Too Big to Jail

[CrackSmokeRepublican]

Too Big to Jail


    "Among a people generally corrupt, liberty cannot long exist."
    Edmund Burke


Although Nassim Taleb makes some excellent points he is a bit narrow in his analysis because of his superior knowledge and experience in a highly specific area of the crisis, which in some ways is a broader cultural crisis.

There may be enough fraud involved in the US over the past twenty years for multiple prosecutions under the RICO statutes. Or it just may be the end result of a general breakdown in morals, from the top down by example perhaps.

One does find some institutions appearing as enablers at the heart of every crisis, from LTCM to Enron to the Accounting Frauds to the Tech Bubble to the Credit Bubble.

No, this was worse than the silence of the witnesses to the assault of Kitty Genovese that gave the label to the bystander effect.

In this case there were 'bystanders' who financially benefited from the assault and who not only kept quiet but actively intimidated and silenced other bystanders through ridicule and fear of retribution. But there are also many who simply did not care then and will not care once the markets rally once again. This is the sad commentary on a nation corrupted by easy money.

There were many bystanders who did call 911 and were ignored because those in the enforcement chain were either asleep on the job or had other competing interests.

The practical problem is that the institutions involved are probably too big to jail.

That is their strength, but ironically also their weakness.


The Financial Times
Bystanders to this financial crime were many
By Nassim Nicholas Taleb and Pablo Triana
December 7 2008 19:18

...Not surprisingly, the Genovese case earned the interest of social psychologists, who developed the theory of the "bystander effect". This claimed to show how the apathy of the masses can prevent the salvation of a victim. Psychologists concluded that, for a variety of reasons, the larger the number of observing bystanders, the lower the chances that the crime may be averted.

We have just witnessed a similar phenomenon in the financial markets. A crime has been committed. Yes, we insist, a crime. There is a victim (the helpless retirees, taxpayers funding losses, perhaps even capitalism and free society). There were plenty of bystanders. And there was a robbery (overcompensated bankers who got fat bonuses hiding risks; overpaid quantitative risk managers selling patently bogus methods).

Let us start with the bystander. Almost everyone in risk management knew that quantitative methods – like those used to measure and forecast exposures, value complex derivatives and assign credit ratings – did not work and could provide undue comfort by hiding risks Few people would agree that the illusion of knowledge is a good thing. Almost everyone would accept that the failure in 1998 of Long Term Capital Management discredited the quantitative methods of the Nobel economists involved with it (Robert Merton and Myron Scholes) and their school of thought called "modern finance". LTCM was just one in hundreds of such episodes.

Yet a method heavily grounded on those same quantitative and theoretical principles, called Value at Risk, continued to be widely used. It was this that was to blame for the crisis. Listening to us, risk management practitioners would often agree on every point. But they elected to take part in the system and to play bystanders. They tried to explain away their decision to partake in the vast diffusion of responsibility: "Lehman Brothers and Morgan Stanley use the model" or "it is on the CFA exam" or, the most potent argument, "modern finance and portfolio theory got Nobels". Indeed, the same Nobel economists who helped blow up the system at least once, Professors Scholes and Merton, could be seen lecturing us on risk management, to the ire of one of the authors of this article. Most poignantly, the police itself may have participated in the murder. The regulators were using the same arguments. They, too, were responsible.

So how can we displace a fraud? Not by preaching nor by rational argument (believe us, we tried). Not by evidence. Risk methods that failed dramatically in the real world continue to be taught to students in business schools, where professors never lose tenure for the misapplications of those methods. As we are writing these lines, close to 100,000 MBAs are still learning portfolio theory – it is uniformly on the programme for next semester. An airline company would ground the aircraft and investigate after the crash – universities would put more aircraft in the skies, crash after crash. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen.

Bystanders are not harmless. They cause others to be bystanders. So when you see a quantitative "expert", shout for help, call for his disgrace, make him accountable. Do not let him hide behind the diffusion of responsibility. Ask for the drastic overhaul of business schools (and stop giving funding). Ask for the Nobel prize in economics to be withdrawn from the authors of these theories, as the Nobel's credibility can be extremely harmful. Boycott professional associations that give certificates in financial analysis that promoted these methods. Remove Value-at-Risk books from the shelves – quickly. Do not be afraid for your reputation. Please act now. Do not just walk by. Remember the scriptures: "Thou shalt not follow a multitude to do evil."

Posted by Jesse at 9:55 PM
Appearance versus Reality in the Prism of Economics


    "Decency, security and liberty alike demand that government officials shall be subjected to the same rules of conduct that are commands to the citizen.

    In a government of laws, existence of the government will be imperiled if it fails to observe the laws scrupulously. Our government is the potent omnipresent teacher. For good or ill, it teaches the whole people by it's example.

    Crime is contagious. If the government becomes a law breaker, it breeds contempt for the law; it invites every man to become a law unto himself; it invites anarchy." Supreme Court Justice Louis Brandeis, Olmstead v. United States


    "And they healed the pain of my people disgracefully, saying: Peace, prosperity, when there was no peace or prosperity." Jeremiah 6:12


The problem of official US statistics not fully reflecting the actual economic situation is reasonably well-documented and accessible to any literate person. It is remarkably underreported and unremarked upon by the economic and media establishment however.

It may often be crap, but it is the crap we use to buy and sell, trade, derive values, and base policy decisions. It does not matter to the buyers and sellers in the short term, but in the longer term it can be seriously misleading, as witnessed by our latest financial crisis.

Peer pressure discourages negativity and outlying opinions amongst many economists, so recognition of trend changes and innovation in ideas become particularly problematic. This is an issue in the leading edge of many sciences, particularly in those that are rapidly evolving such as theoretical physics. Exegesis succumbs more readily to eisigesis in what might be described as a nascent science like economics with so many conflicting opinions and theories influenced by political agendas and ideology.

Noriel Roubini is hailed as a prophet for predicting a downturn that common sense and an examination of the statistics should have made obvious to a first year economics student in March at the latest. Roubini was a maverick in that as a tenured professor with a reputation he dared to state the obvious before it became painfully obvious to everyone.

There are others who were equally forthcoming, if not as famed, in "telling it like it is." Meredith Whitney and Yves Smith are two outstanding examples of those who are led by the data, who are remarkable in the integrity of their thought processes, even when they might be incorrect as we all are.

Why is there a reluctance to state the probable amongst the economic establishment? It is most likely the fear of appearing foolish, of being wrong, because the methods and measures underlying the work of all the economic schools is simply unreliable. In an atmosphere such as this, playing safe and building 'reputation' and a place in a pecking order becomes a higher priority than innovation and advancement of understanding.

It fosters an ideological balkanization of knowledge, and the tendency to impress and intimidate rather than illumnate, because the economic professional understands that they simply do not know the answer with certainty, but can never admit it or explain it sufficiently to a non-practioner or even worse, a client. Perhaps that is why some of the best information has been coming from those who have less vested interest in the established order. There is a certain freedom conferred by the glass ceiling or a lack of material need and ambition.

Then there are the economists who act as hired opinion slingers or unpaid angry villagers for ideological causes and think tanks, tending to dominate the landscape in the short term because it is easier to declare yourself and work for a group of true believers whose first principles you hold, whether in true love or a paid embrace. And you will be right every so often, and will always find a place to hang your hat and park your shoes.

And on the far end of the spectrum are the used car salesmen of the economic and financial industry, who appear in the news and on television program generally with a 'pretty' interviewer as a set piece to promote a view of reality that favors the pocketbook of their employers, with a shamelessness that is almost comic at times, and would almost certainly not be so tolerated in any other aspect of human endeavor.

Can you imagine the state of the food and drug industries if such blatantly fallacious claims and interpretations of the prognosis and prior results were tolerated? It recalls the early days of traveling medicine show salesmen.

Gratefully there are more independents these days, with a forum provided by the internet for their thoughts, who operate outside of the conventional journals and channels of economic orthodoxy. Independent minds like Mark Thoma's Economist's View, Paul Kedrosky's Infectious Greed, Barry Ritholz's Big Picture, Yves Smith's Naked Capitalism, Eric Janszen's iTulip, and of course the benchmark for all, Calculated Risk, among others listed in the Divertissement Éducatif section on the left side of this blog. Their task is too often thankless but a candle lit in the darkness nonetheless.

Change is coming, and a renewal of thought is in the air. Monetarism has clearly run its course, and Keynesianism needs a significant update if not transformation from a genius equal to the original. It also may be time for a radical change in rethinking old ideas of how an economy can operate efficiently, ironically by often viewing even older ideas and theories in the light of new experience.

Out of the destruction of our current system will arise new ideas, new concepts, new attempts to promote the advancement of knowledge, a difficult marriage of economic science and public policy which don't quite speak the same language or have the same core principles, and at least a new look at the operation of human financial interactions.

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