Flunking the professor

Long ago, I was an economics major. I was good enough at it to be asked to participate in the departmental honors program. But I turned away from it for several reasons. One of them came back to me with a vengeance when I read, via Sully, how Harvard econ Prof Greg Mankiw argues against the push for warrants in the bailout:

This is essentially the assertion made in David Leonhart's column in the NY Times on Wednesday. And it again illustrates that we would all be better off if high schools taught the Modigliani-Miller theorem. MM implies that the price of the asset (again,assuming the auction gets it right) will adjust to offset the value of any warrants Treasury receives. In this case of a reverse auction, imagine that the price is set at $10. If Treasury instead demands a warrant for future gains of some sort, then the price will rise in the expected amount of the warrant -- say that's $2. Then the price Treasury pays for the asset will be $12. Some people might prefer to get $12 in cash and give up a warrant worth $2 in expected value. Fine, that's a choice to be made. But the assertion that somehow warrants are needed is simply wrong.

Now I didn't study the Modigliani-Miller theorem. But I knew, as soon as I read that passage, that Mankiw was wrong, and I knew why. And what I knew I can teach you in two minutes, after which you too can slam 90% of "markets are magic" economic claptrap.

So what is the Modigliani-Miller theorem? I wandered over to Wikipedia, and read the following.

The basic theorem states that, in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed.^[1] It does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. Therefore, the Modigliani-Miller theorem is also often called the capital structure irrelevance principle.

Everything you need is in the first sentence, and you don't need to even understand what follows. This theory, like 99% of economic theory, assumes a state of the world that, in the immortal words of one of my economics profs, "is a special case." This magic theory assumes:

1. No taxes
2. No bankruptcy
3. No information asymmetries
4. An efficient market

See the problem yet?

Krugman:

So now the whole rationale for the plan is “price discovery”: we’re going to throw lots of taxpayer funds into the pot because that will let us find the true values of troubled assets, which are higher than the fire sale prices out there, and so balance sheet will improve, confidence will return, etc, etc..

Does that sound to you like information symmetry?

Krugman:

...mortgage-related assets are currently being sold at “fire-sale” prices, which don’t reflect their true, “hold to maturity” value; we’re going to pay true value — and that will make everyone’s balance sheet look better and restore confidence to the markets.

As I said, this is really a giant version of the slap-in-the-face theory: markets are getting hysterical, and the feds can calm them down by buying when everyone else is selling.

Does that sound to you like an efficient market?

Anbody seen a business deal lately that didn't have tax implications (most are DRIVEN by the tax impacts)? And don't get me started on the bankruptcy aspect, which is what got us here in the first place.

So, lessee.... that's at least two, and potentially four, out of four logical predicates violated. The whole reason we are in this mess is that the market failed. The government is stepping in because there are no other buyers -- a textbook non-efficient market situation. And our good professor wants to point to a theory that imposes very strict requirements for market dynamics in order to apply.

And THAT'S why I didn't become an economist. Because everyone carefully states those assumptions, but then ignores them in practice -- because if economists limit themselves to applying these theories to contexts where the assumptions are not violated, well, they don't get to talk so much.

What oughta be taught in high school, Professor, is that textbook economics tends not to map onto the real world so well.

Ooh yeah, I like...

John Cole susses out the real reason McSame is heading to DC:

The real reason is probably twofold. First, he is getting pummeled in the polls.

Second, McCain’s entire campaign is composed of lobbyists, and they need to be in Washington to get their cut of the $700 billion. They can’t miss this shot at the trough.

This is the Haley's Comet of Congressional spending -- I could retire on the rounding errors to a single day's interest on $700,000,000,000. No lobbyist with a pulse wants to miss out on catching a few crumbs now. 

Is it too late to register?

The Joy of Misanthropy

Taibbi:

"Here's the thing about Americans. You can send their kids off by the thousands to get their balls blown off in foreign lands for no reason at all, saddle them with billions in debt year after congressional year while they spend their winters cheerfully watching game shows and football, pull the rug out from under their mortgages, and leave them living off their credit cards and their Wal-Mart salaries while you move their jobs to China and Bangalore.

"And none of it matters, so long as you remember a few months before Election Day to offer them a two-bit caricature culled from some cutting-room-floor episode of Roseanne as part of your presidential ticket. And if she's a good enough likeness of a loudmouthed Middle American archetype, as Sarah Palin is, John Q. Public will drop his giant sized bag of Doritos in gratitude, wipe the sizzlin' picante dust from his lips and rush to the booth to vote for her. Not because it makes sense, or because it has a chance of improving his life or anyone else's, but simply because it appeals to the low-humming narcissism that substitutes for his personality, because that image on TV reminds him of the mean brainless slob he sees in the mirror every morning.

"Sarah Palin is a symbol of everything that is wrong with the modern United States. As a representative of our political system, she's a new low in reptilian villainy, the ultimate cynical masterwork of puppeteers like Karl Rove. But more than that, she is a horrifying symbol of how little we ask for in return for the total surrender of our political power. Not only is Sarah Palin a fraud, she's the tawdriest, most half-assed fraud imaginable, 20 floors below the lowest common denominator, a character too dumb even for daytime TV – and this country is going to eat her up, cheering every step of the way. All because most Americans no longer have the energy to do anything but lie back and allow ourselves to be jacked off by the calculating thieves who run this grasping consumer paradise we call a nation."

Hey, Nineteen

Among Republicans, 46% approve of the way Bush is handling the economy and 48% disapprove. Among Democrats, 97% disapprove of the way Bush is handling the economy and 2% approve. Among independents, 8% approve and 87% disapprove of the way Bush is handling the economy.

Bush’s overall approval rating fell to 19 percent, from 30 percent last month, with 76 percent disapproving.

Sent to my elected representatives

No.

Way.

No way to a $700B blank check to this Administration. The taxpayers may in fact have to pick up the tab for the looting of the financial system. But not for free. Not without punishing the perps. Not without accountability for the funds. And not without reinstating the regulatory framework that effectively prevented such outrages for 50 years until the "Reagan Revolution" put us so far off course.

Even more important than shoring up the "financial system" is putting a stake through the heart of laissez fare.

More like this, please...

And perhaps with a side of:

Math, Alaska style

A few facts worth keeping in mind when the McSame campaign talks about Sarah Palin's awesomnety as governor:

With no statewide income or sales tax, Alaska funds about 90 percent of the state budget from royalties and taxes on oil producers. Soaring oil prices and a higher windfall oil profits tax - an increase pushed through by Palin, now the Republican vice presidential nominee - have state coffers overflowing with petrodollars. The Alaska oil industry calculates that its annual payments to the state doubled in a single year to $10.2 billion.

$10.2B may not sound like much compared to the $2.7 trillion national budget, or even California's $100 billion, but Alaska has fewer than 700,000 people -- roughly the population of San Francisco.

So here is how that math plays out: oil revenues alone translate into more than $14,000 per Alaskan. Now add to that the net inflow of federal spending in Alaska (for the last seven years with data, Alaska has been #1 in per capita federal largesse) of more than $8000. (Alaskans pay on average $5000 into Washington, but get back $13,000.) So that's a net of 22 large for every man, woman and child flowing into the state -- money they get for (a) having a pulse and (b) pulling the lever for "Series of Tubes" Stevens every six years.

Remember the saying about how Dubya was born on third base and thinks he hit a triple? How hard is it to govern when nearly half of the median US per capita income appears from outside the state as if by magic every year?

Winning hearts and minds (hearts on that pile; brains over here)

How we commemorate 9/11: by committing atrocities on innocents, and using Oliver North as a character witness in our defense.

via Greenwald.

Sully

When the human pretzel finally untwists away from his crushes (or at least toward a less insane crush), he can be impressively eloquent.

They think we're stupid. They're right.

'Lies' may not matter in U.S. election

"The more The New York Times and The Washington Post go after Sarah Palin, the better off she is, because there's a bigger truth out there and the bigger truths are she's new, she's popular in Alaska and she is an insurgent," John Feehery, a Republican strategist, told the newspaper. "As long as those are out there, these little facts don't really matter."

Colbert's "truthiness" bit isn't looking so funny about now.

Small town, indeed

Alaskans Speak (In A Frightened Whisper): Palin Is “Racist, Sexist, Vindictive, And Mean”

“So Sambo beat the bitch!”

This is how Republican Vice Presidential nominee Sarah Palin described Barack Obama’s win over Hillary Clinton to political colleagues in a restaurant a few days after Obama locked up the Democratic Party presidential nomination.

According to Lucille, the waitress serving her table at the time and who asked that her last name not be used, Gov. Palin was eating lunch with five or six people when the subject of the Democrat’s primary battle came up. The governor, seemingly not caring that people at nearby tables would likely hear her, uttered the slur and then laughed loudly as her meal mates joined in appreciatively.

Thus the Blue Meme Dictionary defines "elitist" as "being so uppity as to avoid the use of racist epithets."

Meet the new boss

Key Alaska allies of John McCain are trying to derail a politically charged investigation into Gov. Sarah Palin's firing of her public safety commissioner in order to prevent a so-called "October surprise" that would produce embarrassing information about the vice presidential candidate on the eve of the election.

In a move endorsed by the McCain campaign Friday, John Coghill, the GOP chairman of the state House Rules Committee, wrote a letter seeking a meeting of Alaska's bipartisan Legislative Council in order to remove the Democratic state senator in charge of the so-called "troopergate" investigation.

Coghill charged that the senator, Hollis French, had "politicized" the probe by making a number of public comments in recent days, including telling ABC News that Palin had a "credibility problem" and that the investigation into the firing of public safety commissioner Walter Monegan was "likely to be damaging to the administration" and could be an "October surprise." Wrote Coghill: "The investigation appears to be lacking in fairness, neutrality and due process."

Because the Republicans would NEVER pursue politically motivated investigations...

Call me lazy, but I am just going to point to what I wrote almost 4 years ago:

One of the basic questions about how we make our way through the world is, “What do you do when belief and data collide?” A core tenet of post-Enlightenment Western society is that a rational person will drop a hypothesis that is contradicted by good empirical evidence. It is the scientific method enshrined by Descartes and Bacon, and, for good or ill, it has given us every scrap of technology and science. But we see evidence in every corner that this is not how people live their lives.

Bizarre hybrids like “Creation Science” notwithstanding, fundamentalist religion rejects reason. Reason embraces the possibility of error; absolutist religion must deny it. By definition, Fundamentalists maintain belief by rejecting the data.

For the hard core, no amount of corruption or immoral behavior will change votes -- they will reject all engative data about their new sweetheart/savior. (Think about the type of mental gymnastics required for adults to ecstatically embrace a leader they had not heard of a week before.) But every drip of bad news slices off a few wavering souls who have not completely abandoned reason. So of course McCain will seek to shut off the bad news at the source.

I hope Obama wins anyway. But I do not envy him the messes he will inherit, or the hornet's nest of ignorance that will stand in the way of every effort to repair the damage they have done.

The genius of the Palin pick

I'm not talking about the winger political angle. I'm talking about the less obvious advantages of putting a Pandora's Box of a candidate on the ticket.

Maybe they didn't vet her because they were lazy or stupid or desperate. But think about the situation from the perspective of the mouth-breathing base -- the folks who actually believe that the press has an overwhelming liberal bias. By picking someone completely off the radar, McCain has set up a very useful game:

1) Press finds abundance of dirt on Palin;

2) Republican noise machine cranks up the liberal media charges;

3) Obedient sheeple repeat liberal media shibboleth and tune out even the most egregious revelations about their new sweetheart.

Pretty creative, actually.

Update: Oh, and of course there is step 4: use the hostility of the media as an excuse to hide her behind stagecraft and teleprompters and prohibit all unscripted press availability.

America's Next Top Vice President!

I think that one of the more insightful pieces I wrote for Raw Story was the one called Unreality TV. The thesis:

I believe the primary reason Joe Sixpack watches [reality TV] is that he thereby vicariously lives his own fantasies of emerging as a butterfly from the chrysalis of his own glamourless life. Where past generations understood that such transformation required hard work (or, as in the case of slackers like our President, considerable skill in the choosing of one’s parents), today’s Americans are bombarded with evidence that the media deux ex machina can obviate the need for such inconvenience.

This new, passive myth has filled the vacuum left by the death of the old: the Horatio Alger story. Americans have always believed, in a way Europeans have not, in class mobility. The world’s tired, poor, huddled masses head for Lady Liberty, work hard, and rise into the middle class or even higher. As a result, America has thought itself to be a less class-based society, and its social policies have done less to favor the poor than those of most European nations. In the American mythos, poverty was largely a consequence of personal failure.
...
And so a populace trained by its religion to believe in miracles, magic and divine intervention has welcomed the morphing of the Horatio Alger story into something far more injurious to society: rather than look to their own efforts and resources to better their lives, the proles hope against passive hope that they will be chosen to play the television lottery that transforms ugly ducklings into swans, poor into rich, and obscure into famous. The result is arguably more effective in inoculating Joe Sixpack against economic class consciousness than a lifetime of hypocritical scoldings from Pat Robertson and James Dobson could ever be.

The hallmark of this new crop of gentry-in-waiting is an unprecedented dissociation of preferences from realistic self-interest. To an unprecedented degree, these tele-sheep tend to favor not the interests of the economic class to which they really belong (and which the odds are overwhelmingly that they will never leave), but the interests of the class living in the style to which they expect to become accustomed. The world thus no longer consists of rich and poor: there is a third category, which should perhaps be known as the “rich-any-day-now.”

I hadn't thought about it much in a while, so I missed the implications of Dr. Bloor's comment yesterday. But then I saw this at Mother Jones (via Digby) online:

...Palin's omnipresence isn't about John McCain or Barack Obama, or even this week's RNC. It's not about her experience or stance on issues. It's about the "Pop" American Dream.

The old American Dream is dying. Rampant economic inequality makes the cost of working hard to achieve prohibitive. In a culture where more people vote for the next American Idol than for the next president, no wonder Sarah Palin is the top story: She defines the new American Dream, where leaping to the top against all odds is the end goal in itself. Of course there are voters appalled that someone 'like her' can be a 'heartbeat away from the presidency.' But there are also plenty of voters delighted that someone 'like her' has a shot at the ultimate American Dream—a spot in the White House.

Exactly. What Sarah Palin signifies is that some significant slice of the population has so internalized this unreality that they don't just want to live it, they want to use it to choose a Vice President.

If McCain's numbers bump significantly in the next few days, I have a feeling I am going to start losing sleep.

Karma overload

Remember how, almost exactly a month ago, the conservo-punditocracy was so anxious to show us how credible and mainstream the National Enquirer is (when it happened to be exposing the John Edwards affair).




Heh.

And remember how, a month or so before that we were told that Obama's pastor's sermons were relevant?

Double heh.

Ready, fire. aim

Or, in this case, select, nominate, vet.

At this rate, Sarah Palin is going to offer up more laughs than Michael ever did, and give Obama a month of Christmases.

Heh.

Update: The immortal Billmon goes there, too. And a dKos poll asks whether Palin will last as the nominee until election day. I think that, barring an Edwin Edwards-class blowup, she is there for the duration. In Rove World, mistakes are not mistakes if you don't admit them. I think they will conitnue to pretend all is well right up to November 5th, when the long knives will finally come out in earnest. (Remember 2006, when they insisted they thought they would retain control of Congress?)

Questions I'd ask the Maverick

1. Can you explain why Sarah Palin is better qualified to be President than Mitt Romney?

2. Can you explain why Sarah Palin is better qualified to be President than Rudy Guiliani?

3. Can you explain why Sarah Palin is better qualified to be President than Mike Huckabee?

4. Can you explain why Sarah Palin is better qualified to be President than Joe Lieberman?

5. Is Sarah Palin is better qualified to be President than George W. Bush was 2000? Why?

6. How many hours did you personally spend meeting with Palin prior to her selection?

7. How many hours did you personally spend talking on the telephone with Palin prior to her selection?

8. Did you personally know that her unwed teenage daughter was pregnant prior to the selection?

9. Do you think that abstinence-only sex ed is appropriate? Effective?

10. Do you think the government should have any role in scolding or punishing teens who have pre-marital sex, or their parents for not preventing it?

11. Do you think it is helpful for a Senator from a landlocked state to visit Louisiana during a hurricane?

12. Do you think creationism should be taught in public schools?

(more later)