Scrimping on the Future

October 18, 2009 9:12 AM

Information is stimulus, confusion is contraction.
posted by kliuless (15 comments total)

Replace the word "information" with belief, or trust, or faith, and you'd be right. To suggest that information alone is a stimulus is false. Information cuts both ways.
posted by SeizeTheDay at 9:36 AM on October 18

Agreeing with Seize - Information is the basis for actual growth - Belief causes stimulus.
posted by Orb2069 at 9:42 AM on October 18

To suggest that information alone is a stimulus is false.

Not necessarily.

I think the connection between information and stimulus lies in Shannon's classical definition of information: That which reduces uncertainty.

From the article: A housing boom, any kind of boom, is attended by an increase in certainty. Information is stimulus, confusion is contraction. A bust occurs when the market is unsure of everything, when market participants perceive better risk-adjusted return in holding government securities (or supply-inelastic commodities) than in financing real investment.
posted by tybeet at 10:09 AM on October 18

My cousin wrote the first article. He's one smart cookie, and unsurprisingly, a little nerdy.
posted by alzi at 10:17 AM on October 18 [1 favorite]

Tybeet, by that definition, disinformation has the same meaning as information, which is why I said that it comes down to belief, or faith. Information or disinformation, true or false, the underlying stimulus is the belief, not the data itself.

Point: at the height of the credit bubble, creditors believed in an endless refinancing environment. The belief in unlimited easy credit allowed for all sorts of valuations (which are based on the *faith* of future cash flows).
posted by SeizeTheDay at 10:51 AM on October 18

SeizeTheDay: "by that definition, disinformation has the same meaning as information"

Mainstream information theory does not address the subject of deceit or deliberately misleading others, information is something that reduces uncertainty, not some epistemological claim to transcendent truth.
posted by idiopath at 11:12 AM on October 18

He seems to define information as "knowledge that investing in x will return a profit".
posted by bhnyc at 11:29 AM on October 18

bhnyc: "He seems to define information as "knowledge that investing in x will return a profit"."

If you reduce uncertainty about the market, that allows a place for reasonable decision making, and according to the capitalist theory of markets, this is supposed to be how prosperity and stability are possible. The whole theory of what is supposed to make a free market efficient or productive kind of breaks when you don't have a certain level of reliable information.
posted by idiopath at 11:36 AM on October 18

Point: at the height of the credit bubble, creditors believed in an endless refinancing environment. The belief in unlimited easy credit allowed for all sorts of valuations (which are based on the *faith* of future cash flows).

You really think that creditors "believed in an endless refinancing environment"?

My take is that creditors knew full well the refinancing boom wasn't endless, but they were making fantastic returns in the short term by making loans then repackaging and selling the debt (pronounced risk), and that it was to their advantage to make CONSUMERS believe in an endless refinancing environment, to sustain their profits for as long as possible.

Creditors did have a well-placed faith in the government to not let them fail.

Carry on.
posted by Artful Codger at 11:53 AM on October 18 [1 favorite]

You confuse creditor with bank, Artful Codger, and there is a huge difference.
posted by SeizeTheDay at 12:07 PM on October 18

Ugh.

The stimulus comes only and precisely form the certainty the program provides to investors that capital spent will be repaid, with interest.

Anytime you try to re-define common terms to fit you're argument, you've probably lost.

The point of the stimulus isn't to increase investor confidence, it's get out of the liquidity trap. Think about the following problem. In neighborhood X 20 people have houses that are poorly insulated, and therefore they're wasting money on energy bills. If they fixed their insulation, they could save thousands of dollars over the years. And, there are a few unemployed contractors who could do the job. Obviously, everyone would be better off if those contractors were paid to fix the houses.

But, no one has enough to do the investment right away. So, the hands sit idle, simply because the money is gone. The opportunity to increase value and wealth sits un-taken because there is no money to spend.

The purpose of the stimulus is to get cash out on the streets so that these obvious investments can be taken.

Now, in that example, the investment is a "sure thing", we know it will work out. There's no chance that the houses are suddenly going to stop needing insulation. The author is saying that if we simply have the government guarantee the loans of big business we can turn lots of other investments into "Sure things" too.

And that's kind of what the government is doing, but that's a perverse form of "stimulus" It only benefits people who have been hoarding cash and lets them amplify it while those stuck on the bottom with very little cash already are on the hook for their mistakes. Rather then simply rigging the economic system to extract economic rents from the middle class, the rich and CEO classes have simply rigged the government to extract wealth directly from the masses without even doing anything at all.

Let me give you an example of an economic rent: you know those overdraft fees you have to pay if your checking account balance goes below zero. And how if you by, say 5 different things with your Debit card, the bank will arrange the transactions so the most expensive item goes first and dings you for as many overdraft charges as you they can? There's no legitimate reason to do that, other then profits. And Banks earned 23.7 billion dollars doing that in 2008. With more people struggling due to the bad economy created this year, of course you would expect them to earn even more. And, in fact they're on track to collect 38.5 billion. Congress actually considered legislation to curb these abuses, but of course bank lobbyists killed it.

I agree that green energy banking guarantees are a good idea, but right now all those bank guarantees are going to big banks and then right into the hands of Hedge Funds.

Definitely check out this post on the Baseline Scenario, which goes into how the very wealthy are using the loan guarantees to make sure-thing zero-sum investments that add no value to the world, simply suck money up for themselves.
posted by delmoi at 12:35 PM on October 18 [1 favorite]

> You confuse creditor with bank, Artful Codger, and there is a huge difference.

Please elucidate.
posted by Artful Codger at 12:36 PM on October 18

Creditor = holder of debt
Bank = *could* hold debt (and traditionally has), but in the past decade has found it more profitable to basically do what you said: package the debt into securities, and sold to either a conduit (QSPE) or Fannie/Freddie or directly to investors.

What I meant by my comment is that insurance companies, pension funds, hedge funds, private equity firms, etc. all operated on the assumption that if something ever goes wrong, the debtor could refinance. Lose your job? No problem, get a stated income loan with a high FICO score, or a subprime mortgage, and kick the can down the road. Sales are slow, and can't meet debt obligations? No problem, just get a covenant-lite loan to tide you over until sales rebound. Some really, really bad companies and people got loans they never could afford because the environment was such that everyone thought that the debt could be rolled over. Even now, if you listen to investor calls, you hear CEOs/CFOs telling investors that the debt isn't due until 2012 or 2013, and by then the credit markets will have healed (i.e. we can easily refinance then...).

And THIS is precisely what I meant by discussing information/disinformation vs. belief/trust/faith. It's what people will believe that matters.

(And by the by, creditors last year and early this year were getting slaughtered. Creditors include CALPERS, endowment funds, pension funds, etc.) There is a lull right now, as people think everything is getting better, but 2008 was a record year for municipal defaults, and I expect corporate defaults to stay nice and toasty for years to come. And, of course, holders of RMBS and CMBS, as we continue to have record foreclosures. As I said, big difference between banks and creditors - banks can be creditors and creditors can be banks, but they aren't the same.
posted by SeizeTheDay at 1:47 PM on October 18

delmoi writes: ... how the very wealthy are using the loan guarantees to make sure-thing zero-sum investments that add no value to the world, simply suck money up for themselves ...

You're assuming, here, that the rich hoovering up more money fails to add value to the world. But if I was rich, I would disagree. Hoovering up more money would add value to my world. The problem is, everybody wants to hoover up money, and sees any impediment to that as a bad thing. It's just that the (presently) rich are in a better position to have the government lay out lines of money for them.

If being rich, in and of itself, was expensive, inconvenient, painful or gauche, then people would aspire less to be rich. But it's not.
posted by spacewrench at 3:14 PM on October 18

So, is the basic point that if the government wants to stimulate the economy, they should help structure the future so that investors are more certain of what they should invest in? So if they want to stimulate green technology, they'd be smart to mandate efficient appliances in new buildings, and use cap and trade or a carbon tax to strongly encourage business to buy into green technology. And, in theory, they could levy such strong mandates and taxes that they create a bubble this way.

How would they go about gently bursting a bubble so that it's less disruptive? Taxes? Attempting to create more attractive mini-bubbles in other sectors to get people to diversify?

Also, agreed on information not being always beneficial. If you told people in 2006 that there will be a recession over the next few years and that most stocks will go down, people would dump their stocks and the market would contract even harder than it did. Seems more like good news grounded in reality works best. Irrational exuberance creates hyperinflation, so it's not so good, either.
posted by mccarty.tim at 9:10 AM on October 19