Checksum Arcanius

Scott posted a link to an article (text below). I found it interesting and with some good ideas, but also woefully misguided at some points.

Ten principles for a Black Swan-proof world

By Nassim Nicholas Taleb

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

This is easy. Nothing is ever too big to fail. That is a term invented by bankers and politicians to justify taxpayers supporting banks. Taleb is on to something about hidden risks, though.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

Nothing actually ever has to be bailed out, or nationalized, but I suppose nationalization would be preferable to the current trend of just giving bad companies money.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

No arguments here. It is interesting that the government, the media, and probably most people still view the ones who created this mess “financial experts”.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

I think this is sound advice to financial companies. I see no need to legislate this opinion, however. Rather, get rid of the corporate safety net, and companies will shape up or fail and die, and the problem will fix itself.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

Seems to be sound advice again, for me and for you. Again, I don’t see any need to mandate this sound advice in law. But some people see the need to outlaw salt, so probably not everyone agrees with me.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

The world somehow survived 4 billion years without banning complex financial derivatives. I know that many people think regulation solves everything (it doesn’t), but I really think the world will survive this too. Let those who learned from this go on without blowing themselves up. Again, I see no need to open the door to unintended consequences by trying to set up rules (that will be circumnavigated) to prevent a one-time occurrence from happening again.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

Many banks were robust in the face of these rumors. They are the ones not receiving any money from the government (That’s why I “love” the bailout(s)). Most of the economy is still fine and has proven to be robust in the face of tempestuous times.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

I agree. Many people seem to be under the impression that the legal and economic system we currently have — progressively more regulations outlawing progressively more things and creating progressively more perverse incentives — makes sense, and that it only fails occasionally. Well, it doesn’t make sense, and it is always going to fail.

Of course, many people disagree with me about what constitutes a fix. So I say to them, go ahead and try out your ideas, just don’t force me to be a part of your fix. Then we can both be happy.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

This is very bad advice. Citizens should make this choice themselves, depending on how much risk they are willing to take on. I think it is generally good to have people invested in a market economy — it is one of the best financial engines ever developed.

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

I like the voluntary part. Market capitalism itself has never been broken. It is the continuous political patching of perceived flaws in the that has created the many perverse incentives of our current wonderful system, somewhere in the murkiness between fascism and capitalism and socialism and stupidity.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.

Humans have used their intelligence to out-compete the rest of the natural world. I don’t see why we should model one of the best wealth production mechanisms we have developed yet — the market-based capitalist economy — on a biological world that will continue to become less relevant as technology progresses. This is just useless sentimentalism.

The writer is a veteran trader, a distinguished professor at New York University’s Polytechnic Institute and the author of The Black Swan: The Impact of the Highly Improbable

The writer calls himself a “veteran trader” — ie, a “financial expert”, and wonders if maybe we should take the part of  advice where he says we shouldn’t take the advice of financial experts. As a fellow beneficiary of a relatively free, relatively stable, capitalist market economy, I would urge you to not make the situation any worse.

My friend Theo recently got a ticket for riding his bike in Seattle without a helmet. Another friend, Christine, recently wondered if she could ride her bike around Greenlake without a helmet. I knew that legally, the answer was no, but I didn’t really know exactly how it was illegal — ie, which level of our government is screwing us over in this case, and how it came to be. So I did some research. It ended up being a lot more difficult than it should have been to figure out,but here’s how it became illegal to ride a bike without a helmet:

Part 1: The King County Board of Health enacts Title 9, regarding Bicycle Helmets. The text of title 9 can be found on the Board of Health’s regulations page.

Part 2: The City of Seattle Council votes 9-0 to extend Title 9 to cover Seattle

So, despite the fact that I’ve been passed by numerous Seattle cops while riding without a helmet, ticketed by a UW cop for “running a stop sign” while not wearing a helmet (and he didn’t even mention the fact), and even told by a Seattle Police Officer that “the helmet law is not enforced in Seattle,” it apparently sometimes is, when it suits the officer’s whim, just like the rest of the laws that can be used to arbitrarily screw over anyone at anytime, if you dare cross the gargantuan police state government.

Erik pointed me towards some interesting research with an accompanying website: It tries to understand the moral foundations behind political affiliations. Along with an interesting paper (worth the read, in my opinion), there is a survey that tries to get at the survey taker’s moral foundations. Here are my results (red is average conservative, blue is average liberal, and green is my score):

Hmm…

There was (yet another) post today on Slashdot about Apple’s policies on its App Store for the iPhone. Often I find interesting and funny content in the comments, so I read those as well — and after doing so, I wanted to share some of the better comments and my thoughts:

Budenny commented:

If you don’t like the way Apple runs its store, don’t buy from it.
… If you don’t like gay marriage, don’t do it.
… If you don’t like murder, don’t commit it.
… If you don’t like France, don’t go there.
… If you don’t like math, don’t learn it.
… If you don’t care for Enron, don’t buy the stock.
… If you don’t like subprime, don’t take one out.
Why am I starting to wonder if there might not be something a little bit wrong with this form of argument?

To which Foorat replied:

If you don’t like that form of argument, don’t use it.

Which of course was quite amusing, but Budenny’s point is well taken: I generally advocate the “if you don’t like ___, then don’t ___” approach myself. It’s how I feel about gay marriage, for example — I don’t feel that it impacts me significantly one way or the other, so I don’t care if people (who are not me) do it.

It doesn’t seem to work for murder, though. Why not?  Because the unstated assumption in the argument is that the actions are such that they don’t affect people not willfully involved in the action. Murder, by definition, has an unwilling participant, so that unstated assumption clearly does not hold and the argument fails.

What about gay marriage? I don’t think it affects me personally. I know that others feel differently, though. Just because they are unable or unwilling to state why they feel this way (I recently saw a clip of Mike Huckabee unable to state how his marriage would be negatively impacted by gay marriage), doesn’t mean they don’t feel this way. One of my guesses is that some truly believe that if they go too far down the path of “redefining marriage”, then we will be in for an episode of Sodom and Gomorrah (ancient cities that were destoryed by God with fire for sexual deviation). Maybe people feel that such a claim today would be ridiculed; it doesn’t change how they feel though.

The other examples are similar: “If you don’t like subprime [mortgages], don’t take one out” — this has the implicit assumption that a subprime mortgage affects only the parties involved, which is no longer the popular way of looking at things (I would argue that, without government intervention, the statement would hold predominately true: the effect on the borrowers and lenders would so far outweigh any effect on me that it would be acceptable for others to make and take subprime mortgages. Unfortunately, government stepped in and has made it my burden to pay for the mistakes of evil corporations and stupid people).

The real question that arrives out of this is, who determines what affects other people and what doesn’t? Given that it is an impossibility to account for every externality, what in the world qualifies as a significant enough externality to make the overhead of regulation (with all of its pitfalls) a better solution?

This is the crux of the problem with modern politics, and especially with the libertarian philosophy that I am so fond of: everyone has a different opinion on what is “significant enough.” My set is fairly small, but I know people whose sets seem endless to me. Really, the modern conservative and liberal philosophies are simply different interpretations of where government has the right or responsibility to interfere with people and libertarianism is simply a very small subset of the intersection of the two philosophies.

That is happens to be the right subset is ever-apparent to me, but not, apparently,  to very many others.

From another comment, quoting the original article:

Of course, many are quick to remind that it is Apple’s store and they are free to do whatever they want with it.

Kind of like it is Microsoft’s operating system, and they are free do anything they like with it. Except, it seems, provide a web browser.

Ah, so biting, but so true. But antitrust regulations are a topic for another day.

My freedom-loving friend Jeff E. Jared is a frequent writer of letters to the editor. His latest published letter is well worth a read:

Daniel Bennet believes that the cause of our economic woes “was the institutions which had never had any regulations to begin with” and the repeal of the Glass-Steagall Act (3-25). He couldn’t be more wrong.

Banking is heavily regulated. There’s the Federal Reserve (which controls interest rates and the money supply), the SEC (which enforces regulations), the Glass-Steagall Acts (1932-33), Federal Deposit Insurance (FDIC), capital requirements, reserve requirements, financial reporting and disclosure requirements, credit rating requirements, large exposure restrictions, related party restrictions, affiliation restrictions and payment system requirements. Money is the most regulated thing in America.

Mr. Bennet cited the repeal of the Glass-Steagall as a cause of the crises. But remember, only part of Glass-Steagall was repealed in 1999, the part barring investment banks from combining with regular banks. It kept deposit insurance (FDIC) backed by the government. Thus, the risk was socialized (because FDIC would bail out bad banks) while profit was privatized (now being able to combine, get big and diversify). This is corporate socialism.

Further, the institutions that failed, Bear Stearns and Lehman Brothers, were investment banks that didn’t combine with commercial banks. They were bought by banks that had combined under deregulation to become stronger: B of A and JPMorganChase. So without the repeal, the crises might be worse.

The root problem is that previous government bailouts, like the S & L crises of the 1980’s, were always looming in the background to encourage risky behavior. It doesn’t make sense to forbid banks to diversify their product line to limit risk, while at the same time guaranteeing their deposits–which increases risk. So the repeal of Glass-Steagall didn’t go far enough.

Liberals who support regulation often fall into this trap. They see a problem, and–failing to understand that we don’t have unfettered capitalism and that there are pages and pages of regulations already—they mistakenly demand more regulations, rather than repealing the excessive ones we already have.

The American economy is not a free market. It might have been in 1880, but since FDR and the New Deal 1930’s, we haven’t been close. The key is to deregulate by abolishing the Federal Reserve and ending subsidized insurance to the banking industry, and repealing the rest of Glass-Steagall.

Without the FDIC, banks would be tuned into any potential panics and runs and reel in their loans accordingly when public anxiety rose, like a kind of shock absorber. Subsidies and regulations disable this natural self-regulation of the market.

Jeff E. Jared, Kirkland

Not long after I received a ticket on my bicycle, I saw a driver get pulled over on Stevens Way, the main drag through UW campus, for momentarily stopping to let out a passenger. This is a road where  buses stop every hundred yards, traffic crawls as students constantly cross streets, and people get dropped off from cars in a similar fashion thousands of times a day.

I was riding my bicycle by as the stop happened, and I decided to do something about it. I stopped where the cop had pulled the motorist over and proceeded to give the officer a hard time for what she did. First I asked if what he did was really illegal. She responded yes and I said “Are you serious?” incredulously. I then proceeded to talk to the driver of the car while the officer was doing something else. I told the driver that I would give him my contact info and I would help him fight the total BS ticket. I said this loudly enough for the cop to hear. I then started writing down my contact info to give to the driver. At this point, the officer returned to the car she had pulled over and told me to give her room to speak to the driver. I backed away to finish writing down my info, but then I learned that the officer had decided not to issue a ticket.

Victory!

The only way we can fight police tyranny is to band together and proactively fight it. If someone had done for me what I did for this motorist when I received my ticket, I may have very well not been issued the ticket, and even if I had been issued the ticket, I would have had the witness I am now going ot have to search for in probable vain.

So here is my charge to all of you: If you see a fellow motorist being pulled over for the inane “crime” of speeding, follow them off the road, encourage them to contest the ticket, and offer to be a witness in their case against the state. Although I haven’t seen it work myself, my guess is that a third party who has nothing to gain or lose through testifying would make a very compelling case against the ticket. The state relies on the fact that most people who contest tickets have only their own word against the officer’s, and the officer’s word is implicitly less tainted since the officer is assumed to have little to gain from the ticket whereas the defendant is assumed to have a lot to lose.

One other person, previously unknown to the defendant, saying, “Your honor, I was behind the car that got pulled over and can testify that the car was traveling at or below the speed limit” would go a long way in getting these travesties dismissed. Do it for others, and hopefully when you find yourself being pulled over by a cop who himself speeds at every opportunity with no repercussions, someone will return the favor.

I certainly will.

I went to court today to contest the ticket that a UW bicycle police officer issued to me on February 3, 2009 for allegedly failing to obey a traffic control device.

As I got there early, I sat through a few mitigated hearings before making my way to the contested hearing courtroom. I listened to a few others plead their cases, mostly unsuccessfully, until I had the chance to present my case.

I started out with the nit-picky technicalities, but the judge did not seem to be too interested in them. Maybe I just introduced them the wrong way, but I have a feeling if it had been a lawyer there the judge would have paid more attention to what I was actually saying — for example, the case against me was not mailed to one of the addresses I requested, the ticket was not signed, and the ticket was listed as a non-traffic violation even though the cited RCW is a traffic violation.

Next I proceded with my case. I gave the judge a photo of the intersection where the officer alleges I failed to stop and showed that, by RCW 46.61.755, I was acting as a pedestrian at the time I passed the stop sign and was therefore not required to stop.

The judge said “Well how do I know that’s what happened?” and decided to postpone the courtdate to subpoena the officer to testify.

Since it looks like its turning into a “my word versus his” battle, a battle that police officers will always win unless there is compelling video evidence to the contrary, my next step is to find some witnesses who can back up my story. This is no small task — the incident occurred two months ago — and more importantly, a college quarter ago — and the only witnesses were random people out and about at 10:40 am. Perhaps my best bet is to stand out there with a sign saying I’m looking for witnesses, but even that seems like a long shot.

A more realistic option will be to postpone the court date as long as possible, hope the officer doesn’t show up, and if he does quiz him about other facts in the case — such as the color of the car I rode alongside as I came to the stop sign, the color of my bike and my backpack, about how many bicyclists ran the next stop sign where he detained me while he ticketed me, and so forth. But even that seems like a losing battle.

And if I lose that battle, I will appeal based on the unsigned ticket, the traffic-vs-non-traffic disparity, and the insufficient time to subpoena witnesses.

What I do promise is that the state will, overall, lose much more money going after me than they can possibly hope to gain by forcing me to pay the ticket.

In fact, I would encourage everyone who ever gets a ticket of any kind to contest to the fullest extent of the law — if we make it so expensive to enforce these inane laws that overall they lose money, the laws will either go away or become unenforced, which is better for everyone. Maybe the cops can go back to stopping and solving real crimes instead of harassing motorists and bicyclists on UW campus.