Weekly Cartoon (Via Dilbert):
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The rule-of-thumb definition for a recession is two consecutive quarters of declining production,…
Or as the L.A. Clippers define it… Halftime.
-Via Jay Leno
Miguel’s Weekly Favorites
Jared Diamond: Will Big Business Save the Earth? – Via NYT – There is a widespread view, particularly among environmentalists and liberals, that big businesses are environmentally destructive, greedy, evil and driven by short-term profits. I know — because I used to share that view. But today I have more nuanced feelings. Over the years I’ve joined the boards of two environmental groups, the World Wildlife Fund and Conservation International, serving alongside many business executives.[/url]
[url=http://rajivsethi.blogspot.com/2009/12/economics-of-hyman-minsky.html]The Economics of Hyman Minsky – Via Rajiv Sethi – Minsky’s theoretical framework combines a cash-flow approach to investment with a theory of financial instability. Investment is motivated by the expectation that it will yield a stream of cash flows sufficient to cover contractual debt obligations as they come due, while allowing for adequate margins of safety. During stable expansions, profits accrue disproportionately to firms with the most aggressive financial practices, resulting in an erosion of margins of safety. This raises the probability that a major default will trigger a widespread crisis. When a crisis does eventually occur, its most devastating impact is on the highly indebted firms that prospered during the expansion. Balance sheets are purged of debt, margins of safety rise, and the stage is set for the process to begin anew. From this perspective, expectations of financial tranquility are self-falsifying. Stability, as Minsky liked to put it, is itself destabilizing. The real effects of a crisis depend on the size of government and the role of the central bank. Large countercyclical budget deficits can sustain profit flows even when investment collapses, preventing a crisis from resulting in a debt-deflation. Similarly, lender-of-last-resort interventions can keep a crisis from spreading beyond its point of origin.
Animal Spirits[b] By George Akerloff & Robert Shiller[/b] - Via Foreign Policy – The human mind is built to think in terms of narratives, of se quences of events with an internal logic and dynamic that appear as a unified whole. In turn, much of human motivation comes from living through a story of our lives, a story that we tell to ourselves and that creates a framework for motivation. Life could be just “one damn thing after another” if it weren’t for such stories.The same is true for con fidence in a nation, a company, or an institution. Great leaders are first and foremost creators of stories.
Exclusive Features (The Must Reads):
How the Tricks That Crashed Wall Street Can Save the World - Via FP – As countries including the United States reform their financial sectors, they should look inside the banks themselves for the tools for the fix.
Why a cap-and-trade system can be bad for your health - Via Vox.EU- The purpose of a cap-and-trade system is to help in the fight against global climate change. This column warns that a unilateral approach could increase global emissions by shifting production to more carbon-intensive methods abroad. Acting alone, the EU’s Emission Trading Scheme may be doing more harm than good.
Spending time in nature changes our values – Via Scientific American – But a recent article by researchers at the University of Rochester shows that experiences with nature can affect more than our mood. In a series of studies, Netta Weinstein, Andrew Przybylski, and Richard Ryan, University of Rochester, show that exposure to nature can affect our priorities and alter what we think is important in life. In short, we become less self-focused and more other-focused. Our value priorities shift from personal gain, to a broader focus on community and connection with others.[/url]
[url=http://mindblog.dericbownds.net/2009/11/watching-our-brains-judge-gain-versus.html]Watching our brains judge gain versus pain – Via Deric Bownds - The maxim “no pain, no gain” summarizes scenarios in which an action leading to reward also entails a cost. Although we know a substantial amount about how the brain represents pain and reward separately, we know little about how they are integrated during goal-directed behavior. Two theoretical models might account for the integration of reward and pain. An additive model specifies that the disutility of costs is summed linearly with the utility of benefits, whereas an interactive model suggests that cost and benefit utilities interact so that the sensitivity to benefits is attenuated as costs become increasingly aversive. Using a novel task that required integration of physical pain and monetary reward, we examined the mechanism underlying cost–benefit integration in humans. We provide evidence in support of an interactive model in behavioral choice. Using functional neuroimaging, we identify a neural signature for this interaction such that, when the consequences of actions embody a mixture of reward and pain, there is an attenuation of a predictive reward signal in both ventral anterior cingulate cortex and ventral striatum. We conclude that these regions subserve integration of action costs and benefits in humans, a finding that suggests a cross-species similarity in neural substrates that implement this function and illuminates mechanisms that underlie altered decision making under aversive conditions.
Loneliness Can Be Contagious - Via Science Daily – Loneliness, like a bad cold, can spread among groups of people, research at the University of Chicago, the University of California-San Diego and Harvard shows.
The commons, and the culture of climate change - Via Culture Matters – While we’re talking about national parks and other common spaces in relationship to migration, I’d like to draw attention to this nice short film on the concept of “The Commons”. Using some groovy retro animation and sporting a catchy soundtrack, the film makes an argument for recognising those things that we (should) share as members of societies, including water and government. The film encourages us to see the value of these shared things and to see the injustice of their exploitation by the few.
Young Adults Who Exercise Get Higher IQ Scores - Via Science Daily – Young adults who are fit have a higher IQ and are more likely to go on to university, reveals a major new study carried out at the Sahlgrenska Academy and Sahlgrenska University Hospital.
Story? Unforgettable. The Audience? Often Not – ViaNYtimes - In their long study of memory, psychologists have made important distinctions between the short-term and long-term varieties. They have documented crucial differences between explicit memories, like for faces and vocabulary, and the implicit kind, like for driving skills. They have published hundreds of studies on autobiographical memory, false memories and so-called source memory — the ability to recall where a fact was learned, whether from the radio or a book, from a work colleague or the neighborhood gossip.
Finance Value & Rules - Via Naked Capitalism – In a sense, this crisis is about values (the prices paid for many assets) and the rules (regulations governing financial markets). It is also about rules (rigid model based formulations of price) and values (ethics or the lack thereof). These two books provide different perspectives on the issues. In Wall Street Revalued, Andrew Smithers, an experienced practitioner (in fund management and now as a consultant), explores the value of stocks. This is a theme that Mr. Smithers has written about before, most notably in his 2000 book Valuing Wall Street which together with the Robert Shiller’s better known Irrational Exuberancepresciently highlighted the overvaluation of new economy Internet stocks
Obama, Afghanistan, Decision Making Under Uncertainty – Via NYT -One of the key jobs of the human brain is to simulate the future, and the less information it has to work with, the more anxious it becomes. Pinning things down in time makes waiting less troubling. With a clear idea about the order and timescale of events, people are more patient and less anxious. And that is the hope implicit in President Obama’s declaration of a time line.
Why are economics students more selfish than the rest? - Via Drepec & GB Center – A substantial body of research suggests that economists are less generous than other professionals and that economics students are less generous than other students. We address this question using administrative data on donations to social programs by students at the University of Washington. Our data set allows us to track student donations and economics training over time in order to distinguish selection effects from indoctrination effects. We find that economics majors are less likely to donate than other students and that there is an indoctrination effect for non-majors but not for majors. Women majors and non-majors are less likely to contribute than comparable men.
The Hostage Business - Via NYT – Port Harcourt is the most populous city in the Niger Delta, a sprawling wetland in southern Nigeria that covers an area the size of Kentucky and possesses vast amounts of light, sweet crude oil. John, who specialized in offshore engineering — and whose full name cannot be given here because he still takes jobs in the delta — moved there in 1992, lured by the city’s boomtown aura. His new salary dwarfed what he had been making back in Aberdeen, the heart of Europe’s petroleum industry (thanks to North Sea oil). Nigeria’s proven reserves are the 10th largest in the world, and the swamps of the delta provide almost all of it. In the past 50 years, foreign oil companies and scores of crooked politicians have made billions of dollars while most residents of the Niger Delta continue to live in squalor.
Why do (bad) banks (really) matter? - Via WCI – Banks are financial intermediaries. A financial intermediary is a firm whose (primary) business is borrowing and lending. (They intermediate between the ultimate borrowers and the ultimate lenders). That’s an important job. The ultimate lenders could lend directly to the ultimate borrowers. But then each ultimate lender would have to collect information on the creditworthiness or profitability of the ultimate lenders. Information is a non-rival good. There is no point in several ultimate lenders duplicating the costs of collecting that same information. A financial intermediary can collect the same information just once, and act as agent to the ultimate lenders’ principal. To ensure the agent acts more or less in the principals’ interest, banks act as residual claimant, and for this they need capital, so banks’ capital can take the first hit when their loans go bad.
Why Didn’t Canada’s Housing Market Go Bust? - Via ClevelandFed – Housing markets in the United States and Canada are similar in many respects, but each has fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust.
The Evolution Of Obesity - Via Wilson Quarterly – The average American adult is now 23 pounds overweight. That’s according to Thomas Frieden, director of the Centers for Disease Control and Prevention, who spoke in July at a CDC conference on obesity in Washington, D.C. Obese Americans—those who have a body mass index of 30 or greater, a number calculated from an individual’s weight in relation to height—spend about 40 percent more on health care annually (nearly $1,500 per person) than people of normal weight. Obesity increases the risk of developing heart disease and stroke, type II diabetes, certain cancers, and other diseases.
Evolution, the Cambrian Explosion and the power of natural selection - Via TimesOnline – The first 3.5 billion years of life are still being explored, while evolution remains under attack from religion
Deceit & Self Deception Noam Chomsky & Robert Trivers – Via SeedMagazine – In the 1970s, a Harvard class taught by Robert Trivers ignited a controversy that would escalate into the “sociobiology wars.” Across town at MIT, Noam Chomsky had earned a reputation as a leading opponent of the Vietnam war. Throughout those pivotal years, and in the following decades, the two explored similar ideas, although from different perspectives. Long aware of each other’s work, they had never met until a couple of months ago, when they sat down to compare notes on some common interests: deceit and self-deception.
Videos of The Week :
Mobile Health Care Via PopTech
Charlie Rose’s Brain Series Via MIT
Chocolate and Fair Trade – via Shock MD – Cocoa is an important world commodity, produced and consumed around the globe. However, the fluctuation of the world market price poses real obstacles to earning a decent livelihood for the millions of farmers working to cultivate cocoa on small family farms in equatorial regions. Many who live in villages lack access to clean water and health care and struggle to support their families.
The Crisis of 2008 -
The crises of 2008: What is real and what is behavioural? - Via Farnam St
Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis – Via SSRN – Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.
Monetary policy and the risk-taking channel – Via BIS – This paper investigates the link between low interest rates and bank risk-taking. Monetary policy may influence banks’ perceptions of, and attitude towards, risk in at least two ways: (i) through a search for yield process, especially in the case of nominal return targets; and (ii) by means of the impact of interest rates on valuations, incomes and cash flows, which in turn can modify how banks measure risk. Using a comprehensive dataset of listed banks, this paper finds that low interest rates over an extended period cause an increase in banks’ risk-taking.
How Debt Markets have Malfunctioned in the Crisis – via NBER – This article explains how debt markets have malfunctioned in the crisis, with deleterious consequences for the real economy. I begin with a quick overview of debt markets. I then discuss three areas that are crucial in all debt markets decisions: risk capital and risk aversion, repo financing and haircuts, and counterparty risk. In each of these areas, feedback effects can arise, so that less liquidity and a higher cost for finance can reinforce each other in a contagious spiral. I document the remarkable rise in the premium that investors placed on liquidity during the crisis. Next, I show how these issues caused debt markets to break down: fundamental values and market values seemed to diverge across several markets and products that were far removed from the “toxic” subprime mortgage assets at the root of the crisis. Finally, I discuss briefly four steps that the Federal Reserve took to ease the crisis, and how each was geared to a specific systemic fault that arose during the crisis.
Lessons from the Great American Real Estate Boom and Bust of the 1920s – Via NBER – Although long obscured by the Great Depression, the nationwide “bubble” that appeared in the early 1920s and burst in 1926 was similar in magnitude to the recent real estate boom and bust. Fundamentals, including a post-war construction catch-up, low interest rates and a “Greenspan put,” helped to ignite the boom in the twenties, but alternative monetary policies would have only dampened not eliminated it. Both booms were accompanied by securitization, a reduction in lending standards, and weaker supervision. Yet, the bust in the twenties, which drove up foreclosures, did not induce a collapse of the banking system. The elements absent in the 1920s were federal deposit insurance, the “Too Big To Fail” doctrine, and federal policies to increase mortgages to higher risk homeowners. This comparison suggests that these factors combined to induce increased risk-taking that was crucial to the eruption of the recent and worst financial crisis since the Great Depression.
The Value of Control in Emerging Markets – Via Harvard Law – Foreign acquisitions extend the boundaries of the firm across national borders. In the context of emerging markets, these boundaries are extended across countries with vast asymmetries in institutions and property rights protection. If developed-market firms can extend the benefits associated with superior institutions to their operations in emerging markets by acquiring control, the stock price of the acquiring firms should reflect these value gains. In our forthcoming Review of Financial Studies paper, The Value of Control in Emerging Markets, we examine the returns to shareholders of developed-market firms that undertook acquisitions in emerging markets.
Other Very Interesting Articles:
Uncertainty doesn’t make people more religious if you first make them feel good about themselves - Via Epiphenom – A series of studies over recent years have found that if you make people feel uncertain or anxious, they’ll respond by turning up the intensity of their religious faith. Quite why this happens isn’t known. It might be that unhappy people turn to their gods. Or it might be the implicit threat to their well being that’s triggering the response.
The Ministry of Climate Change Misinformation – Via Good – Conservative think tanks such as the Competitive Enterprise Institute happily keep lists of “skeptical” climate scientists, compensated by the think tanks themselves, for media appearances. “The beauty of this tactic,” Hoggan writes, “as a method of keeping the debate alive is that none of these ‘scientists’ ever have to conduct any actual research or put their views forward to be tested in the scientific peer-review process. They don’t even have to be experts in a related field. And they certainly don’t have to win the argument. As long as groups of scientists are seen to be disagreeing, the public continues to assume that the science is uncertain.”
Understanding Why Crime Rates Fall - Via NortonBooks – Everyone seems to have their pet answer for this question. Besides the economy, some will point to a rise in the number of law enforcement officers, tougher sentencing laws, even the legalization of abortion (according to the authors of Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, anyway). I once had a student who was an ardent supporter of one political party and was convinced that crime rates rose when the other party was in power.
A Photo is Worth a Thousand Ways to Change Your Memory – Via Neuronarrative – A recent study in the journal Applied Cognitive Psychology tested whether showing people photos of completed actions–such as a broken pencil or an opened envelope–could influence them to believe they’d done something they had not, particularly if they were shown the photos multiple times.
The Fall and Rise of Media – Via NYT – Historically, young women and men who sought to thrive in publishing made their way to Manhattan. Once there, they were told, they would work in marginal jobs for indifferent bosses doing mundane tasks and then one day, if they did all of that without whimper or complaint, they would magically be granted access to a gilded community, the large heaving engine of books, magazines and newspapers.
Infographics (Click On Images For Larger Versions):
The Evolution of Storage
The Freedom Of Labor Around The World