Archive for March, 2007

As wars of occupation go, Iraq is going pretty well….

Tuesday, March 27th, 2007

A lot of things have gone horribly wrong in Iraq. In many ways it can be justifiably considered a disaster. But if you compare it to similar invasions and occupations of other countries, the US military has been doing a pretty good job.

For comparison’s sake, look at how Russia as been doing in Chechnya. As The Telegraph reports….

In an attempt to stem the steady trickle of Russian casualties, 11,000 of whom are estimated to have died since the second Chechen war erupted in 1999, Mr Putin has made Yamadayev his main battlefield commander.

In other words, the Russian’s have lost 11,000 men in a country that is far smaller then Iraq and they still have not ended the insurgency. I do not mean to pick on the Russian’s here. I don’t think you can point to an insurgency anywhere in the world that looks pretty or has been fought clean. And if the insurgency’s have any kind of popular support, they are never ended quickly.

I bring this up because I hear a lot of commentators saying “if only this had been done (fill in the blank here) things would be so much better.” I don’t think any of them know what they are talking about.

The blunt facts are that Sunnis don’t want to cede power the Shiites. No matter how many troops were on the ground, you would not change this basic fact. At the most, the US would have done a little better job at keeping the lid on things. But as soon as you started drawing down your forces the fight would have flared up just like they had never been there.

In the long run, I think this would have happened even if the US had never invaded. The really bad thing about successful dictators like Saddam Hussein and Josip Broz Tito is that they bottle things up. Thus, the pressure builds…..

But regardless of any theories about how history would have turned out, I think that by any fair comparison the US military is doing a good job fighting the insurgency. It is just that insurgencies are nasty things to fight. No one really knows how to win them short of genocide.

The facts are scary even if the theory is wrong…..

Monday, March 26th, 2007

If Stuart Staniford is wrong, he is making one of the most rigorous wrong arguments I have ever seen. He now has a third essay up making the case that Saudi Arabia is facing involuntary cuts in production.

You would think that his last two essays would have covered all there is to cover with currently available data. But in this essay he gets into the issue of water. Specifically, he talks about how much water is being brought up with the oil.

You see, when the pressure gets low in an oil well, a common technique to keep production up is to pump water down into the well. To grossly oversimplify things, the more water you pump down in the well the more water is going to come out with the oil. The higher the water content in your oil, the closer you are to closing up shop.

Anyway, in Stuart Staniford’s latest post, he makes a convincing argument that the water levels in the Saudi oil point to big problems ahead. I think his latest essay is well worth reading as always. But I want to point out that wither you buy his theory is largely irrelevant to whether you should be concerned with the facts he brings up.

It seems to me that if you deny Stanford’s theory, it you must accept that there has been a fundamental shift Saudi policy away from cheap oil. This shift will have much the same implications for Oil consumers as if Stanford’s theory that cuts are involuntary is correct.

First off, let me say that I am constitutionally inclined to doubt any talk of resource scarcity. To my mind, resource problems are usually an indication of the folly of man, and not any natural lack.

In spite of my constitutional make up, I have to confess that sometimes you just don’t get the rain you want. And as a kind of corollary, I have to allow that sometimes you just don’t have the resources you would like. The essays that have been written that set out to debunk Staniford have not been convincing and I am coming to the conclusion that Staniford may well be right.

The reason that I have come to believe Staniford in spite of my constitutional make up has much to do with the weakness in explanations put out by Staniford’s opponents for the Arabian production cut. To believe that Saudi Arabia is cutting production voluntarily, you have to believe a lot of things that I just can’t swallow.

For example, as soon as prices went above 30 dollars a barrel in 2004, Saudi Arabia dramatically kick up its oil production by about 1.5 million barrels of oil per day almost in the blink of an eye. But even though prices kept rising, Saudi Arabia’s production leveled off at around 9.5 million barrels of oil per day. They stayed at the level until sometime in 2006. At which point production started dropping even though the price of oil was above 60 dollars a barrel.

Now those who disagree with Staniford argue that this drop is voluntary. But why did Saudi Arabia think that above 30 was to high in 2004 and above 60 was to low 2006?

Maybe it's just me…..

Thursday, March 22nd, 2007

Maybe it’s just me being too tired from working to much over time, but it seems to me that Tyler is letting his emotions cloud his judgment. I just can’t think of any other reason why he would approvingly quote this on his blog…..

But remember, the tech bust devoured about $9 trillion in corporate equity; next to that, the subprime problem looks like an insect bite—unless it spreads to the rest of the mortgage market.

Maybe it’s just my ignorance showing through, but this seems like an absurd comparison to me. I waited to see if any of Tyler fine commentators picked up on this, but they seem to have dropped the ball.

Maybe the problem is just me, I don’t know.

Let us say that I create a company that has 1,000 shares. Let us say I sell one share to my mom for $5. Do I now have a company worth $5,000? How much money have I lost if I can’t find another sucker to buy my stock? $4,995? This is how I saw the accounting being done in the tech boom era.

Now let us say I loan $500 to some one and they only pay me back $5 dollars. How much money have I lost? $495 dollars right?

If you are Michael Mandel (the guy Tyler was quoting) you would say I lost 10 times as much money on my company as I did on my loans. I would disagree….

Now I am not saying that no real money was lost during the tech boom. I am not even saying that more money will be lost in the housing slump then on tech stocks (though I suspect that this will be the case.) But I do think it is awful sloppy reasoning to say that the 9 Trillion dollars of equity “lost” during the bust dwarf the potential loses in the sub-prime.

There are a lot of people on the doom and gloom sides of the housing bubble debate that are letting their emotions get the better of them. But most of optimists seem to be stretching things equally far if not farther.

The Idolatry of Great Britain….

Wednesday, March 21st, 2007

There is a certain amount of irony in the fact that the land that produced Richard Dawkins has such a touching faith that the government will take care of you. But of course, the good people of Great Britain are not content to have faith in their government. No, they feel it necessary to impose that faith on everyone in the land.

In Great Britain it is taken as an article of faith that you should always rely on the police to keep you safe. Even if you see other people being attacked or otherwise harmed, you should still wait for the police. Here is a Minister in the British government on what to do if you see someone committing a crime….

Jeremy Vine: You see something happening in the street. Do you step in?

Tony McNulty: I think the general line must be to get in touch with the authorities straight and make sure that if things are as bad as you paint the police will be there as quickly as they can.

Jeremy: You see a young man looking aggressive, shouting at an old woman, what do you do? You retreat and ring the police?

Tony McNulty: I think you should in the first instance. It may well be the simply shouting at them, blowing your horn or whatever else deters them and they go away.

Jeremy: He’s now hitting her and the police haven’t come, what do you do then?

Tony McNulty: The same the same, you must always …

Jeremy: Still wait?

Tony McNulty: Get back to the police, try some distractive activities whatever else.

Jeremy: What jump up and down?

Tony McNulty: But I would say you know sometimes that that may well work.


Why over consumption of higher education is a bad thing…….

Tuesday, March 20th, 2007

I have been working too much overtime to keep up with my favorite blogs. But I did manage to catch the post by Tyler Cowen on Bryan Caplan’s summarization of his next book. The post kept my mind occupied during a long night of plowing snow. Two lines from the post in particular stuck in my mind. This line……

This will be a good popular book, but I don’t yet understand Bryan’s attack on education.

And this line….

I view the contemporary higher education story as “more value” and “more waste” coming together.

The reason Cowen’s short post on a book that is not even finished yet caught my attention is because I have wrestled long and hard on a personal level with the value of education (In particular, the value of higher education). As might be guessed from my earlier posts, I don’t hold with Cowen’s view of education.

To do justice to my thoughts, I should write a proper essay. But I fear that overtime and other constraints are going to prevent that. Yet it seems a shame to devote so much thought to a post without throwing up at least some kind of response. So here goes a slap dash response shorn of any supporting facts and figures…..


Are Fannie and Freddie going to need a bailout?

Monday, March 12th, 2007

Felix Salmon is one of those people who do not think that the busting of real estate bubble is going to amount to anything. In this post he rips into a New York Times article that suggests that a crisis looms in the market for mortgages. Most of Felix’s gripe against the New York Time’s article revolves around something that I still don’t understand very well. Namely, the market for subprime MBSs.

But notwithstanding my ignorance, I still have to wonder what Felix was thinking when he said this…..

Morgenson also talks at great length about the enormity of the market in MBSs, but never stops to point out that the vast majority of that market is in bonds issued by Fannie Mae and Freddie Mac, and that no one has any worries whatsoever about those securities crashing.


Is Bernake somebody? This just in from the CNN News…..

“The size and the potentially rapid growth of GSE portfolios, combined with the lack of market discipline faced by GSEs, raise substantial systemic risk concerns,” Bernanke said via satellite to a banking conference in Hawaii.

Is Greenspan somebody?

This is Greenspan in 2005……

“The strong belief of investors in the implicit government backing of the GSEs does not by itself create problems of safety and soundness for the GSEs but it does create systemic risks for the U.S. financial system as the GSEs become very large,” he said.

I don’t know much, but I am pretty confident that saying that nobody has any worries about Fannie Mae and Freddie Mac’s securities is a big stretch. To give you an idea of how vulnerable Fannie Mae and Freddie Mac are consider this quote from Martin Hutchinson….

However there’s a snag here, and that’s Fannie and Freddie. With $3.8 trillion of the $10.7 trillion of home mortgages, they should suffer $350 billion of losses. Since they have an upper mortgage amount limit of $417,000, they will have fewer loans on the coasts than average, and fewer loans against grossly overpriced McMansions than average. They may also have fewer sub-prime loans than average, though they have been active in negative amortization rubbish. Thus their losses may be lower than average, perhaps only $250 billion.

However, there’s a snag here. Fannie and Freddie’s combined capital is only $79 billion. That means they are almost certain to default, and to require bailout by the long-suffering U.S. taxpayer. The one consolation will be that their losses on inappropriately hedged interest rate risk on their $1.4 trillion of directly owned mortgages, about which Bernanke was concerned, will be dwarfed by their simple credit losses on their guaranteed mortgages as a whole.

Ignore Hutchinson’s estimates of how much Fannie and Freddie stand to lose if you want to. The point is that losing less than 5% of the money that Fannie and Freddie have guaranteed in mortgages market will destroy their entire capital and then some. Loses on that scale don’t strike me as at all that inconceivable given the scale of the problems in the real estate market. If they did suffer losses on that scale, how will they make payments on those bonds that Felix says that nobody has any worries about whatsoever?

Of course, Fannie and Freddie have an implicit government guarantee so they will probably get bailed out.

But I don’t think that was Felix’s point. I gather that he does not think that the woes affecting the subprime market are going to have any significant effect on Fannie and Freddie. To my mind, that is a very dubious proposition.

Maybe I am revealing my ignorance again, but wasn’t the whole point of Fannie and Freddie to make housing more affordable for lower income people? Does that not imply that the problems that are infecting the subprime market will also affect them?

Just who are these subprime borrowers?

Monday, March 12th, 2007

In the comments to a post in Calculated Risk, I found a link to this chart at OC Register. It purports to show the subprime’s regional share of home-buying mortgages. I say purports because it is drawn from a database that only holds 50 percent of all subprime loans and 80 percent of traditional mortgages so it can’t be taken as the gospel truth. Still, it seems like it is a big enough sample that it ought to be roughly accurate.

This is what the chart says about Binghamton NY……

Binghamton, NY $76,300 15%

Based on what I know about the Binghamton Market, that seems roughly right to me. $70 to $90 thousand is what it will take to get a poor family a livable house in the Binghamton area.

Now let’s look at he figures for the Richmond-Petersburg, VA area……

Richmond-Petersburg, VA $116,600 41%

Let me ask you a question; do you think upstate New York or Virginia has been doing better economically? I don’t think there is much doubt about the answer to that question. It seems clear Virginia has had a lot better economic performance in recent years than upstate New York. So how come sub prime in Richmond-Petersburg area is more than twice the share of Binghamton? Are there really more poor people in the Richmond-Petersburg area?

I doubt it. I think the answer can only be that the speculative excess in Virginia was worse than it was in upstate New York, thus causing more people to overtax themselves to get a home.

But this raises an interesting question. Many people have been dismissing the problems with subprime as something that will not affect the majority of Americans. The current conventional wisdom seems to be that only poor people will suffer.

But if you look OC Register’s chart you will see that most of the areas that have the biggest percentage in subprime loans are also the areas that have had the strongest economic growth in recent years. If most of the subprime pain is going to be found in places that have done the most to contribute to this country’s economic growth in recent years, what does it say about the chances of the country as a whole weathering this problem without going into recession?

Is Saudi Oil production going into decline?

Sunday, March 11th, 2007

In an earlier post I already mentioned an article by Stuart Staniford that made me think this might be the case. Since then the debate has moved forward. A man by the name of Euan Mearns responded with a well written article of his own that was critical of Staniford’s methodology.

While I appreciated the fact that Euan Mearns took the time present an alternate interpretation of data, I have to say his article only helped highlight how compelling Staniford’s argument is.

As I understand it, the core of Mearns’s argument is this…

High oil prices worked their magic, dampened demand growth and stimulated a global exploration and production effort with the oil industry working flat out, everywhere. There is no shortage of oil throughout the OECD. US and European inventories remain high.

Faced with this scenario, it seems plausible to me that Saudi Arabia and other OPEC countries have cut production in order to support prices at the $60 level which does not seem to present any problem to the developed world economies. That is what the Saudis say they have done and I can see no evidence or reason to doubt it.

When I read Mearns’ argument, the first thing that I wondered was why in Saudis all the suddenly decided that they were happy with the price of oil at $60 dollars a barrel? After all, the data contained in Mearns’s own article shows that the Saudis ramped up production in a big way when oil went over $35 dollars a barrel.

To be more precise, they added 1.5 million barrels of oil per day in new production in 2004 to bring their daily pumping rate up to 9.5 million barrels of oil a day. After they reached about 9.5 million barrels of oil a day they stopped increasing production even though the price of oil kept going up. In late 2006/early 2007 they stated cutting production even though prices were still high.

What I am getting at is that the Saudis thought that oil was too high in 2004 when it started going past 30 dollars a barrel. But if we are to believe Mearns, in 2006 the Saudis decided that they wanted oil 60+ dollars a barrel. So what changed over those two years that caused the Saudis to decide that they wanted Oil to be more expensive?

Or did they decide?

We are all going to die…..

Friday, March 9th, 2007

For a depressing read look at this article in the New Yorker on whether the US can be made safe from nuclear terrorism. The answer is no.

That answer will surprise no one of course, but I was surprised to learn that a load of bananas were easier to detect with radiation detectors then Uranium. There were a lot of other nasty surprises like that in the article. Well worth the time it took to read.

Ezra Klein’s reaction to the article was to complain about the Bush Administration’s failure to do more to lock down lose radioactive material. But my reaction to the information presented in article was that it is impossible to effectively lock down radioactive materials. I mean, we spent a lot of money during the Clinton years locking down radioactive materials in Russia while unbeknownst to us Pakistan was selling stuff to everyone with money. And the New Yorker article makes it clear that it is easy to get the stuff needed to make a dirty bomb commercially.

Personally, I think it would make more sense to research ways of cleaning up after a dirty bomb. The best deterrent to a dirty bomb would be the ability to clean up the mess it makes with relatively low cost.

Why don't we hear more about this?

Thursday, March 8th, 2007

This is from Bloomberg…..

Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.

I don’t know why people aren’t making a bigger deal out of this. There was a small post in Calculated Risk and Noriel Roubin included it in one of his doom and gloom lists. But in general, the story seems to have been ignored.

Personally, I would like to know what those traders know that I don’t know……..