Things to Come

A few things I'm considering posting on that I haven't gotten around to writing yet, due to time constraints:

- What the conservative NJ firebrand Steve Lonegan and the liberal D.C. blogger Matt Yglesias have in common.

- The challenges of predicting default for financial firms: why the Altman Z-Score model isn't recommended for financials and the limitations of alternative, market-based models.

- Looking at a couple of recent bankruptcies, e.g., that of Eddie Bauer: would the Altman Z-Score model have predicted bankruptcy two years ago?

An Astronomer with a Sense of Humor

A humorous letter to the editor in today's Financial Times, "Buy me a massive telescope or pay the consequences":

From Dr Charles Beichman

Sir, “Give me a billion dollars for my accelerator or I’ll kill your economy.” These words should strike terror into the hearts of bureaucrats everywhere. And the next time they hear them, those responsible for funding big science should immediately just hand over the money.

As your article (“Of couples and copulas,” April 25) on David Li^[1] describes, the flood of theoretical physicists, aka the “quants”, coming into Wall Street after the cancellation of the SuperConducting Super Collider (SSC) created the financial weapons of mass destruction whose power to annihilate wealth is now obvious.

With the loss of trillions of dollars throughout the world economy, how much safer we all would have been if Congress had just paid the ransom over a decade ago and kept all those physicists safe in their laboratory at the Waxahachie, Texas, site of the SSC. So, please, listen carefully when I say that we have one or two major space telescopes that need funding. Otherwise I might consider moving to Wall Street.

Charles Beichman,
Executive Director,
Nasa ExoPlanet Science Institute,
California Institute Of Technology, US

The image above, of David Li's Gaussian copula function, comes from the Wired article by Felix Salmon linked to in the footnote below.

^[1]Creator of the Gaussian copula default function ("the formula that killed Wall Street").

The Latest Warning from China about the U.S. Dollar and Debt

From an op/ed column by Professor Yu Qiao of the School of Public Policy and Management, Tsinghua University, Beijing, in the Financial Times this week ("Asia is the victim if the bond bubble bursts"):

Most of Mr Obama’s stimulus spending is devoted to social programmes rather than growth promotion, which may exacerbate America’s over-consumption problem and delay sustainable recovery. On top of this, the unprecedented fiscal stimulus, with the Federal Reserve’s move to inject money into credit markets, contains self-destructive seeds. The US risks ending the dollar’s role as the reserve currency, especially considering there is already $10,000bn (€7,535bn, £7,009bn) in US Treasury debt, and much more in liabilities from the costs of social security, healthcare and financial institution bail-outs.

The provision of stable, reliable and viable dollars may be subordinated to short-term US interests, posing a risk to global monetary stability. In the long term, America may seek to resolve its economic mess by devaluing the dollar at best and a default at worst. This is depicted in a Chinese proverb: “Drinking poisonous liquid to quench thirst”.

Professor Yu proposes an interesting alternative in his op/ed: essentially, for China and other Asian holders of our debt to work with the U.S. government to convert some of these holdings into preferred minority stakes in equities and infrastructure projects, since "equity claims on sound corporations and infrastructure projects are at less risk from a currency default".