An interesting suggestion

One of my correspondents writes:

......instead of the Washington boys giving away our money to GM and other big boys.....why not give, let's say, ten thousand dollars. To every American household with the stipulation that the money must be spent on durable American products within a 12 month period, and proof of purchase must be supplied to the IRS at tax time. Any money not spent has to be returned to the IRS along with your tax obligation. I'm sure this sort of plan would cost less, give the people who own the money use of it, and promote American industries that need the input of dollars to keep the economy going.

Note: the current $700Bn package would provide $10,000 to 70,000,000 households. (The Census Bureau's Current Population Survey reports about 117,000,000 households in 2007. 70,000,000 is about 60% of 'em.)

If you like the idea, my correspondent had a couple of suggestions:

1. Pass this idea along to all the folks on your email list and see what happens.
2. Send it to Washington too.

It's very rewarding - at least on a personal level - to write a letter to your Congressman and your Senators.

Have a nice day.

a fun forecasting quotation

The following quotation is poorly attested, but fun:

"Prediction is very difficult, especially about the future."
[attributed variously to Niels Bohr - Nobel Prize-winning physicist... or to Yogi Berra, NY Yankees catcher!]

Martingales

Semi-technical definition:

In probability theory, a martingale is a stochastic process (i.e., a sequence of random variables) such that the conditional expected value of an observation at some time t, given all the observations up to some earlier time s, is equal to the observation at that earlier time s.
[Wikipedia, ]

A martingale forecasting model is very simple: Tomorrow will look like today.

What brings this to mind is this headline:

U.S. economy expected to contract in 2009

The article notes that, "The U.S. economy is expected to shrink 0.4% in 2009 compared with 2008, according to the monthly survey of 49 economists published Monday by Blue Chip Economic Indicators."

Yep - the economy went down yesterday, so the forecast is that it'll go down tomorrow.

Recall last spring and early summer, when oil was headed upwards of $140/bbl, the economic sages were suggesting that it could go as high as $200/bbl. (It's currently hovering around the low $60s/bbl.)

Numerous academic studies over the past 30+ years confirm that the best guess for tomorrow's stock price is today's stock price.

All economic forecasting based on anything more sophisticated than reading tea leaves or asking grandma is based on the assumption that "the future will look like the past." The differences between the myriad models out there is just which aspects of the past will be repeated, and just what constitutes the relevant past.

Recent economic projections (say, those made over the past year or so) all seem to suggest that "rate of change" is the dimension of past behavior most favored by forecasters, and that "yesterday" is the relevant past. That is, many - if not most - of the forecasts that have made the news in the past year seem to be based on a pretty simple model: the best guess for how tomorrow will look is based on assuming that the rate-of-change from today-to-tomorrow will be the same as the rate-of-change from yesterday-to-today. A martingale on rates-of-change.

Readers may notice a flaw in this methodology: it cannot predict a change in direction. As it turns out, there just aren't any good models in use that do a decent job guessing when 'up' will turn to 'down' or vice versa.
[Aside: a none-too-sophisticated analysis of recession frequency since WWII led me to predict (as part of my job as a forecaster) in Dec 2006 that there was better than an 80% chance of recession before 2010. When would it start? My none-too-sophisticated model didn't provide a guess.]

I believe I have just equipped my readers to forecast the economy at least as accurately as many of the high-paid economic gurus: tomorrow will look like today!

Aside: martingale forecasting is a purely statistical procedure, which takes into account nothing about economic 'fundamentals'. Economists like Krugman did a pretty good job suggesting more than a year ago that 'up' would soon turn to 'down' based on an analysis of these fundamentals.

... but most folks are happy to let their computer models do the thinking. And academic research over the past 30 years continues to affirm that, if you're letting your computer models do the work, the best model around is also the simplest: tomorrow will look like today.

Have a nice day.

Kenny Rogers: political philsopher

My turn to join in the ever-expanding chorus of folks offering President-elect Obama advice.
My advice isn't related to policy, but to process.

Kenny Rogers had some good advice:

You got to know when to hold em, know when to fold em,
Know when to walk away and know when to run.
[Kenny Rogers, The Gambler]

I've in mind a few specific situations requiring this counsel:

foreign policy

Iraq
Afghanistan

Bailout

AIG
General Motors

Focusing on the economic/bailout cases: what informs the decision? (Hold 'em, fold 'em, walk away, run?)

I'd really like to see a serious cost/benefit analysis from someone - GAO, CBO? (Independent analysis preferred!)
We're already seeing that the original bailout of AIG has failed - even tho' it was deemed more than sufficient at the time.
How much more is likely to be needed to keep AIG afloat?
Will any amount be sufficient?
What would be the effect of AIG failure? (I note that we have a smaller case-study available: Lehman. The world did not come to an end; the market really did quickly manage to value Lehman's assets.)

Same analysis for GM: What's the likely total cost to "rescue" GM?
Can GM honestly be rescued?
What is the cost of GM failure?

One component of "cost of rescue" is opportunity loss: What else could be done with the $$$?
Would the proposed $$$ be better spent mitigating the effects of failure?

If I start quoting Hank Williams, it's probably time to stop reading AQA.

AIG: Deja vu all over again

Today:

Government provides record aid package to AIG
By JEANNINE AVERSA, AP Economics Writer Jeannine Aversa, Ap Economics Writer
10 Nov 2008
WASHINGTON – In a record bailout of a private company, the government on Monday provided a new $150 billion financial-rescue package to troubled insurance giant American International Group, including $40 billion for partial ownership.

The action, announced by the Federal Reserve and the Treasury Department, was taken as it became increasingly clear that an original financial lifeline thrown to AIG in September would be insufficient to stabilize the teetering company.

Was there warning?

Yes (but you'd never know it from reading the article):

Concerns rise as AIG blows through 70% of government cash
No asset sales yet, so insurer continues to tap securities lending facility; ‘you’ve got to draw the line’
By Beth Braverman
Financial Week
October 24, 2008
American International Group tapped its securities lending facility with the New York Fed this week for another $7 billion, but it did not draw down any more of the $85 billion bridge loan it received in September, also from the New York Fed.

As of Thursday, AIG had borrowed $72 billion under the bridge loan (that amount has remained constant since Oct. 9), $18 billion under its securities lending facility and $300 million in capitalized interest, according to company spokesman Peter Tulupman. In total, the company had tapped more than 70% of its available credit.

This sounds eerily familiar.

Recall (long distant past): November 2001. As part of a proposed deal to acquire Enron, Dynergy injects $1.5Bn into Enron. Shortly thereafter Enron - at the SEC's insistence - publishes 10-Q quarterly report. The report reveals that:

Enron has blown through the $1.5Bn, and can't say how;
Enron revealed it would have ~$2Bn payment due by end of year;
Enron is technically insolvent: immediate obligations ~ $2.8Bn; $1.2Bn cash on hand.
[Details derived from Kurt Echenwald's Conspiracy of Fools.]

Only the scale is different... vastly different. $1.5Bn (Enron) vs $90Bn (AIG).

The need for re-doing the AIG deal is never really made clear in the article, other than to say that interest payments on the Govt loan were depleting all AIG's cash. Where'd the principal go?

This doesn't sound promising.

Maybe they're reading AQA!

Pentagon board says cuts essential
Tells Obama to slash large weapons programs
By Bryan Bender
[Boston] Globe Staff / November 10, 2008
WASHINGTON - A senior Pentagon advisory group, in a series of bluntly worded briefings, is warning President-elect Barack Obama that the Defense Department's current budget is "not sustainable," and he must scale back or eliminate some of the military's most prized weapons programs.

The briefings were prepared by the Defense Business Board, an internal management oversight body. It contends that the nation's recent financial crisis makes it imperative that the Pentagon and Congress slash some of the nation's most costly and troubled weapons to ensure they can finance the military's most pressing priorities.

Those include rebuilding ground forces battered by multiple tours to Iraq and Afghanistan and expanding the ranks to wage the war on terrorism.

Wow! AQA regulars will recognize in these proposals many elements I've championed previously, as I've railed against the Pentagon's addiction to high-tech weapons systems at the expense of boots on the ground & basic support for troops.

Of course, any attempt to impose sanity on our Defense budget will be met with cries of "weak-on-national-defense" from the so-called loyal opposition. Obama will need to market this carefully.

... which brings us to a larger point:
The Dems need to communicate better than they have in the past to counter easily anticipated Republican rage. This applies not only to defense spending, but to a wide range of policy issues.

The Republicans have successfully used the "tax-and-spend liberal" tag for decades without having to worry that the Dems will formulate a consistent convincing retort.

Republicans have succeeded in making "liberal" a dirty word.

Any mention of cutting Defense spending will almost certainly meet with "weak on national security" accusations.

Me? I'm drafting a brief proposal for my Congressman-elect, suggesting that the 110th Congress freshman class could make a name for itself by drafting a clear set of principles & policies to help sell the progressive agenda - and to counter the easily anticipated Republicans attacks on any such agenda.

Have a nice day.

As we near the season of "Goodwill toward men"

You could make this stuff up, but there's no need:

Monks brawl at Christian holy site in Jerusalem
By MATTI FRIEDMAN, Associated Press Writer
9 Nov 2008
JERUSALEM – Israeli police rushed into one of Christianity's holiest churches Sunday and arrested two clergyman after an argument between monks erupted into a brawl next to the site of Jesus' tomb.

The clash between Armenian and Greek Orthodox monks broke out in the Church of the Holy Sepulcher, revered as the site of Jesus' crucifixion, burial and resurrection.

This is not a unique event at the Church of the Holy Sepulcher.

Since the renovation of 1555, control of the church oscillated between the Franciscans and the Orthodox, depending on which community could obtain a favorable firman from the Sublime Porte at a particular time, often through outright bribery, and violent clashes were not uncommon. In 1767, weary of the squabbling, the Porte issued a firman that divided the church among the claimants. This was confirmed in 1852 with another firman that made the arrangement permanent, establishing a status quo of territorial division among the communities.

The primary custodians are the Eastern Orthodox, Armenian Apostolic, and Roman Catholic Churches, with the Greek Orthodox Church having the lion's share. In the 19th century, the Coptic Orthodox, the Ethiopian Orthodox and the Syriac Orthodox acquired lesser responsibilities, which include shrines and other structures within and around the building. Times and places of worship for each community are strictly regulated in common areas.

Establishment of the status quo did not halt the violence, which continues to break out every so often even in modern times. On a hot summer day in 2002, the Coptic monk who is stationed on the roof to express Coptic claims to the Ethiopian territory there moved his chair from its agreed spot into the shade. This was interpreted as a hostile move by the Ethiopians, and eleven were hospitalized after the resulting fracas.

In another incident in 2004 during Orthodox celebrations of the Exaltation of the Holy Cross, a door to the Franciscan chapel was left open. This was taken as a sign of disrespect by the Orthodox and a fistfight broke out. Some people were arrested, but no one was seriously injured.

On Palm Sunday, in April 2008, a brawl broke out due to a Greek monk being ejected from the building by a rival faction. Police were called to the scene but were also attacked by the enraged brawlers. [13] In November 2008, a clash erupted between Armenian and Greek Orthodox monks.

Under the status quo, no part of what is designated as common territory may be so much as rearranged without consent from all communities. This often leads to the neglect of badly needed repairs when the communities cannot come to an agreement among themselves about the final shape of a project. Just such a disagreement has delayed the renovation of the edicule, where the need is now dire, but also where any change in the structure might result in a change to the status quo disagreeable to one or more of the communities.
[Wikipedia article, Church of the Holy Sepulchre]

It's not clear to me how the West hopes to achieve mutual tolerance among Christians, Jews, and Muslims when various flavors of Christians cannot jointly govern what they believe to be one of the most sacred Christian sites.

Have a nice day.