By James Kwak
There has been a lot of criticism of regulatory agencies in the past couple of years, from the Office of Thrift Supervision and the Securities and Exchange Commission (Madoff who?) to the Minerals Management Service. But most of the people in these agencies are not evil; on the contrary, I believe (without a ton of evidence in support at the moment) that a majority are conscientious, hard-working, and civic-minded, and a significant minority are actually quite good at what they do. So why do they get things so wrong?
A few days ago, Leslie Kaufman of The New York Times wrote an article describing how the Fish and Wildlife Service “signed off on the Minerals Management Service’s conclusion that deepwater drilling for oil in the Gulf of Mexico posed no significant risk to wildlife.” This sounds like classic incompetence, or corruption, or both.
But the report itself, it seems, was not so far off, at least in its details. The report assessed spills of up to 15,000 barrels of oil. As Kaufman paraphrases,
“In its 71-page biological assessment, the Minerals Management Service concluded that the chances of oil from a spill larger than 1,000 barrels reaching critical habitat within 10 days could be more than 1 in 4 for the piping plover and the bald eagle, as high as 1 in 6 for the brown pelican and almost 1 in 10 for the Kemp’s ridley sea turtle. When the model was extended to 30 days, the assessment predicted even higher likelihoods of habitat pollution. . . .
“‘Heavily oiled birds are likely to be killed,’ the assessment said.”
Fifty-one days after the well explosion, the amount of oil spilled is probably somewhere between one and three million barrels.
So what happened? Probably two things.
First, someone at MMS decided that they would only model spills of up to 15,000 barrels, even though BP’s permit to drill the well estimated a worst-case scenario of 162,000 barrels per day.
Second, the local FWS office “considered that any likelihood under 50 percent would not be enough to require the protections of [the] office.”
This second decision seems incredibly stupid. After all, why 50 percent? And let’s say you review four reports for four different things, each of which says there is a 25 percent chance of something bad happening. At that point, the chances of something bad happening rise to about 70 percent. You always rule out the possibility of stupidity at your peril. But another possibility is that FWS had been told it could only act in cases where the risk was greater than 50 percent, because some political appointee had decided that that was the meaning of some statute.
In other words, it doesn’t take a lot of meddling to produce these terrible results. One political appointee or middle manager sympathetic to industry sets the parameters of a study. Another political appointee sets the threshold for action. And look what happens.
It’s like saying that all regulations have to pass cost-benefit analyses, and then setting the rules for how to do those analyses. (In general, it’s much harder to measure the benefits of regulation–because it involves the value of, say, clean air–than the costs of regulation.) Like saying you have to discount future lives at a rate of 7 percent per year, which makes it possible to justify putting any amount of toxins into the ground (or the plastic products we eat out of), because the health effects are decades away.
We all know what the results look like.
138 thoughts on “Why Agencies Get Things Terribly Wrong”
In my view you cant broadly have faith in free markets AND be surprised with a nasty outcome where two opposing forces, who may well be very much at war (the national debt is certainly war sized!) and at least will be during times when it matters most, face such a vast gap in resources. The importance of pay is hardly a topic alien to the industry, in fact they like to articulate about it, often! Its not sufficient, but it’s certainly necessary.
Articles every so often on this blog make this point well. https://baselinescenario.com/2010/06/17/why-%E2%80%9Cliving-wills%E2%80%9D-fail/
Some what less seriously, “I believe (without a ton of evidence in support at the moment) that a majority are … hard-working …”
Many people should understand how this happens as it is not confined to regulatory agencies but occurs on a regular basis in business as well.
I find that a “faith in free markets” of commerce is as foolish as a “faith in free intersections” of transportation. Markets and their users are “structured” by education, training and physical infrastructure to enable primarily homeostatic regulation of the flows of commerce. Intersections and their users are similarly “structured” by education, training and physical infrastructure to enable homeostatic regulation of the flows of traffic.
There is nothing magic, nor particularly reliable about how either operate. Neither could function without the mental and physical infrastructure and enforcement mechanisms which inhibit the selfish or poorly educated from destroying overall flow in pursuit of selfish gains.
I recently posted a more detailed account of the commerce flow/traffic flow duality, which makes clearer the stupidity of economic deregulation.
Another metaphor which I like to use vis-a-vis regulation and regulatory agencies is the eternal battle between our immune systems and pathogens and parasites. To a large extent, executives of large corporations are parasites, with their companies being their primary hosts and the market place as their indirect hosts for parasitic activities of their companies. Parasites drain resources without returning comparable value to their hosts.
One solution to the problem of unreliable or miscreant regulators would be their placement in military penal units assigned to serve only during the most dangerous offensive operations in Afghanistan. A direct connection would be made in part thereby between those most responsible for corruption and the policies that issue from it. A similar program of emergency nude diver units could be instituted for the manual recaping for oil well leaks and so on. I fully suspect that a noticible improvement of regulatory efficiency would come about.
“I find that a “faith in free markets” of commerce is as foolish as a “faith in free intersections” of transportation.”
Great analogy. It’s also like sports without referees.
Too often, “free market” advocates seem to want to falsely assume that markets are some sort of natural, organic feature of the social universe while at the same time viewing government as some sort of artificial institution that exists outside the system and was “imposed” upon it.
Sane people need to make sure they continually point out the absurdity of this view.
We shouldn’t be surprised that the parasites and pathogens of business (generally corporate executives seeking to fatten their compensations by taking shortcuts) need to be continually regulated by a social immune system. Nor should we be surprised that they regularly game their corporate hosts, the regulations, the regulatory agencies, the legislatures which write the laws and fund the agencies, and the people who vote for the legislators. That is the nature of parasites and pathogens, to find some way through defense mechanisms so that they can thrive. In nature it is a strategically healthy dance of Shiva.
However, we should be more critical of ourselves for allowing deregulation upon which the parasites thrive and the economic system collapses. We must regulate economics, safety, pollution, etc. but we must do so in a multi-layered and adaptable way and be ever vigilant of how the system is being gamed.
The human immune system has evolved to deal with all levels of parasitic and pathogenic manipulation; not perfectly because it is has limited resources, but adequately under most situations. We can learn how to regulate business more effectively by studying how our immune systems operate to protect us from parasites and pathogens.
For a detailed description of how executive parasites game their corporate hosts see
Click to access Executive%20Compensation%20and%20Golden%20Parachutes.pdf
As someone who had to do the cost-benefit analyses, you also have to realize that the Office of Management and Budget has a ton of embedded free marketers in there who evaluate and micro-manage every assumption going into these analyses. They are incredibly powerful and have successfully blocked environmental and safety rules. After a while, the agencies get “trained” on what kinds of analyses will get through the reviews.
The mantra of “deficits” is to prevent anti-biotic action.
Don’t be too hard on OMB. The ethical problems involved in intergenerational utility comparisons are serious. The guidance for regulatory analysis in Circular A-4 discusses the subject extensively. (http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf)
It includes this instruction:
“If your rule will have important intergenerational benefits or costs you might consider a further sensitivity analysis using a lower but positive discount rate in addition to calculating net benefits using discount rates of 3 and 7 percent.”
Why do you not keep to the theme of Baseline?
If you go to the web page of Bank of International Settlements and search for Basel II you will find a document from 2005: http://www.bis.org/bcbs/irbriskweight.pdf?noframes=1 and that explains how the risk-weights were set in Basel II
In it you will be able to read that “The confidence level is fixed at 99.9%, i.e. an institution is expected to suffer losses that exceed its level of tier 1 and tier 2 capital on average once in a thousand years.” And many institutions went bust within 2 years.
The problem is that just because good-intentioned souls like James Kwak and Simon Johnson say that banks should be better regulated, they and many think, they can scheme and regulate… and which is of course pure nonsense.
Look at the current sad looking crew of regulators we found ourselves. Even though they must have known that no bank crisis has ever occurred because of banks investing in something perceived as risky, and that all crisis have derived from over-investments in what was perceived as not risky, they went ahead and build up incredible incentives for the banks to overinvest in AAA rated instruments and thereby accelerated the resurgence of a crisis.
You may be comparing apples and oranges here. Obviously backing off from regulation is not going to prevent another BP oil spill. Rather, what is required is hyper-vigilance, against perceived low-risk for catastrophic consequences. There has been a monumental failure by the regulators tasked with protecting the Gulf of Mexico.
I’m with you on Basel. One might be tempted to describe Basel as a convocation of well-intentioned ignoramuses. Certainly, a 1:62 capital ratio opened a floodgate for investment. But the AAA-rating proved illusory.
One can only wonder what Basel III is up to.
Not necessarily because we are talking about regulating the possibility of the oil spill so that a similar cannot occur in 99 or 999 years? … each scenario has different costs… also how much are you going to invest in prevention and how much in remedies? … all those question are not answered by just setting up a regulatory agency and probably the last thing you would like is for the regulators to provide those answers… they would, just like those holed up in splendid isolation in Basel, solely concern themselves with not having a spill at no matter what cost for the society (such as the banks not doing what they are supposed)… and yet not being able to guarantee that an oil spill will not occur.
Oh I know what they are up to with Basel III …. namely digging the banks even deeper in the whole they are in, by fine-tuning the incentives for them to go even deeper into what is perceived as low-risk land. With financial regulators like these, what more enemies does the real economy where risk is the oxygen need?
What have you been huffing?
Confusing socially-determined patterns of behavior with “natural” physical laws has been a feature of economic thought for more than two centuries now. Back in 1776 there was some excuse for it. 134 years later…not so much.
Certainly messed that up.
You didn’t think that this would help? ;-)
Speaking of “well-intenetioned ignoramuses.”
WSJ: “$1.65 Trillion Euro Zone Bank Debt Coming Due In 2010 , 2011”
7/10/2010 01:50:00 PM – CalculatedRisk
“As investors fret about European banks’ exposures to Greece and other financially troubled countries, those banks’ borrowing costs are rising sharply. … This year and next, some $1.7 trillion in euro-area bank debt will come due, far more than among banks in the U.S., the U.K. or elsewhere.
The results of the stress tests will be released on July 23rd.”
“….the EU-wide stress test exercise which is now being finalised by CEBS and the national supervisory authorities, in close cooperation with the ECB. The objective of the extended stress test exercise is to assess the overall resilience of the EU banking sector and the banks’ ability to absorb further possible shocks on credit and market risks, including sovereign risks, and to assess the current dependence on public support measures.
Thank you for this.
Per, are you involved with Basel III directly?
No of course not!
They would never invite, after the explosion, someone who back in 1999 wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse”.
But that does not stop me from reading what is coming out from the Basel Committee and their addendum the Financial Stability Board.
lol … “namely digging the banks even deeper into a hole”
With a 62:1 capital ratio it means a bank need only hold $1 billion in reserve and lend $62 billion to purchase AAA-rated products. No wonder they needed a $600 billion TARP plus whatever trillion or so the ECB forked up.
Now we hear everything is better and smart investment banks (hedging on taxpayers’ future ability to pay current and future account deficits) are headed off to the greener pastures of emerging markets.
We Norte Americanos can take solace in the fact that we too will soon be attractive emerging markets.
Speaking of parasites and gaming the system, check this out. http://www.reuters.com/article/idUSTRE6691JH20100710.
What’s a few billion here or there.
Why is it that regulation is effective in the airline and nuclear industries and not in other industrial sectors or behaviours in our society? Could it have something to do with the public perception of risk, which is mostly based on emotion and very little on rational thinking?
Having worked for a federal agency for 13 years I can say with confidence that many actions or lack of actions are directed by powerful Congress members behind closed doors. They do not send memos or emails. They just make phone calls. When disaster strikes Congress then opens up public inquiries even though they know answer. Elected representatives are like derivatives, if you own enough of them you can apply a lot of pressure in the shadows and never have it see the light of day.
Actually, I thought the theme of Baseline Scenario was whatever Simon and I want it to be. Isn’t that what blogging is about?
As I have noted here before we need COMPETITIVE markets, not “free markets” (which lead to monopolies and monopolistic competition, which are the antithesis of what is an essential element of Capitalism: competition. It is competition which creates value – the best products and services at the best price).
Again, we need COMPETITIVE markets, not “free markets.”
There are some signs that the SEC is making some baby steps of progress since President Obama has stepped into office. Rick Bookstaber seems like an impressive individual at first glance, as do some other newcomers.
There is also a guy with an Arab sounding name (I’m embarrassed to say it escapes me at this moment) who is supposed to be a real go getter in the SEC and I think they did a story on him in the last 2–3 months in the NYT. Anyone else who knows this Arab dude’s name can plop his name under this comment.
That being said, I think there has still been way way way too much inaction by Mary Schapiro. And I think Mary Schapiro is a big part of the problem. I don’t see Mary Schapiro as being anywhere near to being sincere in her duties. She is from FINRA which means she has filth and slime all over herself which she can never (and does not want to) clean off. President Obama made a huge mistake choosing a FINRA person for the job, and the next person he chooses for head of SEC I hope he will be certain they have never been within 50 square miles of FINRA.
FINRA is nothing more than the dirty brother of the securities dealers, and FINRA has no interest in seeing that markets operate efficiently for the smaller players, and I think eventually this will come out in the way they are “policing” the trades on the NYSE now. Hopefully it will come out sooner rather than latter.
@Edwin & @Rue — good comments.
I myself believe the topic of regulatory agency integrity to be very closely related to the core idea of this blog, so in fact I believe the basis of Kurowski’s complaint itself to be bogus.
I have finally come to the conclusion that 85% of what Kurowski says on this blog is garbage or at best a red herring. If he wants to say Basel is a fraud, that’s fine. Basel 1 is a fraud, and Basel II is a fraud. I haven’t seen anyone on this site defend Basel that I remember.
The problem with Kurowski’s complaints is he would have us believe that Basel is why bankers bribed ratings agencies to stamp AAA ratings on garbage paper. Basel had nothing to do with bankers bribing agencies to put an AAA stamp on garbage paper. The bankers would have done that either way. In fact it is the bankers’ lust for profits that created the glut of garbage CDOs and the credit default swaps which destroyed their balance sheets and destroyed the miniscule amount of capital the bankers themselves chose to keep on their balance sheets. Nothing else, and certainly no regulations forced AIG’s swaps desk to co-sign their suicide note together with Goldman.
Robert Khuzami, I think is the name that escaped me.
James, I love you, man, and feel that you are caring, competant and smart. However, as you may have guessed, I thoroughly disagree. Actually, you are probably in the ballpark of correctness, as far as you went. We know that there was a substantial and off-record meeting between MMS, Halliburton, Transocean, and BP, some months before the actual drilling commenced. Between BP and Halliburton, please pick which would be most likely to “push” for MMS to be somewhat casual in their oversight. It would not be Transocean, because they were the ones actually on the job, and their only profit would be in delivering a completed operable wellhead. And, in fact, they would probably opt for greater oversight, just as a double check on their folks on the platform. Halliburton was the operator, which shared profits with BP. Each of those entities had a substantial stake in getting production under way.
Understand, at this point, some highly astute geophysisists had delivered (along with other scientists) reports, with copies to all parties, on the details regarding both the reserves, and the strata to penetrate to get to them. These reports formed the basis for the terms of permit issuance. The permit allowed for drilling to a depth of 18,000 feet. The permit also contained all other technical specifications relating to structure, safety, precautions, etc. During each stage of drilling, MMS had people on site to do inspections, ask questions, etc. According to the best information available, they were not only ignored, but did not demand strict compliance. But, the biggest problem turned out to be the fact that Transocean exceeded the depth limit on the permit by many thousands of feet. The scientific investigations indicated that this would be a major problem. And, it was, as we now know. We also know that on the day of the initial catastrophe, there was no way that any device could have stopped the eruption that occured. You see, this same kind of deposit has been tapped in Russia at least four times, and in each case (on land) the only way that the flow could be stopped was by sealing the well by use of a nuclear explosive device.
MMS simply lost control of their regulatory responsibility. It may cost us all of humanity, but certainly will cost us great loss of life. The agency, as it turns out, was much like most regulators, that is subject to capture, both in reality due to politics, and intellectually (because they get cozy with those they regulate, kind of like Barack and Jamie).
By the way, for those of you who, like me, refuse to pay for NYT content, when you see the title of the article, just input the title of the article into a Google search and you can still read it for free. My guess is this would be true for ALL articles, and I don’t see that changing anytime soon with Google flexing its muscles to everyone. In other words, if you’re not the person who reads New York Times from front to back, you’re basically an idiot to pay for the content. Any articles worth note will be sited in free web sites.
Maybe everyone on planet Earth already knew that little trick, but I just figured it out about 6 weeks ago when FT blogs kept sending me to paid content. That’s why I hate FT blogs. They have that one female writer from the Caribbean or some place and all she ever does it writes a short paragraph and drops 30 links back to premium priced FT content.
Of course you are free to blog on anything of your liking… who am I to question that right?
The title of this blog though, which you wrote, is “Why Agencies Get Things Terribly Wrong” and in this respect the financial regulators obviously got things much more wrong than the Minerals Management Service or the Fish and Wildlife Service. The first created the conditions that led to the crisis, by creating incentives for the banks to drill excessively in “risk-free” land, while the second two only failed to help to prevent the oil spill caused by the so many incentives of wanting and needing oil … and that is why I asked why you do not keep to what I perceived was the basic theme of Baseline.
But come to think of it… what would have happened to the regulators of MMS or FWS had they based their studies on the possibility of an oil spill such as the one that occurred and decided to stop drilling for oil in the Gulf?… Would they still be regulating?
But if I have in anyway upset you, please excuse me. Strange though that after all my factual comments and explanations on what the financial regulators have really been up to, it is first this comment on Baseline that stirs sufficiently the interest of one of the blog owners to make a direct answer.
If you as a bank make half a percent margin on a AAA rated operation and need to hold the 8 percent capital you must hold when lending to small business you can then only leverage 12.5 to one, and make 6.25 percent in yearly return on AAA paper.
But if regulators allow you to hold only 1.6 percent in capital, as they now do, and thereby to leverage 62.5 to one, then you make a whopping 31.25 percent in yearly return on AAA paper.
If you still think that is a red herring as far as incentives for AAA paper go, then there is nothing more I can explain to you.
Yes, and No. The definition of capitalism has no constraint as to size/fraction of the marketplace controlled. But what makes a free enterprise system work is competitiveness, as you underscore.
Too bad the economics community has, over the past 40 years, sold the political community on the idea that FREE markets are what works best, rather than COMPETITIVE markets.
I am not a female but I keep my http://teawithft.blogspot.com/ (on which for lack of time I do not take comments)
Any reader is free to google the article I refer to there but I also give the direct link so that any premium content registered reader of FT can access the article… and by the way… quite often the google route will not lead you to the FT article.
You are absolutely right.
Currently small businesses and entrepreneurs have to pay around 2 percent more in interests only to make up for the regulatory advantages given to those who have a AAA rating.
This is not a free market this is a market where the regulator is shamelessly intervening on behalf of those that the credit rating agencies perceive to be less risky.
The regulators don’t assign the rating, and they don’t issue the paper (CDOs and swaps).
Your argument resembles the following hypothetical explained in 3 parts:
—A cookie company starts putting false “healthy” labels on sugar cookies so they can increase sales. The marketing company making the labels doesn’t want to put “healthy” labels on the cookies, but does it because they want to make more money and they know the cookie company will go to another label company if they don’t make the “healthy” labels for the sugar cookies.
—Then many American children suffer health problems and the children’s parents sue the cookie company for false labels.
—Then the cookie company cries it’s the government’s fault the child got sick eating the falsely labeled sugar cookies, because the government offers lower tax rates for companies that make healthy cookies.
Your argument is nonsensical and borders on the retarded.
The regulators tells the cookie makers that if he can produce cookies that according to one of three cookie safety raters will be rated AAA on safety for the children, then he is going to save himself a lot of money in interest payments to the banks, since in that case he is going to allow the banks to post much less capital against his loans.
Question 1: Do you think the cookie maker is going to try his hardest to convince that cookie safety rater he merits an AAA.
Question 2: Do you think that the banks are going to treat especially favorable all the cookie makers and build up especially large loans to those cookie makers whose cookies have an AAA rating?
Question 3: Don’t you think that those small cookie makers who are not big enough to afford the procedure of getting a credit rating will now have to pay extra in interest rates just to make up for the competitive disadvantage produced by the regulators?
Question 4: What do you think will be the real big systemic risk for society… that small cookie makers are going to produce dangerous cookies for our children or that cookie raters are captured by the big cookie makers and so that dangerous cookies are sold as certified safe cookies to millions of our children?
Is this too hard to understand?
By the way I do not justify for one second any bank mistakes… they pulled the trigger of the gun that was furnished to them by the regulators.
What I do not accept are regulators dumb innocent or gullible enough to:
1. Believe that just because something is perceived safe from a default perspective by some credit rating agencies that something needs to be more favored by the markets than what it already is.
2. Believe the market will find the way to capture the credit rating agencies.
3. Believe that with their regulations they will not risk the buildup of excessive bank exposures to what is considered “safe”.
Now if anyone wants to let the regulators of the hook by claiming they were mislead by bad credit rating agencies and so the only think we need is to make sure that never happens again… then that somebody is either more retarded than I thought possible… or a regulator in disguise that refuses to accept any blame.
But Ted K, I admit that your point of view is still the accepted point of view and that my explanations have not yet been able to break through the mental barricades a paradigm always creates… but it will happen.
Competitive markets are markets whose overall outcomes are homeostatic and individual outcomes somewhat random. That is, collectively they produce outcomes that relate to relative “competitiveness” of suppliers with one another and buyers with one another. However, some of the better suppliers and buyers will get reamed, and some of the worse ones thrive. That is a healthy reality of a truly competitive market, imperfect but productive of one set of results…. some of which economists don’t even consider like being training grounds for enough future leaders to keep an adequate pool of competent leaders and risk takers in play from one generation to the next. Monopolies fail to develop enough future leaders and the ones that they do develop are bureaucrats like Tony Hayward and Blankfein.
However, for a market to be truly homeostatic there must be at least a dozen independent competitors, and hopefully scores to hundreds. Such markets are few and far between, and the benefits of scale for both sellers and buyers creates a gravitational like force to centralize and reduce the number of players on either side of the transaction. When one side is more cohesive than the other, fewer and larger share players, it gains a negotiating advantage and more of the benefits of each transaction. The terms and conditions imposed by a handful of banks or credit card companies is one example of a market where suppliers are “coherent” and few and buyers (us) are scattered and many. An opposing example is the relationship between farmers selling corn (scattered and small suppliers) and ADM or Cargill as buyers.
“Competitive” markets require careful and continual maintenance. They are negative entropy constructs with natural inclinations to decay into monopolies on one side and disorganized players on the other. One failing of economics is not to see markets as systems, which like any other systems decay unless continually renewed. It has to do with the history of economics… born during Newtonian times, but prior to the development of thermodynamics.
I apologize for drifting, but these topics are interelated. When Christopher Cox was appointed chairman of the SEC, everyone knew the fix was in and when Rove went to fix the Justice Dept, well, like-wise, plus there would be no prosecutions. Our main impediment to success in Afghanistan is corrupt government. We cannot even hope for success there until we fix corrupt government here. The former chairman of the SEC, has recognized the organization’s own multiple failures, but everyone got there check.
the viking wrote:
“Having worked for a federal agency… I can say with confidence that many actions or lack of actions are directed by powerful Congress members behind closed doors. They do not send memos or emails. They just make phone calls.
Elected representatives are like derivatives, if you own enough of them you can apply a lot of pressure in the shadows and never have it see the light of day.”
Thanks for eloquent backstage observations.
IMF Plans Mega Bail-Out For Next Crisis… Frogs, Pestilence, & Famine
July 11 2010 09:11 – FT.com
“We try to respond to our readers’ needs here, which means it is not enough to predict the forthcoming plagues of frogs, pestilence, famine, quantitative expansion withdrawals, etc. You need to know how the particular order of the plagues should determine your asset allocation decisions. ( :-) )
So here is some news you can use. Be very careful about allowing any bad macro news over the coming months to tempt you into taking large short positions on risk assets. It’s not just that short sellers, or buyers of credit protection, have been officially determined to be Bad People, though of course they have been. It’s that there is a new set of mega-bail-out plans being put together in preparation for the next international financial crisis.
You might think such plans would be hatched in Wall Street or the City of London, but that is not where to look. Instead, you should be paying attention to Washington, and by that I don’t mean Congress or the White House. Rather, you should keep your eye on the International Monetary Fund, and its constellation of associated think tanks and academic advisers.
There is nothing hidden about what is going on; all the major elements of future bail-outs have been laid out in staff papers and public speeches. It’s just that most normal people would find the language incomprehensible or terminally boring.
Incomprehensibility and boredom induction are among the greatest powers of the énarque, or graduate of France’s École Nationale d’Administration. The managing director of the IMF, Dominique Strauss Kahn, was a professor at the ENA, and is therefore probably as close as anyone to achieving the bureaucratic equivalent of the Zen Buddhist state of satori.
Where the Zen adept seeks to achieve inner enlightenment, the énarque wants authority without legislative oversight, all in the public interest, of course. A current term for this in IMF-speak is “automaticity”. As far as I can tell, with the limited understanding of a non-énarque, it means that when trillions of euros, dollars, or IMF Special Drawing Rights are needed to avert or stop an international crisis, no votes are required in Congress or the Bundestag.
All that would be needed to save life on Earth as we know it would be a decision by the Fund’s management, based on pre-authorisations from the IMF executive directors.
Useful insights into the Fund’s current philosophy and preparations can be found in a speech by Mr Strauss-Kahn on June 29, at a conference at the Peterson Institute for International Economics in Washington. The IIE is a non-profit bridge between official multilateral financial institutions and private sector financiers. The speech effectively gave senior management approval to a range of proposals for the expansion of IMF resources and freedom of action. These had been floated in published staff papers in recent months; with that speech they went beyond deniable academic musings to outlines for action.
As Mr Strauss-Kahn noted: “There are still gaps in the global financial safety net.” While recently established multi-hundred-billion-whatever facilities were a start, “it also might be useful to establish a framework for dealing with systemic crises – a co-ordinated mechanism to proactively channel liquidity to countries under pressure. To be effective, resources should be deployed as quickly as possible . . . ”
Multilateral Man and Woman look on the delays and public struggles in legislatures over the US Troubled Asset Relief Program, or the European Financial Stability Facility with dismay and concern. A long list of such professionals were co-authors of a March IMF paper called The Fund’s Mandate – Future Financing Role. Since getting member governments to approve changes in the IMF’s enabling treaties and agreements is trouble-prone and time-consuming, the authors found creative ways to use existing authority.
Three directions were laid out: the lifting of country lending caps on existing lines of credit, the provision of pre-approved multi-country central bank currency swap lines, and an increase in the issuance of the IMF’s own currency, the Special Drawing Right.
Of these, the central bank swap lines are the most intriguing potential tools in a future crisis. In the past, bilateral swap lines, or short term exchanges of one currency for another, were non-controversial means for central banks to manage short term tidal washes of cash across the borders, quickly extended and quickly paid back. At the end of 2008, though, drawings on Federal Reserve swap lines reached almost $600bn (£395bn, €473bn), principally to counter dollar funding constraints on non-US commercial banks.
The use of the swap lines has subsided, but the speed and scale of their use at the time seems to have inspired some creative thinking at the IMF. Thus was born the MSL, or Multicountry Swap Lines, which would be intermediated by the Fund. Since no legislature has said you can’t have such an open-ended facility with no limits on size, it would seem that you can.
So when the next crisis comes, the IMF’s contingency plans will almost certainly have been pre-approved, and quickly put into effect. When you are making a one-way bet against risk assets, consider the avalanche of official money that will crush you at the moment you expect to cash in.”
I’m sure Mr. Johnson could add some clarity.
If you don’t want to be financial roadkill, keep your powder dry and stay on your toes.
People Are Nervous
July 9, 2010 – NY Times – excerpt
“It could be we will look back in 10 years and say, ‘Wow, Volcker really changed the tone of the debate and the outcome,’ ” says Simon Johnson, an economist at the Massachusetts Institute of Technology and a historian of financial crises and regulation.
“But I kind of worry that is not going to happen.”
Hear, hear, says Mr. Volcker.
“People are nervous about the long-term outlook, and they should be,” he says.”
You overestimate the powers of the Gulag.
I’ve been there :-)
“Speaking of parasites and gaming the system, check this out.”
Sat Jul 10, 2010 1:58pm – Reuters
“Bank of America Corp is beefing up its internal accounting controls after it incorrectly classified as much as incorrectly classified as much as $10.7 billion in short-term lending and repurchase deals for mortgage securities as sales…”
Thanks windmill. Words fail me.
I actually get what you are saying, Edwin.
So Ponzi scheme vs franchises? :-)
Which can be renewed more efficiently without regulation?
“The Pig Is Dead, No More Bacon ”
States Can’t Count on Federal Bailout, Obama Appointees Say – excerpts
July 11 (Bloomberg) — “States can’t count on the federal government for more budget bailouts, the heads of President Barack Obama’s debt commission told governors today….
Former Republican Senator Alan Simpson of Wyoming, the panel’s other co-chairman, told governors today that the depth of the federal government’s spending imbalance is “shocking,” which limits the help it can provide for strained state budgets said Simpson, referring to so-called pork barrel spending that Congress directs to states. “There’s no more bacon.”
An oil spill was once considered a SURE THING – it WILL HAPPEN – everyone agreed!
So the SURE THING is what was going to be regulated so that it could be avoided. In the case of deep ocean drilling, had the SURE THING been accepted, it would have never been approved. Ridiculous, even ludicrous, to BELIEVE that that much titan-god machinery and technology could not produce another way to harness “energy” for mass consumption.
It’s all about regulating the SURE THING – both positive and negative. Giving subsidies to farmers to NOT grow food – SURE THING in biology, plant reproduction – is NOT the point of “regulation”.
Manipulation? Yes. Regulation? Hardly!
Cut off subsidies to PROMOTE doing the SURE THING that is NOT sustainable
and cut off subsidies to PROMOTE NOT doing what is sustainable.
Trillions of Bank Debt Coming Due
7/11/2010 05:35:00 PM – CalculatedRisk
” (it will be a busy week) ”
I think I have a pretty realistic sense of what’s going on in government agencies. While I wouldn’t impugn the character of civil servants, I have been struck by the level of ignorance and fear of offending power on their part.
I recently covered in great depth the evolution of the Honduran coup. Purely from the viewpoint of realpolitik, this was completely unnecessary and has ended up destabilizing the whole of Latin America. It could not have occurred had there been a well-trained, professional bureaucracy in place at State. Contacts with bureaucrats at State, as well as the press briefings, convinced me that they simply didn’t know or understand what was going on.
Even today, faced with evidence from many human rights groups, they refuse to face the fact that there are serious ongoing human rights violations. They have endorsed a “Truth Commission” even though it has no credibility. The situation continues to deteriorate, yet they cling to this idiotic Cold War model to interpret events, which only makes things worse.
Agencies do not get payments to large investment banks or permits to giant oil firms wrong. They only get wrong things that matter to little people. That’s enough to tell one that what goes on is not a random event.
Charles II wrote:
“I think I have a pretty realistic sense of what’s going on in government agencies. While I wouldn’t impugn the character of civil servants, I have been struck by the level of ignorance and fear of offending power on their part.”
I’e had experience with such agencies and Hobson’s Choice.
“In the television series Early Edition, the main character, Gary Hobson, was presented with Hobson’s choices by a newspaper which he received the day before it was published. Gary would then have the choice of trying to prevent a bad event, or not.”
There Is A Cliff We Are Racing Toward — It’s Huge
July 11, 2010 – NY Times – excerpts
“There is a cliff we are racing toward — it’s huge,” said Richard Barwell, an economist at Royal Bank of Scotland and formerly a senior economist at the Bank of England, Britain’s central bank.
“No one seems to be talking about it that much.” But, he added, “it’s of first-order importance for lending and output.”
How banks will come up with the money is an open question.
If institutions are unable to raise the money that they need on the open market, the European Central Bank would have to decide whether to continue to prop them up.
“Banks that have trouble tapping new funding sources will have to shrink,” the Bank for International Settlements said in its annual report in late June. The institution, based in Basel, Switzerland, brings together the world’s main central banks.
Stephen G. Cecchetti, head of the monetary and economic department at the institution, called the refinancing issue “a vulnerability and something to be watched.” But, he added, in a telephone interview, “I am confident that national authorities will take the necessary actions so that it isn’t a problem.”
“There is a risk that banks alleviate their own funding pressures by further constraining credit conditions for customers,” the Bank of England said last month in its Financial Stability Report.
“That would dent economic recovery and so raise credit risk for all banks.”
Our economic system would appear to be in a Catch-22 situation (profits are private, losses are socialized,) “….the phrase “Catch-22” is common idiomatic usage meaning “a no-win situation” or “a double bind” of any type. ”
@ Ed Lee
“We must regulate economics, safety, pollution, etc. but we must do so in a multi-layered and adaptable way and be ever vigilant of how the system is being gamed.”
Agreed! But isn’t that the critical issue of the regulators being constrained by using 2-D maps while the regulated use 3-D GPS. Before regulators can think outside the box to govern effectively and efficiently, they first have to think outside their 2-D square.
Regulatory capture is enabled by the limits of 2-D determinism.
Every once in awhile a man of great foresight and vision comes along. Maybe 200 years, maybe a millennium, this person will be amongst us, but we must sit in awe.
Let me know if that was jokey enough.
Maybe next time, overly ambitious Moms and Dads will let their destined-for-institutions wunderkinder watch some cartoons instead of doing “math” all day long :-)
nice giggle – thanks
Does MMS have a “force” unit – people with guns to make the point to people ignoring them?
They could just have worse lobbyists. Your question merits consideration though. Thanks!
@ Edwin – well said. In my opinion, the primary economic role of government is to ensure competition in the markets. This would be accomplished through various mechanisms, from strong and vigorously enforced anti-trust laws, to progressive taxation, to educating the populace, to direct loans for small/med R&D, etc.
There have been major catastrophes with the fossil fuel industry over the last 40 years beginning with Texaco in Ecuador. Most remember the Exxon Valdez in this country. By now, from simple observation alone, most everyone knows there’s high risk involved per incident and the cumulative effect posed to the public, their livelihoods, wildlife and environment.
If “one political appointee or middle manager sympathetic to industry sets the parameters of the study” or there’s any other impediment to data required to secure our safety, it’s flawed. Why aren’t others in the agency reporting this to the public?
At any time during the scandalous history of these industries members of congress could have directed the GAO to review, study and identify these agencies effectiveness, integrity and critical weaknesses. (SEC & MMS: A Tale of Two Failures, http://www.huffingtonpost.com/…/sec-and-mms-a-tale-of-two_b_639266.html)
The only thing we currently know for sure is that the people living in these toxic areas, or near waste dumpsites, weren’t responsible, taxpayers will be billed in the future and we don’t need more Harvard lawyers protecting the few over the rights of the many.
Cry for your small businesses and entrepreneurs!
The saddest part with the financial regulatory reform is that the most important issue has not even been raised.
Borrowers, if perceived to be more risky, should of course pay the banks higher interest rates.
But, just because the regulators decided to allow the banks to lend to others who are perceived as being less risky with lower capital requirements, the small businesses and entrepreneurs, on top of the risk-adjusted higher interest rates they pay, need to pay an additional 2 percent a year only to remain competitive when accessing bank credit.
If it is easier for you think of capital requirements as the “handicap” weights put on horses to make the race more equal… bank regulators are putting the heaviest weights on the weakest runners.
In tuff times when we precisely need tuff small businesses and entrepreneurs to get going this is sheer lunacy. Yet this issue is being totally ignored. Could you please help raise it?
I agree with Kwak
“most of the people in these agencies are not evil; on the contrary, I believe (without a ton of evidence in support at the moment) that a majority are conscientious, hard-working, and civic-minded, and a significant minority are actually quite good at what they do”
“it is easier for you think of capital requirements as the “handicap” weights put on horses to make the race more equal… bank regulators are putting the heaviest weights on the weakest runners.”
So why so they get it so wrong?
It is because they are deterministically trained and therefore focus on determinate “risk,” and are not appreciative of indeterminate uncertainty. It is analogous to trying to receive an analog message on a digital antenna. Entrepreneurs face uncertainty relative to acceptance of their product and resultant cash flow, while small businesses face uncertainty of cash flow.
“Small is Beautiful”, The National Interest, No. 77 – Fall 2004.
Comments on Release No. 34-49695, File No. S7-22-04 (June 9, 2004)
Click to access saboyko060904.pdf
Click to access OP-1189_1_1.pdf
I see your argument, but I guess I don’t see your answer. If regulators are stupid and/or corrupt that doesn’t mean the answer is no regulation.
Just because there are corrupt and stupid cops doesn’t mean we don’t need law enforcement. It means we need cops that aren’t stupid and corrupt.
I get that the regulatory system, if what you indicate is true, actually encouraged the market failure, but that doesn’t mean the alternative – no or limited regulation is better. It means we need to fix the regulatory structure.
Am I missing something?
This observation certainly doesn’t apply to the MMS but to the financial regulatory agencies. Don’t discount the fact that actual people work at these places with actual personal experiences. During the 40’s, 50’s, 60’s and in some respects the 70’s the majority of the people working in these agencies, the congresmen and senators, the President and executive branch members and even the bankers themselves lived through the Great Depression at an age where they actually remembered the impact it had on them and the country. I believe there was a sense of duty to make sure it never happened again, so regulators were harder on banks, banks backed down more easily and the majority of Congress’ constituants backed governmental intervention – they remembered too.
But George Santanya was right – we who lived only in a country of basic prosperity forgot the lessons of history and so we repeat it. The regulators certainly were influenced by industry jobs in waiting and cozy relationships, but I don’t believe they are all monsters only looking for the next penny. These people have families, they have a conscience, they just came to believe their job was to help grow the economy, not protect the economy and those they regulated seemed so much smarter, and richer, and better educated etc. in 1965 that SEC employee who stood in line with his Mom to get bread as a 12 year old in 1933 had a different outlook about what his job was than the same person in 2005 who just watched his parents sell their $30,000 house from 1972 for $700,000 and retire to a golf community in Florida.
No you are not missing anything. You are completely right. We need to fix the regulatory structure… but in order to do that you have to make certain that regulators are not let on their own to regulate in vacuum… like making certain that banks do not default…and so to remind them all the times that banks are there for a much more important purpose than being mattresses… a bit like that old argument that if we let our homes be designed by the firemen we would all be living in swimming-pools.
Man-oh-man, they just won’t let go of their piece of the carcass…animals trained to understand WORD magic – “entitlements” – Rrrrrrr, woof woof, “go get ’em!!”
The only “people” who believe “entitlements”
(AKA the amount of currency needed to flow to life maintenance activities IN A CIVILIZATION built by HUMANS)
are the problem are the cretins who know only ONE math formula:
More misery for others = More money for ME ME ME.
Science at its best?
AT&T/SWBELL, always a union company, has always provided good health/retirements benes and working conditions since the ’60s, in spite of 14% profits cap as a utility, yet made profits outright and by hiding them with loopholes provided by Congress. Yet, Corporation are paying less not more in taxes, especially those with offshore mailboxes. THEY PROVIDE THE JOBS; FREE ENTERPRISE AND THE MARKET WILL REGULATE ASIDE.
Midland, TX OIL PATCH Scuttlebutt is: Party for CEOs preceded safety measures for bringing in well in time for guests on Deep Water Horizon Rig. FUNNY, FOX DOES NOT discuss this, or anyone else, right? Oil Spil Response Committee in House of Reps, U S CONGRESS today starts with explosion……..see if they ever get to this cause!!!! K -Cspanvideo.org/program/id/226794 Corporate Profits have gone thru the roof; CEO pay has gone thru the roof…….in response TO caller: “Union workers i.e. janitor is making $30/hr yet gov wants to tax Corporations to death.” …….Ed: I’D like caller to answer that.
ATT/SWBell Corp, always a Union Company, provides best Healthcare benes and retirement benes, yet profits go through the roof despite 14% cap as utility in the past. Why is it that the working class believes that we are overtaxing Corporations, especially those with offshore mailboxes to avoid taxes. NOTE: ED IS SMALL BUSMAN…CONSTRUCTION AND OWNS BROADCASTING CO. For many years GE paid no taxes.
BP in talks to sell assets as spill costs mount – Yahoo! News
Thanks Annie, That’s what I was alluding to days ago. J.P. Morgan’s offer that highering half of strikers to kill the other half is one way to improve statistics by reducing the denominator in per capita equations and /or there’s Hitler’s pro Bogeyman killing.
My intro to corporate governance was working for Penn Central after graduating from college in 1971 on a track gang some months before their bankruptcy. The rumor was that the execs had formed a new corp. called Arvida to buy land in Florida rather than re-invest in Penn. Central. Hence the bankruptcy.
Imagine, if you will, the entirely satisfying vision of regulators who have allowed themselves to be bedded and swayed by, say, munitions industry lobbyists, serving in penal units during offensive operations in Afghanistan. Stalin, of course, employed a similar concept with disserters and others facing the death penalty during the pitched battles of WWII. Visualize the profound impact on honesty and integrity in public service. Why the possibilities are limitless. :-)
“Adversity makes men, and prosperity makes monsters.”
Victor Marie Hugo
Fair enough – then no argument. Thank Per.
@ hermanas — you are absolutely correct.
As I see it, BOTH forces have been and continue to be at play. Sociopathic banksters and bigCorps will devise con games, and regulators will continue to create incentives and accelerants. It’s both a symbiotic and synergistic relationship – and the debate at this point seems close to asking which came first, the chicken or the egg. IMHO the bankster greed came first and once there was enough concentration of influence & wealth – the regulators were captured.
“The rumor was that the execs had formed a new corp. called Arvida to buy land in Florida rather than re-invest in Penn. Central. Hence the bankruptcy.”
“The American financial system was seriously shocked when after only two years of operations, Penn Central declared bankruptcy on June 21, 1970. It was the largest corporate bankruptcy in American history up until that time… The federal government stepped in and, in 1971, created Amtrak, a virtual government agency, which began to operate a skeleton service on the tracks of Penn Central and other U.S. railroads…The Penn Central continued to operate freight service under bankruptcy court protection… etc ”
Prudential Arvida Bid Is Confirmed
September 4, 1981 – excerpt
“The Penn Central Corporation and the Prudential Insurance Company of America said late yesterday afternoon that discussions were under way regarding the sale of Penn Central’s Arvida Corporation subsidiary, a land development concern in Boca Raton, Fla., for an undisclosed sum.
Richard Dicker, chairman and chief executive officer of Penn Central, stated that ”Prudential has expressed interest in Arvida Corporation for some time before our recent public announcement.
He added that the subsidiary was for sale and that Prudential’s ”experience, financial capacity and ability to decide quickly make Prudential a qualified potential purchaser of Arvida.
Penn Central has refused since Monday to discuss a bid of $300 million to $350 million from a group of Florida investors ….”
“Our task is to ferry wounded souls across the River of Dread till they see the dim light of hope, at which point we stop, push them into the water and tell them to swim… “
The IMF Is Coming for Your Social Security
July 12, 2010 04:49 PM – Huff Post – excerpts
“Last week, the IMF told the United States that it needs to start getting its budget deficit down. It put cutting Social Security at the top of the steps that the country should take to achieve deficit reduction. This one is more than a bit outrageous for two reasons.
First, the IMF deserves a substantial share of the blame for the economic crisis that gave us big deficits in the first place…
The other reason that the IMF’s call for cutting Social Security benefits is infuriating is the incredible hypocrisy involved.
The average Social Security benefit is just under $1,200 a month. No one can collect benefits until they reach the age of 62. By contrast, many IMF economists first qualify for benefits in their early 50s. They can begin drawing pensions at age 51 or 52 of more than $100,000 a year.
This means that we have IMF economists, who failed disastrously at their jobs, who can draw six-figure pensions at age 52, telling ordinary workers that they have to take a cut in their $14,000 a year Social Security benefits that they can’t start getting until age 62.”
You have to determine whether capital market either needs reform as Congress proposes by amending the deterministic, one-size-fits-all, legacy system, or is it broken requiring fundamental repair.
If the latter, then adding regulation to existing legacy system eventually makes the system more toxic as evidenced by more frequent and larger economic crashes.
The fundamental change which I advocate is segmenting the capital market into predictable (money market instruments for which a separate regime already exists), probabilistic, and uncertain regimes.
Uncertain regime is needed to be consistent with underlying economic environment to limit non-correlative information that leads to category errors.
DOI 1776 – “When in the course of Human Events….”
Any questions left about “foreign” tyrants…?
Google is slowly taking over FDA “regulations” of experimental data. I wasn’t kidding when I said that the new “healthcare” will consist of people filling out questionnaires on the internet – a data free-for-all – and we’ll be on our own in trying to find enough “elite” people with the same kind of genetic freaky-ness as ourselves to help hedgehog together a biotech to address our personalized medical condition…we’re all Berlin-ers :-)
However, “the poor” will always be at bottom of the google lists for organ transplant while at the top of the list as an organ donor. Think of the potential for all sorts of unique business negotiations (CDS/CDOs ?), though, for organ transplant bartering. Wha’? You thought the anti-smoking campaign was because they were worried about YOU? Nope, it’s your organs – they want them clean.
Next up, decide on whether Xena, Princess Warrior is a better do-it-yourself medical arts teacher or Oprah and Dr. Oz….?
They’re setting up a special commission, Prez request, to “study” what happened – you might want to help them out and send your wonderful post to them to get them started.
MK wrote, in part, “…but I don’t believe they are all monsters only looking for the next penny. These people have families, they have a conscience, they just came to believe their job was to help grow the economy, not protect the economy…”
I suggest that there was a deliberate dumbing-down – there does not seem to be any other explanation for why a couple of decades of “prosperity” gen XYZ completely lack any knowledge of the fundamentals of REALITY – basic science, math. What were they teaching?! And why did no one have the HUMAN curiosity to ask HOW the “prosperity” came into being…? It’s weird, actually…but the sincere question remains – “what were you thinking?” and “what were you taught to think?” (Collective use of “you”, not YOU YOU, MK) :-)
@ Stephen A. Boyko – Clearly the system (economy, finance & government) is broken and requires “fundamental repair.”
As for your remedy, based on your description:”me no comprehend.” However, if it helps create the following results, I’m all for it – otherwise, not:
* a separation of wealth and political influence
* prosecutions of financial and political fraud and deceptions
* the end of our debt-as-money monetary system
* more decentralization of power
* claw backs of the wealth pillaged from “the small people”
* the end of TBTFs
* competition in our markets
* the end of the “phantom economy” and a return to a “real economy”
Anonymous, I think you’ve confused “Strange Agencies I don’t understand” with “Government.”
The Fed is not “the Government.” It’s a Quango. It’s controlled by the banks, although the chair is appointed by the actual government.
So, “the Government” did not create the housing bubble through low interest rates. The banks did, through its appointees. Greenspan and then Bernanke were entirely acceptable to the financial barons who run the casino.
“The Government” certainly did not cause mortgage brokers to concoct liar or NINJA loans, nor did it order investment banks to bundle them into instruments too complicated to understand.
“The Government” did not control Fannie and Freddie, although it had an oversight duty which it shirked. Fannie and Freddie were public companies which f–ked up all on their own.
The really bad things “the Government” did is that (1) it repealed the legislation of the 1930s which gave it the power to regulate the banks, and (2) it provided unsecured funding through Maiden Lane that is deeply (ca. 50-60%) underwater. And why did it do these things? Because so much money was pouring into Washington from the investment banks that they had unprecedented power to influence legislation–indeed, investment bankers were running the Treasury department both when Glass-Steagall was repealed and when Maiden Lane was created.
No, blaming “the Government” will not do. This mess, from start to finish, was a private enterprise extravaganza.
To achieve “competition in our markets” the focus should be “ranmdomness” (uncertainty, probability, and predicatability)not scale. Taleb’s books Black Swan and Fooled by Randomness provide great references.
It is TRTR (Too random ro regulate)as in the expansion of CDSs, that I believe should be the focus.
What is new or innovative in Dodd Frank? It is just more or less of the same. Reshuffling and renaming, while activity, is not reform.
As soon as TBTF became the goal, the deterministic legacy system prevailed letting the financial suits set the terms of the engagement. Jamie Diamon et.al. are very smart people who can game the existing system better than Dodd and Frank, and even better than Messrs. Johnson and Kwak.
So if you want change, advocate “REAL” change. That is why “We’re All Screwed” was written.
In 1999 in a published article I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of the OWB (the only bank in the world) or the financial dinosaur that survives at that moment. Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”
And as an Executive Director of the World Bank I kept on warning, in formal statements, that a crisis was doomed to happen because of stupid regulators who were regulating as if the whole financial world was a toy they could experiment with.
And the Bang happened because of that dangerous AAA bomb that resulted when the regulators mixed up the ingredient of very low capital requirements for banks with credit ratings issued by human fallible and capturable credit rating agencies.
And so please do not come and tell me that the governments are not responsible for this all.
@ Stephen A. Boyko
I do not concur in the reference to a Black Swan, since that refers to “high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology”.
The current supposed Black Swan we have standing in front of us was totally manmade and predictable… stamped “Made in Basel”
The regulators just adore Nassim Nicholas Taleb, since his Black Swan saves them from much embarrassment when their children ask them “Daddy were you not a financial regulator?”
Per, you are proving my point. “Stamped “Made in Basel” is a one-size-fits-all, deterministic approach that is antithetical to what I advocate.
Think of randomness as H2O. It has to be managed differently in its solid state of ice, liquid state of water, and gaseous state of steam.
Financially this is represented as predictable money market instruments, probabilistic positive cash flow instrument, and negative cash flow (e.g. Liar and NINJA loans). There already exist governance regimes for predictable Treasuries. What needs to happen is to segment conflated (probabilistic and uncertain) investments.
“Change” is defined as the relationship between risk and uncertainty. The dictionary defines “risk” as the chance of loss. Risk is probabilistic and thus presents foreseeable consequences, unlike “uncertainty” which is indeterminate and characterized by unforeseeable consequences.
“Uncertainty” is not a linear extension of a “riskier form of risk,” but a separate and distinct concept. One-size-fits-all advocates argue an EMH extension, but have difficulty reconciling crashes where the market opens down 20 percent.
When uncertainty becomes risk, that’s learning or innovation—you have greater control over your underlying economic environment. On the other hand, when risk becomes uncertainty there is either confusion, too much information, or ambiguity, too little information. Should the uncertainty become unstable as in New Orleans when the levies broke, you have chaos.
Unless we segment governance regimes the trend of larger and more frequent crashes will continue.
@Per and Charles, You guys are dancing on the head of a pin here, there’s not a lot of difference these days. “These days I sit on cobblestones and count the time in quater tones ’till ten, my friend.” Allman Bros.
Correction; “These days I sit on cornerstones. Count the time in quarter tones ’till ten my friend…” Lyrics by Jackson Browne performed by Allman Bros.
Since we do not have, thanks to the wisdom of evolution, one World Government, who is the “government(s)” responsible for all this?
Blaming the “government(s)” is like blaming Jesus for the China-Japan War in the 20th century…
But we aren’t bad people, we have families…
Luther Standing Bear opined, “He knew that man’s heart, away from nature, becomes hard.”
Those who inhabit virtual reality world – Money God – are insane. We MUST stop believing that they are “rich” and “powerful”.
And now for something completely different, since we are talking about gummint agencies…
After reading a blogger brag about how he can write computer programs that would eliminate the need for human beings operating the vacuum hose sucking up the $$$
(watch out India, your jobs are just as ship-able/temporary as were ours, and we have better water)
I would like to revisit “regulatory capture” – what role did the Patriot Act have in gathering up the data about which demographic group
(anti-semites, anti-gay, “racist”, single women and anti-war types – first overboard)
to target next for the transfer of wealth to the war lords and drug lords after every Congressional “war funding” appropriation?
The psychodrama now is watching these sadistic burrowed-in voyeur Patriots come to the realization that THEY have to ante-up for the latest Afghan appropriation…nothing left to steal from the “little people” – so who in ‘gummint’ is still protecting the entitlement mattress? Shouldn’t we go help them, we the people as the CAVALRY?
The zinger was the last line of the song.”Please don’t confront with my failure. I’m aware of it.”
Well the Basel Committee was initially created by the G10, but how they came to amassed so much unchallenged power beats me.
It is not that I am opposed to global powers in these days were problems are global but what I criticize is that this power has been handed over to a totally undiversified group of so called experts who represent absolutely no one except themselves. The Basel Committee and their recent appendage the Financial Stability Board are as close to a mutual admiration club you can ever get.
With all due respect… this caveat “But most of the people in these agencies are not evil; on the contrary, I believe (without a ton of evidence in support at the moment) that a majority are conscientious, hard-working, and civic-minded, and a significant minority are actually quite good at what they do. So why do they get things so wrong?” defeats the substance of your commentary. “Evil” is a nebulous term, and perhaps does not apply in this context, – but partisan might, and in some instances incompetent, negligent, or even criminal would be accurate. Regulatory capture is painting lipstick on the pig that is bribery and extortion to cloak or advance criminal activities. Until and unless we start defining and dealing with the gravity of these issues, and frame or define bribery as bribery, incompetence as in competence, willful deception as willful deception, crimes and crimes, and criminals as criminals, – there is no hope for righting these wrongs, all we witness and endure is bad kabuki theater. The predatorclass is illicitly and illegally commandeering America. The predatorclass owns the government, the regulatory apparatus, the oligarchs and industry titans, most of the nations wealth and resources. That’s all fine and dandy if we accept fascism, or oligarchy, or tyranny as our form of government ruling our republic and our various societies. But those forms of government are contradictory and anathema to the core principles this nation was founded upon. We either standup and demand a restoration of the principles and standards that shaped and defined our “unique experiment in democracy”, – or the predatorclass will continue to dominate and devour us.
Mr Foresta, “Until and unless we start defining and dealing with the gravity of these issues,”
Why would the Secretary of the Treasury’s authority need to be expanded…? First two under Bush resigned…
“The Act dramatically reduced restrictions on law enforcement agencies’ ability to search telephone, e-mail communications, medical, financial, and other records; eased restrictions on foreign intelligence gathering within the United States; expanded the Secretary of the Treasury’s authority to regulate financial transactions, particularly those involving foreign individuals and entities; and broadened the discretion of law enforcement and immigration authorities in detaining and deporting immigrantssuspected of terrorism-related acts. The act also expanded the definition of terrorism to include domestic terrorism, thus enlarging the number of activities to which the USA PATRIOT Act’s expanded law enforcement powers could be applied…..Title II established three very controversial provisions: “sneak and peek” warrants, roving wiretaps and the ability of the FBI to gain access to documents that reveal the patterns of U.S. citizens.”
Seems to me like the only “regulation” at work was in revealing “the patterns of U.S citizens” and then deploying media-capture vicious, skank psychobabble at people while stripping them bare of a lifetime of HONEST work – via computer programming, no less. If they had to steal from MILLIONS mano-et-mano, it would have been IMPOSSIBLE for such a minority of 1% to do it themselves, no? S & M not limited to “rich” players…
We are in as bad of a situation as all the countries before us in history were after a prolonged, internal war against the GOOD people. We’re not SAINTS, but we the people MAJORITY are not psychotic liars, thieves and murderers, either. THEY took the preemptive shot. WE have the RIGHT to defend ourselves.
A lot of you guys who KNOW the details and facts better grow some cajones and get the STALKERS and Predators out of D.C. and into Arizona :-)
@ Stephen A. Boyko – Thanks for the clarification. I get your point.
Wall Street Fix Seen Ineffectual by Four out of Five in U.S.
July 14 (Bloomberg) — “Americans harbor doubts that a financial-regulation bill about to be passed by Congress will do what President Barack Obama says it will: help avoid another crisis and make their finances safer.
Almost four out of five Americans surveyed in a Bloomberg National Poll this month say they have just a little or no confidence that the measure being championed by congressional Democrats will prevent or significantly soften a future crisis. More than three-quarters say they don’t have much or any confidence the proposal will make their savings and financial assets more secure.
A plurality — 47 percent — says the bill will do more to protect the financial industry than consumers; 38 percent say consumers would benefit more…“Banks and the government are making out, not the ordinary person,” says Lenore Critzer, a 70-year-old retiree and poll participant who lives in Nelson, Ohio, about 40 miles from Cleveland. “We’re going to have another crisis and worse.”
While skeptical about the bill’s benefits, Americans don’t want a return to the days before the financial markets suffered their biggest turmoil since the Great Depression: A plurality of respondents says they have become more supportive in recent months of tougher regulations. By a three-to-one margin, Americans have grown more favorable to stronger regulation rather than less. Even Republicans have become more inclined to stricter oversight.
“What happened was a farce,” says Victor Bruno, a 58- year-old surgeon in Westfield, New Jersey. “These guys were just gambling with our money. Something needs to be done.
Obama praised the overhaul as “the most comprehensive reform of Wall Street” since the Depression, telling reporters at the White House yesterday that the measure “will prevent a financial crisis like this from happening again, by protecting consumers against the unfair practices of credit card companies and mortgage lenders.”
Americans say the restructuring won’t make much difference in the way Wall Street does business. Almost half of those polled say banks will make few if any changes in the way they act in response to the overhaul; another 22 percent expect only minor changes.
“They’re just going to find a way around the new rules,” says Pamela Evans, 24, who lives in Everett, Washington, and has two jobs, at a building company and a check-cashing firm.”
Then perhaps you can help me.
Please explain to me why many bloggers invoke a “moral imperative” demanding that the oligarchs (aka “banksters”) act against their self-interest?
Further confusing, is having impugned the morals of the oligarchs, these well-intentioned but misguided (my term, but supportive of Mr. Kwak’s description of agency Federalis) individuals proceed to engage the oligarchs on their terms—one-size-fits-all, deterministic governance?
The legacy system for capital market governance has evolved into a flawed construct producing larger and more frequent crashes (to be elaborated on in a forthcoming blog). Repeatedly doing more of the same as Al Einstein said …
@ Stephen A. Boyko – second @ btraven
“Thanks for the clarification..”
And the use of the dictionary, and attention to details.
Obama’s OMB Pick Oversaw Citigroup Unit That Shorted Housing Market
07-14-10 11:22 AM – Huff Post
“President Barack Obama’s choice to lead the White House budget office oversaw a Citigroup unit that profited off the housing collapse and financial crisis by investing in a hedge fund king who correctly predicted the eventual subprime meltdown and now finds himself involved in the center of the U.S. government’s fraud case against Goldman Sachs.”
“Wall Street Fix Seen Ineffectual by Four out of Five in U.S.”
It’s not just Wall Street. Why didn’t the health bill subsidize seeds and fertilizer and cut subsidies for potatoe chips, now costing 1/3 of lettuce? No, we eat the chips and get insurance,duh? You grow from the field, not from the office.
And on this subject, since the IRS is in charge, can’t they apply your taxes to health insurance first rather than fine those who have nothing after taxes?
And FDR chose Joe Kennedy to lead the SEC.
How can we penalize an individual for being prescient, complain about the Madoff enforcement laps, and be logically consistent?
Conflicts of interest can be handled by disclosure and/or recusement.
Stephen A. Boyo wrote:
“And FDR chose Joe Kennedy to lead the SEC.”
A hat tip to a fellow student of history.
Your plan depends on a higher class of regulators who are reliable and not miscreants, to perform this judgement and placement. If these existed there would be a more peaceful solution anyway.
Re: firemen, this is actually an interesting parallel because in recent decades, changes to building codes pushed by fire departments have resulted in far fewer fires, which means less demand for firefighters. In other words, regulation done right should reduce the need for regulation by addressing root causes and “baking in” a more stable system.
Big picture, big picture…hmmmm
What is a nanosecond big picture? :-)
Okay, Earth is a spaceship.
We’ve been invaded by an alien species who is breaking through all the barriers to get at earth’s “warp core”…red alert!
That works, right? Too Holloweed for Baseline? Sorry, but “confused” needs a simple cartoon now and then – meep meep…
That BP oil was going to China…how about saving OUR face?
Check out the “vocations” of both Dems and Reps scratching and clawing their way through Arizona elections 2010…military contractors, real estate scam artists, lawyers – when you become an “expert” on living off of fundraising, the best and brightest at it get promoted to D.C. to subsidize the war effort fundraising…
DOI 1776 – “He has erected a Multitude of New Offices, and sent hither Swarms of Officers to harass our People and eat out their Substance.”
Patriot Act – 2001
The way they talk about the relationship between USA and Israel makes it sound as if it goes back 30,000 years to when the ancient gods were petty and cruel and plagued mankind with suffering :-)
Israel has only existed as a sovereign country since WWII so how “deep” is it?
USA got started with Declaration of Independence in 1776.
Why can’t we “nation build” here in USA using the same “idea” for how they’re doing it in Afghanistan? Step one – want to be “legit” as a government? Convince everyone that only your paper $$$ currency is accepted as legal tender…the rest of you DO have to bring your cattle to my office to be taken, er, to be counted…
When I left this past December to attend my father’s funeral, I came back to find that a homeland security agent had left the toilet seat up in the bathroom…oops…
Why don’t we focus on the 3 major ideologies that are in place NOW to PREVENT LIFE-sustaining job creation?
The “deficit” was created by SUBSIDIZING non-sustainable, life-threatening businesses AND the cretins who manage them – the TRUTH mantra is “too big to save” not “too big to fail”…
The only was “We the People” can become legit as a sovereign nation again
is to stop using the blood and drug soaked more-misery-for-others = more-money-for-ME-ME-ME
currency of the psychopaths…
The holier-than-thou issue is settled. No more “Jim Jones-ing” political strategies…agree?
They are VERY VERY VERY bad people. They will never change. If Israel has the right to defend itself, who are we that we can’t?
“Terrorists” are defined by Nihilists?
@ Stephen A. Boyko –
“Please explain to me why many bloggers invoke a “moral imperative” demanding that the oligarchs (aka “banksters”) act against their self-interest?”
2. Perhaps they think banksters will someday balance their short term interests with some long term interests (e.g. avoiding the pitchforks)?
Fed Considers New Steps To Bolster U.S. Economy
Officials at U.S. central bank’s June meeting considered whether new measures would be needed to keep the recovery rolling
Wed, July 14, 2010 4:39PM EDT – AP
(Washington) “U.S. Federal Reserve officials at their June meeting weighed whether new steps would be needed to keep the economic recovery alive.
A new document, released Wednesday, also revealed that Fed policy makers lowered their forecasts for economic growth this year in light of Europe’s debt crisis, a volatile Wall Street, a stalled housing market and high unemployment.
With risks now growing, Fed officials at their June 22-23 meeting saw the need to explore new options for bolstering the economy. That’s a turnaround from earlier this year when they were moving to wind down crisis-era supports.
No new specific steps were disclosed or agreed upon.
In fact, the minutes said that a few Fed officials worried about the risk of deflation.
The Fed has left the door open to resume purchases of mortgage securities. It ended a $1.25-trillion (U.S.) mortgage-buying program in March, an initiative credited with driving down mortgage rates and bolstering the housing market earlier this year.”
Unfortunately, Edwin, we live in the real world where politicians are paid off through campaign contributions from the largest players in the markets, and bureaucrats and regulators get and keep their jobs by adhering to the ideological precepts of those who have the power to hire and fire them. We exist in an atmosphere of payoffs to the regulators in the form of drugs, sex and cash, and the disingenuous, if not dishonest, diatribes of our “leaders” and those who purport to be experts.
The public is not educated about economics, markets or much of anything else, and is led to panic by fear-mongering pronouncements spouted by politicians who stand to gain from the ignorance and gullibility of their constituents for whom they give not one rat’s ass.
There may be someplace in this world where markets operate as you have described, but it isn’t in this country at this time. And it doesn’t look like anyone in any position of power is willing to do what it would take to force the markets and the corporations that exist in them to follow the very sane policies you have laid out.
The problem is whether government agencies can effectively regulate powerful private interests without being captured. A century ago, Milwaukee Mayor Daniel Hoan argued for socializing is city’s public utilities on the grounds that regulatory capture was unavoidable in any other kind of regulatory system.
Ironic that the record for “pro-business” government can do more to advance the idea of public ownership than socialists could ever do by themselves, an incompetent, crooked MMS makes the inefficient but honest Post Office look like a pretty good deal by comparison. The USPS version of the MMS would look like Norway’s state-owned oil company.
“The problem is whether government agencies can effectively regulate powerful private interests without being captured.”
July 14, 2010, 6:23 PM – NY Times – Paul Krugman
Has it really been 16 months since I wrote this?
“So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.
But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.
Yes, the recession ended in a technical sense. But still.
I wish I had something constructive to propose. But as I feared right from the beginning, there was only one chance at doing this on a sufficient scale. And the administration didn’t take that chance.”
To quote US Grant__”hope” is not a strategy.
For real “change” to take place Dodd-Frank must advocate something that is truly different, not more or less of the legacy governance system.
If there is complexity, there is uncertainty. How does DF govern the underlying economic condistion of uncertinty becomes the key issue.
Thanks for your feedback, it is helpful to the work that I do.
I argue it is because financial regulators conflate “risk” and “uncertainty.” In a world of financial innovation and bubbles, it is uncertainty — not risk — that should be the regulatory randomness component of focus.
Uncertainty is different from, rather than a higher degree of, risk. This distinction was made famous by economist Frank H. Knight in his seminal book, “Risk, Uncertainty, and Profit” (1921). Risk refers to situations in which the outcome of an event is unknown, but the decision maker knows the range of possible outcomes and the probabilities of each. Uncertainty, by contrast, characterizes situations in which the range of possible outcomes, let alone the relevant probabilities, is unknown.
Well said. Comports with my 12-year employment with the NASD, now FINRA.
Carl Safina: The oil spill’s unseen culprits, victims
An interesting article that warns agaiinst conflating risk and leverage. I make a similar arguement against conflating risk and uncertainty.
Risk Lies in the Risk-Based Capital Approach of Basel III, American Banker by Jeff Horrowitz
I can’t read the article but it is obvious that the plain stupid Basel approach brings risks… on both sides… that the capital requirements for the lending we need to get us out of this crisis are going to be too high… and that the capital requirements for lending to what is going to dig us even deeper in the hole we’re in are going to be too low.
Please enlighten the thread as to why the market would not provide this “education, training and physical infrastructure”.
In fact, would not the market provide said education, training and infrastrucure in a content and form that better meets the subjective preferences of consumers? If the government is a better producer of these, why is it not a better producer of Ipods, or medical devices, or manufacturing procedures or drill-bit advances?
Your self-developed theory of commerce reads more like the scheme of an engineer with engineer’s syndrome. One does not simply impose infrastructure, education and training and expect “commerce.” This is the Soviet model. I suggest you read Hayek’s Nobel speech “the pretense of knowledge” if you are interested in testing your theory.
In a private property order, please explain why private property owners would not “inhibit the selfish or poorly educated from destroying overall flow in pursuit of selfish gains” (whatever that means). Also, why is such a person selfish and not the Anakin Skywalker imposer of infrastructure, education and training.
The problem with government regulation is simply the lack of competition…. there is little or no motivation for a regulator to get it right.
There is no magic in “free enterprise” other than check on greed achieve by the balance of competing entrapreneurs. When those of us who call for “free enterprise”, we are not suggesting a world in which anyone can get away with anything…. what we want is a world in which checks and balances are provided through competition rather than government bureaucrats.
Suggestion: consider “competitive government”
Competitive Government: whenever an agency of government exceeds a critical size, split it into two competing agencies who’s funding depends upon outdoing the other agency… allow up to 5 such agencies to florish in each “market”, seeking the pleasure of funding committees of congress by demonstrating cost effective regulation.
The key is defining “cost effective” … allow the other agencies to help define this by showing the cost to the nation of the failures of the “cheap and easy” peer agency that let corp xyz get away with something.
As it is now, lazy or corrupt bureaucrats can easily hide in an agency until things rise to a level where even non-experts can spot the failure…. we need those experts competing with each other!!!
You can split agencies geographically or randomly. You can have two out of 5 peer agencies assigned to the same target company being regulated. There are many ways to distribute the workload to still ensure that agency heads can compete before the funding committee for growth. Once the “superior” peer grows too large through success, it can be split up and the two halfs thrown back into the competitive pool. Poor peer agencies will simply die-off as workers tranfer or are fired for lack of funds.
Our Founding Fathers had come close to this by suggesting each State was a “lab” in which experiments could be performed… each state trying their own solutions to problems and passing ideas to their peers. Unfortunately, the growing power of the Federal Government has destroyed the experimental nature of the state model by over-riding local authority and demanding national standardization far too prematurely … and resisting evolution as all large bureaucracies do.
Let’s give it a try! We now well know that concentrating power in the hands of the “experts” in Washington does not work well…. without competition, the “experts” get into the same bad habbits of all bureaucrats…. “we don’t do it that way” parochialism and “we know best” group think.
I think you raise many valid points but need to go further. Not only do you need competitive forces but competitive view points as well.
If there is complexity, there is uncertainty. Yet one-size-fits-all regulatory regimes are primarily deterministic. Society has asked regulators to go beyond that for which they were trained and for which they have little or no experience.
As a former regulator, I think the SEC is getting a bum rap in all of this. If we have a great left-handed baseball player, why would we play him on third base instead of first? The SEC does certain things very well. It regulates the deterministic market well. This is in large part due to staffers being trained in the deterministic disciplines of law, accounting and neo-classical economics. But how many of them were trained for governing uncertainty? It is “uncertainty” that is the great governance gap.
I need some kind of definition for “uncertainty”.
Weather for crops?
Finding the “god” particle?
“Uncertainty” is a lucrative business and it is “regulated” – it’s called a Casino.
A rigged Casino is one where you get to win if you win and win if you lose – place your bets…
Per your example: “Uncertainty” is a lucrative business and it is “regulated” – it’s called a Casino.
A rigged Casino is one where you get to win if you win and win if you lose – place your bets…
No, in both cases the probabilies are known
Weather for crops? closer given given context. I will address application aspect in forthcoming guest blog.
See Mr. Volcker is wrong!
Uncertainty is different from, rather than a higher degree of, risk. This distinction was made famous by economist Frank H. Knight in his seminal book, “Risk, Uncertainty, and Profit” (1921). Risk refers to situations in which the outcome of an event is unknown, but the decision maker knows the range of possible outcomes and the probabilities of each. Uncertainty, by contrast, characterizes situations in which the range of possible outcomes, let alone the relevant probabilities, is unknown.
For further reference see: “Best Fit for Best Practice Governance”
that compares and contrasts in Figure 1
1. Predictability of knowable knowns
2. Probability of knowable unknowns and unknowable knowns
3. Uncertainty of unknowable unknowns
Comments are closed.