Ridcully poked at his pipe with a pipe cleaner and said, “Ye-es, that is a conundrum. Surely the steam engine cannot happen before it’s steam-engine time? If you saw a pig, you would, I think, say to yourself, well, here’s a pig, so it must be time for pigs. You wouldn’t question its right to be there would you?”
“Certainly not,” said Lu-Tze. “In any case, pork gives me the wind something dreadful. What we know is that the universe is never-ending story that, happily, writes itself continuously. The trouble with my brethren in Oi Dong is that they are fixated on the belief that the universe can be totally understood, in every particular jot and tittle.”
Ridcully burst out laughing. “Oh, my word! You know, my wonderful associate Mister Ponder Stibbins appears to have fallen into the same misapprehension. It seems that even the very wise have neglected to take notice of one rather important goddess … Pippina, the lady with the Apple of Discord. She knows that the universe, while it requires rules and stability, also needs just a tincture of chaos, the unexpected, the surprising. Otherwise it would be a mechanism — a wonderful mechanism, ticking away the centuries, but with nothing different happening. And so we may assume that the loss of balance will be allowed this time and the beneficent lady will decree that this mechanism might yield wonderful things, given a chance.”
“For my part, I would like to give it a chance,” said Lu-Tze. “Serendipity is no stranger to me. I know the monks have been carefully shepherding the world, but I rather think they don’t realize that the sheep sometimes have better ideas. Uncertainty is always uncertain, but the difficulty with people who rely on systems is that they begin to believe that nearly everything is in some way a system and therefore, sooner or later, they become bureaucrats.”
Terry Pratchett, Raising Steam, 2013.
December 20, 2014
May 14, 2014
This image showed up in a post at Coyote Blog a couple of days ago, and it’s an indication of the decline in new business formation in the United States:
Increasing bureaucracy — especially at the state level — undoubtedly contributes to that depressing chart, but it’s far from the whole story:
Home equity has historically been an important source of capital for small business formation. My first large investment in my company was funded with a loan that was secured by the equity in my home. What outsiders may not realize about small business banking nowadays is that it is nothing like how banking is taught in high school civics. In that model, the small business person goes to her local banker and presents a business plan, which the banker may fund if they think it is a good risk.
In the real world, trying to get such an unsecured loan from a bank as a small business will at best result in laughter. My company is no longer what many would call “small” — we will do millions in revenue this year. But there is no way in the world that my banker of over 10 years will lend to my business unsecured — they will demand some asset they can put a lien on. So we can get financing of equipment purchases (as a capital lease on the equipment) and on factored receivables and inventory. But without any of that stuff, a new business that just needs cash for startup cash flow is out of luck — unless the owner has a personal asset, typically a house, on which the banker can place a lien.
So, without home equity, one of the two top sources of capital for small business formation disappears (the other top source is loans from friends and family, which one might also expect to dry up in a tough economy).
May 9, 2014
I am not an economist. I am an economic historian. The economist seeks to simplify the world into mathematical models — in Krugman’s case models erected upon the intellectual foundations laid by John Maynard Keynes. But to the historian, who is trained to study the world “as it actually is”, the economist’s model, with its smooth curves on two axes, looks like an oversimplification. The historian’s world is a complex system, full of non-linear relationships, feedback loops and tipping points. There is more chaos than simple causation. There is more uncertainty than calculable risk. For that reason, there is simply no way that anyone — even Paul Krugman — can consistently make accurate predictions about the future. There is, indeed, no such thing as the future, just plausible futures, to which we can only attach rough probabilities. This is a caveat I would like ideally to attach to all forward-looking conjectural statements that I make. It is the reason I do not expect always to be right. Indeed, I expect often to be wrong. Success is about having the judgment and luck to be right more often than you are wrong.
Niall Ferguson, “Why Paul Krugman should never be taken seriously again”, The Spectator, 2013-10-13
February 26, 2014
Published on 25 Feb 2014
Featuring the author Megan McArdle, Columnist, Bloomberg View; with comments by Brink Lindsey, Vice President for Research, Cato Institute; moderated by Dalibor Rohac, Policy Analyst, Center for Global Liberty and Prosperity, Cato Institute.
Nobody likes to fail, yet failure is a ubiquitous element of our lives. According to Megan McArdle, failing often — and well — is an important source of learning for individuals, organizations, and governments. Although failure is critical in coping with complex environments, our cognitive biases often keep us from drawing the correct lessons and adjusting our behavior. Our psychological aversion to failure can compound its undesirable effects, McArdle argues, and transform failures into catastrophes.
Video produced by Blair Gwaltney.
September 20, 2013
In The Spectator, a muted tone of “we told you so” about the upcoming IPCC report:
Next week, those who made dire predictions of ruinous climate change face their own inconvenient truth. The summary of the fifth assessment report by the Intergovernmental Panel on Climate Change (IPCC) will be published, showing that global temperatures are refusing to follow the path which was predicted for them by almost all climatic models. Since its first report in 1990, the IPCC has been predicting that global temperatures would be rising at an average of 0.2° Celsius per decade. Now, the IPCC acknowledges that there has been no statistically significant rise at all over the past 16 years.
It is difficult to over-emphasise the significance of this report. The IPCC is not simply a research body making reports and declarations which are merely absorbed into political debate. Its word has been taken as gospel, and its research has been used to justify all manner of schemes to make carbon-based energy more expensive while subsidising renewable energy.
The failure of its predictions undermines the certainties which have been placed upon the science of climate change. Previous IPCC reports — and much of the debate over how to react to them — have appeared to treat the Earth’s climate as if it were a domestic central heating system, with carbon emissions analogous to the dial on the thermostat: a small tweak here will result in a temperature rise of precisely 0.2°C and so on. What is clear from the new IPCC report is that the science is not nearly advanced enough to make useful predictions on the future rise of global temperatures. Perhaps it never will be.
Some climate scientists themselves, to give them credit, have admitted as much. Their papers now incorporate a degree of caution, as you would expect from genuine scientists. The problems arise when the non-scientists leap upon the climate change bandwagon and assume that anything marked ‘science’ must be the final word. As the chemist and novelist C.P. Snow once warned in his lecture about the ‘two cultures’, you end up in a situation where non-scientists use half-understood reports to silence debate — not realising that proper science welcomes refutation and is wary of the notion of absolute truths.
September 6, 2013
This necessity for taking risks had previously been stressed by a passage in a letter written by James Wolfe when a colonel on the staff in 1757, a passage that has become justly famous:
Experience shows me that … pushing on smartly is the road to success; that nothing is to be reckoned an obstacle to your undertaking which is not found really so upon trial; that in war something must be allowed to chance and fortune, seeing it is in its nature hazardous and on option of difficulties; that the greatness of an object should come under consideration as opposed to the impediments that lie in the way; that the honour of one’s country is to have some weight; and that in particular circumstances and times the loss of a thousand men is rather an advantage to a nation than otherwise, seeing that gallant attempts raise its reputation and make it respected; whereas the contrary appearance sink the credit of a country, ruin the troops, and create infinite uneasiness and discontent at home.
General Robert E. Lee puts it in fewer words:
There is always hazard in military movements, but we must decide between the possible loss from inaction and the risk of action.
Napoleon laconically brings out the same basic idea:
Shuffling half-measures lose everything in war.
Lt. Colonel Alfred H. Burne, “The Strands of War”, The Art of War on Land, 1966.
July 30, 2013
In The Atlantic, James Fallows explains why the NSA’s digital overreach has likely harmed US long-term interests in many different ways:
In short: because of what the U.S. government assumed it could do with information it had the technological ability to intercept, American companies and American interests are sure to suffer in their efforts to shape and benefit from the Internet’s continued growth.
American companies, because no foreigners will believe these firms can guarantee security from U.S. government surveillance;
American interests, because the United States has gravely compromised its plausibility as world-wide administrator of the Internet’s standards and advocate for its open, above-politics goals.
Why were U.S. authorities in a position to get at so much of the world’s digital data in the first place? Because so many of the world’s customers have trusted* U.S.-based firms like Google, Yahoo, Apple, Amazon, Facebook, etc with their data; and because so many of the world’s nations have tolerated an info-infrastructure in which an outsized share of data flows at some point through U.S. systems. Those are the conditions of trust and toleration that likely will change.
The problem for the companies, it’s worth emphasizing, is not that they were so unduly eager to cooperate with U.S. government surveillance. Many seem to have done what they could to resist. The problem is what the U.S. government — first under Bush and Cheney, now under Obama and Biden — asked them to do. As long as they operate in U.S. territory and under U.S. laws, companies like Google or Facebook had no choice but to comply. But people around the world who have a choice about where to store their data, may understandably choose to avoid leaving it with companies subject to the way America now defines its security interests.
Update: Also in the aftermath of Edward Snowden’s revelations, you’d think that Senator Ron Wyden would get the credit he clearly has been deserving all this time:
For many, many years we’ve covered Senator Ron Wyden’s seemingly quixotic attempts to signal to the American public (and press) that the NSA was doing a hell of a lot more surveillance than most people believed, even those who were carefully reading the laws. Because secrecy rules meant that he couldn’t directly reveal what he’d learned while on the Senate Intelligence Committee, he had to issue vague statements, documents and speeches hinting at things that were going on that he couldn’t actually talk about. Of course, now that Ed Snowden leaked a bunch of documents, it’s shown that Wyden was absolutely correct in what was going on (and that the American public wouldn’t like it).
You’d think that would lead people to have a lot more respect for the incredible efforts he went through to alert people to these issues without breaking the secrecy laws. And, in fact, many more people are aware of those efforts. The Washington Post has a nice article about Wyden’s attempts to bring these issues out and to get a real debate going on them.
However, towards the end, the reporter talks to two different former top lawyers at the NSA, who both appear to be really, really angry about Wyden daring to suggest to the public that the NSA wasn’t playing straight with the American public. First up, we’ve got Stewart Baker, the former NSA General Counsel and top Homeland Security official, who is so anti-civil liberties and pro-surveillance that he’s almost a caricature of himself — including claiming that the Boston bombings prove that Americans need less privacy and that civil libertarians complaining about too much surveillance are the real cause for the September 11 attacks.
July 27, 2013
In the US, municipal bonds — bonds issued by city or other municipal governments — have been widely viewed as “safe” investments. Detroit may cause that view to change drastically. Reggie Middleton has been sounding the alarm for a few years:
Following up on my timely post “Here Come Those Municipal Defaults That Everyone Said Couldn’t Happen, Pt 2“, I comment on Meredith Whitney’s OpEd in the Financial Times. If you remember, she — like I — warned of municipal defaults years ago and was ridiculed for such. Ms. Whitney is quoted as saying:
“As jarring as the reality may be to accept, Detroit’s decision last week to declare bankruptcy should not be regarded as a one-off in the U.S. municipal market.” she said.
“There are five more towns like Detroit in Michigan alone. There are many more municipalities across the country in similar positions.”
“The bill for promises past is now so large for some cities and towns that it is crowding out money for the most basic of services — in the case of Detroit, it could not even afford to run its traffic lights,” she said.
“Will [lawmakers] side with taxpayers, unions or the municipal bondholders? If they back residents, money will be directed to underfunded public services at the expense of pensions and bondholders. If they side with the unions, social services will continue to be cut and the risk to bondholders will increase considerably. If they side with bondholders, social services and pensions are at risk.”
In the case of Detroit, elected officials, for the first time in a very long time, are siding with residents, Whitney said. This is a new precedent that boils down to the straightforward reality of the survival and sustainability of a town or city, she said.
“After decades of near-third-world conditions in the richest country in the world, the city finally stood up and said enough was enough,”
Well, this is the problem. Defaulting on revenue bonds where the underlying asset (ex. a housing project, utility, or infrastructure project) is not generating the sufficient cash flows is part and parcel of the risk of investing in said class of bonds. This is widely accepted and understood, which is likely why those bonds have a slightly higher yield.
For some obscene reason, defaulting on the general obligation bonds which purportedly carry the “full faith and credit’ of the municipality as a back stop is deemed as wholly different affair. The reason? Who the hell knows? This is a point I tried to drive home in the original “Here Come Those Municipal Defaults That Everyone Said Couldn’t Happen” article in 2011. Backing by the full faith and credit of a public entity does not make an investment risk free. To the contrary, if said entity is fundamentally insolvent, the investment is actually “riskful” as opposed to risk free.
Treating these bonds as unsecured in the bankruptcy is essentially the way to go. If you don’t want to do that, well you can still consider them backed by the full faith and credit of the insolvent municipality, which is essentially unsecured — and move on anyway — particularly as many potential collateral assets of value would have likely been encumbered by agreements with a little more prejudicial foresight.
July 14, 2013
Feeling positive about the economy? Michael Snyder has ten reasons to change your mind:
Have you ever seen a disaster movie that is so bad that it is actually good? Well, that is exactly what Syfy’s new television movie entitled Sharknado is. In the movie, wild weather patterns actually cause man-eating sharks to come flying out of the sky. It sounds absolutely ridiculous, and it is. You can view the trailer for the movie right here. Unfortunately, we are witnessing something just as ridiculous in the real world right now. In the United States, the mainstream media is breathlessly proclaiming that the U.S. economy is in great shape because job growth is “accelerating” (even though we actually lost 240,000 full-time jobs last month) and because the U.S. stock market set new all-time highs this week. The mainstream media seems to be absolutely oblivious to all of the financial storm clouds that are gathering on the horizon. The conditions for a “perfect storm” are rapidly developing, and by the time this is all over we may be wishing that flying sharks were all that we had to deal with. The following are 10 reasons why the global economy is about to experience its own version of Sharknado…
#1 The financial situation in Portugal continues to deteriorate thanks to an emerging political crisis. […]
#2 The economic depression in Greece continues to deepen, and it is being reported that Greece will not even come close to hitting the austerity targets that it was supposed to hit this year […]
#3 The economic crisis in the third largest country in the eurozone, Italy, has taken another turn for the worse. […]
#4 There are rumors that some of the biggest banks in the world are in very serious trouble. […]
#5 Just before the financial crisis of 2008, the price of oil spiked dramatically. […]
#6 Mortgage rates are absolutely skyrocketing right now […]
#7 This upcoming corporate earnings season is shaping up to be an extremely disappointing one. […]
#8 U.S. stocks are massively overextended right now. […]
#9 Rapidly rising interest rates are causing the bond market to begin to come apart at the seams. […]
#10 Rapidly rising interest rates could cause an implosion of the derivatives market at any moment. […]
Most Americans don’t realize that Wall Street has been transformed into the largest casino in the history of the world. Most Americans don’t realize that the major banks are literally walking a financial tightrope each and every day.
All it is going to take is one false step and we will be looking at a financial crisis even worse than what happened back in 2008.
So enjoy this little bubble of false prosperity while you can.
It is not going to last for too much longer.
March 24, 2013
In the Telegraph, Colin Freeman looks at how the banking crisis is impacting ordinary Cypriots and retired EU citizens in Cyprus:
Last weekend, the small Mediterranean island was plunged into the epicentre of the eurozone crisis when Brussels finance chiefs, led by Germany, demanded a levy of up to ten per cent of savers’ deposits in return for a 10bn euro bail-out of the country’s ailing banks. The move left many of Cyprus’s 60,000-strong British community facing heavy losses on retirement nest eggs — and as the week rolled on, that looked like being just the least of their worries.
On Thursday, unhappy at the Cypriot parliament’s rejection of the deal, Europe’s Central Bank then threatened to cut financial life support for the island altogether, a move that would have led to its banking sector collapsing, and savers losing not just a percentage of their money, but all of it. It was only thanks to a last-minute agreement hammered out on Friday night, which is expected to restructure the country’s banks and restrict the levy to deposits of more than 100,000 euros, that all-out chaos was averted. For now, anyway.
[. . .]
Since last weekend, when all of Cyprus’s banks were shut to stop a run on withdrawals, work has ground to a halt, as the repair man has been unable to buy in the materials he needs from suppliers, who are all now demanding cash. The job symbolises the malaise of the wider Cypriot economy, built on shaky foundations, and now in a state of paralysis, with thousands of shops, businesses and restaurants unable to operate properly because of the financial uncertainty.
“None of my food and drink suppliers are taking bank payments any more,” said Yiota Vrasida, 43, who owns a café in the winding streets of the capital, Nicosia. “We can keep going until this weekend, but that is about it.”
[. . .]
“Nobody will want to leave so much as 10 euros in any Cypriot bank any more,” said Dino Karambalis, 49, an IT worker, standing at the end of a 30-people-long queue at the Laiki Bank, where he had 90,000 euros in savings. “They say this levy is only for Cyprus, but why should anyone believe that? This is undermining confidence in the euro as a whole, and in the whole EU project itself. I was pro-European before, but not now.”
This weekend, the Cypriot parliament sought to reassure smaller savers, saying those with less than 100,000 euros would face at most a levy of less than one percent. State television also talked of a one-time charge of up to 25 percent on savings of over 100,000 euros held at the Bank of Cyprus. With that in mind, capital controls will be imposed to stop a run on the banks when they reopen next week.
But whatever new measures come in, some damage has already been done by declaring savers’ accounts to be fair game in the first place. Britain’s Business Secretary, Vince Cable, warned on Friday that it could lead Northern Rock-style runs on banks all over the eurozone in future.
March 16, 2013
At Forbes, Tim Worstall explains why the mandatory levy on bank accounts is an epic facepalm:
There’s nothing particularly bad about making depositors carry some of the load of a bank failure. Indeed, it has something to recommend it: if it happens occasionally then people will take more care over where they put their money and what the banks do with it.
However, there’s a very great difference between allowing depositors without government insurance to take losses and actually reneging on the previously promised government insurance. And it’s that second that they’re actually doing here. [. . .]
Under the system until yesterday all depositors in Cypriot banks were insured up to the value of €100,000 with any one bank. Today that solemn and governmental promise has been shown to be false. And not even the European Union nor the European Central Bank are going to make them stick to it. Indeed, very much the other way around. The EU and ECB are insisting that the Cyprus authorities breach this deposit insurance provision.
As I say, there’s nothing wrong with making uninsured depositors take some of the pain. Certainly nothing at all wrong with making those with large deposits take a haircut. The problem is when government has said “we’ll insure this” and when push comes to shove they say “err, no, we won’t”. And the problem with this is that it makes all future EU deposit insurance worth that much less.
February 27, 2013
Before 25-30 years ago, most people had a sense of what the law was, without having to go to law school, because they understood, intuitively, that some things were bad. Mala in se, the law calls it — “bad in itself.”
But the criminal codes have proliferated mala prohibata offenses — “bad just because the law has prohibited it” — like evil freedom-eating Tribbles for 30 years.
Do you know what you are currently permitted to do? Do you know what you will face a criminal penalty for doing?
You don’t. None of us are aware of the myriad laws we’re breaking every day, simply by doing things that seem obviously legal but some vicious Marxist bureaucrat somewhere decided to put you in jail for.
And this state of affairs works out perfectly for the Marxists.
30 years ago, you’d just assume that anything that wasn’t obviously contrary to morality was legal. That is, you’d have a built-in default setting of assuming liberty. And that assumption of liberty would then propel you to take actions.
But now, you have to assume that many things that aren’t contrary to morality are illegal anyway. And so you now have — quel coincidence! — a built-in default setting of assuming prohibition. And that assumption that many of the things you’d like to do are illegal and criminal thereby reduces your desire to take any action at all.
You become docile, unmotivated, compliant, and risk-averse.
And this state of affairs works out perfectly for those who would control you. Only half the things you’d like to do are actually criminal, but you assume the rest might be too, thus putting it in your head you need State Permission to take virtually any action besides going to work and, of course, paying the state its dues.
Ace, “Enemy of the State”, Ace of Spades HQ, 2013-02-26
January 30, 2013
Tad Dehaven thinks the upsurge in horror stories about what sequestration will do to the US economy means it’s more likely that those cuts will actually take place:
The odds that $85 billion in “unthinkable, draconian” sequestration spending cuts will go into effect in March as scheduled are looking better. The odds must be getting better because, as if on cue, the horror stories have commenced.
A perfect example is an article in the Washington Post that details the angst and suffering being experienced by federal bureaucrats and other taxpayer dependents over the mere possibility that the “drastic” cuts will occur. You see, the uncertainty surrounding the issue has forced government employees to draw up contingency plans. Contingency plans? Oh, the humanity!
[. . .]
I certainly believe that Washington’s bouncing from one manufactured fiscal crisis to the next is detrimental to the economy, but my sympathy lies with the private sector – not the federal bureaucracy. It’s the private sector that has been suffering under the constant uncertainty surrounding federal tax and regulatory policy. And let’s not forget that there is no public sector without the private sector – the former existing entirely at the latter’s expense.
Yet, what follows in the Post article is boo-hoo after boo-hoo without the slightest regard to those who are paying for it or whether the whiner’s agency could use some belt-tightening
January 7, 2013
The Economist reports on last week’s “deal” in Congress and why the markets are still able to function in spite of the almost unprecedented level of political uncertainty:
Markets now live in the policy equivalent of Beirut in 1982. They have adjusted to perpetual political dysfunction. Over the last eight weeks, as the fiscal cliff talks stumbled, revived, collapsed, then came to life again, market movements were surprisingly narrow, and much of them could be explained by tax considerations as investors prepared for higher capital gains and dividend rates. The sang froid perplexed many of us who follow the policy process for a living and knew how high the stakes were. But perhaps we were too close to it. You can steep yourself in the intricacies of political coalitions, the electoral calendar, the makeup of the executive, senate and house, the interaction of permanent and temporary fiscal policy and such arcana as reconciliation, filibusters and blue slips, and yet still not know how to model the outcome. The fiscal cliff perfectly illustrated this: the people closest to the process didn’t know any better how it would end than those reading the newspapers, or not reading the newspapers, for that matter. There were just too many moving parts.
Richard Bookstaber once attributed the evolutionary success of the cockroach to coarse decision rules: it ignores most of the information around it and responds only to simple signals. Investors do something similar when confronted with hopeless complexity. They boil it down to a binary question: disaster/no disaster. Then they ignore all the idiosyncratic inputs and ask: what does experience suggest the probability of disaster is? Four times in the last two years, politicians went up to some do-or-die deadline without going over: in December, 2010, when the Bush tax cuts first came up for expiration; in April, 2011, when the federal government nearly shut down for lack of discretionary spending authority; the following August, when Treasury was days away from hitting the hard debt ceiling; and December, 2011, when the payroll tax cut first came up for expiration. In each case, one side, or both blinked; tax rates never went up, the government never shut down, and Treasury did not stop paying bills, much less default. It was, arguably, a better record than in 1995-96 when the federal government shut down twice and Bill Clinton threatened to suspend social security payments if Newt Gingrich’s Republicans didn’t raise the debt ceiling. Ignore the specifics of the latest episodes, and the logical conclusion is that despite their differences, both sides have powerful incentives to avoid disaster, so they will.
And who are the policy experts to say otherwise? For all the twists and turns, the cliff negotiations ended up where the median market participant a few months ago assumed they would: with a short-term fix and the remainder stuffed in a can and kicked down the road.
What’s that odd whistling sound coming from Wall Street?
January 21, 2012
Writing in Time, Robert Johnson has a few recommendations to rescue the field of economics from its current state:
First, economists should resist overstating what they actually know. The quest for certainty, as philosopher John Dewey called it in 1929, is a dangerous temptress. In anxious times like the present, experts can gain great favor in society by offering a false resolution of uncertainty. Of course when the falseness is later unmasked as snake oil, the heroic reputation of the expert is shattered. But that tends to happen only after the damage is done.
Second, economists have to recognize the shortcomings of high-powered mathematical models, which are not substitutes for vigilant observation. Nobel laureate Kenneth Arrow saw this danger years ago when he exclaimed, “The math takes on a life of its own because the mathematics pushed toward a tendency to prove theories of mathematical, rather than scientific, interest.”
[. . .]
The third remedy for repairing economics is to reintroduce context. More research on economic history and evidence-based studies are needed to understand the economy and overcome the mechanistic bare-bones models the students at Harvard objected to being taught.
[. . .]
Fourth, we must acknowledge the intimate, inseparable relationship between politics and economics. Modern debates about who caused the financial crisis — government or the private financial sector — are almost nonsensical. We are living in an era of money politics and large powerful interests that influence the laws and regulations and their enforcement. In order to catalyze the evolution of economics, research teams would benefit from multidisciplinary interaction with politics, psychology, anthropology, sociology and history.
H/T to Tim Harford for the link.