Greek contagion

Since yesterday, news reports are full of comments like this:
Many economists fear that if Greece exits the euro, it could lead to financial contagion, as investors and ordinary bank depositors in other eurozone countries may fear that their own government will follow suit.

What does this mean? Are the Spanish looking to the Greeks as a model? That would be really weird. Esos griegos tenían un gran éxito con su incumplimiento de las deudasHagámos lo mismo. Or is it a matter of queueing up? Greece has first dibs on default, and Spain just has to wait its turn. Or is this setting up a resonance in a Sheldrakian morphic field of default patterns? Perhaps we are witnessing the final consummation of the marriage of 21st century mathematics and 20th century pseudoscience that finance has been tending toward for the past three decades (at least).

Surely the impact on investors will depend in part on the effects seen from a Greek euro withdrawal. At the very least If we think back to recent history, presumably any reasonable person would have thought, after the Lehman Brothers shit-storm, that the US financial authorities would be less likely to allow another similar bankruptcy to proceed. So, if Greece leaves the euro in a ball of flames, Spain will be unlikely to see it as a model. And if Greece’s exit from the euro isn’t so terrible then… maybe it’s just not so terrible.

Consent of the governed

Speaking at the recent Conservative party conference, a government minister has said that the mass arrests and prison sentences for decent citizens who chose to rob shops and set buildings ablaze in London and other cities during a recent wave of looting, had brought the law into disrepute.

Our laws against arson were introduced centuries ago, when a typical London building was built of wood. There have been huge advances in fire-fighting technology since then. Our blanket ban on arson has been discredited, because it failed to keep up with these changes. And what about “vandalism”? Should the law really be fixated on the practices of wandering bands of hairy Germanic tribesmen? Can anyone genuinely say he thinks our laws against burglary are fit for a 21st century economy? By allowing a portion of the shops’ overpriced merchandise go up in flames, and another portion to the informal vending sector, where it is substantially marked down, we bring thousands of decent firebugs and thrifty shoppers back within the law, restoring the legitimacy of the penal system, improving productivity and delivering hundreds of millions of pounds of stimulus that the economy sorely needs.

No, sorry, I got that wrong. The correct quote is:

The 70mph motorway speed limit has become “discredited” and resulted in millions of motorists breaking the law, Transport Secretary Philip Hammond said today as he confirmed plans to consult on allowing it to rise to 80mph.

Mr Hammond told the Conservative Party conference the move would “restore the legitimacy” of the system and benefit the economy by “hundreds of millions of pounds”.

He said: “The limit that was introduced way back in 1965 – when the typical family car was a Ford Anglia.”

Mr Hammond said he owned an Anglia, as did Baroness Thatcher when she became an MP, but added: “Things have changed quite a bit since then. There have been huge advances in car technology, road deaths have been reduced by three-quarters.

“Meanwhile, the 70mph limit has been discredited because it failed to keep up with these changes – with almost half of all motorists exceeding it, bringing the law into disrepute.

“So I will consult on increasing the limit on motorways to 80 mph, bringing millions of decent motorists back within the law, restoring the legitimacy of the speed limit system, speeding up journey times, improving productivity and delivering hundreds of millions ofpounds of net economic benefits.”

We should start making a list. Laws that need to be ruthlessly enforced when they are disobeyed en masse: Arson, burglary, “theft by finding”, receiving stolen goods. Laws that need to be abolished when they are disobeyed en masse: Tax laws, speed limits. Hmmm. What’s the pattern? Prosperum ac felix scelus virtus vocatur. [Seneca. A successful and happy crime gets to be called virtue.]

Of course, Monty Python nailed it while I was still a toddler. In this case, the Mouse Sketch:

Make a thing illegal and it acquires a mystique. Look at arson – I mean, how many of us can honestly say that at one time or another he hasn’t set fire to some great public building? I know I have. The only way to bring the crime figures down is to reduce the number of offences.

British riots, further reflections

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From the BBC web site:

Home Secretary Theresa May has asked the Metropolitan Police to check whether banning theft and arson is an effective strategy for preventing crime. Some criminologists have claimed that widespread looting and arson mean the laws are not having the desired effect. Speaking on BBC Radio 4’s Today programme, Mrs May hinted that the riot laws remained under review. She added: “There’s not much point in having laws that are inefficient.” She suggested that the funds currently spent on policing might be better spent on reconstruction.

No, sorry, I got that wrong. It wasn’t the Home Secretary, it was the Chancellor of the Exchequer. The correct quote is:

Chancellor George Osborne has asked the Inland Revenue to check whether the 50p top rate of income tax is actually making money for the government. Some economists have claimed that tax avoidance and evasion mean the rate is raising less income than expected. Speaking on BBC Radio 4’s Today programme, Mr Osborne hinted that the 50p rate remained under review. He added: “There’s not much point in having taxes that are very economically inefficient.”

Continue reading “British riots, further reflections”

On the downgrade

Further reflections on non-transitive folk probability

Continuing my thoughts about zero-one probability from here, I come to the recent decision of Standard & Poor’s to lower their rating of US treasury debt. There are plenty of reasons to doubt their judgement,  both because they’ve been absurdly wrong in the past (subprime mortgage backed securities were AAA, but treasury bills are risky?), because they can’t read budget estimates or can’t do basic arithmetic, because they are trying to project political trends, which they surely know even less about than about arithmetic, or because the people who work there are generally known to be pretty dim. But from a probabilist’s point of view what’s strange is the timing. Whatever you may think of the recent deal to avoid the US defaulting on its debt, it did avoid defaulting on its debt. Surely the likelihood of a default went down after the deal was passed. So why is the credit rating lower this week than it was last week? Now, this is all perfectly consistent with the view that S&P is not actually making a prediction of future default probability, but simply seeking the best opportunity to promote its wares. Certainly, the way they operate is not the like someone trying to give what will be perceived as neutral advice; they act more like central bankers, timing their announcements to try to move markets and (above all) seem relevant. They’re reminiscent of the folktale of the rooster who threatens to withhold his crowing, which inevitably will forestall the sun rise. The other animals plead with him to relent, but it’s a threat that only works as long as the rooster is modest enough to recognise that he can’t hold out forever. In the case of the US treasury bonds, S&P held out, and still the sun rose.

But there is something about their approach that seems to make sense to intelligent people, and not purely idiosyncratic. I’m reminded of Tversky’s famous conjunction fallacy, with studies seeming to show that people’s everyday probability intuitions don’t necessary satisfy the apparently inevitable law of conjunction: The probability of A or B must be bigger than the probability of A and the probability of B. Here we see intuitions of probability that don’t seem to satisfy the law of total expectation: If  are possible future states of the world, and is the probability of event A conditional on  happening, then the probability of event A now must be some kind of average of these conditional probabilities.

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British riots

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The well-known history of enclosure riots in 16th and 17th century England fascinates above all for their orderliness. Describing one riot in early Jacobean Bedfordshire, V. Magagna writes “The assembly that plotted the riot met in the church[…] The leader of the riot was the village constable.”

I thought of this when I read the following on the BBC web site, on the third day of riots and looting throughout London:

“Full scale looting going on at Clarence convenience store right by the burning car on clarence road. “One by one” shouts one man as people crowd round to get into the shop, whose entrance has been smashed in. Women calling: can you get me a magazine? Other people asking for alcohol.”

One by one. That’s British looting for you. They’ll pillage, and they’ll rampage, and they’ll kill, but they’ll queue up in an orderly fashion to do it… particularly if they have hopes of being rewarded with alcohol.

“Petitioning implies a belief in a natural order of society protecting the interests of rich and poor alike, which the authorities can be expected to enforce once the misdeeds of individuals are brought to their notice. Even riot can be seen in this light, for the intention was usually to compell authority to maintain a traditional order, rather than to overturn it.” Underdown, 1985, p. 118

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Playing Euro Survivor

It’s starting to look like we’re all going to be entertained this summer watching the monetary reality show, Euro Survivor: Who can be the last country left in the Euro? Greece has already been voted off the island, even if it hasn’t left yet. Ireland and the Iberians are looking decidedly unpopular, and Italy seems headed downhill as well. (I never understood why Italy was not on financial deathwatch. Is such a massive default just too horrible to contemplate? Or perhaps people just assumed Italy couldn’t possibly print lire until Berlusconi has arranged adequate shell companies to siphon the printing contracts discretely into his own syndicate.) My money is on Luxembourg. It seems fair that they should get to keep the Euro for themselves, since I can’t remember what their currency was called before the Euro. Belgium may end up with two new currencies. (But what’s the first prize? Maybe they get the rump European Central Bank, and a free set of dominoes.)
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Credit and Credibility

Are banks crazy or a cartel?

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When a government (let us say, in Athens) could possibly renege on promises made to banks who loaned them money or bought their bonds, which that government is unable to fulfill without draconian cuts to public services, all right-thinking people attack the feckless politicians and threaten a collapse of confidence and the world economy. This is a DEFAULT! Other governments and the IMF might jump in to pour money into the state coffers, on the condition that they flow out the other end into the investors’ pockets.

But when a government (could be in Athens, or in London, or for that matter Madison, Wisconsin) has made promises of pensions to government employees, but has failed to fund them adequately, it is short-sighted and greedy for these civil servants to insist on these promises being honoured.

Why is a default such a terrible thing? Because, they say, if the country defaults on its debts it will be shut out of the credit markets. Hmmm. Let’s suppose it is true. Why? Suppose you own a bank, and your thinking of lending to one of two countries, let’s call one of them Piigsia and the other Sameria. Both are heavily indebted. Piigsia introduces crushing austerity measures, while Sameria repudiates its sovereign debt. Which of those countries would you rather loan your bank’s money to? The one that’s shown a great willingness to pay off its debts but is financially crushed, or the one who may be more likely to try to weasel out of its debts, but is eminently capable of paying. Solvency is not merely (or even primarily) a state of mind. I mean, what good is it to have the current government express a willingness to pay off its debts, knowing that it’s likely to be punished by voters for these “good” intentions? Maybe they just don’t want to be serial defaulters, so having avoided defaulting this time will encourage them to default on the next batch of loans.

As for Sameria, it sucks for the other banks that have lost their money, but why should I give up a chance to make a good profit for the sake of punishing Sameria for hosing my competitors? In fact, in a competitive market, why shouldn’t I be happy that my competitors have made a loss, and just try to get better conditions for my loan?

Continue reading “Credit and Credibility”

New Year Austerity Plan

A Press Release from the Ministry for Calendars, Clocks, and the Underclass

Deputy minister for Temporal Affairs Nigel Thwart (Lib-Dem) is releasing today guidelines for the coalition’s plan to save £120 billion by cancelling the new year. ‘We found that 1983 was still in excellent condition. Military chronologists have refurbished the year and put it into place to be serving us again starting shortly after 23:59 GMT on 31/12/2010. The year has functioned flawlessly in intensive testing, and we are confident that it will meet all the nation’s chronological needs through December, if not longer. We do recommend early bedtimes, though, to avoid overstressing the slightly threadbare post-midnight hours.”We reject claims of some malcontents that the Liberal Democrats have violated the pledge famously signed in blood* by Nick Clegg and other party leaders to “move the country into the future”. This is a coalition government, and we cannot expect to govern as we would like to had we a majority. We are most proud of our party’s influence to moderate the initial Conservative Party plan to return to 1940, which is currently owned by the Smithsonian Institute in Washington. While this year would have been substantially cheaper, the Liberal Democrats maintain that such a regressive move would blatantly contradict our election manifesto pledge.’The year will be sold to a consortium of private investors, and leased back by the Crown, leaving the taxpayers with substantial savings.’We are confident that it will still be possible to modify the year to introduce a referendum on election reform.’
* Mr Clegg’s spokescaitiff has emphasised that it was not the Deputy Prime Minister’s own blood on the signature.

(by DS and JB)

Obesity and education standards

Applying lessons from education reform to win the fight agains obesity

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recent article in the British Medical Journal reports that obesity costs the UK £2 billion in direct and indirect costs. 22% of the British population is thought to be obese, defined as a body mass index (BMI) of 30 or higher; some experts predict that this cost could rise to £45 billion by 2050. The problem of rising obesity, with its multifarious costs, has been described as intractable. These defeatist sentiments ignore the lessons of some of the great successes of social policy, and how seemingly intractable problems can melt away, when attacked with the right combination of zeal and creative new thinking. Consider the progress in state education over the past two decades, and particularly in the 13 years of the Labour government, after Tony Blair announced his three top priorities in the election campaign to be “education, education, education”.

Back in the 1980s, doomsayers were lamenting a collapse in UK secondary education, with the dissolution of the grammar schools. Today, A-level marks are the highest they have ever been, which must surely reflect a huge increase in British school children’s educational attainment. Education experts have expressed amazement at the educational progress over just the decade from 1997 to 2006: In 1997 only 87.2% of A-level (age 18) marks were passes, while by 2006 that had risen to a stunning 97.2%. The fraction of A grades (the highest possible) rose from 16% to 24%. Similar progress was recorded in the GCSE performance (age 16). The percentage of state school applicants admitted to Oxford rose in that time from less than half to 55%, which can only mean that these pupils are learning more, compared with their counterparts at expensive independent schools.

The key insight came from the Prime Minister’s Office for Post-Structuralist Policy Initiatives (PMOP-SPI, pronounced mop spy, the first P being silent), which recognised, in the words of director Pauline deVrouw, “Standards were created for man, not man for the standards. Therefore the Commons is lord over the standards.” This has been extended in the brilliant new Department of Health white paper “Health consequences of the  standard kilogram”. “Obesity,” states the white paper’s forthright preamble, “has many causes, but ultimately it is a matter of centimetres and kilograms. The standard kilogram, although it was manufactured in London, is now kept in a vault in Paris, indifferent to the particular British mensuration needs.” The paper goes on to explain how just a 10% increase in the size of the kilogram  — easily achievable with current technology, and barely even noticeable to the casual observer — would produce a 9% reduction in BMI, and thus reduce the number of obese Britons and the attendant costs by more than half. This approach is found to be vastly cheaper than the next most cost effective plan for reducing obesity, a complicated scheme which involves citizens exercising more and eating less junk. (What costs do accrue — mainly new scales — would be borne by the private sector, and would, in the present economic climate, be useful as an economic stimulus.)

For all that the French call their jealously guarded kilogram “Le Grand K“, the fact is that the kilogram is underweight. Not only has it failed to keep pace with the increasing demands that our population puts on the scale, it has apparently been shrinking even in absolute terms. According to one estimate, the French have managed to misplace 0.005% of Le Grand K (50 micrograms) in its first century. That may not sound like much, but a 0.005% reduction in the size of a kilogram leads inexorably to a 0.005% increase in BMI for the entire population. From this we may infer that there are about 3000 British adults who are currently obese, who would not be obese had the kilogram not diminished.*

Just as Britain’s leaders had the wisdom to withdraw from its fixed exchange rates in the 1990s, and to avoid the unworkable European monetary union, so we need politicians intrepid enough to withdraw from our archaic pessantory union with France. Like the European Central Bank, maintaining its hard-money policies which suit powerhouse Germany and impoverish weaker economies like Ireland and Greece, the myopic French small-kilogram policy, while perhaps acceptable to gallic lightweights, is having unacceptable consequences on this side of the Channel. How could we expect the same kilogram to suit a nation of snail-peckers and a nation of haggis-and-roast-beef-chompers? We are still calculating BMI with a kilogram that was milled in the era of top hats and whale-bone corsets. It’s time to repatriate the kilogram, and take control of the Britain’s weight problem, just as we have set British education on its unstoppable upward trajectory.

* These are the individuals with BMI currently between 30.000 and 30.0015.

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What’s a queen for?

One really peculiar thing that immigrants from republican lands need to adjust to in the UK, is that they actually take this monarch thing seriously. Not in the sense that people regularly drink toasts to the Queen, or speculate about fine points of the order of succession, but that people genuinely think it a reasonable constitution order that the head of state should be selected on the basis that her father held a similar position many decades ago, and that her son (and grandson) should be presumed to take on the job after her demise. Having always lived in republics (except for a brief stint in the Netherlands) kings and queens seemed to me figures from fairy tales and history. I knew that there are people called kings and queens existing in the modern world, but that always seemed an unreal and somewhat ridiculous anachronism, like the toga party in Animal House, or hobby jousters. But when the most recent elections descended into chaos, the experts were clear that it would be the Queen’s prerogative (after consultation with her advisors) to decide which politician should be “invited” to form a government. Again and again the Prince of Wales makes scandals by interfering in London city planning, among other functions of government. They fuss and fume about the prince overstepping his constitutional bounds, but no one would think of telling the prince to just go fuck himself, and treat his “black spider letters” with the same consideration they would give to the letters of any citizen — is he even a citizen?

Which leads to my proposal, which I hope will be taken seriously, given the depth of the current financial crisis in Britain: A lottery for the right to be the next monarch. I suspect that very many people would be willing to stump up a few pounds for a shot, and quite a few might pay several millions for a really substantial chance. The winner of the lottery has exactly the same chance of having the personal qualities required of the head of state as the monarch selected by the genetic lottery currently in force. We might have to eliminate certain requirements of the job, like weekly meetings with the prime minister, to make it more attractive. They could keep the post until death, and then it would revert to the state for a future lottery.

Now, this may seem like a huge constitutional change, but when I read about the British Constitution, the only argument that ever seems to be presented for the hereditary principle is that it saves the British the nuisance of having to vote for their head of state, or of having some washed up old politician appointed head of state by his old confederates. I think it should be clear that my scheme also avoids these problems, as well as complying with all EU directives.

I’m sure the professionals can work out some good advertising slogans (“Paris is worth a mass, but London is worth a pound”; “The new Magna Carta” — stamped on a mock-up lottery ticket; “It’s never too late to have a royal birth”?)maybe a jingle or two, and a legal and constitutional framework.

All British institutions have submitted to the exigencies of finance, except the monarchy. It’s about time the Queen gets with the program and moves to the City.