Paul Krugman's regular Times editorial, "Fighting Off Depression," an accompanying Op-Ed by Wendell Berry and Wes Jackson entitled "A 50-Year Farm Bill,", and a 'Current Markets' report in the Journal by Deborah Blumberg, "Twin Risks for Treasurys in Year Ahead," together suggest some important ideas that seemed useful to develop. Of all the marvelous materials concerning the morass that now confronts us--folks might also look at Joe Nocera's essay in the 'Magazine' section of yesterday's Times, "Risk MisManagement"--none obviously attempts to synthesize critique and analysis in such a way as to include the systematically, structurally and dynamically unavoidable issues that surround the recent impasse. This brief missive attempts a first step in that direction.
Here are the links to the articles above, should anyone want to visit.
farm bill-- http://www.nytimes.com/...
fighting off depression-- http://www.nytimes.com/...
twin risks-- http://online.wsj.com/...
(full text)-- http://remington-work.blogspot.com/...
risk mismanagement-- http://www.nytimes.com/...
As far as I've noticed, and I've been following this since the last really systemic world-wide contraction in the early seventies--the bubbles of the Savings and Loan crisis and the 'dotcom' crash are bumps-in-the-road by way of comparison--somewhere between zero and very few analyses in the popular press are presenting a complete picture of what characterizes our collective present day economic activity around the globe. At the very least, such a depiction would need to include and interrelate the following factors.
#1--Productivity of labor worldwide is highly advanced if not completely uniform, with a few pockets of exceptions in Asia and Latin America, and fairly general exceptions in sub-Saharan Africa.
#2--Large wage differentials characterize labor markets, which are neither pliable by nor participatory for outside parties without governmental permission.
#3--Flows of capital on the other hand, and capital markets generally, are often electronic and for the most part open to access from anywhere, including placement and utilization of all but the most 'sensitive' productive technologies.
#4--Public corporations generally have a legal, fiduciary duty to maximize profits, and in any case, most 'private-sector' conglomerations of capital do maximize profits.
#5--'Unemployed' capital is thus often against the law, and it is always anomalous.
#6--Unemployed labor, on the other hand, often appears unavoidable, at as high as 10% in 'developed' nations, and as high as over 1/3 of the work force in still 'developing' nations.
#7--International trade relations, similar to capital flows for investment purposes, while not always in the form of inviolable statutes, nonetheless favor open borders for exchanges and transactions that deal with capital and commodities, while labor rights, similar to workers' rights to relocate or otherwise participate globally, remain much more the province of national government.
#8--Long term cycles(Kondratiev, et al.)that no one contends to completely understand seem to make downs as inevitable as ups.
#9--Over time, productivity rises substantially, while wages stagnate or fall, which results in regular gluts or surpluses and trouble in the clearing of commodities for profit.
#10--Even as productivity and fluidity and technical proficiency increase overall profits, finding the highest rate of profit becomes harder and harder to manage, which results at some juncture in a crisis that effects a plunge in equity and trade and confidence, as well as, most recently credit of almost every sort.
#11--Extending business and consumer credit widely has for the past decade or so served as the most recent solution to the paradox or disparity apparent in #10.
#12--At the top of the political economic food chain, groups of organizations, families, and individuals--the Ford Foundation and other NGO's, for example; JPMorgan, AIG, UBS and other financial organizations, for example; top manufacturing and extractive cartels such as OPEC, auto companies, steel manufacturers, and more, for example; Governmental executives such as the Federal Reserve, the Bank of England, and many more, for example;, military and other industries dependent on tax expenditures, for example; U.N. and other International NGO's such as the IMF, the World Bank, G-8, and more for example--all are conscious of #'s1-11 and many other critical areas of understanding, and they work consistently, if not always in tandem, nevertheless always in such as fashion as to maintain their place and power.
#13--Opposite, if not opposing, these organized and conscious ruling elements stand an inchoate mass of humanity that does the work and buys almost everything that makes the hegemony of #12 possible.
As I noted, several particularly interesting assessments of elements of this general situation have appeared in the past couple of days. Joe Nocera examines the so-called "Value-at-Risk" formula which so effectively managed the issues outlined above that for fifteen years, even through the collapse of Long Term Capital Management and the Silicon Valley implosion at the end of Clinton's second term, financiers turned to it as what Nocera called "the one number" that determined a firm's investment and strategic choices.
VaR, in other words, became institutionalized. RiskMetrics went from having a dozen risk-management clients to more than 600. Lots of competitors sprouted up. Long-Term Capital Management became an increasingly distant memory, overshadowed by the Internet boom and then the housing boom. Corporate chieftains like Stanley O'Neal at Merrill Lynch and Charles Prince at Citigroup pushed their divisions to take more risk because they were being left behind in the race for trading profits. All over Wall Street, VaR numbers increased, but it still all seemed manageable — and besides, nothing bad was happening!- Advertisement -
Nocera notes that VaR replaced the discredited "Portfolio Insurance," which contributed to the S&L meltdown in similar fashion as VaR lubricated our present implosion. But the international marketplace necessitated something akin to the discredited mechanism, making VaR, to use one banker's term, "inevitable." As Nocera explains,
The late 1980s and the early 1990s were a time when many firms were trying to devise more sophisticated risk models because the world was changing around them. Banks, whose primary risk had long been credit risk — the risk that a loan might not be paid back — were starting to meld with investment banks, which traded stocks and bonds. Derivatives and securitizations — those pools of mortgages or credit-card loans that were bundled by investment firms and sold to investors — were becoming an increasingly important component of Wall Street. But they were devilishly complicated to value. For one thing, many of the more arcane instruments didn't trade very often, so you had to try to value them by finding a comparable security that did trade. And they were sliced into different pieces — tranches they're called — each of which had a different risk component. In addition every desk had its own way of measuring risk that was largely incompatible with every other desk.
Of course, nine out of ten or more of the accounts from the past six months that have sought to account for the collapse have focused on this sort of 'gambling.' Unfortunately, according to everyone whom Nocera interviewed, with the curmudgeonly exception of Nassim Nicholas Taleb, or Taleb to his cohorts and clients and opponents, this course of what most people would call arrogant incaution was essentially a systemic mandate.
"If you say that all risk is unknowable," Gregg Berman said, "you don't have the basis of any sort of a bet or a trade. You cannot buy and sell anything unless you have some idea of the expectation of how it will move." In other words, if you spend all your time thinking about black swans, you'll be so risk averse you'll never do a trade.
Moreover, fiduciary duty and the pursuit of maximization was a matter, not of expectation and choice, but of the essential nature of the beast.
At the height of the bubble, there was so much money to be made that any firm that pulled back because it was nervous about risk would forsake huge short-term gains and lose out to less cautious rivals. The fact that VaR didn't measure the possibility of an extreme event was a blessing to the executives. It made black swans all the easier to ignore. All the incentives — profits, compensation, glory, even job security — went in the direction of taking on more and more risk, even if you half suspected it would end badly. After all, it would end badly for everyone else too. As the former Citigroup chief executive Charles Prince famously put it, "As long as the music is playing, you've got to get up and dance." Or, as John Maynard Keynes once wrote, a "sound banker" is one who, "when he is ruined, is ruined in a conventional and orthodox way."- Advertisement -
This helps a bystander to understand the seemingly gratuitous greed and carnivorous cupidity that at least 95% of the corporate media articles on the disaster point out. Greed is good, greed is fundamental, greed is capitalism.
Nocera's piece is brilliant, but in it you'll find nothing about trade, nothing about unemployment, nothing about politics except the excuses of the Federal Reserve. Whatever we make of the present pass, we who are not of the plutocratic set must find a way to make sure that our needs and ideas are part of the frame. At least, VaR missing out on such basic facts of life cannot be in our long term best interest. The critic, Taleb, put the matter bluntly in his rejection of such instruments, contradictions of capitalism be damned. 'If you can be sure that 99% of the time, you won't lose more than your stake, put another way, 1% of the time you can lose amounts that are essentially too big to calculate.'
Deborah Blumberg tells a much more mundane tale, albeit it is one that makes last week's Russian fantasy--that the U.S. would break into pieces in the next few years--seem altogether too plausible, chillingly so if one considers what her assessment implies. She writes a story about the prospects for long term Treasury Bond auctions in 2009. As bad as 2008 was, she says, 2009 may end up even more daunting.
A chief concern is the amount of issuance on tap. Goldman Sachs Group Inc. puts the amount the U.S. government needs to raise at about $2 trillion, including new issuance and rolled-over securities. Goldman said it could be more, depending on the size of the incoming Obama administration's stimulus package.