On Sun, 10 May 2009 16:09:53 -0700, "John R. Carroll"
wrote:


"F. George McDuffee" wrote in message
.. .
On Fri, 8 May 2009 15:33:52 -0700, "John R. Carroll"
wrote:
snip
Do you have confidence in this economy?

No, and I won't until I see Congress step up and put a company like GM, or
really GM for starters, down like a dog.
There isn't a single reason America ought to go on the hook to create jobs
in China, Mexico or anywhere else, not in the numbers GM's latest
restructuring plan indicates. That plan says only one thing to me. GM just
doesn't get it and that means they are too stupid to survive.
Then it will be time to release the productive capital of the 19 banks
just
stress tested back to the market. We have a mechanism to do this.
Congress,
the Obama administration and the American public need to just suck it up,
quit crying like a bunch of Nancy boys and get the hell on with it.

I'd start with a non-bank, AIG. Have Congress pass the necessary
legistlation poste haste, authorize the money with new legistlation and
then
just BK the thing the way we sieze a bank.
American's are not the ones that need a confidence transplant, it's the
banking and financial services giants.. The confidence that Citi needs to
have is that when they mess up big, the American taxpayer is going to come
in, sieze and sell their ****, kill the men, rape the women and then burn
what's left to the ground without batting an eye. Were these 19 banks to
believe that this might be their fate, they would probably alter their
conduct in the direction of prudent behavior. The banking business might
go
back to being as completely dull as it was in the 40's and 50's. That
would
be entirely appropriate and, to borrow a phrase from Mike Milken, I'd be
highly confident.


JC
=====
This just posted on CNBC. My only comment is "what took so
long," but then again it is hard to believe things got so bad so
quick, with everyone assuring everyone else that things were just
fine.

This "sudden unexpected failure" took at least 30 years to
create, and wipes out a generation's [or more] financial/economic
gains and savings.

snip

First I have to ask - Unexpected by whom?
Certainly not by either myself or probably the majority of the people
involvd. A huge number of smart, respected industry people predicted this
failure. You, George, detected the odor a while ago yourself but like a
silent fart, didn't know who had issued from.

Second, the actual failure took just under seven years to occur. The 20
years prior to that were nothing more than getting the camel lined up with
the tent flap in the minds of average Americans. The guardians, such as they
were, remained at the gates.

I've reviewed my take on history earlier in a previous post to this thread
so I won't belabor the issue.
You replied, in part, "While a bit rhetorical, you appear to be entirely
correct."

Largely correct , but not entirely, because Treasury already has the
authorities to deal with the banking system. They just need Congress to
cough up some money. I also chose to omit a couple of things because they
are so obvious that they nearly defy belief in spite of the fact that they
are true and because this is a little like telling tales out of school. Oh
well, shoot me if you feel the need. My NDA has long since expired.

The first ommision is that the financial services industry has been sucking
more than six hundred billion dollars per year from the real economy since
the turn of the century, more or less, and you can't remove that much zero
return capital without consequences.

Second, take Dave Li, whom I have refered to a couple of times as patient
zero. He actually is and yes, please, just take himG
Dave is a smart guy but hardly an intellectual. Educated at MIT, he's a
mathematician and it's a shame he went to work on Wall Street instead of
Mound Road but you know, when you offer a guy a choice between Wall Street
"Shooting Star" and working for the auto industry and having your friends
ask you "What went wrong?" at class reunions, you go with the money and
prestige. Dave did just that.

Mathematically modeling the financial universe is as old as mankind. So is
fortune telling. Both are undertaken by ametuers with an interest or reason
and professional mathematicians and economists like David Li. The goal, at
least in his case, was to precisely estimate risk. Doing so is especially
important if what you want to do is sell unregulated risk that isn't backed
up with a reserve. You absolutely must properly value default products
correctly because you only really get one bite at the apple if the risk
market fails.
The model Dave created went further. It supported the proposition that you
could not just resolve risk down to a single value, but that you could use
the model to test pools of risk and formulate securities for which risk had
been driven to zero. It's the greatest thing if you can do this because you
get to charge by the individual risk quotient but never have to PAY
anything. I saw the Li model while it was being written because I was
working on something similar but using different topology . I only had a
couple of comments and I was pretty pleased to meet Dave and his boss as
well as extremely flattered. Somebody at that level expressing interest in
what I had to say was a little unusual. Anyway, I pointed out that thinking
that you could express something complex as a single value seemed unlikely
and that any risk analysis that excluded a behavioral component was crazy.
This was the reason I was using a fractal based model for what I was doing.
I even showed it, and the underlying studies and data, to them and, as I
ater learned, that was the actual reason anyone was interested in what I was
doing - Fractal modelling.

In the end, they finished their work and I gave up on mine. I thought at the
time that my model didn't work and I didn't know how to get it fixed. What I
know now is that it was working, it just didn't produce the result I was
interested in seeing. The model kept crashing my virtual economy.
Well, no ****. As it turns out, the real world behaved in a similar manner.
LOL

The David Li model DID seem to work and was rolled out as the "Gaussian
Cupola". That model, and its clones and derivatives, was what gave the
government, as well as the financial "Masters of the Universe", the
confidence to remove the barriers previously in place that barred certain
asset pools and cash flows from being invested innapropriately. Some of the
worlds best economists looked the Gaussian Cupola and called bull ****. The
mathematics, however, were sound and this could be demonstrated. That was
the road show and it was persuasive enough to steam roll the econ weenies.
Mathatematics is a science, economics is guesssing and Geeks Rule!

Increasing reserves and stress testing Daddy Warbucks is really just
tinkering around the edges. Financial institutions can't bring themselves to
face their situation head on and so far, they haven't had to. The American
economy can't work without the secondary credit markets. Two thirds, at
least, of lending is supported there. That market, and the banks that hold
linked derivative products won't work again until all of the flaky zero risk
products are isolated and the wealth destruction they represent monetized.
Period. Everything so far has been an effort to keep the patient alive long
enough to figure out how to do the surgery.

Siezing the banks would make the entire reality impossible to avoid. You
couldn't just show part of your hand and ask for help with a specific
problem and in the end, Americans are going to be on the hook for the losses
anyway, it's unavoidable, so we ought just to get on with it. It's a bill
our kids will have to pay, like it or not. That will be easier for them to
do if we leave them a vibrant and growing economy to do it with and the
sooner the better.

You will know something is going to happen when Bernanke, Geithner and our
President start to use the phrase "Hold to Maturity".
That is what we are going to have to do because Li was wrong, the risk
coefficient can be preordained but peoples perceptions can't and that, in
the end, is what counts.

JC

-----------
Long and very interesting/insightful post.

My disenchantment came when I realized that what was being
proposed and sold was economic "perpetual motion" of the first
class.

The phrase
This "sudden unexpected failure" took at least 30 years to
create, and wipes out a generation's [or more] financial/economic
gains and savings.
was intended to be sarcastic. While it qualifies as a failure,
it most definitely was not sudden or unexpected. Indeed it was
the only possible outcome, the only question being one of timing
and not occurrence. While Lehman Brothers are popularly blamed
for "causing" this crash, if it hadn't been them it would have
been somebody else, and it was always just a question of who was
going to go first. The system was [and is] inherently unstable,
based on several thousand years of history. This is not to say
that it can't be made to work, after all the newer stealth and
air superiority fighter aircraft are inherently unstable, but can
fly with the use of very fast, very powerful "fly by wire"
computers and continuous [minor] corrections. The technology has
evolved beyond the possibility of manual/mechanical control.

I am interested in your use of fractals distributions as modeling
tools. I am sure that you have read "The (mis)behavior of
markets" by Mandelbrot. Any comments that you can share? Were
you able to identify any attractors? Were you using a Monte
Carlo simulation approach, or attempting to directly "solve"
Leontev I/O matrix with fractal equations for [some of the]
elements?

Given its publication date of 2004, with some of the more
important conclusions reached/published much earlier, such as
using the Cauchey rather than the Gausian/normal distribution for
financial modeling based on the actual examination of prices, in
some cases for more than 100 years [cotton trading], rather than
the ease of calculation, it does indeed appear that the model
that would gave the desired results was selected.

As you point out, it is entirely possible to have a model of
great complexity and indeed "beauty" which is mathematically
correct, even brilliant, but totally misleading because the basic
assumptions on which it is based are incorrect. Two example that
come to mind are Astrology and Numerology. However it should be
noted that both of these "sciences" have had considerable
influence on human conduct, and continue to do so even today,
e.g. the management of the Orange County [California] investment
pool. Indeed, many papers continue to have an astrology column
and publish the day's "lucky" number.

You raise a very interesting philosophical point about the nature
and meaning of "future." Is it fixed and determinant, and thus
capable of being described by a single index or coefficient, or
is it probalistic/stochastic and best described by a probability
distribution?

You again appear to be correct when you observe:
The Obama administration and the American public need to just suck it up,
quit crying like a bunch of Nancy boys and get the hell on with it.
the problem being this is major surgery, like a limb amputation,
and at least on the political side no one wants to antagonize the
banksters/broksters and/or lose their campaign contributions.
However it does appear at this point that it is like a severe
case of "gas gangrene," in that the choice is between losing the
limb and losing your life, not between losing and not losing a
limb.

You may very well be correct when you observe
The first ommision is that the financial services industry has been sucking
more than six hundred billion dollars per year from the real economy since
the turn of the century, more or less, and you can't remove that much zero
return capital without consequences.
Indeed, the total amount "skimmed" may even be higher if the
defined benefit pension funds, 401ks, and insurance companies on
the borders of the financial services industry are included. Any
idea where this money is going/has gone?

We are living in interesting times....


Unka' George [George McDuffee]
-------------------------------------------
He that will not apply new remedies,
must expect new evils:
for Time is the greatest innovator: and
if Time, of course, alter things to the worse,
and wisdom and counsel shall not alter them to the better,
what shall be the end?

Francis Bacon (1561-1626), English philosopher, essayist, statesman.
Essays, "Of Innovations" (1597-1625).