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Food (travel) day [Jan. 31st, 2010|09:20 am]
Today I had an English style breakfast (eggs, beans, mushroom, toast etc.,) at my hotel. Later,
lunch was vege dumplings and buns at the Sogo on the corner of Zhongxiao and Fuxing in downtown Taipei. Early dinner of spaghetti on an airplane. Then a night time snack of appam (a small apple dosa) and cashew pakoras at a hole in the wall restaurant in the little India section of Singapore.
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my little town [May. 30th, 2009|06:43 pm]
When people ask me where I grew up, I usually say New York City. The actual part of NY is named Glendale, but most don't know where Glendale NY is. So to people familiar with New York, I usually say something like, "You know when you drive into Queens and see miles of cemeteries? That's where I grew up."

I just discovered that Google knows I'm not joking. Type "Glendale, NY" into Google maps, and see where the marker goes:
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Economics vs Finance [Mar. 9th, 2009|09:29 pm]
It seems to me that one of the main sources of the current crisis is a fundamental flaw in finance theory, relative to economic theory.

In most economic models, prices are derived in terms of underlying fundamentals - cost of production, consumer utility, etc.,. This includes the most basic of all economic models, the intersection of supply and demand curves.

In contrast, many (most?) successful and widely used models in finance express the price (value) of financial assets in terms of other financial assets. The CAPM and APT show how to fairly price assets relative to the value of the total market or to aggregate factors. The Black-Scholes formula shows how to price options relative to the price of the underlying assets. Tools like these were applied and generalized to construct and price ever more exotic derivatives, like the now toxic collateralized debt obligations.

The problem with these financial models is that they don't identify or rule out massive, systemic bubbles. If a stock is not mispriced according the CAPM (has a zero alpha), and the price of (or more precisely the returns associated with) every stock including that one increases 1,000%, or 10,000% then the CAPM will still say the stock is correctly priced, because the CAPM only judges the return on an asset relative to the returns on a basket of other assets.

In exactly this way, the financial models used to construct the infamous mortgage backed securities appeared to work perfectly (until the real world intervened), because no matter how overpriced actual houses became in any real economic sense, the models said the securities were appropriately priced relative to the (insane) housing prices.

This suggests to me that what the next generation of financial models require is some economics, that is, a deep way to incorporate economic fundamentals, to avoid (or in the case of wall street, to profit by exploiting) not just relative mispricing, but absolute mispricing of financial assets.
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I've got a fan somewhere [Mar. 6th, 2009|10:58 pm]
Cool - A colleague just informed me that I've got a wikipedia entry:
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Globe again. [Dec. 4th, 2008|10:28 pm]
The Boston Globe newspaper is apparently fond of me. See
Most of the over a dozen other bell ringers who were there would probably have been better choices.
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brief election thought [Nov. 5th, 2008|12:55 pm]
I hope the generation will soon be born that can't really understand why yesterday was historic.
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blame [Sep. 30th, 2008|06:30 am]
It has become popular, at least among republicans and libertarians, to blame the subprime mess on government policies and regulations that encouraged homeownership and subprime mortgages. But this argument does not explain the timing of the financial meltdown. Policies to encourage low income mortgages have existed for decades. Fannie Mae (and its implicit moral hazard of gov't backing) was created in 1938.

One could argue that regulations encouraging mortgage lending helped create the problem, but it can equally be argued that deregulation (e.g., relaxing the regulatory oversight and debt/equity requirements of investment banks) exacerbated the problem by allowing the bubble to grow much longer and larger before bursting.

I'm not an expert in this area, but it appears to me that what was new during the recent bubble years was not government policies or regulations encouraging lending, but rather the securitization of those mortgages. Encouraged by gov't homeownership policy, liar loans could have been written for decades. But they only actually started to be sold in a big way when loans began being resold in security bundles.

The real question to be asked is why did the secondary mortgage market (both bond rating agencies and the buyers of mortgage backed bonds) misrate and misprice these mortgage based securities so spectacularly? The problem would appear to be a market failure.
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bailout thoughts [Sep. 23rd, 2008|09:48 pm]
While I do know some economics, I'm not a macro or finance expert, and no one reads this blog anyway, but I still can't resist making a suggestion regarding the mortgage mess bailout: To minimize the ultimate cost to taxpayers, the government should demand equity shares from everyone it helps. In particular I would propose that:

1. Any company that sells its bad debt to the government must also give the gov't stock in the company. This essentially takes money away from the bank's owners and gives it to the taxpayers. The government sells the stock in the future for a profit if/when the bank recovers, thereby recouping at least some of the losses from the bad debt. It has been argued that this would interfere with quality of debt auctions by reducing the number of participants, but this won't matter if, as is currently proposed, debt will be priced based on the quality of the underlying mortgages rather than by bidding.

2. Homeowners who can't pay their mortgage be allowed to appeal to the government to refinance the mortgage at more favorable (fixed) rates, in return for giving the gov't something like a 10% share ownership in the house. When the homeowner sells the house in the future, the government gets 10% of the sale price, again recouping in the future at least some and perhaps all of the costs it incurs by rewriting the terms of the mortgage. The now gov't owned Fannie Mae could administer this program.
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costs in perspective [Sep. 18th, 2008|08:58 am]
Are the costs of the current financial crises unprecedented? No. The US gov't has now spent about the same amount of money in bailouts (fannie, freddy, bear sterns, and AIG) as it spent cleaning up the savings and loan mess in the previous era of financial deregulation. It has also been about the same amount as the cost of one year of the Iraq war.
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LHC [Sep. 10th, 2008|03:32 pm]
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