Lemons problem

Moral: Wherein we nod to an Ivy school (not Harvard), in the form of Sanjeev Arora, Boaz Barak, Markus Brunnermeier, Rong Ge, for offering insights about financial games that are remarkably accurate, in our opinion, and really bear on the issues (12/11/12 -- see: FAQ, at Princeton).

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The title? Yes, if the buyers know that sellers only have 'lemons' (not, in any way, disparaging the wonderful fruit), then buyers will not buy (without heavy discounts) and the game ends. To whom will sellers sell?

Did we not see that with 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).

Liquidity left; the economy dumped. What happened?

Big Ben, and his ilk, put savers, and taxpayers, on the line to provide a huge pile of wealth so that these idiots would get back to their gaming. And, folks, we have not yet unwound from that. The chimera's rise is due, essentially, to our monies being offered to those who crapped on the economy (diaper changing, folks).

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The 'lemon' concept is used in a very timely paper that covers some of the issues brought by computational support for finance. We have harped about that (many times).

(ACM Communications): Computational Complexity and Information Asymmetry in Financial Products. Abstract: Securitization of cash flows using financial derivatives transformed the financial industry over the last three decades. Derivatives have attracted criticism, but others say problems with derivatives would disappear with use of more accurate financial models, more vigilance by buyers and better governmental oversight.

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The authors talk about financial derivatives, their use, and the troubles. The example derivatives are based upon mortgages, which is a timely subject. The use, supposedly, is because we can: modern environment, global scope, computers, mathematics, oodles of money, lots of suckers, and so on. The troubles?

Well, they are several, and we'll get technical about these later. For now, let's just itemize them with some comment.

• The lemons problem - as mentioned above, this problem is why auto dealers offer a warranty. And, we might add, states enacted 'lemon' laws.
• Complexity - ah, dear to our hearts, as undecidability lurks, everywhere. I like the example that they use for intractability -- which then leads to the decision problem, as how can you decide when you cannot compute? Oh, intuition? Yes, folks, as an aside, one job, in the future, will be trained intuitionistic overseers (ah, have we not tried that from the beginning? - no, the computer turned things around - think quasi-empiricism and Chaitin, et al). But, in particular, they show how it is much easier to check an answer than it is to actually find an answer.
• CDOs - as a form of derivative (remember, Buffet said that these things were WMDs) for which there may be some value to we, the people - and, not via our bailing out the idiots. They talk tranches (trash, as we explained earlier).

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Their conclusions? Well, for one, how do you determine that you're not getting crap, after the fat cat 'cherry picked' out the best? That is, the 'wedge' (difference between what the banker who wants to sell you junk thinks something is worth and what you can discern with your limited information) can be complicated to discover (actually, we deal with this type of thing as a general rule (such as, measuring progress in any of our endeavors), yet do so well when the cards are not stacked against us as we find with the current financial game).

In short, ex ante, even with the best of efforts, is not 20-20. We know that. One solution? Simple living folks driving our money system - it can be done (the military personnel who put their lives at stake are an example - not the best and brightest).

Then, transparency (no, dark pools, idiots -- by the way, this needs attention, too).

Even, ex post can be a problem. Yes. Who the hell has gone to jail out of the rogue table?

The paper is well worth the read. We'll go back through this whole thing, with some technical focus (adding to M&M and ergodic states).

Remarks:

06/11/2013 -- CDOs and tranching, once again.

12/22/2012 -- Fair and open actually used in a WSJ article.

12/13/2012 -- In the 12/11/2012 Remarks, the use of barbarian was in the context of either migratory (or invasive) movement of people from one locale to another with the result of the populace in the receiving bit of land undergoing an adjustment that could range from minor nuisance to major upheaval and death. That, then, motivates a look at why there might be migration, such as being forced. Turns out that the Wikipedia editors have done a good job of collecting the instances that we know of: Diasporas.

12/11/2012 --  Rick asks of the new barbarians from a historical perspective. ACM Communications, this month, interviews Sanjeev. The issue is locked, however this FAQ covers the topic very well.

01/01/2012 -- Recently ran across the work of Kazimierz Dabrowski. We need to pay more attention to his theory on development. Yes, CEOs (and other takers) as immature (seriously, so).

12/05/2011 -- It's interesting how idiotic the supposedly smart can be. The real issue: the failings of an idiot have a small influence; the failings of the 'real idiots' has wide impact (and, in so many ways). Somehow, we muddle through.

08/30/2011 -- Essentially, we have financial piracy.

07/12/2011 -- See Salem Commoners for a continuation of the theme. Also, changed 'Jaime' to 'Jamie' (oh yes).

05/31/2011 -- Lil Timmy. What a guy!

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

05/28/2011 -- We'll put avatars to more use than just being glorified (hyper-dimensional) icons.

05/27/2011 -- It's good to see others raise questions: why are the too big still doing crazy things? Why were there not prosecutions? ... It's disconcerting to hear that the feds (as in our elected officials, and their appointees) allowed (are allowing) the bank's sleight-of-hand in order to not 'rock the boat' or to keep the ease for the fat cat (miscreant aristocat).

05/25/2011 -- What they're talking: How do we control financial sleight-of-hand, which may even be unconscious, driven by humanness? Is the 'lemon' the norm in finance (and its gaming)? We have to learn how to 'engineer' truth, thanks to the growing prowess of computation in the hands of the idiots.

05/25/2011 -- The referenced article is under controlled access. However, here is an editorial review (appears in the magazine as a one-pager right before the article) that is available.

05/24/2011 -- How many times did we hear bankers say that they weren't going to lend? Despite all sorts of jawboning. Well, we could have nationalized (what does that mean?) the game more than we have so far with the hands-off approach (oh, they're adults, can self-govern - hah!!)? Their not lending is like the kid who takes his ball and won't play the game (so obvious, yet do we see any embarrassment, at all, of recognition on their part of their immaturity?).

Modified: 06/11/2013

Hedge funds

Moral: Wherein we carry forward a look at the privileged, especially those who have taken advantage of Ben's largess.

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After all, Ben has sacked the savers for several years now, letting people like the last man gain at the savers' expense.

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Look who is at the Las Vegas meeting on 'hedge funding' this week, according to Market Watch. Yes, indeed. As a reminder to everyone, these things got their start to help those who have big pockets to grow them larger.

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Ever heard that any of this type are after sustainable growth? On the contrary, we could probably gather a whole lot of support to show otherwise. The main theme seems that these people want special deals, such as opaque transactions, and a whole host of other questionable practices.

A commenter (WalterScott) has it right: The Danish theoretical physicist and mathematician Niels Bohr looked at the problem and concluded that only people with inside information to act upon can consistently make winning picks on the stock market. So what you need is a connected hedge fund manager, or a very lucky one.  (bold added on 01/20/2013, see about Steven Cohen who was at the above-mentioned meeting) 

I would add, a clever one who can skirt the edges of the legal without getting caught and prosecuted or of the ethical without worry or dilemma or of the moral without suffering any conscience pangs. Yes, there are these type; there are those with money; technology evolved to allow manipulations; politicos are mere mortals; hence, hedge funds exist.

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The politicos are in this crowd, for good reason. Money. Notice the names (attendees) who are political.

Now all of that would be fine, if we had term limits and removed the career politician.

The way things are now, it pays for the politicos to belly up, how else to feed their hunger for money (the symptom? salivating when a buck is passed beneath the nose).

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Mind you, the 'way things are now' include fiat money and a whole bunch of other systemic problembs (providing handles that allow the fat cats to exploit the working people). For instance, putting money into speculating on oil can cause the price of gas to go up. In essence, price being set by other than supply and demand. Pro: US Newspaper Con: Seeking Alpha Mixed: Davies at FT

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As said in the prior post: hedge funds are for the rich; ponzis are for the poor. They both have smelly feet; the hedge funds are accepted since the money needs (or thinks that they need) their services.

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Caveat: there may actually be some reasonable use for hedge funds. However, none are apparent at this time, to me. Yet, I'm willing to consider the possibility further. Such as this: wouldn't it be nice if a never-losing hedge fund kept Social Security in the black?

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New attitude: Above are pointers to a Pro and a Con position on a subject. This will continue. Some have used the fact of no clear answer to exploit the system. How? By embedding what are systemic risks, essentially little hooks, that allow regular extractions to their pockets. Then, this has been done under the aura of intellectualism (flim-flam - even, to the Nobel level -- prize winner using rule-of-thumb when it counts, not his high-falutin' mathematics); the whole problem exacerbated by theory, and practice (namely, computational-ism), without mature rationality, and sense, ever getting its chance.

Remarks:

01/20/2013 -- It's been almost a year since any remark and almost two since the post. Of late, a post on busyness and silliness looked at some issues. The recent Business Week had something interesting article (Steven Cohen, of SAC Capital). Some employed in the business have misgivings about their ways of doing things. One talker, under questioning, was asked if he knew of any hedge fund that was clean, or above reproach using the old concept (as in, no shady dealings). No, he said. They could not survive, otherwise. It's like doping.

01/15/2012 -- It is or It is not. Jobs, labor, and disrespect.

06/15/2011 -- Said it before; we'll get into it again. Hedge funds are for the rich. Ponzis are for the poor (their hedge funds). How many characteristics match between these two (hedge fund, ponzi)?

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

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

Modified: 01/20/2013

Milking the system

Moral: Wherein we promise to use subjects other than Big Ben for awhile as there are other things of more importance.

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Retirement? What does it mean? Yahoo Finance had an article today (there is a regular series) about 10 issues that need attention. We'll look at a couple of these later on.

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Mostly, though, let's look at some of the comments.

In particular, there was this ('pa' denotes new paragraph) that relates to milking the system:

• Yep, I saved nothing. I will be living of the taxes produced from your savings. Your savers are suckers. I got to enjoy my life with my fancy cars, large houses and exotic vacations every year. When I retired at 62 I took my SS and declared bankruptcy. I was able to wipe out nearly 300k of credit card debt and a 550k home loan. (pa) Now I sit here in a nice condo that I bought using credit off the cash advances using a shell company. I paid nothing for my 1 bedroom condo near the beach on Hilton Head, and live very comfortably on my SS check. I sit back and enjoy life and all those goodies I bought on the credit cards that I stored for retirement. I have a 60 inch flat screen tv, surround sound, leather couches, brand new furniture oh and a 2004 BMW all paid for with cash and funneled through the shell company I set up in 1995. It was a long planed out process with lots of credit card shuffling and using all of my income just to pay the minimums. When they raised the minimums I was easily able to file bankruptcy. When the judge asked why I was so irresponsible, I blamed the CC companies for continuing to send me cards. (pa) Play the system people. I now have a fully funded retirement on SS, with no real expenses going out each month I enjoy my life walking the beaches and playing golf with friends. (pa) I have since met a nice lady whom I now live with, between my $1,803 a month and her $2,249 we live a really nice life. She also was one who saved about $100k and so we have a really nice emergency fund. We eat out 3-4 times a week, enjoy movies, golf, and the clubs. It is such a pitty you guys all seemed to struggle and not enjoy your life, only at the end of it to still be suffering due to debt. (pa) My advice to the young. Spend every cent you earn and then work on a plan to expand your Credit. Once you have racked up as much as you can and your income no longer supports the minimum payments, file for bankruptcy and start the process all over again. (pa) Keep on putting some nice purchases in storage for your later years. Then keep it all off the books buy opening up a shell company and hiding from your creditors, as they are too stupid to look much further than your own SS number when filing for Bankruptcy. USE THE SYSTEM TO YOUR ADVANTAGE....

Was that tongue-in-cheek? Wait, before replying, see below.

Makes one think about those who took money out of their houses, in the just past days of malfeasance'd finance (from which we have not recovered), for profligate living. Then, when the houses went underwater, many just walked away leaving a mess for those who had to handle unwinding the mortgage-related paperwork.

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Ben, tell me, since you sack the savers (your guys are into our pockets deeply), is this the type of economic behavior that you want to reward with your easy money (realize - there are those who put their lives on the line for these types)?

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Now, the above comment raised some discussion, including a reply from the original commenter.

• You sound like a thief.
• Yes, you sound like a mini-Madoff. Perhaps someone who is in law enforcement will take your logon and start an investigation and you will be living in a one-bedroom 'condo' overlooking the prison yard. And who knows, perhaps someone who really likes you (I mean really, really likes you -- you know - wink, wink) will share your living space and you can flip flop instead of wearing flip flops. But sadly, you will still be living off the taxpayers.
• (original commenter) Nope just somebody who works the system to my advantage. It is totally legal to file bankruptcy... You sound like a jealous person...
• Bay Boomer? Right?
• You took advantage of the system! It's people like you that put us in the debt situation that we are in! Living off the taxpayers. I hope you drop dead!
• Amoral, scum ... and probably also lied in the OP.
• You're obviously a former [snipped slur]
• This guy brags about having no morals whatsoever!! This may be a good reason to reinstate debtors prisons.

It's good to see that most of those who responded noted a problem with this logic.

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Yet, one has to think that this might very well be what the best-and-brightest are taught (tell me otherwise, Professor).

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In fact, much management effort is just this: getting something for nothing by sacking the suckers and the doers.

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Folks, this is one example of why near zero needs to be better understood (yes, even you can learn this lesson, Warren).

Remarks

12/22/2012 -- Fair and open actually used in a WSJ article.

09/21/2011 -- On Wealth and the CEO MVP.

05/17/2011 -- Golden sacks, by Rolling Stone.

05/13/2011 -- Yahoo Finance says that the sheriff is back. Good. Too bad that Spitzer had feet of clay.

05/11/2011 -- Insider trading conviction. Some say that this won't hamper anything as the money to 'too big.' Well, how about changing the context, and use, of trading? Matt Nesto somewhat suggests this. We all know that what has evolved is merely ca-pital-sino, essentially. Other panelist (the cynic), Minyanville.

05/10/2011 -- Not picking on Warren, but this is a nice little analysis. One thing to note is that there are other connotations of 'intrinsic' value which we'll have to get to at some point.

05/10/2011 -- As of 1338 EDT, now there's 14 replies to the comment. The reply above, that was snipped, was removed. The overall number of comments is 122 with this comment hitting the button and getting the most replies. Nice little piece of prose, even if fictional.

05/10/2011 -- On milking, is this not what the Street does daily? Are not those who run the system those with their hands deepest into the pot? ... Even if this were fiction, its threads represent real occurrences. That is, an interesting task might be to find events that are similar to what was written. ... But, back to milking, this would be an example of the little guy's take. Our reality is that those who can take do so in very much larger amounts than this story relates.

05/09/2011 -- Out of 15 replies to the comment, as of 6 pm EDT, about four mentioned that this story cannot be true (will the real commenter please stand up). But, this diversion does raise some interesting issues. For one, how illegal is any of the described? How many have seen themselves behind bars (other than Made-off) due their actions over the past 4 years? How many walked away from homes without any lasting mark (what business head saw justice?)? The mention of debtor prison points back to times when morals were supposedly definable and enforceable. Are we not now in an era where anything goes (if you're not caught), since the basis is gaming without much oversight (ruthless winners adored - Warren, et al)? For two, the commenter is bragging about $4k per month with a cushion of about $100. As we all know, a serious medical problem could eat into that cushion quickly. Too, all of the collectibles would require some type of maintenance (or replacement) in the future, causing another set of payouts that could be huge. ... Even if this was sham comment, it was a nice little aside. ... By the way, registering guests is one way to control little fictions such as this one may have been.

Modified: 12/22/2012