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Monthly Archives: January 2010

Elizabeth was just telling me about the review session for her statistics class. People had difficulty understanding what a median was. Then someone said:

“I don’t understsand cumulative and relative frequency”

So the tutor in his/her earnest attempt to help this student said:

“yeah, I don’t really either”

I find this terribly worrying that the most basic principles aren’t understood. This is a math class for science students (albeit ecology students) at one of the top 20 science universities in the world.

And its not like statistics aren’t useful in ecology. Remember back in 5th grade when you had to go and throw your quadrant squares onto the ground in the park and count the number of organisms in each quadrant? That’s what ecology is like in the real world except on a bigger scale.

It’s pathetic. The undergraduate econometrics classes were scarcely better (I attended a few) and UCSD has the 2nd best econometrics school in the country! Although, I did attend a basic graduate level econometrics class and it just blew me away.

Do you want to know the real reason the financial sector crashed? It’s cause people don’t have an intuitive understanding of numbers. Subprime mortgages were priced using a Gaussian equation, which basically assumes that prices of NY mortgages and CA mortgages are uncorrelated. But gee, did anyone consider that by packaging NY and CA mortgages into one security that you might be driving market forces to make them correlated?

And now you have Obama abandoning his health care plan because people are too stupid to understand more simple numbers. They think it will radically increase government spending… when the Congressional Budget Office has said that it will be revenue neutral (assuming certain cuts are made, which may be a somewhat suspect assumption). Then he launches an all out assault on the banking sector when the banks that are being taxed have already repaid their loans with a 50% profit on top of it.

Systemic idiocy in the American political system is what will cause the downfall of America. China is going to eat you people alive.

Banks are big. Banks are ugly and mean. We’ve all heard the spiel by now after roughly two years of financial crisis. Banks lend you money then ask you to repay it with interest on top. Yes, they’re terrible people.

But you know what’s even worse? President Obama. When banks lend you money, they’re upfront about a few things – we want the money back eventually, and we want it back with interest. We’ll tell you the interest rate up front too (unless you choose the variable rate instead of the fixed rate). By the way, there are certain conditions on this loan- but we’ve written them down on this contract here. But don’t worry – once you repay the principal and the interest, we’ll leave you alone and ask no more of you.

President Obama, on the other hand, leant the investment banks money under the TARP program. Actually, let’s not mince words – he didn’t lend money, what he did was invest in the investment banks and the banks. In exchange for about $200bn, he bought shares in Goldman Sachs, JP Morgan and all the others. There were conditions on those ‘loans’ – for example, there were limits on executive compensation whilst the government still owned shares in those companies.

Time moved on, the stock market recovered. As widely reported, the share price of Goldman Sachs skyrocketed along with those of the other investment banks as profits recovered. The banks repaid the money. They paid it with interest on top – a lot of interest in fact – a 50% return on investment since the ‘loan’ was actually shares in the investment banks. The government made $100bn on the portion of the bailout that focussed on the investment banks.

More time moves on. The health care bill flounders in the Senate and it looks like the Democrats may lose Massachusetts. The Democrats need to pull a rabbit from a hat to win the race – and here we go, let’s blame the investment banks. Let’s put more hidden conditions on top of the ones we already placed on your loan. The $100 bn interest repayment isn’t enough – we want even more.

If the US government was a bank, what would happen. If a bank lent you money for your house and did this to you, what would you be saying?  ‘We paid back our loan, we paid our interest, we stuck to all the conditions in the contract.” If any investment bank had made a $100bn dollar profit from the financial crisis, the People would be going crazy. By comparison, JP Morgan’s $3.3 bn profit earlier this week was greeted with large shouts of anger.

Plus, this financial responsibility fee paints a broad brush. It’s targetted squarely at big investment banks, ignoring the commercial banks which originated the subprime loans in the first place – and whose poor accounting practices caused the information asymmetries that lead to their price collapse. Whilst the Big 3 auto makers and the insurer AIG who benefited under TARP cost the taxpayer $30bn and $40bn respectively, they are exempt from this attempt to repay the TARP program unlike the investment banks which paid $300bn to the government – $100bn of which was profit. Now the government wants an extra $90bn from this responsibility fee which falls only on the investment banks.

The tax does not distinguish between those banks which are still engaging in risk-seeking activity. It is a flat tax on how many liabilities owns. Whether those are highly risky liabilities (like options) or not is irrelevant to the tax. Morgan Stanley, for instance, has decided to scale back its riskier operations. Goldman Sachs has not and is making huge profits by comparison. Both are taxed equally.

Some of the smallest banks are in fact the riskiest. Most of them have collapsed – 190 last year alone. They are the reason securitisation is necessary in America. They weren’t large enough to fund their own mortgages so they asked the investment banks to do it for them. They created subprime loans then sold them on without adequate documentation. They are exempt from this tax.

Furthermore, this general hatred completely confuses the word ‘investment bank’ with financial institution. There’s endless hatred of AIG who issued credit derivatives. It is not an investment bank (and until 2009 wasn’t even a financial institution). There’s endless hatred of funds managers like Bernie Madoff. He is not an investment bank either, nor would he be taxed were he still around.

The justification for this tax is nil. It doesn’t reduce risk. It doesn’t target those who caused the deficit in the first place. It’s just to raise revenue. Just because a group isn’t sympathetic doesn’t mean it deserves to be whacked with huge fees. Think about speeding tickets – huge revenue raisers targetting an unpopular group without any increase in road safety.

This tax won’t prevent future financial crises, its just a jealousy tax. It must not be passed.

I was reading the Stump blog on Crickey the other day which is always a mistake, much like reading a Miranda Devine ed. Neither seems particularly generous of heart to those opposing and somewhat parsimonious with their supporting facts. This article was about how government funding to Quadrant magazine, the foremost intellectual magazine of the Australian right, has been slashed this year.

The author, some left-wing fanatic with less than half a brain, recounts how she wanted to read an article in Quadrant without paying for it going so far as to read it in a newsagency and then comes the following…

And then, after all this effort to avoid swelling the Quadrant coffers, the next day’s Crikeyreminded me that I already pay for the ****ing thing. We all do , via the Australia Council funding – even if we’re paying $15 000 less this year than last.

So to the powers-that-be on the Australia Council – can I have my money back, please? I promise to donate it to the first struggling performance poet that crosses my path, no matter how embarrassingly awful they are.

My first thought: A thousand small government conservatives are rolling with laughter at the irony that she wants the freedom to choose how her money is spent, and not to give that choice to the government.

My second thought: She wants the freedom to choose how her money is spent and not to give that choice to the government.

Now that is exactly why culture subsidies are wrong. This woman, as intolerant of opposing opinions as she is, does not want to pay for Quadrant any more than I want to pay for postmodernist idiots pretending to be artists. I don’t wholly subscribe to small government ideology – after all, government expenditure is vastly more effective than charity or privately organised infrastructure projects but I think its hilarious how well she makes the point.

Here is a most intriguing article on the constant diatribes opining that America is about to fail. I’m not sure I agree with all its conclusions, but its certainly very well written and certainly poses a lot of food for thought. I thoroughly recommend you read it (as an aside, I’m rather a fan of the Atlantic magazine, though I only ever read it online).

If you ask me though, the great difficulty in channelling Nostradamus is that none of us have ever lived through more than one era. The modern American has lived through an attack on American soil which killed several thousand people. But worse times have happened – during the War of Independence, the White House itself was apparently scorched when the British invaded. Without that its so hard to keep things in proper perspective and the Atlantic article does a superlative job of reminding us of that perspective.

But what’s more, even if we had lived through that era, how much can any one man see from his limited perch on life? Whether a man saw an activist court forcing the states to give those former slaves more rights than they deserved, or whether a man saw the Supreme Court uphold the Constitution and the rights it was sworn to defend is a matter of geography – did he live in the South or in the East?

To my mind, the great flaws with America have always been there. Are immigrants undertrodden and forced to work harder than the white majority? Perhaps that is the case. And perhaps that was true for the Jewish and Catholic immigrants struggling to survive in the few decades after the Great Depression. Now you would be hard pressed to say that either race is systemically discriminated against. Of the nine justices of the Supreme Court, only one is neither Jewish nor Catholic – Justice John Paul Stephens who is set to either die or retire. And they do not only dominate in law (Skadden Arps and many of the dominant NY law firms were founded by Jews), but also in finance – we have all heard the overwrought stereotype that Jews hoard all the money. We’ve all seen the Dan Brown novels alleging some great Catholic stranglehold over the highest levels of government.

Is America less cultured or less educated than all the world? Watching Beyonce and Brittany one would have difficulty arguing otherwise, but if that were the case America has always been less cultured. In the 1980s, it was disco what were destroying our morality and our nation. In the 1960s it were jazz. In the 1930s it was swing music and those scandalous skirts that showed oh so much knee. And throughout those times, Americans denounced poindexters and ivory tower intellectuals in universities – even as they applauded the space race and before that the race to build the bomb.

The great flaws that America has – her useless government, her lack of culture and education, her rampant individualism leading to gross social inequality – these flaws have not only always existed, but they are perhaps the source of America’s greatness. Even whilst these forces have been seething beneath the surface threatening to destroy America, forces elsewhere perfectly counterbalanced them. Whilst Beyonce was shaking her jiggly bits, conservatives were mobilising to protect the family and traditional marriage. Whilst conservatives denounced knowledge and evidence, America’s universities remained the best in the world. Even now, UC San Diego has something like 12 living Nobel laureates associated with it. That’s more than Australia has ever had in total, whether alive or dead, whether citizen or expat.

Constitutional lawyers refer to America’s 50 states as ‘laboratories of federalism’ – each state government testing out its own government programs. If they fail, they try again. If they succeed, those programs are copied ad nauseam by the other states until they become the norm. But its more than that. It’s more than just the law and government -its the entire society which benefits. In America today, think of how many different strands of music there are. Hip hop, rap, the blues, rock from the cities. Country music, country rock, Christian rock from the country. Some experiments fail (after all, looking at emaciated goths and emos, its hard to describe them as anything but the failed experiment of some mad geneticist). But others succeed wildly and are emulated across the world. Think alternative music, think Michael Jackson.

But more than being fifty disparate places, America manages to unite these states into one country. Her great universities suck up the smartest kids from across the country – leaving more kids than they take and leaving those kids with massive social inequalities – like some scientist harvesting the best plants from her experiment. Hollywood and Broadway suck up the best singers. Football takes the jocks. The countervailing forces throb and pulse with opposite beats. Even as business leaders pride themselves on practical rather than academic knowledge, investment banks and law firms hoover up the best and brightest of Harvard graduates. Even as American counter-culture derides the man, white music producers sign yet another contract with the latest rap band.

Far be it from being the end of history, America’s distinctive flaws are what make her great. Her individualism fails to nourish the talent in those without the opportunity to display it, but it also propels many to unparalleled heights that other nations cannot match. It’s a culture that can only exist in one place – the United States of America.

The following quote comes from an article on Perry v Schwarzenegger, the upcoming challenge to the Californian ban on gay marriage. The defence includes the Yes on 8 coalition (which wanted to ban gay marriage) and the conservative Alliance Defence Fund.

“Second, the defense argues, homosexuality is not an unchangeable characteristic. This is where things get weird. Defense lawyers plan to subpoena California’s domestic-partnership and marriage registries and note any matches. They also argue that sexual orientation falls on a continuum and that sexuality is “fluid,” a decidedly nontraditional view that has taken root in college queer-studies departments but not the sort of thing you’d ever hear from Focus on the Family’s James Dobson.”

That’s hilarious. ‘Fluid sexuality’ and queer studies are usually realms visited only by transsexuals and rampant hippies. Its good to see the conservative movement embracing the Rocky Horror side of things.

On a more serious note, there’s some interesting discussion of whether or not homosexuals form a ‘suspect class’ of people, along with people of minority races and a few other groups. It claims that:

“Legal experts say getting judges to recognize gays as a suspect class will be a tough sell; the Supreme Court has long refused to make age or disability a protected category.”

For my part, I can hardly see why. Age has always been treated differently to other characteristics in terms of discrimination. As Justice Kitto of the Australian High Court pointed out, being a child (or being old) is a characteristic everyone faces, and hence discrimination against the young is discrimination that everyone faces. That being so, its not unfair discrimination. I’m not sure what disability those legal experts refer to, but mental disability is another special characteristic which requires special treatment. To deny full mental capacity is to attack the rationality of men which stands at the heart of the law. If you deny that legal fiction, the entire legal framework stops working so lawyers are quite reluctant to break that assumption.

It seems to me that homosexuality has more indicia in common with race or gender than with age or disability. It is an inherent characteristic’s of one’s personality. It won’t be accidentally discriminated against (unlike disability) but must be targetted against.

But of course, I am not an American lawyer. And more importantly, I am wise enough to know that should it ever reach the SCOTUS, it would be a real challenge to reach 5 votes. But not impossible – it seems everything depends on Kennedy J yet again.

This article in the New Yorker makes a good point – if private insurers are banned from price discriminating on the basis of anything except age, region, and whether or not someone smokes, then what use are they? The argument for private insurers is that they are better managing risk – but the major way to allocate risk is to use price discrimination to stop adverse selection and other risks. If so, then what use are they?

Whilst the point is, I think, very interesting, it is mired in the old American way of thinking of health insurance as non-universal and non-compulsory. You see, back when insurance was non-compulsory then the healthy would be less likely to sign up to insurance and those who were more likely to be prone to be sick would be more likely to sign up to insurance. Whilst insurance companies can look out for certain variables that make you more likely to be sick (such as pre-existing conditions, obesity, whether you smoke) they can’t capture everything. They can’t measure how much I exercise, for example. Therefore, more ‘sick’ people signed up than ‘healthy’ people would sign up, an effect called adverse selection. Adverse selection obviously drives up the cost of premiums and is quite unfair (especially on the healthy people who want insurance).

To counteract this, the insurance agencies tried to get entire pools of people to join that captured both healthy and sick people together. By basically removing the voluntary nature of insurance, it removed the adverse selection effects in that pool. Two easy examples – by combining health insurance with employment you ensure that every worker is covered – both healthy and sick. You get economies of scale and remove adverse selection so premiums fall. Second example: college kids. When I went to UCSD, I was forced to use either their health insurance or to pick my own insurer.

When you have (theoretically) universal health care, there is no need to use price discrimination as a way to discourage adverse selection. Everyone has health insurance. Changing prices between groups (such as fat people and thin people) is just a distributive exercise. Under non-universal insurance, you would shift $10 from fat people and give $9 to thin people because of adverse selection. Under universal insurance you take $10 and give $10. As a matter of equity therefore, you want everyone to have the same price. It’s just fairer.

So actually, aside from the discrimination against smokers (who choose to harm their own health) I’m against discrimination on the basis of age and region. Yes, its true that old people have higher health expenses. But they didn’t choose to be old. As a matter of ethical practicality its not possible to discriminate against those who choose to eat/exercise unhealthily, but perhaps it would be wise to do that too where possible.

Discriminating on the basis of region actually allows indirect discrimination on the basis of race and socioeconomic status. In America, where races are unusually stratified by socio-economic position, there are clearly black suburbs and white suburbs. These positions also correlate with poorer dietary conditions – poor blacks tend to eat fattier food (not because of their race, but because of their poverty and the culture engendered by that poverty). Just as their culture discourages blacks  ‘acting white’ by being intellectual and going to college, it also discourages them from eating white. Allowing price discrimination on the basis of region is yet another hurdle to breaking the poverty cycle.

Of course region discrimination doesn’t exist because Congress hates black people, its just an accidental offshoot. It would be impossible to prevent region discrimination. Smaller insurers only focus on a few cities near where they are. Different places have different hospitals, different abilities to pay for insurance etc. You want people to be able to offer cheaper insurance in Harlem than in the OC (a good side-effect of region discrimination) but you have to take the good with the bad.

In this respect, private insurance is vastly superior than the government at allocating prices between regions. They have localised knowledge of the geography. They have specialised knowledge of insurance. By appropriately tailoring incentives, you can try to maximise the good and minimise the bad.

In the glaringly bright optimism of my mind, I see insurers who specialise in offering ‘poor insurance’. Whilst the majority of insurers concentrate on getting higher coverage in the richer areas, there are so many insurers competing for the same suburbs that at some point it becomes more profitable for them to chase the poorer suburbs. Whilst price discrimination is banned, it sounds to me like you can still offer different policies in different regions. So you may want to create an insurance contract that encourages the insured to exercise. Perhaps you can offer a half-price premium, if the insured is willing to have a pedometer surgically inserted into their rectum. (Or perhaps something less invasive like creating a discount voucher system with Subway :P).

One of the great tragedies of the 20th century is that after being freed from slavery, African-Americans created their own bonds of culture that discourages them from acquiring those qualities that help them succeed. It encourages young black children to speak ghetto, and thus unable to communicate effectively in the professional world. Teasing of nerds is amplified in poorer schools, depriving them of the opportunity to attend college. It encourages them to eat fattier foods. Perhaps insurance is the way to break at least one of these self-imposed cultural bonds. Or perhaps insurers will find it cheaper to lobby the government than to genuinely compete for their business. My bet’s on the latter.

Oh and to answer my initial question – yes they are. The government is not perfect, humans are not perfect. Why put all your eggs in one basket? Perhaps the government model will work, perhaps it won’t. But by having multiple insurance companies, some of those models will work, some will not. You’re diversifying your risk. And as I argued earlier, you’re taking all that risk off government balance sheets and onto private balance sheets. You’re spreading it further afield by allowing international insurers to absorb that risk. You’re allowing it to be reinsured by other multinationals.

You are all probably aware that there is a great jihad going on between the West and the extremist Islamic world. A jihad upon America and her warmongering president(s). A jihad upon the Jew and the Homosexual, groups so central to the western way of life that they have never ever been maligned by the Christian infidels.

And you all of course know that this jihad, Allah willing, shall stretch across the very face of the Earth and touch every man in his soul. You know that this war is being fought on a thousand fronts. But did you know that this jihad stretches not only to making women property  but to even everyday parts of life? When you open the newspaper, be aware that there is a jihad upon cartoonists!

Remember always that Allah is merciful. When you go to the beach and wonder what sumptuous wonders are being hidden therein, know that this is a jihad on bikinis. When you feel the wrath of the Reserve Bank, know also that there is a jihad on interest rates.

Convert to Islam. It’s good for you.