Global financial system implosion begins
- Thread starter Falcon
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@ DD
Adjust the terminology and numbers in Dooling's op-ed as you wish - it doesn't detract from the point he (and Kaczinski) is making.
The trouble with a system predicated on perpetual growth in the context of Tainters complexity/yield graph, is that once the 'peak performance' point is reached, the subsequent decline is likely to be rather more abrupt than the gentle one depicted in the graph.
The moment further performance increases are impossible, the 'system' ceases to grow - if it is dependent (as a debt-based monetary system is) upon perpetual growth, it's likely to fail suddenly and completely.
A global network of lightning-fast machines to do the trading only makes it more likely to be very 'sudden'.
'Change it! Change it!'
Here's a bit more from Taleb:
THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS [9.15.08] By Nassim Nicholas Taleb
Adjust the terminology and numbers in Dooling's op-ed as you wish - it doesn't detract from the point he (and Kaczinski) is making.
The trouble with a system predicated on perpetual growth in the context of Tainters complexity/yield graph, is that once the 'peak performance' point is reached, the subsequent decline is likely to be rather more abrupt than the gentle one depicted in the graph.
The moment further performance increases are impossible, the 'system' ceases to grow - if it is dependent (as a debt-based monetary system is) upon perpetual growth, it's likely to fail suddenly and completely.
A global network of lightning-fast machines to do the trading only makes it more likely to be very 'sudden'.
'Change it! Change it!'
Here's a bit more from Taleb:
The Dangers Of Bogus Math
I start with my old crusade against "quants" (people like me who do mathematical work in finance), economists, and bank risk managers, my prime perpetrators of iatrogenic risks (the healer killing the patient). Why iatrogenic risks? Because, not only have economists been unable to prove that their models work, but no one managed to prove that the use of a model that does not work is neutral, that it does not increase blind risk taking, hence the accumulation of hidden risks.
Figure 1 My classical metaphor: A Turkey is fed for a 1000 days—every days confirms to its statistical department that the human race cares about its welfare "with increased statistical significance". On the 1001st day, the turkey has a surprise.
Figure 2 The graph above shows the fate of close to 1000 financial institutions (includes busts such as FNMA, Bear Stearns, Northern Rock, Lehman Brothers, etc.). The banking system (betting AGAINST rare events) just lost > 1 Trillion dollars (so far) on a single error, more than was ever earned in the history of banking. Yet bankers kept their previous bonuses and it looks like citizens have to foot the bills. And one Professor Ben Bernanke pronounced right before the blowup that we live in an era of stability and "great moderation" (he is now piloting a plane and we all are passengers on it).
Figure 3 The graph shows the daily variations a derivatives portfolio exposed to U.K. interest rates between 1988 and 2008. Close to 99% of the variations, over the span of 20 years, will be represented in 1 single day—the day the European Monetary System collapsed. As I show in the appendix, this is typical with ANY socio-economic variable (commodity prices, currencies, inflation numbers, GDP, company performance, etc. ). No known econometric statistical method can capture the probability of the event with any remotely acceptable accuracy (except, of course, in hindsight, and "on paper"). Also note that this applies to surges on electricity grids and all manner of modern-day phenomena.
THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS [9.15.08] By Nassim Nicholas Taleb
Re: Computer modelling of risk...
Even Charles Babbage, who invented the things, suggests (170 years ago) that we
Even Charles Babbage, who invented the things, suggests (170 years ago) that we
RhymnRzn
anti-doter
they should've shut em down way back when the markets were going UP beyond the sober view: they were launching into outerspace and leaving the rest in the dirt. welcome back to earth.
hipipol
Peckham Wry
Several points
! D.F Ypir possition is that "any system predicated on continual growth is bound to fail" -true, however EVRY system of governemnt or economic organisation is predicated on the notion of increasing population. How you stop people breeding is NOT an economic one. Ecoonomies have to grow in order to feed all the new people plus - in the developed nation s at least - the tendency for people to like longer
I think you would have a better argument if you pointed out that what is actually being chased is "continual increaase in the RATE of growth" - not linear but exponential growth, hence the emergence of products like CDOs
2 DD - agree with the analogy of insurance - effectively the reason derivatives came into existance. The media has been throwing the notional value of all contracts outstanding and quoting them as inivetable losses - 90% of this stuff will NEVER actually get executed
Generally re- program tading and algos
It is true that the 87 crash was as sudden as it was partly because of early black box program tade systems, and yes the speed the systems can react can take the breath away, however, as virtually all profressional investors are armed with very similar toolsets in effect, they pretty much net out accross the market
The best Quants are NOT in wall street, they are in Grand Cayman, or Greewwich (US one, not just down the Thames!) or mayfair. The hedgies have the smarts, the issuers of the CDO and CDS dont have the smarts.
Go to DE Shaws website, ask for an application form to join em
The pages of guff that turn up in your inbox will give you a vague feel for the kind of guys the hedgies hire.
It is sell side firms that issue the products, only Goldmans had anything like the brainpower of their clients. It is mainly a failure of Governance - these credit derivatives markets are largely unregulated. Its a bit like letting everyone who buys a Ferrarri simply drive it away without the inconvenience of actually having to pass a test - you know they were clever enough to get the money to buy this thing, course they'll be cool behind the wheeel
Stupidity
Oh yeah, Greenspan is now pro regulation,...hmmmm horse barn door, etc spring to mind......
! D.F Ypir possition is that "any system predicated on continual growth is bound to fail" -true, however EVRY system of governemnt or economic organisation is predicated on the notion of increasing population. How you stop people breeding is NOT an economic one. Ecoonomies have to grow in order to feed all the new people plus - in the developed nation s at least - the tendency for people to like longer
I think you would have a better argument if you pointed out that what is actually being chased is "continual increaase in the RATE of growth" - not linear but exponential growth, hence the emergence of products like CDOs
2 DD - agree with the analogy of insurance - effectively the reason derivatives came into existance. The media has been throwing the notional value of all contracts outstanding and quoting them as inivetable losses - 90% of this stuff will NEVER actually get executed
Generally re- program tading and algos
It is true that the 87 crash was as sudden as it was partly because of early black box program tade systems, and yes the speed the systems can react can take the breath away, however, as virtually all profressional investors are armed with very similar toolsets in effect, they pretty much net out accross the market
The best Quants are NOT in wall street, they are in Grand Cayman, or Greewwich (US one, not just down the Thames!) or mayfair. The hedgies have the smarts, the issuers of the CDO and CDS dont have the smarts.
Go to DE Shaws website, ask for an application form to join em
The pages of guff that turn up in your inbox will give you a vague feel for the kind of guys the hedgies hire.
It is sell side firms that issue the products, only Goldmans had anything like the brainpower of their clients. It is mainly a failure of Governance - these credit derivatives markets are largely unregulated. Its a bit like letting everyone who buys a Ferrarri simply drive it away without the inconvenience of actually having to pass a test - you know they were clever enough to get the money to buy this thing, course they'll be cool behind the wheeel
Stupidity
Oh yeah, Greenspan is now pro regulation,...hmmmm horse barn door, etc spring to mind......
Bernie Gunther
Fundamentalist Druid
There's fairly convincing evidence from a number of sources e.g. this in Nature that population growth is stabilising.
Anyway, closely coupling human life-support systems to an apparently chaotic system of financial mass hallucinations designed to benefit a tiny rentier class isn't the obvious way of making sure everybody gets fed and has a decent life.
A problem that is likely to become more acute ...
Anyway, closely coupling human life-support systems to an apparently chaotic system of financial mass hallucinations designed to benefit a tiny rentier class isn't the obvious way of making sure everybody gets fed and has a decent life.
A problem that is likely to become more acute ...
newbie
undisambiguated
not only there but here as well. The knock-on consequences are starting to cause difficulties: already I know of a sheltered retirement block with at least 7 empty flats because the residents have died and the stagnant market prevents anyone replacing them. If the elderly are unable to sell their home or buy their way into the sheltered accommodation they will, almost inevitably, become unnecessarily reliant on social services. Meanwhile, in London it's traditional for a lot of parents to move out when their kids reach primary school age, and another, larger group to go just before secondary age. London school provision is calculated knowing this. If the freeze continues there will be more kids than places next September. watch this space
hipipol
Peckham Wry
I would rather a "tiny rentier class" than say the Cadres of say the Chinese Communist party or any other cntrally cotrolled state
The danger here is seeing a number of greed driven eveil genius types someone bending the world to their twisted will - for a start it assumes they are actually in control, which I bery much doubt. It also assumes some unity of porpose in such a group, which I also seriously doubt
What has happened is that no fucking effort was made by Governments globally to actually find out what lay behind their burgeoning Financcial markets. Most of the products that caused the problem in the banks - I am not talking about trade imbalances, commodity bubbles whatever, just the finance biz - are OTC products - ie over the counter, which is a one off agreement with varying conditions every time they are done but conforming to rough guidelines, they are not like exchange traded products where evryone can see what they are - their are specific agreements between two counterparties. It is difficult to police that sort of market, but actually very little effort was made to do so - the upshot of which is that a lot of dodgy practice then took place - both before and after the issuing houses got hold of the raw loans and mortgages and after wards with the connivance of the ratings agencies.
There are rules, but with no coppers about tho, whey hey, the theives pop out. It does not mean that everything about the system is wrong - it means that some fuckers did not do their jobs and some fuckers were/are dorrupt
For those that believe that somehow a chance for universal change has come about, I have disappointing news - the 1890s and the 1930s were worse. This will be bad but it is not going to bring Capitalism crashing down
ymu
Niall Ferguson's deep-cover sock-puppet
With the whole situation made much more acute by the willingness of Western governments to allow all the cash from the "boom" to end up almost entirely in the pockets of the top 1% - giving them ever more incentive to create phantom profits because they'd get to keep more or less every single penny of it.
Note the phantom incomes in the top 1% which disappeared after the dot.com bubble, but which were then rapidly recovered by the housing and cheap credit bubbles.
It won't bring Capitalism crashing down - you are correct. It'll just mean New Deal-esque type measures and more regulation for a while, and then we'll forget and it'll happen all over again. We probably are just that stupid and gullible as a species.
Bernie Gunther
Fundamentalist Druid
What matters is the entirely unnacceptable risk inherent in closely coupling our life-support systems and our well-being in general to the aforementioned mass hallucination, allowing it to turn around fuck us all whenever it goes wrong.
Whether it's effectively serving the interests of that tiny rentier class or not, it's certainly not in the interests of the vast majority of people on earth to allow this situation to continue.
A fairly large number of those in e.g. south america who've been 'structurally adjusted' for its benefit one time too many have already realised this.
I think it's only a matter of time before everyone else does too ...
Whether it's effectively serving the interests of that tiny rentier class or not, it's certainly not in the interests of the vast majority of people on earth to allow this situation to continue.
A fairly large number of those in e.g. south america who've been 'structurally adjusted' for its benefit one time too many have already realised this.
I think it's only a matter of time before everyone else does too ...
ymu
Niall Ferguson's deep-cover sock-puppet
I agree, but I doubt any serious revolutionary move will come from the West (unless Obama loses the election, and even then, it won't be anti-capitalist) - reform of capitalism is the furthest we're likely to go. Despite the inequalities and brutalism of capitalism, it's been far far worse for those in the countries we steal most of our wealth from.
South American and Africa have largely been exploited for their natural resources - the more advanced political systems and different history of South America has put them on a firmly socialist path and the US is no longer in a position to directly interfere as China is now more influential south of the border. Africa is much more messy politically with many states being effectively under foreign control - China is investing heavily there also. I think terrorism is more likely than revolution in Africa right now.
I'd have thought that Asia would be the most likely source of anti-capitalist revolution. The capitalist model in India and, to a slightly less extreme extent, across much of the rest of Asia, have created very extreme income inequalities with some of the very richest people in the world living alongside hundreds of millions of the very poorest. There are many deeply unpopular despotic governments and a lot of popular unrest in the last couple of years - although, as in Venezuela, the right is fighting back in Thailand and perhaps elsewhere.
Bernie Gunther
Fundamentalist Druid
I'm not picturing a revolution necessarily. Probably something more like the collapse of the Soviet Union.
A prolonged economic (and perhaps given enough time, environmental) crisis, combined with a fundamental and permanent loss of legitimacy of increasingly ineffective and corrupt states in the eyes of the masses.
I don't think effective reform is possible, because finance capital has too much power over the states in question, but I imagine there might be some lip-service to the idea of reform, much like Gorbachov's half-arsed attempts to reform the Soviet Union before it fell apart.
After all, how many people thought the Soviet Union was going to collapse the way it did? You hear a lot of people claiming credit after the fact, but I don't remember many of them saying so before it actually happened.
A prolonged economic (and perhaps given enough time, environmental) crisis, combined with a fundamental and permanent loss of legitimacy of increasingly ineffective and corrupt states in the eyes of the masses.
I don't think effective reform is possible, because finance capital has too much power over the states in question, but I imagine there might be some lip-service to the idea of reform, much like Gorbachov's half-arsed attempts to reform the Soviet Union before it fell apart.
After all, how many people thought the Soviet Union was going to collapse the way it did? You hear a lot of people claiming credit after the fact, but I don't remember many of them saying so before it actually happened.
8ball
Decolonise colons!
That's because few people were actually listening before it happened.
I came across an interesting paper (via Robb again) that deals with this point (in the context of 'The Great Depression'):
http://en.scientificcommons.org/1049851
That's right. In fact the abolition of capitalism needn't involve messy and violent struggles over the expropriation of physical property. Since capital doesn't actually exist, all that is necessary for its abolition is that people cease to believe in it. And as you suggest, I think that might well happen very suddenly and unexpectedly. Its either that or Armageddon anyway.
Nice idea, except that the financial and technology explosion has equipped Asian leaders far better than they were 20 years ago to control any dissent.
And the fact that most people living south of the equator have been resigned to their poverty for generations - resignation being the only defence mechanism left.
This combined with pervasive, colonial, "internal security" laws left in place by, predominately British, detaching imperial powers (as well as the even harsher legal paradigms evident in those countries that escaped colonialism,) and an impending flattening of the global poorest, leaves me pessimistic regarding the opportunity for uprising.
That and the disinterest of western governments in supporting any grassroots movements anywhere (Burma/ this year being an example,) - let's face it, at government/business level, we live in a globalised world and the interests of these "elites" are aligned.
I've been warning of the risk of seismic social unrest on the mainland for a long time and I think the coming challenges will test my hypothesis, but I still can't see any real chance of a groundswell of truely organised political activism in East Asia - life's harsh enough, best to keep your head down, sadly.
Woof
That's the crunch.
The hyper-optimisation at the expense of resilience that has taken place in the world of finance has also occurred in the systems that produce and distribute food, energy and the other things we depend on to keep us alive.
For instance, major supermarkets have become dependent on highly optimised centralised distribution systems to keep food on the shelves, manufacturers have adopted 'just-in-time' ordering systems (where local 'stock' inventory is kept to a minimum), a deregulated electricity distribution system buys in generating capacity mere hours before it is required.
All of this hyper-optimisation erodes system resilience, leaving the systems ever more vulnerable to shock.
The other aspect (which I feel is being missed) is that, due to all this hyper-optimisation, the scope of the 'crisis' is global.
This 'crisis' is both qualitatively and quantitatively different from the 1930s in that back then, global economic systems were sufficiently decoupled from each other so as to afford at least some resilience.
As the crisis of the 1930s unfolded, it remained a whole lot more 'localised' than it would today. There was still a 'large external environment of relative normalcy'.
Today, the global web of finance is so interconnected that the problem manifests itself simultaneously across the globe - everywhere, at once.
I reckon that there's a very real chance that 'people will cease to believe in it' practically overnight.
ymu
Niall Ferguson's deep-cover sock-puppet
Oh indeed. I don't hold out much hope - it's just the most likely region to tip, as far as I can see. What you say about the technological and political differences is very important - the right fighting back in Asia will likely be much more effective than it has been so far in Venezuela.Nice idea, except that the financial and technology explosion has equipped Asian leaders far better than they were 20 years ago to control any dissent.
And the fact that most people living south of the equator have been resigned to their poverty for generations - resignation being the only defence mechanism left.
This combined with pervasive, colonial, "internal security" laws left in place by, predominately British, detaching imperial powers (as well as the even harsher legal paradigms evident in those countries that escaped colonialism,) and an impending flattening of the global poorest, leaves me pessimistic regarding the opportunity for uprising.
That and the disinterest of western governments in supporting any grassroots movements anywhere (Burma/ this year being an example,) - let's face it, at government/business level, we live in a globalised world and the interests of these "elites" are aligned.
I've been warning of the risk of seismic social unrest on the mainland for a long time and I think the coming challenges will test my hypothesis, but I still can't see any real chance of a groundswell of truely organised political activism in East Asia - life's harsh enough, best to keep your head down, sadly.
Woof
Me too. Imagine all the people who thought they were rich pointing to their bank statements and saying "but look I have all this money, what do you mean I can't buy anything with it...." How deeply satisfying that would be.
Almost a satisfying as watching them try and eat it.
Bernie Gunther
Fundamentalist Druid
Well, I suspect in practice 'stopping believing' in capital would be a complicated, unpleasant and painful process.
In a situation where the state loses what's left of its legitimacy, performs only functions of propaganda, looting and security on behalf of elites insofar as it functions at all, no longer provides basic services in any meaningful way and the basic services they've privatised or which always were private (like our food systems) are seriously malfunctioning and/or stop working altogether due to instability in the global economy to which they are closely coupled, then something along those lines might start to occur.
I'd frankly be just as happy to avoid the experience and see some effective post-Keynesian reforms instead, as in general they would involve less suffering.
I just don't think that the power relationship between capital and the state will allow that to happen and that to continue with business as usual eventually implies increasingly frequent episodes of the sort described; ultimately leading people to find alternatives to capital and its hollow state; alternatives that they can trust with their life-support systems and basic needs.
In a situation where the state loses what's left of its legitimacy, performs only functions of propaganda, looting and security on behalf of elites insofar as it functions at all, no longer provides basic services in any meaningful way and the basic services they've privatised or which always were private (like our food systems) are seriously malfunctioning and/or stop working altogether due to instability in the global economy to which they are closely coupled, then something along those lines might start to occur.
I'd frankly be just as happy to avoid the experience and see some effective post-Keynesian reforms instead, as in general they would involve less suffering.
I just don't think that the power relationship between capital and the state will allow that to happen and that to continue with business as usual eventually implies increasingly frequent episodes of the sort described; ultimately leading people to find alternatives to capital and its hollow state; alternatives that they can trust with their life-support systems and basic needs.
Kaka Tim
Half Arsed and Slapdash till I Die
you only have to cast your mind back to the fuel protests in 2000 - the entire coutnry would have collapsed if the fuel restictions has lasted another 48 hours. We are almost entirely non-self reliant for our food and fuel.
@BG
Yep. All those Biblical injunctions regarding where you're likely to end up if you 'deal with Satan' start to make a little more sense.
I was reminded recently of that parable about 'Heaven' and 'Hell' being essentially identical, with plenty of food etc., but with 'long spoons', the difference being that in the former the 'people feed each other', whilst in the latter they starve whilst trying to feed only themselves.
I commented that they would probably be too busy beating each other to death with the spoons to notice the food.
How the Vicar laughed.
Yep. All those Biblical injunctions regarding where you're likely to end up if you 'deal with Satan' start to make a little more sense.
I was reminded recently of that parable about 'Heaven' and 'Hell' being essentially identical, with plenty of food etc., but with 'long spoons', the difference being that in the former the 'people feed each other', whilst in the latter they starve whilst trying to feed only themselves.
I commented that they would probably be too busy beating each other to death with the spoons to notice the food.
How the Vicar laughed.
Bernie Gunther
Fundamentalist Druid
Useful illustrative example, Argentina's economic collapse a few years ago.
http://uk.youtube.com/watch?feature=related&v=rH6_i8zuffs
Does anyone seriously think something analogous to this couldn't happen here?
http://uk.youtube.com/watch?feature=related&v=rH6_i8zuffs
Does anyone seriously think something analogous to this couldn't happen here?
Barking_Mad
Non sibi sed omnibus
@BG
Yep. All those Biblical injunctions regarding where you're likely to end up if you 'deal with Satan' start to make a little more sense.
I was reminded recently of that parable about 'Heaven' and 'Hell' being essentially identical, with plenty of food etc., but with 'long spoons', the difference being that in the former the 'people feed each other', whilst in the latter they starve whilst trying to feed only themselves.
I commented that they would probably be too busy beating each other to death with the spoons to notice the food.
How the Vicar laughed.
There are many great parables and warnings in SOME Biblical stories, but hey people dont need tall tales from thousands of years ago - we've got computers and telescopes now. We can split an atom and the rest. We're a conceited fucking bunch sometimes
david dissadent
New Member
Asia is full of powder kegs, often religous and ethnic but also poverty. There is probibly a dozen threads worth on that topic alone, but at the moment there is no coherent orginised ideology or movement that I can see other than the affiliated jihadis. This could change rapidly though as the region still has the living memory of the Maoist, Marxist and anti colonial struggles as a template. This together with more modern templates of the likes of the 'color' revolutions, the east european velvet revolutions and the EZLN and even al Quada can be used by people to build revolutionary movements quite quickly. Whether it is desirable is another question. Im not expecting it but Id not be shocked to see a Maoist insurgency in China.
I wouldn't have thought that you need a 'coherent organised ideology or movement' for primary loyalties to become realigned.
Once the 'State' or existing entity becomes unable to provide things like food, energy or security, loyalties will naturally gravitate to whatever (if anything) emerges to assume such a role.
Whatever form such an entity takes - gangs, community supported agriculture, neofeudal arrangements, geographic regions, local currency - if they are able to deliver anything at all, their 'power' becomes subjected to a positive feedback loop, which further undermines the legitimacy of that which they replaced.
Sure, the transition will be messy. See Argentina.
Once the 'State' or existing entity becomes unable to provide things like food, energy or security, loyalties will naturally gravitate to whatever (if anything) emerges to assume such a role.
Whatever form such an entity takes - gangs, community supported agriculture, neofeudal arrangements, geographic regions, local currency - if they are able to deliver anything at all, their 'power' becomes subjected to a positive feedback loop, which further undermines the legitimacy of that which they replaced.
Sure, the transition will be messy. See Argentina.
Bernie Gunther
Fundamentalist Druid
Hezbollah might be a more appealing model of resistance for those in the relevant regions than AQ who seem to make themselves unpopular very quickly with anyone who has the opportunity to get to know them first hand.
Hezbollah on the other hand seem to be quite effective in replacing many of the functions of the ineffective Lebanese state, and seem to command pretty wide local loyalty beyond the obvious religious nutter constituency.
On the marxist side you've still got various more or less maoist outfits running around in India and Nepal in particular.
Where states can no longer deliver basics like physical and food security to the masses, but only function as a vehicle for elites, both local and transnational (e.g. finance capital) expropriating their savings, property, natural resources and so on, all kinds of alternatives might step into the gap. The point I suspect isn't so much their ideology, as whether they can deliver basic rights and security where the state no longer can.
The reason this is relevant here as well as in third-world countries is that we've been moving, at least since Thatcher towards a hollowed out state, which year on year becomes less capable of meeting the basic needs of its citizens and leaves them more dependent on privatised services and an economy which is closely coupled to the global economy and hence leaves them prone to being left broke and helpless on the whim of the markets or when those markets simply go insane due to the inherent instability created by the growing gap between paper claims on wealth and actual production.
Gmart
Well-Known Member
Sure, some stocks will stop being used at least for a bit, the credit ratings agencies will be nationalised and around we go again. The market won't stop existing, it'll just go down for a bit, until more and more people reckon it is at the bottom and then start to buy.
In fact the government could get a jump on the market by opening up sales of stock to the public at large, thus diversifying it, which along with a few choice regulations should see it fine. Some simple Keynesian measures to raise effective demand and bingo Capitalism II. And the added advantage of firing lots of people, thus bigger profits etc.
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