Unpleasant Facts

The only way to solve problems is to be willing to think about them first

Links to the past

I recently ran across some old posts (1 to 2 years old) that highlight some important ideas.

1. My friend commented on how she keeps getting cut off by Prius drivers and it reminded me of this post*. When people act in an acknowledged socially responsible way, they are more likely to treat other people worse. It is like most people are keeping track of their karma and they feel comfortable as long as it is flat.

2. Another post highlights studies that show that we value what we have to work for.  This explains why some writers turn to esoteric writing** - their main ideas are not good enough to stand on their own, but if people have to struggle to identify their ideas before they have a chance to evaluate them then perhaps the reader will value the ideas more highly.

3. Robin Hanson thinks that IQ isn't that useful a metric - how often people decide to think rationally also matters.  However, I wonder how much of the "rationality quotient" measure is explained by the combination of IQ and Conscientiousness.  A low rationality quotient is how some types of smart people are often very stupid***.

4. Falkenblog looks at the importance of teaching kids how to think about the big picture.  While the macro perspective is more important than he gives it credit for (students who think about the big picture should realize that they need to learn something useful), I am mainly resharing this link for how he worked the comic into his post.

5. Bryan Caplan reminds us that people who think that the 2008 crash changed everything in macroeconomics were missing something to begin with.

*Or rather, it reminded me that I had read it and I had to look through my google reader's history to find a relevant article.

**Beyond the obvious "People would hate me if they knew what I truly thought" reasons.

***Low emotional intelligence is another reason high IQ people are stupid, even if they are otherwise very rational.

The BOJ/MoF Put

People used to talk about a "Greenspan Put."  The idea was that if the markets fell too much, Greenspan, then the chairman of the Federal Reserve, would step in and prevent investors from losing too much money.  The effect was almost as if they had bought an option - a put - to protect themselves from a large drop in the markets.

These days, it is looking like there is a BOJ/MoF put for people interested in selling the yen. Selling the currency with the lowest interest rates, which in recent history has been the yen, is a popular trade because if markets don't move then the seller will make money*. 

Recently, the yen has actually been strengthening, but Japan's finance minister just announced that they were buying dollars and selling yen when the yen was trading around 83.  The Bank of Japan released a statement supporting these actions.

The Bank of Japan strongly expects that the action taken by the Ministry of Finance in the foreign exchange market will contribute to a stable foreign exchange rate formation.

Traders interested in selling the yen and buying the dollar are able to take large positions when they believe they have a central bank backstopping their trade.  Of course, this backstop only matters when the traders selling yen have been losing money, so the best way to trade it may be from a tactical perspective of fading yen rallies rather than a long term "sell and hold" approach.  

*Short term interest rates in the US are low enough that this isn't as profitable to do versus the dollar unless a longer term currency forward is used. If a longer term forward contract is traded, the trade is impacted by both movements in interest rates and in currencies. This isn't as popular as trading purely currency or purely interest rates because most traders like to take specific risks and avoid exposure to variables that they are less familiar with.

Monetary Policy and the Bubble

Senior vice president and research director at the Atlanta Fed, David Altig, has a post up at Macroblog discussing the connection between monetary policy and housing bubbles.  He is responding to John Taylor's comments at Jacksonhole where Taylor blames loose monetary for the housing bubble, citing a recent VAR study that found the deviation from the Taylor rule to be a large explanatory variable. Altig responds with points that deviations from the Taylor rule in the US are correlated with looser lending standards, and that this effect was not seen in Europe and in the UK, where the latter had a large increase in debt and housing prices similar to what happened in the United States.

My view of this debate is as follows:

1. You can prove many preconceived notions by carefully selecting your data set, or citing people who do. This applies to both sides.
2. The United Kingdom should be analyzed more like a large offshore financial center, so its own monetary policy's deviation from a Taylor rule would obviously be less important than exogenous variables.
3. Loose monetary policy might be behind looser lending standards. The banks that aren't relaxing their lending standards their lending standards when monetary policy is loose are likely to lose business. This argument is similar to the typical Austrian Economist's response to the rational expectations arguments against the Austrian Business Cycle Theory. Businesses that don't want to participate in the boom because it is unsustainable have to participate in some form because it is the only game in town.
4. Monetary policy was too loose and helped speed along a crisis, but the properties of the finance industry make bubbles and their subsequent crashes inevitable.

The Nurture Bias

Via Reddit, I came across an article about a new study by Eric Turkheimer that suggests that nurture may be more important than nature, at least relative to numbers suggested by previous studies. The newer studies are careful to include identical twins where one grew up broken homes, which has a very negative impact. So extremely bad development can have an impact on intelligence.  This raises the estimations of the nurture impact, but only for 

In the same article RIchard Nisbett, a psychologist who wrote the very excellent The Geography of Thought, shows how people will skew the results.

The findings will undoubtedly please those parents who already send their children to good schools, drive them to violin lessons in the afternoon, and then drag them around museums at the weekend. "So you haven't wasted your time, money and patience on your children after all," Nisbett says.

A lot of parents really want to believe that nurture is really important, so they are very quick to jump to conclusions so "not raising kids in a poor, broken home is important but once you are richer nurture differences matter less" gets turned into the parenting fallacy of "this study supports nurture, and therefore you are right to do everything that common sense tells us is good for children."

Pessimists and the Output Gap

Arnold Kling has a good post up responding to John Taylor's view of the Taylor rule. Arnold Kling highlights a key issue: The main disagreement between hawks (people who want the central bank to focus on fighting inflation) and doves (people who want the bank to focus on stimulating the economy)  is actually about the true nature of the output gap. Mainstream economists are more likely to use traditional measures, which are unstable but generally indicate that the Fed  is either about right or needs to engage in unconventional practices. However, those outside the mainstream are more likely to be economic pessimists about the potential of the overall economy (such as the recalculation theorists or others sympathetic to the Austrian school's idea of malinvestment), view the output gap as much smaller than traditional measures, and worry more about inflation than trying to stimulate the economy in its current form.

If economic pessimists believe there is a small output gap, that should mean that economic pessimists should be more worried about inflation than deflation.  What does that make economic pessimists who believe that deflation is the main problem? They either aren't pessimistic on the economic system in general and believe that policy stimulus will help but it won't be forthcoming (like Krugman), or if they are pessimistic on the system as a whole their approach will probably be to reject the framework of the relationship between the output gap and inflation entirely since it doesn't fit into their view of the world.