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).

---

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).

---

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.

---

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).

---

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.

---

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

---

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.

---

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.

---

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).

---

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

---

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.

---

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?

---

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.

---

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.

---

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.

---

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)?

---

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.

---

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

---

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

---

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

Ben, Ben, ...

Moral: Wherein we consider that Big Ben really does not understand.

---

The big guy said yesterday, among a whole lot of other things, that he was going to keep the interest rate low for a long time. Yes, the guy is actually quite adamant that he would rather continue to sack the savers (trammel the old folks -- and hock to the hilt our future generations) than to cause the Street people (of all ilks) any grief in their daily gaming of the money system.

---

I have wondered motivation, truthfully, but learning that he's into index funds sort of answered the why. Not entirely, though.

Ben, you're the man. Obama could have removed , but did not remove, you when there was a chance. Are you not ever going to talk ethics to these people?

Of course, how would things have been different with someone else? We'll never know.

---

As as aside, being an oracle must be some type of existential peak, with most (of certain types) hanging off of the words of those who play the part, such as Big Ben and King Alan.

---

Nor will we have learned the lessons of taking the nationalization step when it was possible. Rather, those who feed at the money trough just got fatter. In essence, Big Ben carried on with the put that was so important to King Alan.

No doubt, there'll be some big money job awaiting Big Ben after he leaves the FED. My question to him is, will he have left the position with any improvement over the errors of the past?

Some talk about the ballooning FED balance sheet. That move has not helped the savers at all.

What is so important about the savers? Seems that the intellectuals have forgotten. It has to do with the problem of not consuming beyond some sustainable threshold. There are many ways to characterize this, however my explanation will start from the necessity of simple living.

Of course, I'll have lost the interest of the fat cats immediately, since their whole world view is based upon taking (by definition, divinely ordained), luxuriating upon the backs of the many, and much more.

---

I know that these are age-old problems. Also, Big Ben is on the hot seat. And, he has to worry about the reaction when he leaves the position (King Alan was perturbed that his name was taken in vain, for instance) where he will then be exposed to serious ex post facto scrutiny.

---

However, too, how can we get away from funny money that is so easily aerated?

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.

10/24/2012 -- Ben is sticking to his guns. Lucy people like myself will continue to pay through the nose. Thanks, big guy.

04/03/2012 -- Response 1.

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.

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.

08/03/2011 -- Today, the DOW is at 11.7K (hey, let it go to 8K) at mid-morning. Ah, whatirrationality lurks? Yet, Big Ben wants to continue to sack the savers while being ultra-charitable to bankers (like Jamie).

05/09/2011 -- Savers are suckers?

05/05/2011 -- Roosevelt Institute.

04/30/2011 -- FT take on the talk.

Modified: 12/13/2012

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

Some background I

Moral: Wherein we go back further than three hundred, or so, years ago, in order to show from whence the residue (apologies to Weierstrass) that keeps bubbles afloat.

---

Earlier, we looked at our-basis and how that affects our economic selves. That is, what ought to be behind how we treat our beans (current and future)? Too, how is it that the best-and-brightest get us into so much trouble? How is it that they chase after a chimera (albeit, for some, there are rewards indeed - as they get to pilfer, essentially)?

Aside: 3+ years ago, there were predictions of looming failure (we were finding the fiction in finance). There were revelations coming about of trashy tranching. We knew that the idiots had leveraged our futures, but we did not know it had been to the hilt. And, no one got slapped or jailed or even reprimanded (beyond the rogue table). Why? We'll explain that. Too, we learned some of the ways that the finance people are not class acts: George's rant, not fair, culprits, dead peasant. What we saw were people playing with our beans without getting fingered as culprits. No, looking at Jamie's attitude now, it was just business as usual.

---

Let's start from a real early time and leap forward. We'll go back and forth like that for a few posts. George Berkeley is the motivation, somewhat.

Ala Robinson and Poincaré, this is an appeal to the intuition. At the same time, we will not be too inconsistent (nod to Emerson). However, as the argument expands, the intent is to approach completeness as much as we can. Yet, science (the enlightened type) says that we cannot; noting, of course, that those with an operational view don't care.

---

By the way, finance professors, where are these types of basics covered? You know, emphasizing greed (unethics, if you would) is not it (examples abound)?

---

Let's go way back to Zeno (love that guy), namely his arrow paradox.

Aside: if philosophical topics are a turn-off, please read on for a just little. Why? We'll only touch on these things briefly.

The key to this notion is that it's age-old, yet the puzzle continues even to the present day. And, we intend to show that financial engineering has not resolved this issue as it ought.

For those who do not understand why all the energy gets put behind arguments of this kind, we all know that the arrow arrives at its point (with intended consequences if it's path is truth - as in, as anticipated by the slinger of the arrow - er, archer). That's taking the operational stance, somewhat. And, it really is how things get done.

Aside: Philosophers and ilk can deal in the abstract, as someone puts food on their tables. The rich can be idle, as the multitude want to, and must work. Finance folks reap ill-begotten gains because they are allowed to, as others do the real work and suffer from want. At the core of the economy are a whole lot of people doing the remarkable, under dire circumstances and straits, on a daily basis. Has any economic/finance hotshot, or system, ever looked out for the people (and, I do not mean any collection of that thing called the corporate entity to which the Court gave personhood)?

---

Except? Notice how things are going toward the benefit of the geeks and wizards? Why? The pervasive use of the growing computational prowess seems to be unlimited.

Yet, know this, please. At the core of computing is something very much akin to vertigo (the really insightful people know this). Too, the resolution of this deep problem rests upon the backs (and, insights, intuition -- albeit trained, and good sense) of people.

Topsy-turvy is how it has been characterized. Quasi-empiricism, by necessity, is not a bad thing to use for this.

Quants, show me any of you who are insightful in this sense. Please.

---

Now, coming forward, the computational progress rests upon the work of a whole lot of mathematicians, scientists, engineers, and experimenters. Tis true even now, to wit, the profusion of apps (and related effort) upon frameworks that have come out of ideas that were outside of corporate mindset (to wit, social media and much more).

It is to the basic, and residual, effects that we are going to put our attention here.

---

But, we have to set the context such that we can build a picture that makes sense and that suggests how to proceed.

Is this not what we see within the economic realm? Things start, bubble, and then collapse (see

George Berkeley - ghost of departed quantities, indeed)

, as we are all so aware of, given the past few years. And, the effects will linger a long time. Does it have to be that way?

---

In order to build the right mindset, we jumped back to Zeno. We'll now jump forward to George Berkeley (mentioned above) who argued the idealist position. Now, don't get upset with George (after all, we have a University, in California, named after him), as I've heard a philosopher of science argue that the table that we were sitting at did not exist. Of course, he was using the modern parlance and talking boundary conditions. Too, I have heard modern versions of Zeno's thinking casted as jokes for engineers.

Where we are going with this is that there is a strong, trainable, human intuition that has been given no (or little) attention in business schools (actually, the western world's view has thrown this out, for the most part -- except that it has not, rather only a few are allowed to dabble -- we'll get into the necessary role of the autodidact, to boot).

Aside: A few years ago, most enrollments were in computer science. Then, it went to finance. Say what? I thought, at the time. What the hell is there in finance that is so intriguing? Oh, I must have been sleeping to miss out on the shenanigans (give me a break; who would have thought that this idiocy would even gain the light of day?). What is the goal of many students? I saw Business Week with a review (only a couple of years ago) that characterized MBA pursuers. Essentially, it said this: CEOs, we're after your jobs; everyone else, we want to make lots of money (implied: get the hell out of the way).

Of course, the argument for those who agree with this is that the high tide lifts all boats (did we not hear that a lot? Simultaneously, the set of enriched grew their assets rapidly whilst the majority sank into poverty and want. The middle class? Squeezed out, for the most part).

The trouble: each of these succeeding cycle is putting us deeper into the crapper. The past 1/2 century has seen effects multiplied on the event of a downturn. Without due attention, it'll only get worse (ah, let the banks self-police, it was said).

---

So, what is behind a lot of belief, and energy, that goes into bubbles (besides, of course, the aeration by the FED and the like)? We'll get back to that next time, after March Madness is over.

Remarks:

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

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

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

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

05/03/2011 -- With George B being mentioned several times, we need to address, more fully, the notions of adequality and what it means (Katz & Katz, Robinson) in the context of modern computation and its open problems related to certain types of applications.

04/19/2011 -- Some basics need attention, to boot.

04/04/2011 -- We will get technical with things like linear logic. The numerants (opposites of the innumerants - remember the discussions of innumeracy?) have over-laid upon themselves, and us, a choking cloud of numbers that will strangle out our very human essence if we do not wake up and smell its gaseous emanations.

04/04/2011 -- Gross seems to know the bankers well. Note that Big Ben (from our pockets) gave them (while sacking the savers) oodles of free money.

04/03/2011 -- For preparation, be sure to look at the 5 issues to be addressed.

Modified 09/21/2011

Tranche and trash

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

---

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

---

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?

---

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?

---

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?

---

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?

---

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.

---

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.

---

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