More Fantasy Testimony

Monday, October 13th, 2008

Arnold Kling has scribed More Fantasy Testimony on the financial crisis — just in case he gets a chance to present it to someone in power:

I reject the two main partisan narratives of this crisis. The Left wants to blame deregulation motivated by free-market ideology. It is true that poorly-conceived regulation was a major factor. However, the blindness of key regulators reflected not ideology but ordinary bureaucratic information loss. The knowledge that existed inside Freddie Mac, Fannie Mae, Treasury, and the Federal Reserve did not flow up to the leaders of those organizations.

The Right wants to blame overly-aggressive lending to minorities and low-quality borrowers, promoted by Congress and regulators. While it is true that many loans were made that should not have been made, the problem was not the color of the borrowers’ skins or the content of their credit reports. The problem was low down payments and a large proportion of mortgages for what the industry calls non-owner-occupied homes or investor loans, and what ordinary people would think of as speculators.

The crisis had three main causes. First, securitization got out of hand, approaching three-fourths of total mortgage debt outstanding. Second, housing speculation got out of hand. Third, the gap in executive understanding of financial innovation, what I call the “suits vs. geeks divide,” got out of hand.

Starting from Scratch

Monday, October 13th, 2008

Bryan Caplan considers Adam Shephard‘s Scratch Beginnings: Me, $25, and the Search for the American Dream a fascinating self-experiment. From its intro:

I am going to start almost literally from scratch with one 8′ by 10′ tarp, a sleeping bag, an empty gym bag, $25, and the clothes on my back. Via train, I will be dropped at a random place somewhere in the southeastern United States that is not in my home state of North Carolina. I have 365 days to become free of the realities of homelessness and become a “regular” member of society. After one year, for my project to be considered successful, I have to possess an operable automobile, live in a furnished apartment…, have $2500 in cash, and, most importantly, I have to be in a position in which I can continue to improve my circumstances by either going to school or starting my own business.
[...]
On paper, my previous life doesn’t exist for this one year. I cannot use any of my previous contacts, my college education, or my credit history… I cannot beg for money or use services that others are not at liberty to use.

Caplan “couldn’t put the book down until Shephard got on his own two feet,” but he has one big critique of the book:

Shephard’s self-experiment wasn’t really necessary, because illegal immigrants have been proving his point for years. If the American economy didn’t allow unskilled, unconnected people to work their way from abysmal poverty to moderate affluence (known to Americans as “relative poverty”), people wouldn’t risk their lives to come here. So when Shephard ends his book with a call to action to help America’s poor help themselves, it doesn’t ring true.

Lost Generation of Macroeconomists

Sunday, October 12th, 2008

Arnold Kling is thinking more and more about the Lost Generation of Macroeconomists and getting more and more steamed:

If you stacked up everything written by the leading macro folks of my generation and later (actually, starting a few years earlier also), you would have nothing but an enormous baloney sandwich. Ordinarily, I don’t dwell on the fact that these people who were no smarter than me back-scratched each other into the best journals, the prestigious professorships, the important conferences, etc. But sometimes, especially now, I think about how badly they have failed intellectually. They are the precise academic equivalent of Wall Street executives who enjoyed golden parachutes while bankrupting their firms.

Is bank recapitalization a good idea? Probably not, if you think that the main problem with the financial sector is that it is bloated. The best way to restore confidence in banks is to identify the ones that are insolvent and shut them down. The FDIC knows how to do this. They should roll up their sleeves and get to work.

Anyone who wants to stop mortgage foreclosures needs to have his head examined. How many of the bad loans are investor loans, where the borrower never occupied the house? 20 percent of them? 50 percent? 70 percent? We know that in the last years of the bubble more than 15 percent of mortgages were for non-owner-occupied (the true figure might actually be higher than reported, because it is common to fraudulently claim that you will be using the home as a residence when you will not). Investor loans default at a much higher rate than regular loans, somewhere between 3 and 10 times as much. If it’s 4 times as much, then already we can be surmise that a majority of bad loans are investor loans. The best thing to do with those is to foreclose ASAP.

My view of the crisis is that every sector of the establishment has been discredited. The financial establishment has been discredited. Government policymakers and regulators have been discredited. And academic economics has been discredited. The fact that we now have all three on the same page about policy going forward is hardly comforting.

Red Planet Cartoons

Sunday, October 12th, 2008

I’m not inclined to visit a site that calls itself Red Planet Cartoons, but I enjoyed this one:

The Last American

Saturday, October 11th, 2008

J. A. Mitchell was the founder and editor of Life magazine, but he also wrote at least one satirical science fiction novel, The Last American, back in 1889.

As James R. Rummel explains, it “details how a Persian sailing ship in 2951 makes landfall amongst the ruins of a once great city, Nhu-Yok.”

Children’s Books Online presents it with its original illustrations, which I quite enjoyed:




(The Last American is also available in print, by the way.)

Gangsta Style Assault Tactics

Friday, October 10th, 2008

James R. Rummel is a professional self-defense instructor — that is, he teaches people to shoot handguns — and he pokes fun at the Gangsta Style Assault Tactics used by the various Liberian factions who fought for control of Monrovia, the capital, a few years back:

Images from the battle for Monrovia, Liberia, where use of iron sights is known to be strictly prohibited. Also prohibited are aiming, assuming a supported firing stance, and any common practice of marksmanship whatsoever.














Regulatory arbitrage, pure and simple

Friday, October 10th, 2008

Arnold Kling examines an FDIC document on the risk weights of different bank assets, and finds that securitization dominated the mortgage market because of regulatory arbitrage, pure and simple:

The higher the weight, the more capital the bank has to hold against that asset. As I read table 1 and table 3, if you originate a loan with a down payment of 20 to 40 percent, the risk weight is 35. But if you buy a AA-rated security, the risk weight is only 20. So if a junk mortgage originator can pool loans with down payments of less than 5 percent, carve them into tranches, and get a rating agency to rate some of the tranches as AA or higher, it can make those more attractive to a bank than originating a relatively safe loan.

Bryan Caplan on 20/20

Friday, October 10th, 2008

John Stossel interviews Bryan Caplan on 20/20 — the title: “Should Some People Not Vote?” — and Caplan laments a sound bite that didn’t make the final edit and another version he didn’t try:

  • “Before I studied public opinion, I wondered why our policies were so bad. After I studied public opinion, I started wondering why our policies weren’t worse. An important part of the answer is that the people who know less are less likely to vote.”
  • “When you watch the presidential debates, you may think that the candidates are pandering to the Lowest Common Denominator. If everyone voted, though, they’d be pandering to a much lower Lowest Common Denominator.”

About Freakin’ Time!

Friday, October 10th, 2008

James R. Rummel says it’s About Freakin’ Time!

Most people who are not firearm enthusiasts are surprised when I mention that the city of New Orleans enacted a campaign of illegally seizing privately owned firearms in the aftermath of Katrina.

Think about that for a moment. With the looting, the breakdown of order, and the sheer overwhelming job that the police and authorities faced when it came to providing aid to those who needed it, disarming law abiding citizens who needed their guns to protect their homes and loved ones was still deemed top priority.

It was conducted like a military campaign. National Guard troops were under orders to break into homes to find guns, and they were ready to shoot any who resisted.

Sounds like some paranoid right wing conspiracy novel, doesn’t it? But all you have to do is watch this video to hear them freely admit it. Note the images of innocent home owners, flex cuffed and lined up by the side of the road like they were terrorists.

One of the most egregious example of police overstepping their authority was caught on video.

Do you think that cop needed to tackle an old woman, in her own kitchen? God only knows what they would have done to her if the cameras weren’t rolling, considering how she is such a terror and all. This was all three years ago. Why am I bringing up this ancient history?

Because New Orleans has finally agreed to return the guns they seized illegally. It seems that the city has been extremely reluctant to return the private property of the residents, even requiring a sales receipt. Considering that it takes more than a century for regularly maintained firearms to wear out, and many firearms are family heirlooms passed from one generation to the next, this is a ridiculous burden that was enacted by the city to avoid obeying the law.

It has been a long time coming. Let us hope it doesn’t happen again.

How had I not heard of this?

Plan to Kill bin Laden Rejected

Thursday, October 9th, 2008

I don’t normally watch 60 Minutes, but I stumbled on last Sunday’s episode, which covered two topics of interest to me — the Tesla electric roadster and Delta Force operations in Afghanistan.

The Delta Force segment featured a disguised former operative going by the name of Dalton Fury, who has written a book — Kill Bin Laden: A Delta Force Commander’s Account of the Hunt for the World’s Most Wanted Man — about how “politics” got in the way of Delta operations.

(Apparently, Dalton Fury’s real name is Maj. Thomas Greer.)

He explains how his plan to kill bin Laden was rejected, because it involved attacking from Pakistan and laying land mines along the passes between the two countries:

He also complains about being paired up with totally unreliable Afghan “allies” — which is frustrating to hear about, because the region has a long, long history of local tribal warlords playing powers off against each other, and you would think that the people making high-level decisions would know such things.

Palm Nailer

Thursday, October 9th, 2008

Eric Lundquist compares the Palm Nailer to a magic hammer:

Like a nail gun, you hook it up to an air compressor, but unlike a nail gun, it can be held in the palm of one hand. Its appearance doesn’t make its usage obvious, but this air tool pounds in nail after nail without hurting my hand at all. Just place a nail exactly where you want it. Press the opening on the nailer over the nail, and BAP! BAP! BAP! BAP! BAP! — compressed air drives a little hammer head inside the sleeve to gently pound in the nail. It takes about 10+ taps to get a nail all the way in, but in under a second.

Browse the Artifacts of Geek History in Jay Walker’s Library

Thursday, October 9th, 2008

Steven Levy invites us to Browse the Artifacts of Geek History in Jay Walker's Library — including a Sputnik, books bound in rubies, a Kelmscott edition of Chaucer, a chandelier from Die Another Day, a 1665 Bills of Mortality chronicle of London’s plague fatalities by week, the instruction manual for the Saturn V rocket (which launched the Apollo 11 capsule to the moon), a framed napkin from 1943 on which Franklin D. Roosevelt outlined his plan to win World War II, and so on.






Dead Left

Thursday, October 9th, 2008

With the political climate and the financial markets the way they are, Naomi Klein has been getting a lot of air time — on Bill Mahr’s and Stephen Colbert’s shows, for example — to push her book, The Shock Doctrine: The Rise of Disaster Capitalism, which argues that “conservative” politicians have engineered disasters to push their unpopular “free-market” policies.

A more reasonable stance might be that all politicians take advantage of crises to push through new policies that funnel money and power into their hands and their friends’ hands — and there’s nothing conservative or free-market about cronyism.

Robert Higgs’ Crisis and Leviathan, written two decades ago, documents how American government has grown during each war or economic depression — without shrinking after each crisis has passed — and I don’t see this pattern stopping any time soon.

Jonathan Chait, of The New Republic, notes that Naomi Klein’s ideas are those of the Dead Left:

It seems like a very long time — though in truth only a few years have passed — since the most sinister force on the planet that the left could imagine was Nike. In 2001, Time proclaimed that the anti-globalization movement had become the “defining cause” of a new generation, and that the spokesperson for the cause was the Canadian writer and activist Naomi Klein. For puzzled outsiders grasping to understand why bands of youths had begun following the World Trade Organization wherever it went, brandishing oversize puppets and occasionally smashing up the local Starbucks, Klein was there to explain. She has always downplayed her place within the movement, but in fact her influence is as considerable as her press clippings proclaim. Her achievement, and it is no small feat, has been to revive economicism — and more grandiosely, materialism — as the central locus of left-wing politics.

From the time of Marx, and through the Depression, the left concerned itself primarily with economic inequality. The analysis of injustice in terms of class conflict and the forces of production was the canonical one. But the postwar boom — the authors of the Port Huron Statement famously described themselves as “bred in at least modest comfort” — turned the left’s attention to foreign policy and national security in the Cold War, and to civil rights, and to feminism. By the 1980s, left-wing politics had withdrawn almost entirely into academia and other liberal enclaves, which it ruthlessly policed for any dissent from the verities of multiculturalist dogma and identity politics.

This evolution can be seen in Klein’s own family. Her grandfather was a Marxist fired by Disney in 1941 for trying to organize animators. Her father fled the United States for Canada to avoid service in Vietnam, and joined Physicians for Social Responsibility. Her mother directed the anti-pornography film Not a Love Story. And Naomi Klein, like most campus leftists of the 1980s, directed her ideological energies toward the denouncing of various -isms within academia. (She later recalled, with admirable remorse, that she was known as “Miss P.C.”)

By the 1990s, Klein had come to realize, like some other campus activists, that off-campus there could be found worse depredations than the canonization of Shakespeare and other dead white males. And the new enemy turned out to be an old one — the original one, in fact: the corporations, and more generally capitalism. Klein set to work on her book No Logo, which appeared in 1999. That book wove together much of the new economic activism springing up in the precincts of academia into a withering anti-corporate manifesto. Her indictment had two main counts. The first was that many corporations profited from the cruel treatment of Third World labor. This observation was undeniable, and the publicizing of these evils has produced reforms of which activists can rightly be proud. The second charge was that corporations have encroached upon and monetized every aspect of modern life and culture. Klein wrote that she could envision a future “fascist state where we all salute the logo and have little opportunity for criticism because our newspapers, television stations, Internet servers, streets and retail spaces are all controlled by multinational corporate interests.” This aspect of her argument needed a bit more thinking through.

The distinctive thing about Klein’s style was that it was very Old Left. She had a classic Marxist-materialist analysis, arguing that economic conditions, rather than bigotry or ideology, are what shape the world. Her interest in culture and in actually existing life under capitalism was somewhat derivative of the Frankfurt School, though not as intellectually sophisticated. Yet she managed to make the old notions feel new, and to capture the ethos of what was being called “the New New Left.” And her argument reflected the conviction of the new anti-globalization activists, the children of the “cultural left,” that they themselves — and not just workers in Nike factories abroad — were the victims of international corporations.

Arnold Kling’s Fantasy Testimony

Thursday, October 9th, 2008

Arnold Kling typed up a draft testimony on what caused the mortgage/financial crisis:

Forty years ago, depository institutions handled mortgage credit risk very differently than they do today. Back then, the depository institution, which was typically a savings and loan association, held mortgages that were underwritten by its own employees, given to borrowers and backed by homes in its own community. These were almost always 30-year, fixed-rate loans, with borrowers having made a significant down payment, often 20 percent of the price of the home. Call this approach to mortgage lending “Method A.”

Today, mortgage loans held by depository institutions are often in the form of securities. These securities are backed by loans originated in distant communities by unknown borrowers, underwritten by mortgage brokers or other personnel not employed by the depository institution. The loans are often not 30-year fixed-rate loans, and the borrowers have typically made down payments of 5 percent or less, including loans with no down payment at all. Call this approach to mortgage lending “Method B.”

If you compare the two methods using common sense, then Method B does not pass a simple sanity check. In fact, the current financial crisis consists of banks that are up to their necks in Method B.

Method A suffered a breakdown in the 1970′s, because inflation was allowed to get out of control. The 6 percent mortgage interest rates that were commonly charged by savings and loans became untenable when inflation and interest rates soared to double-digit levels. The savings and loan industry went out of business. Whether Method B could survive a similar shock is unclear. The right lesson to learn from the 1970′s was not that we should use Method B. The right lesson to learn is that we should not let inflation get out of hand.

To survive against Method A, Kling notes, Method B requires government favors and subsidies. It always has, and it always will:

The secondary mortgage market began in 1968, when the United States formed the Government National Mortgage Association (GNMA). GNMA pooled loans originated under programs by the Federal Housing Administration (FHA) and the Veterans Administration (VA) and sold these pools to investors. The purpose of this, as with the quasi-privatization of the Federal National Mortgage Association (Fannie Mae) that took place that year, was to take Federally guaranteed mortgage loans off of the books. President Johnson, fighting an unpopular war in Vietnam, wanted to save himself the embarrassment of having to come to Congress to ask for larger and larger increases in the ceiling on the national debt.

Thus, the first steps toward mortgage securitization were taken in order to disguise financial reality using accounting gimmicks. It has been the same ever since.

In the early 1980′s, the savings and loan industry was imploding. The savings and loans held many mortgages that had lost value, due to inflation and high interest rates. Under the accounting rules prevailing at the time, they could record the mortgages at their original book values–as long as they did not sell them. The S&L’s were stuck. If they did not sell mortgages, they would lack the cash to pay depositors. If they did sell mortgages, they would have to recognize losses, and regulators would shut them down.

The solution was a program called Guarantor at Freddie Mac and Swap at Fannie Mae. Under this program,, an S&L paid Fannie or Freddie a fee to pool loans into securities, which were retained by the S&L. The S&L could then use the securities as collateral to obtain loans. The key to the whole operation was an accounting ruling that allowed the S&L’s to maintain the fictional book values of the mortgages held as securities,, even though lenders were using much lower market values when providing the collateralized loans to the S&L’s. This accounting ruling came from fierce lobbying by Wall Street, which wanted to broker the loans to the S&L’s.

Freddie Mac, Fannie Mae, and Wall Street extracted large fees from this program. Ultimately, most of the S&L’s failed, with losses borne by taxpayers. The Guarantor and Swap programs increased the cost, both directly by transferring wealth out of the S&L’s and indirectly by allowing defunct S&L’s to remain in business and continue gambling with other people’s money.

Following the demise of the S&L’s, regulators established capital requirements and other rules that made Method A lending very expensive relative to Method B lending. Freddie Mac and Fannie Mae were given freedom to leverage their guarantee at much higher ratios of assets to capital than were Method A lenders. In fact, the capital regulations even told banks that holding private mortgage securities under Method B was less risky and therefore required less capital than Method A lending. The result was that Method B came to dominate the American mortgage market. Had the playing field been level, Method A would have remained in place, and Method B likely would never have gotten started.

Rad the whole thing.

Safer prenatal Down’s syndrome test

Wednesday, October 8th, 2008

Researchers have developed a safer prenatal Down’s syndrome test:

Quake’s team demonstrated the accuracy of the new genetic test in a small study involving 18 women.

It accurately identified the nine women with a Down’s syndrome pregnancy and three others with fetuses with different chromosomal disorders, the researchers wrote in the journal Proceedings of the National Academy of Sciences.

“It’s the first universal, noninvasive test for Down syndrome. So this should be the first step in putting an end to invasive testing procedures like amniocentesis and chorionic villus sampling,” Quake said in a telephone interview.

Blood tests for pregnant women like the alpha-fetoprotein test can find potential signs of a chromosomal disorder such as Down’s, but cannot diagnose it with certainty.

Quake said such tests serve as only “indirect and weak predictors of what’s going on.”

For a definitive determination, women must have an invasive diagnostic procedure such as amniocentesis or chorionic villus sampling. This is done typically after the 15th week of pregnancy.

These procedures carry a small risk — roughly 1 percent — of causing a miscarriage or birth defects.

Because of that, their routine use has been mostly by women age 35 and older at higher risk for having Down’s syndrome babies. Scientists have been working for years to devise safer, noninvasive tests suitable for any pregnant woman.

Quake said the new test also could be administered much earlier in a pregnancy than amniocentesis or CVS — potentially as early as five weeks after conception. And the results are back within a couple of days, instead of two to three weeks.