The roots of the subprime crisis | 71 comments (71 topical, editorial, 0 hidden)

Re: The roots of the subprime crisis (4.00 / 4)

European Tribune - The roots of the subprime crisis

When you understand the thermodynamic roots of economic life, and when you understand how our financial system flouts thermodynamic law, you can see that regular crises like these are a structural requirement of our system.

This is interesting, but I think boom-bust cycles are an expected feature and not a consequence of the financial system "flouting thermodynamics".

To see this, consider the Lotka-Volterra equations as a model of consumption of a renewable resource: the "predator" is the economy and the "prey" or "food" is the renewable resource.

In the model system, the predators thrive when there are plentiful prey but, ultimately, outstrip their food supply and decline. As the predator population is low the prey population will increase again. These dynamics continue in a cycle of growth and decline.

I fail to see how the Lotka-Volterra system "flouts thermodynamics". Maybe you can argue that the problem is that the predators are "blind" to thermodynamics, but unless the predators precisely manage their fertility and their hunting quite carefully there will be boom-bust cycles, and even a stable system will start oscillating in response to an external shock.

Another useful analogy of the economic system is oscillating chemical reactions

The reactions are theoretically important in that they show that chemical reactions do not have to be dominated by equilibrium thermodynamic behavior. These reactions are far from equilibrium and remain so for a significant length of time. In this sense, they provide an interesting chemical model of nonequilibrium biological phenomena, and the mathematical model of the BZ reactions themselves are of theoretical interest.
An essential aspect of the BZ reaction is its so called "excitability"- under the influence of stimuli, patterns develop in what would otherwise be a perfectly quiescent medium. Some clock reactions such as Briggs-Rauscher and BZ using the chemical ruthenium bipyridyl as catalyst can be excited into self-organising activity through the influence of light.

For "nonequilibrium biological phenomena" read "economic phenomena".

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris

by Carrie (migeru at eurotrib dot com) on Tue Mar 11th, 2008 at 04:58:33 PM EST

Re: The roots of the subprime crisis (none / 1)

Ok.-.. since yous tarted.. I precisely left this part out of my comment.

Tehre are some eocnomists (Marx among them if you want to call it that way) that do defend the existence of cycles..

And I am compltely with you on that.. if we talk about cylces (more growth less groth/minor recession), I think the oscialltory regime is what you should aim for and not thermodynamics. You do not need such a huge precision on the definition of "variable".. given its bifurcation theory approach where actuallyd efining precisely the variable is not "necessary".

I just did not comment on that beccause I thought it deviated from my point.

But I agree with you on that.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Tue Mar 11th, 2008 at 05:22:29 PM EST
[ Parent ]

kcurie (4.00 / 2)

You spell check your diaries. Any chance you also spell check your comments? Seriously, the wya you post makes them really hard to read.

I know that makes them immediately identifiable as your comments, but it's hard-to-read!! Please?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Mar 11th, 2008 at 06:16:31 PM EST
[ Parent ]

Re: kcurie (none / 1)

I will do my best. Only spell check comments.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Wed Mar 12th, 2008 at 04:00:11 AM EST
[ Parent ]

Re: The roots of the subprime crisis (none / 1)

I think that compound interest represents a "positive feedback" that renders a deficit-based system inherently unstable.

There are of course interesting biological analogies, for instance, the system of financial capital as a cancer which cannot help destroying the host, and "limitation of liability" as a very good analogy for a "semi-permeable membrane" (allowing value in, but not out) bounding an organism etc etc

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Mar 11th, 2008 at 05:31:33 PM EST
[ Parent ]

Re: The roots of the subprime crisis (none / 0)

Yes there is positive feedback, and there is negative feedback. They act on different timescales and therefore lead to cycles.

If you remove all the positive feedback all you have is negative feedback and you die off.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris

by Carrie (migeru at eurotrib dot com) on Tue Mar 11th, 2008 at 06:11:15 PM EST
[ Parent ]

pretty abstract, but I think I see... (4.00 / 3)

There may be other dynamics, in addition to the imbalance of debt and real wealth, that produce "boom and bust" cycles in an economy.

I recall that as an undergrad, years and years ago, I had a prof who reported (with a chuckle, as in "could anything be more ridiculous?") that "there is even some evidence that stock market ups and downs correspond to sunspot activity." Hmm... Sunspots affect solar output, which affects agriculture, which is still one of the primary ways that valuable low entropy is brought into an economy (despite the fact that there has been an historical decline in the percentage of the workforce engaged in it. Look for that trend to be reversed as we come off peak oil and are forced to practice sustainable agriculture.)

Interesting analogue:

unless the predators precisely manage their fertility and their hunting quite carefully there will be boom-bust cycles, and even a stable system will start oscillating in response to an external shock.

Imagine if the predator population (representing claims on future population of prey) can grow exponentially, because they are (like debt) incorporeal abstractions. The boom and bust cycles could then easily become large enough in oscillation to threaten not only the dynamic equilibrium implied by the sinusoidal chart, but the continuation of the system as a whole, through the removal of the prey species entirely.

Industrial society is not sustainable. Unsustainable systems change--or disappear.

by Eric Zencey (Eric dot Zencey at UVM dot EDU) on Tue Mar 11th, 2008 at 06:35:22 PM EST
[ Parent ]

Re: pretty abstract, but I think I see... (4.00 / 2)

Eric Zencey:

I recall that as an undergrad, years and years ago, I had a prof who reported (with a chuckle, as in "could anything be more ridiculous?") that "there is even some evidence that stock market ups and downs correspond to sunspot activity." Hmm... Sunspots affect solar output, which affects agriculture, which is still one of the primary ways that valuable low entropy is brought into an economy (despite the fact that there has been an historical decline in the percentage of the workforce engaged in it. Look for that trend to be reversed as we come off peak oil and are forced to practice sustainable agriculture.)

This reminds me of stochastic resonance. There need be no more than a very small effect of the sunspot cycle on economic activity, but since the sunspot cycle is (quasi)periodic it might be able to resonate with the nonlinear oscillator that is the economic system and get amplified in the response.

Strictly speaking, stochastic resonance occurs in bistable systems, when a small periodic (sinusoidal) force is applied together with a large wide band stochastic force (noise). The system response is driven by the combination of the two forces that compete/cooperate to make the system switch between the two stable states. The degree of order is related to the amount of periodic function that it shows in the system response. When the periodic force is chosen small enough in order to not make the system response switch, the presence of a non-negligible noise is required for it to happen. When the noise is small very few switches occur, mainly at random with no significant periodicity in the system response. When the noise is very strong a large number of switches occur for each period of the sinusoid and the system response does not show remarkable periodicity. Quite surprisingly, between these two conditions, there exists an optimal value of the noise that cooperatively concurs with the periodic forcing in order to make almost exactly one switch per period (a maximum in the signal-to-noise ratio).
Such a favorable condition is quantitatively determined by the matching of two time scales: the period of the sinusoid (the deterministic time scale) and the Kramers rate (i.e. the inverse of the average switch rate induced by the sole noise: the stochastic time scale). Thus the term "stochastic resonance".
Stochastic resonance was discovered and proposed for the first time in 1981 to explain the periodic recurrence of ice ages.^[1] Since then the same principle has been applied in a wide variety of systems. Nowadays stochastic resonance is commonly invoked when noise and nonlinearity concur to determine an increase of order in the system response.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris

by Carrie (migeru at eurotrib dot com) on Tue Mar 11th, 2008 at 07:01:56 PM EST
[ Parent ]

Re: pretty abstract, but I think I see... (4.00 / 2)

There is some interesting research on Mother Nature forcing social-economic regimes...

African recessions lead to democratic concessions
In Sub-Saharan Africa, periods of low rainfall often lead to economic downturns. And economic downturns, in turn, lead to the toppling of autocracies.
At least, such is the theory put forth in a summary of a new paper by economists Marcus Bruckner and Antonio Ciccone, "Rain and the Democratic Window of Opportunity."
In his synopsis, Ciccone writes that "Four out of five Sub-Saharan African countries were autocracies in 1980, but twenty-five years later there were more democracies than autocracies." He then references the work of economists of Darin Acemoglu and James Robinson:
They show that democratization becomes more likely after transitory, negative shocks. These shocks give rise to a window of opportunity for citizens to contest power, as the cost of fighting ruling autocratic regimes is relatively low. When citizens reject policy changes that are easy to renege upon once the window of opportunity closes, autocratic regimes must make democratic concessions to avoid costly repression.
So what's most likely to cause a transitory negative shock in the agricultural-based economies of sub-Saharan Africa?
Drought.
In our sample, a 50 percent drop in rainfall reduces real income per capita by around 4 percent relative to trend. Putting the two pieces of the puzzle -- the effect of low rainfall on income per capita and its effect on the probability of a transition from autocracy to democracy -- together yields that a drought-driven recession that decreases income by 5 percent relative to trend raises the probability of democratization by around 7 percentage points.
Thus, the recent history of Sub-Saharan Africa provides empirical support for the idea that economic recessions put autocratic regimes in a position where they have no choice but to make democratic concessions.

by das monde on Tue Mar 11th, 2008 at 08:28:18 PM EST
[ Parent ]

democracy and transient negative shocks (4.00 / 2)

Interesting!

So to support democracy, we should root for "transitory, negative shocks"?

Doesn't seem right, somehow. But I can see how it would work: when times are bad, contesting the existing power arrangement has a lower cost, as your quote from Ciccione says. (This reminds me of a dynamic in gorilla troops: low-status males, with little to lose, apparently behave in ways that destabilize the troop hierachy. Destabilization behavior includes soliciting attacks from neighboring competitive/antagonistic troops.)

But the dynamic that Ciccione describes is seen only in autocratic systems, in which the negative (social, political, economic) effects of the transitory negative shock are interpreted in ways that delegitimize the extant regime and lead toward democratization. If the extant regime is democratic, the transient, negative shock may lead to greater autocracy--as, arguably, happened in the US in the wake of 9-ll.

Really, we shouldn't trust economists to do poliical theory.

Industrial society is not sustainable. Unsustainable systems change--or disappear.

by Eric Zencey (Eric dot Zencey at UVM dot EDU) on Wed Mar 12th, 2008 at 12:32:52 AM EST
[ Parent ]

Re: democracy and transient negative shocks (none / 1)

Since Naomi Klein's "Shock Doctrine", we will never miss coincidences of social and economic shocks and political regime changes!

"Natural" dynamics is important and interesting, but at some point "information" dynamics comes into the picture. The reason why financial-corporate-political elites and Friedmannians are so keen and successful with shock-and-wave therapies, is that they know what they want to do. While everyone else is clueless under a shock, they have a plan to implement their agenda.

In sub-Saharan Africa, both autocratic elites and the population may look relatively clueless, and that hurts the elites more. I guess that if the elites would educate themselves at Chicago University, they could be impressively successful in thriving through all climate and agricultural regimes.

But "nice" political and social parties could probably learn to counter ruthless profiteering from bad shocks and busts, or even start winning over dirty nobilities. Amiable democracy seems helpless now, but mostly because of rather tremendous and diligent efforts of power elites to subvert democracy and regular aspirations. What is needed, is knowledge and determination of what has to be achieved through turmoil times.

In nature, I think that turmoil times (call it equilibrium punctuations, regime shifts, or environmental transitions) generally favor 'niceness' over cutthroat aggression; as cutthroat "dog-eat-dog" competition destroys itself, chances for relaxed and symbiotic relations arise. Similarly, if civilization would collapse in generally uncontrolled fashion, that would hurt autocratic and totalitarian structures a lot, while self-governing and local cooperation would be discovered as best mean to get through, I guess.

by das monde on Wed Mar 12th, 2008 at 03:14:21 AM EST
[ Parent ]

Re: democracy and transient negative shocks (none / 1)

Amartya Sen has argued that authoritarian regimes exacerbate the impact of negative shocks.

His views encouraged policy makers to pay attention not only to alleviating immediate suffering but also to finding ways to replace the lost income of the poor, as, for example, through public-works projects, and to maintain stable prices for food. A vigorous defender of political freedom, Sen believed that famines do not occur in functioning democracies because their leaders must be more responsive to the demands of the citizens. In order for economic growth to be achieved, he argued, social reforms, such as improvements in education and public health, must precede economic reform.

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris

by Carrie (migeru at eurotrib dot com) on Wed Mar 12th, 2008 at 04:39:47 AM EST
[ Parent ]

Re: democracy and transient negative shocks (none / 1)

thinking about your sig....the difference between industrious and industrial...

industry
c.1477, "cleverness, skill," from O.Fr. industrie, from L. industria "diligence," fem. of industrius "industrious, diligent," used as a noun, from early L. indostruus "diligent," from indu "in, within" + stem of struere "to build" (see structure). Sense of "diligence, effort" is from 1531; meaning "trade or manufacture" first recorded 1566; that of "systematic work" is 1611. Industrial (1774) and industrialize (1882) both on Fr. models. Industrial as a style of dance music dates from 1988. Industrious "characterized by energy, effort, attention" (1552) retains the etymological sense.

are hedge funders 'industrious'?

i wonder when the use of the term 'industrial' began. an industrious community suddenly became an industrial one, why?

more dust? bigger machines?

a hedge fund has (had) the value of what? making someone profiting off it happier? any others?

a subprime mortgage gets someone into a bigger house than they can financially maintain, at whose cost? the chinese who sweat for pennies, so international corporations can sell shares, to pension funds which can tank when the house of cards blows over, and joe blow's retirement goes south?

so much of the 'economy' seems based on promises, in an increasingly unstable world, (was it ever any other way?). trust that gets incrementally ramped up, leveraged by being 'vouched' for by 'responsible' overseers (yeah right)...

vouch |vou ch |
verb [ intrans. ] ( vouch for)
assert or confirm as a result of one's own experience that something is true or accurately so described : they say New York is the city that never sleeps, and I can certainly vouch for that.
* confirm that someone is who they say they are or that they are of good character : he was refused entrance until someone could vouch for him.
ORIGIN Middle English (as a legal term in the sense [summon (a person) to court to prove title to property] ): from Old French voucher `summon,' based on Latin vocare `to call.'

vouching their way further and further out on a limb of_hope_ sold as probability....

financial services have cushioned and comforted many an old age, but does it follow that a global casino mentality is a good one, especially if run by cunning thieves?

the sooner we come up with a recyclable alternative to this deeply flawed system, more tied to reality, (cf. chris cook), the better.

one that trusts that the sun will shine and the tides and wind come in, not untransparent, unregulated flyboys milking the present and destroying the future.

i saw a pretty good australian flick about this last night, called 'the bank, enemy no. 1'. it was about a mathematician who came up with some software to predict stock market crashes. he starts off idealistic, and his boss, a gordon gecko-on-steroids type is superbly cast, a human reptile. i won't spoil it...

anyone see it?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Mar 12th, 2008 at 10:07:08 AM EST
[ Parent ]

industrial culture (none / 1)

I think industrious culture became industrial culture when a couple of things happened:

Fewer and fewer of the workforce was engaged in agriculture, thanks to mechanization and industrial methods being applied on the farm;
We (humans) learned how to systematically use past solar income--fossil fuels--to accomplish present work.

Industrial culture could be sustainable, if we can find a way to run it on current solar income. Current solar income will probably support way fewer humans than we have now, if we want anything like our current (even our current world-average) standard of material well being.

Industrial society is not sustainable. Unsustainable systems change--or disappear.

by Eric Zencey (Eric dot Zencey at UVM dot EDU) on Wed Mar 12th, 2008 at 05:55:30 PM EST
[ Parent ]

Re: pretty abstract, but I think I see... (none / 0)

Eric Zencey:

Imagine if the predator population (representing claims on future population of prey) can grow exponentially, because they are (like debt) incorporeal abstractions. The boom and bust cycles could then easily become large enough in oscillation to threaten not only the dynamic equilibrium implied by the sinusoidal chart, but the continuation of the system as a whole, through the removal of the prey species entirely.

Being incorporeal debt can just as well be repudiated as created.

I don't see credit as all that different from "other dynamics producing 'boom-bust' cycles in the economy".

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris

by Carrie (migeru at eurotrib dot com) on Wed Mar 12th, 2008 at 05:37:46 AM EST
[ Parent ]

What is "pretty abstract" about that? (none / 0)

I mentioned a specific dynamical system and a specific class of chemical reactions. Maybe you could walk over to the Chemistry department and ask to see an oscillating chemical reaction. (Follow the link to see some pretty pictures of spontaneous structure formation in oscillating chemical reactions).

It'd be nice if the battle were only against the right wingers, not half of the left on top of that — François in Paris

by Carrie (migeru at eurotrib dot com) on Thu Mar 13th, 2008 at 09:10:20 AM EST
[ Parent ]

The roots of the subprime crisis | 71 comments (71 topical, 0 editorial, 0 hidden)

Top Diaries

Bidenomics made real

Energy (and Other) Events Monthly - October 2024

Of Childless Cat Ladies and other matters...

Recent Diaries

Gaza Massacre One Year On

America's Revenge On the Islamic State of Iran

Post Neoconic Wars, Hypocrisy Thrives In the West

Aysenur's Death a Targeted Murder by IDF

3rd Day Rutte Next Stop Moscow

1st Day on the Job - Mark Rutte

Harsh Lesson On Humanitarian Law and Israel

Bidenomics made real

Picking Targets in Iran :: CNN, Media Cheerleading

October 2024

Biden Collusion w Netanyahu Leads to Armageddon

Is Southern Lebanon Part of Eretz Yisrael?

Judaism: Tikun Olam for a Better World

IL Not A Democracy, Ruled by Fanatics

UK AstraZeneca Leiden Invasion Act

Israeli Appeasement Under Johnson and Biden

Courage President Kennedy in My Lifetime

Energy (and Other) Events Monthly - October 2024

Biden-Blinken Breaking US+Int'l Law Supporting Genocide

Meta: From River to the Sea Not Hate Speech

Occasional Series