Libertarianism is toast

[Image courtesy of Toothpaste for Dinner via tbogg.]

I used to spend a lot of time arguing with libertarians, back in the prehistory of the Internet, when that was the primary form of mental infestation found there. It helped me refine my own views a bit, but was mostly a waste of time, and aside from occasional sniping I don't do it any more.

On reading that Alan Greenspan has started muttering favorably about bank nationalization, which is akin to Genghis Khan becoming a pacifist or the Pope opening an abortion clinic, I realize that I have won. Libertarianism is dead, over, finished, kaput. Although if experience is any judge, its devotees won't realize it and will keep on churning out the same brain-dead arguments over and over, which will be even more disconnected from reality than before. In fact, the stronger the role of the state in the economy, the more they will have to complain about, and the more they can pile the blame for every evil in existence on its ample back. So maybe it's good times for them.

However, their role in the last couple of decades of being the useful idiots of the Republican Party will be over (as will, one hopes, the Republican Party). The governing style of Republicans from Reagan through Bush II was to spout small-government rhetoric while massively building up the state apparatus, and to preach fiscal responsibility while racking up massive deficits. Republicans who campaign on a small-government platform deserve to be laughed off the stage, and for at least the next couple of election cycles, might actually get what they deserve for a change.

Report from Davos

I decided to skip Davos this year so am relying on reports like this one (via Whiskey Fire which has pointers to much more).

Two interesting factoids from this article: One, $25 trillion in market value has evaporated in the current financial crisis. That's a lot! Of course, the right interpretation is not that this much value vanished, but that that's how much fake value was hallucinated by an insane system that is now coming off of some kind of analog of a drug binge.

The other factoid is that you, dear reader, ar just as much to blame for this mess as the more obvious culprits, according to one of the economic luminaries at Davos:

One Davos regular, Washington-based Carlyle Group’s managing director David Rubenstein, said he thinks a key issue at this year’s gathering is “who is at fault.” Yet Rubenstein, who was saying at Davos two years ago that the outlook for leveraged buyouts was “very robust,” says responsibility shouldn’t be tied only to him or his industry.

“There are six billion people on the face of the earth, and probably about five billion participated in what went on,” Rubenstein said in an interview. “Everybody participated in some way or shape or form.”

BTW, if I were inclined to be a conspiracy nut, the Carlyle Group would probably be one of the major nodes in the network graph I maintained in crayon on my apartment walls. Oh wait, the internet is my wall.

Jubilee

Wikipedia on the biblical rule of Jubilee:

These Babylonian kings... occasionally issued decrees for the cancellation of debts and/or the return of the people to the lands they had sold. Such "clean slate" decrees were intended to redress the tendency of debtors, in ancient societies, to become hopelessly in debt to their creditors, thus accumulating most of the arable land into the control of a wealthy few. The decrees were issued sporadically. Economist Michael Hudson has maintained that the Biblical legislation of the Jubilee and Sabbatical years addressed the same problems encountered by these Babylonian kings, but the Biblical formulation of the laws presented a significant advance in justice and the rights of the people...this legislation was also eminently practical, in contradiction to many Biblical interpreters who are not economists and who have labeled it "utopian."

My naive reaction to the financial mess was to say, in my stupid way*, that the real economy (the part that actually produces and consumes useful stuff) should be at least capable of being unaffected. Banks may close, hedge funds may evaporate, but farms and factories and their inputs and outputs don't disappear overnight. Can't the real economy of valuable production and consumption continue while Wall Street shrivels into its own black hole of debt?

But of course the mystery of depression is that a disease of the fake economy causes enormous difficulty and hardship in the real economy. The two are inextricably linked, or so it seems. But let's imagine that they could be separated. If the problem is a collapsing network of debt, why not just ignore all that and get on with the business of living? What if we declare Jubilee and make all that ridiculous network of bad debt null and void?

Well, of course, you couldn't actually do that! Civilization would crumble. Even I'm not stupid enough to think that is practical. Except some people who might actually know something about economics are thinking along the same lines:

In the past, when excessive debt burdens were accumulated by government, they tended to do one of two things: either they defaulted-”this is the Argentine solution-where you say, "œAh, I'm sorry, I'm afraid we'™re not going to be able to meet the interest payments this month, and never again will we make the interest payments."

The other scenario is inflation, where the real debt burden is eroded because the money that it's denominated in loses value.

I don'™t think we'™re really going to be out of the woods here until something of that sort happens to the huge debt burdens of the U.S. economy. Either these debts will have to be fundamentally written off in some way, or inflation will have to reduce the real burden.

Inflating our way out of the problem seems like the most likely scenario to me. Hyperinflation sounds like a lot less fun than "Jubilee", but perhaps they amount to the same thing.

*I am quite willing to admit having very little understanding of anything involving money or economics. I used to feel bad about this until I realized that what William Goldman said about Hollywood applies. You can have a (pseudo) Nobel in economics and still bring about ruin.

Big numbers

via, this interview with Zimbabwe's central banker:

In November you shut down Zimbabwe's stock exchange. Will you open it again?
The stockbrokers were creating a money supply that wasn't there. I printed Z$1.5 quadrillion, but the exchange was operating with Z$100 sextillion. So I said, "Who is doing my job?" Unless there is more discipline and honor, the exchange will stay closed. I can't be bothered. I don't know when it'll open. It's a free market, a business which must be allowed to succeed or fail.

But it gets better, as they attempt to outdo astronomy in the orders of magnitude department:

In the absence of credible official statistics, Hanke developed a hyperinflation index for Zimbabwe and in an article in the December 2008 issue of the financial magazine, Forbes Asia, put the annual inflation rate at around 6.5 quindecillion novemdecillion percent - 65 followed by 107 zeros. "Prices double every 24.7 hours," he noted. "Shops have simply stopped accepting Zimbabwean dollars."

I don't believe I've ever seen the words "quindecillion" or "novemdecillion" used before, certainly not concatenated. Whether this number actually means anything in the context of economic reality is another thing -- it's about 2^365, so was probably calculated on the questionable assumption that prices can continue to double every day for a year. It seems that people would just stop using the currency long before then, and indeed they are starting to, but on the other hand the government just issued a Z$ 100 trillion banknote, which will probably be available on eBay for US$10 in a few months.

[Update: I'm not the first to notice that economics far outstrips the natural sciences in the size of the exponents it can generate:

There are 10^11 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers.

-Richard Feynman, physicist, Nobel laureate (1918-1988)

]

Free fall

FDIC seizes three more banks. Citibank has traded at around 45-50 as recently as mid-2007, today it closed at 3.77. So, it's lost over 90% of its value in a bit more than a year. Some analysts are predicting that all US financial institutions will be under government control in a year. Switzerland seems to be in danger of complete collapse, the way Iceland has -- it has banks that are so leveraged that the country doesn't have nearly enough resources to rescue it, in fact "A 16% fall in UBS's assets would wipe out not only all of its equity but 100% of Swiss GDP on top."

Sure wish I had a farm in some out of the way place that I could retreat to when the food riots start.

I'd go broke but I can't afford it

Credit has gotten so tight in recent weeks that companies contemplating a bankruptcy filing can't find the cash needed to get through the process.

-- from the WSJ via Obsidian Wings

Could it really be this simple?

Mark Chu-Carroll has an explanation of what went wrong in the financial institution's risk assessment procedures, which I find a bit hard to believe, but only a bit. If true, it means that these highly-paid technical portfolio analysts were making the kind of mistake you drill out of undergraduates in the second week of an introductory probability course, namely, assuming the independence of evevents (mortgage defaults) that are in fact highly correlated. This seems way too simple an explanation, but maybe it really is as stupid as that.

The slightly more complex version of this is that they knew this calculation was bogus, but were under incentives that promoted the collections of short-term gains at the expense of long-term risks, and somehow shoved this knowledge under the rug.

Also caught a bit of this weekends This American Life episode, which talked to some Wall Street types about what was going on. Sounded interesting but I didn't catch the whole thing and it isn't on the web yet.

Nassim Nicholas Taleb is getting a boost in his reputation from all this, but I'm not sure exactly why. This particular meltdown was not a "black swan", in that it was entirely predictable. But perhaps his distinction between Mediocristan and Extremistan is a key to the theory above. Normally, mortgage defaults are uncorrelated, but in extreme cases they suddenly become highly correlated.

More Taleb here.

All for the lack of tuppence, patiently, cautiously invested...

And you'll achieve the sense of stature
As your influence expands
To the high financial strata
That established credit now commands!



Foreclosures! Bonds! Chattels! Dividends! Shares! Bankruptcies! Debtor sales! Opportunities!