Bad Economics
goodmath | April 20, 2010 Against my better judgement, I've ended up writing a lot about the
financial mess that we're currently going through. If you've read that, you
know that my opinion is that the mess amounts to a giant pile of fraud.
But even having spent so much time reading and studying what was
going on, the latest news from the financial mess shocks me.
Even knowing how utterly sleazy and dishonest many people in the financial world
have been, even knowing about the stuff they've been doing, the kinds of
out and out fraud that they've perpetrated, the latest news makes them
look even more evil than I…
goodmath | March 19, 2010
I'm glad to report that electricity has been restored to the Chu-Carroll
household. So now I'm trying to catch up.
During the outage, I got a bunch of questions about the latest news coming
out of the big financial disasters. A major report came out about the failure
of Lehman Brothers, and one thing that's been mentioned frequently is
something called repo105.
The whole repo105 thing is interesting to me, not so much because of what
it actually means, but because of how it's been reported. The term has been
mentioned everywhere - but trying to find any information about just what the…
goodmath | July 28, 2009 An alert reader just sent me, via "Media Matters", the single dumbest real-life
video clip that I have ever seen. In case you've been living under a rock, Bill O'Reilly is
a conservative radio and TV talk-show host. He's known for doing a lot of really obnoxious
things, ranging from sexually harassing at least one female employee, to sending some of
his employees to stalk people who he doesn't like, to shutting off the microphones of
guests on his show if he's losing an argument. In short, he's a loudmouthed asshole who
gets off on bullying people.
But that's just background. As a…
goodmath | July 22, 2009 This morning, my good friend Orac sent me a link to an interesting piece
of bad math. Orac is the guy who really motivated me to start blogging; I
jokingly call him my blogfather. He's also a really smart guy, not to mention
a genuinely nice one (at least for a transparent box of blinking lights). So
when he sends me a link that he thinks is up my alley, I take a look at
the first opportunity.
Today, he sent me a link to a guy who claims to have put together
a mathematical model showing that it's impossible to create a national
healthcare system without rationing. The argument is a great…
goodmath | March 30, 2009 Remember the post I made a couple of weeks ago, flaming the wall-street idiots for
a bad graph? They were comparing the value of financial firms before and after the current
mess. But they way that they drew it was using circles, where the diameter of the
circle was proportional to the values, but the way it was drawn strongly suggested that
the area was the metric of comparison.
Well, an astute reader sent me another example of the same error - but it's even
worse. This one is misleading in two ways. Take a look and see if you can figure out
what the two errors are. I'll explain beneath…
goodmath | March 24, 2009 It's economics time again.
I hate economics. I find it hopelessly dull. But apparently my style of explaining
it is really helpful to people, so they keep sending me questions; and as usual, I do my best to try to answer them. Even if I don't particularly enjoy it.
So people have been asking me to explain what the proposed bank bailout plan is,
how it's supposed to work, and why so many people are upset about it.
Background
The basic problem underlying the current financial mess is, quite simply, that banks made
a lot of bad loans. They took those bad loans, and bundled them up into…
goodmath | March 16, 2009 A lot of people, reading the reporting on the current financial
disaster, have been writing me to ask what people mean when they talk
about incentives. The traders, the bankers, the fund managers, and all
of the other folks involved in this giant cluster-fuck aren't
stupid. So naturaly, the question keeps coming up, why would they go
along with it? And the answer that we keep hearing is something along
the lines of "perverse incentives".
The basic idea is that the way that the people in the industry got paid,
it was actually in their interest do do things that they knew would
eventually…
goodmath | March 5, 2009 Watching news reports about President Obama's proposed tax changes,
I've seen a number of variations on a very annoying theme, which involves
a very stupid math error.
A typical example is this story on ABC news, which contains a non-correction
correction:
President Barack Obama's tax proposal -- which promises to increase taxes for those families with incomes of $250,000 or more -- has some Americans brainstorming ways to decrease their pay in an attempt to avoid paying higher taxes on every dollar they earn over the quarter million dollar mark.
A 63-year-old attorney based in Lafayette,…
goodmath | February 16, 2009 I wasn't going to write about this, because I really don't have much to add. But people keep mailing it to me, so in order to shut you all up, I'll chip in.
As everyone knows by now, we're in the midst of a really horrible
financial disaster. I've argued in the past on this blog that the root cause of the entire disaster is pure, simple stupidity on the part of people in the financial business. People gave out mortgages that any
sane rational person would have considered ridiculous. And then they built huge, elaborate financial structures on top of those mortgages, pretending that by…
goodmath | February 9, 2009 I'm behind the curve a bit here, but I've seen and heard a bunch of
people making really sleazy arguments about the current financial stimulus
package working its way through congress, and those arguments are a perfect
example of one of the classic ways of abusing statistics. I keep mentioning metric errors - this is another kind of metric error. The difference between this and some of the other examples that I've shown is that this is deliberately dishonest - that is, instead of accidentally using the wrong metric to get a wrong answer, in this case, we've got someone deliberately taking…
goodmath | January 13, 2009 And now for a short gripe from the other side of the political spectrum.
Normally, I like Media Matters. I personally think that the whole "left-wing media" thing
is a crock. The media has become so sensitive to the accusation of left-wing bias that they actually shy away from even dreaming of criticizing a conservative, and attack liberals with great fervor as a way of showing that they're not being unfairly nice to them. In general,
I find Media Matters does a good job of showing how the modern press really works.
But the fact is, they are a biased organization, and you need to be very…
goodmath | January 11, 2009 Naturally, since this friday was the first time that the SB server has really been down since I start blogging (planned downtime, as it happens, for a major system upgrade), there
was spectacularly bad math in the local news here in NYC friday afternoon.
I'm not sure how long this has been the case, but Mayors of NYC have a radio show. It's a mixture of them spouting off about whatever they feel like babbling about, and call-in questions. I don't generally listen, but once in a while, if the mayor says something either particularly interesting or particularly insane, I'll hear the segment…
goodmath | October 23, 2008 So, the financial questions keep coming. I'm avoiding a lot of them, because
(A) they bore me, and (B) I'm really not the right person to ask. I try to stay
out of this stuff unless I have some clue of what I'm talking about. Rest assured, I'm not spending all of my blogging time on this; I've got a post on cryptographic modes of operation in progress, which I hope to have time to finish after work this evening.
But there's one question that keeps coming in, involving the nature of things
like so-called "Credit Default Swaps", which I thought I'd explained, but
apparently my explanation…
goodmath | October 14, 2008
This is just a short gripe at the NYT, and a
href="http://www.nytimes.com/interactive/2008/10/14/opinion/20081014_OPCHART.html">feature
that they included in today's Op-Ed section.
It purports to compare how the economy does under democratic versus
republican administrations. They claim that they're computing the returns
on a 10,000 dollar stock investment under 40 years of republican
administrations and 40 years of democratic administrations, in the 80 years
since 1929.
The whole comparison is pretty idiotic to begin with. Comparing stock
prices over different time spans is already…
goodmath | September 25, 2008 Ok, another batch of questions have come in, all variants on
the same theme.
The question is, if mortgages are at the root of the current economic disaster, how can it possibly result in close to a trillion dollars worth of losses?
It definitely seems strange, on two different levels. On an absolute scale, it's hard to see how mortgage losses could add up to a trillion dollars. And on a relative scale, it's hard to see how the foreclosures could really overwhelm the lenders when even an extremely high foreclosure rate represents a fairly modest loss considered as a percentage.
Let's…
goodmath | September 23, 2008 There is at least a little bit of interesting bath math
to learn from in the whole financial mess going on now. A couple
of commenters beat me to it, but I'll go ahead and write about
it anyway.
One of the big questions that comes up again and again is: how did they get away with this? How could they find any way of
taking things that were worthless, and turn them into something that could be represented as safe?
The answer is that they cheated in the math.
The way that you assess risk for something like a mortgage bond is based on working out the probability of the underlying loans…
goodmath | September 22, 2008 With the insanity that's been going on in the financial world
lately, a bunch of people have asked me to post a followup to my
earlier posts on the whole mortgage disaster, to try to explain
what's going on lately.
As I keep saying when people ask me things like this, I'm not an economist. I don't know much about economics, and what little I do know, I tend to find terribly boring. And in this case, the discussion inevitably gets political, so I'm expecting lots of nasty email.
Anyway, with that said, I've been doing a lot of reading, to try to understand this mess. And I'll try to explain…
goodmath | June 4, 2008 This is the second part of my series trying to answer peoples questions
about how mortgages work, and what went wrong. In the first part, I described
what a mortgage is, and how it works. In this part, I'm going to describe the
mortgage system - that is, the collection of people and organizations involved
in the business of mortgages, how they interact with one another, and how
that system has gotten into trouble. The next and final part will be
from the viewpoint of a homeowner who is taking or has taken out a mortgage to purchase a home, and what can go wrong from their side.
I'll…
goodmath | February 13, 2008 After yesterday's article about conversion between the value of
british pounds in the '70s versus british pounds today, someone sent me a link toan article at the National Review Online, which just about had me rolling on the floor laughing. The problem is, it's dead serious.
It's written by an "engineer" named Louis Woodhill, who argues from what he calls
an "engineering viewpoint" that the whole idea of fluctuating currency value is total nonsense, and we'd all be better off if we just assigned a fixed value to our currency, and never allowed it to change.
The U.S. dollar is in a scary…