Door To Hell

Paul Solman of PBS conducted this interview with Nassim Nicholas Taleb and Benoit Mandelbroit.  It is very sobering and somewhat scary, mainly because of the fact that they are scared.  Mandelbroit is known for his work in fractal geometry and Taleb works in the financial industry and is the author of Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
and The Black Swan: The Impact of the Highly Improbable.  I've read both works and I highly recommend them.  They are treatises on uncertainty and our knowledge of risk.

Unfortunately, that's what is  being discussed and applied to this current global economic crisis and the two's take on it is frightening.  For those who don't have the time to listen to the interview or prefer to read the summary, Mandelbroit and Taleb make the following comments and assertions:

- First, both feel vindicated since their work has been primarily on the complexity of the current economic models and human inability to assess the risk.  That being said both are not basking in their vindication and are very frightened, stating that this could be worse than the Great Depression and the biggest period of turmoil since the American Revolution.

- Taleb states that never in history have we had so much complexity in our economic system coupled with so much incompetence and misunderstanding.  This system leads to less crises but when they do hit they are far more disastrous.

- The system is Over-Optimized and therefore much more fragile, mainly due to the consolidation of many banks.  Instead of in the past having 10 banks and some failing, now we may have one huge bank fail making things 10 times worse.

- Mandelbroit likens the economic system to the weather.  Using the analogy that forecasters may see an already formed storm coming but due to complexities and turbulences cannot predict a storm forming.  Except he says that the actors in our global economic system are even more difficult to predict and account for than the liquids and gases in the weather system.

-  Mandelbroit also goes on to assert that we can't take into effect multiple little storms forming and rapidly evolving into a bigger and bigger crises because of their interrelated complexity.  The rapidity is overwhelming.

- Taleb says the 700 Billion bailout is pocket money for what is about to come.  He asserts that hedge funds will not be able to get lending from banks and will be forced to sell off positions, that in turn will impact other entitites, prices will drop, businesses will not make payroll.  Everything is tied in intricately in ways we were not able to see or predict these impacts.

-  Admitting that although the worst is possible, it is also possible for recovery as well.  Their is no scientific model to account for what is happening and therefore predicting probabilities moot.  Everything is possible, uncertainty is certain.

I highly respect both of these men, and to hear them speak about the current crisis and be so scared (Taleb is not sleeping) is sobering.  They both hope they are dead wrong about their thoughts on what may happen, however, I too think that we are entering a time of major turmoil.

Finally it's going to come out.  The baseball player's union is going to take it to MLB Owners for colluding against Barry Bonds.

Wasn't it obvious they colluded to keep Bonds out? Freaking Infuriating.  I
hope MLB gets nailed to the wall for this.  This really pissed me off
this season, Bonds should have gotten a fair chance to play.  As a fan
I wanted to see him play.  You know he's clean for sure, so let's see
what he can do clean and in his early 40's.

I have no vehemence
to Barry Bonds, Roger Clemens or anyone else they slimed.  Well, maybe
Palmeiro was a little sleazy but I feel bad for people like Clemens and
McGwire.  I wanted to see Bonds play.  If Florida was going to pull the
trigger on the Manny Ramirez trade and decided not to because of the
cost, WTF?  Why not pick up Barry Bonds, pay him league minimum (which
he was going to donate to charity anyway)?  It's a no lose, if he sucks
drop him – no cost, if he is disruptive, drop him – no cost, can't play
defense, drop him – no cost.  Tampa Bay, a DH AL team, same thing when
Longoria went down.  No Crawford and no Longoria, in a pennant race,
why not?

Biggest sham in the world, do they think everyone is stupid? 

Here's the deal and the parallel with Wall St.  The players in baseball most likely used some enhancing drugs, but the rules allowed it.  In fact there were no rules.

1)  In an extremely competitive atmosphere players used performance enhancers to get ahead.  Why?  Because others were doing it and their livelihoods depended on it.
1a)  In an extremely competitive atmosphere banks leveraged gaboodles of money to make risky investments.  Why?  Because others were doing it and making even more gaboodles of money.  If not them it was going to be their competitor, livelihoods depended on it.

2)  The result of an increase in performance enhancing drugs in the league caused more offense and as a result more attendance and as a result more money for the owners.  Times were good, players were chasing records and attendances were finally coming back from the dismal 1994 strike season.
2a)  The result of the increased investing and leverage for the banks allowed for everyone to be happy, the economy grew, the market went up and the corporations made lots of money.  The economy was coming back strong after the dismal recession after 9/11.

3)  This was the direct result of the MLB rulers, namely Bud Selig, turning a blind eye to the performance enhancers.  There were no rules or testing in MLB for performance enhancing drugs.  Why bother, everyone is doing well.
3a)  The increased investments made by banks were a direct result of the Fed giving out money.  Interest rates were so low, you were stupid not to use it.  The government and Fed had no reason to step in, instead turn a blind eye and delude yourself.  Everyone is doing well.

4)  Finally alarm bells start to go off.  Ken Caminiti, Jose Canseco, Balco.
4a)  Alarm bells go off.  Defaults, foreclosures, mortgage companies failing.

5)  Public turns on players using steriods, attacking them from moral stances.
5a)  Public turns on Wall St.  Calling them greedy and immoral.

6)  MLB cleans up its system and persecutes the stars of its game, whom they ALLOWED to use performance enhancing drugs.
6a)  Treasury attempts to clean up its system and will try to persecute the banks and bankers it ALLOWED to leverage so high and make risky investments.

Are the players and bankers guilty?  Yes, but they only did what the system allowed them to do.  The people that deserve the wrath in both situations are the rule makers of the games, not the players of the games. 

First let me welcome you to my new blog.  I don't have any well thought
out introduction or for that matter, any plans for this blog.  I hope
to write about topics that interest me, and they may as far ranging as
the Florida Marlins to the state of the Economy.

I found this post
by Freakonomics to be quite intriguing.  Immediately I questioned my
girlfriend to see her reaction as I set forth the hypothetical
experiment for her.  I was somewhat surprised when she said that she
would take whatever share was given to her.  Thing is, I never pegged
her to act in the rational manner of making the decision that solely looks into her self interest, as she is very unselfish.

I, on the other hand, believe myself to be extremely logical, yet thought there was a good chance that I would reject the deal if I felt I was getting screwed.  Truthfully, I think that I am spiteful enough to act against my self interests.  That's the big difference between me and her, she doesn't have a spiteful bone in her body.

How often, though, do we justify spite by calling it principal?  I know that this hypothetical experiment is probably not the only instance where I may sacrifice self interest for spite.  It may well be worth the introspection, literally, to question your motives regularly.