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What is a Floppy Disk?

Playing Pictionary the other day, my 7-year-old Piper asks "What is a floppy disk?"

"It's those cartridgey things," my 10-year-old Anthony explains, "We used to have a computer that you can stick them in. Haven't you ever seen one?"

"No," Piper, quizzically.

"Oh, you've seen one. It is on the button you click when you need to save something," Anthony, helpfully.

"Ooooooooooooooohhhhhh."

Two Steps Behind

A fascinating and short observation from Matt Steinglass today:

Obama Always Stays Two Steps Behind Them
...this has always been Obama’s MO. He’s always a step or two behind where his supporters want him to be, getting pulled along by their enthusiasm, rather than out ahead of them where he might get cut off. It’s a community organizer’s MO. You never get out ahead of your constituency. Instead you shape the playing field so that your constituency’s desires flow towards where you think they should go, and allow them to carry you along behind them.

That is a remarkable style of leadership.

Politics is Important

The recent events in Iran provide an unambiguous answer to the question I asked in 2006: should our focus be on the weapons, or the politics? The Bush-lead world decided to worry about the weapons.

However, we can see now: Iranian politics is the right focus.

Your Compiler Vanishes in A Puff of Logic

I can write a program in Java about twice as fast as as I can write the same program C or C++, and I can bang out the same program in Python maybe twice again as fast as I can in Java. In Python, you just get straight to the point and say what you mean by saying things like:

weekly = [sum(daily[j:j+7]) for j in range(0, len(daily), 7)]

In an ideal world, high-level languages like Python would replace all other programming languages.

In principle, a program written in a high-level language like Python should be able to execute faster than one written in a low-level language like C, because fewer of the implementation details are constrained by the programmer. The less the programmer says, the more flexibility the compiler has to speed things up. Of course, in reality high-level languages are much slower than low-level languages, so at Google we write most of our performance-sensitive code in C++. Even though we need to invest maybe four times as much effort.

But the PyPy guys have not given up the dream of fast high-level languages. They are making progress on an epic project to make python - and all interpreted languages - speedier than C. And they are doing it by sticking to their guns: instead of getting in the dirt and implementing a pile of low-level tricks, they are raising the level of abstraction to ever higher heights, writing their compiler, interpreters, profilers and jitters all in highly abstract python, and then applying the compiler to itself to make the final product.

Along the way, they have only needed to resort to one or two easily-explained dirty tricks.

PyPy's progress on a tracing JIT for a python meta-interpreter are documented in a paper by Bolz, Cuni, Fijalkowski, and Rigo. If you are into language technology, it is well worth a read. Their project is akin to engineers who dare to build a ladder to the moon. It seems improbable, but once they do it, it will change the world.

Someday we will all program in python.

Elastic Shortfalls

Anybody reading this space knows I have been a huge fan of Obama and Geithner, but this week they lost me.

The way to recognize a project in trouble is not to ask for a single assessment - the way is to compare today's assessment to the one from a few weeks ago. A troubled project is elastic, stretching to absorb forever more amounts of time and money.

This week's SCAP results release revealed that our bank failures are elastic. Geithner is not doing a good job at calling the situation and driving the bank crisis to a close.

Poetry and Prose

"You campaign in poetry. You govern in prose." - Mario Cuomo

Obama and Geithner have been busy governing in prose in the last week, preparing for a very complex couple weeks with the release of the bank stress test results. Two pieces of prose worth watching:

Obama's Georgetown Speech.

Geithner's testimony to Elizabeth Warren's TARP Congressional Oversight Panel.

Death and Taxes

Jess Bachman has published his 2009 edition of "Death and Taxes", a superb visualization of the Federal budget. If you don't feel like reading the full text, the poster is a much more pleasant way to see how the Federal government is spending our tax dollars in 2009.

Remember that this is last budget of the Bush administration - but Bush didn't get it finished so Obama had to pass the previous administration's final appropriations in March.

The 2010 budget is where we see Obama's budget office at work for the first time (headed by super-nerd Exonian-Princetonian-LSE-Marshall-Scholar Peter Orszag). I'd love it if Jess would draw up the 2010 budget compared to Bush's last budget (and compared to Obama's original proposal before going through the Congressional budget process).

Geithner's China Triumph

Today NYT notes China's about-face on buying Treasuries. Recall that last November, China had ramped up its purchases of Treasuries to an immensely irresponsible rate of $40b per month, and nobody in Washington seemed to care. Now things have apparently changed. Day to day currency trading is very secretive, but quarterly statistics reveal that China abruptly stopped its destructive dollar-slurping policy when the Obama administration took office. The NYT says that China actually sold Treasuries in January and February.

COP and the IMF Playbook

Elizabeth Warren's Congressional Oversight Panel released a critical report on Geither's administration of the TARP so far. So far, he gets a mixed grade - her video is definitely worth a watch.

It is fascinating to see the points of disagreement between members of the oversight panel. Warren clearly wants to prod Geithner to move more quickly to hold bank managers and investors accountable: to identify insolvent banks, change management, and to wipe out shareholders - the "Swedish model". But other COP members Richard Neiman (D) and John Sununu (R) think it is inappropriate to be talking about shuttering insolvent banks in the middle of a liquidity crisis.

If you want to do your own research and read up on the history of bank crises, here's a salient collection of essays from the IMF (thanks to Google Book Search): Bank Restructuring and Resolution. The remarkable thing about the book is how much consensus there seems to be between the economists. They all agree that both liquidity and insolvency need to be addressed - liquidity first, then insolvency next. For example, Frydl and Quintyn write:

Typically, a systemic banking crisis has two principal dimensions that require intervention: first, a liquidity crisis that threatens widespread depositor panic; second, a degree of systemic distress represented by large losses in asset values that have generated widespread insolvency of banks and capital deficiencies. Decisions regarding the liquidity crisis must be taken under pressure in an environment of high uncertainty. After deposits are stabilized, decisions regarding the resolution of failed banks can be taken in a less volatile environment.

It doesn't seem like there is actually much disagreement we need to both inject huge amounts of money, and then close weak banks. But these two types of intervention are opposite of one another, and so the core of the debate is this: is the liquidity crisis over yet?

I agree with Warren that we are done with the liquidity panic, and it is time to start closing the weak banks. We won't be ready to do that fairly, though, until Geithner's stress tests are finished (and there are rumors that the release of the results will be delayed after April 24 to come after Q1 earnings reports). So a little bit of patience is in order.

How To Nationalize

Krugman has been opining (with despair!) that Geithner doesn't have the spine to close the big American banks, and former IMF chief economist Simon Johnson believes that America simply lacks the necessary political structure to nationalize.

They are both wrong - Geithner has both the guts and power to nationalize our big banks. But even so, he cannot show his cards. To understand Geithner, look back a decade ago when he coordinated the international response to the Asian financial meltdown. Then, as now, decades of overaggressive banking ended suddenly in an asset value crash and a complete collapse of commerce - as nicely analyzed by the pre-Laureate Krugman at the time.

In 1997, the difficult part wasn't understanding the problem, but administering the medicine. In the face of the collapse of a constellation of Asian currencies, gradual, piecemeal solutions had failed. The right solution was to raise interest rates (up to 60%!) and to close all but the strongest banks. But these actions could only be done fairly through coordinated international action, which was done by bribing the nations with IMF capital. The Geithner-mediated IMF actions resulted in real pain for Asian bankers, in the end closing 14 out of 30 Korean merchant banks and 56 out of 91 Thai financial companies.

To my eyes Geithner does know how to close banks. And he has the power - that is exactly why he was nominated by Obama. But here is the key. You cannot just close banks one at a time, because that will cause everybody to worry that their bank is next to go - the whole economy would collapse from fear. And you cannot just break up banks based on current market prices: that would just reward the best liars. You need get everybody to beg for salvation on equal terms, pry open their balance sheets and price them fairly, and then pick losers all at once. You need to do it in a way that seems fair and smart. And since this is a global crisis, it is going to take a little bit of time.

Pretend you are Geithner. You have two jobs: one, you need to put domestic banks in line for closures, and two, you need to coordinate international action. How do you do it?

Domestically, you would subject the banks to "asinine" stress tests to force their books open, and you would set up public-private partnership "handouts" to attract vultures to determine a fair value for hard-to-price assets.

Internationally, you would negotiate deals with the biggest economies to work out how to decide which banks need to be shuttered in Hungary, Latvia, Romania - and Britain and Germany and France and Hong Kong and Japan. You would bribe nations to cooperative action by supplying Federal Reserve capital and put a gun to their head by propping up AIG just short of the precipice. You would seal the deal at an international forum like next week's G-20.

Then some Friday evening, probably around the end of April, you would wait for Asian markets to close and then announce a bank holiday. Over the following days, you would roll out complex and comprehensive global bank closures. Carefully justified valuations for the pieces of shuttered banks would be used to chop them up and resell them to private investors. Then after the deed was done, the markets would reopen and the world would know that the crisis was over.

It's the World Series of economics, and we're barely halfway through the game. But we do have an all-star team.

A Cultural Problem

Today Greenspan writes an op-ed in the Financial Times that recognizes that Markowitz has failed us. I also lay the blame at Markowitz's feet. But Greenspan's conclusion that we just need to "increase the financial cushion" misses the problem.

The Problem is Cultural, Not Numerical

The problem is not with regulatory boundaries, but of culture. It is a problem with how we educate our financiers and economists.

Wall Street must get away from the idea that it can always put itself on the winning side. Wall Street must be willing to make real bets and take real risks. It needs to end the flawed and useless concept that risks are unsystematic and unknowable and that a bank's primary mission is to hedge them away.

Wall Street has been running their businesses like the Las Vegas casinos do. A casino knows that there are no good bets or bad bets - the only way to make money is to obey their mechanical models of risk, and blur together millions of gambler's plays. The only business plan in the casino world is to repackage and bundle forever bigger piles of randomness, and to resell it at a markup. There is no insight, no skill - the Blackjack dealer plays by mechanical rules. It is a volume business.

Blame Sharpe Too

The meme that "you can't beat the market" on Wall Street treats ordinary investments like pure gambling.

That idea, which has its roots in Markowitz's Nobel-winning work, is delivered to us ordinary investors using wise words like "indexing", "diversification", and "efficient markets." A generation of sages like William Sharpe have preached that it is futile to invest according to fundamentals, because we can never be smarter than the market in the long run. The best we can do, says this viral meme, is measure risk and diversify it away.

While that may be sound advice for the casual investor, the crime - and the crash - occurs when all participants in the market believe in this Markowitz thread. Once everybody believes you can't beat the market, the market becomes stupid. That is what happened to the market for mortgage CDOs.

Diversification is a disease of intellectual laziness.

Wall Street has been castrated

In a sense, Wall Street has lost its ego: the banks have lost the idea that they can identify sound businesses and genius ideas better than their peers.

Over the decades Wall Street has outsourced on-the-ground gruntwork to credit agencies, mortgage brokers, and VC funds. To the extent that there might be some inaccuracies in their suppliers of numerical data, they dive into their statistical textbooks and hedge it away. Do you get respect on Wall Street by actually talking to the people that you invest in? Pshaw, says the culture of 2008: that is such a small-money idea. That would be like trying to talk with a roulette table.

Wall Street is no longer a business about insight and assessment: it has become a stupid volume business, like Las Vegas.

Instead of doing actual banking, Wall Street has enslaved itself to Markowitz's theory that its role is to bundle huge numbers of bets and repackage risk.

Alan, the real problem is that Wall Street's culture is in tatters.

The world needs a post-Markowitz framework for finance.

Obama to the World: Join Us

Obama's makes a pitch for global cooperation in an op-ed that runs in 31 papers around the world, from the LA Times to the South China Morning Post. The message: keep trade flowing - America will do its part. All the guns are out to prevent a replay of the beggar-thy-neighbor protectionism that shut down trade in the 1930's and prolonged the Great Depression.

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