Monday, April 30, 2007

On a roll

Burton Malkiel in Monday's WSJ ("Irrational Complacency") takes investors on a tour of the upsides and the downsides of today's economic outlook. He applies common sense economic thinking and his assessments are all plausible. He concludes by tipping towards the optimistic.

But Malkiel also notes that his advice is helpful up to a point because "... new highs in the market should induce investors to to review their asset allocations. If the rising stock market has pushed your allocations of equities well above the level consistent with your risk tolerances, it make sense to consider rebalancing."

In The Black Swan, Nassim Nicholas Taleb warns us that we are likely to make a hash of it because we treat uncertainty by invoking distributions that are too simple and with tails much too thin. Taleb's latest book (reviewed in Sunday's NY Times) goes over much the same ground as his earlier Fooled by Randomness and I liked the first one much more.

But reading either, one has to wonder how we survive and prosper. We have either evolved better hedging plans and devices than the author would accept or we are simply not that good and just on a roll.

Friday, April 27, 2007


In the urban planning field, "economic development" is all about place-based rehabilitation policies. There is even a small debate about the merits of people-based vs. place-based interventions. But just as there are reasons to take static income distribution data with a a lump of salt, the same applies to place-based analysis.

It is people that matter. And they move in and out of income quintiles just as they move in and out of neighborhoods. In fact, if some place-based policy were to have a positive effect, we might never know it because the positively impacted indivivudals woudl be likely to have left the area.

This morning's LA Times includes "South L.A.'s growing pain ... Plans to revive the area after the 1992 riots have been largely unfulfilled." (Yes, they used the r-word. Lefty KPCC-FM referred to "economic referendum" in their coverage, this morning. "Insurrection", "rebellion" and other colorful descriptors have been used over the years.)

The Times piece does note that many immigrants have moved into the area. Well, most of these are poor when they arrive so that tell us little. The thrust of the piece and much of the discussion taking place on this anniversary is all about "neglect" and all sorts of other unfairness. Many will pick sides in a debate that boils down to more vs. improved socialism.

There is little about high crime and low skills. Occidental College Prof. Robert Gottlieb is quoted as saying, "We need to have a much more aggressive role in developing jobs, including public-private partnerships and new industry incubators."

The only job development idea that works is better skills. But that would be people-based, probably in the form of school vouchers and an end to monopoly government schools. But that is still too exotic for the concerned and the high-minded.

Wednesday, April 25, 2007


Democracy, we know, has its problems. Jonah Goldberg wrote about the ignorance of the crowd (in yesterday's LA Times, excerpted below).

Yes, there is Wisdom of the Crowds, existing side-by-side with ignorance of the crowd. Bright people can be ignorant people and some of each can be wise people.

But Robert Metcalfe made my day with his "It's All In Your Head: The latest super-computer is way faster than the human brain. But guess which is smarter?" in the May 7 Forbes. For starters, humans conceive, build and operate super-computers. Along the way, they become smarter while at the same time vastly extending the reach and scope of their capabilities and endeavors.

We live in a world where incredible accomplishment exists side-by-side with bottomless ignorance and great potential foregone. Is the glass half-full? I am happy to (still) believe that it is.
HUGE NUMBERS of Americans don't know jack about their
government or politics. According to a Pew Research Center survey released
last week, 31% of Americans don't know who the vice president is, fewer than
half are aware that Nancy Pelosi is the speaker of the House, a mere 29% can
identify "Scooter" Libby as the convicted former chief of staff of the vice
president, and only 15% can name Harry Reid when asked who is the Senate
majority leader.

Also last week, a Washington Post-ABC News poll found that
two-thirds of Americans believe that Atty. Gen. Alberto R. Gonzales' firing of
eight U.S. attorneys was "politically motivated."

So, we are supposed to believe that two-thirds of Americans
have studied the details of the U.S. attorney firings and come to an informed
conclusion that they were politically motivated — even when Senate Democrats
agree that there is no actual evidence that Gonzales did anything improper. Are
these the same people who couldn't pick Pelosi out of a lineup? Or the 85% who
couldn't name the Senate majority leader? Are we to imagine that the 31% of the
electorate who still — after seven years of headlines and demonization — can't
identify the vice president of the United States nonetheless have a studied
opinion on the firing of New Mexico U.S. Atty. David Iglesias?

Oh, before we proceed, let me make clear: This isn't a column
defending Gonzales. This administration should have long ago sent him out of the
bunker for a coffee-and-doughnut run and then changed the locks. No, this is a
column about how confused and at times idiotic the United States is about polls,
public opinion and, well, democracy itself. We all love to tout the glories of
democracy and denounce politicians who just follow the polls. Well, guess which
politicians follow the polls? The popular ones, that's who. And guess why:
Because the popular ones get elected. Bucking public opinion is the quickest way
for a politician to expedite his or her transition to the private sector.

More to the point, Americans — God bless 'em — are often quite
ignorant about the stuff politicians and pundits think matters most. They may
know piles about their own professions, hobbies and personal interests, but when
it comes to basic civics, they just get their clocks cleaned on Fox's "Are You
Smarter Than a 5th Grader?" Though examples are depressingly unnecessary, here
are two of my favorites over the years. In 1987, 45% of adult respondents to one
survey answered that the phrase "from each according to his ability, to each
according to his needs" was in the Constitution (in fact, it's a quote from Karl
Marx). Then, in 1991, an American Bar Assn. study reported that a third of
Americans did not know what the Bill of Rights was.

Tuesday, April 24, 2007

Costly diversions

Yesterday's blog cited Jonathan Kellerman's interesting analysis of deinstitutionalization. Kellerman had some unkind things to say about Dr. Thomas Szasz. Now Dan Klein points me to Szasz's take on psychiatry and the VT shooter.

Szasz writes that "dangerousness is not a disease. ... To be sure, dangerousness is a problem, but it is not a medical problem. It is a human problem -- a moral, legal, economic, social, and political problem -- a problem for everyone in the dangerous person's social ambit."

I get a little antsy when "counseling", "help", "therapy" are discussed in the popular discourse in almost the same tones as going to Midas for a muffler. The VT shooting may have been avoidable and, in hindsight, it is pleasant to think that a timely "intervention" could have saved lives. But all we have are stories that are used as convenient simplifications. As in any field, misdiagnoses are costly diversions.

Monday, April 23, 2007

Lethal coalition

Of what I have read on the Virginia Tech tragedy, I like Jonathan Kellerman's op-ed (excerpt below, from today's WSJ ) best. A "confederation of progressives, libertarians and fiscal conservatives" formed in California in the 1970s and shut down asylums.

Baptists and bootleggers often find common cause to make bad public policy. Prohibition in the U.S. lasted 13 years and exacted huge costs.

Deinstitutionalization trumped selective and targeted reforms. The results include mass murders as well as the loss of most big-city public spaces. Many in my field are in love with the idea of more "open space" but say nothing about how so many common areas have become uninviting -- to say the least. And further retreat into private enclaves elicits all sorts of self-righteous hectoring (e.g. Robert Reich's "secession of the successful", Robert Putnam's Bowling Alone) which neatly avoids the real issue.

Bedlam Revisited


I was in graduate school, studying clinical psychology
when they began shutting down the asylums. The place was California, the time
was the early 1970s, and "they" were an unprecedented confederation of
progressives, libertarians and fiscal conservatives.

From the left marched battalions of self-styled mental health
"liberation activists" steeped in the writings of Scottish psychiatrist R.D.
Laing. Though he denied being opposed to his own profession, Laing's notion that
madness could be a reasonable reaction to an unjust society, or even a vehicle
for spiritual transformation, helped fuel the anti-psychiatry movement of the
post Love-In era. The most radical of Laingians carried revisionism one step
further: Not only wasn't psychosis a bad thing, it was evidence of a superior
level of consciousness.

The libertarians were fueled by Thomas Szasz, an iconoclastic
psychiatrist who was, and remains, an outspoken foe of virtually every aspect of
his chosen specialty. Hungarian-born in 1920, and witness to vicious state
exploitation of medical practice by the Nazis and the communists, Dr. Szasz
pushed an absolutist dogma of individual choice, finding ready converts among
members of the Do-Your-Own-Thing generation. Though his early essays offered
much-needed critiques of the Orwellian nightmares that can result when autocracy
corrupts health care, Dr. Szasz devolved into something of a psychiatric
Flat-Earther, insisting in the face of mounting contrary evidence that mental
illness simply does not exist. Currently, he serves on a commission, cofounded
with the Church of Scientology, that purports to investigate human rights
violations perpetrated by mental health professionals.

Accepting the arguments of the liberationists and the
libertarians at face value led to the assertion that no matter how bizarre,
disabling or life-threatening a person's hallucinations and delusions,
involuntary treatment was never called for. And to the assertion that violation
of that premise created yet another class of political

While moderate members of the anti-asylum movement were
willing to concede that psychosis might pose difficulties for a few individuals,
they insisted that society had no more right to force psychoactive drugs upon
mental patients than it did to hold down diabetics for insulin injections. If
treatment was to be offered, it needed to be consensually contracted between
caregivers and care-recipients on an outpatient basis. That fit perfectly with
the sensibilities of conservative scrooges searching for ways to cut the state
budget, and all too happy to dismantle a massive state hospital system
denigrated as inefficient at best and inhumane at worst. The replacement chosen
was an untested, less costly treatment model: the community mental

How nice that everyone agreed.

Everyone, that was, except for many families of hospitalized,
hopelessly-decompensated, often self-destructive and occasionally violent
psychotics. They'd lived with the reality of severe mental illness and wondered
what "freedom" would bring. But there weren't enough of these families to

Were the state hospitals wretched nightmare-palaces straight
out of "One Flew Over the Cuckoo's Nest"?

A few were. But many were well-run institutions for patients
in wretched circumstances, providing optimal care within the limitations of what
constituted psychiatric treatment at that time: a handful of poorly understood
psychotropic drugs and supportive talk-therapy. Perhaps more important, they
offered clean beds and three squares a day, which led to them being belittled as
warehouses. But the protective environment of the best state hospitals has yet
to be improved upon, or even matched.

No matter, this was baby-and-bathwater time.

Sunday, April 22, 2007

Earth Day

Even if there had never been a Richard Nixon, an Earth Day would have happened sooner or later. Alongside Einstein's famous equation, we have Bob Nelson's Environmentalism = Calvinism minus God. Religions must have holidays and the Greens have theirs. These days, it's the one that the high-minded take the most seriously. It's when they strike their most somber pose. (Does this make them Maggie Thatcher "wets"?)

Of course, it is also a time to celebrate the fact that we have the writings of Julian Simon, Indur Goklany, Fred Singer, Bjorn Lomborg, Ronald Bailey, Terry Anderson and many others.

Deepak Lal cites their work and asks (p. 220):

So why do the Greens persist in their crusade? The
reason is that, like any religion, their beliefs are not based on reason but on
faith. For those who do not profess the same faith, the time has
surely come to take on the new cultural imperialists. The first point
of resistance is to recognize what they are seeking to do. Bluntly, they
would like to perpetuate the ancient poverty of the great Eurasian
civilizations -- India and China -- with, as they see it, their burgeoning
unwashed masses increasingly emittting noxious pollutants as they seek to make
their people prosperous, and achieve economic parity with the West.

Saturday, April 21, 2007


Craig Newmark points to James Pethokoukis' thrashing of the naysayers. There are two things to be done: 1) beat them like a drum each time markets close at a new record high; and 2) profit from the idea that panics are just that and, therefore, wonderful buying opportunities.

There will be many more Feb 27-type crashes and they will sustain the bad news bears. I understand that evolution adapted us to regard interactions with people outside the family (or tribe or clan) to be zero-sum or worse. This is why the positive-sum world of Adam Smith is incomprehensible to so many. Call them naysayers.

The good new is that profits are best made if there are mistakes made by many others. The bad news is that some of these others are policy makers who have it within their reach to do serious damage. They then unwittingly validate their dim view of the world. That's the real reason for depression, economic as well as emotional.

Wednesday, April 18, 2007

Silly me

I have just finished reading Lynn Hunt's Inventing Human Rights. It is easy to read and informative. She develops the idea that increasing middle-class wealth in the 18th century prompted more people to read and become engrossed in novels and their characters, to develop a heightened sense of empathy and to take seriously the idea of human rights. Hence the U.S. and French declarations of human rights.

Yet, in 250+ pages, there is nothing on property rights. In passing, they are mentioned towards the end as something that socialists and Marxists wanted to do away with.

But property rights acrue to humans. They are the right to the fruits of one's labor. This means they are a human right. A wonderful summary of the economics of property rights is by Andrew P. Morriss in the March 2007 edition of The Freeman. (It is not yet posted but, I am told, it will be soon.)

I am perplexed that the human rights story can be told at this late date by an erudite scholar, such as Hunt, who manages to avoid the idea and the importance of property rights.

I would not have thought that this is possible. The 1960s are long gone. It is 2007.

Tuesday, April 17, 2007


Few differences are as clarifying as attitudes towards "gun control". (The quotation marks give me away.) (1) Control advocates trust the authorities to protect us -- and to somehow enforce gun control (consider long-standing attempts at heroin control and consider how carefully the DMV screens auto drivers); and (2) Gun control advocates cannot distinguish between the gun and the owner. Mere access makes us all equally dangerous. I have problems with both thought patterns.

Tyler Cowen at Marginal Revolution cites various sources on inevitable cultural differences that contribute to U.S. violence. And American culture is different -- for better and for worse.

The many commentators to his post note that the shooter was from abroad. And international data comparisons are very difficult.

LA stories

In a watershed moment, the LA Times ran "How To Fix Traffic" in last Sunday's Opinion section. The piece included the sensible views of Jim Moore, Don Shoup, Joel Kotkin, Anastasia Loukaitou-Sideris, Ted Balaker, Joel Reynolds and Brian Taylor.

No reports (yet) of widepsread fainting spells among the readership.

Alas, the Times also included a book review of Witold Rybczynski's "Last Harvest" wherein reviewer Judith Lewis cited Harry Richardson and me as the source of a"bizarre statistic" (she also added her patented description of us) that Rybczsynski includes, that LA is America's densest urbanized area. But the source we were citing was the US census and they had been noting LA area's highest average density since 1990. These stats had been repeated widely, notably in Robert Bruegmann's highly regarded "A Compact History of Sprawl" (p 62-63). Writers like Lewis live by cliches.

But, flush from having just read their Opinion section, I had thought that there were real editors on the job.

Saturday, April 14, 2007

"The Fast, the Slow, and the Still"

City-size distributions are found to follow a power distribution rather than, say, a normal distribution. Small and large are not equally likely (unlikely). Instead, small cities are much more likely. Large are special and they have found ways to remain large and dominant.

New York has remained the largest U.S. city (metro area) for some time. It has had its ups and downs, of course, but it has found ways to remain top dog. Nothing succeeds like success.

The March 2007 American Economic Review includes a splendid paper by Giles Duranton, "Urban Evolutions: The Fast, the Slow and the Still." He shows that three prominent urban phenomena plausibly coexist. He even has an economic model that explains it all. He utilizes the idea of agglomeration opportunities and their relation to city size.

Yet, these are actually realized when efficient location patterns are allowed to emerge. Having said that, one has to admit that the top dog metros (by definition) have done this best.

Here is the Duranton's abstract:

With the use of French and US data, new and systematic evidence is
provided about the rapid location changes of industries across cities (the
fast). Cities are also slowly moving up and down the urban hierarchy (the slow),
while the size distribution of cities is skewed to the right and very stable
(the still). The model proposed here reproduces these three features. Small,
innovation-driven shocks lead to the churning of industries across cities. Then,
cities slowly grow or decline following net gains or losses of industries. These
changes occur within a stable distribution. The quantitative implications of the
model are also explored.

Friday, April 13, 2007

Save them the trip

Today's LA Times includes "Future for Los Angeles' middle class is uncertain." It mentions a symposium at the Southern California Association of Governments titled "The Middle Class on Life Support." UCLA's Anderson Forecast just published "Solutions for Our City" (full disclosure: I wrote one of the 40 short pieces). Many of the essays start with a problem (traffic, housing affordability, schools, health, etc.) which can easily be traced to a government failure and immediately propose various new government programs as fixes.

The data favored by the hand-wringers has been challenged often and widely. But the Times writer sees, "an LA area that finds itself deeply divided among class lines, with 250,000 millionaires, 1.6 million poor people ... and those in the middle facing a miserable squeeze."

It gets better. "Once the paragon of the American dream, Los Angeles in the last 25 years has become a place where the level of income inequality doesn't look too much different from what's found south of the border or in any number of developing nations."

The illegal immigration problem is not a matter of more fences or border agents. Just translate the writer's wisdom into Spanish and leave in kiosks conveniently placed near the crossing points favored by illegals. Save them the trip and the trouble.

Several papers that are useful antidotes to the silliness are at the NCPA website.

Thursday, April 12, 2007

Duke and deconstruction

In the bad old days, race-baiting was standard fare for demagogues and other low-life. But the pendulum never rests in the middle and race-hustlers are a fixture of todays' politics and discourse.

The Duke lacrosse players are now exonerated (see WSJ comment below) but the many race-hustlers who could not wait to pile on have yet to be heard from. Do not hold your breath.

The text of the original letter of concern signed by 88 Duke faculty is bizarre and also embarrassing.

It is grist for serious deconstruction.

Justice at Duke

"We believe these individuals are innocent." With those
six words, North Carolina Attorney General Roy Cooper yesterday ended a travesty
of justice that had lasted 395 days.

That travesty has been known from the start as the "Duke
lacrosse scandal." It began as a narrative all-too-familiar to those schooled in
the "race-class-gender" ideology taught at Duke and other prestige universities:
White male privilege, in the form of the Duke lacrosse team; black female
victimization, in the person of a stripper from the other side of town hired to
entertain them. Into this template came the allegation of rape, unleashed amid
the modern world of media saturation that elevates instant

Mike Nifong, the Durham County prosecutor, harnessed the power
of his office to this machinery of political correctness to bring charges
against three of the team members and, in the process, win an election. As it
is, Mr. Nifong now may face disbarment, which seems apt for such an abuse of his
authority. We wonder, though, whether any analogous sanction will be meted to
those on the Duke faculty who rushed to condemn the accused long before their
guilt could reasonably be established.

At a press conference yesterday, formerly accused student
David Evans noted that "we're just as innocent today as we were back then.
Nothing has changed, the facts don't change." He's right. Facts don't change,
which is why they are free. But unless we get past the narrative that
prematurely judged them, similar miscarriages of justice are bound to

Wednesday, April 11, 2007

The next time you hear a politician suggest taking it the UN

The news from Darfur is awful. People are suffering and dying.

People everywhere else are improperly silent about the ineptness and corruption of the international agencies that are expected to respond (including the UN, the OAU, the EU and you name it). Here is what The Economist (April 7) reports about the UN's (new and improved) Human Rights Council:

The UN adrift on human rights

“WE WANT a butterfly,” John Bolton, then America's
ambassador to the United Nations, said a year ago when explaining his country's
rejection of plans to replace the UN's High Commission on Human Rights with a
leaner and supposedly more credible Human Rights Council. “We don't intend to
put lipstick on a caterpillar and call it a success.” Mr Bolton, now in enforced
retirement from the UN, may feel vindicated as the ludicrously painted creature
creeps along, seemingly doomed never to metamorphose and take

In its fourth regular session, which ended in Geneva on March
30th, the 47-member council again failed to address many egregious human-rights
abuses around the world. Even in the case of Darfur, on which one of its own
working groups had produced a damning report, it declined to criticise the
Sudanese government directly for orchestrating the atrocities, limiting itself
to an expression of “deep concern”. Indeed, in its nine months of life, the
council has criticised only one country for human-rights violations, passing in
its latest session its ninth resolution against Israel.

This obsession with bashing Israel and turning a blind eye to
so much else has disappointed those who hoped that the new council might perform
better than its predecessor. Now alarm is growing that its anti-Israel bias is
going to be compounded by an excessive zeal to defend the good name of
religions, and especially that of Islam, at the expense of free speech.

Why do such agencies exist? Why do sane people fund them?

They promote the agendas of some awful regimes. They allow large numbers of civil servants to live, work and play in some swank cities. And they make it possible for the high-minded set get to feel good about themselves for being internationalist-cosmopolitan-multilateralist, etc.

They do nothing for victims of genocide and kleptocracy.

Tuesday, April 10, 2007

Drive until you qualify

In 1991, my colleagues and I published "The Commuting Paradox: Evidence From The Top Twenty". This was one of a series of papers that considered evidence that, in spite of more people, more cars, more driving and no tolling, aggregate commuting times were remarkably stable.

New location patterns prompted the surburbanization of commuting which became a safety valve. Doomsday was a crock and "gridlock" was "impending". Randall Crane and Daniel Chatman updated our analysis to 1997 from other data.

By way of international comparison, however, American commuters have very little to gripe about.

But gripe they will. This week's New Yorker includes "Annals of Transport: There and Back Again". It cites recent work by Bruno Frey and Alois Stutzer ("Stress that Doesn't Pay: The Commuting Paradox") that alludes to another commuting paradox, behavioral economists' favorite, that people are not so rational and are making bad choices. This line of analysis is typically pleasing to intellectuals and typically rests on opinion surveys. (And there are other problems, accessed via Newmark's Door.)

The New Yorker piece does have some great lines. "'Drive until you qualify' is a phrase that real-estate agents use to describe a central tenet of the commuting life: you travel away from the workplace until you reach an exit where you can afford to buy a house that meets your standards. The size of the wallet determines that of the mortgage and therefore the length of the commute. Although there are other variables (schools, spouse, status, climate, race, religion, taste ..."

It's a nice start

The BEA publishes GDP/capita for the 50 U.S. states and Wendell Cox just published GDP/capita for the world's 116 major metro areas (those in Western Europe, North America, Japan and Australasia).

The latter comparison adds boundary definition issues to all of the GDP/capita accounting and conceptual disputes. And the smaller the geographic unit, the bigger the difficulty. And international comparisons add exchange rate noise and many other problems.

So, as we do with all data, we hold our noses and jump in. Cities (actually metro areas) are engines of growth because they can be hospitable to entrepreneurial success. Wendell's rankings are a rough measure of all this. The top 25 metros are in the U.S.; Paris is number 26; Naples is last.

It's a nice start.

Saturday, April 07, 2007

More inconvenient truths

Today's LA Times reports global warming on Mars. No joke (see below). I gather that there are all sorts of complex cycles in the solar system that impact climate change(s), here, there and everywhere.

There are many turn-offs (beyond Al Gore) from the climate change alarmists, including the hectoring tone, the smug assertions of consensus and the economic know-nothingism.

Clue to Mars' warming is seen

The planet's darkening surface could account for its
temperature rise, scientists report.

Global warming on Mars?

It turns out you don't need belching smokestacks and
city-choking traffic to heat up a planet. Changes in surface reflectivity may
also do the trick, according to research published Thursday in the journal

The research team, composed of scientists from NASA's Ames
Research Center in Northern California and the U.S. Geological Survey, compared
images of Mars taken by the Viking missions in the 1970s to pictures taken a
quarter century later by Mars Global Surveyor.

The surface was noticeably darker in the new pictures, said
Lori Fenton, a planetary geologist at the Carl Sagan Center in Mountain View,
Calif., who worked with Ames scientists on the project.

Plugging in a climate model developed at Ames, the research
team said the changes in surface reflectivity could account for a 1 degree
Fahrenheit rise in the surface temperature of the planet."That's a significant
amount," said Rich Zurek, lead Mars scientist at the Jet Propulsion Laboratory
in La CaƱada Flintridge, who was not involved in the research.

The scientists believe the changes in surface reflectivity —
known as albedo — are caused by wind-driven dust storms that occasionally sweep
the entire Martian surface. The storms fill the air and cover the surface with
fine grains that are more reflective than the bedrock.Several big storms
preceded the visit of Vikings 1 and 2 in 1975, Fenton said. Comparatively, there
was less heavy wind and, consequently, more light-absorbing bedrock in the
picture taken by Mars Global Surveyor in 2000.

If Mars is getting hotter, that could explain one finding that
has puzzled planetary scientists since it was discovered several years ago: the
loss of carbon dioxide ice at Mars' south pole.The CO2 ice forms a cap on top of
water ice that ranges from several feet to several hundred feet in thickness.
Each of the last few years, scientists have seen holes develop in the CO2 layer
late in the Martian summer.

So does all this mean Mars is undergoing a new round of
climate change like the one that dried up its ancient lakes and drove its water
underground?Fenton is unsure. What's going on at the south pole "is an
indication of at least regional temperature change," she said.

Friday, April 06, 2007

New ball game

The internet is (of course) amazing. This morning's WSJ describes, a sort of eBay for borrowing and lending. Writer Jonathan Last desribes it all in playful tones but as the web undercuts middlemen and gatekeepers everywhere, who better to do it to than loan officers -- and the guys in the silk hats?

The latter may have survived socialists and anarchists but this really is a new ball game.

Usury for Beginners

Of all the wonders that the Internet has brought us, none
is as special as Web 2.0. The next generation of Internet empowers you, me --
some might say We, the People -- to click our way to self-actualization. We're
an Army of Davids, taking the world back from the corporate Goliaths, one Web
site at a time. The new Internet lets us be who we've always wanted to

Yes, we all have lofty goals, like helping the infirm,
reaching out to shut-ins or starting a catering service. But what we've always
wanted to be may seem, to some, a bit less commendable. For instance, I've
always wanted to be a loan shark. There's something luridly poetic about outlaw
lending: Getting the juice ticking at 30% on some hard-luck mope; making profits
off of the backs of the union guy who lost it all at the race track or the stock
broker with the expensive drug habit; sending minions like "Bobby Bats" out to
do collections. It's like being a banker, only cooler.

Thanks to, my dream has come true, sort of.
Prosper was launched in February 2006 by Chris Larsen and John Witchel, two
Silicon Valley entrepreneurs. Mr. Witchel was the brain behind FlashMob
computing, a process that links personal computers, allowing them to function as
one supercomputer. Mr. Larsen was the founder and CEO of E-Loan. They wanted to
merge the fundamental principles of Web 2.0 with the trendy economic theory of
microcredit. I wasn't daunted by the fancy, Nobel Prize-winning idea though. I
was sure Prosper would help me find some sweet action.

The idea behind the site is that people can serve one
another's financial interests better than banks can. So if you need a small loan
-- between $1,000 and $25,000 -- you can go to, register and explain
why you need the money. Prosper does a credit check on prospective borrowers,
assigns them a credit grade and then publishes their loan request with the
amount they want to borrow and the maximum interest rate they're willing to pay.

Prospective lenders sort through these pitches to find attractive loans, on
which they bid. Lenders propose an amount they want to give at an interest rate
they are willing to charge. They can fund as little as $50 or as much as the
full loan. As more lenders bid on the loan, the interest rate drops, until it
reaches a floor, beneath which no lenders are willing to go.

The typical loan is for a three-year term. Prosper gets its
beak wet by charging a 1% transaction fee to each borrower when the loan begins
and an annual 0.5% servicing fee to lenders. So far, the company has processed
8,845 loans worth more than $47 million. ...

... There are, however, two small holes in this tapestry of
virtual virtue. The first is, as Prosper's FAQ puts it, "No one guarantees the
loans at Prosper." If a borrower defaults, Prosper will "ding" his credit score
and send a collection agency after him. But if the borrower's credit was already
wrecked, that's not much disincentive. After all, collection agencies don't do
kneecaps anymore. To desperate or unscrupulous borrowers with ruined credit
scores, Prosper might look like free money. The other niggling concern is about
unscrupulous lenders: would-be loan sharks who view Prosper as a way to leach
26% interest from poor, struggling borrowers looking for a

I set off into Prosper territory armed with a couple hundred
bucks, hoping for the frisson that my real career has never given me. After
going through the verification process, I chose a screen name -- "LoanBruce,"
after the mechanical star of Jaws -- which is the only piece of identification
Prosper users see about each other.

A substantial number of the listings are from people wanting
loans to pay off their credit cards. Just the kind of desperate fish I was
looking for. For instance, one prospective borrower requested $16,000 (at 20%)
to pay off her credit cards and boost her soy candle business. Her pitch was:
"Since my bankruptcy in 2002, I have not been late or delinquent on a single

Some of the businesses sound rather suspicious. "AliDixon,"
for example, claimed to be a private investigator in California who wanted
$10,000 to expand his operations. In the course of detailing his financial
situation, AliDixon explained why he owed money on two cars: "Vehicle #1 is a
luxury car, used to entertain millionaire and celebrity clients who expect
high-class treatment from their private investigator. Vehicle #2 is a common
SUV, used for surveillance operations in an attempt to remain covert." Clearly a
scammer; I was too wise to fall for that routine.

Even shadier was a supposed Cornell alum, "Barry1964," who
sought a $7,500 loan for the express purpose of re-lending the money out at
higher rates to other Prosper borrowers. A man after my own

In the end, I purchased three loans, all of which went to the
type of high-risk borrowers that normally resort to getting in hock to
degenerates like me. The first was to someone named "Shannon" who said he (or
she) was starting a small-town newspaper. The second was to a Yahoo! employee
who runs a side business selling refurbished electronics equipment.

The third was to a down-on-her-luck single mom who had no
assets and needed cash to get out of credit card debt. She has an ex-husband who
did her wrong, and the picture of her 5-year-old son was awfully cute. This
cold-blooded loan-sharking racket is harder than it looks. I could imagine
myself being tough on the first two borrowers because, deep down, I thought that
there was a chance that they could make good. But the single mom seemed
hopeless. I gave her the loan anyway. All told, the average interest rate I was
getting on the loans was 19.84%. Not usurious, perhaps, but high enough to make
me feel pleasantly evil.

After making my loans, I talked with Prosper's communications
director, Tiffany Fox. Turns out, I'm just a piker with my three baby loans:
While Prosper doesn't release many statistics about lenders, Ms. Fox told me
that "there are more than a few who have more than $100,000 out on the
platform." My career as a bad-boy money-lender was deflated even further when I
received my first payments, which totaled $4.60 ($4.55, once Prosper took their
cut). All three borrowers made their first collection. I didn't even get to have
anyone roughed up. Not that I could have afforded it -- even Bobby Bats must
make more than $5 an hour.

Wednesday, April 04, 2007

Wonk woes

In the latest issue of Regulation, Paul H. Rubin explains the differences between "Reagan and the Wonks." The latter mine the data but they are up against the limited data processing capabilities of their audience. The everyman audience is equipped with data processing talents honed in our evolutionary past. We make fairly good snap judgments but require the science of statistical inference when up against large data sets.

Court room success or political success are not the same as economteric success. Rubin writes about the natural problems that masters of the latter have when attempting to (or being asked to) make their findings widely known and accepted.

What is a wonk to do? Rubin concludes: "An important remedy would be to devise ways of expressing policies in terms that will resonate with with the decisionmaking process of voters. Ronald Reagan was a master of advocating free-market policies using rhetoric that reflected the biases of voters, and others should be able to learn from his methods."

Tuesday, April 03, 2007


Forbes (April 16) cites a recent paper that finds links between corporate campaign contributions and favors returned. These are real favors that show up as increased asset value. See below.

I found the paper on Google scholar. It's all quite shocking.

All Follow the Money

A new academic paper suggests it pays
for public companies to give to
political campaigns. Using federal elections
records to review 800,000 donations
linked with 1,900 firms between 1984 and
2005, Michael J. Cooper, Huseyin Gulen
and Alexei V. Ovtchinnikov calculate
that political activity gave businesses a
3.6% increase in firm value. They
speculate that their findings--which they
characterized as "quite
startling"--stem from the benefits of
"politician-sponsored legislation."
The researchers write that the strongest
correlation was for contributions
to home-state candidates, races for the House
of Representatives and
Democrats. --D.F. and W.P.B.

Monday, April 02, 2007


I was surprised when I googled (or checked Wikipedia) "survivorship bias"; it simply refers to business firms. The bias being the exclusion of failed firms from most studies and analyses.

Why not people? The ones that survive to participate in the grand discussions of big themes are the ones who are alive to talk about them -- usually having been spared a quick or a slow demise. In fact, the survivors that do bear witness are the articulate ones. Do we then get a biased view of life on earth?

All of this comes to mind just having read Michael Burleigh's Sacred Causes: The Clash of Religion and Politics, the Great War to the War on Terror. How did anyone survive?

Save a cataclysmic encounter with a sizable meteor, there are likely to always be survivors.

The book is a bleak catalog of blunder and evil. Nazism, fascism and communism were led by groups that sought to make them the articles of state-identified faith and religiosity. There are a few heroes. Some elements of the Catholic church stood up to the fanatics, and Burleigh works hard to make the point -- to the exasperation of a recent review by Tony Judt.

Judt writes that the book is mean-spirited and one-sided. Burleigh does have his point of view and he is a fine writer. There are eye-catching phrases everywhere. The man can write.

And I nearly had whiplash when I came to his last sentence. (The last chapter is about Islamic terrorists and make-nice Westerners.) "On the whole, I conclude this book as an optimist, although certainly not of the Panglossian variety, since the increasingly sharp definition of what is at stake is itself part of the solution."

Spoken like a survivor.