Education bubble: WOW

One indication of a bubble is a big increase in debt financing. Using this metric, we are in a huge education bubble. This infographic takes time to go through, but I was shocked at the amount of debt students take on, the default rates on student loans, and students' inability to use bankruptcy to get out of debt.
Via: HealthcareAdministration.com

Defending the undefendable

One of the books that piqued my interest in becoming an economist is now available free, online.

What do you look for in a mate?

An economist has the answer:

...for every 10% increase in a man's Body Mass Index, his salary must increase by 2% in order to [compensate women]. However, women who weigh more by two BMI units compensate [men] with a year of extra education, rather than money.

In other words, women have to be compensated with income for marrying a heavier man; while men must be compensated with education for marrying a heavier woman. HT: Larry

It Ain't Fair

I saw Moneyball this weekend and liked it. But of course I would. It is about how economics and data driven decision making was used to revolutionize how baseball has been managed. The main characters are based on real people - Billy Beane and Paul DePodesta. Click on the links and you will see two relatively handsome men. But the baseball guy is played by this guy















And the economist is played by this guy.















It ain't fair.

Maybe I have a little mind

Ralph Waldo Emerson wrote that "a foolish consistency is the hobgoblin of little minds."

Jobs' biggest mistake: he forgot about complements

Although Steve Jobs is rightly remembered for the innovative products he brought to market, he is also responsible for one of the biggest business blunders, ever.  Like Michael Porter, he forgot about the importance of complementary products and the Macintosh platform almost died on his watch.

In 1984, the graphical user interface on the Macintosh computer gave it a huge advantage over its rivals who had command line interfaces.  Mr. Jobs exploited this advantage by charging a high price to buy the computer, but also to develop software for it.  Meanwhile, Bill Gates, with his inferior product, was doing everything he could to encourage developers to make software that ran on his operating system.

Gates' strategy was the right one because the demand for an operating system increases with the availability of programs that run on it.

Steve Jobs learned from his mistake however, and when he developed the iPhone and iPad, it was an open system, designed to make it easy for App developers to design and make software for it.   

Hurry up and wait

Planes frequently push back from the gate on time, but then wait 2 feet away from the gate until it is time to queue up for take-off. This increases fuel consumption, and increases the time that passengers must sit in a cramped plane awaiting take-off.

One look at the wage scale for flight crews tells you why this occurs:

The first row (per diem) indicates how much the flight crew earns once it checks into the airport, the second (holding pay) after it loads the plane, and the third (hourly wage) after it pushes back from the gate and turns on the beacon.    By rushing to load the plane, and push back from the gate, the captain earns $164/hour more than he or she does by waiting to load the plane.

It would be relatively easy to solve this problem by taking the decision on when to push back from the gate away from the flight crew and give it to the airline instead.  

The best commencement address--Steve Jobs, RIP

I bought my first Mac in 1984, and I will have one until they pry my cold dead fingers off the mouse.

Milestones in regulatory myopia

In Europe under Basel II banking regulation (the current regime), a bank can hold any amount of the debt of the country it is in, with a risk weighting of zero. In other words, no capital at all is required for a bank to hold gov't bonds of its home country.

This may be the reason that Dexia, the Belgian bank, which recently passed regulatory "stress tests" with flying colors, is now in talks with the Belgium government for another bailout, just three years after their last bailout.

Is this so hard to understand: if you bail out banks that make risky loans, you get more risky loans.

What happens when we bail out banks who take on too much risk?

New paper by Ran Duchin and Denis Sosyura finds that we get more risk:

after the bailout, bailed banks approve riskier loans and shift investment portfolios toward riskier securities.

As if this weren't bad enough, the shift to risk occurs within the same asset class so has little effect on the capitalization ratios watched by regulators to make sure that banks aren't taking on more risk. We are left with a most unhappy conclusion:

...the net effect is a significant increase in systemic risk and the probability of distress due to the higher risk of bank assets.