The Mugwumpery

While I’m at it, here’s another letter to The Economist, this one on 2009-01-09.  They didn’t print it, altho I got a very nice reply from the science editor.  Maybe I was a little late getting it in.

Dear Sir,

In “Darwinism”, 2008 December 20, you report that people tell
researchers “they would rather be richer than their peers even if
that means they are absolutely worse off”.

It is one thing to benefit oneself at the expense of others – but to
harm others even at one’s own expense, surely that is the very
definition of evil.

Letter to The Economist sent 2009-05-03.  I’m guessing they won’t print it – it’s too far from the mainstream.  (Also, my Hayekian slant is showing; few people get it.)  We’ll see.

Update May 25 – I was wrong.  They printed it in the May 14 issue, with some unfortunate editing.

Dear Sir:

You say (Briefing – Central Banks, 25 April) “The business cycle was supposedly subdued, yet the world is in the deepest recession since the 1930s.”

Indeed.  Perhaps there is a connection.

For many decades, forest fires were suppressed by well-meaning officials.  Fuel was allowed to build up, eventually resulting in far more devastating fires than would have occurred naturally.  Today we allow fires to serve their necessary functions, while making efforts to limit damage to people and property.

I suspect the business cycle, and attempts to subdue it, are much the same – deadwood must be cleared out, inefficient practices curbed.  The economy, like an ecology, is far more complex than we can comprehend; attempts to control it are more than likely to produce unintended results.

From The Big Bonanza: An Authentic Account of the Discovery, History, and Working of the Comstock Lode by Dan DeQuille (Hartford, American Publishing Company, 1876):

CHAPTER LIII. HOW FORTUNES ARE MADE AND LOST

Bulls and bears – Doings of the brokers – On a margin – “Pussycat Tilde” and “Bobtaile” – Going up! – Dealers and dabblers

During the prevalence of a big stock excitement, times are lively along the Comstock range. Virginia City then hums like a Brobdingnagian beehive. All who failed to make fortunes on the occasion of previous excitements in stocks are going to do better this time. They have seen how these things work and this time are going to sell when they can do so at a fair profit. They don’t want the last cent; they will give someone else a chance to make something.

This is the way they talk at the start. As soon as there is a marked advance in stocks, however, they will be heard to say: “As soon as I can double my money I am going to sell.” In three days from the time of their making this assertion, stocks have taken such a jump that they could sell and double or more than double their money. Everybody is saying, however, that they are not selling for half what they are worth; that they will sell for twice or three times present prices be­fore the end of another month.

The men who were intending to sell whenever they could double their money cannot think of doing anything of the kind as things are now looking. Instead of selling they become excited, put up their stocks (which they had probably bought and paid for “out and out”) as a “margin,” then put in all the money they can raise besides and buy as many shares of their favorite stocks as they can in any way manage to secure. Stocks still go up, and each day these dabblers will be found counting their profits. They have invested largely in the low-priced stocks of “outside mines” – mines in which nothing of value has yet been found, but mines in which, all are saying, grand developments are liable to be made at any time – mines, in short, which in dull times are generally designated as “wildcat.” The masses – the servant girls, chambermaids, cooks, hostlers, washerwomen, preachers, teachers, hackmen, and draymen – are wildly and blindly buying these low-priced stocks, and from day to day they are going up “with a rush,” and everybody is getting rich. Our men who only “went in” to make a fair profit now tell you that they made yesterday ten thousand dollars; today they have made fifteen thousand dollars, and in a week or two they will say that they are worth a quarter of a million, half a million, or a million of dollars.

But they are not going to sell yet; no indeed – the rise has only com­menced. Pretty soon stocks fall off a little. Never mind, tomorrow they will do better. Tomorrow they are still a “little off,” as is said when stocks are going down. The next day they are rather “soft,” which is the same thing as a “little off.” However, that is all right. Our dealers – amateur speculators – have some points given them by a friend who is on the inside. A development is about to be made in a favorite mine. The “bears” are trying to break the stock; but they can’t do it; no, sir! – impossible. Too much merit in the mines at this time. All will be up and “booming” in a day or two. Next time you shall see them go higher than they have yet been seen.

Our men who started in to make a fair profit might yet sell and double their money – much more than double it – but they are not going to do anything of the kind. They are going to wait till “things take a turn.” The “bulls” will soon make a grand rally, and when things go up again, our men will sell. They admit that they should have sold when their stocks were all up before, but never mind! they will go to the same figures again in less than a fortnight, when they will be sure to sell.

There does come a “spurt,” and for a day or two there is a cheering improvement in prices along the whole line. Faces brighten and everybody talks of all stocks going higher than ever.

All at once everything is again “soft,” the next day “softer,” and the next decidedly “off.” It is then said that someone in the “bear” interest has been telegraphing to the “Bay” (San Francisco) a pack of lies about the mines, and the “bears” “below” (at San Francisco) have made use of these lies to get up a “scare.” Never mind! the scare will be over in a day or two.

But stocks still go down. Then it is said that some big dealer is “unloading” and there is talk of a “crash.” Still our men who started in but to make a “fair profit” do not feel like taking thousands, when they might a short time before have taken tens of thousands of dol­lars. They still hold on, saying that even though one or two big deal­ers are unloading, the big men among the bulls will “stand in” and take all the stocks that are offered. Also, they will have some points from a friend “on the inside” and developments are about to be made in one or two of the mines that will make all who have sold “very sick,” particularly those bloodless demons who have “sold short.” The “shorts” will have a merry time of it when they come to “fill.”

Thus matters stand when suddenly there comes what looks very much like the beginning of a “crash.” The “bears” are all diligently crying: “Stand from under.” Many persons become frightened and throw their stocks upon the market. Down go prices and soon “soft” is no name for it. The masses – the tinker and the tailor, the preacher and the teacher, the hostler and the waiter – rush in to try to “save themselves” and there is seen a grand and unmistakable crash. Brokers are calling on all sides for “margins” to be “made good,” and men are rushing about trying to raise money to “put up” in order to prevent their stocks being sold at less than cost.

They perhaps raise the money required and for a few days breathe again, when there is a further decline in stocks, and the brokers are again sending notes to their customers telling them that if they do not put up more money they will be sold out. Sooner or later there comes a time when the customer can raise no more money, and his stocks are thrown into the market by the broker – in whose hands they re­main – and are sold. Thus ends the grand speculation.

Our men who at the start were resolved to be content with a fair profit are generally found among the number of those who are sold out, when they are heard to say that if they ever have another such chance to make money they will not hold on for the last cent. They have said the same thing year after year ever since the opening of the Comstock mines. But whenever there is a grand upward movement in stocks, they never fail to become excited and try to buy about ten times as much stock as they can pay for. In this way they lose all except what they may have happened to purchase at a fair price in a mine of real merit.

Today I got an email from Buy.com asking me to review a cell phone battery I’d bought.

Happy with the battery, and feeling like procrastinating for a few minutes, I decided to do it.

I clicked on the link in the email.  Buy.com immediately asked for my email address and password.

Now, which of my 5 different emails did I use for that purchase?  I guessed – wrong, apparently.

So, forget it.  I was going to do them a favor, but now I’m not.

Why do I have to authenticate myself to review a product I bought?  They know I bought it.  They know who I am – they sent me the email.  So why ask again for authentication?  They should have included a unique ID in the link, allowing me to write one (1) review for that one product.

Either some idiot at Buy.com thinks it’s necessary to re-authenticate me (likely following some corporate rule set down by God) or they’re just too lazy to bother to think about the situation.

This kind of corporate incompetence is all too common.

The December Liberty has an excellent article on the origin and causes of the current global financial crisis; probably the best on the subject I’ve read – From Reform to Crisis by Jim Walsh.

There is plenty of blame to go around – like most man-made disasters, the causes are many and interlocking, and certainly no one intended the result.

One of the generally agreed-upon ingredients was the lack of transparency in extremely complex, yet widely traded, derivatives – mortgage-backed securities, SIVs, CDOs, CMOs, CDSes, etc.  The opacity of these instruments made it extremely difficult to evaluate their underlying risk and value, which in turn made them hard to price and trade in volatile markets.

Which is a shame, because in principle the trading of derivatives, even (or especially) complex ones, offers significant economic benefits to society – these will be lost if the current panic results in this market being regulated out of existence.

But the transparency problem does need to be solved.

My friend Fred Hapgood mentioned that this ought to be the kind of problem that computers are good at solving.  He’s right.

According to Walsh’s article:

SIVs and CMOs were pools of standard MBSs sliced up (often into 64 equal parts) and reassembled according to their riskiness, geographic concentration or other standards. In some cases, Wall Street whiz kids would break a 30 year mortgage into individual securities based on each of 360 monthly payments; then they would bundle thousands of the one-month payments into larger securities offerings. Finally, CDOs were pools of CDSs sliced up and reassembled to reflect default risks more precisely.

It’s easy to understand why these instruments are opaque – their risk and likely return depend on that of multitudes of other derivatives, which in turn depend on hundreds or thousands of individual mortgages and loans, sliced and diced every which way.

In principle these factors can be fully evaluated (after all, they ultimately depend on the creditworthiness of individual borrowers, something the financial world has always coped with). In practice evaluation is impossible because it can only be accomplished by pouring thru thousands of pages of documentation describing the assets and conditions represented by a derivative, and then doing the same for each of the other derivatives of which the derivative is comprised, etc., traversing the entire tree of rights back to the individual borrowers.

As Fred said, this is exactly the sort of thing computers are good at.

So, my proposal is that an appropriate regulatory body should define an XML schema to exactly describe the chain of rights, conditions and assets represented by any traded derivative.  Issuers would be required to legally define the derivative in terms of the XML schema, which would be publicly posted in machine-readable form.

The schema would allow derivatives composed of other derivatives to be simply described as a set of links to (or copying of) the XML descriptions of the constituent instruments, with appropriate operators for expressing conditions, time-dependency, etc.

I imagine the regulator would require these XML descriptions to be posted in such a way that a potential trader could find them online in a uniform way – for example, an exchange might maintain a single database with links to the XML descriptions of all traded instruments.

The rest is details.

A standardized XML schema and the single rule that issuers must describe their offerings using the schema should allow automated analysis of arbitrarily complex instruments, all the way down to each individual loan or other asset.  Each trader could do their own analysis, with their own assumptions and rules – the XML data would supply only the definition of the instrument to be analyzed.

It seems to me that this would solve the transparency problem in a robust and extensible way.  Full information would be provided in a usable form before trading.

Since a portfolio is just an aggregation of assets, entire portfolios could be analyzed in the same way – by buyers, lenders, shareholders, regulators, and analysts.  Markets would then be able to sort out, by the usual means, which kinds of derivatives make sense, who is solvent, who is taking risks, and how much.

I’d love to hear criticism of this idea.

It’s the day before the US presidential election.  I’m going to be voting for Barack Obama.

Why?

I appreciate Mr. McCain’s genuine love of country, independence on some important issues, and willingness to confront his party’s leadership on matters of principle.

And I don’t have any problem imagining Gov. Palin in the presidency – in a free country the presidency isn’t a very important role anyway.  The president does not “run the country”, the people do.  The president’s job is to run the government, and Gov. Palin seems unlikely to be worse at that than most of the presidents we’ve had in the last century.

Further, I disagree with most of Obama’s domestic policies.  I disagree with less of McCain’s.

However, Mr. McCain has a reputation for stubbornness, arrogance, and poor insight into the longer-term consequences of his actions.  Probably the best example of this is that, despite being told so in clear terms, he is still unable to understand (or care?) that McCain-Feingold has the effect of limiting political speech and the competition of ideas, rather than enhancing it.

If this were the worst that could be said about Mr. McCain, I’d probably still prefer him to Mr. Obama’s creeping socialism.

But.  Mr. Bush – who campaigned in 2000 on a platform of a more humble, less arrogant foreign policy – has transformed the last vestiges of America’s reputation as an advocate and example of freedom into that of a thuggish, war-mongering bully, trampling the freedoms of its own citizens and a menacing invader and occupier of nations.  And Mr. McCain promises to continue those policies.

As well, the last 8 years have destroyed any claim of the Republican party to stand for limited government, constrained spending, efficient administration, or defense of the Constitution.  After 8 years of such performance, the Republicans simply deserve to lose.

Mr. Obama is clearly intelligent, is said to genuinely listen to and consider counsel, and appears to value reason and pragmatism.

I do hope the Democrats don’t get a filibuster-proof majority of 60 seats in the Senate – I’m a fan of divided government, and think that that a government that “can’t get anything done” is the best kind.

I expect Mr. Obama to disappoint me.  Nonetheless, I will vote for him.  It’s time for a change.

Update, April 2011:  Mr. Obama has disappointed me.  Can’t say I didn’t see it coming.

A friend forwarded me Orson Scott Card’s recent essay Would the Last Honest Reporter Please Turn On the Lights?, in which Card complains about journalistic bias (in this case, concerning the causes of the mortgage loan crisis).

Card writes:

If you had any personal honor, each reporter and editor would be insisting on telling the truth — even if it hurts the election chances of your favorite candidate.

Because that’s what honorable people do. Honest people tell the truth even when they don’t like the probable consequences. That’s what honesty means. That’s how trust is earned.

Card is a great science fiction writer (if you haven’t heard of him, go read Ender’s Game), but oddly, he seems to expect journalists to care about the truth.

I’m guessing he didn’t study journalism in school.

Professional journalists are trained to worry about “fairness”, not truth.  Reality, they are told, is socially constructed, and there is no such thing as objective truth.

Fairness means reporting “both sides” of a story even when there are 3 or 4 sides, or when it’s obvious who is lying and who isn’t.

If journalists were interested in truth, they wouldn’t pretend to be impartial (they’re human, of course they have opinions of their own).  Instead they’d openly admit their viewpoint and let the reader judge their arguments.

There are still countless newspapers in the US with “Republican” or “Democrat” in their title.  I suspect the relatively high esteem which journalists enjoy is a legacy from the era when these newspapers were founded.

Before the rise of “professional” journalism in the middle of the 20th century, truth was assumed to exist (even if it was difficult to find), and publishers were proud to announce their political allegiance.

Just as active is the opposite of passive, so action is the opposite of passion.

Desire acted upon is action.

Desire suppressed is passion.

Today NPR, that bastion of reasoned, intelligent and thoughtful reporting (as opposed to the crass celebrity-and-sensation commercial outlets) ran a typically panicky story about the documentary “Two Million Minutes”.

According to NPR, the film illustrates the looming downfall of American society as children in developing countries study and learn vastly more in school than their US counterparts. As a result, the next generation of Americans will be illiterate, innumerate, and utterly ignorant of science, history and geography. The sky will fall and Americans will be reduced to foot-washers and burger-cookers to Asian technocrats.

Two points.

First, economics is not a zero sum game. Other countries becoming more productive – even more productive than Americans are – does not hurt the US standard of living.

While it’s certainly true that American primary and secondary schools are pitiful (because they lack competition – compare America’s excellent, and highly competitive, colleges and universities), still, panic is not called for. Productivity determines living standards – nothing else. Americans are becoming more productive, not less, even if other countries are catching up.

Economics is not war. There are no “winners” and “losers” – everyone gets what they produce, be it great or small, and regardless of what others get.

It’s natural that countries like China and India, which still experience poverty that makes even the poorest Americans appear middle-class, are struggling very hard to improve their standard of living; much harder than Americans do or need to. This is admirable, but eventually when these countries catch up to first-world living standards undoubtedly they, too, will start taking some time to smell the flowers.

Second – education only goes so far. The brightest people will always be able to learn what they need to know without much effort, and the dumbest, sadly, will not be able to learn much no matter what effort is put into education. All nations have their share of genius and idiocy.

The December IEEE Spectrum has an article about online game “cheaters” and “gold farmers” who use bots or cheap labor to earn virtual money, which they exchange for real money, and how bad this all is.

According to the article:

For example, in Ultima Online, gamers can make money by cooking and selling chickens to tavern keepers. Thurman programmed his characters to buy raw birds from the butcher and then prepare the food. Ordinarily, a gamer can cook only one bird at a time, but Thurman automated the process so that his 30 PCs could cook as many as 500 birds at a time; he sold them in huge quantities to the taverns.

Chinese “gold farmers” earn virtual money the old-fashioned way:

Unlike Thurman, the Chinese workers actually do go out into the “worlds” and game. But they do so in teams, which gives them a distinct advantage in certain situations. For example, they can gang up on giant monsters whose slaughter will be rewarded with big piles of gold.

I wonder what’s so bad about this? Imagine for a moment that this was happening in the real world – the result is there’s plenty of yummy chicken in the taverns, and fewer dangerous monsters running loose. Who could complain?

OK, maybe the game is less fun when people can just buy stuff (with real money) instead of earning it in the game. But it seems to me that’s more a problem with the way the game works than with the “cheaters”.

Yet I wonder – isn’t this what people are complaining about when somebody invents a machine that “puts people out of work” or brings in low-paid immigrant labor? How dare they make sure there’s plenty of yummy grapes at the supermarket, or cheap clothing to keep poor people warm?

The world still gets the yummy grapes (or widgets, whatever), and the people who are “put out of work” get to do something more useful with their lives than pick grapes or weave cloth all day (like, say, making something new that hadn’t been made before). Seems like a win-win all around to me.

I guess there are people who will complain about anything.