... the first casualty is causality

This week, like everyone, I had some thoughts about the $700B financial industry bailout. I put them in an email to some friends a few ago... Here they are (with some edits):

This bailout is looking more and more like a scam.   The fear-mongering about jobs sounds a lot like when the same folks were saying Saddam was about to nuke the USA in alliance with Al Qaeda. Just because it's scary, it's not automatically true, and it's not automatically the case that the proposed solution will avoid it. 

$25B for Detroit automakers slipped into the bailout? WTF? They would surely have been turned out if they had asked for it alone, but piggy-backed into the $700B... Recall how after Sept 11 all the airlines were begging for bailouts, and many of them got turned down. Imagine how many companies will try to jump onto this bailout like hungry vultures on fresh kill. 

Also, note that the relationship between Paulson and Goldman Sachs is eerily similar to the relationship between Cheney and Halliburton. Nothing against Paulson per se, I'm just pointing out the parallel. In any case, even if he's a saint, is any government capable of disbursing a freestanding $700B fund without massive corruption? Visions of scams with this bailout that'd make Halliburton's no-bid contracts for Iraq look like chump change....  In fact, this whole mass psychological phenomenon  looks more than a bit like an accelerated rerun recent history... With Fannie Mae-Freddie Mac-Lehman-AIG, in the role of Sept 11, and the Big Bad $700B as the Iraq Invasion of 2003,  the US congress as itself,  and special appearance by the Great Depression II as Saddam's WMD. I don't mean to compare the events of course, fundamentally different crises. But the the political and business dimensions sides are similar.

I'm also reminded of Russia in the early 1990s. The experts kept screaming that if this or that privatization didn't happen right away, the consequences would be severe, Russia would be come communist again, the 3rd world war would start immediately, etc etc. Guess what? Behind all the deadlines, and crises, rescues, etc., there were some dudes rigging privatization auctions. By the time people woke up to the game, seven gazillionaire oligarchs had ownership of more than 50% of the GDP of the ex Soviet Union, and the standard of living had dropped, life expectancy had dropped, the economy was in ruins... Basically the entire country got jacked by a few dozen people.

Back to USA 2008. The crisis  exists of course,  and ok let's agree something must be done [NOTE: this was written on Wednesday Oct 1, before the Trouble Asset Recovery Program (TARP)  bailout was approved by congress today].  But I'm skeptical about TARP.

So let's go to the root causes - not because I presume to know something more than the experts have been saying, but just to help me understand by summarizing. The crisis exists because:
1) we don't know how many more homes will foreclose, and what they will be worth when they do; which leads to
2) uncertainty in value of mortgage backed securities (MBS) which leads to
3) uncertainty about balance sheet of banks with lots of MBS, which leads to
4) unwillingness to lend i.e. credit crisis, which leads to loss of savings, loss of jobs, homelessness etc.

Now instead of injecting money at #3 which is what TARP (the current proposed bailout) does, why not inject it at #1? I think the government should just say it will buy the houses that are being foreclosed on rather than the securities derived from them. This seems better to me than TARP because:
a) the taxpayer is buying something whose valuation is better understood, and therefore taking less of a risk;
b) by having a buyer of last-resort for the houses and a known worst-case price, you're putting a floor under the value of these MBSes... this clears up the bank balance sheets, everyone will know which banks are solvent and not, and those that are can resume lending and that stops the credit crunch
c) the socio-political side-effects are better -- i.e. any bailout would not be for insolvent banks and poorly managed companies but for defaulting homeowners, by making them tenants instead of homeless, and the opportunities for corruption are greatly reduced
d) worst case in the long term, the government gets stuck with $700B of new public housing that's hard to sell (but has tenants), whereas the current bailout's worst case is just burning $700B on paper that ends up being worth $0.

I'm no expert but the more I read about this, the more I believe that it's better to solve the problem at the source, i.e. #1 and not #3.

I learned later that this is similar to something done in the 1930s called the Home Owners' Loan Corporation (HOLC), and has been advocated in the current context by Roubini. Some politicians have also called for it, but in addition to TARP!  The Washington  Post too  has a column proposing something along those lines.

In any case, TARP was approved today, so we'll see. If it gets implemented, I predict scandals and a blue ribbon inquiry comission circa 2010.  Hopefully it will work in spite of that, because alternatives are probably eliminated. 

Universal health care & AIG

The big problem with providing Canadian-style universal health care in the US is that it would basically nationalize a large part of the insurance industry (while also expanding it). Undeniably a huge disruption to a huge industry that employs many people. But now, the US government has, in effect, nationalised AIG", the biggest insurance company in the world. If the government ends up actually owning 80% of AIG, then why not use AIG to provide health insurance for the uninsured? Bang! Too good to be true, surely...

Letter to the editor

After reading this opinion piece from the Irish Independent News (archive link)...

Date: Wed, 16 Jul 2008 00:22:44 -0400
From: "Nemo Semret" 
To: kmyers@independent.ie, letters@independent.ie
Subject: Re: Africa is giving nothing to anyone -- apart from AIDS

Dear Kevin Myers,

I agree wholeheartedly with your article.

Indeed, it is a melancholy object to those who walk through that
continent of Africa, when they see the streets, and "vast savanahs"
crowded with "sexualy hyperactive indigents" (as you so aptly put it),
importuning Europeans for aid every few years, generation after
generation. I agree with you that the prodigious number of children
they produce is, given the growing uncertainty of the global economy,
an unacceptable economic, environmental and aesthetic burden on the
lifestyles of the deserving people of the First World.

Ethiopia, as you point out is a particularly galling example. At 80M
population today, with a birth rate of  3-4% and a net population
growth of over 2%, the country is producing 1.6M new mouths to feed
per year. Of those, perhaps 100,000 have any chance of having a
lifestyle that you would consider decent. That leaves 1.5M useless
mouths to feed, 750,000 AIDS conveying organs of each gender, 3M
Kalashnikov wielding arms, etc.

At the same time, China and India are earning their place at the table
of the global economy, but in the process putting pressure on the
world's resources. In particular,  as has been well publicized, their
growing appetite for meat is driving up prices of meat, of soybeans
and corn further down the food chain, and even of oil and gas.

Having turned my thoughts for many years upon this important subject,
and maturely weighed the several schemes of other projectors, I have
always found them grossly mistaken in the computation.  The Gates
Foundation as you point out  is misguidedly deploying considerable
resources to make the problems worse by preventing malaria from doing
it's natural job. I would add that the US government, the United
Nations, the Global fund, and various and sundry funds dedicated to
enabling Africans with AIDS to continue spreading the disease are
tremendously counterproductive.

I shall now therefore humbly propose my own thoughts, which I hope
will not be liable to the least objection. I have been assured by very
knowing people of my acquaintance that a young healthy child well
nursed is at a year old a most delicious, nourishing, and wholesome
food, whether stewed, roasted, baked, or fried; and I make no doubt
that it will equally serve in a lo mein or a curry with rice.

I do therefore humbly offer it to your consideration that of the
previously computed 1.5M excess Ethiopians produced annually, 150,000
be kept for breeding, and the remaining 1.35M,  at a year old, be
offered in the sale to reputable global agribusiness corporations;
always advising the mother to let them suck plentifully in the last
month, so as to render them plump and fat for a good table. This
supply of about 15,000 metric tonnes per year of additional
high-protein food will, if appropriately marketed to the growing
markets of Asia, relieve global prices of a wide range of connected
commodities by up to 10%. Your average countryman stands to save at
least 100 Euros per year in gasoline alone!

I think the advantages by the proposal which I have made are obvious
and many, as well as of the highest importance. The risk of AIDS
bearing immigrants will be reduced, the reduction in civil wars in
Africa will free up more television time for entertainment in the
First World,  increasing not only viewing pleasure but also
advertising revenues and thus commerce and overall economic
well-being, and of course, the long-suffering consciences of the West,
rather than needing to be relieved by constant doses of aid-giving,
will be fully cured of  that most senseless and nagging feeling of
guilt. Many other advantages might be enumerated.

I profess, in the sincerity of my heart, that I have not the least
personal interest in endeavoring to promote this necessary work,
having no other motive than the public good of the deserving First
World, by advancing its trade, providing food for its growing
partners, and relieving its citizens. Though I am Ethiopian myself, I
have no children by which I can propose to get a single penny.

Sincerely,

Yonatan Fetanu

Electoral markets

In my last entry about prediction markets vs polls, I quoted and linked to some aggregate numbers from Intrade for the US presidential election. Now there's Electoral markets, a website called that displays the prediction markets at the state level. Cool stuff! I came across it in a blog entry that sums it up quite well.

Capital del mundo

A ride-by demographic study, one subway car:

Apophis & carpe diem & how to save the world with a billion keychains

There's a 0.0023% chance that asteroid Apophis will impact earth in 28 years. Who cares about a 1 in 45,000 chance? Believe it or not, it is useful information.

For example, you could use this information when negotiating a 30-year loan -- structure it so payments are more heavily weighted to the last two years! At what cost? Of course the world won't end, but if there's a chance... you can precisely calibrate your degree of carpe diem. You should be willing to pay up to $1 for every extra $45,000 (plus additional interest) that is deferred to the last two years. Many people spend $1 on a lottery ticket where you have a 1 in 689,065 chance of winning $10,000. And of course a big loan with a small chance you won't have to pay it back is the same as a lottery ticket -- in fact even better since a) this one pays upfront and b) the normal lottery ticket is overpriced by an order of magnitude.

Back to Apophis. Here's another, less selfish, example of how this information can be useful. We want to know how much money it makes sense for us (earth, one world united!) to spend defending against Apophis. The answer is 0.0023% times the present value of world GDP, cumulated from 2036 forward. Oops that's infinity... Wait not necessarily. If we assume GDP stops growing at some point (e.g. the point where all material needs of humanity would be easily met), and we assume a a discount rate strictly greater than zero, the present value of all future GDP is a finite number. So we should multiply that number by 0.0023% and invest it in a laser beam.

Laser beam schematic:



Take that, make it a billion times more powerful, with a nuclear battery, put it in a satellite with some stuff for aiming and we should be ok! Seriously though, we do have 28 years to work on the technology, so no biggie. But how do we create the political will to spend money on it now?

Societies seem to have a hard time making really long-term investments, whether they are democracies or whatever. But they all love lotteries! Let's revisit the deferment of debt idea. The borrower will be willing to pay a premium to take some debt and push it back past the 28th year. The lender is neutral since they get extra fees to compensate for the risk. Thus we have an efficient transaction between a rational borrower and a rational lender. OK and what has that got to do with asteroids? Recall this is essentially a lottery, one that's better than the usual ones, and we know people are willing to pay 10 times the rational price for lottery tickets. Therefore it should be possible to satisfy the lender with just 1/10th of the fee collected from the buyer! And the remaining 9/10th can be used to build a giant laser beam!!! Everyone's happy. In fact, since the beam also works to eliminate or reduce that very risk, the rational lender might even be willing to contribute part of their one tenth. And then everyone's even more happy. Let's call this the GAALBMF: global anti-asteroid laser beam mortgage fund.

Karma Tycoon

Due to a recent ahem... incident, I stumbled across some old press coverage for Karma Tycoon. Cool! Not just because it's a fun and educational game which anyone can play free (check out the the rave reviews), but because yours truly wrote the game server.

It was a one-off contract for Do Something. 9mmedia, developed the client-side and outsourced the server-side to me at IHN, back in 2006 when IHN needed some cash. It ended up being a pretty cool project... 9mmedia guys are great to work with. I highly recommend them.

The game was fun and interesting to design and implement (but not the schedule -- that was rough especially since I was also busy with some other stuff). We used red5 to interface between the java server and flash client. I was also able to use some components of Merkato too, which was nice.

Mars Landing

'Phoenix Mars Mission scheduled to land May 25, 2008, is the first in NASA's "Scout Program." Scouts are designed to be highly innovative and relatively low-cost complements to major missions being planned as part of the agency's Mars Exploration Program.'

Canary in a coal mine

pulse, naymz, doostang, fastpitch, ...

That is the list of new social networks I've received invitations to join just recently. Some are new, some are old websites recylcing themselves as social networks. Before that, there was ning, facebook, linkedin, geni.com, myspace, friendster, hi5... This is crazy. Have we reached the boo.com stage of facial neworking? (Oops. I just realized I wrote facial instead of social. That's hilarious).

Meanwhile, Blog Friends -- the one thing that I found most promising on Facebook (at least as an example of a feature that I could make use of, not necessarily a general killer app that would change the world) -- died an ominous death. Ominous for Facebook that is. But in it's last gasp, it inspired a useful cliche. The day it died, my status message: wondering if Blog Friends was like a canary in a coal mine.

Why that analogy? See what Blog Friends themselves said: "... we have been at the mercy of Facebook's frequent modifications of their Platform specifications, and that has also been another disabling factor for us." So I remain firmly in the camp of Facebook skeptics -- at best, it's the next AOL (which is still huge).

I remain however a huge fan of Geni.com. That one that should be good for generations.. literally.

Overall, I hope social networking becomes something that's not quite a separate app, and not just a feature, but a service/capability as ubiquitous, useful and unobtrusive as ... email! (Hey check that out: 3 "U"s! Now I sound like a cheesy business book). Somebody should create standard api and ... yeah! Something called Open Social... That would be pretty promising!

Of course, I've been wrong before on this kind of stuff.

Predictions, elections, polls, fractals, reflixivity & the kitchen sink

People argue about whether prediction markets do a better job of forecasting elections than polls, or it's an illusion due to timing.

Initially, I am inclined to believe this is one area where the market works better. This follows from their most basic properties. Let's assume both are mostly mediocre. That is many polls and prediction markets available, but just no good in general.

Now consider polls. If there was fewer of them, and they were well communicated, we could count on the fact that expert from all sides would scrutinize them and that they would thus be held to the highest standards. Or of course if you average a lot of polls, you should get a more accurate poll of polls, as errors cancel out. In both cases, centralization increases accuracy of polls. Conversely, when looking at any one poll alone chances are, the one you're looking at is a bad/biased one.

For markets on the other hand, even if you are looking at one market alone, if it was biased, all it would take is one person who has seen the other markets to arbitrage the bias away, in effect linking the two markets and making them two views of one more accurate underlying market. Two polls cannot get organically linked and become more accurate than each by itself. You have to add them up yourself. But two markets can! Thus any one market you stumble upon is more likely to be accurate than a poll you stumble across.

This argument seems particularly apt for the US presidential elections, since there's so much slicing and dicing... The polls are all complicated what-if scenarios. So anyway, according to Intrade, which I've written about before, here are the current probabilities for the next US President (taking bid prices, to get lower bounds):

• Obama: 55.6%
• McCain: 37.6%
• Clinton: 6.6%

And the Iowa Electronic Markets seem to agree. Thus, the above, in my humble opinion, is as close as you're gonna get to a prediction out there today.

But is it any good?

Getting back to the philosophical argument again... polls are trying to measure current feelings, i.e. they assume there's an underlying "true" preference of the public, and that they are an objective mechanism to reveal it, within a certain Gaussian error. But it could of course be that the error is much larger than we think possible, because the models are completely wrong. As Nassim Nicholas Taleb, the author of Black Swan, that I mentioned here a couple of posts ago, has argued, a lot of mistakes are due to imposing Gaussian models on a reality that has fractal or power-law or heavy-tailed scaling. For polls, if you think there is a true current preference, then I guess the error should be Gaussian (in other words, using Taleb's lingo, the preference is "in mediocristan"). But looking at it over time, as you must for a prediction, maybe a single poll of a few thousand people, even if it's not representing a wider reality, can have a fractal effect, replicating it's belief patterns at larger scales, through media. If that' s the case, most polls will be meaningless, some will be virally important. And prediction markets won't work well either. True the participants size can scale so maybe they can make fractal bets, but no matter how many expert bets the market brings in, it won't improve the information about a black swan type event which is what a fractally scaling popularity would be.

Some people, like George Soros in his recent book (that I just picked up this weekend) argue that, when it comes to human/social phenomena, the underlying reality doesn't exist separately, it is entangled with human attempts to understand it, and manipulate it (he calls it reflexivity). So taking his ideas to polls, are they measuring something that fundamentally may not actually exist? Probably, there's no objective public opinion that exists independently, waiting to be measured. But it exists reflexively (this is my interpretation/application of Soros idea here so sorry if it's wrong). The polls, even if totally arbitrary to start with, by being communicated, may induce the reality they purport to measure. People listen to the news, and the polls, and their future actions are affected in some way, may then come to act in the way that is suggested to them by the polls for people like them. It may or may not be controlled in concentrated way, but if we apply this theory, then polls are as much instruments of action as measurements, in robotic terms, as much actuators as sensors.