Weekly Roundup

If any of you are puzzled by the low inflation rate, consider that in 2005, the Fed convinced themselves that house prices weren't in a bubble because a hedonically adjusted housing price index showed little movement. Sort of like our consumer price indices.  From a Federal Reserve meeting that focused on home price appreciation circa 2005:

For example, over the four years from 2000 to 2004, the OFHEO index increased at a compound annual rate of 8.2 percent, while the constant-quality index increased at a 5.4 percent annual rate. As shown in exhibit 4, the current ratio of price over median family income derived from these two indexes is vastly different. If the OFHEO index is giving an accurate picture of what is happening to home prices, I think one could say with some confidence that prices have been bid up to unsustainable levels. However, if the constant-quality index is a better reflection of reality, home prices actually look somewhat low relative to median family income, particularly compared to the late 1970s. I believe the constant quality index provides a more accurate indication of what is happening to the price of a typical single-family home. In contrast, the OFHEO index is subject to upward biases that accumulate over time and distort ratios such as price-to-income and income-to-rents.

Clearly, that real estate adjustment wasn't helpful. Perhaps our current CPI is similarly biased? That is, if you used 1990's CPI methodology, inflation would be around 5%, and using 1980's, it would be 10% (see here). Were we wrong then, or now?
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Joseph Stiglitz has the following take-away from current events:

The big lesson that this crisis forcibly brought home—one we should have long known—is that economies are not necessarily efficient, stable or self-correcting.

Gee, that's what the latest data say? He has been saying that since he edited Samuelson's papers in 1970: markets are not efficient.  His life's work has been on that theme, as his Greenwald-Stiglitz theorem posits market failure as the norm, and his Sappington-Stiglitz theorem suggests that an ideal government could do better running an enterprise itself than it could through privatization.

I've never seen him seriously address government failure, other than the stupidity of IMF personnel, who he noted were rarely top students from Harvard, Oxford, or Princeton. If he thinks second-rate Yalies have negative productivity, what about your typical bureaucrat?

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Niall Ferguson's remark that Keynes's childlessness influenced his dismissive perspective on the long run created quite a firestorm, including a rather pathetic apology that will only encourage his enemies.  I remember reading a Keynes biography around 1988 and the author's theme was that homosexuality was the key to why Keynes thought 'outside the box.'  I personally doubt his homosexuality was so tenuously related to his economics it's hardly worth much thought, though perhaps it would rise to be worthy of an aside at a luncheon.

Diversity is supposedly this great thing because various minorities have different perspectives, why demographics have systematic predilections towards various parties and issues.  It seems a matter of pure logic to accept that if  different backgrounds can generate positive attributes, some could be negative, but if you ever say that you are a bigot.

I'm not anti-gay, and sympathize with their uniquely difficult coming out issues.  Yet, I'm not sympathetic to the idea that if one asserts any negative consequence of being gay, it's homophobia. I see this as an example of the Left showing its power and making sure that issues it categorizes as taboo stay taboo.
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The latest low volatility continue to show the benefits of low volatility this year.

Any way one would make a low vol portfolio--volatility, minimum variance algorithm, beta--generates the same results. See betaarbitrage.com for the data.

Asness, Frazzini and Pedersen have an important paper countering Ronnie Shah of Dimensional's assertion that low volatility is an industry result. It isn't.

Kevin Simler has some thoughts on the economics of status.  He basically argues it's very important and omnipresent. Never mentions the effect on risk premia, though I expect he wouldn't go that far.    That is, status seeking is accepted by economists at explaining parochial things, but somehow it disappears when it comes to addressing risk premiums, or welfare analysis.

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