Excerpts!
I continue to write these days beneath the shelter of my “drafts blog“. A big benefit of that is almost nobody reads it, so I feel much freeër to write. A downside is, well, almost no one reads it.
I thought I’d excerpt some bits from posts I’ve written since the last “drafts” roundup.
There are not yet comments on the drafts blog, so please feel encouraged to offer comments here. (I do mean to add comments to the drafts blog! But I am now desperately allergic to surveillant or potentially surveillant tech platforms, so I will have to implement them myself. It won’t be instant.)
Without further ado, some excerpts!
From Banks should fail much more often (2023-03-26):
The most important reason to prefer small investent funds, however, is because large-scale funds are stupid. Large banks and investment funds are stupid in a very particular, very destructive way. They rely far, far too much on “hard information”. They are evidenced-based. Fucking idiots!
At a large bank, it will never cut it to go before the loan committee and say “Yes there’s no collateral, and limited credit history. But I’ve known Duane and his family for a long time. They are serious and connected to the community, and the business plan is promising.” But it is exactly this kind of loan that creates the greatest social returns. The true source of economic development is speculative but discriminating monetization of human aspirations and capabilities. You turn people with nothing but a work ethic and a great idea into proud pillars of the community by making available the resources they require to succeed. The more a borrower lacks — the less collateral they have to offer, the further they are from holding a sexy degree from Stanford — the more social upside there is in their success.
The very best loans are the ones that cannot be justified at all in terms of hard information, but are made anyway on the basis of very good soft information. Big banks are simply unable to lend on soft information, due to bureaucratic imperatives, and a need to manage legitimate ethical concerns. (Is this “soft information” just nepotism? Are we “discriminating” on the basis of some hypothetical je ne sais quoi of investment quality, or is it really just race?)
From Financial regulation is just debt covenants (2023-03-24):
Fundamentally, private debt covenants and public financial regulation are the same thing. They are means by which creditors of leveraged firms try to ensure shareholders can’t loot them by building tripwires that allow creditors to usurp control from shareholders when shareholder risktaking threatens creditor interests. They look different, they take different forms, because private creditors can regulate within debt contracts that they sign, while the public sector offers finance primarily via guarantees, and so must impose its regulation outside of the contracts that borrowing firms and their notional creditors devise.
From Banks are not private (2023-03-21):
[P]eople spend far too much energy worrying about the cost of bank failures, and far too little worrying about the cost of bank survival… [T]he most costly forms of state support take the form of subsidies that the state can pretend are not “taxpayer funded”, but that impose quiet costs on the public anyway. Do you remember when the Fed retroactively rewrote millions of lending contracts so that banks could charge more interest and recapitalize? Do you remember when the nation debt doubled in less than four years, precisely so that large banks would not have to be resolved? Yes, Virginia. Bank failures, actually, are much less expensive than the things we do to fill holes in bank balance sheets so we need never acknowledge their failures.
From Unlimited deposit insurance (2023-03-12):
Treasury/Fed/FDIC say no losses will be borne by the taxpayer because they will levy a “a special assessment on banks, as required by law” to recover FDIC’s losses. But who, pray, will pay for that “special assessment on banks”? It is not an assessment on the personal wealth of bank managers or shareholders… Sure, there will not formally be a new tax to cover these costs. But in substance, the tax-paying public will experience higher expenses or foregone income. This habit of declaring “no new taxes” in form, while tacitly imposing taxes in substance, deprives the public of any capacity to design the tax, to shape its incidence, and to hold accountable those who provoke the costs the tax must recover.
From Libertarians and hierarchy (2023-03-08):
Libertarians share exactly the same pathology as university professors and the smiling residents of Marin County: They flatter themselves that they stand in opposition to vicious social hierarchy, and find true-enough narratives by which to spin their allegiances into support for equal dignity. But their actual practices, the institutions they inhabit and animate and from which they earn their succor, belie all that… [U]nder actually existing capitalism, Matthew effects rule the day. Markets may be notionally “free”, but past winners (humans, not just firms) have tremendous advantage. Certain classes of people understand that market arrangements are likely to continue to deliver to them security and abundance, but will sadly deliver those goods less adequately to other groups whose ongoing misfortune, despite occasional bootstrap stories, we can pretty well predict.
Markets, under these circumstances, become a locus of hierarchy, rather than a challenge to it.
From Dilution of faction requires voting system reform (2023-03-08):
David French argues we can “dilute the disruptive power of faction by allowing factions to bloom.” …[James] Madison counseled that factions should be small and many. But our single-winner, first-past-the-post voting system exerts a social gravity that pulls us into two, gigantic factions of similar size… If we want multiple factions, we understand how to design voting systems that encourage and support that, rather than the voting system we have, which punishes any divergence from two major parties… If you think democracy would work better with a more pluralistic ecosystem of factions…please specifically advocate voting system reform!
From Economists are such scoundrels (2023-03-06):
But when you learned about [Arrow’s Impossibility Theorem], I bet you didn’t learn that its original object was the impossibility of authoritative technocracy. Social actions cannot in general be ranked under the ordinal utility constraint economists impose upon themselves. Instead, you learned that it was about the impossibility of a good voting system… In other words, after struggling for decades to come up with a basis to make authoritative claims beyond politics, the economics profession realized by about 1950 that, at least on the terms they had prescribed for themselves, it was impossible. They had no criterion, and could have no criterion, by which they could elevate their conclusions as “scientific” and above the fray. What was to be done? Well, we know what they did.
They took the weapon they invented, this theorem that damned their own authority, and they pointed it at the rest of us. They stopped talking about the impossibility of ranking social actions, but loudly proclaimed their theorem foreclosed the possibility of coherent democratic choice.
From What is fascism? (2023-03-25):
The use of fascism as an epithet, as a kind of rhetorical “cooties” that discredits whomever can be somehow associated with it, prevents us from thinking clearly about a phenomenon whose roots go too deep to simply shun away.
Fascism…represents an approach to solving the key problem of modern nation-states: How do we build and sustain a capacity for effective social coordination over scales so large that people’s interests and identities are likely to be diverse and conflictual? …Fascism can be understood as a means of rendering permanent the clarity, conformity, and collective decisiveness that publics usually tolerate only when they perceive exceptional threat.
As they say, read the whole thing!
If you have nothing better to do. If you read this stuff at all, please understand that I am desperately grateful to you. Thank you always for your company.
Another term for the “Matthew effect” is “wealth condensation”, i.e., new wealth condenses onto old wealth. If you do a Google search for the phrase “wealth condensation”, you’ll see a lot of articles that use that phrase. Here’s an example quote:
Wealth condensation
Wealth condensation is a theoretical process by which, in certain conditions, newly-created wealth tends to become concentrated in the possession of already-wealthy individuals or entities. This is reflected in the common saying ‘the rich get richer and the poor get poorer’ . According to this theory, those who already hold wealth have the means to invest in new sources of creating wealth or to otherwise leverage the accumulation of wealth, thus are the beneficiaries of the new wealth. Over time, wealth condensation can significantly contribute to the persistence of inequality within society.
As an example of wealth condensation, truck drivers who own their own trucks consistently make more money than those who do not since the owner of a truck can escape the rent charged to drivers by owners (Even taking into account maintenance and other costs). Hence, a truck driver who has wealth to begin with can afford to buy his own truck in order to make more money. A truck driver who does not own his own truck makes a lesser wage and is therefore stuck in a Catch-22, unable to buy his own truck to increase his income.
Related to wealth condensation are the effects of inter generational inequality. It has been noted that the rich tend to provide their offspring with a better education, increasing their chances of achieving a high amount of income. Furthermore, the wealthy often leave their offspring with a hefty inheritance, jump starting the process of wealth condensation for the next generation.”
March 27th, 2023 at 3:35 pm PDT
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I’m not sure if you can see when those of us that use RSS feeds read your stuff – that’s my preferred method!
March 28th, 2023 at 12:46 am PDT
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I think the Impossibility Theorem tells us that public discussion and reasoning is essential to collective choice. The so called “dictator choice” can be interpreted as the choice arrived at through a process of public reasoning.
March 28th, 2023 at 7:20 pm PDT
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Exactly right on voting systems!!! A hobby horse of mine. I’m a big fan STAR voting. Expressive ballot, can get rid of primaries, minimizes the opportunity for strategic voting. I found this especially convincing.
March 29th, 2023 at 9:39 am PDT
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re: Fascism. Based on your definition, we only have fascist parties in this country. So yeah, I’d say it has something going for it.
March 29th, 2023 at 9:45 am PDT
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I am a newcomer to your blog, and really enjoying it so far. I arrived here by following a link to your “banking as risk-taking obfuscation” post (I don’t remember how you put it exactly).
You talk in your Banks should fail much more often post about an ideal world where we divorce payments and deposits from banking. Understandably, you focus on what banks would look like after the divorce, but what about those payments and deposits? I assume you envision a world where we all have accounts at the Central Bank? I’m just curious.
March 30th, 2023 at 9:33 am PDT
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Re: Banks should fail –
Former bank examiner here, and yes they should. But under the existing regulatory structure, senior regulators (e.g. regional supervisors and their direct minions) are subject to career risk if too many problems are found at their banks. Second, their is strong pressure to minimize smaller issues because they are not big enough to cause concern. A high-level DC Director asked a group of us (field examiners) once what he should say to a banker who says, yes, your examiners found something, but it is so small it really doesn’t matter. This was a serious question from him.
Also, with regard to what the “best” loans are, you may not realize that, until the advent of enforcement of fair lending laws (which began decades AFTER the laws were on the books), banks made loans based on the three ‘C’s: character, collateral, and cash flows. When FL laws began to be enforced, collateral and cash flows became dominant in order to protect against the very real risk of discriminating on the basis of “character”. It’s reasonably clear that your statement “But I’ve known Duane and his family for a long time” is not something that the majority of white people can say about any person of color.
Credit scores were an attempt to remedy this so that “creditworthiness” could replace “character” – but it is now pretty clear that while this “hard information” worked to tighten the quality of lending overall, it did not fully address the issue of discrimination.
All that said, I do agree that “The true source of economic development is speculative but discriminating monetization of human aspirations and capabilities.” The devil, as always, is in the details on how we get there.
Re: Debt covenants – not really sure I follow that one vis a vis the public sector “offering credit”. IMHO much of bank regulation is set up to avoid the need for the public sector to offer credit. If the public sector actually did offer credit (e.g. a truly national bank), then they would be in competition with the private sector. And god knows, we couldn’t have that level of socialism!
Re: Banks are not private – while I agree in many respects, I think you may be overstating the case a bit. Yes, closing failed banks is not so “expensive” in monetary terms (especially if done early and often). But there are non-monetary political costs as well. Keep in mind that for smaller banks (the FDIC has almost all of those) a bank closure is the responsibility of the regional office, often only when the state banking agencies request it. All along the way, lower-level examiners and higher-level supervisors engage in CYA by getting others, mostly on the same career tracks, to agree. So the process is inherently political (with both the small ‘p’ of office politics as well as, often, the larger ‘P’ of state and federal politicians getting involved – as they frequently do).
Re: Unlimited deposit insurance – I don’t really disagree, but I would note that UDI would be a practical and even possibly unnecessary move if banks, or even just deposits, were simply nationalized.
Re: Libertarians and the hierarchy – ummm…if you would add “a large chunk of the middle- and upper-middle classes” I would agree wholeheartedly. IMHO this is a very human trait that is much larger than economists realize.
Re: Fascism – while I personally abhor facism and the random use of the term, I think your best point is about how it is a response to the need for “effective social coordination over scales so large that people’s interests and identities are likely to be diverse and conflictual?”
IMHO much of what our world is struggling with is simply the scale at which all our institutions must function. There have never been so many people alive at one time, and we still are not very good at working with really large numbers. Structures that worked well at smaller population levels seem to be incapable of functioning well with this many unique personalities to govern (many of whom are not open to being governed b/c they feel entitled to special privileges).
Finally, I think you might be interested in this simulation from The Pudding. It is quite interesting and seems to explain the Matthew effect very well: https://pudding.cool/2022/12/yard-sale/
April 2nd, 2023 at 9:05 am PDT
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Wondering if you would say that the ‘State as coordination’ piece is basically aligned/similar to Althusser’s ideological state apparatuses?
April 9th, 2023 at 6:08 am PDT
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Re fascism: I find the whole subject mysterious. Singapore sometimes gets touted as having hallmarks of fascism because it has tight restrictions on democracy and a government that supports business. And yet Singapore carefully nurtures multiculturalism and economic openness with the rest of the world. I sometimes wonder whether the key distinction between good and bad governments is whether they have respect for and want the best for all their citizens whilst peacefully existing in the world.
April 11th, 2023 at 2:53 am PDT
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I’ve been enjoying the draft blog quite a bit. Thank you for writing these. In re: to the most recent entry, I wonder how you fit the idea of reparations into that? It’s touted as a means to correct a systemic failure, but it struggles to gain acceptance as a legit “solution” among liberals, libertarians, and conservatives alike. Is it a “good” solution? Does it really solve anything?
April 14th, 2023 at 8:44 am PDT
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