Failbook’s Epic Fail: Does Zuckerberg Want Users to Pay?

May 19, 2012

Aziz Current Affairs, Finance, Musings, Wall Street , , , , , , , , , , , 47 Comments

What is there to say about Facebook?

Why would anyone buy a company’s stock when they have no real profit pedigree? When their advertising profit in 2011 came to just over $1 billion, and their book value is the region of $100 billion, how can that really make any sense other than to the kind of nutcase zombie trader who takes Jim Cramer seriously? The sad truth is that people are just not clicking the ads; Facebook ads receive far fewer clicks than competitors such as Google’s AdSense.

If Facebook was floating with a book value of $5-10 billion (or around $2-4 per share) we would be talking about a serious business proposition, albeit one which is already rather saturated (given that there are 2.3 billion internet users, and Facebook already has its claws into 900 million of them). But at these levels? What are people paying for?

Some say the name recognition and momentum (but that’s just paying for hype) as well as the infrastructure and data that Facebook owns. Certainly five or six years of a big chunk of humanity’s likes and dislikes is a valuable database. But how do they monetise that? Does Zuckerberg have any credible plan?

The most under-reported piece of news of the day is surely that Zuckerberg does seem to have a plan. But it’s not very credible.

From the BBC:

Facebook has started testing a system that lets users pay to highlight or promote posts.

By paying a small fee users can ensure that information they post on the social network is more visible to friends, family and colleagues.

The tests are being carried out among the social network’s users in New Zealand.

Facebook said the goal was to see if users were interested in paying to flag up their information.

That’s their plan? That’s Zuckerberg’s big idea? Get users to pay to post premium content!? Did the well-circulated hoax that Facebook planned to get users to pay for use just turn out to be true? If they proceed with this (unlikely) it seems fairly obvious the world would say goodbye Facebook, hello free alternatives.

The truth is that Facebook is a toy, a dreamworld, a figment of the imagination. Zuckerberg wanted to make the world a more connected place (and build a huge database of personal preferences), and he succeeded thanks to a huge slathering of venture capital. That’s an accomplishment, but it’s not a business. While the angel investors and college-dorm engineers will feel gratified at paper gains, it is becoming hard to ignore that there is no great profit engine under the venture. In fact, the big money coming into Facebook just seems to be money from new investors — they raised eighteen times as much in their flotation yesterday as they did in a whole year of advertising revenue. For an established company with such huge market penetration, they’re veering dangerously close to Bernie Madoff’s business model.

On the other hand, they have plenty of time and money to try out various profit-making schemes. Eventually, they may hit on something big; Apple didn’t start out producing huge cashflow or sales, they got there the hard way. But it all seems like a big gamble on an outfit with big dreams but little moneymaking pedigree. I’d consider buying Facebook at $2-4 a share. But current valuations are a joke — and I don’t think the market is falling for it.

Even the NYT notes:

The company’s bankers had to buy shares to keep the stock from falling below its offering price, raising questions about how the stock will fare next week.

The Fabled Greek Mega-Bailout

May 16, 2012

Aziz Economic History, Economics, Fixed Income, Inflation, International Relations, Musings, Philosophy, Politics , , , , , , , , , , , , , , 42 Comments

In a truly eyebrow-raising CNBC interview, Matthew Lynn alleges that Europe shall be saved! (As if by the grace of God!).

With Europe on the brink yet again Germany will act.

The Greeks can’t carry on with the austerity being imposed on them. No country can be expected to endure annualized falls in GDP  of 7 percent or more,” he said, “and 50 percent youth unemployment for years on end.

On Tuesday we learned that the Greek economy shrank by another 6.2 percent in the latest quarter. It simply isn’t acceptable” Lynn said.

But Germany and the rest of the EU could come up with a Marshall Aid-style package for Greece. Very little of the bail-out money so far has gone to the Greeks. It has all gone to the bankers.

Forget talk of a ‘Grexit’. There will be a mega-bail-out—a ‘Grashall Plan’—instead.

And when it happens, the markets will rally on the news.

Who else would publish this? (That’s a redundant question — who else, besides J.P. Morgan and maybe a few government agencies, wouldn’t have fired Jim Cramer after what he said about Bear Stearns?)

At various stages in the last two years everyone from China, to Germany, to the Fed to the IMF, to Martians, to the Imperial Death Star has been fingered as the latest saviour of the status quo. And so far — in spite of a few multi-billion-dollar half-hearted efforts like the €440 billion EFSF —  nobody has really shown up.

Perhaps that’s because nobody thus far fancies funnelling the money down a black hole. After Greece comes Portugal, and Spain and Ireland and Italy, all of whom together have on the face of things at least €780 billion outstanding (which of course has been securitised and hypothecated up throughout the European financial system into a far larger amount of shadow liabilities, for a critical figure of at least €3 trillion) and no real viable route (other than perhaps fire sales of state property? Sell the Parthenon to Goldman Sachs?) to paying this back (austerity has just led to falling tax revenues, meaning even more money has had to be borrowed), not to mention the trillions owed by the now-jobless citizens of these countries, which is now also imperilled. What’s the incentive in throwing more time, effort, energy and resources into a solution that will likely ultimately prove as futile as the EFSF?

The trouble is that this is playing chicken with an eighteen-wheeler. While Draghi might be making noises about “continuing to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet” (in other words, not proceeding with the fabled “mega-bailout” even if it fractures the Euro),  we may well see a full-blown financial meltdown (and of course, the ramifications of that on anyone who is exposed to the European banking system) unless someone — whether it is the ECB, or the Fed, or the IMF — prints the money to keep the banks going.

There are really two layers to bailing out the insolvent nations: the real bailout is of the banks who bought the debt, and the insolvent nations are just an intermediary. Should the insolvent nations become highly uncooperative, it seems more likely that the insolvent nations will just be cut out of the loop (throwing their citizens into experiencing a forced currency redenomination, bank runs, and even more chaos) while policymakers continue to channel money into “stabilising” the totally broken global financial system — because we know for sure that a big disorderly default will likely cause some kind of default cascade, and that is something I am sure that (based on past form) policymakers will seek to avoid.

How close to the collapse we will come before the money gets printed is another matter.

Given that it is predominantly Germans who are in charge of Europe for the moment — with their unusual (at least in the West) post-Weimar distaste for Keynesianism —  it seems to me like we will see quite a lot of chaos (read: Euro exits) before the money printing begins in earnest. And the money printing may be far more ad hoc and decentralised than 2008 (read: The Fed may be on the hook for American exposure). Just as we have seen so far, the money will come at the last minute, and will just keep things ticking over rather than actually solving anything.

And ultimately, I think it is the social conditions — particularly unemployment levels — that matter more than whether or not the financial system survives. If the attendant cost of ad hoc bailouts (in the name of pretending to stick to the ECB mandate) is a continued depression, and continued massive unemployment and youth unemployment then politicians are focusing on the wrong thing.

The problem is that as conditions continue to fester and as solutions seem distant and improbable that Europe’s problems may become increasingly political. As the established (dis)order in Europe continues to leave huge swathes of people jobless and angry, their rage and discomfort will be channelled toward dislodging the establishment. As we have seen in Greece and France, that has already produced big lifts for both the Far Left and Far Right.

We already know, I think, that in Greece’s upcoming election the outsider parties will crush the establishment, with SYRIZA most likely emerging on top. A key metric for me in the next few weeks will be Golden Dawn‘s proportion of the vote.

Let’s not forget history:

The Treasury Bubble in One Graph

May 7, 2012

Aziz Economics, Fixed Income, Musings, Wall Street , , , , , , , , , , 43 Comments

What are the classic signs of an asset bubble? People piling into an asset class to such an extent that it becomes unprofitable to do so.

Treasury bonds are so overbought that they are now producing negative real yields (yield minus inflation):


That’s right, after taking into account inflation, many investors in treasuries are standing over a drain and pouring their money down it. 

And so America’s creditors are now getting slapped quite heavily in the mouth by the Fed’s easy money inflationist policies.

I propose (much, I am sure, to the consternation of the monetarist-Keynesian “print money and watch your problems evaporate” establishment) that this is a very, very, very dangerous position. And I propose that those economists who are calling for even greater inflation are playing with dynamite.

See, while the establishment seems to largely believe that the negative return on treasuries will juice up the American economy — in other words that “hoarders” will stop hoarding and start spending — I believe that negative side-effects from these policies may cause severe harm.

There is the danger of a bursting treasury bubble. What would happen if America’s creditors decide they want to liquidate their positions? After all, they’re getting slapped in the mouth , and the Fed is promising to continue with the zero interest rate policy until at least 2014.

And we know for sure that even before real rates on treasuries turned negative that China were selling:

The Fed has been picking up the slack, and will have to continue to do so for the forseeable future (the private domestic and international markets have no reason to increase purchases assets of with a negative real rate of return).

This means that to keep the Treasury’s interest payments low, the Fed will have to start printing more money, which brings us to the second danger: the danger of runaway inflation.

Bernanke might well believe he can do this without triggering runaway inflation. He might point to his track record of tripling the monetary base without triggering hyperinflation.

But inflation has stayed (relatively) low for one reason: the money he printed isn’t circulating. The primary dealer banks are holding the money as excess reserves. Can this last?

I doubt it. As I noted last month:

So, does the accumulation of excess reserves lead to inflation?

Only so much as the frequentation of brothels leads to chlamydia and syphilis.

Excess reserves are only non-inflationary so long as the banks — the people holding the reserves — play along with the Fed-Treasury game of monetising debt and trying to hide the inflation . The banks don’t have to lend these reserves out, just as having sex with hookers doesn’t have to lead to an infection.

But eventually — so long as you do it enough — the condom will break.

This trend of amassing excess reserves (done, lest we forget, as a stability measure to protect primary dealers against another shadow banking collapse) is closer to going to sleep upon a bed of dynamite. 

But inflation is only the most obvious risk.

The greatest danger is illustrated here:

America — for most of last century exporter and creditor to the world now runs the biggest trade deficits the world has ever seen.

Let’s not forget that these creditors that U.S. monetary policy is now slapping in the face produce most of our consumption, much of our military hardware, and most of our oil. 

Of course, many neocons seem to believe that this position is sustainable; that America can slap her creditors in the face all she likes because she has thermonuclear weapons and can tell the rest of the world to go and bite the big one.

Not so fast.

As VeteransToday noted in December:

“Surprise, Surprise, Surprise”,  to quote Gomer Pyle. The secret spy mission to create photographic proof of Iranian nuclear intentions has gone horribly wrong.

China is the country of origin for many, many of the semiconductors used by the US Military. It was most likely that China provided the hardware with the secret backdoor that allowed the Iranians to seize control of the Stealth drone while the drone was on a secret CIA mission over Iran.

Working together, they captured a state of the art US Military stealth aircraft.

What this means to all US Military personnel serving anywhere in the world? It means that control of any electronics system in any type of platform, can be seized and used against the military that launched it.

I don’t doubt America still has great technological and infrastructural advantages over her Eurasian creditor rivals. But do we really want to test the limits of our power? Do we really want to try and provoke a trade war with China and the other Eurasian nations (who of course are testing the petrodollar reserve to its limits by creating their own reserve currency agreements) by obliterating the value of their dollar-denominated assets?

So now we know, beyond a shadow of doubt that U.S. Treasuries are in a historic bubble.

We know that to some degree the Federal Reserve and Ben Bernanke are guilty of stoking up this program by buying U.S. Treasuries (artificial demand) and thus constricting supply. We know that this is screwing America’s creditors who happen to produce a lot of America’s consumption, components, military hardware, energy and resources. We know that these nations are using increasingly violent rhetoric regarding their relationship with the United States (Putin for instance described America as a parasite), and are activating agreements to ditch the dollar as the reserve currency.

Do we really want to continue in this vein? Do we really want to continue screwing our creditors by forcing them to accept negative real rates on their investments? Do we really want to risk the inflationary impact of continuing to print money to monetise debt (and hiding the money in excess reserves, thereby temporarily hiding the inflation). Do we really want to find out if all those Chinese semiconductors in our military hardware have backdoors that allow America’s enemies to shut down American military hardware?

I’d call that playing dice with the devil.

Anything the Government Gives You, the Government Can Take Away

April 29, 2012

Aziz Current Affairs, Musings, Philosophy, Politics , , , , , , , , , , 82 Comments

From the Guardian:

A majority of doctors support measures to deny treatment to smokers and the obese, according to a survey that has sparked a row over the NHS‘s growing use of “lifestyle rationing”.

Some 54% of doctors who took part said the NHS should have the right to withhold non-emergency treatment from patients who do not lose weight or stop smoking. Some medics believe unhealthy behaviour can make procedures less likely to work, and that the service is not obliged to devote scarce resources to them.

And that’s the trouble with services and institutions run from the taxpayer’s purse, administered by centralists and bureaucrats. It becomes a carrot or a stick for interventionists to intervene in your life. Its delivery depends on your compliance with the diktats and whims of the democracy, or of bureaucrats. Your standard of living becomes a bargaining chip. Don’t conform? You might be deemed unworthy of hospital treatment.

It seems innocuous to promise all manner of services in exchange for taxes. Citizens may welcome the convenience, the lower overheads, the economies of scale. They may welcome a freebie, and the chance to enjoy the fruits of someone else’s labour. They may feel entitled to it.

Many words have been spent on the problems of dependency; that rather than working for an honest living, the poor may be sucked into a vortex of entitlement, to such an extent that they lose the desire to produce. A tax-sucking multi-generational underclass can develop. Individuals can live entirely workless lives, enjoying a semi-comfortable existence on the teat of the taxpayer, enjoying the fruits — financial handouts, free education, free healthcare, a free home — of social engineers who believe that every problem under the sun can be remedied by government largesse and throwing money at problems. And who can blame them? Humans have sought out free lunches for as long as there have been humans.

Welfare dependency is generally assumed to be viewed negatively in the corridors of power. After all, broad welfare programs mean greater spending, and that very often means great debt. And why would a government want to be in debt? Surely governments would prefer it if more of the population was working and productive and paying taxes?

But it is easier to promote behaviour desired by the state when a population lives on state handouts. And for states that might want to influence the behaviour of their citizens — their resource consumption, their carbon footprint, their moral and ethical beliefs, or their attitude toward the state — this could be an attractive proposition. It might cost a lot to run a welfare system, but it brings a lot of power to influence citizens.

And increasingly throughout the Western world, citizens are becoming dependent on the state for their standard of living. In the UK, 92% of people are dependent on the socialist NHS for healthcare. 46 million Americans receive food stamps. That gives states a lot of leverage to influence behaviour. First it may be used in a (relatively sensible) attempt to curtail smoking and obesity. Beyond that, the sky is the limit. Perhaps doctors or bureaucrats may someday suggest withholding treatment or dole money from those who exceed their personal carbon or meat consumption quota? A tyrant could even withhold welfare from those who do not pledge their undying allegiance or military service to a regime or ideology (it happened many times last century). An underclass of rough and hungry welfare recipients is a fertile recruiting ground for military and paramilitary organisations (like the TSA).

With the wide expansion of welfare comes a lot of power, and the potential for the abuse of power. Citizens looking for a free lunch or an easier world should be careful what they wish for. Welfare recipients take note: you depend on government for your standard of living, you open yourself up to losing your liberty.

Mining the Skies

April 22, 2012

Aziz Environment, Musings, Philosophy, Technology , , , 40 Comments

In August last year I wrote:

Concerned about resource scarcity? There’s plenty more up there. Last year, scientists confirmed that there was water on the moon. And there are metals and hydrocarbons abundant in asteroids. Metallic asteroids  possess copper, silver, gold, and all other such elements as well, though not in abundances anywhere near as large as those of their primary constituents.

It’s an age old trope, going back to John S. Lewis’ book on the subject, and one of my greater interests.

I know that Earth is finite. I know that in some limited sense Malthus — my great intellectual nemesis, albeit one who has been proven wrong and wrong again and again — could be proven right. Earth’s resources are limited simply by the fact that Earth is a limited space. If we don’t leave Earth behind, and we continue to expand we will hit Earth’s limits, if not by the end of the century (unlikely, in my view) then by the end of the millennium.

But my key message on this subject is this: Malthus will only ever be proven right if we screw up. It’s a big expansive universe, and we are smart, flexible, ingenious creatures. We don’t know how big, but the amount of resources out there seem far, far beyond the scope of the human imagination. Malthus will always be there with us, a shackle around our necks, forewarning us not to be too gluttonous, or to expand too far too fast, and to maintain an awareness of our access to resources, particularly water and sustenance. Forewarning us, I might add, of the dangers of our own arrogance. But resource pressures are something we can always conquer without resorting to the kind of nasty authoritarianism that so often passes for “environmentalism” today.

For just as I expected — and not a moment too soon — a cohort of the wealthy are putting their economic weight behind the idea of going out and getting more resources.

From the Telegraph:

Power players including Eric Schmidt, the Google chairman, and James Cameron, the film director, are planning to mine the final frontier: space.

They are among the backers of a new venture that will reach for the riches lying elsewhere in the solar system. Planetary Resources will be a “space exploration company to expand Earth’s resource base” according to scant information released ahead of the start-up’s launch in Seattle on Tuesday.

“The company will overlay two critical sectors – space exploration and natural resources – to add trillions of dollars to the global GDP,” was the bold claim. “This innovative start-up will create a new industry and a new definition of ‘natural resources’.”

Mr Schmidt and the internet giant’s co-founder Larry Page are listed alongside Mr Cameron, the director of Titanic and Avatar, among the venture’s investors and advisers.

The company was founded by Eric Anderson and Peter Diamandis. “Since my childhood I’ve wanted to do one thing, be an asteroid miner,” Mr Diamandis told Forbes earlier this year. “So stay tuned on that one.”

While the costs of space travel are high, the hope is that riches contained in asteroids would make the sums worthwhile. Studies suggest that gold and other metals in the earth’s crust originated from asteroids that collided with the planet during its early life.

This is not the end of the road, but the start.

In any new industry there will be failures, some dramatic. Solar energy is a wonderful principle, but Solyndra was a terrible company.

But it is a pleasing start. Human civilisation just took a step in the right direction. And the ghost of Malthus just took another crashing blow.

Economics for the Muppet Generation

April 19, 2012

Aziz Economic History, Economics, Federal Reserve, Fixed Income, Humour, Inflation, Musings, Politics , , , , , , , , , , , 40 Comments

Mark McHugh of Across the Street provides a succinct summation of the problem America faces:

McHugh continues:

  • From 1947 to 1974 US income per capita grew more than National debt per capita 25 times.
  • In the last 30 years, National debt per capita has grown more than income per capita 24 times.
  • The last time income per capita grew more than national debt per capita was 2001.
  • Ben Bernanke arrived at the Federal Reserve in 2002.

So simple, even a muppet can understand what the problem is, right?

Not exactly. We know what the problem is: national incomes aren’t rising, even while we get deeper and deeper into hock trying to maintain our standard of living. We know that this pattern is totally unsustainable; unless incomes rise, that debt will become increasingly impossible to service. What is less clear is the cause of this stagnation.

So what changed between 1990 and 2005 that led the nation debt per capita to so quickly overtake national incomes per capita?

While I am mindful that correlation does not necessarily imply causation, that data fits pretty beautifully. The explanation for this trend would be that as America has become more and more consumptive, and less and less productive that more and more capital went offshore to pay for consumption, and thus less and less contributed to the national income, even as Bernanke ponied up trillions in new reserves, and even as the shadow banking system created trillions in pseudo-money.

So where’s America’s money?

Here:


So is this a criticism of free trade? Should America have been more protectionist of her industries and her domestic manufacturing? Not necessarily; what the Washingtonian elites refer to as “free trade” is heavily subsidised. The status quo that Washington has made seems to heavily favour China and disfavour America. Imports from China are subsidised by American military largesse; every dollar America pushes into its military-industrial complex pushes shipping costs like insurance a little lower. So while labour costs in the Orient are naturally cheaper (due to population density, and development level), that doesn’t necessarily mean that Chinese goods are naturally cheaper in the American market. Under a genuinely free system — where America was not subsidising shipping costs — would made-in-America be more competitive compared to Chinese goods? Would China have built up a less  mountainous supply of American cash? I think so.

Rome & Central Planning

April 12, 2012

Aziz Economic History, Musings, Philosophy , , , , , , , , , , 56 Comments

Central planning — like war — never changes. It has always been a powerful and effective way of achieving an explicit objective (e.g. building a bridge, or a road), but one that has has always come with detrimental side-effects. And the more central planners try to minimise the side-effects, the more side-effects appear. And so the whack-a-mole goes on.

This was true in the days of Rome, too.

From Dennis Gartman:

Rome had its socialist interlude under Diocletian. Faced with increasing poverty and restlessness among the masses, and with the imminent danger of barbarian invasion, he issued in A.D. 301 an edictum de pretiis, which denounced monopolists for keeping goods from the market to raise prices, and set maximum prices and wages for all important articles and services. Extensive public works were undertaken to put the unemployed to work, and food was distributed gratis, or at reduced prices, to the poor. The government – which already owned most mines, quarries, and salt deposits – brought nearly all major industries and guilds under detailed control. “In every large town,” we are told, “the state became a powerful employer, standing head and shoulders above the private industrialists, who were in any case crushed by taxation.” When businessmen predicted ruin, Diocletian explained that the barbarians were at the gate, and that individual liberty had to be shelved until collective liberty could be made secure. The socialism of Diocletian was a war economy, made possible by fear of foreign attack. Other factors equal, internal liberty varies inversely with external danger.

The task of controlling men in economic detail proved too much for Diocletian’s expanding, expensive, and corrupt bureaucracy. To support this officialdom – the army, the courts, public works, and the dole – taxation rose to such heights that people lost the incentive to work or earn, and an erosive contest began between lawyers finding devices to evade taxes and lawyers formulating laws to prevent evasion. Thousands of Romans, to escape the tax gatherer, fled over the frontiers to seek refuge among the barbarians. Seeking to check this elusive mobility and to facilitate regulation and taxation, the government issued decrees binding the peasant to his field and the worker to his shop until all their debts and taxes had been paid. In this and other ways medieval serfdom began.

So much for the view that increasing aggregate demand is the recipe for wider prosperity; Diocletian surely raised it a lot. But that didn’t really accomplish much, either in terms of wider prosperity, or in terms of the sustainability of the Roman civilisation. Raised aggregate demand is only useful if it contributes to creating and producing things that society needs and wants. And as Hayek brutally demonstrated, central planning is notoriously useless at determining what people actually want.

Of course, no modern centralist (e.g. Krugman) explicitly endorses price controls although, I am sure some of the more Hayekian or Paulian-minded among us will point out among other things that the minimum wage and the setting of interest rates are both kinds of price control. Diocletian however, was far more expansive.

From Wiki:

The first two-thirds of the Edict doubled the value of the copper and bronze coins, and set the death penalty for profiteers and speculators, who were blamed for the inflation and who were compared to the barbarian tribes attacking the empire. Merchants were forbidden to take their goods elsewhere and charge a higher price, and transport costs could not be used as an excuse to raise prices.

The last third of the Edict, divided into 32 sections, imposed a price ceiling - a maxima - for over a thousand products. These products included various food items (beef, grain, wine, beer, sausages, etc), clothing (shoes, cloaks, etc), freight charges for sea travel, and weekly wages. The highest limit was on one pound of purple-dyed silk, which was set at 150,000 denarii (the price of a lion was set at the same price).

And how did it work out?

The Edict did not solve all of the problems in the economy. Diocletian’s mass minting of coins of low metallic value continued to increase inflation, and the maximum prices in the Edict were apparently too low.

Merchants either stopped producing goods, sold their goods illegally, or used barter. The Edict tended to disrupt trade and commerce, especially among merchants. It is safe to assume that a gray market economy evolved out of the edict at least between merchants.

Bernanke of course is much more sophisticated; he uses the facility of the primary dealer banks to hide the currency inflation necessary to monetise government debt. Central planning wins again? No; central planning always comes with unpredictable boomerang side effects.

I suppose, though, that it is comforting that history is repeating itself. After the horrors of mediaeval feudalism, we pulled ourselves up anew from the wastes of history.

Should Corrupt Bankers Face the Death Penalty?

April 12, 2012

Aziz Federal Reserve, Musings, Wall Street , 56 Comments

Doing God's Work?

Let’s be clear: financial misdeeds ruin lives. If a Madoff takes your money and uses it to pay off other investors in a ponzi scheme, you won’t be able to get it back. If a Blankfein underling issues you with misleading advice, and then bets against you (creaming himself a nice profit), you won’t be able to get it back. If a Corzine steals your money and uses it to bet on the European sovereign debt market, you might not be able to get it back. You might end up in poverty or worse. You might lose your children’s college money, your retirement money, or capital you needed for your business. You might lose your home.

So shouldn’t we take a tough line against financial misdeeds? Shouldn’t tricking and stealing from investors, tricking and stealing from the public, tricking and stealing from clients carry a heavy disincentive, like death? Would a corrupt banker not think twice about their misdeeds if they knew that apprehension would mean a noose around their neck and a kicked bucket?

Certainly there is a popular impression that big-time criminals with titles, status and MBAs get it easy, while protestors (sometimes protesting the misdeeds of big-time criminals) get shafted by the hyper-vigilant modern security state:

A lot of commentators — like for example, Max Keiser — seem to think so.

And in China financial crimes are treated with a gravity far beyond a cushy minimum security cell, and home visits on the weekends.

Financial criminals in China are often executed.

From Wiki:

China has executed bankers for fraudulent activity:

  • Wang Liming, former accounting officer, China Construction Bank, Henan, with others stole 20 million yuan ($2.4 million in U.S. Currency) from the bank using fraudulent papers, executed.
  • Miao Ping, an accomplice in the same case, executed.
  • Wang Xiang, same bank in an unrelated case, also executed for taking 20 million yuan from the bank.
  • Liang Shihan, Bank of China, Zhuhai, executed for helping cheat his bank out of $10.3 million US.

In a recent case, Wu Ying, a 28-year-old woman, will soon be put to death for taking out multi-million dollar loans from investors she was unable to pay back.

We in the West appear to have a problem; financial crimes ruin lives, but financial criminals either get away with a comparatively small fine (like Goldman did after they misled clients), a cushy prison cell, or sometimes even a taxpayer funded bailout.

Simply, they keep the upside of their behaviour, and pass the downside off to someone else (either a sucker investor, or a junior partner, or the taxpayer).

Hammurabi, the Babylonian King, had a simple principle for dealing with such bullshit:

If a builder builds a house and the house collapses and causes the death of the owner – the builder shall be put to death. If it causes the death of the son of the owner, a son of that builder shall be put to death.

Exact equivalence; you destroy someone’s livelihood, and your livelihood shall be destroyed. Such justice would leave a lot of people, and not just bankers — Dick Cheney, John Yoo, Larry Summers, Tim Geithner — with a lot to fear.

But would it work? Well, China executes bankers — as well as corrupt party leaders, (watch out, Bo Xilai) — and bankers in China keep screwing investors and the nation.

I think the biggest problem with capital punishment is that it is administered by the state (or the mob) and that means that very often it is administered to the wrong people, for corrupt or flawed reasons. Putting the power of life and death in the hands of the state is quite dangerous. More likely than not, the person executed will end up being the innocent junior intern (“take one for the team, buddy!”) while the corrupt CEO enjoys a retirement of golf courses, hookers, viagra, and oxycontin.

A much better goal to aspire to is the end of bailouts, and the end of firing off wads of QE-dollars to preserve badly-run (but well-connected) companies and systems (zombification).

Still, in matters of financial fraud I think it is important to seek out equivalent justice; you destroy a livelihood, we take your trust fund, and your Swiss bank account to compensate the victim. The status quo — where regulators shoot off tiny fines for huge financial crimes — is a joke.

But the best way to punish Goldman Sachs (etc) for their misdeeds is to not bail them out the next time their hyper-fragile leverage-driven business model fails them and they end up over a barrel. It is quick, dirty and emotionally satisfying to talk of executions, but giving the state the power over life and death has far bigger, and far more dangerous consequences, not to mention huge potential for abuse.

It Doesn’t Make Any Sense

April 10, 2012

Aziz Musings, Orwellian, Politics , 26 Comments

I don’t give a damn about Rick Santorum. Had he won the nomination he would have put his foot in his mouth enough times to guarantee defeat, even as the country suffers economically.

What I give a damn about is this:


Rick Santorum thinks it’s legitimate to claim his campaign is about freedom? To use freedom as a campaign slogan? To emblazon his podium with the word freedom while giving his concession speech?

What freedom?

The freedom to ban pornography (so much for the First Amendment)? The freedom to ban oral sex? The freedom to ban birth control (and of course, all abortions, even ones deemed medically necessary)? The freedom to bomb Iran (resulting, most probably, in huge damage to the American economy)?

Santorum’s platform is one of forcing his religious beliefs, his politics and his geopolitics onto the rest of the country. That’s fine; he’s free to believe in doing that, I’m free to tell him to go and fuck himself.

The problem is calling it “freedom”.

As Orwell once put it:

And those words tell us everything we could ever possibly need to know about Rick Santorum.

Two Kinds of Black Swans

April 9, 2012

Aziz Economic History, Environment, Musings, Philosophy , , , , , , , , 23 Comments

The black swan is probably the most widely misunderstood philosophical term of this century. I tend to find it being thrown around to refer to anything surprising and negative. But that’s not how Taleb defined it.

Taleb defined it very simply as any high impact surprise event. Of course, the definition of surprise is relative to the observer. To the lunatics at the NYT who push bilge about continuing American primacy, a meteoric decline in America’s standing (probably emerging from some of the fragilities I have identified in the global economic fabric) would be a black swan. It would also be a black swan to the sorry swathes of individuals who believe what they hear in the mainstream media, and from the lips of politicians (both Romney and Obama have recently paid lip service to the idea that America is far from decline). Such an event would not really be a black swan to me; I believe America and her allies will at best be a solid second in the global pecking order — behind the ASEAN group — by 2025, simply because ASEAN make a giant swathe of what we consume (and not vice verse), and producers have a historical tendency to assert authority over consumers.

But black swans are not just events. They can also be non-events. To Harold Camping and his messianic followers who confidently predicted the apocalypse on the 21st of May 2011 (and every other true-believing false prophet) the non-event was a black swan. Surprising (to them at least) and high impact, because it surely changed the entire trajectory of their lives. (Camping still lives on Earth, rather than in Heaven as he supposedly expected).

To true-believing environmentalists who warn of Malthusian catastrophe (i.e. crises triggered by overpopulation or resource depletion), history is studded with these black swan non-events.

From the Economist:

Forecasters of scarcity and doom are not only invariably wrong, they think that being wrong proves them right.

In 1798 Thomas Robert Malthus inaugurated a grand tradition of environmentalism with his best-selling pamphlet on population. Malthus argued with impeccable logic but distinctly peccable premises that since population tended to increase geometrically (1,2,4,8 ) and food supply to increase arithmetically (1,2,3,4 ), the starvation of Great Britain was inevitable and imminent. Almost everybody thought he was right. He was wrong.

In 1865 an influential book by Stanley Jevons argued with equally good logic and equally flawed premises that Britain would run out of coal in a few short years’ time. In 1914, the United States Bureau of Mines predicted that American oil reserves would last ten years. In 1939 and again in 1951, the Department of the Interior said American oil would last 13 years. Wrong, wrong, wrong and wrong.

Predictions of ecological doom, including recent ones, have such a terrible track record that people should take them with pinches of salt instead of lapping them up with relish. For reasons of their own, pressure groups, journalists and fame-seekers will no doubt continue to peddle ecological catastrophes at an undiminishing speed. These people, oddly, appear to think that having been invariably wrong in the past makes them more likely to be right in the future. The rest of us might do better to recall, when warned of the next doomsday, what ever became of the last one.

Critics will note that Malthusians only have to be right once to provoke dire consequences; deaths, famines, plagues. Of course, that is the same logic that has led governments to spend trillions, and trample the constitutional rights of millions of people in fighting amateurish jihadis, when in reality more Americans — yes including the deaths from 9/11 — are crushed to death by furniture than are killed by Islamic terrorism.

But it is true, the scope of the threat posed by Malthusian catastrophe is probably an order of magnitude greater than by jihadis with beards in caves. And of course, groups like the Club of Rome and individuals like Paul Ehrlich will keep spewing out projections of imminent catastrophe.

So what were the real threats to humanity following Malthus’ predictions? Was it overpopulation? Nope. Imperial warfare killed far, far more than any famine or resource crisis in the 20th Century. To the overwhelming majority of the population, World War I — both in its origins (the assassination of an obscure archduke), its scope, its death toll, and its final ramifications (i.e. the Treaty of Versailles, the rise of Nazism and World War II) was the great black swan event, the great killer, the great menace.

Black swan events defined the 20th Century; the black swan non-events of Malthus did not. The true story of the early 20th Century was the decline of a heavily indebted, consumptive and overstretched imperial power (Britain), and the dangers to peace and international commerce as its productive and expansionistic rivals (especially Germany, but also America) rose and challenged her (in vastly different ways).

There are some real environmental concerns like the dangers posed by nuclear meltdowns, runaway global warming (although I believe a little global warming is probably a good thing, as it will keep us out of any prospective future ice age), tectonic activity, or an exotic solar event like an X-flare, but we have no clue what will hit us, when it will hit, and its branching tree of consequences. We don’t have a full view of the risks. In spite of what unsophisticated mathematician pseudo-scientists in the tradition of Galton and Quetelet may tell us, we cannot even model reality to the extent of being able to accurately foretell tomorrow’s weather.

But once again a heavily consumptive, indebted and overstretched imperial power (America) is coming to terms with the problem of decreasing power in the face of productive and expansionistic rivals (particularly China). That parallel tends to lead me to believe that imperialist warfare will be the greatest menace of the 21st Century, too. But that’s the problem with predicting the future: we simply don’t know what black swan events and non-events nature will deliver (although it would be wise not to place too much trust in politicians or the establishment media, who simply blow their own trumpet and hope for the best).

So what are we to do?

Well, I think it’s important that businesses, governments and individuals think about Malthusian concerns. Malthus’ incorrect theorising touched upon the most significant of human concerns. Quite simply, without food, water and energy we weak and fragile humans are imperilled. It’s important that governments (particularly of importer nations) devise strategies to cope with (for example) breakdowns in the international trade system. Individuals, families, businesses and communities should be aware of where their food, energy and water come from, and of alternatives in case the line of supply is cut. Keeping backups (e.g. solar panels, batteries, wind turbines, storable food and water) is a sensible precaution for all citizens. There will be shocks in the future, just as there have been in the past. We should be prepared for shocks, whatever they may be.

And we should learn to love such volatility. Nature will always deliver it. We evolved and developed with it. It is only in modernity that we have adopted systems procedures and methodologies to subdue volatility. And — as we are slowly learning via the disastrous consequences of every single failed experiment in central planning — volatility suppressed is like a coiled spring.

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