The Democratic Tendency

Deogolwulf explains The Democratic Tendency of the modern Brit — or American, or European, really:

He notices that:
(1) Good government is lacking (in whatever way he might define it: fostering liberty, benevolence, lollipops for all, etc.)
He assumes that:
(2) Democracy is good government
He infers that:
(3) Democracy is lacking
And, having furthermore assumed that all good government is democratic, and wishing for more good government, he concludes that:
(4) We need more democracy.

Siamese Twins

The original "Siamese twins" were a pair of conjoined twins, Chang and Eng Bunker, who were born on May 11, 1811 in Siam (now Thailand), in the province of Samutsongkram, to a Chinese fisherman (Ti-eye) and a half-Chinese/half-Malay mother (Nok).

They were joined at the sternum by a small piece of cartilage; modern surgeons would have easily separated the two.

In 1829, they were discovered by a British merchant named Robert Hunter, and he went on to exhibit them as a curiosity during a world tour.

Here's where the story gets particularly odd:

Upon termination of their contract with their discoverer, they successfully went into business for themselves. In 1839, while visiting Wilkesboro, North Carolina, the twins were attracted to the town and settled there, becoming naturalized United States citizens.

Determined to start living a normal life as much as possible, the brothers settled on a plantation, bought slaves, and adopted the name "Bunker". On April 13, 1843, they married two sisters: Chang to Adelaide Yates and Eng to Sarah Anne Yates. Chang and his wife had 10 children; Eng and his wife had 11. In time, the wives squabbled and eventually two separate households were set up just west of Mount Airy, North Carolina in the community of White Plains – the twins would alternate spending three days at each home. During the American Civil War Chang's son Christopher and Eng's son Stephen both fought for the Confederacy. The twins died on the same day in 1874. Chang, who had been in declining health for several years, died first; Eng died one hour later.

In fact, the Bunker clan has more branches than a loblolly pine:

Their descendants — some 1,500 — have scattered across the country, but many still live in Mount Airy, a town of 8,000 north of Winston-Salem, where the slow roll of the Piedmont plateau lifts to the Blue Ridge Mountains.

(Hat tip to Yana.)

How China has created a new slave empire in Africa

Peter Hitchens was in a car attacked by a Congolese mob, but he got away. Why did these semi-starved miners want him dead?

The diggers feared — and their evil, sinister bosses had worked hard on that fear — that if people like me publicised their filthy way of life, then the mine might be closed and the $3 a day might be taken away.

I can give you no better explanation in miniature of the wicked thing that I believe is now happening in Africa.

Out of desperation, much of the continent is selling itself into a new era of corruption and virtual slavery as China seeks to buy up all the metals, minerals and oil she can lay her hands on: copper for electric and telephone cables, cobalt for mobile phones and jet engines — the basic raw materials of modern life.

It is crude rapacity, but to Africans and many of their leaders it is better than the alternative, which is slow starvation.

On the one hand, he notes that his journalism — which is sure to trigger the "international community" into action — will cost them their jobs, and that their only alternative is slow starvation, yet he clearly thinks he's doing the Lord's work by stopping the "evil" Chinese "slavers" buying up minerals from Africans.

From 12 years onwards you learn differently

From 12 years onwards you learn differently than in your earlier years:

Eight-year-old children have a radically different learning strategy from twelve-year-olds and adults. Eight-year-olds learn primarily from positive feedback ('Well done!'), whereas negative feedback ('Got it wrong this time') scarcely causes any alarm bells to ring. Twelve-year-olds are better able to process negative feedback, and use it to learn from their mistakes. Adults do the same, but more efficiently.

The switch in learning strategy has been demonstrated in behavioural research, which shows that eight-year-olds respond disproportionately inaccurately to negative feedback. But the switch can also be seen in the brain, as developmental psychologist Dr Eveline Crone and her colleagues from the Leiden Brain and Cognition Lab discovered using fMRI research. The difference can be observed particularly in the areas of the brain responsible for cognitive control. These areas are located in the cerebral cortex.

In children of eight and nine, these areas of the brain react strongly to positive feedback and scarcely respond at all to negative feedback. But in children of 12 and 13, and also in adults, the opposite is the case. Their 'control centres' in the brain are more strongly activated by negative feedback and much less by positive feedback.

(Hat tip to FuturePundit.)

We need a Door Number Three for IT professionals

Cringely says, We need a Door Number Three for IT professionals:

I have a friend of 20 years who is in a key technical role at a very large company. He's too vital to the company to risk losing but too geeky to fit in. He's on the craft (non-management) salary scale, but way higher than he ought to be for having no direct responsibility. All he does, in fact, is from time to time save his company from ruin. And even more rarely, he saves all the rest of us from ruin, too, in ways I am not at liberty to explain. How do you manage such a guy? Where he works they have him report to the CEO. The Big Guy has 5-6 direct reports and one of them — my friend — doesn't manage anyone or anything.

THAT'S Door Number Three.

Somali Pirates Involved in Shootout, Leaving 3 Dead, U.S. Official Says

Somali Pirates Involved in Shootout, Leaving 3 Dead, U.S. Official Says:

Disagreements between Somali pirates holding a Ukrainian ship laden with tanks and heavy weapons escalated into a shootout and three pirates are believed dead, a U.S. defense official said Tuesday. The pirates denied the report.

The U.S. destroyer USS Howard and several other American ships have surrounded the cargo ship Faina, which was hijacked Thursday and is now anchored off the lawless coast of Somalia. The pirates have demanded a ransom of $20 million and the U.S. Navy cordon aims to prevent them from taking any of the weapons ashore.

The official in Washington who reported the shootout spoke on condition of anonymity because he was not authorized to speak on the record. He refused to elaborate.

But the pirate spokesman insisted the report was not true. "We didn't dispute over a single thing, let alone have a shootout," pirate spokesman Sugule Ali said by satellite telephone Tuesday.

He said the Somali pirates were celebrating the Muslim feast of Eid al-Fitr despite being surrounded by American warships and helicopters.

"We are happy on the ship and we are celebrating Eid," Mr. Ali said. "Nothing has changed." The Islamic feast marks the end of the holy month of Ramadan.

Do young Somalis take a career-aptitude test that points to options like pirate spokesman?

The Crazy Dream-Car

Wil Shipley — who owns a Lotus Elise, the gas-powered car the Tesla is built on — calls the Tesla "the the crazy dream-car that a kid might design in his naivety of how the world really works, except some engineers didn't get the memo on what's possible, and went ahead and built it":

It's crazy-fast. It handles like a jet fighter. It gets the equivalent of about 140 mpg. It has no gears. It requires almost no maintenance.e It's gorgeous. It's whisper-quiet. And, in Seattle, runs off hydro power.

So, yes, I test-drove a Tesla today, for five laps on a closed course in the parking lot of a defunct K-mart. Then I took my supercharged Lotus Elise around the same course. (The Tesla I drove was an engineering prototype but is said to be very close to the one I'll get next year.)
[...]
Remember: this car is NOT an automatic: there are no damn gears. It's not shifting for you; there's no annoying pauses where the car decides what gear you might want, right in the middle of your burn. The engine is basically hooked up directly to the damn wheels. It's amazing. It has that responsive feeling of when you are driving a normal car in first gear, except it has that no matter how fast you are going.
[...]
Normally, features like "traction control" or "no shifting" put me off of a car, because they essentially translate to "low-performance-idiot-mode." You turn them on and you feel like the car is driving and you're a passenger. I've hated 'em in Ferraris and Mercedes SLs.

With the Tesla, these features are put in to allow you to drive harder and faster and still feel completely in command. I am driving. I feel the road. I feel the wheels.

Branagh in talks to direct 'Thor'

Kenneth Branagh is in talks to direct 'Thor' — aye, verily:

Kenneth Branagh is negotiating to direct Thor, the next Marvel Comics property that will be turned into a live-action film by Marvel Studios. Pic will be released in 2010.

Marvel Studios chief Kevin Feige's choice of Branagh is surprising, as Branagh hasn't really directed an action-heavy film since his debut on Henry V, a bloody telling of the British king's conquest of France.

Branagh is the latest in a string of directors — such as Jon Favreau (Iron Man), Christopher Nolan (the Batman franchise) and Gavin Hood (X-Men Origins: Wolverine) — with arthouse roots taking on big-budget comicbook fare.

Marvel will set a distributor for Thor shortly.

Thor comicbook adaptation, penned by Mark Protosevich, follows disabled medical student Donald Blake, who has an alter ego as the hammer-wielding Norse god Thor.

Marvel will self-finance the film via its $500 million credit facility through Merrill Lynch. Marvel used that coin to fund both Iron Man and The Incredible Hulk and will do the same for the Iron Man sequel that has director Favreau and star Robert Downey Jr. returning.

The Thor negotiations come during a resurgence for Branagh. He's currently drawing raves on the London stage in the title role of Ivanov, and he'll next be seen acting in the Richard Curtis-directed The Boat That Rocked and the Bryan Singer-helmed Valkyrie.

Valkyrie is not, by the way, a Norse-mythology movie.

Finance is interested in you

You may not be interested in finance, to paraphrase Trotsky, but finance is interested in you, Mencius Moldbug notes:

1. We do not have a free-market financial system.

2. We have never had a free-market financial system.

3. Leaving the financial system to "work things out on its own" will not produce a free-market financial system. It will produce a smoking heap of rubble.

4. Paulson's bailout is, if anything, far too weak. Our financial system is part of the government. The proper first step is to stop lying about this. This means nationalizing the banks. This is not an expansion of government, but a recognition of its actual size. It is not an expenditure, but a revision of accounting to reflect reality.

5. A free-market financial system would be way cool. More important, it would be extremely stable. But the only way to create one is to build it right from the start. If you have a car and you want a motorcycle, sell your car and buy a motorcycle. Don't decide to call your car a "four-wheeled motorcycle," and don't think unscrewing two of the wheels will solve the problem.

6. Therefore, the government should close down the financial system we have now and replace it with one that doesn't suck. What is the probability that this will happen? Zero. But at least you know.

The housing market works pathologically

The housing market works pathologically, Edward Leamer notes:

A normal market works because demand curves are downward sloping, but for homes demand curves can be upward sloping. Declining prices in many regions are not bringing buyers back to the market. Price declines are creating the expectation of more price declines to come, and encouraging prospective buyers to postpone their decisions, which causes more price declines, and eventually overshooting of prices. When prices get back to normal and buyers have not returned, that’s when we need to find ways to bring the buyers back.

(Hat tip to Art De Vany.)

Carbon nanotechnology in a 17th-century Damascus sword

Researchers have found what might be called carbon nanotechnology in a 17th-century Damascus sword:

Damascus blades were forged from small cakes of steel from India called wootz. All steel is made by allowing iron with carbon to harden the resulting metal. The problem with steel manufacture is that high carbon contents of 1–2% certainly make the material harder, but also render it brittle. This is useless for sword steel since the blade would shatter upon impact with a shield or another sword. Wootz, with its especially high carbon content of about 1.5%, should have been useless for sword-making. Nonetheless, the resulting sabres showed a seemingly impossible combination of hardness and malleability.

Reibold's team solved this paradox by analysing a Damascus sabre created by the famous blacksmith Assad Ullah in the seventeenth century, and graciously donated by the Berne Historical Museum in Switzerland. They dissolved part of the weapon in hydrochloric acid and studied it under an electron microscope. Amazingly, they found that the steel contained carbon nanotubes, each one just slightly larger than half a nanometre. Ten million could fit side by side on the head of a thumbtack.

Carbon nanotubes are cylinders made of hexagonally-arranged carbon atoms. They are among the strongest materials known and have great elasticity and tensile strength. In Reibold's analysis, the nanotubes were protecting nanowires of cementite (Fe₃C), a hard and brittle compound formed by the iron and carbon of the steel. That is the answer to the steel's special properties — it is a composite material at a nanometre level. The malleability of the carbon nanotubes makes up for the brittle nature of the cementite formed by the high-carbon wootz cakes.

It isn't clear how ancient blacksmiths produced these nanotubes, but the researchers believe that the key to this process lay with small traces of metals in the wootz including vanadium, chromium, manganese, cobalt and nickel. Alternating hot and cold phases during manufacture caused these impurities to segregate out into planes. From there, they would have acted as catalysts for the formation of the carbon nanotubes, which in turn would have promoted the formation of the cementite nanowires. These structures formed along the planes set out by the impurities, explaining the characteristic wavy bands, or damask (see image at top), that patterns Damascus blades.

Apparently the ore used to produce wootz came from Indian mines that were depleted in the eighteenth century, and thus the ability to manufacture Damascus swords was lost.

How To: Take Down Somali Pirates

Why is David Axe writing about how to take down Somali pirates?

The U.S. Navy destroyer Howard continues to shadow the Ukrainian vessel Faina, which Somali pirates seized last week. Faina is loaded with around three dozen T-72 tanks and other weapons reportedly bound for Kenya. "Howard is on-station," Commander Curtis Goodnight, Howard's skipper, told a Navy reporter. "My crew is actively monitoring the situation." The destroyer has even established unspecified "bridge-to-bridge" comms with the hijacked ship.

What might the Navy do if ordered to secure the seized weapons? Two recent French anti-piracy raids might offer a preview. In one raid in April, French commandos in helicopters, operating from ships, chased pirates onto land. A sniper in one chopper shot out the engines of the pirates' vehicles; another chopper landed commandos to grab six of the startled Somalis.

In another raid in September, French commandos parachuted into the water near a hijacked yacht, under the cover of darkness, and swam a short distance to board, unseen. They shot dead one pirate, captured others and freed the yacht's owners.

So if the Pentagon decides to take out the Faina pirates, how's it going to go down? Four words: Djibouti (where U.S. Special Operations Command has a base north of Somalia), helicopters, Navy SEALs.

America Must Rescue the Bonuses at Goldman Sachs

Michael Lewis satirically pleads that America Must Rescue the Bonuses at Goldman Sachs:

The total collapse of the global financial system is one thing — everyone at Davos in January saw that coming. But the shrinkage of the Goldman Sachs Group Inc. bonus pool is another. Whatever else the Treasury achieves it must know that if the employees of Goldman suffer any sort of pay cut, it will be judged to have failed. And our country may never recover.

Last year Goldman paid its employees $20 billion, 44 percent of the firm's revenue. Chief Executive Officer Lloyd Blankfein took home $68.5 million, and many otherwise ordinary human beings took home $10 million or more.

This inspired young people everywhere, many of whom may have privately wondered whether it was still worth their time to become investment bankers. Torn between a future in, say, the law and the manufacture of mezzanine CDOs they sucked up their courage and plunged onto Wall Street. And thank God for that: We needed the best and the brightest to get us into this mess, and we'll need the best and the brightest to get us out of it.
[...]
To its credit the government has thus far done pretty much all it can to prevent any suffering inside the firm. Its extreme sensitivity to Goldman's pain is the only way to explain its actions thus far.
[...]
Think of Wall Street as a poker game and Goldman as the smartest player. It's sad when you think about it this way that so much of the dumb money on Wall Street has been forced out of the game. There's no one left to play with. Just as Goldman was about to rake in its winnings and head home, the U.S. government stumbles in, fat and happy and looking for some action. I imagine the best and the brightest inside Goldman are right this moment trying to figure out how it uses the Treasury not only to sell their own crappy assets dear but also to buy other people's crappy assets cheap.

At any rate, it won't take long for Goldman Sachs to figure out how to make that $700 billion work for Goldman Sachs. This you can trust them to do. After all, Warren Buffett just did.

Starship Troopers Meets G.I. Joe

I'm not sure that I'd describe the XM25 Individual Air Burst Weapon as Starship Troopers Meets G.I. Joe — but it does look like a good choice for hunting xenomorphs:

Current infantry weapons can shoot at or through an obstacle concealing enemy threats, but the Army has been trying for years to come up with a weapon for engaging targets behind barriers without resorting to mortars, rockets or grenades — all of which risk greater collateral damage. After fits and starts using a 20mm rifle housed in a bulky, overweight, complicated shell, technology finally caught up to shave the XM25 from 21 pounds to a little more than 12 pounds.

If the XM25 does what its developers hope, it will be able to fire an air-bursting round at a target from 16 meters away out to 600 meters with a highly accurate, 360-degree explosive radius.

The XM25 is about as long as a collapsed M4, weighs about as much as an M16 with an M203 grenade launcher attached and has about as much kick as a 12-gauge shotgun, said Barb Muldowney, Army deputy program manager for infantry combat weapons.

The semi-auto XM25 comes with a four-round magazine, though testers are looking at whether to increase the capacity to as much as 10 rounds.

Brains are what really makes this Buck Rogers gun work — it has them. The weapon combines a thermal optic, day-sight, laser range finder, compass and IR illuminator with a fire-control system that wirelessly transmits the exact range of the target into the 25mm round's fuse before firing.

A Soldier can aim the XM25 at a wall concealing a sniper, for example, but "dial in" or adjust the distance by an additional meter above the target. When fired, the Alliant Teksystems-built round will explode above the enemy's position, essentially going around the obstruction, Muldowney said.

Military-grade weapons aren't cheap — but the XM25 seems oddly inexpensive next to the M4 carbine:

The weapon costs about $25,000 each, but experts were quick to point out that a fully-loaded M4 for optics and pointers costs pretty close to $30,000. Each ATK-made 25mm round costs about $25.

As Heckler and Koch, makers of the weapon itself, and L3 Communications — which makes the fire control system — crank out more weapons, the Army plans to push them out to the field for testing beginning in March 2009. That could include the first use of such a weapon in combat, Cline said.

If all goes according to plan, Soldiers might have their first XM25s in hand by 2014, far sooner than the Army's small arms community had predicted even last year.

(I have mentioned the XM25 before.)

More virulent strain of herpes hitting sumo wrestlers

More virulent strain of herpes hitting sumo wrestlers:

The herpes simplex virus type 1 (HSV-1) is notorious among the general public for causing unsightly cold sores and sore throats.

The symptoms recur because the pathogen can hide in nerve cells for a long time and then leap out.

But a more extreme form of the disease occurs among athletes who take part in close-contact sports, such as sumo, rugby and judo.

Known as Herpes gladiatorum, or scrumpox, it causes painful, virus-filled blisters to form on the face and the neck that can damage the skin. Fever, headaches and an infection of the lymph nodes can also result.
[...]
In a study published in a British journal, Japanese scientists looked at blood samples from 39 sumo wrestlers in Tokyo who had been diagnosed with H. gladiatorum between 1989 and 1994.

Tests revealed that some of the wrestlers had been infected only once, while in others, the disease had recurred several times.

The culprit for this was a variant of HSV1-1 called BgKL, which reactivates, spreads more efficiently and causes more severe symptoms than other strains, they found.

The authors, led by Kazuo Yanagi of the National Institute of Infectious Diseases in Tokyo, believe the H. gladiatorum was transmitted by other wrestlers in the "stable" where they live and train together.

"Two of the wrestlers died as a result of their infections, so cases like this do need to be investigated," Yanagi said in a press release.

Poor homeowners and greedy bankers correctly assessed the market

Joe Torben notes that poor homeowners and greedy bankers correctly assessed the market:

Any number of things could have happened, but the three most likely were:

1. The bubble will burst after I get out or after I have made enough off it to come out well anyway. This is essentially true for most people getting in before 2005 or so. ("There are no losses")

2. The bubble will burst while I'm still in. This will force me to leave my house and rent, but if I hadn't bought, I would have rented anyway. I had a house for a few years, so I'm really better off. For the bankers: a few years of extravagant bonuses and a job loss may be better than no job if I hadn't started at the bank in the first place. However, the major financial burden will fall on the taxpayers. ("Profits are private, losses are socialized")

3. The bubble will burst, and those responsible will have to foot the bill. ("Profits and losses are private")

Doing what most everyone did was correct in scenario 1 and 2, but incorrect in scenario 3. After the fact, we know that scenario 2 was the one that came to pass. Suggesting that this was in some way unexpected seems a bit silly to me. Suggesting that people should have behaved differently, even though we know now that it was in fact in their best interest to act the way they did seems more than a bit silly to me. In fact, that is downright idiotic!

Pundits As Moles

Robin Hanson describes Pundits As Moles:

In the spy business a "mole" pretends to work for A, but really works for B. The mole may usually do very little for B, and B may avoid acting visibly on any info the mole passes on. The idea is to move the mole up the A hierarchy, and to wait for rare high leverage situations.

Unfortunately something similar seems to hold for pundits, columnists, etc. Before becoming a pundit someone may spend a long career as a trustworthy academic or journalist, giving careful measured evaluations of the small issues before them. As a pundit they may even usually give thoughtful reasoned commentary on issues of moderate importance.

But every four years, when a major election is at stake, or when a big crisis appears, styles change. In their world folks mutter, "pull out all the stops, this is really important." They may retain the outward appearance of keeping to their previous standards, but in fact they start to say whatever it takes to push "their side."

Just as moles mean we can rely on our spies least when we need them most, pushy election pundits also imply we can rely on our pundits least when we need them most.

Competent Elites

Eliezer Yudkowsky has dealt with some surpisingly competent elites:

One of the major surprises I received when I moved out of childhood into the real world, was the degree to which the world is stratified by genuine competence.
[...]
I was invited once to a gathering of the mid-level power elite, where around half the attendees were "CEO of something" — mostly technology companies, but occasionally "something" was a public company or a sizable hedge fund. I was expecting to be the youngest person there, but it turned out that my age wasn't unusual — there were several accomplished individuals who were younger. This was the point at which I realized that my child prodigy license had officially completely expired.

Now, admittedly, this was a closed conference run by people clueful enough to think "Let's invite Eliezer Yudkowsky" even though I'm not a CEO. So this was an incredibly cherry-picked sample. Even so...

Even so, these people of the Power Elite were visibly much smarter than average mortals. In conversation they spoke quickly, sensibly, and by and large intelligently. When talk turned to deep and difficult topics, they understood faster, made fewer mistakes, were readier to adopt others' suggestions.

No, even worse than that, much worse than that: these CEOs and CTOs and hedge-fund traders, these folk of the mid-level power elite, seemed happier and more alive.

This, I suspect, is one of those truths so horrible that you can't talk about it in public. This is something that reporters must not write about, when they visit gatherings of the power elite.

Because the last news your readers want to hear, is that this person who is wealthier than you, is also smarter, happier, and not a bad person morally. Your reader would much rather read about how these folks are overworked to the bone or suffering from existential ennui. Failing that, your readers want to hear how the upper echelons got there by cheating, or at least smarming their way to the top. If you said anything as hideous as, "They seem more alive," you'd get lynched.

Read the whole thing — and the comments.

An Inconvenient Bag

Ellen Gamerman calls the trendy green giveaway of the moment, the reusable shopping bag, An Inconvenient Bag, because it is a case study in how tricky it is to make products environmentally friendly:

"If you don't reuse them, you're actually worse off by taking one of them," says Bob Lilienfeld, author of the Use Less Stuff Report, an online newsletter about waste prevention. And because many of the bags are made from heavier material, they're also likely to sit longer in landfills than their thinner, disposable cousins, according to Ned Thomas, who heads the department of material science and engineering at Massachusetts Institute of Technology.

Used as they were intended, the totes can be an environmental boon, vastly reducing the number of disposable bags that do wind up in landfills. If each bag is used multiple times — at least once a week — four or five reusable bags can replace 520 plastic bags a year, says Nick Sterling, research director at Natural Capitalism Solutions, a nonprofit focused on corporate sustainability issues.
[...]
Finding a truly green bag is challenging. Plastic totes may be more eco-friendly to manufacture than ones made from cotton or canvas, which can require large amounts of water and energy to produce and may contain harsh chemical dyes. Paper bags, meanwhile, require the destruction of millions of trees and are made in factories that contribute to air and water pollution.

Many of the cheap, reusable bags that retailers favor are produced in Chinese factories and made from nonwoven polypropylene, a form of plastic that requires about 28 times as much energy to produce as the plastic used in standard disposable bags and eight times as much as a paper sack, according to Mr. Sterling, of Natural Capitalism Solutions.
[...]
Getting people to actually use the bags is another matter. Maximizing their benefits requires changing deeply ingrained behavior, like getting used to taking 30-second showers to lower one's energy and water use. At present, many of the bags go unused — remaining stashed instead in consumers' closets or in the trunks of their cars. Earlier this year, KPIX in San Francisco polled 500 of its television viewers and found that more than half — 58% — said they almost never take reusable cloth shopping bags to the grocery store.

Phil Rozenski, director of environmental strategies at the plastic bag maker Hilex Poly Co., believes even fewer people remember to use them. Based on consumer surveys conducted by the company, he says roughly the same number of people reuse their bags as bring disposable bags back to the grocery store for recycling — a figure he puts at about 10% of consumers, according to industry data.
[...]
Mr. Shiv also says that according to surveys done by his graduate students, many shoppers say they are less likely to carry a retailer's branded reusable bag into a competing store. "What these bags are doing is increasing loyalty to the store," he says.

This anecdote says a lot:

Sarah De Belen, a 35-year-old mother of two from Hoboken, N.J., says she uses about 30 or 40 plastic bags at the grocery store every week. Late last year, she saw a woman at the supermarket with a popular canvas tote by London designer Anya Hindmarch and promptly purchased one online for about $45.

But Ms. De Belen says she soon realized she'd need 12 of them to accommodate an average grocery run. "It can hold, like, a head of lettuce," she says. Besides, she adds, it's too nice to load up with diapers or dripping chicken breasts.

The overbuilding problem is going to be behind us early next year

The overbuilding problem is going to be behind us early next year, Edward Leamer suggests:

High rates of homebuilding from 2004 to 2006 gave us about a million more single-family homes than suggested by historical rates of building, illustrated to the right. Since 2006, plummeting rates of building have reduced that home overhang to about 400 thousand units, and we should be back on trend in the stock of homes very early in 2009.

A rough calculation of the remaining excess in home prices can be made by extending the 1975-2002 inflation-adjusted trend in the OFHEO home price index to 2008q2 and comparing that with the actual index. That suggests a remaining overvaluation of 24%. Using the 2008q2 rate of decline in home prices, -5%, and the inflation rate of 2%, it will take a little less than three years for home prices to get back to trend. It seems likely going forward that the inflation rate will be higher and the rate of home price decline greater. It is also the case that some of the excess is a consequence of the low rate of interest. Still it doesn’t seem reasonable to expect this pricing problem to be solved nationwide before the end of 2009 at the earliest when home prices are likely to be down another 10% at least.

The data thus suggest that the overbuilding problem is going to be behind us early next year, when the stock of single-family homes will be back to normal, but the price declines for new and existing homes are likely to go on for at least another year or two.

Please think this over

Edward Leamer is Professor of Economics and Management at UCLA. Please think this over, he pleads:

Here are some choice words from the Treasury’s LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS:

The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

When I first read those words in an e-mail, I thought it was an Internet joke. I was sure the Treasury Secretary would be explaining exactly how he would acquire these assets, since the Devil is in the details. Instead, the Secretary merely wants authority to do whatever he wants. He doesn’t even give us a mission statement, or any metrics for the success of this venture.

I have lots of questions about this and I am sure you have many more:

• How is the Treasury going to determine the values of those illiquid mortgage-backed securities when Wall Street has failed to do so? Surely their values depend on future home prices and future mortgage default rates. How is the Treasury going to forecast home prices and default rates? Will these forecasts be made public?
• How is the Treasury going to avoid the winner’s curse: paying more for these assets than anyone else is willing to? More importantly, how can this plan help the financial institutions unless Treasury does pay more for these securities than their current private market auction value, and even more than their current book value, thus in effect making a capital infusion into the banking system?
• Isn’t there a big risk here for many financial institutions that by standard accounting rules are required to value their mortgage-backed-securities at “market prices” rather than internal prices, if there is a market. Once the Treasury starts buying these illiquid assets, there is a risk of major accounting losses that will raise more insolvency problems rather than less.
• Is Treasury going to buy these securities from firms that are well-capitalized and don’t need the help as well as from firms that are on the brink of insolvency? In other words, is this a way to rescue the mismanaged firms and keep the poorly performing management in place? If it doesn’t do that, what help can the plan offer?
• What exactly is the definition of a “financial institution” from which the Treasury will buy mortgage-backed securities? Does it include pension funds, and mutual funds? How about the loan I gave my neighbor that he now refuses to pay back? Am I a financial institution? I would like to be included in this too.
• How much in losses from this speculative enterprise can taxpayers reasonably expect? What systems will be put in place to limit the losses? Who will be held accountable for losses that exceed the limit? Who besides the taxpayers will have skin in the game?
• Why not just make a one-time Federal capital infusion into all the troubled banks, and let them do with the mortgage-backed securities whatever they like? That would leave the corpses in the hands of those who know where they are buried.¹ Wouldn’t that be a more honest and more efficient way of doing this bailout? Or maybe we should just nationalize the whole banking system? (I don’t mean that!!!)
• Perhaps most importantly, have we thought at all about the unintended consequences of this government intervention into the capital markets? The Secretary pays a lot of lip service to the moral hazard problem but a much bigger one is the pound of flesh. Don’t think for a minute that Wall Street can walk away with $700 billion of the taxpayers’ money without draconian consequences. We may be opening up a regulation nightmare that will make Sarbanes-Oxley look like a walk in the park. But the Treasury offered no details. Absolutely none. So we are left to guess.

The Boxer Who Won't Quit

Boxer Ricardo Mayorga has a media-savvy schtick that has led Reed Albergotti to call him The Boxer Who Won't Quit:

After one grueling workout last month in Florida, he toweled off and walked outside the gym. His coach handed him some fresh fruit to eat for recovery and an assistant produced a lighter. Soon Mr. Mayorga was taking a deep drag from a Marlboro, looking relieved and relaxed. "I've been smoking since I was 13," he said. "It seems to be working for me, so why stop?"

Mr. Mayorga's assistant, Anthony Gonzalez, says that when the boxer isn't training, he smokes as many as three packs, or 60 cigarettes, a day.
[...]
As he ascended in boxing, Mr. Mayorga says he originally tried to hide his smoking habit for fear that promoters would scold him. After beating Mr. Lewis in 2002, Mr. Mayorga was sitting in the training room with his coach and smoking a cigarette when Alan Hopper, a publicist for promoter Don King, walked in. His coach frantically grabbed the cigarette and attempted to put it out, but instead of lecturing the fighter, Mr. Hopper told him to light up another one and found him a bottle of beer to take to the press conference. When Mr. Mayorga started taking questions from the media while drinking and smoking, an image was born.

The New Old Country

Stan Sesser explains how tourists are flocking to The New Old Country:

Places that once struggled to attract tourists now worry about where to put them. Foreign visitors to Krakow last year numbered 2.5 million — almost quadruple the number in 2003. "The word has spread," says Katarzyna Gadek, director of the city's Office of Tourist Development. "When we entered the European Union in 2004, that made a big difference." So has the increased number of direct flights in. Ten years ago, most tourists arrived from Western Europe by bus or train, or they caught a connecting flight in Warsaw.

Another prime example is in Slovenia, once part of the former Yugoslavia (and today often confused with Slovakia to the northeast). Slovenia's capital, Ljubljana (loob-lee-YA-na), went from unknown to trendy in just a few years. But be warned: It has so few hotel rooms that by early June the best places are largely booked for summer.

With its medieval Old Town of clean cobblestone streets and outdoor markets, a 16th-century castle perched on a hill and an array of first-rate restaurants, Ljubljana ranks as one of Europe's most attractive capitals. Plus, mountain lakes and the Adriatic coast are just an hour or two away. I had no idea what I'd find when I went there. But taking everything into account — scenery, food, prices and the friendliness of the people — I think Slovenia could qualify as Europe's single best country for tourism.

Arriving in Ljubljana is like turning the clock back 50 years. The local road from the tiny airport into town is lined with trees and grass. The train station is so close to the Old City that you can walk to most hotels. Tourist information is available at the station in two small rooms, one devoted to transport and the other to local attractions. I asked the man at the tourism counter what happens to people who show up without a reservation in this city of just 16 hotels. "We put them in a hotel further out, in an apartment rental or with a family," he replied. "No one ever has to sleep on a park bench."

I booked my trip just one week in advance — too late for a hotel room — so I made reservations with an apartment-booking agency. Little did I suspect I'd end up in what may be the nicest accommodations I've ever had in Europe. My reward for walking up five flights of stairs (the medieval buildings have no elevators) was a big penthouse apartment in an impeccably renovated building next to Town Hall, with a terrace, modern kitchen and bathroom and high-speed Internet. The price? €120 ($175) a night — less than the cost of a closet-size hotel room in London or Milan.

Kevin Kelly on the next 5,000 days of the web

Kevin Kelly notes that the Web has only been around for less than 5,000 days, and it's already full of truly amazing stuff — "It's amazing, and we're not amazed!" So he looks at the next 5,000 days of the web:

'Wall Street' No Longer Exists

'Wall Street' No Longer Exists, Alan Reynolds notes, and the conversion or absorption of all five of Wall Street's big investment banks into commercial banks raises several issues:

First of all, the financial storms over the past year have — before last week — been largely confined to securities markets and to interbank loans among commercial and investment banks. Bank loans to commercial and industrial business, real estate and consumers continued to expand nearly every month. Commercial and industrial loans exceeded $1.5 trillion this August, up from less than $1.2 trillion a year earlier. Real-estate loans exceeded $3.6 trillion, up from less than $3.4 trillion a year ago. Consumer loans were $845 billion, up from $737 billion. Credit standards are tougher, which is surely a good thing, but interest rates for creditworthy borrowers remain low.

The ongoing slow but steady availability of bank credit helps explain the much-remarked contrast between Wall Street and Main Street — the shaky condition of exotic financial markets compared with relatively benign statistics for industrial production, retail sales, employment and the rest of the nonhousing economy. Most people go about their business without depending on investment banks or exotic varieties of commercial paper.

Second, recent events highlight the absurdity of the attempt by several pundits to blame recent problems on "financial deregulation." That complaint was aimed at the Financial Modernization Act of 1999, which passed the House by a vote of 362-57 and the Senate by 90-8, yanking the last brick out of the 1933 Glass-Steagall Act's regulatory wall between commercial banks and investment banks.

If it was somehow possible in today's world of global electronic finance to the rebuild such a wall, that would mean J.P. Morgan could not have bought Bear Stearns, Bank of America could not have bought Merrill Lynch, Barclays could not buy most of Lehman, and Goldman Sachs and Morgan Stanley could not become bank holding companies. It is hard to imagine how things would have worked out in that situation, but it surely would not have been an improvement.

Since the 1933 regulatory wall has collapsed as definitively as the Berlin Wall, all the giant financial conglomerates now face oversight and regulation by the Federal Reserve, the Securities and Exchange Commission, the Comptroller of the Currency and the Federal Deposit Insurance Corp. Innocents who seek security in regulation need to recall, however, that not one of those august agencies exhibited timely foresight or concern about the default risk among even prime mortgages in some locations, or about any lack of transparency with respect to bundling mortgages into securities. People do not become wiser, more selfless or more omniscient simply because they work for government agencies.

Wall Street was always a metaphor, of course, but so are words like "bailout" and "toxic" debt. Nationalization of Fannie Mae and Freddie Mac was a bailout for creditors (who received windfall gains), not for stockholders or executives. The federally enforced shotgun marriage between J.P. Morgan and Bear Stearns at the initially ridiculous price of $2 a share was no bailout for Bear. The 11.3% federal loan to AIG, contingent on the potential expropriation of 80% of shareholder value, is no bailout either.

By contrast, what was done to stop a run on the money-market funds is a real bailout which could encourage them to hold risky paper and also make it tougher for commercial banks to attract deposits. The proposal to buy up mortgage-backed securities is a bailout too, though the beneficiaries are not just the tattered remains of Wall Street. The bailout consists of shifting the risk of loss to taxpayers. Actual losses could not reach $700 billion unless the securities were literally worthless, which would mean the value of the underlying real estate fell to zero.

What was "toxic" for investment banks is not equally toxic for the Treasury Department because the government does not even bother to keep a balance sheet, much less abide by mark-to-market accounting rules. A powerful motive for converting investment banks into commercial banks is to get around those onerous balance-sheet rules that required fire-sale pricing of securities that were virtually unmarketable during a panicky scramble for liquidity. Strict adherence to those rules made patience a vice and a "buy and hold" approach impossible. This confirms what many of us have long been saying about the foolishness of letting arbitrary bookkeeping rules dominate economic reality.

Turning Wall Street into a bunch of commercial banks is a solution of sorts to a problem aggravated by foolish mark-to-market regulations, not by the inevitable demise of the 1933 wall between investment banks and commercial banks. Something good may yet come out of all this, because that wall never made much sense in the first place.

WaMu Is Seized, Sold Off to J.P. Morgan, In Largest Failure in U.S. Banking History

WaMu Is Seized, Sold Off to J.P. Morgan, In Largest Failure in U.S. Banking History:

WaMu has suffered huge losses but still boasts a strong deposit base and a network of 2,239 branches that bigger banks would have paid dearly for when times were good. In March, with the credit crisis in full bloom, J.P. Morgan offered to acquire WaMu but was spurned in favor of a $7 billion infusion led by the private-equity firm TPG, considered one of the savviest buyout firms. TPG, led by investor David Bonderman, said it will lose $1.35 billion, wiping out its investment.

This is the second time that J.P. Morgan, the second-largest U.S. bank in stock-market value, has been a buyer of last resort. In March, the New York company agreed to purchase Bear Stearns Cos., getting a $29 billion backstop from the federal government.

FDIC Chairman Sheila Bair said that WaMu's downward spiral "could have posed significant challenges without a ready buyer." Referring to J.P. Morgan's willingness to buy WaMu and absorb its shaky loans amid continuing debate over the $700 billion bailout package, she added: "Some are coming to Washington for help, others are coming to Washington to help."

Oh, yes, J.P. Morgan is clearly "coming to Washington to help."

Here's how quickly a run on the bank can kill it:

Starting Sept. 15, the day that Lehman filed for bankruptcy protection, WaMu's customers began heading for the exits. Over the next 10 days, they yanked a total of $16.7 billion in deposits, according to the Office of Thrift Supervision. That was about 9% of the thrift's deposits as of June 30.

Note that it only took a 9% drop before regulators rushed in:

Normally, when the FDIC and another regulatory agency are preparing to take over a bank, the FDIC will solicit bids for the bank on Tuesday or Wednesday and then seize it on Friday evening, after the bank's branches have closed for the weekend. Sometimes the FDIC will even wait another week to step in. Every bank to fail this year has been shut down on a Friday. The FDIC steps in on Fridays to ensure a smooth transition so that customers hardly notice the handover.

In WaMu's case, the FDIC set a Wednesday evening deadline for interested parties to submit their offers for various parts of WaMu. Twenty-four hours later, they were already preparing to seize the bank. Earlier this month, Treasury Secretary Henry Paulson made it clear to WaMu that the company should have accepted the takeover deal J.P. Morgan had offered earlier this year, according to a person close to WaMu.

Jonathan Harris collects stories

Jonathan Harris collects stories — nonfiction stories, which he collects via web-crawling software and then visualizes, also via software:



(Some meta-humor: I feel like Jonathan Harris's robot army is watching me, waiting to strike.)

Pricing Mortgage Securities When Nobody Knows Anything

Art De Vany notes that Pricing Mortgage Securities When Nobody Knows Anything is a lot like pricing movies when nobody knows anything — and that's a problem he thinks he's solved:

Everyone will admit that nobody really knows what the mortgages or the securities derived from them are worth. The market is illiquid to an extreme. The proposed bail out makes it rational to wait to unload them to see what the seller can get later. So, the plans being discussed to reinject liquidity to the market are having the opposite effect. It is making the market go away until mortgage holders can see what the Treasury will pay for them later.

As William Goldman famously said of movies, nobody knows anything when it comes to predicting what a movie will earn when it finally reaches the market. I showed in my book, Hollywood Economics, that the way to solve the problem of unpredictable results is to set the price later when you do know. How is that done? Well, to use the movies as an example, you make contingent contracts that pay based on the revenues a movie earns after it is released. Virtually all the industry’s contracts follow this principle, which I call the Option Principle. Designing option-like contracts lets you pay when you do know.

It is easy to apply the Pay When You Know option principle to these distressed mortages and their derivatives. Let every holder of these instruments sell call options on their value. Make the options at least 5 years (preferably 10 years) before they expire so that they do not expire before there is time for a return of liquidity to the market. This would give time for the housing market to recover as well. The option would contain several strike points so that investors with different expectations, risk preferences, and current asset positions can choose to cash in at lower strike points for a quick return while others choose to wait for higher returns. At each strike point, the option would pay a percentage of the value of the asset.

The option would be designed so that the buyer earns a share of the future value of the mortgage security if it rises. The option would be of no value and would not be exercised if the value of the mortgage security fails to exceed the first, lower strike price. The homeowner also should receive a share of the future appreciation. This would give all the parties to the mortgage a share in the future appreciation. Had options of this sort been issued at the initial purchase of the home, the speculative aspect would have been properly separated from the homeowner aspect and this whole mess would not have happened. The homeowner/speculator would have sold all or some of the risk of future appreciation to the market.

I think it makes perfect sense for homeowners to sell off some of the upside risk, but homeowners aren't the most sophisticated financiers around — not that the sophisticated financiers have made such a fine showing lately.

Schwinn Electrics

With all the talk about electric cars coming down the pike, I was wondering when electric bikes — both motorcycles and "hybrid" human-powered bikes with pedals — would start to get some attention. I didn't even realize that Schwinn had a line of electric bikes — the Continental, the World GSE, the Transit, and, announced today, the Tailwind:

According to Schwinn, the Tailwind electric bike represents the next generation of eBike and will be available in early 2009 at a suggested retail price of $3199.99.

The Tailwind (like all Schwinn electric bicycles) is a so-called eBike hybrid and can be ridden in either motor-assist mode or as a conventional bike. The eight-speed Tailwind utilizes a lightweight, Schwinn-designed 6000 series aluminum alloy frame and an SR Suntour NEX-4610 suspension fork with lock-out.

The electric motor in the Tailwind is housed in the hub of the front wheel, an innovation found in all Schwinn electric bike models. In addition, all Schwinn eBike models (including the Tailwind) utilize the Plug N’ Drive removable battery pack which is built into stylishly designed rear bike rack systems, allowing riders to quickly detach the battery for recharging.

It is projected that Tailwind owners will realize an industry leading 2,000 recharge lifecycles with the eBike versus the industry standard of 1,000 charges before needing to replace the battery. Tailwind riders will find they can ride 25 to 30 miles per charge (depending upon such factors as climate, rider weight and terrain). The Tailwind also comes with a 20,000-mile or two-year limited warranty.

What does octane mean?

The Southeast is currently suffering a gasoline shortage. Refineries shut down in preparation for Hurricane Ike's landing, and getting them back up to speed takes some time — and making up for lost time takes even longer.

This supply shock was magnified by all the loud rhetoric about "gouging" after the last hurricane. Gas stations are scared to raise prices, but consumers are not the least bit scared to buy up scarce gas at artificially low prices — perhaps because prices are still a bit higher than normal. In fact, Atlanta consumers have sucked up all the gas in the city, topping off their car tanks and bringing in gas cans as well. You can't have too much semi-cheap gas when there's a shortage.

To make matters worse, Atlanta has clean-air regulations, which require "cleaner" fuel than the rest of country, which means supplies can't simply be trucked in from nearby regions.

Supplies of high-octane fuel are particularly tight, which raises a question: What does octane mean?

The octane rating of gasoline tells you how much the fuel can be compressed before it spontaneously ignites. When gas ignites by compression rather than because of the spark from the spark plug, it causes knocking in the engine. Knocking can damage an engine, so it is not something you want to have happening. Lower-octane gas (like "regular" 87-octane gasoline) can handle the least amount of compression before igniting.

The compression ratio of your engine determines the octane rating of the gas you must use in the car. One way to increase the horsepower of an engine of a given displacement is to increase its compression ratio. So a "high-performance engine" has a higher compression ratio and requires higher-octane fuel. The advantage of a high compression ratio is that it gives your engine a higher horsepower rating for a given engine weight — that is what makes the engine "high performance." The disadvantage is that the gasoline for your engine costs more.

The name "octane" comes from the following fact: When you take crude oil and "crack" it in a refinery, you end up getting hydrocarbon chains of different lengths. These different chain lengths can then be separated from each other and blended to form different fuels. For example, you may have heard of methane, propane and butane. All three of them are hydrocarbons. Methane has just a single carbon atom. Propane has three carbon atoms chained together. Butane has four carbon atoms chained together. Pentane has five, hexane has six, heptane has seven and octane has eight carbons chained together.

It turns out that heptane handles compression very poorly. Compress it just a little and it ignites spontaneously. Octane handles compression very well — you can compress it a lot and nothing happens. Eighty-seven-octane gasoline is gasoline that contains 87-percent octane and 13-percent heptane (or some other combination of fuels that has the same performance of the 87/13 combination of octane/heptane). It spontaneously ignites at a given compression level, and can only be used in engines that do not exceed that compression ratio.

During WWI, it was discovered that you can add a chemical called tetraethyl lead (TEL) to gasoline and significantly improve its octane rating above the octane/heptane combination. Cheaper grades of gasoline could be made usable by adding TEL. This led to the widespread use of "ethyl" or "leaded" gasoline. Unfortunately, the side effects of adding lead to gasoline are:

• Lead clogs a catalytic converter and renders it inoperable within minutes.
• The Earth became covered in a thin layer of lead, and lead is toxic to many living things (including humans).

When lead was banned, gasoline got more expensive because refineries could not boost the octane ratings of cheaper grades any more. Airplanes are still allowed to use leaded gasoline (known as AvGas), and octane ratings of 100 or more are commonly used in super-high-performance piston airplane engines. In the case of AvGas, 100 is the gasoline's performance rating, not the percentage of actual octane in the gas. The addition of TEL boosts the compression level of the gasoline — it doesn't add more octane.

Currently engineers are trying to develop airplane engines that can use unleaded gasoline. Jet engines burn kerosene, by the way.

Financial Meltdown

A hedge fund manager explains the financial meltdown to n+1:

When you’re talking about risk management, there’s an assumption that not every asset class will be correlated. So, sure, sub-prime blows up but the bank’s OK because prime will hold up, or there won’t be a perfect correlation with leveraged loans. But what’s going on is that all these credit products are performing badly at once.

Because?

Because there are some real linkages. If consumer spending has been supported by people extracting equity from their homes, the mortgage market shutting down will hit consumer spending. And that will hurt companies that rely on consumer spending.

And then there are the financial linkages — hedge funds blowing up so that they can’t buy leveraged loans anymore, or banks that got hurt in sub-prime that have to sell down leveraged loans to generate liquidity, and the buyers are gone.

So that’s one financial linkage, but also there’s capital — the banks’ capital base. Every time a bank takes a write-down, that erodes its capital base, and the bigger the base the more risk it can take. There are rules for that — Basel 2 capital adequacy — and if a bank is writing down 10 billion dollars, suddenly the risk-taking capability is reduced. Assume basically capital adequacy ratio for all these banks is 10 percent. So if a bank falls 10 billion below its capital adequacy target that’s 100 billion dollars in risk-taking capacity that disappears.

American Revolutionary

Quiet Boston scholar Gene Sharp is, in fact, an American Revolutionary:

In his writings, Mr. Sharp teased out common principles that make nonviolent resistance successful, creating a broad road map for activists looking to destabilize authoritarian regimes. Mr. Sharp's magnum opus, the 902-page "Politics of Nonviolent Action," was published in 1973. But the main source of his success is his 90-page "From Dictatorship to Democracy."

This slim volume offers concise advice on how to plan a successful opposition campaign, along with a list of historically tested tactics for rattling a dictatorial regime. Aimed at no particular country, and easily downloadable from the Internet, the booklet has found universal appeal among opposition activists around the globe.

Though he warns readers that resistance may provoke violent crackdowns and will take careful planning to succeed, Mr. Sharp writes that any dictatorship will eventually collapse if its subjects refuse to obey.

He offers a list of 198 methods of nonviolent action, like the staging of mock elections to poke fun at problems like vote-rigging, using funerals to make political statements and adopting symbolic colors, a la Orange Revolution in the Ukraine. Less conventional tactics include skywriting political messages and "protest disrobings."

In Zimbabwe, opposition activist Magodonga Mahlangu has organized the tract's translation into two main local languages. In Russia, opposition activist Oleg Kozlovsky estimates he and his colleagues have used about 30 of 198 protest methods listed in Mr. Sharp's booklet. Venezuelan student leader Yon Goicoechea says Mr. Sharp's work inspired him to think creatively of ways to carry out antigovernment protests: Activists once tied themselves to the stairs of a government building and have staged street theater to mock constitutional changes.

He's not the only academic promoting revolution. MIT's OpenCourseWare includes course 21H.001 How to Stage a Revolution, taught by Professors William Broadhead, Meg Jacobs, Peter Perdue, and Jeffrey Ravel.

What is financial systemic risk?

What is financial systemic risk? Arnold Kling explains:

There is systemic financial risk when contingency plans that are developed individually are collectively incompatible.

For example, imagine that we have banks without deposit insurance. My contingency plan, in case I suspect that my bank is in trouble, is to run down to the bank and withdraw my money before they run out. My bank's contingency plan, in case it experiences an unusual rush of withdrawals, is to go to other banks that have plenty of cash on hand and borrow from them on a short-term basis.

My individual plan looks fine. My bank's plan looks fine. But if every depositor and every bank has the same plan, you can see how it could fall apart. A rumor starts at a couple of banks that they are in trouble, everybody tries to pull funds out at once, rumors spread to other banks, and pretty soon the whole system collapses. Note, for future reference, that the risks of this are reduced to the extent that banks have capital and reserves to protect against short-term losses.

As another example, consider a "stop-loss order" in the stock market. I buy 100 shares of XYZ stock, which is now trading at $50 a share. At some point, I issue an order to my broker to "stop loss" at $45 a share. That is, if the price falls to $45 a share, my broker is supposed to sell my shares before they get below $45 a share, in order to stop my loss.

Once again, as an individual plan, this is fine. But if everybody uses stop-loss orders, then at some point if the stock goes down there will be a cascade of sales, and it will be impossible for everybody to get out at once at their stop-loss price.

On October 19, 1987, this stop-loss cascade actually took place. Major pension funds and endowments bought something called "portfolio insurance" from clever trading firms. You can think of portfolio insurance as a stop-loss order on a large portfolio of stocks. On what we now call Black Monday, some declines in stock prices turned into a rout, as portfolio insurance selling programs kicked in.

Another way to execute a stop-loss order is by purchasing a put option on a stock. In the case of my XYZ shares, a put option would give me the option to sell 100 shares at a price of $45. This option is traded on an exchange, and its exercise does not depend on how many other people are trying to sell XYZ shares at the time.

Exchange-traded options tend to be more reliable than option-replication trading strategies, such as portfolio insurance. But the question remains how the party that sold you the option plans to deal with his risk. His plan may be to sell more XYZ shares as the price is falling, just as your plan would be if you were using stop-loss instead of a put option.

Now, we come to derivatives. Let's say that you hold a bond issued by a city, Anytown USA. You do not want to bear the risk that Anytown will mismanage its affairs and default on its bonds. You can go to a bond insurer, who for a fee will provide you with a guarantee of the bond. However, the bond insurer's plan may be to sell similar bonds short if it sees things go sour for Anytown. Other bond insurers may have the same plan. If things start to go sour, they all try to sell Anytown's bonds at once, and Anytown can no longer raise money in the market except at exorbitant cost. It's a classic run, caused by individual contingency plans that are collectively incompatible.

What we have had this year are runs caused by derivatives. For example, if somebody owns bonds issued by Bear, Stearns, they might buy insurance on those bonds. The firm that insures those bonds might have a plan that if things look uncertain for Bear, they will short Bear's stock in order to hedge the risk that Bear will default. The problem is that not everyone can execute this contingency plan at once. Most of the derivatives in this year's financial crisis were related in some way to mortgage securities.

The moral of the story is that derivatives allow folks to feel comfortable holding risking assets. However, the parties that are selling them that comfort have to formulate plans that only work individually or when conditions are relatively stable. When trouble develops, the sellers of derivatives have to scramble to execute trading plans to hedge losses, and those trading plans can be incompatible, leading to catastrophic declines in security values.

What should regulators do?

The problems are tricky. Often, if regulators ban one type of risk management, then firms eventually find their way to a different form of risk management that poses even more systemic risk. There are those who argue that this is how our current crisis emerged. In response to capital requirements and other regulations, financial institutions loaded up on derivatives, creating the current mess.

Biden flunks history in comment on FDR

Biden flunks history in comment on FDR:

“When the stock market crashed, Franklin D. Roosevelt got on the television and didn’t just talk about the, you know, the princes of greed. He said, ‘Look, here’s what happened,’” Barack Obama’s running mate recently told the “CBS Evening News.”

Except, Republican Herbert Hoover was in office when the stock market crashed in October 1929. There also was no television at the time; TV wasn’t introduced to the public until a decade later, at the 1939 World’s Fair.

FDR was elected three years later when voters denied Hoover a second term. The Democratic challenger appealed to the “forgotten man” by promising a “new deal” to solve the Depression era.

Wow.

Cool invention helps tired players bounce back

Julian Guthrie of the San Francisco Chronicle reports on a cool invention that helps tired players bounce back:

The Glove works by cooling the body from inside out, rather than conventional approaches that cool from outside in. The device creates an airtight seal around the wrist, pulls blood into the palm of the hand and cools it before returning it to the heart and to overheated muscles and organs. The palm is the ideal place for rapid cooling because blood flow increases to the hands (and feet and face) as body temperature rises.

"These are natural mammalian radiators," said Dennis Grahn, who invented the device with Stanford colleague Craig Heller.

Grahn and Heller also found that cooling overheated muscles dramatically improved physical performance, allowing athletes to work out harder and longer, and hold on to their gains.

"We learned that you can actually reverse that muscle fatigue in a short amount of time," Heller said. "And if you cool muscles during rest, you get a much greater recovery than if you rested without cooling."

In the early 1990s, Heller and Grahn first began looking at using controlled heat to halt tremors in patients coming out of anesthesia. When they put their device over the hand and arm of a patient at Stanford Medical Center, "The core temperature went up so fast," Grahn said, "we thought our recording equipment had broken." The tremors stopped.

Once the license for their heating technology was sold by Stanford, they shifted their focus to cooling. The two were interested in exploring therapeutic uses of lowering body temperature, particularly for people with cystic fibrosis and multiple sclerosis. They turned to exercise as a way to build up a person's internal heat load and then worked to figure out how to "pull it out through vascular structures," Grahn said.

Their first "aha" moment in cooling came