tag:blogger.com,1999:blog-10656219891405733742024-03-13T00:10:49.970-04:00Risk R-SquaredI'm here to discuss risk taking. R-squared is for Ranting and Raving, R&R, as well as some more technical topicsMarc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comBlogger155125tag:blogger.com,1999:blog-1065621989140573374.post-5546855607338602342017-10-29T13:22:00.002-04:002017-10-29T13:22:34.585-04:00Everything You Know About Taxing Retirement Saving Is WRONG!<div class="separator" style="clear: both; text-align: center;">
<a href="https://si.wsj.net/public/resources/images/ON-CB689_previe_F_20170331205356.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="226" data-original-width="571" height="126" src="https://si.wsj.net/public/resources/images/ON-CB689_previe_F_20170331205356.jpg" width="320" /></a></div>
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Republicans have discussed eliminating pre-tax contributions to 401(k) plans as part of their massive tax overhaul. Everything you've read says this is a terrible result for you. But everything you've read is wrong. Here are five reasons...I cannot believe I am writing this...I agree with the GOP thought exercise that will never become reality...<br />
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<i>Reason #1: Pre-tax savings forces difficult mental accounting, and allows you to delude yourself..</i> <br />
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Deep down, you know this. The taxes are due at some point. How can you correctly plan for retirement when you are looking at total balances instead of <i>after-tax distributions</i> from that balance? This make a difficult long term planning problem worse. Tell me, what is your marginal tax rate going to be in 2040?<br />
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<i>Reason #2: Pre-tax savings makes it easier for Congress to screw you in the future.</i><br />
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Are you really confident that your tax rate today is higher than your tax rate 20, 30 or 50 years from now? Congress can more easily raise taxes on income they have not yet taxed than income already taxed. This is why wealthy people are such fans of Roth conversions of their IRAs and 401(k)s.<br />
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Have you factored in inflation? What if inflation moves up in the next 40 years, and your real value of assets in that 401(k) haven't moved, but your distributions are way higher in nominal terms? Think that's crazy? Forty years of 6% inflation means you have 10x the dollars, but they buy you the same stuff. Think I'm crazy? A lot can happen in 40 years.<br />
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<i>Reason #3: Deferring taxes benefits those finance folks you love to hate.</i><br />
<i><br /></i>
So, if you only really get $65,000 of future value from that $100,000 balance, who wins? Not the government, until they raise the future rate (<i>reason #2</i>...and they will do it!) Your mutual fund manager! She wins big. She collects management fees on the extra $35,000 that you give to her instead of the government. She's thrilled. You and your colleagues at work just built the new kitchen for her summer home.<br />
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<i>Reason #4: Deferring taxes raises your tax rates.</i><br />
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This one is for the advanced reader. If you hold an equity index fund, the vast majority of your gains are capital gains, and they are deferred as long as you hold the investment. This is true of individual stocks as well. So, you basically don't pay taxes until you sell the investment, and then at reduced rates because it's a capital gain. On the flip side, when you hold long term equity assets in your 401(k), you are converting what would otherwise be capital gains into future ordinary income.<br />
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If you do some pretty simple calculations, you can show that owning equity index funds in a retirement plan actually destroys value versus holding the same investment in a taxable plan. You are holding assets that defer taxes forever at capital gains rates, but you then put them into a vehicle that makes them into ordinary income, taxed at an unknown, higher, future rate.<br />
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[Pro tip: Very wealthy people don't hold equities in retirement plans. They hold investments that generate ordinary income in retirement plans, and hold stocks in taxable accounts.]<br />
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<i>Reason #5: Deferring taxes benefits the finance folks you don't like...even more!!</i><br />
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This one is for the even more advanced reader. So, you have your pre-tax 401(k) account. What to do with it? You look for a "good" portfolio manager, whatever that means to you. I can tell you if you aren't a professional, you are probably wrong in this decision. If you are a professional, you know your chances of being right are only slightly better than your changes of being wrong. If you're truly an expert, than you know a 401(k) can't be invested the way you want to invest.<br />
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You don't given a damn if your portfolio manager changes stocks like he changes socks. You aren't taxed on gains, and you don't distinguish between short term and long term. So, you have an incentive to seek out a manager who does "something" to add value over that passive index. That "doing something" costs you real money in higher fees over the long term, and maybe it adds value. (see <i>reason #4</i> again...) And it keeps your fancy portfolio manager employed. Now, she's thanking you for the whole summer house, not just the new kitchen.Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-32675825499201259582016-02-17T12:24:00.002-05:002016-02-19T13:14:24.430-05:00#EndingTBTFThe Federal Reserve Bank of Minneapolis seeks comments on <a href="https://www.minneapolisfed.org/publications/special-studies/endingtbtf/share-your-ideas">how to end "Too Big To Fail"</a>.<br />
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A friend suggested I submit something, so maybe I'd be heard. So, here goes. I am simply submitting a link to this blog post:<br />
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I've <a href="http://blog.riskrsquared.com/2010/01/financial-regulation-in-three-easy.html">written before</a> how to do this conceptually, but here I'm giving slightly more detail:<br />
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Banks engage in two unrelated businesses:<br />
<ul>
<li>Banks make loans;</li>
<li>Banks accept demand deposits.</li>
</ul>
We only think these activities are related because that's how banks have always worked.<br />
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TBTF status arises because banks currently face a mismatch between demand deposits and loans. You can't call all the loans to return cash to depositors. FDIC works for small, idiosyncratic risks of bank failures. Not giant or systematic ones. If we separate those activities, we shall see that the companies that accept demand deposits <i>cannot fail</i> and the companies that engage in lending <i>fail to the detriment of their risk taking investors, not the public.</i><br />
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Three simple steps separate these activities:<br />
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<i>First, Allow anyone to own a bank with 100% reserves.</i><br />
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Regulations today put severe restrictions on who can own banks. For the most part, non-financial companies cannot own banks. Regulators worried that bank deposits might end up supporting non-bank operations. Additionally, lending to competitors of the non-bank company might lead to anti-competitive behavior. (Imagine you made a loan to your competitor widget producer, and threatened to call the loan if they lowered their prices below yours.)<i> </i><br />
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Now suppose you had a special class of bank that did not make loans. This bank held physical currency, Treasury securities and reserves as the Fed. This bank only deals in demand deposits and riskless securities. This bank cannot lend to companies or people. This bank cannot have a run.<br />
<i> </i><br />
<i>This bank is not very profitable. </i>This bank makes money on the spread between interest paid on reserves, Treasury securities and transaction fees. It might pay interest, depending on expenses. Who engages in this seemingly capital intensive, not very profitable business? Walmart, Target, Home Depot, Costco immediately start banks. They have stores full of tellers and cash. Currency is simply a product they already carry in their stores. <br />
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<i>Second, Modify FDIC pricing </i><br />
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<i> </i>FDIC protects bank customers from bank runs. Because it protects bank customers, it protects bank shareholders. FDIC (and the risk of exceeding FDIC limits) are the source of TBTF. Bank customers treat bank deposits as riskless because they've been trained by FDIC to believe it. Corporate (and very wealthy) customers with deposits exceeding limits do not have a riskless alternative EXCEPT TBTF. If my company's payroll is $100 million a month, where do I put that cash so that it is absolutely safe?<br />
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New FDIC rules say banks with 100% reserves do not have to pay for FDIC insurance. Note: I'm not saying (right away) eliminate it. That would not be perceived well by the public. But, it's free. Because FDIC has no risk.<br />
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(Eventually, FDIC goes away. Or, maybe, since FDIC is much smaller than the industry of banking oversight in general, FDIC becomes the official organization that looks at a bank's balance sheet for about 10 minutes a quarter to say: Yup, you have no loans, and your cash plus Treasury securities plus reserves at the Fed equals your deposits. You're good to go!)<br />
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At the same time, ramp up FDIC insurance pricing quickly to banks with less than 100% reserves. Price increases will control the speed with which we separate demand deposit management from lending. FDIC transitions from an insurance handout encouraging TBTF to a painful tax on commingling demand deposits and lending.<br />
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What happens to the existing banks? They restructure into a banking subsidiary managing deposits and an investment manager running mutual funds, (because in the next step we kill money market funds!)<br />
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<i>Third, eliminate money market fund pricing exemptions</i><br />
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<a href="http://blog.riskrsquared.com/2010/02/money-market-fraud-no-fund.html">Money market funds exist to deceive the public</a>. I'm not overstating this in any way. If we remove the exemptions that allow money market funds to manipulate their net asset values so they look riskless, then the public will understand that bank deposits (in a 100% reserve bank) have no risk, but that money market fund's share price bounces around a little because it is risky. The money market fund is pretty darn available for withdrawal, but the price moves.<br />
<i> </i><br />
Under these circumstances, the saving and investing public makes clear distinctions between storing money in a way that is always available (saving), and lending money for risk taking purposes (investing.)<br />
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I suspect this third step would be the end of money market funds. Money market funds would become ultra short term bond funds...<i>because that's what they are without the regulations designed to deceive us. </i>At that point, however, there would be no reason NOT to let them fail. You, the investor took a risk. Too bad. You had an alternative.Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-89757288502804309612015-04-13T12:19:00.000-04:002015-04-13T12:19:41.134-04:00Malcolm Forgot Who Stands In The Middle: Why American Taxpayers Don't CheatMalcolm Galdwell hit the Sunday TV circuit this week in preparation for dreaded Tax Day. In this <a href="http://www.cnn.com/videos/tv/2015/04/11/exp-gps-gladwell-sot-taxes.cnn">video from CNN</a>, he reiterates his standard trope about legitimacy. He tells us that cheating on our income taxes carries little risk because the IRS audits so few, and the penalties lack teeth. But, we pay anyway because we think the system is legitimate.<br />
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<a href="https://ionetheurbandaily.files.wordpress.com/2010/12/wesley-snipes-on-larry-king.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="192" src="https://ionetheurbandaily.files.wordpress.com/2010/12/wesley-snipes-on-larry-king.jpg" width="320" /></a></div>
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Gladwell needs to read some economics. Seriously. <a href="http://en.wikipedia.org/wiki/Jean_Tirole">Tirole</a>. <a href="https://economics.stanford.edu/faculty/milgrom">Milgrom</a>. <a href="http://economics.mit.edu/faculty/bengt">Holstrom</a>. Something on principal agent problems?!? Unless you follow the Wesley Snipes strategy and just don't pay, (which lands you in jail,) cheating on your taxes is pretty darn hard.<br />
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The United States taxpayer faces a uniquely complex, arcane and ridiculous system. Gladwell has that one right. Knowing little about the (vast number of) readers of this blog, I suspect only my mother prepares her taxes unassisted by anything more than IRS instruction documents and a sharp pencil. No software. No accountant. <br />
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Even minor complications cause the average American to toss her hands up and hire a professional. Given the vast sums spent advertising by low cost tax prep companies, I'd imagine the vast majority of even "simple" returns have professional help. <br />
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(Yes, refund anticipation loans may drive the profits of these shops, but that tells us people have decided that the value of the loan is worth more than the expected value of their ability to cheat successfully.)<br />
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So, why is Gladwell delusional? He ignores the principal-agent problem the tax code manufactures. We Americans cannot file our own taxes. Therefore, we cannot cheat without a colluding professional. That professional's entire career depends on a working relationship with the IRS. Your tax gal will not let you cheat. She monitors you, on behalf of the IRS. And, for this you willingly pay her!<br />
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An early Happy April 15!<br />
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<br />Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-178510505713990022015-02-09T15:19:00.000-05:002015-02-09T15:49:12.641-05:00Sam Peltzman on World Cup SkiingThat's Bode Miller last week in Beaver Creek, CO, not me. Looks like he could use an airbag. The thing is, skiing airbags exist, but no one will wear one.<br />
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<a href="http://static01.nyt.com/images/2015/02/10/sports/10SKIBAGweb5/10SKIBAGweb5-articleLarge.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://static01.nyt.com/images/2015/02/10/sports/10SKIBAGweb5/10SKIBAGweb5-articleLarge.jpg" height="209" width="320" /></a></div>
In <a href="http://nyti.ms/1FqdQiB">this </a>New York Times story, Marco Sullivan, U.S. Olympic skier notes "If you're the only guy wearing it, it's probably a disadvantage as far as speed goes." In fact, the author notes less than a second separated gold from 12th place. <a href="http://www.olympic.org/olympic-results/sochi-2014/alpine-skiing/downhill-m">Six one-hundredths</a> of a second separated gold from silver.<br />
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<a href="http://www.chicagobooth.edu/faculty/emeriti/Sam-Peltzman">Sam Peltzman</a> earned his fame demonstrating that seat belts made drivers faster and more reckless. They compensate for their increased safety.<br />
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I am far from a skiing expert, but I have to imagine that the marginally faster/more reckless skiing due to wearing the airbag more than makes up for the weight differential, and just might make up for that 0.06 seconds for second place.Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-72760534162721689872014-05-29T19:35:00.002-04:002014-05-29T19:35:51.135-04:00The Ultimate Short Volatility TradeMy mother-in-law has a magic nose. She diagnosed a gas leak in our main feed into the house in 2009 that the "electronic nose" the PSE&G guy carries took an hour to find. So, when she arrived tonight and announced she smelled gas, I called the emergency hotline.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjr-cvwnzW-kCS0zlqMgnh6IUVGmRKiWP3AHW5t8xkiJcRh8a7OvQgnyZnH-i1BKcfTFNmK2kDVd1BxKurxczd86Xg_ZV30YE2hGTDeMCzqnmbgxSlxxAZw3vnvBim7vGi9JaH75gKLh9Y/s1600/20140529_191839.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjr-cvwnzW-kCS0zlqMgnh6IUVGmRKiWP3AHW5t8xkiJcRh8a7OvQgnyZnH-i1BKcfTFNmK2kDVd1BxKurxczd86Xg_ZV30YE2hGTDeMCzqnmbgxSlxxAZw3vnvBim7vGi9JaH75gKLh9Y/s1600/20140529_191839.jpg" height="320" width="240" /></a></div>
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<a name='more'></a>Driver arrives. Stands in the street a long time on the opposite side of the truck. What's he doing? I can't see. Several minutes pass. I walk down to check.<br />
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"Hey man, I'll be right there. Someone dumped a whole lotta pennies on the ground here. I gotta pick 'em up!"<br />
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I have now witnessed the worst trade in the history of financial decision making.<br />
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Thank-you PSE&G technician!<br />
<br />Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-46381658668384985452014-04-22T10:20:00.001-04:002014-04-22T12:30:05.186-04:00Flash Bubbes: An Ebay RevoltMy mother-in-law (or Bubbe, to my kids,) takes ebay very seriously. Anyone in the family needing to sell must run the gauntlet for her to consider risking her reputation on an item. She won't let you photograph it yourself. She won't let you ship it yourself. But, if you sell with her username, you have instant credibility. <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfpn20Ykdt6BY03zmC901ZR1sIFEUBKxTisiqiENoLSwoSvyRyBRkkZ5NX_Loz_L9yIw4bJc3bJT7QNIisBxmaXRSc7sSngjOpQivOjxUZCqs8HQ5WpyLiVBnQm3SPANORLrxfWfrvFIE/s1600/FB.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgfpn20Ykdt6BY03zmC901ZR1sIFEUBKxTisiqiENoLSwoSvyRyBRkkZ5NX_Loz_L9yIw4bJc3bJT7QNIisBxmaXRSc7sSngjOpQivOjxUZCqs8HQ5WpyLiVBnQm3SPANORLrxfWfrvFIE/s1600/FB.JPG" height="320" width="180" /></a></div>
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However, when it comes time to buy, what does she advise? Turn to <a href="http://www.businessinsider.com/michael-lewis-wall-street-has-gone-insane-2014-4#ixzz2zUtzULa1">Michael Lewis</a>' villains, the high frequency traders. The guys who throw massive computing power and light speed technology at their trades. She never buys without a "sniper"--that's ebay lingo for a high frequency trading operation. You tell them your limit price. They take care of the bidding. They place orders for you, at the tail end of auctions. The more you pay, the longer they'll wait. They virtually guarantee shaving a few bucks off that <a href="http://www.ebay.com/sch/i.html?_odkw=singing+bass&_osacat=0&_from=R40&_trksid=p2045573.m570.l1313.TR5.TRC0.A0.H0.Xbig+mouth+bass&_nkw=big+mouth+bass&_sacat=0">singing fish</a>.<br />
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<a name='more'></a><br />
Think I'm exaggerating? Read some choice details from a <a href="http://www.techradar.com/us/news/internet/the-best-free-and-paid-ebay-sniper-software-667696#null">TechRadar review</a> of sniping tools:<br />
<blockquote class="tr_bq">
Choosing the right number of seconds before the auction ends is crucial and takes time to get right... the speed of your internet connection can be crucial...[Auction Stealer's priority account] bids with only three seconds to go...With sniping, bidding in increments becomes extremely important.</blockquote>
This discussion has striking similarities to high frequency trading. Auction Stealer has no legal obligations to make ebay fair. Ebay barely has an obligation to make ebay fair. What should they do anyway, require human beings input every trade? (Back in the stone ages, like the mid-1990s, NASDAQ had that requirement!)<br />
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But isn't this front running? No. There are no agency relationships here. Take an extreme case: What does Auction Stealer do when one "free" client bids on the same item as a Priority Account? I would have to believe the free client gets picked off. Why? Because Auction Stealer has no duty to either client. <br />
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But stock trading is different, right? Michael Lewis is talking about co-locating servers and the speed of light, right? Not really. Imagine ebay traded billions of dollars a day and you didn't have to ship merchandise. And, you thought you could actually sell that singing fish to some other sucker later. Auction Stealer might start offering "Super Premium" accounts with co-located servers, with bids one millisecond before the auction end because they could make money at it. And, they'd have plenty of competitors too. <br />
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Then what would happen? Maybe a bunch of buyers and sellers would get together and form a competitor to ebay with a different set of rules, where no one gets to play that way. They might go on a massive PR campaign to disparage ebay and tell the whole world their exchange is better. Maybe they'll get 1% of Michael Lewis' press coverage too.<br />
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<br />Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-66391193740900753342014-02-07T11:43:00.001-05:002014-02-07T11:59:07.352-05:00Doctor Sends Economist To ER With Heart Attack!In this <a href="http://www.nytimes.com/2014/02/07/opinion/how-to-stop-heroin-deaths.html?ref=opinion&_r=0">Op-Ed in the New York Times</a>, <a href="http://www.med.nyu.edu/biosketch/hoffmr05">Robert Hoffman</a> of NYU's Langone Center writes in support of easy access to Naloxone, the antidote to heroin overdose. I'm inclined to agree with him, but his argument relies not on data, but on<i> reductio ad absurdum</i>, and the something isn't absurd.<br />
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<a href="http://uncrate.com/p/2012/03/japanese-ice-pick.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://uncrate.com/p/2012/03/japanese-ice-pick.jpg" height="213" width="320" /></a></div>
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Specifically, he writes:<br />
<blockquote class="tr_bq">
Some people might argue that the widespread distribution of a safe,
effective and inexpensive antidote might actually encourage drug use.
<i><b>But that’s like suggesting that air bags and seatbelts encourage unsafe
driving.</b></i> Naloxone is a public-health method of intervening when a life
is in the balance. Its distribution is endorsed by the American Medical
Association. (emphasis added.)</blockquote>
But, as ANY economist will tell you Sam Peltzman is famous for the way he dresses and <i><a href="http://www.jstor.org/discover/10.2307/1830396?uid=3739808&uid=2129&uid=2&uid=70&uid=4&uid=3739256&sid=21103362731651">demonstrating </a>that seatbelts encourage <a href="http://en.wikipedia.org/wiki/Risk_compensation">unsafe behavior</a>!! </i>As I too often say...you want safe cab drivers in New York City? Replace the driver's airbag with an ice pick<i>.</i><br />
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<i> </i>I can almost guarantee Naloxone availability will lead to more heroine overdoses, but that's no longer fatal, so who cares? Will Naloxone lead to more heroine use? Two issues here:<br />
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Will a current heroin user consume more? Probably...the price of over-consumption drops dramatically from "death" to "nasal spray". But, that's the point! Hoffman wants to protect those consumers of heroin from accidental death.<br />
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Will non-heroin users become users? I have not used heroin. I cannot say my risk of death from overdose has ever crossed my mind. Is that risk what stops you from using heroin?<br />
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<i></i> <br />
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<br />Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-85094205083152446222013-10-28T10:10:00.001-04:002013-10-28T10:10:27.036-04:00Gay Couples? What Are The Odds?In this <a href="http://www.huffingtonpost.com/2013/10/27/homo-history-vintage-photos_n_4139208.html">Huffington Post piece</a>, an antique photograph collector explains that he believes he has a special collection of photographs of gay couples from bygone days. He even blogs about it, but I won't include the link because it doesn't seem to work.<br />
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<a href="http://i.huffpost.com/gadgets/slideshows/322434/slide_322434_3042710_free.jpg?1382563505033" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="http://i.huffpost.com/gadgets/slideshows/322434/slide_322434_3042710_free.jpg?1382563505033" width="304" /></a></div>
<a href="http://jeffreygent.com/">Jeffery Gent</a> is passionate about what he does. The article quotes him saying "Unfortunately, so many of these photos were purposely destroyed by horrified family members..." He continues "For every photo that I may have mistakenly identified as gay, thousands
more were burned or torn into pieces to keep a family secret..."<br />
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To those who hated college statistics, it may not be obvious that we can examine this one pretty easily. To those of you who hated college statistics and passed the class, remember, you performed no worse than I did. (D in undergrad stats. You can only imagine what now Nobel Prize winning Lars Hansen, my dissertation adviser, said when he learned this.)<br />
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We'll attempt to apply <a href="http://en.wikipedia.org/wiki/Bayes%27_theorem">Bayes Law</a> to see what we might know about the probability that anyone in these images is gay. Bayes Law is a <a href="http://www.amazon.com/The-Theory-That-Would-Not/dp/0300188226">great tool</a> for drawing statistical inferences.<br />
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Where do we start?I'll formulate an answer so you can easily play with a <a href="http://psych.fullerton.edu/mbirnbaum/bayes/BayesCalc.htm">Bayesian calculator</a> on your own.<br />
<br />
What is our hypothesis? The image shown portrays two gay men.<br />
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What is the data? The data is a picture of two men.<br />
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We want to know, conditional on the existence of a photograph, the probability that the picture depicts two gay men.<br />
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What is the unconditional probability an image of two men is of gay men? This is somewhat arbitrary (and political, potentially.) So, let's say 20%. It doesn't matter much. We could say that number is high (or low) for the total population of men. We could say that number is low (why do two straight guys get photographed together?) We could say that number is high (Don't many brothers appear in photographs together? Grooms and best men?)<br />
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The key, really, is the the claim by Gent that most photographs of known gay couples were destroyed by family and friends out of a desire for secrecy.<br />
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Images are gone for two reasons: Passive loss (accidental disposal, fire, time) and active loss ("We're small minded, bigoted people who are ashamed, so we are destroying his memory.")<br />
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We need to establish the probability that a picture exists today conditional on straight men in it, and the probability that pictures exist today conditional on gay men in it.<br />
<br />
Suppose 50% of all images are lost passively, but that a further 25% of gay men images are lost actively. This is incredibly conservative based on Gent's statement. We're saying only 50% of known gay images are destroyed actively. He's implying the vast majority.<br />
<br />
So, in our calculator, we have Pr(Image Exists | Gay) = 0.25 and Pr(Image Exists | Not Gay) = .5.<br />
<br />
What's the result? Pr(Gay | Image Exists) is about 11%. <br />
<br />
If the vast majority of images depicting known gay men were destroyed (a la Gent) and we set Pr(Image Exists | Gay) = 0.01, then it is virtually impossible that any of the images depict gay men.<br />
<br />
Even if most of the images taken historically were of gay men (90%) and the spiteful relatives destroyed 99% of them, it remains the case that only 15% of surviving images depict gay men.<br />
<br />
Nice collection of old pictures, though.<br />
<br />
<br />Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-17064221776852758772013-10-23T15:50:00.003-04:002013-10-23T15:50:32.380-04:00Oregon Taxpayers, Please Meet Michael DellShould public universities go private? <a href="http://www.psmag.com/education/breaking-away-several-top-public-universities-going-private-68007/">It's a hot topic in Oregon</a>. Three of their seven public universities "go private" next year.<br />
<br />
Of course I'm in favor of most anything going private, but let's consider this from the view of the Oregon taxpayer, the likely loser here.<br />
<br />
A public university going private sounds an awful lot like Michael Dell leading a private equity buyout of the public company he founded. Substitute faculty and administration for buyout firm and Michael Dell. Substitute Oregon for the selling shareholders.<br />
<br />
Since no one has asked, I will offer my "fairness opinion" on this buyout transaction: Good luck making this fair. The state of Oregon contributed land, taxing authority, governance, pension backstops, and I don't know what else, to this enterprise. Now, the new management team wants to take all that in the interests of better education, when the only obvious plans are more generous salaries and benefits, combined with higher top-line tuition. That sounds great already. <br />
<br />
How about this: Let the universities go private. Let them raise capital to fund an endowment, (remember a hedge fund that prints diplomas doesn't pay taxes!) Buy the assets from the state university system: dorms, lecture halls, football stadiums...don't forget the goodwill. Also, make sure they can fund healthcare and retirement benefits without using state resources. <br />
<br />
Sounds impossible right? I guess that's why those who run the University of Phoenix aren't running around buying up universities, huh?Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-52343349316345655532013-05-06T11:19:00.001-04:002013-05-06T11:19:23.127-04:00Another Bad Reason To Invest In Hedge FundsI know, we need bad arguments for hedge fund investing like we need...bad advice from big banks?<br />
<br />
In an May 2nd "Eye on the Market" piece from J. P. Morgan's Private Bank, Michael Cembalest suggests that investing in hedge funds in a low yield/low spread/low <i>everything </i>environment might be an interesting idea. He bases this argument on this very pretty picture:<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilSzrTLn4z1EzcX0wUAooUfwk7wz99-fRreNWAIRVaeGGW2Hqg03EkGQHS-dzmOCYVUZ3Bp0QPRgeOxBYdF76T4o7LeQD_uzuvO4Tb2OM_CEmwy41-Ucyi73cDG3sqZrl7X_dbEdnjTZc/s1600/EOTM.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilSzrTLn4z1EzcX0wUAooUfwk7wz99-fRreNWAIRVaeGGW2Hqg03EkGQHS-dzmOCYVUZ3Bp0QPRgeOxBYdF76T4o7LeQD_uzuvO4Tb2OM_CEmwy41-Ucyi73cDG3sqZrl7X_dbEdnjTZc/s320/EOTM.JPG" width="309" /></a></div>
This picture shows the annualized performance of randomly generated portfolios of five hedge funds that happen to have a ten year history. Cembalest argues that because the volatility of these portfolios apparently falls below the volatility of BBB bonds, and the returns fall pretty reliably in the 4%-7% range, this might be a good time to invest in smartly constructed portfolios of hedge funds.<br />
<br />
Here's the thing: Hedge fund managers trade spreads, they don't perform alchemy. <br />
<br />
So-called "arbitrage" strategies earn a spread <i>over cash returns! </i>The annualized return on three month Treasury Bills over this period plotted above is about 3.1%. So, at least we should knock 3.1% off the annualized returns because even hedge fund managers aren't making that return in today's environment.<br />
<br />
Now, 1% - 4% returns with slightly lower than BBB corporate volatility doesn't look as good anymore, does it?<br />
<br />
I guess we should rethink randomly picking portfolios of hedge funds. <br />
<br />
<br />
P.S. Yes, I <i>should</i> recalculate the vol measures as spreads too.<br />
<br />
P.P.S. You disagree that hedge fund managers earn spreads over cash? Please send me an example. I probably disagree!<br />
<i> </i><br />
Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-86115905072738200872013-03-13T09:17:00.002-04:002013-03-13T09:17:31.949-04:00Conflicts and College Savings...and Brookings Fellow Proposes Zero Taxes on Savings!!<br />
Suppose I worked for Harvard, and I wrote that the education crisis in America had reached new levels, and that the federal government needed to act now(!) to help people realize the American Dream of going to college because, it's in the public interest, after all, people with a college education have far lower unemployment than those without, and our nation benefits.<br />
<br />
You'd call me a hero, right? <br />
<br />
Or, would you cry foul because I'm the direct beneficiary of such Federal Government largess?<br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://sands.hbs.edu/photos/facstaff/Ent220890.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" src="http://sands.hbs.edu/photos/facstaff/Ent220890.jpg" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Robert Pozen, courtesy of Harvard</td></tr>
</tbody></table>
<br />
That's exactly what's going on over at Yahoo!, in a <a href="http://finance.yahoo.com/blogs/the-exchange/529-college-savings-plan-needs-010804992.html">piece written by Robert Pozen</a>, a lecturer at Harvard, and senior fellow at Brookings. <br />
<br />
First, he proposes that the U.S. Department of Education should take a more active role in marketing 529 Plans, the tax protected investment vehicles used to save for college. In other words, the U.S. government should work harder to sell you mutual funds destined to pay his salary. Second, he wants unused balances in 529 Plans to convert to IRAs, traditional retirement savings vehicles.<br />
<br />
Three years ago, I wrote we should <a href="http://blog.riskrsquared.com/2010/02/86-529.html">do away with 529 plans</a>. They're a terrible waste of resources, that even Pozen acknowledges only benefit wealthy people. They
also subsidize Pozen and his colleagues because they lessen the real impact of tuition increases. <br />
<br />
But Pozen wants you to have the added benefit of the IRA conversion if your child doesn't go to college. That sounds good, right? Of course the reason people who are saving for <i>neither </i>college <i>nor </i>retirement is that they're worried they'll have too much saved for college! What??<br />
<br />
In fact, Pozen's proposal is the greatest tax break for the wealthy in the history of...well, in the history of the Brookings Institution! <br />
<br />
Here's a secret: All you need to sock away $250,000 tax free in a 529 Plan is the social security number of the beneficiary. You don't need to tell the beneficiary. You don't need to tell the parents. The IRS doesn't care. No limit on the number of kids. You can play shell games with the beneficiaries, as long as they're first cousins. By Pozen's proposal, one of those first cousins doesn't go to college and PRESTO! one giant IRA. Take that, IRS!<br />
<br />
If Pozen gets his way, here's my advice to the extremely wealthy: Find yourself a nice, large Hasidic Jewish family, and pretend you're the rich grandparent! You could easily have 50 or more first cousins, and chances are someone isn't going to college.<br />
Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-16267879590533806552013-01-10T12:29:00.002-05:002013-01-10T19:35:14.461-05:00It's Only Money<br />
I have a secret for you: U.S. dollars aren't really worth anything. It's magic. Economists call it fiat money.<br />
<br />
<br />
You already knew this. You don't like thinking about it. The debt ceiling debate <i>makes you acknowledge our currency has no value.</i><br />
<br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="http://talkingpointsmemo.com/platinum_coin_evil150.jpg" style="margin-left: auto; margin-right: auto;"><img border="0" height="317" src="http://talkingpointsmemo.com/platinum_coin_evil150.jpg" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">From TPM.com via Krugman at NYT</td></tr>
</tbody></table>
<br />
<br />
In <a href="http://www.nytimes.com/2013/01/10/opinion/an-escape-hatch-for-the-debt-ceiling.html?hp&_r=0">this Op-Ed</a> in the New York Times, <i> </i>Edward Kleinbard suggests the Treasury adopt the solution California used when they ran out of money: Issue scrip. He writes:<br />
<blockquote class="tr_bq">
To avoid any confusion with actual Treasury debt, and to be consistent
with the law governing claims against the United States more generally,
the scrip would not pay interest in most cases. And unlike debt, it
would have no fixed maturity date but rather would become redeemable in
cash only when the secretary of the Treasury was able to certify that
there’s enough money available in the Treasury’s general fund to cover
it. <br />
<div itemprop="articleBody">
</div>
</blockquote>
<blockquote class="tr_bq">
<div itemprop="articleBody">
Finally, the scrip would be transferable, allowing financial
institutions to buy it at a high percentage of its face value, knowing
that the political crisis would almost certainly be resolved before
long. </div>
</blockquote>
Did you read that carefully? Kleinbard defines "scrip" as pieces of paper with serial numbers that change hands freely, and do not bear interest. Guess what: That's fiat money!<br />
<br />
[Yes, California issued its own currency in 2011, in theory backed by U.S. currency, which is backed by air...but only in theory.]<br />
<br />
<a name='more'></a><br />
<br />
So, his great solution is for the U.S. Treasury to issue a <i>parallel </i>fiat money because the existing fiat money is tied up in all the niceties of borrowing limits. We can't get enough green magic paper, so we issue new blue magic paper. The blue magic paper has value because we will promise to trade the blue magic paper for green later.<br />
<br />
My head hurts, and not just because I'm color blind.<br />
<br />
In that context, consider <a href="http://www.nytimes.com/2011/07/08/opinion/08tribe.html?_r=3&ref=opinion&">another interesting piece</a> from our last jaunt down this road. Laurence Tribe, writing about our last run-in with the debt ceiling, (yes, you are shocked that I enjoy reading what he has to say on any topic!) notes that the Supreme Court has only once addressed the question of the public debt clause of the Constitution, in 1935. When we had a gold standard.<br />
<br />
This is weird.<br />
<br />
We have a problem. Kleinbard says it is fantasy to issue the <a href="http://krugman.blogs.nytimes.com/2013/01/08/rage-against-the-coin/">magical $1 trillion coin</a>. Maybe fantasy, but it sure looks like the law allows it. I'd love to know if Tribe thinks said law passes constitutional muster. It seems to me that it solves the problem, so it<i> must be unconstitutional.</i><br />
<br />
But, wait! Which law? The one that allows platinum commemorative coins, or the one that authorizes fiat currency? What's the difference?<br />
<br />
If one magical trillion dollar coin solves the problem, then a trillion magical one dollar coins solve the problem too. <br />
<br />
So, is fiat money constitutional?Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-28453442152378703792012-12-30T13:30:00.000-05:002012-12-30T14:44:26.127-05:00The Grinch Who Mispriced VolatilityIn my very <a href="http://blog.riskrsquared.com/2009/12/why-i-hate-gift-cards.html">first post</a>, I hit on the annual ritual of Grinch economists explaining the inefficiencies of Christmas (and other) gift giving, and my personal disgust with the concomitant trade in gift cards instead of cash. (That's my second post <a href="http://blog.riskrsquared.com/2012/12/weekend-at-bernies-iii.html">this week</a> using the word "concomitant", by the way!)<br />
<br />
I even confessed to my personal failure to adequately monitor <a href="http://blog.riskrsquared.com/2011/11/failing-to-protect-our-borders.html">my accumulated gift card credit risk</a> following the Border's bankruptcy.<br />
<br />
In a beautifully titled piece <a href="http://www.thedailybeast.com/articles/2012/12/26/how-terrible-is-christmas.html"><i>How Terrible Is Christmas?</i></a> Megan<i> </i>McCardle proposes two arguments in favor of inefficient giving, giving a slightly less Grinch-y approach to economic analysis of gift giving. Unfortunately, her arguments don't hold up.<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://encrypted-tbn1.gstatic.com/images?q=tbn:ANd9GcQi_7OVUswzkSsisDm-8mr-nremDPUmC7j41_mkgtXCBCiarK-Gjw" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="https://encrypted-tbn1.gstatic.com/images?q=tbn:ANd9GcQi_7OVUswzkSsisDm-8mr-nremDPUmC7j41_mkgtXCBCiarK-Gjw" /></a></div>
<br />
First, she argues, building social networks requires inefficient allocation of resources. Short term, seemingly irrational, commitments of time, money and effort shows commitments to new, long term relationships. That makes sense.<br />
<br />
However, most Christmas gift-giving focuses on existing relationships, not building new ones. She turns to her own grandmother as an example, but grandmothers cannot buy long term relationships.<br />
<br />
In fact, I'd guess Christmas gift-giving etiquette tends toward much more modest gifts for new relationships, to specifically avoid the risk of "over-commitment" to new relationships. <br />
<a name='more'></a><br />
Second, she argues a mistaken notion that "gifts from others have option value..." and she continues:<br />
<blockquote class="tr_bq">
<span style="font-size: small;">Having another person buy you a gift
stretches your consumption possibilities beyond the limits of your own
imagination. Yes, often they will buy you something you don't like as
much as the thing you would have bought. On the other hand, sometimes
they'll buy you something that you like even better than the thing you
bought with your own money. </span></blockquote>
Here, she has convoluted <i>ex ante</i> possibilities with <i>ex post</i> outcomes. She's acknowledging that "often" the gift will suck, and sometimes it will be great, something you never thought to buy for yourself.<br />
<br />
But, the <i>option value</i> depends on the ex ante value, which includes the possibility of <a href="http://www.amazon.com/MOUTH-BILLY-BASS-SINGING-SENSATION/dp/B000F792BG">Billy the Bass</a>. The good outcome, expanding your motion activated soap consumption (her example!) is not option value...it's a good outcome.<br />
<br />
Here's a thought experiment for Megan's next Christmas: I'll give her $100 cash, or I'll give her something that I will select as an "interesting gift" that has a price of $X randomly selected from Amazon's "Interesting Gifts for $X" list,( which I assume exists!) She's arguing that X < $100. That's a mis-priced option.<br />
<br />
<br />Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-79862191784088925832012-12-27T19:27:00.004-05:002012-12-27T20:34:37.824-05:00Weekend at Bernie's III<a href="http://www.cnbc.com/id/100338795">Bernie Madoff has a lot to say about insider trading and other fun stuff.</a> In his year end letter (hmm...even jailed, fund-less hedge fund managers write them...how quaint!) Madoff expresses concerns over dark pools, high frequency trading and concomitant insider trading. I have concerns too, but not for the same reasons.<br />
<img alt="" class="rg_hi uh_hi" data-height="204" data-width="192" height="204" id="rg_hi" src="https://encrypted-tbn1.gstatic.com/images?q=tbn:ANd9GcRKUALGP6s2AnEd7KWgx5rAF67XJGnwOLErp3bP3vHr4O6HIxcy" style="height: 204px; width: 192px;" width="192" /><br />
Madoff explains that dark pools obscure information (that's good...that's what smart buyers and sellers do,) fast execution prevents leakage of information (that's good too!) but leakage inevitably happens. This leakage, he tags as insider trading. <br />
<br />
[Side note: This insider trading argument about leakage is complicated stuff! Maybe this set of rules helps you understand. If your information is bad and it leaks, you are dumb money being outsmarted. If your information is irrelevant but your trades leak, you're being front run. If your information is good and your trade leaks, you are insider trading. Got that?]<br />
<br />
Is information leakage really insider information? Of course not! Why is anyone interested in the financial market prognostications of a convicted felon who completely failed to successfully manage anyone's money??Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-86420402381738263162012-12-26T11:21:00.001-05:002012-12-26T11:21:16.038-05:00The New UniversityAs a PhD student, I didn't understand MBAs. To me, business school looked like a series of cocktail parties and social events combined with a couple of good finance classes, as a reward for passing rigorous admissions criteria, throwing away two years and a lot of cash. The efficient outcome should have been admissions teams providing signals of approval, combined with cocktail parties, networking, <i>much higher</i> fees and less time away from work. Hence, we now have executive MBAs!<br />
<br />
So, with my stellar, self-proclaimed track record, I'm making five new education predictions in honor of the new year!<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="http://www.blogcdn.com/www.aolnews.com/media/2009/10/tad-gromley-std-425la-103009.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="184" src="http://www.blogcdn.com/www.aolnews.com/media/2009/10/tad-gromley-std-425la-103009.jpg" width="320" /></a></div>
<br /><ul>
<li>Accredited credit aggregation. Some established university will realize they can outsource so much of their course materials to high quality, low cost, online providers that the role of the school will become evaluating the quality of third party provided education, in effect aggregating credits earned somewhere else.</li>
<li>University as group home. <a href="http://blog.riskrsquared.com/2012/05/robin-hood-university.html">Colleges and universities have become resorts</a>. On campus education has lost relevance for students. Social life still matters. Kids still want to live in dorms, away from their parents. And they don't want to cook. Classrooms will have limited use. Research facilities will be privatized and/or separated from the core of the "school". Thw dorms, dining halls, student centers and gymnasiums will transform into year round moderately priced residences for young adults.</li>
<li>Extreme specialization. Endowments at most universities cannot support a broad range of programs. Even those most skeptical of online education will realize that good online courses have greater value than mediocre classroom instruction. Schools will only teach locally the subjects in which they have absolute advantage, or minimally the threshold for comparative advantage will rise dramatically...and cost will matter.</li>
<li>Merger wave. After hurricane Katrina, I suggested Harvard should have bought Tulane. Carnegie Mellon has <a href="http://www.cmu.edu/academics/international.shtml">16 listed degree granting programs</a> <i>not </i>in Pittsburgh. Why should academic departments of a single university be anywhere near each other? MIT wants humanities? Buy William College. </li>
<li>Privatization via globalization. Beyond selling off the research facilities, leaving campuses as non-profit housing operations, maybe even becoming for profit residential REITs, some university will re-brand, i.e. sell itself, to a foreign university. How can we "solve" the University of California funding crisis? Sell off several campuses as the U.S. base of Chinese universities.</li>
</ul>
How much of this happens in 2013? We'll see. Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-46872349337075177222012-12-13T16:39:00.003-05:002012-12-13T16:39:59.153-05:00God Save These United States!In case you've been under a rock, the fiscal cliff approaches. What's our government doing, meanwhile?<br />
<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="http://www.gop.gov/resources/images/contact/members/112/MO/09.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://www.gop.gov/resources/images/contact/members/112/MO/09.jpg" /></a></div>
What could possibly top Bernie Sanders, the great Senator from Vermont, <a href="http://www.nytimes.com/2012/12/14/us/politics/bernard-sanders-a-voice-for-shielding-entitlements.html?pagewanted=1&_r=0">killing 8 hours, 37 minutes </a>of senate floor time on a tirade? <br />
<br />
How about Missouri Republican Blaine Luetkemeyer's (pictured here) ground breaking legislation introduced today, <a href="http://www.gop.gov/bill/112/2/hr5817">HR 5817</a>, which proposes to relax the law that requires your financial institutions send you a privacy statement in the mail once a year that says they share your data with whomever the hell they'd like? He figures it's a waste of paper. I agree. Maybe that even makes him an environmentalist.<br />
<br />
Doesn't he realize those privacy statements keep the Post Office afloat? <br />
<br />
That's the answer! A special tax on banks to fill the budget hole at the Post Office!<br />
<br />
Maybe tomorrow someone will do something useful...<br />
<br />
<br />Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-63454871527401288022012-12-10T12:08:00.001-05:002012-12-10T12:08:25.117-05:00How Much Is That Free Latte?Please read this <a href="http://www.nytimes.com/2012/12/09/opinion/sunday/those-crazy-indemnity-forms-we-all-sign.html?partner=rssnyt&emc=rss">Op-Ed</a> from the New York Times. If you're in too much of a hurry, it reminds us all of the absurdity of the terms and conditions we accept every day. Companies ask us to throw away our rights left, right and center every time we do business with them.<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="http://s-ak.buzzfed.com/static/imagebuzz/terminal01/2009/2/6/15/grr-angry-bread-16001-1233952544-8.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="244" src="http://s-ak.buzzfed.com/static/imagebuzz/terminal01/2009/2/6/15/grr-angry-bread-16001-1233952544-8.jpg" width="320" /></a></div>
<br />
So, I actually read the <a href="http://mypanera.panerabread.com/programterms/">Panera Bread terms and conditions</a> for the MyPanera discount card this morning, before heading out to lunch. Here's the best part:<br />
<blockquote class="tr_bq">
<strong>In the event that Panera, its affiliates, our/their franchisees,
and/or suppliers are found liable to you for any reason, you shall only
be entitled to recover actual and direct damages and such damages shall
not exceed $100. </strong></blockquote>
That's right, $100 limit no matter what happens to you, no matter what Panera (or its affiliates!) may have done wrong.<br />
<br />
<br />
I'm passing on the latte...and not just because I don't drink coffee! Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-23643698340299268512012-12-04T15:51:00.003-05:002012-12-04T15:51:55.922-05:00Economic IronyAccording to <a href="http://www.bloomberg.com/news/2012-12-03/nobel-prize-money-to-get-hedge-fund-boost-after-awards-sink-20-.html">this story</a>, the investment committee that oversees the assets backing the Nobel Prizes has decided that they need to invest in more hedge funds!<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="http://www.nobelprize.org/nobel_prizes/economics/images/all_eco_list_intro.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" src="http://www.nobelprize.org/nobel_prizes/economics/images/all_eco_list_intro.jpg" /></a></div>
<br />
Did they <i>read</i> any of the research behind the prizes in <a href="http://www.nobelprize.org/nobel_prizes/economics/laureates/">economics</a>??Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-48238289280190882252012-12-02T08:52:00.000-05:002012-12-02T09:02:12.686-05:00Jeffersonian Economics?Struck by the confidence and clarity of <a href="http://www.nytimes.com/2012/12/01/opinion/the-real-thomas-jefferson.html?ref=opinion">this Op-Ed piece</a> in the New York Times (for simplicity, Finkelman argues that Jefferson was a deeply racist man,) I had to compare the Thomas Jefferson Foundation's Monticello web site <a href="http://www.monticello.org/site/plantation-and-slavery/thomas-jefferson-and-slavery">official statements on Jefferson and slavery</a>, (which treats the matter of his slaves very "delicately" to say the least.)<br />
<br />
Two entirely incontrovertible statements: Jefferson owned lots of slaves. Jefferson was a brilliant thinker.<br />
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Armed with these two statements, and some basic facts from the Thomas Jefferson Foundation, what could anyone with a basic understanding of economics conclude?<br />
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<i>Question 1: Did Jefferson have a basic understanding of economics?</i><br />
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Rather than simply saying "he was a really smart guy who knew most things", we can point to the official Monticello statements again:<br />
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<a href="http://www.monticello.org/site/plantation-and-slavery/property">"I consider a woman who brings a child every two years as more profitable than the best man of the farm," Jefferson remarked in 1820. "What she produces is an addition to the capital, while his labors disappear in mere consumption."</a></blockquote>
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So, in 1820 Jefferson clearly understood that "his" capital stock grew naturally, and this drove its value. For a farmer, or anyone who raises animals, this is obvious. Female cattle have far greater value than male cattle. People have known this since ancient times. (Why else would virtually all animal sacrifices in ancient times call for males of the species!)</div>
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<i>Question 2: Did Jefferson understand that artificially limiting supply was good for owners of commodities?</i><br />
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Have you ever heard the phrase <i>windfall profits</i>? Jefferson most certainly had. The British outlawed cutting down large trees in the colonies that could serve as masts for naval ships. If the wind blew down a tree, the owner could sell it. For a fortune. <br />
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Now, turn back to Monticello comments on slavery, (<a href="http://www.monticello.org/site/plantation-and-slavery/thomas-jefferson-and-slavery">from the second paragraph</a>): "In 1778, [Jefferson] drafted a Virginia law that prohibited the importation of enslaved Africans." So, the brilliant man, with a good grasp of basic economics, drafts a law to restrict imports of a commodity he owns and carefully manages for growth. Yet we are still to believe he thought people shouldn't own this commodity?<br />
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<i>Question 3: Did Jefferson understand that slavery reduced his cost of labor and therefore cost of finished goods? </i><br />
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The only word that comes to mind: Duh. Next sentence from Monticello: "In 1784, he proposed an ordinance that would ban slavery in the Northwest territories." Okay, great! Propose restrictions on your <i>competitor</i> that raises their production costs. That's brilliant! Imagine if GM had the foresight to organize Ford's labor force, yet keep their own factories union free...you wouldn't be driving a Ford today!<br />
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<i>Question 4: Did Jefferson understand that working his capital stock too hard would reduce their value in a sale, or reduce the internal growth rate of the capital stock?</i><br />
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Again, from Monticello:<br />
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To try to erode Virginians’ support for slavery, he discouraged the
cultivation of crops heavily dependent on slave labor—tobacco—and
encouraged the introduction of crops that needed little or no slave
labor—wheat, sugar maples, short-grained rice, olive trees, and wine
grapes. <i>But by the 1800s, Virginia’s most valuable commodity and export
was neither crops nor land, but slaves.[emphasis added!]</i></blockquote>
So, Jefferson was trying to "erode Virginians' support" by shifting to crops that required no slave labor, (which seems an absurd statement in itself...I've never seen wheat or rice harvest itself, but I don't live on a special Virginia farm!) but he didn't free his slaves, or even sell his slaves?<br />
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I think the economists have to vote with Professor Finkelman.Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-80404021258043783982012-11-25T21:38:00.002-05:002012-11-25T21:38:34.127-05:00Sandy, Part 4: Economics 101, New Jersey Style!In <a href="http://blog.riskrsquared.com/2012/11/sandy-part-2-price-gouging-and-hard.html">Sandy, Part 2</a> I noted that restrictions on post-catastrophe price gouging forced consumers to trade gasoline in <i>time </i>instead of <i>dollars</i>. This resulted in many lost hours, as consumers waited in long lines, and wealthy gas guzzlers bought gas from their neighbors long on time and short on cash.<br />
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I proposed an elegant solution: Gasoline backed contingent claims, freely tradeable, but only usable after the governor declares an emergency. Governor Christie hasn't called for my help. However, his colleague from Parsippany, BettyLou DeCroce, has proposed her own solution: The government should price gouge the gas stations instead!<br />
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That's economics New Jersey style! DeCroce sponsored the <a href="http://www.politickernj.com/60859/decroce-offers-legislation-requiring-back-generators-vital-facilities-serving-public-assemblyw">New Jersey Residents Power Protection Act</a> that would require gas station owners to buy generators that would power their operations for 72 hours or more.<br />
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The legislation also applies to all new grocery stores and convenience stores. (Gee, what about Starbucks? Oil refineries? Why not DeCroce's house?? <a href="http://www.generac.com/">I know how she's getting re-elected</a>!)<br />
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Just for good measure, she says generators must use natural gas to ensure uninterrupted, safer and cleaner power supplies. (Yes, the <i>gasoline station</i> must use natural gas to power its generators because gasoline could be difficult to obtain, and gasoline is dangerous. It's no wonder we don't have self serve gas in New Jersey because it's unsafe!)<br />
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Here's an idea for our fearless politicians to consider: Let gas stations that <i>want</i> to install generators install them<i>. </i>Then, let them <i>charge more for gasoline after a catastrophe </i>to recover the cost of the generator. <br />
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Oh, but that's price gouging.<br />
Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-65070023596928007852012-11-25T16:04:00.003-05:002012-11-25T16:04:32.024-05:00Sandy, Part 3: Equity and AffordabilityIn their <a href="http://www.nytimes.com/2012/11/25/opinion/sunday/paying-for-future-catastrophes.html?pagewanted=1&_r=0&ref=opinion">New York Times Op-Ed</a>, <a href="http://opim.wharton.upenn.edu/risk/faculty/michel-kerjan.htm">Erwann Michel-Kerjan</a> and <a href="http://www.whartoncostarica07.com/bio-m-kunreuther.html">Howard Kunreuther</a> make the following propositions about car insurance :<br />
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First, premiums should reflect risk.This makes transparent the magnitude of the hazards one faces, and could limit driving by lead-footed, distracted drivers in dangerous cars. Careful drivers of safer vehicles could receive discounts for their use of technological innovations making their cars safer for themselves and everyone around them. </blockquote>
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Second, we should address equity and affordability. If premiums are risk based, then those who drive dangerous cars recklessly and cannot afford insurance will require assistance. We propose establishing a federal auto insurance means-tested voucher program similar to the food stamps program.</blockquote>
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This sounds like a reasonable plan, right? Some drivers take more risk than others, so we need to make certain they face higher insurance premiums, right? But, that could make their premiums very expensive. Maybe more than they can afford. How can we expect drivers to get to work if they cannot afford their auto insurance. Heck, they could live far from their workplace, so they have to speed to get there. <br />
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So, <i>premiums</i> reflect <i>risks</i> but not the actual premiums people <i>pay</i>, just the premiums we <i>tell them</i> they ought to pay. The feds will pick up the difference with vouchers.<br />
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Maybe John Colbert will wag a finger at them while they receive their voucher. That will really send a message.<br />
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This is nuts, right? Could the New York Times have really published this? <br />
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No, I lied. <br />
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Here's what they really wrote, and it's about homeowners insurance for people in flood prone areas:<br />
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<div itemprop="articleBody">
First, premiums should reflect risk. This makes transparent the
magnitude of the hazards one faces and could limit new construction in
high-risk areas. Residents would be encouraged to reduce risk by getting
discounts for, say, elevating a house or strengthening the roof.
</div>
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<div itemprop="articleBody">
Second, we should address equity and affordability. If premiums are
risk-based, those who live in hazard-prone areas and cannot afford
insurance will require assistance. We propose establishing a federal
disaster insurance means-tested voucher program similar to the food
stamp program. </div>
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What's the difference? I dunno. You tell me.<br />
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Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-57716732549217879582012-11-02T14:05:00.001-04:002012-11-02T14:54:20.512-04:00Sandy, Part 2: "Price Gouging" and Hard Currency<br />
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<img alt="20 Liter Jerry Gas Can" class="nextProdImage" id="imgProductImageMain" itemprop="image" src="http://maxcdn.nexternal.com/armynavy/images/Jerry%20Can-Green2.jpg" style="border-width: 0px;" /></div>
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I'm just old enough that I remember long lines, waiting to gas up my mom's orange Maverick. Forty years later, my business partner just left my house (<a href="http://www.metarweather.com/">Metar Weather</a>'s backup facility as our offices lost power!) because he "has a line on a car under a big tree with a full tank of gas." No, he's not stealing it. It's a friends' car.<br />
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Why? Price gouging is illegal. In other words "absence of price controls is illegal."<br />
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So, what happens? Instead of selling gas for dollars, we sell gasoline for time plus dollars. Gasoline doesn't get to those who need it most, or value it most, except through reasonably dangerous, probably illegal transactions.<br />
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Solution: Gasoline backed hard currency.<br />
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Licensed drivers in a state receive vouchers that are exchangeable into gasoline during officially designated times of crisis. The vouchers are freely tradeable. When a governor declares crisis, best guess estimates will determine the amount of gas available for purchase in exchange for a voucher, assuming all the available gasoline is divided amongst outstanding vouchers. <br />
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If I am a non-driver, I can sell my voucher to someone who really needs or wants to drive.<br />
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If I must drive to get to work, I can get my entitlement without fighting the hoards and wasting hours searching and waiting.<br />
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If I am so inclined (more common than you'd think) I can burn gasoline with reckless abandon in my 1000 watt generator to keep my cell phone and wi-fi hotspot going.<br />
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Lastly, just in case we need some political fun and games, state governments could reasonably easily "inflate" their way out of the problem that fire trucks and tree removal crews cannot get enough, leading to 50 independent "State Reserve Boards" setting monetary policy! <br />
<br />Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-23914677500568126482012-11-02T12:57:00.001-04:002012-11-02T14:19:07.906-04:00Sandy, Part 1: Fannie and Freddie<span style="font-family: inherit;">Carolyn Maloney represents New York's 14th Congressional District. She is a senior member of the House Financial Services Committee and Ranking Member of its Subcommittee on Financial Institutions and Consumer Credit.<i> </i>I'm guessing she <a href="http://www.americanbanker.com/bankthink/congress-should-move-to-reform-fannie-and-freddie-1054053-1.html">wrote this</a> before Sandy, discussing her demands for Fannie and Freddie reform.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Guess what she forgot: Fannie and Freddie are property insurance catastrophes waiting to happen, if we aren't already too late. All those washed away houses with no flood insurance, and Fannie/Freddie guarantees? You think homeowners pay mortgages on houses bouncing in the surf? </span><br />
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<span style="font-family: inherit;">Although flood insurance is "mandatory" enforcement is lax, except at inception of a mortgage. Why don't people keep paying it? Is it too expensive? That might be conceivable if selling flood insurance made money, or were even a breakeven exercise. We know that's not true, since the federal flood insurance program, if it were a private business, would be a poorly performing Ponzi scheme at best.</span><br />
<img alt="Flood waters rising in a neighborhood of houses" height="125" src="http://www.ready.gov/sites/default/files/styles/callout-thumb/public/images/hazard/floods-5301.jpg" title="Flood waters rising in a neighborhood of houses" width="300" /><br />
<span style="font-family: inherit;">In fact, federal flood insurance is so stupid cheap relative to the risk that the government actually rations it! As an individual, you can only buy $250,000 of coverage. Still, people don't buy it.</span><br />
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<span style="font-family: inherit;">Okay, maybe they cannot afford it. Then they shouldn't live there. There, I said it. I cannot afford to live on Park Avenue, so I don't. I cannot afford long walks on the shore every day from my front yard, so I don't live there either. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">What about those who can afford it and don't buy enough? That's the <i>whole point!!</i> Ask your insurance agent how much private market flood insurance costs when you live on the coast. That's sticker shock.</span><br />
<span style="font-family: inherit;"><br />Here's the simple facts: </span><br />
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<span style="font-family: inherit;">Imagine your house on the coast and contents costs $500,000 to replace in today's dollars. Over the next fifty years, there's some chance you'll be robbed. There's some chance you'll have a fire. There's some chance your dog bites the neighbor's kid and the neighbor sues. It is a near certainty that house and contents will be completely wiped out by a hurricane. </span><br />
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<span style="font-family: inherit;">Could be year one, could be year 50. Let's say it's 25. With interest rates at near zero, it's not too far off to say your insurance cost <i>just for hurricane risk</i> should cost $20,000 annually. That's before inflation. And, like I said, without "ordinary" losses. And, without the insurance company making a profit.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Sure, Fannie and Freddie need to function "better" whatever that means, but, let's stop guaranteeing financial disaster. Stop guaranteeing mortgages on guaranteed to wash away. Bring transparency to the cost of owning beachfront property.</span>Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-58690998653857177402012-10-23T08:04:00.002-04:002012-10-23T08:04:57.119-04:00The NYC MTA as Treasury and CongressAs usual, NYC is in an uproar over speculation about subway fares. In this New York Times <a href="http://www.nytimes.com/2012/10/23/nyregion/subway-base-fare-is-likely-to-rise-transit-chairman-suggests.html?hp&_r=0">piece</a>, we see the discussion is about the middle class, of course!<br />
<img height="272" id="il_fi" src="http://cn1.kaboodle.com/hi/img/2/0/0/ec/a/AAAAAld7GC8AAAAAAOyt-g.jpg?v=1207665390000" style="padding-bottom: 8px; padding-right: 8px; padding-top: 8px;" width="272" /><br />
Observation #1: The MTA has already done away with pennies, nickels and dimes, as the spokesman explains fares may only move in 25 cent increments. Better strategy: Start demanding payments in nickels, the the MTA can start <a href="http://blog.riskrsquared.com/2011/04/nickel-mania.html">melting </a>them down to cover their deficit!<br />
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Observation #2: Many monthly pass riders use Transit-Checks, the program to pay for transportation to work with pre-tax dollars through your employer. So, every time the MTA considers the ratio of monthly pass price to single ride price, they're actually re-allocating federal tax loopholes. Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.comtag:blogger.com,1999:blog-1065621989140573374.post-61685408168721045932012-09-12T13:20:00.003-04:002012-09-12T13:27:26.105-04:00Amway of the Ivy LeagueI just came across the latest USNews school <a href="http://finance.yahoo.com/news/america-s-best-colleges-2013.html">rankings </a>courtesy of Yahoo!. (You do need a period at the end of a sentence that has Yahoo! as the last word, right?) Shamefully, Carnegie Mellon ranks 23. At least University of Chicago lands near the top. I don't have to hang my head in shame.<br />
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More importantly, Harvard had a 6.3% acceptance rate, according to USNews. Harvard had <a href="http://www.admissions.college.harvard.edu/apply/statistics.html">34,302</a> applicants last year, and accepted 2,032. Each of those applicants forked over $75 for the privilege of learning whether or not they could pay $160 something thousand for four years of college fun. <br />
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(But wait, 2,032 is not 6.3% of 34,302! I know. Not my math, sorry. I don't think matriculation accounts for the difference either, as there are 6,657 undergrads, per USNews...They clearly don't have <a href="http://blog.riskrsquared.com/2012/06/hedge-fund-manager-interview-part-1.html">Chicago quants</a> at USNews!)<br />
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I doubt these students applying to Harvard are price sensitive. If they charge $100 instead of $75, who cares? It's Harvard, after all! Tuition and fees reach $40,866, what's $75, $100, $200?<br />
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The more they charge applicants buying lottery tickets, the more students attend at lower cost. Each additional dollar of applicatin fee translates into one more full scholarship! Call the marketing department: Harvard: <a href="http://nylottery.ny.gov/wps/portal">Hey You Never Know! </a><br />
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In fact, I suggest Harvard crowd sources this problem. Each year, tuition should be set only AFTER the next year's applicants have paid up. Think about 6,657 "goodwill ambassadors" roaming the streets, drumming up applicants to keep tuition down! Harvard: The Amway of the Ivy League!Marc Rostonhttp://www.blogger.com/profile/05891121575193072176noreply@blogger.com