Freakonomics Author on Lying Statistics

Steven D. Levitt, co-author of the best selling book, Freakonomics, pulled some doozy statistical magic tricks to reach some of the conclusions in his book.

Turns out, though, he doesn’t trust statistics either, when it comes to his health:

I never trust statistics I get from people in the field of medicine, ever.

We anxiously await Dr. Levitt’s paper explaining why statistics don’t work in medicine, but work in economics, given that there are a lot more variables to contend with in economics, much more difficulty in measuring and observing in economics and, the piece de resistance, there are no constants in economics–--making a lot of economic equations look rather silly. (Levitt’s included).

Carlyle Group's Plan to Takeover the Banking Industry

So what’s Treasury Secretary Henry Paulson’s call for changes in regulation of the financial markets all about? A clue may have been revealed today by Randal Quarles, former Under Secretary of the Treasury who led the Treasury Department’s effort in the coordination of the President’s Working Group on Financial Markets and is a current Managing Director at Carlyle Group.

Quarles spoke at a luncheon meeting of the Washington DC-based National Economists Club. His topic: “Restructuring Financial Regulation”. Quarles told the luncheon group that he chose the topic in January. Hmmm. Didn’t Treasury Paulson just make the proposal to restructure the financial regulatory agencies last week? How did Quarles pick this topic back in January? Short-answer, Quarles is a major insider and his comments should be monitored to get a sense for what insiders are thinking.

In his talk, Quarles said that estimates go into the hundreds of billions in terms of capital that will be required by the financial industry because of losses sustained as a result of the current crisis. He said there will be more financial institutions that will go under in coming months.

He said that public markets will not supply the necessary funds because they don’t have the capabilities to study in detail the risks and potential rewards of the complex financials of financial institutions. He said private equity firms have the capabilities to do so and to supply the necessary funds. (N.B. Carlyle Group is a private equity firm).

Quarles stated that some changes in the structure of regulations that Paulson proposed were necessary but would take time to develop. He specifically stated that one regulation that needed to be changed is the limitation on the size of positions that non-banks can take in banks. (Note: Limitations in the size of non-banks positions in banks now limits Carlyle Group from taking large positions in banks).

During the Q & A session, one questioner summarized Quarles talk this way:

So what you said here today is that you would like to see regulatory changes to make it easier for private equity to take major positions in banks? And private equity, through various entities on and offshore gets its money from banks. So what you want is an environment where private equity can borrow from banks to takeover banks?

In response, Quarles laughed.

We might add this private equity acquisition of financial institutions will go on as the general public is scared off from investing in the financial institutions by scare headlines, or as Quarles would put it, “Public markets just don’t have the capabilities to judge the risks and rewards of the various financial institutions.” Translation: The public is not clued in on which firms the insiders have decided to let survive, like JPMorgan, and which they are going to takedown, like Bear Stearns

The Series Is Back: Notorious Economic Students

Barack Obama's father was a Harvard trained economist. The school's influence was interesting. He came out of Harvard and ended up advocating the communal ownership of land.

He advocated dramatically increasing taxation on "the rich" even up to the 100% level . And in Kenya, he advocated the nationalization of "European" and "Asian" owned enterprises, including hotels, with the control of these operations handed over to the "indigenous" black population.

Freakonomics Author On Lying Statistics

Steven D. Levitt, co-author of the best selling book, Freakonomics, pulled some doozy statistical magic tricks to reach some of the conclusions in his book.

Turns out, though, he doesn't trust statistics either, when it comes to his health:

I never trust statistics I get from people in the field of medicine, ever.

We anxiously await Dr. Levitt's paper explaining why statistics don't work in medicine, but work in economics, given that there are a lot more variables to contend with in economics, much more difficulty in measuring and observing in economics and, the piece de resistance, there are no constants in economics--making a lot of economic equations look rather silly. (Levitt's included.)

Mad Money Mankiw?

Isn't Jim Cramer as a source for mad money investment ideas enough? It appears not. Mad money investment ideas are apparently a type of disease that spreads and has reached the campus of Harvard University. Greg Mankiw, professor of economics at Harvard and author of best selling economic texts, is all hot about Carry Trade investing.

Writes Mankiw:

It is rare that I leave an economics conference with information that will change my personal financial decision making. But I was close yesterday. A fascinating discussion of a paper on the carry trade made me wonder whether I should put a little money there.

The carry trade refers to the act of borrowing from countries with low interest rates, lending to countries with high interest rates, and profiting from the interest rate differential. It is based on the hope that exchange rates will not move too much against you to wipe out the profit. In other words, it is gambling that a condition known as uncovered interest parity will not hold. In the past, this strategy has been a money-maker.

Duh! "In the past this strategy has been a money-maker." There is no dumber reason to get into an investment then because it worked in the past. Long Term Capital Management was all about trading based on things that worked in the past. It was a great strategy until things didn't work like in the past and LTCM blew up. The subprime mortgage crisis is all about default rates that didn't work like they did in the past.

Curiously, even the paper that Mankiw sites, suggests the strategy has not been a money-maker in the past:

This paper provides evidence of a strong link between currency carry and currency crash risk: investing in high interest-rate currencies while borrowing in low interest rate currencies delivers negatively skewed returns.

This certainly is downright Crameresque madness on Mankiw's part.

Oh and, by the way, given the weakness in the dollar and our expectation that the weakness will accelerate, betting against the Carry Trade by investing in the Swiss franc and the Japanese yen is the way to go.

UPDATE: Mankiw has now modified a bit the second paragraph that I quoted from his blog. But here's the real kicker, he has added to his post a chart of a "simulation" showing the Carry Trade position to work. He also added to his comment: "The above chart is a simulated past performance from the ETF's website. It is similar to some of the results shown by the discussants at the conference."

Since he still does not address the researchers (Markus K. Brunnermeier,
Stefan Nagel and Lasse H. Pedersen) findings (From the paper he sites!) that Carry Trade positions deliver "negatively skewed returns", he's just very sloppy or damn deceiving with his simulation chart.

Former Treasury Department Coordinator for President's Working Group Denies Working Group Manipulates Markets

Randal Quarles, former Under Secretary of the Treasury who led the Treasury Department's effort in the coordination of the President's Working Group on Financial Markets, and who is now a managing director at the Carlyle Group, has denied the Working Group manipulates the gold market or stock market.

Quarles spoke at a luncheon today at the Washington DC National Economists Club. During the question and answer period I asked him this question:

There have been rumors on the internet and a bit in mainstream media that the President's Working Group manipulates the gold market and stock market. Has the Working Group ever done so and do they have the funds available to do so? Secondly, have members of the Working Group ever contacted market participants to co-ordinate buying or selling in any markets?

Quarles replied "The short answer is no. No to all of it."

He then went on to state that the Working Group does not even have enough funds to buy notepads. "I had some notepads made that said President's Working Group on Financial Markets, but I paid for them with my own money."

After the Q&A session, I managed to corner him and again asked him if Working Group members ever made calls to co-ordinate market buying or selling. He said definitely not. He said that calls may be made to market participants to get market intelligence but that was it. He then went on to suggest in a casual off the cuff way that the Working Group was just various members of different regulatory agencies getting together to keep informed on markets. I then said to him that, yesterday, in questioning about the Working Group by Congressman Ron Paul, Fed chairman Ben Bernanke seemed to answer the question in the exact same casual way as though to imply that the Working Group was nothing more than some sort of collegiate-type discussion group. He laughed and said, "Yeah, that's what we are co-ordinating these days [Our responses]."

For full coverage of Quarles speech see Carlyle Group's Plan to Takeover the Banking System.