26 July 2015

Sacks, Shiller, Stiglitz

A pretty famous book, for the geek crowd at least, is "Godel, Escher, Bach". So, today brings an alliterative triad. Cool.

Once again, we enter the world of incentive and motive over data. Data's been taking rather a nastry beating here, of late. But, if one recalls how we got The Great Recession, it was the primacy of motive (financial services taking all the profits and sloughing the costs of house mortgages) and incentive (returns on financial instruments look greater than on physical investment) over data (the ratio of house price to median income going nuts) then it's not a stretch to keep an eye on those two balls in the air.

And not to forget: we're on the asymptote of knowledge of the physical world. Well, at least in terms of what modes of science research might yield consumable products. Tang isn't in the offing. Nor is Mr. Fusion, as some knuckleheads would have us believe.

So, let's start with Sacks. He didn't contact me first about the title, "My Periodic Table", but the allusion, that I've used more than once in relation to what remains unknown about the physical world, is eerie. He writes about his personal asymptote.
I almost certainly will not see my polonium (84th) birthday, nor would I want any polonium around, with its intense, murderous radioactivity. But then, at the other end of my table -- my periodic table -- I have a beautifully machined piece of beryllium (element 4) to remind me of my childhood, and of how long ago my soon-to-end life began.

Shiller discusses his standard topic, housing. Regrettably, he still ignores the elephant in the room: are the current rises, regionally, out of sync with median income in those regions? One would think that a deep thinker on housing, and how the Great Recession came to be, would put such data front and center. Rises in house prices in the presence of rising median income are not dangerous. Rises, without such matched income, are what fueled the Great Recession. It remains true that The Giant Pool of Money chases low capital (wholly financial, of course) instruments. ROI is the ratio of returns to money put up. Put up little money, and get a WhatsApp $19 billion. Why build real output, when you can have a fat bank account without actually creating anything substantial? Who will make carrots in the face of such instruments?

Shiller's article asserts that short selling is the panacea for bubbles. But he never demonstrates how or why the mechanism works. Too bad.
...in 1977 Edward M. Miller pointed out in The Journal of Finance something that should have been obvious: Efficient markets require the possibility of selling short. In the stock market, for example, with short-selling, people who think the market is overpriced and headed for a fall can borrow shares and sell the borrowed shares at the current high price. If share prices do indeed fall, they can buy the shares back at a lower price and repay the loan, with a profit.

How is this action, a micro-economic process, supposed to stop bubbles from occurring? He never really says. Too bad. Well, the theory is thus in a nutshell. In Mr. Market, short selling creates artificial shares in the market. Greater supply, therefore drives down the price. What Shiller doesn't discuss why house prices might be bid up in the first place. The run up to the Great Recession was fueled by mortgage companies (not banks, in the beginning) fiddling the rules in order to create mortgages far above what incomes had previously supported. That's just corruption, not smart money (or dumb money) doing a lemming run. The various derivatives, which created the demand for mortgages in the first place, were themselves created to absorb The Giant Pool of Money that wasn't interested in becoming physical investment. In other words, the last housing bubble was secondary effect of the demand for financial instruments by the Giant Pool of Money. The Giant Pool continues to grow, so we can expect that nervous money (that which doesn't want to wait for physical investment to prosper) will, yet again, demand more fiduciary instruments. Whether the new rules will prevent the shenanigans this time? Only the Shadow knows.

What is true,
The bottom line is that there is no reason to assume that the real estate market is even close to efficient. You may want to buy a house if you love it and can afford it. But remember that you cannot safely rely on "comparable sales" to judge that the price is fair. The market isn't efficient enough for that.

What Shiller ignores is that house buyers don't buy based on house price, but monthly payment. That nuance was what allowed Countrywide, and later others, to create mortgages with initial payments within budgets, but which exploded later. Why? Since the bubble began to inflate, mortgage brokers could say, "well, before your mortgage re-sets above your ability to pay, you'll sell off the house at a much higher price. You get to keep some of the capital gain, too boot." Until you couldn't any more. It's that simple.

The point of recent housing bubbles is the simple fact that such bubbles have occurred not because irrational middle-class yuppies get in over their heads, but because mortgage creators make mortgages for ever increasing values disconnected from incomes. If Congress had the gonads to codify a loan to income ratio, housing bubbles would disappear in an instant. But the financial services industry won't allow that.

Finally, Joe Stiglitz. He takes on Greece, yet again. What I'd forgotten: he's ridden in this rodeo before;
As I read the details, I had a sense of déjà vu. As chief economist of the World Bank in the late 1990s, I saw firsthand in East Asia the devastating effects of the programs imposed on the countries that had turned to the I.M.F. for help. This resulted not just from austerity but also from so-called structural reforms, where too often the I.M.F. was duped into imposing demands that favored one special interest relative to others.

So, what's the agenda? It's WWIII, but without the guns (so far). The Germans are determined to punish the little people, by keeping them in economic chains.
... the I.M.F.'s current managing director, Christine Lagarde, said that there needs to be what is euphemistically called "debt restructuring" -- that is, in one way or another, a write-off of a significant portion of the debt. The troika program is thus incoherent: The Germans say there is to be no debt write-off and that the I.M.F. must be part of the program. But the I.M.F. cannot participate in a program in which debt levels are unsustainable, and Greece's debts are unsustainable.

He provides a stark example of the mercantilism of the Germans
Consider the case of milk. Greeks enjoy their fresh milk, produced locally and delivered quickly. ... In 2014 the troika forced Greece to drop the label "fresh" on its truly fresh milk and extend allowable shelf life. Now it is demanding the removal of the five-day shelf-life rule for pasteurized milk altogether. Under these conditions, large-scale producers believe they can trounce Greece's small-scale producers.

Imagine the pettiness. Certainly, according to reports, the troika will protect the wealthy. You know, the ones who buy Mercedes and Audis.

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