“The profit motive is a good thing when it operates in an environment where bad bets are punished with losses and good investments are rewarded. Only government can distort that healthy profit-and-loss system, giving people incentives to make bad decisions. And it’s in this environment that greed is no good to anyone. It turns out, however, that greed—or better, rational self-interest—can help our economy stabilize faster than government ever could. As the lubricant of our economic system, self-interest will cause a million market actors to recalibrate and to direct resources to projects that create value in our society. We the people will temper our irrational urges and mitigate our risks if government restores the rules that let profit and loss bring discipline. But if government continues to change the rules to bias the market in favor of irrational behavior, rent-seeking, and corporatism, the chaotic aspects of the system will continue to wobble out of equilibrium. Black swans will become commonplace.”

Max Borders in The Freeman

Thanks to Mike Martin for pointing out the piece.

Comment:

This is a nice piece pointing out how metaphors govern our thinking – we talk about the economy as it were a machine when it’s actually more like an  eco-system. Interestingly, Tom Wolfe made a similar point about the misuse of metaphors in Freudian psychology (for eg. the term repression, as though the body were in need of an outlet to blow-off steam).

But there are at least two things I object to here.

One is – greed isn’t rational self-interest. That’s a complete confusion of terms. Gordon Gekko-like greed is anything but rational. It’s compulsive.  The self has many other  interests and drives besides doing down other people. Rational self-interest is the prudent self-interest of “right reason,” as the Catholics call it. A well-ordered reason. Not one that’s the slave of your drives. It’s self=governing reason which produces genuine self-interest.

And two: sigh.  None of this was a black swan.  Taleb himself doesn’t claim it was, either.  Black swans only make sense in talking about  an un-manipulated world, I would think. Taleb was talking about the way risk is modeled. He says on his website that he uses the banks in his book as an illustration and then gives some quotes in support, which, he says he wrote between 2003-2006 (the book was published April 2007).

But Felix Salmon at Portfolio.com points out that his actual comments on Fannie in an interview before they went bust were quite vague.

However, the author of this piece is spot on in the rest of this comments.

I’ll try to  post my calls on this, not to prove I can predict the markets (I can’t), but to prove that we don’t have a market. We have a kind of rigged puppet show, which you can (sort of) predict, not because of any genius on your part, but because of the obviously crooked motives of of several leading actors. The only special skill you need for this is the ability to recognize propaganda.

I know I came across Fannie’s corruption when I was researching Goldman Sachs in July 2006 from the Washington Post which had a long series of excellent articles on it from 2004. So, how was this crisis unexpected?

Here’s my piece (from 2006)

“Most recently, regulators are looking into claims that Goldman (among others) helped managers at the US Federal National Mortgage Association (known as Fannie Mae) prettify their books to maximize performance bonuses at the company entrusted with keeping US home loans afloat. Which means that Goldman was center-stage not only in the credit and derivative booms, but in the housing boom too. (Goldman and the other firms deny wrongdoing.)”

My original investment report on which this article is based had much more on Fannie and I will post it here. I’m pretty sure there were plenty of  prominent people in the financial world who had already decided that Fannie was going to go bust. In fact, I think a lot of people had taken short positions on it.  I’m not sure how on that basis you could argue this crisis was a Black Swan.