Home > finance, news, rant > Some really terrible ideas

Some really terrible ideas

October 21, 2011

I’m in the middle of writing up my talk about “math in business”. Turns out I can talk faster than I can type, since it’s taking me much longer to write this up that in took for me to say.

In the meantime I want to share with you some really terrible ideas I’ve seen in the news lately.

The prize goes to this idea of how to make the ratings agencies better in Europe. Namely, by banning them when they don’t like them. From the Wall Street Journal article:

In a press conference, Barnier acknowledged this was a “difficult” issue and said that Europe needed to “reduce its dependency on ratings.”

While Barnier gave no further details on the idea of banning some sovereign ratings, a person familiar with the situation explained when the ratings suspension or ban could be appropriate.

The official said the ban would only be used in a “specific” set of circumstances.

That could include if the consequences of a ratings move led to “volatility” or a threat to financial stability. The person also said that the ratings could be banned if there were “imminent changes to the creditworthiness of a state because of negotiations” on a bailout program.

It would be one thing if we had gotten the overall impression that the ratings agencies have been exaggerating a problem through their sovereign ratings… but I don’t have that impression, do you? Um, I have an idea, instead of banning them, how about we instead force them to explain their reasoning? How is turning off the heart rate monitor going to help the patient?

Next up, I just want to say how much I hate articles with misleading titles like this one. Now that I link to it I realize the title has been changed from “Jobless Claims in U.S. Dropped Last Week” to “Jobless Claims in U.S. Decreased Last Week.” This is slightly better but I’ll still complain: the drop from 409,000 to 403,000 is clearly not statistically significant, as anyone who knows any statistics could see just by how small that relative shift is. But even worse if you read the article, you’ll see that last week’s numbers had come in at 404,000 at this week had been corrected to 409,000. So the actual news should have read “U.S. Jobless Claims Changed Not At All”. I guess that’s not a snazzy title.

Here’s not such a bad idea: making people own the underlying sovereign bonds if they buy CDS contracts on them. I’ve seen enough damage cause by “not knowing where the CDS’s live” with regard to Greek debt to know that uncontrolled selling of CDS contracts needs to be curbed – even better if we can make people transparent about their holdings, of course, but that’s kind of a pipe dream.

However, you’ll notice in the article that it’s kind of a weird rule, where countries can “opt out” of the ban if they want to. When would they want to do that? From the Bloomberg article:

The opt out-clause won over some critics of possible bans.

“I never signed up to the belief that a ban on uncovered sovereign CDS would have any positive impact,” Syed Kamall, who represents London in the EU Parliament, said in an e-mailed statement. “However, I’m reassured that member states will have the ability to opt out of the ban, if they see signals that sovereign debt markets are distressed.”

So, I’m guessing that means that some people think that when nobody’s willing to buy their bonds, they will become willing if they can find some A.I.G.-like entity that is willing to sell CDS contracts on those bonds for way less than they’re worth? I don’t get it. Please explain if you do.

And also I don’t like how this idea of no naked CDS contracts is being lumped in with the idea of no short selling- maybe because there’s also the word “naked” associated with that? Let’s not get confused: naked short selling is already illegal. But short selling itself isn’t and shouldn’t be.

Categories: finance, news, rant
  1. Sean Crowell
    October 21, 2011 at 10:15 am

    Love your comment about the statistical significance of the jobless rate. I think that this points to a much bigger societal issue, which is the lack of understanding of errors and noise in data, so called “error bars”. I’m a math/weather/climate guy, and the public isn’t really up to speed on the fact that no prediction/measurement is without uncertainty. I’ll admit that the local weatherman doesn’t help by telling you deterministic numbers for your daily temps and “probabilities” for your precipitation chances (which are totally undefined).

  2. October 23, 2011 at 2:54 am
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