At the WSJ blog, Michael Derby writes,
The way some schools are being held to account for student performance can corrupt how these institutions seek to achieve the standards, a new paper from the Federal Reserve Bank of New York warns.
In other news, the way banks are being held to risk-based capital standards can corrupt how banks seek to achieve the standards, according to a new paper from researchers at the department of education.
James Hamilton looks at recent stock market behavior.
Fernando Duarte and Carlo Rosa of the Federal Reserve Bank of New York surveyed 29 different forecasters and models for their calculation of the expected return on stocks relative to that on bonds. Obviously you want to take anybody’s claim that they know where the stock market is headed with a rather large grain of salt. But it’s interesting that the consensus assessment of this group is that stocks will outperform bonds by as high or higher margin as ever would have been expected over the last half century.
Investment-grade corporate bonds yield about 3 to 3-1/4 percent these days in nominal terms. In real terms, that is something closer to 1-1/2 percent or less. Meanwhile, according to Hamilton, Shiller’s backward-looking P/E ratio on stocks is 23.4. Taking 1 over that, you get something like 4 percent as the real yield on stocks.
It would seem as though any corporation (such as Apple, which has been doing this) that can issue bonds at a real yield of 1-1/2 percent and buy back stock. Rinse and repeat until your bond investors get scared and drive up the yield. This lowers your cost of capital–it is nearly an arbitrage. So much for Modigliani-Miller.
There is something going on in financial markets that I do not understand. Is the Fed’s quantitative easing powerful enough to drive the real ten-year rate below zero? Could be, but I doubt it.
Pundits talk about a huge demand for safe assets. But for me, that does not explain ten-year bond yields. Ten-year bonds do not look like safe assets to me. They look dangerous as hell.
If I ran a hedge fund, my main bet would be deep out-of-the-money puts on bonds. I would keep enough cash to keep rolling over this bet for five years or until it pays off, whichever comes first.
Last week, the New York Times reported,
For the academic elite — tenured professors at private research universities — average pay this year is $167,118, while at public research universities such professors earn $123,393, according to the annual report by the American Association of University Professors.
…many colleges and universities are cutting back on tenure and tenure-track jobs. According to the report, such positions now make up only 24 percent of the academic work force, with the bulk of the teaching load shifted to adjuncts, part-timers, graduate students and full-time professors not on the tenure track.
The adjuncts earn puny incomes, typically without benefits. Should there not be forces at work leading to convergence between the salaries of tenured professors and the salaries of adjuncts?
What is the most positive economic news that we have received over the last six months? I am using “news” to mean “unexpected” or “somewhat surprising.”
The answer that comes to my mind is the increase in the stock market. But if the stock market is up on the basis of little or no positive economic news otherwise, then that sort of says that the reason people are buying stocks is because the market has been going up. That’s not what one would call a sustainable model. So as of today, I am even a little lighter into stocks than I was yesterday, and I was relatively light yesterday. To be sure, in inflation-adjusted terms, the market is not actually at an all-time high. But I figure that whatever my willingness to buy stocks was 6 months ago, it should be less now, no?
Speaking of stocks, I know of a newsletter writer who recommends specific stocks and always adds what he calls a “protective stop.” So he might say, “but X at 20, but put in a stop-less order to sell if it goes down to 18.” This struck me as a strange strategy, but today I was pondering it and I think I have it figured out.
Suppose that the stocks that he recommends are really no better or worse than buying an index fund. So, without the stop-loss orders, if you followed his buy recommendations you would get the exact same return as the market. With the stop-loss orders, it’s as if you are buying the market portfolio along with a portfolio of out-of-the-money put options. In this case, though, you only pay the option premium if the market bounces around, so you buy a stock at 20, sell it at 18, then buy it back (or buy some other stock recommended by the newsletter) when it goes back up to 20.
I think that this approach minimizes the chances that you will regret taking the writer’s advice. If the market rallies, you will be happy with your gains. If it falls, you will be happy that your losses are limited. And if it bounces up and down you are unlikely to notice that the advice is giving you a tendency to buy at the highs and sell at the lows. So I think this strategy would appeal to regret-averse investors. But it’s not a strategy that appeals to me.
if you drink 32 ounces of Coca-Cola, you’ll rack up 388 calories. A 20 ounce Iced White Chocolate Mocha from Starbucks has 500. Both aren’t good for you, but the Mocha’s worse. The difference is that the kinds of people who want to use government to save ignorant Americans from the harms of soft drinks are the kinds of people prefer an Iced White Chocolate Mocha to a Coca-Cola.
As Jonah Goldberg says, when it comes to culture wars, the left is the aggressor.
At Reason Magazine, Nick Gillespie voices a reactionary point of view.
What actually sets institutions of higher learning apart from high schools, barbers’ colleges, online academies, and various universities-in-name-only is that they are centers of knowledge production. That is, they revolve around faculty scholars who are actively expanding, revising, and remaking the received wisdom in their given fields. Active researchers, whether in astronomy or zoology or cultural studies or good old American literature, are the folks that make college worth a damn.
This is part of a symposium on higher education, which includes several other contributors. I think Gillespie touches on an important point: not all colleges are the same. If you drop from the 100th most prestigious school down to the 300th, somewhere along the way you will have hit the level where one must shed one’s idealistic illusions about “higher learning.”
How should we term these non-elite schools? Perhaps we should call them institutions of lower learning. At many of these, you will find a handful of highly capable students. But they are diamonds in the rough.
The cost of attending institutions of higher learning has increased, but I do not think that is where the crisis lies. Students at those schools tend to get what their parents are looking for, which is confirmation of their membership in the upper strata of society.
My guess is that the real crisis is at the institutions of lower learning. Cost have gone up there as well, and so have the hopes of progressives for results. But they are not wildly successful, to say the least.
By Richard Vedder’s count, close to half of college graduates, including over 100,000 janitors, hold jobs that do not require a college degree. This makes perfect sense, given that more students attend institutions of lower learning than institutions of higher learning. Vedder says that the default rate on student loans is 12 percent. I would bet that at least 2/3 of those defaults come from institutions of lower learning.
That is not to say that institutions of lower learning are bad. It is possible that they teach more effectively than the elite schools, with the latter simply enjoying the halo effect created by being able to reject anyone who is not sufficiently prepared and motivated.
Lisa Snell points out that many students enter college requiring remedial education. For the most part, these students get sifted into the institutions of lower learning.
I do not see the majority of students at institutions of lower learning becoming affluent professionals or articulate intellectuals. In that regard, I think that the potential for online courses taught by elite university professors to penetrate the institutions of lower learning is rather low.
Pundits and policy makers tend to ignore the reality at the institutions of lower learning. They need to give it more consideration.
Charlie Quidnunc spotted this one:
the Department of Agriculture is proposing to purchase 400,000 tons (with a “t”) of sugar from domestic producers
This is why we don’t need to worry about the government Budget. This sort of spending is what grows the economy, right?
Richard W. Fisher and Harvey Rosenblum write,
we would roll back the federal safety net—deposit insurance and the Federal Reserve’s discount window—to apply only to traditional commercial banks, and not to the nonbank affiliates of bank holding companies or the parent companies themselves, where the safety net was never intended to be.
This is one of several proposals that they make to try to reduce the power of big banks.
The opposite choice is the Gary Gorton approach. That is, acknowledge that the financial sector has changed, and expand the government insurance umbrella to include new instruments, such as repurchase agreements. I may not be characterizing Gorton’s views charitably. I have always disliked them.
The Dodd-Frank legislation is an awkward compromise between these two approaches. It probably satisfies no one. It certainly does not satisfy those of us who want to cut the big banks down to (a much lower) size.
1. Russ Roberts talks with long-time Web visionary Doc Searls on econtalk.
2. At MRUniversity, I am trying to have weekly video chats as part of my course on housing finance. Here is a recording of the first one.
Sugata Mitra is the subversive.
He calls it the grandmother technique, and it goes like this: expose a half dozen or so kids to a computer, and let them have at it. The only supervision required is an adult to listen the kids brag about what they learn. It’s the opposite, he says, of the disciplinary ways of many parents—more like a kindly grandmother, who rewards curiosity with acceptance and encouragement. And it is a challenge to the past century and a half of formalized schooling.
Does this idea come across as libertarian? To me, it actually owes something to the New Left of the hippie era. Anyone remember Ivan Illich?