Wednesday, July 25, 2007
Back for a bit
I'm feeling better, after a rough time much exacerbated by copious amounts of second-hand smoke served up by subsidized housing (your tax dollars at work.) Now I need to get caught up in a lot of ways (and find new digs without the smoke if that's possible in my price range.) Maybe with room for an electric wheelchair this time, that might be nice.
So I may or may not be back to update this blog for a bit, but it's nice to be able to spend some time at the computer indulging myself writing small bits, working my way up to tackling larger projects that have been fallow.
So I may or may not be back to update this blog for a bit, but it's nice to be able to spend some time at the computer indulging myself writing small bits, working my way up to tackling larger projects that have been fallow.
Fraudulent subprime mortgages
This was originally a reply to: “Fraudulent subprime mortgages” (click the title of this post to go there.)
On that (rather famous economist) blog, there is a lively discussion about who was defrauded whom. My take:
The ultimate purchasers of the loans didn't stop to analyse how the legal changes in the resale market had suddenly removed any incentive for the initial "lenders" (now really more like scouts than investors) to vet homebuyers. Largely, although not exclusively, the large investment institutions who were hurt when the music stop "fooled themselves." Or rather their hirelings profited (in the short term at least) from self-deception or a lack of "fiduciary curiosity", to coin a term - while the firms who paid these bozos their bonuses lost an far bigger pile of money.
What's most interesting is the parallel between the functionaries who ultimately stuck their investment firms with these loans and the similar functionaries in accounting and stock-sales firms who fully cooperated with Enron frauds with similarly disastrous results (See the film "The Smartest Guys in the Room.") Again and again, decade after decade, now; the big money seems to be in making "Dutch Book" between the interests of large financial institutions, and that of their higher-level managerial staff, who turn out to be very willing to betray the long-term interests of their employers. Bonus structures focused on the short-term obviously exacerbate those differences (conflicts of interest!), which are already extremely problematic for ordinary stockholders.
In support of this view, many of the biggest losers were hedge funds, and note this quote retailed in the same blog:
"...the top 25 hedge fund managers combined appear to have earned more than all 500 S&P 500 CEOs combined (both realized and estimated)."
(originally from Steve Kaplan and Joshua Rauh, http://www.nber.org/papers/w13270)
I don't doubt that bonuses for short-term "performance" were a big part of those "earnings."
It may be that enough evidence is in now in to suggest that with few exceptions, bonuses for management that exceed a small fraction of their wage are an irresistible encouragement to fraud, particularly if the crimes first originate outside that company and give the illusion of allowing theft without ultimate responsibility. It isn't possible to plug every mousehole, to remove every possible fraudulent scheme, so dangling huge carrots in front of executives that most will only be able to reach if they tell themselves and their bosses a few convenient (but eventually very costly) lies is a very bad idea - unless you've just gotten your management degree and want to improve your lifestyle, of course.
CompleteConfusion.com
PS - what does it say about our society that neither Marginal Revolution's website spell checker nor that of Open Office has ever heard of the word "analyse"? No wonder there's a problem with subprime mortgages (amongst other things.)
On that (rather famous economist) blog, there is a lively discussion about who was defrauded whom. My take:
The ultimate purchasers of the loans didn't stop to analyse how the legal changes in the resale market had suddenly removed any incentive for the initial "lenders" (now really more like scouts than investors) to vet homebuyers. Largely, although not exclusively, the large investment institutions who were hurt when the music stop "fooled themselves." Or rather their hirelings profited (in the short term at least) from self-deception or a lack of "fiduciary curiosity", to coin a term - while the firms who paid these bozos their bonuses lost an far bigger pile of money.
What's most interesting is the parallel between the functionaries who ultimately stuck their investment firms with these loans and the similar functionaries in accounting and stock-sales firms who fully cooperated with Enron frauds with similarly disastrous results (See the film "The Smartest Guys in the Room.") Again and again, decade after decade, now; the big money seems to be in making "Dutch Book" between the interests of large financial institutions, and that of their higher-level managerial staff, who turn out to be very willing to betray the long-term interests of their employers. Bonus structures focused on the short-term obviously exacerbate those differences (conflicts of interest!), which are already extremely problematic for ordinary stockholders.
In support of this view, many of the biggest losers were hedge funds, and note this quote retailed in the same blog:
"...the top 25 hedge fund managers combined appear to have earned more than all 500 S&P 500 CEOs combined (both realized and estimated)."
(originally from Steve Kaplan and Joshua Rauh, http://www.nber.org/papers/w13270)
I don't doubt that bonuses for short-term "performance" were a big part of those "earnings."
It may be that enough evidence is in now in to suggest that with few exceptions, bonuses for management that exceed a small fraction of their wage are an irresistible encouragement to fraud, particularly if the crimes first originate outside that company and give the illusion of allowing theft without ultimate responsibility. It isn't possible to plug every mousehole, to remove every possible fraudulent scheme, so dangling huge carrots in front of executives that most will only be able to reach if they tell themselves and their bosses a few convenient (but eventually very costly) lies is a very bad idea - unless you've just gotten your management degree and want to improve your lifestyle, of course.
CompleteConfusion.com
PS - what does it say about our society that neither Marginal Revolution's website spell checker nor that of Open Office has ever heard of the word "analyse"? No wonder there's a problem with subprime mortgages (amongst other things.)
Tuesday, July 24, 2007
Simpsonized Russ
This is my Simpsonized portrait. As a promotion for the movie, you too can have a photo transformed into a .png image, at http://www.simpsonizeme.com
I didn't say it was going to be pretty, but it is rather accurate, I'm afraid.
Surplus Value
Every now and then I can't resist commenting on a blog, and I often reproduce those comments here. This was in reply to a criticism on a comment by Adam Smith on the contribution to price, of labor. Note that the labor that goes into creating machinery and finding, extracting and refining the fuel to run machinery counts here too, not just direct manual labor per se:
And what adjusts supply and demand? Usually labor. If a meteorite lands in your backyard and you decide to sell it, your labor hasn't determined its price.
But there is a market in meteorites, and its prices are determined by the efforts of those who scour their favorite windblown desert sites in dune buggies (with half their finds going to universities if they are searching on Federal Lands.)Markets not determined by labor at one moment usually become so.
Of course, Smith uttered an overgeneralization. But over time where labor is applied is the factor that can be most easily changed, so it ends up determining prices rather closely, even with commodities - but of course it is the marginal labor, of getting the most labor-intensive last part of the supply to market that determines price, often leaving much "economic profit."
It's not impossible that Marx was groping for this last concept, ineptly, with his lamentable theory of "surplus value" (which Bertrand Russell excuses as an emotional outburst due to reading to much about child labor)although this interpretation of mine may be much too kind. In transitional (or subtly corrupt) economies such profits can be very wide spread amongst the rich.
submitted to
http://adamsmithslostlegacy.com/ASLLBlog.htm
And what adjusts supply and demand? Usually labor. If a meteorite lands in your backyard and you decide to sell it, your labor hasn't determined its price.
But there is a market in meteorites, and its prices are determined by the efforts of those who scour their favorite windblown desert sites in dune buggies (with half their finds going to universities if they are searching on Federal Lands.)Markets not determined by labor at one moment usually become so.
Of course, Smith uttered an overgeneralization. But over time where labor is applied is the factor that can be most easily changed, so it ends up determining prices rather closely, even with commodities - but of course it is the marginal labor, of getting the most labor-intensive last part of the supply to market that determines price, often leaving much "economic profit."
It's not impossible that Marx was groping for this last concept, ineptly, with his lamentable theory of "surplus value" (which Bertrand Russell excuses as an emotional outburst due to reading to much about child labor)although this interpretation of mine may be much too kind. In transitional (or subtly corrupt) economies such profits can be very wide spread amongst the rich.
submitted to
http://adamsmithslostlegacy.com/ASLLBlog.htm
Labels: Adam Smith, economics, labor, Marx, meteorite, price, value
