As I mentioned, one of several reasons I was happy about Daniel Kahneman’s Nobel Prize was that he works in the same subfield of economics as me. I’m even happier now because I got a mention in the advance citation. Only a little one and only in a footnote, but it’s my brush with fame! Footnote 11 says:

“Cumulative prospect theory combines prospect theory with a cumulative approach developed by Quiggin (1982), Schmeidler (1989) and Luce and Fishburn (1991).”

You can read the while thing here (PDF download required)

Michael Kinsley shares my view about the confusion of US policy on Iraq.

“Ambiguity has its place in dealings among nations, and so does a bit of studied irrationality. Sending mixed signals and leaving the enemy uncertain what you might do next are valid tactics. But the cloud of confusion that surrounds Bush’s Iraq policy is not tactical. It’s the real thing.”

I’ve been blogging on for a while about the dangers (low probability, but some really nasty possible outcomes) posed by derivatives markets, but I’ve never felt entirely satisfied with the explanations I’ve given. Jim Jubak at MSN Money gives an excellent beginners guide.
I’d observe though that it’s not as reassuring as you might think that 85 per cent of derivatives represent interest hedges, which are relatively safe. The other 15 per cent still accounts for around $8 trillion, and JP Morgans alone has about half of this.

I don’t think I’ve seen a better time in this little corner of the blogging ecosystem (or any corner, for that matter) than right now. Rob Corr, Tim Dunlop, Ken Parish, Jason Soon and Scott Wickstein are all in fine form, with sharply argued and well-reasoned posts on a wide range of topics. There’s more good stuff in the comment threads. All in all, this is the kind of thing I hoped for when the Internet first came along in the 1980s. It was briefly and partially realised in the early days of Usenet, but blogging provides a far superior medium for the exchange of ideas.

Writing for Salon, Andrew Sullivan says:

“At some point, given the increasing desperation of the antiwar polemicists, the code word “imperialism” had to come up. And so it has. In what is to me a deeply clarifying alliance, the hard right and the hard left agree on this: The war on Iraq is an imperialist war. ”

Given Sullivan’s prominence in the warblogging word, it’s hard to believe he’s unaware that the issue of imperialism is being debated by people other than antiwar polemicists. Here, for example, Armed and Dangerous blogger Eric Raymond makes the case for US imperialism, essentially based on the arguments of Stephen den Beste. And here’s a critical response from John Hawkins at Right Wing News.

Outside the blogworld, people like Robert Kagan are making very similar arguments. The idea that the US has a ‘mission civilatrice’ or is taking up the ‘White Man’s burden’ (code phrases from French and British justifications of 19th century imperialism) can easily be read into the statements of the Bush Administration, particularly those of people like Richard Perle and Paul Wolfowitz.

Given the unwillingness of the Administration to state any clear war aims, and the obvious distaste of the Pentagon for long-term commitments, the question of whether the US is moving to an imperialist stance remains open. Equally, as the posts above make clear, there are legitimate arguments for and against imperialism. But Sullivan is being silly, dishonest or both when he refers to an ‘imperialism canard’, and suggests that this is an invention of anti-war groups.

Every culture has its superstitions. One of the great American superstitions is belief in ‘Lie Detectors’. William Safire presents what should be a final demolition of this absurd idea.

The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to”

Daniel Kahneman
USA and Israel

“for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty”

Vernon L. Smith
USA

“for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms”

Both winners are worthy, but I’m particularly pleased about Kahneman, for a number of reasons. His work on a generalisation of expected utility called prospect theory (like much of his stuff, a collaboration with the late Amos Tversky) is very close to my own area of research, and it’s always good for a field to have a Nobel (this is actually the second in this area, the first having gone to Maurice Allais). Also, he’s basically a psychologist rather than an economist and it’s good to see the Prize going outside the inner circle of economics. Finally, he’s very good and a nice guy.

According to Sir Alan Greenspan credit derivatives have reduced the risk that (individual) banks will fail in times of recession like the present. He says

“Improved risk management and technology have also facilitated, of course, the growth of markets for securitized assets and the emergence of entirely new financial instruments–such as credit default swaps and consolidated debt obligations. These instruments have been used to disperse risk to those willing, and presumably able, to bear it. Indeed, credit decisions as a result are often made contingent on the ability to lay off significant parts of the risk. Such dispersal of risk has contributed greatly to the ability of banks–indeed of the financial system–to weather recent stresses. More generally, the development of these instruments and techniques have led to greater credit availability, to a more efficient allocation of risk and resources, and to stronger financial markets. (emphasis added)”

But the safety of individual institutions has been purchased at the cost of increasing the risk of systemic collapse. What if the presumption that the holders of credit derivatives are able to bear the risk turns out to be wrong?

After reading Bush’s speech, and theviews of various bloggers, including those who commented on my last Iraq post, I remain mystified about the US Administration’s strategy and objectives, if indeed there is a coherent strategy and well-defined objectives.
The majority view, and the one that seemed clearly justified before Bush’s appeal to the UN, was that the Administration was set on invading Iraq in order to get rid of Saddam, and that it was happy to use whichever rationale was most convenient (links to Al-Qaeda, weapons of mass destruction, nastiness of the regime, threat to neighbours etc). On this view, the appeal to the UN was just a sop to Blair, Powell and Kofi Annan. Since Bush’s speech mentioned all of the rationales listed above it fits into the picture.
I find this analysis highly unsatisfactory. The effect of the UN appeal was to push the WMD issue to centre stage, and the same was true of the most recent address, particularly as it was reported outside the US. For example, the one sentence grab from The Economist is “America will strike if the Iraqi leader fails to disarm.”
But, since the centrality of WMD is tied up inextricably with the Security Council resolutions it’s going to be very hard to get a plausible casus belli out of this if Saddam complies with the resolutions at least to the point where the Security Council cannot be persuaded to declare him in breach of them. This is even more true if the Security Council passes a new, tougher, resolution and Saddam complies with that.
One the ‘sop to Blair, Powell and Kofi Annan’ theory none of this matters. The US will just go ahead anyway, either declaring the UN resolution inadequate, unilaterally determining that Saddam has breached it or just ignoring the UN altogether.
The problem is that the resort to the UN has incurred substantial costs. In particular, Blair has taken big risks in arguing the case for UN-backed action against Saddam. If the US changes tack now, he will be left to twist in the wind. Not only will he have no chance of delivering active British involvement in an invasion but he might be pushed towards outright condemnation and the withdrawal of existing British forces. The loss of America’s only reliable ally in Europe will be a big price to pay for Saddam’s scalp.
The same is true of a number of Arab leaders who took substantial risks in persuading Saddam to readmit inspectors. If there was never any intention of going ahead with inspections, why get them to put their heads on the block in this way. It is hard to see any of them giving any co-operation to a unilateral strike now, although they might have done so quietly under other circumstances.
In one sense, this is not critical. The US can no doubt fight and win a war without any allies. But if condemnation extends to the refusal of overflight rights and the use of bases, the war will be much more costly and difficult. Moreover, the greater the international hostility, the greater the Administration’s domestic vulnerability if something goes wrong, and history suggests that something usually does go wrong.
In summary, if the Administration never meant to take the UN process seriously, it was a big mistake to get involved in it at all.
I see a couple of alternative explanations.
One is that, in appealing to the UN, the Administration was gambling that Saddam would refuse to admit inspectors or, alternatively, that it could push through a new resolution that Saddam would be bound to reject. If so, this gamble does not look promising at present.
A second is that there is in fact a Plan B, namely, to get the best resolution possible out of the Security Council and, if Saddam accepts it, to declare victory. On this view, regime change is an ‘ambit claim’ which can be dropped if necessary, at least until Saddam can be caught cheating.
I lean to yet another view, namely that neither Bush himself nor the Administration as a whole has a coherent strategy. Some factions are bent on war while others would prefer Plan B and still others are waiting to see what turns up.
In summary, as I’ve said before, if Bush is pursuing a strategy to force the UN into pushing hard for unfettered weapons inspections and to force Saddam to accept them, he’s doing it with a skill that would do credit to Machiavelli. If, as most commentators assume, he’s pushing towards an inevitable war, then his strategy has been about the worst possible. He would have done far better to stick to the Al-Qaeda link, however weak the evidence.

Note:Thomas Friedman takes much the same view as me.

Tim Dunlop gives a running account of the Washington shootings, from the viewpoint of a resident, which is the best thing I’ve seen on this awful topic.