Systematic risk, market and the State.

Market participants have taken taking system-threatening risks in the securities market. Many commentators have taken this to mean that government should intervene to prevent them doing so in the future. I explained previously why this won't work, but now I'd like to focus on how the State encourages and facilitates the taking of "systematic risk". First a definition, "systematic risk" is a risk that could rationally be considered to endanger the entire system it is taken within, necessitating a change to another system if a misfortune occurs. A system is "an assemblage or combination of things or parts forming a complex or unitary whole" (http://dictionary.com).

The theory behind the call for more regulation is simple, market participants have a motive to protect themselves from risk, but no sufficient motive to protect the market from systematic risk. Because any prevention of systematic problems costs the person or institution, but they don't gain the full benefit. Their own risk goes down and that's a benefit, but it's small compared to the full cost of the risk across the market. So the preventer pays the full cost of prevention but doesn't gain the full benefit. It's like paying to purify a entire river so you can take a clean shower. Therefore people theorise that a "domino effect" could happen where one firm goes bust sending one or more of their creditors bust leading to the bankruptcies of their creditors and so on leading to too many bankruptcies for the system to handle.

This analysis ignores the fact risks that could result in defaults to your own creditors are more expensive. Naturally there are creditors out there who will loan to risky people or companies. Just as naturally they charge more than more conservative creditors so announcing that you are taking a risk likely to endanger repayments costs a firm money. This includes any exposure sufficient to destroy the firm no matter how apparently safe the firm you're exposed to. Passively concealing the nature of your risk-taking costs just as much since creditors and investors naturally assume that if what you were doing were safe you'd rush to tell them of it. Actively lying about what financial risks you're taking is called fraud and it's easier to detect and harder to actually profit by than you'd think. Investors and creditors (as well as potential short sellers) have an incentive to ferret out the lies. So any "domino effect" would have to overcome continual barriers to this like bulkheads in a well designed submarine.

A risk to an entire system is more likely if a single factor affects all participants directly, or at least a large number of participants directly and the rest through their connection to those directly affected. A risk is more likely to be systematic if could cause sudden problems, without time for participants to adjust their actions to minimize the problem. Government intervention is of course the most likely thing to create such risks due to the sudden and universal change it causes.

The most obvious government intervention in financial markets is the setting of the "risk free" interest rate by central banks. Since all economic processes include a delay between input and output this affects all economic processes. It also profoundly affects the prices of productive assets. Paying more than the return on an asset divided by the interest rate loses money. For instance if a factory had profits of $1M a year and you paid $10M for it, interest rates of 10% lose you money. So high interest rates mean low asset prices and sudden increases in interest rates mean sudden reductions in asset prices for all participants. This can lead to capital adequacy problems, i.e. a company not a big enough difference between the value of it's assets and it's liabilities. Financial institutions need this gap to be big to reassure investors, creditors and regulators that they're not about to go broke. The usual response to capital adequacy problems is to sell off assets to reduce debt. If many firms have the same problem of course the market is swamped with assets and a good price can't be got for them. This is because the opportunity cost to the buyer of buying your cheap assets is buying someone else's even cheaper assets. Since the government can subject everyone in the system to this same risk the government IS a systematic risk.

So called "credit ratings" were in effect licenses to commit fraud. Since by definition investors in funds lacked either the motivation or the knowledge to investigate individual investments. Therefore they hire someone to do so and get them the best combination of risk and return. Without the previously mentioned motivation or knowledge they had to rely on credit ratings as a proxy for risk. Fund managers delivered not the best combination of risk and return but the best combination of return and credit rating. To make a promise intending to deliver something entirely different is fraud. No fund manager will be prosecuted though because they will all say "But we invested in safe things, look they're all AAA rated.". Indeed the government required that some funds (especially retirement funds) invest only in things rated highly by it's designated defrauders, Moody's, Standard & Poors and Fitch.

Ratings agencies didn't rate unsafe firms or securities highly because the owners and issuers paid them. Although this seems like a good idea a little thought we show that's a bad strategy. If you label every piece of rubbish as caviar why would anyone want to eat in your restaurant? Ratings produced solely because someone pays you to say something are worth about as much as the paper they're printed on, that being how much competitors could produce them for. The only point in producing a rating is having people believe you, and over the long term saying things that aren't true doesn't help that. The reason that ratings agencies went the short term route of simply saying what others wanted them to say is that they have no competition. It's a government-enforced cartel that fund managers can't even refuse to deal with. If they had real competition then people who invest according to what the most credible firms said. But since they don't have to compete they can simply maintain the same low standards as the other two firms and rake in the cash.

Maturity and the State.

I have recently [not so recently now, I left this post as a draft for a long time] been accused of "an impersonation of a spoiled brat" for refusing to take responsibility for the actions of my government. This is a common complaint about the enemies of the State, that they are not mature enough to accept things they ought to. So let us examine the accusation against me in particular and libertarians or anarchists in general.

The reason that "axiomiser" claimed I was immature was I would neither "shut the fuck up and accept the majority vote" or "make some effort to change peoples mind". I was under the impression that I was already doing the latter but let's examine whether this is a reason to accept responsibility for my government.

Let's assume that I can convince 100 people each in Australia, the UK and the US to vote for the candidate that most opposed the war in Iraq. Bear in mind I have NEVER convinced anywhere near this many people to do anything. This is what axiomiser was so upset that I would not accept responsibility for. Of these about half would have voted for that party anyway on other policies. Assuming a two party system and that each person has a 50/50 chance of voting for each party the chance of one vote changing the election is approximately 3/(number of voters). So basically bugger all chance of it EVER happening on a national level. Some chance perhaps that I could change one seat but that rarely changes who forms a government.

So given that I can't change the government, why must I accept responsibility for it? I can't change whether my mother's labor was painful should I accept responsibility for that? I can't change the mind of a terrorist, should I appologise for 9/11? I can't change my socks, should I be blamed if they stink? Oh wait I can change my socks, just a minute... Ok, that's better. But you see the difference, right? Socks, changable by me so I should accept them, or change them. Majority vote not acceptable by me so I need do neither. But the "axiomiser" can't accept this, because he's a spoiled brat. He thinks that he should be given what he wants and everyone should shut up about it. In fact that's what the State is, an attempt to get everyone to shut up about the rights and wrongs of giving the big boy what he wants. Maturity does not consist or resignation to the acts of bullies. It consists of acceptance of reality, and while reality says that the bullies win here, now, it also says that I don't like it. For those that don't wish to hear this, GROW UP!

Swine flu, inefficency and am I crazy again?

Ok, so I've been hearing about the swine flu, which naturally the MSM is declaring as a massive emergency that requires huge government action to prevent thousands of deaths etc. Now I'm not going to talk about the implict assumption that such actions is justified by "emergencies" or the responsbility of government for the rapid spread of such pandemics (given the persistent and large-scale subsidy of rapid transportation). Instead I'm going to make a case that government is seeking to maximise that amount of resources spent on these efforts rather than solve the problem.

This case depends on several things being true and if I'm wrong about any of them, please tell me.

The first is that I'm not an Einstein, a Linus Pauling or indeed the intellectual equal of any Noble prizewinner (with the exception of the "Peace" prize, I'll write something about that farce some other time). By this I don't mean I'm subnormal intellectually, merely that my intelligence is not such that it can routinely find implications of facts that nobody else in the world can. If I can see it, chances are other people can too if they want to.

The second is my understanding of the mathematics of epidemics/pandemics. Basically to be an epidemic the average number of people an infected person will in turn effect must be greater than one. If on average each new victim gives the virus to less than one person the total number of victims will be limited to n = a/(1-r) where a is the number of people infected at a particular time and r is the number of new victims each person infects. This is why schools, swimming pools, etc used to be closed, so that on average each person would interact with and have a chance to infect less people. If these measures reduced r below one then an epidemic could be nullifed without any effective treatment for the disease itself. Traditional responses to Ebola outbreaks (developed well before modern medicine) are an extreme example. Sufferers (or suspected suffereres) are simply left in their hut and food pushed in with a long stick. If the person doesn't collect the food for three days a torch is throw onto the thatched roof destroying the virus present in the victim's dead body.

Third is my understanding of what affects the how many people the average victim infects. One of the chief factors is how many people they come into contact with. This varies enormously over the population. Drivers, door-to-door salespeople, shop assistants and airport ticket personnel contact more people than housewives, computer programmers or carers, I will call the former group "high contact" and the latter "low contact" people. Anything that minimises the chances of high-contact people getting the disease is going to be doubly effective at reducing transmission. Firstly the chance of high-contact people getting the disease is higher because they obviously they have more opportunities to catch it. Once infected they similiarly tend to transmit the virus to more people for the same reason. The average number of people a person will infect during an epidemic is therefore increases with the square of his/her number of contacts minus the number of contacts*. If high contact people have a greater tendency to contact other high contact people (for instance if airports have large numbers of high contact people contacting each other) then the situation is worse, increasing with the cube at least of the number of contacts.

If this is true then it's obvious that a small investment in reducing average chance of transmission (either to or from) high contact people will have a large effect on total infections and therefore deaths. Reducing the chance of someone who contacts 10 times more people than the average person is close to 100 times more effective tranmission chances for the average person. What happens if his contacts are only a 10% more likely to be people like him (10 times as high contact) than the contacts of normal people? Well the average number of people infected by the people he infects goes up by close to 1000%, multiplied together this implies over a thousand times more infections from this person than the average person. All of this is an average which includes the possibility that he is never infected.


So clearly these sorts of people, if they exist, are a huge part of the epidemic pandemic problem, yet the targeting of vacinnes is generally towards the elderly, the young and other people who are likely to die if infected. Many of these people are low contact, in fact in the case of the elderly the lack of interaction is often a serious mental and physical health issue in itself. Now of course likelihood of death or serious illness if infected is rightly a factor in determining who should be protected. However isn't it true that the most effective protection of these people is the dramatic reduction in the transmission of the disease?

Now if I'm right about this then it logically follows that, not being a genius, other people could have also figured this out. This is particularly true of those who job is supposedly to prevent or reduce the death toll of epidemics/pandemics. So if they did so and ignored the implications, what other motive is there to do that but to continue wasting resources? The reason they'd want to do that is clear, so they can keep paying the politically influential drug companies and so that the UN's health employees have something to do.


* Because he can't infect the person who originally infected him, therefore the number of people who could infect him is c and the number of people he can infect is c-1.

The Underbelly of the State or the drama comes to the airport.

I'd like to start by offering my condolences to the family of Anthony Zervas, may you find peace and consolation. Mr Zervaswas murdered in full view of two police officers with guns and numerous security officers with clubs and pepper spray. Later his brother was shot and critically wounded outside his home. The police were waiting for backup, because having a gun against clubs isn't enough for them. Sure there were about 14 thugs, but 4 were fighting the other 10. All they'd have to do would be to scare someone who doesn't have a gun with their own guns, which is not usually difficult. The security officers weren't totally useless of course, they stopped other people from saving Mr Zervas. Now that may not sound useful, but it is. If the general public had stepped in and saved someone when the State, it's agents and those it licenses to protect people it would make the State look stupid. That would be far worse than someone dying. Of course the agents of the State could simply have yelled "Everyone start taking pictures" and the fight would have probably stopped. Not many murderers want their crimes in the holiday snaps of half of Asia. Even if they hadn't stopped at least we would have been able to identify all the attackers. Naturally you can't do this from airport security cameras because, 8 years into the "war on terror" security cameras still aren't good enough to identify anyone.

Of course the small-s state being New South Wales, our old friend Laura has to rear her ugly head. That's Laura Norder, the bitch of Macqurie Street. Every time politicians want to do something bad in Sydney they say it's for "Laura Norder". The murder and later shooting of the victim's brother were part of an ongoing bikie war. The worst kept secret in law enforcement is that this war is over methamphetaimes and hence the fault of the State. Even the mainstream media have said that the violence is the result of drug prohibition with the Sydney Morning Herald editorial openly saying so. The violence of the methamphetamine market was the subject of "Underbelly" the most popular series on australian television. So naturally Premier Rees says nothing about stopping prohibition, instead seeking to make bikie gangs illegal. The proposed law would allow the police to declare an organisation prohibited and not allow it's members to meet. They could also declare people part of these organisations. Of course the police don't have to say why they are making these declarations they just announce that from now on, if you see some of your mates you go to goal for 2 years. They don't have to prove that you and your mates were doing anything illegal, conspiring to do anything illegal or even that you were "consorting" with known criminals. Naturally laws against all these things are already on the books. Only those against whom a case cannot be made for any of these, or indeed anything else, will be caught by this law.

We are supposed to trust that people who let killers drive away in a taxi despite having 22 cops on the premises and cameras all over the place. These are the people who we're supposed to believe will handle their new powers competently and honestly. It's the same everywhere, when they don't have the competence to solve problems they want power to solve them without competence. Of course attempting to solve problems without competence simply creates more problems that the creator isn't competent to solve. Admitting incompetence to solve these new problems would lead to questions about the competence of their previous solutions so of course it doesn't happen. While people are allowed to use power, force in other words, to solve their problems this cycle will continue. While this cycle continues the people will continue to want their leaders to "get tough" because deep down, everyone knows them getting smart is not an option. And when it all goes horribly wrong, when the powers are used in ways that their supporters didn't expect, guys like me will say "I told you so.". When the lastest laws are used to crack down on antiwar protesters, unions, community groups that oppose whatever idiocy the government pushs on us, or bunchs of suspicious looking muslims, I want to be the first to say "No surprise". Because that's all the government ever gives you, the feeling of wisdom that comes with predicting what others wouldn't. Note not couldn't, they could all have predicted it. They just decided not to.

The murderless club basis for objective morality.

It has been claimed by theists that without god it is impossible to have objectively-based morality. Leave aside that doing what someone else says you should do is not an objective morality, how hard is it to make a basis for morality that is objective? Well I thought I'd try and it took it less than 10 minutes.

Imagine a world without rules, no morality, no law, no binding customs (although they might have habits). Obviously you would be better off with some system of rules to limit undesirable behaviour. One of my friends comes up to me and says "I want to be able to trade without fear of being murdered and my cargo stolen. What can I do?". I say well let's form a club with only 1 rule, if you murder someone in the club you are expelled. The only bad thing about being expelled is that members of the club can then murder you without consequence just as they can murder people who never belonged to the club. This club would be very popular. So would a club that had as it's condition that you don't steal from the other members. It is objectively true that if any of these clubs were opened in such a rule-free world I'd join them. I know this objectively because I have sufficent knowledge of my own preferences. These preferences are subjective, but my knowledge of them is objective. So if I base my morality on not doing anything that would get me thrown out of a "rule club" that I join it's objective morality.

Like I said, less than ten minutes.