The Maanga

Even this brilliant paper turned out to be completely wrong for 2008.   

Ritwik, in a fairly idiotic post, essentially blames an idiot for his growing up. If a blog continues to be interesting for more than a six months, the problem is with the reader — not the author. Anyway, that is not the point of this post.

The problem he alludes to is probably very old and yet interesting. Amit Varma’s understanding of political economy is at odds with Ritwik’s and possibly that of Aristotle. DG Boland explains that better than I can in a 1997 write-up,

We should avoid, then, such expressions as “managing” the economy when we mean the political economy. The civil community is not a household “run” by the government. The relationship between the Government (the State in the narrow sense) and the community (the State in the widest sense) is of a kind altogether different from that between the head of the household (or other analogous organisation) and the household itself. The head of the body politic has much less control over how the community (and therefore its economy) is “run”. The communism of modern times makes the same mistake in this regard as Plato did. But all forms of socialism and theories of economic “management” (macro-economics) do the same to a greater or lesser degree.

Anyway, since the MBA types like to bandy serious work and not random mentions of Aristotle, Hannah Arendt deserves mention. Since I am not avataram to write an entire book in two paragraphs, I will link to her personal library which may help you resolve the essential questions on the nature of revolution, freedom, authority, tradition and the modern age. The elegance of much of her work exists in the fact that one gets the feeling of it being obvious after having read it — unlike a certain Taleb.

Tracing the origins of the joker´s rictus smile. The black dahlia is better than the dark knight.

Attributing conspiracy theories to genuine stupidity is a preserve of right wing nuts.

However, NPR’s recent stories have been about playing Tchaikovsky and being a fan of Metallica. In Baghdad. While both Karim Wasfi and Eddy Moretti were charming, it makes one wonder if America still hasn’t come out the cold war. This war isn’t cold — it’s not not even a war.

I don’t quite understand why I think Taleb sucks. Maybe because another author of this blog hyped him up and the book let me down. Maybe the hype was relevant within a context; a puke has a target audience too. In this case, it was a puke on MBA types, which, to someone without that degree, sounds like an irrelevant restatement of the obvious.

Anyway, all that until I read this.

The drive to the temple had taken us deep into the Tamil Nadu countryside, past the electric-green rice fields of the Cauvery Delta. Storms broke out as we were leaving the temple, but I didn’t mind. It all seemed part of the landscape, these rains that would bring a harvest for the farmers making a living the same way their ancestors had done thousands of years ago.

Reminds me how bad my column used to be.

The dead Uncle used to say,

ONGC will drill for 50 years and find nothing. RIL will follow them and find oil in two years. This will then be hailed as a success of private enterprise. Rascals.

Poignant.

A general bonfire is so great a necessity that unless we can make of it an orderly and good tempered affair in which no serious injustice is done to anyone, it will, when it comes at last, grow into a conflagaration that may destroy much else as well. 

John Maynard Keynes, “The economic consequences of the peace”, 1919 

So begins Robert Shiller´s new book, The Subprime Solution. If Soros explained the problem well in his book, Shiller does a good job of explaining what a solution may look like. 

The short-term solution to the current conflagaration is a bailout, as Paulson is proposing. A new RTC or HOLC will go some way is solving the current loss of confidence in the US financial system. 

The long-term solution that Shiller proposes is nothing short of a complete restructuring of the mortgage & financial system as they exist now. He proposes a six-step plan. I slept off during the first four steps, but the last two steps are interesting.  They are:

1) Create large national databases of fine-grained data about individual financial situations.

2) Create new economic units of measurement.

While the database will be useful for better credit rating, The last step is the truly brilliant one. What Shiller suggests is  “Index everything”:

-Index house prices and rents to inflation

-Index mortgage payments to the financial situation of the borrower

-Index government borrowing to the current GDP and so on.  

Any kind of indexing that makes you pay more during the good times, so you can pay less during the bad times is a form of insurance. Shiller believes that the best way to save the US economy from future accidents is to have inbuilt insurance within the system.   

For the home-buyer, this works in two ways. Since salaries and house prices are indexed to inflation, he knows when house prices are too high relative to his salary. When he does take out a mortgage, it is a continuous workout mortgage, whose payments change every month based on his current financial situation. 

For the government, it becomes easier to borrow in trills, or bonds that pay out one-trillionth of the GDP per year. During a boom, this goes up, during a recession, this comes down. That way, you get the Chinese and the Arabs to fund your economy and insure it at the same time.  

He also recommends, like Friedman would have, that the problem is not excessive innovation, but too little. At this difficult time, we need to develop futures on real estate, possibly using his Case-Shiller Index, so anyone who thinks a boom has gone too far can sell the futures. This will also help the construction industry with a good idea of what real estate prices in the future would look like, and they wont construct all these houses that wont sell.   Finally, someone speaks up for short-sellers! 

While the solution is brilliant, I expect zero political will to implement it. Alan Greenspan once said, “If you are unwilling to accept booms and busts in economics, you need to accept a lower standard of living”. If you think of the average disposable income in the US, and its volatility, Shiller´s plan to essentially reduce that volatility by giving up some income as a insurance premium. 

Obama will not consider freeing up the financial markets further, and McCain will not consider insurance. Unfortunately, Shiller´s long term solution, involving both freer financial markets and built-in insurance, will never be considered.

The guy has been hitting the news circuit since yesterday to talk about some course he is taking on faith and globalization.

Yuck!

Now that it is over, maybe it is time to praise some short-sellers.  And buy that BRIC portfolio for the pension plan.

PS: And here is Bess Levin´s wonderful letter to the CEOs of Morgan Stanley and Goldman.