A collection of essays by Bill (website@ccjj.info) accompanied by feedback from his friends.

Saturday, June 5, 2010

Book Report: The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else

De Soto explains that there is a lot of property in the 3rd world that economist's don't normally count. It is all the unofficial, or "extralegal" property. Many of the people, for example, are squatters living in shanties they have built in slums, working at unofficial businesses. The value of their land, buildings, and businesses is often a majority of the total property of a 3rd world country.

People choose to keep their property outside the law because complying with the law and making their property holdings and businesses legal is prohibitively difficult, taking many months or years of work, with hundreds of bureaucratic steps involved.

All this informal property is very hard to deal with -- you cannot use it as collateral for a loan, for example. Building a shanty in a slum is very inefficient, you have to be living in it the whole time to enforce your stake in it, building with what materials become available. If the land had been formally purchased, one could take out a loan against it to fund the construction. Because the state doesn't recognize your property, you often turn to gangsters and the like to guarantee your property rights.

De Soto, a Peruvian, provides many examples from Peru and other 3rd world countries. He spends a lot of time discussing American history -- in much of the nineteenth century, many American settlers and miners had extremely dubious claims to the land they settled and worked, and he discusses how this property eventually evolved into formal, legally recognized property.

Then the author discusses how this process could be brought about in the modern third world. The barriers are formidable, as many of the elite classes and particularly the lawyers are quite unsympathetic to the plight of those who own unofficial property.

De Soto makes a convincing case for a process that is central to spreading prosperity to the third world. The book has many endorsements from prominent people and prestigious economic publications.

The main problem with this book is that it repeats itself too much. It could have been about 1/4 as long as its length of 246 pages.

Tuesday, May 18, 2010

Book Report: Descent into Chaos: The U.S. and the Disaster in Pakistan, Afghanistan, and Central Asia

Fascinating book, a history of Afghanistan and Pakistan since September 11th. The book shows how Musharraf, then dictator of Pakistan, and the Pakistani intelligence service (ISS) extensively fooled the US for years, pretending to be fighting Islamic extremism while actually supporting it.

The book extensively criticizes the Bush administration for 2 things -- its failure to do major nation-building in Afghanistan, and its willingness to leave power in Afghanistan in the hands of warlords. I'm no fan of Bush, but I don't think these criticisms are entirely justified.

Firstly, it would have been nice of us to spend a fortune doing nation building in Afghanistan, but then, why not do nation building in Botswana? At least Botwana had never hosted a terrorist organization that killed thousands of Americans. It would be nice of us to spend more money on foreign aid, but does it make sense to focus that money on countries where the people particularly hate us?

Secondly, I have read (but it was not mentioned in this book), that Pashtuns, if not all Afghans, are notoriously xenophobic. If we had chosen not to leave power in the hands of native warlords, it would have involved a much greater presence of foreign troops in Afghanistan, triggering a xenophobic backlash. Working through the warlords, however backward and unjust they might be, was a shrewd strategy.

Sunday, April 25, 2010

Book Review: "The Conscience of a Liberal" by Paul Krugman

This book wasn't really what I expected. I expected Krugman to be trying to persuade me to become a liberal, while in fact he tends to assume I already am one and is mostly talking about tactics to achieve liberal goals. I also expected a lot of talk about poverty, and about liberal social issues. In fact neither of those things were discussed very much at all. What was discussed was mostly "inequality".

Apparently, while per-capita GDP has risen considerably since 1980, the median income, adjusted for inflation, has stayed roughly constant. The increase in wealth has been mostly concentrated among the rich. This offends Krugman, and most of the book is spent focusing on reducing "inequality".

On the topic of the median income not having risen, has the skill level of the median person increased? Krugman gives no information on this, and I am skeptical about whether it has. In my opinion, one of the biggest problems the economy faces is that so many people are arriving in the workforce without skills. Even people born with a silver spoon in their mouths and their college education paid for by their parents often major in something of no economic value, economically castrating themselves, and spend the rest of their lives complaining about how "unfair" capitalism is because they aren't paid better. People make these unfortunate choices partly because they often find economically rewarding topics less interesting or more difficult, and partly because we have an extremely popular counterculture that is doing everything it can to discourage economically rewarding activity, at least of the legal variety.

One point Krugman makes many times is that the Republicans benefited tremendously from race as an issue, and that race was the main reason Ronald Reagan got elected. I disagree that Republicans gained so much from race, it generally is a topic they're sick of hearing about, while liberals always want to go on and on about it. He makes no mention of a couple of issues Reagan benefited from: Carter's impotence in dealing with the Iranian hostage crisis, and the widespread perception that the UAW had destroyed the Michigan work ethic, and with it, the competitiveness of the US auto industry.

Another point Krugman made, briefly, is that the influx of unskilled illegal immigrants only decreases unskilled wages in the US by about 5%, which I find extremely difficult to believe.

So if we give Krugman what he wants, and divvy up the pie more in favor of those without skills, we will reduce the incentives to get skills and thus have fewer skilled people contributing to the economy, and lower productivity as a result. But Krugman, in the whole book, which was almost entirely about economics, never expresses any concern about productivity. In his mind, wealth is not something you create, it's something you take from the rich.

I am no fan of the Republican party, but Krugman really despises and vilifies them to an extreme level.

Krugman gives a history of the 20th century, slanted from his own point of view, but interesting, nonetheless. He mentions that while the top bracket marginal tax rate is currently about 40%, after WWII it was about 70% and in the fifties it was about 90%. I don't personally understand why so many Americans are so upset about how high taxes currently are. About the only major policy position McCain was offering during his bid for the presidency was a tax cut for the rich, and until the financial crisis, he was neck and neck with Obama, though Obama was better financed.

It's not surprising that Krugman is a fan of labor unions, but it's interesting that one of the reasons he supports them so much is that they provide an opportunity to indoctrinate workers to vote for liberal politics. Of course, as I've said, their negative impact on productivity doesn't bother him a bit. Krugman is convinced that only CEO's and the rich are against unions, he seems totally unaware of the fact that they are unpopular with many common people as well. He bitterly mentions Reagan's firing of the illegally striking air traffic controllers in 1981, but fails to mention the fact that it was met with widespread public approval.

There is a chapter about health care reform, which is quite sensible.

Krugman never mentions religion as a political issue, nor does he mention social issues the Republicans have gained from, such as fighting abortion and banning gay marriage. Thomas Frank, who I think is more liberal than Krugman, in his "What's the Matter with Kansas?", discusses how these issues took the spotlight away from the economic issues that he, like Krugman, would like people to focus on.

Wednesday, April 14, 2010

Book Review: The Genius in All of Us, by David Shenk

The following post was published on The Gotham Skeptic on April 7, 2010.

On Saturday, March 13, David Shenk, the author if "The Genius in All of Us" delivered a lecture to the New York City Skeptics. The book's press release promised a lot, saying Shenk would give us reason to "Forget everything you think you know about genes, talent, and intelligence.". Shenk said there was a "mountain of evidence" for a level of "talent abundance" that we had previously not known about. The talk totally failed to deliver on these promises, as did his book.

I am reminded of the claim that "we all use only 10% of our brains" that was discussed in the latest issue of "Skeptic" magazine, the implication being being that there should be some way to tap into that other 90%. How does one confirm or refute such a claim? But the burden of proof is on Shenk, since he did promised us a "mountain of evidence". Shenk mentions one experiment with a sample size of one, where a college student with average IQ was taught, over the course of a year, to memorize sequences several dozen digits long, but it is questionable whether this is a useful skill, let alone a meaningful increase in "intelligence". Shenk never gives clear evidence that the average human can be made into a genius, in fact the general thrust of his book is to dismiss evidence rather than provide any, unless you're willing to be persuaded by anecdotes, which a skeptic shouldn't be.

To begin with, what, precisely, is the thesis of the book? Shenk gives (mostly anecdotal) evidence, 99% of the time, for the idea that talent and intelligence have nothing to do with genes. He does discuss a concept that intelligence is not a matter of "G + E" (genes plus environment), as many experimenters have analyzed it, but rather "GxE", or a complex interaction of genes and environment (though in his prose, Shenk interprets this as mostly environment). But where is he taking us with this? Is he providing us with another function that fits the experimental data better? No, he just says "it's complex", doing everything he can to render the problem intractable, manufacturing an absence of evidence that will leave him free to draw any conclusion he wants, supported by anecdotal evidence alone. However, he realizes there is strong scientific evidence in favor of a substantial genetic influence, so he occasionally covers himself with statements like "The blank slate is dead. Genetic differences do matter" that contradict what he's saying most of the time. So, in a nutshell, his point is "Genes don't matter! Genes don't matter! Genes don't matter! (Except they do.)". This double talk, this not really admitting what he's obviously out to prove, is shifty and infuriating.

I don't think this "GxE" business comes as news to genetics researchers. Everyone has known all along that the interaction between genes and environment is complex. But when you're doing research and taking measurements, you have to start somewhere, make approximations, and fit data to simple curves. Shenk wants none of that, data and statistics are his enemies, he wants to live in the world of the purely anecdotal, because you can support pretty much any conclusion you want that way.
More from Shenk on statistics: "knowing the average lifespan doesn't tell me how long my life will be". Of course it doesn't tell me exactly how long my life will be, but that doesn't mean it's a useless bit of information. If I am trying to assess how long I will live, say in order to plan for retirement, the average life expectancy for someone of my age and gender is one of the first things I will look at. What is Shenk offering us as a replacement for the evils of statistics? One anecdote after another -- hardly an improvement.

Shenk spends only 10 pages discussing twin studies, which is way too little given that twin and adoption studies provide most of the evidence he wants to refute. Much of these 10 pages are wasted on anecdotes. He does, accurately, report that twin studies have determined the heritability of 60% of IQ, 60% of personality, 40-66% of motor skills, and 21% of creativity.
He then launches into a diatribe about how he doesn't like the term "heritable", pointing out that height is 90% heritable but that doesn't mean that "90% of my height comes from my genes and 10% from my food", which I agree with, but where is he taking us with this? He does not enlighten us with another, more meaningful way to interpret the word, rather his motivation is to give us an excuse to ignore it altogether. The fact that the IQ of adults is at least 40% heritable given a wide range of environments tells us a lot. It is a very meaningful fact.
Shenk attributes some of the observed similarities of identical twins reared apart to "hidden dissimilarities", that is, researchers reporting coincidental similarities while not recording all the dissimilarities, and "coordination and exaggeration", where twins who were raised apart but had met prior to the study would coordinate their scores on tests to be similar. Most twins reared apart and studied as adults had met each other years before being studied.
Regarding the "hidden dissimilarities" I agree that may be a point, and my response to it is to ignore all the stupid anecdotal coincidences that most sources (including Shenk) bring up when discussing twin studies. Regarding the "coordination and exaggeration", let me describe the methodology of the study where Thomas Bouchard at the University of Minnesota studied over 100 pairs of twins reared apart:

"Participants complete approximately 50 hours of medical and psychological assessment. Two or more test instruments are used in each major domain of psychological assessment to ensure adequate coverage (for example, four personality trait inventories, three occupational interest inventories, and two mental ability batteries). ... Separate examiners administer the IQ test, life history interview, psychiatric interview, and sexual life history interview. ... The twins also complete questionnaires independently, under the constant supervision of a staff member."

For twins to "coordinate" scores on IQ tests that they take independently and under supervision would be quite difficult. They would have to somehow assess not only which of the two of them was smarter, but also how much smarter, and have that person deliberately do more poorly than they could have on the test, but not
so poorly that they do worse than their twin. A substantial fraction of the test sample would have to be doing this, the whole effort never being discovered by the researchers. This is so farfetched that it's just not a credible explanation for the high correlation of twin IQ test scores, across multiple studies.Another argument Shenk makes is that early environment, both pre-natal and after birth prior to separation, is shared by twins, so that the similarity observed by twin studies may be caused by environment rather than genes. This would easily be examined by comparing the similarity of fraternal twins versus the similarity of non-twin siblings, I don't know of any studies that did this, nor does Shenk bring any up. I'll bet it has been done.
Another study mentioned by Shenk was in The Skeptical Inquirer; it tested the similarity of identical twins versus the similarity of strangers. The study found, not surprisingly, that when they assembled 25 pairs of same-sex, roughly same age strangers on a college campus, along with 13 pairs of identical twins, they found that some of the strangers had "uncanny" anecdotal similarities to rival those of the twins. Since I try to ignore anecdotes anyway, this doesn't have much impact on me. What Shenk didn't mention was that when the study subjected everybody to systematic, independently taken personality tests, they found the pairs of identical twins were more similar to each other than the pairs of strangers were, despite the small sample size.
Shenk points out one study by Turkheimer (more on it later, and see link at end of article), that studied children raised at or near the poverty line, and which found the genetic influence on IQ was near zero, which shows that a really bad environment can make a big difference, overwhelming the genetic influence.
For all of Shenk's criticism of twin studies, he doesn't suggest how a better study would be done. He is interested in dismissing evidence, not in exploring evidence that could either support or undermine his position.

There is a lot of evidence that Shenk does not discuss. The evidence for genetic heritability of IQ is not limited to studies of identical twins reared apart, there are also studies which compare the IQ of adopted non-twins to (a) the parents who raised them and (b) their biological parents. There are studies that compare correlations between identical twins (0.86), between non-twin siblings (0.47), between half siblings (0.31), between cousins (0.15), and so forth. Shenk never mentions that these studies exist, except that he mentions Turkheimer's study (which he thinks supports his thesis) without explaining that it did not involve adoption. A couple of things that arise from all these studies, neither of which Shenk ever mentions, are that

  • as the child gets older, the genetic influence on IQ increases rather than decreases, which surprised everybody.
  • the correlation of adult IQ between two people raised in the same family is very small, in some studies no more than two equally-related people raised in different families. The total non-genetic effect on IQ is pretty large, but the majority of this variation still seems random to researchers. Factors that would go along with the adoptive family, such as school quality, IQ of parents in the home, parenting style, and quantity and quality of books in the home, seem to have little influence.
The tendency of the effects of genetics to increase, rather than decrease, with age is explained by some by the fact that, as people create their environments as they get older, the genetic influence makes itself felt in their choice of environments. I am reminded of something Eddie Van Halen said: "If you want to be a great guitarist, you've got to like playing the guitar.". Similarly, if you want to be a genius, you've got to like thinking. And whether you like thinking may be genetic. Most people aren't that crazy about thinking, as a glance at the reading material near the checkout counter of any supermarket will tell you. So the people with genes that make them like to think will exercise and develop their minds more than would other people. Young children are in school whether they like it or not, being forced to think whether they like it or not, so the genetic influence on IQ at those ages is less.

One weakness of adoption studies is that poor people are ineligible to adopt, so that few adoptive households are really bad. Turkheimer's study got around this and measured poor children by studying children with varying degrees of genetic commonality raised by biological relatives. Adoptive families range from solid working class to extreme upper class, and over this range, adoptive homes are observed to make little difference. The feeling is that while a really bad environment can make a big difference, any environment at or above what we would consider "adequate" (the bar being pretty low) will make little difference. Note that Turkheimer's study only measured children at age 7, when the genetic influence is known to be weaker.

One interesting study discussed by Shenk involved rats running mazes. In 1958, Rod Cooper and John Zubek deliberately bred one group of rats to be smart at running mazes, and another group to be dumb at it. With time, they were able to observe a large genetic difference in performance between the two strains. Then they tried raising both the smart and dumb strains in a very unstimulating, limited environment. Like the humans in the Turkheimer study, the rats all did poorly and almost no difference in performance was seen. Then they tried raising both smart and dumb rats in an especially enriched and stimulating environment. Now the dumb rats were doing almost as well as the smart rats, again the difference in performance due to genetics was greatly diminished.
It should be noted that the data was shown in a plot. But it wasn't a plot of the actual data -- it was an artist's depiction of the data. I've seen research papers where they give actual data and artists depictions, and the depictions are usually wildly skewed in favor of the point the paper is trying to make.

I would have liked to read more detail about the study, but I couldn't find it on the web. The ramifications for humans raised in poverty were clear and not very surprising given the other studies we've looked at. But what about the "enriched" environment? Twin and adoption studies include children adopted into wealthy homes, and the effect of those homes is observed to be small. Could there be some way of "enriching" our environments to radically improve most people's intellects, like those of the mice? Thousands of educators, some of them very well-funded at the best schools, have been trying for a long time. Some major breakthrough may be possible, you never know. We should certainly keep trying, for the same reason we should keep doing nuclear fusion research -- though the odds are long, the potential payoff is huge.

All this talk about IQ leads me to ask the question, what about other outcomes? What about annual income, marital status, number of divorces, and number of offspring? It is possible that IQ tests have succeeded in measuring a largely genetic quality, but other outcomes might be more affected by adoptive parents. For example, one twin might major in art and wind up being a waiter at $20K per year, while the other twin's adoptive parents might refuse to pay their college tuition unless they do something more practical, so that they wind up being an accountant at $120K per year. Neither Shenk nor anything else that I read on twin studies discusses this.

Genetics denialism has been with us for a long time. During the sixties the consensus was that genes were pretty unimportant, but studies kept showing otherwise. There are a few reasons people want to deny the influence of genes on the human mind:

  1. Fear of Eugenics: Memories of the excesses of the Eugenics movement in the early 20th century, and the horrors of the Nazis, lead many people to fear that misapplication of genetic theories could be a Very Bad Thing.
  2. Social Plans: Many people have plans for the betterment of human society that rely on society's under performers being capable of better things under more favorable circumstances, and when science casts doubt on these pet plans, these people attack the science.
  3. Mysticism: People want to believe there is something "magic" about the human mind, and breaking down the influences on it to things as vulgar as neurotransmitters and genes is just so -- unflattering. For the same reason that many resist the belief that humans are descended from apes, many who accept the evolution of our bodies try to assert that it "stops at the neck", and our intellect is somehow above all that sordid business.
None of these are legitimate reasons to ignore or suppress the truth. As for the first: if you don't want to commit atrocities, then don't commit atrocities. It is my instinct that people in denial are more likely to do horrible things than people who aren't. Regarding the second, social plans that rely on flawed science in order to work aren't going to work -- time to develop new social plans. And the third reason is just inexcusable mush-mindedness.

There is much in the book I haven't covered here, some of it quite interesting, but this review is pretty long as it is. I have focused on the evidence that Shenk has to refute to make his point, and it is there that Shenk is at his worst. I have been a bit vehement, because of Shenk's taste for lengthy anecdotes, his attempts to not admit what his thesis really is, and his dismissal of the whole concept of statistical evidence.

If you want to read a book promoting genetics denialism, there is another, better book I recommend: "Intelligence and How to Get It" by Richard Nisbett. Nisbett claims to prove that normal variation in human genetics has little to do with intelligence. I wasn't persuaded by his arguments, and, like Shenk, he doesn't bring up all the evidence against him, but at least there isn't the double talk, the obsession with anecdotes, and the disdain for statistical evidence in general.


  • Book: "The Genius in All of Us" -- David Shenk
  • One of dozens of papers on Bouchard's Minnesota Twin Study: here
  • Book: "Born That Way - Genes, Behavior, Personality" -- William Wright
  • Book: "Intelligence and How to Get It" -- Richard Nisbett
  • "The Search For Intelligence" - Carl Zimmer, Scientific American, October, 2008
  • "Trends in Behavioral Genetics: Eugenics Revisited" - John Horgan, Scientific American, June 1993
  • Book: "The Blank Slate" -- Steven Pinker
  • "Natural Levels of Similarities Between Identical Twins and Between Unrelated People" - Joseph Wyatt, The Skeptical Inquirer, Vol 9, Fall 1984
  • Turkheimer's Study on Socioeconomic Status Affecting the Heritability of IQ: here
  • Statement by 52 scholars on intelligence published in "The Wall Street Journal", December, 1994: here
  • Longer statement by 11 scholars on intelligence published in "American Psychologist" in February, 1996: here
  • Wikipedia on Heritability of IQ: here
  • Wikipedia on Heritability of Personality: here

Sunday, March 7, 2010

What Are We To Make of the Tea Party?

I've been trying to understand the Tea Party Movement, and feel I've figured out a few things.

The Tea Party Movement is not a political party, it has no clear leaders, it is an amorphous grass-roots movement without a clear platform. The people in the movement dislike politics as usual and don't want there to be leaders or a platform. A few issues are central
  1. Fear that Obama, with the filibuster-proof majority he had (note past tense) in the senate, was going to take the country wildly toward the political left.
  2. Objection, in principle, to the bailouts, particularly of Wall Street firms.
  3. Concern about increased taxation and the growth of the federal government.
Because the movement has no leaders, it has no official platform. Because there is no official platform, there is no one to define what the Tea Party Movement is about and what it is not. Thus, many extreme right wing causes are trying to identify with the Tea Party, and there is no authority to refuse their entry into it. This makes the Tea Party look particularly frightening to outsiders. Side movements trying to capitalize on the movement include
  • The Libertarian Party. The Libertarian Party is not entirely a side issue, in that it agrees with all 3 of what I have listed as the central concerns of the Tea Party. Most people in the Tea Party, however, would probably not agree with the Libertarians' advocacy of the legalization of prostitution, all drugs, and gambling.
  • The John Birch Society, which espouses theories about communist conspiracies.
  • Various efforts to end the Federal Reserve, or undermine the independence of its monetary policy.
  • Advocates against illegal immigration. For 8 years, the Bush administration failed to take any serious measures on this issue, and some people are hoping the new movement will embrace it.
Fear and anger are key emotions driving the movement. Fear:
  • The fear is generated by people seeing the values of their 401k's and their homes drop radically, at the same time, in 2008. This fear is compounded by the fact that few people understand the economics of what happened. Also there are many casualties who have lost their jobs and/or their homes.
  • Fear of a new black president who had the most liberal voting record in the senate.
  • There is great anger over the bailouts. Senator Diane Feinstein, for example, said that 90% of the phone calls and emails her office was receiving about the bailout were against it, yet she voted for it. The bailout of Wall Street was one of the most unpopular things the government has ever done. The fact that many Republicans, including Bush and McCain, supported the bailout, left many conservatives feeling betrayed.
  • Anger at the Democratic decision to stimulate the economy with increased government spending rather than via a tax cut.

Regarding issue #1, the desire to obstruct Obama in anything he was going to do, the Tea Party has had some success -- it helped elect a Republican to fill the position vacated by Edward Kennedy, ending Obama's filibuster-proof majority in the senate. But this could have been accomplished by just helping the Republican Party.
Regarding issue #2, anger over the bailouts, the Tea Party can do nothing. The bailouts are in the past. They can try to prevent more bailouts from happening, but that's about it.
Regarding issue #3, desire to shrink the government, the Tea Party can accomplish nothing. Republicans have a record, under Reagan and W, of cutting taxes without commensurate spending cuts. This was irresponsible and caused huge deficits. At some point, if this effort is to be successful, there needs to an agreement on what services will be cut and then a bill needs to get through congress. That's really hard, and to do it, you need to have an organization that can hammer out a specific platform -- there's no way that sort of difficult consensus can be formed by a leaderless, platformless, amorphous mob.


Sunday, February 21, 2010

Real Estate: Evils of the Owner-Occupied Paradigm

For many years, it has been the conventional wisdom in the United States that home ownership was the best investment strategy for the average person. Since 2006, we have seen real estate prices drop 32% nationwide and more severely than that in some areas, and along with that, we have seen a rash of foreclosures. The time is ripe to be rethinking our investment strategies.

US Home Prices Nationwide: 1994 - mid 2009
Reasons Why Buying the House You Live In Is Not a Good Idea

Diversification: One of the most important factors in an investment strategy should be diversification. You want a lot of little investments, of different types, so that if one investment goes sour, it doesn't wipe out your whole portfolio. You can't get much less diversified than a house -- not only is it a single investment, but if you start out with a 10% down payment, that house is 1000% of your portfolio! So if the house declines in value by 10%, you lose 100% of your initial investment.
Potential Debt: The traditional way to buy a house is on credit. You are investing with money that is not yours. That means that a small increase in the house's value will result in a large payoff for your initial investment. Many people experienced this prior to 2006, seeing huge increases in their net worth as their homes appreciated. It also means that a small decrease can leave you with negative net worth. In my book, having negative net worth is many times more bad than being rich is good. I prefer not to invest money I don't have, and follow an investment strategy where the worst case outcome is flat broke.
Pre-Bubble Mentality:
Prior to 2005, most people buying real estate believed it was a fundamental law of physics that real estate prices would always rise. When most people are thinking that way, it is called a bubble. It was a matter of time until the bubble burst.
Planning For Hard Times:
It really is a good idea to have sufficient savings to carry you through a couple of years of unemployment. Relying on credit to get you through tough times is risky -- banks respond to tough times by restricting credit. Furthermore, a computer glitch or identity theft can destroy your credit rating at any time. Generally, a mortgage payment is much higher than a rent payment for the same sized dwelling. And if you become unemployed for an extended period of time, you'll have no income to write off the mortgage interest against during that time.
When the economy goes badly, the banks are reluctant to extend credit, and are raising interest rates and lowering credit limits. If you rent your dwelling, then when hard times hit, you can easily move into more modest accomodations. If you own your dwelling, you probably can't move out of it and into a cheaper place without selling the old one -- a major hassle and a disaster in a down real estate market.

Industry Diversification:
If you work in an area dominated by a single industry, like Silicon Valley or Detroit or Manhattan, and you work in that single industry, real estate values in that area will fluctuate along with that industry. This means that if your industry takes a beating, you are liable to wind up long-term unemployed and needing money for relocation or retraining at the same time as the net equity in your house goes negative. Not a good position to be in.
Moving Becomes More of a Hassle:
When you move to a new place, many errands have to be taken care of, learn your way around the new city, find schools for your kids. Buying a house adds a huge decision with potentially disastrous consequences to the list of errands to be made when moving.
Too Many Constraints on a Single Decision:
A house you own has to satisfy too many requirements at once. It has to be appropriately located, the house itself has to be the kind of place you want to live in, and it has to be a very good investment. It is unlikely that you'll find a house that really meets all these requirements very well.
Prior to the Bubble Bursting

The government had an attitude that the more Americans owned their homes, the better. I remember in Bill Clinton's autobiography he spoke with pride about how the rate of home ownership increased during his presidency. This attitude is flawed -- many people are not cut out to be responsible home owners. And we have a great system for identifying who those people are, it's called the FICO credit score. People with lousy credit scores should not be given home loans, they are not responsible enough to handle it.

Another way to see if someone is going to be able to pay a mortgage is to demand a substantial down payment. If they can handle their money well enough to save up a down payment, that does a lot to demonstrate that they'll be responsible about paying back the mortgage. In addition, it provides a cushion, so that if the value of the house sinks by less than the down payment, the home owner still has positive equity in the house and is less likely to walk away from it or declare bankruptcy. But prior to the bubble bursting, many loans were being made with no down payment required.

Reasons For the Financial Crisis

Many people attribute the financial crisis to "too much greed". Baloney. A bank that isn't greedy is not a good bank. Greed is what drives the system.

The biggest issue that drove the financial crisis was that too many people, both home buyers and Wall Street investors, thought it was a fundamental law of physics that real estate prices would always rise forever. Home buyers took out many interest-only loans, a practice that makes no sense if you believe that real estate prices might fall. The financial system made loans to many people with poor credit or who otherwise showed signs of being likely to fail paying them back. The reason the financial system was willing to make these loans is that they felt it was guaranteed the value of the house would be greater than the outstanding value of the loan, even if no down payment was made, so that worst case, the value of the loan could always be recovered by foreclosure.
When real estate prices fell, all these deals fell apart. In some states, the homeowner was legally allowed to abandon their home loan if they let the bank take the house. As a result, when home prices fell, many homeowners whose houses were worth less than the outstanding loan walked away, a tactic called "rational foreclosure". With so many loans failing without sufficient collateral to cover the cost of the loan, the banks lost so much money that it caused a crisis.

The biggest mystery of this, to me, is why the people on Wall Street were so stupid. I can understand the homeowners being stupid, the guys on Wall Street had high IQ's and MBA's, and they just should have known better. One guess I have is that many of them did know better, but they were not investing their own money. The worst thing that could happen to them if there was a meltdown is they would lose their jobs in a down market. If this happened, they wouldn't be individually disgraced, since the industry as a whole went bad. And at the rate these guys were paid when times were good, they had plenty of resources with which to weather hard times.

What's Next?

Looking forward, I think people will not, within a generation, assume that owning the dwelling they live in is a sure-fire ticket to easy prosperity. Now that people know that real estate prices can go down, and down a lot, people will be much more careful about buying houses. People will buy houses because they really want to live in them for decades, and if their planning horizon is much shorter than that, they'll rent.
It could be a generation before real estate prices, in real terms, reach the highs of the summer of 2006. Several factors, which will not be repeated soon, contributed to housing values reaching those heights:

* People had not, within living memory, seen housing prices decline significantly on a nationwide basis.
* People were taking out interest-only loans, and loans with negative amortization.
* Mortgages were being extended to uncreditworthy people.
* Home loans were being made without requiring a down payment.

since none of these conditions are going to be repeated for decades, I anticipate that we will not see real estate prices reaching their 2006 peak again for decades.

How are we to invest for retirement from here on out? That's a good question. In the meltdown, all major asset classes -- real estate, stocks, bonds -- took a nosedive. People aren't going to feel safe investing in anything that's likely to deliver a good return. Hopefully people will at least diversify.

A mixture of stocks and bonds is naturally easier to diversify that a house. Even better, mutual funds or, better still, exchange-traded funds (ETF's) -- equity (stock) funds, and bond funds. Since each mutual fund spreads the money over a variety of investments, your portfolio is effectively even more diversified. Use equity funds for growth, and the bond funds for safety. And you don't have to go into debt to buy stocks and bonds.  Yes, if there's a recession, your bond funds will lose some (but probably not a lot of) value, and your equity funds will lose a lot of value, but your nest egg will always have positive worth.

One way to invest in real estate and avoid the problem of under diversification is to buy REIT's, which are funds that invests in real estate. This also avoids the hassle of having to maintain it, and also you can buy in small quantities.

Another reason people should be encouraged to invest in stocks and bonds rather than real estate is that investments in stocks and bonds help fund companies, which employ people and make stuff. Investment in real estate, for the most part, achieves no social good but rather just chases up the price of land.
I've heard the argument made that a purchase of stock only helps industry if you bought the stock directly in the IPO. This is wrong. As long as you own stock in a company, you have a relationship with that company. The shareholders can, at any time, choose to dissolve the company, sell the assetts of the company such as equipment, and return that money to the shareholders. Until they do that, they are continuing to invest in the company and their money is at work doing what the company does.

Wednesday, February 10, 2010

Movie Review: The Secret

This movie discusses the "Law of Attraction", supposedly a secret that will unlock untold and unlimited human potential.

This movie reminded me a lot of when I took "The Forum" (descended from EST), which is typical of the self-help genre, which tends to have the following characteristics:
  • Hardly any of the presentation is spent discussing the specific techniques that are supposedly going to improve your life.
  • Most of the presentation is spent vaguely praising itself. There is a lot of dramatic imagery involved.
  • A very strong pitch is made that you have the ability to completely control your life, the implication being that if you adopt the (barely discussed) techniques, everything in your life will improve.
  • The actual wisdom being imparted is actually very simple, not really enough to justify a whole movie or book, the rest is just window dressing to make it appear to be the core issue of the universe.
The "Law of Attraction" states that the universe delivers to you whatever you think about. It doesn't distinguish between good and bad. If you focus on the bad things, they will inevitably come to you. The way to make good things happen is by focusing just on those good things. That's it. That's the whole secret.
I think there is value to this. If you are focused solely on those bad things, without having positive thoughts about a way out, that's not a very constructive approach.
But I have also seen a couple of the most catastrophically failed people I've ever met who were totally following this philosophy.
  • One was a drug dealer who I knew in college. He was totally focused on how he was going to build his drug dealing business into a billion dollar corporation, and ignored the risks involved - this risks to his health caused by all the drugs he was taking, and the risks posed by the dangerous criminals he was associating with. He lost his sanity because of drug use and never really recovered.
  • Another was a guy who read some books about instant millionaires on Wall Street, who borrowed tens of thousands of dollars on credit cards to play the stock market. He did not think about the risks he was taking, and would not listen to my advice that these books he was reading were not economically sound, but just focused on the great wealth he was going to be enjoying, He had no health insurance, he drove without auto insurance. He lost his shirt in the market (by short-selling a high-tech startup, which makes absolutely no sense to any investor who takes risk into account), and last I heard was being sued by multiple banks while unemployed.
Fear is in many ways a very healthy instinct, keeping us from doing a lot of stupid things. It is a highly underrated emotion. Thinking about risks, avoiding them, and making preparations for the unavoidable ones, is very sound practice.

Another drawback of positive thinking comes to mind. I remember one time the state lottery jackpot was up to 100 million dollars. Normally I don't buy lottery tickets, but that week I bought one.
The whole week I spent a lot of time thinking about all the magnificent things I would do with 100 million dollars. At the end of the week (surprise!) I didn't win. I realized I had made a mistake in buying the ticket. The $2 lost was insignificant to me, but the wasted brain time, which could have been devoted to actually improving my life, which was instead devoted to stupid daydreams about what I would do with the money, was unacceptable. I've never bought a lottery ticket since. The human mind cannot accurately comprehend a one in a million probability, and does not allocate its time well.

There is a lot of talk about visualizing what you want, but that really is no "secret" to athletes. I remember being told in football practice to visualize myself doing the proper technique, and it is definitely a useful tactic.

But the movie makes claims that the supernatural is behind this principal. One guy in the movie claimed to "create" parking spaces for himself by visualizing them ahead of time. If "the secret" really works, I'd want a lot more than parking spaces from it -- I'm reminded of the time Homer Simpson got any wish he wanted and he asked for a really nice sandwich.

The movie talks a lot about sickness. There are always miracle cures occurring - a certain fraction of cancers just go away by themselves, and sometimes people heal when the doctors gave them no hope. For this movie, they dug up some of these people who then claim it was all done with the power of their minds.
I am reminded of a study discussed in a psychology class I took in college. Periodically, wildfires approach suburbs in Southern California, and sometimes they burn down some of the houses. People take numerous measures to save their houses - they stand on the roof with water hoses putting out burning embers than land on them, they run around the yard stomping out the flames. So for this study, they went around the neighborhood taking a survey of what measures were taken to save houses, then studied the correlation between measures taken and house survival. They found no correlation. What people did to save their houses made no difference. In the survey, they also asked people if the measures taken influenced saving their houses. The people whose houses survived tended to think their measures helped. The people whose houses burned down felt there was nothing that could have been done.
I am reminded of hearing about how people would be told in EST seminars that they are responsible for having gotten cancer, and this movie is doing exactly that. If the sick person actually listens to this drivel, their suffering is compounded by feeling guilty for having brought this upon themselves.
Furthermore, people may shun surgery and medication and try to just think themselves healthy. Interestingly, the movie offers no actual studies of survival rates of people who turn to modern medicine as compared to those who adopt a program of positive thinking according to the dictates of the Law of Attraction. But this movie isn't really addressed to the type of people who ask for statistics. Like most quack medicine, the focus is all on testimonials rather than studies.

They claim that The Secret has been passed down through the ages, in secret. What is not made clear is If this were true, Why was it kept secret? The movie specifically states there would be no ill effects if everyone embraced The Secret, there is enough abundance to go around. So the more people knew this, the better. There would be no reason for a few giants to hoard this wisdom and shut out the majority of the human race. There is also no specifics of the history of this secret through the ages, no specific examples of anyone trying to suppress anything.

Sunday, January 17, 2010

Book Report: "Infidel" by Ayaan Hirsi Ali

Ayaan Hirsi Ali was born in Somalia, from an assertive (for a Muslim) mother and a progressive, but largely absent, father. Her father had been educated at Columbia University in NYC.

Her father's political activism against the Somali government made it necessary for the family to leave the country, first traveling to Saudi Arabia, where blacks are referred to as "slaves" by their classmates and teachers, then briefly to Ethiopia, then to Kenya.

As a teenager and young adult, Ayaan sought Islamic teaching, eager to get to the "core of Islam" and reach the point where it would begin to make sense, but she generally found the answers she was receiving to be unsatisfying. Since most of her education occurred in Kenya, she spoke English very well, and read many western books.

By Somali custom, all marriages are arranged, and one day her father returned home to happily announce that he had found a great husband for Ayaan, a Somali man who lived in Canada. When the suitor came by and visited Ayaan and her siblings, they found out that not only were his Somali language skills deficient, but he didn't speak English all that well either! Further conversation showed that he was an idiot. Ayaan pleaded with her father to be released from this arrangement, but he turned a deaf ear to her. The wedding ceremony happened with no women, not even Ayaan, present.

Ayaan was shipped to a relative in Germany, where she was to spend a few weeks before proceeding to Canada. Determined to run the first chance she got, she told her uncle she was going on a brief trip to Holland to visit a friend, and once there, applied for asylum status, and was shocked at how generously the Dutch welcomed her into their welfare state. Her clan and her father disowned her.

European society seemed better in every way than the one she came from. It was more prosperous, less violent, the people were kind, and civil servants were cordial and uninterested in bribes. Lessons in Dutch were available, and she acquired it quickly and was able to earn a comfortable living as a Dutch-Somali translator. In her translation work, she was constantly exposed to the dysfunctional nature of her native culture, in contrast to the more advanced Dutch culture around her. She attended a university, and, determined to understand how such a great society could be created and why the other societies she was familiar with were doing so badly in comparison, majored in political science. She moved in with a white boyfriend, living with him for several years.

She kept asking herself, if Islam was the one true religion and Allah the one true God, why were these societies of infidels doing so much better than the Islamic societies? And as, in her studies, she read the history of Europe, it seemed to be the history of the Catholic church losing more and more of its power, and of the secularization of governments.

Very slowly, she became not only an unbeliever, but developed a strong belief that, for progress to occur in the Islamic world, someone had to criticize Islam, as Christianity had been criticized in Europe, and bring about the secularization of those countries. But who was to criticize Islam? Any white European who did it would be dismissed as a "racist". Anyone who did it in Somalia would quickly be killed. She had studied the Koran extensively, and understood well what she was rejecting and why. Ayaan did what she felt was right and began to make her voice heard.

As she spoke out, she began to receive death threats from Muslims. She switched political parties as her own Labor Party was too politically correct to be comfortable with her views and won a seat in Dutch parliament with the more conservative Liberal Party.

She continued to speak out, and it became clear to everyone that she was a full-fledged infidel. According to Mohamed, any Muslim who renounces their faith is to be killed. Her life changed radically, as she found herself surrounded by burly bodyguards, her whereabouts a secret.

Still determined to speak, she wrote the script for a 10 minute movie about the oppression of women by Islam which was directed by Dutch filmmaker Theo van Gogh. Van Gogh was murdered in the street by a radical Muslim, who left a note on the body saying that Ayaan was the next target.

Holland erupted in rioting -- Mosques and Islamic schools were burned down, and in retaliation, Christian churches were burnt.

The book ends with Ayaan moving to the US to work for the American Enterprise Institute.

It should be made clear that Islam did not oppress Ayaan particularly badly for a Somali girl. The female circumcision and arranged marriage were strictly normal for that society, and she received a pretty good education. Her father did not beat her mother. The family was quite progressive for that country, and would have been more so had her father been around more (the circumcision of his children occurred in his absence and against his express wishes).

It is important to understand the courage it must have taken for Ayaan to criticize the religion she had been raised to believe had a monopoly on goodness. As Richard Dawkins says, this woman is a hero. (show less)