Tuesday, September 30, 2008

The Impossibility of Insuring Against Systematic Risks

One similarity of today's crisis with 1987 is the (failed) role of insurance. In 1987, portfolio insurance was a relatively new idea and many investors had implemented such insurance plans, either through simple things like stop-loss orders or more dynamic portfolio strategies based on options. I think it is pretty well accepted that not only did many portfolio insurance schemes not work -- because prices changed discontinously -- but also that they contributed to the very large (approx. 20% in one day) price declines.

Today we have insurance in the form of credit default swaps, which I do like to think of just as insurance. Once again, many of these insurance policies have not been effective and, because they can lead to forced selling of assets, may also be contributing to positive feedback cycles in the markets.

I recall some of my graduate econ coursework with the late Prof. Jack Hirshleifer, who used to emphasize things like the impossibility of insuring against "social," i.e., wide-scale risks. In 1987 and today, there do seem to be insurance policies taken out that would not be payable in certain states of the world.

Principle vs. Pragmatism

Well, if that is the market's expectation of what will happen without a bailout plan, it is bad but not that bad.

This is a tough call, one that balances principle vs. pragmatism. I do not like this level of intervention in markets, in particular to the extent that it alleviates the costs to investors and managers who made bad decisions in the past. I think that the incentive impact of any kind of workout/restructuring/"bailout" will linger for a long time and will adversely affect future economic behavior and decisions. On the other hand, I do see a legitimate role for Federal financial authorities to help stabilize, in a liquidity sense, our credit markets. That is not intervention like deciding which form of alternative energy should get funded; it is simply playing a role of nudging markets back to an equilibrium path when they are veering towards a series of essentially bank runs.

I do understand the anger of people and their willingness to accept a fair degree of pain, if it means that we will see clearer financial impacts of all those earlier decisions and given the risk of large taxpayer outlays that could enrich further those who already benefitted.

Interesting times, for sure.

Saturday, September 27, 2008

Reverse Auction Questions

The design of any reverse auction to be used by Treasury is not at all clear. One big issue is how to define the range of mortgage-backed securities (MBS) to be included in any auction (I am assuming that they will be buying MBS). The complexity of the MBS market is rather overwhelming: In a typical $1 billion mortgage pool, there would be upwards of 15 different tranches of MBS created, from the top A level securities through mezzanine to even lower priority class securities. Suppose there was $2 trillion of subprime and alt-A mortgages securitized in this way. That would mean 2,000 different pools/trusts created and about 30,000 different classes of MBS securities!!

So obviously you cannot just run an auction where you say, submit offers to sell any MBS. You have to define the class of MBS you will buy more narrowly. Of course, if you go too narrow -- for example, just the M-2 class from the GSAMP Trust 2006-NC2 pool -- you may end up with too few holders and therefore too few potential sellers.

I suspect the Treasury will have to define acceptable securities for any auction by things like original offer date, original degree of credit subordination, current and/or original rating, plus all kinds of characteristics on the underlying mortgage pool. I think one can define classes narrowly enough so that the MBS are similar enough to think that one price can be efficiently put on all of them, while defining the class broadly enough so that the auction has effective competition.

Once the Treasury buys the MBS, what do they do with them? Like a used car dealer, I suspect they will want to "fix them up" so they can be sold at a higher price. What might that mean? Lots of things, including possibly re-pooling the MBS, creating what were called collateralized mortgage obligations. Put all the MBS from an auction into a new pool, and define new securities with claims to that pool of cash flows. I would love to see some simplification there: don't define many new classes, keep it simple and just create one or a couple different CDO tranches.

Then they have to structure an auction to re-sell the new securities. That will be the easy part.

Connection Between the Two Most Messed-Up Industries

I would have to give the housing industry, especially the financing side of it, and health, again the financing side of it, as the two most problematic industries in the country.

Is there possibly a common factor leading to problems in each industry?

Well, one candidate would be tax deductibility. Mortgage payments, and real estate taxes, are deductible from Federal income taxes, and provision of health care benefits by employers are not considered taxable income.

Such deductibility raises demand for these products/services by about 25% and causes distortions in how they are paid for (encouraging borrowing and encouraging payment by employers).

Using this as a predictor of future industries that will have problems, I guess I would have to point to two: one, retirement pensions, and two, education. As for pensions, contributions up to certain limits are deductible, and as for education, we have the relatively new 529 Plan industry, with 529 Plan investment earnings being tax free.

Friday, September 26, 2008

RIM vs. Apple

It appears that the iPhone might indeed be taking a large bite out of RIM's Blackberry-flavored apple. See this story.

Many of my Bridge students valued RIM last summer as part of the Business Bridge curriculum. I wonder if you want to go back and change some assumptions?

I use my iPhone more than any other device I have owned. Why? Easy to use, it works, zero marginal cost, and it is cool. Not a bad mix of qualities.

Wednesday, September 24, 2008

McCain's Wrench?

McCain seems to be calling for a delay in the Presidential campaign to allow him (and Obama) to join the deliberations over the proposed finance plan.


I give him the benefit of the doubt on sincerity. There certainly is an intellectually defensible position in saying that there needs to be a little due diligence put into this plan (after all, one can argue that if the Wall Street crowd had done more due diligence on mortgages, we would not be where we are today).

The markets are gyrating a bit today, but I am not sure we are hanging by a thread that would break if we took a few more days.

If McCain doesn't show up for the debate Friday night, will Obama debate himself?

Profits from Government Plan?

I have said that in principle the government should make a profit from serving as market maker of last resort: buying mortgage backed securities low and selling them high. With auctions being used at both ends, they might be able to pull it off; auctions are after all very good at setting prices.

Turns out I am in good company. Here is Warren Buffett saying the same thing:

"While "no one likes to write" a $700 billion check, Buffett thinks the government could make a profit when it eventually sells the now-toxic debt it would be acquiring in a bailout. "They could make money on this," he predicts, if it's handled properly."

Of course, trusting the government to handle this properly is taking a big bet...

Tuesday, September 23, 2008

Tuck School Event on Crisis

At Tuck today, we had a "News Hour" on the credit crisis. Besides myself, the speakers were Associate Dean Matt Slaughter, Professor Syd Finkelstein, and Professor Phil Stocken.

The video is here.

Good session, I think -- we managed to make some points in a short time.

Monday, September 22, 2008

Insolvent or Illiquid?

Suppose I run a bank with $X of assets, $95 of liabilities and $5 of equity. My assets are of long maturity, but my debt is short term.

Someone asks me the value of my assets. I check the market, and the current offer is $80.

If I can provide more information on my assets, and/or wait until more buyers show up, I think I can get a higher offer.

Am I insolvent, or is this a liquidity problem?

This is rather key to the government's plan. If the institutions are insolvent, this plan will cost the taxpayers. If the underlying problem is illiquidity, the cost will be minimal or negative.

This line of reasoning also suggests the similarity between the classic old commercial banking problem of lending long and borrowing short to the problem that investment banks face today. We never had a problem, I think, of having the Fed stand ready to help out commercial banks that were illiquid -- if their short term depositors demanded money, and they could not sell their long term assets at immediate prices to cover deposits, then the Fed would step in.

We just never imagined that the illiiquidity problems would be so systematic and that commercial banks had pushed this problem on to someone else.

Beware the Oil Price Data

From what I can tell, the massive increase in oil prices today -- around $25 -- is not really an increase in a meaningful price. The price increase was for the contract that was expiring, I assume the September or October contract. The next-in-line contract is not trading nearly as high.

It appears that some folks had very large short positions in that contract and had to buy to cover their shorts.

Some reporters are being careful to report the difference in price between the monthly contracts, others are not.

That by itself though is somewhat strange. Short squeezes do not happen often in large, liquid markets.

Sanity is indeed taking a vacation in some parts.

Of Credit Crises, Adverse Selection, and Reverse Auctions

One concept is absolutely critical to understanding the origins of the mortgage crisis, the current seizing up of markets and credit crisis, and to certain problems that the government will have with its plan to buy and resell mortgage-based securities: asymmetric information and adverse selection.

The classic examples are for used-cars and insurance. Suppose I offer a fixed offer price at which I will buy all used cars put on the market. Due to adverse selection, I will only find sellers who think their cars are worth less than my offer -- the "lemons.". If gains from trade are not great enough, then the average value of the cars I buy could be less than my offer. To at least break even, I would have to lower my offer price, but that will mean that more of the better cars drop out of the market, leaving me with even worse of a pool...In the worst cases, markets can cease to exist under these conditions.

The way I put the example should make clear the connection to the original financing of mortgages, the problems in lending to banks who have lots of mortgages on their books, and especially, the problem that the government will have in buying mortgage backed securities.

If the government offers to buy all AAA rated mortgage backed securities, to take an example, who will participate in that market? If the government sets a fixed price, the adverse selection will be severe. If they do a "reverse auction," there will still be a problem: The institutions offering their securities at the lowest price will be the ones who win the auction, and their securities will be the worst of the lemons. The good ones will stay out -- classic lemons market (for those not familiar with the "lemons" terminology, a lemon refers to a low quality item like a bad used car).

Auctions do not necessarily perform well when information is very poor, and that is the case we are in.

All this said, the lesson from adverse selection is that there are tremendous gains to trade that are going unexploited. If some entity (the government, for eg.) can solve the lemons problem, mutually beneficial exchange can explode, and the entity solving the problem can take a spread from each trade and make a mint. This would be the best case scenario for the government's plan -- in which case the cost of the plan will not be $700 billion but will be negative.

The classic way to solve lemons/adverse selection problems is pooling. You cannot let individuals decide whether to enter the market or not. Pooling works great for insurance, as in employer-based pools for health insurance. I suspect it will be critical for the government's plan to have some kind of forced pooling.

Saturday, September 20, 2008

Tax the Underwriters

I have not been able to see the details of any proposal on the Resolution Trust Corporation idea being discussed as a grand plan for fixing the credit crisis.

I think we should consider a tax on all underwriters of mortgage backed securities to help finance any plan. A significant tax, based on historical underwritings, also based on the risk of the mortgages written.

Not just for incentive reasons, but because otherwise capitalism will get a blackeye from which it may never recover. The banks have to step forward and take some responsibility.

I am out in the heartland (Michigan) and seeing what people think. There is a fair amount of disgust, as much for the homeowners who stretched for mortgages they could not repay as for the banks who were writing and selling bad paper. If the plan does not make those people who are commonly, even if mistakenly, viewed as the perpetrators, I think we will have large political/populist problems.

Banks' Balance Sheets and Naivety

I got on a plane to Motor City at 4 pm Thursday and the market was up 380 points. I wonder where it will close…(UPDATE: Obviously lots has happened since then!)

There are many, many lessons from this ongoing financial crisis. We professors of the dismal science, especially those of us who dabble in financial economics, will have plenty to talk about for years to come. Adverse selection, a concept that has to be part of any explanation, will have to be resurrected in many an MBA curriculum.

There is a fair amount of talk about the greed and stupidity of Wall Street managers. I think we should be a little careful in doling out blame as a result of what might be more of a perfect storm, a truly once-in-a-hundred years type event. Does some behavior of the past few years at this point look really stupid? Yes. Will it always be possible to find evidence of stupid behavior after a crisis? Yes.

One specific point that I have been thinking about is this: how could the principals in investment banking have thought that putting $30 of risky assets on top of $1 of equity be a reasonable idea?

We should hesitate just a bit, right? These are smart people, with great educatons, who even if they did not have huge ownership stakes (most of them did) it was pretty clear that their income depended on their firm surviving. That is, incentives were aligned and ability was certainly there. (There might be some issue around overpowered equity incentives, creating incentives to swing for all or nothing, but I would have to be convinced on this one.)

So leaving aside the question of how they got to a balance sheet of $25 billion of equity and $750 billion of risky assets, let’s just think for a minute of how you get out of the situation (these are roughly the Lehman numbers).

The $750 billion of assets is yielding a cash profit stream based on a spread, say borrowing at 5% and lending at 5.005% (yes, a very thin spread, but on a huge asset base). That yields $3.75 billion of spread, which along with some fee income etc., and a capitalization factor of 6.67 yields a market value of equity of the $25 billion.

Now all of a sudden those assets paying 5.005% lose two percent of their value. The two percent loss of value is $15 billion, so over half of your market value of equity is gone, and your leverage has increased even more.

So, why don’t the managers work out of this situation? Well, suppose they sell half of the assets remaining. But that leaves only about $368 billion of assets, with the cash flow stream from that spread now only $1.84 billion, which with the same capitalization factor of 6.67 yields an equity value of $12.3 billion. Selling any of the remaining assets takes away more equity value, which is going to be hard to swallow.

What I am saying is that once you suffer the loss in asset value, to deleverage by selling assets can be quite painful, as it gets rid of assets that are contributing cash flow, and , with lack of information from outsiders, market value as well. Holding on to the assets, while they continue to pay cash, is going to be real tempting.

And of course, getting more equity to deleverage is also difficult, as the new equity providers will see the new economics of the situation – that the old spread of .005 is no longer around. New equity will demand onerous terms, making old equity quite upset.

Do we see why we might try to hold on and see if times will get better?

I am trying to come up with a good metaphor. Maybe: it’s like asking a man dying of gangrene that has gone from his toe up his leg and is now attacking his whole body – why didn’t you cut that little toe off when it turned black?

Tuesday, September 16, 2008

Rescue AIG?

I have been looking a bit into the AIG situation. From their 2007 annual report, one can read about what their financial products group did:

AIG Financial Products Corp. (AIGFP) is at the forefront of
AIG’s global capital market activities. It acts as a principal in nearly
all of its transactions... AIGFP focuses on a variety of over-the-counter derivative and structured finance transactions...
A key attribute that differentiates AIGFP from its peers is its
ability to commit significant amounts of its own capital—depending
on the opportunity arising from a particular investment—at different
levels of a company’s debt and equity capital structure.
The firm is also a major investor in a wide array of debt and
equity securities.

As a result of the severe disruption in the U.S. residential mortgage
and credit markets that accelerated during the fourth quarter of 2007,
AIGFP recognized unrealized market valuation losses of more than
$11 billion on its credit default swap portfolio written principally on
the super senior tranches of multisector collateralized debt obligations."

I read this as follows. We have a profitable full line traditional insurance company that generates lots of cash, but returns have not been extraordinary. In search of extraordinary returns, we set up a financial services group to write insurance (credit swaps) on all kinds of debt securities. Counterparties bought our insurance, not understanding that in the event of a systemic crisis, we would either renege on our insurance or not be able to pay. In the meantime, we booked a lot of revenue and profit from selling this insurance.

Now that the systemic crisis has occurred, we are asking the Federal government to bail us out, and thereby, all of our customers as well.

I fail to see the compelling argument here. Let those who unwisely bought the insurance go without it; we do not want to save them from their mistake -- too little of caveat emptor remains in our economy as it is. Send the holding company into bankruptcy, with losses taken by equity and by all the claimants on the financial services insurance. Separate the traditional AIG insurance business from the rest and let it continue -- no problems there.

The long term interests of a free market economy would seem to prevail in this case, unless someone can convince me that the collapse of AIG would cause not just a further decline in equity markets but a true banking crisis. Otherwise, I have to think that we can get over this.

Monday, September 15, 2008

Lehman vs. Bear?

Hank Paulson, the Treasury, and the Fed helped Bear Stearns shareholders get $10 per share.

They are letting Lehman hang by itself.

What's the difference between Investment Bank A (Lehman) and investment Bank B (Bear Stearns)?

1. Bear had the good luck to go first. One is an exception, two becomes moral hazard.

2. Bear was more intricately entwined with the rest of the financial system through complicated swaps and other guarantees.

3. The markets had ample time to get ready for Lehman's demise.

I suspect my order of the above is about right.

If I were in Manhattan today, I would have gone to Lehman and stood on the sidewalk and just watched. I was at the Berlin Wall in 1989 -- that was a much, much bigger event, but history is being made today.

My favorite question now is: How does it make sense to have $700 billion of assets supported by about $20-25 billion in equity (i.e., 30x leverage) -- when those assets can change in value by 5% in a matter of days? Is this a question of liquidity or of solvency (recognizing that the line between those two concepts is not clear).

Sunday, September 14, 2008

"Sarah Palin is No Woman" ??!!!

That is the first line in an editorial in our local newspaper, the Valley News, written by our sometimes-resident liberal columnist Steve Nelson.

The article perfectly defines liberal, elitist smugness and proves the hypocrisy in all the liberal Democratic MSM whining about Republican divisiveness.

I cannot find a link to the entire article (maybe the Valley News should get a tech lesson from McCain), but after that provocative first line, Nelson goes on to argue why Palin does not fit the "social construct" of a woman:

"As well as a biological reality, womanhood, like race, is a social construct...Unlike Obama's understanding of race, Palin doesn't bring an understanding of the social construction of womanhood to her candidacy. She not only fails to recognize or remind us of the reality of historic or contemporary sexism, persistent inequity and gender-based assumptions and biases -- she smugly rejects them."

"Palin is partnering with John McCain, whose record includes: opposing equal pay for equal women; voting to eviscerate the Family and Medical Leave Act; opposing funding for a program to avoid unintended and teen pregnancies...And he has declared the intent to appoint judges who would overturn Roe v. Wade."

"Those positions are decidedly anti-woman."

Mr. Nelson's point is obvious. He, along with the rest of the smug liberal elite, have defined womanhood. If you believe in small government, individual liberty, personal responsibility, and hold to the perfectly intellectually and morally defensible position of being strongly pro-life, fine...just don't think of yourself as a woman. Biological, yes, but in terms of "social construct," no.

This is not divisive, to pit a liberal definition of womanhood against all others? I thought of an apt analogy. Suppose the NRA were to decide that the only members would be those gentlemen who hunt quail with Italian-made over-and-unders that cost thousands, while wearing Orvis clothing and following a purebred retriever. How do we think the deer-hunters of the Upper Peninsula -- or the moose hunters of Alaska -- would respond? Might that create a bit of a wedge in the nation's hunters?

The NRA seems capable of building a tent large enough to accept the diversity inherent in the population of US hunters. Funny that the liberal elite cannot find it in their interests, moral or even basely political, to embrace the diversity inherent in the population of US women.

Among other benefits of the Palin nomination, seeing the paroxysms of fear, anger, and sheer incredulity ("how could any woman hold such a position????) from my dear liberal friends and the MSM are giving me tremendous joy. I have never seen anything cause all the liberal alarm bells to go off so simultaneously and so violently (read the NYT today if you need any more evidence).

It is going to be a fun several weeks. Watching the media destroy their own candidate through their revealing responses to Sarah Palin is unbeatable.

Thursday, September 11, 2008

More Signs of Oil Market Rationality

A story on Bloomberg reports that oil prices are down while gas prices are up -- "a strange situation where the products are higher and crude is lower.''

No, not strange at all. What was strange were all the times when refineries were being shut down for weather-related reasons and crude prices were bid up.

More elaborate models are useful, but the basic idea is that if refining capacity is cut, the demand for crude falls. Refined product prices increase, input prices decline, and refinery profits increase.

Oil Falls To $100; No Russian Effect?

The NYMEX crude oil contract is almost at $100, and Brent crude is below $100. We are therefore again right around the inflation-adjusted highs hit back in 1979...and much lower than the $147 per barrel of just a few months ago.

It appears that basic supply and demand forces are making themselves felt. Makes me feel good about my small bet on not signing up for a fixed price heating oil contract this year (they wanted almost $5 per gallon, which seemed to me to be just too steep an insurance premium).

Yesterday, there was talk that the Russians were going to team up with OPEC on oil supply and pricing issues. Not necessarily a full fledged member of OPEC, but a partner. That did not stop the downward trend in oil prices.

If OPEC could get more of the world's oil suppliers into the cartel, then it is true that the incentives of the cartel lean more towards restricting output and higher prices. Marginal revenue from the cartel's perspective decreases in market share, and the cartel also faces a lower elasticity of supply from the rest of the world -- both forces tending to raise prices.

But the issue of course is that as you add more members, the incentives for free riding, and disagreements over objectives, may increase. Personally I would be worried about adding as a partner to my oil cartel a country that holds the world's largest reserves of natural gas.

Think about it.

Monday, September 08, 2008

CNBC Pessimistic Bias: Part Two

No sooner did I finish that last post and a new headline jumped out at me on CNBC:

"Key Mortgage Rate Plunges, But Maybe Not for Long."

The 30 year mortgage rate fell from 6.5 on Friday to 6% today. That is a HUGE one day drop. Sure, it might go up tomorrow. And it might go down tomorrow too. And maybe those physics professors experimenting with dark matter over at CERN will indeed create some kind of maelstrom that will consume the earth. Hey, if we are going to speculate wildly, why not go for broke?

The real question is why I keep watching that dumb channel.

The CNBC Pessimism

MSNBC announced today that Chris Matthews and Keith Olberman were being dropped as anchors of of the channel, at least in part because of criticism of their possible bias -- yippee, I say!

Now maybe NBC should take a look at their financial news service, CNBC. Here is their headline around 4pm today, when the DOW was up almost 300 points:

"For the Markets, Bailout is Hardly a Game-Changer."

The story goes on to say,

"The government bailout of Fannie Mae and Freddie Mac has given investors at least a short-term reason to believe the worst has begun to pass, but it's hardly a game-changer...Market pros remain unconvinced that the rescue plan by itself will be enough to snuff out the Wall Street bears."

Of course, the first point is that to call this a bailout is a bit of a stretch -- with Fannie and Freddie stocks both down to less than a dollar per share, with almost 90% losses today.

But come on guys, the market is up 300 points. How you can you not say that that is a pretty strong vote of confidence in the takeover of the two GSE's? Worldwide, by how many hundreds of billions of dollars did stock markets go up today??

Of course, as one colleague pointed out, this massive increase in wealth could also be from the lead that McCain has taken in the polls and the closing of betting odds in some of the online political markets. I personally, however, attribute the stock market increases to Hank Paulson and his colleagues.

iTunes as Subscription Model?

There are rumours that Apple will announce tomorrow something new and big, having to do with iPods and music in some way. One specific rumour is that they will move towards a subscription model for music pricing: pay a monthly or yearly fee and consume all you want.

I have been saying this for years now. The (social) marginal cost of one more person listening to a song, especially in the digital age, is zero. For economic efficiency, and for maximum revenue extraction, the optimal price for the marginal song is zero. An "entry fee" pricing model accomplishes this. Price the marginal song at zero, get consumers to buy the efficient amount of music (to where their marginal value is zero) and then extract all the value created in one fell swoop with an entry fee.

Apple has to overcome a couple hurdles to implement this. One is that up to now, their marginal cost has not been zero, as they pay royalties on a per song basis, and they are quite high. Second is the property rights issue. Getting an infinite number of songs for one entry fee in one month and then cancelling the service cannot be an option.

Sunday, September 07, 2008

Fannie and Freddie

It will be interesting to see how the markets react to the takeover of Freddie and Fannie tomorrow. I predict positive (not for their stocks, but for overall market). There was no immediate reason for the takeover, it was just good action given the overall circumstances and, especially, it was a great time to clean up an age old problem.

I think this quote from Paulson sums up a lot: "These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS."

One can criticize a lot of prior administrations for not cleaning this up before. But sometimes it takes a crisis to give one a reason for action. That is the silk lining in this sow's ear -- finally we get these monsters, manipulated by politicians for their own benefit, out of the public domain (not in the short run of course, but in the medium term).

Those who are calling this a bailout at the taxpayer's expense should think twice. This is a takeover, and it is not being done at a premium. The government is basically dictating quite onerous terms, beginning with the firing of both CEOs and warrants to buy up to 80% of both firms at nominal cost. I think my Ricardian tax liability just went down -- I will in fact go celebrate.


For the first time since 1913, an entire calendar month has gone by without the observance of even one sunspot. See here.

Is this important?

It could matter to climate change, both theoretically and empirically. There is growing understanding that sunspots affect cloud formation on earth, and clouds are a big factor in climate modes -- indeed a factor that is not well understood. Better understanding of what determines cloud type and cover will help forecast climate. On the empirical side, "tests" of global warming at the aggregate temperature level essentially take the actual temperature record and adjust it for things like changes in solar radiation, volcanoes, atmospheric particulants, etc. What is left is presumed to be the effect of greenhouse gases. Summarizing very briefly, the "unexplained" temperature deviation from this process does match up reasonably well with the predictions of climate models (that is, the temperature is somewhat higher than it should be, after adjustment for non-GHG effects).

But note that, like so many things, this is a test of a joint hypothesis: that the adjustments are correct, and that the climate models are correct. If the adjustments are wrong, then what appears to be a correct climate model is actually wrong. Since solar activity (sunspots) has been high since 1940, and since that is theoretically and empirically related to warming, could it be that the adjustment to the temperature record for this effect has been too small? That would leave more of the observed warming to be explained by the models.

At any rate, if we are at a real low period for sunspots, and if that continues, we could be in for some cooling.

Wednesday, September 03, 2008

Home Run for Palin

I don't think that anyone can argue with the assessment that Sarah Palin delivered a dynamite speech tonite. Her poise, her message, her confidence, her humor, her family...everything was in place.

What I simply cannot believe is how many times in the half hour after she stopped I have heard comments about how Palin did not write the speech, that she just read it. But, according to one woman pundit, she should still get some credit because reading the teleprompter is hard.

I just cannot believe it. How many politicians write their own speeches? Did we hear anything about Obama's speech being written for him, or George Bush's even? Or Reagan's? Or have we ever heard about how someone did well because, after all, using the teleprompter is hard?

The hypocrisy in this world will kill me yet.

My prediction is that the wolves will be out to get Mrs. Palin. Watch out.