COFFEE & BISCUITS


An aspect of financial crises: fragile reputations
January 30, 2008, 12:47 am
Filed under: Economics

Studies of financial crises have been done from different angles.  There is the classic Charles Kindleberger’s book, a very readable documentation of the ingredients of crashes and panics over history.  Then there are the more modern academic classic, Morris and Shin’s paper on currency attacks, which give the insight that a small addition in agents’ noise may lead to the reduction of multiple equilibria game into a unique equilibrium (no coordination) .  Then there are also studies that attempt to quantify the impact of an exogenous shock on financial variable, which as yet I don’t know of any classics, but the form of which usually take some asset pricing equations.  Then there is another aspect, which I learned today in the Friedman Workshop, in the shape of fragile reputations.

The talk was given by a job market candidate from UCLA, Guillermo Ordonez.  The paper is motivated by the observation that reputation building usual serves as a deterrent to excessive risk taking activities, but such an effect can collapse under some situations, leading to a sudden spike in excessive risky activities in response to small changes in fundamentals.  He suggests that “reputation may have been an unnoticed detonator of financial collapses and credit crunches characterized by confidence crises.”

Reputations of a firm are assigned by lenders who observed signals, and are Baysian updated in every period.  Firms can engage in two types of projects:  safe or risky.  If the firm succeeded and didn’t go out of business, that’s a good signal.  By engaging in safe projects, a firm has higher probability to succeed, get a good reputation from lenders, receive lower lending rates, and hence generate higher profits in the future.  Now, reputation is a state variable ( I think of it as stock of firm capital), and you cannot change it quickly.  Firms at the intermediate range has the most incentive to build good reputations, whereas firms at the extreme end have less incentives to do so.  When reputation is high , there’s less incentive to build reputation. 

The subsequent action is triggered initially by a change in theta.  (the author simulated this (iid-ly) and showed how default probabilities spike with small drop in fundamentals).  He defines this cutoff for fundamental, under which a firm with a certain reputation will decide to go for risky projects.  Changes around this cutoff general big changes in firm risk taking activities. 

 If I understand him correctly (I find the wording in this paper very confusing), this implies that during good times when a lot of firms were able to have good reputations (hence the distribution of firms are skewed to the high side), a drop in the fundamental variable, theta, would shift a lot of firms into risk taking for the given level theta (since it moves them closer to the immediate?  Confusing!).

His conclusion:  in bad times, so he says, we should see two effects:  firms become more risky because the bad alternatives decrease incentives for building reputation, and second, markets have harder time updating firm reputations because of the shift to the extreme.   What happens then?  Market loses confidence on all firms, and you see what see today, a credit crunch.



And I endorse….
January 27, 2008, 11:35 pm
Filed under: Politics

1.  John McCain

2.  Rudy Giuliani

3.  Barak Obama

 (in that order).

 Since there were so many endorsements over the weekend, I have decided to throw in mine into the blogosphere as well. 

 If the race is between McCain and Obama, I will vote for McCain.

(It then naturally follows that if the race is between McCain and Hillary, I’ll vote for McCain)

If the race is between Rudy and Obama, I will vote for Rudy.

(It then naturally follows that if the race is between Rudy and Hillary, I’ll vote for Rudy)

If the race is between Huckabee/Romney and Obama, I’ll vote for Obama.

If the race is between Huckabee/Romney and Hillary, I’ll vote for Hillary.

 If the race is among other people, I will not vote.

Why are my top candidates Republican?  (To think that in 2004 I was canvassing for John Kerry in Virginia, knocking on doors in a red district to convince people not to vote Republican, or rather, Bush)  Just because I like McCaine and it’s easy to see that he is a good and honest man.  Why Rudy?  Because the moment I saw him on NBC when the twin towers crumbled I liked him, and it doesn’t hurt that he is pro gay, pro abortion, and pro gun laws.

 Alright, the real reason is Iraq and national security.  Is it inconsistent of me to be anti-war in 2001 (protested in anti-war protest at Hippie College) and support continuation of occupation candidates in 2008? (wow this war has been going on for 7 years?!!)  No, I don’t think.  It does not strike me as right to march into someone’s country then leave it in a worse place than it was, especiallly now that the last surge has demonstrated to be effective.  Given that the world is a rather crazy place right now (though not crazy as in 1980s), we need someone that inspires confidence.  McCain does it for me.

Why Obama is not my first?  He’s cool, but McCaine gives me more confidence.

 Why not Hillary?  Because that would mean that my schools’ grads will never be hired as white house economics advisers and only those from salt water would :).  It’s personal.



Belated Music Review for 2007
January 26, 2008, 6:09 am
Filed under: Music

Listening to CD is different from listening to indidvidual MP3 radio.  With the latter, you only hear the selected best that someone had decided for you.  But you are choosing YOUR favorite artist, and of course you want to look for more than an one-hit artist:  you are also deciding on his/her consistency in artistry, in addition to whether you like one of his/her songs.  Hence you should listen to an entire CD of the artist, not only  his/her more mainstream music.  After investing perhaps one hour in listening, you begin to recognize the flexibility of music tastes of the artist, and perhaps can answer questions such as:  is the song melody in each track similar (meaning, boring)?  Does she/he sing in the same style, tone, and scale?  .  So I find there are artists which produces an inspiring single, but flops in a 12-track record (meaning I would drift off to sleep in the middle of the CD).  So many times an artist captured my attention by his/her one hit, but let me down in their record by the tiring, formulaic repetitive tone of their CD.  Cantonese pop people especially suffer from this trait.

On that note, I want to share with you some record CDs which I find worthy of your buck this year.  They are not necessarily released this year:

1.  My Story – by Brandi Carlile.  The hit song that motivated me to buy this CD is “My Story”, which aired in the popular Grey’s Anatomy.  But I heard it on the radio (a rock/pop station which airs songs such as Chris Daughtry, Christina Aguilera, Pink, Nickleback) , and the uninhibited yet not uncontrolled emotions of the singer immediately electrified me.  (Do you understand how some music would tense your muscle and make you stop and listen?  Well, Brandi carlile is it)  The song and the delivery of the artist stood out in the pack of modern rock/pop songs.  The rest of the sountrack in the CD confirmed that star power of this artist. Every track in the CD is engaging. Every song is heavy in acoustic or electric guitar and drum.  Some songs just make you want to jump off a building.  Really a good buy.  Her music style would be what is categorized as “rock/folk/pop”.  You can check her out on youtube.com first.  She gives tour performance in small bar setting around the country.  I suspect her concerts would be very engaging as well (judging from you tube), but last I checked her concert tickets in Chicago was costing as much as $60, for the cheapest one.

2.  Back to Black – by Amy Winehouse.  The Economist intially brought my attention to this artist when they did a substantial feature on her.  Amy Winehouse has a unique way of slurring her words.  While the lyrics of her songs are replete with dark themes, you wouln’t have noticed had you only listen to the melody.  For example, one song is about why she doesn’t want to go to rehab (she is notorious for serious drug abuse) The music arrangement and singing is in the style of the standards and blues, ie. Sarah Vaugh, Ella Fitzgerald, Eartha Kitt, means means lots of brass sounds.  (Wow, a day after I wrote this, I read in a local review of Amy Winehouse comparing her to Fitzgerald and Eartha Kitt — just as I did.  Hey, my ear matches that of a professional critique!) This singer could easily be misleadingly included in the genre of standards.  But if you read the lyrics you’ll figure out the mistake.  For example, the track which bears the name of the famous old standard “Me and Mr. Jones” begins with “What kind of fuckery are you…..”.  What can you say?  Even though this girl (who is younger than I am) is living an unhealthy lifestyle, maybe that sort of living life through blurriness mesh her deeply with her music.  How can one not be unaffected by a singer who seems so connected with every musical word she utters?  If you don’t buy it for yourself, at least by it for your grandfather/mother who has hearing problems.

3.  Alright Still – Lily Allen.  The cover of this CD has a parental advisory explicit content disclaimer (Amy Winehouse’s also.  But I want to emphasize this one more).  I was initially obsessed with the song “Smile” which topped the UK chart.  The song is about how a girl took cunning revenge on her former boyfriend by, say, buying off gangster to beat him up on the streets, to ravage his home, and by adding diarrhea powder in his coffee and at the same time bought off the gangster to clog the boyfriend’s toilet.  The title “Smile” refers to how seeing him suffers makes her smile.  But what makes “Smile” such a great song is that Lily Allen has this airy and lighthearted, and gaspy voice which makes perfect to deliver songs that are flippant, naughty, voyeuristic, and …especially perverted.  The CD contains 12 tracks, which range from songs telling elders to shut up, and describing what is behind seemingly perfect scenes on the streets of London/world.  This is a subversive CD.  Lily Allen’s singing style is unique to artists today in the pop/rock scene.  If you want escape from the one-dimensional diva blowing style of Christina Aguilera/Kelly Clarkson/Carrie Underwood, here is something refreshing.

Wishlist in 2008:  Martina McBride, and Ingrid Michaelson’s Girls and Boys



Ms Lee’s Story (I)
January 25, 2008, 10:10 pm
Filed under: Stories

Brenda Lee shares the same name as the famous American singer and the last name of a famous American Civil War general, but she never had their fame.  But how she did long for fame.  When she was young, she wanted desperately to be a singer, to have all eyes centered on her.  And by all witnesses, how hard she had tried.  But the hopes and dreams of the youth quickly faded into just what they are as the reality of failures repeatedly pressed upon her.  Time went by, and she became just a regular Ms. Lee, a voice teacher in a community learning center. 

Her brush with love was as full of dashed hopes and dreams as her singing career.  She had wanted desperately to fall in love, and she did, but the object of her love somehow never returned her love.  This is not to say that Ms. Lee wasn’t attractive when she was young, for she did have a little beauty and a decent voice.  When she was in her twenties and held a temp job as a nightclub singer in the Peninsula Hotel, Ms. Lee noticed a man who was a regular to her performances.  She found out his name when one day she saw his face on the cover of the Asia Fortune magazine, and then decided that she just had to have him.  Exhausting whatever advantages she had with her looks and voice, she relentless pursued the tycoon until finally her efforts granted her a one night of tossing with him.  Just when she began to soak in the happiness of planning a glamorous future in the high society, the tycoon sent her a letter, typed by his lawyer, saying that he would sign over to her an apartment at a place called Sea Cove, as long as she would not bother him anymore.  Broken hearted, Ms. Lee wrote him back a letter, which read:  “A broken heart cannot be healed with money.”  She then placed the keys in a deposit box in her bank, vowing that she would never use his gift. 

Fifteen years later when she reached her forties, her little beauty faded, stage requests and money became elusive.  Monthly rent payments became a problem.  Then she remembered the deposit box.  Soon after she moved into the apartment that she had vowed not to set foot on.



What Comes Around, Goes Around
January 21, 2008, 7:08 am
Filed under: Stories

On a nice summer day, as most people in Sea Cove went down to the beach to enjoy the sunshine, a rattle snake in the mountains also decided to take an excursion away from the mountain shades to find warmer grounds.  Leisurely, it weaseled down the unfootprinted mountain paths, and before long found itself at the gate of Mr. Robinson’s garden.  Go in, sizzled the snake’s animal instincts.  It snuggled under the white fenced gate.   Viola! How correct is the voice:  there it is, in the middle of the garden, a caged rabbit. 

It was over in a matter of seconds.  Blackness fell, and the poor thing didn’t even know what ate him.  The snake had adroitly slid its slim and slimy body passed the bars into the cage, and engulped the rabbit right the way.  Unfortunate for the greedy predator though, it did not do what every mom would tell their kids:  chew!  With a wholesome rabbit in its body now, the snake was too fat to get out.

When Mr Robinson’s daughter, Eliza, opened the garden gate, she found a snake trapped between the bars of her rabbit cage.  The shape of rabbit ears could still be made out from the hump in the torso of the reptile.  Authorities were promptly notified, and the snake’s summer vacation was over when it deservedly arrived at the exhumanator.

This story was recount over and over in Sea Cove.  How brave Eliza was!  Eliza would tell everybody excitedly about this encounter, while her father….



The Hermit at Pandora Village
January 14, 2008, 2:43 am
Filed under: Stories

A young man was driving along a remote, narrow, winding mountain road, when he spotted an old man walking by the side of the road.

“Are you going to the Pandora Mouth?  I can give you a ride,”  offered the kind driver.  Since it is a one-way road, with a direction sign pointing to “Pandora Mouth”, the old man can only be heading to Pandora Mouth.

When the car paused next to the old man, the old man was wheeling a heavy cart (for groceries) and supporting his strides with an umbrella that was specially made to have a crutch handle. 

The lines on his forehead are deep and stretches from one side to another.

The driver helped lift the old man’s bags into the car; they were very heavy.

The driver asked whether he lived in the village.
He said yes, and added, “It’s not far off from here.”

The car continued on the winding road.  Nowhere is the village in sight several minutes into the ride.  It only got longer, with no houses on the way, which gave the opportunity to produce conversation.  The driver asked if he lived in the village for long.

The old man said he had lived there for more than twenty years and his kids all are living in the city.  He told us that about twenty people currently live in the village.  If one looks at the island from the plane, one can clearly see the road leading to it like a pandor a neck.  There is an marine observatory at the end of the road, he said.

The village is still nowhere to be seen.  The young man remarked on his surprise of the length of the road.

The old man said walking on this road is good for his health.  Also, driving on this road can improve one’s driving skills.

All the while, the young man was thinking this old man gives off an air of erudition in the way he talked.  Although the lines on his forehead are deep, his voice has a ring of energy to it.  Is it the years of walking that long and winding mountain road?

Finally they arrived to a roadside pointing left to the pandora mouth.

The car turned into another even narrower road, on both sides littered junks, ranging from piled up mountains of paper boxes, an abandoned car, dispersed parts of cars, and an abandoned school.

The old man said the school was abandoned because everybody had grown up and there are not enough of children in the village.

Before he closed the car door, he instructed the young man to make a U-turn to get out of the village.

Who is this gentle recluse living in squalor and waste?  Is he a professor?  A researcher at the marine observatory?

The encounter left the young man with more wonder about the random people one may meet in the world if one may just pause a moment to look.



What I gleamed from “How to profit from the coming real estate bust”
January 7, 2008, 2:58 am
Filed under: Books, Economics

The book was written in 2003 by John Rubino, a former financial analyst on Wallstreet.  At the time of his writing, he foresaw that in the next few years (2003-2007) we’ll witness a housing booom and then bust.  I suspect his call turned out to be a bit early, and then the dollar briefly spat up in 2005.  But what I found informative and maybe a bit impressive is that in 2003 he already pointed out the many deficient and shady mortgage lending practices that are indeed the main actors in the current subprime mess.  He also pointed out that many house owners are using cash-out finance to support the consumer spending, and that housing equity has been decreasing for a long time while consumer spending has been increasing for a long time, and wages are not rising as fast as national consumption.   All in all, he put together quite an accurate prediction (on hindsight). 

For investment strategies in bear markets, Rubino recommended short strategies on consumer finance, finance, and mortgage companies.  The long stocks to go long are health care and pharmaceuticals.  To cover the currency risks, he recommended goldmines and gold and silver.    

Here are a list from the further reading section:

BUBBLES, MANIAS, AND FINANCIAL PANICS
At the Crest of the Tidal Wave:  A Forecast for the Great Bear Market, Robert R. Prechter Jr.  The Elliott Wave perspective on the development of financial crises.  Ahead of its time when pblished in the mid-1990s, but spot-on today.

 Extradordinary Popular Delusions and the Madness of Crowds, Charles MacKay and Bernard M. Baruch.  The classic survey of the great bubbles of the past, including the Dutch tulip mania and the South Sea Bubble.

 Manias, Panics, and Crashes:  A History of Financial Crises, Charles P. Kindleberger.  A more modern and theoretical look at why markets act the way they do.

BEAR MARKET INVESTING
Bear Market Investing Strategies, Harry D. Schultz

Conquer the Crash:  You can Survive and Prosper in a Deflationary Depression, Robert R. Prechter Jr.

Infectious Greed:  How Deceit and Risk Corrupted the Financial Markets, Frank Portnoy.

The Ultimate Safe Money Guide:  HowEveryone 50 and Over Can Protect, Save, and Grow Their Money, Martin D. Weiss.

BEAR MARKET WEBSITES

Bear Market Central:  www.bearmarketcentral.com

Beartopia:  www.beartopia.net/earlybear.html

Prudent Bear:  www.prudentbear.com

SafeHaven:  www.safehaven.com

CASH
Savings Bonds Direct:  www.publicdebt.treas.gov/ols/olshome.htm
www.publicdebt.treas.gov/of/ofbasics.htm

The Safe Money Report:  www.safemoneyreport.com

Everbank (Swiss franc accounts):  www.everbank.com

THE CONSUMER CREDIT BUBBLE
CardWeb:  www.cardweb.com/cardtrak

Loan Performance:  ww.loanperformance.com/library.asp

American Bankruptcy Institute:  www.abiworld.org

DERIVATIVES (THEIR RISKS)

BIS tracks global derivatives exposure:  www.bis.org

Derivatives Study Center, a clearing house for derivatives statistics–including the exposure of individual banks–and regulatory updates.  www.financialpolicy.org

US Treasury Derivatives Page: www.occ.treas.gov/ftp/deriv/dq402.pdf

DERIVATIVES (THEIR USES)
Lycos Finance Overview of LEAPS:  finance.lycos.com/home/options/education.asp?options=ao1

NASDAQ’s LEAP page:  quotes.nasdaq.com/asp/option_index_leaps.asp

Nothing but Options:  Funny illustrations and simple explanations to put a beginner at ease.:  www.nothingbutoptions.com/education/default.asp

Options Institute The Chicago Board Options Exchange Educational site.  Lots of basic information and free tutorials.  www.cboe.com/LearnCenter/OptionsInstitute1.asp

Option Tutor:  More theoretical, for those who really want to know how these markets work.  www.ftsweb.com/options/optut.htm

ECONOMICS STATISTICS
BEA: www.bea.gov

Census Bureau:  www.census.gov

BLS:  www.bls.gov

Economics Statistics Briefing Room:  www.whitehouse.gov/fsbr/international.html

Federal Reserve Board Statistical Releases:  Source of the Z.1 Report, the most complete flow of funds analysis available.  www.federalreserve.gov/releases

Financial Services Fact Book www.financialservicesfacts.org/financial/

Grandfather Economic Report:  Great site.  A concerned grandpa presents our financial situation in a series of charts that are mong the scariest things on the Web.  mwhodges.home.att.net

National Association of State Budget Officers:  www.nasbo.org

THE HOUSING BUBBLE
Housing Bubble:  www.housing-bubble.com

Fannie Mae Watch:  www.fwatch.org

National Association of Realtors:  www.realtor.org

Mortgage Daily: w ww.mortgagedaily.com

Realty Times:  www.realtytimes.com

MORTGAGE RATES AND HOME PRICES
Interest.com:  www.interest.com/calculators

Domania.com:  www.domania.com/index.jsp

Electronic Appraiser:  www.electronicappraiser.com

Local Market Monitor:  www.localmarketmonitor.com

Mortgage Bankers Association www.mbaa.org

Office of Federal Housing Enterprise Oversight (OFHEO) www.ofheo.gov/house

PROPERTY TAXES

National Taxpayers Union:  www.ntu.org

Property Tax Online:  www.propertytaxax.com

State Tax Notes www.tax.org/tcom/state/stn.html

STOCKS, BONDS, AND MUTUAL FUNDS
ConvertBond.com   www.convertbond.com

NASDAQ’s Exchange Traded Funds page:  quotes.nasdaq.com/asp/etfsSector.asp

National Association of Real Estate Investment Trusts.  www.investinreits.com

RealtyStocks:  www.inrealty.com