Club Troppo

Over at Penguin Unearthed. 

 

Extreme distributions

20 February, 2009 by penguinunearthed

John Connor, CEO of the Climate Institute, made a speech today talking about bushfires. Ive been pondering one of his key points for the last two weeks, ever since the bushfires.

Climate change is not just about warmer weather, it is about wilder weather.

One of the lessons I learned early on as an actuary is that the extremes of any distribution do not behave the same way as the middle. So if the middle of a distribution of temperature rises by 1 degree, the effects on the extremes are not intuitive.

Something that was a 1 in 100 chance of occuring in the old distribution is not just slightly more likely. Moving the distribution up the curve can significantly increase the chance of that 1 in 100 event. For an extreme event that is three deviations away from the mean of a distribution, moving the mean up 20% of a standard deviation doubles the chance of that extreme event. So put it in temperature terms – say the summer mean maximum temperature is 25 degrees, with a 1 in 400 chance of a 40 degree day. Increase the mean maximum temperature to 26 degrees, and there is a 1 in 200 chance of a 40 degree day. And that is assuming that the climate follows a nice stable normal distribution model (or bell curve – the one that statisticians like, because its easy to work with mathematically). (Continued)

And no exception here. 

 

CAMBRIDGE Capitalism is in the throes of its most severe crisis in many decades. A combination of deep recession, global economic dislocations, and effective nationalization of large swathes of the financial sector in the worlds advanced economies has deeply unsettled the balance between markets and states. Where the new balance will be struck is anybodys guess.

Those who predict capitalisms demise have to contend with one important historical fact: capitalism has an almost unlimited capacity to reinvent itself. Indeed, its malleability is the reason it has overcome periodic crises over the centuries and outlived critics from Karl Marx on. The real question is not whether capitalism can survive it can but whether world leaders will demonstrate the leadership needed to take it to its next phase as we emerge from our current predicament.      

Capitalism has no equal when it comes to unleashing the collective economic energies of human societies. That is why all prosperous societies are capitalistic in the broad sense of the term: they are organized around private property and allow markets to play a large role in allocating resources and determining economic rewards. The catch is that neither property rights nor markets can function on their own. They require other social institutions to support them. 

So property rights rely on courts and legal enforcement, and markets depend on regulators to rein in abuse and fix market failures. At the political level, capitalism requires compensation and transfer mechanisms to render its outcomes acceptable. As the current crisis has demonstrated yet again, capitalism needs stabilizing arrangements such as a lender of last resort and counter-cyclical fiscal policy. In other words, capitalism is not self-creating, self-sustaining, self-regulating, or self-stabilizing.      

The history of capitalism has been a process of learning and re-learning these lessons.   (Continued)

Car theives steal cars but they steer away from cars that are worth nothing and they steer away from more recently made and more expensive cars that are fitted with anti-theft technology like engine immobilisation. The CIS prefaces its reporting of this pedestrian fact as follows.

Among the chattering classes debating the usefulness of economic analysis has become the topic du jour. Economists seem to be as clueless as anyone else when it comes to understanding the global recession, let alone dealing with its consequences.

But while it is now fashionable to discard long cherished economic insights, the crisis also shows that people still behave rationally. Just ask Australias car thieves.

Stealing a car is perhaps not the most obvious activity that economists would pay attention to. But it turns out that car theft is the perfect example to show how people react to incentives.

So there you go! Stop chattering and get with the program. The rest of the post is below the fold. (Continued)

From finance industry newsletter The Sheet. It’s nice to know that after swallowing all those bank guarantees Wespac are keeping on keeping on. If only the entire economy was a bank, we could just sail through the crisis.

The most profitable bank in the world may be Westpac.

Or at least the most profitable universal bank.

With a return on equity in the year to September 2008 of 20.4 per cent, Westpac leads a bank profit ranking published yesterday by Boston Consulting Group in an annual survey. The ranking features universal banks and excludes more specialist institutions with higher returns.

Westpacs ROE exceeds the country average for Australia, of 16.5 per cent, by a quarter. The data used in the survey will precede the bank’s takeover of St George, and the most recengt evidence of rising margins offset by a rise in impaired loans.

The BCG ranking is a little unfair on Hang Seng Bank (which operates in south China), which reported an ROE of 23 per cent, but which the consultants preferred to rank in a second table of the most profitable niche banking entities.

The study is a reminder that profitable banks remain even in countries with distressed banking sectors.

Other most profitable banks for their own markets (but not so profitable as Westpac) are BBVA, Royal Bank of Canada, Standard Chartered, Mediobanca, Sumitomo Mitsubishi Financial Group and even, in the United States, Northern Trust.

Among specialist entities the tiny China Merchants Bank topped the table with an ROE of 33 per cent. With a mere 500 branches CMB is a flea in Chinas banking industry. Two hundred thousand branches is whats required for reach in that market.

The data is a little dated and that shows in some ways. For example, Macquarie Group made BCGs list of profitable niche banks, something true on the basis of March 2008 full year financials but now overtaken by write downs on many investments.

Leaving this point aside, the return on equity across the banking sector fell to 6.5 per cent in 2008 down from 14.2 per cent in 2007 and 17.8 per cent in 2006.

BCG estimated the cost of equity rose to 14.7 per cent last year from a low of less than 11 per cent in 2005 and 2006.

Boston Consulting Group published the Value Creation in Banking survey yesterday

.

Richard Parker writes HT Mark Thoma .

It’s easier to unwind. 

 

Dear Mr. President, 
In a future two-volume work, I intend to deal with the relation of a President to economists. I will naturally urge that he listen to them attentively, and indeed with a certain respect and awe. But in times of economic challenge, the President must have a sense of what the people want. Economists only know what people should want – or sometimes what they used to want. 
- John Kenneth Galbraith to President Kennedy, 
August 1962

TREASURY Secretary Timothy Geithner’s debut last week of his $2.5 trillion rescue plan sent Wall Street into a tailspin – and raised new concerns about the Obama administration’s savvy – when it became apparent that this was The Plan That Wasn’t One.

The Plan – clearly crafted by the Larry Summers-led economic team – had been fiercely opposed by top White House political advisers (including David Axelrod). The political people apparently feared The Plan, however sketchy, made the White House look like it was bringing back last year’s arsonists to be this year’s firefighters – while doing too little for the millions trapped in our still-burning economy.

To Ken Galbraith, all this would have been eerily familiar (and alarming) had he not died three years ago. The 6-foot-8 Harvard professor had been the nation’s most famous liberal economist from World War II until his death. He served in the Roosevelt, Truman, Kennedy, and Johnson administrations, and knew about the intersection of economics and politics.

For Galbraith, the Geithner Plan would have recalled haunting memories of what happened when he was a top adviser to John F. Kennedy.

Kennedy entered office in 1961, during what was then the worst downturn since the Depression. JFK was a new, young, and untested president, uncertain in economics, a leader attuned to bipartisanship (he chose a Republican investment banker as treasury secretary). His economists were all Keynesians and eager to put their blackboard models to work. But they disagreed about what to do.

Pay close attention.

One camp was led by White House chief economist Walter Heller, a tax specialist who favored a big stimulus package based on deep tax cuts. Ken Galbraith, FDR’s man in charge of price controls in World War II (a job at least as tough as the one facing Geithner), led the second camp. Galbraith wanted spending – deficit spending – that focused on building schools, roads, and parks, and creating public jobs

It wasn’t a dispute about theory. But Galbraith had a second worry: Kennedy was coming under heavy pressure because of a little war in Southeast Asia. Costs for such a war weren’t in Heller’s economic models. If war came in Vietnam, he knew spending would soar but that Congress would put off raising taxes to pay for it. (Continued)

Crikey! rang today wanting to publish something developed from yesterday’s post Costello 1, Keating 0. I obliged. Readers of the first may find it a bit repetitive, but I reproduce it below as a matter of record and also because it has a few additional thoughts on foreign investment after discussing Chinalco and Rio.  In addition to supplying the headline, Crikey! corrected my punctuation in the last sentence (re-corrected in this organ of record) and has been duly reported to the RSPCA (Royal Society for the Protection of Cruelty to Ambiguity).

Costello trumps Keating in Rio stoush

Should we allow Chinalco to buy Rios resources assets? Peter Costello made some telling points in yesterdays SMH comparing his own insistence on keeping BHPs headquarters in Australia with Paul Keatings preparedness to let Britains Rio effectively take over Australias CRA in 1995.

Its easy for non-economists to object to foreign takeovers. Who’d want “our” assets owned by foreigners? But economists have a tougher time of it. Our discipline says that everything comes at a price — in this case less call on foreign resources and usually less investment in the activity at hand.

Trouble is, in order to try to compare both costs and benefits, economists leave so much out of the picture that we rarely get beyond general principles. As Costello implied in his column, Treasury doesnt advise Treasurers to block foreign takeovers. Ever.

In a world in which (as is becoming increasingly evident) we are painfully ignorant about how the economy really works and how to manage it, the Treasury approach is at least clear and it may be the best we can manage. But I think Costello’s call was the right one in the circumstances.

The most important question is “how much did Australian BHP shareholders give up — in terms of a lower takeover price — in order to keep BHP’s headquarters here?” Who knows? Not me. Not Treasury or the Treasurer of the time. But . . . Id guess “not much” if anything.

And the gains? Well I wouldn’t want to prevent all takeovers that would end up seeing a headquarters relocate offshore. Indeed one might want to prevent very few. But if one were going to prevent any, it’s hard to think of a stronger case than one where we’ll have one of the largest firms in the relevant industry where we have a long established, resource rent backed, comparative and competitive advantage. Ditto for two of the largest companies in the same industry. But as Costello pointed out, his predecessor kissed CRA goodbye.

But most of my other guesses strongly favour foreign investment. I can’t see the harm in letting Rio’s Australian resources assets pass to the Chinese (though the fact that Chinalco is state owned gives me pause) and its hard to think of a better time to allow foreigners more access to our (inflated?) real estate market.

If we want more investment, any general favours we do investors should be for foreign rather than domestic investors (there are so many more of them so our favours will buy more investment). So we should ditch dividend imputation favours to domestic shareholders and use the $20 billion it costs to cut company tax to 19% putting some desperately needed upward pressure on share prices.

And we’ve had some lousy foreign owners of assets. Im thinking particularly of Ford Motor Company — going nowhere here or back home in Dearborn, Michigan — focused like Mitsubishi was, on minimising risk and investment all the while panhandling for government handouts until the inevitable day of departure.

Yet their assets — the know-how to design, build and export a complete large, rear wheel drive car — could be seriously valuable to some aspiring, entrepreneurial, investment ready Chinese firm already scoping out its small and medium car offerings to the rest of the world and able to re-badge a large car off the shelf. Assets ready to Cherry pick.

From Tuesday’s Financial Review:

The Australian Institute of Company Directors acknowledged last week that there have been mistakes made by company boards in setting executive remuneration. As feeble as this admission is, it is the only one shareholders are likely to see from any company board or associated body.

Notwithstanding these failures, the Institute maintains it is the board, not shareholders or government, where the responsibility for remuneration setting should continue to reside. This mirrors reports in this paper yesterday disclosing board member disquiet about re-regulating company activities.

The Institute believes that boards will improve their performance in remuneration matters. It even issued a set of guidelines to assist. But if the AICD thinks that its suggestions will help companies lift their game, it has more faith and hope than is deserved. (Continued)

HT: 3Quarks.

FORMER GITMO GUARD TELLS ALL

Scott Horton in Harper’s:

Army Private Brandon Neely served as a prison guard at Guantánamo in the first years the facility was in operation. With the Bush Administration, and thus the threat of retaliation against him, now gone, Neely decided to step forward and tell his story. The stuff I did and the stuff I saw was just wrong, he told the Associated Press. Neely describes the arrival of detainees in full sensory-deprivation garb, he details their sexual abuse by medical personnel, torture by other medical personnel, brutal beatings out of frustration, fear, and retribution, the first hunger strike and its causes, torturous shackling, positional torture, interference with religious practices and beliefs, verbal abuse, restriction of recreation, the behavior of mentally ill detainees, an isolation regime that was put in place for child-detainees, and his conversations with prisoners David Hicks and Rhuhel Ahmed. It makes for fascinating reading.

Neelys comprehensive account runs to roughly 15,000 words. It was compiled by law students at the University of California at Davis and can be accessed here. Three things struck me in reading through the account.

First, Neely and other guards had been trained to the U.S. militarys traditional application of the Geneva Convention rules. They were put under great pressure to get rough with the prisoners and to violate the standards they learned. This placed the prison guards under unjustifiable mental stress and anxiety, and, as any person familiar with the vast psychological literature in the area (think of the Stanford Prison Experiment, for instance) would have anticipated produced abuses. . . . 

Second, there is a good deal of discussion of displays of contempt for Islam by the camp authorities, and also specific documentation of mistreatment of the Quran. . . .

Third, the Nelly account shows that health professionals are right in the thick of the torture and abuse of the prisonerssuggesting a systematic collapse of professional ethics driven by the Pentagon itself. He describes body searches undertaken for no legitimate security purpose, simply to sexually invade and humiliate the prisoners. This was a standardized Bush Administration tacticthe importance of which became apparent to me when I participated in some Capitol Hill negotiations with White House representatives relating to legislation creating criminal law accountability for contractors. The Bush White House vehemently objected to provisions of the law dealing with rape by instrumentality. When House negotiators pressed to know why, they were met first with silence and then an embarrassed acknowledgement that a key part of the Bush program included invasion of the bodies of prisoners in a way that might be deemed rape by instrumentality under existing federal and state criminal statutes. While these techniques have long been known, the role of health care professionals in implementing them is shocking.

Our Government was complicit in all this.  It was defending civilisation after all.