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Archive for February 2006

Bubblicious

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Here’s a nice comparison of recent bubbles, and a similar graph comparing US to Japanese real estate bubbles. The extension of the green curve on the right of the first graph is a prediction (based on a PIMCO model 😉 of what kind of “mini-bubble” we are headed into with NASDAQ. Black is historical NASDAQ, blue is Nikkei (1980-99) and red is Dow (1919-39). The lower graph shows how the current US property bubble compares to the Japanese bubble of the late 20th century. I’ve posted a million times on the US real estate bubble, you can just search on “bubble” on the right to find those discussions.

Meanwhile, the long awaited equilibration between manufacturing labor costs here and abroad has begun — the Times reports a drop of almost 50% in hourly compensation for new workers at Caterpillar (and other midwestern manufacturers) versus what older “grandfathered” workers are making (about $20 per hour including benefits, versus about $40 in the good old pre-globalization days). Equilibration can hurt!

On a related note (via Economistsview), Krugman emphasizes that the main beneficiaries of the new economy are a tiny elite of super-rich — it’s not just manufacturing workers losing out, average white collar compensation is stagnant as well. I’m going to check in with some of my financier friends to see whether they wouldn’t mind sharing some of the gains from globalization with me 😉

So who are the winners from rising inequality? … A new research paper by Ian Dew-Becker and Robert Gordon … gives the details. Between 1972 and 2001 the wage and salary income of Americans at the 90th percentile of the income distribution rose only … about 1 percent per year. So being in the top 10 percent of the income distribution, like being a college graduate, wasn’t a ticket to big income gains.

But income at the 99th percentile rose 87 percent; income at the 99.9th percentile rose 181 percent; and income at the 99.99th percentile rose 497 percent. No, that’s not a misprint. Just to give you a sense of who we’re talking about: … the 99th percentile will correspond to an income of $402,306, and the 99.9th percentile to an income of $1,672,726. The … 99.99th percentile [is] probably well over $6 million a year. …

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Written by infoproc

February 27, 2006 at 7:51 pm

Posted in Uncategorized

Summers and Shleifer

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Apparently there was more to Summers’ resignation than politically correct backlash and rejection of his arrogant management style. One of the issues behind the new FAS vote of no confidence was the so-called Shleifer affair. Summers has been protecting Andrei Shleifer, a star economist (John Bates Clark medal winner) and protege, despite a scandal involving Shleifer that cost Harvard over $40M (including legal fees) to settle with the US government. Shleifer remains on the Harvard faculty, despite the well-documented malfeasance.

Strangely, the story was little covered by big media (WSJ, NYTimes), and it took a 25,000 word investigative piece by Institutional Investor (based on court documents including 60 depositions and over 1000 exhibits) to reveal the sordid details of Shleifer’s involvement with Russian privatization and misuse of US funds through the Harvard Institute for International Development. I am sure copies of this article have been circulating widely among Harvard faculty. (See here for an amusing account of how a Boston jury was completely unimpressed by Harvard lawyers’ narrow technical defense that Shleifer was not bound by conflict of interest rules. The jury took only two hours to decide unanimously against Harvard and Shleifer.)

Then, in quiet contrast, there is the case of economics professor Andrei Shleifer, who in the mid-1990s led a Harvard advisory program in Russia that collapsed in disgrace. In August, after years of litigation, Harvard, Shleifer and others agreed to pay at least $31 million to settle a lawsuit brought by the U.S. government. Harvard had been charged with breach of contract, Shleifer and an associate, Jonathan Hay, with conspiracy to defraud the U.S. government.

Shleifer remains a faculty member in good standing. Colleagues say that is because he is a close longtime friend and collaborator of Summers.

Another amusing Summers anecdote, from the Boston Globe (Ellison, an anthropologist, was Dean of the Graduate School under Summers. Summers, an MIT man, is not exactly what you’d call a smooth diplomat 🙂

Over lunch not long after Summers took over the presidency in 2001, Ellison said, Summers suggested that some funds should be moved from a sociology program to the Kennedy School, home to many economists and political scientists. ”President Summers asked me, didn’t I agree that, in general, economists are smarter than political scientists, and political scientists are smarter than sociologists?” Ellison said. ”To which I laughed nervously and didn’t reply.”

Of course, Summers was correct if average GRE scores are any guide 😉

Written by infoproc

February 25, 2006 at 5:06 pm

Posted in Uncategorized

Fannie Mae redux

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I normally don’t agree with much that appears on the editorial page of the WSJ, but in this case I do. Fannie Mae execs are guilty of fraud and mismanagement, as discussed in previous posts here and here.

Will Franklin Raines keep his $40M+ in compensation awarded during years when Fannie was violating the law and deliberately misleading investors and the public? I watched the hearings on CSPAN over a year ago and heard Raines and his CFO lying directly to Congress. Will there be consequences?

(Why is a physicist interested in this at all? Because the problem of hedging a portfolio of mortgages is theoretically interesting. Fannie was claiming to have smooth, predictable earnings from a business notorious for causing blow ups for the most sophisticated banks and hedge funds. How were they doing it? Or were they just gambling with taxpayer dollars?)

Fannie’s Funny Business

The stock market seemed relieved yesterday when Warren Rudman’s 2,652-page report into Fannie Mae’s accounting troubles didn’t report major new discrepancies in the mortgage giant’s books. That news was enough to put the stock up about 2% on the day after a nearly 4% rise Wednesday ahead of the report’s release.

And we suppose it is good news of a sort that Fannie Mae’s accounting restatement, for which the world has been waiting for more than a year, won’t grow from the $10.8 billion figure already estimated. But $10.8 billion is big enough as it is; WorldCom’s fraud came to “only” $11 billion. The report’s main findings paint the picture of a company that routinely flouted both the rules and law. Some conclusions from the executive summary give a flavor:

• “[M]anagement’s accounting practices in virtually all of the areas that we reviewed were not consistent with GAAP, and, in many areas, management was aware of the departures from GAAP” (emphasis added).

• “[E]mployees who occupied critical accounting, financial reporting, and audit functions at the Company were either unqualified for their positions, did not understand their roles, or failed to carry out their roles properly.”

• “[T]he information that management provided to the Board of Directors with respect to accounting, financial reporting, and internal audit issues generally was incomplete and, at times, misleading.”

• “[T]he Company’s accounting systems were grossly inadequate.”

The report also identified one case, in 1998, where earnings were manipulated specifically to meet a bonus target. That one instance was a doozy, however; a $199 million amortization expense that went unreported in order to make sure management got its lush payday.

If Fannie Mae were a normal private company, it would be tarred and feathered faster than you can say “Enron.” But Fannie Mae is not just another private company. It has a federal charter and an implicit guarantee from the government (read: taxpayers) of its debt. Which makes it all the more vital that Congress reduce the risk that Fannie Mae and Freddie Mac pose to our financial system and the federal fisc.

One of the Rudman report’s more worrisome findings was that Fannie’s derivatives accounting was wrong because Fannie claimed that its hedges exactly matched its risk exposure when it did not. Fannie has long claimed it is capable of perfectly hedging the interest-rate and prepayment risks in its $800 billion portfolio of mortgage-backed securities. The Rudman report found that that often was not true. But the report only looked at the accounting issues posed by derivatives and hedging, so the public still knows precious little about the extent of the portfolio risk.

The report lets former CEO Franklin Raines off lightly, blaming him mainly for a “culture” that tolerated the accounting abuses. But the core of that culture was a belief that critics — including us — could be dismissed and assailed because the company knew it had Congress bought and paid for. And judging by the laughably weak reform that Financial Services Chairman Mike Oxley passed through the House, it still does. If Republicans on Capitol Hill want to know why voters think they’ve gone native, the failure to rein in Fannie even after a $10.8 billion accounting scandal is Exhibit A.

Written by infoproc

February 24, 2006 at 4:30 pm

Posted in finance

Harvard’s loss

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This is why Harvard needed Larry Summers: “He pointed out, for example, that while it was socially unacceptable at a great university to admit that one hadn’t read a play by Shakespeare, you could safely joke about not knowing the difference between a gene and a chromosome.”

See related post here.

Written by infoproc

February 23, 2006 at 3:49 pm

Posted in Uncategorized

Harvard’s loss

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This is why Harvard needed Larry Summers: “He pointed out, for example, that while it was socially unacceptable at a great university to admit that one hadn’t read a play by Shakespeare, you could safely joke about not knowing the difference between a gene and a chromosome.”

See related post here.

Written by infoproc

February 23, 2006 at 3:49 pm

Posted in Uncategorized

Harvard’s loss

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This is why Harvard needed Larry Summers: “He pointed out, for example, that while it was socially unacceptable at a great university to admit that one hadn’t read a play by Shakespeare, you could safely joke about not knowing the difference between a gene and a chromosome.”

See related post here.

Written by infoproc

February 23, 2006 at 3:49 pm

Posted in Uncategorized

Dark energy and the future of the universe

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I just gave this talk at the UO Center for High Energy Physics (PDF slides). I’m giving it as a colloquium at Washington University in St. Louis and the University of Kansas later in the spring, so no peeking if you are from one of those places.

Title: Dark Energy and the Future of the Universe

Abstract: Recent observations of Type Ia supernovae, cosmic microwave background radiation and large scale structure indicate that the expansion rate of the universe is increasing. A number of models describing exotic forms of matter, generically referred to as dark energy (not to be confused with dark matter), have been proposed to explain this acceleration. For example, the dark energy may be due to Einstein’s cosmological constant. In this talk I will give an introduction to big bang cosmology and dark energy, with emphasis on the dark energy equation of state and how it determines the future (large time evolution) of the universe.

Written by infoproc

February 21, 2006 at 5:56 am

Posted in physics