Income Inequality and Financial Crises

An article from the New York Times: "Income Inequality and Financial Crises".

New technologies, the rise of speculative capital, the polarization of wealth ("income inequality" sounds a bit gentler) are all correlative, and arise together in the hothouse of capitalism. And speculative capital can have a small stabilizing effect, or a major destabilizing one if the sloshing of speculation gets so intense as to spill over into a systemic collapse.

The NYT article referenced above is interesting in that it observes the correlation in the first place, and goes the liberal next step: Poverty isn't just bad for poor people, having lots of poor people around is bad for rich people at a big, system-wide level.

The article is a bit skimpy on how such a causal relationship works.

(The article refers to the mortgage / housing crisis, and here is how the polarization of wealth contributes to financial crises: companies take on more risk, to maintain profitability, by reaching into increasingly impoverished markets, helped along by new technologies that support spreading risk via electronic trading markets. The underlying poverty is unable to sustain the structure, and then it comes tumbling down.)

jd

Computers. Again.

Here are two almost completely unrelated stories (they do both involve computers though):

The First Church of Robotics: A column by Jaron Lanier (remember "virtual reality" anyone?), about the fetishization (or religification) of computers and robots, criticizing the devaluation of thought that takes place when people talk about "artificial intelligence," and reminding us that we "must instead take responsibility for every task undertaken by a machine and double check every conclusion offered by an algorithm, just as we always look both ways when crossing an intersection, even though the light has turned green."

And a much different piece, Market Data Firm Spots the Tracks of Bizarre Robot Traders: The rise to dominance of speculative capital has only been possible with the electronic infrastructure. This article peeks at one strange corner of the world of trading that takes place entirely within interconnected computer systems. Looking at the trading patterns of the bizarre bots graphed out, I wonder if the bot designers are really just using the bots as pencils, to see what kinds of clever patterns they can sketch on their market canvas?


jd

57,000 monkeys

Here is a link to a Pretty Neat New York Times article:

In a Video Game, Tackling the Complexities of Protein Folding

Basically, someone turned a software application that looked for ways to fold proteins into a video game, so humans could take a crack at folding strategies. Understanding how long amino acid chains fold into proteins is important to understanding the functions different proteins play. (Or something I like that.)

Two things stand out for me: One, humans saw shortcuts and efficiencies that the automated algorithms missed, and brought creativity to the strategies. Two, the Internet provided the infrastructure to allow 57,000 people to do that, together, meaning 57,000 different minds could bring their perspectives and problem-solving skills to bear on the puzzle-like folding action.

jd

College Inc.

The PBS series Frontline aired a deep investigation of for-profit higher education last May, called College Inc. The tagline from the website gives an accurate hint of the show: "Investigating how Wall Street and a new breed of for-profit universities are transforming the way we think about college in America..."

An important element of capitalism always has been the hunt for new sources of profit. The confluence of many factors (economically necessary, technologically feasible) has driven capitalism-in-the-age-of-electronics to gnaw at the public sector, to pull previously public activities into the Value relationship. That is, to turn it into a Commodity in the Marxist sense, of something exchanged in the market on the basis of the socially necessary labor it took to produce it, and therefore a new source of profit. In the process of becoming a commodity, the Law of Value kicks in, which precipitates the necessity of driving down production costs or extending the market or ... to maximize profitability. That's something of how a Marxist analysis would go, and, well, the shoe seems to fit very well in this case. (For definitions, etc. see this exploration on Value)

The sketchy steps:

1. The massive transitions in production, in the economy, obsolesce old skills and old activities. Workers are driven to develop new skills to continue to participate in the economy (i.e., to survive).
2. Workers must work on one job while trying to train for something better; or feel compelled to re-tool on their own dime to keep the job they have. This means going to school after work or on weekends.
3. Starve the public sector. The existing non-profit, state-supported institutions, particularly community colleges, cannot meet the needs of everyone who wants an education.
4. New technologies arise that make distance learning and online learning a practical possibility.
5. Wall Street (or investors or finance capital) is always on the lookout for new sources of profit.
6. Entrepreneurs sort out the details: snatch up accreditations from struggling non-profit schools to provide a veneer of respectability, install sophisticated data centers and hire cheap adjunct faculty to deliver instruction, aggressively market their services to a desperate market, charge almost six times the tuition of a community college, and get federal government to subsidize student loans.

Students become debt-slaves in yet another way, and the loans become another large pool of debt ripe for securitization. It feeds speculative capital. Total outstanding federal loans are over $500 billion, with an additional estimated $125 billion in loans from the private sector, and the private sector role is growing much much faster (see CNBC, America's Biggest Types of Personal Debt).

The Frontline show covers all this, not exactly in the same way, but in a much more entertaining way.

jd

Confusion on Where New York School Performance Stands - NYTimes.com

http://www.nytimes.com/2010/07/30/nyregion/30tests.html?_r=1&emc=tnt&tntemail1=y

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Inconsistency

Inception spoiler alert! Do not read on if you plan to see the movie!

I think the movie Inception works because it works so hard to provide a coherent theory to hold the various plot twists and turns together. The first Matrix was more or less coherent, although the sequels, imho, were less and less coherent and, well, not as enjoyable. The coherent theory allows the willing suspension of disbelief and all that.

So since they worked so hard to create coherency, the incoherent, inconsistent bits are irritating my little mind. I have to get this out and be done with it:

1. Why doesn't everyone wake up when the van hits the water? I thought that was the big bump that would pull everyone out of their dreaming? Instead, they continue at that level, either sitting on the shore resolving, or escaping from the van. [Why were their oxygen tanks on the van? Did they dream them up? If they could dream up oxygen tanks in the van, why couldn't they dream up better guns?]
   
2. How does Leonardo get the old Ken out of whatever level they were on? They were talking, then they were waking up on the plane. How actually do you get someone out of limbo? (This might actually come in handy some time.)
3. Did it work? The filmmaker could have had a headline in a newspaper lying on the dining room table, or a TV in the background, to suggest that the inception worked. I wanted to know.
   

jd

More on high tech manufacturing

Another NYT article on high tech manufacturing in China, and also how the dynamics of capitalism grind on.

jd

http://nyti.ms/av0hSi

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Changing nature of manufacturing

Good description of how the nature of manufacturing is changing, from today's (7/2/10) NYT:

http://nyti.ms/9ICCpK

jd

NYTimes: BP Loses Trading-Floor Swagger in Energy Markets

As an indication of the role of speculative capital in industrial corporations, note the high percentage (20% or $2 to $3 billion) of its profits that BP took in from it's trading operations.

jd

From The New York Times:

BP Loses Trading-Floor Swagger in Energy Markets

The future of BP's trading unit is uncertain as oil spill costs mount and rival firms try to lure away traders.

http://nyti.ms/9qRDR1

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NYTimes.com: What Is I.B.M.'s Watson?

Interesting article that shows how the universe of possibilities expands as technology develops -- cheaper, faster, more, more, more. And that it enables hundreds of thousands or maybe even millions of people to add to information Out There.

jd

MAGAZINE | June 20, 2010
Smarter Than You Think: What Is I.B.M.'s Watson?
By CLIVE THOMPSON
The category is artificial intelligence. This question-answering computer system is ready to challenge some flesh-and-blood "Jeopardy!" champions.


P.S. And this -- the other side of the tech revolution; how sausage is made: A Night at the Electonics Factory

NYT: The genome at 10

From The New York Times:

THE GENOME AT 10: Awaiting the Genome Payoff

The Human Genome Project has not produced the promised cornucopia of new drugs.

http://nyti.ms/dm9RBi

A couple of observations:

1. A revolution in the instruments of production is at the same time a revolution in the instruments of science.

2. Perhaps one of the problems is reducing the human being to a chemical machine.

jd

Not if, but when

It is impossible to overstate the tragedy that is spreading over the Gulf of Mexico, now in its second month, and likely to continue through the summer. There are no surprises there, sadly, either. It was not a question of "if", but of "when". Drill in hard to reach, risk-prone areas, with a more and more precarious chain of technology, with a built-in drive to cut corners -- not if but when.

The whole thing fits so neatly into the dismal dynamics of globalization, a further unfolding of what the ecosystem of globalization looks like.

I still think the most functional, concise definition of "globalization" is "capitalism in the age of electronics." It captures the idea that globalization is very much an expression of capitalism, with its compulsion to constantly expand and maximize profits, but capitalism under very specific technical conditions, the production environment of new technologies. New technologies have enabled oil companies to exploit more distant, hard to reach sources of oil, which entails more and more risk of something going wrong. In the effort to speed production and maximize profits, BP cut corners, used riskier methods, and voila, the largest oil spill ever.

I wrote a piece a few years ago about the "ecosystem of globalization", trying to understand environmental change and how it relates to globalization and speculative capital. In short, my conclusion was that globalization doesn't just transform markets and social relations, it also transforms the environment, creating an ecosystem that facilitates the maximization of profit using new technologies. It recreates the world in its own image. The oil slick spreading over the ocean and coating the shores of Gulf Coast is what that image looks like.

jd

NYT on job market shift

Check out the recent New York Times article, "In Job Market Shift, Some Workers Are Left Behind" (5/12/10) for an insightful (I think) description of the changes in work pushed along by new technologies in the current economy, and the social wreckage that that entails.

jd

Magnetar and meltdown

Another episode on This American Life about the Big Meltdown, this one about the hedge fund Magnetar and its deals both contributed to and profited from the mortgage security market collapse:

Inside Job

The program will shortly (Sunday 4/11 7p) be available from iTunes or the link above.

jd

Follow-up on synthetic biology/

As a kind of follow-up to my previous post on synthetic biology, here is a link to a very good (I think) discussion of the mechanical thinking behind the synthetic biology field: How to Manufacture the Notion of Synthetic Life, by Steve Talbott (whose work I very much like).

jd

DIY genetic engineering

Here is a link to an Interesting Article from Sunday's (2/14/10) NYT Magazine: Do-It-Yourself Genetic Engineering. The article describes the bubbling new field of synthetic biology, a a step or two beyond traditional genetic engineering -- instead of adding new genes to existing species to change their properties, synthetic biology is more about assembling new organisms from genetic legos.

It's more next-gen technology revolution stuff: "synthetic biologists imagine nature as a manufacturing platform: all living things are just crates of genetic cogs; we should be able to spill all those cogs out on the floor and rig them into whatever new machinery we want." With the added possibility of creating self-replicating factories.

Which is both fascinating and terrifying -- the article references "bio-terrorism", but that's only a minor issue I think compared to what the article describes as "bio-errorism". When fiddling with stuff, if anything can go wrong it will -- that's just the nature of technology. Mainly you want to minimize downside risk so that no one gets hurt. Nature-as-genetic-laboratory is incredibly cautious. It has a vigorous quality assurance department, and runs any new developments through a lengthy testing and shakeout process.

[Cynicism / realism alert] Why am I not so confident about the same when money is on the table?

And then there is the utter reduction of nature to machine. Is that all there is?

jd

Fresh Air interview with Ed Thorp

The Fresh Air radio program recently featured Ed Thorp, mathematician and author of the classic card-counting book, Beat the Dealer, and Scott Patterson, Wall Street Journal reporter and author of the new book, The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It.

From the interview, Patterson's book sounds like a re-hash of how mathematical models, supported by computers, have changed the financial system. New technologies have created the possibility of new forms of speculation, and the demand for maximum rates of return has taken advantage to that possibility.

Thorp comes across as dispassionate and insightful. He recognizes the proper role of models in general. It's not that mathematical models of the world are bad, they just have limits. The "quants" (those who rely on math models for trading, as opposed to, say, the fundamentalists who are studying balance sheets) on Wall Street today "don't have a long history of experiences of what's wrong with models." They are "wowed by the math" and "didn't use them correctly." And so recent history is likely to repeat itself, somehow. "You know something bad is going to happen, you just don't know when."

Although it is popular to call Wall Street (or the modern financial system in general) a giant casino (which Thorp does in the interview), it is important to note that someone like Thorp was not a gambler, even when he was confirming the validity of his models at the blackjack tables in Las Vegas. On Wall Street, he did the same thing. Gambling and the application of theoretical models to acting on probable outcomes of current events share the important factor of risk, but they are fundamentally two different activities.

jd

Garry Kasparov, chess and computers

Check out The Chess Master and the Computer, by former chess grandmaster Garry Kasparov, from the February 11, 2010 issue of The New York Review of Books. The article is very good -- insightful, reflective, maybe even inspiring. Here are a couple of quotes, but I recommend the whole thing.

On the effect of computers on chess, and the quantification of the world:

The heavy use of computer analysis has pushed the game itself in new directions. The machine doesn't care about style or patterns or hundreds of years of established theory. It counts up the values of the chess pieces, analyzes a few billion moves, and counts them up again. (A computer translates each piece and each positional factor into a value in order to reduce the game to numbers it can crunch.) It is entirely free of prejudice and doctrine and this has contributed to the development of players who are almost as free of dogma as the machines with which they train. Increasingly, a move isn't good or bad because it looks that way or because it hasn't been done that way before. It's simply good if it works and bad if it doesn't. Although we still require a strong measure of intuition and logic to play well, humans today are starting to play more like computers.

And related to that, the dark shadow of the market across innovation and even chess (the article is reviewing a book called Chess Metaphors, by Diego Rasskin-Gutman, hence the beginning phrase):

This is our last chess metaphor, then—a metaphor for how we have discarded innovation and creativity in exchange for a steady supply of marketable products.... Like so much else in our technology-rich and innovation-poor modern world, chess computing has fallen prey to incrementalism and the demands of the market. Brute-force programs play the best chess, so why bother with anything else? Why waste time and money experimenting with new and innovative ideas when we already know what works? Such thinking should horrify anyone worthy of the name of scientist, but it seems, tragically, to be the norm. Our best minds have gone into financial engineering instead of real engineering, with catastrophic results for both sectors.

jd

Giant Pool of Money radio program

The NPR radio program This American Life aired an update to their "The Giant Pool of Money" program from a year ago (called appropriately, Return To The Giant Pool of Money. The producers did a nice job, I think, on the details of the collapse.

The podcast is available from iTunes, and should be available from the show's website here shortly.

jd

A couple of updates

I realize this blog has been very quiet over the past couple of years. Or rather, I have not posted very much. Despite the enormity of the financial crisis, I don't think there is anything new, or unexpected there. Yes the details of how the latest act began and played out are of some interest, and the jockeying over the possible restructuring is somewhat revealing. But overall, it was all to be expected: more and more extended speculation and risk-taking to seek historically shrinking rates of profit until the precarious structure collapsed, and set the stage for the next act.

One year after poo really hit the fan on Wall Street, it perhaps bears repeating Marx's description of financial crises: they are not the destruction of value, but a powerful (even violent) means of centralizing wealth (CW/Vol. 37, aka Capital Vol. III, p. 468). In this regard, the crisis represents a violent ratcheting up of the polarization of wealth and poverty.

There are a few threads in the recent news that highlight that stood out to me.

First, as Nasser Saber pointed out in his book Speculative Capital, an important element of speculation (Saber defines speculative capital as capital used in arbitrage), taking advantage of price differences in different markets. As speculative capital develops, the arbitrage opportunities shrink, requiring either larger sums to be committed to arbitrage to achieve the same return, or a kind of arms race to get ahead of the arbitrage crowd by shrinking the trading time through faster computers and smarter software. "Flash trading" is a way of exploiting price differences, or soon-to-be price differences by learning of upcoming (measured in milliseconds). [And today, only just today I am sad to say, I discovered Nasser Saber's blog on finance and speculative capital, and so I direct the reader to his blog for any more on speculative capital.] See e.g. NYSE's Fast-Trade Hub Rises Up in New Jersey in the July 30, 2009 Wall Street Journal. It also explains the significance of the theft of Goldman Sachs computer code used to power its trading juggernaut: see The Man Accused of Stealing Goldman's Code.

A second thread has to do with the destruction of value (as opposed to wealth), to wit the cash-for-clunkers program and the subsequent destruction of functioning automobiles to take them permanently off of the market (as automobiles, some value persists as scrap, see a YouTube video Cash for Clunkers: How to destroy an engine for instructions on how you can do this at home -- kids, ask your parents first! The video is sad in a way, and pornographic in the worst sense of the word). And the destruction of the tart cherry crop in Michigan (Bumper Cherry Crop Turns Sour: Tons of Unharvested Fruit Rots Under Government Program to Keep Prices Stable).

jd