30.9.08

IT ALL SEEMS OBVIOUS NOW. Here's a passage from pages 118-119 of Rosenberg and Birdzell's How the West Grew Rich.

The development of marine insurance markets in Italy, Amsterdam, and London separated commercial risks from the risks posed by the perils of the sea and made it possible for merchants to venture increasingly large amounts of capital on the commercial outcome of a voyage without subjecting themselves to the less calculable uncertainties of the sea. The commercial risk was that the cargo might not bring prices as high as had been hoped for, so that the voyage might not be as profitable as expected, or might even result in a loss. But only rarely was there a commercial risk that the cargo might prove wholly worthless and produce a loss of the entire capital invested -- a risk decidedly present from storms, pirates, and the other hazards of the sea.

The division of risk between the perils of the sea and the perils of the market, with specialized insurers undertaking the former and shipowners the latter, converted an intrinsically hazardous business into one capable of drawing capital from relatively cautious and conservative merchants. Some such division of risk was essential to the development of maritime commerce. It is possible to think of other ways the risks might have been divided, such as marketing shares in the voyages themselves at Lloyd's instead of shares of the risk of loss from perils of the sea. But this would have required the underwriters at Lloyd's to familiarize themselves not simply with the risks of the sea, but also with the commercial risks involved in every line of trade conducted by sea. The division between specialists in maritime risks and specialists in market risks greatly facilitated the growth of maritime trade.

We thus take for granted the slicing and dicing of risks to ships, even if there no longer is a Lloyd's coffeehouse with a bell that rings to announce a sinking, and we understand foreign-exchange hedges against loss in the value of the cargo on delivery.

Because the book is a survey of the institutions that contributed to the prosperity of Europe and the former English colonies, it necessarily scants any survey of the controversies that must have accompanied the introduction of these new speculative instruments. I suspect there's some fascinating reading there: can anyone suggest a place to start?

But it places the current financial troubles in some perspective. There's a large market in private insurance for financial instruments, under the rubric of credit default swaps, and it has some people frightened.

As Congress wrestles with another bailout bill to try to contain the financial contagion, there's a potential killer bug out there whose next movement can't be predicted: the Credit Default Swap.

In just over a decade these privately traded derivatives contracts have ballooned from nothing into a $54.6 trillion market. CDS are the fastest-growing major type of financial derivatives. More important, they've played a critical role in the unfolding financial crisis. First, by ostensibly providing "insurance" on risky mortgage bonds, they encouraged and enabled reckless behavior during the housing bubble.

"If CDS had been taken out of play, companies would've said, 'I can't get this [risk] off my books,'" says Michael Greenberger, a University of Maryland law professor and former director of trading and markets at the Commodity Futures Trading Commission. "If they couldn't keep passing the risk down the line, those guys would've been stopped in their tracks. The ultimate assurance for issuing all this stuff was, 'It's insured.'"

I wonder if there isn't some ancient parchment complaining about those guys drinking strong coffee at Lloyd's encouraging reckless shipping during the South Sea bubble. (There's no such reference in Extraordinary Popular Delusions and the Madness of Crowds.) With 500 years of hindsight, the ability of captains to pass the maritime risk to Lloyds and some of the commercial risk to a foreign exchange speculator looks like a positive development. The insurers and the trading houses developed their own codes of conduct, and those were augmented by regulatory commissions with additional powers. One lesson the regulators and the industry ethics committees ought have learned is that transparency is a must. That structure is missing from the credit swap business.
And the fear of a CDS catastrophe still haunts the markets. For starters, nobody knows how federal intervention might ripple through this chain of contracts. And meanwhile, as we'll see, two fundamental aspects of the CDS market - that it is unregulated, and that almost nothing is disclosed publicly - may be about to change. That adds even more uncertainty to the equation.
The transactions themselves aren't anything complicated.
A CDS is just a contract: The "buyer" plunks down something that resembles a premium, and the "seller" agrees to make a specific payment if a particular event, such as a bond default, occurs.
The buyer puts sterling on the counter and the seller agrees to replace the hull if the ship sinks.
Used soberly, CDS offer concrete benefits: If you're holding bonds and you're worried that the issuer won't be able to pay, buying CDS should cover your loss. "CDS serve a very useful function of allowing financial markets to efficiently transfer credit risk," argues Sunil Hirani, the CEO of Creditex, one of a handful of marketplaces that trade the contracts.
That's exactly the Rosenberg-Birdzell formulation, only for a contingency more abstract than a ship foundering.
Because they're contracts rather than securities or insurance, CDS are easy to create: Often deals are done in a one-minute phone conversation or an instant message. Many technical aspects of CDS, such as the typical five-year term, have been standardized by the International Swaps and Derivatives Association (ISDA). That only accelerates the process.
No coffee, no coffehouse, no need to bring hull owners and underwriters to London. Less uncertainty, also, about whether an overdue ship has sunk or not. I have to wonder how economic historians 500 years from now will view the teething troubles we're having with these new institutions for dividing and transferring risk. The article even sees the parallel.
And as long as someone is willing to take the other side of the proposition, a CDS can cover just about anything, making it the Wall Street equivalent of those notorious Lloyds of London policies covering Liberace's hands and other esoterica. It has even become possible to purchase a CDS that would pay out if the U.S. government defaults. (Trust us when we say that if the government goes under, trying to collect will be the least of your worries.)
There is nothing notorious about insuring a pianist's hands. The problem an insurer faces, however, is of limiting membership in the club to reliable underwriters in a sound financial position. Again, there's nothing new.
When you put $10 on black 22, you're pretty sure the casino will pay off if you win. The CDS market offers no such assurance. One reason the market grew so quickly was that hedge funds poured in, sensing easy money. And not just big, well-established hedge funds but a lot of upstarts. So in some cases, giant financial institutions were counting on collecting money from institutions only slightly more solvent than your average minimart. The danger, of course, is that if a hedge fund suddenly has to pay off on a lot of CDS, it will simply go out of business. "People have been insuring risks that they can't insure," says Peter Schiff, the president of Euro Pacific Capital and author of Crash Proof, which predicted doom for Fannie and Freddie, among other things. "Let's say you're writing fire insurance policies, and every time you get the [premium], you spend it. You just assume that no houses are going to burn down. And all of a sudden there's a huge fire and they all burn down. What do you do? You just close up shop."
It's rules written in blood (the railroad version), or in red ink, again. We have prudent investor rules and reserve requirements and codes of ethics and the disinviting of careless underwiters to the coffeehouse to protect against such events. We have a 500 year head start on understanding these things.
IT IS TIME TO GET GREEDY. Professor Mankiw elaborates.

I made my customary allocations of today's paycheck to investments and debt retirement. If the opportunity to pick up my mortgage at 10 cents on the dollar presents itself, I will be in a position to take advantage of it.
THE ONLY THING WE HAVE TO FEAR? The Chicago Tribune interviews a number of macroeconomic experts, from a wide variety of research and political perspectives.

Hearing some of the dire predictions for an economy struggling to avert a financial collapse, it's easy to recall 1930s photos of people huddled in soup lines or traveling the country for work and wonder what a depression would look like in the modern world.

Experts say that won't happen. Yes, banks are failing and the stock market plunged Monday. And yes, there is genuine concern that regardless of the government's $700 billion bailout proposal the United States still could land in a severe recession, with more business failures, higher unemployment, an even weaker housing market and depleted retirement savings.

But despite the alarms, including dire warnings from President Bush, economists insist there is no risk of a second Great Depression because, for some time now, the U.S. economy has been in the midst of a very different, less threatening phenomenon: "the Great Moderation."

I have memories of people traveling the country for work. There were some bitter jokes in Texas about broken down Michigan-registered cars causing traffic jams. Here's the capsule version of that era.
In 1982, at least one member in 8 million families was unemployed, accounting for 13 percent of all families. The housing, automobile, aircraft and steel industries all were hit. High oil prices reduced the demand for oil and gas, putting 150,000 miners out of work in a single year. Residential construction slowed because of high mortgage rates. Meanwhile, jobs in the services sector grew but at a slower pace than previously.
Since then, assorted sectors of the economy have been subject to recession at different times, something the commentariat used to call "rolling recessions." A repeat of the pattern of 1982, even if on a smaller scale, will be unlike any of the more recent recessions.
THE OPPORTUNITY COST OF IGNORANCE. King Banaian.
Taxpayer dollars "saved": $700 billion.
Loss on Wilshire 5000: $1.024 trillion.
Exposing Congressional fecklessness: priceless.

Oh, wait a minute, why should this day be any different from any other day?

Now for a puzzle. If Congress does nothing, has the market approximately discounted the capital losses of those sliced, diced, defaulted mortgages?
OCTOBER MADNESS. The Chicago Cubs secured their playoff spot with a week to go. The Milwaukee Brewers were in on the last day of the regular season. The Chicago White Sox had to play a makeup game yesterday to earn a one-game tiebreaker with the Washington Senators Minnesota Twins. Despite a three-hour rain delay Monday and a chilly evening for early fall today (a retractable roof is recommended for fall baseball) the White Sox had one more home run in them, and they'll open at Tampa Bay Thursday.

Wednesday is for the National League, with Milwaukee opening at Philadelphia and the Brooklyn Trolley Dodgers coming to Chicago, where the mayor has prevailed on the bars near Wrigley Field to stop serving after the seventh inning stretch. First a pate ban, then shortened bar hours. I suppose he'll have to make the same request to the bars near Sox Park.

There is plenty of Guinness at the Cold Spring Shops Hofbrauhaus, but the first games are on school nights.

29.9.08

GET OUTTA HERE ... GONE! Because we can't be all economic crisis and hollowed higher education.


ANTICIPATING THE TROUBLES. My copy of John R. Talbott's The Coming Crash in the Housing Market has a purchase date of October 2003, and I'm writing Book Review No. 41 about it only now. He starts his analysis with a surprise: foreclosure rates were rising more rapidly than house prices as early as the 1990s. He then explains, in accessible language, the dynamics of a rational expectations hyperinflation as well as some of the third-party actors, including lenders and the non-governmental organizations whose behavior turns the housing market into something other than the textbook price-takers' market. The fundamentals -- increased leverage and government-insured mortgages that give risk-takers a put option -- are there for all to see. In 2003, few people would have believed this scenario, from page 75.
There will be no comparables in the neighborhood because nothing will be selling. Bankers will have to go back to very realistic valuations, probably based on square footage and historical pricing. Valuations will further be damaged by the banks' own activity as they dump foreclosed properties on the market at huge discounts to the mortgage amount. Banks really do not want to hold bad loans on their books, because it only reminds them of managerial errors of the past. They are infamous for buying high and selling low when it comes to foreclosures.
On the other hand, if Congress does not bail them out, they might have to wind up their portfolios in a less panicked way. And perhaps a failure of the Congress to act will resolve the uncertainty. But that might be asking too much. Mr Talbott notes the failure of the insurers, including the government-backed organizations, to do their due diligence. The easy course was to ride the bubble and try not to sneeze.

One chapter is titled "How Bad Can It Get?" See page 125.
Over $750 billion of mortgages outstanding are covered by private mortgage insurance. These are the riskiest of mortgages because the homeowner typically puts less than 20 percent down at time of purchase, thus necessitating the need [c.q.] for private insurance. And yet, only two PMI companies are of a size to withstand any sizeable losses -- AIG and GE Credit -- and they control only approximately 30 percent of the total market for PMI.
Oops.

The paragraphs that follow contemplate trouble at Fannie and Freddie. "[T]here is no pessimistic scenario I can describe that will adequately depict the ensuing disaster." (Page 127).

The subtitle is 10 Things You Can Do Now to Protect Your Most Valuable Investment.
  1. Decrease Your Exposure to Residential Real Estate.
  2. Move from a High-Priced Area to a Lower Priced Area.
  3. Manage Your Debt Leverage Better.
  4. Hedge Your Exposure to Residential Real Estate.
  5. Plan Now in Case of a Major Transition Event.
  6. Examine Other Contingency Plans.
  7. Maintain Adequate Insurance.
  8. Investigate Bankruptcy Protections Now.
  9. Become More Civically Involved.
  10. Reassess Your Life's Priorities.
Some of these will be harder to implement now that the shakeout is upon us, but these are worth reading.

(Cross-posted to 50 Book Challenge.)
A PRIMER ON ADVERSE SELECTION. Joseph Stiglitz evaluates the proposed financial bailout.

There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.

The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense.

The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

He applies the logic of adverse selection in his policy proposal.
By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem--the government getting stuck with the worst or most overpriced assets.
Nowhere in his post does he write about a $700 billion outlay; he notes that, with the correct structuring of the bailout the taxpayers might turn a profit.
ANATOMY OF A BUBBLE. Steven Horwitz of St. Lawrence University goes into detail.

To call the housing and credit crisis a failure of the free market or the product of unregulated greed is to overlook the myriad government regulations, policies, and political pronouncements that have both reduced the "freedom" of this market and channeled self-interest in ways that have produced disastrous consequences, both intended and unintended. Let me briefly recap goverment's starring role in our little drama.

For starters, Fannie Mae and Freddie Mac are "government sponsored enterprises". Though technically privately owned, they have particular privileges granted by the government, they are overseen by Congress, and, most importantly, they have operated with a clear promise that if they failed, they would be bailed out. Hardly a "free market." All the players in the mortgage market knew this from early on. In the early 1990s, Congress eased Fannie and Freddie's lending requirements (to 1/4th the capital required by regular commercial banks) so as to increase their ability to lend to poor areas. Congress also created a regulatory agency to oversee them, but this agency also had to reapply to Congress for its budget each year (no other financial regulator must do so), assuring that it would tell Congress exactly what it wanted to hear: "things are fine." In 1995, Fannie and Freddie were given permission to enter the subprime market and regulators began to crack down on banks who were not lending enough to distressed areas. Several attempts were made to rein in Fannie and Freddie, but Congress didn't have the votes to do so, especially with both organizations making significant campaign contributions to members of both parties. Even the New York Times as far back as 1999 saw exactly what might happen thanks to this very unfree market, warning of a need to bailout Fannie and Freddie if the housing market dropped.

Complicating matters further was the 1994 renewal/revision of the Community Reinvestment Act of 1977. The CRA requires banks to to make a certain percentage of their loans within their local communities, especially when those communities are economically disadvantaged. In addition, Congress explicitly directed Fannie and Freddie to expand their lending to borrowers with marginal credit as a way of expanding homeownership. What all of these did together was to create an enormous profit and political incentives for banks and Fannie and Freddie to lend more to riskier low-income borrowers. However well-intentioned the attempts were to extend omeownership to more Americans, forcing banks to do so and artificially lowering the costs of doing so are a huge part of the problem we now find ourselves in.

At the same time, home prices were rising making those who had taken on large mortgages with small down payments feel as though they could handle them and inspiring a whole variety of new mortagage instruments. What's interesting is that the rise in prices affected most strongly cities with stricter land-use regulations, which also explains the fact that not every city was affected to the same degree by the rising home values. These regulations prevented certain kinds of land from being used for homes, pushing the rising demand for housing (fueled by the considerations above) into a slowly responding supply of land. The result was rapidly rising prices. In those areas with less stringent land-use regulations, the housing price boom's effect was much smaller. Again, it was regulation, not free markets, that drove the search for profits and was a key contributor to the rising home prices that fueled the lending spree.

While all of this was happpening, the Federal Reserve, nominally private but granted enormous monopoly privileges by government, was pumping in the credit and driving interest rates lower and lower. This influx of credit further fueled the borrowing binge. With plenty of funds available, thanks to your friendly monopoly central bank (hardly the free market at work), banks could afford to continue to lend riskier and riskier.

The final chapter of the story is that in 2004 and 2005, following the accounting scandals at Freddie, both Freddie and Fannie paid penance to Congress by agreeing to expand their lending to low-income customers. Both agreed to acquire greater amounts of subprime and Alt-A loans, sending the green light to banks to originate them.

From 2004 to 2006, the percentage of loans in those riskier categories grew from 8% to 20% of all US mortgage originations. And the quality of these loans were dropping too: downpayments were getting progressively smaller and more and more loans carried low starter interest rates that would adjust upward later on. The banks were taking on riskier borrowers, but knew they had a guaranteed buyer for those loans in Fannie and Freddie, back, of course, by us taxpayers.

He calls it an open letter to the Left, which I suspect is a reference to faith-based colleagues in other departments. It is also a primer on several deeper insights from economics. Go. Read. Understand.
REVENGE OF THE NERDS. Vermont Tiger's Art Woolf offers plain advice for difficult times.

Recent events have shaken our confidence and made us wonder how the financial meltdown will affect us personally.

For most of us, the answer is... not much.But it will be hard for anyone to entirely escape. The U.S. government does not spend upwards of $700 billion of taxpayer money without affecting - well, taxpayers.

That $700 billion figure is misleading. Some fraction of the devalued mortgage portfolios will be written off, creating a claim on the government that could be monetized by the Federal Reserve. Some other fraction, should the Congress present a bill to the President, will be recovered at a profit.
Right now, the problem is confined to Wall Street and has not spread to Main Street. Yes, unemployment is rising and firms are shedding jobs, both here and nationally. But by any measure the economy today is in better shape than it was during 2001 recession.
Although that's true, there's still a lot of air to bleed from private retirement accounts and in occupied houses with the mortgage payments being made.

That doesn't mean we're out of the woods. But what should a concerned person do?

If you were managing your finances prudently before the crisis hit, then don't do anything differently. Prudence is a good rule in general and an iron rule during an emergency.

And this is not a good time to panic. No one makes good decisions while panicking. So take a deep breath.

If this crisis does nothing else, it should remind us to stick to the fundamentals: Don't buy things you can't afford. People facing foreclosure on homes whose mortgage is costing half their income are learning this the hard way. Fortunately, there are few of these in Vermont.

Only go into debt for things that last a long time, like a house or education. Don't take out a home equity loan to buy a new wardrobe or a Caribbean vacation.

Save for short run needs in a safe, liquid asset in a bank or money market mutual fund. After last week's government backstopping of all money market funds, that's now even simpler.

Invest for the future in a diversified portfolio of stocks and bonds - preferably in a low-cost broad-based indexed mutual fund. During the dot com bubble of the 90s, people with a diversified portfolio didn't gain as much as the investors who bought into tech stocks, but when the bubble burst in 2000, tech stocks went down the drain.

Don't try to beat the market. If we have learned one thing from what's going on, it's that you only get high rewards for taking high risks.

How concerned should we be? It's a cliché to say that the U.S. economy is fundamentally sound. But it is. We have a system of laws and institutions that have given our economy the flexibility to adapt and withstand unforeseen shocks. That's been true in the past and it is just as true today.

We've also written and rewritten the rules, sometimes in response to past crises, sometimes in response to unanticipated consequences of crisis management. Check out the recriminations over repealing Glass-Steagall, or for that matter, the recriminations about the Community Reinvestment Act whose role, if any, in the current troubles will be material for numerous dissertations, not limited to economics.

In the near term, the financial crisis will likely cause the economy to cool and even retreat a little. People should be prepared for a period of slow economic growth and maybe even a recession.

But this, too, shall pass. The economy will recover, the stock market will rise, and those of us who have kept to the basics of our financial plans - however simple or sophisticated - will be rewarded.

Should the policymakers not destroy the opportunities in their attempts to save them, that is.
FOURTH TURNING ALERT. Daniel Henninger, with the latest variation on "take care of the o-rings and the Space Shuttle will take care of itself."

Standards of behavior matter.

All that remains is to see if this week's left-right consensus on standards can be extended to any corner of American life beyond "CEO pay" and other sitting ducks.

Once we're done imposing Spartan discipline on the dining rooms of Wall Street, how about some of the same for the halls and classrooms of the average inner-city high school? A nation in panic at the sight of banks imploding has yawned for years while the public-school system melted down.

A handful of Supreme Court decisions going back 40 years relaxed standards of oversight for dress codes, comportment, speech and expulsion, and the average school principal or teacher threw in the towel on daily discipline.

It was so much easier to be liked. Cheap fuel, cheap credit, and productivity gains in construction gave more people the option of choosing a better school district. Better is a comparative: their kids still couldn't integrate ln x if their portfolio depended on it, but they could count on a relatively safe environment in which their self-esteem was never tested.

Many school administrators can relate to the frontline mortgage-lending officers, some of them old-school bankers who used to help young borrowers understand the difference between the real world and probable ruin. That's what high-school principals used to do. No more.

Suddenly, local lenders were toiling (if they survived) in the easier liar-loan world fostered by Congress, Fannie and Freddie and guys with great tans in Los Angeles. The old public-school system, once a tight ship in countless towns, knew that game. The schools learned to shove another class of semi-educated bodies into the street every June and call them "graduates" the same way lenders called zero-down-payment borrowers "homeowners."

Now comes a test with a stern grading curve. If the fallout includes seeing off access-assessment-remediation-retention from the universities, all the better.

I hope only that there are sufficient bankers and common-school principals that remember the older United States, the one before the 1960s, when the institutions worked.
THERE'S NOTHING WRONG WITH FANNIE OR FREDDIE. The Congressional Diversity Caucus told us so, back in 2004.


By their fruits shall ye know them.
THE FACE OF SUBPRIME? This Stanley Kurtz column suggests the man was participating in an organized protest.



Photograph courtesy New York Post.

I have seen the photograph in other papers. It could be a stock picture, it could be a spontaneous protest. Mr Kurtz is skeptical.

Community organizers intimidate banks into making high-risk loans to customers with poor credit.

In the name of fairness to minorities, community organizers occupy private offices, chant inside bank lobbies, and confront executives at their homes - and thereby force financial institutions to direct hundreds of millions of dollars in mortgages to low-credit customers.

In other words, community organizers help to undermine the US economy by pushing the banking system into a sinkhole of bad loans. And [Senator Barack] Obama has spent years training and funding the organizers who do it.

THE seeds of today's financial meltdown lie in the Community Reinvestment Act - a law passed in 1977 and made riskier by unwise amendments and regulatory rulings in later decades.

CRA was meant to encourage banks to make loans to high-risk borrowers, often minorities living in unstable neighborhoods. That has provided an opening to radical groups like ACORN (the Association of Community Organizations for Reform Now) to abuse the law by forcing banks to make hundreds of millions of dollars in "subprime" loans to often uncreditworthy poor and minority customers.

Any bank that wants to expand or merge with another has to show it has complied with CRA - and approval can be held up by complaints filed by groups like ACORN.

In fact, intimidation tactics, public charges of racism and threats to use CRA to block business expansion have enabled ACORN to extract hundreds of millions of dollars in loans and contributions from America's financial institutions.

Banks already overexposed by these shaky loans were pushed still further in the wrong direction when government-sponsored Fannie Mae and Freddie Mac began buying up their bad loans and offering them for sale on world markets.

Fannie and Freddie acted in response to Clinton administration pressure to boost homeownership rates among minorities and the poor. However compassionate the motive, the result of this systematic disregard for normal credit standards has been financial disaster.

Roger Kimball elaborates.

For decades the government has done things to help Americans to realize the dream, e.g., graciously allowing citizens to keep some of their own money to help pay for the interest on a mortgage (the official term for this is a “tax deduction,” but I prefer my locution since it emphasizes the fact that it is YOUR MONEY we are talking about).

But what about people who do not work hard (if they work at all)? What about people who have not saved up for a down payment? What about people who do not pay their bills on time (if they pay them at all)? Why shouldn’t they get to live the American dream?

That was the question that led to

”The Community Reinvestment Act” (see here for more).

* The original Community Reinvestment Act was signed into law in 1977 by Jimmy Carter. Its purpose, in a nutshell, was to require banks to provide credit to “under-served populations,” i.e., those with poor credit.

The buzz word was “affordable mortgages,” e.g., mortgages with low teaser-rates, which required the borrower to put no money down, which required the borrower to pay only the interest for a set number of years, etc.

* In 1995, Bill Clinton’s administration made various changes to the CRA, increasing “access to mortgage credit for inner city and distressed rural communities,” i.e., it provided for the securitization, i.e. public underwriting, of what everyone now calls “sub-prime mortgages.”

Sub-prime loans to people with no experience managing credit are part of the problem. The foreclosures of blighted properties in garden spots such as Cleveland, Detroit, and Milwaukee are the consequence of that policy decision. They're a symptom, however, of a greater malaise.

Anatomy of a bubble

Step 1. The intoxication: “My house is worth millions!” From 1995 - 2005, the number of sub-prime mortgages skyrocket. So did the house prices.

Step 2. The hangover: “Oh my God, my house isn’t selling. What went wrong?”

The television show "Flip This House" wasn't pitched to the slums. Neither were the advertisements for interest-only mortgages on Chicago news and talk stations catering to drive-time listeners, presumably contributing to the congestion on the expressways from the yuppie ghettoes to the Loop.

Mr Kurtz goes on to note Senator Obama's involvement in subprime, in ways more effective than street protest.

As Howard Husock, writing in City Journal way back in 2000 observed: “Bank examiners would use federal home-loan data, broken down by neighborhood, income group, and race, to rate banks on performance. There would be no more A’s for effort. Only results—specific loans, specific levels of service—would count.” Way back in 1994, for example, Barack Obama sued Citibank on behalf of a client who charged that the bank “systematically denied mortgages to African-American applicants and others from minority neighborhoods.”

In an era of stable prices and stable interest rates, the policy makes sense. In an era of rising house prices and falling interest rates, a bank that had to be sued to lend to risky borrowers might have its stock bid down. Rising house prices convert an interest-only mortgage into a 20% down claim that can be refinanced as a fixed rate, and an expected lower rate upon refinance is the closest thing we have in economics to a free lunch. Where everyone went wrong was in expecting that appreciation to happen in a year or two, rather than in the more normal six to eight years. Crash.

ON THE LIGHTER SIDE. It's being forwarded around the internet and the numbers are unaudited.

If you had purchased $1,000 of shares in Delta Airlines one year ago, you will have $49.00 today. If you had purchased $1,000 of shares in AIG one year ago, you will have $33.00 today. If you had purchased $1,000 of shares in Lehman Brothers one year ago, you will have $0.00 today.

But, if you had purchased $1,000 worth of beer one year ago, drank all the beer, then turned in the aluminum cans for a recycling refund, you will have received a $214.00.Based on the above, the best current investment plan is to drink heavily & recycle. It is called the 401-Keg.

On a day when libertarian Republicans and welfare-rights Democrats find common ground, one finds amusement where one can.

28.9.08

CONDOLENCES. A student at Finland's Seinäjoki University of Applied Sciences has murdered ten people and injured at least one other person before taking his own life. The shooter had been detained by police after he posted some videos, but there was insufficient evidence to hold him.

I'll leave the analysis to others. There's a university with people coming to terms with what ought not to have happened to think about.

Some developments.

First-responders required two hours to secure the crime scene.

The shooting is the second at a Finnish school within a year, with predictable reactions. Some see anomie.
A national student survey published today showed the scale of the problem: one in ten felt that they did not have any friends and the same number said that they never discussed problems with their parents.
Others see a frontier mentality.

Tuesday’s rampage happened almost a year after another gunman killed eight people and himself at a school in southern Finland, an attack that triggered a fierce debate about gun laws in this Nordic nation with deep-rooted traditions of hunting in the sub-Arctic wilderness.

With 1.6 million firearms in private hands, Finland is an anomaly in Europe, lagging behind only the United States and Yemen in civilian gun ownership, studies show.

Copycat Effect has been on the case.
HALF OFF, ALL ON. Two weeks ago, the Packers had an early lead in Detroit, with the Lions booed off the field at halftime. The Lions came back, took the lead, then gave it back.

Yesterday, the Badgers had an early lead in Ann Arbor, with the Blue Hens Wolverines booed off the field at halftime. The Wolverines came back, took the lead, and protected it , assisted by several Wisconsin errors.

Earlier Saturday, the Northern Huskies had an early lead in Ypsilanti, with the local fans out of the stands at halftime. The Hurons Golden Eagles didn't come back; in fact they gave up a garbage-time safety that developed so slowly the radio announcer called "safety" several seconds before the tackle for loss.
CAUGHT SHORT. Reason's Brian Doherty objects to the government's ban on some short sales.
In standard short-selling, you have already borrowed or arranged to borrow the stock that you're selling. In the more controversial, and largely illegal, “naked” short selling, you make a deal to sell them before you have actually borrowed or arranged to borrow. This frequently ends with you being unable to deliver the security, leaving an open “failure to deliver” contract that may (or may not) ever settle with the buyer actually getting the stock. (Most believe naked short-selling is especially pernicious, essentially creating fake “fiat” shares that don’t exist and driving down prices. Others have argued the economic differences between naked and non-naked short-selling probably don’t exist.)
Regulators have imposed a number of specific prohibitions against naked short-selling, but those prohibitions might simply be distorting the information content of prices.
That first naked short-sell ban wasn’t enough to keep a lot of institutions with lots of worthless assets from continuing to be in trouble—nor should any intelligent market watcher have expected it to.
The short sale is a symptom of trouble. If the fundamentals suggest a lower valuation for the stock, it will go down, short-sale ban or not. If the fundamentals do not, the short seller who hopes to trigger lower prices to cover a naked short position has a lot of buying back to do. Mr Doherty suggests, charitably, that the regulators would like to prevent a rational expectations hyperdeflation.
The order has vague imprecations about being “concerned that short selling in the securities of a wider range of financial institutions may be causing sudden and excessive fluctuations of the prices of such securities in such a manner so as to threaten fair and orderly markets.” An application of “herding” theory is basically in play, the idea that if people see lots of sales going on, they will start selling willy-nilly, too, with no good reason. What the SEC are really trying to do is impose a subtle and second-hand form of price control by limiting people’s ability to sell as many shares as they would otherwise be able to if they could short-sell—it's one more attempt to prop up a falling market for a couple of more weeks.
There's still a lot to learn about complex adaptive systems here. Mr Doherty suggests that the recent elimination of the uptick rule (on which a short sale could only be entered on an upward price change) is not to blame.

Two discussions I had this week, the first with [J.B.] Heaton and the second with investment strategist Jeff Saut of Raymond James, presented violently opposing views on this matter: Heaton told me of the results of the SEC test and of academic studies indicating that the uptick rule had little impact. In general, Heaton argues against the notion that short-sellers, other things being equal, can wreck a stock. Instead, he maintains that when the short-seller, who allegedly pressures prices down by selling, returns the stock he borrowed, he then by necessity becomes a buyer, who other things being equal pressures prices up.

Saut, on the other hand, noted that he’d seen those academic studies on the uptick rule, but is still sure that it does matter and that highly capitalized hedge funds, once they get rolling with shorts, can and do wreck companies. Such drama about the short-seller’s occasional role as wrecker is well exemplified by this 2005 Time article. However, truer to the typical reality of the short-seller is this more sober account from 1996 in Business Week describing the slow, steady, important, and risky work in spreading economic information that the short-seller generally provides.

But here we have the fundamental dilemma of economic policy in a market system in which the payoffs serve both as signals ("the slow, steady, important, and risky work in spreading economic information") and as rewards in themselves (which is how hedge fund managers earn their keep).
WHY IT MATTERS. City Journal's Heather Mac Donald suggests the snobbery of anti-snobbery can go too far.

The conservative commentariat hangs prestigious college degrees around the necks of the media and political liberals like so many dead coons. Charlie Gibson? “Princeton ’65,” sneered one Wall Street Journal columnist. Barack Obama? “Columbia and Harvard Law,” guffaws Ralph Peters in the New York Post. Many of those heaping scorn on the hypereducated elites have a Yale or Cornell degree in their own closet, as was the case in that first burst of Jacksonian populism.

This derision for the contemporary academy is unquestionably deserved. I am as depressed as anyone by the university’s descent into ignorant narcissism and victimology over the last 30 years. And yet I fear that the enthusiasm for Sarah Palin’s anti-elite status risks spilling over into a rejection of intellectual life and serious study tout court. I know that the Palin enthusiasts do not intend to knock rigorous liberal education per se, only its current deformity. But in all the fulminations against Harvard, wouldn’t it be possible to signal that it’s not just paying the mortgage, pumping the gas, and enjoying her husband and children that qualifies a working mom for the vice presidency, as one commentator has suggested, but that the study of history and political thought might help, too? Such study can be accomplished at the University of Idaho no less than at Princeton.

Idaho, Princeton, Northwestern, Northern Illinois: all in the same endeavour. It's incumbent on anyone in authority at any university with no claim on membership in the fifty or so claimants to top twenty status, and, per corollary, to anyone in authority at any of the claimants, to resist the notion that "we're not Harvard and we'd best not have high expectations." The status anxiety that keeps the Harvards and the Princetons well-endowed is a genuine flight to quality, one that the land-grants and the mid-majors can serve, but better so by steering clear of access-assessment-remediation-retention.

Ms Mac Donald appears to concur, for reasons that are subtle.
Obviously, learning needs to be merged with experience and common sense to result in political wisdom. The Palin populists are right to point out that many highly educated people make idiotic decisions. Political wisdom can derive from everyday experience and common sense alone. But the populist message at times seems to carry a subtle implication that learning is itself a disqualifier. At a time when historical and literary ignorance is at such a high, an occasional hint of the value of serious study would be most welcome.
Post-high school enrollment rates: high. Required literary and historical content of post-high school curriculum: low. Find the responsible people and turf them out.
SHIFTS HAPPEN. Demand for firewood begins to soar. The reporter acts surprised.

Firewood sales are stacking up as more people turn to the natural fuel in hopes that it will offset their winter heating bills.

But in some cases, firewood prices also have increased about 30% with the higher demand and higher harvesting costs.

There's no "but" about this. We really ought to have more tractable language than "change in demand" (the demand shift for firewood in response to a higher price of heating oil) as contrasted to "change in quantity demanded" (the movement to a smaller consumption rate of heating oil along the demand curve for heating oil in response to a higher price), if for no other reason than to not confuse journalists. Well, perhaps to not confuse economists.

Where there's excess demand at a price, there's competition among buyers to induce sellers to offer more. But if the stuff could have been offered at the old price, it would have been offered at the old price. A higher price calls forth more stuff.
THEY COULDN'T TAKE THE TEN LINE STREETCAR. The usual practice on fall Sundays is for WTMJ radio to broadcast the Packer games, relegating the Brewers to another radio station with short legs. I was fully expecting to have to listen to the Cub side of the story, although with a playoff spot at stake, the radio masters switched things. Well into the game, broadcaster Bob Uecker alerted Milwaukee fans that all parking lots at Miller Park were full and he asked his aides whether to recommend State Fair.

At one time a fan could park at State Fair and ride the 18 NATIONAL car to within walking distance of the stadium. The Rapid Transit line was abandoned just before County Stadium was built, precluding parking at Pius XI High School and riding a 2 LOCAL RAPID TRANSIT car from 76th Street to Soldiers Home.

The game? The Curse of the North Shore Line lurks in Philadelphia, first stop in the playoffs.
It was nice redemption for the Brewers. They blew a big lead in the NL Central last year, and were in danger of a big fold this season after going 3-11 to start September.
The big fold was in New York. Remember this?
If the Mets go 4-3 in the final week, the Brewers would have to finish 5-1 to force a one-game playoff.
The Brewers finished 5-1, while the Mets had to work to earn a 2-2 split with the Iowa Cubs, and the Florida Marlins took 2 of 3 to close Shea Stadium for good.

The Packers? Too many turnovers, a loss at Tampa Bay, and quarterback Aaron Rodgers may have a shoulder separation.

27.9.08

THE GREAT DEPRESSION TOOK THE INTERURBANS WITH IT. A few people had the time and the disposable income to set up preservation efforts. A museum for streetcars? [guffaw]. Ferroequinology, fairly or unfairly, does not get the respect enthusiasm for abstract art does. Electric cars are prettier to look at, and they move. That's compensation enough.

Despite the odds, the Central Electric Railfans' Association has lasted seventy years, a time interval in which almost all the electric transit systems went for scrap, only to come back in a new form. The light rail systems of today have their own enthusiasts, and some of them will discover what came before.

The Illinois Railway Museum hosted an inspection tour as part of the anniversary festivities, and they rolled out some infrequently used stock for the enthusiasts to inspect.

Illinois Terminal 101 is a 1917 product of American Car.


It was built for suburban service east of St. Louis.


The car has a railroad-style communication whistle rather than the traditional traction company bell. Here the motorman works it out of the East Union station trackage and across the trestle that was necessary in order for a preservation railroad to begin operation in the mid-1960s. The car does operate in regular museum service, but only if there is no rain in the forecast.

Although Sand Springs Railway Car 68 looks older than Illinois Terminal 101, it is a 1918 product of Cincinnati Car Company built for the Cincinnati, Lawrenceburg & Aurora Railroad and subsequently sold to Sand Springs as a low-budget off-peak car.


A museum member has been working on this car for 40 years. It has operated on a few special occasions, without passengers. I took this video on the first run of the car with a load of passengers.



The car host explained that some metal brackets at standee level held signs that designated the "colored" section, something required under the Jim Crow laws in effect in Oklahoma. The museum has a single-truck, curved-side Knoxville car that is also a Jim Crow car. That car, however, is not operable.

The museum collection began with Indiana Railroad 65, a 1931 Pullman product built to offer faster, more comfortable service through central and southern Indiana. The cars arrived just in time for the Depression to do its work. This car remains because it was purchased by an Iowa interurban to complement a fleet of similar cars it had obtained from the Cincinnati and Lake Erie, one of which had been destroyed. The rest of the Indiana Railroad fleet went for scrap, aluminum being useful in the buildup to World War II.


The car offers a smooth, quiet ride. It operates only rarely, and then only as a chartered car. There's only one trolley pole on it, leading to some improvisation to run it in reverse. Humph. The Green Special cars that The Milwaukee Electric rebuilt at their Cold Spring Shops were single-ended cars, but they had a trolley pole for reverse movements.


It looks fast enough running through Johnson Siding and crossing Seemann Road.
MAINLY MACROECONOMICS. Econ Log continues to follow developments in the financial system bailout, or workout, or restructuring, or gridlock. Go here for comments on a Harvard faculty roundtable. Go here for reaction to the Questions of the Day.
Why, if we don't act this weekend, will we get the Great Depression? I don't think that what has happened so far is going to do it. Do we really think that the lagged response of spending to the increase in liquidity preference that has already taken place will be that large?
King Banaian at SCSU Scholars notes the history as well as the tradeoffs involved.

26.9.08

NOT YET THE ELECTROLINER. Weekend operation of the Skokie Swift, which the Chicago Transit Authority insists on calling the Yellow Line and which I understand as the first section of the North Shore Line's high-speed line, will continue, although nobody is willing to commit for how long. The extension to Old Orchard Shopping Center has yet to materialize.
I'M NOT THE GRUMPIEST WEBLOGGER. The Pope Center's George Leef sees disinterest in academic "accountability" (the latest management fad).

Students who have been conditioned for twelve years to think that education is something where success comes automatically and without effort can’t be transformed into knowledge-thirsty scholars. Most of them go to college simply because they’ve heard that a degree is an occupational necessity. As they see things, they’re buying a product and expect to get it quickly and easily – just like buying a new cell phone or stylish shoes.

Faced with that mindset, colleges and universities pretend to educate students, offering an array of courses that students who don’t want to read and see no point in having an intellectual life can pass. Consequently, we have huge numbers of college grads who don’t read, write, or do math as well as high school grads did fifty years ago, as this National Association of Scholars study indicates.

That’s why I think that the talk about “accountability” is mostly hot air. The educational “customers” are getting the products they want. For some, that is a challenging and mind-expanding college experience and those who want that can still find it. For many others, however, a fluffy “education lite” is all they want and that’s what schools will keep giving them.

I don't agree with that conclusion. There is sufficient professorial discontent with the entitled attitude many weak students display that a little prodding of the admissions offices, and a little information about the resource sinks access-assessment-remediation-retention are, strategically provided to the right people, might go a long way toward improving faculty morale and higher education's public standing.
GOING BROKE WITH A CLEAR CONSCIENCE. Hee.

Washington Mutual, Inc. (NYSE:WM), one of the nation’s leading banks for consumers and small businesses, has once again been recognized as a top employer by Hispanic Business magazine and the Human Rights Campaign.

Hispanic Business magazine recently ranked WaMu sixth in its annual Diversity Elite list, which names the top 60 companies for Hispanics. The company was honored specifically for its efforts to recruit Hispanic employees, reach out to Hispanic consumers and support Hispanic communities and organizations.

The Human Rights Campaign, the largest national gay, lesbian, bisexual and transgender (GLBT) civil rights organization, also awarded WaMu its second consecutive 100 percent score in the organization’s 2009 Corporate Equality Index (CEI), which measures progress in attaining equal rights for GLBT employees and consumers. WaMu joins the ranks of 259 other major U.S. businesses that also received top marks in the annual survey. The CEI rated a total of 583 businesses on GLBT-related policies and practices, including non-discrimination policies and domestic partner benefits.

In both surveys, WaMu earned points for competitive diversity policies and programs, including the recently established Latino, African American and GLBT employee network groups, all of which have a corporate executive sponsor and champion.

A colleague doesn't make himself popular by asking the diversoids to specify the tradeoff between performance and diversity, in university hiring. Perhaps a few more failed market tests will concentrate some minds.

(Via Division of Labour -- "You can't make this stuff up." --off The Corner.)
GET A GRIP. The editorial board of the Chicago Tribune makes sensible observations. First, they note that the all-time high and the all-time low prices are probably not the best indicators of value.
Our hunch is that some of the current stark devaluing of loan portfolios and asset-backed securities is at least a little over the top. But in selling panics as in hurricanes, some people are content just to live to see another day. Once capital markets reprice the true value of those instruments, and holders of lousy debt admit as much, disruptions like Monday's will subside.
They assign responsibility, reasonably accurately.

The feds are letting the bulk of the consequences fall where they should: on those companies and their stockholders, who had taken the risks of ownership. Main Street customers and account holders should feel few if any repercussions (beyond, of course, Monday's scare).

Bear Stearns, Fannie and Freddie had grown too big for Washington to let fail -- the latter two because Washington itself had, over the decades, given them too much protection from market forces. But the sooner executives of other companies realize that taxpayers won't save them from their bad decisions, the better. Example: Automakers hoping that taxpayers will rescue them from their prior overreliance on gas guzzlers now have little reason to think that an administration willing to let Lehman Brothers go bankrupt wants to ship gazillions of taxpayer dollars to Detroit.

I'll have more on that federal involvement in mortgage assurance in a day or two. Let the car-makers eat Escalades.

Lastly, they suggest the long run is the revenge of the squares.

Seven days ago, this page urged the Bush administration in a headline to "Bail out of future bailouts." The key passage: "It's reckless to let Washington provide implicit support to private companies. Once this deal [Fannie and Freddie] has worked itself out, the government needs to make an orderly withdrawal from the business of mortgage lending."

That's heresy to those who believe, for example, that it's more important for every American to own a home than for him or her to have the certifiable ability to gradually pay for it. The bursting of the housing bubble spatters us all: Qualifying for a mortgage or other loan now will mean proving we're borrowing within our means to repay.

We'll all see fewer TV ads for "no-documentation" and other gimmicky lending schemes -- occasionally smart options, but usually geared to consumers living beyond their means.

Of course, if so many loan outfits hadn't made money so ridiculously easy to buy -- because that's what borrowing really is: buying today's money with tomorrow's income -- our capital markets would be healthier today. And many Americans wouldn't be staring down the barrel at so much debt.

I know where some reasonably-priced older houses are on offer, for those who think better of the McMansion.

I've located some more technical material to bring to your attention, although the pennant races might distract me.
GET UP, GET UP, GET OUTTA HERE. Rickie Weeks this time, with two on. Brewers deny Cubs a 100-win season and Florida takes one from the Mets. The Guinness tastes pretty good.
REVEALED PREFERENCES. Never mind that the graduates aren't ready for calculus or history or making sense of their adjustable rate mortgage disclosure statements. Their football players run onto Astroturf with larger-than-life video clips on the Jumbotron. The Astroturf story, as reported (or spun) by the Milwaukee Journal-Sentinel invokes tight school budgets in upscale suburbs, where assistant coaches are exhorted to recruit donors.
It’s a message that is resonating throughout public education as private dollars are being tapped to help fund public facilities, especially extras such as sports. Artificial turf projects are among the most expensive upgrades being made in local prep sports, and several Milwaukee area districts are completing and considering projects.
The article makes no mention of parallel efforts to support the chemistry lab or the art studio. We should be grateful that it makes no mention of seat licenses or preferred parking for bigger donors.

The Jumbotron is a recent development, and Chicago Tribune reporters checking the state's first, in Barrington, find a few skeptics.

"There are some kids that put some huge efforts in community service . . . or academics," said Doris Gierlach, who has two children at the school. "The likelihood of them being recognized in that scale is probably not great."

Sam Lialios, 20, a 2007 Buffalo Grove graduate and former Bison tight end, was another who wondered whether the jumbo screen was sending the right message.

"It kind of takes the high school aspect out of the experience," said Lialios, now a sophomore receiver at North Park University in Chicago.

I'm attempting to intuit that "high school experience." Pseudo-sophisticated phrasings a substitute for clear speech? Discuss.

25.9.08

WORST-CASE SCENARIO? Reason's Radley Balko sees more corporate welfare ahead.

Wall Street moguls may be "greedy," as both John McCain and Barack Obama have described them, but at least there are real consequences when their greed becomes excessive. They go out of business.

Except, that is, when the government bails them out. Thus far, in addition to being on the hook for the federal government's own massive debt, taxpayers are also putting up $85 billion to back insurance giant AIG and up to $100 billion each to back Freddie Mac and Fannie Mae, and we're funding the Bear Stearns backstop. Congress is also expected to approve at least $25 billion in corporate welfare for the big three automakers. You can probably expect more handouts down the road. All of this has some analysts now questioning the U.S. government's bond rating, and worse, wondering whether the government itself may soon collapse under the weight of its own debt.

When you, Joe Citizen, spend frivolously and default on your loans, the bank takes your house. When the government spends your tax dollars frivolously, it simply cooks the books to cover its excesses. When the books are left in ashes, the government just takes more of your money, or it prints more money, leaving the money it hasn't already taken from you devalued. Over the last few weeks, we've learned that you now face the prospect of an additional indignity: When your neighbor's bank spends frivolously and defaults on its loans, the government's going to take your money then too, to keep the bank in business.

Many commenters have blamed all of this on capitalism. This isn't capitalism. It's a peculiar kind of corporatist socialism, where good risks and the resulting profits remain private, but bad risks and the resulting losses are passed on to taxpayers. There's nothing free-market about it.

Neither Barack Obama nor John McCain, nor either party's leadership in Congress, has proposed a reasonable plan to deal with the government's unfunded Social Security and Medicare liabilities. In fact, all have proposed expensive new government programs that can't possibly be funded over the long term. All seem both oblivious to the federal government's impending financial peril and intent on making it worse.

Perversely, all are then simultaneously demanding that they be given greater control over the private sector—because, they gallingly explain, corporations have shown that they can't be left alone to behave in a manner that's fiscally responsible.

As of post time, there still is no agreement in Washington on the bailout, or whatever it is. I've been less than impressed with Senator McCain's calls for bipartisanship, that generally meaning the governing class agreeing to something at the expense of everyone else.
THE BYLINE SUMMARIZES THE COLUMN. Naomi Jaffe is a long-time activist in upstate New York and a former member of the Weather Underground.
It may put the brakes on some of the greed that is plunging the earth into climate destruction. It may allow, for the first time in 500 years, a global culture to emerge that is not dominated by white people.
I wasn't aware there was a global culture in the early 1500s. China turning inward, Spain outward, thirty-year life expectancies, and people living completely unaware of potential trading partners (best case) or potential enemies (worst case) two day's ride away.

Be careful what you wish for, you just might get it.
GET UP, GET UP, GET OUTTA HERE. Ryan Braun hits a timely grand slam, his first and the Brewers' first of this season. It was probably too much to ask of the Cubs to take the series in New York.
A LAZY CHAIN DEFINES A CATENARY CURVE. That might be an engineering maxim, or a mathematically minded economist might have said it, and it is a useful trick for designing a pottery kiln, but not a pizza oven. Now comes Elvis, the dog whose companion human, mathematician Timothy J. Pennings, wondered if he has a canine optimal pursuit algorithm.

Elvis doesn't actually do calculus. Nonetheless, Pennings remarked, "Elvis' behavior is an example of the uncanny way in which nature . . . often finds optimal solutions."

"I'd guess that most dogs have the same problem-solving software built in from the factory," he says. My article is just "drawing attention to something that has been in front of us all the while."

Never underestimate the power of adaptation and selection. Sub-optimizing dogs would have starved years ago.

22.9.08

OBSERVATIONS OF THE DAY. Nailed to Newmark's Door.
These are just links that I think are interesting or useful or both. They may not even be the best links I've seen recently; they're just ones I could gather quickly on a Sunday morning when I should be doing other things.
Not quite "Here I stand, I can do no other." No matter. Read. Follow the links.

The early commentary on the financial system bailout comes in two forms. Some comes from an ideological perspective, whether that's Trotskyist or Crolyist or Hayekian. Some is more pragmatic: sometimes the government gets paid.

But even there, there are tradeoffs. Yes, Chrysler did repay its guaranteed loans. But it used the breathing spell to develop the minvan (just the thing for yuppie hell in Oakland County) followed by the Ram series of pickup trucks (playing to that Macomb County crude) all as if cheap fuel would go on forever.

And yes, the government did turn a profit privatizing Conrail. But it passed up the opportunity to sell pieces to other eastern systems, the outcome that private markets chose nearly 20 years later.

The true cost of the financial rescue might not be known for years. There's a contingent liability of unknown size. Some houses will be sold under more conventional mortgages in the near future, and additional houses will be sold later. The taxpayer exposure to bad debt is there, but nobody knows how much or for how long.
GIVING THE AWARD TO THE SECOND SINGER? Ralph Peters.

Why does Sarah Palin energize all of us who don't belong to the gilded leftwing circle? Because she's us. We sat beside her in class. We hung out after school (might've even shared a backseat combat zone on prom night). And now she lives next door, raising her kids.

For the first time since Ronald Reagan, our last great president, we, the people, see a chance that one of us might have a voice in governing our country.

Speaking of Reagan (Eureka College, Illinois), every chief executive we've had since the Gipper snapped his final salute as president has had the imprimatur of an Ivy League university. And we've gone from bad to worse:

* George Herbert Walker Bush: Yale.

* William Jefferson Clinton: Georgetown, Oxford, Yale Law.

* George W. Bush: Yale and Harvard Business School.

The first lacked the sense to finish the job in Desert Storm; the second lacked the guts to go after al Qaeda when it was just a startup - and the third, well, let's just say he disappointed our low expectations.

Now we have the Ivy League elite's "he's not only like us but he's a minority and we're so wonderful to support him" candidate, Sen. Barack Obama (Columbia and Harvard Law).

Our country can't afford another one of these clowns. Harvard isn't the answer - Harvard's the problem.

Yes, he's a bit over the top. He's probably not wrong.
EVERYTHING OLD IS NEW AGAIN. A Destination: Freedom columnist suggests that buffing strength standards for railroad equipment address a symptom of unsafe railroading, where the real pathology is separating the trains.
The traditional approach of the U.S. FRA has been to require, with mandatory regulations, some well-intended but very challenging and expensive design standards regarding structural strength, mechanical deformation and energy absorption during a collision between two trains. In Europe and elsewhere around the world there are similar standards and requirements, which stipulate crashworthiness design and collision performance of rail vehicles. But the FRA is unique in the absolutes of these requirements. The consequence is that passenger rail vehicles authorized for use on mainline rail systems in North America are far heavier and typically more expensive than equivalent rolling stock in Europe due to the collision strength and crash energy absorption regulations. That means that most rolling stock in use on Europe’s mainline rail network would not be allowed by the FRA to operate in America.
That observation reinforces one I made. With productivity measures on the railroads pointing toward even heavier freight cars, and the principle of exhaustible resources pointing toward higher fuel prices, perhaps a different approach to passenger safety is best.
In Germany, much of the rail network is equipped today with a system called PZB (the German acronym for point-source train override system) which is coupled to the conventional red/yellow/green signal light masts or semaphore signal masts adjacent to the tracks. PZB uses a system of induction coils mounted by the tracks and on the locomotive or multiple-unit rail vehicle to indicate to the signaling system when a train has past a signal and to indicate on-board the train the status of the signal which it is approaching or which has just past. Without going into a lot of heavy technical detail and explanation, the main purpose of the PZB system is to automatically slow or stop a train which has gone past a red signal.
Look closely at my map, from the July 12, 1953 issue of the Chicago and North Western System's main line public timetable. In the lower right the legend identifies double track and automatic train control, the North Western's version of the German PZB.



Much of the double track, particularly in Wisconsin, has been reduced to single track, if not abandoned outright. The automatic train control is still in use on the Overland Route, and it is a bit disconcerting to watch stack trains sailing by at 70 mph on what looks like unsignalled track. (Train crews get the warning of tracks occupied ahead from the train control equipment. The equipment also alerts crews to restrictive aspects at interlockings, where there are lineside signals.)

The columnist suggests additional investment in train control technologies has a higher cost-benefit ratio than additional strengthening of the rolling stock.

Designing vehicles, such as trains, to minimize injuries in collisions is a worthy goal. But this approach in the American passenger rail industry increasingly creates ever more negative consequences and unintended side effects. It will never prevent loss of life and limb as effectively as existing technologies which can prevent these collision from happening in the first place. Let the investment in collision prevention begin.


OFTEN MALICIOUS, BUT SUBTLE THEY ARE NOT. Albert Einstein only had quantum phyics to worry about. That's probably more straightforward than a baseball pennant race.
If the Mets go 4-3 in the final week, the Brewers would have to finish 5-1 to force a one-game playoff.
That's the algebra. The story is more compelling. Philadelphia, the first team to 10,000 franchise losses, is in first place in the East on the strength of a sweep of the Brewers followed by a sweep of the Formerly Milwaukee Braves, and they're playing the Formerly Milwaukee Braves again this week. The Mets are hosting Chicago, and tonight Cub pitcher Jason Marquis helped his cause with a grand-slam home run. The Cubs secured home field for all National League playoff series they are in, and they're in the position of having to play it straight against the Mets and against Milwaukee, both jockeying for the wild-card playoff position.

Furchtbar nunerfind' ich des Fluches Kraft!

Milwaukee Journal-Sentinel baseball pundit Tom Hardricourt analyzes the Brewers' difficulties, without mention of the ghosts of Henry Cordell and Samuel Insull.

20.9.08

BUYING AND SELLING WINS. Indiana State's football team has a long losing streak in the middle of an even longer run of losses interrupted by one win. The team plays at the FCS level, where the acronym conceals its non-premier status, although its conference seeks to play at the premier level. One way to learn to play at a higher level is to schedule games against stronger opponents, such as Northern Illinois.

Before the game, the band plays the alma mater.


We observed a minute of silence in tribute to the students killed on February 14 (some of the spectators were a bit slow to catch on) but the university has restored the traditional ending to the song.

The game itself was settled by halftime. Here's DeMarcus Grady scoring with about two minutes to go in the half, followed by the howitzer shot, and if you watch carefully, the shadow of the smoke ring. In the background, there's a tree already changing.


Playing conditions were a bit hot and humid, but it was a pleasant afternoon for Huskie fans, and a well-bought victory for the team.

On the supply side, Nick at Red and Black Attack offers a case for Northern Illinois moving a home game against Wisconsin to a larger stadium in Chicago.

Wisconsin, however, knows better than to treat a Northern Illinois game as a bought victory. Twenty years ago this weekend ... (and it was in the promotional material for years.)
IT GOES ON YOUR PERMANENT RECORD. People who read your permanent record, such as university admissions officers, don't necessarily have time to read all of it.

At the University of Notre Dame, which received 14,000 applications for 1,985 slots last year, assistant provost for enrollment Dan Saracino said he and his staff "don't go out of our way" to scrutinize students online, but sometimes they come across candidates portraying themselves in a less-than-flattering light.

"It's typically inappropriate photos—like holding up a can of beer at a party," Saracino said.

"We try to turn it into a teaching moment," he said. "It's an opportunity to let students know that what they put on these sites is not just between you and your friends, but you and the world."

On the other hand, using the Internet to vet someone's character seems overly intrusive to Northwestern University's Christopher Watson.

"We consider Facebook and MySpace their personal space," the dean of undergraduate admissions said. "It would feel somewhat like an invasion of privacy."

That sentiment was seconded by the University of Chicago's dean of admissions, Ted O'Neill, who was surprised by the survey's results.

"We don't have a policy not to look, we just don't look," he said. "Despite the fact that these things are semipublic . . . I don't think we should be spying on things that aren't intended for us."

The article suggests that when admissions officers elsewhere are looking for a reason to say no, those transgressive pages might provide the reason.

19.9.08

PATERNALISM BECOMES COMPULSION? Last week, a Canadian physician, Andre Lalonde, gave an interview to Toronto's Globe and Mail in which he suggested that Governor Palin's decision to give birth to a Down syndrome baby set a bad example.
Ms. Palin's widely discussed decision to keep her baby, knowing he would be born with the condition, may inadvertently influence other women who may lack the necessary emotional and financial support to do the same, according to André Lalonde, executive vice-president of the Society of Obstetricians and Gynaecologists of Canada.
That comment does not play well with felix hominum or at Life Site News, for predictable reasons.

Cowardly Political Musings offers a different public policy perspective.

Palin can afford dealing with someone like Trig. She seems to have the will. She appears to have the financial backbone (at least in the future). If she makes the decision, she can deal with it. Not everybody can. People need to worry about that.

André Lalonde was expressing that concern. It’s a valid one.

Not everybody can manage a portfolio of options. Therefore people who draw paychecks each Friday must deposit their money in deposit-insured, interest-rate-regulated banks.

By the same logic, not everybody will be disciplined enough to set money aside for their retirement, and leave it there despite the temptations. Therefore everyone must make a contribution to a public pension plan that consists entirely of I.O.U.s.

Get the picture? The argument that one person's example undermines the public interest can be the first step toward making everyone's behavior compulsory.

And in that direction (and in Canada, where Down syndrome children are claimants on a starveling national health service) lies compulsion for reasons Professor Munger presented last year.
If we collectivize costs, by having a social safety net, suddenly most of my choices have externalities associated with them. My big fat ass is likely to cost you higher medical bills, because I rely on you, the working guy, to pay my health insurance.
He was talking about mandatory fitness training. The generalization, or lack of a generalization, is left to readers as an exercise.