Wednesday, March 31, 2010

Bare-faced gall

"“Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.”" Garnered from Mike Shedlock's blog

I laughed/coughed out when I read that quote. The criminals are again to be bailed out by the tax payer, and without remotely contemplating prosecution! FFS! This has warped beyond the other side of funny, hurtled across bizarre, skidded over surreal and has thudded down somewhere sick, fetid, putrid and indigestible. The proper words to describe the situation don't actually exist. Maybe future generations will look back at this and come up with something appropriate. I hope we make it that far.

Sunday, March 28, 2010

'Free' Markets = Corrupt Markets?

An economy — whether local, national or global — is just a system, as are all other multi-component, cohesive processes we know of. As such economies are subject to internal and external forces acting upon them, affecting their behaviours, shaping the manner of their operations. The discipline of economics studies economic systems, but, sadly, comes to the task with a raft of core assumptions about the ground rules governing economic operations — such as rational buyers and sellers, unlimited wants and scarce resources (though, strangely, energy is assumed to be infinite in some regards!) — all of which are, at least in the mainstream, out of bounds when it comes to what may be discussed. These assumptions shape socioeconomic policy generally, which shapes our lives. I refer the reader to Steve Keen’s “Debunking Economics” for a forensic analysis of the internal inconsistencies and logical contradictions of the dismal science (it really is not a science), my focus here is on the discipline’s blinkered attitude to corruption, an observation I first heard made by William K Black. Generally speaking, according to the professor, economics fails to consider corruption at all.

For me the best sentence I have read so far highlighting the systemic pressure to corruption inherent in economic systems was written by Jacque Fresco (from “The Best That Money Can’t Buy”):

“In a monetary system there is an inherent reason for corruption and that is to gain a competitive advantage over someone else.”

A core assumption that arises from the perception of unlimited desires having to deal with limited resources is eternal competition. In economic theory rational market participants are also “law-abiding” market participants (though laws are not really considered), so this endless competition should produce efficiency everywhere it is allowed full scope. The real world, that messy, recalcitrant thing, makes this assumption laughable. Here some quotes from a recent discussion at Financial Armageddon:

“Don’t forget the Dow is fake also. They took out GM and Citibank from the Dow. Those are two zeros and they put in Travelers and Cisco…that’s 640 Dow points that were added because they swapped GM and Citi for Travelers and Cisco.”


“Those trades [in Citi, Bank of America, AIG and Wells Fargo] are 80% of all trades in the market and the total market volume is less than half of what it was back then [2007]. In other words, you’ve got half the market participation of what it was and of that half, 80% of it is concentrated in less than half a dozen financial firms.”

Some observers are resolutely opposed to the idea that the markets are manipulated by powerful market players, but we need only recall that economic systems have built in to them a constant and unending pressure to corruption, for the idea of corruption to become more than predictable. We then see corruption as inevitable. There is crime (of which some 90% is economic), humans are capable of a great variety of behaviours — that is, they are not the robotic, homogenous, mechanical components of economic engines economics theory needs them to be — consequently it is silly to assume all who are motivated to become ever richer are nice human beings. If they were we would need no laws in this scarcity-based system. That we have laws, and that laws cannot be perfect, says enough.

And of course the world is vastly more complex than a ragtag of markets efficiently distributing scarce goods and services via the price mechanism. We poor saps watch the voodoo of stock markets in hushed awe, feeling good when it rises, and concerned when it drops. In Ellen Brown’s “The Web of Debt” I came across a wonderful analogy for the importance of stock market performance; the Dow is a dead military dictator propped up in the castle window, his arm moved reassuringly up and down by some mechanical device to pacify the troubled crowds outside. So not only do we have internal, get-rich-quick motivations to corruption, we have external, socioeconomic and political pressures to corruption. Economic systems experience constant internal and external pressure towards corruption, and yet in the mainstream the idea that markets are even manipulatable is a virtual heresy. ‘Free’ markets are the panacea for all ills. Just leave markets alone to work their magic and all will be fine.

But at last there are the beginnings of a serious attempt to address this woeful shortcoming of economic theory, and the fallout of this on socioeconomic practices. From the abstract of a recent paper at (hat tip nakedcapitalism):

“How does economic theory need to adjust in light of the global financial crisis? This column presents a new insight on how innovation leads to rent capture, which in turn is a sign of a potential crisis. This stems from asymmetric information in the financial sector. To avoid a repeat of the crisis, policymakers need to increase transparency.”

Asymmetric information is anathema to perfect (and free) markets, in which all participants need to be perfectly informed about what’s going on, for price to be fair and distribution to be efficient. Of course, to the untrained eye, such a market is impossible right from the get-go, but here, in the rarefied air of economics academia, we must look at particular instances of a particular sector of the economy (finance), rather than at the very foundations. Such is change of established institutions; a painfully slow nibbling at the edges.

The article looks at the arcane complexities of CDSs, asserting the sellers are privy to more information than the buyers, and as such possess too much power in the transaction, favouring them greatly over the buyer. The authors extrapolate from CDSs to the financial market as a whole, arguing that the entire sector benefits the sellers with asymmetric information advantages that destabilise the entire economy over time.

What is important about this is that the holders of the keys of current orthodoxy, that elite shouting loudest about the beauties of ‘free’ markets, are suddenly under the microscope being exposed as the least ‘free’ sector. A small beginning it may be, but it has the potential to weaken considerably the paradigm-controlling power of financial institutions. Hopefully the debate about the ongoing crisis will widen as a consequence of this, and other, research.

Meanwhile, it must still be only at the extreme fringes that scarcity itself is viewed as an outdated assumption. Once momentum builds around open and unbiased discussions of scarcity and its fallout, then the idea of a resource-based economy might take hold in the public’s imagination. So much of what we ‘know’ about life on Earth arises from this key assumption. Tackling it will prove, I feel, to be humanity's greatest challenge to date.

Monday, March 22, 2010

Ponzi scheme, meet brick wall

Recent posts by blogger George Washington on money creation and fractional reserve banking are drawing much needed attention to the fact that the monetary system effectively functions as a state sanctioned ponzi scheme, a highly simplified version of which looks like this:

All money that comes into existence does so as an interest bearing loan. This activity takes place at private banks, which are authorized to create new money by extending credit to willing borrowers. That debt-money is then expunged as the borrower makes the final payment on the loan, but the interest is kept by the bank. The interest was not created, but "won" from the existing pool of money in the economy. This happens over and over again worldwide, millions upon millions of times, in a kind of tectonically-slow but tectonically-inexorable sucking up job, to money creating institutions, of all money in the economy. Over time more and more borrowers drown in debt as they compete amongst themselves to stay afloat financially, until there are not enough borrowers out there to keep the ponzi ballooning. This is debt saturation, and the data here shows very clearly that this has indeed happened.

Though I have probably the bloggosphere's tiniest readership, I urge you all to check that link out. It's very sobering ... for those still inebriated anyway.

Welcome to the end of the line. If we make it past this monumental challenge, the future might just be very wonderful indeed.

Tuesday, March 16, 2010

Humans Synthesize Happiness

What would make you happier, winning the lottery or becoming a paraplegic?

Even though we all "know" the answer to that question, the results of people measured for happiness one year into their respective experiences showed very little difference between the two, with paraplegics actually showing marginally higher happiness levels than the lottery winners. Without going into too much detail, the reason for these surprising results (though I imagine I am not alone in thinking, after seeing the data, "you know, that kinda makes sense"), is that humans can synthesize their happiness, somewhat along the lines of "Love the one you're with."

I recommend Dan Gilbert's talk (all of it) for those interested in learning more about this than I divulge in this brief blog entry. What interests me most of all here is the extent to which such revelations should fracture, even shatter, economics’ core beliefs, were it ready to listen and learn. We too, at a cultural level, need to pay close attention to such information, since the energy we spend chasing illusive “success” is indeed, as wise men through the ages have said, wasted, because most often it’s right in front of us, and not “somewhere over the rainbow.” But of course, this wisdom is one the current system does not want us to learn. Dan Gilbert puts it very well:

"What kind of economic engine would keep churning, if we believed that not getting what we want could make us just as happy as getting it!?"

Of course, we cannot realistically expect to be happy with every life circumstance. Our ability to synthesize happiness is constrained to some degree. Interestingly, there appears to be a degree of material comfort we all “need,” which once achieved serves as a good bedrock for progress along other lines (perhaps artistic or intellectual). It looks almost certain that we won't get more and more of what we chase (happiness) if we expend our limited energies climbing the greasy monetary pole in pursuit of it:

"Below $60,000 a year people are unhappy, and they get progressively unhappier the poorer they get. Above that we get an absolutely flat line, I mean I've rarely seen a line so flat." Daniel Kahneman (

Such findings are, taken together and in terms of their combined gravity and relevance, fatal to orthodox economics. Any socioeconomic model predicated upon the untested assumption that the pursuit of happiness, and indeed even freedom itself, is somehow about the accumulation of money and material goods, about earning more than your neighbor, with totally insatiable yet calmly rational market participants everywhere you look, is not remotely in line with what science shows us, nor can its narrow prescriptions ever make proper use of humanity’s great subtleties and wonders. If we are to set our civilization on a course which has a half-way decent chance of approaching our creative potential, it will be by listening closely to what science tells us, and in being fearless when it comes to reassessing all the things we think we know.

My personal reading of this is that we’re here, the train’s arrived, we’ve solved the material problems of shelter, food, water, warmth and transport. More and more of each per rich person yields nothing extra, in fact does serious harm as income inequality grows and our priorities remain sick and unwise. Now that we have a very good idea of what makes us healthy and happy, we owe it to ourselves to deconstruct the system that got us here, and prepare a new one to take us forward. As I’ve said before, we have the know-how and the resources to do this. For the moment, however, a tool we made earlier, money, is in our way.

Friday, March 5, 2010

Free market, perfect market

“So contrast that to the crash of ’29, when, suddenly, the US got involved in a lot of programs, like Barrack Obama’s getting involved in a lot of programs now ... and so ... the recession/depression we can look forward to lasting a lot longer in America, than if Obama just sat back and let the market, you know, be a market.” Max Keiser

Max Keiser, that very entertaining online econo-show host and ex trader, is advocating here the kind of laissez faire, non-interventionist economics that quickly turned the 1920-21 stock market crash into the roaring twenties. I enjoy much of what Max Keiser says and support his efforts to bring important information to the attention of as many people as possible, but this is an argument I do not agree with. However, because it is a good example of the circular “freedom = free markets = democracy” meme so virally ensconced in the public’s imagination, and spreading worldwide since the collapse of “communism,” it presents me with an opportunity too nice to ignore.

The roaring twenties was a speculation-led bubble that directly created the 1929 crash, which itself gave us the Great Depression, so to see that period as somehow economically healthy is somewhat specious. Furthermore, there is a lot of debate about whether intervention or non-intervention turned what might otherwise have been merely a mini-recession into a multi-year depression, but neither of these objections is what I want to tackle here. What troubles me is this idea of the free market. What does that actually mean, in detail?

To my mind it would mean, in pure form at least, no rules whatsoever, which would mean all synthetic derivatives and any trading of anything — including kiddy-porn, snuff movies, cocaine, heroin — would be okay, as would Wild West style gangsterism and true, hard-man, survival of the fittest punch-ups by any means imaginable. If only the fittest survive, in terms of ruthlessness, brawn, intelligence, cunning etc., that can only be good, right? Children working in factories, slavery, genocide of unneeded human excess, the whole nine yards. Those who survive that kind of a market place really would be deserving of their precious existence. But no one in their right mind advocates such a world. So what are free markets?

A free market is one in which the settled rule of law operates in the interest of effective and honest trading. So free markets need laws, which are tricky, complex things full of devilish details and convenient loopholes at the best of times, and subject to revision and interpretation — change is the only constant. The Market therefore needs the help of a legislature and executive that properly understand it (very problematic because politicians don’t work in the markets), the legislature and executive themselves needing money to operate at all. This money must of course come from the business activity of the market via taxation and donation.

So we necessarily have a State-Market partnership which exists in a system whose principal quality is the pursual of success as denoted by material acquisition and wealth. Ever-present in this system as an ongoing pressure towards corruption is money, and, by definition, that being rich is better than being poor. Out of this bizarrely supposed separation of Market and State there is, to my mind, simply no way a free market can exist. There has never been one, and will never be one; intervention is essential, corruption inevitable.

As I have argued before, markets are monopoly/oligopoly/cartel creating processes. They are predicated on competition, which means winners and losers, and the winners slowly gain sufficient power to control the market to their advantage. Nice guys finish last. Greed is good. Greed cuts through. Being rich is better than being poor. The system is stimulated by its very nature to render perfect competition impossible, regardless of its intrinsic theoretical failings. Only perfect competition could produce a free market. A perfectly competitive market is composed of perfectly informed and rational market actors, both as buyers and sellers. This is not possible. If it were, markets probably wouldn’t need any laws.

Perfect competition and free markets are economics’ Utopia condition that can never be reached. Until they occur (and they never do), distribution of goods and services will not be efficient (i.e. built-in obsolescence), will be unfair, and we will get poverty, war, and the many other unsavoury aspects of all monetary socioeconomic models. Even Adam Smith, a passionate advocate of free markets, recognised this:

“To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but, what is much more unconquerable, the private interests of many individuals, irresistibly oppose it.”


“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

There is no way to prevent conspiracy, fraud, or any other type of corruption that the human imagination can conceive of, except through intervention by the State in the Market, such intervention always being, of course, very imperfect. And because the State must intervene, there is necessarily a close relationship between it and the Market (to my mind they are two sides of the same coin and share many characteristics). It is in the Market’s interest — because the name of the game is to acquire wealth — to pressure government to enact law in its favour. This dynamic is inescapable.

Unless we pursue true abundance globally and establish an economics without price. In the same way that Open Source Software and Wikipedia are self-organising and non-monetary in their internal operations, so resource distribution can be too. Now that we can technically produce abundance, the only way to distribute goods and services fairly is by transcending the price system. We just have to learn how to want this, culturally, voluntarily, and then go for it.

Wednesday, March 3, 2010

Of shorting, naked and otherwise

“You mean just like those wonderful "CDOs" that Goldman (and others) created that were in fact fully synthetic instruments and which came into being ONLY because someone wanted to SHORT your house?” Karl Denninger

Shorting (from Wikipedia):

“In finance, short selling (also known as shorting or going short) is the practice of selling assets, usually securities, that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as he will pay less to buy the assets than he received on selling them”

Ellen Brown discusses naked short selling – short selling's ugly sister – in her very informative and eye-opening book “Web of Debt”, relating the following story, which she trawled from the SEC's online archives. In 2005 a gentlemen by the name of Robert Simpson purchased all remaining 1,000,000 shares of a small company and put them in the proverbial sock drawer at home. He watched in astonishment as the self-same shares traded 60 times each over the next 2 days. 60,000,000 transactions of those shares he had about his person, so to speak. To quote Brown:

“The incident substantiated allegations that a staggering number of “phantom” shares are being traded around by brokers in naked short sales.”

While in shorting there is at least the sense of borrowing in the transaction, there is something distastefully opportunistic about it, and done in great mass can shift the market down. Naked short selling is still more nefarious, with trades of shares the broker neither owns nor has use of taking place. But the legality, criminality, immorality or otherwise of such actions is, to me, of secondary importance to the obvious weighty blow such trades and market activities deal to the cherished idea of the perfect market, and to the idea that unregulated and unrestricted buying and selling, via the mythical “invisible hand,” ends up benefiting everyone, young and old, rich and poor, black and white. That tired old argument of market efficiency, trotted out by free marketeers of every stripe in a bewildering variety of forms, is not only fallacious on the face of it, it is also destroyed by the very greed which is supposed to lead to such benign efficiency.

The perfect market, only possible when every participant is perfectly rational and informed, cannot exist. The speed, complexity and enormity of market activity today makes perfectly informed market participants even more of a laughable idea than it was in days of yore. Add to that the skill and power of advertising, the increasing division of labour and automation that makes it almost impossible to judge knowledgeably the actual value (all definitions of value aside for the moment) of things like iPods and laptops, and you have an even greater gap between theoretical and actual. Consumers and buyers are adrift on a sea of shimmering manipulations while, in the background, price, value, wealth, and ultimately social integrity are the play things of the sociopathically greedy in pursuit of ever more power.

Ideally the perfect market prevents the formation of monopolistic power, which distorts the proper (or wished for) functioning of that market. Since there can be no such thing as a perfect market, we have monopolies. We always have, and always will. Unless, that is, we transcend money and its now overwhelmingly negative effects, by rendering it an unnecessary tool via abundance.

Even Adam Smith, father of The Invisible Hand, though he had no idea of the state we would be in today, nor of alternatives such as a resource-based economy, knew well the importance of human wisdom over 200 years ago:

“The violence and injustice of the rulers of mankind is an ancient evil, for which, I am afraid, the nature of human affairs can scarce admit of a remedy: but the mean rapacity, the monopolizing spirit, of merchants and manufacturers, who neither are, nor ought to be, the rulers of mankind, though it cannot, perhaps, be corrected, may very easily be prevented from disturbing the tranquility of anybody but themselves.”

Smith's warm views on intervention aside, to my mind the regulation/deregulation debate is a distraction, as are others of its ilk (such as fiat or gold backed currency). We live in a mesh of assumptions and myths about money, value, labour, efficiency, scarcity and our very natures which is strangling us to death. Applying the study and research required to break out of this mesh, and then begin the hard work of forging a new paradigm, is an obligation we all share, if the better future we are technically so capable of is to be realized. That, or more of the same tending to worse, and very possibly to collapse. It's up to us.