March 2009 Archives

Selection Bias

I haven't been paying much attention to my Netflix queue lately and the result has been some discs I haven't been too too excited to watch.  This got me wondering why there weren't more good movies in my queue.  After all, I don't watch much in the theater, so there must be some good stuff out there I am missing.  But as I browse through the recommendations Netflix is giving me, I see a clear case of selection bias.  Netflix is recommending films for me, but they are based only on what I have gotten from Netflix before.  Those movies I really wanted to see, I shelled out $8 for and saw in the theater- so Netflix has no idea I saw these and can't base recommendations off of them.

This reminds me of Geithner's recent proposals to have more government oversight of financial firms.  Let's hope that any additional regulation won't suffer from the same problems as my Netflix queue.  That is, Geithner needs to do more than look at what caused this crisis- he needs to understand what will cause the next.  
More on the international bailout arms race.  I guess some people know when to hold 'em and when to fold 'em:
"First, in an interview for Monday's Wall Street Journal (no-subscription-required summary here), Jean-Claude Trichet, head of the European Central Bank, said that no new measures are needed to combat the global economic crisis. Then Mirek Topolanek, the prime minister of the Czech Republic and the president (in this rotation) of the European Union called the U.S. emphasis on fiscal stimulus "the way to hell.""

What a smart show- I need to start watching more TV.  South Park picks up on Higgs' "regime uncertainty" and all of Taylor's recent arguments against current monetary and fiscal policy:

Madoff with commodity money

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That's the headline.  Goodbye private property rights.  As Long or Short Capital jokingly notes:
"Ever since the New Deal-era Supreme Court translated the Commerce Clause into English as 'we can do what we want and you can't stop us,' Congress has been able to take as much of your money as they want, at any time and for any reason. It's a testament to their monumental stupidity that it took them nearly 80 years to figure this out."

Which bailout plan now?

Mark Thoma writes:
"In addition, as time has passed and prices have fallen, solvency issues have come to the forefront - the balance sheet problems are no longer hidden by overpriced assets - and the solvency problems must be addressed directly. That means that if there is no separate program to provide an infusion of capital, simply removing the toxic assets from the balance sheets through government purchases at current prices - prices so low that the banks are insolvent - won't be resolve the problem."

If the prices of "toxic" assets has fallen overtime, isn't this evidence of a very low true value of the assets?  The original argument was that a panic had temporarily suppressed the prices of said assets and that the government only need take hold of these assets until prices rebounded.  From what I can tell, the credit crisis is not as severe as last fall.  So if the price of assets is lower now and the credit crisis not as severe, shouldn't one conclude that the continuing fall in these asset prices is due to a deterioration in the fundamentals of those assets?


I'm fixing to start a section on stabilization policy in intermediate macroeconomics.  As part of the discussion, I wanted to include a statistic I heard from a buddy of mine recently: the Sharpe ratio for the US economy was higher before the Fed was created than afterward.  One could look only at GDP growth, but the Sharpe ratio (the ratio of the average rate of return and the standard deviation of the return) gives a measure of the return per unit of volatility.  Since people like more stuff (higher GDP) and also like to consumption smooth, this is metric provides a good measure of how well economic policy is doing.

He pointed me to some historical data and where I could verify his claim.  Sure enough, one finds a pre-1913 Sharpe of 1.13 (growth of 4.2% per year, with a standard deviation of 3.7%) and a post-1913 Sharpe of 0.67 (growth of 3.4% and a standard deviation of 5.1%).  Plotted below is a 20-year moving average of the Sharpe Ratio:

US_Sharpe.png

Greg Mankiw posted this link yesterday (3/17/09, St. Patrick's Day) to another funny Flash video from the folks at JibJab--Leprechaun Bailout.
Jim Hamilton (UCSD) at Econbrowser.com has set up the second annual 2009 NCAA Bracket Econbrowser Tournament. You can find instructions on how to join the group and enter your bracket in Hamilton's post yesterday. It was a blast last year. I don't know of anywhere else where you can pit your NCAA tournament game-picking ability against such a large number of economists.
I spoke two nights ago at a meeting of the Timp Valley (Utah County) chapter of the International Association of Administrative Professionals (IAAP). In preparing for the presentation, I gathered some information on the Utah economy. I was surprised to see how well Utah is doing relative to the rest of the country.

USUTunempRtGphMthSA2009-03.png
This cartoon appeared in the Wall Street Journal today. (Thanks Kerk.)

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The following three graphs brought me to the conclusion that changed my perspective on the relative size of our current recession in the United States. You often hear that the current recession is the most severe since the Great Depression. However, when you actually go to the data, that is only the case if you look exclusively at the financial sector.

rGDPrecessCompGraph.png
I couldn't resist posting and responding to this Glenn Beck video (1/29/09) because I know that he has been advised by multiple parties against the arguments that he is pushing. We all should have reason to be worried about the economy, but not for the reasons Beck is trumpeting.

Banking Panics

Some sentences I'll be thinking about over spring break (from Gary Gorton's "Subprime Panic"):

"How do banking panic's come to an end?  Some history is instructive.  During the 19th century, in the USA, the solution to banking panics was the institution of the private bank clearinghouse, which evolved over the century to the point where banks' response to panics was fairly effective... This system was abandoned with the founding of the Fed and the subsequent adoption of deposit insurance.  These were institutions aimed [at] preventing a panic from happening.  But they are not equipped to solve the information problem that arises if a panic does happen.  Clearinghouse loan certificates attacked the problem directly."

McDonalds value menu

(Calculated risk posted a variant of this joke today.)

"McDonalds just added another item to its $1 value menu... Citigroup stock!"

Adjusting retirement dates

A student of mine sent me this cartoon.

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Great (sad) bumper sticker

A student of mine sent me this bumper sticker.

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More unhappy data

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Rick's been posting some disturbing data.  As much as I'd like to cheer things up, I can't get over what's been going on in the U.S. Stock markets in the last couple of days.  Check this out:

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I feel really bad for those nearing retirement.  But I guess we have to remember that this is a huge transfer to those of us in the younger generations, not a "destruction of wealth" as properly defined.

Related to these recent numbers, Bryan Caplan posits an excellent question:
"If the government had followed a laissez-faire policy for the last six months, and output, employment, housing, and financial markets stood exactly where they stand today, what fraction of people would conclude that 'Events decisively prove that laissez-faire is a disaster'?"
Calculated Risk posted a series of very ominous graphs on Saturday showing just how bad things are in this recession. Almost as startling as the depth of our current troubles is how far above normal things were two years ago.

As I have argued before, the reason why this is a global recession--and not confined primarily to the U.S.--is the same reason that allowed the bubble to get so big. The financial instruments that were based on the U.S. real estate market got stamped AAA by S&P and Moody's and went around the world as low-risk, high-return investments. This further fueled the bubble while broadening the scope of what would turn out to be the biggest world economic downturn since the 1930s.
The New York Times ran an editorial today entitled, "When Will the Recession Be Over?" that surveyed 11 experts about their forecasts of when the recession would end. This is the first mainstream compilation of forecasts that I have felt was realistic.