Pranks, Academia Edition

You know it's going to be a good day when someone says "I need to prank the shit out of someone."

There is a long history of inspired creativity around these parts, and no better time than April 1st to execute such ideas. What if, hypothetically, a series of emails were sent to an unsuspecting AE (let's call him Z) from an economist, such as Steve Levitt? In particular, it is known that Z despises Levitt and widely disparages his research. So, how would he respond to an attractive job offer from a prominent economist?

These emails were sent from a Hotmail account, rather than a spoofed U of C account. After all, the goal here was to be a jerk, not ruin lives.

Email #1

Z,

Congratulations on your recent admittance to the University of Chicago Economics Department. As you may know, I currently direct the Becker Center on Chicago Price Theory housed at the Booth School of Business. I have familiarized myself with your work on DSGE models, and I believe it is in line with the contributions of the Becker Center. To that end, I thought I would make you aware of an opportunity here at the Becker Center. Each year we take on several Graduate Assistants, these are people who we believe show promise. More than half of our Graduate Assistants have gone on to become Becker Center Research Fellows. This position would allow you to work closely with the Becker Center faculty such as myself to develop your ideas as you progress through your degree. I realize you have not yet finalized your graduate school decision yet, but I hope that this offer may help you to understand all of your options. Please e-mail me if you have any questions or to follow up about the position.

Steven Levitt

Let's review: this email included a rather unusual offer, and was sent on April 1st from a Hotmail account. I thought it would get spotted as fraudulent in about 30 seconds. Much to my shock, Z replied sincerely, saying that he was interested in meeting Levitt and looked forward to seeing him at the Chicago open house tomorrow. What now? Clearly, this is a cue to up the ante and become progressively more outrageous.

Email #2

Z,

Outstanding. While you're here I'd like to make sure I introduce you to Gary. Unfortunately he's been a bit moody recently but the color purple seems to have a soothing effect on him (the doctors have called it "neurochromopathy") so if you can make sure to include it in your ensemble it would be for the best. I look forward to our meeting and discussing some of my research with you. Please e-mail me if you have any further questions.

Steve

That's bizarre enough that warning flags should triggered, right? Or, it could result in Z borrowing a purple sweater...

Time to bring out the over-the-top guns.

Email #3

Z,

Do you mind swinging by Treasure Island on your way over and bringing some Greek style plain yogurt for Gary and I? I really love the luxurious silky texture of the yogurt in my mouth. When I eat it while listening to a bit of Chopin it, it really helps me focus on the current problem. Perhaps you can try it with us.

Steve

At this point, it was time to call it quits before serious damage was done. Z took the news well, and for the record, claims to have known it was a joke. Also, he said that he did not notice the Hotmail address, since Gmail automatically hides headers unless you click "details."

Lessons learned:

1) The most credible pranks are ones that give the prankee something they desire.

2) Never trust email sent from Hotmail.

Changing of the Guard

At a meeting of Associate Economists last fall, our department head casually asked how many of us were applying to grad school or otherwise planned on leaving in the next year or so. Given the competitive nature of grad applications, I am not entirely surprised that there was complete and total silence; no one responded and we all sort of shifted uncomfortably in our chairs. Since the probability of getting rejected from all the grad programs you apply to is quite nonzero, we have pretty strong incentives to ensure that we are not replaced by a new hire. Though, to be fair, many of us (myself included) were uncertain at that point about where we would be in a year.

Flash forward to the end of March, and grad school results are in. A quick survey reveals that 9 out of the 20 AEs currently employed will be gone by next August, a whopping 45% turnover. (I did not include the casework department in these figures.) Of the 11 remaining AEs, at least two are considering pursuit of unrelated fields (not econ/math/business). Perhaps my unorthodox exit strategy is rubbing off on others.

About a year ago, I was pondering the transient nature of my social circle and felt a little left behind. Today, I can say with confidence that I have not stagnated and I am going places. About 7,700 km away, in fact. And despite the large exodus of AEs this summer, life at the Fed will still go on and on and on and on...

Anyway, congrats to everyone who was accepted to grad school this year. Anecdotally, it seems like this year was as tough or even tougher than last year. (I heard of someone who won his school's undergrad thesis award and had two incredibly well-known recommenders who hasn't gotten in anywhere.) So, it is no small feat that many AEs have landed spots in respected econ PhD programs.

Sweet Carolina

The one thing North Carolina has in common with London is its fervent observation of God's day...MF and I were heartbroken when we got to Stamey's barbeque for lunch and found shuttered doors.

Erik and Ricky have been gone for less than two months, but as I regaled them with tales from Chicago, it felt like they'd missed out on light years of information. It's funny how we've gone from having a wholly shared experience for the last two years, to simply filling in and recapping the major highlights. It's even funnier how the Crew has carried on and revitalized in the aftermath of many departures.

Most of my social activities are spent with a nerdy, Fed-centric crowd, but hanging out with Erik's econ grad school buddies was a new level of nerd. At the James Joyce tavern, we debated the best version of Risk (Lord of the Rings?), the appropriate frequency of showering, and the greatness ordering of Mas-Colell, Green and Whinston (the authors of the seminal grad textbook in microeconomics).

The grad cohort appears to have self-segregated into study groups of Asians (both international and not), Mormons, and All Others. Apparently, there are strong ties between BYU and the econ department at Duke.

Finally, Cornell Plantations, move over. The South wins hands-down for the beauty of their gardens. I explored the Greensboro Arboretum, some parks, and the Duke Gardens while I was here, and the latter in particular was jaw-droppingly gorgeous. Look at those giant lily pads! I wanted to curl up on a lily pad and take a nap.

Deflationary Donations

Last June, after donating $25 to Cornell (directed to the Cornell Chimes fund), I decided I could commit myself to donating $25 every year in perpetuity. Furthermore, to make sure my gift would maintain the same buying power over time, this amount would be adjusted each year to account for inflation.

Well, BLS has just released the CPI numbers for the month of May, so I did some quick math to calculate my annual contribution to Cornell:

$25 in 2008 dollars * 213.856 (May '09 CPI-U, all items) / 216.632 (May '08 CPI-U) = $24.68 in 2009 dollars

Ah, deflation. Thank you, Helicopter Ben!

I can't wait to get my letter from President David Skorton thanking me for my $24.68 donation this year.

Why Our Meetings Rock

"Is there a Super-Duper Senior?"

"Nationally, we're back to 2003-level home prices."

"That's so much better than the stock market!"

"So, this picture is telling me that I shouldn't be worried because my bank is well-capitalized?"

"Yeah, they're well-capitalized...by us."

"Instead of presenting the forecasts, why don't we just show the SNL skit on Geithner?"

Deal of the Day

Either the economy is just that bad, or someone made a terrible mistake, because I just purchased a $120 peacoat for the low, low price of $6. My decision making process went something like this:

Me: But I don't need a coat. I don't even like peacoats!

Alex: Dude, six bucks. My lunch cost more than that.

Me: Excellent point. Dammit, I really wanted brownie. Quick, tomato or sunflower?

Alex: Red. Yellow looks bad on Asians.

Me: Fine, it's in the cart. Wait, do I really want this coat? Much less a tomato one?

Alex: But how can you pass something like this up? It's 95% off, almost free!

Me: Shipping is $5 so I am spending $11 that I otherwise wouldn't have today. Yeah, that's like free.

[For the next 20 minutes, I valiantly attempt to check out and encounter error after error as Tulle's servers are swamped by traffic from cheap bastards like myself. The endowment effect and loss aversion kicks in...]

Me (hyperventilating): Noooo! Why won't my order go through?? Wait, that worked! YES.

As with any arbitrage opportunity, the window with which you can take advantage of it is quite small. By the time I managed to check out, it appeared that there were no coats left in stock.

I figure if I don't actually want to wear it, I can always resell the coat for way more than its purchase price.

EconomyCat is Sad

The next FOMC meeting is on the 27th, which means that here at the Chicago Fed we are busy as beavers, preparing our forecasts for the new year. At a department meeting this afternoon, there was abysmal news from nearly every sector and the mood was downright depressing. Financial markets? A few spreads are down from historic highs, which means credit conditions have gone from "outrageously bad" to "really bad." Labor? Last month's unemployment figures were uglier than Anna Nicole Smith. Manufacturing? Like Steve Jobs' weight, steel production is 41% of what it was a year ago. On the bright side, at least we don't have the inflationary pressures that we had a year ago, but this will change quite soon when the printing presses are running full-speed.

Toward the end of the meeting, we began brainstorming ideas for what to do when the economy is going to hell in a hand basket. As you might expect, there are no easy policy prescriptions, particularly when the federal funds target rate is already at/near zero. Should we continue introducing programs to buy troubled assets? This will at least keep the Acronym-Generating sector fully productive. What if we move into the business of buying longer-term debt? How can we justify buying some assets and not others, implicitly making value judgments on certain goods? Will the Fed be able to eventually disentangle itself when it needs to exit these markets?

At least the current situation makes for plenty of dark humor, as evidenced by the following comments:

"The unemployment numbers are in...the good news is, everyone in this room is still employed!"

(Looking at the S&P 500) "This is where I'd retire at 60, this is where I'd retire at 70, and this is where I'm never retiring."
Me: "Oh yeah? Well, this is where I pay for your social security."

"All the business guys want to know which sector is going to grow this year."
"Don't worry, academic publishing will save us all."

Let us all cross our fingers that Obama (and his $825B stimulus package) will prevent a crippling depression.

Finally, I particularly enjoyed these captions (courtesy of Dealbreaker) from yesterday's US Air plane crash in the Hudson. (Too soon? I've decided that since no one died, the answer is no.)

Don't Panic!

This article is one of the best accounts of the last two weeks of financial turbulence out there. It's written in layman's terms; if Dan Brown wrote a thriller about Wall Street, this would be it.

Times are very bad indeed, and with every new development, I am reminded that I am living and experiencing unprecedented events, while working from the Fed no less. We had a town hall meeting yesterday afternoon, to give an overview of the financial market turmoil and answer questions about how the Fed has been impacted. I decided to ask what would happen if the bailout bill didn't pass, what other magical tricks does the Fed have in its bag? The answer wasn't exactly comforting.

When I went home for the day, there was a quartercard attached to my bike, inviting me to join a protest against the Fed next week. Among other things, this group was protesting the bailout because it was "illegal" and "immoral." LMAO. Should I join in on Monday morning?

On Inflation

25 lb bag of jasmine rice 6 months ago: $11.50
Same bag of rice bought today: $21.50

There's a Chinese colloquialism that goes something like "I fear x more than the price of rice increasing." Well, it turns out that the fear is now coming to fruition.

In other news, last night I paid $47.53 to fill my gas tank. I know that higher gas and food prices are the product of myriad of global forces, and that in many ways, expensive fuel will serve to reshape and improve the way we use environmental resources. However, it's still hard to adjust to a higher baseline price when something has historically been "cheap." At the rate that oil has been skyrocketing, I'm pretty sure the gas in my tank is accruing value faster than the money in my savings account.

Academia

Leland's last day at the Fed was Friday afternoon, and as the economists are wont to doing, an email was sent out to the department inviting everyone to go to Ceres for happy hour.

Despite Erik and Ryan trying to sway me, I'd already made up my mind that I wanted to go home. To be honest, I was never particularly close to Leland, and I'm not sure if any of the AEs could claim close bonds. But we do all have a healthy amount of respect, for his astounding work ethic and passion for economics. The ongoing joke is that the macro team's output is going to halve in the aftermath of Leland's departure. Moreover, Leland certainly has ample amounts of support and kinship from the macroeconomists.

Then Sumit (Chris' economist) came by, and asked why we were still dawdling, and why we weren't at Ceres. We made noises about not knowing anyone on the macro team, whereupon Sumit announced, "Well, that's ok. We're going to this thing and we're having a drink. Grab your bags, we're leaving." I gave Chris a stunned look and hastily grabbed my belongings. How could you not acquiesce? It was about as good as drinking with your profs.

Much to my surprise, a healthy crowd had gathered already, including Jeff and Francois from the macro team, Charlie Evans, the Chicago Fed president, and a handful of other AEs. I ordered a Blue Moon and sat back as they regaled us with Tales of Academia. Aside from Leland, who was leaving for grad school at Maryland, Ana was also there, and she'll be leaving for grad school at Berkeley. What advice then, would you give to an aspiring economist? Doesn't it seem like it's getting harder and harder every year to break into the field? Aren't all the good ideas already taken?

Jeff suggested looking for papers in third-rate journals from first-rate academics; it's an indication that they wrestled with a challenging idea and failed, so perhaps you can take a fresh look and solve the problem. He also suggested keeping up Fed ties, by say, working at the San Francisco Fed. This would also conveniently provide a place for you to escape when you need to write your dissertation.

Charlie gave some thoughts on giving presentations. Unfortunately, the first seminars you give are often your most important ones: job market seminars. If you skimp on background information, someone will say they don't understand the motivation behind this paper. If you give an elaborate literature review, others will invariably say they're only interested in seeing your regressions. How do you reconcile the contradictory opinions? It's practically impossible to strike a perfect balance; the best thing you can do is simply know your audience. Sumit: "Yeah Jeff, remember when I gave a seminar and you said you didn't like the title? I wasn't even past slide one!"

Sumit is a special case of an economist who was in the private sector and then left for a more academic position. (Generally, this only happens in reverse.) We asked if the transition had been easy, and he responded, "My recommendation for you guys is not to do what I did. There's a lot of disdain for private sector economists; you can never really come back after you've gone out there, and in many ways, I'm still paying for the six years I worked in industry." But why turn down the money, the hefty one or two million a year? Besides, it's not as though he doesn't work 12 hour days anyway at the Fed. "Well, that's not the same," Sumit replied. "That's a lifestyle choice. If I suddenly started working 8 hours a day tomorrow, no one would say anything. Even though I'm still working long hours, it's because I want to."

It took some pushing, but I'm glad I went. For the first time, I felt like a part of the economics field, as though I'd been initiated into an ancient guild of craftsmen. I realize this is silly, since I haven't even applied to grad school, nor am I confident that I want to apply, but for that shining hour, I could feel the invisible hand patting me on the back.

By the way, in case you ever wondered, Charlie is a gin & tonic kind of guy. In particular, a Beefeater gin kind of guy.

Dungeons & Dragons, session 1

First, an admission. For all its connotations of pale, nerdy guys huddled in a basement, arguing over how to slay a dragon and severely disconnected from reality, Dungeons & Dragons is actually a beautiful metaphorical representation of life.

Sure, it's formulated in a fantastic world, and I would never need to battle a goblin in real life, but the underlying premises are the same. You have to work in groups with teammates who each have personal talents and flaws. You need to accomplish particular tasks, and your success (or failure) depends on how skilled you are, with some allowances for random luck or misfortune. Solutions are not always clear-cut, and the consequences of your actions are not immediately apparent. In fact, when you think about it, DnD, like economics, transforms everyday interactions into quantifiable mathematical equations. However, there is still plenty of room for open-ended creativity.Hence, the inherent appeal for us Feddies.

Phil started us off on an adventure titled "The Sunless Citadel," which is supposed to help ease newbies into the game. There were 5 of us who were new role-players, plus Amber, who knew what she was doing, and saved our asses on several occasions by dutifully checking for snares and traps. Right off the bat, I could see how people get caught up in ludicrous, hour-long debates over how to cross a bridge. We were told that there was an ancient citadel which was ripe for exploration, but Phineas (Erik) wanted to try helping the dying wife of a villager instead, which I deemed to be a waste of time. (We're all level 1 characters, so Phineas' healing powers consist of healing "minor wounds.") Meanwhile, Yocxjufyabiu (Nate wrote a random name generator) the sorcerer was bent on casting spells left and right, and decided to "animate a rope" to be very stiff and sturdy while we climbed down into a ravine. Combat rounds were taking an hour to resolve, in part because no one knew how to add up points and modifiers, so Phil had to help us do all the math. I did roll a 20 during combat (the highest point value), though I didn't get the critical hit. After killing a few dire rats and undead goblins, we began arguing over where to set up camp for the night, and Nygavok the sensitive fighter (Chris) tried to seduce me while we were supposed to be keeping watch.

After playing for a few hours, we had to catch the train back to the city. I tend to view everything through a rational economist perspective, but I started to catch myself thinking in DnD terms. We weren't sure which direction the train was coming from, so we decided to ask a passing pedestrian. Mentally, I thought, "A stranger approaches. Does he appear trustworthy? Should we send the member of our party with the highest charisma, or the person most able to intimidate him into giving us directions?"

I also have to confess that certain web comics have become a lot funnier.

The "R" Word

Here at the Fed, we've been in a bit of a tizzy, looking for signs that we are, in the words of former Chairman Greenspan, undergoing a "cumulative dynamic unwinding of economic activity that feeds upon itself," also known as a recession. To make things even more interesting, I am in the finance group, which means I have an upfront view of the hottest-burning fires. It's ironic that I came to the Fed because I wanted nothing to do with investment banking...yet here I am, 6 months later, learning all sorts of things about finance, albeit from a much more theoretical vantage. Who knows, I may end up working at a big bank after all...

A lot of people have been asking me questions like "Why does the economy suck balls?" The short non-answer is, it's complicated. In a nutshell, in the aftermath of 9/11, the Fed lowered interest rates and credit became cheap, e.g. borrowing money was really easy. Mortgage brokers began underwriting loans to borrowers with checkered credit histories. Why would you lend money to unreliable borrowers though? Well, here's an innovative idea: you can bundle these subprime mortgages into new securities and sell them to investors, like other banks, hedge funds, institutional investors, etc. That way, rather than holding the loans on your balance sheet, you can resell these securities and escape risk-free. But who would buy securities based on crappy loans? Well, we could bundle a large portfolio of mortgages into separate tranches, with a range of risk levels, say, AAA through CCC. If some borrowers default, investors in the lower-rated tranches will not get paid, but the higher-ranked senior tranches will continue to pay. To compensate for the increased risk, junior tranches will also receive higher interest pay-offs. Wow, now we've even managed to create AAA securities out of a bundle of sketchy loans! This process sort of cycles through (you can repackage securities again), until homeowners decide they can't afford their mortgage payments, bank balance sheets are a black hole of intangible assets, and investors suddenly realize the emperor is wearing no clothes.

To further complicate matters, most of the financial terminology being thrown around is confusing for economists, not to mention reporters and novitiate news readers. Alt-A mortgages? SIVs? ABS? CDOs? CLOs? A new acronym seems to pop up every week. No wonder the mainstream press is replete with errors when they try to explain the unfolding events. When our department gathered for a meeting earlier this week, someone commented, "Who knew 3 weeks ago what an auction-rate security was?" This garnered a lot of laughs.

The combination of bubbles in the housing market and the financial sector is a bludgeoning one-two blow to the economy. Whereas a few years ago, credit was too cheap, now credit is too expensive, and businesses and consumers who should be able to borrow are being denied loans. Banks are nervous about lending out money, particularly to each other, and the anxiety is pervasive. This credit crunch is unusually far-reaching in scope, and seems to be taking down arcane sectors of the financial markets that have nothing to do with housing. A month ago, the leveraged loan market was under pressure. The next week, it was municipal bonds and student loans. The week after that, auction-rate securities fell victim. And now, it looks like Bear Stearns (the 5th largest investment bank on Wall St) is on the verge of going bust.

This news scares me more than any other development so far. Basically, at the beginning of the week, rumors and speculation began swirling that Bear Stearns didn't have the cash flows to meet the demands of its creditors. Despite releases and press conferences by Bear Stearns' top brass stating that their liquidity positions were sound, the market's fears were not eased. By Thursday, investors were pulling funds out en masse, and by Friday, it was clear that, regardless of whether the original rumors were true, Bear Stearns' "liquidity position in the last 24 hours had significantly deteriorated." Take a good, hard look, because we have just witnessed the modern-day equivalent of a bank run. For more details, Felix Salmon has an excellent, clear explanation of what just blew up.

Luckily, J.P. Morgan and the Federal Reserve are working to partially bail-out Bear Stearns. Amusingly enough, almost exactly one century ago, J. P. Morgan himself stepped with large sums of cash to quell the Panic of 1907, and stabilize the US economy.

As FDR once said, the only thing we have to fear is fear itself.

The next FOMC meeting is on Tues the 18th. I intend to take my final exam for stochastic processes (man, those quarters zip by fast compared to semesters!), and then dash back to my computer to see what sort of rate cut will be unfurled.

And the Nobel Prize in Economics goes to...

The 2007 Nobel Prize in economics was announced today, and goes to three American economists: Eric Maskin (Princeton), Roger Myerson (Chicago), and Leonid Hurwicz (University of MN). As is often the case, the winners were not on the "short list" of potential candidates, but turned out to be unexpected dark horses.

This is the sort of story that journalists have nightmares about--a bunch of economists, whom they've never heard of, win a Nobel prize for developing a discipline, mechanism design theory, which they've also never heard of. To explain briefly, a mechanism is a framework of rules that enable a market to function efficiently. Many markets don't need mechanisms to work well, but lots do (think organ allocation, public goods like utilities or water, or the sale of rare paintings). Mechanism design can take a variety of forms, like taxation or the creation of auctions.

At age 90, Hurwicz is the oldest Nobel laureate in history. There was some talk that if the academy wanted to award him, they needed to do it soon before he died. As for Myerson, there was no shortage of opinions on him from the Chicago alums around the Fed cafeteria.

"One time, Myerson was running up the stairs so I held the door open for him at the top, and he blew right past me without saying a word!"

"Ha, in his mind he was probably thinking 'And that's the way it should be.' Myerson is notorious for taking things out on his grad students whenever he's angry. Apparently, one time he was pissed at Levitt (of Freakonomics fame) over, I dunno, a hiring decision or something, and at this grad student's seminar presentation, he just completely ripped a new one in him."

In the meantime, I'd like to give a shout out to this year's Ig Nobel Prize winners, who are recognized for quirky, entertaining and sometimes scientifically legitimate research. This year's laureates include the developers of the "gay bomb" which would provoke widespread homosexual behavior amongst enemy troops (Peace), researchers who ironed out the problem of how sheets get wrinkled (Physics), and Cornell's very own Prof. Brian Wansink, who studied mindless eating behavior using self-refilling bowls of soup (Nutrition).

The Market is Gyrating

At the risk of losing my veneer of coolness and respectability, I am going to confess: the subprime mortgage tumult in global financial markets makes me really excited.

I know, this is barely on the radar for most people unless you are working on Wall Street, or have been trying to obtain a mortgage. But this is a market crisis on the order of the 97-98 Asian financial crisis, and I'm in a prime (ha!) position to analyze and perhaps even influence what is going on.

In essence, subprime mortgages are those given to borrowers with less than perfect credit. The practice began in 2005 or so, when mortgage brokers began offering adjustable rate mortgages, with low interest rates and payments for the first 2 years, and an adjusted (higher) rate afterwards. Now it is 2007, and in a lovely surprise, families are suddenly finding themselves unable to pay their mortgages.

Just 2 weeks ago, Fed Chairman Bernanke released a statement suggesting the credit woes would not impact the wider economy, and that the market was going through a necessary self-correction. The global markets continued to slide, as lenders and securities tied to subprime mortgages murmured about bankruptcy and default. Ten days later, the Fed reversed course, and in an unusual move, cut the discount rate at which banks loan money to each other. It's becoming clear that a few risky mortgages are coming to impact financial sectors in unforeseen ways.

Today, I was doing research on asset-backed commercial paper, which is normally the most mundane security instrument out there, relatively risk-free. Until credit tightens and liquidity dries up, that is. In recent weeks, the yields on CP have risen overnight to 6-year highs. Here's an introduction to what commercial paper is exactly:

A: Can I borrow $10 till tomorrow?
B: Sure.
A: I'm good for it, you know.
B: But you're not earning any money tomorrow, how will you pay me back?
A: Oh, there's lots of liquidity at the short end of the yield curve.
B: In English, please?
A: You're going to lend it to me.
B: Lend what to you?
A: The $10 I need to pay you back.
B: Ah.

In other words, this is the kind of scheme that will work until it doesn't. CP is safe because investments mature quickly (say, tomorrow), but issuers must be able to roll over debt by borrowing what they owe. Thus, CP yields have increased to premium levels in order to attract skittish buyers.

I did some work and gave my results to Rich, who will be talking to Chicago Fed president Moscow tomorrow morning, who will be giving Bernanke an earful at the next FOMC meeting. So there, I like to think I've done my part to contribute to history.