Wall Street’s Game of Risk

A relatively thoughtful piece from The New York Times Magazine on the risk metrics used by Wall Street, especially the now notorious Value at Risk (VaR).  However, it still seems like neither the author nor the risk managers they interviewed really get what Taleb is saying.  Or possibly they’re just not willing to admit the implications of what he’s saying: that market outcomes, especially when investing is focused on the short term, are dominated by so-called “rare” events.  And that the consequence (as one of the managers even says outright), is that a lot of the investment banks don’t really have a business model.

Except, of course, for the fact that they can count on the public coffers if they all arrange to go bankrupt simultaneously.  Better, in this case, to fail in a conventional way along with everyone else, and be bailed out, than to play your own game for the long term, like Warren Buffet, and either succeed unconventionally, or have to take responsibility for your own failures, which are then likely not to take place at the same time industry wide.

We’re playing the same game of fat-tails chicken with Earth’s climate, and that story will eventually have the same ending if we are unable to generalize the lessons of this relatively innocuous financial disaster.

Machine Readable Financial Reporting

The SEC will soon require machine readable reporting of all financial data, using an XML based markup language known as XRBL (the eXtensible Business Reporting Language).  Holy crap.  Yes, this could have been done a decade ago in theory, but apparently it takes some serious mess to get anyone thinking at the SEC.  Probably bad for Morningstar‘s financial-data-silo business model, but good for just about everyone else.  Will spur a lot of financial transparency, as machines can be easily utilized to find patterns and irregularities in corporate and mutual fund reports, in near real time.  I don’t think most people give this kind of development the credit it deserves.  Long term, machine readability of all law and legal requirements will change the face of regulation, democracy, and ultimately, law itself.

What is the Fed doing?

Trying to keep track of all the shenanigans innovation going on at the Federal Reserve is difficult.  Econbrowser and Interfluidity among others have been trying to help…  but every time I read about how our money system works, I find my head spinning in incredulity.  And that’s just when I’m reading about how it’s “supposed” to work.  It’s been getting more confusing lately.

Continue reading What is the Fed doing?

Ideas for Change in America

Change.org is a kind of public idea tourament.  There are a bunch of different subsections: agricultural policy, government reform, energy, etc.  Readers vote and comment on the ideas, and the top few ideas in each category advance to the next round.  Larry Lessig has submitted Citizen Funding of Congressional Elections whereby only public money and small contributions can be applied toward election campaigns.

Not sure how well this kind of system can work.  Many of the highest rated ideas don’t sound very productive…

Rearranging vs. Reinventing the Global Economy

The US road to recovery runs through Beijing says Asia Times Online, and Thomas Barnett emphatically agrees.  Everyone is talking about how to reorganize the global economy, but mostly the discussion is about how to most efficiently export our recently collapsed model of growth to the developing world.  Better this time around for sure, we say, but not fundamentally different in any way.  The Chinese need (and want, it turns out) more domestic consumption and consumer debt.

Continue reading Rearranging vs. Reinventing the Global Economy

Congress has failed us on renewable energy again

Last week Congress left DC for its summer vacation without extending the federal tax credits for investments in renewable energy. This is an abject failure on the part of our elected representatives. Without these tax credits, the booming renewable energy industry will grind to a halt come December 31st. Already, companies like EI Solutions in Pasadena, that design and build large solar installations, have been forced to stop signing contracts for projects that cannot be completed before the end of the year. For years these tax incentives have been renewed only on an annual basis, and sometimes only at the last minute, or even retroactively, making it impossible for the industry to develop long range business plans and investments.

At the same time, we reliably subsidize the mature, well capitalized, and fabulously profitable domestic fossil fuel industries, encouraging our dependence on polluting, finite, and often foreign resources. This doesn’t make any sense, because the oil, gas, and coal companies already have they capital they need to make investments in additional production capacity, but they choose not to, and instead return their profits to their shareholders. On the other hand, tax credits for renewables currently make or break the industry.

Which should we be doing? Pouring money into the pockets of ExxonMobil shareholders, or fostering the emergence and growth of a domestic, renewable, clean, energy industry, that can provide thousands of new jobs in California. I think the choice is clear. Evidently, Congress feels otherwise. An army of lobbyists paid by the fossil fuel industry has made sure of it. We don’t have to depend on fossil fuels forever, but unless we demand change from our elected representatives, they are going to keep listening to the campaign contributions.

We need more Dionysian Science

Michelle and I just finished reading The Botany of Desire by Michael Pollan. It was good. He can get a little rambling at times, but overall it was entertaining and enjoyable. The book follows the relationships between people and four plants, through history. The four plants are: apples, tulips, cannabis, and potatoes. It pairs with them four desires, respectively: sweetness, beauty, intoxication, and control. The connections are more than a little tenuous, but the histories are certainly worth examining. The apple chapter in particular has inspired me to learn more about hard cider (since it turns out that’s largely what Johnny “Appleseed” Chapman’s apples were used for, all across 19th century America). And who can resist an examination of cannabis’s relationship with humans, written at least partially while stoned?

One theme Pollan has touched on repeatedly, in this book and his others, is the competition between Apollonian and Dionysian impulses in nature and society. Apollo representing order and control, Dionysus wildness and chaos, both being utterly necessary for civilization to be dynamic and persistent, for knowledge to increase and broaden through time. E.g. our Apollonian monocultures of Russet Burbank potatoes are vulnerable because of their uniformity, but are also productive and economically efficient. The Andean potato farmers of antiquity grew dozens of different varieties in different micro climates, all the while allowing the plants to hybridize with the local wild potatoes, maintaining a possibly less productive, but certainly more diverse and robust system of potato cultivation, in which new biological innovation was constantly taking place, and in which the farmers were well protected against catastrophic collapse in any one year… unlike the potato farmers of Ireland in the 1840s. The potato chapter in particular focuses largely on a very recent interaction with the potato: the introduction of a genetically engineered variety called the “New Leaf” by Monsanto, that produces Bt toxin to guard the plant against the Colorado potato beetle and other insect pests. Continue reading We need more Dionysian Science