Newsnotes 2010 11

Notes On The News

by Gwydion M Williams

USA Defeating Itself [Tea Party politics]

New Right Oddities [USA]

America the Ignorant

China Still Rising [supercomputer & space]

Piety for the Guy [Guy Fawkes]

Brazil Rising [Dilma Rousseff]

Hostages [Linda Norgrove killed by ‘Rescuers’]

Fat-Tailed Economics [False Economic Models]

 

USA Defeating Itself [Tea Party politics]

Ronald Reagan revived the USA by emphasising and praising everything that was wrong with it. The ‘Tea Party’ movement continue the error. The more influence they have, the quicker the USA will decline.

Back in 2008, people knew that the banks had caused the trouble. But by 2010, most of them have been persuaded to blame someone else. The didn’t blame the rich who made millions and billions turning finance into a giant casino. Instead they blamed ordinary people in need of help after the crash:

“Between 1998 and 2006 house prices [in Arizona] doubled. When economic gravity intervened, parts of the country like this fell hard. House prices in Tucson are down to the level they were in 2004. Since foreclosures in the state now account for almost half of all home sales, they have much further to fall. A state that was never very wealthy now has the second-highest poverty rate in the country. One in five are poor: roughly the same proportion that have no health insurance.

“When the CNBC correspondent Rick Santelli became the first to call for a ‘tea party’ to prevent the government bailing out the ‘losers’ mortgages’ in February 2009, these were the kind of losers he was referring to: those unlucky enough to have just signed on the dotted line when the good times stopped rolling. ‘This is America!’ he yelled from the floor of the Chicago stock exchange. ‘How many of you people want to pay for your neighbour’s mortgage that has an extra bathroom and can’t pay their bills?’ The traders booed.

“The only thing more stunning than the contempt that Republicans in general and the Tea Party in particular have shown for working- and middle-class Americans during this recent crisis is the propensity of those same Americans to back them.

“The issue here is not false-consciousness – the notion that people do not know what is right for them. There are legitimate philosophical reasons why people – including the poor – might be in favour of lower taxes and less government. But polling shows that when it comes to poverty, the elderly and education, if anything people want to do more rather than less.

“But that is not what they are going to get. It is the Democrats’ failure to sufficiently deliver that has provided the fertile ground for this cynicism to grow. But it has been the right that has been providing the manure and tending the plot. In terms of policy and rhetoric the country has moved beyond a stage where reasonable people might differ, to the realms of fantasy, calumny and idiocy.” [A]

People have been given a false history, one that the left has in part gone along with. The USA as a society was probably at the height of its power in the 1950s. It was also an era dominated by a culture that seems very right-wing today, but which both the ‘Tea Party’ and the ‘Reagan Democrats’ look back to with fondness. But this was also the classic era of ‘tax-and-spend’, the policies that got the USA out of its Great Depression. Yet people believe otherwise:

“[Tea Party] supporters like Rick and Pam say they want to return the US to its fundamental roots. For them that means lower taxes, lower spending and less interference from the state…

“‘[Obama] is doing all the wrong things. You cannot spend yourself out of a recession. It just don’t work.'” [B]

The USA was not in fact a country of low taxes or a weak state when it overtook Britain and the rest of Western Europe in the late 19th century. And it did spend its way out of the Great Depression, in part thanks to World War Two. Also Ronald Reagan’s anti-state rhetoric was false: he did not reduce the size of the government, just shifted the emphasis to military spending and moved taxes away from the very rich.

I’m writing ahead of the results of the USA’s mid-term elections, where it may turn out that the Tea Party cost the Republicans some seats they could have won with a more moderate candidate. But that’s secondary: the main point is that a brief outbreak of popular discontent with the rich in 2008 has been transmuted into a further demands for less taxes and less state regulation. This helps a small rich Overclass to grow at the expense of the US mainstream. George Mombiot explained how it has been done:

“Charles and David Koch own 84% of Koch Industries, the second-largest private company in the United States. It runs oil refineries, coal suppliers, chemical plants and logging firms, and turns over roughly $100bn a year; the brothers are each worth $21bn. The company has had to pay tens of millions of dollars in fines and settlements for oil and chemical spills and other industrial accidents. The Kochs want to pay less tax, keep more profits and be restrained by less regulation. Their challenge has been to persuade the people harmed by this agenda that it’s good for them.

“In July 2010, David Koch told New York magazine: ‘I’ve never been to a Tea Party event. No one representing the Tea Party has ever even approached me.’ But a fascinating new film – (Astro)Turf Wars, by Taki Oldham – tells a fuller story. Oldham infiltrated some of the movement’s key organising events, including the 2009 Defending the American Dream summit, convened by a group called Americans for Prosperity (AFP). The film shows David Koch addressing the summit. ‘Five years ago,’ he explains, ‘my brother Charles and I provided the funds to start Americans for Prosperity. It’s beyond my wildest dreams how AFP has grown into this enormous organisation.’

“A convener tells the crowd how AFP mobilised opposition to Barack Obama’s healthcare reforms. ‘We hit the button and we started doing the Twittering and Facebook and the phonecalls and the emails, and you turned up!’ Then a series of AFP organisers tell Mr Koch how they have set up dozens of Tea Party events in their home states. He nods and beams from the podium like a chief executive receiving rosy reports from his regional sales directors. Afterwards, the delegates crowd into AFP workshops, where they are told how to run further Tea Party events.

“Americans for Prosperity is one of several groups set up by the Kochs to promote their politics. We know their foundations have given it at least $5m, but few such records are in the public domain and the total could be much higher. It has toured the country organising rallies against healthcare reform and the Democrats’ attempts to tackle climate change. It provided the key organising tools that set the Tea Party running.

“The movement began when CNBC’s Rick Santelli called from the floor of the Chicago Mercantile Exchange for a bankers’ revolt against the undeserving poor. (He proposed that the traders should hold a tea party to dump derivative securities in Lake Michigan to prevent Obama’s plan to ‘subsidise the losers’: by which he meant people whose mortgages had fallen into arrears.) On the same day, Americans for Prosperity set up a Tea Party Facebook page and started organising Tea Party events.” [C]

The main effect of the Tea Party will be to disable US politics, make the politicians scared of public opinion and thus much less likely to do anything to restore the controls on finance that have been removed since the 1980s. And the Tea Party people are quite happy to distance themselves from actual US Republican policies since Reagan:

“Conservative uprisings reliably emerge in the years after Democratic presidential victories. John F Kennedy’s win in 1960 was followed by the rise of Goldwater’s movement, the spirit of which is the closest antecedent to the Tea party. Jimmy Carter’s 1976 victory coincided with the first flowering of the religious right, while Bill Clinton’s 1992 election brought the mountain militia movement. And just as Ross Perot’s independent run for president was partly a response to the failures of the first President Bush, so the Tea party is also a response to the failures of the second.

“In the hotel bar back at CPAC I talked to Republican Grover Norquist, known for his weekly strategy meetings that bring together Washington’s bigwig conservatives. Norquist told me the Tea party has become ‘a huge asset’ in his push to get more Republicans elected. But he backs the idea that the movement began because the mainstream party was no longer the authentic conservative voice of protest against Obama—a problem he blames on the previous Republican president.

“‘We started to win again only when we got Bush out of the way,’ said Norquist. ‘Bush was a rat head in the Coke bottle. It damages your brand when you are saying ‘Buy Coke!’ but people know the last one had a rat head in it.’ Citing the president’s expansion of government and occupation of Iraq, he continued: ‘Bush was not a conservative, which is kind of surprising, because he led us to believe that he might be.’ This is a widely held view in conservative circles. Amid the many bumper stickers for sale at the conference, one that caught my eye read: ‘George W Obama.'” [D]

 

New Right Oddities [USA]

In the USA, people calmly accept the destruction of the sort of jobs they do, while protecting a rich Overclass that they are never likely to be part of. Of course in the USA, 25% of the population suppose that they are in the richest 1%, 25 times too many.

There is little point hoping that the working mainstream in the USA will act intelligently in its own interests. Their thinking is dominated by a brand of hard-line Protestant Christianity that is almost extinct in Britain. It was very prominent in England at the start of the 20th century and was largely gone by the 1950s, but the USA has kept it and failed to develop socialism.

Race and ethnicity play a role. The older immigrants resent the newer, and blacks were always kept at the bottom of the heap. There was however some support for welfare – right up until the point that it ceased to be mostly for whites.

The Tea Party response to the USA’s problems is angry and foolish. Blame someone else, don’t take responsibility for your own actions. They have got a lot by global standard, but are full of resentment for what they have not got. This means also they identify with the rich, the people they’d like to be.

The New Right have shown an impressive talent for manipulating large numbers of rather stupid people. The trouble is, this stops anything much being achieved. People think they are defending tradition, and are not in fact doing so.

When it comes to world-views, the New Right almost alone in saying that maximum freedom for business is a good idea. This is expressed as ‘Free Market Values’, which is sloppy terminology. Their system is called ‘freedom’ but there are many state-enforced rules, including an emphasis on ‘intellectual property rights’.

They also believe also that maximum freedom for business won’t have bad social effects. They deny the connections, including the erosion of small independent property, which has accelerated since Thatcher and Reagan.

The Keynesian Era created security but also maintained the existing cultural values. Things fell apart when these were undermined by popular discontent among young people who had grown up in the new order. Also by blunders like the Vietnam War, where the USA repeatedly went for victory rather than looking for some compromise solution.

A Mixed Economy or Collectivist system can deliver a fairly stable society, and will do so unless there is a leadership intent on preventing this. In the USA, the Democrats under Kennedy and Johnson took effective action to break down segregation in the US South. This was necessary in the context of the Cold War, where non-white opinion had to be conciliated. But it broke up the broad alliance that Roosevelt had created with the New Deal in the 1930s. This opened up the possibility of something new, but the left mostly moaned about corporatism and ignored the change to get the state to act in the interests of the working mainstream. On the right, the response was nihilistic rather than functionally conservative.

If you remove the economic regulation, then you undermine all existing social values, regardless of the wishes of those involved in the process. 19th century Tories pioneered economic regulation in Britain and were correct to do so. Just not successful enough to save what they valued.

The shifts in the West since the 1970s has created an economy that is not fit for human beings to live in. There is a lot of stress, partly by risks and partly by large rewards that a lot of people hope for but very few of them get. The average person thinks that they should have much larger material rewards than the average person actually gets. They are encouraged to think of themselves as way above average in terms of likely material rewards.

As well as economic bubbles, there has been a gigantic cultural bubble. No one knows what to believe any more. A superficial sort of Christianity satisfies the ignorant and the desperate, but has no credibility with the majority.

 

America the Ignorant

The former chief economist at the IMF Raghuram Rajan is another person trying to stop a change in financial policy, a shift that would reject decades of work by the IMF as a grand error. Despite which, he seems to have some valid points on what the USA has been doing wrong:

“He starts by describing the growth of income inequality in America, which he says is directly caused by the growing inequality in educational outcomes. In the US, levels of earnings are largely determined by levels of education. Since the 1980s, improvements in the average years of schooling across the American population have slowed significantly, from around one additional year per decade from 1930 to 1980, to a third of a year per decade since 1980. This is mostly due to stagnant college graduation levels. Despite an increase in enrolment in higher education, graduation rates for men born in the 1970s are no higher than for men born in the 1940s.

“Relative to the rest of the world, American workers are losing the competitive edge that greater educational attainment provides. Investment in human capital is no longer higher in the US than it is in Asia. As a result, those who drop out of the education system early lose out in the global competition for labour. American policymakers could have chosen to reform and improve the education system. Instead they sought to mitigate the consequences for the lower-skilled, less-employable segment of the workforce. Cheap credit, particularly for housing, allowed US workers to live their dreams even though they lacked the skills to secure the jobs that would have paid for them.

“There are other contributory factors, which the book also explores in detail: inappropriate exchange rates and trade deficits, weak safety nets for the unemployed, monetary policies targeted at job creation rather than deflating asset bubbles, a banking system that rewarded short-term self-interest rather than stability, and the inability of senior managers in the financial sector to appreciate their companies’ exposure to extreme risks.

“But, for Rajan, the origins of the subprime crisis are to be found in 20 years of feeble US education policies, combined with a bipartisan determination not to allow those Americans in low-paid jobs, or with no jobs at all, to become cut adrift from the social norm of owner-occupation.

“By placing the financial crisis in the wider context of social policy, Rajan provides a convincing account of why the bursting of the bubble in US house prices caused so much damage, both to the financial system and to the wider economy. The financial crisis, as he presents it, was the occasion for a wider crisis of US policy making. Much the same applies to Britain. Policy responses to the crisis that focus exclusively on the financial sector will be limited in their effectiveness. We must treat the causes, not just the symptoms.” [E]

There are lots of causes of the USA’s relative decline. But there has definitely been a stronger anti-intellectual element since the 1970s, part of the New Right mix. They don’t want to know what science has to tell them. And though the USA still has immense academic strength, a lot of it depends on first, second or third generation immigrants. Even the New Right gets most of its thinkers from this stratum, but at a popular level there is resentment against foreign input.

Incidentally, it would be interesting to try to figure how the USA might have gone had its 1850s political crisis gone differently. Historically, the Whig Party disintegrated and was replaced by the Republicans, committed to tariff protection for the USA’s rising industry and to a prevention of slavery spreading any further west. There was also a brief upsurge by the ‘Know-Nothing’ party, an expression of the older US population’s resentment against immigration. But supposing it had been otherwise? Supposing that the Know-Nothings had emerged as the replacement for the Whigs, that slavery had somehow been abolished gradually and peacefully but that further immigration had been banned. You could do a list of all of the notable US citizens who would have been missing if they or their immediate ancestors hadn’t been able to enter the USA from 1860, say. It would illustrate how much the USA has always depended on European inputs. And how much they have to lose if they choose to distance themselves, or if Europe moves away in the face of the alien values of US ‘conservatives’.

 

China Still Rising [supercomputer & space]

The USA still imports vast numbers of well-educated eager immigrants, but is being overtaken by China. China was never just an exporter of cheap goods. Cheap exports were a profitable line and paid for imports of raw materials, but China has been developing successful high-tech industry since the beginnings of the People’s Republic. Under Mao, they produced hydrogen bombs and satellites. Now they have gone much further in a lot of areas:

“A Chinese scientific research center has built the fastest supercomputer ever made, replacing the United States as maker of the swiftest machine, and giving China bragging rights as a technology superpower.

“The computer, known as Tianhe-1A, has 1.4 times the horsepower of the current top computer, which is at a national laboratory in Tennessee, as measured by the standard test used to gauge how well the systems handle mathematical calculations, said Jack Dongarra, a University of Tennessee computer scientist who maintains the official supercomputer rankings…

“Over the last decade, the Chinese have steadily inched up in the rankings of supercomputers. Tianhe-1A stands as the culmination of billions of dollars in investment and scientific development, as China has gone from a computing afterthought to a world technology superpower.

“‘What is scary about this is that the U.S. dominance in high-performance computing is at risk,’ said Wu-chun Feng, a supercomputing expert and professor at Virginia Polytechnic Institute and State University. ‘One could argue that this hits the foundation of our economic future.’

“Modern supercomputers are built by combining thousands of small computer servers and using software to turn them into a single entity. In that sense, any organization with enough money and expertise can buy what amount to off-the-shelf components and create a fast machine.

“The Chinese system follows that model by linking thousands upon thousands of chips made by the American companies Intel and Nvidia. But the secret sauce behind the system — and the technological achievement — is the interconnect, or networking technology, developed by Chinese researchers that shuttles data back and forth across the smaller computers at breakneck rates, Mr. Dongarra said.

“‘That technology was built by them,’ Mr. Dongarra said. ‘They are taking supercomputing very seriously and making a deep commitment.’

“The Chinese interconnect can handle data at about twice the speed of a common interconnect called InfiniBand used in many supercomputers.

“For decades, the United States has developed most of the underlying technology that goes into the massive supercomputers and has built the largest, fastest machines at research laboratories and universities. Some of the top systems simulate the effects of nuclear weapons, while others predict the weather and aid in energy research.

“In 2002, the United States lost its crown as supercomputing kingpin for the first time in stunning fashion when Japan unveiled a machine with more horsepower than the top 20 American computers combined. The United States government responded in kind, forming groups to plot a comeback and pouring money into supercomputing projects. The United States regained its leadership status in 2004, and has kept it, until now…

“Mr. Dongarra said a long-running Chinese project to build chips to rival those from Intel and others remained under way and looked promising. ‘It’s not quite there yet, but it will be in a year or two,’ he said.” [G]

There is also progress in space. NASA clearly has an incentive to ‘talk up’ Chinese strength in the battle for more funds, yet there is clear progress.

“China has hailed its latest success in space as Chang’e 2, the country’s second lunar probe, successfully sent back high-resolution pictures that are going to be used to plan the country’s first unmanned moon landing in 2013.

“But the officials in charge of Beijing’s space programme have set their sights much further than that. They announced last week that by 2020, China should have its own manned space station.

“If it succeeds, it will prove itself to be only the third country, following the US and Russia, capable of building a space station.

“Eric Hagt, head of the China programme at the Center for Defense Information in Washington, said China’s aim was to claim ‘a stake as a nation with full rights to explore and exploit deep space’. He added: ‘The Chinese have big space ambitions for many reasons – prestige, domestic political legitimacy, and scientific and technological prowess.’

“However, this is fuelling concerns in the west. ‘The US feels like China maybe is taking over its leading role in space,’ said Mr Hagt. While analysts say China’s programme is not designed to take over what Nasa, the US space agency, does comprehensively, China has pulled ahead in certain areas, such as the development of small satellites.

“China is building microsatellites that can ‘sneak up’ to enemy satellites to spy on them or act as ‘bodyguards’ of other Chinese ones – capabilities which have great military significance.

“Another Chinese strength is the ability to get up to three different payloads on one satellite – a technology that makes launching satellites much cheaper.

“These strengths make China’s space programme cheaper and more commercially viable than that of the US – just as some American space programmes have been called into question because of a lack of funding.

“‘Our space products are becoming ever more popular in third-world countries,’ said Jin Yongde, professor-emeritus at the School of Astronautics at Harbin Institute of Technology. ‘We export communications satellites to Venezuela and Pakistan already.'” [H]

Russia seems to be reading the signs. After a notable Chinese-Japanese dispute over some small islands, Russian President Dmitry Medvedev chose to pay a visit to the Kuril Islands, which the Soviet Union took after World War Two but which Japan still claims. Japan also has a dispute with South Korea after yet another disputed island, and looks very much like a country that has been bypassed by events.

 

Piety for the Guy [Guy Fawkes]

Prospect magazine is often a good source, but not on the matter of Guy Fawkes, whom they describe as an anarchist in their latest issue. He was nothing of the sort. He came from a family that had hung on to Roman Catholicism when the state religion was changed to Anglicanism. He would have been a teenager at the time of the Spanish Armada in 1588: what he believed at the time is uncertain. But within a few years he had become a committed supporter of the Spanish and Counter-Reformation cause.

The 80-year war in the Netherlands – the lands that became Belgium and the Dutch Republic – were a key struggle. King Phillip of Spain was born there and was a fan of local artist Hieronymus Bosch, but in substance his realm was Spanish and the local Protestants rebelled. The Dutch did at least as much as the English to ensure Protestant strength and cause the eventual downfall of Spain’s world-empire. They have also across the centuries been rather more keen than the British on promoting religious tolerance and liberal values, the framework within which anarchism later developed.

Fawkes chose to be on the other side. He left England in 1593 or 1594, a young man in his early 20s, and joined the Spanish army still fighting to conquer the whole of the Netherlands. He did so as a dedicated Roman Catholic and in fact quite pious, as far as we can tell:

“Fawkes held a post of command when the Spaniards took Calais in 1596 under the orders of King Philip II of Spain. He was described at this time as a man ‘of excellent good natural parts, very resolute and universally learned’ , and was ‘sought by all the most distinguished in the Archduke’s camp for nobility and virtue’ … ‘a man of great piety, of exemplary temperance, of mild and cheerful demeanour, an enemy of broils and disputes, a faithful friend, and remarkable for his punctual attendance upon religious observance’.” [F]

He then came back and was part of the Gunpowder Plot. Killing the King and a swathe of English nobles might have created enough chaos to allow Spain to invade and restore Catholicism, which was probably still the religion of the majority. The chaos was not an end in itself, as it might be for a genuine anarchist, but part of a plan to create a much more controlled and authoritarian order. Nothing anarchist about it.

 

Brazil Rising [Dilma Rousseff]

Back in the 1960s, Brazil was one of a number of countries where the USA supported a right-wing military regimes. In those days there was no demand for a multi-party electoral system: free elections had a way of being won by people the USA didn’t approve of. Brazil and Greece were just two of many countries where moderate leftists were overthrown with US support.

At the time there were several attempts at left-wing guerrilla warfare in Latin America. None of them succeeded: the left was factional and not very efficient. But the legacy of those movements lives on.

The Presidential election has just been won by Dilma Rousseff, whose father was a Bulgarian Communist who fled to Brazil (assuming the Wikipedia entry is accurate). She herself was associated with one of the left-wing guerrilla movements of the 1960s, was jailed and tortured and then moved to constitutional politics when the military dictatorship ended. She has now got 56% of the vote in a run-off with a candidate of the Social-Democratic Party. That party seems to have been leftist in origin but to have been influenced by Blairism and become the main prop of the right in Brazil, where there is a confused medley of parties that have a mostly leftist origin.

The run-off was necessary because of the strong showing by a woman from Brazil’s Green Party. But that seems to have been personal: the Green Party as such is small, with 15 seats in a Chamber of 513. The various parties lumped together under the leadership of President Lula’s Workers Party have 359, and 54 in a Senate of 81 seats. The coalition includes the Communist Party of Brazil, itself at one time a guerrilla movement of generally Maoist outlook. It now has 15 seats in the Chamber and 2 in the Senate, making it a shade stronger than the Greens. Far behind the Workers Party with 88 seats in the Chamber, the strongest single party.

 

Hostages [Linda Norgrove killed by ‘Rescuers’]

What sort of idiot throws a lethal grenade during a hostage rescue mission?

The sort of idiot who gets specially selected and intensively trained by the USA’s Navy SEALS, it seems. If they’re not doing so well training the new Afghan and Iraqi armies, maybe they are not setting a very good example themselves.

A detailed inquiry has been promised, but it is already clear that British aid worker Linda Norgrove was killed by a US grenade. Rescues are always bound to be tricky, but there are some basic rules:

“The rescue attempts are made in a closed environment, requiring ‘close quarter’ breaching and movement techniques. This sort of operation requires detailed intelligence. Floor plans and information on windows, which way a door opens and the type of locks are critical. There must be knowledge of where the hostage is being held. The rescue team moves from room to room in a ‘stack’ within inches of each other. They clear each room with precision use of rifles or shotguns. Area weapons, such as hand grenades, are not used in hostage rescue. Instead, ‘flash bang’ grenades, which have a high intensity flash and concussion effect, are used. They stun but generally do not kill. They are thrown into rooms in advance of the ‘stack’ of men – and cause a momentary blindness and intense ringing in the ear that incapacitates anyone in the room, including the hostage. This is the key for the rescue team to enter the room and secure it by killing the hostage holders and identifying the hostage.” [K]

Which is just what did not happen. No doubt we’ll learn more in due course.

I’ve also not seen much discussion of whether she could have be freed by negotiation. Since they did not kill her outright, it seems likely they wanted to trade her, probably for some of their own prisoners. Israel has done plenty of such trades, mostly very unequal. It is curious.

The well-publicised death of a British woman also occurred in the context of vast numbers of other innocents killed in the crossfire. The military were dumped into a very difficult situation without proper preparation and do not seem to be fully under control.

Meantime in Iraq, some of the hard-line Sunni Islamists made the puzzling decision to seize a congregation of Arab Christians as hostages. Possibly they believed their own propaganda about the current government being tools of the West. It’s a Shia and pro-Iranian Islamist government, the Sunni Islamists aligned with al-Qaeda are among their foes. It seems they gave priority to killing their enemies and probably feel the Christians should not be there at all. Iraqi Christians are a remnant of the pre-Islamic culture, but not valued in the present disorder. They were safe under Saddam’s regime, which was secular. Ever since being ‘liberated’ by the West they have been at risk, being threatened or murdered and encouraged to leave, which many have done. Many more will surely do so after the latest episode:

“At least 52 people died when troops stormed the Baghdad church in which gunmen were holding dozens of hostages.

“The Iraqi government says it had no choice but to storm the Catholic church on Sunday night: Defence Minister Abdul-Qadr al-Obeidi said the gunmen had threatened to kill all their captives.

“Al-Baghdadia – an independent station based in Egypt – says its public hotline number was phoned by the gunmen who requested it broadcast the news that they wanted to negotiate.

“As the station was being taken over, it broadcast pictures of security forces surrounding the building, before the screen went blank. Transmission then resumed from al-Baghdadia’s Cairo studio…

“Younadim Kanna, a Christian Iraqi MP, said the government had failed to protect its citizens, but added that the Christian community would not be intimidated by violence.

“‘Despite all of these terrorist attacks against the Christians, we are determined not to leave our country,’ he said…

“Many churches have been bombed in recent years – including Our Lady of Salvation in August 2004 – and priests kidnapped and killed, but there has never been a prolonged hostage situation like this before, our correspondent says.

“Christians – many from ancient denominations – have been leaving Iraq in droves since the US-led invasion in 2003. About 600,000 remain.” [L]

 

Fat-Tailed Economics [False Economic Models]

October saw the death at 85 of Benoit Mandelbrot, discoverer of fractal geometry. If you don’t already know about fractals, the best place to learn is James Gleick’s Chaos: Making A New Science. But an important extra is what Mandelbrot said about economics. Well in advance of the 2008 crash, he said that the existing models were badly under-estimating the risks:

“In 2004 he published with Richard Hudson The (Mis)Behaviour of Markets: A Fractal View of Risk, Ruin and Reward – a devastating attack on the failure of mainstream economists and mathematicians to understand the likelihood of wild swings in prices and the risk of financial disaster.

“Mandelbrot felt vindicated by subsequent events, such as the near collapse of the global banking system in 2008.” [M]

“‘Economics is a science of fashions – Keynes and ‘pump-priming’ at one time, Friedman and monetarism at another,’ the Franco-American mathematician, Benoit Mandelbrot, who died last week at 85, wrote in The (Mis)behaviour of Markets, a book he co-authored with Richard L. Hudson in 2004. ‘The profession burns through new theories the way a teenager hops from one new date to another: it meets them, spends some time with them, examines them, finds what it thinks are flaws, and then drops them for a newer face.’ If the condescension and intellectual vanity are typical of Mandelbrot’s writing, so is the fearlessness and general good sense.

“Mandelbrot was not the only analyst to warn that our financial system was headed for a reckoning. However he zeroed in with unusual specificity on the besetting flaw – models that understated risk – and his conclusions grew out of rich and varied work in the natural sciences.

“Mandelbrot had no better method for picking winners and losers. ‘I agree with the orthodox economists that stock prices are probably not predictable in any useful sense of the term,’ he wrote. His gripe, rather, was with the system. All algorithms tended to underestimate the risks of investing. Mandelbrot distinguished between ‘Joseph’ effects and ‘Noah’ effects. Joseph effects – seven fat years here, seven lean years there – occurred when markets were evolving gradually and continuously. Noah effects were cataclysms – the Flood, or the week of September 11 2001, when the New York Stock Exchange closed for five days and dropped 7.5 per cent on re-opening.

“Because Joseph effects rule the market most of the time, they are what models measure. But Noah effects make and unmake investors. ‘Wild price swings, business failures, windfall trading profits – these are key phenomena. In all their drama and power, they should matter most to bankers, regulators and investors.’ And Mandelbrot showed them to be much more common than they would be if market movements followed a standard bell curve. The 20th century saw 48 days in which the Dow Jones Industrial Average swung more than 7 per cent. ‘Normal’ statistical modelling predicts such swings should happen once every 300,000 years. We forget the explosiveness of the market at our peril.

“But did we forget it?

“Mandelbrot’s argument with quantitative analysts resembles the argument religious people have with scientists. He blamed them for failing to explain absolutely everything. But if the quants [sic] really did believe their models were omniscient, then theirs would be some of the weakest theories anyone was ever lionised for debunking. Mandelbrot saw traders did not fully believe in them. They still monitored trading closely and looked for signs of market momentum, which would have been unnecessary if their equations were perfect. We persist with mathematical models, because they capture a lot of reality. But only a fool would believe they capture all of it.” [N]

Conventional economics over the past 30 years has assumed the standard pattern is something called the Normal Distribution or the Bell Curve. From average events, you can calculate how likely it is that something unusual will happen. Mandelbrot warned that the reality was much more likely to be ‘Fat Tailed’ distributions, which broadly means that unlikely events are much less unlikely than if the Normal Distribution applied. We are not likely to encounter a human 12 feet tall, or 20 feet tall, but equivalent oddities in markets do happen. He said this years before the ‘impossible’ combinations happened in the crisis of 2008.

But most of the ‘Rocket Scientists’ who designed the complex investments knew enough maths to be aware of the issue. They would also have known that they had no hope of getting fat bonuses for wise warnings about foolish risks, while they had every chance of being clean away before the system blew up. This is pretty much what happened, and so far they have got away with it.

 

References

[A] [http://www.guardian.co.uk/commentisfree/2010/oct/10/tea-party-arizona-midterms-undermine]

[B] [http://www.bbc.co.uk/news/magazine-11626255]

[C] [http://www.guardian.co.uk/commentisfree/cifamerica/2010/oct/25/tea-party-koch-brothers]

[D] [http://www.prospectmagazine.co.uk/2010/10/tea-party-american-political-establishment/]

[E] [http://www.prospectmagazine.co.uk/2010/10/fault-lines-raghuram-rajan-revie/]

[F] [http://www.gunpowder-plot.org/fawkes.asp]

[G] [http://www.nytimes.com/2010/10/28/technology/28compute.html]

[H] [http://www.ft.com/cms/s/0/9b2d563c-e515-11df-8e0d-00144feabdc0.html]

[J] [http://en.wikipedia.org/wiki/Dilma_Rousseff]

[K] [http://www.guardian.co.uk/world/2010/oct/11/aidworker-hostage-rescue-expert-analysis]

[L] [http://www.bbc.co.uk/news/world-middle-east-11668634]

[M] [http://www.ft.com/cms/s/0/fefe50ae-da15-11df-bdd7-00144feabdc0.html]

[N] [http://www.ft.com/cms/s/0/0d0da878-de0f-11df-88cc-00144feabdc0.html]

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