The Economic Elephant

It would be unfair to describe the Book TV broadcast of a panel discussion on the economy organized by The Washington Post as three blind men grabbing at an elephant. For one thing only one of the panelists, Thomas Friedman, was male, although he compensated for his minority status by definitely being the most myopic of the group. The women on the panel, Barbara Ehrenreich and Michelle Singletary, could not be accused on blindness, although in a situation as complex as this one, it is often hard to tell the difference between sharp focus and tunnel vision. I suspect that I tended to see focus in Ehrenreich's remarks because they were so sympathetic to my own. Much of Ehrenreich's writing has examined the lives (perhaps it would be more accurate to call them "survival tactics") of the so-called "working poor" and the widening of the gap that separates their incomes from those of the wealthy. Ehrenreich is a champion for those of us who react strongly against Main Street being forced to foot the bill for the mistakes made by Wall Street, and she would probably even reject my one grasp at optimism in the belief that Wall Street cannot survive without Main Street. However, I was advocating that position on the basis of economic theory and history. Ehrenreich is neither an economist nor a historian. She is a journalist who usually shares David Simon's intuitive talent for anthropological field work without necessarily making any claims to anthropological training. She goes into the field of the working poor the way Simon has gone into the field of urban Baltimore to examine its decay from multiple points of view. She thus distinguished herself from both Friedman and Singletary by coming to this panel informed by data, rather than anecdotes and factoids; and I can hardly fault her for wanting to focus on data while all around her preferred to ignore the data by telling pleasant stories.

Singletary is also a journalist who apparently covered some of the same Baltimore beats that Simon did; and, while she now writes the nationally syndicated column, "The Color of Money," for The Washington Post, her performance on this particular panel was closer to that of a motivational speaker. Like Ehrenreich she has been exposed to the world of the working poor; but, if that exposure was limited to her grandmother ("Big Momma"), then it is easier to accuse her of succumbing to tunnel vision. There is nothing wrong with her holding up Big Momma as a model for how to live frugally; but, in the current crisis conditions, motivational lectures about the virtues of frugality are about as helpful as just-say-no sermons were for dealing with drug addiction. Indeed, to the extent that consumerism is, as I have suggested, just another form of addiction, Singletary was basically bringing Nancy Reagan into the arena of personal finance management.

Friedman's myopia is best understood in terms of his single-minded focus on creating wealth, even when surrounded with those trying to get their heads wrapped around the problem of poverty. Listening to his mile-a-minute declarations, one could easily wonder whether or not the noun "poverty" is even in his working vocabulary. Another noun that appears to be absent from his vocabulary is "bubble," which means that he is blithely oblivious to factors that cause economic bubbles, as well as the consequences that arise when those bubbles burst. Nevertheless, his rhetorical style carries such a compelling sense of conviction that he is a real-life embodiment of the Old Lady in Maria Irene Fornes' musical Promenade, whose one major song includes the lines:

I know everything.
Some of it I really know.
The rest I make up.

One has to be very alert in reading Friedman to catch him when he is making things up, and following his flamboyant speaking style is even more challenging.

Needless to say, meaningful discussion among such different minds is about as unlikely as the three blind men finally coming to agreement about what an elephant it. The result was more like a something-for-everybody variety show. Some were probably ready to shell out their money to buy Friedman's wealth-making patent medicine. Others were content to nod knowingly at the stories of Big Momma's lessons in frugality. My guess is that few wanted to hear Ehrenreich talk about all those poor who are still scraping at the door, and that does not bode well for Barack Obama's intentions to get us all to work together towards repairing our seriously broken economic system.

Why Grameen Bank Can Continue Through the Crisis

Today's SPIEGEL ONLINE has an interview with Nobel Laureate Muhammad Yunus, founder of the microcredit institution, Grameen Bank. Yunus received the 2006 Nobel Peace Prize for his efforts on behalf of a financial system that placed its highest priority on "providing the greatest benefit possible for human kind," rather than the usual priorities of "the maximization of profits and rapid growth." At the present time Grameen appears to be maintaining its stability, while just about every major bank around the world has at least one cause for significant distress. Is this just because Grameen is small?

The SPIEGEL ONLINE interviewer (Hasnain Kazim, translated from the German by Charles Hawley) framed the question in terms of whether there were lessons that "the entire finance world" could learn from the Grameen model. Here is Yunus' reply:

The fundamental difference is that our business is very connected to the real economy. When we provide a loan of $200, that money will go to buy a cow somewhere. If we lend $100, someone will maybe buy some chickens. In other words, the money goes to something with concrete value. Finance and the real economy have to be connected. In the US, the financial system has completely split off from the real economy. Castles were built in the sky, and suddenly people realized that these castles don't exist at all. That was the point at which the financial system collapsed.

Given my own preoccupation (thanks to Isaiah Berlin) with the need for a "sense of reality," particularly when the World Economic Forum meetings continue to remind me how much of that sense has been lost, these are refreshing words. In a financial system where debt itself became a commodity that could be traded (and thus inflated to unrealistic prices), there is something comforting about an exchange system that is still grounded in the more concrete realities of cows and chickens. Yunus hit on just the right metaphor: It is almost as if the entire vocabulary of current financial practices provided the building blocks for those castles in the sky; and, since the words had concrete semantics (even if they were understood by only a very elite few), the world at large took it for granted that the castles were just as concrete, so to speak.

When you think about it, this economic crisis is a postmodern malady for postmodern times. If the very "possibility of attaining truth" can be questioned as being nothing more than idea represented by some configuration of significant symbols, then why should the concept of price (continuing to cleave to Robert Solow's preference for talking about economics in concrete language) be any less vulnerable to questioning? What is debt-as-commodity other than such a configuration of significant symbols that became endowed with semantics more on the basis of rhetoric than on the foundation of any concrete logic? Cows and chickens, on the other hand, are not significant symbols; they are objects through which one can obtain food, clothing, and possibly even shelter. Grameen Bank thus confines itself to exchanges grounded in such objects, rather than those fictions of convenience that would change the rules of the game for those playing for "the maximization of profits and rapid growth." The problem is that the new rules were the rules of a confidence game; and Grameen, with its unconventional system of priorities, knew enough to stay out of that game.

This is not to deny that objects cannot have their own problems. Cows may not give enough milk; and, as a result of their diet, the milk they give may be sour. Chickens may not lay enough eggs, and the chickens they then breed may be too scrawny to eat. Nevertheless, these are problems of resource management; and those who know about farming are likely to be better equipped to deal with them than with problems of debt management. I suppose that the basic Grameen principle is that the customer should worry about sensible resource management and let the bank worry about responsible debt management. Somehow I just cannot imagine Wells Fargo thinking in those terms (although they may well have done so in their earliest days)!

Another Input Source for Congressional Deliberation

In the time since I made my assertion this morning that "the Congress should recognize that there are more voices to hear in addition to the Treasury Department and the Federal Reserve," The Nation has provided us with one of those voices, Joseph Stiglitz. For those who may have forgotten, Stiglitz is the Nobel laureate in Economics who co-authored, with Linda Blimes, The Three Trillion Dollar War: The True Cost of the Iraq Conflict. This provides us with a useful perspective:

• He is not afraid to get down and dirty with his mathematics.
• He is not afraid of large numbers.
• In the tradition of his fellow Nobel laureate, Robert Solow, he knows that talk about "value" is a dangerous proposition; so he keeps his eye on the ball of price.
• He is not afraid to speak truth to power.

If Senate Banking Committee Chairman Christopher Dodd does not invite Stiglitz to appear before his committee, it would not hurt for him to drop whatever else he may be doing and give Stiglitz' Nation piece a serious read. My guess is that he will then make it required reading for everyone else on his Committee and pass it on to the House Financial Services Committee.

Thus far my primary argumentative position has been to question the consequences of adopting the Treasury proposal. Stiglitz takes a different approach: He grants the problem it does solve and then identifies three problems that it ignores. Here is how Stiglitz frames his argument:

There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.

The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense.

The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner. The administration even turned down an effective stimulus package last February--one that would have included increased unemployment benefits and aid to states and localities--and they still say we don't need another stimulus. To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn't they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? If a quick consensus is required, why not include provisions to stop the source of bleeding, the millions of Americans that are losing their homes? Why not spend as much on them as on Wall Street? Do they still believe in trickle down economics, when for the past eight years money has been trickling up to the wizards of Wall Street? Why not enact bankruptcy reform, to help Americans write down the value of the mortgage on their overvalued home? No one benefits from these costly foreclosures.

The administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again. There are alternatives. Warren Buffet showed the way, in providing equity to Goldman Sachs. The Scandinavian countries showed the way, almost two decades ago. By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem--the government getting stuck with the worst or most overpriced assets.

Finally, we need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness.

I am not saying that Main Street will quickly grasp all the twists and turns of Stiglitz' reasoning, but he has expressed himself with a rhetoric that may well be the best retaliation against that "shock doctrine" thinking that has Main Street so convinced that they are about to be "bamboozled" again, this time for an astronomical sum. If Franklin Roosevelt tried to reassure the United States by telling its citizens that the only thing they had to fear was fear itself, today's citizens need to recognize (and may, indeed, have recognized) that what they most need to fear are the very purveyors of fear.

Needless to say, we should not be seduced into trying to find that Holy Grail that will resolve all four problems in one fell swoop. Mencken's precept remains: Complex problems are rarely (if ever) resolved by clear and simple solutions. The Congress should not immediately embrace everything that Stiglitz has to say, just because he has demonstrated that, whatever Hank Paulson and Ben Bernanke may tell them, there are alternatives worth considering. A good first step for the Senate Banking Committee would be to decide whether or not they accept Stiglitz' proposition that the current crisis is grounded in more than a single problem. If they can agree on that, then perhaps they can also agree on how many in Stiglitz' list of four need to be addressed, if not in terms of a single solution then by asking if solving the first problem will end up making matters worse for the others (meaning that it will only be a matter of time, more likely sooner than later, that they will be deliberating yet another expensive proposal). For that matter they may even ask if that first problem on the list is really the first one that should be addressed.

The good news is that Dodd has the support he needs to hold to his conviction that doing things right is more important than doing them quickly. Main Street clearly shares that conviction. They also know better than to fall for that "My way or the highway" line. They may not know where the straight path is, but they know when someone is trying to bamboozle them into taking a crooked one.

The Ultimate Shell Game

There is much to be gained from this morning's Financial Times account of the basic nuts and bolts involved in our President's decision to rescue major financial institutions on the brink of collapse:

The Bush administration sought congressional support Saturday for a $700bn bailout for US financial institutions to quell the turmoil in financial markets.
The plan would allow the government to buy the bad debt of any US institution for the next two years, raising the legal ceiling on the national debt from $10.6 trillion to $11.3 trillion.
President George W. Bush said: “We’re going to work with Congress to get a bill done quickly.” Treasury officials and members of Congress were meeting throughout the weekend to secure broad agreement on the package by the time world markets reopen on Monday. Legislation could pass early next week.

Saying the administration was faced with preventing the collapse of a financial “house of cards”, Mr Bush said: “People are beginning to doubt our system, people were losing confidence and I understand it’s important to have confidence in our financial system.” he said.

Consider first those numbers, which offer two radically different points of view:

1. With a "stroke of the pen" (as political writers like to say), the President will have the power to increase the national debt by $700 billion, a quantity that most of us can barely (if at all) comprehend.
2. On the other hand that same "stroke of the pen" would be increasing the national debt by "only" a little more than 6.5%, which is the sort of markup that would not surprise us if it were applied to the groceries we were buying as sales tax.

Put another way, do these numbers have anything to do with "real money" (as Everett Dirksen supposedly put it); and, if so, just what is that reality? Invoking the language of Richard Neustadt and Ernest May, what are likely to be the consequences of that "stroke of the pen," not just for those financial institutions being rescued for whom "business as usual" rarely regards money as anything other than a "fiction of convenience," but for those of us for whom money is all-too-real, since without it we most likely will be deprived of food, clothing, and shelter (not to mention health care). Sadly, the Bush Administration (apparently with the McCain campaign conveniently in tow) has revealed, through its track record, how loath it tends to be when it comes to thinking about consequences, let alone deciding upon action based on such thoughts.

The pathos of this negligence is painfully underscored by the use of the word "confidence" twice in the final sentence in the above quotation, a sentence uttered by George W. Bush. The only thing I could think of as that sentence stuck in my craw was a cautionary piece that Rafe Needleman had written for his CNET News.com blog back in August of 2006, where he described the Cluetrain Manifesto in terms of "shiny new values competing with reasonable but conservative older values." The irony of course is that it is through such "shiny new values" that the Bush Administration is now threatening our reality by playing reckless games with fictions of convenience. Indeed, when I wrote my commentary on Needleman's piece, I observed that he had overlooked how the "shiny new value" of confidence was winning out over the "conservative older value" of credibility, which is probably why the blunter description of a "fiction of convenience" is "confidence game."

Of course the very use of the word "value" is so abstract that just about any interpretation amounts to a confidence game. However, pulling a fast one in the philosophy of semantics is one thing; doing it with the working man's wallet is quite another, which is why Robert Solow has felt so strongly about the need for economics to dispense with the notion of "value" and stick to more ordinary observables, like price. That is where hit on the fundamental ugly truth of the chaos of this past week: For most of those large financial institutions, price is as remote an abstraction as value is; and, as we can see from the way of Government talks about the national debt, it is just as abstract in both the Legislative and Executive Branches. I suppose you could say that, contrary to what Solow believed, price is only an "ordinary observable" to those of us who have to pay it!

Blaming the Victim (Again)

Henry Blodget's latest blog post on The Huffington Post, "US Homeowners Still Living in Dreamland," may well be living in a dreamland of its own. It is short enough to be reproduced in its entirety to make sure that its argument is fairly analyzed:

When will our economy begin to recover? Not until US homeowners wake up and realize that their houses are worth what all assets are worth: what someone will pay for them.

The NYT's David Leonhardt chronicles the dreamworld inhabited by most US homeowners, a bright cartoon-land in which the value of their neighbor's house has dropped by 30% but theirs is still worth more than they paid for it at the 2006 bubble peak. These homeowners refuse to move or sell until they can "at least break even," which means they'll stay in their depreciating assets for years while skyrocketing inflation reduces the value of whatever they eventually get by about 4% a year.

Of course, those who inhabit only the digital world shouldn't cackle too loudly: As Fabrice Grinda observes on Silicon Alley Insider, start-up owners behave just the same way--refusing to sell a dollar of equity as prices drop...right up until they run out of cash.

In any event, our economy won't truly recover until house prices adjust. And in the housing market, at least, price-to-income and price-to-rent ratios suggest that that "adjustment" is likely to be down.

As often seems to be the case with my analyses, I would assert that the best way to uncover the flaw in Blodget's reasoning is through a scrupulous examination of his text. The problem in this case is that his argument trips over a conflation of two separate motives for "investing" (by which I mean the commitment of financial resources, whether "hard" or "soft," as in loaned or otherwise promised). The simpler motive is "acquisition for use;" and the other is "speculation." Most of us buy real estate because we want to live in it. Some of us can even afford a second property for use. (While living in Palo Alto, we purchased a condominium in San Francisco for weekend use, primarily for its proximity to three of the major performing arts spaces in the City. We also saw it as a good retirement residence, which is what it became when we sold the Palo Alto property.) My point, however, is that "acquisition for use" has been normative probably since the end of World War II, when having your own place became a fixture in the American dream.

Speculative investing is another matter, since it is basically a gamble on Blodget's fundamental premise: assets are worth "what someone will pay for them." Think of it as a "gamble on the future tense," which means that it is just like any other gamble, whether it involves which horse wins the race or what the price of Google will be at the end of the calendar year. Most gambles thrive on the premise that "anyone can play;" and those who run the gambles profit because, when anyone plays, most of them are going to lose. In other words investing in real estate for its future value is no different than buying stock for its "anticipated growth." It is risky, but it is promoted by those who do everything they can to get you to ignore the risk.

Whether or not homeowners are "still living in dreamland" is not the real issue. The real problem is that their dreamworld was imposed upon them by predatory lenders, who forced them into a speculative investment to support acquisition-for-use. When the speculation went south (as most speculations do), the victims no longer had what they thought they had acquired for use. The current response of our Administration appears to be that these victims should have remembered the caveat emptor rule; but to what extent can this rule be imposed upon those who have been force-fed under pressure with deceptive information? I suspect that economic recovery is going to depend less upon a readjustment of housing prices and more on a general readjustment of the "rules of the game" under which the majority of our population can engage in acquisition for use.

Bubble Talk about Semantics

While most of the business world seems focused on the corporate fate of Yahoo!, BBC NEWS decided that this might be a good time to report on some of their recent attempts to advance on the technology front:

Yahoo has announced its adoption of some of the key standards of the "semantic web".
The technology is widely seen as the next step for the world wide web and it involves a much richer understanding of the masses of data placed online.
The company said it would start to include some semantic web identifiers when indexing the web for Yahoo search.
The move could mean a big boost for semantic web technologies which have struggled to win a big audience.

Before addressing any details, it would be a good idea to dwell on that last sentence. Why has that "audience" for the Semantic Web been so much weaker than its champions assumed it would be? I suspect that the primary reason has to do with the never-ending opposition between simplicity and complexity. Whatever complex computations may lie behind the Google machinery for page ranking, simplicity from the user's point of view has always been the highest priority. When coupled with speed, simplicity is one of the best ways to "win a big audience:" if Google does not give you what you want on the first try, it's so fast that there is no hassle in trying a second, or even third, time. Google has become one of the undisputed masters of what many take as the primary law of user-centered design: KISS (Keep It Simple, Stupid!).

Therein lies the problem. There is nothing simple about "a much richer understanding of the masses of data placed online." Indeed, because it straddles the objective, subjective, and social worlds, there is nothing simple about understanding, itself. To reduce the argument to the bluntest of terms, how well do any of you out there really understand your mother? How many of you really understand any electronic mail or voice mail that she leaves for you? All kidding aside, if you are still struggling to understand your communications with the one person you have known longer than any other, just how much progress do you expect to make with those "masses of data placed online?" Put another way, it took Jürgen Habermas some 900-odd pages to work out a viable theory of understanding in The Theory of Communicative Action; and the reader who follows him persistently to the very end of this magnum opus may well find himself/herself "as befogged as before" (as Anna Russell put it so well)!

Once we confront these hard truths, we can see why, while the very nature of understanding can be very appealing in academic circles, there is a broad gulf between what we have learned from an abundance of academic exercises and what can actually be done in the real world. Since Yahoo! can only survive on the basis of its performance in that real world, we have to pose the classic cui bono question. Translated literally as "to whose good," we may well assume the simpler version of "Who benefits?" After all, if we can put a price on that benefit, then we can start talking about cost, which is what matters most to any self-respecting business.

Unfortunately, the BBC report is not particularly informative about the answer to this question:

At the moment most search engines, particularly Google, identify relevance for a particular topic using the interconnections between sites as much as they do the text on any single page.

The semantic web promises to change this because it helps to capture the meaning of data on a page and so give machines classifying or searching the web the capability to work out its relevance to a particular topic.

In an entry on Yahoo's blog, Amit Kumar, director of product management for the company's search site, said it was now starting to back key semantic web standards.

Mr Kumar said despite "remarkable progress" being made on how to classify meaning on webpages, the benefits of this work have not been felt by the average web user.

What was lacking, he added, was a compelling reason or "killer app" to use the semantic web technology.

"We believe that app can be web search," he wrote.

The most dangerous part of this piece of text is probably the return of the "killer app" concept. That is a phrase that was essentially blown away when the dot-com bubble burst; and there is something downright frightening about it's rising from the dead like one of George Romero's zombies. There is certainly nothing wrong with the underlying spirit of the phrase: If you cannot answer the cui bono question in terms of a well-defined deliverable with a well-defined user community, then you haven't really answered the question. The problem when the dot-com bubble was inflating was that start-ups deluded themselves into believing that whatever they happened to be doing was the "killer app;" and the only problem was to get everyone else to believe the same thing. To some extent Kumar is guilty of exactly the same specious reasoning: Yahoo! has its roots in Web search, ergo the "killer app" for Semantic Web technology will be Web search.

We are thus back in that world of reckless talk about innovation that we were hearing at Davos. This is the talk about what is new and cool (even if the Semantic Web concept has now been around so long that it is a bit of a strain to count it as either) that disregards what needs are being satisfied and what it will ultimately cost to satisfy those needs. This is not to deny that there are ways in which new software would enable our computers to facilitate our dealing with that complex problem of understanding. Rather, it is to argue against the positivist strategy of carving off a "cleanly objective" part of the problem, solving that part, and then declaring, "My work here is done!" Doing so ignores the part of the problem that resides in the social world; and, because the Internet has now become a social medium, we ignore that part at our peril, as I have tried to demonstrate in terms of the impact of "social software" in workplace settings.

The irony is that, when Google was growing to imperial size on the basis of its KISS approach to Web search, Yahoo! was promoting itself as social software: The all-purpose portal for your life in the social world. Unfortunately, this vision has not been translating into revenue with the same strength as Google's strategy of linking advertising to search results. My guess is that there are quite a few great minds agonizing over why things turned out this way. However, if those minds are too obsessed with "killer apps," they may lose any "sense of reality" of what people are doing with their computers, both at home and in the workplace; and they would forget the warnings of Ludwig Wittgenstein concerning the attempt to write a book called The World As I Found It!

As if We Don't Have Enough Bubbles

Having already addressed, earlier this week, the extent to which the "Internet prosperity" of corporate giants like Google may be a bubble about to burst, I took great interest in the analysis by Beat Balzli and Frank Hornig on SPIEGEL ONLINE entitled "What's Really Driving the Price of Oil?" This article deserves serious extended reading. However, the underlying principle is the case they make that the current price of oil has nothing to do with supply or demand and everything to do with the speculative behavior of futures trading; and this should remind us that economic bubbles are inflated when the "thin air" of speculation displaces those models of value that are based on "hard" commodities or the goods and services associated with those commodities. From this point of view, the key paragraph of the Balzli-Hornig analysis is probably the following:

Enormous amounts of money are currently changing hands in the business of oil contracts. With the American real estate debacle infecting ever larger segments of the capital markets, from stocks to bonds, investors are seeking alternatives worldwide. Oil, with its supposedly straightforward market rules and ever-rising prices, seems to be a perfect tool for spreading risk and maximizing profit. But many investors will have a rude awakening when they realize that an investment in oil, though it may look different, is no less a gamble than other types of investments.

This raises another important underlying principle, which is that any radical economic loss tends to incite desperate behaviors aimed at recovering from the loss as rapidly as possible. Anyone who doubts this principle can see it in action at just about any gaming table in Las Vegas (or at any other gambling establishment): the more you lose, the more driven you are to recover by playing the same game. Now that everyone has lost their shirts by betting too heavily on the financial sector, they are determined to recover them through oil futures. All Balzli and Hornig are doing is reminding us of the most important precept from The Money Game by "Adam Smith:" the crowd is always wrong. The only problem is that these gamblers are rarely the victims of their own bad judgment. The real victims are those for whom, as America Jones put it in a comment on one of my earlier posts, "the stock market represents a comfortable retirement rather than a fancy roulette wheel." Indeed, those victims lucky enough to have a job at all are now faced with an unpleasant choice between no longer being able to afford the commute to work or trying to live off of an enfeebled retirement fund. Meanwhile, our President told this morning's news conference that he "hadn't heard" about the likelihood of a gallon of gas costing $4. So much for all my cautionary remarks about the need for a "sense of reality!"

Finding Visible Clothes for the Emperor

Jakob Nielsen has been writing about the effective design of Web pages for almost as long as there have been Web pages, or at least as long as Web pages moved from plain text to "rich media." He offers sound advice in clear, no-nonsense language. Therefore, I think that BBC NEWS made an excellent move in running a feature in which Nielsen sounded off on Web 2.0. Nielsen's message was that Web 2.0 was goring his favorite ox, providing site designers with slick distractions from the principles of design and usability have that been his focus for over a decade. This message provides an alternative take on my proposition that Web 2.0 is little more than dot-com redux, an economic bubble that is still inflating but will repeat the history of the dot-com bubble. Here is how the BBC feature put it:

He [Nielsen] said sites peppered with personalisation tools were in danger of resembling the "glossy but useless" sites at the height of the dotcom boom.

The problem is that those who have drunk the Web 2.0 Kool-Aid blind themselves to the sad truth that most of the world out there (including the world that visits the World Wide Web) does not share their technocentric perspective. Nielsen offers a pithy summary of most of the Web-using community:

For them the web is not a goal in itself. It is a tool.

For all his keen perception and sound advice, Nielsen is not interested in diagnosing why Web 2.0 technocentrism should be turning what could be a valuable tool into such as "glossy but useless" place. My own opinion is that technocentrism is the "new utopianism;" but, while most previous utopias were (or at least began as) rather isolated intellectual exercises, this is a far more populist movement, perhaps because so many choose to view it as a magnet for venture investments. However, whether intellectual or populist, utopianism still fails to stand up to the criticisms of Isaiah Berlin, who, while hardly the first to see the connection to fascism, was one of the most articulate (political correctness of not, that is the best word for it) about it.

Hayek's Road to Serfdom addressed the question of how, through subtle manipulations in social context, a free society could prepare itself for fascist domination. His target was the rigid controls of economic planning; but, were he alive today, he might view technocentrism through the same lens, since, at the end of the day, it, too, is all about control. To build on Nielsen's perspective, the "potential serfs" of today are deluged with propaganda endorsing extremely attractive tools. However, these tools do not do what we want; and, for the most part, we do not want what they are capable of doing. They thus fulfill Douglas Adams' vision of the elevator that, when you press the "down" button, tries to convince you that you would rather go up.

Sadly, when we are not blinded by propaganda, we are confused by turbulence. This is another powerful social context. When people are confused, they crave simplicity above all else, even their civil liberties. We have seen this in history; and, as I recently observed, times of turbulence engender any number of false hypotheses. We may now have progressed beyond the ability to learn from cautionary tales, however clear and alarming they may be. Perhaps we shall just all sit on T. S. Eliot's beach and wait for the whimper.

At Last, a non-IT Economic Bubble!

Sometimes it seems as if the only consequence of the bursting of the dot-com bubble has been a frantic search in the IT world for the next bubble. Web 2.0 has been, and may still be, one of the major contenders for such a bubble. Another, examined today on Lou Paglia's CoRrElate blog, is Web Services. However, an article by Fiona Harvey posted on the Financial Times Web site last night has served to remind us that you do not have to be an IT "player" to inflate a bubble.

The bubble that Ms. Harvey has chosen to examine is the market for carbon credits. She never uses the word "bubble." Nevertheless, experienced bubble-watchers should have no trouble seeing a red flag in her lead sentence:

The market in carbon credits grew faster than expected last year, tripling to $30bn from $10bn in 2005, the World Bank said on Wednesday.

Now, for those who have not been tracking this market, it emerged from an interesting strategy:

The market in carbon credits was brought into being by the Kyoto protocol, under which rich countries can meet their targets to reduce emissions by about 5 per cent by 2012 by investing in projects, such as wind farms, that reduce emissions in developing countries.

Reduced to less honorable language, the strategy basically says: We shall compensate for our failure to reduce emissions by financing the reduction of emissions elsewhere, thus improving conditions on the overall global scale. Ms. Harvey points out some of the problems with this kind of thinking, devoting much of her attention to the amount of this market that is unregulated. However, she does not examine the extent to which this is basically a market of intentions, not that different from the sorts of intentions being marketed by dot-com startups and the venture funds backing them in the late Nineties. However, while most venture funds could manage with a strategy of hitting a major success only ten percent of the time, I cannot imagine that a ten percent success rate in investments in emissions reduction is doing to do much for the overall good of the planet. There are also some interesting numbers as to just who has been benefiting from what the rich countries have been buying:

China was the biggest beneficiary, selling 61 per cent of last year’s carbon credits, while India took 12 per cent and Brazil 4 per cent. Credits normally sell for between $5 and $10. The UK was the biggest buyer of credits, purchasing 50 per cent of the supply.

Is this really going to bring about the Kyoto goal by 2012? I have serious doubts, particularly when it comes to wondering why, in light of my last post, China is selling when it has the economic resources to invest in global-scale improvements.

There is an often-repeated story that President Kennedy had been reading Barbara Tuchman's Guns of August when he found himself thrust into the Cuban Missile Crisis. He was strongly persuaded by Tuchman's argument that Europe basically blundered its way into the First World War and did not want a similar blunder to take place on his watch. The heart of the blunder was, of course, a preoccupation with "the great game of diplomacy" that blinded the diplomats to what was actually happening "on the ground." (As I previously mentioned, this was nicely depicted in choreography by Kurt Joss in his "Green Table" ballet.) These days "the great game" is the game of finance; but it is just as capable of inducing blindness. The bubble of carbon credits will probably burst sooner rather than later (most likely far before 2012); but this time the consequences will involve far more than financial losses!

The Mother of All Bubbles

One of the last entries I prepared for my previous blog addressed the question of whether or not the next economic bubble-burst would begin in China (and probably propagate from there, thanks to the "virtues" of globalization). The speculation was based on a London Times article about a pending "bruising internal power struggle among the highest ranks of China’s secretive ruling Communist Party." Today the Financial Times has a story with the headline, "Warning on China stock market ‘bubble.’" What makes this story particularly interesting, given the context set by the London Times, is the source of the warning:

Cheng Siwei, vice-chairman of the National People’s Congress and an influential figure in Beijing financial circles, warned the mainland stock market could be overheating, after a rise of 130 per cent last year.

My reaction to the earlier article was that any "bruising internal power struggle" could bring about a level of instability that would lead to uneasy feelings about the stock market. If enough people translated those feelings into a shift of investments into something based less on a "fiction of convenience," then this could bring on the sort of crash that would burst the bubble. Cheng seems to have enough confidence in his personal position of influence to state publicly that "The market is based on people’s behaviour," rather than any "theory of value." In other words, as John Kenneth Galbraith did when writing about the concept of money, Cheng has developed his own terminology for representing the market as a "fiction of convenience."

There is also the possibility that a bubble-burst is precisely what some of the agents involved in this power struggle want. Having a stock market at all must be extremely galling to any remaining old-timers who are still passionate about Mao's ideology; and it is not too far-fetched to imagine that they see it as a nightmare from which China must awaken, preferably sooner rather than later. Fomenting an instability that would weaken the market when it is in such a vulnerable state would be just the sort of alarm clock that these ideologues would desire. After all, if they read their Marx along with their Mao, they probably subscribe to the conviction that "Men make their own history" and see this as an opportunity to put theory into practice. Indeed, the sentence from which that phrase is plucked may well capture the state of affairs in not only the China stock market but also the global economy:

Men make their own history, but not spontaneously, under condition they have chosen for themselves; rather on terms immediately existing, given and handed down to them.

Those "immediately existing" terms for bursting a bubble can be found all around the world; but it is beginning to look like the holder of the pin may be in China!