Philosophical Issues of the Credit Crisis
I am amazed that the credit crisis forces us to consider some basic philosophical issues re informal fallacies, e.g.
- Kantian unprovable apriori synthetical metaphysical premises--"the world is one credit crisis";
- Ghostly deus ex machina causation--"the credit crisis has made my train late";
- Circulus in probando by filthy rich bankers-turned-unelected dictatorial ministers--"this is the only alternative (pay bankers with taxpayers' money) because I know it is worse any other way";
- dicto simpliciter--"this is a credit crisis because I say so".
C'mon.
The media's game is to get under our skin so that as Aristotle put it, "we become what we perceive." Thus, "I think therefore I am part of the credit crisis." For the media, "the credit crisis is, therefore I, the media, make money".
One way we might protect ourselves from the electronic tsunami of rumour, falsehoods, hearsay and outright frauds by the news pundits and "macro-economists" who happen to work for banks or funds is to gain a modicum of financial literacy and to focus on what might be called "a critique of pure luck".
What is financial literacy? It is basically to understand risk in its dimensions through social time and social space. When you think about it, finance as risk is extremely symmetrical. We can get into a very long and fascinating discussion here. [Beyond the basic slogans, for the social theorists, I will only point to two areas of fundamental fecundity: (1) Group Theory--as defined by the mathematical logicians of the 19th century--from Galois on through Lie, Abel, and used to re-write the physics of the 20th & 21st centuries; and (2) Category Theory--an alternative to set theory which is yet to be applied in social science and law but extremely suggestive--the world as arrows and functors.]
Another way to approach financial literacy is to simply "keep some skin in the game". I would suggest that if the maths are just too boring for you, that you can learn finance viscerally by just trading. As preparation for trading, consider some of the best traders I know are: (1) excellent surfers on real oceanic waves; or (2) shark divers. A fine trader's mentality is found in some of the highest levels of abstraction, e.g. note Pascal's God-bet before he entered enlightened quiessence and Hilbert's enlargen programme on the 10 hardest bets on research programmes in the 20th century.
What is a critique of pure luck? It is the belief that all things are alive. Lots of so-called traditional people think this is obvious--what the cultural anthropologists called "animistic". To update this "animistic urge" into the best of Western thinking and to be a bit more precise (but still unpardonably vague), all things that interact as communicating systems are Von Neumann Universal Constructors--that is, these "things" do just that (what is logically required) to replicate themselves in whatever world they find themselves. These nestled systems give the world its form. This form is not invariant. The only necessary invariant is that material of this world hasn't changed at all for billions of years. [Democritus & Leucippus, et Lecretius RIP.] Physicists tell us this--that the planet Earth is composed of the same atoms (give or take some meteroic and cometal accretions and collisions) since the very beginning over 4.5 billion years ago, and for another googleplex years, the atoms will be the same. Although we might wrongly believe that there has been "progress" since way back then. All there has been is really a "re-arrangement" of form. Socrates is even more right now--we as humans are ridiculously insignificant.
As an exercise for the Von Neumann Universal Constructor, we might consider the credit crisis as a good opportunity to think about what laws are conserved through global crisis or anticipating the dark ages (forget the Depression, that's just too small a wave to bother surfing), in case of the BIG ONE, what is the form of laws that are necessary to re-boot civilization?
Answers should be sent to the New York Times and the Financial Times.
Tracking the Credit Crisis - History & Synchrony
Reading the FT in the mornings on the train from Welling, Kent to Victoria, London gives me about 35 to 40 minutes to take views of the world seen from the lenses of financial journalists who've scoured short-term and long-term facts and presented the jumbled mess of the world into a rain of news with some pattern.
The pattern (trend?) I've noticed in today's FT is that the credit crisis has rippled into the shipping world. This is the real world of products shipped from point A to point Z on the planet Earth, and the letters of credit which should function boringly without any sense of risk or untoward regret have become problematic because the clerk-teller in India, say, has refused credit of another bank because ...because ...who knows whether the bank in question is linked to the Lehman bankruptcy. The Lehman bankruptcy according to the news-pattern was a categorical error of judgment (See John Dizard's (Oct 27, 2008) "Firefighters better save shipping next," FTfm at 13). Dizard's words: "Treasury secretary Hank Paulson's ignorant and clumsy attempt to avoid moral hazard and systemic risk resulted in uncounted quantities of goods piling up on loading docks, and customers living off inventories and consuming less."
My gentle meander through the course of history, however, came from reading Edward Chancellor's (Oc 27, 2008) "History is not exactly repeating itself," FTfm at 28) where he quotes the "brilliant study" by Barrie Wigmore on The Crash and Its Aftermath. In this classic description of a ravaged US economy where everything appears to be surrealistically stopped, Wigmore says, "Shipping docks in the coastal cities lay idle for weeks without a single ship arriving." Dizard in his article says that the Baltic Dry Index (BDI) which trackes the price of shipping dry cargo along key routes has fallen from the day of Lehman's bankruptcy--September 15, 2008 (everyone should remember this date as the exact reference point when a capitalist error caused the Anglo-Saxon model of financial capitalism to fail and fall under the arms of the socialist construction)--when the BDI was 4,949 to 1,149. This is a fall of 76 percent. As in the bursting of any economic bubble, the choices of the market players become digital. Dizard asks in his immitable American way, "Why should they [the hardworking, middle class, average, families who are sitting around the kitchen table playing by the rules] care that some Greek or Lebanese is underwater, so to speak, on his ship?" He answers his own rhetorical query with "How about because what you need to stay middle class and average, or hardworking, is being carried on those ships?"
If Chancellor and Dizard weren't enough to remind me about how important shipping is and so vulnerable to the credit crisis, I came across Robert Wright's (Oct 27, 2008) "Sales of ships for scrap being 'suffocated', FT at 21. He starts off with: "A key safety valve for regulating the world's supply of ships has stopped working in recent weeks, after credit and other problems brought the sale of ships for scrapping to a near halt." Further, "The central problem, according to people invovled, is that many shipbreakers' banks are no longer willing to issue letters of credit-documents assuring the seller's bank that the agreed price for the vessel will be paid. The banks fear that falling scrap values mean their customers will be unwilling to pay the seller the guaranteed sum and the vessel will not cover the guaranteed amount if it is seized as security. Some Indian banks also appear to have refused to honour letters of credit over fears about the value of the ships pledged as security. Vessels were fetching record prices of up to $740 a tonne as recently as September, while the present market price has collapsed to $300."
So, here is the short-long category theory equation of the credit crisis:
Asset-backed Securities (ABS) --> Residential Mortgage-backed Securities (RMBS) --> Sub-prime ($615 bn 2006), Alt-A ($475 bn 2006), and Jumbo ARMS ($395 bn 2006) of which $250 bn subprime ARM) --> $2.75 trn of mortgage-debt is bad ($1.25 trn is subprime, $1 trn alt-A and $500 bn are jumbo ARMs)--> mismanagement at Bear Stearns Asset Management & its bankruptcy $1.7 bn loss Feb 2007 to June 2007-->collapse of ABCP market on August 6-7th 2007-->money market seizure thereafter with retail withdrawals-->official "liquidity" problem declared in banking system with US Fed and US Treasury Secretary allowing "dead mice" of RMBS to be traded for treasury paper Nov 2007-->Bear Stearns "rescued" by JP Morgan with $24 bn guarantee issued by US gov't Feb 2008-->too big to fail argument becomes bank solvency problem with list of banks on "death row" doubling and tripling, until in March 2008 "every bank" appears to be a target for failure-->measures of potential loss from credit crisis is now minimum of $500bn and rizing in slow exponential fashion to $6 trn, the D (depression) word becomes a constant image-->Sept 2008 Wall Street independent investment banks disappear and Lehman Brothers goes bankrupt on September 15, 2008.
Research topics: (1) How to compose fundamental human rights in opposition to dictatorial discretion of governments that act like pirates raiding the long-term value of their shares? (2) How to grow your own vegetables for investment bankers?
ciao
joe
