"Your inferiority sickens me. My superiority makes it all but impossible even to endure knowledge of your existence. There is, however, at least this: all your scumbaggery makes you the prefect target for my indignant ire, my evolutionary perfection. Even the likes of the senior Goldman Sachs executive is not worthy enough to painstakingly moisturize in the slow evaporation of my bath water.
You have been trying to ignore me for years, but now, as I reflect the glint from my Nobel Prize from the back row into your eyes during your presentation on the dangers of Value At Risk models, I can hear the irritation in your voice. You cannot ignore me forever. Not anymore. Not now that the New York Times prints whatever I write without so much as editorial review. All your Op-Ed are belong to me. Me, do you hear me? My star is rising. My time has come. I will leave you as you once left me. Buried alive. Even now I can hear the rage rising in you. Before long, the echoing scream 'Krugman!'"
The Madoff Economy [The New York Times]
Posted by guest , Dec 19, 2008 3:57PM
wtf first
Posted by guest , Dec 19, 2008 3:59PM
wrath of kahn? really?
Posted by guest , Dec 19, 2008 3:59PM
I am pretty sure I can pick up a Nobel on Broadway
Posted by guest , Dec 19, 2008 3:59PM
K H A N ! ! ! !
Posted by guest , Dec 19, 2008 4:00PM
If krugman was a stock, I would short it.
Posted by guest , Dec 19, 2008 4:04PM
Krug rhymes with crook.
Posted by EconAnalyst , Dec 19, 2008 4:04PM
Awesome Star Trek II reference. Clearly the best movie of the series.
"I've done more than kill you. I've hurt you. And I wish to go on...hurting you. I shall leave you as you left me. As you left her. Marooned for all eternity in the center of a dead planet. Buried alive... Buried alive... Buried alive..."
Posted by guest , Dec 19, 2008 4:07PM
Star Trek? A new low. You gotta give the krug props. He was calling bush an idiot before calling bush an idiot was cool. Arrogant, yeah well that's unique...
Posted by guest , Dec 19, 2008 4:09PM
@7, that isn't the line--everyone knows that as Khan is about to abandon Kirk on the dead planet, he s--
--I mean--NERDS! You're all a bunch of nerds!!
Posted by guest , Dec 19, 2008 4:10PM
This obviously hits a little too close to home for some...his aim is accurate.
Posted by diablo , Dec 19, 2008 4:10PM
Whatever Krugman says. He nailed it.
Posted by guest , Dec 19, 2008 4:12PM
A few more articles like that to incite "Main St" and we'll have vigilantes on the street trying to pick off bankers, DW style. Nice job, Krug!
Posted by Lowly Assistant , Dec 19, 2008 4:13PM
The title is phenom.
Posted by guest , Dec 19, 2008 4:13PM
@5, that's ironic, because if you were a stock (which you may, in effect, be), I think Krugman would already have shorted you.
Posted by guest , Dec 19, 2008 4:15PM
@9
Guilty as charged. When will the SEC and the black shirts turn up to take me away?
Posted by guest , Dec 19, 2008 4:20PM
Main street rebellion is close. Hope the high end is still decoupling!
Posted by Anal_yst , Dec 19, 2008 4:21PM
"Logic clearly states that the needs of the many outweigh the needs of the few..."
"...or the one"
Everything I need to know I learned from Star Trek
Posted by guest , Dec 19, 2008 4:23PM
How much do we pay social science academics? What do they produce for us?
What portion of GDP was the academy in 1980? How about now? Are we turning out more intelligent, educated students who advance society and benefit mankind?
Seems like Dr. Krugman is earning an awful lot of money and sitting on tenure for writing Op-Ed pieces in the New York Times.
And...how much of Princeton's endowment has come from alumni in the finance industry? I don't hear Krugman suggesting the university reject such 'tainted money.'
Posted by VOL IS KING , Dec 19, 2008 4:26PM
The continuum
Krugman: You judge yourselves against the pitiful adversaries you have so far encountered -- inflation, recession, are nothing compared to what's waiting. Picard...er...Paulson, you are about to move into areas of the economy, containing wonders more incredible than you can possibly imagine... and terrors to freeze your soul. I offer myself as guide -- only to be rejected out-of-hand.
From Bloomberg:
A global stock slump may have further to go, according to Tobin’s Q ratio, which compares the market value of companies to the cost of their constituent parts, CLSA Ltd. strategist Russell Napier said.
The ratio, developed in 1969 by Nobel Prize-winning economist James Tobin, indicates the Standard & Poor’s 500 Index is still too expensive relative to the cost of replacing assets, said Napier
http://krugman.blogs.nytimes.com/2008/12/10/q/
Posted by guest , Dec 19, 2008 4:26PM
#18 - 1
Krugman - 0
Posted by guest , Dec 19, 2008 4:27PM
Krug is a crock.
Posted by guest , Dec 19, 2008 4:27PM
@ 18 I am with you, self righteous people on there high horse waiting for other people to fallmake me sick
Posted by guest , Dec 19, 2008 4:29PM
@16 Since when does Krugman even remotely represent Main Street. Hell, when does the NYT even remotely represent Main Street.
Posted by guest , Dec 19, 2008 4:41PM
@22
You people have to fail for things to get better otherwise we keep dumping money down clownish, black hole, ponzi scheme balance sheets. This country would have been significantly better if seven new banks had been started with $50bn each in new capital. You likely could have even attracted private investors for a significant portion of the initial capital and many people would be itching to jump ship to a clean balance sheet bank.
Begging for hand outs on this scale necessitates self righteousness as it is putting talented people out of work to subsidize the failures. The bankruptcy process is here for a reason and it actually works.
Posted by guest , Dec 19, 2008 4:43PM
What is main street?
Posted by guest , Dec 19, 2008 4:43PM
@22
You people have to fail for things to get better otherwise we keep dumping money down clownish, black hole, ponzi scheme balance sheets. This country would have been significantly better if seven new banks had been started with $50bn each in new capital. You likely could have even attracted private investors for a significant portion of the initial capital and many people would be itching to jump ship to a clean balance sheet bank.
Begging for hand outs on this scale necessitates self righteousness as it is putting talented people out of work to subsidize the failures. The bankruptcy process is here for a reason and it actually works.
Who cares where Princeton's endowment comes from? No reason to continue to subvert the Truth.
Posted by guest , Dec 19, 2008 4:46PM
This website has serious design flaws. Someone should work on that.
Posted by Anal_yst , Dec 19, 2008 4:51PM
@24/26
Start new banks?
Yea, on paper, sounds like a great idea.
In reality? Not so much.
Do you understand the sheer amount of data, IT, processes, procedures, legal/regulatory/compliance investment is necessary to start a large bank?
Or, are you just suggesting we chop up current banks, then use their assets (non financial) and roll them up under new corporate names?
Either way, your suggestion is lacking in the reality department, unfortunately, as I don't necessarily disagree with what I think is the principle behind it.
Posted by guest , Dec 19, 2008 4:59PM
Krugman is right this time.
Posted by guest , Dec 19, 2008 5:09PM
@28
At least a serious attempt at punishing (and rewarding) certain parts of the capital structure. Not rewarding the poor security choices at the cost of the correct (or even worse, the people). Are these capital markets or tools for managing the people?
Posted by diablo , Dec 19, 2008 5:10PM
@27
That's old.
Posted by guest , Dec 19, 2008 5:14PM
@31
But still not fixed?
Posted by guest , Dec 19, 2008 5:23PM
Nice, parody, EP. Krugman's a stuck up douche.
Posted by Anal_yst , Dec 19, 2008 5:41PM
@30
Thats a far longer discussion that I don't, again, necessarily disagree with, however you're up against very tall odds on a variety of fronts, but a noble goal regardless
Posted by cy , Dec 19, 2008 5:43PM
Nice work, #18...
What makes me want to vomit even more than Krug's columns are the NYT reader comments his columns seem to foster.
I know, I know, I should just stop reading them, but, alas, the self-torture continues.
Posted by SausageOfDoom , Dec 19, 2008 5:46PM
#18: Fantastic response. You picked apart Krugman’s argument point by point, making him look like a fool.
Okay, I lied. You’re an idiot.
Posted by guest , Dec 19, 2008 5:49PM
Peasants with pitchforks AND Nobel prizes
Posted by Jesse , Dec 19, 2008 6:19PM
Krugman is right.
The truth hurts.
Posted by guest , Dec 19, 2008 6:27PM
NYT 6.6
Posted by guest , Dec 19, 2008 7:17PM
Krugman is a fucking crotch phesant.
Posted by guest , Dec 19, 2008 8:19PM
The "Nobel Prize in Economics" isn't a real Nobel Prize. It was created by a bunch of Swedish central bankers who, not being content in trashing the value of the krona, decided to trash the good name of Alfred Nobel over 70 years after he died. Nobel's descendants object to the misappropriation of his name.
Posted by guest , Dec 19, 2008 8:51PM
@28
The existing big banks are bankrupt anyway, so new banks will come sooner or later as the economy continues to deteriorate. The bad part is that trillions of taxpayer funds will have been transferred from Hanky's croonies to overseas accounts before that happens. Why do you think they refuse to disclose how and where the money was spent?
Your kids and grandkids will be debt slaves forever. Merry Christmas!
Posted by Joseph di Jersey City , Dec 19, 2008 10:18PM
41: Spot on and very few people know this. One of my dreams is to similarly establish a Nobel Prize in Pornography.
Posted by VOL IS KING , Dec 19, 2008 11:14PM
@ 42
The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
"If you have to call something a science, then it is most certainly not one. Christian science, political science, social science"
-Larry Summers
Posted by guest , Dec 20, 2008 12:00AM
I'm just waiting for Bloomberg to be dragged into all of this.
Posted by guest , Dec 20, 2008 7:23AM
Krugman learnt well, he got his phd under an indian..
Posted by guest , Dec 20, 2008 1:04PM
@18: You are a butthead. How much has academia contributed? Let's see: portfolio management/the benefits of diversification, the concept of beta versus alpha, pricing and hedging of options, yield curve models, better ways to estimate volatility, and so on. And those ideas were made freely available.
Krugman is an idiot. But if you don't believe money management is better now than in the 1940s, then you are also an idiot.
Posted by VOL IS KING , Dec 20, 2008 3:49PM
@47:
Money management is not any better of now. All of the theories you sited are intellectual bankrupt. Risk is not variance, prices do not revert to a "mean" arithmetic, geometric or otherwise. If anything money management is worse off because people think they have less at risk than they actually do VaR, anyone?. Further, all of those ideas had been arrived at in the 1800's Louis Bachelier and others http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1012075
However, academics contributes a great deal to the sciences.
Posted by guest , Dec 20, 2008 7:02PM
Yours... is.. superior.
Posted by guest , Dec 21, 2008 4:45PM
@48: No, risk is not variance. Yeah, I know about coherent risk too. The fact that you realize the difference is also a contribution from academia.
Bachelier did additive Brownian motion -- yielding prices which could go negative. Other than taking a quantitative approach to finance, he is responsible for none of the ideas I mentioned.
None of the theories I listed require any reversion. The effects of beta versus alpha decomposition are still playing out. Bachelier did no yield curve models; and, the better estimates for volatility that I mentioned handle microstructure noise. So Bachelier had an approximation to pricing options; big deal, so did others. Give me the error rate you want and I'll kick one out for you in the next hour too.
So how does your point hold together exactly? Did I miss the coherence somewhere?
Posted by guest , Dec 21, 2008 5:24PM
Bank of America and Mr. Higgins missing $millions, It can happen to you, my fellow Americans
More info: http://www.maxhiggins.com/blog
Posted by VOL IS KING , Dec 21, 2008 6:22PM
@50:
I'll get back to you on coherent risk, I've never heard anyone use the term before in my life. I would define risk has the maximum loss on the investment which Frank Knight, an academic, pointed out some years ago.
Of course portfolio theory requires mean reversion, otherwise, all that rebalancing would be pretty silly.
My point with Bachelier was that options hedging and pricing was known well before the 1940's as you implied. However, Bachelier was a member of the academy.
Since volatility is infinite there are no "better ways" to estimate it. Some guy named Mandelbrot pointed that out in the 60's (he was also an academic).
Yield curve models are particularly laughable because the only part of the Fisher equation that actually matters is the rate of change of expectation of future inflation. The Germans new this way back in 1923 (before the 1940's) as they had to pay 20mn papiermarks for a loaf of bread.
At any rate, in never said academics hadn't come up with some good ideas that have added value. I simply said it is likely in aggregate their ideas about finance have done more harm than good. This is mainly because the poor ideas were implemented overly broadly by people who forgot the underlying assumptions.
"The theorist not having definite assumptions clearly in mind in working out the 'principles,' it is but natural that he, and still more the practical workers building upon his foundations, should forget that unreal assumptions were made, and should take the principles over bodily, apply them to concrete cases, and draw sweeping and wholly unwarranted conclusions from them. The clearly untenable and often vicious character of such deductions naturally works to discredit theory itself."
–F. H. Knight, Risk Uncertainty and Profit
Posted by guest , Dec 21, 2008 6:57PM
@52: For coherent risk, read Artzner, Delbaen, Eber and Heath's 1996 (in Risk) and 1997 articles.
Saying vol is infinite and talking about a maximum loss is unhelpful. Vol is very likely not infinite; but, large kurtosis would make vol look very big -- sometimes.
The statement on Fisher information: I assume you mean Kullback-Leibler divergence? That the information is related to the rate of change is not always true -- just for the exponential family. Otherwise, it's related to the curvature of space near your estimate.
And I still think money management is done better now. But (to return to the topic) I do tire of hearing Krugman (an economist) talking about finance and politics (areas in which he is ignorant).
Posted by VOL IS KING , Dec 21, 2008 7:45PM
@53:
Why is saying volatility is infinite and risk is maximum loss unhelpful? I find it very helpful. I don't understand why people think they need to forecast volatility in order to trade. I simply minimize the maximum loss of my portfolio by hedging. What could be more helpful than that?
Sure you can think of it as Kullback-Leibler divergence. I am most certain inflation's variance is infinite, so modeling it is really besides the point.
“In modern economies, the inflation rate is indeterminate...It can be whatever people think it will be...a pure case of self-fulfilling expectations”
-Fisher Black, Exploring General Equilibrium p. 80
Of course finance and politics are part of economics, it was called Political Economy once upon a time and obviously finance is the very essence of economics. Though this does not mean Krugman knows what he's talking about.
P.S. Didn't david heath's modeling prowess help blow up lehman brothers?
Posted by guest , Dec 21, 2008 8:08PM
i am a hedge fund manager. what is academia? or risk for that matter?
Posted by guest , Dec 21, 2008 9:34PM
a more apt comparison for krugman would be those ear-burrowing slugs in the opening scene
Posted by guest , Dec 21, 2008 10:34PM
@54: Saying vol is infinite is unhelpful for a few reasons.
First, with a finite amount of data, it would be well-nigh impossible to distinguish between infinite vol and finite vol with occasional structural breaks.
Second, Mandelbrot was wrong: You can estimate the tail decay of financial returns. Even with very extreme events thrown in, the tail decay is still not so fat-tailed as to have infinite vol.
Third, if you have infinite vol, how can you characterize your maximum loss? If you could bound that, then you could bound vol.
Fourth, to calculate any imperfect hedge (e.g. hedging with bond futures), you need finite vol so you can calculate the hedge's effectiveness.
Fifth, an even better way to view vol would be as a stationary process with an activation point for a game-theoretic regime. Inside that regime, players push the weakest player into bankruptcy to (effectively) divide up his riches. Unfortunately, they hurt themselves and some must liquidate. After the chaos, things return to a randomness-dominated world. Nothing in that precludes a finite vol; but, it means that estimating that vol is a different estimation than just using all log-returns.
As for why vol matters: I forecast vol so I know how to price limit orders on a millisecond-by-millisecond basis. It is critical for doing that. Vol also helps decide how to spread trades across the day, and how to set spreads and inventory guides for my market making machines.
You seem like a sharp person; so, I'd be wary of buying into the infinite vol argument without considering finite vol and structural breaks -- or randomness punctuated by bouts of game-theoretic backstabbing. I personally find those much more believable.
And HJM is not the best yield curve model I can think of. OK, but not phenomenal.
Posted by VOL IS KING , Dec 22, 2008 8:23AM
@57:
If you're around today....
"Second, Mandelbrot was wrong: You can estimate the tail decay of financial returns. Even with very extreme events thrown in, the tail decay is still not so fat-tailed as to have infinite vol."
Here's the issue. I don't know volatility is infinite in fact its impossible to know something is infinite by definition. What I can do is assume its infinite because, its also impossible to know whether its finite. For this reason we cannot say whether Mandelbrot was wrong or not. Simply because your estimate was within your confidence interval for realized vol doesn't mean much of anything.
I would say most of our historical data is cherry picked. If we include russia 1917 and germany 1923, zimbabwe present day, ect. then you would get a true character of the variance of market data. But we always strip out the data that is an "outlier". It is my contention that these data are not outliers at all.
"Third, if you have infinite vol, how can you characterize your maximum loss?"
If I own an ITM Call and buy an ATM Put to hedge it, then my maximum loss is the cost of the ATM Put.... iterate ad infinitum.
Since I don't forecast vol, its irrelevant to me whether its actually infinite. There's no cost to me for assuming it is. As long as its not zero I will make money.