Fancy maths and data series are no reason to ignore supply and demand

Came across a 2014 NBER paper Betting The House (pdf) by Òscar Jordà, Moritz H.P. Schularick & Alan M. Taylor. I was wildly unimpressed. I am not quite sure whether I am willing to use the tag line of "numbers make smart people stupid"--as per this wonderful post on the adoption of farming, criticising an attempted cliometric study of said transition from foraging--but still, wildly unimpressed.

Judging monetary policy fail
First of all, the paper associates low interest rates with "loose monetary conditions". For example:

The long-run historical evidence uncovered in this study clearly suggests that central banks have reasons to worry about the side-effects of loose monetary conditions. During the 20th century, real estate lending became the dominant business model of banks. As a result, the effects that low interest rates have on mortgage borrowing, house prices and ultimately financial instability risks have become considerably stronger... these historical insights suggest that the potentially destabilizing byproducts of easy money must be taken seriously (p.3).

Or, later:

Using short-term interest rates as a proxy for monetary conditions ... (p.14).

The paper also refers to "easy low interest rates" (p.35).

The paper is centred around an equation based on the monetary policy trilemma (that monetary policy cannot have a stable exchange rate, free flow of capital and autonomous monetary policy all at the same time) where interest rates "measure" the stance of monetary policy (p.15), leading to the central conclusion (p.37) that (italics in original):

Loose monetary conditions are causal for mortgage and house price booms, and this effect has become much more dramatic since WW2.

Judging the stance of monetary policy from interest rates is deeply problematic. In Milton Friedman's words:

Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

This is hardly surprising, as nominal interest rates include inflationary expectations, so will be higher if inflationary expectations are higher. During the Great Moderation, inflation and interest rates were low: in what world is low inflation a sign of "loose monetary conditions"? To quote Milton Friedman again:

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Apparently, they don't.

Money has two uses--the demand to hold money as an asset and the use of money in transactions. (Or, if you like, the demand to keep money for use in future transactions and its use in current transactions.)  If inflation is low, that means that the use of money in (current) transactions is roughly keeping pace with the growth of goods and services. So, not loose monetary conditions, with (nominal) interest rates to match. (Which, by the way, is the only way the quantity theory of money makes sense--i.e. if the demand to hold money is not included: money held has no effect on the price level because it is not being used to buy things.)

As long as one separates out the demand to hold money as an asset/for use in future transactions, then monetary conditions are a matter of supply and demand (of money in circulation and goods and services on offer). A simple way of thinking of the price of money is that it is what you can buy with it, so 1/NGDP (the inverse of total money spent on goods and services). Thinking of it that way, the price of money moves inversely to the price level (since NGDP = Py, where P is the price level and y is output of goods and services) holding y constant: as the price level goes up, the price of money in goods and services falls (and inflation is when that keeps happening); as the price level goes down, the price of money in goods and services rises (and deflation is when that keeps happening).

Conversely, if the demand to hold money shoots up, as happened in 2008, but the central bank does not adjust monetary policy accordingly (as also happened in 2008) then the effect is a serious (if passive) tightening of monetary policy. Which can lead to things such as the steepest fall in spending on goods and services in the postwar period. All that without any significant shift in interest rates.

Exchange rates are also prices of money. But they are the price of one money in terms of another money.

What is NOT the price of money are interest rates. (The price to borrow something is not the same as the price to buy it.) Interest rates are the price of credit (aka, the price of delayed obligation). Low interest rates (which normally implies low real interest rates) are a sign that credit is cheap, so we can expect, in such circumstances, more purchasing of goods and assets on credit. Such as, for example, housing.

To put it another way, easy credit is not the same as easy money. Though changes in a monetary regime can certainly shift risks. For example, when unification into a common monetary area lowers nominal interest rates in previously inflation-and-exchange-rate-depreciation prone economies that are no longer subject to differentiated money risk (since they are now using a single currency) nor to exchange rate risk (ditto). But that is not really "easy" money; it is a shift in expected risks favourable to more use of credit. One, indeed, based on the expectation that the common money will be "harder" (more resilient in value) than the local money that preceded it.

Time preference

Interest rates are typically divided into money risk, asset/agent risk and the “risk-free cost of capital” (plus other transaction costs, which we can ignore). The “risk-free cost of capital” is better conceived of as pure time preference; what people are concerned about in any delay in use of income, which can differ across time and space. If people’s concern about delay is dominated by fears that they won’t have income later, time preference may even be positive—i.e. people become willing to pay to have access to their capital in the future.

In other words, interest rates should be treated as entirely an across-time price: thus if there was no delay risk or fears about future income, people would be indifferent to which time period they had access to their income (capital which was genuinely “risk free”--so no agent risk--would have no cost across time, apart from money risk). Though risk of death does, of course, give us a reason to be concerned about delay.

A nice short discussion of shifts in general risk since the medieval period is at William J Bernstein, The Societal Risk Premium. For a discussion of situation where pure time preference is positive (i.e. there is willingness accept negative returns in order to have future access to capital) see John Hempton's essay, The Chinese Kleptocracy Is Like Nothing In Human History.

As an aside, time preference should not be regarded as a single number, but as a continuum for agents across which the supply and demand for credit is matched--thus, if demand for credit sharply increases compared to supply, interest rates can be expected to rise, likely attracting new credit from people whose time preferences are now being covered and so are more willing to offer credit. (This can be understood as movement along a supply curve.) Conversely, if the demand for credit sharply decreases compared to supply, then interest rates can be expected to fall, reducing the number of people whose time preferences are covered and so are willing to offer credit. (This is also movement along a supply curve.)

If people increasingly judge that general delay risks are falling, their time preferences will shift, affecting their willingness to offer credit. (This can be understood as a shifting supply curve.) If such tendencies become entrenched, major effects can follow. Such as changing the arrangements of farming fields. Most peasant societies handle farming risk by dispersal across space (using scattered fields, thereby accepting reduced average production in order to reduce production variability from year to year). If interest rates fall, allowing much cheaper smoothing of income across time (either by increased use of less costly/risky storage or by use of--now significantly cheaper--credit), farmers tend to shift to concentrating fields, thereby increasing average production while accepting increased variability in production from year to year. That is, they move to managing variability across time rather than across space. Hence falling interest rates led to the enclosure movement (pdf).

So, the market for credit is not the market for money and interest rates are not a good basis for judging the stance of monetary policy.

Housing market fail
Then there is the Jordà, Schularick & Taylor paper's treatment of housing markets as if they are generic. A particularly egregious example is given at p.14:

Viewed as a natural experiment, the question is whether these differences in monetary policy treatment led to different outcomes in Ireland and Spain using Germany as control.

Paul Krugman famously divided US housing markets into the Zoned Zone and Flatland. Germany is Flatland, so it cannot be used as a control for any housing markets where the supply of land-for-housing is rationed (such as Ireland: by rationed I mean restricted in a way which significantly reduces the responsiveness of supply to increased demand, typically by various regulations).

Just as with money, where we need to distinguish between demand for money-as-asset and use of money to purchase goods and services, so we have to distinguish between demand for house-as-asset and use of housing--i.e. the demand for shelter. (Actually, as Matt Yglesias has pointed out, houses are large decaying structures, it is the land the housing is on which is the enduring asset.) The demand for shelter can be satisfied by buying or renting, a choice which will depend on the circumstances of particular people and the structure of a given housing market. The demand for house(land)-as-asset can only be satisfied by purchase.

So, if people think that land is a particularly good asset--because, for example, land-approved-for-housing is rationed, so has an entrenched tendency to increase in value faster than inflation--then the demand for house(land)-as-asset will be greater. A choice that will be definitely affected by interest rates, as low interest rates imply lower borrowing costs, so encourage more people to take out mortgages to enter the market for house(land)-as-asset, driving the price of houses even higher; if regulation or other constraints continues to inhibit supply responsiveness. So, easy credit can certainly be expected to have an upward effect on house(land)-as-asset prices in land rationed housing markets (or other housing markets with strong feedback effects). But, as discussed above, the price of credit and the price of money is not the same thing. Hence monetary policy having very little correlation with house price rises, but capital inflows having quite a strong correlation, as then Fed Chair Ben Bernanke pointed out in a 2010 speech.

What do we know about markets for assets in restricted supply? They tend to be more unstable (pdf). Hardly surprising, since there tends to be a positive feedback effect, where rising prices expected to continue of themselves encourage more demand for the asset. Particularly as there is experimental and empirical evidence that lack of experience in investors increases feedback effects; with house-buyers largely being inexperienced (or, at least narrow-experienced) investors, in that they rarely have experience of investing with other major assets, or engage in many house purchases; factors especially important when various housing markets had prolonged price-build ups.

So, using Germany--where supply of land-for-housing is responsive to demand--as a control for Ireland, where it was not, is a basic failure of analysis: an apples-with-oranges comparison. (In the case of Ireland, access to some areas was highly rationed, driving up prices, and to other areas was much less so, encouraging misallocation.) Supply and demand, they matter, really they do. Thus, the structure of particular markets matter, really they do.

What we appear to have here is data disease--"we have assembled all this lovely data, and it is much more pliable for our analysis if we just abstract across housing markets". But that is precisely what one cannot do--at least, not across housing markets with very different supply dynamics, for example.  The paper's failure to consider the difference between demand for shelter and the demand for house(land)-as-asset is quite clear:

The house is a bundle of the structure and the land used in its construction. An ideal index would capture the appreciation of the price of a standard, unchanging house which is hard to identify (p.5).

Monetary policy general: assets specific
Then there is the general versus particular problem. Monetary policy is a general phenomenon while "bubbles" (i.e. asset price surges and collapses) occur in specific asset markets. It is always a pertinent question, why did a surge-and-collapse occur in this asset market and not another? The US, for example, does not have a single housing market, it has hundreds, with wide diversity in levels of boom or bust.

Monetary policy also has a poor record when applied to asset "bubbles", including housing asset "bubbles". (Which, btw, is not a helpful way to think about housing price dynamics.) Lars Svensson noted that such "leaning against" policy can actually make debt-to-gdp ratios worse (pdf), by depressing income needed to service past debt more than it discourages future debt. Folk such as Richard Koo in Japan and Steve Keen in Australia typically apply Irving Fisher's Debt-Deflation Theory (pdf) of depressions in this unbalanced way--too focused on debt, not enough on income expectations (the deflation bit). There is no more effective way to produce disastrous debt dynamics than tight monetary policy driving down income expectations, thus spending, thus income, thus ability to service debt. Which is what happened in both the Great Depression and the Great Recession and continues to operate in much of the Eurozone.

The Jordà, Schularick & Taylor paper argues that the unified monetary policy of the Eurozone provides a situation for countries where the unified monetary policy was "too loose" to have credit booms through the "credit channel" of monetary policy (Pp11ff). First, as previously noted, it is surely more a matter of a unified monetary realm changing expected risks in various economies. Second, if it is a "monetary policy via credit channel" issue, one might expect that a similar process could operate in the US, since it is about as large as the Eurozone and also has a common monetary policy. Which then raises the issue of the paper's different treatment of the US versus the Eurozone--either treat the various US housing markets separately or treat the Eurozone as one big housing market, as the paper treats the US. Treating the US as one housing market and the Eurozone as a collection of them is worshipping far too much at the altar of national statistics rather than market dynamics.

Extending the former point, what the creation of the Eurozone did do was to eliminate money risk differentiations between economies as well as exchange rate risk: the consequent drop in nominal interest rates would be expected to increase demand for credit and the elimination of exchange rate risk increase the supply thereof in countries where both factors acted most strongly (i.e. the Mediterranean economies). But, as the paper points out, the effects on housing markets were not consistent--which again points to need to examine the structure of specific housing markets. A paper such as this (pdf) which provides a simple model for explaining housing price bubbles also (very sensibly) confines itself to policy recommendation which are specific to housing markets.

The Jordà, Schularick & Taylor paper holds that long-term interest rates are a good proxy for mortgage rates (p.21). Well yes, since mortgages are classic long-term financing and even more since mortgages have become such a large part of banking business (p.5). But, to invoke Milton Friedman once again, interest rates are set in a whole range of linked asset markets, so the question of why credit is drawn to a particular asset class still remains very relevant. Yes, monetary policy fundamentally affects general income expectations which will have a general tendency to push up (or down, depending on what income expectations it is generating) asset prices, but that is not even close to saying that monetary policy drives asset prices in anything close to a uniform way.

The failure to examine land use regulation in any systematic way also shows up in this paper bv Sebastian Dellepiane, Niamh Hardiman & Jon Las Heras on the housing boom-and-bust in Ireland and Spain. The paper notes that Portugal, Greece and Germany had very different experiences, but does not engage in any systematic examination of differences in land use regulation. (There is a passing reference to zoning in Ireland, and some hand-waving about de-regulation in Spain, but that is about it.)  The Dellepiane, Hardiman & Las Heras paper also engages in the unfortunate usage of "easy money" when they mean easy credit. On the other hand, the paper is clear that encouragement of "housing(land)-as-asset" was very much central to the difficulties in Spain and Ireland.

Either way, nice data and fancy maths do not warrant ignoring basic dynamics of supply and demand.

About history
If you are going to study the effect of monetary policy and monetary conditions on asset prices, then one really must familiarise oneself with C19th economic history. There you will find some truly spectacular asset booms and busts under a gold standard monetary regime: not generally regarded as conducive to "loose" monetary conditions. Yet one marked by generally low interest rates.

In particular, technological uncertainty (of which there was a great deal in the C19th) is more than enough on its own (pdf) to create asset booms and busts. But so will the supply of capital increasing in a way that it is "pushing on" investment opportunities; as per Andy Harless's analysis here.

Speaking of whom, he made an apposite comment about low discount rates and asset price volatility:

Low discount rates (which may not be quite the same thing as low market interest rates) do make assets hard to value (which may not be quite the same thing as causing bubbles), because they make asset values more sensitive to flows in the more distant future, which are harder to estimate. For example, if you assume a constant growth rate, as asset value is V = d/(r-g), where d is the current flow (“dividend”), g is the growth rate, and r is the discount rate. If r is only slightly higher than g, then a slight change in g will have a dramatic effect on V. So suppose r is low, and people happen to get a little too optimistic about g. It’s debatable whether this fits the definition of a bubble, but in any case it’s going to cause the price of the asset to skyrocket, and when the overoptimism fades, the asset price will collapse. (Of course the situation is symmetric. Maybe people rightly became optimistic about g, the asset price rightly skyrocketed, and then people happened, wrongly, to get just a little bit less optimistic, and the asset price collapsed. In this case there wasn’t a bubble per se, but the same volatility problem exists.)

To which monetary economist Scott Sumner responded:

Yes, asset prices might be more volatile, but that would not be because of monetary policy in any case. At least not for any extended period of time. Suppose rates were low, but inflation was below target. The Fed could raise rates, but that would drive inflation even lower. In that case either rates would fall again, or we’d go into deflation, and rates would fall a bit later. 

In any case, I see asset price volatility as being very different from asset price bubbles. Japanese stock prices have been very volatile over the past 20 years, but there has been no Japanese stock bubbles over the last 20 years. So it’s not clear that this sort of asset price volatility is a problem.

So, we are not talking about simple asset price volatility and housing prices were not notably affected by technological change (except, perhaps, changes in financing technology).

Comments I also made on the same post are apposite.  If there is a prolonged period of rising incomes are not asset prices going to rise? Not merely from expectations of future incomes but such further magnified by (rising) savings pushing on investment. And if expectations of increased income increased asset prices why would not also positive expectations about an asset as a store of value? Whether for gold or approved-for-housing land.

Moreover, in a market economy with multiple interest rates and multiple assets, with assets being various bundles of income-expectation, store-of-value-expectation, and expected risks, how can one measily central bank rate be more important than any of the aforementioned? And, in a market economy with multiple interest rates and multiple assets, with assets being various bundles of income-expectation, store-of-value-expectation, and expected risks, how can one interest rate be “the” rate that balances planned savings and planned investment?

To which the response is, it can't. (A weakness of Austrian analysis is that, on one hand, it insists that the heterogeneity of capital is crucial, yet it also gives a single interest rate amazing pivotal power.) One has to look at the dynamics of different asset markets. (Another problem with Austrian business cycle analysis is that an implication is that downturns should hit industries in a sequence according to their different average investment cycles, rather than all at once, as actually happens.) And housing markets are not asset markets in an all-the-same-really sense, as specific housing markets are not equally driven by the demand for shelter; in large part because they are not subject to the same supply dynamics.

And no amount of data assembly and fancy mathematics gets around that. Just as it cannot get around interest rates not being good indicators of monetary policy: in particular, low interest rates are very much not a reliable indicator that monetary policy is "loose" or "easy".

Scott Sumner famously keeps reminding folk to never reason from a price change. Another way to put that is: always attend to supply AND demand (even if no one understands that no one understands supply and demand). And so attend regardless of much data you have assembled and how much fancy maths you can apply to it.

[Cross-posted at Skepticlawyer.]

Palestine's disastrous political leadership

I recently read Mark S. Weiner's The Rule of the Clan: What an Ancient Form of Social Organization Reveals About the Future of Individual Freedom. I heartily recommend the book, which includes various case studies--the comparison of the largely contemporaneous consolidation of state power against claims of kin, clan and lineage in Anglo-Saxon England with Arabia under Muhammad and the Rashidun Caliphs was particularly striking. Though Weiner seems to have largely missed the role of the Catholic Church's family revolution (such as banning cousin marriage) in the fading of clan in Latin Christendom.

One of Weiner's case studies is Palestine where, once again, we learn what a disaster Yasser Arafat was. Because Western colonial authorities came from liberal (in the broad sense) societies where clans were things of the distant past, their rule often had unfortunate effects on existing clan structures. (Though Afghanistan shows that the lack of colonial rule hardly improve matters.) Either way, the 2004 Arab Human Development Report (pdf) identifies "clannism" as both a problem and a response to weak states. As in the rest of the Arab world, Weiner notes that:

Traditionally, social and political power among Palestinians has been rooted in systems of lineage. These kinship systems include not only those of nomadic Bedouin tribesmen and the elite families who served as intermediaries between the Palestinian population and government administrators under the Ottoman Empire and the British Mandate, but also hundreds of extended family groups of hamula, tracing their patrilineal descent to a common ancestor (loc 1342).

Such hamula:

... continue to play an important part in Palestinian politics and the administration of justice.
In particular, clans possess their own tribunals for resolving disputes within their lineage groups, and they abide by time-honored practices for reaching reconciliation and renewal  (islah) between disputing groups under recognised principles of customary law ('urn). They also observe a strict code of honour (mithaq al-sharaf) that requires members to take revenge (tha'r) against those who have injured their kin (loc 1342).

As Weiner points out:

The viability of a free and independent Palestinian state will depend not only on Israeli political will, but also whether these traditional systems of justice can be replaced with state institutions under democratic public control (loc 1355).

The first Intifada (1987-93) pushed Palestine in the direction of state building:

... it gave rise to a new generation of leaders known as the intifada elite, university-educated activists committed not to the interests of their kin groups but to the principles of nationalism. The intifada elite sought to advance the cause of Palestinian independent by developing the institutional structures of government and civil society. Their deep, grassroots connections gave them the authority and legitimacy to construct a modern, albeit revolutionary, state (loc 1355).

But then Arafat returned from his Tunisian exile in 1994, in the wake of the Oslo Accords. Anyone familiar with the history of the Palestinians as, in Abba Eban's words, the people who "never miss an opportunity to miss an opportunity" can guess what happens next:

To bolster his own power, Arafat undermined the institutions forged by the intifada elite and strengthened the power of the clans, which he could control directly through patronage (loc 1355).

Including an election law which, in the words of one scholar:

produced what is was designed to produce: a parliament of clan leaders, largely pliant to the wishes of Arafat and his cabinet (loc 1368).

The second Intifada (2000-2005) (including the Israeli response) then largely completed the process with the result that, as Weiner writes:

... clans now pose a major obstacle to practical institution builders seeking to establish the rule of law in the Palestinian Authority (loc 1368).

A problem that extends to Gaza:

The obstacle has been as vexing to the Islamists of Hamas in Gaza as it has been to the nationalists of Fatah in the West Bank. Although Islam has historically accommodated clan groups, at its heart it sets religious identity against tribal loyalty. Hamas is philosophically committed to this anticlan ideology, which regularly brings it into violent conflict with powerful Gazan families (loc 1382).

Choosing violence and hatred
But both Arafat and Hamas found conflict much easier than peace-building. Especially as it is such an excellent revenue source: the Hamas leadership appears to have become seriously wealthy from its anti-Zionist intransigence.

But choosing violence and hatred because it offers easier political returns goes back to the origins of the Palestinian "struggle". When Jewish settlers first started coming to Palestine at the time of the Ottoman Empire, they brought capital (physical, financial, human), raising local wages and expanding economic activity. Which then attracted migrants from other areas of the Middle East. (A proportion of Palestinians are also descendants of settlers: hence the UN definition of a Palestinian refugee only requires residence in Mandatory Palestine from 1 June 1946 to 15 May 1948.)

Jewish settlers 1880s

The existing Palestinian elite had a choice: come to some mutually beneficial arrangement with the new settlers (Palestine was hardly crowded at the time) or play the ethno-religious hatred game. Some of the Palestinian elite was willing to do the former, even if it was just selling land to the newcomers.

Enter the new Grand Mufti (1921-1937) of Jerusalem, Mohammed Effendi Amin el-Husseini. Already implicated in anti-Jewish violence, he propagated an Arab nationalism that excluded the Jews--yet Jews had been residents of the region longer than Arabs. Hatred and violence pushed the Jews towards creating their own institutions, while defining a new Palestinian identity against Jews. Zionism was based on the principle that Jews were not safe in Europe (which turned out to be true), el-Husseini's approach made state-Zionism seem an increasingly necessary refuge in the Middle East as well. The 1929 Riots and even more the 1936-39 Arab Revolt further accelerated both processes.

Husseini saluting Muslim Waffen SS

Fleeing a British arrest warrant, el-Husseini ended up in Nazi Germany, actively supporting the Nazi war effort and a policy of expelling all Jews from Muslim countries (including Palestine). His continuing policy of no-compromise and no-place-for-Jews failed to build effective Palestinian institutions but greatly helped motivate the creation of Jewish ones. Culminating in the creation of Israel, the 1947-48 Israeli War of Independence and the fleeing or expulsion of hundreds of thousands of Palestinians (events known to Palestinians as the nabka, the catastrophe). It was record of utter disaster, which lost el-Husseini any credible leadership but never seems to have led to serious reconsideration among Palestinians--it was all the Jews' fault. His post-nabka All-Palestine Government was a shadow, lasting as long as it was convenient to Egypt and no longer.

Arafat's disastrous choices
In 1964, the Palestinian Liberation Organisation (PLO) was formed. By 1969, Arafat became Chairman, a position he held until his death in November 2004. His only real achievement was survival. The War of Attrition (1967-1970) led Arafat's PLO to disastrous conflict with Jordan. Fleeing to Lebanon, the Palestinian military presence helped destabilise the weak Lebanese state, leading to the Lebanese Civil War (1975-1990). Once again, the PLO was driven out, this time to Tunisia in 1982.

Arafat at UN 1974

The adoption of the PLO's Ten Point Program neither reassured the Israelis that negotiations could be serious nor united Palestinians, since the Rejectionist Front objected to any implied recognition of Israel. Based in Tunisia, Arafat was far from Palestine and seemed increasingly irrelevant.

Arafat was rescued by the First Intifada, which he seems to had nothing to do with. He negotiated the Oslo Accords, which allowed him to return to Palestine and proceeded, as noted above, to undo the best hope for an effective Palestinian state. Confronted with the consequences of sacrificing state-building for his own personal power, and his own inability to agree to any plausible peace deal with Israel, Arafat unleashed the Second Intifada which, as with all Arafat's resorts to violence, led to dead Palestinians (and rather fewer dead Israelis) and the Palestinian cause (yet again) going backwards, since it (including the Israeli responses) largely completed the process of reversing the building of effective Palestinian institutions.

Having rejected Israeli Premier Ehud Barak's peace offer without making any serious counter-offer of his own, it is no wonder that it became bipartisan US policy to wait for Arafat to die. Said death (November 2004) finally allowing the Second Intifada to end.

And so it continues
With an effective Palestinian state even further away, and Arafat's politics of patronage and corruption having rotted away Fatah's credibility, the openly genocidal Hamas decisively won the 2006 Palestinian elections. Which led to the further division of Palestine between Hamas-controlled Gaza and Fatah-dominated West Bank. With Hamas continuing the Arafat strategy of disastrous "victories".

A case can be made that the Palestinians have disastrous political leadership because they get the leadership they deserve. (In the words of a prominent Egyptian historian "they don't want to resolve their own problems".) But that same leadership either tolerates or approves religious preaching and educational materials that make it that much harder to reach any sort of agreement with Israel--both because it makes Israelis all that much more suspicious and fosters revanchist delusions among Palestinians.  Including making the Palestinian right of return an apparently untouchable totem of Palestinian politics while also clearly a terminal block to any peace agreement. Arafat's successor, Mahmoud Abbas, declared that:

... it’s better [that Palestinians] die in Syria than give up their right of return.

Yet the current spectacle of ethnic, clan and other mayhem and massacre in Libya, Syria and Iraq (and the fragility of Lebanon) provides a daily grim spectacle of why Israeli Jews would be mad to agree to any state where they became the minority. That even without the memory of what happened to Jewish minorities in the rest of the Middle East.

Yazidi refugees

By contrast with the disastrous record of Palestinian political leadership, the open, argumentative, democratic politics of Israel have been much more successful at, well, just about everything. Including absorbing hundreds of thousands of Jewish refugees from Arab and Muslim country, when it has clearly been Arab policy to leave Palestinians as stateless sticks to beat Israel with. A policy the UN and EU have facilitated in various ways. (For example, Palestinians are the UN's only hereditary refugees.)

Nothing Hamas ever does, and little Fatah ever does, seemed to be seriously aimed in any way at convincing the Israeli electorate that a peace agreement can be had. By contrast, Nelson Mandela never seems to have lost sight of the fact that South African whites would have to be included in any final settlement. Mandela grasped that true victory was when the whites were no longer the enemy: there is no sign that the Palestinian leadership has ever even remotely grasped that. That contrast says all one has to say about the disastrous Palestinian leadership.


[Cross-posted at Skepticlawyer.]

Too many tweets make a twat: ANZAC version

SBS sports reporter Scott Mcintyre let loose with a series of anti-ANZAC tweets and then was promptly sacked by SBS for breaching their code of conduct. It is helpful to be clear about the issues involved.

(1) This is not a free speech issue. Scott Mcintyre is not being prosecuted for his tweets, and it would be outrageous if he was.

(2) No one has a right to publicly breach the code of conduct of one's employer. "Right" here understood as "able to act without penalty". Australian law is fairly clear on this.

(3) Tone and context matters. The issue is not the facts of Gallipoli or other relevant history (though his cause is not helped by some factual infelicities). Being sacked for stating facts (not received in confidence) would also be outrageous. Being sacked for gratuitously insulting large numbers of fellow citizens is a rather different matter. Showing oneself blind, indifferent or ignorant of context is also an issue; particularly for someone employed as a journalist.

For example:

The cultification of an imperialist invasion of a foreign nation that Australia had no quarrel with is against all ideals of modern society.

The Ottoman Empire was at war (due to a rather complicated series of interactions) with the British Empire, which we were very much a part of and thought ourselves to be. The Gallipoli invasion was perfectly reasonable under both international law and just law theory. Fairly clearly, Mcintyre was appealing to that sort of moral childishness where war is just "doubleplusungood", but these things matter. (At the time of the invasion, said Ottoman Empire was responding to Russian advances in the Caucasus by beginning the Armenian genocide--along with the Assyrian and Pontic Greek genocides--building on a previous, and recent, history of massacre.)

Consider:

Wonder if the poorly-read, largely white, nationalist drinkers and gamblers pause today to consider the horror that all mankind suffered.

SBS relies significantly on tax-payer funding and still grapples with a lingering identity issue as "ethnic media". It really does not need this sort of gratuitous undergraduate sneering.

As for:

Not forgetting that the largest single-day terrorist attacks in history were committed by this nation & their allies in Hiroshima & Nagasaki.

First, if he is referring to the death toll, actually the biggest Tokyo fire raid killed more people in a single night. Second, it was a purely American action: "this nation" had nothing to do with it except in the sense that it was done by an ally. Australian opinion at the time was overwhelmingly supportive, even grateful, since it meant that the War was over; but we were not then, and have never been since, a nuclear power. The nuclear bombings also likely saved a lot of lives, since the alternative of an invasion of Japan was, on the evidence available, going to kill a lot more people. Context matters, and it is the job of a journalist to understand that context matters. 

Which goes back to it not being a free speech issue. If Scott Mcintyre was being hounded merely for having different opinions than others, then it would become a free speech issue. But that is not why he was sacked.

(4) Whether SBS's response was proportionate is a reasonable question. Suspending Scott Mcintyre without pay would definitely have been a reasonable response. Sacking perhaps was too strong,* but one can understand why SBS did not want the issue hanging around during the Gallipoli centenary.

(5) The objections to "mythologising" history are mostly bunk. Progressives regularly mythologise history--notably indigenous history (Stolen Generations anyone? Secret Women's Business?)--and, for that matter, current events (Israel-Palestine). It is what people with strong emotional connections to events do. The objections regarding the "ANZAC myth" are clearly far more about objecting to other people's mythologising. When it comes to the public space, the Virtuous are not sharing folk.

(6) PC is not about civility. This is perfectly obvious to anyone with their wits about them, but the way gratuitous insult is invisible when it was a PC-acceptable target is, yet again, in evidence. One can criticise or demur from the treatment of matters ANZAC without sneering, being misleading or getting one's facts wrong. Which likely has the further advantage of not embarrassing one's employer: they might even have a code of conduct to try and avoid precisely such. 

(A slightly different take is here. Cross-posted at Skepticlawyer.)

* Though that also depends on whether he is teachable (i.e. would learn from the experience).

Sad Puppies

I have not been following the Sad Puppies controversy in detail, so my comments are very general. (And am so not touching Gamergate, which deals with a particularly intense subculture I have only passing acquaintance with.) However, the Hugo Awards controversy reprises similar controversies in other fields; hence the general comments.

(1) Be suspicious of arguments from quality.

Quality in artistic and literary endeavour is far from an empty concept, but it is also far from an entirely objective one.  Which leads it open to all sorts of contention and hi-jacking. In particular, it is absolutely standard for supporters of the status quo to make the argument from quality--i.e. we don't have any black/female/conservative/... writers/announcers/artists/... not because we are prejudiced against them, but because there simply aren't any that are good enough.

(2) Diversity has varied dimensions.

Racial and ethnic diversity is one sort of diversity. So is diversity in ideas. They have no necessary correlation. People of varied racial and ethnic backgrounds are likely to have varied experiences but that does not, of itself, lead to diverse ideas.

(3) Covert politicisation is easy to not see and hard to fight without engaging in overt politicisation.

All the various groups marching down the Emancipation Sequence have engaged in overt politicisation and been condemned by supporters of the status quo for doing so.

(4) Critics of Sad Puppies are using fairly standard Defenders of the Status Quo arguments.

Arguments such as: nothing to see here, those over there just troublemakers subverting standards of quality, they are politicising what as working just fine ... . Which, of course, makes said critics the Embattled Establishment. Not the self conception the Virtuous like to have, but that does not make it any less true.

A quick Google suggests that mainstream media coverage has been largely fairly awful--engaged in identifying who are the Bad Guys and holding the status quo to be unproblematic (which, by definition, means that no critique thereof has any legitimate basis).  But that is also a recurring pattern when the media is largely on the side of the status quo.

Would it be better if the Hugo Awards had not become subject to overt politicisation? Probably: but folk should have thought of that before they began judging writers by their personal beliefs (or rumours thereof). But that is the problem with Virtue signalling: it is subject to Virtue inflation--both in ever finer moral distinctions (such as making a big moral deal over the difference between "coloured people" and "people of colour") and ever broader range of social matters to signal Virtue over. To be ever more socially invasive is it basic logic.

Particularly as part of Virtue signalling is to hold that the said Virtuous have a monopoly of moral legitimacy, so it is just fine to exclude folk of different views from social goods. But other folk may care about their, for example, SF too, and are likely to respond.

For a useful corrective, recovering a sense of nuance and moral diversity, I recommend this essay by Jonathan Chait on the dynamics of US culture war debates. Or, in other words; people have differing views: get over it and lets get back to SF as fun.


ADDENDA: George R R Martin on the controversy.  Larry Correia, founder of Sad Puppies, replies.

"Over-valued" is the wrong metric about "bubbles"--housing or otherwise.

Thinking about asset price stability is pervaded by incorrect framings. Particularly if folk start throwing around the term "bubble".

Not the fault of the central banks
One incorrect framing is "the central banks did it"; with the finger usually pointed at low interest rates and clams of "easy money" fuelling "bubbles".  Low interest rates are not a sign of "loose money". Judging the stance of monetary policy from interest rates is deeply problematic. In Milton Friedman's words:

Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

This is hardly surprising, as nominal interest rates include inflationary expectations, so will be higher if inflationary expectations are higher. During the Great Moderation, inflation and interest rates were low: in what world is low inflation a sign of "loose monetary conditions"? To quote Milton Friedman again:

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Apparently, they don't. Yes, low real interest rates  combined with strong income expectations will lead to more use of credit, particularly to purchase assets. But central banks have no influence over real interest rates and maintaining strong (or at least stable) income expectations is what they are supposed to do. Failure to do the latter is what led to the Great Depression and the Great Recession.

So, low real interest rates (not the fault of central banks) + strong income expectation (what we want them to do) => more use of credit to purchase assets.

Does that mean we get surges in asset prices?  No, because there is the little thing called the supply side. Prices are a matter of supply AND demand.  If the supply of assets responds to the surges in demand, there are no price effects.

If the assets are slow to construct, you might get some price surges, but they are unlikely to persist once supply catches up with demand. If, however, supply permanently lags demand, then the price surges can persist (as demand is continually outpacing supply). Such as, for example, from land rationing in housing markets blocking supply from catching up to demand. (Remembering that houses are large decaying structures, the enduring asset is the land the house is on.)

About housing and "bubbles"
We live in an age of low real interest rates. The Reserve Bank of Australia (RBA) has been doing an excellent job in maintaining income expectations. (No recession since the early 1990s). All our State and Territory Governments, aided and abetted by many of our local governments, land-ration. We are relatively high immigration country (and we are good at cherry-picking our migrants). Of course our housing prices have surged, and surged, and surged.

So, is it a "housing bubble", allegedly one of the worst seen? The problem is the word "bubble".  By "bubble" people typically mean that (asset) prices surge upwards, then collapse pretty quickly. The problem is that the term bubble has no useful predictive value. If we could reliably predict turning points (of prices) there would be no such "bubbles", because people would generally not purchase at a price that were reliably expected to collapse. So, the entire notion depends on unknown turning points.

The same goes with notions of "overvalued" assets. If that means anything, it means that future prices are expected to be lower. But, if that is a general expectation, they will not reach that price in the first place.

Expectations matter a lot to asset prices, because assets are things which are expected to provide enduring benefits--either as a store of value, or a producer of income, or both--over more than one time period. And we have no information from future time periods, only expectations about them based on already existing information.

Asking the right question
The question which people are fumbling towards asking is the one they should focus on directly: how stable are these prices? How vulnerable are they to new information? That is an excellent question.

In the case of new technology, very vulnerable: because, well, it is new, and thus has large amount of uncertainty (in the Knightian sense of unable to be reliably calculated). Hence new technology is a great generator of asset price instability (pdf), of asset boom and busts. One of the features of the Global Financial Crisis (GFC) was new technology in the finance industry.

If the asset prices are built on strong income expectations, they will be very vulnerable to any sudden fall in income expectations. That is, the central bank screwing up. They will be particularly vulnerable to that if the asset purchasing is highly leveraged.

If the asset prices are built on supply constraints, they will be vulnerable to any sudden removal of said supply constraints.

They will also be vulnerable to any sudden shift in specific demand for that asset not covered above.  For example, in the case of housing, a drop in immigration.

So, does Australia have various housing bubbles? That is the wrong question, focusing on unknowable turning points based on not yet existing information. The correct question is: are Australian house prices vulnerable to sudden downward shifts?

Absolutely: if the RBA screws up income expectations, if there is a major drop in immigration, if State and Territory governments suddenly abolish land rationing--from which they garner a lot of tax revenue plus grateful home-owning and -buying voters while political parties get a lot of funding from developers who (in a land rationing policy regime) simply have to have access to officials to operate their businesses and are willing to pay for it. (Ironically, that it is such a universal practice among our State and Territory governments actually makes its price effects more resilient, as there is unlikely to be negative signalling across markets.)

So, how likely do you think any of them are? Not very I would have thought. Ironically, the most likely is the RBA screwing up; and the most likely scenario for that is that it makes the mistake of paying attention to (via) the "it's your fault!" bubble-manics and does what no central bank should ever do--get into the "bubble-popping" game. Especially as the most likely effect thereof is to make the leveraging problem worse (pdf); potentially much, much worse.

So, do Australian housing prices make much more sense now? Isn't to useful to frame the questions in the right way? Bubble-mania, it will rot your analysis.


[Cross-posted at Skepticlawyer.]