tag:blogger.com,1999:blog-8524070301101240472.post7749352211546071786..comments2023-09-28T08:13:11.489-07:00Comments on Only In It For The Gold: It's Raining and It's Windy and I'm SadMichael Tobishttp://www.blogger.com/profile/08229460438349093944noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-8524070301101240472.post-71518159250763508012008-10-06T14:55:00.000-07:002008-10-06T14:55:00.000-07:00Stevenson is a good example of why we need regulat...Stevenson is a good example of why we need regulation of ANYONE who offers financial advice. Does she have ANY qualifications? That is going to be as important as regulating banks and brokers. The current mess has its roots in a mortgage finance industry that was unregulated, with unregulated mortgage brokers, unregulated investment banks and a whole lot of fools who play financial advisers on TVEliRabetthttps://www.blogger.com/profile/07957002964638398767noreply@blogger.comtag:blogger.com,1999:blog-8524070301101240472.post-60663219600710474432008-10-04T17:25:00.000-07:002008-10-04T17:25:00.000-07:00See, in particular, methodological reductionism in...See, in particular, <I>methodological reductionism</I> in<BR/><BR/><A HREF="http://en.wikipedia.org/wiki/Reductionism" REL="nofollow">Reductionism</A>David B. Bensonhttps://www.blogger.com/profile/02917182411282836875noreply@blogger.comtag:blogger.com,1999:blog-8524070301101240472.post-21890260876971864292008-10-04T02:27:00.000-07:002008-10-04T02:27:00.000-07:00Maybe financial and economic models are like clima...Maybe financial and economic models are like climate models?<BR/><BR/>The more accurate they get, the less people believe them.<BR/><BR/>Phil, tongue half in cheekPhilhttps://www.blogger.com/profile/05789761931551673481noreply@blogger.comtag:blogger.com,1999:blog-8524070301101240472.post-68737314090773504262008-10-03T19:08:00.000-07:002008-10-03T19:08:00.000-07:00"Cutting over to ever higher performing computers ..."Cutting over to ever higher performing computers and every more complex algorithms is a form of reductionism. Reductionism does not work in science and engineering;"<BR/><BR/>Can I say 'amen'? No?<BR/><BR/>Well, what he said, anyway. <BR/><BR/>Actually, I'm not sure I'd call this mistake 'reductionsism', but I'd very much call it a mistake, and a seductive and obviously dangerous one as well.<BR/><BR/>I am very very much and vigorously in agreement that this is not a fruitful approach. However, the bulk of the climate science community is not in agreement with us.Michael Tobishttps://www.blogger.com/profile/08229460438349093944noreply@blogger.comtag:blogger.com,1999:blog-8524070301101240472.post-52388499761940089052008-10-03T18:59:00.000-07:002008-10-03T18:59:00.000-07:00As evidence: How Wall Street Lied to Its Computers...As evidence:<BR/><BR/><A HREF="http://bits.blogs.nytimes.com/2008/09/18/how-wall-streets-quants-lied-to-their-computers/" REL="nofollow"> How Wall Street Lied to Its Computers</A>David B. Bensonhttps://www.blogger.com/profile/02917182411282836875noreply@blogger.comtag:blogger.com,1999:blog-8524070301101240472.post-31409375892043890132008-10-03T18:09:00.000-07:002008-10-03T18:09:00.000-07:00Re: the update.My informed opinion is not changed ...Re: the update.<BR/><BR/>My informed opinion is not changed by those remarks. Too many people trust the output of computing just because it went through some algorithm.<BR/><BR/>Cutting over to ever higher performing computers and every more complex algorithms is a form of reductionism. Reductionism does not work in science and engineering; there is no reason to suspect that it does in finance.David B. Bensonhttps://www.blogger.com/profile/02917182411282836875noreply@blogger.comtag:blogger.com,1999:blog-8524070301101240472.post-33774065621720764372008-10-01T09:32:00.000-07:002008-10-01T09:32:00.000-07:00Excellent post on a fascinating (and unfortunately...Excellent post on a fascinating (and unfortunately vivid) subject.<BR/><BR/>I heard the first half of that "This American Life" episode while driving back in May, and kept listening to the end, even after I parked.<BR/><BR/>Transcript here:<BR/><BR/>http://thislife.org/extras/radio/355_transcript.pdf<BR/><BR/>Epic sequence:<BR/><BR/>"The global pool of money. That's where our story begins. Most people don’t think about it but there’s this huge pool of money out there, which is basically all the money the world is saving now. Insurance companies saving for a catastrophe, pension funds saving money for retirement, the central bank of England saving for whatever central banks save for. All the world’s savings. <BR/><BR/>Ceyla Pazarbasioglu: It's a lot of money. It's about 70 trillion."<BR/><BR/>Which had to find a place to go, just when the rising US housing market, cheap credit, and shoddy 'mortgage-backed securities' seemed inviting. That, plus the bankers leveraged themselves up to 30:1 or more, to extract even more cash from bigger deals. <BR/><BR/>Also: making bets with borrowed money is great, as long as you win the bets.<BR/><BR/>Two personal recollections:<BR/><BR/>re: your observation on --<BR/>"brilliant people who might have been doing useful work involving derivatives and integrals"<BR/><BR/>My closest friend from the science high school I went to in NYC has a PhD in astrophysics (Princeton, U Chicago). He went into finance in the early 90's after eating ramen as a post-doc at Yale for a few years. He now runs the 'risk' desk at Morgan Stanley, where he's a managing director. Making -- or assessing -- models about derivatives is part of his job, I think. His work as a scientist involved making models about the first three seconds of the universe.<BR/><BR/>The pay scale in NYC jobs in finance was, until this year, 4:1 over the average pay in NYC.<BR/><BR/>The average pay at Goldman (clerks, IT people, security guards, traders) was $ 622,000 in 2006.<BR/><BR/>Because of the pay, over the past decade and more about 40% of the US's best college students (seniors at the Ivies and MIT, for example) entered the financial industry. Perhaps there has been a double cost: the perpetuation of a Ponzi scheme, and a brain drain. The talent drain may have been particularly acute because of the consuming nature of financial jobs -- with no actuators but greed and fear, & no end product but the firm's profit. 15+ hr days, 7 day weeks, roped to Blackberries and screens, with little time to reflect on the wisdom of their machinations.<BR/><BR/>A story about imaginary money: in 1999 I went to Cuba, and heard stories of their bitter economic crisis in the early 90's from a stringer for the Economist. He had arrived in 1992, when the paper currency was blowing down the street with no one bothering to pick it up. (The only real currency was the dollar, which was strong.)Unknownhttps://www.blogger.com/profile/16888223087774725299noreply@blogger.comtag:blogger.com,1999:blog-8524070301101240472.post-39596226932989015562008-09-30T16:55:00.000-07:002008-09-30T16:55:00.000-07:00The availability of vast computing power contribut...<I>The availability of vast computing power contributed.</I><BR/><BR/>Yes.David B. Bensonhttps://www.blogger.com/profile/02917182411282836875noreply@blogger.comtag:blogger.com,1999:blog-8524070301101240472.post-72147247334543726412008-09-30T13:22:00.000-07:002008-09-30T13:22:00.000-07:00There have been two interviews on Moyers [1., A. ...There have been two interviews on Moyers [<A HREF="" REL="nofollow">1.</A>, <A HREF="" REL="nofollow">A.</A> ]that I think really get at what is going on here. 1. is Kevin Phillips and A. is Andrew Bacevich. Please take the time and watch. <BR/><BR/>That they echo what I (and Dano) have been saying for years is - IMHO - a testament to stepping back and looking. Not owning a TV helps, but these are excellent contextual backgrounds for what we have today. <BR/><BR/>Lastly, IMHO, the world isn't going to end tomorrow. That we don't have growth! growth! groooooowth!!!! for a little while - against the alwaysgrowth! mantra - won't kill us. <BR/><BR/>The ululating, gnashing of teeth and rending of garments is almost all coming from the FIRE sector and esp Finance and Insurance. Their primacy (echoing Phillips and even Kunstler) got us here in the first place. <BR/><BR/>It won't be easy to get us off our addiction to paper wealth, but we can do it. <BR/><BR/>Best,<BR/><BR/>DDanohttps://www.blogger.com/profile/03709762632849004871noreply@blogger.comtag:blogger.com,1999:blog-8524070301101240472.post-13951749432389630942008-09-30T11:53:00.000-07:002008-09-30T11:53:00.000-07:00One short comment as I muddle my way through this ...One short comment as I muddle my way through this wtf as well...<BR/><BR/>W.r.t. <I>"Growth addiction... In my view, though, the wtf occurring now is decades early with respect to resource limits. Normally we could have worked through the petroleum shortfall using the genuine creativity and competence that capitalism unleashes. This ought to have been a glitch... Eventually those will bite, but this is too early."</I><BR/><BR/>What disturbs me is that key resource limits - even IF decades away - may NOT be far enough into the future that they won't have serious impacts on our economies and capital markets in the rather near future.<BR/><BR/>Here's why. As <A HREF="http://www.peterbernstein.com/index.html" REL="nofollow">Peter Bernstein</A> says: "Financial markets are a kind of time machine that allows selling investors to compress the future into the present, and buying investors to stretch the present into the future." So, when you invest in a stock or a market trading at, say, 20x earnings... What you are in effect acknowledging is that 5% of the value of the investment is represented by next year's earnings... and the other 95% is represented by "something else"... The "something else" is first and foremost "the future" and our expectations about that future... <BR/><BR/>So, capital markets valuations are finely-tuned to our expectations about the future... As a thought experiment, imagine that the investment above was expected to grow at 4.5% for the next 20 years or so... and thereby theoretically justified the market's assignation of 20x multiple of next year's earnings... But suppose the prevailing market paradigm for expected growth in general were to relatively shrink from 4.5% to 3.0%... The future earnings pool would be cut by roughly 16%... But further, the investments would no longer be worth a 20x multiple... So that too would have to adjust to the lower-growth paradigm... say to 14x... What this would imply is as follows: Say we initially had a "market" that was expected to earn $5 next year, and was trading at $100. Just the <B>assumption</B> of reduced growth expectations for the future could easily result in a >>40% decline in the market capitalization of our enterprises NOW. Not someday in the future... NOW.<BR/><BR/>The finance math is a bit of an oversimplification there, but the magnitude and timing of valuation changes are not off materially.<BR/><BR/>Leaving aside what slower <B>realized</B> earnings growth would mean to incomes, entitlement program funding, trade balances, etc. as growth slowed due to the arrival of <B>real</B> resource limits... what concerns me more is the impact that shifts in growth <B>assumptions</B> can have on market caps NOW. That store of wealth is in turn critical to our abilities to fund investment in clean and sustainable energy infrastructures, etc.<BR/><BR/>And I don't think this is at all tangential to what is going on in the financial markets presently. Even if I agree that there is no direct connection in the financial contraction and resource limits, what we are witnessing is a manifestation of the same valuation contraction that I described above. The "2+2=5!" paradigm of 40:1-or-25:1-or- whatever-leveraged f.i.'s has proven to be a mirage, and part of what is happening is a compression of earnings expectations and earnings multiples. Same dynamic. In this case, the spillover is enough that we can have wealth contractions across the board, beyond just financials, or $1.2 trillion just yesterday! Consider what happens when we collectively begin to muse "Ya know, what with oil peaking, and the oceans dead with the acidity of a can of Coca-Cola, and the Arctic ice free, mebbe we should ease off on the accelerator a tad..."... And I know I am not alone in suspecting that the financial crisis is the beginning of a longer introspection of the role of government in (un)regulated markets, and the sustainability of a variety of growth models - not just in finance...<BR/><BR/>Another disquieting parallel from the financial crisis is how the thing escalated to apparently near-catastrophic proportions before we acknowledged the gravity of the situation and the required mitigation/adaptation... <BR/><BR/>I am not doom and glooming it... I think the grow-grow-grow paradigm is so heavily invested in itself that we will not see an abrupt shift. But some kind of downshift in material throughput is coming, whether gradual or abrupt (because some resource/sink limits are simply non-negotiable)... <BR/><BR/>In my most hopeful scenarios, we actually end up with the kind of near-term economic boom that some forecast can result from a massive retooling and buildout of long-life energy and resource management infrastructures... and a refocussing of economic goals to the more nebulous "development" rather than "growth" that the ecological economists call for... but I get an unnerving sense that these problems kind of sneak up on us, and we can get major discontinuties... and that "resource limits" will hit financial markets decades before they "really" hit... wtf indeed...tidalhttps://www.blogger.com/profile/08979480547719289608noreply@blogger.comtag:blogger.com,1999:blog-8524070301101240472.post-28282473938107309722008-09-30T10:08:00.000-07:002008-09-30T10:08:00.000-07:00FDIC regulated banks ARE limited in how much they ...FDIC regulated banks ARE limited in how much they can lend. The limits are related to total assets rather than to cash. So, yes they can loan more cash than they have on hand, but the ratio of loans to assets is strictly controlled. <BR/><BR/>You could use your good credit to borrow more than your net worth and then loan it to your freinds. An FDIC bank can not. And, FDIC banks have tended to do better than say, investment banks.<BR/><BR/>The FDIC banks that got into trouble were those that were in the housing loan business as it was deregulated ("Bush's ownership society") and they got greedy. Or, they went into the deregulated housing loan business because they were greedy. This was a matter that they were not repaid for loans that they made, rather than the fact that they loaned more money than they had. Their loans were imprudent rather than excessive.<BR/><BR/>The FDIC rgulattions are a good read for any budding economist. (http://www.fdic.gov/regulations/laws/index.html, When I worked for a bank, they were only available as leather bound volumes in the VP's office.) The great read is to see how they have changed over the last 8 years. "Streamlining the regulations to save money" has cost us $billion$.Aaronhttps://www.blogger.com/profile/05150805906414546377noreply@blogger.com