Gyroscopic Investing

http://reason.com/archives/2013/03/24/h ... tems/print

Taleb’s new book, Antifragile: Things that Gain with Disorder, argues that in order to create robust institutions we must allow them to build resilience through adversity. The essence of capitalism, he argues, is encouraging failure, not rewarding success....

Every plane crash makes the next plane crash less likely and our transportation safer. Now, with the banking system, [a failure] leads to increased probability of failure of an entire system. That’s a bad system.

Benko wrote: http://reason.com/archives/2013/03/24/h ... tems/print

Taleb’s new book, Antifragile: Things that Gain with Disorder, argues that in order to create robust institutions we must allow them to build resilience through adversity. The essence of capitalism, he argues, is encouraging failure, not rewarding success....

In the start-up world there is an idea of "Fail Fast." Meaning you want to try things quickly and see if they work or fail. Make small changes due to negative feedback constantly. Don't wait for large problems to blow up in your face. Those that don't learn from their mistakes will fail.

Banking does none of these things. They have this illusion of conservatively run business, but behind the scenes they are playing Russian Roulette. With no negative feedback (due to bailouts, depositor insurance, etc.), banking systems are very fragile. They allow big banks to get bigger and riskier. Each new failure is worse than the last and has wider impacts. The system is not sustainable.

craigr wrote: Banking does none of these things. They have this illusion of conservatively run business, but behind the scenes they are playing Russian Roulette. With no negative feedback (due to bailouts, depositor insurance, etc.), banking systems are very fragile. They allow big banks to get bigger and riskier. Each new failure is worse than the last and has wider impacts. The system is not sustainable.

But most importantly… none of that has anything to do with capitalism per se. A lot of it is actually unintended consequences of trying to make banks safer. Rather than letting bad banks fail, these well-meaning regulations allowed marginal players to use the government-imposed safety mechanisms (working or not) as a shield to take even more risk. Oops.

Pointedstick wrote: Rather than letting bad banks fail, these well-meaning regulations allowed marginal players to use the government-imposed safety mechanisms (working or not) as a shield to take even more risk. Oops.

So capitalism is like evolution i.e. survival of the fittest--Until we apply well minded compassion and try to prevent things from failing.

I somewhat agree, but what do you do in the event that that failure would be devastating? If all of the banks had been allowed to crash 5 years ago...we might be all living in a Mad Max world today instead of typing peacefully in this forum. In certain circumstances, letting things crash and fail works fine...in other circumstances it could set us back into the dark ages. I think a nuanced position is preferable to a cut and dried rule.

doodle wrote: I somewhat agree, but what do you do in the event that that failure would be devastating?

Good point.  However allowing lots of little failures instead of propping things up e.g. because someone believes green energy will be the thing, for real, any time now, can help prevent big ones.  Let things fail while they are little.  Encourage lots of experiments and the best/unexpected will emerge ala evolution (or capitalism).

But yes, one cannot allow catastrophic things to fail.  The key is to minimize intervening, and only intervene when one really has to.

Benko wrote:

doodle wrote: I somewhat agree, but what do you do in the event that that failure would be devastating?

Good point.  However allowing lots of little failures instead of propping things up e.g. because someone believes green energy will be the thing, for real, any time now, can help prevent big ones.  Let things fail while they are little.  Encourage lots of experiments and the best/unexpected will emerge ala evolution (or capitalism).

But yes, one cannot allow catastrophic things to fail.  The key is to minimize intervening, and only intervene when one really has to.

I agree in some cases, but in others not so much. Everything in its infancy requires nurturing. Every plant and animal when first born requires greater attention and assistance. Nascent technologies are the same way. Green energy has made enormous strides in the last decade due to government nurturing. I would argue that factoring in all the externalities of conventional power sources, it is actually cheaper. But we will live to see the day when it achieves parity in strict monetary terms....

And allow investors to take the hit for bad investments.
Too many "fat cats" were protected by Ben and the boys.

doodle wrote: I somewhat agree, but what do you do in the event that that failure would be devastating? If all of the banks had been allowed to crash 5 years ago...we might be all living in a Mad Max world today instead of typing peacefully in this forum. In certain circumstances, letting things crash and fail works fine...in other circumstances it could set us back into the dark ages. I think a nuanced position is preferable to a cut and dried rule.

The situation could have been handled completely different and more fairly.

The banks requiring the bailouts could have had their assets all taken into receivership, allow the banks to go away, and then auctioned back off to the survivors. Or I may even accept simply giving the assets away to the survivors if that had to be done. But the banks causing the trouble would need to be gone, as in completely gone. I shouldn't even be seeing Goldman Sachs, Citibank and Bank of America in existence today for instance. They should just not be here. But that's not what politically was allowed to happen. So the negative feedback does not exist across the banking spectrum as it needs to be.

annieB wrote: And allow investors to take the hit for bad investments.
Too many "fat cats" were protected by Ben and the boys.

Agree as well....but not in all cases. No private group of investors would take on massive projects like converting over to hydrogen fuel sources for transportation or investing in fusion technology becuase the payback might take several generations of investment. In these cases there is a role for government to nurture and invest in a technology until the private sector takes it over and runs with it. The internet is a perfect example. This type of environment has the most potential if you ask me....

craigr wrote:

doodle wrote: I somewhat agree, but what do you do in the event that that failure would be devastating? If all of the banks had been allowed to crash 5 years ago...we might be all living in a Mad Max world today instead of typing peacefully in this forum. In certain circumstances, letting things crash and fail works fine...in other circumstances it could set us back into the dark ages. I think a nuanced position is preferable to a cut and dried rule.

The situation could have been handled completely different and more fairly.

The banks requiring the bailouts could have had their assets all taken into receivership, allow the banks to go away, and then auctioned back off to the survivors. Or I may even accept simply giving the assets away to the survivors if that had to be done. But the banks causing the trouble would need to be gone, as in completely gone. I shouldn't even be seeing Goldman Sachs, Citibank and Bank of America in existence today for instance. They should just not be here. But that's not what politically was allowed to happen. So the negative feedback does not exist across the banking spectrum as it needs to be.

Im agreeing with everyone today 

I think it should have been handled differently as well. But to allow to allow grandma and grandpa to lose their life savings becuase they werent vigilant about the inner working of financial derivatives at such and such bank would have been highly destabilizing to the system. In the complex world of today, there is a role I believe for effective consumer protection. While imperfect, it beats the inefficiencies of reliable and intelligible information among market participants. Stability in the system (even if it involves moral hazard) is preferable and more amenable to economic growth than allowing the great instability and creative destruction to consume our everyday lives. People need a safe stable environment to have the time and energy to think and create.

doodle wrote: People need a safe stable environment to have the time and energy to think and create.

Since you are into spirituality:

Zen saying: EVERYTHING changes. 

You can not step into the same river twice.  There is no stable environment.  Clining to what is is the cause of much suffering. 

Benko wrote:

doodle wrote: People need a safe stable environment to have the time and energy to think and create.

Since you are into spirituality:

Zen saying: EVERYTHING changes. 

You can not step into the same river twice.  There is no stable environment.  Clining to what is is the cause of much suffering. 

True, but It is hard to escape our biologal reality. According to maslows hierarchy, there are basic needs (food, water, shelter etc.) that must be satisfied before creativity and self actualization can take place. Modern society dependent on industrial processes is dependent on stability and property rights. That in turn is dependent on rules and regulations....

Maybe this is somehow all connected to the idea of dependent origination. In other words, you cannot have freedom without rules...appears to be a contradiction, but in reality they are codependent.

Pratitya samutpada is sometimes called the teaching of cause and effect, but that can be misleading, because we usually think of cause and effect as separate entities, with cause always preceding effect, and one cause leading to one effect. According to the teaching of Interdependent Co-Arising, cause and effect co-arise (samutpada) and everything is a result of multiple causes and conditions... In the sutras, this image is given: "Three cut reeds can stand only by leaning on one another. If you take one away, the other two will fall." For a table to exist, we need wood, a carpenter, time, skillfulness, and many other causes. And each of these causes needs other causes to be. The wood needs the forest, the sunshine, the rain, and so on. The carpenter needs his parents, breakfast, fresh air, and so on. And each of those things, in turn, has to be brought about by other causes and conditions. If we continue to look in this way, we'll see that nothing has been left out. Everything in the cosmos has come together to bring us this table. Looking deeply at the sunshine, the leaves of the tree, and the clouds, we can see the table. The one can be seen in the all, and the all can be seen in the one. One cause is never enough to bring about an effect. A cause must, at the same time, be an effect, and every effect must also be the cause of something else. Cause and effect inter-are. The idea of first and only cause, something that does not itself need a cause, cannot be applied.[d]
[edit]

Adversity is part of nature. The wood you're building your table with is strong because weaker trees for thousands of years were allowed to blow down or be destroyed by disease.

Capitalism needs destruction to be successful. There is no way for it to work without bad actors facing bad consequences for their decisions.

craigr wrote: Adversity is part of nature. The wood you're building your table with is strong because weaker trees for thousands of years were allowed to blow down or be destroyed by disease.

Capitalism needs destruction to be successful. There is no way for it to work without bad actors facing bad consequences for their decisions.

I agree, forest fires are also neccesary. But when one breaks out in los angeles you have no choice but to put it out.

craigr wrote: Adversity is part of nature.

The desire to prevent adversity is understanable, every mother has it, but is not helpful in this context.

craigr wrote: Capitalism needs destruction to be successful. There is no way for it to work without bad actors facing bad consequences for their decisions.

+++

craigr wrote:

Benko wrote: http://reason.com/archives/2013/03/24/h ... tems/print

Taleb’s new book, Antifragile: Things that Gain with Disorder, argues that in order to create robust institutions we must allow them to build resilience through adversity. The essence of capitalism, he argues, is encouraging failure, not rewarding success....

In the start-up world there is an idea of "Fail Fast." Meaning you want to try things quickly and see if they work or fail. Make small changes due to negative feedback constantly. Don't wait for large problems to blow up in your face. Those that don't learn from their mistakes will fail.

Banking does none of these things. They have this illusion of conservatively run business, but behind the scenes they are playing Russian Roulette. With no negative feedback (due to bailouts, depositor insurance, etc.), banking systems are very fragile. They allow big banks to get bigger and riskier. Each new failure is worse than the last and has wider impacts. The system is not sustainable.

What does everyone think about holding bankers -- or anyone else having control over the success or failure of a "too big to fail" organization -- legally culpable if their business should fail?  Punishment could include steep fines and/or lengthy jail time. 

Facing those possibilities, I would think bankers would be extremely careful in their dealings so as to not risk failure.  Just a thought. 

Removing limited liability would fundamentally alter industrial capitalism. Why cant people accept the state and private sector can work together to mutually benefit everyone? There is a reason why a republican form of social organization has created the type of wealth we enjoy today.

One other problem that I have with the type of material consumerism that modern capitalism has created is that it assumes that the "goods of life" are the means by which we achieve a "good life". It seems that after a certain point, further material wealth does nothing to improve our lives based on studies of happiness and depression across income levels. In some ways, modern capitalism is like a cocaine addict pursuing ever larger highs.

I don't think describing capitalism as survival of the fittest is entirely accurate. The fittest companies thrive by (hopefully) providing something more useful and push out less successful ones - but those who benefit are the whole society who suddenly have access to things that were once unattainable. We're supposed to be able to buy more stuff with the same amount of money. 

doodle wrote: Removing limited liability would fundamentally alter industrial capitalism. Why cant people accept the state and private sector can work together to mutually benefit everyone?

Because that's crony capitalism, which sucks all around. It leads to the richest actors in the private sector controlling government to further their own private ends. Corporations write "draft" or "model" laws that they then pay off politicians to enact which just happen to conveniently hand them an advantageous market position or even a de facto monopoly.

For example: building codes routinely require products sold by corporations that just happened to donate large amounts of money to politicians who were sympathetic to enacting building codes requiring said products. When the private sector and government cooperate, really bad things happen. I thought this stuff was liberalism 101! It's something that IMHO liberals are absolutely right about.

doodle wrote: I somewhat agree, but what do you do in the event that that failure would be devastating? If all of the banks had been allowed to crash 5 years ago...we might be all living in a Mad Max world today instead of typing peacefully in this forum. In certain circumstances, letting things crash and fail works fine...in other circumstances it could set us back into the dark ages. I think a nuanced position is preferable to a cut and dried rule.

Oh B.S!  Ireland let all the banks fail but protected the depositors and their economy has recovered.  Cyprus is in the process of doing the same with their insured depositors.

Former BB&T CEO talking about why eliminating FDIC and having banks privately insure themselves lowers risk:

http://www.youtube.com/watch?feature=pl ... 7yZLdTKCgs

Slotine wrote:The FDIC wasn't designed as a watchdog to stop bank failures.  It's designed to backstop a system-wide bank run.  Tell me this, did you go withdraw your money from the bank after the 100th bank failure in 2009?

No. But I check my bank health through a variety of services that monitor such things (http://www.bankrate.com/rates/safe-soun ... earch.aspx). And if I were to see the bank was in jeopardy, I most certainly would remove my money and it doesn't matter what insurance they have.

Also, I did tell people I know to remove money from any bank that was involved with the problems. This wasn't because FDIC wouldn't back the deposits, but on principle that any bank needing to receive massive bailouts doesn't deserve your money because they don't care.

The point still returns to there is no negative feedback to control bank behavior. If a bank is wobbly, it's because they are over-leveraged. Today, they can run down to the bare wire and still pass muster.