The Pru 100


Unlike Team Sky on the Champs Elysées, we’d not practised this for crossing the finishing line, which is why we both look a bit worried.  A week on, Annie is off travelling, and I’m catching up with my life post retirement, with a blog about the whole experience, and thanking everyone who sponsored me, on my list of things to do.  So here goes.

It was wonderful being able to do something like this with Annie – and met by Maggie at the end, who’d just come tenth in a 5k run in Hyde Park.  So, for all of us it was a great family day.

As a cycle ride, it was a bit disappointing, because a serious accident meant we were held in a bottleneck along with thousands of other cyclists, for over an hour, and the most challenging climb, Leith Hill, was cut from our route. My official time was even slower, because I had an earlier start time than Annie, and I waited for her to catch up, so my official time was 7′ 21”.  But for the sections where we were going normally, although this included parts where there was still severe congestion, our average speed was just over 16 mph.  Not too bad, I think, and as we’d both trained fairly well, neither of us had ’emptied the tank’, in the cyclists’ jargon starting to creep into my  language.

I’d also done most of the course, including Leith Hill, at a similar speed, but without closed roads, a couple of weeks before, which took rather more out of me.  On the day it was fun to be cycling without cars and lorries – hoping here that no motorist friends were too inconvenienced – and the spectators in the last few miles were lovely and encouraging.  Of the various good causes on show on the day, I think Shelter must be one of the best recognised brands.

Personally, the training was probably the most interesting part of it all.  Nearing 60, I decided to approach this more seriously than I ever took preparation for long cycle rides I did in the past.  I also joined a couple of local cycling clubs, (Anerley and Penge) and found myself getting out into the Kent, Sussex and Surrey countryside again. There’s a potential digression starting here from how often these routes took us through London’s hallowed Green Belt – but that can wait.

I hadn’t appreciated how club cycling works socially, blending relaxed sections with more competitive climbs, and places where it’s possible to go fast.  I’d no idea that my relative strength would be as a climber, but given my size, that should not be a surprise.  I also took to cycling part of the way to see my Dad most weeks, which involved riding to Marylebone, and then through various Oxfordshire villages.

The new technology is fascinating too, with GPS and a heart rate monitor allowing read outs of how much progress is being made.  It seems my completely un sporty parents had managed to endow me with some good genes as well, based on my resting heart rate. Previously I’ve always been a bit squeamish about blood and other aspects of human physiology, but I seem to have got over that. Another thing on my list of things to do is to work out how those estimates of power and energy used are made from the data inputs.  I’m also interested in how this fitness related technology percolates from elite athletes to the wider population – can it make a difference to public health?

The fund raising was a bit more difficult than I expected, although I realised it would never be as easy as when I worked on an investment bank trading floor. I’m not sure that I’ll do a sponsored ride again, having now learned there are many such ‘sportifs’, but I’m very pleased that both Annie & I hit our funding targets, and as well as supporting the work Shelter does directly, helped raise awareness of the housing crisis.  There’s an even longer digression possible here, starting from one of my favourite observations about housing, which is that Shelter’s foundation in the mid 1960s, and all the attention that housing got then, was also when the level of UK house building started to fall.  For whatever reasons, public concern about housing does not necessarily translate into the essential requirement of getting more homes built.  I’ve written elsewhere about why I think this didn’t happen, and will do so more, along with all the other things on my lists of things to do.

So also is meeting up with old contacts, especially those who were kind enough to sponsor me, and I’d love to talk more about this with those who are interested in housing, economics & politics.

John Kay on Mervyn King’s “The End of Alchemy”

Having already expressed my doubts about Mervyn King’s ideas on credit in his recent book, “The End of Alchemy”, I’m moved to comment on John Kay’s very positive review of it yesterday for the FT,

The enduring certainty of radical uncertainty

where for him the most important message was the stress on radical uncertainty. He describes his and Mervyn King’s parallel intellectual careers where they were together at the start, receiving and passing on what now seems an absurd idea of Milton Friedman’s – that there is no “sharp distinction between risk, as referring to events subject to a known or knowable probability distribution, and uncertainty, as referring to events for which it was not possible to specify numerical probabilities.”

Up to a point, I don’t think Friedman is being absurd, although that point is reached only a few lines further on in the text John Kay refers to (Price Theory, p. 282), of which more later. Of course there is a distinction to be drawn between these types of risk, but I don’t think it’s that sharp, because almost all financial risks have a degree of uncertainty in the sense of the distribution not being known. But now, conjuring up the idea of radical uncertainty, it suggests a qualitative boundary beyond which quantification is pointless, and that given the pervasiveness of uncertainty, this applies to most financial risk.  Perhaps mundanely, I’d suggest

  • there is no such boundary,
  • that pretty well all financial risks have a degree of uncertainty in this sense, but
  • that in general this can be reduced with some risk analysis (preferable not just collecting data about past performance), and
  • a subjective estimate of the remaining uncertainty is useful for a financial risk taker.

Where I’d say Friedman crosses the border to absurdity is when he writes

Sometimes people will agree – we then may designate the probabilities as “objective”; sometimes they will not – we may then designate the probabilities as “subjective”.

In this, I think Friedman is claiming that by observing how such risk takers act on their subjective estimates, and generate a market price for the risk if there are enough of them, then it will be possible to calculate the probability implied by that price, and that this probability is “objective”.  The scare quotes are still there, but so are they round “subjective”, for no reason I can see.  Combine with this dogma that markets are the best possible calculating device – rather than just a signal worth having on the radar – and the intellectual path is open to the justly derided excesses of financial quantdom.

The example of Gillian Tett’s insights into CDO traders from her studies as a social anthropologist is now well known, and in retrospect we can see that this would have kept our estimates of the uncertainty – and expected value – of such products more objective – no scare quotes needed here.  But so would insights from other disciplines – understanding of IT systems security, for example, and  maybe even some of what still seems like financial quantdom will have a role in understanding uncertainty and reducing it.

Mervyn King on credit

John Plender gives a warm review to Mervyn King’s recent book, The End of Alchemy: Money, Banking and the Future of the Global Economy

Uncertainty principles: ‘The End of Alchemy’, by Mervyn King


It is rare to encounter a book on economics quite as intellectually exhilarating as The End of Alchemy

I’m not convinced, at least by the review.

The aim of the book is said to be to “put an end to the alchemy that has made financial crises a permanent feature of the landscape and allowed money — a public good — to become the by product of credit creation by private-sector banks”.

This is odd, because there are numerous public goods which are created to a significant extent as by products of private-sector activities.  A typical pattern is that private sector agents engage in transactions where both parties benefit – which, if you insist, can be expressed as both seeing an increase in their utility – and that by such transactions becoming routine, helped by the emergence of institutions to support them, a public good is created.  Very often a public sector agency is needed to support such goods – so judges to support a system for enforcing and interpreting contracts, paid as indirectly as possible – by general taxation – by the parties to the transactions.

It’s how money and banking systems developed, and while in a sense they are inherently unstable, being based on a degree of trust which may suddenly evaporate, on balance I would expect a Central banker to see private-sector credit creation as a strength of a banking system, to be helped impartially in supporting the public good it creates, but not something to be eliminated.

The starting point for the argument is that we live in what economists now call “radical uncertainty”, where it is not always possible to compute the expected utility of any action, and the probabilities of all future events cannot be identified, so no set of economist’s equations that describe people’s attempts to cope with that uncertainty.

I wonder if it was ever possible to calculate the probabilities of all future events, so raising some doubts about any such set of equations.  So what have bankers and monetary economists being doing all along?  Doing the best they can, and if we accept that banking systems have on balance been beneficial, then the policy focus should be on helping them do better in serving the public. This would suggest greater transparency, more public provision of data which will help bankers and their customers identify individual risk, and the prevention of structure which divorce individual risk from public risk (the problem of too big to fail.)

Instead, the concept of radical, or Knightian uncertainty, asserts that some risks can never be calculated, so is qualitatively different from the sorts of risk which it might be possible to understand better.  I can accept that a theoretical distinction can be made between some risks which is it possible to quantify – the result of tossing a coin, for example – and others, which are not, such as whether a potential client is actually an extraordinarily accomplished conman, or whether a technology which depends on cutting edge science – quantum computing, anyone? – is actually going to deliver. Put like that, I’d suggest bankers have always dealt with radical uncertainty, an impression supported when I google to look for examples of such uncertainty.

Explained: Knightian uncertainty

Mervyn King’s response to accepting the world as it is, with such uncomfortable uncertainty to be found not only in businesses as modelled by central banks, but the financial sector itself, is to give Central banks the authority to perform various calculations

he offers an elegant refinement of the concept of “narrow banking”, which seeks to ensure that all deposits are covered by safe, liquid assets. In his system, banks would decide how much of their asset base to lodge in advance at the central bank to be available for use as collateral. For each asset, the central bank would calculate a haircut to decide how much to lend against it.

What is more, it would not just apply to the current financial system, but to any other business which emerged performing an equivalent role

The system would apply to all financial intermediaries, including those now outside full banking regulation, to avoid the “boundary” problem whereby depositors evacuate in search of higher yielding outlets.

I struggle to see how this is elegant – unless the word carries with it the suggestion of intensely learned or technical discussion, with subtleties beyond the appreciation of those not trained as economists.  It doesn’t look that different, to me, to the system of risk weighting for bank capital.

What is rather clearer, however, is that somehow, in a world just admitted to be characterised by radical uncertainly, the central banks will someone be in a class apart from everyone else in the economy, and able to get their calculations right.

It is fairly clear this is nonsense.

Gene Gini

Alternatively, how much inequality would there be if all human lives were played out on an economically levelled playing field?

I know it’s never going to happen, not least because economic winners, whether thanks to luck or talent, like to tilt the odds for the next generation by giving their children the benefit of their experience while alive, and their money when they die.  In earlier ages they have also constructed ideological systems requiring access to certain roles – being High Priest of the Temple, Caliph, or allowed to vote in elections – to those with some arbitrary genetic inheritance, or born or living within some administrative region.

But there is a more modern ideology out there in favour of equal opportunities, which has had some success in getting measures implemented in public policy.

Chart of the Week: How two decades of globalization have changed the world

This chart derives from the work of Branko Milanovic – no fan of inequality, or neo-liberal cheer leader – but the implication is that globally inequality has declined thanks to globalisation, and inequality only appears to increase if seen through a nationalist prism.  The big picture, I’d say, is that on balance globalisation has levelled the economic playing field, and the developed world middle classes are now obliged to compete with equally talented people from emerging economies such as India and China.  Meanwhile members of elites, individually benefiting most from globalisation, very often buy assets in safer developed economies, and go to live there for at least some of the time, so boosting inequality as perceived in these countries.

That chart was just for the period up to 2008, so what happens now, post-crash, will be interesting. From a simple Marxist point of view, one would expect the development among the middle classes of the developed world of ideologies opposing globalisation.

What to read about financial bubbles and crashes?

So asks @TimHarford today, linking to a reading list proposed by Noah Smith

“Panics and Bubbles” reading list

itself a comment on another proposed reading list by Tony Yates,

If I was devising a panics and bubbles course…

which, while commended, is criticised for being too focused on ‘macro and money-based models, usually with rational expectations’. Continue reading What to read about financial bubbles and crashes?

Housing expenditure – overlooked and undertaxed

This is a follow up to an earlier post, Since housing is economically a luxury good, why not tax it more?, where the argument was based on a longitudinal study.  For this I am endebted to @RichGreenhill for pointing me to an ONS spreadsheet showing expenditure by income decile, which can be downloaded here. Continue reading Housing expenditure – overlooked and undertaxed

If it wasn’t for the Nimbies inbetween

More evidence that capitalism wouldn’t be so bad if it wasn’t for the Nimbies inbetween.

This graph from Matthew Rognlie’s paper disaggregating Piketty’s overall story of increasing returns to capital is well known (although not as well known as it should be …)

Deciphering the fall and rise in the net capital share

But today I saw this analysis of the impact of ‘closed access cities and states’ in the US

Housing, A Series: Part 77 – Housing is defining politics and the repercussions are dreadful

Kevin Erdman writes

It is frequently noted that American politics have become more angry and more bifurcated.  The housing supply problem has its fingers in many of our problems, and I believe it includes this.  Bear with me here.  This might become a long post, but I think the implications may be surprising.

so I’ll leave it there, but please do follow the link.

As for the title – it’s an obscure reference to the old Music Hall song which somehow seems relevant, but I’m not exactly sure how …