Friday, October 31, 2008

All aboard the Bailout Train

Investment banks, regular banks, insurance companies, automakers, and now: Librarians?

The American Library Association (ALA) is asking Congress for $100 million in stimulus funding to aid the nation’s working families during the current economic crisis. Aid is sought to stem the bleeding of critical library services that help Americans with job searches, small business development, financial literacy and other essential assistance in hard economic times....

“America’s free public libraries provide a lifeline for citizens in need across the country,” said ALA President Jim Rettig. “Ensuring Internet access, career workshops, business seminars and other economic support services are vital links in the nation’s financial recovery. This is no time to cut much-needed support, reduce hours or close library doors.”

Read the whole thing here. People, exactly when did our country jump the shark?

And no one thought this could be a problem?

People, here is a story about just how nuts the real estate market was. The article is about how minorities are suffering from foreclosures, but try to ignore the racial politics angle and just consider the personal finance angle.

Class, the question to be answered is the following:

"So how did Ramirez, the strawberry picker with an annual income of just $14,000, purchase a $720,000 home in Hollister without any money down?"

So far the only answer I come up with is collective insanity.

hat tip to Dr. Housing Bubble.

Thursday, October 30, 2008

Dr. Doom's diagnosis

Uber-bear Nouriel Roubini was interviewed on the "Nightly Business Report" Tuesday night (here is a link to the transcript).

The first question and answer is the most interesting to me:

SUSIE GHARIB: Professor Roubini, who or what is the major culprit of this financial crisis?

ROUBINI: First of all the Fed kept interest rates too low for too long and created the housing bubble. Secondly the Fed and the other regulators were asleep at the wheel and allowed all these toxic mortgages to be created without controlling it. Three, there was plenty of greed and excessive risk taking on Wall Street. And four, the rating agencies had major conflicts of interest because they were being paid by those that were supposed to be rating. So the blame is to be shared by many different culprits.

I pretty much agree with this and for those with really really short attention spans, let me point out that half of the reasons point to the Fed. There is always greed on Wall St. but the blindness to the riskiness of it all was truly staggering.

Hat tip to Tim Iocono

That's gonna leave a mark

I now have a huge man-crush on Mike D'Antoni. People he hung a DNP-CD on Starbury in the Knickerbockers' opener. In plainer English, he buried Stephon Marbury on the bench, giving him zero playing time! Wow! It was a surprise too. D'Antoni had announced that chunky Eddie Curry was eating pine until he got in shape (he too was DNP-CD'd), but the expectation was that Marbury would not be starting but would be getting substantial minutes.

The Knicks beat the Heat and it seems like a new day might be fixin' to dawn in MSG. Adrian Wojnarowski of Yahoo sports says that the Starbury burial is likely permanent.

Wednesday, October 29, 2008


Or, just because you add fixed effects and blow up the standard error of a variable's coefficient doesn't mean that the variable in question is not substantively important.

For a case in point consider the article, "Poverty and Civil War: Revisiting the Evidence" by Djankow and Reynal-Querol. They argue that poverty does not cause conflicts as many have previously reported and they show that when you add country fixed effects to their model, the coefficient on lagged income in the civil war regression becomes insignificant. It is interesting to note that the coefficients themselves barely change when the estimation changes from OLS with time dummies to full two way fixed effects.

For example, the first two columns of their Table 1 (p. 17 in the link above) they report a coefficient for income on the onset of civil war in two otherwise identical models, one pooled OLS and the other Fixed Effects. The OLS model has a coefficient on lagged income of -.08 with a t-stat of 4.16, while the corresponding coefficient in the FE model is -.09 with a t-stat of 1.74.

The FE coefficient is actually bigger, but its standard error is about 2.7 times larger (.0192 for OLS vs .052 for FE) so it becomes "insignificant".

Income is fairly persistent (autocorrelated) while civil wars are not, so taking all cross country information out of the mix is going to inflate the standard errors on the persistent variables (by reducing the variance of the independent variable). Lant Pritchett makes this point in the context of growth regressions in his 2000 paper in the World Bank Economic Review 2000, p. 239 "Understanding Patterns of Economic Growth" and also describes how using FE can increase problems resulting from measurement error.

In sum, it's one thing show that the effect of a variable in a panel comes totally from cross sectional differences and thus is suspect because it may be correlated with non-observed country specific factors. This would imply that putting in FE should push the coefficient on the offending variable toward zero. However, when the coefficient stays the same but becomes insignificant, especially when we know the variable is quite persistent over time, it is far from clear that the effect is really not there. It is likely that you've just inflated the coefficient variance enough to push the coefficient to statistical insignificance, even though its size is unchanged from the OLS regression.

Fixed effects is not always (dare I even say not often) the best estimator in panel models when we care about the economic effects of persistent independent variables.

Tuesday, October 28, 2008

Photo of the day: Hank Paulson takes the measure of the crisis

Easy Answers to tough problems

1. Why didn't I think of that? White House "orders Banks to start loaning Money"! Such a simple and elegant solution. Thank you White House! Is it too late to change the constitution and give Shrub a third term?

2. If you're not home by midnight I'm dropping you off at the hospital: "State officials say a 15-year-old girl left at an Omaha hospital is the 21st child abandoned under Nebraska's unique safe-haven law." The government is planning to amend the law to put a on 3 day old age cap for drop offs. That is just so unfair.

3. I'm sure the IMF knows how to fix this: "IMF has '6 days to save Pakistan'" Sure, that'll work. If anyone knows how to rescue a developing country it's the good old IMF! That's a no-brainer (note that Iceland today raised their interest rate from 12% to 18% and explained the bizarre move as follows: "The central bank governor said the increase was part of its agreement with the International Monetary Fund, from which it borrowed $2bn (£1.3bn)."

Run Pakistan Run!!!!!!!!

A French View of the Financial Crisis

From the inimitable Bernard-Henri (God is dead but my hair is perfect) Levy in The New Republic:

"Is man a predator of man? Does the fear of this predator slumber within us? An anxiety, formerly concealed by a poorly applied varnish of civilization, about a state of nature that is re-emerging? Consider the princes of finance, once so polite, so complicit, so civilized, who have been facing each other at the edge of the abyss, waiting to see who will be the next to fall; consider that dance of wolves, the ferocious ballet of battered predators sniffing at each other, detecting the scent of death on their neighbors, coveting their remains; consider the tango of white-hot hate that has been discreetly called the "drying up of interbank credit."

The scent of execution and of collective suicide has been circulating in the middle of the pack.

It is as though we have been watching a deadly dance around a fire, where those same people who, through their irresponsibility, devastating egoism and, it must be said, intelligence, turned mad and led the financial world toward implosion, thinking that they could pull themselves out of the furnace by pushing the others in first.

And the result has been, for all of us, a suspended apocalypse, in which it is easy to lay out the implacable chain of consequences, but also a situation in which no one knows how to defuse the mechanism. How to respond if account holders attempt to withdraw cash that the banks no longer have? How should we react if electrical and gas utilities default on payment to their employees? What will happen when an angry mob of ruined savers, mainstream borrowers harassed by those who pressured them to go into debt in the first place, and the desperate and unemployed erupt in protest and--according to a scenario that we in France know too well--shout their rage beneath the windows of the speculators, loan sharks and others with golden parachutes?"

Wow, so drugs are legal in France eh?

Hat tip to Felix Salmon

PS: Here's a shot of Bernie and his bride at Yves St. Laurent's funeral (Bernie is the one wearing shades).

Republicanus Alaskus

A great headline this morning from the AP:

"Senator Stevens' career cloudy after conviction"

Well for one thing he's 84!! The future of any green bananas he happens to buy could be considered cloudy too, right?

For another thing he just got convicted on 7 counts of corruption and is running in an election next Tuesday. However, Ted isn't taking that lying down (figuratively at least, literally he probably is):

"I will fight this unjust verdict with every ounce of energy I have"

Oops, my bad, I guess he is giving up after all.

However, all is not lost as the people of Alaska have a very low bar for their public "servants":

It would be a mistake to write Stevens' political obituary with the election still a week away, said Carl Shepro, a professor of political science at the University of Alaska in Anchorage. Many Alaskans believe Stevens is being unjustly attacked, he said.

"It's very possible that he's going to win the election," Shepro said.

Is this a great country or what?

Monday, October 27, 2008

News from the world of food

1. Guess what this week's special was going to be.

2. Assault with a deadly chicken?

3. One man's poop is another man's treasure

When the did AP newswire become the Onion? Is this a great country or what?

Could it be that the biggest problem is in Emerging Markets?

Latin America and Eastern Europe seem ready to melt down. Commodity prices are falling and their currencies are under a lot of pressure. It's the same old story from 1982, tons of borrowing in other currencies (Euro, $, even some in the Yen). Paul Krugman says beware the "mother of all currency crises" (and he should know because, as he just happens to mention, he "invented" their study), Dani Rodrik is calling for massive rich country and multilateral institutional lending to emerging economies. Tyler links to an article describing the grim situation in Eastern Europe and the high amount of exposure to it that European banks face.

Argentina is heading for another sovereign default. Brazil's currency and equity markets are falling and precarious. Chile and Mexico seem stronger but quite vulnerable.

Here's what the Telegraph reports on the exposure of European banks:

"The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles."

Holy Crap.

Sunday, October 26, 2008

Obama will make Greg Mankiw a better father??

It's true people, the G-man says so himself in this post (where amazingly he refers to himself as being upper-middle class):

"If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories."

Vote for Obama, people. Think of the children.

Who's your daddy?

“From everything I’ve heard, Babe Ruth only had one home run, and he kept hitting it over and over.”

--Steve Jobs (when asked if Apple needed to make more variations of the iPhone)

People, he walks the walk so he can talk the talk. Apple is now the 3rd largest phone maker in the world and they've sold over 13,000,000 iPhones. And they are making a lot of money doing so:

"The numbers are stunning. In the quarter ended in September, Apple said iPhone sales represented 39 percent of the company’s $11.6 billion in revenue (adjusted for some accounting technicalities). That means Apple sold $4.5 billion worth of iPhones in the quarter."

Here’s another stunner: Apple’s $4.6 billion in revenue from phones is more than its sales of computers. Analysts expected Apple to sell about $4 billion in Macintosh computers and $1.6 billion in iPods in the quarter."

Don't hate the player, pity the Blackberry.