29 August, 2011

A long comment in reply to an interesting thread

From Fabius Maximus, of course.  For this to make sense, the thread here: Our fears are unwarranted. America is in fact well-governed.
I’ve been using the sheep analogy in my classes for years. Most don’t like to take its implications seriously. It also contributes to a tendency to give up and submit in those rare instances when a group of committed individuals can make a positive difference. (There are more opportunities to make a negative difference–but not all that many of them, either.)
Regarding some other comments:
“The species as a collective may have a good deal, but it is far from optimal for most individuals.”
Evolution is about the survival of groups. If it selected the optimum for individuals, we’d be immortal.
“Our leaders incite fear to build support for policy changes. … They will steer America away from the rocks because they own most of it.” – FM
Be careful not to assume “our leaders” are American–or think of themselves as American–let alone public officials. In a globalizing world, you get global elites. Global ownership. Global interests. If what’s best for the elite(s) is to allow some particularly stupid and needy sheep to die in order to maximize wealth extraction from the herd as a whole, it may be a regrettable but rational move. This may also include culling the flock.
“You have an overabundance of confidence in the competency of our ruling class to steer the boat.”–ruralcounsel
Sometimes that seems like the best hope for something like a liberal republic. If the some elite(s) in power really screw up, in a liberal republic there is a relatively nonviolent mechanism to co-opt more competent critics. Moreover, in the long run a sense of personal reward and personal control among the sheep (read “rights”) encourages more production, and thus more to extract. When that breaks down _and_ the elite(s) can no longer govern themselves–a situation we are increasingly in today–some counter-elite with greater self-discipline and competence still emerges, within or without, to replace the failures.
But the transition is usually a lot more messy.

05 August, 2011

What we don't know can't hurt us. Right?

As if the written provisions of the PATRIOT Act weren't bad enough, Danger Room | Wired.com reports

Two Senators have been warning for months that the government has a secret legal interpretation of the Patriot Act so broad that it amounts to an entirely different law — one that gives the feds massive domestic surveillance powers, and keeps the rest of us in the dark about the snooping.

“There is a significant discrepancy between what most Americans – including many members of Congress – think the Patriot Act allows the government to do and how government officials interpret that same law,” wrote the Senators, Ron Wyden and Mark Udall. “We believe that most members of the American public would be very surprised to learn how federal surveillance law is being interpreted in secret. ”"
Of course, most Americans--and most Senators--don't care.

04 August, 2011

Ideas have consequences

Especially economic ideas. For example, what we assume about discounting the future--whatever we assume--likely leads to error. It does, however, clothe our assumptions in the image of "science."

Mark Buchanan - Bloomberg:
Pretend, for example, that we want to see if it is worth creating a costly marine sanctuary that could take many years to establish and even longer to effectively protect a population of endangered salmon or cod. The costs of the sanctuary come mainly in the first years -- the expense of setting it up and policing it, as well as perhaps millions of dollars a year in lost fishing revenue. The most important benefits, on the other hand, may come in the distant future. Even if the fish population might increase 100-fold, creating a sustainable fishing industry 500 years from now that is far more valuable than today’s, economists would discount the advantages coming in those distant years almost to nothing.
*************

[But]...Geanakoplos and Farmer find that the correct formulas for discounting over long periods don’t follow the textbook exponential form. The math is tricky (I’ve put some discussion of the technical stuff on my blog. But the consequences are not. Using a standard model from finance for interest rate movements (with an average rate of 4 percent), the authors show that, for the first 100 years or so, their correct form of discounting gives results that are similar to those that come from traditional calculations. But at 500 years the standard exponential discounts the future not just a little too strongly, but a million times too strongly. And it gets worse after that.
Going back to the example of the marine sanctuary, and using the Geanakoplos-Farmer formula, you find that the present value of benefits 500 years from now gets multiplied millions of times compared with the standard analysis. A thriving marine ecosystem in the future, linked with a much larger fishing industry, might well be worth investing in today.
In effect, today’s standard economic methods make the distant future count for almost nothing. And those who always thought this seemed hopelessly na├»ve turn out to be right.

We really need new ways to think about economics.   Several people are trying to create them, but these people not only have serious methodological problems to overcome--there are entrenched interests  that profit from keeping our indicators and analysis techniques as they are.

03 August, 2011

Telling it straight

One of the nice things about quality financial writing is it not only tells you what's going on, it does it in a clear and personal way. If I want to know what's going on, I usually find more value in the Wall Street Journal than the New York Times, and FAR more than anything coming out of Washington. This is because if you are financial advisor--and you're not "too big to fail"--you need to tell your clients the truth as you see it.

A good example of this is a recent letter from Oaktree Capital Management to its members. The letter was posted online by Oaktree (here), and it's pre-"compromise," so I assume I can now quote a couple of paragraphs. (If I'm wrong, let me know and I'll immediately remove this post.)
One of the most striking aspects of debt in the modern era is that little if any
attention is paid to repayment of principal. No one pays off their debt. They merely
roll it over . . . and add to it. Thus credit ratings are highly deficient (shocker!) in a way
that few people talk about. What ratings describe isn’t the borrower’s ability to repay
principal, but its ability to make interest payments and refinance principal. But the
assessment of their ability to roll their debt – likewise – isn’t based on an ability to repay,
but rather to refinance again. So ultimately the security of capital providers stems not
from the borrower, but from the continued willingness of other capital providers to roll
debts in the future. (It was their occasional refusal in 2007-08 that caused the worst
moments of the financial crisis.) 
With no one asking how debt could be repaid, nations were allowed for decades to
increase their deficits and debt non-stop relative to their GDP. And then, in the first
quarter of 2010, the little boy stepped out from the crowd, took note of the
emperor’s non-existent new clothes, and said “Hey, wait a minute: Greece will never
be able to repay even the debt it has, forgetting that it takes on more all the time. Its
economy is non-competitive and stagnant, and tax compliance is non-existent. They
shouldn’t be able to borrow.”

That’s all it took. Greece was denied further credit. And then people took a look around
peripheral Europe and saw more of the same. Today, although the situation is nowhere
as dire, they’re also looking at the U.S. and some of its states.
The entire letter is a thirteen page pdf, and well worth a read.