Noah Smith Writing Lesson

Source Noah Smith

Noah Smith has a good review of the writing in Deirdre McCloskey's review of Thomas Piketty's book.

A lesson for students learning to write papers: Don't needlessly annoy readers before you get to your point. If a reader disagrees, finds something wrong, or insufficiently documented, of if you offend a reader, he or she will leave without getting to the main point.  Once a reader finds one thing he or she thinks is wrong, he or she will distrust the rest of the argument. Grand methodological statements and criticisms of swaths of literature are especially dangerous.

Noah's post is a great example. As you can see, Noah never got to the main point of McCloskey's review, and happily admits it.

And Noah's criticisims are spot on.  The first four pages of McCkoskey's review are full of grand, outrageous, and arguably false statements, having nothing to do with Piketty, inequality, or anything else that follows.  McCloskey, author of a splendid essay on writing in economics, should really have known better.  My review said as much too. Interestingly, I quoted quite a few of the same points Noah found.  (I put that at the bottom of a "too-long post on a far-too-long review of a enormously-too-long book" because  my main point was not about writing and for once I followed my own advice and put the secondary point at the bottom.)

So, dear students, learn the lesson: write the minimum up front needed to make your main point later. If you think everyone runs too many regressions, or you don't like non-cooperative game theory, and unless this point is absolutely necessary to your criticism of Piketty, save it for another day. Only offend people you really really need to offend. Otherwise, you risk having a potential reader like Noah give up in disgust before he gets to your point. Noah, hold your nose and plow on, it gets better.

Four percent?

Timothy Noah from Politico called yesterday to ask if I thought four percent growth for a decade is possible. Story here. In particular he asked me if I agreed with other economists, later identified in the story, who commented that it has never happened in the US so presumably it is impossible.

This prompts me to look up the facts, presented in the charts at left. The top graph is annual GDP growth. The bottom graph gives decade averages. Data here. The red lines mark the 4% growth point. Notice the sad disappearance of growth in the 2000s.

Judge for yourself how far out of historical norms a goal of 4% growth is.

By my eye, avoiding a recession and returning to pre-2000 norms gets you pretty close.  A strong pro-growth policy tilt, cleaning up the obvious tax, legal, and regulatory constraints drowning our Republic of Paperwork (HT Mark Steyn) only needs to add less than a percent on top of that. 4% might be too low a target!

Note the question asks about real GDP not per capita. Adding capitas counts. If you want total GDP to grow, regularizing the 11 million people who are here and letting people who want to come and work and pay taxes counts toward the number. You may argue with the wisdom of that policy, but the point here is about numbers.


This is not a serious answer to the question whether 4% growth is possible. The serious answer looks hard at demographics and productivity, estimates how far below the free-market nirvana level of GDP we are, and estimates how much faster free-market nirvana GDP could grow.  If you think that sand in the gears or inadequate infrastructure or not enough stimulus means we're 20 percent below potential, and potential can grow 2% per year, then 4% growth for a decade follows.

What happened in the past is largely irrelevant, since the US has never experienced free-market nirvana. If you were to look in 1990 at historical Chinese GDP plots to assess whether it is possible for China to grow as it has for the last 25 years, you'd say it's impossible. Conversely, if you were to look at postwar US data you'd say our lost decade of 2% growth can never happen.

But, having asked the question whether four percent is outside of all US historical experience, at least it's interesting to know the answer.

Update. A few commenters asked about my 10 year average plot. I've updated it to include two ways of calculating the 10 year growth rate. The solid line is the ten year percentage growth rate divided by ten. The dashed line is the ten year average of one year growth rates. You can also haggle about compounding,  logs vs levels, which price index to use, long-term inflation measurement (that can add as much as 1%), whether some components of GDP should be excluded and so on. Calculated either way, I conclude that 10 years of 4% growth is not an outlandish impossibility. After all, the policy choices being advocated for 4% growth go a good deal beyond rewinding the clock to exactly the policies and laws of some bygone era. But make up your own minds.

Complete disclosure:

dgdp = 100*(gdp(2:end)./gdp(1:end-1)-1);

dgdp10 = 10*(gdp(1+10:end)./gdp(1:end-10)-1);

dgdp10a = filter(ones(10,1)/10,1,dgdp);

Trance Healer Autobiography: A Mere Grain of Sand



A Mere Grain of Sand (2004) is the autobiography of Ray Brown.  His wife Gillian and Paul Dickson are the coauthors.  Ray is a trance healer whose body is regularly controlled by spiritual healer 'Paul' to treat patients.  In the Introduction, Paul Dickson commented about collaborating with Ray, Paul and Gillian:

Ray and Gillian's stories are narrated in their own words based on edited, recorded interviews with them.

 
Paul's story is also drawn together from interviews and his lectures in which he always explains that he is the spirit of the early Christian leader, Paul of Tarsus, who was beheaded in Rome during the reign of Emperor Nero.  He says he is the same man who famously was converted to Christianity following a vision on the road to Damascus.  After his death, he says he chose to train as a doctor in the spirit dimension and was later selected to return to Earth to heal and also to teach and increase our understanding of the spirit world.  In addition to his new teachings and explanations of the spiritual dimension, Paul also explains his reasons for working through Ray and Gillian.

In one of our early interview sessions, while I was talking to Gillian, I was suddenly aware that Ray was staring at me.  But in fact this was not Ray!  Paul had arrived unexpectedly and unannounced in Ray's body.  I felt very uncomfortable as he continued to stare very intently at me.  It felt as if he was reading my mind.  Afterwards Ray and Gillian told me smilingly he was just checking that I was up to the job!

Ray Brown was born in Birmingham, England in 1946.  His father left home when Ray was five.  His mother then began a relationship with Bob Black, who continuously "battered" Ray and his elder brother.  After a period of illness upon contracting tuberculosis, Ray returned to school when he was ten.  The missed lessons resulted with him being placed in "the D class, D for Dunce!"

Ray described childhood out-of-body experiences: "The next morning I would remember what I had seen, but it would seem just like a dream . . . At one stage I came out of my body every night.  Paul told Gillian that the reason for doing it was to make the transition between Paul and myself easy."

 
After Bob "married his girlfriend using Mom's money," the family lived with Ron and Marjorie Wells, who later brought Ray to their spiritual healing group.  Soon after Ray's fifteenth birthday, Ray's mother gave Bob a second chance and he resumed living with the family. 

Attending the Christopher West Healing Group was a step for Ray toward becoming a trance healer.  "George Jones, the leader of the group had a spirit called Dr. Hoist who came through and told me that a spirit would work through me, and that I had to prepare myself . . . He said that I had to sit and train for trance."

George Jones, with Dr. Hoist working through him, chose the healers for each patient and asked them to place their hands on the affected areas.  The healing was done by the laying on of hands.

We were allowing the power of healing to pass through our bodies without them being taken over.

At age 17, Ray left home and began an unhappy first marriage.  He formed a home development circle with two Healing Group members.

I sat on and off for nearly four years waiting to go into trance.  Then one night, soon after my 21st birthday I said to the group: "This is going to be my last night.  I have had enough.  I could still be waiting here in another 20 years."

They all understood.  I sat down and suddenly, it was as if a hammer had struck the back of my head.  It happened as quickly as that.

I sat down and closed my eyes to go into a state of meditation.  I felt my eyes go 'boom, boom, boom.'  Lights were flashing in front of my closed eyes.  Afterwards, the group said that they saw nothing move, but I felt as if my eyes were going berserk.

 

When Waters Running cane through he (or I!) started dancing round the room.  I was aware that I was there, but still thought that I was sitting in my chair.

 

On that first evening, I knew that I was talking but I could not hear myself.  There was a brief pause when I felt that I was slumped on the table.  I think that was the change over between Waters Running and Paul being in possession of my body.

When Paul first came through, he announced himself as Doctor Andrew Portlock.  It was a far deeper sensation than with Waters Running.  Paul did not reveal his true identity until much later, and it was not until the 1990s that he explained his background and spiritual mission in public.

On one evening at the home circle, instead of Waters Running coming through prior to Paul, the Native American Indian Chief Geronimo took over Ray's body and, upon being interrupted with football scores, angrily threw the new participant against the wall.  Ray observed: "That evening really taught everyone in the room that you should always take care over who you invite into a physical circle."

In 1971 after his mother was killed outright in a car accident and Bob died from his injuries a few days later, Ray returned to work at Portsmouth dockyard and fell over a hundred feet from his crane after a handrail broke away.  It was one of a variety of accidents that Ray has miraculously survived.  He divorced his wife in 1973: ". . . by then, thanks to all the added stress of Helen's abuse accusation, I had suffered a complete mental breakdown.  I became an in-patient at St. James' Hospital, Eastney where I met Sally a fellow patient, who was to become my second wife.  It was Sally who helped me to reconnect with Paul."  Ray became employed as a bricklayer.

My dealings with the spirit world had been on the back burner, to say the least, since my mother's death.  But one night, soon after we moved into the flat [in Southsea], Paul materialised in front of Sally and recommenced my spiritual development.

The incident resulted with Ray becoming acquainted with Sally's aunt, Janet, who was knowledgeable about spiritualism.  Janet began a circle for him at her house.  Paul (still known as Andrew Portlock) healed members of her family.  During this period, other guides came through Ray to talk, including on one occasion apparently the Anglo-Saxon 'King Athelstane.'

In the mid-1970s, Paul's cousin introduced him to Jeanne Lambourne and he went to her development circle for a couple of years.
 
In December 1979 while working at the Portsmouth Naval Base dockyard painting submarines, Ray was exposed to toxic fumes.  While driving home, he passed out and his car collided with three other vehicles in quick succession.

As the dust settled, people rushed over to free my leg from the clutch pedal.  If I had been wearing a seat belt, the steering wheel would have speared me through the chest.  The car had been compacted by the three blows and resembled a cube!

Waters Running spoke about the incident —

I have always protected Ray when he has had big accidents like the car crash, by lifting him out of his body.  This allowed his body to relax and prevent any real injury.  He would not be here now, if he had been in his body.

In May 1980 there was another incident when Ray inhaled toxic fumes while painting the submarine.  He lost track of time while in the ballast tank and his lungs collapsed when he was pulled onto the deck.

Paul had a hand in getting me out of the tank.  Because they were struggling to get me to move, he intervened, took over my body and put my hands through the hatch.  Everyone was amazed that I managed to get out.

Paul's next job was working for a firm of undertakers yet he later returned to the building trade.  In 1985 Ray became involved with a weekly healing circle at the home of Pat Cowen and this became the site of his first regular clinic. 

His second divorce resulted with "a big depression . . . I had lost my house, lost my kids again . . ."  Some help from Jeanne Lambourne and other friends enabled him to eventually "make a go of full-time healing" in 1990.  The same year, he met Gillian, who had been involved with a spiritualist church for fifteen years.  After hearing about Ray, she sought healing for a repetitive strain injury and a longtime earache.  Gillian invited Ray to do a demonstration at the church.  The following is from the chapter description at the beginning of Chapter 12.

Gillian was drawn closer and closer to Paul and his work.  The medium, Paul Lambillion did an auric drawing, which confirmed that she was going to pursue a full-time healing career.  Gillian consequently began organizing Ray's clinics and went all over England with him doing demonstrations at spiritualist churches.  Because of this a rift appeared in Gillian and Terry's marriage.  After she went on two healing trips to Kenya with Ray, who nearly drowned in a diving accident on the second visit, Terry gave Gillian an ultimatum: choose between him or Ray and Paul.  Gillian decided to stay with Ray and Paul.

In Chapter 19 of the book, Paul is quoted about what happened when Ray's second marriage ended.

I went back to Spirit and asked them to look for someone for Raymond, who would help get him on the right pathway.  It was suggested that Gillian would be the right person.  She was experienced in mediumship, and had all the skills that were necessary to steer Raymond on the right pathway.

Gillian's guides already knew what they wanted for her.  She had her life with her previous husband, but it was gradually being steered towards meeting Raymond.  My contact with Gillian was with her Spirit guides who worked through her.  She was like a voice crying in the wilderness and was really asking for a change.  There was no better person for us to choose.  She is good in every aspect of the work.  It was meant to be.

It was not until I saw her for the first time that I knew that she was the one for the job.  Whenever I meet people for the first time I always sit and look at them and pick up on their wavelength spiritually.  Then I endeavor, within spiritual laws, to manoeuvre the situation to where it needs to be.  I cannot, however, interfere with free will.

 

Ray and Gillian married in May 1995.  They and Paul became the subject for a segment of the six-episode BBC documentary TV series "Secrets of the Paranormal".  The show was telecast in May 1996.  In 1998 there was more publicity when the newspaper News of the World published a succession of articles about Ray and Paul with reports of many successful "spirit surgery" cures.

Chapters in A Mere Grain of Sand offer an outline of Paul's Earth life and spiritual teachings.  "I was born Saul of Tarsus.  Paul was my Roman name."  After becoming a Pharisee, he led the revolt against the Nazarenes, whose leader was a man named Stephen.  "We eventually found Stephen preaching and stoned him to death.  We then continued to terrorise and beat the Hellenic Nazarenes of Jerusalem . . . I did become increasingly troubled, and started to regret the terrible suffering that I had inflicted upon others.  In fact, the guilt weighed so heavily upon me that it badly affected my health."

Paul experienced a vision of Jesus, who told him: "I am Jesus of Nazareth who you are persecuting."  The vision resulted with Paul's conversion to what is now known as Christianity.  The following are some excerpts of Paul's quotations from the book.
 

Instead of persecuting the Nazarenes for their beliefs, I became one of them.  I am nothing.  I wish to be nothing.  That is the way that it has been throughout my life, until given life again by God.

  

Spirits do not come down from on high.  We pass from our own dimension which is Spirit into your dimension, the Earth plane.  The only reason that you cannot move between dimensions is that you are attached to your body.  If you tried, you would hurt yourself.  I could walk Raymond to a wall and he would hurt his nose, but I could pass through to the other side as I am in a different dimension.
 

Every person on Earth is equal.  What makes you different is the clothes that you wear and the material things that you possess.  The same as we are all equal in Spirit, depending on the level we have reached.

Once I reach my level I am with the people of my time.  The disciples are in Level Nine and Jesus comes down from Level Ten to meet with us.

  

Jesus taught love, lived love, and gave love.  He taught us not to be afraid of those who threatened us.  For although they could hurt our bodies and take away our lives, we would live on in Spirit and become part of him and the universal power.

 

I started studying to be a doctor about 300 years ago in Earth time.  The High Council in Spirit, on Level Nine, asked me to train as a doctor to advance healing on Earth, and at the same time to teach people the correct pathway to Spirit. 

 

On Earth or in Spirit, a doctor is a miracle worker; a nurse is a miracle worker.  They repair your body and get you back on your feet.  Childbirth, the beginning of physical existence, is a miracle.  The creation of the universe is a miracle.

 

When I first worked through Raymond, I did not want anyone to know my identity, although I still wanted to keep the name Paul.  At the time it was not right for anything to be said.

There was no purpose to be served by revealing that I was Paul the Tarsean, a Rabbi in Jesus Christ's time.  There will always be opposition.  But now is the time for the truth to be revealed.

 

Speaking English through Raymond has become natural.  When I first came through him, it was a bit rusty, because I came from a level in Spirit where we do not need to speak. 

 

In addition to collaborating with Ray, Gillian and Paul to write A Mere Grain of Sand, coauthor Paul Dickson interviewed 21 people who provided testimonies concerning this case.  One of the interview participants whose commentary is presented in Chapter 25 "Patients and their Healing" is Ray and Gillian's secretary Carol Epstein, for whom Paul once 'untrapped' nerves in her back.  Carol remembered:

Between my first and second [healing] appointments I contacted Gillian about the secretarial job.  We had just settled terms on the day of my second appointment.  Gillian took me in to let Paul have another go at my back and said to him: "This lady is going to be our new secretary."  Paul looked at me and smiled: "Yes, I already know that."  I think that on my first appointment, when he had given me that really intense stare, he had looked inside me to see if I was the one to work with him, Ray and Gillian.  I have always felt honoured by that."

 

Jeanne Lambourne is another of the interview participants whose commentary is included in the book:

. . . the time came when Paul told us that he was moving to Suffolk to 'go up a gear' and work for Spirit full time.  We were privileged to have worked with Ray and Paul.  The wonder of it all will always remain.

 

The Ray Brown/'Paul' Trance Healer Case

Ray Brown in a Daily Mail article photo

 

 

The case of UK trance healer Ray Brown and 'Paul'—who regularly uses Ray's body to work as a spiritual healer—is documented in an autobiography and video interviews.  A Mere Grain of Sand (2004) was written by Ray and Gillian Brown with Paul Dickson.  The Browns' website is raybrownhealing.com.

 

Background information about "Ray Brown, The Medium" and "Paul of Tarsus, The Spirit" is presented at the website.

 

Ray was born in 1946 and lived for most of his early life in Portsmouth.  Ray trained to become a healing medium following out-of-body experiences when he was only five years old.  He went into the building trade and became site manager for a construction company.

 

During a demonstration by the renowned Harry Edwards, Ray at 17 was called from the audience to go on stage and assist the renowned spiritual healer.

 

Healing soon became a way of life for Ray, who continued to work hard on developing his mediumship.  When he was 21, Paul came through and they have been working together ever since.

 

When working with Paul, Ray is completely taken over and is not aware of anything that is done while Paul is in control.  It is a partnership of complete trust which has developed over the many years they have worked together.

  

Paul is Ray’s spirit guide.  Paul lived 2000 years ago in Tarsus which was then under Roman rule.  After his blinding on the road to Damascus, he came to believe in the teachings of Jesus although he did not actually meet him.  Paul was eventually beheaded by the Romans for preaching the words of Jesus the Christ.

 

After preparations in the spirit world, Paul chose Ray as his medium for spiritual healing.

 

Other raybrownhealing pages present information about the healing organization, the International Church and Healing Fellowship, and the integrated ministry of the ICHF called The International Church of St. Paul.  There are eight council members of the ICHF with Ray as president/trustee.  Also at the website are "Testimonials," a "Gallery" page, information about clinics, and a page where information resources may be purchased (as I did myself).  There are also links to three video documentaries.

 

As I mentioned in a previous article, the "Ray, Gillian & Paul" episode of the UK series "Trust Me, I'm a Healer" was broadcast in 2007.  The documentary offers candid glimpses from the Browns' daily life, which is centered on intervals when Ray goes into trance to undergo an unusual conversion — allowing 'Paul' to provide healing and talk about life in the ascended state of existence.  The BBC interviewer, Steve Poole, is heard commenting: "When Paul takes over his body, Ray's personality seems to disappear completely.  I'm slowly getting used to the process but it's still a bit spooky.  Blink and you'll miss it."
 

 

In the documentary, Ray explains the evolution of his channeling.

And it was like being hit with a sledge hammer.  And knowing your mouth was moving and you could hear words coming out of it but you couldn't stop it.  And that went on really every time he came then for about six, seven months, I suppose.  And then gradually I was being distanced although I could still see my body.  I could still hear myself talking but it wasn't me.  Obviously when Paul was operating on someone's, say, shoulder, it was almost if although I was outside my body I could see the person — inside the person's shoulder and all the arteries and bits and pieces.  And I couldn't handle that at all.  So I just said to him, "If you're going to carry on like this you're going to have to get a bucket because I'm going to be sick every time you do it."  So that made their mind up really to take me further away.

 
Ray commented that without Paul he could give 'hands on healing' like everybody else: ". . . but I couldn't do what Paul does."
 

Paul often expresses himself in a manner that affirms that people keep their sense of humor after making the transition to another dimension.  At one point Paul is seen commenting about his patients: "They've come along and they say, 'We're going to see this dead man who's going to work on my body.'  And they don't really go a hundred percent along with it.  They're there because they're in pain and they don't care what — who they're seeing as long as they get out of this pain.  To me — it doesn't matter to me either as long as, you know, I get them out of the pain so that's the most important thing."  This is an example of the phenomenon when a person—even one from the ascended state—says "you know" spontaneously.  Sometimes people may also unconsciously negate what they are saying by uttering the word "no" within a sentence or between sentences without being aware of doing so.  In audio and video recordings of conversation, there can also be found instances of EVP (Electronic Voice Phenomena) with "no" often being especially noticeable.

When the skeptical interviewer confronted Paul while "working out if Paul really is who he says he is," Paul is seen saying: "I am who I am.  I am Paul — Paul who had the conversion on the road to Damascus.  Saul was my Jewish name.  Paul is my Roman name.  Whether you believe it or not, or anyone else believes it or not it's not my problem.  I can only be who I am.  I am Paul."

Ray's daughter Sophie from a previous marriage—a lawyer who was 26 years old at the time the video scenes were filmed—is seen meeting 'Paul' for the first time.  As in other channeling cases of visitors from the ascended realm, 'Paul' occasionally comments using the pronoun 'we' instead of the first person singular 'I.'

 

The second video at the website is entitled "Secrets of the Paranormal BBC Television 1996".

The following statements are made by Paul as seen in the video.

The first thing I do is to look into their body and to focus on the problem area.  I am not on my own.  There is a whole team of spirit doctors standing by to advise me.

 

When I operate I use instruments which are very similar to those in the physical world.  The difference is that you cannot see them.  They are spiritual instruments.  My hands work through Raymond's and my instruments are inside the patient's body.  Patients often tell me they can feel the work going on inside them.

 

There are many spiritual doctors willing to come down to work.  They've trained for it.  But how many mediums are there like Raymond?  How many people would give up nine hours of their day?

The third video (available on YouTube) is a 2012 interview segment of "The Lightworkers Guide to the Galaxy" with instances of EVP.



In the third of the five YouTube videos presenting the video, when there is seen the process of Ray going into a trance and Paul taking control of Ray's body, Paul's initial comment is another example of his humor: "Am I supposed to say 'Boo'?"

Paul commented about spiritual teachers: "Most of the teachers that you find in the world are simple people.  They are people who come from simple backgrounds and God has chosen those people.  And that is the way it is."

Other YouTube videos I found about this case are "Spirit Surgeon - Ray Brown" (6:17) and "Life After Death - Your Spiritual Journey - Ray Brown" (8:55).  Both are compilation videos presenting clips from DVD documentaries produced in 2003 and 2011 by Michael Courtney-Hunt, whose website is www.spiritsinc.co.uk.

  

Another video available on YouTube is "Dead and Alive" (2010), a short film by Adrienne Grierson.

Other trance channeling/spiritual healing cases have been profiled in previous blog articles about Brazilians John of God (1, 2, 3); Rubens de Faria, Jr. (1, 2, 3, 4, 5); and Arigo (1).

Asset Pricing Summer School

I’m going to offer my online course “Asset Pricing” over the summer. The intent is a “summer school” for PhD students, either incoming or between the first year of foundation courses and the second year of specialized finance courses.

At least one university is going to use this more formally: Require completion of the class for their PhD students (either incoming or between first and second year,) and organize a TA and group meetings around the class. We have found that this sort of social organization helps a lot for students to get through online classes.

The course offers a free “certificate” for achieving a certain grade level in the class, which gives an incentive to actually do the problems. Faculty can tie achievement of the “certificate’ to whatever carrots and sticks they want to offer. For example, one instructor is going to treat achievement of the “certificate” as an assignment for his fall PhD class, and include it in the grade.

Since the class covers most of the basics, this structure may free a faculty member teaching next year to focus the PhD classes on more advanced material. It’s also useful as a “flipped classroom,” allowing the faculty member to spend less time on algebra and derivations, and more on intuition, extensions, and current research.

This session won’t have TAs on my part, though I will monitor the forums and attend to glitches as they crop up.

The class is free. To sign up or see the classes, follow these links

Part 1: https://www.coursera.org/course/assetpricing
Part 2: https://www.coursera.org/course/assetpricing2

The class experience consists of watching short lecture videos, doing the assigned reading, answering quzzes and fairly extensive problem sets, and taking an exam. The course has discussion forums which are quite useful.

The class starts next Monday, June 8. It is open for registration now, and will be open for students to see materials and start work by the end of the week. Part 1 (7 weeks) ends July 27, and Part 2 (7 weeks) ends Sept 14. The two parts may be taken independently. Students not wishing a grade may use these materials freely and just do whatever parts seem interesting. I've also set up the grading pretty flexibly to allow people to adjust their schedules rather than follow the week by week rigid schedule.

This is a bit late notice, but I hope blog readers will pass on notice to PhD students or prospective ones, and to faculty members who are teaching PhDs in the fall and might find this resource useful.

The syllabus:

Part I
Week 1 Stochastic Calculus Introduction and Review. dz, dt and all that.
Week 2 Introduction and Overview. Challenging Facts and Basic Consumption-Based Model
Week 3 Classic issues in Finance. Equilibrium, Contingent Claims, Risk-Neutral Probabilities.
Week 4 State-Space Representation, Risk Sharing, Aggregation, Existence of a Discount Factor.
Week 5 Mean-Variance Frontier, Beta Representations, Conditioning Information.
Week 6 Factor Pricing Models -- CAPM, ICAPM and APT.
Week 7 Econometrics of Asset Pricing and GMM.  Final Exam

Part II
Week 1 a) The Fama and French model b) Fund and performance evaluation.
Week 2 Econometrics of classic linear models.
Week 3 Time series predictability, volatility and bubbles.
Week 4 Equity premium, macroeconomics and asset pricing.
Week 5 Option Pricing.
Week 6 Term structure models and facts.
Week 7  Portfolio Theory and Final Exam

Greek roll-over

The latest Greek debt "crisis" poses an interesting puzzle. (Quotes because it's hard to call something that's been going on this long a "crisis.") Greece needs to come up with $300 million euros by Friday to pay off the IMF. And the most likely source of this money is... the IMF.

What's going on here? Obviously, Greece was going to need decades to pay off loans, in the sense of running primary surpluses to actually work down debt. Why lend Greece money for a short amount of time, then institute regular "crises" about rolling over the debt?

This is part of a larger question. In "A new structure for U. S. Federal debt" I thought about the same question for the U.S. Why does the U.S. continually issue new debt to pay off the old debt? Why not just issue perpetual debt, which automatically rolls over? For the U.S., I couldn't come up with a decent reason.

For Greece, there is a good reason. Yes, in the end, the IMF will most likely lend Greece the money to pay back the IMF. Or maybe the ECB will lend Greece the money to pay back the IMF. But both sides will renegotiate the terms.

The IMF and Europe lent money to Greece with conditions that are politically painful, but that are be beneficial for Greece and for the chance of the money being paid back eventually, at least in the IMF and Europe's eyes. (I don't agree with all the conditions, especially tax increases, but the point here is the negotiation not the wisdom of the terms.) By lending for a year and then renegotiating, they can enforce that Greece actually follows through on the conditions.

If you are going to lend money to a spendthrift relative you might want to do the same thing. Limit the time of help, and in a year we'll see if you're really cleaning up your act.

But this is a two-sided renegotiation. They can only impose conditions if the costs to them of allowing a default are not too large. And Greece will only take the conditions if the costs of default to them are large.  So it is to Greece's interest to make its default as painful to the rest of Europe as possible.

Also by calling it a roll over, though, Greece had an interesting option -- if it didn't like "austerity," it could try other means of reviving their finances and paying off the debt. It's too late for that one.

Doug Diamond and Raghu Rajan in a series of papers have been arguing that short-term debt allows lenders to monitor and discipline the borrowers. "Short" here can mean years, any debt that has to be rolled over a few times before being eventually paid off. This situation seems like a good instance of their theory.

Back to the U.S., though, this does not strike me as a good argument that the U.S. should voluntarily issue debt that needs to be rolled over. So I'm still in favor of perpetuitites for the U.S.

The Wall Street Journal's Greek Debt Timeline is an interesting perspective on this issue. I excerpted the full set of payments, and the payments due in 2015 and 2016 below. Of course, as debt is rolled over, new payments take the place of old ones.

 Except "treasury bill holders," the debt until 2020 is almost all due to governments. A small slice of "private investors" starts showing up after that. So for the next 5 years, this really is about IMF and ECB lending money (presuming nobody else wants to) to pay back loans to the IMF and ECB.

The 2015 and 2016 graphs make it even clearer. All the loans are to IMF, ECB or EIB.

But..What about these Treasury bill holders? There is this huge slice of debt that needs to be rolled over this summer. Who is going to do that? Who is holding this debt?

Bank at the Fed

"Segregated Balance Accounts" is a nice new paper by Rodney Garratt, Antoine Martin, James McAndrews, and Ed Nosal.

Currently, large depositors, especially companies, have a problem. If they put money in banks, deposit insurance is limited. So, they use money market funds, overnight repo, and other very short-term overnight debt instead to park cash. If you've got $10 million in cash, these are safer than banks. But they're prone to runs, which cause little financial hiccups like fall 2008.

But there is a way to have completely run-free interest-paying money, not needing any taxpayer guarantee: Let people and companies invest in interest-paying reserves at the Fed. Or, allow narrow deposit-taking: deposits channeled 100% to reserves at the Fed.

(I'm being persnickety about language. I don't like the words "narrow banking." I like "narrow deposit-taking" and "equity-financed banking," to be clear that banking can stay as big as it wants.)

That's essentially what Segregated Balance Accounts are. A big depositor gives money to a bank, the bank invests it in reserves. If the bank goes under, the depositor immediately gets the reserves, which just need to be transferred to another bank. This gets around the pesky limitation that the Fed is not supposed to take deposits from people and institutions that aren't legally banks.

...the funds deposited in an SBA would be fully segregated from the other assets of the bank and, in particular, from the bank's Master Account. In addition, only the lender of the funds could initiate a transfer out of an SBA; consequently, the borrowing bank could not use the reserves that fund an SBA for any purpose other than paying back the lender. ...The bank receives the IOER rate for all balances held in an SBA. The interest rate that the bank pays the lender of the funds deposited in an SBA would be negotiated between the bank and the lender

The reverse repo program achieves the same thing, but many at the Fed seem to regard it with suspicion.

Why is this such a good idea? First, from my perspective, it opens the door to narrow banking; to government provided run-proof electronic money.

Second, emphasized in the paper, SBAs could help "pass through" interest rate rises. Suppose the Fed wants interest rates to be 5%  It starts paying banks 5% on reserves.  Banks will probably start demanding 5% or more on loans, since they can get 5% from the Fed. But banks may not compete on deposits, merrily taking our money at 0% and investing at 5%.  Large institutional investors, who can invest in money market funds, aren't going to sit still for that however, so they SBA accounts should very quickly reflect interest on reserves. In turn, that will put upward pressure on short-term commercial paper, Treasury, and other markets, and provide competition for deposits.

I learned an interesting legality. Are the SBA accounts really run free, exempt from bankruptcy proceedings? Not totally

Under the FDI Act, and subject to certain exceptions that are not applicable here, creditors of a DI [Depository Institution] that is in FDIC receivership are prohibited from exercising their right or power to terminate, accelerate, or declare a default under any contract with the DI, or to obtain possession or control of any property of the DI, without the consent of the receiver during the 90-day period beginning on the date of the appointment of the receiver. For purposes of this paper, it is assumed that the FDIC would act quickly to permit lenders to gain access to SBAs that collateralize their loans. However, this treatment has not been approved by the FDIC, and the decision by the FDIC on treatment of an SBA account in resolution could affect the willingness of firms to participate in these accounts.

That's all putting it mildly. It could also affect the willingness of firms not to run at the first hint of trouble, which is the whole point. Evidently, the FDIC needs to carve exemption from bankruptcy in stone.

A few quibbles

The near elimination of credit risk, which is the hallmark of SBAs, would level the playing field so that all banks could borrow in the overnight money market on equal footing..

Well, not really. Sure, they can borrow on equal footing so long as they put the results right in to the Fed. They cannot borrow for other purposes, like to lend it out to you and me, on equal footing.

The paper also echoes the worry that firms might run to these programs in a crisis

One concern is that SBA take-up could be too large. .. in times of intense stress, which may be characterized by a flight to quality, flows into SBAs could produce a scarcity of reserves that banks use to meet reserve requirements and could also cause (temporary) dislocations in funding markets for nonbank entities.  

I beat up on this view in discussing the overnight RRP program here, so I won't make the same points again. It still makes no sense to me. Flows into SBAs have to come from somewhere; and we're $3 trillion dollars away from required reserves anyway. And will be even further away once this program goes in.

Update: In fact, when you dig in to the paper, it pretty much concludes that these "financial stability" arguments are not important. From p 18

Recently, market observers and policy makers have expressed concerns that uncapped ON RRPs could exacerbate flight-to-quality flows, by providing a risk-free alternative to bank deposits, thereby causing a removal of much needed liquidity from the financial system.  For these reasons, an aggregate cap on the amount that can be invested at the ON RRP facility has been imposed and an auction pricing mechanism has been introduced to ration ON RRPs in the event that bids exceed
the aggregate cap. 

A similar concern could arise with SBAs. During a crisis, SBAs might be seen by lenders as an attractive near risk-free investment. However, a "surge" into SBAs i.e., an increased supply of funds by lenders for SBA collateral arrangements, would be accommodated by counterbalancing price movements.... an increase in the federal funds rate, as usable reserve become scarce. Further, because SBAs are supplied competitively, their rate would not adjust, since the rate is "competitively tied" to the IOER rate. The result would be an increase in the spread between the federal funds rate and the rate paid on SBA balances, which would help to arrest the surge and mitigate potential dislocations in funding markets. 

Additional factors could limit the ability of investors to suddenly place large sums of money into loans secured by SBAs. ...

I think there are deeper conceptual problems with the whole argument that offering SBAs, ON RRPs, or floating-rate Treasuries contributes to a run by offering a safe alternative, but in the end we are agreeing just for slightly different reasons.

Reserves for all! Via money funds and overnight RRP, or via narrow deposits at banks. Or, via fixed-value floating-rate Treasuries. Let the run-proof financial system begin to emerge.

Now, if the Fed would only say "and, by the way, any bank that puts all of its deposits in SBAs, and finances all of its lending with equity capital, will be exempt from all the Dodd-Frank regulation and stress tests, because it is obviously completely un-systemic."