The Failure of Judges and the Rise of Regulators

kliuless — Thu, 23 Feb 2012 06:54:39 -0800

The Control Revolution And Its Discontents - "the long process of algorithmisation over the last 150 years has also, wherever possible, replaced implicit rules/contracts and principal-agent relationships with explicit processes and rules."

more of the same

kliuless — Tue, 25 Jan 2011 08:11:14 -0800

Life after Capitalism - Beyond capitalism, it seems, stretches a vista of... capitalism:

We cannot approach utopia in terms of material welfare because we can always imagine how increased resources could give us a more comfortable and rewarding life. Or perhaps it is better to say that from the standpoint of every previous century we have surpassed utopia, but failed to stop and properly appreciate the accomplishment. An equally important answer, of course, is that Utopia does not require merely command over nature. It requires command over self, and command over society as well. Command over self is a matter of psychology. [W]e have not achieved utopia--in spite of immense material wealth--because we have approached it as a problem of engineering, and it is in fact a problem of psychology.

With over half the world still impoverished, it'll be a while before all our material needs are met and wants satisfied (+ we can imagine quite a bit, as Han Solo sez) still the marginal utility of wealth diminishes and so but if you can ignore positional goods, conspicuous consumption and status effects, what we'll literally be left with, it seems, are our values.

Be it resolved that financial 'innovation' does not boost economic growth

kliuless — Tue, 02 Mar 2010 06:24:34 -0800

Basicland vs. Sorrowland
A parable about how one nation came to financial ruin by Charles Munger. For extra colour there's... ...a debate on the merits of financial innovation; Jeremy Grantham writes "Beware the Financial Industrial Complex"

Clients can't easily distinguish talent from luck or risk taking. It's an unfair contest, nothing like the fair fight assumed by standard Economics. As we add new products, options, futures, CDOs, hedge funds, and private equity, aggregate fees per dollar rise. As the layers of fees and layers of agents increase, so too products become more complicated and opaque, causing clients to need us more. As total fees in the past grew by 0.5%, we agents basically reached into the clients' balance sheets, snatched the 0.5%, and turned it into income and GDP. Magic! But in doing so, we lowered the savings and investment rate by 0.5%. So, we got a short-term GDP kick at the expense of lower long-term growth. This is true with the whole financial system. Let us say that by 1965 – the middle of one of the best decades in U.S. history – we had perfectly adequate financial services. Of course, adequate tools are vital. That is not the issue here. We're debating the razzmatazz of the last 10 to 15 years. Finance was 3% of GDP in 1965; now it is 7.5%. This is an extra 4.5% load that the real economy carries. The financial system is overfeeding on and slowing down the real economy. It is like running with a large, heavy, and growing bloodsucker on your back. It slows you down. For 100 years the GDP Battleship grew at 3.5%. (Even the Great Depression did not change that trend.) But after 1965 the GDP growth rate ex-finance fell to 3.2% a year. After 1982 it fell to 3.1%, and after 2000 to 2.5%, with all of these measurements to the end of 2007 before the current crisis. From society's point of view, this additional 4.5% burden works like looting or an earthquake. Both increase short-term GDP through replacement effect, but chew up capital. All of the extra financial workers might as well be retirees or children, in that they are supported by the rest of the workforce, but they are much, much more expensive.

BONUS(es) Bonuses boost activity, not quality Bonuses and pay-for-performance are a risky business:

First, it can be hard to see whether employees make the right decisions; superiors do not hold the same information, and the results of decisions play out years later. Second, performance pay will attract exactly those who are willing to take on more risk. People interested in high but steady income will choose other careers. Third, to get their pay, employees may manipulate the system, against the interests of those who set up the incentives: like teachers who are threatened with losing their jobs and teach to the test. Finally, and most perniciously, performance pay can crowd out intrinsic rewards, as when children, having received gold stars for drawing pictures, later draw less than before in their own time. Why draw without getting paid? In organisations that work well, employees identify with their work and their organisations. People want to do a good job because they think they should and because it is the right thing to do... Why then, we ask, do traders and bankers need outsize bonuses and performance pay to get them to do their jobs?

CAUSES So What Exactly Caused the Financial Crisis? [1,2,3] Lessons from the crisis How financial innovation causes bubbles A special report on financial risk: Financial risk got ahead of the world's ability to manage it, cf. Mark-to-Make Believe – Still toxic after all these years, viz. When Goldman Sachs hates marking to market Are Derivatives the Real Problem? "it's the underlying 'business purpose' of transactions. Hedging has a legitimate business purpose. Making markets, speculation, and financing projects have solid business foundations as well. But entering into transactions that serve to hide or obfuscate economic reality work against this principle... let's be clear. The issue isn't derivatives; it's all financial transactions whose objective is to deceive or to weaken financial transparency." FIXES Breaking the Banks: "they promote a noncompetitive industrial organization. They do that by, among other things, creating informational asymmetries. The innovative products they promote -- both derivatives and consumer products -- give them an informational edge over their customers." Maybe it's time to bank simple? The Big Bank Fix:

...many countries with integrated banking systems did not have to bail out any of their financial institutions. Canada's banks were not too big to fail – just too boring to fail. There is nothing in Canada to rival the power of Wall Street or the City of London. This enabled the government to swim against the tide of financial innovation and de-regulation. It is countries like the US and Britain, with politically dominant financial sectors competing to take over financial leadership of the world, that suffered the heaviest losses. This is the point that the well-intentioned regulators miss. At root, the battle between the two approaches is a question of power, not of technical financial economics...

cf. Douglass North POLITICS Business interests and democracy, cf. Persistence of bad governments Were the US & UK central banks complicit in robbing the middle classes? Elizabeth Warren Does The Daily Show Again, cf. Parametric estimations of the world distribution of income The Market's "Howard Beale" Moment How Should We Reform Taxes? [1,2,3] A government that works well is a government that taxes easily [1,2,3,4] CULTURE Institutional failure Double Down Institutional Investing: "Are we the double-down society as far as investing goes? It's sad to see this phenomenon reappearing. Don't we ever learn?" Interview with Raghuram Rajan: "Private sector—yes, it can take care of itself, but its incentives may not be in the public interest; may not even be in the corporate interest if corporate governance is problematic. So the trader could fail the corporation, could also fail society." Power: "The scientists argue that power is corrupting because it leads to moral hypocrisy. Although we almost always know what the right thing to do is - cheating at dice is a sin - power makes it easier to justify the wrongdoing, as we rationalize away our moral mistake." Does feeling like a victim make you selfish? The corporate conscience Ten things that influence conformity: "People use conformity to ingratiate themselves with others... Have you noticed that nonconformers are less likely to care what other people think of them?" Beliefs Conform To Cultural Identities: "an experiment that demonstrates that people don't put as much weight on facts as they do their own belief about how the world is supposed to work" The arts are far more than just another industry: "After gravity, culture is the thing that holds humanity in place." ACADEMIC A financial system ill-equipped to serve the purpose to which it is addressed: "Real market institutions seem designed to hide information and shift consequences rather than reveal outcomes and allocate costs and rewards." [1,2] Market Failure: "I want to propose a new definition of market failure. For me, market failure exists to the extent that innovation is blocked by incumbents. If innovators can succeed by out-competing incumbents, then the market is working. If incumbents have a self-reinforcing system that keeps out innovators, then we have market failure." [1,2] Winding up economists: a research methodology

Q: What is a market? A: it's an institution Q: who owns it? A: often nobody, sometimes a private company Q: so is it a private asset or not? A: not really. Even if it is owned, it has considerable positive externalities. It's what we call a 'public good'. Q: what is a 'public good'? A: It's one of the four varieties of 'market failure'. Q: So you're telling me that a well-functioning market is a 'market failure'.

The disciplines of economics [1,2] High modernism and expert knowledge -- Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed OVERVIEW What Is the "New Normal" for Global Growth? Your undivided attention for the full 90 seconds

To begin with, let's get reacquainted with the fundamental economic problem of our age – lack of global aggregate demand – and how we got to where we are today: (1) Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries' workers/citizens, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an "aggregate demand" gap – making sure that consumers keep buying things. When the private sector assumed too much debt and asset prices bubbled (think subprimes and houses, or dotcoms/NASDAQ 5000), American-style capitalism with its leverage, deregulation, and religious belief in lower and lower taxes reached a dead end. There was a willingness to keep on consuming, there just wasn't the wallet. Vigilantes – bond market or otherwise – took away the credit card like parents do with a mall-crazed teenager. (2) The cancellation of credit cards led to the Great Recession and private sector deleveraging, the beginning of government policy reregulation, and gradual deglobalization – a reversal of over 20 years of trade policies and free market orthodoxy. In order to get us out of the sinkhole and avoid another Great Depression, the visible fist of government stepped in to replace the invisible hand of Adam Smith. Short-term interest rates headed to 0% and monetary policies of central banks incorporated new measures labeled "quantitative easing," which essentially involved the writing of trillions of dollars of checks to replace the trillions of dollars of credit that disappeared after Lehman Brothers. In addition, government fiscal policies, in combination with declining revenues, led to double-digit deficits as a percentage of GDP in many countries, a condition unheard of since the Great Depression. (3) For awhile it seemed that all was well, that the government’s checkbook could replace the private market’s wallet and credit cards. Risk markets returned to normal P/Es as did interest rate spreads, and GDP growth resumed; it was only a matter of time before job growth would assure the world that we could believe in the tooth fairy again. Capitalism based on asset price appreciation was back. It would only be a matter of time before home prices followed stock prices higher and those refis and second mortgages would stuff our wallets once again. (4) Ah, but Dubai, Iceland, Ireland and recently Greece pointed to a potential flaw in the model. Shaking hands with the government was a brilliant strategy in 2009 when it was assumed that governments had an infinite capacity to leverage themselves. But what if they didn't? What if, as Carmen Reinhart and Kenneth Rogoff have pointed out in their book, "This Time is Different," our modern era was similar to history over the past several centuries when financial crises led to sovereign defaults or at least uncomfortable economic growth environments where real GDP was subpar based on onerous debt levels – sovereign and private market alike. What if – to put it simply – you couldn't get out of a debt crisis by creating more debt? You are now up-to-date and I've used up all of my 90 seconds...

The Ring of Fire: "These red zone countries are ones with the potential for public debt to exceed 90% of GDP within a few years' time, which would slow GDP by 1% or more. The yellow and green areas are considered to be the most conservative and potentially most solvent, with the potential for higher growth." Forward Don Quixote, the windmills are in sight:

Quixotic journeys often make for great literature, but by definition are rarely productive. I am, after all, referring to windmills here – not their 21st century creation, but their 17th century chasing. Futility, not productivity, was the ultimate fate of Cervantes' man from La Mancha. So it is with hesitation, although quixotic obsession, that I plunge headlong into a discussion of American politics, healthcare legislation, resultant budget deficits and – finally – their potential effect on financial markets. There will be windmills aplenty in the next few pages and not much good can come of these opinions or my tilting in their direction. Still, I mount my steed, lance in hand, and ride forward. Question: What has become of the American nation? Conceived with the vision of liberty and justice for all, we have descended in the clutches of corporate and other special interests to a second world state defined by K Street instead of Independence Square. Our government doesn't work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people. Washington consistently stoops to legislate 10,000-page perversions of healthcare, regulatory reform, defense, and budgetary mandates overflowing with earmarks that serve a monied minority as opposed to an all-too-silent majority. You don't have to be Don Quixote to believe that legislators – and Presidents – often do not work for the benefit of their constituents: A recent NBC News/Wall Street Journal poll reported that over 65% of Americans trust their government to do the right thing "only some of the time" and a stunning 19% said "never." What most politicians apparently are working for is to perpetuate their power – first via district gerrymandering, and then second by around-the-clock campaigning financed by special interest groups. If, by chance, they're ever voted out of office, they have a home just down the street – at K Street – with six-figure incomes as a starting wage. What amazes me most of all is that politicians can be bought so cheaply. Public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return. The fact is that American citizens have never been as divorced from their representatives – and if that description fits the Democratic Congress now in control – then it applies to Republicans as well – past and present. So you watch Fox, or is it MSNBC? O'Reilly or Olbermann? It doesn't matter. You're just being conned into rooting for a team that basically runs the same plays called by lookalike coaches on different sidelines. A "ballot box" pox on all their houses – Senators, Representatives and Presidents alike. There has been no change, there will be no change, until we the American people decide to publicly finance all national and local elections and ban the writing of even a $1 check for our favorite candidates. Undemocratic? Hardly. Get on the internet, use Facebook, YouTube, or Twitter to campaign for your choice. That's the new democracy. When special interests, even singular citizens write a check, it represents a perversion of democracy not the exercise of the First Amendment. Any chance that any of this will happen? Not one ghost of a chance.

The Twilight of the Guilds? "The biggest bubble in the United States is the upper-middle class professional bubble; for the last generation the incomes of Americans with professional degrees continued to rise, sharply in many cases, even as incomes for blue collar workers steadily fell... This can't and won't go on." Towards A Vocation Nation The cost of doing nothing [1,2,3] The Real Roots of the Crisis

Macroeconomists argue that the roots of the crisis are in imbalances: asymmetries in the flow of trade between nations. But those imbalances themselves are just effects. A current account deficit is a symbol: just numbers that point to a deeper reality. The real roots of the crisis aren't about liquidity requirements, reserve ratios, or monetary transmission mechanisms. No amount of regulation or rule-making can fix it. And mere "growth" in GDP, as we're discovering, isn't a cure for it. What really caused the crisis was the fact that we didn't care. Bankers didn't care about the loans they issued. Boards didn't care about bankers. Shareholders didn't care about boards. Markets didn't care about shareholders. Communities didn't care about markets. Society didn't care about communities. No one cared much about society. The fundamental question, then, is this: why not? My answer's simple — and probably even simplistic. But it will serve well enough to make a point. We didn't care because we were chasing stuff. The real crisis is a crisis of nihilism: the belief that apart from stuff, nothing else matters economically. In the name of stuff, we sacrificed what mattered: people, community, comity, trust, education, skill, quality, happiness — and tomorrow itself. It is those institutions — not mere stuff — that underpin authentic value. Stuff is just window dressing. In Wall Street's parlance, we got blown up by a bad trade. Trading stuff for institutions was a bad idea. The real crisis is inside us. It's how we make sense of the world, what motivates us, and in what we value. It is, in short, culture. And it is culturally that we have lost our way.

cf. The Rules Have All Changed: "Julian Sanchez, criticizing guru Umair Haque and his manifesto[s]" [1,2,3,4,5]

The Adaptive Value of Human Institutions:* Building a Better (Secular) 'Religion'

kliuless — Sat, 25 Apr 2009 11:42:14 -0800

Keynes & Marx thought "that productivity would grow sufficiently to allow our needs to be met with very little labour," and that humankind's biggest preoccupation in the future would be leading lives of comfortable (or comparative) leisure. Obviously, that has not yet come to pass. But why?** Yochai Benkler (previously), for one, is working on it... *just saw jared diamond on the evolution of religion (and was inspired ;) **e.g., one could say the social utility of the enclosure movement has reached its limit (or a local logical maximum) and that the means of (re)production might now be (self-)organised not by the state and/or market per se, but (at long last!) by a conscious collective cultural aesthetic :P

MetaFilter posts tagged with socialism and culture

The Failure of Judges and the Rise of Regulators

more of the same

Be it resolved that financial 'innovation' does not boost economic growth

The Adaptive Value of Human Institutions:* Building a Better (Secular) 'Religion'