Carmen Segarra revelations

I just came across the Carmen Segarra revelations via ProRepublica and This American Life.

Following through on the story I came across a Joseph N. DiStefano post on Philly.com.  In the post DiStefano quotes economist Steve Golub as follows:

Golub says economists in general need to return to basic analysis of the copious financial reports the government and banks generate. “But that’s not the kind of thing research economists like to do. The Fed 20 years ago decided to make their research more academic. Rather than do the humdrum policy stuff. At the New York Fed you got promoted based on academic articles. That’s not a terrible thing. But the economists weren’t motivated to really get down and dirty in the data. It’s just not what we do. We want a data set you can enter into a computer easily and run some statistical packages on. Rather than say, ‘What’s happening here?’”

Who does that? “Anthropologists. Economists have to be a little more like anthropologists to be successful. Take the policymakers, the economists and the regulators -- and connect the dots.”

Anthropology is an under appreciated discipline - just as economics is over valued in the public policy discourse.  The attachment of most economists to mathematical models that might work if data that is fundamentally unobservable were observable makes them too often easy dupes for the self interested - or, at best, foot soldiers for the conventional wisdom of the day.

Carmen Segarra fairly obviously has the sort of personal and intellectual integrity that is too rare in New York city.  Different, but the same as Harry Markopolos.

I wonder how they do it

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A large retailer is reported today to have 'imposed' a 5 % cut on prices paid to suppliers for a 3 month period as an 'investment of mutual benefit to both our organisations'.

This is Orwellian. 

If a consumer walked out of their store with 5% more than they had paid for, presumably they would want it to be called theft rather than a 'mutual investment'.

A farmer in the industrial system has to deal with these people.  Even a farmer outside the industrial system has to deal with the consequences of consumers having access to product derived from exploitative systems.

People in the city should understand the level of abuse and economic distortion that underlies their access to 'cheapness'.  These things don't last forever.
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A Good Book

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I've almost finished reading No One Would Listen  - by Madoff whistleblower Harry Markopolos.  I read a lot of his material when it first came out, but the book is very good.  I would say essential reading.

I'm not at all surprised by the incompetence he exposes at the SEC.  They have also caused the industry I've been part of (accounting) tremendous cost and aggravation for little or no benefit. 

The really jolting thing to read, in detail, is how every one with half a brain knew something was wrong, but still the thing lasted so long.  That suggests Wall St is one bad, corrupt system.  It was Burke who said "All that is required for evil to prevail is for good men to do nothing."  And then they have the cheek to pay themselves millions as well.

I've listened for years to people describing a country I love (Indonesia) as hopelessly corrupt.  After reading Markopolos my question is ....  Compared to what?
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What a wise man said at the Kyneton Bowling Club

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Yesterday I attended an event put on by the Kyneton branch of the University of the Third Age.  U3A is a really interesting institution - an example really of what is best about Australia.  It consists of a bunch of people in a small town being interested in working together to facilitate their own and others learning.

So yesterday about 150 people gathered on a wet cold day to listen to one of my heros.  Most people know of Professor Ross Garnaut as the primary author of a report on climate change that was published back in 2008.  Actually he has been a significant contributor to various Australian public policy debates all the way back to when he was an economic adviser to Bob Hawke in the mid 80s.

He has been a contributor to 3 things that have ended up being the focus of my professional life:

He played a significant role in developing the intellectual framework the economic reforms made by the Hawke and Keating governments that led to what became known as Competition Policy in the 1990s.

It was Competition Policy that motivated the electricity and gas privatisations that my firm became a major adviser to and then led to me (eventually) becoming an energy markets specialist.

He became Australian Ambassador to China from 1985 to 1988 and has since played a major role in trying to shape Australia's engagement with China - and Asia more generally.

I have spent 2 periods, totalling over 5 years, living and working in Asia.

He has, more recently, become the climate change / carbon pricing guru.

How the electricity sector deals with the transition from a high emissions present to a low emissions future has become the major focus of my professional work since I have been back in Australia.

I deal with things on a fundamentally different level to Ross Garnaut - with the consequential reforms that flow from the 'big pictures' that he paints and then navigates through the political level.  I get to work when officials want to know what to do next - or how to make something work.

When you do my sort of work, it is always helpful to have a good sense of why you are doing something - and I've always found Garnaut to be a good source of that sort of content.

Yesterday he had various things to say, but one thing really stood out for me.  He was talking about the impact of the Global Financial Crisis of 2008.  In the midst of his usual measured and careful analysis, there was one little burst of the sort of passionate language I don't associate with people like him.

It was quick - but went something like this:  "The behaviour of those responsible for managing and regulating global financial systems was traitorous - their choices have condemned the people of North America and Europe to a generation or more of economic grief."  I've put it in quotes, but it is just my memory of the gist of what he said.

I think I agree.
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Tim Lindsay does understand Indonesia

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See my previous post (8 November) on the current political situation in Indonesia.

Finally there is an intelligent article in the Australian press on the great battle underway in Jakarta.  As one might expect, it's written by someone other than an Australian journalist.  Tim Lindsay is an academic.

Here is the article.

However, there is one thing where I think I disagree with Lindsay.  He puts the Bank Century issue in his list of issues with the implication that it is just one more corruption scandal.  I suspect that something more complex is happening.

As I understand it, Bank Century was a (reasonably typical) badly run Jakarta bank.  It had the misfortune (perhaps good fortune) to get into trouble at the time the Global Financial Crisis hit late last year.  This meant that, in the rush and panic of the GFC, the banking regulators and the politicians had to consider the possible systemic impact of a bank failing.

Government decided to 'rescue' Bank Century.  Surprise, surprise - the rescue cost more than first thought.  So - there is now a clamour to find out who benefited - and to attack the people involved in the decision to rescue as 'corrupt'.  It is worth looking at who is being targetted - and who is doing the accusing.

The primary Bank Century targets are a lady called Sri Mulyani Indrawati (Minister of Finance) and Boediono (Vice President).  The main accusers are from the Indonesian parliament.

Sri Mulyani and Boediono are very prominent members of a group among the Indonesian elite sometimes referred to as 'the professionals'.  They are called this because of their education and approach to public administration - in summary, their commitment to professionalism.

The main alternative to professionalism is an approach that 'works things out pragmatically' based on more than just the facts and rules - taking into account interests, opinions, past obligations, future expectations .....  a bit like 'stakeholder' politics in Australia really.  And just like in Australia, professionalism is the natural enemy of pragmatic stakeholder politics.

I think Bank Century is actually being seen by the 'pragmatics' as an opportunity to attack the 'professionals' - with the hope being that, if the professionals get a bit of their own medicine in relation to corruption allegations, they will support the pragmatics in their wider battle to reign in the anti corruption forces at the KPK.
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Denial as a strategy

It seems like no one is much worried about the global financial crisis any more. Most markets are up 50% from their lows. Interest rates are low - prosperity is just around the corner ....

I don't believe it. I just read a comment by Charles Hugh Smith (Oftwominds blog) which went:

Denial is a wonderful survival strategy until suddenly it isn't.

I think we're well and truly in this stage of denial.

The US is fundamentally and structurally stuffed - I think they have a long way to fall before the fundamental goodness and soundness of the American people kicks in. It's funny, but the thing they're most proud of - their system of government - is probably the thing that is dragging them down. The reality is that many (if not most) first world countries have a better performing system of government than the US. And there is no better example of this than US health care.

What I think is underestimated is the extent of China's vulnerability. Things I read suggest to me that there is a huge correction somewhere in the works. It's not clear to me that China has the structural capacity to adjust. I hope they do, but it won't be pretty. It seems to me like they're building an asset price bubble bigger that California real estate. Perhaps more like Japanese real estate in the late 80s - when the value of downtown Tokyo was said to be worth more than all the real estate in - where ever ... Turns out it wasn't!

And where goes China - so goes Australia - at least in the sense of being the miracle economy that is cruising through everything else. In the last few weeks there has been much talk about the A$ being a proxy for China - and that investment in Australia is now a low risk way of investing in China. Methinks there is an asset price bubble building in Australia.

Bush fires

I've been looking at submissions to the Bushfires Royal Commission.

There is one from the Australian Forest Growers that makes a lot of sense. The person who wrote it is measured and careful, but the recipe for disaster comes through:

Psuedo science + Politics + Bureaucratic caution = Disaster

This recipe for disaster afflicts us in multiple spheres. To avoid the charge that I'm either right wing - or left wing - let me use three examples side by side (and try to offend everyone equally).

Example disasters
Victorian bushfires	Industrial food	Global financial crisis
Underlying ‘pseudo’ science
Environmental sciences	High input, industrial agriculture	Modern finance and risk management theory
Politics
The green vote	Cheap food	Too big to fail
Bureaucratic failure
Inaction on fuel reduction	Skewing of the regulatory system in favour of industrial food	Deregulation and self regulation of financial sector
Result
Fuel build-up leading to catastrophic fires	Local food systems are disadvantaged by an excess of caution while industrial food systems are subsidised and their externalities socialised	The profits of excessive risk taking are ‘earned’ by the finance sector – while the inevitable losses are socialised

In each case there are alternatives to the psuedo science that has come to dominate the politics - but we've exercised our democratic choices or allowed stakeholder manipulation of our democratic choices - to the point of disaster. Bureaucrats follow the politics - as, to a degree, they must.

In each case the system turns out to be more complex than we though - ahhh - complex systems again.

Complex systems

I've been becoming more and more interested in complex systems theory. According to Wikipedia:

A complex system is any system featuring a large number of interacting components, whose aggregate activity is non-linear and typically exhibits self-organization under selective pressures.

It seems to me that both economies and farms are best understood as complex adaptive systems. I have always understood this on an intuitive, common sense level. Complex systems theory puts an intellectual framework around it.

One of my Dad's favourite aphorisms (perhaps just when he was arguing something with me) was 'beware of people who give simple answers to complicated questions'. I would like to think I've spent a good part of my life since I left the farm trying to avoid the tendency we all have to look for 'simple answers'.

I've recently come across someone who is is using complexity theory to explain the wet rice agriculture systems on the island of Bali. His name is Prof. Stephen Lansing - and he is very special!

I first found him via a podcast you can find on this page. The lecture was given in February 2006 - so it's well down the page. You can just search for Lansing or Bali.

From there, I found a book he has written called Perfect Order: Recognizing Complexity in Bali. So far I've only managed to read part of the first chapter on Amazon, but it's very good.

There is also an interview with him on YouTube called Cycle of Rice, Cycle of Life.

Another favourite author / thinker of mine is Nicholas Nassim Taleb. He is a trenchant critic of mainstream capital markets theory. His best book is The Black Swan. The following is a quote from his website:

What I do: I am interested in how to live in a world we don’t understand very well –in other words, while most human thought (particularly since the enlightenment) has focused us on how to turn knowledge into decisions, I am interested in how to turn lack of information, lack of understanding, and lack of “knowledge” into decisions –how not to be a “turkey”. My last book The Black Swan (and the 4th Quadrant papers) drew a map of what we don’t understand; my current work focuses on how to domesticate the unknown "what to do in a world we don't understand".

I find myself wondering what my own response to the challenges presented by Lansing and Taleb ought to be?

Retirement Planning

When my son David (against explicit instructions to the contrary) met and married an American wife, I got a lovely daughter in law - and, in her father Bob, someone who has become a good friend.

Bob and I correspond about many things - political, philosophical, financial and even culinary. Bob introduced me to Nicholas Nassim Taleb and Benoit Mandelbrot. Taleb I understand and adore, Mandelbrot and fractal geometry went somewhat over my head (like about a mile).

Given the times, we talk a lot about the global financial crisis (GFC) at present - sending links to various articles and blogs back and forth. The other day Bob managed to provoke a little ‘outburst’ from me. But because we’re both polite guys, we always try to pre-apologise when either of us writes anything that gets too close to a ‘rant’.

On this occasion - I made an appropriate self-deprecatory reference to ‘writing a book’, but Bob came back with an offer to ‘write the foreword’. So I reproduce the essence of the argument below.

There is a fundamental problem with a lot of the literature that addresses retirement planning or personal investment strategy.

The problem is that investing in financial assets in the hope of one day being able to retire only ever happens in a wider context that is so important relative to the investment issues that general rules are actually quite hard to derive.

One might think of the wider context as planning for The Rest of My Life (TRoML). Let’s call it TRoML planning. It has a number of components:
- one’s relationships (family, friends and acquaintances)
- one’s mental health
- one’s physical health
- one’s physical assets (housing, and other 'things')
- one’s business assets (wealth and income from business activities)
- one’s financial assets (wealth and income from tradable financial assets)

Maybe it's just me, but I think the first three items are hugely more influential on the quality of TRoML than the final three. If it were possible to develop something akin to a correlation coefficient between component success and TRoML quality I think you would find:
- relationships - highly correlated
- mental health - highly correlated
- physical health - correlated - up to a point
- physical assets - correlated - up to a point
- business assets - minimal correlation
- financial assets - no correlation

This suggests a strategy for TRoML optimisation should start with relationships.

It’s clearly not possible for everyone to have perfect relationships. But it is important to set aside the insane baby boomer attachment to individualism - over the family and the community. Actually a good start would be to simply make anything ending in ‘-ism’ subservient to the inter-related interests of family and community - and that even includes capitalism!

Let’s say a man or a woman is approaching 60 years of age and has had the same life partner for 30 years, has a halfway decent relationship with adult children, has grandchildren, has cared for or is caring for aging parents, has contact with siblings, aunts, uncles, cousins and old family friends, has a modest group of close friends and a wide circle of acquaintances and community connections. Does it seem possible that such a person will not be reasonably content - and the other components will have taken care of themselves.

If, instead, some unhappy combination of failed and failing relationships applies - is it actually possible for a combination of good health and wealth to compensate and produce reasonable TRoML quality? It seems unlikely.

So priority one for every day of one’s life should be on the maintenance of a web of family and community relationships in the best order one can manage. And an interesting feature of relationships is that they are almost always repairable - or, at least, more repairable than any investment gone sour.

I could go on - but then I’d be starting to write the book. And it’s probably not very original anyway.

In Bob’s response to my email he included the following good story:
John Bogle (founder of the Vanguard mutual fund group) just came out with a new book titled "Enough". …… it is based on a conversation between Mr. Bogle and a well known author who attended a dinner at a billionaire's house. They were quite impressed by the opulence of it all, but the writer remarked to Bogle, "You know John, he has it all, but I've still got something he hasn't." "What's that?" replied Bogle. "Enough" said the writer.

Like many things: easy to say - harder to do!

My confidence in the absence of a positive connection between wealth and contentment has been affected by my relationship with a country (Indonesia) that has a GDP per capita of just under US$4,000 pa. Australia is said (by Wikipedia) to have a GDP per capita of between $35,000 and $39,000 pa depending on who measures it.

My personal experience is that people are just about equally happy (or unhappy) in either place.

The same seems to go for other countries where I have spent a reasonable amount of time - New Zealand ($28,000) - the UK ($36,000) - the US ($47,000). All these figures are calculated on a purchasing power parity basis.

So following all this - my strategy for dealing with the GFC is ………..

I guess it is to make sure my relationships are in as good order as I can manage. And then because I’m me, and because I’m a male in the (late) middle of my most productive years, I know that I’m an important part of the physical and financial security for a quite a range of people.

So I need to ‘tend’ the various things I’ve set up over the years - and make sure that they continue to fit the circumstances and needs of those around me.

For over a decade now my strategy has been to build business assets (component 5) and pretty much avoid tradable financial assets (component 6) entirely. I decided in the late 1990s that there were some serious principal agent problems in capital markets. The alternative I settled on was to invest directly in forestry and agriculture.

As a result the GFC found me with no shares - or any other tradable financial asset - not even indirectly through superannuation. My only connection with capital markets and the banking system in recent years has been to borrow from them!

Lest I be accused of hubris - let me freely acknowledge the opportunity cost of staying out of stock markets between 1998 and 2007 - and also that our investments, in the main, are illiquid and difficult to value.

Also, when I started, I didn’t really know that much about the businesses I was getting into. But over time one learns.

For the future - I continue to fundamentally distrust capital markets’ and the banking system’s capacity or willingness to properly respect capital providers / savers. We’ve edging painfully towards an understanding that we have allowed financial intermediaries to systematically and (mainly) legally extract enormous returns for doing a disastrously bad job of managing other people’s money. But I don’t think we yet know what to do next!

I’m in the camp that wouldn’t prop up failing banks and other financial institutions - and I’m also doubtful of the net benefit of stimulus packages. It seems to me the outcome of a determination to ‘rescue’ the old system may well end up being sovereign default and a whole new stage of the disaster.

The Victorian fires - and parallels with the global financial crisis

I haven't felt much like blogging the last week.  The horrible toll of the Victorian fires has been slowly emerging - along with an understanding that this has been way outside the range of expectations for most people.

Of course there are people who are saying 'I told you so'.  And you can't really blame them when the cost has been so severe - and they did point at what seems to be the main 'avoidable' factor in all this - that of fuel load.

Australian eucalypt forests shed substantial quantities of leaves, bark and branches.  And under-stories thicken in the absence of regular fire.  This creates fuel load - which together with air temperature, air humidity and wind speed determines a fair proportion of fire risk.  Last Saturday the 3 climatic factors were 'off the scale' - and the fuel load was there to create a disaster.

Fuel load was there because of the way we manage our forests and roadsides - the result of a whole raft of public policy choices.  I observe in sadness rather than the anger of some, but I can't see how we can avoid the conclusion that our policy choices have been seriously wrong in a range of areas and that an overt, covert and bureaucratic bias against regular fuel reduction burning has been the great avoidable error.

On Friday I spoke to a friend who has farmed near Kilmore for what must be 50 years or more.  The fires started just to the east of his property.  He expressed what I have also been feeling - a fear that the 'rules' by which he (and I) have minimised our own exposure to bushfire risk have changed and that we are not as safe as we think.

If you read back to my blogs last week, you can see that I felt a reasonable level of confidence in our safety at Moora.  I have to concede to being less sure now, and that I will be a careful observer of the Royal Commission proceedings, and that I will be reviewing precautions at Moora, and that I will be adjusting what I think is reasonable in considering any other properties we might buy.

It's actually all quite like the global financial crisis.  We don't really understand what is happening.  There are those who are seen to have 'predicted it' who are now enjoying public acclaim - even when what they predicted was some different form of disaster.

It seems to me that what we need to acknowledge is that we don't know exactly what has happened and why, that while the 'guilty' should probably be punished (when we understand exactly what they did wrong), the most important thing to do is to think clearly and realistically about the future - unshackled from constructs that have clearly failed.