Monday, October 20, 2008

government spending

From James Surowiecki:
[...] surely calling the recapitalization package “spending” is more than a bit misleading, since the money will be literally invested, going to purchase preferred shares in the banks, which come with guaranteed dividends and warrants attached that will give the government an upside (albeit not enough of one) if the banks’ stock prices rise. If you take part of your income and buy municipal bonds or stock, we generally wouldn’t say you’d spent that money. We’d say you invested it. I realize that, given the way the U.S. budget is accounted for, it’s accurate to say the $250 billion package is increasing the deficit. But it’d be good to see some acknowledgement that, in this case, “spending” that money is going to make the government richer, not poorer.

After the last few weeks, I think we can all agree that investing your money doesn't necessarily make you richer.

In particular, the government isn't making such a great investment. Some people seem to think there's a decent chance that the government will make money on these investments. To them, I'd say: could I interest you in some lovely mortgage-backed CDOs?

There's a good point in the quoted post, though: it might be interesting to see a government accounting that's more like private sector accounting in some ways. For example, even though the government debt ballooned when Fannie and Freddie were nationalized, that debt is offset to some (unknown) extent by Fannie and Freddie's assets. Just looking at the debt number is a bit misleading; what you'd really like to see is something like a balance sheet instead.

Thursday, July 17, 2008


In this silliness linked from naked capitalism people are still assuming a gaussian distribution for stock prices. Still! I can't believe that people keep doing this, after watching that kind of mistake almost take down the financial system. A lot of people made mistaken assumptions about the distribution and independence of mortgage defaults. They assumed that it was impossible for everything to blow up at the same time, but then it did.

Lesson: this stuff happens! A lot!

Learn it already.

Thursday, July 10, 2008

Tuesday, June 24, 2008

Bowden on Murdoch

There's a nice piece from Mark Bowden on Rupert Murdoch's takeover of The Wall Street Journal. It's a long, in-depth, serious story about how there's no more long, in-depth, serious journalism.

Friday, June 13, 2008

Modeling foreclosure

This research paper from the Boston Fed on negative equity and foreclosure attempts to model the probability of foreclosure over time, taking into account a number of covariates. They predict that 6.9% to 8% of borrowers with negative equity will end up in foreclosure over the next few years, but I think that's too low.

In their model parameter estimates, the two most important covariates affecting the foreclosure rate were negative equity and whether or not the loan was subprime. The subprime variable had a huge effect on the foreclosure rate, and you have to remember that they estimated these model parameters using data from 1989-2007. How many subprime foreclosures are in that data? Not as many as there will be over the next few years, that's for damn sure--this credit cycle downturn is still too young. So even this large estimate of the effect of being subprime is probably too low.

Also, they determine whether or not a loan was subprime by looking at the lender's name. So as far as I can tell, they make no attempt to model alt-A mortgages.

This is one of the footnotes from the paper, and the table that it refers to (emphasis added).

The proportional hazard assumption can be seen in the last row of the bottom panel in Table 4, which displays the effect on the default hazard due to the combination of a subprime purchase mortgage and a one-standard-deviation fall in negative housing equity. The change in the default hazard is dramatic, increasing from approximately 0.05 percent to almost 1.5 percent. The intuition for this huge effect comes from the proportional hazard assumption. The fall in equity increases the default hazard by approximately 220 percent, from 0.05 percent to 0.16 percent. The difference between a subprime purchase mortgage and a prime purchase mortgage then increases the default hazard by 813 percent, from 0.16 to 1.5 percent.

Default Sale

(+/-) std. dev. % change hazard % change hazard
equity (−) 0.38 222 -15.1
negative equity indicator . 8.5 -32.9
libor (6-month) (+) 1.85 9.2 -14.5
unemployment rate (+) 2.06 10.3 -13.6
% minority (2000 zip-code) (+) 19.58 16.6 6.7
median income (2000 zip-code) (−) $24,493 48 -4
multi-family indicator . 58 4.3
condo indicator . 43.4 66.3
subprime purchase indicator . 813 50.4

HT: Calculated Risk

Wednesday, June 11, 2008

Thursday, April 10, 2008

Effects of alcohol on blogging, part 1

You know how you always think you're cooler when you're drunk? Have you ever wondered whether you were really cooler, or if you were just fooled by the alcohol? I have. Pretty much every time I drink. I always wish I had some way of recording the drunk version of me, so that the sober version of me can try to figure it out.

Clearly, there's no way to make this a blind study. Unless I get blind drunk. Double-blind drunk!

Tomorrow, I will visit this post (sober) to re-evaluate how funny it is. For Science!

I fear the blind study/blind drunk joke might not hold up so well.