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Media Infiltrations: Obama's Social Security Fine Print  The Wall Street Journal June 25, 2008 Commodity-Prices Scapegoats The Wall Street Journal June 3, 2008
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Chronicle of the Conspiracy
Join us as we discover, document, expose and challenge the bad people, the bad institutions and the bad ideas that stand in the way of wealth creation -- and show you how to fight back!
Friday, April 18, 2003
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Pollution is a negative externality -- something that imposes an unfair cost on third parties. So that's the kind of externality that doomsayers like Krugman -- people who think in terms of "diminishing expectations" and "depression economics" (both terms from titles of his books) -- like to focus on. So Krugman calls today's column "Rejecting the World," and sets up his case against the "isolationism" and "unilateralism" of the Bush administration, the "right-wing," and "conservatives" by decrying their rejection of global cooperation to end global warming. Krugman: "dealing with it requires concerted action by governments around the world. And that's what the right really can't stand."
But there are positive externalities, too -- things that bestow uncompensated benefits on third parties. For example, when you repaint your house, you make the whole neighborhood a better place for all your neighbors. And when the US took the lead in deposing the dictatorial regime of Saddam Hussein in Iraq, it made the world a better place -- even for those who opposed our action, such as France, Germany and Russia. Krugman cannot credibly deny that the Bush administration didn't first try to make that a "concerted action by governments around the world." But not everyone would go along, so a small group of nations led by the US went ahead -- and the others enjoyed the positive externality.
Right now those others are trying to enjoy
that positive externality perhaps a
bit too much, by seeking advantageous roles in post-war Iraq. I am reminded of
the classic children's story,
The
Little Red Hen. "Who will help me make the
bread?" asked the Little Red Hen. None of the other animals would help, so who
can blame the Little Red Hen for not wanting to share the bread she had to make
all by herself? Who can, in fairness, call her an "isolationist" or a
"unilateralist"? Yes, one must take responsibility for one's negative
externalities. But by the same token, one must get credit for one's positive
externalities.
>>Update... John Weidner comments on Random Jottings that Krugman conveniently ignores the externalities that would be triggered by the US signing on to the Kyoto Protocol on global warming: "reductions in GDP and employment that would result from greenhouse gas emission roll backs." And he questions how Krugman "could he justify an international agreement on emission reductions that exempts the two largest and fastest growing countries -- India and China?" And he wonders, "How can the Bush position on emissions be branded unilateralist when the Kyoto treaty was rejected by the U.S. Senate during the Clinton administration 99-0?"
>>Update 2... A reader submits a correction on our Letters Page about the Senate vote on the Kyoto Treaty.
>>Update 3... Dave Nadig airs a pet peeve on our Letters Page: he hates it when people like Krugman lie in the service of a cause he basically agrees with.
Posted by Donald L. Luskin at 11:38 AM | link
Thursday, April 17, 2003
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Morgenson starts by spending the first 231 words of this 627-word column talking about how wrong "so many strategists" and "many market pundits" and "the soothsayers" have been about the stock market over the last couple years. That's an easy target -- there's never a shortage of wrong market pundits. But what she doesn't say is that there are many strategists, pundits and soothsayers who have been right about the market. And she doesn't mention the occasions when she herself, or the strategists, pundits and soothsayers whom she quotes, were themselves wrong.
Morgenson says that, instead of listening to all these gurus (except herself, apparently),
"...investors should look at the expectations of large institutional investors, based on their actual bets made in stock-index futures. These derivative securities allow investors to bet on where they think the indexes, like the S.& P. 500, are going. RiskMetrics, a financial analytics company in New York, has analyzed S.& P. futures prices and determined how many investors are moderately positive, wildly optimistic or outright negative about the overall market for the next three months.
"At the moment, for example, while many strategists are calling for a hefty rally, only 19 percent of futures investors have bet that the S.& P. will rise more than 10 percent. Most of these investors — 62 percent — appear to believe that the index will trade in a range of plus or minus 10 percent. Some 14 percent have wagered that it will be 10 to 25 percent lower in three months."
To prove that the technique works, Morgenson writes
"...in early January 2001, while the pundits were pounding the table for stocks, 54 percent of stock-index futures players had wagered that the index would remain in a range of plus or minus 10 percent. And 12 percent had made bets that the index would fall as much as 25 percent within three months. By the end of March, the S.& P. had fallen 9.6 percent."
Sounds really scientific and statistical, doesn't it. How unlike all that grubby stuff the strategists, pundits and soothsayers are always saying. But it turns out to be a little bit more scientific and statistical than Kvetchin' Gretchen's Pulitzer Prize qualifies her to handle. Nearly every single thing she has said here was dead wrong. Is this what Warren Buffett was worried about when he warned of an impending catastrophe in derivative securities?
I talked to Michael Thompson, a Risk Strategist with RiskMetrics whom Morgenson quoted in her column. He confirmed the following errors in Morgenson's description:
- RiskMetrics' analysis is based on options contracts on S&P 500
futures, not on the S&P 500 futures contracts themselves, as Morgenson
claimed.
- That distinction is absolutely critical because RiskMetrics' analysis is, basically, nothing more than a measurement of
the "implied volatility" in options, a simple transformation of the
statistic captured in the well-known
CBOE Volatility Index (VIX). It is a method that has been around for decades (I was using it
myself in the late 1970s when I was an options market-maker on the Pacific
Stock Exchange and the CBOE). All it does is
measure the forecasted riskiness of the market based on options prices
-- it says nothing about the direction of the market.
- RiskMetrics' analysis says absolutely nothing about the percentage of
investors who believe the market will do any particular thing, though
Morgenson makes such claims for it repeatedly. It looks only at options prices,
and has no knowledge of how many investors may have positions in those
options.
- Any forecast made by RiskMetrics' analysis is completely symmetrical -- that's inherent in the way options prices conceive of risk. Therefore, the forecast of a probability that the market will go down by 25% (ignore for the moment that Morgenson confuses the probability of the event with the number of investors betting on the event) is perfectly matched by the same probability that the market will go up by the same amount.
That pretty much makes the January 2001 "prediction" that Morgenson data-mined utterly worthless -- or at least not a "prediction" in any conventional sense. If you want to find out what the RiskMetrics analysis is really saying, visit their website and take a look at a simple graphic that says it all. A picture there is worth 627 of Morgenson's words.
As a courtesy, I called Morgenson to get a comment, but she never called me back. RiskMetrics' Thompson was quick to fall on his sword and take the blame for the errors in Morgenson's column. "If there was any fault it should be on my shoulders, because I didn't adequately explain it... it was a last minute thing."
Fair enough. But I am left wondering whose fault it really was. We cannot overlook the value of free publicity for sources like RiskMetrics -- something that they would not wish to jeopardize by being anything less than gracious about Morgenson's column. As it turns out, Morgenson alone has quoted RiskMetrics nine times since August, 2001 -- a real pet source. John Roderick of the Rosen Group, RiskMetrics' public relations firm, told me that one of RiskMetrics' "strongest assets is that we are a journalists' tool."
Indeed. And the problem is that tools get used. Sometimes the right way, and sometimes the wrong way. And that's the lesson here. Maybe Morgenson was a little too eager to put down competing pundits. Maybe she was in a hurry. Or maybe she just didn't understand the technical material -- after all, she's just a columnist for the New York Times, using her sources and getting used by them. All in a day's work in the conspiracy to keep you poor and stupid.
Posted by Donald L. Luskin at 4:45 PM | link
Wednesday, April 16, 2003
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Posted by Donald L. Luskin at 2:15 AM | link
Tuesday, April 15, 2003
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"Critics see Tim Golden's April 1 resignation as the latest sign that Raines does not understand the needs of a successful investigations desk. ...Raines killed several stories by Golden and fellow reporter David Kocieniewski. For months, the two had been pursuing allegations of influence peddling by former New Jersey senator Robert Torricelli, who was running for re-election. The New York Observer reported last week that Raines felt the pieces he spiked had been 'reckless.' Times insiders tell another story: They say editors asked Raines to spell out his complaints about the spiked pieces, but he declined, citing only his aversion to 'piling on' or to giving prosecutors too much credence. After all, the Justice Department had declined to press charges, and the Senate only gave the senator a severe reprimand. But the spiked stories included a jailhouse interview with Torricelli's accuser, David Chang, and an inventory of the evidence investigators had collected to corroborate Chang's claims that he gave Torricelli gifts in exchange for political favors. One source claims that Landman lobbied hard for the spiked pieces and felt undercut when they did not run."If "piling on" and "giving prosecutors too much credence" are career-limiting moves at the Times now, then Golden's fellow Pulitzer winner Gretchen Morgenson had better start cleaning out her desk -- if she didn't kick every Wall Street businessman when he's down and trance-channel for every prosecutor, attorney general and plaintiff's pimp that came along, her Sunday column would be a big white space.
A tip 'o the hat to Bruce Bartlett of the National Center for Policy Analysis for pointing out this article.
>>Update... Mickey Kaus "piles on," as it were...
Posted by Donald L. Luskin at 7:05 PM | link
Monday, April 14, 2003
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Allow me to get away with simply referring you to my SmartMoney.com column from last Friday, in which I demolish the myth perpetuated today by Krugman that "our deficits are too large."
Having nothing to do with Krugman, while I've got your attention, allow me also to refer you to two excellent recent postings (this, and this) by my National Review Online colleague Victor Davis Hanson. With his usual virtuosic command of history, VDH skillfully excoriates the media for their shameful handling of the US victory in Iraq. Must reading.
>>Update... Matthew Hoy is back after a bit of a blogging hiatus, and he's got the goods on Krugman's lies about the GOP slashing veterans benefits.
>>Update 2... John Weidner enjoys Krugman's "splutterings." He writes, "We think Krugman has it exactly backwards. The public is already well on the way to figuring it out. It is Krugman we are waiting on. Simply put, what the public is figuring out is that the fairy tale does not work for them. As a result, the Democrats are losing their long held position as majority party."
>>Update 3... Here's an op-ed by Republican Representative John Klein defending against Krugman's charge that the GOP budget slashes veterans' benefits.
Posted by Donald L. Luskin at 11:01 PM | link
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It's the second story the Times has run about the meeting of economists I attended at the White House on April 2, and in both cases it has portrayed the meeting as a purely political event designed to further the policy objectives of the administration, deliberately excluding economists with dissenting views. Well... yes! Should anyone be shocked (shocked! ...no, nowadays shocked and awed!) to learn that political events take place in the White House, events to further the policy objectives of the administration, deliberately excluding dissenting views? What else should happen there? Should the White House be a place of, say, educational events as opposed to political ones? Should events there be organized by the administration in such a way as to thwart its own objectives? Must dissenting views be heard at all events, even ones designed to deal with the furtherance of decisions that have already been taken?
But apparently the Times is indeed shocked and awed. And so we learn (twice) that economists of the largest and most prestigious firms -- Morgan Stanley, Goldman Sachs, and Merrill Lynch -- were not invited to the meeting, because they do not agree with the administration's economic policies. These are the same firms, of course, that are regularly excoriated in the pages of the Times because their stock analysts are foolish and corrupt -- but perhaps their economists are different in the judgment of the Times.
What is most remarkable to me is that while the Times notes that these firms have in common size, prestige, opposition to the administration's economic policies, and exclusion from the meeting, the Times never once offers the slightest evidence (or even the slightest claim) that the economists of these firms are any wiser or any more often correct than those economists that were invited to the meeting. Apparently the quality of their viewpoints is not considered important enough even to mention. And that is why I say that this story is an example of its own subject: it treats economists entirely as political actors who differ from one another only in the amount of power they have, as though the content of their beliefs is subject to no inherent tests of right or wrong independent of political objectives.
And that brings me to something -- or, rather someone -- that the Times left out of both these stories. One of the economists seated on my side of the table across from President Bush was Ed Hyman of ISI Group. There is something very special about Hyman. He is, objectively, probably the most respected applied economist in the world. For every single one of the last 23 years, Hyman has been voted the number one economist in the All American Research Team poll conducted by Institutional Investor magazine. That magazine's readers are the portfolio managers who really use economic research every day to make investment decisions governing the management of trillions of dollars of equity and fixed income investments. They know what they like. They know what works. The picked Hyman. Hyman was at the meeting. The Times didn't see fit to mention that.
Posted by Donald L. Luskin at 12:27 AM | link