If you still haven't read The Next Bubble, you might try this article. Minsky's theory of the market seems broadly consistent with Janszen's, but his regulatory remedy sounds unfortunately similar to Mihm's, and therefore hopeless. Even more unfortunately, he is dead, and therefore unable to defend himself or revise his prescription for the bubble of the moment.

Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.

Many of Minsky’s colleagues regarded his “financial-instability hypothesis,” which he first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the subprime crisis seemingly on the verge of metamorphosing into a recession, references to it have become commonplace on financial Web sites and in the reports of Wall Street analysts. Minsky’s hypothesis is well worth revisiting. In trying to revive the economy, President Bush and the House have already agreed on the outlines of a “stimulus package,” but the first stage in curing any malady is making a correct diagnosis.

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There are basically five stages in Minsky’s model of the credit cycle: displacement, boom, euphoria, profit taking, and panic.

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You might think that the best solution is to prevent manias from developing at all, but ... the greatest need is for intellectual reappraisal, and a good place to begin is with a statement from a paper co-authored by Minsky that “apt intervention and institutional structures are necessary for market economies to be successful.” Rather than waging old debates about tax cuts versus spending increases, policymakers ought to be discussing how to reform the financial system so that it serves the rest of the economy, instead of feeding off it and destabilizing it.

The Minsky Moment

The same voices that supported tough macroeconomic policies to deal with the excesses of spending and borrowing in east Asia, Russia and Latin America are today pushing for a significant relaxation in the US to deal with the so-called subprime crisis...

Main Street consumers have overspent and over-borrowed and are unable to meet their obligations...

Consumption has been above sustainable levels and needs to adjust down, whatever view one has about the responsibility of adults over their financial decisions.

The adjustment of private consumption to sustainable levels is necessary, but is likely to have a negative influence in the short run on the growth of aggregate demand... put downward pressure on world growth.

Sustainable growth is not the consequence of an unsustain­able consumption boom but of the progress and diffusion of science, technology and innovation...

An efficient adjustment to the US over-consumption imbalance (and Chin­ese under-consumption) in a way that does not hurt longer-term growth should be based on compensating for the decline of US consumption with an increase in domestic investment and in consumption abroad. It should not be based on giving the US consumer more rope with which to hang himself... giving US households a $1,000 cheque by April, a trick that no macro­economic textbook would argue is particularly effective...

This essay is extremely clear and paints a stark picture.

Many of these points were made elsewhere earlier in the week:

The current slowdown is layered on top of deep-rooted economic problems that are not addressed by a stimulus package. If the nation’s leaders do not start showing the political will to do more than dole out popular tax breaks during an election year, short-term fixes could actually make the long-term problems worse.

For all its power, the Fed cannot change this troubling fact: trust in much of the financial system -- banks, brokerage houses, ratings agencies, bond insurers, regulators -- has been severely damaged by the subprime mortgage crisis. And that damage cannot be reversed with a quick cut in interest rates.

Stop behaving as whiner of first resort

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) ]

The black box economy

Rattle quoted WSJ:

President Bush has promised a frugal budget proposal next month, but one big-ticket item is stirring controversy: an estimated $6 billion to build a secretive system protecting U.S. communication networks from attacks by terrorists, spies and hackers.

Then Decius asked:

Could it be related to this?

And by that you mean The Spymaster, which I recommended earlier this month. The article recommended by Rattle is here in full text. Significantly, the figure cited above is only the starting point:

The administration’s plan is to reduce points of access between the Internet and the government and to use sensors to detect intrusions displaying potentially nefarious patterns, said former top intelligence officials. The program would first be used on government networks and then adapted to private networks. Former officials said the final price tag is approaching an estimated $30 billion over seven years, including a 2009 infusion of around $6 billion, though those numbers could change significantly as the plan develops.

This Chertoff quote is either amusing or disturbing, depending on your perspective:

"There is a lot of thought being given to: How do you organize this in a way that protects an incredibly valuable asset in the United States but does it in a way that doesn’t alarm reasonable people, and I underline reasonable people, in terms of civil liberties?"

Finally:

The CIA and the Pentagon didn’t want other agencies mucking about ...

This tussle is referred to at the end of the Washington Post coverage just now recommended here.

What's silly here is that no one is talking about ROC curves. How can you even propose to monitor the open Internet? The human resources involved would be outrageous, no? Not quite as bad as having human telephone switch operators, but as presented, this proposal simply doesn't scale, and as such is not credible. The stated intention to "protect US networks from hackers" is not credible, because the proposed task cannot be resourced. How much can they really accomplish, anyway? Consider the following:

Insertion, Evasion, and Denial of Service: Eluding Network Intrusion Detection

All currently available network intrusion detection (ID) systems rely upon a mechanism of data collection -- passive protocol analysis -- which is fundamentally flawed.

Maybe they intend to install normalizers at every access router in the US?

Network Intrusion Detection: Evasion, Traffic Normalization, and End-to-End Protocol Semantics

A fundamental problem for network intrusion detection systems is the ability of a skilled attacker to evade detection by exploiting ambiguities in the traffic stream as seen by the monitor. We discuss the viability of addressing this problem by introducing a new network forwarding element called a traffic normalizer. The normalizer sits directly in the path of traffic into a site and patches up the packet stream to eliminate potential ambiguities before the traffic is seen by the monitor, removing evasion opportunities.

Of course even then you face The Eavesdropper's Dilemma.

RE: WSJ | Bush Looks to Beef Up Protection Against Cyberattacks

“While I was working on the book,” Mr. Selznick said, “there were people who said, ‘You’re doing a book about French silent movies and clocks for kids? That sounds like a very bad idea.’ ”

“The Taliban came in two vehicles,” Mr. Sherpao said. “They said to the intelligence officer, ‘Are you so and so?’ When he said ‘Yes,’ they shot him dead.”

For all its power, the Fed cannot change this troubling fact: trust in much of the financial system -- banks, brokerage houses, ratings agencies, bond insurers, regulators -- has been severely damaged by the subprime mortgage crisis. And that damage cannot be reversed with a quick cut in interest rates.

The Fed cannot turn a bad mortgage loan into a good one.

In other words, it is likely to take many more months to plumb this well of losses. And it will far exceed the $150 billion federal stimulus plan being hashed out in Washington.

Just as surely as the SUV will yield to the hybrid, the half-pound-a-day meat era will end.

We are living in a post-bubble world, following the stock market bubble of the 1990s and the real estate bubble of the 2000s. That is the backdrop for the current crisis. We need to restore confidence in the markets’ basic ability to function, not in their presumed tendency to make us all rich by always going up.

People who are extremely color-conscious will have to wait another few years before they can happily leave incandescents.

It would take manufacturers about one year to produce a billion doses of any vaccine based on a new pandemic strain. But the pandemic would have circled the globe within three months.

“Right now, all they’ve done is shown they can buy a bunch of DNA and put it together.”

The problem with all these neo-Lovecraft jobs, though, is that even when they’re as impressively peculiar as Laird Barron’s, they feel secondhand, pointless, helplessly de trop.

... bitter ... change ... infused ... contest ... plunges ... vowed ... cynics ... illusion ... euphoric ... demonize ... change ... capture ... base ... spoiler ... interwoven ... swayed in the cool breeze ... vigorously ... hampering ... female support ... vigorous sniping ... a mere manager ... heading into the crush ... lay to rest any doubts ... change ... a pathway to citizenship ... detoured from straight talk ... change ... decidedly gentle sparring ... able fiscal stewards ... bland, fairly polite ... all lulled into a very false sense of security ... the succulent telenovela that is the 2008 presidential race ... touchy-feely ... relatively brainy ... change ... elaborately synchronized twists, leaps and spins ... it is the females who are the born politicians ... occasional displays of populist umbrage ... change ... making friendly overtures ... nothing more than costly malarky ... change agent ... flamboyant self-importance ... ingratiatingly twee ...

The metropolis it depicts is one in which money is the measure of all value, and in which every human relationship can be reduced to a transaction, a deal.

To gain control over runaway costs, the movie industry is increasingly striving for a one-size-fits-all strategy when it comes to the types of films it churns out and the megawatt marketing campaigns that accompany them. But while the studios once tailored their product to the tastes of American audiences and tweaked it for the international crowd, the reverse is becoming the norm.

“It doesn’t matter how good or bad the product is; the fact is that people don’t read anymore,” he said. “Forty percent of the people in the U.S. read one book or less last year.” To Mr. Jobs, this statistic dooms everyone in the book business to inevitable failure. Happily, however, 27 percent read 15 or more books.

American officials said the visit was prompted by an increasing sense of urgency at the highest levels of the United States government that Al Qaeda and the Taliban are intensifying efforts to destabilize the Pakistani government.

The citizens like Ms. Yang who marched on People’s Square are wary of calling their event and the antitrain movement a protest. Most even shy from the word “march,” preferring to speak instead of a “collective walk” to the square.

“A wonderful example of what some observers of politics call ‘inside-outside’ -- when the protester works with those in authority who are sympathetic, behind the scenes, to achieve the desired goal and where those in authority, who are sympathetic, work with the protester on tactics that they believe would be helpful to the cause.”

What accounts for this need to pay public tribute?

In most cases, Mr. Sherpao said, the police have had a boilerplate approach to solving the suicide bombings. They have blamed them on Baitullah Mehsud.

Maybe the best story in this superb collection is a rapt little piece called “Skeeter Junkie,” in which a young heroin addict first begins to enjoy the feeling of the mosquito feeding on his arm, then starts to identify with it and then, as the drugs ooze through his veins, somehow becomes it and finally uses the “exquisite” flying bloodsucker to transport him to the apartment of his comely but standoffish downstairs neighbor. It’s a horror story, I guess, but it’s also funny, weirdly erotic and, in a way that horror almost never is, tragic.

Star suicides shock us, raising the question of whether celebrities, underneath all their glamorous trappings, are just as miserable and depressed as everyone else.

In a country that declares happiness to be a constitutional right, it is unclear whether therapy -- a process that mostly offers a means of arranging rather than altering experience -- provides enough bang for the buck.

Performers thrive on attention, and sometimes admit that it’s an addiction; now, the Internet enables that addiction all too easily. The unintended consequence is that we can now watch stars self-destruct in real time.

“There’s definitely a winter malaise setting in. The fun group dynamic that we had the first week or two has dissolved. It’s tough to see any kind of hope on the horizon.”

Caroline Kennedy: Sometimes it takes a while to recognize that someone has a special ability to get us to believe in ourselves, to tie that belief to our highest ideals and imagine that together we can do great things. In those rare moments, when such a person comes along, we need to put aside our plans and reach for what we know is possible. We have that kind of opportunity with Senator Obama.

The crowds that turn out for Mr. Giuliani seem adoring enough. He drew more than 200 at the Columbia Restaurant here Saturday morning. But when he asked how many had voted early -- which his campaign has been pressing its supporters to do for two weeks -- only a few hands went up.

“Suddenly you win Iowa, and the knives come out."

All game shows are by definition mercenary, but producers go to great lengths to try to dress up contestants’ cupidity as altruism.

"Just because you didn’t find every Easter egg didn’t mean that it wasn’t planted."

While Mr. Romney, a former business executive and governor of Massachusetts, has reveled in the shift in attention to the economy in the contest, Mr. McCain, of Arizona, has sought to remind voters about the continuing threat of Islamic extremism and his national security credentials.

In a Nakuru neighborhood called Free Area, hundreds of Kikuyu men burned down homes and businesses belonging to Luos, Mr. Odinga’s ethnic group. The Luos who refused to leave were badly beaten, and sometimes worse. According to witnesses, a Kikuyu mob forcibly circumcised one Luo man who later bled to death. Many people in Free Area, which is now almost totally Kikuyu, say it will be difficult to make peace.

The weakness of the Pakistani police and the army response to determined and religiously motivated Taliban fighters was allowing the insurgency to get stronger day by day, he said. “The police are scared,” Mr. Sherpao said. “They don’t want to get involved.”

In the North-West Frontier Province, there was a risk of “total Talibanization,” he said.

Judge Kornmann cautioned the jury that nobody got “a free pass to shoot somebody” because they “went to Iraq or Afghanistan or the moon.”

American officials contend that now, more than ever, he recognizes the need to step up the battle against extremists who are seeking to topple his government. But he also believes that if American forces are discovered operating in Pakistan, the backlash will be more than he can control, especially because the Taliban and Al Qaeda are trying to cast him as a pawn of Washington.

The ease with which Mr. Maheras and Mr. Kim have put themselves back in play is a reminder that for many top Wall Street executives, humiliation and defeat need not result in a professional exile.

Today, purchases of computer hardware and software account for half of all capital spending by businesses.

What does it mean to be part of the first generation coming of age steeped in a virtual world seemingly outside parental control?

The generation that came of age in the ’80s, as the VCR was becoming a staple, is especially prone to VHS nostalgia, a manifestation of the broader retro culture that has accounted for untold hours of programming on VH1.

Igor Jablokov says cellular companies tell him in meetings that two-thirds of their teenage customers have either sent or read a text message while behind the wheel.

If Americans were to reduce meat consumption by just 20 percent it would be as if we all switched from a standard sedan -- a Camry, say -- to the ultra-efficient Prius.

Sheryl Crow: "Honestly, I don’t know what record sales mean anymore."

Lenny Kravitz: "Music on the radio is in a very bad state because people are not really musicians, not really writers or singers in a lot of cases. Everything is geared toward selling, and the music is like McDonald’s: tastes good going down but then you’re like, why did I do it?"

By all appearances, female sperm whales are terrible size queens.

His ennui is almost French in its intensity: “He felt weak at the thought of reading another story about vampires having sex with other vampires. He tried to struggle through Lovecraft pastiches, but at the first painfully serious reference to the Elder Gods, he felt some important part of him going numb inside, the way a foot or a hand will go to sleep when the circulation is cut off. He feared the part of him being numbed was his soul.” I think we’ve all been there.

“Never get into a wrestling match with a pig,” Senator John McCain said in New Hampshire this month after reporters asked him about Mr. Romney. “You both get dirty, and the pig likes it.”

Insiders are now behaving more bullishly than at any time since November 2002, the month after the end of the 2000-2002 bear market.

Global demand for meat has multiplied in recent years, encouraged by growing affluence and nourished by the proliferation of huge, confined animal feeding operations. These assembly-line meat factories consume enormous amounts of energy, pollute water supplies, generate significant greenhouse gases and require ever-increasing amounts of corn, soy and other grains, a dependency that has led to the destruction of vast swaths of the world’s tropical rain forests.

You may view “Untraceable,” as I do, as a repugnant example of the voyeurism it pretends to condemn. Or you may stand back and see it as a cleverly conceived, slickly executed genre movie that ranks somewhere between “Seven” and the “Saw” movies in sadistic ingenuity.

The way the series is structured, viewers can tune in according to their interest level.

If the South Carolina result buoyed the Obama team, it left Senator Hillary Rodham Clinton’s campaign facing a new set of questions. Her advisers’ steady attacks on Mr. Obama appeared to prove fruitless, if not counterproductive, and the attack-dog role of former President Bill Clinton seemed to have backfired.