Turbulence

The Age of Turbulence abruptly begins with Alan Greenspan on a flight across the Atlantic. The captain brings him up front and tells him that the World Trade Towers were hit, and the plane had been redirected back to Zurich. It was 9/11, and he recalls his racing thoughts about what this would mean for the new world. Second to his wife, his obvious concern was for the economy. It was clear that the terrorists weren’t directly after the financial system, or else they would’ve hit the banks, but everyone knows that a sound economy abhors such instability.

“The mood in the cockpit was somber,” writes Greenspan. “’You’ll never believe this,’ the captain said, ‘Listen.’ I put my ear to the headset but couldn’t hear anything other than static. ‘Normally the North Atlantic is full of radio chatter,’ he explained. ‘This silence is eerie.’ Apparently nobody was out there.”

Greenspan recalls the likewise eerie aura on Capital Hill over the next year. Everybody kept insisting that America was safe and her citizens should stay calm, but there was no concrete evidence for this; and in contrast to their words, it looked like White House officials were bracing for a second large-scale attack, as if it was more of a question of when, instead of whether, it would happen.

Amidst the chaos and the aftermath, however, Greenspan was rather surprised about how the economy managed to get itself right back onto its feet. While it did involve some minor tinkering with air-travel and communications, for the most part, business as normal resumed rather soundly.

The lesson that Greenspan took away was that it reflected the rigidity of the economy. 9/11 left a political and social gash on the country, but from the eyes of the economy, it was just a blip on the radar. For Greenspan 9/11 was a testament to the strength and independence of the US economy.

It borders on irony that less than a year after publishing his monumental autobiography – 544 pages long, and with an $8.5 million advance from Penguin Press – his book is already outdated, with the banking system on the brink of failure and the US potentially facing the worst depression since the 1930's. Indeed, the economy is sound and it is rigid. But it seems to be a beast onto itself - strong enough to bear external blows as heavy as 9/11, while anything but immune to its own internal writhing and convulsions.

The Blame Game

Jim Cramer recently had a comedic, and quite frankly shameful, run-in with Jon Stewart, in which Cramer blamed his interviewees for lying to him. No doubt the blame game has just begun.

Bernanke, Greenspan’s successor, recently came out with his most emotional statement yet, in part blaming AIG’s irresponsible risk-taking for the collapse.

“If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one, than AIG,” he said. “AIG exploited a huge gap in the regulatory system. There was no oversight of the financial products division. This was a hedge fund, basically, that was attached to a large and stable insurance company, made huge numbers of irresponsible bets, took huge losses. There was no regulatory oversight because there was a gap in the system.”

Of course what Bernanke partly overlooks is expanding credit in the economy – largely through the rise of credit default swaps – which AIG was in part responsible for backing up. Credit-expansion during a boom is one thing, but similar to investment banking it crumbles when the economy falters in the least. Merrill Lynch and Bear Stearns can blame their falls on the stock market; creditors can blame their problems on the lack of funds to repay debts; and Bernanke can blame it all on those who were responsible for backing the expansion of credit. But what’s shortsighted is a thorough examination of the system in and of itself.

Communism, after all, would work perfectly if only the laborers worked hard. Yet blaming the fall of communism on laborers' laziness is futile, because they’re not working for a reason: No incentives.

Every society has its screw-ups. Shit happens as Forest Gump might say. But society banks on the fact that these screw-ups remain small in number and are randomly dispersed. When their numbers grow and their mistakes become more apparent, then you have to start looking for other answers. In other words, you have to dig deeper when shit starts happening in a frequent and consistent manner.

Which is why the notion of an "insurance" company that backs credit defaults is absurd, because the frequency of credit shit happening is non-random and inter-dependent. Other types of insurance depend on the fact that the covered averse events occur randomly and independently. If all of GEICO's customers, for instance, crashed their car on the same day, then it would surely go out of business, but that's not how car crashes work. However, such is how the credit business works, with one default often linked to another in a chain of events, having a similar effect as a massive car collision pile-up spanning the entire country would have on GEICO. Third parties can't feasibly "insure" credit contracts; you can't hedge the risk of credit defaults with successful creditors, because both events are tied to eachother. That's also why Bernanke's anger towards AIG is misdirected.

Indeed, AIG acted irresponsibly, but why were they in a linchpin position to aid in the collapse of the entire economy? Where were the corrective forces that should’ve come into play?

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Depression Economics

Murray Rothbard’s America’s Great Depression (which I’ve just started) opens with a similar point regarding business cycles and failures: Just like screw-ups and bad-apples, they’re seen throughout society. What’s rare is when a nation experiences a string of failures – each tied to the other – and the economy as a whole (rather than any particular company) lacks the corrective forces to get back on track. The Great Depression, similar to current times, has been blamed on various individual enterprises, such as Galbraith’s 200-page rant against speculators of the 1920’s, or the accelerative properties of the capital goods sector. But these explanations ring hallow insofar as they’re always present, and, if true, are relatively non-specific to a particular time period.

Rothbard continues that the largest tragedy of the Great Depression wasn’t the pain forced upon the nation, but the dearth of literature explaining it. Most commentators on the subject agree. Indeed previously the country had seen various mini-crises, but they proved to be self-correcting within a year or two. The Great Depression was shocking, not because of the panic of 1929, but because of the huge length of time it took to be resolved.

Part of the dearth of study, Rothbard contends, is because few theories account for the business cycle. Recessions are conceptualized as the exception rather than the rule, and when they last for more than a few years, this is generally true. But that’s no reason to shy away from studying them. Insight can be gleaned from them, similar to an extreme medical case. Phinneas Gage – the railroad worker who had his frontal lobes shot through with an iron spike – was also the exception, but it was the extreme and curious nature of his state that kick started modern brain science as we know it today. Advances in neuroscience have only increased our understanding of Gage’s case, even a century and a half after the event. Such aberrations have proved invaluable to neuroscience and to medical science as a whole; and likewise economic aberrations should be a natural starting point for inquiry into economic theory. Unfortunately, the later is rarely the case, and we may have to wait much longer to understand current economic events.

-KJ

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Media (in order of appearance)

Photo: (1)Greenspan, 09/15/2007, by chickenhawkdown; (2)President George W. Bush address to the nation and joint session of Congress Sept. 20; (3) Plane, 02/20/2007, by ores2k; (4) Cover of Greenspan's 2007 book, The Age of Turbulence; (5) Ben Bernanke, 03/06/2006, by Simon; (6) Mad Money, 08/16/2007, by Carlos Gomez; (7) Murray Newton Rothbard, 02/01/2009, by Taylor; (8)Phineas Gage (Lesioni), 09/28/2008, by epanto.

Video: (1) Daily Show interview with Jim Cramer, of CNBC's Mad Money, 03/13/2009. Sphere: Related Content

Bad Policy Kills

It’s estimated that Soviet Russia’s government killed at least 20 million of its own citizens. Higher estimates are triple that around 60 million, lower estimates are around 7 million. 6 million Jews are thought to have died in the holocaust, and yet holocaust victims are given infinitely more memorials and museums than Soviet Russia’s. Part of this is in response to the sheer idea of the planned genocide of a whole race – no doubt one of the ugliest marks on Western civilization. Post World War II saw dramatic improvements but only in some areas: US and England experienced one of their largest growth eras. And yet in the decade after the war, Russia saw around a quarter to a third of those mass Russian deaths.




We tuck away in history the bits and pieces that we want to ignore while other bits and pieces continue to have meaning today. Modern-day Nazi’s are despised as murderous racists while communists are simply considered harmless liberal extremes. But “it works in theory” I hear from some of my friends. Yet so does Nazism, which is as steeped in its own ideas as any other ideology. Any theory works in theory; if it didn't it would cease to be a theory and then it would be something else. To advocate communism without addressing areas in which its lead to widespread starvation and death - Russia being just one example - is like advocating Nazism without addressing the holocaust.

The extremes of where an idea have gone wrong are often most telling, but you have to look within extremes as well: Extremist ideas, many have argued, aren't always categorically different from their watered down counterparts. Consider

• Communism in the extreme has led to mass starvation, but in the less extreme it's bad health care.
• Nazism in the extreme was the holocaust, but in the less extreme it was Kristallnacht.
• Discrimination in the extreme led to lynchings, while in the less extreme it led to segregation.
  
• Religious fanaticism in the extreme is seen as terrorism, while in the less extreme it's evangelical Christianity.

Moderate ideas from one culture sound radical to another. While the outcomes of such extremist movements are alarming, we are doing ourselves a disservice by separating ourselves from them, rather than trying to discern historically where they came from. The holocaust was terrible, but Nazi's are people too. What part of human nature - the very same human nature that yes we all share - had gone wrong? Looking at the roots of many extremist movements in the world, we can see many of our own commonly held moderate ideas, and their drawn out implications.

Not to sound polarizing, it’s just surprising how we cling so readily to some atrocities while completely disregarding others. Europe circa WWII is a very concrete example, as both Nazi and Soviet atrocities occurred in the same era and in the same part of the world. And this is by no means a mere abstract question, we’re dealing with two independent events responsible each for over 6 million deaths. Yet how often do you hear, "Remember the Soviet Union and its millions of victims"? My suspicion is that we’re less likely to recall the deaths in Soviet Russia because communism, moreso than Nazism, is somewhat accepted in America, particularly among liberals.

People cling to their opinions as their personal identity. As Tocqueville pointed out, this is a natural byproduct of democracy and freedom of speech. Ideas suddenly separate people, and they have concrete manifestations. Opinionated as I may seem, I really try to hold them at an arm’s length from my mind.

Sometimes I’ll go to social events with “intellectual conversations” where people will say things like “I believe that all people should earn equal incomes” or “I think education is important”, note with the emphasis more on the first person than on the opinion itself. It’s indeed correct that the first person, I, deserves emphasis, it is more important than the opinion itself. But unfortunately the manifest content of the discussion is inevitably on the issue being discussed not the person talking. And in this context, something like “I think education is important” is one of the the weakest arguments. What people fail to realize – I think sometimes to a fault – is that opinions are easy. They’re cheap. And granted this is just my opinion as well, but they’re often fairly meaningless.

Opinions again can be very personal while the real world is anything but. To get the one confused for the other is a very confusing state indeed. Should I ever come across such concrete evidence as to truly undermine my own opinions about the world, then I hope that I have the strength and peace of mind to change how I view the world.

Some people say that the best politics is always personal. But I just don’t buy it. Because the personal is referring to you - how you feel - and the politics is reflected in reality. It's like saying that physics should always be personal - a colossal confusion between the subjective and objective. And no it's not that politics deals with things that are more personal than physics, as I'm sure some physicists would tell you that physics is more personal. It's that reality abides by laws - such as economics laws - much sooner than it abides by our personal preferences. Contrary to the notion of personal politics, passion and fury when it's coming from a politician is ultimately no more persuasive than when it's coming from a crazy scientist. Distinguishment for the most passionate and fiery politician might very well go to Hitler with his unmatched ability to rile crowds and to gather a whole nation behind him. Personal politics isn’t necessarily opposite of good politics, but they are often placed at odds. The disconnect between personal politics and good politics is like that between the short-term solution and the long-term solution; between the irrational and the rational; between a rash emotional decision and a carefully thought out one. Which isn’t to say that good politics can’t be personal – ultimately all these distinctions are artificial – but it is to say that that which is personal isn’t categorically better. Often it’s worse.

When reality doesn’t match people’s opinions, they often think that it’s the world that has to change. Anything but.

-KJ

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Media (in order of appearance)

Photo: (1) CCCP, 04/07/2008, by MrOmega; (2) At the Temple, 02/05/2007, by Pete4Ducks; (3) She's made up her mind, 10/12/2008, by bobster1985; (4) Del Martin, 1966, 10/20/2008, also by bobster1985; (5) Hong Kong in Motion, 09/16/2006, by Steve Webel.

Video: (1) Tv Theme World At War, 10/05/2008, tvtestcard's channel from the 1973/1974 documentary series World at War. Sphere: Related Content

The Good, the Bad, and the Positive

Enron collapsed when it did for a reason. The business had the unfortunate luck of rising to power during the bull market of the 90’s. The company subsequently hid its ever mounting debt behind a rising stock price. So long as it looked legit on the outside, and investors continued to invest, it could smooth over massive losses – a strategy that was uniquely tailored to a bull market, but which threatened to crumble should the market falter. The company finally fell when after the internet bubble popped. Underlying its falling stock price was the fact that investors’ heads were no longer in the clouds. The public finally saw the company for what it really was - a sham. During bear markets, investors are more scrupulous and exacting - their minds are screwed on tighter.

Bad times are categorically different from good times. Negative news is more informative than positive news. Positive psychology doesn’t make sense. And this all needs to be taken with stride, as it’s easy to criticize without offering any solutions. In sum, we have more to learn from when things go wrong than when things go right.

This principle can teach us a lot. It’s obvious in some regards, but not in others. The best place to start is positive psychology, a field hell-bent on violating this principle.

Positive psychology is not so much a field as it's a movement. It’s the sort of movement that, in a funny way, could only happen in modern America. In the words of some of the movement's biggest supporters:

The science of psychology has made great strides in understanding what goes wrong in individuals, families, groups, and institutions, but these advances have come at the cost of understanding what is right with people. (Gable & Haidt, 2005)

…at the subjective level [positive psychology] is about valued subjective experiences: well-being, contentment, and satisfaction (in the past); hope and optimism (for the future); and flow and happiness (in the present). At the individual level, it is about positive individual traits: the capacity for love and vocation, courage, interpersonal skill, aesthetic sensibility, perseverance, forgiveness, originality, future mindedness, spirituality, high talent, and wisdom. At the group level, it is about the civic virtues and the institutions that move individuals toward better citizenship: responsibility, nurturance, altruism, civility, moderation, tolerance and work ethic. (Seligman & Csikszentmihalyi, 2000)

That should give you a sense of positive psychology, it’s a feel-good science. Hopefully just reading that made you feel a little good.

The impetus for positive psychology is that we live in such a negative world: We’re surrounded by negative news. All too often people focus on others’ bad qualities, particularly psychologists. So they’re hoping to turn that trend around, and show the world – through scientific study – about the sunny side of humanity.

I can sympathize. We define ourselves by our positive qualities, not our negative ones. We accomplish more when we focus on the positive skills of ourselves and those around us. There’s something to be said for making a point of holding back unnecessary negativity and truly enjoying your time on this earth.

But inevitably positive psychology begs the question why are we so focused on the negative?. There’s actually good reason.

It teaches us more. It’s more urgent. At the very least, you have to admit that in life, the negative and positive are categorically different: The negative is not just the polar opposite of the positive, as it is in mathematics.

Examples abound, perhaps the most telling is that of Phineas Gage, the railroad worker who suffered a spike blown through his brain (in the frontal lobes) in 1848. His survival – how he was functional, but newly irritable, forgetful, and obstinate for the rest of his life – is often credited with kick-starting modern brain science, a field that has benefited more from such brain lesions than from any other modern experimental manipulation.

We’re quicker to notice when things are wrong than when they’re right. This lesson was painfully drilled into me during summers when I waited tables. When you’re waiting tables, many things can go wrong, and patrons are quick to verbally (or nonverbally) point them out to you. Indeed, a good job waiting an individual table is not so much defined by an outright acknowledgment of such but rather by the lack of any complaint.

But there’s something else that annoys me about positive psychology. It’s not merely a flawed scientific approach, it’s the assumption that the positive side of life is worth spending so much time on, that it needs to be understood - indeed, that it can be understood - and that such a science can truly improve people's lives.

In this world, there are infinite different ways to succeed. But there’s a limited number of ways to fail. People don’t just randomly fail to thrive; they generally fail in some sort of systematic way. They fall into categorizes of sickness or mental disorders – categories that, granted, are man-made, but which still, I’d argue, genuinely represent the state of nature. Just like waiting tables, the best way to improve others’ lives is to prevent things from going wrong. Under those circumstances, mankind can thrive – we have for over 100,000 years.

The positive psychologist might retort that focusing on positive areas such as happiness is the best buffer against negative consequences like say depression or anxiety. Yet this is still interpreting the import of happiness from the perspective of the negative. Nonetheless, buffer has become a buzzword in positive psychology, with studies concluding that various positive traits “buffer” people from negative consequences. The word protect is used in a similar manner.

Take a study on emotional intelligence - an interesting construct in itself, which, unnecessarily, is for some reason tied up in positive psychology. The 2004 study found that male participants' emotional intelligence predicted negative behaviors such as drug use and social deviance. Concluded the authors, “Our findings suggest that emotional intelligence may protect males from engaging in potentially harmful behaviors.” The causal implication in the wording is high emotional intelligence prevents these behaviors, not low emotional intelligence leads to those behaviors. But once again, the positive side of something – in this case, high emotional intelligence – is often qualitatively different from its negative side – which here is low emotional intelligence. For instance, say you run a longitudinal study showing that depression at time one predicted suicide at time two. Would you suggest that a lack of depression buffered participants from suicide? Does a lack of depression prevent suicide? No, it would be more reasonable to interpret your results along the lines of depression causing suicide. Once again, there are many ways to be not depressed, and there are many ways to not commit suicide, but there are only a few ways to be depressed and to kill yourself. Another parallel can be found in cognitive psychology under Spearman’s law of diminishing returns, it holds that the construct of intelligence is empirically more sound for people who are less intelligent than for people who are more intelligent. In other words, there are a few tangible and quantifiable ways to be dumb, but there are many more ways to be smart.

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The increased role of negative things in life is manifested in all sorts of ways, and in a sense it’s in who we are. We have more to lose from negative things than we have to gain from positive things. No one would ever publish a medical case study of an exceptionally healthy person. Sad music is almost always the more beautiful. Dante’s Inferno is incredibly stirring and moving. His Paradisio is a bore-fest.

This disconnect between the positive and negative in life is manifest on the national level as well. Socialists often take the role of the positive psychologist, with the goal of determining what’s best for people. It seems simple enough, but it fails by oversimplifying man's happiness. Just as case studies of things gone wrong are integral in medicine, examples of disastrous policy decisions can teach us much about economics. Sowell writes about Lenin’s early transformations in his approach towards implementing communism. At first, Lenin oversimplified human prosperity, not unlike positive psychologists. The result was an overwhelming lack of prosperity, which even Lenin was able to attribute towards his initial shortcomings.

On the eve of the Bolshevik revolution, V. I. Lenin declared that “accounting and control” were the key factors in running an enterprise and that capitalism had already “reduced” the administration of business to “extraordinarily simple operations” that “any literate person can perform” – that is, “supervision and recording, knowledge of the four rules of arithmetic, and issuing appropriate receipts.” Such “exceedingly simple operations of registrations, filing, and checking” could, according to Lenin, “easily be performed” by people receiving ordinary workmen wages.

After just a few years in power, however, Lenin confronted a very different – and very bitter – reality. He himself wrote of a “fuel crisis” which “threatens to disrupt all Soviet work”, of economic “ruin, starvation, and devastation” in the country, and even admitted that peasant uprisings had become “a common occurrence” under Communist rule. In short, the economic functions which had seemed so easy and simple before having to perform them now loomed menacingly difficult.

Belatedly, Lenin saw a need for people “who are versed in the art of administration”…Lenin warned his comrades: “Opinions on corporate management are all too frequently imbued with a spirit of sheer ignorance, an anti-expert bias.” (Sowell, Basic Economics, 2006, p. 164-166).

The fatal flaw of socialism is equivalent to that of positive psychology: That we can correct the wrong by simply actively pursuing the good. The flaw is in the assumption that man’s pursuits are as tangible, predictable, and manipulable as his shortcomings.

-KJ

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Media (in order of appearance)

Photo: (1) P1030672.JPG, 06/30/2008, by Stanandlou; (2) 200811 bull market, 10/10/2008, by superciliousness; (3) Frankfurt Stock Exchange-Bear, 04/30/2007, by Leonieke; (4) Girasoles para los amigos/Sunflowers for the Friends, 12/31/2007, by Claudio.Ar-Hermes; (5) soledad, 12/02/2005, by Robotson; (6) Mike Butcher being judgmental, 10/21/2008, by Adam Tinworth; (7) Representation of Phineas Gages' leison, 2004, by Antonio Damasio; (8) sadness under a big sky, 05/04/2006, by goatopolis; Grosse tete-Big Head, 12/21/2005, by Gentil Garçon [sombres présages].

Video: (1) Music video of the song Fake Plastic Trees, by Radiohead, released on the album The Bends, which was put out in 04/05/1995. Sphere: Related Content