The now bankrupt investment bank Lehman Brothers invested heavily in the politics of global warming and were hoping to make millions out of emissions trading. In an earlier blog post entitled ‘Bankrupt Lehman Brothers Promoted Global Warming’ I suggested this was part of their undoing. According to Graham Young the issue is not specific to Lehman Brothers, or global warming, but rather systemic, and it has everything to do with computers and modelling.
“In the real estate investment and development industry computer models never really took over. Valuation practice meant that valuers had to check their calculations by using at least two, and preferably three methods for comparison. Cost of construction and direct market comparisons didn’t negate computerised discounted cashflow models, but they did mean banks wouldn’t lend to you on the digital blue-sky valuations. The models might be right, but few lenders were prepared to risk their shirts on them.
“I know I soon realised that if it didn’t work on the back of an envelope, then making it work with a computer program was very dangerous.
“The same thing can’t be said for equity and credit markets, where asset pricing models for risk have taken over at the large ticket end of things. Which brings us to the sub-prime mess.
“Even though a cursory explanation of how the mortgage packages were structured sounds daft, the models said that they were fine. GIGO (garbage in garbage out) is the technical term for this. And the models were so complex, and the products they were used to produce so opaque, that no-one really knew the full risks of what they were “investing” in.
“And at the bottom of the pile, making all of this possible with abstract computerised models, were undoubtedly a lot of physics and maths graduates.
Which is pretty much where we are with climate change.”
Read more here:
http://ambit-gambit.nationalforum.com.au/archives/003396.html
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Don’t forget there is a community thread at this blog. Breaking news over there includes the retirement of Don Burke as chair of the Australian Environment Foundation.
Jennifer Marohasy BSc PhD is a critical thinker with expertise in the scientific method.
I can’t believe you would even suggest that the Lehman Brothers investment in Carbon Trading sent them broke. Their problems were much, much bigger than anything to do with what would have been a relatively small project.
Actually, the financial industry creamed off the brightest and best in computer modeling. The second raters found jobs in government and academia doing things like GCMs. We’ve now seen the results of what the best modelers can do. The havoc wrought by the second raters should really be interesting.
SJT
Jennifer is pointing to the use of computer modelling to make risk decisions etc. It’s that which sent them broke not carbon trading per se.
financial models are not based on invariant physical science. They are based on subjective valuations. The difference is not hard to understand.
This is becoming repetitious but the climate system is a non-linear chaotic one and as such has much in common with ecnometrics, especially when the science is problematical to begin with.
Louis you are correct. Emergent properties. You can do all the quantum mechanics you like on carbon, oxygen, nitrogen and hydrogen atoms etc and still cannot predict life. And QM makes far, far, better, exact predictions than economics or atmospheric physics.
Eyrie,
What is truly frustrating is the inability of economists to understand that predictive econometric modelling isn’t possible yet this, together with GCM’s forms the basis of the IPCC process for estimating future outcomes.
Given the continued failure of Keynesian economics, the inability of ecnomic modelling to predict anything, and they still soldier on irregardless.
Given that AGW is a billion dollar operation, it is, as Walter noted above, going to be interesting watching the results of second rate computer modelling that is climate science.
But what drives these people into thinking that its feasible in the first place? Crass ignorance of the physical sciences?
There is a view stated on one of the sceptic blogs that the AGW movement seems to be restricted to the social sciences, sympathetic media types and politicians.
This might start explaining the lack of solid science behind AGW – though many AGW supporters believe that obscure statistics is science – William Briggs could disabuse them of that fallacy.
“The second raters found jobs in government and academia doing things like GCMs”
Oh do wank on …
So James, if GCMs are built on invariants, how is it there outputs differ so widely?
““And at the bottom of the pile, making all of this possible with abstract computerised models, were undoubtedly a lot of physics and maths graduates.”
Those physicists again? How do we stop them destroying our freedoms?
Any possibility that relentless climate doom forecasts (and attendant real Stern/Garnaut business costs) are having a negative affect on asset valuations at the heart of the financial crisis?
SJT, it’s obvious that only a Hissink-Bird-Siddons triumvirate with temporary powers of arbitrary arrest, imprisonment and execution can save Freedom from Science.
Jimmock
I think the financial crisis has been simmering for a long time. There isn’t any conspiracy (Rothchilds and Rockefellers) etc, what is proven is socialist stupidity, and this present crisis is a predictable outcome from government interference in the market.
Louis,
Not suggesting any conspiracy, and I agree with your general point about government regulation.
My point is fairly mundane. Climate taxes (lets call them New Green costs) are bound to be ‘priced in’ to asset values. This occurs as soon as they are anticipated not after they are imposed. That is what share markets do (they assess long term future value).
So all these books about war, famine and pestlience under climate change are redundant. If enough people really, really belived the alarmists, the havoc would occur decades before any physical climate problems through the destruction of asset values, ie, human impoverishment. Only Clive Hamilton and Philip Adams would be happy with that.
These banking collapses will happen as long as there is fractional reserve without any reserve asset ratio. 77,000 pages of cartelisation-regulations but no reserve asset ratio.
Supposing all these risk-management quantitative guys really knew what they were doing. They don’t but suppose they did. Or suppose the capital backing cartelisation-regulations were more stringent.
All that would do would be to allow and encourage the financial institutions to pyramid yet even greater multiples of ponzi-money on top of the inner core of cash. Hence they would still come unstuck sooner or later.
They got to where they had pyramided $100 of ponzi-money for every $3 of cash. Thats an elephant balancing on its trunk. But supposing they had all this risk management really well sussed. Well all that would happen is that they would feel they could get by creating twice as much cash. So they could then pyramid $200 on every $3 of cash.
Banking crashes are therefore inherent to fractional reserve. The Reserve Asset Ratio would have to be at least about 40% to avoid them.
Each time they happen there is a new excuse. There is no mystery why that would be since financial institutions make there profits by creating money and by offering financial services that mostly just mitigate against the problems that high and unstable rates of monetary growth cause.
This makes these guys about the most unproductive sector that there is.
In theory the most productive financial system is when prices are pretty much always falling. And the short-term rate of nominal interest is close to zero.
Total revenues are growing glacially, but consumer prices are always falling. Under these circumstances people don’t need the banks all that much. They would choose to hold high cash balances and use debt sparingly.
In practice the only way to get to this scenario is to start adding cash and raising the reserve asset ratio. When its 100% there is no implied subsidy of the financial sector by the community and these guys would have to earn there profits or dissapear.
“Each time they happen there is a new excuse.”
It is still worth looking at the marginal factors (such as New Green Costs) each time the system reaches a…er… tipping point like this.
Graeme,
That would require a sound basis of money – not the fiat money we have now – gold.
But as Hayek observed, this continual incremented regulation of society will, without warning, reach a stage when we suddenly find ourselves in socialist heaven , wondering how we ever got to it.
Notice that everytime we elect a new government, new laws and new regulations always seem to be added to the existing one? Politicians obviously think that if they are not submitting new laws to the parliament then we mug punters might get the idea that they are living on the high hog.
“SJT, it’s obvious that only a Hissink-Bird-Siddons triumvirate with temporary powers of arbitrary arrest, imprisonment and execution can save Freedom from Science.”
It would make a great series on HBO.
“Graeme,
That would require a sound basis of money – not the fiat money we have now – gold.”
Thats right. I didn’t want to complicate matters by bringing that in. If you went 100% backing with fiat, for one thing it would be a liability because some leftists could show up and say “ho ho. This prohibition against fractional reserve is anti-capitalist. We’ll just get rid of it”
and you’d have hyperinflation on your hands.
But the thing is, the process of adding cash, and slowly lifting the reserve-asset-ratio is setting the situation up where you can start phasing in gold, silver, stored platinum, Stored copper, and other stored commodities via digitalization, just so long as the provider can prove that he will always assure 100% backing.
I think its better to phase into a number of these stored commodities otherwise you jack up the price of gold and silver to levels from which they must fall in value. If you start off with a few of them the market will likely expand in its most favoured monies. Most likely silver for small transactions and gold for large. And perhaps these other things like digitalized copper and platinum will fade down.
Without fractional reserve the speculators do their assigned job of smoothing out gyrations in the prices so there is no real harm making the trade when you go to buy something out of any one of your commodity holdings.
I really hate the idea of bidding gold up to 10,000 dollars an ounce just to make the changeover work, and there is no reason why we can’t start off with a whole bundle of these monies and the best ones may crowd the others out over time if the market so wills it.
Having fractional reserve fiat ensures that commodities can never be taken up. Since the central bank will loan money at wholesale rates for fiat, which they won’t do for gold. And in any case you won’t loan your gold to any bank that is going to lend it all out on the sly. Because it is a valuable thing whereas the fiat loses value.
So the main thing is beginning the steady phase-out of fractional reserve and the buildup of cash. Perhaps you have the 100% backed commodity contracts non-taxeable right from the start to encourage the take-up.
Under 100% backing spending patterns will be less unstable so people will likely be able to apply a lot more of this just-in-time inventory management. Or something close to it. Hence it will lead to much less inventories. In such a case it is no waste of resources to have all these stored commodities and with digitalization and some waiving of taxes we could even have liquified coal (diesel equivalent) stored for this purpose.
A sort of privatized strategic reserve.
Graeme,
I wonder how it will take before the usual suspects work out we are not discussing italian cars.
Right. People go even crazier about this subject than they do about CO2. I don’t understand the motivation. Its like the vested interest of the great many feeds in to the bad craziness of the individuals. Whenever this topic came up at catallaxy it would turn into a thread of doom.
I think the big thing that has changed since Rothbard formulated this idea is digitization. There was always problems with the straight changeover. And as time has gone on these problems have made the straight changeover harder to imagine.
But I think digitization has made a pretty fast changeover to all commodities more than feasible. People trade commodities all the time but in practice this is just a debt index against the spot price. Because the provider doesn’t have the backing.
Tax exemptions are appropriate to make this digitalized gig work with stored diesel, copper, platinum, palladium, almost anything durable and homogenous… as a way of licensing this gear to be used as straight money…
The thing is if we were to do this and we good guarantee 100% backing for all our providers we would likely take the world financial markets by storm just as little Holland did when the Amsterdam bank was opened. Since it would be far better for an American car company or software company to keep any excess holdings in fully backed Australian monies under this circumstance.
There are great economies of scale when it comes to providing absolute certainty in these matters.
James, are you still researching the answer to my question, or do you concede?
This just gets dopier and dopier.
As James reminded us in the last post, it was only a few weeks ago that Jennifer was holding up the objective clarity of the financial sector as the apogee of transparency and accuracy to which climate science should aspire.
Now, with the same calm certainity, it’s all down to the evil of computers and models, which naturally becomes the stick to attack climate science with.
First it’s the success of finance that she bludgeons away with, a few weeks later, it’s failures. The only consistency with Jennifer is the target.
Can’t say I blame her. Given her ideological stance as an anti-regulation, free marketeer, I’d be desperately ignoring that particular elephant in the living room too.
No thats rubbish. She just pointed out what we see in the Australian or the Financial Review every day. We see graphs of trends. We sometimes see a dozen of them in a single day.
Graham,
The point you made elsewhere that calculators and computers are great for doing the drudgery of calculations but should not be used for thinking is one that any normal person should understand.
It’s interesting that James, Michael and SJT don’t seem to agree.
The obvious cure for the econometrics boys, as with the GCM’s, is to let Koutsoyiannis or Stockwell or McIntyre or lucia loose amongst the software.
eh? what question?
(scrolling) – sorry, I missed that one.
Why do outputs differ, top of my head answer; once you get into regionalism, 2 and 3 d models, multiple atmospheric layers with different heat transfer mechanisms, turbulence, etcetera, etcetera, the equations cannot be solved precisely, like simple stefan boltzmann. (This doesn’t mean they can’t be written, or explained). Iterated numerical approximations have to be used. These can be sensitive to the initial data, the number of grid points, etc – basically, the more computing power you have, the finer detail you can simulate and those fine details can modify gross details. People may also model processes that are not yet perfectly understood, one of which being IIRC the physics of cloud formation, in different ways.
Which is why models are run many times and averages and error margins are deduced from their cumulative results, and why multiple models are used and compared to each other. You might get different results each time (like the weather), but if they fall within a normal distribution of a central result (in this case, doubling CO2 is going to increase temperatures by 3 degrees +/- 1.5 degrees) then you can be pretty sure that the underlying invariants (the climate) have been captured.
This is known as the Monte Carlo method and has a long history in physics – it’s often used to model atomic reactions as once you get more complicated than helium, QM wave equations can’t be solved exactly either. As a result, every nuclear reactor (and nuclear weapon) on the planet depends on the accuracy of such approximation methods. It’s not the invention of climate scientists.
For a bit of discussion of computer models, finance models, etc from someone who knows more than I do, I would suggest the linked post at Deltoid by John Mashey (why are my posts here rejected whenever I put a web address in?).
It should be noted that a common manouevre by “sceptics” is to say that the simple explanations of greenhouse warming (one page stefan boltzmann) are too simple, and then claim that the complex explanations, because they are produced by computers, are… too complex. This basically renders the sceptic position immune to evidence. Most recently displayed here by Barry Moore.
Btw, I totally agree with SJT that this would make a great HBO series. Also with him and Michael on pretty much everything else that’s come up here, actually.
Verbiage James; since 1900, if you believe Keeling and Callendar, CO2 has gone up 40%; temps have gone up 0.7C according to HadCrut to 2000, and have dropped about 0.05C since then. Temps should have gone up by 1.3C; whats more the 0.65C temp increase can be attributed to insolation increase and/or PDO. The thing about all the bloviations that smugly emnate from the AGW side is that increasingly they sound like excuses; they’re not of course, too much ego involved; in which case they are prevarication.
Its all a waste of time James. The variables for a start ought to be hooked up together via fuzzy logic algorithms. Or when you run the models they careen one way or the other.
In fact early on thats what would happen. Most models would seem to careen towards warming while some careened towards cooling. And it must have been big progress when they could beat the square peg into the round whole enough to get a model to stop from going entirely off the rails.
What they needed to do was not be so ambitious as to imagine that they were modelling reality. They ought to have run various dummy models with simplified assumptions to test various hypotheses.
Like there is Goddard. And their model falsified by the snowball earth. Every last model falsified by CLIMAP.
And yet they are not abandoned. Unbelievable.
No use running the damn thing several thousand times. Better to fire everyone and cut your losses. In fact running things many times over ought not change the climate outcome. It ought to change the weather outcome and not the climate outcome. The weather could be different every time but the climate generally turn out the same. If they don’t get something like that they are way off track.
“Verbiage James; ”
You either didn’t read or didn’t understand a thing he said, did you? If you want to disagree, fine, but you first of all have to disagree with his argument.
If you look at the temperature record, there are several pauses in the temperature rise. The current one is no different, and is associated with the steep jump from a massive El Nino, and the current effects of the recent La Nina. The next El Nino should see the trend react accordingly.
For starters you are looking at the wrong metric. The atmosphere is just the oceans by other means. You ought to be looking at the energy and circulation of the oceans and worrying about the temperature as mostly a derived secondary step.
While on the subject of bankruptcies, has anyone seen this comment by the Quiggin.
“I’ve been finding it hard to concentrate on the future of the planet …..”
http://johnquiggin.com/index.php/archives/2008/09/22/climate-change-and-the-murray-darling-basin/
This isn’t funny anymore. Since his return from the 2020 summit, he’s become insufferable which is saying something even for him. Is there a medical term ” delusions of grandeur”.
He obviously needs a full time job. Give the kid a bucket to fill up the Murray.
The point scoring in respect of modellers financial vs climatic is quite a bit off the mark. The underlying driver of the economic crisis was not modellers nor was it bankers greed.
Some time ago the US congress mandated that all lenders had to allocate a large, fixed, portion of their housing lending to minorities as an off budget social program.
The key problem with this was that this meant lending to people with a very unstable work history, low skills base and high marginal propensity to consume any additional income they might gain. They also purchased property in less investment worthy locations as the regulators intended them to.
Bankers recognise these people as “bad risk”, race or skin colour had nothing to do with it. And when faced with a compulsory accumulation of this bad credit in their portfolios they had no choice but to get the modellers to work to see how far they could syndicate this stuff to spread their risk as wide as possible.
The financial modellers were not maximising greed but, rather, minimising risk that stemmed directly from an ill-conceived regulatory measure.
It should also be noted that this structural expansion of the lending envelope had a strong expansionary impact that tended to obscure the underlying instability of the employment prospects of the borrowers. Add an expensive, but in my view, necessary war of occupation and some ill-timed tax cuts and the rest is history.
But none of this has been mentioned by all the leftist economists who, after crawling into holes after the Vietnamese, Chinese and now Indian economic take-offs, are now back out in the street regurgitating their calls for rigid financial re-regulation.
But even these calls are all quite redundant as the US banking system is now essentially being nationalised as the government picks up both good and bad quality assets at a fraction of their fundamental value.
Note, the worlds richest man, Warren Buffet, has recently entered the market to get his full share of bargain wealth at the firesale. And when the write-offs flow right through the economy over the next decade or two the government will make some very healthy profits at the expense of the public whose savings will fund the repurchases.
The point scoring in respect of modellers financial vs climatic is quite a bit off the mark. The underlying driver of the economic crisis was not modellers nor was it bankers greed.
Oh low IQ bullshit. Models were understating risk across the board. Stop bullshiting
“This isn’t funny anymore. Since his return from the 2020 summit, he’s become insufferable which is saying something even for him. Is there a medical term ” delusions of grandeur”.”
I’m just not able to sort out these gradations of unrighteousness with your subtlety. I thought he was just as appalling before he left.
I think he’s even more appalling now that he thinks he’s somehow a nationally recognized intellectual or at least was given intellectual stardom by being invited to the 2020 summit. He seems to have this extra spring in his step due to some unaccountable confidence that simply shouldn’t be there.
So yes, he’s even more of an insufferable twerp than before.
Ra calling anyone an insufferable twerp is enough to blow my bull$hit canary right out of his cage.
At least take your head out of your own ass long enough to give us some substance as to why it was not mandated loan targets that dug the current economic hole. Just a single fact would be an improvement on your last few posts, you bombed out bogan. Did they exist or didn’t they? And what was their impact?
Yeah, regarding Jimmy err… Warren Buffet wowing them again:
http://www.dailyreckoning.com.au/warren-buffett-goldman-sachs/2008/09/25/
I’m not claiming conspiracy here. But offloading your overblown real-estate-portfolio onto minorities, and then getting the taxpayer to bail out the banks is a pretty good way to win the fractional reserve musical chairs game.
>>>>>>>>>>>>>>>>>>>
Of course you are right Ian. The regulations specific to this crisis is an integral part of the crisis. But we see the specific problem of bank crises and the business cycle echoing down through the ages. And the one thing that is common to all crisis is the unwinding of fractional reserve pyramiding.
Now that our banks are so huge and regulated it can take longer for the bubble to burst. And in the information age the pyramiding can go further before it bursts and this is the case also because of the pure fiat nature of the system and the implied government backing.
We have even lost any reserve asset ratio. For the very first time pyramid money outweighed cash 100 to 3. Thats a system that is a hair-breadth away from collapse.
In fact forcing it all onto minorities might have kicked the can down the road another year or two but made things a great deal worse when the unwinding came. This is like what Greenspan described in the 60’s as “putting a penny in the fusebox.”
We see government action or any number of problems precipitating the crash in every generation for some hundreds of years.
But the one thing that all such banking collapses and recessions have in common is the fractional reserve ponzi-scheme.
The war spending the bad regulations and the stimulus packages would have stressed the system. But where you have a crash what you have is an unwinding of fractional reserve.
I agree, Graeme. And there has been no shortage of good economists warning about this for years and to no avail. But what we need to guard against is the rewriting of history to suit an over-regulation agenda when a “proper” regulation regime is what has always been required.
It is interesting the way the reserve deposit system has been completely discarded as a monetary policy tool. Primarily due to the banks sidestepping these requirements by way of non-bank intermediaries.
If there is one good thing to see from all this is the sight of Republican Senators getting their heads around the fact that one of the core roles of government is as “lender of last resort”. The ideology of strict non-intervention is taking a timely beating but the issue is more one of whether the regulatory price of that role will be in proper proportion to the long term need.
Its been disregarded since the Fed is run for the banks and not for the public. If you and I were able to create new money we would be famously rich and this new money creation is a direct subsidy to the banking system.
In the last 7 years (June to June) I make it that the community subsidised the banking system here in Australia about 50 billion dollars with a further 25 or so billion dollars of inflationary benefit going to the government.
If the Americans flushed in enough cash to stop a free-fall in total spending they will need to also put in an RAR to stop all this extra cash being inflationary.
This would be a retirement of debt. Since they could retire debt with the extra cash. The RAR would eat into the financial sectors earnings since they would no longer be being subsidised. So most of them could well go broke anyway. But in this scenario them going broke wouldn’t hurt the general public.
But they won’t do it. They will raise debt, taxes, hurt anyone, collapse the dollar, destroy everything before them……. they will do this before they will give up their money-creation priviledges.
None of them will give up their counterfeiting priviledges nor would they even so much as suggest it.