Where Are The Reporters?

Woe the decline of the newspapers.

Krugman: Deficits Saved The World

From Krugman's Blog:

The private sector financial balance—defined as the difference between private saving and private
investment, or equivalently between private income and private spending—has risen from -3.6% of GDP in the 2006Q3 to +5.6% in 2009Q1. This 8.2% of GDP adjustment is already by far the biggest in postwar history and is in fact bigger than the increase seen in the early 1930s.

That’s an interesting way to think about what has happened — and it also suggests a startling conclusion: namely, government deficits, mainly the result of automatic stabilizers rather than discretionary policy, are the only thing that has saved us from a second Great Depression...

The Economist: Business in America

The latest issue of The Economist has a special report on Business in America. You can view it here. Some passages which stuck out to me:

Second, one can look at America’s admirable record of dealing with turmoil. A study by the Ewing Marion Kauffman Foundation, a think-tank that studies entrepreneurialism, found that America’s high rate of economic “churning” boosts productivity and hence material well-being. Between 1977 and 2005 some 15% of all American jobs were destroyed each year as firms closed or cut back. Thanks to the expansion of successful firms and the entry of new ones, however, many more jobs were created than destroyed. Start-ups (ie, firms less than five years old) provided a third of the new jobs during this period.

...

But the central problem is that most Americans get their health insurance through their employers. This dates back to the era of post-war wage controls, when firms offered benefits instead of pay rises. Today’s tax code sets it in stone. Employers can buy health insurance with pre-tax dollars. Individuals cannot.

This creates an agency problem. When a typical patient goes to the doctor, he has no idea what anything costs. He pays only about 15% of the bill, so if the doctor recommends something he will probably say yes. The doctor gets paid for everything he does, so he has a powerful incentive to perform costly, unnecessary procedures. Besides, he may be socked for damages if he omits a test that a lawyer subsequently convinces a jury might have been useful. The costs are passed on to insurers, who pass them on to employers in the form of higher premiums, who then pass them on to workers in the form of lower pay.

...

…Managed care will return. This is the model whereby doctors work for the insurer, which pays them to keep people well. Instead of letting patients go straight to a specialist, managed-care firms like Kaiser Permanente make them see a primary-care doctor first, who will figure out whether the problem is serious. This is crucial. Specialists tend to recommend their own specialism—surgeons advocate surgery, and so on. The lack of a gatekeeper in traditional fee-for-service insurance leads to over-doctoring that is often harmful as well as costly, as that IBM executive discovered.

The Time Paradox

hat tip to Miguel Barbosa at Simoleon Sense:

Let's Have Cap and No Trade

A real good op-ed by David Sokol, CEO of Mid-American, regarding the cap and trade proposal:

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The real hidden catch of the cap-and-trade system, though, is that it will require consumers to pay twice: first for emission allowances and then for the construction of new low- and zero-carbon power plants.
...

The solution? Keep the cap and remove trading from the equation: Mandate that the industry, over the same 40-year period, simply limit its emissions to the same levels proposed in the Waxman-Markey bill. This can be accomplished with a clear plan that gives states an option: Either they participate in a cap-and-trade program or they elect an alternative compliance mechanism to reach the same greenhouse gas emission goals by working with their utilities to develop a 40-year program of shutting down aging coal plants, retrofitting plants to capture carbon dioxide if the technology becomes available, and/or building zero-carbon energy plants. More important, the carbon dioxide reductions in this proposal can be achieved while providing adequate time to plan to minimize price shock and economic dislocation. It is the states, through their public utilities commissions -- not the federal government -- that have both the interest and obligation to manage citizens' costs while transitioning to a carbon-free future.

"The Wire": The Men Behind The Scenes

Some argue it is the best TV series ever written- and I would be one of them. "The Wire" was an amazing HBO series dealing with the inner-workings of the Baltimore city. And for me, its writing and directing were in a class of its own. So, I got interested in learning about the leading men behind the scenes, David Simon and Ed Burns, and I loved what they had to say. Below are links to a good summary article as well as two interviews I quickly came across. There is surely plenty more.


The Angriest Man In Television

and then, the interviews...

*Update: PBS interview with David Simon (hat tip to comments)

Interview With David Simon

Slate: One thing that struck me about the show, from the get-go—and this may sound like base flattery: It reminded me of Shakespearean drama for the way that even the villains are humanized. No one is just a bad guy. Even Avon, whom I loathed at the opening of Season 1, I came to like.

Simon: It's funny you should say that, because the portrayals in Deadwood are in the Shakespearean model. On The Sopranos, there's an awful lot of Hamlet and Macbeth in Tony. But the guys we were stealing from in The Wire are the Greeks. In our heads we're writing a Greek tragedy, but instead of the gods being petulant and jealous Olympians hurling lightning bolts down at our protagonists, it's the Postmodern institutions that are the gods. And they are gods. And no one is bigger.

Interview With Ed Burns

HBO
So is there a message that you think people can take away from this year's arc?

BURNS
I think the idea we're trying to bring across is that kids are going to get educated. And that we're going to see where. It's not about kids making bad mistakes and becoming caught in the Criminal Justice system. They don't have an option of choice. We in society have the choices. So you might see a kid who clearly doesn't have a prayer and it will be very apparent why he doesn't have a prayer. It's not about blaming kids. They will survive. They will learn. It's just a question of where.

Growth in the 21st Century

A rare dose of common sense:

The Paradox of Choice

"The absence of alternatives clears the mind marvelously" - Henry Kissinger

You just bought a brand new pair of pants and bring them back home. You try it on again and this time notice that the waist is actually a little loose. Your satisfaction drops. You regret not having a better fit; in fact, you've already come to expect it. And you blame yourself for not making a better choice- because (or maybe even though) the options at the store were mind numbingly endless.

Sound familiar? Some particular variant of the story must ring true. That is the Paradox of Choice which has been created by our society, and it is something which has been studied closely by Barry Schwartz (who, with one look, you'll find has risen above this ).

Seriously though, how can we avoid this cycle of negative feeling? Well for one, I would acknowledge what you do have, instead of focusing on what you could. Keep things in perspective; it is one thing to err in a critical way, but chances are we are dealing within the realm of minor inconveniences. Finally, learn from the experience, and move on. There's no sense in getting riled up when what's done is done. Keep your focus on what lies ahead, and feel the weight of choices lift off your mind.

Coming Down To Earth?

The Economist says Obama's Presidency is coming down to Earth, and they cite Buffett:

Mr Buffett has given voice to widespread worries about the administration’s failure to prioritize. “Job one is to win the war, the economic war. Job two is to win the economic war—and job three. And you can’t expect people to unite behind you if you’re trying to jam a whole bunch of things down their throat.”

Buffett is wrong to criticize. Obama and his team have done everything feasible and necessary to handle the financial crisis and restart growth. People will be surprised by how quickly things will change, and there's a glimmer of hope that it is already beginning. The major threat for America now lies in the structural problems it faces. And in this, Obama is right to be strong and efficient in trying to move us forward. He is sacrificing his own interests and tranquility for the benefits of our future. For this, he should be praised.

This Economist article, however, does the opposite, and in the process displays an all-too-familiar logical problem of keeping things in perspective. His faulty qualities, according to this article, are his optimism, hard-work and ambition (really?); his mistakes include mis-chosen cabinet members and 165 million in bonuses. These are very obviously minor in scale. Do I even need to list off the hundreds of real, serious, structural problems which were caused or left to us by the previous administration? And yet for some reason, the Economist was hesitant to rule Bush's presidency a disaster after 8 years, and it is already citing Obama's as potentially such.

Geithner: My Plan For Bad Bank Assets

Posted on WSJ:

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However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

...

I'm all for it.

March 7 Weekly Address

Also, you can find some notes from a NYT interview with Obama here.

President's Weekly Address

See it here.

Housing Correction

According to Calculated Risk, total housing starts were 464 thousand annualized for the month of January. Now, I remember reading a government report stating that new household units of people were forming in the U.S. at a rate of 1.5 million a year. If so, any bubble in excess capacity over the last several years is quickly reversing itself (see chart). Assuming, of course, that people can still get jobs to afford shelter.

Attention Under Siege

Thanks to Miguel for finding this article.

To avert a dark age, we must take several steps:

Question the values that undermine attention - Helped by influential tools that are seedbeds of societal change, we’ve built a culture over generations that prizes frenetic movement, fragmented work and instant answers. Recently, my morning paper carried a front-page story about efforts “in a new age of impatience” to create a quick-boot computer. Explained one tech executive, “It’s ridiculous to ask people to wait a couple of minutes” to start up their computer. The first hand up in the classroom, the hyper-businessman who can’t sit still, much less listen - these are markers of success in American society. Instead of venerating scattershot focus, rushed detachment, knowledge built on sound bites, we need to value whole focus, full awareness and the difficult work of knowledge creation.

Your Weekly Address

Financial Innovation

From Volcker's recent speech:

Volcker: When it comes to innovation, I'll raise a question to you, what is the most important financial innovation of the past 20 or 30 years for the average person? I think its the automatic teller machine. It's not any high class sophisticated financial operation, its a technical improvement which has sure changed banking. I have more connection with my automatic teller machine, as do many of you, than any other part of the financial markets.

Watching The Greats

Berkshire Hathaway and Fairfax Financial are perhaps the two of the greatest asset allocating machines out there today. They both released their 13-F filing yesterday, listing their common stock holdings at the end of the December period. Paying particular attention to Fairfax, we see a lot of major positions:

(Value, in $)

102 mil Alcoa
99 mil Burlington Northern
271 mil Dell
162 mil Frontier Communications
195 mil GE
234 mil Intel
459 mil Johnson and Johnson
98 mil King Pharma
294 mil Kraft Foods
96 mil Level 3 Comm.
159 mil Magna Intl
318 mil Pfizer
104 mil Wells Fargo

*Note: Positions in bold are new.

Not surprisingly, there is a lot of overlap with Buffett, who holds major positions himself in Burlington Northern, Kraft, Wells Fargo, and Johnson and Johnson.

According to Nasdaq, the total value of U.S.-listed common stock holdings at Fairfax is now up to *$4.7 billion (this excludes any foriegn holdings). Just over two years ago, the total common stock portfolio was at about $1.8 billion, and that was significantly hedged with market short positions. Prem and co. are at last putting major money into work with stocks, indicating that they see significant returns ahead. If they're right, great things lie in store for shareholders of Fairfax.

Source:
http://holdings.nasdaq.com/asp/OwnerPortfolio.asp?FormType=OwnerPortfolio&CIK=0000915191&HolderName=FAIRFAX+FINANCIAL+HOLDINGS+LTD%2F+CAN

*Correction, 2/19/09: included in the Nasdaq portfolio was $2.2 billion in value of Odyssey Re shares which were not included under equities in their 2006 balance sheet. Because Fairfax reported earnings today however, we know that total common stocks is at $3.8 billion, with $2.3 billion added to investments in the quarter. So although not as large as the originally stated notional amount, there has been a considerable increase in their common stock exposure.


Disclosure: The author owns shares in Fairfax Financial, Odyysey Reinsurance, and Burlington Northern.

Buffett's Buy Metric

...Fortune first ran a version of this chart in late 2001 (see "Warren Buffett on the stock market"). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.

But he visualized a moment when purchases might make sense, saying, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you."...

See the complete article here.

On Globalization

Ran across this during my reading:

Where one nation has got the start of another in trade, 'tis very difficult for the latter to regain the ground it has lost; because of the superior industry and skill of the former, and the greater stocks which its merchants are possest of, and which enable them to trade for so much smaller profits. But these advantages are compensated, in some measure, by the low prices of labour in every nation that has not an extensive commerce, and does not very much abound in gold and silver. Manufactures, therefore, gradually shift their places, leaving those countries and provinces, which they have already enriched, and flying to others, whither they are allured by the cheapness of provisions and labour, till they have enriched these also, and are again banished by the same causes. And in general we may observe, that the dearness of every thing, from plenty of money, is a disadvantage, that attends an established commerce, and sets bounds to it in every country, by enabling the poorer states to undersell the richer in all foreign markets.

-David Hume, Of Money- 1752

It's all just a little bit of history repeating!

Lessons From Animal Behavior

A fascinating article from The Economist:

...

In a study reported in a special issue of the Philosophical Transactions of the Royal Society B, researchers led by Dr List looked at colonies of honeybees (Apis mellifera), which in late spring or early summer divide once they reach a certain size. The queen goes off with about two-thirds of the worker bees to live in a new home leaving a daughter queen in the nest with the remaining worker bees. Among the bees that depart are scouts that search for the new nest site and report back using a waggle dance to advertise suitable locations. The longer the dance, the better the site. After a while, other scouts start to visit the sites advertised by their compatriots and, on their return, also perform more waggle dances. The process eventually leads to a consensus on the best site and the swarm migrates. The decision is remarkably reliable, with the bees choosing the best site even when there are only small differences between two alternatives.

But exactly how do bees reach such a robust consensus? To find out, Dr List and his colleagues made a computer model of the decision-making process. By tinkering around with it they found that computerised bees that were very good at finding nesting sites but did not share their information dramatically slowed down the migration, leaving the swarm homeless and vulnerable. Conversely, computerised bees that blindly followed the waggle dances of others without first checking whether the site was, in fact, as advertised, led to a swift but mistaken decision. The researchers concluded that the ability of bees to identify quickly the best site depends on the interplay of bees’ interdependence in communicating the whereabouts of the best site and their independence in confirming this information.

This is something members of the European Parliament should think about. In the same journal, Simon Hix, also of the London School of Economics, and his colleagues examined their voting and concluded that, as might be expected, it was along party-political lines even though the incentives to do so were far less than at national parliaments. Dr Hix and his colleagues reckon that European parliamentarians share the collection of information but, unlike the honeybees, they do not necessarily progress to investigating the issues for themselves before taking a vote.

There is danger in blindly following the party line, a danger that the honeybees seem to avoid. Condorcet’s theory fails to consider whether there is an inbuilt bias among a group that comes together to consider a problem. This “groupthink” occurs when people copy one another. According to Dr List: “The swarm manages to block and prevent the kind of groupthink that can bedevil good decision making.” Dr List adds that people demonstrate this kind of bad decision-making when investors pile into a stock and others follow, creating a bubble for which there is no good reason.

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