Quality Assessors as Paradigmatic Rational Actors

Posted April 15th, 2008 by Jerry Ravetz and filed in Ignorance of Ignorance

A brief supplement to my last post, from: ‘Ratings game: As housing boomed, Moody’s opened up’, by Aaron Lucchetti, Wall Street Journal – Europe, April 14, 2008, pp. 16-17.

Bond issuers, knowing that a higher rating means they pay a lower interest rate, have an incentive to shop around among rating agencies. And they have clout as they shop: They are the ones paying the bill…

…“There never was an explicit directive to subordinate quality rating to market share,” says Mark Froeba, a former Moody’s analyst who recently started a bond valuation company that may compete with rating firms. “There was, rather, a palpable erosion of institutional support for rating analysis that threatened market share.” An example would be raising too many legal issues on deals, slowing them down unnecessarily.

Eye-rack, sub-prime, and three neo’s

Posted April 2nd, 2008 by Jerry Ravetz and filed in Ignorance of Ignorance

The two new words, Eye-rack and sub-prime, sum up the crisis in the American empire and its ideology. And they will help us to dispense with the three neo’s.
In both cases, there is the classic cycle of fantasy, mendacity, corruption and incompetence. The details differ. For Eye-rack, the fantasy has its obvious start in the ‘Project for the New American Century’ of 1995. In that neo-con manifesto, the prospect of absolute American domination in all spheres and dimensions was given as both a necessity and a plan. Then other fantasies came in, most famously the one where a ‘high White House official’ told the writer Ron Suskind that we no longer need to be reality-based (just as we no longer need to be faith-based); our will is supreme. The mendacity of March 2003 needs no rehearsing here, the corruption of the American occupation is legion, and its incompetence is acknowledged even by its supporters. Now we have a war that we cannot win and dare not stop.
For sub-prime, the fantasy has been that what goes up must go up indefinitely. The sophisticated mathematical models whereby traders moved their bets around simply did not have facilities for dealing with bad news (Alan Greenspan has confirmed this). Even when the U.S. housing market softened two years ago, the system could not recognize the change or its potentially lethal consequences. As to corruption, the shyster practices that were indulged in by the whole American financial industry, from the bottom to the top, are now known to all. This involved large-scale mendacity, as securities of junk quality were promoted and traded as if they had real value, rather than being just the numbers pasted on by the universal mutual con-job. And the incompetence needs no description, as we may all yet be engulfed in its consequences.
The effects on the American empire, both its power and its ideology, will be drastic. As the rest of the world decouples from its economy, they will surely decouple from its politics and military as well. Since South America has effectively declared independence, Africa has gone Chinese, and the oil has gone to the Iranians and the post-Soviets, there is little left for America’s super-profits or even security. As to GB, we can say that Gordon Brown’s journey to the east, with top businessmen as pilgrims, and shouting the message “Come and buy up whatever you want” was an early sign of a declaration of independence.
The consequences of sub-prime and Eye-rack for our ideas about society should be profound. The evil pair of neo’s, -liberal and -conservative, cannot survive this debacle with their plausibility intact. After the steady degradation of the Socialist and Statist ideals in the post-war period, the right-wing reaction really did seem like a liberation to many. ‘Regulation with a light touch’ along with the stripping down of the state, has remained the constant in British politics from Thatcher herself through the three Thatcherites who have followed. And now we find all those ardent apostles of free enterprise, with all their contempt for the nanny state, running to mummy for protection against the consequences of their own criminal folly. Can anyone now say, with a straight face, that Business Knows Best, that the profit motive is the way to get things done all through social institutions, and that we should all praise and welcome our millionaires?
The neo-conservative ideology has long since been in tatters. All those who have depended on it, including the right-wingers who control Israeli politics, will find themselves exposed. As the dollar sinks and the Sovereign Wealth Funds of the Gulf states increase in influence, the balance of power can shift only one way. It is impossible to tell how all this will work out, but the old assumptions can no longer be sure to hold.
There is yet another neo that might hopefully be a casualty of this whole affair. Along with –liberal and –conservation, we have –classical. The ‘science’ of economics, in its neo-classical variety, has for long been the great rhetorical resource of the big business ideology. Critics of all sorts have attacked it for its built-in bias, its lack of reality-testing, and its pernicious effects on policies at all levels. But it has been hard to land that knockout punch, since it presents as a closed system of ideas with a certain initial plausibility and enormous political clout. Now we may have seen its fatal weakness: quality.
The present predicament of the Western banking system might be seen as a malign echo of Oscar Wilde’s definition of the cynic, as someone who knows the price of everything and the value of nothing. For, as we all know only too well, the banks have gargantuan sums invested in products whose value they cannot determine. This is not some ethereal conception of value as a reflection of The Good; it is an estimate of the cash that might be realized if the product were put on the market. And no one knows, and cannot know; there are just too many of those products, starting with dodgy ‘subprime’ loan-shark mortgages, which were then chopped and scrambled ad infinitum.
The banks could not have entered into this madness without help from the regulators, and this is where the fatal weakness of neo-classicalism is exposed. For the neo-classical theory of the market involves only sellers and buyers. For understanding regulation we need recourse to Institutional Economics, a field which was bombed during the McCarthy period and never recovered since. So, in the best neo-classical spirit, the products of the regulators, the quality ratings from AAA downwards, became objects of buying and selling just like any other product! Why shouldn’t Quality be a commodity like any other? Outside the neo-classical framework of ideas, this would be called corruption. But inside, it is just business, which always Knows Best.
Thus the neo-classical conception of the market has now come perilously close to destroying the object of its analysis. Where will its gurus go from here? How will they apologize for this process where everything went totally according to plan and then exploded?
The interaction of ideas with politics is always messy and confused. Just now we know that neo-conservatism has collapsed, neo-liberalism is on the defensive, and neo-classicalism is threatened with total refutation. How that will all work out, remains to be seen.

Farewell then, wimps of America

Posted December 4th, 2007 by Jerry Ravetz and filed in Living in Post-Normal Times

All of a sudden, the wimps of America aren’t there. Now that they’re gone, we miss them. Come back please, we really do love you. After the wimps, it won’t ever be the same again.
What is a wimp? It’s one of those funny people who doesn’t sincerely believe that Greed Is Good. Or someone who knows about Adam Smith’s other book, the sentimental one about morals.
The wimps in America were the self-appointed guardians of our standards. They took pride in quaint things like ‘integrity’, even though it kept them poor. When the gave an AA rating to a financial product, it used to mean just that and no more, no less. We didn’t need to know what sort of junk had been chopped up and repackaged inside. We could just buy them cheap and sell them dear in confidence, knowing that what the wimps said was true.
Then something happened. The American wimps wised up. Perhaps they had heard all those students asking, “If you’re so smart, why ain’t you rich?” Or they realised that they were behaving like irrational actors in the paradigm. So they joined the game. In addition to derivatives and SIV’s, their ratings went for sale too. What could be more natural?
Noone told us that that was happening. In fact we hadn’t even known that the American wimps were there. That’s not really our fault; who ever learned about Regulation? Only the people who took courses with numbers like 327, in other words the wimps themselves. The rest of us just learned how to make with the curves, so as to get our ticket for the professional gravy train.
But now the wimps are gone, and in New York another show is beginning. This is called ‘Mister District Attorney’. It involves exposing a scandal, getting newspaper headlines, sending a few guys to jail, and then going for a Governorship and beyond. Over there, the wimps have been replaced by the sharks.
After the sharks comes the outraged Great American Public, and their legislators. They want to make a Prohibition of sin in finance. So first we had Sarbanes-Oxley and now it’s to be FAS 157, standards for evaluating assets. Never mind that it’s all bad for business; the Great American Conscience will have been appeased.
But back here in Olde England, the horizon is still clear. We have really nice wimpy wimps for regulators. Normally they just murmur, “wonderful, wonderful.” When something really atrocious happens they whisper, “naughty, naughty”. For them it would be simply inconceivable for a city gent to do anything so vulgar as to go to jail.
So it’s very likely that in the present Puritanical reaction in the States, London will soon take an even bigger piece of the action from The Big Apple. Then with our own dear wimpy wimps as regulators, it will be like the kids taking over the candy store. ‘Anything goes’ will be the new theme song in The Square Mile. And it doesn’t need much history of economics to know that eventually, as night follows day, we’ll all be using that old American saying, “Buddy, could you spare a dime?”.

Book Review: Intervention – Confronting the Real Risks of Genetic Engineering and Life on a Biotech Planet

Posted December 4th, 2007 by Jerry Ravetz and filed in Book reviews

Denise Caruso
Intervention: Confronting the Real Risks of Genetic Engineering and Life on a Biotech Planet
San Francisco: The Hybrid Vigor Institute, 2006.
This book is required reading for anyone who still has illusions about the essential beneficence of science. With scientific insight and journalistic skill, Denise Caruso dissects the world of corporate biotechnologists, and provides a terrifying picture of what they are now doing to the world. She goes through the whole scene of biological interventions, including transgenic interventions of every sort. In every case, it’s the same appalling story.
The key to the problem lies in the researchers, perhaps motivated by scientific curiosity but definitely directed by corporate greed. Theirs is a Tinkertoy vision of reality, where all you need to do is to fit in a piece from anywhere and make it all work your way. Any idea of uncertainty, risks, unexpected effects or the reactions of complex biological systems, is totally absent from their vision. As to social consequences, this is left to the PR men who promise to cure any of mankind’s ills with their latest gadget.
The combination of myopic scientists, predatory corporations, and revolving-door regulators is totally lethal. Fortunately many of their productions have flopped on the market, and they hype each other as much as the public. But some of it will work, some time, somewhere. Only luck will save us from some sort of man-made Kudzu of some size, shape or form. We probably won’t know when it is happening, and may not even know about harmful consequences until much too late.
Of course there are still many scientists who work with breadth of vision and integrity, as well as citizens’ groups that raise the alarm. The question is, who will prevail. Our fate may well depend on the answer.