David Brooks on Detachment

Read the entire column. An excerpt:

These days most writers land on the engaged side of the continuum. Look at most think tanks. They used to look like detached quasi universities; now some are more like rapid response teams for their partisan masters. If you ever want to get a political appointment, you have to be engaged, working on political campaigns and serving the team.

But I would still urge you to slide over toward the detached side of the scale. First, there is the matter of mental hygiene. You may think you can become a political partisan without becoming rigid and stale, and we all know people who achieve this, but the risk is high.

I am very sympathetic to Brooks’ point of view. If anything, I think he is more charitable than I would be toward what he calls the “engaged” pundit.

In fact, a major goal of The Three Languages of Politics is to encourage people to be more detached. Incidentally, for those of you who do not have Kindles, you can get a Kindle app that would enable you to buy and read the book.

Wesley Mouch Update

Veronique de Rugy writes,

In 2009, Fisker received a $529 million federal loan from the Department of Energy’s ATVM program. According to the New York Times, two years after receiving the loans, the company repeatedly missed production targets and other deadlines. They’ve now fired 75 percent of their workforce and hired bankruptcy advisers. It has not built a car since July 2012. That lead the DOE to suspend their support, after having guaranteed $192 million of the $529 million loan. Like Solyndra, taxpayers will foot that bill, minus the $21 million that the government managed to seize from the company’s cash reserves.

At the time that the loan was made, I hailed it.

Forget a carbon tax. Forget cap and trade. Steven Chu is going straight to picking winners and losers.

Two months later, I was still ecstatic.

The American people are being forced to participate in a venture capital fling in which they take most of the down side and none of the up side. And it is not being debated. Nobody has to come before the public and explain themselves. If you call yourself a progressive, are you proud of this?

If there were any justice in the world Steven Chu would be occupying a cell with Bernie Madoff.

Unwanted Care

Jonathan Rauch writes,

Unwanted treatment is American medicine’s dark continent. No one knows its extent, and few people want to talk about it. The U.S. medical system was built to treat anything that might be treatable, at any stage of life—even near the end, when there is no hope of a cure, and when the patient, if fully informed, might prefer quality time and relative normalcy to all-out intervention.

It is a good article on the challenges of reining in late-stage medical interventions.

Interesting Paper on the STEM labor force

From Hal Salzman, Daniel Kuehn, and B. Lindsay Lowell. It covers a lot of ground, but I was struck by the education/employment disconnect.

[1] For every two students that U.S. colleges graduate with STEM degrees, only one is hired into a STEM job.

[2] 36 percent of IT workers do not hold a college degree at all.

[3] The annual number of computer science graduates doubled between 1998 and 2004, and is currently over 50 percent higher than its 1998 level.

Pointer from Tyler Cowen, who focuses on other results.

My questions:
[1] What are the other 50 percent of STEM grads doing? How many are going to grad school? How many are flipping burgers? If the latter, are their degrees maybe not so impressive, for whatever reason?

[2] What counts as an IT worker? The security guard at Google? Or only people who do technical work?

[3] Does everyone agree on this? Using a different endpoint, Alex Tabarrok wrote,

we graduated more students with computer science degrees 25 years ago!

Assuming consistent measurement between Alex and these authors, we must have had a huge drop in computer science degrees between 1985 and 1998. Note that the drop from 2004 to today seems to be large, also.

Against Home Borrowership

Dean Baker writes,

If homebuyers knew that they had to put down 20 percent to get a lower cost mortgage, then they would be more likely to have a 20 percent down payment than in a context where this was not a requirement

Pointer from Mark Thoma.

I wish Baker had been there to help me at the hearing yesterday. The Congresspeople were chanting at least three scary mantras.

1. We need more home ownership.

2. We need to make sure that people who can’t make a big down payment can purchase homes.

3. We need to preserve the thirty-year fixed-rate mortgage that is pre-payable at any time.

I could not address any of these.* Instead, I tried to focus on debunking the idea that government needs to revive the mortgage securities market in order to “provide sufficient private capital” for mortgages. The other witnesses, and pretty much every Congressperson, were against me.

I am afraid that the housing lobby is alive and well, and very few economists share Dean Baker’s willingness to take it on.

*I tried a little bit, and more in my written testimony, to address (3), and in particular to explain that the interest-rate risk on the thirty-year mortgage is likely to be borne by taxpayers. Any institution that takes on a large portfolio of thirty-year mortgages has to, in addition to issuing long-term debt, purchase derivatives to hedge the prepayment option. Who will be on the other side of such transactions, writing these out-of-the-money options? My concern is that buried in the housing finance system somewhere will be the equivalent of AIG financial products. That is, an institution with way too much risk in its book, which regulators will discover only when it is too late.

aaAARRGGH!!!!

That sums up my post-mortem on the hearing today. You can watch a replay here. The witness testimony begins about 1/5 of the way through, and I am the last witness, so I start about 23 percent of the way through. (My media player does not show minutes.) After that, there are questions/speeches from members of the House Committee.

I left with a sense that it was me against everyone else. Everyone else thought that the problem with withdrawing FHA, Freddie, and Fannie from the mortgage market is that private capital is not ready to take their place. I tried to point out that all of the capital in the mortgage market today is private capital. The real issue is that taxpayers are taking much of the risk in mortgage lending. If taxpayers were not taking that risk, then, yes, interest rates would rise, particularly on 30-year fixed-rate mortgages. But to say that private capital is not ready to come into the market makes it sound as though the consequences of phasing out the GSEs would be much worse than actually would be the case.

Even more frustrating to me were the other three witnesses, who insisted that securitization is necessary for mortgage markets. The guy next to me was particularly insistent on that point, and some of his comments during the Q&A reminded me of the worst of the spokesmen in the Freddie/Fannie propaganda machine. It took a lot of restraint on my part not to yell “baloney sandwich!” at the top of my lungs.

It disgusts me that these witnesses are the people that Congress brings in to “educate” themselves. Interest groups are not the people that you want providing education. They can provide input to people who are educated, but if you are not educated enough to know when they are informing you and when they are spinning you, you should not be listening to them.

This is the Financial Services Committee, and I think they need a basic course that teaches the concept of financial intermediation. After that, they could take my housing finance course, but right now my course would be too advanced for them.

Of course, I should be the last person who is surprised by the knowledge-power discrepancy. But for some reason I was not prepared to be reminded of it, and I walked out of the hearing with a need to scream.

More Trouble for Risk Weights

From Viral V. Acharya, Robert Engle, and Diane Pierret.

Macroprudential stress tests have been employed by regulators in the United States and Europe to assess and address the solvency condition of financial firms in adverse macroeconomic scenarios. We provide a test of these stress tests by comparing their risk assessments and outcomes to those from a simple methodology that relies on publicly available market data and forecasts the capital shortfall of financial firms in severe market-wide downturns. We find that: (i) The losses projected on financial firm balance-sheets compare well between actual stress tests and the market-data based assessments, and both relate well to actual realized losses in case of future stress to the economy; (ii) In striking contrast, the required capitalization of financial firms in stress tests is found to be rather low, and inadequate ex post, compared to that implied by market data; (iii) This discrepancy arises due to the reliance on regulatory risk weights in determining required levels of capital once stress-test losses are taken into account. In particular, the continued reliance on regulatory risk weights in stress tests appears to have left financial sectors under-capitalized, especially during the European sovereign debt crisis, and likely also provided perverse incentives to build up exposures to low risk-weight assets.

UPDATE: A reader forwards a link to these slides, in which Mark Flannery points out that Basel risk weights are based on book values, rather than market values.

Type I errors, Type II errors, and Congress

The Wall Street Journal reports,

Lawmakers of both parties questioned Sunday whether law-enforcement officials did enough to monitor the activities of suspected Boston Marathon bomber Tamerlan Tsarnaev before last week’s terrorist attack, given his apparent extremist beliefs.

The failure to stop Tsarnaev was a type I error. However, there are probably hundreds of young men in America with profiles that have at least as many “red flags” as he had, and few, if any, are likely to commit acts of terrorism. One sure bet is that for the next several years we will see a lot more type II errors, in which the FBI monitors innocent people.

Speaking of Type I errors, type II errors, and Congress, I will be testifying at a hearing on mortgage finance on Wednesday morning for the House Committee on Financial Services. Part of what I plan to say:

It is impossible to make mortgage decisions perfectly. Sometimes, you make a reasonable decision to approve a loan, and later the borrower defaults. Sometimes, you make a reasonable decision to deny a loan, and yet the loan would have been repaid. Beyond that, good luck with home prices can make any approval seem reasonable and bad luck with home prices can make any approval seem unreasonable. During the bubble, Congress and regulators beat up on mortgage originators to get them to be less strict. Since then, Congress and regulators have been beating up on mortgage originators to be especially strict. I expect mortgage originators to make mistakes, but the fact is that they do a better job without the “advice” that they get from you.

Here is my talk on type I and type II errors for my housing course.

This is Too Much

Jared Bernstein writes,

had R&R gone through the peer-review process, I’m fairly confident that a) the spreadsheet error would NOT have been found, but b) the paper would have been sent back to them for failing to provide even a cursory analysis of the possibility of reverse causality (slower growth leading to higher debt/GDP ratios vs. the R&R claim of the opposite). Re “a,” peer reviewers do not routinely replicate findings, though they should when possible (more work these days is with proprietary data sets which cannot legally be shared).

Pointer from Mark Thoma.

I have not been commenting on the Reinhart and Rogoff fracas. My view of empirical macroeconomics is that there are hardly any reliable findings, so I always brushed aside the notion that there is some adverse growth impact of having a debt to GDP ratio of 90 percent. But some people took it seriously. And now the left is howling that all of the austerity policies in the world are due to Reinhart and Rogoff, and they should be burned at the stake, or something.

But speaking of unreliable findings in empirical macroeconomics, this is the same Jared Bernstein who co-authored a memo for President Obama saying that the multiplier is 1.54, as if we know what it is with that precision (I do not think we know with any precision that it even has a positive sign.) He has about as much right to complain about Reinhart and Rogoff as a crack-head has to complain about somebody who got drunk once.

And do read F. F. Wiley. (pointer from Tyler Cowen)