Sunday, January 25, 2009

Amherst History at Google Books

I stumbled across two old books about Amherst at Google Books; "The Handbook of Amherst, Massachusetts" by Frederick H. Hitchcock (1894), and "The History of the Town of Amherst, Massachusetts" by Carpenter & Morehouse (1896).

The Handbook has lots of great pictures of things like the then-brand-new Town Hall. And the History has records from every single Town Meeting, from 1759 through 1867.

I continue to be amazed by all the great stuff available for free on the Net; now if we could just roll back the copyright laws so we didn't have to wait a century for old stuff to enter the public domain...

Saturday, January 24, 2009

Financial Crisis Stories

My stepfather sent along a video from Fox News last year that "shows Bush and McCain warning the Democrats of financial mess."

I'd rate it somewhere between a 1 and 2 on the 1-10 truthiness scale (where 10 is 100% true).

The most-likely-to-be-true explanation for the financial crisis I've seen is from Arnold Kling. He's an economist who used to work for Freddie Mac. He thinks that the regulators screwed up the banking system with some bone-headed regulations-- it goes something like this:

Banks are required to keep a certain percentage of the money they get in safe investments ("capital reserves"). The rest they can lend out.

For example: Say you deposit $100 in the bank. They invest $10 of that in a Treasury Bond, and lend out the other $90 to your neighbor who wants to buy a hot dog stand.

Banks want to lend out as much as they can, but they also want to make as much money as they can on their capital reserves.

So Wall Street creates some new-fangled financial doo-hickeys that are supposed to be really safe. For example, they take a bunch of crappy mortgages, put them in a blender, package up the "cream" that rises to the top, get it rated as "AAA", and sell it to the banks. Oh, and they package up the gunk at the bottom of the blender along with an insurance policy (a "credit default swap") that's supposed to insure against catastrophic losses and sells THAT to investors.

And the regulators go along with it. They write rules that encourage the banks to park their money in very profitable AAA-rated mortgage-backed securities, rather than investing in traditional 20% down, 30-year mortgages.

For example, you put $100 in the bank, and the regulations allow them to:
a) Keep $15 in reserves, invested in traditional mortgages paying 6% interest, and lend $85 to the hot dog cart guy (at, say 10% interest).
b) Keep $10 in reserves, invested in AAA-rated mortgage backed securities that pay 6% interest and lend $90 to the hot dog cart guy.
c) Keep $9 in reserves, invested in Treasury Bonds paying 2% interest, and lend $91 to the hot dog guy.
(dollar figures Not To Scale-- I have no idea what the actual requirements and interest rates are)

Choice (b) is a better deal, so banks were buying up a ton of these mortgage-backed securities, and everybody was making lots of money. Fannie Mae and Freddie Mac got into the game kinda late, but did make the crisis worse by funding a lot of crappy mortgages and reselling them.

Well, it turns out the Wall Street Wizards were wrong about the risks. You can't actually take a bunch of crappy mortgages and make them safe-- it just looks like you can when housing prices are rising everywhere. The vicious circle that inflated the housing bubble went something like this:

Banks see they can make more money holding mortgage securities, SO
Mortgage brokers sell more and more mortgages with lower and lower requirements, SO
People buy more and more houses, SO
Housing prices rise, SO
Nobody defaults on their mortgage, making the crappy mortgages look safe.
So the regulators and investors and banks and homeowners are happy. And the cycle starts again...

Until the bubble pops. Then it all comes crashing down.

I think this story is probably 80% true. There are some mysteries (like why are Ireland and Spain having very similar housing crises? Are their banking regulations similar, or did their banks invest in US mortgages?), but it seems to me it explains what happened without relying on any conspiracy theories involving evil bankers or deregulation or deadbeat homeowners or Barney Frank.

Tuesday, January 13, 2009

CitizensBriefingBook: Extreme Democracy Experiment?

I just spent half an hour voting up and down ideas at

I really like our soon-to-be-President's style; I'm sure the Bush administration would find a hundred reasons NOT to put up a website where people can post their ideas (and where other people can vote on them). Heck, I can think of a few reasons why it might not work out, but trying it is a fantastic idea. The best ideas, that pretty much everybody agrees on, should rise to the top, controversial ideas should get stuck in the middle, and the bad ideas should be quickly voted down.

I think this kind of "Extreme Democracy" is the future of politics (but my track record of predicting the future is poor, and I'm overconfident).

(PS: I know nothing about the folks; I just ran across their website googling for the phrase "extreme democracy" because I wanted to see who else was thinking similar thoughts...)

Monday, January 12, 2009

Worst-case economic scenarios...

Mark Thoma (via Paul Krugman) says:
I think the stimulus package is like driving up an icy hill. If you don't have enough momentum from the start and fail to provide enough "stimulus" to get the car over the crest of the hill, you can slide all the way back to the bottom, crashing into things along the way and ending up worse off than when you started.
Krugman and Thoma have been trying to figure out just how big a stimulus will be sufficient for the economy to pull itself up by its bootstraps, and both are worried that a trillion dollars isn't enough.

Here's a best guess on what unemployment will look like over the next few years with and without the Obama stimulus (from Krugman's blog):

I have very little faith in macroeconomic models of the economy, so naturally I'm skeptical that the data on this graph will have any relationship to reality. I think that we understand the economy about as well as we understand the weather-- we can make reasonably precise predictions about what conditions will be like over the next few days. And we can make some very broad, imprecise guesses about what will happen over the next decade or two. But I think both the weather and the economy are impossible to predict with any certainty in between.

But I'll swallow my doubts, and pretend that the experts will be right. So: should we do nothing, suffer from 9% unemployment for three years, and let the economy recover on its own?

Should we spend a trillion dollars, suffer from 8% unemployment for two years, and risk "sliding down the icy hill" and ending up worse than we were before?

Or should go all-in: spend three (or four or five?) trillion dollars to get to the top of the hill? What if the hill is bigger than THAT? Or what if the Keynesian theory of economic stimulus is wrong?

My brain kind of understands numbers as large as a couple of million dollars. Billions and Trillions are just way too big for me.

So, lets break it down: Lets say we spend an extra trillion dollars to get up the icy hill. And lets be wildly optimistic and assume the unemployment rate immediately drops from the current 7% to the normal, "full employment" rate of around 5%.

Two percent of the US workforce is 3.2 million people.

One trillion dollars divided by 3.2 million people is about $300,000 per person.

Somebody please check my math; are we really talking seriously about spending THREE HUNDRED THOUSAND DOLLARS PER JOB SAVED?!?

I don't have a PhD in economics, but common sense tells me that just cannot be a good idea.
Update: I checked my own math, and I goofed on the first version of this post. It's "only" $300,000 per job saved, not $600,000 as I originally thought.

Tuesday, January 06, 2009

10 Predictions for 2009

I can't resist: I got a new crystal ball from a Certified Authentic Psychic who tells me I can't possibly go wrong this year.

1. Oil prices will continue to be wildly volatile; oil will cost more than $100 per barrel again on at least one day in 2009.

2. Congress will pass, and Obama will sign, an economic stimulus package larger than $900 billion.

3. The economic recession will last through the entire year.

4. Conservatives will claim that the stimulus is causing the recession to last longer.

5. Progressives will claim that without the stimulus we'd be in the Second Great Depression.

6. General Motors will declare bankruptcy after getting billions more dollars of bailout money.

7. Now that Home Depot is open, Rocky's Ace Hardware in Hadley and Leader Home Center in Amherst will close in 2009.

8. Mark's Meadow school in Amherst will be closed.

9. Lance Armstrong will not win the Tour de France again.

10. I'll only get 7 of these 10 predictions right. I really hope I'm wrong about #3...