Archive for April, 2009

Every day or two I receive spam email at my work address.  I often find the subject line of these emails funny, because they don’t make sense.  I mean, I know what they are trying to say, but the English isn’t quite right.  Here are some recent examples (yes, I’ve been collecting them):

  • The night of your couple will never be a routine! It will be like an avalanche tearing down a mountain!
  • Nights will be longer than they should be.
  • Shy of your personal life?
  • You will be first quite scared of your own ability to break all the loving limits that seemed fantastic before.
  • Amaze the girls around. Win your victory in bed
  • 2,5 half inches for 2 month, incredibly, but true!
  • Have no cold this winter. Make your woman tremble with fire!
  • Do with you gf what millions of man do everyday.
  • Give your action this strength and girls will bend their knees.

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Paul Krugman did a great job of summarizing the paper that I wrote about ealier  (link):

Before 1930, banking was an exciting industry featuring a number of larger-than-life figures, who built giant financial empires (some of which later turned out to have been based on fraud). This highflying finance sector presided over a rapid increase in debt: Household debt as a percentage of G.D.P. almost doubled between World War I and 1929.

During this first era of high finance, bankers were, on average, paid much more than their counterparts in other industries. But finance lost its glamour when the banking system collapsed during the Great Depression.


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I read this interesting paper “Wages and human capital in the US financial industry: 1909-2006” (linkto abstract; email me if you want the pdf). Anyway, one part of the paper that is particularly relevant to the current financial crisis is the part on deregulation of the financial industry.  Below is a graph that appeared in the paper (I added the arrows and notes): 

nber_graph2The green curve is an index of deregulation (larger values mean more regulation).   The red curve is relative wage in finance versus nonfarm private sector.   Hopefully you can see from notes on the graph that there were a series of regulatory measures taken during or after the late 1920s.  Most of these were repealed in the 80s and 90s. Specifically:

  • Branching:  McFadden Act of 1927 prevented branching of nationally chartered banks.  By 1999, all states had removed branching restrictions.
  • Separation of commercial and investment banks.  Glass-Steagall act fully enacted by 1934.  Relaxed in 1987, 1989, 1997 and repealed in 1999 (Gramm-Leach-Bliley). 
  • Interest rate celings. Introduced in 1933 and removed after 1980.
  • Separation of banks and insurance companies.  Bank Holding Act of 1956. Repealed in 1999.

It seems to me that the largest contributors to our current situation occurred in 1999.   Although deregulation is more of a Republican philosophy, and Phil Gramm pushed hard to repeal Glass-Steagal, we should not let Democrats off the hook here.  Clinton was President at the time, and many Democrats voted for it.  Recall, for example, what Larry Summers said (link):

”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. ”This historic legislation will better enable American companies to compete in the new economy.”

Before I continue with Summers, I need to include this great quote by Phil Gramm:

Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.

Even back then, Republicans were using the word ‘freedom’ as a tool to persuade people to support legislation that would make their rich buddies richer. 

But let’s get back to Larry Summers.  We recently learned that:

Lawrence H. Summers, one of President Obama’s top economic advisers, collected roughly $5.2 million in compensation from hedge fund D.E. Shaw over the past year and was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations.

Glenn Greenwald has a nice summary of this whole situation:

Just think about how this works.  People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting.  When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal.  Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government.  Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced.  This corruption is so tawdry and transparent — and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity — that it is mystifying that it is not provoking more mass public rage.

It is so blatant, so transparent, that it is almost surprising that they can get away with it.  The wealthy are calling the shots, and they’re not really hiding that fact.  We don’t have a major political that seems willing to stop this (if they did, they wouldn’t be a major party very long).  Even worse, the people that contributed to the problems seem to be the ones put in charge of fixing it.  I guess I’ll just leave with this quote, that seems relevant. 

I do suppose, tho, as we keep making adjustments to the tide, we can call it experience even if we are not sure that it is wisdom.  –Charles Bukowski

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Here is a slice a pizza from a restaurant in central PA.  Notice the white color of the cheese.  That’s because there is so much of it.  You can’t even really see any sauce under the cheese.  Think of this as a slice of semi-melted cheese.  This is bad pizza.

bad pizza


Now, here is pizza from Delorenzo’s on Hamilton street in Trenton, NJ.  Notice the color of the cheese and how you can see the sauce.  The crust is thin and well done.  There is the right balance of crust, cheese and sauce.  This is great pizza. 



great pizza


good pizza slice

great pizza slice

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I think it is important to expose kids to a lot of different ideas.  If you are Christian, you shouldn’t prevent your kids from hearing about other religions.  Similarly, as an atheist, I want my kids to be exposed to many different beliefs, with as little prejudice as possible. I don’t presume to be right.  I want them to make up their own mind.

There is another reason to expose your kids to different religious ideas.  Teenage volunerability:

4. To avoid the “teen epiphany.” Here’s the big one. Struggles with identity, confidence, and countless other issues are a given part of the teen years. Sometimes these struggles generate a genuine personal crisis, at which point religious peers often pose a single question: “Don’t you know about Jesus?” If your child says, “No,” the peer will come back incredulously with, “YOU don’t know JESUS? Omigosh, Jesus is The Answer!” Boom, we have an emotional hijacking. And such hijackings don’t end up in moderate Methodism. This is the moment when nonreligious teens fly all the way across the spectrum to evangelical fundamentalism.

A little knowledge about religion allows the teen to say, “Yeah, I know about Jesus”—and to know that reliable answers to personal problems are better found elsewhere.

Christian ‘youth groups’ are a scary thing.  They attempt to get to kids when they are most vulnerable.  While I want my kids to be exposed to different ideas, I don’t want that first exposure to come from some cult trying to recruit them.

There is still the question of how much exposure we should give to ideas that we don’t agree with.  Robin Hanson asks

So is the principle here that parents should go beyond their simple judgment when choosing to what to expose our kids?  For example, should we let polygamists argue for their way of life directly to our kids?  Should we let pedophiles argue their case directly to our kids?  Or is the principle here that we know we are right and those other parents are wrong, obligating us to make those parents give their kids what we judge best?

We should distinguish here between exposing children to facts about what some people believe and to exposing them to people who are going to try to persuade them.  I want my kids to know what different groups believe and why they believe it.  I don’t necessarily want them to hear the sales pitch directly, though.  At least, not until they have developed their skills as judges of evidence.

I want my children to be well trained as rational thinkers.  I imagine exercises where they have to find the flaw in an argument. Or maybe we could play the Paranoid Debating game.   I’d like them to know about many of the different biases that we are all susceptible to.

I want my children to always be open to the possibility that they are wrong.  No matter what you believe, there are people out there who: (a) are  smarter and more experienced than you; (b) have a belief that contradicts your own; and (c) are just as confident that they are right as you are.  If you keep that in mind, you’ll be more open to different ideas.  It also helps if you think of belief as probability that can be updated, not as a binary fixed state.

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I’ve been reading some of the stories on Deep Capture regarding our financial system, naked short selling and the mainstream financial media.  Naked short selling is described here:

You and I enter a stock trade. You buy a share of stock from me.  You hand over your money, and I hand over the share of stock. That is called, “settlement.”

It may surprise you to learn that there are loopholes in our nation’s regulations that permit some people, when it comes time to settle, to hand over nothing but an IOU. 

…The general idea is that, if someone sells shares it turns out he cannot deliver, he can create these IOU’s and send them on as though they were real shares, giving himself time to clean up whatever error he is experiencing, and sending the real shares a couple days later.

There is no system in place to alert you to the fact that you sent me your money and received nothing but an IOU. The system treats these IOU’s just as though they were real shares. Your brokerage statement will say that you got shares, even though I never sent anything but an IOU. You can sell them, and that IOU will pass on through the system into someone else’s account.

The problem is, suppose I (having mastered these loopholes) start using the system’s “forgiveness” strategically? Suppose I find a company that is likely to need capital to expand, or simply survive, in the near future? They plan on raising that capital by issuing shares of stock to the public…  Imagine that I target one of them, and deliberately go out selling that company’s shares into the marketplace, yet instead of delivering stock, I deliver nothing but IOU’s. I flood the market with them, always standing ready to sell more than anyone wants to buy. My IOU’s are anything but temporary: they drift around in the market for weeks, months, and eventually years. If anyone gets mad and tells me that I have to deliver real shares against one of the IOU’s I sold, I say, “Sure, I’ll deliver shares against that IOU,” but what I deliver is … just another IOU. Eventually I flood the market with so many IOU’s that people end up reselling them, and they go and on until there are more share-IOU’s bouncing around than there are actual shares.

If…I choose a tiny company, and I generate more IOU’s than there are shares of stock in the company, then the market in those shares will crack… Once cracked, the stock becomes next-to-worthless. And if I manage to issue enough IOU’s in my target company’s stock that it cracks and becomes near-worthless, they become barely an obligation at all. Who cares about millions of IOU’s, if those IOU’s are for something with infinitesimal value?

I walk away with my winnings. The company, however, is in a fix: they planned on issuing stock to raise capital, but now their stock price has been destroyed through my manipulations, and they cannot raise capital. Maybe they run out of funds and disappear, or maybe they go into hibernation mode in order to nurse what capital they have.

A big part of the story was the role of the media.  If I weren’t generally so uninspired by the competence of the media, I might be surprised at how easily they were manipulated.

One person that was particularly emphasized in the research was CNBC’s Jim Cramer (link):

As was becoming my custom, at the end of the quarter I wrote a lengthy shareholder letter explaining what was going on in the business, where my colleagues were doing well, where I was screwing up, and projects the company needed to accomplish in the future. In that letter I mentioned, “Gross profit,” a term about as common in the discussion of financial statements as, I’d estimate, the term “wide receiver” is in discussions of football (in the case of my letter, 2.5% of the letter concerned gross profit).

The day our earnings press release appeared (with my letter embedded in it), Larry Kudlow & Jim Cramer of CNBC invited me to appear on their TV show. I had been on Kudlow & Cramer once or twice by then and they seemed like smart, decent fellows, so I agreed, and drove to the studio in Salt Lake City from whence one does remote interviews. This interview was different from our prior ones, however, in that they attacked me aggresively. The basis of their attack was my use of the mysterious phrase, “Gross profit,” in my discussion of Overstock’s financials. Cramer in particular berated me as if he had caught me in some heinous incantation. They gave me a brief moment to respond, then quickly signed off.

As I drove away from the studio feeling somewhat mystified, my cell phone rang. The caller was a man from deep within Wall Street “smart money” circles, someone known widely within the hedge fund community, who has been friendly to me, and even has looked out for me when he could. He speaks in charming if profane emphatics.

He said, “You know what just happened, don’t you?”

“What do you mean?” I asked.

You want to know what just happened? I’ll f—ing tellyou what just happened. Here’s how it works. Those two guys are part of the short-seller community. Cramer especially is part of this ring of hard-charging short-sellers on Wall Street. I’ll bet you anything that one of his buddies is short your company. Whoever it is saw your earnings release, saw you blew your numbers away, got on the phone to Cramer and said, ‘Don’t you dare let this thing start moving. Don’t you f—ing darelet this move!’ So Cramer goes on TV and screams that nonsense at you. I bet my last f—ing dollar that’s what happened.”

Cramer pretty much admitted to his crimes here.  In his book, he also admitted to talking up stocks he’s invested in.

Anyway, I’ve been reading this stuff, and was pleasantly surprised to see Jon Stewart’s interview with him.  See here and here.


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