Preventing financial meltdowns.

[jerseycajun.livejournal.com]

It's often been said of libertarians that we only tear down in a very ideological and un-intellectual way, and to that the detractors are not entirely without a case. Patrolling the old stomping grounds on the libertarian boards yields no shortage of true believers who rely only upon the mantra and never delving into the nuts and bolts that comes with the territory of actually making a persuasive argument.

I am posting this video in an effort to make an affirmative case for an alternative attitude that doesn't fit into what I would call any ideological model (it should have things in it that are disagreeable to all comers here most likely. I know I myself have to give a lot more thought on the video before I could say I agree or disagree with some specific aspects of it).


I do not know if Tim Harford is a libertarian or not and I don't particularly care. There are some conclusions he comes to later in the video that I can certainly see some of those closer to my end of the political divide might not fully agree with. He does at least make an argument in the following video for a few solutions you don't hear talked about often and hopefully by posting it here it might generate a conversation that isn't the standard one that revolves around all those infuriating mantras and the equally infuriating snarky counter-mantras.


A few ideas I hope to generate discussion around: Things that are complex and "coupled" as the video defines them. The decoupling of complex systems, the extent coupled complexity is harmful, and what can be done to mitigate those problems that can utilize the understanding of complexity to its advantage rather than just adding layers of complexity to satiate the desire for safety, be it in the physical world or the financial one.

For my part, I think that not only decoupling, but methods and ideas the focus on that as well as decentralization and diffusion are at least worth investigating seriously. I also have a preference for the idea (preferable to the one that makes up the current popular ideas of financial regulation) that dealing on an individual level with banks to determine what their institutions' required reserves should be is better than one-size fits all, in the same way I think that dealing with individual student's issues is better than zero-tolerance policies that have zero nuance to them. Many of the complexities, as Harford notes, are there for tax purposes, not structural ones. Again, that doesn't make the financial system not-complex anymore, but it may address some of the ways we end up with dangerous systemic situations that necessarily go beyond the emotional responses to the situation, which while completely understandable, are nonetheless also completely unhelpful on their own.

*Fair warning to the mods- I am not going to be able to be around very much the remainder of the week, but I may still check in to read responses if there are any who make it through the long time the video takes to watch. -

For everyone else, I do hope at least a few of the community takes the time to watch it. It's rarely boring. Harford to my ear does have a way of keeping the listener going. You can even listen to it in the background while doing other things.

Comments

[htpcl.livejournal.com]

Will watch it in pieces. Sounds interesting.

[jerseycajun.livejournal.com]

Glad to hear it. Hope to hear your thoughts on it.

[htpcl.livejournal.com]

Just a warning: I tend to watch these in bed with my earphones on, and I'm asleep after 10 mins. The next day I watch another 10 mins. So don't expect a coherent analysis any time soon, maybe.

Sorry, I'm a slacker.

[jerseycajun.livejournal.com]

Hey, I'm just happy there are already four comments on the topic already. I figured the length of the thing would drive all but maybe ten responses total.

[htpcl.livejournal.com]

It's not the vid that matters. It's what you say underneath.

[jerseycajun.livejournal.com]

Yeah, but I didn't say anything deliberately inflammatory! How the heck am I gonna get a decent post-count without that? ;)

[htpcl.livejournal.com]

Can't help you there, I don't know anything inflammatory. 0:-)

Sorry to derail this...

...hmmm, see?

[kayjayuu.livejournal.com]

You mean a geezer. I totally do the same thing.

[sealwhiskers.livejournal.com]

I think this is an interesting speech, and I as someone firmly to the left of libertarianism don't find much at all to disagree with in what Harford says here.
I wouldn't call Harford a libertarian at all, in fact there is a lot here that he claims is necessary to make the financial markets safer, that go against classical ideas of "Free market", to the point that I'm a little
baffled that you are even considering it (hats off if you do though). Your fifth paragraph implies to me, that you are in kind of on board with what Tim is saying, as it is in fact the same as what he is saying, to various extents.

So, the rough breakdown in what he's saying is:
1) Systems are too complex and two villains are main ones in this: a) decoupling/derivatives b) obscuring branch offs for tax reasons - he is actually heavily implying a c) too, which would be lack of transparency.
2) Systems *will* fail, and to not plan for failure is crazy. And one of his main points is not only to have contingency plans, but also for regulators to approve of said plans before further transactions are cleared.
Some of his methods are, I agree with you, interesting, but *all* of his methods include to some extent regulators - and this is why Harford is no follower of the libertarian school of thought. He believes in various
entities regulating each other, and providing full transparency in doing so, including regulating organs of the state. This has been indicated in his writing too.
I for one think that his idea of more shareholders in banking and his notion of a restructuring balance in banks and their ownership are the most interesting. Basically banks are regulated regardless of who owns them, which makes the ability to separate one piece of a whole body and save that, is much more attainable if another part goes belly up.

I'm actually fairly sure Harford is rather a-political, as his pieces on pragmatism in politics indicate. (he is always careful to make examples from all over the political spectra)

But some of the strongest personal criticism from Harford actually comes in the questions-and-answers section of the speech. He there gives a fairly strong kick at Greenspan, a rather libertarian (even Randyan) economist who was vehemently for deregulation all through his time in the Federal Reserve.

I feel I want to tell you, that there was a woman called Brooksley E. Born (member of the same working group, but a lot less known than Greenspan and his boys), who actually advocated *exactly* the same caution as Tim Harford does in this speech. In fact, and I'm not sure all the articles spell this out, but she even advocated for some of the methods that Harford tries to push here.
She was the only woman in a group of men, and she was told by Greenspan to shut the fuck up, not in those words, but clear enough. She fought an uphill battle, about ten years before the crisis in 2008. In the end she had to leave the group.
She gained a brief surge of media interest just after the crisis of 2008, where some articles were written about her being right the whole time, and a few interviews were made with her (in which she showed a graceful lack of schadenfreude).

I have to admit that I get slightly irritated at the rock star status of Harford and the lauding of his ideas, when this middle aged lady was said to shut up, and basically was saying much of the same thing. But since I like Harford, I'll let it pass.

Here are articles on Brooksley E Born: Long Washington Post article (http://www.washingtonpost.com/wp-dyn/content/article/2008/10/14/AR2008101403343.html?wpisrc=newsletter&sid=ST2008101403344&s_pos=) and equally long New York Times article (http://www.nytimes.com/2008/10/09/business/economy/09greenspan.html?_r=3&em&oref=slogin&oref=slogin)

Anyway, thanks for an interesting topic!

[jerseycajun.livejournal.com]

The virtues of the free market that I find work are heavily involved in diversity of thought, and as a mechanism that efficiently aggregates the people who need/want with the people who have/supply. There are of course naturally arising conditions that can hamper that, a lot of which have to do with another author, James Suroweiki (sp?) who did the book on crowd wisdom had to say on harnessing it and what causes it to fail. I think that in many cases market regulation is not as nuanced to individual situations as he's suggesting that are required, and that politicians are not naturally disposed to solutions which are not affirmatively and supremely confident in their particular solutions' success. I can't think of any politician that has ever uttered even the hint that a particular plan might fail unless it's the 'other guy's plan that's under scrutiny.

I also liked the point (naturally) that a lot of the regulatory spider web that still existed at the time of the collapse was in part responsible for the eventual extra levels of complexity that brought about the recession. There are layers of complexity which are just endemic to such a system as a large-scale economy, and then there is the complexity we sometimes add to it, in this case either the intra-corporate policy, or the extra-corporate regulation that can themselves aid in the self-destruction of whole companies or whole systems by the tendency to further couple elements of their respective systems. Independence is key.

What's irritating from my perspective is that we have 50 smaller laboratories (and countless more on the county governance level) to see what or will not work locally here for us in the U.S., but because the only other time in our country's history that state's rights were put into significant assertion was to support one of the few things it shouldn't and couldn't do (in terms of slavery) and therefore taints the term and the justification that it might be worthwhile to let the states actually handle a greater part of the load on several fronts. The push however, is not for that kind of decentralizing, decoupling of infrastructure. The regulations we have at the moment I see as increasing the coupling effect, and increasing the odds that the seemingly insignificant will become catastrophic.

There is little or no humility of the kind Harford is keen on in government or in corporate bodies to think that any such paradigm shift in thinking is likely to take hold. As he put it himself in his TED talk video which I link to quite often, we are besieged with "little Gods" both in public and private sector, and what's worse, is that being a 'little God' is exactly what most voters seem to expect out of their candidates, who are only too happy to oblige in taking on the role. I know it's common to say that corporate roles seem to attract the self-absorbed and the greedy, but the prideful are attracted to roles of prominence, both in the corporate and the public sphere. Hell, I know people in the local community who have let the smallest amount of authority granted go right to their head, for no other reason than they simply had the authority.

Greenspan wasn't necessarily libertarian in a few key ways. He was a monetarist, in favor of a master rate-setter in terms of trying to anticipate and set the bar for the interest rate preemptively rather than figuring out a way to harness the boots-on-the ground wisdom put forward by the aforementioned Suroweiki, who himself is not as far as I know libertarian, but aware of the folly that kind of top-down approach intends to accomplish. Some paradigm-shifting needs to be done in terms of the Fed as well, and what we come to expect from any such institution. I wouldn't mind seeing it replaced with a more diffuse system itself for what we seem to expect it to do. What that would look like I have no idea. I just know the bar that has to be realistically met in how it handles: Independence of diverse points of view (even ones who are 'clearly' wrong), decentralization, and a means to aggregate information.

I know I said I wasn't going to comment very much for the next few days, but you had a very polite and kind response, so I felt it deserved the best I could do.

[sealwhiskers.livejournal.com]

that a lot of the regulatory spider web that still existed at the time of the collapse was in part responsible for the eventual extra levels of complexity that brought about the recession

I have to say that I can't see where he said that. The spider web wasn't regulatory on the contrary, the regulatory agencies had slacked completely. The spider web was the loaning/security/ownership transactions that no one kept count on. Also, what furthered complexity was the entities that used tax loopholes in the form of income splitting tekniques (dividing up companies, but not security, with muddled ownership) Could you please point me to where exactly Harford is blaming a regulatory spider web for the crisis? I honestly disagree that that's what he is saying at all.

As much as I like discussing with you, I have to assume a critical stance toward your notions on de-centralized regulation and the view that regulation in itself is increasing the coupling effect. You'd have to clearly fortify such vague sentences with clear examples. In what way do they fortify coupling, when I read from Harford that it is in fact laissez faire type of regulatory actions that are part of the problem?

I am not opposed at all to more detailed and individualized regulations however, so I agree with you on that, but I think that goes hand in hand with Harford's claim that regulatory agencies must work harder and have more overall insight in complicated matters, as well as demanding capital as security, along with contingency plans.

Hmm..Somewhere in Greenspan's writing, there is said that not only is he heavily libertarian leaning, but also a Randyan. As I can't give you citation now, I'll just still say that his long and hard deregulation efforts speak for themselves. In any case, I will take a closer look at Surowiecki's (it's a Polish name, so any "ki" sound is spelled "cki") writing, I'm familiar with him, but not closely, so thanks for the tip.

[jerseycajun.livejournal.com]

My apologies, it was the tax structure, not the regulatory one he cited. (Try 38:45 for one mention 55:38 for another)

As you said, he's not taking this from any political stance, but more from a practical one. It is very easy to read into his words, I suppose whatever preconceptions you bring to it. He describes the situation as not unreasonable from the perspective of the bank. (about 19:00 or so) The regulators requirement as it stood and still stands, is not as flexible as we both agree it would be better to have as part of it. Well, from the perspective of JP Morgan, you've got Exxon which is a reasonably good and trustworthy entity to loan funds to, but because the current inflexible requirements don't allow for your specific circumstances you 'innovate' a way to satisfy both the regulators and Exxon, and the regulators don't blink because as far as they're concerned, the new credit default swap tool is a sufficient safety valve. None of this is unreasonable from either of their perspectives and because only hindsight is really helpful here, it's hard to see why anyone at the time would necessarily have seen what is only obvious now. In fact, the transaction between JP morgan and Exxon may very well have been a safe bet depending on the individual circumstances of that company if they had the option to lower their requirements. But the creation of the credit default swap was a way to get around an inflexibility in the regulation, the same flexibility we both agree needs to be incorporated in the legislation, if we're to have it at all.


Harford also mentions that it would be better to have more players in the game, and I agree. The way I see that happening is through more frequently allowing entropy to take its course and to be less terrified of naturally occurring corporate 'death'. The same complexity which fouls attempts by state-run economies to manage their economies centrally, affects larger corporations whose scale of management rivals that of the economies of a few small countries and maybe a couple that aren't so small. Either the company learns a fair bit about humility and allows its lesser branches to have more autonomy, or it will mess up enough on an unsurvivable scale (also a theme of Harford) that it cannot survive without external life support, if it can get it, in the form of beneficial legislation, tax law carved to its particular benefit, or outright bailout. And it's not just on the government-corporate level we see this going on. State-on-state life support has its own examples, of which I think the relationship between N. Korea and China is a prime example. The latter of course, which has had to allow its market to become gradually more liberal (in the classical sense) in order to keep the engine running. North Korea, however, without infusions from it's powerful economic neighbor and supporter, would be as devoid of life as it is of electricity outside of Pyongyang.

In order for a government to approach anything complex, it too must first embrace humility. Decentralizing government authority itself would be one way to keep itself honest, or at least keep the effects of when it goes awry limited to a survivable scale. If the principle can and should be applied to large corporations in keeping itself from succumbing to the kinds of complexity + coupling + hierarchical dominance (where the solution to stopping a problem before it happens can most easily be found by someone closest to the locality, and hence needs the ability to trump the higher-ups and has the confidence to do so) then the government needs this kind of bottom's up approach as well to protect itself as an institution from the same threats. The states and localities and the people closest to the ground level should be the ones with the power to be equivalent whistle-blowers.

Wisdom of Crowds is an interesting read. Again, have much to agree with and a little to disagree with from a personal perspective. Let me know what you think of it if you read it. I'd love to have someone else's perspective on it.

[peristaltor.livejournal.com]

Greenspan wasn't necessarily libertarian in a few key ways.

Oops, gotta jump in on this one. Greenspan was not only libertarian, he could be considered their poster chid. There's a Frontline documentary about the near-crash in '98 (involving the collapse of LTCM) that involved Brooskley Born that could shed some light on Greenspan's Randian thinking.

Here's another example from the hard drive of quotes. Thomas Homer-Dixon wrote a book that might be a cautionary tale against relying too much on Surwieki's Wisdom of Crowds (which I also heartily enjoyed). In Homer-Dixon's book, The Ingenuity Gap, he demonstrates that not only have systems become more and more complex, but he questions whether we will have the intelligence to adequately deal with upcoming complexity. He cites Greenspan as an example. Greenspan had a few months earlier raised interest rates, hoping to slow monetary growth by what should have been a predictable rate. It did not achieve nearly the effect for which he hoped. What he said next was revealing: "As the historical relationship between measured money supply and spending deteriorated," Greenspan acknowledged, "policy making, seeing no alternative, turned more eclectic and discretionary." (Thomas Homer-Dixon, The Ingenuity Gap, Alfred A. Knopf, 2000, p. 296.)

In short, Greenspan reacts to the failure of the money supply to slow its growth with a libertarian dismissal of its importance. After all, bankers do banking best when left alone, a libertarian would say (and as he himself said in so many words to Brooksley Born). Worse, though the situation confronted his own economic model of how banking works, he made no effort to investigate what had changed, modern banking or his mental model of it. Homer-Dixon explains:

Greenspan's remarks on this and other occasions have been disconcerting. He is at the very pinnacle of economic policy-making, and if he doesn't know how the economic system actually functions, who does? Reading his remarks, one gets the sense that the elite policy-makers at the Federal Reserve are standing on constantly shifting ground, and are repeatedly forced to react to situation "in which incoming data have not readily conformed to historical experience."

(Homer-Dixon, ibid.)

I'll try to tackle the video later.

[gunslnger.livejournal.com]

Greenspan was not only libertarian, he could be considered their poster chid.

It isn't (as usual) quite that simple. http://www.lewrockwell.com/long/long19.html

Also, http://themaestrosrep.org/wpblog/?p=25

[peristaltor.livejournal.com]

Please. I say, "Looks like a cat," and you say, "No, clearly that is a Siamese-Maine Coon cross with a bit of tabby." Hair splitting at best.

I am amused at how many self-described libertarians are quick to dismiss, even disavow or condemn, other self-described libertarians with whom they find disagreement. It's a constant replay of the True Scotsman Fallacy.

[sealwhiskers.livejournal.com]

It's because that particular cat pissed in the milk, therefore the breed needs to be examined with extra scrutiny, so that we can conclude it isn't a cat at all.

[gunslnger.livejournal.com]

Based on the actions taken, his self-description is clearly inaccurate. It's pretty simple. Would you call your meter-reader a postman because he wore a USPS uniform while checking your meter? The actions matter more than the superficial claim of membership.

[peristaltor.livejournal.com]

I would never accuse a meter-reader as being a postman. Why? Because he didn't bring me any mail.

Your analogy falls flat, however, when the meter-reader both wears the uniform and brings some mail. Self-described libertarians quack and waddle like other libertarians.

Speaking of quacking, did you know that ducks have corkscrew-shaped penises? Really long, literally kinky things they are. Why? Because lady ducks have extra pseudo-vaginal canals just off the main ovipositer duct. When a horny drake tries to overcome a lady duck, she can direct his kinkiness to a dead end in her lady parts, one that protects the actual eggs from fertilization by a rapist.

Perhaps if you suspect a self-described libertarian of blasphemy, you could engage in a kinky sex act and see what fits. ;-)

[peristaltor.livejournal.com]

I got through the talk up to his conclusions about decoupling, contingency planning and whistleblower support. What book was he pimping in this talk? Sounds right up my library alley.

I will say that there are a few items he should put on his list involving policies established in 1933 (here in the States) that were abandoned in 1999. I would also advocate he talk not only to failure specialists outside banking but also outside neoclassical economics. These new branches of economic thought have shed quite a bit of light on banking functioning (and malfunctioning) that those of the neoclassical set (like Greenspan and Bernanke) literally can't see; their core values, their core mental models, will not allow them to see the solutions.

Greenspan even admitted as much in front of the House of Representatives when questioned by Henry Waxman. That's good video.

[jerseycajun.livejournal.com]

Is this what you're talking about? (http://en.wikipedia.org/wiki/Complexity_economics) Because I have seen libertarians shifting towards this kind of economic model rather than the neoclassical form.

The article linked even mentions Cesar Hidalgo, who Harford cites in his significantly shorter TED speech on "The God Complex".

[peristaltor.livejournal.com]

That's part of it. Honestly, treating all barter interactions like a spot market, just so an economist can deny dynamism? That fallacy lies at the heart of neoclassical fail.

Google "Steve Keen debtwatch" for a really insightful economist, one that doesn't ignore debt in the economy as a the dynamic element. I give a rundown on some of his points here (http://talk-politics.livejournal.com/1429322.html). It's another wonky speech, like the one in your OP, but also with some media presence.