Posts filed under “Philosophy”
From an institutional sales desk that must remain anonymous
There something very unnerving about this Minsky conference and I may be getting closer to putting my finger on what that is. There are myriad differences between adherents of the Austrian School of economics (“Austrians” from now on) and Minskians, who view themselves as a kind of elite guard in the Keynesian army. I won’t go into them all here, mostly because I am first and foremost a market enthusiast and have only an amateurish understanding of the two schools. I’ve read some Von Mises, I’ve read some Menger, I’ve read some Hayek, I’ve read some Keynes and I’ve read some Minsky. I have friends who hail from both camps and have been party to vigorous debates on the relative merits of the two schools. That’s the extent of my knowledge – well, that and a B.A. in economics – and I don’t want to hold myself out as an expert.
That disclaimer aside, I have an observation to make about the Minskians: you have to be very smart to be one. I mean, you have to be very smart…preferably brilliant. Let me give you an example of what I mean. Here is how Gary Gorton (professor of finance at Yale and a research associate at the NBER) began his presentation this afternoon (you can access all of these presentations in audio form here: http://www.levyinstitute.org/news/?event=32):
“I’m going to talk about ‘talking.’ I’m going to talk about talking about the financial crisis. As a by-product of that I will talk about the financial crisis. I want to talk about how we talk about the financial crisis and why we talk a certain way about the financial crisis.”
That, I think, sums up well the level of thinking (and talking!) that’s being done at this conference. The Gorton speech was phenomenal. He drew on a working knowledge of two hundred years of American economic history in making his argument, which goes (I think) something like this:
1. All financial crises begin with an impulse by lenders or depositors to secure their cash, and in that regard this crisis was not out of the ordinary. The “shadow banking system” was outside of the regulatory landscape and was therefore unprotected and vulnerable to a “run.” Contrary to popular opinion, CDOs and derivatives weren’t the root of the problem – a run on the repo market was, as lenders in that market moved to secure their cash.
2. The run on the ~$10trillion repo market resulted from a shortage of good collateral (an age-old economic problem, according to Gorton, although I confess I’ve never seen it emphasized by other economists).
3. Academic economists were caught totally flat-footed by the crisis and only pretended that they understood it after the fact. The reason they were caught flat-footed is because the existence of the Fed had led them to believe that such a crisis was no longer possible. In fact, if you look at modern crises – the Japanese real estate/stock market bust for example or the S&L crisis in the U.S. – you’ll see that economic and financial market participants don’t act the way they would normally act if there wasn’t a central bank. Nobody panics because it’s ingrained in them that the central bank will act to snuff out any “run.”
4. As a result of this ingrained belief in the agency of the Fed (or central banks in general), economists’ collective focus has shifted away from the underlying “shortage of good collateral” problem and toward the problems caused by the government’s response to the underlying problem. That is, the focus shifts to “moral hazard” and “too big to fail.”
5. The real problem is that government/central bank intervention is unreliable. Therefore, economists, who are the crossing guards for the economy so to speak, don’t know whether to anticipate the fallout from the financial system’s underlying problems (e.g. a “shortage of good collateral” leading to a run on repos) or the fallout from the government’s interventions.
I’m doing his speech a disservice with this recap, because his insights really come through in the details and the examples, but hopefully you get a flavor for the kinds of discussions taking place at this conference.
Not all of the speeches are brilliant, of course, but enough of them are to make it a worthwhile experience. You can do worse than spend an afternoon at the website which I’ve linked to above to listen to some of them (I’d recommend Randall Wray and Eric Tymoigne in session 1, Steve Randy Waldman in Session 2, Andrew Sheng, Rob Parenteau and Marshall Auerback in session 5, and Gary Gorton).
The problem which nags me, however, and I’ve alluded to this above, is that the level of brilliance needed to untangle the inner workings of our financial system is absurd. It just shouldn’t be this complicated, this reflexive, or this psychological. Austrians happen to understand that, and they propose an economic system which really isn’t a system at all. You have commodity-based money, well-defined property rights, no lender of last resort for the banking system, and economic actors figure out the rest themselves. I promise I will delve more into this debate in my weekend note.
Today’s QOTD: “Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs. There has been a massive wealth transfer from middle-class America’s retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny.” -Albert…Read More
This was originally posted by Kent Thune at The Financial Philosopher.
Whether you are an investment trader, a music fan, a mathematician, a curious observer wishing to learn more about human nature, or any combination thereof, you will appreciate this lesson on the Fibonacci Sequence (more on this after the YouTube link):
The video, created by a college student to help explain the Fibonacci sequence, features images of space from the Hubble Telescope and music from the cerebral and progressive hard rock band Tool. What makes the video and song incredibly compelling is the lyrics, which teach a lesson on pattern recognition.
For those non-traders and non-mathematicians out there, a Fibonacci sequence is a series of numbers where, after two starting values, each number is the sum of the two preceding numbers. For example, the number sequence 2, 3, 5, 8 and 13 are a Fibonacci sequence (2+3=5, 3+5=8, 5+8=13, and so on).
Making the video and song more interesting is that the cadence of the lyrics (number of syllables of succeeding verses) follows a Fibonacci sequence. What’s more, the meaning and lesson of the lyrics implies that humans are hopelessly addicted to looking for patterns everywhere they turn: The “over-thinking” and “over-analyzing,” as the lyrics suggest, have an effect of dulling intuitive thought and often results in missed opportunities.
Pattern Recognition: Strength, Weakness or Both?
Philosopher and mathematician, T.L. Fine, once said, “A keen eye for pattern will find it anywhere.” This profound statement is neither a compliment nor an affront to humankind but it suggests that a fundamental awareness of the human tendency for pattern recognition allows for a healthy balance of intuitive thought and science.
Pattern recognition is a means of making sense of randomness. This search for understanding, which is rooted in the desire for control and safety, can be self-defeating. Wanting to find patterns can be considered thinking “inside the box,” but the answers are not always in the box. Additionally, being comfortable without having answers can often open doors to new ideas, new opportunities and success. Therefore asking questions is more important than having answers. As 19th century philosopher and spiritual leader Jiddu Krishnamurti once said, “Freedom from the desire for an answer is essential to the understanding of a problem.”
Balance Linear And Lateral: Seek But Remain Open to Discovery
Returning to the message within the Tool song, aptly named Lateralus, too many people think and live linearly (in straight lines, black and white, inside the box), whereas thinking and living laterally (randomness, color, outside the box)–embracing the unknown–is healthy.
Perhaps the wisest solution is to balance the linear with the lateral. There is no stopping your nature to seek and find patterns; and to eliminate this nature is nothing less than attempting to become something other than a human being. Just be aware of your nature, and its potential limitations, and you’ll open doors to intuitive thought–expand beyond the narrow-minded linear thought–balance responsibility with adventure–seek but remain open to discovery.
Kent Thune is an investment adviser, free-lance writer and blog author of The Financial Philosopher, where his philosophical musings guide readers to think independently and to place “meaning before money, purpose before planning.”
Birthdays and Investment Risk By John Mauldin April 4, 2011 > “Tail risk (the risk of large losses) is dramatically underestimated by many investors and the tools we have available to manage such risks are hopelessly inadequate. Financial theory which is taught at business schools and universities all over the world is plainly wrong.” This…Read More
I mentioned this on Bloomberg early this morning, but its worth exploring further: What is the average half life of your favorite technology? We operate under the false assumption of substance and solidity, when in reality, things are deeply in flux. Everything changes, nothing lasts. The various technologies we use are physical manifestations of ideas,…Read More
Quote of the day from the piece From Hiroshima to Fukushima. > “The problem is not that another backup generator is needed, or that the safety rules aren’t tight enough, or that the pit for the nuclear waste is in the wrong geological location, or that controls on proliferation are lax. It is that a…Read More
Interesting quote of the from Bob Lefsetz: EGYPT: “We were there first, music fans already revolted. They killed not only the album, but the major labels. We’re living in an era of chaos. To complain is to be Mubarak. The audience was oppressed for too long, given an opportunity to go its own way, it…Read More
A bit of Friday philosophy: Most of us will morph through different phases of our life, as we grow and live and learn. Its not quite a caterpillar to butterfly metamorphosis, but it represents specific changes in what we know, do, feel and think. A little introspection, perhaps some insight gleaned through hard work and…Read More