Leveraging anew

With a new year looming and with a coming change to the political and economic landscapes, the tone of the blog will need to adapt. All things are not by nature fraudulent (made-off shows the need for due diligence, but some people are trustworthy - yes, Boy Scouts, for one). Too, some know how to handle the map/territory problem.

So, let's start with leveraging (and its associated fiction). Earlier posts seem like diatribes in some cases, as they were not complete. As an aside, that is one drawback of the blogging paradigm; as, even with extensive linking, coherence is not as readily attained as it can be in sequential text.

Leveraging is not bad, in itself. After all, we have used the lever since Archimedes explained the principle and use. But, financial types went overboard with leveraging many times, including in the great market drop of 1929. Laws were put into place to limit using debt for things that were highly risky. These laws seem to have been forgotten, of late, as fairy dusting allowed magical returns to become realistically expected. Then, we had a mess; made-offing was the most recent example.

Friedman, in a recent article, noted that we need an ethical as well as a financial bailout. He used "I'll be gone" to describe a syndrome related to leveraging. In short, we had people thinking that someone else would have to clean up their mess. Why care about it when the perpetrator was long gone? (Yes, CEOs as diaper messers (we've said it before)). Friedman said that Madoff was the "cherry" on this cake of ours.

By the way, the article notes that we were not walking our talk. We were trying to shovel the 'casino' of capitalism under the rug while telling everyone else that we're the best.

One could probably argue that leveraging went awry due to misunderstandings. A common theme here is that computational and mathematical ideas have been interloped and used to screw things up. Take what we learned from the Modigliani-Miller theorem in which a type of equivalence is shown between debt and equity (to put it loosely). Gosh, folks, just look at the list of assumptions. A whole bunch of economists have built careers just looking at implications of this list.

One that we'll quibble about is the efficient market bit of fairy dust. Too, MM deals with a firm, yet who is usually a large holder of equity. The public, consumers all!! Yet, we counsel them to not indebted themselves in order to play the market (or used to, as a lesson from the Great Depression).

In short, there are intrinsic differences twixt equity and debt that MM does not eliminate. The discussion here would ask how anything wrong for those behind the firm could not hold in the collective. You see, look at the tranche mess (where crap was gathered, sliced/diced, then rated to not smell).

Okay, now, to look at an example of leveraging financially, consider the mortgage. Some of the older folks like to pay cash, for whatever reason, for their houses. Or, we saw movement of monies this way from sales in high-valued (using the term advisedly) area to a buy in a low-valued area (think CA to AZ, if you would). But, let's consider a normal situation.

If you want to buy a house with some form of down payment and then make periodic payments, that loan is a type of leverage. You will have some equity, with a lien, of course, and enjoy current benefits based upon future payment. One assumes that the future payment requirements will be met. Also, various risks are handled with things like home-owners insurance. All in all, this model has worked well for millions over the years. One could think of several examples like this. Perhaps, an enumeration of these would be a good thing to do here.

But, there are many things that went wrong. Such as, allowing leverages to be built (almost ad nauseum) upon leverages which is very suspect, just by definition. As well, some were put into mortgages without having the means to pay. We'll look at all of these at some point.

Remarks:

04/03/2011 -- Tis tranche and trash.

11/22/2010 -- Tranching, under the guise of securitization? Silly games.

11/02/2010 -- Two years later, the message is the same, except some changes have occurred. Of real note is that the jobless rate is high; out-housing really set up for that. Also, we need to re-look at that learned from the 'vons' guys, Ludwig and Friedrich. See Near Zero.

03/03/2010 -- Applies to the debate about MM and equity/debt.

10/14/2009 -- Knowledge can, and ought to, be leveraged.

08/18/2009 -- As promised, FEDaerated is here.

07/23/2009 -- After the bust and the rebound, toxic assets are still a problem due to tranche realities.

Modified: 04/03/2011

Leverage and truth

Context: See Tru'eng anew, focus going forward, mathematics.

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As said before, some of the financial methods lead to fiction, and leveraging is one of these. Let's look at the problem.

According to the Modigliani-Miller theorem, capital structure is immaterial given certain conditions, such as the presence of an efficient market and absence of information asymmetry. There are other factors but notice how the two stated conditions are extremely abstract and wishful. In terms of the first, efficient market, computation is thought to be key. But, too, we need things like Sarbanes-Oxley for the second.

So, what is the point? Well, a lot of the recent problems came from the use of leverage. It used to be that there was caution about margin trading. Using Bill Buckley's concept, 'Stop', that is, don't borrow to speculate. And, the issues have not all been resolved; many are concerned about amount of margin trading that is extant in the current market.

The point is not to argue against modern trading schemes, such as the futures market, much of this goes back to something real; rather, some realism needs to be imposed. The arguments would probably follow closely those related to monetary standard (for example, gold) that is other than the current illusory one (the Fed can print at will).

Taking one recent example, the Fed's low rate allowed cheap short-term borrowing. Many borrowed to create long-term instruments which were inflated via 'magic' from their native junk state.

Well, some fundamental change is required. Supposing someone's hot idea needs funding with cheap money (will that become a rare commodity?). The original source of the funds ought to share in the take, to boot. What about risk? Well, in some cases, the original loaner lost when risk, that was supposedly filtered out, came down the line.

Reinsurance (ah, yes, AIG comes to mind; we had all the risks handled, didn't we guys? 10/26/2008) is supposed to help with some of this. But, how often of late have we seen people puzzled that the model broke down under severe stress such that what was supposedly good showed its junk-ness.

The discussion will continue.

Remarks:

01/05/2015 -- Renewal, see Context line.

11/22/2010 -- Tranching, under the guise of securitization? Silly games.

11/02/2010 -- Two years later, the message is the same, except some changes have occurred. Of real note is that the jobless rate is high; out-housing really set up for that. Also, we need to re-look at that learned from the 'vons' guys, Ludwig and Friedrich. See Near Zero.

10/06/2009 -- Near zero applies to this discussion.

06/17/2009 -- Michael Milken says that structure counts (see WSJ article). Remember, the theme here is that a lot of securitization is bunk, many times. Sheesh, talk about a perpetual motion machine, always moving monies from the pockets of the hapless to that of the fat cats.

03/01/2009 -- Sufficient time has elapsed to allow things to unfold in ways that are of interest to our analysis.

12/18/2008 -- Leveraging, in and of itself, is not bad.

10/26/2008 -- Yes, things fell apart for several reasons: fiction, leverage, and more.

03/31/08 -- This post took little steps in looking at problems related to leveraging, somewhat feeling the way. However, the concepts of leveraging and de-leveraging are found used more often now in books and articles that look at current financial problems.

Modified: 01/05/2015

Islamic Finance

As we watch things unravel due to influences, such as leveraging and gaming, and observe discussions about how to get stable, we might consider that the big 'T' issues might bear some of our attention, at some point.

In the meantime, we might learn something from Islamic Law which does deal with banking (and finance). Speculation is verboten as is usury.

Business Week (11/24/08) wondered if "Islamic Finance may be on to something." But, the focus of the article was on how Islamic banks fared in the current situation of toxic debt. Well, "excessive debt" is not allowed.

One has to wonder how the western mind came up with the notion that leveraging was creative. Clever it may be; yet, stupid is another way to characterize the propensity to gamble away one's future.

Sharia-based methods do not mean not-modern, witness the debit-card offered by Mastercard that is compliant.

By the way, search at Business Week on 'Islamic Finance' and read more, if you are interested.

The current set of oops that is due to mis-cues, poor thinking, mathematical-malfeasance, greed, etc., cannot be other than a lesson on how not to do it. We do know how.

Remarks:

11/21/15 -- Why-does-the-Islamic-banking-system-not-charge-interest-on-loans-and-advances-What-are-their-alternative-sources-of-revenue?

10/17/2011 -- If we're to challenge Harvard on its duty, then we'll need to beef this up. For one, is education only operationally important, measured in bucks? Ah, so much to discuss.

06/20/2009 -- The Economist reports on an attempt to build a "truly global Islamic bank."

02/03/2009 -- It would do well to consider how the Islamic culture can add to the capitalism/socialism debates. One start might be to read about Islamic Economics, such as this insightful look at command versus free enterprise, albeit with other influences at hand.

01/18/2009 - We even need to look at why we need finance.

12/18/2008 -- Leveraging, in and of itself, is not bad.

12/01/2008 -- AME Info asks: Are Islamic banks the financial institutions of the future? There are two attributes of importance, elsewhere covered in these posts: asset-based system, closer to the real economy. The former pertains to the leveraging issue, in part. The latter has to do with the abstraction-phile leanings of the western mind as well as the fictional flavorings.

Modified: 11/21/2015

Greek to many

As mentioned before with the topics of fiction and leveraging, there needs to be some time occasionally where things lay quiet during a catch-up activity, such as looking more deeply into the recent advances (if one could call them that) of finance. Given that the gaming behind the market is mathematically colored and given that we need to get technical, some time will be spent immersed in details of the CBOE and related efforts, such as Options Monster.

Today, volatility was the theme that has a few interesting twists in its influence on the pricing of options. So, to look at that, we need to start with "the Greeks" and the related etiology.

All one has to do is consider the strategies related to option trading (pages and pages of tables) to see the relation to gaming.

Our future, in general, requires better than that albeit that many do support themselves quite well through the auspices of CBOE, et al.

Remarks:

11/21/2010 -- Three years ago, it was said: Computational foci raise miraculous need. Still applies.

08/18/2009 -- As promised, FEDaerated is here.

02/18/2009 -- We can look at why securities become toxic, almost by necessity.

12/18/2008 -- Leveraging, in and of itself, is not bad.

Modified: 11/21/2010

Truth, fiction, and finance

Fiction is a respected genre of literature, yet we use the word, sometimes pejoratively, to characterize non-truthness.

Finance deals with money. That some parts of finance approach fiction is troublesome (see Business Week, Jan7, about the Bear flu), yet some might actually want that as a means to line their pocket (and we cannot just blame Ponzi). Finance, unlike building a plane, has a problem in that evaluations deal with nothing real (thanks to decisions in the 20th century). Therefore, expertise, opinion, and other human traits are the main devices. Yet, some types of 'empirical' effort are possible and essential, such as verifying that a borrower has a good potential for repaying.

Engineers, at least, can go up against nature and the real world with their ideas. Yet, finance has been adopting scientists in its modeling; one wonders if these new players, who were supposedly well-grounded, have let froth grow between their ears; but, hey, who cares if you're making millions?

A WSJ article (1/10/08, David Wessel, "How to Unbreak the Banks") touches on this subject which is near and dear to truth engineering. In fact, Wessel addresses computer modeling and risk analysis as two major culprits. Wessel also points a finger at the Basel agreements as they leave too much leeway in leveraging (techniques for the few to bilk the many) among other things.

Truth engineering sees it as a generational issue, cultural rather than biological. That is, the advent of the computer's ubiquity and usefulness has turned things topsy-turvy (Chaitin) and brought to fore the importance of those concepts first approached by Wigner and others under the umbrella of quasi-empirical issues. Yet, we have major operational differences through time with generations; the younger only have their limited experience to control their enthusiastic use of new stuff; the older haven't kept pace with changes (not true in general, as the writer of this blog is of the generation now approaching comparatively advanced age).

So, such statements, by the WSJ, denoting insight into the bases of some problems are encouraging.

We can use issues related to both finance and engineering to understand and to apply truth engineering.

Remarks:

05/25/2011 -- Lemons problem, dark pools, ... Oh, so much to look at!

04/19/2011 -- We have to get back to the basics.

11/04/2010 -- Big Ben is still putting us at risk and trashing the savers.

10/11/2009 -- Discussion has gone over to FED-aerated. Note the 10/11/2009 Remarks about the Business Week article on India's progress' inhibitors. 'Near zero' recognizes that some always suffer more than others, especially in win-win situations, as the whole notion of characterization minimizes visceral reactions by diminishing the real in favor of the abstracted (ah, the modern world, you say?).

05/27/2009 -- That we have topsy-turvy needs to be addressed more fully in both an epistemologic and an operational sense.

12/18/2008 -- Leveraging, in and of itself, is not bad.

10/21/2008 -- Yes, it's time to re-look at this theme.

10/20/08 -- It got even worse throughout the year, from Ben's blink, through spitting in the face of savers, to bailouts (what?) of those touting capitalism.

03/14/08 -- Lots of water under the bridge, yet the financial games continue. A whole lot of industry and resources have gone into the infrastructure for finance. That these would inflate the gaming aspect is natural consequence.

01/18/08 --- We'll need to look again at three ways to evaluate in more detail. These are market (which goes beyond the gaming that we have seen), model (a necessity, though wizards of mathematics and computation can be problematic without the quasi-empirical framework), and myth (that is, myth may be a function along the belief axis).

01/17/08 --- Some call for more openness, yet effort is required to know.

01/16/08 --- Stories from yesterday relate to this theme. Many argue that the market (whatever that is) is not zero-sum. That's saying that the system is open. To what? Shenanigans?

Granted the advances in handling abstractions (the gift of the 19th century) and the ubiquity and power of the computer (the gift of the 20th century) have opened the door. To date, the old human traits (gifts of nature, etc.) have come to fore, namely greed and others.

If there is a market, and if it is built upon mathematics and computation, then the 'value' ought to have a broader basis than we see with pocket lining, one upmanship (unless, of course, we allow gaming in a controlled fashion), etc.

Modified: 05/25/2011

Effort and truth

From a cynical view (and in many situations today), we get our information fed from some PR machine which we are to take passively. Opinions differ about the amount of believability we can assign to such phenomena. Though, there are laws that attempt to maintain that information is not too problematic.

In more analytic terms, we always have a disparity between substance and surface; we just expect that the mappings that project from interior information to the exterior are not manipulated beyond some reasonable extent (that which is necessary).

Whether we put forth effort to go beyond the message depends upon several things, such as whether there is money involved (we want to control book cooking), whether there is personal interest (an extreme example would be the airplane), and more.

Actually, any effort requires resources, getting back eventually to money. Regular assessments of 'truth' will be costly, hence we would want them to be effective.

Opinions, without any backup, are easily captured using blogs and comments. Would one weight more heavily a signed comment as opposed to that one provided anonymously?

Would a technique, like bet2give, has a better way to weight than would the poll (7oops7)? The former is a permutation on the idea that the market can be used as a measure.

Remarks:

01/20/2013 -- Changed link for bet2give.

09/02/2009 -- Let's face it, folks, undecidability needs to be discussed and adopted in any complex situational setting, especially if computers are involved. Only hubris pushes us to make loud exclamations about what we're going to do in the future.

01/27/2009 -- At the time of this post, engineering was the main focus. Then, other areas become of interest due to overlaps in the problems: map-territory, computation and being, and much more. There will be more integrating posts to bring some cohesion, such as leveraging and fiction.

10/18/2007 -- This post was timestamped early am. Later the same day, there was an announcement of a delay in the case of a particular program that is of interest. With the announcement was a disclaimer (Forward-Looking Information is Subject to Risk and Uncertainty) that is encouraging in that it recognizes the forward-looking problems.

Sometimes, one wonders if reporting wants to be based upon a static view that can be impossible to attain. It's even more difficult assessing how well risk was defined and managed.

Further discussion will pull together earlier posts dealing with earned-value and status checking.

Modified: 01/20/2013

Where is the money?

Some of this may seem moot now, what with Goldman making oodles (the WSJ counsels us to not 'hate' them for it - I say, yes, it's more evidence of near-zero) and with the increasing levels of the equity markets though they are still below the 2007 peak. But, we need to look at money in its various senses and existences. Even the Pope knows of its importance.

The post is precipitated by Marilyn's answer in the Sunday Parade to a subject that had been handled earlier by Investopedia.

• Marilyn: Where did the stock money go? -- if she were not so smart, I would worry about her being disingenuous. Sounds more like she has been taken in by those who want to perpetuate what is essentially the big pocket picking scheme.
• When Stock Prices Drop, Where's The Money? -- no doubt, these guys are into financial engineering which seems to always move toward pocket picking. But, then, so too does government action seem to run this way. The little guys cannot seem to get a break. (italics added on 8/2/2009 - see Remarks, same date)

Both viewpoints are a little misleading. Why? Several reasons described below.

For one, they do not consider nuances of 'intrinsic' as it applies to value that have been thrown out as not necessary (gaming can be partly to blame). Let's call it Okkam for convenience of the favored. Then, there are some temporal issues that are not addressed. First, a little background is necessary.

What we have is a bunch of people passing along the same few bucks. We can take any number as the basis though the Fed tries to really pin this down. Remember that the Fed can print as many virtual bucks as it want in the fiat situation within which we find ourselves.

These bucks pass at a high rate of speed to where some illusion rises that makes us think that there is more than those basic bucks. Ah, yes, delusion at its best. The illusion is, in part, due to the leveraging notions that have gotten out of hand, but, too, it relates to the casino effect (ca-pital-sino) that has grown to underlay things monetary.

A proper audit (to be defined), from time to time, would allow us to see just how few bucks there really are. We do not have to have the shaky times like we're seeing now where real people get hurt in order to do this audit. Of course, we do know that some of those who are richer (by definition of some, smarter) find themselves in a bind, too.

Now another way that the two articles are misleading is that they do not consider the leech effect. As well, through time monies go into the pockets of the several along the way who sold for more than they bought in the past. Some of it definitely would be in the pockets of those running the game. So, you see, there is a temporal issue that seems to be missing.

Today, the markets are up sharply. Of course, the interest rate is low, but who is lending for speculative buying? Supposedly, liquidity is still not what it was. Some say we're heading to a 15,000 DJIA (who is to know?).

There is definitely more to consider here, as we go along, than just a simple metaphor.

Remarks:

03/06/2014 -- An update of this theme.

03/03/2010 -- Applies to the debate about MM and equity/debt.

08/27/2009 -- I need to add that the explanations by these two emphasizes the multiplier effect of a fiat currency scheme. However, as the arguments against marking to market tell us, the additional effect is not, by necessity, ponzi or just hot air. (links pending)

08/10/2009 -- As promised, FEDaerated is here.

08/02/2009 -- Wait! More exposures: "computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else's expense." To anyone who isn't at Goldman Sachs or the like, does that appeal to you as the way that we ought to be handling our beans?

So, is this what financial engineering is all about? Sounds more like leeching. We'll look further as part of an econoblog. Where is the money indeed?

07/31/2009 -- Let's see, 5,000 got over $1M for services rendered. Well, that's probably a sign of being a best-and-brightest, at least to certain eyes; it's called rolling-in-the-dough.

Now, this can be used to illustrate how the game it to fill the pockets of a small set to an exorbitant amount. Does the game need to be that way? Hell no. We'll look at that some more.

07/30/2009 -- Note, everyone, the run up of the DOW lately. I'll agree that a lot of this may be fictitious capital, that is, gained through gaming means. Yet, the movement is real. So, where does the money go when equity tanks? It moves to another look, morphs, if you will (money, no better shape changer exists).

07/29/2009 -- The use of intrinsic will need some discussion, as we don't have to go to the level of t-issues. Rather, there is a broader notion that gets lost in the finance's watered-down abstraction. This theme will be central to the new econoblog (leaning toward FEDaerated).

03/06/2014

Leverage and truth III

A recent post on 7oops7 was motivated by finding a blog related to finance. That the topic is leverage tells a lot. Two earlier posts on Truth Engineering looked at this method and how it has become a central idea (Leverage and truth, Leverage and truth II).

You see, leverage (other people's money, in short) can produce wild returns. At the same time, it can kill everyone. That gaming has been accepted at the core of finance is something to ponder and to argue about. Hopefully, a more true economy can emerge.

This reliance upon wild risks would not have even come about without advances in mathematics, modeling, and computation. All of these, and related themes, are what this blog is about. The above-mentioned blog struck a chord; for one thing, the blog author is retired and not in the game; for another, the roles played by that author were business focused.

See Remarks below for some info about the Truth Engineering motivation. This will be incorporated, at some point, back into the Mission and method. In the beginning of this blog, there was no 7oops7 or WhoseNoseKnows; these developed as a means to cover the necessary bases.

Remarks:

04/03/2011 -- Tis tranche and trash.

11/22/2010 -- Tranching, under the guise of securitization? Silly games.

11/02/2010 -- Two years later, the message is the same, except some changes have occurred. Of real note is that the jobless rate is high; out-housing really set up for that. Also, we need to re-look at that learned from the 'vons' guys, Ludwig and Friedrich. See Near Zero.

07/23/2009 -- After the bust and the rebound, toxic assets are still a problem due to tranche realities.

12/18/2008 -- Leveraging, in and of itself, is not bad.

10/26/2008 -- Yes, things fell apart for several reasons: fiction, leverage, and more.

05/31/2008 -- Let's suppose that a blogging viewpoint can be based upon advanced educational efforts from 30+ years ago, where there was continuing education over the years in terms of specifics of modeling improvements and of the basis for mathematical advancements.

If we go back 30+ years, the 'gaming' metaphor was not so prominent, except in theory. Also, finance was the game of the few who were on the floor of the Street and at auxiliary sites, though this is not to imply that only a small set was involved.

Crashes were still possible, as history shows. However, things were different.

How different? Here is one example. In the beginning of the 401K times, companies had experts involved with the management of the assets. And, they predicted that the rewards of participation would be nice - not stating, of course, that there was a growing use of risky methods.

So, how was this handled? Well, it was in the mid-1990s when companies started to remove themselves from responsibility of handling these bucks and threw those in the plans to the wolves. So, one cannot argue that everyone ought not to know about their monies; yet, opening up a game that is not a level playing field has an impact just like we have seen evolve (growing inequity in wealth - wolves and sharks win).

Too, leverage was more verboten than not; evidently, it came back into a much greater play than was allowed after the big Crash. Betting with other people's money has always had some moral smell; how did it get to be thought of as a nice scent? By the way, that the higher-educational institutes (who are of superior membership) play the game is by no means any moral support.

Now, supposing the above-mentioned educational foci were economics and related modeling as well as the necessary mathematical frameworks. That experience, including PhD level work in Economics, involved computation (albeit, of that time) and culminated in a Master's. So that, right there, provides a comparative basis that will be explored.

Let's say the work since then of the blogger had an increasing focus on computation as it provides the basis for management decision, for science, and for engineering that operated on all platforms to within the past three years and that covered over 40 languages and related environments. As well, let's say that there was involvement in the whole notion related to artificial means for doing the above which is at the center of issues to explore.

Given the particular demands of the work, the drive over time would be oriented toward empirical prowess, with finance playing a minor role.

So, would not one with such a world view say "what the heck happened?" upon reviewing recent problems (tranching and trenching, for one) and would attempt a quick re-education especially in those realms that have been active since Chicago opened up the door to the over-the-counter madness.

So, what do we see? A scheme has emerged where brilliant moves that are lucky make oodles of money, while, at the same time, brilliant moves that are not so lucky (and this may be a factor of timing, for instance) kill the hopes of literally millions.

Considering the first, well, perhaps we ought to give those people a playpen where they can exalt in their big pockets. Considering the second, well, we cannot build the sustainable world (as we see with problems on every front) that we humans need with such techniques.

So, that brings us to the current situation where we see people making decisions that impact everyone yet they are mostly shots-in-the-dark, it would seem to some views.

That is, economics (and finance) are both dismal sciences, though some have tried to apply physical insights to these two.

But, guess what? Even the exalted realms of physics and engineering have their problems. The basis for these can be understood partly by knowing about quasi-empirical issues.

We'll be looking further at that. Too, we'll bounce around the ideas, hopefully retaining some coherence.

Modified: 04/03/2011

Economic groundwork

In order to establish where things may have gone awry and why it will be necessary to look at what has gone on and from when. That is, there have been claims here of a gaming-centric ontology going bad; well, let's see what that might mean.

So, at the bottom, let's suppose that we can look at two classes of people, doers and speculators (next post). Now, the doers are those who keep the world going with their efforts; for many of these, life is a drudge with very little payback; for others who are the real cream of life (by aptitude, attitude and application), their talents get used however without sufficient reward; we could characterize this useful set (the old adage of the ant works) for a long time and with a whole bunch of words (but let's not, yet).

Those other type abounds, too, yet, the world has continued despite their machinations (speaking of the old adage, we're talking the grasshopper). You know, financiers might fall within this realm. Back at some point, one thought of financing as being involved in production or transportation or something else real. But, guess what. Around 1973, the fact that the mathematics was understood (having been created by doers, mind you) and that there were sufficient advances in the computational led to what was done at the CBOE and to provide the means to enable financial gaming to a maximum extent.

What happened? Well, option processing, essentially. Options are only one of several types of derivatives. Yet, they are a good example to analyze their problems to attempt to lay out a better framework for financial economics that would somehow inhibit forthiness and other problems.

Too, a proper viewpoint might help balance that mindset that glorifies riches (gosh, even a premier Ivy League school which started for the glorification of God [early motto: For Christ and the Church] is a player and raker) and allows the pockets of the hapless to be picked with impunity.

The exercising of an 'option' is a type of leverage; we will need to enumerate types of leverage, such as silly game 1, silly game 2, etc.

The whole notion is that economics (financial and otherwise) can get divorced from reality. Fortunately, engineering does not have this problem so much. But, when we apply engineering to finance, watch out! As Buckley, stop and think. How do we get back some realness for several reasons (such as, allowing the boomers to have a reasonable retirement)?

Remarks:

03/25/2013 -- The Atlantic had an article about King Abdullah II. Now, he is an example of a doer, from several angles. What I liked when I read it was that while being educated in Massachusetts, he bussed tables. What that means for those who don't know is clean up dirty dishes and such. When I, as a young man, was in the US Army, we had still had KP duty which included such types of things. Another task that ought to be tried once by everyone: cleaning the grease pit.

05/09/2011 -- Doers, reconsidered.

11/04/2010 -- Big Ben is still putting us at risk and trashing the savers.

09/09/2009 -- Alan's reign will be looked at, in time.

12/18/2008 -- Things were going along so fast (the meltdown, made-off, ...) that the basic message got lost. We'll start again with a new look at leveraging.

09/14/2008 -- Minsky's hierarchy is very much apropos, here, among other things. Probably, anything beyond hedging (which is respectful, if done right) and part of speculation (perhaps, halfway along some spectrum that could very well be defined) would be consider suspect and definitely ponzi-like.

Alan's and Ben's (you guys need to rethink your position) position that we cannot see crap when it is happening (oh no, says Alan, we can only clean up after the fact) is very much indicative of how blind is their sight. The proper tools are there, folks.

Modified: 03/25/2013

Tranche and truth

The financial types like to be creative in ways that move money between different pockets. The year-end festivities rely on such movement happening consistently. This year though, reality has caused fewer pockets to balloon than we saw in 2006.

One such scheme is the 'tranche' which essentially looks to add value to certain parts of an asset while hoping that the diminishing of value in other parts is kept to the future. We'll look at this more closely.

Oh, Lord, how do we escape such machinations that have so many holes?

And, yes, the rewards go to those who accept the risk (yet, one would think that more effort would go into getting a better calibration than we've seen). One would think that any scheme like this is not unlike spinning a top (another bane - that old magic called spin) which cannot stay in motion forever (let's count the ways that this can fail). It is not that risk is bad; the problem is assessing the thing appropriately. Oh, we'll look at the many games there, to boot.

One wonders if such types of thinking haven't infiltrated project management. Well, they have in the sense that earned value is still an art wishing to become more substantial.

Remarks:

12/05/2011 -- It's interesting how idiotic the supposedly smart can be. The real issue: the failings of an idiot have a small influence; the failings of the 'real idiots' has wide impact (and, in so many ways). Somehow, we muddle through.

05/25/2011 -- Lemons problem, dark pools, ... Oh, so much to look at!

04/03/2011 -- Tis tranche and trash.

11/22/2010 -- Tranching, under the guise of securitization? Silly games.

11/04/2010 -- Big Ben is still putting us at risk and trashing the savers. This topic will be given more attention under the context of proper capitalism.

08/18/2009 -- As promised, FEDaerated is here. Ah, the tranche, a perpetual motion machine, indeed.

07/23/2009 -- After the bust and the rebound, toxic assets are still a problem due to tranche realities.

06/17/2009 -- A fresh look will be needed, especially at things like securitization.

12/18/2008 -- Have we seen anything more silly or more representative of fairy dusting in the great realms of financial engineering? It makes leveraging look to be quite reasonable.

11/20/2008 -- Boon and bust, the way of fairy dust.

08/19/08 -- As things unwind from the recent craziness, some analysis can be thoughtful.

05/27/08 -- We must really look at how this is getting something from nothing which we know from physics is not a mature notion. Except, there may be some delta out of the junk status that is reasonable; however how could one get AAA except for perhaps some minor aspect?

05/20/08 -- When I first read about this technique, supposedly thought of by highly intelligent minds, I thought 'Huh?". Of course, something from nothing is what the wizardry of the computer has been reinforcing on many fronts.

Further study has only increased the bafflement at the problems. Thankfully, others are looking at this type of thing, to boot.

Modified: 12/05/2011

Appeal of Abstractions

Everywhere we see greater facility at reducing things to a state that allows us to think that we understand them. One result is that a lot of little things, when disparately displayed, can look fairly complicated. We've learned rules and methods to handle separate items as well as wholes, mainly using computational analogs and tools.

That bit of evolution culminated in the modern gaming and visualization regimes where we successfully deal with complicated things that may or may not have counterpart in the real world. In the former sense, think of CAD/CAE/PLM in terms of products. For the latter, we have many examples of worlds that are without any natural map.

On the product side, think of a car that has been pulled apart. How much ground area would be covered? Also, in pieces, can the car function? That's the point. After we apply the reductionist step, how do we get things back together?

Of course, that we could put the car back together, if we knew how, is one point. How does one take an arbitrary set of items and collect them into a coherent whole that is functional?

Well, the difficulty is that pieces from different things may be collected together. As one would think, this would be a new entity. This is essentially the design context. But, 'would a design work?' is always the question. A bane of modern thinking is how truth (little t) cannot be used to integrate back pieces, we need more in the sense of simulation and test.

Now, think of the issue of a new design, especially of a complicated system with severe operational demands. Our improved computational prowess has led us to place strong reliance on types of modeling that may not be as solid (pun) as then seem. Somehow, we need strategies and methods related to maintaining the proper balance.

For now, we will ignore the influence on these issues of Truth (big T); there are many examples of related problems that truth engineering can address, but let's look at some examples.

Finance - the subprime issue results from a little bit of real property being layered with abstractions that map to money and that end up integrated into something with more value, at least from a market sense. One common problem in the market is that a bubble can arise from a lot of unfounded expansions. The Federal Reserve says that we cannot identify bubbles (no foresight is the claim); that leads to the strategy of trying to lessen falls like those recently seen by adding liquidity. Yet, truth engineering can show that the concept of intrinsic value can be used with somewhat of a good foundation. One common theme has been leveraging with things that are extraneous, such as borrowing, virtual transactions (selling something that is not there), etc.

Virtual worlds (including gaming) - a whole new realm of economies and environments (example is Second Life) is being developed upon the limited bits founded upon a set of servers communicating with databases and presentation devices that are not thin. Enough progress has been made in this regard that virtual value has been mapped to money in the 'first world' (considering that the virtual world is the second - how many of these can be stacked?). These types of creations are fairly new; computational progress will only make these more confounding; we don't understand their influence on the human psyche or on the social fabric. Yet, several potential roles for truth engineering will be discussed and demonstrated.

Design -the realm of new products deals with many types of abstractions that may not relate easily to each other. For instance, planning accumulates steps that hopefully map well to goals and necessary resources. Engineering and manufacturing have to define the product to meet requirements and then successfully build within a not small set of constraints. A recurring problem can be described under the 'earned value' umbrella with which project management has struggled. Too, 'analytics as truth' is still full of open issues. As risk increases, to error on the side of empirical tests might be a preferred way to go.

The list could go on. That the 20th century brought forth our abilities to deal with 'abstract nonsense' is something that we're still trying to understand. Opportunities abound for both study and application of knowledge.

Remarks:

01/22/2013 -- T-issues will migrate to issues of science and religion.

08/04/2012  -- Over five years, we had a lot of side trips. We'll try to focus more. BTW, Rumsfeld has recently had his say.

09/03/2009 -- Let's face it, folks, undecidability needs to be discussed and adopted in any complex situational setting, especially if computers are involved.

07/05/2009 -- This subject is central to understanding computerism.

05/18/2009 -- With things kicking up dust again, we'll need to re-address these issues related to truth, being, computation, et al.

01/27/2009 -- Now, a new day and way (the whole sky has changed) to consider these matters.

12/12/08 -- The financial mess turned out to be worse than thought possible. The 787 problems continued to loom large.

06/01/08 -- More analysis is being done on consequences related to bad financial choices, as usual adding interesting twists to the story.

01/12/08 --- Things are getting interested, both in the Design and Finance (analysis is progressing as it ought) realms.

Modified: 01/22/2013

The best

The post is motivated by the fact that the most-read post is "Best and brightest of what?" from almost a year ago (10/03/2013).  There has been much change in the world since then that ought to be of interest to the theme.

Let's recap a few of these changes:

• We had the Olympics in Russia. Despite some infrastructural problems, things happened enough to allow the record books to continue. Yet, right after, the Ukraine became a hotspot. 
• There was a loss of an airliner (777, which has had no major crashes during the program's long life - kudos to engineering) which has never been explained. Then, another plane was lost to a ground-to-air missile over the Ukraine. 
• We now have solidification of an Islamic-based organization and society to contend with. If you have to ask, it's ISIS (lots to discuss regard this emergence). 
• Janet has seen to it that savers (flayed to the bone, if you would) are still the fall guy. The ca-pital-sino rages along nicely due to a continual filling (spiking) of the punch bowl. Yes, QE is easing; the coo-coo (goo-goo) talk has not (yes, they need a continuation of the soft-handling - and do not even think of removing the training wheels from the bike). 
• Google said that creativity and other attributes trump that which leads to good (and perfect) SAT scores. The theme will continue (many reasons - best of what?). 
• Early responders (9/11) are reporting after-effects related to health. 
• ... 

One thing of interest will be to look at the posts from early on. The problems are still there, not having been resolved by the political wags (leveraging is up, dark pools are seen as necessary, ..., a very, very long litany whose elucidation attempt might be a worthy expenditure of time and energy).

Remarks:  Modified: 11/21/2015

11/21/15 -- Why-does-the-Islamic-banking-system-not-charge-interest-on-loans-and-advances-What-are-their-alternative-sources-of-revenue? 

OWS Occupy Wall Street News | Plutocracy Files

OWS Occupy Wall Street News | Plutocracy Files

Yes, it is almost as if old Rip ought to wake up now. One ought to hope that wonderful things will come out of this manifestation of human spirit.

People are tired of hearing arrogant, best-and-brightest, finance manipulators talk about how good that they are at pulling the ca-pital-sino strings, silly game that it is. And, this is after they trashed our world (remember the Irish) by playing with our money in insane ways.

Were any lessons learned? When will 'near-zero' be understood (in this sense, folks -- a lot of the game playing is not unlike a wish for perpetual motion)?

It has been only two weeks since this event (and the follow-ons) started, yet things have changed really fast. And, given the new order (social media), one has a lot more information available that requires digestion.

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Thankfully, we can lag in that work. We just hope that the phenomenon persists long enough to lay down some lasting tracks and have real effects.

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And, we hope that economists learn from this, especially those of the financial ilk.

Remarks:

01/15/2012 -- Jobs, labor, and disrespect.

12/13/2011 -- McKinsey report shows that households hold over 40% of the world's wealth. Hence, the consumer as the major influence on the economy. Now, consider that the household wealth collection (using income in the U.S. as a proxy) is skewed to a very small bunch.

12/05/2011 -- It's interesting how idiotic the supposedly smart can be. The real issue: the failings of an idiot have a small influence; the failings of the 'real idiots' has wide impact (and, in so many ways). Somehow, we muddle through.

10/20/2011 -- It's said that the OWS doesn't have an agenda. That is not bad. However, there ought to be a list of things that NEED attention (and, not just cursory -- or from the 1%'s viewpoint), such as leveraging and speculation. Neither is as necessary as the fat cats argue. Too, there is a whole lot more that could be added to the list, many of these topics have been touched upon here and in the related blogs. Thinking of a Magna Carta equivalent would be a very good exercise.

10/18/2011 -- Hopefully, the OWS will bring this type of thing to public awareness.

10/15/2011 -- The recognition goes global. Banking ought to be handled by those whose greed is close to nil.

10/14/2011 -- One thing that has always concerned the blogger was the trickery that finance did with student loans which ought to be as straightforward as mortgages. Yet, some play games with those needing the support and, in doing so, made oodles (atrocious, in essence). Some of have this in mind as they join in the protest. Yes, it was turned over to bankers of whom there are many types; and, do not bankers exist for the purpose of filling their pockets?

10/13/2011 -- It is our economy.

10/12/2011 -- The CEO MVPs need to look to Paul.

10/10/2011 -- If the OWS wants specifics, there are plenty to list, such as this one. We can only resolve this with an amendment (like the 13th) for the rights of workers (folks, employment is not unlike indentured servitude in many ways) plus a Magna Carta equivalent to give the big pants (egos) something to think about.

10/10/2011 -- Economists, please explain why this is allowable, implying that it is not unconscionable and that it is taken to be ethical.

http://spectrum.ieee.org/computing/it/financial-trading-at-the-speed-of-light

A deeper look will expose multitudes of these types of shenanigans that the less than 1% have spawned (and have been allowed to spawn) in order to perpetuate (almost guarantee - especially with our implicit acceptance of moral hazard'ry) the sucking into their large pockets the very substance of the many (whose members are becoming increasingly hapless).

Of course, the technological basis that enables this type of mischief (yes) is not our friend, either.

Modified: 01/15/2012

Madoff (made-off)

We can thank Bernard Madoff for providing a means to update the 'ponzi' idea. After all, Ponzi lived long before the computer era.

Henceforth, when discussing things related to the Minsky idea of the necessity of crap, we'll use 'made-off' in order to be more modern. That is, Minsky suggested that financial matters always lead to froth (control in financial engineering would start with making money real).

So, expect some definition, plus itemization of examples around the various pieces of infrastructure built to sustain the gaming. Too, how do we ferret out all those 'made-offs' that are now in operation?

Actually, the whole argument that we're not dealing with near-zero sum is bogus. Why? Because the accounting is not extensive enough to show all the necessary relationships. Will we get there?

Well, 'when?' might be a good question. It's easy enough, via a mind game, to see how any of the richest got there through a giant sucking-out of multitudes and multitudes of pockets who, in many cases, were more hapless than not.

Hapless how? Look at those who took the direct hit from Madoff's games to see examples.

Remarks:

04/04/2011 -- The M & Ms are apropos. Need to look at some background.

11/04/2010 -- Big Ben is still putting us at risk and trashing the savers.

10/11/2009 -- Discussion has gone over to FED-aerated. Note the 10/11/2009 Remarks about the Business Week article on India's progress' inhibitors. 'Near zero' recognizes that some always suffer more than others, especially in win-win situations, as the whole notion of characterization minimizes visceral reactions by diminishing the real in favor of the abstracted (ah, the modern world, you say?).

08/27/2009 -- Madoff exemplifies (albeit somewhat indirectly) systemic risk.

01/18/2009 - We even need to look at why we need finance.

12/18/2008 -- One thing to note in the Minsky hierarchy is a movement from the more concrete to the more abstract. Getting away from the gab standard would put a better basis on this, however any extrapolation goes awry (except in the special case of a linear extension - but even there we get to leveraging issues). All sorts of metaphors could apply, such as out-on-the-limb, bleeding-edge, ...

Modified: 04/04/2011

Last post for 2008

Context: See Tru'eng anew, focus going forward, mathematics.

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The posts have gone on long enough that they serve a basis for the necessary expositions (recent example). As mentioned before, there will be some posts that integrate within a theme from time to time. Examples are leveraging and fiction, in terms of the financial area (mainly, fairy dusting).

Then, through time, the posts will be, hopefully, coherent (as far as can be done with the temporal disparity of the web blog), and the integration posts will allow a better view than can come from categorizing.

Needless to say, those who think that the best and brightest offer what cannot be understood, by necessity, are way off base and probably deserve to lose THEIR money, but definitely these smarties ought to not have access to other peoples' money in many cases.

On the engineering side, there will be things to harp at, too.

But, the view, hopefully, will be balanced. Engineering needs money to do its thing. Perhaps, the money side of things could learn from engineering and science. In that latter note, the work would go far beyond game theory to include a more broad philosophy.

Look to more discussion, and use, of arguments about being.

Remarks:

01/05/2015 -- Renewal, see Context line.

12/31/2013 -- A popular post.

12/29/2012 --  Summary - 2012.

01/01/2011 -- We have four last posts of December under our belt.

Modified: 01/05/2015

Free and fee

This post, as said last time , was going to look at doers and speculators (next post), but let's delay that to look at the subject of free or not. As with all subjects related to t-issues, there is a lot that can be said.

However, we ought to look at how close free is to fee (both are old english), namely one letter. But, let's just limit things to that observation, for now.

Basically, we have those who claim that 'free' is what we're after in several regards, such as market, trade, and what have you. Well, many say that thing that we're looking for with 'free' is an illusion that needs to be tempered and to be seen as the ideal that it is.

But, wait, one can use doers (and not) in this context. In actuality, doers always use energy and resources, even though it may be that many doers seem to make things appear to be effortless. Actually, that magical touch is one characteristic of excellence. Yet, no amount of easy accomplishment happens without some expenditure.

And, fee is only being used facetiously, as fees, hidden or otherwise, are always there. We all know, though (and learn), to watch that those 'greased slides' referred to in another post don't move monies from our pockets; that is, who wants to be included among the hapless? What is the adage: once burned, twice shy?

Another type of basis for these things could easily bring in better means to look at what happens in economical terms; as an example, perhaps energy processing, as a metaphor, would be stronger than has been allowed.

So, we'll need to look further at doers, as promised; too, a better characterization of non-doer (oh, perhaps free may apply here, as in something for nothing) might be in order.

Remarks:

03/25/2013 -- The Atlantic had an article about King Abdullah II. Now, he is an example of a doer, from several angles. What I liked when I read it was that while being educated in Massachusetts, he bussed tables. What that means for those who don't know is clean up dirty dishes and such. When I, as a young man, was in the US Army, we had still had KP duty which included such types of things. Another task that ought to be tried once by everyone: cleaning the grease pit.

05/09/2011 -- Doers, reconsidered.

08/10/2009 -- As promised, FEDaerated is here.

12/18/2008 -- Fairy dusting continues with made-off results. But, we can construct with robust methods, including leveraging.

11/12/2008 --

Well, things feel apart fairly quickly, starting in September of 2008. By N0vember, there was general spooking. Starting in September, movements toward nationalization sped so fast that it was easy to forget that a Republican administration was still in the White House. Talk about rewarding hubris and moral hazardness!!!!

Modified: 03/25/2013

Leverage and truth II

Context: See Tru'eng anew, focus going forward, mathematics.

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There are several connotations of leverage, but one that pertains to discussion here deals with a multiplier effect that is almost recursive (see "mathematization", below). In his book, the 'Trillion Dollar Meltdown', Charles R. Morris considers that the current crisis that may be facing the financial sector may be just an indication of more things to come.

But, of interest here, are his thoughts about why things are in such disarray. Well, Morris names three developments of the past 20 or 30 years that have been touched upon here in various posts. These are, namely, according to Morris: structured finance, expansion of derivative markets, and mathematization of trading.

All three of these relate to the issue of the appeal and problems of abstractions which have led us a jumbled up state of affairs. One has to wonder how computational froth is of any more substance than the natural type. One thing that Morris mentions is the AAA problem which rating appeared out of the air though the underlying instruments were no more than junk.

Effectiveness in capitalism and the market ontology evidently became associated with how well the Street people (gigantic bonuses) and their management (immense wealth) did. Of course, how could we blame just the finance folk who are, necessarily, removed from reality when similar problems crop up in engineering when the issues of quasi-empiricism are ignored?

Except that there is one difference. In areas where engineering deals with the critical, there are processes and policies that help ensure the general public's safety and means to support those who experience accidents.

In the financial world, there is no such science; there is motivation and creativity, where the measure seems to be greed (can "market dogmatism" ever get away from this?).

Some claim that the financial game is more a prisoner dilemma rather than zero-sum (see Fedaerated). Yet, analysis may lead one to see it more of the latter due to the advantages on the financial side (unless, there is oversight such as that being suggested recently by Paulson).

Remarks:

01/05/2015 -- Renewal, see Context line.

12/31/2013 -- A popular post.

05/02/2013 -- This has been a popular post (third most popular), of late. Perhaps, it's the growing awareness of the ever-increasing gap twixt the haves and those without. The post ought to be re-done using insights gained over the past six years. It seems like a life-time ago. Well, the theme of the blog needs to look at lessons from the past (such as, we not learning Anselm's message). Too, money does not solve existential problems. Never has. And, one does not need a pot load to figure that out. Too, playing games with other people's money and lives ought to be a given (ah, smarts or not - the most popular post).

09/29/2011 -- The question remains. Even with 'financial engineering' what is the science behind finance? Gaming, only? Who has the basic ontology (other than wealth for the few)?

04/04/2011 -- The M & Ms are apropos. Need to look at some background.

02/26/2011 -- When this was written, I was still incredulous (shocked) at the idiocy (which abounded beyond limit, and was held by supposedly smart people) that we can just wish 'value' out of nothing. Of course, that value did come from something: the sacrifice of the people by fat cats (need to think of a more appropriate characterization).

11/22/2010 -- Tranching, under the guise of securitization? Silly games.

11/02/2010 -- Two years later, the message is the same, except some changes have occurred. Of real note is that the jobless rate is high; out-housing really set up for that. Also, we need to re-look at that learned from the 'vons' guys, Ludwig and Friedrich. See Near Zero.

10/11/2009 -- Discussion has gone over to FED-aerated. Note the 10/11/2009 Remarks about the Business Week article on India's progress' inhibitors. 'Near zero' recognizes that some always suffer more than others, especially in win-win situations, as the whole notion of characterization minimizes visceral reactions by diminishing the real in favor of the abstracted (ah, the modern world, you say?).

06/17/2009 -- Michael Milken says that structure counts (see WSJ article). Remember, the theme here is that a lot of securitization is bunk, many times. Sheesh, talk about a perpetual motion machine, always moving monies from the pockets of the hapless to that of the fat cats.

12/18/2008 -- Leveraging, in and of itself, is not bad.

10/26/2008 -- Yes, things fell apart for several reasons: fiction, leverage, and more.

Modified: 01/05/2015