Ben and Ryan translate rap

For your indulgence:
I am in fact orating with little or no prior preparation, an act commonly referred to as freestyling. Once again, and I think this bears repeating, I would like to restate my claim that I am in fact much stronger and have endured a larger number of hardships than you; hardships which have left me with an aggressive behavior and an imposing demeanor which, I believe, frightens you.
Thanks to Freakonomics.


Ideological reporting in Slovenia

There's an old joke that, in one of its incarnations, goes like this.

During the Cold War, the Soviets and the Americans decided to arrange a good-will running competition between the two presidents. The day of the competition arrived, and Reagan, being in better shape, outran Gorbachev. The next day, American newspapers proudly reported: "Reagan first, Gorbachev last!" On the other hand, the Soviet newspapers reported: "In yesterday's presidents' running competition, Gorbachev finished an excellent second, while Reagan was second-to-last."

Slovenia used to be part of Yugoslavia - not as bad as the Soviet Union, but still a decidedly socialist state. In its heyday, socialist Yugoslavia featured such boons as a single type of jeans (why would you need more than one type of jeans?); a single type of toothpaste; stores that were predominantly empty; essential goods that were sometimes available, and sometimes were not; for aspiring drivers, waiting lists of several years to buy a Yugo that would start falling apart in about a year.

These times are looked back upon fondly by socialist nostalgists, who emphasize how life was simpler then; how things were less hectic, and everyone lived in harmony, and so forth. Yes indeed, everyone lived in harmony, except the political dissidents who were sent to Goli Otok (Naked Island) - a forced labor camp on a barren rock with no escape, the Yugoslav equivalent of gulag. On the other hand, if you were smart and unscrupulous enough to abuse the system, it was indeed possible to live quite well.

People say that, in those days, everyone could have a house. Yes, indeed: during the times of high inflation, you could get a no-interest loan from a state bank to build a house, and you could repay that loan at a later date when the money became worthless. The hard part wasn't getting money: it was getting the materials to build a house. You needed to pull all sorts of connections to get cement; once you had cement, you didn't have bricks; once you had bricks, you didn't have tiles; etc. But yes, houses could be built on loans that effectively were not repaid, incurring foreign debt and leaving repayment to future generations.

Not to be too wordy, this is to illustrate the dis-economy of socialism, which wasn't even as bad in Yugoslavia as it was elsewhere.

Now, back to the starting joke. Indeed political ideological reporting was ubiquitous in socialist Slovenia. But now, the country has been out of socialism for some 18 years. You would think that, by now, the people working in the media might have changed, and that professional standards might have prevailed, right? No.

Here's an LA Times article titled House panel heaps blame on Alan Greenspan for financial crisis. The article describes the recent congressional hearing of Alan Greenspan, Christopher Cox and John Snow. You can read the article at the link and discover that it is fairly reasonably balanced.

Consider now an article about the same topic, published in dominant Slovenian newspaper Delo (Work). I translate:

Greenspan admitted his mistake

Washington - Former president of the American central bank Federal Reserve (Fed) Alan Greenspan, who led the central bank for a long 18 years and in the process acquired the reputation of an unerring prophet, on Thursday in Congress crushedly admitted that he was mistaken in his unwavering faith in free markets.

Greenspan was questioned by the House Oversight and Government Reform Committee along with Securities and Exchange Commission Chairman Christopher Cox and former Treasury Secretary John Snow. The committee, led by Henry Waxman, a California Democrat, is attempting to determine the causes for the outbreak of the worst financial crisis in the U.S. after the Great Depression in the 1930s. After the hearings of investment bank leaders and ratings agencies, congressmen were facing regulators on Thursday.

Greenspan admitted flaw in his lifelong faith in the free market ideology

Waxman told the three witnesses that, as regulators of the markets, they contributed to the outbreak of crisis due to their beliefs in the unmistakeability of markets without government regulation. Waxman brought Greenspan to admit a flaw in his lifelong faith in the free market ideology. "I don't know how fundamental and long-lasting this realization is, it shook me very much, because for 40 years I believed that the thing works," said Greenspan among else.

A tsunami that comes once in 100 years

The forerunner of Ben Bernanke at the helm of the Fed is under attack from critics that at the beginning of the decade he did not raise interest rates, or rather that he left them low for too long, which contributed to the explosion of the housing market. He also did not use the Fed's ability to regulate the issuing of new types of mortgages, such as subprimes, whose breakdown caused the crisis.

Congressmen faced him with his own statements at the time of the real estate boom, when he denied the probability of a collapse in real estate prices on a national level, and Greenspan apologized that he did not predict this because the United States had not yet faced such a crisis, which he named "a tsunami that comes once in 100 years".

Greenspan admitted that he believed that banks would act in their self-interest and protect their investors and their equity. In his words, there was an error in the economic models used to forecast the future. These models apparently took into account only the past two decades, which were decades of "enthusiasm".

After admitting that even he did not anticipate what happend, he also blamed investors who en masse bought mortgage-backed securities without worrying about a potential fall in condominium and house prices. Greenspan said that he doesn't see how the U.S. can now avoid an increase in layoffs and unemployment, while he also forecasted a fall in consumption. In his words, a necessary condition to end the crisis is stabilization of house and condominium prices, but this will not occur for several more months.

"Will someone go to jail, too?"

Congressmen asked Greenspan, along with the other two, how to ensure that something similar does not happen again. Greenspan said that regulatory reforms will be useful, but he also immediately added that they will mean less than market self-regulation, which ostensibly is already coming. Greenspan is convinced that, in the future, there will be a higher degree of self-restriction.

To questions in the sense of: "Will someone go to jail, too?", the three "wise men" were muted. Cox admitted that someone in this mess probably also broke the law, but he opined that cleansing with the help of the Justice Department is not "ideal", but that it is necessary to learn lessons from it all and prevent a repetition.

Congress Republicans replied to Democratic attacks on their faith in the free markets that the main responsible parties for the crisis were the para-governmental mortgage companies Fannie Mae and Freddie Mac, for which Democrats did not allow more regulation. Waxman asked the three witnesses about this, and they in turn admitted that the two companies were not responsible for the crisis, but contributed to it.
Similar article, different choice of words.

While reporting more or less the same things, the Delo article tries to portray Greenspan, especially to a casual reader, as "crushed", as thoroughly intellectually defeated, as wrong in everything he believed in for the past 40 years.

Yet, this is not the impression that one gets from the LA Times article, and indeed is probably far from the truth. Greenspan did trust the self-regulation of financial institutions more than he should have, and has admitted as much. But this does not change the fact that his trust in markets over regulation is, for the most part, well-founded and valid.

The editors of Delo, however, strive to make hay while the Sun shines. Once again, Gorbachev finished an excellent second, while Reagan was second-to-last.


Harlem voters make an educated choice

Now, I think McCain is a sleazebag - which is not to say that Obama is a good choice - but this is great. Transcript:
Stern: ... and, most people said - Barack Obama. So what he said is, do you support Obama's views, but he attributed all of McCain's views to Obama. And it didn't sway anyone.
Quivers: But it didn't cause people to even flinch -
Stern: No. This is crazy. Listen to this.

Interviewer: Some people speculate that blacks are voting for Obama strictly because he's black and not because of his policies. So we took McCain's policies and pretended they were Obama's. This is what they had to say.

Interviewer: For the election, Obama or McCain?
Person A: I like Obama.
Interviewer: Now, what don't you like about McCain?
Person A: McCain seems to not really know what he's doing right now.
Interviewer: Are you more for Obama's policy because he's pro-life, or because he thinks our troops should stay in Iraq and finish this war?
Person A: I think because our troops should stay in Iraq and finish this war, I'm really for him with that.
Interviewer: Okay. Now, how about as far as him being pro-life. Do you support Obama in that case?
Person A: Yeah. I do. I support him in that case.
Interviewer: And if he wins, would you have any problem with Sarah Palin being vice president?
Person A: No, I wouldn't. Not at all.
Interviewer: You think he made the right choice in that?
Person A: I do.
Interviewer: Thank you very much for that and have a great day.

Stern: So the guy agreed with everything McCain is for, except he said he was for Obama. Here's another example.

Interviewer: Are you for Obama or McCain?
Person B: Obama.
Interviewer: Okay. Why not McCain?
Person B: Well, I just don't agree with some of his, you know, policies.
Interviewer: Now, Obama says that he's anti-stem cell research. How do you feel about that?
Person B: I believe that's - I wouldn't do that either, I'm anti - stem cell, yeah.
Interviewer: Anti-stem cell research. Now if Obama wins, do you mind Sarah Palin being vice president?
Person B: No. No, I don't.

Stern: Aight, there you go, and our third example, in which we found this woman.

Interviewer: This election, Obama or McCain?
Person C: Obama.
Interviewer: Now, why not McCain, what don't you like about him?
Person C: Umm... he sort of doesn't sound like he has enough... like he does - he's uneducated - because when he had, um, they had, um, both of the presidents speaking - he didn't sound like he knew what he was talking about too much, whereas Obama had facts and information when he was speaking.
Interviewer: Good point. Let me ask you this. Do you support Obama more because he's pro-life or because he says our troops should stay in Iraq and finish the war?
Person C: Um... I guess both.
Interviewer: Now if Obama wins, do you have any problem with Sarah Palin being his vice president?
Person C: Um, no - not at all.
Interviewer: You think she'll do the job?
Person C: I think she'll do the job.
Interviewer: Are you glad that he elected her to be the VP if he wins?
Person C: Yup.
Interviewer: Thank you very much.
Thanks to Eric Falkenstein on Overcoming Bias.


Subprime mortgage vs. loan sharks

At the end of an otherwise fine article comparing loan sharking to subprime lending, Mark Gimein makes a doo-doo.

The core of Mark's article explains how loan sharking is not as profitable as you might think. Advance America charges $17.50 as its fee on a two-week $100 advance. If that were an annual interest rate, it would be 450+%. However, a huge proportion of borrowers default on their loans: the defaults work out to $49 per customer, while the average loan is $366. Advance America loses most of its fees to those who fail to repay their advances.

Then, Mark Gimein waltzes off into fantasy world and makes the following conclusion:
We've yet to see what lesson lenders draw from the subprime debacle. One possibility is that they will conclude that they need to stay away from any but the safest borrowers at all costs-that seems to be the direction they're heading in. And it's likely to be bad news for the economy. That'll mean less credit for those at the bottom and higher rates for everyone else. Another possibility, however, is that lenders will be very careful about raising rates in the hope that borrowers will be more likely to repay more affordable loans. Then they will run less risk of crossing what looks like the "fairness threshold" at which borrowers throw up their hands and give up. They might conclude, in other words, that they want to stay as far away from the payday-loan/sky-high-rate model as they can. That would take a little bit of rethinking of interest rates and risk from the credit industry. But then, it sure feels like this is a good time for some rethinking, doesn't it?
In his next article, I suggest that Mark could explain how rain is associated with umbrella use, so if everyone just left their umbrellas at home, it would stop raining.

The thing with risky borrowers is, they don't become less risky if you just charge them lower interest rates. If that were the case, the government could just give everyone free money, charge no interest rate, and count on 100% repayment. Who needs banks, eh?

It doesn't work that way.

The former of Mark's predictions is realistic and will come true. There will be less credit. Especially for people who cannot be relied on to repay.


Detroit houses for sale: prices from $9,000


The median property in Detroit sells for $9,250.

Here's just one listing (they're easy to find) for a 3-bedroom house, 1 bathroom, built 1941. Price: $14,900.


We spend more each year on groceries.

Apparently, this is what happens in places where supply exceeds demand.

Why does no one want to live in Detroit?

Do a search on its demographics...


South Africa sees the light on HIV

After years of HIV denial, in various assorted forms:
  • prime minister Thabo Mbeki and his hosting of alternative AIDS conferences;
  • governing party chief Jacob Zuma and his condomless rape of a woman he knew had AIDS, which small fact he didn't consider a problem because he showered afterwards;
  • health minister Tshabalala-Msimang and her advocacy that AIDS patients should simply get better by eating onions and beetrot;
after all that, South Africa now surprises the world with a new health minister who takes HIV seriously and calls for efforts against it.

Congratulations, South Africa. Way to go.

This all took place after Thabo Mbeki resigned:
Malegapuru Makgoba, vice-chancellor and principal of the University of KwaZulu-Natal, said that for the first time in years, South African academics were free to "state that HIV causes Aids without getting threats".

"It is a liberating experience," he said at the conference. "You don't know how long we suffered in bondage."

Former President Thabo Mbeki for many years suggested that HIV did not lead to Aids.

He resigned last month and his successor Kgalema Motlanthe quickly moved to name a new health minister.


Too big to exist #2

Here you go, exactly what I've been saying:
“Prior to Lehman, there was an almost unshakable faith that the senior creditors and counterparties of large, systemically important financial institutions would not face the risk of outright default,” notes Neil McLeish, analyst at Morgan Stanley. “This confidence was built up ever since the failure of Continental Illinois (at the time the seventh largest US bank) in 1984, a failure in which bondholders were [fully paid out].”


This would seem to put the complaints about Fannie Mae and Freddie Mac, and their implicit government guarantees, in proper context. Everyone, or at least the big guys, was behaving as if there was no chance that the government would allow them to fail.

The rules will have to be torn up and rewritten after this is all over and done with. As things stand, there are plenty of too-big-to-fail institutions remaining. They must either be reduced in size to the extent that the government's promise to let them fail is credible, or they must become more heavily regulated, particularly where leverage is concerned. We simply cannot allow firms to grow large and vulnerable enough to threaten the economy and hold it for ransom, to be paid by taxpayers.
Emphasis my own. From The hazard in moral hazard, on the Free Exchange blog.

James Bond at work

Two interesting tricks that the British used successfully against the IRA:
Having lost many troops and civilians to bombings, the Brits decided they needed to determine who was making the bombs and where they were being manufactured. One bright fellow recommended they operate a laundry and when asked "what the hell he was talking about," he explained the plan and it was incorporated -- to much success.

The plan was simple: Build a laundry and staff it with locals and a few of their own. The laundry would then send out "color coded" special discount tickets, to the effect of "get two loads for the price of one," etc. The color coding was matched to specific streets and thus when someone brought in their laundry, it was easy to determine the general location from which a city map was coded.

While the laundry was indeed being washed, pressed and dry cleaned, it had one additional cycle -- every garment, sheet, glove, pair of pants, was first sent through an analyzer, located in the basement, that checked for bomb-making residue. The analyzer was disguised as just another piece of the laundry equipment; good OPSEC [operational security]. Within a few weeks, multiple positives had shown up, indicating the ingredients of bomb residue, and intelligence had determined which areas of the city were involved. To narrow their target list, [the laundry] simply sent out more specific coupons [numbered] to all houses in the area, and before long they had good addresses. After confirming addresses, authorities with the SAS teams swooped down on the multiple homes and arrested multiple personnel and confiscated numerous assembled bombs, weapons and ingredients. During the entire operation, no one was injured or killed.
See the original article for another interesting trick at the end. Thanks to Bruce Schneier.


Feldstein's loan proposal: Similarities to my call for a decentralized money supply

Steven Levitt summarizes on Freakonomics the following proposal by Martin Feldstein:
Writing in The Wall Street Journal, highly respected economist Martin Feldstein proposes that the government provide low-interest loans to consumers in return for mortgage debt.

These government loans would not be secured by the borrower’s home. The loan would need to be paid back even if the home goes into foreclosure and would not be eligible for relief in bankruptcy.
The narrower focus of Martin's idea notwithstanding, notice the similarities to the decentralized money supply I recently proposed.

I wrote recently how a true solution to the smaller and bigger banking crises we experience every decade requires us to turn the economy on its head. We need to keep the good parts of the economy which drive our progress: most importantly, capitalism and a limited role of the state. However, we need to replace the parts that are dysfunctional: banks and the monetary supply, which facilitate bubbles, wasteful boom and bust cycles, and dangerous depressions.

The fragility and volatility brought on by banks and bank-like institutions can be done away with by prohibiting interest-bearing loans (see discussion under Without banks). All investment would need to be driven by equity, as in the Berkshire Hathaway model. Meanwhile, people would still need to be able to get financing for emergencies and important personal investments. By decentralizing the money supply, everyone would be able to borrow against their future income - and the system would make people repay.


Another year, more St. Kitts power outages

Last year, I noted that there was no power for 2 consecutive days during our first month of living on St. Kitts. The ostensible reason given was that the government-run electricity company was installing a new power generator to prevent load shedding (i.e. outages) in the future. Similar prolonged outages repeated a few times in subsequent months, but after that the situation stabilized. We have had fairly decent power supply over the course of 2008.

That was until October. On October 1st, we noticed one or more outages, which preceded a fire in the power plant on the morning of October 2nd. This fire brought 50% of the generating capacity offline, and we noticed this as frequent and repeated outages on October 2nd and 3rd. As of today, October 4th, electricity is being shut off at different parts of the island at largely unpredictable times and for largely unpredictable durations. Our area was without power for ten hours, from 08:30 to 18:30 today.

It all looks like this is going to continue at least until Monday. They're supposed to be putting online a smaller generator that was previously in maintenance, which will bring capacity up to 80% of peak demand. Further blackouts are certain for at least two weeks, as it takes time to repair at least the smaller one of the two generators that were damaged in the fire. With a power generating capacity of only 60% today, however, tomorrow we're most likely looking forward to another power-less Sunday.

This would have all been much easier to bear if the development we live in, St. Christopher Club, had a generator on backup, as many other businesses and institutions do, as well as most developments that cater to tourists. Unfortunately, the people who decide such things here, did purchase a generator, but are not keeping it online, as they consider the cost of maintenance too expensive. Apparently, the impact on the residents' quality of life (and in our case, loss off time that could be spent working) was not a factor in their equation.

I'm currently looking for a UPS solution, one that lasts longer than classic battery-based UPS, and can provide power to laptops and office equipment, as well as possibly a refrigerator, for at least 12 hours, although preferably up to 48. I'd like to avoid an oil-based generator, as they are loud and require frequent refueling, and thus onerous trips for gas. A nice solution would be a self-refueling UPS system based on water and fuel cells, which when powered would separate hydrogen and oxygen in water through electrolysis and store them in separate tanks, but when unpowered, would burn the hydrogen and oxygen back into water, producing electricity in the process. The best solution would be a closed system that doesn't burn oxygen from air, which would allow it to be stored inside without a risk of suffocation - if there is any such risk at all; it ought to be durable, not requiring new expensive batteries every 3 years; and it might be able to store sufficient capacity to last 12 hours, or even possibly days. Any tips?

Edited: Here's a fuel cell. Delivers up to 5 kW. Now all someone needs to do is bundle this into a system that will electrolyze water when there's power, and burn hydrogen when there is not.

It would sure beat 500 kg worth of batteries. That need replacing in 3-5 years.


A decentralized money supply: Solving the scarcity of money

A major problem with all currencies we've had so far is that varying amounts of currency are available in different parts of an economy. This leads to sharp depressions in the prices of products and services in parts of the economy which are transactionally far from the sources of money, and sharp price increases in other parts of the economy which are close to the sources of money. There is no greater fundamental cause for this than simply that there's more money near the source, than there is farther away from it. These leads to injustice as parts of the economy that are transactionally far from the money sources struggle along with the paltry amount of currency that they can get, while people who are closer to the money sources can effectively exploit the rest of the economy, since they live in an environment where money is abundant.

The cure for this is to decentralize the supply of currency, and the most effective way to decentralize is to let every person be their own bank.

What I am describing would be a virtual monetary system, reliant on information technology, where instead of hauling gold or carrying cash, people would have accounts not with other people's banks, but directly with a single central bank.

The sums on those accounts would start at zero, but could be positive or negative. People could borrow from their future income without requiring anyone's blessing. Your debt would be not to anyone in particular, but to the economy at large. This solves the problem of the initial distribution of money - everyone starts with zero; then some people go into minus, and some go into plus. I would propose that there's no unnecessary interest, neither on positive nor on negative amounts, to avoid people spiralling into debt. Instead, to avoid people running up infinite debt, there would be a maximum amount of debt that they can have, and this amount would decrease towards zero with age, to avoid people running up debt as they approach their deaths. If someone exceeded their permitted maximum debt, they would be arrested and sent into forced labor until their balance returns to zero - i.e., they pay off their debt.

There would have to be some minor systemic adjustments to maintain a system-wide balance of zero as some people will die prematurely with negative amounts. Such systemic adjustments could take the form of a small interest rate on negative balances to further motivate repayment, as well as a small deflation of positive balances to motivate investment rather than hoarding currency.

Since money could be originated by everyone, there would be sufficient supply in all parts of the economy, and prices in different parts of the economy would cease to differ as much. This is assuming an absence of banks, which would be achieved by prohibiting interest-bearing loans, requiring all non-charity lending to take the form of equity investment. (See Without banks, in particular the ensuing discussion with Wei Dai.)

This might be an all-around better monetary and financial system than any we have now. The absence of interest-based lending emphasizes equity-based investment, which leads to better supervision of the investment process, no wasteful boom and bust cycles, and better results in the long run. A currency that slightly deflates stimulates everyone to invest, while the ability to borrow from one's future income up to a point guarantees a way out in the case of an emergency.

Cochrane on Why the bailout would be a disaster

This, I think, is a thoughtful rebuke of the Treasury-proposed bailout. This is the first time that I've read an economist weigh in on the topic, and my thoughts were, yes, that makes sense. On Freakonomics.


The harm of banks: Economic booms and busts

I have argued recently that banks cause economic harm for a few reasons. One of those reasons is that the banks' varying lending moods cause expansion and contraction of the effective money supply. This leads to economic booms driven by malinvestment, as people compete to spend easy credit, followed by economic busts driven by a widespread realization of investment mistakes.

A counter-argument that I've seen more than once is such as made by this correspondent:
I disagree with the underlying premise that volatility is a bad thing and that the goal of "architecting" a financial system is to smooth-out the ups and downs. I have no problem with volatility. There's no law of nature or moral principle that states that the optimal state of the world is an even keel with minimal volatility.
The purpose of my proposal to phase out fractional reserve banking altogether is not to do away with volatility for the sake of itself. Rather, it is to remove the systemic harms and risks of this volatility, which are:
  • On a small scale, when the malinvestment cycle caused by lending trends is small, the economic bust that follows is a form of pollution. Economic stability is a common good that benefits everyone who wants to make solid business plans for the long run. When this stability is distorted by economic busts, a common good is being destroyed just as if a factory spews toxic ash into the air of a residential area. The economic cycles have strong negative externalities, and it is the role of government - even small government - to eliminate such externalities. Just like a factory must not pollute the environment - or else must pay for it - banks must not pollute the economy; or else must pay for it. But they cannot pay, because it would annihilate their profit. Therefore their business model us unviable. This is a principled libertarian argument.
  • Also on a small scale, the economic booms and busts are not something that's valuable for the economy. It's not that the busts are damaging, but the booms are beneficial, so it's all worth it in the end. No: the booms themselves are damaging, because they are widespread malinvestment; booms are valuable resources and human time that are largely being thrown away. The busts, in turn, are recognition of this waste, and a return to saner principles. The economy would have been better off if there was no boom and no bust. This is a pragmatic utilitarian argument.
  • On a large scale, when the boom is too long and the bust too large, this can lead to acute and widespread unemployment, threatening the individual existence of a large proportion of people, which in turn threatens the existence of a libertarian state.
Yes, a libertarian state can permit banks, but at the expense of polluting a common good of economic stability; at the expense of large scale waste of resources during lending booms; and at risk of being toppled, and replaced with a much less desirable regime, when a malinvestment boom that lasted too long results in a bust that's too strong and too large for a large proportion of people to survive without expropriating others.