Jill Dupré raised the question of crypto as an orgregore. Exploring the question helped me think about what an orgregore (aka ogregore or materialist's egregore) is.
Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts
Wednesday, November 30, 2022
Wednesday, March 24, 2021
Dionysus on Wall Street
The GameStop saga was a big story in February 2021. It’s often told as David against Goliath, but I think there’s a deeper pattern that reflects the role of technology.
Saturday, January 10, 2009
Forever blowing bubbles
In a Wall Street Journal op-ed (PDF) Paul Rubin* suggests that bubbles and crashes are a natural part of capitalist markets. More to the point, the very factors that have recently increased the efficiency of markets – notably the internet – have also facilitated the formation of bubbles.
Technology is double-edged, as always: the internet facilitates both the functioning and malfunctioning of markets. Of course, the difference between function and malfunction is in the eye of the beholder. As John Sterman famously said, “There are no side effects—only effects.”
While this is a perennial problem, the internet may have caused a qualitative change in the degree of interconnection, which leads to significantly less resilience. Note the paradox: The internet is more resilient as a communication system, but it causes the systems that use it to be less resilient.
The corollary is that regulators face an impossible task: one can’t eliminate the downsides of the internet without simultaneously eliminating the benefits.
My study of the complex adaptive systems literature leads to the same conclusion:
[*] Paul Rubin is a professor of economics and law at Emory University and a senior fellow at the Technology Policy Institute. He served in a senior position in the Federal Trade Commission in the 1980s.
Technology is double-edged, as always: the internet facilitates both the functioning and malfunctioning of markets. Of course, the difference between function and malfunction is in the eye of the beholder. As John Sterman famously said, “There are no side effects—only effects.”
While this is a perennial problem, the internet may have caused a qualitative change in the degree of interconnection, which leads to significantly less resilience. Note the paradox: The internet is more resilient as a communication system, but it causes the systems that use it to be less resilient.
The corollary is that regulators face an impossible task: one can’t eliminate the downsides of the internet without simultaneously eliminating the benefits.
My study of the complex adaptive systems literature leads to the same conclusion:
- more interconnected systems are less resilient
- crashes are healthy, because they allow new entrants to flourish
- the regulatory task is not to avoid crashes (this just makes the eventual correction worse) but to manage them
[*] Paul Rubin is a professor of economics and law at Emory University and a senior fellow at the Technology Policy Institute. He served in a senior position in the Federal Trade Commission in the 1980s.
Tuesday, December 02, 2008
Reforming the FCC: Diagnosis
The financial crisis has called into question how markets are regulated; calls for reforming the FCC have been growing louder for some years. The legal/regulatory shortcomings of the FCC are a topic of frequent conversation (e.g., GMU Sep 08, PK/Silicon Flatirons Jan 09. It is therefore instructive to ask why it has ended up in this situation. Some of the problems are due to the personalities and politics of the moment, and are thus transitory. Some are due to its terms of operation; the FCC’s structure and mission are determined by the Communications Act, and won’t change fundamentally unless the Act changes. The deeper cause, which most interests me, is a change in the nature what is being regulated: the transformation of the communications business from telecoms+broadcasting to the internet.
Since the mid-90s, the computer, information and communication services have come to dwarf telecommunications services. For example, the graphic at the top of this post charts the service exports of the OECD countries according to the OECD Communications Outlook 2007 (p. 256). This was not only a quantitative change; computing brought a qualitative change. The internet/web is modular, decentralized, self-organizing, adaptive and diverse on a fundamentally different scale to telecommunications (Internet Governance as Forestry). These are all characteristics that distinguish complex systems from merely complicated ones.
An analogy may help: the FCC in the telecoms era was like a farmer managing agricultural production; today it is like a ranger responsible for a wilderness. A farmer can decide which crops to cultivate, where to plant them, and when to rotate – though the plants do the work of converting sunlight to carbohydrate, and the animals convert food to meat. Some inputs, like weather and market conditions, are unpredictable, but many – irrigation, fertilizer, seed type, antibiotics – are under the farmer’s control. (And even weather and market risk is mitigated by massive government subsidies for major crops.) The desired output is well-defined and easily measurable. Rangers, on the other hand, have to deal with a very different balance of power and responsibility. They have to protect endangered species, prevent catastrophic fires, and provide access to citizens, but have little or no control over the animals and plants in the ecosystem, or the inputs in the form of weather, migrating animals, or pests.
This limited control implies that detailed, rule-based regulation is no longer sustainable. An approach based on principles, supported by tools such as transparency and computer simulation, is the only viable strategy. Rules can determine which crop hybrid to use for a particular market need given climate and soil type; but principles – such as flexibility, taking a big picture view, fostering diversity, and delegating responsibility – are unavoidable when managing an ecosystem.
In a New Yorker article about the financial crisis, James Surowiecki uses a sport analogy to explain the difference between principles and rules:
It’s something like the difference between football and soccer. Football, like most American sports, is heavily rule-bound. There’s an elaborate rulebook that sharply limits what players can and can’t do (down to where they have to stand on the field), and its dictates are followed with great care. Soccer is a more principles-based game. There are fewer rules, and the referee is given far more authority than officials in most American sports to interpret them and to shape game play and outcomes. For instance, a soccer referee keeps the game time, and at game’s end has the discretion to add as many or as few minutes of extra time as he deems necessary. There’s also less obsession with precision—players making a free kick or throw-in don’t have to pinpoint exactly where it should be taken from. As long as it’s in the general vicinity of the right spot, it’s O.K.Pursuing this metaphor, the FCC is not only the referee of a football game, it also makes the rules – often as the game goes along.
--- James Surowiecki, Parsing Paulson, The New Yorker, 2 Dec 2008
I’ll suggest some possible ways for a new FCC to manage the new communications business in an upcoming post. However, a caveat: The ICT business hasn’t had a crisis of melt-down proportions, as finance has had, to concentrate the mind. It remains to be seen how the change in power in DC will affect this process. Some of the loudest calls for change at the FCC have come from the Right, arguing that the FCC regulates too much and too intrusively; the Left has chimed in, arguing that it regulates too ineffectively. With Democrats now in control of both Congress and the Administration, and the GOP in some disarray, the pressure to reform the FCC may well abate; calls for its abolition will certainly have less resonance.
Friday, November 28, 2008
The Finance Goose and the Telecoms Gander
I’ve been trying to think through the analogies between finance and ICT (aka telecoms [1]) in the hope of gleaning insights about ICT regulation from the market melt-down. (Recent posts: From transparency to intelligibility in regulating finance, Lessons for communications regulation from banking complexity, More on Intelligibility vs. Transparency.)
While finance and ICT are both complex adaptive systems, there are some deep differences [2] – deep enough that “Re-regulate, Baby!” thinking about financial markets shouldn’t automatically include ICT. In other words: while self-regulation on Wall Street may be anathema in the current climate, it should still be on the menu for ICT.
Money is a core commodity
The dotcom bust of 2001 was severe, but pales in comparison to the Savings & Loan debacle, let alone the current crisis. The ICT business doesn’t have the societal or financial leverage to drive meltdowns that rock society. Finance is about making money with money, and money drives the economy. Money is the ultimate commodity; when you can’t get money, nothing works.
ICT is not (yet?) so central. Information, for all the talk about bits and bytes, is not really a commodity. A dollar is a dollar is a dollar, but a brother could be a sibling, a comrade in arms, or any human being, depending on the context [3]. Distortions of information transfer, whether in transport or content, are therefore not as leveraged as bottlenecks in the money supply.
Information flows are undoubtedly important, and their interruption would cause disruption. For example, cargo ships need to provide electronic manifests to their destination ports 24 hours before arrival in the US. If this data flow were blocked, the movement of goods would stop. However, this is a point failure; it isn’t obvious to me how something like this could cause a cascade of failures, as we saw when banks stopped lending to each other [4].
Leveraged Intangibles
Finance is more leveraged than ICT. It’s more abstract, not least because money is a more “pure” commodity than information; that is, it’s more generic. The sub-prime crisis was the collapse of a tower of derivatives: loans were bundled into CDOs, which were then re-bundled into CDOs, and again, and again. There was double leverage. First, the obvious leverage of betting with borrowed money; second, the recursive bundling of financial instruments to magnify even those inflated returns. The tower of derivatives was possible because its bricks were intangible; failure only came when the conceptual opacity of the structure overwhelmed our individual and institutional comprehension, rather than when its weight exceeded the compressive strength of its materials.
ICT also has its fair share of intangibles; many problems of large-scale software development are due to the opacity of boundless webs and towers of abstractions. However, the recursiveness is not as thoroughgoing, at least at the lower levels of the stack. The risks of network infrastructure companies misusing their market power in interconnection, say, is limited by the fact that no part of the network is many abstraction steps away from tangible wires and routers.
The risks do become greater in the higher network layers, such as applications and content. Software carries more and more value, here; even though the bits and MIPS live in data centers somewhere, complex layers of abstract processing can create unexpected risks. One example is the way in which personally identifiable information doesn't have to be a name and address: when sufficiently many seemingly random items can be aggregated, someone becomes uniquely identifiable even though they didn't provide their name.
Subjectivity
The finance business is shot through with unquantifiable and unpredictable subjectivity, notably trust, greed, and panic. Of course, all businesses including ICT rely on trust, etc. However, in finance subjective assessments drive minute-by-minute market decisions. When banks lost faith that their counter-parties would still be solvent the next morning, all were sucked down a maelstrom of mutual distrust. Businesses all try to quantify trust, but it’s a fragile thing, particularly when assets are intangible and unintelligible. Investors thought they could depend on ratings agencies to measure risk; when it turned out that they couldn’t due to the agencies’ conflicts of interest, the downward spiral started (and was accelerated by leverage).
The ICT business, at least at the lower transport levels, is much less dependent on subjective assessments. One can measure up-time and packet loss objectively. Things are less sure at the content layers, as can be seen in the rumblings about the incidence of click fraud, and whether the click-through accounting of search engine operators can be trusted; so far, though, there’s been no evidence of a rickety tower of dubious reputation.
Conclusions
Finance today arguably needs more supervision because of the wide ramifications of unfettered greed, fear or stupidity. The impacts are so large because of the amplifying effects of leverage and intangibility; the risk is greater because of the opacity due to unintelligibility.
ICT also has leverage, intangibility and opacity, but not at the same scale. Therefore, objections to delegated regulation in finance do not transfer automatically to ICT.
Counter-intuitively (to me, at least), the parts of the ICT business that are most defensible against claims for re-regulation are those that have a great deal of physical infrastructure. The more software-intensive parts of the cloud are most vulnerable to analogies with the runaway risks we’ve seen in financial markets
Notes
[1] While telecoms is an easy old word that everybody knows, it really doesn’t capture the present situation. It connotes old technologies like telephony, ignores the media, and misses the importance of computing and software. There is as yet no better, commonly used term, and so I’ll reluctantly use the acronym ICT (Information and Communication Technologies). ICT is about business and policy as well as technology, but it’s a little more familiar, and shorter, than “connected computing”, my other preferred term.
[2] Jonathan Sallet observes that the financial crisis derives from market externalities that put all of society at risk (personal communication, 26 Nov 2008). The very large scope of this risk can be used to justify government intervention. We’re hoping to combine our thinking in an upcoming note.
[3] I’m toying with the notion of doing a metaphor analysis of information. At first sight, the discourse seems to be driven by an Information Is a Fluid analogy; it’s a substance of which one can have more or less. This metaphor is both pervasive, and open to criticism. Reddy introduced the Communication Is a Conduit metaphor for knowledge transfer; this is related to the Lakoff’s Ideas Are Objects. See here for his critique, and citation of his paper.
[4] Just because I can’t see a cascade doesn’t mean it isn’t there, of course; it may just be my uninformed and uninspired imagination. Network security analysts have, I’m sure, constructed many nightmare scenarios. The weakness of my analysis here is that my argument for the implausibility of a meltdown rests in part on the fact that it hasn’t happened – yet. The 9/11 fallacy. . . .
While finance and ICT are both complex adaptive systems, there are some deep differences [2] – deep enough that “Re-regulate, Baby!” thinking about financial markets shouldn’t automatically include ICT. In other words: while self-regulation on Wall Street may be anathema in the current climate, it should still be on the menu for ICT.
Money is a core commodity
The dotcom bust of 2001 was severe, but pales in comparison to the Savings & Loan debacle, let alone the current crisis. The ICT business doesn’t have the societal or financial leverage to drive meltdowns that rock society. Finance is about making money with money, and money drives the economy. Money is the ultimate commodity; when you can’t get money, nothing works.
ICT is not (yet?) so central. Information, for all the talk about bits and bytes, is not really a commodity. A dollar is a dollar is a dollar, but a brother could be a sibling, a comrade in arms, or any human being, depending on the context [3]. Distortions of information transfer, whether in transport or content, are therefore not as leveraged as bottlenecks in the money supply.
Information flows are undoubtedly important, and their interruption would cause disruption. For example, cargo ships need to provide electronic manifests to their destination ports 24 hours before arrival in the US. If this data flow were blocked, the movement of goods would stop. However, this is a point failure; it isn’t obvious to me how something like this could cause a cascade of failures, as we saw when banks stopped lending to each other [4].
Leveraged Intangibles
Finance is more leveraged than ICT. It’s more abstract, not least because money is a more “pure” commodity than information; that is, it’s more generic. The sub-prime crisis was the collapse of a tower of derivatives: loans were bundled into CDOs, which were then re-bundled into CDOs, and again, and again. There was double leverage. First, the obvious leverage of betting with borrowed money; second, the recursive bundling of financial instruments to magnify even those inflated returns. The tower of derivatives was possible because its bricks were intangible; failure only came when the conceptual opacity of the structure overwhelmed our individual and institutional comprehension, rather than when its weight exceeded the compressive strength of its materials.
ICT also has its fair share of intangibles; many problems of large-scale software development are due to the opacity of boundless webs and towers of abstractions. However, the recursiveness is not as thoroughgoing, at least at the lower levels of the stack. The risks of network infrastructure companies misusing their market power in interconnection, say, is limited by the fact that no part of the network is many abstraction steps away from tangible wires and routers.
The risks do become greater in the higher network layers, such as applications and content. Software carries more and more value, here; even though the bits and MIPS live in data centers somewhere, complex layers of abstract processing can create unexpected risks. One example is the way in which personally identifiable information doesn't have to be a name and address: when sufficiently many seemingly random items can be aggregated, someone becomes uniquely identifiable even though they didn't provide their name.
Subjectivity
The finance business is shot through with unquantifiable and unpredictable subjectivity, notably trust, greed, and panic. Of course, all businesses including ICT rely on trust, etc. However, in finance subjective assessments drive minute-by-minute market decisions. When banks lost faith that their counter-parties would still be solvent the next morning, all were sucked down a maelstrom of mutual distrust. Businesses all try to quantify trust, but it’s a fragile thing, particularly when assets are intangible and unintelligible. Investors thought they could depend on ratings agencies to measure risk; when it turned out that they couldn’t due to the agencies’ conflicts of interest, the downward spiral started (and was accelerated by leverage).
The ICT business, at least at the lower transport levels, is much less dependent on subjective assessments. One can measure up-time and packet loss objectively. Things are less sure at the content layers, as can be seen in the rumblings about the incidence of click fraud, and whether the click-through accounting of search engine operators can be trusted; so far, though, there’s been no evidence of a rickety tower of dubious reputation.
Conclusions
Finance today arguably needs more supervision because of the wide ramifications of unfettered greed, fear or stupidity. The impacts are so large because of the amplifying effects of leverage and intangibility; the risk is greater because of the opacity due to unintelligibility.
ICT also has leverage, intangibility and opacity, but not at the same scale. Therefore, objections to delegated regulation in finance do not transfer automatically to ICT.
Counter-intuitively (to me, at least), the parts of the ICT business that are most defensible against claims for re-regulation are those that have a great deal of physical infrastructure. The more software-intensive parts of the cloud are most vulnerable to analogies with the runaway risks we’ve seen in financial markets
Notes
[1] While telecoms is an easy old word that everybody knows, it really doesn’t capture the present situation. It connotes old technologies like telephony, ignores the media, and misses the importance of computing and software. There is as yet no better, commonly used term, and so I’ll reluctantly use the acronym ICT (Information and Communication Technologies). ICT is about business and policy as well as technology, but it’s a little more familiar, and shorter, than “connected computing”, my other preferred term.
[2] Jonathan Sallet observes that the financial crisis derives from market externalities that put all of society at risk (personal communication, 26 Nov 2008). The very large scope of this risk can be used to justify government intervention. We’re hoping to combine our thinking in an upcoming note.
[3] I’m toying with the notion of doing a metaphor analysis of information. At first sight, the discourse seems to be driven by an Information Is a Fluid analogy; it’s a substance of which one can have more or less. This metaphor is both pervasive, and open to criticism. Reddy introduced the Communication Is a Conduit metaphor for knowledge transfer; this is related to the Lakoff’s Ideas Are Objects. See here for his critique, and citation of his paper.
[4] Just because I can’t see a cascade doesn’t mean it isn’t there, of course; it may just be my uninformed and uninspired imagination. Network security analysts have, I’m sure, constructed many nightmare scenarios. The weakness of my analysis here is that my argument for the implausibility of a meltdown rests in part on the fact that it hasn’t happened – yet. The 9/11 fallacy. . . .
Saturday, August 11, 2007
The mortgage mess as a cognitive problem
The sub-prime mortgage debacle is a problem of cognitive complexity. A lack of understanding of the risks entailed by deeply nested loan relationships is leading to a lack of trust in the markets, and this uncertainty is leading to a sell-off. More transparency will help – but has its limits.
A story on NPR quotes Lars Christensen, an economist at Danske Bank, as saying that there is no trust in market because of the unknown complexity of the transactions involved. (Adam Davidson, “U.S. Mortgage Market Woes Spread to Europe,” All Things Considered, Aug 10th, 2007; more was broadcast than seems to be in the online version.)
This is a ‘hard intangibles’ problem: intricate chains and bundles of debt arise because there’s no physical limit on the number of times these abstractions can be recomposed and layered, with banks lending to other banks based bundles of bundled loans as collateral. When questions arise about the solvency of one of the root borrowers, it’s in large part because there’s no transparency into what they’re holding. According to the Economist (“Crunch time” Aug 9th 2007), complex, off-balance sheet financial instruments were the catalyst for the market sell-off. Phrases like “investors have begun to worry about where else such problems are likely to crop up” suggest that lack of understanding is driving uncertainty. The entire market is frozen in place, like soldiers in a mine field: one bomb has gone off, but no-one knows where the next is buried.
One of the drivers of the problem, according to the Financial Times (Paul J Davies, “Who is next to catch subprime flu?” Aug 9th 2007), is that low interest rates have propelled investors into riskier and more complex securities that pay a higher yield. “Complexity” is a way of saying that few if any analysts truly understand the inter-relationships among these instruments. The market is facilitated by the use of sophisticated models (i.e. computer programs) that predict the probabilities of default among borrowers, given the convoluted structure of asset-backed bonds. As the crisis has evolved, banks have come to realize – again, suggesting that this was not immediately obvious – that they’re exposed to all forms of credit markets, to more forms of credit risk than they thought.
This suggests a policy response to a world of hard intangibles: enforced transparency. The US stock market, the most advanced in the world, has of necessity evolved to be more transparent in terms of disclosure requirements on company operations than its imitators. According the FT, the Bundesbank is telling all the German institutions to put everything related to sub-prime problems on the table – indicating that increased visibility for the market will improve matters.
It’s striking how little the banks seem to know. BusinessWeek quotes an economist at CalTech as recommending that the Federal Reserve insists firms rapidly evaluate their portfolios to determine exactly how much of the toxic, risky investments they hold – by implication, they don’t know. (Ben Steverman, “Markets: Keeping the Bears at Bay” Aug 10th 2007.) The situation summed up well here:
“The problem here is that the financial industry has created a raft of new, so-called innovative debt products that are hard, even in the best of times, to place an accurate value on. "You don't have the transparency that exists with exchange products," the second-by-second adjustment in a stock price, for example, says Brad Bailey, a senior analyst at the Aite Group. The products are so complex that many investors might have bought them without realizing how risky they are, he says.”
Transparency may be a useful solvent for governance problems in all complex situations. For example, in an unpublished draft paper on network neutrality, analysts at RAND Europe recommend that access to content on next-generation networks be primarily enforced via reporting requirements on network operators, e.g. requiring service providers to inform consumers about the choices they are making when they sign up for a service – one of the keystones of the Internet Freedoms advocated by the FCC under Michael Powell. This may be one of the only ways to provide some degree of management of the modularized value mesh of today’s communications services.
However, transparency as a solution is limited by the degree to which humans can make sense of the information that is made available. If a structure is more complex than we can grasp, then there are limits to the benefits of knowing its details. A hesitate to draw the corollary: that limits should be imposed on the complexity of the intangible structures we create.
A story on NPR quotes Lars Christensen, an economist at Danske Bank, as saying that there is no trust in market because of the unknown complexity of the transactions involved. (Adam Davidson, “U.S. Mortgage Market Woes Spread to Europe,” All Things Considered, Aug 10th, 2007; more was broadcast than seems to be in the online version.)
This is a ‘hard intangibles’ problem: intricate chains and bundles of debt arise because there’s no physical limit on the number of times these abstractions can be recomposed and layered, with banks lending to other banks based bundles of bundled loans as collateral. When questions arise about the solvency of one of the root borrowers, it’s in large part because there’s no transparency into what they’re holding. According to the Economist (“Crunch time” Aug 9th 2007), complex, off-balance sheet financial instruments were the catalyst for the market sell-off. Phrases like “investors have begun to worry about where else such problems are likely to crop up” suggest that lack of understanding is driving uncertainty. The entire market is frozen in place, like soldiers in a mine field: one bomb has gone off, but no-one knows where the next is buried.
One of the drivers of the problem, according to the Financial Times (Paul J Davies, “Who is next to catch subprime flu?” Aug 9th 2007), is that low interest rates have propelled investors into riskier and more complex securities that pay a higher yield. “Complexity” is a way of saying that few if any analysts truly understand the inter-relationships among these instruments. The market is facilitated by the use of sophisticated models (i.e. computer programs) that predict the probabilities of default among borrowers, given the convoluted structure of asset-backed bonds. As the crisis has evolved, banks have come to realize – again, suggesting that this was not immediately obvious – that they’re exposed to all forms of credit markets, to more forms of credit risk than they thought.
This suggests a policy response to a world of hard intangibles: enforced transparency. The US stock market, the most advanced in the world, has of necessity evolved to be more transparent in terms of disclosure requirements on company operations than its imitators. According the FT, the Bundesbank is telling all the German institutions to put everything related to sub-prime problems on the table – indicating that increased visibility for the market will improve matters.
It’s striking how little the banks seem to know. BusinessWeek quotes an economist at CalTech as recommending that the Federal Reserve insists firms rapidly evaluate their portfolios to determine exactly how much of the toxic, risky investments they hold – by implication, they don’t know. (Ben Steverman, “Markets: Keeping the Bears at Bay” Aug 10th 2007.) The situation summed up well here:
“The problem here is that the financial industry has created a raft of new, so-called innovative debt products that are hard, even in the best of times, to place an accurate value on. "You don't have the transparency that exists with exchange products," the second-by-second adjustment in a stock price, for example, says Brad Bailey, a senior analyst at the Aite Group. The products are so complex that many investors might have bought them without realizing how risky they are, he says.”
Transparency may be a useful solvent for governance problems in all complex situations. For example, in an unpublished draft paper on network neutrality, analysts at RAND Europe recommend that access to content on next-generation networks be primarily enforced via reporting requirements on network operators, e.g. requiring service providers to inform consumers about the choices they are making when they sign up for a service – one of the keystones of the Internet Freedoms advocated by the FCC under Michael Powell. This may be one of the only ways to provide some degree of management of the modularized value mesh of today’s communications services.
However, transparency as a solution is limited by the degree to which humans can make sense of the information that is made available. If a structure is more complex than we can grasp, then there are limits to the benefits of knowing its details. A hesitate to draw the corollary: that limits should be imposed on the complexity of the intangible structures we create.
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