Risk and rationality

Moral: Wherein these two concepts play heavily in economics, and finance, in several ways. So, they are worthy of some attention.

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First, let's look at a couple of recent media offerings. On the print side, today, McClatchy Newspapers provided some words about how gambling laws might help dampen the effects of the games related to derivatives. Earlier, on the tele, I glimpsed an ad for an investing class where the theme was a clever take on the differences in risk taking, that was observed, between male and female students. Now, this latter has been discussed in several forums, but Laura's take is worth a read.

So, we are reminded that 'casino capitalism' has been allowed to become the basis for the economy, for reasons that we'll be looking at in depth. Too, those who may see that near-zero is the reality are pushed aside for several reasons, of which gender is only one.

Both of these topics are extremely important to our future, risk and rationality. About 'risk' we can say a lot, especially that it is inherent in life, to wit, the monies paid by the big boys to manage it. That the idea has been pushed to the limits of rationality needs some discussion.

Somehow, we hear this inane spiel about the rewards going to those who take the risk. Ah, yes (gains go to the pocket; failures are bailed out and mitigated). That nonsense goes back to the argument that getting out of bed is risky. Well, staying in bed is risky, too. Risk, in this sense, ought not be the focus as risk always is there. Okay, perhaps, some notion about managing risk's effects is appropriate, yet, a real accounting of the types of pain is what needs our attention. It has never been done right.

Oh, things are great? Millions are out of work and without any meaningful life? The fat cats bask in their bonuses, even thinking that these are appropriate? And, those working buy junk from China, assuming that they have money? Extremest luxury for the smallest few is accountable as progress in what sense? (a small sampling of thousands of possible questions, by the way)

Economics, in the classical sense, stressed 'rationality' from its beginning. Well, we can, and will, go into the etiology of that notion. For now, just be aware that economics getting biological (to wit, neuroeconomics) portends that some fundamental changes are coming. Too, we are only at the start of the computational influence. There is a whole lot we'll learn, even to the point of getting an appreciation for innumeracy (is not idiocy!).

When one considers ourselves, what is a rational view founded upon? That is, do we really know which neurotransmitter mix is optimal? Is that why we stress the mental IQ and associated performance (hey, isn't that what's behind the best-and-brightest labeling?) measures?

Or, is rationality tied to mathematical prowess (some economists seem to think so)? Well, can that be done on other than a quasi-empirical basis (think borgs)? Oh, are mathematics and its ilk (er, practitioners) any less subject to influences of the neuropeptidergic nature of ourselves than the rest of humanity (think mole hills)?

Well, to be fair, the argument is usually couched in terms of rational self-interest. However, underdetermined-ness is an important concept to consider in this context that is not easily tossed aside.

So much to discuss.

Remarks:

12/06/2013 -- If only Ben would put a shot across the bow. He's helped the chimera unfold in unhealthy ways. He could, at least, say a mea culpa.

03/11/2012 -- We need to update this, especially with a nod to Alan M. Turing.

11/21/2010 -- Three years ago, it was said: Computational foci raise miraculous need. Still applies.

02/10/2010 -- We could probably use the auto (and recent events) as a way to characterize the concepts of the blog. Of course, we have the value versus quality mis-think as part of the problem. Business Week reports that Toyota was asking suppliers for a 10% cut. Well, such scrimping would have an effect, even if it was only in looks. However, cutting into the life of a system may appear smart but, actually, relies on the same unstable basis as does a lot of economic thinking.

12/01/2009 -- The consumer as focus.

11/30/2009 -- Neuropeptidergic limitations are only one consideration for our basis.

Modified: 12/06/2013

Profits are what? Or, Gravy train II

Moral: Wherein we diverge, a minute, from the slow trek toward a position that is reasonable, and well-founded (knowledge, imperatives) with regard to that which everyone would hope is fair and just, and that honors Adam Smith and other thinkers; we pause just to ponder a few things.

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Such as profits and other illusions associated with the cap-ital-sino and its gravy trains.

Why ask about profits? A recent Vanity Fair article discussed how the Irish are paying more through the nose than are the Americans (though, it is debatable when you think of the largess of Big Ben to business (hey, guy, some of the supposed little folk are as capable and mindful than are those who are milking the land of honey -- one difference, 'tude!) and of the mountains of debt being pushed out to the future generations), for the dumb (outright stupid, okay?) actions of those who were handling the monies (and who have no sense of 'on the behalf of"). Yet, the Irish are not complaining about their huge burden or about their stalled economy. Well, in the article, some old banker is asking a hot-shot about expected returns which were in the double digits (of course, before the fall and bail out). The old guy said, how is that? Meaning, of course, that long-term, sustained returns for a good bank would be not far above 5%.

Anything above is suspicious, non-sustainable, and downright anti-human. Yes.

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Gosh, any saver can tell you what it is like to be sacked, thanks to Big Ben.

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What are reasonable profits? Mind you, before you answer, many occurrences of large returns may be accompanied by luck (hence, not repeatable), malfeasance (Made-off is only one example, cooking the books has many connotations), and other deleterious characteristics. Show me an honest firm, working within the constraints of near-zero, who has sustainable success beyond a mere generation or two?

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But, other things go into obtaining profits, such as outhousing and the like. Too, we have pushing the boundaries of cutting (see Toyota, as an example) so as to reap returns. Many times, such reduction methods can push toward a serious reduction in quality.

Why is this of interest? Well, a recent experience, involving a Sealy sham, brings this to the fore. Does diminishing of repute mean anything? At some point, one would think that good will would get chewed down to the bone.

It seems that jumping from a defensive mode to that of attacking the consumer is the preferred approach. In a sense, turn a blind eye to problems. At the same time, institute insurmountable obstacles for rectifying failed items.

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But, as we know, generally, out-sized returns happen daily. From where I sit, many of these are being pulled in by those who run things. Is that not crappy or what? Gravy train? Or, those involved have some special situation (as in, the global elite) that allows the money to flow like a huge river.

Perhaps, some type of balance is obtained if those with the dough turn around and offer a benefactor's hand to the less fortunate. I wonder if Buffett could take time to discuss, and look at, a sustainable economy (I don't mean more for your pocket, Warren)?

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It is obvious that some type of insight goes along with the luck. Can that be taught? Well, plenty seem to think so (there are many buying the training, many offering the training). Too, the reward may go to the risk, yet there is risk and risk. What we have seen, more than necessary, is risk spilling over to others, of late. In fact, what risks can be associated with our mortgaging the financial lives of those to come?

Remarks:

07/22/2015 -- Some of these are, now, poster boys.

05/17/2011 -- Golden sacks (leftmost mug of the rogue table), by Rolling Stone and Daily Ticker.

04/20/2011 -- Simple living (see Remarks 04/15/2011 - game theory), as opposed to greediness.

03/23/2011 -- The hopes spring, again, forgetting, of course, near-zero, all because of M&M. See the real story. But, Big Ben ought to know better.

03/16/2011 -- On the rise of the professional politician (will there ever be the citizen polico? that is, those who do not salivate when a buck is passed beneath the nose) toward robber barony. The M & Ms are apropos. As well, need to bring in Schervish's viewpoint.

02/24/2011 -- People matter.

02/16/2011 -- Ah, yes. The morning's paper has a couple of stories that we'll have to expand upon. We did miss the 'nationalization' chance two years ago. Too bad.

• NYSE's moves -- as the thing says, computers run (rule) the realm. Which means, essentially, the fat cats, and their techie wizards, collect their fees (huge sucking machine).
• Golden sacks -- speaking of fees, and windfalls (Gravy train?).
• Middle class -- disappearing act

Both of these are only a small sampling of many things that ought to be looked at.

Modified: 07/22/2015

Big Ben redux

Moral: Wherein we consider that our use of Big Ben (does have some appeal: sits proudly in the skyline, wakes up now and then and bongs, towers over its architectural mates, etc.) might be too casual since it is used in reference to someone whose chief role is to keep our beans safe, provide stability, and keep bankers in control.

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So, after a congratulatory nod, let's look to the future.

We may begin, shortly, with another moniker for Mr Bernanke who has an important role to play (actually several roles). Poor guy, as his task may be impossible, from the getgo, due to issues of fiat currency.

Let us ask? From whence comes Ben's wisdom? To what direction does he turn for guidance? Theory? These are important questions as he deals with an entity that is inherently dismal.

Ben was confirmed yesterday for his second term. Perhaps, now that he's not following another (Lord Alan), doesn't have to worry about the next time (not for a few years), is independent, and continues to want to do a good job, he'll raise the rates and listen to the little people.

Even though the Fed Reserve was set up for the bankers (fat cats, by definition?), this might be a chance for Ben to set history straight.

We are starting a new series, soon, that will look at the Fed, its place in history, bankers (can we ever get away from them?), the current situation, how we got here. We'll look at the Fed's actions over the past few years, and much more.

Thanks to Congress, we can use Ben's newly obtained position, again he did it on his own, for an analysis that is essential.

At DAVOS, it is said that sustainability is a key idea.

• How about some attention to 'sustainability' notions for finance (meaning, keeping our beans safe)? Seems to me that the mental gymnastics needed for a 'greenish' view can lead quite readily to dropping the 'ergodic' myth behind the efficient market mania that perpetrated the current messes (ca-pital-sino, indeed). We always have real problems to resolve, yet we've allowed a couple of generations of the best-and-brightest to essentially run us off the cliff through 'un-managed' gaming.

We'll look at asset classes thoroughly, in a new light. We agree with Volcker's assertion that banking needs to be split into the utility (piggy bank) and investment (sandbox). But, we disagree with the view that risk being rewarded is the prime concern for Ben and any of us dealing with beans, not without some qualification.

Would you have wanted your mother to risk your butt (unnecessarily) when she was carrying you? Oh, that doesn't apply? We'll go into this thoroughly (philosophy of economics).

We can apply insights from Minsky (Oops and truth) and, perhaps, quantify a spectrum that is usable. In this regard Ben needs to educate himself on the need for savers to know that they will have when they need it. That is, 'risk adverse' is not stupid; the analog here is innumeracy which, again, supposedly is stupid (well, we intend to show otherwise: the numerants have muddied the waters and pilfered the till).

Okay, savers got sacked by Big Ben, continue to get sacked, and are considered unessential. That is a basic economic error, folks. We'll show this. As, risk can be managed only so far, then it needs to be avoided; so, gaming has to be cordoned off into its own sandbox. What will this look like?

My hope is that Ben's re-up vote will motivate him to lead a re-educating process in regard to things economic. Actually, jawboning about these issues is one of his roles.

Remarks:

03/23/2012 -- Ben is doing a series of four lectures on his, and the FED's, role.

01/27/2012 -- Ben will continue to sack the savers; he must love the ca-pital-sino.

01/19/2011 -- For the most, things are dire, not by necessity.

09/02/2010-- The FED just had their hoe-down.

05/14/2010 -- Oh yes, smartest guys in the economy. Thanks, big guy.

03/20/2010 -- Big Ben says that bailing out the big banks was (or is it is?) 'unconscionable' yet was this not what he did?

02/01/2010 -- NYTimes reports that AIG's shell game wasn't on the fringe. Ben said no. Wake up, big guy. Please do your second term with your eyes open to keep them stupid capitalists in line.

Modified: 03/23/2012

Systemic risk

Moral: Wherein we continue the Quants series.

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We're not picking on these lowly workers; no, the intent is to get at the motivation behind the scene. What is that? Well, it's essentially a "license to steal" (concept has been used before) that seems to have become acceptable, if enough money is behind the thrust and if a market ideology is overlaid as a cloak.

James Fallows (Atlantic) says that Dr Doom (who has some good news) likes Timmy's work. After all, as the NY FED guy, he (Timmy) was talking systemic risk way back in 2003. Perhaps, now he has an opportunity to do something rather than just jaw bone.

Just to get the discussion started, one big piece of systemic risk is the rapid growth of types and kinds of computational resources being applied to support markets. Ah, you say, they could not work without the computer.

That is true. Yet, in many cases, those who provide the service hide behind a proprietary wall. Just remember how Madoff pulled off his feat. Too, that high-frequency trading (see Remarks: Wait! More exposures: "computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else's expense." To anyone who isn't at Goldman Sachs or the like, does that appeal to you as the way that we ought to be handling our beans?) is seen with such glamor, with a hint of respectability, suggests something.

Where the heck has common sense gone?

Every day, there ought to be an accounting of the markets that has some meaning. No, not just some figure like the closing DOW. Actually, something like a SOX for the market is a good analogy, yet we all know the grief that that initiative spawned. And, did it prevent this current mess?

Who can do an accounting? Does the FED know its own balance sheet? How can they know the economy's?

Oh, too, the markets are 24/7, you might argue. Ah, is that so by necessity? If we use a biological metaphor, what complex entity does not sleep?

Actually, probably as much effort ought to go into accounting and scrutiny as it does into efforts as maximizing the sizes of some pockets. We can probably use those media who watch (another example) as an example, yet it needs to be a deeper look.

Well, it's obvious that the accounting will be computational. So, there is no reason to take this as the grumblings of one who is anti-progress.

The problem is that the computational is new, non-intuitive, and run by wizards. All of this allows lots of room for exploitation and mischief.

Did I mention mis-used mathematics and theoretical flim-flam? That, too. Of course, truth engineering suggests that there isn't an easy answer (see Remarks).

Or, let's look at it again: Some statements in this blog deal with the Philosophy of Science (here's another nice little rundown), in particular as it applies to one issue contended by mainstream economics against the Vienna school: Critics of the Austrian school contend that by rejecting mathematics and econometrics, it has failed to contribute significantly to modern economics. Additionally, they contend that its methods currently consist of post-hoc analysis and do not generate testable implications; therefore, they fail the test of falsifiability.^[5] Austrian economists contend that testability in economics is virtually impossible since it relies on human actors who cannot be placed in a lab setting without altering their would-be actions.

Ah, falsificationism, but what does that have to do with making oodles of money by the best-and-brightest (see Goldman's Town Hall)?

Well, we can start with lessons to learn. One is that some things are undecidable no matter how much computational power is thrown at them. Therefore, they need considered thought (and voting - ah, not necessarily by a market game!).

Somehow, the PDE aura allows some type of pass on reason (ah, fairy dusting).

Remarks:

01/15/2015 -- This week, this post is getting read. Great! Nice little piece of work (kidding, in part) so many years ago. ... At last, a series that will establish the basis and extensions, as required. We are going to go back to some simple and come forward to the modern, complicated economy. Why? My long chain of ancestors (inherited via Prof. Lucio Arteaga) is one motivation.

12/06/2013 -- If only Ben would put a shot across the bow. He's helped the chimera unfold in unhealthy ways. He could, at least, say a mea culpa.

01/27/2012 -- Ben will continue to sack the savers; he must love the ca-pital-sino.

10/10/2011 -- If the OWS wants specifics, there are plenty to list.

02/01/2011 -- The chimera shines.

10/07/2010 -- Several principles need to be explored, such as the ergodic one.

05/07/2010 -- Out of control, essentially, and not healthy for the backbone.

02/10/2010 -- We could probably use the auto (and recent events) as a way to characterize the concepts of the blog. Of course, we have the value versus quality mis-think as part of the problem. Business Week reports that Toyota was asking suppliers for a 10% cut. Well, such scrimping would have an effect, even if it was only in looks. However, cutting into the life of a system may appear smart but, actually, relies on the same unstable basis as does a lot of economic thinking.

01/03/2010 -- More news on Goldman Sachs as the uber example of 'not on the behalf' comes to fore regularly. It'll need to be a separate subject at some point. Thanks to McClatchy: Nov 1, 2009 & Jan 3, 2010 (update). Goldman has to respond, of course.

12/15/2009 -- Requiem for the dollar (WSJ) and responses.

12/03/2009 -- Rationality and risk. Need a new look.

10/05/2009 -- Ah, yes, on the behalf of.

09/15/2009 -- Lessons, one year after Lehman. Also, Time on culprits. Ben is happy-talking, again.

09/09/09 -- We'll need to look at UUUN, as a framework.

09/04/2009 -- It has been decided about Ben, the saver sacker. We still need to discuss the overarching metaphor for the economy. Quants are it!!

Modified: 01/15/2015

Tranche and trash

Moral: Wherein we go back to the basics to show a few things. Yes, to three hundred, or so, years ago.

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We have to set the context, first. Tranching, under the guise of securitization? Silly games. What is tranching? Why silly?

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For the 'what is' part, Wikipedia has a good overview. Essentially, something that has value is cut into pieces to be sold. Each of those pieces can be rated as to risk and payback which we know are reciprocal, in a sense. That is, to the risk taker goes the spoils; this is a long running concept in the western economy, seemingly being the essence of capitalism.

In terms of rating, some type of contrivance is thought to be smart (idiotic, really). Let's say that the thing of value is low in rating (meaning, highly unlikely to be successful - okay? -- or, junk, in the words of people like Milken). Yet, tranching will attempt to lift out something that is AAA. Well, of course, that comes about from the pockets of those buying into the junk.

Not to be long winded here; look at the wiki page. But, the question has to be asked: who thought that this was a step forward? Who would buy such junk?

You see, therefore the notion of 'why silly?' comes forward?

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Firstly, the whole mechanism rests upon mathematical, and technical, advances of the past three hundred years which really accelerated around the 2000 year change. These are not as unproblematic as some would allow us to believe. That, of course, relates to the quasi-empirical nature of what we can know, even by mathematics.

We can also propose that those who want this type of chimera are those in position to milk the situation, via continuation of the scam.

As an aside: is it not scary that behind the derivatives, and other, markets is just such type of flim-flam?

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Secondly, the approach tries to spread risk amongst several players. Yet, the underlying basis is not improved thereby. Assume that I have $7K. If you loan me $93K, I'll have $100K to play with (this a nod to Little Jamie, as opposed to Big Ben). But, is there, for me, really any more than that $7K?

The leverage is way out of line, except if there is a certainty in winning. That, folks, is one key which we'll get back to. For now, realize that if there is loss, leveraging amplifies the downward movement.

Please note, too, that all this stuff demands some type of accountability and bookkeeping. That is another area open to manipulation (via the book cook).

Tranching would split things into various layers and get buyers (probably by some overly optimistic selling) for these. Yet, does the reality become stronger thereby?

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Thirdly, the whole money system seems to be based upon this type of insanity. We have funny money (whose value come about via jaw-boning). Who has clearly shown that money cannot have a physical basis? Is not the confusion from fiat money used to exploit the situation?

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Fourthly, as said before, we go from one craze to another with reality becoming more bleak for the many. Too, moral hazardousness seems to be the thing that is reward. Why? Surely, it is not because we need the distraction, as entertainment.

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Fifthly, we have that which appeals to the abstractphile (lover of the ephemeral). Such as, the M & M concern. For what it's worth, Milken (see Remarks 06/17/2009) thinks that structure is important. Or, things like the ergodic hypothesis wherein we see stability as the norm.

There is no end to the source for these concepts. Are they ever put to test? And, financial engineering has not met the challenge, yet.

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Hence, we will pause to use George Berkeley's thoughts which, by the way, are very much apropos. Now, Weierstrass may have banished the 'infinitesimal' in an operational sense; he did not remove the motivational dynamics. This residue, folks, is what we see now behind the madness.

Remarks:

08/13/2013 -- Yesterday, we mentioned that President Obama wants to change the mortgage arena.This seems like a good opportunity to start a look back. One would hope that those who are in charge of the changes know the intricacies of why we have idiots running things now. If not, we'll attempt such an analysis here. Idiots? Yes, such inconsistencies of tying up money for 30 years, at a low interest (without acknowledging that taxpayers allowed this to occur in the first place, early on for veterans coming back from WWII). There are others things like this that seem so like chasing after the perpetual-motion machine. Finance, built upon bogus money, has no way to ground itself, essentially. So, let's start with Investors II.

02/12/2013 -- We ought to have nationalized these guys' playground.

06/05/2012 -- We have the cause wrong?

05/28/2011 -- Tranche on tranche, okay! If it has become apparent, this blog tries to attain a sound, naturally expressed (as in phrasing that is understandable) rendition of something. Tranches, trashy as they are, were thought to be some epitome of the best-and-brightests' schooling in mathematics (hence, flim-flam). Give us a break!

05/26/2011 -- This post appears to merge the concepts of leveraging and tranching. Well, folks, I'll be more careful in the future, but consider that the 'lemons' article talks about CDOs being built upon CDOs being built upon CDOs. Okay? Can you tell me that the motivation behind tranching is not to allow further leveraging (that is, raising the multiplier)? As I was writing, I assumed a position that would try to cut through these layers, looking for the basis. That is, at any point, something would collapse to what was behind it (which would be a fractional amount). You know what? I would bet that noone can say what is the basis at any point. OR, are not willing to admit publicly for many reasons, one of which would be to not look stupid. But, the nose knows when it smells stinky stuff which this whole financial apparatus apparently is at its core. So, again, tranching is trashy in many cases. When ought it be allowed, and what would be reasonable controls?

05/24/2011 -- Lemons problem, dark pools, ... Oh, so much to look at!

04/14/2011 -- We ought to have nationalized the bunch. Cowtowing to them (thanks, little Timmy) reinforces their egotistical notions of their necessity and worth.

04/03/2011 -- On the 7% example (second bullet), some will quibble technical issues, much as multiplier effect, margins (upon what?), etc. True, enough, I'm using a broad brush. However, consider my example a gross approximation that bounds your technicalities (why? ergodics, man!). One of our problems will be defining a more solid (yes, or gaseous - based upon some type of matter) basis for how we account for wealth (and our beans) in a manner that gets away from the house-of-cards (and its gravy train). Another is the sand-box. There are many more, of course. Let's, at least, enumerate the more compelling.

04/03/2011 -- Changed the title to 'Tranche and trash' for reasons to be explained (earlier, Tranche and truth). But, first, some background.

Modified 08/13/2013

Ben's Lectures III

Moral: Wherein we continue with Ben's look at the mess and its aftermath (do we want to know what roles contributed to the problems and the lessons to be learned by those involved?).

---                       Lecture 1, Lecture 2, Lecture 3, Lecture 4

Foreword: Today was the 3rd (on youtube, transcript (pdf), slides (pdf)). The first two lectures were on 3/20 and 3/22. Material (video, transcript,slides) are available at federalreserve.gov (media center). There will be one more after today. These are being hosted by the George Washington University School of Business. The following are notes and comments that were taken while watching the third video today. See earlier Lecture posts for background.

Note: Since both the transcript and the slides are available with the video, the below notes are terse entries to jog my memory later on. Ben did a good job of talking about the crisis, gave his side of many of the stories (information not available through the press), and supported the actions. He used 'ad-hoc' several times which is in his favor. He expressed the distastefulness of what they had to do (I agree). Next time, he'll talk the future.

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Notes (italics, my aside, sometimes with links - times are clock - CDT):

Last time, we heard about the onset of the crisis. Today, we'll hear 'what he did next' from a prime player.

Ben reminded of the context, the 2008 financial crisis. Too, there are two responsibilities. For the financial stability task, the thing is to act as lender of last resort. For the economic stability task, the focus is on monetary policy, principally interest.

~11:47 -- recap on vulnerabilities (see Lecture II), there were both private and public
     private -- too much leverage (result of the long-going moderation?), exotic securities
    public -- gaps in regulation, even fannie & freddie
      they pioneered securitization, using morgages for packages, but f & f' got to where
         they operated without adequate capital, and other problems that portended problems

     (this was seen, by many, long before the crisis --
                     it would be interesting to list those discussions)

        also, f & f' started to buy packages from others, of unknown value

        on triggers     mostly non-standard mortgages
              payments assumed rising house prices, anytime re-financing (post a year, for example)
                many types, ARM, option-ARMS, too long term 30+ years,
                      even negative amortization

         showed a couple of ads, one offered this: 1% start rate, for a year, only needed to
                   state income (no documentation required), 100% financing, interest only
                           (get this!) debt consolidation (put together your credit card and other debt
                                           rolled into the mortgage)

    so, these things were packaged and sold into the financial market
                    (2011 - Tranche and trash, 2007 - Tranche and truth)
             CDOs - combined mortages, and others
               then tranche'd, which leads to complex and opaque entities
                   these were given AAA (see below)

      sold to pension funds, foreign banks, etc.

~11:57 -- AIG (got special attention several times), used other derivative types
                         to insure these above, which amplified the risk
         
               the AAA?, partly through negotiation

            (essentially, junk offered) large basis for the crisis

     what is a crisis: some illiquid event, causes loss of faith, then panic (runs)

      2006, 2007 - mortgages started to fail, shifting the ground under the securities
             actually, not large losses (compared to movements on the stock market)
               but, no one knew was responsible for what
                        (too, leveraging brought into the securitization scheme)

        during the depression, 1000s of bank failures, small
          2008 Bear Stearns (mar), Lehman Brothers (sep), Merrill Lynch
              and mae and mac (propped up by Treasury)
                   AIG, Washington Mutual Bank, Wachovia (oct)

        for a depression, central bank needs to lend, also be accommodative

            2008 vigorous action by Fed, also G-7 (Oct 10)
                    shows interbank rates, went up (2007), then down (after Oct 10)
                       didn't trust each other 
                (hah! worse than the lemons problem -- "... the recent affair where the 
                       bankers (and other financial types) essentially froze their gaming 
                        as they knew that they were dealing mainly with crooks 
                            (like themselves) ...")
   
      Fed, discount window, longer terms, lower rate, auctions
               new programs, and collateral for loans

      enhance stability, allow availability (didn't work)

     emergency authority already in the law (13-3)
       banks, broker-dealers, paper borrowers, money market funds, asset-based securities
                     that last, consumer credit

        mmfs     buy shares, invest in short-term assets (commercial paper)
                     $1 share price
                 not insured         on demand, plus interest
           90 days, non-financial (payroll, inventories), financial (manage positions)
       lehman created a shock-wave, was into cps, plus mortgage, comm real est securities    
                                    lehman  both cre and mortgage hits
               withdrawals, ..., no new capital, so bankruptcy
                      even Fed tried to help

     mmfs failed their $1, hence redemptions (run or panic)

        Treasury, Fed provided backstop, ..., run ended in a few days

            about billion a day outflow

             mmfs started to drop cp which went into shock
                   cp rates went up    
              so Fed again     bolstered confidence
                   cp rate peaked, then recovered

              mar 08, bear stearns to jp morgan
                  oct 08, fed bailed out AIG
                       AIG said that they would insure what were bad securities
                            (no doubt, all sorts of bonuses for this crap)

               AIG did have collateral, 85 billion

                      Fed repaid, but Treasury own stock
                             distasteful, not to set a precedence

~12:34  too big to fail (will go into next time)
                trying to end this                      

    gdp down 5 percent     manu 30 down       homes 80 down
             serious collateral impact (yeah, savers sacked)

                      8 1/2 million out of work            global slowdown
                threat of a Great Depression

                 it was worse, the policy response seems to have worked

       indicators: stockmarket, 29, 07    truncated timeline, essentially
                         (yet, moral hazard still there - too, we have not
                                un-wound from the computational influences)

             15-16 months, stock price recovered, in U.S.
                       (so, what does this mean beyond aeration?)

           industrial production,        large v,  versus short, less deep v
                       (we'll id the slides when they're out)

~12:39       aftermath next, recovery, change, lessons

questions:
-- why the bad mortgages with high risk? --
      too much confident about prices going up
            1 year, then re-finance            
      demand for the securitized product
         ever-clever finance,  (he said that) 
             took the mix, then engineered AAAs (something from nothing)
               kept the bad pieces or sold
                of course, [would try to] sell them off [if there were a problem]
     it was profitable (short term, yeah bonuses)

-- volcker rule? --
       will talk about this next, reduce risk, prevent banks from doing
             proprietary trading -- legitimate exceptions (hedging, make markets)
               how to keep exceptions in control?
        liquidity - trading volumes  (he sees as important!)
               contagion - sell offs, lower price, puts pressure on those
                     who still hold

-- global collaboration, G-7, bail-out of AIG? --
            some inconsistencies, say Lehman UK and US,
              complexity is that something too big to fail might be international
                    how to help them fail safely?,
       said ad-hoc, no lead time was problematic
            cooperation between federal banks
               some use dollar funding
                  swapped dollars for euros (still in existence)
             coordinated cuts on same day in 08
      cooperation will be an on-going issue

-- off-balance sheet vehicles? --
       accounting rules, create vehicle, bank might own part,
           limited control, so separate organization, to get away with less
                 capital, ..., rules have been re-worked, need to be
            consolidated and put on the books

-- large firms, too big to fail -- how do you decide? --
             no doctrine, judgment on size, impact, etc.
            reform is to get rid of this     bad, unfair, etc.
        said they chose the least bad thing to do
       tried to be conservative
         AIG was obviously in need,
           Lehman was insolvent, couldn't borrow from the Fed
               was before TARP, there was no way to do the lone
         ad-hoc, again
            now, they'll have to assess how critical some bank is
                size, complexity, inter-connectedness, etc.
       on merger, will it create a more dangerous situation?
                numerical thresholds need to be determined
          if bad, no merger
     more focused on stability, group working on metrics, etc.

-- vulnerabilities, ratings, buyers would want better ratings,
             why these didn't come forth?  --
     you would think that it wouldn't be the seller who did the rating
             the buyer bears the risk,
         free rider problem, how to keep the work secret?
               better incentive for credit raters
                 investors would have to save the cost,
                      not want to give it away

Remarks:

12/13/2012 -- Don't know how long this page will be there, Daily Ticker. But, when I looked, 69% had said 'no' (hurt rather than helped) as to whether Ben has helped.

04/03/2012 -- Response 1.

03/28/2012 -- New page covering the series and its material.

03/28/2012 -- Distasteful? Many are saying that (Romney, et al). However, we could have NATIONALIZED the idiots. Perhaps, we ought to have (we would not have been any worse off). Of course, Ben's mind cannot grasp that notion. He says 'ever-clever' finance. Well, their antics hurt the rest. Why is that type of thing allowed? He says accounting is to blame. Who works to monitor/limit the 'smart' idiots and their tactics that lead to inevitable messes? How about having more mature approaches as the standard? Hey, Harvard!! You there? Oh wait, you left that realm in the mid-1800s, right?

03/28/2012 -- Added links. Will update when transcript and slides are available.

Ben needs to think about how he's sacked the savers (they are legion) over the past few years just so that he could get his pseudo-capital markets back up into an inflated mode (as if the ca-pital-sino, as evolved, is it for us). Ah, big guy!

Too, he's looking only at junk via mortgage packaging. Big guy, there were other types, and you know it. Plus, leveraged buyouts have been part of the scene for a long while. In many case, wrecking havoc, in the small, that is much worse than this slowdown which came from silly games.

Modified: 12/13/2012

Why not?

Moral: Wherein we ask 'why not? which question can go a couple of ways. We're going to look at one of these. Actually, there is a third that is the mantra of the toddler learning about its will, that of others, and boundaries (say, good behavior), but we'll not go there either.

---

The query could indicate an awareness that something ought to be done or to happen, say like realizing one suggestion from the President's speech. Stay in school and be a good student (as good as you can be). Or, why not build a new plane with entirely new processes and material, that is, re-position the decision framework on an unknown center plus relax constraints along about all decision axes? In other words, the little engine that could. Or, why not pursue globalization? That's not the focus, for now.

The query could relate to reasons for something not happening, such as causal analysis tries to effect. Oh yes, risk analysis tries to do this before the fact. That use is what we're going after in order to pull together some 'un' words with a coherent message. For instance, 'undecidability' has be thrown about here, thanks to its use by the Vienna School. And, 'underdetermined' has been used, mainly due to its usefulness in resolving how we think about several dilemmas. We need to add 'unpredictable' as the risk people don't seem to know the concept.

Let's try this sequence of using these concepts (U U U N, unfortunately, not as meaningful as TANSTAAFL) in order to explain why these have appeared as well as to start discussion about what their applicability means to our difficult situations. There are other orders; this one seems to have some power for explication.

• Unpredictable - Actually, this ought to be used for the fact that we have no a priori knowledge of how events will unfold, for the most part. Of course, some stable events recur without our involvement or worry. For instance, days succeed one another. Yet, how many lost their wealth, and income, of late due to some idiocy (not necessarily their own) that can be explained? Do we know of any problematic programs? Say, has weather forecasting in your area been 100% on (whatever that would mean) this past summer? That the quants have run off after their stochastic taming attempts we'll be looking at further. That CAE folks have broken the rules of map/territory differentiation is another variation of mis-handling of that which this sequence denotes.
• Underdetermined - Well, what does this mean? We can use the wiki definition. Since predictability, and its complement (ah, is that so?), are figured using mathematics, albeit a subset dealing with things called statistics, let's use that type of story here. Basically, if we have a series of equations and unknowns to be determined, we like them to match in cardinality. That is, if there are too few equations, then we'll have to sort out the extra unknowns by various schemes (assumptions, swags, etc.). If there are too many equations (too few unknowns), then we're on the other side of the bad boat. The case, with computational modeling, is just this. Too much fudging (sorry, techie folks, but the truth has to be told). Also, note that we talked about unknowns. The equations would contain variables, to boot, whose definition and handling can be problematic.
• Undecidable - Now, we have to mention Turing's, and related, work, briefly. Then, we can just discuss the issues involved with the complicated concept, in general. It is more than just a computation problem, as we see from Hilbert's query. To shorten a potential long story, we can say that some issues are not related to time, sequence, or any type of order. Yet, we can always re-frame things to be decidable, within limits (meaning choice, allowable error, etc.), of course.
• NP (Nondeterministic polynomial) -- We're using this to introduce complexity. You see, even re-framing does not guarantee some solution unless we're exceptionally good (which some people are) or lucky (again, we see this). Yet, it's the computational aspect that is troublesome, such as using approximation, heuristics, and more. Why? We have had many of years to learn about human dynamics; yet, there continues to be intractable problems. Adding in the computer just exacerbates things incredibly. But, for thinking of complexity in terms of using the computer for solutions take the chess game. Well, that little game, on a small board, is highly complex. Something as seemingly simple as checking if two circuits are equivalent is, to boot.

Having gone through this, can you see other orders? It's the chicken/egg thing. For instance, 'undecidable' might be made the basis, with incompleteness being a key thing. The order, shown in the list, comes about since we're dealing with things that have gone awry due to our immaturity with using computational resources.

One could suggest a decision framework based upon this order that is operationally effective (with a bow of acknowledgment to quasi-empiricism). By the way, with NP at the core, how can we proceed? Ah, that is the essence of truth engineering's contribution.

But, this question of 'why not?' and UUUN ought to be part of the program management vernacular, and jargon. So, we'll continue this next time.

Note: An important concept will be separability. On predictability, some say, well, the sun will rise. Sure. But, weather was added in for this reason: will it be clear enough to see the rise? You see, NASA faces this problem all the time with shuttle launches. So, various windows of opportunity can be identified, with some ranking of certainty. Yet, the operational scheme is to be ready to take advantage; and, how many times does weather cause a mission delay? Now, if the parts of engineering that relate to business would just go back to their true framework, perhaps some of the hubris would diminish. The issues of underdetermination, undecidability and NP are important just because predictability, as a highly mathematicized approach, can be easily mis-used. Too, people play power games in these complex situations where someone who fails to solve an essentially intractable problem has his head removed. Sheesh. How the hell can we expect to learn without failure? Those who try and fail ought to be honored. Except in this situation that is very much apropos for mention and current: playing silly games with other peoples' monies in a risky fashion is verboten, by definition. Because of near-zero, we ought not even honor those who win. Stupid game, folks.

Remarks:

01/15/2015 -- This week, this post is getting read. Great! Nice little piece of work (kidding, in part) so many years ago. ... At last, a series that will establish the basis and extensions, as required. We are going to go back to some simple and come forward to the modern, complicated economy. Why? My long chain of ancestors (inherited via Prof. Lucio Arteaga) is one motivation.

03/11/2012 -- We need to update this, especially with a nod to Alan M. Turing.

10/07/2010 -- Several principles need to be explored, such as the ergodic one.

12/08/2009 -- Consider current CEOs in relation to Paul. Not fair? Well, these guys/gals have set themselves upon some supposed plane that is above the rest of us.

11/29/2009 -- Rationality and risk. Need a new look.

11/08/2009 -- The gigantic chimera needs proper attention.

10/16/2009 -- 201K <-- 401K --> 25601K, this denotes the current financial gaming.

Modified: 01/15/2015

Greed vs simple living

Moral: Wherein we look at greed in a framework that ought to be familiar to Big Ben.

---

One question: Is greed mostly a New Testament concept? Well, there are some who use the Torah as the basis for discussing this human trait.

---

This could be considered Some Background II as we look how the smarties have packaged trash with the intent of selling it to us as being of value.

---

Why the question? I heard it said that 'greed' is largely running rampant, thereby causing havoc. I beg to differ, somewhat. Greed is always there.

So, what is different? Besides, of course, the idiocy that claims that 'greed is good' and the best and brightest are allowed to be greedy, without any limit.

---

Let's look at Kaku's opinion on the future. Or, we can discuss the opinions that he collected from talking to a bunch of scientists (see book).

By the way, he's the string theory guy. He makes some broad claims. And, he did this despite knowing how afar from the target have been almost all prognostications since the beginning of time.

---

However, Dr Michio does mention two trends. Now, remember that these are not new, in any sense, except for how we look at them.

There is the trend to peace and health (ergodic theory applies here). Then, there is that which is chaotic (which is behind the risk management mania as well as a new type of engineering).

Now, to use the Biblical thought, would that not be the angelic and demonic principles in their eternal conflict? Is it not nice that one convergence is toward worldviews that show how true are those old concepts?

---

One difference? As mentioned many times, mathematics and computation. And, remember that we have essentially dumbed ourselves down in order for these tools to work.

But, is not the zombie state of those entranced with the LED-lit (or other) screen not unlike some type of state of spiritual rapture? Except, we know how to quiesce this (remove the power from the device enabling the enrapture - yes, as in pull the plug).

----

By the way, Big Ben, all this is because of the season for both (of course, there are more than two) of the major worldviews that revolve around the Bible.

---

We're, today, in day three of the five gaming days. Every week, it continues. Winners and losers. Yes, people, where is the discussion of the basic truth of near zero? In fact, Big Ben's largess to the fat cats which is sacking/soaking the savers is one big example.

---

But, what can Big Ben do? I mentioned before that he's heavy into the equity index game. And, to think that he is expected to be independent in thinking. Anyone remember when he ran scared (yes, 2008/9 time frame) and loosened the book of our beans for the fat cats to feed on without any constraint (or, does anyone even care?).

---

Is it not remarkable that in 2011, we're still arguing age-old problems? Well, considering that each generation learns anew (and parents know the travails that can come from their kids -- examples abound -- some kids even exalting in trashing the past -- but, we did that as a country here (in a sense) in the revolutionary times (ah, how many atrocities could be attributed to the patriots), if we only knew?), what else can we do? Now, given the question, we'll now have to venture into these realms. You know? Big Ben does not have to care. Like King Alan, keeping those in power, and in the money, happy is sufficient for the guy.

Remarks:

07/22/2015 -- Some of these are, now, poster boys.

09/19/2013 -- All's not lost. Some accountants see a change that is problematic. But, first, savers are more than just risk averse; they put their actions where their mouth is by being prudent. Now, that was once considered a virtue; in fact, one could argue that it was expected for fiscal responsibility. However, some claim that accounting has removed prudence in lieu of theoretical nonsense leading to annual reports that are incomprehensible. Actually, the computer can make things such, too, so the whole bit that underpins our world seems to have been given a shaky basis (on purpose, to allow rooking the people? - or, through stupidity?). Of course, the side that argues that prudence is quaint (well, it seems to be for quants) is vocal, too. But, we have China asking prudence of Ben and the Fed?

02/12/2013 -- We ought to have nationalized these guys' playground.

10/11/2011 -- If the OWS wants specifics, there are plenty to list, such as this one. Can we only resolve the grabby-ness problem with an amendment (like the 13th) for the rights of workers (folks, employment is not unlike indentured servitude (you sign over your rights when you agree to the onerous nondisclosure rules) in many ways as it is now defined) plus a Magna Carta equivalent to give the big pants (egos) something to think about? Why is finance about greed? Rhetorical, in part, but only because those with money have defined the game. We can show how smart/non-greedy peoples can run this show, no matter how complicated some might think that it is. And, it would demonstrate what 'markets' are meant to show.

09/20/2011 -- This will be used in our constructive effort.

05/29/2011 -- Fair dealing, can that be brought back? Was it ever?

05/17/2011 -- Golden sacks (leftmost mug of the rogue table), by Rolling Stone and Daily Ticker.

05/09/2011 -- Savers are suckers?

04/21/2011 -- When 250K isn't enough? Flimflam & swindle.

04/19/2011 -- That systems thinking has led us awry is obvious. Answering why this is so is the task.

04/15/2011 -- Daily Ticker quotes the New Yorker on the wealth gap: the top 1% of Americans own 1/3rd of the country's wealth. That is, 99% share the remainder.

04/15/2011 -- The IEEE Spectrum has an article that talks game theory in an accessible manner. The example starts with the failure of Steve Jobs' demo of the new IPhone, last year, which was attributable to the many mobile hot-spots that were collected in the room. Essentially, selfish action is expected. We see this in finance where the best-and-brightest are allowed a favored spot at the trough with the result that they become fat cats. There will be a post soon on this. As these related blogs have argued for a concept which could be characterized as 'simple living' (which takes note of near zero) as that need to bring the dismal realm of the economy into a more humanly oriented state. Yes, indeed. The antithesis of the fat cat is what we need to run our markets and to care for our beans. And, those who grow to be huge giants ought not, in most ways, be honored or emulated. Lesson: for any of those who have accumulated hugely, how many bodies were left in their wake? Then, is there any amount of retribution that they could offer (yes, the philanthropist's dilemma - recompense) that would account for those who were thusly sacrificed.

04/14/2011 -- Golden sacks. Where to start on these people? 

04/14/2011 -- We ought to have nationalized the bunch. Cowtowing to them (thanks, little Timmy) reinforces their egotistical notions of their necessity and worth.

Modified 07/22/2015

Ben and Timmy

Moral: Wherein we let someone else talk about Big Ben's and Little Timmy's culpability in raising the ca-pital-sino nature of the big chimera.

---

Ben and Timmy, two of a kind.

---

Seeking Alpha has a real good read on this. Note the use of 'narcissistic males' in the discussion as to things that drive toward the awry (oldest profession - see Remarks 08/03 & 05/2011 -- head butting -- somehow, this has morphed into what risk is all about - as in, that risk that gets the reward - the second oldest profession - yet, which is first? ).

---

Please note, this post is not an endorsement of the viewpoint (Quants) expressed at the 'seeking alpha' site. However, the post being referenced does say a lot that is right.

Remarks

07/06/2012 -- Today, we have the one-year remembrance of George Edward Kimball III (GEK III). 


03/23/2012 -- Ben is doing a series of four lectures on his, and the FED's, role.

03/05/2012 -- In Timmy's own words.

01/27/2012 -- Ben will continue to sack the savers; he must love the ca-pital-sino.

12/05/2011 -- Now, he's giving money to Europe, on the backs of our savers.

09/27/2011 -- Yes, Ben, keep steering us toward those who pick the pockets.

08/16/2011 -- Big Ben treasonous?

08/13/2011 -- Banks still struggling. We could have taken them over.

08/10/2011 -- Weird stock market. Removes all arguments for the legitimacy/sustainability of this financial mechanism; that is, how ought this be done in a civilized, sane manner?

08/10/2011 -- Down 600+, then up 400+ (due to Big Ben's group having their meeting -- and continuing to poke it to the old folk), then down 400+. What is stupid here? People actually trying to find some rhyme and reason to this madness. Let's look at an example company that shows the results of the excesses of the past decade and that demonstrates how the consumer suffers.

08/09/2011 -- Historically stupid (sacking the savers through 2013 --- giving our money to the fat cats who 1) got us into the mess, 2) has sat on their bucks to the effect of keeping the economy dampened, 3) made easy money off of Ben's largess).

08/08/2011 -- Oh well, Little Timmy is staying. Anyone for a DOW of 8K?

Modified: 07/06/2012