Government – Page 124 – artdiamondblog.com

“Ill-Conceived Regulation Poisoned the System”

Source of formula title and of formula: online version of the WSJ commentary quoted and cited below.

(p. A17) Here’s how ill-conceived regulation poisoned the system. Until recently, bank CEOs and regulators slept well at night thanks to a financial model developed in the 1990s called “value at risk” or VaR. It assesses historical variances and covariances among different securities, informing financial institutions of the risks they’re taking. By assessing risk factors across all securities, VaR can compare historical levels of risk for given portfolios, usually up to a 99% probability that banks would not lose more than a certain amount of money. In normal times, banks compare the VaR worst case with their capital to make sure their reserves can cover losses.

But VaR can’t account for extreme unprecedented events — the collapse of Barings in 1995 due to a rogue trader in Singapore, or today’s government-mandated bad mortgages bundled into securities that are hard to value and unwind. The “1% likely” happened. And because the 1% literally didn’t compute, there was no estimate of the stunning losses that have occurred.
Yale mathematician Benoit Mandelbrot pointed out the shortcomings of the VaR model in his “The (Mis)behavior of Markets,” published in 2004. He noted that bell curves work for, say, disparities in the height of people. In markets, instead of flat tails of rare events at either end of the bell curve, there are “fat tails” of huge upsides and huge downsides. Markets are more complex than the neat shape of bell curves.
Last year’s bestselling nonfiction book had a similar theme. In “The Black Swan,” former trader Nassim Nicholas Taleb pointed out that extreme outcomes are actually common, warning that financial engineers — “scientists,” as he calls them — ignore these unlikely outcomes at their peril. But today’s credit panic was not entirely unpredictable. Mr. Taleb was prescient in writing, “The government-sponsored institution Fannie Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: Their large staffs of scientists deemed these events ‘unlikely.'”

For the full commentary, see:
L. GORDON CROVITZ. “The 1% Panic.” The Wall Street Journal (Mon., OCTOBER 13, 2008): A17.
(Note: the online version of the article had the following added subtitle: “Our financial models were only meant to work 99% of the time.”)

For the Taleb book mentioned in the commentary, see:
Taleb, Nassim Nicholas. The Black Swan: The Impact of the Highly Improbable. New York: Random House, 2007.

For an insightful review of the Taleb book, see:
Diamond, Arthur M., Jr. “Review of the Black Swan: The Impact of the Highly Improbable.” Journal of Scientific Exploration 22, no. 3 (2008): 419-22.

Dem’s Acorn Group Registers Mickey Mouse to Vote for Obama

“Suspicious voter registration applications in recent months include this one for Mickey Mouse, of Orlando, Fla.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. A13) WASHINGTON — Thousands of suspicious voter registrations collected by the housing-advocacy group known as Acorn have become a rallying point for Republicans, who claim left-leaning activists may be trying to rig votes in the 2008 elections.

Many of the potentially faulty registrations were flagged to election officials as a result of the group’s own internal controls.
Democrats say the Republicans are attempting to whip up fear as a way of discouraging some newly registered voters from going to the polls. If past elections are an indication, such claims also may serve as a way to set up potential legal challenges should close election results produce disputed counts and recounts.
Faulty registrations in recent months include those in the names of Mickey Mouse in Florida, Batman in New Mexico and Dallas Cowboys football players in Nevada. State and federal authorities have opened investigations in about a dozen states; as many as 16,000 registrations in Pennsylvania are under suspicion. The Michigan attorney general’s office Tuesday said it arrested and filed felony charges against a former Acorn canvasser for allegedly forging six voter applications.

For the full story, see:
EVAN PEREZ. “Probes Focus on Advocacy Group’s Voter Registration.” The Wall Street Journal (Weds., OCTOBER 15, 2008): A13.

Lawyer for Obama’s Acorn Group Is Concerned About Group’s Embezzlement and Possible Violations of Federal Laws

(p. A15) An internal report by a lawyer for the community organizing group Acorn raises questions about whether the web of relationships among its 174 affiliates may have led to violations of federal laws.

The group, formally known as the Association of Community Organizations for Reform Now, has been in the news over accusations that it is involved in voter registration fraud, charges it says are overblown and politically motivated.
Republicans have tried to make an issue of Senator Barack Obama’s ties to the group, which he represented in a lawsuit in 1995. The Obama campaign has denied any connection with Acorn’s voter registration drives.
The June 18 report, written by Elizabeth Kingsley, a Washington lawyer, spells out her concerns about potentially improper use of charitable dollars for political purposes; money transfers among the affiliates; and potential conflicts created by employees working for multiple affiliates, among other things.
It also offers a different account of the embezzlement of almost $1 million by the brother of Acorn’s founder, Wade Rathke, than the one the organization gave in July, when word of the theft became public.
“A full analysis of potential liability will require consultation with a knowledgeable white-collar criminal attorney,” Ms. Kingsley wrote of the embezzlement, which occurred in 2000 but was not disclosed until this summer.

For the full story, see:
STEPHANIE STROM. “Acorn Report Raises Issues of Legality.” The New York Times (Weds., October 22, 2008): A15.

Growing the Nanny State: California Senate Bans Helium Balloons

“Don Caldwell, who made an effigy of California state Sen. Jack Scott in protest of his proposed balloon ban, with his wife, Laura.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. A1) California state Sen. Jack Scott says he didn’t intend to “be a party pooper.” It’s just that helium-filled foil balloons — like those found at hospital gift shops and office parties — are dangerous. They float into electric lines and cause power outages, more than 800 in California last year, utilities say.

He drafted a bill to ban foil balloons; it sailed through the state Senate and now awaits a vote in the Assembly.
He didn’t expect the issue to blow up the way it did.
Last month, at a pro-balloon rally in a Pasadena park, protesters cheered as a group of children pounced on an effigy of Mr. Scott — made entirely of balloons.
“There’s a leg, get that leg!” shouted John Kobylt, a radio talk-show host who broadcast the protest live. “Look what’s left of him!” he said, holding up a sagging cluster of punctured latex. “That’s what happens when you ban our balloons.”
Wedding planners, party organizers and balloon artists all rallied to the cause. The industry body, the Balloon Council, set up a Web site — www.savetheballoons.com — that urges people to contact their state representatives. Members began a grass-roots campaign to garner support.
“My first reaction to this was, ‘You’ve got to be kidding. Is this a joke?'” recalled Barry Broad, the lobbyist they hired to spearhead the pro-balloon effort. “Balloons (p. A16) and ice-cream cones are associated with the lighthearted parts of life, and now suddenly they have this evil-twin side?”

For the full story, see:
AMY KAUFMAN. “California Targets New Menace: Helium-Filled Foil Balloons; State Senate Sees Danger and Cracks Down, But Party Planners Fight Back; the $100 Fine.” The Wall Street Journal (Tues., July 15, 2008): A1 & A16.

SNL CSPAN Pelosi, Frank Bailout Skit

Source: screen capture from the NBC video clip mentioned, and linked to below.

Most Saturday Night Live (SNL) skits support liberal causes and politicians, and are critical of those with sympathies for free markets.
There was a wonderful, rare exception aired as the second skit on the 10/04/08 show. The skit pokes fun at the Democrats for their responsibility in creating the mortgage meltdown crisis. Nancy Pelosi and Barney Frank are shown expressing sympathy for various miscreants who expect the taxpayer to bail them out of their financial responsibilites.
(An interesting sidenote is that NBC pulled the clip from their web site for a about a full day, even though they left up other clips from the same show. Some bloggers suggested that employees of NBC had political motivations for their act of quasi-censorshp.)

The skit was entitled “C-span Bailout” and as of 10/08/08, could be found at:
http://www.nbc.com/Saturday_Night_Live/video/clips/c-span-bailout/727521/

The Fragility of Freedom

Source of book image on the left:
http://images.barnesandnoble.com/images/25780000/25788683.jpg
Source of book image on the right: http://www.churchillsociety.org/Churchill%20Book%20Discussion%20Group.htm

Several recent books support a common conclusion that freedom is fragile, and its preservation can sometimes depend on the courage of a few individuals. I recently heard discussions on C-SPAN of a couple of books (images above) on WW2 that emphasize this point. Hitler might very well have succeeded in the long-term conquest of continental Europe, and even Great Britain, if Churchill and a few others had not taken a stand.
Earlier, also on C-SPAN, I heard John Ferling make a similar point with regard to the American Revolution. (See the images of his two relevant books below.) Were it not for the actions of George Washington, and a few others, the revolution very well might have failed.
One can view this as a bad news, good news, story. In earlier entries on the blog, I have quoted articles suggesting that the French are especially bothered by how “precarious” life can be. Well, the bad news is, that on this, the French may be right.
But, on the other hand, the stories of Churchill, and Washington, also tell us that with some courage and determination and wisdom, individuals can sometimes make a big difference in how stories end. That is the good news.
(And yes, Nassim, luck matters too.)

Books referred to:
Ferling, John. Almost a Miracle: The American Victory in the War of Independence. New York: Oxford University Press, USA, 2007.
Ferling, John. A Leap in the Dark: The Struggle to Create the American Republic. 1st ed. New York: Oxford University Press, USA, 2003.
Lukacs, John R. Blood, Toil, Tears and Sweat: The Dire Warning: Churchill’s First Speech as Prime Minister. New York: Basic Books, 2008.
Olson, Lynne. Troublesome Young Men: The Rebels Who Brought Churchill to Power and Helped Save England. 1st ed. New York: Farrar, Straus and Giroux, 2007.

Worst Hard Time

Source of book image: http://www.bookswim.com/images_books/large/The_Worst_Hard_Time_The_Untold_Story_of_Those_Who_Survived_the_Great_American_Dust_Bowl-119185970830588.jpg

Timothy Egan’s book presents an engrossing picture of what life was like in a particular time and place in U.S. history. The time is the 1920s and 1930s, and the place is the lower “high” plains, mainly of Oklahoma and Texas. Egan is a master of telling us meaningful stories about the goals and struggles of particular people, so that we care when the land blows away from them, and they suffer.
You will need, however, to look elsewhere for a deep understanding of the causes of what happened. Egan mainly aims at describing, not explaining. And when he explains, he mainly rounds up the usual suspects one would expect a New York Times reporter to round up (e.g., Herbert Hoover).
(For deeper and more illuminating explanations of what was going on during the worst of the period, you’d do better by consulting Amity Shlaes’s The Forgotten Man.)

References to books mentioned above:
Egan, Timothy. The Worst Hard Time: The Untold Story of Those Who Survived the Great American Dust Bowl. Boston: Houghton Mifflin, 2006.
Shlaes, Amity. The Forgotten Man: A New History of the Great Depression. New York: HarperCollins, 2007.

EPA Mandates that Texas Keep Digging Ethanol Hole

“At the Reeve plant near Garden City, Kan., grain is made into ethanol, and the byproducts are fed to cattle in the adjacent feedlot.” Source of caption and photo: online version of the NYT article quoted and cited below.

Unfortunately, the EPA rejected Gov. Paley’s request, discussed in the article quoted below:

(p. C1) The ethanol industry, until recently a golden child that got favorable treatment from Washington, is facing a critical decision on its future.

Gov. Rick Perry of Texas is asking the Environmental Protection Agency to temporarily waive regulations requiring the oil industry to blend ever-increasing amounts of ethanol into gasoline. A decision is expected in the next few weeks.
Mr. Perry says the billions of bushels of corn being used to produce all that mandated ethanol would be better suited as livestock feed than as fuel.
Feed prices have soared in the last two years as fuel has begun competing with food for cropland.
“When you find yourself in a hole, you have to quit digging,” Mr. Perry said in an interview. “And we are in a hole.”
His request for an emergency waiver cutting the ethanol mandate to 4.5 billion gallons, from the 9 billion gallons required this year and the 10.5 billion required in 2009, is backed by a coalition of food, livestock and environmental groups.
Farmers and ethanol and other biofuel producers are lobbying to keep the existing mandates.

For the full story, see:
DAVID STREITFELD. “Uprising Against the Ethanol Mandate.” The New York Times (Weds., July 23, 2008): C1 & C5.

Rent Control as a Form of “Hatred of the Bourgeois”

New York City is one of the few remaining cities that has rent control laws (aka “rent stabilization”). Economists view such laws as a version of price ceilings, and they generally argue that such laws reduce the incentives to build and maintain housing.
Libertarian philosophers would add that the laws also violate fundamental rights of property.

(p. 25) At its core, the fight involves a law allowing landlords to displace rent-stabilized tenants if the landlords will use the space as their primary residence. The Economakis family has prevailed, thus far, on the principle that the law applies even to a building this large. But the tenants continue to press the notion that given the scope of the proposed home — which calls for seven bathrooms, a gym and a library — the owners are just trying to clear them out so they can sell the building off to become so many market-rate condos.

Mr. Economakis insists his family would never have subjected itself to years of argument — and tens of thousands in legal bills — if they did not want to live there. He acknowledged that it is a lot of space, but said that having the place to themselves is also a matter of privacy. He said that the family long ago offered, as a halfway measure, to let the tenants in the five rear apartments stay, along with a couple on the first floor, and said he would happily sign a promise to turn over the profits to the existing tenants if he sold within 20 years.
“We really believe that, as owners, we have a right to live in the building,” he said.
. . .
Last year, the tenants staged a rally outside the building and some 400 people showed up. Mostly, they lodge their silent protest daily on their doors. Mr. Pultz has his evil eye, while his first-floor neighbor, Laura Zambrano, has one poster giving the dictionary definition of the word hubris and another quoting Flaubert:
“Two things sustain me. Love of literature and hatred of the bourgeois.”

For the full story, see:

MARC SANTORA. “Landlord’s Dream Confronts Rent-Stabilized Lives.” The New York Times, Section 1 (Sun., June 15, 2008): 25.
(Note: ellipsis added.)

Perhaps the most eloquent critique of rent control was penned in the only paper that Chicago Nobel Prize winners Milton Friedman and George Stigler ever wrote together (published as a pamphlet):
Friedman, Milton, and George J. Stigler. “Roofs or Ceilings? The Current Housing Problem.” Irvington-on-Hudson, New York: Foundation for Economic Education, 1946.

Obama Has Doubts About Justice of Current ‘Affirmative Action’ Laws

“Barack Obama at Harvard, where he was the first black president of The Harvard Law Review.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 1) Mr. Obama, a Democrat, has continued to support race-based affirmative action, calling it “absolutely necessary” when he was a state senator in Illinois and criticizing the Supreme Court for curtailing it in his time in the United States Senate. But in his presidential campaign, he has unsettled some black supporters by focusing increasingly on class and suggesting that poor whites should at times be given preference over more privileged blacks.

His ruminations about shifting the balance between race and class in some affirmative action programs raise the possibility that, if elected in November, he might foster a deeper national (p. 16) conversation about an issue that has been fiercely debated for decades. He declined to comment for this article.
“We have to think about affirmative action and craft it in such a way where some of our children who are advantaged aren’t getting more favorable treatment than a poor white kid who has struggled more,” Mr. Obama said last week in a question-and-answer session at a convention of minority journalists in Chicago.
During a presidential debate in April, Mr. Obama said his two daughters, Malia, 10, and Sasha, 7, “who have had a pretty good deal” in life, should not benefit from affirmative action when they apply to college, particularly if they were competing for admission with poor white students.
. . .
Ward Connerly, a crusader against affirmative action, said he believed that Mr. Obama’s remarks would buoy support for his ballot initiatives in Arizona, Colorado and Nebraska in November that would ban preferential treatment on the basis of race, ethnicity and sex in government hiring and public education.
Last week, Mr. Obama’s Republican rival, Senator John McCain, announced his support for those measures. . . .
Mr. Obama opposes the ballot initiatives, saying they would derail efforts to break down barriers for women and members of minorities. But Mr. Connerly said Mr. Obama had already helped the cause. “He’s advanced the debate,” Mr. Connerly said. “He’s brought it to a new level.”
. . .
A federal judge once asked a friend of Mr. Obama’s whether he had been “elected on the merits” as law review president, Mr. Obama told The Journal of Blacks in Higher Education in 2001. He said the question came up again when he applied for a job as a professor at the University of Chicago Law School.
Mr. Obama has not described how he felt then. But as a state senator, he spoke with empathy about accomplished minority students at elite universities who sometimes lived “under a cloud they could not erase.”
Over the past few years, Mr. Obama has also voiced sympathy for whites who feel resentful of race-based affirmative action and questioned how long such programs need to continue.
Even as he argued that timetables for minority hiring may be necessary where there is evidence of systemic discrimination, he also warned in his second book, “The Audacity of Hope,” that “white guilt has largely exhausted itself in America.”
It was 2006 then, and Mr. Obama was a wealthy senator considering a bid for the presidency. He worried that race-based preferences, while necessary, might undermine efforts at building cross-racial coalitions.
Presaging his recent focus on class, Mr. Obama argued that whites were more likely to join blacks in supporting programs that were not racially based.
“An emphasis on universal, as opposed to race-specific programs isn’t just good policy,” Mr. Obama said in his book. “It’s good politics.”

For the full story, see:
RACHEL L. SWARNS. “Obama’s Path on Preferences, Race and Class .” The New York Times, Section 1 (Sun., August 3, 2008): 1 & 16.
(Note: ellipses added.)
(Note: the online version has minor differences with the print version; the online version is quoted here, except for the article title. The online article title was: “If Elected … Delicate Obama Path on Class and Race Preferences.” The ellipisis in the online title was in the original.)

Medicare Pays $110 for Walker that Wal-Mart Sells for $60

Source of table: online version of the NYT article quoted and cited below.

(p. C1) On Wal-Mart’s Web site, you can buy a walker for $59.92. It is called the Carex Explorer, and it’s a typical walker: a few feet high, with four metal poles extending to the ground. The Explorer is one of the walkers covered by Medicare.
But Medicare and its beneficiaries aren’t paying $59.92 for the Explorer or any similar walker. In fact, they’re not paying anything close to it. They are paying about $110.
. . .
(p. C5) In the abstract, fixing the health care system sounds perfectly unobjectionable: it’s about reducing costs (and then being able to cover the uninsured) by getting rid of inefficiency and waste. In reality, though, almost every bit of waste benefits someone.
Doctors who perform spinal fusion surgeries, despite decidedly mixed evidence that they’re effective, are making a nice living. Hospitals that order $1,000 diagnostic tests, even when a cheaper one would work just as well, are helping their bottom line. Medical equipment makers selling walkers for $110, while Wal-Mart sells them for $60, are fattening their profits.
The current fight to protect those profits is a microcosm of what you can expect to see if a larger effort to rein in health costs ever gets going. The defenders of the status quo won’t say that they are protecting themselves. Instead, they’ll use the same arguments that the medical equipment makers are using — that a change will destroy jobs, bankrupt small businesses and, above all, harm patients.
. . .
But this is a case in which the market can clearly do a better job than a government-mandated fee schedule. Just look at Wal-Mart’s Web site or, for that matter, the bids that Medicare has already received.
By standing in the way of this competition, Congress is really standing up for higher health care costs.

For the full commentary, see:
DAVID LEONHARDT. “ECONOMIC SCENE; High Medicare Costs, Courtesy of Congress.” The New York Times (Weds., June 25, 2008): C1 & C5.
(Note: ellipses added.)