Felix Salmon

Silly ideas of the day, Dylan Ratigan edition

Felix Salmon
Jan 11, 2012 20:36 UTC

Noam Scheiber is raving about Dylan Ratigan’s new book, giving it his highest praise: he calls it “sensible”. Which is maybe not obvious from the title, Greedy Bastards: How We Can Stop Corporate Communists, Banksters, and Other Vampires from Sucking America Dry.

He’s wrong. It isn’t sensible at all. Scheiber says that “one of the more intriguing ideas” in the book comes from Dick Grasso, of all people, who wants to classify a large part of the CDS market as “online gaming” and therefore “null and void”. Which sounds like one of those ideas which sounds great in the middle of your third bottle of wine.

But giving Scheiber (and Grasso, I guess) the benefit of the doubt, I had a look at the page of the book in question. Here it is, page 54, in full:

We must require not only that banks retain more capital but also that when they place bad bets, they pay the price for their losing bets themselves. Otherwise we are stuck with the worst of two economic systems: like a capitalist country, we have private banks that keep their profits. But like a communist country, we have a system where banking losses are charged to the government. Only when we end this corporate communism will we realign the interests of the banks with the investors they serve. The way to do this is debt reduction or cancelation. If the system is so out of control that we can use a computer to fabricate trillions in new money by simply adding some zeros, then surely we can find a way to delete some zeros as well. By definition, if you can print it, you can cancel it.

As we have already seen, a swap can either be an insurance policy that helps to lower long-term costs for a business or a bet by an outsider on whether a given company or country will succeed or fail. Putting swaps on a public exchange would create the visibility for all to see the difference between commodity insurance that is critical to the economy and speculative bets that are not much different from gambling. In fact, Richard Grasso, former chairman of the New York Stock Exchange, suggested to me in a personal interview that the speculative bets that fueled the financial crisis could be reclassified legally as online gaming — and then cancelled. His technical explanation: “I believe regulators should require the product to be registered with a central clearing agent (like an exchange) and thus able to be monitored globally to prevent contracts being written in excess of the debt obligations they are designed to insure (corporate or sovereign). This is easily accomplished by [regulators] and Treasury issuing a cross-markets rule adopted by non-US counterparts. Any contracts written outside these requirements would be deemed null and void by regulators as simply online gaming.”

This is exactly the kind of thing we need much less of, at least in book form. It’s fine if you’re just shooting the breeze with a bunch of financially-illiterate friends, but it really doesn’t belong in a volume which aspires to present “smart policy” prescriptions.

I mean, we start off OK, with a standard-issue broadside about privatized profits and socialized losses. Got that. But what on earth is this supposed to mean?

The way to do this is debt reduction or cancelation. If the system is so out of control that we can use a computer to fabricate trillions in new money by simply adding some zeros, then surely we can find a way to delete some zeros as well. By definition, if you can print it, you can cancel it.

I’ve spent the best part of a day trying to work out what on earth Ratigan might be driving at here, and I’ve come to the conclusion that he was probably just high. Never mind the fact that he doesn’t bother to identify which debt he wants reduced or canceled; just admire the elegant way that he proves that debt cancellation is somehow the equal and opposite action to printing money. (In reality, of course, printing money is a way of canceling debts, by inflating them away.)

Even more admirable, in a sense, is the way that Ratigan throws in his “let’s just delete some zeros” idea and then jumps straight to something completely unrelated — the idea of putting all derivatives on exchanges. I mean, it’s not as though deleting zeros willy-nilly would destroy the fundamental nature of capitalism as we know it, and might therefore be worthy of, oh, another sentence or two. We’ve got Grasso to get to!

Of course, we’re not going to get into any nitty-gritty here about the difference between exchanges and clearinghouses, despite the fact that Ratigan’s talking about the former, Grasso’s talking about the latter, and the two are not at all the same thing. And we’ll not spend much time either on the silly idea that anything interesting or systemically important happens at the point at which the notional value of derivatives contracts exceeds the amount of the underlying. (It doesn’t.)

Because even putting those points aside, what Grasso is suggesting here doesn’t stand up to the scrutiny of sober thought. (Especially if debt obligations — the underlying bonds being insured — can simply be reduced or canceled by deleting zeros.)

The way that markets and exchanges work, there’s no way that a clearinghouse would ever be able to know whether the counterparties to a derivatives contract had some kind of insurable interest in the underlying. Grasso’s proposal wouldn’t put an end to what Scheiber calls “naked bets”, it would just allow speculators to crowd out genuine hedgers, to the point at which people who did have an insurable interest wouldn’t be able to do any hedging, because the speculators would have got there first and written contracts up to the maximum allowable limit.

Ratigan has a bully pulpit on the television, and his heart is pretty much in the right place. I can see why he’d want to publish a book where he can tease out his policy ideas in detail, while keeping them accessible to his television audience. But it’s irresponsible to boil complex issues down into a simplistic world of good and evil, complete with simplistic solutions (cancel debt! outlaw speculative gambling!). If anything, it plays right into the rhetoric of the Tea Party, which Ratigan hates.

There are big and hugely important issues to be addressed in the global economy; the least we can do is take them seriously. And stop pretending that being harsh on a coterie of banksters would be both necessary and sufficient to solve all our problems.


Foppe, I guess dealing with facts is beneath you right? Especially as they seem to regularly get in the way of your opinions. No wonder you were such a fan of Graeber.

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Vikram Pandit’s clever idea

Felix Salmon
Jan 11, 2012 17:39 UTC

Vikram Pandit has a clever idea:

It is not enough to require financial institutions to disclose capital ratios. Without knowing what that institution’s underlying assets are (only insiders and select regulators know that), outsiders, including most investors, cannot properly assess how that institution calibrates risk.

What is needed is a way to compare apples with apples. Regulators should create a “benchmark” portfolio and require all financial institutions, not just banks, to measure risk against that. The benchmark portfolio would not actually exist on the balance sheet of any one institution. Rather, it would be a collection of real investments that stand in for the kinds of assets that most financial institutions actually hold at the time. What is more, its contents would be 100 per cent public.

Institutions would be required to produce, on a quarterly basis for that benchmark portfolio, a hypothetical loan/loss reserve level, value at risk, stress-test results and risk-weighted assets. Right now these measures are run only against an institution’s actual portfolio and only a limited number of the results are disclosed. Worse, those results have no common frame of reference. The benchmark portfolio would supply that needed frame of reference.

As Lisa Pollack and Kate Mackenzie say, the problem here is that investors have to be able to trust that banks are modeling the benchmark portfolio in exactly the same way, using exactly the same tools, as they use for their own real assets. And this I think is where this whole idea falls down.

In the real world, banks know when they’re doing something risky, and then they create structures which make that risk invisible. They might, for instance, classify assets as “Level 3″ in an attempt to stop having to mark them to an inconvenient market. Or they might do what Pandit’s employer, Citigroup, did, and create all manner of off-balance-sheet vehicles which don’t report to shareholders or investors at all. Or they might do something else entirely which we won’t discover until after the next crisis.

That said, there’s the germ of something useful in Pandit’s proposal. So here’s how I’d improve it. Rather than having just one benchmark portfolio, or even four, as Mark Carney has suggested, give banks a kind of pop quiz every so often. One day, at about 10am, all the big banks in America would suddenly get given a surprise portfolio as selected by the New York Fed, and told “reserve against this”. With results due at, say, 3pm that afternoon. The New York Fed would then publish every bank’s answers, along with the amount of time that bank took to generate them.

By all means keep Pandit’s benchmark, too. But don’t allow the banks to game the benchmark just because they know exactly what it contains: it’s important to see how banks’ risk-management systems treat a portfolio which they haven’t been tweaked to expect.

What I’m thinking about, here, is the series of statements coming from John Thain, when he was the CEO of Merrill Lynch, saying that this latest write-down was the last ever write-down he would ever need to make against the bank’s mortgage-related assets. In that kind of atmosphere, the New York Fed could easily have published a portfolio of mortgage bonds, and asked every big bank to mark it to market and say how risky they thought it was. And that, in turn, would give a pretty good idea of just how conservative someone like Thain was really being.

And more generally, just being able to see the range of results, for any given portfolio, will be a healthy reminder that banks measure risk in very different ways. Pandit’s proposal wouldn’t just show which banks were particularly conservative; it would also show how much variation there is in the banking system as a whole. Which is in many ways even more important.

So let’s keep this concept alive, and try to make it as good as we can. As Mark Carney says, it can’t hurt. And it might just do some good.


Vikram Pandit’s idea is awful. The core issue is that Wall Street successfully lobbied regulators to end mark to market accounting and replace it with “fair value. Well since mark to market was ended bank stocks have moved in a very predictable fashion and for good reason, nobody trusts the valuation of bank balance sheets. If Vikram wants investors to have faith in his bank’s balance sheet he needs to value it with prices that reflect where the assets trade and can be sold.

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What happened at Chase’s credit-card collections arm?

Felix Salmon
Jan 11, 2012 15:11 UTC

Jeff Horwitz has an astonishing story about Chase’s credit-card collections efforts, which look as though they’re riddled with sloppy record-keeping and even possible fraud.

Consider Dade County, for instance, in Florida: Chase was filing claims at the rate of 640 per month in January. And then, after April — nothing. There were a lot of layoffs in New York, too:

In a sign that Chase acted with urgency, numerous regional collections teams were fired in mid-2011 at the order of the New York bank’s headquarters, according to people familiar with the events.

“Nobody told anybody anything. It was very traumatic,” says a former Chase attorney who asked to remain anonymous because of a nondisclosure agreement. “I think there were investigations by the [Office of the Comptroller of the Currency] and other government entities. If we’re not there, we can’t be interviewed.”

Now every bank has a choice when it comes to defaulted debts — it can chase those claims itself, or sell them on to a collections agency. Maybe Chase just decided that supporting an in-house team wasn’t worth it, and that it would outsource most everything, going forwards. Except, Horwitz couldn’t find any surrogate claims, either, in a recent search. And then the whole thing seems to be very closely related, at least in timing, to a lawsuit in Texas last spring:

Linda Almonte, a former team leader in Chase’s San Antonio credit card services division, accused the bank of firing her for objecting to the sale of $200 million in legal judgments obtained by bank attorneys. Half the accounts lacked adequate documentation of judgment and one-sixth listed the wrong amounts owed, Almonte claimed in a suit filed in U.S. District Court for the Western District of Texas.

In its response, Chase did not dispute inaccuracies in the debt balances and documentation. Instead, it said its sales agreement allowed for errors and thus was proper. “[T]he parties explicitly agreed that the judgments were purchased ‘as is’ and “with all faults,” Chase’s attorney wrote.

Chase was unsuccessful in getting the case dismissed and settled it on undisclosed terms last April; it ceased filing new consumer debt lawsuits in many states the same month.

While collections agencies often get the amount owed wrong, no one really stopped to ask whether banks themselves might not know how much they were owed. But that seems to have been the case here: Chase was selling faulty claims to collections agencies, and I’m sure those agencies didn’t suspect for a minute that the amounts owed were often incorrect. After all, the reason you’d buy claims from a bank “with all faults” is precisely because you don’t expect there to be many faults.

Already, the move seems to be having a negative effect on Chase’s collections:


Third-quarter collections, at $266 million, were down 35% from the first quarter, and haven’t been this low in a very long time. And if Chase is willing to give up anything like $100 million per quarter by effectively shutting down its collections operation, one can’t help but suspect that the legal or reputational risk of keeping that operation in place was truly enormous. I hope that American Banker encourages Horwitz to continue digging into this case: there could be a really big story here, somewhere.


The reason Chase lost on collections is because of it’s failure to work with the American people that lost income and jobs because of mortgage schemes. To add to that they burdened the people with double and triple payments. Then, they refuse to take any less or provide any payoff assistance! I have heard so many people say that the only company that would not allow them to make a lesser payment until they found work was Chase. So they could not pay off their owed debt. So I have no sympathy with a company like that!

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Nick Rizzo
Jan 11, 2012 05:08 UTC

The Mafia is now the number one bank in Italy, by one estimate — Reuters

A common misconception about what Reinhart and Rogoff mean for the US economy — BI

The “Iowa effect” and the county at the center of America’s farm boom — Reuters

The unsustainable history of US healthcare costs in 7 charts — Washington Post Wonkblog (duh)

The 36-year-old head of the best-performing hedge fund is posher than you — Bloomberg

And former MF Global employees had a Jon Corzine pinata party. Good for them — FINS


Isaac: Your faith is touching, but actual history shows that the one who raises the most money wins 94% of the time. This is why serious candidates spend so much of their time at fundraisers, and why only candidates polling under 5% waste time with realistic policy proposals.

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Adventures with job titles, Davos edition

Felix Salmon
Jan 11, 2012 00:17 UTC


This is a word cloud of the job titles of the 2,623 official delegates to the World Economic Forum in Davos this year. It’s pretty clear what’s going on: while the most important people at the forum are still the ministers and heads of state, there are only 24 ministers in all. (I’m not sure about the presidents, they get mixed up in all the executive vice-presidents and the like.) Meanwhile, there are 674 CEOs, from Mustafa Abdel-Wadood to Jaime Augusto Zobel de Ayala. And, of course, 490 Chairmen and Vice-Chairmen (but only two Global Chairmen).

There are also two Archbishops; 133 Founders; one Novelist; three Candidates; six Mayors; one Technical Support Superintendent; 109 Heads; three Hosts; six Artists; one Theorist; 11 Fellows; one Leader; six Economists; one Singer (not including Wyclef Jean, who’s coming as “Ambassador-at-Large of the Republic of Haiti”); one Curator; 27 Deans; one Executive Geek; four Consultants; two Activists; four Researchers; and four Global Heads.

And then, of course, there are the Media Leaders: 1 Journalist, 1 Blogger, 1 Photographer, 4 Writers, 18 Anchors, 19 Columnists, 19 Correspondents, 33 Editors-in-Chief, and 152 Editors of all stripes, including the Billionaires Editor at Bloomberg.

There are 40 instances of the word Global, 15 of International, and 0 of Local or Domestic. Asia appears 7 times; Africa 8; America 10; and Europe 19.

What all of this means, I cannot say. But I’m quite glad there’s only one Chief Change Officer, even though she does have one particularly wonderful line in her bio. After listing the various advisory boards she’s on, it just says “recipient of award”. All bios, surely, should say that.


Hmm, I really get the feeling that maybe there should be a way of including the inputs of a few people without titles as well at Davos. Or perhaps some of the Chief whatever’s should go and spend same time in the Occupy igloos. The Wisdom of Crowds etc???

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Can financial innovations help the eurozone?

Felix Salmon
Jan 10, 2012 22:13 UTC

For all that financial innovation has got itself a pretty bad name recently, there’s no shortage of people with bright ideas as to how to address the euro crisis. Robert Barro is one. He thinks the euro should be phased out entirely, and has a plan for how to do just that:

Germany could create a parallel currency—a new D-Mark, pegged at 1.0 to the euro. The German government would guarantee that holders of German government bonds could convert euro securities to new-D-mark instruments on a one-to-one basis up to some designated date, perhaps two years in the future. Private German contracts expressed in euros would switch to new-D-mark claims over the same period. The transition would likely feature a period in which the euro and new D-mark circulate as parallel currencies.

Other countries could follow a path toward reintroduction of their own currencies over a two-year period. For example, Italy could have a new lira at 1.0 to the euro. If all the euro-zone countries followed this course, the vanishing of the euro currency in 2014 would come to resemble the disappearance of the 11 separate European moneys in 2001.

Is this workable? It all depends, I think, on the degree to which contracts could and would be switched over to German law during the two-year period of parallel currencies. While many people might be happy to see their euros converted to Deutschmarks at a rate of one to one, many fewer would be happy to see their euros converted to lire at the same rate. Which means that there would have to be some serious coercion — and a lot of court cases, too — before people holding euro contracts in Italy were forced to see those contracts redenominated in lire.

So while Barro is correct that this approach would help solve the sovereign debt problem, by allowing the likes of Italy to simply print new money to pay off their debts, it would also be a legal nightmare, as every contract turned into a fight between creditor and debtor over which currency it should become. The creditors, of course, would all want the contract to become Deutschmarkized, while the debtors would probably all want their debts to be converted to drachmas at that one-to-one rate. Given that the whole point of European monetary union was that it would become a single monetary union, trying to break it up into 17 component parts is certain to be a legal and logistical nightmare.

Would it be easier, then, to come up with a clever way of keeping the eurozone together? Because Jed Graham has one of those: he calls it Safeguard bonds, which is actually an acronym: Sovereign Approvable First-loss EFSF-Guaranteed Upfront Automatically Recallable Debt.

Graham’s idea is not that easy to understand, so I called him up and asked him to explain it to me. Basically, if countries signed up for a fiscal austerity program, they would be allowed to issue a certain quantity of Safeguard bonds, which would be guaranteed by the EFSF. Then, if at any point they broke free of their fiscal constraints, they would have to pay down 10% of the bonds, immediately, in cash. If you held €1,000 in Italian Safeguard bonds and the country ended up borrowing too much money one year, then Italy would automatically pay you €100 for 10% of your holding, and you’d be left with €100 in cash and €900 in Safeguard bonds; failure to do so would constitute an event of default.

The idea is that this would act as a real fiscal constraint: if a country were to avail itself of this facility, it would then be in a position where any fiscal slippage would be very expensive — because it would have to borrow at a very high rate to make the bond payment. Meanwhile, the EFSF-guaranteed bonds would trade at much lower yields, because of that EFSF guarantee, and because, under Graham’s plan, the ECB would step up and guarantee all Safeguard bonds in the event that EFSF monies ran out.

Because Safeguard bonds would be long-dated and very cheap, countries would have every incentive to use them to fund their current deficits — and thereby lock in fiscal constraint for the next 30 years.

It’s an intriguing idea, but technically extremely difficult to put together — these things are a bit like reverse CoCo bonds, in that they actually punish the issuer when the issuer gets into trouble. And, of course, as such they’re extremely pro-cyclical, if they ever get triggered. If a country suffers a nasty recession and sees its tax revenues fall a lot, the Safeguard bonds would get triggered and it would have to find a lot of extra cash just when it could least afford it.

I’m reminded of a clever idea that the World Bank had in the between 1999 and 2001, called the Rolling Reinstatable Guarantee. It was meant to be a way for the countries that used it — Thailand, Argentina, and Colombia — to reduce their borrowing costs by putting in place a World Bank guarantee which would cover the next coupon payment. In the event of a default, the World Bank would have to make the coupon payment, the country would have to pay the World Bank (because the Bank is a preferred creditor), and then the guarantee would get reinstated. Rinse and repeat.

When put to the test in the Argentine default, however, the mechanism didn’t work. And in general whenever people attempt to solve deep economic problems with the application of clever financial ideas, they fail. The eurozone might break apart, or it might stay together. But either way, financial innovations like these are not going to make much of a difference.


Mr. Salmon is certainly correct to point out the danger of pro-cyclicality, but he regrettably (and unconstuctively) assumes that Safeguard bond triggers would have to be designed in a way that is extremely pro-cyclical, which would indeed be self-defeating.

As I note, the triggers built into the bond contracts would have to be designed with the utmost care in consultation with the IMF. The triggers (likely some combination of debt-to-GDP and fiscal balance) could be moving targets and would need to have some degree of flexibility built in based on economic conditions.

The technical challenge of setting appropriate triggers is not a minor one, but nor is it rocket science, and past experience such as the World Bank guarantee program Mr. Salmon references would inform the process.

The importance of the idea of Safeguard bonds is that it changes the discussion from a question of whether it is politically possible to provide an adequate lifeline to at-risk sovereigns to a focus on exactly how such a lifeline can be provided in a way that balances both political and cylical concerns.

Mr. Salmon also is off-base when he casts Safeguard bonds as an “attempt to solve deep economic problems with the application of clever financial ideas.”

Safeguard bonds address urgent political problems, not economic ones, though they could give troubled nations some breathing space to address their economic problems by bringing down interest costs while putting the monetary union on path toward a more workable fiscal union.

Mr. Salmon says casually: “The eurozone might break apart, or it might stay together.” Yes, but Safeguard bonds, by providing an answer to the political question of how the ECB can provide adequate (and somewhat proactive) support to stem the crisis, could avoid the potential of another nasty leg down and would improve the odds of long-run success.

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Checking accounts vs prepaid cards, Suze Orman edition

Felix Salmon
Jan 10, 2012 15:14 UTC

I still like Suze Orman’s Approved Card — but maybe not as much as I liked it yesterday morning. The main reason is an interview she gave to GOOD:

The majority of people who have these cards are called the unbanked and the underbanked. They do not have a bank account at all—unbanked—and even if they do have a bank account, what’s then happening is that they’re not using all the services that the bank is providing…

The 99 % movement, the Occupiers, is a very valid movement. It’s a movement that is very necessary. By the way, this card was developed for them, because this card which I have now created is a way for you to carry a little bank in your pocket with you. I’m actually asking the 99 percenters, ‘you best join me with this movement, people.’ If you want to keep your money in big banks, if you want to continue to get fees, if you want to continue to get all those things, you leave it right where it is. If you want to make a difference in your own life, how you use money, the accounting of money, everything about it, I am telling you put your money on me.

Orman, here, is destigmatizing the idea of being unbanked, which is very much in keeping with her “people first” approach to finance. If you’re going to provide a prepaid card to the unbanked, then it’s silly to lecture your customers on how they really should have a bank account instead.

But Orman goes further than that, to the point at which she’s actually encouraging the banked to become the unbanked — to close out their bank accounts and use the Approved Card as a checking-account alternative.

And I don’t think that’s a good idea.

Now I can see where Orman is coming from: the “move your money” campaign makes perfect sense in the context of big, heartless banks which charge enormous fees to people who can’t afford them. But I haven’t seen any impartial financial advice saying that the best place to move your money is a prepaid card, as opposed to a community bank or a credit union. The whole Suze Orman brand is centered on giving good financial advice — but Orman is helplessly conflicted now, and she’s giving advice which looks very much as though it’s mainly serving Suze Orman’s interests, rather than the general public’s. If she wants to make the case that people with bank accounts should become unbanked, she’s going to have to do so very carefully, spelling out her argument explicitly, because that advice is decidedly out of the mainstream.

On top of that, I also remembered the Amex prepaid card this morning — which looks in many ways even better than Orman’s offering, not least because it has no monthly fee. I get the feeling that they’re targeting different populations, but if you’re choosing between the two, and especially if you want a prepaid card to supplement your checking account rather than to replace it, then the Amex card, it seems to me, is probably the superior choice.

And there’s an Approved Card fee that I missed, yesterday, when I was writing about it. I said that the Approved Card would have to have great customer support; I didn’t notice that it charges $2 per call if you’re forced to call more than once in any given calendar month.

Jeremy Quittner of American Banker, covering Orman’s card launch, does nothing to assuage my concerns:

“Younger people are not interested in traditional checking accounts, they don’t write checks, and their need to write them has diminished, particularly with fees on checking accounts,” says Patricia Sahm, managing director of Auriemma Consulting, of New York…

Neither Suze Orman nor her representatives made themselves available to comment.

If Orman is serious when she says that “I couldn’t be more proud of this card if I tried,” then she should be extremely transparent and responsive when rolling out this product. And she should be very clear about whether she’s encouraging people in general, and young women in particular, to use her prepaid card rather than opening up a bank account.

I still think that people should have bank accounts. If you decline overdraft protection and just use the debit card which comes with your account, that behaves much like a prepaid card but has much more flexibility: for one thing, you can deposit cash into a bank account for free, while putting cash onto a debit card is non-trivial and costs money.

Do young people need checks? No — and there’s probably a case to be made for a new kind of financial product, a no-monthly-fee bank account without checks. Basically, what the Brits call a “current account”. Such an account would be at a competitive disadvantage with respect to Orman’s Approved Card, since a normal debit card is subject to Durbin limits on interchange fees, but prepaid debt cards are exempt from those limits, meaning that Orman can charge merchants a lot of money when they accept her card as payment. But from the perspective of what people like Orman like to call “financial wellness”, a bank account is, over the long term, surely always a Good Thing. And Orman shouldn’t be doing anything which discourages people from having one.


Have to give the media a big fat “f” on this. She’s being invited on all the shows to promote her card and making it all seem like she’s a non-profit and not self-promoter.

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Nick Rizzo
Jan 10, 2012 00:30 UTC

The Greek economy is so bad that thousands of Greeks are taking up farming — NYT

Shocker: doubts grow about the Greek debt restructuring — Spiegel

While Romney was in charge of Bain, 22% of investments failed within 8 years — WSJ

Government jobs have declined further under Obama than any other President — NYT Economix

About 400 Goldman partners could see their pay cut this year — WSJ

The mathematics of Lego — Wired

And nearly 10% of the companies at CES have “Shenzhen” in their names — NYT Gadgetwise


Not sure what the WSJ article is trying to say or what you are trying to infer. That only 80% of the companies Bain invested in didn’t fail? That it would have made more money if it hadn’t invested in investments that lost money? That some companies that Bain invested in eventually failed, sometimes long after Bain was involved?

The phraseology suggests some sort of scandal. Care to expand on what that might be?

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Felix Salmon smackdown watch, misperceptions edition

Felix Salmon
Jan 9, 2012 22:45 UTC

Apologies to John Sides and Jack Citrin for dismissing their science out of hand on my Tumblr: they really are careful and sophisticated researchers, and Sides is well within his rights to give me a good slap.

On the other hand, when Sides talks about “the substance of my remarks about innumeracy”, he doesn’t get me exactly right — which is hardly surprising, given that he was going on just two throwaway sentences.

My point about innumeracy was not that people will always guess wrong when asked to estimate something. In fact, there are some things — especially very salient variables like gas prices — which people know to within a high degree of accuracy. But that doesn’t make them numerate.

Instead, I had in mind two broader points. Firstly, everybody is bad at estimating small or large numbers: the difference between a millionth and a billionth, for instance, or the difference between a billion and a trillion, is much smaller, in the human mind, than the difference between 1 and 1,000. So when you ask people to estimate things which are small in reality but high in perceived salience, like the percentage of the US budget going on foreign aid or the proportion of immigrants in the population as a whole, then you’re always going to end up with an overestimate.

And more generally, numeracy is about much more than estimating proportions and percentages. It’s about comfort with numbers and number lines, and having an intuitive feel for how they work. If I ask you what two thirds of three quarters is, do you have to work it out, or do you pretty much know that it’s one half without having to think about it? In my experience there are two kinds of people in the world: the ones who have to think about it and will probably get it wrong, and the ones who don’t have to think about it and will probably get it right. That’s what I mean by numeracy.

And what about my second point, that “generally you can’t argue people out of positions that they weren’t argued into”? I still think that’s true. Sides gives a couple of carefully-chosen counterexamples, which show that in certain circumstances it can be possible to influence some people’s opinions on certain subjects, at least for a limited period of time, if you provide them with clear information about those subjects first. (This is a well-known fact in political circles, and has given rise to the phenomenon of “push-polling”.)

And in other research Brendan Nyhan has shown that if you present information in graphical form, it’s more effective than if you just present it verbally. Again, this comes as little surprise.

But the big picture base case is still unchanged — indeed, Nyhan says that his results “underscore the challenges faced by those who hope to reduce misperceptions among the public”. The general public doesn’t want its mind changed, and any changes which do happen are always going to happen slowly. Which is why presidential debates are almost never about who won the argument on any particular point, much as people like myself would love it if they were. The goal in such debates isn’t to win some kind of intellectual argument: it’s to make as many people as possible think that you think the same thing that they think. People will vote for the person they agree with — not the person with the sharpest wit or the cleverest arguments or the most apposite facts.

Wouldn’t you agree?


@Curmudgeon: And here he is speaking at the London School of Economics:
http://www2.lse.ac.uk/newsAndMedia/video AndAudio/channels/publicLecturesAndEvent s/player.aspx?id=1251

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