Posts Tagged ‘Nassim Nicholas Taleb’

Theories of the Financial Crisis: Misjudging Risk

Tuesday, April 28th, 2009

[digg-reddit-me]The bankers – whose enormous salaries were earned based on their skills at judging risk and making money – caused a financial cataclysm because they disastrously misjudged the riskiness of the complex financial instruments they created and sold.

This was the lesson I learned in the immediate days after the financial crisis – and it still explains a great deal of what happened. (Of course, there was also a good deal of outright fraud and the perversity of short-term incentives in which bankers could profit exorbitantly if they made profits regardless of how their investments turned out over the long-term.)

Cognitive errors may have contributed to the misjudging of risk. Megan McCardle for example gave a compelling description of different cognitive errors which contributed to the financial crisis – including the recency effect which she describes:

People tend to overweight recent events in considering the probability of future events.  In 2001, I would have rated the risk of another big terrorist attack on the US in the next two years as pretty high.  Now I rate it as much lower.  Yet the probability of a major terrorist attack is not really very dependent on whether there has been a recent successful one; it’s much more dependent on things like the availability of suicidal terrorists, and their ability to formulate a clever plan.  My current assessment is not necessarily any more accurate than my 2001 assessment, but I nonetheless worry much less about terrorism than I did then.

These cognitive errors were so damaging because they were programmed into the models for minimizing risk that the “quants” created to divvy up mortgages and just about everything else that could be bought and sold. 

Michael Osininski tried to claim some share of the blame in a recent New York magazine article – as one of the top “quants.”  Osininski described how he had an inkling of the disaster ahead:

[T]he world I had helped create started falling apart. I hadn’t anticipated it, but at the same time, nothing about it surprised me.

Last month, my neighbor, a retired schoolteacher, offered to deliver my oysters into the city. He had lost half his savings, and his pension had been cut by 30 percent. The chain of events from my computer to this guy’s pension is lengthy and intricate. But it’s there, somewhere. Buried like a keel in the sand. If you dive deep enough, you’ll see it. To know that a dozen years of diligent work somehow soured, and instead of benefiting society unhinged it, is humbling. I was never a player, a big swinger. I was behind the scenes, inside the boxes. My hard work, in its time and place, merited a reward, but it also contributed to what has become a massive, ever-expanding failure.

Jordan Ellenberg described how these models that purported to minimize risk actually just compressed the risk into “one improbable but hideous situation” in a manner similar to that of the 400 year old sucker bet, the Martingale. For example, Wall Street bankers combined hundreds of mortgages into securities in the belief that while some of the mortgages might default – most would not. The more mortgages you combined, the safer the investment was – as only a small percentage of mortgages typically defaulted. Unless something went very wrong. Comparing Wall Street bets to the Martingale, Ellenberg described the bet Wall Street was making:

(0.99) x ($100) + (0.01) x (catastrophic outcome) = 0

Wall Street bankers thought that the collective assets they were trading were worth $99 each in this estimate – rather than $50 as they would be if each asset were judged individually. 

One of the few people who saw this misjudging of risk as the inevitable cause of a financial crisis was Nassim Nicholas Taleb who wrote that Wall Street had consistently ignored the possibility of what he called “Black Swans” and what Ellenberg described as an “improbable but hideous situation.” Taleb has placed a great deal of blame on the mathematical models used by the quants and on the hubris of the bankers and traders who believed that they were created wealth when they were instead building an elaborate house of cards.

While he was running his own hedge fund in the 1990s, he turned his own knowledge of his lack of knowledge – and others’ lack of knowledge – into enormous profits. It came at the expense of losing a little money 364 days of the year – but making enormous profits in that one remaining day. He would bet on market volatility – which he understood financial firms repeatedly underestimated.

Taleb was castigating Wall Street barons for years as they hubristically bet greater and greater sums of money – making leveraged bets that the market would continue to rise.

Taleb’s key insight is that we know very little of the world itself – and will be more often fundamentally wrong than right. The example he uses is the Black Swan as described by David Hume:

No amount of observations of white swans can allow the inference that all swans are white, but the observation of a single black swan is sufficient to refute that conclusion.

This fundamental unknowability of the world must inform our actions, and perhaps points to some solutions. Taleb himself recently wrote a list of steps we should take to create a world more resistant to Black Swans. But his overall philosophy insists that we must attempt to resolve this crisis by tinkering with different solutions, and seeing what works, while being mindful that our actions will inevitably have consequences we do not imagine. And remember – at any point – a black swan could come around and reshape our world suddenly – as 9/11 did, as the assassination of the Archduke Ferdinand to start World War I, as did the invention of the personal computer, as has this financial crisis. The solution will not come from our determined application of fixed ideas, but by our openness to the possibility that we may be wrong, even as we are determined to act. We must see the shades of gray and acknowledge that we do not fully understand the world, yet still act – tinker, if you will. 

In this, Taleb seems to have reached a philosophical end point similar to the famous libertarian economist Friedrich Hayek who in his Nobel Prize speech explained that “we needed to think of the world more as gardeners tending a garden and less as architects trying to build some system.”

To tinker, to garden, to nudge – all of this points to a more modest liberalism, a market-state liberalism.

[Image courtesy of robokow licensed under Creative Commons.]

Ten Principles of Liberalism

Wednesday, April 22nd, 2009

[digg-reddit-me]Barack Obama’s incipient presidency has set off a furious debate over what his administration’s principles are. George Will described Obama’s administration on this past Sunday morning as the Third Wave of government intervention and expansion (with FDR’s New Deal and LBJ’s Great Society being the first two. Will, for some reason, declined to mention TR’s introduction of the regulatory state, as does almost everyone.) Right-wingers from Rush Limbaugh to Sarah Palin have described Barack Obama as a “socialist.” Meaghan McCain and Niall Ferguson deride what they characterize as a leftist agenda. On the other hand, supporters of Barack Obama’s candidacy have criticized him for betraying his progressive vision and defending the status quo. Others have defended him against charges of socialism and suggested he stands for good old-fashioned liberalism.

At this moment in history, as capitalism seems to have failed, as American international power is at an ebb, as globalization seems destined to continue, as the threat of terrorism continues to grow – evident both in our vulnerability and in the number of our enemies, as the nation-state which derives its legitimacy from providing for the needs of its citizens seems to be evolving into a market-state which is legitimated by the opportunities it offers its citizens – at this moment in history, Barack Obama has become president. The liberalism I am attempting to describe in this post is merely a sketch – but it is a sketch of what I see to be the right approach in this world – which as I have commented before, seems to have much in common with what I identified in the summer of 2007 as the Obama approach. As liberalism tends to be pragmatic rather than theoretical, many of these principles have regained prominence most specifically in response to recent problems in the world and with the Bush administration. I am focusing here on those aspects of principles which distinguish liberalism from other political philosophies – specifically, progressivism, various leftist movements, conservatives, libertarians, and extreme right-wingers. 

Here are the 10 principles of liberalism – whose three goals are to allow individuals liberty, opportunity, and community.

  1. Doubt v. Action. These two competing impulses are at the heart of all the rest of these principles. A Hayekian doubt about the efficacy of centralized planning coupled with a Rooseveltian (TR or FDR) need to act – to conduct “bold, persistent experimentation” while acknowledging that our “grasp on the truth is always provisional.” This balance was best articulated by Reinhold Niebuhr who wrote that while “We must exercise our power,” we must be remain aware that power corrupts even ourselves. Hayek similarly explained that “we needed to think of the world more as gardeners tending a garden and less as architects trying to build some system.” Liberalism was never utopian, but today’s liberalism has been tempered by the failures of big-state liberalism – as well as the failures of anti-regulatory “free” market fetishism. Only conservatism, properly defined historically, attempts a similar balance.
  2. The Market & the Government. Contemporary liberals reject the doctrinaire distinction between the “market” and the government that animated so much of the conflict in the 20th century. The free market should not be treated as some theoretical utopian ideal or as a perpetually lost state of innocence. And the government is not some evil force which must be reduced until it is of a size that it “could be drowned in a bathtub.” Rather the government and the free market exist together – and in a capitalist republic such as ours, each is dependent on the other. The free market does not exist in a state of nature but must be created by and maintained by the society and the state which provide the values and the rules and other conditions without which a market cannot be free. In other words, a free market is a product of a just government.
  3. Empower individuals. One of the key roles of government then – in creating a free market – is to empower individuals to participate in market freely, as individuals. A market is less than free if employees can be held hostage by large corporations and health care burdens1. To empower individuals then, the government must ensure that there is sufficient technological and transportational infrastructure; the government must ensure that basic needs can be met by individuals – for example access to health care; and the government must ensure that every individual has the opportunity to get an education. At the same time, individuals must be empowered to shape and control government more directly. Liberalism in a market-state must exhibit a preference for the individual over the corporation and government and must empower individuals against bullying and coercive measures of these large institutions.
  4. Predictability & stability. Government in a market-state must be predictable and the economy and society must be stable. Neither of these is an absolute good – both are contingent goods – as without predictability and stability, economic growth is impeded and liberty is impossible. Related concepts are sustainability and resilience.
  5. Reform. (Not revolution.) Liberalism has embraced a policy of reform – presuming that the status quo is not perfect yet acknowledging that rapid change could lead to worse. Reform is the balance liberalism strikes between stability and progress. This distinguishes them from conservatives who embrace the status quo over any change (standing athwart history yelling stop!) and leftists and right-wingers who embrace revolutions of various types to overthrow the current order as fundamentally wrong. The focus on reform is informed by the balance between doubt and action. Perhaps the best understanding of what reform means for a liberal can be found in Nassim Nicholas Taleb’s advocation of the word “tinkering.”
  6. Preventing destabilizing concentrations of power and encouraging fair processes of distribution. Liberalism acknowledges that power tends to become concentrated – sometimes in particular branches of the government (for example, in the presidency in the unitary executive theory); sometimes in corporations (as they become too big to fail); sometimes in a particular class of individuals (as they control more and more wealth.) Liberalism sees that such concentrations of power are incompatible with democracy and liberty – and that while such concentrations of power will empower certain individuals – they do so at the expense of most people. While socialists and communists and other utopians believe equality must be created – liberals merely seek to prevent extreme concentrations of power in the hands of any minority. At the same time, as Confucius said, “In a country well governed poverty is something to be ashamed of. In a country badly governed wealth is something to be ashamed of.” Which is why liberals must ensure that power is distributed through a fair process. Political power has been distributed by a constitutional order that needs to be tweaked now and then – and sometimes shaken up, as with the abolition of slavery. Economic power similarly is distributed in a market that sometimes is entirely unjust – as pollution imposes costs on some that are paid by others; and of course with the issue of slavery again. Government must step in to ensure that such unfair practices are not allowed. The goal is not to prevent someone like Bill Gates from having so much wealth, as his wealth is small enough to pose little threat to stability no matter what he does (almost) – it is to prevent 75% of the power from being controlled by 5% of the population – which does pose such a threat.
  7. The Rule of Law. Liberals embrace the fact that our nation was founded “as a nation of laws, not men” and that laws, while sometimes inconvenient are the foundation of our social bargain. Our leaders swear to uphold the law and to remain subject to it. That means if say, a President authorizing wiretapping in direct contravention of federal law, then he must be prosecuted.
  8. Aid to the disadvantaged. Liberals believe in the moral principle that a society and a government cannot be judged without taking into account how it deals with the disadvantaged – especially those who are disadvantaged as a result of the inevitable flaws in the system we choose to embrace. Liberals subscribe to the idea that “A nation’s greatness is measured by how it treats its weakest members.”
  9. First among equals. Liberals acknowledge that America has often been and remains a force for good in the world – but they believe that it detracts from this when it considers itself unrestrained by any law or treaty and unilaterally imposes its will. This creates instability and unpredictability – as well as encouraging other nations to form collectives against us and to obtain weapons of mass destruction to prevent an invasion and provoke a standoff. Instead, liberals see that America has been most effective and done the most good when it acted as “first among equals” in the community of nations. As technologicaland macro-economic forces have been rapidly decentralizing power, America remains the single most potent force in a non-polar world – but it detracts from it’s power when it acts alone and delegitimizes the trust the world has given it to act responsibly.
  10. Diversity and federalism. Liberals – embracing their fallibility as human beings, and acknowledging that their grasp of the truth is always provisional – embrace diversity and federalism. Diverse viewpoints, diverse cultural, cultural, economic, etc. backgrounds all should be welcome and protected so long as they do not attempt to impose their specific view on those not willing. This is why liberals must embrace federalism – which has traditionally been a conservative principle. Liberals seem to be embracing the idea of federalism – at least with regards to the issues of gay marriage and medical marijuana.

(more…)

  1. As Daniel Gross explained in Slate, “An affordable national health care policy, which could allow people to quit their jobs and launch businesses without worrying about the crippling costs of premiums or medical costs, might be a better spur to risk-taking than targeted small-business loans.” []

A Scientific Approach To The Economic Crisis

Tuesday, February 17th, 2009

[digg-reddit-me]There are relatively few serious political figures who argue that our economy does not need fiscal stimulus at this time – few political figures are comfortable advocating inaction while serious disruption occurs. But there are a significant minority who do take this position – including, it seems likely, some number of Republicans who though publicly are not advocating this extreme course, position themselves to oppose what Obama is doing in whatever ways are feasible.

The majority of Republicans in power seem to advocate stimulus by enormous tax cuts while railing against deficit spending (although the proposed tax cuts cost more than the proposed spending). This piece does not address their concerns – although independent, non-partisan Congressional Research Service did – explaining why the economic consensus was that tax cuts stimulated less and less quickly than spending – and I will address them again later today. A significant number of other Republicans simply have a bad feeling about the stimulus and are looking for which approach best suits them to oppose it.

For those who do oppose any form of stimulus, James K. Glassman’s article in Commentary has proven to be a rallying cry. But it has also provided ammunition to many others who seeking to oppose Obama by any available means. Cited by House Minority Leader John Boehner and many others, this article has found a large audience despite Glassman’s previous infamous prediction (as an author of Dow 36,000) that the stock market was undervaluing companies in 1999 at the height of the tech boom. I addressed some of the questionable historical claims Glassman made to build his case in an earlier post, but now I’m going to address his broader, more basic argument.

Glassman makes two points which leads him to label fiscal stimulus a folly repeated throughout recent economic history:

  • Economics is a limited profession and we can never quite understand the market enough to affect it the way we intend to; which is why, “Government simply cannot know enough to direct an economy successfully.”
  • “Meanwhile, left alone, what Hayek called ‘spontaneous order’ will find its way forward;” meaning the market is self-correcting as long as the government does not interfere.

The inherent contradiction is obvious. If we do not understand the market enough to affect it deliberately, how can we predict how it will act. If economics is such a limited profession that it cannot provide us with enough information to affect the economy in any predictable way, how can we trust an economist’s presumption to do nothing? The market – as Glassman describes it – is a kind of god who we must have faith in. Letting our economy slide deeper into recession while taking no is the economic equivalent of a “leap of faith.” Given this understanding, economist are little more than priests of the free market – who cannot predict or effect their god’s will – but whose job is to assure us that this god will bless us eventually with plenty in its own good time, but only if we trust it and restrain sinful (government) interference.

But Glassman then says something extraordinary given the two above statements and the inaction he is advocating now:

[I]n the 1930’s, “something in the normal regenerative process was missing.”

He doesn’t offer an answer to this – but the economist he derides throughout, John Maynard Keynes, does.  My meager understanding of Keynes suggests he believed the economy, like an engine, would need to be primed from time to time to prevent it from stalling – and he saw the best means of doing this as stimulus spending. The spending boom of the Second World War, for example, can be seen from a Keynesian perspective, as finally getting the world economic engine started again.

Obama however seems to have incorporated Hayek’s admonition that he “cannot acquire the full knowledge which would make mastery of the [economic] events possible” with a cautious Keynesianism. For those who believe that grand challenges such as possible financial collapse demand a grand ideological vision, Obama’s approach will disappoint. But the kernel of wisdom in Hayek (as well as many other truly conservative thinkers) is that grand visions are as likely to fail as minor tinkering projects – except when they fail, they will cause far more damage than the tinkering. 

Obama’s approach to the crisis is in this mold; some call his bill too cautious and too small; some call his stimulus bill an ideologically mixed up mash with a little of everything; some are frustrated his bailout approach focuses more on process than results. But all of this makes sense if Obama is approaching this crisis as a tinkerer. 

Hayek believed that the economy was a mysterious thing and that, to quote another philosopher/economic thinker, we shouldn’t “disturb complicated systems that have been around for a very long time [as w]e don’t understand their logic.” This other thinker, Nassim Nicholas Taleb, believes that if we must act, we should “tinker” to use his word. As “[w]e have the ability to identify our mistakes eventually better than average,” we can avoid the worst outcomes, and potentially latch onto the best innovations:

Look at the three big inventions of our time: lasers, computers and the internet. They were all produced by tinkering and none of them ended up doing what their inventors intended them to do…We choose the iPod over the Walkman. Medicine improved exponentially when the tinkering barber surgeons took over from the high theorists. They just went with what worked, irrespective of why it worked.

Instead of the paralysis and faith preached by Hayek, Taleb offers us a path forward – one of action tinged with doubt, of trial and error, of identifying mistakes quickly, of evaluatinr results honestly. His approach to economics is, at its base, science, in it’s most basic and primitive form. 

This seems to be the approach Obama is taking – pragmatic, cautious, aware of the wisdom of both Hayek and Keynes. He’s tinkering. And that’s exactly what we need.

Someone Who Predicted the Financial Crisis

Wednesday, January 28th, 2009

“There is nowhere to hide,” Roubini, an economics professor at NYU’s Stern School of Business who predicted the financial crisis, said from Zurich in an interview with Bloomberg Television. “We have for the first time in decades a global synchronized recession. Markets have become perfectly correlated and economies are also becoming perfectly correlated. This is not your kind of traditional minor recession.” [my emphasis

Nouriel Roubini was one of the economists whose analysis I latched onto in the immediate aftermath of the collapse of Lehman Brothers. His writing makes a lot of sense, especially recently. But I’m sure I’m not the only person tired of hearing people identified as someone “who predicted the financial crisis.”

Many of these people who “predicted the financial crisis” have been predicting the financial crisis we are now seeing every year since the 1980s. Specifically, I’m thinking of Michael Lewis and Nassim Nicholas Taleb – both of whom were in the finance industry in the 1980s and got out while the going was good – and then went on to write about it’s unsustainability. They were right that the Wall Street boom was unsustainable and built on shakey foundations. But they obviously missed something in what was going on as the boom continued for many years. In other words, they were right in the end, but wrong for quite some time. Their insight allowed them to see moral problems that would come back to haunt us but had little practical effect in terms of predicting the future – including this crisis.

All this is less true of Roubini though who famously did predict with some precision what has happened – and did so in a timely fashion. As the New York Times described his 2006 presentation to the IMF:

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

What Michael Lewis and Nassim Nicholas Taleb did was correctly point to an unsustainability in our system – but their insights haven’t had the same predictive value as Roubini’s.

The Detroit Investment Group

Friday, December 5th, 2008

[digg-reddit-me]Jon Stewart pointed out against last night how non-constructive the political debate regarding the bailout of the Big Three Automakers has been:

Clearly, politicians are applying a double standard. But I think the hypocrisy is worse than Stewart suggests – because the product financial companies are supposed to be creating is profit with the risks associated thoroughly managed and quantified. Their product has proved to be far more defective than the cars produced by the Big Three, as the financial products have not just malfunctioned, but acted as a virus spreading the failures around to everyone.

Stewart previously pointed out how the first story regarding the bailout of the Big Three focused almost exclusively on the method of transportation used by the CEOs of the auto companies to get to hearing instead of any substantive issues. The real controversy has barely been discussed:

Corporations, whose primary purpose is to amass wealth by any means available for their owners (and who always manage to simultaneously amass wealth for the managers) cannot be trusted with public money. There is no public purpose to such profit-making. The public value of a corporation comes from it’s incidental activities – the means by which it is able to amass it’s profits. By bailing out General Motors, the government would be giving it’s money away for no public purpose. But the government does serve a public purpose by keeping General Motors’ factories churning out cars – by keeping people employed, by providing stability, by keeping the economy going and producing usable items.

Within that distinction lies the difference between outrageous abuse of taxpayer funds and a valid public purpose. The more difficult question is how to avoid the abuse while serving the purpose. [edited slightly from my original]

Which is why I think a bailout should be postponed – to attempt to find the least worst of all the options – rather than to cause great problems with hasty solutions. If the automakers won’t survive without an instant cash infusion though, the government needs to step in one way or another.

Michael Moore described his common sensical solution to this whole mess earlier this week:

1. Transporting Americans is and should be one of the most important functions our government must address. And because we are facing a massive economic, energy and environmental crisis, the new president and Congress must do what Franklin Roosevelt did when he was faced with a crisis (and ordered the auto industry to stop building cars and instead build tanks and planes): The Big 3 are, from this point forward, to build only cars that are not primarily dependent on oil and, more importantly to build trains, buses, subways and light rail (a corresponding public works project across the country will build the rail lines and tracks). This will not only save jobs, but create millions of new ones.

2. You could buy ALL the common shares of stock in General Motors for less than $3 billion. Why should we give GM $18 billion or $25 billion or anything? Take the money and buy the company! (You’re going to demand collateral anyway if you give them the “loan,” and because we know they will default on that loan, you’re going to own the company in the end as it is. So why wait? Just buy them out now.)

3. None of us want government officials running a car company, but there are some very smart transportation geniuses who could be hired to do this. We need a Marshall Plan to switch us off oil-dependent vehicles and get us into the 21st century.

Moore’s solution seems like what was done with the railroad industry in the 1970s – when it was taken over by the government, revamped, and then privatized again. I think Moore’s almost got it right. But not quite. Moore’s solution seems very 20th century – like India’s Five Year Plans or other centralized, government-sponsored attempts to solve large problems. Instead, I think Moore could take a lesson from Nassim Nicholas Taleb, the philosopher, economist, and former hedge fund manager who has been explaining the underlying weakness of our financial markets since he made a killing in the 1987 crash. Taleb understands that if you put a bunch of geniuses in charge, you might get something great. But as he points out, the truly game-changing developments happen by accident. The computer, lasers, the internet – all of these innovations have accidentally changed the world in a way that could not be anticipated. He refers to this type of game-changing development as a Black Swan.

And a Black Swan is exactly what Michael Moore, Barack Obama, and the rest of us know we need to jump start the green energy industry. The best way to catch a Black Swan in Taleb’s parlance is to tinker.

In that spirit I propose to create a government-affiliated entity, the Detroit Investment Group (DIG).1  DIG would be a modern-day government intervention in the market that would take inspiration from the Tennessee Valley Authority (especially it’s regional focus), the Manhattan Project (it’s think tank aspect), NASA’s moon shot (in the specificity of it’s goal and it’s timeline), and the Department of Defense (in how it creates incentives for inventors to create new technologies with the promise of contracts.)

Government intervention is necessary as the marketplace has failed to invest in the long-term development of green energy. This tendency of the market to focus on short-term profits over long-term projects has certainly been revealed to be a significant flaw in our current economic structure, as, for one common example, corporate managers seek instant profits which lead to huge bonuses and leave before the long-term effects of their actions hit. Not knowing how to fix this tendency to focus exclusively on the short-term, a government agency can create incentives within the market to focus on long-term issues that are essential to our nation’s security and stability. This would be the purpose of DIG – to supplement the market rather than to impose it’s own hierarchical structure.

DIG would be given goals and rules rather than a typical bureaucratic organization. It’s goals would:

  1. To spur the creation of new green technologies and a green energy industry in America; and
  2. To rejuvenate Detroit and the surrounding areas.

To accomplish both of these goals, DIG would make Detroit the place to go for green industry – the way Silicon Valley is for computer technology. DIG would not have a specific method of encouraging green industry – but would use an infusion of cash and people to tinker and innovate and generate solutions. It would need quite a number of tools to spur this growth and innovation:

It would need the authority:

  • To offer government contracts to license green technologies or buy green products;
  • To sponsor a think tank of top experts in various fields to come up with technologies;
  • To offer prizes for creating products that meet certain benchmarks or accomplish certain ancillary goals;
  • To have input into a cap-and-trade program not managed by DIG;
  • To buy companies with worthwhile technologies or resources (including General Motors for example) and continue to operate them.

The point is – DIG would try everything. It’s task would not be to follow certain procedures, but to achieve it’s goals. It would be structured in such a way as to create market incentives and to centralize planning – on two alternate tracks – and let each influence the other. If this problem is fixable, then DIG would unleash the money and human resources to find the fix – and it would be agnostic about the ideology of it’s solution.

It is, in short,  a very Obama-esque approach to the problem.

  1. Dig.gov is not being used by any government agency at the moment. []

Leave It To Beaver Socialism

Friday, October 17th, 2008

[digg-reddit-me]Following up on this post

All in all – there’s a lot of talk about socialism these days – driven by a fear, especially among the financial elite, that a blowback is coming. At the same time, after the better part of four decades of Republican rule, the Republicans need to scare people out of voting for the charismatic candidate who’s offering to help them in this time of crisis. And certainly this ongoing financial crisis has demonstrated to many the insufficiency of the Republican approach to regulation and governance and the limitations of the market. (Though not to Republicans and free-market ideologues who continue to insist that the problems that have spiraled out of control in the shadow banking system were the result of too much government in the more stable, regulated banking system.) I could easily see a populist candidate gain power today by railing against the big money elites. But Obama is not this candidate, let alone an advocate for socialism, class warfare, or any similar ideology. (In fact, McCain’s rhetoric comes closer to populist demagoguery of Wall Street.)

Obama’s economic plan is not about socialism or revolution or any such radicalism. He’s not that type of politician. The goal of his Obamanomics (if you will) is not a socialist paradise or a European-style market socialism but a restoration of the economic justice that made 1950s and 1960s America so stable. Unless you think Leave It To Beaver took place in a socialist nation, then Obama’s economic plans shouldn’t strike you as far left. As Andrew Sullivan pointed out while thoroughly debunking the right-wing spin that Obama is “far left,” Obama is to Richard Nixon’s right on taxes, which you would never guess from the ads Senator McCain has been running. Even the “code words” that the Investors Business Daily finds to be so fraught with meaning – “economic justice” – which they insist is just code for socialism – are from1950s era American thinkers Kelso and Adler. They were the authors of the 1958 Capitalist Manifesto, a book which sought to figure out how to make American capitalism more just – while acknowledging that “capitalism [is] the only just form of economic life.”

Barack Obama’s economic plan falls well within the mainstream of American economic history.

Alexander Hamilton – that first budding capitalist of a new nation – believed that government must create and maintain infrastructure, encourage industry, and maintain financial stability through central banks and financial regulation. Henry Clay promoted (and Abraham Lincoln supported) what he called “the American system” – which included various government interventions to build up American industry. After the Civil War, industry gained more and more power – and by the time the Panic of 1873 gave way to the Gilded Age, extreme capitalism had taken over America – with extreme concentrations of wealth and vast amounts of power concentrated in the hands of a few magnates.

McCain’s hero, Teddy Roosevelt, believed that we needed to protect essential institutions and elements of society from extreme capitalism – and focused on environmental conservation, on breaking up monopolies and other concentrations of power, on increasing regulations and beginning government’s role as a protector of consumer rights. This conservatism of Teddy Roosevelt’s resembled that of William F. Buckley – who defined conservatism as a man standing athwart history, yelling, “Stop!”1

As a result of Teddy Roosevelt’s reforms, and then the turmoil of the Great Depression, World War II, Hoover, FDR, and Truman – America had reached a point of social and economic stability. This stability of the 1950s and 1960s came at the expense of tamping down certain social and economic forces. The social stability was torn apart by the Civil Rights movement, feminism, free love, and the later radicalisms of the late 1960s and early 1970s. This culture war has been dominating politics since then.

The economic stability of this period was destroyed by the forces of extreme capitalism, greed, deregulation, and other economic radicalisms of the 1970s and early 1980s – as labor unions were undermined, executive compensation grew exponentially, social mobility was impeded, and economic power concentrated in a handful of large corporations.

The excesses of the social radicalism of the 1960s have been cataloged by the conservative movement – and many of the worst excesses have been reversed – while other elements have become accepted by the vast majority of Americans. There has been no similar concentrated political effort to moderate the other radicalism that destroyed the status quo of the 1950s and 1960s America, extreme capitalism. Just as the social radicalism of the 1960s produced great good – from the Civil Rights Movement to women’s rights – and the mainstream opposition today accepts these progressive strides forward, so the economic radicalism introduced market forces, encouraged competition, and has elevated many people in Third World nations from abject poverty as it’s mainstream opposition today accepts these positive effects of the market.

Obama belongs in this camp of mainstream opponents of extreme capitalism. His agenda stems from an understanding of the middle class best encapsulated in this clip from West Wing, which though it aired ten years ago, seems eerily relevant today:

Obama’s economic plan is a response to this wish to make things “just a little bit easier.” It is an attempt to temper the forces of globalization and extreme capitalism that have wreaked havoc in our society and position us to compete in a globalized marketplace. Like Teddy Roosevelt, he’s attempting to protect the core values of our society from economic radicalism; like Alexander Hamilton, Henry Clay, Abraham Lincoln, and Americans throughout history – he is proposing investments in our infrastructure and incentives for industry. Obama’s plan isn’t perfect – it’s just a start. It’s just tinkering – which is how that sage Nassim Nicholas Taleb describes “the best we can do” to improve our condition. It’s an attempt to make things “just a little bit easier.”

When Obama talks about “economic justice” he is not referring to some obscure Communist codeword – he is calling us to remember the world of Leave It To Beaver – a world where firemen and bankers, lawyers and plumbers, could all live in the same neighborhood. Obama doesn’t pretend he can bring back this past – but he believes we must stop the forces of extreme capitalism from destroying this American ideal and that we must take pro-active steps to reduce the destabilizing effects of globalization and capitalism while protecting our core values as a society.

This isn’t socialism – this is common sense – and it has been the American system since our founding. The radicals are those who propose we do nothing in the face of attacks on our way of life and in the face of economic calamity – the nihilists among the House Republicans and the Hooverites and those who continue to favor deregulation and oppose sensible  government intervention in the markets. The radicals are those who believe the free market will cure all ills and will heal itself.

Those who claim that Barack Obama would be the most liberal president in history must have skipped the American history classes covering the period before 1980. Those who claim he is a socialist are just plain wrong.

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  1. Of course, Buckley came to distance himself from contemporary conservatism – which dropped this moderate approach with preemption and prevention. []

Jesse Ventura vs. The Black Swan

Sunday, September 7th, 2008

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[Jesse Ventura, former professional wrestler and governor of Minnesota, speaking at Ron Paul’s Liberty Rally in Minneapolis last week. For the rest of this Jesse Ventura’s speech, check out Fora.tv.]

You certainly didn’t see this in the mainstream media.

I don’t agree with Ventura’s points completely – but he makes a very compelling case for libertarianism. He does it by avoiding subtlety and going for the jugular – which is what you’d expect of gladiators in either politics or professional wrestling.

He speaks to the tremendous anger at our current political and economic system – the anger tapped by Ron Paul in his presidential run.

Barack Obama stands for the hope that our current political and economic system does not need to be overthrown in a revolution, but instead can be ameliorated through gradual and focused change. For example, if the middle class is being squeezed – then give them tax cuts, and ensure that they can get health insurance, and attempt to create new green collar jobs in America.

Ron Paul (and Jesse Ventura) both stand for the anger and revolutionary impulse to overthrow the existing order. Revolution is a word both Ron Paul and Jesse Ventura use in their respective books prescribing what we need to do. Ron Paul for example preaches the reinstitution of the gold standard, the abolishment of the Federal Reserve, and other revolutionary measures. These men have little time for such tinkering as Barack Obama proposes within our current system. As such, they see him and John McCain as equally part of the problem.

That’s where I have to part ways with these two men. I admire them and their passion. But I mistrust any ideology to give me all the answers. As for tinkering – I think, in many ways, that is the best we can do.

Nassim Nicholas Taleb, a scholar who predicted the latest financial crisis, speaks of “tinkering” as the ideal form of change because we shouldn’t “disturb complicated systems that have been around for a very long time [as w]e don’t understand their logic.” As Brian Appleyard described Taleb’s views in the Sunday Times:

Taleb believes in tinkering – it was to be the title of his next book. Trial and error will save us from ourselves because they capture benign black swans. Look at the three big inventions of our time: lasers, computers and the internet. They were all produced by tinkering and none of them ended up doing what their inventors intended them to do. All were black swans. The big hope for the world is that, as we tinker, we have a capacity for choosing the best outcomes.

“We have the ability to identify our mistakes eventually better than average; that’s what saves us.” We choose the iPod over the Walkman. Medicine improved exponentially when the tinkering barber surgeons took over from the high theorists. They just went with what worked, irrespective of why it worked. Our sense of the good tinker is not infallible, but it might be just enough to turn away from the apocalypse that now threatens Extremistan.

By this logic – revolution is dangerous because it fully commits us to a change, a change which can result in enormous negative consequences. The American Revolution was a kind of beneficial black swan – that ended up producing a unique, stable, and free form of government. The French Revolution on the other hand unleashed a Reign of Terror and totalitarianism – all justified with the same values as the American Revolution. Tinkering allows us to experiment and see what works best and to adopt those measures that work best. It is precisely this determination to tinker that imbues Obama’s plans – from health care to energy policy to education. It’s why Obama’s health care plan works with the current system, creating incentives to fill gaps, rather than mandating an overhaul as the Clintons attempted in 1992 or attempting to push everyone out of the current system as McCain proposes now.

I admire Jesse Ventura for his inspiring rhetoric – and we always need scourges who point out how our society fails to live up to it’s ideals. But if there is anything redeemable in America, if there is any hope that through some determined tinkering we might make things better, then revolution is not yet the answer. Barack Obama and John McCain are not equally part of the problem. Obama seeks to tinker with our economy and government to protect the middle class and to soften the jarring forces of globalization; John McCain seeks to double down on Bush’s policies based on an ideological faith that markets will, on their own, produce goodness and light.  Although Jesse Ventura doesn’t know it, he’s fighting the Black Swan – that knowledge that we do not understand the world as well as we think we do, and revolutions fail far more often than they succeed. That’s why we need a tinkerer in the White House come January 2009 – and not yet another ideologue.

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