Category Archives: economics

Blue swan with pink spots

Could perhaps be created using genetic engineering in the future πŸ™‚ I’ve been reading Nassim Taleb’s The Black Swan. It’s an engaging book once you get beyond the pages and pages of insults directed against professional statisticians.
They key point could be summarised as follows. Professional statisticians have become obsessed with applying gaussian distribution models to real world phenomenon which don’t match the model for a range of reasons. Primarily the gaussian model attaches a lower probability to rarer events than is actually the case in many real world phenomenon such as degrees of wealth. When these models are used for prediction and risk management the results may be acceptable when making predictions about data close to the median but are hugely error prone about rarer conditions. The seeming success of the model in limited predictions promotes over-confidence and encourages further bad predictions.
Mr. Taleb goes on to point out that Mandelbrotian randomness more accurately depicts many phenomenon as it allows for greater deviations within a sample and more probable outliers. The point is made enthusiastically and in an idiosyncratic style. It’s accessible in a way that encourages most people to understand the contents and query current models for market analysis. It’s not an in-depth mathematical treatise and this is ultimately a weakness given some of the grand claims. However, Taleb’s rage at the amount of bullshit spouted by should-know-better financial and quantitative engineers is understandable. You only have to watch market analysts in programmes on CNN, MSNBC to figure out that, with a lot of jargon, there’s often not a lot of actual knowledge or understanding. Differences of opinion and rude/crude arguments abound but few of the experts called the current crisis. What’s the point of accepted financial models if they’re not just unsuccessful at predicting (a very hard task) but cause risk to be discounted (a very bad thing)? The Black Swan is essential reading for anyone who’s blithely applying statistical models to whatever economic, marketing or social science application they’re working on. It should give them pause for thought.
So, back to my headline. Mankind are great at producing huge inequalities and surprising outliers. History is littered with them! The more power we achieve over our environment and, indeed, our genetics the more probable the improbable becomes. I’d content that the number of potential black swans increasing (if that isn’t too wild any idea). Not in a linear way of course. More of a giant leap, black swan, kind of increments πŸ™‚ We’ve found black swans on the moon, black swans in space, black swans in the earth, on the earth and with genetic engineering we can create human black swans. Scary.
So the current market models are deeply flawed. Indeed they don’t seem so much models as talking points for TV debates. Who predicted the crisis? Currently in the “Deep Financial Shit is Nigh” hall of fame are international players like Peter Schiff, Nassim Taleb and local players like David McWilliams, Alan Ahearne and Morgan Kelly. Very few economists correctly predicted the current crisis nationally or internationally.
I believe one reason for this is that it became fashionable for these most miserable of analysts to predict boom followed by a soft landing. Economists by their nature are supposed to be pessimistic and risk aware. They should be over-predicting recessions, which is the butt of the famous economist joke.

“An economist is a person who predicts 10 of the last 3 economic recessions”

In this case, there seems to have been an international fear of being caught out in predicting an end to this boom, fueled by financial innovations in the bond market. Many economists simply suspended disbelief even when scandals like Enron encouraged skepticism. Conversely this old joke gives the lie to the belief that economists create recessions. They make predictions and pass comments. Some may add to recessions and further despair but if they could really create economic turmoil then their predictions would never be wrong!

Nash, McWilliams and an economy of words

I picked up this link in my travels. The article contains an interview with John Nash where he discusses the current economic crisis.

β€œI get the impression that the government is not ready to do anything that is really beyond a short-term basis,” said Nash, a senior research mathematician at Princeton. β€œ[But] we need a natural stability of value.”

Nash advocates an international monetary system with suitable accords like a new Bretton Woods. He fundamentally believes that such a system should be democratically introduced. He believes that short-termist keynesianism has wrecked the stability of the financial system. A big problem he has cited now and in the past is the variable rate mortgage. Should home-owners really be speculating on their repayments? Do many really understand the implications?
In many cases the illusion of liquidity was craved more than any tangible value. The sprocket-loan derivative market (fictional I HOPE) could be a great source of earnings as long as people kept buying sprockets. If they slow down, the mechanics of the market falls apart as, like a Ponzi scheme, it’s reliant on getting more derivative buyers in so previous buyers can bail out at a profit.
Something like the gold standard has always been deemed inflexible in times of extravagance, mostly due to the cost of warfare. Does anything good come out of a fiat currency, unbacked by commodities? Does it really create sustainable wealth that wouldn’t arise otherwise?
Is the opportunity it creates simply too hazardous to our wealth (and health)?
Despite his well-documented problems Nash is, perhaps the world’s most famous and most brilliant economist with a formidable reputation as a pure mathematician. His comments ring true and this crisis is an opportunity to bring about a more conservative economic system again with less exotic derivative products acting as “get rick quick” mechanisms for greedy hedge funders. Still you have to be brave and a bit different to affect real change.
Right now, we really need change. Lateral thinking backed by some pragmatic experience. One way to do this is to put someone in charge of the banks in this country who thinks differently Which brings me around to the obvious conclusion that Lenihan should appoint David McWilliams as the CEO of one of the banks. Yes, the floppy ginger haired bloke who used to present Agenda and wrote those books about our economic rise and fall. If anything, he’s got timing and great TV hair. Very important in a bank CEO.
I’m deadly serious here. McWilliams has the credentials and the experience of the banking sector. He has worked in the central bank, as an analyst for UBS and as a director of BNP. His predictions have been prescient yet he appears to listen and respond to criticism well, certainly on the evidence of his blog. When an idea is berated he’ll discuss it rationally, responding reasonably to even savage criticism. We don’t get much of that in the FF-led government these days. BIFFOT, Minister for Cork & Battman don’t seem able to take criticism with anything less than a snarl. Then there’s my namesake.. πŸ™
On the positive side the Walking Handshake from Drumcondra is gone!
Even more importantly, McWIlliams would scare the over-leveraged but still living shit out of the incumbents. He’s been attacking them for years so imagine their discomfort to be faced with him as their boss or competitor. We might aswell make Michael O’ Leary Taoiseach. Now there’s an idea.
Seriously though, whatever cash he wants, whatever it takes to entice him back into the financial sector, we should pay him. It would be worth it for the entertainment value alone and we’ll need a lot of entertainment over the coming months to distract us from the economic misery in store.

Budgetting for a generation of fear and loathing

Brian Lenihan has committed the political equivalent of armed robbery. Now that the sham of the celtic tiger economy has been exposed. While the budget is to “target all sectors of society” according to today’s Irish Times article, it’s difficult to see what good that will do.
“Radical direct and indirect taxes” mostly affect the middle and upper middle classes. Think of families with 2 working parents earning between 70 and 110k in total. That seems like a lot of money until you realised they’re saddled (or perhaps shafted) with massive debts to buy mediocre accomodation and are possibly in negative equity. The bigger their salaries the greater the debt on their massively overpriced accomodation that this same government encouraged them to buy. Their fuel bills, travel costs and medical bills will now rise.
Their children’s allowance will be cut. Their mortgage relief has been cut. Any to cap it all.. a move of utter stupidity a half percent rise in the high rate of VAT.
I suppose we can console ourselves that by using less fuel and catching pneumonia we’ll be delivering a double benefit to the environment. I miss the principled outspoken PD’s when all I see are these ingratiating tax apologists hanging onto the monster’s coat tails. I’m talking about the greens of course πŸ™‚
As a retailer I can tell you I’m feeling the pinch together with everyone in “trade”. Consumer spending has been moving steadily down the past 2 christmas as rising interest rates and massive house prices reduced the disposable income and hence spending. The sheer pointlessness of raising the high rate of VAT to 21.5 percent. Retailers around the country will have an extra bit of their margins eroded and will have to adjust prices. Has Minister Lenihan noticed the whole country is on sale?
Throw in overpriced childcare and this budget has pulled the trigger of the long gun barrel the middle classes have been looking down since our economy went into free fall. This group are the engine of most retail in Ireland and on their spending many businesses will fall, creating more unemployment, poverty, emigration and all the negative aspects of Irish life for decades. It was well known economist Morgan Kelly who suggested that the boom was so great because successive generations of governments had managed to insulate the Irish people from the effects of a boom for years. Cometh they hour, cometh Lenihan!
The government are suggesting the poor have been protected. What about the friggin middle classes or the “new poor” as I like to call them? I know a few families of modest incomes that are already struggling. Finances are tight and jobs are uncertain. This budget won’t help them or ease their concerns one bit. Instead, it slaps them across the face for bothering to work as opposed to living on benefits.
It seems the super rich (the oligarch class as David McWilliams describes them) will escape relatively unscathed with tax incentives in place and a relatively modest hike in income tax. It would be such a shame to hurt the stud farm industry. I wonder do they escape the 1% levy?
We already some of the world’s highest levels of indirect taxation masking a low-ish direct tax regime. Far from reform we’ve moved farther away with, in reality, nordic levels of personal taxation for inadequate service provision.
Raising taxes across all sectors has been proven time and time again to exacerbate the effects of a recession. While the reckless trading of credit derivatives in the US might have created this crisis, there’s a cogent argument to suggest that raising taxes brought about the recession that together with US bankruptcy laws led to the meltdown in the sub prime market.
The following piece from the Cato Institute makes some valid points about the effect of increasing tax burden during a downturn. By reducing growth and actually causing bankruptcies such measures increase the burden on the exchequer. Raising taxes only bails out the state for poor economic planning. It HAS NEVER and NEVER WILL ameliorate a recession as it reduces the available income for industry, spending etc.
Richard Bruton also made some neat points about this “take away” budget.

β€œThis is a Budget that is all about extra taxes for ordinary families, about extra charges for people, and about cutting capital spending,’’ said Mr Bruton.
β€œYou are looking to make it tougher for people who are struggling to get by,’’ he added.
“There is no sign that you are aware of the pressure on people from fuel bills, the pressure on people who have lost their jobs.”

There are signs he may actually know what he’s doing and it’s a shame that Enda’s shiny suit distracted from what could have been a very capable minister for finance. There’s still time!
It’s difficult to be shocked that a Belvedere-educated, former Trinner-lecturing, barrister (Lenihan) is a bit out of touch with the general electorate. Oh, of course we needed to do this to remain within our EMU parameters. That’s some incentive to the overstretched single parent who’s had their child support for college-going kids slashed. How will they pay the registration fees which just doubled. Equal opportunities indeed.
If the management of a public company had performed so badly they’d be ousted at an A/EGM. Yet the cabinent are congratulating themselves on their principled 10% wage cut. They got reelected by telling the people of the country an economic fairytale that several economists rubbished and which precipitated a crisis in almost the exact way they predicted. There’s a clear attempt at political misdirection where they try to confuse the issue in the public’s mind. The credit crunch hasn’t lowered consumer spending NOR did it lower a few weeks ago. This is a fallacy and any attempt to suggest this budget is entirely the effect of “worldwide economic conditions” is horseshit. George Hook dealt with this very nicely when Miniature Cullen tried this tack on his radio show yesterday evening.
What can we really expect when we don’t have a cabinet member who has any experience of running an SME? If we keep electing these monkeys we SHOULD EXPECT to live on peanuts.