Video: Nassim Taleb On Occupy Wall Street

Video after the jump:

Video: Steve Jobs 2005 Commencement Address at Stanford

Michael Lewis on Bankrupt California

It's Michael Lewis week here at the PolyCapitalist.

His latest in a series of financial disaster pieces he's been penning for Vanity Fair is about his home state of California. The whole article is a must-read (here's a link to the full article) but below are a some of the highlights:

But when you look below the surface, he adds, the system is actually very good at giving Californians what they want. “What all the polls show,” says Paul, “is that people want services and not to pay for them. And that’s exactly what they have now got.” As much as they claimed to despise their government, the citizens of California shared its defining trait: a need for debt. The average Californian, in 2011, had debts of $78,000 against an income of $43,000. The behavior was unsustainable, but, in its way, for the people, it works brilliantly.

On the fiscal nightmare that is the City of San Jose...

The ex-Governator

The relationship between the people and their money in California is such that you can pluck almost any city at random and enter a crisis. San Jose has the highest per capita income of any city in the United States, after New York. It has the highest credit rating of any city in California with a population over 250,000. It is one of the few cities in America with a triple-A rating from Moody’s and Standard & Poor’s, but only because its bondholders have the power to compel the city to levy a tax on property owners to pay off the bonds. The city itself is not all that far from being bankrupt. 

By 2014, Reed had calculated, a city of a million people, the 10th-largest city in the United States, would be serviced by 1,600 public workers. “There is no way to run a city with that level of staffing,” he said. “You start to ask: What is a city? Why do we bother to live together? But that’s just the start.” The problem was going to grow worse until, as he put it, “you get to one.” A single employee to service the entire city, presumably with a focus on paying pensions. “I don’t know how far out you have to go until you get to one,” said Reed, “but it isn’t all that far.” At that point, if not before, the city would be nothing more than a vehicle to pay the retirement costs of its former workers. The only clear solution was if former city workers up and died, soon. But former city workers were, blessedly, living longer than ever. 

This wasn’t a hypothetical scary situation, said Reed. “It’s a mathematical inevitability.” In spirit it reminded me of Bernard Madoff’s investment business. Anyone who looked at Madoff’s returns and understood them could see he was running a Ponzi scheme; only one person who had understood them both­ered to blow the whistle, and no one listened to him. (See No One Would Listen: A True Financial Thriller, by Harry Markopolos.) 

“How on earth did this happen?” I ask him. 

“I think we’ve suffered from a series of mass delusions,” he says. 

I didn’t completely understand what he meant, and said so. 

“We’re all going to be rich,” he says. “We’re all going to live forever. All the forces in the state are lined up to preserve the status quo. To preserve the delusion. And here—this place—is where the reality hits.” 

...and the bankrupt hell that is the City of Vallejo:

On the way back to the elevators I chat with two of Mayor Reed’s aides. He’d mentioned to me that, as bad as they might think they have it in San Jose, a lot of other American cities have it worse. “I count my blessings when I talk to the mayors of other cities,” he’d said. 

“Which city do you pity most?” I ask just before the elevator doors close.

They laugh and in unison say, “Vallejo!” 

I notice on his shelf a copy of Fortune magazine, with Meredith Whitney on the cover. And as he talked about the bankrupting of Vallejo, I realized that I had heard this story before, or a private-sector version of it. The people who had power in the society, and were charged with saving it from itself, had instead bled the society to death. The problem with police officers and firefighters isn’t a public-sector problem; it isn’t a problem with government; it’s a problem with the entire society. It’s what happened on Wall Street in the run-up to the subprime crisis. It’s a problem of people taking what they can, just because they can, without regard to the larger social consequences. It’s not just a coincidence that the debts of cities and states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They’d been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans. 

The evolutionary explanation underpinning society's collective behavior:

The road out of Vallejo passes directly through the office of Dr. Peter Whybrow, a British neuroscientist at U.C.L.A. with a theory about American life. He thinks the dysfunction in America’s society is a by-product of America’s success. In academic papers and a popular book, American Mania, Whybrow argues, in effect, that human beings are neurologically ill-designed to be modern Americans. The human brain evolved over hundreds of thousands of years in an environment defined by scarcity. It was not designed, at least originally, for an environment of extreme abundance. “Human beings are wandering around with brains that are fabulously limited,” he says cheerfully. “We’ve got the core of the average lizard.” Wrapped around this reptilian core, he explains, is a mammalian layer (associated with maternal concern and social interaction), and around that is wrapped a third layer, which enables feats of memory and the capacity for abstract thought. “The only problem,” he says, “is our passions are still driven by the lizard core. We are set up to acquire as much as we can of things we perceive as scarce, particularly sex, safety, and food.” Even a person on a diet who sensibly avoids coming face-to-face with a piece of chocolate cake will find it hard to control himself if the chocolate cake somehow finds him. Every pastry chef in America understands this, and now neuroscience does, too. “When faced with abundance, the brain’s ancient reward pathways are difficult to suppress,” says Whybrow. “In that moment the value of eating the chocolate cake exceeds the value of the diet. We cannot think down the road when we are faced with the chocolate cake.”

Lewis concludes on an optimistic note:

When people pile up debts they will find difficult and perhaps even impossible to repay, they are saying several things at once. They are obviously saying that they want more than they can immediately afford. They are saying, less obviously, that their pres­ent wants are so important that, to satisfy them, it is worth some future difficulty. But in making that bargain they are implying that, when the future difficulty arrives, they’ll figure it out. They don’t always do that. But you can never rule out the possibility that they will. As idiotic as optimism can sometimes seem, it has a weird habit of paying off.

For more Michael Lewis, both past and present, simply click on the tag with his name at the bottom of this post.

Video: Ethics in Economics

More on this topic here and here.

Quote of the Day: Paging Mr. Oliver Cromwell

Oliver Cromwell

Putting aside his controversies for a moment, the below words Oliver Cromwell used during his address to the Long Parliament in 1653 feel appropriate for today:

"It is high time for me to put an end to your sitting in this place, which you have dishonoured by your contempt of all virtue, and defiled by your practice of every vice. Ye are a factious crew, and enemies to all good government; ye are a pack of mercenary wretches, and would like Esau sell your country for a mess of pottage, and like Judas betray your God for a few pieces of money. Is there a single virtue now remaining among you? Is there one vice you do not possess? Ye have no more religion than my horse; gold is your God. Which of you have not bartered your conscience for bribes? Is there a man among you that has the least care for the good of the Commonwealth? 

Ye sordid prostitutes, have you not defiled this sacred place and turned the Lords temple into a den of thieves by your immoral principles and wicked practices. Ye are grown intolerably odious to the whole nation. You who were deputed by the people to get grievances redressed, are yourselves become the greatest grievance. Your country therefore calls upon me to cleanse this Augean stable, by putting a final period to your iniquitous proceedings in this House; and which by God`s help, and the strength he has given me, I am now come to do. 

I command ye therefore, upon the peril of your lives, to depart immediately out of this place; go, get you out! Make haste! Ye venal slaves, be gone! So! Take away that shining bauble there, and lock up the doors. In the name of God, go!"

Are there any politicians out there today who can deliver similar words with conviction and credibility?

The SEC: Just When You Think You've Run Out of Outrage...

SEC Commissioner Mary Schapiro

Things were starting to look up for the beleaguered-since-Madoff  U.S. Securities and Exchange Commission (SEC) with its spate of successful prosecutions of high-profile insider trading criminals. But for the U.S. stock market cop it continues to be a case of one step forward, four steps back.

Rolling Stone's Matt Taibbi delivers the latest bombshell:

For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history. 

It goes without saying that no ordinary law-enforcement agency would willingly destroy its own evidence. In fact, when it comes to garden-variety crooks, more and more police agencies are catching criminals with the aid of large and well-maintained databases.

Much has been made in recent months of the government's glaring failure to police Wall Street; to date, federal and state prosecutors have yet to put a single senior Wall Street executive behind bars for any of the many well-documented crimes related to the financial crisis. Indeed, Flynn's accusations dovetail with a recent series of damaging critiques of the SEC made by reporters, watchdog groups and members of Congress, all of which seem to indicate that top federal regulators spend more time lunching, schmoozing and job-interviewing with Wall Street crooks than they do catching them. As one former SEC staffer describes it, the agency is now filled with so many Wall Street hotshots from oft-investigated banks that it has been "infected with the Goldman mindset from within."

Anyone seen the latest Intrade odds on SEC head Mary Schapiro keeping her job?

Full Taibbi article here. 

Video: Our Political and Economic Problems Are Fundamentally a Crisis in Virtue

Marcus Aurelius

George Friedman of STRATFOR gets to the heart of the current political and economic malaise in a brief and succinct video interview here.

He's spot on about the point that all the new regulation in the form of Dodd-Frank, Basel III, etc. do zero good without enforcement.

And why aren't both existing and new regulations being enforced? In Dr. Friedman's view, it comes down to a lack of virtue among our current elite.

The good news is that this is not an insolvable problem for two reasons: First, virtue, in my opinion, is unlike height, raw intelligence, or good looks, in the sense that it is not something that one is by-and-large born with. Virtue is both learned and cultivated over time.

But how much attention do we currently place on the development of virtue? The classics in the western world on this topic include the works by Marcus Aurelius, Benjamin Franklin, Adam Smith, Thomas Aquinas, Aristotle, among others. To perhaps unfairly single out two disciplines, what room is made for those works in our current economics and business curriculum? From my personal observations, zip.

The idea of a renaissance education has been steadily pushed aside through the years in favor of the poly-technical practicalness of the 1-minute manager MBA and quant-PhDs. Today's economic and political conundrum is arguably a by-product of this de-prioritization of the study and development of virtue.

The second reason I am optimistic we can solve this problem is that when our leaders first fail society in such an epic fashion, and then next fail a second time by not fixing the root-cause of the problem, then those of us in representative democracies often make change.

Here's to hoping we get the change right this time.

The Three Way Intersection: Ethics Problems Atop the Economics Academy?

Larry Summers and Secretary Geithner

For anyone interested in the subject of ethics, conflict of interest, and disclosure of financial relationships by academic economists, here is a great read from Nancy Folbre, an economics professor at the University of Massachusetts Amherst.

A related article which I highly recommend is Inside Job filmmaker Charles Ferguson's scathing critique of the academic economics profession (and Larry Summers in particular). From the article:

Summers is unique but not alone. By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government. What few Americans realize is that the revolving door is now a three-way intersection. Summers's career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power. 

In my film you will see many famous economists looking very uncomfortable when confronted with their financial-sector activities; others appear only on archival video, because they declined to be interviewed. You'll hear from:

Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation.

Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy.

Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks' Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6-million to $17-million.

Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000 per year.

Richard Portes, a professor at London Business School and founding director of the British Centre for Economic Policy Research, paid by the Icelandic Chamber of Commerce to write a report praising Iceland's financial system in 2007, only one year before it collapsed.

And John Campbell, chairman of Harvard's economics department, who finds it very difficult to explain why conflicts of interest in economics should not concern us.

Education Site: Others interested in joining the study of economics should check out Online-MBA.