Peter Levin’s Rethinking Markets

April 30, 2008

They know the score

Filed under: Technology — Peter @ 3:13 pm

Two cases, separated by 150 years, about technology, missionaries, and institutional change:

The first:

In 1818 the directors of the London Missionary Society sent a mechanical clock to grace the church at its first station among the Tswana in South Africa. No ordinary clock - its hours were struck by strutting British soldiers carved of wood - it became the measure of a historical process in the making. Clearly meant to proclaim the value of time in Christian, civilized communities, the contraption had an altogether unexpected impact. For the Africans insisted that the “carved ones” were emissaries of a distant king who, with missionary connivance, would place them in a “house of bondage.” A disconsolate evangelist had eventually to “take down the fairy-looking strangers, and cut a piece off their painted bodies, to convince the affrighted natives that the objects of their alarm were only bits of coloured wood” (Moffat 1842: 339). The churchman knew, however, that the timepiece had made visible a fundamental truth. The Tswana had not been reassured by his gesture; indeed, they seem to have concluded that “the motives of the missionary were anything but disinterested.” And they were correct, of course. In the face of the clock they had caught their first glimpse of a future time, a time when their colonized world would march to quite different rhythms.

- Jean and John Comaroff, Of Revelation and Revolution, Volume 1, p. xi

And the second:

The first step toward implementing the system was a pilot study, involving one specialist and two or three stocks, to determine whether a specialist could physically monitor an automatically executing trading system while simultaneously performing other activities. Because of the narrow physical dimensions of specialists’ posts, Loss enlisted the Exchange’s carpenters to mount a wooden platform on a pedestal-pipe two feet above the pilot specialist’s post, where the ATS computer screen would stand and display its prices for all to see. A brochure explaining the new system was distributed to member brokers. The Friday before the pilot study was to begin, Loss left his office for what he described as his first relaxing weekend in months. The following Monday morning, all was in readiness for the start of the pilot program. Except…

As soon as Loss walked into his twenty-third-floor office he received a phone call from the Exchange’s floor manager. “You’ve gotta come down and see this,” said the manager.

“What am I going to see?” Loss remembers asking.

“Just come down.”

Minutes later, Loss saw for himself: In a pile of sawdust on the floor near the designated specialist’s post lay his Automated Trading System equipment. Someone had used an ax or a saw to cut a semicircle through the wooden platform and disconnect it from the post.

The jagged teeth marks on the wood, Loss recalled years later, “Looked like Jaws had just been through.”

- Marshall Blume, Jeremy Siegel and Dan Rottenberg, Revolution on Wall Street, pp. 195-196

April 24, 2008

What would a system collapse look like?

Filed under: Markets — Peter @ 8:55 am

A blurb-y article from Thompson Financial (in Forbes online) cites a common feeling among the financial movers and shakers about the current and most recent credit crunch:

The international financial system was close to the brink in March when joint action by the U.S. Federal Reserve and JP Morgan Chase & Co. avoided the collapse of investment bank Bear Stearns, Credit Suisse Group’s ex-CEO Oswald Gruebel said.

The breakdown of the comparatively small investment bank would have triggered a global run on other financial institutions around the world and the situation would have spiraled out of control, he said in an interview with Swiss Sunday newspaper SonntagsBlick.

Gruebel, chief executive of Switzerland’s second largest bank from 2004 to 2007, said that central banks fortunately realized that they had to de facto take over the interbanking market.

‘We’ve narrowly escaped a system collapse. This has never happened before,’ Gruebel said.

I wonder about this last bit, and what a ’system collapse’ means in the current financial system vernacular. Craig Calhoun has been writing about ‘emergency’ and the ways that emergency has taken a rarified place in international relations, providing a moral justification for action that cuts across traditional notions of nation-state and interests, while also solidifying those very categories. Emergency implies anomaly, and particularly for things like humanitarian emergencies it provides a counterpoint to something like, say, ‘national interest’ as a way to mobilize international resources and attention.

I don’t want to push his point too much. But I think there is something similar going on in financial markets. Here we should substitute ‘crisis’ for ‘emergency’. But there are strikingly similar elements: a market crisis implies an anomaly in an otherwise working institution. That is, a market crisis suggests a global system of allocating risk and resources that works with glitches. An alternative would be a permanently failing system, one where market crises are the rule rather than the exception, and where the fixes to the system - governmental interventions on behalf of a small group of investors, while purporting to be acting in the best interests of the rest of us - don’t actually fix anything.

So let me sketch this out. A system collapse would mean the failure of trillions of dollars worth of notional value. This is not the same thing as saying the loss of trillions of dollars worth of wheat or US dollars or houses, but rather the value of the contractual obligations on which derivatives are built. If the wheat futures markets closed tomorrow, there would still be farmers growing wheat, selling it on the spot market to wholesalers, who would still make it into tasty Hostess Cupcakes. The futures markets for a number of hard commodities disappeared during WWII, replaced by price controls in the spot market, and well, people still ate.

In the currency markets, we would still have trade. In fixed income, banks would still issue loans, the US government would still auction treasury bills. You would still be able to buy AT&T stock.

What would disappear is two things: 1) an absolutely enormous amount of value for a small number of investment banks and related institutions - on the order of hundreds of billions if not trillions of dollars; and 2) a system for distributing risk, and its attendant costs/benefits.

For the former, that would indeed be a crisis. Well, for some people. It would have real effects, and dramatic ones for places like NYC which is built not just on the finance industry but on all the consumption patterns of high-income people.

For the latter, it would mean that risk would be managed more locally, and probably much, much, much, much, much, much more conservatively than it is now. It would be reasonable for a bank to give out a loan, but without the ability to lay off their risks in a global market they would do more due diligence. Ditto housing lenders, grain wholesalers, etc. The effect would be a massive tightening of credit and much more volatile prices for commodities (both physical and financial).

And that’s it. The argument that we need global finance is simply a status quo argument, not necessarily a substantive one. And while there was (and is) economic justification for the global structures of financial markets - making the distribution of resources more efficient - these justifications have not always held sway, even in finance. Their seeming solidity is a mid-20th century invention at best. A collapse would be a massive change. But it would not be Armageddon.

April 22, 2008

New template

Filed under: Ramble — Peter @ 8:03 pm

there’s going to be some ugliness as I work out the kinks in this new template of mine, but it’s pretty much designed as a combination of existing pastiche and original sentiment, so be nice.

Priorities

Filed under: Ramble — Peter @ 8:15 am

April 16, 2008

Feeling mediocre

Filed under: Ramble — Peter @ 11:24 am

Workin on some sociological goodness and a site redesign. In the meantime, I give you the always wonderful xkcd:

April 9, 2008

Went to a bat mitzvah…

Filed under: Culture — Peter @ 5:53 pm

…and if you think kids are still dancing line dances to Electric Slide, Celebration, or even the Cha Cha Slide, you’d be wrong wrong wrong.

It’s all about Soulja Boy.

Luckily, 13-year-old girls still look a lot like 13-year-old girls. And 13-year-old boys? Jeez, don’t really know even what to say.

April 3, 2008

Bubble bubble bubble

Filed under: Markets — Peter @ 4:11 pm

Josh Guetzkow, who has outed himself as that person who is reading my blog, is a professor at Arizona and works on income inequality and mass imprisonment (though he masquerades as a sociologist of sociology). He passes along an interesting article on bubbles and the new new real estate downturn. This is appreciated, and I think it’s his trying to make sense of his own decision to buy property at the top of the market my earlier half-assed attempt to explain housing CMOs.

As for the article, I have a sneaky suspicion that the author is full of it. His contention is that bubbles are preceded by legislation (this is similar to Neil Fligstein’s contention that legislative activity precedes merger waves), and:

That the Internet and housing hyperinflations transpired within a period of ten years, each creating trillions of dollars in fake wealth, is, I believe, only the beginning. There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle.

The rest is an analysis of the dot-bomb and the new housing troubles.

I think it’s worth disentangling the housing bubble, which may well be what we are facing here, and the new global financialization, which is less well-understood. Greta Kripner is doing some work on this, with an emphasis on the US economy. For those ambitious graduate students out there, I would say that global financialization may be one of the most important master-narratives since modernity and the industrial revolution at the end of the 19th century (I’ve had this conversation with Ryon Lancaster as well, we may well be on the same page I think). And there were, you know, a couple of good books written about that earlier transformation.

April 2, 2008

Failure of Journalism

Filed under: Ramble — Peter @ 11:37 am

Lisa DePaulo, writing in the GQ blog (ht political wire) demonstrates how to do bad work. I realize this is not the NYT, but I don’t care. You interview politicians, you are doing politics. From an interview with Karl Rove:

I get the sense you respect Hillary more than you respect Obama.
Off the record?

Please don’t go off the record.
Off the record… [Yeah, it's good. Sorry.]

Damn! Now say that on the record.
No. Nope. Nope. Nope.

Let’s try again, then: on the record. I get the sense you respect her more than him.
Uh, I know her better than I know him. And I just, uh—she has been around public life a lot longer and has demonstrated, you know, more involvement than he has.

This is different from confidentiality in social sciences, which affords us no protections under the law and is not, you know, an important institution of a free society. What a good, non-hack journalist would say is, if you can’t tell me on the record, don’t tell me. Otherwise, stick it back in your pocket. Again, I don’t care if it’s a style magazine, in some ways it is even worse since it has the style of journalism without any of the standards.

More generally, and this is not limited to DePaula, is the insider nature of the press compared with the outsiders they consider their readers - i.e., us. What makes these kinds of things so galling is that people in the press either fail to see how they are being used (which makes them idiots), or else know they are being used and use that to advance their careers without actually doing their jobs (which makes them craven - lacking even the rudiments of courage).

April 1, 2008

It must be you…

Filed under: Markets — Peter @ 10:56 pm

An article by Richard Florida notes large disparities between the numbers of single men and single women in urban locations across the US. Let the conforming to already-existing gendered assumptions begin!

As you can see, if you are looking for a single man, he’s on the West Coast - if you are looking for single women, they’re on the East Coast. Of course, this says nothing about who they are, sexual orientation, and the like. Now, sure, I can go into the sociological implications of life course decision-making, job opportunities, gender differences and similarities. But really, I just want to say that if you are a straight woman in New York looking for a straight man, you’re kind of S.O.L. If you’re that same woman looking for a straight man in LA (though many more men in LA are gay than comparables elsewhere) or Dallas or Denver or Seattle, it must be you. If you are a straight man looking for a straight woman in NYC and not succeeding, you aren’t working hard enough.

Don’t know what to make of it, so not makin’ anything

Filed under: Ramble — Peter @ 5:26 pm

I’ve kind of been in a funk about posting, though the shennanegins of investment banks are interesting. But the massive multi-billion dollar write-downs is depressing me, and I just don’t know what to say about them. Plus, I’ve been and will be out of town for weddings and other family stuff. Will return with verve soon.