$5 Billion in Funny Money Movements Before 9-11

William Bergman worked at the Federal Reserve Bank of Chicago as an analyst. In late 2003, he was asked to consider an assignment in the money laundering area. Bergman accepted the assignment, underwent a background check, received credentials affording him access to confidential banking information, and began working in the area. He was told that he was “part of the fight against terrorism” and that he “had been asking good questions.”

Bergman noticed supicious increases in the August 2001 currency componet of M1 money supply numbers. He tried to determine what caused the currency escalation. In his own words:

The currency component of M1 (Federal Reserve Notes circulating outside of banks) rose especially rapidly in July and August 2001. In fact, up to and including August 2001, that month (August 2001) was one of the three fastest growing months for the currency component of M1 since 1947, on a seasonally adjusted basis, even on the heels of significantly above-average growth in July 2001. Much of the July-August surge (over $5 billion above-average) seems to have been in the $100 denomination. Among other explanations, persons aware of any imminent terrorist attacks and concerned about possible asset seizures such as those that arose after the 1979 Iranian hostage crisis and the 1998 embassy bombings could have been trying to liquidate their bank accounts in July and August 2001. The money trail could provide important clues about people aware of, if not responsible for, the attacks. I looked at some internal data bearing on this issue that was available to anyone within the Federal Reserve’s internal computer network; after going back to look at this important data again a week or two later, it was no longer freely available, but password protected.

Bergman had worked at the Chicago Fed since July 1990, Approximately one month after his money laundering work was terminated for what was described at the time as an egregious breach of protocol attributed to his contacting the staff of the Board of Governors, Bergman’s department was absorbed into another department, and his 14-year employment with the Federal Reserve ended. Bergman was told that the elimination of his position at the Federal Reserve had nothing to do with him personally – that it was an organizational matter. He was offered and accepted a severance package, and left the Chicago Federal Reserve Bank in March 2004.

The Mucraker Report has the full story.

The Truth About Alan Greenspan and the Real Estate

Alan Greenspan continues to warn about problems in the real estate markets and other parts of the economy. But with every warning, Greenspan paints a picture that suggests the problems have nothing to do with his irresponsible money management during his reign at the Fed. In truth, if one man can be blamed for today's problems in the real estate markets, it is Greenspan. He flooded the home mortgage market with trillions of dollars during his watch.

Here are the cold hard facts:

When Greenspan took over at the Fed in 1987, total outstanding US home
mortgages stood at only $1.82 trillion.

By 1999, total outstanding mortgages in the US stood at $4.45 trillion.

By 2004, US home mortgages stood at $7.56 trillion.

In 2005, Greenspan's final full year as Fed chairman, home mortgage debt
outstanding amounted to $9.1 trillion.

Here is some of the jawboning Greenspan conducted while he was Fed
Chairman.

In 2003, he called the refinancing of housing, "support" for the economy:

The outsized dollar volume of these refinancings--by our estimates, $1-3/4 trillion net of cash-outs--was an all-time record and represented almost
one-third of the value of all regular home mortgages outstanding at the
beginning of last year...An even greater support to the economy than cash-
outs last year was the extraction of home equity associated with a record
6.4 million existing home sales, including condos, at record prices.

And he basically advised not to worry about a housing bubble:

...any bubbles that might emerge would tend to be local, not national, in scope... In evaluating the possible prevalence of housing price bubbles, it is
important to keep in mind that home prices tend to consistently rise relative
to the general price level in this country...A sharp decline, the consequences of a bursting bubble, however, seems most unlikely...Here is Greenspan spinning things now, as though he had nothing to do with the problem.

On March 15 of this year, he said:

You can't take 10 percent out of mortgage originations without some
impact...

In October 2006, he blamed the entire thing on the Berlin Wall coming down:

I dont think that the boom came from a 1 per cent Fed funds rate or from
the Fed’s easing. It came from the collapse of the Berlin Wall.

The Berlin Wall??

In 2003, while discussing refinancings, he came closer to the truth:

Owing largely to the lowest mortgage interest rates in more than three
decades and rising home prices, close to 10 million regular home mortgages were refinanced.

There are massive distortions in the economy right now, caused by
Greenspan's low interest rate monetary policies when he ruled the Fed.
Many different sectors could implode: further problems in real estate, the
carry trade, the hedge fund industry, etc. Greenspan knows this. He sees
that the economic tsunami wave is about to hit. His warnings should not be
taken lightly. He created the mess ahead. He knows it and understands how
bad things can get.

On Phil Gramm

Of late, we have been reading a couple books where the name Phil Gramm keeps appearing. The former United States Senator from Texas once sought the presidential nomination of the Republican Party.

The Irrepressible Rothbard, edited by Llewellyn Rockwell, contains a 1995 commentary (pgs 137-8) by Murray Rothbard where he analyzes Gramm as a presidential candidate:

Gramm is first of all the brightest of the candidates: unlike Gingrich, he is an intelligent academic, having taught economics at the Distinguished Friedmanite economics department of Texas A&M.

Unlike other candidates, when Gramm sells out principle, which he will do often, he knows he is selling out and why, which I guess is a virtue...Since he bends to the political winds...he is the likeliest of all the major candidates to be an opportunist [in favor of free markets and small government, when he
can].

More recently, and from real world dealings, former Citigroup chairman, Sandy Weill, in his autobiography, The Real Deal, writes of his experience with Gramm, whiich seems to backup Rothbard's take:

...Phil Gramm..appeared uninterested in serious reform and never missed a chance to remind me that there were no important banks, brokers or insurance companies domiciled in his state of Texas. In other words, financial services companies were far from his natural constituency...Just as we were about to cross the goal line, one last obstacle arose. Senator Gramm, ever the savvy horse trader, took exception to a provision of the bill which forced banks to invest in poor areas, a long-running political football in Washington. One afternoon he called and threatened, "Call your friend Clinton and get him to change the provision or else I'll fire my rockets and blow your bill apart."...Gramm called again the next day to
repeat his demand, and this time the president and Texas senator found some way to compromise.

On November 12, President Clinton signed into law the Gramm-Leach-Bliley Act, and in a stroke, modernized the structure of financial services.

On Tuesday of this week in an op-ed piece for WSJ, Gramm endorsed John McCain for president. Wrote Gramm, "He might not be the right president for all times, but he is the right president for these times."

Edmund "Three Card Monte" Phelps

On the streets of New York City, you can occasionally run into card sharks who make it appear damn easy to win money off them by picking the red card out of three cards-where the other two cards are black cards.

Our advice, if you happen to pass by these scammers, is to just keep walking. You won't win. They have shills in the crowd to rope you in and the card dealer is a card shark.

In the world of economics, there are also sharks. They have mad schemes to "improve" the economy, and they occasionally have shills to rope you in and entice you to pay attention to the madness. The Royal Swedish Academy of Sciences has got to be one of the better washed, most refined shill operations the world has ever seen. They don't play at street level. They are far above it all. They award Nobel Prizes. In the field of economics this year, they awarded the Prize in economics to Edmund C. Phelps. And, yes, it did rope us in to check Phelps out.

Since he was named a Nobel recipient, we have published below two other blog posts about Phelps. But what really got us to pay attention to Professor Phelps, with additional caution, are his comments today in the Wall Street Journal. They would make any Three Card Monte dealer jealous with envy.

In fact, to keep our Three Card Monte analogy going, Phelps is only dealing with two cards--two black ones, but he tries to convince you that you can pick the red card from his lot of two black cards. Smooth man, smooth.

But let's take a closer look at his double dealing.

Phelps wants to raise taxes on low income earners. This is how he puts it inthe WSJ interview:

Over the last couple decades, the federal government has virtually abolished taxation of a wide swath of people with smallish incomes. This was a mistake, because we need all the tax revenue we can get. It's inefficient to have low marginal tax rates on low incomes, because people with upper middle incomes and high incomes get the same breaks, but they don't get any incentive to work harder. What you want to do is give tax breaks that give people an incentive to earn income that would not otherwise be earned. So in my view, President Bush should have restored the taxes on the low-income people rather than lowering the taxes on the
high-income people.

And what does Phelps want to do with this new tax revenue? He wants to give it to low income earners. From WSJ again:

I think economic justice is all about pay rates at the low end relative to those in the middle. So the government needs a lot of tax revenue to meet the problem of low-wage workers. Too many people in America suffer joblessness, and when they are employed they can't earn a decent living. I've been advocating a solution: subsidies that would be paid to companies for the ongoing employment of low-wage workers.

Are you seeing the double dealing here, tax low-incomes and use the money to subsidize low incomes? Of course, it runs through the government bureaucracy where who knows how much is siphoned off. Smooth, very smooth--that is if you love big government shell games and double dealings.

Phelps also thinks there is too much wealth in the economy, and he wants you to give it to the government:

I have the eccentric view that there's too much wealth sloshing around the American economy. This wealth has bad incentive effects on the supply of labor, employee performance and maybe even innovation. We have become wealthy thanks in part to unsustainably low tax rates. From that point of view, it would be a good thing for the federal government to raise taxes and run big surpluses until we have retired the public debt. In the short run the higher tax rates might be unpleasant.

Notice the card he isn't showing here. What about cutting the size of government, instead of raising taxes, to reduce the deficit?

And just exactly who has stopped working today because taxes are too low?

Don't get in a card game with this character.

The Flaw in the Economic Freedom Report

The Fraser Institute is out with their latest "Economic Freedom" rankings. In the report, Economic Freedom of the World: 2006 Annual Report, countries are ranked by their so-called economic freedom.

The problem with this report is that no country deserves a passing grade,yet many are given impressive scores.

The report completely ignores the destructive nature of money manipulation (Particularly money supply inflation) , especially the long-term destructive consequences of such.

Why are we up in arms about this?

The United States, for example, receives an overall rating of 8.2 (out of 10)and generally gets a rank of 9 plus for money soundness. This categorization occurs despite the fact that the money supply (M2NSA) in the United States has grown over the last 10 years from $3,754 billion [August 1996] to $6,868 billion [August 2006].

This money supply growth suggests tremendous mis-allocations in the economy--that
wll ultimately lead to a severe economic downturn.

Thus it makes no sense to give a passing grade, i.e. above 6, when a country has a money supply controlled and manipulated by the state. When the ultimate business cycle collapse occurs, won't socialist's of every stripe point to the high freedom ranking as an indication that freedom is a failure?

In fact, the failure will not be because of freedom, but because there simply is no money freedom and free banking in the world.

Who Owns All the Mortgage-Backed Securities?

As signs of real estate collapse become all the more obvious, the big question has to be "Who owns all the mortgage-backed securities?".

Total market value of all outstanding U.S. MBS at the end of the first quarter of 2006 was approximately $ 6.1 trillion, according to The Bond Market Association.

Think about that, a $6.1 trillion debt sector where the underlying collateral is declining in price. Wall Street has sold these securities to every nook and cranny of the investment world. There are going to be huge MBS portfolios that will be underwater once the foreclosures start. It is going to damage retirement plans and much more. We trust you don't own any of this stuff.

Reckless Real Estate Loans

This note is about the wacky loans being made in the real estate market. But first, we wish to emphasize that the ultimate cause of the real estate slowdown is not wacky loans, but the micro-managing of the economy by Federal Reserve money manipulations. First they pump huge amounts of money into the economy, then they raise rates and cut the money flow. The loans are a byproduct of the Federal Reserve money pumping activity.

But, the types of loans being created for the housing market will result in the real estate crash coming sooner than would otherwise be the case, and also deeper. WaPo reports that loans that are being made "include interest-only mortgages and 'option' mortgages, in which borrowers decide each month how much to repay."

WaPo goes on to state:


Many borrowers are paying as little as possible. About 70 percent of the people who take out an option adjustable-rate mortgage, which lets the buyer avoid paying even the full interest on the loan, end up paying the lowest permissible amount each month, according to the Federal Deposit Insurance Corp... The amount unpaid is added to the mortgage balance, so borrowers end up owing more than when they started. Having no equity in a home increases the risk of foreclosure, especially when housing values fall and houses are hard to sell...

In 2000, just 1 percent of American homeowners who got new loans had these types of loans, but by May 2005, about a third of all borrowers did -- about the same percentage as in May 2006, according to new data from First American LoanPerformance, which tracks the statistics.

It's an open secret these loans are a problem. WaPo again:


"We are deeply concerned about the potential contagion effect from poorly underwritten or unsuitable mortgages and home equity loans," Suzanne C. Hutchinson, executive vice president of the Mortgage Insurance Companies of America, wrote in a recent letter to regulators. ". . . The most recent market trends show alarming signs of undue risk-taking that puts both lenders and consumers at risk."

We have speculated on these pages that the Federal Reserve will at some point open the floodgates and pour enormous amounts of money into the system, when some type of financial or economic panic occurs. We have not speculated as to where in the financial system or the economy such a panic will occur. There are many, many possibilities. But looking at the current structure of the real estate market, one can not rule out a major panic or problem by those holding all these mortgages where foreclosures are almost a foregone conclusion.

One question that remains is who is holding this high-risk mortgage paper. Banks are to a large degree making these loans, but they are then securitizing the mortgages and selling them off. But someone is ultimately holding this wacky paper. Is it pension funds? Hedge funds? Unfortunately, in time, it is likely we will learn when the entire structure collapses.

Reckless Real Estate Loans

This note is about the wacky loans being made in the real estate market. But first, we wish to emphasize that the ultimate cause of the real estate slowdown is not wacky loans, but the micro-managing of the economy by Federal Reserve money manipulations. First they pump huge amounts of money into the economy, then they raise rates and cut the money flow. The loans are a byproduct of the Federal Reserve money pumping activity.

But, the types of loans being created for the housing market will result in the real estate crash coming sooner than would otherwise be the case, and also deeper. WaPo reports that loans that are being made "include interest-only mortgages and 'option' mortgages, in which borrowers decide each month how much to repay."

WaPo goes on to state:


Many borrowers are paying as little as possible. About 70 percent of the people who take out an option adjustable-rate mortgage, which lets the buyer avoid paying even the full interest on the loan, end up paying the lowest permissible amount each month, according to the Federal Deposit Insurance Corp... The amount unpaid is added to the mortgage balance, so borrowers end up owing more than when they started. Having no equity in a home increases the risk of foreclosure, especially when housing values fall and houses are hard to sell...

In 2000, just 1 percent of American homeowners who got new loans had these types of loans, but by May 2005, about a third of all borrowers did -- about the same percentage as in May 2006, according to new data from First American LoanPerformance, which tracks the statistics.

It's an open secret these loans are a problem. WaPo again:


"We are deeply concerned about the potential contagion effect from poorly underwritten or unsuitable mortgages and home equity loans," Suzanne C. Hutchinson, executive vice president of the Mortgage Insurance Companies of America, wrote in a recent letter to regulators. ". . . The most recent market trends show alarming signs of undue risk-taking that puts both lenders and consumers at risk."

We have speculated on these pages that the Federal Reserve will at some point open the floodgates and pour enormous amounts of money into the system, when some type of financial or economic panic occurs. We have not speculated as to where in the financial system or the economy such a panic will occur. There are many, many possibilities. But looking at the current structure of the real estate market, one can not rule out a major panic or problem by those holding all these mortgages where foreclosures are almost a foregone conclusion.

One question that remains is who is holding this high-risk mortgage paper. Banks are to a large degree making these loans, but they are then securitizing the mortgages and selling them off. But someone is ultimately holding this wacky paper. Is it pension funds? Hedge funds? Unfortunately, in time, it is likely we will learn when the entire structure collapses.

Reckless Real Estate Loans

This note is about the wacky loans being made in the real estate market. But first, we wish to emphasize that the ultimate cause of the real estate slowdown is not wacky loans, but the micro-managing of the economy by Federal Reserve money manipulations. First they pump huge amounts of money into the economy, then they raise rates and cut the money flow. The loans are a byproduct of the Federal Reserve money pumping activity.

But, the types of loans being created for the housing market will result in the real estate crash coming sooner than would otherwise be the case, and also deeper. WaPo reports that loans that are being made "include interest-only mortgages and 'option' mortgages, in which borrowers decide each month how much to repay."

WaPo goes on to state:

Many borrowers are paying as little as possible. About 70 percent of the people who take out an option adjustable-rate mortgage, which lets the buyer avoid paying even the full interest on the loan, end up paying the lowest permissible amount each month, according to the Federal Deposit Insurance Corp... The amount unpaid is added to the mortgage balance, so borrowers end up owing more than when they started. Having no equity in a home increases the risk of foreclosure, especially when housing values fall and houses are hard to sell...

In 2000, just 1 percent of American homeowners who got new loans had these types of loans, but by May 2005, about a third of all borrowers did -- about the same percentage as in May 2006, according to new data from First American LoanPerformance, which tracks the statistics.

It's an open secret these loans are a problem. WaPo again:

"We are deeply concerned about the potential contagion effect from poorly underwritten or unsuitable mortgages and home equity loans," Suzanne C. Hutchinson, executive vice president of the Mortgage Insurance Companies of America, wrote in a recent letter to regulators. ". . . The most recent market trends show alarming signs of undue risk-taking that puts both lenders and consumers at risk."

We have speculated on these pages that the Federal Reserve will at some point open the floodgates and pour enormous amounts of money into the system, when some type of financial or economic panic occurs. We have not speculated as to where in the financial system or the economy such a panic will occur. There are many, many possibilities. But looking at the current structure of the real estate market, one can not rule out a major panic or problem by those holding all these mortgages where foreclosures are almost a foregone conclusion.

One question that remains is who is holding this high-risk mortgage paper. Banks are to a large degree making these loans, but they are then securitizing the mortgages and selling them off. But someone is ultimately holding this wacky paper. Is it pension funds? Hedge funds? Unfortunately, in time, it is likely we will learn when the entire structure collapses.

Options Investigation and 9-11

The Wall Street Journal recently placed a story on its front page that details an investigation by WSJ that showed many companies granted their executives stock options following the 9-11 related drops in their stocks. So what? Where is it written you can not buy stock or set options when your stock is down? If executives believe in their companies, one would hope they do exactly this.

But while WSJ seems to have no problem going after corporate America for doing something that is clearly legal, the WSJ continues to be silent on the real 9-11 options scandal. We continue to hear from sources inside the CBOE that there was a cover-up as to who bought put options on airline stocks just before 9-11. It remains a state secret as to who exactly profited from 9-11 through the purchase of those put options.

Our sources tell us that the CBOE was told to stop the investigation into who bought the put the options. "Documents were destroyed," a friend at the CBOE tells us.

Bernanke to Real Estate Investors: Drop Dead

Federal Reserve chairman pride themselves on being opaque in their testimony before congress. You always have to read between the lines to find out what they are really saying. Reading between the lines of today's testimony by Fed chairman Bernanke, before the House Financial Services Committee, should be far from comforting to the real estate industry.

Does Bernanke know the housing market is crashing? Oh yeah. During today's testimony, he said: "The downturn in the housing market so far appears to be orderly."

Translation: The housing boom is over. All the numbers point to declining prices from here, but there is no crash yet. At the Fed we call this "orderly." This means there are still a few people out there who think they can buy real estate and flip it in six months. Once we run out of these people, we have no idea how bad things will get.

Does Bernake care about falling housing prices?

Reuters reports on his testimony this way:

One of the things that Bernanke and his Fed colleagues are keeping close tabs on is the extent to which a housing slowdown will put a damper on overall economic activity.

"We recognize the risk ... and we are watching it very carefully," he said.

Translation: The Fed at this point doesn't care about the real estate crash. If things get so bad that there is a major crisis somewhere in the economy, the Fed may stop just watching. But for now the Fed is just watching. Housing market be damned, pass the popcorn.

The Real Estate Market View from Beverly Hills

The housing market continues to deteriorate and now the credit problems are starting to emerge. Yesterday, we had a meeting with a Beverly Hills mortgage broker who has been in the business for more than 40 years.

He tells us that he expects many credit problems for low and middle class wage earners. In some cases, he tells us, home owners have borrowed, between mortgages and home equity lines of credit, four or five times against their houses.

He told of one case that had just come across his desk,a woman,who years back, had paid $200,000 for a home with $50,000 down. As the price of the property climbed in value, she borrowed against the house. First $15,000. Then $50,000. Then $100,000. Then another $80,000. Including her first mortgage, she had borrowed against the house five times.

From each new loan, she used funds to make payments on her earlier outstanding home loans, and just plain spent a lot of the money on personal items. Now that the real estate market has stopped climbing in value, she is not able to get anymore loans. Her current situation: She has monthly loan payments of $4,200 per month. Her income from her job as a secretary is $2,500 per month.

There is no way she can meet her financial obligations. She is going to lose her house. We remarked, "She must be in shock." Our mortgage broker friend replied, "She is numb. It is hard to even carry on a telephone conversation with her. You can tell she is having difficulty processing the situation she is in."

Our friend claims that across the country there are hundreds of thousands that will be in the same situation. And although he expects the brunt of the crisis to be absorbed by the low and middle class, he tells us that there are going to be some spectacular celebrity bankruptcies in six months or so. He personally knows of two situations that are developing right now.

He tells us that there are some super-wealthy in Beverly Hills, but most are in debt up to their plucked eyebrows. "It's a lot of show. Many, many of them don't have a penny in the bank," he says. "There will be some newsmaking bankruptcies."

Options Investigations and 9-11

The Wall Street Journal recently placed a story on its front page that details an investigation by WSJ that showed many companies granted their executives stock options following the 9-11 related drops in their stocks. So what? Where is it written you can not buy stock or set options when your stock is down? If execuitves believe in their companies, one would hope they do exactly this.

But while WSJ seems to have no problem going after corporate America for doing something that is clearly legal, the WSJ continues to be silent on the real 9-11 options scandal. We continue to hear from sources inside the CBOE that there was a cover-up as to who bought put options on airline stocks just before 9-11.
Our sources tell us that the CBOE was told to stop the investigation into who bought the put the options. "Documents were destroyed," a friend at the CBOE tells us.

This Babe is Betting Big that Bernanke goes on a Bender

We recently had a conversation with a woman who just started dabbling in the real estate market. For purposes of this note, she will be referred to as Jane.

Jane is a legal secretary in Los Angeles and doesn't strike one as the type that would, say, belly up to a Vegas crap table and lay a grand down on one throw of the dice. Yet, Jane is making a big bet, much bigger than a grand, that Ben Bernanke will bail her out of a stupid investment.

Jane bought a loft, for investment purposes, in downtown Los Angeles. It's a small loft. We have actually lived in residences that had bigger bathrooms than the size of this entire loft unit. Whatever she laid down for this dog house, Jane confessed to us that her monthly nut--mortgage payment, real estate taxes and common fees-- amount to about $2,200 per month. She has owned the loft for three months. It's still not rented.

At first she tried to rent it out for $1800 per month. She is now down to $1400 per month and still no takers. Welcome to the final stage of the real estate boom. Jane is dead in the water on this baby. Who the hell loaned her the money for this nutty investment? She is paying out of her own pocket the monthly $2200 hit. And while all this is going on, Ben Bernanke and his brigade are still raising interest rates. The real estate market is slowing already, before any further hikes. The next hike will destroy the value of this loft. It will tank in price.

Jane may not understand, but you need to keep your eye on the Fed before making real estate investments (or most other investments for that matter). The Greenspan years at the Fed will someday become known as the easy years. Easy money, easy times. We don't think Bernanke will get off so lucky.

When the Fed is flooding the markets with easy money, it bails out a lot of people who make stupid stock market investments and stupid real estate investments. Tough times are tough for even the shrewd. Jane is not in the shrewd camp. Her investment is going down the tubes, unless of course Bernanke loses his mind, goes on a days long bender, walks back in the office about a week later, and in a tequila fueled craze cuts the discount rate, cuts the reserve requirement and cuts the Fed funds rate, just because it feels good. Not likely, but that in essence is what Jane is betting on.

What are you betting on?

The Invasion of Panama: "There was something else going on."

With George Bush I as Commander and Chief, the United States invaded Panama in December 1989.It has been a long time since I have thought about this invasion but, my curiosity about the deeper reasons for this invasion have recently been awakened.

A few days ago I spoke to a former marine who was one of the first marines leading the U. S. invasion. This guy is a pretty red, white and blue kind of guy and gave me some patriotic reasons for the invasion. You know, the normal "Noriega was a bad guy kind of stuff".

But after careful probing and questioning, it became obvious that even he had some reservations about what the invasion was all about.

This is what he finally said to me:

"You know there was something else going on when that invasion took place. We had some target buildings we were given to destroy. The buildings weren't any type of military threat to us and we kind of looked around at each other and said 'What the hell is this all about?', but we followed orders and blew the buildings up. I really think that grabbing Noriega was a secondary reason for the invasion. There was something else going on."

He had a very puzzled look on his face at this point.

-RW 

Inside The Mind Of Steven D. Levitt : A Review of Freakonomics

Steven D. Levitt (with Stephen J. Dubner) has a hot new bestseller Freakonomics: A rogue economist explores the hidden side of everything.

In the introduction, Levitt makes abundantly clear that his book has no central theme. I can almost agree with this assessment. The book is indeed much more a blog type compendium of different topics, rather than an exposition on one theme. But I did find one theme that runs through out the book. Levitt poses interesting questions, reports interesting facts and occasionally makes clever arguments, but these questions, facts and arguments are surrounded by misleading statements, hazy statements, inaccuracies, poor logic, sloppiness and outright errors.

These flaws run from the minor to the grand scale. Indeed,one must begin by considering that Levitt clearly believes that through out the book he is "doing economics." In fact, although he does tend to include some type of cost benefit analysis in most chapters, his analysis tends to be much more that of a sociologist than that of an economist. Consider the titles of some of his chapters: "What Makes a Perfect Parent?", "Where Have All the Criminals Gone?" and "What Do School Teachers and Sumo Wrestlers have in Common?"

Further although there is an implication by Levitt that he is writing theory, he is in fact more of a historian reporting on past data.(For the important distinctions between theory and history, see Ludwig von Mises' Theory and History.)So instead of a book of economic theory, we have a flawed book on sociological history.

On a minor scale, Levitt tends to use misleading chapter titles. His chapter "What do School Teachers and Sumo Wrestlers have in Common?" comes up with the answer: some in both groups cheat to get ahead. Since there are some in almost any group that will cheat to get ahead, there is nothing distinctive about this supposed "link"

It is the same as saying "What does Steven Levitt and the members of the offensive front line of the New York Giants football team have in common?" Answer: They all use cell phones. The facts in both cases are true but they result in no new insight, but the questions themselves tend to mislead one into thinking that there is some type of distinctive link in the answers when there is not. At most the chapter title is a sloppy effort at being cute.

Levitt goes from bad to worse in the title of his next chapter: "How is the Ku Klux Klan like a Group of Real Estate Agents?" His answer: they both use privileged information to their advantage. Again, nothing remarkable about this chapter, since everyone uses privileged information to their advantage (Indeed that is pretty close to the definition of an entrepreneur!)

Levitt's presentation is so sloppy that it almost fails to get across the point that privileged information is used by the Ku Klux Klan and real estate agents. In short, it is a pretty bad example used to get in a little, quite interesting, history about the Ku Klux Klan.

As for sloppy and hazy arguments, in one chapter, Levitt relates the story of how a pre-school attempted to solve a problem of children being left late after school. The pre-school instituted a fine for parents who left their children late. With the new stated policy (It was only a $3.00 fine), more parents left their children late.

Levitt in the next chapter on page 45 calls this cheating: "So if...day-care parents...cheat are we to assume that mankind is innately and universally corrupt?"

Given all the cheating going on in the world, it is quite odd that Levitt uses this as one of the examples, which only by the wildest stretch could be called "cheating." In fact, it really is a story about the limits of knowledge, and how people will change their actions when more knowledge becomes available.

In Levitt's next chapter sloppiness is coupled with an implied wrong conclusion. Levitt does the math and shows that on a per hour basis "The per hour death rate of driving versus flying...is about equal." He then concludes "The two contraptions are equally likely... to lead to death." He ends his analysis of flying versus driving with this conclusion, which tends to imply that it doesn't matter whether you fly or drive. But, in fact, using Levitt's own data the clear conclusion is the exact opposite of what Levitt implies. The clear conclusion is to fly whenever possible. Why? Because you get there faster, which means you are traveling a shorter amount of time at the per hour death rate. If it takes five hours to fly from New York to Los Angeles and three days or 72 hours to drive, then if the death rate per hour is the same, the risk by driving is close to 15 times greater. If you do nothing else after reading his book other than take Levitt's implied conclusion on driving versus flying and drive instead of fly, Levitt has increased your chances of dying when traveling by nearly 15 times!

Levitt's chapter on names continues the trend of sloppiness, haziness, illogic and poor conclusions.


He tells us that "...it isn't famous people who drive the name game." He uses the fact that no parents are naming their daughters Madonna as part of his argument that this is proof that parents don't name their children after famous people, but this is just sloppy logic. Just because parents don't name their children after Madonna doesn't mean many parents aren't naming their children after famous people. In fact only a page away from where Levitt tells us that famous people don't drive the name game, Levitt lists the most popular black names in California in the year 2000. Number 4 was Michael and Number 2 was Jordan. Hmmm, it seems to coincide with a period when there was a pretty famous basketball player on the court, named Michael Jordan.

In short, I could literally write a book (maybe many books) detailing the errors, sloppiness, inaccuracies, haziness and poor theory going on in this book. And I haven't even touched on the errors in his chapter on Roe v.Wade. (Levitt is probably most well known for his theory that abortions reduce crime, see Steve Sailer for a critique of this theory.) Nor have I discussed his love affair with regression analysis, which is a questionable method to prove theory in the social sciences (See Leoni and Frola)

In a sense though, this book is a great mystery book. The great mystery being just what marketing plan was implemented to drive this disaster onto the best seller list?

In The Enron Audience

Saw the Enron documentary film on Saturday.

The woman sitting next to me kept letting out an all knowing laugh every time the film showed a clip of Ken Lay or Jeff Skilling saying something positive about Enron in the days before the collapse.

Somehow I doubt she was so all knowing before the collapse. And I wonder if she owns a condo here in Chicago, morgatged to the hilt. I wonder if she will be letting out her all knowing laugh when Alan Greenspan's money tightening tanks the real estate market.