ponies

Imagine if you borrowed money from a hundred investors to bet big on a horse race. And then, as the race was underway, and your horse was trailing by a head, your backers decided to collect on their loans, with interest, one by one. Would you still stand to win even if your horse did?

Noting that investment banks are organized gambling, James Surowiecki points out that for investment banks, “going public…meant exposing themselves to a minute-by-minute referendum…on the health of their operations.” Which is to be expected, he adds, since they were betting with other people’s money.

In the same issue of the New Yorker, Nick Paumgarten describes credit-default swaps and related instruments as the products of magical thinking.

It might be a good time for an adaptation of The Rocking-Horse Winner.

people

performance

I marvel at how well Barack Obama performs. For quite a few years now, the bar for American performance has been lowered in so many ways.

“Heckuva job, Brownie.”
“12 mpg.”
“Performing non-performing loans.”

Performance once meant to enact or do. It can also mean to act only formally – to “go through the motions” or simulate an action. As a nation if not as a global economy, we’ve spent more than decade flirting with the question: can a successful simulation supplant reality?

I believe the answer has turned out to be “no.”

From Baudrillard to Bush.

ideas

in us we trust

Upon first hearing there was some bailout plan coming out of the White House, I jokingly asked if we were going to use our armed forces to prevent creditors from collecting.

In reality, any plan will require the use our soft and hard power to collect on the public debt:

So is all this magic? No, over time Treasury has to pay interest and principal on the bonds it issues; the value of the bonds comes from the fact that people believe the US government can do that, which ultimately comes from the government’s ability to raise taxes. If investors lose faith in that …

So, the bailout will be based on investors’ trust in – and hope for – the American experiment. Wow. “Obama ’08.”

people

politics

this is what happens when the world’s most powerful country elects willful idiots into office, again and again, drunk on its own wealth and power:

World leaders expressed concern at the effect of the US vote.

“It will have a big impact on the US economy, and it will also greatly affect the global economy,” said Japanese Economics Minister Kaoru Yosano.

Australia’s Prime Minister Kevin Rudd said he had spoken to his British counterpart Gordon Brown and they agreed to urge the US Congress to reverse Monday’s decision

“The attitude that we will adopt… is to urge the United States Congress to pass this or a similar measure when it is represented to the Congress later this week,” said Mr Rudd.

Earlier, Brazilian President Luiz Inacio Lula da Silva accused the US and other wealthy nations of financial irresponsibility that could jeopardise the economic progress made in recent years by developing countries.

Brazil’s Ibovespa stock index dropped 9.4% on Monday.

ignorance is bliss, until it isn’t.

from the NYT:

While there were lawmakers who opposed the package on the merits, with Election Day just five weeks away, substantial numbers decided that to favor the bill would be to imperil their own political futures. And once the vote was under way and so few Republicans were voting aye, Democrats were disinclined to force more of their members to help pass the unpopular plan.

Mustn’t upset the baby.

Boh from “Spirited Away”

people

analogy

there is a part of the u.s. government that helps control the complex machine that is the u.s. economy. that part of the u.s. government is missing. let’s see if the rest of the machine is able to operate without it.

ideas/people

epistemology matters

John Cassidy on Soros on our current systemic failure:

Outside the idealized world of Lucas’s theory, knowledge is imperfect, people stick to wrongheaded ideas, and there is no agreed version of how the economy works. In these circumstances, Soros rightly points out, economic expectations, even biased ones, can help to determine economic fundamentals.

As in:

Until last summer, the US economy was awash in easy credit. In one way or another, the banking system played an important part in issuing many of these loans, which is hardly surprising since that is how banks make money. Rather than criticizing his fellow investors on Wall Street, who created many of the newfangled debt instruments—such as mortgage-backed securities and collateral debt obligations—that have now imploded, Soros puts the blame on the regulators and central bankers who aided and abetted the financiers’ incendiary activities. Under the system of “self-regulation” adopted by American and European banking regulators, many big financial institutions, such as Citigroup, Barclays, and Union Bank of Switzerland, were allowed to rely on their internal risk-management systems. The only outside check on their activities came from commercial ratings agencies, such as Moody’s and Standard & Poor’s, which depended on the banks’ fees for business.

Or, simply, the referee cannot play in the game.

ideas/people

kool aid for mother’s milk

Paul Krugman:

How did we get to this point? It’s the culmination of many past betrayals.

First of all, we have the Republican Study Committee blowing things up with a complete nonsense proposal — solving the crisis with a holiday on capital gains taxes. How is that possible? Well, if a party runs on economic nonsense for 25 years, eventually many of its foot soldiers will be people who actually believe the nonsense.

ideas/people

job description

Digby:

This is what all the politicians are pussyfooting around right now. Both presidential candidates are on the populist field but they are playing different games. They don’t yet know how to gauge the public mood. But I think when facing these kinds of major crises, politicians shouldn’t try top hard to guess the public mood. These are situations where the public really does look to their leadership to actually lead. We don’t need them telling us who we are allowed to sleep with or what music to listen to. But we do want them to call on all the best minds in the world and try to figure out a solution to a serious, complicated crisis.

people

moral hazard

Glenn Greenwald is not feeling it:

What is more intrinsically corrupt than allowing people to engage in high-reward/no-risk capitalism — where they reaped tens of millions of dollars and more every year while their reckless gambles were paying off only to then have the Government shift their losses to the citizenry at large once their schemes collapsed? We’ve retroactively created a win-only system where the wealthiest corporations and their shareholders are free to gamble for as long as they win and then force others who have no upside to pay for their losses. Watching Wall St. erupt with an orgy of celebration on Friday after it became clear the Government (i.e., you) would pay for their disaster was literally nauseating, as the very people who wreaked this havoc are now being rewarded.

ideas

witness

I just heard part of Terri Gross’ interview with Maher Arar, the Canadian who was kidnapped by the U.S. (our public servants) and dropped off in Jordan / Syria to be tortured on allegations that he was an al Qaeda agent.

If I were a television executive in search of a sensational story to grip viewers, wouldn’t his be money in the bank?

people

business

Wow:

More than a billion AIG shares changed hands, a record for the company that was also nearly 30 times the daily average activity so far this year. The AIG activity represented about 12% of all volume in New York Stock Exchange-listed names, which saw an overall record for a second straight day, with 9.3 billion shares changing hands.

people

truth & method

Nassim Nicholas Taleb channels Socrates to disparage (now obviously flawed) financial models and the abuse of statistics in general:

Go to a bookstore, and look at the business shelves: you will find plenty of books telling you how to make your first million, or your first quarter-billion, etc. You will not be likely to find a book on “how I failed in business and in life”—though the second type of advice is vastly more informational, and typically less charlatanic. Indeed, the only popular such finance book I found that was not quacky in nature—on how someone lost his fortune—was both self-published and out of print. Even in academia, there is little room for promotion by publishing negative results—though these, are vastly informational and less marred with statistical biases of the kind we call data snooping. So all I am saying is “what is it that we don’t know“, and my advice is what to avoid, no more.

ideas

bumper sticker

It’s almost good enough for a bumper sticker: “If we have to protect against bank runs by providing deposit insurance, we also have to regulate capital, reserves, and so on to limit the resulting moral hazard.”

things

controlled crash

The final graph of an epic article:

Outside the public eye, Fed officials had acquired much more information since March about the interconnections and cross-exposure to risk among Wall Street investment banks, hedge funds and traders in the vast market for credit-default swaps and other derivatives. In the end, both Wall Street and the Fed blinked.

people

cartoon

this is one of the most compact representations of our financial crisis I’ve come across:

RJ Matson’s “Subprime Mortgage Mess”

it’s over a year old. i’m sorry i hadn’t seen it until now. (Thanks, Ron.)

ideas

meals

I just wrote the below in an email to a friend and realized it’s the umpteenth time I write some (though usually abridged) version of this list. So, for posterity: here are some of our favorite places to eat in San Francisco (and Berkeley).

continue…

things