Regular finance-focused readers have probably noticed that I’ve neglected economic commentary recently. That’s because 1) there hasn’t been much net marginal information recently to clarify what I see right now (monstrous reflation in the West, looming monstrous deflation in the East, looming war in the Mid-East, commodities as The Big Thing through late July). 2) the geopolitics of Lebanon is probably the single most influential thing going on (for commodities markets, anyway) with such a corresponding lack of true public analysis.
Anyway, as I have scrolled through my lonnnnnng list of finance blogs and gotten more and more bored, one wasteful meme in particular has infected more and more online financial discourse. (Which is still way ahead of the NYT and WSJ, who are probably wondering how best to appeal to the estrogenated millenials, i.e. the yuppie female/ gay demographic, with more front-page fashion coverage.) Let’s call it the Complex Systems Meme.
The Complex System Meme is what all the Smart Guys In The Room, the quants, talk about these days. CSM exhibits a predictable life-cycle.
- Quant adds long, verbose, high-syllable-per-word, hypertechnical, and thus unfalsifiable comment to a mainstream financial blog.
- Blogger, realizing he’s in the presence of a Smartest Guy In The Room, gracefully and tacitly hands over the reins of discussion to Quant.
- Many, many jargon-intensive paragraphs ensue. Frequently sighted examples of jargon intensity include “information latency,” “Knightian uncertainty,” “systems architecture,” “the financial transmission mechanism,” “the securitization process is driven by nonlinear systemic processes,” “counterproductive proliferation of systemic dependencies,” “constructive ambiguity” (Greenspan’s fave), and “reflexivity.” The liquidity of discussion within the broader discursive framework of the weblog, if you will, exhibits a six-sigma nonlinear growth trajectory.
- At this point, 100.00% of common sense has been scared the hell out of the room. Only certified high priests of quantology, and their most zealous qualitative admirers, remain.
- After paragraph count has vaulted into the upper two digit range, absolutely nothing has been said that couldn’t have been stated much more simply.
- However, Quant’s intellectual stature has been established beyond all dispute. If anything, the transaction cost of challenging him (requiring at least as many ubersyllabic paragraphs as were just hemorrhaged) has become prohibitive.
Verbose commentary wastes everybody’s time.
I don’t blame quants for crappy writing, just as I don’t blame myself for crappy quantification. The problem is that carpet-bombing a discussion with unnecessary technical verbiage excites a majestic awe in influential qualitatives least able to challenge — but best able to disseminate — quants’ “solutions” to the “problem,” which are at least as benighted as everybody else’s, yet treated with greater credibility.
Everything in life is nonlinear.
Just because liquidity is an economy of scale, doesn’t make it a national imperative of the federal government. In the long run, economic surplus of even the largest economies of scale is captured by the operators of that system. For example, mass transit seems like a great idea on paper, and it is — in the medium run. However, the workers and conductors of any mass transit system quickly realize that society is capturing much more surplus from their activity than they are. So their rational best choice is to unionize, and go on strike, holding the broader economy hostage until they capture (in the form of higher salaries, pensions, etc) the entire social surplus of that activity. Such is the case with the French railway workers’ union.
Liquidity isn’t nearly that nonlinear — I’m just using a more dramatic example to make the point.
Every commodity, whether it’s oil, debt, or whatever, has a parabolic marginal cost/marginal benefit curve. “Scale economies'” MB/MC curves currently seem to offer higher rates of return with greater investment, until some point farther off in the future, than those of corresponding industries. Over time, scale economies become identical to those of non-economies of scale, except that the production side has fewer participants. Fewer producers relative to consumers means that consumers’ bargaining power asymptotes to zero. Consumers get mad, and government steps in and regulates producers. Leveraging of producers’ superior bargaining power ends. In the long long long run, both producers and consumers enjoy more surplus. In theory.
The market for lending, ostensibly a sacrosanct economy of scale, obviously went into negative territory on that curve. Now it’s snapping back. Government interventions to maintain the current level of debt are only going to cause a snapback much more “nonlinear” than whatever nonlinear correction we would otherwise have undergone.
Getting wrapped up in “the nonlinear nature of liquidity” only obfuscates the discussion for everyone. Every process is nonlinear relative to itself at the distribution of previous moments in time. But processes tend to be much more linear relative to all other processes. Since we’re talking about subsidizing one somewhat nonlinear process (debt-funded liquidity) at the expense of all other nonlinear processes, why bring nonlinearity into the discussion at all.
If smart people spent their time weighing on other Smart People to solve simple problems, instead of taking themselves so seriously and flaunting their technical knowledge, maybe we would actually get somewhere in terms of stopping BS Bernanke & Co. from butchering the financial credibility of the United States, and actually get some return on all this talking/typing time investment.
When that starts happening, and private parties are barred from free-riding off of AAA government bond ratings courtesy of taxpayer sweat, I will crawl out of my dollar-bearish, euro- and “safe” fixed income-uberbearish hibernation. And maybe the future of finance will become an interesting topic to blog about again. It’s just that with Fannie Mae et al. going $400bn-$1.1trn in debt, in addition to the Fed ~$400bn of Treasuries exchanged for worthless MBS, AND $500 billion in FY09 debt, the medium term US bond rating is already staring at either much higher taxes or an epochal downgrade. Capital is already leaving in anticipation of necessarily higher taxes, which will mean still higher taxes on whatever capital is left. Prescriptions of “solutions” to the current “credit crisis,” as if we can outsmart mean reversions of debt if we just think hard enough, are as stale as they are futile.
And in case you were wondering what the point of all that bloviation was … it was just a rant. It’s frustrating, waiting and wishing for a better alternative to capital flight.
[*] unless the abbreviation damages rhythm too much