Monday, June 29, 2009

Shocked, shocked!

There are a couple of examples this morning of people surprised by the ignorance and narrow-minded self interest of our politicians. I consider this akin to being surprised by the sun coming up.

From Jim Hamilton:

The Wall Street Journal reports:

Bernanke faced open hostility from lawmakers who barraged him during a Congressional hearing over his handling of the financial crisis and the central bank's role in reshaping the banking system.

These interrogations reveal more about those doing the grilling than they reveal about Bernanke. I see this as pure political theater, and I don't like it.

And then from Paul Krugman:

Indeed, if there was a defining moment in Friday's debate, it was the declaration by Representative Paul Broun of Georgia that climate change is nothing but a "hoax" that has been "perpetrated out of the scientific community." I'd call this a crazy conspiracy theory, but doing so would actually be unfair to crazy conspiracy theorists. After all, to believe that global warming is a hoax you have to believe in a vast cabal consisting of thousands of scientists — a cabal so powerful that it has managed to create false records on everything from global temperatures to Arctic sea ice.

Yet Mr. Broun's declaration was met with applause.

Given this contempt for hard science, I'm almost reluctant to mention the deniers' dishonesty on matters economic. But in addition to rejecting climate science, the opponents of the climate bill made a point of misrepresenting the results of studies of the bill's economic impact, which all suggest that the cost will be relatively low.

Still, is it fair to call climate denial a form of treason? Isn't it politics as usual?

Yes, it is — and that's why it's unforgivable.

Krugman at least admits that this political theater is the norm, but even so, why do these very smart people waste their time trying to jawbone us back into morality? Can we please stop expecting politicians to behave like humans? Can we please start analyzing how the political and economic machine actually works? We have already been post-human for a long time now. There is no going back. Morality worked pretty well when we had to learn how to share meat in a cave. It ain't going to cut it when it comes to carbon permits. Morality doesn't scale.

White Elephant Safari

Tim Duy always writes a great column. The most recent one is about how, despite the fact that American consumers appears to have reached their limits, the US is still running a current account deficit and a fiscal deficit, and remains dependent on foreign capital. He thinks this is okay in the short run but worrisome in the long run. I agree, though I think the long run maybe longer than he thinks, and that at any rate, this is a two-sided question -- if China and Germany decide they want export economies and current account surpluses, that money has to go somewhere. At the international level, you can't blame the debtor more than the creditor, you can merely observe that the two are conspiring to mire themselves even more deeply in a situation for which we have no ready political solution. A stable dollar and business as usual now can lead to a larger crisis later.

But that was not my point. Backing up then, here's the quote:

Domestically, the optimal path is to meaningfully address the long term budget challenge. Does this mean cutting programs and boosting taxes now? No, quite frankly, at this juncture that would be an almost insane policy response, one that would not be appropriate for either the US or our trading partners. In the short run, such as policy response would be needlessly disruptive (indeed, that potential disruption is what keeps foreign central banks in the game of buying US Treasuries). Instead, you need to examine the policy space to find an obvious candidate for controlling the growth of aggregate spending in the US. And that exercise always leads you back to health care, and the realization that we spend an extra $1 trillion more than other industrialized nations, and we don't get much if anything for it. A trillion dollars is a lot of money; more in fact, than the recent pace of foreign central bank Treasury purchases. If you can meaningfully "bend the curve" on health care spending, you can see a light at the end of the tunnel. If you can't or are not willing to bend the curve, I fear waning global patience in sustaining US spending will result in a rude awakening that the tunnel of US fiscal policy ends at a hard wall.

Check out the budget chart though. People harp on health care because it is the political flavor of the day. But healthcare spending isn't any bigger and isn't growing any faster than defense spending. If the US goes bankrupt you can blame it on medicare. Or you can blame it just as well on the military. We are spending $500 billion more than Europe on defense. What are we getting for that money except another useless war? Why can't this be part of the political debate? Why has basic common sense been exiled?

Friday, June 26, 2009

SSS

For Super Secret Security.  Actually though, this article fails to mention that things are greatly improved now -- the story that the FBI has a secret argument to justify why it's okay the secret service provider hasn't had its secret rights abused in the secret investigation is now, mercifully, no longer secret.

So in the case of Doe v. Holder, the FBI is carrying out a secret investigation using secret guidelines on what is and is not constitutional, and as part of that investigation they've compelled the secrecy of a service provider and are using a secret justification to argue that nobody's First Amendment rights are being violated. "Just trust us," indeed.


Thursday, June 25, 2009

Dancing About Architecture

Those wacky Hamburgelers have scored themselves a coup with this groovy looking Herzog and Meuron concert hall.

Wednesday, June 24, 2009

Almost there

Thomas Frank, has done what many of might have considered impossible if we weren't there to witness it with our own eyes -- he has written an intelligent op-ed in the WSJ.  The best part is an excellent quote.

What the report leaves largely unaddressed, however, is the political problem.

It was not merely structural problems that led certain regulators to nap through the crisis. The people who filled regulatory jobs in the past administration were asleep at the switch because they were supposed to be. It was as though they had been hired for their extraordinary powers of drowsiness.

The reason for that is simple: There are powerful institutions that don't like being regulated. Regulation sometimes cuts into their profits and interferes with their business. So they have used the political process to sabotage, redirect, defund, undo or hijack the regulatory state since the regulatory state was first invented.

The first federal regulatory agency, the Interstate Commerce Commission, was set up to regulate railroad freight rates in the 1880s. Soon thereafter, Richard Olney, a prominent railroad lawyer, came to Washington to serve as Grover Cleveland's attorney general. Olney's former boss asked him if he would help kill off the hated ICC. Olney's reply, handed down at the very dawn of Big Government, should be regarded as an urtext of the regulatory state:

"The Commission . . . is, or can be made, of great use to the railroads. It satisfies the popular clamor for a government supervision of the railroads, at the same time that that supervision is almost entirely nominal. Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things. . . . The part of wisdom is not to destroy the Commission, but to utilize it."

Business has come a long way since the days of the railroads, and they no longer need the politicians to point out to them that they can help protect an industry from competition and from public meddling.  In fact, with the invention of the too-big-too-fail finance and the military industrial complex, we invented a whole class of industry whose very business model is regulatory capture.  As a corollary, we now have a whole class of politicians that depend on this model for their political livelihood.  The two go together like hand in iron glove. 

Which makes you wonder why Frank stops where he does.  He goes on to question why Obama would think that tweaking around the organizational structure of regulation will have any effect if the problem is that regulators are captured.  He asks why we don't have clearer guidelines for regulators by which they can be judged.  All fine things to question.  But these avoid the more basic problem that the politicians who appoint the regulators and who judge them are also captured by industry.  At the risk of repeating myself, it doesn't matter what regulatory structure you put in place now if the next guy in office can take some campaing contributions in exchange for gutting it.  Under those conditions, every expansion of nominal 'regulation' will be just another even larger lever for corruption and anti-competitiveness.  So the fundamental problem is with how we choose our politicians, not with how we write our regulations 

You can't have big government without publicly funded elections, and if you had publicly funded elections it doesn't matter how big the government is.


Tuesday, June 23, 2009

I'm sending the Wolf

He solves problems:

Such a crisis is not only the result of a rational response to incentives. Folly and ignorance play a part. Nor do I believe that bubbles and crises can be eliminated from capitalism. Yet it is hard to believe that the risks being run by huge institutions had nothing to do with incentives. The unpleasant truth is that, today, the incentive to behave in this risky way is, if anything, even bigger than it was before the crisis.

Regulatory reform cannot end with incentives. But it has to start from incentives. A business that is too big to fail cannot be run in the interests of shareholders, since it is no longer part of the market. Either it must be possible to close it down or it has to be run in a different way. It is as simple – and brutal – as that.



What he said

I mostly agree with Simon Johnson:

There are two views of the global financial crisis and – more importantly – of what comes next.  The first is shared by almost all officials and underpins government thinking in the United States, the remainder of the G7, Western Europe, and beyond.  The second is quite unofficial – no government official has yet been found anywhere near this position.  Yet versions of this unofficial view have a great deal of support and may even be gaining traction over time as events unfold.

The official view is that a rare and unfortunate accident occurred in the fall of 2008.  The heart of the world's financial system, in and around the United States, suddenly became unstable.  Presumably this instability had a cause – and most official statements begin with "the crisis had many causes" – but this is less important than the need for immediate and overwhelming macroeconomic policy action.

...

The second view, of course, is rather more skeptical regarding whether we are really out of crisis in any meaningful sense.  In this view, the underlying cause of the crisis is much simpler – the economic supersizing of finance in the United States and elsewhere, as manifest particularly in the rise of big banks to positions of extraordinary political and cultural power.

If the size, nature, and clout of finance is the problem, then the official view is nothing close to a solution.  At best, pumping resources into the financial sector delays the day of reckoning and likely increases its costs.  More likely, the Mother of All Bailouts is storing up serious problems for the near-term future.

Finance has become unsustainably large.  Remember, while finance up to a certain level is win-win, producing profits for itself and better allocation of resources for the overall economy, it eventually becomes just like friction in a mechanical system.   When do the benefits outweigh the costs?  Hard to say, but a good guess would be when financial profits are 10% of corporate profits, not 40%.  It's pretty hard to read stories about Goldman already breaking records in bonuses and conclude that anything fundamental has changed.

But then what do you expect when the savers and the investors are so far apart?  Sure, better regulation in the US would help, but what we really desperately need is a fiancial system in CHINA.  How can you have China save money, pass it to the US, pump it through housing and consumer spending back into the Chinese export mafia, and not expect some of it to get lost?  This is the most inefficient and backasswards global financial system I can imagine, so it shouldn't come as a shocker that a lot of the money goes up in smoke.  We can argue over whether Geithner and Obama are doing the right things or doing enough to re-regulate American finance, but it's clear that the bigger elephant in the room is not being addressed, and is in fact un-addressable without bringing China into economic and political modernity in a more sustainable way.  Until we face this problem or until China starts to develop it's own internal mechanisms for mitigaitng it, we should expect the road to be a very bumpy status quo.

Monday, June 22, 2009

The greased palm of prosperity

Those Greeks were so wily that you couldn't even tell who lost the arguments.

When Alexander the Great came to see Diogenes in his barrel, he was so impressed by the philosopher that he offered him money. Diogenes scornfully pointed out that he had no need of money, to which Alexander replied, "Have you no friends?"

The ROI of Lobbying

The Journal has a story today about the increase in hedge fund lobbying over the last few years. Here's one example:

One of the biggest hedge-fund lobbyists is Citadel Investment Group, which spent a total of $1.9 million from 2007 through the first quarter of this year, records show.

Citadel has somewhere around $15 billion in assets under management, give or take whatever the market is up to when you read this. That means they probably collect around $300 million in management fees (2%of AUM). Let's say further that they have a slow year and make a 10% return, or add $1.5 billion in value to the company. Under the typical 2-and-20 arrangement they would take home another $300 million in carry (20%) from the fund's profits. So under very unheroic assumptions these guys stand to make $600 million a year.

Now let's say that whatever lobbying they can do adds 1 basis point to their returns -- so that they make 10.01% or 1.0101 times their money. This would add $1.5 million to the fund's profits for the year, of which they would take home $0.3 million as their direct share. All things being equal, this would also increase the fund's AUM by $1.5 million at the end of the year, which translates into $0.03 million more in management fees for the next year. Adding one basis point to their returns in just one year translates directly into $330,000 in these guys pockets. This doesn't quite pay for an $850,000 annual lobbying campaign, but it puts you in the neighborhood of break even.

You can put whatever number you want in for the incremental return of lobbying. If you think they can add 10 basis points or 0.1% to the returns with some clever legal maneuvering, then they will add $15 million to the funds profits, and personally pocket an incremental $3.3 million. The return on lobbying would be somewhere in the neighborhood of 380%. Not too shabby as an investment. They break even if they can increase returns by 2.6 basis points. And none of this includes the fact that being seen as plugged in to the Washington establishment obviously helps you raise more money and expand the fund.

I know I'm belaboring the obvious here, but I've always wanted to do that math. The return you get from investing in lobbying can be huge. In addition, it scales well as a business model because you don't necessarily need to spend more as the size of your fund increases, and given the fact that human politicians are a bottleneck with limited amounts of time, but large influence over an entire industry, lobbying also allows you to build a competitive advantage. It's a classic network effect type business model where an initial investment puts you ahead and builds a sustainable moat around your business.

Corruption is a natural and inevitable consequence of large concentrations of capital vying to produce the best returns under conditions of centralized government.

Sunday, June 21, 2009

Miserly Gluttony

A recent Goldman Sachs report revisits the idea of the savings glut Ben Bernanke first propounded back in 2003. I'll admit that when I first heard this theory, I found it kinda laughable. It sounded like yet another justification for the huge US current accounts deficit in particular and for US exceptionalism in general -- if things look unbalanced, let's blame the Chinese; the American economy is unstoppable and infinite by divine right. Over the last year or so though, I have come to see that reaction as both right and wrong. There really was a savings glut and the Chinese really are partly to blame for this mess. Their choice to peg to the dollar and accumulate US Treasuries was a necessary, if not sufficient, part of this whole crisis.

The basic argument is pretty simple. Sure, we had a giant credit bubble, centered on housing, accompanied by all the scams and looting that come with every bubble. Part of the reason for this was a lack of financial regulation, a corrupt government, and a crazed compensation structure. But that only explains explains why the bomb went off just where it did. It does not explain why everyone sat down on a powder keg to begin with. For that you needed the availability of easy credit, and for that you needed low rates and low inflation expectations.

The Chinese peg to the dollar and their forced march to industrial prosperity goes a long way to explaining these last two items, and this is the case the paper makes in some detail. Essentially, it boils down to the fact that China over-saved and under-invested. The first bit is what kept interest rates and inflation so low for so long (though Easy Al Greenspan should probably get some blame for this as well). The second part is no less crucial however, and that's what makes the paper interesting. They show that in addition to saving too much and pushing down rates, the Chinese were unwilling to take any investment risk with the glut they had piled up. They didn't invest enough in their own factories, or anyone else's factories, despite the fact that returns on real capital were high, and they didn't invest in equities or any other productive asset class. They just wanted to pile it up in ultrasafe Treasuries, which completely skewed relative prices in the financial world. If they had distributed things more evenly between asset classes, the price of everything would have risen together, and we would have called it prosperity, and not a bubble. However, since the US government was the only group they would lend to, somebody else had to do the magic of putting this pile of scaredy-cat funds into use in the economy. And lo, the nearest thing to hand was housing, commodities, and bank debt for private equity. To compensate for a large player's risk aversion, everyone else was encourage to embrace more risk.

Naturally, I don't mean that we should bomb China or let they boys at Citibank off the hook, but we should try to really understand how we got here, and I think this is a fundamental part of it. On the other hand, if you want to play conspiracy theory, you might claim that this was China's attempt to sponsor a socialist coup in the United States through clever financial engineering. Induce a financial crisis that you know they will resolve via larger government involvement in the economy. Maybe Trotsky was right and socialism's permanent revolution worldwide is inevitable -- we just failed to understand the mechanism. Clever monkeys.

Saturday, June 20, 2009

Common Logical Fallacy

National Geographic has a pretty interesting article on the history of Ankor Wat.  The basic idea is that they now believe the city rose to power because they engineered a clever system of irrigation that trapped and then dispensed the monsoon rainfalls.  This control of the water supply provided a reliable surplus of rice, which, together with really impressive looking rituals, is the essential currency you use to pay slaves.  Subsequently the city and then the empire fell apart because the engineering fell into disrepair, perhaps as a result of some climactic shifts that led to droughts and floods.  Interesting stuff.

One line in the article caught my eye though, because I feel like it reflects a whole warped way of thinking about history that we have difficulty getting away from.

Although Angkor won that clash, the city was riven by rivalry, which heightened its vulnerability to attacks from Champa to the east and the formidable kingdom of Ayutthaya to the west. Khmer kings had several wives, which blurred the line of succession and resulted in constant intrigue as princes vied for power. "For centuries, it was like the Wars of the Roses. The Khmer state was often unstable," says Roland Fletcher, an archaeologist at the University of Sydney and co-director of a research effort called the Greater Angkor Project.

Some scholars believe that Angkor died the way it lived: by the sword. The annals of Ayutthaya state that warriors from that kingdom "took" Angkor in 1431. No doubt the prosperous Khmer city would have been a rich prize: Inscriptions boast that its temple towers were clad in gold, as Zhou's breathless account confirms. To reconcile tales of Angkor's wealth with the dilapidated ruins encountered by Western travelers, French historians a century ago concluded from the tantalizing allusion that Ayutthaya sacked Angkor.

Fletcher, who says his obsession is to "figure out what makes settlements grow and die," is dubious. Some early scholars, he says, viewed Angkor through the lens of the sieges and conquests of European history. "The ruler of Ayutthaya, indeed, says he took Angkor, and he may have taken some formal regalia back to Ayutthaya with him," says Fletcher. But after Angkor was captured, Ayutthaya's ruler installed his son on the throne. "He's not likely to have smashed the place up before giving it to his son."

I don't think being conquered can actually ever be considered a legitimate explanation for the demise of an empire.  Without denying the importance of simple chance in human affairs, I think we can safely say that loss in battle will never explain the end of an empire -- they always rot from within long before the military weakness is apparent.  The real explanation may be political, or technological or economic or whatever, but saying with a shrug that Ankor, "died by the sword", isn't even an explanation at all.  So you don't have to be "dubious" about it -- nothing substantive has been offered which requires doubting; someone is trying to pass off a story about what happened as an explanation for why it happened.

A trivial point I know, but one I think you can find over and over again in people's thinking about power and history.  Power is always built systematically and from within, even if it comes in the form of the imposition of the most totalitarian conquering state.  This is really just a tautology, though that at least has the benefit of making it true, and, in my opinion, a useful place to start.  When you strip the dictum, "we always have the government we deserve," of its moral connotations, it is perfectly valid. 

And just in case you think this is all theoretical, a contemporary analogy would be that we always have the financial system we deserve.  The corresponding error is the widely disseminated idea that the financial crisis was caused by the collapse of Lehman Brothers.  That event, like all of the ones we put in the history books, is merely a trigger, not a cause.




Friday, June 19, 2009

Nits and Grits

TBP has a good list of detailed reactions to the financial reform whitepaper. He's right on, which saves me the trouble of being. The main complaints are the lack of any action on the ratings agencies, the sanctioning of the too-big-too-fail idea rather than breaking up these institutions, the lack of a simple and straightforward cap on leverage, and the centralization of so much in the hand of so few (demonstratably fallible) regulators.

NC comments, and well as PK (though he has an interesting point here as well, which runs a bit counter to the grain I'm working).

UPDATE: Gretchen Morgenson has some circumspect observation at the NYT:
More than two years after the crisis began, “too big to fail” remains “too problematic to address” with anything other than more souped-up regulation. Given that earlier efforts at policing these entities failed so miserably, why should anyone think that a new-and-improved regulatory approach will fare better?

Thursday, June 18, 2009

Centralized Frameworks

The Obama administration has big plans, or at least big words for the financial industry. Though there has already been plenty of commentary on their new proposals and plenty of people weighing in with their own take on what a revamped financial system should look like, I feel obligated to opine as well. If what follows sounds overly theoretical and short on details, bear in mind that the 90 pages Treasury put out contains exactly one hard number, and an incorrect one at that (they suggest originators should be required to hold 5% of the value of a securitization on their books, which would be no more than symbolic). So the devil remains in the details. The debate is necessarily still very high level and still mainly a product of what you think caused the crisis, and what you think a healthy financial system actually looks like.

The clearest conclusion one reaches from reading the whitepaper is that the new financial system will be even more centralized in the hands of the Federal Reserve and the Treasury. They propose to have the Fed extend to the entire financial system regulation that till now has applied to the official banking system (ie. they propose to regulate the shadow banking system. They propose to create a new department within Treasury to oversee systemic, and not merely firm level, risk. They propose to have centralized Federal level regulation of banks, thrifts, hedge funds, investment banks, insurance, etc ... We can debate the merits and even the necessity of any of these particular steps -- most of them make pretty good intuitive sense and in general they are not terribly radical -- but the overall effect of these reforms will be to consolidate financial and regulatory power, and concentrate it the hands of very few people. Perhaps in an effort to minimize turf wars and lobbying pushback, the paper is written as a sort of political two-step that doesn't trumpet this fact, but it still comes through loud and clear.

Hence the predictable response of the WSJ op-ed types (and remember never to trust anything that comes out of the AEI):

Although the president said in his speech that he supports free markets, these initiatives confirm that the administration fears the "creative destruction" that free markets produce, preferring stability over innovation, competition and change.

According to the administration white paper circulated prior to the president's speech, the Federal Reserve would be authorized to create a special regulatory regime -- including requirements for capital, leverage and liquidity -- for any firm "whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed." In addition, if a large financial firm is failing, the Treasury is to be given the power -- in lieu of bankruptcy -- to appoint a conservator or receiver to "stabilize" it.

Designating particular financial firms for this kind of special regulatory treatment clearly signals to the markets that these institutions are too big to fail. It will reduce the perceived risk of lending to them, enabling them to raise funds at lower cost than their smaller competitors.

In other words, the administration's plan would create what are essentially government-sponsored enterprises like Fannie Mae and Freddie Mac in every sector of the financial economy -- insurers, securities firms, finance companies, bank holding companies, and hedge funds -- where these specially regulated firms are to be designated. The result will be devastating for competition. Larger firms will squeeze out smaller ones and aggressive small companies will have less opportunity to overcome the government-backed winners.

While predictable, I think there is something to this observation, though the final lines veer towards ideology and away from description. The administration is definitely opting for stabilization and regulation, not for radical change, and not for dismantling the largest firms who were at the center of the crisis. The effect will be to sanction some firms as too big to fail, a fact made apparent from their introduction of an entirely novel regulatory category, the "Tier 1 Financial Holding Company". However, it remains to be seen how draconian the regulations imposed on those firms actually are. One can imagine a situation where the too big to fail doctrine is effectively sanctioned, but the newly vindicated mega-firms are kept on such a tight leash that they become rather boring. One interesting passage in the whitepaper even states explicitly that the idea (at least) is to allow these firms to exist, but to force them to internalize the costs of protecting against their failure. You can do this with higher leverage ratios, more restrictive regulation, more taxes, etc ... At any rate, contrary to the leap of logic in the op-ed, it is theoretically possible to have a boring regulated monopoly type baking sector that is highly concentrated, but not overly profitable and hence relatively stable. Mr. AEI here romanticizes "creative destruction" and "financial innovation" per the party line, but the truth is that you probably don't really want either of those terms to apply to your core banks. A highly concentrated and tightly regulated but government protected financial sector is probably not the worst thing that could happen to the real economy ...

... for about 5 minutes ...

... because that is how long it will last.

This is the point in the debate that everyone misses. And I know why they always miss it too; people have the hardest time imagining how systems adapt. They always imagine that we can design even the most complex systems from the top down, figure out how we want them to look in their ideal state, put them in that state, and then expect them to stay there. In my opinion this is our fundamental problem in thinking about politics and economics. We design fragile monocultural solutions that depend on a shallow unstable equilibrium. No wonder the damn thing blows up every twenty years. We never confront the hard problem of designing something that is evolutionarily stable, something that has built-in defense mechanisms to protect against the most obvious threats. Or, at least, we haven't done this since we signed the Constitution.

Anyhow, the main problem with the new financial regulatory structure is being billed as a feature, not a bug. We will have something more centralized, more concentrated, more technocratic, and even more susceptible (after a suitable period of mourning of course) to the same disease we just witnessed. The op-ed thus gets to the point, and proceeds to miss it entirely. Yes, we will have a less competitive, more managed and 'socialist' financial system. But the real problem is not that this is inefficient or that it rewards failure instead of success (the op-ed goes on to make embarrassingly stupid statements about how the government model is to treat everyone like AIG and how it really wasn't that big a deal to let Lehman go under). The problem is that in the long run it is not even stable. If the only way to get ahead is to capture the one central regulatory body, if that is a sound business model, then you can be sure that someone will manage it.

I know I know, we all think we have learned our lesson, and we all believe that Obama is a great guy, an that the Fed is full of smart people and we all want to and need to trust our government -- but this is exactly the problem, it was trusting our government when it fell, quite predictably, into the hands of an idiot that got us here in the first place.

I might write some more on the details later. The ideas, in the short term, are actually pretty reasonable, though we lack the details, and much of the discretion is left up to the Fed and Treasury. Do you trust Geithner and Bernanke to fix everything, or do you think that they may find themselves an opening at Goldman Sachs when all this blows over? Yeah, that's what I thought, and that's the problem.

Saturday, June 13, 2009

Bacon, Spinoza, and the Straight of Hormuz

Sitting in the park today after my run I was reflecting idly on the way Sheep's Meadow fills up on a Saturday afternoon. The odd couple with blankets, the big groups having bar mitvahs or birthdays with their kids, the frisbee throwers, and the little calisthenics groups with their paramilitary discipline. This particular morning was not especially glorious, it was warm, but with a cloudy sun and grass still damp from the night before, so things were still a bit slow. But we've all seen it fill way up on the nice days. As the density increases it gradually seems to self-organize into patches alternately dominated by picknickers and players (frisbee, futbol, catch, etc ...) that is, it agglomerates into interspersed low and high energy zones. It would be interesting to have some time lapse photography of this process taken from directly above the meadow, and some visual processing software. I'm not sure what you would be looking for in this, but I'm less interested in characterizing the algorithm the system follows than in adapting it to aesthetic purposes, for example changing it into music or making all of the people into dots with trails following their movements that fade out over time, or whatever.

This got me thinking again about Bacon, partly because I went back to the Met to look at his paintings before hearing Josh Ritter (pleasant yawn) at Summerstage last night. Apparently, Bacon himself called that spatial frame thing that I mentioned last time, and which appears in every painting, his "visual machine". It seems like he must have used it as some sort of taking off point for framing the figures, but also for animating the whole motion of the painting, if you can call it that. In fact, while some sort of spatial framing occurs in every painting, it's not always rectilinear; sometimes the space is curved, or doubled back on itself, and even the rectilinear stuff is skewed at odd angles. The effect is to integrate the figure into the background, to the point where you almost confuse the two, which you can really see in the Pope paintings. There, to quote one of the Met's descriptions, the figure materializes in the middle of a sort of vertical curtain, and not in front of or behind it. In some of the other paintings it's not so much that the image and background are on the same plane as that you can literally almost feel the background reaching out to stretch and twist the figures into knots, putting the too into intimate contact.

Obviously, you wondering what the hell this has to do with poisoning pigeons in the park. To answer this, let me take one more detour through the labyrinthine connections of the intertubes, and show you a giant parking lot.


That image is taken from a Google Earth mash-up of oil tanker locations. These tankers are parked off of the coast of Singapore (which doesn't sound as good in a title as the Straight of Hormuz). What I see here is a macroeconomic version of the same thing that interested me in the park. Ignore for a moment what a giant parking lot full of oil tankers might tell us about the state of the world economy. The interesting thing in the park is the coherent collective patterns built from the interactions of the units, not the reasons why the units are doing what they are doing. And I think the interest goes beyond the wonder of an invisible-hand (per Nozick) or algorithmic explanation of some pattern.

Spinoza (and Whitehead and Deleuze as well) had this idea that these collective patterns indicated an emotion. They are the outward effects of the inward forces pushing a system towards or away from some pattern of action. This seems like a loose analogy at first, until you start to take seriously the idea that animals have no monopoly on the basic definition of life, and that what we mean by emotion could actually apply to any self-sustaining system. Joy is the expansion of something's power of acting and the sorrow its contraction. You can come, as Whitehead did, to see the rocks and the atoms as having emotions in this sense. He thought of each entity in each moment as a separate thing. The joy of today's rock lies in being here tomorrow, which expands the existence of that rock in the most basic possible sense -- by prolonging it. Before you object that the rock didn't cause itself to continue, stop for a moment and consider how difficult it is to define a rock in a completely deterministic world. The world doesn't inherently include all the divisions we normally think of it as having. Our simple habits of coping with it contribute much of the structure that separates foreground from background, but the world would continue to be what it is even if we couldn't cope. Nothing actually causes itself to do anything in a deterministic world, because that thing could not be part of the world. In fact, the closest you can get to being the cause of yourself -- which is incidentally how Spinoza defines freedom -- is to become everything. So just consider that the emotions of a rock may differ from yours only by a matter of degree. The rock doesn't do much more than persevere if it can, whereas your emotions reflect a whole range of augmentations and diminutions of your power of acting.

Anyhow, I don't imagine that I can convince anyone why this is a nice way to see the world in just a paragraph, so I won't continue to try to argue that any system holding itself together can be said to have emotions. I see it this way, and I've recently realized that this viewpoint inherently leads you in an aesthetic direction, which is why I found myself connecting Bacon to the woof and warp of Sheep's Meadow. Because every time you are looking at the behavior of a system you are seeing something with an aesthetic value, namely an emotional reaction. So in the tanker photo above, you might see something like the frustrations of the world; it could be doing so much more. Maybe in Sheep's Meadow you are seeing the idea of accommodation or domestication -- quiet domestic joy. I know this sounds like anthropomorphizing everything in the worst way, but consider that the logic is actually going in the opposite direction -- I want to see our feeling of domestication as like the meadow, rather than vice versa.

And now we are back to Bacon. If you are interested in the aesthetics and the emotions of a process maybe you can investigate this by trying to duplicate the process in paint. Painting would be like a sort of simulation in this case. It's not a duplication of the results of the processes we see in the world, not a copy of reality, but it's another version of reality that feels its way into the world and expresses the same emotions that the world is having. Bacon happens to be using paint where I imagine little colored dots on a computer monitor or notes on a keyboard, but these are working towards the same end of extracting the aesthetics from the world and of making the most abstract processes into concrete aesthetics statements.

Yeah yeah, I know, kinda delirious. And I realize that "how do you paint the global macroeconomy" is a weird question, but, hey, it's Saturday.

Friday, June 12, 2009

Bingo for Bailout Nation Boy

Barry Ritholtz speaks the truth:

I find it amazing that at this late stage of the bailouts, how so few people — still — see the full picture. A perfect example of that is the focus (even obsession) on compensation. This is focusing on the symptom of an unhealthy6 corporate system, and not the underlying disease.

The true problem underlying the comp issue is corporate governance, and the way the Boards of Directors fail to represent the interests of shareholders. The way they systemically engage in the worst form of crony capitalism, transferring wealth from shareholders they are charged with representing to the senior management they are cronies with.

Democracy does not scale.  Not for a 300 million person country, and not for a $300 billion dollar company.

Not the Safest Way

Today's WSJ has an op-ed from the CEO of supermarket chain Safeway.  He brags about how Safeway has managed to contain the cost of its healthcare program while improving the health of its employees.  The article is not badly written, and you can go check it out yourself, but a picture is worth a thousand words in this case.  The idea, in brief, is to charge unhealthy people more for healthcare. 

In a sense, this is perfectly coherent.  The most straightforward way to get a healthier society is to give people a monetary incentive to be healthier.  Tax the fat.  One wonders a bit at the surface contradiction lurking in this guy's faith in "market based solutions", on the one hand, and his desire to engineer society on the other, but it is likely that only the paleo-conservative brain of WSJ op-ed writers would burst at that thought. 

Unfortunately, that's not the real problem with the argument.  The idea of using risk-based healthcare costs to encourage better health (similarly to auto insurance) makes sense for Safeway in isolation, or any other subsegment of the economy that can push off the cost of treating the really sick to someone else.  The problem is that in the end, regardless of what premium the fat smoker paid before he got sick, we aren't, as a society, just going to let him die (at least in the US).  Add to this the fact that a lot of fat people are pretty poor, and that many would not be able to afford a correspondingly higher premium, and you can see the effect of a scheme like this at a nationwide level would be to push all those people out of the system completely, and to push the cost of treating them directly onto ... well ... onto the hospitals who are required to treat them right now.  Does anybody think those hospitals might pass on the increased cost to the people who are still paying?

So this scheme works fine if it works, that is if it actually encourages people to get healthier, and it works terribly if it doesn't, because we are still ultimately going to treat people who don't stay healthy, but now only after bleeding them dry and then not treating them until they completely keel over from poverty and diabetes.  A full-fledged market is only going to work here if we have the dispassion to not to provide healthcare for poor sick people -- normally, in a market people who don't pay for the product don't get to use it.  The fact that the best way to improve healtcare over the long run is to have a healthier population does present a tricky question, but taxing the fat is clearly no solution, unless you're willing to tax them out of existence in whatever way they choose to go.


Wednesday, June 10, 2009

Twitter

As you might imagine, I'm a skeptic when it comes to the Twitter phenomenon.  At the same time, I assume that in 10 years the web will just tell us what we like and what we're doing today, without much involvement on our part beyond pressing the feeder bar.  So I'm left with a sentiment similar to the one Steve Johnson (rather anti-climatically) gets to in his Time article on Twitter:

Social networks are notoriously vulnerable to the fickle tastes of teens and 20-somethings (remember Friendster?), so it's entirely possible that three or four years from now, we'll have moved on to some Twitter successor. But the key elements of the Twitter platform — the follower structure, link-sharing, real-time searching — will persevere regardless of Twitter's fortunes, just as Web conventions like links, posts and feeds have endured over the past decade. In fact, every major channel of information will be Twitterfied in one way or another in the coming years

 

Chinese hoarding?

Macro Man has a bunch of fascinating charts about Chinese commodity imports by volume.  It looks like they stocked up while things were on sale.  This would also explain the dramatic recent rise in the Baltic Dry index, which would be less about global trade to the end user recovering, and more about the logistics of trying to import twice as much iron ore as they did last year.  This is as decisively inconclusive as all macro data, but is suggestive nevertheless. 

Maybe China is using the opportunity to buy itself some time to move towards a more consumer economy.  They might blunt the slowdown in exports by keeping everyone employed building new capacity while gradually redistributing enough income so that people can eventually afford to buy the products they are gearing up to make for themselves.  If the Chinese leadership is genius and not too greedy, they may actually manage to pole-vault into the first world very rapidly.  Color me still skeptical, but they do seem to be rather clever monkeys. 

A Model Mania

Here's a quote from Tyler Cowen's new paper about what caused the crisis.

Once we liberate ourselves from applying the law of large numbers to entrepreneurial error, as Black urged us, another answer suggests itself.  Investors systematically overestimated how much they could trust the judgment of other investors. Investment banks overestimated how much they could trust the judgment of other investment banks. Purchasers of mortgage-backed securities overestimated how much they could trust the judgment of both the market and the rating agencies as to the securities' values. A commonly held view was that although financial institutions had made large bets, key decision makers had their own money on the line and thus things could not be all that bad. Proceeding on some version of that assumption, most market participants (and regulators) held positions that were increasingly vulnerable to systemic financial risk.

What he's trying to do is come up with a theory where a bubble can be seen as rational response on the part of the participants, hence integrating it into what they call "rational expectations" theory in economics.  Normally, the theory is aimed at proving how the market will always revert to the mean.  Some people overestimate how much something is worth, other people underestimate it, and in aggregate these cancel out.  If this were true, it would generally be fine to look at what your neighbor was doing and copy it (ie. trust him), statistically speaking, because your neighbor would be bound to be within certain error bars of reality, even if he were doing the same type of copying.  It's true, a crowd where people copy one another could fall into a pattern of systematically misestimating the value of something if it started with just the wrong seed, but given that the crowd will never have just one seed, this is probably not a robust mechanism for introducing error.  Even if most of the people just copy their neighbor, if there were some percentage who acted independently, you would still overall have a reversion to the mean.  The only difference would be in the size of the actor units, if that makes sense.  There would be 'lead steers' who influenced a whole herd of people, but there would be several such steers, and in general their errors, and hence the errors of their followers, could be expected to cancel one another out. 

If you reduced the number of independent actors (increased the number of copiers) as a percentage of the population, there would presumably be a tipping point where any misestimation could spread unchecked, with no tendency to revert to the mean, and indeed, with the tendency to echo around this hermetic ring of imitators and reinforce itself.  You could look at this as a sort of mathematical version (on the assumption you needed one) of the theory that misaligned incentives can lead to a bubble.  If your neighbor only makes money when he correctly bets on some underlying reality, then you can trust him to have independent incentives, and in general it's no problem to copy him.  If instead he just gets paid based on the number of people who trust him, then of course he's not trustworthy at all, and you should steer clear of imitating him.

But what's going on here with this notion of "underlying reality"?  What the fuck is that supposed to mean when we know that this reality is created by the market participants themselves?  A simpler and more immanent definition of trust wouldn't make reference to any underlying reality or independence, but just to the idea that you can trust someone whose incentives are aligned with your own -- you can trust someone who only wins if you do.  But this type of trust still leaves a system vulnerable to delusional feedback loops.  Everyone's incentives might line up and we might all march off the cliff together. 

Now I'm thinking that you really get to the core of the problem when you see this in terms of zero and non-zero sum games.  Trust comes fundamentally from alignment of incentives, that is from playing games where we both win or lose together -- trust would be warranted in these instances.  Conversely, you cannot trust someone whose outcome is not correlated with your own, and especially not if you are competing with them, winning when they lose and vice-versa -- here trust is unwarranted.  It seems to me that you can get a bubble in either of these cases.  Cowen points out that too much trust where it is not warranted can lead the copying mechanism to diverge from the underlying reality.  But lots of trust even when it is warranted can also lead to out of control copying.  The difference is that in this second case the divergence can be self-fulfilling by actually altering the reality.  I suspect that this might be a consequence of the mutuality of the one situation (warranted trust runs in both directions) versus the lack of such a requirement in the other (unwarranted trust doesn't require that we both win, and so may leave open the possibility of a global non-zero sum game) but I can't quite see this clearly.

Anyhow, I'm not sure this is anything but a poor restatement of the ideas Soros talks about.  I do find it intersting to think about the light and dark sides of feedback loops though.  We only get somewhere in the long run by working together with our incentives aligned, but our tendency towards this is so easy to abuse, either because we figure out a way to fake the alignment of incentives for a time, or because we really do jump in the same handbasket to hell.  To wax philosophical for a moment, we might conclude that "reality" is just about time scales and sustainability.  So when Cowen says:

One view of rational expectations is that investors' errors will cancel one another out in each market period. Another view of rational expectations is that investors' errors will cancel one another out over longer stretches of time but that the aggregate weight of the forecasts in any particular period can be quite biased owing to common entrepreneurial misunderstandings of observed recent history. In the latter case, entrepreneurial errors magnify one another rather than cancel one another out. That is one simple way to account for a widespread financial crisis without doing violence to the rational expectations assumption or denying the mathematical elegance of the law of large numbers.

we can only reply:

The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again. 


 

Tuesday, June 9, 2009

Waiting for Godot

That is apparently the script for our current macroeconomic worries.  Having lived last year's absurdity at close range, we wake up midway through 2009 only to find ourselves in the same bizarre situation.  Waiting for the collapse of American empire and the US dollar is like waiting for Godot.  We perpetually have assurances that it will arrive sometime soon.  And yet, nothing seems to be able to permanently break down this system, no one can think of a way to leave it behind, and we all return to the squalid, crisis-prone arrangements that brought us here.  Nothing to be done.

I've already talked about how this applies to banking reform.  Today, I am reflecting on the renewed weakness of the dollar, the rising commodities prices, and the continued dollar reserve accumulation of China and others.  Consider the way and even less stable version of Bretton Woods 2 has been so quickly reinstated, even when we know that original was a flop.

Actions, I believe, speak louder than words. No doubt the world's emerging markets aren't pleased with their exposure to the dollar, but for now they seem to have no good alternative to accumulations of large dollar reserves. The simple reason? Structural imbalances are very difficult to unwind. Nations heavily dependent on exports can't afford to go playing around with exchange rate values in ways that reduce their competitiveness in key markets. The question is, how long will this last?

Well, in one sense, the system is still pretty stable. America currently has a much smaller current account deficit to finance, and while much hay has been raised over government borrowing, that borrowing has largely offset the massive fall in private American borrowing, leading to no net change. On the other hand, as Brad Setser points out, Bretton Woods 2 was based on a very simple quid pro quo—America got the cheap borrowing and BRICs got a plum market for exports. These days, America is still getting the cheap borrowing, but the exporters aren't seeing much of a return for their efforts; support for the dollar may have prevented a larger collapse in exports (to the extent that's possible), but it hasn't reinvigorated export-dependent economies.

With the basis of Bretton Woods 2 no longer in place, there is a greater incentive for emerging markets to move to a new system, presumably one in which domestic demand plays a stronger role. But as the latest data indicates, the transition is unlikely to involve a sudden move away from dollars. These things take time.

Somehow the world seems unable to make any substantive course correction, a fact which I would chalk up to politics. The instability of this system is essentially held together by politics.  Without the centralization of currency manipulation and reserve investment decisions in places like China, it is unlikely that their private sector would have made the same huge bet on the dollar and on export driven growth.  Without the phony regulation of the US financial system to guarantee an air of respectability, we would also not have been able to absorb so much surplus capital in the US without more of it passing into real investment either domestically or abroad, or without it at least spreading into equities.  As it was, politics was what held this stable disequilibrium together to begin with -- Chinese politics, led by exports and with its debilitated domestic financial system, and American politics, with its hyperactive financial system that enabled it to find some place to gamble away Chinese savings. 

So I think you can see the macroeconomic patterns of the last decade (in retrospect we can see that this cycle really began with the Asian crisis of 98) as the system's response to the political bottlenecks that constrained it -- the capture of the US government by financial services, and the capture of the Chinese government by its rapidly growing exporters.  Because the real driving economic force through all of this has been the same force that has driven rising standards of living (on and off) for the last 500 years -- 2 billion newly productive workers entered the market economy.  Normally this type of productivity increase would have been highly deflationary, and would have dramatically raised standards of living in the emerging world.  Unfortunately, finance and deflation go together like oil and water, and China at least wasn't ready to see too fast a rise of a new and more independent middle class making financial decisions on its own.  The productivity boom of China's rapid industrialization was thus channeled in a particular direction because it fit with the political constraints on both sides of the globe.  I think this goes a long way to explaining all of the relevant factors that Martin Wolf discusses in his new column.

The paper points to four salient features of the world economy during this decade: a huge increase in global current account imbalances (with, in particular, the emergence of huge surpluses in emerging economies); a global decline in nominal and real yields on all forms of debt; an increase in global returns on physical capital; and an increase in the "equity risk premium" – the gap between the earnings yield on equities and the real yield on bonds. I would add to this list the strong downward pressure on the dollar prices of many manufactured goods.

In a certain sense, this is a relatively comforting conclusion -- the current crisis is, from the perspective of the globe as a whole, a rich man's problem.  Globalization was too successful and too productive, or at least too rapid relative to the global financial system's ability to absorb the benefits.  All one has to do to fix this is slow down consumption in the US and stimulate consumption in China, and voilĂ , we can gradually go back about our business. 

The dominant feature of today's economy is that erstwhile private borrowers are, to put it bluntly, bust. To sustain spending, central banks are being driven towards the monetary emissions of which Ms Merkel is suspicious and governments are driven towards massive dis-saving, to offset higher desired private saving.

Today, Germany wants to preserve the value of its money, while China is desperate to preserve the value of its external assets. These are understandable aims. Yet, if this is to happen, debtor countries have to stabilise their economies without another round of profligate private borrowing or an indefinite rise in government debt. Both paths will ultimately lead to defaults, inflation, or both and so to losses for creditors. The only alternative is for debtors to earn their way out. At the level of an entire country that means a big rise in net exports. But if indebted countries are to achieve this aim, in a vigorous world economy, the surplus countries must expand demand strongly, relative to supply.

China's decision to accumulate roughly $2,000bn in foreign currency reserves was, in my view, a blunder. Now it has a choice. If it wants its claims on the US to be safe, it must facilitate an adjustment in the global balance of payments. If it and other surplus countries wish to run huge surpluses and accumulate vast financial claims, they should expect defaults. They cannot have both safe foreign assets and huge surpluses. They must choose between them. It may seem unfair. But whoever said life is fair?

While macro-economically straightforward, this solution runs counter to the interests of the political constraints that sponsored the meltdown.  On top of the difficulty of either side slipping those constraints, you have to establish some trust between the two new political establishments that would replace the current ones.  So to get to there from here, you not only have to change US politics, but you have to simultaneously change Chinese politics in a complementary fashion.  We still sink or swim together.

Hopefully ...

... the High Line is just as much fun when legal.

Alex Ross has some pictures.  A 40oz pilgrimage is obviously warranted.

Saturday, June 6, 2009

Further Formulas

Anarchy is the immune system of freedom.

An aesthetics of politics -- anarchy is the political version of minimalism.

Thoreau said:
I heartily accept the motto, "That government is best which governs least"; and I should like to see it acted up to more rapidly and systematically. Carried out, it finally amounts to this, which also I believe--"That government is best which governs not at all"; and when men are prepared for it, that will be the kind of government which they will have.
Anarchy is eternally preparing us for that best government.

Anarchy is permanent revolution.

Anarchy is not opposed to the organs of power, just to their always being bound up in an organism.

The idea of anarchy is like universal acid.  It eats through everything till you see the bones of power.

Anarchy is the art of organizing decoupled centers of power that refuse to resonate together.

Anarcho-theism For Beginners

Recently I've been feeling the need to revisit or restate some of the presuppositions and prejudices of my political philosophy (should you accept such an outlandish title for my motley collection of opinions).  Since it's always nice to have a starting point for this sort of exercise, Marc Thoma on Bruce Bartlett seems as good a departure point as any.

In my heart of hearts, I'm pretty libertarian. I really don't want government looking over my shoulder and telling me what I can and cannot do.

Where I part with many libertarians - perhaps due to my background - is in the idea that government is almost always at odds with liberty. In my case, government played a key role in providing me with opportunity - education is one example, without tuition of $100 per semester at a state school, I probably would not have gone to college

Governments also need to intervene to prevent monopoly and political power from building up. Without such interventions, power will tend to concentrate and we will likely be exploited in one way or another, so government needs to ensure that our opportunity to enter a particular business - that our economic opportunities generally - are not limited by these factors.

I sympathize with this sentiment as well.  I feel like I'm pretty capable of deciding for myself, and I want the government to stay the hell out of my way, and keep everybody else out of it too.  However, phrasing it this way already opens up a can of worms.  Even if you agree that government only exists to keep us free (and not, principally, to create a fairer or 'better' society), one of its principle aims is bound to be keeping us free from each other, and not just from the government.  In fact, the basic purpose of government is to keep us from sliding back into that free-est of all markets -- the protection racket of a mafia.  In its inception then, the government is not only not at odds with liberty, but is the very stuff of which (more) liberty is built.  We get a government in order to solve problems of collective action that stand in the way of us expanding our ability to act.  This is what freedom is -- the ability to do more stuff.  Some of these problems are positive, like organizing a bunch of people to build a bridge that will benefit everyone, and some of these problems are negative, like agreeing to have  dedicated police force and not waste time and effort in the zero-sum game of going around bonking each other on the head and making off with each other's wives.

Nozick has outlined this theory of government-as-freedom better than I can possibly hope to.  I realize that modern libertarians have fallen very far from this tree, but to me, the idea that all libertarians believe that government (rightly conceived as self-organizing politics) is always the problem is just ludicrous.  You can't be in favor of the "free" market, as we love to call it, without also being in favor of some organization that writes and enforce the rules for it.  Without this there is just chaos, or not even, there is just a return to the needless suffering and collective self-oppression of routine head-bonking and wife-stealing.  That is not more freedom, that is less; less freedom -- less power to act.

So then how did this debate get so perverted that liberals can just naturally assume that libertarians almost always believe that government and liberty are at odds?  I can think of two reasons, one blaming each side.
  1. The government got so fucking ginormous that it became obvious that most of what it did was so far beyond what any reasonable person could justify on the grounds of providing an infrastructure for cooperation.  The government itself become the very mafia state it was invented to protect us from.
  2. Libertarians lost sight of the fact that their beloved private industry was so deeply in bed with the government that the two were as indistinguishable as good cop and bad cop.  They are both just pigs feeding at each other's trough.
These two points turn out to be connected, and point us to the deeper reason that this debate has gone astray.  The problem is that we have created a false dichotomy between government and industry, between public and private.  Once you imagine that on one side you have gallantly self-reliant free private industry and on the other the decrepit hand of a stupid bureaucracy, you cannot fail to confuse the issue.  On the other hand, the same thing happens from the opposite direction if you imagine a grubby corrupt and narrow-mindedly profit seeking private sector opposed only by that great bastion of justice and fairness, the state.  Government doesn't reign in private industry and industry doesn't compete with government.  Government and industry are not enemies but allies in their desire to control us or liberate us (depending on how they are working) for the simple reason that these two forms of power resonate and reinforce one another so strongly that they have become symbiots.  It doesn't matter which side opresses you, especially when they become indistinguishable.

So to get back to the original quote, while I'm sympathetic to the idea that government is not inherently at odds with liberty -- after all, somebody has to lay out the rules of the market, and if a real market is created it can be an incredibly powerful tool -- I'm not so convinced that the net effect of government is to prevent monopoly power from building up.  In fact, governments don't intervene to prevent the build-up of monopoly power because they are generally the cause of the build-up of monopoly power. This is really the dirty secret of capitalism.  The problem isn't money or markets or industrial production as such, but the way these interact with the governments we inherited from Charlemagne (this is perhaps even what Marx had in mind in his more coherent critiques).  Once you lay out a set of rules that gets cooperation off the ground and establishes a market, you immediately start to run the risk of some part of that market captures the process by which new rules are written.  If the winners write the rules, they are likely to win even bigger the next time around. 

To respond to the Bartlett article in turn (the click through is worth it), where he complains that libertarians are too focused on economics, I would say that the real problem is that they're not focused enough on how economics actually shapes the political machine.  How can they ignore the way money buys influence and so disrupts the competitive utopia they imagine?  How can they ignore the fact that a large chunk of the world lives in what amounts to economic servitude -- a lack of freedom, lack of ability to do more stuff, that is due at least as much to economic as to political power for so many people.  There could be a meeting of the minds (to a point) between liberals and libertarians if both could be made to see that the current industrial-political complex is conducive neither to fairness nor to freedom.  Both camps would simply have to admit that their proposed remedies represent two sides of the same danger.

Freedom is threatened by getting either the beginning or the endpoint of government wrong.  Without organizing rules at all we get chaos.  But with the ability to create many rules you get the danger -- no, really the near inevitability -- that the winners will rewrite the rules in their favor.  The first situation creates a total absence of government, and also a total absence of functioning private markets.  The second creates a gigantic government, but also a gigantic concentration of private power that goes right along with it.  Whether the power or the absence of power is public or private simply isn't the key question.  The key thing is to see that once you set up some rules, the outcome of the game is coupled to the writing of the rules.  Social organization touches off a feedback loop that increases our power but is always in danger of spiraling out of control.  Whether this feedback loop is operating to increase our freedom or restrict it does not depend fundamentally on whether the public or the private side is driving it -- in fact, the two are inevitably coupled.

I think that this insight is as deep as it is simple, and modifies the whole political debate once you grasp it.  I find that it cuts right across the political right-left lines we are used to drawing.  Because if you start with the basic premise that we invented government to keep us free, and try to work out what type of organization will keep us the most free, that is, able to do the most stuff, you can leave behind all the doctrinary debates about whether the government should be bigger or smaller, and focus instead on the open-ended empirical question of whether the system it is actually working

It is impossible to overstate how important this difference is.  Political philosophy needs to give up the idea of utopia.  It needs to start with some principles and work forward instead of starting with a final goal and working backwards.  Once you start working from a principle, adapting it to the circumstances without trying to know the final outcome, and treating politics as a process, you quit worrying about whether it is industry or government or your fellow apes who are impeding your freedom.  You start to realize that it doesn't matter why you are cut off from your ability to do stuff, all that matters is changing things so that you can do more.  If this ends up looking like communism or a free market or anarchy, then so be it.

And so there it is, I have finally tipped my hand.  Because the name for a political philosophy based around the principle of freedom, a political philosophy defined by a trajectory towards more freedom, without any preconceived idea of what the rules should be or what the final outcome should look like -- that is Anarchy.  Anarchy is a principle and a trajectory, a commitment to continually trying to organize and reorganize political structures to expand our freedom.  There is a fine line between anarchy and chaos; even chaos has its rules, they just are too many and too conflicted to produce anything coherent.  And there is a fine line between anarchy and democracy; democracy sets a few rules in stone and so has no defense against the spiraling centralization of power that builds up when someone hacks those rules.  Anarchy is less well defined and more flexible, it has a "broad-back" that endures anything, as someone once put it.

I'm sure that sounds terrifically vague and idealistic.  Not at all "actionable".  But actionable is the hobgoblin of politicians.  We have plenty of politicians who justify everything in terms of actionable.  Someone has to have a vision here as well, or we will just continue to action ourselves right into slavery.  Beyond that though, the claim that anarchy is not actionable or is somehow impossibly naive and unworkable is already unfair.  The idea of anarchy not only gives a direction to move in based on some principles, but it involves a particular (and particularly non-partisan) diagnosis of what the problem is -- the feedback loop between political and economic power.  With that diagnosis in mind we can search for some imminently actionable solutions.  These aren't really revolutionary solutions, though of course anarchy has nothing to do with revolution because it never imagines itself overthrowing the current order and ushering us into some political paradise.  The solutions are things like greater transparency in voting records and donations, greater awareness of the point I am making here about corruption, and perhaps, ultimately, public funding of elections.  You don't have to be an anarchist to want these things, but they are entirely in the spirit of the idea.

But the truth is that if we were only going to talk politics, there probably wouldn't be any reason to invoke the charged term Anarchy.  Not that I want to soften my points about feedback loops and freedom or the superiority of thinking about political process instead of utopian endpoint.  However, summing these ideas up as Anarchy would probably be entirely polemic, and just meant to piss people off.  Much as I love that, I actually have a more respectable ulterior motive for self-labeling my political philosophy as a form of anarchy.  Anarchy is the only political philosophy that puts human political institutions into the correct historical and philosophical light.  It's the only idea of politics that can be applied to our nearest (past and future) relatives, the apes and the computers.  Autarky or democracy or liberalism or conservatism don't share this advantage.  Those concepts only apply to humans (and only even to the most recent 500 years worth of humans).  They presume that people have intentions and essences.  They presume that humanity is somehow different, special, and that human political problems are of a different order.  Concepts that only apply to humans are not philosophical concepts.  If you want to be able to say something useful to Google when it reads you three-thousand years hence, you will have to say something philosophical.  I'm not saying that has to be your goal in life, but if it is, you will have to find some way to integrate human politics into a continuum of forms of animal behavior.  Anarchy is the only political concept I have come across that does this (unless we include it's mirror image -- fascism).

All this is again due to anarchism's broad back.  The central concept is just the self-organization of power.  In human political terms this means the self-organization of some government that enables us to cooperate and prevents us from all ending up in an arms race to the bottom.  Almost certainly, the first form of this was ethics and religion (I wonder if this is tied up with the history of language in an interesting way).  Hierarchies and rituals evolved that held a community together and ensured its own propagation alongside that of its members.  If you roll this proto-government forward you move towards the states we are familiar with, and if you dig further back into history you quickly get to the monkeys.  In all of these cases you have some political machine that results from the interactions between economics and aesthetics and culture.  Politics, broadly construed, is the name we give to the process by which these forces operating at a lower, more individual level, work themselves out in the context of a group.  Which is why politics is everywhere and politics precedes being.  Politics is the way a new entity or system gets organized.  Politics, anarchy, is all about the production and sustenance of novelty.  This process is going on all around us all the time, with units fighting to organize and increase their power, their freedom, their ability to act, with other units fighting to be born, and with yet others clinging to the toehold they have carved out. 

Which brings us finally to the theological aspect of anarchy.  The concept doesn't work just to connect human political systems back to the monkeys.  That's just the first step.  After that you realize that you can expand it to talk about how ants cooperate to find food, or genes manage to cooperate in meiosis, or protons and electrons cooperate to form atoms -- each level broader and deeper, each having its own peculiarities, but each, perhaps, benefiting from being seen as a process by which more or less stable solutions form new units out of the interactions between other more or less stable solutions.  Follow this too far and you will end up back at the idea of a god who is little more than the name for this principle of connection, a non-zero god who draws life together and pulls it apart, and always keeps it in motion.

Anyhow, I could drone on endlessly about the usefulness of the concept of anarchy, but eventually it will just end up sounding like a tautology, which it mostly is.  In the meantime, anybody up for a No Gods No Masters book club?

Friday, June 5, 2009

The new baseline

I found Simon Johnson's recent comment fitting.  I increasingly feel like the world in general and our brave Obama in particular may be in denial.  The powers that be have managed to get the wheels back on the cart for the moment, but nobody seems to be willing to admit that the wheels fell off for a reason, and that the world needs to get together and restructure it's financial system or we will just face a repeat of the same pressures until the lid blows off again.

My takeaway: we are still not ready for hard economic conversations anywhere in the world.  Wishful thinking prevails, in Europe as much as in the United States.  No one wants to start the difficult and messy task of restructuring – i.e., reducing – debt payments.  Everyone feels entitled to a bailout.  And the banks get one.

Or put it to your elected representative like this – we're transferring Latvia's debts from European banks onto the IMF, which is underwritten by our future tax dollars; then there will be default and devaluation for which no one is prepared.

Brussels, you're doing a heck of a job.

To me, the debt restructuring is key.  We have proven that debt is a powerful but unstable way to tie together people and economies.  Unless we think about ways to mitigate that fundamental problem we are going to be in for a bumpy ride.