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Arnold Kling's Sheriff

I’ve been thinking about Arnold Kling’s “Stern Sheriff” idea for regulatory management of financial crisis. In brief, he suggests that when there’s a rush for collateral from an endangered institution, regulators should immediately step in and “penalize liquidity preference” – i.e. tell everyone to wait.

What that really amounts to is declaring bankruptcy earlier. After all, if you are demanding payment which you are due, and someone is telling you you can’t have it, the debtor is officially not creditworthy.

Put that way, it seems a very good idea. After all, my layman’s understanding of insolvency is that a party is insolvent not when it fails to make a payment, but when it knows that it is not going to be able to make a payment, and that to take on new obligations while insolvent is not allowed. Of course, in real life, that is presumably wrapped up in a whole lot of very necessary, very complicated accountancy. But the principle is that bankruptcy happens not when the money runs out, but before the money runs out, so it can be shared out fairly without chaos and panic. And that’s all that Professor Kling is asking for.

It seems a good idea, but of course the next problem is that no real financial institution can pay all its debts on time without access to more borrowing. If I accept the stern sheriff, I’m likely to end up at the Moldbug position, that all maturity transformation is wrong, that a borrower that will not have cash on hand to pay every debt as it comes due is insolvent. I’ve argued against that view, largely on the basis that it’s too easy, and too profitable, to do secretly. If you stop financial institutions from doing it, the result will be that everybody else does it.

There is, to be fair, some room for action between a run on a borrower’s credit being possible and it actually happening. But it’s very small. And the earlier you are expected to step in and prevent withdrawals, the more incentive you create to withdraw (or call collateral, or whatever) even sooner, before the sheriff arrives, so that window gets even smaller.

The more of a “hair trigger” you put on bankruptcy, the easier it is for the creditors to expropriate the equity-holders at any time. That conflict of interest becomes much sharper and more problematic for maturity-transforming financial institutions than for other enterprises – perhaps those institutions should avoid having two tiers of financing in that way.

Hey! I just invented the investment-banking partnership and the mutual building society! Maybe I’m onto something…

Strictly Voting Systems

One striking thing about the successive controversies over Strictly Come Dancing is the apparent lack of attention to detail paid to the technicalities.

When it first occurred to me that John Sergeant was likely to win the competition, I spent a while trying to work out whether the judges would be able to get rid of him somehow. I was handicapped by not knowing what the scoring system was, or how many couples were supposed to get to the final.

A day or two later he announced he was quitting, and, after kicking myself for not seeing that coming, I immediately wondered how they were going to handle being one couple short in the last few rounds.

Neither of the two questions I spent time pondering seemed to occur to the show’s organizers. They’ve now got round to explaining in detail how the scoring works. Even there there are oversights; I think it is an error to give both couples in a tie the higher number of points, although it doesn’t matter this late in the competition. Last week’s judge points should have been 2.5, 2.5, 1, rather than 3,3,1. That could have made a difference earlier in the competition.

However, I would take a more drastic approach. Collapsing the judges’ votes into an ordering of the contestants is throwing away information to begin with. It might be better to keep the actual points awarded by the judges, and then add the popular votes, scaled down to the same maximum. For instance, if there were a million votes, each judge point would be worth 1000000/160 phone votes. (about 6000). Apart from making the actual number of votes more important, that would encourage the judges not to bunch their votes into the 8-10 range all the time.

These type of shows have been going for years and years; I still think the problems appearing now are all because previously they never took the voting seriously, and would just cheat if they didn’t like the way it was going. Having people like Undercover Economist Tim Harford discussing it now is a real step forward. Maybe next year’s competitions will be designed by people who’ve heard of Arrow’s Theorem.

Update

20:05 – phone voting is currently going on to select the last two.

Scores carried from last week are

Rachel 5 (3 judges + 2 phone)
Tom 4 (1 judges + 3 phone)
Lisa 4 (3 judges + 1 phone)

Tom ranks above Lisa because in a tie phone votes are worth more than judge votes.

The points from the judges this evening were

Lisa 3 (80)
Rachel 2 (79)
Tom 1 (73 or thereabouts, I can’t remember)

So the running total is:

Rachel 7 (3+2 judges, 2 phone)
Lisa 7 (3+3 judges, 1 phone)
Tom 5 (1+1 judges, 3 phone)

So Tom needs to win the popular vote to make it to the last 2, while the girls each just need to come second to make it.

Again, the compression of the judges’ votes has been very evident – no vote lower than an 8, no vote from 3 of the 4 judges lower than a 9. Len and Arlene, I think, each gave 9 to Tom’s first dance and 10 to the other 5 dances. What’s the point of being there if they can’t say which dance is better?

Tierney on Holdren

John Tierney attacks Obama’s science advisor John Holdren.

Dr. Holdren is certainly entitled to his views, but what concerns me is his tendency to conflate the science of climate change with prescriptions to cut greenhouse emissions. Even if most climate scientists agree on the anthropogenic causes of global warming, that doesn’t imply that the best way to deal with the problem is through drastic cuts in greenhouse emissions.

There is some merit on Tierney’s criticism, but it is obviously the reverse of what’s really happening. Whenever I have talked to a scientifically literate person who accepts the AGW consensus, and I have challenged it, it is never more than a couple of minutes before they something like “well, maybe there is room for doubt, but the things we should do about global warming are all things we should be doing anyway, like reducing fossil fuel use”.

It’s fair enough to believe both of those things, but each proposition needs to stand on its own without support from the other. Both sides of the debate have a tendency to shift ground when presented with strong arguments – do point me back here if you catch me doing it.

What matters about oil

Wonderfully deluded slashdot piece on using coffee grounds as a biofuel.

This is a great example of the misapprehension many people have about fossil fuels.

There are two vital facts about fossil fuels:

1. They burn
2. They are very, very, very cheap.

It’s the cheapness that makes them hard to replace – there are plenty of other things we could use, but none that are as easy to obtain as drilling a hole and pumping stuff out. One commenter pointed out that the year’s supply of coffee grounds would replace less than 3 hours of the USA’s gasoline consumption, but the real point is that the insignificance of a few pounds of stuff that still has to be refined or processed in some way should have been completely obvious to everyone.

Management costs again

Good post from Neil Craig on the cost of Crossrail. It reinforces the point I made last month, that for big or difficult projects, management is the biggest cost. In the private sector there is some pressure to economize on management, though not nearly as much as there should be because the decisions are all made by managers. With public sector funding (and the public-private fairy dust is of zero or negative benefit), there is no pressure.

Democracy Fails

It’s now official. Respected political journalist John Sergeant has agreed with BBC producers that the task of selecting the best celebrity ballroom dancer of the year is too important to be left to the public. If the voters were given a free choice, they would probably choose him, despite his evident lack of ability, and therefore he has felt it necessary to pull out.

What a good job this is the only area where we let the general public decide something by vote!

Best quote: “I know a bit about voting“

Second best quote: Google News

John Sergeant pulls out of Strictly Come Dancing
Times Online – all 1,017 news articles »

Using encryption

Dan Goodin at The Register has a very timely article recommending that everyone encrypt their email.

If you think that at any point in the next ten years you might want to send or receive an email message that can’t be read by your ISP, your government, the US government, or a lawyer, then the time to start using PGP-compatible encryption is now.

The reasons for this are:

If you suddenly start using encryption just when you need it, the fact will be obvious to whoever you are trying to hide things from.
Setting up encryption is a fiddly business, you should get it done when you have time, not when you need it.
You are helping everyone – the more people are set up to use encryption, the more useful and normal it becomes for everyone else.

I came to the conclusion a few days ago, dusted off all my old keys, found that they’d all expired (fortunately, since I’d forgotten passphrases), and created some new ones. I posted a key for sending to this blog, and if you have my personal email address, there is a key for that on the MIT keyserver.

So, if you’re using Windows, read the Register article; if you’re on Linux, install gnupg and enigmail (I’m on Debian and the packaged Thunderbird comes automatically with Enigmail to integrate with gnupg – just turn it on), even if you use webmail, there is now a firefox extension FireGPG to make it easy to send and receive encrypted messages.

So invest a couple of hours now in being ready.

Sam Mason

The Sam Mason episode is quite amusing.

There’s a strange anomaly in our laws regarding thoughtcrime as they stand today – it’s illegal for an employer to choose an employee on the basis of race, but it’s quite legal for a consumer to choose a supplier on the basis of race. We are not followed around and audited on the colour of the tradesmen we hire or the shopkeepers we buy from. I would think any such laws are probably still ten years off.

Of course, the main reason why it is still legal is simply the difficulty of detecting it. Once we have a national ID database, and requirements to provide ID when buying most goods (not just obviously terrorist ones, like phones), such audits will become much more practical.

But even today, it is possible, if one is clumsy enough, to leave a paper trail. “We should advise you that this call may be monitored for training purposes, or for the purpose of ratting you out to your employer for political incorrectness, if you’re stupid enough to boast about who your employer is in a misplaced attempt to impress us”

The other amusing aspect is that it was all about not alarming the poor little girl. When it comes to protecting our children from any appearance of a threat, mere facts are not, as a general rule, any obstacle. Be it emissions from wifi routers, artificial food colourings, or toys that could possibly be violently dismantled in such a manner as to create small parts, no evidence beyond simple prejudice is ever required to justify keeping children away from such peril. But not all irrational prejudices are good irrational prejudices.

Bad Timing

Guess I picked the wrong week to complain about the state stealing peoples children.

I stand by what I wrote. The lives being destroyed in the way I described – that is happening all the time. You don’t hear about it because, as Camilla Cavendish explained in her award-winning articles, it is illegal to report it.

Cases like “Baby P”, and Victoria Climbié are so rare as to be negligible in comparison. One could, rightly, argue that there is no number of murdered children that is “acceptable”, but there may be a number that is impossible to reduce. Until vast improvements are made to the care system, we should not be trying to push ever more children into it. One death every few years, against hundreds of lives wrecked in secret by breaking up families – there is no comparison.

Now, the one every few years that we see are in spite of the efforts of social workers. Since I am arguing for them to do less, I have to admit that the result could be more Baby Ps. Again, I think that more children would be protected by helping those already without their families than by taking more children away from their families.

Evidence? Well, it’s hard to know, isn’t it? But there’s an “eyes closed” argument here: children who are harmed by their parents in spite of social workers end up on the front of newspapers for weeks. Children wrongly taken from their families are never heard of because it is illegal to talk about it. Which of the two problems are going to happen more often?

Another voting conundrum

Voting theory has a new mystery to explain. In what may turn out to be his greatest contribution to an understanding of electoral politics, journalist John Sergeant has made it onto week 9 of Strictly Come Dancing.

Let no one be under any illusions about this – he could end up winning the whole thing. The presenters tell us that half the contestants’ marks come from the four judges, and the other half from the phone-in vote. The final will be on phone-in votes only. Sergeant always gets the lowest votes from the judges, and yet never finishes in the bottom two once the viewers’ votes are added.

This could not have happened in the past. In years gone by, if telephone votes looked to undermine a program, the vote would simply be rigged. These practices were exposed last year, and they would certainly not be able to get away with it for Strictly this year.

An obviously similar event was the MTV Europe “Best Act Ever” award – won on Thursday by Rick Astley.

The key fact is that people cannot be assumed to vote for the “right” reason. Why vote for the best dancer, when annoying the judges is more fun? Why vote for the best Mayor of London, when Ken Livingstone or Boris Johnson will be far more entertaining?

If Sergeant does win, the TV producers will have to find a way in future to make the show workable despite perverse phone votes. The things they try may turn out to have relevance for politics.