Monthly Archives: November 2010

The Questions Education Reformers Aren’t Asking

There is a long article by Mike Rose posted on, The Questions Education Reformers Aren’t Asking.

…both elite and mainstream media have pretty much fallen in line with the reigning policy talk about the problems with our schools and how to fix them. As well, no one in power is asking the more fundamental questions like: What is the purpose of education in a democracy, and are our reforms enhancing—or possibly restricting—that purpose?

The article closes with:

The way we express the purpose of schooling shapes our collective definition of the educated person. If we want our youth to thrive and stay in school, the goal of all current school reforms, then we need an education policy that embodies the full range of reasons people go to school in a free society.

The article is composed of five parts that are all linked together.  To give you some idea of the content, I’ll post the titles of the five parts and the direct links to each part.

Maybe it is just my predeliction for cutting to the chase, but I am always frustrated by the preponderance of generalities and the under emphasis on specifics of these articles. There are some specifics to reward you for reading all the words. Perhaps you have to read the book to get what I am looking for.

Mike Rose is on the faculty of the Graduate School of Education and Information Studies at UCLA and is the author of Why School?: Reclaiming Education for All of Us.

Miss Massachusetts USA

The Boston Globe article, Miss Massachusetts USA, says that the newly crowned Miss Massachusetts USA is from Bolton, Ma, works for Genzyme. and won the annual pageant at the Lowell Memorial Auditorium on Sunday.

Our daughter grew up in Bolton and works for Genzyme. We are so proud of her.

The fact that I was born and brought up in Lowell has absolutely nothing to do with the awarding of the Miss Massachusetts USA title to the current winner.

The Spanish Prisoner

Paul Krugman writes in his oped column The Spanish Prisoner,

So Spain is in effect a prisoner of the euro, leaving it with no good options.

The good news about America is that we aren’t in that kind of trap: we still have our own currency, with all the flexibility that implies. By the way, so does Britain, whose deficits and debt are comparable to Spain’s, but which investors don’t see as a default risk.

The bad news about America is that a powerful political faction is trying to shackle the Federal Reserve, in effect removing the one big advantage we have over the suffering Spaniards. Republican attacks on the Fed — demands that it stop trying to promote economic recovery and focus instead on keeping the dollar strong and fighting the imaginary risks of inflation — amount to a demand that we voluntarily put ourselves in the Spanish prison.

It has always been my contention that the way the U.S. will adjust to the fact that countries like India and China can do all the jobs that Americans can do and for much lower wages, that our wage rates will come into line with those of India and China.  Either our wages will decline in dollar terms or the dollar will decline.  As Krugman says, I think the decline of the dollar will be the less painful way to accomplish the adjustment. (Of course Indian and Chinese wages will rise some to ease our pain a little.)

If we go the route of lowering wages in dollar terms, the wealth of the rich will be preserved.  Their wages will also be preserved because the wealthy don’t get wage cuts.  If we let the value of the dollar decline, then everyone in the country gets to take the ride together.  Now you know why the Republicans are so dead set against letting the value of the dollar decline.

Iceland Is No Ireland as State Free of Bank Debt, Grimsson Says

The article Iceland Is No Ireland as State Free of Bank Debt, Grimsson Says talks about how Iceland has avoided the trouble that Ireland is facing.

“The difference is that in Iceland we allowed the banks to fail,” Grimsson said in an interview with Bloomberg Television’s Mark Barton today. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.”



Kaupthing Bank hf, Landsbanki and Glitnir Bank hf failed within weeks of each other in October 2008 after they were unable to secure short-term funding. The banking crisis led to an 80 percent slump in the krona against the euro offshore, until the slump was stemmed by the introduction of capital controls at the end of 2008.

For more on this issue than is in the Bloomberg article see the interview with Iceland’s Prime Minister.

Perhaps this article and interview provided the basis of some of what Paul Krugman wrote in yesterday’s column, Eating the Irish.

Debt Vultures Shot for Chanukah

Greg Palast’s story, Debt Vultures Shot for Chanukah, explains one way capitalists can make money.

Dr. Eric Hermann, who, for a couple pennies on the dollar, secretly bought the right to collect a $6 million debt owed by Liberia.

Hermann and his flock of vulture partners demanded Liberia pay $43 million—a devastating sum for that nation—or he would, in effect, block aid funding for that nation’s recovery from civil war. The nation was now Hermann’s economic hostage.

Read the article to see how this story had a happy ending.

I don’t think that this story is too far different from what happens in this country with some individual  and corporate debts.

Of course there is also the opposite end of the spectrum where the public (through its government)  steps in to buy the debt of a risky business to let the perpetrators off the hook for their risky behavior. See yesterday’s post, Eating The Irish.

Eating the Irish

Paul Krugman talks about the Ireland financial problems  in the oped piece Eating the Irish.

I was going assign to you, dear reader, the task of reconciling Krugman with my posts about Blustein, Roubini, and Taleb. However, I realized that he did his own reconciling.

He asked the question about Ireland’s bailout “Does it really have to be this way?”. I quote his answer comparing Iceland’s economic recovery to Ireland’s lack thereof as follows:

Part of the answer is that Iceland let foreign lenders to its runaway banks pay the price of their poor judgment, rather than putting its own taxpayers on the line to guarantee bad private debts. As the International Monetary Fund notes — approvingly! — “private sector bankruptcies have led to a marked decline in external debt.” Meanwhile, Iceland helped avoid a financial panic in part by imposing temporary capital controls — that is, by limiting the ability of residents to pull funds out of the country.

And Iceland has also benefited from the fact that, unlike Ireland, it still has its own currency; devaluation of the krona, which has made Iceland’s exports more competitive, has been an important factor in limiting the depth of Iceland’s slump.

Nassim Nicholas Taleb Explains It All

Nassim Nicholas Taleb has some very useful information for us about how to invest.  The trouble is that he has such a hard time sticking to the point and putting it in terms that we can understand, that I have not figured out how to put into practice what he is telling me.  However, I seem to pick up something on the edge of usefulness each time I read something he has written or listen to him speak.

I was going to post this on my blog when I noticed that RichardH had posted Bill Sharpe ( of CAPM fame) on ‘The Wrong Financial Advisor’.  In my stumbling across the videos below, I read an item `Black Swan’ Author Says Investors Should Sue Nobel for Crisis that quotes remarks by Taleb.

Taleb singled out the Nobel award to Harry Markowitz, Merton Miller and William Sharpe in 1990 for their work on portfolio theory and asset-pricing models.

“People are using Sharpe theory that vastly underestimates the risks they’re taking and overexposes them to equities,” Taleb said. “I’m not blaming them for coming up with the idea, but I’m blaming the Nobel for giving them legitimacy. No one would have taken Markowitz seriously without the Nobel stamp.”

Now for the videos I originally intended to post here

26 Nov 2010

I realized that parts of his message are really simple

  1. We need to have a robust system that can withstand the shock of unpredictable events
  2. Have safety margins so that your survival doesn’t depends on the accuracy of your forecasts
  3. Debt means leverage means more risk. Decrease debt levels.
  4. Concentration increases risk, so diversify
  5. Pay systems that are no bonus without malice – means if you get extra pay (a bonus) when you do well, you should lose pay (malice) if you do poorly
  6. Don’t transform private debt into public debt (i.e. bank bailouts without equity)

Bill Sharpe ( of CAPM fame) on ‘The Wrong Financial Advisor’

In the 1960’s, four economists (Jack Treynor, William Sharpe, John Lintner, and Jan Mossin) independently developed a theoretical model (the Capital Asset Pricing Model [CAPM]) for determining an asset’s appropriate expected rate of return as a function of its non-diversifiable risk. In 1990, William F. Sharpe, along with Harry Markowitz and Merton Miller, were awarded the Nobel Memorial Prize in Economic Sciences for their contributions to the analysis of financial risk.

Yesterday (23 November 2010), ‘wfsharpe34’ posted an animation to YouTube called, The Wrong Financial Advisor. You might find it amusing.

I have no reason to believe that ‘wfsharpe34’ is not THE Bill Sharpe.

In case you are interested, here is a photo of Bill Sharpe and here is his Nobel Lecture.

I thank my friend, Nalin, for forwarding an email, purporting to be from Bill Sharpe, which points to this video.


Crisis Economics: A Crash Course in the Future of Finance

Having just read two books on the economic crises by journalists, I am feeling the need to find out what some actual economists think about these crises.

One economist this leads me to is Nouriel Roubini.  I have found that he, along with Stephen Mihm, has written the book Crisis Economics: A Crash Course in the Future of Finance. The interview with Roubini at the above link gives some idea of what may be in the book. Here is just one set of questions and answers from that interview.

Bremmer: In the book you propose radical reforms of the system of regulation and supervision of banks and other financial institutions and criticize the more cosmetic reforms now considered by the US Congress and in other countries. Why the need for radical reform?

Roubini: If reforms will be cosmetic we will not prevent future asset and credit bubbles and we will experience new and more virulent crises. The currently proposed reforms of “too-big-to-fail” financial institutions are not sufficient: imposing higher capital levies on these firms and have a resolution regime for an orderly shutdown of large systemically important insolvent firms will not work. If a financial firm is too-big-to-fail it is just too big: it should be broken up to make it less systemically important. And in the heat of the next crisis using a resolution regime to close down too-big-to-fail firms will be very hard; thus, the temptation to bail them out again will be dominant.

Also, the modest Volcker Rule – that may not even be passed by Congress because of the banking lobbies power – does not go far enough. It correctly points out that banking institutions that have access to insured deposits and to the lender of last resort support of the Fed should not be allowed to engage into risky activities such as prop trading, hedge funds and private investments. But more needs to be done: we need to go back to the more radical separation between commercial and investment banking that the Glass Steagall Act had imposed. Repealing this Act was a mistake that led to excessive risk taking and leverage by both banks and non-bank financial institutions.

Finally, the government should regulate much more tightly toxic and dangerous over-the-counter derivative instruments; and compensation of bankers and traders should be subject to radical “clawbacks”: bonuses should not be paid outright but go into a fund and clawed back if the initial investments/trades turned out to be risky and money losing over time.

I think I’ll have to put this book on my reading list.