Felix Salmon

Greg

Mankiw, after watching Hillary Clinton:

For some reason, energy is one of those topics that makes politicians sound

like Soviet-era central planners.

Here’s Hillary’s official

site on the subject:

Hillary proposed a simple idea to help end the cycle of dependence: put some

of the oil industry’s windfall profits into a fund that would help develop

practical new sources of renewable energy.

OK, so there we at least get the addition of the word "windfall",

which might (or might not) imply a one-off windfall tax as opposed to something

more ongoing. Who knows. But it certainly seems that Hillary agrees with Mike

Mandel that the best way to develop alternative energy sources is for the

government to spend money on energy-related R&D. It’s certainly a

way, but is it the best way?

I’m pretty impressed with

the idea that hedge fund fees are high because hedge funds, as the ultimate

capitalist machines, naturally charge whatever the market will bear.

In which case, what was Fortress Group doing pricing

its IPO at $18.50, when the market values

the stock at over $30? By my back-of-the-envelope calculations, the lucky few

who got in at the IPO price are now sitting on some $450 million in mark-to-market

profits. Why didn’t the Fortress Group want any of that money?

Floyd

Norris, today, devotes his column to a recent paper from a senior SEC executive,

Ethiopis Tafara. He’s so unimpressed, indeed, that he doesn’t either link to

it or give us its name. Well, I’m here to help: it’s called "A Blueprint

for Cross-Border Access to U.S. Investors: A New International Framework",

the abstract is here, and

the paper itself is here.

Here’s Norris summarizing the paper:

The idea, proposed in an article in The Harvard International Law Journal

by Ethiopis Tafara, the director of the commission’s office of international

affairs, and Robert J. Peterson, a lawyer in that office, is that the commission

would reach deals with other regulators to recognize each other’s regulation,

and to cooperate in providing information.

Once that was done, stock exchanges in the affected countries, and brokers

from those countries, could sell securities directly to all American investors

without having to conform to American rules.

Norris isn’t impressed:

At worst, such a move could expose American investors to added risk and less

protection, while leaving American stock markets at a new competitive disadvantage…

technology has progressed, and the S.E.C. and other regulators are going to

have to design an international regulatory regime to deal with the new realities.

How well they succeed may determine whether future investors have adequate

protection, or whether an international regulatory race to the bottom ends

up making it easy for crooks in jurisdictions with little effective regulation

to prey on people the world over.

There are three things which rub me the wrong way here. The first is the implicit

idea that the SEC, at present, has the best regulatory structure in the world,

and that if the US system moves towards, say, the UK system, then that would

be a move in the wrong direction, away from investor protection and towards

corporate impunity. No one, to my knowledge, has come close to demonstrating

such a thing.

The second is that a "regulatory race to the bottom" is really something

which anybody needs to worry about. Again, is there any evidence that regulators

in developed countries have competed with each other to have the most market-friendly

and consumer-unfriendly regulations?

And third is the zero-sum assumption: that anything which is good for consumers

is bad for companies, and vice versa. Not at all. Here’s Tafara:

Investors now search beyond their own borders for investment opportunities

and, unlike the past, many of these investors are not large companies, financial

firms, or extremely wealthy individuals. A good number are “typical”

retail investors—individuals with normal jobs and average incomes—who

save for retirement and their children’s education, and who may be well-educated,

but nonetheless are not “sophisticated investors” in the legal

sense. Investors (whether retail or professional) and large firms pursue international

opportunities for the same reasons: higher investment returns and the reduction

in risk offered by portfolio diversification.

In other words, there’s a very real cost to preventing retail investors from

being able to participate in the same markets that more sophisticated investors

play in. And I’m not talking about structured products here: I’m talking about

foreign stock markets, which are all completely open to retail investors in

their respective countries. There are many more stocks in the world than those

listed in New York, and anything which increases the number of stocks available

to US investors might well help them reduce their investment risks,

through diversification, rather than increase them, through decreased regulation.

It’s worth reading through to the end of Jenny

Anderson’s profile of Tim Geithner today. It’s not just a personal puff-piece

(although it’s that too): there’s also some very good reporting, at the end,

on how Geithner managed to reduce counterparty risk in the CDS market.

In 2004, Mr. Geithner’s staff conducted an extensive review of counterparty

risk. But rather than dump its conclusions on the industry, he chose to stay

behind the scenes while encouraging Mr. Corrigan to reconvene the group. In

January 2005, Mr. Corrigan brought together a group that included some of

the most senior executives on Wall Street. Six months later, the group produced

a report that made 47 recommendations on issues from the very technical to

the philosophical.

Central to the report’s findings were shocking weaknesses in the way

credit derivatives were being assigned and traded around without any sense

of who owned what. The so-called “assignment issue” was simple:

credit derivatives were negotiated by two parties, say JPMorgan and Goldman

Sachs. But banks were “assigning” the contracts out to others

— like hedge funds — without telling each other. It was a little

bit like lending money to a friend who is really rich who in turn lends it

to her deadbeat brother and fails to mention it.

“It violated the first and most sacred principle of banking: know your

counterparty,” Mr. Corrigan said.

In September 2005, Mr. Geithner brought together the so-called 14 families

of Wall Street and told them to fix the problems they had found. They set

goals. Then he raised them. “You want to have a tipping-point dynamic,

where the targets were ambitious enough that they would be forced to put a

lot of resources to work, all together, quickly, otherwise you might not get

traction," he said.

Standards were set, and backlogs came down sharply. One particularly effective

tactic was to collect data from everyone and anonymously distribute it to

the group so that every bank — and that bank’s regulator —

could see how it measured up.

The industry felt triumphant about being part of the solution. It was a classic

“collective action” problem solved: the industry had set an abysmally

low standard and no one would budge for fear of losing business, so someone

had to move everyone.

I’m not sure whether or where this has been reported before, but it’s new to

me, and very interesting – although I’d be interested in whether Wall

Street’s biggest CDS players, such as Deutsche Bank and Goldman Sachs, see the

episode in quite the same way.

What strikes me, from the way that the problem is described, is that CDSs were

being treated as though they were securities, which could be "assigned"

rather than sold. Of course, one of the reasons why Wall Street loves the CDS

market so much is precisely that they are not securities, and therefore

they are subject to much less regulation. But you’d think that Wall Street banks

would at least pay lip service to the distinction, and simply write a new contract

rather than "assigning" an old one.

In fact, that’s a big reason, I’ve always understood, why total notional CDS

outstanding has been rising so quickly – when people trade in and out

of a CDS, they generally write a new contract each time, rather than treating

the CDS as a security. Was that not always the case in the past?

Maybe that practice only became universal after Geithner got involved. In which

case, he can consider himself to some degree responsible for the rise

in total CDSs out there!

I’ve now got my hands on the UBS climate change report (98 pages, dated January

2007), to accompany the Lehman

and Citigroup reports.

UBS’s paper doesn’t have much of an equities focus at all, but it does include

an interview with Armory Lovins, the recipient of a fascinating New Yorker profile

by Elizabeth Kolbert last month:

What are the highest priority areas for technological development to

bring about reductions in greenhouse gas emissions? What sort of leading technologies

need to come first?

You seem to be very interested in future technologies to solve our climate

change problem. However, that is not really my focus. The technologies that

are already on the market offer everything we need and more, to reduce greenhouse

gas emissions dramatically…

The climate debate has unfortunately been misguided as implying large costs

of climate protection. In my view there has been a “sign error”

here. In fact, the opposite is true. Climate protection can save money, because

energy efficiency costs less than the fuel it saves. Interestingly enough,

100% of the experts involved in energy efficiency measures talk about profits,

and 100% of the politicians concentrate on the costs.

In terms of what this all means for investments, here’s a couple of interesting

charts from the report.

Freddy Mac’s official statistics

notwithstanding, HSBC

is facing heavy weather in its US subprime operations:

The impact of slowing house price growth is being reflected in accelerated

delinquency trends across the US sub-prime mortgage market, particularly in

the more recent loans, as the absence of equity appreciation is reducing refinancing

options. Slower prepayment speeds are also highlighting the likely impact

on delinquency of higher contractual payment obligations as adjustable rate

mortgages reset over the next few years from their original lower rates.

As a result, says HSBC, its total provision for the year 2006 is likely to

exceed by 20% the $8.8 billion consensus estimate. Says Peter

Thal Larsen in the FT:

The worsening picture in the US helped push HSBC shares, which were the worst

performers in the UK financial services sector last year, to a 9-month low

on Thursday. By mid-morning they were down 231⁄2p at 907p, the lowest

level since last May.

Concerns about HSBC’s US mortgage book have triggered a sharp fall in

the bank’s share price, largely because the problems raised questions

about the bank’s ability to price correctly loans in the sub-prime lending

market.

Mike Verdin

at Breaking Views also piles on, but he has a few more numbers:

The bank has just added an extra $1.8bn in 2006 provisions for Household,

now HSBC Finance. That will drag the division’s pre-tax profits to about $2.3bn,

40% below previous estimates. It’s a big enough hit to deprive the whole group

of half its profits growth.

The bad news will certainly revive doubts about whether Household was worth

buying, even at the cut-price $14.2bn HSBC paid in 2003.

There seems to be $300 million missing somewhere, since profits seem to be

only $1.5 billion lower than expected, by these calculations. But putting that

to one side, can I just point out that HSBC’s subprime mortgage business is

still on track to make well over $2 billion in 2006? I appreciate that

2007 might be worse, with ARMs resetting and all that. But I have a feeling

that the subprime business is never going to lose money for HSBC –

the worst that happens is that its profits will be less spectacular than they

might have hoped.

Once again, there’s nothing indicating a massive credit crunch. I see increased

provisioning much the same way as I see wider MBS spreads: as an indication

that the market’s own cushioning systems are working pretty well.

Mike

Shedlock (Mish) is convinced that mortgage delinquencies are rising, despite

finding this chart in a recent Freddie Mac report:

That’s Mish circling the footnote: he’s convinced that the explanation for

the drop can be found in the footnotes.

Essentially Footnote # 12 says that if Freddie Mac renegotiates the terms

of the loan with someone who is delinquent then "voila" that person

is no longer delinquent. It seems to me that since about June of 2006 Freddie

Mac is struggling to keep this ponzi scheme afloat.

Does Mish have any evidence that Freddie’s renegotiation rate is increasing?

No. And in fact, if renegotiation rates were increasing, that would

be great news for the subprime mortgage market. A lot of the subprime

crunch can be explained by the fact that up until recently, underwriting

standards were getting ever looser, which meant that borrowers in trouble could

always renegotiate rather than default. But if Mish is right – and he

cites a WSJ article by Ruth

Simon in support of his thesis – then in fact many subprime borrowers

might well be able to refinance their way out of trouble, rather than falling

into default and foreclosure.

The Simon article also notes an increase in "short sales":

The rise in bad loans also is leading to a pick up in so-called short sales,

in which a lender allows the property to be sold for less than the total amount

due and often forgives the remaining debt. For the lender, the process can

be shorter and less costly than foreclosing, especially in a declining market.

For borrowers, it is a way to avoid having a foreclosure on their credit report.

If such things are allowed, they’re much better than foreclosure for both borrower

and lender; it’s good news that these things are increasing despite the boom

in mortgage-backed securitizations (which you’d expect might make short sales

more difficult).

It seems to me that the market is actually doing a very good job, so far, of

coping with developments in the mortgage sector. MBS prices for 2006-vintage

subprime loans are down, and underwriting standards are getting tighter, as

you’d hope and expect – but at the same time, overall delinquencies are

falling, not rising, and lenders are being constructive when it comes to relations

with distressed borrowers. A massive credit crunch is by no means a foregone

conclusion.

Robert Shiller has been predicting

a housing-market crash for as long as anybody, which is why his piece in the

Wall Street Journal today

is so interesting: it seems he’s not predicting a crash any more! Here’s the

final paragraph of his piece in the same space on August 30:

Unfortunately, there is significant risk of a very bad period, with slow

sales, slim commissions, falling prices, rising default and foreclosures,

serious trouble in financial markets, and a possible recession sooner than

most of us expected. Deterioration in that intangible housing market psychology

is the most uncertain factor in the outlook today. Listen hard and watch out.

And here’s his conclusion today:

We are left with a deeply uncertain situation, but one in which it would

seem that a sequence of price declines continuing for many years has some

substantial probability of happening. Traditional finance theory has trouble

reconciling even a semi-predictable sequence of price declines with basic

notions of market efficiency. The situation we are facing is a reminder of

the glaring inefficiencies and incompleteness of existing markets for residential

real estate, and may be regarded as evidence that institutional changes will

be coming in future years to fundamentally change the nature of these markets.

There’s the move from "significant risk of a very bad period" to

"some substantial probability" of "a sequence of price declines".

But there’s also a more philosophical shift: the first piece was often reprinted with a graph

which was clearly designed to show that the housing boom looked just like the

dot-com stock-market boom, and that the housing bust would not be dissimilar.

Now, Shiller’s saying that there’s nothing predictable about housing prices

at all, and that anything can happen:

With the failure of anyone really to predict today’s high home prices, one

may well conclude that no one can predict today whether a home-price bust

is coming, or whether the housing market will land softly, or even is poised

to resume its upward climb. That may be the right conclusion about our ability

to forecast the markets…

We haven’t seen really long and significant strings of price decreases in

the U.S. since the first half of the 20th century. The consecutive-year home-price

declines in the major U.S. cities from 1990-93 amounted to a total drop of

only 8% from peak to trough. More recently, we have seen sharp reversals of

sudden price drops. San Francisco home prices dropped 7% between 2001 and

2002, and then resumed a strong upward climb. London home prices dropped 5%

between 2004 and 2005 and then resumed an upward climb…

Of course, Shiller balances all his upside scenarios with downside scenarios.

But my point is that that balance was nowhere visible in August, when he was

nothing but downside scenarios. Why the change, I wonder?

Dean Baker has been worrying

for a while

about US

productivity. Could it be that he needn’t

have worried?

U.S. productivity up sharply in 4th quarter

The productivity of U.S. workers rose sharply in the fourth quarter and labor

cost growth slowed, but future revisions may temper what at first blush is

good news for the inflation-wary Federal Reserve.

Nonfarm business productivity, a gauge of how much a worker produces per hour,

mounted at a 3 percent annual pace in the final three months of 2006, the

Labor Department said on Wednesday.

Wall Street had expected a 1.8% rise in Q4 productivity, not a 3% rise –

so you can see why David

Altig (who has lots of pretty charts) says that the report "makes it

easy to feel good".

On the other hand, it’s not that hard to feel bad if you try hard enough: Q3

productivity was revised down to -0.1%, which is frankly dreadful.

Here’s one of Altig’s charts. It seems that overall, 2006 (the yellow bars)

was pretty much in line with 2005 (the blue bars), while the final quarter of

2006 (the pink bars) was very strong indeed. So I’m not worrying too much.

Yesterday I mentioned that Lehman Brothers had released a 145-page research

note on climate change. In response, a friendly reader sent me a similar report

from Citigroup (120 pages, dated January 19), and said that UBS might have one

out as well. Interestingly, the Citigroup report came out of the New York office

– and although it’s similar in structure to the Lehman report, it’s more

optimistic about the list of 74 companies which it says "seem well positioned

to benefit" from climate change-related trends. It strikes me, however,

that those 74 stocks – which I’ve summarized after the jump – are

overwhelmingly in the energy sector, one way or the other, and I’m sure that

quite a few of them would be anathema to "green" investors.

Continue reading →

Larry

Summers doesn’t trust the judgment of the market, and thinks the government

should step in to intervene – by throwing money into R&D related to

the life sciences:

In today’s economy, an outstanding graduate of a leading business school

earns a substantially higher salary than a potential Nobel Prize winner graduating

with a doctorate in biology. Several years after graduation, the differences

are even more pronounced. It should not be a surprise that more talented young

people are not headed toward careers in basic research in the life sciences.

Michael

Mandel doesn’t trust the judgment of the market, and thinks the government

should step in to intervene – by throwing money into R&D related to

energy and the environment:

I won’t believe that the U.S. is serious about global warming until I see

the feds start throwing real money into R&D into energy and environment-related

R&D. After all, no matter what your political views, everyone can agree

that more R&D in energy and the environment can only be a good thing.

Isn’t interesting how Davos Man is perfectly happy with the idea of government

subsidies in the realm of scientific research, while being very, very uncomfortable

with the idea of government subsidies for, say, agriculture?

I’m not saying that either Summers or Mandel is wrong. But all this does strike

me a little bit as the overeducated shilling on behalf of the overeducated.

When the elected representative of an agricultural community asks for more life-science

research, or when the former president of the world’s foremost research university

asks for more agricultural subsidies, then I think we might be moving towards

consensus. But for the time being, I’m tempted to conclude that no one has quite

as much objectivity as they like to think they do.

Matthew Tubin comments,

apropos the large increase in bilateral overseas development assistance to Africa

under the Bush Administration:

Given the geostrategic competition that is emerging over oil (Nigeria, Chad

and even the Sudan) and influence in Africa between the United States and

China the substantial rise in bilateral ODA is not surprising.

This is mildly depressing: There was definitely a certain amount of hope at

the beginning of the post-cold-war era, that aid might become depoliticized

and targeted at poverty reduction rather than at geostrategic goals. Is Bush’s

aid to Africa simply a pleasant byproduct of his trying to keep increasingly-important

oil producers onside? And if so, does that bode ill for poverty reduction?

Indonesia has signed a memorandum of understanding with Baxter Healthcare,

whereby Baxter will pay Indonesia for samples of the avian flu virus.

At the same time, Indonesia has stopped sending samples of the virus to the

WHO.

Baxter Healthcare says this development is not its fault, reports Donald

McNeil in the NYT:

A Baxter spokeswoman said the company had not asked Indonesia to stop cooperating

with the W.H.O. She added that the agreement under negotiation would not give

it exclusive access to Indonesian strains…

“Baxter has nothing to do with this,” she said. “Our role

is in developing vaccines. We’re not involved in ownership decisions.”

Some leading flu experts said they believed that Indonesia was acting on its

own, not understanding the ramifications.

Nevertheless, is Indonesia is standing firm, and seems to understand the ramifications

perfectly well:

A spokeswoman for Indonesia’s Health Ministry told Reuters yesterday

that the country “cannot share samples for free.”

“There should be rules of the game for it,” said the spokeswoman,

Lily Sulistyowati. “Just imagine, they could research, use and patent

the Indonesia strain.”

What’s going on? It seems that Indonesia has

a beef with the WHO:

The action underscored in dramatic fashion Indonesian displeasure over the

production of a vaccine from a strain of H5N1 the Indonesians sent to WHO.

WHO in turn sent it to Australian blood products company CSL to produce an

H5N1 vaccine, using a model of non-exclusive seed strain sharing with vaccine

makers now used for seasonal influenza. In this context, CSL did not notify

or ask permission of the Indonesians:

[The] news this week that the Australian pharmaceuticals company CSL had

developed a vaccine against the H5N1 bird flu virus was met with alarm by

Indonesian Health Minister Siti Fadillah Supari.

She says Indonesia is seeking intellectual property rights over the Indonesian

strain of the virus on which the vaccine is based.

In other words, it’s Indonesia, not Big Pharma, which is trying to

assert IP rights over viral isolates – something which is allowed, if

not usually practiced, under international IP law.

Concludes Tyler

Cowen:

If this entire episode does not convince you that IP law is out of control,

I don’t know what would.

Well yes, IP law is out of control. But it’s kinda ironic that it’s

only when a developing country starts trying to take advantage of it that big

multinationals like the WHO go whining about it to the New York Times.

Todd Moss:

Under President George W. Bush U.S. assistance to Africa has sharply increased,

reaching $4.2 billion in 2005, nearly four times the level of 2000, and more

than twice the level of any previous administration.

Here’s the chart:

(Via PSDBlog)

Thomas Palley has a blog entry

today entitled "In Defense Of Sarbox". If only it were. In fact, it’s

more of an argument against anti-Sarbox arguments, some of which – Palley

is right – are pretty weak.

On the other hand, Palley comes up pretty short himself in terms of actual

arguments in favor of Sarbox. Is there any evidence that Sarbox has

made the stock market a safer place to invest, or has otherwise improved corporate

governance in the US? Does Sarbox’s rules-based approach to regulation really

have a more beneficial effect than a principles-based approach? Has there even

been the slightest attempt to run some kind of cost-benefit analysis on Sarbox?

If so, has anybody determined that the benefits outweigh the costs?

Sarbox strikes me as a classic "something must be done; this is something;

therefore this must be done" piece of legislation. I understand the reasons

why it was brought into law – but even if those reasons are very good,

that doesn’t mean Sarbox is a very good law. If we can reduce the harmful aspects

of Sarbox – and, by the Law of Unintended Consequences, there are sure

to be some harmful aspects of Sarbox – would that not be a good

thing?

Lehman Brothers has released

a 145-page report (out of its London office, natch) entitled "The Business

of Climate Change". It’s a very solid book, with excellent analysis of

the facts as we know them, the prospects for how climate change might be mitigated,

and the role of both governments and the private sector going forwads.

Of course, it also looks for investment opportunities related to climate change:

although the downside is big, that doesn’t mean there aren’t companies who might

be able to position themselves to benefit from it, such as Renault, GE, Siemens,

uranium miners, and healthcare companies who can benefit from an increase in

respiratory diseases, such as GSK and AstraZeneca. The big picture, however,

is pretty gloomy: climate change is definitely bad for markets, it would seem.

Here’s one interesting chart from the report, showing developments in the EU

carbon-emissions market (click for larger version):

Is economic stability always a good thing? Well, yes, of course it is. But

look at what’s happened to Kenya over the past few years, which have seen what

JP Morgan, in a recent research note (yes! a research note on Kenya!) calls

"broad-based, accelerated economic growth" – a crazy stock-market

bubble, with prices up 787% in dollar terms since 2002. The Guardian’s Xan

Rice has the story:

Stories of overnight wealth creation have created a huge frenzy for shares

from people who have never invested in the stock market before. When KenGen,

the state’s biggest electricity company, listed its shares last year, there

were queues at brokerages all over the country. Local media reported how small-scale

farmers were selling their cattle to buy the shares. Banks suddenly offered

"share loans" to people who had been considered unworthy of credit.

The KenGen offer was more than three times oversubscribed, and 70,000 people

were allocated shares. The price quadrupled on the first day of trading.

Both the strong economy and the soaring stock market date to the departure

of strongman Daniel arap Moi at the end of 2002, and his replacement by the

democratically-elected Mwai Kibaki, who is favored to be re-elected this year.

But now we can add a stock-market crash to all the other risks facing Kenya:

it borders the likes of Sudan and Somalia, for one thing, and of course there’s

the long-term toll of HIV/Aids. All the same, it seems that Kenya is much better

off now than it has been at any point in recent history – which is not

something which can be said of most sub-Saharan countries.

(Via Alphaville)

One of the most compelling parts of the Bloomberg-Schumer

report was the way in which it praised London’s principles-based approach

to financial-sector regulation over New York’s rules-based approach: "our

regulatory framework is a thicket of complicated rules, rather than a streamlined

set of commonly understood principles, as is the case in the United Kingdom

and elsewhere", it

says.

But London itself, it turns out, is struggling with the same problem, and not

only because of EU regulations which threaten to override and generally defeat

the purpose of the FSA’s principles. Ian

Morley, the CEO of Dawnay Day Brokers, writes in the FT today:

The problem is that the FSA approach seems to lack courage and consequently

may result in a craving for certainty and a move back to rules. The situation

may be compounded by the fact that many people in the trade associations (and

compliance departments) that deal with such issues are themselves of a legal

background and prefer black and white to grey.

The FSA’s proposed approach is not really helpful. For example, in point 2.3

of this paper, it states: "Industry guidance must not claim to limit

or affect the rights of third parties." That is an understandable legal

point but means anyone who does not like it can drive a truck through it by

suing; in effect, of little real value to the industry.

In other words, a principles-based approach is hard, and is likely to be continually

threatened by lawyers both within the financial services industry, who want

certainty, and within national and international legislatures. Given the degree

to which laws and lawyers control the US economy, it could be impossible to

develop a principles-based approach here.

A few commenters have

said that they like the recondite stuff, so I did quite enjoy, earlier today,

throwing out a blog post talking about the CFTC and the CDS market and hazard

rates without bothering to spell everything out. Maybe I went too far –

but it just so happens that Arnold

Kling Bryan Caplan has a blog entry today which allows me to spell out some of the assumptions

I was making. Here he is on bankers:

Borrowers rarely default on their loans. Nevertheless, differences in default

rates have huge effect on rates of return. Suppose, for example, that two

lenders charge 3% interest, but one has a default rate of 1% and the other

has a default rate of 2%. The first lender has twice the rate of return of

the second. After all, when the first guy lends out $100, he gets back .99*$103=$101.97,

while the second only gets back .98*$103=$100.94.

Caplan’s rhetorical point is right, but his mathematics is wrong, unless the

recovery rate on the loans is zero. When a borrower defaults, the bank

doesn’t get back nothing. Usually the borrower has already repaid some principal

and interest, and nearly always the bank can sell the loan to a collections

agency for more cash still. Let’s say the lender with a 2% default rate has

a 50% recovery rate – then his total return is .98*103+.02*50=101.94.

See, I’ve doubled his return at a stroke!

Caplan goes on to talk about education in similar terms:

People often enroll for

a year of school, attend for a while, and then give up. And sometimes they

attend for a full year, but get failing grades. Either way, they spend most

or all of the cost of a year of education (including foregone earnings), with

little or no benefit. It’s analogous to defaulting on a loan – you spend the

resources, but don’t get the return.

The omission matters. If there is a 7% return to successfully completed education,

but a 3.5% default rate, the expected rate of return is 3.5% – half as big

as the naive estimate.

Once again, Caplan is assuming a recovery rate – the value of a non-completed

transaction – of zero, which is ridiculous. Obviously an extra year’s

education has some value. Let’s say that the 7% return to a successfully-completed

four-year degree is comprised of 1% for each year completed, plus an extra 3%

for the piece of paper you get at the end. Then if 3.5% of students "default"

– drop out after one year, say – then the expected rate of return

is 0.965*1.07+0.035*1.01=1.0679, for a 6.8% return.

It’s important not to write off anything completely – either loans or

students.

Jean Rogers waxes Wittgensteinian:

Arabic, for example, can convey business, merchant, etc., in a word, but

it takes a lengthy explanation to capture ‘entrepreneur’. After

the recent success in working with Ministries and linguistic experts to invent

an Arabic word for “corporate governance”, which also did not

exist until the recently approved “hawkamat ash-sharikat”, CIPE

and its Egyptian partners are now raising the issue of creating Arabic terminology

that captures the breadth of meaning in entrepreneurship. This is really a

process of concept formation. It can be lengthy and seem esoteric, but it

is essential to moving forward on these issues — if there is no common

word or language for a topic, then the concept itself does not adequately

exist in society.

As something of a Wittgensteinian myself, I’m attracted by the implied argument

here: all of our thoughts can be expressed in a public language, and if an important

word does not exist in a given society’s language, then the idea associated

with that word can’t really take off an that society. If there is no word for

entrepeneurship in Arabic, then in some important sense there is no

entrepeneurship in Arabic-speaking societies. Wow, that sounds racist, doesn’t

it? I think I need to talk to a Proper Philosopher before I take this any further.

Any suggestions of Philosophy of Language types who might be able to help?

Sara

Welch of the NYT has been talking to the State Department about the difficulty

of getting visas to enter the US:

Changes added after Sept. 11, 2001 “came so quickly that we weren’t

as efficient as we wanted to be,” said Maura Harty, assistant secretary

for consular affairs in the State Department. “But we now have an expedited

service for business travel visas in place in every U.S. consulate and embassy

in the world.”

Ms. Harty said that only 29 percent of the respondents in the Discover America

Partnership survey had applied for a visa in the last 18 months. “I

urge people who haven’t applied for a visa in a few years to come back,”

she said. “Try us, you’ll like us.”

I’m sorry, I should have warned you to put your coffee down before reading

that, so you didn’t spew it all over your keyboard.

Welch herself, of course, finds no difficulty in finding all manner of people

who have tried their local US embassy, and not liked the experience one bit:

Luis Gómez Hernández, a meeting planner in Ecatepec de Morelos,

Mexico, said he used to bring groups of 30 to 40 businesspeople to the United

States four times a year, but stopped in 2003 because of the difficulty in

obtaining visas. It took up to three months for applicants to get an appointment

at the United States Embassy or a consulate and at least two more weeks to

obtain the visa, “and in a group of 40, only 3 or 4 would get them,”

he said.

I’m sure there are some business trips which can be planned on three months’

notice, but I’m equally sure there aren’t many. One of those trips is the Consumer

Electronics Show in Las Vegas – but this year, stories were legion of

overseas attendees not being able to come, especially from China, for failure

to be able to get a visa. And it’s hard to argue with the numbers:

In November, Euromonitor International, a London-based market research firm,

found that the number of business arrivals in the United States fell 10 percent

from 2004 to 2005, while the number of such arrivals in Europe grew 8 percent

over the same period.

Clay Risen,

at TNR (HT: Gross),

also has numbers, altough they have a slightly more dubious provenance: he cites

only "one industry group" as saying "that, between July 2002

and mid-2004, border restrictions cost U.S. businesses $30 billion". He

sees which way the wind is blowing:

The United States must make a decision. Much of the world believes that the

benefits of open borders trump the threats. We obviously feel differently

but have yet to recognize the costs involved. But, by tightening our borders,

we risk being passed over by a globalizing, integrating world…

The economic consequences are obvious enough: Why headquarter a company in

New York if its international employees, let alone clients, can’t get there?

As a foreigner who’s spent a great deal of time in the US (I’ve had, in my

time, not only tourist waivers but also a B visa, two H visas, an I visa, a

J visa, "advance parole", and – finally! – a green card),

and also as a New Yorker with many foreign friends, I know full well how unpleasant

the whole immigration palaver can be.

And the fact is that it’s simply untenable these days to ask a Chinese CEO,

who’s jetting all over Asia on a regular basis, to surrender his passport for

two or three weeks while maybe or maybe not getting a visa to visit the US.

What’s more, such procedures do absolutely no good whatsoever in terms of protecting

US homeland security.

My wonder is that the business lobby hasn’t made this much more of an issue.

But the more press we can get on this idiotic state of affairs, the better.