Regulatin’

Posted on by David Wright

Regulation: is there a more terrible word in the English language?

Michael Mandel:

[A]t a time when President Obama is calling  for more innovation,   the wireless industry has produced more genuine new products and services than anyone else. So given the great performance of the industry during this tough period, why the heck does the Federal Communications Commission keep imposing additional regulations on wireless providers?

He presents an incredibly convincing picture for how well the unregulated telecoms industry is doing, from a consumer perspective. Continue reading Regulatin’

Bitcoins

Posted on by David Wright

Here’s Russ and Gavin Andresen, the technical leader on the Bitcoin project.

The Bitcoin project is a supranational currency. There are precedents for this kind of thing in, for instance, the Sims Online game. Trick is, though, the entire Sims Online economy was wiped out because of a bug in the software. It was literally years before they could engineer a replacement system and hard reset of the economy. Bitter remedy, indeed.

I’m also reminded of this book about startup founders. In it, Max Levchin (Paypal) talks about how commercial bankers told him he was “going to get killed by fraud”. He brushed it off at first, but sure enough:

2000 was basically the year of fraud, where we were just losing more and more money every month. At one point we were losing over $10 million per month in fraud. It was crazy.

Luckily for Paypal (and us!), the scale of this disaster, relative to the scale of the dollar economy, is tiny. A disaster to Bitcoin could permanently destroy the trust people have in it. From the interview, it appears that Gavin is underestimating the one-way nature of such an economic disaster. Not to say people won’t be intrigued at first; after all, there was a time before monetary authorities had monopolies on issuing currency.

But our collective memories of free banking are gone and modern societies are very intolerant of risk. Ultimately, there’s only one final insurer of risk: the government. Only it can inflate away economic problems and nuke away physical ones.

The Bitcoin economy, of course, will never have the protection of the monopolist it threatens.

Does Inflation Make Any Sense?

Posted on by David Wright

(I’m not going to attribute all of the ideas below to the places I learned them, mostly because I don’t have time to find all the links)

Inflation is a theme for me at the moment. I’m writing this to think through how it works.

So there’s money out there. In terms of the stock of money, I’m not sure it’s possible for there to be ‘too much’ at any point in time, but there can be too little.  Krugman’s retelling of the babysitting co-op explains this very well. Do read it.

Ok, if some critical mass of people worries about having too little money, that’s bad.

But that’s not very satisfying. What is ‘critical mass’ and what is ‘too little’?

And honestly? I don’t think anybody can answer those questions rigorously.

There are two candidates for instances when we’ve passed that threshold: the Great Depression and the Great Recession.

The orthodox view today is that policy makers collectively* missed the first one and so literally caused the Great Depression. I quote Ben Bernanke (to Milton Friedman):

Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

The irony is astonishing. Obviously it’s harder than it looks.

And I think that’s because the Fed isn’t run by an economist, it’s run by a committee. It’s probably a committee the largely reflects the consensus view of economists, but what if that consensus is non-existent? Inaction. And that spells disaster when the money supply is too tight.

And here’s a real head-spinner, google “deflation trade” and you get this:

The deflation trade is a rising US dollar, rising gold prices, rising treasuries, and falling equity markets.

Anyway, when people think of inflation problems, they don’t think of the Great Depression, they think of the hyper-inflation experienced in some places and the far less scary 70s and 80s in the US.

So what the hell is persistently high inflation? Well, you get from having less money to having more by adding some.

So what happens if everyone suddenly has twice as much money? They’ll probably spend it prices will be bid up.

Ok, so now drop the ‘suddenly’ part. How does the government actually pull this off?

um…

I’m going to take a break here and go read some Nick Rowe.

*By collectively, I mean what their actions did, as opposed to their mouths (or pens) said.

ProGRESS Already!

Posted on by David Wright

This week’s economist has two articles updating us on some windmills technofiles have been tilting at for a decade or so.

First is the health care industry. The article itself is a typically bland offering but, in fairness, the subject is tough to spice up. Health care, like insurance, is a human interaction business and innovation here is glacial.

My mother’s an occupational therapist in a rural area and she spends a lot of time traveling to peoples’ homes delivering care. I’ve learned from her that, in health care, mobile technology is a red herring. This is a solution in search of a problem.

Now, she’s on board in principle. It’s extremely hard to attribute the economic benefits of positive health care outcomes. Costs, however, are very easy to measure, so any countervailing force there is extremely welcome. But does it work?

Automating administrative records only really matters when you need to retrieve those records, usually fairly far into the future. A heavily discounted benefit.

The costs of implementation, however, are significant. To implement an ipad into my mother’s visits to her patients would require replacing pen and paper (with, I kid you not, carbon copies beneath it) with an ipad, a portable printer and keyboard. All while touring this heavily debilitated senior’s house and educating him/her and family. Not any time soon.

It’s always possible that some bonehead will legislate a technological revolution and massively inflate the relative price of health care but, barring that, we’re decades away.

Second is the media industry.

This problem is so strange, isn’t it? We all know where the business is going: on-demand media consumption packages across multiple channels. The problem is that we think of content companies in the wrong way. Much like insurance, the people who control everything the distributors, not the creators. These new online-related distribution models are direct competition for them.

Of course they’re resisting!

Until Netflix and Apple build enough scale to genuinely compete for original content, the model won’t change.

Porno leads the MSM: fewer distribution channels, smaller pie and less spend on overt promotion. In 50 years, viral distribution networks will be king (and free!).

John Paulson Bets on Inflation

Posted on by David Wright

I went to a talk today by John Paulson who has a big bet out on gold.

His logic:

1. inflation is related to money supply (proof? He never mentioned Milton Friedman for some reason)

2. Gold is related to inflation

3. Money supply is increasing, therefore gold will go up

I want to look into it some more, but judging by the graphs in his fancy pamphlet here (take my word for it), there wasn’t anything like today’s spike in the money supply during the last gold run up.

And, um, there isn’t any inflation today.

So has something changed?

Again, I want to do a bit of research here but the short answer is… who knows!? Who cares!? He has a gold fund and it’s up 60% or something.

Take your fancy pants ‘analysis’ and go write some blog posts about it, Poindexter. Those boys might even read it on their way to the bank.

Organizations as Leaders

Posted on by David Wright

In syndicated financial transactions, having larger, higher-status companies on a placement makes a genuine difference in completing it. Generally, a company’s status is closely linked to its longevity and (re)insurers feel this even more keenly. For organizations whose purpose is to absorb economic shocks, the highest achievement is to persist.

Incidentally, I am constantly intrigued by the anthropomorphism. Corporate law aside, companies aren’t persons. It makes as little sense to refer to a conscious entity called “Sony” or “AIG” as it does to say “China” devalues its currency or “America” wages war. Individuals make decisions, not organizations.

Anyway, I get why there are leaders and followers. In the reinsurance world*, where syndicated placements are common, the only accepted competitive advantage is a company’s record of sourcing and selecting risks to assume. Not too hard to copy that, is it. And so you have a relatively homogeneous market with terms usually set by the company longest in the tooth.

The logic here reminds me of an idea I really struggled to understand for a while. I’ll try explaining it with an example from the link.

The number of things we use our eyes for is very large. If all we ever did was look down a pipe, we could get by with lots of configurations: one eye, fifty eyes, etc. But because there are so many tasks for our eyes, there’s really only one solution that works optimally for everything: two eyes.

Systems that need to adapt to many environments tend to converge to an optimal solution. Homogeneity is a sign of progress!

There’s a competing idea that celebrates diversity. This is the theme of Scott Page’s *The Difference*, which taught me two things that I already knew, but always need reminding of: first, diverse problem solving heuristics in cooperation are superior to homogenous ones.  Second, that real solid ‘scientific’ proof of a social phenomenon is a stupendously (stupidly?) rigorous affair.

So, diversity or uniformity? I’m not sure which is right, really, and maybe both are. Diverse heuristics get you to the answer faster, no doubt, but once the optimal answer is discovered, the diversity isn’t very useful anymore. Well, until the environment changes, that is.

Some things always work. Until they don’t.

*Insurers tend to compete with different distribution models; reinsurers, for the most part, don’t.

Vindication

Posted on by David Wright

And here I genuinely thought I was mailing in that last blog post.

I just wrote it a day early!

Genuinely not caring about pressure is perhaps what gives kids the upper hand in poker play:

But really, we don’t know what making $400,000 or losing $800,000 means, because we don’t have families or whatever. This blind spot gives us the freedom to always make the right move, regardless of the amount at stake, because our judgment isn’t clouded by any possible ramifications.”

That’s from the NYT.

And here’s Tyler Cowen on professionals vs amateurs. It’s hard to excerpt his short post:

Amateurism is splendid when amateurs actually can make contributions.  A lot of the Industrial Revolution was driven by the inventions of so-called amateurs.

In fields where risk is high and barriers to entry are relatively low, amateurs will dominate.

Here’s an awesome bit on politicians:

Policymakers need more of a sheer willingness to do the right thing, even if it means sacrificing reelection [depends also on knowing what the right thing is -DW].  Selection mechanisms, however, do not much favor that bravery.  For a sane, well-adjusted person, the job is neither fun nor well-paying, so the job attracts people who love being in office and thus who fail to do the right thing.

Suitability for any given job is, at best, evaluated on messy proxies for future performance. For many jobs, selection criteria have a zero (or even negative!) correlation to expected performance.

Often it is silly to fume about poor performance without evaluating the selection process.

Maybe you’re getting exactly what you asked for?

More on the Great Stagnation

Posted on by David Wright

Interfluidity says:

I think of government, education, health care, and finance collectively as the “information asymmetry industry”

The point there is that these industries are prone to all kinds of market breakdowns, mostly to do with producers knowing more than consumers.

In response, Arnold Kling says:

I think what distinguishes these four industries is that the sellers themselves know less than what people expect.

Hm..

TED likes to divide financial services into agency and principal businesses. I think that Kling is thinking about Principal businesses here. Agents (intermediaries, like myself) have a problem with credibility that I’ve described elsewhere, but I’m not sure that this is where we’re going.

Principal businesses aren’t really financial services, though, are they. They’re more concerned with finding asymmetric payoffs out in the streets (ie fucking people over).

Remember: “Behind every great fortune, there is a great crime”.

Interfluidity makes one more interesting point:

It’s not at all clear that what people conventionally think of as technology is the growth-limiting factor.

He then goes on to say that poor countries have lots of low hanging fruit but don’t necessarily pick it. There are social or political barriers that hold them back and maybe our own social and political barriers are holding US back.

Politics Fires Us All Up

Posted on by David Wright

I recently did tours of two tenement apartments at the NY Tenements Museum.

The tourists were mostly women, which I don’t really understand, but the tours were interesting.

Frequent polling of the group members for their “impressions of what tenements are” or ‘what we would do if we lived here and lost our job’ lent a rankling juvenile quality to the day, but I got past it.

Apparently not everyone does.

We were told one of the last questions of the day once sparked an argument so heated it shut the tour down early and forced an evacuation of the recreated 1920s apartment.

The question, asked in a living room last occupied by an immigrant family from Italy, was: “would you want the government to take care of immigrants who have lost everything?”

Yikes.

Well, FDR, the governor of NY at the time, enacted massive State welfare programs that did just that.*

To be sure, some of parts of this museum were horrifying to 21st century tastes (no indoor plumbing, blah, blah, blah).  But Mary and I both went in expecting some kind of urban refugee camp and came out unimpressed.

And to our astonishment, most of the things that we would personally find unpleasant (common outhouse toilets, no running water), were LEGISLATED ‘improvements’ and vehemently opposed by both landlords and tenants!

Why? Rents had to go up to pay for it!

So easy for sentiment to overpower the minds of an interventionist political elite.

*and, incredibly, his photograph kept Jesus and the Virgin Mary company in the living room

Yune-Yawns

Posted on by David Wright

The anniversary of the Triangle Shirtwaist Factory fire is this week. This event has been coming up in my life frequently of late.

Mary and I just got through this part in a giant 6-part documentary on the history of new York; we recently went through the tenement museum here, which deals with ‘those kinds of issues’; and, on account of the anniversary, there’s been some press comparing that event to political battle over unions in Wisconsin.

It’s a gruesome event and, unsurprisingly, served as a catalyst for pro-union legislation, improvements in workplace safety and I believe its occurrence prevented other such tragedies.

But my hackles always get raised when presented with one-sided narratives. The kind of self-satisfied ease with which left -leaning folks present this event and its ‘context’ only avails itself to the victors of history. Sacrilegious as it is to say, I bet that most factory conditions of the day were tolerable by the standards of the day.

Most isn’t all, of course, and a single disaster like this is enough to condemn the entire system supporting it.

Much as unions really irritate me, I’m not terribly surprised they exist.