IPCC vs Reality

MSimon · Post by **MSimon** » Tue Jun 09, 2009 4:08 am

What will the harm have been if CO2 emissions are limited until then?

Hungry people in America. Revolution in China. People who could be lifted out of poverty with more electrical power condemned to starvation. Forests decimated to provide cooking fuel and warmth at night.

Nothing very serious though. Because the people doing the dying are not our kind.

vankirkc · Post by **vankirkc** » Tue Jun 09, 2009 4:28 am

There may be occasional swings of irrationality in one sector or another, but if capitalism were essentially irrational we'd all be communists instead because that would work better. Overall, markets are very rational. Oh, and btw: fear and greed are rational too.

What is the basis for your assertion that capitalism and markets are 'very rational'? I would think the last twenty years of deregulation in the capital markets would conclusively prove that when they are left to themselves they aren't rational at all. What was the rationale for bankrupting the entire world? On an individual level, perhaps it made sense for the traders at AIG who got bonuses from the risky trades, but surely you can't argue that it was rational for the rest of us?

Don't get me wrong, I'm a believer in capitalism, but I think it's a stretch to argue that it is 'essentially rational.' Rather, I would argue that it is an excellent way to harness greed and individual self interest in the service of efficiency. In this regard it's far superior to communism, which relies on individual altruism to function. But to function properly it needs to be constrained, just as individual actions are constrained by laws elsewhere in society (e.g. prohibitions on theft, arson, murder, rape, etc).

MSimon · Post by **MSimon** » Tue Jun 09, 2009 4:38 am

vankirkc wrote:There may be occasional swings of irrationality in one sector or another, but if capitalism were essentially irrational we'd all be communists instead because that would work better. Overall, markets are very rational. Oh, and btw: fear and greed are rational too.

What is the basis for your assertion that capitalism and markets are 'very rational'? I would think the last twenty years of deregulation in the capital markets would conclusively prove that when they are left to themselves they aren't rational at all. What was the rationale for bankrupting the entire world? On an individual level, perhaps it made sense for the traders at AIG who got bonuses from the risky trades, but surely you can't argue that it was rational for the rest of us?

Don't get me wrong, I'm a believer in capitalism, but I think it's a stretch to argue that it is 'essentially rational.' Rather, I would argue that it is an excellent way to harness greed and individual self interest in the service of efficiency. In this regard it's far superior to communism, which relies on individual altruism to function. But to function properly it needs to be constrained, just as individual actions are constrained by laws elsewhere in society (e.g. prohibitions on theft, arson, murder, rape, etc).

The capital markets were no more deregulated than California's electrical market was deregulated when they were having electrical power troubles.

Instead a perverse set of incentives was installed and that was called deregulation. Same for the economic meltdown. Here is how it went. Government incentives encouraged less than credit worthy people to buy homes. This started all real estate on an upward spiral. Then the music stopped.

Where exactly was the deregulation?

And the trouble with regulation as it is done? It gives a false sense of security. Risks are underestimated. Meaning returns are not high enough for the actual risk. Bringing more high risk situations into the market. Not to mention moral hazard.

vankirkc · Post by **vankirkc** » Tue Jun 09, 2009 5:51 am

MSimon wrote:
vankirkc wrote:There may be occasional swings of irrationality in one sector or another, but if capitalism were essentially irrational we'd all be communists instead because that would work better. Overall, markets are very rational. Oh, and btw: fear and greed are rational too.

What is the basis for your assertion that capitalism and markets are 'very rational'? I would think the last twenty years of deregulation in the capital markets would conclusively prove that when they are left to themselves they aren't rational at all. What was the rationale for bankrupting the entire world? On an individual level, perhaps it made sense for the traders at AIG who got bonuses from the risky trades, but surely you can't argue that it was rational for the rest of us?

Don't get me wrong, I'm a believer in capitalism, but I think it's a stretch to argue that it is 'essentially rational.' Rather, I would argue that it is an excellent way to harness greed and individual self interest in the service of efficiency. In this regard it's far superior to communism, which relies on individual altruism to function. But to function properly it needs to be constrained, just as individual actions are constrained by laws elsewhere in society (e.g. prohibitions on theft, arson, murder, rape, etc).
The capital markets were no more deregulated than California's electrical market was deregulated when they were having electrical power troubles.

Instead a perverse set of incentives was installed and that was called deregulation. Same for the economic meltdown. Here is how it went. Government incentives encouraged less than credit worthy people to buy homes. This started all real estate on an upward spiral. Then the music stopped.

Where exactly was the deregulation?

And the trouble with regulation as it is done? It gives a false sense of security. Risks are underestimated. Meaning returns are not high enough for the actual risk. Bringing more high risk situations into the market. Not to mention moral hazard.

All I can say about this is that I hope you are better informed about Polywell technology than you are about finance.

MSimon · Post by **MSimon** » Tue Jun 09, 2009 8:51 am

vankirkc wrote:
All I can say about this is that I hope you are better informed about Polywell technology than you are about finance.

I have learned one or two things about finance over the years:

http://powerandcontrol.blogspot.com/200 ... d-buy.html

http://powerandcontrol.blogspot.com/200 ... frank.html

And one of my very favorites where the head of Fannie personally thanks Mr. Obama for his support:

http://www.classicalvalues.com/archives ... p_bet.html

==

http://www.classicalvalues.com/archives ... nnect.html

http://www.classicalvalues.com/archives ... _help.html

http://powerandcontrol.blogspot.com/200 ... arade.html

There are way more but that ought to be enough to get you started.

==

And it is quite possible I'm slightly acquainted with Polywell as well.

TallDave · Post by **TallDave** » Tue Jun 09, 2009 6:07 pm

What will the harm have been if CO2 emissions are limited until then?

It scares me that some people don't understand why losing trillions of dollars in economic growth because of a nonissue is harmful.

What is the basis for your assertion that capitalism and markets are 'very rational'?

Because if they weren't, countries with free markets wouldn't have had the huge GDP growth they've had over the last 100 years compared to non-capitalist countries, and we would have lost the Cold War (at the time, a lot of smart people thought the West would in fact lose out to "rational" Communism for just that reason). Strangely, lot of people still seem confused by this, even though the Soviet Union collapsed and Korea stands as a stark contrast of capitalism and the alternative.

Capitalism allocates investment with an efficiency that is unparallelled.

I would think the last twenty years of deregulation in the capital markets would conclusively prove that when they are left to themselves they aren't rational at all.

Well, first off, one crisis doesn't reverse a couple hundred years of cumulative GDP improvements that are so unprecedented in human history middle-class Americans live better than any ancient king ever did by most measures. This is like complaining bitterly about losing a quarter down a storm drain after winning the lottery.

Secondly, two things happened: the politicians dismantled Glass-Steagal, allowing banks to become "too big to fail." The rational response to an implicit guarantee of gov't bailout was for those companies to take on more risk. They did. Politicians then demanded they take on even more risk by giving loans to bad credit risks in the name of social justice. They did. And as soon as recession hit and some people couldn't repay their loans, instead of a few high-risk players going down we had a systemic problem.

This was not a failure of free markets, it was a failure to keep markets free. A free market cannot players that are deemed too big to fail, carrying bad investments pushed on them by the government.

Acts of government may not be rational, but the economic responses to them generally are.

What's interesting is that Europe, which is supposedly more regulated, has problems just as bad. The one glaring exception in all this is Canada, which has a relatively simple reserve regulation scheme that didn't have the loopholes found in other countries' more complex regulations.

MSimon · Post by **MSimon** » Tue Jun 09, 2009 6:32 pm

Capitalism allocates investment with an efficiency that is unparallelled.

Take America - you have 300 million people all looking for a better deal.

What's interesting is that Europe, which is supposedly more regulated, has problems just as bad.

Worse actually.

This time it was going to be different. But it is the same old. America catches a cold and the world catches a fever. Everyone tells us how bad our system is - until they figure out that without it they don't do well.

TallDave · Post by **TallDave** » Tue Jun 09, 2009 7:06 pm

America catches a cold and the world catches a fever.

I told people for years that a trade deficit was a double-edged sword. Some of the GDP numbers in trade-surplus countries like Japan and Germany are truly frightening. I can't even imagine what a 15% quarterly decline would be like.

Live by the export, die by the export.

tomclarke · Post by **tomclarke** » Tue Jun 09, 2009 8:35 pm

Simon,

We all agree markets live by having bubbles and crashes, to temper people's (irrational) risk-seeking behaviour. Too long without a crash and the risk-seeking gets bigger, so the eventual crash is worse.

The reason this time was worse is that a whole load of obscure derivatives were traded without regulation or transparency, so allowing risks to be magnified many times. That is what happens in a free market unless care is taken to regulate.

You may call this regulation ensuring transparency - it does not matter - it still needs some over-arching control.

The Reith Lectures 2009 (BBC Radio 4) are particularly apposite for this thread - about the moral consequences of marketisation:
http://www.bbc.co.uk/programmes/b00729d9

They suspect they will deeply annoy you & TallDave.

Tom

TallDave · Post by **TallDave** » Tue Jun 09, 2009 9:21 pm

The reason this time was worse is that a whole load of obscure derivatives were traded without regulation or transparency, so allowing risks to be magnified many times.

Not true, we had all kinds of regulations, and so did Europe. They just weren't applied very well. This wouldn't have mattered especially (lots of financial companies failed due to derivative problems in the past) except the politicians allowed institutions to become so large the risk was systemic.

The Reith Lectures 2009 (BBC Radio 4) are particularly apposite for this thread - about the moral consequences of marketisation
...
Michael Sandel, Harvard Professor of Government, delivers four lectures about the prospects of a new politics of the common good.

I scanned the transcript, it wasn't that interesting. It's a given in market economics that marketising changes norms; that's really the whole point. The situation of charging late fees at school/daycare is a perfect example; the point is not to reduce the number of late parents, the point is to stop rewarding people for violating social norms and impose costs on those requiring the extra service of having their children watched after hours. It just better matches the costs of that service to those using the service. If the fees are insufficient to pay what it costs the school to watch the children after hours, then you raise the fees. If parents are willing to pay for the privilege of being late, great, if not they show up on time. Everyone wins.

You should really pick up Milton Friedman's Capitalism and Freedom and Hayek's Road to Serfdom.

MSimon · Post by **MSimon** » Tue Jun 09, 2009 11:07 pm

Tom,

The fact that people think that regulation reduces risk below actual risk is a hazard of regulation. People are more careful in high risk situations.

i.e. it is safer jumping out of airplanes if you rig your own chute (assuming you know how) and if you don't know how you probably shouldn't be jumping out of airplanes. At minimum you should know enough to be able to tell if your chute was properly packed.

So the deal is: the more government regulates to eliminate hazard the greater the odds of very big problems.

vankirkc · Post by **vankirkc** » Wed Jun 10, 2009 2:08 am

TallDave wrote:
What will the harm have been if CO2 emissions are limited until then?
It scares me that some people don't understand why losing trillions of dollars in economic growth because of a nonissue is harmful.

What is the basis for your assertion that capitalism and markets are 'very rational'?
Because if they weren't, countries with free markets wouldn't have had the huge GDP growth they've had over the last 100 years compared to non-capitalist countries, and we would have lost the Cold War (at the time, a lot of smart people thought the West would in fact lose out to "rational" Communism for just that reason). Strangely, lot of people still seem confused by this, even though the Soviet Union collapsed and Korea stands as a stark contrast of capitalism and the alternative.

Capitalism allocates investment with an efficiency that is unparallelled.

I would think the last twenty years of deregulation in the capital markets would conclusively prove that when they are left to themselves they aren't rational at all.
Well, first off, one crisis doesn't reverse a couple hundred years of cumulative GDP improvements that are so unprecedented in human history middle-class Americans live better than any ancient king ever did by most measures. This is like complaining bitterly about losing a quarter down a storm drain after winning the lottery.

Secondly, two things happened: the politicians dismantled Glass-Steagal, allowing banks to become "too big to fail." The rational response to an implicit guarantee of gov't bailout was for those companies to take on more risk. They did. Politicians then demanded they take on even more risk by giving loans to bad credit risks in the name of social justice. They did. And as soon as recession hit and some people couldn't repay their loans, instead of a few high-risk players going down we had a systemic problem.

This was not a failure of free markets, it was a failure to keep markets free. A free market cannot players that are deemed too big to fail, carrying bad investments pushed on them by the government.

Acts of government may not be rational, but the economic responses to them generally are.

What's interesting is that Europe, which is supposedly more regulated, has problems just as bad. The one glaring exception in all this is Canada, which has a relatively simple reserve regulation scheme that didn't have the loopholes found in other countries' more complex regulations.

So let me get this straight. Your argument is that this crash happened because Glass-Steagall (a regulatory constraint preventing banks from owning other kinds of financial companies) was removed, and that if it hadn't been we would have been okay? Putting aside the fact that this is wrong, if it were correct how would it support your assertion that a) the crash isn't a result of deregulation, and b) that markets should be 'free'?

The truth is quite a bit more involved than you're making it out to be. I agree with you, though. Markets do need to be regulated in order to keep them safe, just like streets need to be policed. And by safe, I don't mean risk-free.

vankirkc · Post by **vankirkc** » Wed Jun 10, 2009 3:27 am

MSimon wrote:
vankirkc wrote:
All I can say about this is that I hope you are better informed about Polywell technology than you are about finance.
I have learned one or two things about finance over the years:

http://powerandcontrol.blogspot.com/200 ... d-buy.html

http://powerandcontrol.blogspot.com/200 ... frank.html

And one of my very favorites where the head of Fannie personally thanks Mr. Obama for his support:

http://www.classicalvalues.com/archives ... p_bet.html

==

http://www.classicalvalues.com/archives ... nnect.html

http://www.classicalvalues.com/archives ... _help.html

http://powerandcontrol.blogspot.com/200 ... arade.html

There are way more but that ought to be enough to get you started.

==

And it is quite possible I'm slightly acquainted with Polywell as well.

The problem with drawing all your information from blogs is that the facts get lost and in their place you get dogma.

I'll stipulate that Fannie Mae bought influence in Congress. In fact..I'll stipulate that all of the financial companies did so. To a large extent, this influence money is responsible for the traction that the deregulation doctrine has had over the past twenty years or so.

But if you think that Barney Frank has some secret cabal of all-powerful gnomes directing the course of global finance then you're just deluded. I mean so what if Frank has skeletons in his closet. Who on capitol hill doesn't? They're all corrupt as far as I'm concerned.

You have to keep in mind that the financial markets are populated with large numbers of very well educated and intelligent people (or at least were until they all got fired!) who were more than capable of understanding what they were doing and the risks they were taking. In fact, many of them were Republicans! Each link in the chain had a different reason for doing the things that they did, some of the reasons were delusional, some were cynical, and some were just plain stupid. But I would argue that none of the guys trading this stuff had much interest in the government beyond keeping it out of their hair, nor did the government have much impact on what they were doing..because mostly these markets, the ones that actually did the damage, were free of regulatory constriction.

Next, you say that 'regulation gives a false sense of security'. I dispute that. Generally speaking regulation in the financial industry is implemented in three ways:

a) disclosure requirements
b) capital adequacy requirements
and c) trading restrictions

One of the key reasons that the credit derivative mess became so intractable was that, unlike most insurance policies, this variant had no caiptal requirement. You could, and some players actually did, write multi-billion dollar swaps with no capital to back them up. If AIG had been required to reserve capital for their swaps in the ratios that are already required of normal insurance policies they never would have been able to build up positions large enough to become a systemic risk, and it would have been apparent to everyone in the company what kinds of risks that unit was taking on. Incidentally, the repeal of Glass Steagall had no effect whatsoever on AIG, an insurance company, so the idea that the root of the mess can be traced back solely to that change is wrong.

Anyway. Running a market without regulation is like driving without a safety belt. It doesn't guarantee you'll live through a crash, but driving with one on improves your chances of survival. And yeah it might chafe and feel limiting, but it's not going to prevent you from getting where you're going.

MSimon · Post by **MSimon** » Wed Jun 10, 2009 4:34 am

Anyway. Running a market without regulation is like driving without a safety belt. It doesn't guarantee you'll live through a crash, but driving with one on improves your chances of survival.

I would agree if regulation was done by disinterested third parties. It is not. It is done by bought and paid for legislators.

And of course Barney Frank is not part of some secret cabal. It is the people who buy him who are the cabal - secret and not so secret.

So then the question is - why weren't CDSs regulated?

Here is one theory:

http://blog.americanbanker.com/bankthin ... _play_nice

My theory? Well the cabal might have had something to do with it. With no reserve rqmts. there was a LOT of money to be made. And you know the quants had "proved" the risks were manageable. So why regulate?

But it all started with "risk free" loans backed by the full faith and credit... Followed by bundling. So the originators sold their risk to people unfamiliar with the actual properties. Property became a commodity. Unfortunately property does not have all the properties of grains of rice. Substitution of the Taj Mahal with your downtown Hilton Hotel is not possible.

Of course regulation can be bad when the cost of compliance exceeds the value of the losses (not a strictly true idea it has to be averaged, losses with no rules or different rules must be estimated, etc. but this is a blog comment).

We see the regulation problem in government (esp. military contracts). I worked for a company that wanted to give a $600 bolt set for a piece of eqpt. to the government for free as a good will gesture. The government said that without the paperwork proving the bolts are exactly the ones we want we can't accept your kind offer. We SOLD them the bolts at a good profit and made a nice profit on the paper work too!

What the financial industry needs is its own UL. Funded the same way - voluntarily. And who should be behind such a venture: insurance companies. They have skin in the game. The government is a very blunt instrument and acts only after all the horses are stampeded from the barn and the government is subject to "influence".

We used to have honest bond rating agencies. These days their honesty seems a little frayed around the edges.

So what is the real fix IMO ? Assume regulations do the most for the cheats. Accept that in exchange for high average growth occasionally things need sorting out by the MARKET. Be prepared for a haircut.

MSimon · Post by **MSimon** » Wed Jun 10, 2009 4:52 am

Short version: running a system on the basis that "every one is a crook" is a losing proposition. If there is enough trust transaction costs are low.

Letting the market sort out the untrustworthy is probably cheaper than government regulation if you consider all the factors such as forgone growth.

Simple regulations encourage simple scams which are easier to detect.

i.e. can you accept a cold every year in exchange for reducing your risk of an Ebola epidemic every 20 years? (which is strictly a hypothetical since AFAIK colds do not improve immunity to Ebola).

It is a genetics problem. If dumb crooks can't survive you are left with the really smart ones. The dumb crooks provide an educational service. At low cost. So government has regulated out the low cost producers. Now there is a surprise.