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About "On the Road to Frugality Island"

"One of the greatest pieces of economic wisdom is to know what you do not know.
—John Kenneth Galbraith ".

This is a  Programmer (Slightly Skeptical) attempt to understand he economics "as is", rather than what fake theories of Chicago school or mainstream media presents.

As I am not a specialist in economics, in no way this an attempt in independent thinking. This is just a compilation of selected financial blogs, which do demonstrate independent thinking.  So this is a second derivative ;-), a modest amplifier of existing critical thinking which unfortunately is pretty rare and almost invisible in the huge stream of Wall Street sponsored media.  Bernard Stiegler argues in his book, Acting Out, that consumer capitalism is in fact destructive of what he calls primordial narcissism. That desction is pretty apt for the description of Wall Street.

As one reader of Big Picture blog aptly noted this is a kind of civil war:

1.  CNBC Sucks Says:
   March 10th, 2009 at 11:22 am

   I don’t know how you do it, Barry. I cannot do what you do. You fight day after day for the virtues of objectivity, critical thinking, and reality under your own real name. Economically, we are not at a war, but a civil war, in which armies of the opposite side are conscripted against us by their own ignorance, gullibility, belief-system-impaired perceptions of reality, and self-destroying sociopolitical dogma.

   I don’t know how we Americans compete against Europe and Asia when we are so divided within our own borders.

   My hat is off to you and anyone else who has the stomach to keep fighting intellectually for what is right for our country against all odds.

And the other side of barricades is very well organized. Here is another apt comment about the state of mainstream media from Paul Craig Roberts ( Former Wall St. Journal editor savages the mainstream media)

Today reporters write the stories that their masters want to hear, or they are out. The function of editors is to make certain that no uncomfortable information reaches the public.

The public is slowly catching on, and the print media is slowly dying. The New York Times, Chicago Tribune, and Los Angeles Times are all on the ropes to one extent or the other.

Americans are still subjected to Fox "News" and CNN propaganda piped into airport waiting rooms, doctors’ offices, and exercise centers. It is very much the situation that George Orwell describes in 1984.

The focus is on 401K investors needs to avoid expensive blunders into which CNBC and similar organization guide 401K "donors" crowd (we are not investors in any reasonable meaning of this word as we are fleeced and on average cannot get returns above inflation).  The author thinks that comments to leading blogs are as important to read as the blog posts themselves. The web discussions in key blogs are truly a wonderful resource. And exploring this resource is the focus of the page.

This is more a "retrospective" and no attempt is made to stay current and there is at least 24 hours delay between post in the original blog post and its reference on this page.  The main blogs that have high quality discussion of posts and that are covered in this derivative chronicle are:

• naked capitalism,
• The Big Picture,
• Economist's View,
• Calculated Risk
• Mish's Global Economic Trend Analysis

in this particular order.  The special attention is paid to comments and bringing the best comments to the light they deserve, as comment section are often as informative or more informative than original posts. The list of blogs that I read is at the Recommended Blogs section.

Economic science is not an exact science, it is 'dismal science".  So absence of economic education in itself might represent advantage that then handicap, only the absence of the desire to learn. There is nothing complex in neo-classical economics for a skilled programmer, other that the number of naive assumptions about complex systems.  Moreover as large part of neo-classical economics taught at the universities looks somewhat like Lysenkoism and as such is not very attractive for anyone with in-depth understanding programming, Excel and mathematical statistics. 

For example some Krugman's efforts to use mathematics (and his pretenses for "mathematically literate" economist status) are not very convincing. 

• The first sign of real mathematician is to make sure that mathematical theory used (for example, linearity assumptions for many models) are justified.
• The second test is making sure the complexity of the mathematic apparatus used matches the precision of the data (and if the data are very unreliable the model should be extremely simple like it is the case for data about inflation or unemployment) .

Krugman fails both tests.

Here is how John Walsh expressed similar reservations in a footnote to his article The Root Cause of the Crisis of 2008:

John Walsh is a professor at U Mass. He is not an a practitioner of the Dismal Science, and he frankly doubts that “economics” as taught in the universities now, as distinguished from political economy, is a valid discipline. He has some knowledge of the physicists and mathematicians who put together the Wall Street “instruments” that have triggered the present crisis.  Many of these people knew that they were simply providing their bosses with simulations that proved what the bosses wanted proven.  And many of these former academics openly referred to themselves as “whores.”  It may be dangerous to let too many physicists go unemployed.

My first and only observation is that as programmers are used to learn all their life, so it is not hard to learn basic (and pretty controversial) neo-classical economic theory by going to community college or at least buying and studying a couple of textbooks and reading several popular of  books on economics. For the latter category I personally prefer books by Prof. Robert Shiller  and Prof. John Kenneth Gailbraith. 

• Shiller wrote Irrational Exuberance, Market Volatility,  The New Financial Order- Risk in the 21st Century,  The Trillion Dollar Meltdown- Easy Money, High Rollers, and the Great Credit Crash,  among others. Sheller is very diplomatic and quite insightful critic of "economics status quo". 
• JK Gailbright wrote a series of brilliant books from The Affluent Society, the groundbreaking book to the Great Crash, an unsurpassed account of the events that let to great depressions. without some theoretical background you will be a prisoner of some junk theory like "efficient market hypothesis" or even Lysenkoism-style "supply side economics" (which was apply called "voodoo economics").  Perhaps Galbraith's greatest appeal as an economist is the disdain he holds his own profession in. He is a merciless critic of academic corruption, ignorance, and hired guns who for money defend absurd, but profitable for Wall Street ideas -- and he's quite fun to read.

For those who do not want to buy anything I wrote a very raw notes that might be useful too (see Saving your 401K  ;-). 

As Kevin Phillips noted:

We've had 25 years of what I call financial mercantilism, which is the government aiding and pushing and bailing out the financial sector. It's not going to change. But I do think finance is going to lose its control over the economy in the sense that the public is going to be so angry they're going to insist on more regulation.

Ludwig von Mises in  Human Action (1949) was more pessimistic:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as the final and total catastrophe of the currency system involved.”

The key economic trend of today is a gradual end of the credit expansion and with it putting limits on conspicuous consumption of the USA nouveau riche or banksters as they are colloquially called during Great Depression.  As Andrew Bacevich  acerbically observed, if there is one word that defines the identity of what the republic has become, it is “more”. He noted that currently the USA is in the midst of three crisis:

• Leadership crisis.  The current leadership is bent on preserving "the US empire." As Paul Craig Roberts noted that means propagating "the delusion that Americans are an “indispensable people” who have a monopoly on virtue that gives them claim to hegemony over the world." (Paul Craig Roberts What Uncle Sam Has to Tell His Creditors). In a way Reagan revolution was about saving empire by converting the declining manufacturing-based economy into FIRE economy. After FIRE economy collapsed in 2008 the economic costs of American Exceptionalism became unsustainable...
   
• Huge, simply huge economic crisis. Reaganomics was about promoting FIRE sector at the expense of other along with simultaneous dropping of middle class living standards. That was done under the smoke screen of "free markets" ideology, which is essentially a socialism for rich: you are entitled to all profits when market go up and taxpayers are entitled to losses when market goes down. 

  Due to "socialism for the rich" the US economic life for the last 25 years was dominated  by  excessive consumption which masked negative wage growth and erosion of social benefits. The latter was first of all huge rip-off connected with replacement of pensions with 401K offloading the expenses and risks to 401K account holders). The second factor was dramatic rise of cost of medical insurance and medical insurance in general. The third factor is dramatic rise of price of housing (house bubble).  The latter is now imperiled. 

  The collapse of the USSR which gave "socialism for the rich" additional 15 years of life by adding half-billion new customers and dollarization of huge economic space was one time event that will not repeat anytime soon.  In a way the USSR managed to give the US a serious blow from its grave...
   

• Corruption on all levels but first of all in FIRE sector. The second gilded age (counter-revolution restoring the power of financial oligarchy) started by Reagan featured rampant corruption on all levels but first and foremost for new financial robber barons is probably over. Congress became nothing more that a FIRE insurance company; the same is true for Fed.
   
• Foreign policy crisis which includes military doctrine crisis. “A grand bazaar”, Andrew Bacevich  writes, “provides an inadequate basis upon which to erect a vast empire.” He claims that the constitution has been perverted by the expansion of the presidency and by national security, at the expense of Congress. Concluding that America’s military power “turns out to be quite limited”, he argues that the country “doesn’t need a bigger army. It needs a smaller—that is, more modest—foreign policy, one that assigns soldiers on missions that are consistent with their capabilities.”
   
• Deteriorating global situation that ties hands domestically. Deterioration of situation in almost all countries make situation in the USA worse as there can be no hope of expanding exports. The fact the China along with several other nations holds a lot of treasuries create certain limits in monetary policy. Some client state such a Poland and Ukraine are in deep economic trouble...

So what's next for 401K investors ?   While Bush administration public figures soon will go to the bar and cry in each others beer not much will change in Washington.  They were a public disgrace for all American people but people who will replace them are from the same crowd. That means that 401K investors who will pay full price of Wall Street excesses and I believe this will be a heavy price.  The situation tells us the obvious:  "The king has no clothes" but in reality it is 401K investors who are now walking naked... 

It would be nice if the Wall Street executives which aided and abetted this financial storm be sent to renovated Alcatraz, not saved by the government. But the hope that they will be held accountable are extremely slim. At most a couple of scapegoats will be prosecuted for their lack of due diligence or excessive corruption, the same scam that was rehearsed on Enron's executives. While the Nietzsche superman stereotype of  "chosen people" of global finance (hedge fund managers, buy-out gurus, etc)  are now a "damaged good", they are probably safe from joining population of prisons for white collar criminals. 

At present general public has less confidence in money managers and brokers than in people from virtually any other profession. But the fact that matter most is that financial losses of  Wall Street buccaneers are now thrown into this bucket and we were about to be asked to pay for it but do not ask any questions. Would this be a more blatant case of  taxation without representation?

Baby boomers retirement is really in jeopardy. Simpler more frugal life is in the card. As one reader of the article Failure to save East Europe will lead to worldwide meltdown - Telegraph noted

... Do we really need all the junk we've been persuaded to buy over the past couple of decades?
People can live perfectly happily on remarkably little if they try.

The market for many products will significantly diminish over the years to come.

Ready-made foods (e.g. a handful of prawns on a bed of flavored pasta, total cost 50p, selling for �3.95 a portion), bottled water, organic foods, gourmet items and countless other "non-essentials" can all be expected to shrink in size.

Restaurants and pubs will be visited far less often. Holidays will be in Britain. Clothes and footwear will be chosen for their durability rather than their fashion. Entertainment will be home-based.
The future is simple.

Charles Lee on February 15, 2009 at 10:22 AM

What is interesting that 401K investors, especially baby-boomers,  are not only victims, but also a willing participants of this "financial excesses" saga...  I think 401 investors should be more properly called 401K donors. As Washington Post reported in No Longer Ready to Retire  (unfortunately they did ask the key question: will there be any jobs for those who cannot afford to retire ?)

After last week -- which saw volatile market swings, major bankruptcies of once-stable and venerated Wall Street firms and the largest government intervention in the market since the Depression -- people across the Washington area reported not only heightened anxiety about money, but uncertainty, if not outright fear.

People such as Tim Kenney or Thomas Williams said the summer's stress over rising gas, food and energy prices now feels like nothing. Now they are watching hard-earned savings shrink or simply disappear. Kenney began to wonder if the very foundation of the economy, and with it people's dreams and plans, was crumbling.

Jean Celine, 64, was already so worried about rising health-care costs that she'd been forcing herself to go to the gym every day to stay healthy. After last week, her nerves are shot. Like many her age, she has only a small pot of money to live on for the rest of her life. Any loss is a big loss. And the average 65-year-old retiree can expect to live 17 more years, the AARP says. So this weekend, Celine started a $15-an-hour job. "I'll probably be working for the rest of my life," she said. "Some golden years."

After last week, psychologists took to the airwaves to tell people not to become sick over losing money, advising that pausing was better than panicking. But by then, enough people had sufficiently panicked to make a run on the $3.5 trillion in money market funds, similar to the bank runs that led to the Great Depression.

"It's just amazing in the last four or five days how many times I've heard the words 'The Depression' brought up," said Kevin Flannery, general manager of the Leisure World retirement community. "It's all people are talking about here."

By Friday, after word of the federal intervention, people seemed to breathe a sigh of relief. But the wild week left many with changed visions of what might lie ahead.

* * *

Kenney, 58, had a gauzy vision of what his retirement would look like. A creative type, he didn't want to decamp to Florida or play golf all day. He wanted freedom. That meant having enough money to do only the work that he loved, to compose music, finally get to those two books he's been meaning to write, perhaps buy a farm in Iceland.

But after last week, Kenney, like tens of thousands of people reaching retirement age, is being forced to reconsider his future. Glued to his chair in front of two Mac computer screens, chain-smoking Camel Lights, Kenney watched, wide-eyed, as over the course five business days one-third of the value of his retirement savings simply vanished.

He hasn't slept well since.

Reading this selection of outdated financial news please remember that its your hard earned money and  you better be careful with them. Programmers and system administrators work is a hard one so it reckless to invest something without creating a ticket for the transaction and analyzing consequences of it in a small spreadsheet (Excel is a really great program for economic models) or using Perl.

One often forgotten lesson is that higher returns entail disproportionately high risk. The key word here is "disproportionately": often slightly higher returns entail dramatically higher risk. So please don't be greedy: 401K investors are pray for financial services companies and should properly be called 401K donors...

We all want to blame someone. It's pretty human to crave for scapegoats. There were certainly a lot of people who saw this crisis coming, while there were certainly even more people (like myself) who did not. Unfortunately, the ones who did not controlled both the finances and the politics of the country. I am less concerned with prosecuting the CEOs (who pushed the limits of risk-taking to produce quarterly results) but with the failure of the checks in the system, namely the outside auditors, regulators, rating agencies and CFOs and controllers of the banks who knew or should have known that valuations were unrealistic, or even fraudulent. It is their collective failure that allowed the problem to metastasize. Once one player in the marketplace is allowed to post results based on unrealistic valuation , competitive pressures will incentivize or even force the other players to follow suit.

A key skill for investors is to verify the accuracy of sources and their evidence.  Economically, we are not at a war, but a civil war, in which armies of the opposite side are conscripted against us (401K investors) by exploiting our own ignorance, gullibility, belief-system-impaired perceptions of reality, and self-destroying sociopolitical dogma.

"My estimate is that the financial sector takes $560 billion a year out of society," Bogle explains to Bill Moyers. "Banks, money managers, insurance companies, certainly annuity providers. They're all subtracting value from the economy." (Bill Moyers talks with John Bogle)

We will pay dearly for the collapse of regulation. Here are a couple of apt comments on this subject:

The proximate causes of the crisis are usually said to be easy credit, bankers' cavalier attitudes toward risk, "securitization"..., the extraordinary leverage built into the financial system by complex derivatives, and the failure of our regulators to do their job.

But the larger cause was our failure to recognize the sea change in the nature of capitalism that was occurring right before our eyes. That change was the growth of giant business corporations and giant financial institutions controlled not by their owners in the "ownership society" of yore, but by agents of the owners, which created an "agency society."

The managers of our public corporations came to place their interests ahead of the interests of their company's owners. ... The malfeasance and misjudgments by our corporate, financial and government leaders, declining ethical standards, and the failure of our new agency society reflect a failure of capitalism. ...

What's to be done? We must work to establish a "fiduciary society," where manager/agents entrusted with managing other people's money are required -- by federal statute -- to place front and center the interests of the owners they are duty-bound to serve. The focus needs to be on long-term investment (rather than short-term speculation), appropriate due diligence in security selection, and ensuring that corporations are run in the interest of their owners. ... Making that happen will be no easy task.

Please note that this "That change was the growth of giant business corporations and giant financial institutions controlled not by their owners in the "ownership society" of yore, but by agents of the owners, which created an "agency society." is the same problem that doomed the USSR.

In another comment DownSouth said...

Thus, for instance, a laissez faire economic theory is maintained in an industrial era through the ignorant belief that the general welfare is best served by placing the least possible political restraints upon economic activity. The history of the past hundred years is a refutation of the theory; but it is still maintained, or is dying a too lingering death, particularly in nations as politically incompetent as our own. Its survival is due to the ignorance of those who suffer injustice from the application of this theory to modern industrial life but fail to attribute their difficulties to the social anarchy and political irresponsibility which the theory sanctions. Their ignorance permits the beneficiaries of the present anarchic industrial system to make dishonest use of the waning prestige of laissez faire economics. The men of power in modern industry would not, of course, capitulate simply because the social philosophy by which they justify their policies had been discredited. When power is robbed of the shining armor of political, moral and philosophical theories, by which it defends itself, it will fight on without armor; but it will be more vulnerable, and the strength of its enemies is increased.

When economic power desires to be left alone it uses the philosophy of laissez faire to discourage political restraint upon economic freedom. When it wants to make use of the police power of the state to subdue rebellions and discontent in the ranks of its helots, it justifies the use of political coercion and the resulting suppression of liberties by insisting that peace is more precious than freedom and that its only desire is social peace. A rational analysis of social facts easily punctures this pretension also. It proves that the police power of the state is usually used prematurely; before an effort has been made to eliminate the cause of discontent, and that it therefore tends to perpetuate injustice and the consequent social disaffections. Social intelligence may, in short, eliminate many abortive means to socially approved ends, whether they have been proposed honestly or dishonestly, and may therefore contribute to a higher measure of social morality. If psychological and social scientists overestimate the possibilities of improving social relations by the development of intelligence, that may be regarded as an understandable naïveté of rationalists, who naturally incline to attribute too much power to reason and to recognize its limits too grudgingly. Men will not cease to be dishonest, merely because they have discovered their own deceptions. Whenever men hold unequal power in society, they will strive to maintain it. They will use whatever means are most convenient to that end and will seek to justify them by the most plausible arguments they are able to devise.

Since Niebuhr wrote his book prior to Postmodernism becoming an important cultural force, he did no critique of overly pessimistic rationalists. He did, however, do a critique of overly pessimistic religionists, and it is most intriguing to see how similar they are in their beliefs to their secular first cousins--the equally pessimistic modern day libertarians--who also worship at the altar of the imperial self:

Nevertheless the tendency of religion to obscure the shades and shadows of moral life, by painting only the contrast between the white radiance of divine holiness and the darkness of the world, remains a permanent characteristic of religious life.

This tendency has more than one dubious effect. It certainly tends very readily to a moral, social and political indifferentism. The individual, and more particularly society, are regarded as too involved in the sins of the earth to be capable of salvation in any moral sense. Usually the individual is saved by the grace of God, while society is consigned to the devil; that is, the social problem is declared to be insoluble on any ethical basis. Thus Augustine concludes that the city of this world is "compact of injustice," that its ruler is the devil, that it was built by Cain and that its peace is secured by strife. That is a very realistic interpretation of the realities of social life. It would stand in wholesome contrast to the sentimentalities and superficial analyses, current in modern religion, were it not marred by a note of defeatism. That note creeps easily into all rigorous religion, with its drift toward dualism. The injustices of society are placed into such sharp contrast with the absolute moral ideal, conceived by the individual conscience, that the religiously sensitized soul is tempted to despair of society. Religion thus degenerates into an asocial quest for the absolute. The soul seeks the perfection of God in either quietistic absorption or ascetic withdrawal from the world; and in each case perfection is defined and experienced in purely individualistic terms.

The last paragraph of  famous "The Quiet Coup" article by Simon Johnson suggests the old elite (banksters) is in danger :

"The conventional wisdom among the elite is still that the current slump 'cannot be as bad as the Great Depression.' This view is wrong. What we face now could, in fact, be worse than the Great Depression -- because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late."

As Roubini put it: "The U.S. financial system is effectively insolvent."  Or as Financial Times' American blog aptly put it: On housing: "Myopia, opportunistic behavior and insider protection: welcome to U.S. home financing policy." The Congress is indulging in a populist frenzy with Republican fascinated by "Tea parties" (after squandering all the nation wealth and dismantling all the New Deal regulation (with substantial help from Clinton and his economic hit men); and Obama administration is hoping for the best."

Old News ;-)