Two Funnies From the 5-Year-Old
I was reading my son his bedtime story and he had a long hair in his mouth. So we commented on its yuckiness and so forth, and then he started rubbing his head. He said, “I have lots of hairs.” Then he rubbed my head and said, “You have 2 hairs.”
Later on I was getting ready to leave the room and he said he needed his lamb (i.e. a stuffed animal). I asked where it was. He pointed and said, “Right there.” So I’m looking all over the place and don’t see it. “It’s right there?” I demand, gesturing at the wall. He says yes.
After some exasperation, he finally gets up to get it himself. He walks out of the bedroom and into his play room. I start cracking up and say, “So you were pointing through the wall?!” and he answers “yes” as if that’s totally normal.
In retrospect, who ever said you can’t point through a wall? We adults impose all sorts of constraints on our minds.
The Jackpot Question In Advance
I know many of you simply assume that an internationally known Austrian economist (that’s me) would be ringing in the new year hanging with my boyz in da club, and then we’d take the show back to the hotel to party some mo. Alas, my wife is out of town so I am spending New Year’s Eve entertaining my 5-year-old.
We did the usual circuit: First we hit Barnes & Noble for some Thomas the Train action, followed by the joys of coin op Bob the Builder and the generic fire engine. But since today was special, I capitulated when my son headed into Dave & Buster’s. (I actually hadn’t heard of it until coming to Nashville, so maybe you haven’t either: It’s a restaurant/arcade combo and even has bowling alleys.)
Here are some random observations:
* My son is mercifully still at the age (and we let him play arcade games so rarely) that we spent a half hour in there with him just enjoying the demos of various games.
* Although I didn’t have my son’s patience with games that were waiting for quarters, I was perfectly content to watch a 15-year-old kill dozens, perhaps hundreds, of storm troopers and other miscreants in the employ of the Emperor. It would have been in the thousands, except the TIE fighters blew him up defending the original Death Star and he stopped pumping in more money. I don’t think I’ve ever seen anyone actually fight Vader, even though that scene is featured when no one’s playing the game.
* I didn’t conduct an extensive survey, but it seemed that the gap between the 1st and 2nd place high scores was much much bigger than the gaps between the other rankings. On one game that had cardinal scoring, the 1st place score was almost 5 times higher than the 2nd place score, whereas after that the scores would drop by 10% or so with each step. On the racing games, where the scores were in terms of lowest times, the “Course Record” was so low that I wasn’t sure I was reading the information correctly. The 3rd place would be, say, 3:02, the 2nd place 2:40, the 1st place would be 2:31, and then the “Course Record” would say 0:48 or something. So like I said, I’m not sure what that meant, but it could have been consistent with the cardinal top scores. The point being, there isn’t a bell curve when it comes to killing Aliens. The best guy is WAY the heck better than the others.
* There were security cameras distributed around the place, and there were also TV monitors that would cycle through the cameras. So the point was, they were letting you know they were watching. My son was on a motorcycle and for some reason reached out and put his hand over the lens of the camera and moved it so it pointed somewhere else. Atta boy. Fight the power, my son.
* Without any prodding from his pacifist father, my son grew quickly bored with the shoot-your-way-out-of-a-zombie-house game and spent most of his time racing. (Or more accurately, he spent most of his time watching commercials for racing games.)
* I think if someone from the 1950s–who had warned that Elvis’ devil music would corrupt America–were magically transported to a modern arcade, he would feel completely vindicated. There weren’t too many games that honed your hand-eye coordination by seeing how many kittens you could rescue from a towering inferno, or how many heart transplants you could perform in 60 seconds.
* I’m sure everyone thinks the games of his childhood were the best ever, but I still say nothing beats Super Mario Bros. on the original Nintendo.
The Wonders of the Internet
I’ve enjoyed Rick Rolls, and I enjoyed seeing the young Bill O’Reilly explosion when it first surfaced. Can the two be married? Apparently so (HT2 Brad DeLong), and watch out for the F-bomb if you are viewing in a sensitive location (or have morals):
If You Go to a Birthday Party at a Restaurant and Somebody Skips Out, Who Pays Her Bill?
Akal Singh Krau is an extremely interesting guy who is a law student at the University of Tennessee (Knoxville). A few months ago he invited me to give my standard doom-and-gloom talk to bum out his peers, and we realized that he literally grew up down the street from where I currently live. Anyway, since he was back home for the holidays we had dinner. Afterward my other buddy and I went to the karaoke bar (of course), while Akal went to a “hip” Nashville restaurant, PM, where one of his friends was having a birthday party celebration. Here’s Akal’s post-game show:
The scene at the restaurant was…highly contentious by the time I left! One of the birthday girl’s friends accidentally walked out without paying her check. Other than the birthday girl, no one else present knew the friend who walked out, so none of us felt any responsibility.
The waiter and restaurant manager kept pushing the concept of “the table” as a single entity by which all persons present are accountable for every item brought to it. I tried to explain basic contract liability (which I presented as methodologically individualistic) but completely gave up when the manager looked at me and said, “Life is gray; nothing is black and white.” It wasn’t pleasant.
In a follow-up (after I asked for permission to blog this) Akal added:
Yeah, it was kind of interesting. I felt some sympathy with the restaurant’s table-as-entity argument since even customers don’t always know how the check will be paid. Sometimes I might cover your meal, or you might cover mine; and social grace does not permit us to explicitly work this out in advance. As it would be indelicate for a waiter to require an explicit account for each item ordered and brought to the table, the assumption that someone will cover it seems proper.
On the other side of things, the happenstance placement of one’s derrière does not sufficiently communicate an intention to incur gaurantor liability. And how do you define the concept of “the table?” By physical proximity of physical tables? By degree of interaction or familiarity between persons?
Discuss.
Potpourri
* I know we rarely say nice things about Matt Yglesias around here, so I should point out this really good post arguing that the comparison of legislation to sausage making is unfair to the sausage makers.
* EPJ links to a very interesting story about how Business Insider got hacked. Really, you should check out what the Nigerian email scammers did once they gained control of the email account; they were fast and clever.
* One of the justifications for formalism is that it allows arguments to be settled quickly. Rather than people going ’round and ’round, equivocating and playing word games in their arguments, you just make your claims in formal language and BAM everybody can quickly determine who’s right. Or not (see comments).
* This is a short video [.wmv] showing the end of Kodak Park. (If I didn’t know better, I’d swear the Kodak buildings were taken down by passenger jets flown by radical Muslims.) I grew up literally down the street from a Kodak plant; in fact I suspect its smokestack is the source of my super powers. (Either that or the red Krypton sun.) Unfortunately that building is still standing, according to my dad, so I can’t give this blog post too much personal flavor. I am pretty sure though that my dad spent much of his career in some of the buildings that are now demolished. Outsourcing takes no prisoners.
Bill and I Don’t See Eye to Eye on Estate Taxes
Check out this comment from “Bill” when Alex Tabarrok discussed estate taxes:
Having been the surprising beneficiary of an uncle’s demise, I can assure you that estate taxes, or rather the absence of them, are quite a surprising windfall.
You see, my uncle never paid taxes. He did all he could ever do to defer taxes, buying equipment when he didn’t need to, just tons of stuff. I mean tons of stuff, all for the purpose of avoiding taxes.
So, when he died, and I along with some cousins inherited his estate, I thought, well, at least my uncle’s estate finally paid taxes.
Nope. No estate taxes. No capital gains. Nada. When the tax lawyer told me I couldn’t believe it.
My uncle is probably laughing from the grave, but I’m wondering: how did we ever let people escape paying taxes? We probably got some chumps to repeat the slogan death taxes long enough so they were mesmerized into submission. Thank you for your generousity. Now, let’s talk about the deficit.
Regrets, I’ve Had a Few…
I made a joke comment at MarginalRevolution, and then another commenter wanted me to elaborate, so I did:
What I meant was, when I was reading Black’s collection of essays, and hit the one on interest rates as an option, I made an intuitive connection between the major project I was grappling with at the time. Namely, I was trying to enter the finance world as an economist with a dissertation in capital theory, and so I was trying to come up with a paper where I linked up standard finance papers explaining interest rates as random walks or whatever, with standard GE econ models explaining interest rates as the marginal product of capital. I thought I could provide more constraints on how interest rates evolved over time, by bringing in “knowledge” from macro econ models.
So anyway Black’s approach to interest rates clicked with me and made me think I was on the right track, but then I got a job offer and it’s 4 years later and I can’t really remember what my brilliant insight was. 🙁
A Quick Note on Recapitalization
In November of 2008 I had a long phone conversation with the impregnable von Pepe, which clarified the typical discussions of the financial crisis in light of my hazy knowledge of accounting. In fact I was so energized after the call that I set out to do a whole series of blog posts sharing my newfound understanding.
Well that never happened. But I had another talk with von Pepe tonight and something really clicked, so I thought I would share it verbally (i.e. without coming up with a hypothetical balance sheet to illustrate the idea) while it’s still fresh.
One last point before we dive in: I am going out of my way to “not get it” in the analysis below. Before my talk with von Pepe, it’s not that I doubted the conventional wisdom on these matters, but I just had my doubts and wasn’t sure how to dispel them.
Here’s the context: After the crisis, you heard many commentators say things like, “The banks took huge hits on their holdings of mortgage-backed securities and standard loans. After writing down their assets, they have very little equity remaining. They need to issue more stock to recapitalize themselves.”
Now here were two vague concerns I had with this type of statement:
(1) Why did the firms need to attract new capital through the issuance of stock? If they needed to raise money, couldn’t they just issue more bonds? But then that wouldn’t be a recapitalization, it would be borrowing.
(2) If these firms were on the ropes because of their huge losses, how does that get magically fixed by pumping in more capital? Or to put it another way, why would investors want to buy shares in a company on the verge of bankruptcy? To put it a third way, if the company is solid and outside investors are willing to pump in more money, then who cares if they currently only have a razor-thin margin of shareholders’ equity? What’s a billion here or there in extra losses on MBS holdings if the underlying firm is solid?
The answer to all of the above turns out to be really elementary, but for some reason it didn’t click with me until my phone call tonight. So here it is: When a corporation issues more debt, it is taking on fixed liabilities (to make periodic interest payments and eventually return the principal). If the corporation does really well and has high earnings, then it pays off the bondholders the contractual amount and keeps the rest. On the other hand, if the firm loses money, it still owes the bondholders.
In contrast, if the corporation issues new shares of stock, it isn’t committing itself to future payments. If times are bad, nothing happens. If times are good, however, then the pool of available earnings to be distributed as dividend payments must be spread over a larger number of shares.
So if we’re looking at a financial institution that took huge writedowns on its loan portfolio and holdings of MBS, such that there is only $1 billion in shareholders’ equity compared to (say) $100 billion in outstanding debt, then that firm is incredibly leveraged. If things go smoothly and no further writedowns occur, then it will slowly climb out of its hole and the shareholders will make a killing.
However, if they lose just 1% in the value of their assets, that could wipe them out and they would have to declare bankruptcy. I.e. their liabilities would exceed their remaining assets.
So rather than remain in such a precarious position, the corporation can issue new stock and spread the potential gains and losses among a broader base of capital. If the corporation does well, it dilutes the return to the original shareholders. On the other hand, if things go poorly, the original shareholders aren’t wiped out. In essence they’ve brought in others to reduce both the expected return and its variance.
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