W C Fields asked a man if he wanted to play cards. The man said piously, “That’s a game of chance!” Fields replied, “Not the way I play.”

AND THE KILLIN’ GOEZ ON AND ON AND…

“…if there are enough players and among them they have full information, they are likely to get the right outcome.”

And if you have an infinate number of monkeys at an infinate number of word processors they will eventually write all the great economic theories. For 50 years everyone with more than 2 brain cells left knew that Ayn Rand was a czarist lunatic except for the leaders and decision makers in the American political economy. I wonder if we can survive as a country…sheesh, I wonder if we DESERVE to survive!

KEEP THE FAITH AND PASS THE FUCKIN AMMUNITION, IT’S ALL ABOUT THE WARS STUPID!!

“Uncle Milty” got it all wrong free unregulated markets always end up failing, just look at the history. Bring back the regulations of the Glass-Stegall Act but updated for today’s interconnected business place.

Excellent post, Masaccio.

“Lending … is dependent on trust”

Confidence in the other company’s financial position …

How may this be if fundamental integrity of “information” AND of behavior
cannot be “counted” upon?

This is where the “something magical occurs” bit ALWAYS confuses me, especially when OUTSIDE and INDEPENDENT regulation, which the ONLY thing which may keep “behavior” on the “up and up”, is swept away.

DW

Citizen WVMJ:

Fields also said when asked if he drank water with his whiskey:” Water?? WATER??!! …can’t stand the stuff, fish shit in it!” The man knew more’n our leaders do and he and H.L. Mencken knew more about our collective intelligence as a country too!

I disagree. The capital markets live and die by profit reports to keep funding coming into their operations. The “too big” to fail cooked the books in sophisticated ways to show profits that enabled them to keep the scam going. Momentum. Since Enron cooking the books creatively by assigning value to valueless assests has been the method of deception. Underlying assests were over valued whether or not investors got the correct data. The investors relied on market momentum and “market making by the big players as buy advise on certain issues. They arecrooks that live outside the law stealing trillions with impunity and then getting the pols to shift the losses to the taxpayers. This is a RICO operation with complicity throughout the markekets.

Correction: Claude said,”Ah yes, I never drink water, fish fornicate in it.” ‘Godfrey Daniel,Someone has been putting pineapple juice in my pineapple juice.’

this is a terrific breakdown masaccio, I’m going to take issue with one point

To be useful, rational expectations and the efficient market hypothesis both require that players take into account all relevant information.

which is to say it cannot be useful since ‘relevant information” is gamed, it’s either not really relevent and promoted as relevent or actual relevent information is deliberately withheld

in other words, the game is fixed by the very people making the rules so that they can do whatever the hell they want

605 banks have been shut by FDIC or are under strict orders to comply with banking regulations. These banks would be gambling with hard earned savings of their depositors and investors. When I asked several local bank presidents why they are not lending they all said it was the regulators fault.

Precisely, perris, and they can regulate or control the speed at which “information” is available to different “players”. Information by itself is often of less import than WHEN one has access to such information.

DW

Posner is an asshole. His turning against his colleagues is entirely opportunistic.

LOL…I stand corrected…I still LOVE that man…and the brothers Marx too!!

Massacio I am not critical of this post. it is good information toward understanding the corrupt corporate culture and its is a part of that culture. The notion of deregulation ala free market practice has been revealed to disaster capitalism by Naomi Klein.. We saw many small economies destroyed by private takeover of government services. Blackwater (Xe) and others in MIC. Then shifting massive capital from the public sector to the private sector was not an unplanned accident. the think tanks that dream this shit up are well positioned in Congress, the White House and the Judicial system. This has been a conspiracy by the Oligarchy and their Ivy League conservatives to maintain control of global society as the forbears have done and continue to do.

I wrote a paper in a graduate econ course at NYU in the 1980s the irrefutable disprove of efficient markets. It wasn’t unique; it’s pretty easy to do. My particular contribution came from U.Mich. survey of consumers on inflation expectations. Turns out those inflation expectations are nothing but a lag on past inflation. That is rational, in the sense of using all the information available to regular folks at the time, but it is not rational in the sense of “getting it right” as it missed on every turning point.

Luckily I had a reasonable professor. Despite my iconoclasm, I got a passing grade because the prof couldn’t refute the evidence. He did write on my paper that my evidence was not conclusive, however.

When I asked several local bank presidents why they are not lending they all said it was the regulators fault.

Of course they did. What were they gonna do, openly admit that they intentionally collude with their CFO’s and other execs to actively deceive the examiners? That’s the game, it has always been the game, and until these criminals are held to account, preferably in supermax pens, the game will continue. While there are some good people working in the industry, the real movers and shakers must be viewed as a criminal class who will do essentially anything to hang onto their power.

Reminds me of the line in G-1 where Kay says to Michael, “But Senators don’t have people killed.” And Michael replies, “Now who’s being naive?”

I traded on the Iowa market for awhile but came to realize since accounts are limited to $100 it’s really just a way to fleece the suckers. Come to think of it that description fits Wall Street pretty good too.

He did write on my paper that my evidence was not conclusive, however.

Kool-Aid will do that to a prof…

Johnny did not take all my toys because he wanted to play with them, he took them because he could. Johnny was tall for his age and everybody called him beanpole.He hated that. He loved dodge ball and could slam the little kids good.I lost track of him after middle school.I saw him at a school reunion last year. He went to Harvard and got an MBA. He owns about a dozen hog factories and has 2000+ employees. His business is very profitable, he knows how to exploit unskilled labor, but he treats them well he said. He even let some of them work on his house. They were grateful for the job. He said they did excellent work.

Full information, my ass. That only people with “full information” are the casino operators…and anyone with an ounce of brains knows that the house always wins…

Jail time is the solution, for Wall Street gamblers and the politicians who have enabled them. And I’m not talking about “prison resort,” either. I mean hard-core, super-max, 23-hour lock down type prison.

Excellent post about a judge who has some understanding of economics.

Some thoughts:
As I remember from long ago, a perfectly efficient market means that there are not further profits to be made. All of the irrationalities that could have been there to provide opportunity have already been exploited. So exactly how were these geniuses of rational expectation expecting to make a profit?

On the equal access to information, did not Kenneth Arrow explore this area extensively? And in your example about a stock, everybody in the market could have equal access to false information about a company or incomplete information about a company. Accounting systems in US corporations are byzantine in the rules used to roll up transactions to financial data for reporting.

On financial companies being connected in unexpected ways, that was a feature not a bug in AIG, the idea being to randomly spread the risk of sliced and diced mortgages and other security obligations.

On risk management programs, there is no technical standard for actually evaluating risk. That’s why it’s risk. The more the risk is randomized, the harder it is to manage. Spreading risk is an attempt to randomize the risk so you don’t incur significant losses. Even the best risk management programs can come up with all lemons in the slot machine. And all companies coming up with all lemons, while highly improbable, is nonetheless possible.

On panic, it can be modeled with the same models for epidemics and depends on the information networks through which panicky messages spread. Once the panic moves outside of one institution, then it is highly likely that very soon it will become public knowledge.

He went to Harvard and got an MBA.

There’s a red flag…

The primary function of assholes is to eliminate shit. So Posner has shown himself to be a little bit constipated. Eventually the time comes.

I love what Harpo didn’t say.

An iconoclast, eh, eCAHN?

Good on ya!!!

Could you expand a wee bit on your comment @ 11?

Would appreciate your thoughts on Posner.

;~DW

So the evolution ran thusly?

eCAHN in the 1980′s

Brooksley Born in the 1990′s

Elizabeth Warren in the late 2000′s

Let us know when you get that call from the Nobel committee.

The bizarre part about these two theories is that in themselves, they might have something useful. The problem is that they were leveraged to screw up the very system in which they were incubated.

I shoudda known right away.

You flatter me to an immeasurable degree. I am deeply honored.

If you can find another thesis from the 1980′s was wasn’t praising Reagan, Laffer, Friedman and Stockman’s brand of trickle down kool-aid drinking, we can submit their name for consideration.

Alternatively, I think it’s time that FDL had its own Nobel laureate in eCAHNomics. Just don’t ask them to rename the prize.

What would it take, for a bank to loan money to anyone without knowing his or her ability to pay back the money?

They always used to check folks out.
Bankster 101
(1) We have insured our potential loss against credit default and bear no risk.
(2) If our client pays we win. if our client defaults we win.
(3) How can we also package that garbage as AAA Securities, and make more money? We own the regulators and raters, no problem.
(4) And there is also a fat fee to collect for each stinky mortgage.
(5) In addition the Government will rescue us, we are to big to fail.
(6) We will always have the house. Mha, ha, ha.

I don’t know enough about Posner to comment intelligently, but I’ll be happy to type what little I know. Becker, from the Chicago school was the first to apply economics to human decisions that were not thought of in those terms before. For example, criminals choose crime because, risk-adjusted, it was their way to maximise income. For example, crime in the slums resulted from low education levels, making young men incapable of earning a better income legally. The policy implication was obvious. He also wrote some interesting and correct things about women’s economic decisions about working for no overt paycheck in the household, vs. working for an overt paycheck outside the household.

Similarly, Posner wrote about legal decisions from an economic POV. I am much less familiar with his work than Becker’s, with which I have only a nodding acquaintance (he wrote a Newsweek or Busniess Week column for quite awhile). What little I did read of Posner’s approach to using economics in the legal system made sense.

So I was seduced by both Becker & Posner.

What I did not understand was the lengths to which they would use their approaches. At this point, I fade out. I’d learned useful stuff and was not interested in the weeds.

After 9/11 Posner wrote a book about catastrophes. His basic arguement was to use a cost-benefit analysis to determine how many resources to use to prevent catastrophes (I didn’t read the book but I scanned it several times to get the gist). So if a catastrophe, like a space object knocking the earth out of orbit, has a low probability, but the consequences are existential, then it is worth spending gigundo sums to make sure it doesn’t happen.

Seemed reasonable, but wrong. Took me years to figure out why. (Not that I was working on it, just letting it mull in the back of my brain.) The reason it’s wrong is that if you allocate necessary resources to low probability-high consequence events to make sure they don’t happen, you probably wouldn’t have anything left over for normal day-to-day living. Not to mention that humans don’t actually behave anywhere like that.

In time I came to regard Catastrophe as just another book by a U.S. Jew to support Israel’s policies wrt Palestine.

IOW, Becker & Posner start out with analyses that advance the way we think about real world problems, but soon take them to abusive lengths.

This has been a stream of conscience comment. Ask for clarification, and I’ll do my best.

Seemed reasonable, but wrong. Took me years to figure out why. (Not that I was working on it, just letting it mull in the back of my brain.) The reason it’s wrong is that if you allocate necessary resources to low probability-high consequence events to make sure they don’t happen, you probably wouldn’t have anything left over for normal day-to-day living. Not to mention that humans don’t actually behave anywhere like that.

Because the system can’t bear these costs and still stay afloat.

Not dissimilar to the theory of lending where only a very small percentage (2 to 3%) of loans require enforcement by foreclosing on the collateral. Increase the percentage to 20% of all mortgages, and the model crashes under the weight of absent cashflow and huge administration costs that sink the ship.

Signed loan documents are only an evidence of the debt. Actual repayment depends on the borrower’s ability and willingness to honor their agreement.

We’ll see how the battle goes between strategically defaulting homeowners and strategically non-foreclosing lenders. With the Fed & Treasury backing up the freshly chartered bank holding companies, you get one guess as to who will be left holding the bag.

Bush 41: When he was running against Regan in the Republican Primary for President, he said Reagan’s financial supply side policies were “Voodoo Economics” Regan won the nomination and made GHWB his Vice President.
All together now,
“Exxon trickle down ho, down, ho,
fat cats trickle down ho,
early in the morning”

W C Fields forever: “Never smarten up a chump, nor give a sucker an even break.”

The real problem is that these are social science theories, not hard science, and people expect the precision of hard science theories and formulations. And the investing industry exacerbates this problem by spending billions to convince the public that it is both precise AND easy to make accurate predictions.

The truth is, it can be done, but it is VERY complex, and cannot be done by part-timers or herd followers.

I predicted in the comments here a month ago that the Dow would top out at 10,710, and then have a major decline. The actual intraday high was 10,729.85, actual closing high was 10,710. The Dow then declined 900 points to 9,830. I also called the exact bottom last March 6 and bought at 666 on the SP 500 futures, actual low was 665.70. I also called the start of the major decline by making a huge sell trade in the last hour of October 31, 2007. So, it can be done, there are rules and patterns which allow for good prediction of extremes.

But the whole game is about convincing suckers that it’s easy, and getting them to throw their money into a game they don’t understand. The result is the same as when novices sit in on a high stakes poker game. The guy named Doc takes all their money. Then a new round of propaganda is instituted to convince a new crop of suckers that there is easy money just waiting for them.

Recall the discount brokerage ad about a guy towing a yacht thru the streets of New York? If you believe such crap, you’re ripe to be fleeced. The smartest guys figure out what going to happen first, and they make the money. This works despite all the corruption and distortions in the information flow.

I’d say this is one of those situations where, given the information, the prices were completely accurate; as the prices include the irrationality of the market at the time. The problem is the vast disparity between the price and the value.

I’d disagree with this:

“In panic, it can be modeled with the same models for epidemics and depends on the information networks through which panicky messages spread”

It’s a system with non linear feedback. When the panic occurs ts evidence of the strange attractor. Neither the time (date) of the onset of panic, nor it’s extent are readily predictable.

Epidemics are based on linear models, infections, the mechanism of infection, and incubation period, and very probably not applicable to human behavior.

“The reason it’s wrong is that if you allocate necessary resources to low probability-high consequence events to make sure they don’t happen, you probably wouldn’t have anything left over for normal day-to-day living. Not to mention that humans don’t actually behave anywhere like that.”

What an excellent description of the DoD budget.

Which regulators? FDIC? Fed?
On what basis can they tell everyone to NOT lend?
Only banks in trouble? Well, that is different?
How many are being told not to lend?
What level of lending are they allowed, relative to pre-crisis times?

(2) If our client pays we win. if our client defaults we win.

One problem here was what if the assets drop 40%, but not 100%?
You get a payoff at 100%, but it doesn’t go there.
How co you screw up everything, so it finally gets pushed down?

That’s where destruction capitalism comes into play. They have to crash the market. They have to destroy GM. They have to trash homeowners & mortgages. They have to bash everything to win.

That’s a tragedy and serious criminal behavior.

sounds a lot like Cheney’s One Percent Solution — if there’s even one percent chance of something bad happening, then you’re justified in doing anything, including human debasing torture, to prevent that One Percent possibility from occurring.

Of course, you said, once you go down that road you’re in trouble.

Thank you, eCAHN;

Your Posner response is most useful, as I definitely appreciate “mulling”, that combination of considered thought and intuition, and, as well, the inclusion of your thoughts regarding Becker. You’ve given me the “flavor” of both, from your perspective and that perspective is precisely what I was seeking.

I’m taking some advantage of your well-calibrated BS meter, of course, so I thank you for that, also.

DW

This is all very murky.

What is the outcome that all these market players are predicting with certainty will occur or not occur if we grant that together they have all the relevant information. Is it that stocks will rise or fall, or that trades of insurance instruments are guranteed to give high yields, or that highly leveraged investments are safe.

I mean when attempting to ascertain these outcomes you just do due diligence as you would in any transaction. Where is the novelty that these theories purport to have discovered. It is not that apparent at first glance.

It is most interesting that the forte of the managerial classes is said to be “management”. Objectively, the class has done an absolutely lousy job of “managing”, yet they have managed to plunder and pillage themselves into an unprecedented “bailout” with no strings attached,and even continue to manage the Fed.

They did have some timely help along the way, most especially from Congress, who most happily gutted regulation, and opened the purse, the one they assured us they did with clear eyes and the second, they would have us “believe”, with trembling knees and anxious sighs.

Still, yet, the managers are said to be savvy and claim to worthily be doing much of God’s work …

Oh yes, they can manage to claim obscene bonuses while all they give back is merely a smirk, and that is the sum total we may expect from these jerks.

DW

It’s because “Manager” is an identity, not a function to be fulfilled. Think of hereditary wealth classes and circular logic.