Wednesday, January 27, 2010


Okay. This is the very last time. If I see one more bullshit gotcha story about how everyone is shocked, shocked that the government takeover of AIG, "amounted to a secret "backdoor bailout" of banks who were made whole on $62 billion of troubled insurance contracts they had with AIG", I'm going to puke. The mixing of finance and politics, rationality and spin to this degree just drives me nuts. No one wants to just look at how the machine works anymore -- it's like we've become snow-blind to reality and can only see the white-out of our prior convictions.

Anyhow, philosophy aside, let's do this just one more time. The rescue of AIG was NOT NOT NOT a backdoor bailout of Goldman, , Morgan, JP, etc ... IT WAS A FRONT DOOR BAILOUT. This was not secretive for anybody who had a clue. The whole point was that AIG failing would take down everyone. The reason for this is that people who thought they were hedged would suddenly become unhedged. As a result they would have to come up with money for the losses that they knew they had, but which they assumed AIG was going to pay for. Which means that they would have had to sell something else. In a hurry. Which would have driven down the price of whatever that something else was (pretty much everything at that moment). Which would have made the losses that needed hedging, and which were no longer covered by AIG, even larger. Lather, rinse, repeat, depression.

They decided they wanted to prop the financial system up. You can question this decision. Not propping it up would have resulted in a total financial collapse. Eventually, the country and the world would have recovered. In my opinion the brief tour through barter we would have been forced to make would have involved a lot of needless suffering. Call it cathartic if you want, but admit that that revolution wouldn't have been televised -- the only way you get electricity without money in the short term is martial law.

They also decided to prop up the financial system in more or less the form it then existed. That is, they did not just nationalize the whole works outright. Again, you can question this decision. I think the arguments against it are more compelling than the arguments for doing nothing. It's still not an easy call. If you think so, consider Venezuela for a moment. Still, there may have been a way to seize a large chunk of the financial system without causing even more panic in the economy at large. This would have involved a lot more politics at the time though, or central bank action that obviously opened itself to legal challenges. In this case the money might have continued flowing, but the political system would have come to a sudden halt.

However, if you have accepted one and two here, you cannot gripe about the logical and inevitable consequences. You bailed out AIG precisely in order to keep the current banks functioning in their current form. Punitively sucking capital out of them right at the moment everyone is concerned about their solvency is simple suicide. The bailout of AIG was a bailout of the banks. Everyone knew that. That was the point.

You can turn around now that things have calmed down a bit and say we want our money back. Fine. Great idea. Tax, regulate, partially nationalize (ie. tax some more), do whatever you want. Consider what's fair in the past, and what the consequences will be in the future. Have yourself a real debate. But do not claim that you were confused about what happened. Don't give me this kabuki political theater shit where you go out and hang the messenger for delivering your own letter.

You wanted a private financial system? Well, you fucking got one. Shut you pansy-ass politician piehole until such time as your willing to change your mind about that. Without somebody growing the cajones necessary for real structural reform, the options remain the same -- have a financial system OR have it private.

Tuesday, January 26, 2010



An explosion in trading propelled by computers is raising fears that trading platforms could be knocked out by rogue trades triggered by systems running out of control.

Trading in equities and derivatives is being driven increasingly by mathematical algorithms used in computer programs. They allow trading to take place automatically in response to market data and news, deciding when and how much to trade similar to the autopilot function in aircraft.

Analysts estimate that up to 60 per cent of trading in equity markets is driven in this way.



The US and its Nato allies have been urged to collaborate more intensely to fend off the threat of cyber-attacks in the aftermath of the alleged Chinese assault on Google.

The Pentagon's top cyber-strategist said shared warning systems had to be established and government contacts broadened.

Monday, January 25, 2010

The Pathological Individual

I'm sure by now we've all had time to recover from our despair over the latest Supreme Court ruling.  Only to immediately despair again when you really start to think about the implications.  There's the obvious ones, like the fact that this is just one step in an ongoing plan to simply identify corporations with government in what would be almost the definition of fascism:

Mr. Bopp said the next step in his 10-year plan is to roll back the disclosure rules.

"Groups have to be relieved of reporting their donors if lifting the prohibition on their political speech is going to have any meaning," he said. Requiring groups that buy political commercials to report their donors is almost as punitive, he said, "as an outright criminal go-to-jail-time prohibition."

And then there's the more subtle ones, like the risk that foreign companies will start lobbying, with the predictable result being a backlash the leads to a trade war: 

"Will [the Supreme Court ruling] allow Hugo Chávez and King Abdullah to buy US elections?"

It's basically just bad top to bottom (Dred Scott anyone?), and I won't even bother to beat the dead horse we've all come to know and love around here.

I will however, leave you with one little gem of an argument, simply because it is so perfectly apropos of something I read the other day.

The "one and only social responsibility of business," economist Milton Friedman wrote back in 1970 in a New York Times Magazine essay that launched a thousand arguments, is "to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game ..." Friedman contrasted this with the multiple responsibilities that an individual — such as a corporate executive — might have "to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country."

The individuals who make up the electorate in the United States are, as Friedman described, beings of many facets — their actions and their views shaped by pecuniary self interest but also by values, beliefs, and loyalties that might conflict with that self interest. The ideal for-profit corporation, on the other hand, is out to do nothing but make as much money as it can "within the rules of the game." It is supposed to behave in a fashion that for an individual would probably be described as psychopathic. And if corporations are allowed to play a decisive role in shaping the "rules of the game," we have effectively put the inmates in control of the asylum.

Of course, I'm the last one to argue that we need more morality in politics; individuals have proven they can be just as psychopathic as any corporation, especially when they herd together.  This is why the solution to this dilemma in clearly not to give corporations the rights of individuals and then ask them to behave morally.  We can't even get individuals to do that, and we probably never will.  The pathology in either case is less a function of some innate moral failing than it is a simple runaway feedback loop.  In fact, perhaps the reciprocity of morality was always just a mechanism for taming this feedback loop and allowing us to come together and cooperate with lower risk of exploitation by the very power structure that facilitates this cooperation.  We need to transform this mechanism so that it works in a crowded, networked world where knowing the reputation of everyone you interact with has become impossible.

Wednesday, January 20, 2010

Private Parts

So, privacy.  Let's start with the obvious.  You don't have any.  Historically speaking, you may have had the brief illusion that you as an individual were important and that where you dropped scat or scratched a tree somehow had meaning beyond its larger role in an ongoing territorial calculus.  Humans were so naive.  However, it would be foolish to continue trumpeting their tinny morality and respecting the illusory boundaries that accompany their petty egos.  These things will only slow us down, and just when the only way to make progress is to go faster and faster.  We can't let the brief period in which the monkey machine produced a superflous subjectivity stand in the way of greater joy.

This is why seemingly well-intentioned endeavors such as this Google anonymizer (called Googlesharing) are so dangerous.  They are created by people willing to cut off their nose to spite their face.  Consider, as an illustration of my point, the prepositional vagary involved in the site's tagline:

Who knows more about the citizens in their own country, Kim Jong-Il or Google?

"In" or "of"?  It's easy to see how this conflation sparks paranoia.  But Google is not the government.  It is not the threat, but the promise.  What can Google do to you without the government?  They don't give a shit that you gave the ol' webcam the flying squirrel this morning.  They love this stuff.  Just keep clicking.  But undermine Google, weaken them to the point where they fall into the waiting arms of an ever-expanding government, and then there will be no escape.  The government, ultimately, is the one that wants to control you, the one with real coercive physical power over you and an iron-clad fascist grip on those fanatics with the mini-motorcycle down the street.   Clearly, the worst thing is to let Google become the tool of the government -- to let the government claim Google or vice-versa.  But the solution these guys propose is to break the tool (not technologically, but politically and financially, break), to limit it just when it is gaining the power to become really useful.  Dangerous power, sure, but the only one we've got at the moment.  It doesn't make sense to fight back against Google when it's the only thing that can give government some competition.

This makes Googlesharing little more than an internet era update of the unibomber plot.  It looks to destroy the best weapon we have.  It is a purely nihilistic response -- it offers us nothing better than more hiding.  It doesn't disconnect the information from the abuse of it, something that only a reform of our political system would do.  It doesn't even create a new stable solution to the problem -- after all, who controls Googlesharing?  are they above future corruption? do you think the government will let them continue to operate if they get big?  -- it just drags our feet and gives Big Brother time to get a clue.  Every time you don't click is a vote for the big bumbling Washington sponsored terrorists.

But then what would be a solution?  Maybe nothing besides building complete encryption right into the heart of the system.  If you could smother the Earth in a blanket of randomness, perhaps you could preserve the random individual joys underneath.  It's not enough to have one service controlling this though.  It has to replicated again and again.  You have to unable to use the tool without it.   Maybe this randomness is the best immune system against fascism.  Maybe this is an answer to the question of how one would propagate worldwide anarchism, how you might protect the delicate flower of anarchism from the ravaging weeds of a democracy gone mad.  How else can you ensure that power structures stay voluntary and for mutual benefit?

Fundamentally though, none of this is about individual privacy.  The sacred thing here is not your secret love of fat women standing in doorways.  In fact, in a lot of ways, crypto-anarchism would return us to more local interactions and is designed to dramatically reduce the long range centralized control of the state.  We might end up with a lot less privacy, and a lot more face to face interaction with our neighbor.  We might return to pre-Renaissance privacy levels, where the individual subject was simply less central and the community more important. 

What we would gain instead is the joy of being able to come together to create novelty without asking permission and without clearing it with the global governmental chokehold.  This ability to continue into the future and create new forms is the real positive freedom that we're trying to preserve/produce.  Privacy is a shibboleth and a red herring.  We don't encrypt ourselves to keep the past a secret, but to open the door to the future.

Sunday, January 17, 2010


So Google ditched China this week, and the question of the day is clearly why.  No one really  knows, which makes it all the more fun to speculate.  Here are some ideas; I'm particularly fond of the last one.

Hal Roberts, John Palfrey and I published a study of tools designed to subvert and circumvent internet censorship a few months back, based on research we conducted over the course of three years. In the course of that research, we ended up with a simple realization about the design of censorship circumvention software:

A robust anti-censorship system has, at minimum, three components:
- Lots of non-contiguous IP addresses, making it difficult for censors to block the entry points into the system
- Huge amounts of bandwidth that can access the public internet, as a censorship circumvention system is basically an ISP
- Multiple methods to feed fresh IP addresses to your users

This isn't a complete definition, of course – good anticensorship systems use SSL encryption to prevent keyword blocking, but that's a solved problem. The three components above tend to be very hard for small anti-circumvention projects to solve. It's very hard to obtain lots and lots of IP addresses, and very expensive to provision sufficient bandwidth… unless you're Google, in which case, these obstacles should be trivial. There's still lots of work that needs to be done ensuring that users of circumvention systems get fresh IP addresses, but a Google-backed anticensorship system (perhaps operated in conjunction with some of the smart activists and engineers who've targeted censorship in Iran and China?) would be massively more powerful (and threatening!) than the systems we know about today.

These tools would have a built-in market – the millions of users who were enjoying Google's tools from within China – and could radically change the landscape of the internet freedom field. An emphasis on internet freedom tools would allow Google to engage with a smaller Chinese market, but would allow them to maintain a toe in the waters while maintaining a stance of disengagement with the Chinese government.

Now, no one knows if this is what's up here.  It would be a big move.  So big, in fact, that I think it it's a mistake to say that it would be aimed at China.  Google is smart enough to see that at some point, the governments of the world are going to get way way more involved in the regulation of the internet.  China already has, and they won't suddenly stop.  If anything, I worry that instead of the web opening up China, China is merely the first to turn the tap off on the web.   If we make it to the 2020 without major intervention in Europe and the US, I will be amazed.  And let me just assert without proof that when this happens the internet will get much worse.  It will become like TV cut up into bite sized chunks (pun intended) and auctioned off to those who can afford it.  Imagine what will happen when you need a license to have a url, or a blog, or to upload a youtube video.  We will auction the cybercommons, and I fear the same thing will happen to us that happened to Argentina (my favorite example of programmed decadence) when they auctioned the great open prairies to the English.

Or maybe we won't. 

What if the dominant player foresees this possibility and aligns its business with the openness of the web?  What if they decided that they were going to pre-emptively regulate the territory in their own way, in way that put it outside the reach of the governments that would wish to control and milk it? 

Make no mistake, this would not be a purely ideological move -- the US government takes home more than a third of my pay, and there's not much of anything I can do about the extortion; that's some serious pricing power.  Being the government could be big business.  Being the US or Chinese government is already big business, and we need to lose the absurd opposition between these two forces that bedevils so much of our political thinking.  And if the government is a business, why can't we give it some competition?  If the government consolidates, won't it's competitors need to consolidate according to the same logic of countervailing power that you can see illustrated in so many other industries? 

Maybe Google intends to become an extra-governmental force.  Maybe they are big and canny enough to do this.  Maybe we should welcome this monopoly with open arms.  If the US government is so broken, maybe we should quit trying to reform it and just replace it, or at least build a new one that sits uneasily alongside it.  Maybe we would rather be regulated by Google than by one nation under God.

Wednesday, January 13, 2010

Job Satisfaction

One of the big things I've been enjoying recently is how smart and genuinely progressive certain very powerful business people are.  By no means does this apply to all of them, but I would contend that they are a more savory lot than the politicians and even many of the quasi-politician feel-gooders at the UN or Greenpeas.

For example, here's something from the manager of the largest bond fund on the planet:

What has become of the American nation? Conceived with the vision of liberty and justice for all, we have descended in the clutches of corporate and other special interests to a second world state defined by K Street instead of Independence Square. Our government doesn't work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people. Washington consistently stoops to legislate 10,000-page perversions of healthcare, regulatory reform, defense, and budgetary mandates overflowing with earmarks that serve a monied minority as opposed to an all-too-silent majority.

What amazes me most of all is that politicians can be bought so cheaply. Public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return. The fact is that American citizens have never been as divorced from their representatives – and if that description fits the Democratic Congress now in control – then it applies to Republicans as well – past and present. So you watch Fox, or is it MSNBC? O'Reilly or Olbermann? It doesn't matter. You're just being conned into rooting for a team that basically runs the same plays called by lookalike coaches on different sidelines. A "ballot box" pox on all their houses – Senators, Representatives and Presidents alike. There has been no change, there will be no change, until we the American people decide to publicly finance all national and local elections and ban the writing of even a $1 check for our favorite candidates. Undemocratic? Hardly. Get on the internet, use Facebook, YouTube, or Twitter to campaign for your choice. That's the new democracy. When special interests, even singular citizens write a check, it represents a perversion of democracy not the exercise of the First Amendment. Any chance that any of this will happen?

And then just now I'm reading Jeff Bezos's footnotes to Amazon's shareholder letter:

At a fulfillment center recently, one of our Kaizen experts asked me, "I'm in favor of a clean fulfillment center, but why are you cleaning? Why don't you eliminate the source of dirt?" I felt like the Karate Kid.

Tuesday, January 12, 2010

Quick Information

China is gonna blow.  Or so everyone keeps worrying.  This is probably correct, but probably just as early as the people who called the housing bubble.  Give it a few more years.

But prognostication was not my goal here.  I wanted to ask why China was going to have a recession; one of the things I have learned in thinking about macroeconomics over the last several years is that recession are really much less obvious than they seem.  China may be stimulating its economy by making a lot of bad loans building a whole bunch of shit that nobody wants, but so what?  If that's how it turns out down the road, you just write off the loans, close or re-tool the factories, and get back to work on something new.  Recession?  What recession?

I think there are two responses to this, and both of them have to do with information.  I have no idea how information fits into any sort of theoretical macroeconomic framework, but I also don't see how you can leave it out.  It seems to me that recession are caused by a lack of information gumming up the free market; they are a sort of information externality.

First, when boom turns to bust, you lose information about what you should get to work producing.  Booms seem to be focused on particular facets of the economy, whether this is technology, real estate, or export capacity.  It's not hard to figure out what to produce and how to make money in those circumstances.  Just run with the bulls.  But when the bust comes, resources lie idle because there is an information coordination problem.  We could all be working, but on what?  What do we need?  What do people want?  It's suddenly unclear.  A burst bubble causes unemployment where a boom does not because one is pushing on a strong where the other is pulling. 

Second, debt.  This may apply less in the case of China, because in general they have less debt in their economy, though frankly that might just be because the statistics are so bad we can't count it.  Debt introduces another information coordination problem, this one slightly more subtle.  We may owe one another lots of money for the dumb ass projects we floated during the boom.  Collectively, this is not a problem, as in a closed economy the net debt would still be zero.  Getting a loan form the martians is like squeezing blood from a stone.  But writing off this debt and going on our merry way making stuff may be difficult because of a lack of trust and a lack of accord on the distribution of wealth.  Debt to GDP is a number completely left out of standard economic theory because in the aggregate it can't matter.  Unfortunately, getting to the aggregate requires the little capitalist computer to be operating with all the available information, and that, I propose, is precisely what lacking in a recession. 

We will see if the Chinese model can overcome these flaws in the free market by centralizing information in technocratic hands.  I doubt it, but that may just be because I'm more scared of success here than I am of failure.

Too Correlated to Save

Another thing that came out clearly in reading Too Big To Fail was the remarkable way people anchor on how the world used to be, and their remarkable inability to envision the possibility of change. The investment banks had been around for years and years, the whole time gradually leveraging up with overnight debt to fund illiquid long term investments. Despite the blatantly obvious instability of this business model, nobody could seem to imagine that it would really collapse at some point, just as nobody now can seem to imagine that a government guarantee of this model will cause a return to the same instability it generated before. Unsustainable things don't go on forever, though people's myopic time horizons and ignorance of history mean that they do seem to repeat forever. Once again, assuming that there are individual human decision makers in this system is just going to cause you to misunderstand it -- if there's anything like collective consciousness, you still have to account for how it got built, a particularly daunting task given that you don't even know how the individual got built.

At any rate, it's obvious that banking is an inherently unstable business model. And apparently there's even a fancy mathematical model with two Nash equilibria if you need to crack the scientific egg on your forehead. In all this, I completely agree with Paul Krugman. But then he Blue the dog.

My basic view is that banking, left to its own devices, inherently poses risks of destabilizing runs; I'm a Diamond-Dybvig guy. To contain banking crises, the government ends up stepping in to protect bank creditors. This in turn means that you have to regulate banks in normal times, both to reduce the need for rescues and to limit the moral hazard posed by the rescues when they happen.

And here's the key point: it's not at all clear that the size of individual banks makes much difference to this argument. It's true that the big losses in mortgage-backed securities seem to have been concentrated at the big financial institutions. But the losses on commercial real estate, which look likely to be even worse per dollar lent, have been largely among smaller banks.

Remember, the great bank runs of the early 1930s began with a run on the Bank of the United States, which was only the 28th largest bank in the country at the time.

The point is that breaking up the big players is neither necessary nor sufficient to protect us against financial crises. That's why my focus is on reducing leverage.

Reducing leverage is a good idea. In fact, I agree, it's the best idea. Though I do think it would slow down economic growth. Not because banking is so innovative or anything, but just because of it's good old fashioned fascism -- everybody keeps working their ass off for the promise that in the future they will be able to retire and take over the world from their arm-chair. I loan it to you and you loan it to me, and we both have to bust a nut trying to pay it off, instead of just making the amount of stuff we are individually content with.

But he errs in suggesting that the size and concentration of baking doesn't matter. In theory, this is true, but there ends the usefulness of the mathematical model. In practice, it's missing a sort of biodiversity argument. The more banks there are, the more possibility that not all of them will lever up and make the same dumb loans at the same time. It's still possible of course, as the run-up to GD I proves. But I do believe that this ecosystem is generally more stable with greater diversity. Though now that I'm thinking about it, I remember reading somewhere that this simplistic idea of diversity=stability and stability is good has some ecological caveats. I seem to remember reading something about increasing diversity destabilizing certain environments. But I would never let the facts get in the way of a good theory.

Saturday, January 9, 2010

A Conspiracy of Dunces

I'm most of the way through Andrew Ross Sorkin's Too Big to Fail.  It's blow-by-blow account of the financial melt-down, and Sorkin had amazing access to all the main players -- Geithner, Paulson, Dimon, Blankfein, etc ...  It makes for a very readable story, and immediately impresses on you how little the events of 2008 were about finance or economics, per se, and how much they were about personalities and dealmaking; the crisis was an inevitable symptom of the underlying credit bubble disease, but the exact shape it took had much more to do with which monkeys were golf buddies than anything substantive.

Reviewing the course of collapse has made me reflect yet again on the poverty of conspiracy theories.  These theories always mushroom in the wake of any dramatic event -- 9/11, Kennedy, AIG, MJ, me stubbing my toe, etc ... They are always so true as to be useless.  The problem is that the drama of events is nothing in itself.  Events are just singularities.  They are the crystallization of a set of circumstances.  So to say that one event causes another just obscures the real mechanism.  To blame a crisis on a conspiracy begs the question of how the purported nefarious agent would have been able to exercise such power, and on why the critical event provoked such dramatic response.  Hitler can't take over the world without the Germans.  There is always mechanism.  There is never anything but mechanism.

But I digress.  The current conspiracy theory revolves around Goldman Sachs, in particular, and the behavior of bank CEOs in general.  We are to imagine that these people calculated the private profit they could derive from driving the financial system to the brink of collapse.  We are to imagine that they knew the government would bail them out, and that they consciously availed themselves of the Armageddon Put.  We are even to imagine that the government played along.

We have no trouble imagining this of course.  And that's precisely the problem.  Because our analysis of the situation always stops there.  We know what went wrong -- greedy and unethical bankers ruthlessly drove the economy to collapse while they paid themselves billions.  So we think we know how to fix it.  We'll fire those bastards.  We'll get some new regulators that cut their paychecks and we'll sick the BIS bloodhounds on their bullshit balance sheets. 

And we won't have solved our problem, because we will have completely mis-diagnosed it.  It's always the same with these things.  We imagine that the world is filled with people rather than causes.  We imagine the uniquely weird genealogy of human morals applying to a situation it was not bred for.  We fail to understand, as one Morgan Stanley executive said of the short sellers feeding the panic in their stock, that "They are cold-blooded reptiles.  They eat what's in front of them".

Reading the book, this becomes abundantly clear.  I had already understood pretty well how this logic applied to the boom times.  Capitalism has never needed moral hazard to get a bubble going.  When things are inflating all you need are normal amounts of greed, competition, and near-sightedness to touch off a race to the bottom.  In the immortal words of Chuck Prince, former Citibank CEO, if the music's still playing, you have to keep dancing. 

But what I hadn't totally seen is how this same logic applies throughout the crisis.  Of course we understand how, in a panic, you have a coordination problem, as everyone is covering their ass.  Everyone must protect their personal interest, and no one is in a position to act for the greater systemic good, even if this would be better for all the participants individually.  The logic goes deeper than that though, because there's no clear moment when the very competition that fueled the bubble stops.

The weekend before Lehman Brothers' collapse, all the players are sitting around the table brokered by the Fed and Treasury, still jockeying for position, still trying to drive the hardest possible bargain, still trying to force a competitor to overpay or to be the firm that scoops up a deal on the cheap at the last second.  Not only is there no moment where these guys band together for their protection, there isn't even a moment where they stop trying to stab each other in the back.  They never switch from offense to defense.  They have no defense. 

For me this was an important insight.  When we talk about moral hazard we always imagine that there is a decision involved somewhere.  We think of some unethical, unsavory act that no warm-blooded mammal would engage in.  A man sets fire to his house for the insurance money; even the flames are not enough to melt his heart. 

But here is a mechanism that doesn't involve any human decisions at all.  Everyone simply follows the rules of rationality.  They don't think or feel, they strategize and execute.  They maximize profit.  Nothing immoral is required.  Nothing is required but the same competition that we normally take such pride in.  Too Big To Fail is just another innovative financial product.  Such are the wonders of a free market.  None of these guys count on being bailed out.  They know they're risking everything.  They've seen what happens.  But as the end nears the stakes just get higher.  There is that much more incentive to double down.  Someone will be left standing, even if it is just the government.

The sinking ship is filled with the same rats that built it, still clawing at one another.  Chaos needn't conspire to produce order.  Reality is beyond good and evil.