Paul Kedrosky's Infectious Greed
Musing about technology, finance, venture capital, & the money culture with Paul Kedrosky
by pk
1 Sep 2010 at 3:34pm
I am fascinated with how we don't notice that much of the past is still with us, that it's so evenly distributed as to be invisible. I often talk about this in the context of urban fire departments, and the small percentage of their calls that are actually for fires.
A new NBER paper got me thinking about the same thing in a surprising context: river portages. I think this stuff is riveting. [-]
Portage: Path Dependence and Increasing Returns in U.S. History
Hoyt Bleakley, Jeffrey Lin
We examine portage sites in the U.S. South, Mid-Atlantic, and Midwest, including those on the fall line, a geomorphologic feature in the southeastern U.S. marking the final rapids on rivers before the ocean. Historically, waterborne transport of goods required portage around the falls at these points, while some falls provided water power during early industrialization. These factors attracted commerce and manufacturing. Although these original advantages have long since been made obsolete, we document the continuing?and even increasing?importance of these portage sites over time. We interpret this finding in a model with path dependence arising from local increasing returns to scale.
by pk
1 Sep 2010 at 3:12pm
Immigration wave in the U.S. (Source)
How I Learned to Love Farmed Salmon (Source)
Ecologists fear Antarctic krill crisis (Source)
Landowners Shout `Bingo' on Property Boom in West Australia Mining Towns (Source)
Warmer temperatures in China to reduce crop yields (Source)
by pk
1 Sep 2010 at 3:10pm
From a friend, an actuarial brain-teaser:
My friend Josh (55) and his wife Ericka (48) asked another couple to be their guardians if both of them die. According to actuarial tables, Josh has a 1/125 chance of dying this year and Ericka has a 1/358 chance. Without spending too much time on it, what are the chances that their friends become guardians in the next year? What about the next 9 years? (After nine years their youngest is 21).
Have at it. I'll put up some analysis/ideas later. [-]
[Update] Here are some thoughts on the problem from my friend Jeff, a hedge fund manager near here, who originally posited the problem:
Let's look first at the chances of them both dying in the first year. An obvious lower bound is assuming the deaths are completely independent, thus 1/125 * 1/358 =1/44750 is a good lower bound. There are two ways to proceed: try to estimate the correlation, which seems very hard, or to try to estimate the P(J|E), or the probability that Josh dies given that Ericka has died. Plane crashes are orders of magnitude less likely than car crashes, so let's focus on car crashes. Given 36,000 automobile deaths per year, and assuming Ericka is as likely as average to die in a car crash, that means 3% of her deaths will occur in a car. The chance that Josh is a) in the car times the chance that Josh also dies is pretty small, perhaps 5-10%. So this means that the chance that Josh dies in a car crash with Ericka is about the same as both of them dying independently. There are other ways they could both die together (from a communicable disease, for instance). And, of course, the kids could die as well. So I'm going to estimate that P(J|E) is around 1/40. This means that for the first year the chances of both dying are 1/40 * 1/358 or about 1/14000. Over the next nine years the chances that each of them die almost doubles (nice estimate, Rick, right on the mark there), so we'll make our official estimate (9*1.5)/14000 or about 1 in a 1000 that their friends become guardians.
by pk
30 Aug 2010 at 10:19pm
You can now geek out on Kansas City Federal Reserve documents from the just-completed Jackson Hole econo-fest. Here are the documents that have now been posted: [-]
Opening Remarks
BEN S. BERNANKE
Chairman, Board of Governors of the Federal Reserve System
Evaluating the Global Economic Recovery
Author:
CARMEN M. REINHART
Professor, University of Maryland
Paper:
After the Fall
Discussant:
WILLIAM R. WHITE
Chairman, Economic Development and Review Committee, Organisation for Economic Co-operation and Development
General Discusssion
Incorporating Financial Factors into Macroeconomic Analysis
Author:
LAWRENCE J. CHRISTIANO
Professor, Northwestern University
Paper:
Monetary Policy and Stock Market Booms
Discussant:
JOHN GEANAKOPLOS
Professor, Yale University
General Discussion
Inflation Dynamics in the Decade Ahead
Authors:
JAMES H. STOCK
Professor, Harvard University
MARK W. WATSON
Professor, Princeton University
Paper:
Modeling After the Inflation Crisis
Discussant:
FRANK R. SMETS
Director General, Research, European Central Bank
General Discussion
Luncheon Address
JEAN-CLAUDE TRICHET
President, European Central Bank
General Discussion
Rethinking Monetary Policy in Light of the Crisis
Author:
CHARLES R. BEAN
Deputy Governor, Bank of England
Paper:
Monetary Policy After the Fall
Discussants:
ALAN S. BLINDER
Professor, Princeton University
JOHN B. TAYLOR
Professor,Stanford University and Senior Fellow, Hoover Institution
General Discussion
Risks and Challenges of Large Fiscal Deficits
Author:
ERIC M. LEEPER
Professor, Indiana University
Paper:
Monetary Science, Fiscal Alchemy
Discussant:
FRANCESCO GIAVAZZI
Professor, Bocconi University
General Discusson
Reconsidering the International Monetary System
Panelists:
JOHN LIPSKY
First Deputy Managing Director, International Monetary Fund
MAURICE OBSTFELD
Professor, University of California, Berkeley
UMAYYA S. TOUKAN
Governor, Central Bank of Jordan
by pk
30 Aug 2010 at 4:14pm
As part of the Kauffman podcast series we've called "Infectious Talk", I had a half-hour conversation recently about "wrongness" with the delightful and smart Kathryn Schultz. She has a wonderful book out on the subject called Being Wrong.
The topics unsurprisingly ranged from rocketry, to climbing, to economics, to sports. Listen here.
[-]
by pk
30 Aug 2010 at 3:00pm
The summary of a new NBER paper on the link between economics and the "quality" of suicide terrorism:
We analyze the link between economic conditions and the quality of suicide terrorism. While the existing empirical literature shows that poverty and economic conditions are not correlated with the quantity of terror, theory predicts that poverty and poor economic conditions may affect the quality of terror. Poor economic conditions may lead more able, better-educated individuals to participate in terror attacks, allowing terror organizations to send better-qualified terrorists to more complex, higher-impact, terror missions. Using the universe of Palestinian suicide terrorists against Israeli targets between the years 2000 and 2006 we provide evidence on the correlation between economic conditions, the characteristics of suicide terrorists and the targets they attack. High levels of unemployment enable terror organizations to recruit more educated, mature and experienced suicide terrorists who in turn attack more important Israeli targets. [Emphasis mine]
Experienced suicide terrorists? Say what?
by pk
30 Aug 2010 at 2:39pm
From VoxEU, the case for radical moves -- like a reversing sales taxes slash -- aided and abetted by the U.S. Treasury:
A helicopter drop for the Treasury
Ricardo Caballero
30 August 2010
The US may be near a liquidity trap. This column argues that the ineffectiveness of monetary policy can be turned on its head by using money creation to finance fiscal policy stimulus ? such as a large but temporary cut in sales taxes. To avoid future problems, the Treasury could commit to transfer resources back to the Fed when the economy is back to full employment. This would be a helicopter drop with a drainage contingency.
The economy is barely muddling through. While some of this is unavoidable given the magnitude of the financial shock that is slowly working its way out of the system, macro-policy still has an important role to play in preventing a relapse. Unfortunately, the Federal Reserve has the resources but not the instruments, while the US Treasury has the policy instruments but not the resources. It stands to reason that what we need is a transfer from the Fed to the Treasury.
This is not a step to be taken lightly, as much of the progress in central banking over the last few decades has been aimed at giving central banks independence from hungry executive branches. However, all good systems need escape clauses if they are to be preserved as the anchor for daily policy concerns. Moreover, the Chairman of the Fed should have the final, and perhaps the first, word over this matter.
Isn't quantitative easing just such policy? Not quite. Quantitative easing, when directed to Treasuries, adds a little bit of good to the mix by lowering the cost of funding public debt, and it also helps a little bit with the long-run cost of capital for the private sector. But these are second-order effects; the Treasury still increases public debt at a fast pace, and a slightly lower cost of capital doesn?t much help the private sector if aggregate demand is not there to buy the goods in the first place.
Cutting taxes without raising public debt
Instead, what we need is a fiscal expansion (e.g. a temporary and large cut of sales taxes) that does not raise public debt in equal amount. This can be done with a ?helicopter drop? targeted at the Treasury. That is, a monetary gift from the Fed to the Treasury.
Critics may argue that this is simply voodoo accounting, as it is still the case that the consolidated balance sheet of the government, which includes the Fed, has incurred a liability. But this argument misses the point that the economy is in liquidity-trap range, and once this happens the system becomes willing to absorb unlimited amounts of money. In this context, by changing the composition of the liabilities of the consolidated public sector in the direction of money, the government gets a sort of ?free lunch.?
Critics can also argue that even if the above logic holds during a liquidity trap, things can get quickly out of control once we are out of it. I counter that this can be solved by having Fed mechanisms ready for a quick drainage once the economy is out the woods (the Fed has already been working on the design of these mechanisms) and by adding a contingency to the helicopter gift. For example, the Treasury could commit to transfer resources back to the Fed once the economy returns to full employment.
From the point of view of public debt stability, the scenario to be concerned with is a combination of large fiscal deficits with stagnation. By making public debt contingent on the end of stagnation, this dreaded scenario is averted. And by having this contingent debt being held by the Fed, there is the added benefit that the ineffectiveness of monetary policy in the neighbourhood of a liquidity trap is turned on its head by acting instead as fiscal policy.
by pk
30 Aug 2010 at 2:35pm
A helicopter drop for the US Treasury (Source) A birth surge from all that 'cocooning' in blizzards (Source) Sugar Imports by China May Jump 42% as Demand Exceeds Supply, Survey Shows (Source) Here's Something You Don't Want To Know (Source) The Web 2.0 Summit Points of Control Map (Source) Dan Ariely on procrastination (Source) Orange County Is No Longer Nixon Country (Source) The value of luminosity data as a proxy for economic statistics (Source) Economic conditions and the quality of suicide terrorism (Source) Pros should whack the crap out of their second serve more often (Source) Tennis players should challenge more calls (Source)
by pk
30 Aug 2010 at 2:31pm
What kind of world is this where rigging and then handily beating analyst earnings estimates doesn't pay off? Capital markets where cheaters don't prosper are hardly worth hanging around in, are they? Oh, wait.
[via Bloomberg]
by pk
30 Aug 2010 at 2:22pm
Towering inflows into U.S. bond funds persist:
[via Moody's]
by pk
30 Aug 2010 at 2:20pm
From a new Moody's report, the number of vacant houses in the U.S. is now roughly 2x the entire Canadian housing stock. [-]
by pk
29 Aug 2010 at 2:36pm
A few links from my weekly Weekend Reading column:
Have we underestimated Chinese consumption
Why LA hasn't produced more successful (tech) startups
The uncomfortable mathematics of monetary policy
Gold's Evangelist
Latest issue of Chance
Thousands flee as long-sleepy Sumatra volcano erupts
One New Bank in 2010, but at Least It?s a Double-Wide
Food production: Agriculture wars
by pk
29 Aug 2010 at 1:25pm
Lots of interesting material this weekend on one of my favorite subjects, the rediscovery of scarcity and increasing costs in agriculture. To highlight a couple, the FT has a piece on the Potash contest, plus there is this Hugh Hendry appearance on BBC Newsnight to talk food production, potash, and energy [-]:
by pk
27 Aug 2010 at 7:10pm
I often give venture capital firms a hard time. It's partly because with their crummy performance that they deserve it, partly because with their humorlessness and hubris that they need it, and partly because I know more VCs than bankers -- and it's always more fun to fight with people you know than with people you don't.
But there is a flip side to this. Financial services industry is in upheaval like at no other time since the previous depression. From banks to brokers to, yes, VCs, financial services is seeing major changes in how and whether it makes money.
So, which part of the industry is changing fastest? Venture capital. More venture firms, as a percentage of the total extant, will have failed over the current period than is the case with banks in the U.S.
At the same time, the nature of the VC industry is changing rapidly, with new entrants (micro-VCs and super-angels, but also larger funds), new partners and new brands, and even a change in sectoral & stage emphasis. The industry a couple of years out will look very different from what it did a few years ago, let alone what it looked like a decade ago. This change is not being driven by regulators, but by the individual actions of new entrants and competitors, trying to respond to changes in the funding market, as well as to changes in their customers -- entrepreneurs.
The result: Radical change in a sector of the otherwise wasted financial services industry. New people, new companies, new markets, new providers of capital, all in the space of a few years. Will it produce higher returns? I hope so, but if it doesn't, rest assured more VC firms will fail, and there will be no talk of a safety net, or a bailout.
Why is venture different? Why is this rapid failure/speciation/innovation sequence not playing out in banking? In part, and not to get all deregulatory about it, because we don't let it. The most important difference between venture and other parts of the financial services system, especially banking, is that the former has no leverage and isn't regulated (okay, regulated very, very lightly), while the latter has leverage and is highly regulated. That regulation, while well-intended, has the effect of straight-jacketing the industry and increasing risk, meanwhile preventing usurpers and change and innovation, and making banks that are already too big to fail, too bigger to fail.
It is wrong and simplistic to say that if we just deregulated banks that all would be well. But it is also true that the path to having half of the banking industry (in assets and firms) shrink away, with no societal consequences (as is happening in venture), could be at least informed by what is happening right now in U.S. venture capital. [-]
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