Tuesday, January 12, 2010

"Wall Street Is An Asshole" - Bumper Sticker

Note: I may have come up with a killer app. You've got spellcheck for proofreading. You've got spellcheckplus (spelling check and grammar check). What you don't have is definitioncheck. Problem is, it is an app meant more for readers than writers. Your average American has the IQ of a carrot, and needs an app that flags big words what they don't know what it means. The problem is with hyperlinks, it is a cumbersome process to find out the meaning (click the link and read the definition in a separate page, then try to remember what the fuck it was you were doing, with yet another open window to distract you). Instead, there should be one of those java script thingies, so that when you put your little pointer arrow on the word, a balloon appears with the summarized definition. That way we have one less thing to remember, and can all get just a little bit dumber, and use our brains just a little bit less. Whoever is out there that does all the work and comes up with this app, you better fucking send me a royalty check.

I once had a chance to get up close and personal with a B-17 Flying Fortress at an air show. The B-17 was employed in the daytime bombing of Germany during WWII. Underneath the plane is a ridiculously small plexiglass bubble where the belly gunner sits. My Uncle Ed was a belly gunner. Small wonder, then, that he was an alcoholic. 

Flying in these bombers was not a pleasant experience. Aside from the cramped conditions, the lack of oxygen, the below-freezing temperatures, the inability to void your waste products in an expeditious or dignified manner, there would also be encounters with pesky German fighter planes who would hurtle high velocity large caliber lead projectiles at you, and flak - truly evil-looking pieces of sharp-edged shrapnel from exploding anti-aircraft artillery shells. 

These artillery shells were designed using a mathematical technique which combined probability theory and operational optimization. You have an explosive shell, and, by scoring the surface, you can control its fragmentation. It will break up into pieces of a certain size. How many pieces do you want? How large should they be? If the pieces are too small, they may not do much damage. If the pieces are big, they will do real harm. But you will have less pieces, and the chance of hitting the plane will be correspondingly less. 

This philosophical exercise isn't just theoretical, and it isn't just a horrifyingly cold little academic calculation. Lives are at stake. Blood and treasure are at risk.

So, anyway, yesterday I actually started on something which may develop into an extended theme, namely, simulations and models. A large part of the theme is that most mathematical or computer models, really having only a partial, idealized description of reality (not unlike a philosophical exercise) are silly. 

Well, let's briefly talk about philosophical exercise. It requires a certain suspension of disbelief, a degree of let's pretend, a modicum of play. At its best, it is informed, structured speculation, a good form of improvisational comedy, an exercise of the mind. At its worst, it is trite and annoying, a clumsy form of public masturbation, like a Quentin Tarantino movie.

The ancient Greeks were very good at coming up with these silly exercises, such as the Ship of  Theseus: an exercise in identity, persistence, categorization, that will, for most people who check out the link, suck all the joy, the precious juice of life, right out of your day, cause your eyes to roll into the back of your head, and your head to slam into the edge of your desk and give you a nasty bleeding gash that will require stitches. The ancient Greeks were probably also very good at public masturbation, but I've no real desire to check up on that.   

The interesting, or appalling thing, depending upon your point of view, is how often these idealized models inform our day-to-day behavior. Take, for example, the Flak Problem related above. Milton Friedman, the Nobel-prize winning economist, and fucker-up of the Chilean economy (among other things), was one of the first to notice the similarity between portfolio investment strategy and the optimal explosive pattern of anti-aircraft shells. (Not surprising, as he worked on the mathematical modeling of both).  

Friedman, and many others, were working under the assumption - now (post-Panic of 2008) pretty much discredited except by a few die-hard lunatic Libertarian idiot types - that the stock market is both efficient and rational. How the fuck they ever managed to delude themselves that this was the case is beyond me, but that is the model.

Of course, anyone who has even the slightest ability of even the most superficial of observations about human - or should it be simian? - behavior, knows that the market is composed of actions produced by irrational choices by irrational dumb, stupid, herd animals motivated by fear and greed. There is, after all, a reason why all the market upsets have been called Panic of this or that year. 

The market, as a model, mirrors only coincidentally attributes of the "real" economy. The market is there to be manipulated, and everyone is manipulating the market. If it wasn't for everybody manipulating the market, there wouldn't be a stock market at all.  

One of the premises of financial forecasting is that the fluctuations of stock prices are completely random. A statistical analysis of prices by mathematical economists has suggested otherwise, but, as is usual with mathematical conveniences, the modeling of fluctuations as random were "close enough". 

Thus flawed and faulty financial equations and instruments were and are used that assume price changes are random. Instruments used that assume that, on average, market behavior rests comfortably under the classic bell curve. As Nassim Nicholas Taleb likes to say, Wall Street ignores "black swans", or "fat tails" (the extreme edges outside of the bell curve behavior, the bubbles and busts) at their peril.

Now, there are still free market apologetics out there who, in a rather pathetic infantile whine, complain the the government should have saved us from ourselves (irony alert), that the SEC watchdog should have curbed this insane and irrational behavior before the party got out of hand.

But this was never the intended purpose of the Securities and Exchange Commission. When the SEC (fortunately or unfortunately the legislation written NOT by mathematical economists, but by lawyers and bankers) was created in 1934, the intent was... how to reassure the public that the stock market was not rigged? (Remember folks, in the 30s, a LOT of financial executives, rather than getting obscenely huge bonuses for fucking up the economy, went to jail). The SEC's mission was "to restore public confidence in the securities market". In other words, how to make the stock market look real?

The answer was stringent new laws aimed, not at the sweaty mob of average Americans, but at the Wall Street Elite, to make sure that never again would their manipulations of their poop-covered dirty birdie fingers soil the clean white linen sheets resting upon great altar of Capitalism.  

In other words Securities Police Theater, to borrow the phrase "security theater" from Bruce Schneier. Fake controls on a fake model of a toy economy which does nothing to protect very, very real livelihoods. Not quite a danger to all of us, but certainly an inconvenience. Fun, huh?

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