On Risk and Uncertainty

This is a placeholder more than anything else.

Some other things that struck me as ideological in CHS's Survival+ are the unfounded assumptions that (1) free market capitalism is not only possible but existed in the past, (2) the middle class has always been a part of civilized human existence, (3) prices are determined by supply and demand, and (4) transparency will ensure the proper operation of the free market.  I don't see any evidence for item (1).  Item (2) is marred by CHS' conception of the middle class he grew up in, which was the result of massive State intervention into the normal operation of laissez-faire captialsm.  Item (3) fails to account for the fact that both supply and demand can be artificially manipulated (as is happening every day these days in the financial markets).  As to item (4), that's a fantasy as financial "innovators" (read fraudsters) can and do invent new fraudulent offerings to avoid transparency obligations.  In any event, there is a difference between being transparent and sharing insights and information that only you have.

CHS: Mischaracterizing Market Risk as Natural

Charles Hugh Smith' Survival+ is one of the many books I am reading these days.  I have read enough of the book to highly recommend it, as it displays all of the insight and thoughtfulness we've come to expect from CHS, and it does so in a concentrated, cogent manner.  It also suffers from some of his ideological blindspots, which I have noted in the past.  This passage struck me in particular:

A similar mechanism is the exempting of capital and high-caste Elites from risk-- that is, from the risk inherent in free markets.  Just as monopoly capital strives to eliminate "uncertainties" (i.e. losses) by eliminating competition, capital and high-caste Elites (public employees, technocrats, etc.) strive to exempt themselves from risk by constructing fiefdoms protected by the States

Risk is not a characteristic of capitalism or free markets; it is a characteristic of life which markets simply reflect.

While I agree that risk is a natural part of life, market risk is not at all natural and nothing like what we experience in life.  That is because all market risk arises from the demand for compounding interest (i.e., yield), a human invention for making money from money, a distinctly unnatural thing to do with an inanimate, fictive object. I further believe that exempting capital and high-caste Elites from risk is a feature of capitalism, not a bug.  The owners of the money supply WILL be paid for allowing its use.

CHS's mistake was assuming that risk in capitalism and risk in life are one and the same.  Interestingly, CHS less than a page later notes recognizes how words can obscure the truth:

The tool, language, easily becomes a weapon in skilled hands, and the strongest group will do all in its power to protect its own interest.

And later, he says:

Some ideas are easier to express and understand than others.  This stems from language being an ontological force in itself; language carries with it vast powers and equally vast difficulties of interpretation and ambiguity.

So CHS clearly understands the mechanism, language, as well as the cognitive biases that, when applied to the interpretation of language, create blind spots.  But that did not stop CHS from writing an entire book about another language-induced blindspot called An Unconventional Guide to Investing in Troubled Times.  What CHS actually discusses there is speculation, not investment.

TAE: Modern Slavery, Part Deux

Really good stuff here.

The worst part about the dominant neoliberal paradigm-- and what makes it evil-- is that it was designed to normalize and rationalize debt slavery.  In hindsight, there is no other way to read what the Hayeks, Mises and Friedmans wrote.  Their double truths reveal themselves to any who care to look.

TAE: Understanding Modern Slavery

The Automatic Earth explained modern slavery well here.

People need to understand that laws like Arizona's SB 1070 are designed to perpetuate modern slavery of the type described by The Automatic Earth in the above-linked post.  When a society outsources its prison systems, prisons must be profitable, and profitability must grow perpetually.  Neofeudalism is the necessary result.

Giving Credit Where Credit Is Due

Charles Hugh Smith is one of the few bloggers I still follow, but I rarely remark on him these days unless I'm critiquing him.  So, it is with some joy that I can recommend this excellent CHS piece without comment: When Debt is More Important Than People, The System Is Evil.


Some people insist that language created the system, but that's nonsense.

Haiku for a Boy Named Debbie

Language creates naught
It is nothing but a tool
That can't wield itself

Misframing the Frame

The day after missing the mark, Charles Hugh Smith hits it without realizing it in his latest post "The Grand Game of Perception Management."

All economic models of human behavior, whether a technocratic "econometric" model or the Austrian School's economic model, are designed to drive human behavior, not reflect it.  What is portrayed as a camera is really an engine.  All of human history has shown the fundamental truth that having enough people believe it is so will indeed make it so.

The cornerstone of perception management is the false certainty of superiority, in particular the false certainty of superiority of one's political economy.  Without an FCS to anchor what one perceives, perceptions cannot be managed.

Layers of Truth

Today, Charles Hugh Smith proudly declares "The Grand Failure of the Econometric Model."


In one sense, and the sense he means, CHS is correct that the econometric model fails to deliver the certainty that its adherents claim.


But in the more important and accurate sense, CHS is flat wrong.  The econometric model is not offered for its truth but for its capacity to create false certainty.  All econometric models claim to model probabilities and, therefore, describe the present and predict the future.  The problem is that at best these models consider only risk and do not model uncertainty, but calculating probabilities requires modeling both risk and uncertainty.  The utility of the models only arises when they are used by advocates of the current control system to drive false certainty and, therefore, influence behavior.


The econometric model is nothing more or less than propaganda used to shape public opinion.  To claim that the model has failed because it does not predict the future is to miss the point that the model has succeeded greatly for its intended purpose of controlling human behavior.

Company Planet

"Consumer or consumed?"  That's the question I raised over at Russ's place in response to an excerpt from a post by a "progressive" blogger that liberally used the term "consumer."

I spent a little time this morning trying to quickly track down the history of the terms "consumer" and "consumerism."

From the brief survey of full view hits in Google books, "consumer" in an economic sense has been with us at least since Adam Smith's The Wealth of Nations, but from what I can tell at a glance, the term was used strictly to distinguish between the producer of the commodity (the seller) and the consumer of the commodity (the buyer) for the purposes of allocating tax liability.

Fast forward to the early 20th century, and you start to see a shift from the classical use of the term "consumer," as the marketing types start introducing the concept of consumer sovereignty, although that term itself was not used.  Instead, the idea that it is the consumer who ultimately determines what will be produced gets subtlety layered into the discussion.

The problem, of course, is that once you start telling somebody that they have power and discover they don't have it, they try to get back what they think they lost and, hence, the rise of "consumerism" as a political sub-movement in the mid-20th century to vest market power in the consumer.  It should go without saying that "progressives" led the charge in consumerism.

As we are now seeing today, the cost of accepting the market-based "consumer" frame is that citizens have neither choice nor sovereignty in either the political realm or in the marketplace.  Consumerism is but one more example of how the progressive approach of accepting the frame of the current power structure in order to impose modest reforms (tweaks, actually) is not only doomed to fail but destined to advance the aims of the current power structure.  Wikipedia argues that FDR's New Deal instituted reforms that ended the company town in America, but I'd argue that the rise of globalization since the New Deal has given us a company planet.

How Modern "Progressivism" Normalizes Evil

"Progressivism" has an interesting history of which I was unaware until very recently.  Interestingly, both major parties coined their own versions during the presidential election of 1912 .  The Democrat's vision of progressivism is set forth in Woodrow Wilson's The New Freedom.  The Republicans' version is set forth in Teddy Roosevelt's The New Nationalism.  I'm not going to discuss either vision here except to say that early Progressivism was not the tinkering of modern progressivism but promised to bring real, substantial change, for good or ill.

The modern progressive does not seek change, real or substantial.  Her function is to push for cosmetic changes to the status quo and, in so doing, legitimize it.

Let's take a look at a recent post from my favorite establishment hack, Yves Smith.

Remember that historical mortgage settlement deal that was the lead news story on Thursday? It has been widely depicted as a done deal. The various AGs who had been holdouts said their concerns had been satisfied.

But in fact, Bank of America’s press release said that the deal was “agreements in principle” as opposed to a final agreement. . . .

This may not sound all that important to laypeople, but most negotiators and attorneys will react viscerally to how negligent the behavior of the AGs has been. The most common reaction among lawyers I know who been with white shoe firms (including former partners) is “shocking”. Let me explain why.

Negotiating of large, complex deals (or even little deals) does not happen in one fell swoop. Even when the two sides have outlined the major terms, and in sone cases hammered out the really important ones in some detail, there is still a great deal of negotiating that takes place in finalizing the text of the contract. The negotiation over the definitive agreement makes a great deal of difference on how fair the pact turns out to be. For instance, one of the sayings of transaction lawyers is “He who controls the document controls the deal.” The party that writes up the initial version of the contract has undue influence because that becomes the default and the other side has to negotiate back from that language.

***

Why is it deeply troubling that the attorneys general have gone along with the Administration’s messaging and have all fallen in line with the “biggest Federal-state settlement ever” when no such settlement in fact exists? This isn’t just acceding to the Administration’s pet wish to build on its State of the Union PR. They’ve completely abandoned their negotiating leverage at a critical stage.

Let's leave aside for a moment that parties may use a binding memorandum of understanding to bind themselves to the major terms and conditions of a deal while they work out the smaller details (i.e., the banks may well be bound by the terms and conditions that have thus far been announced).

Let's focus on the faux populist outrage of Ms. Smith.  What precisely is she angry at?  What shocked her?  The fact, in her view, that the attorneys general "completely abandoned their negotiating leverage."

Shouldn't her outrage be at the fact that the attorneys general are negotiating a "settlement" AT ALL?   A settlement is something you have in a civil action.  In a criminal action you have plea bargains.  Why are the states' lead criminal prosecutors treating clear criminal activity as if it were a civil matter?

By focusing her ire on how the AGs seem to be negotiating, Ms. Smith has legitimized the negotiations themselves.  Indeed, she has gone much farther than that, she has lied about the options that remain for the AGs.

Think about it:  if there is no binding agreement between the banks and the AGs, as Ms. Smith argues, then the AGs maintain ALL of their negotiating leverage, including the ability to start criminal investigations and prosecutions.  Ms. Smith is a very smart woman, and I cannot believe that she does not recognize this obvious truth.

If Ms. Smith were truly the crusader for change that she portrays herself to be, she would be hailing the fact that there is no deal (assuming that is the case) as an opportunity, not an outrage.  Yves Smith: establishment hack normalizing evil one event at a time.

Update: Predictably, Ms. Smith has misled her lambs to the slaughter.  In the comments, not one person has questioned her false framing of the situation.  Instead, people seemed outraged that the really bad deal the AGs allegedly cut is not actually done and could get worse.  That is, her readers are now pining for the bad deal they were decrying only a few days ago.  Anchoring and adjustment.  Ms. Smith defines the "progressive" anchor, and her followers adjust around it.

Yves Smith: Establishment Hack

Back in mid-December of last year (2011), I got into a bit of a row with Yves Smith.  I had accused her in a comment on her site of misleading her readers.  Specifically, in response to this post, I commented:

I don’t have a ready answer to this problem of CEO greed and narcissism.

Truly, Yves, that is the single most ignorant comments I’ve seen from you, and you are not ignorant. I must therefore ascribe it to faux populism intended to stir up and distract your “progressive” readers.

As you well know, in public companies, CEOs do NOT set their own salaries. Instead, the Board typically appoints a Compensation Committee to do so (and for the entire executive team, as well). Compensation Committees typically articulate a compensation philosophy (e.g., we target the 50th percentile in total compensation among our peers), and they hire a third party consultant like Radford, Compensia or Mercer to provide the comparables and make recommendations about executive compensation according to the comparables and numerous other metrics. 

Since the CEO does not set her own salary, her greed and narcissism are completely irrelevant. Whatever she wants, it is not her decision. it is the Board’s, and the Board is ultimately accountable to the shareholders (at least in theory, a theory that will never be practiced because people like you aim the masses’ anger at the recipients of unjust rewards, not those who bestow those rewards). 

What everybody here needs to face is that the system is rewarding the CEOs with ever higher salaries because the results they are achieving are precisely what the system views as success. Think it through. What you view as failure the “system” views as success. That is the ONLY way to explain what Yves misdescribes as “greed” and to truly understand what we actually face, which is directed evil and not merely ignorant, irrational shit that just seems to happen.
This is reality, folks. Your anger at CEOs is misguided as even many CEOs are but servants of the system, just like you but for the fact they work in the Master’s house instead of the Master’s fields. 

But you CAN change this dynamic. If you want to try and make a difference in companies whose CEOs you think are overpaid, buy a single share of stock in each of those companies, attend the shareholder meetings, and ask tough questions of the management and Board, who typically attend. Heck, consider putting your own shareholder initiative on the ballot of the Annual Meeting for a vote. Make sure to read the company’s by-laws and watch for announcements regarding the Annual Meeting to ensure you can meet the deadlines for shareholder ballot measures. 

If you’re really angry at CEO salaries, I just told you how to do something about them, something Yves’ faux populism prevents you from even thinking about. But if you enjoy revelling in your impotent fury against a false meme, by all means continue doing so. I’m sure Yves will help you, if that is your goal. 

But think about it. A share of BAC is $5.23. For less than a Benjamin Franklin, you can buy a share of Goldman Sachs. I invite you to Occupy Shareholder Meetings.

She responded in comments and then with an email to me stating "your comment was utterly out of line."  I took it right back to her, stating in email:

Which part? The part that informed people how CEO compensation is actually determined? The part that informed people about how to make a difference and accomplish real progress in view of the stated goals of your site? Or the part that called you out for distracting people from accomplishing those goals?

The first and second were merely truth, the third was merely my opinion. My guess is all three parts upset you, but particularly the first two. If I had merely opined that you were intentionally misleading people without providing any factual support, you would not have been so upset, as you could have merely dismissed everything I said. But that is not possible in the full context of what I said. I clearly transgressed the First Law of Power.

It is your site, so feel free to do whatever you want with my comment, I won't remark anywhere on what you did with my comment. Why? You were my sole audience for the comment. Mission accomplished?

Still, when you calm down, ponder on what I said. Whether you realize it or not, what you are doing is making the world safe for the forces you claim to oppose. This sad fact is why I was happy to issue a comment that you might view as "utterly out of line."

I hope you actually live up to the ideals you espouse and are not just another false prophet of progress. To that extent, I wish you luck.

She came back with the following response:

I already responded in comments.

You are way off base and you know it. The forms and the substance of what happens are two different matters. I cannot believe you write that CEOs are servants of the system. That is utterly incorrect.

You accused me of acting in bad faith and wanting merely to whip up my readers. That is dead wrong and completely unacceptable.

To which I responded:

Well, at least we get to the crux of the harm you think I caused you.

Thank you for the explanation. I don't agree that I am off base at all (let alone way off base). I have personal experience to back me up. I don't think you do.

In any event, I did not say that ALL CEOs are servants of the system, I said that MANY are. And that's just a fact. Every CEO I've known personally has been a servant of the system, not its master, but I agree that folks like the Koch brothers are not. (These are typically newly-minted CEOs.)

A final question for you: if you were acting in good faith and all that happened as a result was that your readers got whipped up, do your intentions matter?

And let's be clear, that's all that happened (or will happen). 

Thanks again for the response.

Yves' reply:

I know quite a few people in search (ex the big firms) who worked on board and CEO searches, as well as senior member of HR departments involved in C level comp decisions, and also am friends with attorneys who've negotiated multiple CEO compensation agreements. I suspect my data set is at least as good as yours. They've had a ringside seat on comp decisions.

If your data points are the CEOs, do you really think they are candid with you about how the process serves them? They have both their reputations and their need to believe their pay is merited arguing against honesty.

My response (which ultimately proved to be the last word):

Your data set may well be better than mine. I just ask you to accept that your data set is not complete. I do. 

Over the last several weeks (months actually), I have been dealing with a comp consultant hired by the Board and hostile towards the CEO. I have had a ringside seat, as you say. 

I have made no attempt to argue that CEOs deserve their compensation because, according to my personal metrics, they don't. And I don't care about arguments they make to the contrary. A large percentage of people who rise to that level are sociopaths, egomaniacs, or both. I cannot and will not defend them. 

My argument is that others need to accept the fact that our personal metrics of merit don't matter, that we need to accept that what the CEOs do passes as meritorious under the operative metrics of the system, and we need to attack the metrics and the system that rewards CEOs for dismantling what is left of the society the Enlightenment wrought. 

Accepting reality as true does not mean you believe that is the way things ought to be, but it is the first step towards changing reality, if you are inclined to do so.

Since this interchange, I stopped commenting at NC, but this week I broke down and submitted a comment, which made it through moderation.  My second (and truly final) comment to NC was not so lucky.  It was in response to this post about the mortgage settlement:

Let’s press the rewind button:

http://www.nakedcapitalism.com/2011/05/new-york-ag-schneiderman-investigating-goldman-morgan-stanley-bank-of-america-mortgage-operations.html

Yves said:

Note that this announcement effectively blows up the 50 state attorney general settlement talks.

I said:

Schneiderman is going to show the rest of the AGs how to play ball with the banksters. Just watch. He’s doing the opposite of blowing up the settlement talks: he’s going to make them a reality. He’s going to show how achieving the same results as what the broader set of talks are suggesting will be widely accepted by the voters of the state. The states need money, and the banksters are happy to pay them “fines” because they know they’ll get those fines back with a lot of interest.

Yves reassured us, saying:

Schneiderman is AG basically over the Democratic Party’s dead body. Cuomo and the NY Dem machine didn’t and haven’t supported him. And remember, there is more to financial services than big banks. Investors are mad as hell about what has happened (both the bailouts and continued abuses) and some are capable of writing large checks

I replied:

Party affiliation is irrelevant. Whether Schneiderman and Cuomo are friends is irrelevant. You don’t need to be associated with or like someobody to learn by watching how they succeed or fail.

No bankster is going to go to jail. No crimes will be found. Agreements will be struck that provide immunity to the banksters and money in the form of fines to New York State, and that money will be taken out of bank reserves created courtesy of the initial bailout, QE1 and QE2. Fines mean nothing when you’re paying with other people’s money.

[done with excerpt; turning to new comment]  

And don’t forget to read what attempter and DownSouth wrote. While they no longer comment here, they have something to say.

While I didn’t get the details right, I was right in the macro sense. Schneiderman was not the “Great White Hope” that others (especially Yves) made him out to be.

So-called “progressivism” is a dead letter. You cannot expect to incrementally improve a fundamentally corrupt system for which progressives are as much to blame as so-called conservatives.

Societal evolution is no longer available as an option. Sorry.

This comment still has not shown up over at NC, nor do I expect it to do so in spite of the fact that the criticism I offered Yves was considerably mild compared to what "conservative" troll heap on her on a daily basis.  The problem with my criticism, as mild as it was, is that it is too credible to reveal to her gullible followers.  Stated plainly: Yves Smith is a propagandist for the Establishment she pretends to criticize.  Yves Smith, Establishment Hack.

The Bane of Human Existence: A False Certainty of Superiority

As I continue following the threads of thought that arise as I delve deeper into the Project, I recognize that the common thread that leads to the root of en masse human misery is a false certainty of superiority (or "FCS").  Essentially, this is a species of arrogance supported by societal institutions.  But run-of-the-mill arrogance is a distinctly personal, atomized event, while a false certainty of superiority is, by definition, a social event that empowers a collection of individuals to commit "violence" (whether physical, emotional, spiritual or economic) on others and rationalize their evil away as good.

In the West, historically the most malicious form of FCS has been the "monotheism" of the Abrahamic religions (Judaism, Christianity and Islam).  To be clear, I have no beef with the spiritual aspects of these religions, as I believe that asking a human being to give up spiritual pursuits is asking them not to be human.  I do, however, take issue with what others have termed "the Mosaic Distinction," which states that this religion or belief system, is the only truth.  The way I read history, the rise of anti-Semitism is inextricably linked with the creation and promulgation of "monothestic" Judaism in the 3rd Century BCE (this is over a thousand years AFTER monothestic Judaism is generally believed to have arisen, but the consensus ignores an historical record that demonstrates a temple outside of Jerusalem and polytheistic Judaism as ealry as the 4th  Century BCE).

Unfortuantely, the West's secular institutions also suffer from FCS.  The various schools of economics, with perhaps the exception of the Post Keynesians, suffer from this disease, as well (especially the Austrians).  So, too, do the most strident modern atheists, such as Richard Dawkins.  But defensive religious adherents are correct in their criticisms of rationalist dogma as suffering from the same flaws that the Dawkinses of the world accuse the religious adherents.

At the end of the day, the problem is the false sense of superiority, whether it is based on pure superstition or myth  (as in the case of religion) or fallacious inductive "reasoning" (as in the case of a variety of rationalist dogmas such as economics).

I would love to see a society whose central value is that nothing is certain.

NOTE:  I want to be clear that I view any certainty of superiority as inherently false as ALL such judgments, no matter the cloak of objectivity that covers them, are inherently subjective.  The underlying assumptions and metrics determine the outcome.