Monthly Archives: December 2008

Sometimes, there is nothing to add

Eliot Spitzer Lost Money With Madoff


Another datapoint

reminding me why my mother called me the absent minded professor when I was five years old.  Today I went to the gym, and when wasI changing after working out, I could not find my keys.  I remembered having them, so I panicked.  Of course they were in my unlocked office across the road.  Such things happen to me not infrequently.

Yet I can still remember formulas from courses I took 20 years ago, ones that I have not needed to use since the final exam.

And I try, too.

Somehow, this seems a bit scary

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My understanding is that non-profits have been engaging in both a tax arbitrage strategy,

and also taking risk.  It looks like Bard was smarter-they  took less risk.  I am not sure about the rest of the article, though.

For Leon Botstein, Happy Days Are Here Again :: Inside Higher Ed :: Higher Education’s Source for News, Views and Jobs

What about Bard? After all, it’s easy to critique Harvard’s billions in
losses, but Bard has an endowment too. Prior to the economic collapse
this fall, Bard had a $150 million endowment for its undergraduate
programs, and a $100 million fund for graduate programs. The former
lost about 20 percent and the latter (on which investment strategy is
restricted) lost about 4 percent. While those percentage losses are
considerably smaller than those at Harvard and elsewhere in the Ivies,
Botstein said “the reason is not that we’re smarter.” Where Bard is
smarter, he said, is viewing the endowment “as a cash reserve against
bad times, not an offset for operating expenses.”

A downside of eating a lot of beets

is that you can be fooled to thinking you have internal bleeding.


At last, a place to sell your used MP3s | The Ridiculant

Of course, P=MC

Somebody forgot his basic RBC model, or did not have to solve it.

Economist’s View: Do You Believe?

Showing this is wrong seems like a simple exercise:

Representative agent with log utility, or even power utility would work.

Aggregate endowment i.i.d. growth with one disaster state with a 40% drop, perhaps log-normal otherwise.

eg, ln(C_t)-ln(C_t-1) is a lognormal with probability 0.999 and drops by 40% with probability 0.01

The equilibrium has consumption proportional to wealth, so that in the 40% disaster state, and the stock market drops by 40%, and consumption also drops by 40%

The representative agent feels pretty bad when that happens, with his utility taking a big dive in the disaster state.

This is a homework exercise for a basic graduate macro or finance course.

I am not saying that I believe that the model captures reality, or that we should not try to worry about recessions, but saying that a big drop in wealth (and therefore a big drop in consumption by the permanent income hypothesis) is something that rational agents should not worry about is missing the point.

You could do this with a model with TFP shocks, capital accumulation, and production too.  Simply replace exogenous consumption growth with the TFP shocks.

This, to me, argues that we spend time trying to understand TFP shocks, or exactly what could cause a 40% drop in consumption growth.  It would have to be a pretty big  ‘cost push shock’ to get this to work in a neo-Keynesian model, but so too with the TFP shock, etc.