Freefall

Recently I have reading "Freefall" by Joseph Stiglitz, another book about the recent financial crisis. I haven't managed to finish it (and probably won't as it is due back at the library today) but will review it anyway.

I didn't like this book much. I found Stiglitz's style annoying. He is a liberal prone to taking partisan shots. He will say things like "We believed such and such but we learned we were wrong" where he doesn't really mean "we" but "crazy right wing Republicans". If Alan Greenspan writes a book confessing error that is ok but I don't like such confessions on behalf of others. Particularly since I doubt the real crazy right wing Republicans have learned much of anything and especially not what Stiglitz is claiming was learned.

On a more substantive note I didn't find the book very interesting. A rather conventional and predictable explication of what happened from a liberal perspective is mixed with what seem to me to be some often rather poorly thought out proposals for alleviating the problems.

For example on pages 103-104 Stiglitz writes:

The government (through the Federal Reserve) has been lending money to the banks at very low interest rates. Why not use the government's ability to borrow at a low interest rate to provide less-expensive credit to homeowners under stress? Take someone who has a $300000 mortgage with a 6 percent interest rate. That's $18,000 a year in interest (.06 x $30,000[sic]) or $1,500 a month, even with no payback of principal. The government can now borrow money at essentially a zero interest rate. If it lends it to the homeowner at 2 percent, payments are cut by two-thirds to $6,000. For someone struggling to get along at twice the poverty rate, around $30,000 a year, that cuts house payments from 60% of the before-tax income to 20%. Where 60 percent is not manageable, 20% is. And apart from the cost of sending out the notices, the government makes a nice $6,000 profit per year on the deal. At $6,000 the homeowner will make the payments, at $18,000, he or she will not.

Stiglitz is proposing that the government give 2 percent interest only mortgages so stressed homeowners can payoff their existing 6 percent mortgages and drastically reduce their expenses. He further claims this will be a good deal for the government. This proposal is totally deranged.

First Stiglitz does not explain how someone with an annual income of $30,000 obtained a $300,000 mortgage. A likely explanation of course is a grossly fraudulent loan application (for example claiming an annual income of $120,000). This is theoretically a serious crime and while it may be too much to expect such homeowners to go to jail, the government certainly shouldn't be bailing them out.

Second while it is true that the government can currently borrow money for 30 days at near 0 rates the government can't borrow money for 30 years (much less forever) without paying interest. Borrowing short and lending long is a classic recipe for trouble.

Third Stiglitz does not say how much the house is actually worth but, under current conditions, $200,000 or less seems likely. Lending $300,000 against a house worth $200,000 to a homeowner with an annual income of $30,000 is a really bad idea whether done by a bank or the government. At least for someone intending to profit as Stiglitz claims the government would.

Fourth it is hardly certain that the homeowner will be able to make payments of even $6,000 a year. Property taxes and other expenses on even a $200,000 house can be substantial and the homeowner may have other priorities. In any case the homeowner won't live forever at which point the government will own a $200,000 home with $300,000 mortgage not a desirable situation to be in.

Stiglitz goes on to claim that banks will be opposed to this sort of thing because they don't want the competition. In fact under current conditions the banks would be delighted to unload all their lousy $300,000 mortgages on the government. Something like this is actually happening as the government is currently guaranteeing (through Fannie Mae, Freddie Mac and the FHA) lousy refinancing loans which are getting the banks out from under a lot of dubious loans. This is costing the government a lot of money (far more than the direct payments to the banks Stiglitz complains about in this book). Perhaps at some future point when all the bad loans are gone the banks will try to get rid of the government competition but not just yet.

So in conclusion I didn't find a lot of value in this book. Stiglitz has a economics Nobel prize and there are occasional indications in this book that he is capable of writing an interesting and worthwhile book. However I don't think "Freefall" is it. Give it a pass.

Paint problem

Here is a nice math problem I encountered recently.

N painters arrive at random positions around a circular fence. Each paints the section of fence between them self and the nearest neighboring painter. As a result of this curious procedure some sections of fence are painted twice and some are not painted at all. In the limit as N goes to infinity what fraction of the fence on average will be painted (at least once)?

Actually as originally posed the fence was not circular which doesn't change the limit but is not as easy to deal with.

You can also ask the same question for the case where each painter paints the section of fence between them self and the farther of the two adjacent painters.

Census

Last weekend I finally got around to filling out and mailing in my US census form. It was actually pretty simple and I feel a bit guilty about causing the government to waste money trying (unsuccessfully) to contact me in person. The problem is there is no real incentive to handle this in a timely manner and many people don't . In my case a quite modest incentive would probably have been sufficient (although it didn't help to have the form due at the same time as my taxes). However designing a suitable incentive doesn't seem simple. It can't be too expensive as you couldn't exclude people who would have returned the forms anyway. And you don't want people submitting fraudulent forms. Perhaps entering people who return their forms on time (and don't opt out) into a lottery would be a cost effective incentive.

Teacher bashing

Yglesias asks why advocates of performance pay for teachers are accused of teacher bashing since presumably as many teachers would benefit as would be hurt. I don't think this is any great mystery. The basic premise of such plans is that many schools are currently "failing" and that this is mainly the fault of the teachers at those schools. This seems like teacher bashing to me and unjustified at that since the premise is false.

Yglesias does identify a way in which teachers have brought this upon themselves. Teacher unions like to argue for higher wages on the basis that teachers are very important. This naturally suggests that perhaps greater efforts to identify and remove bad teachers are justified.

But while turning union propaganda against teachers in this way may have its attractions the fact remains that the evidence is that within the range of teacher quality currently found in US schools teachers aren't very important to outcomes. And, contrary to Yglesias, measuring individual teacher quality is very difficult as random variation will swamp any plausible differences in quality.

So the likely effect of any merit pay system is greater anxiety and uncertainly for teachers as some are randomly labeled bad with little if any benefit to students. It is no wonder teachers are largely opposed.

Buffett and Moody's

Warren Buffett has been taking some heat lately because he is the largest shareholder in Moody's and Moody's is one of the government approved rating agencies who greatly enabled the recent financial crisis with absurdly generous ratings for mortgage backed securities. While I don't think this has been Buffett's finest hour, I think some the criticism has been a bit overblown. Expecting people to be objective about matters in which they have a large financial interest is about as realistic as expecting parents to be objective about their children. As Buffett himself has said, "Don’t ask the barber whether you need a haircut.".

For my part I think the current system provides unacceptable incentives for corrupt ratings and needs to be drastically reformed. New York State requires me to get my car inspected every year. It does not allow me (as far as I know) to go to several inspectors and only pay the one who agrees to pass the car. Nor does it allow me while doing this to swap out all the parts in my car until I find the minimum configuration that will pass. It should be obvious that allowing this sort of thing is a bad idea but that is how the security rating system currently works.

Hollywood Moon

I recently read "Hollywood Moon" by Joseph Wambaugh. Joseph Wambaugh is a former Los Angeles cop who has written a number of books (fiction and nonfiction) mostly about Southern California law enforcement. This is his latest book, a novel about cops working in Hollywood. Although it is the third in a series it is largely independent.

I found the book to be a somewhat uneasy mixture. Apparently Wambaugh still knows a lot of cops and they tell him stories, some of which he has incorporated into the book. Several of these stories are fairly amusing but they are a bit disconnected from the rest of the book. The remainder of the book is a fairly routine police procedural where a number of threads come together at the end. The ending was fairly grim and a reminder that police work is often not all that funny.

I didn't think this book was as successful as some of Wambaugh's other efforts such as "The Secrets of Harry Bright". Perhaps noteworthy is that the descriptions of cops griping about having to obey the law did produce in me some unexpected sympathy for liberal federal judges.