Twofish's Blog

May 30, 2009

More notes on Gillam Tett’s book

Filed under: academia, finance — twofish @ 8:05 pm

I’m rather surprised that people haven’t asked her more about her fieldwork in Tajikistan.  Googling around, I found a lot of interesting and relevant things about Tajikstan that is very relevant to world affairs. You have the interaction between Soviet/post-Soviet ideology and Islam.  You have some very interesting gender issues.  Men in Tajik society were suppose to be “modern” since they had to go out and work in a Soviet system, and women “traditional” and this caused a interesting interactions when the Soviet Union fell.  You had a major and very tragic Civil War, which has some relevance to my life.

Also the fact that she was a goat herder was treated as a point of humor, but I found it interesting that no one seemed to take that seriously.  Being in banking, my first reaction was “how do people in Tajikistan make money herding goats” since that hits the second question which is “how can I make money off the people in Tajikistan herding goats.”  The only google reference that I can find is that goats are being used for cashmere, which makes me interested in the economics and social structure of goat herding.  It seemed from some of the pages that Tajiks are considered to have some special ethnic affinity to goat herding.

The other reason I was pleasant surprised by Tett’s book is that she didn’t do the standard reporter thing.  I’m afraid to talk to reporters since I often get the impression that reporters feel that their job is to make you look bad.  Reporters seem to assume that life is a battle between good and evil, and heaven help you if a reporter thinks that you are evil.

However besides some nit-picking, I think that it is useful because it addresses a big problem in that most of the public really has no idea what bankers do and how banks work.  It’s because no one really has the incentive to explain it to them.  It’s not that bankers are intrinstically evil or are hiding something out of shame or fear.  The problem is that the risks of being a public figure outweigh the benefits of public knowledge.  If there is a one in a million chance that I will be fired or publicly humiliated by something I say, then why should I take the risk, since I personally don’t get any benefit out of greater public knowledge.  And the fact that there is no shortage of people that are “out to get you” just increases those risks.

So here is some nitpicking…..

* one thing that I think Tett seems to imply from the interview is that people don’t talk about the “shadow banking system” because they are ashamed or fearful about it.  Actually bankers don’t talk about the “shadow banking system” for the same reason that people don’t talk about the clouds or the air they breath.  It’s such a nature part of the system, that people don’t think about it.  The other thing is that it’s not a matter of the banks hiding things from the regulators.  Most of the regulators in 1990-2008, where actively encouraging the development of the new banking system.  It’s also not that the regulators were hiding anything from the public, after all it was the public that voted in a series of administrations that believed in loose regulation.  It’s not also that bankers had this nasty conspiracy to defraud the public.  Most people in banking believed what they were doing was a good thing, and personally I still believe that if you properly regulate derivatives trading that you will end up with a better financial system.

* Something else that Tett also doesn’t make clear is that when she says the banks were able to use CDS to reduce their capital levels.  She is referring specifically to European (particularly German) banks.  American commercial banks aren’t allowed to do this.  This does bring up a problem in that in a global economy, you just can’t fix one countries regulations, since you can side step them.  Also, you have to view regulation as a system.  In England they drive on the left side of the road.  In the US, they drive on the right side.  What happens at the intersection.  A lot of English regulation is based on what are basically informal “gentleman agreements,” but Americans are suspicious of that sort of system and prefer impersonal rule based systems. These systems work in isolation, but you end up with Frankensteins like AIG-FP when you aren’t careful.  One thing that caused problem is that insurance in the US is primarily a state regulated system, and US states normally don’t talk directly with people in other countries, so no one ever thought of getting the New York insurance regulators and the UK FSA in the same room.

And if you have this much trouble making the US and UK financial systems compatible, just wait until you try to bring in China and Saudi Arabia.  In the case of China, this turns out to be a lot easier because of Hong Kong.

* Not that it would have helped much.  The way that derivatives were used help cause the problem, but the underlying problem was bad loans, and in that area derivatives didn’t play a huge role.  For example, Washington Mutual didn’t have much in the way of derivatives, and if you look at the dozens of banks that are failing on the FDIC website, derivatives didn’t play much of a role in their failure.

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Notes on Gillian Tett’s book Fools Gold

Filed under: academia, finance — twofish @ 7:19 pm

Got it on back order.  From the interview it looks like one of the best books out there…..

http://www.npr.org/templates/story/story.php?storyId=104130944

Something that Gillian Tett makes more clear is that most people outside of banking think that the “shadow banking system” is some secretive thing that is a small part of the system, whereas in fact that “shadow banking system” is bigger than the “non-shadow banking system.” If you get a mortgage, a credit card, auto loan, commercial business loan, or any credit at all, the money that you got came from the “shadow banking system” rather than the “non-shadow banking system.”

The “shadow banking system” needs to be regulated because it *is* the banking system, and it really can’t be shut down, because there really is no “non-shadow banking system” any more. People in banking don’t talk much about the non-shadow system not because it is some deep dark secret, but rather because it’s like the air or the clouds. You see it every day that you don’t think about it.

Part of the reason the shadow system is rather poorly regulated is that throughout the 2000’s, there was this idea that government was the problem rather than the solution, and any sort of government intervention with business was bad, so routing everything through this other banking system was a good thing. Over time, the shadow banking system would prove to be so much better than the traditional one, that the traditional system would fade away.

The fact that this just didn’t work probably became obvious the day after Lehman died. I’m willing to bet that no one at the US Treasury had the slightest idea that if Lehman died, that AIG would go under, because there was just no one keeping track of who had what risk.

May 15, 2009

Thoughts on the Universities and the Financial Crisis

Filed under: academia, massachusetts institute of technology — twofish @ 7:32 am

http://www.wilmott.com/messageview.cfm?catid=16&threadid=70579&STARTPAGE=1

Speaking of universities.  One thing that shocks me is that universities are now facing their biggest financial crisis since the Great Depression as endowments plummet, and I’m a bit shocked at the lack of leadership and vision that is coming out of the academy.  MIT is facing a $150 million short fall in revenue over the next three years, and all they can do is create committees to study the problem, and no one is even talking about the fact that the drop in revenue may be permanent.

One reason I think that academia is in such sorry state is that anyone with any vision and determination got out of academia.

February 28, 2009

We are all losers now……

Filed under: academia, finance — twofish @ 11:47 am

http://delong.typepad.com/sdj/2009/02/the-forest-of-outstretched-arms-looking-for-work-grows-thicker-and-thicker.html

Emerson: Someone said somewhere that the schools with big endowments were going to start spending part of their endowment on education, but that unlikely rumor turned out to be false.

What endowments? University endowments are getting crushed by the market collapse, and that’s the lucky universities. The unlucky ones have found that they they were investing with the likes of Madoff, and a few universities have found that they have no money at all.

There is a deeper problem in that the financial structure of academia forces universities to create a Ponzi scheme. In order to support the salaries of the tenured faculty you have to have lots of money coming in through tuitions and grants which require large numbers of teaching assistants and research assistants. However the only way you can get large numbers of TA’s and RA’s is by promising them tenured faculty jobs, and in most cases these promises are lies. They are lies because the economics of the situation forces them to be lies.

This creates very perverse incentives for academia, because they only way any decent human being can deal with this is not to think about the problem, which is particularly a problem for academia whose job it is to think about these problems.

This is part of an even deeper problem which is that we’ve created a society of winners and losers. Winners get money and power by taking it from losers, but this causes problems because eventually the losers realize that they are getting shafted, and then overthrow the winners.

So the solution is to create a large middle class of people that *think* that they will be winners someday, and tell the “almost winners” that the losers deserve what they get. You see this in academia, if you don’t get the job, you didn’t work hard enough, and you are a *loser* you don’t *deserve* to be a winner. The fact that your work and efforts allow the system to exist as it does is irrelevant.

You don’t deserve tenure, go work at a community college as an adjunct with all of the other academic losers, where you get to teach all of society’s other losers, and not any of the winners that get to go to elite universities. The only people that deserve money, power, or respect are winners, and you aren’t one of them.

The trouble with this system is that it requires people identify with winners more than losers. One good thing that is coming out of this is that people are realizing that the system isn’t rational, and that you have a much higher chance of ending up a loser than a winner.

With the result economic collapse, it turns out that we are all losers now…..

January 18, 2009

The 80’s are dead

Filed under: academia, china, finance — twofish @ 9:45 pm

http://mpettis.com/2009/01/monetary-conditions-might-exacerbate-the-chinese-adjustment/
DB: As for the question whether or not China was in need of foreign capital to accelerate its economic growth, Huang Yasheng, Associate Professor at the MIT Sloan School of Management, argues that the main driver of China’s economic miracle up to the end of the 1980s were domestic private village and township enterprises.

Somewhat correct but completely irrelevant…..

What he doesn’t mention is that in order to drive this economic growth, these TVE’s had to borrow extremely heavily to the point where you had rural credit instititutions that were (and still are) insolvent. The TVE’s growth phase ended around 1990 when the countryside basically ran out of cash.

DB: Then at the beginning of the 1990s, the central government decided to shift the economic development scheme towards urbanization driven and controlled by the public and governmental sector

Because they had no choice in the matter. The boom in the countryside was not because private enterprise was particularly good but because Maoist communal agriculture was a total disaster. By 1990, the rural countryside had recovered from the Maoist disaster. At that point, there were no productivity gains to be made anymore, and the rural credit institutions that were designed to take advantage of these gains started going bust.

Also “privatization” is not a good way of describing rural land ownership. The “contract responsibility” system is something that is not quite private and not quite socialist. You can see it when people like Huang are saying good things about it that it becomes private, but when they say bad things about it, it becomes non-private.

DB: Now the point is: Huang argues in his studies that economic activity driven by the private sector in townships and villages in the 1980s have led to greater benefits for the Chinese people then the subsequent government- and public sector-led urbanization. What do you think of his view?

Maybe it is true, but it is completely irrelevant. The basic problem is that what worked in the 1980’s wouldn’t necessarily work in the 1990’s and the 2000’s and the 2010’s. The reforms of the 1980’s were designed to fix the problem of the 1970’s, and once those problems are fixed, you have to do something different. Times change, and policies that create a miracle in one place and time can be totally disastrous in another. Much of the “China miracle” wasn’t that privatization was very good, but because Maoist communal agricultural was particularly bad, and switch to another system (any other system) would have improved things.

This is the problem that I have with ideological people whether they are socialist or capitalist. They fail to adapt when the situation changes. People loved the Soviet model in the 1960’s not because they were total idiots but because the Soviet Union generated extremely large amounts of economic growth in the 1950’s. When talking about the failures of state planning in the 1990’s, we also have to consider the successes in the 1950’s. We can certainly learn things from the 1980’s, but we can’t repeat them because the world is different.

This applies to current issues. I personally think that Chinese industrial and banking reform in the 2000’s was a huge success. Does that mean that I think that we can relax and just follow exactly the same policies? Hardly. *Because* it has been a success, a lot of the problems that the policies had to fix have been fixed, which means that there is nothing more to do. China’s economic model in the 2000’s is highly capital intensive and highly export intensive. It worked well in the 2000’s because China is where the Soviet Union was in the 1950’s or where East Asia was in the 1980’s.

It’s going to stop working in the 2010’s Much of the export intensive part will never come back. Building one expressway is going to be very useful, but building two isn’t. Right now building stuff works because there are a lot of things that need to be built. As time passes there are going to be fewer and fewer things that can be usefully built.

So right now the big thing in China is trying to move the economy from an capital driven, export driven economy to an technology based, innovation based economy. This means basically tearing lots of things up and starting over again, and looking at how other countries (particularly the United States) promote innovation. It’s going to be wrenching and painful, change always is, and people will do a lot of stupid things and make lots of mistakes, just like they did in the 1990’s and in the 2000’s. Expect to make mistakes and set things up so they aren’t fatal ones.

I’m optimistic because managing an economy requires constant change and constant renewal, and my feeling is that the people in the Chinese government aren’t trapped replaying the glories of the past like the Soviet leaders of the 1970’s or frankly like Ya-Sheng Huang is.

Sleeper agents and real conspiracies

Filed under: academia, massachusetts institute of technology — twofish @ 9:50 am

http://www.wilmott.com/messageview.cfm?catid=16&threadid=68043

Harvard has a huge bank account. Also, it’s possible to monetize the value of the MBA. We let you classes with large subsidies, and then in the process brainwash you so that when you make megabucks, you feel guilty and give us large amounts of cash. Every few months, I can this call from Cambridge, MA, in which some freshman starts a conversation about how my job is going. At this point I get out my credit card, since I know what they are going to ask next (i.e. you do know who gave you the skills for that job.)

This is the basic business model for Harvard and MIT undergraduate programs.

MIT has extra cash come in from technology industrial programs. They also heavily subsidize the classes, so that when you go out in the world, MIT has “sleeper agents” in the major banks, governments, and industries which MIT can then use for its own nefarious purposes. If someone from MIT career services calls me and wants the names and phone numbers of people in my firm that have jobs open and they want to know the secret code words to put on a resume to get them those jobs, my “preprogrammed brainwashing” kicks in, and I tell them.

This business model works, much, much better for the student than those that rely on tuition to fund operations. From the point of MIT, it also works because it requires vast sums of money, lots of branding, and pre-existing social networks, which keeps competitors out. There is no such thing as a “non-profit” university, you just have to understand the business model to make sure it makes sense for you.

Career advice for Ph.D.’s

Filed under: academia — Tags: , , , — twofish @ 9:46 am

http://www.wilmott.com/messageview.cfm?catid=16&threadid=67996&STARTPAGE=1

Do not be picky about what you do, especially in a bad economic climate. Apply for everything you can think of, finance, non-finance, academia, etc. etc. In almost all cases, you will end up having the door closed in your face, which is why you need to knock on as many doors as you can. It doesn’t matter if a 1000 people say no, as long as one person say yes, and you have to keep knocking on doors until you get to someone that has cash to give you.

The psychological pressure can be huge. There are a lot of people in Ph.D. programs who have never had the experience of being rejected, because since kindergarten their history has been “pass the test” go to the next level, and the system they have been in has been somewhat rational in which if you don’t make it to the next level, it’s because of something “bad” you did. Once you got your Ph.D., you are no longer in the world (even if you stay in academia), and it is a huge transition to make to realize, that you are going to fail and be rejected, even if you are very, very good. In a situation in which you have to keep knocking on doors and getting rejected time and time again is new, and something that most people have to deal with is the (justified) fear of rejection, humiliation, and failure.

As far as finance goes….

This situation may change quickly or it may not. I wouldn’t be surprised if in two weeks, the word from on high is “start hiring.” Having worked in the oil industry, I also wouldn’t be surprised if the situation *never* improves. There was a massive burst of hiring in the 1980’s oil boom and no major hiring until the early-2000’s when people started retiring. (Working with a lot of programmers in their 50’s and 60’s was a very good experience, since I don’t have this fear of growing old that a lot of people in younger industries have, since I’ve seen something people in their 60’s doing cool things that I want to do when I’m 60.)

Be ready, be flexible, so that you are ready if there is a massive burst of hiring in two months or if Wall Street ends up a dying industry. One thing that this means is that it helps if you don’t have too fixed an idea of what you want to do. If you say ‘I want to be a quant” then you run into the problem in that there may be no jobs whatever this quant thing is. On the other hand, if you say “I want to do cool things with math and computers” your options vastly increase.

January 1, 2009

The Non-Collapse of China

Filed under: academia, china — twofish @ 6:08 pm

You saw huge leverage in investment banks, because with leverage the higher bonuses you can pay in the good times, and when everything falls apart it is someone else’s problem. Part of the problem is in the 1990’s when investment banks switched from the partnership model in which the owners of the bank had unlimited liability and were careful to the joint-stock corporate model in which the high level managers can pay themselves big bonuses and walk away when things fall apart. Another problem is that you ended up with an extremely fragmented system in which it was possible to find gaps in the risk control system.

You run into big problems when no one cares about risk which is what happened with the American financial system but not the Chinese one. *Someone* has to care about risk and it could be partners with unlimited personal liability, some government agency, or the Communist Party. The trouble with “privatization is god” advocates is that they get rid of the socialist controls without putting in adequate capitalist controls, and the result is widespread looting followed by financial collapse. It happened in Russia, it happens in China. It happened in Wall Street. People that believe that “privatization is magic” have to explain why it happened on Wall Street.

In 2000, Gordon Chang wrote a book “The Coming Collapse of China.” I’d really be interested if Chang, Minxin Pei, or Yasheng Huang would write an essay “Why the Chinese Financial System Didn’t Collapse But the US Financial System Did.” I have my answers, I’m curious what theirs are. One possible answer is “just wait a year and you’ll see things fall apart.” Possible, after giving this answer year after year, it gets a bit old, and you have to wonder if there is anything new.  It’s also pretty useless.  All human institutions are impermanent.  Some day the Chinese banking system will collapse, some day the Communist Party will fall, some day the sun will stop shining.  Saying something will happen eventually is useless.  What’s important is whether it happens tomorrow, next year, next decade, or next century.

One thing about me is that I try to be non-ideological and data-driven.  I’m not going to say that you won’t have a collapse in the Chinese banking system.  What I am saying is that if I’m right about how the world works, there won’t be a systemic collapse in the next two years (although I wouldn’t be too surprised if you had isolated bank failures).  If there is a systemic collapse, then it looks like I was wrong.  It’s happened before, and I’d much rather lose an argument than end up trying to advocate bad policy.

April 13, 2008

How to rule the world

Filed under: academia, china, politics — twofish @ 4:35 pm

I’m actually getting a bit tired of talking about Tibet, so let me talk about something related.

How does a group manage to stay in power and end up ruling the world?

In the 19th century, there were two groups that were elites that managed to control their bit of the world. The Protestant Ascendency in Ireland and the Boston Brahmins in New England. No one hears about the Protestant Ascendency anymore (even in Northern Ireland, the Church of Ireland Ascenency lost control to the Prespertyerians that run it now), but it turns out that the ideological heirs of the Boston Brahmins managed to end up ruling the world.

The center of Brahmin power was Harvard University, and rather than fight the inclusion of new groups (like the Irish), the people running things came up with a new definition of “elite” that ended up incorporating any group that could possibility challenge them. Gradually, one ended up with an institution that ends up being one of the centers of power for the groups that rule the world.

Conspiracy theorists are right that the world is basically run by a rather small number of people (at most 10000 people on a planet of 6 billion). Where they get things wrong is they underestimate the ability of the people that run the world to get the cooperation of the remaining people in the world. Most middle class parents in the United States (and in fact most in China) are trying to get their kids in Harvard rather than trying to overthrow it. Also the most successful conspiracies are “hidden in plain sight.” Harvard has a website, with rather detailed instructions on how you can have your son or daughter join the people that run the world.

January 15, 2008

Stanley Fish shows how awful academia has become…

Filed under: academia, history — twofish @ 6:53 am

http://fish.blogs.nytimes.com/tag/humanities/2008/01/06/

http://fish.blogs.nytimes.com/2008/01/13/the-uses-of-the-humanities-part-two/index.html

There are these sad and awful writings by Stanley Fish that I think illustrate how out of touch and useless academia has become, and why we really need to rethink the entire system of higher education.

I happen to come from an intellectual tradition that believes that the role of the intellectual in society is to serve as leaders and examples for the community and to carry the eternal flame from past generations to future ones. The fundamental belief is that if people think about what they are doing, and learn from the past, that in the end society benefits. One reason I find myself outside of academia and in the world of business and commerce is that I find far more people on Wall Street who are trying to use their skills to make the world a better place than I’ve ever found in academia. Something I find shocking is that academics don’t really try to use their skills and their learning to make even academia a better place.

You can’t argue that a state’s economy will benefit by a new reading of “Hamlet.” You can’t argue – well you can, but it won’t fly – that a graduate who is well-versed in the history of Byzantine art will be attractive to employers (unless the employer is a museum). You can talk as Bethany does about “well rounded citizens,” but that ideal belongs to an earlier period, when the ability to refer knowledgeably to Shakespeare or Gibbon or the Thirty Years War had some cash value (the sociologists call it cultural capital). Nowadays, larding your conversations with small bits of erudition is more likely to irritate than to win friends and influence people.

Utter nonsense.

Great art and great literature let’s people try to answer or at least ask the really important questions. For example, “why do I want to be attractive to an employer?” “what does an employer find attractive?” Reading Hamlet to be personally very useful because it gives you an appreciation of irony and of tragedy which is really useful for day to day official social interactions. How is Byzantine art useful to an employer? I don’t know, maybe an expert in Byzantine art can tell me, but one thing that I’ve found is that creative people are always on the look out for something new and different and you can often find something new in something old. As far as the Thirty Years War and Gibbon, it might not be that useful when you are at parties, but it is deadly serious that you know something about history when you go to vote.

It’s a pretty idea, but there is no evidence to support it and a lot of evidence against it. If it were true, the most generous, patient, good-hearted and honest people on earth would be the members of literature and philosophy departments, who spend every waking hour with great books and great thoughts, and as someone who’s been there (for 45 years) I can tell you it just isn’t so.

That says something really, really bad about literature and philosophy departments and not something bad about literature and philosophy. Academia nowadays actually discourages people from thinking big thoughts and coming up with great ideas.

As far as the usefulness of literary analysis. Prof. Fish points to an example where he analyzes a line an in old poem. Interesting. Now the ability to do that sort of analysis comes in to be *really* useful if you start using it on a 30 second television commercial or if you are writing a 30 second television commercial. Look at any campaign ad or ad for orange juice. It’s in effect a poem that wants to get you to feel something and once you feel that something, it makes you want to go out to do something. If you can analyze what it trying to make you feel and why, then you can make more intelligent decisions about whether you really do what to do that something.

Do humanities courses change lives and start movements? Does one teach with that purpose, and if one did could it be realized?

If the answers to these questions are (as I contend) “no” – one teaches the subject matter and any delayed effect of what happens in a classroom is contingent and cannot be aimed at – then the route of external justification of the humanities, of a justification that depends on the calculation of measurable results, is closed down.

That says something bad about humanities professors and not about humanities.

Assuming that if they had been schooled in the right texts (Paul Krugman rather than Milton Friedman, Cornel West rather than William Buckley) they would have devised better policies is a fantasy, and indeed, it is the same fantasy the neoconservatives buy into when they argue that if we were to introduce radical Muslims to the writings of Jefferson, Madison and J.S. Mill, they would learn to love freedom and stop wanting to destroy us. The truth is that a mastery of literary and philosophical texts and the acquisition of wisdom (in whatever form) are independent variables.

No. This isn’t true. I doubt that anyone who has read Aristotle, Thucycides, or Gibbons would have make the same mistakes that the neoconservatives made. Also if you are widely read, you would have read the Koran and the writings of Islamic jurists to understand the culture and the mindset of the middle east. As far as introducing radical Muslims to Jefferson, Madison, and Mill, I don’t know how they would react. Give them some of those texts and start having a dialogue. Find some suicide bomber, give him a copy of Jefferson, and ask “what do you think about this?” I’m pretty sure that the answer to that is going to be more useful than if you try drowning him.

I should point out that this is a shockingly simplistic notion of what it means to be educated. Because educated means *reacting* to texts, not merely passively absorbing them. It means being part of a conversation with the author even if the author has long since been dead. Someone who is educated makes what they read part of them, even if they disagree with it.  It’s not a matter of the “right texts” or the “wrong texts”.  It’s a matter of being exposed to a wide variety of contradictory information and trying to make some sense out of it.  Someone really can’t claim to have been educated in economics for example, unless they’ve tried to read both Adam Smith and Karl Marx (Marx is more fun to read the Smith).

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