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Archive for December 2007

Bitter defeat

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Some more reading recommendations, this time on the immediate aftermath of WWII: the Russian occupation of Berlin and the US occupation of Tokyo. It’s interesting that (at least in English translation) both the Germans and Japanese referred acerbically to their conquerors as the Victors.

Why this subject? I’m interested in how people behave when the framework of civilization has all but collapsed (i.e., the Hobbesian natural state, where life is nasty, brutish and short), and also in how order and the social contract are subsequently reimposed.

A Woman in Berlin: this memoir is interesting because of the period it covers — 8 weeks beginning in April 1945, including the siege of Berlin, the early Russian occupation, and emerging postwar normalcy — but also because of the unmatched clarity and insight of the 34 year old German author, a Russian-speaking journalist with a cosmopolitan background. Most readers will be shocked at the behavior of the Russian occupiers (in particular the mass rapes), but if the recollections of the author are correct the Russians seemed to have behaved much better than their German counterparts in the earlier eastern campaigns. I was quite impressed by the literary quality of the writing and feel that this memoir should someday make an excellent film.

Related recommendations: the early short fiction of Nobel laureate Heinrich Boll. Until I read this memoir I felt Boll’s stories (“Trümmerliteratur”—the literature of the rubble) best captured the feel of occupied Germany. See also After the Reich: the Brutal History of the Allied Occupation for a historian’s summary with none of the literary merits of Boll or the memoir (which seems to be used as a primary source by a number of historians).

Tokyo Year Zero: this is a novel, and a bit over the top, but captures well the deprivation and despair of Tokyo in 1946 (Guardian review). The title evokes Rossellini’s film Germany Year Zero, which I also recommend. See also John Dower’s Embracing Defeat, which seems to have provided some of the historical background.

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Written by infoproc

December 28, 2007 at 6:52 pm

Posted in books

Anatomy of a CDO

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Click the image for the original flash graphic, which illustrates quite clearly the re-bundling of securities. The process may sound technical, but in fact it appears the main variable is just an estimate of default probability and recovery fraction for various categories of mortgages. It will be interesting to see, when the dust settles, how much of the (massive) error in prediction came from outright fraud on the mortgage application (essentially, miscategorization) versus error in estimates of default probability by category.

WSJ: … Mr. Ribotsky says the selling required little effort, as Merrill drummed up interest from its network of contacts. “That’s what they get their fees for,” he says.

Norma sold some $525 million in CDO slices — largely the lower-rated ones with higher returns — to investors. Merrill declined to say whether it kept Norma’s triple-A rated, $975 million super-senior tranche or sold it to another financial institution.

Many investment banks with CDO businesses — Citigroup Inc., Morgan Stanley and UBS — frequently kept or bought these super-senior pieces, whose lower returns interested few investors. In doing so, they bet that the top CDO slices, which typically comprised as much as 60% of the whole CDO, were insulated from losses.

By September, Norma was in trouble. Amid a steep decline in house prices and rising defaults on mortgage loans, the value of subprime-backed securities went into a free fall. As increasingly worrisome delinquency data rolled in, analysts upped their estimates of total losses on subprime-backed securities issued in 2006 to 20% or more, a level that would wipe out most triple-B-rated securities.

Within weeks, ratings firms began to change their views. In October, Moody’s downgraded $33.4 billion worth of mortgage-backed securities, including those which Norma had insured. Those downgrades set the stage for a review of CDOs backed by those securities — and then further downgrades.

Mezzanine CDOs such as Norma were the hardest hit. On Nov. 2, Moody’s slashed the ratings on seven of Norma’s nine rated slices, three all the way from investment-grade to junk. Fitch downgraded all nine slices to junk, including two that it had rated triple-A.

Worse Performances

Other mezzanine CDOs, including some underwritten by other investment banks, have had worse performances. Around 30 are now in default, according to S&P. Norma is still paying interest on its securities. It is not known whether it has had to make payouts under the credit default swap agreements.

Ratings companies say their March opinions represented their best read at the time, and called the subprime deterioration unprecedented and unexpectedly rapid. “It’s one of the worst performances that we’ve seen,” says Kevin Kendra, a managing director at Fitch. “The world has changed quite drastically — and our view of the world has changed quite drastically.”

By mid-December, $153.5 billion in CDO slices had been downgraded, according to Deutsche Bank. Because banks owned the lion’s share of the mezzanine CDOs, they bore the brunt of the losses. In all, banks’ write-downs on mortgage investments announced so far add up to more than $70 billion.

For larger banks, holdings of mezzanine CDOs could account for one-third to three-quarters of the total losses. In addition to the $9.4 billion fourth-quarter write-down Morgan Stanley just announced it would take, Citigroup has projected its fourth-quarter write-down could reach $11 billion. UBS said this month it would take a $10 billion write-down after taking a $4.4 billion third-quarter loss.

Merrill, for its part, took a $7.9 billion write-down on mortgage-related holdings in the third quarter. Analysts expect it to write down a similar amount in the current quarter, which would represent the largest losses of any bank. News of the losses have led to the ouster of CEO Stan O’Neal and Osman Semerci, the bank’s global head of fixed income. Mr. Margolis left this summer.

Written by infoproc

December 27, 2007 at 4:45 pm

Nerds!

with 4 comments

I haven’t read this yet, but am looking forward to it. (OK, maybe I just like the title and cover 🙂

Here is the author’s web page; he’s a psychology professor at Bennington.

Q: Do other countries have this problem?

A: The idea that it is unattractive or unappealing to be intelligent is not a universal concept. Not in Asia, certainly not in India. There’s no concept in India that being good at math and science and technology has negative social consequences. That’s the reason there are so many Indian engineers.

Q: Why did this grow out of American culture?

A: Historically, America is a place for men of action, for men who discover things, make things with their hands, have practical intelligence as opposed to book learning. Book-learning was suspect — the musty old European way, as opposed to practical, snazzy America. I think this tradition has never gone away.

The problem is that now it just doesn’t work anymore. You can’t do anything unless you pay attention in school. You can’t invent things without knowing calculus. If you don’t study math, it won’t work. Benjamin Franklin was an American genius, a model of the American tinkerer, but the Ben Franklin model is not working anymore.

Q. Wasn’t everyone talking about the need for better math and science education back in the days of Sputnik?

A: What’s new is the sexualization of it. Kids live in such a sexualized world. … (If you are called a nerd or a geek, it’s) not just creepy or weird, you’re labeled as someone who is never going to get laid. There’s a lot more at stake because kids are so much more exposed to a culture that’s all about being attractive, having sex early.

The nerds and the geek stereotype is that if you’re doing well in math and science, you are completely unattractive to the opposite sex.

All the nerd and geek self-tests, what they ask you is: Are you good at science and math? Are you unwashed? Have you never had a date? You don’t know anyone’s phone number except your mothers?

Written by infoproc

December 27, 2007 at 4:18 pm

Posted in aspergers, geeks, nerds

On earth peace, good will toward men

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For years, when asked what I wanted for Christmas, I’ve been replying peace on earth, good will toward men 🙂

No one ever seems to recognize that this comes from the bible, Luke 2.14 to be precise!

Linus said it best in A Charlie Brown Christmas:

And there were in the same country shepherds abiding in the field, keeping watch over their flock by night.

And, lo, the angel of the Lord came upon them, and the glory of the Lord shone round about them: and they were sore afraid.

And the angel said unto them, Fear not: for, behold, I bring you good tidings of great joy, which shall be to all people.

For unto you is born this day in the city of David a Saviour, which is Christ the Lord.

And this shall be a sign unto you; Ye shall find the babe wrapped in swaddling clothes, lying in a manger.

And suddenly there was with the angel a multitude of the heavenly host praising God, and saying,

Glory to God in the highest, and on earth peace, good will toward men.

Merry Christmas!

Written by infoproc

December 23, 2007 at 10:29 pm

Posted in christmas

Vacation reading: Gregory Clark’s A Farewell to Alms

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A Farewell to Alms: A Brief Economic History of the World

Clark’s book is an ambitious look at world economic history. The first half of the book is an excellent discussion of the Malthusian trap, in which increases in standard of living only lead to increases in population, which then (over generations) lead to declines in standard of living. The only stable point of this dynamics is at subsistence-level income. I need to think more about it, but I suspect Clark overstates the case for how well the Malthusian model applied in early human history. My impression is that there were wide disparities in levels of development that can’t be easily explained in that context.

The second half of the book concerns the industrial revolution, and advances his (controversial) thesis that one of the main causes for this qualitative shift in the rate of human advancement was genetic. By analyzing historical demographic data he argues that by 1800 almost all residents of England were descended from previous generations of wealthy strivers — reproduction rates correlated highly with family wealth in the previous Malthusian era, and the wealthy literally replaced the poor over time (less favored offspring of the rich often become the poor of future generations). Therefore, traits which are positive for commerce, long term planning, wealth accumulation, market organization, etc. had become much more widespread thanks to natural selection. I find this effect plausible — it is consistent with recent genetic data on accelerated human evolution — but am not as convinced that it dominates over cultural factors (at least, the two would work hand in hand). His case that it was a priori likely for England to be the first to have an industrial revolution doesn’t seem particularly convincing (see Kenneth Pomeranz’s Great Divergence for another set of arguments based on geography and natural resources).

Clark makes the interesting connection between modern man’s descent from the strivers of previous generations and the hedonic treadmill: our happiness seems to correlate more with our position relative to perceived peers than with absolute levels of wealth.

I like the following quote from the final chapter of the book. I always found it very amusing that modern economic models can’t do much better than to treat technological change as an exogenous, stochastic variable. (Yes, I know about Romer and growth theory, but would lump that in the “can’t do much better” category.)

God clearly created the laws of the economic world in order to have a little fun at economists’ expense. In other areas of inquiry, such as the physical sciences, there has been a steady accumulation of knowledge over the past four hundred years. Earlier theories proved inadequate. But those that replaced them encompassed the earlier theories and gave practitioners greater ability to predict outcomes across a wider range of conditions. In economics, however, we see instead that our ability to describe and predict the economic world reached a peak around 1800. In the years since the Industrial Revolution there has been a progressive and continuing disengagement of economic models from any ability to predict differences of income and wealth across time and across countries and regions.

Written by infoproc

December 21, 2007 at 5:37 pm

Vacation reading: Gregory Clark’s A Farewell to Alms

with 2 comments

A Farewell to Alms: A Brief Economic History of the World

Clark’s book is an ambitious look at world economic history. The first half of the book is an excellent discussion of the Malthusian trap, in which increases in standard of living only lead to increases in population, which then (over generations) lead to declines in standard of living. The only stable point of this dynamics is at subsistence-level income. I need to think more about it, but I suspect Clark overstates the case for how well the Malthusian model applied in early human history. My impression is that there were wide disparities in levels of development that can’t be easily explained in that context.

The second half of the book concerns the industrial revolution, and advances his (controversial) thesis that one of the main causes for this qualitative shift in the rate of human advancement was genetic. By analyzing historical demographic data he argues that by 1800 almost all residents of England were descended from previous generations of wealthy strivers — reproduction rates correlated highly with family wealth in the previous Malthusian era, and the wealthy literally replaced the poor over time (less favored offspring of the rich often become the poor of future generations). Therefore, traits which are positive for commerce, long term planning, wealth accumulation, market organization, etc. had become much more widespread thanks to natural selection. I find this effect plausible — it is consistent with recent genetic data on accelerated human evolution — but am not as convinced that it dominates over cultural factors (at least, the two would work hand in hand). His case that it was a priori likely for England to be the first to have an industrial revolution doesn’t seem particularly convincing (see Kenneth Pomeranz’s Great Divergence for another set of arguments based on geography and natural resources).

Clark makes the interesting connection between modern man’s descent from the strivers of previous generations and the hedonic treadmill: our happiness seems to correlate more with our position relative to perceived peers than with absolute levels of wealth.

I like the following quote from the final chapter of the book. I always found it very amusing that modern economic models can’t do much better than to treat technological change as an exogenous, stochastic variable. (Yes, I know about Romer and growth theory, but would lump that in the “can’t do much better” category.)

God clearly created the laws of the economic world in order to have a little fun at economists’ expense. In other areas of inquiry, such as the physical sciences, there has been a steady accumulation of knowledge over the past four hundred years. Earlier theories proved inadequate. But those that replaced them encompassed the earlier theories and gave practitioners greater ability to predict outcomes across a wider range of conditions. In economics, however, we see instead that our ability to describe and predict the economic world reached a peak around 1800. In the years since the Industrial Revolution there has been a progressive and continuing disengagement of economic models from any ability to predict differences of income and wealth across time and across countries and regions.

Written by infoproc

December 21, 2007 at 5:37 pm

Vacation reading: Gregory Clark’s A Farewell to Alms

leave a comment »

A Farewell to Alms: A Brief Economic History of the World

Clark’s book is an ambitious look at world economic history. The first half of the book is an excellent discussion of the Malthusian trap, in which increases in standard of living only lead to increases in population, which then (over generations) lead to declines in standard of living. The only stable point of this dynamics is at subsistence-level income. I need to think more about it, but I suspect Clark overstates the case for how well the Malthusian model applied in early human history. My impression is that there were wide disparities in levels of development that can’t be easily explained in that context.

The second half of the book concerns the industrial revolution, and advances his (controversial) thesis that one of the main causes for this qualitative shift in the rate of human advancement was genetic. By analyzing historical demographic data he argues that by 1800 almost all residents of England were descended from previous generations of wealthy strivers — reproduction rates correlated highly with family wealth in the previous Malthusian era, and the wealthy literally replaced the poor over time (less favored offspring of the rich often become the poor of future generations). Therefore, traits which are positive for commerce, long term planning, wealth accumulation, market organization, etc. had become much more widespread thanks to natural selection. I find this effect plausible — it is consistent with recent genetic data on accelerated human evolution — but am not as convinced that it dominates over cultural factors (at least, the two would work hand in hand). His case that it was a priori likely for England to be the first to have an industrial revolution doesn’t seem particularly convincing (see Kenneth Pomeranz’s Great Divergence for another set of arguments based on geography and natural resources).

Clark makes the interesting connection between modern man’s descent from the strivers of previous generations and the hedonic treadmill: our happiness seems to correlate more with our position relative to perceived peers than with absolute levels of wealth.

I like the following quote from the final chapter of the book. I always found it very amusing that modern economic models can’t do much better than to treat technological change as an exogenous, stochastic variable. (Yes, I know about Romer and growth theory, but would lump that in the “can’t do much better” category.)

God clearly created the laws of the economic world in order to have a little fun at economists’ expense. In other areas of inquiry, such as the physical sciences, there has been a steady accumulation of knowledge over the past four hundred years. Earlier theories proved inadequate. But those that replaced them encompassed the earlier theories and gave practitioners greater ability to predict outcomes across a wider range of conditions. In economics, however, we see instead that our ability to describe and predict the economic world reached a peak around 1800. In the years since the Industrial Revolution there has been a progressive and continuing disengagement of economic models from any ability to predict differences of income and wealth across time and across countries and regions.

Written by infoproc

December 21, 2007 at 5:37 pm