Friday, January 30, 2009

Iceland

Oh, Iceland. Looking back on the explosion in Icelandic bank and sovereign CDS spreads in late March of last year, these blog posts by Paul Krugman (well, ok, the second is just a quote from the Financial Times, but I like digging at Krugman anyway) look pretty hilarious.

Is Iceland the victim of a financial conspiracy? ... One interesting point: it appears that the Icelandic authorities particularly suspect Bear Stearns. I'll be keeping an eye on this.
What started as an alcohol-fuelled evening has become a full-blown investigation by Iceland’s Financial Supervisory Authority into an alleged speculative attack by hedge funds on Iceland’s currency, banking system and stock market. Jonas Jonsson, director-general of Iceland’s FSA, says the authorities are “searching whether some parties have systematically been distributing negative and false rumours about the Icelandic banks and financial system in order to profit from it”.
Ah yes, of course, barely-alive Bear Stearns shorted Iceland and took down the whole country. It had nothing to do with bank capitalization over four times GDP and leveraged out the wazoo...

Although, I admit, I did/do believe that the correlation of sovereign CDS with bank CDS was a bit ridiculous, and the crux of the argument turned out to be exactly why the country has in fact not yet defaulted on its sovereign debt: Defaulting on maybe 15 billion in sovereign debt that comes due over the next two decades isn't going to put a tiny dent into a hypothetical bailout of the banks. It's just not feasible, so why pay the political cost to do it? It's a huge sacrifice to cut off all possibility of eurozone membership to save a few billion out of 80 billion lost. Then again, that's what I was saying when 5 year CDS spreads were bouncing around 300 bps, and they since jumped to almost 1000, so not very useful information...

Wednesday, January 28, 2009

Updike

John Updike, one of my favorite authors, died today. He will certainly be missed, although I must say, now at least I have a chance at catching up on his works. He was a more prolific writer than I am a reader.

If anyone, like I often do, reads the plethora of death announcements and becomes intrigued enough to pick up one of his books, I would recommend starting with his earlier collections of short stories. This will prevent your falling into the trap of reading only his many works that beat the topic of suburban adultery to death. Yet even with so much on one subject, his ornate description of the infinite minutia (that normally washes over you unnoticed, but seems of absolute foremost importance as he notices it) never allows it to get completely tiring.

Monday, January 26, 2009

the art of reading

After hearing me complain about how unenjoyable Virginia Woolf's To The Lighthouse is to read (so far - too early to really judge), my friend Gautam sent me this essay about reading that Woolf wrote. It's amazing: If asked to describe the best way to read, I think I would make exactly the same points. Yet despite agreeing so thoroughly, even this short little essay was aggravating to read. It takes a special talent to come up with a writing style that uncomfortable.

Anyway, the points are worth repeating:
  1. While actively reading, you should be looking for what the author is trying to create. In other words, search for what is high quality about that particular book. This potentially requires conscious effort in order to break from preconceived notions of absolute quality.
  2. After reading, let it marinate in your subconscious, and form your reactions and feelings towards the book as a whole. Place the book in relation to other books you have read under whatever mental structure seems relevant and satisfying.
  3. (Not so explicitly expounded by Woolf) With your own mindset formed, enjoy the perspectives of others. Every book review or book club discussion let's you experience the book again from a slightly different angle, some more comfortable and some less, but all adding to your cummulative impression.

Wednesday, January 21, 2009

recent books

The Great Gatsby, by F. Scott Fitzgerald: This was apparently one of the priceless joys of tenth grade that I missed. Having read it, I'm glad to have traded a year of high school social trauma and lack of freedom for the experience. It wasn't at all bad, but disappointing compared to his short stories.

The Westing Game, by Ellen Raskin: This staple of 8th grade Language Arts was one of my favorite books in junior high and I couldn't help re-reading it when I came across it at home. Surprisingly, it was just as good at age 22 as at 13. But that might be because my memory for books is so bad the mystery was fresh all over again.

The Black Monk and Other Stories, by Anton Chekhov. I was utterly, completely bored by these. I kept having to rewind because my brain was more inclined to factor mile markers than focus on the literary tedium. Devoid of compelling characters, engaging plots, moving or thought-provoking commentary, and beautiful writing.

Pride and Prejudice, by Jane Austen. Silly, trite, and shockingly entertaining. Austen is amazing at developing an entire cast of interesting, three-dimensional, relatable characters. I expected to be too put off by the cultural setting to enjoy it, but it just makes the whole thing funnier, and Elizabeth Bennett is a headstrong and independent enough female main character that you hardly notice you're reading about stiff shallow rich aristocratic boring Victorian freaks. I completely adore her actually.

Plus, now I understand this. *giggles*

Friday, January 16, 2009

Picasa for mac!

Oh how long I have waited for you... Even though it works fine with Parallels already, this is so much more convenient. Download now: http://picasa.google.com/mac/

Admittedly, I have not tried iPhoto in iLife 9, but there's no way iPhoto could make up for the galaxy-sized gap between itself and Picasa with one update. Mac just refuses to catch on that people are not idiots and actually don't like it when software insists on reorganizing their stuff for them, especially in obfuscating and useless ways. Stick with google products.

(Caveat: Unless you're in my mom's computer-literacy generation. Ie, you still haven't gotten the hang of single- versus double-clicking, and you have no earthly idea what the difference between hard drive memory and RAM is.)

Edit: First bug report (it is a beta version, after all). Uploading slideshow videos to youtube fails (something about the format - while .movs usually work with youtube, not even manually uploading a picasa-created video to youtube works.) But the kinks will get worked out and overall it's working perfectly smoothly.

Thursday, January 15, 2009

biased coin flipping

Probability riddle!

Easy version: There are two players, A and B. They have one fair coin. What game can they play such that player A wins with probability exactly 1/3?

Harder version: Now players A and B have a single coin that lands heads with probability p in [0,1]. What game can they play, which halts with probability 1, such that player A wins with exactly probability q in [0,1]? (Hint: First pretend they have a fair coin. Then simulate a fair coin with an unfair one.)

Try it first, this riddle is quite within reach with a little pondering, and there are lots of correct answers at least for the first part.

Answer after spoiler space...
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Ok, for the first version here is the answer I came up with but there are others for sure, maybe much simpler. Write 3 as 11 in binary. Now flip the coin in sets of two flips, with heads as "1" and tails as "0", so that each pair of flips spells an integer between 0 and 3. If you ever spell 11, ignore it. If the first integer between 0 and 2 that you spell is 0, player A wins. Another answer: Flip the coin repeatedly until you get tails. If tails occurs on an even numbered flip, player A wins.

Note that in general, you can use this method to simulate any rational number a/b. If 0 is one of the first a unique n-bit (where n is the number of bits needed to write b in binary) numbers spelled with the coin in {0,1,...,b-1}, then player A wins. The logic is that in an arrangement of the integers from 0 to b-1, there is an a/b chance that 0 is in the first a numbers in the sequence.

For the harder version, first let's create an event of probability p with a fair coin. To do this, write p in binary. Now spell out another decimal digit by digit by flipping the coin as above. If the resulting number is less than p, player A wins. This halts with probability 1 because in some finite time you will figure out whether the number is less than or greater than p: on the first flip that differs from that digit of p. The intuition for this is pretty straightforward. p fraction of all real numbers between 0 and 1 are less than p.

Now to simulate a fair coin: I actually found a much less pretty answer for this, thought to myself "I bet there's some really easy symmetrical solution to this" and then didn't bother trying to find it. But then a friend of mine told it to me. Turns out it's known as Von Neumann's trick. All you have to do is flip the coin in sets of two. If it comes up T/T or H/H, ignore it. If it comes out T/H, take that as a tails flip. If it comes out H/T, that's heads. By symmetry there is an equal probability of these two events.

Tuesday, January 13, 2009

football, sadly over and over sadly

Well the football season is effectively over. The three teams I usually follow (Jets, Giants, and Chargers) are all eliminated. Those left I either despise (Eagles) or am apathetic about (Ravens and Steelers) or only care about to the extent that no one can help rooting for an underdog as historically pathetic as the Cardinals.

The Jets started weak, ended weak, and pulled off an amazing five-game streak in the middle of the season just long enough to get everyone's hopes up and the commentators speculating on an all-NYC superbowl. Of course, with an organization as disappointing as the Jets and a tired old quarterback like Favre that can't stay strong an entire season, there wasn't much chance of that happening.

The Jets most urgently need a new defensive coordinator that won't run scared with his tail between his legs every time they take a one point lead in the 2nd quarter. They led the league in sacks but spent most of their time playing prevent defense and giving up score after score slowly but surely. If you're going to hire such a talented, big, and fast defensive line, hire a coach that knows what to do with it. But they also need better leadership in the form of a consistent, unemotional, machine-like quarterback. I'd rather have a quarterback like Eli Manning (ignoring his performance in the playoff game vs. the Eagles) who, even if far from the most talented quarterback ever, is consistent, humble, and a good calm team leader when things get tense, than someone like Favre (or McNabb or Cutler or any other of the plethora of similar hot-shots) who can make some amazing plays but makes too many mistakes and gets tired and inconsistent before he gets anywhere with it.

The Giants had a great regular season and should be in the championship game next week. It's exceedingly disappointing to see them lose out to their 9-6-1 division rival Eagles that just barely scraped their way into the playoffs at all. As much as I'm glad to see Burress getting what's coming to him for being such an unmitigated bastard all season, the Giants were really hurting for a good receiver in that game. Even without Burress though, they should have tried throwing to some of their other guys rather than failing to pick up 4-inch 3rd-down conversions by running every single play, while McNabb threw one 11-yard screen pass after another.

The Chargers... well, I'm still stunned they got in the playoffs at all. And stunned they won their first game. And not at all surprised or peeved that they're out now. They win when they get good and scared and it's crunch time, but that's not enough, and even though I root for them I wish they hadn't gotten that chance. Maybe missing the playoffs would stun the coach into realizing he has to take the whole season seriously, not give up game after game on the final play and then turn it around in the postseason.

Saturday, January 10, 2009

against a massive Keynesian stimulus

One of my favorite economics bloggers, Willem Buiter at Maverecon, has written a fantastic explanation of why this is not the best time for the United States to be engaging in gargantuan Keynesian stimulus tactics.

Admittedly, with a strong personal bias towards low-risk financial self-sufficiency and responsibility, and with a strong distrust of government's discipline to make healthy long-run decisions, there's not much more you have to tell me to convince me not to spend 5% of GDP over two years to boost a lagging economy than "don't spend what you can't afford, especially after spending what you can't afford even during a decade of prosperity". But Buiter's argument should convince much more social welfare-inclined readers as well.

Essentially (but read the whole thing. Buiter requires patience, but it's worth it.):

1. "The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally. Even the most hard-nosed, Guantanamo-bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

2. "So the US will have to start to pay a normal market price for the net resources it borrows from abroad. It will therefore have to start to generate primary surpluses, on average, for the indefinite future. A nation with credibility as regards its commitment to meeting its obligations could afford to delay the onset of the period of pain. It could borrow more from abroad today, because foreign creditors and investors are confident that, in due course, the country would be willing and able to generate the (correspondingly larger) future primary external surpluses required to service its external obligations. I don’t believe the US has either the external credibility or the goodwill capital any longer to ask, Oliver Twist-like, for a little more leeway, a little more latitude. I believe that markets - both the private players and the large public players managing the foreign exchange reserves of the PRC, Hong Kong, Taiwan, Singapore, the Gulf states, Japan and other nations - will make this clear."

3. "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets."..."So two things will have to happen, on average and for the indefinite future, going forward. First, there will have to be some combination of higher taxes as a share of GDP or lower non-interest public spending as a share of GDP. Second, there will have to be a large increase in national saving relative to domestic capital formation."

4. "[The vastly increased future Federal deficit] implies the need for a future private to public sector resource transfer that is most unlikely to be politically feasible without recourse to inflation. The only alternative is default on the Federal debt. There is little doubt, in my view, that the Federal authorities will choose the inflation and currency depreciation route over the default route."

5."Those familiar with the post World War I and post-World War II public debt levels will not be impressed with even a doubling of the public (Federal) debt held by the public as share of GDP, from its current level of around 40 per cent of annual GDP (gross public debt, including debt held by other government agencies, like the Social Security Trust Fund, stands at around 70 per cent of GDP)."..."That, however, was then. The debt was incurred to finance a temporary bulge in public spending motivated by a shared cause: defeating Japan and the Nazis. The current debt is the result of the irresponsibility, profligacy and incompetence of some. Achieving a political consensus to raise taxes or cut spending to restore US government solvency is going to test even the talents of that Great Communicator, Barack Obama."

6."So will the Keynesian demand stimulus work? For a while (a couple of years, say) it may. When the consequences for the public debt of both the Keynesian stimulus and the realisation of the losses from the assets and commitments the Fed and the Treasury have taken onto their balance sheets become apparent, the demand stimulus will fade and may be reserved as precautionary behaviour takes over in the private sector. My recommendation is to go easy on the fiscal stimulus. The US government is ill-placed financially and fiscally, to engage in short-term fiscal heroics. All they can really do is pray for a stronger-than-expected revival of global demand, without any major stimulus from the US."

7. "Everything that is desirable from a short-run Keynesian aggregate demand perspective (assuming these measures are indeed effective) is a step in the wrong direction from the perspective of restoring external equilibrium and raising the US national saving rate. One obvious response to this opposition between what is desirable now and what is necessary in the longer run is to say: let’s do now what is desirable now and let’s take care of what is necessary tomorrow. That might be viable if the US private sector and the US policy makers had the necessary credibility to head south when the destination is north, because they can commit themselves to a timely reversal. If the authorities go ahead with the short-run Keynesian stimulus without having convinced the global capital markets and domestic producers and consumers that there will be a timely reversal, the policies will not work."