Saturday, March 28, 2009


In Washington right now there is a great deal of squabbling and pontificating regarding the role of regulation is our finacial system. It is accepted as given that regulation is fundamental, that it is necessary to the functioning of the economy. Now it may in fact be the case that government regulation in some manner is a better way, and some might argue, the best way of ensuring market integrity, but this does not establish that it is the only way.

Economic activity is much older than the government regulatory schemes about which we fret right now. Trade occurred between tribes and loosely organized city-states and between farmers and tradesmen without a noticeable bureaucracy. The function which is now served by regulation was once served by skepticism, explicitly recognized as the principle of caveat emptor. One has to think that if banks and other financial institutions had to rely only on their own evaluation of financial risks, and had to bear the consequences of evaluating poorly, then there would have been no credit default swaps, derivative financial instruments and "opaque transactions."

It may certainly be argued that the novel financial instruments, which emerged under the noses of regulators, did have beneficial attributes, such as increasing liquidity, etc., but the more skeptical banker would be expected to rely on more conventional means of ensuring the same, i.e. having people that take out loans pay them back.

The net benefit of regulation is undoubably positive but that does not mean that there is not a down side. If people generally retained the skepticism of our more saavy ancestors, the consequences of regulatory failures would be much less severe. When regulators do their jobs poorly, such as when the investigator who examined Bernie Madoff's books could not figure out where the investment returns came from but let Mr. Madoff continue to pretend to make them, that is arguably worse than having no regulation at all. Like domesticated animals that have lost their survival instincts, and thus are incapable of providing for themselves, so too are Americans who have been gulled by the existence of regulatory schemes into thinking nothing bad can happen to them.

When people remain responsible for the results of their own voluntary transactions, there is an inherent limit to the amount of damage done by nefarious or poorly designed schemes. It takes thousands of people to make a disaster. But when assurance against calamity is relinquished to regulators, it takes only the ineptness or corruption of a few individuals to cause a fiasco.

Sunday, March 22, 2009


I have yet to see any widely distributed pundit make what I believe to be an obvious point regarding Congress's attempt to confiscate AIG executive bonuses:

The single most important determinant of economic recovery is confidence in the financial system. Predicatability is essential to confidence. One would be reluctant to drive an automobile if sometimes the steering wheel affected the direction of travel and at other times it did not. We would not use microwave ovens if sometimes they warmed our frozen burritos at at other times responded with a mechanical boxing glove sock-in-the-face.

Predictability is essential not only to confidence but to progress of any sort. That is the reason, and in fact the only reason why we have written laws and why we enforce contracts. What Congress is doing with this retroactive abrogation of contacted terms is destroying the predictability necessary to economic activity. It is undermining confidence that companies and individuals can plan and function without being frustrated by the unpredictable emotional tantrums of our elected officials.

I doubt that our elected officials have any idea at all how much real damage will result from their opportunistic grandstanding.

Sunday, March 15, 2009


Here is an illustrative pastime for when the new government starts cranking out new laws, policies and regulations: Whenever you read about such actions, count the number of times the word "requires" appears in the descriptions. You know, a law requires employers to do this, or insurers to do that, a new regulation requires drivers to do such and such and utilities to do so and so. Get a feel for how much the activities of government are dependent on compliance with "requirements" and imagine what happens when such compliance is not forthcoming. You may notice something odd about liberals and government.

A fundamental paradox of liberalism is this:

Liberals look to government to be the primary problem solver and organizing institution of life, not only for themselves, but for everyone. They instinctively look to government to ensure fairness, to insulate everyone from risk, to coddle subjective grievances and validate emotional needs. They look to government to do this because 1.) Government has a seemingly endless supply of money, and 2.) What the government cannot procure by persuasion it can compel by force. One quickly realizes that these two attributes are not separate. The government also aquires control of money under the threat of force. Thus, liberals flock to government to solve their problems, validate their worths and calm their fears, primarily because the government can, if necessary, resort to force. The liberal view of the world contains no small elements of compulsion, from compulsory taxes, to compulsory use of particular light bulbs, to compulsory diversity, to compulsory insurance, to compulsory community service etc. They like government because it "requires" things under the threat of force.

But the United States and Israel have lost moral standing in the world because they, when deemed necessary, well...use threats of force. Thus, the threat of force, and the consequent metastasis of government into the lives of its citizens, is the prime attraction of the liberal to the concept of big government, but the threat of force as a necessary element of survival? Well, that's bad. Threatening force to subsidize an indulgent ideology is satisfyingly chic; threatening force to make someone stop killing the citizens of your country is barbaric. It's the type of paradox that resists self-reflection, and not coincidentally, the type of paradox that allows a particularly shallow and clueless sort to wear a Che T-Shirt without the slightest hint of irony.

Wednesday, March 04, 2009


Here's my hypotheses regarding the financial crisis:

1. The fallacy. The fallacy underlying the current financial mess is that the amount of realestate in the United States is relatively fixed, but the population continues to grow; thus real estate is always going to appreciate over time. Thought eh general principle is true, the fallacy is that it will continue to appreciate over ANY period of time.

2. The anomaly. The anomaly in the situation occurred because of efforts to intervene in the market mechanics of real estate pricing, to the effect that the appreciation in realestate outpaced income growth. This inflated the housing bubble and would inevitably lead to a bust.

3. The confounder. The usual balancing mechanisms that operate in fair markets were skewed by artificial devices that obscured where value was being created and disappeared. These were the "derivatives" which supposedly added liquidity to real estate investments. What actually happened however was that the derivatives became divorced from the intrinsic value of the underlying mortgages and asumed the nature of wagers. Thus, money invested in these derivatives did not go to increasing value, but merely shifted it between the people who bet correctly and those who did so poorly.

4. The vortex. Because of the proliferation of derivatives, and because of the synergistic effect of ineffective government oversight on one hand and inappropriate meddling on the other, money that should have gone to maintaining equilibrium in the credit market, and maintaining liquidity of the system the old fashioned way, i.e. by having debtors pay off their obligations, the underlying assets became "toxic" and the artificial value of realestate collapsed.

5. The upshot. Foolishness in the housing market shook the credit and investment sectors of the economy, but the underlying premise is still sound. Even though real estate and housing are subject to bubbles, i.e can have artificially high valuations, over the long term, real estate values will appreciate. My bet is that the safest investments right now for liquidity appreciation and safety is real estate investment trusts.

Monday, March 02, 2009


Among all of the current political discourse and debate; whether this program or that expenditure is appropriate, or whether this new regulation, mandate or prescription is necessary, there exists a more fundamental set of questions. Specifically, given that the one attribute that the state has over private enterprise is that it may resort to force, what do we consider appropriate uses of force by the state? Obviously, most of us agree that the state may use force in our behalf to prevent bodily harm or breach of the peace. We agree generally that the state may protect property rights, such as when a sheriff evicts delinquent tenants from a home. But now it seems we are being presented with a menu of potential proscriptions and mandates that, if the average citizen does not comply, such compliance will be enforced by the authority of the state. So to get an idea of just where the acceptable boundaries of such enforcement lie, it may be useful to consider whether we think that laws should be passed and enforced that affect matters such as the following:

1.) Determining whether you have the right to educate your children according to your values, or must relinquish them to the priorities of the public education system;

2.) Determining how and when to discipline your children;

3.) Whether you may express an opinion that someone's religious beliefs seem nutty to you;

4.) Whether you may decide for yourself what life's activities justify risks to your health;

5.) Whether you should be legally liable in any way for expressions that hurt the subjective feelings of others;

6.) Determine what kind of car you drive, if you are allowed to drive it at all;

7.) Whether you can pay from your own resources for medical services that you want and can afford, but that are not favored in a managed system;

8.) Whether you can decide for yourself who you will and will not do business with, on whatever criteria you choose;

9.) Whether you can express opinions that make other people "uncomfortable;"

10.) Whether you may refuse to participate in or fund the voluntary activities of others that you find morally objectionable;

11.) Whether you can defend your life and family from mortal threats with appropriate levels of force, including lethal force;

12.) Whether you can tell a joke that some official somewhere thinks creates an undesirable "atmosphere;"

13.) Whether you can decide for yourself what altruistic causes are most deserving of your financial support;

14.) Whether you may charge whatever a willing buyer is willing to pay for your products or sevices;

15.) Whether you may decide for yourself what activities are meaningful and beneficial to you, regardless of what someone else thinks those activities should be.

Sunday, March 01, 2009


Humans have a certain type of curiosity that is a fascination with origins. We delve into geneology of course, but we also want to satisfy ourselves as to the origins, and thus the nature, of more universal phenomena. Thus, James Bruce was moved to search for the source of the Nile, scientists are presently striving to confirm the existence of the "God particle" and ruined investors search for the etiology of their woes. The entire conflict between evolution and creationism is over which of the two doctrines is a more useful approach to the seminal question of human life. Underlying these investigations is the assumption that there is a single underlying nature, which if understood, will enable us to more effectively manage our affairs. In some cases, like physics, or biology, this is true, but human psychology seems to extend the principle to areas unsuitedto the premise. One such inappropriate discipline is politics.

The emphasis on bipartisanship and rejecting extremists of both the left and the right, is motivated by a notion that the welfare of the people has a single objective origin, and that there is some form of political compromise that leads us closer to an ideal form of government. For example, the current fashion is to agree that the more perfect economy is one that strikes a balance between private enterprise and government activism. Similarly there is presumed to be some type of Zen-like balance between individual liberty and governmental regulation, and between individual prerogatives and coerced duties.

For centuries, physicians have tried to trace the origins of disease in order to have some clue as to how to treat it. But in each case they had no dispute as to what the goal was: to return the patient to the state of health he enjoyed prior to affliction. When Bruce sought the source of the Nile, there was no confusion as to what phenomenon he was trying to explain. This is not the case with politics however. The whole existence of politics arises from the fact that there is no right answer to the question of what is the proper role of government, and what should be the priorities of interests among citizens of the state. If we seek to understand the role of government and the rule of law, we are likely to come to vastly different conclusions if we assume that it arises form the need for collective defense, than if does from protection of economic growth, or maintenance of public order, or providing food and shelter.

In fact, the nature of politics is inherently and unavoidably adversarial, a characteristic that need not vex the physicists seeking elementary particles, explorers seeking out geological features, or researchers trying to understand what makes people sick. In the latter cases, it may reasonably be assumed that there is a "right" answer; in politics there are only accomodations of certain interests, and while these accomodations and compromises might achieve certain common goals, they do not resolve the tension that arises because people will always have differing interests, needs, and ideas of how things ought to be.