I’m not an Economist, but I thought that I’d share a link to a nice article about why we currently face an economic crisis.

The Infinite Loan Machine. An examination of the effect of loan securitization on the fractional reserve banking system.

Loan securitization has become a widely used method for consolidating collections of loans into financial instruments with sufficiently stable statistical properties that they can be freely traded. In recent years the concept has been generally extended, creating a class of asset backed securities, financial instruments which are created from a wide variety of loan sources, including credit card, commercial real estate and even financial investment (hedge fund) lending. In this paper the money and loan supply implications of these instruments within a fractional reserve banking system are examined. It appears that the interaction of these instruments create an infinite loop within the monetary system, which removes the limit on loan creation that should be imposed by the bank’s reserve requirement. This has effectively disabled the ability of the central bank’s reserve requirements to limit the expansion of credit by commercial banks, leading directly to the current credit crisis. The evidence suggests that loan securitization and the sale of commercial bank loans outside the regulated banking industry are incompatible with the stable operation of a fractional reserve banking system.

This past week I finished my reading of Mandelbrot’s most recent book The (Mis)Behavior of Markets. I actually didn’t like it that much. I found the book to be especially light on details; for a mathematical empiricist Mandelbrot didn’t actually explain, in unambiguous terms, the patterns that he sees in market data. He did a good job of showing that price charts appear roughly the same independent of company and time-interval. (That is, if you forget to label your axes then a chart covering a few years doesn’t look appreciably different from a chart covering only a few seconds.) But the details of how he knows about the multi-fractal patterns, and how to measure such patterns, or even the basic mathematical characteristics of mult-fractals went entirely ignored. Some of these details were given in a reference appendix for each chapter, but not nearly enough to satisfy my avid mind. The editor also did a poor job of citing Mandelbrot’s references to peer-reviewed papers throughout the text; you had to simply follow along in the appendix simultaneously while reading the main text (an annoying usability bug). Instead of discussing such details within the main text, he opted to give generalized overviews with inadequate pictures of fractals that have nothing to do with finance. Now, I know that since I read graduate-level textbooks on Computer Science in my spare time, I’m not the target audience for this book, but I would have expected to see many, many more price charts and elucidating discussion of features within such charts, esp. considering that he’s so big on empirical data. As it was, even when the book had pictures to convey the geometric ideas within the text they came out piss-poor and confusing. Tufte would be appalled.

Mandelbrot also seems to have a healthy dose of self-assurance (deservedly so, for he is quite accomplished). He didn’t fail to mention that one of his students (Fama) formulated the Efficient Market Hypothesis, and that his early paper on cotton prices help to form a pillar of econophysics. He certainly deserves recognition for developing a very important part of mathematics, but I consider his abilities to write for the layperson to be severely lacking.

I’ve also been reading up on Component-Oriented Software Construction. It’s not a panacea that will solve all the industries woes, but I consider it a significant step towards solving many of our current problems. The traditional Object-Oriented inheritance paradigm is fundamentally incompatible with parallelism, and OO in general suffers from systemic rot as shown by the Circle-Ellipse Problem and the Fragile Base Class Problem. The move toward a Component-Oriented architecture is, in my opinion, a beneficial one. But it comes at a high cost; instead of having a (complex and rigid) framework for message passing and method calling, the programmer must handle request forwarding and chaining themselves; functionality is derived through composition instead of inheritance. In my experience, programmers are the most unreliable piece in the software construction business, and relying on humans to successfully adapt their minds (already trained on the OO model) to a new methodology is a mistake. Furthermore, the Component-Oriented message passing system is so flexible (best formulated as a general directed graph) that a programmer could easily get themselves into the opposite of a deadlock (messages getting passed around continuously in a Hamiltonian path). Debugging could be a real nightmare in such a system, and we’d really best develop techniques for tracing and visualizing information flow throughout the program.

I watched a recording of Guy Steele’s infamous lecture Growing a Language (because of the poor video quality, you really want to read the article as you watch), which he gave at OOPSLA ‘98. This was a delightfully instructive video, I recommend that everyone interested in programming language watch it. I also watched a presentation he gave about his newest language, Fortress, because it was mentioned at LtU. I especially like the mathematical nature of the language, and his willingness to go back and try syntax experiments (APL, PL/I) that failed due to requirements of specialized hardware.

I also read Vannevar Bush’s famous article As we may think, wherein he introduces the memex. I found the proposed interface to the memex to be both antiquated and mechanically cumbersome, when compared to the modern computer. But, given the technology in his day this is to be expected. Some of the issues related to search, recall, and annotation, were unfortunately glossed over; in fact, these same issues still plague us today, everybody consistently underestimates the complexity of the task; reliable associative search is a hard problem. He did have the remarkable foresight to envision how people would wish to use such a system, and, were he alive today, would probably be greatly enamored with the collaborative efforts of knowledge sharing that places such as wikipedia represent.

From, My Biased Coin we have an argument for a Tuition Free Harvard. While, this is a really great idea, I don’t think it goes far enough. I actually think that the goal of providing a reputable education at zero cost to the student can be accomplished.

Let’s first specialize the college to the field of financial engineering. An institution focusing on this field could easily be self-funding. The professors would split their time between running/creating financial models and teaching classes, while the more gifted or graduate students would be expected to help fund the university. The immediacy of hands-on work, and it’s importance to not only the institution but also to ones own salary would be an excellent motivator. Many of the graduate students would be highly sought after on Wall Street simply because of their experience and practical knowledge. All of this would lend to an enormous amount of prestige.

That prestige can then be leveraged to provide a highly competitive application process that would weed through the volumes of undergrad applicants looking for a free education (for a highly lucrative career). Unlike most universities, filtering out applications via grades and essays wouldn’t be enough. A formal, lengthy, and costly interview process would have to be followed, lest the real truth about elite colleges prematurely doom success.

After becoming self-sufficient the college could expand into other areas (mathematics, physics, bio, humanities, etc..) as budget allows. Even some of these areas could be formed as apprenticeships that fund their own departments. The Film majors would have to break-even financially, Art and Music majors required to exhibit their work and rake in profit through ticket sales, Mathematics can contract out to other departments, all fields can potentially benefit from directly encouraged entrepreneurialism.

Supposing that we can’t make a self-sufficient educational system, further funding can be acquired through a small 1–5% tax on the salaries of the recently graduated and employed, though such a policy obviously has major draw-backs, it might not be nearly as bad as student loans.

A long while back, I remember reading about Stallman proposing a change to copyright time. I thought that the setting of a particular figure, and then refining it was an absurd solution. In my opinion a much better solution is to set a formula by which the length of copyright is to be calculated, and a figure on how often that length should be recalculated.

Today, I finished reading My Life as a Quant. Somewhere in the middle of the book he talks about the drive to become a partner at Goldman (before it’s IPO). The firm had some specified number of partners, and a means by which to add to that group. I also assume that they had a beneficial profit sharing scheme. These partners would also form the committee that decides policy and in what direction to take the company.

The world seems to run more on figures than formulas. The US Constitution is anomalous in this regard, because of a formula for specifying how representation in Congress should be calculated. Interestingly Congress’s composition is determined by a formula based on state population while the Senate is fixed at 2 members per state. There have been many arguments (mostly a result of integer arithmetic) about this formula, beginning with the framing of the constitution itself.

I thought it would be interesting if a business’s direction were a summation of the votes of it’s employees. Of course we wouldn’t want to represent everyone equally, and so a weighting by salary would probably be good (even though managers get paid more, the workers probably get more in total). But it’s difficult to cast company-wide votes because of issues with wording and understanding of what’s at stake. As an example, suppose a trading company wanted to keep it’s risk in sync with those working at the company. During the hiring process, each new employee could take a risk-assessment test (so popular during the 80’s) that would chart their personal risk-profile. Then this graph could be added to the sum of everyone’s profile in the company (weighting by salary) to obtain the risk profile of the entire company. This graph could then be handed off to the market modeling groups and trading desks who would use it for portfolio calculations.

I also am really fond of the use of internal markets to make company decisions. Formulas and markets are simply more flexible and responsive to changing environmental conditions. Constructing a bureaucracy on formulas rather than figures would likely give you a very competitive edge, and it lets everyone feel a modicum better about their representation. I call this the Democratic Business Model.

Also of interest is a post on what Gen Y wants from work.

I was reading Andreessen’s thoughts about Web 2.0 and had a nice thought myself: Wall Street is behind. They have giant festering piles of business and financial logic, and are falling behind on the internet front. What is needed is an internet trading company that can provide free quotes (with better than 20min delay) and insanely low commission rates (because everything’s automated). A company that specializes in accepting trades over the internet through an open API. A company that disdains to doing thigs the old fashioned way. A company that is fully zen with the here and now of the marketplace of ideas.

Even better would be if they acted as a front end to foreign exchanges, thus giving the little guy (ubergeek math heavyweight with a rack of machine at home and algorithms coming out the wazoo) a convenient way to non-stop day trade by transparently moving the trades among the markets. ( Sony is traded on American, European, and Japanese exchanges, so why not trade 24hrs/day? )

A nice Web 2.0 interface would be the main attraction though, and the toughest to get right. People have been trading stocks for a very long time, and everyone does something different in their analysis. The AJAX stock plotting, and automatic signal generation shouldn’t be a stepping stone for the open API, it should in fact replace it. It’s time that we had a web-site that could be user-programmable. And I don’t mean dropping in widgets, I mean full-on IDE.

As a start though, figure out what the majority of traders need, and how best to represent that in GUI, and work from there, providing the trading API so nobody gets left out while the fundamental user-interface research gets done live, the instant-feedback Web 2.0 way.

Also, free registration for a ‘paper’ account, so that users can back-test and familiarize themselves with trading before actually plunking down hard-earned wealth. The free account should do everything except actually trade on the exchanges. It shouldn’t be crippled in any other way.

GStock is wonderful, but they don’t go far enough.

I was reading Why Geography Matters by de Blij, and in the first chapter (page 15) he says

But, as so often happens when social engineers get hold of a system that’s working well, the wheels came off. Professional educators thought they had a better idea about how to teach geography: rather than educating students in disciplines such as history, government, and geography, they would teach these subjects in combination. That combination was called social studies. The grand design envisioned a mixture that would give students a well-rounded schooling, a kind of civics for the masses, which implied that school teachers would no longer be educated in the disciplines either. They, too, would study social studies.
…
But when the social studies agenda took effect, the student teachers stopped coming. They now had other requirements that precluded their registration in geography.
We geographers knew what this would mean and what it would eventually cost the country. The use of, and knowledge of maps would dwindle. Environmental awareness would decline. Our international outlook would erode. Our businesspeople, politicians, and others would find themselves at a disadvantage in a rapidly shrinking, ever more interconnected — and competitive — world.

This reminds me of what John Taylor Gatto observed in the governmental hijacking of education. Before the Prussian mentality of schooling, many rural educational facilities wouldn’t even accept a student that didn’t already know basics, like addition and the alphabet. By monopolizing the education system the government has ensured that all people get the same small amount of knowledge, that which the social engineers deem appropriate. This stunts the growth, not only of individual minds, but of the whole country, as the system feeds back on itself.

I remember a distinctive distaste for social studies as I was growing up. In fact, I hated it. I really much more enjoyed the ‘harder’ subjects like math and science. Social studies was simply too flaccid to warrant any attention. Now, I think that might have been a subjective rejection of a ’study’ which had been rendered impotent by social engineering.

(I do tend to repress memories of unappealing subjects, so I have gaping holes in this analysis.) I remember that we studied some details of various things; but those details were isolated, and non-contextual. We studied wars without motivation, events without causality, and cultures without context/connection. Never once did I get the impression that more work needed to be done in these fields, (I mean history, it already happened, so what’s the argument?) nor was I enlightened to the fact that each had a process of hypothesis, analyzing data, and forming new hypotheses. Separating History, Geography, and Anthropology into their respective fields would have at least given me individual context and appreciation of what each field was striving to accomplish. But social studies had no direction at all.

Now, to get back to government involvement in public education. It shouldn’t be. Some of the industrial giants that Gatto mentioned in his Underground History of American Education had the brilliant idea that they could engineer a school that would train people like mindless robots to properly fill their roles within the industrial complex, specifically that business of which they happen to own. Opening a school is most definitely a good recruiting/training tactic. It might have a very high upfront cost, but overall you get specifically trained personnel, giving you a leg up on the competition.

I fully support this idea, with some caveats.
1. It is all well and good to train your personnel, but you must be careful about premature specialization, and narrow focus. Best practice would have your business school its students on full scholarship, with high barriers to entry. But we’d also like to train as early as possible (starting at 4 or 5 yrs old), in which case, any test is most certainly misleading (perhaps you can screen the parents.)
2. A business sponsored school has a tendency to have an overly business-centric curriculum. Knowing how to make a PowerWaste presentation is not a full semester course. Typing Skills is not a course. Those have no ideas behind them. This is to be an Educational Institute, not a lifetime Training Session. It needs to remain focused on ideas. I have, as yet, no system in mind that might enforce this, other than higher good educators and trust their judgment.

The benefits of business sponsored educational institutions are wide-reaching. If a company can succeed in sponsoring a school, and then derive the benefit of better educated employees, it will outstrip its competitors. Upon seeing this success competitors will try to copy the program, with varying success (some might improve on the first). This will lead to an educational market with increased competition, creating a more effective means of distributing the value rankings of different subject areas. No longer will a single entity decide what all must learn, so the sins perpetrated by social engineers will be marginalized. Education, as a market, will work much better than education as an engineered social structure. If parents don’t like what their children are taught, they are free to place the child in a different school, with a different curricular emphasis. More and varied schools will coexist, competitively.

Without a monopoly control over a single educational system, each business is more dependent of the abilities of HR to make decent hiring decisions, and each parent has a heightened responsibility for the welfare of their offspring. This really works to the benefit of all.