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Monday, October 27, 2008

Senator Tubes Down the Tube
Republican Political Violence

via Matt Yglesias

If you disapprove of the use of physical violence in politics you can donate to Wolf's opponent Judy Feder

Pollster has "no polls available" but VA-10 is in Northern Virginia. This should be doable.

Oh and Wikipedia ? I think there is some blatant slander in Wolf's wikipedia entry (no link). There is an accusation with no evidence or even details. I suggest it be removed. Oh yes Wikipedia is Wikipedia, so I have a voice. I think I just removed it.
More on Anti-Depressants

PJ please e-mail me at so we can communicate in some way other than leaving comments at each others' blogs.

Based on his expertise as a baseball handicapper, Nate Silver is trying to explain to pollsters how to do their job. He is awesome.

One of my rare disagreements with Josh Marshall came when he decided to follow the pundit tradition of excluding outliers before averaging (he's over it TPM now averages tracking polls which is arbitrary but simple). Silver is actually coming close to convincing me that dumping outliers often makes sense.

My position was that, unless one has reason to suspect the methodology of a poll, the best estimate of true support in a population is a sample size weighted average of different polls. It is a mathematical result that, if the polls differ only due to random sampling error, then such an average is a better estimate of population voting intentions than a trimmed average.

In particular, it is almost impossible to tell a story for why it is reasonable to drop a poll because the result is extreme and not drop a pollster because there is reason to suspect their methodology.

Polls whose results are very different from the average poll might be worthy of special methodological scrutiny, but it is a bad idea to just drop them. The fact that this is a pundit tradition is further evidence that it doesn't work.

Now I would say drop an outlier if and only if Silver comes up with an objection to the pollster's methodology. The problem is that he always can. I fear that my current approach implies dropping all polls from any pollster who reports one extreme result (Silver is very firm the doubt is about a pollster not a single poll by that pollster and I totally agree). Worse he seems to find fault with polls that are surprisingly good for McCain and, of course, he personally supports Obama.

Still he is very convincing. In particular a key fact about this election is support is very different by age with young people strongly for Obama. This creates huge challenges for pollsters (and the Obama campaign) since many young people who are registered to vote don't vote. This must be part of the reason for Obama's immense emphasis on the ground game, although another part is his background as a community organizer, his sense that high turnout is not just good for his chances but good for democracy and the fact that he has money coming out of his ears (and look at those ears).

Hence problems. Gallup has repeatedly told people to ignore results with their traditional likely voter model which doesn't work in August, then when it stubbornly gave weird results in September introduced an alternative likely voter model.

It seems that pollsters get in trouble with Nate the Poll-Fascist (I take some words seriously) because they have trouble contacting young voters, then their likely voter filter excludes most of them.

On day 11 of the poll the IBD-TIPP tracking poll had McCain way ahead among young voters 74% to 22%. This uhm differs from the results of other polls to an extent which can't be explained by sampling error unless the IBD-TIPP sample of young voters was tiny. Silver's theory (and I can't think of another possibility) is that, after filtering, IBD_TIPP had a tiny sample of young voters each of which then had a huge weight in the headline over all average as they weighted them up to match the fraction of actual voters in past elections who were young.

This might mean that the young likely voter sample is tiny and chance did the rest. It also might mean that for a young person to get counted as a likely voter, the young person has to be very odd, for example, lying about their age and actually not so young (hey I do that some times) or for another very rich or with lots of children already or something.

Now Silver also came down like lead on a polltser who didn't weight by age and so had a final average that would be valid only if the turnout of young voters will be much lower than it was in 2004 (can't find the link he's posted so much since then).

Now I think one problem with likely voter filters is an absurd step in the methodology. I know Gallup does this (they explain a lot) and I assume others do to. The traditional Gallup filter estimates the probability of voting based on answers to 7 questions (including one which is similar to "have you voted before ?" which is clearly biased against the young). Then they guess the turnout percentage at x, then they count as likely voters the people who have a probability of voting greater than x. This makes no sense at all. It consists of rounding estimated probabilities to 0 or 1. They toss out responses, then multiply the remaining responses by weights to match actual voting by characteristics. This is crazy. There is no way it could be optimal. Even if the probability that someone actually votes is low, some information is contained in their statement about for whom they would vote if they voted.

It would make more sense to estimate the likely vote by multiplying responses by the estimated probability of voting (an aside moved down here *). If the demographic characteristics of interest (age, race, gender, marital status, income) are included in the qualitative response model which was fit to past voting, this would automatically imply no further weighting is required to match the past election turnout data. Taking lots of numbers and multiplying by numbers between 0 and 1 which add up to N implies less sampling error than averaging just N them (if numbers between zero to one sum to N, their squares sum to less than N).

The only problem is that the estimate of the likely vote is not an average over "likely voters". So ? Already poll results aren't fractions among a sample of likely voters as likely voters are weighted to match recorded voting behavior in past elections. It does mean that the likely voter sample size is not a whole number (again true with weights). It is still possible to calculate standard errors due to random sampling (which will be smaller than with the traditional approach). I think it is honest to back out an equivalent likely vote sample size from those standard errors (so long as the pollster explains what they are doing).

by Silver is very good, but I just found it when looking for the link immediately above so I don't have anything to add to it.

* One could also get estimates for different turnouts by fiddling with the constant term in the voting probability estimate (although this is only optimal if you assume that disturbances to latent variables must be normal or extreme value and that assumption is demonstrably false as shown by Jonathan Nagler et al). In this case, thee assumption is that shifts in enthusiasm affect everyone equally and that the distribution of the unobservable (desire to vote minus desire to do something else with ones time) which implies voting if it is greater than 0 is the same as the assumed distribution for a probit (normal) or a logit (extreme value). Such an approach can't handle the idea that there will be increased turnout due to something specific to young people or African Americans which, you know, is plausible this time. I'd leave "turnout might be different this time" as a warning, and not pretend one can quantify it. Or report results with various turnout scenarios.

Sunday, October 26, 2008

What could possibly make things worse for the mavens of Wall Street ?

stumped eh. I have one remaining risk.

What if Nate Silver decides to try to predict asset returns.

I just learned from Stephen Colbert that his profession is baseball statistics analyst. Yep, like Olbermann he came over from sports and totally humiliated the pundits and the pollsters while beating the poltical scientists (many of whom do quite well but have trouble with breaking pitches).

So let's imagine that having schooled himself in the ultra-competitive field of baseball geekdom and demonstrating how easy it is to handicap a political horse race, he decides to price credit default swaps ?

I have tenure so I'm not scared, but if I had to put my money where my mouth is I'd be saying money is boooorrrrringggggggg and then if that didn't work investing in T-bills (putting my money where my mouth is).

Saturday, October 25, 2008

When checking how much better Talking Points Memo is than others news organizations, I found that, this time, they got semi scooped.

The scandal is voter intimidation in New Mexico. TPM regular Pat Rogers (who was a star of the US attorney scandal) appears to have hired a private investigator who has told legitimately registered voters that they are not eligible to vote. This is potentially a serious crime -- voter intimidation. The voters' names are on the highly embarrassing list of 28 people who, according to the GOP, voted illegally in the Democratic primary. In fact, they have the right to vote. The GOP backed off the claim during the period from when they set up a conference call to trumpet it and the actual conference call (maybe the GOP should notice that Mr P.R. means pr trouble).

The TPM review of the latest twist links to Gwynith Doland of the New Mexico Independent who got the story one day before Zachary Roth of TPM !

I would like to applaud Doland in particular for one bit of the article which I think should serve as a model for all journalists. She wrote

When asked the question again, Rogers said, ”I am not responding to any questions. I am not being quoted. This is off the record.”

Right when somone tries to unilaterally take an interview off the record, the attempt is on the record too.

Also LP scooped TPM.

Doland won links from TPM and The Daily Kos.

Thursday, October 23, 2008

Mole Watch

This may be a new feature of my blog. Recently, Sarah Palin dropped her cover and revealed that she is, as should have been obvious, a Democratic mole whose mission was to destroy the Republican party (I for one sure aint buying the "I thought they were mooses excuse).

She's not alone. Now Ari Fleisher argues

Under his policy it’s about 45% of this country would no longer pay any income tax. [...] You can’t have a country that’s gonna be strong if you’ve got about 45% of the country that is excused from paying income tax.

via sadly no.

Is Ari really trying to convince people that they better not vote for Obama, because if they do, they won't pay income tax ? Sadly no. He's a mole coming out of cover.

Now there is one Republican who is certainly not a demo-mole -- Dick Cheney -- he may be trying to destroy the Republican party (and the Republic) but he clearly can't stand democrats.

Monday, October 20, 2008

Red Lining and Land Use Horrors

I totally disagree with Atrios

He writes

Where the economics of land prices have run smack into stupid zoning and land use policies.

Rockville Pike between the NIH and downtown Rockville is an ugly mess of an edge city. Like Tysons, it has too much density to be truly car friendly, but all the ugliness of suburbia: strip malls set back behind acres of surface parking.

Essentially these are the worst of both worlds kind of places, dense enough to have the unpleasant aspects of density but without the sensible land use policies which would allow the good effects of density to appear.

I'm not confident than many of them can be sensibly reshaped, but the ones which probably can be are the ones which are on a decent transit line. Access to mass transit reduces car dependency at least for some, as if someone in your household can use it to commute you can have one fewer car.

-Atrios 10:10

Uh uh

Rockville pike is pretty much right smack above the DC metro red line. I remember back before the metro (long long ago) when it wasn't appalling.

My sense is that there is a reverse public transit effect where the metro makes it sensible to put huge stores on Rockville Pike and then people drive to them.

Definitely the monster traffic and parking lots came after the metro was built not before.

Sunday, October 19, 2008

Elwyn Tinklenberg is the Man of the Hour !

The Elwyn Tingklenberg movement, nay the Elwyn Tinklenberg uprising should strike terror into the hearts of Republicans (which isn't hard at the moment they seem to be panicking).

conflict of interest notice. I am actually part of the Elwyn Tinklenberg uprising having actually donated some of my not so hard earned money to his campaign.

Saturday, October 18, 2008

A sentence written by David Brooks was so bizarre that I considered blogging about it.

Matthew Yglesias wrote about the column. His post is excellent but strangely gentle with Brooks. I comment

Excellent example. Brooks suffers from the error you describe to an astounding degree. Consider this sentence "With that cool manner, he would see reality unfiltered." Now a manner is a way of presenting oneself to the world a form of showing, yet Brooks just states that it is a way of seeing reality.

You claim that Brooks mistakes appearances for essences, manner for character. You are typically blunt even harsh, but he is much blunter. He says that a "manner" helps one "see". This is almost insane.

How did Brooks get into that sentence ? I think a serious part of the problem is going horse race. Often pundits shift from talking about who they think should be President to who they think will win. If the aim is to handicap the horse race it doesn’t matter if a “presentation of self” which convinces people one is of good character really is correlated with good character. Whether it is or not it is equally useful to a candidate.

Now the strange thing is that the focus on who will win is based on a desire to be positive not normative and talk about facts not opinions. However, it often leads to the exact opposite. Even in cases in which the facts can be demonstrated (e.g. what fraction of US federal spending goes to foreign aid) a political handicapper cares more about the median opinion (10%) than the fact (1%). If my aim is to predict who will win the election, I care about voters’ opinions, including voters opinions on matters of fact where the opinions are demonstrably false.

Friday, October 17, 2008

The very smart Ezra Klein is very confused about how to measure the placebo effect and what to do if it is a large fraction of the treatment effect.

His post here.

Briefly he assumes that changes in people treated with a placebo are the effect of the placebo treatment. This is not at all what the placebo parts of controlled studies are for. Change with placebo is the course of the syndrome with no treatment plus the placebo effect.

Also, even if Klein had data on the placebo effect, the correct comparison is not placebo effect divided by treatment effect, but the difference compared to costs including financial costs and the costs of side effects.

Klein seems to think that the cost of off patent anti-depressants is a noticeable fraction of the cost of treating depression. Of course it isn't. The cost is almost entirely the cost of diagnosis and even the most minimal counselling and follow up which would be needed with placebo treatment. The cost of the pills is almost entirely the cost of checking purity, advertizing and profits for the manufacturers which again would still with placebo treatment (or could be eliminated with the same un-acceptable level of risk for both placebo and anti-depressant treatment).

My full indignant comment below.

I do not believe that it is significantly cheaper to give a placebo than say generic fluoxetine Prozac (off patent). The cost of producing the active ingredient in the pill is tiny. On the other hand, fluoxitine causes an improvement on the Hamilton scale which is strongly statistically significantly greater than the placebo.

There is no reason to look at the ratio of the treatment effect to the placebo effect. The comparison should be between the lowest plausible estimate of the difference in the effects
and the costs of the treatment (not just in dollars but also in side effects such as, gasp, weight loss which are, I'd guess a main reason so many people take Prozac).

Also, the bar labled placebo is *not* an estimate of the placebo effect. It is a measurement of the change in symptoms of people who received the placebo. For all the data which you present show, it could just be the normal course of depression, knee pain or angina. To measure the placebo effect, you have to compare treatment with a placebo to no treatment. That means you have to get people to participate (which means return for the second measurement of their symptoms) even though they know that nothing is being done for them.

Consider the placebo effect on the common cold. If you have a cold and I give you a
sugar pill, in a week you will feel better. This is not an argument for giving people with colds sugar pills. That should be obvious. the argument you make in this post for syndromes other than the common cold is just as obviously invalid.

The evidence that prozac is better than the placebo is statistically significant at standard significance levels. The lower end of the 95% interval of the benefit from prozac over the placebo is definitely positive. Comparing it to the cost of prozac (tiny *including* measured side effects) is the reasonable thing to do.

We are talking about less than a gram per year per patient of a chemical which can be easily synthesized (plus the side effects which are a on average a benefit).

see for more of my thoughts on the topic (it's a google search of this blog).

Update: However this is a very important public policy announcement. I didn't know Fafblog was back ( I mean I know it was back but I didn't know it is back). Fafblog -- more effective that a placebo -- the cure for what Ailes us.
The Bride of the Gallup Anomaly

OK now I have no explanation. The Gallup likely voter filter gives results completely unlike those of any other poll. Currently the Gallup likely voter poll has Obama up by 2% against an average of around 7% !

Matt Drudge has noticed. This has made news around the world. Well at least in Italy where La Repubblica reports the result (and the Zogby result). Drudge's aims are clear. I think that the un-named La Repubblica reporter is just web illiterate. He or she notes that the Gallup likely voter filter excludes the young and stresses that Obama is still ahead. I don't see why someone is paid to generate an article which contains much less information than is easily available on the web.

I have no idea why the Gallup likely voter filter is giving results so different from other pollster's filters. For months Gallup and I have been arguing that it is only useful close to the date of the election, since it is based on, among other things, the question "do you know where your polling place is." Not knowing in August has little to do with voting intentions, in October is looks like carelessness.

The anomaly is sooo strong that Gallup won't stand by their traditional likely voter filter to which they had been loyal for decades. Instead they have chickened out and introduced the Gallup likely voter filter II (or Bride of the Gallup anomaly) which is clearly designed to be less anomalous. Now the justification for not going with the traditional filter is no longer that it is too early for it to work, but that Obama is special. I quote "Gallup's "expanded" likely voter model determines likely voters based only on current voting intentions. This estimate would take into account higher turnout among groups of voters traditionally less likely to vote, such as young adults and minorities."

Very plausible, but 4 years ago Democrats predicted that young voters were going to turn out that time (fear of a possible draft remember ?). Every election is unique although Obama is clearly the uniquest candidate for whom I have ever had the chance to vote.

As an Obama supporter, I am a bit concerned. The traditional Gallup filter has worked well soon before elections. The many other pollsters with other filters don't have all that much of a track record. Gallup may just be panicking because they are all alone out there. That is the race might really be closer than the average poll suggests. Still ahead is ahead and one poll is one poll.

But I just can't wait for "Final Battle for the Gallup Anomaly" on your monitor late night November 4.
Invalid voter casts invalid vote !!! in Ohio !!!

The Republicans have finally found one !!!

His name is Smauel Joeseph Wurzelbacker (aka Joe the plumber).

He cast a vote although the registered voter in question is named Samuel Joseph Worzelbacher.

Clearly an invalid vote (just the thing that Republicans have been screaming about and in Ohio too !

Mr. Wurzelbacher is registered to vote in Lucas County under the name Samuel Joseph Worzelbacher.
“We have his named spelled W-O, instead of W-U,” Linda Howe, executive director of the Lucas County Board of Elections, said in a telephone interview. “Handwriting is sometimes hard to read. He has never corrected it in his registration card.”

The records, she said, showed he voted Republican in the March primary.

But I'm sure that now that the gross miss-match has been discovered Joe W will be in the same fix as hundreds of thousands of other people in Ohio with similar problems no ?

The court didn't spell out what the counties must do with the information on mismatches. It's illegal for election officials to unilaterally remove voters from the rolls this close to an election, but voting-rights advocates fear that the information could allow some counties to mount challenges to voters whose records don't match up, even if the mismatch is the result of nothing more than a typographical error, and force them to cast a provisional ballot -- "disenfranchised by a typo," as Michael Waldman of the Brennan Center, a voting-rights activist group, puts it.

(as likely as that Michael Waldman is really Michael Waldmann, the cousin I never knew I had and our relationship was obscured by a typo).

Wednesday, October 08, 2008

On Somalia McCain was Right and I was Wrong Wrong Wrong

Running up the score, the Obama campaign claims to list 17 lies McCain told during the debate (why 17 ? They probably just chose a number at random). The first 16 are whoppers. Most have long since been debunked. The fact that McCain repeats debunked claims, means that they are lies not mistakes.

However, what about number 17 (17 is the unlucky number in Italy)

17. SOMALIA. McCain held up Somalia as an example of failed American foreign policy, saying “we ended up having to withdraw in humiliation.” McCain ignored the amendment he introduced in 1993 to cut off funding for troops in Somalia.

Huh ? This shows that McCain opposed the intervention while it was happening and not just when Clinton agreed that it had failed and withdrew US troops. This was not 20-20 hind sight. Interestingly, the Obama campaign doesn't argue that the US troops shouldn't have been withdrawn (their are fact checking). They suggest that the troops were withdrawn because funding was cut off. This is nonsense. They were withdrawn because some were being killed and they were contributing to the problem not to the solution.

I can say this with 20-20 hindsight, because I disagreed with McCain when he argued for a troop withdrawal and with Clinton when he ordered it (at that point supporters of a cointinued US presence were down to Boutros Boutros-Ghali, Robert Waldmann and, maybe, Jonathan Howe) . I thought Somalia would fall back into hot open high level civil war and famine. I was wrong. The level of violence decreased.

On Somalia I was wrong wrong wrong and John McCain was right. He tried to use the power of the purse to end an engagement which was worse than worthless. Also his quoted statement is true. The fact that he denounces using the power of the purse (when not voting against funding for US troops in Iraq himself) is a separate matter.

Look a sweet 16 would have been plenty. There was no need to gild the lilly.

Monday, October 06, 2008

Sebastian Mallaby makes an argument

the key financiers were the ones who bought the toxic mortgage products. If they hadn't been willing to buy snake oil, nobody would have been peddling it.

Who were the purchasers? They were by no means unregulated. U.S. investment banks, regulated by the Securities and Exchange Commission, bought piles of toxic waste. U.S. commercial banks, regulated by several agencies, including the Fed, also devoured large quantities. European banks, which faced a different and supposedly more up-to-date supervisory scheme, turn out to have been just as rash. By contrast, lightly regulated hedge funds resisted buying toxic waste for the most part — though they are now vulnerable to the broader credit crunch because they operate with borrowed money.

Mallaby's argument, to the extent that he has one, is that hedge funds were regulated even less than investment banks and did fine. He is basing his claim on anecdotal evidence.

Since hedge funds are almost un-regulated, we don't know how well they are doing on average. They report once a quarter. Their investors can withdraw funds once a quarter.

Mallaby has made his argument invulnerable to mere facts by claiming that current and future problems for hedge funds are spillover "— though they are now vulnerable to the broader credit crunch because they operate with borrowed money." So the only relevant evidence is that hedge funds didn't fail during the period when their investors couldn't withdraw funds.

Also, hedge funds have limited leverage, because their counterparties don't allow them to lever up. Those would be investment banks. IIRC typically each REPO account of a hedge fund can lever up only 50 fold. This implies a much lower overall leverage. I'd guess that Bear Sterns had higher leverage than any hedge fund.

Finally, of course, hedge funds are highly regulated. They can accept investments only over $100,000 and, so, deal with large agents who should invest in information gathering, and which are few enough to coordinate in avoid a hedge fund run. They aren't covered by other regulations, because that huge regulation makes them relatively stable.

Via Kevin Drum who writes a more thorough refutation of Mallaby's nonsense. The link between specific acts of deregulation and specific financial catastrophes is very clear.

Sunday, October 05, 2008

Klinging to the fragments of a shattered world view

Arnold Kling has a proposal

My alternative is to encourage new lending by lowering capital requirements at the margin. Tell banks that loans issued after September 1, 2008, require half the capital of similar loans issued before September 1. Some banks are in such bad shape that even with those lower capital standards they will not be able to make new loans. Fine. You don't want those banks to grow. But other banks have room to grow, and you want them to grow more than they would under the existing regulations.

I'd place Kling's idea in the trash can along with suspending mark to market.

I recall what happened the last time capital requirements were relaxed (2004) they were relaxed for "investment banks" a strange 20th and early 21st century type of firm which doesn't exist anymore.

I think the idea of more flexible rules for "new loans" is silly. Old loans can be made new by paying them back and relending. I don't think it would be practical to keep the lower requirements at the margin.

The issue clearly isn't excessive capital requirements. If it were, the equity of seized banks would be very valuable. In fact, they seem to be worth less than their debt, that is, they broke the 0% equity line not just the 12% (or whatever) equity capital requirement.

Basically in the face of overwhelmingly strong evidence that deregulation endangered world capitalism, Kling insists that the problem must be excessive regulation.

via Kevin Drum who provides a typical link from Mother Jones to a Cato paper.

Saturday, October 04, 2008

Bill Ayers ought to be hiding under a rock.

Below I write about the Obamas and the Rezkos. Another possibly embarrassing acquaintance of Obamas would be with the former Weather people Bill Ayers and Bernadine Dohrn.

My conclusions are that Class privilege is alive and well in American and that Bill Ayers ought to hide his head in shame. However, I don't think Obama did anything wrong at all.

This one will require no memory, because there is a good article by Scott Shane in the New York Times on the issue. I think the whole issue is silly, and I'm sure a balanced (note just one l) article which gives the concluding words to Bill Hayden

“If Barack Obama says he’s willing to talk to foreign leaders without preconditions,” Mr. Hayden said, “I can imagine he’d be willing to talk to Bill Ayers about schools. But I think that’s about as far as their relationship goes.”

will hurt Obama, because people remember the accusation and not the conclusion. Still the article seems thorough and convincing. In particular it seems clear to me that, after investigating I'm sure, Shane thinks that there the minor association with Ayers is not a reason to be less enthusiastic about or more opposed to Obama (he doesn't reveal which side he is on). However, he did explore all aspects of that association and reported something obscure which I didn't know anything about (Obama praised a book written by Ayers once)

First who were the weathermen weather underground ? I'm barely old enough to remember, so for the kids they were the radical fringe of the radical fringe of the student left in the USA during the war in Vietnam. They planted bombs mostly in empty buildings (I just learned that one such bomb killed a police officer). They didn't deliberately kill anyone so I would count them as borderline terrorists.

Katharine Boudin, then a former weather person, was convicted of participating in an attempted robbery of an armored car in which someone was killed. She was condemned to a long sentence. The others generally got off very very lightly. Simple membership in a violent organization is not a crime. Also charges were dismissed in some cases due to prosecutorial misconduct (I remember how furious conservatives used to be about cases dismissed on "technicalities" and wonder how many are furious that Ted Stevens just tried to get charges dismissed due to prosecutorial misconduct).

Many Weather people had rich parents. They were accused of being rich kids playing at being revolutionaries. This accusation may help explain how they got to be so extremely extreme. Then after 10 years or so as fugitives, they demoncstrated the power of the class system in the USA as their rich parents hired hot shot lawyers who got them off while petty criminals defending by public defenders go to jail.

Later, Bill Ayers became prominent in charities doing good works in Chicago. I assume his principle strength was his family wealth, although I don't doubt that he worked hard.

As such he got a grant to improve schools from the Annenberg challenge funding by the very rich owner of Reader's Digest tv guide (thanks for ccorrection anonymous in comments) and friend of Ronald Reagan Walter Annenberg. "In March 1995, Mr. Obama became chairman of the six-member board that oversaw the distribution of [Annenberg challenge] grants in Chicago. [snip] Archives of the Chicago Annenberg project, which funneled the money to networks of schools from 1995 to 2000, show both men attended six board meetings early in the project — Mr. Obama as chairman, Mr. Ayers to brief members on school issues."

Basically Obama is hanging out with friends of friends of Ronald Reagan and, thus, couldn't help meeting Bill Ayers.


In addition, from 2000 to 2002, the two men also overlapped on the seven-member board of the Woods Fund, a Chicago charity that had supported Mr. Obama’s first work as a community organizer in the 1980s. Officials there said the board met about a dozen times during those three years but declined to make public the minutes, saying they wanted members to be candid in assessing people and organizations applying for grants.

A board member at the time, R. Eden Martin, a corporate lawyer and president of the Commercial Club of Chicago, described both men as conscientious in examining proposed community projects but could recall nothing remarkable about their dealings with each other.

So again, Obama has something to do with rich people who are trying to do some good on the side with their money and so he can't help meeting Bill Ayers.

There was a meeting that was more voluntary, Ayers and Dorhn had a coffee at their house to introduce Obama as a state senate candidate

It was later in 1995 that Mr. Ayers and Ms. Dohrn hosted the gathering, in their town house three blocks from Mr. Obama’s home, at which State Senator Alice J. Palmer, who planned to run for Congress, introduced Mr. Obama to a few Democratic friends as her chosen successor.

Basically Ayers is part of the Chicago establishment. Obama attended board meetings of foundations and a coffee with the outgoing state senator.

Finally Obama read a book by Ayers once and Ayers donated to his re-election campaign.

What we learn is that rich kids can get away with anything. A few bombs haven't caused the upper class to expell Bill Ayers. Now I never liked Marx and tend to resist class based explanations, but, after losing the faith himself I'm sure, Mr Ayers has managed to convince me that old Karl had a point.

My question is how does he look at himself in the mirror ? Not just because of the non lethal terrorism but because of the vanity which lead him to risk helping hawks by creating embarrassment for people who wanted to organize poor communities and improve schools. His duty to the cause of peace was to hide under a rock. If he wants to help the world to make up for his idiotic violence or just to help the world he can send checks to good causes. He should have kept his face far far away from all decent people.
Good Fences Make Good neighbors -- The Obamas and the Rezkos

Looks like the McCain campaign has decided that they have been to high minded. Out of the gutter and into the sewer

Michael Sheer reports

Sen. John McCain and his Republican allies are readying a newly aggressive assault on Sen. Barack Obama's character, believing that to win in November they must shift the conversation back to questions about the Democrat's judgment, honesty and personal associations, several top Republicans said.

via Hilzoy

OK so lets take a trip down memory lane and ask about the Obamas and the Rezkos. This is all from memory so no specific links, but I get all my info on such matters from TPM muckraker.
For those who don't want to read boring crap from memory, my conclusion is that the episode suggests that the Obamas are extraordinarily honest.

Antoine Rezko is an actual Arab American (Syrian by birth), looks like a total crook, and, is a total crook (IIRC he has been convicted).

His wife owns the vacant lot next door to the Obama's house. Furthermore the Rezkos sold the Obamas a strip of land 10 feet wide right next to their house. Thus Obama has an actual transaction with the Rezkos (which he has called "boneheaded").

The dubious events, however, occurred earlier when the Obamas and the Rezkos simultaneously bought the house and the lot from the same previous owner. Mrs Rezko paid the asking price for the lot and the Obamas paid about $300,000 less than the asking price for the house. The owner wanted to sell the whole package.

Note Mrs Rezko bought the lot. It is in her name because Mr Rezko was near bankruptcy at the time. Now Mr Rezko is a builder who regularly buys empty lots to build on them. Still it is hard not to doubt that Mr Rezko felt he was doing a favor for the Obamas and hoped for something in exchange. The interesting question is whether Obama shared this view. I think it is obvious that he didn't, that he had no idea that Rezko had anything in mind except for building on the lot. That is I think the record shows that the Obamas behaved in a totally honest upright manner.

Huh ? It is easy to get to the claim that there is no proof that they knew that Rezko thought he was doing them a favor, but how can I positively claim that they didn't know ?

Well the key is the boneheaded purchase of the 10 foot wide strip. First this shows that Mrs Rezko was not letting the Obamas use her vacant property as a yard. In fact, the Obamas and Rezkos agreed to build a fence to keep, say, the Obama kids from the temptation to use something that their family didn't own or rent. There is a record of planning permission for the fence and a photograph which shows it uncomfortably close to the Obamas house (but note that since the house is historic they needed permission just to build a house. The reduces the value of the lot to the Rezkos, since it might be difficult to get permission to develop it. Still that's all about the deals from Rezkos point of view and not from the Obamas').

So the Obamas decide to buy a strip 10 feet wide from the Rezkos. This was one sixth of the Rezkos' empty lot. The couples had professional appraisers decide on a fair price. Uh Oh it was less than one sixth of the price ($ 600,000) that the Rezkos had paid. I think it was about half. So the appraisers said that the Rezkos overpaid by about $300,000 and oh my that was the difference between the asking price of the house and the amount the Obamas paid. Sure looks like it was a package deal in which, in effect Mrs Rezko gave the Obamas $300,000. I think this is proof that the Obamas are very very honest.

Why ?

Look if there was a wink wink nudge nudge deal that Mrs rezko overpaid and the Obamas underpaid then they would have kept it secret. If you are hiding a gift by claiming that something is worth more than its true value you don't have it appraised. The strong evidence that Mrs Rezko overpaid is proof that there wasn't a secret or even tacit understanding that she overpaid.

Then the Obamas insisted on paying more than the appraised price and bought the ten foot strip for IIRC $100,000 that is one sixth of the purchase price of the lot.

Now many things might be going on here. Maybe Rezko decided to buy a lot he couldn't develop (being short of cash and permission would not be trivial to get) to help Obama and had his wife pay extra for it all hoping that Obama would be grateful. The uh oh, Obama didn't get it. He insisted on a fence and then decided to buy some of the property and insisted on an appraisal. Only then, after the fact, could the Obamas guess that something funny was happening between Rezko and the third party while they were buying their house.

Another possibility is that the appraisers are dishonest and gave a low appraised value so the Rezkos attempted to give the Obamas about $50,000 and the Obamas refused. If the appraisal was invalid, it could have been designed to give the Obamas the false impression that they had already gotten a favor from the Rezkos without noticing to make them feel guilty and grateful.

Finally it is possible that the Rezkos and the appraisers have different impressions of the value of the land and everyone acted as they would have if Obama were just an average Joe (except for the Obamas ability to buy a 1.3 million dollar house).

The one hypothesis that makes no sense at all is that the Obamas chose to accept a favor from the Rezkos. There is no way that they would have called in appraisers if they were trying to hide a transfer by overstating the value of the lot.

Friday, October 03, 2008

Fact Check Check

The Washington Post is fact checking the vice Presidential debate. Here is a fact check in its entirety.

10:17 p.m.
Biden claimed that Obama warned against the administration's decision to push for Hamas participating in Palestinian legislative elections in early 2005. Obama had only been a senator for a few days when the election took place, but if he made such statements they did not appear in news reports or transcripts that are contained in the Nexis or Factiva news databases.

Obama was one of 70 members in the Senate who signed a letter a month before the Palestinian election expressing concern that Hamas was participating without disarming. The letter did not say a victory in the election would give Hamas credibility, but urged Bush to insist that Hamas adhere to "a basic set of principles before they can run for political office." Biden did not sign the letter.
--Glenn Kessler

So Obama's signature is on a letter which urged Bush to insist that Hamas do something that Hamas had not done before participation in the Palistinian election but there is no record in Nexis or ├╣Factiva that Obama Wwarned against the administration's decision to push for Hamas participating in the the Palistinian legislative elections.

I have a vaguely positive impression of Glenn Kessler but I must award him 4 Pinocchios for this one. I don't know if his claim in the first paragraph is grossly false or if his claim in the second paragraph is grossly false, but one of them must be, since he plainly contradicts himself.

Here is another one

10:00 p.m.
Biden said that McCain said he would not "sit down with the government of Spain." This is an overstatement. Biden is referring a recent interview McCain gave to a radio station, in which McCain did not appear to recognize the name of the Spanish prime minister.

"I'm willing to meet with any leader who is dedicated to the same principles and philosophy that we are for human rights, democracy and freedom and I will stand up to those who are not," McCain said, in comments that riled the Spanish government.

But in In an early-April interview with a reporter from Spanish newspaper El Pais, McCain said, "This is the moment to leave behind discrepancies with Spain" and said he would like the prime minister to visit the United States.
--Glenn Kessler

Kessler neglects to mention that the McCain campaign insisted that McCain had understood the question and that he had stated his official position on the question. That little detail -- confirmation long after the fact and after the question had been transcribed, translated and retranslated -- is absent from Kessler's analysis. Biden is right. Kessler is wrong. McCain said it, Scheunmann confirmed it and McCain did not contradict Scheunmann.

Look I know Kessler is fact checking in real time, but so am I. How about we take up a collection and buy him a subscription to the Washington Post ? Wouldn't help. The article which proves that Biden was right and Kessler is distorting the facts was written by By Glenn Kessler and Ed O'Keefe. The fact that McCain has flip flopped and reversed his earlier position rather than admit to not understanding a question is not Biden's fault. The fact that Kessler neglected to mention the position of the McCain campaign as communicated directly to him (or his co-author) earns him the rare 5 Pinocchios for writing something so absurd that Sarah Palin wouldn't say it.

Kessler isn't alone. Jonathan FBD Weisman adds his bit

9:29 p.m.
Sen. Joseph Biden accused John McCain of offering big oil companies $4 billion in tax breaks. That is misleading. The figure comes from the share that the oil companies would get from McCain's corporate income tax cut proposal. He has not proposed a tax break solely for oil companies.
--Jonathan Weisman

I think the paragraph would be improved if the word "misleading" were replaced with the word "correct". Biden didn't say that it was solely for oil companies.

Update: When I read the text in the link at Eschaton I thought I had been scooped, but it turns out that there is a much more important case of Biden being right and the fact checkers being wrong.

In reports on the vice presidential debate,,, and all falsely claimed that Sen. Joe Biden's statement that Sen. John McCain "voted against funding the troops" in a 2007 appropriations bill was wrong. In fact, while McCain did not vote on a later version of the appropriations bill, he voted against the measure on March 29, 2007, and said at the time that he was opposing it, in part, because it "would establish a timeline" for U.S. withdrawal from Iraq.

To avoid rubbing it in, I won't mention how Cokie Roberts (et al) corrected Biden for referring to Bosniaks as "Bosniaks".
CR confusing about rationality.

Calculated Risk attempts economic theory without the assumption of rational expectations. It is not his fault that the result is confusing.

The fact is that no one seriously believes that economic agents have rational expectations (one economist once told me he did but I think he was joking). Economists also know that violations of rational expectations which aren't gross and obvious can make a huge difference (A game theorist told me this in a lecture in 1978).

However, economists just can't do without the assumption. Otherwise anyone can argue anything.

Here CR totally demolishes an argument by Glenn Hubbard and Chris Mayer that What is to be done is to lower interest rates to drive up home prices. The excerpted argument is

We are in a vicious cycle: falling housing values cause losses on securities, which reduce bank capital, thereby tightening lending and causing house prices to fall further.

I will discuss the argument of Glenn Hubbard and Chris Mayer as excerpted by CR (GHCMAECR).

In response CR first asserts that agents sure aren't rational "First, house prices are falling because prices are too high when compared with fundamentals like incomes and rents." , "analysts are finally getting realistic on their house price projections" and "it is important for a healthy housing market to allow prices to return to more fundamental levels (and that means further price declines and/or increases in household incomes)" CR is sure the prices were wrong 2 years ago and are still too high.

On the other hand, when discusses the price of mortgage based securities CR assumes that agents are rational "Second - and this is important to understand - the value of the securities is based on projections of future house prices, not on current house prices."

The argument is First that if financial distress is causing a temporary decline in house prices, it would be irrational to extrapolate the temporary decline to low house prices in the future. The value of mortgage based securities depends mostly on future house prices because house prices matter when mortgage initiators foreclose or when debtors try to refinance. Most foreclosures of houses whose mortgages are currently securitized will take place years from now (even in expected present value and even if the foreclosure rate will be extraordinarily high in the near future). The second part of the argument is that financial operators are rational and, therefore, if something is causing a temporary decline in house prices it won't cause them to incorrectly predict a permanent decline.

Basically the argument is First we know that financial operators are totally irrational Second if we assume that they are rational we conclude.

One could as well claim that they were rational before and are now irrationally panicking. I absolutely agree with CR, but the argument beginning "second" is only convincing if one assumes that financial operators are rational. If they irrationally extrapolate recent trends, then events which would, if people were rational cause only a temporary downturn in house prices can cause a vicious circle.

Now as to the solution Again we get First agents are Irrational and Second If we assume agents are rational then.

"First, it is important for a healthy housing market to allow prices to return to more fundamental levels" Agents aren't rational so prices can differ from fundamental values. Indeed house prices are above their fundamental value.


Second, this shows a misunderstanding of the role of interest rates with regards to house prices. This gets complicated, but if the interest rate is artificially low today, the buyer can expect rates to rise - and therefore that the home price will not be as high in the future (all else being equal). The buyer should discount this lower house price back to the present, and we discover that interest rate changes only play small role in house prices.

That is Glenn Hubbard doesn't understand how interest rates should affect house prices, but it is reasonable to assume home buyers and sellers understand perfectly.
Ordinary people understand that if interest rates are low now they will rise (including the people who didn't understand that their mortgage would reset).

This is standard practice for economic theory. Economists are perfectly willing to say that other economists do not understand the implications of economic theory. However, the standard assumption is that everyone else understands perfectly. Thus the standard assumption among economists is that we are the least able to understand the economy.

The problem is very serious. If we assume that people have rational expectations we must conclude that the price is right now and it was before and ... well it's so crazy that no one would stick to the assumption when talking about policy during a crisis (there are no fresh water economists in a depression).

If we allow ourselves to hypothesize this or that kind of irrationality which sounds semi plausible, we can justify any policy, by claiming that the problem is one of irrational pessimism which will be eliminated by the proper burnt offerings or whatever so long as people believe that the burnt offering will solve the problem.

The situation is so desperate that it has driven Paul Krugman himself to become an accidental theorist. When linking to CR he presents a graph. The implicit theory is that price to rent ratios have a normal level and will decline if they are above that normal level. This is a hypothesist, but it is presented without any formal model or testing of competing hypotheses.

Now I agree with PK and CR, but my argument is "it's obvious".


Actually, now that I think of it, I'm not even sure that the complicated argument is valid as a statement in economic theory. If I have a 30 year fixed rate mortgage and am sure that I (and my heirs) will never move or want to sell my house, I really shouldn't care about future interest rates. If home buyers were of this type, future interest rates wouldn't matter. They matter if home buyers have some kind of floating rate mortgage, or if there is a significant probability (in expected discounted value) that they will sell the house. Standard simple asset pricing models assume that people can make infinitesimal changes to their holdings (sell one brick of the house) and that there are no transactions costs. These assumptions make no sense for house prices.

Now I think the asset pricing models have realistic implications (including that there can be bubbles if people are irrational in a way that isn't grossly obvious) because many many homebuyers actually made the crazy assumptions typical in simple asset pricing models, that is, they acted as if they could sell part of their house by taking out a home equity loan and they decided that the transactions costs were negligible. Then they assumed that house prices would go up forever and interest rates would stay low forever (neither grossly obviously irrational as predictions are hard especially about the future).

Wednesday, October 01, 2008

Senate Includes Tax Cuts in Bailout

My first reaction to this was horror. I would have preferred taking advantage of the House Republicans to push through a new plan based on public equity stakes in banks. At least some progressive add ons to get Democrats in the House united and to make the bill popular.

Now, however, the Senate Democrats have decided to cave as always adding tax cuts not directed at the poor to the plan.

Still the tax cuts don't sound all that horrible and a recession year is a reasonable time for tax cuts

The Senate proposal would cost more than $100 billion and extend and expand many individual and business tax breaks, including tax credits for the production and use of renewable energy sources, like solar energy and wind power.

The bill would also extend the business tax credit for research and development, expand the child tax credit, protect millions of families from the alternative minimum tax and provide tax relief to victims of recent floods, tornadoes and severe storms.

I have no problem with that so long as the AMT patch is temporary (linking progressive measures to this years AMT patch is a key tool against Republican filibusters).
Moran Gets a Brain

Soros floats alternative bailout plan with Dems

By Alexander Bolton
Posted: 09/30/08 11:19 PM [ET]
The billionaire financier George Soros, a major Democratic financial backer, is floating his own rescue plan among Democratic lawmakers who are uncertain what to do in the wake of a surprise defeat of a proposed $700 billion rescue package proposed by Treasury Secretary Henry Paulson.

Soros has outlined his plan in an opinion editorial in the Financial Times and circulated a concept paper among decision-makers.

Specifically, the liberal philanthropist has proposed that government funds should be used to recapitalize the American banking system by purchasing equity in banks and investment firms.

Democratic Rep. Jim Moran (Va.) scheduled a meeting Tuesday afternoon with Robert Johnson, a former manager of the Soros Fund Management, to discuss the proposal.

Moran compared the proposal to Warren Buffet’s $5 billion investment in the investment firm Goldman Sachs Group in return for preferred stock and warrants to buy common stock at a discount.

Now why didn't I think of that ? (I'm not bragging few economists haven't thought of that).

I just posted this so I can re-post this photo

Remedial Accounting and Bankruptcy Law

Over at Angrybear and (thanks John Quiggin) crooked timber, I have gotten some flak for dubious claims about accounting standards.

My claim was that a firm can write a credit default swap on its own debt without telling anyone. 2 commenters correct me.

Fred at angrybear writes

no. can't be. these would be contingent liabilities and have to be on balance sheet at their expected loss. that matters because under bk law any transfers w/in 2 years of relief date are voidable if made to hinder creditors or if as a result there was balance sheet insolvency, and if insufficient consideration was received. bonuses that are discretionary and not the result of contract rights would be such. failure to mark to market the contingent liabilities in this context would be a serious bk matter.

at Crooked Timber Royt writes, among other things,

ROYT 09.28.08 at 9:45 am

The central assumption in “AngryBear’s” speculation is this: “Lehman could have made their senior debt worth 12 cents on a dollar in case of default by selling CD insurance on their own debt—lots of it. This would not require any false accounting as they are not required to report this fact.”

The AngryBear couldn’t be more wrong. Reporting of such a CDS would indeed be required.

and in more detail

ROYT 09.29.08 at 7:41 pm


I asked above, Why would CDS positions such as have been theorized by Waldmann (and further speculated upon here) be required to be disclosed? One answer is, Materiality. Another is Concentration.

Lehman did not, in a recent reported quarter-end have any such position. We know this because we can read their May 31 10-Q. We can peruse their footnotes for extraordinary transactions (which E&Y would surely have regarded these as being), we can search the MD&A, examine disclosures on liquidity and concentration… in vain.

I reply

Robert Waldmann 09.30.08 at 4:18 pm


Thanks Royt. I admit I am fairly ignorant about accounting standards and don’t know what is in the Lehman May 31 10-Q. Could you provide a link ?

This seems relevant
“SEC Info – Lehman Brothers Holdings Inc – 10-Q – For 5/31/08 – E”…
is seems relevant

I search for concentration
I get “Concentrations of Credit Risk
[snip] The Company’s exposure to credit risk associated with the non-performance of these clients and counterparties”

Not relevant. That is risk related to Lehman assets not liabilities.

something in a section on valuing securities which is not relevant

“geographic concentrations” (not relevant)

more on concentration of assets (not relevant)

something on risk management thinking about concentration (not relevant)

Concentration appears to be a word related to assets and counter party risk. It has nothing to do with Lehman liabilities which require payment only if Lehman defaults on its debt (the topic of my post).

The word “materiality” does not appear in the 10-q report entitled “Lehman Brothers Holdings Inc · 10-Q · For 5/31/08”

I’ll keep looking
26 Robert Waldmann 09.30.08 at 4:30 pm

I’m searching for “credit default” a relevant entry just shows the current market value. This is not the issue. The issue is the value of liabilities if Lehman is in liquidation

I quote

“Fair Value of Derivatives and Other Contractual Agreements”
this includes credit default swaps as liabilities. They are booked at current market value. This is not relevant.

It also appears in a section entitled

Notes to Consolidated Financial Statements

There is another entry about credit default swaps with SPE’s again in (Unaudited). Again just amounts at fair value. Nothing about the correlation with bankruptcy of Lehman brothers and typically in unaudited notes.

I don’t see how I can tell if Lehman wrote CD swaps on its own debt from this document (but I repeat I am ignorant).

Now maybe a competent accountant, which I am not, can tell that Lehman didn't write any CDSs on its own debt from the May 31 10-Q but I sure can't.

Finally John Quiggin himself notes

John Quiggin 09.30.08 at 7:54 pm

ROYT, it appears from your explanation that any requirement to disclose is very limited, and that the disclosure is far from continuous.

Indeed. It isn't May 31 2008 anymore.

I might add that Quiggin explains how to do it without being too obvious in his post

For a start, it seems obvious that allowing firms to sell CD swaps on themselves is a terrible idea, but Waldmann says it’s not illegal and has happened in the past. But even if you could stop the most obvious version, there are plenty of ways around it. Suppose for example that Bank A and Bank B sell lots of CD swaps on each other. Then if one gets into trouble so does the other, and both default, so the CDS are reduced to their bankruptcy value. As long as both banks survive, it’s money for jam.

My bottom line view is that booking CD swaps at fair market value and telling bond holders and rating agencies the total value is no where near enough to protect bond holders from the scam I imagine. What matters to bond holders is not the expected value of liabilities, but the value of liabilities if the firm is bankrupt. If Lehman had written CD insurance on its own debt, the fair market value would be low (few imagined that Lehman would go bankrupt and most are not attracted by a claim on a bankrupt firm even if it has positive value).

On accounting I think the one thing I don't know about is whether the accounting firm which certifies the books would add a specific warning.

Now Fred also makes an important claim about bankruptcy law, another aspect of my almost infinite ignorance. It seems to me clear that a self CDS can't cause insolvency (it costs the firm nothing until it is already insolvent for some other reason). It also seems hard to argue that the compensation for the liability was inadequate as disinterested people have claimed that the just price is zero. I think a judge could just decide that the contract is illegitimate, because it was designed to hinder creditors. That is, in common law countries, you can lose by being too clever as judges have great leeway to interpret and apply vague principles in a way that punish people who followed the letter of the law (to the extent that it was explicit) while violating its spirit.

I'd say the chance that a bankruptcy judge would void a contract, because Robert Waldmann can think of a sneaky reason to write it is less than 100% and so the value of the contract is still positive and the deal benefits shareholders at the expense of bond holders.