Sept, 2001

“the new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fuelled the stock market bubble.”

Aug, 2002

“While the short-term effects of a housing bubble appear very beneficial—just as was the case with the stock bubble and the dollar bubble—the long-term effects from its eventual deflation can be extremely harmful, both to the economy as a whole, and to tens of millions of families that will see much of their equity disappear unexpectedly. The economy will lose an important source of demand as housing construction plummets and the wealth effect goes into reverse. This will slow an economy already reeling from the effects of the collapse of the stock bubble of 1999, … Unfortunately, most of the nation’s political and economic leadership remained oblivious to the dangers of the stock market and dollar bubbles until they began to deflate. This failure created the basis for the economic uncertainty the country currently faces … [which] will be aggravated further by the deflation of the housing bubble. This process will prove even more painful if the housing bubble is allowed to expand still further before collapsing.”

2003

“I am very pessimistic. We are heading into something in the world which is worse than what we experienced in 1982. It will be the worst recession since the Second World War.”

“The reckless financial policies of leading western powers in the last two decades make it likely that the next seismic debt crisis will be in America, not Argentina. It can be avoided . . . only by serious efforts to bring regulation and balance to the international economy.”

“There will be a collapse in the credit system in the rich world, led by the United States.”

Anatomy of a Doom and Gloom Blog Post

I just read a post at another blog and it says we’re all doomed

Cited passage from another economics blog which says the economy is in fact headed straight to hell. The citation also includes at least one basic mathematical error and/or one misunderstanding of a basic economic concept or number which a simple reading of the data explanations would have avoided. For example, “not in the workforce” has a very specific meaning — or, more specifically, it does not mean that everyone who “left the workforce” simply ran away from the job market screaming to the hills. As another example, the unemployment rate is a lagging economic indicator.

Because this above referenced web site said we’re doomed, it must be true.

In addition, all government economic numbers are wrong.

But wait — this number (also issued by a government agency) is correct! Why? Because it’s a bearish number, and we all know that all bearish numbers are correct! So, I’ll trumpet this one from the hills.

And — here is a link to a person in an important federal job position who says we’re all going to hell:

Link to a news story from a major news source such as Bloomberg or CBS.Marketwatch which states that a person in the Federal government indeed said something bearish about the economy.

Of course, the fact that I routinely call this same person a shill for corporate interests does not in any way lower his/her credibility. In fact — it makes it more credible. Why? Because I say so!!!!!!

And if you question my authority, I will be forced to make-up a resume to impress you, and thereby add further credibility to my statements!!!!

Here’s the deal with what Bonddad is really saying here.

The economic blogsphere — in general — did a really good job of pointing out and calling the recession. A lot of people (myself included) noted the huge amount of leverage in the system and publicly stated there was no way the economy could handle that level of debt. Score one for the blogsphere.

But then the economy started to get better. GDP started growing. Manufacturing picked-up. Retail sales started to increase. The market started to rally. In short — things started improving. But a ton of people were wedded to a negative perception. As the numbers got better they continued to argue the economy was on the brink of a collapse. And the blog posts became more and more ridicules.

Here’s the basic deal about where we are. The economy has generally turned the corner. But, we face three primary issues that need to be addressed.

1.) Most of the jobs (over 70%) lost during the recession were in manufacturing and construction. Neither of these areas is coming back at anywhere near previous levels. The housing market is still trying to recover and manufacturers are replacing employees with technology. These long-term unemployed need policies to get them working again. This is the most important issue the economy faces. Sometime ago, New Deal and I proposed starting a modern day WPA program. Considering the poor shape of the US’ infrastructure, this is a sure-fire way to get at least the construction portion of the work force going again.

2.) The housing market is healing, but needs further help. The tax credit should be extended indefinitely. Mortgages need to be modified en masse. Banks need to take the hits (which their bottom lines should be able to handle now).

3.) Financial regulation needs to be passed. In this area, we basically have two choices. Either we accept large institutions with a powerful regulator, or we break up the large institutions. Either way is fine, but make up your mind and get to it. In addition, CDS’ need to be traded on an open exchange.

Dealing with the above three points will go a long way to helping the economy continue to heal.

As for the blogosphere, look where the numbers have been headed for the last 9-12 months and you’ll see a positive direction. Does that mean it will continue? Who knows. But let the data tell you instead of your preconceptions.

Here is the complete paper, titled “WARNING: Physics Envy May Be Hazardous to Your Health,” by Andrew W. Lo and Mark T. Mueller. From the introduction:

The Financial Crisis of 2007–2009 has re-invigorated the longstanding debate regarding the effectiveness of quantitative methods in economics and finance. Are markets and investors driven primarily by fear and greed that cannot be modeled, or is there a method to the market’s madness that can be understood through mathematical means? Those who rail against the quants and blame them for the crisis believe that market behavior cannot be quantified and financial decisions are best left to individuals with experience and discretion. Those who defend quants insist that markets are efficient and the actions of arbitrageurs impose certain mathematical relationships among prices that can be modeled, measured, and managed. Is finance a science or an art?

In this paper, we attempt to reconcile the two sides of this debate by taking a somewhat circuitous path through the sociology of economics and finance to trace the intellectual origins of this conflict—which we refer to as “physics envy”—and show by way of example that “the fault lies not in our models but in ourselves”. By reflecting on the similarities and differences between economic phenomena and those of other scientific disciplines such as psychology and physics, we conclude that economic logic goes awry when we forget that human behavior is not nearly as stable and predictable as physical phenomena. However, this observation does not invalidate economic logic altogether, as some have argued.

In particular, if, like other scientific endeavors, economics is an attempt to understand, predict, and control the unknown through quantitative analysis, the kind of uncertainty affecting economic interactions is critical in determining its successes and failures… Fully reducible uncertainty is the kind of randomness that can be reduced to pure risk given sufficient data, computing power, and other resources… (O)ur taxonomy is reflected in the totality of human intellectual pursuits, which can be classified along a continuous spectrum according to the type of uncertainty involved, with religion at one extreme (irreducible uncertainty), economics and psychology in the middle (partially reducible uncertainty) and mathematics and physics at the other extreme (certainty).

However, our more modest and practical goal is to provide a framework for investors, portfolio managers, regulators, and policymakers in which the efficacy and limitations of economics and finance can be more readily understood. In fact, we hope to show through a series of examples drawn from both physics and finance that the failure of quantitative models in economics is almost always the result of a mismatch between the type of uncertainty in effect and the methods used to manage it. Moreover, the process of scientific discovery may be viewed as the means by which we transition from one level of uncertainty to the next….

Erotic Capital

by Catherine Hakim, Department of Sociology, London School of Economic

Introduction

We present a new theory of erotic capital as a fourth personal asset, an important addition to economic, cultural, and social capital. Erotic capital has six, or possibly seven, distinct elements, one of which has been characterized as ‘emotional labour’. Erotic capital is increasingly important in the sexualized culture of affluent modern societies. Erotic capital is not only a major asset in mating and marriage markets, but can also be important in labour markets, the media, politics, advertising, sports, the arts, and in everyday social interaction. Women generally have more erotic capital than men because they work harder at it. Given the large imbalance between men and women in sexual interest over the life course, women are well placed to exploit their erotic capital. A central feature of patriarchy has been the construction of ‘moral’ ideologies that inhibit women from exploiting their erotic capital to achieve economic and social benefits. Feminist theory has been unable to extricate itself from this patriarchal perspective and reinforces ‘moral’ prohibitions on women’s sexual, social, and economic activities and women’s exploitation of their erotic capital.

Madonna flaunted it in her Sex book, and still has it at 50. Jesus Luz, her toyboy lover, clearly has it, but it is rather easier at 22 years. Pierce Brosnan has it, even as he ages, long after dropping the James Bond role. Catherine Deneuve still has it, remaining sexually attractive after she reached 60. The sexy, energetic singer Tina Turner, with her fabulous legs and erotic voice, still had it at in her 50s. The commodity is erotic capital, to which sociological and economic theory have been blind, despite its palpable importance in all spheres of social life. Writers and artists are very sensitive to it. Shakespeare captured it nicely when describing Cleopatra: ‘Age cannot wither her, nor custom dull her infinite variety.’ The expanding importance of self-service mating and marriage markets, speed dating, and Internet dating contributes to the increasing value of erotic capital in the 21st century. Sociology must rise to the challenge of incorporating erotic capital into theory and empirical research.

This paper presents a theory of erotic capital and its applications in studies of social mobility, the labour market, mating, and other topics. We argue that erotic capital is just as important as economic, cultural, and social capital for understanding social and economic processes, social interaction, and social mobility. It is essential for analysing sexuality and sexual relationships. There are difficulties of measurement, but these are no greater than for social capital. In sexualized individualized modern societies, erotic capital becomes more important and more valorized, for both men and women. However, women have a longer tradition of developing and exploiting it, and studies regularly find women to have greater erotic appeal than men. We ask why erotic capital has been overlooked as an asset in sociological theory. The oblivion of the social sciences to this factor suggests that a patriarchal bias still remains in these disciplines. As women generally have more erotic capital than men, so men deny it exists or has value, and have taken steps to ensure that women cannot legitimately exploit their relative advantage. Feminists have reinforced ‘moral’ objections to the deployment of erotic capital….

Read the full paper here.

Here’s an interesting chart tracking the amount of currency in circulation:

Chart topics include real estate, employment, interest rates, and taxes.

Too much? Nah. What’s the mattah with data?

First, Frankel:

Job market confirms end of recession

The recession is over. The last piece has fallen into place, with the BLS announcement that employment rose in March.

Identifying the beginnings and ends of recessions has been difficult in recent decades because the two most important indicators, output and employment, have sometimes behaved differently from each other. Most notoriously, in the recovery that began in November 2001, employment lagged far behind economic growth. If one had gone by the labor market, one might have called it a three year recession. But if one had gone by GDP, one might have wondered whether there was a recession at all.

This time around, the difficulty is not so great. True, the magnitude of job loss after December 2007 was unparalleled since the 1930s. It was severe even relative to the loss of GDP. But contrary to some impressions, the labor market in this recovery has not lagged unusually far behind the rest of the economy. It always lags behind somewhat: due to costs of search, hiring and training, firms wait until the recovery is reasonably well established before adding workers to the payroll. But by either of two criteria, the lag has not been unusually long this time. First, the three months of greatest job loss virtually coincided with the three months of greatest output loss, in the first quarter of 2009, as had also been the the case in the 1991 and 2001 recessions.

By July 2009, job market indicators were showing their first signs of life. Second, with the latest figures, employment changes have now turned positive. This is the more definitive criterion, because a recovery is defined as a period of increasing economic activity. The nine month wait was painful. But the lag between positive income growth (June 2009) and positive job growth (March 2010) turned out to be shorter than in the preceding two recessions (one to two years)…

And here’s Thoma’s response:

“The recession is over”

Jeff Frankel — a member of the NBER Business Cycle Dating Committee — says: The recession is over.

He is basing this conclusion on the recent job market number showing positive employment growth:

…with the latest figures, employment changes have now turned positive. This is the more definitive criterion, because a recovery is defined as a period of increasing economic activity, not a period when economic activity is high. The nine month wait was painful. But the lag between positive income growth (June 2009) and positive job growth (March 2010) turned out to be shorter than in the preceding two recessions (one to two years). …

He may well be right, but I’m waiting for more than one month of somewhat encouraging employment data before coming to that conclusion. It’s always possible that one month is a blip, not a trend. In addition, the conclusion is based upon the fact that labor markets are exhibiting positive growth, but positive growth is all that is required, the strength of the growth is not the determining factor. However, even though growth is positive, it is very sluggish and as David Altig notes, at current rates of job creation, the unemployment rate will still be over 9% a year from now. So this is by no means an “all clear” signal for labor markets.

The Somali Pirates’ Business Model

by Mark Leon Goldberg

Last week, a group of investigators dispatched by the Security Council to Somalia released an exhaustive, 100 plus page report on arms trafficking, aid diversion, and other criminal activities in Somalia… I found this short explanation of the pirates’ business model, tucked away in the report’s annex, to be fascinating:

“A basic piracy operation requires a minimum eight to twelve militia prepared to stay at sea for extended periods of time, in the hopes of hijacking a passing vessel. Each team requires a minimum of two attack skiffs, weapons, equipment, provisions, fuel and preferably a supply boat. The costs of the operation are usually borne by investors, some of whom may also be pirates.

To be eligible for employment as a pirate, a volunteer should already possess a firearm for use in the operation. For this ‘contribution’, he receives a ‘class A’ share of any profit. Pirates who provide a skiff or a heavier firearm, like an RPG or a general purpose machine gun, may be entitled to an additional A-share. The first pirate to board a vessel may also be entitled to an extra A-share.

At least 12 other volunteers are recruited as militiamen to provide protection on land of a ship is hijacked, In addition, each member of the pirate team may bring a partner or relative to be part of this land-based force. Militiamen must possess their own weapon, and receive a ‘class B’ share — usually a fixed amount equivalent to approximately US$15,000.

If a ship is successfully hijacked and brought to anchor, the pirates and the militiamen require food, drink, qaad, fresh clothes, cell phones, air time, etc. The captured crew must also be cared for. In most cases, these services are provided by one or more suppliers, who advance the costs in anticipation of reimbursement, with a significant margin of profit, when ransom is eventually paid.

When ransom is received, fixed costs are the first to be paid out. These are typically:

• Reimbursement of supplier(s)

• Financier(s) and/or investor(s): 30% of the ransom

• Local elders: 5 to 10 %of the ransom (anchoring rights)

• Class B shares (approx. $15,000 each): militiamen, interpreters etc.

The remaining sum — the profit — is divided between class-A shareholders.”

Wonder if they teach that at Wharton?

From the blog of economist Greg Mankiw: Economics in One Picture.

1. Friedrich Nietzsche, Thus Spoke Zarathustra. While I ultimately didn’t learn much of substance, this book got me very excited about about ideas. Nietzsche’s vision of discovering the truth, whatever is may be, and proclaiming it, no matter how much it offends others, is still with me.

2. Ayn Rand, Atlas Shrugged. An old libertarian adage says that “it usually begins with Ayn Rand,” and in my case it’s true.

3. Ayn Rand, The Virtue of Selfishness. While I ultimately decided that her central arguments were actually incompatible with moral realism, this book nevertheless sparked my obsession with meta-ethics.

4. Murray Rothbard, Man, Economy, and State. It’s full of gross logical errors and sophistry, but still taught me at least half of what I know about econ – and 90% of what I know about how economists ought to write.

5. Ludwig von Mises, Human Action. In terms of pure economics, it’s just a poorly organized (but still beautifully written) version of Rothbard’s MES. But Mises’ implicit political economy made a huge impression on me – and I eventually realized that it’s a lot more empirically grounded than standard public choice.

6. Murray Rothbard, For a New Liberty. This is the book that made me an anarcho-capitalist. It’s got lots of problems, but still amazes me.

7. Paul Johnson, Modern Times. Some of my favorite academic historians don’t take this book seriously, but its broad brush paints a true picture of the 20th century.

8. Julian Simon, The Ultimate Resource. Simon’s amazing empirics burned away my lingering Randian pessimism about the modern world – and converted me to natalism.

9. Richard Posner, Economic Analysis of Law. Reading this book convinced me to start taking neoclassical efficiency analysis seriously. It also rekindled my love of econ right before I had to choose between law school and an econ Ph.D. So thank you, Judge Posner, for helping me make the right choice!

10. Richard Herrnstein and Charles Murray, The Bell Curve. From a young age, I thought that intelligence matters a lot. But several of my favorite K-12 teachers tricked me into abandoning my youthful insight. TBC gave me back my birthright – and persuaded me that econometrics was not a waste of time along the way.

11. Steve Landsburg, The Armchair Economist. This slim volume taught me that economic puzzles are everywhere. If Posner rekindled my love of econ, Landsburg’s delightful book poured an endless supply of gasoline on the fire.

12. Donald Wittman, The Myth of Democratic Failure. This is the book that awoke me from my dogmatic public choice slumbers – and (negatively) inspired all of my work on voter irrationality. It’s a gift.

13. Geoffrey Brennan and Loren Lomasky, Democracy and Decision. This neglected work finally explained why, contrary to orthodox public choice, basic economics implies radical differences between consumer and voter behavior.

14. Judith Harris, The Nurture Assumption. Harris sucked me into the exciting world of behavioral genetics – and got me thinking about the implications for the meaning of life.

15. Thomas Reid, Essays on the Intellectual Powers of Man. Mike Huemer sold me on the philosophy of common sense years before I actually read EIPM. But I was still shocked at how persuasively Hume’s obscure contemporary solved all the main problems of philosophy. Or to be more precise, Reid developed a philosophical technique for dissolving any philosophical problem whatever.