In what some on Wall Street are calling the biggest blockbuster deal in the history of the financial sector, Goldman Sachs confirmed today that it was in talks to acquire the U.S. Department of the Treasury.
According to Goldman spokesperson Jonathan Hestron, the merger between Goldman and the Treasury Department is "a good fit" because "they're in the business of printing money and so are we."
The Goldman spokesman said that the merger would create efficiencies for both entities: "We already have so many employees and so much money flowing back and forth, this would just streamline things."
Mr. Hestron said the only challenge facing Goldman in completing the merger "is trying to figure out which parts of the Treasury Dept. we don't already own."
Goldman recently celebrated record earnings by roasting a suckling pig over a bonfire of hundred-dollar bills.
Wednesday, July 22, 2009
Juajuajua
Goldman Sachs has finally taken its business model to its logical conclusion.
Lo and behold
Andrew Lo has done lots of good work on replicating hedge fund return distributions and other esoteric financial topics you don't give a shit about. His more interesting contribution is what he calls the Adaptive Markets Hypothesis which he opposes to the standard that-can't-be-a-hundred-dollars-because-somebody-would-already-have-picked-it-up Efficient Markets Mythology. His column in today's FT is worth a read, and has some priceless quotes:
and:
leads to the punch line:
Markets do function quite efficiently most of the time, aggregating vast amounts of disparate information into a single number – the price – on the basis of which millions of decisions are made. This feature of capitalism is an example of Surowiecki's "wisdom of crowds". But every so often, markets can break down, and the wisdom of crowds can become the "madness of mobs".
and:
From an evolutionary perspective, markets are simply one more set of tools that Homo Sapiens has developed in his ongoing struggle for survival. Occasionally, even the most reliable tools can break or be misapplied.
leads to the punch line:
This is good stuff, though I find it a little weird that he doesn't come to the most obvious conclusion, namely that one of the first adaptations that will happen in a market system is for some participant to try to game it. Sure, markets are sometimes 'irrational' in a pure mob sense, perhaps due to leftover behavioral biases that make humans unsuited to dealing with money in prefect homo economicus fashion. However, it seems clear that the bigger problem is the inevitable tendency to hack the system, which is anything but irrational from the perspective of the hacker, even if it sets off a chain of events that looks like irrational behavior on the part of the system. Naturally, every participant can engage in this type of hacking, which would lead you back to the efficient markets hypothesis if it weren't for the winner-take-all nature of hacking the political system.The implications of the AMH for regulatory reform are significant. Markets can be trusted to function properly in normal times, but if humans are subject to emotional extremes, animal spirits may overwhelm rationality, even among regulators and policymakers.
Therefore, fixed rules that ignore changing environments will almost always have unintended consequences: those enacted in the aftermath of crisis may be too severe during normal times, and those repealed after long periods of prosperity may lead to future excesses. The only way to break this vicious cycle is to recognise its origin – adaptive behaviour – and design equally adaptive regulations to counterbalance human nature.
Monday, July 20, 2009
Keynes, Koo, and Minsky ...
... in a nutshell. If you ever wanted a quick explanation of the basic idea of Keynesianism, Krugman has a chart that goes straight to the point -- if we all try to save at the same time the only equilibrium you can reach is when we all get too poor to save anymore, and only government deficits can prevent us from reaching this equilibrium.
Good joke
From today's 1930 Wall Street Journal:
A judge was reproving a man for deserting his wife. "Wife desertion is something that I must deal with severely, and I feel very strongly on this subject." "But judge, you don't know that woman. I'm no deserter, I'm a refugee."
Wednesday, July 1, 2009
Socialism Glut
Brad Sester has a great post about the famed savings glut hypothesis I have commented on before. He complicated the argument with data and facts though, which obviously makes reaching the same conclusion so much less satisfying.
In a global economy, a rise in savings relative to investment in one part of the world necessarily implies a fall in savings relative to investment in the rest of the world; sorting out why key macroeconomic variables change is always difficult.
Maybe this equilibrium was a function of excessive demand stimulus by the advanced economies in the aftermath of the last recession – and lax financial regulation that allowed households to over-borrow. High US and European demand allowed the emerging world to save more. Maybe it was a function of policies in the emerging economies, policies sometimes put in place to support undervalued exchange rates. That would explain why the growing US savings deficit didn't put upward pressure on global interest rates and why the rise in the US external deficit didn't lead to a rise in US real interest rates — something would have short-circuited the housing boom. Probably it was a mix of both. Emerging market savers (really their governments, as private savers weren't exactly seeking out depreciating dollars) helped to provide Wall Street and the City the rope they (almost) used to hang themselves.
No matter. We don't need to assign responsibility for the imbalances that marked the pre-crisis global economy to know that the chain of risk-taking that allowed emerging market savers to finance heavy borrowing by US households didn't result in a stable system.
The Feeling of Reason
Mr. Dr. Marshall writes to say that he believes my take on the uselessness of those protesting the absurdity of our political system is too harsh. After all, these gentleman are just trying to inject some rationality into the debate by pointing out that the 'arguments' being bandied about are specious. Isn't that a good thing?
Rather than agree with so obviously reasonable an objection, let me push it into the absurd.
What we don't need is more rationality. My point is that this is what is getting us into difficulty in the first place. We have a lovely post-enlightenment image of a rational scientific debate, where we all sit down to discuss the issues and examine the evidence and come to some conclusion about how to act. We imagine that this is what goes on in the brain of a scientist, and we imagine that something analogous goes on in the political brain of the ideal democracy. In both cases we think that by carefully studying and reasoning about the world in an impartial and politically unbiased manner, we can come to some true representation of what it is actually like. In the case of science, we think that this will let us get an accurate picture of nature, and in the case of a politics, we think that this same unbiased process will put us in touch with the will of the people, which is of course what we imagine democracy is supposed to represent.
Unfortunately, representation is a completely flawed concept. There is no such thing as a objective picture of the world or of a will (this is not that same thing as saying that there isn't a world or a will, by the way. This is not a relativist argument). Being part of reality, we cannot take a complete picture of it, we can just bounce light off of some of it and see how it reflects back on our part. If you are skeptical of this reasoning in the case of science, or if the argument sounds unnecessarily metaphysical there, just consider the political question.
Because in the case of politics it's pretty obvious that there's no "will of the people" that politician's are supposed to represent. There is a mechanism that translates our actions (our votes, our talk, our purchases, etc ...) into political and legal reactions. That is all. Politics is a machine. Everything is a machine, but it's especially easy to see it with politics, because instead of a bunch of tiny neurons you have a bunch of giant egos whose bumping and grinding are easier to observe. I mean, this stuff makes headlines every day. Strangely though, we have a tendency to think that these easy to observe interactions are somehow 'distortions' of the real will of the populace. We imagine that if we just had more reasonable politicians or better journalism or whatever, we could stop playing these silly who-slept-with-the-Argentine-Firecracker type games and get down to the serious business of doing what the people 'really want', without all the 'politics as usual'. And of course, not only would we get to doing what the people really want, but we would clearly discover that they really want peace, sustainability, and really good subsidized sushi, because ... well ... because that is what all reasonable people want ¿no?
But this is ludicrous reasoning. How do you find out what the people really want? How do you implement it and how do you evaluate whether you really gave it to them? Do you ask them to vote? Do you take polls? How do you decide what to ask or whose votes to count? These things all require a mechanism. It doesn't matter whether the mechanism is spelled out in a legal document or hacked together through political horse trading or enforced by a military, it's still a mechanism. There's no will of the people in any of those cases, there is merely what the people do, and that is precisely what a political system is about. It is the integration of all the various pressures, social and economic and technological, that make up our body politic. It's the mechanism by which these forces are translated into action, like a lever or a Rube Goldberg device. And there is no way around having a mechanism. There will always be a machine at bottom. There will never be anything like political 'intuition' where the will of the people is somehow simply and mysteriously done (though one might say that the Nazis were aiming at that -- as Konrad Heiden once put it, "Propaganda is not the art of instilling an opinion in the masses. Actually it is the art of receiving an opinion from the masses").
This is why moaning about the theatricality of politics and pining for a more 'rational' political discourse is dangerous. Because what would rationality even mean here. Ultimately, if you look at rationality in a more evolutionary context you realize that it is actually a way to get you to stop looking at how the machines works. It's the mechanism by which you give someone the feeling that they can quit asking questions, that they have reached some common sense that is just obvious and doesn't need more debate. Reason is perfectly opposed to empiricism, and politics is an engine, not a camera.
So injecting more 'reason' into politics by encouraging politicians to debate one another like scientists would not make it more 'representative' and would not make it any less of a machine. It would just create a technocratic subclass of the political machine, a phenomenon that is not without its parallels in history (Chomsky has penned some good stuff about this). This might give us the feeling that our leaders were being more rational, which might shut us up for the moment, but without any more feedback between how these newly vulcanized leaders make decisions and the effects of their decisions on the populace, it would only be more rational in the eye of the beholder. I mean, the last time we got these hyper rational planners in government we ended up with mutually assured destruction (imminently rational) the domino theory, and a giant highway system that is still hanging around our necks. All societies are rational and irrational in different ways, even one run by slide-rule wielding geeks or by google. A more rational politics will not save us, even if it was under the control of benevolent dictator geeks with our 'best interest' in mind. It's not stable and its definition is not immanent.
I'm phrasing this all in terms of politics, but I think you can extend the logic to wonder about how rationality works in general. For example, why is a mathematical proof convincing? Why do you accept that 2 +2 = 4? Mostly, I think, because it gives you a good feeling to be able to follow the algorithm. The algorithm isn't rational or irrational though, it just executes. The feeling that something is reasonable or proven true is just that -- a feeling. Rationality makes us feel good because following the twists and turns of a complicated algorithm and grasping the pattern it produces makes us feel good. And this, presumably, is because it was and is useful. Once we developed the ability to get a pleasant buzz off of figuring out which berries grew where at what time of the year, we immediately started dosing each other with this same drug, because the most useful thing in the world was getting someone else to help you out. So we learned to exploit this feeling of 'understanding' which wasn't any less powerful when all I was doing was using the same mechanism to get you excited about the fact that I had just proved there were only 72 angels that could dance on the head of a pin, or that it was a terrible idea to kill people.
Reason was originally one of the moral emotions that bound us together. And it still is, for better or worse. I'm not saying that the emotion can't be useful, but you certainly can't trust it in your own brain, and it's even less the basis for a system of government.
Rather than agree with so obviously reasonable an objection, let me push it into the absurd.
What we don't need is more rationality. My point is that this is what is getting us into difficulty in the first place. We have a lovely post-enlightenment image of a rational scientific debate, where we all sit down to discuss the issues and examine the evidence and come to some conclusion about how to act. We imagine that this is what goes on in the brain of a scientist, and we imagine that something analogous goes on in the political brain of the ideal democracy. In both cases we think that by carefully studying and reasoning about the world in an impartial and politically unbiased manner, we can come to some true representation of what it is actually like. In the case of science, we think that this will let us get an accurate picture of nature, and in the case of a politics, we think that this same unbiased process will put us in touch with the will of the people, which is of course what we imagine democracy is supposed to represent.
Unfortunately, representation is a completely flawed concept. There is no such thing as a objective picture of the world or of a will (this is not that same thing as saying that there isn't a world or a will, by the way. This is not a relativist argument). Being part of reality, we cannot take a complete picture of it, we can just bounce light off of some of it and see how it reflects back on our part. If you are skeptical of this reasoning in the case of science, or if the argument sounds unnecessarily metaphysical there, just consider the political question.
Because in the case of politics it's pretty obvious that there's no "will of the people" that politician's are supposed to represent. There is a mechanism that translates our actions (our votes, our talk, our purchases, etc ...) into political and legal reactions. That is all. Politics is a machine. Everything is a machine, but it's especially easy to see it with politics, because instead of a bunch of tiny neurons you have a bunch of giant egos whose bumping and grinding are easier to observe. I mean, this stuff makes headlines every day. Strangely though, we have a tendency to think that these easy to observe interactions are somehow 'distortions' of the real will of the populace. We imagine that if we just had more reasonable politicians or better journalism or whatever, we could stop playing these silly who-slept-with-the-Argentine-Firecracker type games and get down to the serious business of doing what the people 'really want', without all the 'politics as usual'. And of course, not only would we get to doing what the people really want, but we would clearly discover that they really want peace, sustainability, and really good subsidized sushi, because ... well ... because that is what all reasonable people want ¿no?
But this is ludicrous reasoning. How do you find out what the people really want? How do you implement it and how do you evaluate whether you really gave it to them? Do you ask them to vote? Do you take polls? How do you decide what to ask or whose votes to count? These things all require a mechanism. It doesn't matter whether the mechanism is spelled out in a legal document or hacked together through political horse trading or enforced by a military, it's still a mechanism. There's no will of the people in any of those cases, there is merely what the people do, and that is precisely what a political system is about. It is the integration of all the various pressures, social and economic and technological, that make up our body politic. It's the mechanism by which these forces are translated into action, like a lever or a Rube Goldberg device. And there is no way around having a mechanism. There will always be a machine at bottom. There will never be anything like political 'intuition' where the will of the people is somehow simply and mysteriously done (though one might say that the Nazis were aiming at that -- as Konrad Heiden once put it, "Propaganda is not the art of instilling an opinion in the masses. Actually it is the art of receiving an opinion from the masses").
This is why moaning about the theatricality of politics and pining for a more 'rational' political discourse is dangerous. Because what would rationality even mean here. Ultimately, if you look at rationality in a more evolutionary context you realize that it is actually a way to get you to stop looking at how the machines works. It's the mechanism by which you give someone the feeling that they can quit asking questions, that they have reached some common sense that is just obvious and doesn't need more debate. Reason is perfectly opposed to empiricism, and politics is an engine, not a camera.
So injecting more 'reason' into politics by encouraging politicians to debate one another like scientists would not make it more 'representative' and would not make it any less of a machine. It would just create a technocratic subclass of the political machine, a phenomenon that is not without its parallels in history (Chomsky has penned some good stuff about this). This might give us the feeling that our leaders were being more rational, which might shut us up for the moment, but without any more feedback between how these newly vulcanized leaders make decisions and the effects of their decisions on the populace, it would only be more rational in the eye of the beholder. I mean, the last time we got these hyper rational planners in government we ended up with mutually assured destruction (imminently rational) the domino theory, and a giant highway system that is still hanging around our necks. All societies are rational and irrational in different ways, even one run by slide-rule wielding geeks or by google. A more rational politics will not save us, even if it was under the control of benevolent dictator geeks with our 'best interest' in mind. It's not stable and its definition is not immanent.
I'm phrasing this all in terms of politics, but I think you can extend the logic to wonder about how rationality works in general. For example, why is a mathematical proof convincing? Why do you accept that 2 +2 = 4? Mostly, I think, because it gives you a good feeling to be able to follow the algorithm. The algorithm isn't rational or irrational though, it just executes. The feeling that something is reasonable or proven true is just that -- a feeling. Rationality makes us feel good because following the twists and turns of a complicated algorithm and grasping the pattern it produces makes us feel good. And this, presumably, is because it was and is useful. Once we developed the ability to get a pleasant buzz off of figuring out which berries grew where at what time of the year, we immediately started dosing each other with this same drug, because the most useful thing in the world was getting someone else to help you out. So we learned to exploit this feeling of 'understanding' which wasn't any less powerful when all I was doing was using the same mechanism to get you excited about the fact that I had just proved there were only 72 angels that could dance on the head of a pin, or that it was a terrible idea to kill people.
Reason was originally one of the moral emotions that bound us together. And it still is, for better or worse. I'm not saying that the emotion can't be useful, but you certainly can't trust it in your own brain, and it's even less the basis for a system of government.
My First Blog Post
This is a posterous Test. An MP3 and a picture are attached, and I'm leaving a youtube video and pic link inline.
We will see if this reposts correctly to blogger. The main reason I'm thinking of changin things up is because posterous appears to have a slicker interface that makes for less cutting, pasting and typing. Maybe.
Cartoon by Martin Tétrault/Otomo Yoshihide
Download now or listen on posterous
01 Cartoon.mp3 (2087 KB) Download now or listen on posterous
UPDATE: This appears to work rather well, and those who want to see the posterous site can go check out the new shadow blog I've created. Soon the Capitalist Axiomatic will be propagating through the internet without limit, feeding back on itself and spawning a new race of vodka-swilling fembots. Or something like that.
Subscribe to:
Comments (Atom)