Get yer anger right here

First up, we have Matt Taibbi. I always take Taibbi's pieces with a grain of salt, not because I think he's nuts or even wrong, but because I usually think what he's saying is an extreme version of reality. In a slightly alternate universe, every piece he writes is a searing exposé; I'm just never quite sure that that universe is this one. That said, usually his point of view is basically correct, if colored up a bit, and usually it's the thing that's not being said. So take it away, Matt:

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

Next is Glenn Greenwald, arguing that we need more public anger:

It makes perfect sense that those who are satisfied with the prevailing order -- because it rewards them in numerous ways -- are desperate to pacify public fury. Thus we find unanimous decrees that public calm (i.e., quiet) be restored. It's a universal dynamic that elites want to keep the masses in a state of silent, disengaged submission, all the better if the masses stay convinced that the elites have their best interests at heart and their welfare is therefore advanced by allowing elites -- the Experts -- to work in peace on our pressing problems, undisrupted and "undistracted" by the need to placate primitive public sentiments.

While that framework is arguably reasonable where the establishment class is competent, honest, and restrained, what we have had -- and have -- is exactly the opposite: a political class and financial elite that is rotted to the core and running amok. We've had far too little public rage given the magnitude of this rot, not an excess of rage. What has been missing more than anything else is this: fear on the part of the political and financial class of the public which they have been systematically defrauding and destroying.

Greenwald likes Taibbi's piece, too:

Matt Taibbi's new Rolling Stone article perfectly summarizes what the AIG scandal reveals about our political and economic system, and should be read in full. In sum: financial elites own the Government and both political parties. Their money drowns Washington and their lobbyists control it. They used that ownership of Government to abolish decades-old legal and regulatory protections which previously constrained what they could do. In the lawless environment which they literally purchased from our political leaders, they were able to pillage and pilfer and steal without limit. And even now that everything has come crashing down, they continue to dictate what the Government's response is, to ensure that they -- the prime authors of the disaster -- are the prime beneficiaries, at the public's expense, of the "solutions," solutions which preserve their ill-gotten gains and heighten even further their power and influence.

John Cole at Balloon Juice:

If this were a medical emergency, it appears it would look something like this:

The Illness - reckless and irresponsible betting led to huge losses
The Diagnosis - Insufficient gambling.
The Cure - a Trillion dollar stack of chips provided by the house.
The Prognosis - We are so screwed.

If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs.

Meanwhile, Krugman is furious--Despair Over Financial Policy:

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved. [...]

In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess.

I have nothing to add to these pieces: they're all good and they're all worth reading in full (particularly the Taibbi--do click through on that one). Even setting aside the financial hooliganism under discussion in these links (I know, that's a big concession), I would wholeheartedly contend that there is not enough public outrage in this country. Where are the angry mobs screaming for justice over war crimes perpetrated in their name? Where is the angry populism that everybody seems to warn against (see Greenwald) but never seems to manifest? I know we're all supposed to stay calm and avoid bank runs or whatever, but generally I think it's rather telling that the population of, supposedly, the world's model democracy doesn't seem to give a damn what its leaders are up to.

Well played, us. Well played.

Good one

As you may know, Jon Stewart and Jim Cramer (of CNBC) have been engaged in a bit of a spat lately. A summary:

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Well, last night the other night [ed.: this post took a few days] Cramer went on Stewart's show, the poor fool. All I can really say is oof. Tim F. at Balloon Juice said, "My immediate reaction is that the whole experience is painful to watch. It would be great if someone could explain to me why Jim Cramer did not stay home."

He received numerous responses, as is the norm at BJ, but I somehow was struck by these two:

Just Some Fuckhead

We are in freefall as a society when a fucking comedy channel is the only place we can get hard news.

Indylib

@r€nato:

Why is it that two comedians on basic cable are pulling so much of the weight for our so-called journalists?

The comedians do good journalism and the journalists do really, really, really bad comedy.

What really did it, honestly, was one commenter's link to "his take on the exchange, in comic book pictures." The first picture is from Watchmen, and the post is called "Don't Fuck with the Comedian."

Also relevant here is the honestly incredible comment thread over on Roger Ebert's blog post on Watchmen. (If you want to get some really nice basic education in quantum physics, scroll until you see some long comments and hunker down.) There I read, among other things, the following:

Ross Durham: ...between your review and this blog entry there is little mention of my favorite aspects of the novel. What about the Comedian? What about the joke? It's a very postmodern look at the human condition in addition to being a look at humanity, or life's, place in the universe.

alex: ...you do have to realize that the Comedian is living his life as being one great big parody of Humanity and his actions just really go to show what he thinks of humanity.

Ike: the Comedian, the nihilistic everyman, who wonders why god will not save him from his own immorality, and finds the entire situation to be one giant joke.

Emphasis added to this one:

Ray R.: While Manhattan is interesting, the real depth in the story is The Comedian. "The Big Joke" is what this is really all about. While nuclear war and the atomic clock are significant symbols, the most prominent and repeated motif is The Comedian's smilely face marred with blood. It's present at the beginning of the story and at the end of the story. Even as Dr. Manhattan stands on Mars giving his huge and empty speach about the uniqueness of each individual (come on dudes - anyone who knows the first thing about science knows what a load of junk this speech is), the camera backs up and reveals that his beautiful construct is actually a small portion of that big smiley face. Manhattan is interesting, but The Comedian is the real key to understanding Alan Moore's masterpiece.

All of this initially had the effect of making me go looking for my copy of Watchmen to reread it so I could get a handle on the various inklings stirring around my head. Unfortunately, I can't find it (though the search has led me to a desire to reread A Canticle For Liebowitz also, as it shares a certain nihilist cackle).

So instead of that, head back over to the Balloon Juice comments for a minute (bear with me):

jwb:
@William

The irony of Stewart and other Hollywood celebrity commentators like Maher is that they are really the only people in the country who have both regular, guaranteed access to the media and the willingness to point out the bullshit. They’re famous and wealthy enough not to be overawed or intimidated by politicians and executives and too prominent to be suddenly "disappeared" from the TV screen by the media for being too honest.

Actually, it’s their humor that gives them the power—not their celebrity or wealth (in the league they are playing in, that’s miniscule). That’s their difference from someone like Cramer—who has to depend on shilling for da boss guys because he can’t bring in the eyeballs any other way.

And now back to Ebertville:

Daniel: The tragedy of this movie is that it could translate only in severely truncated form what I think is the most interesting part of it and what you rightfully put in the title of this blog entry: the bit about being a puppet that can see the strings.

...We are, as a species, only starting to see the strings. Our growing knowledge of the universe creates entirely new intellectual challenges to deal with. H.P. Lovecraft wrote: "The sciences, each straining in its own direction, have hitherto harmed us little; but some day the piecing together of dissociated knowledge will open up such terrifying vistas of reality, and of our frightful position therein, that we shall either go mad from the revelation or flee from the light into the peace and safety of a new dark age."

ABVC: If there is someone else controlling your deeds and your thoughts, he could choose in an arbitrary way what you were going to do. You would only see the strings if he wanted [you] to. But then, you wouldn't need a crazy experiment gone wrong to see them. Maybe if he wanted you to need it.

If there is no puppeteer, or the pupeteer [sic] is not someone with a will, but the universe, then the possibility arbitrariness (is quantum randomness arbitrary?) would be eliminated and we would be puppets of the laws of cause and effect. You have a will, but it is not free, it is the effect of lots of causes.

All of this pasticherie on my part is intended to be pointing at the way we think we understand The Economy and a little bit at journalism. I'm now going to back up, sort of, and go through my own thoughts, tying back to all this source material when appropriate. Again, bear with me.

Current discussions of economics and the economy contain a bizarre contradiction: On the one hand, the Free Market Rulz OK because the economy is too complex, diverse, and fast-moving to be comprehended sufficiently by any planner or regulator. It is, to a certain degree, unknowable and all-powerful, if benevolent. This idea is roughly analogous to ABVC's description of a puppeteer with no will--"the laws of cause and effect. You have a will, but it is not free, it is the effect of lots of causes." (Free-marketeers might object to the statement that the will is "not free," but I think that the distinction that might be made here is not actually very significant, at least for what I'm trying to do. The "effect of lots of causes" bit I think is unimpeachable.)

On the other hand, we flatter ourselves that with enough math, studies, models, and theorizations we can understand how these things work. Even with the whole question of government interference set aside, there is more than one industry entirely devoted to studying and understanding the workings of The Economy, whether that means finance, Depression economics, international development, day trading, or financial journalism. This effort is roughly analogous to the notion of "seeing the strings", or trying to.

We understand the economy as both a reflection and the driver of our entire world. "Stocks rallied today in response to _______"; "In response to the recession, people are rediscovering the value of ______ by _______"; "We may see a cultural shift through learning to deal with austerity"; and "culture of commodification" are only a very few of the thousands of phrases we use to describe what the economy does to us or how it reacts to things that we do. The story is, In the endlessly circular dance of incentives, choices, and effects, easy credit and a housing bubble caused "reckless" spending and lending, which sent the economy to recklessly dizzying heights, leading to a crash which, apparently, will now reshape our entire culture and bring us a new Greatest Generation (unless it simply ends the world as we know it). This is a bizarre combination of The Economy's being by and of us while simultaneously being completely alien to us. We do things to it, we figure it out and profit off it, we game it, we live in it, but occasionally it completely swamps us. It's a force of nature--it is to us as the sea is to fishermen, or the Euphrates was to Mesopotamian farmers (floods are a central mythic trope in ancient Mesopotamian religion).

It follows from this that we seek to understand how this incredibly powerful force works and what our place in it is--to "see the strings". Just as we try to understand and harness physics, we try to understand and harness economic forces (maybe this explains all those Wall Street physicists).

But the great irony is that all of our efforts to see the strings--our glass edifices on Mars--are ultimately recursive and meaningless. They fit together, they explain each other, and most of the time they fit reality well enough that they seem to explain and describe it. But every so often things happen that they did not predict and don't explain, or at least don't explain conclusively. Even the Great Depression is not understood, in that lots of people understand it in completely incompatible and mutually exclusive ways, and we've had a good 80 years to try to figure it out. (The "was it Keynesian stimulus/WWII, or just the natural end of the downturn?" debate reminds me of the quantum debate about nonlocality--there are strong arguments for both, and no proof of either, and no clear way to figure it out.) Ultimately, we don't see the strings at all; we argue endlessly about the workings of our little glass automaton and fail to understand that it's sitting in the middle of a massive smiley face.

Lately, I've been having a very difficult time caring at all about the news when it comes to the recession, banking system reform, bailouts, any of it. I'm sure part of it is just fatigue with the whole thing. But I keep finding myself retreating into what I've dubbed my anthropologist's cynicism, which is the belief that none of this actually matters at all and most of it isn't real. NOTE: this is not to say that the hardship involved isn't happening. Of course it is, and it matters. But sometimes it's hard to believe that what's happening isn't just some sort of spontaneous, natural sea change or cycle, like a tidal wave--that something very like it would have happened nowish almost no matter what we did, and that AIG and CDOs matter about as much as algae. This entire disaster is built on a near-incredible series of abstractions (going all the way back to currency--I won't go so far back as the notion of property), to the point where one can almost think of it as a mass hallucination. Furthermore, even when I come out of my academic funk enough to take the crisis at face value, the degree to which nobody has any idea what is going on or what is to be done about it, and the degree to which any one opinion can be convincingly argued against, certainly suggests that while the phenomena at hand are real, our understanding of them is merely a comforting fiction.

This idea is not at all surprising to the anthropological cynic. As I learned over and over in The Anthropology of Policymaking, policy frequently has myriad effects in addition to--or in place of--its intended result. The process by which problems are identified, solutions conceived, and policies implemented generally involves multiple heroic assumptions, sometimes retrospectively insane logic, willful ignorance and oversimplification. What policy or methods represent the best solutions is determined less by an empirical advance of knowledge than by personal politics and ideological fads--much as in economics (supply-side! No, demand-side!) and quantum physics (nonlocality is real! No, it's not! It secretly doesn't violate relativity, I swear! Except when it does!) But we persist in believing, very firmly, that policymaking and many other arguably more quantitative fields are rational processes of improvement, whose wildly unpredictable results are owed more to the complexity and difficulty of the problems or questions these disciplines engage than they are to the complete disconnect between what we think we are doing and what is actually going on.

This, of course, is the joke. We think we see the strings, but they are far too long for us to comprehend them as such. They may not actually be strings at all, but rather Slinkies--hell if I know. This is why (in colossally superior and self-satisfied terms) I'm so bored with the financial crisis stories: a joke isn't funny when you already know the punchline. The punchline is that we don't actually understand the economic forces around us, nor do we understand our interactions with them. It's all fooled by randomness with a healthy dose of storytelling and myth. A form of paganism, if you like--believing that human actions affect natural phenomena. (Thank god we burned a Yule log this year, or the sun might not have come up in January either.)

Much the same can be said about political journalism and even journalism as a whole. There were many astute comments about this in the BJ thread as well as in the original post; there was also a Marc Ambinder piece that I cannot for the life of me find that I thought said something very true about the election coverage. Ambinder said that he truly thought, and had for most of the election, that the whole thing would swing on voters really hating Republicans right now plus a couple of big, sort of constant issues (I think the war and maybe the economy). That was it. None of the daily stories mattered. But he, and the press in general, can't just write that one story and be done with it. Nor can they write the same damn story word for word over and over (much as it may seem like it sometimes). So they cover all the little stuff that doesn't matter as if it did, because it's a story. And people who follow politics, who follow campaigns--and people who are in campaigns--all come to believe that it matters too, because again, what are they going to do? Sit around, whistle, and wait for November?

I'm sure this same basic myth applies to many more human endeavors, especially as everything that humans do becomes more and more data-driven on a more and more granular level. We have to do something with all that data, and so we come to believe that it's important. We build whole occupations around collecting, analyzing, and storytelling that information (in a sense, that's part of what finance is, and it's certainly what financial infotainment like Cramer's show does). Only very rarely does something big enough and inescapable enough come along and show us that it's all one big joke.

In the margins, though, we have court jesters to point out how silly it all is. Humor rests, often, on uncomfortable truths--on saying things that are just true enough to laugh about but not so true as to kill the party that is our collective hallucination that we can see and even pull some of the strings. The reason journalists keep finding themselves in service to the big guys, as Glenn Greenwald points out in searing terms, is that the daily practice (as opposed to the occasional monumental achievement) of journalism involves maintaining those fictions, structures, assumptions, and logics. This isn't, particularly, an insult to journalism--it just means that journalists, like everyone else, live in a kind of social fiction. If they stepped outside it, not only would power structures make their lives difficult, but no one would actually understand what they were saying. They would look like crackpots. Humor is, most often, only language we have for such things.

In that sense, then, it's not so surprising that the key to Watchmen, or, on occasion, the real truth-teller in the room, is the comedian.

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You may have heard about Sir Allen Stanford? Madoff-style scandal, except way worse? That guy?

Well, it turns out he's managing to take an entire country down with him. [H/t TPM]

Must have been nice, having his own backyard island empire, eh?

It was Antigua where Stanford located all his off-shore bank shenanigans. But he had so many different operations going on down there (a recent report said that he was "a chief financier of government projects" in the island) that he and his businesses were the second biggest employer in the country after the Antiguan government.

...As a funny illustration, a few days ago I went to the website of the local newspaper, the Antigua Sun, to try to find out the latest on what was happening down there. And I couldn't find anything about it, which struck me as weird. And then I dug a little deeper to discover that ... well, the Antigua Sun is owned by Sir Allen. So maybe that explains it.

.

This entire story sounds like one of those fun anecdotes you get in a shaded box in your history textbook in the British Empire chapter. It's not supposed to happen anymore.

This reminds me of something my class briefly almost talked about today--which is to say that we would have talked about it if the class weren't quite such a waste of time. Colonization and imperialism in the 16th-20th centuries, as a phenomenon, didn't start out with actual states actually going out and conquering places just because. Didn't even start with states going out and conquering in search of resources. It started with companies. Trading companies. Like the East India Trading Company, which actually used force to coerce local governments into trading with it and granting it access to resources. And, in many ways, like the multinational conglomerates we see today that contain both security and mercenary forces and mining companies--to take advantage of all those diamonds the security forces get paid in for their work in Sierra Leone.

Depending on where we see cases like PMCs and Stanford types going in the next few decades--and on the degree to which finance, production, and outsourcing catch up in non-Western countries--this could be an example of history not repeating itself, but thumping out a really heavy rhymed couplet. I guess it remains to be seen.

Unbelievable

California has to shut down all construction and start firing people because Republicans wouldn't raise any taxes.

I understand the rationale that if you really believe less government is better, then being anti-tax isn't just something you play around at until the rubber hits the road and then you have to rush in to save the state. I get that. What I don't get is how the huge numbers of people who are going to lose employment, contractual (construction) or more permanent (20,000 state workers?), and who will decidedly not be absorbed by our ailing economy, is just fine and dandy.

This is one of those things that you see coming but always assume will be averted. It is going to be hard as hell for a Republican to get elected in most of California for the next few cycles if the world makes any sense at all. (Not holding my breath, I'll admit.)

The stimulus needs stimulus

dday writes:

The upshot is that this bill, with the entire goal of stopping a careening disaster in the economy and putting people to work, is seriously off the rails. And I've got to say, a lot of it is because the Obama Administration isn't answering the critics with any kind of force or action plan. Now the job numbers for January due out on Friday - which could be astronomically bad - will create more of a sense of urgency, but that won't create action on Washington unless people are knocking at the gates. The bad timing of the Daschle withdrawal ruined Obama's media blitz yesterday, as his "I screwed up" line got all the headlines. But even the content of their pushback when they've bothered to do it has been suspect.

And,

Finally, as Chris Bowers notes, the Obama team is asking shockingly little from its constituents. There was an organizing call last night that asked for some input, and they're setting up house parties, but that's EXTREMELY late in the game. This is the biggest legislation of the year, which will set the tone for all of the future promises Obama made. That he's not effectively using the bully pulpit or organizing his cadres is astounding. It could be that they are working so hard on all these simultaneous crises that they forgot how important it is to bring the people along.

Frankly, the degree to which the Obama camp seems to have forgotten about the media is really surprising to me; it feels out of character. Beyond that, I honestly think the Congressional Democrats have been downright embarrassing. There's no united front, nor does there ever seem to have been any effort to put one together, let alone get it out on TV where people can see it. I read about Obama and the Republicans reaching out, out, ever reaching, but I never hear about Obama falling back on Democrats when that doesn't work, nor do I hear of Democrats, well, doing much. Doesn't necessarily mean they're not, but it does mean that nobody is getting it into the public eye.

This is the part where many would throw up the "Everybody chill the fuck out, I got this" macro and point out that "Every time you/we/I/they second-guessed Obama in the campaign, you/we/I/they were wrong, and look how it turned out!"

I suppose that's possible. But this is a different game, for two reasons:

1. Media management. As dday pointed out, the Obama people now have to walk and chew gum at the same time on a much grander scale than ever before. While Obama did some work in the Senate while campaigning, he was still generally able to focus on managing public opinion at not too high a cost elsewhere. Now he has to do a lot of policy work as well as PR work, and a number of people in the campaign who did one or the other are doing both, and the policy work can't be limited to three or four big issues that voters care about, and it may be that they just haven't figured it out yet.

In addition, the campaign was all about Obama the individual, as it should have been. But the administration needs to have people other than President Obama himself that they can put on TV to defend the agenda. Again, this is where Democratic Senators should come in, since much of Obama's communications Dept. isn't familiar yet. I'm not saying it was a bad idea to trot out the President; this is a really big deal and it's important that people outside the Village pay attention, and he's the best way to do that. But there needed to be preemptive selling of the bill, and there needed to be damage control before and after the President made the rounds so that there is someone pushing back on the Republicans when the President, you know, has other things to do. Where are they?

2. The goals are now radically different and Obama hasn't yet changed his methods. The "11-dimensional chess" and bipartisan outreach that the media love and many bloggers are rolling their eyes over doesn't surprise me. It's who Obama is. Obama likes to be liked, he likes to be the reasonable one, the one who can sit everybody down and get a handle on the situation. He played that role all through campaign--even when it was just down to him and McCain, there were enough hysterical people around that he didn't need any hysteria of his own--and sure enough, people liked him for it.

The problem is that before, the goal was to be liked. That's a useful and ever-present goal, but it's tangential now and it's not THE goal of this fight. This disaster is unreasonable. Anything we do that has a chance of helping us with it will seem unreasonable. If Obama's goal is to seem reasonable and likeable, then he will be reasonable and likeable right up until we all move into Hoovervilles. There comes a point when you have to sacrifice the (truly fulfilling) work of changing the tone in order to beat your fist on the table and stop the whole damn conversation because it's going down the wrong road.

In my opinion, whether Obama proves willing to do that or not will make the difference between a decent, or maybe a failed, presidency, and a strong one. Right now he really doesn't look like a leader. He looks like he's in over his head. He's the guy at the head of the table that everybody is yelling over and he needs to bring this meeting to order right quick if the stimulus is to have a chance, and if he is to have much chance going forward.

You have got to be kidding me

NYTimes: Both Parties Move to Aid Homeowners.

The title seems innocuous enough. Half of what's in the article is innocuous too.

Apparently the stimulus is being recrafted to include provisions intended to a) help reduce foreclosures and allow bankruptcy judges to renegotiate mortgage payments for homeowners in default, and b) stimulate the housing market because that is the cause of all of our troubles.

A) makes sense. B) is insanity.

The housing market is in a slump because there was a housing bubble. Trying to get people to buy more houses will not change the fact that the bubble must deflate. All you do is delay the inevitable.

There is an argument for doing so--that if you can spread out the pain and make the deflation longer and slower, the economic pain won't be as catastrophic. That's basically the argument for bailing out banks, or it was when "bailing out" implied breaking up businesses, restructuring, selling off bad assets, or anything else that involved dealing with economic pain rather than sending everybody off on a three-month cruise and hoping they all get drunk enough that they won't remember this "crisis" business by the time they come back.

But the problem with that argument in terms of the housing market is that people are not perfectly rational and no one is going to buy a fucking house right now. I don't care what tax credits you throw at them, it's just not going to happen. From the article:

Even though home-building has been depressed for almost two years, the soaring number of foreclosures has continued to drive prices down and kept the supply of unsold homes at extremely high levels.

See? Home-building has been depressed for two years, guys. That's because demand for houses has been down for longer than that. Nobody wants to touch a mortgage right now, and the number of people for whom the government can make a difference on this is negligible in terms of economic healing and/or stimulus.

The article in general is an odd read--it keeps lurching back and forth between reasonable things (make it easier for people whose mortgages are killing them to stay in their homes) and this housing market madness. Ah, but all becomes clear:

But beneath the consensus over helping the housing market, there are huge differences over who should benefit under the competing plans. Democrats want to aim money directly at people in the greatest distress; Republicans want to aim money at almost all homebuyers, on the theory that a rising tide will eventually lift all boats.

[...]

The Republican approaches are aimed much more at boosting the entire housing market, and would only provide indirect relief to families about to lose their homes.

Of course. The Democrats want to do something potentially sensible and the Republicans are yammering on in supply-side clichés.
And--don't forget!--it manages to simultaneously come with a hefty price tag:

But senior Democratic lawmakers are staunchly opposed to the plan, warning that the costs could climb as high as $1 trillion.

It's amazing the duds these people can come out with. This is one case where bipartisan outreach is really, really not a good idea.

Changing odds

The Economist, in its special report on the future of finance, included a nice little box called "When markets turn". I was quite struck by this point [emphasis added]:

After Wall Street bailed LTCM out, Mr Meriwether quoted his colleague, Victor Haghani, on how other firms had traded against it: “The hurricane is not more or less likely to hit because more hurricane insurance has been written. In the financial markets this is not true. The more people write financial insurance, the more likely it is that a disaster will happen, because the people who know you have sold the insurance can make it happen.”

It was an example of something that Mr Soros calls “reflexivity”. Once people come to believe that house prices never fall, they will buy too much property—and house prices will fall. When they believe that shares always do well in the long run, they will buy too many shares—and the market will do badly for years. When funds believe that diversification always pays, they all invest in the same exotic instruments. Diverse markets suddenly have something in common: the funds that have bought into them.

People often talk about financial markets as if they were casinos, but reflexivity makes them much more dangerous than any gambling den. The numbers on a roulette wheel never change, but markets offer no guarantee that yesterday’s odds will be the same tomorrow.

I haven't seen this said anywhere else, and it makes a lot of sense to me in terms of financial fads and the nature of bubbles. The report discusses the inevitability of bubbles quite a bit and this is a nice encapsulation of why they're so unavoidable. In these cases, every good idea is a bad idea when it becomes universalized, and competition dictates that good ideas will be universally applied.

quick thought

I'm way too swamped with a cappella right now (our ICCA quarterfinal is in a week and a half) to really write anything of any weight, though I have what seems like eight hundred tabs open of interesting things I want to read and discuss. Just a quick thought about the House Democrats' stimulus proposal.

I can't imagine it's going to play well that they're taking money out of future Social Security funds (by reducing withholding) for stimulus now. I know the CW is that we have to handle this now and then we'll deal with the long-term budget and entitlement issues we're facing, but I have the feeling the Blue Dogs as well as many Republicans will be all over that.

I'm not even sure how I feel about it. I'm inclined to agree with The Economist when they say that now is the time when the government will have enough political capital and leeway to start handling these problems as part of an overall economic strategy, and furthermore that showing that these issues are being taken seriously will help revive investing and general confidence.

Russia's economy not looking so good.

In words and pictures

Here is a very important post about the potential Big Three bailout, the real vs. shadow economies, and the places that built this country into the economic juggernaut we all believe it to be. It's beautiful and the photography is, too.

File under "didn't see it coming"

Iceland is on the brink of financial collapse. We're talking grocery stores not being able to import pasta anymore, old-fashioned bank runs, the works. The currency is currently ranked just above Zimbabwe's.

Frivolous musings

Well.

Seems the British have to bail out one of their banks for 150 billion pounds (or about 300 billion dollars). All those behavioral economists and cognitive psychologists must be right that we measure our happiness by how we compare to others, because knowing that British taxpayers are paying out about as much as we are just now makes me feel better (when it really shouldn't).


Also, while I truly appreciate Dr. Montgomery McFate's work in bringing social science to the army (anthropology in counterinsurgency, for example), right now I honestly appreciate her name more. I mean, come on, it's like someone straight out of Watchmen.

Eek.

At the Banking Committee hearing today, Chuck Schumer—not generally known as someone who is tough on Wall Street—asked Hank Paulson a reasonable question: why do you need $700 billion right now? You said you were going to use about $50 billion a month; so why don’t we give you $150 billion now and then come back in 3 months?

And Paulson simply refused to answer the question.

H/t Balloon Juice.

Long form links: financial crisis edition

More on Lehman's end game:

This isn't like Y2K, when if computers were still working at 1am, you knew that they'd survived the test. If AIG (AIG) hasn't collapsed after New York markets open and the broader stock market is down less than 5%, all that will mean is that there hasn't been a systemic meltdown yet. It's going to take a long time to liquidate Lehman and unwind all of its positions, and nobody has a clue how that's going to play out. Specifically, there might well be a levered-to-the-eyeballs multi-billion-dollar hedge fund or two with enormous Lehman Brothers counterparty risk, and if they start defaulting on their derivatives contracts, delayed contagion could spread very quickly indeed.

It's not just hedge funds, either, which could end up being the vector by which crisis is spread. It could be a big insurance company, or it could be a series of failures of small and medium-sized banks. Or it could come out of left field entirely: the "shadow banking system" is now so big and so global that for all we know a series of bad decisions by a mid-level technocrat in Kazakhstan could precipitate cataclysm across America and the world.

An interesting point from Tim Duy.

"...the Fed has already pushed their legal boundaries; some would argue they have stepped well beyond those boundaries. And it hasn’t stopped – the Fed expanded the collateral it will accept in repo operations, putting taxpayer dollars at risk in a less explicit manner (I see no legal justification to open a credit line to AIG – if them, why not Ford or GM?). Still, despite the Fed’s creative efforts to date, the crisis is moving to a stage that is simply too big for the Fed; Congress needs to step up and define the parameters of any mass bailout of the financial sector. Some version of the Resolution Trust Corporation is the most likely outcome. I suspect that taxpayers will ultimately absorb significant losses, but it will be a crime if such a bailout does not entail a radical reevaluation of financial regulation. But to what extend will Congress be willing to perform a hard look as an industry that has brought the illusion of wealth that hides gaping and undeniable equity flaws in the US?"

http://www.nytimes.com/2008/07/16/business/economy/16econ.html?_r=1&th&emc=th&oref=slogin

Good. I think Bernanke (Ben Bernanke, Chief of the Federal Reserve) is right on the money here in explaining why speculation (basically trading on what you think the future price of oil will be, which drives up prices in reality too) is not necessarily pure evil and insisting that energy prices are fundamentally about supply, demand, and the growth of the world economy. Other solutions--get rid of speculators, drill off Florida, gas tax holiday--are either demonstrably unhelpful or dealing with symptoms rather than cause. It goes like this:

-Gas tax holiday: remove the federal gas tax for the summer. All that happens is that since it's cheaper, people buy a little more gas, and the actual monetary benefits go straight to oil companies. It's a temporary non-fix and it helps consumers not at all.
-Drill off Florida: oil companies already have acres upon acres of of land they're not using and even if they did drill off Florida the (miniscule) price benefits--we're talking like maybe a few cents' difference--wouldn't show up for years anyway.
-Crack down on speculation: oil speculators can do what they do precisely because demand for oil is so inelastic--which is to say, people don't change how much gas they buy that much based on price variation--which is a consequence of how dependent our society is on oil. We could stop speculation and oil might get cheaper, but sooner or later we'd be back at square one and antarctica would be completely gone this time around.