Friday, April 11, 2008

Wal-Mart is famed for its hardball tactics negotiating with vendors. Including, it seems the contractor they hired to store videotapes of their internal meetings. In fact, they've played such hardball with their former custodians that they have now been outbid for access to their own archive by the plaintiffs of lawsuits against them.

Under other circumstances, I'd be upset about the breach of trust here. But these are two companies that clearly deserve each other, and I'm pleased to say that they make a fine couple.

The past, they say, is another country. Elizabeth Warren visited 1978. Life is better there.

If you don't have time to sit through the whole hour (and shaving off the five minute intro doesn't help), here's a summary:

  • The typical family then (couples with two kids) was saving for retirement. The typical family now has no net savings, and is deeply in hock.
  • Most families had only one income, but they only needed one. Two-income families these days need both incomes just to make the mortgage payment; if either is unemployed for long, they lose the house, so they're doubly at risk.
  • The portion of income devoted to fixed and inelastic expenses like transportation and shelter was roughly 50%; it's now more like 75%. There are more cheap trinkets to buy with what's left, so long as you have it --- but losing 35% of income, once a major inconvenience, has become a calamity.
  • Public education and a high school degree used to be enough for a kid to attain a middle class lifestyle. Now preschool and college are effectively required --- and expensive.
  • Health insurance is less common, less available, and just covers less.
  • And so on. And so on. And so on.

Many people are old enough to remember that life --- if not from having lived it themselves, then from having lived in the homes of their parents. I guess they're too busy scraping by to complain much about what they have now. And so, panglossian economists get to tell us that since this was all the result of choices made by free people in a free market, it necessarily follows that the cheap trinkets we've gained are a more than adequate compensation for the ease we have lost.

via Mark Thoma

And, speaking of other countries, there is once again Real Housewives of New York. Bethenny's camera-crew suffering boyfriend is now suffering seriously --- he's lost his job because, says his employer, they're offended that he'd choose to appear on the "tawdry" show. (The tawdry appearance in question was apparently at a charity function he was involved with, and not the later episode in which Bethenny's camera crew ambushed him on a date.)

They said it was reality television. Reality isn't pretty.

Wednesday, April 09, 2008

In Dubya's first term, when the nation was still high on testosterone fumes, he called himself "Commander in Chief" so often that the job title "President" started to seem passé.

Now, of course, whenever anyone questions his strategy in Iraq, he's just following orders from General David Petraeus.

So, it's naturally of interest to know what Petraeus has to say in Congress. You can find plenty of it detected, selected, and rejected on other blogs. As for myself, my attention was regrettably diverted by other matters of pressing national interest (and if the home opener isn't of pressing interest to Red Sox nation, I don't know what is) --- but I did catch a bit of the beginning, and was rather struck by the exchange between Petraeus and Senator Carl Levin.

On one point, Petraeus stonewalled for a while before finally admitting that the coalition of Iranian-sponsored militias that we're calling an Iraqi government had "not adequately planned and prepared" their attack on the rival militia of Muqtada al-Sadr. (To summarize briefly: they attacked, and quickly got humiliated, as a lot of their own force either refused to fight or defected to the Sadrist side. After a week, Sadr graciously allowed them to stop, having conceded nothing.)

So, how's our own planning for, say, the further troop withdrawals that everyone says they'd like to see if the "surge" actually creates the conditions of political stability that it was supposed to? After a comical exchange about how long he'd need to just "assess" the situation (three months? four months? more? Petraeus wouldn't say), we get this:

LEVIN: Now, next question, if all goes well -- if all goes well, what would be the approximate number of our troops there at the end of the year?

Let's assume conditions permitted things to move quickly. What, in your estimate, would be the approximate number of American troops there at the end of the year?

Can you give us a -- just say if you can't give us an estimate.

PETRAEUS: Sir, I can't -- I can't give you an estimate on that.

So, it would appear that there is no plan.

Unless, of course, the plan is to leave the troops all in on any excuse, and pass the buck...

Monday, April 07, 2008

Via BoingBoing, we learn that the science of psychohistory is coming!

We are in a period analogous to the early 1970s, when developments like the Capital Asset Pricing Model and the Black-Scholes equation transformed finance, changing it from an art to a science, and opening enormous new markets in the process. Now, new equations describing “crowd dynamics” are about to change our lives. And not always for the better. This is one of the most significant technology trends I have seen in years; it may also be one of the most pernicious.
Particularly if the models don't work.

In more words:

In order to make a mathematical model like Black-Scholes work, you need to make simplifying assumptions. And once you've accepted the models as real and useful, the assumptions, or the fact that they were assumptions, can be forgotten. Witness this clinker in Charles Morris's generally excellent (and highly critical) book on what the self-described "science of finance" has wrought, "The Trillion Dollar Meltdown":

Such arbitrage strategies are usually quite safe. It makes no difference if [relative] bond prices rise or fall, so long as the relative prices of [certain short term bonds] move closer together. Occasionally, they don't, but Black-Scholes tells you those are rare occurrences.
In fact, it's an assumption of the Black-Scholes model that there are no arbitrage opportunities. Maybe it's true, maybe it isn't, but either way, Black-Scholes itself has nothing to say about the matter, or the viability of arbitrage in general. (If anything, the "no arbitrage opportunities" assumption may appear true in the real world only because when arbitrage opportunities do arise --- and they do --- a real arb generally comes along to wipe them out.)

And, as I've already mentioned, a similar mistake is at the heart of the mortgage-backed security mess. These securities were rated on the assumption that even in a pool of risky mortgages, you wouldn't see all the loans defaulting, all at once. Mass defaults happened to be the predictable response to a predictable situation --- a rise in interest rates --- but since it wasn't in their model, the raters had an excuse for pretending it just wouldn't happen.

Turn now to Steve Steinberg's blog post on psychohistory, which presents the white hope:

It shows up, for example, in Isaac Asimov’s Foundation Trilogy, the best-selling albeit thinly-plotted space opera, in which protagonist Hari Seldon develops the science of “psychohistory”. According to Seldon, just as physics can predict the mass motion of a gas, even though any individual molecule is unpredictable, psychohistory allows us to predict the future of large groups of people.
Reading about it like that, you could almost forget Seldon was fictional. But again, the models are only as good as their assumptions.

Sometimes, those assumptions may be pretty safe. One of Steinberg's sample models concerns the behavior of a crowd trying to get through a narrow doorway. The crowd's motivations are simple, the constraints are largely physical, and the results are probably pretty good.

But in messier situations, things are a lot more tenuous.

Steinberg's very worried about what the largely military sponsors of this research will do with it if it works.

Me, I'm more worried with what happens if it doesn't.

"Yeah, Iraq was a mess. But this situation is different. Our models say so. We have mathematical proof!"