Sunday, April 18, 2010

A Gathering of Donkeys at the “Genteel Surroundings of the Great Hall of Kings College”

Last week, the inaugural meeting of the Institute for New Economic Thinking was held in Cambridge University.

Gillian Tett attended the meeting and covered it for the readers of the Financial Times:
In the genteel surroundings of the Great Hall of Kings College, Cambridge, dozens of the world’s leading economists conducted an earnest conference on the future for economics, partly funded by Soros’ $50m largesse. One of the central conclusions of the day was that economists and market traders alike needed to devote far more time to human psychology, rather than just the raw economic numbers beloved by so many policy wonks.
So, the aim of the seminar, with George Soros as its sugar daddy, was to promote the “behavioral economics” that has been making the rounds in the past decade – the word “new” in the title of the gathering notwithstanding.

The meeting produced some original and high quality thoughts.

Jeremy Siegel of Wharton compared the years prior to 2007 with the years prior to 1929 and noticed a similarity: In both cases the “risk premium” went down. This, he concluded, only makes sense if investors “convince themselves that the economy is stable”.

George Akerlof, a behavioral economist, said: “In good times, people trust. But in bad times, confidence disappears and that cannot be restored.”

Adair Turner of FSA said: “We need to recognise that humans are partly rational and partly instinctive.” Half angel, half devil, he might have added.

George Soros summarized them all: “Economic phenomena have thinking participants, natural phenomena do not ... [but] participants’ thinking does not accurately represent reality.”

Hmmmm. Participants’ thinking does not accurately represent reality.

I don’t suppose Soros meant that people involved with markets are mad; that would be embarrassing. He must have meant, rather, that the reality “in itself” is something different from what we comprehend; we cannot know the reality, he wanted to say. This is more than saying that the reality is unknown. It is saying that reality is unknowable. America's own European sophisticate skipped over 200 years of the development of philosophical thought in the West to reach the beliefs of the medieval monks, which he suggests should be the starting point of a new way of thinking about economics and finance.


A while back I wrote about the Walking Man and pointed out that Giacometti is depicting a man at the instant of stopping in reaction to something he has seen.

The key to understanding the work is the Walking Man's face, which is void of any expression . At the instant that we see him, he has not yet had time to analyze, contemplate, recognize or otherwise form an opinion about the object before him. These stages of mental engagement will come later – an instant, an hour, or a year later. Our Walking Man, as we see him, is not a Thinking Man. He has not stopped because he remembered or realized or thought of something. He has stopped because he saw something in the outside world.

What will come next?

If he recognizes the object – a river, an animal, a group of men running towards him – he would do so from experience, either his own or that of his fellow men.

If he does not recognize the object, he would have to “investigate”; thinking alone will not do.

Through observation and thinking, the Walking Man would learn only the immediate, outward properties of the object. But no amount of staring at the object and thinking about it will reveal anything about its essence. He has to get closer to the object and examine it.

The connotations of “investigate” and “examine” are clear: our Walking Man will have to take action . He could, for example, run an experiment: change the natural state of the object and force it to react to new conditions and relations, in consequence of which it will reveal new properties. There are other methods of cognizance available to our man. The point is that the conscious, purposeful interaction with the outside world is the beginning and condition of the knowledge.

Knowledge is the reflection of the outside world in human consciousness. But such reflection is not passive or mechanical, a mere “mirroring”. It is “active” because it is interplay of the outside world and the man’s faculty of reasoning, interplay between the material world and subjective thought which arises from the purposeful and practical transformation of the real world by men.

But how could our Walking Man be sure that his subjective thought process accurately reflects the essence of the object, the thing “as is”, or “as God sees it”? After all, his thinking takes place through abstract, a priori notions such as cause and effect and time and space that do not seem to depend on experience. If his thinking depends on these subjective constructs, what assurance is there that he will be able to understand the true essence of the black cube, that Thing-In-Itself?

Thinking is subjective. And it does take place through a prior notions. But these notions, far from being independent of experience, are the controlling forms of experience as reflected in the human mind. They are the framework through which humans perceive the world.

It is precisely the interaction of the material world and subjective mind that is knowledge, or the search for Truth. There are not two sets of knowledge, one, “true” nature of the world, the Thing-In-Itself and the other, its reflection in human mind, the Thing-For-Us. Knowledge, rather, is the dialectical unity of these opposites. Truth is the process of interaction between the material world and the subjective mind. It is the truth of this relation, the Identity of Thinking and Being.

Truth, then, is absolutely relative because it is a process of becoming. It constantly evolves towards a higher stage, as we discover more interconnectedness. At the same time, it is relatively absolute in the sense that, with respect to a given set of conditions, it describes persistent and stable relations. The Newtonian mechanics is absolutely true within the confines of Newtonian mechanics. So are the relations of quantum mechanics within its confines. But neither is, considered abstractly, absolutely absolute.

At each stage, within the given bounds, we verify the absolute truth of the relation objectively: by our ability to reproduce, exploit and recreate the objects under definite conditions. When we know all the qualities of a thing and the synthetic unity of its parts, we know its “essence”; there is nothing more left to know except that the object is outside us.


Everything I wrote above is a part of the Western philosophical canon.

(Eastern, too, as I will show in Vol. 5. For now, here is Rumi, with an impossible brevity, in 14 words in Farsi, and an impossible beauty and poetry that cannot be translated: You hold the pen in your hand and the entire universe is a view in front of you. Some attributes of that view you create [by drawing]; some you take in [by being there]. Let the Western philosophers struggle to explain the interaction of mind and matter and the transformation of the material world by man!)

Yet, setting aside the enticement of the “research” dollars offered by Soros, none of the donkeys gathered in the Great Hall of Kings College knew anything about it. This is clear from the agenda of the conference and the utterances of its participants: In good times, investors “convince” themselves that the economy is stable. In bad times, they convince themselves otherwise. Just like that.

We say nothing by saying that man is the cause of what takes place in the world. That statement is self-evident enough. It is akin to saying that the “cause” of airplane crashes is gravity.

Man is the ultimate economic agent, it is true. But he does not act in a vacuum. He reacts to the objective conditions in the outside world.

I began this blog with a 10-part series on the current crisis. In Part 1, I wrote:
The events leading to this seizure have been covered in detail from many perspectives but always within the same prescribed framework: the crisis as the culmination of a series of unfortunate events set in motion by (choose your emphasis) greedy traders, irresponsible lenders, foolish borrowers, sleeping-at-the-switch rating agencies and feeble regulators.

The focus on the human element makes for good storytelling and has an evangelically uplifting bent that is appealing: If only the bad guys were to be replaced with good guys – something definitely in the realm of possible – the wrongs will be set right. The fault, dear Brutus, is not in our stars, but in ourselves!

Such takes on the crisis are not inaccurate; they are irrelevant. The subject matter of finance is not people; it is capital in circulation. It is silly to point out that “ultimately”, things happen in markets because people take actions; capital as a thing cannot trade or structure deals. People, however, do not act in a vacuum. They act on the basis of what they see and perceive in the market, which is another way of saying that their actions are shaped by the dynamics of capital – the form and pattern of its movement in the market. This movement takes place according to the objective laws that rise and operate independent of the actions of individual agents. To the extent that these individual actions also affect the markets, such effect is secondary.
This theme is present in many of the posts on this blog, most recently here and here.

I will have more to say on the subject on Vols 4 and 5.

Sunday, April 4, 2010

A Sad Justice

“What really for me marks a conservative judge is one who doesn’t decide more than he has to in order to do his own job. Our job is to decide cases and resolve controversies. It’s not to write broad rules that may answer society’s questions at large.”
Thus spake Justice John Paul Stevens of the U.S. Supreme Court on the eve of his retirement from the bench.

What a fool. What a waste. What an ass.

A few pages later, under the heading “School Law Clinics Face a Backlash”, the same New York Times reported how, after these clinics “go after powerful interests, lawmakers get involved”:
Law school students nationwide are facing growing attacks in the courts and legislature as legal clinics at the school increasingly take on powerful interests that few other nonprofit groups have the resources to challenge.

On Friday, lawmakers [in Maryland] debated a measure to cut money for the University of Maryland's law clinic if it does not provide details to the legislature about its clients, finances and cases.

The measure, which is likely to be sent to the governor this week, comes in response to a suit filed in March by students accusing one of the state’s largest employers, Perdue, of environmental violations.
Yet, the man who sat on the bench of the Supreme Court for 35 years, deciding matters of life and death – of individuals, communities, societies, customs and habits – sees his role as that of a clerk and a referee, of merely “resolving controversies” and not “writing broad rules that may answer society’s questions at large”.

Another simpleton who scorns “social engineering”.

I am the clerk. I am the scribe, not understanding what I hear, not knowing what I write.

What explains this mentality – this limiting quality, really?

The answer is the absence of self-criticism, that not “watching oneself”. “To the extent that I look back at earlier situations,” the judge told the Times, “I really don’t think I’ve changed all that much.”

John Berger, in his masterful novel on the exposition of art, A Painter of Our Time, writes:
[A]genius ... watches himself. That is the largest part of his technique, and it is what separates him from others. We all forget continually. The genius, because he watches himself, remembers. He naively remembers his dreams, he ruthlessly remembers his real experiences, and gradually, very gradually, he learns to remember the exact nature of his mistakes and successes as a man applying paint to a flat surface. And so he recognizes what others have felt but never known. Technique and genius are nothing more nor less than that recognitions.
The point here is not to criticize an old clerk; merely to emphasize the importance of being continually self-critical. Such vigilance gradually brings about a broader comprehension of events; we see how they all are connected.

That stage of comprehension is the material basis of a theory that is no longer an intellectual pursuit or a parlor game but a weapon.

When the Fed People Act Responsibly

Dialectics is the investigation of the relation between the whole and the part. In the past couple of times that I wrote about the illegality of the Fed’s actions, I put them in the context of a larger development of social decay.

But there are also the parts. Like the individual lines in a painting or sentences in a story, they shape our comprehension of the big picture.

On Thursday, under pressure from Congress, the Federal Reserve Bank of New York released more information about its holdings. I am quoting a few passages from a related Wall Street Journal article, followed by my comments in blue.

  • The Federal Reserve Bank of New York lifted a veil of secrecy on the troubled mortgage assets it purchased as part of the 2008 rescue of Bear Stearns Cos. and American International Group Inc.
That’s very good. We’re all for transparency. What did the newly released data show?

  • The data show the government is now in the same situation as many U.S. banks: dealing with a portfolio of loans and property that have lost their value, and which borrowers are struggling to pay off.
No surprise there. Unloading junk unto the Federal Reserve is like throwing garbage in the ocean. The garbage might not be in front of your eyes, but it is there in the environment and will be returned to you in due time.

  • For months, the regional Fed bank has been under pressure from lawmakers to make public details of the assets in three special-purpose companies that were created to take on roughly $80 billion in troubled mortgage positions previously held by Bear Stearns and AIG ... As of the end of 2009, the New York Fed was owed about $62 billion by three Maiden Lane vehicles.
The New York Fed has invested $80 billion in troubled “positions”; the paper cannot bring itself to call them securities. Now if you invest $80 billion in fixed income securities, you should be “owed” $80 billion. But the New York Fed is owed “about” $62 billion. The missing $18 billion must have been straight write down, money down the rat hole, as explained next.

  • One loan controlled by the government is $12.75 million in financing Bear Stearns provided to the owner of the 167-room Radisson Hotel in Jacksonville, Fla. The hotel is owned by a venture controlled by Philadelphia real-estate investment company AMC Delancy Group Inc. Kenneth Balin, AMC chairman and chief executive, said he believed Bear provided the loan with plans to include it in a debt pool known as a securitization. But that never happened, leaving Bear, and now the government, with the note.
Bear Stearns provided the loan with plans to include it in a debt pool known as securitization.

In case you don’t follow the technical jargon, Bear Stearns lent $12.75 million to AMC Delancy group without, no doubt, much of any review or analysis. Why? Because it was planning to bundle the loan with other equally shaky loans, say one for $12.25 million and another for $25 million, and sell the pool, now a “callateralized debt obligation or CDO” for more than its par value of $50 million, to say, $55 million. That is what Countrywide also did. And Citi. And Washington Mutual. You get the idea. That is what drove the “boom” that preceded the crash.

Alas, all the good things must come to an end. Bear went under before it could sell the junk to the public.

  • Mr. Balin said that loan was used to refinance debt borrowed in 2004, when it bought and renovated the hotel property.
This is the confirmation, if any was needed, that the current “note” is a junk bond that replaced another junk bond. The interesting thing is that the Journal does not say when the refinancing took place. My guess would be sometime in 2006.

  • Mr. Baling said that, so far, he gives top marks to those overseeing the loan on behalf of the U.S. taxpayer. “The people that are handling this note are behaving responsibly,” Mr. Balin said.
Here, the Journal abdicates its responsibility of honestly reporting the event by not telling us the Mr. Balin winked. In fact, it adds a wink of its own by bringing in the U.S. taxpayers.

Nasser, but you were not there. How do you know that he winked?

The man must have winked because he is mocking us.

He has a $12.75 million loan that he cannot repay. But the original lender is gone and the loan has somehow ended up on the books of the Federal Reserve Bank of New York, which “oversees” it. And what a marvelously accurate word that is, the “oversee”, the ultimate mot juste.

You see, the New York Fed cannot foreclose the loan, else it would be in possession of a Florida hotel. No one would buy the loan because it is junk. So, what other option is there if Mr. Balin is not paying, which he is not? The answer is, Nothing. The bank has to oversee the loan, the way a loyal agent would oversee an estate, until such time that Florida real estate market recovers. Then Mr. Balin would approach the Fed with an offer that the bank cannot refuse. He will buy his note at some deep discount and the New York Fed would announce another step towards the anxiously awaited goal of reducing its balance sheet.

  • Noting guest-satisfaction surveys, Mr. Baling added: “It’s a beautiful hotel”
I told you, the man is mocking us.

One critical item that I do not understand is how this note ended up on the balance sheet of the New York Fed. I thought that Bear Stearns was taken over by JPMorganChase, so this security should have been on the bank’s balance sheet.

But that is not entirely accurate. Come to think of it, I actually do understand.