There are sites claiming you can make money at blogging....which do make money. (If you see their ads show up on here, let me know, I try to ban them!)
EP gets healthy traffic, we assuredly need more and I hope all promote EP and invite people as you find them...
but trust me, the ads on the site pay for that cup of coffee I drink while maintaining it for free. ;)
I saw a local news cast promoting these "freelance" websites and about flipped.
The contract law is pathetic, one can get stiffed, they take 15% but the biggest thing is one is bidding on work in a lump sum. People want say 1 months worth of work for $300 dollars, things like this. I mean you could get a paper route and be better off.
You are bidding on work from all over the world, where $500 dollars is a living wage in many other places but here, you won't even be able to pay for dog food.
I have thought the unions should go after these sites for violating US labor laws. They are getting around labor laws by declaring their "freelancers" to be "small businesses" and it's really disgusting, predatory.
Though I'm attempting to work on something similar in my spare time- an argument that the reason Bush's horrid 13.6% labor-to-population increase didn't result in more unemployment was because people turned to freelancing.
I'm having a hard time getting numbers of freelancers though- best bet seems to be number of alternative tax ids applied for, but the IRS doesn't exactly have a neat and tidy spreadsheet for that one.
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Executive compensation is inversely proportional to morality and ethics.
The article points out that these are middle-aged people - you know, worthless. They can just wander off to die in a ditch somewhere, no harm done. Little Tommy Friedman says we can fix everything by importing millions more younger Chinese and Indians to buy the homes these expendable people can't afford anymore, and he's the smartest man in the world. Gosh, Americans are so spoiled and have such a ridiculous sense of entitlement, to think that they deserve to be able to earn a living for more than ten or so years after sinking $100K+ in training. Sheesh, we really need to expedite getting those "assisted suicide" laws passed in more states. Maybe if we paid for assisted-suicide services for this deadwood they'd stop whining and clear out, eh? Then the productive people who matter can get back to the important business of selling out the country for fun and profit.
He did that by two problems (that are flawed in my view).
First was the entire concept that defaults are "random" or uniformly distributed.
If you assume efficient markets, then you assume away systemic interactions between events, like defaults, that are not captured in the prices established in markets for financial assets affected by the events.
If you do not assume efficient markets, there is no way to get to independent and identical distributions, because there's no scientific basis for the assumption. Its only when, as in mainstream economics, it is normal to invoke commonly used assumption despite that fact that they are contradicted by reality that someone could possibly treat the distribution of the returns on a pool of mortgages as a Guassian.
Obviously there is nothing there in terms of
(Observation->assumption)
But mainstream economics does not work in terms of (Observation->assumption). It works in terms of:
(Requirements for tractable solution -> assumption)
So as you describe it, there is nothing about what Li did that is in any way outside of the mainstream practices of economics. That fact that it does not result in a model that applies in the real world is par for the course ... that is the downside for modeling as mainstream economists do, as opposed to modeling as natural and social scientists do ... there is nothing in the process that filters out models that are irrelevant to the real world.
... is driven by a concern about market equilibria? Its a program in applying a certain type of mathematical toolkit to economic modeling. The historical data is never the primary driver of the modeling.
The reason for the focus on market equilibria is that is a big part of the rationalization for the use of the toolkit. But mainstream economic models are originally mathematical models, and only secondarily about the economy as such.
After all, the whole reason for the existence of the field of econometrics is to use characteristics of mathematical models in order to take shortcuts that would not be justified based on the statistics alone. If it were not for those shortcuts, economics would just use statistics, as the natural and social sciences do.
That's right, your money is being used to offshore outsource your job.
What else is new? It's been the policy of the U.S. government since at least Bush I's time that the U.S. now exists only to subsidize the development of other nations (while enriching "American" elites along the way to that goal). Since they've already managed to seriously damage the economic prospects of working Americans and their children without any credible backlash, I guess they've decided they no longer have to waste time and energy on pretense, and are merrily spitting right in our faces and stealing us blind in broad daylight.
Why? Because they can. At this stage of the game they're just laughing out loud at citizens "getting so mad they're going to...they're going to...write a letter to their Congressmen!" There's probably a tradition now among Congressional staffers of Friday afternoon happy hour dedicated to drinking and laughing at the faxes and emails from all those ridiculous sputtering impotent citizens.
American Capitalism leads to two class system: workers and corporate elite. "American Dream" is similar to religion - demanding "blind faith". Don't question the exists of the "American Dream". Just follow it and get it. Sure, get a higher education, take on a mortgage, buy that car, pump money into that 401k, sign-up for company stock purchase program, accept stock option. But it is all illusory.
In the end, American Capitalism, means that most people, particularly middle class, will end up on the losing end because with American Capitalism that has to be winners and losers. The winners will always be the ones that are controlling policy and capital. In American capitalism, middle class doesn't fit - either working class or corporate elite. Organized labor is the thorn in the side of American capitalism. It is the one force that can help maintain a middle class. But those controlling policy and capital will fight to the death to prevent the growth of organized labor.
American capitalism depends on higher profits and higher return for corporations. American capitalism, through globalization, will always find cheaper sources of labor it needs it to survive. What is left in its wake doesn't matter! Millions of uninsured, millions underemployed, millions in debt. American capitalism will continue to lead to the destruction of the middle class - intended or unintended.
How about layoffs from the retail sector and any local supplier to that industry? I suspect you will see a "die off" of industries and towns. Worst yet, there will be what I call zombie towns. Areas that have had their economic potential killed off, but are still running due to some sort of government assistance or some remaining niche employer. For example, look at Gary, Indiana, where the steel industry is a shadow of its former self and the casinos are laying folks off. A third of the town is vacant, resembling that opening scenes from George Romero's Day of the Dead ('78 Dawn still rocks).
Actually, what we're seeing here is almost the equivalent or derivative of the Morganthau Plan in action. Slowly, but surely, we're being de-industrialized. Years ago, when I was a kid I saw them tear up rail road lines around Chicago. The same when I visited my late aunt in Indiana. What did they have in common, most went to factories or industrial areas that today are commercial centers or housing developments. Ironically, many of the latter now resemble the abandoned factories they replaced! I suspect that it isn't just my area that witnessed the pogrom on rail lines. Now maybe they weren't needed, but why weren't they needed? In most industrial nations, and correct me if I'm wrong here, there has been an expansion in new lines for industrial use.
Well what happened to the rail lines can be applied to stores and soon towns. I know I keep bringing up things like when I visited so and so, or some other personal experience. So grant me one more for the day. When I went on a trip out west in places like Arizona, we saw old ghost towns. My sister, who tought in the Mesa-Phoenix area, told me how the gold was no longer being found the people left and the town tied. Well, my friends, "gold" or economic activity is starting to not be found in other towns and cities. Worst yet, the nuggets are there waiting, but some folks would sooner throw them away in favor of importing them from overseas!
You are the second person to tell me something similar. I was having outpatient surgery at Northwest hospital, well prior to that I was in the waiting room. Lady next to me strikes up a conversation. I don't remember much, except that she was hoping to make money blogging. Now this young lady had to be in her 30s easy. I tried to explain to her that there is no real money in it unless you can generate traffic, but she wasn't going to have none of that. Ok...fine, why argue? She couldn't find work, she had a degree of some kind, nothing technical. But still couldn't find a job outside of working at a chain restaurant. Now she's trying to make money on a blog talking about "common sense" or something like that. Honestly, my mind was on other things at that moment.
But later on, sitting at home eating Chinese, for some reason I thought about how sad it was here. We've become a nation where once you didn't even need a college degree to get a job to put food on the table for your family, to a nation that thinks blogging can be a vocation. Don't get me wrong, even I have a site and I'm not putting down any of Robert's commercial aspirations for this site. Just that, well, you know the economic terms "barrier of entry"? It seems, we've put the bar on that a bit too high in this country. We really have to ask ourselves, do we really want an economy where it is almost mandatory to get a college degree?
Look the sheepskin is nice, and the education you get is just about invaluable. But what if you don't want to go to college? Not everyone can become a computer programmer or a doctor or what have you. Some people are content with high school and their "street education". There is nothing wrong in being a handy man or a construction worker or a janitor. These jobs provide useful economic inputs just as other jobs requiring that degree. But we almost make it shameful to not want to go to college. Economically speaking, we make it so that even though one applies for a job that doesn't require a college degree, that person in Human Resources will put your resume in the trashbin if say I walk in there because I have a degree and you don't.
So yeah, its sad...a nation of would-be bloggers who think they can really make a living out of this. The math tells me that out of the bajillions who will start up a blog, 1-2% will become the stars that make the money. Its odd, today while recovering I was watching the Grapes of Wrath. There is a scene where the Joad family is at a rest stop and they are talking with some others. Well this one guy was already returning from California and telling them that the flyers were bunk. Tom Joad, startled, inquires how so. The man goes on how there is the promise of making $$$, but then everyone from places like Oklahoma or Arkansas or Texas shows up. The laws of supply and demand take over, and it ain't $$$, but now $. How many out there really can write a blog, continously? I tried, of course I have some severe physical problems going on, but I know others who also had series but could not keep up. Are we heading towards quantity versus quality, the Chinese watch maker versus the Swiss watchmaker?
I've probably alienated myself from this site by now with what I'm saying. But my fear is that the so-caleld barrier of entry is non-existant when it comes to blogging. There are millions out there already in existence, but most are of dubious quality. My fear, and my encounter with this young lady almost proves it, is that more and more in desperation will pin their final hopes in that the market for opinions will lay a road to financial security. Sadly, this isn't the case.
Tranching is more just "tacking on some bad" with some good again with the idea that defaults are not dependent (wrong). so like you buy a piece of cheese and part of the cheese is the "best part", but you get those dried out crappy parts with the "best parts". Ya gotta buy the whole cheese. But every cheese can get mold in it...although mold usually hits the "bad part" first.
Well, in tranching they assume your cheese would never, all at once become moldy...that a new "super strain" of mold would hit your cheese at once, in say...30 minutes.
Therefore since your cheese mold is assummed to start at the bad part....you could eat the good part before the mold overtook your whole cheese.
Mold was also random with "tranches", i.e. cheese regions on your wheel of cheese, i.e. areas where one could expect "more or less" mold to grow on the cheese in that particular area.
Think Gouda or Port Salute or wheels of Brie.
Where the Games begin is evaluating those risks in each tranche. I guess they had been bundling these things up previously, so this new game allowed them, instead of using complex models to evaluate the worth of each tranche, i.e. part of the cheese where the risk of mold would occur, they just used this Li model, cranked out some numbers on the below invalid assumptions and said there! All safe. (ha ha). I guess they used to bundle securities up (with tranches) (crap, I'm getting out here) in ....mumble, mumble..
in let's say in the past tranches of bundled securities were, one part was the cheese, another part was aluminum, impervious to mold, another part was say paper, can get moldy but very very slowly. So in the past they bundled up a bunch of different things to spread risk and were sold that way as bundled securities with tranches.
With Li's formula they bundled the entire security as "sections of the cheese". With Copulas, all cheese was good, bundling only cheese with cheese to manage risk was good, even breaking up bad cheese and selling it together to manage the risk of mold was good.
i.e. a rat's dream.
The cheese in this case was MBS, or assets of all one class, i.e. residential properties.
What Li said was one could safely estimate the chance that if one mortgage defaulted, another one would.
He did that by two problems (that are flawed in my view).
First was the entire concept that defaults are "random" or uniformly distributed. Take that meaningless number IQ score. Well by the scores themselves, they are distributed with an average and then "tails" out on the end. A bell curve. So, the chance if Bob is born with an IQ of 50, Betty would have an IQ of 150, just by the limits of human "intelligence" measurement and the way they want the "distribution" represented to ensure 100 is the "average". (IQ has it's own bs but for another day!). So, Li assumed the chance of one person not being able to pay their mortgage was a simple relationship to someone else, i.e. a more "randomized" or "normal", (evenly spaced with the most being in the middle) distribution akin to a IQ bell curve. Problem is that just ain't the way defaults work, especially historically and especially when companies are busy giving mortgages to people with phony social security numbers, no legal right to be in this country, no income, not enough income, absurd, predatory terms from lenders, so over-inflated prices no one could really afford the asset in the first place and bad credit scores.
So for example, Li said the chance someone in Riverside, CA couldn't pay their mortgage would affect someone in Ohio not being able to pay their mortgage by increasing that Ohio person's chance of defaulting by say 1.5%. and that number would stay constant, that 1.5%...until someone else defaulted.
So, things like "all of Riverside" homeowners defaulting wasn't in the model...even though it's clear Riverside, CA is a "ground zero" of foreclosures due to these other dependencies as well as through time....
In Li's math world, events are all constant and linear. Kind of like a traffic light only ignoring the increasing line of cars waiting for it to turn. The light stays green, red, yellow at constant intervals. The back up of cars along the road....does not.
But in the real world of massive mortgage defaults, things happening are absolutely not constant and linear here. Time ain't on one's side and the relationship of default is not linear either. If all of your neighbors default, you are in serious SOL because not only is your property now worth nothing, the banks just lost big money and all of the stores and employers closed around you because now the majority are flat broke. Time ain't on your side, ain't constant, ain't steady just waiting around for Betty in Ohio to default anymore.
i.e. that chance that Betty will default in Ohio, well firstly it's kind of meaningless to you because everybody around you is now homeless, without a job and the whole area looks like a war zone but also that chance even your neighbor will default is still 1.5%, by Li's model, even though it's clear the default rate in your neighborhood is really 98.9%!
in other words Li claimed that "all defaults are created equal" from their origins, affected by "external forces" by from the start are "separate" from each other directly, each affected only by these large "external forces" that also were not so "regional".
(uniform distribution which is required by the Gaussian Copula to be valid).
So for each "region" (say Ohio and riverside) one could break it down more "piecemeal" and give a default risk number.
In other words, you have a bunch of cheeses where the good parts were taken out. You put them all together. But then you say at time of creation, none of the cheese has mold. Therefore the probability that all of the cheeses, all of the parts of the cheese will go bad, will be a constant, linear value and it doesn't matter anymore that you just packaged up a bunch of cheeses that are the first to mold because you claim that it's still random and uniform on how the mold grows on each piece of bad cheese.
Not so says anyone who knows cheese. If you put bad cheese together it can get moldy quick, it will blow up, explode in disgusting gruesome smell all over your refrigerator, even though each piece of bad cheese (when it's with good cheese) doesn't have that property...you will have a nasty mess on your hands because it spreads and it's not independent or uniform, or constant over time. It is not even linear never mind constant. i.e. Li's assumption flaw.
Second Li flaw I perceive:
Because of the above assumptions, he then claimed that CDS and "market data" was a valid metric to determine increased chances of default. Call it an "indicator" simply because credit default swaps are valued daily and would somehow follow the markets.
Now this is where you get the comment about "equilibrium" as if there is a section of the world that has decided to ban the = symbol as an evil doer.
But it is not the = sign, or how "market data does not reflect equilibrium" (no shit Sherlock, of course all real data does not have equilibrium, firstly there are always unknowns, knowledge is not constant, information is not uniform) but this other notion of instantaneous is pure illusion and anyone who deals with any time based system analysis will tell you that. There is ALWAYS a lag man!
I digress, back to the cheese analogy and the flaw I really see in using CDS data as a risk curve creator:
To me, the proposal of using CDS data was really nuts. I mean obviously nuts and why no one flagged this guy's paper is beyond me. CDSes are not a 1:1 ratio to the underlying asset, one can have unlimited CDSes associated to one mortgage. There is no upper and lower bound on CDSes. CDSes also do not have any historical data pattern to prove they model default data or correlate to it. Jesus man, they haven't been around long enough to claim they, as an asset class by themselves are modeled accurately!
It's like me going out to the highway at midnight, counting cars for an hour, and then claiming that is the constant daily traffic flow, 24/7, every day of the year for that highway.
Robert, just to sum this all up, wasn't the promise of Li's approach the notion that by distributing risk probabilities (throughout a tranched security) the overall risk would be minimized? And, accordingly...would you please summarize (in simple language) where the whole thing was flawed? (Personally, my sense is that in a perfectly closed system without any external variables perhaps his system might have worked. But reliance on Appraisals and FICOs solely as the underlying valuators...fails to consider local/regional employer health, job creation, global outsourcing, real wage impacts, etc.) So, in a nutshell, can we distill Wall Street's main flaw into a simple set of factors?
I have no idea what you are talking about at this point.
The CLT is for large aggregate numbers but it assumes random probabilities, i.e. random variables. i.e. independent probabilities or independent events.
This has nothing to do with "market equilibrium".
"market equilibrium" is simply, in mathematics terms...
well, solving a basic algebra problem...but in no way does it assume, imply or use random probability variables. Market events are well known to not be random.
i.e.
x1 + x2 + x3 ... + xn = y
and one can take this much further of course, one can add multi-dimensions, they can also add projected probabilities, but as far as I am aware, no one in regular economics, even advanced modeling is using Copulas because one must find a method to which one can claim the probability of event A, where A happens solo....has a uniform distribution (i.e. Gaussian, etc.).
They would use that possibly in future scenario projections modeling but in "regular" macro, it's more deterministic (dependent) modeling.
But in undergraduate economics, it's all algebra and calculus and much of that is for concepts. Many of those concepts, say the law of supply and demand, are proven, not with gaussian distribution models, but with statistical real world information, i.e. real data.
ex. would be Keynes:
Basic Stimulus Keynes:
C+I+G+X-M= GDP
As an example, I'll just take Borjas over there. He has pretty good math. Well, I know for a fact he goes through his data, his statistics in great detail and publishes every assumption when he doesn't have the raw data, if he extrapolates anything.
i.e. they are much more about statistics, data analysis.
Li, on the other hand, has a PhD in actuary science. This is a branch of mathematics that is notorious to pay big huge bucks. This was an unsolved problem simply because one could not easily model the probability of default...
because they were indeed using Markov models, which is kind of an "AI" type of thing as well as diversifying their derivatives, also to spread risk.
But this issue of Li is another entirely separate area.
It is mathematics, applied to finance.
I'm sorry but the point is the mathematics, simply because this is the branch of science at hand.
I hate to say this but many models ARE anchored in reality. I have no idea what you are referring to.
I would not see a "Gaussian Probability Model" in say for example, the model for free trade because it is not applicable. That's another different branch of mathematics and from my readings to date, I have never seen a good macro economic theorist, or say a labor economist, trade theory ever use a "Gaussian distribution", except say something like "skills" per subgroup as superior/inferior, i.e. for data that is known already to cohere to a Gaussian distribution by historical evidence.
I honestly have no idea at this point what is your point.
Maybe you heard a blurb about DSGE modeling, which is used by the world bank and so on.
But Stochastic modeling is quite different. That implies Markov models, which are transitional states, and can be independent of past events, i.e. not a Gaussian Copula, which is a fancy way of saying one is computing to a constant a joint probability model (i.e. dependence events).
I think I noted this last year. We have not been served well by this part of the profession...not enough rigorous analysis, and too much Maria Bartaromo glitz. Mezmerized by the glamour of the super-rich, financial journalists failed miserably and they and their editors/producers should be ashamed at the fact that they've become little more than shills and hacks. They were afraid to pull up the skirt and take a cold hard look. They were out of touch with the man on the street. A case of insider trading, really.
Gaussian copula
One example of a copula often used for modelling in finance is the Gaussian copula, which is constructed from the bivariate normal distribution via Sklar's theorem.
If markets are not efficient, the classical central limit theorem does not yield a Gaussian distribution, because the events cannot be assumed to be a series of independent and identically distributed events. And it is certainly only the classical CLT that would give a basis for using a Gaussian ... there's never even a weak test for normality for the individual distributions.
I think once one sees this is actually a mathematical formula, a model, it becomes clear Li's model in in the realm of advanced mathematics and has little to do with "data points" (which are assuredly misunderstood in the first place, it's really regions of convergence) of "equilibrium". This is advanced statistics, mathematical modeling and has zero to do with some absurd argument about the realities of equilibrium versus mathematical models used by economists.
In what sense is what Li done different in any respect from what mainstream economists normally do?
Criticizing the quality of the mathematical analysis in a mainstream economic model is beside the point because the model is not anchored in reality ... whether the math is pedestrian or strong, its far more common flaw is that its beside the point. Mainstream economists do not argue about the realities of equilibrium versus the models that they use, they simply make the conventional assumptions required to proceed with their modeling ... as Li did ... and then focus on the math. The quality of the math is one of the main determinants of the quality of the journal that they get published in.
are completely exploitative to workers. People are bidding for work, way below even minimum wage. And then they take money on the form of a "commission" from people's pockets.
10% unemployment will be norm by 2010 across this great nation. I see a big shift as the govt breaks unions and we all soon become a nation of freelancers all on our own. you can see the movement already just look at the growth in websites where americans have turned to freelancing. look at the alexa rating (alexa.com) of vois.com or getafreelancer.com - they have soared doubling in traffic as more americans move away from union labor and go to freelance. is this our future?
Anybody remember the star-bellied Sneetches? That's what I feel we have, a star-bellied Sneetch machine and all one has to do is get a star and wala, all is good.
Doesn't matter what the Sneetch actual does, all that matters is that star.
Just when you see a sane person, invite them over to EP. Finding sanctuary that is focused on what the facts actually are is becoming hard to find these days. ;)
If any of the kossaks truly grasped the concept of this move. They are busily celebrating the defection of the senatorial mainstay.
Rather than try and point out the obvious over there I come to the happy place that can decipher this sudden change of events.
This my fellow EP's ... is a politician ... recognize it for what it is. This old, corrupt senatorial representative is smelling his parties decay. So what does he do... he turns to the next party to do one thing ... Save his fucking job.
Does anybody think these asshats are in it for anything other than $$$ and power? This crap has nothing to do with representation and party affiliation. This is saving ones own ass.
He needs badly to join the ranks of the unemployed. But not the distinguished, beloved unemployed working class ..... no he needs to join the ranks of the batshit crazy, worthless piece of trash, with zero job skills except of the CYA type.
There are sites claiming you can make money at blogging....which do make money. (If you see their ads show up on here, let me know, I try to ban them!)
EP gets healthy traffic, we assuredly need more and I hope all promote EP and invite people as you find them...
but trust me, the ads on the site pay for that cup of coffee I drink while maintaining it for free. ;)
I saw a local news cast promoting these "freelance" websites and about flipped.
The contract law is pathetic, one can get stiffed, they take 15% but the biggest thing is one is bidding on work in a lump sum. People want say 1 months worth of work for $300 dollars, things like this. I mean you could get a paper route and be better off.
You are bidding on work from all over the world, where $500 dollars is a living wage in many other places but here, you won't even be able to pay for dog food.
I have thought the unions should go after these sites for violating US labor laws. They are getting around labor laws by declaring their "freelancers" to be "small businesses" and it's really disgusting, predatory.
Though I'm attempting to work on something similar in my spare time- an argument that the reason Bush's horrid 13.6% labor-to-population increase didn't result in more unemployment was because people turned to freelancing.
I'm having a hard time getting numbers of freelancers though- best bet seems to be number of alternative tax ids applied for, but the IRS doesn't exactly have a neat and tidy spreadsheet for that one.
-------------------------------------
Executive compensation is inversely proportional to morality and ethics.
The article points out that these are middle-aged people - you know, worthless. They can just wander off to die in a ditch somewhere, no harm done. Little Tommy Friedman says we can fix everything by importing millions more younger Chinese and Indians to buy the homes these expendable people can't afford anymore, and he's the smartest man in the world. Gosh, Americans are so spoiled and have such a ridiculous sense of entitlement, to think that they deserve to be able to earn a living for more than ten or so years after sinking $100K+ in training. Sheesh, we really need to expedite getting those "assisted suicide" laws passed in more states. Maybe if we paid for assisted-suicide services for this deadwood they'd stop whining and clear out, eh? Then the productive people who matter can get back to the important business of selling out the country for fun and profit.
... assumes efficient markets:
If you assume efficient markets, then you assume away systemic interactions between events, like defaults, that are not captured in the prices established in markets for financial assets affected by the events.
If you do not assume efficient markets, there is no way to get to independent and identical distributions, because there's no scientific basis for the assumption. Its only when, as in mainstream economics, it is normal to invoke commonly used assumption despite that fact that they are contradicted by reality that someone could possibly treat the distribution of the returns on a pool of mortgages as a Guassian.
Obviously there is nothing there in terms of
(Observation->assumption)
But mainstream economics does not work in terms of (Observation->assumption). It works in terms of:
(Requirements for tractable solution -> assumption)
So as you describe it, there is nothing about what Li did that is in any way outside of the mainstream practices of economics. That fact that it does not result in a model that applies in the real world is par for the course ... that is the downside for modeling as mainstream economists do, as opposed to modeling as natural and social scientists do ... there is nothing in the process that filters out models that are irrelevant to the real world.
... is driven by a concern about market equilibria? Its a program in applying a certain type of mathematical toolkit to economic modeling. The historical data is never the primary driver of the modeling.
The reason for the focus on market equilibria is that is a big part of the rationalization for the use of the toolkit. But mainstream economic models are originally mathematical models, and only secondarily about the economy as such.
After all, the whole reason for the existence of the field of econometrics is to use characteristics of mathematical models in order to take shortcuts that would not be justified based on the statistics alone. If it were not for those shortcuts, economics would just use statistics, as the natural and social sciences do.
That's right, your money is being used to offshore outsource your job.
What else is new? It's been the policy of the U.S. government since at least Bush I's time that the U.S. now exists only to subsidize the development of other nations (while enriching "American" elites along the way to that goal). Since they've already managed to seriously damage the economic prospects of working Americans and their children without any credible backlash, I guess they've decided they no longer have to waste time and energy on pretense, and are merrily spitting right in our faces and stealing us blind in broad daylight.
Why? Because they can. At this stage of the game they're just laughing out loud at citizens "getting so mad they're going to...they're going to...write a letter to their Congressmen!" There's probably a tradition now among Congressional staffers of Friday afternoon happy hour dedicated to drinking and laughing at the faxes and emails from all those ridiculous sputtering impotent citizens.
Link
American Capitalism leads to two class system: workers and corporate elite. "American Dream" is similar to religion - demanding "blind faith". Don't question the exists of the "American Dream". Just follow it and get it. Sure, get a higher education, take on a mortgage, buy that car, pump money into that 401k, sign-up for company stock purchase program, accept stock option. But it is all illusory.
In the end, American Capitalism, means that most people, particularly middle class, will end up on the losing end because with American Capitalism that has to be winners and losers. The winners will always be the ones that are controlling policy and capital. In American capitalism, middle class doesn't fit - either working class or corporate elite. Organized labor is the thorn in the side of American capitalism. It is the one force that can help maintain a middle class. But those controlling policy and capital will fight to the death to prevent the growth of organized labor.
American capitalism depends on higher profits and higher return for corporations. American capitalism, through globalization, will always find cheaper sources of labor it needs it to survive. What is left in its wake doesn't matter! Millions of uninsured, millions underemployed, millions in debt. American capitalism will continue to lead to the destruction of the middle class - intended or unintended.
But there is a better way.
How about layoffs from the retail sector and any local supplier to that industry? I suspect you will see a "die off" of industries and towns. Worst yet, there will be what I call zombie towns. Areas that have had their economic potential killed off, but are still running due to some sort of government assistance or some remaining niche employer. For example, look at Gary, Indiana, where the steel industry is a shadow of its former self and the casinos are laying folks off. A third of the town is vacant, resembling that opening scenes from George Romero's Day of the Dead ('78 Dawn still rocks).
Actually, what we're seeing here is almost the equivalent or derivative of the Morganthau Plan in action. Slowly, but surely, we're being de-industrialized. Years ago, when I was a kid I saw them tear up rail road lines around Chicago. The same when I visited my late aunt in Indiana. What did they have in common, most went to factories or industrial areas that today are commercial centers or housing developments. Ironically, many of the latter now resemble the abandoned factories they replaced! I suspect that it isn't just my area that witnessed the pogrom on rail lines. Now maybe they weren't needed, but why weren't they needed? In most industrial nations, and correct me if I'm wrong here, there has been an expansion in new lines for industrial use.
Well what happened to the rail lines can be applied to stores and soon towns. I know I keep bringing up things like when I visited so and so, or some other personal experience. So grant me one more for the day. When I went on a trip out west in places like Arizona, we saw old ghost towns. My sister, who tought in the Mesa-Phoenix area, told me how the gold was no longer being found the people left and the town tied. Well, my friends, "gold" or economic activity is starting to not be found in other towns and cities. Worst yet, the nuggets are there waiting, but some folks would sooner throw them away in favor of importing them from overseas!
You are the second person to tell me something similar. I was having outpatient surgery at Northwest hospital, well prior to that I was in the waiting room. Lady next to me strikes up a conversation. I don't remember much, except that she was hoping to make money blogging. Now this young lady had to be in her 30s easy. I tried to explain to her that there is no real money in it unless you can generate traffic, but she wasn't going to have none of that. Ok...fine, why argue? She couldn't find work, she had a degree of some kind, nothing technical. But still couldn't find a job outside of working at a chain restaurant. Now she's trying to make money on a blog talking about "common sense" or something like that. Honestly, my mind was on other things at that moment.
But later on, sitting at home eating Chinese, for some reason I thought about how sad it was here. We've become a nation where once you didn't even need a college degree to get a job to put food on the table for your family, to a nation that thinks blogging can be a vocation. Don't get me wrong, even I have a site and I'm not putting down any of Robert's commercial aspirations for this site. Just that, well, you know the economic terms "barrier of entry"? It seems, we've put the bar on that a bit too high in this country. We really have to ask ourselves, do we really want an economy where it is almost mandatory to get a college degree?
Look the sheepskin is nice, and the education you get is just about invaluable. But what if you don't want to go to college? Not everyone can become a computer programmer or a doctor or what have you. Some people are content with high school and their "street education". There is nothing wrong in being a handy man or a construction worker or a janitor. These jobs provide useful economic inputs just as other jobs requiring that degree. But we almost make it shameful to not want to go to college. Economically speaking, we make it so that even though one applies for a job that doesn't require a college degree, that person in Human Resources will put your resume in the trashbin if say I walk in there because I have a degree and you don't.
So yeah, its sad...a nation of would-be bloggers who think they can really make a living out of this. The math tells me that out of the bajillions who will start up a blog, 1-2% will become the stars that make the money. Its odd, today while recovering I was watching the Grapes of Wrath. There is a scene where the Joad family is at a rest stop and they are talking with some others. Well this one guy was already returning from California and telling them that the flyers were bunk. Tom Joad, startled, inquires how so. The man goes on how there is the promise of making $$$, but then everyone from places like Oklahoma or Arkansas or Texas shows up. The laws of supply and demand take over, and it ain't $$$, but now $. How many out there really can write a blog, continously? I tried, of course I have some severe physical problems going on, but I know others who also had series but could not keep up. Are we heading towards quantity versus quality, the Chinese watch maker versus the Swiss watchmaker?
I've probably alienated myself from this site by now with what I'm saying. But my fear is that the so-caleld barrier of entry is non-existant when it comes to blogging. There are millions out there already in existence, but most are of dubious quality. My fear, and my encounter with this young lady almost proves it, is that more and more in desperation will pin their final hopes in that the market for opinions will lay a road to financial security. Sadly, this isn't the case.
Tranching is more just "tacking on some bad" with some good again with the idea that defaults are not dependent (wrong). so like you buy a piece of cheese and part of the cheese is the "best part", but you get those dried out crappy parts with the "best parts". Ya gotta buy the whole cheese. But every cheese can get mold in it...although mold usually hits the "bad part" first.
Well, in tranching they assume your cheese would never, all at once become moldy...that a new "super strain" of mold would hit your cheese at once, in say...30 minutes.
Therefore since your cheese mold is assummed to start at the bad part....you could eat the good part before the mold overtook your whole cheese.
Mold was also random with "tranches", i.e. cheese regions on your wheel of cheese, i.e. areas where one could expect "more or less" mold to grow on the cheese in that particular area.
Think Gouda or Port Salute or wheels of Brie.
Where the Games begin is evaluating those risks in each tranche. I guess they had been bundling these things up previously, so this new game allowed them, instead of using complex models to evaluate the worth of each tranche, i.e. part of the cheese where the risk of mold would occur, they just used this Li model, cranked out some numbers on the below invalid assumptions and said there! All safe. (ha ha). I guess they used to bundle securities up (with tranches) (crap, I'm getting out here) in ....mumble, mumble..
in let's say in the past tranches of bundled securities were, one part was the cheese, another part was aluminum, impervious to mold, another part was say paper, can get moldy but very very slowly. So in the past they bundled up a bunch of different things to spread risk and were sold that way as bundled securities with tranches.
With Li's formula they bundled the entire security as "sections of the cheese". With Copulas, all cheese was good, bundling only cheese with cheese to manage risk was good, even breaking up bad cheese and selling it together to manage the risk of mold was good.
i.e. a rat's dream.
The cheese in this case was MBS, or assets of all one class, i.e. residential properties.
What Li said was one could safely estimate the chance that if one mortgage defaulted, another one would.
He did that by two problems (that are flawed in my view).
First was the entire concept that defaults are "random" or uniformly distributed. Take that meaningless number IQ score. Well by the scores themselves, they are distributed with an average and then "tails" out on the end. A bell curve. So, the chance if Bob is born with an IQ of 50, Betty would have an IQ of 150, just by the limits of human "intelligence" measurement and the way they want the "distribution" represented to ensure 100 is the "average". (IQ has it's own bs but for another day!). So, Li assumed the chance of one person not being able to pay their mortgage was a simple relationship to someone else, i.e. a more "randomized" or "normal", (evenly spaced with the most being in the middle) distribution akin to a IQ bell curve. Problem is that just ain't the way defaults work, especially historically and especially when companies are busy giving mortgages to people with phony social security numbers, no legal right to be in this country, no income, not enough income, absurd, predatory terms from lenders, so over-inflated prices no one could really afford the asset in the first place and bad credit scores.
So for example, Li said the chance someone in Riverside, CA couldn't pay their mortgage would affect someone in Ohio not being able to pay their mortgage by increasing that Ohio person's chance of defaulting by say 1.5%. and that number would stay constant, that 1.5%...until someone else defaulted.
So, things like "all of Riverside" homeowners defaulting wasn't in the model...even though it's clear Riverside, CA is a "ground zero" of foreclosures due to these other dependencies as well as through time....
In Li's math world, events are all constant and linear. Kind of like a traffic light only ignoring the increasing line of cars waiting for it to turn. The light stays green, red, yellow at constant intervals. The back up of cars along the road....does not.
But in the real world of massive mortgage defaults, things happening are absolutely not constant and linear here. Time ain't on one's side and the relationship of default is not linear either. If all of your neighbors default, you are in serious SOL because not only is your property now worth nothing, the banks just lost big money and all of the stores and employers closed around you because now the majority are flat broke. Time ain't on your side, ain't constant, ain't steady just waiting around for Betty in Ohio to default anymore.
i.e. that chance that Betty will default in Ohio, well firstly it's kind of meaningless to you because everybody around you is now homeless, without a job and the whole area looks like a war zone but also that chance even your neighbor will default is still 1.5%, by Li's model, even though it's clear the default rate in your neighborhood is really 98.9%!
in other words Li claimed that "all defaults are created equal" from their origins, affected by "external forces" by from the start are "separate" from each other directly, each affected only by these large "external forces" that also were not so "regional".
(uniform distribution which is required by the Gaussian Copula to be valid).
So for each "region" (say Ohio and riverside) one could break it down more "piecemeal" and give a default risk number.
In other words, you have a bunch of cheeses where the good parts were taken out. You put them all together. But then you say at time of creation, none of the cheese has mold. Therefore the probability that all of the cheeses, all of the parts of the cheese will go bad, will be a constant, linear value and it doesn't matter anymore that you just packaged up a bunch of cheeses that are the first to mold because you claim that it's still random and uniform on how the mold grows on each piece of bad cheese.
Not so says anyone who knows cheese. If you put bad cheese together it can get moldy quick, it will blow up, explode in disgusting gruesome smell all over your refrigerator, even though each piece of bad cheese (when it's with good cheese) doesn't have that property...you will have a nasty mess on your hands because it spreads and it's not independent or uniform, or constant over time. It is not even linear never mind constant. i.e. Li's assumption flaw.
Second Li flaw I perceive:
Because of the above assumptions, he then claimed that CDS and "market data" was a valid metric to determine increased chances of default. Call it an "indicator" simply because credit default swaps are valued daily and would somehow follow the markets.
Now this is where you get the comment about "equilibrium" as if there is a section of the world that has decided to ban the = symbol as an evil doer.
But it is not the = sign, or how "market data does not reflect equilibrium" (no shit Sherlock, of course all real data does not have equilibrium, firstly there are always unknowns, knowledge is not constant, information is not uniform) but this other notion of instantaneous is pure illusion and anyone who deals with any time based system analysis will tell you that. There is ALWAYS a lag man!
I digress, back to the cheese analogy and the flaw I really see in using CDS data as a risk curve creator:
To me, the proposal of using CDS data was really nuts. I mean obviously nuts and why no one flagged this guy's paper is beyond me. CDSes are not a 1:1 ratio to the underlying asset, one can have unlimited CDSes associated to one mortgage. There is no upper and lower bound on CDSes. CDSes also do not have any historical data pattern to prove they model default data or correlate to it. Jesus man, they haven't been around long enough to claim they, as an asset class by themselves are modeled accurately!
It's like me going out to the highway at midnight, counting cars for an hour, and then claiming that is the constant daily traffic flow, 24/7, every day of the year for that highway.
That's the best I can do (at past midnight).
In Math:
correlation parameter, γ is CDS data based.
Robert, just to sum this all up, wasn't the promise of Li's approach the notion that by distributing risk probabilities (throughout a tranched security) the overall risk would be minimized? And, accordingly...would you please summarize (in simple language) where the whole thing was flawed? (Personally, my sense is that in a perfectly closed system without any external variables perhaps his system might have worked. But reliance on Appraisals and FICOs solely as the underlying valuators...fails to consider local/regional employer health, job creation, global outsourcing, real wage impacts, etc.) So, in a nutshell, can we distill Wall Street's main flaw into a simple set of factors?
Seriously.
I have no idea what you are talking about at this point.
The CLT is for large aggregate numbers but it assumes random probabilities, i.e. random variables. i.e. independent probabilities or independent events.
This has nothing to do with "market equilibrium".
"market equilibrium" is simply, in mathematics terms...
well, solving a basic algebra problem...but in no way does it assume, imply or use random probability variables. Market events are well known to not be random.
i.e.
x1 + x2 + x3 ... + xn = y
and one can take this much further of course, one can add multi-dimensions, they can also add projected probabilities, but as far as I am aware, no one in regular economics, even advanced modeling is using Copulas because one must find a method to which one can claim the probability of event A, where A happens solo....has a uniform distribution (i.e. Gaussian, etc.).
They would use that possibly in future scenario projections modeling but in "regular" macro, it's more deterministic (dependent) modeling.
But in undergraduate economics, it's all algebra and calculus and much of that is for concepts. Many of those concepts, say the law of supply and demand, are proven, not with gaussian distribution models, but with statistical real world information, i.e. real data.
ex. would be Keynes:
Basic Stimulus Keynes:
C+I+G+X-M= GDP
As an example, I'll just take Borjas over there. He has pretty good math. Well, I know for a fact he goes through his data, his statistics in great detail and publishes every assumption when he doesn't have the raw data, if he extrapolates anything.
i.e. they are much more about statistics, data analysis.
Li, on the other hand, has a PhD in actuary science. This is a branch of mathematics that is notorious to pay big huge bucks. This was an unsolved problem simply because one could not easily model the probability of default...
because they were indeed using Markov models, which is kind of an "AI" type of thing as well as diversifying their derivatives, also to spread risk.
But this issue of Li is another entirely separate area.
It is mathematics, applied to finance.
I'm sorry but the point is the mathematics, simply because this is the branch of science at hand.
I hate to say this but many models ARE anchored in reality. I have no idea what you are referring to.
I would not see a "Gaussian Probability Model" in say for example, the model for free trade because it is not applicable. That's another different branch of mathematics and from my readings to date, I have never seen a good macro economic theorist, or say a labor economist, trade theory ever use a "Gaussian distribution", except say something like "skills" per subgroup as superior/inferior, i.e. for data that is known already to cohere to a Gaussian distribution by historical evidence.
I honestly have no idea at this point what is your point.
Maybe you heard a blurb about DSGE modeling, which is used by the world bank and so on.
But Stochastic modeling is quite different. That implies Markov models, which are transitional states, and can be independent of past events, i.e. not a Gaussian Copula, which is a fancy way of saying one is computing to a constant a joint probability model (i.e. dependence events).
I think I noted this last year. We have not been served well by this part of the profession...not enough rigorous analysis, and too much Maria Bartaromo glitz. Mezmerized by the glamour of the super-rich, financial journalists failed miserably and they and their editors/producers should be ashamed at the fact that they've become little more than shills and hacks. They were afraid to pull up the skirt and take a cold hard look. They were out of touch with the man on the street. A case of insider trading, really.
Is Sweden Fabian?
From that link:
If markets are not efficient, the classical central limit theorem does not yield a Gaussian distribution, because the events cannot be assumed to be a series of independent and identically distributed events. And it is certainly only the classical CLT that would give a basis for using a Gaussian ... there's never even a weak test for normality for the individual distributions.
In what sense is what Li done different in any respect from what mainstream economists normally do?
Criticizing the quality of the mathematical analysis in a mainstream economic model is beside the point because the model is not anchored in reality ... whether the math is pedestrian or strong, its far more common flaw is that its beside the point. Mainstream economists do not argue about the realities of equilibrium versus the models that they use, they simply make the conventional assumptions required to proceed with their modeling ... as Li did ... and then focus on the math. The quality of the math is one of the main determinants of the quality of the journal that they get published in.
are completely exploitative to workers. People are bidding for work, way below even minimum wage. And then they take money on the form of a "commission" from people's pockets.
I'm sorry but people shouldn't use them.
10% unemployment will be norm by 2010 across this great nation. I see a big shift as the govt breaks unions and we all soon become a nation of freelancers all on our own. you can see the movement already just look at the growth in websites where americans have turned to freelancing. look at the alexa rating (alexa.com) of vois.com or getafreelancer.com - they have soared doubling in traffic as more americans move away from union labor and go to freelance. is this our future?
Anybody remember the star-bellied Sneetches? That's what I feel we have, a star-bellied Sneetch machine and all one has to do is get a star and wala, all is good.
Doesn't matter what the Sneetch actual does, all that matters is that star.
Just when you see a sane person, invite them over to EP. Finding sanctuary that is focused on what the facts actually are is becoming hard to find these days. ;)
If any of the kossaks truly grasped the concept of this move. They are busily celebrating the defection of the senatorial mainstay.
Rather than try and point out the obvious over there I come to the happy place that can decipher this sudden change of events.
This my fellow EP's ... is a politician ... recognize it for what it is. This old, corrupt senatorial representative is smelling his parties decay. So what does he do... he turns to the next party to do one thing ... Save his fucking job.
Does anybody think these asshats are in it for anything other than $$$ and power? This crap has nothing to do with representation and party affiliation. This is saving ones own ass.
He needs badly to join the ranks of the unemployed. But not the distinguished, beloved unemployed working class ..... no he needs to join the ranks of the batshit crazy, worthless piece of trash, with zero job skills except of the CYA type.
It has always been about class warfare.
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