Financial Meltdown

Wednesday, September 24th, 2008

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.

Posted in Business | No Comments »

American Revolutionary

Wednesday, September 24th, 2008

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.

Posted in Education, Policy | No Comments »

What is financial systemic risk?

Wednesday, September 24th, 2008

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.

Posted in Arnold Kling, Economics, Policy | No Comments »

Biden flunks history in comment on FDR

Wednesday, September 24th, 2008

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.

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Cool invention helps tired players bounce back

Wednesday, September 24th, 2008

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 after they talked their assistant Vinh Cao into doing his regular workouts in the lab instead of at the gym. His routine included 100 pull-ups. One day, Grahn and Heller started using an early version of the Glove to cool him for 3 minutes between rounds of pull-ups. They saw that with the cooling, his 11th round of pull-ups was as strong as his first. Within six weeks of training with the cooling breaks, Cao did 180 pull-ups a session. Six weeks later, he went from 180 to 616.

“I’ll never forget the number 616,” said Heller. “He tripled his capacity in six weeks. We were like, ‘Wait a minute, this is crazy!’”

Heller used the Glove to work up to 1,000 push-ups on his 60th birthday.

After their findings were published in the American Journal of Applied Physiology, they received a $3 million grant from DARPA. The Glove is now being distributed and redesigned by Avacore Technologies of Ann Arbor, Michigan:

Grahn and Heller are board members and working with the company to create a more user-friendly version of the coffee pot-shaped model — which they call “klutzy” — to make it look and feel like an actual glove. Avacore is in contract with the military to deliver the new, streamlined gloves by the end of the year. Some 100 units of the cooling device are in Iraq with the 101st Airborne Division.

It is also being used by other football teams, including the Oakland Raiders and the Miami Hurricanes, and by American cyclists who competed in this year’s Tour de France.
[...]
The Glove, formally known as Core Control, is available through Avacore Technologies of Ann Arbor, Mich. It retails for $2,500, but is available at select times throughout the year for less than $2,000. The price is expected to come down with the second generation of the Glove, now in development.

I first read about the Glove in Noah Shachtman’s piece for Wired, Be More Than You Can Be, back in March, 2007.

Posted in Fitness, Science, Technology | No Comments »

How Sweden Solved Its Bank Crisis

Wednesday, September 24th, 2008

Carter Dougherty of the New York Times explains How Sweden Solved Its Bank Crisis back in 1992 — by demanding warrants in return for bailing the banks out:

That strategy held banks responsible and turned the government into an owner. When distressed assets were sold, the profits flowed to taxpayers, and the government was able to recoup more money later by selling its shares in the companies as well.

“If I go into a bank,” said Bo Lundgren, who was Sweden’s finance minister at the time, “I’d rather get equity so that there is some upside for the taxpayer.”

Sweden spent 4 percent of its gross domestic product, or 65 billion kronor, the equivalent of $11.7 billion at the time, or $18.3 billion in today’s dollars, to rescue ailing banks. That is slightly less, proportionate to the national economy, than the $700 billion, or roughly 5 percent of gross domestic product, that the Bush administration estimates its own move will cost in the United States.

But the final cost to Sweden ended up being less than 2 percent of its G.D.P. Some officials say they believe it was closer to zero, depending on how certain rates of return are calculated.

The US government demanded warrants from Chrysler too, years ago, but, to my surprise, it’s not demanding equity from banks (yet):

The reason is not quite clear. The government has already swapped its sovereign guarantee for equity in Fannie Mae and Freddie Mac, the mortgage finance institutions, and the American International Group, the global insurance giant.

Posted in Economics, Policy | No Comments »

How many dollars are there in the world?

Wednesday, September 24th, 2008

How many dollars are there in the world?:

There is a nice official answer to this question. The figure is known as M0, the monetary base, and its current value is about 825 billion.

So, we know that n, the number of dollars, is 825 billion, M0, right?

Wrong. The problem is that this assignment, n = M0, simply does not make sense. It is not consistent with economic reality. Of course USG can enforce it, as it can enforce anything, but the result will be social and economic disaster. North America will become a burned-out Mad Max wasteland, patrolled by marauding gangs and packs of radioactive mutant wolves.

The US governemtn has a national debt of roughly $10 trillion, not counting unfunded entitlements:

Moreover, this debt is not even discounted. Quite the contrary: it is considered “risk-free.”

Question: how, exactly, in a world that contains only 825 billion dollars, can a debt of $10 trillion be risk-free?

Moreover, USG runs an annual trade deficit of $750 billion. Even if it started each January 1 with all 825 billion of these dollars in the country, which it most certainly didn’t, its subjects should be feeling pretty impoverished by Christmas. But no. They run the same trade deficit, year after year after year. Perhaps the dollars are being lent back to them — but why?

There can only be one answer: this $825 billion number is just plain wrong.

825 billion is the number of formal dollars outstanding. It is not the droid we are looking for, though.

Posted in Economics, Mencius Moldbug, Policy | No Comments »

The Two Classes of Airport Contraband

Wednesday, September 24th, 2008

Security expert Bruce Schneier explains The Two Classes of Airport Contraband:

Airport security found a jar of pasta sauce in my luggage last month. It was a 6-ounce jar, above the limit; the official confiscated it, because allowing it on the airplane with me would have been too dangerous. And to demonstrate how dangerous he really thought that jar was, he blithely tossed it in a nearby bin of similar liquid bottles and sent me on my way.

There are two classes of contraband at airport security checkpoints: the class that will get you in trouble if you try to bring it on an airplane, and the class that will cheerily be taken away from you if you try to bring it on an airplane. This difference is important: Making security screeners confiscate anything from that second class is a waste of time. All it does is harm innocents; it doesn’t stop terrorists at all.

Let me explain. If you’re caught at airport security with a bomb or a gun, the screeners aren’t just going to take it away from you. They’re going to call the police, and you’re going to be stuck for a few hours answering a lot of awkward questions. You may be arrested, and you’ll almost certainly miss your flight. At best, you’re going to have a very unpleasant day.

This is why articles about how screeners don’t catch every — or even a majority — of guns and bombs that go through the checkpoints don’t bother me. The screeners don’t have to be perfect; they just have to be good enough. No terrorist is going to base his plot on getting a gun through airport security if there’s decent chance of getting caught, because the consequences of getting caught are too great.

Contrast that with a terrorist plot that requires a 12-ounce bottle of liquid. There’s no evidence that the London liquid bombers actually had a workable plot, but assume for the moment they did. If some copycat terrorists try to bring their liquid bomb through airport security and the screeners catch them — like they caught me with my bottle of pasta sauce — the terrorists can simply try again. They can try again and again. They can keep trying until they succeed. Because there are no consequences to trying and failing, the screeners have to be 100 percent effective. Even if they slip up one in a hundred times, the plot can succeed.

The same is true for knitting needles, pocketknives, scissors, corkscrews, cigarette lighters and whatever else the airport screeners are confiscating this week. If there’s no consequence to getting caught with it, then confiscating it only hurts innocent people. At best, it mildly annoys the terrorists.

To fix this, airport security has to make a choice. If something is dangerous, treat it as dangerous and treat anyone who tries to bring it on as potentially dangerous. If it’s not dangerous, then stop trying to keep it off airplanes. Trying to have it both ways just distracts the screeners from actually making us safer.

Posted in War | No Comments »

Short-Term Financing Is Not An Accident

Tuesday, September 23rd, 2008

Diamond and Kashyap explain that short-term financing is not an accident:

Lehman’s demise came when it could not even keep borrowing. Lehman was rolling over at least $100 billion a month to finance its investments in real estate, bonds, stocks, and financial assets. When it is hard for lenders to monitor their investments and borrowers can rapidly change the risk on their balance sheets, lenders opt for short-term lending. Compared to legal or other channels, their threat to refuse to roll over funding is the most effective option to keep the borrower in line.

This was especially relevant for Lehman, because as an investment bank, it could transform its risk characteristics very easily by using derivatives and by churning its trading portfolio. So for Lehman (and all investment banks), the short-term financing is not an accident; it is inevitable.

Why did the financing dry up? For months, short-sellers were convinced that Lehman’s real-estate losses were bigger than it had acknowledged. As more bad news about the real estate market emerged, including the losses at Freddie Mac and Fannie Mae, this view spread.

Lehman’s costs of borrowing rose and its share price fell. With an impending downgrade to its credit rating looming, legal restrictions were going to prevent certain firms from continuing to lend to Lehman. Other counterparties that might have been able to lend, even if Lehman’s credit rating was impaired, simply decided that the chance of default in the near future was too high, partly because they feared that future credit conditions would get even tighter and force Lehman and others to default at that time.

Posted in Business, Economics | No Comments »

What’s a paradigm shift in finance?

Tuesday, September 23rd, 2008

I don’t follow n+1 — “a twice-yearly print journal of politics, literature, and culture” — but they carried an interesting Interview With a Hedge Fund Manager back in January:

I didn’t go to business school. I did not major in economics. I learned the old-fashioned way by apprenticing to a very talented investor, so I wound up getting into the hedge fund business before I think many people knew what a hedge fund was. I’ve been doing it for over ten years. I didn’t even know what a hedge fund was when I first had this opportunity. I’m sure today I would never get hired.

Really?

Yeah, it would be impossible because I had no background, or I had a very exiguous background in finance. The guy who hired me always talked about hiring good intellectual athletes, people who were sort of mentally agile in an all-around way, and that the specifics of finance you could learn, which I think is true. But at the time, I mean, no hedge fund was really flooded with applicants, and that allowed him to let his mind range a little bit and consider different kinds of candidates. Today we have a recruiting group, and what do they do? — they throw resumes at you, and it’s, like, one business school guy, one finance major after another, kids who, from the time they were twelve years old, were watching Jim Cramer and dreaming of working in a hedge fund. And I think in reality that, probably, if anything, they’re less likely to make good investors than people with sort of more interesting backgrounds.

Why?

Because I think that in the end the way that you make a ton of money is calling paradigm shifts, and people who are real finance types, maybe they can work really well within the paradigm of a particular kind of market or a particular set of rules of the game — and you can make money doing that — but the people who make huge money, the George Soroses and Julian Robertsons of the world, they’re the people who can step back and see when the paradigm is going to shift, and I think that comes from having a broader experience, a little bit of a different approach to how you think about things.

What’s a paradigm shift in finance?

Well, a paradigm shift in finance is maybe what we’ve gone through in the sub-prime market and the spillover that’s had in a lot of other markets where there were really basic assumptions that people made that, you know what?, they were wrong.

The thing is that nobody has enough brain power to question every assumption, to think about every single facet of an investment. There are certain things you need to take for granted. And people would take for granted the idea that, “OK, something that Moody’s rates triple-A must be money-good, so I’m going to worry about the other things I’m investing in, but when it comes time to say, ‘Where am I going to put my cash?,’ I’ll just leave it in triple-A commercial paper, I don’t have time to think about everything.” It could be the case that, yeah, the power’s going to fail in my office, and maybe the water supply is going to fail, and I should plan for that, but you only have so much brain power, so you think about what you think are the relevant factors, the factors that are likely to change. But often some of those assumptions that you make are wrong.

He has a few things to say about statistical arbitrage:

People actually call it “black box trading,” because sometimes you don’t even know why the black box is doing what it’s doing, because the whole idea is that if you could, you should be doing it yourself. But it’s something that’s done on such a big scale, a universe of several thousand stocks, that a human brain can’t do it in real time. The problem is that the DNA of a lot of these models is very, very similar, it’s like an ecosystem with no biodiversity because most of the people who do stat-arb can trace their lineage, their intellectual lineage, back to four or five guys who really started the whole black box trading discipline in the ’70s and ’80s. And what happened is, in August, a few of these funds that have big black box trading books suffered losses in other businesses and they decided to reduce risk, so they basically dialed down the black box system. So the black box system started unwinding its positions, and every black box is so similar that everybody was kind of long the same stocks and short the same stocks. So when one fund starts selling off its longs and buying back its shorts, that causes losses for the next black box and the people who run that black box say, “Oh gosh! I’m losing a lot more money than I thought I could. My risk model is no longer relevant; let me turn down my black box.” And basically what you had was an avalanche where everybody’s black box is being shut off, causing incredibly bizarre behavior in the market.

He also explains how CDOs work:

They buy mortgages, and then they package them and they tranche the pools of mortgages up into various tranches from senior to equity. So, basically you have a number of tranches of paper that get issued that are backed by the mortgage pools and there’s a cash flow waterfall, the cash comes in from those mortgages, a certain tranche has the first priority. And then you have descending order of priority, and the hedge fund would usually keep the last piece, which is known as the equity, or the residual, as opposed to the stuff that was triple-A, that’s the most senior paper. So if you had a pool of half a billion dollars of mortgages, maybe there would be 300 million dollars of triple A paper you would sell to fund that, and then there would be smaller tranches of more junior paper. And the buyers of that paper, particularly the very senior paper, the triple-A paper, were not experts, they’re not mortgage experts, they say, “It’s triple-A? I’ll buy it.” This is money market funds, accounts that are not set up to do hardcore analysis, they tend to just rely on the rating agencies. And again the spread that they’re getting paid is very small, so they don’t really have a lot of spread to play with to hire a lot of analysts to go and dig in the mortgage pools and really understand them, they kind of rely on the rating agencies, and that’s their downfall. It’s kind of an interesting interaction in the sense that a lot of this mortgage project was almost created by the bid for the CDO paper rather than the reverse. I mean, the traditional way to think about financing is “OK, I find an investment opportunity, that on its face, I think, is a good opportunity. I want to deploy capital on that opportunity. Now I go look for funding. So I think that making mortgage loans is a good investment, so I will make mortgage loans. Then I will seek to fund those, to fund that activity, by perhaps issuing CDO paper, issuing the triple-A, double-A, A, and down the chain.” But what happened is, you had the creation of so many vehicles designed to buy that paper, the triple-A, the double-A, all the CDO paper… that the dynamic flipped around. It was almost as if the demand for that paper created the mortgages.
[...]
What tends to happen in financial markets, is bad things happen when you really divorce the people who take the risk from the people who understand the risk. What happened is that that distance in the sub-prime market just increased and increased and increased. I mean, it started out that you had mortgage companies that would keep some of the stuff on their own books. Sub-prime lenders, it wasn’t a big business, it was a small business, and it was specialty lenders, and they made risky loans, and they would keep a lot of it on their books.

But then these guys were like, “Well, you know, there are hedge fund buyers for pools that we put together,” and then the hedge fund buyers say, “You know what? We need to fund, we need to leverage this, so how can we leverage this? Oh, I have an idea, let’s create a CDO and issue paper against it to fund ourselves,” and then you get buyers of that paper. The buyers of that paper, they’re more ratings-sensitive than fundamentals-sensitive, so they’re quite divorced from the details. Then it got even more extended in the sense that vehicles were set up that had a mandate to kind of robotically buy that paper and fund themselves through issuing paper in the market.

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Clogged Plumbing Theory

Tuesday, September 23rd, 2008

The Paulson plan, Arnold Kling notes, is based on the clogged plumbing theory:

The mortgage assets are stopping up the plumbing of the financial system, so the government has to buy up those assets to unclog the system.

Why worry about the clog in the first place? Because banks have some of these securities, they are marking these securities to market value, which means marking them way down. As a result, their balance sheets show a shortage of capital. To come back into compliance with regulations, they either have to sell new shares of stock (good luck with that) or curb lending. As they curb lending, the economy suffers.

That is why some people say that the solution is to get rid of mark-to-market accounting. Let the banks estimate the “intrinsic” values of their mortgage securities. These values are higher than market values, so that using this alternative accounting the banks’ balance sheets won’t looks so bad. That way, they can keep lending. My problem with that is that phony accounting has a history of keeping failed institutions in business, raising the cost of the subsequent cleanup.

My alternative is to encourage new lending by lowering capital requirements at the margin. Tell banks that loans issued after September 1, 2008, require half the capital of similar loans issued before September 1. Some banks are in such bad shape that even with those lower capital standards they will not be able to make new loans. Fine. You don’t want those banks to grow. But other banks have room to grow, and you want them to grow more than they would under the existing regulations.

Posted in Arnold Kling, Economics, Policy | No Comments »

Henry Paulson is not the first strong Treasury Secretary to appear in a crisis

Tuesday, September 23rd, 2008

Henry Paulson is not the first strong Treasury Secretary to appear in a crisis, Arnold Kling notes:

John Connally held that job in the Nixon Administration, In response to a run on the dollar, he abandoned the Bretton Woods agreement and introduced wage and price controls. In the short term, this was well received, and it allowed the economy to rebound in time for Nixon’s re-election. In the long run, it was a disaster, ultimately unleashing virulent inflation and, as oil prices rose, leading to the painful disorder of rationing and lines at gasoline stations.

Connally’s cure was worse than the disease. I strongly suspect that Paulson’s cure will prove similarly harmful.

Posted in Arnold Kling, Economics, Policy | No Comments »

Look Who’s Irrational Now

Tuesday, September 23rd, 2008

Look Who's Irrational Now:

“What Americans Really Believe,” a comprehensive new study released by Baylor University yesterday, shows that traditional Christian religion greatly decreases belief in everything from the efficacy of palm readers to the usefulness of astrology. It also shows that the irreligious and the members of more liberal Protestant denominations, far from being resistant to superstition, tend to be much more likely to believe in the paranormal and in pseudoscience than evangelical Christians.

The Gallup Organization, under contract to Baylor’s Institute for Studies of Religion, asked American adults a series of questions to gauge credulity. Do dreams foretell the future? Did ancient advanced civilizations such as Atlantis exist? Can places be haunted? Is it possible to communicate with the dead? Will creatures like Bigfoot and the Loch Ness Monster someday be discovered by science?

The answers were added up to create an index of belief in occult and the paranormal. While 31% of people who never worship expressed strong belief in these things, only 8% of people who attend a house of worship more than once a week did.

Even among Christians, there were disparities. While 36% of those belonging to the United Church of Christ, Sen. Barack Obama’s former denomination, expressed strong beliefs in the paranormal, only 14% of those belonging to the Assemblies of God, Sarah Palin’s former denomination, did. In fact, the more traditional and evangelical the respondent, the less likely he was to believe in, for instance, the possibility of communicating with people who are dead.

This is not a new finding. In his 1983 book “The Whys of a Philosophical Scrivener,” skeptic and science writer Martin Gardner cited the decline of traditional religious belief among the better educated as one of the causes for an increase in pseudoscience, cults and superstition. He referenced a 1980 study published in the magazine Skeptical Inquirer that showed irreligious college students to be by far the most likely to embrace paranormal beliefs, while born-again Christian college students were the least likely.

Surprisingly, while increased church attendance and membership in a conservative denomination has a powerful negative effect on paranormal beliefs, higher education doesn’t. Two years ago two professors published another study in Skeptical Inquirer showing that, while less than one-quarter of college freshmen surveyed expressed a general belief in such superstitions as ghosts, psychic healing, haunted houses, demonic possession, clairvoyance and witches, the figure jumped to 31% of college seniors and 34% of graduate students.

We can’t even count on self-described atheists to be strict rationalists. According to the Pew Forum on Religion & Public Life’s monumental “U.S. Religious Landscape Survey” that was issued in June, 21% of self-proclaimed atheists believe in either a personal God or an impersonal force. Ten percent of atheists pray at least weekly and 12% believe in heaven.

Posted in Science | No Comments »

Crows make monkeys out of chimps in mental test

Tuesday, September 23rd, 2008

Crows make monkeys out of chimps in mental test:

Crows seem to be able to use causal reasoning to solve a problem, a feat previously undocumented in any other non-human animal, including chimps.

Alex Taylor at the University of Auckland, New Zealand, and his team presented six New Caledonian crows with a series of “trap-tube” tests.

A choice morsel of food was placed in a horizontal Perspex tube, which also featured two round holes in the underside, with Perspex traps below.

For most of the tests, one of the holes was sealed, so the food could be dragged across it with a stick and out of the tube to be eaten. The other hole was left open, trapping the food if the crows moved it the wrong way.

Three of the crows solved the task consistently, even after the team modified the appearance of the equipment. This suggested that these crows weren’t using arbitrary features — such as the colour of the rim of a hole — to guide their behaviour. Instead they seemed to understand that if they dragged food across a hole, they would lose it.

To investigate further, the team presented the crows with a wooden table, divided into two compartments. A treat was at the end of each compartment, but in one, it was positioned behind a rectangular trap hole. To get the snack, the crow had to consistently choose to retrieve food from the compartment without the hole.

A recent study of great apes found they could not transfer success at the trap-tube to success at the trap-table. The three crows could, however.

“They seem to have some kind of concept of a hole that isn’t tied to purely visual features, and they can use this concept to figure out the novel problem,” Taylor says. “This is the most conclusive evidence to date for causal reasoning in an animal.”

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Cesarean section linked to allergy in children

Tuesday, September 23rd, 2008

Cesarean section linked to allergy in children:

The study involved 432 children who were followed from birth to 9 years of age. One or both parents had a history of allergies or asthma. Physician-diagnosed asthma and allergic rhinitis in the children was assessed using caregiver interviews conducted at least twice a year. Allergy skin testing was performed in 271 children at an average age of 7.4 years.

Children born by cesarean section were 2.1-times more likely to develop atopy than their peers born by vaginal delivery, the report indicates.

Similarly, the authors found that cesarean section increased the risk of allergic rhinitis 1.8-fold. As noted, however, cesarean section did not increase the risk of asthma or wheeze.

Allergic rhinitis, sometimes called “hay fever,” refers to a group of symptoms that mimic a common cold such as nasal congestion, sneezing, itching and tearing eyes. Atopy is the innate tendency to develop the classic allergic diseases, such as allergic rhinitis and asthma. It involves the overstimulation of the immune system in response to common environmental proteins such as house dust mite, grass pollen, and food allergens.

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