Saturday, January 26, 2013

Friday, January 25, 2013 Nassim Taleb Talks Antifragile, Libertarianism, and Capitalism's Genius for Failure


Nassim Nicholas Taleb is a former trader and hedge fund manager, a best-selling author, and a ground-breaking theorist on risk and resilience.
Taleb drew wide attention after the 2007 publication of The Black Swan: The Impact of the Highly Improbable, which warned that our institutions and risk models aren’t designed to account for rare and catastrophic events. Among other things, the book cautioned that oversized and unaccountable banks using flawed investment models could bring on a financial crisis. He also warned that the government-sanctioned housing finance agencies, Fannie Mae and Freddie Mac, were sitting on a “barrel of dynamite.”
One year after The Black Swan was published, a global banking crisis was brought on by the very factors he identified.
Taleb doesn’t identify as a libertarian, but he often sounds like one. He has argued that we need to build a society where major actors have “skin in the game” and our public intellectuals can bloviate without subjecting the rest of us to the consequences of their bad ideas. He supported Ron Paul in the 2012 presidential election and has cited the libertarian economist Friedrich Hayek as an influence.
Taleb has called New York Times columnist Thomas Friedman “vile and harmful” and coined the phrase the “Stiglitz Syndrome”after Nobel-prize winning economist Joseph Stiglitz, which refers to the phenomenon of public intellectuals being held utterly unaccountable for their bad predictions. Paul Krugman and Paul Samuelson are among Taleb’s other Nobel laureate bête noires.
Taleb's new book - Antifragile: Things That Gain from Disorder Taleb’s new book is Antifragile: Things that Gain with Disorder, which argues that in order to create robust institutions we must allow them to build resilience through adversity. The essence of capitalism, he argues, is encouraging failure, not rewarding success.
Reason’s Nick Gillespie sat down with Taleb for a wide-ranging discussion about:
  • why debt leads to fragility (5:16);
  • the importance of “skin in the game” to a properly functioning financial system (10:45);
  • why large banks should be nationalized (21:47);
  • why technology won’t rule the future (24:20);
  • the value of studying the classics (26:09);
  • his intellectual adversaries (33:30);
  • why removing things is often the best way to solve problems (36:50);
  • his intellectual influences (39:10);
  • why capitalism is more about disincentives than incentives (43:10);
  • why large, centralized states are prone to fail (44:50);
  • his libertarianism (47:30);
  • and why he’ll never take writing advice from “some academic at Cambridge who sold 2,200 copies” (51:49).

Thursday, January 24, 2013

Update: Lanny Breuer quit

The day after the Frontline episode aired, Lanny Breuer resigned and the Department of Justice has said they will not cooperate with the PBS program in the future. But since Lanny has successfully run out the clock and the statute of limitations has expired for any and all frauds leading up to the crash, I'm sure he'll be rewarded with a partnership at a big law firm where he will defend Wall St clients with help from his DOJ contacts.

Here are some more money quotes from Frontline's website:

"We spoke to a couple of sources from within the fraud section of the Criminal Division, and through mid-2010 they reported that when it came to Wall Street, there were no investigations going on; there were no subpoenas, no document reviews, no wiretaps."
"We’ve spoken to people inside the Residential Mortgage-Backed Securities Working Group who said that when they began their work in January, February, March of 2012 that they found nothing at the Justice Department in the pipeline, no ongoing cases looking at securitization." No Justice.

And here's a quote from Lanny's recent speech to the Bar Association:

"To be clear, the decision of whether to indict a corporation, defer prosecution, or decline altogether is not one that I, or anyone in the Criminal Division, take lightly. We are frequently on the receiving end of presentations from defense counsel, CEOs, and economists who argue that the collateral consequences of an indictment would be devastating for their client. In my conference room, over the years, I have heard sober predictions that a company or bank might fail if we indict, that innocent employees could lose their jobs, that entire industries may be affected, and even that global markets will feel the effects. Sometimes – though, let me stress, not always – these presentations are compelling.  "

No Justice.   Too big to fail --> too big to jail.

Tuesday, January 22, 2013

Frontline: The Untouchables

FRONTLINE investigates why Wall Street’s leaders have escaped prosecution for any fraud related to the sale of bad mortgages:

Voltron says, here's the money quote from Lanny Breuer, assistant Attorney General for the Department of Justice, Criminal Division.

Frontline: You gave a speech before the New York Bar Association. You talked about your use of nonprosecution and deferred prosecution agreements. And in that speech, you made a reference to “losing sleep at night over worrying about what a lawsuit might result in at a large financial institution.” Is that really the job of a prosecutor, to worry about anything other than simply pursuing justice?

Breuer: I think I am pursuing justice. And I think the whole entire responsibility of the department is to pursue justice. But in any given case, I think I and prosecutors around the country, being responsible, should speak to regulators, should speak to experts, because if I bring a case against institution A, and as a result of bringing that case there’s some huge economic effect, it affects the economy so that employees who had nothing to do with the wrongdoing of the company –

Frontline: Or shareholders.

Breuer: Well, first let’s talk about the employees. Employees may lose their jobs. Shareholders may or may not lose, and shareholders invested. But the employees perhaps did something different.

If it creates a ripple effect so that suddenly counterparties and other financial institutions or other companies that had nothing to do with this are affected badly, it’s a factor we need to know and understand.

We have, as a government and as an administration, dug out of one of the great financial crises in the world. And at the Department of Justice, we’re being aggressive, but we should in fact take into consideration what the experts tell us.

That doesn’t mean we won’t go forward, but it has to be a factor. And if you look at deferred prosecution agreements and nonprosecution agreements, they are a tool that we use in appropriate cases. And we have to continue to use those.

Gold Infographic

Click on the image below to view the big infographic. Be sure to check out part IV, Gold as an Investment

Wednesday, January 16, 2013

Germany wants its gold back

Suddenly after months of mocking those calling for an audit of German gold held in the US as kooks and conspiracy theorists,  the Germans decided they want their gold back.  For some reason it is going to take seven years to return 300 tons of gold, even though the Fed says it has 6,700 tons.  They are also requesting all 374 tons held in France.

For comparison, Hugo Chavez repatriated 110 tons in the summer of 2011, gold went from the $1600s (roughly where it is now) to the all-time nominal high of almost $2000.  The last time Germany repatriated gold was 1000 tons from the UK.  Between 1999 and 2002, The Chancellor of the Exchequer, Gordon Brown, (basically their Treasury Secretary) conducted pre-announced sales of 60% of the UK's gold reserve under the absurd pretext of diversifying away from volatile gold into the more stable Euro. The real reason was to drive the price down to a low of $252 - known today as "Brown's Bottom" - in order bailout the banks that had already swapped the UK's gold for cash.   Gordon Brown's reward for dumping 60% of the UK's gold at massive low point: election to Prime Minister of course!

Tuesday, January 8, 2013

Trillion dollar platinum coin

Steven Colbert's take on it:

Voltron's take: It's silly for congress to pass a budget and not fund it properly.  Congress were the ones that gave the executive branch the authority to issue platinum legal tender coins.  Clearly it violates the spirit of the law and it's silly to argue about the law with the people who make the laws, but in this case it's just a way to break the filibuster gridlock in the Senate.  If the Senate can't get enough votes to raise the debt ceiling, it probably won't get enough votes to repeal the coin law.  Obama should do it.

It also brings to light the absurdity of our fiat money system.

Monday, January 7, 2013

Is gold the answer?

As GASG readers know, I've been an advocate of investing in gold, basically since the beginning.  I don't think we should move to a gold standard for many reasons.  We do need monetary reform, though.

The people who are in favor of the gold standard now (or fiscal austerity) are the same people who made a fortune because of the debt-based money system.  They own debt, not wealth.  Now they want to convert that debt into wealth.  Wealth that can't be inflated away or defaulted on.  They want gold.  If they just tried to convert all of their debt based money into gold by buying gold in the market, the price of gold would go up too quickly.  They want a gold standard to guarantee them gold at the current price.  A free call option.

I read a brilliant reposte to a Paul Krugman column in which the writer "Pavlo" very eloquently describes what he calls the three phase crisis cycle.

In the first phase - The Bubble - you have  some kind of mania or boom.   In the second phase - The Stall - people realize that the mania created way more debt than it can service.  This is when the panic and bailouts happen.  Under emergency conditions, the bad debt is then transferred to, or guaranteed by, the government.  In the third phase - The Payback - the government, which also has no way of servicing this huge debt, has to deal with it through austerity, taxation, write-off, default or inflation.

The Bubble phase can only occur if debt is allowed to grow unchecked.  A debt based money system facilitates this.  A gold standard would inhibit it.  This is the time when a gold standard might be useful, but who would want to take away the punch bowl in the middle of the party?   No, it is during the third phase that the gold standard is proposed so that the claims on wealth that were accumulated during the bubble won't be inflated away.  This same wealth was protected from default when the government took it on during the panic of the second phase.  Once their purchasing power is secured,  they will advocate austerity so that the deflation it causes will allow them to scoop up assets at fire-sale prices.  Those now flush with assets will pour them into the next mania that comes along and the cycle repeats.

This is not the time for a gold standard!  That would only be rewarding the thieves (again).  I do think that monetary reform is essential to breaking this cycle.  This is not such a radical concept, in fact it's historically overdue.  The US monetary system has been reformed every 30-40 years (the last time was when we came off the gold standard in 1971)  The world reserve currency has changed every 100 years or so.  (the last time was when the British Pound fell to the Dollar after World War I)

Our paper money system is antiquated anyway.  In the information age, shouldn't we have some kind of electronic money?

In Money As Debt III, Paul Grignon proposes a self-issued digital currency where people, companies and governments pledge promises of specific goods and services.   As an interesting example, password protected cell-phone minutes credits has become the de-facto currency in Kenya and can be sent by text message.  It doesn't need to be electronic though: Canadian Tire Money is widely accepted in Canada and I used to use NYC subway tokens to buy candy in high school.

What does this mean for us?  Just like the oligarchs who made money during the bubble, you need to preserve your purchasing power.  Unlike them, you can buy gold without having to worry about pushing up the price.  Then you too will be able to scoop up assets at fire-sale prices in the near future and then enjoy the roaring 2020s

Here is a post about the three-phase crisis cycle from Pavlos' blog:

Here is an article on the Safaricom text message payment system: