Cognitive dissonance

Was it just me, or does something in this NYTimes article on designing for the elderly not make sense?

Consumers with less-nimble fingers find the large knobs in Honda’s boxy Element easy to manipulate. But Honda did not design them for the arthritis stricken, but for young people who drive while wearing ski gloves, said a Honda spokesman, Chris Martin. The Element’s design, aimed at younger people, inadvertently attracted consumers across age groups.

An important future trend, said Eero Laansoo, a human factors engineer for Ford, will be the personalized car, which gives drivers the ability to change instrument fonts and colors to make gauges and dials easier to read.

Perhaps what they meant to say was

An important future trend, said Eero Laansoo, will be a well designed car, which has easy-to-read gauges and dials

Why anyone thinks that arthritis stricken Grannie will have any interested in determining whether the speedo is in blue Times 10, or pink Helvetica 12 is beyond me.

Pro-bum SF

It helps to have sympathetic judges.

Yet even as cities experiment with new approaches, those traditionally opposed to restrictions on panhandling are fighting back—notably, civil liberties groups and some homeless advocates, who oppose any actions that might criminalize conduct by even a minority of the homeless. In 2003, San Francisco residents overwhelmingly passed a ballot proposition authored by then-supervisor (and now mayor) Gavin Newsom outlawing in-your-face panhandling. But the ordinance has been ineffective because scores of volunteer lawyers, many from the city’s biggest law firms, have fought every citation. People cited for panhandling don’t even need to appear in court. They simply drop their citations in boxes at various advocacy groups, and the lawyers pick them up and appear in court, where judges have ruled that cops must file lengthy reports in order to get a conviction. The courts are dismissing about 85 percent of all tickets handed out under the ordinance, frustrating police, prosecutors, politicians, and residents who voted for it. “If you had been here several years ago, before the ordinance passed, and came back today, you wouldn’t see a difference in the level of panhandling. There’s as much as ever,” says supervisor Sean Elsbernd.

Traffic calming

I enjoyed this excellent profile of recently deceased traffic engineer, Hans Monderman. His claim to fame is removing traffic signs and mixing cars, bicyclists, and pedestrians, which forces everyone to pay more attention and results in both fewer collisions, and lower impact collisions. It's easy to fall into the "see, regulations are bad" or "we can rely on the good will of others" traps when reading about Monderman's idea, but I think the key graf is this:

As I watched the intricate social ballet that occurred as cars and bikes slowed to enter the circle (pedestrians were meant to cross at crosswalks placed a bit before the intersection), Monderman performed a favorite trick. He walked, backward and with eyes closed, into the Laweiplein. The traffic made its way around him. No one honked, he wasn’t struck. Instead of a binary, mechanistic process—stop, go—the movement of traffic and pedestrians in the circle felt human and organic.

A year after the change, the results of this “extreme makeover” were striking: Not only had congestion decreased in the intersection— buses spent less time waiting to get through, for ­example— but there were half as many accidents, even though total car traffic was up by a third. Students from a local engineering college who studied the intersection reported that both drivers and, unusually, cyclists were using signals— of the electronic or hand variety— more often. They also found, in surveys, that residents, despite the measurable increase in safety, perceived the place to be more dangerous. This was music to Monderman’s ears. If they had not felt less secure, he said, he “would have changed it immediately.” Emphasis mine.

When thinking about human behavior, it makes sense to understand what people perceive, which may be different from how things are, and will almost certainly be very different from how a removed third party thinks them to be. Traffic accidents are predominantly caused by people being inattentive. Increase the feeling of risk, and you increase the attention. I know when I am in traffic on my bike, I'm hyper-vigilant, and this has made me a better car driver.

No mystery

Paul Krugman does not understand why the world's economies are as coupled as they are.

I'd say it has something to do with the fact that the world runs on the dollar as a reserve currency, and when the dollar money supply grows, the world grows, and when it shrinks, the opposite.

This "linkage" across the globe does not connect all countries equally. For example, if Germany was slumping into depression, the US would not notice.

Nothing to do with the US

The gloriously apocalyptic Nouriel Roubini blames the US for the war between the US and Georgia.

While on military terms the US is still the only superpower even its military power is now restricted by imperial overstretch and its armed forces being bogged down in Iraq and Afghanistan; thus, Russia has now been able to flex its muscle in its Central Asian backyard and humiliated the US – not just Georgia – in the latest conflict on South Ossetia. For the Bush administration having supported Georgia by words only and show its impotence – or unwillingness - to support an ally in spite of the administration push to have Georgia join NATO shows the limits of the American power. The US is at fault for effectively letting Georgia start a reckless attack on South Ossetia.

So, the US is at fault both because it cannot stop Georgia from attacking Russia, and cannot stop Russia from retaliating against the Georgian attack. Got that?

Maybe, just maybe, the Russia/Georgia war has nothing to do with the US. Maybe it has something to do with the fact that Saakashvili is a hot-headed, militaristic leader, who signed a peace treaty with South Ossetia recently, and then decided to invade it anyway. It's not like countries in that area aren't known for being hot-headed and militaristic (Does no one remember Ajara? or Abashidze?)

And not only is Saakashvili militaristic and hot-headed, he's also incompetent. Why is the Roki Tunnel not a cooling pile of rubble? Did he honestly think that the US, or Europe, would send in troops to fight Russia? This guy should be literally or figuratively fired.

I don't mean to leave Putin out of the picture. Maybe another factor in this war is that Putin likes to fight when he can win, but he also likes to fight just for the hell of it.

Alt-A

Everything you wanted to know about Alt-A but were afraid to ask. I live in a heavily Alt-A area, so we'll see what happens to lending and prices as the credit bubble continues to deflate.

Being French is a full time job

This Bloomberg piece by Michael Lewis is hysterical. And yes, McVities digestives really are that good.

"We used to stock those," she said, sweetly, "but we kept running out, so we've stopped."

Right then I thought: Thatcherism is doomed. The English will never embrace efficiency, or money-making, or the-customer- is-always-right mindset, or any of those uneasy values that underpin modern capitalism.

There's must more, read the whole thing.

Jam tomorrow, crack today

Larry Summers, who was thrown out of Harvard for saying that men and women are different, and this difference may be biological, is now an MD at DE Shaw. Good for him. He's also on FT opining about how to allocate the $6T or so in losses that the US financial sector has racked up over the past 5 years, which is now the hot potato between banks, tax payers, and the Chinese. The article is long and tedious, but I'll do my best to make sense of it:

The point can be put in another way. Four vicious cycles are simultaneously under way: falling asset prices are forcing levered holders to sell, driving prices further down; losses at financial institutions are reducing their ability to finance investment, which in turn reduces asset values, causing further losses; the weakness of the financial system is reducing growth, which in turn weakens the financial system; and falling output is hitting employment, which in turn leads to reduced demand for output.

Without active efforts to interfere with these mechanisms, there can be no basis for confidence that the American economy will recover even in the medium term.

What Summers classifies as four vicious cycles, I characterize as one. $6T was destroyed from ~2003-2008, but those losses have only now been revealed. We cannot place these losses on those who caused them, because that would be the US financial system. The other candidates we could stick these losses to are the US taxpayer, and the Chinese, but the US taxpayer has no money left, and the Chinese are propping up what's left of the dollar.

At this point you would think that a system that renders itself insolvent ought to be rethought from the ground up, even if the ultimate solution is more minor, but Summers does not seem to agree.

Granting that US consumer spending grew more rapidly than gross domestic product over most of the past decade and that ultimately the consumption share of GDP will have to fall back to more normal levels, it is hard to see why necessary increases in saving require a protracted recession. Instead, declines in consumer spending and improvements in the government’s fiscal position should be sequenced to coincide with improvements in net exports and investment. Allowing consumer spending to spiral downwards without offsetting policy actions risks reducing investment and incomes in the US and transmitting the US slowdown to the rest of the world. More­over, even if the argument for supporting consumption at present were rejected, there would still be a strong argument for supporting investment in areas such as infrastructure, where there is no evidence of a glut and considerable evidence of shortfalls.

When both consumer and government consumption is over leveraged, and has to deleverage, both will shrink. There is no identity for "bubble" or "waste" in Summers' macro models. Incomes have already gone down through inflation, although the official CPI only calculated inflation net of inflation, and so shows no problems. Also, while I agree the US needs better infrastructure, it has outlawed all new construction. Try adding a runway to O'Hare. Or building a tower in Manhattan. Making anything new in the US is almost impossible, the environmental impact statement itself takes 5 years, and then you have the community activists. China and Dubai can build. California and New York no longer can.

As for the inflation question, constant vigilance is necessary. It is certainly true that product price inflation has ticked upwards, though this seems to be heavily commodity-related.

Thank god! At least higher prices have confined themselves to stuff we use to build everything. Finally, a ray of light.

In an environment of rising unemployment, greater worker insecurity and increasing global competition, there are likely to be substantial pressures militating against any rapid increase in wages in the big industrial economies. Without rapid increases in labour costs, which are by far the largest component of production costs, it is hard to see how higher rates of inflation can be entrenched.

And we have a second ray of light! A weak job market will keep wages from rising. We are fortunate to keep consumer spending from falling through stagnant wages and higher prices.

In thinking about fiscal policy, it is essential to consider both near and long term. For the near term, larger deficits are likely to be potent in stimulating demand, especially in the context of an economy where there are constraints on the ability to lend and borrow. This is especially the case when new spending is directed at addressing the “repressed deficit” associated with the failure to maintain an adequate infrastructure.

Success in using fiscal policy will depend on also taking concrete steps that reduce projected deficits in the medium to long term. The enactment of new permanent measures, such as the extension of the 2001 tax cuts, without means to pay for them would be counterproductive. Conversely, measures that pointed to long-term fiscal savings would reinforce fiscal stimulus.

Fantastic! So transferring money from A to B, and burning 30% of it through deadweight loss in the process is a winner. But long term, we must balance the budget. I've heard this song before, and am glad that we have not reached the "balance the budget" phase of the plan, since that sounds unpleasant.

To date the focus of public policy has been on the extension of credit to banks and other financial institutions by the Federal Reserve so as to ensure their liquidity. This strategy is appropriate but may be reaching its limits. Where the problems a financial institution faces are of confidence or liquidity, lending can be highly efficacious. When the problems are of underlying solvency and the constraint on lending is a lack of capital, lending is not an availing strategy. It is necessary, at least on a contingency basis, to plan policy responses to such problems.

But what is the difference between insolvent and liquidity constrained? I used to think I knew, but I no longer do. If "insolvent" means "no one will lend to you" and "liquidity constrained" means someone will, then this becomes a political definition -- will the US taxpayer step up for you or not? The large banks are in good shape here. Detroit automakers I'm not so sure about.

Third, there is the question of whether government will need to find a way to recapitalise institutions through taking some kind of preferred interest, as ultimately proved necessary in the US in the 1930s and Japan in the 1990s. This is obviously a big step that one wants to avoid if possible. But in the absence of any framework for the government infusing capital, there is the danger that liabilities will simply be guaranteed de facto or de jure with no other change made, creating problems down the road. Government involvement in recapitalising financial institutions is like devaluation: a very unattractive last resort. Delay is tempting, but it can be enormously costly.

I'd go for it. Just step in and nationalize everything. It's quick, it's honest, and it's inevitable.

More transparency, please

This Bloomberg story suggests that the Chinese called former Goldman Sachs CEO, and current Treasury Secretary Henry Paulson to ask if the US Government would back up Fannie Mae and Freddie Mac. Fannie and Freddie's government guarantee has always been informal, so I guess Paulson was asked to make things a little more formal. He dutifully did so, and the two entities have full access to the Federal printing presses.

If the US reneged on Agency paper, it would be like it reneging on it's own sovereign debt (which may happen, in due course). That's the thing about privatizing gains and socializing losses -- there's something in it for everyone.

Political chic

I have mixed feelings about this letter regarding the Milton Friedman institute at my alma mater, U Chicago. One the one hand, it's an excellent letter. It is clear, concise, and calls drivel, drivel.

On the other hand, it's unfortunate to see that U Chicago is home to so many Ogres.

What is inflation?

Paul Krugman seems to think that inflation is a change in general price levels. I believed the same thing, but I've found that it's an unhelpful way to think about inflation. Changes in general price levels are, in fact, a composite of two factors: 1) dilution (or concentration) of the money supply, and 2) other factors, such as supply and demand, that genuinely change prices. When Milton Friedman said that "inflation is always a monetary phenomenon" he was talking about 1.

The US is currently experience a dramatic reduction in money supply, as credit and investments made in the past 8 years have been revealed to be worthless. The US has too many strip malls, office buildings, and houses. The prices for houses remain far in excess of their worth from a DCF perspective, and the non-residential real estate crash is just beginning. These were loser projects, and their existence is the same as a pile of dollar bills being set on fire. Money supply is shrinking.

On the other hand, the Fed is printing money like there is no tomorrow, and for the fiat dollar, there may not be. Taking on the huge liabilities of Fannie Mae and Freddie Mac, taking on investment banking toxic waste, running large deficits, essentially all increase the money supply and give that new money to investment banks and the housing Agencies. This money is being taken from the 3 or 4 American chumps who actually save money, and the Chinese.

So, is the net effect of this an increase or decrease in the money supply? Is there inflation or deflation? And how does this impact the latest bubble we see in commodity prices?

Suppose, just suppose, that there is someone out there who is not a currency speculator, and just wants a safe place to store value. I know, it's a crazy idea, but work with me here. Suppose that person decides that the US financial system, where the Fed prints dollars and gives it to banks who get rich wasting it, no longer represent a good store of value. Where do you go next? Do oil or gold sound like better bets?

Paul Krugman thinks that the commodity bubbles are unrelated to dollar dilution, and so the Fed should continue printing like there is no tomorrow. I think Paul is wrong -- the commodity bubbles are directly related to dollar dilution, and continuing to print money will just make things worse. I don't think wages in the US will rise, I think they will continue to fall in relative terms, and the US will be locked into a long term deflation trap, like Japan.