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.

Known unknowables

Posted November 5th, 2007 by Sylvia S Tognetti and filed in Ignorance of Ignorance

Via ThinkProgress – Al Gore on the NBC Today show, in response to a question from Meredith Viera, regarding a predictable op-ed by so called climate skeptic John Christy:

But, Meredith, part of the challenge the news media has had in covering this story is the old habit of taking the on the one hand, on the other hand approach. There are still people who believe that the Earth is flat, but when you’re reporting on a story like the one you’re covering today, where you have people all around the world, you don’t take — you don’t search out for someone who still believes the Earth is flat and give them equal time.

To be fair, perhaps Christy should get a kudo for recognizing that there is indeed indeed uncertainty about climate change, but it isn’t just in science. In the second post on this blog, I even gave kudos to the Bush administration for recognizing and pointing out that changes in climate are uncertain, pointing out that, under a business as usual scenario, which assumes the continuation of current trends, the climate itself will only become more uncertain. Christy goes on to recite the usual fallacies that aren’t even worth responding to, even confusing weather with climate….

Less predictable is the sensitivity of the climate itself, as is explained in this must read RealClimate post that discusses a new paper by Gerard Roe and Marcia Bakerk, which explains certainty of uncertainty in the relationship between climate forcing and the range of potential temperature changes. Perhaps even more uncertain is whether all obtainable scientific information would actually make any difference in policy decisions and whether we have the capacity to actually make high stakes policy decisions in which uncertainty and value conflicts are part of the equation. But we do know that the earth is round, and that even small changes can make a big difference.

For more discussion of this and other recent and noteworthy climate papers, you might want to listen to last week’s edition of Science Friday, in which guests included Gerard Roe together with Chris Field, Steve Rayner and Eileen Claussen.

Addendum: this morning I found this YouTube video which has the complete interview. Gore still doesn’t “have plans” to be a candidate, but asked about whether he might serve in some high-level capacity in an Obama administration, he added that he has “no plans to go back into government service in any other capacity.” I have nothing against the other candidates, but next to Gore, they just seem very small. I realize it could have something to do with how demeaning the campaign process has become. All the more reason to Draft Gore. Running by not running provides an opportunity to change that too, and to start evaluating candidates on their merits.

The difference between science and policy

Posted October 20th, 2007 by Sylvia S Tognetti and filed in Ignorance of Ignorance

pilingupuncertainties

The challenge of communicating policy relevant science is perhaps nowhere better illustrated than this statement made by John H. Marburger III, as reported in the Washington Post, seemingly to justify White House rejection of the goal of limiting the global rise in temperature to 2 C, although, according to Stephen Schneider, it is entirely possible Marburger’s remarks were taken out of context:

The president’s top science adviser said yesterday there is no solid scientific evidence that the widely cited goal of limiting future global temperature rises to two degrees Celsius above pre-industrial levels is necessary to avert dangerous climate change, an assertion that runs counter to that of many scientists as well as the Nobel Prize-winning Intergovernmental Panel on Climate Change.

John H. Marburger III, director of the White House Office of Science and Technology Policy, said at a news conference that the target of preventing Earth from warming more than two degrees Celsius, or 3.6 degrees Fahrenheit, “is going to be a very difficult one to achieve and is not actually linked to regional events that affect people’s lives.” …

…”you could have emerging disasters long before you get to two degrees. . . . There is no scientific criterion for establishing numbers like that.”

Regardless of what Marburger intended to say, it is reported as if there is a debate with legitimate opposing views as to whether there are or could be scientific criteria for establishing what is essentially a policy decision. Then, since he acknowledges the possibility of disasters at a rise of under 2C, it isn’t clear what he means when he said this target is “not actually linked to regional events that affect peoples lives.” Fortunately, Alden Meyer from UCS had a good answer: “The question for [Marburger] is, if not two degrees, what?”

Marburger should know better than to make such statements, and if that is what he actually said, journalists should know better. I was going to say they get away with this kind of shoddy journalism because of a lack of public appreciation of the the scientific process, but I think most people know that life is uncertain and that science is not a crystal ball. So the best explanation I can come up with at the moment is that they get away with it because it is more convenient than debating acceptability of risks for which there is no data on probabilities, and because too often, such statements go unchallenged.

Scientists, and others who do know better and seek to use science for policy, often sigh knowingly at such statements – as happened when the article was held up in opening statements of the Science for Nature symposium I attended yesterday at WWF regarding forests and climate. So during the next break, I took the opportunity to discuss it with Stephen Schneider who was also at the symposium – and who is seen in the picture above along with Chris Field, both standing next to Al Gore when he made a statement about receiving the Nobel Prize. Schneider was among those whose work led to the establishment of the IPCC and who have been part of it from the beginning. The person who actually took the most leadership to bring about the establishment of the IPCC and who also belongs in that picture is Bert Bolin.

Noting that he has had enough experience with journalists to know how often things are taken out of context and misrepresented – Schneider said the statement might not have been as bad as it was made to sound, and that it could have been a great statement if Marburger had only clarified that the selection of a target is a policy decision. However, it would be necessary to see the full text of his remarks to determine what he actually meant. After all, Marburger did acknowledge that there could be dangers even with a temperature rise under two degrees. According to Schneider, the IPCC selected the 2C target because there is a realistic shot at being able to achieve it.

In a presentation Schneider gave on Thursday morning in the opening session of the symposium, he talked about the issue of whether the “jury is still out” which depends on the standard of evidence. Science and policy have different standards and ways of looking at the world, and there is no probability data for the future. That is why scientists build models, and why Cost Benefit Analysis is meaningless outside the OMB – the trade-offs are political. Asked whether they thought the science was settled or unsettled, I was relieved that most in the audience waited to raise their hands until asked whether they thought that was a dumb question – which it is. So, when it comes to policy, we have to rely on informed judgments, and on trust. Schneider’s judgment is that it is not too late to prevent the big stuff, such as the melting of Greenland, but that it will be necessary to address the problem as fast and as fair as possible. For Greenland, there is not a long enough time series and there is a lot of noise, but the degree of melting sure looks like a trend.