by Nate Silver
I hope to return all these favors someday. I will start by buying the first beer for anybody on this list, and the first three for anybody who should have been, but isn’t.
—Nate Silver
Brooklyn, NY
NOTES
INTRODUCTION
1. The Industrial Revolution is variously described as starting anywhere from the mid-eighteenth to the early nineteenth centuries. I choose the year 1775 somewhat arbitrarily as it coincides with the invention of James Watt’s steam engine and because it is a nice round number.
2. Steven Pinker, The Better Angels of Our Nature: Why Violence Has Declined (New York: Viking, Kindle edition, 2011); locations 3279–3282.
3. Much of the manuscript production took place at monasteries. Belgium often had among the highest rates of manuscript production per capita because of its abundant monasteries. Relieved of their need to produce manuscripts, a few of these monasteries instead began to shift their focus to producing their wonderful Trappist beers. So another of those unintended consequences: Gutenberg’s invention, however indirectly, may be at least a little bit responsible for improving the quality of the world’s beer.
4. Albania De la Mare, Vespasiano da Bisticci Historian and Bookseller (London: London University, 2007), p. 207.
5. Elizabeth Eisenstein, The Printing Revolution in Early Modern Europe (Cambridge, England: Cambridge University Press, 1993), p. 16.
6.
That which has been is what will be,
That which is done is what will be done,
And there is nothing new under the sun.
Is there anything of which it may be said,
“See, this is new”?
It has already been in ancient times before us.
There is no remembrance of former things,
Nor will there be any remembrance of things that are to come
By those who will come after.
—Ecclesiastes 1:9-11 (New King James translation) http://www.biblegateway.com/passage/?search=Ecclesiastes+1&version=NKJV
7. De la Mare, Vespasiano da Bisticci Historian and Bookseller, p. 207.
8. Eisenstein, The Printing Revolution in Early Modern Europe, p. 17.
9. Eltjo Burnigh and Jan Luiten Van Zanden, “Charting the ‘Rise of the West’: Manuscripts and Printed Books in Europe, a Long-Term Perspective from the Sixth Through Eighteenth Centuries,” Journal of Economic History, vol. 69, issue 2; June 2009.
10. “Recognizing and Naming America,” The Library of Congress, Washington, DC. http://www.loc.gov/rr/geogmap/waldexh.html.
11. Eisenstein, The Printing Revolution in Early Modern Europe, p. 209.
12. Louis Edward Inglebart, Press Freedoms: A Descriptive Calendar of Concepts, Interpretations, Events, and Court Actions, from 4000 B.C. to the Present (Westport, CT: Greenwood Publishing, 1987).
13. Renato Rosadlo, “The Cultural Impact of the Printed Word: A Review Article,” in Andrew Shyrock, ed. Comparative Studies in Society and History, vol. 23, 1981, pp. 508–13. http://journals.cambridge.org/action/displayJournal?jid=CSS.
14. Eisenstein, The Printing Revolution in Early Modern Europe, p. 168.
15. Arthur Geoffrey Dickens, Reformation and Society in Sixteenth Century Europe (New York: Harcourt, Brace & World, 1970), p. 51. http://www.goodreads.com/book/show/3286085-reformation-and-society-in-sixteenth-century-europe.
16. Pinker, The Better Angels of Our Nature, Kindle locations 3279–3282.
17. “War and Violence on Decline in Modern Times,” National Public Radio (transcript), December 7, 2011.http://www.npr.org/2011/12/07/143285836/war-and-violence-on-the-decline-in-modern-times.
18. Simon Augustine Blackmore, The Riddles of Hamlet (Stratford, England: Stratford and Company, 1917). http://www.shakespeare-online.com/plays/hamlet/divineprovidence.html.
19.
Whose end is purposed by the mighty gods?
Yet Caesar shall go forth, for these predictions
Are to the world in general as to Caesar.
—William Shakespeare, The Tragedy of Julius Caesar, Act II, Scene II; ll. 27–29.
20. Douglas Harper, Online Etymology Dictionary.http://www.etymonline.com/index.php?term=forecast.
21. www.etymonline.com/index.php?term=predict.
22. One representative seventeenth-century text used the term forecast in this way:
Men in all trades consider . . . where ’tis best to buy, andEndnote Extract FR what things are likeliest to sell, and forecast in their own minds, what ways and methods are likeliest to make them thrive in their several occupations. John Kettlewell, Five Discourses on So Many Very Important Points of Practical Religion (A. and J. Churchill, 1696); http://books.google.com/books?id=ADo3AAAAMAAJ&dq
23. Not least because Calvinists and Protestants believed in predestination.
24. Max Weber, The Protestant Ethic and the Spirit of Capitalism (Abingdon, Oxon, England: Routledge Classics, 2001).
25. Eisenstein, The Printing Revolution in Early Modern Europe, p. 269.
26. J. Bradford DeLong, Estimating World GDP, One Million B.C.—Present (Berkeley, CA: University of California Press, 1988). http://econ161.berkeley.edu/TCEH/1998_Draft/World_GDP/Estimating_World_GDP.html.
27. Figure 1-2 is drawn from DeLong’s estimates, although converted to 2010 U.S. dollars rather than 1990 U.S. dollars as per his original.
28. Google Books Ngram Viewer. http://books.google.com/ngrams/graph?content=information+age%2C+computer+age&year_start=1800&year_end=2000&corpus=0&smoothing=3.
29. Susan Hough, Predicting the Unpredictable: The Tumultuous Science of Earthquake Prediction (Princeton: Princeton University Press, Kindle edition, 2009), locations 862–869.
30. Robert M. Solow, “We’d Better Watch Out,” New York Times Book Review, July 12, 1987. http://www.standupeconomist.com/pdf/misc/solow-computer-productivity.pdf.
31. “U.S. Business Cycle Expansions and Contractions,” National Bureau of Economic Research, http://www.nber.org/cycles.html.
32. Although, as we explain in this book, economic statistics are much rougher than people realize.
33. Figures are adjusted to 2005 U.S. dollars.
34. I use the number of patent applications rather than patent grants for this metric because patent grants can be slowed by bureaucratic backlog. Among the only real bipartisan accomplishments of the 112th Congress was the passage of the America Invents Act in September 2011, which was passed by a an 89–9 majority in the Senate and sped patent applications.
35. For figures on U.S. research and development spending, see “U.S. and International Research and Development: Funds and Alliances,” National Science Foundation. http://www.nsf.gov/statistics/seind02/c4/c4s4.htm.
For patent applications, see “U.S. Patent Statistics Chart Calendar Years 1963–2011,” U.S. Patent and Trade Office. http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.htm.
Note that the patent applications statistics in figure I-3 include those from U.S.-based inventors only as the U.S. Patent and Trade Office also processes many patent applications that originate from abroad.
36. “What Is Big Data?,” IBM. http://www-01.ibm.com/software/data/bigdata/.
37. Chris Anderson, “The End of Theory: The Data Deluge Makes the Scientific Method Obsolete,” Wired magazine, June 23, 2008. http://www.wired.com/science/discoveries/magazine/16-07/pb_theory.
38. Nate Silver, “Models Based on ‘Fundamentals’ Have Failed at Predicting Presidential Elections,” FiveThirtyEight, New York Times, March 26, 2012. http://fivethirtyeight.blogs.nytimes.com/2012/03/26/models-based-on-fundamentals-have-failed-at-predicting-presidential-elections/.
39. John P. A. Ioannidis, “Why Most Published Research Findings Are False,” PLOS Medicine, 2, 8 (August 2005), e124. http://www.plosmedicine.org/article/info:doi/10.1371/journal.pmed.0020124.
40. Brian Owens, “Reliability of ‘New Drug Target’ Claims Called into Question,” NewsBlog, Nature, September 5, 2011. http://blogs.nature.com/
news/2011/09/reliability_of_new_drug_target.html.
41. This estimate is from Robert Birge of Syracuse University. http://www.sizes.com/people/brain.htm.
42. Alvin Toffler, Future Shock (New York: Bantam Books, 1990), p. 362.
43. “The Polarization of the Congressional Parties,” VoteView.com. http://voteview.com/political_polarization.asp.
44. Dan M. Kahan, et al., “The Polarizing Impact of Science Literacy and Numeracy on Perceived Climate Change Risks,” Nature Climate Change, May 27, 2012. http://www.nature.com/nclimate/journal/vaop/ncurrent/full/nclimate1547.html.
45. Karl Popper, The Logic of Scientific Discovery (Abingdon, Oxon, England: Routledge Classics, 2007), p. 10.
CHAPTER 1: A CATASTROPHIC FAILURE OF PREDICTION
1. “S&P/Case-Shiller Home Price Index: Las Vegas, NV.” http://ycharts.com/indicators/case_shiller_home_price_index_las_vegas.
2. Jeffrey M. Jones, “Trust in Government Remains Low,” Gallup.com, September 18, 2008. http://www.gallup.com/poll/110458/trust-government-remains-low.aspx.
3. Although the polling on the bailout bills was somewhat ambiguous at the time they were passed, later statistical analyses suggested that members of Congress who had voted for the bailout were more likely to lose their seats. See for example: Nate Silver, “Health Care and Bailout Votes May Have Hurt Democrats,” FiveThirtyEight, New York Times, November 16, 2011. http://fivethirtyeight.blogs.nytimes.com/2010/11/16/health-care-bailout-votes-may-have-hurt-democrats/.
4. As measured by comparison of actual to potential GDP. As of the fourth quarter of 2011, the output gap was about $778 billion, or slightly more than $2,500 per U.S. citizen. “Real Potential Gross Domestic Product,” Congressional Budget Office, United States Congress. http://research.stlouisfed.org/fred2/data/GDPPOT.txt.
5. More technically, S&P’s ratings consider only the likelihood of a default, in any amount, while the two other companies also consider a default’s potential magnitude.
6. Anna Katherine Barnett-Hart, “The Story of the CDO Market Meltdown: An Empirical Analysis,” thesis, Harvard University, p. 113. http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf.
7. Diane Vazza, Nicholas Kraemer and Evan Gunter, “2010 Annual U.S. Corporate Default Study and Rating Transitions,” Standard & Poor’s, March 30, 2011. http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245302234800.
8. S&P downgraded U.S. Treasuries to a AA-plus rating in 2011.
9. Mark Adelson, “Default, Transition, and Recovery: A Global Cross-Asset Report Card of Ratings Performance in Times of Stress,” Standard & Poor’s, June 8, 2010. http://www.standardandpoors.com/products-services/articles/en/us/?assetID=1245214438884.
10. Barnett-Hart, “The Story of the CDO Market Meltdown: An Empirical Analysis.”
11. Most of the CDOs that did not default outright are nevertheless now close to worthless; more than 90 percent of the mortgage-backed securities issued during 2006 and 2007 have since been downgraded to below investment-grade (BlackRock Solutions, as of May 7, 2010; per a presentation provided to author by Anil Kashyap, University of Chicago).
12. “Testimony of Deven Sharma, President of Standard & Poor’s, Before the Committee on Oversight and Government Reform,” United States House of Representatives, October 22, 2008. http://oversight-archive.waxman.house.gov/documents/20081022125052.pdf.
13. This remains S&P’s first line of defense today. When I contacted an S&P spokeswoman, Catherine Mathis, in September 2011, asking for an interview on their ratings of mortgage-backed debt, she responded in nearly identical language. “We were not alone, which you should point out,” she wrote in an e-mail. “Many homeowners, financial institutions, policy makers, and investors did not expect the U.S. housing market to decline as quickly or as far as it did.” S&P declined my request for a full interview. For additional evidence on this point, see Kristopher S. Gerardi, Andreas Lehnert, Shane M. Sherlund and Paul S. Willen, “Making Sense of the Subprime Crisis,” Public Policy Discussion Papers No. 09-1, Federal Reserve Bank of Boston, December 22, 2008. http://www.bos.frb.org/economic/ppdp/2009/ppdp0901.htm.
14. Robert J. Shiller, Irrational Exuberance, (Princeton, NJ: Princeton University Press, 2000).
15. Dean Baker, “The Run-Up in Home Prices: Is It Real or Is It Another Bubble?” Center for Economic and Policy Research, August. 2002. http://www.cepr.net/index.php/publications/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble/.
16. “In Come the Waves,” The Economist, June 16, 2005. http://www.economist.com/node/4079027?story_id=4079027.
17. Paul Krugman, “That Hissing Sound,” New York Times, August 8, 2005. http://www.nytimes.com/2005/08/08/opinion/08krugman.html.
18. Google “Insights for Search” beta; “housing bubble” (worldwide). http://www.google.com/insights/search/#q=housing%20bubble&cmpt=q.
19. Google “Insights for Search” beta; “housing bubble” (United States). http://www.google.com/insights/search/#q=housing+bubble&cmpt=q&geo=US.
20. Newslibrary.com search; United States sources only.
21. The volume of discussion in the news media forms a parallel to that of the stock market bubble in the late 1990s, references to which increased tenfold in news accounts between 1994 and 1999, peaking just the year before markets crashed.
22. Janet Morrissey, “A Corporate Sleuth Tries the Credit Rating Field,” New York Times, February 26, 2011. http://www.nytimes.com/2011/02/27/business/27kroll.html?pagewanted=all.
23. Alex Veiga, “U.S. Foreclosure Rates Double,” Associated Press, November 1, 2007. http://www.azcentral.com/realestate/articles/1101biz-foreclosures01-ON.html.
24. Elliot Blair Smith, “‘Race to Bottom’ at Moody’s, S&P Secured Subprime’s Boom, Bust,” Bloomberg, September 25, 2008. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ax3vfya_Vtdo.
25. Hedge funds and other sophisticated investors generally do not have these requirements: they will do their own due diligence on a security, happy to bet against a ratings agency’s forecast when warranted (as it often is). But public pension funds and other institutional investors like college endowments are stuck. Jane’s retirement savings and Johnny’s college scholarship are dependent on the accuracy of the ratings agencies, while a hedge fund leaves itself the flexibility to make the big short.
26. Per interview with Jules Kroll.
27. Another catch-22 is that historically an NRSRO was required to be in business for three years before it could start rating securities. But without any ratings revenues, there was no way for the business to get off the ground.
28. Moody’s is the only one of the three major agencies that does most of its business through its credit ratings alone. S&P, by contrast, is a part of McGraw-Hill, a publishing company, making its financials harder to scrutinize.
29. Chicago Booth School, “Credit Rating Agencies and the Crisis.”
30. Jonathan Katz, Emanuel Salinas and Consstantinos Stephanou, “Credit Rating Agencies: No Easy Regulatory Solutions,” The World Bank Group’s “Crisis Response,” Note Number 8, October 2009. http://rru.worldbank.org/documents/CrisisResponse/Note8.pdf.
31. “Moody’s Corporation Financials (NYSE:MCO),” Google Finance. http://www.google.com/finance?q=NYSE:MCO&fstype=ii.
32. Sam Jones, “Alphaville: Rating Cows,” Financial Times, October 23, 2008. http://ftalphaville.ft.com/blog/2008/10/23/17359/rating-cows/.
33. Ibid.
34. “New CDO Evaluator Version 2.3 Masters ‘CDO-Squared’ Analysis; Increases Transparency in Market,” Standard & Poor’s press release, May 6, 2004. http://www.alacrastore.com/research/s-and-p-credit-research-New_CDO_Evaluator_Version_2_3_Masters_CDO_Squared_Analysis_Increases_Transparency_in_Market-443234.
35. Efraim Benmelech and Jennifer Dlugosz, “The Alchemy of CDO Credit Ratings,” Journal of Monetary Economics 56; April 2009. http://www.economics.harvard.edu/faculty/benmelech/files/Alchemy.pdf.
36. S&
P later conducted another simulation under a yet-more-stressful scenario—a housing decline severe enough to trigger a recession—and came to the same conclusion. The results were at first made public but have since been deleted from S&P’s Web site.
37. Douglas Adams, Mostly Harmless (New York: Del Rey, 2000).
38. Benmelech and Dlugosz, “The Alchemy of CDO Credit Ratings.”
39. Barnett-Hart, “The Story of the CDO Market Meltdown: An Empirical Analysis.”
40. The 20 percent chance of default refers to the rate over a five-year period.
41. And it can get worse than that. These securities can also be combined into derivatives of one another, which are even more highly leveraged. For instance, five Alpha Pools of mortgage debt could be combined into a Super Alpha Pool, which would pay you out unless all five of the underlying Alpha Pools defaulted. The odds of this happening are just one in 336 nonillion (a one followed by thirty zeroes) if the mortgages are perfectly uncorrelated with one another—but 1 in 20 if they are perfectly correlated, meaning that it is leveraged by a multiple of 16,777,215,999,999,900,000,000,000,000,000.
42. Ingo Fender and John Kiff, “CDO Rating Methodology: Some Thoughts on Model Risk and Its Implications,” BIS Working Papers No. 163, November 2004.
43. Statement of Gary Witt, Former Managing Director, Moody’s Investment Service, to Fiscal Crisis Inquiry Commission; June 2, 2010. http://fcic-static.law.stanford.edu/cdn_media/fcic-testimony/2010-0602-Witt.pdf.
44. Financial Crisis Inquiry Commission, Financial Crisis Inquiry Commission Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (U.S. Government Printing Office, 2011), p. 121. http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.