by Marcos Lopez de Prado Wiley 2018 Overfitting is the curse of anyone who tries to use the past to predict the future. Forecasting is a delicate balance between two extremes: at one end we risk creating a model which is too simplistic to be of practical use, whilst at the other the model is… Continue reading..
by Craig Turnbull Palgrave Macmillan 2016 The reputation of actuaries in the UK has declined precipitously in the last three decades. Once they were among the most powerful decision makers in Britain’s financial sector, albeit semi-invisible. Today their role has been sharply curtailed by regulation and market trends, while their profession struggles to articulate its… Continue reading..
by Gillen D'Arcy Wood (Princeton University Press 2014) In my last year at Harvard, before I decided to drop out of the PhD program and pursue other things, I took a graduate meteorology class. The class teacher, Brian Farrell, was doing what other professors did and quietly sounded students out about taking him on as… Continue reading..
The authors are experts at crunching microeconomic data on American borrowing patterns and uncovering explanations for what they see. Their starting point is the remarkable statistic for US household debt, which doubled to $14 trillion between 2000 and 2007. This build up of debt was responsible for the ensuing havoc because of its effect on borrowers, Mian and Sufi argue.
To understand this argument, consider mortgage borrowers versus those who invest in their mortgages via bank deposits. The borrowers tend to be poorer than the investors, who have spare cash. As Mian and Sufi put it, a poor man’s loan is a rich man’s asset.
However, the risk distribution is highly asymmetric because mortgage holders have a senior claim on property while the borrowers’ equity claim is junior, and gets wiped out first. When US house prices fell from late 2006 onwards, losses were concentrated among the poorest segment of the population who had levered exposure, while the richest segment ““ the savers ““ were cushioned.
That explains why inequality increased during the Great Recession, but Mian and Sufi don’t stop there. Using economic analysis that reads like a detective story, they show how the evaporation of poor peoples’ wealth led to a collapse in spending, effectively causing the Great Recession itself. To show causality, they point out that spending initially fell the most in areas of biggest housing wealth declines.
by Timothy F Geithner (Random House 2014) If you had perfect foresight and were going to pick the best regulator or policymaker capable of dealing with the global financial crisis and its aftermath, whom would you choose? You'd probably want someone with a track record of dealing directly with crises, perhaps in emerging markets, and… Continue reading..
The In/Out Question: Why Britain should stay in the EU and fight to make it better by Hugo Dixon (Kindle Single, 130pp) European Spring: Why our Economies and Politics are in a Mess and How to Put Them Right by Philippe Legrain (Amazon print-on-demand, 448pp) As the May elections to its parliament showed, the… Continue reading..