Nassim Nicolas Taleb, the author of the Black Swan, quotes from his own book to show that he has been warning against a systematic collapse of the banking system for a long time. But the collapse was not an instance of a Black Swan, which is an unpredictable rare event. Instead he has long maintained that the collapse we are now witnessing was the result of epistemic arrogance which he defines as “a measure of the difference between what someone actually knows and how much he thinks he knows.” Taleb wrote: “to me a banking crisis –worse than what we have ever seen — was unavoidable and NOT A BLACK SWAN, just as a drunk and incompetent pilot would eventually crash the plane. And I kept receiving insults for 12 years!” His own book had this to say about Fannie Mae, bankers and epistemic arrogance. It was devastatingly cutting writing and now seems justified by events.
Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought.
Banks hire dull people and train them to be even more dull. If they look conservative, it’s only because their loans go bust on rare, very rare occasions. But (…)bankers are not conservative at all. They are just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug.
The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events “unlikely”.
There is no way to gauge the effectiveness of their lending activity by observing it over a day, a week, a month, or . . . even a century!
(…) the real- estate collapse of the early 1990s in which the now defunct savings and loan industry required a taxpayer-funded bailout of more than half a trillion dollars. The Federal Reserve bank protected them at our expense: when “conservative” bankers make profits, they get the benefits; when they are hurt, we pay the costs.
Once again, recall the story of banks hiding explosive risks in their portfolios. It is not a good idea to trust corporations with matters such as rare events because the performance of these executives is not observable on a short-term basis, and they will game the system by showing good performance so they can get their yearly bonus. The Achilles’ heel of capitalism is that if you make corporations compete, it is sometimes the one that is most exposed to the negative Black Swan that will appear to be the most fit for survival.
As if we did not have enough problems, banks are now more vulnerable to the Black Swan and the ludic fallacy than ever before with “scientists” among their staff taking care of exposures. The giant firm J. P. Morgan put the entire world at risk by introducing in the nineties RiskMetrics, a phony method aiming at managing people’s risks, causing the generalized use of the ludic fallacy, and bringing Dr. Johns into power in place of the skeptical Fat Tonys. (A related method called “Value-at-Risk,” which relies on the quantitative measurement of risk, has been spreading.)
My own insight, admittedly less inspired and rigorous than Taleb’s was to liken what we are witnessing as an unfolding chaotic system which we think we can control with linear measures like the bailout long after it has strayed into nonlinear territory. I wrote in the Second Debate that:
It used to be a case that if you did X then Y resulted. If 2X then 2Y. But the old certainties don’t hold any more. Maybe part of the problem, if there is still some linearity as I have written elsewhere, is that the bailout efforts don’t clearly signal that the bad old ways of doing business have ended. During World War 1, the more troops the generals fed into the machine guns the less confident the home publics were of victory. Only when they started doing things differently was confidence somewhat restored. To some extent the circumstance that governments are resorting to these desperate rescue packages conveys more clearly than anything else that they are firing into the dark; and the market understands this, even if the politicians don’t. They’ve tried the rescue packages. Now maybe they should try handcuffing a couple of dozen senior politicians and sending them to the graybar inn. That might restore confidence in a way untold trillions won’t.
The relationship between my critique and Taleb’s is this: our institutions haven’t fessed up to their epistemic arrogance. They’re still “firing into the dark” while maintaining that they know what they’re doing. The very same people who led the global system into disaster are pretending to lead it into safety. Barney Frank, for example, is as honored as ever. Barack Obama was known to take calls from Franklin Raines on housing and mortgage policy matters. Raines “graduated from Harvard University, Harvard Law School; and Magdalen College, Oxford University as a Rhodes Scholar.” He was just the sort of guy who knew what he was doing.
Adding resources to a disaster is like reinforcing failure on the battlefield. It doesn’t help. That’s why “during World War 1, the more troops the generals fed into the machine guns the less confident the home publics were of victory.” Adding resources to a broken system only meant you killed more people. Things have to be done differently to make any headway. We’re not going to do that because we already know what we’re doing, right? In a few weeks, if the polls are to be believed, we are going to entrust the safety of everything to a new administration which believes the government knows best. Expect more “epistemic arrogance”, not less.
There was a time when people explicitly understood their ignorance. And they defended against uncertainty by relying on simpler, less interdependent systems for survival. In case snow blocked the roads they had hams, canned goods, dried beans and sacks of flour in the storeroom. In the event 911 didn’t answer they had a shotgun in back. Family was the insurance against unforeseen crisis. Nation was the refuge against enemies. Culture provided a standard operating procedure which everyone was expected to know.
We have abolished much of that because in our foolish pride, it became an article of faith that we no longer needed them. Canned food is now shunned for the preservatives that it contains. Bacon is bad because it has salt. Allah forbid that there’s a gun in the house. And who could be less ‘with it’ than a woman with five children and a husband who drives a snowmobile. Sarah Palin is hated by sophisticates because she is almost a cliched example of this kind of simplicity. Ha ha ha. Today really cool people live in big cities, dependent on power grids, power circles and power lunches. They imagine there’s no heaven, no countries, nothing to kill or die for and no religion too. Today the truly cultured person is expected to know nothing of his own culture and smattering of everyone else’s. Because they’re certain in their epistemological arrogance they’ll never need any of the things they’ve safely abandoned. Who needs a family when you’ve got a retirement fund?
Lenin once described Communism as “socialism plus electricity”. The modern version of Nirvana is “socialism plus Google”. When will we learn? Never, I fear, while pride and the desire for power rule the human breast.
Tip Jar.
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92 Comments
1. Tamquam Leo Rugiens:There is no doubt but that a whole raft of government entities from both the executive and legislative branches have left their fingerprints on the housing bubble and the credit collapse. Whereas it is important in many respects to pursue studies of who did what in order to correctly remedy the situation and prevent it’s recurrence, there is another side to the story that nobody seems to be talking about.
Some time back Real Estate Commissioners across the country began relaxing the requirements for licensing procedures. It got to be fairly easy to become a licensed Real Estate Sales Person or Mortgage Broker. And when the market got hot everybody and his brother saw that there was money to be made in real estate so they jumped in. Many did so without properly understanding or caring about the responsibilities of the job. Many, a surprising number actually, jumped in without bothering with the niggling formality of passing the real estate exam and getting a license. The result was a whole lot of people who presented themselves as real estate professionals who were incompetent and many were simply unscrupulous. The result was that a public that perforce trusted an agent or mortgage broker to safely guide them through the process wound up taking bad advice. And, in the case of mortgage brokers in particular, advice that was not just bad but positively rapacious.
Not a week goes by but that I don’t run into somebody who got an adjustable mortgage who had been promised a 30 year fixed; who paid double or triple or more the going rate for fees; a higher interest rate than what they actually qualified for and were promised; who had gotten a mortgage on the basis of fraudulent information; who had hidden fees rolled into the loan; who bought a house only to discover some major fault that had been hidden at the time of sale; who had paid for services which were never rendered. On and on it goes. The FBI has begun to go after some of these parasites, but meanwhile people are losing their homes as a result of the illegal actions of these unlicensed, improperly educated, improperly supervised so-called professionals. It’s gotten almost as bad as politics, the reprehensible behavior of 90% of these people make the rest of us look bad.
In the case of mortgage brokers especially, the actions of the unscrupulous tends to debase the integrity of the honest ones. “If you’re not willing to fudge the numbers for me so I can get the loan I want, I’ll take by business over to a guy I heard about who will.” When the choice comes down to fudging the numbers or no food on the family table, standards erode.
It is the job of the Real Estate Commissioner and the Corporations Commissioner to set the standards, oversee and enforce them. This they have failed to do. Despite blatant, egregious, widespread and ongoing abuse they have not done their job. They have become useless watch dogs on the public payroll who can neither bark nor bite. Oddly, I don’t see anybody calling them on it.
The first step is to start cleaning up the mess on the ground, never mind what they do in Washington. Until the States are willing to implement and enforce the regulatory, oversight and accountability powers they already possess it will be business as usual even if Congress manages to pull off a miracle and clean up the cesspool in Washington. I personally feel that the penalties for this kind of illegal behavior are too mild. These blood suckers have been enriching themselves at the expense of the public who have in many cases lost their life savings, their credit, their home, their hope for the future, their good name and their native trust in not only their fellow man but in the social institutions which exist to protect them in the first place. The law need teeth. Big teeth in strong, relentless jaws that will not only leave a mark but draw blood and break bones.
First, the unlicensed real estate and mortgage players need to be taken down and prosecuted to the fullest extent of the law. Same goes for licensed people who defraud their clients to enrich themselves.
Secondly, these people, including licensees, should be required to make restitution to the full extent of their assets. That goes for the Commissioners who failed in their trust. The practice of fining someone $1,000 for failures of ethics that cost their clients hundreds of thousands of dollars is baloney. You got paid $20,000 for setting someone up a crooked deal which led your client to lose their $500,000 home which gets auctioned by the bank for $350,000? You pay back the $20,000 plus the $150,000 plus you get the 1099 for the bank’s loss. You did it 175 times between 2001 and 2007? Add it up. Sorry, bankruptcy’s not an option and there’s no statute of limitations.
Third, there should be a Rapid ReFi available through FHA for people with these rotten loans who have been making their payments for two consecutive years. No appraisal required, the barest minimum of paperwork. Just a simple modification of terms to clean up the loan. In most cases people bought the home in the first place because they liked it and wanted to live there and that hasn’t changed.
Homeowners in trouble who contact the bank on their own initiative to try to work out a modification of terms should be able to do so whether or not they currently qualify for the loan under the new rules. Having spent years giving away loans based on insanely flimsy criteria, the banks have now thrown out the baby with the bathwater and are setting the bar so high that you almost have to prove that you don’t need a loan to buy in order to get one. Charge a little higher mortgage insurance to cover the risk. If a bank refuses a reasonable workout with an existing mortgagor they should not be allowed to dump the loan under the provisions of the rescue package, but must keep it.
Finally, REO asset managers need to thoroughly vet the brokers they are using to sell the inventory they’ve taken back. They are in many cases trusting the same crooked brokers and agents who caused so much of the problem in the first place. Unless they do so they will guarantee that the issue will not be solved, but keep on cascading into the future.
Oct 9, 2008 - 5:40 pm 2. Lifeofthemind:The problem with Taleb’s thesis is that it lacks specificity. The world is corrupt, it was corrupt and it will prsemably remain corrupt. Denouncing this and predicting doom does not improve the situation. He sounds like Obama demanding that we withdraw troops and predicting that eventually peace will happen after war. Lo and behold after 5 years of ignoring his advice the US establishes a fragile but improved condition and begins withdrawing troops. Obama without any capacity for irony claims credit for our following his advice.
Your advice is more practicle. Napoleon said of the English that every now and then they hang an Admiral to encourage the rest. It is impossible to know the exact culprit in every interlocking conspiracy and when the problem is systemic incompetence legal standards of proof are not appropriate. We can not eliminate “greed” from commerce any more than we can eliminate self interst from politics or illegal parking from our streets. What we can do is, on random occasions or as needed to prevent a revolution, take a few egregious examples and publicly destroy them. The best nominees for right now are Franks, Doddand Raines.
Oct 9, 2008 - 5:49 pm 3. Harry:It sounds to me like we are looking for more regulations to protect us from people who have no moral compass.
Oct 9, 2008 - 5:49 pm 4. Cindy S. Simon:For all of Franklin Raines’ college and university degrees, none of them is a testament to his morals and ethics — or, more to the point, lack thereof.
Oct 9, 2008 - 5:55 pm 5. Doug_S:This is silly, the problem of corrupt officials is not difficult to solve, particularly in America where there are plenty of well meaning, honest people and the rule of law pretty much reigns.
Oct 9, 2008 - 5:57 pm 6. Mad Fiddler:Nassim Nicholas Taleb is to be thanked for providing an extremely eloquent and euphonious phrase – “epstemic arrogance.”
But the proximate cause of the troubles of this country has been pretty darned obvious for decades. Simply, the Democratic Party does not know how to speak any more except by inverting the truth.
But the problem with telling lies any time you wish to steer events your way is (1) the people who don’t know they’re lies behave with the expectation that the lies are true, which eventually leads to problems, and (2) the people who KNOW the lies are lies are forced to behave as if they were true, too, to convince the duped ones, and they also eventually fetch up against the consequences of operating on the basis of falsehoods.
Reality is what it is, regardless of what we want it to be.
Oct 9, 2008 - 6:04 pm 7. Kenneth:Raines & Frank were able to lead us into a crisis (it’s not a disaster yet) because they could hide behind the idea that they were forcing the rich (banks) to help the poor at no cost to the taxpayer. Plus the whole operation funded a Democrat jobs program through organizations like La Raza and ACORN, guaranteeing the scheme would perpetuate itself through the re-election of Democrats and almost complete reliance of poor minorities on Congressional cash.
The rich (banks) went along because of white guilt and fear of bad PR, but mostly because they figured out a way to offload their risk in an unregulated market. Or so they thought.
The Feds are doing what they can, but with the election only a month away, there’s few major structural changes that can be made.
Neither McCain or Obama know what they will be able to do once elected, and neither really has the expertise to handle a financial crisis. McCain’s suggestion of Warren Buffet for Treasury secretary proves that; and I’m certain Obama dreams of his own Bolivarian Revolution.
And maybe we shouldn’t expect complex problems to be remedied in a few weeks.
Oct 9, 2008 - 6:42 pm 8. slade:and I’m certain Obama dreams of his own Bolivarian Revolution. – Kenneth
Thank you Franklin Delano Kenneth
(with apologies for my mood)
Oct 9, 2008 - 7:00 pm 9. wretchard:Neither McCain or Obama know what they will be able to do once elected, and neither really has the expertise to handle a financial crisis. McCain’s suggestion of Warren Buffet for Treasury secretary proves that; and I’m certain Obama dreams of his own Bolivarian Revolution.
One of the unrecognized reasons why shakeouts work is because they simplify the system. When a complex system collapses from some emergent event it often splits up into parts and self-corrects. Overly complicated systems break down until they reach a workable degree of simplicity. One of the problems with this election cycle is that both McCain and Obama are, to different degrees, Hive-Men. In Obama’s case he believes the Hive is the solution to the problem. If it’s not working right it only needs to be made bigger. In McCain’s case belief in the Hive takes the form of an attachment to tradition and “bipartisanship”. Things will work if we pull a little here and extend a little there.
The idea that enlarging the problem solves it is alive and well. The Telegraph, for example, has an opinion piece making the case for a global “banking policeman”.
Oh it won’t be repeated. The new layer — the new world banking policeman — will probably ensure that something far more catastrophic eventually occurs. But who will listen? Every problem to a bureaucrat is a situation crying out for a bureaucratic solution. More complexity is their reflexive response. Simplicity? Why it is characteristic of a good design. Sometimes less is better. But the Hive-Men will be the last to know.
Oct 9, 2008 - 7:01 pm 10. Steve Kilner:This is just another economic bubble in the course of human history. It happens over and over and over. We can analyze it to death, but the pattern is always similar. The right conditions come to exist in some segment of the economy, combined with availability of credit, and **people start buying things for their resale value rather than their use value.** Eventually the bubble bursts and people busily blame other people.
It just seems to be part of human nature – across cultures, across centuries. It almost always ends in a bailout just like this. Read “Manias, Panics and Crashes”, its well-described there.
Oct 9, 2008 - 7:02 pm 11. Alexis:If nothing changes in America, it looks as though the United States will continue to have severe housing bubbles for the next century. The reason is simple. Americans are taught to regard home ownership as a form of cultural citizenship. Freecreditreport.com even suggests that it’s better to be a bachelor who owns a home in a suburb with a dog and a yard than to marry a “dream girl” who has bad credit.
As long as home ownership is regarded as a badge of cultural citizenship in America, the government will come under strong political pressure to force banks to lend to people who wouldn’t otherwise afford their homes. The illusion of home ownership has come close to becoming an entitlement. And home ownership is an illusion so long as the house is mortgaged to the bank.
Is a low comparative rate of home ownership among black people a scandal or not? I suggest that it is not a scandal principally because home ownership should not a metric to measure a person’s well being and certainly not a metric to measure a person’s “Americanness”. Yet, a critical mass of Americans do regard home ownership to be a metric of “Americanness”, so the political pressure for government intervention in the housing market will continue to be relentless.
Oct 9, 2008 - 7:12 pm 12. slade:This is just another economic bubble in the course of human history. – Steve Kilner
Agree with the meta-theory but if Dow drops to 7700 (+/-) that’s close to 50%. It’s the magnitude that keeps many of us “sleeping like babies” (crying and sh^tting our pants every two hours).
That and the egregious pre-bankruptcy parachutes.
Breath-taking hubris.
Oct 9, 2008 - 7:15 pm 13. Tamquam Leo Rugiens:Oh, aye, a global economic “policeman”, just what we need. And who is to appoint him, watch him, and to whom will he be responsible, and what checks and balances will circumscribe his power and authority, and what will guarantee his incorrubtability and what global criminal will rise to challenge his might and undermine his writ?
Oct 9, 2008 - 7:19 pm 14. slade:A “Mortgage Nazi” – that would be a “trip wire” omen.
I will be watching who supports it.
Oct 9, 2008 - 7:29 pm 15. slade:Great post Tamquam. It was unclear to me how/where criminal prosecution could proceed. I’ve read that the FBI is conducting investigations. We’ll see.
Oct 9, 2008 - 7:39 pm 16. Leo Linbeck III:Steve Kilner – just so.
TLR – indeed. And excellent thoughts on licensing.
Another problem with the mortgage lending business was that people grew to believe that a home loan was an asset-backed security. This model is based upon the assumption that a house, as a physical asset, has intrinsic value. But it doesn’t.
A mortgage is, like all debt, a claim on a future cash flow stream, namely the imputed rent paid by the person “consuming” the house. That rent stream, in turn, is a part of the gross cash flow (i.e. income) of the consumer. This is generally wages, dividends, and capital gains. Without someone willing and able to pay the imputed rent on the house, the house has no value because there is no future cash flow to claim.
Models are dangerous things. Especially unconstrained linear models in a non-linear world.
L3
Oct 9, 2008 - 7:43 pm 17. Leo Linbeck III:Failure is not a problem in a competitive market. One firm fails, and its competitors swoop in to pick apart the carcass.
Failure is a catastrophe in monopoly markets. Since there is only one supplier, failure completely eliminates supply. This has cascading effects up and down the supply chain, none of them good.
A single global financial regulatory regime is a prescription for an eventual return to the Dark Ages.
L3
Oct 9, 2008 - 7:48 pm 18. NahnCee:I’m unclear about something, and would appreciate a concise clarification from one of the present Very Smart People: Is the system(ic) we’re talking about the American system? Or is it a whole global system of banking which includes Europe, Russia, the Middle East and now Japan?
Do all of those banking systems in other countries have the same rules and goals as the American system does? If so, this is surprising to me in that I thought America was capitalism and the wild west of bully money making, while Russia is whatever communism mutated into, and Europe is nanny-state socialism.
Or is the problem with the rest of the world merely that America is *such* a Gulliver on the planet that when Wall Street trips everyone else gets squished in the subsequent fall even if they’re hard-working and innocent. Given the prevalence of corruption throughout the world, that seems unlikely.
I’d just like to get an idea of precisely what needs to be fixed because if we’re talking about fixing a system outside of AMerica that doesn’t seem very do-able.
Oct 9, 2008 - 7:54 pm 19. MarkJ:“A single global financial regulatory regime is a prescription for an eventual return to the Dark Ages.”
Ash nazg durbatulûk, ash nazg gimbatul, ash nazg thrakatulûk, agh burzum-ishi krimpatul.
One ring to rule them all, one ring to find them, one ring to bring them all, and in the darkness bind them.
Oct 9, 2008 - 7:54 pm 20. viktor silo:I am past my three score and ten and I am in poor health. It occurs to me that I shouldn’t be commenting or giving advice on matters that will no longer affect me.
Having said that, I would offer this up about real estate: be wary of the housing market when a considerable number of baby-boomers, whose pension investments consist wholly of home ownership, have to cash in.
As a general observation: I came across this Burkean quote over at American Digest that I think is worth remembering,
“But what is liberty without wisdom, and without virtue? It is the greatest of all possible evils; for it is folly, vice, and madness, without tuition or restraint.” –Edmund Burke
Lastly, Mr. Fernandez, you certainly have a brainy collection of commenters here. This is due, no doubt, to your consistently thoughtful posts.
Oct 9, 2008 - 8:06 pm 21. Leo Linbeck III:I’m not a fan of Wretchard’s advice. It didn’t really work for Enron; Lay, Skilling, Fastow, et. al. did the perp walk but nothing changed. What we’re seeing now is just a repeat of what happened then.
Moreover, it implies that economic failure is a crime against the people. But it’s not. Fraud should be punished, to be sure. But pushing your business beyond the pale and then failing is an important economic function, an empirical verification of the required Design Margin. And a source of breakthrough innovation that drives productivity.
No, it seems to me that the best solution is to take our hand off the stick, and let these firms fail. The mode of failure may vary (bankruptcy, fire sale, FDIC takeover, AIG “DIP” loan, etc.) but those that followed the leaders must now follow them off the cliff. It will be painful, but it will be quick. And the carrion will be recycled.
On the other hand, where the Fed can appropriately intervene is to play its traditional role of market maker for the debt markets. This is why opening the Fed window wide open, buying commercial paper, and pumping up liquidity are proper responses, all of which are focused on maintaining a functioning market and preventing a complete flight to quality that reinforces monopolistic behavior.
Finally, it appears to me that the main reason that Wall Street is being bailed out is because New York is both the center of finance and the center of financial media. The media has an incentive to protect its golden goose against the Black Swan.
Kinda like Washington and the political media…
L3
Oct 9, 2008 - 8:09 pm 22. outa my league:@LIFO
“What we can do is, on random occasions or as needed to prevent a revolution, take a few egregious examples and publicly destroy them. The best nominees for right now are Franks, Dodd and Raines.”
Sorry, but those guys are Democrats, and thus their incompetence and criminality “merit” promotion, say to a post such as Secretary of Treasury or at least World Bank Backbencher.
Oct 9, 2008 - 8:17 pm 23. whiskey:First, I am shocked Wretchard that you don’t get it — the failure of the elites is that they have BEEN in place too long. Without tooting my own horn, I’ve blogged on my site (link fixed btw on my name) on just why the elites failed to foresee the eminently foreseeable Fannie/Freddie fiasco:
They’ve been in place too long.
Basically, the same families in the US have been running things since well, in some cases to the 1930’s, and in other cases the 1950’s. In Hollywood, in Media, in Finance, and particularly Government. You don’t have guys like Biden (36 years) or Frank or Dodd or what have you getting purged by periodic populist uprisings any more.
You don’t have successful populist uprisings because they DEPEND on middle class family formation. Take away middle class families being formed, presto! No Howard Jarvis Taxpayers Association, enacting Prop 13 AND REMOVING it’s opponents. It’s why Jerry Brown after opposing it got the fear of the voter into him and has supported it since.
Urban anonymous living, the pill and condom, have created an episode of “Friends” that never fricking ends! High real estate prices and concentration of jobs around coastal cities don’t help.
So you have NO populist uprisings, including the critical low-level leaders that remove elites in power through voter drives, etc. The kind that put Reagan in power, or Thatcher. This is a global phenomena. [Yes that annoying Free Credit Report ad was stupid -- he's got a "dream girl," what's he complaining about? Move someplace cheap.]
Regarding why the crisis is global — heck, read the original post. Interconnected banks, with each lending each other money or partially owned or invested in each other, creates as noted a global, fragile system. Though I would doubt that volatility is reduced. Asian Currency Crisis? Mexican Credit Crisis (after devaluation)? How soon they forget!
Moreover, the S&L crisis was in the late 1980’s, not early 1990’s.
The systemic problem with the West rests on it’s people. Unable to create steady growth through productivity gains and cheap energy, with a middle class workforce, it has relied, internationally, on bubble markets. Everything from Comic Books to the Dot-Com bubble, to real estate. Each betting bigger than the last. Pets.com? Please!
What’s wrong with the West: not enough middle class people.
Oct 9, 2008 - 8:18 pm 24. Rob:Only when they started doing things differently was confidence somewhat restored. To some extent the circumstance that governments are resorting to these desperate rescue packages conveys more clearly than anything else that they are firing into the dark; and the market understands this, even if the politicians don’t.
Oct 9, 2008 - 8:19 pm 25. wretchard:I’m not a fan of Wretchard’s advice. It didn’t really work for Enron; Lay, Skilling, Fastow, et. al. did the perp walk but nothing changed. What we’re seeing now is just a repeat of what happened then. referring to Now maybe they should try handcuffing a couple of dozen senior politicians
I completely agree that prosecutions by themselves will do nothing. But as you say, “the best solution is to take our hand off the stick, and let these firms fail” so the practical problem is how to get the bureaucrats to be a little less activist. Perhaps it’s irrational, or maybe it stems purely from an aesthetic desire, but I just want people like Barney Frank removed from the cockpit in an orderly way. Let’s just say he serves no further useful purpose. Allowing firms to fail is the economic way to handle the crisis. On the bureacratic side I just wished there were some way to persuade these jokers from inflicting their wisdom on the crowds any further.
Oct 9, 2008 - 8:23 pm 26. Stew:Tamquam
Oct 9, 2008 - 8:32 pm 27. Leo Linbeck III:couldn’t agree more about the real estate profession. My sister bought a house in L.A. When she and her husband filled out the credit app, the r.e. agent inflated their income. When they protested, the agent told them to just keep their mouth shut.
victor silo,
Great Burke quote. Virtue, indeed, is the ticket.
The Catholic Church has seven virtues that correspond to the seven deadly sins:
Lust vs. Chastity
Gluttony vs. Temperance
Greed vs. Charity
Sloth vs. Diligence
Wrath vs. Patience
Envy vs. Kindness
Pride vs. Humility
These are easily translated into modern terms:
Chicks for free vs. monogamy
Obesity epidemic vs. family dinner
Hedge fund promote vs. the tithe
Money for nuthin’ vs. daily chores
Community organizing vs. neighborhood building
Income redistribution vs. a helping hand
Expertise vs. common sense
The theme of Wretchard’s post is the damage that comes from Pride, via its modern incarnation of The Expert. Perhaps future posts can meditate on the other deadly sins. There’s certainly enough source material to work with…
L3
Oct 9, 2008 - 8:40 pm 28. Leo Linbeck III:W,
Sorry I missed the reference to politicians. Now I understand the aesthetic desire
.
Still, the unintended consequences of criminalizing bad judgment seem pretty scary to me. The problem is systemic, not personal. You can remove Barney Frank, and another joker will be dealt in his place. The second ranking member on the House Financial Services Committee (and Chairwoman of its Subcommittee on Housing and Community Opportunity) is Maxine Waters. ‘Nuff said.
It seems to me that systemic problems require systemic solutions. Although I wouldn’t deny the appeal of seeing Barney in handcuffs ed: whoa, careful there big guy…, it’s better to fix the problem – excessive Federal government size and scope – and leave justice to the next life, IMHO.
L3
Oct 9, 2008 - 8:55 pm 29. programmer:I am off to spend two weeks in the hills of north central Pennsylvania. No television, no wi-fi, no laptops. Just scotch whiskey, big cigars, and a bunch of guys sitting around talking like pirates. Please get this icongnomic stuff straightened out by the time I get back to my computer.
I have been chafing at the bit to post all sorts of intelligent, biting commentary today, but I am almost speechless with anger. So instead, a song from Hank Williams, Jr.
http://www.youtube.com/watch?v=FIWb8HJ5gLo
Oct 9, 2008 - 8:57 pm 30. Derek:In my work, I sell and install systems that the owners don’t, can’t and never will understand. My place is to understand and keep them running. I could never live that way. I understand the things I purchase and use and depend on. Not totally, but I understand microprocessors, programming and logic.
The experience of most people is similar to the ancient farmers who put a seed in the ground and watched it sprout and grow. Why? Maybe it was the god they sacrificed their child to. Or the incantation that they uttered.
I had coffee with a bunch of guys who have money, have lost money and are watching carefully what’s going on. One gentleman said that if you explained to anyone how a hedge fund worked, you would not walk, but run away. He explained: Say you have four investors, each putting $1 million in the pot. The hedge manager leverages the $4 million 30 or 40 times, invests, makes $7 million in profit, and wants 20% for being real smart. Except if it collapses, the 4 investors are on the hook for $40 million each.
The whole capital system was run like this to the tune of trillions of dollars. It has collapsed. Maybe the wrong incantation, or not enough virgins sacrificed.
Paulson, Bernacke (sp?) and all the various central bankers think this stuff is normal and good business. I know. Let’s get the smartest one, give him almost unlimited power, and he will save us.
Bah.
It’s past saving or patching up. The only reasonable thing to do now is to keep societal cohesion as best as possible so not too many get hung from lamp posts, and wait it out. Whatever country can manage that will come out the other end. Maybe.
Derek
Oct 9, 2008 - 9:01 pm 31. Konyok:The worm Ouroboros.
The most enduring folk wisdom from the Great Depression is that real estate is the only wealth that you can depend on. Stock markets crash and banks can fail, but your home is your castle.
It’s only natural that home ownership for the poor would be a consensus strategy for fighting poverty. A corollary to “teaching a man to fish.” Ownership is also a plank in the “broken windows” philosophy of fighting crime – people who own their own homes are less tolerant of street crime than renters.
What so quickly has become a new conventional wisdom that it is wrong to lend to people that aren’t qualified to own a home simply was not a consideration when these “affordable housing” policies evolved. Oh, sure there might have been some irascible banking types with some objections, but this seemed a good solution to liberals and conservatives alike.
Remember, the ’90’s were the time of welfare reform, welfare to work, and, yes, home ownership. Policy makers were desperate for some fix for the pathologies created by the War on Poverty.
In a concession to social conservatives, AFDC was configured with a kind of morals clause – the tax payers were not to be responsible for able bodied men. The unintended consequence was that the program became a powerful environmental pressure for unwed mothers and single parent families. (That’s a big 10-4, whiskey!)
“Affordable housing” was intended to reverse that trend, and help encourage intact families in the underclass.
So, here on the other side of the demographic bulge, as the baby boom children of the depression babies begin to slacken their demand for real estate, what we thought was our safest bet becomes the runaway anchor threatening to founder our ship.
Oct 9, 2008 - 9:03 pm 32. Leo Linbeck III:Derek,
A quick note on the structure of hedge funds.
I think your gentleman friend is mistaken. Hedge funds are structured as either Limited Partnerships or Limited Liability Companies. As such, investors (like your four dudes dropping in $1M) are not liable for the debt taken on by the hedge fund. If the hedge fund tanks, they lose their $1M, but have no further liability.
This is why hedge funds are systemic dangers, however. If the hedge fund leverages $4M to $150M, then makes a bunch of bad investments and the value drops to $50M, the investors lose $4M but the lender loses $100M of the $146M they loaned. That means their banker now has a problem, since he now has to write off $100M from his equity, which means he has to sell $1B worth of assets to maintain his regulatory ratios. When everyone does this, there aren’t enough buyers, so he actually has to sell $2B worth of assets, which means he has to write down another $1B of equity, which means he’s bankrupt, and his lender now has to write down the loans he made, etc. A cascading, systemic failure; a sort of financial septic shock.
FWIW.
L3
Oct 9, 2008 - 9:16 pm 33. Konyok:The Epistemic arrogance is epidemic.
Especially at times like these, we all seek solutions in aphorisms.
Oct 9, 2008 - 9:29 pm 34. Derek:I honestly think that the central bankers and politicians are thinking that if we do this right, we will have a bumpy ride for a bit, then it will go on as before.
Nope.
Someone commented that Paulson hasn’t realized that the securitized mortgage business is gone. Dead. Finished absolutely. Any attempt at saving it is foolish and throwing good money after bad.
Same as the banking industry. Europe doesn’t have privately held banks any more. Or not many. They have been nationalized. Maybe just in time for them to do smoke an mirrors only as a government agency can to come up with their 25% gdp pension liabilities.
Energy is gone. Oil is cheap now because no one is using it. Only it isn’t cheap, just cheaper than a month ago. Where is the trillions of dollars to rework the electrical grids, generation capacity and transportation infrastructure going to come from? The moment demand rises, the prices will go up.
Yesterday’s papers talked about grain shipments sitting in Canadian ports because no one will trust the credit certificates issued by banks. I thought that it would be a wonderful opportunity for someone with a bit of cash (more than a bit) to jump in and make some money providing a service like that. Except that you can’t. Banking regulations wouldn’t allow it. Banks are bust, yet routing around the problem is illegal.
I suspect there are people who realize the enormity of the problem. The only solution is somehow writing down the equivalent of the worlds GDP in flaky paper.
There are going to be a number of rolling crises in the coming months. Hedge funds will come due and huge losses will be absorbed. Pension liabilities will by law force governments and corporations to come up with large sums of cash to meet obligations.
Government revenues are falling like a rock. They can either borrow (from where?) or cut services. Societal cohesion? There is no head room left. Most western democracies already have very large governments taking as much as they can out of the economy.
If the banking system can freeze, Dow can drop almost 50%, what if the economy dropped by some huge number? Worldwide GDP drops 30-40%? Impossible? I think the numbers right now would cause most people to faint. Remember that anything we hear right now is at least a month old. GDP numbers are usually 2 months.
Nassim Nicolas Taleb may have been right, but I doubt he’s very happy about it.
Derek
Oct 9, 2008 - 9:33 pm 35. slade:I’m unclear about something, and would appreciate a concise clarification – NahnCee
The Hole Truth
Oct 9, 2008 - 9:34 pm 36. buddy larsen:L3, you might add that this time, when the liquidations came to be necessary, there’s no ready vultures as we have come to expect –they’re out there, but can’t get any financing. In a major asset-price deflation, capital requirements are best met by hoarding capital, thinks any half-prudent banker. the Bailout made no demand that banks lend –a mistake, it now appears –an omission.
And this election –would YOU as a banker want to enter contracts that promise to be soon enough subject to some populist judge’s re-write? And what do you think about your paying client, whose neighbor soon enough will get a big federal discount and softer terms on his troubled mortgage, while he continues working two jobs to service his similar contract?
Moral hazard is here, and will never again in our lifetimes be heard as some arcane philosophical abstraction.
Oct 9, 2008 - 9:40 pm 37. Dave:Symptomatic of what plagues us is calling
rampant speculations “hedge” funds.
It took me a while to understand that jargon.
Where I come from “to hedge” means to limit
your potential profits by guarding against
total loss.
Does corruption of language accompany crooked dealings or presage them?
Oct 9, 2008 - 9:43 pm 38. mika2k1:Wretchard,
When the law is no longer accountable to society, society is no longer is accountable to the law. You said the same earlier. Why would such sentiments require moderation?
Oct 9, 2008 - 9:56 pm 39. Charles:Instead he has long maintained that the collapse we are now witnessing was the result of epistemic arrogance which he defines as “a measure of the difference between what someone actually knows and how much he thinks he knows.”
………..
this is especially true of the democrat establishment in the USA who expanded the work of the Community Investment Act into a stealth great society program for which the bill has come due suddenly….
That said, all the actions of the fed suggests that they have known and have been preparing for this event for 10 years or starting at the same time that Community Reinvestment Act morphed into a system killer
Oct 9, 2008 - 9:58 pm 40. wretchard:When the law is no longer accountable to society, society is no longer is accountable to the law. You said the same earlier. Why would such sentiments require moderation?
I think the phrasing sounded a little dangerous. Please be patient if you feel I’ve misjudged in moderation. I have a try to keep this site within bounds. And the only guide I have sometimes is my own judgement. BTW, that applies to me too. If you feel I’ve crossed some legal or ethical line let me know. Once I got an email suggesting I had been unfair to some public figure in a post. I reviewed the post, which had just come up and removed it. You may have observed that I will occasionally pull my own posts and my own comments. It’s an imperfect process and sometimes I will give unintended offense.
Oct 9, 2008 - 10:05 pm 41. Derek:Leo: Thanks for the clarification.
Add to that the default credit swaps, a form of insurance. So in the cascading failure, you have another layer of people over leveraged and bankrupt.
Isn’t this whole mess just the Orange County clerk playing with derivatives? Only with the whole world’s economy put on the line?
Derek
Oct 9, 2008 - 10:07 pm 42. Charles:(…) the real- estate collapse of the early 1990s in which the now defunct savings and loan industry required a taxpayer-funded bailout of more than half a trillion dollars.
………
when they finally cleared that property off the books the total bill to the taxpayer was about 40 billion.
The fed is buying bad debt at about 9-17 cents on the dollar. They’ll likely get 30 cents on the dollar for stuff they actually sell.
Conventional wisdom is that in the end the actual cost to the taxpayer will be minimal.
I don’t know what the truth actually is.
My feeling for the author is that he understands banking about as much as I do; which is to say not much.
I was just listening to australian business commentators. there were a couple of really grizzly auzzies. one mentioned that IBM just 15 billion worth of loans so while things were bad they weren’t too bad. further the fed was stepping in and doing things the banks normally do. they thought this was proper life support until things got back to normal.
but normal won’t be like it was for the last 10 years. there will be a massive amount of deleveraging. think about what that means. in that context is flooding the system with money so inflationary?
Oct 9, 2008 - 10:09 pm 43. mika2k1:I think the phrasing sounded a little dangerous.
==
Ok. New phrasing:
Yes, time to go back to the basics. First thing to understand is who allowed a $700 trillion derivative market to emerge in $50 trillion world, and how do we terminally disable them.
Oct 9, 2008 - 10:17 pm 44. Derek:Charles: My understanding is that inflation is a reflection of the economy divided by the money supply.
If the economy is shrinking or not growing, and the money supply is growing, inflation is inevitable.
Although it probably is on the bottom of most lists of “Crises To Deal With”.
Derek
Oct 9, 2008 - 10:21 pm 45. Derek:Mika: $700 trillion? Do you have a reference?
I ran across $60 trillion somewhere in the last day or two.
Not arguing with your point however.
Derek
Oct 9, 2008 - 10:24 pm 46. Leo Linbeck III:Derek,
It may be an Orange County-style mess, but I kinda doubt it will lead to utter collapse.
Credit default swaps are potent instruments, but they could actually mitigate the problem. Here’s how.
If we return to our example above: the bank has a $100M loss on a failed hedge fund. If the bank has to absorb the entire failure, it has to dump $1B of assets. But if it has hedged this risk by swapping pieces of the default risk with others, it could be better off.
Say it swapped the default risk on that $146M loan with 20 other institutions. In that case, each institution would lose $5M. This may be small enough to not cause much of a regulatory problem by itself. For some banks it might, but now they only has to sell no more than $50M worth of assets each, which is much easier to do in short order than dumping $1B.
So, effectively CDSs spread the risk across multiple institutions, so you have a much bigger equity pool to absorb defaults.
Now, if the TOTAL defaults in the market are too big, you have a REALLY big problem, because this triggers a simultaneous cascade at all institutions. This is, I believe, the problem the government faced with AIG, although there’s probably no way to know at this point. But it may have been better to stop the cascade at the bottleneck.
Where our big risk exists is in a sudden and deep recession that pushes wages down fast. This is where illegal immigration actually may cushion the blow; if we experience significant reverse migration, we could see lots of short-term layoffs but not a lot of wage compression. Demand will fall, but so will supply. Total employment will fall, but unemployment will be stable. People might have to take a slightly lower paying job, but businesses will not have a big pool of workers (with immigrants gone), so wages won’t move too much. This will really help the mortgage mess, since wages are really the cash flow stream that backs mortgages.
Anyway, this may all seem hopelessly optimistic, but there it is.
L3
Oct 9, 2008 - 10:28 pm 47. mika2k1:Derek,
“700 trillion derivative market” returns 43,600 hits.
Wiki has it at “$516 trillion at the end of June 2007″
These numbers are academic. The fraud is blatantly obvious. Nobody in world has this kind of money.
Oct 9, 2008 - 10:33 pm 48. mika2k1:..Nobody in ^the world..
Oct 9, 2008 - 10:36 pm 49. mika2k1:Conventional wisdom is that in the end the actual cost to the taxpayer will be minimal.
==
What about the people that lost trillions in savings while Goldman Sachs make a killing shorting the market. What about the cascade of effects that will put a world of hurt on people and the economy, these don’t count?
Oct 9, 2008 - 11:04 pm 50. Tamquam Leo Rugiens:L3
Oct 9, 2008 - 11:36 pm 51. LennyB:I seriously doubt that many illegals will be going home. Certainly among the Hispanics the economies they came from were basket cases to begin with. With the US economy leading the world economy into a tailspin their native economies will be even more shattered than ours. They’ll stick; they are survivors or they wouldn’t be here in the first place.
“Epistemic arrogance” is a wonderfully apt addition to the vocabulary, and I’m glad to learn it. I think it nicely complements a pet issue that I haven’t been able to get over lately — or even really put my finger on exactly. But I feel like it’s one that should really be front-and-center to all of us at this time — all of us, that is, who are concerned about the integrity of the capitalist platform upon which our personal liberty and chance for prosperity is secured. Before the blasted left can seize on it as some kind of blunt instrument to deploy in their dastardly struggle to turn us all into the Europeans, that is.
That pet issue? Progressively greater levels of rent-seeking behavior present in the US economy, and specifically, the fact that it doesn’t just happen in the public sector. The private sector seems to be more and more rife with rent-seekers every day, and the threat this poses to genuine productivity (the only solution to all of our problems) and resultant GDP growth ain’t exactly getting smaller here in America. It’s not necessarily that the private sector variant is any more or less parasitic than that of your average bureaucrat (whose very existence can be said to be rent-seeking, after all). Rather, it’s that increasing levels of “epistemic arrogance” in both sectors seems to be the catalyst fueling progressively more of it in the private sector — which is in turn reinforced not by lack of regulation as those on the left might suggest, but by public policy crafted to prevent them from reaping the just market-driven consequences of their speculation (crafted by, you guessed it, rent-seeking politicians).
For instance, like a natural rate of unemployment, I’ve come to expect a natural rate of rent-seekers, public and private alike. You can’t even establish a marketplace without it, and we’re all rent-seekers to a degree. But many, many epistemically arrogant individuals are shifting the balance of American productivity from real to merely perceived. Institutional, collaborative, trans-sector rent-seeking is the problem, and for some reason the “bail-out” seems to be coming from the same place of epistemic arrogance. At micro level, I just have to say that anyone who signs a 5 -year arm or an interest-only loan and depends on 10%+ annual growth plus a buyer when they want to unload it, just to finance whatever it is in the hell they are doing financially, deserves to lose their house.
But alas, the productivity of non-rent-seekers will always end up rescuing the freeloaders courtesy of government. How much seems to just depend on the party you vote for.
Oct 10, 2008 - 12:01 am 52. Nomenklatura:I’m really not convinced that what we are seeing is particularly, to this point, anomalous.
There were several comparable stock market declines over the past century, for example 1929, 1973-4, 1987 and 2001. In every case both the world and the US went back to getting wealthier after just a very few years.
Nor is there any reason to expect the general level of our politics or our politicians to improve just because we are in a mess. If anything one should perhaps expect the reverse, and yet none of the clowns in office during previous crises managed to derail our economy in any lasting way.
The fact that few people understand much about the systems which keep them alive and prosperous, from the sewer systems that keep them healthy to the banks which fund their paychecks, is disappointing and even dangerous. Nevertheless the preference affluent people display for cooking up dreamy social transformation schemes which are aesthetically pleasing but in practice hazardous to life, livelihood and liberty is a problem that has been with us at least since the days of the Roman Empire.
Quite a few of our dreamier elites are about to experience a rude awakening. What many of them will learn about the real world over the next 2-3 years as they sober up will never appear on any balance sheet, but will become an important asset for all of us nonetheless.
Oct 10, 2008 - 12:03 am 53. sgi:So what does the end of an era really mean? I contend that it means the end of a long period of relative stability based on the United States as the dominant power and the dollar as the main international reserve currency. I foresee a period of political and financial instability, hopefully to be followed by the emergence of a new world order.
George Soros
http://www.nakedcapitalism.com/2008/10/soros-he-foresaw-end-of-era.html
Neither Obama or McCain are qualified for the job. But if John McCain were to put some Canadian or Australian bankers in charge…
http://www.reuters.com/article/newsOne/idUSTRE4981X220081009
Oct 10, 2008 - 1:43 am 54. lc:Like the proverbial growing sandpile as an example of a self-organized system, occasional, small scale “avalanches” keep the overall system structure stable. Fiddle too much with how that sandpile grows and you create greater potential for larger scale erosion of system integrity. Mess too much and I’m sure you get something that is no longer anything at all like a sandpile. Too, these types of systems are “amoral,” “moral” being an entirely human construct…..(uummm, I think.)
Taleb’s book “Black Swan….” sounds very interesting and I have requested it from my local library.
In regards to the bailout, someone else has said its like helping an alcoholic by paying his bar tab.
Oct 10, 2008 - 3:54 am 55. Chris:Remember – the same math modeling of complex systems used by the mortgage and derivatives quants is used by the climate modelers as well.
Oct 10, 2008 - 5:19 am 56. In the Industry:These risks were also discussed with some precision in “Demon of Our Own Design” by Richard Bookstaber and the framework was established in “Normal Accidents” over twenty years ago. Check there.
Oct 10, 2008 - 5:36 am 57. RWE:“Global Banking Policeman”?
Here is an alternative idea. I first thought of it during the S&L crash.
Get their names. The names of everyone involved. The CEOs. The CFOs. The risk analysts. The guy who mops the floor at night. The Congressmen and their aides.
And put them on the Internet in a website that anyone can access, with a brief description of their involvement. And before you deal with a financial institution, and before you vote, you look them up. Make a requirement for all financial institutions to list all their employees and contractors and consultants.
I tried to do something similar to this after the 2000 election, make a list of all the lawyers and their affiliated companies that were involved in challenging military votes in Florida. Seems that no one thought to write down their names.
Oct 10, 2008 - 5:55 am 58. Stones Cry Out - If they keep silent… » Things Heard: e36v5:[...] arrogance and the financial crises. Or game theoretic [...]
Oct 10, 2008 - 6:09 am 59. Hot Air » Blog Archive » Open thread: Wall Street:[...] excruciating day, so let’s open a thread for chatter. Reading stuff like this and this feels like being told there’s a giant asteroid headed towards Earth and it’s probably [...]
Oct 10, 2008 - 6:19 am 60. Michael Hoskins:Wretchard,
I find I am in agreement with your view that the system may need some “hands off the controls” self correction.
The current banking/ monetary system is overburdend with derivatives built on alternates and work arounds. This is similar to a high temperature thermodynamic system. At some point it must become unstable due to the energy input to maintain status quo, not to mention increase. The energy, conceptually, comes from the entropic sea of finite enthalpy. We have support wealth by using ever more complex intertwined financial paper as cash. Once the underlying cash reaches the fullest extent of reasonable leverage, boom. Everything then falls back into financial entropy…things bought and sold for usefullness (hat tip) and with real cash.
This goes to the thread comments for another layer of regulation. They too will reach an unstable level and crash.
The more reasoned approach may be to find where the system was stable and self sustaining and allow collapse back to that energy state. There was a time when the percentage of deposits a bank was allowed to lend was as low as 80%(20% reserve against loan losses). It has been in the last 25 years increased to its current high 90% range. Were the reserves to loan loss still on hand, we wouldn’t be here.
Oct 10, 2008 - 6:25 am 61. Paul from Florida:“Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction”
Involuntary servitude shall exist within the United States.
There, fixed it.
Any questions, ask Harvard Law School graduates Raines, Frank, Obama.
Oct 10, 2008 - 6:32 am 62. Sgt. Hulka:Lighten up, Francis.
Oct 10, 2008 - 6:39 am 63. Hey Guys? Relax. | The Sundries Shack:[...] The Dow is down almost 700 within a blink of opening this morning. Allah is nearly ready to leap out the nearest window, and he’s hardly alone. [...]
Oct 10, 2008 - 7:03 am 64. Jules Crittenden » It’s Your Money:[...] Belmont Club’s Fernandez at Pajamas: It’s the epistemic arrogance, stupid. [...]
Oct 10, 2008 - 7:26 am 65. geoff puterbaugh:Why all the fancy pseudo-intellectual language?
“Housing bubble pops” is followed by a classic clash between the bulls and the bears.
Whatever Burke may have recommended to us, the stock market is ruled by two emotions: Fear and Greed.
Enough psychobabble about “linear” and “nonlinear systems.” Some people, driven by Fear, are dumping their stocks at a terrible moment; some others, driven by Greed, are sniffing around for bargains.
Oct 10, 2008 - 7:38 am 66. Joe Buzz:You are my kind of guy geoff..I had to go see Merriam Webster about “Epistemic”.
Oct 10, 2008 - 8:10 am 67. PJ:Great article. I hope McCain is reading it.
Until Raines & Co. and Frank and Dodd are indicted, the markets will go wild. We are bailing out criminals.
Oct 10, 2008 - 8:34 am 68. lc:its funny how a system like the stock market can be so greatly affected by emotion. It seems another matters, too – Confidence….
Oct 10, 2008 - 8:59 am 69. Charles:Conventional wisdom is that in the end the actual cost to the taxpayer will be minimal.
==
What about the people that lost trillions in savings while Goldman Sachs make a killing shorting the market. What about the cascade of effects that will put a world of hurt on people and the economy, these don’t count?
Oct 10, 2008 - 9:02 am 70. Stephen:=========
I’m in favor of cutting the capital gains tax to zero as is done in singapore and china. this would give more incentive for people to risk their capital. right now the only organization that is risking capital is the government.
“Enough psychobabble about “linear” and “nonlinear systems.” Some people, driven by Fear, are dumping their stocks at a terrible moment; some others, driven by Greed, are sniffing around for bargains.”
It must be wonderful to have such a complete understanding of financial markets.
Good luck with your investing!
Oct 10, 2008 - 9:10 am 71. Paul from Florida:IC
“its funny how a system like the stock market can be so greatly affected by emotion”
Blame it on being human. Emotions, they are a feature, not a bug.
Anyway, with the clowns driving the bus, the behavior seem logical. People want off the bus, even if they paid full fare, they are willing to leave luggage and a refund behind.
After the crash, I’ll wonder out of the woodline and pick through the wreckage for valuables.
Oct 10, 2008 - 9:19 am 72. Lorenz Gude:Great discussion. I though Dick Fuld getting slugged in the Gym on Sunday was a nice example of basic human reality breaking through. We lack the kind of collective temperament that allows us to tear people limb from limb in the street – like Mussolini. Nonetheless a good reminder to our executive class that someone might just take a shot at them in the street. And that there are human, not just legal, consequences for their actions.
Oct 10, 2008 - 10:58 am 73. Daily Pundit » Black Swans and Dumbasses:[...] Belmont Club » Taleb’s warning Nassim Nicolas Taleb, the author of the Black Swan, quotes from his own book to show that he has been warning against a systematic collapse of the banking system for a long time. But the collapse was not an instance of a Black Swan, which is an unpredictable rare event. Instead he has long maintained that the collapse we are now witnessing was the result of epistemic arrogance which he defines as “a measure of the difference between what someone actually knows and how much he thinks he knows.” Taleb wrote: “to me a banking crisis –worse than what we have ever seen — was unavoidable and NOT A BLACK SWAN, just as a drunk and incompetent pilot would eventually crash the plane. And I kept receiving insults for 12 years!” His own book had this to say about Fannie Mae, bankers and epistemic arrogance. It was devastatingly cutting writing and now seems justified by events. [...]
Oct 10, 2008 - 11:05 am 74. Eversor:There are parallels with what the Government is trying to do to the erroneous Forest Service policies of the past. The policy used to be that Forest fires had to be fought and their spread contained to protect the forest itself (Or so they thought). It was discovered that by doing this it caused an extreme accumulation of drybrush and dead tree matter that would then burn more intensely during a later fire, creating wider destruction and adversely affecting the life cycle of the forest ecosystem.
Nowadays I believe that the Forest fires are only attacked if they will be endangering property and/or lives.
Sometimes you just need to let the forest burn, and look forward to the next Spring.
Oct 10, 2008 - 12:01 pm 75. Brian Macker:“Taleb wrote: “to me a banking crisis –worse than what we have ever seen — was unavoidable and NOT A BLACK SWAN, just as a drunk and incompetent pilot would eventually crash the plane. And I kept receiving insults for 12 years!” ”
Yeah, Taleb, because your theory is still idiotic. This was predictable not because it was unavoidable. It was predictable because the specific actions needed to avoid it, letting the free market determin interest rates, was not done.
Of course, lowering interest rates below the market price is going to result in this mess. Nothing unavoidable about it. Could have just fired Alan Greenspan, abolished the Fed and we would have been fine.
Oct 10, 2008 - 12:55 pm 76. wrecktafire:Great discussion. This reminds me of Feynman’s analysis of the Challenger accident, in which he described a NASA culture in which significant risks would acquire, over time, and with repeated running thereof, less psychic significance to those making the risk assessments.
Oct 10, 2008 - 1:15 pm 77. Captain Ramen:In other words: “I’ve been playing Russian roulette for five straight minutes–I guess it’s not really that dangerous.”
TLR:
Actually from what I’ve noticed is they HAVE been going home. I have two anecdotal examples:
1) When things were booming here in Los Angeles, the freeways were jammed with traffic pretty much all day. Construction / home fixy-uppy requires a lot of labor, and illegals filled a lot of that out.
I’ve noticed a pretty sharp decline in the amount of freeway traffic when housing went Tango Uniform (hahah I love that). It’s still pretty bad at rush hour, but I get home in half the time if I leave right before it starts.
2) My wife’s friend is a teacher. They had to move her to another school because there weren’t enough new children enrolling (this is a hispanic part of LA btw).
Almost all of the growth in public education around here comes from children of illegal aliens. So either a) Mexican immigrants suddenly discovered birth control or b) there ain’t as many as there used to be.
I do expect them to start coming back when the shit hits the fan down there.
Oct 10, 2008 - 2:34 pm 78. koblog:Who is John Galt?
Oct 10, 2008 - 3:26 pm 79. Jason:To add to comments from above:
As the natural instinct of bureaucracy is to add additional complexity to all systems, everywhere, including their own – for it is by this complexity that bureaucracies prosper and self-propagate – then the only workable solution to this problem is to engineer the system such that bureaucracies cannot form in the first place (or, barring this, ensure that the environment is such that any bureaucracies that do form become unstable before they gain sufficient regulatory power so as to ensure their existence into perpetuity).
To inflict upon this board a bad analogy: one may look at the organization and propagation of bureaucracy in much the same way as one does the formation of tropical storms. Where the environment is unfavorable, either they do not form or, once having formed they do little and dissipate. However, if the environment is favorable, they grow, and eventually dominate the local environment to such a degree that they become quite resilient to the negative conditions which would have earlier destroyed them, and even to a degree prevent those conditions from coming into existence. Instead, we find that only catastrophic failure – for the case of our analogy, the imposition of land – is sufficient to disrupt the system; thus, the system continues until catastrophic failure occurs.
Oct 10, 2008 - 3:34 pm 80. Richard Fernandez has some great material on the meltdown. « Bear Diaries … with Stillman.:[...] The rest is here. [...]
Oct 10, 2008 - 3:35 pm 81. LennyB:No disagreement on the instincts of bureaucracy and complete absence of value that is contributed therefrom. But despite the fact that bureaucracy (public or private) by definition runs counter to what drives a market (although bureaucracy is simultaneously necessary to establish the market in the first place, at least it is if you do not wish to enforce your own transactions), I would just submit that bureaucracy is not the root cause of the immediate situation. And although certainly the reactionaries out there will see fit to argue for additional bureaucracy as a response, which is obviously very bad — stop to consider that said reactionaries want bureaucracy for entirely different reasons than resolving financial crisis.
Complete absence of bureaucracy could hardly have mitigated the damage being done by reckless speculators.
Rather, as is usually the case, I think we must look at ourselves and our own natural instincts, for we are all the market — and the instincts are greed. Good greed being the desire to convert labor into value (and thus wealth), bad greed being the desire to chisel from this value without any labor to attain similar wealth (thereby affording a marginal benefit in that this wealth will be ultimately recycled in the form of bling, but no meaningful contribution to the economy other than bling-conduit). And so ultimately, the problem is a manifestation of the cyclical, naturally occurring entry to and exit from the market of traders in bad greed… which only becomes a real problem if for some reason the destined exit is prevented by decidedly non-capitalist manipulations.
Oct 10, 2008 - 5:31 pm 82. Leo Linbeck III:The microeconomic argument for reverse migration is that people come illegally to the US to earn more, after all costs (both money and other), than they would earn at home, and when that additional earning shrinks, people return home.
The costs of working in the US illegally include:
- Housing
- Marginal food cost
- Travel
- Fear of arrest (however small)
- Inconvenience of being separated from one’s family
Let’s say a day-worker makes $8/hr, and works 30 hours a week. That’s $240/wk. Let’s say that housing eats up $90/wk, and other living expenses add up to $60/wk. That’s a net benefit of $90/wk, or about $3/hr.
Let’s say that same laborer can earn $2/hr in their home country. That means they’re willing to put up with the non-money costs for an extra $1/hr.
Now, if a recession comes, demand for labor will fall. This translates into either fewer hours, lower pay, or both. Let’s assume pay stays constant; that means that a 12.5% decrease in hours from 30 hr/wk to 26.25 hr/wk pushes the US “send home” pay to the same as the home country pay.
Because of the fixed cost of living abroad, the supply of labor is very sensitive to changes in demand. If demand falls a little, it can lead to a significant reverse migration, just as a small increase in demand caused a flood of illegal immigration.
L3
Oct 10, 2008 - 5:37 pm 83. Bob Murphy:@L3
Oct 11, 2008 - 12:02 am 84. Kirk Parker:Then it’s at the peak of that reverse migration that we should proceed in all haste to complete the border fence.
programmer,
What, no firearms? You guys are only having 20% of the fun you could be having… clinging fun, of course.
Oct 11, 2008 - 1:20 am 85. Daniel Cosgrove:Geoff Puterbaugh and Joe Buzz are good examples of why America is failing in some respects. Linear and Non-Linear are mathematics and physics concepts. They aren’t “psychobabble.” Same with epistemic; that is a term from philosophy.
Had you guys had a good basic education you would have known that.
My critique of you isn’t from some egghead intellectual, but from someone who thinks we have come far astray from basic educational standards. Philosophy and math are the foundations of western civilization and you two make a mockery of it.
Oct 11, 2008 - 5:43 am 86. buddy larsen:@koblog –heh –good one –
Oct 11, 2008 - 7:53 am 87. Bob Murphy:@Daniel Cosgrove
Oct 11, 2008 - 3:14 pm 88. Economic Crisis Round-up at Combat Consulting:Quite so.
I couldn’t agree more.
And it’s never been easier to overcome educational deficiencies.
I got 31 million + listings for non-linear in 0.18 seconds.
Geoff and Joe-Google is your friend, as it is ours.
First of all you have to understand that you don’t understand (means getting your ego under control and joining the real world).
BC drives me to distraction, dictionaries and Google very frequently.
Exhilarating stuff much of the time.
And educational.
And not for the faint of heart.
Bless y’all.
[...] Taleb’s Warning by Richard Fernandez [...]
Oct 12, 2008 - 8:47 am 89. The Financial Crisis is not a Black Swan — LimbicNutrition Weblog:[...] Taleb predicted this whole catastrophe in his brilliant book “Black Swans”. From “Taleb’s warning“: Nassim Nicolas Taleb, the author of the Black Swan, quotes from his own book to show that [...]
Oct 12, 2008 - 8:54 am 90. The Financial Crisis is not a Black Swan at Combat Consulting:[...] Taleb predicted this whole catastrophe in his brilliant book “Black Swans”. From “Taleb’s warning“: Nassim Nicolas Taleb, the author of the Black Swan, quotes from his own book to show that [...]
Oct 12, 2008 - 8:54 am 91. Fat Man:Stress in Global Markets Is a `Black Swan Event’: Chart of Day by John Glover at Bloomber.com on 13 Oct. 2008:
The CHART OF THE DAY shows Bloomberg’s Financial Conditions Index, which includes yield spreads and measures of the money, stock and bond markets. The index’s drop this month is the kind of rare, devastating event described in Nassim Taleb’s book “The Black Swan: The Impact of the Highly Improbable,” said Nigel Marriott, the founder of Bath, England-based Marriott Statistical Consulting Ltd.
“It’s way off the scale, a one-in-billions chance,” said Marriott, a fellow of the Royal Statistical Society. “This is absolutely a black swan event.”
In statistical theory, about 68 percent of events are within one standard deviation above or below the average, 95 percent are within two deviations and 99.7 percent within three. Markets are currently 9.47 so-called standard deviations from usual levels, the Bloomberg index shows.
The measures indicate conditions so unusual that they’re comparable only with winning the lottery twice in a week or the earth being destroyed by an asteroid, said David Watts, a strategist at CreditSights Inc. in London.
The data go back only to 1992 and so don’t reflect market disruptions such as Black Monday in October 1987 or the Great Depression. * * *
Oct 13, 2008 - 10:35 pm 92. Rant of the Week: 10/26/08-11/1/08 » The Ethereal Voice:[...] week’s rant of the week is Taleb’s Warning from the Belmont [...]
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