Friday, April 10, 2009

the oligarch's song

I am not a Black Swan fan. Taleb’s faith in Popper is definitely not my faith. On the other hand, nobody can doubt that a rigged risk assessment system has just blown up, and – if it were properly accounted for – taken down the global elite that were amassing real power with fictitious fortunes. Here, he presses the right buttons. How do I know? Read The Economist’s blog response to him: it is a full court oligarch’s defense, containing some beautiful zombie lines. In the zona, the second tier, the people who specialize in the kind of patter that picks your pocket, often consists of people who are not cynical at all: they are sincerely, blessedly stupid.

This is my favorite bit:

“While limits on leverage are necessary and tax policy which encourages firms to issue debt rather than equity is misguided, the villain here is not complexity. Perhaps Mr Taleb and lawyers hired as regulators do not understand complex derivatives, but many people do. Should we outlaw innovation for the benefit of people who lack quantitative skills? These products do indeed provide a means to hedge risk. The crisis may have been much worse without some of the financial products that did pay off.”

Innovation. One can only laugh. There are innovations of all kinds in the world. For instance, off the coast of Somalia at the moment, an innovation in piracy is being launched – Piracy 2.0. Yippee! The second tier has a Pavlovian instinct for wrapping a motive and an instrument (greed/robbery) in the appalling banalities of bizspeak. If this was simply a throatclearing defense of rentseeking behavior by the richest, at least it would be honest. But innovation simply means finding more cockamamie combinations, whose only use is to enrich the inventor by creating non-productive risk (and no, when you create a risk, you don’t get extra points for creating insurance for that risk ). A commenter, obviously from the financial services industry, remarked piously that these “innovations” freed up capital. They did indeed. They freed up capital to find other non-productive innovations to pour into. Fiction attracts fiction, which is how a nominal 400 trillion dollars worth of derivatives piled up from 2001-2008.

However, the best is: “The crisis may have been much worse without some of the financial products that did pay off.”

Now, in one sense this is true, just as it is true that, when a fire is sweeping through a forest, the best fire-fighting formula may be to set a counter-fire. But before a fire sweeps through a forest, one can do preventive work – for instance, don’t douse every living thing in the forest with gasoline and then throw about lighted matches.

There is an ant’s nest blindness to the oligarchy. They have learned, over the past 30 years, that they can loot, and that their looting will be rewarded with huzzas in the press. The secondary market in sycophancy has boomed. And it will continue to plug along during the zona, as the new line will be that the crisis proved how splendidly the slicers and dicers worked things out.

At least the Somalian pirates are honest. So far, they don’t slice a throat and talk about the wondrous innovations they are foisting upon the world in the matter of throat-slicing.


JCD said...

I really like this line in that response:

And who exactly are the smart people with clean hands—Mr Taleb and Nouriel Roubini? Or is he suggesting we replace everyone in finance, academia, and government with people who have no knowledge or skills?

Well, maybe not everyone--that guy William Buiter seems alright, and I know there are a couple people in the econ department at my school whose heads are on straight, Shaikh and Foley, etc--but perhaps the vast fucking majority. It's not like it would be that hard; fire the fucking quants or put them in a padded room with colorful baubles. The people who would replace them will have knowledge and skills--just not the ones that the sycophants would like to see in place.

Taleb strikes me as a 'good' or 'honest' liberal, sort of akin to Paul Krugman. I could share a beer with him and not end up spitting it in his face.

Roger Gathmann said...

Oh, JCD - I bet you could share a beer with most anyone and not end up spitting in his or her face!

I agree that firing would be excellent. But my assessment of the state of the zona is: at the moment, everybody who is in power thinks that they now understand it. This is just gonna be a recession, they've decided. And then things will equilibriate back to the land of milk and CDS-es.

Well, I'll hang my wizard hat on the idea that that ain't going to happen. The financial sector does expect a government financed bubble, some trillion dollar Last Dance. But the only real "green shoots" out there is China's decision to go for the electric car market. As an American, this breaks my heart - this is what the U.S. shoulda done 10 years ago. If there is one place in the word that should dread and fear global warming, it is China - the population significantly depends for water on the Himalayan glacial ice pack not, like, melting. So Chinese officials know that thay can't keep polluting like a Soviet mining town. The Electric cars can only be the beginning. Still, I thought - capitalist stooge that I am - that, according to the theory of comparative advantage, the U.S. would wake up to making something for export like, well, electric cars for China.
But as Metallica once said, you wash my back I stab yours. See - we still have Metallica to export!