Top Financial Stories 2010

I generally ask myself at this time of year what were the biggest stories of the past twelve months, in business/financial news.

By "stories," I don't mean themes, such as "China Rising" or "EU unraveling." I mean stories, such as one might have seen in a particular newspaper on some specific day. Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.

Further, I don't rank them, as in a top ten list. I generally assign one top story to each of the twelve months.

All that said, here is this year's list.

January. Google announcement. Google said that it was no longer willing to censor its searches in the People's Republic of China in accord with the desires of the authorities there. This was part of an escalating dispute that would lead to Google pulling out of China altogether in March.

February. Two competing biotech companies in Denmark claimed a break through in the production of commercially viable cellulosic ethanol.

March. U.S. health care reform bill finally passed -- though the actual changes are to be phased in over a period of years. Judicial challenges to the new law are an ongoing story as the year ends.

April. Greek bonds. The S&P rating for these bonds was lowered to junk level. The unfortunate acronym "PIIGS" for the 'periphery' countries of the EU receives some currency. (For the record, that's Portugal, Ireland, Italy, Greece, and Spain.)

May. The EU Finance Ministers. The Finance Ministers over-rode the strong objections of both the outgoing and the incoming UK government, approving the Alternative Investment Fund Manager (AIFM) Directive.

June. The Gulf of Mexico oil spill. This spill had begun with an explosion on the Deep Horizon platform in April, but it grew as a story week after week, and only this month did it attain totemic full-sh!t-storm significance, even at the level of diplomacy between US and UK.

July. The Dodd-Frank bill reforming the way the financial services industry in the U.S. is regulated, passed. Obama signed it. Much of it kicks the can forward, authorizing reports and possible new regs by a variety of agencies. Some obvious reforms, like the consolidation of CFTC with SEC, go still unmade.

August. The Hong Kong Monetary Authority. The HKMA announced the tightening of its rules on mortgage lending. This reflected its concerns about a developing real estate bubble in the Special Administrative Region.

September. Muncipal bonds in the U.S. Meredith Whitney put out a 600 page report predicting big trouble ahead for the municipal bond market in the US. By serendipity, she released this just as Harrisburg, PA was getting into big fiscal trouble.

October. Sarkozy, President of France. This month, the President pushed pension reforms through the French legislature despite crippling nationwide strikes. (And since we're talking about France, this was also the month that Kerviel was sentenced.)

November. Midterm elections in the US. The most remarkable development here, from the point of view of this list, was the defeat of a proposition designed to suspend AB32, in California, and the election of a Governor committed to enforcing same. AB32 is California's cap-and-trade bill regarding carbon emissions. This development has kept cap-and-trade alive, despite its political failure at the federal level.

December. Ireland. In crisis, and after cutting a deeply unpopular deal with the IMF, Ireland enacts legislation that readies a sweeping re-organization of the banking sector there. Memories of the "Celtic tiger" are just that.

A quick perusal of this list shows that it is much less of a US-centric compilation than most of its precursors in this blog. I have a hometown bias. In this case, though, only five of the stores that strike me as the biggest in their respective months are US-oriented. Five are European, and the other two are Chinese. What does that mean? Nothing much, I suppose.

Happy new year everyone.

Mad Men Thoughts: Part II

Cicily and I continue our viewing of episodes of the television show Mad Men. We aren't viewing them in "real time," but in our own time, and we've only recently moved from the later episodes of the second season into the earlier episodes of the third.

The second season covers the period from Valentine's Day 1962 until the Cuban Missile Crisis that October.

The Missile Crisis provides an obvious way to have the various characters contemplate their own mortality. Specifically, it leads to a conversation between Peggy and Father Gill that, I imagine, is meant to signify the state of the pre-Vatican-II-Council Catholic Church: just why it needed the reforms that Council brought.

Peggy is an ambitious career woman who arrived at Sterling Cooper in the first episode, and who has since become a copywriter. She had a brief fling with accounts manager Pete early on, became pregnant as a result, and gave up the child, so that her sister could raise him as her child. If I understand correctly, Father Gill has gotten wind of this and wants to get Peggy to confess it.

During the Cuba crisis, Gill makes an impassioned pitch that Peggy should confess her sins in order to save herself from hell -- to which she might be consigned rather quickly if the missiles start flying.

The Vatican II Council convened, as it happened, in October 1962, though unless I missed something the fact went unmentioned in the episode. Still, it is hard to believe the screenwriters were unaware of that fact, when seeing the Gill-Peggy interaction.

By the time of the opening episode of the third season, Sterling Cooper has become a subsidiary of a London-based ad company. The Londoners are laying off Americans, making everyone remaining quite nervous. Also, Don Draper and a closeted-guy member of his creative team, Sal, go to Baltimore to meet with the bosses of London Fog, a company with no actual London connection but which has had success branding its raincoats. (Also, as one of the actual Londoners explains, there's no such thing. The so-called "fog" of Dickens novels and other literature of the period was industrial soot -- London, as it happens, was the first industrialized metropolis in history.)

Draper catches sight (I won't try to explain how -- but Don was not playing the sneak -- the sight was an innocent accident) of an encounter that establishes for him that Sal is in fact gay. On the airplane flight back to NYC, Don tells Sal that he has an idea for a new ad campaign for London Fog. The tagline would be "Limit Your Exposure." At that moment, the significance of this phase is ambiguous. Are we really supposed to take this as an idea for a campaign, or is Don sending a message to Sal: "I don't care about your sexuality, but since others might I hope you'll keep it better hidden hereafter than you did last night."

It later turns out that Don and Sal are intent on putting together a "Limit Your Exposure" campaign. That doesn't change the obvious fact that Don was sending a message on the plane. Perhaps what was originally intended as a discreet message to Sal (to be discreet) got away from them both and became their actual campaign.

Snoopy's Christmas

Am I violating someone's copyright? Heck, I'll live dangerously.

The news it came out in the First World War
The bloody Red Baron was flying once more
The Allied Command ignored all of its men
And called on Snoopy to do it again

The Allied Command has a rather low opinion of its own men. Snoopy's flying-ace fantasy on top opf his doghouse was firmly established in the pop-cultural consciousness well before The Royal Guardsmen did this in 1967. But Snoopy always seemed to lose his imagined battles with the Red Baron. He'd go down in flames, shouting "Curse you!" That was the running gag. So how had the Allied Command developed its confidence in his ability to do "it again" -- if "it" means anything they should want done?

Was the night before Christmas and forty below
When Snoopy went up in search of his foe
He spied the Red Baron and fiercely they fought
With ice on his wings, Snoopy knew he was caught

Wasn't it just as cold for the Red Baron? Why wasn't there ice on his wings too?

CHORUS:

Christmas bells those Christmas bells
Ring out from the land
Asking peace of all the world
And good will to man

The Baron had Snoopy dead in his sights
He reached for the trigger to pull it up tight
Why he didn't shoot, well, we'll never know
Or was it the bells from the village below

There's a wikipedia article on this song. Oddly, that article (as of the time of this writing anyway!) says that the Baron doesn't fire "possibly due to his respect for Snoopy's prowess at flying." I don't see any basis for that supposition. The suggestion is that he didn't fire out of a Christmas-eve act of compassion.

REFRAIN

The Baron made Snoopy fly to the Rhine
And forced him to land behind the enemy lines
Snoopy was certain that this was the end
When the Baron cried out "Merry Christmas, mein friend!"

How far, I wonder, was the trip from the site of initial contact to this Rhine-bank place where they finally landed. Snoopy was apparently doomed, earlier in the song, because he had ice on his wings. Are we supposed to conclude that the ice harmed his ability to maneuver sufficiently for a dogfight, but not his ability to fly in a straight line to the Rhine?

The Baron then offered a holiday toast
And Snoopy our hero saluted his host
And then with a roar they were both on their way
Each knowing they'd meet on some other day

REFRAIN TWICE.

We again here a few bars of O Tannenbaum after the final two refrains of the tune proper -- this time it is being played by a piano, not sung as in the intro.

I trust all my readers have had a wonderful Christmas and will enjoy the remainder of this holiday season.

From John Milton's Nativity Ode

Time will run back, and fetch the age of gold,
And spekl'd vanity
Will sicken soon and die,
And leprous sin will melt from earthly mould,
And Hell itself will pass away,
And leave her dolorous mansions to the peering day.

Yea Truth, and Justice then
Will down return to men,
Th'enamelled Arras of the Rainbow wearing,
And Mercy set between,
Thron'd in celestial sheen,
With radiant feet the tissued clouds down steering,
And Heav'n as at some festival,
Will open wide the Gates of her high Palace Hall.

[lines 135-148].

I love these lines, and post them here each year due to the vividness with which they display hope, the most forward-looking of the virtues.

Merry Christmas

Fannie, Freddie, Joey and Petey

A controversy involving Joe Nocera and Peter Wallison draws my attention, because it has a good deal to do with how we understand the crisis of 2007-08.

Joe Nocera is a long-time business journalist, the co-author with Bethany McLean of a newly published book, "All the Devils are Here." As the Shakespearean title suggests, McLean/Nocera's theory is that the crisis had a lot of causes, plenty of "devils." The government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, play a role in their story, but only a supporting role. They are not leading the devilish pack.

Peter Wallison is a member of the Financial Crisis Inquiry Commission, the bipartisan panel that is supposed to issue a report soon explaining what did happen in 2007-08 and why. Wallison, it is fair to say, wants to give Fannie and Freddie a larger share of the blame than Nocera does. Okay --everybody agrees the GSEs get some blame, and how much sounds like an appropriate subject for debate. So ... have at it, guys!

The problem, though, is that this is the US in the early 21st century and it is amongst us always easier to tell someone to shut up than it is to discuss substantive differences. Besides, "shut up" is so much snappier a thing to say. THAT is probably the worst of our devils. But I digress....

On December 17, Nocera wrote in his column that he had spoken to Wallison about their differences and that Wallison claimed to have seen still-secret papers. (What? not on Wikileaks yet?) here.

"Mr. Wallison said he had seen documents, not yet made public, as part of his work with the financial crisis commission that would prove that he’s right and I’m wrong. Well, we’ll see," writes Nocera.

Nocera makes his point without reference to anything secret. The GSEs, in his view, struggled to keep up with the private market operations like Ameriquest and Countrywide, fearing that they would become irrelevant, and politically vulnerable, if they didn't act in line with those practices.

Wallison has replied. He confirms here the sentiments that Nocera attributed to him about those secret documents.

"I told him this was wrong—that as part of the Commission’s work I have seen internal documents from Fannie and Freddie that show this particular mantra of the left to be a myth. For a reporter, that would have been a signal to hold his fire—a warning that there were facts out there of which he was unaware. I was telling him he should wait and see what I might write in connection with the Commission’s report. But he repeated his own dogma immediately thereafter."


This strikes me as fundamentally the wrong attitude to take. Wallison is saying that Nocera should "hold his fire" until he becomes aware of facts that will sooner or later become available. Well ... no. Every rational human being is entitled to form an opinion based on such facts as are available to that person. One should hold and express one's opinions with a consciousness of fallibility, but the idea that one should "hold one's fire" because there might yet be other facts is a demand for a lifetime of silence. It will always be the case that there might yet be more facts out there! So what?? If Nocera were writing about the causes of the outbreak of the American Revolution in 1775 it might be the case that there are still as yet unknown documents somewhere. That is not a signal to "hold one's fire." Indeed, it should be an incentive to fire away -- it may help in smoking out the new stuff.

Nocera should keep expressing the views that he forms on the basis of facts known to him, and if and when Wallison feels free to make further facts known, he should do so.

In the meantime, the rest of us are entitled to suspect that this talk about "internal documents" about which Wallison will write in the future is a tad too convenient. Felix Salmon puts it well.

So much for the ethos of debate.

On the underlying dispute, I would say (subject to being disproven by any "internal documents" that become external down the road) that the real cause of the bubble was monetary policy, not micro-economic factors, not regulatory shenanigans, and not the GSEs. Greenspan created the Housing bubble in order to get us out of the recession of 2000-02, which was caused by the busting of the previous (dotcom) bubble, which was also largely caused by monetary policy. In order to get off this merry-go-round, we need sound money.

Given all that, though, I am inclined to think that the Republicans do overstate the GSE role. It gives them a government target to shoot at, and a target that seems smaller and safer than shooting at the Federal Reserve. Ron Paul, of course, is the honorable exception. He targets the elephant.

From Florence to Houston

Below is an outline for the second chapter as represented in the table of contents for my projected book.

I've already done the same for the first chapter. We will focus here on the institution of lending money for a fixed rate of interest: this is "usury" or "riba" to its foes.

I. Renaissance Florence
A. Theology, Damnation, and Evasion
B. The Rise of the Medici

II. The North of Europe
A. Luther on usury
B. Calvin
C. Calvinism in the Lowlands
D. London and the Classical Economists

III. Colonies and States
A. Debt in the Colonies
B. Debt and the Founders
C. The Post-Classical Economics of Henry George

Here I will make in essence the points I sought to make in this blog on November 19, 2010.

D. Leverage, the Business Cycle, and Enron

The difficulties that arise when finance becomes too disconnected from the physical world, when an excess of liquidity gives rise to dreams of infinite leverage, are well illustrated in the rise and fall of the now infamous energy-trading firm, and it is a cautionary tale we should heed even this early in our study.

We have addressed thus far the fundamental ideas of speculation and leverage (i.e. debt). We need to introduce the final key idea from our subtitle, regulation: and we will do that in the next chapter.

More on Phaedo

As faithful readers may remember, on December 12th I commented on an argument in Plato's Phaedo, under the more contemporary inspiration of Anderson Brown.

Now I think I may have grasped a point that puzzled me then. For when Socrates is challenged with the idea that the soul may be a sort of harmony, and thus dependent upon the physical instrument that plays it, his response is to contend that this can't be a good analogy. Why not? Because having a soul is a binary choice: you either have one or you don't. Being harmonious, or melodic, though, is a matter of degree. Some tunes are more tuneful than others.

Setting aside Brown's exegesis of the passage, I found the argument weak. It appeared to be a mere playing with words. Surely, a defender of the soul-as-harmony theory could say that we sometimes use "harmony" in a binary sense, while at other times using it as a matter of degree. Indeed, as a music critic might use the word "soul" in writing of R&B musicians, it is susceptible to a matter-of-degree interpretation too.

But perhaps Plato's point is two-fold. First: if we think of the tune Mary-had-a-little-lamb as a Platonic Idea (as Plato presumably would have), then we will think of the first musician ever to have played that tune on whatever instrument -- or the first composer ever to put it to paper -- not as its creator but as the discoverer of that bit of imaginative space.

Second, though, there is a sharp distinction. The soul is that which does the discovering. A particular tune is that which is discovered. They are as different as subject and object.

Plato is then saying that (a) both tune and appreciative soul can exist in some sense without embodiment, but (b) the soul exists in a fuller, more active, sense than the tune. The soul is that which rejects one tune for another, deciding that one is more "tuneful" than the other.

I'm reminded a bit of something Wittgenstein said about the self. My self would not be part of the contents of a book called "The world as I found it." The self is the finder.

The Nature of Evil

In Yahoo!Answers, a college student called Tolly117 asked about Thomas Aquinas and the nature of evil. Homework is kind of fun for those of us for whom it is voluntary, so I gave her a hand with the following.

-----------------

In the Summa Theologica, Thomas Aquinas begins by asking whether God exists. He starts by proving that the existence of God is not self-evident: proving that we need a proof. Next step? He advances the arguments an atheist might use for the contrary conclusion, in order to rebut them. One of those arguments is this: "It seems that God does not exist; because if one of two contraries be infinite, the other would be altogether destroyed. But the name God means that He is infinite goodness. If, therefore, God existed, there would be no evil discoverable; but there is evil in the world. Therefore God does not exist."

So: how does Thomas answer that argument? "This is part of the infinite goodness of God, that He should allow evil to exist, and out of it produce good."

That's an important contention. It suggests that the nature of evil is that of a challenge, and God's goodness is demonstrated through His ability to master such challenges. If there were no such challenges, then, the world would not be as good as it can be -- and is.

-------------------

I just include that here because I'm too lazy to think of something more fresh just now.

Microfinance II

If all you knew of them was what I described in the preceding post, you'd think Yunus and his Grameen Bank universally beloved.

But of course, on this conflict-ridden planet, nobody is universally beloved.

Bangladesh Foreign Minister Dipu Moni spoke on December 7th of how "famous Yunus" can not be considered above the law, and a certain charge must be investigated "for the sake of the truth".

Those comments came about because a reporter asked the Foreign Minister about a documentary that aired on Norwegian television, November 30, entitled "Caught in Micro Debt." Why Norwegian television? Apparently because the Grameen bank has become a 'cause' in northern Europe. People from Norway, as well as Sweden and Germany, impressed by Yunus' work, have donated money to assist the bank in its micro-lending.

The most explosive allegations in the piece involved a transfer of funds from Grameen Bank to Grameen Kalyan, a sister organization that offers health "microinsurance".

Authorities in Norway say that they find it "totally unacceptable that aid is used for other purposes than intended no matter how praiseworthy the causes might be."

The maker of the documentary said that the transfer was a tax-evasion trick. (Whose taxes does it help evade? Norway's? Bangaldesh's? Both?) At any rate, the govt of Norway has formally dropped the matter, Yunus and Grameen have denied they did anything wrong, and the controversy over this particular transfer is only significant because it is a part of a larger whole: continued confusions over the morality, and practical significance, of lending money for interest at all.

If interest rates are inherently suspect, then lending money to the poor is even more so. If lending for interest is a natural and practical part of a system by which a country can develop and pangs of poverty can be banished -- or at the least lessened -- then what Yunus is doing is right, but one should also re-examine the laws by which people are stigmatized and punished as "sharks" for doing much the same.

A recent FT story on Grameen Bank quoted Mirza Azizul Islam, a former adviser to the finance ministry in Bangladesh, "Microcredit has played an important role in poverty alleviation in Bangladesh. My reservation is that people have gone just above the poverty line, but they have not been able to graduate much further."

Yes, for going "much further" something more than village bike repair shops, and the other microprojects that Grameen finances, would be necessary. Still, that fact hardly allows one to deprive Grameen of the credit for extending those services to those villages.

Microfinance I

In the mid 1970s, about 80 percent of Bangladesh population was below the poverty line.

In 2010, that number is 38 percent.

I take those statistics from the Financial Times weekend edition, which had a story entitled "Cradle of Microfinance Rocked."

But let's back up a bit. In 2006, the Nobel Peace Prize gave its renowned award jointly to one man and one institution: Muhammad Yunus and the Grameen Bank. The former was the founder of the latter.

More recently, Yunus has received the pop-culture equivalent of the Nobel Prize: an appearance on The Simpsons. In the second episode of 2010-11 season of the Fox network's hit animated program, Lisa sees a video in which Yunus discusses microfinance, and Lisa is inspired to lend her $50 of disposable income to Nelson Muntz. Nelson plans to start a bicycle repair shop with it.

The only thing wrong with the Muntz example is that it is set in the U.S. The typical "microfinance" loan takes place in the developing world, and goes to a prospective entrepreneur in a village. Some have argued that village social constraits are crucial to its success. Microfinance works because institutions like Grameen don't have to use draconian collection means. In a village, everybody knows everybody, and peer pressure sees to it that the borrower makes good use of the money. Perhaps with a profitable bicycle repair shop.

So the idea of "microfinance," the idea that won that Nobel Prize is that institutions can make money by banking people that traditional banks would never touch.

Yunus does in fact have videos on the web through which he promotes the idea. This is one of them.

So ... what went wrong? What is "rocking" this promising system of development? I will hold off on that point until tomorrow.

Phaedo

At one point in the dialogue Phaedo [pronounced Fay-doe], Socrates has to meet an objection that Simmias poses to the notion of immortality of the soul.

Simmias is at first reluctant to state his doubts. After all, Socrates will take the hemlock soon, and one does not quarrel with the self-consoling thoughts of a man about to die! But Socrates encourages him, and Simmias says that the preceding discussion has proven the duality of body and soul to his (Simmias') satisfaction. But...here comes a big "but".

"One might also make the same case about harmony and a lyre and its strings, that on the one hand, harmony is something invisible and without a body ... whereas the lyre and its strings are physical and corporeal and composite and earthy and are akin to the mortal."

From this duality is does NOT follow, Simmias points out, that the harmony will survive the death of the lyre. If someone cuts the strings, the music ends.

"If then the soul happens to be a particular harmony, it is clear that, when our body is slackened or stretched without measure by diseases and other evils, the soul ... must in fact immediately be destroyed, even if it be most divine...." [Sounds like John Searle's view of the mind-body problem, BTW.]

How does Socrates respond? It takes some time -- the dialogue moves in zig-zags, not straight lines. When we in time we come back to this issue of the lyre and harmony, Socrates says that some harmonies are more harmonious than others. Harmony, then, is a matter of degree. This is not the case with the possession of a soul. If I understand the point here, Socrates/Plato is arguing that "possession of a soul" is a binary matter. No one person is more ensouled than another.

"All the souls of us living are equally good, if indeed, souls are, by nature, the same as this itself: Soul."

Thus, the analogy fails, and Simmias lays aside his own objection to immortality.

Contemporary philosopher Anderson Brown translates that argument into 21st century lingo, in a lively way.

Brown sees Plato as saying that we don't simply find material things and discover that you can pluck them and get music. We create material things for that purpose. A manufacturer created the lyre, stringing it together just so, in order to allow it to carry a harmony. Thus: harmony precedes the lyre. Harmony inspired the lyre. So the duality of harmony and lyre is one in which the intangible side of the dualism both precedes and survives the tangible side. It supports Socrates' contention, rather than weakening it.

I don't really see in Phaedo what Brown sees, but he seems to have given a lot more thought to it than I have, so I'll take it for granted this is there somewhere.

The Old Stigma: Speculators as Parasites

I plan to fill in a bit here the first chapter as represented in the table of contents of my projected book. See yesterday's post for the context.

This chapter will flesh out the claim in the introduction that "a very old stigma of the speculator as an anti-social parasite has re-emerged."

I. Russia

A. Dostoyevsky's Raskolnikov and the death of a pawn broker
B. To the 20th century: who were the kulaks?
1. their speculations
2. their stigmatization
3. their deaths.

II. "But that was all so long ago!"

III. The CDS Market as our pawn brokers

A. What is a CDS market?
B. Consider a column Ben Stein wrote in The New York Times back when he was writing for them.
C. Or consider Goldman Sachs as "vampire squid" and the barrage of Congressional investigations.
D. Short course: why CDS' should not be scary.

IV. Transition.

If they are not in fact parasites, what function do they serve? That brings us into the next chapter.

My Book Proposal

Listen up publishers. Here's a book proposal.

I'd like you to bid on rights to my not-yet-complete manuscript, Gambling With Borrowed Chips: The Role of Leverage, Speculation, and Regulation in a Modern Economy.

I am willing to accept millions, though hundreds of millions would be nice.

When complete, this will be a scholarly ms of approximately 76,000 words, with approx. 30 figures in the text, and extensive endnotes for each chapter, an index, and a bibliography.

As I complete outlines of each chapter in subsequent posts, I'll use the chapter titles here as links, for convenient navigation.

Synopsis

Speculation performs at least three indirect but valuable roles that assist a broader society in the wise allocation of resources: it allows commercial parties to hedge their positions; it uncovers the real value of assets; and it creates accountability for corporate managers, who in the absence of active speculators are better positioned to entrench themselves.

Speculative activity can become excessive and abusive -- the best check upon this, though, is not through regulation, much less criminalization -- the best check is the systemic one of a hard money policy.

The events of recent years -- as they have been popularly misunderstod -- have delegitimized this valuable activity, and that has given rise to a lot of real and threatened policy consequences that have done or would do more harm than good. Or, to be more precise, a very old stigma of the speculator as an anti-social parasite has re-emerged.

Outline

Introduction

Part One: The Value of Speculation
Chapters
1. The old stigma: speculators as parasites
2. From Florence to Houston
3. Equity and Prop Desks
4. The Crisis of 2008
5. Commodities and Their Derivatives
6. Betting on Foreign Exchange
7. Accounting and Valuation
8. Corporations and Accountability.

Part Two: Important Abstractions
Chapters
9. Efficient Capital Markets, A Tidy Theory.
10. ECMH, The Much Sloppier Practice.
11. On Greed and Money.
12. A World Without a Monetary Superpower

Part Three: Some Policy Consequences
Chapters
13. Bankruptcies and Rescues.
14. Public and Private Pensions.
15. Home Ownership.
16. Energy.
17. Conclusion.

UConn in the Fiesta Bowl!

On the weekend before Thanksgiving, as I have mentioned here before, the University of Connecticut Huskies football team defeated their Big East rival Syracuse putting themselves in position for a bowl game bid.

But at the time I described their bowl eligibility as still a "long shot."

They've pulled it off, though! On Saturday of the long Thanksgiving weekend, they defeated Cincinnati. The week after that, they beat the South Florida Bulls in an exciting game that ended 19-16, after Dave Teggart's 52 yard field goal broke a tie.

As Casey Keefe wrote on the CBS Sports website, "It's unfathomable to think how far Connecticut football has come."

They are the champs of the Big East conference, and headed for the Fiesta Bowl in Arizona on New Year's Day 2011.

As some of you know, I live a stone's throw from the state line and spend a lot of time on the northern side of said line. So it seems only fair to ask: how did the U.Mass Minutemen do this season?

Well ... they sure aren't in a major bowl game! Nah-nah. The Minutemen are part of the Colonial conference. They ended the season this year with a 4-4 record within that conference, a 6-5 record overall.

Books of the Year

The New York Times has released its list of the top Books of the Year for 2010

Five fiction, five non-fiction. I haven't read any of them. But they make for an intriguing list. In case someome needs ideas on a Christmas gift for me, these are the most tempting three books on that list:

1. Among the fiction entries: A VISIT FROM THE GOON SQUAD by Jennifer Egan. The Times calls it a “virtuosic rock ‘n’ roll novel,” apparently on the grand scale, following 13 characters over four decades, combining their fictional lives into "an artful whole, irradiated by a Proustian feel for loss, regret and the ravages of love.”


2. Non-fiction, APOLLO's ANGELS, by Jennifer Homans. This is a history of ballet. I've never actually sat through a ballet in person. I think I watched all of "The Nutcracker" on television once, but that is the extent of my appreciative history. Still, the history of any art form is bound to prove a microcosm of cultural history in general, and should provide insights from its own particular angle of vision.

3. Memoir, FINISHING THE HAT, the first half of a projected two-volume autobiography by Stephen Sondheim. The strange titular phrase is the name of a song in "Sunday in the Park with George."

A birthday

Jacques Barzun turned 103 years old a few days ago, on November 30.

Yes, that was not a typo: one hundred and three. He was born in 1907 in Créteil, France, the son of Henri-Martin and Anna-Rose Barzun. His father was well-connected with the modernist artists of that epoch, so Jacques knew as a child Guillaume Apollinaire, Albert Gleizes, Marcel Duchamp, and others of that rank.

I've paid tribute to him before: back when his age could still be stated with only two digits, and I'll just lnk to that now.

One of the better features of Leo Wong's "Barzun 100" website, created for such tributes, is the constant scrolling of Barzun quotes across the top of the home page. Some of these are clerihews, brief poems of four lines, with the AABB rhyme scheme, offering an incident from the life of a famous person. The first line of a clerihew is usually the name of that person.

Barzun is very fond of the form. One of his clerihews, scrolling past regularly, is as follows:

Henry James
Names no names
But Bostonians knew
Who was who.

Adding a link was my idea.

All the best to the birthday celebrant -- may Barzun continue to shatter conventional notions of the human life span!

New York's Prominence

Years ago, some time in the 1990s, I began a ms on American history, aimed at the high school level, in the hope of selling it to a textbook publisher.

I fished about a bit for publishers, without any luck, then settled into some other project and forgot this one.

I mention this because I've just now rediscovered the long-forgotten partial ms. Leafing through it, my eyes fell upon my brief attempt to acknowledge, and to give some but not too much credence to, geographical explanations of NYC's rise to world prominence.

I observed that the Hudson River gave the holders of its southern extremity, from the era of Dutch dominance to the present, easy access to fertile lands along the long valley. Also, in English colonial times, this was "a highway to the lucrative fur trade and it could carry an intrepid traveller most of the distance to 'New France,' or Quebec. What is more: Hudson's tributary, the Mohawk, offered access to the western frontier."

I also noted, at a remove: "Also customary at this point is the observation that New York was positioned, in colonial times especially, to serve as the intermediary between Massachusetts and Virginia. As a geographical explanation for New York's rise to prominence this is unhelpful. First, it is also true of Baltimore and Philadelphia (which, likewise, possess fine natural harbors.) Second, it is true of virtually any point anywhere that it serves as an 'intermediary' between someone to its north and someone else to its south, so no site derives any especial benefit from that fact."

Okay, not a great piece of writing. But I have retained the ambivalent attitude toward geo-historical explanations that you can hear in my voice there.

Random Bit of Judicial History

In 1971, the Supreme Court heard arguments in a case arising from documents leaked to the press by Daniel Ellsberg, illustrating the history of U.S. military involvement in Vietnam.

I have a random hankering today to quote from Justice Hugo Black's opinion in that case.

"Only a free and unrestrained press can effectively expose deception in government. And paramount among the responsibilities of a free press is the duty to prevent any part of the government from deceiving the people and sending them off to distant lands to die of foreign fevers and foreign shot and shell. In my view, far from deserving condemnation for their courageous reporting, the New York Times, the Washington Post, and other newspapers should be commended for serving the purpose that the Founding Fathers saw so clearly. In revealing the workings of government that led to the Vietnam war, the newspapers nobly did precisely that which the Founders hoped and trusted they would do."

Reality is fractal

Mandelbrot was right. Reality is fractal. Just when you think you've discovered s straight line from A to B, you zoom in a bit and discover the zig-zags and the swirls.

Then you think, aha! within those swirls I've discovered a lower-level A and B, and between these two, anyway, there is a simple straight line. But when you make another zoom, you find it isn't so.

This truth pressed itself upon me recently when, for the sake of a quick paycheck, I agree to write a brief essay on "Accounting for Software Licenses." Can't be too complicated, right? So ... how does one account for software licenses?

Turns out there are swirls. First, do we want to talk about the accounting of the leesor or the lessee? From the point of view of the lessee, the payments it has to make on a regular basis (yearly? quarterly?) are treated, one might naturally suspect, as a liability on its balance sheet.

But maybe not. Is this a "capital lease" or an "operating lease"? If the former, then in general the lease is a liability for the borrower, and an asset for the lender. If it is an operating lease, though, it can be kept off-balance sheet which (many biz management types seem to think) is re-assuring to actual and potential investors. Are they right? Is it really re-assuring, or does the rational expectations theory rightly presume that the market sees through mere formalities?

Never mind all those squiggles and squirrels! What about the lessor's POV? Can't we at least achieve some clarity, some sort of straight line, there? No. Have I mentioned that reality is fractal?

In general, how a lessor treats a productive asset that it has lent out for the use of another will depend on whether the asset is classified as "direct financing" or as a "multiple-element arrangement." (There is a grey zone in between those two possibilities, and further swirls, but for my brief essay I ignored that zone.)

If a financing company buys software for me and lends it to me, and if that is the only thing it does -- if it doesn't promise any upgrades or trouble-shooting services, and it doesn't deliver same -- if in the words of one authority the lessor "has no involvement with the software that is inconsistent with being a lender" -- in that case, the lease is a loan, and my lease payments are a matter of paying off that loan. The accounting proceeds accordingly, with a "Lease Receivable" item on the vendor/lendor's balance sheet.

But if it does promise and deliver upgrades and the like, then this lease contract is a "mutliple-element arrangement," more akin to a sale than to a loan. It becomes necessary to distinguish and value the different elements of the deal. This is true, too, of the loan of tangible equipment (you might lease me a backhoe with servicing promises). But distinguishing the separate elements in a software contract is apparently especially tricky, and auditors will require vendor-specific objective evidence (VSOE) of the value of the different components.

Zoom in further, and try to grapple with what VSOE means, and what are the consequences when VSOE can't be produced, and you get yet further Mandelbrotian swirls within swirls.

And there is the additional complication that software often comes embedded in hardware -- the "appliance" model. So the question of distinguishing among the elements of the arrangement may include the complexity of distinguishing the valuing of the dance and the dancer.

Agawam, Mass.

In recent weeks I have been making regular contributions to a western Massachusetts community newspaper known as the Agawam Advertiser News.

I have long been perplexed and saddened by the fact that when one travels in the US, and picks up different papers along the way, one reads largely the same stories. The various 'local' papers fill most of their papers, and certainly all the ones near the front, with stories from Reuters and AP. Thus, such newspapers find themselves in serious economic difficulties. Anyone with access to the internet can go to Reuters' website. When not cut out the middleman?

I mention that only in order to acknowledge that the Agawam Advertiser doesn't have that problem. Nobody disintermediates it. First, it has no online presence. Unless you are willing to pay the dollar for the dead tree version, you won't read the stories it offers.

Second, and related, there are no wire stories. The stories are local in both topic and conception. The front page of this week's issue includes a story headlined "Council nixes zone change," written by Gregory Scibelli. The lede? "Resident concern and perceived lack of benefit to the community led the Agawam City Council this week to rule against a zone change at the corner of Maple and Spencer Streets."

If you don't know or care about the corner of Maple and Spencer in Agawam, Mass. -- well, you are presumably not the audience for that particular story. You'd rather read about who is going to be the next chair of various important committees of Congress in Washington? Go for it -- but the Agawam Advertiser carries no wares in that overcrowded marketplace. That is the better part of its charm.

What about the back pages? You won't find here reviews of the latest books on the New York Times best seller list. When there are book reviews, they involve local publishers, local authors, and local issues. One of my own recent contributions was a review of a book by an Amherst College professor on slavery in the Connecticut River in Massachusetts in colonial days.

So: the Agawam Advertiser News is an institution for which I believe the people of Agawam and environs have reason to give thanks on this thanksgiving day weekend.

Nasser Saber and Algebra

Last week I had a few thoughts to share about Saber's critique of time preference. My own view, again is that time preference, understood as the philosophical basis for interest-bearing contracts, is perfectly rational and arises both from consumption and from production.

Another recent and closely-related Saber entry discusses a neat algebra word problem. I'll give Saber's words for it: "A father is 48 years old; his son, 18. How many years from now will the father’s age be 3 times the son’s?"

I'm no great shakes as a mathematician, but I can handle this. Like a good student, I'll "show my work."

48 + x = 3(18 + x). Find for x.

48 + x = 54 + 3x

48 = 54 + 2x

-6 = 2x

-3 = x.

So we have learned that our question was badly worded. The two men have passed the point at which the father was three times as old as his son. They did so three years before the moment described in the question. Math corrects the false assumption buried in the wording of the problem.

Saber understands this, but I submit that he draws the wrong conclusion from it, and this again has everything to do with time preference. He seems to think that our intuitive sense of the passing of time is wrong, and math has here corrected it.

I disagree. Our intuition is that time only runs in one direction, so that there is no "negative year." That intuition is correct. It doesn't, and in a deep and true sense there isn't. We create various abstractions, and use those abstractions to do neat things. But if we let our tools tell us who we are, we have created a golem.

The mathematical tools let us write "-3 years," but they don't let us live three years in reverse and reach that younger age. Would that they could!

If you are a regular reader of these entries at all you know that I am about to quote William James. So here goes: "The essence of life is its continuously changing character; but our concepts are all discontinuous and fixed, and the only mode of making them coincide with life is by arbitrarily supposing positions of arrest therein."

Roughly that, I think, is one of Saber's key mistakes.

UConn Beat Syracuse

With all due respects to the Pilgrims, to the traditional sentiments of harvest time, and to expressions of gratitude, both cosmic and local, Thanksgiving Day for some of us constitutes chiefly the center of the football season -- its culmination for high schools, and the college games that serve as a natural lead-in to the wonders of the bowl-game season.

Allow me, then, to express my own gratitude to the fates for bringing Coach Edsall to the helm of the football program of the University of Connecticut.

The Huskies won in convincing fashion against the Orangemen of Syracuse last weekend: 23 to 6. In the Carrier Dome, yet. This makes three wins in a row and puts the Huskies in a tie for second place in the Big East (behind Pitt, even with West Virginia).

Huskies have two more conference games. One is at home, this weekend, Saturday, against Cincinnati. The week after that, they play an away game, vis the South Florida Bulls.

The Huskies are now eligible for a bowl game bid, but still somewhat long-shots to get one, given the shaky start they got this season. But we can hope.

Oddly, there was a fair amount of talk before the UConn-Syracuse game of what great friends the two coaches are. Well, I guess the use of that story line itself reflects the genial biases of this time of year.

Plagiarism Scandal in the Phillippines

The Supreme Court of the Phillippines recently ordered the whole of the faculty of the University of the Phillippines Law School to show cause why they shouldn't be sanctioned. What was this awful thing the facilty did en masse? It criticized a member of that bench -- calling out one of the Justices who had plagiarized from a foreign source in an opinion.

President Benigno Aquino III sensibly has jumped into this debate on the side of the faculty members in a speech at the alumni homecoming of their institution.

"Those in high positions shouldn’t intimidate or threaten persons who only want to freely express their own opinion and come out with the truth. This practice that has already been there from way back should not be used to cover up the sins of those who have wandered into the crooked path,” he said.

Well said.

Since I'm a safe distance away from repurcussions, allow me to say that the plagiarist at issue,. the one hiding behind his friends and official position so no one will call him out on his intellectual laziness, is by name Associate Justice Mariano del Castillo.

Harry Potter

Harry Potter and his world are back in movie theaters.

Here's a short version.

Okay, too short. Here's a more exciting version, including Snape's poetry as read by and to puppets.

Bit of a surprise ending to that one.

Unfortunately, these aren't really "sock puppets." That's a pity because I have a few posts already in which I have used the label "sock puppet" and this would make a neat addition to that already-idiosyncratic collection.

All right. Who's going to mind? Let's call them sock puppets!

Thoughts for Nasser Saber

About five years ago now (how time flies!) I wrote a book review under the headline "Of a Philosophical Difference with Black-Scholes."

I had been asked to review volume three of a series of books by Nasser Saber, his theory of "speculative capital." The themes of the series are broadly Marxist, with some slants of Saber's own.

Volume three, in particular, "Speculative Capital: The Enigma of Options," involved as the subtitle implied the valuation of options to buy or sell stock. That justified the title of my review, because the predominant model of the valuation of stock options among non-Marxist finance theorists is known as the Black-Scholes -- or sometimes more elaborately the Black-Scholes-Merton -- theorem. It seems to maintain its prominence sometimes because it makes a valuable target. Still, it does maintain that status.

Saber, by raising the controversies over Black-Scholes to a philosophical plane, performed a valuable function. As it happens, I think Marxism philosophically corrupt, and all its conceptual applications accordingly suspect, but I was happy for the opportunity to say so with his books as a foil.

Saber wrote me after the appearance of my review, irate over several fairly trivial matters. Most irking of his complaints to me was the charge that I had misquoted him by inserting an exclamation point into a quotation where it didn't belong. I had in fact included the exclamation point there because he had put it there. He had apparently failed to confirm his own memory of his text before writing me an irate inaccurate email.

I wrote him back, citing the page on which he could find the accurately quoted exclamation point, and saying -- anent his somewhat more substantive complaints -- that he might want to respond to me in the course of his projected volume four. He said he would likely do that.

I still await volume four, as does the rest of the world.

In the meantime, Saber has a blog, the "Dialectics of Finance," here

A recent entry in that blog denounced the notion of "time preference." This returns me to the heart of his philosophical dispute with Black-Scholes. The question is whether the preference for immediacy is inherent in the productive process, or simply a matter of consumer impatience.

Think of a two-year old child offered a cookie: now or later? The cookie now will always win out. Even a much bigger cookie, later, will fade into insignificance beside the forces of appetite and the present moment. As humans grow older, we learn to control immediate impulses. But the preference for immediacy remains, however tamed. We have to be bribed to accept a wait for the promise of the bigger cookie.

That's consumer impatience, and it certainly sounds like a reason for the phenomenon of interest payments on loans. If I give you money, I am putting off some possible consumption of my own until you pay me back. I need to be bribed for this.

Saber doesn't disagree that the two year old prefers the cookie now, or that Kim Kardashian and Paris Hilton (his examples) prefer shopping now to shopping later, but he says here in his blog, and in the books, that it doesn't apply to all people everywhere, and where it does apply, it is a variable fact (as consumer preferences notoriously are), and thus not a given for an economist.

"Beyond empty-headed women and mountebanks, what gives rise to the illusion of time preference and helps sustain and institutionalize it is the commodity fetishism of a consumer society," Saber writes.

I commented on this blog entry. Since it is a moderated comment section I don't know yet whether ny comment will ever show up, [NOTE: It has show up there] but I'll explain it here anyway.

I postulated two reasons for the time preference (beyond consumer impatience).
The first is simply that we have lives of limited duration, and during the course of those lives we AGE in something more than a purely nominal sense. Our bodies obey the second law of thermodynamics.

This means, if you are a 20 year old with a chance at a professional athletic contract, it is a good idea (ceteris paribus) to take it now rather than next year. Nobody can predict with certainty the number of years during which your body will be able to play at a competitive level, but anyone can predict that there won't be an unlimited supply of them. So you prefer to get started.

Notice that this example isn't about consumption. It is about a particular employment relationship, and one's suitability for it. It is about production -- though what one is producing in this particular case is a spectacle rather than anything more tangible.

So the first reason for time preference: aging, with all it entails. Or, if you prefer: finitude.

The second reason? The processes of life in our fellow inhabitants of this globe -- in animals, plants, and fermentation-generating bacteria, etc. -- require time, and produce value when given that time. In other words: while we are aging, they are growing. Life succumbs, but it doesn't merely succumb to the second law -- it first, and generation-by-generation -- resists that law.

Henry George developed this idea in the course of his critique of an illustration used by Frédéric Bastiat explaining the nature of interest and profit.
Bastiat wrote of two carpenters. One has built himself an extra plane, a crucial tool in the craft they share, and loans it to his colleague. Will he be satisfied with the return of as good a plane in a year? Surely not! He'd expect, Bastiat suggests, a board along with it, as interest. Never mind Bastiat's reasoning, I'd like to focus on George's reply.

George wrote, "I am inclined to think that if all wealth consisted of such things as planes, and all production was such as that of carpenters -- that is to say, if wealth consisted but of the inert matter of the universe, and production of working up this inert matter into different shapes, that interest would be but the robbery of industry, and could not long exist." But some wealth is inherently fruitful, like a pair of breeding cattle, or a vat of grape juice soon to ferment into wine, or a field of wheat. In each case, the processes of life themselves over time generate value.

Planes and other sorts of inert matter (and the most lent item of all—- money itself) earn interest only indirectly, by being part of the same "circle of exchange" with fruitful forms of wealth such as those, so that tying up these forms of wealth over time incurs a opportunity cost.

Notice that neither Bastiat nor George was discussing the sort of consumer impatience on which Saber would re-build the theory of interest.
So living generates a demand for interest (because organisms decay) and the processes of life also provide the ground for the supply of interest (because organisms resist decay).

Time preference then is a rational reflection of the realities of production. QED.

Random Bit of History

"In a vicious cycle, the Federalists became obstructionists because the Republicans cast any opposition as treasonous. Rejecting the concept of the two-party system, the Republicans insisted that they alone expressed the will of the people. Thomas Jefferson explained to William Duane, 'I will not say our party, the term is false and degrading, but our nation will be undone. For the Republicans are the nation.' If the Republicans were the nation, then the Federalists were traitors.

"While urging unitred support for the war, the Republicans gave the Federalists scant reason to cooperate."

Alan Taylor, "The Civil War of 1812" (2010), p. 180.

Dante and Anarchism

"...over thyself I mitre thee and crown."

That is the (Dorothy Sayers) translation of the moment in Dante's Divine Comedy when Virgil tells the pilgrim that he has become a fully self-responsible, self-aware individual. They have travelled through Hell and Purgatory together. Virgil, as a pagan, can go no further -- can never enter the third Realm -- so he will soon depart.

"Over thyself I mitre thee and crown." In Italian, "per ch'io te sovra te corono e mitrio." You have now within yourself the powers of both state and church.

Obviously, Dante is not taking an anarchistic (or an antinomian) position here. He is simply saying that once one's will has been purged of all the twistings that might lead it astray, it will not be led astray. The institutions of mitre and crown are supposed to contain those twistings during this life, purgatory will cure them in the next.

Still, it does not take much free-associating from that line to associate it with the hope that even in this life, human history will reach a point at which earthly sovereigns and hierarchs will no longer be, or even be thought to be, necessary.

At some point, each of us may seize his own mitre and crown.

Syllogistic Argument

In Yahoo!Answers I encountered the following question, which has me thinking.

Someone calling himself XO Manowar said that his instructor has given him a passage from the writings of Martin Luther King and asked that it be presented formally. The passage is this:

One has a moral responsibility to disobey unjust laws. […] Any law which degrades human personality is unjust. All segregation statutes are unjust because segregation distorts the soul and damages the personality. It gives the segregator a false sense of superiority and the segregated a false sense of inferiority. Segregation, to use the terminology of the Jewish philosopher Martin Buber, substitutes and “I-it” relationship for an “I-thou” relationship and ends up relegating persons to the status of things. […] Thus it is that I can urge men to […] disobey segregation ordinances.

XO Manowar says that his instructor stipulated the passage "has two sub arguments that are the premises of the overall argument. I need help identifying which ones are which...."

My own initial reaction, and my answer to XO, was as follows:

The overall argument seems to be this:

MAJOR PREMISE: (P1) One has a moral obligation to disobey unjust laws.
MINOR PREMISE: (P2) Segregation laws are unjust.
CONCLUSION: One has a moral obligation to disobey segregation laws.

--------------

King doesn't seem, in this passage, to have addressed the question of why people should believe P1. But he did address the question of why we should believe P2. And that is what your instructor was talking about. The sub-arguments can be put formally in this way.

SUBARG. 1

MAJOR PREMISE: (P3) It is unjust to relegate persons to the status of things
MINOR PREMISE: (P4) Segregation laws do relegate persons to the status of things.
CONCLUSION: P2 as stated above.

Another way of getting to P2 is at least hinted at here as well.

SUBARG. 2

MAJOR PREMISE: (P5) It is unjust to distort souls and damage personality (apparently those two phrases essentially are synonymous in this context).
MINOR PREMISE: (P6) Segregation distorts souls and damages personality.
CONCLUSION: P2 as stated above.

I'm reading King here as a Ph.D. in theology (which of course he was -- hence his comfort with quoting Buber), not as an activist and political leader (which of course he also was, though the Venn diagram overlap of those two circles is fairly small).

But now, thinking about it some more, I may have gotten King wrong. I don't think that subarg 1 and subarg 2 are on the same level, each directly supporting the minor premise of the main argument. This is, rather, a three-link chain. There is an argument about what distorts personality. That leads to the CONCLUSION that segregation distorts personality. That conclusion then serves as the minor premise of a second argument, about what kind of laws are unjust. THAT syllogism then establishes the conclusion that segregation is unjust. This then serves as the minor premise of the main argument.

P.S. here is the original source for the passage under discussion.

Gold Standard Links

There is talk -- not fever-swamp debate but serious discussion stimulated by the president of the World Bank --of bringing back the gold standard in some capacity.

Zoellick had a lot of sensible things to say as you can read here for yourself.

Robert Harding, writing for the FT, noted that gold "prices have risen from close to $200 a decade ago to almost $1,400 today. The rapid rise in recent years reflects fears that unconventional central bank policies – such as last week’s move by the US Federal Reserve to expand its balance sheet by another $600bn – could lead to inflation."

For some historical background, you might go here or here.

For the Austrian school's take on the significance of gold, go here.

For informed speculation on where the price of gold is headed, you might look to a Bloomberg story yesterday by Nicholas Larkin.

But back to Zoellick. Who the heck is he? Who was he before he was put in charge of the World Bank? Here'a the official bio.

Or you could listen to this fellow talking about the history of the institution.

And here are some final thoughts specifically on how a return to a gold standard might be accomplished.

Funny Stuff

I would like to thank Anderson Brown, the philosopher behind several blogs and some wonderful Facebook entries, for introducing me to this.

I've never taught in my life, yet I can sufficiently sympathize to find this fantasy funny.

Also, that led me to this one, another YouTube gem using the same generic animation software, and for that matter the same professor character in the same virtual office. Enjoy.

"Can you see where I am teaching? We're in Nowhere, Nebraska."

Nice dis of Harold Bloom, too.

From 1824

"The question of character has always been a staple of presidential elections, but it became an especially prominent issue in 1824 as Jackson's people questioned Clay's and lauded Old Hickory's. The tactic succeeded in planting seeds of doubt about Clay....Clay had earned repute as an effective political broker, but that made it easy to paint him as a backroom dealer. Clay made no secret that he drank spirits, but that made it easy to whisper that he was a drunkard. He was famous for gambling, and that made it easy to depict him as reckless."

David S. Heidler & Jeanne T. Heidler, HENRY CLAY: THE ESSENTIAL AMERICAN (2010) p. 169.

The Blundering Herd

Two fine finance reporters, Bethany McLean and Joe Nocera, collaborated on a Merrill Lynch-centric re-working of the story of the financial crisis of 2008, and the result appears in the November issue of Vanity Fair.

McLean has previously distinguished herself by getting the Enron story right before anyone else. She wrote "Is Enron Overpriced," which ran in FORTUNE on March 2001.

That story began with a meditation on the term "it," as in the It Girl in Hollywood talk, or "the It Stock" for Enron at the turn of the millennium. The story proceeded to this:

And the numbers that Enron does present are often extremely complicated. Even quantitatively minded Wall Streeters who scrutinize the company for a living think so. "If you figure it out, let me know," laughs credit analyst Todd Shipman at S&P. "Do you have a year?" asks Ralph Pellecchia, Fitch's credit analyst, in response to the same question.

Nocera? Well, I wrote of him in this very space quite recently and before I knew anything of his collaboration with McLean.

Anyway, you can use the first link above to click on their Vanity Fair article. Please do.

Failing to Feed the Monster

Overstock held its conference call on Wednesday to discuss third quarter earnings.

You can see the transcript here.

I've also attached their one-year stock chart. As you can see, there was a strong upward move in the early spring of this year. At the vernal equinox, the price was under $15, through May it was repeatedly close to or above $24.

It lost all of that gain over the course of the spring and summer, and was back at $14 in August. Yesterday, November 4, it closed at $13.39.

The stock has also been underperforming the indexes markedly since August, when it reported a second quarter loss of $1.4 million.

On this week's call, OSTK officials discussed another loss, for the 3d quarter, this time of more than $3.3 million, or 15 cents per share.

I maintain some skepticism over the value of Overstock's numbers, a skepticism I explained in posts on my other (now-suspended) blog in February, and before that.

In my humble opinion (and in the opinion of observers who have looked into the matter quite keenly), Overstock created a cookie-jar reserve for itself in 2008. It inflated its 2009 results with the help of that reserve. The problem, though, is that once you start doing that, you'll find it tough to maintain. The cookie jar runs empty, and you have to get ever-more creative.

I suspect that Overstock's creativity has failed, and so it is now reporting the kinds of losses it would have been reporting for some time had it not engaged in trickery. Thus, the hit it has taken on its stock price.

I have no personal position, long or short, on OSTK, by the way. Furthermore, I am not giving financial advice, except to say that if you are going to invest in the stock market in any capacity, you would be an idiot to rely on anything you saw in a blog, including this one. Also, picking stocks for most people is a fool's errand anyway.

Still: there is an empty cookie jar from OSTK's kitchen and a rather bad odor wafting thence.

So I don't have to read the book

I don't plan to read Rattner's recent book on the auto industry bailout and restructuring.

I feel a bit guilty about not reading it. On the basis of its topic and the author's point of view thereof, it surely seems like the sort of thing I should read, to help preserve my own econoblogger cred.

Rattner, you'll all remember, was chosen in the opening days of the Obama administration to superintend the federal restructuring of both General Motors and Chrysler, and this book is his account of his work at that task.

Rattner also got himself into some hot water in a pay-to-play scheme involving New York State's pension funds, but I don't imagine that scandal figures prominently in the book, OVERHAUL.

Anyway, to ease the aforesaid pangs of guilt, I've read Malcolm Gladwell's detailed review of OVERHAUL in The New Yorker, as well as Felix Salmon's reply to Gladwell in Salmon's Reuters-sponsored blog.

Okay, those pangs were never very sharp....

"I do believe in spooks"

The headline of this entry is of course the affirmation of the Cowardly Lion, as Dorothy and her three allegorical companions walk through the scary forest surrounding the witch's castle. An affirmation appropriate to today's holiday, surely.

The 19th century German logician, Christoph von Sigwart (1830 - 1894), didn't believe in the Lion's affirmation. Well ... presumably he had never walked through that particular forest. Still, let us record that he wrote: "No amount of failure in the attempt to subject the world of sensible experience to a thorough-going system of conceptions, and to bring all happenings back to cases of immutably valid law, is able to shake our faith in the rightness of our principles. We hold fast to our demand that even the greatest apparent confusion must sooner or later solve itself in transparent formulas."

The "we" in the second of those sentences is the western post-Renaissance scientific spirit, inclined to put facts into tables and draw conclusions, then impute those conclusions to God or (what is the same) the nature of things.

As Dostoyevsky knew, as his "underground man" expressed with eloquence at about the time that Sigwart was writing those words, there is also that within "us" that rebels against the "transparent formulas" in which "we" have such faith. So let the thorough-going system of conceptions have the other 364 days of the year. This one is given over to defiance, to sensible experiences that aren't so sensible, and aren't interested in "solving themselves." To flights on broomsticks and knocks on the door though nobody is there.

To the unenlightened belief in spooks. Cheers!

Comments on Mandelbrot

I won't repeat here my modest obit for Benoit Mandelbrot.

But I was struck by a fascinating discussion of Mandelbrot, and of his significance in or for the world of finance, catalyzed by Justin Fox. Fox, a guest blogger for Felix Salmon, said that once upon a time, Mandelbrot was part of the "random walk gang," and considered Eugene Fama to be a protégé.

But Mandelbrot moved away from the sort of efficieny capital markets theory associated with Fama. This drifting-away dates to the 1960s, before the Black-Scholes option pricing model, or the various developments and arguments that have arisen from same.

Mandelbrot became interested in the subject again after the 1987 crash, which came about in large part due to portfolio insurance. But, Fox says, he didn't make the impact one might expect by this comeback.

Congrats to Fox for the fine blog entry, but more especially congrats to his commenters for inciting some fascinating comments.

I think DaggaRoosta has a lot of value to say there, including this observatrion (which is quite Mandelbrotian): "I do suspect that quants have spent a little too much time learning complex models and not enough time understanding the fragile philosophy behind the methods."

Proxy Advisors

I recommend an intelligent piece by John Carney, newly posted in NetNet.

Carney, a senior editor at cnbc.com, writes about proxy advisors, like ISS and Glass Lewis.

He wonders whether they actually have any impact on proxy fights and, if they don't, why they exist.

The Broom of the System, concluded

A final few words, if I may, about Wallace's first novel, as I described it last week.

I'm attracted to the sensibility behind it, as regular readers of this blog will probably suspect. The rapid moves from high-brow to low, from Wittgensteinian philosophy to Gilligan references, make for a hybrid of challenge and comfort.

Another strength is dialogue. He has a fine ear for the way people really talk to each other. I'm reminded of the Woody Allen move "Bullets over Broadway," because that is the criticism that the artistically gifted mob soldier directs at the not-so-gifted playwrite, "Nobody in real life talks like your characters. You gotta real problem wid dat."

Anyway, people in real life do talk like Wallace's characters. Or, at least, the stylization of necessity in fictional dialog never draws attention to itself. Here is one character, whose job entails reading a lot of manuscripts submitted to a journal, talking to his lover.

"Do you know where all the really sad stories I'm getting are coming from? They're coming, it turns out, from kids. Kids in college. I'm starting to think something is just deeply wrong with the youth of America."

That's the way people old enough to worry about "kids in college" do talk -- and the sentiment advances the story, while introducing one of the book's stories-within-the-story, because of course this editor proceeds to describe an example of one of these sad submissions.

I was a little disappointed in the ending. I won't describe it, out of deference to any of you who may wish to read it yourself. But a plot this intricate needs a neat tie-up at the end, or the intricacy can feel like a cheat. As, alas, it does.

Still: there was a lot to admire, and finally reading Wallace allows me retrospectively to mourn his passing.

Have I mentioned my recent discovery that Wallace was the target of satire by The Onion?

The Broom of the System

I've lately been reading the 1987 novel "The Broom of the System," by the late David Foster Wallace. Broom was his first novel, though he later became famous with "Infinite Jest" (1996).

The title reference to a "broom" alludes to the philosophy of Ludwig Wittgenstein, which is a theme of the novel. LW wrote: "For a large class of cases — though not for all — in which we employ the word ‘meaning’ it can be defined thus: the meaning of a word is its use in the language." That line is often shortened to just three words: meaning is use.

One character in this novel explains this to another using the example of a broom. What is the more essential part of a broom, the straw bristles or the wooden handle? Most people if pressed, will say the bristles, because the bristles do the actual cleaning. But one says this because one is thinking of the use of a broom -- its use is to clean. If one thought of the same object as a baseball bat, or as a burglar's tool for breaking windows, the handle would be vastly more valuable. The change in use would change the meaning.

The protagonist of the novel is a young woman named Lenore, a 24-year-old telephone switchboard operator for a publishing company that does hardly any publishing (since it is in reality somebody's tax dodge). The catalyzing crisis of the plot is Lenore's discovery that her Wittgensteinian great-grandmother, the one who uses the broom example to explain language -- this woman, also named Lenore, had studied in England in her youth and had known LW personally -- is no longer in the nursing home where she is supposed to be -- that she and several other residents have disappeared.

One intriguing character in the novel is the manager of that nursing home, David Bloemker. Bloemker repeatedly expresses himself in an overly elaborate manner, only to have to reduce his own locutions to a much simpler form. For example, he tells Lenore that if they find her great-grandmother they will likely also find the other missing residents of the facility. Why? Because, she "enjoyed a status here -- with the facility administration, the staff, and, through the force of her personality and her evident gifts, especially with the other residents that leads one to believe that, were the mislocation a result of anything other than outright coercion ... it would not be improper to posit the location and retrieval of Lenore as near assurance of retrieving the other misplaced parties."

The younger Lenore says that she doesn't understand all of that.

Bloemker tries again, "Your great-grandmother was more or less the ringleader around here."

That sort of trick -- the comic reduction of ornate speech to plain speech -- is commonly attempted, yet it is rather hard to pull off, and I think Wallace handles it well when he uses it.

Better than, say, the screenwriters for the old television show "Gilligan's Island." In one episode of that show, the castaways discover helium escaping from the ground, and attempt to leave from the island in a balloon. When Gilligan shows the professor the source of helium, the prof says, "why, it's obviously an invisible and odorless gas." Gilligan replies, "not only that, you can't see it or smell it."

The Gilligan version of the joke is lame, Wallace's version shows how it can be done properly.

The conjunction of the two isn't unfair to Wallace, because he actually introduces Gilligan's Island into this novel. There is a restaurant in this novel's fictional version of Cleveland Ohio that is decorated like the set of that TV show.

"Once an hour the bartender would be required to do something cloddish and stupid -- a standard favorite had the bartender slipping on a bit of spilled banana daiquiri and falling and acting as if he had driven his thumb into his eye -- and the patrons would, if they were hip and in the know, say with one voice, 'Aww, Gilligan,' and laugh, and clap."

Wallace's use of the baroque-speech-turned-plain meme is not just a gag to pull out, and pull off, when Bloemker happens to be in a scene -- it is a contribution, after all, to the novelistic meditation upon language -- a contributor to the Wittgensteinian theme of the whole.

One character suggests (this is young Lenore's father, the older Lenore's grandson) that the elder Lenore has left the home because she no longer believes that she has any use. In her worldview, use is meaning. And without use, as a broom incapable anymore of sweeping, she has no further meaning. So she is willing to involve herself in a biochemical experiment in order to again have a use.

I will leave this open-ended.

R.I.P. Benoit Mandelbrot

Benoit Mandelbrot, pioneer of fractal geometry -- indeed, the man who coined the term "fractal" -- died of pancreatic cancer on October 14, 2010.

My heart goes out to his friends and family. They may take some comfort in the fact that he changed the way much of our species sees the world, an impact in depth of a sort that few can boast. The ubiquity of images like the one above these words is just a piece of it, fascinating and beautiful as such "Mandelbrot set" images can be.

I had the honor of reviewing one of his final books The (mis)Behavior of Markets in 2006.

In that book, Mandelbrot explains the nature of fractals from the beginning, for those of his readers who hadn't caught on yet even in 2006. He quotes Jonathan Swift in service of this cause. Swift wrote:

So, Nat'ralists observe, a Flea
Hath smaller Fleas that on him prey,
And these have smaller Fleas to bit 'em,
And so proceed ad infinitum.

Mandelbrot, at any rate, is now free of the world of fleas-biting-fleas. And he is no doubt explaining the geometry of clouds to Saint Peter.

You can find my review of Mandelbrot's 2006 work here.

Lady Bird

Wasn't just the nickname of a First Lady.

It was the title of this composition.

Now that you know: listen and enjoy.

Those Were the Days

I was in the Queens, NY the other day. Passing through to a job interview in Brooklyn, so I ended up on the BQE. Those of you who know me will not be surprised that my mind follows certain pop-cultural associative trains, and while in Queens I naturally started humming to myself the opening theme song to the old television show "All in the Family."

This in turn led me to wonder about whether the lines fit together with the characters they are supposed to describe. Anyway, here is the song, just as a reminder. Supply the tune your own self.

Boy, the way Glen Miller played. Songs that made the hit parade.
Guys like us, we had it made. Those were the days.
Didn't need no welfare state. Everybody pulled his weight.
Gee, our old LaSalle ran great. Those were the days.
And you know who you were then, girls were girls and men were men.
Mister, we could use a man like Herbert Hoover again.

LaSalle was a division of Cadillac, and its last model came off of the assembly line in 1941. If either Archie or Edith rode in a Lasalle as a child they had come down in the world before the viewing public met them!

Glenn Miller's heyday was 1937-1943. He died over the English Channel in 1944.

So these two clues are mutually consistent. Archie and Edith are remember the 'good old days' of the late 1930s and the war years. We know from the show that Archie was a WW 2 veteran -- remember one's adolescence and/or army years fondly is unsurprising.

Yet the line about Hoover doesn't really seem to fit. Hoover was of course President from March 1929 to March 1933. The timing was unfortunate for his memory, surely. One can imagine Calvin Coolidge sneaking out of DC after the inauguration ceremony in March 1929 saying to himself "Apres moi, les deluge." Yet I'm wandering from the point. I'm willing to accept the notion that one or the other of the singers, Archie or Edith, grew up in a household in which Hoover's memory was held dear. Still, this refers us a 'good old days' (if one wants to call them that) several years porior to the good old days of the lines about Glenn Miller etc. Miller wasn't anybody in 1933. And there was no "Hit Parade" on radio before 1935.

This isn't leading anywhere folks, but thanks for coming along for the ride -- the one along the BQE and the one it incited in my head.

Helen Thomas

Sorry, Helen, I'm not buying.

Helen Thomas is back in the spotlight, after a summer of silence. Here's the AP story based on an interview with Scott Spears.

Let's review: on May 27, David Nesenoff asked Thomas whether she had anything to say on Israel. She said, "Tell them to get the hell out of Palestine." He asked where they should go.

"They should go home."

Where's home, Nesenoff pressed.

"Poland, Germany, and America and everywhere else."

Everybody with even a modest grasp of 20th century history who saw this clip had the same thought. Interesting choice of first two countries to list as possible destinations for dispersing Israelis! There used to be a lot of Jews in Germany and Poland. I'm guessing Helen Thomas knows what happened to them -- she's 90 years old, after all.

Anyway, when the shit hit the fan in June. Thomas apologized. That wasn't enough to save her job, and she quit soon after. Now she is more combative.

She said then "exactly what I thought" she now says. The problem wasn't any bias on her part, but that some unspecified "they" has distorted her remarks. After all, she says, the third country she named on her little list was America. Then she said "everywhere else." So obviously she wasn't talking specifically about Germany and Poland.

Sorry, but that's not distortion. She decided to list three specific countries and the first two out of her mouth were Germany and Poland. There is no room for that kind of crap. She had to go and I wish she (like Mel-the-great-director) would just do a lot of fishing, stay out of the public eye, and spare us the need to point out the thinness of their rationalizations for their garbage and the need to filter out their whining about people who recognize said garbage as such.

Writing Against The Scholars

Friedrich Nietzsche wrote: "Kant wanted to prove, in a way that would dumbfound the common man, that the common man was right: that was the secret joke of this soul. He wrote against the scholars in support of popular prejudice, but for scholars and not for the people."

Joshua Greene, an assistant professor of psychology at at Harvard University with an interest in moral philosophy, has evidently found that a stimulating quote. It inspired the title and much of the reasoning of his essay The Secret Joke of Kant's Soul. (Hmmmm. A Harvard man officially tasked with teaching psychology who writes about moral philosophy? Why would he interest a Jamesian like myself?)

Greene discusses trolley cars in that essay, and regular readers of Pragmatism Refreshed will not be surprised to learn that this bit drew my attention. [I'll assume my reader already familiar with the standard trolley-car hypothetical. Follow that last link if you want a refresher.]

Greene ups the ante: "What if the trolley is headed for a detonator that will set off a nuclear bomb that will kill half a million people?" he imagines asking a stubborn deontologist. "Suddenly the welfare of society as a whole starts to sound important again."

His point is that the initial refusal of many of his students to (imaginatively) sacrifice somebody to an oncoming trolley for the good of two or more somebodies is an emotional reaction, one bred into us by evolution, where immediate interpersonal relations are the only ones that really counted for our selfish genes. The emotional reaction gives way and "cognition" kicks in once numbers get really large.

So should we conclude that we owe it to ourselves as a species to get over our inbred emotional responses and do the right thing as our cognition indicates? That deontology is a phase in our existence we ought finally to outgrow? Green does not draw that conclusion. After all, taken without qualification that line of reasoning tells me also that I should "feel uneasy" about loving my children more than any other children. No parent [almost no parent?] feels uneasy about that, and Greene states the reason well. "It seems that one who is unwilling to act on human tendencies with amoral evolutionary causes is ultimately unwilling to be human." There must be a line between "correcting the near-sightedness of human moral nature and obliterating it completely...." Giving up on parental love would obliterate human nature. On which side of the line would one put the deontological refusal to stop the runaway trolley, even if it dooms two victims rather than one? Is that the humanness we must preserve or the near-sightedness thereof we should correct?

Greene leaves that question open. But the fact that he suggests deontology still has some life in it, even after treating it as an emotional response at odds with cognition, suggests that the secret in his soul may be the same as the secret in Kant's.

Conflict of Interest? Gibberish

The New York Times worries about ethics. Okay, stop laughing. They worry about what they consider to be ethical principles, anyway.

This leads to such absurdities as you'll see here.

"In the Talking Business column in Business Day on Saturday, Joe Nocera wrote about a lawsuit by Oracle against a division of SAP, claiming theft of intellectual property. Mr. Nocera learned after the column was published that Oracle was represented by the law firm of Boies, Schiller & Flexner, where his fiancée works as director of communications. To avoid the appearance of a conflict of interest, Mr. Nocera would not have written about the case if he had known of the law firm’s involvement."

It sounds like they're trying to be nice to Joe, while giving him some sort of slap on the wrist. Would someone explain to me why the slap?

Suppose that Nocera had been aware of the rather indirect connection between himself and Oracle discussed here. It sounds like the game of "six degrees of Kevin Bacon" or however many degrees its supposed to be. But never mind that.

Suppose Nocera had known and had written exactly the same column anyway.

Here is the offending column.

Now: what would Nocera have done wrong?

Talking Business is an opinion column. It has always been an opinion column. If you want a just-the-facts type of story -- don't read it. Nocera isn't twisting your arm into reading his opinion. If you read Nocera (and you should, he understands business and he writes well) -- it is because you expect and desire his particular slant on business news.

So; who friggin' cares where his fiancee works? He hasn't even tied the knot yet. Besides, the law firm she works for, Boies, Schiller & Flexner, is huge. It represents lots of companies that someone like Nocera will write about. So let him write about them.

The way people get twisted around pretending that any significant piece of writing is not advocacy is just astounding.

Today's Random Quotes

This is from RIGHT STAR RISING: A NEW POLITICS, 1974-1980, by Laura Kalman.

Richard Viguerie and his "new right" first displayed their political clout, she tells us, in a surprising way, in 1975.

They "forced [President] Ford to renege on his pledge to support legislation that would have enlarged the right of unions to picket construction sites. The President had not known what hit him when nearly three-quarters of a million letters and postcards deluged the White House demanding a veto of the common situs picketing bill. At first, only the construction industry lobbied against the bill, but then Ford's staff noticed that a broad spectrum of opponents had mobilized. Antiunion businessmen had been brought aboard by the appeals of the National Right to Work Committee, a client of Viguerie's. Reagan opposed the bill, too, and the New York Times reported that Ford had developed the 'fear that if he lost any more of his conservatrive Republican support, he might not get his party's Presidential nominatioin.' Trapped, Ford caved at the end of 1975 and vetoed legislation that the AFL-CIO had sought for more than twenty years, that he had pledged to support, and that his own secretary of labor, Harvard economist John Dunlop, had drafted. Dunlop resigned in protest, and George Meaney called Ford a weakling who 'ran out' on his promises."

Question: why does she write about the New York Times?

Shouldn't it be The New York Times?

Anyway, here is another quotation from later in the same book. What happened once the Democrats took office? With no Republican around to veto anymore, surely common situs picketing became law, right?

"The Democratic Congress also narrowly defeated the common situs picketing legislation enlarging the right of unions to picket construction sites that candidate Carter had pledged to sign. (That President Carter did not press for it spoke volumes.) Eleven Democrats who had voted for the common situs legislation in 1975, when Ford vetoed it, now opposed it."