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The black box economy
by noteworthy at 10:15 pm EST, Jan 28, 2008

Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.

Lest anyone forget:

The reality is that, despite fears that our children are "pumped full of chemicals" everything is made of chemicals, down to the proteins, hormones and genetic materials in our cells.

1. This thesis seems to run counter to Ben Stein's complaint from yesterday, in which he argues that "market makers" are completely and nefariously in charge of the whole thing, swinging the pendulum at a whim for their own benefit. (To clarify: there is an important distinction between being able to make a particular stock or sector move in one direction or another, and having positive control of "the market.")

2. The author's characterization of the "prevailing assumption" runs counter to the evidence compiled by Eric Janszen, who argues that "The bubble cycle has replaced the business cycle." The author implies that before hedge funds, we understood the mechanisms of the market and were more or less in control of things. How, then, to explain the Asian financial crises of the 90's?

3. Frankly I'm surprised this article appeared in the Globe. Now, the Globe is not NYT or WSJ, or even WaPo or LAT, but this article would have been more at home in the Boston Herald, perhaps printed in Comic Sans. I'm inclined to believe the author is simply plugging his friend's new book. The chattily informal prose is off-putting: "swinging wildly", "slapping together", "booster shot", "building blocks", "sound the alarm", "huge wilderness", "chafe against the restraints", "prying eyes", and so on. I am led to believe those "small-circulation newsletters" he mentions are known elsewhere as "spam." But I have to admit I laughed at the characterization of innovative derivatives as "very sophisticated and chi-chi."

4. The author attempts to explain away Enron as a problem of "nontransparency". Hardly. I suggest he take "The Smartest Guys in the Room" and Gladwell's Open Secrets and revisit this in the morning.

5. He acts as though everything would have been alright if only everyone had been more upfront about all of the dodgy debt they were buying up. Never mind that the risks of issuing adjustable-rate interest-only jumbo loans to the marginally employed were always plainly obvious, even to the most casual observer. He pretends to ignore the fact that speculators built entirely too much new housing, flooding the market.

6. It's like, "Everything is so complicated. We ne... [ Read More (0.1k in body) ]

RE: The black box economy by Decius at 12:10 am EST, Jan 29, 2008
So your position is that there is no wider economic problem caused by the subprime mortgage meltdown and everything's cool?
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RE: The black box economy
by noteworthy at 9:37 pm EST, Jan 29, 2008

Decius wrote:

So your position is that there is no wider economic problem caused by the subprime mortgage meltdown and everything's cool?

Hardly.

My position is that contemporary international markets are complex regardless of the level of transparency. Even if you eliminated every asymmetry you would not make it simple and manageable in the way that Mihm seems to want. You would dramatically reduce its productivity and therefore its utility, but it would still be too complicated to "manage", and it would still not be "safe".

The market is not supposed to be safe. In Kedrosky's rant about Stein, he writes:

Particularly egregious, at least to me, was the implicit claim that the capital markets are there in large part to help people save for old age. No they're not, and if regulators or governments ever decided to enforce that particular view we would likely have a market crash. The market are there to provide liquidity. Period. And if by doing that people are able buy stock and bonds in companies whose value appreciate, that's great. But markets whose core notion is wealth accumulation for individual savers, and markets whose main object is liquidity creation, are very, very different things, as even a lapsed economist Mr. Stein should know.

And if you accept Janszen's view that "The bubble cycle has replaced the business cycle," then it is no longer reasonable to expect much utility from the regulatory mechanisms for which Mihm seems so nostalgic.

Mihm conflates transparency and controllability, whereas Janszen would argue that the bubble cycle has become a collective imperative that no regulatory action can manage to terminate. Nor would a regulator want to, because the pain of ending it would be even worse than the pain of continuing on to the next bubble.

The black box economy - The Boston Globe by Decius at 4:43 pm EST, Jan 28, 2008
Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.
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The black box economy - The Boston Globe
by k at 7:05 am EST, Jan 29, 2008

Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control.

Ugh, depressing.