Via Democracy in America, a recap:

I think popular deficit anxiety is related to a mistrust that what worked to end the Great Depression will still work today. The political will to achieve sufficient stimulus spending to kick-start the American economy out of its shortage of aggregate demand in the 1930s arrived in the form of an existential military threat: for four years, the government blew out all the stops on spending and printed money like there was no tomorrow. (Wars make it easy to get people to think that way.) At the end of the war, the national debt was over 100% of GDP, and the de-militarising economy faced a realignment that dwarfs anything today’s creative-destruction fans could imagine. But that late-1940s economy could count on two things: lots of young families who’d been starved of consumer goods for years and had built up a tremendous appetite, and a technological moment in which all sorts of fabulous new consumer goods were just being invented and advertised and pouring onto the shelves. In an industrial economy that was inventing amazing stuff people had never seen before—Whirlpools, Buicks, split-level ranch houses—demand was not hard to create. Today’s post-industrial economy is still creating a lot of amazing stuff people have never seen before, but a tremendous amount of it is downloadable and free. Much of the rest is fabulously expensive, and only useful if you have a rare genetic disease.

Paul Krugman has a famous essay in which he explains that our inability to imagine what people will spend money on as the economy changes is a failure of our imagination, not of the economy. But still, I’m having a hard time imagining what people will spend money on as the economy changes. We could certainly use a bunch of high-speed trains, a smart electric grid, highway and water-main upgrades and so forth, but only government can pay for those things, and to do that, you have to either tax or borrow. And those are the two things the public remains unwilling to do, because they don’t believe the spending will do the trick.

It seems to me that there is some room for splitting the difference here. I think a reasonable coalition could be assembled to cut spending by:

• raising the retirement age to 68 or or even 70, as the EU is preparing to do
• increase the social security contribution limit above $102,000 to say… oh, half a million sounds good

cutting several tens of billions from the Pentagon budget by killing programs aimed and fighting a Major Land/Air/Sea War (I’m looking at you DDG-1000, F-35and, and Expeditionary Fighting Vehicle) and refocusing on asymmetric war fighting (people).

One could then take about half of that and put it straight to bottom line deficit reduction — the retirement, SS moves alone would have long-term beneficial help for the deficit beyond the simple year-on-year revenue savings — and put the other half into big budget, big vision jobs projects like high speed rail and smart grid technology.

This is something that could probably get done in the House. In the Senate on the other hand, good luck getting it through without some Senator blocking the process because his/her sacred cow of a DoD project is on the chopping block.

Why, you make everyone a contractor.

IT giant IBM told Personnel Today that the firm’s global workforce of 399,000 permanent employees could reduce to 100,000 by 2017, the date by which the firm is due to complete its HR transformation programme.

Tim Ringo, head of IBM Human Capital Management, the consultancy arm of the IT conglomerate, said the firm would re-hire the workers as contractors for specific projects as and when necessary, a concept dubbed ‘crowd sourcing’.

“There would be no buildings costs, no pensions and no healthcare costs, making huge savings,” he said.

Okay, first of all “crowdsourcing” as it is normally understood is the idea that an organization’s customers, stakeholders and other interested parties can often come up with a solution to a particular problem better than insiders who are often blinded by organizational groupthink and prejudices. Thus the problem is thrown out to the public where people, usually for free or for credit only work away at all or parts of the problem.

Wikipedia is crowdsourced.

What IBM is doing is firing a two-thirds of its workforce and then hiring them back on an as-needed basis, sans benefits like retirement and HEALTH INSURANCE.

At first blush (and second) this looks like a pretty cold-blooded, typical Evil-Big-Corporation thing to do, you have to admit that for a company that is in IBM’s line of work — increasingly in the business of using smart people to solve problems on a project basis, less in the “making stuff” business — then this kind of business model makes a lot of sense. Given the increasing ubiquitousness of broadband connections and applications “in the cloud” that allow for long-distance collaboration it is probably inevitable.

Which brings into even starker contrast the need to get away from the employer-based model of health care financing and to an individual-based, portable model. All of which means we are going to have to revisit the single-payer and cost containment parts of health care again sooner rather than later.

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Gelinas makes a good point. But this is hardly a comprehensive solution either to pricing externalities or to controlling oil demand. Note first this free-market pricing of risk will only work if the U.S. government holds oil companies’ (in this case BP) feet to the fire for the full cost of damage and cleanup. Which will require that a reasonable number of pro-business politicians ignore the special pleading of BP and do the right thing. Because, in the case of the Deepwater Horizon spill, those costs are likely to run well into the tens of billions of dollars; enough to wipe out the better part of a couple of years’ worth of BP profits.

But U.S.-based production accounts only for a smidgen of world oil production. Oil is a fungible asset. BP sells its oil from the wellhead to refiners who get crude from all over the world, refine it, then sell it back to BP’s chains of gas stations. The oil from a BP pump doesn’t necessarily come from a BP well somewhere. I might come from a Petrobras or a Yukos well.

Those who think that free-market approaches to pricing in externalities and risk would be well-advised to do a little research on the success of the residents of the Niger Delta region in getting adequate settlement for the environmental degradation of their region by various oil companies. Hint: not much. Or of the efforts of environmental activists in Russia. Hint: they end up dead.

The problem for Tourre—and for Wall Street more broadly—is that they’re so intent on proving that what they did was legal that they can’t see that what they did was wrong. These are men (and they usually are men) of the market, and they played by the market’s rules. And the market’s rules are these: you make as much money as you can without actually going to jail. This is a world in which people are applauded for “blowing up the customer”—that is to say, offloading a crap product on a dim investor.

Once upon a time, the financial services industry existed to perform an essential social good: they provided capitol that businesses large and small required to run their operations, expand and to build stuff. They charged interest on that capitol to hedge against non-payment and to provide income to the banks. And to the extent that those businesses paid back that capitol (almost always), the owners and investors of the financial services businesses thrived. Long before the invention of deriviatives and hedge funds, working for a large investment bank was a ticket to if not filthy lucre, at least to a very well-off life.

At some point this all changed. And the point of the exercise became to make money for the sake of making money. How much money wasn’t even the point. As many wealthy individuals have said over the years, after the first few million the money doesn’t matter any more, its just a way of keeping score.

If anything has been rather well proved by the last few years it is the lie that the financial services industry should not be excessively regulated because it is the essential engine of economic growth.

The financial services industry worked just fine at “being the engine of economic growth,” for the nation in the sixty-six years between the enactment of the Glass-Stegall Act in 1933 and its repeal in 1999. Any argument that returning to such a strict regulatory regime would somehow strangle the American ecnomy is, quire frankly, bullshit.

And to cheapen this first post back from over a month away even more… I’m just going to link to another blog.

Via Economist blog Democracy In America

PAUL KRUGMAN says the really glaring malefactor wasn’t Goldman Sachs; it was the rating agencies. The problem, he says, is rooted in the notorious system in which the rating agencies are paid by the issuer of the security being rated, and he suggests a proposal by Matthew Richardson and Lawrence White of New York University to have the SEC pick the agency to rate each security. Dean Baker likes this solution too. Kevin Drum demurs:

I guess this is my question: if you do this, the ratings agencies no longer have any incentives to do much of anything. There are three of them, and presumably each one would get a third of the business at a price set by the SEC. So their incentive would be to hire the cheapest possible analysts and cut costs to the bone. The result would be ratings agencies even less able to cope with complex modern securities than the current ones.

This is what stonkers me about the ratings dilemma: there just doesn’t seem to be any good answer. Turning the ratings agencies into regulated utilities might be better than the current situation, but not by much. And if you’re going to do that, why bother with ratings agencies at all? Why not just have the SEC provide ratings?

Ezra Klein replies: “Actually, why not?” Indeed, it seems like a good question. My instinct is that it’s better to keep the ratings agencies as heavily-regulated public utilities than have the government actually assume their function. There are lots of reasons why certain things work better as regulated utilities than as government agencies. Electricity transmission, for example, is pretty much a natural monopoly, but we don’t have the Department of Energy just take over the whole business.

Indeed. The idea that a private business whose core business is to basically provide a public service — for example, financial ratings agencies, utilities, product safety ratings businesses — should have the same opportunities for unlimited growth and profit potential than say, a company that actually makes stuff, seems to me to be a bit silly. Sure they can make money and people who are interested in this kind of thing either from a sense of wanting to do well by doing good, or as a way of having a nice, “safe” job are going to want to do it. But that doesn’t mean that you are going to get filthy rich.

Just as there are different career options for people of differing skills and ambitions in life, it seems to me that a free market system can have room for different business models.

Since the global financial system unraveled in 2008, U.S. policymakers have struggled heroically to improve the performance and oversight of global banks and investment firms. But these actions have been largely unresponsive to the growing number of Americans who would like to remove their hard-earned retirement savings from these high financial fliers altogether and invest their nest eggs in their community. Might it be time for policymakers to consider the potential stimulus payoffs from nurturing micro-equity investments?

Growing evidence suggests that every dollar spent at a locally owned business generates two to four times more economic benefit—measured in income, wealth, jobs, and tax revenue—than a dollar spent at a globally owned business. That is because locally owned businesses spend much more of their money locally and thereby pump up the so-called economic multiplier. Other studies suggest that local businesses are critical to tourism, walkable communities, entrepreneurship, social equality, civil society, charitable giving, revitalized downtowns, and even political participation.

We have two fundamentally contradictory legal regimes operating today. One, called gambling, allows every adult, irrespective of income, to risk everything for a probable loss. Another, called small-stock investing, prohibits 98 percent of us from investing in the local businesses that are essential for the well-being of community, unless businesses pay prohibitively expensive lawyers’ fees to prepare the unreadable disclosure statements.

Something is deeply wrong here. Outdated federal securities laws have left Main Street dangerously dependent on Wall Street, and overhauling them may well be a key to economic revitalization.

This week more IEA people are going off the reservation and declaring that the IEA’s official statements regarding future oil supplies were basically just shit they made up and had no basis in reality.

“The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year,” said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. “The 120m figure always was nonsense but even today’s number is much higher than can be justified and the IEA knows this.

“Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further.”

IEA Petroleum Production Estimates (IEA, The Guardian)

The problem here is that the last time I looked, global demand for oil products was around 85m barrels a day. And that is in a depressed global economy. That only leaves about 10m bbl/day in excess capacity to support a robust economic recovery. Since plunging to $38 or so in April, crude futures have climbed consistently back up into the mid-60’s and 70’s this summer and have started to show support in the $80 range the last week or so. The upshot of all this is that as soon as economic growth begins to take off, demand is going to come close to supply and oil prices are going to go back to very high levels. This will effectively put the brakes on any serious recovery.

Time is not on our side in the move to move our economies out of their dependence on oil. To my mind, energy policy will need to be front anc center once the health-care debate is finished.

LyondellBasell said yesterday that one of its European holding companies had also filed for bankruptcy protection and that it arranged for up to $8 billion (£5.4 billion) in financing to keep operating. The private company took on billions of dollars in debt obligations a year ago, when Mr Blavatnik led a $12.7 billion leveraged buyout of Lyondell, an American company, by Basell of the Netherlands.

Volker Trautz, chief executive of LyondellBasell, said the company had seen a dramatic softening in demand and volatile raw materials costs over the past two quarters.

“December was particularly difficult, as many of our customers postponed orders to reduce their inventories,” he said.

Basell Finance, a subsidiary of LyondellBasell Industries, also filed for bankruptcy protection. It said that it had listed assets and debt of more than $1 billion and admitted that it was keeping at bay more than 25,000 creditors. It is believed that the company’s 79 affiliates will also file for court protection.

The latest filings indicate that LB will emerge from Chapter 11 protection this month.

This week rumors are circulating that Indian chemical giant Reliance Industries is aiming for a takeover.

Reliance Industries has a market value of about $70 billion and is the most widely held stock by fund managers in India. The company has a cash of $4.6 billion and gross debt of $10.8 billion. With such a strong financials and cash raised from the proposed sale of treasury stock, the company’s desire for aggressive growth via inorganic model is obvious.

Here, on a sleepy stretch of shoreline at the far end of Asia, is surely the biggest and most secretive gathering of ships in maritime history. Their numbers are equivalent to the entire British and American navies combined; their tonnage is far greater. Container ships, bulk carriers, oil tankers – all should be steaming fully laden between China, Britain, Europe and the US, stocking camera shops, PC Worlds and Argos depots ahead of the retail pandemonium of 2009. But their water has been stolen.

They are a powerful and tangible representation of the hurricanes that have been wrought by the global economic crisis; an iron curtain drawn along the coastline of the southern edge of Malaysia’s rural Johor state, 50 miles east of Singapore harbour.

They are a powerful and tangible representation of the hurricanes that have been wrought by the global economic crisis; an iron curtain drawn along the coastline of the southern edge of Malaysia’s rural Johor state, 50 miles east of Singapore harbour.

Business for bulk carriers has picked up slightly in recent months, largely because of China’s rediscovered appetite for raw materials such as iron ore, says Huxley. But this is a small part of international trade, and the prospects for the container ships remain bleak.

Some experts believe the ratio of container ships sitting idle could rise to 25 per cent within two years in an extraordinary downturn that shipping giant Maersk has called a ‘crisis of historic dimensions’. Last month the company reported its first half-year loss in its 105-year history.

Acelerando won the Locus award and was a finalist for the Hugo, Cambell and Clarke awards in 2005-2006 and is one of the seminal science fiction works.

This isn’t a book review. This is a post demonstrating Bruce Sterling’s maxim: The future is here, it just isn’t widely distributed yet.

In Accelerando there was a passage that I was reminded of reading the news this week.

The last great transglobal trade empire, run from the arcologies of Hong Kong, has collapsed along with capitalism, rendered obsolete by a bunch of superior deterministic resource allocation algorithms collectively known as Economics 2.0.

Think about the massive amounts of leverage and speculation that led to the present economic situation. Now read The Matrix, But With Money

It sounds like something out of The Matrix: a giant, world-spanning electronic network where high-powered machines, some of them using GPUs to gain a speed advantage, run secret, rapidly-evolving software algorithms that battle it out for profits in a high-stakes game of cat-and-mouse, attack-counterattack, that yields some $21 billion a year for the winners and can spell ruin for the losers. Except that it’s not The Matrix—it’s the stock and commodities markets, and the fact that these markets mainly consist now of computers trading against one another has been brought closer to the public’s attention by last month’s alleged theft of Goldman Sachs’ proprietary trading code.

The collection of computer-automated, high-speed trading technologies and techniques that are typically lumped under the heading of “high-frequency trading” (HFT) have been around for a while, but HFT has recently become heavily identified with the banking giant Goldman Sachs, which dominates some aspects of it on the New York Stock Exchange.

The final animal in the HFT menagerie that I’ll point out on this brief tour is the automated market maker (AMM), which is a subtype of what is often called “dark pools,” or “dark liquidity.” AMMs like Citadel always stand ready to buy and sell large quantities of assets, and they don’t publish price quotes to other market participants via exchanges.

To find out what assets a dark pool will either sell or buy and at what price, you first have to ping it. Once you ping the pool with a request to, say, buy a specific asset, the pool will reply with the price that it’s willing to sell you that asset for. You can either accept the price and complete the transaction, or turn it down and ping again later to see if the price has moved in your direction.

Dark pools, then, let traders completely sidestep normal stock and commodities exchanges in order to buy and sell assets without having to broadcast their desired price to the rest of the world. This anonymity has a number of uses, the most important of which is that it makes it easier to implement the “iceberg” strategy described above.

As with the other creatures in our HFT menagerie, the AMM makes money a little at a time, but in volume. These massive, computer-automated brokers turn a profit by making money on the bid/ask spread and by not being too exposed to price movements in any one asset class.

Here is a collection of links on high frequency/high speed trading (and yes, they are all chock-full of SF references):

• The Dust Hasn’t Settled on Wall Street, but History’s Already Repeating Itself (Washington Post)
• The Rise of the Machines (The Economist)
• NYSE’s Fast Trade Hub Rises Up in New Jersey (Wall Street Journal)

We’re probably going to hear a lot more about HFT in the near future. But here is the real takeaway. As with all computer and network technology it obeys a pretty steep curve of innovation and increasing capability. Once semi- or completely-autonomus market-making machines become possible it is only a matter of time (we’re talking just a handful of years) before they begin to become very powerful indeed.

So the question becomes, are human institutions even capable of coming up with policies and regulations in response? Human institutions are slow, clumsy things that work at a geologic pace compared to the innovation pace of information technology.

I’m not saying that we’re gazing into the maw of some apocalypse out of Matrix or Terminator. But I am saying that unless we reform both our economic system and our regulatory system pretty quick lots of aspects of our existence are going to no longer be under our control By “our” I don’t mean humans, I mean people as opposed to a small clique of super-rich people and their trading algorithms.

There are lots of good reasons for cleaning house anyway. This is just another really good reason to get down to business.

Otherwise, we are going to see lots of stories in the coming months and years that look like they were pulled verbatim from the pages of a science fiction potboiler. And, if you read SF like I do, you know that most of those futures are not very pleasant.