The Reverse Black Swan, Part I

(Michael Mandel on Nassim Nicholas Taleb’s book) Because technological innovation really is fundamentally unpredictable, increasing the amount spent on R&D and innovation does not lead to diversification and a reduction of uncertainty. Taleb writes:

In spite of our progress and the growth in knowledge, or perhaps because of such progress and growth, the future will be increasingly less predictable.

This is especially true in the U.S. The way that the global economy developed in recent years, the U.S. has outsourced production to other countries, and kept the high-end task of design and innovation. As Taleb puts it:

The American economy has leveraged itself heavily on the idea generation.

This is precisely the point that I missed in my 2004 book, Rational Exuberance. In that book, I argued that a “hot” financial system—one with lots of highly mobile capital —would boost growth by seeking out and funding the development of the most promising innovations. I also argued that this growth-enhancing effect was worth the added possibility of financial crises. This is what I wrote then:

During boom times, the U.S. is able to fund innovative and growing new businesses with financial instruments--venture capital and junk bonds--that barely exist anywhere else. And then when the inevitable bust comes, the U.S. financial system is highly liquid and far more diversified than elsewhere, able to cope with sharp plunges without freezing up.

Har de har har. How stupid could I have been...

In my (weak) defense, I acknowledged in that book the possibility that the pace of innovation would slow, leading to lower real wages for college-educated workers. What's more, I pointed out that in the absence of innovation:

...it will become a lot harder to service all the debt that companies and people took on during the 1990s. Housing prices will slump and perhaps even plummet.

But despite this nod to the potential Black Swan of the financial crisis, I didn't really wrap my mind around the possibility that all this money out there might not get results. The fundamental unpredictability of technology means exactly that--we could summon up all this capital, and not get the big innovation. The big potential innovations such as biotech didn't take off in the post-2000 era, as was expected. As a result, that big pot of hungry money had no outlet except for housing. The innovations didn't happen.

What did happen was a big negative Black Swan--the financial crisis. And a Taleb-type analysis tells us that such negative unexpected events--a sudden acceleration of global warming, global war, a breakdown of the Internet, you name it--are almost guaranteed over a long enough time span.

So here's the thing. What reading Taleb tells me is that as a technological optimist, I need to accept three statements.

1) Unexpected technological breakthroughs are possible. That's good

2) The timing and nature of the breakthroughs cannot be controlled. That's bad

3) Unexpected large bad events are possible as well. That's bad. In fact, we can get bad events which have as big an impact, in the negative direction, as the technological innovations.

www.businessweek.com

Если завтра война

http://www.zavtra.ru/cgi/veil/data/zavtra/09/798/11.html

Samsung SSD Awesomeness

In God we trust; all others pay cash

We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.

http://www.berkshirehathaway.com/letters/2008ltr.pdf

http://www.cbsnews.com/stories/2009/02/28/business/main4835570.shtml

"Crispest" racquets...

Crisp is how you describe that sweet combination of stiff frame, high tension, and soft strings. Pop is the response you get when a crisp racket hits a ball. Snap is how you feel when you pop the ball with a crisp racket. Crackle is what your opponent does when he succumbs to your snap and pop off your crisp racket.
Am I wrong?
http://tt.tennis-warehouse.com/showpost.php?p=3170397&postcount=24

Dumb Money

In the past few months, we've been riveted and disgusted by the exploits of scamsters like Bernard Madoff and Allen Stanford (characters who, if they didn't exist, would have to be invented by Tom Wolfe). It's both easy and convenient to hold them up as the ultimate symbols of the just-ended boom. But we shouldn't. While there was some crime in the mortgage industry, law-abiding, respectable, upstanding citizens caused the overwhelming majority of financial losses suffered thus far. Skeezy money managers and mobbed-up boiler rooms didn't create the economic catastrophe. It was visited on us by firms in the Dow Jones Industrial Average and S&P 500—companies that trace their origins back to the 1800s, run by graduates of Yale and Harvard. The people who blew up the system weren't anarchists. They were members of the club: central bankers and private-equity honchos, hedge-fund geniuses and Ph.D. economists, CEOs and investment bankers. And the (overwhelmingly legal) con they perpetuated on themselves, their colleagues, their shareholders and creditors, and, ultimately, on us taxpayers makes Madoff's sins look like child's play.

That's one of the central arguments of my book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, which has just been published as an e-book. (You can buy a digital version, for the Kindle or Sony Reader, or an audio version. Readers interested in seeing a PDF of the first chapter or learning about a paper version should send an e-mail to:    dumbmoneybook@gmail.com)

My book explains how during the late, great credit bubble, an Era of Cheap Money devolved into an Era of Dumb Money, and then into an Era of Dumber Money. The culture of Wall Street and the rise of the shadow banking system spawned reckless, largely unregulated lending, borrowing, and trading, a financial culture that preferred short-term fees to long-term gains, and that confused liquidity (access to other people's money) with cash on hand. Looking back, the investors who believed the stories told by Madoff and Stanford—that they could deliver steady, positive, market-beating returns in any type of climate, despite the manifest failure of virtually every other money manager to do so—were obviously foolish. But our best financial minds also spun tales and theories with great assurance, making seemingly irrational and unprecedented activity seem completely sensible. And we bought them.

http://www.newsweek.com/id/186296

Active Corporate Sponsor

A lavish spender, Stanford owns a number of private jets. His companies have been big corporate sponsors of professional sports teams and charitable causes. Stanford and his employees also have contributed heavily to political campaigns over the years. The firm also has spent a great deal on its many offices—and refers to some of them as "temples of finance."
Former brokers say they never understood where the company got all the money to pay for the sponsorships and fancy office digs.

(It's like eating the cake and having it too...)