Tuesday, September 30, 2008
Finally someone makes sense
This article is about how animal fat is not that bad for you. No Kirstin, I don't want to hear why she's wrong. I prefer to justify my bacon eating through faith alone.
"Animal fats have lots of good fatty acids that fight disease, help absorb vitamins and lower cholesterol. Your body burns the short-chained fatty acids found in animal fats and stores the long-chained ones found in polyunsaturated fat. It is a myth that eating animal fat makes you fat."
All hail the short-chained fatty acids. Go pigs!
"Animal fats have lots of good fatty acids that fight disease, help absorb vitamins and lower cholesterol. Your body burns the short-chained fatty acids found in animal fats and stores the long-chained ones found in polyunsaturated fat. It is a myth that eating animal fat makes you fat."
All hail the short-chained fatty acids. Go pigs!
Scale - part II
Of course, the market is back up today in a big way. So cost of failing to pass the bailout is now only about 1.12% of total wealth in the U.S., or about $650 billion.
So if today the stock market is getting valuations right, we just substituted a roughly $700 billion dollar loss in the stock market for a (maybe) $200 billion loss on the bailout. Is that a fair trade-off? It depends on how heavily invested you were, and how much longer you'd expect to be paying the taxes that will have to be raised to pay for the bailout. For a lot of people, I'm guessing that they are a) not heavily invested and b) old enough to not be paying taxes very long - so they're feeling alright with this.
So if today the stock market is getting valuations right, we just substituted a roughly $700 billion dollar loss in the stock market for a (maybe) $200 billion loss on the bailout. Is that a fair trade-off? It depends on how heavily invested you were, and how much longer you'd expect to be paying the taxes that will have to be raised to pay for the bailout. For a lot of people, I'm guessing that they are a) not heavily invested and b) old enough to not be paying taxes very long - so they're feeling alright with this.
Scale
You'll see this number - $1.3 trillion - as the amount of wealth lost in the U.S. yesterday because the stock market dropped in the wake of the failure of the bailout bill. For some perspective, the total wealth of the U.S. in 2007 was around $58 trillion. So a loss of about 2.24% of wealth in the U.S.
For comparison, the bailout bill, even if the "bad assets" that it buys up turn out to be truly toxic and equal to exactly zero, would represent a loss of $700 billion, or only about 1.2% of all U.S. wealth. In reality, the bailout won't cost $700 billion because the assets are not worthless, they are just worth less than we thought. So the true cost of the bailout is (depending upon who you ask) between $0 and $200 billion. So the loss to U.S. wealth from the bailout would be between 0% and 0.3%.
So the failure of the bailout cost people an extra 1.94% of total wealth. Oops.
For comparison, the bailout bill, even if the "bad assets" that it buys up turn out to be truly toxic and equal to exactly zero, would represent a loss of $700 billion, or only about 1.2% of all U.S. wealth. In reality, the bailout won't cost $700 billion because the assets are not worthless, they are just worth less than we thought. So the true cost of the bailout is (depending upon who you ask) between $0 and $200 billion. So the loss to U.S. wealth from the bailout would be between 0% and 0.3%.
So the failure of the bailout cost people an extra 1.94% of total wealth. Oops.
Monday, September 29, 2008
Take a deep breath
...and read this article. The upshot is that despite the 'financial meltdown' on Wall Street, there is not a huge body of evidence that the wider world of banks are failing or have reined in lending.
"The most recent Federal Reserve data show that the volume of outstanding bank loans declined 0.5 percent from the last week of August to the second week of September, though it was up more than 6 percent from the corresponding time last year."
Almost exactly one year ago, the subprime meltdown started. Since then, banks have been in so much trouble that total outstanding bank loans have.....gone up by 6%. This is not a sign of the apocalypse. Could bank lending have been higher? Probably, but it is not contracting dramatically (as it did during the Depression).
There is a part of me that wonders whether the drama surrounding the Wall Street investment banks is something that has fewer ties into the rest of the economy than they would have you believe.
Here would be a simple explanation of what I mean. Let's say that Kirstin and I have made a series of loans to each other (I loaned her $50 for a mani/pedi, and she loaned me $50 for beer and steaks, and so on). We've each built up huge piles of debt (I owe Kirstin the $50) and huge piles of assets (Kirstin owes me $50). On paper, we could generate billions (like, say, $700 billion) in offsetting assets and liabilities to each other. Now let's say that I "fail", or might "fail". All of the sudden I can't make my loan payments to Kirstin (why? partially because she can't pay me all of the sudden). We have billions in value on our books - we're too big to fail! But if we go down, who and what do we take with us? Nothing.
Part of me wonders whether the current crisis is not just a crisis of Wall Street, at least in large part, and we are overselling the ramifications. I think one approach to understand this would be for the government to require that all the investment banks reveal their balance sheets to the public. Let investors and other banks see precisely what they have on the books. Then we can understand how important their failure actually will be.
Maybe they'll already done this, and shown the Fed and the Treasury their books. In that case, Bernanke and Paulson know a lot more than anyone else and are judging the crisis correctly.
"The most recent Federal Reserve data show that the volume of outstanding bank loans declined 0.5 percent from the last week of August to the second week of September, though it was up more than 6 percent from the corresponding time last year."
Almost exactly one year ago, the subprime meltdown started. Since then, banks have been in so much trouble that total outstanding bank loans have.....gone up by 6%. This is not a sign of the apocalypse. Could bank lending have been higher? Probably, but it is not contracting dramatically (as it did during the Depression).
There is a part of me that wonders whether the drama surrounding the Wall Street investment banks is something that has fewer ties into the rest of the economy than they would have you believe.
Here would be a simple explanation of what I mean. Let's say that Kirstin and I have made a series of loans to each other (I loaned her $50 for a mani/pedi, and she loaned me $50 for beer and steaks, and so on). We've each built up huge piles of debt (I owe Kirstin the $50) and huge piles of assets (Kirstin owes me $50). On paper, we could generate billions (like, say, $700 billion) in offsetting assets and liabilities to each other. Now let's say that I "fail", or might "fail". All of the sudden I can't make my loan payments to Kirstin (why? partially because she can't pay me all of the sudden). We have billions in value on our books - we're too big to fail! But if we go down, who and what do we take with us? Nothing.
Part of me wonders whether the current crisis is not just a crisis of Wall Street, at least in large part, and we are overselling the ramifications. I think one approach to understand this would be for the government to require that all the investment banks reveal their balance sheets to the public. Let investors and other banks see precisely what they have on the books. Then we can understand how important their failure actually will be.
Maybe they'll already done this, and shown the Fed and the Treasury their books. In that case, Bernanke and Paulson know a lot more than anyone else and are judging the crisis correctly.
More Economics....
And who doesn't love more economics? So I posted some stuff on how the Fed and interest rates work. This was leading me up to the bailout, which as of today, seems less important to explain. (FYI - the House voted against the bailout).
The market (Dow, S&P, Nasdaq, and any other measure of stock market value) is tanking. It is down 8% for the day as I'm writing this. Are we in financial meltdown, with imminent depression-like conditions? To the first, maybe. To the second, unlikely.
First, don't mistake the stock market taking a big tumble as synonymous with either financial meltdown or with the onset of a new depression. If the year ended today, the stock market (as measured by the S&P 500 index) would have lost 24% of its value in 2008. Ouch. Here's the yearly return on the S&P from the last 12 years.
2007: 3%
2006: 14%
2005: 3%
2004: 9%
2003: 26%
2002: -24%
2001: -13%
2000: -8%
1999: 19%
1998: 26%
1997: 31%
So the current market "disaster" is the worst decline in the stock market since....oh my god, 2002. You know, that was like, before "Lost" even came on TV. 2002 was when Enron and Worldcom went down to bankruptcy for being a little fancy with their accounting (hmmmm, over-zealous corporate types get fast and loose with the rules, get rich, and then get crushed. Sound familiar?).
The point is that we are not witnessing anything truly historic in terms of stock market valuation. Does it suck to lose 25% of your 401(k) value in one year? Abso-friggin-lutely. You know what is really great, though? Making 31 or 26% on your 401(k) back in the late 1990's. Here's how the stock market works: it goes up, it goes down. ON AVERAGE, OVER LONG PERIODS OF TIME, the trend is upwards. That means that things can suck for a while before they get better.
If you were about to retire tomorrow, then it sucks to be you. For the rest of us, we've got to wait this out a while longer (like, years). Your investments are, with 99.9% probability, not going to be worthless tomorrow.
The market (Dow, S&P, Nasdaq, and any other measure of stock market value) is tanking. It is down 8% for the day as I'm writing this. Are we in financial meltdown, with imminent depression-like conditions? To the first, maybe. To the second, unlikely.
First, don't mistake the stock market taking a big tumble as synonymous with either financial meltdown or with the onset of a new depression. If the year ended today, the stock market (as measured by the S&P 500 index) would have lost 24% of its value in 2008. Ouch. Here's the yearly return on the S&P from the last 12 years.
2007: 3%
2006: 14%
2005: 3%
2004: 9%
2003: 26%
2002: -24%
2001: -13%
2000: -8%
1999: 19%
1998: 26%
1997: 31%
So the current market "disaster" is the worst decline in the stock market since....oh my god, 2002. You know, that was like, before "Lost" even came on TV. 2002 was when Enron and Worldcom went down to bankruptcy for being a little fancy with their accounting (hmmmm, over-zealous corporate types get fast and loose with the rules, get rich, and then get crushed. Sound familiar?).
The point is that we are not witnessing anything truly historic in terms of stock market valuation. Does it suck to lose 25% of your 401(k) value in one year? Abso-friggin-lutely. You know what is really great, though? Making 31 or 26% on your 401(k) back in the late 1990's. Here's how the stock market works: it goes up, it goes down. ON AVERAGE, OVER LONG PERIODS OF TIME, the trend is upwards. That means that things can suck for a while before they get better.
If you were about to retire tomorrow, then it sucks to be you. For the rest of us, we've got to wait this out a while longer (like, years). Your investments are, with 99.9% probability, not going to be worthless tomorrow.
Tuesday, September 23, 2008
What's up with the Fed?
So take a step back from panic mode and let's make a few points clear. First, it is important to understand that the U.S. Treasury and the Federal Reserve Bank (the Fed) are not the same thing. The U.S. Treasury manages the money of the U.S. Government. Hank Paulson, the Treasury Secretary, is essentially the CFO of the U.S. The Fed is a bank. A very big, unique kind of bank, but only a bank at its heart. Ben Bernanke is the president of the bank.
Aside from being the bank for the U.S. government, the Fed is the bank for other banks. In fact, all U.S. banks over a certain size are required to deposit money ("reserves") at the Fed (hence the Federal Reserve Bank). This is normally a percentage of their liabilities. (For the record, Lehman and Goldman and other investment banks are not "banks", so they were not required to do this.)
It's easiest to imagine that the Fed has a bunch of individual vaults, one for each of the banks it serves. (I like to think of the Gringott's bank from Harry Potter, with little goblins rolling carts full of money down dank subterranean passages, but you use whatever visual works for you. Alan Greenspan is, of course, really a goblin. Look at him.) Inside the vault for Chase Manhattan, for example, is a pile of money equal to 5% of their liabilities - let's say that is $1,000,000.
Now the Fed, much like little goblins, is kind of sneaky, and the Fed takes some of the cash out of the vault, and replaces it with treasury bonds, equal in face value. So Chase Manhattan still has $1,000,000 in total value, but now only $500,000 is in cash, while $500,000 is in t-bonds. BUT, the rules say that Chase has to have $1,000,000 in CASH in the vault. Chase can borrow $500,000 in cash from another bank (and the little goblins will roll a cart full of money from one vault to another, little devils). But if the Fed has swapped out everyones vault, then ALL the banks need more cash, and start to bid up the price of cash today.
What does that mean? Well, how do you bid up the price of money today? You offer higher interest rates. In other words, the increased demand for money today raises the relative price of money today, and lowers the relative price of money in the future. If the price of money in the future is low, then it must be that the interest rate is high. So the Fed goblins have succeeded in raising the interest rate - this rate that the banks charge each other is called the "Fed Funds Rate", and its what the Fed decides in their meetings that you hear about.
To lower the interest rate, the Fed just performs the opposite swap. Now they go into the vaults and replace some of the treasury bonds with cash. Now all the banks have big piles of cash in their vaults, but many of them don't need that much cash around (because they only need cash = 5% of their liabilities). So banks with extra cash start offering it around - there is a glut of money today, and a shortage of money for the future. So the price of current money is low, and the price of future money is high. If the price of future money is high, then the interest rate has to be low. The only way banks can unload their extra cash is to offer to lend it out at really low rates.
The Fed goblins just move treasury bonds in an out of the vaults until the interest rate that banks charge each other is exactly equal to what they want it to be - the Fed Funds rate target.
Why do they do this? Because the whole structure of different interest rates that banks charge is based off of the Fed Funds rate, to some extent. If the Fed Funds rate is low (and the future is expensive), then the banks can get money today on the cheap, and therefore they can lend money today to YOU for a low interest rate. If the Fed Funds rate is high (and the future is cheap), then banks have to pay a lot for money today, and so they charge YOU a high interest rate.
Hence the Fed goblins influence interest rates in the whole economy just by playing with the reserve balances of the banks in the system. It's not perfect, but it's pretty powerful.
Now why is the Fed currently having trouble? With slowing economic activity today, the Fed would like to make the future expensive and get people to spend their money today (by lowering interest rates). Normally this would work just fine - start replacing T-bonds with cash in the vaults.
Except that because of the uncertainty about bank balance sheets, the financial markets are scared, and so they've rushed to buy up the only safe assets around - treasury bonds. The demand for bonds is so high that the interest rate on short run treasury bonds has gone to essentially zero. Therefore they are jsut slips of paper guaranteed by the government, but yielding zero interest - which means they are no different than cash. So swapping out t-bonds for cash in the vaults doesn't change anything, it's just swapping one slip of paper yielding 0% for another yielding 0%, and the banks don't respond the same way they did before.
Because of this, the Fed has lost traction to move the financial markets, and we are in the position where it will take something else (like the bailout or some version of it) to get banks active again. More on that tomorrow.
Aside from being the bank for the U.S. government, the Fed is the bank for other banks. In fact, all U.S. banks over a certain size are required to deposit money ("reserves") at the Fed (hence the Federal Reserve Bank). This is normally a percentage of their liabilities. (For the record, Lehman and Goldman and other investment banks are not "banks", so they were not required to do this.)
It's easiest to imagine that the Fed has a bunch of individual vaults, one for each of the banks it serves. (I like to think of the Gringott's bank from Harry Potter, with little goblins rolling carts full of money down dank subterranean passages, but you use whatever visual works for you. Alan Greenspan is, of course, really a goblin. Look at him.) Inside the vault for Chase Manhattan, for example, is a pile of money equal to 5% of their liabilities - let's say that is $1,000,000.
Now the Fed, much like little goblins, is kind of sneaky, and the Fed takes some of the cash out of the vault, and replaces it with treasury bonds, equal in face value. So Chase Manhattan still has $1,000,000 in total value, but now only $500,000 is in cash, while $500,000 is in t-bonds. BUT, the rules say that Chase has to have $1,000,000 in CASH in the vault. Chase can borrow $500,000 in cash from another bank (and the little goblins will roll a cart full of money from one vault to another, little devils). But if the Fed has swapped out everyones vault, then ALL the banks need more cash, and start to bid up the price of cash today.
What does that mean? Well, how do you bid up the price of money today? You offer higher interest rates. In other words, the increased demand for money today raises the relative price of money today, and lowers the relative price of money in the future. If the price of money in the future is low, then it must be that the interest rate is high. So the Fed goblins have succeeded in raising the interest rate - this rate that the banks charge each other is called the "Fed Funds Rate", and its what the Fed decides in their meetings that you hear about.
To lower the interest rate, the Fed just performs the opposite swap. Now they go into the vaults and replace some of the treasury bonds with cash. Now all the banks have big piles of cash in their vaults, but many of them don't need that much cash around (because they only need cash = 5% of their liabilities). So banks with extra cash start offering it around - there is a glut of money today, and a shortage of money for the future. So the price of current money is low, and the price of future money is high. If the price of future money is high, then the interest rate has to be low. The only way banks can unload their extra cash is to offer to lend it out at really low rates.
The Fed goblins just move treasury bonds in an out of the vaults until the interest rate that banks charge each other is exactly equal to what they want it to be - the Fed Funds rate target.
Why do they do this? Because the whole structure of different interest rates that banks charge is based off of the Fed Funds rate, to some extent. If the Fed Funds rate is low (and the future is expensive), then the banks can get money today on the cheap, and therefore they can lend money today to YOU for a low interest rate. If the Fed Funds rate is high (and the future is cheap), then banks have to pay a lot for money today, and so they charge YOU a high interest rate.
Hence the Fed goblins influence interest rates in the whole economy just by playing with the reserve balances of the banks in the system. It's not perfect, but it's pretty powerful.
Now why is the Fed currently having trouble? With slowing economic activity today, the Fed would like to make the future expensive and get people to spend their money today (by lowering interest rates). Normally this would work just fine - start replacing T-bonds with cash in the vaults.
Except that because of the uncertainty about bank balance sheets, the financial markets are scared, and so they've rushed to buy up the only safe assets around - treasury bonds. The demand for bonds is so high that the interest rate on short run treasury bonds has gone to essentially zero. Therefore they are jsut slips of paper guaranteed by the government, but yielding zero interest - which means they are no different than cash. So swapping out t-bonds for cash in the vaults doesn't change anything, it's just swapping one slip of paper yielding 0% for another yielding 0%, and the banks don't respond the same way they did before.
Because of this, the Fed has lost traction to move the financial markets, and we are in the position where it will take something else (like the bailout or some version of it) to get banks active again. More on that tomorrow.
Interest Rates
So I wanted to post something about the potential bailout package, but I couldn't see how to explain it without referring to the Fed, and why the current crisis is beyond the Fed's ability to manage. So I figured I would post something first about the Fed, but that I couldn't see how to explain the Fed without referring to interest rates, and what they mean, and why they are important. So I ended up here, starting with a post about what interests are, and why they matter to the economy.
Let me start with a question: will you trade me $1 for $1 right now? It would be kind of dumb, but why not? $1 is $1.
Now, let me ask a different question: will you give me $1 right now, and I'll give you $1 one year from now? No? And why wouldn't you give me $1 today for $1 in a year? They're both dollars, right? The problem is that you will now have to wait one year to spend your $1, rather than spending it today. And $1 a year from now is not as fun as $1 today. So you refuse the offer.
Now, let me ask another question: will you give me 50 cents right now, and I'll give you $1 one year from now? Why is the answer now likely to be 'Yes'? Because now you are being compensated for giving up your money today and waiting one year for it. Since $1 in a year is equal in value to $1/2 today, the price of future money is equal to 1/2.
The price of future money can be summarized as P(future) = 1 / (1+r), where "r" is the interest rate. Does this work? Well, if our price of the future is 1/2, then r = 1. In other words, the interest rate is 100% - and this is actually what we have: if you give me 50 cents, I pay you the 50 cents plus 100% interest (another 50 cents) next year, for a total of $1. If the interest rate were 10%, then the P(future) = 1 (1 + 0.10) = 0.909, or it is much cheaper than when the interest rate = 100%.
The point is that interest rates determine the price of future money. If r goes up, then the price of the future goes down, and you'll "buy" more future money by saving your money today. If r goes down, then the price of the future goes up, and you'll "buy" more current money by spending it today.
If the price of future money gets really low (r gets big), then everyone decides to "buy" money in the future, and starts saving their money. Which means they stop spending money today - and if they stop spending money today, economic activity will be less today (i.e. a recession if things slow down enough). To keep the recession from happening, we need interest rates to go down, so that the price of future money goes up, and people decide to "buy" less future money and consume more money today.
So when the Fed sets interest rates, it is trying to change the price of future money, and either get you to move your consumption from the future to today, or from today to the future. Which now gets us into how the Fed actually accomplishes this change in interest rates.
Let me start with a question: will you trade me $1 for $1 right now? It would be kind of dumb, but why not? $1 is $1.
Now, let me ask a different question: will you give me $1 right now, and I'll give you $1 one year from now? No? And why wouldn't you give me $1 today for $1 in a year? They're both dollars, right? The problem is that you will now have to wait one year to spend your $1, rather than spending it today. And $1 a year from now is not as fun as $1 today. So you refuse the offer.
Now, let me ask another question: will you give me 50 cents right now, and I'll give you $1 one year from now? Why is the answer now likely to be 'Yes'? Because now you are being compensated for giving up your money today and waiting one year for it. Since $1 in a year is equal in value to $1/2 today, the price of future money is equal to 1/2.
The price of future money can be summarized as P(future) = 1 / (1+r), where "r" is the interest rate. Does this work? Well, if our price of the future is 1/2, then r = 1. In other words, the interest rate is 100% - and this is actually what we have: if you give me 50 cents, I pay you the 50 cents plus 100% interest (another 50 cents) next year, for a total of $1. If the interest rate were 10%, then the P(future) = 1 (1 + 0.10) = 0.909, or it is much cheaper than when the interest rate = 100%.
The point is that interest rates determine the price of future money. If r goes up, then the price of the future goes down, and you'll "buy" more future money by saving your money today. If r goes down, then the price of the future goes up, and you'll "buy" more current money by spending it today.
If the price of future money gets really low (r gets big), then everyone decides to "buy" money in the future, and starts saving their money. Which means they stop spending money today - and if they stop spending money today, economic activity will be less today (i.e. a recession if things slow down enough). To keep the recession from happening, we need interest rates to go down, so that the price of future money goes up, and people decide to "buy" less future money and consume more money today.
So when the Fed sets interest rates, it is trying to change the price of future money, and either get you to move your consumption from the future to today, or from today to the future. Which now gets us into how the Fed actually accomplishes this change in interest rates.
Friday, September 19, 2008
More capital market stuff
There is a really interesting bit of information in this article.
For the last 30 years, the SEC has required that broker-dealers (i.e. investment banks like Lehman) have a debt-to-net-capital ratio of 12 to 1. That is, they can borrow $12 for every $1 they have in equity. So someone like Lehman, with $100 in equity, would have $1300 in money to invest ($1200 debt + $100 equity). They could use that $1300 to take bets that mortgages would not collapse. If they did lose those bets, then they'd have to come up with the $1200 to pay back their creditors. A bad situation.
However bad this financial mess would have been, it is actually far worse because the SEC gave an exemption to five firms in 2004. They allowed these five firms to have debt to net capital ratios of 30 or 40 to 1. So now they have $4100 in money to make bets with, and when those bets go bad, they owe $4000 to creditors. It's a lot harder to come up with $4000 than $1200. The financial system goes down a lot harder when $4000 suddenly disappears than when $1200 disappears.
The five firms that were granted the exemption? Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns, and Morgan Stanley. Bear Stearns? Collapsed and purchsed by Lynch. Lehman? Bankrupt. Merrill Lynch? Getting bought out by Bank of America. Morgan Stanley? Looking desperately for someone to buy them and pay off their debts. We haven't necessarily heard terrible news about Goldman yet, but it is hard to believe they aren't in a similar boat.
In something as complex as the financial system, it would be a mistake to try to identify a single cause of the current crisis. But this certainly has to be a big part of the explanation.
For the last 30 years, the SEC has required that broker-dealers (i.e. investment banks like Lehman) have a debt-to-net-capital ratio of 12 to 1. That is, they can borrow $12 for every $1 they have in equity. So someone like Lehman, with $100 in equity, would have $1300 in money to invest ($1200 debt + $100 equity). They could use that $1300 to take bets that mortgages would not collapse. If they did lose those bets, then they'd have to come up with the $1200 to pay back their creditors. A bad situation.
However bad this financial mess would have been, it is actually far worse because the SEC gave an exemption to five firms in 2004. They allowed these five firms to have debt to net capital ratios of 30 or 40 to 1. So now they have $4100 in money to make bets with, and when those bets go bad, they owe $4000 to creditors. It's a lot harder to come up with $4000 than $1200. The financial system goes down a lot harder when $4000 suddenly disappears than when $1200 disappears.
The five firms that were granted the exemption? Goldman Sachs, Merrill Lynch, Lehman Brothers, Bear Stearns, and Morgan Stanley. Bear Stearns? Collapsed and purchsed by Lynch. Lehman? Bankrupt. Merrill Lynch? Getting bought out by Bank of America. Morgan Stanley? Looking desperately for someone to buy them and pay off their debts. We haven't necessarily heard terrible news about Goldman yet, but it is hard to believe they aren't in a similar boat.
In something as complex as the financial system, it would be a mistake to try to identify a single cause of the current crisis. But this certainly has to be a big part of the explanation.
Thursday, September 18, 2008
Let's take it down a notch
Okay, that last post ended up being way too long and more complex than I wanted. Let's try again with an even simpler example.
I am a bookie. I have taken a bet for $100 that the St. Louis Rams will win the Super Bowl, at odds of 100,000 to 1. That is, if the Rams do win the Super Bowl, I have to pay out $10,000,000. I don't have $10,000,000, so I have a few options on how to cover this possibility.
a) I could sell counter-bets. That is, I could get 100 people to bet me $100,000 each that the Rams won't win the Super Bowl. If the Rams win, then I owe one person $10,000,000, and I have $100,000 x 100 = $10,000,000 in hand to pay this off. If the Rams lose, I pay back the 100 original bettors their money, plus $1 each. I can cover that with the $100 from the original bet on the Rams.
b) I could lay off the risk to someone else. That is, I could take the original $100 and lay a bet with a different bookie on the Rams at 100,000 to 1. If the Rams win, then bookie B will pay me $10,000,000, and I'll use that to pay off the original bettor.
c) I could take a lot of other 100,000 to 1 bets on different events. That is, I can take a $100 bet that the Pittsburgh Pirates will win the World Series. If I take 100,000 more bets with these odds, all at $100, then I've got $10,000,000 in hand. If it so happens that the Rams win the Super Bowl, I'm alright.
So what happened? Well, not only did the Rams win the Super Bowl, but the Pirates won the World Series as well. How do I pay back the $20,000,000 I owe? Well, if I pursued option c), then I've only got $10,000,000 on hand, and I can't cover the bets. If I used option b), then I should be cashing in my own bets on the Rams and the Pirates, and I should be okay.
So some firms got into trouble right away, because they used option c), and got burned by two low probability events. The firms that used option b) went to their bookies and asked to get paid off, except that their bookies were the ones using option c). So the firms using option b) ended up not being able to get paid off either. So in the end the firms could not make good the original bets.
Who is to blame? Firms using option c) seem culpable - but the chances that two 1/100,000 events happen at once is 1 in 100,000,000,000 - so maybe they were just unlucky. Firms using b) were trying to be careful, but maybe they should have paid more attention to whom they were betting with.
All the firms were stupid in one sense. They did not consider that some of the 1 in 100,000 events were correlated. That is, it sure seems like the Pirates and Rams have nothing to do with each other. They play different sports. Except that a little research would have shown that they are owned by the same company, and a new training regimen imposed by the company made the players on both teams better. If they had known this, then the probability of both events happening is much better than 1 in 100,000,000,000.
In real life, firms didn't consider enough that mortgage defaults are correlated with each other. Defaults could be correlated because they are related to general housing conditions, which affect everyone. Firms got caught out when defaults went way higher than they expected (i.e. both the Rams and the Pirates won), and since they all were exposed the same way, no one could pay anyone else off.
Now none of the firms (bookies) are willing to take any bets until they figure out how much they will actually get paid back. No bookies, no bets = no loans, no economic expansion.
I am a bookie. I have taken a bet for $100 that the St. Louis Rams will win the Super Bowl, at odds of 100,000 to 1. That is, if the Rams do win the Super Bowl, I have to pay out $10,000,000. I don't have $10,000,000, so I have a few options on how to cover this possibility.
a) I could sell counter-bets. That is, I could get 100 people to bet me $100,000 each that the Rams won't win the Super Bowl. If the Rams win, then I owe one person $10,000,000, and I have $100,000 x 100 = $10,000,000 in hand to pay this off. If the Rams lose, I pay back the 100 original bettors their money, plus $1 each. I can cover that with the $100 from the original bet on the Rams.
b) I could lay off the risk to someone else. That is, I could take the original $100 and lay a bet with a different bookie on the Rams at 100,000 to 1. If the Rams win, then bookie B will pay me $10,000,000, and I'll use that to pay off the original bettor.
c) I could take a lot of other 100,000 to 1 bets on different events. That is, I can take a $100 bet that the Pittsburgh Pirates will win the World Series. If I take 100,000 more bets with these odds, all at $100, then I've got $10,000,000 in hand. If it so happens that the Rams win the Super Bowl, I'm alright.
So what happened? Well, not only did the Rams win the Super Bowl, but the Pirates won the World Series as well. How do I pay back the $20,000,000 I owe? Well, if I pursued option c), then I've only got $10,000,000 on hand, and I can't cover the bets. If I used option b), then I should be cashing in my own bets on the Rams and the Pirates, and I should be okay.
So some firms got into trouble right away, because they used option c), and got burned by two low probability events. The firms that used option b) went to their bookies and asked to get paid off, except that their bookies were the ones using option c). So the firms using option b) ended up not being able to get paid off either. So in the end the firms could not make good the original bets.
Who is to blame? Firms using option c) seem culpable - but the chances that two 1/100,000 events happen at once is 1 in 100,000,000,000 - so maybe they were just unlucky. Firms using b) were trying to be careful, but maybe they should have paid more attention to whom they were betting with.
All the firms were stupid in one sense. They did not consider that some of the 1 in 100,000 events were correlated. That is, it sure seems like the Pirates and Rams have nothing to do with each other. They play different sports. Except that a little research would have shown that they are owned by the same company, and a new training regimen imposed by the company made the players on both teams better. If they had known this, then the probability of both events happening is much better than 1 in 100,000,000,000.
In real life, firms didn't consider enough that mortgage defaults are correlated with each other. Defaults could be correlated because they are related to general housing conditions, which affect everyone. Firms got caught out when defaults went way higher than they expected (i.e. both the Rams and the Pirates won), and since they all were exposed the same way, no one could pay anyone else off.
Now none of the firms (bookies) are willing to take any bets until they figure out how much they will actually get paid back. No bookies, no bets = no loans, no economic expansion.
Positive Correlation will Kill You
Big drops in the market, big investment houses going down, and big loans by the government to prop up AIG all indicate that the financial system is having severe issues. I've gotten enough questions about this to warrant an attempt at a coherent explanation. Here you go.
You want to buy a $100,000 house, but you only have $10,000 in cash. A mortgage company agrees to provide you with $90,000, and in return you'll pay them back over time. More importantly, you'll pay them back more than $90,000 (the interest). So far, so good.
Why do you pay interest? To compensate the mortgage company for a) the fact that they cannot invest the $90,000 someplace else, and b) the fact that you might default on the loan. Let's ignore a) for now, because b) is what got us into trouble. There is a 1/100 chance that you'll default on the loan (maybe you'll lose your job, or it will turn out your neighborhood is on a toxic dump and the house value goes to zero). To compensate the mortgage company, you agree to pay them back $90,909 with a 99/100 probability, and $0 with a 1/100 probability. Thus the mortgage company can expect to get 99/100*$90,909 = $90,000 back, exactly equal to what they loaned you.
But the mortgage company now has this risky loan - there is a 1% chance you'll default. They don't like risk, so they have two options. One, they could keep $90,000 in the vault, and if you default, they have the $90,000 to cover it. But that sucks because it's a waste of $90,000. The second option is to unload the risk to someone like Fannie or Freddie. The mortgage company sells the mortgage to Fannie for $90,000. The mortgage company now has no risk - they don't care if you default.
Fannie, though, now has a 99/100 chance of making $909 ($90,909 that you pay back minus the $90,000 they paid for the mortgage) and a 1/100 chance of having lost $90,000. Sounds great, but Fannie doesn't really like that risk of losing $90,000 either, so they decide to sell the risk onto another financial firm (let's call them Lehman Brothers). Fannie insures their risk by giving Lehman $909 in return for a promise by Lehman Brothers that they will give Fannie $90,909 if in fact you default on the mortgage. So now no matter what Fannie gets back $90,909 (but they paid $90,000 for the mortgage and $909 for insurance, so their net profit is zero).
So now we get to Lehman. They have a 1/100 chance of having to pay Fannie $90,909, but a 99/100 chance that they keep the $909. That's a 99% chance of making $909 for doing nothing. That sounds like good business. So Lehman keeps doing this. They offer to insure another mortgage (maybe from Fannie, or Freddie, or another firm) for $909, promising to pay off $90,909 in the 1/100 chance that the mortgage defaults. Let's say that Lehman buys up exactly 100 of these contracts.
Now Lehman has 100 contracts, each with a 1/100 chance of default. Here is the big assumption that Lehman makes: that those mortgages are all statistically independent. That is, if one mortgage defaults, that doesn't make the other ones more or less likely to default. If that is true, then Lehman can expect 100*1/100 = 1 contract to default. One contract default means Lehman has to pay off $90,909 to Fannie. Lehman made 100*$909=$90,909 (off due to rounding) from making these deals, so they have a zero net profit.
[Here's an aside: why do firms do this if they make zero net profits? At each stage, in addition to the contract, they are charging a fixed fee. Your mortgage company charged you a fee for originating the mortgage - that fee, not the interest, is the basis of their profits. Fannie charges a fee for every mortgage they buy. Lehman charges a fee for every contract they write. The fees make the profits and bonuses get big. The fees are why Lehman didn't stop buying contracts.]
For a couple of years, this keeps going on, and no-one defaults at all. Lehman is making $90,909 for doing not very much (in addition to the fee they charge) and is raking in the profits. But sometime around August 2007, someone defaults on their mortgage. This would be managable for Lehman. Except that the conditions that make ME default on my mortgage are positively correlated with the conditions that make YOU default on your mortgage. In other words, if the housing market pops, it pops for everyone at once, and all of the sudden I have 5 or 10 or 20 defaults all at the same time.
Now what? The mortgage company doesn't care, they sold your mortgage to Fannie. Fannie theoretically doesn't care - they bought insurance against this from Lehman. If 10 mortgages default, then Lehman will pay them $909,090 to cover their losses. Lehman, though, is now on the hook for $909,090. They are supposed to pay this to Fannie. Lehman doesn't have $909,090. They only have $90,909 available from insuring the mortgages. Now they could pull capital from other parts of their business (like commercial lending or investment banking or whatever) to cover this loss. This would lower Lehman's profitability, but they could make good on their contracts.
The problem is that enough mortgages default all at once that Lehman cannot cover its obligations even if they liquidate everything else they own. They go bankrupt. If Lehman goes bankrupt, then what happens to Fannie? Fannie is out $909,090. If Fannie is out $909,090, they cannot purchase more mortgages. If they can't purchase more mortgages, the originators will no longer offer mortgages, because they don't want the risk, they just want the fees.
So the government steps in to un-privatize Fannie, providing Fannie with more money so they can keep buying mortgages. They let Lehman go, but after Lehman's bankruptcy proceedings, they might be able to pay back Fannie say $800,000 of the $909,090 they owe them.
Why did this all happen? Because Lehman (and many others) thought (implicitly or explicitly) that all those mortgages were not correlated at all. That with a 1/100 chance of default, then there would be 1 default for every 100 mortgages. The problem is that mortgage defaults are actually positively correlated. This meant that when things were good, they were really good (no one defaults). When things went bad, they went really bad (lots of people default all at once).
Should Lehman (and others) have been smarter? Yes. But they wrote more and more contracts as the good years rolled by, assuming that they'd be able to cover the 1/100 losses that might occur. They didn't get greedy, they got dumb. Dumb enough to not see the positive correlations in the mortgage market. And this brought it all crashing down.
What are the ramifications for us, the little people? The big problem is that because of all this, financial firms are reluctant to lend out any more money. Lehman obviously cannot enter into new contracts, Fannie is reluctant to buy more mortgages because they can't buy insurance on them, and mortgage originators are not loaning money to new people. So the housing market is slowed down. In addition, places like Lehman have stopped lending to other businesses, because they need the money to cover their existing debts. So lots of businesses are not hiring new people, or buying new equipment, which means that the job market is bad.
When will it be over? Once all the financial firms can unwind who owes what, and figure out exactly how much they can expect to be paid from places like Lehman. Once they have certainty again, they will start to lend, and the economy will pick back up. I have no idea how long that could take.
You want to buy a $100,000 house, but you only have $10,000 in cash. A mortgage company agrees to provide you with $90,000, and in return you'll pay them back over time. More importantly, you'll pay them back more than $90,000 (the interest). So far, so good.
Why do you pay interest? To compensate the mortgage company for a) the fact that they cannot invest the $90,000 someplace else, and b) the fact that you might default on the loan. Let's ignore a) for now, because b) is what got us into trouble. There is a 1/100 chance that you'll default on the loan (maybe you'll lose your job, or it will turn out your neighborhood is on a toxic dump and the house value goes to zero). To compensate the mortgage company, you agree to pay them back $90,909 with a 99/100 probability, and $0 with a 1/100 probability. Thus the mortgage company can expect to get 99/100*$90,909 = $90,000 back, exactly equal to what they loaned you.
But the mortgage company now has this risky loan - there is a 1% chance you'll default. They don't like risk, so they have two options. One, they could keep $90,000 in the vault, and if you default, they have the $90,000 to cover it. But that sucks because it's a waste of $90,000. The second option is to unload the risk to someone like Fannie or Freddie. The mortgage company sells the mortgage to Fannie for $90,000. The mortgage company now has no risk - they don't care if you default.
Fannie, though, now has a 99/100 chance of making $909 ($90,909 that you pay back minus the $90,000 they paid for the mortgage) and a 1/100 chance of having lost $90,000. Sounds great, but Fannie doesn't really like that risk of losing $90,000 either, so they decide to sell the risk onto another financial firm (let's call them Lehman Brothers). Fannie insures their risk by giving Lehman $909 in return for a promise by Lehman Brothers that they will give Fannie $90,909 if in fact you default on the mortgage. So now no matter what Fannie gets back $90,909 (but they paid $90,000 for the mortgage and $909 for insurance, so their net profit is zero).
So now we get to Lehman. They have a 1/100 chance of having to pay Fannie $90,909, but a 99/100 chance that they keep the $909. That's a 99% chance of making $909 for doing nothing. That sounds like good business. So Lehman keeps doing this. They offer to insure another mortgage (maybe from Fannie, or Freddie, or another firm) for $909, promising to pay off $90,909 in the 1/100 chance that the mortgage defaults. Let's say that Lehman buys up exactly 100 of these contracts.
Now Lehman has 100 contracts, each with a 1/100 chance of default. Here is the big assumption that Lehman makes: that those mortgages are all statistically independent. That is, if one mortgage defaults, that doesn't make the other ones more or less likely to default. If that is true, then Lehman can expect 100*1/100 = 1 contract to default. One contract default means Lehman has to pay off $90,909 to Fannie. Lehman made 100*$909=$90,909 (off due to rounding) from making these deals, so they have a zero net profit.
[Here's an aside: why do firms do this if they make zero net profits? At each stage, in addition to the contract, they are charging a fixed fee. Your mortgage company charged you a fee for originating the mortgage - that fee, not the interest, is the basis of their profits. Fannie charges a fee for every mortgage they buy. Lehman charges a fee for every contract they write. The fees make the profits and bonuses get big. The fees are why Lehman didn't stop buying contracts.]
For a couple of years, this keeps going on, and no-one defaults at all. Lehman is making $90,909 for doing not very much (in addition to the fee they charge) and is raking in the profits. But sometime around August 2007, someone defaults on their mortgage. This would be managable for Lehman. Except that the conditions that make ME default on my mortgage are positively correlated with the conditions that make YOU default on your mortgage. In other words, if the housing market pops, it pops for everyone at once, and all of the sudden I have 5 or 10 or 20 defaults all at the same time.
Now what? The mortgage company doesn't care, they sold your mortgage to Fannie. Fannie theoretically doesn't care - they bought insurance against this from Lehman. If 10 mortgages default, then Lehman will pay them $909,090 to cover their losses. Lehman, though, is now on the hook for $909,090. They are supposed to pay this to Fannie. Lehman doesn't have $909,090. They only have $90,909 available from insuring the mortgages. Now they could pull capital from other parts of their business (like commercial lending or investment banking or whatever) to cover this loss. This would lower Lehman's profitability, but they could make good on their contracts.
The problem is that enough mortgages default all at once that Lehman cannot cover its obligations even if they liquidate everything else they own. They go bankrupt. If Lehman goes bankrupt, then what happens to Fannie? Fannie is out $909,090. If Fannie is out $909,090, they cannot purchase more mortgages. If they can't purchase more mortgages, the originators will no longer offer mortgages, because they don't want the risk, they just want the fees.
So the government steps in to un-privatize Fannie, providing Fannie with more money so they can keep buying mortgages. They let Lehman go, but after Lehman's bankruptcy proceedings, they might be able to pay back Fannie say $800,000 of the $909,090 they owe them.
Why did this all happen? Because Lehman (and many others) thought (implicitly or explicitly) that all those mortgages were not correlated at all. That with a 1/100 chance of default, then there would be 1 default for every 100 mortgages. The problem is that mortgage defaults are actually positively correlated. This meant that when things were good, they were really good (no one defaults). When things went bad, they went really bad (lots of people default all at once).
Should Lehman (and others) have been smarter? Yes. But they wrote more and more contracts as the good years rolled by, assuming that they'd be able to cover the 1/100 losses that might occur. They didn't get greedy, they got dumb. Dumb enough to not see the positive correlations in the mortgage market. And this brought it all crashing down.
What are the ramifications for us, the little people? The big problem is that because of all this, financial firms are reluctant to lend out any more money. Lehman obviously cannot enter into new contracts, Fannie is reluctant to buy more mortgages because they can't buy insurance on them, and mortgage originators are not loaning money to new people. So the housing market is slowed down. In addition, places like Lehman have stopped lending to other businesses, because they need the money to cover their existing debts. So lots of businesses are not hiring new people, or buying new equipment, which means that the job market is bad.
When will it be over? Once all the financial firms can unwind who owes what, and figure out exactly how much they can expect to be paid from places like Lehman. Once they have certainty again, they will start to lend, and the economy will pick back up. I have no idea how long that could take.
Tuesday, September 16, 2008
Hurricane Ike Photos
As promised, here is a little slideshow with some of the damage done by Ike in our yard. This is all superficial stuff, and today our lawn looks like nothing happened. There are lots of gigantic old trees down in Houston, and lots of people still without power or drinkable water. We were spared.
Hurricane Ike Post Game
Short version: we're okay. We now have power, water, and phone/internet/cable. No damage to the house, just lots of tree limbs down.
Lots of random thoughts during this whole process:
- I should probably have turned off the sprinklers
- Power line fuses blow up with a really eery green light
- In the future, trying to cram ourselves into a single closet is not a good idea
- When you don't have power, you can't get "Barbie and the Diamond Castle" out of the DVD player
- Abby turned 5 during a hurricane
- Our power was back up in 24 hours, our water was drinkable in 72, and our cable/phone/internet was back up in about 60. Lucky.
- Dog-sitting for nervous part Shiht-zu during a hurrican is sub-optimal when you want to try to sleep
- Lot's of people are idiots - the radio had tons of call-ins from people "watching from our back porch"
- Hurricane is a good way to meet your neighbors (during clean-up)
- Our block is really industrious, most people had their debris out on the curb by Saturday night
- Our weather is great right now, seems like a big cost to pay for nice weather in Houston in September
- Why is UH open for class today? Most of my grad students are still without power and water
- Several of our faculty are without power or water, too
- But beyond that, one of my colleagues wife had their baby on Saturday, during the hurricane (no, they did not name him Ike)
- Wind can be really, really loud
- Thanks to the roof guys who fixed the leak around our chimney a few months ago, it held up great
- Can't say the same for the caulk job around the front windows, most of which leaked during the storm
- The girls school really got hammered, and now we're wondering what we're supposed to do with them
- More broadly, how are people supposed to get back to work if they can't send their kids to school? Not saying that closing the schools is wrong, but it is kind of a catch-22
- Got to use a chainsaw for the first time in a long time, very fun to destroy things
- Lots of wet organic matter lying around in our yard, so we've got a jump start on the compost pile we wanted to start
I'll try to post some pictures later today or tomorrow.
Thanks to everyone who e-mailed, called, or just thought about us during the storm. We appreciate it.
Lots of random thoughts during this whole process:
- I should probably have turned off the sprinklers
- Power line fuses blow up with a really eery green light
- In the future, trying to cram ourselves into a single closet is not a good idea
- When you don't have power, you can't get "Barbie and the Diamond Castle" out of the DVD player
- Abby turned 5 during a hurricane
- Our power was back up in 24 hours, our water was drinkable in 72, and our cable/phone/internet was back up in about 60. Lucky.
- Dog-sitting for nervous part Shiht-zu during a hurrican is sub-optimal when you want to try to sleep
- Lot's of people are idiots - the radio had tons of call-ins from people "watching from our back porch"
- Hurricane is a good way to meet your neighbors (during clean-up)
- Our block is really industrious, most people had their debris out on the curb by Saturday night
- Our weather is great right now, seems like a big cost to pay for nice weather in Houston in September
- Why is UH open for class today? Most of my grad students are still without power and water
- Several of our faculty are without power or water, too
- But beyond that, one of my colleagues wife had their baby on Saturday, during the hurricane (no, they did not name him Ike)
- Wind can be really, really loud
- Thanks to the roof guys who fixed the leak around our chimney a few months ago, it held up great
- Can't say the same for the caulk job around the front windows, most of which leaked during the storm
- The girls school really got hammered, and now we're wondering what we're supposed to do with them
- More broadly, how are people supposed to get back to work if they can't send their kids to school? Not saying that closing the schools is wrong, but it is kind of a catch-22
- Got to use a chainsaw for the first time in a long time, very fun to destroy things
- Lots of wet organic matter lying around in our yard, so we've got a jump start on the compost pile we wanted to start
I'll try to post some pictures later today or tomorrow.
Thanks to everyone who e-mailed, called, or just thought about us during the storm. We appreciate it.
Wednesday, September 10, 2008
Convention Bounces and National Polls
We're about two months away from Election Day, and every day stories run about Obama or McCain's "bounce" from their conventions, or selection of VP candidates, or what-have-you. There are things I dislike about both candidates, but the coverage of the campaign is particularly annoying at times. One aspect that really grates on my nerves is the breathless reporting of the latest results of national polls. Let me say this slowly: these...polls....are....useless.
We do not have a popular vote for President, we have an electoral system. The national poll is irrelevant. If you'd like a recent example, consider the year 2000, when GWB had fewer votes but won the election. If you'd like to go back further, consider that Bill Clinton won in 1992 without getting 50% of the vote. So examining national polls has close to no information to offer you on the election.
The appropriate metric to consider is the likely electoral vote count. Talking about national polling numbers is like talking about total runs scored in the World Series. Quick, who scored more total runs last year, the Red Sox or the Rockies? Doesn't matter. What matters is that the Red Sox won 4 games. Doesn't matter how big the margin was, it just matters that they won.
Regardless of the national polling, most states are probably locked into voting Republican or Democratic. Obama probably has 243 electoral votes pretty much locked up, while McCain has 240 (assuming Florida is solid McCain territory). To reach 270, the number needed to win, each of them has to capture some portion of the relatively undecided states in this list:
New Hampshire (4), Ohio (20), Michigan (17), Colorado (9), and Nevada (5). So just like the last several elections, Ohio is going to matter a lot.
National polling doesn't tell you a lot about how people in Ohio or Michigan or Colorado are going to vote. Day to day variations in national polling mean nothing. The total national vote means nothing. Most political reporting parses out the national polling results so closely because it is easy, and the reporters are lazy. If you want to look hard at the likely outcome of this election, track the movement in the polls in those five states.
We do not have a popular vote for President, we have an electoral system. The national poll is irrelevant. If you'd like a recent example, consider the year 2000, when GWB had fewer votes but won the election. If you'd like to go back further, consider that Bill Clinton won in 1992 without getting 50% of the vote. So examining national polls has close to no information to offer you on the election.
The appropriate metric to consider is the likely electoral vote count. Talking about national polling numbers is like talking about total runs scored in the World Series. Quick, who scored more total runs last year, the Red Sox or the Rockies? Doesn't matter. What matters is that the Red Sox won 4 games. Doesn't matter how big the margin was, it just matters that they won.
Regardless of the national polling, most states are probably locked into voting Republican or Democratic. Obama probably has 243 electoral votes pretty much locked up, while McCain has 240 (assuming Florida is solid McCain territory). To reach 270, the number needed to win, each of them has to capture some portion of the relatively undecided states in this list:
New Hampshire (4), Ohio (20), Michigan (17), Colorado (9), and Nevada (5). So just like the last several elections, Ohio is going to matter a lot.
National polling doesn't tell you a lot about how people in Ohio or Michigan or Colorado are going to vote. Day to day variations in national polling mean nothing. The total national vote means nothing. Most political reporting parses out the national polling results so closely because it is easy, and the reporters are lazy. If you want to look hard at the likely outcome of this election, track the movement in the polls in those five states.
Ike Ike Baby
Right now, we're just on the outskirts of the "Cone of Doom", so we might miss out on any major mayhem. Fingers remain crossed.
Monday, September 8, 2008
Well sh#@
So this is not promising. Even if this thing doesn't hit us in the face, it looks like we'll be on the dirty side, with the wind pushing all the water up the ship channel, giving the rain no place to go. Time to blow up that inflatable raft.......
Friday, September 5, 2008
I'm so hungry
This article explains so much. Apparently people engaged in intellectual tasks have greater variance in their glucose levels, and so feel hungry. This is despite the fact that in 45 minutes of intellectual activity, you've burned only 3 calories more than you would watching TV.
Wednesday, September 3, 2008
More Books
Just finished off a few more books:
1) Suite Francaise, by Irene Nemirovsky. (** 1/2) The story behind the book is almost better than the book itself. Nemirovsky was a French Jew who wrote in the 1930's and into the 1940's before being shipped off to Auschwitz. The notes and manuscript for this book were only found recently and published. It tells the story of the occupation of France from the perspective of a host of different families. The first half of the book is really engaging, as it connects the lives of these different people in random and coincidental ways as they all try to retain some normalcy. Unfortunately, the second half of the book lags when it settles down on to the experience of primarily one woman and her slowly growing infatuation with the German officer billeted in her house (cue the Hallmark channel music here).
2) Devil in the White City, by Erik Larson. (****) Might be one of the most riveting books I've read in a long time. The story of the building and staging of the Chicago World's Fair is told alongside the story of H. H. Holmes, one of the first serial killers in American history. Chilling detail on Holmes' activities, and a fascinating set of trivia and information on how the World's Fair changed Chicago itself along with many people who worked or went there. Fun read, aside from the gruesome serial killing, of course.
1) Suite Francaise, by Irene Nemirovsky. (** 1/2) The story behind the book is almost better than the book itself. Nemirovsky was a French Jew who wrote in the 1930's and into the 1940's before being shipped off to Auschwitz. The notes and manuscript for this book were only found recently and published. It tells the story of the occupation of France from the perspective of a host of different families. The first half of the book is really engaging, as it connects the lives of these different people in random and coincidental ways as they all try to retain some normalcy. Unfortunately, the second half of the book lags when it settles down on to the experience of primarily one woman and her slowly growing infatuation with the German officer billeted in her house (cue the Hallmark channel music here).
2) Devil in the White City, by Erik Larson. (****) Might be one of the most riveting books I've read in a long time. The story of the building and staging of the Chicago World's Fair is told alongside the story of H. H. Holmes, one of the first serial killers in American history. Chilling detail on Holmes' activities, and a fascinating set of trivia and information on how the World's Fair changed Chicago itself along with many people who worked or went there. Fun read, aside from the gruesome serial killing, of course.
Tuesday, September 2, 2008
She's, like, soooo intellectually vacuous
So I was playing with Abby this weekend, and this involved a lot of dressing and undressing Barbie dolls. I will give you all a moment to cackle evilly at my complete emasculation. Go ahead, it's okay, I'm fine with it now.
Done?
Okay, so everyone knows that Barbie possesses a frame that would be structurally impossible for a real person to emulate. One noticeable feature is that her ankles and feet are impossibly small. It would be like trying to drive a Suburban on a set of bicycle tires - they couldn't take the load.
Aside from the freakishly slender ankles and the impossibly long legs, though, the thing I found most disturbing about the Barbies was the congenital head tilt they all had. If you pick you up, the head droops ever so slightly to one side or the other. Not backwards, not frontwards, sideways.
This gives Barbie an eternal expression of air-headedness. This is the same pose taken by every over-makeuped giggle slut I have ever met, whether they were found at the bar, the fraternity party, the mall, or the pick-up line at the pre-school. It's an expression of complete intellectual submission, and I want to punch everyone who appears this stupid.
You can just hear Barbie telling Ken, "Wow, that's soooo interesting. You must be very successful. I can barely remember to pay my Abercrombie and Fitch credit card on time. Hey, did I hear you say you had tickets to the Matchbox 20 concert?"
I can only imagine that this happens to women who've been lobotomized in some manner. Their brain must only occupy a fraction of the volume inside their skull, and they have no counter-weight to keep their head upright. Or is this some kind of optimal re-fueling stance to get the air back into their head?
I'm trying to figure out how I can drive some screws through each Barbies head to fix it in an upright position, just in case the girls decide that because they can't look like Barbie, maybe they'll act like Barbie.
Done?
Okay, so everyone knows that Barbie possesses a frame that would be structurally impossible for a real person to emulate. One noticeable feature is that her ankles and feet are impossibly small. It would be like trying to drive a Suburban on a set of bicycle tires - they couldn't take the load.
Aside from the freakishly slender ankles and the impossibly long legs, though, the thing I found most disturbing about the Barbies was the congenital head tilt they all had. If you pick you up, the head droops ever so slightly to one side or the other. Not backwards, not frontwards, sideways.
This gives Barbie an eternal expression of air-headedness. This is the same pose taken by every over-makeuped giggle slut I have ever met, whether they were found at the bar, the fraternity party, the mall, or the pick-up line at the pre-school. It's an expression of complete intellectual submission, and I want to punch everyone who appears this stupid.
You can just hear Barbie telling Ken, "Wow, that's soooo interesting. You must be very successful.
I can only imagine that this happens to women who've been lobotomized in some manner. Their brain must only occupy a fraction of the volume inside their skull, and they have no counter-weight to keep their head upright. Or is this some kind of optimal re-fueling stance to get the air back into their head?
I'm trying to figure out how I can drive some screws through each Barbies head to fix it in an upright position, just in case the girls decide that because they can't look like Barbie, maybe they'll act like Barbie.
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