Tuesday, October 25, 2005

Jimmy Rogers, Refco and Gold

I remember Jimmy Rogers, of Quantum Fund fame, singing the praises, a few years back, of other commodities in contrast to a more sanguine view on Gold: Most commodities are going to do better than gold. I am long gold. I own gold and gold is in the fund. But the best commodities will be other commodities. Lead and other commodities will probably continue to do better than gold over the next few years. The problem with a trading room view like that is that one may forget that commodities are not stocks, by which I mean, commodities are physical.

No kidding, Dude, you might be saying, Jimmy knows that, that's why he bought them. Well, I think there are certain aspects of the game that may have eluded Mr. Rogers. Most notably the difference between other commodities and Gold lies in one's ability to store it. To profit from trading wheat, for instance, one either takes credit and counter party risk or buys a few silos and trucks. While the price increase one might see on the screen may be tempting, realizng the profits might be tricky, as he seems to be discovering in the Refco fiasco. $1Mil of wheat is many rail road cars of wheat, $1Mil of Gold can be easily stored at home and transported by car.

The disconnect between the financial superstructure and the physical universe is, in my view, substantial. Profits will likely be made in commodities but perhaps not so much by Wall St. as by others. Let the labor price spiral commence.

New White House Theme Song

Should I stay or should I go now?
Should I stay or should I go now?
If I go there will be trouble
An’ if I stay it will be double
So come on and let me know

New White House Theme Song performed by The Clash according to CHB

I remember watching a power struggle for the NY trading operation at Chase Manhattan, as a pawn, mind you, and in wondering how life must be like in Washington DC these days those memories serve as a possible hint. In any hierarchy the guys at the top will have different projects they have sponsored and depending upon how well their projects do they will rise or fall. In the instance I watched the metric was profit of the desks each prospective boss had created and staffed. Those of us on the trading desks knew who was going to win well before the quarterly profit and loss statement was released, the day which marked the changing of the guard. One day you reported to this guy and the next day, to another. Quite soon the changes in philosophy became apparent. Also, as they say in war, to the victor go the spoils, to which we on the trading desks add, to the loser go the losses. We found an awfully big loss in the loser's desks' portfolios, shame, shame.

With yesterday's announcement of Bernanke as new Fed head and continued raising of the stakes in the CIA leak/Niger Uranium forgery case; VP Cheney is now reported to be the source of Scooter Libby's info, two of the more powerful corporate offices in the world will soon be under new management. In the case of the Fed, the change is overt, while in the case of the White House, the change might not be, by which I mean, the Neo-cons might be purged but Bush might remain. Then again, perhaps we will get a full-Nixon. In any event I imagine the words of the Clash song are playing in the minds of many at 1600 Pennsylvania Ave.

I haven't finished reading through Bernanke's academic papers on monetary policy but my first impression is that he believes monetary policy is a more powerful force than do I. In my view, particularly when the token currency in question is also used as global reserve currency, the power of monetary policy is severely limited, except in choosing the side towards which the deck will be stacked, savers or debtors. Of more import is the continuation of political and military hegemony.

In that regard, I think the next few years will be retrenchment years for the US on the world stage. The great problem for any expansion effort by an empire comes when the expansion runs out of steam, in much the same way that any corporation is great to work for when it is growing but much more difficult when revenue growth stalls or goes negative. I also expect to see a fair bit of house cleaning of a financial sense now that scape goats have been produced.

This is where Bernanke's helicopter speech may prove quite prescient. To the extent Refco proves to be another Enron, by which I mean a corporation whose books were radically imbalanced, and there are more Refcos to be exposed, the die is cast, we are going to inflate.

I don't think the experience will be pleasant but then again, a loss of faith in the central institutions of a society never is. Neither are the first few weeks of a new diet regimen, but that doesn't mean it isn't useful in the long run. Oh well, let the resolution commence.

Monday, October 24, 2005

The Booby Prize in Economics goes to.....

So, the winner of the booby prize in economics goes to Ben Bernanke. What booby prize?, you ask. Why the chance to follow in Greenspan's wake, who, having put off the need to tighten for years can now pass on the accumulated nastys to the next guy. Talk about passing the buck.

Fear not, however, Greenspan has no doubt that he will be a credit to the nation as Chairman of the Federal Reserve Board. Not a doubt in your mind, eh Al? not even a small one? Oh right, gotta keep those "animal spirits" up.

Mr. Bernanke is already out there stressing continuity, if I am confirmed to this position, my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years. How he might go about achieving this continuity is a puzzler to me in light of ex Fed Vice Chairman Alan Blinder's view that the secret to Greenspan's success is still a secret.

I wonder how long it will be before we get a deflation scare that gets those helicopter's flying.

Good Luck, Ben, I think you're going to need it.

Eyes of the World

"Wake up to find out that you are the eyes of the world" begins the chorus to a Grateful Dead song I find particularly thought provoking. It must be heady stuff to go from being a garage band playing local bars to being in front of a crowd of 20,000 fans all singing the words to a song you wrote. Different people, however, respond differently to the experience, consider, for instance, the different choices of the Beatles songwriting duo, Lennon and McCartney. Of somewhat lesser iconic status but with similar, albeit diminished, influence are TV's talking heads and the myriad journalists of the main stream media. In sum, these people are, for many, the eyes and ears of the world, those who must see and hear the tree fall in the metaphoric forest in order that the lesser mortals might know it made a sound. It is heady stuff, if you can see it, but many can't or won't. I know, I didn't see it.

I've been on financial TV quite often, mainly out in Asia during the mid to late 90s. To me at the time, TV was a means by which I might increase my firm's revenues, and by virtue thereof, line my pockets further. The idea of "doing a Howard Beale" (stop reading the script on TV and say, in effect, this news is bullsh*t) a la the film Network never occurred to me, to my everlasting regret, even though I had seen the film. I'm not arguing the world would be a better place if I had. I don't believe that. However, at least I could look back knowing that when given a chance to rock the boat I didn't go with the flow.

Why didn't it occur to me to rock the boat? I was too busy making money, which was my primary object, to which other considerations were subordinate. Further, I was, it seems to me now, extremely naive about the ways of man. I can remember disregarding news of strange dealing in the THB forward market before the Asian Crisis exploded into public view because, if memory serves, "Central Bank officials couldn't be that stupid." Oops, my bad.

These thoughts have been floating around my head lately while contemplating the actions of Judy Miller of the NYTimes and just today the views of Caroline Baum of Bloomberg news. In a sense, Judy Miller is just now entering a frame of mind in which Caroline Baum may eventually find herself, the realization that you got something terribly wrong which was terribly important. Ms. Miller is fighting this realization tooth and nail however.

For those unfamiliar with Ms. Miller's reporting, she was the main advocate in the NYTimes for the view that Saddam possessed WMDs and wanted to possess nuclear weapons. I won't speculate as to the assumptions which led her to the, now widely seen as incorrect, view but that she got it very wrong is clear. In a recent published article she tries to hide her error among the crowd: WMD -- I got it totally wrong... The analysts, the experts and the journalists who covered them-- we were all wrong, a "explanation" which, when coming from my 4 year old, elicits from me, "if lots of people were to run off a cliff, would you follow? In a recent email which came to be published she asks, What did I do wrong? in the context of her relations with her bosses. If I was her editor I would respond, "you mean besides using and abusing the reputation of the NYTimes to mislead millions of people about the basis for a war which has killed at least 10s of thousands." Keeping the tenacity of Ms. Miller's self-righteousness in the face of evidence which to this outsider looks quite damning, in mind, let's turn our attention to the views of Ms. Baum.

Over the past few years, Ms. Baum has ridiculed the notion that there might be some collaboration between government and financial interests aimed at maintaining certain prices in the financial markets. Today she tells us why: The reason the notion of a global cabal is so preposterous is that the paper trail would be too long. Too many people would have specific knowledge of the PPT's operations. Some concrete proof would have surfaced by now. Luxuriate for a moment in the irony of her statement in the context of Patrick Fitzgerald's investigation....amazing isn't it.

Let's see now, so Ms. Baum would have us believe that if some cabal cut down a tree in the forest everyone would know it because there would be "concrete proof." I assume "concrete proof" means objectively indisputable evidence in the public square. Yet recalling Ms. Miller's current lack of contrition, and previous ability to cast aside the views of most of the weapons inspectors themselves, one woman's concrete proof might be another woman's preposterous notion.

The words of Bertrand Russell, the whole problem with the world is that fools and fanatics are so sure of themselves while wiser people are so full of doubts, keep coming to mind as I think about the eyes of the world. I'm not arguing that I know there is a PPT, but given my read of history, my agreement with the view that people, including me, can very easily blind themselves to the obvious, and my experience working in the belly of the beast itself, Chase Manhattan Bank, I would never ridicule the notion and do entertain it as a plausible explanation. I've been the fool enough to have learned that only fools speak definitively about things they don't know. I've also come to the view that I have to "wake up to find out that I am my eyes of the world", waiting for "concrete proof" just makes me another lemming. As William James wrote, our faith is faith in some one else's faith, and in the greatest matters this is often the case. I would hate to be one of those people upon whose faith, in part, lives or fortunes were lost.

In the event Ms. Baum proves as wrong about the absence of PPT as Ms. Miller was about the presence of WMD those relishing their schadenfreude might be tempted to sing a few lines from Otis Redding's Sitting of the Dock of the Bay, watching the tide roll away (exposing those naked swimmers). Oh, one other thing, can someone please forward this NYTimes article to Ms. Baum, Mystery at Refco, How could such a huge debt stay hidden?

Sunday, October 16, 2005

Behold Greenspan-Shiva

A little learning is a dangerous thing
Drink deep, or taste not the Pierian spring
There shallow draughts intoxicate the brain,
And drinking largely sobers us again.
Tired at first sight with what the muse imparts,
In fearless youth we tempt the heights of arts
While from the bounded level of our mind
Short views we take nor see the lengths behind
But more advanced behold with strange surprise,
New distant scenes of endless science rise!
So pleased at first the towering Alps we try,
Mount o'er the vales and seem to tread the sky,
The eternal snows appear already passed
And the first clouds and mountains seem the last.
But those attained we tremble to survey
The growing labors of the lengthened way
The increasing prospect tires our wandering eyes,
Hills peep o'er hills and Alps on Alps arise!
Alexander Pope - Essay on Criticism

There is a Zen saying, One moon shows in every pool; in every pool, the one moon, which I find to be a wonderful description of the relation between internal minds and the external world. The corollary saying A finger pointing at the moon is not the moon is an earlier manifestation of Korzybski's maxim the map is not the territory i.e. the words one uses to describe a phenomenon are not the phenomenon, the thoughts in your head of the external world are not the external world. Yes, I promised a bit of Greenspan today and I'll get there, but first I'd like to bring a few thoughts to the foreground of your mind to act as an anchor.

Man has been thinking about the experience of life for a very long time. Throughout that time, as each culture or collective sense of the world has waxed and waned, the same elemental questions keep popping up. In Philosophy circles one of these issues is expressed as the problem of universals; what is the relation, if any, between a general word or thought and the "real world" for want of a better phrase. Here's the kicker, your ability to understand the external world will be profoundly affected by your answer to this question...and everyone has to make a choice, whether you are aware of that or not.

Keeping those thoughts in mind, let's turn to the big cheese himself, Fed Chairman, Alan Greenspan. My professional life in finance has coincided almost exactly with Greenspan's tenure. Ever since the crash of '87 that served as his "wake up" call, I've been reading his speeches, parsing his comments and trying to get my head around his philosophy. I've found this no easy task; as he once noted in a speech, I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said. Like Rep. Ron Paul of Texas, I've raged at his seeming about face from Gold Standard advocate in 1966 to High Priest of Fiat Money. Like an impudent child in a classroom I've poked fun at seeming contradictions in his speeches. Like a tenured college professor who confuses his view of the world with metaphysical truth, I've noted that Greenspan alternatively "gets it" or "doesn't get it" when I perceive his comments to be in accord or discord respectively, with my own views. What I haven't done is to take a step back and remember that he is just a man, or in Zen terms, one of many pools reflecting on the light of the one moon.

The child who became the man was born in 1926 in the Washington Heights area of NYC. According to most accounts I've read he was a good student, class president and a jazz musician of some acclaim. After dropping out of Julliard he switched gears from music to money, enrolled in NYU and earned his BS and MA in Economics.

Although he was employed in the "suit and tie crowd" Greenspan in his mid twenties hadn't yet turned his back on artistic bohemia. He met an artist, [Thanks to a reader who alerted me to an error, the Joan Mitchell to whom Greenspan was married was not the abstract expressionist, but more of a formalist], with whom he was married briefly, Joan Mitchell, who introduced him to Ayn Rand, nee Alissa Zinovievna Rosenbaum, the author of a novel with a cult-like following, The Fountainhead. Although Greenspan initially was not enthused about Rand, Ms. Mitchell, before, during and after their marriage, kept urging him to open his mind to her philosophy given his own views. Eventually he did opt to associate with Rand, quite closely, and in the process decided his answer to the immortal question of universals.

Justin Martin, in Greenspan: The Man Behind Money, describes that decision process:

Mitchell continually urged Greenspan to be more open toward Rand and her circle. Given his personality, she was certain that he would respond to objectivism's emphasis on rationality and individualism. It was through her that Greenspan got to know Nathaniel Branden, objectivism's chief proselytizer. Over several months in 1954, they met a number of times, sometimes in restaurants, sometimes at Branden's apartment at 165 East 35th Street.


Branden kept after Greenspan. At their meetings, Greenspan would say things such as: "I think that I exist. But I don't know for sure. Actually, I can't say with certainty that anything exists."

[note: According to Nathaniel Brandon Greenspan was philosophically a logical positivist and economically a Keynesian when he met Rand. Logical Positivists are skeptical of theological and metaphysical propositions [i.e. assumptions] and exclude them from logical reasoning. To those of this persuasion, the logical truth of a proposition must be ultimately grounded in its accordance with the (physical) material world. This rigidity might seem just the ticket but as Descartes' plunge into the skeptical abyss suggests, if you can't assume the universe is real or even that you exist, two of those aforenoted metaphysical propositions, then there can be no accord, for there is nothing with which to compare the thought. In a sense logical positivism's view of the world puts the cart before the horse, logic is great once you have some assumptions and associations with which to work, but useless without, call it a case of analysis-paralysis. Greenspan's doubts are entirely consistent with this philosophy.


One day, Branden was riding in a cab with Rand. He had some surprising news and could hardly contain himself. Finally, he just blurted it out.

"Guess who exists?"

Rand was shocked.

"Don't tell me," she said, "you've won over Alan Greenspan."

"Yes, I have," he answered. "And I think you're going to change your mind about him. I think he's a really interesting man with a very unusual brain."

I wonder if he knew he was walking in Descartes' footsteps when he was soul searching, or if he questioned whether the road he took out of the skeptical pit, Rand's road of self affirmation [a is a, I exist, existence exists], was really a road at all, but we'll get back to that.

As noted in this article, once he made his choice in 1954, Greenspan's close association with Rand continued throughout the rest of her life:

...Greenspan was a member of Rand’s inner circle during this entire period and beyond. He lectured on economics for the Nathaniel Branden Institute. He wrote for the first issue of The Objectivist Newsletter, and when Rand broke with Branden, he signed a public statement condemning the traitor “irrevocably.” When Gerald Ford appointed him to the Council of Economic Advisors, he invited Rand to his swearing-in ceremony, and attended her funeral in 1982.

The article also notes that Greenspan's name first appeared in the NYTimes in the fall of 1957 not, as one might expect, in connection with politics or economics, but as the author of a 73-word letter to the editor of the Times Book Review. The future head of the Federal Reserve wrote to protest a hostile review of Ayn Rand’s novel Atlas Shrugged that had appeared a few weeks earlier. Here I see evidence of his choice in the question of universals, there is only one interpretation to each thing, those who don't see what I see are wrong.

In digging through the research materials to put this essay together I recalled my own flirtation with Rand's views. Fortunately, I believe, I didn't read Rand as a soul searching twenty-something, nor did I have to contend with her physical presence while I entertained her views, as did Greenspan, but rather somewhat later in life, intrigued by her economic views, which were, in the main, copied from the Austrians. Even more fortunately, I had read enough philosophy before reading Rand to have my own opinions on some of the essential questions of the discipline. She was not the medium (as she was for Greenspan) through which I discovered that man had been pondering the same questions that I pondered. I am most thankful to her, in an ironic sense, for leading me to reinvestigate Plato's thought. In hindsight, I didn't have much grasp of Plato when I read selections in college, now I agree, in a sense, with Whitehead, The safest characterization of the European philosophical tradition is that it consists of a series of footnotes to Plato.

As her, in my view, simplistic treatment of certain of the essential questions of philosophy had already led me to view her work with skepticism I didn't read her novels, The Fountainhead and Atlas Shrugged, in full, although I did check out some of the more important, according to Objectivists, sections when I popped into a library and bookstore. Neither of the books spoke to me on first acquaintance almost a decade ago.

In between then and now I've done a lot of reading, had a child and, well, aged a bit. My sense of the world has changed. I've revisited some of the "more important" sections and plot lines of those two novels. Sticking with reasonably contemporary comparisons, Tolkien's Lord of the Rings evidences to me much deeper scholarship in a much easier to read package, in my view, a sign of true genius-making the complex, simple. Tolkien's study of the relations between man and the language he uses both in elemental and complex forms, the words themselves and the literature respectively, led him to imagine a world where the effects of history on today were clear and unavoidable. Tolkien's heroes were more caught in the flow of the times than Rand's drivers of the world who could turn the flow of history on a dime.

As far as novel as metaphor for the times, I much prefer Kesey's One Flew over the Cuckoo's Nest. Kesey's work, like Rand's promotes a sense of individualism and an awareness of the madness of the system. Kesey's brand of individualism, and freedom, however, was more consistent with the 19th century Transcendentalists, Emerson and Thoreau- while you are entitled to them, don't impose your ideals on others, let people discern their own truth. Rand's vision of individualism seems to me confused, as if it needs to be validated by everyone else, which seems more like solipsism.

Neither Howard Roark or John Galt, the heroes of her two main novels, are complaining that they can't do what they want, although they phrase it that way, but rather that the people around them aren't giving them enough credit and jumping to do their bidding. Roark could design any building he wanted, nobody was stopping him. The problems came because, in order to manifest his vision in the real world he needed other people, some to work and some to invest, but none to think on their own. Both "heroes" were, in the end, destructive, much as a young child can be when he loses a board game- "if I can't win then nobody can play."

During the climactic courtroom monologue, Roark says The creator lives for his work. He needs no other men. His primary goal is within himself. The parasite lives second-hand. He needs others. Others become his prime motive. According to that definition it seems to me that Roark is a parasite, as is Galt. If you really don't need others, follow Thoreau to Walden Pond, don't complain that the "others" you supposedly don't need aren't thinking, feeling and doing what you want them to. In her own way, Rand made a wonderful Nurse Ratched, imposing her "sanity" on the world, whether they wanted it or not.

Yet, I can see how this book would appeal to a bunch of young, intellectual city dwellers who have little to no sense of the grunt work required to bring any idea into reality, or, more pertinently, the grunt work required to keep the people of that city fed, watered, clothed and housed. This isn't to denigrate "reason" but to understand that a man alone with only his thoughts will soon starve. While Marx tried to convince people that a headless workman could rule the world, Rand tried to convince people that a bodiless thinker could. While I agree with the essential critique, that relations between the 2 classes aren't great, both responses seem to be an exercise in cutting off one's nose to spite one's face. My wife and I put a fair bit of thought into planning our garden. We also break the soil, fertilize, plant according to the plan, weed, water when needed, and harvest.

Leaving aside my perspective on Rand, let's return to her effect on devotees. To highlight the allure of Ms. Rand and her views consider the case of Libertarian Philosopher/Economist Murray Rothbard, born in the same year as Alan Greenspan, 1926. After reading Atlas Shrugged, Rothbard wrote to tell Rand, Atlas Shrugged is the greatest novel ever written...when, in the past, I heard your disciples refer to you . . . as one of the greatest geniuses who ever lived" he had thought this to be "the outpouring of a mystic cult. But, now, upon reading Atlas Shrugged, I find I was wrong. A few months later, when Rand learned that the economist Murray Rothbard's wife, Joey, was a devout Christian, she all but ordered that if Joey did not see the light and become an atheist in six months, Rothbard, who was an agnostic, must divorce her. Rothbard never had any intention of doing anything of the sort, and this estranged him from Rand, who found such "irrational" behavior intolerable. Rothbard would later write one of the first exposés of what he called The Ayn Rand Cult.

I'm not arguing that Greenspan was or still is some sort of mind controlled Trilby to Rand's female Svengali. As is noted throughout the accounts of their relationship, Greenspan was treated differently by Rand than her other acolytes. Although she named Nathaniel Brandon as her intellectual heir, until their affair (they were both married but not to each other) went sour, Greenspan seems to me to have grasped the essential Rand, although with an even shallower scholarship than his mentor; the ability to convince others that you are right, to evoke what Emerson called the idolatry of the herald, using that tool, rhetoric, so well described by her muse, Aristotle.

Let me illustrate this process or rather, describe a possible demonstration occurring right now. Part of the reason I went into such detail and used such a broad range of allusions was to illustrate a rhetorical tool, the art of weaving the spell of a knowledgeable person. I could just as easily have written, Greenspan is a book smart city boy whose life has been so isolated from the real world that he likely can't change the oil in his own car, or connect his own computer to the network. That anyone thinks he has some special grasp of the economy, which is made up of millions of people doing things just like that, seems silly to me, but without all the allusions and subordinate clauses it wouldn't enter the mind the same way, although the essential message would be similar.

If you have been blessed with both the time and inclination to spend the hours necessary to form your own opinions on the subjects discussed you are likely to read this essay with a critical eye. You might disagree with my perspective on Logical Positivism, for instance. As Carlyle wrote, the eye sees what the eye has means of seeing. If, by contrast, I invoke names and ideas with which your acquaintance is limited, you could easily come to the view that I seem like a smart guy who knows his stuff, the first step in the process of herald idolatry, confusing the message with the messenger. This process can occur in both minds, the listener's and the speaker's, or in this case, writer's. How tempting to pass on the wisdom of others as your own, to fail to see the sense behind Newton's metaphor, standing on the shoulders of giants.

This is to argue that Greenspan, like Rand and many others before them fell into the trap of the aspiring intellectual, a la Pope, allowing the shallow draughts of the first few sips of wisdom to intoxicate the mind, confusing the sense of having a sharper, quicker, and more informed mind on certain topics than many people one meets, with being a wise person. As the proliferation of advisory newsletters suggests, it seems to be far easier to convince people, including and especially yourself, you are right, than to actually be right. Going further, I believe a focus on convincing other people of your brilliance is a sure way to lose sight of the real object, having an accurate sense of the real world. Learning, at least as an adult, is mainly an exercise in error correction. If you spend lots of time convincing people you don't make mistakes, you can't be learning much.

As Rothbard noted about Greenspan's forecasting firm, Townsend-Greenspan (thanks, RJ); I found particularly remarkable the recent statements in the press that Greenspan's economic consulting firm of Townsend-Greenspan might go under, because it turns out that what the firm really sells is not its econometric forecasting models, or its famous numbers, but Greenspan himself, and his gift for saying absolutely nothing at great length and in rococo syntax with no clearcut position of any kind.

As to his eminence as a forecaster, he ruefully admitted that a pension-fund managing firm he founded a few years ago just folded for lack of ability to apply the forecasting where it counted- when investment funds were on the line.

Even adulatory speeches, like this from Alan Blinder, who worked with Greenspan at the Fed, contain interesting observations.

For years now, US monetary policy has been said to be on "the Greenspan standard" meaning that it is whatever Alan Greenspan thinks it should be. What sort of standard is that?

Greenspan cherishes option value. Federal Reserve policy under his chairmanship has been characterized by the exercise of pure, period-by-period discretion, with minimal strategic constraints of any kind, maximal technical flexibiliy at all times, and not much in the way of explanation.

....The Greenspan standard is highly situational, even opportunistic. FOMC decisions are made one meeting at a time, without pre-commitment to any future course of action and often without much indication as to what those future actions might be. The secret to Greenspan's success remains a secret.

.....Mindful of the fact that the financial markets now view Chairman Greenspan's infallibility more or less as the Chinese once viewed Chairman Mao's [note: is this a Freudian slip? or a poke...the Chinese thought Chairman Mao was infallible in large measure because he killed or tortured those who disagreed, which, come to think of it, is, in essence what intervention does in the financial markets, kill and torture, in the financial sense, those who disagree with the Chairman's view] we nonetheless turn...to some possible negative aspects of the Greenspan legacy....we ask whether the extreme personalization of monetary policy under Greenspan has undercut his ability to pass any "capital" on to his successor and/or has undermined the presumed advantages of making monetary policy by committee.

So 18 years of Greenspan and we throw out the ideas of policy consistent with schools of thought, distributed decision making with its checks and balances, and even the virtue of passing on wisdom to those who come after. Oh well, what did you expect from a guy who never had kids.

Perhaps the event which brought the Rand/Greenspan relationship to the fore of my mind was his recent speech on Economic Flexibility. Here we find the heroic Adam Smith whose "prescription" of free markets became the guiding philosophy of the United States. He continues in this line of thought, noting the "assaults" on the system from other thinkers, and the damage done by Keynes. This, to me, is Rand's philosophy of human achievement, that extraordinary men, by virtue of individual human reason, invent revolutionary ideas about what others ought to do based on their much clearer vision of how the world works.

The true title of Smith's book to which Greenspan refers is An Inquiry into the Nature and Causes of the Wealth of Nations, in other words, an observation and speculation as to cause, not as he terms it, a prescription. Students of Philosophy might notice the is-ought problem described by one of Smith's contemporaries, David Hume, of which Smith was very aware. As Hume might have put it, just because other wealthy nations have done these things does not mean that if my nation does them, they will be wealthy. The more offensive notion, to my understanding of economic history, is that free market institutions somehow began with Smith. I imagine it would be offensive to Smith himself, who was drawing on centuries of history to make his observations.

Indeed, Smith outlines the emergence of what we might call, free market institutions, in Europe:

At first, the farm of the town was probably let to the burghers, in the same manner as it had been to other farmers, for a term of years only. In process of time, however, it seems to have become the general practice to grant it to them in fee, that is for ever, reserving a rent certain never afterwards to be augmented. The payment having thus become perpetual, the exemptions, in return for which it was made, naturally became perpetual too. Those exemptions, therefore, ceased to be personal, and could not afterwards be considered as belonging to individuals as individuals, but as burghers of a particular burgh, which, upon this account, was called a Free burgh, for the same reason that they had been called Free-burghers or Free-traders.

Along with this grant, the important privileges above mentioned, that they might give away their own daughters in marriage, that their children should succeed to them, and that they might dispose of their own effects by will, were generally bestowed upon the burghers of the town to whom it was given. Whether such privileges had before been usually granted along with the freedom of trade to particular burghers, as individuals, I know not. I reckon it not improbable that they were, though I cannot produce any direct evidence of it. But however this may have been, the principal attributes of villianage and slavery being thus taken away from them, they now, at least, became really free in our present sense of the word Freedom.

I note these few differences between Greenspan's expressed view on Smith and what Smith actually wrote to highlight the effects of the philosophical choice Greenspan made in following Rand's path out of skeptical solipsism, which, in my view, is not a path at all. Rand's axiom, existence exists, merely elevates to a tautology one's perceptions and observations of the external world, i.e. these things I see, hear, smell, taste, touch and think are true. More succinctly it is the philosophy that one is always right, ridiculed so well by Lewis Carroll, When I use a word,' Humpty Dumpty said, 'it means just what I choose it to mean -- neither more nor less.'

Greenspan would have you believe that the US economy has become "more free" since the 70's, or as he puts it "more flexible." He argues; These increasingly complex financial instruments have contributed to the development of a far more flexible, efficient, and hence resilient financial system than the one that existed just a quarter-century ago. He continues: The impressive performance of the U.S. economy over the past couple of decades, despite shocks that in the past would have surely produced marked economic contraction, offers the clearest evidence of the benefits of increased market flexibility.

We weathered a decline on October 19, 1987, of a fifth of the market value of U.S. equities with little evidence of subsequent macroeconomic stress--an episode that hinted at a change in adjustment dynamics. The credit crunch of the early 1990s and the bursting of the stock market bubble in 2000 were absorbed with the shallowest recessions in the post-World War II period. And the economic fallout from the tragic events of September 11, 2001, was moderated by market forces, with severe economic weakness evident for only a few weeks. Most recently, the flexibility of our market-driven economy has allowed us, thus far, to weather reasonably well the steep rise in spot and futures prices for oil and natural gas that we have experienced over the past two years. The consequence has been a far more stable economy.

I laughed out loud when I first read this thinking, what fun it must be to be a legend in one's own mind. What flights of solipsistic fancy must be required to confuse the effects of monetary easing, with a more flexible system. Here's a question for Mr. Greenspan, if the financial system is more flexible now than it was during the 70s why is it that you fear to invert the yield curve or even make a bold move and hike rates by more than 50 basis points now? From 1968 through 1987 when Greenspan was appointed, the spread between Fed Funds and the 10 year note was more than 100 basis points negative for a total of 54 months. From 1987 to today that same spread has been more than 100 basis points negative all of 3 months. Why has that same spread, which measures, in a sense, the vig of the Federal Reserve system, what Adam Smith might call a toll, perhaps even an example of "villianage", averaged 150 basis points during Greenspan's tenure but a mere 37 basis points in the preceding 20 years? Why is it that Paul Volcker, among many others, sees such perilous undercurrents beneath the surface of the US economy while Greenspan does not?

Yet there is one element of Greenspan's vision with which I certainly agree, his sense that the US is moving back to the forefront of what Joseph Schumpeter, the renowned Harvard professor, had called "creative destruction." As Greenspan is an atheist who thinks that great minds invent notions out of thin air, he might not know that Schumpeter is referring to one aspect of the Vedic Trinitarian Godhead- Shiva (Siva). According to this view of the world, there are 3 stages of a culture; the Brahma or creative phase, the Vishnu or preservation phase and the Shiva or destructive phase that sets the stage for the return of Brahma and rebirth.

Shiva is known as the auspicious or perfect one who nonetheless, or perhaps by virtue thereof, brings destruction. To me he represents the dictatorial stage in a culture, the view that man has been perfected and can fix what ails the world, rather than come to peace with the way it is. Behold Greenspan-Shiva, the destroyer who will teach us all that man's individual reason without limit or check is but an exercise in solipsism. Worship him if you will, and everyone who trusts in the solvency of the financial system does in some way or another, but know what you worship- a man who believes in the virtues of obscurantism, a man who has called into question the practice of distributed decision making and of checks and balances within a decision process, a man who couldn't see the reason to pass on his wisdom to those who must follow or perhaps there just wasn't anything to pas on. Of course, I could be all wrong and he could really be a what the Randians call a Francisco, intentially imploding the monetary system from within.

If I was John Galt I would tell you that if you didn't write and tell me I was the greatest writer who ever lived I'd put some virus in your computer that would destroy it. As I'm not, feel free to critique the view, or even find it downright silly. Ah the virtues of a purer individualism.

Wednesday, October 12, 2005

The Faces of Hubris

Our delight in reason degenerates into idolatry of the herald. Especially when a mind of powerful method has instructed men, we find the examples of oppression. The dominion of Aristotle, the Ptolemaic astronomy, the credit of Luther, of Bacon, of Locke;- in religion the history of hierarchies, of saints, and the sects which have taken the name of each founder, are in point. Alas! every man is such a victim. The imbecility of men is always inviting the impudence of power. It is the delight of vulgar talent to dazzle and to blind the beholder. But true genius seeks to defend us from itself. True genius will not impoverish, but will liberate, and add new senses. Ralph Waldo Emerson, "Uses of Great Men"

As long as a man knows very well the strength and weaknesses of his teaching, his art, his religion, its power is still slight. The pupil and apostle who, blinded by the authority of the master and by the piety he feels toward him, pays no attention to the weaknesses of a teaching, a religion, and soon usually has for that reason more power than the master. The influence of a man has never yet grown great without his blind pupils. To help a perception to achieve victory often means merely to unite it with stupidity so intimately that the weight of the latter also enforces the victory of the former. Friedrich Nietzsche Human, all too human

The other day I came across an article in the Washington Post, World Helpless Against Assaults of Nature, which suggested a cause behind the fascination in a number of quarters with "natural disasters." The article begins:

In a more hopeful time, buoyed by the promise of science, it was thought hurricanes could be tricked into dispersing, earthquakes could be disarmed by nuclear explosions and floodwaters held at bay by great mounds of dirt.

Such conceits are another victim of a year of destruction.

"It was thought" seems such a wonderfully impersonal phrase, begging the question, by whom was it thought? Going by the media's fascination with these events, and the tone of their coverage, it would appear that many people share some sense of this view. The great Gods of the modern world, Science, Government, and Technology would combine to make your life better, cure all ills, bring prosperity to all, and apparently disperse hurricanes and disarm earthquakes.

The recent exhibitions of force from mother earth suggest, to me at least, just how small man still is. This link takes you to a page quantifying the force released by nuclear bombs. In brief, the Hiroshima explosion was estimated to release some 63TJoules or the equivalent of 15K tons of TNT (.015MegaTons). The biggest Soviet Hydrogen bomb released an estimated 240KTJoules or the equivalent of 58 Megatons. The earthquake that caused the recent Tsunami was variously estimed to release between the energy equivalent of 5000 to 32000 Megatons, millions of times the force of the Hiroshima bomb and thousands of times more than the biggest bomb man has reportedly exploded. As an aside, the earth is estimated to receive 160Trillion Tons of energy in the form of sunlight each day, far more than the entire world's nuclear arsenal. I'm not suggesting that a nuclear bomb wouldn't cause damage, but rather that man has already survived far larger explosions than anything we could currently produce.

As the opening quote from Nietzsche suggests, it may be that the prophets of the Gods of the modern world might have, in their combined ignorance and zeal, overstated the promises of the disciplines. How many quasi-scientific articles find their way into mass market venues claiming that man has unlocked the secrets of the atom, deceiphered the human genome, peered into the beginnings of time and discovered the building blocks of the universe. I think the average reader should be forgiven for assuming, after reading these articles, or perhaps more accurately scanning the headlines, that the natural world is quite malleable to modern man's touch. It is as if the world were a toy in the hand of man, which is pretty near to the manner in which elementary science is taught, as if man were a disembodied observer and not at all times a part of nature. Thoughts such as these led philosopher-physicist David Bohm to argue against the view of a universe of things and for a view of a universe that is an undivided whole, itself a thought at least as old as the Greeks.

In a sense, unlocking the secrets of the atom is quite similar to unlocking the secrets of your VCR or Microwave. It, the atom, VCR, or microwave, respectively, does certain things in certain conditions. If you create the proper conditions and press the right buttons you get the desired result. However, your VCR won't transport you out of danger in the event of an earthquake. Science, in essence, is the study of reptititive behavior with the hope of deriving some general principle. The presupposition of Science is that there are laws or rules of behavior in the material plane. To expect that Science will in some way change the natural order of things seems to me contradictory. Science depends on the extension of that natural order through time.

Of course, many people have heard or read of "miracles of science" which recalls to my mind the views of David Hume; A miracle is a violation of the laws of nature; and as a firm and unalterable experience has established these laws, the proof against a miracle, from the very nature of the fact, is as entire as any argument from experience can possibly be imagined. I agree, when you define miracle as a violation of the laws of nature, miracles can't happen. Of course, something might happen which is contrary to man's current understanding of the laws of nature, a la A Connecticut Yankee in King Arthur's Court.

Given the faith in the great God Science, I am aware that some (many) readers might perceive a Luddite tendency in my view. I'm all for Science, by which I mean finding out how the world works, a process which is much nearer the beginning than the end, in my view. I just think that faith in the Great God Science who bends the universe to his will feeds a view which runs counter to Science the discipline. More to the point, at least equally important as finding out how the world works is coming to peace with that reality. Faith in the Great God Science makes that "coming to peace" much more difficult.

On the topic of Great Gods, I see the grand vizier of finance has been offerring more sacrifices to the the demi-God Market Flexibility, son of the Great God Technology (if we don't watch out we'll have the whole Greek Pantheon back soon); The impressive performance of the U.S. economy over the past couple of decades, despite shocks that in the past would have produced marked economic contractions, offers the clearest evidence of the benefits of increased market flexibility. Methinks Greenspan is soon to discover that the ability to ward off financial disasters is no more advanced than our ability to ward off natural ones, indeed, the sense that we could avoid natural disasters almost ensures the manifestation of a financial one.

I have a bit more to write on Greenspan tomorrow, actually more than a bit more, a little study of the man from his curious first loves; first wife, Joan Mitchell a renowned abstract artist and Ayn Rand, we needs no introduction, to his seeming changed view on Gold.

Sunday, October 09, 2005

High Noon

What was Rome like in the days before Brutus killed Caesar? was the mood tense in Washington in the weeks before Nixon resigned? could one sense the "fire in the minds of men" that spread from country to country in Europe once it burst into flame in France? If life was experienced as portrayed on TV, there would always be dramatic music in the background to alert you to an approaching conclusion. Your attention would be focused on the main players and the guy with the white hat would beat the guy with the black hat. You could just sit back, as it were, and let someone else mediate the experience of life for you, drawing your attention to the important bits at the appropriate time.

Those who opt to allow the mass media to mediate life for them are today concerned about earthquakes in Kashmir, mud slides in Guatemala. NYC subway bombs or perhaps, bird flu. Meanwhile it looks to me as if a counter coup is being waged in Washington D.C. As the noose tightens around the executive branch, evoking notions of divide and conquer, Congressional support for the Executive has been hobbled by the scandals surrounding Delay and Frist. The ruling party is in disarray as they await word of indictments from Patrick Fitzgerald. Instead of the more pedestrian and thus more palatable notion of an out-of-spite exposure of a CIA agent, leaks are emerging which suggest a broader conspiracy to not only discredit the "debunker" of the Niger Uranium claim which stood as basis for those 16 words, but to also hide those who originally forged the documents. In other words, assuming the allegations prove true, this was no honest mistake.

[ cue dramatic music ]

This brings us to one of those potential inflection points in history. I often wonder, these days, about the last days of the Nixon Presidency. Did he ever think about just arresting those trying to prosecute him? or firing them? or something more sinister? I've read accounts that suggest the first two were on his mind and possibly the third option. Ah to have been a fly on the wall in the Oval Office in those days, or these days for that matter.

In Rome, at least as I interpret history, the Caesars' rise to power was enabled as faith in the Republican system waned while faith in man as god rose. Perhaps Nixon found that faith in the system was stronger than the shared desire to continue on his path.

I don't know how Bush and his Neo-cons will react which is why I keep hearing that dramatic music. Its the system vs a group of people with a vision that cannot co-exist within the system and the suspense, if this was a TV show, would be killing me.