Archive for September, 2008

Big Bail Out

How is the big bail out supposed to work? The basic idea seems to be that the U.S. government will pay bad financial assets. Once these have been purchased, financial companies will know how much money they have. Right now, nobody will lend money, because they don’t know how much they should keep in reserve. Once they’ve unloaded all their bad assets, they will know how much to keep, and they will be willing to lend money. At least, that is the theory.

This means that for the bail out to work, the companies will have to have enough cash on hand to support themselves after selling their bad assets to the government. As far as I can tell, that means that the government will have to pay something close to book value for these assets. If they pay much less than book value, then financial companies will be in the bad situation which they have been trying to avoid: they won’t have enough cash to cover their remaining loans, and they won’t be willing to make new loans.

However, if the government pays book value, then the government is (probably) vastly overpaying. Some people are saying that this approach is like the Reliance Trust Corporation which was created to clean up after the S&L debacle. It is not. The Reliance Trust Corporation took over entire S&L’s, good assets and bad. It cost a lot of money upfront, but in the end the RTC was able to sell the good assets and recover a lot of the money. That bailout cost the taxpayer a decent amount, but it wasn’t outrageous. And, of course, the S&Ls were federally insured, so it was already an obligation of the government, unlike this case.

If the government buys the current crop of bad assets at book value it will be stuck with many of them. The worst stuff out there is worth zero; it’s mortgages that were taken out by speculators to build houses. The speculators are gone and the houses don’t exist. Then there is a set of mortgages out there which people do want to pay, but the value of the mortgage far exceeds their ability to actually pay. The government will have to negotiate with the homeowners in those cases, but they will in the end get something back, though probably much less than they paid for. And then there is a large set of complicated assets out there which nobody can price at all. There is no market for these assets, and nobody has the least idea what they are worth.

So this could wind up being very expensive. The money is going to come from taxpayers. The money is going to go large financial firms. They will use the money to lend it out, and also to pay large salaries. We’ll be propping out Wall Street to save Main Street. Doesn’t that seem backward? Why not just prop up Main Street—e.g., start a new financial services company with the $700 billion.

We need some basic guidelines on the money. Any company which sells assets to the government must cap the pay and incentives of all executives to some reasonable value. If they won’t take the money on those terms, let them go under. Any mortgage acquired on a primary residence must be renegotiated to let the homeowner stay. We can only hope that Congress can stand up to the stampede to put on some basic guidelines, rather than just handing out cash to the wealthiest people in the country.

How did we get into this mess? A lot of people cite excessive deregulation, but I think that slightly misses the point.

  • The financial system has become too complicated for anybody to understand. Companies made bets without understanding just what they were betting on. Many companies effectively bet on the fact that housing prices would never go down. That was nuts, considering how many people were pointing out the housing bubble. We could see this complexity happening ten years ago with Long Term Capital.
  • A big success today means a big payout today. A big failure tomorrow means zero. The people in the financial companies had a huge upside, and their only downside was they might lose their job. The incentives were strongly in favor of taking a big risk, because if it paid off you got a ton of cash which you never had to give back. If the risk didn’t pay off, you could always try something else.
  • People increasingly believed in market fundamentalism: the market is always right, so it follows that the prices set by the market are always right. They can’t be far too high because the market wouldn’t permit that to happen. There is of course a limited sense in which that belief is correct: the market has not permitted those high prices, and is now correcting them down. Unfortunately the correction only kicks in after several years of high prices–plenty of time for people to take a lot of money home with them. That is, even if you believe in market fundamentalism, you can only believe in it if you allow a long time lag.
  • There was indeed a significant lack of regulation, showing that it’s been too long since the last economic debacle, and that people have forgotten its lessons. However, people will always try to work around the rules, because there is so much money to be made. A responsible government would not necessarily have increased regulation, but it would have ensured that the collapse of financial companies would not affect the ordinary use of business credit. This government—both Democrats and Republicans in this case—was completely irresponsible. The root cause was most likely that the government is for sale, and the people who were making money had more input into the law than the rest of us.

Most of the bad effects of the crisis are still on Wall Street, not on Main Street. The Main Street economy is weak but still moving. The effect of paying $700 billion to Wall Street is going to hit Main Street down the road, when the government raises taxes and inflation to cover the losses. I’m not at all sure that this is a good idea.

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Imperfect Storm

I’m sure I am not the only person annoyed by the overuse of the phrase “perfect storm”. The phrase first appeared with the book and movie of that name, referring to a real storm in 1991. I lived in Massachusetts at the time, and it was indeed a notable storm for me, as a very large branch fell in my yard, fortunately just missing my house which would have been seriously damaged. The phrase referred to the combination of weather conditions which led to the storm, the idea being that they combined in a way which made the storm multiplicatively worse rather than merely additively worse.

So far, so good, although it’s worth noting that it’s not that unusual for those weather conditions to combine–it’s a lot more common than the similarly proverbial 100-year flood. So the phrase really refers to a combination with powerful effect rather than, say, something very rare.

Unfortunately once the phrase escaped into common use it rapidly started to mean something else. As far as I can tell the current meaning is, more or less,”an unexpected coincidence with a bad effect.” Now, that’s something that happens all the time; we call it “bad luck” or “bad planning.” Calling it a “perfect storm” becomes a way of making whatever happened seem like an unavoidable force of nature, when in many cases it is nothing of the sort.

Please never use the phrase “perfect storm” unless you really do mean a powerful combination of several unrelated coincidences. Actually, please never use it at all. Thanks for your attention.



I just finished Neal Stephenson’s new book Anathem. I enjoyed it quite a bit. The book is based on a lot of the Western philosophical tradition, albeit under different names. He provides an SF explanation for Plato’s Theory of Forms, which I think anybody has to appreciate, loosely (very loosely) based on some of Gödel’s work. And he is getting better at actually writing endings to his novels.



The U.S. government has just now moved to bail out A.I.G. In this case it may not be a pure bailout: the government issued an $85 billion loan in return for warrants for 80% of the company. To put $85 billion in perspective, it’s the cost of the was in Iraq for eight months. So it’s a lot of money, but it’s not completely insane, particularly considering that the Bush administration is keeping the cost of the Iraq war out of the budget and paying for it with emergency expenditures. There is also a decent chance that the loan will in fact be repaid: if the credit markets ever settle, there is every reason to expect that A.I.G. will be able to stay afloat.

Still there is something horribly wrong with watching hedge fund managers put hundreds of millions of dollars into their pockets, and to then discover that the U.S. government must assume the debts of the people who paid that money.

The government is hoping to create a bottom for the market, but I don’t see why taking these steps will do it. There is a mania on Wall Street with investors short selling companies which look vulnerable. This rapidly becomes a self-fulfilling prophecy, as these sales make the company move vulnerable. But the expectation that the government will step in keeps people buying the stock even as prices fall. If that expectation were not there, people would stop buying: the stock would become illiquid. That would leave the companies unable to raise cash by selling stock, but, so what? They wouldn’t get much anyhow. And a private sale would still be possible.

What the government is saying right now is that if you lose your job because of a downturn, too bad. If you lose your company, the government will buy it from you, and at least you’ll keep a few million dollars or more. We all know that the rich get different treatment in the U.S., but it’s sort of shockingly obvious right now.

And since the short sellers will keep moving from company to company, there is no bottom to this market. There is no reason for it to stop until all the companies which purely make money from money, and thus have no underlying measurable value, have been decimated.

The only bright side I see to this is that the market doesn’t turn around until everybody is convinced it will keep going down much longer.

Comments (1)

Syntax vs. Semantics

Is consciousness a purely syntactic process or does it require semantics? That is another way of asking whether, if you take a snapshot of all the neurons in a human brain, and simulate it on a computer, the resulting program will be conscious. Computers are purely syntactic engines: they simply manipulate symbols. So if consciousness requires semantics, then a program running on a computer can not be conscious.

Of course, if you asked the program whether or not it was conscious, it would simulate the answer that the human would give, and would say that it was conscious. In fact, by definition, it would give all the answers that the human would give. So to argue that the program is not conscious requires believing in something very much like zombies–people who act perfectly normal but are not conscious. I think that the whole idea of zombies is incoherent, and it baffles me that some philosophers appear to take it seriously. Consciousness is not something extra that gets added on to our brains, and thus can be added to some brains but not others. Anything which acts exactly like a conscious human must be conscious.

So that would seem to settle the question. Actually, though, it doesn’t. I’ve assumed that it is possible to simulate a human on a computer. I can see two reasons that that might not be possible.

The first is that human intelligence may require quantum operations. If the human brain is a way of turning quantum effects into macroscopic effects, then it need not be possible to simulate those effects on any non-quantum computer. And while we don’t fully understand what a quantum computer is at this point, it is at least possible that it is not a purely syntactic engine. A quantum computer can, supposedly, come up with the answer to a problem without walking through all the intermediate steps. In that sense a quantum computer is not a purely syntactic engine. This is similar to the way that one can argue that the spaghetti sorter–in which you represent all the inputs as strands of spaghetti, tap them on the table, and easily pick out the largest one–is not a purely syntactic engine. The spaghetti sorter uses physics to jump immediately to the right answer. A quantum computer may do the same thing. Admittedly, arguing that this is what we want “semantics” to mean is going to be a bit of a slog. But I think it is fairly clear that it is not what we mean by “syntax”.

The second reason it may not be possible to simulate a human on a computer is that it may not be possible for human consciousness to exist separated from the world. The simulated human brain may simply be unresponsive. Arguably one could proceed the simulate the whole world around the human, or at least the perceptible part of it. But at some point I think it is reasonable to ask whether this is possible even in principle. Simulating all the neurons in a brain already sounds pretty darn hard, but one imagine simplifying to just the neurons and the neurotransmitters. Simulating the whole world sounds pretty darn hard. Can we possibly do it without requiring a computer which is as complicated as the world? And that implies, again, a quantum computer.

My bias is to believe that computers can be conscious, and to believe that the brain is purely a syntactic engine. I think that the brain dampens quantum effects rather than magnify them. But I have to admit that the alternate argument is coherent and may be the truth.


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