March 2009

Recently, I’ve decided to look back at old rants for inspiration for new stuff, bad or good. In this spirit, back after the election I wrote:

So, coming soon to a Diehard Republican—and, I think even more likely, the sorely disappointed “bake sale bomber” type progressives when Obama fails to deliver on the impossible things they’ve projected onto him—near you: Obama Derangement Syndrome…[.]

You can read the rest here. So, let’s just say I was “pleased” to see this.

Maybe “unsurprised” is the right word. Whatever. Is anyone really surprised? Back during the recent period of Republican dominance the backbenchers got kept in line by Tom “The Hammer” DeLay, but Dems haven’t been so good at that kind of strongarm for quite some time.

In a recent NY Times piece, noted imperial advisor Nicolas Kristof points out that the Emperor’s Advisers Have No Clothes:

The expert on experts is Philip Tetlock, a professor at the University of California, Berkeley. His 2005 book, “Expert Political Judgment,” is based on two decades of tracking some 82,000 predictions by 284 experts. The experts’ forecasts were tracked both on the subjects of their specialties and on subjects that they knew little about.

The result? The predictions of experts were, on average, only a tiny bit better than random guesses — the equivalent of a chimpanzee throwing darts at a board.

I salute Kristof for having the courage to declare that his profession (along with pretty much everyone else) has no clothes (or at least far fewer clothes than we think—perhaps a German speedo!) I have sometimes disagreed vehemently with Kristof over various issues, but I have to admire anyone who has the moral courage to turn the harsh light on his own profession, and even himself:

The marketplace of ideas for now doesn’t clear out bad pundits and bad ideas partly because there’s no accountability. We trumpet our successes and ignore failures — or else attempt to explain that the failure doesn’t count because the situation changed or that we were basically right but the timing was off.

For example, I boast about having warned in 2002 and 2003 that Iraq would be a violent mess after we invaded. But I tend to make excuses for my own incorrect forecast in early 2007 that the troop “surge” would fail.

As Kristof notes, the greatest problem is with extremely self-confident experts who are morally certain that they’re right:

Mr. Tetlock called experts such as these the “hedgehogs,” after a famous distinction by the late Sir Isaiah Berlin (my favorite philosopher) between hedgehogs and foxes. Hedgehogs tend to have a focused worldview, an ideological leaning, strong convictions; foxes are more cautious, more centrist, more likely to adjust their views, more pragmatic, more prone to self-doubt, more inclined to see complexity and nuance. And it turns out that while foxes don’t give great sound-bites, they are far more likely to get things right.

Perhaps the problem is that expertise grants enormous ability to describe details about the present state of things in a field or area. There’s no absolute logical requirement for that to translate into better prediction in that area, but we’re basically hard-wired to think that there is. Combine that with our hard-wired response to confidence and we’ll follow a knowledgeable hedgehog anywhere, even to Hell itself.

Contrast that with the ability of markets,in general, to outperform experts. The best example is the stock market, whose simple average generally outperforms 2/3 of managed mutual funds each year (an example from last year: and another: Over time, the results are even more staggering, as very few mutual funds repeat winning performance from year to year. Experts simply cannot complete with the “wisdom” of the market as a whole.

An important thing to keep in mind, especially today as we’re urged to put more and more confidence in expert management of the financial sector by government regulators, expert allocation of money by government bureaucrats, and the most massive transfer of money from the private market-driven economy to government experts in recent history. It’s perhaps no coincidence that the government is relying upon the least-regulated part of the financial sector (which has been least affected by the recent woes) to bail out the most-regulated part:

Democrats like Barack Obama and Barney Frank, at least on the campaign trail or in sound bites, have portrayed the financial crisis as the product of deregulation. The solution, they say, is more regulation. In that vein Frank, one of the brainiest members of Congress, is proposing that the Federal Reserve become a regulator of systemic risk, with the power to regulate firms that because of their size or strategic position are of systemic importance.

My American Enterprise colleague Peter Wallison has argued powerfully that this is a bad idea. Neither the Federal Reserve or other regulators identified the systemic risk which caused this crisis. Neither did most financial institutions or investors. Systemic risk is hard to identify for the very reason that it is systemic.

If experts are as unreliable as Kristof argues, can expert risk assessment (which is what regulation is) be expected to outperform market-based risk assessment (which is what an unregulated market does)? Certainly not all the time, which is precisely the lesson that we should learn from the recent crisis originating in the heavily-regulated mortgage industry…and precisely the lesson our leaders seem determined not to learn.

(Hat tip to Angry New Mexican for the Kristof link and article!)

In war, truth is the first casualty. –Aeschylus

Not quite a year ago I waxed slightly poetic about the French Navy’s qualities in the Le Ponant mission. If you recall, this was the luxury yacht that was captured in the Gulf of Aden and then ransomed, and subsequently a commando mission of the style of a Charlie Sheen movie (but with less casualties) bagged pirates, who were triumphantly brought back to Paris to stand trial.

It seems that the devil is, in fact, in the details.

If William Langewiesche’s Vanity Fair story is to be believed, the much-applauded Le Ponant rescue mission seems to have been rather long on PR and rather short on actual heroics by les commandos francais. Basically, after some delaying and theatrics reminiscent of a Charlie Chaplin movie, the pirates got paid off—in fact paying them off is cost-effective by a long shot, possibly even profitable, or so the cited article claims—and a small proportion of the money was recovered. Three hapless pirates were purloined back to Paris. An SUV was destroyed with an anti-tank rocket which alone probably cost more than the recovered ransom. I have little doubt the entire military theater cost far more than the ransom. It’s not even clear that they were all even pirates; one may simply be a taxi driver. Of course, after perpetrating the Jessica Lynch fraud, it should be noted that the US military is in no position to talk, but nonetheless, the Le Ponant story has a peculiarly gallic je ne sais quoi? to it.

In the past year or so, I’ve gotten pretty serious about photography. One of the things I’ve discovered both through my own experimenting, and by reading a number of excellent books on the subject, is that there is this magical device called a “polarizing filter” which, believe it or not, will make a good 95% of your outdoor pictures worlds better, just by slapping it on, and rotating it until the sky turns a deep and magical blue. While just about every photographer knows this little trick, I’d bet they don’t know the history of this incredible device. It’s a tale of war, of invention, and most of all, dog piss.

The polarizing filter was invented by Dr. Edwin Land, of Polaroid fame (hence the name), who had been studying the problem of making a polarizing filter for civil and military applications during his time as a student at Harvard, when he ran across work by Dr. William Herapath whose pupil, one Mr. Phelps, discovered that feeding a dog iodine and quinine caused it’s urine to form strange green crystals which polarized light, called herapathite. Dr. Herapath had spent years trying to grow a single large crystal of herapathite, to no avail, and had given up on the project. Land, inspired by these antics with dog urine, decided to go the opposite direction, and invented a process for forming many small crystals of herapathite, and lining them up properly so they would function as a single large crystal by forcing the, *ahem* crystalizing substance through narrow slits. His experiments were successful, and Harvard invited him back and provided him with space to continue his research.

World War II had several profound effects on Land’s invention. Reflections on the water made it difficult to spot submarines and other naval vessels, thus polarizing sunglasses were used to cut down on the reflected light, making it easier for scouts to spot ships at a distance. However while this increased the demand for polarizing filters, World War II also saw US soldiers coming face to face with the terror of malaria in the South Pacific. Large amounts of quinine were needed to treat these men, limiting the supply for polarizing filters. Land, ever the inventor, took this challenge as an opportunity and developed a new process for creating polarizing filters using sheets of polyvinyl alcohol stretched so as to pull the molecules into alignment.

This new method did not require quinine, and was actually found to create better quality filters than the older iodoquinine sulfate methods, and continued to be the dominate method for producing polarizing filters. Thus died the dog piss polarizer.

-Angry Midwesterner

Seldom does a day go by when someone or other doesn’t pronounce the American lifestyle doomed. Our cars will kill the planet, our cities will kill the planet or our very existence will kill the planet. We’re just wrong, wrong, wrong and we some person who is “right” feels the need to tell us what to do to save ourselves and everybody else.

Let me say first off, I have no sympathy whatsoever for the overpopulation alarmists. Nine times out of ten they’re crypto-eugenicists who are absolutely terrified of the countries where people are still having children above the replacement rate (places where people have dark skin… coincidence? I think not!). These are the very same people who feel that we ought to blanket all of Africa in a layer of latex to prevent “them” from ever being a threat to our self-indulgent existence. These folks are worse than the hippies — at least the hippies are willing to put their money where their mouth is when it comes to sustainable living (even though I’d rather see the hippies compromise when it comes to hygiene) — these folks think that shopping at Whole Foods and posting child-hating comments on blogs fulfills their duties as stewards of the earth (unless they’re not shopping at Whole Foods because corporations are evil. Lucky for us the Zero Population Growth crowd is a self-correcting problem in the long term… we just have to live with their blatant hypocrisy in the interim.

More reasonable opponents of the American lifestyle fall into two categories. The first are what I’ll call “Walden Pond Hippies.” They think we need to go back to the land and leave our cities and suburbs to fallow. While they certainly have sympathies with the crypto-eugenicists, and share their distaste for homo sapiens sapiens, the Walden Pond Hippies envision a new America based on a return to farming small towns and local commerce. And in a sense, the Hippies aren’t too far off from a livable idea — the Amish already live the life they foresee in a fairly complete way. And you can’t find people who more honestly live a substantial portion of the American dream than the Amish. Not to mention, the Amish do Steampunk in real life. In no other country could you find people like this. It just would not work.

Unfortunately, the WPH’s still want things modern things like electricity, which is where their plan (as opposed to the Amish) starts to break down. Rural living is hideously energy inefficient. There’s a reason why New York City is the most energy efficient portion of the United States, no matter how much the WPH’s despise it — density breeds efficiency. Even the Amish would have to change their lifestyles in “Hippymerica,” as they don’t oppose technology like Luddites, they just don’t want to let technology disrupt their community life. They still profit from our fancy American lifestyle, albeit indirectly. In “Hippymerica” this would no longer be possible.

The second group of opponents to the American lifestyle are what I’ll call “Effete Europeans.” Noting the flaw in the WPH argument — their proposed alternative is profligate in energy — the Effete Europeans insist on urban living as the real answer. Goodbye Levittown, hello Hell’s Kitchen. The problem with this argument is again all in the density — people who don’t have space generally don’t reproduce. There are a number of reasons why fertility rates in Europe are in the toilet but the one I want to harp on here is simple — when you’re stuck living in your tiny apartment (or worse still your parents’ tiny apartment, which appears to be the European norm), you’re not going to have kids. Which two European countries have the highest fertility rates? Ireland and France the two countries whose love affair with the land (and in France’s case, with farming specifically) hasn’t been consumed by faceless urbanism. “Euramerica” would look just like the worst parts of Amsterdam only with more cynical gun-toting conservatives. Call me unimpressed.

And so we’re left with America’s Choice: The Suburb. Sure it’s energy intensive — but not as bad as “Hippymerica” and we’ll for sure have a lot more space for the kids necessary to preserve Western Civilization than in “Euramerica.” Truth, Justice and Subdivisions. We have a long way in terms of things like energy efficiency, but if saving the planet means living in Walden or Amsterdam, then I’m all for investing heavily in space travel right now. I hear that real estate on Mars is pretty cheap these days and the views are out of this world…

Money down the Drain

Do your pockets feel a little lighter than they used to? Perhaps about $7,000 lighter? Well don’t worry, that’s just the cost of the economic stimulus for each tax paying American! That emptiness you feel is just feeling of our economy being stimulated by Obama’s package! So now that we’re out $7,000 each the question is, will it work? Will our economy finally get the treatment it needs to get up again? Will we be driven into the cold deadly arms of Socialism? Is Obama’s $825 billion package really as big as everyone seems to think it is?

The Angry Men weigh in on the issue, and hopefully you, dear reader, will as well. We want to know, what do you think of Obama’s package?

Angry Midwesterner

Despite having voted for Obama over McCain, I have to agree with McCain on this issue, the so called “stimulus package” is mostly pork. Even the slightest bit of research shows us that only around 3% of the stimulus money will be spent in the next year, and in two years time only 16% of that money will be spent. A huge chunk of the money isn’t even marked to spent before 2011. So how exactly is this the crucial time sensitive stimulus it was sold as? How does it help America if the money isn’t even being spent? This isn’t about reviving our economy, it’s about never letting a crisis go to waste, as Rahm Emanuel has mentioned, many times.

The worst of it is, the pork isn’t even good pork. It’s mostly wasteful spending probably driven by lobbyists. If Obama really wanted to pork the US so badly, I at least wish he’d had the decency to not lie to us and claim it would stimulate our economy while the special interest groups he is beholden to got theirs too. This stimulus package is a violation of the trust America put in Obama, and is most definitely not the change we voted for.

Angry Diesel Engineer

I don’t see how this massive piece of legislation (almost 500 pages in the form Obama signed) is supposed to “spend us out of our recession.”  

While I completely disdain Obama’s socialist utopia (believing that I am better suited to manage my affairs than Uncle Sam), I am interested to see what happens with all this oversight that gets put in place.  If you haven’t checked it out yet, is an interesting website, with lots of ambiguous statements about how our crazy reckless spending is going to help everyone keep their job.  I am disappointed that millions of dollars are going to create government bureaucratic jobs for said oversight positions though.

I am interested to see where this takes us especially with health care.  I’m not sure how making all medical records electronic will help save jobs (unless you get a job on the H.I.T. board).  All in all, I have great distrust in the government making health care decisions for me.  If they were making decisions for you over  100 years ago, your free health care would have been mandated by the gov. to let your blood.  In a field that is constantly improving in technique and knowledge, free market is the only logical way to go.

Angry Overeducated Catholic


I think Angry Midwesterner’s boiling it down to $7000 per taxpayer is a great way to think about this. Another is how much money is being spent per job created (about $300,000 if I recall). And a third is to note the areas most impacted by the current economic woes, the areas where the most money is going, and then notice that they don’t really line up:

At first glance, Nevada, for example, should be up in arms. In fact, that map doesn’t look at all like the map of a package intended to help out those hurt by the recession. Actually, though, the per-capita map shows you that it’s not really that bad, but it’s still somewhat disconnected from the unemployment rate.

Because, after all, it’s not really about helping those hurt by economic turmoil…it’s about buliding the Great Society v2.0 (aka New Deal v3.0).

And that $7000 price tag? Only going to go up folks, or should I say, suckers! You tax-paying, hardworking chumps whose money will be systematically confiscated and transferred to the ne’er-do-wells, luckless souls, aging Boomers, shiftless bums, and criminal classes across this great land! The Democratic leadership views you as so many stupid hick sheep to be sheared for the Greater Glory of the People’s Government. It’s just the start!

Remember: Obama is going to cure cancer…with your money, all of it if that’s what it takes.

Angry Political Optimist

The size of the stimulus package is not so much of an issue. At the end of World War II, the debt as a fraction of GDP approached 100%. Even if the dire predictions of the Republicans bear out, and Obama’s administration creates a $4T running deficit, a functional United States of America can recover in less than ten years. 

What should be worrying people is the implicit surrender of what makes America great that is embedded in these packages. Since when do Americans look to the government for assistance? Remember when people listed the classical set of great lies and number two on the list was “I’m from the government and I’m here to help you?” Americans need to look inwards to themselves and to each other for support, not to Obama and his minions. If we accept what Obama and the Congress tells us we are — what is implicit in this package — then we will NEVER recover as a nation.

As a practical matter, spending money requires an efficient bureaucracy, even if they only spend on themselves. Bush’s Katrina fiasco was caused not by an unwillingness to assist black residents but by the total unwieldiness of the FEMA distribution system. Wal-Mart, and for that matter, the US Military were on site and assisting within days (only to be rebuffed and hindered by FEMA). Does anyone really think that doubling down on the bureaucracy in Washington will allow them to spend the stimulus money. Do the math. You have to distribute $2.2B a day. (I realize that this is not the way it works, but really, by 2010, I bet that most of the money is still just an allocation on the liability side of the balance sheet. One that can be wiped away with a stroke of a pen in 2010 I might add.)

Obama and the Congress have shown their true colors. They make the Republican porkers look like pikers. Let them have their day in the sun, and then in two years bury the bastards for another 40.

    The Wall Street meltdown might have a silver lining.

    No I’m not talking about the schadenfreude that many are experiencing now that the investment bankers are falling from their lofty heights. That might be fun, but it’s not a silver lining. No, I’m talking about the large amount of highly talented people who became “quants” aka mathematical modelers in the finance sector now having to seek employment elsewhere.

    Now don’t get me wrong, there’s a place for finance, but we as a society over-invested in it. One of the really sad things was that the greed led a lot of people to put deep and abiding faith in the models. Those of us involved in mathematical models for any length of time know from bitter personal experience: The last thing you should do is believe a model, especially if it’s your model. Models are useful, not true, and should be viewed with a great deal of skepticism, always. While I suspect that the “quants” knew this, the greedy, myopic twenty five year olds doing the trading—the ones with the right hair and a nice liberal arts degree from an Ivy or Duke—didn’t (they’re certainly not trained to evaluate such things), and given the almighty dollar coming their way I suspect a good number of the quants started believing too.

    If you want a case in point, I offer up Doctors Merton and Scholes, Nobel laureates in economics, 1997, and principals of Long Term Capital Management. LTCM was a hedge fund founded by the smartest guys in the room. Unfortunately, their model was predicated on some assumptions that turned out not to be true, most importantly one about lack of correlation in various investments. This assumed other people weren’t copycats on what LTCM were doing. Whoops, funny how when the smartest cats in the room seem to have found a burrow of endless mice every other cat starts copying.

    One of the giant market distortions engendered by the rise of Wall Street has been the shortage of scientists, broadly defined: Fewer Americans going to engineering, chemistry, math, statistics, economics (besides finance, that is), etc. Instead, far too many of the best and brightest young people go into finance and investment banking. Something like 20% of the graduating class of Harvard in recent years goes directly to investment banking. That’s right, a 22 year old is managing your money, hoping to retire by 35 or 40 to a house in the Hamptons, another house in Bermuda, and a third one in Tahoe, with a nice trophy wife on his arm, and the surplus of young ladies living in finance capitals are there hoping to be said trophy wife. One of the reasons to chase the Ivy degree so hard was the hope—not unreasonable—that an in would be available for Junior into a hedge fund, Lehman, etc. So this massively distorted the college admissions market, too, making otherwise solid schools seem like poor buys and encouraging many families to run up piles of debt on undergraduate educations, mostly in the hope that Junior would get the right contacts in Duke that he wouldn’t get at, say, Illinois.

    I recall taking real analysis back in the mid ’90s. Hands down the smartest guy in the class was a Cal Tech educated engineer getting a PhD in Finance. Now this was just before the big model finance mania. He’d worked for a big aerospace company but with the defense budgets going down, he realized that his future lay elsewhere. This is, of course, why so many physicists ended up on Wall Street, too. I’m sure he did well but you know, finance doesn’t actually produce anything, whereas airplanes are something. It was getting so bad near the end of my tenure in grad school that I’d see students trying to “stealth” their way into finance by applying to programs in one area but taking finance classes. Getting into an actual PhD finance program was tricky and often costly but most schools will let you take a few courses in another department….

    So if there is a silver lining, I hope it is this: Smart kids with math skilz considering careers in finance, please come back. The rest of the world needs you to help deal with things like, oh, climate change, looming mass extinctions, energy shortages, world hunger, transit and infrastructure, finding productive things to do now that we won’t make piles of dough on houses nobody wants, to say nothing of good old “basic science.”

    As for the Ivy league liberal arts major turned investment banker who ran my admittedly modest portfolio into the ground with $200K in student loans breathing down his neck… thanks but I don’t want aioli, arugula, sprouts, grape tomatoes or olive tapenade, I’ll enjoy my schadenfreude plain and unadulterated.

    For further reading:

    • Niall Ferguson, The Ascent of Money. Excellent and very lucid writing. I read this on a plane to Vegas (for business!), which seemed appropriate.
    • Nassim Nicholas Taleb, The Black Swan. Rather more personal pique than is really necessary and some excessively broad statements, but generally he’s right on, particularly about the excessive faith in the Gaussian error distribution when modeling extreme events, the so-called “tail risk” being too low. We’ve seen this in other areas as well.
    • Any others?

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