Stuff that caught my attention (STCMA) – 15th February 2019

Who would have thought that ‘The Economist’ would be forced to write a leader on the love of the millennials for socialism. I think, once again, the diagnosis is correct. But, the solutions are hackneyed. Capitalism has gone to extremes. Share buyback, financed by debt, and its brazen link to executive compensation are just an example.

Pity that an astute observer like James Mackintosh twists himself too much to exonerate or minimise share buyback. It is hard to understand how one has to be mutually exclsuive about these things. That is, one can be critical of share buybacks and one can also be critical of the other stuff that he writes. Why does it have to be EITHER/OR?

This is incredible. The story is about how some of the corporate bonds that the European Central Bank bought went bust barely a year later. Had it happened in India, all hell would have broken loose and the Reserve Bank of India would have either had to close down and then be reinvented or the entire management and the Board would have had to resign. But, there is barely an eyelid batted in Europe. They preach governance to us. Read these extracts:

Scores of banks and bond investors were freely lending to investment-grade rated companies on not particularly onerous terms back in 2016. Yet the ECB determined that jostling its way to the front of this queue would boost investment and create jobs. What it did create were immediate pricing distortions, with companies able to issue negative-yielding bonds for the first time — charging investors for the privilege of lending to them. …

This QE bezzle was sometimes dramatically revealed even while central bank bond-buying was in full swing. Months after the ECB bought Steinhoff’s bonds in 2017, it had to dump the position at half face value amid an accounting scandal at the retailer. [Link]

I do not think Indians are paying attention to what is happening in Italy although folks of Italian origin continue to make the news in Indian politics. Mateo Salvini, one of the two Italian Deputy Prime Ministers,spoke about seizing the gold reserves from the Bank of Italy. Again, had the Government in India spoken like this, the so-called elites will have concluded that India was doomed forever.

In the meantime, the other Deputy Prime Minister did meet anti-government protesters in France:

Italy’s Deputy Prime Minister Luigi Di Maio said he met leaders of France’s “yellow vest” anti-government movement on Tuesday, an encounter likely to further test already strained bilateral relations. [Link]

Interesting, isn’t it?

For economists who see ominous patterns in the world of numbers, one figure — 18 — is giving pause for thought. Last year, China, the world’s second-largest economy, accounted for 18 per cent of the global economy — just like Japan on the cusp of a decade of stagnation, and just like the Soviet Union shortly before it collapsed.

“In different ways, the USSR and Japan both stumbled when they faced the need to generate growth from more bottom-up, entrepreneurial, service- and network-oriented activities,” says Arthur Kroeber, managing director of research company Gavekal Dragonomics. “Despite a strong record of bottom-up dynamism, China is now moving in a much more statist direction.” [Link]

That leads to interesting political battles too:

Last month, the son of 1980s reformist leader Hu Yaobang warned that the USSR’s demise was due to overly centralised power and over-reliance on a planned economy, in a pointed swipe at Mr Xi. The son of reformist leader Deng Xiaoping has similarly warned that the country’s aggressive international stance could lead to danger. [Link]

The Free Exchange blog in ‘The Economist’ argues that a world without Facebook will be a better place. It might be hard to quarrel with that, even for FB users.

Recommended reading – 10th Feb 2019 edition (part 2)

We need positive change to avoid climate hell. Can we? Colour me sceptical.

This is grim stuff:

Total student loan debt rose 161% for people aged 60 and older from 2010 to 2017—the biggest increase for any age group, according to the latest data available from TransUnion.

Between 2010 and 2017 people in their 60s, like most other age groups, accelerated their borrowing in nearly every category, according to the TransUnion data.

Seniors are finding they have to work longer, holding onto positions younger adults might otherwise receive. They’re relying on credit cards and personal loans to pay for basic expenses. People 65 and older account for a growing share of U.S. bankruptcy filers, according to the Consumer Bankruptcy Project; unlike most consumer loans, student debt is rarely dischargeable in bankruptcy. [Link]

The DNA kit can and did unravel families. What will happen if it becomes ubiquitous in India? Absolutely fascinating reading.

A fiction explores the dark side of Sweden. FT has a book review on it.

A friend forwarded this Brookings blog post on ‘joyless growth’ in India, China and in America. I think it is mostly right.

Jason Gay thanks Katelyn Ohashi for her perfect and joyful 10 in the floor gymnastic exercise. She deserves it every bit. Watch the 2 minute video embedded in the article.

Bolsonaro should beware the asymmetry

This story in Bloomberg on the new Brazilian President’s plans to relax the country’s strict gun-control laws reminded me of the note I had written with my friend and co-author Gulzar Natarajan on asymmetry in economics and in public policy.

His claim is that the country’s strict gun-control laws have not really ended violent crimes. May be. But, relaxing them might well raise them substantially. That is the asymmetry that he should be mindful of.

De-globalisation and cultural marxism

Rana Foroohar has a well-written piece in FT on how elites are failing to see deglobalisation coming. It marshalls facts to show that ‘elites’ may be misreading or not reading the situation at all correctly.

Personally, the useful thing about the piece is that it cites research on elites’ strengths and weakness in cognition. The biggest weakness is overconfidence and that negates all other strengths in my view.

Since, we all come under the category of ‘elites’ as per the definition – it is not just material wealth or positions of power that determine ‘elite’ status – we must beware of the weakness in ourselves.

The paper cited by her can be accessed here.

This is a good time (make it, ‘great time’) to be a student for the world is in a churn/inflection point. One order is gone or is going and the other order is trying to establish (or, re-establish) itself. I am not even saying if it is good or bad. It is inevitable.

The pendulum will keep swinging from one fashion to the other. That is what Rana Foroohar’s article is hinting it – it is back to nationalism-socialism now. I think there are some common elements between Nationalism on the Right and Cultural Marxism that Anthony Mueller writes about here. Both don’t like markets, competition and both are elitist in their own ways.

Some of his observations, well-known, bear repetition:

Communist authors spread the insight that the socialist dictatorship must come in disguise. Before socialism can succeed, the existing culture must change. Control of the culture must precede political control.

His observation that cultural Marxism is dictatorship of the intellectuals is quite apt and spot on.

Unfortunately, for India, all of these have adverse implications both culturally and economically. In the Indian context, we need less of socialism for the economy (from our starting point) because, in practice, it has always meant state control over assets and incomes and their utilisation or distribution. The state’s record in that is not pretty. It has neither brought about equity nor prosperity.

With respect to cultural Marxism, it has the potential to wreak moral destruction of the individual through its attack on the dominant culture and religion in the country. Thus, India faces twin risks, in this regard. The following paragraph appears pertinent in the Indian context:

The way toward the rule of the cultural Marxists is the moral corruption of the people. To accomplish this, the mass media and public education must not enlighten but confuse and mislead. The media and the educational establishment work to put one part of the society against the other part. While group identities get more specific, the catalog of victimization and history of oppression becomes more detailed. To turn into a recognized victim of suppression is the way to gain social status and to obtain the right to special assistance, of respect and social inclusion.

Anthony Mueller identifies at least two weaknesses in cultural Marxism: one is that it is utopian in nature and because of its inherent nature of promoting group conflicts, it cannot grab political power. Presumably because it divides and does not assimilate or integrate to form a coherent and powerful electoral or voting bloc. He does not discuss ways and means to exploit those weaknesses to nullify the effectiveness or mute the appeal of cultural Marxism.

Worrying and dangerous times for the world and for India.

Soulless capitalism is now global

In the last three years, CEOs’ combined compensation has expanded at a compound annual growth rate (CAGR) of 18.3 per cent, against 13.3 per cent growth in corporate earnings, 4.8 per cent CAGR in net sales and 10.1 per cent annual rise in the total salary and wages bill. [Link]

There are at least seven top executives among listed companies who earn more than a thousand times the compensation of their median employees….The gap at the very top of this ranking was actually higher in this larger sample, with the top executive earning over 25685 times the pay of the median employee.

The top companies in terms of this difference for 2017-18 include information technology, auto and engineering companies.

There are also no women in the top ten list of remuneration multiples for either year. [Link]

The above two are from Indian corporate sector!

Nearly 50% of the US Foreign Direct Investment Income for the United States come from five tax havens. In other words, profits-shifting by US corporations overseas is rampant. [Link]

Gabriel Zucman, Professor at University of California, Berkeley, author of the paper above, has this to say:

If globalization means ever-lower taxes for the rich and for multinational companies, and ever-higher taxes for those who presently don’t benefit from globalization—for retirees, for small businesses—then it’s a scam. It doesn’t work. [Link]

Check out this discussion of a paper by Thomas Piketty published in April 2018. The link to the paper is here.

Piketty says that both the Left and the Right mainstream parties have been captured by elites – intellectual or moneyed or both. He takes three countries – US, UK and France. So, the only option left for the people is to go with the populists because there is no consideration for their concerns in the mainstream parties of the Left and the Right. It is not about the Left vs. Right but Globalists vs. Nativists. Makes sense.

Instead, both the left- and right-wing parties have come to represent two distinct elites whose interests diverge from the rest of the electorate: the intellectual elite (“Brahmin Left”) and the business elite (“Merchant Right”). Piketty calls this a “multiple-elite party system”: the highly educated elite votes one way, and the high-income, high-wealth elite votes another.

There is a very good summary of the critique of the Piketty paper and other related papers by Thomas Edsall here. But, I personally believe that Piketty is on the ball here, notwithstanding the neglected role of race in Piketty’s analysis, as his critics charge.

I don’t think it is a white vs. black thing in America or white vs. non-white (black or brown). It is about ‘globalists’ and ‘nativists’ as Piketty put it. Globalists are comfortable with racial and religious minorities and immigrants as they see these minorities as similar to them although they are not in economic terms. Far from it. It assuages their guilt at being self-centred globalists, unrooted locally and unconcerned about local issues where they reside.

Thomas Edsall’s NYT article had a link to this very interesting sounding paper, ‘Why Hasn’t Democracy Slowed Rising Inequality?’. The paper is co-authored by four  academics and can be found here. Have not read it yet.

On a related note, the interview with Dani Rodrik, also by promarket.org, a month before the discussion of the paper by Piketty took place is also interesting. In this interview, Dani Rodrik distinguishes between economic populism (‘good’ populism) and political populism (‘bad’ populism).

He defines economic populism, in the context of the United States as follows:

Today in the US, economic populism would take the form of bringing the financial sector down to size, reducing the influence of Wall Street in political institutions, and having much greater regulation of the financial sector. It would mean taking aim at concentrations of power in high-tech and digital industries. It would mean taking aim at our current pattern of trade agreements, which often privilege particular corporate interests and investors. [Link]

Gulzar Natarajan deal with some of the elements of ‘economic populism’, as outlined by Dani Rodrik above, in our forthcoming book, ‘The Rise of Finance – Causes, Consequences and Cures’.

As for market concentration, high-tech and digital power, lest we forget, here is the story of Barry Lynn of (formerly) the New America think-tank who was fired (in 2017) because they had dared mention Google by name:

In the run up to that event, the leadership at New America became very concerned about the fact that some of our work was focused on Google, and they asked us to maybe add different people to the panels, to frame panel discussions in different ways, to give them a heads up, to let other organizations have a say in what we’re doing. That had never happened before and it was very clear that it had to do with Google. Because we’ve done events in which we’ve really hammered Wal-Mart or Anheuser-Busch or Amazon, and there were no problems. But that event, it was the fact that we were mentioning Google by name that got people really upset. [Link]

UNCTAD’s annual report for 2017 presents the evidence for and the consequences of market concentration:

Concentration has increased markedly in terms of revenues, assets (both physical and non-physical), and market capitalization: in 2015, the combined market cap of the world’s top 100 firms was 7,000 times that of the bottom 2,000 firms, whereas in 1995 the same multiple was 31. At the same time, the share of surplus profits grew significantly for all firms in the database, from 4 percent of total profits in 1995–2000 to 23 percent in 2009–2015. For the top 100 firms, the share of surplus profits grew from 16 percent of total profits in 1995–2000 to 40 percent in 2009–2015.

The trend toward concentration, the authors note, has not extended to employment. Between 1995 and 2015, as the market cap of the world’s top 100 firms quadrupled, their share of the job market didn’t even double… [Link]

There is a counter-argument that much of the surplus that accrues to market concentration is not rent but due to technology leadership and productivity. But, it is strange that such critics do not acknowledge that both arguments need not be mutually exclusive.

A former Google Scientist tells Senate to act over Google’s unethical and unaccountable China censorship plan. Bravo!

Finally, this review of Walter Scheidel’s book, ‘The Great Leveler’ is worth a read. I had not heard of the book until my good friend Ajit Ranade mentioned it to me. Walter Schidel, I understand, thinks that violent levelers have been more often the answer to inequality – Four Horsemen’ – warfare; revolution; state collapse; and pandemics – have been the primary mode through which income levelling has occurred throughout history.

Despite overwhelming evidence, this LSE blog expresses the hope that peaceful levelers will achieve the job as they have done sporadically and feebly in a couple of minor instances.

But, let me end this blog post on that hopeful note.

“Dictatorships do not grow out of strong and successful governments, but out of weak and helpless ones” and other links

On September 15, 2008, Lehman Brothers filed for bankruptcy. That marked neither the beginning nor the end of the financial and economic crisis of 2008. Yet, there has been such a deluge of coverage in the last one week of the crisis. That is part of the crisis. Excessive event-oriented attention that does little to improve the process.

Central bank hubris and complacency and the ‘Rise of Finance’ (the title of an upcoming book authored by Yours Truly and Gulzar Natarajan) played a part in the 2008 crisis. They are still around and alive. The world is unprepared because of the protagonists of the crisis of 2008 are unrepentant. That is the burden of my column in MINT on Tuesday.

Ben Bernanke summarises his own research published by the Brookings Institution (he is a Senior Fellow there) in this post. He is partly right. I have alluded to that in my column above. Why did the financial panic become global? The role and the rise of Finance have a lot to do with it. He does not go there. That is where my column went.

It is obligatory to refer to the piece that Paulson-Bernanke-Geithner wrote because it contains nothing of meaning except this passing ‘mea culpa’ reference:

Although we and other financial regulators did not foresee the crisis, we moved aggressively to stop it. [Link]

It is instructive to see the links that come up below the article. They sum up the failure of their post-crisis efforts too:

NYT Headers.png

Staying with Ben Bernanke and his former colleagues, we note the speech by Peter Fisher (not to be confused with Richard Fisher, former President, FRB Dallas) at James Grant’s Symposium last year. Peter Fisher has served in the U.S. Treasury and in the Federal Reserve. See his profile here.

A key extract from his speech delivered in March 2017:

Curiously, the Fed has acknowledged no failures. All the experiments have been successful, every one: no failures, no negative side effects, no perverse consequences, only diminishing returns.

The third claim, inviting us to imagine how much worse things would have been had the central banks not done exactly what they did, suggests exactly the opposite of the scientific method and a striking lack of imagination. It implies that the only other possible courses of history would have been worse. It leaves no room for perverse consequences or negative side effects. It claims the counterfactual all to itself, leaving no room for doubt….

… So, as I see it, forward guidance is the process through which the Fed – through its more explicit influence on the expected rate of interest – becomes the much more explicit owner of the “conventional valuation” of asset prices.

One person who referred to this speech is John Authers of FT. His remarks:

Ten years ago many of us, myself included, thought a rerun of the Great Depression was very likely, and some of the actions taken in desperation during the crisis hold up slightly better than might have been expected. But long waves of monetary ease, fiscal austerity, and legal leniency for the guilty did not need to follow from this, and have left the bulk of the populace angry and embittered. [Link]

What John Authers has done in the piece linked above is something similar to what I am attempting here. He has linked to several pieces of writing on the crisis. The good thing for you, dear reader, is that his coverage and mine have only few common elements. So, if you read this blog post and his column, you will have covered a pretty good range of the writings that marked the 10th anniversary of the global financial crisis.

But, pieces such as these were not very common. We have another one by Peter Doyle, former IMF staffer in FT Alphaville. A key extract from his post:

But these ex-firefighters cannot bring themselves to say — though let’s hope it hasn’t entirely escaped their attention — that: public debt has more than doubled, curbing critical fiscal capacity (even if only due to political constraints) to respond in future; that policy interest rates are barely off their floors and QE is barely off its ceiling, so they are not much in reserve for the future either; that banking concentration has increased since pre-crisis; that no-one has any idea if international bank resolution frameworks will actually work in the heat of battle; and that the whole policy response to the crisis has emphatically underscored to big institutions that they will collectively be bailed out — spurring herd, concentration, and moral hazard behavior further. Focussing only on policy actions taken (raising the flood barriers) and ignoring the increased moral hazard and other impairments arising from the crisis response itself (the higher tide), everyone wants to agree that things are “safer” now; but absolutely no-one wants to be asked if things are safe.

However, I believe that Peter Doyle lets bankers off too lightly. He does not ask the question that John Authers asks. He is dismissive of the fact that no real big cat banker went to jail.  Peter Doyle is happy with political accountability.

Also, I am not quite sure that China bailed out the world economy and that they did it out of their generosity or enlightened public interest. Of course, policymakers who were part of the G-20 deliberations at that time tell me that those who had the capacity to stimulate were asked to stimulate their economies (those with external surpluses). China had one of the largest external surplus.

But, central bankers have their defenders too. A prime example is Neil Irwin of NYT. The header of the article gives the story away:

The Policymakers Saved the Financial System. And America Never Forgave Them [Link]

It comes across as a pathetic attempt to paint policymakers as victims of irrational, ungrateful lynch mobs.

I think Peter Fisher demolishes the argument that they saved the world. Assuming that American policymakers did indeed save the world, the question that comes to mind is this:

If a firefighter puts out the fire dousing the house with water, one will be thankful. But, what if he continues to douse the house with water, long after the fire is put out?

Joseph Sternberg in Wall Street Journal asks the right questions:

After decades of financial transformation, globalization and policy experimentation, central banks know less than they used to about the effects they have on Main Street. It’s likely to be some time before we figure out what central banks actually did to the economy after the Lehman crisis, let alone whether it worked. [Link]

He says that central banks lost control of the transmission to the real economy after the 1970s. Quite true. They never admitted to it. The change happened with the Rise of Finance as banks created money (credit) plentifully since then.

Matt Stoller of the Open Markets Institute contrasts the Roosevelt bailouts with that of Geithner-Obama bailouts. He says that the Paulson-Geithner-Bernanke bailout eroded the social contract that lies behind the capitalist America – home-ownership. He has a pithy quote from Roosevelt:

In 1938, Franklin Delano Roosevelt offered his view on what causes democracies to fail. “History proves that dictatorships do not grow out of strong and successful governments,” he said, “but out of weak and helpless ones.” Did the bailouts of ten years ago work? It’s a good question. I don’t see a strong and vibrant democracy in America right now. Do you? [Link]

I have to agree with Franklin Roosevelt there. Obama administration is responsible, in more ways than one, for the economic and social polarisation of the American society.

Anand Giridhardas takes a different but related line about the elites (ht: Rohit Rajendran). The burden of his song is that philanthropy is a very poor (even morally wrong) substitute for self-aggrandisement of the elites in their normal lines of business or commerce. Quite true. Their true philanthropy will come through or should come through in the manner in which they run their businesses and treat their employees. You can read his interview and his article here and here.

But, the interesting thing – no fault of Giridhardas – is that he has very few cogent answers’ to elite aggrandisement. His ideas – assuming student loans and doing some affordable housing – sound too naive. I do not blame him. That is the nature of the world. Even democracy is only a symbolic fig leaf for the dominance of the elites. It gives the ordinary folks a belief (false) that they have a stake in the process and they shape it. It is far from the truth. They benefit when the tide is so big that it lifts all boats. But, they fail to notice that some of the boats are lifted higher and those are bigger and more powerful boats too. The second time their needs get some attention is when a crisis like the ‘Great Depression’ strikes.

In a way, by preventing the ‘Great Depression II’, the crisis managers – Paulson, Bernanke and Geithner – prevented meaningful benefits and better lives for the ordinary masses which Teddy Roosevelt managed to deliver using the Great Depression as the trigger.

Barry Ritholtz, a bear (Pre-2008) turned bull (post-2008) has a short and pithy column on ten things that people still get wrong about the crisis. One tends to agree with most of what he had written. Talking of Barry Ritholtz, one should read this column by Joshua Brown (ht: Rajeev Mantri) who had commented on how he met Barry and benefited. The column is about how intellectually open-minded Bary was (and, if I may add, lucky) after the crisis and turned bullish. That merits a separate blog post. I shall do it after this one.

Aaron Brown of AQR Investments wrote (ht Rajeev Mantri) in Bloomberg that crisis autopsies asked the wrong questions. He wonders why banks accumulated illiquid assets, cut loan-loss reserves and raised dividend payments after 2006 when the problems were beginning to manifest already. That could be due to poor risk management, complacency and indefinite extrapolation of near-term optimistic trends.

In India, Ila Patnaik could not resist taking potshots at RBI for claiming to have handled the crisis fallout far better than other countries did. But, that is true. Not only did RBI do well in the immediate aftermath but some of its pre-crisis measures are only now becoming de rigueur in the Western world.

This sentence is too clever by half:

It (India) was at the other end of the spectrum, where instead of worrying about sophisticated derivatives products being traded, most derivative products have restrictions, or are banned, and the bulk of the population has no access to bank loans. [Link]

It is too clever because ‘non-access to bank loans’ is a serious problem but not trading derivatives is not. It is gambling by another name. Putting both in the same sentence or mentioning them in the same breath is to draw an utterly false equivalence between the two.

If India had absorbed the lesson from the crisis that financial sector liberalisation had to be pursued even more deliberately than before, it was then a lesson well learnt, unlike what Ms. Patnaik thinks.

Niranjan Rajadhyaksha (now with IDFC Institute) wonders if there is so much a need for a new economics as there is one for a dialogue between different schools of economics, in the wake of the 2008 crisis:

Too many critics have lazily equated modern economics with a certain style of macroeconomic thinking that was dominant in the financial markets as well as in central banks, especially the ability to forecast future outcomes. It is a bit like criticizing all of modern medicine because oncologists are not yet capable of predicting when cancer will strike. [Link]

He praises Olivier Blanchard for intellectual honesty. But, Blanchard has not deviated from the Washington – New York consensus as much as he made us believe that he has done so. Niranjan’s praise is not fully earned, yet.

Ira Dugal has a good conversation with Dr. Subbarao, who stepped into RBI and stepped into the crisis, into G-20, etc. His entire tenure was marked by a series of global and local crises. Her interview with Dr. Y.V. Reddy is here.

My favourite academic-politician Yanis Varoufakis was part of a panel of experts whose views ‘The Guardian’ newspaper sought. I had not read all their views. But, here are his proposals to make the world better:

What should be done? First, we need a global green investment programme to put the global glut of idle savings to useful purpose. A multilateral partnership of public investment banks could issue bonds in a coordinated fashion, which their respective central banks would support in the secondary markets. In this manner, global savings would be energised into major investments in jobs, the regions, health and education projects, and the green technologies that humanity needs.

Second, trade agreements must commit governments of poorer countries to minimum living wages for their workers. Third, we need a new Bretton Woods agreement to rebalance trade, re-couple trade and capital flows, put the financial genie back in the bottle, and create an international wealth fund to alleviate poverty and support marginalised communities across the world. [Link]

His ideas make sense to me. But, that also means that they won’t be taken up seriously. Comments by rest of the panel also, at the headline level, make sense. But, one has to dig deeper. I have not done that.

The panel by FT – a novel one – was not a panel. It simply asked seven people as to how their lives changed post-crisis. Each one was interesting and human in its one way. Comments by Nick Bayley, who was the Head of Regulation at the London Stock Exchange are appropriate in this context.

This episode alone would make for an interesting case-study:

I was on the Sunday night conference call on September 14 2008 when Paul Tucker from the Bank of England told representatives of all the big City firms and infrastructure that the Barclays acquisition of Lehman had failed, and Lehman was going to go down the pan the following morning.

It was just a monumental time. Lehman was a global titan. The idea that it would collapse was unthinkable. We knew there were issues in the market; prices were all over the shop. But we went into that weekend assuming that someone would step in and a deal would be done.

There must have been 30-odd institutions on that Sunday night call. When Paul told us that Lehman would go down the next day, nobody said anything. He said he wanted to go around the call and hear that we were ready and this wouldn’t cause a problem. He said he’d start with the London Stock Exchange, so I was the first person to speak.

When in doubt, keep it short. I made a few noises about Lehman’s important role in the equity markets and that we have default rules that come into play, and then I shut up. We went around the call and everybody said the same thing. Nobody told Paul Tucker, ”This is going to cause huge problems, and there will be a major domino effect.” [Link]

No one says what every one knows to be true because no one wants to be the bearer of bad tidings! Nor does Paul Tucker probe them (based on this recollection here, of course).

Andy Kessler (I have read one of his books but forgotten which one it is!) has a good piece on the politics of the collapse of Lehman Brothers. His concluding words:

There is more concentration in banks today than pre-Lehman. They’re better capitalized with better reserves, but it’s still fractional reserve banking. And the shadow banking business that got drenched in derivatives may be larger today than it was before the crisis. Leveraged loans are rampant. That doesn’t point to stability.

In downturns, equity hurts but debt kills. Like an electrode-implanted rat that can’t stop pushing a pleasure lever, banks will lend until they implode. A decade ago, the Fed failed as the lender of last resort. It’s still failing at preventing the next crisis. [Link]

This is the best quote (by Nick Bayley) to end this blog post:

We live in a bubble in financial services. Anyone who tells you otherwise is probably kidding you. We get paid more than most industries do. Do we deserve it? Not in my view. Are people much cleverer in financial services than in other industries? No, not in my view.

Kissinger on Artificial Intelligence

I am no fan of Henry Kissinger. One cannot be, after reading ‘The Blood Telegram’. But, his comments on Artificial Intelligence were very thoughtful. They were written in ‘The Atlantic’ three months ago. I do not know why I never got around to posting the extracts from that article here, although I had saved the extracts for posting as soon I had finished reading that piece. Today, when I read the well-written review of Yuval Harari’s latest book by Manu Joseph in MINT, I resolved to post it here today:

Inundated via social media with the opinions of multitudes, users are diverted from introspection; in truth many technophiles use the internet to avoid the solitude they dread. All of these pressures weaken the fortitude required to develop and sustain convictions that can be implemented only by traveling a lonely road, which is the essence of creativity. ….

………….  Before AI began to play Go, the game had varied, layered purposes: A player sought not only to win, but also to learn new strategies potentially applicable to other of life’s dimensions. For its part, by contrast, AI knows only one purpose: to win. It “learns” not conceptually but mathematically, by marginal adjustments to its algorithms. So in learning to win Go by playing it differently than humans do, AI has changed both the game’s nature and its impact. Does this single-minded insistence on prevailing characterize all AI?…

…….  Through all human history, civilizations have created ways to explain the world around them—in the Middle Ages, religion; in the Enlightenment, reason; in the 19th century, history; in the 20th century, ideology. The most difficult yet important question about the world into which we are headed is this: What will become of human consciousness if its own explanatory power is surpassed by AI, and societies are no longer able to interpret the world they inhabit in terms that are meaningful to them?

…………  Ultimately, the term artificial intelligence may be a misnomer. To be sure, these machines can solve complex, seemingly abstract problems that had previously yielded only to human cognition. But what they do uniquely is not thinking as heretofore conceived and experienced. Rather, it is unprecedented memorization and computation. Because of its inherent superiority in these fields, AI is likely to win any game assigned to it. But for our purposes as humans, the games are not only about winning; they are about thinking. By treating a mathematical process as if it were a thought process, and either trying to mimic that process ourselves or merely accepting the results, we are in danger of losing the capacity that has been the essence of human cognition….

….. the scientific world is impelled to explore the technical possibilities of its achievements, and the technological world is preoccupied with commercial vistas of fabulous scale. The incentive of both these worlds is to push the limits of discoveries rather than to comprehend them. [Link]

So, what did Manu Joseph write about Artificial Intelligence that triggered this post?

To draw our attention to the impending darkness, Harari mentions a chess contest that was held in December last year. One of the contenders was known to chess players around the world. Stockfish, believed to be the world’s most powerful chess engine, is a computer program that has been designed to analyse chess moves. No human has a chance to beat it. Stockfish played AlphaZero, Google’s machine-learning program. The two programs played a hundred games.

AlphaZero won 28, drew 72 and lost none. The programmers of AlphaZero had not taught it chess; it learned on its own—in 4 hours.

Google’s claim of “4 hours” is actually a bit dramatic and opaque.

Also, AlphaZero has been training through such powerful devices that we should not try to comprehend “4 hours” in human terms. Harari, despite being a historian, is not concerned with the nuances of it all. He wants us to be scared. All things considered, it still is extraordinary that AlphaZero could teach itself chess and become the best chess player in the universe known to us. Harari uses such events to point to the future when machines will do almost all human tasks.

It is fitting (in many ways) to end this post with a link to the article by Nicolas Carr published in 2008 on whether Google was making us stupid. Now, we know the answer or do we?