Marginal Revolution

Bottom line

What's really going on? What's going on is that perhaps $6T of mortgages with a duration of a decade that had been priced at a 1% per year chance of default (with a 1/3 value haircut in the event of default) are now being priced at a 4% per year chance of default. That's a loss of $600B in market value--and if your share of that $600B is greater than your capital, or is thought to be greater than your capital and so impedes your operations, you are gone.

But truth be told it is a zero-sum game--not a real destruction of wealth. The real rates at which cash flows of constant risk are being discounted haven't changed much: there hasn't been a big redistribution of wealth between the present and the future. What has happened was that a bunch of people believed that the default risk was 1% when it was actually 2% and reported gains of $200B (of which they took 2-and-20 on the hedge fund slice, perhaps $20B, for themselves), and that now a bunch of people believe that the default risk is 4% when it is actually still 2% (unless, of course, the assembled central banks of the world fail and unemployment heads rapidly upward). So in aggregate hedge fund partners have gained $20B, hedge fund investors have paid$20B to their money managers for the privilege of losing another $200B that they never had, and there are $400B of transitory paper losses that will turn into real losses for those overleveraged and caught by the credit crunch and so forced into fire sales, and into real gains for those with steel nerves and liquidity.

Unless, of course, Ben Bernanke and company fail to contain the crisis, and we wind up in a severe depression. But then we would have much, much bigger things to worry about than $600B of missing paper mortgage value. 4 years x 3 percent excess unemployment x Okun's Law coefficient of 2 x $13T economy means a $3.1T cumulative Okun gap in lost real wages, salaries, and profits. That's the thing to worry about.

That's Brad DeLong, here is the link.

Retribution, by Max Hastings

In the course of the war, Germany lost 781 submarines, Japan 128.  By contrast, the Japanese navy sank only 41 American submarines, 18 percent of those which saw combat duty.  Six more were lost accidentally on Pacific patrols.  Even these relatively modest casualties meant that 22 percent of all American sailors who experienced submarine operations perished -- 375 officers and 3,131 enlisted men -- the highest loss of any branch of the wartime U.S. armed forces.

The subtitle of this book is The Battle for Japan, 1944-45.  Have you ever wondered what kind of peace the Japanese expected (before losing), how the battle for the Philippines unfolded, why the Japanese treated their POWs so badly, or what it is like to be in a submarine surrounded by falling depth charges?

Every year there are five or six books that just wow me.  This is one of them.  It is as gripping as a first-rate novel and I learned something on almost every page.  Here is one review.  You can buy it here.

How to choose a mechanic

Eamon McGinn, a loyal MR reader, asks:

I was wondering if you were willing to share your ideas for picking a mechanic. I had a look through the archives and couldn't find anything.

Considering a choice between a garage run by an individual mechanic and one run by a nationwide company:

The individual run garage stands to lose more if too many repairs are done (causing me not to return in the future) but he has a temptation to increase the amount of repairs as he gets most of the profits (as opposed to the mechanic working at a company run garage who, ipresume, gets a wage). I feel the latter effect will dominate as I can't really tell if too many repairs are done.

This would indicate that the company run garage is the one to go for. However the lack of incentive to over-charge also implies a lack of incentive to do a good job.

This is a tough dilemma, though I am not sure if individual vs. company is the trade-off I am worried about.  I would expect individual mechanics in large repair companies to have plenty of incentives to overcharge you (does anyone know how these people are compensated?)

I am pleased that, at 46 years old, I've never had to use a mechanic in the traditional sense.  I've never needed anything other than standard maintenance.  So my first piece of advice is to always buy a Toyota or Honda.  My second piece of advice is to support free trade and, if I dare say so, to support a reasonable level of immigration.  I suspect that a mechanic who is an immigrant, indeed an illegal one, is less likely to rip you off.  No proof, that's just my best educated guess, based on the idea that people who are afraid of losing a big surplus are less likely to invite scrutiny and the irritation of others. 

As for the question itself, lack of experience, in this case, also implies lack of expertise.  Readers, do you have good suggestions for Eamon?