Wall Street's Indian Rope Trick
Either nobody understands the recent financial meltdown, or nobody who understands it can explain it to anyone who doesn't. This resembles a certain period in the history of India when everyone knew someone who had seen the "Indian rope trick," but no one had seen it themselves.
In the "Indian rope trick," a magician holds one end of a rope and throws the other end high up into the clouds. Then his boy-assistant (jamoora) climbs the rope and slowly disappears.
So anyone who has seen the "Indian rope trick" is obviously insane, and likewise with anyone who claims to understand the recent financial meltdown. Although a few traders probably understood a few varieties of vanilla derivatives, like the most basic credit default swaps, all that vanilla was compounded over multi-national networks with much more exotic flavors like Asian options, "path-dependent" options like lookbacks, and options depending on a multitude of related or unrelated indices, like Altiplano, Annapurna, and Atlas options.
This was a mix which literally ran away to infinity through a garden of forking paths and mutually dependent asymptotic series summed over terms which themselves depended on hypothetical truncations of other asymptotic series, and so on.
So it was already almost impossible to understand enough about this mess to understand that you didn't understand it, and it was exponentially more difficult to understand that nobody understood it, and...
Here we are again exactly where we began, because no one who understood that no one understood the infinite tangle of derivatives could explain that no one understood them to anyone who didn't already understand that no one understood them.
Yes. one of the problems is/was that regulators didn't know what the banks knew. A more serious problem is/was that regulators didn't know what the banks did NOT know. But the worst problem is/was that regulators evidently don't CARE what the banks do or do not know - as long as they can print money fast enough to replace all that disappears in a puff of smoke.
October 31, 2009 10:00 AM | Reply | Permalink
Obey, did you get the cedar waxwing? Or does your computer still consider me "junk"? (there are days I would not quarrel with their epithet mind you.)
October 31, 2009 10:20 AM | Reply | Permalink
Hey Wendy! YES, just saw it!! Thanks so much. And you, my dear, are marked as PRIORITY!
;0)
You should do more of these photo-blogs. Rootie here has done some beauties...
October 31, 2009 10:27 AM | Reply | Permalink
I especially like the photo of the Sharp-Shinned Hawk, the subject of many bitter disputes among my birder friends.
"It's a Cooper's Hawk!"
"You wouldn't recognize a Cooper's Hawk if it bit you on the binoculars! It's a Sharp-Shinned Hawk!"
Wendy's outstandingly clear, detailed, and saturated image could eliminate a lot of stress on the bird-paths.
October 31, 2009 11:04 AM | Reply | Permalink
Here is the death-dealing-sharp-shinned hawk (uh-oh!) with prey, a jay, I think I remember.
I couln't get it to work on that blog. The photos all looked under-water bleary, too. Beats me.
http://www.flickr.com/photos/43894623@N06/4052284301/
From the little I can glean from the flickr site, I can only lead people to one photo at a time, unless i use the '10 invites' crapola.
I just heart watching sharp. The way they maneuver through the trees with their hunched-shoulders, wow.
October 31, 2009 11:11 AM | Reply | Permalink
Well, that's the way to tell off that asshat computer! Tell it to kiss my grits, anyway, for the former disses.
Rootie is an actual photographer, with obviously excellent equipment. I used to pine for some long-lost realtive to die and leave me enough $$ for an SLR and lenses, but now I figure who cares? I don't sell almost anything, anyway. I have zero magic about $-making. Good thing I'm in good practice at penury, eh wot?
October 31, 2009 11:14 AM | Reply | Permalink
'Tis why it was known as The Shadow Banking System, a term you rarely hear used any more.
A hidden system contained in deception and wrapped in obfuscation...linked to Fraud.
October 31, 2009 10:23 AM | Reply | Permalink
Churchill said of Russia in 1939, "I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest." Just substitute Wall St. for Russia and the sentiment still holds true. Unfortunately no one seems to be interested in asking the questions about Wall St. today that Churchill did of the Soviet Union in 1939.
October 31, 2009 1:25 PM | Reply | Permalink
Yeah, I was plagiarizing-with-a-darker twist. Thanks, Miguel. There is a tiny cadre who are asking the right questions; perhaps they will be contagious. Think how long it has taken for most TPMers to want to talk about the economy instead of HRC.
October 31, 2009 5:42 PM | Reply | Permalink
It is really quite remarkable, eh?
I think Matt Taibbi pretty much called it back in March when he started off his first article on the subject in Rolling Stone Magazine by writing "It's over — we're officially, royally fucked."
Taibbi has done a great job explaining the outrageous theft on Wall Street in terms even I can understand. (Also see this piece from July wherein he examines the financial coup d'etat successfully managed over decades by Goldman Sachs.)
It is appalling that GS acolytes Geithner, Summers, Paulson, and Bernanke continue to hold the keys to the Treasury. Their manipulation of the bailout has been so transparent in its objective of "Goldman Sachs first; fuck everybody else" that they should be doing time in Leavenworth. Instead, they continue holding sway over our Treasury to a degree that we must ask "Who REALLY owns this government?"
But where's the outrage? Taibbi lays out in plain language the case for revolution against these thieves. Why is it no one is listening?
October 31, 2009 11:07 AM | Reply | Permalink
It's been true for a while as you point out that we are fucked... but only if we do nothing. Obama, the great bamboozler, is an enabler of the worst elements in our economy instead of a check on their unrestrained greed. The only hope for us is if the people will rise up against them. But we have no real leadership and that is definitely a necessary element in a revolt. I pray one arises and soon.
October 31, 2009 1:17 PM | Reply | Permalink
Revolt! This has worked so well in the past. Just look at all those marvelous progressive changes that revolt has brought to the world. Stalin, Mao, Napoleon... History's brightest lights!
For every velvet revolution, there are a dozen repressive coups with blood in the streets. Sitting back and praying for leadership only creates a discrete distance between tea and bag.
But you are just going tell me that I am ignorant and know nothing of history. Only you, praying for the world to drop a leader from the skies, knows that such leaders are always a boon to mankind.
October 31, 2009 1:49 PM | Reply | Permalink
And your solution is... ummmm... what, exactly?
October 31, 2009 2:01 PM | Reply | Permalink
You know, it might be that someobdy would take you seriously if you weren't such a shallow, flaming asshole. You sometimes (not often but sometimes) actually have something useful to say. But instead, adolescent that you clearly are, choose to be a dick more often than not. Good luck with that.
October 31, 2009 2:25 PM | Reply | Permalink
Replace somebody with "I." Using somebody offers cover for your own unique opinion.
Yes, I dickmove you. That is because you cheerlead for benevolent dictatorship... The overthrow of our oligarchy by populist leaders. Your opinions are invariably stained by this authoritarian tautology. Tom Joad the statist.
But you deeply dickmove dialogue by insisting that since you know what's wrong (corporate power) your solution (charismatic populist revolt) is the best answer. I am saying that these revolts are fraught with unintended consequence. A monkey's paw (Happy Halloween).
I am in favor of activism, critical thinking, and the arts. I don't pretend to know the answer. But I know that harnessing anger is as dangerous as greed.
I am done hijacking a great thread. I will attempt to tie it in by stating that a populist revolt is an Indian Rope Trick.
October 31, 2009 2:58 PM | Reply | Permalink
The problem is that you are an asshole pal.
You can make whatever comment you like and hold whatever opinion you like, but you are quick to assume much from any particular comment, you leap to conclusions that are completely uninformed with respect to the meaning of other commenters and you are deliberately, needlessly and pointlessly rude. In short, you choose to be a disagreeable asshole and there's just no justification for it. You discredit your overblown opinion of your own views by being such a prick and again I point out that you do so without any cause whatever and that's the issue. Your pointlessly rude reply to my comment was way the fuck off the mark but in your uninformed opinion you knew what I was talking about without making any sort of inquiry. That kind of leaping to conclusions and assuming that you know what another is meaning is a clear demonstration of what an asshole you are. So, for future reference asshole, I couldn't care less about anything you have to say nor about your lame, psuedointellectual, shallow criticisms. So do us both a favor and don't bother.
November 5, 2009 1:31 PM | Reply | Permalink
It took the French a couple tries, but they got it right(-ish) eventually.
The most important factor conveniently forgotten when looking at the "people's revolutions" in Russia and China is that neither of the places had had a particularly enlightened history of government, and their economies were very agrarian if that.
A relatively democratic culture, such as the U.S., would have a far better chance of a successful revolution. It is still a bit of a silly idea.
October 31, 2009 3:10 PM | Reply | Permalink
When I speak of revolution, it is not so much the "man the barricades" type of venture I have in mind, although this concerns me as a possible outcome of injustice being allowed to continue at its present rate of growth between the haves and have-nots. And I do share zipper's inelegantly stated concern that such revolution can quite plausibly result in a fascist state, although these concerns are somewhat modified by the details you point out regarding our particular history and economy.
Yet, we have known successful revolution in our history. And it is time to generate a new Progressive Era. Who will be the muckrakers and the agitators we require? Who will be the 21st Century equivalent of Upton Sinclair? Where is our Steinbeck? Who stands in Washington in place of "Fighting Bob" La Follette and Henry Wallace?
We need to rise against Wall Street in strong fashion. The "Masters of the Universe" have grown so out of touch with Main street that they cannot possibly be rehabilitated to direct an economy that serves everyone's interests. Taibbi is only one who effectively points out just how sinister is the cabal that circulates in a tight loop between Wall Street and Washington. Somehow, his story must get told in a way everyone hears it. Likewise with the story about Brooksley Born and her attempt to fend off the thieves on Wall Street.
And we most certainly have to get private money out of our public politics. If ever there was any doubt just how corrupting our present state of campaign financing is, it was made abundantly clear during this most recent attempt to reform our health care system.
Revolution is required. How it is accomplished - rather as another progressive movement or at the end of a pitchfork - is yet to be determined. But it must certainly begin with each of us doing what we can to no longer allow the bastards to have their way with us.
October 31, 2009 6:35 PM | Reply | Permalink
I like that Taibbi guy. He keeps running newer and longer stories. I got one book marked now.
And a pundit will show up on MSM and 'demonstrate' how he does not know what he is talking about.
This tells me Taibbi knows what he is talking about. I mean he pisses off an awful lot of people on the right.
October 31, 2009 7:59 PM | Reply | Permalink
The trick is understandable as a series of events. The events are organized by statistical likelihood, with greater payoff tied to risk, but escape mechanisms built in to mitigate the risk. The investment basket (which derive their value from assets but are not assets themselves [that's the trick]) is insured and at the same time is of amorphous character. Certain evens make certain investments fall off the ledger--another risk mitigating factor.
The problem is the trick. The swaps and derivatives are based on speculation. There was an asset bundle whose behavior was insured for and bet against. It was a craps game where the table could bet on the behavior of rolled dice.
In this instance, incredibly stupid aristocrats hired financial prodigies and fired all the accountants. Trash assets (property issued at margin/adjustable rates) were given an artificial mint... They polished turds and sold their value (but not the turds) on the market. Or, to put it mathematically, they convinced the aristicrats that the dice were loaded to roll pass and pairs, when they were actually shaved to roll snake eyes.
The main issue, like the rope trick or donkey show, is that you can't bet on the behavior of what you do not observe. You believe what you are told by credible observors, and there is no ultimate risk because your gambling is subsidized by the government.
To me, asset derivatives and default swaps are no better than gambling and hedging on Schrodinger's cat. The international community needs to pull their heads out of their asses and ban these instruments of blind speculation.
In other words, Rootie: love the post. This accountant cheers you on.
October 31, 2009 11:54 AM | Reply | Permalink
And to give credit, invoking Borges is apt. Tlon, Uqbar, Orbus Tertius is very much about the self-perpetuating quality of abstraction. This group of banks and financiers boight into a world where objects assumed a state that bypassed thermodynamics. The poor and middle class were strip-mined under the delusion that value would rise if only we could ponder and not touch the valuable.
As if wealth could derive from observation. That implies that examination yields a surplus of energy. But the moron aristocrats will believe ANYTHING if money is involved.
October 31, 2009 12:10 PM | Reply | Permalink
Orbis vice Orbus. Borges wouldn't cotton my making yet another phenomenal world by accident.
October 31, 2009 12:35 PM | Reply | Permalink
Thanks for reminding me of all those other great stories, Zipperupus.
Besides his stories some of Borges poems are truly wonderful. My favorite, which I couldn't find online, is General Quiroga Rides to Death in A Carriage, and I only intended to copy out a couple of stanzas here, but what the heck would that say about me, if I can't even be bothered to copy out a whole poem by Borges which apparently isn't online anywhere, so...
(trans, H.R. Hays, partially corrected and improved by Jacob Freeze)
October 31, 2009 3:33 PM | Reply | Permalink
Good illustration of the mathematical side of the problem. It is, however, just the tip of the iceberg ofthe problems with the financial sector.
Until people understand the true, fundamental problem of it, this is not going to go away.
October 31, 2009 3:12 PM | Reply | Permalink
I saw things in India that I couldn't dare translate back into Western common sense. East is East and West is West and never the twain shall meet. Except with a few drones in Pakistan.
October 31, 2009 5:11 PM | Reply | Permalink
One big problem here: there seems to be a line of thinking among some of the people here, that just because we can't understand financial derivatives that means...what? That they're bad for the economy?
I bet none of use can understand Kabala, we can't understand most aspects of medicine, we all can't understand engineering either.
The fact that we don't understand derivatives should give us pause before we judge them. What we do know is that nobody is forced to buy them. It is a completely consensual interaction. Therefore, while we can't understand derivatives we can understand that they ought to be allowed to exist unfettered.
October 31, 2009 10:00 PM | Reply | Permalink
Pirate, the problem is that people who do not understand them - retail investors - bought them under false advertising ("AAA rated!") and got screwed. The problem is that people who should have understood them - AIG - sold 400+ billion in notional value, a bet which drove AIG into insolvency, and other people who should have understood THAT, bought AIG's product, despite the fact that AIG would be unable to pay.
And so all this ignorance leads to a government bail-out to save the whole system. The problem is not the harm you can do to yourself in the derivatives market, it's the harm those involved cause to those outside it.
There's a reason we aren't aloud to buy and sell weapons of mass destruction. you can hurt people...
November 1, 2009 10:31 AM | Reply | Permalink