then he had slept on the decision to see whether it felt right. The last step is important.

DECISION TREES FOR PATIENTS.

Philip — Sun, 22 Jan 2012 03:08:06 +0000

DECISION TREES FOR PATIENTS. Laura Landro’s review describes how Doctors Groopman and Hartzband “examine a formula for rational decision-making often used in economics: Measure the probability of an outcome and place a numerical value on the outcome itself.” The probable value of each medical result can then be compared. The tool described is known as a “decision tree.” It is called a decision tree because there may be a series of outcomes to be evaluated with each choice, and a graph of the analysis looks like the branches of a tree. Here is an example of the use of a decision tree with a drawing of a decision tree. Yoram Bauman, the Standup Economist I posted about here, begins his exposition of microeconomics in THE CARTOON INTRODUCTION TO ECONOMICS with decision trees.

DECIDING WHAT KIND OF PATIENT YOU ARE.

Philip — Sat, 21 Jan 2012 03:18:38 +0000

DECIDING WHAT KIND OF PATIENT YOU ARE. Jerome Groopman (an oncologist) and Pamela Hartzband (an endocrinologist) have written YOUR MEDICAL MIND, which analyzes the role of patient choices in medical decisions. (I have relied on this review by Daniel J. Levitin and this review by Laura Landro.) The premise of the book is that for many medical decisions, there is no black and white answer so that often patients will have to make decisions based on probabilities. The doctor and the patient should work together in doing this. The authors (husband and wife) propose two useful dichotomies: first, patients tend to be maximalists or minimalists. Dr. Groopman was a maximalist until a bad experience with back surgery made him more risk averse. Dr. Hartzband identifies herself as a minimalist, using medicines only when absolutely necessary. Second, a patient can be biased either for or against new technology. Is a patient willing to try a new medical treatment before it has been “proved”? Is a patient willing to let nature take its course perhaps with the aid of “alternative medicine”. The two dichotomies result in four classifications. Mary Jane and I tend to be maximalists who are open to new technology.

A VOTE FOR THE INVENTION OF AGRICULTURE BEING A GOOD THING.

Philip — Thu, 19 Jan 2012 01:46:00 +0000

A VOTE FOR THE INVENTION OF AGRICULTURE BEING A GOOD THING. In her article, Elif Batumen raises the argument Jared Diamond makes that the invention of agriculture was “the worst mistake in the history of the human race”—responsible for “the gross social and sexual inequality, the disease and despotism, that curse our existence.” I raised the issue in this post, without expressing my strongly-held opinion on the issue. Diamond’s argument relies on the fact that agriculture permits a population density of about 100 times the population density for hunter-gathering but that the population increase with agriculture eventually led to Malthusian traps. However, the hunter-gatherers presumably also encountered Malthusian traps—consisting of whatever was holding their population size down— but at much lower levels of population density. In any event, we don’t see many people today who have a choice making the choice to live as hunter-gatherers.

I am appalled by Diamond’s position. I acknowledge I have a conflict of interest on this issue. I would not be around in Diamond’s utopia. And billions of other people would not be around either. And the odds are we would not have had Shakespeare or Chekhov. It is scary to read about somebody who is walking around thinking it would be a good thing if most of the people in the world were not there.

DID BEER LEAD TO THE INVENTION OF AGRICULTURE?

Philip — Wed, 18 Jan 2012 01:43:19 +0000

DID BEER LEAD TO THE INVENTION OF AGRICULTURE? I had a conversation recently with my friend Don Warfield in which he told me about the archaeological theory that hunter gatherers turned to agriculture because of beer. This article describes the theory of biomolecular archaeologist Patrick McGovern that it was the discovery of beer that led hunter-gatherers to develop agriculture approximately 11,000 years ago. McGovern says: “Available evidence suggests that our ancestors in Asia, Mexico, and Africa cultivated wheat, rice, corn, barley, and millet primarily for the purpose of producing alcoholic beverages.” McGovern rests his argument not only on physical evidence but also on the premise that it would have been more difficult for early man to learn to bake bread than it would be to learn to make alcoholic beverages. The theory is sometimes referred to as the “beer before bread” hypothesis. This Smithsonian article tells more about the research by Patrick McGovern into “identifying traces of alcoholic drinks on prehistoric finds.”

SELLING GOODS IN THE SHADOW MARKET.

Philip — Tue, 10 Jan 2012 01:26:02 +0000

SELLING GOODS IN THE SHADOW MARKET. In the shadow market, the biggest flow of goods is from China, but large American companies like Procter & Gamble make their products available to these markets through local distributors. Neuwirth explains how the illegal goods get from China to the underground markets: “There are the guys who sneak stuff out of the port. Then there are the guys who get it across the border. And there are the truck drivers and the loaders and unloaders. It’s a fantastic number of people—all of them working under the table.” As for international brands, the local brand name is often a variant—”Guuucci” with three u’s for example.

Neuwirth’s final point is that: “It’s not a bureaucrat in Washington or Nigeria who can best establish what’s needed to help the poor in Lagos. It’s the people who are working in these markets and living on the streets who can tell us that.”