Spero Consulting

Posts Tagged ‘free market principles’

Manip­u­la­tion is the Real Issue

There’s an arti­cle in Tuesday’s edi­tion of The Wall Street Jour­nal that announces that Traders Blamed for Oil Spike.

It high­lights more of the speculation-​is-​bad com­men­tary that’s been in vogue since at least the Spring of 2008. In fact, we recall hunt­ing for and post­ing the fol­low­ing John May­nard Keynes quote dur­ing that time:

“Spec­u­la­tors may do no harm as bub­bles on a steady stream of enter­prise. But the posi­tion is seri­ous when enter­prise becomes the bub­ble on a whirlpool of spec­u­la­tion. When the cap­i­tal devel­op­ment of a coun­try becomes a by-​product of the activ­i­ties of a casino, the job is likely to be ill-​done.”

Mr. Keynes’ water and tur­bu­lence pro­vide an apt and pic­turesque metaphor, but it’s not par­tic­u­larly use­ful because it doesn’t pro­vide a clas­si­fi­ca­tion of char­ac­ter­is­tics needed to dis­tin­guish between mere bub­bles and whirlpools nor does it pro­vide a guid­ance on how to pre­vent (sup­pos­edly dan­ger­ous) whirlpools from form­ing. (We know that we’re quite demand­ing and ask a lot of a two-​sentence quote.)

In fact, that’s the prob­lem with much of the effort to dis­cern “spec­u­la­tion” in var­i­ous mar­kets in the inter­ven­ing seventy-​or-​so years since he made that com­ment. The “know-​it-​when-​I-​see-​it” approach is hard to generalize.

Mr. Keynes also said that, “Invest­ing is an activ­ity of fore­cast­ing the yield over the life of the asset; spec­u­la­tion is the activ­ity of fore­cast­ing the psy­chol­ogy of the market.”

That’s not bad, but we pre­fer our own def­i­n­i­tion that we offered exactly one year ago today: finan­cial or mar­ket spec­u­la­tion is when other peo­ple make invest­ments or trades that you don’t approve of, espe­cially when those trades incon­ve­nience you.

Last ⁹⁄₁₁, we wrote that it is highly likely that in the short-​term in most mar­kets, there are more daily and intra-​day fluc­tu­a­tions with spec­u­la­tion than with­out it. We doubted, how­ever, that prices would be as sta­ble in the long-​term with­out spec­u­la­tors – what­ever they are – pro­vid­ing liq­uid­ity.¹ This, of course, gives rise to sev­eral ques­tions that should be answered (more pre­cisely than we do it the foot­note): (1) what is spec­u­la­tion? (2) What is valu­able or harm­ful about it? (3) What met­ric should be used to mea­sure the harm or value?

Now, it seems that many folks like to address the third ques­tion with ref­er­ence to or in terms of price sta­bil­ity. How­ever, that – of course – gives rise to sev­eral ques­tions, too, includ­ing: (a) what exactly is sta­bil­ity?² (b) Why is it valu­able? © How should it be mea­sured or cal­cu­lated? And, (4), given that it can be mea­sured, what is the opti­mal level of it? It would seem that every­one would agree that prices should be allowed to vary; so, com­pletely sta­ble (or con­stant) prices aren’t opti­mal, yet many are unhappy when prices vary too much (and incon­ve­nience them). That’s one rea­son that we are quite happy with our pithy definition.

So, why repeat much of we wrote last year? Because per the arti­cle men­tioned above, it remains very rel­e­vant today. In fact, today, the head of the Com­modi­ties Futures Trad­ing Com­mis­sion, Gary Gensler, stated that the agency should con­sider strict lim­its of trad­ing: see Gensler Pushes for Trad­ing Curbs.

More­over – and this is sheer spec­u­la­tion on our part – we think that many folks con­fuse spec­u­la­tion, which often involves noth­ing more than wild-​ass guesses (like our own), with manip­u­la­tion. Of course, like most oth­ers, we’d agreed that manip­u­la­tion should be pros­e­cuted to the full­ness extent of the law. In addi­tion, we’d imag­ine that it would be very dif­fi­cult to find any­one will­ing to defend such manip­u­la­tion, but that’s not the nature of spec­u­la­tion. So, per­haps a lit­tle per­spec­tive is in order.

So, we ask: other than the poten­tial incon­ve­nience, what’s wrong with spec­u­la­tion? It seems to pro­vide liq­uid­ity, which many would con­clude is a good thing, and it seems to pro­vide amuse­ment and inter­est to a sub­set of the pop­u­la­tion. In addi­tion, no one really knows what would occur or would have occurred (in the past) if such activ­ity were (or had been) elim­i­nated. It’s pos­si­ble that spec­u­la­tion – what­ever it is – caused dis­tor­tions in resource allo­ca­tion deci­sions, but why would those deci­sions have been bet­ter with­out such spec­u­la­tion? NO ONE can answer that question.

So while the head of the CFTC wants to elim­i­nate things that he can’t nec­es­sar­ily iden­tify, define, or under­stand, we’d like to show inter­ested read­ers the fol­low­ing help-​wanted ad that appears on page D4 of today’s paper edi­tion of the Jour­nal. (We couldn’t find it on-​line; so, it appears as a jpeg below.)

Taken at face value, that’s quite a set of require­ments for posi­tions that pay between $60K and $153K. So, while such qual­i­fied indi­vid­u­als may exist, we won­der why they would be will­ing to work for the gov­ern­ment at such (rel­a­tively) low pay?

More­over, we’re sure that the posi­tions will be filled, but we’re less con­fi­dent that they’ll be filled with qual­i­fied indi­vid­u­als who know their own lim­i­ta­tions and the lim­i­ta­tions of their method­olo­gies. In fact, we’re more con­cerned about the dam­age and havoc of falsely iden­ti­fy­ing and either per­se­cut­ing or pros­e­cut­ing the inno­cent, because that would destroy liq­uid­ity and could cause irrepara­ble harm to the economy.

We cer­tainly hope that they live by our motto of “thought before cal­cu­la­tion.” That’s what make us con­ser­v­a­tive, and what also scares us most about the gov­ern­ment in them near future.

In this post, we muse and spec­u­late on items and notions that we don’t com­pletely under­stand. That’s noth­ing new – as we’ll read­ily admit – but we think it’s worth the time to con­trast the cer­tainty of God-​given freewill with the lack of man­age­r­ial dis­ci­pline within firms and gov­ern­ments – well, actu­ally, all orga­ni­za­tions and soci­eties. Unfor­tu­nately, we all must con­stantly deal with the harm­ful side effects of that lack of discipline.

In many of our posts, includ­ing one from yes­ter­day, we often advise or admon­ish pol­i­cy­mak­ers to fol­low the Hip­po­cratic Oath: “first, do no harm.”

Because of their lack of humil­ity and dis­ci­pline, we fully expect our advice (and sim­i­lar advice given by oth­ers) given to gov­ern­ment lead­ers to go unheeded and there­fore we ratio­nally expect that prob­lems – eco­nom­ics and social prob­lems in par­tic­u­lar – will be exac­er­bated and harm­ful “unin­tended con­se­quences” will be real­ized. All due to that uncon­trol­lable impulse to DO SOMETHING! (AIG bonuses anyone?)

Such is the nature of med­dling (and dilet­tan­tism) is it not?

Lately, we’ve been think­ing much about the dis­ci­pline required not to med­dle – whether with a child’s irra­tional and over-​excitable bas­ket­ball coach or within orga­ni­za­tions that claim to be decen­tral­ized. In our mind, these issues are closely related to the notion of freewill granted to us by the higher being.

For new read­ers, it;s worth not­ing that we believe in a God as the Cre­ator and also believe that He has granted us absolute freewill (and that with that freewill comes respon­si­bil­ity so that we will be held fully account­able for our actions if we fail him). 

Seem­ingly unre­lated, but also lately, much of our con­sult­ing work now involves the use, analy­sis, and edit­ing of pho­tographs to an extent that we never dreamed pos­si­ble when we orga­nized our firm and began devel­op­ing our own web site one year ago to the day.

That work includes search­ing the world’s finest source of free, non-​copyrighted, dig­i­tal pho­tos for use on web sites. (Well, they’re not really, totally free pho­tos because they were pro­duced with your and our tax dol­lars, but that’s right. The fed­eral gov­ern­ment has a very large archive of excel­lent and freely-​available pho­tos for your use. (Ever won­der how so many dif­fer­ent orga­ni­za­tions and firms get pho­tographs of the earth from space with­out own­ing their own space­craft or pos­sess­ing really long arms?))

Now, we find some of those pho­tos of space – shown in this post cour­tesy of NASA – to be awe-​inspiring and to (some­what) reveal­ing of the true extent of the power of God, the Cre­ator. For if he is the Cre­ator, then all the power and majesty of these dis­tant galax­ies were cre­ated by him in – what to us – was a Big Bang. (But to him? Well, who knows?)

An Aside on Sin

To us, this means that sins against nature are also sins against God, and sin (against God) is there­fore an unnat­ural part of the uni­verse, i.e., it is man-​made, and being unnat­ural (from the Creator’s per­spec­tive), it goes against the very fab­ric of the rules of the uni­verse. So, per­haps rather than vio­lat­ing “just a moral or eth­i­cal code” per­haps we’re vio­lat­ing a phys­i­cal law in a dimen­sion that we can’t observe.¹

Now, the real­iza­tion of astro­nom­i­cal omnipo­tence illus­trated by the pho­tos – along with every other kind power that we might imag­ine – may not pre­vent one from sin­ning, but view­ing such pho­tos should give one pause to con­tem­plate what they’re up against (in the end) when they don’t do the right thing.

Of course and unfor­tu­nately, even that real­iza­tion doesn’t nec­es­sar­ily help with the cat­e­go­riza­tion prob­lem of dis­tin­guish­ing sin from other per­sonal fail­ings and fail­ures, and per­haps that is the true nature of Pascal’s Wager, i.e., at the mar­gin, it’s bet­ter to err on the safe side. 

That cat­e­go­riza­tion prob­lem also seems to be the cause of a con­tribut­ing fac­tor for the plethora of reli­gions – each with slightly dif­fer­ent inter­pre­ta­tions of right and wrong. For exam­ple is eat­ing pig a sin or fish on Fri­days dur­ing Lent? What about drink­ing wine? Per­haps that is where the expres­sion “the devil is in the details” derives.

But that’s not really why we are writing.

Freewill and the Dis­ci­pline to Per­ma­nently Grant It

Instead, rather than focus­ing on us, we want to briefly focus on Him, and the unworldly power, unimag­in­able dis­ci­pline, and incom­pre­hen­si­ble love required to per­mit fallen crea­tures, such as our­selves, to have freewill. 

Would you, dear reader, per­mit it if you pos­sessed such power? If yes, even given the atroc­i­ties that we’ve wit­nessed through his­tory and con­tinue to observe today? We mean real, harm­ful and deadly atroc­i­ties. Not lesser ones, like most late-​night monologues.

More­over, look at how gov­ern­ments his­tor­i­cally have and presently try to restrict free­dom and in many cases go fur­ther to try to elim­i­nate crea­tures that “just don’t fit in” or are pow­er­less and in the way, i.e., sheer nui­sances. And, yet, the God that per­mits freewill will have not of it: his gift of free­dom is given and is irrev­o­ca­ble. There is no dis­cernible, heav­enly inter­fer­ence to impede free choice.

To be clear, we are not argu­ing for anar­chy and law­less­ness and doing one’s own thing so-​to-​speak. Instead, we are not­ing that the God of freewill does not grant and then rescind dis­cre­tion and auton­omy. Once given it is per­ma­nently and irrev­o­ca­ble – despite the neg­a­tive exter­nal­i­ties that such free­doms per­mits (via dys­func­tional behav­ior and its impli­ca­tions). God plays accord­ing to his rules, but does not seem to change them on a whim.

That, of course, is in stark con­trast to humans and human nature. We’ve writ­ten about the earthly and quite fallen nature of man and man­agers in a few essays (Strate­gic Con­sis­tency and Man­age­r­ial Dis­ci­pline and Com­mon Man­age­r­ial Mis­takes in Decen­tral­ized Orga­ni­za­tions) and in any num­ber of posts. In firms and in the gov­ern­ment, par­tic­u­larly dur­ing this eco­nomic cri­sis, we see that too many are too weak to leave well-​enough alone and “do no harm,” and the impli­ca­tions of such inse­cu­rity and panic and impul­sive­ness and thought­less­ness rule (and ruin) the day.

The same God who is revealed as the God of rea­son (actu­ally as rea­son) in the first chap­ter of Saint John’s Gospel is the same God of the dis­ci­pline and love who grants freewill. That can’t be a coincidence.

His dis­ci­pline in main­tain­ing the rules and each person’s auton­omy as well as our fore­warn­ing of the ulti­mate day of reck­on­ing is suf­fi­cient to mit­i­gate the moral haz­ards of many. Too bad that except in rare instances, men have nei­ther the dis­ci­pline nor the insights into human nature to con­struct, imple­ment, and main­tain of scaled-​down ver­sion of sim­i­lar, long-​lasting mechanisms.

We’ll prob­a­bly revise and append this post as we revise and append our thoughts. May God be with you.

Or – to seri­ously mix our metaphors – falling head-​over-​heels for the wolves’ claims that the “sky is falling.”

Our favorite line from the play and movie, A Man for All Sea­sons, is Saint Thomas More’s state­ment at his trial in which he gen­tly belit­tles one of his per­jur­ing accusers, Richie Rich:

“Why Richard, it prof­its a man noth­ing to give his soul for the whole world…Ahh, but for Wales?”

Mr. Rich received an appoint­ment from Henry VIII in Wales for his efforts.

After per­form­ing a short and cur­sory search of the web, we’re not sure – and it seems that no one else is, either – as to whether the mar­tyred Saint actu­ally made that statement, or whether it is an apoc­ryphally placed by the play­wright, Robert Bolt.

Nonethe­less, it so beau­ti­fully expresses the wry, amused, and con­sid­ered insight of a thought­ful, yet con­demned, man, who by quot­ing scrip­ture (Mark, 8:36), makes clears Rich’s Faus­t­ian bar­gain, and for what?

The Scared: We have been reminded of that 16^th cen­tury, court­room scene sev­eral times dur­ing the past sev­eral weeks, includ­ing today when we read Kim Strassel’s poorly-​reasoned, col­umn on in today’s WSJ, What Lead­er­ship Looks Like, and yes­ter­day, when we read The Wall Street Jour­nal’s edi­to­r­ial, enti­tled, “Free AIG.”

Yes­ter­day, the Journal’s the edi­to­r­ial staff seemed to regain – at least tem­porar­ily – their free-​market prin­ci­ples long enough to crit­i­cize the Fed­eral Reserve’s seizure of AIG in mid-​September. Unfor­tu­nately, the edi­tors have failed to take that same logic and apply it to the larger finan­cial cri­sis, as does Ms. Strassel and her subject, Congressman Paul Ryan.

Indeed, while claim­ing to be for “free mar­kets and free peo­ple,” they seemed awfully will­ing to for­sake it for a smidgen of a promise security.

Reg­u­lar read­ers know that we’re morally opposed to the plan for sev­eral rea­sons, includ­ing that trade-​off of free­dom for secu­rity and our doubts that it is nec­es­sary despite the many, many pleas of exi­gent cir­cum­stances, falling skies, and wolves.

Furthermore, as we have writ­ten exten­sively dur­ing the past two weeks, we believe that there are harm­ful imme­di­ate and long-​term impli­ca­tions of the bailout and that it will fail. 

So, the promised secu­rity and sta­bil­ity will be illu­sory – a mirage, per­haps – as all such promises have been since at least the takeover of Bear Stearns in the early Spring. See any of these recent posts: The Finan­cial Bailout, Reverse Auc­tions and Mark­ing to “Mar­ket”; Moral Haz­ard and Another Prob­lem with Illiq­uid Assets; If ‘If’s and ‘But’s Were Candy and Nuts…(#2); Big­ger Is Not Nec­es­sar­ily Bet­ter; OMG! OMG! OMG! Largest US Bank Fail­ure Ever!; The Cri­sis and Free Mar­ket Crit­ics; The Uncer­tain Value of Mort­gage Secu­ri­ties; Sorry Mr. Bush, We Respect­fully Dis­agree; Could a “Bailout” Pro­long the Finan­cial Cri­sis?; Idio­syn­cratic and Con­cen­tra­tion Risk, Again.; and Pub­lic Bailout? Why Rush or Do It at All?. (Actu­ally most every­thing we’ve writ­ten dur­ing the past two weeks.)

In that regard, we have pro­posed our own privately-​oriented, market-​based plan, A Bet­ter Solu­tion (than a gov­ern­ment takeover), that requires only a few small changes in the tax laws to imple­ment. It is sim­i­lar to allow­ing accel­er­ated – well, imme­di­ate – depre­ci­a­tion of the cost or an invest­ment tax credit to the prospec­tive pur­chasers of cer­tain mort­gages and MBS and CDS issues. (Note: the cur­rent bill pro­vides invest­ment tax cred­its for risky R&D but not risky mort­gages. Does that make any sense?)

The Scary: In addi­tion, we ask the dear reader to con­sider this: if the cur­rent plan fails to alle­vi­ate the pan­ics, can he or she imag­ine how far the gov­ern­ment will fur­ther over­step its author­ity to solve what will then be a pro­longed cri­sis REQUIRING addi­tional gov­ern­men­tal inter­ven­tion, or have sup­port­ers not con­sid­ered that prospect?

The Sorry: Think­ing of the illu­sory nature of many such bar­gains and trade-​offs made us won­der about the indi­vid­u­als – exec­u­tives, reg­u­la­tors, and employ­ees – who “cut cor­ners,” turned a “blind eye,” or just went along with some­thing in which they didn’t believe…in hopes of gain­ing the world or per­haps just a small bit, say, a lit­tle cor­ner of Wales or Long Island.

In the process, not only did they bear high per­sonal costs, but in many cases, the gains, e.g., the value of their stock grants or their new titles, turned out to be illu­sory. (Cromwell was guil­lotined a few years later, too.)

We sym­pa­thize with them – not the amoral ones; they don’t care and would only mock our sym­pa­thy. No, we mean the folks with con­sciences, who knew right from wrong, but couldn’t resist and traded their decency (and in many cases their self-​worth) for the lure of a few dol­lars more or a lit­tle less aggra­va­tion. That near-​universal weak­ness is the rea­son that we and many oth­ers admire Sir Thomas, even if we can’t always emu­late him.

The Final Irony: All such sac­ri­fices (and gov­ern­ment direc­tives) are designed to lead one or one’s peo­ple to Utopia. By the way, who wrote that book?