Saturday, December 26, 2009

How working on Wall Street made me an Anarchist

Today, the lucid wonder that is Interfluidity linked to a Milton Friedman essay, which I found interesting.

... there is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Milton, if I may call him that, is always a joy to read because he is a sort of reductio ad absurdum of the libertarian position that once held me in its near total sway.  The essay succinctly summarizes the basic insight that third party managers (eg. corporate executives employed by a businesses owners) who declaim the "social responsibility of business" are really just spending other people's money, and without even the semblance of pseudo-democracy that serves as the prelude to this same expropriation by our government. 

I still like this perspective, and I think it has something to offer anyone willing to take it on for a moment, even though, as I say, I have moved away from it.  The reason for my change of stance in not, however, because I've gone all soft and bleeding heart.  On the contrary, I feel like I've departed from Milton only by taking the best part of his philosophy -- the reliance on freedom as a principle that can unify your view of politics -- to its logical conclusion.  This turns out to look a lot different than his stopping point, and suddenly lets his ideas communicate with anarchists like Chomsky, and even, strictly for illustrative purposes you understand, allows you to conceive of what it would mean to be a "free-market Marxist".  But for all that it has evolved, I still trace my thinking back to the moment when I saw how the question of freedom cuts right through the political spectrum and for the first time organizes your views into something that can properly be called a political philosophy.  Of course, it was actually Nozick, not Milt, that first made me see this, but whatever.  In either case, politics is transformed from a scattering of unrelated opinions/superstitions pertaining to various issues, into the application of a single principle under varied conditions -- how can we free ourselves?

What has changed since then?  Basically, I've just felt the need to expand the definition of freedom; passing from rebellious youth to creaking maturity has made me aware that being able to do what you want goes beyond simply not being told what to do.  From freedom from to freedom to.  I'll certainly not disagree with anyone who considers this extension obvious, but that doesn't make it any less profound.  It is not simply a matter of adding more freedom, as if freedom from were a proper subset of freedom to; while there is always a danger that utopian ideology wields the hammer of oppression, it's also evident that our age suffers from an overly narrow version of freedom from that can end up cutting us off from our ability to do more things, and in fact can even come back to erode the very walls we use to hold at bay all those things we are free from.

All of which brings us to the razor-sharp quote with which we began.  People should be free from the exploitation that occurs when someone else spends their resources without their consent.  Hence business as such has no social responsibility and should be uniquely concerned with profit.  So long as they stay within the rules and compete without deception or fraud, these joint ventures, as it were, are nothing but the voluntary and temporary pooling of individual resources, and it is as morally unconscionable for them to arbitrarily confiscate the resources of individuals by failing to maximize profits, as it would be for any of these individual members to expropriate the goods of another.  Freedom from coercion.

The political principle that underlies the market mechanism is unanimity. In an ideal free market resting on private property, no individual can coerce any other, all cooperation is voluntary, all parties to such cooperation benefit or they need not participate. There are not values, no "social" responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form.

Loyal readers will be absolutely groaning with the obviousness of where I'm going with all this, so I'll drop the coy shit now.

Who writes the rules that the businesses play within?  We admit the necessity of having rules.  The rules have to be uniform and standardized for the competition to be free and open.  Somebody has to write the rules. Somebody has to define the game we're playing.  So, how do the rules get written?  With just that one question, the entire libertarian apparatus unravels.  Because it's evident that businesses seeking to maximize their profit will find themselves morally obligated to extend their competition in an effort to write the rules in their favor.  And this feedback loop is entirely within the rules of the game, involves free and open competition in a political market and no more than customary quantities of deception and fraud.  In other words this problem is an inevitable and predictable outcome of a libertarian philosophy, and not a question of particular petty corruption  and dishonesty.  Eventually, strictly profit seeking enterprise will always seek it by capturing the government.  The logical conclusion of this freedom from coercion is its own self-destruction. 

The self-destruction of the libertarian position does not mean we should give up on the principle of freedom.  On the contrary, broadening this principle to include the concept of positive freedom and to safeguard our ability to engage in these games of voluntary cooperation to begin with can serve to reinforce the basic libertarian conclusion that the best way to stay free is to keep the government small.  It's true that you could argue in the opposite direction.  Consider the way people have painted the alternatives since our latest financial crisis -- government vs. business, profit and innovation vs stability and control.  The thinking is that big government will put a leash on the profit aspirations of big business by adding more rules to the game and insisting that all that panting and straining drag us in the right direction. 

But this doesn't turn out to be a very coherent response if you agree with my diagnosis of the problem.  How can adding more rules make this system more stable?  The instability arises from precisely the way the players are able to write new rules.  How can compounding this effect ultimately lead to a better outcome?  Even if, today, in a fit of reformist zeal, you manage to add rules that restrain business and channel its energies in the desired direction, you will still have tomorrow and the next day to worry about.  In fact, you can't even be sure that the new rules you write now are not precisely those that certain businesses wanted written to begin with.  Making the problem bigger in order to solve it might work, but does it seem like the most sensible direction to pursue?  Why give this feedback loop more material to consume?  Why imagine that it will somehow stop itself?

Nevertheless, I think most people instinctively go in the direction of bigger government and more rules because it is something they understand.  Control.  Domination of the future.  Planning and centralization and subsequent re-delegation to those trusted organs charged with maintaining the forward momentum that the great technocratic brain has calculated for our social organism.  Everybody is pretty comfortable with the wizard, and nobody really wants to know exactly what's behind the curtain.

And anyhow, the other direction is marked hic sunt draconesLess government?  More freedom?  How are we going to solve our problems?  How are we going to get what we want?  How are we even going to know what will happen?  Do you know who's in charge here?  It's just Anarchy.  The mind recoils.

So I became an anarchist.  And I've been becoming one ever since.

Tuesday, December 22, 2009

Jânio Quadros -- Strangest Populist Ever

The English wikipedia entry simply doesn't do this guy justice, so here's the spanish version.  Lord knows what they say in portugese.

La carrera meteórica de Quadros puede ser atribuida a su retorica populista y su comportamiento extravagante. Es electo Alcalde de la ciudad de São Paulo en 1953 y gobernador del mismo estado en 1955. Resulta electo ganador por mayoría absoluta de la presidencia de Brasil en las elecciones de 1960, tomando posesión el 31 de enero de 1961.

Quadros recibió la presidencia de su antecesor, Juscelino Kubitschek, en la recién inaugurada ciudad de Brasilia el 31 de enero de 1961. Luego comenzó a tener actitudes extrañas: se comunicaba con sus ministros por medio de esquelas; prohibió el uso de bikinis en los concursos de belleza; prohibió la riña de gallos; intentó poner reglamentos a los juegos de baraja. Intentando una aproximación con los países comunistas, Janio recibió y condecoró a Ernesto Che Guevara con la Orden de la Cruz del Sur (Cruzeiro do Sul), la más alta distinción honorífica del gobierno brasileño.

Carlos Lacerda, gobernador del extinto estado de Guanabara (formado por la ciudad de Río de Janeiro, después que esta dejó de ser la capital federal de Brasil) que hubiera apoyado a Janio, empezó a oponerse a él. En una proclama del 24 de agosto de 1961, Lacerda denunció lo que llamó un plan de Janio para "intentar un golpe de estado" y convertirse en dictador. El día siguiente, 25 de agosto, Jânio anunció su renuncia, lo que prontamente fue aceptado por el Congreso Nacional Brasileño. Se cree que Jânio deseaba que el Congreso no aceptase su renuncia, y le diese poderes especiales para gobernar el país, lo que constituiría un "autogolpe".

There are some basic rules in modern politics -- never start a land war in Asia, never argue with your dentist, and never, ever, overthrow yourself, especially not in Latin America, and especially not after prohibiting the use of bikinis.

Wednesday, December 16, 2009

The Best of the Most

So, I made the mistake of looking at some of the most popular videos of the year on Youtube.  I mean, I felt like I should know what the rest of the world, including even the parts beyond my extremely well-examined and handsomely groomed navel, might be interested in.  This, I hypothesized, would make me more understanding, more forgiving, more ... human.  Instead, it just makes me wonder why I'm not on a boat, motherfucker!  And it also made me wonder whether this Schirrmacher fellow was onto something.

"What if the price of machines that think is people who don't?"

Friday, December 11, 2009

The Year in Punchlines

Liberal black women from New York City drive like maniacs:

Victor Harris was rendered quadriplegic after the police rammed his car, ending a nine-mile high-speed chase outside Atlanta. The issue was whether a suit by Harris against the officer who rammed him should be allowed to proceed to a jury trial. Lower courts were inclined to give Harris his day in court, because he had committed no crime except speeding before he fled, and while he topped 85 miles per hour during the chase, he was in theory in control of his car.

The Supreme Court disagreed and defended its position in an unprecedented way: by posting a video of the chase, taken by the police, on its Web site. "No reasonable jury," Antonin Scalia wrote for the majority, could watch the video without agreeing that the chase had to be stopped, even if it meant killing Harris.  "We are happy to allow the videotape to speak for itself," Scalia wrote.

Did it? Kahan, Hoffman and Braman showed it to a diverse group of 1,350 Americans. Most of the test subjects saw things as the Supreme Court did: 75 percent concurred that deadly force was justified. The dissenters, however, were not randomly distributed: they reflected distinct subcategories of Americans, like liberal African-American women from cities in the Northeast.

Don't shaft drunk people:

Morewedge and Krishnamurti took a "data truck" to a strip of bars on the South Side of Pittsburgh (where participants were "often at a level of intoxication that is greater than is ethical to induce")

Reduce, Recycle, Reuse your loved ones:

... powering a crematorium requires an enormous amount of gas and also sends carbon dioxide and other pollutants skyward. Enter resomation, an alternative to cremation for the eco-conscious cadaver.  Unlike cremation, resomation doesn't vaporize the toxic mercury of dental fillings and doesn't char joint implants, leaving them clean, shiny and potentially recyclable.

In a way, Austen's novels are already zombie novels

Wednesday, December 9, 2009

Just in case

... you thought you were anything but an algorithm

Posted via email from The Capitalist Axiomatic

Tuesday, December 8, 2009

My biggest fear

One of the things that I've been trying to understand is to what extent the boyz down at the Fed get it.  No doubt, these are smart folks, they have great data, and they know 6000 times more about economics than I do.  But, is that knowledge counter-productive?  Some days it seems like they've grasped the fundamental problem that would require a major re-think of neo-classical economics -- namely that money is real, and that how you count stuff matters to the real economy -- and some days it seems like they are trapped in a "money is just a very efficient form of barter" mindset. 

Which is what makes reading stuff like this new paper from the Dallas Fed so scary.

If the nominal exchange rate regime matters for the determination of relative prices such as the real exchange rate or the terms of trade, it must matter because there is some kind of nominal price stickiness. For example, if the U.S. dollar/euro exchange rate is to affect any real prices, it must be because there are some nominal prices that are sticky in dollar terms and others that are sticky in euros. From the standpoint of modern macroeconomics, the question should be posed: What policy best deals with the distortions—from sticky prices and other sources? Is it a fully flexible exchange rate, or some sort of exchange rate targeting?

Now, this sounds like an interesting paper.  The basic question being why you need the nominal exchange rate to adjust when you could just have prices and wages adjust to produce the same effect in real terms.   In other words, if China keeps the Renminbi pegged too low, why isn't there more inflation in China or more deflation in the US?  Good question.  Maybe I'll read the paper. 

But note how the question is phrased (the bold emphasis is mine).  A behavioral fact as simple as the reluctance of people to take a pay cut is being called a "distortion".  Yeah, okay, it's a distortion of some economist's imaginary model of a perfectly frictionless economy, but that is not a very useful definition of "distortion".  Until these sorts of "distortions" are simply considered "facts", I'm not sure we're going to make any fundamental progress in managing or meta-managing the economy, and I will remain worried that the brave men in charge of the liquidity hose are all wet.

Friday, December 4, 2009

Hey, wasn't that equilibrium we just passed?

Unsurprisingly, very smart Harvard profs suggest that we need nothing more than a technical fix for financial regulation to get us moving on towards the next bubble.

The harder question is how to limit inordinate risk-taking by the protected financial firms, especially given the difficulties in evaluating the risk in their portfolios. Ideally, bigger firms that enjoy some sort of public guarantee should pay a "public insurance premium,'' which would be a function of capital levels and risk. 
But the daunting problem in either charging such a premium, or enforcing plain old capital requirements, is measuring risk-weighted assets.

So don't risk weight the fucking assets.  This was always a practice that lent itself to regulatory arbitrage, and the definition of risk as recent volatility leaves, ahem, something to be desired.  People always tell you that, "yes, we're highly leveraged, technically, but you have to differentiate between leverage and risk". Bullshit.  Leverage IS risk.  Volatility comes and goes, but bankruptcy is forever.

One way for regulators to better evaluate financial risk is to borrow a trick from the income tax system. Our incomes are reported more or less correctly because employers have a strong incentive to state our earnings. Since stating our full income reduces their tax liability, firms rarely help hide their workers' incomes. Employers and employees that report different numbers are raising a giant red flag.

Banking regulation can use the same rat-on-your-partner structure. Every credit default swap involves two parties - one taking on more risk and one shedding risk. The regulatory system should treat this as a transfer of risk where the insurer is taking on exactly as much danger as the insured party is shedding. If each firm's public insurance payments or capital requirements depend on their risk, then the insured entity has an incentive to accurately report the risk the insurer is taking on. With the right system, every firm has an incentive to report on each other and to make sure their numbers match.

Having the banks rat on each other sounds great until you realize that:
  1. there are only a few big ones now, and they could collude pretty easily
  2. your measure of risk is useless to begin with.  The banks could each run to the Fed screaming about how little Cathy stuck her hand in the cookie jar, while they meanwhile ignore and even encourage Testosterone fueled Tommy in the basement with his shiny new nuclear weapons playtime kit.
All this brings up another question.  Lots of clever people have come up with lots of clever ideas about how to improve the rules the financial system is forced to play by.  These solutions are typically designed to involve the smallest of regulatory tweaks to our existing structure.  The claim is that this approach is more "pro-market" and preserves the incentives for "financial innovation".  The obvious flaw is the reasoning is that these people begin with the mistaken assumption that we have a market, and that we have financial innovation worth preserving.  We clearly have neither.  Markets allow firms to fail when they flounder.  Innovation provides for new services (such as banking for the 25% of Americans who don't regularly use a bank) which tends to be disruptive and causes some firms to fail and others to succeed. 

Real pro-market (rather than pro-business) solutions don't try to dot an imaginary i in an effort to preserve a non-existent market.  Real pro-market reforms start with the realization that the market for rules -- financially, politically, and ideologically -- has already been cornered.

Thursday, December 3, 2009

Deriving Derivatives

Tommy Gun Tim, The Man of A Thousand Silver Bailout Bullets, recently testified in Congress about the next act in the financial regulatory charade.

Mr. Geithner said that pending bills in the House which would carve out fairly broad regulatory exemptions for companies that use customized products to hedge risks should be reviewed and possibly tightened.

Mr. Geithner testified about administration's plan to bring new regulations to the over-the-counter market. A key part of the plan would require many routine products to be traded on platforms and processed through clearinghouses, which guarantee trades.

But businesses have warned such a move could have a dramatic cost impact because it would force them to post cash margin to a clearinghouse. In response to those concerns, two key House panels carved out exemptions for commercial firms in their derivatives bills.

Mr. Geithner on Wednesday reiterated his support for preserving a customized swap market in which products are still traded off-exchange. But he warned that any clearing exemptions should be narrowly defined so firms can't skirt the rules.

Just two thoughts. 
  1. The things that are going to get proposed exemptions are actually the only derivatives that should exist to begin with.  These derivatives are useful for real economy hedging and should clearly not be traded in a custom, opaque and high margin OTC fashion, because the companies that are using them to hedge will never know whether their counterparty is actually good for it or not.  Your not hedged unless you know you're hedged.  This, you will recall, is why we're having the "gee, maybe we should regulate derivatives," discussion to begin with.  So I can't tell whether the ploy here is to create a loophole so large that nothing important happens at all, or whether he's trying to force all the useless and speculative derivatives (like CDS) onto an exchange as a way to effectively kill them by raising the collateral requirements to the point where they're uneconomic.  And it could be both at the same time -- take away the shiny bauble the child keeps choking on, but give him a less dangerous and still highly profitable gift in its stead so as he keeps his yap shut.
  2. The idea that having to post cash margin will kill the useful commercial derivatives is nonsense.  I mean, what do we have banks for to begin with if not to assess the credit worthiness of a borrower and extend ... um ... credit ... aka ... cash ... which could then be used to post collateral.  Right now we've got all this opaque bullshit like increasing ownership of a utility's turbines serving as Goldman Sachs' collateral on some funky structure they've got with an aluminum smelter in China.  Please, guys, this is what we invented money for.  It makes things a hell of a lot clearer than bartering derivative exposure, which as we have seen, also has a cost that only comes out when everything goes bad, and in the meantime sweeps it under the accounting rug.  If the derivative is worth it to begin with, GS can loan the utility and the aluminum smelter some money to post as collateral to an exchange traded product which hedges both of their electric prices.  All this does is makes the cost clear and upfront and explicitly accounts for the implicit leverage involved.  Oh, and cuts into the vampire squid's margins -- money is, lest we forget, a commodity.

Wednesday, December 2, 2009

Capital and Imagination

I really enjoyed the opening lines of something Yves pointed to this morning, an introduction to the work of Marxist Historian Robert Brenner.

For even the most ardent critics of today's distributions of power and wealth tend to accept reflexively the pervasive reality of prices, markets, and money. We cannot really see these institutions that govern our lives as anything other than givens, and thus our grasp of the role of place, of history, of culture and power in shaping these institutions has indeed almost entirely loosened.

In this sense, despite the ease with which one can poke fun now at theorems such as Modigliani-Miller and Black-Scholes that underpin orthodox modern finance theory, [1] the hegemony of capitalism is complete, to paraphrase Gramsci. We can no longer conceive in any visceral concrete manner of different arrangements ordering our lives. We may be aware that our financial system has failed us; that our ways of doing things threaten to despoil irrevocably the water we drink and the air we breathe; that hundreds of millions of people live in unnecessary misery – unnecessary because we have the technologies at our disposal to feed, clothe, and shelter everyone alive in reasonable comfort and dignity. And yet our proposed "solutions" amount to tinkering – a little more regulation here, a bit more welfare spending there, turning over governments and supra-national organizations to the high-minded who will see to good educations for all, strict environmental standards, and a gradual reduction in armaments.

The rest of the piece is also worth reading, and contains some interesting reflections on Japan's and China's paths to economic development.  I don't agree with all of it -- either in theory or in terms of the facts.  There's been no systematic decline in profitability as he suggests, and as Paul Krugman points out very well in Pop Internationalism, nations don't really compete the way companies do, so you have to be very careful in making that analogy.  I also completely fail to understand why Marxist thinkers can't get it together to differentiate between capitalism and markets, so as to make their best point much more clearly and without an inevitable stream of soothsayingly apocalyptic rhetoric one might expect out of the local fishmonger.  But at least we have here some of the imagination we so sorely lack.

If you want another example, you can also go watch George Soros, the only multibillionare Marxist I know of (depending on how you define Marxism).  Those who have no patience for how atrocious a speaker he is might prefer the short version, or even the really short version.

Tuesday, December 1, 2009


Interfluidity is truly one of the wonders of modern communications technology.  Consider his latest post on a real version of the famed "democratization of finance":

If someone devised an equity instrument that would offer stronger, easier-to-value promises than common equity, that would effectively disperse entrepreneurs' risks while offering investors an upside, that could be efficiently offered in modest chunks small investors could incorporate into diverse portfolios, I think that would be a fantastic financial innovation.

Suppose businesses sold numbered dollars. Dollar number 420,167 has just been rung in. How much would you pay for dollar number 600,000? If you pay 91¢ for that dollar and it takes a year for the business to bring the next ~$180K, you've earned a 10% return. If business is great, and it only takes 6 months reach that sales level, then you earn a 20% annualized return. ROI is dependent only on the briskness of sales, something that is tangible and observable, something that customer/investors can understand and estimate. These claims would confer no control rights upon their holders (except potentially when they are in arrears), so entrepreneurs, the residual claimants, would price their goods and services to maximize profits, not revenue. Holders of fixed income / variable term claims would be along for the ride. Assuming a non-wimpy business owner, investors' best strategy for maximizing the value of their claims is to drum up business, which is a win/win for the entrepreneur and the investor. Investor repayments would naturally correlate with business success: when business is slow, few payments to investors would come due. When business is brisk, lots of claims would mature.

This is quite a bit bit smarter than anything I had to say when I was reflecting on why we have debt to begin with, though it goes in the same direction.  It's funny to think of this as innovative, when it turns out that truly democratic finance would look a lot like the investment companies of yesteryear, minus the fraud of the South Sea Company (we hope).  Everything goes to reinforce the idea that democratic finance shouldn't be trying to "restore the flow of credit" or "allow homeowners to tap their equity" or any of the nonsense that was flogged off as terribly innovative during our latest round of Ponzi finance.  Instead, we should be trying to imagine a system that puts people who save together with people who need the money to build something new, plain and simple. 

Real financial innovation would put a lot of banks out of business, just as real technological innovation made the mainframe obsolete.  And local equity investing would not only be a financial revolution, but you can easily see how it would be the first step in a revolutionary political decentralization as well.  Which of course brings me to my dead horse of recent months, namely that after 500 years of rapid technological development, our species really only has one social technology, applied intermittently at best, to show for its efforts -- I wish my markets improved as rapidly as my motherboard.

Wednesday, November 25, 2009

Imaginary blinders

Add these to yesterday's reflections, and just package the whole thing together under the same heading.

First, Tim Duy takes a deserved swipe at the idiocy of "reigning in the deficits" in the middle of a tepid recovery (check out his charts too, which, one might point out, bear more than a passing resemblance to this model, with the picture of Karl Marx on the cover one might point out)

And where are policymakers as we slog through the final month of 2009? The Administration is poised to do virtually nothing:

The White House is lukewarm about proposals by congressional Democrats to introduce broad legislation to create jobs, instead favoring targeted measures that would be less likely to inflate the deficit, administration officials said.

There is as yet no agreement within the White House or in Congress on how to try to curb the U.S. jobless rate. But the differences in opinion suggest that rifts could emerge among Democrats as they wrestle with how to beat back the highest unemployment rate in a generation.

...Hamstrung by the nation's $1.4 trillion deficit and his pledge not to raise taxes on middle-class Americans, Mr. Obama is keen to avoid any measures suggestive of a second, big-ticket stimulus.

Indeed, the failure of the Administration to take bold moves early in the year now cripples it in any attempt to take bold action now. Apparently, the best we can expect now is a "Cash for Caulkers" program that will dribble money into the economy, ensuring that we do little if any better than limp along.

This is why I've already had enough of the man with the deep tan we elected last year.  There's all sorts of ways to defend what's he's done in the face of a difficult situation.  Twelve dimensional chess and all.  But the truth is that we spend all our time defending the long-term implications of the way he takes a bow, and we never get to him actually doing anything NOW.  Saying that Obama is not "bold" has got to be the understatement of the century, and it doesn't help to defend this as something that will play out over the years. There's a midterm election in one year that is I fear is going to spring out of the box like a coiled political snake, and, after Carter, we need to remember that they don't give you a second term for your long-term planning, but for what you do in the first 4 years of strutting and fretting.  Pretty soon I'm not going to have any more sympathy for the "deck was stacked against him" argument -- a real player would have flipped the table over and started fresh.

Fundamentally what's happening here is the lack of imagination we see everywhere playing out in a political context.  Nobody can imagine anything changing.  So it doesn't.

Second, we have the inertia of the same clueless policymakers who helped us get to this sorry state of economic affairs.  Duy already mentions this, but there is even dissension deep within the ranks, as David Altig's latest macroblog salvo illustrates.

If you ask me, it's time to get "real," pun intended—that is to ask questions about the fundamental sources of persistent low inflation and risk-adjusted interest rates (a phrase for which you may as well substitute U.S. Treasury yields). To be sure, the causes behind low Treasury rates are complex, and no responsible monetary policymaker would avoid examining the role of central bank rate decisions. But the road is going to eventually wind around to the point where we are confronted with the very basic issue that remains unresolved: Why is the global demand for real physical investment apparently out of line with patterns of global saving?

The charts he provides are perfect.  Everyone is panicked about the government debt and the rise in yields and all the new ... bank ... lending ... and wait a second, all of those things are just phantoms of a bankrupt (pun intended) past.  There's no lending and rates are staying very very low.  No one can seem to imagine that the economy wasn't in equilibrium before, and so it's not going to just go back to the same massive disequilibrium of 2003-2008 (or longer).  There's no lending because the banks are fried, and because nobody in the US wants to borrow any more.  So the only place you have to worry about inflation is in China, where they're actually still building shit.

It's the same phenomenon as we see politically.  Despite the fact that we ran the country in the ground, we keep using the same tools and applying them in the same way, expecting, like lunatics, to achieve a different result.  Once again, the biggest obstacle to change is simply the inability to imagine a different world.  I respectfully suggest that if we are unable to do this, we let Google do it for us.  The rest of the cosmos certainly isn't going to put up with tired bullshit for long.

Tuesday, November 24, 2009

A Failure of Imagination

Robert Nozick said somewhere that, "Lack of invention is the mother of necessity". As a philosopher, he was talking about the existence of necessary metaphysical truths, but I love this quote and I think it applies perfectly to our current economic and political situation as well. Despite all the things that have happened to our country over the last decade to highlight the problems with our system, we seem completely incapable of imagining any other way of doing things. We are nothing but a tired and fading empire too set in its ways to make substantive change or adapt to the rise of the new forces we ourselves have unleashed. At best we can hope for the dignified senescence of Europe or Japan. At worst we can expect the cycles of repeated collapse common to the rest of the colonial world. In either case, we should admit that we have marched West as far as we can, till we piled up huge castles made of sand on the coast of California and watched its bloated dream topple into the ocean.

The great American experiment is over.

From such an introduction you might expect that I have something profound and new to say about our culture. In truth, though, it's the same story as ever; we have simply run out of steam, and the apparatus has been captured by those seeking to enforce the status quo. This capture goes very deep, and has many faces, ranging from the mechanism by which we elect our politicians, to the ideology of our conception of governments and markets, to the way in which we desperately cling to our bankrupt financial system. But today it's this last bit of capture that serves to best illustrate all these aspects at once.

Morgan Stanley has spoken, and Simon Johnson has talked back. They argued that higher capital requirements for our banks would serve to limit economic growth. And he points out that this is a huge load of shit for three very good reasons.

The essential premise of the Morgan Stanley reasoning (heard much more widely on Wall Street) is that the size of our biggest banks cannot be constrained – because it would raise the cost of equity for these smaller units. This misses three points:
  1. If you are sufficiently small, you can take more risk without jeopardizing the system. So the expected risk/return combination can attract investors and be fine for society. Most successful venture capital funds, hedge funds, and private equity funds are in the right size range from this perspectives and don't have trouble attracting capital – except when the big banks blow up. As long as you are small enough to fail, go for it.
  2. Morgan Stanley's pricing of risk model implicitly assumes that big banks still exist as a comparison point and an alternative for investors. But if you put a size cap on the largest banks (e.g., assets cannot exceed 1% of GDP), this defines the asset class available – so investors don't choose small vs. medium vs. large; they choose small vs. medium. Yes, this removes a choice for investors, but we routinely constrain investors ability to put money into activities that are potentially dangerous for society (e.g., try proposing a "new" high risk/high return approach to nuclear power).
  3. There will always be financial shocks, but these do not always need to have such devastating effects. Our financial system worked fine in the post-World War II period, with a great deal of risk-taking and much nonfinancial innovation – our biggest banks were much smaller, in absolute terms and relative to the economy. The notion of "let us take any risks we want and, if it all goes bad, bail us out so we can make it up to you later" is simply preposterous and completely at odds with the historical record of US economic development.
But look what's going on in this argument. It's easy (and obvious) to observe that this is just Morgan Stanley talking its book. It goes way beyond that however. For one, them talking their book is going to become a Republican talking point almost instantaneously, illustrating the capture of our political system. For another, the idea that we need a modern banking system for economic growth is theoretically questionable, and practically, just plain proven wrong by the breakneck growth of China, who doesn't have one. And finally, even if you gave up those first two points, you can see how the whole things revolves around the premise that Morgan Stanley has to be one of the profitable necessary banks underwriting our economic growth.

In fact, we could need a banking system that has the potential for high returns, that finances high growth, and yet that, in aggregate and over time, can't turn a profit. In other words, even if we need a banking system as big as the one we have, there's nothing indispensable about the individual banks, and indeed, the best system is probably one so competitive, so commoditized, that they never turn a profit as a group. Consider the airlines. Plenty of flights. No net industry profit over time. Some are good, some are bad. New firms come and old ones go, and ... well .. that's what we call a market. So now you have finally reached total ideological capture, where the idea of market has become synonymous with a government guaranteed return for a chosen set of 'necessary' firms.

Like I said, the great American experiment is over.

Saturday, November 21, 2009

Capitalism and Infinity

Your humble blogger's devoted readers are, no doubt, already aware of your host's thoughts regarding the end of humanity.  To wit: it never really got started to begin with -- we have never been human.  At least, we have never been a certain rather naively conceived version of human that remits, at base, to a sort of ghost in the machine, a little man inside our little man, a quasi mystical conception of the rational agent, sprung, fully formed, from the head of the gods, and now buried deep within our brains.  I know it's down there somewhere, let me just take another look.

In fact, truth be told, we are surrounded by chimps.  We might even say we're possessed by them.  Namely, ourselves. 

But I won't bore you with another tirade about how we are merely a bridge between ape and superman and how the ghost in Google's machine is likely to replace us at the cutting edge of the spectral.  At best we may hope to be the sex organs of this new technology, the pliant antennae of a new consciousness.  I won't bore you because that's still so far away, really, and so ill assured when you realize that Google, too, has competition.  You needn't go futuristic to see how a large system built out of purportedly intelligent parts can take on a life of its own and, without the parts ever realizing it, orchestrate events so as to fight for its survival, expansion, and reproduction.

Before Google, we had multinationals, and before those, the state (if these last two are indeed separable -- let's lump them together for right now under the heading of Capitalism -- if I still have to explain this thought, and the way capitalism is the opposite of a market economy, you readers aren't as devoted as I thought.).  We have been building larger units since we invented language, and the history of our humanity, of our consciousness as humans, has been modified each step along the way.  The parts compose a whole, which in turn remakes the parts.  An interesting aside here would be to understand why these older composite organizations convinced us we were "human" to begin with.

A lot of the time it seems that this perspective is left out of the science fiction debates about thinking machines, network intelligence, and the singularity.  Google may be the newest trans-human (meta-human?) organism, but it is not the first, nor is its success, or even survival, assured.  In fact, this new intelligence remains in fierce competition with those lumbering dinosaurs whose operating systems are still encoded on parchment and parliament.  Most fundamentally I think these creatures compete to remake the raw material of their cells.  Or, if you prefer a strictly modern metaphor, they compete for the clock cycles and computational architecture of the human brain.  And while you may isolate regimes in this ongoing competition, or eras where the landscape changes shape, it's not as if the old organisms just give up and die -- not even the humans, who may yet inherit the earth.  These strata come mixed together in the most messy way, and aren't even limited to those I've mentioned -- the roaches and computer viruses and weather systems happily join the fray as well.

My point here dude is that Capitalism already represents a new organism, and a changed species (or perhaps the species are the institutions of state and corporation, and their symbiotic coevolution is a sort of ecosystem or landscape -- but then, what's the difference between those? isn't the ecosystem an animal too?).  Capitalism is an animal behavior pattern and a entity unto itself -- which perhaps sounds less bizarre if you realize that everything that is a thing is a pattern of behavior.  What we call things are just patterns of behavior, processes, that don't change rapidly relative to our human patterns.  I think this question of time scales is a big part of why we find it easier to imagine talking to Google than talking to Capitalism or Ford or the federal government -- it moves so fast we recognize it as one of our own.  "Is Capitalism lonely?"

But recognizing that we have been building artificial intelligence all along was actually not quite where I was headed.  I was actually trying to make sense of an related idea I've had for a number of years.  Completely lost my train of thought.

Capitalism is a game.  It's like the initial play of a child.  It's the awkward stretching and testing of a newborn trying to assess its powers and limits.  All intelligent species play.  If you want, you can almost call that the definition of intelligence.  If we talk about a new intelligence emerging on this planet, what makes us think it would be any different?  Sure, this game has real consequences for us humans, but then, really, we are just pawns in it.  Or maybe some of us are worthy fucking adversaries, but my point here is that the game has a logic of its own that doesn't necessarily care about mere human happiness.   The game will probably function more smoothly if it can find a way to engineer our satisfaction into itself -- the quirks of the East African Plains Ape are part of why the rules are laid down exactly as they are, even if it's not the apes that really designed the game.  So Capitalism would like to make us happy, if it can.  But if it can't ... well, so long as the material doesn't rebel it's internal state doesn't really matter.  In fact, if things get hairy, it might be bets to empty it of internal state entirely. 

The reason to prefer Google to Capitalism (from our little human perspective) is not that one is inherently better or more inevitable in some cosmic evolutionary sense, but simply that one is likely to be much more pleasant for us.  One may give us a chance to play too.  Google is likely to allow the consciousness of our tribe of apes to expand much further and realize itself much more fully.  And this, ultimately, is the only way to 'judge' an organism; this is how the cosmos pronounces judgment: "how far can you go?  how big can you get?  how infinite are you?" -- it's a question of being unlimited, unshackled by the Capitalist Axiomatic that would corral your proposition and convert your algorithm from generative to normative.  None of that is assured, of course, but it seems like our best new weapon in the struggle for infinity.

Dear Sweet Baby Fucking Jesus

I am normally a big supporter of the EFF, but they really need to take their fucking head out of their ass and look at the bigger picture on this Google book settlement question.

At the heart of the proposed settlement is a bargain that lets Google (and only Google) leapfrog the problem of "unclaimed works"—books whose copyright owners cannot be found or whose owners can't be bothered to fill out paperwork for a small payment disbursed by the Registry (consider how many "class action" notices you've tossed in the trash unread). Thanks to the magic of the class action process, the settlement solves this problem by resolving the copyright claims of these otherwise unreachable copyright owners and designating all of their works by default as available for "Display Uses" by Google. In other words, so long as no one steps forward to claim these books, Google (and only Google) has a license to make them available in all the ways the settlement allows.

Nobody likes this "only-for-Google" aspect of the settlement—in fact, Google has said that it would support orphan works legislation that would empower the Registry to make the same deal (or even a better deal) with others who want to use these unclaimed works. (Where the claimed books are concerned, in contrast, the Registry will likely ask the rightsholders to appoint it to license companies other than Google. But that still leaves all the unclaimed books out.) The settlement agreement even has a provision that makes it clear that the UWF can license others "to the extent permitted by applicable law"—what amounts to an "insert orphan works legislation here" invitation.

But absent some legislative supplement to the revised Settlement 2.0, it still seems that any other company would have to scan these books, get sued, and hope for a class action settlement. That, of course, is the kind of barrier to entry that any monopolist would envy. 

So, let me get this straight.  The evil monopoly inserts a clause into the settlement granting it this monopoly that expressly aims at letting Congress get its act together and actually take the monopoly away in the near future.  Wow, that's some powerful evil all right.  These guys have really out-maneuvered everyone.

To their credit, the EFF doesn't really even believe what they're saying, as they go on to point out:

This raises a worthy question: if legislation is necessary to fix the competition problem posed by the settlement, then why do we need a class action settlement in the first place? Why not solve what seems like a quintessentially legislative problem with legislation, instead? (As Amazon points out, that's exactly what was done when music publishers brought a class action against the first digital audio tape (DAT) recorders).

Here's where realpolitik enters the equation. Google correctly points out that Congress has been working on orphan works legislation for years, to no avail. And none of the legislative proposals came close to the comprehensive solution embodied in the proposed settlement. So the question boils down to a political one: do you believe that approval of Settlement 2.0 will make orphan works legislation more likely, or less likely? Without a crystal ball, it's hard to know.

If there were intelligent legislation, we wouldn't have needed this whole lawsuit to being with.  But of course, that was the whole point, to force our kleptocratic government, drunk with the campaign contributions they received in exchange for renewing the rights on Mickey Mouse and Sony Bono till 3451, to wake up and do something.  The bigger picture here is that the only thing capable of breaking through the big monopoly in the sky (aka the US government) is the emergence of another sort of monopoly -- the only way to challenge the power of incumbent lobbying is a new economic power that springs from the ground up.  Remember Good Monopoly, Bad Monopoly already a blogosphere classic? If we don't reward this sort of bravado, if we don't, in fact, subsidize it, we won't get any more of it.  You can see how all the more established players in this space banded together not to be able to get a piece of the pie, but the prevent there from being any pie to begin with because it would be a challenge to their incumbent business.  It's classic Gridlock Economy stuff where too many owners end up preventing a resource from ever being used.  No one was missing those orphaned works, even though all those ideas have been trapped in an ever-distending legal limbo for half a century now.  You can't see under-utilization till after the fact. 

So the choice in this case isn't between having access to these books through one company versus having multiple ways to access these works -- it's between having access to those books and not having them at all, or better yet, between having access to this question versus not having it at all.  Ultimately that is why I think it's better that Google not give away everything directly in the settlement, and instead force the issue into the open via requiring potential competition to push for legislation if they want a piece of the (now extant) pie.

Someday Google will mature and will itself be an impediment to innovation.  But not today.  Today they are the only people willing to go out on a limb and challenge the monopolies that already exist.  In fact, maybe Google should join the Pirate Party, or vice versa. 

Wednesday, November 18, 2009

Random sentence from a BIS report called "Banking on the State"

"The taking of imaginative forms of collateral has a history which predates central banking: in the 12th century, King Baldwin II of Jerusalem secured a loan using his beard as collateral"

Tuesday, November 17, 2009

Move over Madoff

Here's one I never heard before -- this Gregor MacGregor guy actually invented a whole country, with its own currency and bonds and everything.

Strangely, the Republic of Poyais later defaulted on its debt, though not before Venezuela, Peru, Colombia, Chile, and Buenos Aires, did the same. 

Let no one claim that the English don't know how to run a smashing good armchair banana republic.

Thursday, October 29, 2009

Good Monopoly, Bad Monopoly

I think this morning's WSJ article about cosmic legal rights is meant to be at least a bit comical; if we can't laugh at lawyers, who can we laugh at?

Experts in contract drafting say lawyers are trying to ensure that with the proliferation of new outlets -- including mobile-phone screens, Twitter, online video sites and the like -- they cover all possible venues from which their clients can derive income, even those in outer space. FremantleMedia, one of the producers of NBC's "America's Got Talent," declined to comment on its contracts.

The terms of use listed on, where people can post to message boards among other things, tell users that they give up the rights to any content submissions "throughout the universe and/or to incorporate it in other works in any form, media or technology now known or hereafter developed."

Lucasfilm Ltd., Star Wars creator George Lucas's entertainment company that runs the site, said the language is standard in Hollywood.

"But, to be honest with you, we have had very few cases of people trying to exploit rights on other planets," says Lynne Hale, a Lucasfilm spokeswoman.

Of course, there's also a serious edge to this story, as it's illustrating the 21st century version of a land grab.  And it makes me reflect on something I thought about a bit when I was reading about the economic and political history of Argentina.  Because one argument for why Argentina is today so fucked (to put it succinctly) -- in spite of the fact that they were as rich as the US per capita at the turn of the last century -- is that they chose the wrong tactic in distributing their newly conquered agricultural hinterland. 

The history is remarkably similar to that of the US.  Argentina had it's own sort of manifest destiny, and it expanded to cover as much of the southern cone as it could, eradicating the indians living on this "wilderness" along the way (in one of history's great branding exercises, they actually called it the 'conquest of the desert', which is kinda brilliant if you think about it).  The land was great for farming, and the introduction of better transportation, refrigerated shipping, etc ... turned the country into an agricultural export powerhouse by 1900. 

There was one major difference between their history and that of the US though.  In the US, once we had wiped out the natives, we just let people move out West and squat.  Settlers didn't have to buy the land, they could just go claim it by living on it and making it 'productive' (the indians, of course, were completely wasting this stuff).  By contrast, in Argentina, they divided up the land and auctioned it off.  Wealthy folks in Buenos Aires and British investors bought most of it, and the concentration of ownership was remarkable.  In fact, it still is to this day.  These investors hired folks and put the land to use of course, planting crops and building railroads for easy export, and just generally getting their money's worth out of it.  But the inequity of the initial distribution meant that the rewards of this new production accrued disproportionately to the investors, so income remained as remarkably concentrated as it had been in Europe.  This seems to have led to a feedback loop where wealthy Argentines and Brits controlled the political process, and ... well ... when the winners get to write the rules of the game, they tend to keeping winning -- Argentina set up laws that were ruthlessly free trade, and legal rights that strongly favored creditors and international capital.  The elite group controlling both the economic and political game didn't see any reason to invest in eduction and industrialization when they could get both of these from the UK, and with vendor financing to boot. 

In other words, the initial circumscription, division, and auctioning of the land, led to quasi-monopolistic control of the productive resources, which led to almost total monopolization of political control.  Once you have a closed monopoly of that sort, you have guaranteed stagnation -- what monopoly do you know of that invests in its future?  Why bother.

Very simple, and the analogy of Lucasfilm pre-extending their rights throughout the universe is obvious enough.  But this is where it gets interesting.  Because you can actually imagine another type of 'monopoly' that is creative.  This kind of monopoly works precisely by not circumscribing the territory in advance.  In fact, it opens up new territory in an unlimited fashion.  It can be just as much of a monopoly -- it may be the absolutely dominant force opening up this virgin land -- but it only remains a monopoly so long as it is expanding faster than everything else.  It's a sort of self-organizing monopoly that forms the base for a new exploration.  The best example I can think of today would be something like Google, or the internet in general, but what I'm really trying to get at is a sort of principle, like language, or DNA, or something like that.  The world evolves a coherent lingua franca that allows for new creativity to radiate in all directions, rather than defining at the outset what will be possible and who will own which piece of the results.

Hopefully, our luck will be better than Argentina's.  At least it's easier to make more ideas than to make more farmland ... at least for the moment.

Wednesday, October 28, 2009

The party of no party

It's a sign of the decadence of American politics that two smart people can basically agree almost completely about what direction the country should take, and yet still find themselves on opposite teams.  Truly, divide and conquer has succeeded.  Mark Thoma responds to Luis Zingales:

Luigi Zingales is worried that populist anger might fall into the hands of evil Democrats rather than Republicans who would, of course, use this strong populist force for good:

Pro-Market Populism Is GOP's Out, by Luigi Zingales, Commentary, ...[T]he financial crisis has created significant discontent. In a survey taken last December, 60% of Americans declared themselves "angry" or "very angry" about the economic situation.
If Republicans ignore this popular anger, as the party establishment did last autumn, they leave a powerful and potentially disruptive force in the hands of Democrats. The Democrats could channel popular anger into protectionism, 90% tax rates and onerous new market constraints.
In Republican hands, populism could become a strong force for positive change.

And Republicans would do this by adopting Democratic ideas:

The Republican Party has to move from a pro-business strategy that defends the interests of existing companies to a pro- market strategy that fosters open competition and freedom of entry.
While the two agendas sometimes coincide, they are often at odds. Established firms are threatened by competition and frequently use their political muscle to restrict new entries into their industry, strengthening their positions but putting their customers at a disadvantage.
If standing up for markets means -- running down the list above in order -- reducing market power, regulating financial markets, eliminating subsidies, breaking up too big to fail firms, providing a robust safety net, overcoming income inequality, fixing schools, increasing the availability of student loans, providing retraining, and providing health care, then the answer is Democrats.

When are we going to come around to the realization that there is not now, nor has there ever been, a pro-market, pro-competition party.  Along the way, the US has had a few truly reform minded officials who understood that markets are one of the greatest social technologies humankind has invented (up there with language and low-rider jeans subsidies) -- but we have never had a "pro-market" party.  One side wants private monopolies, and the other wants public monopolies.  No politician seeking re-election is in favor of competition, because competition benefits everyone diffusely, whereas the mechanism of re-election requires concentrated financial support.  It is utterly non-sensical to say that either the Democrats or the Republicans are going to defend free markets.  The nature of our political process makes championing the good of society an exercise in extinction. 

We must abandon tweedledee and tweedledum and found a pro-market party that takes publicly funded elections to be its first principle.  The two ideas are as revolutionary as they are inseparable.  Kinda like evolving a left hand to match the right.

Tuesday, October 20, 2009

Hedge fund managers of the world unite!

You have nothing to lose but your gains!

One of the interesting things about this age is the way some people society considers the "bad guys" actually turn out to be amongst the loudest progressives.  In particular, I've been impressed by how some of the biggest guns in hedgefundlandia are actually pretty candid about how fucked up the system is, and pretty straightforward in terms of suggesting what should be done about it.  These are some of the wealthiest folks on earth, and you might expect them to circle the wagons and defend the status quo, but that's not actually what you hear. 

Consider two recent examples.  Here is David Einhorn of Greenlight Capital getting pretty much straight to the point:

The financial reform on the table is analogous to our response to airline terrorism by frisking grandma and taking away everyone's shampoo, in that it gives the appearance of officially "doing something" and adds to our bureaucracy without really making anything safer. 
And here is John Burbank of Passport Capital, telling us that we better grow some more food if we want to keep the Chinese fed. 

Current yield growth is around 1%, less than half the average rate during the 1960s and 1970s.  This trend towards a plateau in global yields, combined with limitations on current arable land, is leading to concerns about the ability to increase supply rapidly in response to tight inventories and rising prices.  This trend requires more capital investment into all aspects of agriculture, including infrastructure, proper soil fertility, seed technology, crop chemicals, and the development of higher cost acres.

Now, remember, these guys are not what you would call philanthropists exactly.  So it's remarkable that this is what people in our government would be saying if they had any brains or balls.  It illustrates the basic idea of markets, namely that you're only supposed to be able to make money by providing what the world needs and wants.  It's a weird world where we need to be reminded of this fact by progressive hedge fund managers.

Saturday, October 17, 2009

Loco for Local

Here's another salvo in the local foods debate, this time from the FT .  Similarly to beer, the key issues are the efficiency (carbon, water and otherwise) of the production, the extent of the packaging, and the way the product is consumed -- transportation appears to be the least important piece once again, not that this justifies overlooking it. 

In a study of the carbon footprint of a packet of crisps, Walker's says the biggest proportion (36 per cent) can be put down to agriculture and producing the raw ingredients. Another big portion comes from packaging (34 per cent). Distribution and transport account for just 10 per cent of the footprint, according to the study, which was conducted with the Carbon Trust, the UK government-backed environmental adviser.

"The whole food miles debate is nonsense," says Euan Murray, general manager of carbon footprint at the Carbon Trust. "For the vast majority of products there's no link between the distance it has travelled and its carbon footprint."


Food waste is also a growing problem. When left in landfills, solid food waste produces methane, which can leach into the atmosphere. In the UK, about a third of food purchased is thrown away, according to the Chartered Institution of Water and Environmental Management. Meanwhile, in the US, more than 25 per cent of the food Americans prepare is discarded, generating about 43.5m tonnes of food waste a year, according to the Environmental Protection Agency.

I'll be honest in saying that I don't have a lot of detailed knowledge of the whole green debate, but every time I read something new, I find that the a lot of the way things are framed is pretty misleading.  In fact, I'll go one better and say that I'm sliding inthe direction of subscribing to the "secular religion" view of most of the movement.  The idea that we are a part of the planet and having an impact on it is pretty indisputable, but the responses -- from ethanol to large scale solar to the obsession with non-GM local food -- are so ill conceived that it betrays the gap between the treating the problem as a practical question and lending it an moral-religious overtone.  I'm not saying that we should count on some quick techno-breakthrough to solve all our problems (a la Freeman Dyson and his carbon eating trees) but I think we should approach it as a technological question, with the biggest emphasis on the social technology we so sorely lack.  This is not how I see it treated in general.

Did I mention they gave the Nobel prize to an anarchist who studies this stuff? 

Thursday, October 15, 2009

No, seriously

I kid you not. They really did give the Nobel Prize in economics to an anarchist.

Tuesday, October 13, 2009

Tax credits

Here's a NYT article via CR about tax credits for employers to create jobs:

Timothy J. Bartik, a senior economist at the Upjohn Institute for Employment Research who is working on the draft with John H. Bishop of Cornell, estimates that it would cost about $20,000 for each job created.

And here's another one the geniuses in Washington have dreamed up (naturally with a little creative support from the National Association of Homebuilders):

From the NAHB:
Extending the credit through Nov. 30, 2010 and making it available to all purchasers of a principal residence would result in an additional 383,000 home sales ...
The NAHB has also been arguing to expand the tax credit from $8,000 to $15,000. But using $8,000 per home buyer - and estimating 5 million home sales over the next year - the total cost of the tax credit would be $40 billion.

According to the NAHB this would result in 383,000 additional home sales. Dividing $40 billion by 383 thousand gives $104,400 per additional home sold!

It's easy to understand why tax credits are the favored approach of Congress -- Congress exists to regulate, and if money (or credit) doesn't continue to drop from their hands like mana from heaven, their power as regulator is diminished.  This simple survival tactic is the basic feedback loop that keeps government expanding and expanding (growth tactic, really. No organism 'fights for survival'.  They either grow or they can't, survival is just the world pushing back, and not very hard in the case of Congress).  And you can see that it doesn't matter how inefficient this form of regulation is, which tells you immediately that the supposed goals -- propping up home prices and reducing unemployment -- are not the real goals.

But I digress. 

Because my main point was the reaction I had to that initial article about the job creation tax credit.  $20,000 per job.  You know with certainty that this is a dramatic underestimate.  I don't remember how much Congress estimated that the housing tax credit would cost when they put it in place, but I know it wasn't even in the ballpark of $100K per home.  So let's say they underestimated the cost per job by a factor of 2, and the credit will amount to $40K per job if it passes. 

Now, you're asking yourself, if it's going to cost them $40K per job, isn't that about what you'd have to pay some out of work person anyhow to get them back in the saddle?  Why doesn't the government just hire the guy themselves?  Yeah, yeah, I know, creeping socialism blah blah blah.  But what the fuck do you think we have now!?  It just creeps from a different direction, going through the banks and through the bailout of inefficient high-employment low-value industries (consider which business would benefit, relatively from the credit -- it ain't the money losing start-ups and other creative stuff that really makes the economy dynamic).  Why don't we just get over the fact that capitalism has really always been State capitalism, and simply try to push the State into the form and roles that are appropriate to it?  Why don't we have the State employ the people directly, if that's what ultimately needs to happen, and let the rest take care of itself?

This turns out to have been the crux of Minsky's argument, and as I've thought about it more it's grown on me.  To review: his basic idea was that capitalism is inherently unstable, because large capital intensive projects require large financing.  So the simplistic I-cook-while-you-build-houses market exchange is complicated by the need for a banking system to finance these big projects.  Competition in this new financial sector makes it inherently unstable and prone to crisis, as people can profit from making shorter and shorter term loans at lower rates to finance long-term projects by just refinancing more frequently.  At some point, the financing becomes so speculative and Ponzi-esque that any small bump in the road in terms of the profitability of these projects causes the financiers to go bankrupt and results in a debt-deflationary spiral.  People try to cover their debts by liquidating the longer-term assets.  If everyone tries to do this at the same time, these productive assets are idled, the associated workers unemployed, and the strategy doesn't even work because all the liquidating drives the price of the assets even lower, whereas the debt you are trying to pay off stays fixed. 

Capitalism differs from a pure market economy and does not settle into an equilibrium the way such an economy would.  Why? It's the debt, stupid.  The structure of ownership gets us into a log-jam type of situation where money can no longer circulate, and money circulating is the bread and butter of the economy operating somewhere near equilibrium.

I think this is a pretty reasonable story.   I think there are also additional reasons why capitalism is unstable, but I think the effects of money and finance are probably the most wobbly leg of the edifice.  So, let's say we take this instability to be the main problem.  How are we going to fix it?  How are we going to get money to circulate and not just pile up in the wrong spots (whether that is mattresses or bank reserves at the Fed)?  How are we going to get people working and making stuff again?

Over the years, we (as a society) have tried a variety of solutions
  1. Do nothing.  Eventually you get a Depression deep and long enough that prices fall to the point of stimulating a recovery.  This is self-regulating market equilibrium of a sorts, it's just that the time scale can be excruciating.  I remember Jim Grant commenting that the depression of 1873 become the depression of 1878 before there was anything like a move to "do something" about it.
  2. Have the government manage the money supply.  If you think that finance is at least partly unstable because it is subject to occasional crises of confidence with no deep basis in reality (liquidity panics as opposed to solvency crises) you can alleviate some of the instability by having a lender of last resort.  In the US, this was JP Morgan at one point, and then we invented the Fed. 
  3. Have the government spend money directly.  The problem with (2) is pretty obvious once you realize that you almost never have a liquidity crisis without at least the real threat of a solvency crisis.  People are scared and want their money back because they think they might not get it.  If everyone wants to save up and pay off their debt we have a debt-deflationary problem, and the only way to save the system is to have the government go into debt while everyone works their way out of it.  This is the upshot of classic Keynesianism, though I'm bending it a bit in light of Richard Koo's later adaptation.  Keynes didn't imagine that the government would have to go into debt for years and years to get money circulating again.  He seems to have thought of it as a one-off sort of a thing that would soon become self-fulfilling.  The length of this though depends on how deeply in trouble the financial system got.
  4. Regulation.  Post GD I, we decided to have much more tightly regulated banks, the idea being that we could oversee the financial system and its tendency towards instability, and preempt the build up of debt that causes trouble.  That worked pretty well for a while (until the 70's) and then not so much.  I'm enough of a cynic (or an optimist, depending on your perspective) so as not to believe in the perfectibility of human control over large complex systems.  Hence I think this solution is evolutionarily unstable, and I'm surprised we even got 20 years out of it.
  5. Attack the problem directly.  If we want people to keep making stuff and keep spending money so that it continues to circulate, why don't we ... um ... pay them to do stuff.  Why do we insist on sending this money through the banking system or crediting it to businesses.  Why don't we just have the government hire people to do stuff we all want.  We could build parks or teach kids or grow publicly funded high quality hydro.  I don't mean as a temporary stimulus measure designed to restart the economy, and I don't mean the government going into debt to 'stimulate' the economy through tax credits of bank bailouts or defense contracts.  I mean, if the problem is not enough jobs, let's invent some more fucking jobs already.  Let's have the government guarantee everyone a minimum wage job producing whatever it is we collectively think we need.  Yeah, there are problems with how we decide what we need, but they don't seem more insurmountable to me than the problems attendant upon any of these other solutions. 
Number (5) was basically Minsky's adaptation of Keynes.  The government as employer, not lender, of last resort.  If you are out of work the government will give you a crap job.  It won't pay as much as you used to make, so you won't be tempted to stick around after business improves, but it will keep you eating and producing, and keep the money moving, which is what the economy is all about.  Let the big banks fail.  If no one can be out of a job, you have put a backstop behind the economy, and it won't be long before new banks arise to take their place.

Minsky's idea sounds crazy and socialist, but I wonder whether in the end it doesn't actually amount to the smallest government intervention into the economy that is consistent with its basic principle -- namely to let us play as many non-zero sum games with one another as possible.  Everything else involves a lot of regulating and fine tuning and bailing-out and etc ... Here, the only difficulty is in deciding what the people you hire ought to make.  We're more than capable of getting that wrong, but we might even be able to get it right.


Been studying the beer industry a bit lately, which has led me to a few interesting environmental nuggets.  Impressed with the ability of the big brewers to drive down their costs, I started looking into the energy advantages that accrue to large scale brewing.  Hence the accompanying chart.  Dramatic ¿no?  The biggest German brewery is almost twice as efficient as the smallest in terms of the Kbtu needed to produce each barrel.

In addition, as you can see from the other chart, there are efficiencies in the distribution as well.  If you're going to get Miller and Coors to every bar in America, the total shipping costs will be lower if you consolidate the two, even if this means that very little of the beer will be produced locally -- every beer will have to travel a ways, but the average beer will travel less far.  In addition, as this Slate article points out:

... distance is only part of the equation; the mode of transport matters, too. For example, a recent study (PDF) by wine expert Tyler Colman and sustainability engineer Pablo Päster has gotten a lot of attention for proposing that people living east of an imaginary "green line"—which runs roughly through Kansas—would be better off buying wine sent by container ship from Bordeaux, France, then trucked to its final destination, than wine trucked all the way from Napa, Calif. That's due to the fact that container ships are generally considered cleaner modes of transport, which makes up for the longer journey. By the same token, shipping by rail rather than truck would push the green line eastward.

But maybe, you say, we should not have national beer brands at all.  Maybe everything should be made locally.  To evaluate that idea we would need to know whether the scale savings from the brewing offset the costs of shipping.  That leads us to the third chart, which I found here, and which immediately takes us down the rabbit hole.  Because once you start to work out exactly what part of the emission come from what, things get complicated. 

According to that study, the malting and production stages that the big brewers do so efficiently is only 14% of the total carbon emissions (this is for the UK, it's potentially large in the US).  There's another 6% related to the growing of hops and barley (a significant chunk of which comes from producing the fertilizer).  Unless your local brew uses organically grown barley, that portion, as well as the 11% the comes from producing the glass or can, is unlikely to be substantially more energy efficient for a small local a brewer.  In fact, I would assume that because the packaging and ingredients themselves need to be transported to the bottling plant, the big brewers probably have an efficiency of scale in this respect as well.  So, at least 14% and perhaps up to 31% of the emissions may  be reduced by buying non-local beer brewed by a large manufacturer, and this reduction might save anywhere between 7% and 15% of the total emissions.

On the other hand, the fully local plant requires less transportation, and this is 21% of the total emissions.  So if everyone was home brewing, we could eliminate this part entirely.  The other way to reduce this substantially is to drink only draught beer. Not only is the packaging less costly in this case, but it adds much less weight to the freight.

Then you come to the final category of consumption related emissions, which in fact dominates the emissions spectrum at 47% of the total.  This category is due to the refrigeration at home or at the pub, keeping the lights on in the pub or restaurant where you are having the drink, and driving to the pub.  Naturally, none of this changes at all if you choose Local Lager instead of PBR.

So, basically, drinking local beer is unlikely to make a major dent in the greenhouse gas emissions that beer drinking causes to begin with.  If you really want to make a difference, try sitting at home in the dark drinking a warm barrel of locally fermented spit.

Posted via email from The Capitalist Axiomatic

Monday, October 12, 2009

Holy Shit Batman,

They gave an anarchist the Nobel prize.

Ms. Ostrom "challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized," the Nobel judges said. "Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, [Ms.] Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes."

Wednesday, October 7, 2009

Friday, October 2, 2009


I realize, now, here, how remarkably similar French Philosophy is to High Finance. Consider:

. . . .

Tuesday, September 29, 2009

Thursday, September 24, 2009

A Wolf Amongst Sheep

Calling Wen Jiabao: Martingale currency strategy misguided.

That would be equivalent to official holdings by the US government of $6,000bn (€4,000bn, £3,670bn) all denominated in the currencies of other countries. It is little wonder such a huge exposure makes the Chinese government nervous. But nobody asked the Chinese to do this. On the contrary, US policymakers have consistently (and wisely) advised them to do the opposite. Having made what I believe was a huge mistake, the Chinese government cannot expect anybody to save them from its consequences.

And this is particularly good; I had never thought to look at it this way.

It is important to understand how distorted China's economy now is: in 2007, personal consumption was just 35 per cent of GDP. Meanwhile, China was investing 11 per cent of GDP in low-yielding foreign assets, via its current account surplus. Remember how poor hundreds of millions of Chinese still are. Then consider that the net transfer of resources abroad was equal to a third of personal consumption.

Honestly, the more you think about it, the more you realize that Steve Keen's idea of a debt jubilee is the most sensible solution (minute 6:20). on grand scale. Maybe the Jews were onto something with that sabbatical thing. We can keep making all the stuff we're making (there need be no falloff in production) if we just admit that some of the benefits of this are going to be redistributed in a way nobody anticipated when they followed the incentives laid out for them. This is true in the US, and true in China as well. The only fundamental problem with the world economy is that the Chinese have excess capacity in Teddy Bear production and shortage of capacity in clean air, while we have excess capacity in housing and a shortage of capacity in air filtering technology. That may take some time to cure, but doesn't seem insurmountable to me (which and so by the way, where's our green tech bubble when we need it).

On another note, I'm a little worried that I find myself agreeing with some obscure Australian economist being interviewed on some pirate internet news channel over a bad Skype connection to the backdrop of an office that looks like it was recently raided (again) by some nefarious government agency. Things is definitely gettin' weird.

Anyhow, this all gets into the obvious problem that if the government did have a debt jubilee it would change the incentives for the future. How do you get people to go out and work really hard and invent new stuff and provide new services and just generally fuck up their time with shit to do, when they know that even if they do (or don't do) shit the table will be reset in 7 years?

Well, I think the answer is you just make debt illegal to begin with. I suppose this was the Islamic improvement on the Jewish financial regulation. Following this train of thought, it's clear that the Christians went overboard with the whole turning the other cheek thing -- Jesus was a commie. What we need is naked, ruthless, unfettered, equity-only supercapitalism. And a religion to go with it.

Anarcho-theism to the rescue!