The value of uncertainty

At Edge.com, John Brockman recently had a fascinating conversion with Emanuel Derman, who noted that "many physicists and other scientists . . . have flooded Wall Street in recent years." Derman described their work as follows:

They are known as "quants" because they do quantitative finance. Seduced by a vision of mathematical elegance underlying some of the messiest of human activities, they apply skills they once hoped to use to untangle string theory or the nervous system to making money.

Derman then quoted particle physicist Heinz Pagels on the importance of maintaining uncertainty on Wall Street:

Mathematicians and others are endeavoring to apply insights gleaned from the sciences of complexity to the seemingly intractable problem of understanding the world economy. I have a guess, however, that if this problem can be solved (and that is unlikely in the near future), then it will not be possible to use this knowledge to make money on financial markets. One can make money only if there is real risk based on actual uncertainty, and without uncertainty there is no risk.

This quote fuels my suspicions regarding the unnecessarily complex nature of modern financial instruments.

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Messing with the phone company

My phone company has utterly and repeatedly lied to me about my bill. It's infuriating. I call them up and ask them to justify my bill. They "apologize" and insist that it will cost exactly $X every month in the future. Then the bills show up and they are $X plus an extra $15. What do you do, go to small claims court over $15? I'm saving up my bills and I actually might do that someday. In the meantime, I do wonder how many other people are having the same experience, and I assume that there are plenty of you out there. Unfortunately, these do not make good class actions because they usually involve oral misrepresentations over the phone. In order to prove that a large group of people were lied to, you'd need to call every customer into court to testify. Courts usually reject these as class actions. Therefore, anyone with this situation is likely in the same boat I'm in. Small damages also combine with clever arbitration clauses to amount to telephone company immunity. I'm telling you this little story as a prelude to showing you this image. I do understand this person's frustration. Bravo!

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The college version of the subprime mortage mess

Investor Steve Eisman whose huge wager against the subprime mortgage market was described by Michael Lewis The Big Short has launched an assault on fast growing for-profit college industry. Here's the link at Mother Jones. According to the Eisman, for-profit colleges "raked in almost one-quarter of the $89 billion in available Title IV loans and grants, despite having only 10 percent of the nation's post-secondary students." Here is the main parallel between for-profit educators and the sub-prime lenders:

Eisman attributes the industry's success to a Bush administration that stripped away regulations and increased the private sector's access to public funds. "The government, the students, and the taxpayer bear all the risk and the for-profit industry reaps all the rewards," Eisman said. "This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper."
Here's another similarity between subprime lending and for-profit education

Both push low-income Americans into something they can't afford—in the schools' case, pricey programs that leave the students heavily in debt; what's more, the degrees they get mean little in the real world: "With billboards lining the poorest neighborhoods in America and recruiters trolling casinos and homeless shelters—and I mean that literally—the for-profits have become increasingly adept at pitching the dream of a better life and higher earnings to the most vulnerable."

In the Mother Jones article, Eisman pointed to the self-reported (and thus potentially under-reported) 50-plus percent dropout rate at for profit colleges as further evidence that they offer poor-quality education. After reading the above article, I referred to Wikipedia's article one of the biggest for-profit colleges: Phoenix University, subsidiary of the publicly traded Apollo Group, Inc. It offers "open enrollment," meaning that it requires "proof of a high-school diploma, GED, or its equivalent." Phoenix graduates only 16% of its students, compared to the national average of 55%. On the topic of de-regulation and quality of education, consider this:

The school was the top recipient of student financial aid funds for the 2008 fiscal year, receiving nearly $2.48 billion for students enrolled. In 2006, due largely to the efforts attributed to the Apollo group, the 50-percent rule (requiring colleges and universities to conduct at least half of its instruction in person in order to receive federal aid or collect federal student loans) was modified. It no longer classifies students receiving instruction through telecommunications methods as correspondence students.

The Wikipedia article offers a lot more information to feed the fires of my suspicion. I don't claim to know any more about Phoenix University than what I have read in these two articles. What I do bring to the table is that I investigated diploma mills as part of my job while I worked as an Assistant Attorney General for the state of Missouri; I don't like the smell of what I'm reading about these for-profit colleges. Based on what Michael Eisman has stated, it would seem to be a good idea for the federal government to tighten its standards for the types of post-secondary schools eligible for federal loans, and to take a much closer look at the quality of education received by the typical Phoenix University student. Is it really worthy of a federal loan guarantee?

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Saving Africa’s Witch Children

I am often asked, "Why do you fight against religion?" Today my answer would be best expressed by this article from the New York Times. A new documentary called "Saving Africa's Witch Children" will be airing Wednesday May 26th on HBO2. The documentary follows Gary Foxcroft...

...founder of the charity Stepping Stones Nigeria, as he travels the rural state of Akwa Ibom, rescuing children abused during horrific “exorcisms” — splashed with acid, buried alive, dipped in fire — or abandoned roadside, cast out of their villages because some itinerant preacher called them possessed.
One of the main subjects of the documentary is Helen Ukpabio.
At home in Nigeria, the Pentecostal preacher Helen Ukpabio draws thousands to her revival meetings. Last August, when she had herself consecrated Christendom’s first “lady apostle,” Nigerian politicians and Nollywood actors attended the ceremony. Her books and DVDs, which explain how Satan possesses children, are widely known. So well-known, in fact, that Ms. Ukpabio’s critics say her teachings have contributed to the torture or abandonment of thousands of Nigerian children — including infants and toddlers — suspected of being witches and warlocks.
If ever there was a reason to continue to strive to undermine the authority of religion, this is it.

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Senate votes 96-0 to audit the Fed

This momentum to audit the Federal Reserve is long-overdue, after months of debate. If our election system involved public financing, the debate would have lasted five minutes. Now it's time to reconcile the House and Senate bills, then let the sun shine in. It's time to shine an especially bright light on the recipients of the the Fed's largess, and this will information must be produced pursuant to the Senate bill. Let's just hope that the audit is meaningful and thorough. Speaking of which, it's time to turn a sharp eye to the roll the Wall Street bond rating companies played in the meltdown. After all, how could it be that so many sub-prime mortgage-backed securities were so highly rated, despite strong evidence to the contrary? We're now seeing good momentum to reform the practices of these bond raters too:

A critical amendment to the Wall Street reform bill being debated in the Senate this week picked up a key Republican backer Tuesday. The amendment, sponsored by Sen. Al Franken (D-Minn.), would end the practice of banks choosing which credit rating agency they hire to rate a particular offering. Often, banks will ask raters for a preliminary review, allowing them to pick the rater most likely to look favorably on whatever bundle of products the bank wants to sell to investors.

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