Alan Greenspan: “I screwed up!”

In his bluntest admission to date of his role in inciting the financial crisis, former Fed Chairman Alan Greenspan has decided to come out clean:

“I screwed up!”

Greenspan, 83, was speaking at a press conference in Basel, Switzerland, at the fringe of the Global Symposium on Rebuilding the Pillars of Self-Regulation, which he intended to boycott.

Asked about his one-time conviction about bank officers’ superior risk-management skills to those of regulators, the Maestro conceded:

“They had me with their fan charts! Default probabilities in color!… I’d never seen them before!… Bayesian, no less!”

Greenspan expressed his stern commitment to do whatever it takes to redeem himself, including re-writing his memoirs, proofreading FOMC minutes, or even taking a job at the Treasury.

Yet, local sources, who spoke on condition of anonymity, revealed Greenspan has applied to extend his Swiss visa, after being tipped by Chinese secret agents he had been shortlisted by Secretary Geithner for the post of Bank Nationalization Czar.

“That would be a step too far,” he suggested, when asked about the prospect.

Chinese secret agents were not available for comment.

Still, trusted sources report China is working to quash Greenspan’s plan to stay in Switzerland, luring him instead into spending his latter years in Beijing.

Greenspan did not seem entirely closed to the idea. Visibly distressed by the fatals flaws he discovered in his ideological framework, he said:

“As long as I can get my saving deposits out of Citi and into China, it could help me find my peace of mind,” he said.

Indeed, sources say he is already considering a lucrative offer to employ his formidable forecasting skills as prime-time anchor for the Chinese weather channel.

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>Happy April Fool’s!

Looking for a Valentine: A Directed Search Model with Search Frictions

So you’re in your thirties, gifted, energetic, romantic and all that, yet somewhat disconcerted with the thought that the people you have fallen for recently have invariably turned out to be “involved with a half-sibling”, “self-absorbed egomaniacs”, “the emotional equivalent of a sack of potatoes” or “die-hard Republicans".

And as your flustered mother pleads “Fine about the potato.. but what’s wrong with Republicans?!!”, you rush to me for some real advice. An economist’s advice! So here we go… My 2009 Valentine’s Special!

The search for a soulmate is a process best captured by the so-called “search models” that economists use to answer burning questions about the labor market. No, I’m serious… Check this out:

Why do the unemployed sometimes choose to stay unemployed, e.g. by turning down job offers? What determines the length of time a person will stay unemployed? How can we have both unemployed workers and unfilled positions at the same time? Importantly, can we do anything to make the search process more efficient and increase welfare?

See? All you have to do is replace “unemployed” with “single”! In fact that’s exactly what I’m going to do, to see what these models tell us.

So say you’re that single, gifted, romantic and “all that” individual and you’re looking for “The One”. Beauty is in the eye of the beholder, of course, so “The One” can be anything from “romantic and caring” to “intellectual genius” to “filthy rich” to "Matt Damon" (/"Scarlett Johansson”). More often than not, it can also be an abstract concept.

But while you’re looking, life as single doesn’t exactly s**ck… there is a certain “utility” in those wild weekends in Vegas after all. Call it singles’ bliss.

Every now and then, say N times a month, a guy (/woman) calls you up to ask you on a date. [OK, for simplicity I’ll stop this man/woman thing and focus on a woman’s perspective. Guys, just replace everything with “Scarlett Johansson”!]

Anyway, so you think “I might as well” and off you go to “sample” the offer. A while later you’re done with sampling (and vice versa) and you render your verdict: “Self-absorbed!” “Sack of potatoes!” “Fun, but not quite…”

So here is the dilemma… You can either say “I do” and advance to a life of “married bliss, but not quite;” or you can press “delete” and move on, albeit at the cost of yet more searching, more samplings, more verdicts!

Search models have something to say about which one you’ll go for. It boils down to this: The more impatient you are to find the“one”, the more likely you accept. In contrast, the more picky you are, the more likely you remain single!

(I suppose one doesn’t need a model to come up with that!)

Moreover, there are several factors affecting how picky you are: You’ll tend to be pickier if you keep being bombarded with offers; if you kind of enjoy your single’s bliss; or if you’re not that in a hurry to take the plunge.

So nothing wrong staying single then, right?

Well, yes and no. You see, in the world of economics, having unemployed workers and job vacancies at the same time is a missed opportunity to produce output! The dating world is similar, arguably…

I mean, some things in life are more fun a deux, from candlelit dinners, to games of scrabble, to that groundbreaking paper you can co-author! Let alone the obvious… Certainly that’s how your mother sees it, citing, in passing, reports that Republicans’ sex life is superior to that of Democrats. Either way, collective utility/value-added would increase, if more people found their match.

So what can you do?

Well, one option is to outsource the search process to a Planner—your mother for example—whose sole objective is to find you a partner, no matter what. She is certainly up for the challenge, so she rushes to her yoga class, asks around and, soon enough, she’s found your 97% match: A single guy in his thirties, gifted, romantic and all that, and a lovely individual, only Republican!

So the arrangement is made, the transaction goes through, “unemployment” reduced. Only that, as it turns out, you love to dance, he likes walks, you like fire, he loves snow, so you spend the rest of your life in the lukewarm in-between, devoting your most passionate moments to debates about the future of the Republican Party. That’s more or less the difference between “maximum employment” and “maximum welfare.”

Alternatively you can try resting on “market forces” to deliver you the best (welfare-maximizing) outcome. Only you might have to make a bit of extra effort.

For example, you may be receiving very few offers each month… or maybe your social circle is such that you only meet potatoes and egomaniacs. In which case you’d better take the extra step of “advertising” who you (really) are and what you (really) expect from the other side.

So, if you’re looking for a geek, say, you could start hanging out at the Apple store (a singles’ hotspot I am told)! Or, if you’re dying for an erudite, sensitive type, you could start frequenting happy hours for fans of Victorian poetry. Alternatively, you can move to Miami and groom yourself into a pretty bartender to get the Matt Damon type.

All this might be tiresome but it may well pay off. The other side now knows who you are, as well as your expectations and constraints. If they like what they see, they’ll make an offer, and one that you can’t refuse (else they wouldn’t make it in the first place). The deal closes, mother stays out of it, but all three of you happy…

…ever after? Well, there’s a catch: Even in this “best” world, partners can fail to deliver… your geek might have a knack for dismantling your appliances; your poet might be lousy at scrabble; and your Matt Damon might “see the light” and devote himself to a life of abstention and spiritual healing. It’s even conceivable (a minute possibility!) that you fail to deliver, being the rash, “delete-button” breed of your Facebook generation (and mine).

So what then… call up your mother?!!

Maybe.. though, before you pick up the phone, let me tell you one more thing.. According to those search models, being picky is a good thing.. It means that you’ll take your time, wait for “the” offer, end up much happier and, therefore, less likely to engage in “on-the-job search.” A desirable outcome for everyone!

Better yet.. If you do screw up, you’ll be at peace knowing it was you who made the choice!


Glossary: search models, on-the-job search, planner, Republicans, Democrats, potatoes

(What) a year in review!

I began this blog about a year ago with the sole intent (and hope) of making economics fun, accessible and an integral part of your average cocktail party conversation.

Part of it was selfish—you know, trying to make us economists feel “included” at cocktail parties… But part was also an attempt to demystify the economic jargon, in the hope that, sooner rather than later, non-economists will stop skipping the economics pages and instead become more engaged in the economic policy debate.

As a test of success, I subscribed to the blog my (very smart) younger cousin, a psychologist in her senior year. The goal was that she’d be able to put the words “Ben” and “fat tail” in the same sentence within a few weeks.

The test arguably failed, as the sentence I got was “Ben has a fat tail,” at which point I settled on an intermediate goal: Make Ben Bernanke a household name by year-end. Don’t gasp, shouldn’t be that hard! It's the Fed Chairman we’re talking about! Kind of like Robert de Niro or Britney Spears, only for economics!

To my amazement, within a few months Ben was indeed becoming a household name! Only the reason was not Models & Agents but, rather, the tectonic meltdown of our financial system and his central role in trying to bring it out of its coma.

With my own contribution to the public interest in economics dwarfed by the scale of the financial crisis, I decided to check out whether my blog was of any help at all! So I got a techie friend to help me track what kind of searches stumble upon my blog.

So what do I get?

Top search of the year hitting my blog was “originate to distribute.” Pretty chuffed about that, as I took it as a signal of rising public interest in the origins of the credit crisis and in M&A’s contribution in explaining it.

But M&A's contribution seemed to go way beyond economics! Looking at a few more (admittedly less frequent) searches I realized that I, Chevelle, have the potential of competing with Oprah in providing foresight and direction on some deep existential dilemmas:

“What does a few extra pounds mean in online dating?” “Should I bother with online dating?” “Infidelity: What’s the probability it will not happen again?” “Am I or Morgan Stanley too big to fail?”

Regardless of, for me this has been tremendous fun! And if you wish to boost my ego, you know, as a Christmas gift, you can do it by showing off what you’ve learnt… Ten questions below, plus one as bonus. Waiting to hear your scores!

And while I’m at it, my wishes to all of you for health, fulfillment, a happy holiday and a happier new year!

Chevelle.


1. Which central bank governor has the most facial hair?

a. Masaaki Shirakawa (Japan)
b. Durmus Yilmaz (Turkey)
c. Ben Bernanke (You tell me!)
d. Jean-Claude Trichet (Eurozone)

2. Your wealth in 2008: How much has the US stock market (S&P 500) moved this year? How about house prices across the US (as measured by the Case-Shiller index)?

a. Minus 38% and minus 17%
b. You are a buy-and-hold investor and didn’t really follow.
c. You suffer from vertigo and couldn’t look.
d. Who cares, the Arctic is melting!


3. Which one of the following instances would you describe as having a “fat tailed” distribution?

a. A state governor seeking prostitution services from a petite brunette
b. A CEO of a major investment bank escaping the wrath of his disgruntled, laid-off employees with a golden parachute.
c. A former NASDAQ Chairman and long-time investment guru defrauding his clients with a multi-billion “Ponzi” scheme
d. All of the above

4. What’s the difference between a government bailout and a government rescue?

a. In a bailout, the government saves somebody else’s ass; in a rescue it saves mine
b. In a bailout, the government saves crooks; in a rescue it saves idiots
c. A bailout is for those with private jets; a rescue is for those with hybrids
d. Rescue is the new bailout


5. What’s the difference between a bazooka and a squirt gun?

a. Bazookas are typically messier.
b. You can hide a squirt gun in your pocket, but you can’t hide a bazooka
c. If people see you have a bazooka, you won’t have to use it. But if they see a squirt gun…
d. No difference, if Hank Paulson is holding them


6. If you were to construct the world’s most exhilarating water slide, what chart would you take as your prototype?

a. The S&P 500 in 2008
b. The price of oil in 2008
c. The share price of Citigroup since end-2006
d. The Zimbabwean dollar’s exchange rate to the US dollar


7. What is the meaning of cojones?

a. A drastic cut in interest rates to near zero and the promise to keep them there for some time.
b. A giant Structured Investment Vehicle set up by the Fed to purchase the bulk of the illiquid junk that is clogging the financial system.
c. It’s an important word in Spanish.
d. What Hank Paulson doesn’t have.


8. Who has come closer so far to predicting the amount of bank write-downs?

a. Nouriel Dr. Doom Roubini (April 2008, $1 trillion for mortgage-related losses, $1.7 trillion for overall losses. Raised the estimate eventually to $3 trillion as the year progressed)

b. The International Monetary Fund (March 2008: $1.170 trillion, of which $945bn on securities like ABS and $225bn on unsecured US loans, including subprime)

c. The Group of 7 advanced economies (Feb 2008: $400 billion, subprime-related)

d. Standard & Poor’s Credit Rating Agency. (March 13, 2008: Global write-downs related to subprime loans estimated at $285 billion, of which $150 billion had already occurred by March 13, 2008. “The end is now in sight, for large financial institutions”, asserted Standard & Poor’s.) Can't help to note here that the "end" was very much in sight: Four days later, Bear Stearns collapsed!

9. How many Starbucks tall mocha frappuccinos could you buy with one Citi share on November 21, 2008?
(Hint: In January 2007, one Citi share could buy 13 mocha frappuccinos)

a. three
b. one, if the guy behind you could spare you some change
c. you’ve switched to instant because of the recession
d. fifteen

10. Who said “Why make trillions, when we can make… Billions?”

a. Dick Fuld
b. Hank Paulson
c. Sarah Palin
d. Dr. Evil

And the bonus question:

11. Where, oh where, am I spending New Year’s eve?

a. This country’s currency has been among the worst performers vs. the US dollar during 2008.
b. The country’s hot! (that’s a BIG hint for those who thought I'm nuts enough to go to Iceland in the middle of winter!)
c. Ben Bernanke has judged the country to be a “fundamentally sound and well-managed economy”
d. Jesus will be watching!



Answers:
1C; 2A; 3D (not based on any statistical research, but they all happen more often than you think!);
4D; 5D; 6D; 7B; 8A (Nouriel gets the prize for being one of the earliest prophets of a trillion-dollar doom!);
9B; 10D;
11: Olha que coisa mais linda, mais cheia de graça,
é ela menina, que vem que passa
num doce balanço, caminho do mar….
If you don't get it now, I'll tell you when I'm back!

Plan B

It’s days like today when you wonder whether there is an urgent need for a Plan B. Markets are crashing, performance has s&#$ked, clients are screaming on the phone and, yes, people are now getting fired. No, not Lehman’s, nor Wachovia, nor those other guys across the street.. This time is our own very offices being cleaned up.

So I’m sitting with a colleague pondering on the alternatives… New York on $10 a day? Hmm, some brave ones have tried this before and lasted... a week! Not to mention of course that there’d be still a rent to pay, a doorman to tip and that irresistible key-lime mini cheesecake at Magnolia Bakery for $4.50 a piece!

Move to a Mediterranean isle and dedicate myself to producing olive oil? An enticing thought no doubt—staples should outperform in a global downturn after all. And then you have those heavenly beaches to relieve the stress after a wearying day of fierce tree-shaking to bring the olives down for collection… And those fig trees.. and the grape vines.. the fresh fish…

Just as I was pondering on my comparative advantage in tree-shaking, I get an email… “Maria Sharapova could be yours for a cool $10,000! ” No, no, don’t get me wrong! Here is the idea: If Maria Sharapova can auction herself and fetch a dinner date for $10,000, then…me...?

OK, I’m no Maria Sharapova… but, sorry, Maria Sharapova is no Chevelle either. I mean, let’s talk comparative advantage here. And I do mean comparative advantage. Sure, my serve is a joke. But dinner is not (all) about serving.. There’s that (home-made) olive oil, the figs, the table manners, the repartees… on the future of the dollar, no less! Besides, I look (almost) as good in a tennis skirt, thank you very much.

So now that we’ve established I can put a “dinner-with-Chevelle” up for auction, the burning question of course becomes what type of auction! Of course I want to fetch the highest price. But that’s not enough; I also want to make sure I get a fair price.

So here is where Sharapova (can I call you Maria?) got it wrong. Maria put herself up on an “ordinary” auction, whereby the buyers compete for whatever is up for sale—be it a Picasso painting or dinner with a blonde. Problem is, the price you end up getting will depend on who is in the pool of buyers at the time of auction.

For example, the auction’s winner might have been willing to pay far, far more than $10,000. I mean, she is a hottie, with long legs and the enviable title of ex-No.1 tennis champ, so arguably $10,000 falls way below her fair value Yet the guy got a bargain, likely because $10,000 already hit the bounds of the available competition’s “reservation price.

So here is my approach: A reverse auction! Very much in fashion after the Paulson bailout plan, it’s also a way to obtain a fair price. This is how it goes: I offer a price—obviously one in line with my sense of my intrinsic value. Other “sellers” offer a price too, for their own dinner-date. Of course, since each one of us does want to win, we won’t be making any extortionate offers--that is, way above our sense of market value. So potential buyers out there get the best price, and a fair one for that matter.

What?? You don’t trust my price? My sense of my own intrinsic value? Sorry, but if you trust Goldmans & co. using their obscure, in-house econometric models to put a price for the illiquid garbage they are about to sell to the government, surely you can trust my price for a “commodity” that is arguably far more liquid and certainly less toxic!

Wall Street men and women unite… there is a business opportunity here. And, by the way, I do mean dinner!



Glossary: auction, reverse auction, reservation price, olive oil, Maria Sharapova

An Economist on the Beach

For a New Yorker working in currencies, taking a summer vacation in Europe these days is equivalent to unreserved masochism. With the euro overvalued, you know you’re about to get financially abused, yet you brim with anticipation!

But before you jump into undue conclusions, let me clarify that choice I had not. It has become an annual ritual for my scattered family to rendez-vous in the Mediterranean for our joint summer vacation. Part of the ritual involves picking a theme, and this time the task fell on Younger Sister who, after careful deliberation, settled on “Exclusively Beach.” (A retaliation, I’m sure, to my choice of “Beach and Beyond” last year which, admittedly, overstressed the “Beyond”).

Faithful to its name, Sis’ plan involves a road trip tracking Greece’s western shores, crossing over to the Ionian isles and then further west to Italy, to explore the Amalfi coastline. And, frankly, overpriced espressos aside, I really can’t complain… while you’re here, I’ll be here!

So, with two weeks of (exclusive) beach time, what are an economist’s quintessential beach accessories this summer season? Here are my top five, beyond sunscreen and swim suit (if you care for one):

The Age of Turbulence: Almost a year after its publication, Alan Greenspan’s memoir remains more topical than ever, and not just because of its title. The “Maestro’s” legacy is being re-examined in some circles in light of the recent (turbulent) events. And while the jury’s still out, one may not have to be a cynic to still see the book as an exhaustive account of the build-up to the current mess, straight from the horse’s mouth.

The big question, of course, is how to get away with reading a 500+ page book with a geeky old man on its cover without looking like a complete nerd. So here is my tip. Get the audiobook version. Download it on your iPod. Put on your headphones and lie down on your comfy, laguna-pink beach-mat feigning your most relaxed look. Hum your favorite tune now and then. And tap your foot every time Greenspan says the word “conundrum.”

Bayesian… is the new Vogue: They say that beauty is in the eye of the beholder and, actually, so is probability. At least that’s what Bayesian statisticians will tell you. The idea goes as follows:

Suppose I am at the beach, taking a break from my audiobook to check out the Italian ‘material’ roaming around. And suppose I have a ‘prior’ belief that 73 percent of Italians are avid womanizers, based on some vague theory I came up on the relation between pasta consumption and womanizing.

Now, as guys stop by for a chat, they help expand my set of “observations” and may lead me to update my prior belief. My probability number (the 73%) is thus just a subjective “degree of belief” that I may choose to update, based on my theory and in light of new information. This is the Bayesian paradigm.

And it is different from the so-called “frequentist” approach, which claims that there is a true, objective probability (that Italians are womanizers)—anything from 0 to 100%. In fact, if you were a frequentist, you would ideally want to sample as many Italians as possible so that you can get closer and closer to the truth.

Why did I ever get here? Because estimation techniques based on the Bayesian paradigm have been increasingly in vogue among economists in their attempts to gauge their economic model parameters. And my task this summer is to catch up with the latest in this field. As dreary as it sounds, the good news is that the anti-nerd disguise is far easier this time: The academic papers in question are in standard A4 format, easily inserted as a "supplement" in the Italian Vogue.

The Financial Times: Apart from its sporadic misreadings of the Fed’s intentions (who doesn’t?!), the FT remains the best in print media when it comes to global economic and financial news and analysis. Especially for those who are into british spelling and/or captivating reviews of ‘must-see’ performances shown all the way from London to… Bath (U.K.).

The best part of the FT, however, is the paper… I mean, its actual paper. And not because it’s pink. The FT’s paper actually has an interesting property that makes it perfectly cut out for the beach: When exposed to the sun, the ink fades!… A useful reminder that, the news you’re struggling to read, a couple of days later, is no longer news.

Eternal Debt: Eternal Debt (or Deuda Eterna) is Latin America’s response to Monopoly, its title playing with the region’s perennial economic problem: External debt. The game was given to me as a gift by an Argentine colleague, back in the days where I was assigned the (fun?) task of assessing whether the IMF’s lending program to Argentina, in 2002-03, was a good idea (for either).

“Who can beat the IMF?” That’s the objective. And to achieve it, one must convert oneself from a wretched farmer or miner to an industrialist, set up plants to add value to the region’s natural resources, and export the finished products to the rich North. In the process, industrialists have to surpass all sorts of obstacles, including asset confiscations, exchange rate devaluations and—the much despised—IMF “conditionalities” (lending conditions).

For all its factual inaccuracies, I find the game tremendous fun and it’s the third year in a row it’s making it into my beach bag. Only we have never actually played it... when it's come to assigning the roles, nobody ever wants to be the IMF.

A Blackberry: Courtesy of my employer I carry a Blackberry, which I expect to maintain at close proximity—right next to my iPod. I must say, Blackberry has made life much easier: Not only can I track the euro-dollar exchange rate in real time, anywhere; but my boss, too, can track me in real time, anywhere.

But a Blackberry is indispensible for another reason: Bloomberg! No, I’m not referring to the New York mayor, but to his lavish news and financial services empire, that he has made downloadable to a Blackberry. Believe me, it’s far more addictive than the device itself. And a Bloomberg addict I am, particularly when it comes to small “treats” in the form of thought-provoking morning quotes like Gertrude Stein’s “Rose is a rose is a rose is a rose” or, the more insightful “The hardest thing in the world to understand is the income tax”... by Albert Einstein.

So this is it guys… I am officially on holiday. Out of the office, two weeks, flat on the beach, can’t promise I’ll miss you. Rendez-vous mid-August!


Glossary: Bayesian, frequentist, Bloomberg, IMF conditionalities, external debt, FT, Vogue.

Economists vs. Accountants: The Duel!

So I’m at this party, a cocktail one I suppose, since cocktails are being made by a couple of sultry Japanese hired help who giggle awkwardly upon mention of anything other than beer before rushing to the cocktail recipe book. I promptly decide to suppress my urge for a cucumber martini and opt for sparkling water instead.. no ice.

“Careful with that, I won’t take you home even if you begged,” says a voice behind me… male. I turn around. Not my type but hey! So we begin the usual party chitchat and within five minutes I know about his favorite martini, his 400 New York friends and his flashy BMW—“courtesy of my employer.” He? The sales rep for a major European cosmetics company. Me?

An economist, I say, expecting the typical bland look followed by a question on the stock market. Au contraire. What I get instead is a smartass laugh and… “a quote I just read, that an economist is someone who is good with numbers, yet lacks the personality to be an accountant!”

Ha ha.. NOT funny! I mean, don’t get me wrong, I would have laughed my head off had the “thesis” come from an economist. But anyone else??… It calls for a duel! Yet, stunned by the need to defend the… obvious (?), I stood there speechless. No… worse! “That’s right,” I said, “I spend my evenings playing with currency models while you’re trying night creams.”

Yes, that didn’t take me far. So that very night I decided to put aside my models for once and collect ammunition instead. Here it is:

1. The celebs: Let’s talk personality first. Think of Adam Smith, renowned political economist of “invisible hand” fame. David Ricardo, the precocious speculator, forerunner of “classical economics” and author of the theory of “comparative advantage.” John Stuart Mill, the influential liberal (and feminist!), free-marketeer and “utilitarianist,” advocating the maximization of (higher, intellectual forms of) happiness. Karl Marx, the father of communism; John Maynard Keynes, the prominent interventionist calling for an active government role as the solution to economic downturns. Joseph Schumpeter, the “creative destructionist.” Milton Friedman, the “freedom fighter.”

You’ve heard of these guys, right? Some of them? Scratching your head? Fine, just wait until you hear the accounting “superstars.” “Father of accounting” Luca Pacioli, a wandering Franciscan monk and author of the first written description of double entry bookkeeping (in 1494). Josiah Wedgwood, an 18th century potter(!), leading figure in the Industrial Revolution and “inventor” of modern cost accounting . The “legendary” Abe Briloff, “philosopher-king” of accounting today and ardent advocate of ethics, rectitude and high standards in the profession. Kenny G! (apparently an accountant before gaining global renown as the composer of ultimate cheese!). OK, I’m struggling here.. someone help?

2. The parties: Perhaps not the right benchmark for a good party, but economists’ gatherings are much (much) more exciting than those of accountants! Think Jackson Hole, the annual economic symposium and a prime occasion for spotters of policy wonks, academic nerds and Wall Street VIPs (paparazzi please attest!). The WTO Ministerials, where trade negotiations (purportedly) in the name of free trade have invariably raised the passions of thousands of hot-blooded protesters. Or Davos, the glitzy ski resort and seat of the World Economic Forum—an event so glamorous that even Angelina Jolie turned to an economics cause (the plight of refugees) to get an invitation. Now, just try to invite Brangelina to a conference of the American Institute of Certified Public Accountants! (A bit sneaky on my side perhaps, but this is a photo collection from what seems to be a typical accountants’ party!)

3. The scandals: One must admit, there have indeed been occasions when accountants have managed to steal the limelight: Accounting scandals! From Enron to Tyco to WorldCom to the many more instances of auditing negligence and/or abuses, accountants managed to grab their few “seconds” of front-page fame, together with the collective abhorrence of the victims, who saw their pension savings evaporate as the firms’ stock plummeted (and so did their 401k’s).

That said… economic “scandals” (we prefer to call them “crises”) have arguably been far more sensational! A fresh example is the subprime-mortgage crisis that has been unfolding in front of our eyes since last summer: The stock market losses that have accompanied it have been staggering: The market capitalization of the S&P500 Index has dropped by 1.7 trillion dollars—a rather hefty destruction of wealth, equivalent to 12 percent of America’s annual product (or GDP). Not to mention the wealth losses from the calamitous decline in home prices and the millions of those affected. Not really something to boast about, but, remember, the criterion here is headline-grabbing! Besides, as economists will tell you, “it’s not our fault!” Better yet.. What they’ll say is “I told you so!”.

4. Our “issues”: What would you rather daydream about… how to fill out your 1040 or how to spend that $600 tax rebate that the government might be mailing you, come May? Exactly! Unlike accountants, who will bore you with tax talk, economists prefer to banter about tax stimuli! A far more exciting topic, and it's not just semantics. Debates about the nature and magnitude of a tax stimulus package tend to be “electrifying,” as economic efficiency is traded off with political expediency: Temporary refundable tax credits or permanent tax cuts? Target everyone or just the lower-income groups? Aim at boosting consumption or investment? And, crucially, how big a package? Questions that, I’d say, dominate the details (however important!) of how to file short vs. long capital gains for tax purposes.

5. Our philosophy: The differences go beyond tax banter, however, to a more fundamental level. Think of the concept of “cost,” as simple as it sounds: Let’s say you go and buy an I-phone for 400 dollars. When I see you showing off your new gadget, I ask you “how much did it cost you?” and you say “400 bucks.” You know what I’ll say? I’ll say, “I’m sorry to tell you, but you were born to be an accountant!” You see, economists don’t think in terms of the “accounting cost” (those 400 bucks) but in terms of “opportunity cost,” i.e. the cost of missing out on (better) alternatives by spending your $400 on an I-phone—be it a fine dinner with a beautiful woman or a well-informed investment in the stock market. And when it comes to efficient allocation of our (scarce) resources, economists’ perspective wins this one big time!

6. Our profits: An extension of our differences over cost is our concept of “profit.” Accountants will measure profit as revenue minus cost, which, as I’ll show, is somewhat misplaced. Say I quit my job for a year and move down to Tulum to write a book about how thrilling the economics profession is. I live in a cheap beach hut, fish for my food and contain my entertainment to daily strolls through dilapidated Mayan temples, so that for $5,000 a year I can live like a (beach) queen. As “production” completes, an unlikely publisher emerges and the book gets published. You guys go out and buy three copies each (a fine investment!) and I end up making $50,000 out of the whole thing. Great job, you say, you made $45,000 of profit. No, my friend, I’ve just made an economic loss—for good or for worse, I could be earning a bit more spending my days (and nights) playing with currency models in New York.

7. The pick-up lines: Not convinced? Think dating! Once again, differences between accountants and economists are stark, with one fuzzy exception perhaps: Their respective pick-up lines, where I confess I’m having a hard time deciding the winner. I mean, would you rather go for “baby, let me withhold you!” or “I’ll be capital, you’ll be labor, you know the rest”? So I’ve decided to cheat.. only a little bit. Heard of John Nash? Famous mathematician and inventor of the Nash equilibrium, widely used in game theory? (You got it, the “Beautiful Mind!”). At the risk of receiving threat mail from mathematicians the world over for downgrading him to an economist (though he did share a Nobel prize in Economics!), I’ll borrow the line that he was made to say in the movie by screenwriter Akiva Goldsman to Alicia, his date and, eventually, wife (one of the funniest I’ve heard, but don’t get ideas, it only works for geniuses!):

“I find you very attractive. Your aggressive moves toward me indicate that you feel the same way. But still, ritual requires that we go through a number of platonic activities before we ….have sex. I'm simply proceeding with those activities. But in point of actual fact, all I really want to do is have intercourse with you as soon as possible.”

8. The dating: Despite their purported expertise in “dual dating,” accountants can be a pain to date. First of all, it’s darn hard to even find an accountant to date: Nobody admits to knowing an accountant, let alone being one (“no no, I’m a tax consultant”)! And in the rare cases when you do get hold of one, just try to set a date with him/her before April 16th. Taxes come first, it seems.

Economists, though.. oh no.. they won’t miss a single opportunity for a bit of making out (or, more accurately, the expectation thereof)! Whether in between meetings, in the taxi to the airport or pressed for time to deliver a critical presentation by 12 midnight, they will still make a move—“on demand” or not—even whilst you’re in the middle of discussing the impact of the Sarbanes-Oxley act on American competitiveness!

9. Après dating: So let’s say it all went well.. pick-up line worked, conversation rocked, move was accepted. What next? Given my limited experience in the field, I’ve decided to report the “gossip” as told by those at the frontier of the "professionals-in-grey-suits" dating scene. Accordingly, accountants do it “by the book,” though they often also do it “with double entry” and “without losing their balance!” Economists, on the other hand, do it “with interest,” will never miss “the bliss point” and, importantly, know how those “yield curves” respond! Your pick!

10. So… Economics or Accounting? You can tell, I’m running out of arguments! So in my quest for a proof as to which profession dominates, I decided to seek advice from Autoadmit.com, an online discussion group about college admissions and career choices and (according to itself) “the most prestigious college admission discussion board in the world.” Apparently, someone else had asked the question before me:

“Hi I'm trying to decide whether I want to continue pursuing my economics major or change my major into accounting. […] My main concern is the difficulty of getting a job as an economics degree after graduation , whereas with an accounting degree, it wouldn't seem too difficult. […] Can anybody help me with this decision? […] I’m very lost!”

I won’t “ruin” it by giving out the verdict. All I can say is keep on scrolling down, it gets better and better!

Glossary: accounting vs. opportunity cost, accounting vs. economic profit, invisible hand, comparative advantage, dual dating, beautiful minds.

Models & Agents

I knew I was an economist when I began laughing hysterically as soon as a colleague said “Economists do it with models”.

We were sitting at a fairly uptight sushi bar in midtown Manhattan and my riotous laughter attracted quite a few stares, perhaps with a dash of envy, by fellow diners who felt they were missing out on something terribly funny.

He went on: “Economists do it discretely and continuously… And econometricians do it with dummies!” I laughed myself to tears and couldn’t stop... But I bet you’re not laughing!

Instead, you’re probably thinking “you guys are a bunch of cliquey schmucks… self-absorbed PhD smart-asses, full of esoteric ideas and useless papers.. oh yeah, and with a knack for wasting taxpayer money on high-powered conferences and all those exclusive “après” parties.

Huh, not quite…

So then you’re thinking, “OK then, you’re just a pile of utterly boring and incommunicative nerds who draw demand curves on napkins and laugh with economists’ jokes because you.. really hardly ever do it!”

Touché!

Though, to my defense, I have heard of Oprah, I occasionally follow American Idol and, if pressed at gunpoint, I could even just be able to think of a difference between Ronaldo and Ronaldinho. Importantly, I am fully versatile in the critical issue of shoe-shopping, including what looks best in recessions! And no, I won’t comment on the “doing it” part… not for now.

In the end, it’s all about demystifying the jargon, which is what this blog is about. And, believe me, that jargon can take you far. Because, whether you like it or not, you’re an Agent.. yes, an economic agent, with incentives, actions and a Big Impact. And as such, forming a view on your future mortgage payments could be at least as fascinating as predicting the winner of the 2010 World Cup (ooops.. I can’t believe I just wrote that!)

Not to mention the guaranteed fun at those “après” parties.. because, let me tell ya, if your party conversations haven’t yet touched on the vital topics of “original sin”, “loose policies” or “naked options”, well.. you really haven’t been to “the right” parties!

Chevelle

Glossary: models, dummies, recession, agents, original sin, Ronaldo, Ronaldinho.