Byrne's Eye View

Zimbabwe's inflation rate is still pretty high. I wonder if their economic plan is to reach a Keynesian Singularity: full employment because it takes so much labor to keep the printing presses running fast enough.

A few months ago, financial writers started muttering about how most hedge funds were just looking for clever ways to sell puts. Put-selling is a great strategy if you're paid on performance and don't care about ethics, because, done right, it means you'll make more money with lower risk for a while, until you blow up. The math is pretty simple: out-of-the-money options expire worthless most of the time, and occasionally pay off massively. A put-selling strategy could be calibrated so it returned 15% a year, guaranteed, unless there was a March 2000 or 9/11 or Summer '02 or August '07, in which case it would lose a very lumpy 50%. A great deal for the manager making 2% of assets and 20% of profits, because he's earning roughly 5% on assets most years, and giving nothing back when he blows up.

But not all hedge funds behave that way -- a good quant fund might just be a way to sell expensive puts, which would have the same performance characteristics with higher peaks and shallower valleys (this seems to describe quant funds pretty well). And hedge funds aren't the only ones playing that game. Thus, I present the world, in options trades:

Buying calls: Artists, musicians, entrepreneurs, venture capitalists, and trendsetters whose trends don't always catch on. Anyone who is trying to do something useful and original, and is probably going to fail. Basically, the Bohemians.

Selling calls: Critics, media distributors, intellectual property trolls, heirs, heiresses, and anyone trading on influence over talent. Anyone who is extracting rents from a dying business or a diminishing capital base. In short, the Establishment.

Buying puts: Macro fund managers, survivalists, and basically nobody else. Oh, yeah: Goldman Sachs. Summary: misanthropes. Won't be invited to any parties, but every so often they're the only ones who can afford any parties at all.

Selling puts: Banks, quants, closet index-fund managers, anyone with a get-rich-quick scheme that works. But these guys aren't even a small fraction of the story: there's one entity that seems to sell very low-risk insurance to anyone who asks -- it's willing to bail out people who build houses in the paths of hurricanes, people who buy houses for twice what they're worth, people who make the loans to buy those houses, people who build terrible cars, people who make the expensive steel that goes into less terrible cars, and anyone who has lost a job or lived long enough to quit without saving up the money to do so. And, oddly enough, it never sells puts for cash when it can just sell them for votes.

Why do American voters have so many choices? The statistician and economist Harold Hotelling claimed that everyone has an incentive to make their products undifferentiated, and this applies quite nicely to politicians. Consider: the average voter seems to want the government to pay for a certain fraction of all health care. Let's say the average voter wants that fraction to be 30%. You might expect politicians to be scattered -- with Kucinich types advocating 99%, Paul-ish ones pushing for 0%, and a cluster of mainstream Democrats at 35% with a cluster of mainstream Republicans at 25%. But every politician has to be aware that if he's the most moderate, he'll capture the most moderate votes -- and if support for different levels of health care spending is distributed normally, the marginal benefit of moderation goes up the more of if you offer. So cynical politicians should all be exactly moderate, and differentiate themselves only with rhetoric.

The rhetorical differences are wider than the policy differences, but it's still amazing that, in 2008, an American voter will probably be able to vote for either leaving Iraq soon or leaving it a very long time from now -- whereas Hotelling might expect voters to decide between, say, leaving a month before the average voter wants to, and leaving a month later.

Why do voters have so many choices?

1. This relies on treating every position as a point on a scale, with no penalties for changing opinions. But a waffling politician could lose support from voters who want someone who is 99% honest (the other 1% involves forcing a smile; being "Thrilled to be here in" Iowa, New Hampshire, South Carolina, and other places said politician would never visit voluntarily; being photogenically faithless, or having wayward relations, or enjoying unorthodox hobbies). Perhaps politicians are partisan enough to win the primary, but then moderate their positions just enough to get the maximum moderation benefit without suffering from too much of a dishonesty deficit.


2. Partisans only vote for partisans: going back to the 'health care' debate, it could be that 80% of voters who think health care should be 25% or 35% of the budget will turn out to vote for someone who says so, while only 50% of voters will turn out to vote for someone who takes the middle position. If there are a few very important issues, this would explain everything: but if everyone is voting for candidates based on a combination of different policies, the moderates would still have an advantage: it's better to win 50% of every voter group than 80% of one issue's single-sided fringe. Which is a surprising route to an obvious conclusion: voter preferences are best expressed when they vote for people with specific responsibilities; even though we all spend more time thinking about the Presidency, knowing who someone supports for terminally boring local offices like school boards.


3. Politicians may accumulate political capital by appearing moderate, then spend it when they're as powerful as they ever expect to be. This would explain the two halves of George W. Bush's career, the "Red-State Romney/Massachusetts Mitt" phenomenon, but doesn't explain Bernie Sanders' decades as a socialist.


4. Politicians are too honest. Anyone who can convince a majority of voters to send him to DC on their dime is probably persuasive enough to raise a few hundred million for his hedge fund, and live easy ever after on the generous 2 and 20. So maybe these guys are in politics because they genuinely care.

But the last is just too weird to contemplate.

Pablo Escobar was once worth $9 billion.

Carlos Lehder was worth up to $2.5 billion.

These numbers sound like liquid net worths, because cartels usually don't release their numbers, and nobody's quite sure what the P/E ratio ought to be. Illegal drugs are a product with: 1) a very high markup, 2) a tendency to be produced by monopolies, and 3) very high risk of arrest or murder for sellers. It seems to me that this guarantees that a few people in the drug trade will simply have more money than anyone could possibly spend, and they won't pay taxes on it.

Consider Manhattan in 1985, borrowing liberally from Brett Easton Ellis. Let's say there are 10,000 bond traders with a $100/day coke habit. And let's say the profit margin on cocaine is a very conservative 90%. Each year, they transfer $328,000,000 to Mr. Escobar and his associates. Now, any individual bond trader could find a way to blow his $36,500/year on something besides, well, blow. But Mr. Escobar would be hard-pressed to spend more than 1% of his money on luxuries, so he has to save it. And what are the effects of that?

Either a) he invests in more coke-producing capacity (but only if that raises net profits, which just means deferring the question), b) he holds on to cash, which keeps bills out of circulation and fractionally lowers the money supply, making net lenders richer and net borrowers poorer, or c) he invests that money, turning consumption in Manhattan into capital everywhere else.

The answer is clear: if the government wants to increase our savings rate, the first thing they need to do is increase the number of Masters of the Universe (unfortunately, we may already be at capacity). The second thing the government needs to do is more stringently enforce laws against using cocaine, without trying to lower the demand (seems we're already doing that, too). And finally, if none of that works, the cheapest way to increase global savings rates is to subsidize the next Pablo Escobar.

Guaranteed trick for making writing more pretentious:

1. You can use more words, unless
2. ... you can use the same number of words, with more syllables, unless
3. ... you're ending a sentence with something like "... less pretentious than I am," which should be "... less pretentious than I.

Jesse Jackson has an editorial ($) in the Wall Street Journal calling for a "Marshall Plan" to pay people to occupy homes they can't afford. His plan:

It's time for another U.S. government-sponsored Marshall Plan. But instead of reconstructing Europe after World War II, today's Marshall Plan for mortgages would restore homeowners' and investors' confidence and dreams.

We already have a model for such a plan. It has been used successfully several times since the Great Depression, and has always worked. That model is the Reconstruction Finance Corporation. During the Depression, President Hoover used the independent government agency to provide $2 billion in aid to state and local governments, and for loans to banks, railroads and other businesses. Subsequently, President Roosevelt used it to finance the most creative aspects of his New Deal.

That's right! The new economic policies that, for some reason, coincided with the longest and most severe economic contraction in US history are precisely what we need right now!

The RFC helped to restore business prosperity by financing building programs for highways and other infrastructure, and for reorganizing the banks. It founded Fannie Mae and its government-insured home mortgages, and provided funds for rural electrification efforts. And practically all of the nearly $10 billion in loans made by the RFC were repaid to the U.S. Treasury -- with interest.

Hm! Sounds like a good deal -- making loans, and getting money back with interest. In fact, it's a suspiciously good deal -- if it's so profitable, shouldn't we let the private sector do it? And if it isn't profitable, why disguise the real cost by making low-return loans when you can just admit it upfront with a giant subsidy?

Since then the RFC has helped our farmers and, during the 1990s, a similar agency -- the Reconstruction Trust Corporation -- rescued failing savings and loans. If we can save the S&Ls, we certainly can save homeowners with subprime mortgages. And whatever you call the revived agency, whether its middle name is Finance, Trust or even Mortgage, it is needed to rescue those Americans steered into subprime, adjustable-rate mortgages, often laced with hidden fees they never knew about.

A fee isn't "hidden" if it's spelled out in a contract someone didn't read. Some of these mortgages were fraudulent, of course, but it's redundant to create a new government agency to deal with fraud -- we already have one, which we call "the judicial branch." A real "hidden fee" would be, for example, an ex post facto tax on not patronizing Jesse Jackson's friends.

We must move immediately to adopt this Marshall Plan for mortgages or face the prospect of entire neighborhoods and communities becoming depressed and potentially abandoned.

Unlikely, to say the least. Jackson's political beliefs notwithstanding, the mortgage crisis is not just a sinister plot by right-wing meanies to steal houses from poor people.

Our leaders must not fail us. On Monday, thousands of Americans, including business leaders, mayors and others, are expected to march on Wall Street and in cities across the country to urge the government to take the right steps immediately to solve this economic emergency that touches everyone.

I hope they get the right address this time. Their last protest was at Goldman Sachs, which is massively short subprime mortgages. In other words, to express their rage at subprime lenders, Jackson's friends and associates gathered up their ire and picket signs -- and marched on the world's largest subprime borrower.

I finally read this week's Becker/Posner piece on carbon offsets, and I must admit that I'm unimpressed: Becker and Posner both believe that offsets will fail because they just fund projects that would happen anyway. So a company that plans on planting an acre of trees, for example, will first find someone will to pay them for the carbon those tree would produce, and only then to plant them. Two obvious solutions present themselves:

1. Admit it. Realize that suddenly, carbon-reducing activities will earn a 'carbon dividend', which will cause just about everyone who cuts emissions to make a little money. This is an admission in another way, too: it means admitting that the market places a positive value on emissions reduction, and compensating people accordingly. As long as nobody sells the same acre of trees more than once (a risk one can mitigate by, for example, giving a receipt that includes GPS coordinates, and uploading those coordinates to a central auditing database), this will make offsets less effective, but will make past virtue more rewarding. That's a good precedent to set.


2. Only buy offsets from companies that use carbon-emissions futures to bet that the total amount of CO2 produced will decline as they implement their projects. I've mentioned this technique before.

How do you summarized Paul Krugman's article on structured finance? By saying "Paul Krugman wrote an article on structured finance. It's a delightful gem of unreason; Krugman admits that he doesn't understand the subprime market or these new investment products, but also notes that they're proof that his political prejudices are right.

The test of a theory isn't "Upon hearing new information, can you construct a plausible narrative that includes your theory and the new information?" It's "what did your theory predict?" My theory predicts that, in the future, Krugman's articles will note that good consequences are caused by the people he likes, bad consequences are caused by the people he hates, and that his rhetoric remain in the blissful nirvana of having nothing to prove and nothing to say.

Look at this, then look at this, and then ask yourself: does Tom Tomorrow ever actually talk to people with whom he disagrees, or does he merely fantasize about stating his argument and leaving them speechless?

A while ago, I suggested that real 'campaign finance reform' would restrict spending extra time the way we already restrict spending extra money.

Today's Wall Street Journal mentions that:

More good publicity came last week when talk-show host Oprah Winfrey committed to campaign for him for two days in Iowa as well as New Hampshire and South Carolina.

How much would Mitt Romney or John Edwards pay for this? $100,000? $200,000? Would they pay less than the McCain-Feingold-mandated maximum per-person donation for Oprah's services, if they were bidding against one another? If the answer is 'no', it's obvious that Oprah is violating the spirit of McCain-Feingold. She is essentially laundering her vast wealth and selling her celebrity by taking a break from her job to tell her fans whom to vote for. If the point of McCain-Feingold was to reduce the influence of powerful people on politics, why did they leave such a gaping loophole?

James Flynn says:

Two twins raised apart, thanks to having slightly better genes than average, would both get into increasingly privileged environments. Both would get more teacher attention, would be encouraged to do more homework, would get into a top stream, and by adulthood, they would both be far above average. Moreover, thanks to their identical genes, their environmental histories would be very similar.

He's attacking the idea that the 80% correlation between IQs for twins raised apart implies that genetics can play a strong role in determining IQ. But the way he phrased it is interestingly discursive. A more compact way to say that is "Genes for intelligence are expressed through the environment." Which is a way of illustrating the absurdity of his view, because the above paragraph could also refer to those genes being expressed in brain size and structure. Imagine: "Twins raised apart have a slight IQ advantage, which tends to cause them to think more complex thoughts than most, which causes their brains to develop in a way different from most. Thus IQ is not caused by genes. It's caused by things genes cause."

I'm not sure what Flynn is doing here, but I'm pretty sure it isn't science.