The Crisis of 2008

Finally, I return to the task of filling out my book. You'll remember that my January 27 blog entry consisted of a brief passage from what may become the third chapter of my proposed book as represented in the table of contents I provided on December 10, 2010. Now I move to the fourth chapter, about the financial crisis that precipitated these reflections. Instead of any passage, I'll just offer the following reflections on it.

The mechanisms behind the real estate bubble of 2003-07 were much less novel or mysterious than they are sometimes made out to be.

There has been a good deal of talk about how the doomsday machinery involved a 'shadow banking' system on one hand, and new-fangled off-balance-sheet entities on the other. Michael Lewis' book, by focusing on entities like Harding Advisory (which has since filed a defamation lawsuit against him) contributes to this to some degree.

But the fact is that the key failures were at the old-fashioned broker-dealers, and for that matter their failures were to a very great degree hidden in plain sight -- on the balance sheets.

The focus on the supposed shadows is an error, or at any rate an imbalance in perceptions, because in outline that crisis was created by very familiar mechanisms. The following ingredients were key:

1) Absurd easy-money policies at the Fed
2) Rest of the world (notably China) continues to treat U.S. dollar as the pseudo-gold standard, enabling those absurd easy money policy, and
3) Easy money makes the big investment banks sloppy about the risks they take — risk managers get re-assigned to closets, etc.
4) Complicity of bond raters, bond insurers, accounting standard boards, and all the usual suspects.

The truth about ingredient (3) was right there on the balance sheets. Nor did Bear Stearns, Merrill Lynch, and the others need fronting by Chau and Harding Advisory to dig themselves (and Main Street) into this hole. If you believe that the price of a certain type of asset can only go up, you too are likely to dig yourself a hole.

Although some marginal operators may have helped bring a shovel or two to the construction site.

Some dates. On January 3-4, 2001, Greenspan's Fed cut both the federal funds rate and the discount rate. One important point about this, it did NOT happen at a regularly scheduled meeting of the Fed Open Market Committee (FOMC). Greenspan thought this important enough to arrange it between regular meetings.

Why? Because the dot-com boom, fueled in part by the rescue of LTCM's counterparties arranged under Fed auspices and its "Greenspan put," had burst in early 2000, creating a (mild) recession, and like an alcoholic in the pangs of a hangover AG reached for the dog with which he had bit us.

On the last day of that month, the FOMC did meet, and cut both rates again.

It again lowered both the discount and the fed funds rate in March 2001, and then again in April, and then again in May....

When the year began, the federal funds rate was 6.5%. In early September of that year, BEFORE the US was attacked, that rate was down to 3.5%. Down nearly to the half-way mark. In reaction to the attacks, they cut some more. At the end of the year, the funds rate was 1.25%.

Given this environment of easy credit, tjhere was going to be a bubble in some assets, real estate or commodities or CDOs or tulip bulbs or something, and concomitantly it was going to find its way to people who didn't know what they were doing with it. That is what easy credit does. This would have happened had there been no GSEs. Though of course there were, and the shape the crisis took had something to do with the pro-housing ideology of many on Capitol Hill, which Greenspan did his own little bit to encourage -- but we might as well give him a bye on that one. His part in the pro-housing ideology was probably fairly small.

Quote in this context the words of a Jacksonian Democrat in 1837. Newspaper editor William Leggett, denouncing Nicholas Biddle and the bankers who had followed his lead, writing: “[They] have used every art of cajolery and allurement to entice men to accept their proffered aid” which in turn led their borrowers to rush “upon all sorts of desperate adventures. They dug canals, where no commerce asked for the means of transportation; they opened roads, where no travelers desired to penetrate; and they built cities where there were none to inhabit.”

The result was that, inevitably, the bubble burst. The panic of 1837 that occasioned Leggett’s analysis led to a depression that continued until 1843. Leggett would not have been surprised by the opening years of the 21st century. He might have been surprised, though, that in the long period between his time and our own an ideology of home-ownership-for-all had developed that compounded the extent of such artificial booms and the damage that the inevitable bust then works.

Atlas Shrugged

That title will boost my hits.

Next month the first movie in a projected trilogy, dramatizing Ayn Rand's notoriously ponderous novel, hits screens near you.

Since the movie is a 21st century event, it has its own webpage here.

Anyway, here is a link to a Slate review of that name.

The review is not especially enthusiastic. I like this line: "Anyone who's seen a SyFy Channel original movie in which a mutated insect battles a mutated amphibian will be comfortable with the production quality."

In general, regular readers will know what are my views on Objectivism. They are, roughly, the views that Murray Rothbard expressed even while Ayn Rand was still formulating this as a philosophy. Any recognition of the supposed need for any sovereign is too much of a concession to the myth of sovereignty.

Further (and this is a related point) the case for freedom is best made not through painfully abstract or conceptualist arguments but through practical demonstrations of how freedom works, and how central planning fails. Hence the title of this blog: Pragmatism Refreshed.

As for the novel, it is almost painfully bad. It was written by someone who could never say anything in a single sentence if a 20-page speech would do the job.

Finally, a guess about the movie: it might be better than a lot of what reaches theatres these days. The Fountainhead was a good movie, after all, and even made for a decent episode of Barney Miller.

Science News: Panspermia

There is something new on this subject. But I'm not writing a news report, so I'll bury my lede and begin with some introduction of the topic.

Panspermia, as one can infer from the "seeds-everywhere" etymology, is the theory that the seeds of life are ubiquitous in the cosmos, and that they sporadically land on planets where conditions are propitious for their development.

Panspermia divides naturally into two sorts. One might think the spreading of these seeds a spontaneous or a directed fact.

Directed panspermia is a view associated for example with Francis Crick (no shabby authority, one of the co-founders of modern molecular biology). He believed that the earth is an unlikely place for the development of life out of non-life. He suggested though, that there are more likely planets, and that on one of them life, and even "a higher civilization," might have developed "perhaps eight to 10 billion years ago," and it may deliberately have seeded the universe, using bacteria that can be "stored almost indefinitely at very low temperatures."

Spontaneous panspermia, associated with the almost-equally renowned name of Svante Arrhenius, a chemist who published WORLDS IN THE MAKING more than a century ago, argues that no such direction is necessary -- spores might randomly escape one planet and then travel through space pressed by electromagnetic radiation until captured by the gravity of another.

So: what is the news? The Journal of Cosmology has published a paper by Dr. Richard Hoover, of NASA, which offers evidence for panspermia (of the spontaneous sort). The paper has the formidable title: "Fossils of Cyanobacteria in CI1 Carbonaceous Meteorites." It maintains that certain microfossils discovered in the interior of carbonaceous meteorites are "the fossilized remains of living organisms which lived in the parent bodies of these meteors, e.g. comets, moons, and other astral bodies." Meteors are, then, a plausible mechanism for the life transfer that spontaneous panspermia requires.

The Journal of Cosmology is a serious peer-reviewed publication and its editor-in-chief is a serious guy, one Dr. Rudy Schild of the Harvard-Smithsonian Center for Astrophysics. Schild posted a note with the pre-publication copy of the paper indicating that he has asked 100 experts for critical analysis. and that their responses will be published along with the paper.

I look forward to following a stimulating discussion. Given such important claims, there wil and should be a good deal of skepticism. Still, on philosophical grounds this is a theory to which I for one am inclined to give credence.

Question

What would have been Immanuel Kant's view on the ethics of cloning?

We can be confident he would not have said, "Ah, so long as it turns out to have medical uses. It is good to help people after all. Necessary means to that end."

Kant is the Arch-deontologist. Begin there.

Can we go any further?

A Consequence of the Second Law

"The second law [of thermodynamics] establishes that the amount of useful work you can get out of a furnace depends on how much hotter things are in the furnace than on the cold side of the engine -- the cold side being the condenser, cooling tower, or whatever else is at hand to use as a dumping ground for the inevitable (and virtuous) waste....So all the gains in thermodynamic efficiency have to come from making the hot side hotter. Which means that you want to burn your fuel -- your coal, uranium, gas, oil, or whatever else may be at hand -- not just hot, but hotter, fiercely hot, as hot as you can possibly make it without melting down or blowing up all your expensive hardware."

- Peter W. Huber and Mark P. Mills, The Bottomless Well (2005).

Thoughts on Mad Men

Mad Men works as a series in large part because of the look. A lot of bright and hard-working people are evidently working very hard to get the 1960s right -- the clothes, the furniture, the cars, the ubiquitous use of cigarettes -- and it pays off.

But how often would you want to keep going back to the same museum? The show works, and is sustainable as entertainment, for some other reason.

Is it the plotting? As I believe all of the posts I have devoted to the question have helped illustrate: the plots are almost absurdly complicated. They deal with all the great themes that your undergraduate Lit professor told you were important: birth, death, commitment, abandonment, conflict, reconciliation, mystery. But every drama, and every comedy, treats of these themes. So what?

Is it the acting? The acting is serviceable but not, I think, in a stand-out way.

So (by process of elimination) is it character? I think there we have to say yes. The characters are indelible, and the otherwise rickity plots work only because these characters are interacting.

Why are the characters indelible? For those of us of a certain age, these characters are our parents, when we were kids and they were in their prime. (Yes, I know I'm not the first to make this point.) I was born in October 1958. Most of the events of the first season of the show took place before I turned two. But the world of the series, especially in seasons three and four, is decidedly my parents' world.

I had only the vaguest of ideas what my father did for a living, and the byzantine nature of the office intrigue at Sterling Cooper in a way captures this vagueness. The idea that the grown-ups were doing grown-up stuff and it wasn't something for me to worry about overly much.

The scenes in Westchester are priceless, they play to this sense of seeing events from a child's POV more directly.

What about for the younger fans of the show? I understand it has a lot of admirers who were born in the 1970s or later. My sense is that they pick up on the same inter-generational theme, even if it isn't meant for them in quite the same way.

Ending Season IV of Mad Men

Cicily and I have finally caught up with real time viewers of Mad Men.

Meanwhile, I've heard that Mad Magazine is coming out with its spoof in this year's April issue. Don Draper as Alfred E. Neuman. The thing almost writes itself.

Anyway, as always for no good reason, here's a quick review of the final three episodes.

Episode 11.
This episode is called "Chinese wall." That's a ubiquitous term in the business world. It refers to any situation in which different operations are underway under the same corporate roof that could create conflicts. For example, a bank may have a research department that provides analysis for the benefit of clients, and may also have a 'prop desk' that trades in various securities on the bank's own accounts. There is a need for organizational arrangements that keep the two operations separate so they don't undermine each other, or amount to a pump-and-dump scheme or the like.

In this episode, it is Faye -- one of Don Draper's current romantic interests -- who alludes to a Chinese Wall. She doesn't work for Sterling Cooper. She is a consultant, and Sterling Cooper is but one of the ad agencies with whom she consults. She has to abide by a "Chinese wall," i.e. separating what she does for one client from what she does for another.

Sterling Cooper Draper Pryce, though, faces an existential crisis when it loses the Lucky Strike cigarette account. This was the account for which Don created the iconic line, "It's toasted" in the very first episode. That, though, was for "Sterling Cooper" full stop, and this is a new and somewhat wobbly firm, now in serious danger. So Don decides to climb right over Faye's Chinese Wall, and he asks her whether any of the other agencies that she advises are about to lose clients.

Peggy, with her stereotypical Catholic conscience, thinks the disappearance of the Lucky Strike account must be due to the fact that she's just had satisfying sex with a new man in her life. God is punishing her for that, surely. The punishments continue for Peggy, as she gives a client presentation while lipstick is plainly smudged on her teeth.

In the episode's final scene, Faye relents and tells Don that she does have a lead for him -- the Heinz people are thinking of a new agency for their beans.

Episode 12.
This episode features the return of Midge, a much earlier example of Don's flings -- his bohemian Greenwich Village girlfriend from the first season. They used to smoke pot and listen to beat poetry, then he'd head back to Westchester. Her life has evidently not gone well since those heady days of 1960.

Midge has found out where Don's new office is, and arranges to seem to have accidentally bumped into him so she can invite him over to her place. She there introduces him to her husband, and together they work to cadge money out of him, as it becomes clear they are both heroin addicts. Don agrees to "buy a painting" in which he has no interest, giving her the cash she has on hand, and then walking off with the painting, an undistinguished effort at surrealism.

Even before all that, though, Don had met with the man Faye had connected him with, the man from Heinz. They talk about beans ads. The meeting doesn't go well. The Heinz guy was thinking of SCDP as a possible resource months down the road -- Don knew that his agency needed income sooner than that, and his desperation has shown.

Later in the episode, our protagonists try to get a meeting with another tobacco company so they can transfer their Lucky Strike derived expertise in that area. They are rebuffed.

At this point, Peggy reminds Don of something he had said to her years before, "If you don't like what they're saying aout you, change the conversation." It doesn't strike a chord at first.

That evening he loooks again at Midge's painting. The gears fall into place. Change the conversation ... addiction ... heroin ... tobacco. Aha! He goes back to the notebook/diary he had started a couple of episodes back, and this time uses it for a non-Pepys-like purpose -- he uses its pages to draft an ad he will have placed in The New York Times the following morning, denouncing tobacco and avowing that SCDP will no longer do that kind of work.

His secretary (and yet anther romantic interest) Megan puts the gist of this gambit best. "It's saying 'he didn't dump me, I dumped him.'"

Episode 13.

Don is with Faye as this episode begins. Don is going to California with his kids, and Faye says goodbye. She has seen him (earlier in this season) in the midst of a panic attack over the danger that his Korea/desertion past will yet catch up with him, and in their goodbye scene she tells him that he has to find a way to come out as Dick Whitman. He tells her it isn't that simple.

Don's original plan had been to take his kids' nanny, Carla, along with him for this trip. But his ex-wife (for reasons I won't try to relate -- this all gets pretty complicated) has fired Carla and doggedly demands he not re-hire her for such a purpose. Faye isn't any good with kids, as we've learned from earlier interactions. So ... Megan comes to California.

While Don and Megan and the kids are in California, the folks back at the office are still trying to save SCDP. Except that maybe it is now SDP, becase Cooper, enraged at Don's anti-tobacco-industry ad, has severed connections with it. Things are picking up on a couple of fronts. The American Cancer Society is interested. And Peggy gets a "Topaz pantyhose" account. Meanwhile, they've laid off a good part of their staff to save money.

But the Big News in this episode happens in California. Don proposes marriage to Megan. He uses for this purpose the same engagement ring that the real Don Draper, the dead-in-Korea fellow, used for the same purpose. Megan accepts, and much of the rest of this episode is a display of how this news affects the various people who must inevitably learn of it.

From an earlier Asian war to a current one: we see a brief telephone conversation between Joan Harris and her husband in Vietnam. He's still alive. I had rather cavalierly assumed that he wouldn't survive the season. Further, Joan seems more committed to him than ever, since she seems at last to be free of her own emotional attachment to Roger Sterling.

The episode closes with Peggy and Joan gossiping together. Joan has recently received a grand new title, but with no additional pay and no popping of corks. She takes a cynical view of the Don/Megan announcement, and says that she's glad she has learned to find her own satisfactions outside the office. Peggy says, "That's bullshit," and they share a laugh.

I may find some Significance in all of this by the time I write tomorrow's entry.