looting: on banks and debt traffic and collapse - Tilted Forum Project Discussion Community

roachboy · 03-11-2009, 09:07 AM

Quote:

The Looting of America’s Coffers
By DAVID LEONHARDT

Sixteen years ago, two economists published a research paper with a delightfully simple title: “Looting.”

The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

On Tuesday morning in Washington, Ben Bernanke, the Federal Reserve chairman, gave a speech that read like a sad coda to the “Looting” paper. Because the government is unwilling to let big, interconnected financial firms fail — and because people at those firms knew it — they engaged in what Mr. Bernanke called “excessive risk-taking.” To prevent such problems in the future, he called for tougher regulation.

Now, it would have been nice if the Fed had shown some of this regulatory zeal before the worst financial crisis since the Great Depression. But that day has passed. So people are rightly starting to think about building a new, less vulnerable financial system.

And “Looting” provides a really useful framework. The paper’s message is that the promise of government bailouts isn’t merely one aspect of the problem. It is the core problem.

Promised bailouts mean that anyone lending money to Wall Street — ranging from small-time savers like you and me to the Chinese government — doesn’t have to worry about losing that money. The United States Treasury (which, in the end, is also you and me) will cover the losses. In fact, it has to cover the losses, to prevent a cascade of worldwide losses and panic that would make today’s crisis look tame.

But the knowledge among lenders that their money will ultimately be returned, no matter what, clearly brings a terrible downside. It keeps the lenders from asking tough questions about how their money is being used. Looters — savings and loans and Texas developers in the 1980s; the American International Group, Citigroup, Fannie Mae and the rest in this decade — can then act as if their future losses are indeed somebody else’s problem.

Do you remember the mea culpa that Alan Greenspan, Mr. Bernanke’s predecessor, delivered on Capitol Hill last fall? He said that he was “in a state of shocked disbelief” that “the self-interest” of Wall Street bankers hadn’t prevented this mess.

He shouldn’t have been. The looting theory explains why his laissez-faire theory didn’t hold up. The bankers were acting in their self-interest, after all.

•

The term that’s used to describe this general problem, of course, is moral hazard. When people are protected from the consequences of risky behavior, they behave in a pretty risky fashion. Bankers can make long-shot investments, knowing that they will keep the profits if they succeed, while the taxpayers will cover the losses.

This form of moral hazard — when profits are privatized and losses are socialized — certainly played a role in creating the current mess. But when I spoke with Mr. Romer on Tuesday, he was careful to make a distinction between classic moral hazard and looting. It’s an important distinction.

With moral hazard, bankers are making real wagers. If those wagers pay off, the government has no role in the transaction. With looting, the government’s involvement is crucial to the whole enterprise.

Think about the so-called liars’ loans from recent years: like those Texas real estate loans from the 1980s, they never had a chance of paying off. Sure, they would deliver big profits for a while, so long as the bubble kept inflating. But when they inevitably imploded, the losses would overwhelm the gains. As Gretchen Morgenson has reported, Merrill Lynch’s losses from the last two years wiped out its profits from the previous decade.

What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it “management fees” or “performance bonuses.” Once the investments were exposed as hopeless, the lenders — ordinary savers, foreign countries, other banks, you name it — were repaid with government bailouts.

In effect, the bankers had siphoned off this bailout money in advance, years before the government had spent it.

I understand this chain of events sounds a bit like a conspiracy. And in some cases, it surely was. Some A.I.G. employees, to take one example, had to have understood what their credit derivative division in London was doing. But more innocent optimism probably played a role, too. The human mind has a tremendous ability to rationalize, and the possibility of making millions of dollars invites some hard-core rationalization.

Either way, the bottom line is the same: given an incentive to loot, Wall Street did so. “If you think of the financial system as a whole,” Mr. Romer said, “it actually has an incentive to trigger the rare occasions in which tens or hundreds of billions of dollars come flowing out of the Treasury.”

Unfortunately, we can’t very well stop the flow of that money now. The bankers have already walked away with their profits (though many more of them deserve a subpoena to a Congressional hearing room). Allowing A.I.G. to collapse, out of spite, could cause a financial shock bigger than the one that followed the collapse of Lehman Brothers. Modern economies can’t function without credit, which means the financial system needs to be bailed out.

But the future also requires the kind of overhaul that Mr. Bernanke has begun to sketch out. Firms will have to be monitored much more seriously than they were during the Greenspan era. They can’t be allowed to shop around for the regulatory agency that least understands what they’re doing. The biggest Wall Street paydays should be held in escrow until it’s clear they weren’t based on fictional profits.

Above all, as Mr. Romer says, the federal government needs the power and the will to take over a firm as soon as its potential losses exceed its assets. Anything short of that is an invitation to loot.

Mr. Bernanke actually took a step in this direction on Tuesday. He said the government “needs improved tools to allow the orderly resolution of a systemically important nonbank financial firm.” In layman’s terms, he was asking for a clearer legal path to nationalization.

At a time like this, when trust in financial markets is so scant, it may be hard to imagine that looting will ever be a problem again. But it will be. If we don’t get rid of the incentive to loot, the only question is what form the next round of looting will take.

Mr. Akerlof and Mr. Romer finished writing their paper in the early 1990s, when the economy was still suffering a hangover from the excesses of the 1980s. But Mr. Akerlof told Mr. Romer — a skeptical Mr. Romer, as he acknowledged with a laugh on Tuesday — that the next candidate for looting already seemed to be taking shape.

It was an obscure little market called credit derivatives.

http://www.nytimes.com/2009/03/11/bu...l?ref=business

this article is little more than a plot summary of the akerlof & romer article--i have a copy of it, but it's too big to upload. pm me with an email address if you want a copy and i'll send it to you--alteratively, you can maybe track it down yourself. it appeared in the brookings papers on economic activity 1993 (no. 2) pp. 1-73.

consider this as a partial explanation for the banking crisis: it fits with more than it does not. in the paper, you have a combination of possibilities that mitigate the free-marketeer impression given by the summary above, which emphasizes "moral hazard" on the one hand and state intervention as representing it's suspension on the other--the pattern, which is outlined above, is patterns of borrowing (leverage) from large numbers of institutions....

anyway, the analysis is quite interesting and poses a series of questions concerning (for example) the extent to which the savings & loan fiasco of the late reagan/bush 1 period could and should have functioned as a prompt for instituting the kind of tighter regulation of banking that the post neoliberal world is now calling for across the board.

but it also raises an interesting problem internal to the fantasy world of the free-marketeers: whether the distinction between betting and looting is in fact operative, whether it means anything. i am not sure.

how accurate does the outline seem to you as a partial explantion for the present banking fiasco?
what, if anything, does it change about your way of thinking about it, if you do think about it? (i say this because i find it a source of continual amazement the extent to which you hear and read claims that the crisis is mostly a function of "bad news" and that if only there'd be days of "good news" everything would somehow return to "normal" as if this was a function of some giant attitude problem and not the result of a plundering of the common weal by a particular class fraction aided and abetted by incompetents and fools of titanic proportions from the american right)....

and feel free to pm me for a copy of the larger paper: keep in mind that it is a big file.

blktour · 03-11-2009, 09:43 AM

I already have known that the big businesses and governemnt have been milking us. I daily follow dailypaul.com and there you see him talking to Ben Bernake and ripping him up with sound questions that he doesnt even have the answer to.

I feel this article doesnt even touch on Ben Bernakes lack of help that he should be doing for us. But then again, he doesnt work for us, he works for the fed reserve.

The Fed Reserve are the ones who are the ones to blame. Even congress for not doing their constitutional duty to support the money supply. Now we are stuck on this Fiat money and the congress has the authority to changes things, but why should they?

The article just touches on our financial problems.

Cynthetiq · 03-11-2009, 10:10 AM

This is where the disconnect happens for me. If you're a gambler and you have wins and losses, it's part of the game. If you're an investor and you have profits and losses, the losses are on the other guy.

I should qualify that with investor of LARGE quantity.

I don't take such risks myself, and even when I do take risks, I'm always trying to mitigate my risk as much as possible.

roachboy · 03-11-2009, 10:12 AM

the article, even in it's plot summary form, has nothing to do with libertarian fantasy scenario building.
rather, what it outlines is an internal critique of something quite basic to neoliberals and right libertarians alike: the myth of "enlightened self-interest" connected to the god-like "invisible hand" that makes it even thinkable that markets left to themselves (whatever the hell that means) produce outcomes that are desirable on utilitarian grounds (greatest good for the greatest number, blah blah blah). instead, what you have is a thin line between the type of gambling that is internal to market rationality (a metaphysical principle, but no matter) and looting. and what you have in the absence of coherent oversight (and so under the OPPOSITE conditions to those presupposed in libertarian la la land) and given the circulation of bundled or aggregated debt as a financial device, kind of a commodity futures market in debt instruments, and given the potentials for immediate-term profit in exchange for longer-term implosion is a situation--or more accurately a series of situations--in the context of which any meaningful boundary between "enlightened self-interest" and looting disappears. add to this the nature of the bounded rationalities of any organization, which tends to operate through notions of professional duty or role to exclude from consideration outcomes that diverge from those affirmed by whatever Authority is running the show, and you have a recipe for catastrophe.

this seems to me what libertarian-style thinking leads to. this is no different from what neoliberal thinking leads to. this is a significant measure of where we've landed.

you can see from the plot summary--and in much more detail in the article itself--a detailed description of the ways in which this combination of factors can produce situations in which it is of no consequence, to anyone, whether people who are taking on debt can possible meet the obligations they acquire along with it. it doesn't matter--the real game is elsewhere.

this has nothing whatsoever to do with the ronpaul nonsense about "fiat currency"...this is the kind of world that libertarians and neoliberals alike were arguing for. it's upon us and so are its consequences.

sooner or later folk really need to abandon this nonsense and start trying to figure out other ways to think about the socio-economic world they live in. it's not a good time to wait for some other Authority--be it a television pundit or someone who knows that they're talking about (the distinction is serious) to figure something else out for you.

-=------

cyn---one of the points of the plot summary is that in the savings and loan fiasco--and again now, in magnified forms, the distinction between gambling and looting was entirely erased. looting *was* the game. notions of "moral hazard" meant nothing.

but the types of capital circulation that enabled it have little to do with the types of capital circulation most individuals operate with--except maybe players like warren buffet who have immense private wealth and make tons more by using it to play the looting game, sometimes falling within the bounds of acceptable outcomes, sometimes outside (like triggering the currency collapses in southeast asia in the 1980s)...

so i'm not sure of the analogy between individuals in isolation or private life and individuals in the context of institutional bounded rationalities...

Cynthetiq · 03-11-2009, 10:29 AM

one thing i can tell you from close to 15 years in Corporate America, is that people within the organization are sheep and unwilling to call someone on their bullshit. We wind up with poor, shoddy products, incoherent and insolvent investments of other companies all because no one wishes to stand up and tell the chief in the room that this is a bad idea. no one wants to be the blocker to an idea.

I've waved my hands plenty telling people they were making mistakes only to watch them make the mistake over and over again. In fact, I'm going to countless meetings these days wherein we're going to do just that. Everyone knows it but no one is willing to speak up to or against the higher ups. Pretty lame really.

When it comes to this looting, who in the end benefits? and how does the company benefit? the CEO probably and the investors that knew it was part of the game ala Enron, Tyco, MCI/Worldcom...

Willravel · 03-11-2009, 10:43 AM

I'd love a copy, rb. My gmail account would be fine, if it's not too much trouble.

The outline of the paper seems to have the right general idea, imho. This line in particular stands out:

Quote:

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

This is an excellent summarization. Especially now that the largest failures are being bailed out, it seems that the most irresponsible lenders are being rewarded for their "looting", somehow lending credibility to their repeated mistakes and outright frauds. And why wouldn't they expect to be saved? They were allowed to become so bloated that their failure couldn't be allowed.

Part of me wishes I'd been born 10 years earlier so I could have really seen the implementation and first failures of deregulation. I feel that, not being generally aware of economics until maybe the late 90s, I missed out on a lot of necessary context (like the Texas real estate bust).

blktour · 03-11-2009, 11:01 AM

I am not talking ron paul this, and ron paul that and libertarian this and conservative that.

you can say something is the problem, when in the article it just touches on the problems and never really says what can be done to fix this.

I just reference Ron Paul because he makes so much sense in the "normal" sense as to which us "regular" folk can make out what he is saying compared to your big words, and anologies, or whatever have you.

fiat money? this wouldnt have happened if they didnt give the right to one company NOT under the law to print money out of thin air.

How would we come to this if we dealt with silver or gold? how can you "make" that up?

So If i was in the business of printing stuff, and I decided to make money out of paper, that would call me a counterfeiter right? what makes the federal reserve any different? We cannot monitor what they print out and why and where it is going? is that fair?

THIS is why we are in the mess we are in today.

I mean us normal folks know what to do in times like this but it is the big ups that are making this happen and not paying for it, but we have to suffer for it? doesnt make sense to me.

RB, this is one time that I am disagreeing with you. you are touching the surface fo the problem by this article. Just because someone wrote this and pointed out what they say, doesnt mean it is the TRUE problem.

Willravel · 03-11-2009, 11:10 AM

The fix would have been tighter regulation after the deregulation-related failures of the 80s. It should have been abundantly clear that there is a direct correlation between deregulation and market-side corruption. And yet here we are again.

BTW, is anyone else thinking that economics needs to be less guesswork and more science? I keep trying to study references about what's going on only to find astrology-level science at best.

roachboy · 03-11-2009, 11:16 AM

first off, it's fine to disagree. geez: most of the reason i put things here is that it's a space for trying to work things out on the fly.
and the "big words" are mostly shorthand--i write this things pretty quickly and it's just the terminology i think in that let's me say things directly. that's all--everyone has a shorthand. this is the one i use.

anyway, what i think the article--not so much the summary from the ny times--points to are several intertwined problems.
one is a version of what cyn said above. in my shorthand, i referred to the same thing as bounded rationality. what this means is that bureaucratic organizations--and a corporation of any size is one--generate internal cultures ("norms") that discourage critical thinking and action--this work through hierarchy, through job definitions, through internal or informal censorship etc. one thing this results in is that a corporation can undertake a sequence of actions that are entirely insane from an external viewpoint and generate consent internally for it as part of it's normal operations. this explains, in general terms, how it might be possible for a bank to move into derivatives, skimming off immediate returns, knowing (if anyone thought about it) that this trade was setting up a wall of problems and moving the bank at high speed toward it. if the notion of "enlightened self-interest" and "rational actor" theory central to market ideology held, this type of action--which is suicidal institutionally--would be excluded up front. the explanation the article offers is that the wall of debt problems that playing in derivatives necessarily created was rationalized away--the phrase for it is that it was "treated as though it were someone else's problem."

the article (and summary) claim that this "someone else" was the state, but i'm not convinced that this was the case--i think it was someone else's problem in an abstract sense, just something no-one particularly thought about--because of the emphasis on immediate profits, the relation of that to salary structures, professional advancement, etc.

one outcome of this is to see in corporations not rational actors but bureaucracies capable of radical compartmentalization such that entirely nutty actions can be made to seem normal--which means that either you radically rethink organization--or you hedge them round with regulation.

of the two, the former is probably the way to go really, but it's unlikely, particularly not now. too much inertia, too much ideological horseshit. so the latter.

the problem with that is there's little, if anything, the average joe can do.
with the former, there's alot that can be done with thinking about and experimenting with different types of organization of businesses--but that'd take time, require work, the latitude to fuck up, etc.

there's more, but i have stuff i have to do, so maybe later.

blktour · 03-11-2009, 11:18 AM

Quote:

Originally Posted by Willravel

The fix would have been tighter regulation after the deregulation-related failures of the 80s. It should have been abundantly clear that there is a direct correlation between deregulation and market-side corruption. And yet here we are again.

BTW, is anyone else thinking that economics needs to be less guesswork and more science? I keep trying to study references about what's going on only to find astrology-level science at best.

more regulations? I read somewhere that said that more regulations lead to more problems. I forget where.

also, if you read the constitution it says that the people and the states should be putting in their regulations so that we all come to an agreement more so than what we have now by being run by a select few in power.

Here is a video I found I find it kind of relevant since RoachBoy wants to praise Warren Buffet.

YouTube - Peter Schiff "Warren Buffet Won't Tell The Truth/Bill Maher Lied" 3/9/2009

roachboy · 03-11-2009, 11:21 AM

uh---i didn't praise warren buffet. i just used him as an example of the few individuals who might operate in a financial context comparable with that of a corporation. that's it. and if you read the rest of the sentences i wrote, you'll find that i think buffet is kind of a menace.

blktour · 03-11-2009, 11:25 AM

Quote:

Originally Posted by roachboy

first off, it's fine to disagree. geez: most of the reason i put things here is that it's a space for trying to work things out on the fly.
and the "big words" are mostly shorthand--i write this things pretty quickly and it's just the terminology i think in that let's me say things directly. that's all--everyone has a shorthand. this is the one i use.

anyway, what i think the article--not so much the summary from the ny times--points to are several intertwined problems.
one is a version of what cyn said above. in my shorthand, i referred to the same thing as bounded rationality. what this means is that bureaucratic organizations--and a corporation of any size is one--generate internal cultures ("norms") that discourage critical thinking and action--this work through hierarchy, through job definitions, through internal or informal censorship etc. one thing this results in is that a corporation can undertake a sequence of actions that are entirely insane from an external viewpoint and generate consent internally for it as part of it's normal operations. this explains, in general terms, how it might be possible for a bank to move into derivatives, skimming off immediate returns, knowing (if anyone thought about it) that this trade was setting up a wall of problems and moving the bank at high speed toward it. if the notion of "enlightened self-interest" and "rational actor" theory central to market ideology held, this type of action--which is suicidal institutionally--would be excluded up front. the explanation the article offers is that the wall of debt problems that playing in derivatives necessarily created was rationalized away--the phrase for it is that it was "treated as though it were someone else's problem."

the article (and summary) claim that this "someone else" was the state, but i'm not convinced that this was the case--i think it was someone else's problem in an abstract sense, just something no-one particularly thought about--because of the emphasis on immediate profits, the relation of that to salary structures, professional advancement, etc.

one outcome of this is to see in corporations not rational actors but bureaucracies capable of radical compartmentalization such that entirely nutty actions can be made to seem normal--which means that either you radically rethink organization--or you hedge them round with regulation.

of the two, the former is probably the way to go really, but it's unlikely, particularly not now. too much inertia, too much ideological horseshit. so the latter.

the problem with that is there's little, if anything, the average joe can do.
with the former, there's alot that can be done with thinking about and experimenting with different types of organization of businesses--but that'd take time, require work, the latitude to fuck up, etc.

there's more, but i have stuff i have to do, so maybe later.

so if things need to change, and be "reorginized" why not give it back to the states and the people like it was suppose to be back when this country was founded?

Why even give the power to people we do not know or will ever begin to know about since they hide everything?

Tell me, if you give the forum the right to do this, don't you think we could find a better solution to the problem, than say, someone who is not of this forum and doesnt even know the issues that stem from JUST THIS FORUM? Then imagine giving them power to not only contol this forum but all rules of all forums?

It doesnt make sense, but for some reason it makes sense when dealing with government?

---------- Post added at 11:25 AM ---------- Previous post was at 11:23 AM ----------

Quote:

Originally Posted by roachboy

uh---i didn't praise warren buffet. i just used him as an example of the few individuals who might operate in a financial context comparable with that of a corporation. that's it. and if you read the rest of the sentences i wrote, you'll find that i think buffet is kind of a menace.

Sorry my point to this was to show this video and also "pick" at the fact that when listening to someone we don't always know if it will be true. reguardless of their status.

roachboy · 03-11-2009, 11:27 AM

your proposals are tied up with the thinking that produced this problem in the first place. they're not options, for better or worse.
firms and banks and nation-states are at this point so intertwined as a function of the scale and speed of capital flows that your "returning prerogatives to the states" is quaint and nothing more.

and in constitutional terms, the strict construction viewpoint has nothing to offer that is of even the slightest use in the present context.
try another tack.

blktour · 03-11-2009, 11:32 AM

that is the "defense" that eveyone says. "it is out dated." what a bunch of rubbish.

You don't even want to try it? i mean this isnt working now, so why do we meddle around and change a little here and a little there?

Why not go back to what was working back then? it has nothing about "time line".

but you try another tact , instead of some of the same.

this all started when the gold standard went away anyways. and the inflation was to delay the problem. So to fix it we inflate more money? doesnt make sense.

roachboy · 03-11-2009, 11:39 AM

why not go back? because reality doesn't allow for it. you can't wish away the transformations in the nature of capitalism that have happened over the past 30 years. i've thought the whole time that the ideology which enabled them was batshit...now you can see it for yourself. but we're stuck in this situation, trying to figure out something of a way forward from here, and not somewhere else. not some pre-1970 currency order--we're here. not some pre-world war 1 notion of federalism. not some strict constructionist fantasy about the magical moment the constitution was written by giants. none of that matters, except as parlor games. we're here. we don't even have adequate information to get our collective heads around the actual organization of the economy in real time--i can understand the desire to run away from all that and think that maybe some earlier arrangement worked better--but it didn't work better, and even if it did, it doesn't matter.

for the record, i'm interested politically in revolutionary politics.
i think the entire approach to organization that is coterminous with capitalism is fucked up and has to be changed for anything like a coherent equitable system to even start taking shape. but that's a longer term prospect--at the moment, again, we're here and like it or not implicated in this order, dependent on it one way or another, with varying degrees of insertion. we're talking on the internet for god's sake. think of the infrastructure that requires.

no going back. it's a waste of time to dream about it.

blktour · 03-11-2009, 11:43 AM

what to do, what to do? hmm..

as far as reality not allowing it? well no one wants to pay the price of what this has brought us to. That is what I see. of course you didnt have a say in what happened and to abolish a way of life and start from scratch will take lots of sacrifices that you or I are not willing to take.
It COULD be a reality but no one wants it to be.

as far as running away? I try not to. I love new info, and new ways to think. I just still think that the old ways would work today. Just to get the ball rolling in that direction would take a miracle. Though I am always open for ideas.

but to do more of the same is what it seems like they all want to do.

it is as if they TRY for these big issues to consume us just to have a reason to control more.

Willravel · 03-11-2009, 11:58 AM

Quote:

Originally Posted by blktour

more regulations? I read somewhere that said that more regulations lead to more problems. I forget where.

I've read it a few times, but it's usually written by someone that's read Atlas Shrugged one time too many.

The system can't work without some regulation. The only question is how much and what kind. We've seen what happens when we have too little.

Quote:

Originally Posted by blktour

also, if you read the constitution it says that the people and the states should be putting in their regulations so that we all come to an agreement more so than what we have now by being run by a select few in power.

Huh?

Cynthetiq · 03-11-2009, 12:16 PM

Quote:

Originally Posted by Willravel

The fix would have been tighter regulation after the deregulation-related failures of the 80s. It should have been abundantly clear that there is a direct correlation between deregulation and market-side corruption. And yet here we are again.

BTW, is anyone else thinking that economics needs to be less guesswork and more science? I keep trying to study references about what's going on only to find astrology-level science at best.

Mathematicians have been wooed by Wall Street for many years now.

The first two articles go over the current bust, the last one from 1994 talks about the uncertainty but ability to try to predict the market. The biggest problem is that you can't predict people.

Quote:

http://www.nytimes.com/2009/03/10/science/10quant.html
Emanuel Derman expected to feel a letdown when he left particle physics for a job on Wall Street in 1985.

After all, for almost 20 years, as a graduate student at Columbia and a postdoctoral fellow at institutions like Oxford and the University of Colorado, he had been a spear carrier in the quest to unify the forces of nature and establish the elusive and Einsteinian “theory of everything,” hobnobbing with Nobel laureates and other distinguished thinkers. How could managing money compare?

But the letdown never happened. Instead he fell in love with a corner of finance that dealt with stock options.

“Options theory is kind of deep in some way. It was very elegant; it had the quality of physics,” Dr. Derman explained recently with a tinge of wistfulness, sitting in his office at Columbia, where he is now a professor of finance and a risk management consultant with Prisma Capital Partners.

Quote:

Recipe for Disaster: The Formula That Killed Wall Street
A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

Quote:

Wired 2.07: Cracking Wall Street
In the subsequent years, as the stock market rebounded, the increasing computerization of financial trading was ignored. More and more of the everyday tide of money flowed in digital bits, and more and more sophisticated games could be played with them. The traditional financial gamble of derivatives is the latest to be computerized.

A derivative is sort of a bet on a bet, or a speculation squared. Really complex derivatives may give you, say, the option of buying milk at a certain price in New Zealand while simultaneously selling oil in Taiwan. Third- and fourth-order derivatives -- those betting on an option based on a bet that hinges on another gamble -- up the complexity and incomprehensibility of these financial instruments.

Derivatives are only made possible by the immense number-crunching power of 1990s desktop computers. Yet exotic bets form an increasingly major part of the world economy. The bulk of the approximately US$14 trillion that is entangled in derivatives is three times as much money as is tied up in the ordinary stocks and bonds that these esoteric gambles are derived from. When the stock market shuddered in early 1994, computerized derivatives were blamed.

blktour · 03-11-2009, 12:23 PM

Quote:

Originally Posted by Willravel

Huh?

just that the people and the states make the laws on a lower level instead of in washington, and if we cant come to an agreement then it moves up to congress or of the sorts..

somethin of this nature.

Willravel · 03-11-2009, 12:24 PM

That's what game theory is all about: it's the application of mathematics to social sciences like economics. Are game theorists just out in the dark or have they been largely ignored? Maybe they've fallen victim to neoliberalism?

---------- Post added at 01:24 PM ---------- Previous post was at 01:23 PM ----------

Quote:

Originally Posted by blktour

just that the people and the states make the laws on a lower level instead of in washington, and if we cant come to an agreement then it moves up to congress or of the sorts..

somethin of this nature.

Ah. I was wondering if there was a secret section of Article 4 or 6 that I missed.

03-11-2009, 10:10 AM	#3 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	This is where the disconnect happens for me. If you're a gambler and you have wins and losses, it's part of the game. If you're an investor and you have profits and losses, the losses are on the other guy. I should qualify that with investor of LARGE quantity. I don't take such risks myself, and even when I do take risks, I'm always trying to mitigate my risk as much as possible. __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!

03-11-2009, 10:12 AM	#4 (permalink)
roachboy Super Moderator Location: essex ma	the article, even in it's plot summary form, has nothing to do with libertarian fantasy scenario building. rather, what it outlines is an internal critique of something quite basic to neoliberals and right libertarians alike: the myth of "enlightened self-interest" connected to the god-like "invisible hand" that makes it even thinkable that markets left to themselves (whatever the hell that means) produce outcomes that are desirable on utilitarian grounds (greatest good for the greatest number, blah blah blah). instead, what you have is a thin line between the type of gambling that is internal to market rationality (a metaphysical principle, but no matter) and looting. and what you have in the absence of coherent oversight (and so under the OPPOSITE conditions to those presupposed in libertarian la la land) and given the circulation of bundled or aggregated debt as a financial device, kind of a commodity futures market in debt instruments, and given the potentials for immediate-term profit in exchange for longer-term implosion is a situation--or more accurately a series of situations--in the context of which any meaningful boundary between "enlightened self-interest" and looting disappears. add to this the nature of the bounded rationalities of any organization, which tends to operate through notions of professional duty or role to exclude from consideration outcomes that diverge from those affirmed by whatever Authority is running the show, and you have a recipe for catastrophe. this seems to me what libertarian-style thinking leads to. this is no different from what neoliberal thinking leads to. this is a significant measure of where we've landed. you can see from the plot summary--and in much more detail in the article itself--a detailed description of the ways in which this combination of factors can produce situations in which it is of no consequence, to anyone, whether people who are taking on debt can possible meet the obligations they acquire along with it. it doesn't matter--the real game is elsewhere. this has nothing whatsoever to do with the ronpaul nonsense about "fiat currency"...this is the kind of world that libertarians and neoliberals alike were arguing for. it's upon us and so are its consequences. sooner or later folk really need to abandon this nonsense and start trying to figure out other ways to think about the socio-economic world they live in. it's not a good time to wait for some other Authority--be it a television pundit or someone who knows that they're talking about (the distinction is serious) to figure something else out for you. -=------ cyn---one of the points of the plot summary is that in the savings and loan fiasco--and again now, in magnified forms, the distinction between gambling and looting was entirely erased. looting was the game. notions of "moral hazard" meant nothing. but the types of capital circulation that enabled it have little to do with the types of capital circulation most individuals operate with--except maybe players like warren buffet who have immense private wealth and make tons more by using it to play the looting game, sometimes falling within the bounds of acceptable outcomes, sometimes outside (like triggering the currency collapses in southeast asia in the 1980s)... so i'm not sure of the analogy between individuals in isolation or private life and individuals in the context of institutional bounded rationalities... __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite Last edited by roachboy; 03-11-2009 at 10:16 AM..

03-11-2009, 10:29 AM	#5 (permalink)
Cynthetiq Tilted Cat Head Administrator Location: Manhattan, NY	one thing i can tell you from close to 15 years in Corporate America, is that people within the organization are sheep and unwilling to call someone on their bullshit. We wind up with poor, shoddy products, incoherent and insolvent investments of other companies all because no one wishes to stand up and tell the chief in the room that this is a bad idea. no one wants to be the blocker to an idea. I've waved my hands plenty telling people they were making mistakes only to watch them make the mistake over and over again. In fact, I'm going to countless meetings these days wherein we're going to do just that. Everyone knows it but no one is willing to speak up to or against the higher ups. Pretty lame really. When it comes to this looting, who in the end benefits? and how does the company benefit? the CEO probably and the investors that knew it was part of the game ala Enron, Tyco, MCI/Worldcom... __________________ I don't care if you are black, white, purple, green, Chinese, Japanese, Korean, hippie, cop, bum, admin, user, English, Irish, French, Catholic, Protestant, Jewish, Buddhist, Muslim, indian, cowboy, tall, short, fat, skinny, emo, punk, mod, rocker, straight, gay, lesbian, jock, nerd, geek, Democrat, Republican, Libertarian, Independent, driver, pedestrian, or bicyclist, either you're an asshole or you're not. What's the best nation in the world? DO-NATION!

03-11-2009, 11:16 AM	#9 (permalink)
roachboy Super Moderator Location: essex ma	first off, it's fine to disagree. geez: most of the reason i put things here is that it's a space for trying to work things out on the fly. and the "big words" are mostly shorthand--i write this things pretty quickly and it's just the terminology i think in that let's me say things directly. that's all--everyone has a shorthand. this is the one i use. anyway, what i think the article--not so much the summary from the ny times--points to are several intertwined problems. one is a version of what cyn said above. in my shorthand, i referred to the same thing as bounded rationality. what this means is that bureaucratic organizations--and a corporation of any size is one--generate internal cultures ("norms") that discourage critical thinking and action--this work through hierarchy, through job definitions, through internal or informal censorship etc. one thing this results in is that a corporation can undertake a sequence of actions that are entirely insane from an external viewpoint and generate consent internally for it as part of it's normal operations. this explains, in general terms, how it might be possible for a bank to move into derivatives, skimming off immediate returns, knowing (if anyone thought about it) that this trade was setting up a wall of problems and moving the bank at high speed toward it. if the notion of "enlightened self-interest" and "rational actor" theory central to market ideology held, this type of action--which is suicidal institutionally--would be excluded up front. the explanation the article offers is that the wall of debt problems that playing in derivatives necessarily created was rationalized away--the phrase for it is that it was "treated as though it were someone else's problem." the article (and summary) claim that this "someone else" was the state, but i'm not convinced that this was the case--i think it was someone else's problem in an abstract sense, just something no-one particularly thought about--because of the emphasis on immediate profits, the relation of that to salary structures, professional advancement, etc. one outcome of this is to see in corporations not rational actors but bureaucracies capable of radical compartmentalization such that entirely nutty actions can be made to seem normal--which means that either you radically rethink organization--or you hedge them round with regulation. of the two, the former is probably the way to go really, but it's unlikely, particularly not now. too much inertia, too much ideological horseshit. so the latter. the problem with that is there's little, if anything, the average joe can do. with the former, there's alot that can be done with thinking about and experimenting with different types of organization of businesses--but that'd take time, require work, the latitude to fuck up, etc. there's more, but i have stuff i have to do, so maybe later. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

03-11-2009, 11:21 AM	#11 (permalink)
roachboy Super Moderator Location: essex ma	uh---i didn't praise warren buffet. i just used him as an example of the few individuals who might operate in a financial context comparable with that of a corporation. that's it. and if you read the rest of the sentences i wrote, you'll find that i think buffet is kind of a menace. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

03-11-2009, 09:43 AM	#2 (permalink)
blktour Psycho Location: Anchorage, AK	I already have known that the big businesses and governemnt have been milking us. I daily follow dailypaul.com and there you see him talking to Ben Bernake and ripping him up with sound questions that he doesnt even have the answer to. I feel this article doesnt even touch on Ben Bernakes lack of help that he should be doing for us. But then again, he doesnt work for us, he works for the fed reserve. The Fed Reserve are the ones who are the ones to blame. Even congress for not doing their constitutional duty to support the money supply. Now we are stuck on this Fiat money and the congress has the authority to changes things, but why should they? The article just touches on our financial problems.

03-11-2009, 11:01 AM	#7 (permalink)
blktour Psycho Location: Anchorage, AK	I am not talking ron paul this, and ron paul that and libertarian this and conservative that. you can say something is the problem, when in the article it just touches on the problems and never really says what can be done to fix this. I just reference Ron Paul because he makes so much sense in the "normal" sense as to which us "regular" folk can make out what he is saying compared to your big words, and anologies, or whatever have you. fiat money? this wouldnt have happened if they didnt give the right to one company NOT under the law to print money out of thin air. How would we come to this if we dealt with silver or gold? how can you "make" that up? So If i was in the business of printing stuff, and I decided to make money out of paper, that would call me a counterfeiter right? what makes the federal reserve any different? We cannot monitor what they print out and why and where it is going? is that fair? THIS is why we are in the mess we are in today. I mean us normal folks know what to do in times like this but it is the big ups that are making this happen and not paying for it, but we have to suffer for it? doesnt make sense to me. RB, this is one time that I am disagreeing with you. you are touching the surface fo the problem by this article. Just because someone wrote this and pointed out what they say, doesnt mean it is the TRUE problem.

03-11-2009, 11:10 AM	#8 (permalink)
Willravel ... a sort of licensed troubleshooter.	The fix would have been tighter regulation after the deregulation-related failures of the 80s. It should have been abundantly clear that there is a direct correlation between deregulation and market-side corruption. And yet here we are again. BTW, is anyone else thinking that economics needs to be less guesswork and more science? I keep trying to study references about what's going on only to find astrology-level science at best.

03-11-2009, 11:27 AM	#13 (permalink)
roachboy Super Moderator Location: essex ma	your proposals are tied up with the thinking that produced this problem in the first place. they're not options, for better or worse. firms and banks and nation-states are at this point so intertwined as a function of the scale and speed of capital flows that your "returning prerogatives to the states" is quaint and nothing more. and in constitutional terms, the strict construction viewpoint has nothing to offer that is of even the slightest use in the present context. try another tack. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

03-11-2009, 11:32 AM	#14 (permalink)
blktour Psycho Location: Anchorage, AK	that is the "defense" that eveyone says. "it is out dated." what a bunch of rubbish. You don't even want to try it? i mean this isnt working now, so why do we meddle around and change a little here and a little there? Why not go back to what was working back then? it has nothing about "time line". but you try another tact , instead of some of the same. this all started when the gold standard went away anyways. and the inflation was to delay the problem. So to fix it we inflate more money? doesnt make sense.

03-11-2009, 11:39 AM	#15 (permalink)
roachboy Super Moderator Location: essex ma	why not go back? because reality doesn't allow for it. you can't wish away the transformations in the nature of capitalism that have happened over the past 30 years. i've thought the whole time that the ideology which enabled them was batshit...now you can see it for yourself. but we're stuck in this situation, trying to figure out something of a way forward from here, and not somewhere else. not some pre-1970 currency order--we're here. not some pre-world war 1 notion of federalism. not some strict constructionist fantasy about the magical moment the constitution was written by giants. none of that matters, except as parlor games. we're here. we don't even have adequate information to get our collective heads around the actual organization of the economy in real time--i can understand the desire to run away from all that and think that maybe some earlier arrangement worked better--but it didn't work better, and even if it did, it doesn't matter. for the record, i'm interested politically in revolutionary politics. i think the entire approach to organization that is coterminous with capitalism is fucked up and has to be changed for anything like a coherent equitable system to even start taking shape. but that's a longer term prospect--at the moment, again, we're here and like it or not implicated in this order, dependent on it one way or another, with varying degrees of insertion. we're talking on the internet for god's sake. think of the infrastructure that requires. no going back. it's a waste of time to dream about it. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

03-11-2009, 11:43 AM	#16 (permalink)
blktour Psycho Location: Anchorage, AK	what to do, what to do? hmm.. as far as reality not allowing it? well no one wants to pay the price of what this has brought us to. That is what I see. of course you didnt have a say in what happened and to abolish a way of life and start from scratch will take lots of sacrifices that you or I are not willing to take. It COULD be a reality but no one wants it to be. as far as running away? I try not to. I love new info, and new ways to think. I just still think that the old ways would work today. Just to get the ball rolling in that direction would take a miracle. Though I am always open for ideas. but to do more of the same is what it seems like they all want to do. it is as if they TRY for these big issues to consume us just to have a reason to control more.