Sunday, October 19, 2014

Nobel Prize in Economics

Picture of Jean Tirole

The Nobel in Economics this year went to the dapper Frenchman pictured here, Jean Tirole, a member of the Toulouse School of Economics, and with the Institut d'Economie Industrielle (IDEI). In fact, he chairs the board of directors of IDEI.

Nonetheless, if you are an Anglophone, even if you are reasonably well informed about contemporary academic economics, the odds are good you've never heard of him.

Which is just as well. The selection of a more widely-known figure, Krugman, Kahneman, Mundell, to take recent examples, doesn't really teach us anything. The selection of Tirole naturally leads some of us to wonder why, and so to teach ourselves something. In that teaching-moment respect, the choice is akin to that of Elinor Ostrom a few years back.

Tyler Cowen got the goods, collecting a lot of material about Tirole quickly and effectively on his blog on the morning of the announcement.

About a third of third of the way down Cowen's blog piece, this caught my eye, "He has written some key papers on financial intermediation, collateral, and the agency problems associated with lending." As you might gather from that, he is an analytic numbers-crunching kind of economist, not one of the ideological warriors in the field.

Cowen also links us to a paper Tirole co-authored back in 1997 on financial intermediation. The short version: they worked out a model of intermediation that makes predictions about the consequences of collateral squeezes, a credit crunch, or a savings squeeze.

Through the website that the Royal Swedish Academy of Sciences devotes to these awards you can get a detailed 54-page discussion of the bases for honoring Tirole. You get to those financial intermediaries at the bottom of page 36. By page 39 the authors are describing the "Holmstrom-Tirole model" outlined in that '97 paper as "a workhorse for analyzing issues in financial intermediation as well as corporate finance."

Operating firms, the "real economy" widget manufacturers of the world, can ensure their liquidity in the event of a future crisis by hoarding lots of funds. But, as Holmstrom and Tirole understood, there are inefficiencies inherent in such hoarding. It is much more efficient to have a credit line with a bank. Thus, the buffering role of intermediation.  Yet there must be enough liquidity in the intermediates. Thus, H&T argue, there is a positive role for the public sector, for government Treasuries and central banks.

Tirole has also written about asset-price bubbles: about when they are impossible and under what circumstances they are not only possible but rational and socially useful.

Further (again quoting to document from the Swedish Academy, he has "combined his early work on bubbles with his more recent work on financial regulation...."




Saturday, October 18, 2014

Nobel Prize in Chemistry

Eric Betzig

Nobel week is a fascinating time of year. Each day brings an announcement of one of the prizes, in a way that starts with the hard sciences and seems to build toward the politically contentious pair -- Peace and Economics.

The news in the hard sciences is intriguing (and political in its own way surely, though I am happily abstracted from the sort of academic politics that would manifest itself in such matters). It is intriguing because the bestowal of an award on someone who certainly ISN'T a household name, like the chemists Eric Betzig, Stefan Hell, and William Moerner this year, forces various bright science journalists to explain their life work to the rest of us. And I always enjoy getting some easily digestible field about a subject to which I never otherwise give any thought at all.

Here is the prize committee's own explanation of the work of the three chemists who win this year.

Click.  

I've put a photo of Eric Betzig at the top of this post -- due respect to the others named -- and so I'll include the official biography of Betzig.

Click.

This is all about nanotechnology, which may be the critical way forward for our species. Nina Porzucki, for PRI The World, explains nanotech and this Nobel's recognition of the field here:

Click.

Porzucki's essay includes a now-obligatory reference to a lecture delivered by Richard Feynman in 1959 that serves as sort of a manifesto for the field to this day. "There's Plenty of Room at the Bottom." Now I've referenced it, too. I told you it was obligatory.

Click.

And here is coverage of the subject from India:

Click.

Here's an explanation of why I think this field of science might just be THE issue in our day that will still matter, say, 1,000 years from now.

Click.


Friday, October 17, 2014

Wikileaks

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Wikileaks is now saying that it is about to release more information about the Trans-Pacific Partnership (TPP). It'll be a 30,000 word document.

Okay, you're saying "be still my beating heart" wiseguys, aren't you?

But this could be significant. A year ago, Wikileaks released its first satchel [e-satchel?] of TPP documents, the Intellectual Property agreement.

The participating nations constitute about 40% of the gross net product of the planet. They include: the U.S., Canada, Japan, Brunei, Australia, New Zealand, Singapore, Peru and Mexico.

Critics of the TPP interpreted the materials disclosed in late 2013 as an effort to get higher prices for drugs, higher profits for Big Pharma.  

So: what has Wikileaks got in store this year?

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The above photo shows the leaders of all the TPP member states as a 2010 summit.

Thursday, October 16, 2014

Proposed Ending for Book


 
We have travelled a long way. A look back is a good way to end a journey.

We began with a discussion of some of the concepts essential to any discussion of contemporary finance. Why do stock prices move? Do they move randomly? We discussed the fact that modern finance theory has long used the bell curve as a randomness base line.

Related to this, we said that the efficiency of markets, built as it is upon their liquidity and transparency, as well as the fact that a lot of very smart people are looking for an edge in competition with one another, is an adequate explanation for random movements, but that inefficiencies of inefficiencies of markets, which show up as skewed or otherwise non-normal curves, require other explanations.

From there we moved to the questions: how stock options derive their value? And, what are the defining facts about bonds, either corporate or sovereign? We also discussed accounting, and so the balance-sheet difference between stocks (as equity) and bonds (as debt).

In the second section, we turned to the recent history of finance capitalism,  both the ways in which academia understands it and the way in which it is in fact practiced. In the matter of practice, we discussed the Clinton era crises over Mexico and East Asia, and we worked our way forward through the internet revolution, the dotcom bust, the Bush II era housing bubble and its bust, the fall of Bernard Madoff, and the rise of high-frequency trading in the markets, along with the disappearance of those colorfully jacketed old-fashioned floor traders.  

Since then, the rolling crises have been those of the European sovereigns, as the continent tries awkwardly to come together as a single financial entity while several of its participant states seem poised to come apart.

A rescue package for Greece, announced by the European Financial Stability Facility in July 2011, is symptomatic of the broader rolling crisis. Though the announcement looked a lot like a dressed-up default, investors reacted with relief. Bad though it was, it still seemed to them a stumble forward rather than back.

In this third section, we have tried to extrapolate near-term future trends based upon three legacies: the nation-state form, the growth of militant Islam, the increasing significance of the blend of secularism and Islam in the nation-state of Turkey, and now the availability of alternative 9non-nation-state based) currencies. I believe an attentive reader has received a fine return on his investment in terms of the grasp of the existing and unfolding world, and I could without further ado rest my labors.   

Except that I wish to express my own sense of optimism about our species. Here it is: I see the world of finance as part – an important part, though not the important part – of the continuing effort of the species to reconcile with one another, to allow one another to pursue a variety of disparate life goals without conflict. In the end this will mean, this must mean, that we or our descendants (not too far distant) will find ways of interacting that do not depend upon sovereignty, hierarchy, and command.  

This is why the cryptocurrencies are so important. Each is a peer-to-peer network, where there is no central bank, nor any central computer, nor even any central cloud. There is no central anything, no chain of command, no highest link. There are peers.

I look forward to the day when humanity itself shall be one really big peer-to-peer network.

Sunday, October 12, 2014

Geoengineering



I belong to a facebook group on "Climate Change Discussion," and recently another participant, David, in that group offered the following reflection:

As powder is heavier than air (aerosol), as demonstrated by the two year temperature reduction after Krakatoa and similar volcanoes erupted, doesn't that mean all geoengineering is pointless (as well as extremely toxic) as the powder can only stay in the air and block the sun out for the same period and then return to the status quo? If so why do Spice and the Gates Foundation spend millions or more researching it when we probably already know not only would it be a very short term effect but probably not enough chemicals in the entire world to carry it out?

The kind of geoengineering David has in mind here provided material for a full chapter of McKenzie Funk's book, WINDFALL.

Yes, there are ideas in some circles, among people who accept that climate change is both real and troublesome, that the best way to address it is technological. If humans can add ... something ... to the existing atmospheric mix we establish a lasting temperature equilibrium.

As Funk says, there are three sorts of people who advocate geoengineering on the necessary scale, or at least serious research into how it might be done: scientists "deeply afraid of run-away climate change; free-market advocates deeply afraid of mandated carbon cuts; and the capitalists or philanthrocapitalists who sustain them both."

Newt Gingrich presumably was speaking for the second category when he said, "Geoengineering holds forth the promise of addressing global warming concerns for just a few billion dollars a year. instead of penalizing ordinary Americans, we would have an option to address global warming by rewarding scientific innovation."

Parenthetically, I don't know when exactly Gingrich said that. There is no documentation of it in Windfall, and nothing more specific on the dating than that it was said prior to his presidential campaign of 2012.  Some googling gets me to other sources that agree in attributing this quote to him, and that seem to date it to 2008, when Congress was considering a carbon tax bill and Gingrich thought the prospect of an engineering fix would help kill that idea.

I'd like to thank David for bringing up the matter and giving me something upon which to ruminate.

Saturday, October 11, 2014

Contra Wittgenstein

Hubble view of barred spiral galaxy Messier 83.jpg


I hold to an understanding of the word "world" such that:

1) whether the world is everything that is the case is an open question;

2) but not a very interesting one.

All clear?

Friday, October 10, 2014

High-water marks



In yesterday's entry here, I made what may have seemed to some a quite cryptic observation about "high water marks."

To review, I said that the use of a 20%-of-gain element in the fee structure of hedge funds makes an issue out of the high-water mark, but that I would discuss this at another day.

The underlying idea is this. A hedge fund manager takes as his compensation 20% of the increase in fund value over the last recorded maximum.

Suppose a fund was worth $3 million at the end of year 1. Then it had a bad second year, and ended that annum worth only $2.5 million. No performance fee for them, of course (they have to content themselves with their share of the AUM.) In the third year, they do somewhat better, and get the value of the whole back to $3 million.

In their heart of hearts, the managers would surely like to say that they grew their fund by $500,000 in year 3, so they are entitled to 20% of that, or $100,000. But they can't. By standard contract terms, the profit is measured against the previous high water mark. so here it is ... zero ... at the end of year three.

Good luck with a better year four guys.

Here is an academic discussion from 2007.