Pandemonium, Kingdom of the Quants 2

THE QUANTS

Quants is a term for a breed of mathematical wizards who, from the early 1970s forward, essentially built the computerized system of finance we have today. Before the quants, Wall Street types were largely made up of testosterone filled, play- by- the- gut traders- (think Gordon Gekko of the 80s classic- Wall Street- though no doubt with harrier  knuckles than Michael Douglas.) After the quants, Wall Street would be filled with refugees from the world of quantum physics or other math heavy branches of the sciences. Its myriad of financial transactions would be no longer be based on the gut instinct of human traders, but run by advanced algorithms that churned away the world’s daily business within a bewilderingly complex network tied together through satellites and fiber optic cables that literally circled the globe. The world for the first time had truly become “one world” with everything of value in it symbolized in electric strings of ones and zeros.

How did this come to be so?

A book probably destined to become the definitive story of the rise of the quants is the Wall Street Journal’s Scott Patterson’s The Quants: How a new breed of math whizzes conquered Wall Street and nearly destroyed it. Patterson begins his story with Ed Thorp, who started his career not as a Wall Street trader, but as an academic with a penchant for gambling.

The journey to quantdom began with the quest to beat the roulette wheel. Thorp was sure he could figure out a “scientific system” to predict where the ball would fall, and thus conquer chance and make himself a fortune. He found an unlikely ally in the economist, and gagater, Claude Shannon.

In a scene that reminded me of the 60s classic Get Smart, Patterson recounts how Thorp and Shannon invented a roulette computing computer that was placed in Shannon’s shoe. Shannon would relay the predictions to the roulette playing Thorp through a radio device in his ear. The scheme, of course, went nowhere, and could have ended up getting the both of them killed. Thorp, however was not to be deterred, chance could be beaten, even if it wasn’t the chance of the roulette wheel. He turned his attention to BlackJack, where he did, indeed, come up with a winning strategy that he would turn into a best selling book- Beat the Dealer.  With one kind of chance beaten, Thorp set out to conquer another, and he set his eyes on the biggest casino in the world, the one found on Wall Street. Thorp’s core method, as it would be for all quants, would be to use advanced computers, and highly sophisticated mathematics borrowed from the physical sciences, to divine the future of the market, the outcome of the great financial game, and in the process make a killing for himself.

Thorp, who with philosophy major, Jay Regan, started the computer based trading firm Thorp and Regan, was but the first of a flood of people with an advanced mathematical background who would stream into Wall Street, especially after the 1980s, enabled by financial deregulation, the explosion of super-fast and relatively inexpensive computing, and the development of sophisticated mathematical finance.

Thorp’s quant brethren, a good deal of whom also had a taste for gambling included: Ken Griffin (Citadel Investment Group), Cliff Asness (AQR Capital Management), Boaz Weinstein (Deutsche Bank), and Jim Simons, who emerged from the super-secret field of military cryptography to create what is perhaps the most successful quant fund in the world (Renaissance Capital Management).

I should step aside from Patterson’s narrative for a moment and provide a general picture of the historical circumstances that coincided with the rise of the quants. The quants were just one of many groups linked together by newfound faith in “the market” that had emerged from the failure of Keynesian economics. To overly simplify the matter, Keynesianism, which had grown out of the collapse of the global economy in the 1930s, held the position that government managers should interfere with the economy to prevent a rerun of the Great Depression, and perhaps more importantly, believed that such interference with the economy would work. This interference was largely what is called “counter-cyclical”. When recession struck the government would run up huge budget deficits to keep unemployment from going so high that it would derail consumer spending, thus, in theory, avoiding the vicious circle of unemployment-less spending-more unemployment that had characterized the Great Depression.

By the 1970s, Keynesianism was a spent force. Yes, another Great Depression hadn’t occurred, but Western economies became mired in unemployment and seemingly intractable inflation as this great sketch by comedian Father Guido Sarducci illustrates better than any economist could.

The revolution that Ronald Reagan (though Reagan with his oversized budget deficits was perhaps more of a Keynesian than some would admit) and Margaret Thatcher launched in the early 1980s would assert not only that markets were smarter than any government manager, but that giving the freest reign possible to the markets would eventually lead to prosperity for all.

The argument between those who favored some sort of government management of the economy, and the proponents of the wisdom of the markets, was at root an epistemological argument- an argument over how knowledge worked. The Keynesians might have argued that if an economy was to avoid the kinds of crises experienced in the 1930’s you needed able management at the top, an expert who kept the ship on course. The position of the market proponents was that knowledge was best processed from the bottom up, as individuals made decisions based on their interactions with one another. Based on these interactions, the sum of all individual interactions- the market- was an order of magnitude smarter than any individual bureaucrat who by necessity had to understand the economy on an abstract level, and thereby risked losing so much of the economy’s actual detail that they lost touch with reality itself.

To return to Patterson’s narrative, the strange thing about the quants is that they were both true believers in the free market, who simultaneously held that they were so smart that they could “beat the market”-the title of one of Thorp’s books.  This idea that the market could be outsmarted flew in the face of the prevailing theory of how markets worked, the so-called,  Efficient Market Hypothesis. The idea behind the EMH was that markets were always smarter than any individual or subgroup because markets reflected the total of information exchanged between individuals.  If you own what is called an “Index Fund”, through your 401K  at work, or for some other reason, your retirement future is built on the assumption of the EMH. That is, an Index Fund buys an entire market assuming that there is no way for human beings to be able to pick winners and losers- the hope being that winners out number losers over the long haul.

Quants certainly believed in the wisdom of the market. They even had a word for it “Alpha”, the website Seeking Alpha, and the hedge fund magazine Alpha get their name here. What the quants believed was not that the market was wrong, but that it was slow. If, through their sophisticated mathematical models and lightning fast computers, they could get to the “Truth” first- say by buying up a stock that their models told them was about to rise in price- they could make a killing. And many of them did just that.

Here’s Patterson on the quest for Truth of the quants:

The Truth was a universal secret about the way the market worked that could only be discovered through mathematics.  Revealed through studies of obscure patterns in the market, the Truth was the key to unlocking billions in profits. The quants built gigantic machines- turbocharged computers linked to financial markets around the globe- to search for the Truth, and to deploy it in their quest to make untold fortunes. The bigger the machine, the more Truth they knew, the more they could bet. And from that, they reasoned, the richer they would be. (The Quants, p. 8)

The quants, using their sophisticated mathematics were largely responsible for the creation of a whole host of financial exotica, such as Credit Default Swaps, that came to the public’s attention with the financial collapse of 2008. Many of their creations were meant to hedge risks, thereby “guaranteeing” profit, and became a large component of the delusion that human beings had gotten so smart that full-blown financial crises were a thing of the past. Economists called this lack of crises, what proved to be a mere calm before the storm “The Great Moderation”- a delusion that was believed in all the way up to Federal Reserve Chairman, Alan Greenspan himself. Once the valuation models the quants had devised to price their exotic financial instruments was shown to be an illusion, the financial institutions that held them started to unravel.  As the financial system verged on the edge of collapse in 2008, the quants models, which predicted that the market would soon return to equilibrium, stopped working. Panicked investors were not acting as the model of human beings as rational actors would suggest. Quant funds were forced to join in the massive selling, or risk being wiped out entirely, as the value of not just the exotic instruments they invented, but the market itself, evaporated in the biggest decline since the 1930s.

There had been lone prophets who tried to point out the fundamental errors in the models of the quants. One of these prophets was the mathematical genius Benoît Mandelbrot who, way back in the 1960s, observed that many markets rather than reflecting the smooth structure one would expect from a phenomenon of rational actors looking for the best price, was instead filled will all of these crazy spikes as prices alternatively soared then crashed. A more contemporary critic of the quants was the trader and writer, Nassim Taleb, who pointed out that the mathematical models of the quants, which were based on the physical sciences where predictable averages- Gaussian bell curves- were the order of the day (say the average human height- Mediocristan) did not work in the realm of economics because it was prone to extremes (say a sample of average income with Bill Gates in the mix-Extremistan).

The cries of the prophets were for-not until the whole system reached a point of near implosion.  An implosion that was only halted by a massive Keynesian intervention and reinflation in the form of bailouts and stimulus aimed largely at the financial sector, but also elsewhere (GM) by the world’s most powerful governments and their central banks. An action that almost certainly lacked much, if any, democratic legitimacy, and that, while probably having saved us from a full-scale implosion of the global economy, has not allowed us to escape what is proving to be a long“soft-depression”. Indeed, if the current crisis in the EU portends the future, governments may have merely postponed an economic reckoning that will likely now be centered on the bloated finances of the governments of the rich countries rather than the financial markets themselves.

This may seem like a particularly long and drawn out detour from what I had promised in the post preceding this one, that is, to apply what I had learned from David Hawkes’ reading of Paradise Lost to the quants. So, without further ado, let’s see where this takes us:

I should say right off the bat that what I am about to do is apply religious concepts to secular phenomenon. This might strike some as vulgar and a debasement of spiritual concerns. I understand this concern, and think it real myself, but nevertheless find this effort worthwhile. My suspicion is that when we peer underneath things we today believe to be wholly secular, we will find ideas that have their origins in religion. The reason we likely don’t recognize this is that ours is the first truly secular age,  that is, it is the first age whose social conventions are devoid of any explicitly religious context, or, in other words all other ages have approached both the human and the natural world through religious ideas. It is from this realization, not from any sense of my own personal religion or spirituality (I have little of either) that I think approaching the world using religious concepts is sometimes helpful, and this is the case even if the current religions are no more “real” than the religion of the Greek gods.

To continue: It would be a mistake, I think, to believe the quants were brought low by the vice of greed alone, and Milton/Hawkes can perhaps help us see why.  The broken relationship (sin) that underlies the whole of Paradise Lost is the sin of idolatry, and for our purposes, one can see this most especially in the construction of the capital of Hell, Pandemonium. The fallen angel Mammon (again meaning money) whose vision becomes the basis for Pandemonium was, while he was still in Heaven, transfixed by its beauteous gold. Mammon confuses this mere symbol of Heaven’s beauty for the beauty of Heaven itself. If its golden visages could be duplicated, in the logic of Mammon, then the fallen could recreate Heaven in what was actually Hell. It is this confusion, of the power brought to us by money, Milton seems to be telling us, with the powers of Heaven and of God, which is the danger point of our relationship with earthly wealth, rather than the animal-like greed for more and more. Mammon’s Pandemonium, is perhaps, like the beautifully decorated Anglican (and before that Catholic) cathedrals that dotted England in Milton’s day, a confusion of style over substance, an affront to the idea of God as the source of charity and love.

Ultimately, this boils down to an argument over what we should attend to during this short life of ours. The quants were, without doubt, brilliant individuals. Yet, they chose to use this brilliance not to seek out cures for disease, or find ways to aid the poor, or even to unveil the beauty of creation through science, but sought the generation of riches for themselves, and wealth for the already well off members of the hedge funds they managed. (Hedge funds, by law are limited to people with a minimum of a million dollars in assets).

The quants might respond that the wealth they were chasing would eventually make its way down to the lower classes like manna from Heaven. It would be a difficult argument for the quants to make in regards to the poor, given how hard the financial crisis, in part caused by the quants, has been on the least well off. It would be just as difficult a case for the quants to make for the middle class whose imaginary wealth- the value of their houses and stocks- disappeared as quickly as the electrons it was made of, once the power of cheap borrowing, of leverage, short- circuited.

It is not merely, however, the fact that the quants could be accused of idolatry in the sense of their worship of wealth, of which many could be accused, but that they were guilty of idolatry in that they both exalted their own idea of “truth” in a way that was almost quasi-religious, and that they practiced what was in a sense a form of divination.

On the first point: the mathematically inclined seem almost cognetally prone to a form of Platonism. That is, they tend to look at numbers not as mundane symbols to be manipulated for our purposes, but as part of some sort of higher reality whose truth stands above all human convention. You get this weird faith in the ability of numbers to capture reality in the most practical of people, “show me the numbers”, means the same thing as show me the truth, a phrase whose underlying assumption is that the truth can best be captured by abstract digits.

For the quants, “Alpha” was not some limited model of the financial world, but the deep, underlying truth of the it. Alpha was not a symbolic representation of the market, but was the market itself. The fact that this idea was neither rational, nor pragmatic, but instead constituted a sort of faith, can be seen in the fact that the quants’ belief in Alpha was not subject to doubt. Critics, such as Benoît Mandelbrot, or Nassim Taleb weren’t really engaged or answered, they were brushed aside because they didn’t conform to this “faith”. In an earlier age, such heretics might have been burned at the stake, but in our humane present, they were subject to the intellectual equivalent- they were ignored. This blind faith was only called into question by the quants when their “god” failed them and their models were shattered by the hammer blows of reality.

On the second point, I don’t think it is surprising that many of the quants started as gamblers, and not just because Wall Street is the greatest casino on earth, which it certainly is. Rather, gambling has a deep relationship with divination, and what the quants were really trying to do was peer into the non-existent future in order, as all divination does, to assert control over the existent present.

It’s a chicken-and-egg- question of whether gambling or divination came first in human history, and for all intents and purposes, it seems the further we go back the more indistinguishable the two probably become. The fact that a person’s future could be predicted using cards- the modern version of this is, of course, the Tarot deck, or dice, makes perfect sense if we put ourselves into an idolatrous frame of mind- which is essentially the frame of mind of almost all pre-scientific forms of thinking. The key mistake of idolatry is to confuse the symbol with the symbolized. This mistake seems to naturally imply that the more “like” the actual thing our symbol for something is, the more it actually is the thing being represented. An individual life is subject to chance, therefore, if we know the outcome of a game of chance we will be able to predict what will happen in an individual life.

The quants did almost precisely this with their models. What they did is construct extremely sophisticated chance games with one caveat: that the outcome of the chance games would trend towards the equilibrium of the Efficient Market Hypothesis. Like a fortune teller they played their Tarot decks, and then confused the outcome of these games with the economy the rest of us make our living in. Perhaps like the gut-level traders they replaced, and like the successful fortune teller, much of their initial luck arose as much from their intuition as their models. Perhaps, too, like the successful fortune teller, many of them were supremely good con-men who were quick to recognize and exploit the vulnerabilities of people who believed in their predictive power.

This world the quants had helped create only became supremely dangerous for the rest of us when the gap between their models and reality became too wide, or worse was ignored. The fall of idols is always difficult to bear, and given the fact that the larger economy had become tied up in the belief in these false models, their being proven false couldn’t help but affect the vast majority of us who had never heard of a quant or a hedge fund or, or algo-trading, or a credit default swap.

The markets were only saved when the public and quasi-public institutions, the world’s most powerful governments and central banks- (the latter, which especially, had up to that point, been the most vociferous proponents of the virtues of the free market) both turned tail and “got Keynesianism” flooding the markets with cheap cash. This magical elixir to cure the burdens of debt, however, was one limited to the richest institutions and elements of society. Financial deregulation and the exotic instruments devised by the quants had turned the creditors into their own debtors, and these debtors would be cured by the magic of cheap money, a concoction brewed by the world’s central banks who had previously treated even the hint of cheap money like poison.

Something seems to be seriously wrong with our financial system, something that reaches back long before the quants, and touches upon the fundamental assumptions behind the seemingly oldest elements of our economic life- money and debt. Which leads me to the last question along this train of thought:

How might something seemingly so essential to our lives as economic creatures, our money and our debt, be viewed through the lens of idolatry?

Until next time…

* Scott Patterson, The Quants: How a new breed of math whizzes conquered Wall Street and nearly destroyed it, Random House, 2010

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24 comments on “Pandemonium, Kingdom of the Quants 2

  1. Pete Laberge says:

    WOW! A fascinating and true story! Well told! Some incredible Insights and Truth here. (And humor, with Father Guido!) I loved it. Well written. Easily comprehended. Accurate. You did a good job! Take a bow. And thank you for the explanation and merging together of a huge number of facts, that I had floating in my head, but which had nor “jelled”.

  2. James Cross says:

    Imagine a sort of Day the Earth Stood Still event where every financial record was destroyed.

    Probably the chaos that would result would be as great as the stoppage of electrical power.

    So much of current civilization runs fundamentally on something completely intangible – the agreement that money can be exchanged for things that are tangible. This agreement spans almost every political system, although there have been some attempts (the Kymer Rouge, for example) to abolish it. Although the use of physical coin has been around probably since the earliest agrarian societies, most of the current financial world- stocks, bonds, and financial markets where intangibles are traded for other intangibles – has been relatively recent.

    We might imagine a future utopia without money where the agreement no longer becomes necessary, perhaps because resources are so plentiful that everything becomes in effect free. But would we have to transform human nature to achieve that?

  3. James Cross says:

    Just to expand slightly on the Day the Earth Stood Still analogy.

    If every financial record was destroyed, in a fundamental way, nothing would have been really changed. Farms could still produce food. Factories could make automobiles and appliances. Electricity could flow. Everything tangible would still exist completely unchanged.

    In the same way, during economic downturns and upturns, nothing fundamentally changes either. The same people previously employed now unemployed could be working producing the same things they used to produce. The same factories now idle could be operating.

    The billions lost by the hedge funds were never really there to begin with they were a part of the agreement we had at the time and now they are lost the loss is a part of our current agreement.

    • Rick Searle says:

      Hi James,

      Thanks as always for your thought provoking comments.

      I am currently reading a fascinating book, David Graeber’s, Debt the First 5,000 Years
      which, I think, has something to say about your excellent “Day the Earth Stood Still” analogy,
      and is challenging many of my prior assumptions (assumptions based on your comments you may likely share) about what money is, how it originated, how it is related to debt, and how both relate to the “real” economy.

      I am less than half way through the book, so I lack the whole picture he is trying to present, but based on his first chapters, we wouldn’t have to go far to encounter your analogy in reality because it has been repeated hundreds of times in ancient debtor revolts. According to Graeber, the very first thing the debt revolutionaries did was to destroy all of the financial records thereby making it impossible to know who owed what to who.

      Based on my reading of Graeber I might agree with you that there is a real disconnect between the financial system and the real economy, but it would be hard to agree that with the destruction of all financial records “nothing would really change”: imagine if banks had no idea of who had paid what on their loans- mortgages, credit cards, car loans, student loans, business loans etc. Not merely loans would come into question but so would ownership- who really owned the factory, farm, house. In such a situation, the tensions that now exist between creditors and debtors would become an open war.

      And this kind of takes me to your comment:

      “The billions lost by the hedge funds were never really there to begin with they were a part of the agreement we had at the time and now they are lost the loss is a part of our current agreement.”

      What I am getting from Graeber is that he wants us to start asking some fundamental questions,
      in terms of our current financial structure- are its core assumptions even true? how did it originate? who does it benefit? is it just? are workable, better arrangements conceivable?

      He agrees that there is a “current agreement”, but wants us to ask: agreed to by whom? For my part, I think asking these fundamental questions is the place to start, and I do not think imagining alternatives would of necessity be utopian, or such alternatives require any fundamental change in human nature for, as I am learning from Graeber, the human nature we think underlies our economy is a recent invention, and has little to do with the findings of either anthropology or history.

      • James Cross says:

        I am going to look for the Graeber book.

        Of course, I am not saying nothing would change if the all the financial records were destroyed. It would be complete chaos and the world economy would probably collapse. What I am saying is that everything in actual physical existence, everything with capacity for production of goods, every physical and human resource would still exist unless they got destroyed in the aftermath of chaos resulting from the collapse. In other words, there would be no physical impediment to life going on the day after the destruction of the financial records the same as the day before. Contrast that to the day after a nuclear war, where power generation, medical care, food production, and almost every form of industrial production would be impossible because the physical infrastructure would be gone. The destruction of the financial records would destroy only the human agreement on the how the economy operates.

        So it is clear that our current financial structures are, on the one hand, the organizing structure of our economy, but, on the other hand, are completely artificial. Now the current structures may have arisen in some evolutionary fashion. I mean this almost in the Darwinian sense that less useful or economic structures may not have survived through time. But even in evolution less than perfect organisms and adaptations often survive. This leaves us with the possibility the structures could be improved or even replaced with better systems in the future. The driving force of this evolution might be technological change itself. Undoubtedly the modern institutions could not have existed in their present form without computer technology and the increasing global interdependence of economies may drive future changes.

        Great post by the way. I initially didn’t think it was going to be that interesting but it got me thinking along some new lines.

  4. Rick Searle says:

    Well written, James. And I totally agree with your last point. No economic system has ever lasted forever, and to believe that capitalism in its present form is the end of economic evolution would actually be, should I say, Utopian.

    I hold the same idea as you that technology might result in an alternative to the current system.
    I’ve no doubt bought into a lot of hype, but I see 3D printing to be something with a lot of potential in this regard, with the ability to produce anything, anywhere, perhaps giving rise to a more decentralized, local form of economics and politics than the current capitalist/nation state system we have today. Time will tell, though I won’t be around to see it.

  5. I think the second point you note is fascinating, regarding the gambling aspect as an attempt to put fortune (in both senses, as money and as Lady Fortune) in the chains of computation. In mythic terms, it revisits how Nietzsche conceived of Greek culture as a dialectic between the Apollonian and the Dionysian, though I find what you say about the connections with religion raise this beyond the level of cliché. A truly excellent post, are you planning on pursuing this as an ongoing project, by using myth as a tool of analysis?
    Re: Graeber, I don’t know how far in you are, but keep yourself alert for the mention of old Irish Brehon law and the reading of the legal implications of a bee-sting. Glorious!

  6. Rick Searle says:

    Hey Andrew,

    No, I don’t plan on pursuing this as an ongoing project, though I think that would be fascinating: I have other fish I hope to fry. The genesis of the idea for these series of posts came from my reading The Quants, not long after I had read the David Hawkes’ edition of Paradise Lost. The two kind of fused in my mind, so I wanted to explore for a while what exactly that might mean. While doing the posts, I was reminded of an idea I had, or a question I had, sitting in my head for a long, long time- how exactly is money like or unlike a magical “talisman”? Here I ran into Graeber- whose book is fantastic! (I literally just finished it, the bee sting part you mention made me laugh out loud.)

    Graeber answered this question for me, and then some, and also gave me a way to bring the whole back into focus, which I hope to do in the next post.

  7. Rick,

    An interesting assessment, but for some reason I am suspicious of the “facts” that purportedly guide your logic. You speak of financial deregulation as if it were True. I have been caught unaware! Could you enlighten me?

    David Graeber is a funny character. He had a tenure-track position at Yale but didn’t like the peer-review process very much so they let him go…

    • Rick Searle says:

      Thanks for stopping by, Brandon. I am not quite sure I catch the gist of your question regarding financial deregulation.

      A good bit of what I was thinking behind that was the repeal of Glass- Segal which allowed the merger of institutions engaged in a great deal of risk taking- and the big banks. The repeal has recently been identified as a catalyst for the crisis by one of its architects- John S. Reed, who helped to create Citigroup.

      http://www.bloomberg.com/apps/news?pid=newsarchive&sid=albMYVE7D578

      Re Graeber, for my money, he certainly has interesting things to say, and his findings regarding the history of money and credit, from what I can tell. seem to be supported by the fields of economic anthropology and history, even if they seem to contradict some of the core assumptions, regarding barter etc, of neo-liberal economics. It is, as the libertarian economist, Tyler Cowen, points out, on the issue of more recent history that Graeber’s narrative becomes subject to doubt.

      • Rick,

        Thanks for the thoughtful reply. Unfortunately, the deregulation that “began in the 1980′s” is a myth that has been propounded all too often recently by economist and layman alike. This is a pernicious myth that helps lend credence to arguments like “capitalism is on its way out, too” and serves to give post-modernists a much undeserved boost.

        Such a myth is no doubt good for telling stories around the campfire, but they can be dangerous if allowed to spread much further than beyond such superficial musings.

        Since 1980 there has been nearly four pieces of legislation created for regulating financial markets to every one piece of deregulation, and most of this regulation came during the Bush administration starting in 2001.

        The repeal of Glass-Steagall has served as a convenient scapegoat for the financial crisis of 2008-10, but when one looks at it in context it becomes obvious that other, far more important factors are responsible for the crisis.

        This reminds me of our exchange on Adam Smith in the not-too-distant past, where you tried to pull one of his quotes out of context in order to further your opinion on the matter of free trade. It seems to me that if your foundational assumptions about deregulation are wrong then _________ (fill in the blank).

        People often have interesting things to say. There was a street preacher hooting and hollering about Jesus Christ just outside of UCLA the other day that kept reminding everybody and nobody about both our impending doom and our ability to be saved by the Nazarene’s “sacrifice” for us.

  8. Rick Searle says:

    Hello again Brandon,

    For my money, I’d consider the idea of a pure form of capitalism, untainted by the existence of the state, to be another one of those camp-fire stories. It’s an interesting hypothetical with little or no historical actuality, or probably even possibility- in other words- a myth.

    By the way, if you ever take the time to read Graeber you will see that he is actually very pro-market in some respects. Even a market where the government has a very light touch, or no touch at all.

    Your point on financial de-regulation is an interesting argument, and one I’ve frankly never heard.

    Do you have this from any peer- reviewed economics journals, or is this merely the opinion of you or your mentor?

    As for capitalism being on the way out, I don’t think anybody, proponent or opponent, should ever think capitalism is down for the count: it’s always shown a dynamic ability to change in times of crisis. Our differences are over- change into what? and in the interest of whom?

  9. James Cross says:

    The Graeber book is great. In my typical fashion, I have read the first and last chapters and now will work on the middle.

    Regarding deregulation, just citing legislation that is supposedly regulatory doesn’t really mean there was more effective regulation or any more regulation at all on the books, to say nothing of the fact that regulation requires actual enforcement, something often lacking especially during the Bush years. In addition, many of the financial vehicles have become so complex with so many interrelationships that probably they cannot be understood by regulators or the complexities are so great that it is unclear whether they are legal or illegal The fact that no one has even been charged with a crime in the wake of the financial meltdown means that there was no effective regulation in place to prevent the excesses. Probably the same is the case today.

    Regarding capitalism, it doesn’t exist, never has existed, and never will exist. People, of course, act in their own self-interest. Ideally I believe people as individuals should be granted as much freedom as possible. However, what we have today driving our economy are not individuals but various forms of state-sponsored organizations with varying degrees of overt control by the state. I am saying that corporations both private held and publicly traded are, in fact, state-sponsored organizations. They are granted existence by the state through their corporate charters and they are granted rights, special tax treatment, and special legal treatment through the body of corporate law. Conservatives constantly conflate the concept of God-given or Nature-given rights of human beings with the rights of corporations that are given by the State to fool the naive into thinking that regulating corporations is the equivalent of regulating or controlling individual behavior.

  10. Rick,

    For my money, I’d consider the idea of a pure form of capitalism, untainted by the existence of the state, to be another one of those camp-fire stories. It’s an interesting hypothetical with little or no historical actuality, or probably even possibility- in other words- a myth.

    An interesting red herring (something that is brought up in an argument to change the subject), but one that has no merit to this discussion of your false musings about how society actually works. This is a tactic that many sophists employ to keep their campfire crowds captivated, but they are of no use to intellectual exercises.

    By the way, if you ever take the time to read Graeber you will see that he is actually very pro-market in some respects. Even a market where the government has a very light touch, or no touch at all.

    I am very familiar with Graeber, which is why I made the effort to point out his dislike of the peer-review process.

    Your point on financial de-regulation is an interesting argument, and one I’ve frankly never heard.

    Do you have this from any peer- reviewed economics journals, or is this merely the opinion of you or your mentor?

    I don’t have a mentor (another red herring Tricky Dicky!). Why does it not surprise me that you have never heard of an argument that basically destroys your post-modernist myths? The best article on the myth of deregulation – the one that you continue to believe in to satisfy your imagination – can be found here. It was written by an economist educated at MIT.

    As for capitalism being on the way out, I don’t think anybody, proponent or opponent, should ever think capitalism is down for the count: it’s always shown a dynamic ability to change in times of crisis. Our differences are over- change into what? and in the interest of whom?

    And from Mr. Cross’s post-modernist pulpit:

    Regarding capitalism, it doesn’t exist, never has existed, and never will exist.

    Your musings on capitalism are vague. I have found that vague arguments are often simply dressed-up versions of “I don’t know what I’m talking about so I am going to try to bullshit my sparring partner and hope he blinks first.”

    This whole post is nothing but post-modernist sophistry. I’d expect as much from a 23 year-old recent college graduate, but not from a grown man with a life’s worth of experience. Shame on you and your lackeys.

  11. Rick Searle says:

    Hey James,

    Really glad you’re liking the Graeber book. Based on what you wrote above, you’re likely to be intrigued by his take on how the development of capitalism was largely driven by the state.

    This Friday or Saturday, I intend to put up the last of my Pandemonium posts. It’s heavy on Graeber, so the critical input of someone who’s read Debt the First 5,000 would be greatly appreciated.

  12. Rick Searle says:

    Brandon- refrain from being a Troll.

    Did you actually read this paper you cite? From his conclusion:

    “Regulators lacked the will and the ability to
    enforce competitive boundaries in the financial
    sector. These boundaries eroded over a forty year
    period, primarily as a result of innovation
    but also as a result of regulatory decisions and
    legislation. Consequently, institutions became
    large and complex. These “too big to fail” firms
    posed major challenges to policy makers during
    the crisis, because they were subject to domino
    effects and 21st-century bank runs.”

    Sure, part of his argument is that not having repealed Glass-Steagall would not have prevented the financial crisis, but that’s because financial innovation- like the stuff I dealt with on the quants, had evolved well beyond what GS, having been designed in the 1930s could handle.

    This doesn’t change my view, only qualifies it- thanks.

    • Rick,

      Such childish nonsense from a grown man!

      Just as with the Adam Smith argument, where you tried to pull his quotes out of context in order to further your religious convictions, you don’t know how to read things properly. Education is far more important than I thought. I’ll gladly suffer through the rest of summer school thanks to your buffoonery, Rick!

      I am happy to have “qualified” your views, of course, but I still don’t think you realize what you are talking about. This helps to explain your fascination with Graeber, but it doesn’t help to explain your comments concerning “deregulation beginning in the 1980′s.”

      If your whole post-modernist article is about how deregulation contributed to the love of profit-seeking and mathematical wizardry, and the said deregulation did not take place, then ________ (fill in the blank Rick).

      Ho-hum. Thanks for grappling with me Rick. You just boosted my self-esteem for the next ten days, but of course my esteem for humanity in general has dropped a couple of points as well!

  13. Rick Searle says:

    I see, you won’t explain the actual quote I cited, but lob insults. I guess I am the grown-up in the room. Come back any time man, it’s always fun.

  14. [...] extensively  by Martin Ford in his Lights at the End of the Tunnel.  Advanced algorithms now effectively run our financial markets, and this despite their corrosive effects on the public will expressed through democracy. [...]

  15. [...] and psychology to target both individuals and groups strategically. Like the world’s of finance and government surveillance it is a new ecology where past, and bogus, claims by individuals to be [...]

  16. […] Supercomputers using sophisticated algorithms now perform a great deal of the world’s financial transactions in milliseconds,  and sometimes lead to frightening glitches like the May 2010 “flash crash” that may portend deeper risks lying underneath a world where wealth is largely detached from reality and become a sea of electrons. Even if there are no further such crashes our ever shortening time scale needs to be somehow tempered and offset with an idea of the future where the long term horizon extends beyond the next financial quarter. […]

  17. […] digital technology and finance is the Wall Street Journal’s  Scott Peterson with books like his Quants, and even more so his Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock […]

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