The Magic of Math

The Magic of Math

via The Big Picture de Barry Ritholtz le 13/12/08

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via Dilbert

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Trade protection and growth

Il y a encore des abrutis (l'essentiel peuple les facultés d'économie et la presse anglo-saxonne) pour nier l'efficacité, dans certaines ocnditions, de politiques douanières ou assimilées qui s'éloignent du dogme ricardien. A cela il suffirait de répondre "China, 1978/2008" mais cela ne suffit apparemment pas. Heureusement certains économistes gardent une approche empirique et le résultat est intéressant, quoique assez intuitif.

Trade protection and growth

via Dani Rodrik's weblog de Dani Rodrik le 30/11/08

Ugh, yet again! But the question of whether trade liberalization/protection promotes or retards economic growth is one of those venerable topic of discussion in economics that simply refuses to go away. See for example Ha-Joon Chang's recent op-ed in the FT. One reason is that much of the discussion is driven by pre-conceived ideas (on the efficacy of markets versus governments) instead of actual evidence.

Two recent papers represent a significant advance. One, by Lehmann and O'Rourke focuses on the late 19th century, while the other, by Estevadeordal and Taylor, looks at the last thirty years. The chief contribution of these two papers is that they actually differentiate between different types of tariffs. Lehmann and O'Rourke distinguish between tariffs that protected industry, tariffs that protected agriculture, and tariffs intended to simply raise revenue. Their conclusion:

Industrial tariffs were positively correlated with growth. Agricultural tariffs were negatively correlated with growth, although the relationship was often statistically insignificant at conventional levels. There was no relationship between revenue tariffs and growth.

The sample of countries is a group of mostly developed countries over the period of 1875-1913.

Estevadeordal and Taylor, meanwhile, distinguish among tariffs on capital, intermediate, and consumer goods (plus they use an imaginative identification strategy to alleviate reverse-causation concerns). They find that it is mainly tariffs on capital and intermediate goods that retard growth, while tariffs on consumer goods have a much weaker effect.

Now, the two sets of results are somewhat in tension with each other, and it is not clear whether the differences are due to differences in statistical methods, or to the fact that the late 19th and late 20th centuries were inherently different, with the former being a period in which protection of industrial goods was good for growth while the latter was one where, at best, it was not too damaging.

Regardless of reconciliation, the bottom line is this: what matters is the structure of protection (what is being protected). The answer to the age-old question is one that economists should be accustomed to giving: it depends.

And of course one thing that it depends on is the overall state of the global macro-economy. At a time when the world is digging deeper into recession, exporting your problems through trade protection is the last thing that any responsible country should be doing.

Does globalization erode social safety nets?

Does globalization erode social safety nets?

via Dani Rodrik's weblog de Dani Rodrik le 11/12/08

Economic theory and intuition suggest that as economies become more globalized, the ability of governments to undertake redistributive policies and to engage in social spending erodes. After all, a large part of the tax base--corporations, financial intermediaries, and skilled workers in particular--become internationally mobile and can evade taxes needed to finance those public expenditures.

This is important because historically countries that are more exposed to international trade have actually had larger public sectors, in part to insulate their citizens from shocks originating from abroad. This fact, along with the lack of an obvious decline in the overall tax take in major advanced economies, has led many observers to think that the hypothesized decline of the welfare state has not in fact taken place.

Giuseppe Bertola and Anna Lo Prete have now brought new evidence to bear on this question, and their findings bear out the simple intuition. As they put it, "as technological progress and multilateral trade liberalisation have made borders less of a barrier to economic activity, the scope of redistribution policies has become smaller." Here is the chart that goes along with their result:

Another interesting argument Bertola and Prete make is that private finance seems to have partly filled the whole left by public transfers. The claim is that more developed financial markets are able to supply the insurance and consumption-smoothing provided traditionally by the welfare state in very open economies. They use the share of house prices financed by mortgages as an indicator of financial development.

I am sure this argument made a lot more sense a year ago, when the authors were doing their original research, than it does now. It will take a while until we think of finance, and housing finance in particular, as a source of insurance and stability.

Bertola and Prete are aware of this of course. So they conclude thus:

Financial markets are indeed in trouble and, if our perspective on past developments is correct, their fragility does not bode well for globalisation. The breakdown of private financial markets excites calls for stronger redistribution. If redistribution is national (as it has to be as long as politics are national), it will only be sustainable if national borders become less permeable to economic activity.

Indeed. Welcome back to the political trilemma of the global economy.

Paul Krugman: The Madoff Economy

Paul Krugman: The Madoff Economy

via Economist's View de Mark Thoma le 19/12/08

The costs of "America's Ponzi Era":

The Madoff Economy, by Paul Krugman, Commentary, NY Times: The revelation that Bernard Madoff — brilliant investor (or so almost everyone thought), philanthropist, pillar of the community — was a phony has shocked the world, and understandably so. The scale of his alleged $50 billion Ponzi scheme is hard to comprehend.

Yet surely I'm not the only person to ask the obvious question: How different, really, is Mr. Madoff's tale from the story of the investment industry as a whole?

The financial services industry has claimed an ever-growing share of the nation's income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it's ... had a corrupting effect on our society as a whole.

Let's start with those paychecks. ... The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.

But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

Consider the hypothetical example of a money manager who leverages up his clients' money..., then invests the bulked-up total in high-yielding but risky assets... For a while — say, as long as a housing bubble continues to inflate — he (it's almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he'll keep those bonuses.

O.K., maybe my example wasn't hypothetical after all.

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients' money rather than collecting big fees while exposing investors to risks they didn't understand. ... Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.

We're talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America's G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we're talking about $400 billion a year in waste, fraud and abuse.

But the costs of America's Ponzi era surely went beyond the direct waste of dollars and cents.

At the crudest level, Wall Street's ill-gotten gains corrupted and continue to corrupt politics... Meanwhile, how much has our nation's future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

Most of all, the vast riches ... undermined our sense of reality and degraded our judgment. Think of the way almost everyone important missed the warning signs of an impending crisis. How was that possible? ... The answer, I believe, is that there's an innate tendency on the part of even the elite to idolize men who are making a lot of money, and assume that they know what they're doing.

After all, that's why so many people trusted Mr. Madoff.

Now, as we survey the wreckage and try to understand how things can have gone so wrong, so fast, the answer is actually quite simple: What we're looking at now are the consequences of a world gone Madoff.

New York Times Pulls Punches On Wall Street Bubble Era Pay

New York Times Pulls Punches On Wall Street Bubble Era Pay

via naked capitalism de Yves Smith le 18/12/08

Why is no one willing to call things by their proper names, and instead resort to euphemism and double-speak?

A New York Times story today, "On Wall Street, Bonuses, Not Profits, Were Real," makes its most important point in its headline, and managed to get some good data points on how rich investment bank compensation was in the peak years, but otherwise glosses over the fundamental nature of what went on.

It was looting, and it is high time the media starts describing it in those terms.

Let us turn the mike over to Nobel Prize winner George Akerlof and Paul Romer. From the abstract of their 1993 Brookings paper:

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Bankruptcy for profit occurs most commonly when a government guarantees a firm's debt obligations. The most obvious such guarantee is deposit insurance, but governments also implicitly or explicitly guarantee the policies of insurance companies, the pension obligations of private firms, virtually all the obligations of large or influential firms. These arrangements can create a web of companies that operate under soft budget constraints. To enforce discipline and to limit opportunism by shareholders, governments make continued access to the guarantees contingent on meeting specific targets for an accounting measure of net worth. However, because net worth is typically a small fraction of total assets for the insured institutions (this, after all, is why they demand and receive the government guarantees), bankruptcy for profit can easily become a more attractive strategy for the owners than maximizing true economic values...

Unfortunately, firms covered by government guarantees are not the only ones that face severely distorted incentives. Looting can spread symbiotically to other markets, bringing to life a whole economic underworld with perverse incentives. The looters in the sector covered by the government guarantees will make trades with unaffiliated firms outside this sector, causing them to produce in a way that helps maximize the looters' current extractions with no regard for future losses...."

Re-read the key phrase: "pay themselves more than their firms are worth and then default on their debt obligations." This has happened en masse in what formerly were investment banks who have now become wards of the state.

But no one is willing to call this activity for what it was. In fact, some are still urging that we not squelch "financial innovation," which Martin Mayer described as

... a way to find new technology to do what has been forbidden with the old technology....Innovation allows you to go back to some scam that was prohibited under the old regime.

But we digress. Dick Fuld reportedly spends much of his days allegedly wondering why he didn't get a bailout. He should instead be thanking his lucky stars he is not in jail. Bankruptcy fraud is criminal, and fraudulent conveyance is subject to clawbacks. How could Lehman possibly have been producing financials that showed it had a positive net worth, yet have an over $100 billion hole in its balance sheet when it went under? No one has yet given an adequate answer on where the shortfalls were.

Commonwealth countries have a much simpler solution. If a company is "trading insolvent," that is, continuing to do business when it is in fact broke, its directors are personally liable.

We have said repeatedly that one of the triggers for the crisis was permitting investment banks to go public (prior to 1970, no NYSE member firm could be listed). We had dinner with one of our long-standing colleagues who was responsible for Sumitomo Bank's investment in Goldman Sachs and had (and continues to have) close and frequent dealings with the firm. He said that the change in the firm's behavior after it went public was dramatic. Before, it would deliberate (one might say agonize) important business decisions,. Waiting two years to enter a new field was not unheard of. But after the partners cashed in and were playing with other people's money, the firm quickly became aggressive in its use of capital in expanding the size and scope of its activities.

But the New York Times article gives an anodyne portrayal:

As regulators and shareholders sift through the rubble of the financial crisis, questions are being asked about what role lavish bonuses played in the debacle. Scrutiny over pay is intensifying as banks like Merrill prepare to dole out bonuses even after they have had to be propped up with billions of dollars of taxpayers' money. While bonuses are expected to be half of what they were a year ago, some bankers could still collect millions of dollars.

Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street's pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning...

For Wall Street, much of this decade represented a new Gilded Age. Salaries were merely play money — a pittance compared to bonuses...

While top executives received the biggest bonuses, what is striking is how many employees throughout the ranks took home large paychecks. On Wall Street, the first goal was to make "a buck" — a million dollars. More than 100 people in Merrill's bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter. Goldman declined to comment.

The bulk of the piece is about Dow Kim, former co-president of Merrill's fixed income business, and does deliver some detail about how Kim and his subordinates were paid. But it fails to delve into how the profits were illusory, the bad decisions made, how the fixed income area in particular lead to the end of Merrill's independence. Perhaps the author, Louise Story, assumed the tale has been well told elsewhere. However one effort to demonstrate the business was on the wrong track, falls woefully short. It discusses a CDO deal that went bad, but fails to establish whether Merrill took losses by virtue of retaining a big interest ("The losses on the investment far exceed the money Merrill collected for putting the deal together" does not clearly say that Merrill, as opposed to investors, suffered. One assumes so, but the drafting is ambiguous).

Even more glaring, the story mentions Merrill's disastrous, end of cycle $1.13 billion acquisition of mortgage originator First Franklin, without mentioning that deal came a cropper (Merrill shut the unit down only a year and a couple of months after it completed the transaction).

Other stories have given some of the sordid details about Merrill's ill fated mortgage expansion (a Wall Street Journal piece, "Merrill Upped Ante as Boom In Mortgage Bonds Fizzled," is one of many examples), Giving short shrift to the staggering level of strategic errors and lax risk oversight means the article fails to pin responsibility clearly for the mess on Kim and his fellow business heads. The article simply assumes the connection, but by talking about the profits without giving sufficient detail on the colossal errors, it makes Kim and his lot seem far more innocent than they really were.

Quantitative Easing

Quantitative Easing

via The Big Picture de Barry Ritholtz le 16/12/08

via Mish

Monkeys Trade Assets I

Monkeys Trade Assets I

via Grasping Reality with Both Hands: The Semi-Daily Journal of Economist Brad DeLong de Brad DeLong le 13/12/08

Virginia Postrel writes:

Pop Psychology: For more than two decades, economists have been running versions of the same experiment. They take a bunch of volunteers, usually undergraduates but sometimes businesspeople or graduate students; divide them into experimental groups of roughly a dozen; give each person money and shares to trade with; and pay dividends of 24 cents at the end of each of 15 rounds, each lasting a few minutes. (Sometimes the 24 cents is a flat amount; more often there's an equal chance of getting 0, 8, 28, or 60 cents, which averages out to 24 cents.) All participants are given the same information, but they can't talk to one another and they interact only through their trading screens. Then the researchers watch what happens.... "The fundamental value is unambiguously defined," says the economist Charles Noussair, a professor at Tilburg University, in the Netherlands, who has run many of these experiments. "It's the expected value of the future dividend stream at any given time": 15 times 24 cents, or $3.60 at the end of the first round; 14 times 24 cents, or $3.36 at the end of the second; $3.12 at the end of the third; and so on down to zero. Participants don't even have to do the math. They can see the total expected dividends on their computer screens....

The trading price should stick close to the expected value. At least that's what economists would have thought before Vernon Smith, who won a 2002 Nobel Prize for developing experimental economics, first ran the test in the mid-1980s. But that's not what happens. Again and again, in experiment after experiment, the trading price runs up way above fundamental value. Then, as the 15th round nears, it crashes. The problem doesn't seem to be that participants are bored and fooling around. The difference between a good trading performance and a bad one is about $80 for a three-hour session, enough to motivate cash-strapped students to do their best....

Experimental bubbles are particularly surprising because in laboratory markets that mimic the production of goods and services, prices rise and fall as economic theory predicts, reaching a neat equilibrium where supply meets demand. But like real-world purchasers of haircuts or refrigerators, buyers in those markets need to know only how much they themselves value the good. If the price is less than the value to you, you buy. If not, you don't, and vice versa for sellers. Financial assets, whether in the lab or the real world, are trickier to judge: Can I flip this security to a buyer who will pay more than I think it's worth?... Based on future dividends, you know for sure that the security's current value is, say, $3.12. But—here's the wrinkle—you don't know that I'm as savvy as you are. Maybe I'm confused. Even if I'm not, you don't know whether I know that you know it's worth $3.12. Besides, as long as a clueless greater fool who might pay $3.50 is out there, we smart people may decide to pay $3.25 in the hope of making a profit.... Noussair... "if you put people in asset markets, the first thing they do is not try to figure out the fundamental value. They try to buy low and sell high." That speculation creates a bubble.

In fact, the people who make the most money in these experiments aren't the ones who stick to fundamentals. They're the speculators who buy a lot at the beginning and sell midway through, taking advantage of "momentum traders" who jump in when the market is going up, don't sell until it's going down, and wind up with the least money at the end. ("I have a lot of relatives and friends who are momentum traders," comments Noussair.) Bubbles start to pop when the momentum traders run out of money and can no longer push prices up...

"The Rising Tide Tax System"

En particulier pour le concept, cité à la fin, de "equal marginal sacrifice", qui est une justification moralement intéressante de la progressivité de l'impôt

"The Rising Tide Tax System"

via Economist's View de Mark Thoma le 14/12/08

This is one of the entries in the NY Times Magazine's annual Year in Ideas:

The Rising-Tide Tax System, by Stephen Mihm, NY Times: In the last 20-plus years, overall economic growth in the United States has come at a cost: rising income inequality, which in the past few years has hit levels not seen since the late 1920s. A more progressive income tax, introduced during the New Deal, helped mitigate the problem, and it remains a likely prescription today. Yet a team of economists that includes Robert Shiller of Yale University and Leonard Burman of the Tax Policy Center recently released a paper in which they propose another way of "spreading the wealth"...

Under the proposal, the tax code would automatically be rewritten at the end of each year to reflect any changes in the relative share of national income earned by each income bracket. For example, if one year the nation's top earners saw their share of national income rise while people at the bottom saw their share grow at a slower rate (or decline), the following year's tax rates would be automatically rewritten to compensate for the new inequality. This would keep everyone's share of after-tax income at the earlier level.

The ... proposal would work both ways: if the rich saw their share of the nation's income grow more slowly relative to people lower down the economic ladder, the tax system would become less progressive...

The name of the proposal — the Rising-Tide Tax System — is an allusion to John F. Kennedy's claim in 1962 that "a rising tide lifts all boats," a promise that general economic growth would benefit all members of society. Shiller argues that it's still possible to turn Kennedy's vision into a reality. "It's something we can engineer," he says.

This has attractive properties, and it may help us to avoid the concentration of bubble-inducing excess liquidity in the hands of relatively few people, but how do we know which baseline level of inequality to target?

Also, this approach leads to the idea that the only reason for progressive taxation is redistribution, but that's not the case. Concepts such as equal marginal sacrifice can be used to support a progressive structure, so even if there is no redistribution at all we may still want to have progressive taxes. Thus, before we can use this approach we'd have to decide (at least) two things - what is the level of inequality we are targeting, and what is the base level of progressiveness that we use. For example, if there is no change in inequality from previous years, does that mean taxes should be flat?

Regression to the Mean

Regression to the Mean

via The Big Picture de Barry Ritholtz le 10/12/08

Another interesting chart from Doug Short over at dshort.com
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Here's Doug's commentary:
http://dshort.com/articles/regression-to-the-mean.html

Corporate Logos Remixed for Crisis

Corporate Logos Remixed for Crisis

via The Big Picture de Barry Ritholtz le 10/12/08

Here's a few favorites from Business Pundit:

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There's some more at the link below . . .

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Source:
After The Crisis: A Parody of 15 Corporate Logos
Ryan
Business Pundit December 9, 2008
http://www.businesspundit.com/after-the-crisis-a-parody-of-15-corporate-logos/

Dec. 3, 1984: Bhopal, 'Worst Industrial Accident in History'

Dec. 3, 1984: Bhopal, 'Worst Industrial Accident in History'

via Wired Top Stories de Tony Long le 02/12/08

1984: Poison gas leaks from a Union Carbide pesticide factory in Bhopal, India. It spreads throughout the city, killing thousands of people outright and thousands more subsequently in a disaster often described as the worst industrial accident in history.

Union Carbide chose Bhopal, a city of 900,000 people in the state of Madhya Pradesh, because of its central location and its proximity to a lake and to the country's vast rail system.

The plant opened in 1969 and produced the pesticide carbaryl, which was marketed as Sevin. Ten years later the plant began manufacturing methyl isocyanate, or MIC, a cheaper but more toxic substance used in the making of pesticides.

It was MIC gas that was released when water leaked into one of the storage tanks late on the night of Dec. 2, setting off the disaster. Gas began escaping from Tank 610 around 10:30 p.m. although the main warning siren didn't go off for another two hours.

The first effects were felt almost immediately in the vicinity of the plant. As the gas cloud spread into Bhopal proper, residents were awakened to a blinding, vomiting, lung-searing hell. Panic ensued and hundreds of people died in the chaotic stampede that followed.

An exact death toll has never been established. Union Carbide, not surprisingly, set the toll on the low end at 3,800, while municipal workers claimed to have cleared at least 15,000 bodies in the immediate aftermath of the accident. Thousands have died since and an estimated 50,000 people became invalids or developed chronic respiratory conditions as a result of being poisoned.

Regardless of the numbers, all evidence pointed to Union Carbide and its Indian subsidiary, as well as the Indian government, its partner in the factory, being responsible, mainly through negligence, for what occurred. Despite the extreme volatility and toxicity of the chemicals in use at the factory, safeguards known to be substandard were ignored rather than fixed.

In the subsequent investigations and legal proceedings, it was determined, among other things, that:

• Staffing at the plant had been cut to save money. Workers who complained about codified safety violations were reprimanded, and occasionally fired.

• No plan existed for coping with a disaster of this magnitude.

• Tank alarms that would have alerted personnel to the leak hadn't functioned for at least four years.

• Other backup systems were either not functioning or nonexistent.

• The plant was equipped with a single back-up system, unlike the four-stage system typically found in American plants.

• Tank 610 held 42 tons of MIC, well above the prescribed capacity. (It is believed that 27 tons escaped in the leak.)

• Water sprays designed to dilute escaping gas were poorly installed and proved ineffective.

• Damage known to exist, such as to piping and valves, had not been repaired or replaced because the cost was considered too high. Warnings from U.S. and Indian experts about other shortcomings at the plant were similarly ignored.

The aftermath of the disaster was almost as chaotic. Union Carbide was initially responsive, rushing aid and money to Bhopal. Nevertheless, faced with a $3 billion lawsuit, the company dug in, eventually agreeing to a $470 million settlement, a mere 15 percent of the original claim. In any case, very little money ever reached the victims of the disaster.

Warren Anderson, Union Carbide's CEO, went before Congress in December 1984, pledging his company's renewed commitment to safety, a promise that rang hollow in India (and probably to Congress as well).

Anderson was subsequently charged with manslaughter by Indian prosecutors but managed to evade an international arrest warrant and disappeared. Investigators from Greenpeace, which has kept up an active interest in the case, found Anderson in 2002, alive and well and living comfortably in the Hamptons. The United States has shown no inclination to hand him over to Indian justice, and most of the serious charges against him have been dropped.

Union Carbide, meanwhile, was acquired by the Dow Corporation in 2001, which refused to assume any additional liability for Bhopal, arguing that the debt had already been paid through various court settlements. It did go on to settle another outstanding claim against Union Carbide, this one for $2.2 billion made by asbestos workers in Texas.

A few outstanding legal claims from Bhopal remain to be settled, both in India and the United States, but most of the court wrangling is over.

The victims of the disaster, those who live on, continue dealing with various health problems — including chronic respiratory problems, vision problems and an increased incidence of cancer and birth defects — and an environment that remains contaminated to this day.

Source: Various

Felix Salmon sur les banquiers

arf arf
Une des grandes blagues de l'actualité récente est l'effort pitoyable que font les banques et leurs séides dans la presse pour justifier les rémunérations délirantes propres à cette industrie. felix Salmon a quelques remarques intéressantes à faire sur le sujet...

Finance Salaries: A Reply

via Portfolio.com: Market Movers de Felix Salmon le 02/12/08

Free Exchange responds to my declaration that finance-sector salaries should be slashed:

The problem, however, is with self-selection. The most talented people in finance would be the ones to go. Even in the worst labour market talent is in demand. Workers may go abroad, where finance jobs still pay well, or into another industry. The finance industry will be left with a less-skilled labour force, which will lead to an unambiguous decline in performance.

First, finance jobs don't pay more abroad than they do in the US. There's always a hot emerging market somewhere where a few lucky bankers are making millions, but they're the exception. Most countries' finance industries are more like Japan, where bankers make a fraction of the going rate in New York or London. (And no, there aren't many jobs in London.)

As for other industries, they pay much less than finance, as a rule. And although bankers flatter themselves that they're so smart they could work anywhere, that's really not the case: the skills needed to run a trading desk don't translate well to a widget manufacturer.

But most importantly, we simply don't know whether a less-skilled labour force would "lead to an unambiguous decline in performance". Especially considering the decline in performance we've seen with today's, ahem, highly-skilled labor force. The "dumb" banks -- the ones which just took in deposits and underwrote loans -- have massively outperformed the smart banks, after all.

The Economist's blogger continues:

It is hard to justify the kind of money Vikram Pandit got as he presided over Citibank this past year. But why else would you become the face and shoulder the responsibility of such an embattled bank, many of whose problems predated your tenure?

I don't buy it. "Vikram, do you want to be CEO?" "How much are you paying?" "$10 million." "Not enough." "$20 million?" "OK, I'll do it." It doesn't work like that. People accept high-profile CEO jobs for lots of reasons, and they decline them for lots of reasons as well. But they don't decline them because they aren't paying enough.

The blogger does concede that she "wondered if salaries in other fields, such as engineering, might not include positive externalities and if high finance salaries therefore constituted a labour market failure". The answer is yes: it's very difficult to come up with a model which explains why financial-sector salaries are so high, given the demand for the jobs in question. But she quickly moves on: "other industries cannot thrive without a burgeoning financial industry", she says. Oh yes they can, very much so. Look at the thriving industries in the BRIC countries: are they built on a burgeoning financial industry? Not at all. And I don't think that Google, say, has relied much on financial technology to get to where it is today.

In fact it's simply not true that the finance industry needs to burgeon (ie, grow) in order for other industries to do well. The finance industry can and should be a modest intermediary, adding a little bit of value here and there, but not always growing so that it takes up an ever-larger proportion of GDP. Right now, few people would disagree that the finance industry, in toto, needs to shrink. That's not "hobbling" it, as Free Exchange would have it. Maybe "optimizing" is a better word. Let's have fewer bankers, making less money. And put all that skilled labor to more productive use.

Sad News: Tanta Passes Away

Tanta et le blog calculated Risk ont été, depuis avant le début de la crise, un exemple accompli de ce que le blog pouvait apporter en termes de qualité d'information et d'analyse, particulièrement dans un contexte où les médias traditionnels avaient totalement failli à leur mission. Sa disparition est une triste nouvelle.

Sad News: Tanta Passes Away

via Calculated Risk de CalculatedRisk le 30/11/08

My dear friend and co-blogger Doris "Tanta" Dungey passed away early this morning. I would like to express my deepest condolences to her family and friends. Photo: Tanta in 2004 (from her sister Cathy).

From David Streitfeld at the NY Times: Doris Dungey, Prescient Finance Blogger, Dies at 47

The blogger Tanta, an influential voice on the mortgage collapse, died Sunday morning in Columbus, Ohio.

Tanta, who wrote for Calculated Risk, a finance and economics blog, was a pseudonym for Doris Dungey, 47, who until recently had lived in Upper Marlboro, Md. The cause of death was ovarian cancer, her sister, Cathy Stickelmaier, said.
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Tanta used her extensive knowledge of the loan industry to comment, castigate and above all instruct. Her fans ranged from the Nobel laureate Paul Krugman, an Op-Ed columnist for The New York Times who cited her in his blog, to analysts at the Federal Reserve, who cited her in a paper on "Understanding the Securitization of Subprime Mortgage Credit."

She wrote under a pseudonym because she hoped some day to go back to work in the mortgage industry, and the increasing renown of Tanta in that world might have precluded that. Tanta was Ms. Dungey's longtime family nickname, Ms. Stickelmaier said.

From CR to Tanta's many readers, fans and internet friends: Tanta enjoyed writing for you, chatting with many of you in the comments, and corresponding with you via email. She told me several times over the last few months how much she enjoyed discussing current events with you.

Tanta worked as a mortgage banker for 20 years, and we started chatting in early 2005 about the housing bubble and the changes in lending practices. In 2006, Tanta was diagnosed with late stage cancer, and she took an extended medical leave while undergoing treatment. At that time I approached her about writing for this blog, and she declined for a simple reason – her prognosis was grim and she didn't expect to live very long. To her surprise, after aggressive treatment, her health started to improve and she accepted my invitation. When she chose an email address, it reflected her surprise: tanta_vive ... Tanta Lives!

Armed with a literary background and extensive knowledge of the mortgage industry, Tanta wrote about current events with deep insight and wit. Here is the introduction to one of her posts in 2006: Let Slip the Dogs of Hell

I still haven't gotten over the fact that there's a "capital management" group out there having named itself "Cerberus". Those of you who were not asleep in Miss Buttkicker's Intro to Western Civ will recognize Cerberus; the rest of you may have picked up the mythological fix from its reprise as "Fluffy" in the first Harry Potter novel. Wherever you get your culture, Cerberus is the three-headed dog who guards the gates of Hell. It takes three heads to do that of course, because it's never clear, in theology or finance, whether the idea is to keep the righteous from falling into the pit or the demons from escaping out of it (the third head is busy meeting with the regulators).

Tanta wrote a number of posts detailing the inner workings of the mortgage industry. These posts covered a wide range of topics, from mortgage servicing, to everything you want to know about mortgage backed securities (MBS), to reverse mortgages. She called these posts "The Compleat UberNerd" and in typical fashion she noted:

An "UberNerd" is someone who is compelled to understand how things work in grim detail, even if the things in question are tedious in the extreme …"

Tanta liked to ferret out the details. She was inquisitive and had a passion for getting the story right. Sometimes she wouldn't post for a few days, not because she wasn't feeling well, but because she was reading through volumes of court rulings, or industry data, to get the facts correct. She respected her readers, and people noticed.

Felix Salmon at Condé Nast Portfolio.com, wrote on Nov 7, 2007 wrote:

"Tanta is one of the best financial writers in the world, and explains complex ideas with wit and great clarity."

Paul Krugman at the NY Times complemented Tanta several times, recently writing:

"The great thing about this age of blogs is the way people who really know something about a subject can quickly weigh in, without being filtered through Authority."

Even researchers at the Federal Reserve referenced Tanta's work: From Adam Ashcraft and Til Schuermann: Understanding the Securitization of Subprime Mortgage Credit, credit on page 13:

Several point raised in this section were first raised in a 20 February 2007 post on the blog http://calculatedrisk.blogspot.com/ entitled "Mortgage Servicing for Ubernerds."

Tanta was also extremely funny. She introduced the Muddled Metaphor Index (MMI) and Excel Art featuring the Mortgage Pig, and she was the originator of a number of phrases in use today, like "We're all subprime now!"

This is a very sad day and I know many of you are in shock. Tanta was our teacher. She generously shared her knowledge with all of us. I doubt she knew how many lives she touched; her insights, spirit and passion lives on in her writings – and in all of you.

Tanta Vive!

P.S. please post or email me your thoughts and remembrances, and I'll post some of them. Please no tips - I'll post a charity of Tanta's choice soon. All my best to everyone on this very difficult day.