Convergences

Finance and Climate Change: Beware of Geeks Bearing Gifts

At ChicagoBoyz, David Foster notes:

[W]e are experiencing a serious credit crisis, brought about to a substantial extent by naive and inadequate mathematical models–mostly developed by people with very high SAT scores and very often with advanced degrees.

A recent Forbes (proprietary) column elaborates the point: much of the problem was caused largely by hubristic computer modelers, who thought that algorithms invented in an empirical vacuum accurately represent the real world of risk.

There is a lot of this computer-generated schistosomiasis going around.   

The sensible skeptics of climate change theory, such as M IT Professor Richard Lindzen, point out that the hysteria about the topic is fueled not by empirical observations but by computer models. Never forget GIGO: feeding hysterical assumptions into a computer results in hysterical conclusions, only at the end of the exercise the nature of the inputs is lost and the outputs have the facade of “science.” An example is the notorious “hockey stick” model, which came from a program that produces the hockey stick no matter what data is fed into it.

Foster goes on to quote management guru Peter Drucker arguing the need to keep a firm tether to empirical reality:

We have gone much too far toward dependence on untested quantification, toward symmetrical and purely formal models, toward argument from postulates rather than from experience, and toward moving from abstraction to abstraction without once touching the solid ground of concreteness. We are in danger of forgetting what Plato taught at the very beginning of systematic analysis and thought in the West, in two of the most beautiful and moving of his Dialogoues, the Phaedrus and the Krito…They teach us that experience without the test of logic is not “rhetoric” but chitchat, and that logic without the test of experience is not “logic” but absurdity.

Forget Drucker’s wisdom, and we wind up with a financial crisis, and with climate change policy in the state described by Right Coast blogger Tom Smith:

Whatever [ the New Green Deal] is . . . It looks like we are pouring a lot of money we don't have into technologies that very well may not work to solve a problem we are not sure we have.

Sunny Side Up

Ken Fisher, Forbes columnist and unflappable financial guru (see The Only Three Questions That Count) has added a new feature to his www.MarketMinder.com website:

Sunny Side: A Dose of Positive News
While there’s no shortage of negative news easily found in the press, finding anything positive is challenging. MarketMinder has created this new feature called “Sunny Side”. The section’s sole purpose is to identify positive financial news on a daily basis. It will not be fair and balanced—it’s designed so that if you find yourself feeling especially glum, you can get a dose of positive news. As hard is it might be to believe, there are still many positives in the world.

It is a good idea, a bit of equilibrium for the constant lurching between greed and fear that characterizes the financial markets.

Bring it On

The conservative blogosphere rings with alarums over Rahm Emanuel's statement last week that "You never want a serious crisis to go to waste . . . .Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before."

The blog fear is that the various crises will serve as excuses for the expansion of government power. And so they might, but one should take a more optimistic view. The government already has immense power, much of which is being used badly. So if the crises focus attention on these areas, we are presented with a singular opportunity for reform.

In all the areas we care about at Convergence Law Institute -- intellectual property and the production of pharmaceuticals, preemption and legal reform, energy production, telecommunications regulation and net neutrality -- our side has, we think, the better of the arguments. So if the public is paying attention because of the crises, it becomes what is called in the education trade "a teachable moment."

The familiar saw is that the Chinese character for "crisis" is a mix of the characters for "danger" and "opportunity." This is apparently a bit of a myth, but the reason for its frequent citation that the underlying concept is true. Crises break up old structures of both thought and action, and open up new possibilities. Destruction, including destruction of ossified ideas, is a precondition of creation. So if the saw is not true, it should be.

"The only safe plan for the [Fed] is the brave plan"

The sudden announcement that the US will bail out Citi is unnerving, and the Monday morning comments are shaping up as "don't PANIC"!

But it makes sense. The rationale seems to be that if the economy regains it's footing, then the values of the underlying assets will be good and the Treasury will make some money. At the moment, private capital is so spooked that it is sitting on the sidelines, unwilling to respond for fear that the economy will not regain its footing.  So the government is in self-fulfilling-prophecy land. If it acts boldly on the assumption that the underlying economy is okay, then it will be. And if the government goes into a turtle-like hunkering down, then things will indeed go to hell.

As Bagehot said 150 years ago:

The only safe plan for the Bank is the brave plan, to lend in a panic on every kind of current security, or every sort on which money is ordinarily and usually lent. This policy may not save the Bank; but if it do not, nothing will save it.

What's Wrong With Washington

Last Tuesday, at the annual dinner honoring the FCC Chair put on by the Federal Communications Bar Association, a guest looked at the 1500 or so assembled lawyers and lobbyists and commented: "This room is what is wrong with Washington."

He was right. The FCBA has over 3000 members. Their function, mostly, is to write comments and talk to each other endlessly about the correct interpretations of or additions to a body of detailed laws, regulations, and judicial decisions.

The goal is rarely to make the system work efficiently; it is to skew the game toward the benefit of their clients. Above all, it is to freeze the system if any change might occur to the disadvantage of the client. Since everything is to someone's disadvantage, it is rare for things to happen. And if the things that get through the mesh are good things, that is happenstance rather than the design of the system.

The government is the prime culprit here. Congress and the FCC assume that there is some abstract "public good" that can be discerned if only they get one more round of legal comments. When the Commission embraces the free market, it does so only as one tool of central planning -- it thinks the market will produce whatever result is wanted, but should be over-ruled if it goes in another direction, as markets tend to do.

The best thing the FCC did was to resist early pressures to regulate the Internet, which let it grow. But the pressures to meddle are relentless, and most of them were in the room last Tuesday.

Every Silver Lining Has a Cloud

"Innovation" is one of the all-purpose buzzwords. But as a commenter on a blog of that name notes, it is not necessarily a blessing:  "[The] problem is that the ability of tax software to handle the intricacies of outrageously complicated tax laws has allowed for an explosion in outrageously complicated tax laws."

This is a general problem. The ability of the computer to keep track of things means that governments are finding more things that need to be kept track of, and are able to invent more intrusive and inefficient sets of rules, such as Sarbanes Oxley or McCain Feingold. 

A little more of this trend toward super efficiency and we will never get anything done. How about some denovation -- getting rid of stupid innovations.

FTC Patent Hearings

There is a general expectation that patent reform will return to the Congressional agenda next year, so the Federal Trade Commission has put itself at the head of the hearings queue.

On Dec. 5, it "will hold the first of a possible series of public hearings to explore the evolving market for intellectual property (IP). . . .  The FTC will examine changes in IP law, patent-related business models, and new learning about the operation of the IP marketplace since the issuance in October 2003 of the Commission report To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy."

The Chief Judge of the Federal Circuit will give a keynote address, and three panels will address developing business models, recent and proposed changes in remedies law (including their impact on innovation and consumers), and legal doctrines that affect the value and licensing of patents, such as the recent Supreme Court cases on obviousness, declaratory judgment and exhaustion, and doctrines that make the scope and enforcement of patents unpredictable.

Comments will be open until February 5.

Give Me Land, Lots of Land

I know we are in an "information economy," but that does not mean that we can all make a living by sending each other Seinfeldian messages about nothing. Information, to really mean anything, must be about something, such as making things or developing energy resources.

Thus it is disturbing to see Congress moving to "eliminate major recreation and restrict new oil and gas leasing, logging, mining, and all other business activity" in millions of acres.

Let's see -- we don't want to make anything anymore (ooh, manufacturing is so yucky!), we refuse to use our energy resources, the Asians are laughing at our once-proud financial services firms, our food production is diverted into biofuels that take more energy to produce than they return, and now we do not even want to allow people to use pseudo-wild areas for recreation.

So our lives are to consist of sending each other twitter messages about what we are not doing?  I am trapped in a Russian novel --  "Oblomov (1859) . . . relate[s] the story of a man who, deep down, never really wants to get out of bed."

What Bagehot Said

Over the past few months, there have been hundreds of references to Walter Bagehot’s 1873 injunction that in times of panic a central bank should lend without stint against good collateral at a penalty rate.

This is all well and good, but of course a chief characteristic of a panic is that no one knows exactly what collateral IS good. Furthermore, the problem is circular, since the goodness of collateral depends to a large extent on whether the bank does indeed stem the panic.

So I looked up the full quotation, which follows. Note the last two sentences.

And with the Bank of England, as with other Banks in the same case, these advances, if they are to be made at all, should be made so as if possible to obtain the object for which they are made. The end is to stay the panic; and the advances should, if possible, stay the panic. And for this purpose there are two rules:—First. That these loans should only be made at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greatest number of applications by persons who do not require it. The rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the Banking reserve may be protected as far as possible.

Google Comes to Town

On Tuesday, Nov. 18, Eric Schmidt  speaks on What's Ahead: Technology, Economic Growth and Open Government. The talk will also be webcast. "He will offer specifics on such topics as the need to build a 21st Century Infrastructure, support for research and innovation, repairs for our education system, and ways to make the government more open and responsive."

Then on Thursday, Nov. 20, Google D.C. Talks presents the first in a three-part series, Tech Agenda 2009: Building an Infrastructure for a 21st Century Economy.  "The event will examine the crucial role of technology in driving economic growth, with a special focus on the infrastructure needed to foster innovation: an open Internet, broadband access, and a smart energy grid."