Posted tagged ‘money’

Bald Faced Theft

January 13, 2013

Fallows latest is a post titled “The Two Sentences That Should Be Part of All Discussion of the Debt Ceiling,”

Victor_Dubreuil_-_Barrels_on_Money,_c._1897_oil_on_canvas

In it, he writes:

 

1) Raising the debt ceiling does not authorize one single penny in additional public spending.

2) For Congress to “decide whether” to raise the debt ceiling, for programs and tax rates it has already voted into law, makes exactly as much sense as it would for a family to “decide whether” to pay a credit-card bill for goods it has already bought.
Ayup.
Image:  Victor Debruil, Barrels of Money, c. 1897

Don’t Play Poker With…

March 16, 2008

JP Morgan.

This not so much science as natural history. Observe the behavior of the fauna in the wild.

Or perhaps this is science, or at least an illustration of the kind of observation on which scientific ideas rest. Consider this quote:

I should premise that I use the term Struggle for Existence in a large
and metaphorical sense, including dependence of one being on another,
and including (which is more important) not only the life of the
individual, but success in leaving progeny. Two canine animals in a
time of dearth, may be truly said to struggle with each other which
shall get food and live.

That Charles Darwin fella kinda had a thought or two in his head.

One Bear goes extinct, and a more lupine creature feasts on its carcase.

File this one variously: The Struggle for Existence (the title of the chapter of The Origin from which the quote above was taken); Homo hominis lupus est, (with a nod to my man Tommy Hobbes); or perhaps in the Gordon Gecko file, under the subhead, “The Rich Get Richer (even the ones that fail).”

And yes, this all pretty much an excuse to link to the ur-Darwin text one more time. It’s never a bad moment to read a little of what the Devil’s chaplain had to say.

Update: I’d temper my snark about wealth immune to risk because while it is certainly true that people like Bear Stearns chairman “Ace” Greenberg have done OK over the years, but there are a lot of folks out there less well cushioned to the blow. They’re grownups, risk is risk, and Wall Street is not for the faint of heart…but still, it’s a very bad day for a lot of folks, and I do not want too dance to hard to other folks’ dirges. (h/t Atrios)

Update 2 (March 24, 2008):  Maybe you can play poker w. JP after all.  Perhaps there was a reason Bear Stearns managed to maintain the third highest average compensation average of the big players on Wall Street as recently as 2006.  (h/t Atrios)

Image: Alfred Wierusz-Kowalski, “Wilki podczas zamieci” [AKA -- your guess is as good as mine, unless you have some Polish competence handy], 1910. Source: Wikimedia Commons

I don’t know nuthin’ ’bout economics, but…: NPR/Henri Poincaré/Mortgage follies edition

February 25, 2008

Innumeracy is a problem I have and will come back to a lot here. But as I listen to more and more popular presentations of technical subjects, I still get astonished by the intersection of two structural problems in the media.

That is: many reporters — not so high a proportion of self-described science writers, though still plenty there — have trouble with even the most elementary uses of quantitative approaches to their stories because they just don’t think in numbers at all. That’s the negative way of framing the problem; journalists have a lack that inhibits their capacity to do good work in an ever-more technically imbued world.

Then there’s the affirmative problem. Reporters establish stories by anecdote, by individual bits of data, single episodes. They’re called stories for a reason: the goal is to perform one of the most powerful acts of communication humans have figured out, to convey information that compels belief because its hearer can place themselves right into the narrative.

That’s why, to edge closer to the real subject of this post, so much of the reporting on the mortgage crisis (fiasco) centers on some family that’s about to lose a house, and spend little time, on the meaning of the big numbers, like the implications of a repricing of US housing on a large scale.  The point is that not only do many journalists not know a set of ideas that could help them figure out such things;  what they do know leads them away from the kind of approach to their work that more mathematical sophistication would provoke.

But there’s a wonderful passage that bears on this from the great French mathematician Henri Poincaré in a collection of essays that greatly influenced the young Albert Einstein:

We can not know all facts, and it is necessary to chose those which are worthy of being known.

Choose? Worthy? Surely Poincaré is not going prematurely po-mo on us here?

Not really. The notion embedded in his deliberately provocative turn of phrase is that facts need form, some apparatus that can incorporate a given datum into a richer story — one with a meaning larger than that of a single incident. That apparatus is quantitative.

(BTW — I use the word “quantitative” rather than mathematical, because for a great deal of human experience, the math needed to make sense of what’s going on is not that complicated.  It’s often a matter of counting, sorting, and extracting relationships within the formal limits of what you learn by the end of high school.  I have posted on a couple of such examples from great scientists — Freeman Dyson, for one, and J.B.S. Haldane for another.  There are lots more — perhaps readers could be persuaded to post examples of what they think are elegant, simple insights a bit of math can give us ?)

All of this  into mind while I listened to NPR this morning.

This is the story that got me going — a short (1 minute, 10 seconds) reporter-voiced account of what seemed to the Morning Edition team to be something strange: Even though the Fed is cutting interest rates, mortgage rates went up sharply last week. That ain’t how its supposed to be, according to the reporter, Adam Davidson, because when the Fed lowers its rates, other rates are supposed to drop.

The reason Davidson gave for what he saw as weird is not all wrong: he said that lenders are newly afraid of inflation, and hence want to charge a higher price for money that is going to be paid back over time.

But look at the unexamined assumption: that the Fed can control rates in general. That’s not true.

What’s missing here? An understanding of the real importance of time.

The Fed mostly exerts its influence on interest rates through the shortest of short-term instruments, the overnight federal funds rate — which is just the price banks pay for extremely brief loans required to keep their minimum reserves up to snuff.

But real people borrow money for houses on long time scales, most famously through 30 year mortgages. The enormous difference between the types and uncertainties of risk between those two scales of time serve at least partially to decouple the two rates — see the data to be retrieved here for a survey view of this.

So it is true that fear of inflation could keep push term rates up, whether or not the Fed was playing around with short term rates. But so could lots of other things.

Perhaps that the value of US real estate is unclear in a falling market, and thus lenders demand a risk premium before they lend against such difficult-to-value assets. Perhaps the overall credit worthiness rating of American real estate borrowers has dropped in the aggregate.  Perhaps lenders fear that the secondary market for mortgages is going to get a bit less liquid.  Lots of factors play into long term interest rates that have nothing to do with the reasons the Fed makes its interest rate decisions.

In other words: and the NPR story was either meaningless or misleading. And it failed because the reporter glossed over or did not fully understand what the mortgage rate summarizes as a single number — all the complex calculations of risk and profit that underpin the decision of whether or not to make a loan.

What I would have loved to hear instead of a “this fact is strange” report would be that story: how do interest rates express quantitatively our ideas about the future.  It’s still a good, fully human story:  Those numbers tells us a tale about what we think we know about what’s coming down the pike — and how much in dollars and cents we fear changes in our perception of what we don’t know.

Image: Rembrandt van Rijn, “The Money Changer,” 1627. Source: Wikimedia Commons.

Friday (Isaac) Newton blogging: Q: How did Newton get rich? (A: He mastered a mundane form of alchemy.)

February 1, 2008

Three hundred and eight years ago this Sunday, Feb. 3, Isaac Newton finally got his hands on the one sure way to multiply gold.

This time Newton had got his hands on the real thing — not the phantom he had pursued so deeply in his alchemical researches. It’s true that seven years before he had convinced himself that he had discovered the Philosopher’s stone. With it he believed, he had found the secret that allow the adept to begin with a stock of gold and then, as he wrote in his last alchemical manifesto, “you may multiply [it] to infinity.”

He believed — and held on to that faith for a few weeks, before recognizing his error, and then (perhaps coincidentally) falling into the deep depression that has led Newton historians to call 1693 his black year.

That experience more or less cured Newton of alchemy — not that he abandoned what he saw as its animating idea, but he did give up trying to turn its concepts into a practical experimental program. (He did in fact perform a few more laboratory experiments in the mid 1690s, but with nothing approaching the intensity of his pre 1693 research).

But the failure of his alchemical ambition did not end his deep involvement with the gold in it’s vulgar, day to day manifestation. In 1696, Newton left his academic job in Cambridge to begin life as an officer of the Royal Mint. And then, on February 3, 1700, he managed to make his way into the top job, taking the post of Master and Worker of the His Majesty’s Mint.

There he had formal responsibility for the production of all England’s coin. As of 1700, the official coinage was silver, with gold guineas and half guineas serving as convenient high denomination tokens that could be exchanged for “real” silver money. (How big a chunk of change was a guinea? About one week’s wages for a skilled London craftsman.)

Over the next decade and a half, Newton would preside over the death of the English silver currency; by the late teens, gold became the de-facto standard — a shift driven in part by a mis-pricing of the value of a golden guinea as measured in the value silver could command on an increasingly globalized market for precious metals. (The full legal switch to the gold standard came only in 1844, with the passage of the Bank Charter Act.)

The switch from silver to gold did not bother Newton. In fact, though he was as scrupulously honest as any man — more so than most in that patronage and corruption ridden age — he personally gained from any event that brought more metal into the Mint and spat more coins out. In his first post at the Mint, he received only a stipend — a generous one, to be sure: 500 pounds a year by 1699 — but not a foundational fortune, not an inheritance.

At the same time, it’s important to note that he worked for his money, more than any prior holders of his Mint offices for the previous century at least.He did the paperwork, made himself an expert assayer, kept exceptionally accurate accounts (shortly after coming to the Mint, he fought the Treasury over a discrepancy of two pence. Two pence! He was, in fact, one of England’s first real civil servants — along with his friend, the philosopher John Locke, who earned his keep at the same time as one of the founding eight commissioners of the Board of Trade.

This was, in other words, another side of the revolution in science — the very first steps (a lot of the one-forward, two-back variety) towards instituting an ideal of disinterested expertise in government.

That took a while — some might say that we are still waiting

Civil service — bureaucracy, if you will — was still in its infancy in England when Newton became Master of the Mint, however, and there were definitely some bugs left in the system. The job was one of the great surviving feudal privileges left for powerful patrons to deliver to loyal supporters. He got both a substantial stipend — and a percentage of every pound of silver or gold minted into coins. Now you were talking real money, an income that handily topped four figures in the busier years.

When Newton died in 1727, with almost three decades of his cut from the Mint’s prodution in hand, he left an estate — excluding the land inherited from his mother — worth 30,000 pounds. That’s between four and five million pounds in contemporary currency. Newton died rich…

…And thus was proved the proposition that the surest way to make a pile of money is to make it yourself.

Q.E.D. — with this qualification: don’t try this at home, kids.

(This last is a long distance tease for my book-in-progress — which will have a lot more to say about Newton and some of the more questionable ways English men and women tried to make money back in the day. My telling of that story is due out on Houghton’s Winter 08-9 list.)

Images: Sir Godfrey Kneller, “Isaac Newton,” 1702 and “Coining Press used by the Royal Mint,” 1818. Source: Wikipedia Commons.


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