CQ2 | Ed Murphy

From The Economist, 3 January 2009:

The second feature of the Danish system is that mortgage-holders can also buy the bonds in the market and use them to redeem their mortgages.  This is useful if a rise in trest rates (or a fall in house prices) causes mortgage-backed bonds to trade at a discount.  Redeeming their bonds allows homeowners to reduce the amount they owe.  In America, for instance, mortgage-backed securities have fallen far below their fundamental value in thinly traded markets, partly because the people who would benefit most from buying them have no mechanism to do so. “Everybody can buy that bond at a discount except that one guy who is most involved with the loan, the homeowner,” says Alan Boyce, a mortgage expert who has worked with George Soros, an investor and philanthropist, on promoting the Danish model in emerging markets.  In Denmark, by contrast, a fall in the value of mortgage bonds usually encourages homeowners to snap them up to redeem their own mortgages, as is happening now.

Seriously: Do not trust anyone who uses the term “tranche.”

The Pakistan Taliban war is being fought in areas that 1500 years ago were Buddhist. The districts of Dir, Buner, and especially Swat are rich with Buddhist ruins, a record of a time when they were part of the Gandharan Buddhist heartland centered on the ancient capital of Taxila, now on the outskirts of Islamabad/Rawalapindi. Padmasambhava, for instance, was from Swat, ancient Uddiyana, before he went on to convert Tibet to Buddhism. These were rich, sophisticated centers of learning and art, famous for their monasteries, now sadly the locus of much suffering.

[updated 13 May 2009 with the maps above; for more detail you're wanting John Huntington's gorgeous map.]

[22 June 2009: It turns out that the identification of Uddiyana with Swat is contested; it might instead refer to modern-day Orissa, in eastern India.]

In form, if not in fact, the structure of Chinese sub-provincial units goes as follows:

• Region (province)
  • Prefecture
    • County (and/or district)

There may be one or many counties/districts in a prefecture and one or many prefectures in a region.  China also has the idea, if not in fact, of autonomous regions, prefectures, and counties.  The general naming structure is: <placename> <ethnicity> <”autonomous”> <unit>, where unit could be region, prefecture, or county/district.  So, for example, you have, officially, the “Xinjiang Uyghur Autonomous Region.”  But the autonomous designation is, as it were, autonomous, so you end up with situations like:

• Xinjiang Uyghur Autonomous Region
  • Bayin’gholin Mongol Autonomous Prefecture
    • Yanqui Hui Autonomous County

So that’s a nominally autonomous region of Hui (Han Chinese Muslims) within a Mongol autonomous prefecture within a Uyghur autonomous region, none of which are, of course, in the slightest bit autonomous.

Marriage is an assertion.  A man and a woman, call them Bob and Alice, assert they are married and so they are.  Bob asserts to others that he is married to Alice and this assertion is accepted as valid.  Their claim is accepted at face value by their community and supported by their society’s institutions.  

This pertains in both formal and informal situations.  Alice informally asserts that she is married through explicit symbols and claims, such as her wedding ring, and by claiming the state of marriage in formal documents such as tax returns, health insurance, birth certificates, wills and trusts, and health care directives.  

There is normally no check on this assertion.  In twelve years of marriage I have never once been asked to prove that I am married.  I have a copy of our marriage certificate, the legal document, but I have never once had the occasion to present it in support of the assertion of my married state.  I’ve asked others about this, including my parents who’ve been married for 49 years, and I have yet to hear of a situation where someone was required to prove through documentation that they were indeed married.  I’m sure those situations exist, but they’re boundary conditions: immigration officials doubting that Alice and Bob are really a couple and not just married for purposes of obtaining citizenship, for example, or a messy divorce where Alice claims that she was never married to Bob in the first place and thus doesn’t owe him the alimony he claims.   

As an everyday matter, in both formal and informal situations, marriage is an assertion between two people.

“Common law marriage” recognizes the situation of couple that assets their marriage, without any external agency (the state or the church).  Common law, the law of precedents, is always superceded by statutory law so that as we put laws on the books they take priority over the body of judicial precedents.  It is important to note, though, that in the past there was clear legal precedent for the validity of marriage solely by the agency of the two parties involved.  Common law marriage in the US is only recognized in eleven states today, and even in those states to varying degrees; some recognize its validity only for probate or grandfathered in prior to the 1990s, for instance.  In all cases, though, it’s worth noting that common law marriage *requires* assertion; simply living together, or owning property and having children together, is never adequate.

I believe that the situation in canon law, the religous law of the Catholic Church, at least in the past, was similar to our common law tradition; Alice and Bob did not need a priest for their marriage to be valid.  The priest is there as a representative or a witness not as the agent granting the marriage.  

So the fact that the state or the church today intervenes and ‘grants’ marriages — “by the authority invested in me by the state of Illinios, I now pronounce you husband and wife” —  represents diachronic change in the institution of marriage which was in the past, and is still in practical terms today, an assertion between the couple.

We can legislate the institution of marriage all we want but we need to very clearly acknowledge that this legislation, specifically the claim of the state to agency, is innovation and not tradition.

(more…)

I went to a panel discussion tonight at Harvard on the current economic crisis. I figured the topic was important enough for me to skip out of work early (I was in a training class in Waltham) although the session did nothing to calm my anxiety about the current situation.

My notes on the discussion:

Jay Light, dean of the Business School

There are three main issues in the crisis at the moment:

(1) leverage

(2) transparency

(3) liquidity

Traditionally, home prices in the US have been 2.8 to 3.0 times income but it’s gone to 4.0 in the US and even higher elsewhere (6.0 in the UK, for example.) Short term credit markets have seized up. It’s been like a slow-motion train wreck, although the wreck has speeded up in the past 10-12 days. To resolve it we need the $700 billion to stop the patient from bleeding to death in the operating room. Next, we need to stablize the patient over the course of the next few months and then in the long term go through some process of rehabilitation, undoubtedly including regulatory reforms.

Rob Kaplan, professor of management and former vice-chairman of Goldman Sachs

The real problem that the economy is facing is that it’s engine of growth, the middle-American family, has slowed. The middle class, he said, is disappearing. Over the past ten years, middle class wages have stagnated but costs — including food, energy, and especially health care costs — have been rising rapidly,. This gap has been financed by tapping the equity in homes, a perfectly rational economic choice.

Like Jay Light, Kaplan believes the $700b plan is good and necessary but alone it is not enough. We as a country need comprehensive policy reforms to support the engine of the US economy, the middle class.

Elizabeth Warren, law professor

First of all, let’s be clear that this isn’t the fault of poor people; we hear about subprime loans and we think about poor people getting into houses they couldn’t afford but 80% of subprime loans were existing homeowners re-financing. It turned into a giant Ponzi scheme that inevitably came crashing down.

We have a new home finance industry that was never tested by a bubble and it’s clear that it didn’t survive its test.

One problem is that we don’t have a one-to-one correspondence between the debt owner and the debtor. Because mortgages were divided up and bundled you can’t work out specific situations between the lndor and the borrower like you could in the past. Instead, what we have is a zillion fractionalized shares. Ten percent of what the government will buy will be actual whole mortgages.

Her recommended solution is a Financial Product Safety Commission because at the base of it we’re dealing with a dirty faulty product. It doesn’t meet basic ’safety’ requirements; if it was a toaster, you wouldn’t be able to sell it (no matter what the price) in the US; why don’t we have similar regulation over financial instruments, which have proven to be very very dangerous?

Kenneth Rogoff, Professor of Public Policy

The financial sector is too big; as a sector it’s 3%-4% of the economy but in recent years it’s represented 30% of corporate profits, and because of all of the outsized pay packages, 10% of the wages in the country. The sector needs to shrink, which is what’s happening now. Why should we prop this sector up? What makes them more special than say the auto industry? This is especially true since we don’t know how much these investments are worth and the people that are going to *try* to price them for us are the same (unemployed) investment bankers who couldn’t do this before and created this whole mess in the first place.

Greg Mankiw, Professor of Economics

Falling housing prices, not bad underwriting, are the core of the problem; there was bad underwriting, for sure, but that isn’t all of it.

Everyone has known that the GSE (government-sponsored entities, i.e., Freddie Mac and Fannie Mae) were a problem but the politicians, on both sides of the aisle, didn’t wan to touch it. He served on a Bush-sponsored committee to review the GSEs and they made the same recommendations that a similar panel had made to Clinton but neither was acted upon.

As far as the presidential candidates’ responses, neither of them has done a stellar job of addressing the problem.

Robert Merton, University Professor and Nobel laureate

There has been a real wealth loss in the country, something like $16b to $18b.

There is a strong negative feedback loop going on in the financial markets now.

Need to figure out in the future how to reward innovation and take acceptable levels of risk without imploding the whole system.

(Coincidentally, I had written about Sanders Theatre a couple of weeks ago, so it was a real pleasure to be back there after fifteen years.  It’s such a beautiful space.)

See also Larry Summers’ piece in the Harvard alumni magazine