Month: January 2009

Categories
Uncategorized

Us and Them

I notice that the private sector have now decided they’re supporting the public sector who are being described as “parasites” or “wastrels” by some commentators.
The whole private sector supporting the public sector thing is a bit of a crock. In effect both private and public sectors getting loans they couldn’t afford to buy houses that were over-priced and giving the government over a billion in stamp duty a year was a huge part of the problem.We’ve been living on an overdraft often provided by Arab and Chinese investors for the past 15 years.Our public sector didn’t look disastrously expensive to the exchequer when everybody was all spending like there was no tomorrow. Unfortunately, tomorrow came.
So now we’re figuring out who to blame when nobody is spending in an economy reliant on spending and extravagance for tax revenue. Spending has decreased much more than unemployment so it’s not that everyone is on the dole. Are we so much poorer on a monthly income basis than in 2007, excluding asset value from houses? I don’t think so. Spending is depressed as people have actually started to think about saving based on a panic and an inability to get more debt to fund more things they don’t need. This isn’t the fault of public or private sectors. In particular a big chunk of the shortfall is a collapse in the housing market, the biggest sign of our extravagant tiger years. It’s not that nobody can afford to buy houses anymore, it’s that the prices haven’t dropped far enough. The only people who don’t publicly admit this are auctioneers and/or politicians. There’s a lot of overlap between the two 🙂
I’d contend that there’s something worse than mere deflation, it’s long term consistent deflation. It’s depressing and discourages all sorts of investment. David McWilliams suggestion regarding a 20 year moving average for property valuations is one mechanism of drawing a line in the sand regarding the current house prices versus their actual value. Helping developers to cling on to delusional notions of a recovery in property value is actually only harming the situation. Everyone is waiting for the collapse so nobody will buy now. The end result is that the property chain is frozen and stamp duty revenue is being lost.
Now that the builder bank is nationalised, the government could call in NPL’s and put the resulting already developed properties to auction to find their true market value. We’re better off to get people buying at knock down prices now than to perpetuate a bluffing game that’s already gone on for more than 12 months. At worst we’d confirm what the markets believe, that our banks face a huge asset write-down. Remember that perpetuating this is now costing every taxpayer in the state as we’ve guaranteed the interbank loans of these banks. Whatever our investments are used for it shouldn’t be kicking out maturities or allowing interest holidays for breakfast roll men while they wait for pigs to fly and the market to recover.

Categories
economics

Blue swan with pink spots

Could perhaps be created using genetic engineering in the future 🙂 I’ve been reading Nassim Taleb’s The Black Swan. It’s an engaging book once you get beyond the pages and pages of insults directed against professional statisticians.
They key point could be summarised as follows. Professional statisticians have become obsessed with applying gaussian distribution models to real world phenomenon which don’t match the model for a range of reasons. Primarily the gaussian model attaches a lower probability to rarer events than is actually the case in many real world phenomenon such as degrees of wealth. When these models are used for prediction and risk management the results may be acceptable when making predictions about data close to the median but are hugely error prone about rarer conditions. The seeming success of the model in limited predictions promotes over-confidence and encourages further bad predictions.
Mr. Taleb goes on to point out that Mandelbrotian randomness more accurately depicts many phenomenon as it allows for greater deviations within a sample and more probable outliers. The point is made enthusiastically and in an idiosyncratic style. It’s accessible in a way that encourages most people to understand the contents and query current models for market analysis. It’s not an in-depth mathematical treatise and this is ultimately a weakness given some of the grand claims. However, Taleb’s rage at the amount of bullshit spouted by should-know-better financial and quantitative engineers is understandable. You only have to watch market analysts in programmes on CNN, MSNBC to figure out that, with a lot of jargon, there’s often not a lot of actual knowledge or understanding. Differences of opinion and rude/crude arguments abound but few of the experts called the current crisis. What’s the point of accepted financial models if they’re not just unsuccessful at predicting (a very hard task) but cause risk to be discounted (a very bad thing)? The Black Swan is essential reading for anyone who’s blithely applying statistical models to whatever economic, marketing or social science application they’re working on. It should give them pause for thought.
So, back to my headline. Mankind are great at producing huge inequalities and surprising outliers. History is littered with them! The more power we achieve over our environment and, indeed, our genetics the more probable the improbable becomes. I’d content that the number of potential black swans increasing (if that isn’t too wild any idea). Not in a linear way of course. More of a giant leap, black swan, kind of increments 🙂 We’ve found black swans on the moon, black swans in space, black swans in the earth, on the earth and with genetic engineering we can create human black swans. Scary.
So the current market models are deeply flawed. Indeed they don’t seem so much models as talking points for TV debates. Who predicted the crisis? Currently in the “Deep Financial Shit is Nigh” hall of fame are international players like Peter Schiff, Nassim Taleb and local players like David McWilliams, Alan Ahearne and Morgan Kelly. Very few economists correctly predicted the current crisis nationally or internationally.
I believe one reason for this is that it became fashionable for these most miserable of analysts to predict boom followed by a soft landing. Economists by their nature are supposed to be pessimistic and risk aware. They should be over-predicting recessions, which is the butt of the famous economist joke.

“An economist is a person who predicts 10 of the last 3 economic recessions”

In this case, there seems to have been an international fear of being caught out in predicting an end to this boom, fueled by financial innovations in the bond market. Many economists simply suspended disbelief even when scandals like Enron encouraged skepticism. Conversely this old joke gives the lie to the belief that economists create recessions. They make predictions and pass comments. Some may add to recessions and further despair but if they could really create economic turmoil then their predictions would never be wrong!