By my reckoning, the actual solution arrived at was close to #26, the “Classic Eurofudge”. A bit more short term current account finance, a bit more austerity, a more or less certainty of another crisis a year down the track and the big question being whether the Greek political system can handle the strain. My own choice was #5 (as a few people noticed), which (as Alan pointed out to me on Twitter) is basically a classic 1990s-vintage IMF program.

The reason I wrote the post was to try and get people to understand the sort of constraints that the international policy structure are working under. The CYOA format really is an excellent teaching tool for this sort of exercise[1]. Firstly, it makes it impossible for people to do what they tend to do in these kinds of debates and use a preselected ideology as a substitute for thinking about the questions. And secondly, because of the “first person shooter” aspect – by framing the discussion from the viewpoint of Maynard and his boss, you really do encourage the reader to empathise with the decision makers and the problems they face, rather than treating them as manifestations of a great big impersonal and probably evil entity. As a propaganda tool, the CYOA structure is a great way to manipulate people.

However, because it’s such a great way to manipulate people, you have to be a bit careful the way you use it. Anyone who reached #17 in the original post can see that I’ve been very careful to frame the possibilities so that the only choices in the adventure are choices which would actually be open to a European civil servant who didn’t want to think outside the box or rock the boat too hard. As a result, (as I mentioned early on in comments to the original post), it certainly is open to the criticism that it’s just erasing political viewpoints, including some that really shouldn’t be erased. One of the motivations for the post was a discussion I had with @PabloK on twitter about the Greek negotiations, in which he said, rather succinctly, that the purpose of protest was to change the space of what was politically possible. I think this is a crucial point; although it is important to make a good faith attempt to understand the constraints that people work under (which is why I wrote the post), it is equally important not to regard those constraints as necessarily being imposed by Ultimate Reality.

What will rewrite the script for Greece? I don’t know. Typically, based on the history of the EU, it will be some sort of crisis. If the bailout compromise leads to political collapse in Greece, then new things will become possible. It may turn out that the Lisbon Treaty does need to be renegotiated – as I said in #17, it wasn’t Maynard’s job to do that, but it might be someone’s job some day. So in many ways, the real adventure starts at the end of the choose-your-own-adventure; this is when you have to start thinking about the ways in which the set of possibilities could credibly be extended.

These constraints are further explored in “Who’s In Charge?”, and one of the fundamental questions is – do the problems facing the world right now require a major overhaul of the international institutional structure and if so, how the hell might that be achieved? I don’t think I agree with Alan in his conclusion, which seems to me to basically be that a lot of the work of coherent international institutions could be done by having more sensible domestic politics, although I do agree with him that the existing international institutions basically serve as an excuse factory for domestic politicians who want to avoid tough decisions (or alternatively, who want to make decisions which are “tough” on other people and avoid the political consequences of having done so for themselves). I think it’s well worth buying the book[2] and reading it, as a preparatory step for thinking about what kind of a new world system you really want to see.

[1] And surprisingly easy to write! All you have to do is a little flowchart of the structure on a piece of paper – unlike a proper adventure book, there is very little recombination of the branches, so it just looks like a decision tree which is about four plies deep. Then the best thing to do is to give each node of the tree a binary code indicating which decisions were taken, and write out each of the paths in turn. Then you can do a find-and-replace changing the codes for numbers, and copy them into a Word document in order. The great thing about the task is that it’s amazingly “chunkable” – I wrote the paragraphs on the bus to and from work.

[2] It’s worth noting that “Who’s In Charge” costs £1.99 and has 60 pages, all of which are written by Alan Beattie. A typical copy of the FT costs a penny more and can have as few as 56 pages (not counting the adverts and the unit trust prices), with the vast majority of these pages not written by Alan Beattie at all, despite the fact that he is clearly one of the best journalists there. The book is clearly better value.

What interested me, however, from the point of view of a professional banker, is that the document in question provided only for the discharge of personal debts of the Sumerians; commercial debts of merchants were not discharged. Clearly (and I suppose there is an interesting anthropological history to be written of the extent to which the appropriate level of cynicism about these things as changed from pre-Christian Mesopotamia to modern London), anyone who could have convinced the Babylonian legal system that his liabilities were all personal debts covered by the jubilee, while his assets were all mercantile trade credits, would have made out like a bandit. The point I am trying to make here is that as well as being the first mention of the word “freedom”, this proclamation marks the first recorded instance of a regulator-sanctioned selective default. Then a lot of things happened including the Fall of Rome and the Beatles, and then we had the FDIC’s decision in 2009 to transfer the assets and deposits of Washington Mutual to JP Morgan Chase over a weekend, leaving holding company creditors exposed to an extravagantly bankrupt shell. So from the start to the beginning of the story of debt, it has always mattered whether or not you were on the right side of what the relevant regulator wanted to accomplish.

Debt is a great book – I don’t think I agree with it at all, but it’s that rare thing – a book that you can have an argument with and more so, the kind of book that you can see is intelligently arguing back. The argument I found myself having again and again related to this particular point – on more than one occasion during the history of debt, it was noted almost parenthetically that a particular debt reform was carried out on the basis “except commercial debts”, and I found myself saying “No! Hang on! Tell me more about these exceptions!”.

And I think this because commercial debts between merchants are a really important part of the story here. Not only are they, in simple numeric terms, a much bigger part of the picture than debts between individuals in social groups, or even tax obligations between subjects and rulers, the fact that trade credits between merchants have generally, even in conditions when other kinds of debt relation were being repudiated, tended to be preserved and honoured, gives us a few clues toward an alternative story of debt over the last 5000 years.
The Babylonian merchants weren’t included in the debt amnesty, of course, because to have upset their trading accounts would have done serious damage to the commercial basis of Babylonian society – to put it frankly, they were too big to fail. In general in the commercial world, the ability to put yourself in debt is a privilege, not an obligation – one of the most important aspects of corporate legal personhood, as an introductory legal textbook will tell you, is not the right to sue other people, but the right to be sued. If you can be sued, then you can enter into agreements with other people that they have confidence that the courts will enforce. And really, in a lot of important technical senses, a debt between merchants is simply a legal codification and recognition of the very basis human ability to promise to do things and then do them. (Parenthetically, I’d note that I do consider it a weakness of the book, perhaps an inevitable one given space constraints, that the word “oath” appears very rarely and “promise” only a little less so. A debt is a promise to pay, and the history of promises seems to me to be potentially very different from Graeber’s history of the debt relation – the Celtic and Nordic sagas are chock full of people carrying out totally extreme actions in order to underline the importance attached to keeping one’s word. Meum dictum pactum (my word is my bond) is the motto of the London Stock Exchange).

So it is noticeable that the concept of “too big to fail” has grown up hand in hand with the concept of the debt relation for the entire traceable history of debt. Although the parallel track of debt as obligation, religion and morality has certainly been there, and is described expertly in the book, from day one it has been recognised among merchants and men of commerce that the point of the debt relation is to serve the organisation and arrangement of commercial need.

To my mind, this fact rather colours one of the central theses of Debt – the idea that debt has from its origins been entwined with slavery, military tribute and imperialism. I’d advance the suggestion that of course the first people to start codifying the debt relation were the first emperors and rulers; they were the first people who ever came across the problem of organising a productive economy larger than a small village or subsistence farming community. The fact that debt has its origins in the creation of tax-collecting, military societies seems to me to be equivalent to the fact that NASA invented Teflon – they had to do it, in order to solve the problems put in front of them.

It’s also notable that actually over the years, debt (by which I mean, the commercial and mercantile kind of debt) has worked noticeably better than most of the alternatives. The dzamalag ceremonies described in the book:

This sets in motion the dzamalag exchange. Men from the visiting group sit quietly while women of the opposite moiety come over and give them cloth, hit them and invite them to copulate; they take any liberty they choose with the men, amid amusement and applause, while the singing and dancing continue. Women try to undo the men’s loin coverings or touch their penises, and to drag them from the ‘ring place’ for coitus. The men go with their dzamalag partners, with a show of reluctance, to copulate in the bushes away from the fires which light up the dancers. They may give the women tobacco or beads. When the women return, they give part of this tobacco to their own husbands, who have encouraged them to go dzamalag. The husbands, in turn, use the tobacco to pay their own female dzamalag partners …

New singers and musicians appear, are again assaulted and dragged off to the bushes; men encourage their wives ‘not to be shy’, so as to maintain the Gunwinggu reputation for hospitality; eventually those men also take the initiative with the visitor’s wives, offering cloth, hitting them and leading them off into the bushes. Beads and tobacco circulate. Finally, once participants have all paired off at least once, and the guests are satisfied with the cloth they have acquired, the women stop dancing and stand in two rows and the visitors line up to repay them.

Then visiting men of one moiety dance towards the women of the opposite moiety, in order to ’ give them dzamalag‘. They hold shovel-nosed spreads poised, pretending to spear the women, but instead hit them with the flat of the blade. ‘We will not spear you, for we have already speared you with our penises’. They present the spears to the women. Then, visiting men of the other moiety go through the same actions with the women of their opposite moiety, giving them spears with serrated points. This terminates the ceremony, which is followed by a large distribution of food”.

… certainly have some attractive qualities, but although Graeber wins the battle against the “Myth of Barter” here I think he loses the war – really, although the discussion of socially embedded exchange is incredibly interesting and illuminating, I think anyone who reads the passage above is going to end up sympathising with the people in the economics department who say that you really can’t organise a modern industrial society on the basis of organising a wife-swapping party every time you want to buy a blanket. Perhaps the fact from the book that will end up resisting the longest against the onslaughts of late nights and Scotch whisky on my ability to recall, is that more or less every urban society in the world has ended up inventing an equivalent phrase to “Please”, and “Thank you”, terms which have the social function of asserting between parties to a commercial transaction that the transaction itself does not embed them in any deeper social relation.

(Another parenthetical note: the only real attempt I can think of to organise industrial production on any other basis from the debt relation is Soviet Communism, and while Soviet production quotas weren’t debts, they seem to me to have had all the aspects of debts which Graeber finds to be pernicious and quite a few more besides. But I don’t really know enough about Soviet Communism to be able to say any more about the analogy, if there is one).

So what might one draw in the way of policy conclusions from an alternative history of debt that traced it down the line of debts between merchants and commercial entities, rather than individuals and sovereigns? Well, I think it would be hard to get very near to the last chapter of Debt. When Graeber points out that the US banking system has loaded itself up with “bad assets”, he doesn’t seem to be recognising that these assets (ie, mortgage loans) are “bad” precisely because there is a governing law which doesn’t enforce the debt contract as a matter of religion or morality, but rather gives US mortgage borrowers the right to hand back the collateral and walk away from the debt. The development of modern bankruptcy codes (and, one has to say, the fairly scandalous changes made to the US bankruptcy code in 2006) has gone hand in hand with the growth of debt in the modern world, and the “modern jubilee” which Graeber suggests is basically the same thing as the “bad debt crisis” which has actually happened.

I’ve repeated myself to a boring extent in the past on the subject of the science of economics being basically a branch of control engineering (“economic cybernetics”, as the Russians called it) which went rogue in the 19th century and got caught up in a whole load of moral and political philosophy that didn’t belong there. Debt as per Graeber’s book is an example of this – the debt contract is basically a tool of industrial organisation that escaped from the laboratory and ran wild. But I think he understimates the extent to which there have always been domesticating influences on the concept, and the extent to which the debt relation has always been, correctly, the subject of revision and reappraisal, with the basic underlying question being that of economics rather than anthropology – “How do we best organise the decision making process with regard to production, consumption, and exchange?”

Having said that, there are some situations where Graeber’s analysis seems completely accurate. Countries don’t have bankruptcy codes governing them, and so in the sphere of international debt negotiations, one can see all the pernicious aspects of the “folk-economics” version of the debt contract that Graeber describes. Looking at the relationship between the European Union and Greece, or even Ireland, one can see that the debt relation is being specifically shaped into a tool for exercising power in a way which would not have been possible through democratic means. IMF programs seem to be typically designed to fail, to put the client country into the position of a defaulting debtor and entirely reliant on the mercy of its creditors. So even though I’d have liked to see the book twice as long and ten times as ambitious, the analysis that it presents is very useful in looking at debt-relations outside the commercial codes that govern most of the world’s actually existing debts, and it’s a very salutary reminder of what happens when people forget that debt is really only (or really only ought to be) the legal system’s best guess at what kind of arrangements would best serve the general purposes of commerce. It is, as Graeber intimates, when the debt relation takes on an independent life of its own that the problems all start.

I don’t have a solution myself – the more I end up discussing this with people, the more I am reminded of the London Business School proverb taught on some of the gnarlier case studies, which is “Not All Business Problems Have Solutions”. So, CT hivemind, what do you think the best outcome is? Below the fold, I note some talking points, aimed at preventing our commentariat from falling into some of the pitfalls and mistakes which appear to be dominating debate at present. Because the whole issue is a twisty turny maze which at times seems to consist of nothing but false moves, I am presenting it in the form of a “Choose Your Own Adventure” book. I would note at this stage that I could probably have presented it in a funky HTML way rather than making you scroll up and down, but I have convinced myself that this is a feature rather than a bug – the medium matches the message here, because international debt negotiations are cumbersome, inconvenient and irritating too. Also, it is probably easier than it needs to be for readers to end up at the wrong paragraph and get a confusing jumbled narrative which bears little resemblance to the decisions they thought they’d made. Again, this is a crucial part of giving you the authentic international financial diplomacy experience.

I will have another post on this in a few days (more realistically: in a week). But for the meantime, I’d be very interested if CT readers would play the game below and let me know, in comments, where they ended up. And also, if having ended up there, they were left with a strong feeling of having been bamboozled into something they didn’t really want to do.

Update: It is no longer literally impossible to reach #50 (and therefore #15 and #21). I don’t think this was a popular path, but sorry. Thanks to “M” and “Vasi” for noticing.

INTRODUCTION

Welcome to Choose Your Own Troika Program For Greece! You are a junior member of the One World Government, and you have been given the job of coming up with a proposal to resolve the Greek crisis. You have also been given an advisor who will help you talk through the consequences of decisions. Remember that you have to consider the economic consequences of the various policy choices, but that there is no point in submitting a proposal which is politically unacceptable to either the Troika or the Greek government. Good luck!

If you answer “Yes, I know it’s going to be difficult, but we have to plan on that basis”, turn to 32.
If you answer “I think we have to plan on the basis that there isn’t”, turn to 47.

If you say “Yes, leave the Euro”, go to 18
If you say “No, I didn’t say that. I think we can structure this to keep them in the Euro.”, go to 34.

3:
“Right, details”, say Maynard, picking up a legal pad and a sharpened pencil. “This is a kind of internal devaluation strategy, am I right, with a future string of fiscal transfers written in to soften the transition?”

If you say “Yes, you’re right”, then go to 26
If you say “No, I am thinking more of an investment-driven plan”, then go to 36

4:
“So to summarise, we’re going to look for a degree of further debt relief but keep Greece in the Euro and try for rough current account balance over the long term”, Maynard says. “So this is an internal devaluation strategy, right?”

If you answer “Right.”, go to 31
If you answer “No, you don’t understand at all”, go to 7.

5:
“You’re going to take a lot of flak for this from some quarters, but it seems to me to be that you could do a lot worse”, says Maynard, finishing his tea. “In terms of consumption smoothing and reducing the fiscal adjustment, I don’t think you’ll do better – you’ve written down the debt and you’re getting structural current account funding. But there is not really much escaping from the fact that Greece is not going to get back to the levels of consumption (or more accurately, the gap between consumption and production) that it saw in the 2000s. A lot will depend on the gap between the maximum amount that is politically possible for the Eurocore to deliver in terms of fiscal transfers, and the minimum amount that is needed to prevent riots in Greece. Which is a parameter outside our control, unfortunately. But at least this plan sorts out the debt, and gets Euroland on the road to fiscal union. Let’s get it written up”.

THE END

6:
Maynard is looking at you quizzically. “This is presumably some seriously heterodox idea. Even with a total moratorium on the debt, there is a fundamental problem with targeting current account balance while not really addressing the difference in relative costs. What’s the plan, Stan?”

You shoot him a baleful look and say …

If you say “We need a step change in ECB policy to target higher inflation in core Europe. Greece is in recession, so a higher target for Europe-wide inflation is going to help improve our relative unit costs”, turn to 17
If you say “We need to improve competitiveness by investing in the Greek economy. We should be negotiating in terms of the structural reconstruction funds to be made available to improve Greece’s capital stock”, turn to 44.

7: “So, if not internal devaluation, what? Are you sure you want to have current account balance as one of your aims?”, Maynard asks.

If you want to reconsider this, go back to 32

“Ok, we are gunning for long term equalisation of Greek competitiveness. So what’s the plan, Stan?”

If you answer “We need stimulus in Germany, and accommodative monetary policy from the ECB. We can get Greece back onto competitive terms by an internal revaluation of the creditor countries rather than an internal devaluation by the debtors”, go to 17.
If you answer “We need a five year plan. We can carry out structural reforms under the auspices of a tightly-drafted IMF program, with funding for capital investment. Clearly this means that Greece is giving up a lot of political independence, but maybe that’s not a bad thing”, go to 27.
If you answer “Structural funds and lots of them. If we flood the Greek government with money, then it will end up in regional development, particularly if we put some sort of conditionality on it. We are stuck with the Greek political system, unfortunately, but they will perform a lot better if we stand behind them”, go to 42.

8:
Maynard puts his teacup down and assesses his notes. “This is going to be very difficult for the Greeks to manage politically, you know. Since the context is a disorderly defaulter and we are giving up fiscal sovereignty for them, you would have to guess that the Troika plan is going to involve quite a lot in the way of internal devaluation and shock treatment restructuring. So you have the humiliation of the default, the humiliation of imposing a fiscal viceroy on them, and then they get a whole load of shock treatment in return for some structural current account financing. This is the policy mix that pretty much defines the ‘IMF Riot’. Go on then, let’s write it up. It is a bit depressingly close to a lot of policies that didn’t work, though.”.

THE END

9:
“Now that, conversely, is going to be a tough sell in Greece. Tea?” While Maynard pours you a cup, he asks about how the fiscal balance is going to be looked after.

If you answer “We will need to delegate Greek fiscal policy to a European agency, committed to the aim of bringing the primary deficit into balance after fiscal transfers as soon as possible”, turn to 25.
If you answer “There is no point in austerity in this plan. The devaluation will be followed by aggressive Keynesian stimulus”, turn to 51.
If you answer “We will draw up a plan to achieve primary balance over the medium term, and negotiate with our EU partners for the deficit financing required”, turn to 37.

10:
“So, an internal devaluation strategy, with some of the pain of adjustment financed by the debt default”, says Maynard. “There’s going to be a lot of pain for Greece anyway. I think you might be underestimating the deadweight costs of the default itself, and although Greece is a lot closer to primary surplus than it was a few years ago, it’s still a way away (unless you use a funny measure counting privatisation receipts and not counting accruals spending). So there’s a lot more fiscal austerity on the way for them, in the context of a blown-up banking and savings system. And I suppose that if it turns out ex post that you were too pessimistic about further money from the troika, that’s a bonus.”

“The good thing about this strategy is that if Greece goes for it, they don’t have to negotiate it with anyone. As a result, it might be what they end up doing anyway if a negotiated settlement fails. So we should definitely write it up, on that basis alone. But I can’t help feeling that we ought to be able to do better”.

THE END

“See you then”, he adds, pointedly, as he walks out of your office.

THE END.

12:
“I think we’ve got off track here”, says Maynard, pouring a cup of tea. “If they’re leaving the Euro, then we have to be aiming for current account balance, at least in the long term. Do you mean that we are going to aim for current account balance, or that we’re not leaving the Euro?”

If you answer “The first”, go to 55.
If you answer “The second”, go to 38.

13:
“Ooh. So, having carried out the disorderly default, we are basically going to suggest that the same Greek government which has so comprehensively failed for the last forty years is going to restructure the economy to a modern value-added basis, with no wage cuts, and that the rest of the EU should just stand back and write them cheques to cover the fiscal deficit and finance a massive investment programme? Something like it has worked once in the past, but the relationship between Greece and the EU isn’t really very like the relationship between the UK and the Falkland Islands. And the Falklands had better governance. This would be absurdly aggressive as an opening negotiating position for the Greek side – as a suggestion for a solution it’s politically insensitive to say the least. I’ll submit it to the process, but I am frankly not optimistic about your career.”

He finishes his tea and leaves your office.

THE END

14:
“That’s definitely a significant adjustment”, Maynard warns you. “Since Greece ran large structural deficits (which were the counterpart to its fiscal deficit) for most of the 00s, we are basically saying here that we can’t return to the pre-crisis consumption path. This isn’t really a growth-oriented or cyclical policy; we’re trying to smooth the transition to a structurally lower standard of living in Greece. Just to be sure you know that, because it is going to factor into the political decisions later on”.

“I understand”, you answer. “But let’s deal with that later. We need to consider our debt strategy. My proposal is …”

If you say “That the current process is a can-kicking farce. We should just plan for a straightforward default on the debt”, turn to 22.
If you say “That part of the fiscal contribution is going to have to take the form of a significant further reduction in the debt by the official sector, over and above the private sector contribution already made”, turn to 39.
If you say “That we have to find a solution within the constraints of the current nominal debt level. We’ve got a certain amount of private sector writedown, but there won’t be any more”, turn to 49

15:
“This seems like a bit of a long shot, frankly”, Maynard says. “I can sort of see how you could bring the troika back on side after a Greek default by adopting the orthodox IMF playbook. But even with that, it’s going to take a lot to bring them back into the fold after we’ve made them angry with the debt strategy, and a hell of a lot to convince them that they should go on providing current account support without any real control over how it’s spent. I suppose that Greece still has the threat of leaving the Euro in this strategy though, so it’s not an unplayable hand from their point of view. What the hell, let’s write it up. Although it looks a lot like the policy mix that defined Argentina, before they defaulted and left the dollar peg. I’ll take it away and get it written up.

He is shaking his head as he leaves your office.

THE END

16:
“The Argentinean solution”, Maynard says. “I suppose it worked for them, so it can’t be ruled out, can it? But … Argentina was and is a commodity exporter with a clear way to raise hard currency revenues. Greece has got tourism and shipping as its exports. The tourism generates soft currency, and the shipping … well, with the best will in the world, I am not seeing those hard currency revenues coming back to Greece if it is in the state that this plan is going to leave it in. It looks like a roll of the dice to me. Remember that even today, Greece has twice the GDP per capita of Argentina.”

As he leaves, Maynard starts to hum the theme from “Evita”, but thinks better of it.

THE END.

17:
“Would you try to live in the real world please?”, Maynard demands. “We are here to work out a package for Greece, not renegotiate the Lisbon Treaty. To start with, to get the sort of Euroland-wide inflation that would make a real difference to Greece’s competitiveness or debt burden would imply double digit inflation in Germany. But more fundamentally, this is a long term solution to a short term problem. What are we meant to do about Greece now and in the next couple of years? I’m not going to let you avoid all the tough decisions by assuming a deus ex machina.”

Go back to 1

18:
“I think we’ve gone a bit off track here”, Maynard says. “You’re planning for a disorderly default, and leaving the Euro. Which, by the way, means that you’ve caused a financial meltdown and credit crunch in Euroland. But having done both those things, you’re planning for the Greek economy to still maintain a structural current account deficit (even though it’s not in a single currency any more) and to have this deficit financed by its European partners.”

“You don’t mean what you say here. Do you mean that you want to go down this road because you don’t expect long term current account support from Europe, or that you’re looking for temporary current account support outside the Euro because you do expect the current account deficit to close in time?”

If you answer “The first”, go to 47.
If you answer “The second”, go to 33.

19:
Maynard is chewing his lip; he is frustrated, although not unsympathetic. “This is pretty close to the current state of negotiations”, he says, shaking his head, “but there’s still a big gap between the minimum that the Greeks need to maintain political deliverability, and the maximum that the Germans are willing to deliver without any strings. There’s a fundamental credibility problem here. I can’t really fault your logic, but the politics look unworkable”.

He shrugs his shoulders and leaves your office, in the direction of the word processing department.

THE END

20:
Maynard hands you his pad. “I can’t work with this. We’ve taken Greece out of the euro and imposed a disorderly default. Now, with Europe in financial meltdown, we’re asking for the equivalent of a Marshall Plan, with no restructuring of the government system that caused this crisis? What, exactly, would the core European nations be getting out of this deal? Once Greece is out of the Euro, there’s a strong presumption that it’s off their hands, and the disorderly default and rejection of any loss of sovereignty reinforces that view. You are being much, much too blasé about the dangers of a financial crisis. This looks to me like the sort of mistake that gets written about in history books. Submit it if you like, but not with my name on it, please.”

THE END.

21:
“Forget it”, says Maynard, shortly. “You can’t announce a disorderly default and then turn around and ask for no-strings cash. There might be the germ of an idea here, but it needs to be based on, at the very least, a negotiated writedown. Shall we go back and rethink the debt strategy?”

If you answer “OK”, then go to 46.
If you answer “No, I have made my decision on debt strategy”, go to 57

22:
Maynard gulps. “As you wish. And will Greece be remaining in the Euro?”

If you answer “Yes, definitely”, go to 41
If you answer “No, Greece has to leave the Euro, temporarily or permanently”, go to 33

23:
Maynard’s hands are trembling slightly as he pours a cup of tea. “Well, let’s go there, then!”, he says. “Default in the Euro, or default out of the Euro?”

If you say “In”, go to 10
If you say “Out”, go to 52

24:
Maynard’s tone of voice turns hostile. “How, exactly, is Greece going to maintain service on an unreduced burden of euro-denominated debt, if it leaves the Euro? Will you concentrate, please? I think we’d better start again from the beginning.

Go back to 1

25:
Maynard reads from the yellow legal pad on which he has been taking notes. “To recap, your plan is that Greece should declare a unilateral moratorium on its debt, while remaining within the Euro, and should then negotiate the appointment of a special commissioner to bring the primary fiscal balance back to zero, while enacting an internal devaluation to restore competitiveness”.

“It’s got a certain coherence to it. We would at least be addressing the long term problem of the debt burden. Everything would really depend, however, on how much we could get for Greece in the way of fiscal transfers, and we do not really help our case with the moratorium – this is likely to cause them all sorts of problems, and doesn’t really do much to establish the Greek governments good faith. We can build some or that credibility back by showing Greece’s willingness to accept a tax commissioner, but this is going to be a very difficult political sell in Greece. In fact, when you combine that with the wage cuts, then I think that this package may be completely impossible to implement in Greece. It would certainly have the crowds on the streets, even if the fiscal transfers were very large.”

“I will have it typed up and submitted”, he mutters, “but I think it has little chance of being seriously considered”. He excuses himself and walks out of your office.

THE END.

26:
“The short term debt path on this one is going to scare a lot of people”, Maynard remarks. “After all, you’re effectively deepening the austerity while trying to maintain service on an unserviceable debt burden. This plan has got a further restructuring or crisis more or less written into the numbers a few years down the road”.

You wait for his final cutting remark, but it never comes.

“But, there’s worse things than that. What we have here is a classic Eurofudge, and I think Europe might go for that. And if Greece goes along with your idea, they’ll certainly be playing the game the troika’s way, and I think they would have the right to expect a generous debt writedown further down the track, by which time we might have a less toxic political climate. If this works, we’re making real progress to a new Greece and a new Europe.

“The problem is, will it play in Greece? If you think the current situation isn’t politically sustainable, then this plan definitely isn’t. It scarcely matters whether we’re going to include a sovereignty deal or not – although we will have to fill in that detail before the draft is complete. We can only go ahead with this line of thinking if you are convinced that the Greek political system is a lot more robust than it appears to be. On that basis, let’s start drafting”.

THE END

27:
“It’s worth a try.” Maynard shrugs. “We negotiate down the debt, then put Greece into effective administration by the Euroland partners, aiming to restore competitiveness by investment. If it worked, it would be heroic. I do worry that you’re asking a lot from both sides, politically – don’t underestimate the national humiliation factor for the Greeks here, or the reluctance of the Germans to put so much money into what is effectively a regional development scheme. If it works, it certainly forms a strong basis for fiscal union. Maybe that will help sell it. I’ll go and get it typed up”.

As he leaves your office, he is whistling, “There May Be Trouble Ahead”.

THE END.

28:
“Baby steps in the direction of fiscal union? Or something?”. Maynard is not looking wholly sceptical as he drains his tea.

“So the idea here is that we’re going for a unilateral moratorium on debt – I still think this is far too aggressive, by the way – and then immediately throwing Greece on the mercy of the court, looking for large restructuring funds and giving up the governance in order to get them. This is a bit of a shock-treatment approach, and you shouldn’t underestimate how much disruption and political stress it’s going to cause in Greece, but I can see your idea here in trying to minimise the short term impact and maximise the consumption smoothing. I think the problem with it is the size of the funds that would be needed, and also it is going to take a lot of work to convince Europe that the end of the road here has a Greece with sufficient competitiveness to maintain current account balance. It’s not wholly dissimilar to Yanis Varoufakis’ ‘Modest Proposal’. A difficult sell to the creditor countries, but I think it deserves a chance. I’ll get it written up and submitted. Somehow, though, I think you’re too good for this naughty world.”

THE END.

29:
Maynard screws up his face, like he’s tasted something sour. “We have to respect budgetary arithmetic here”, he says. “If we are not restructuring the debt, then it is going to be on an explosive path, and so the fiscal transfers needed to maintain service on it will also be on a growing path. Since the Greek economy is not going to generate enough output to pay the debt, a writedown is necessary out in the future. The only difference here is that Greece is going to be a constant debtor on the brink of default, continually in breach of its debt and defict targets and at the mercy of the troika; so it will effectively have a constant IMF program in return for its current account financing. At the right level, however, this might not be the worst plan – basically, it’s can-kicking forever. It’s economically equivalent to a plan whereby we just negotiate a writedown in return for a permanent IMF program.

Maynard passes you a slim folder. “I happen to have had such a plan in my bottom drawer”.

Go to 5

30:
The smile evaporates from Maynard’s face. “We need to be serious here”, he says. “This plan would be very hard on the Greek people indeed. In its favour, this is actually the only success story I can think of – it’s basically what Latvia did. Against it, Greece isn’t Latvia. It has much weaker institutions and it hasn’t just finished a decade of hyper-growth. And lots of people don’t think that Latvia was all that much of a success story. And the debt numbers were a lot better. I think this plan will play well with the harder-nosed members of the troika, but I suspect that the Greek government will run a mile from it. I’ll write it up”.

As he leaves your office, you can hear him muttering “And I suppose it will get you a job in a think tank”.

THE END.

31:
Maynard’s brow furrows. “We’ve got a tricky tightrope to walk here. If we can presume enough debt relief to bring the long term fiscal position to a non-explosive path, then the Euroland partners are already contributing quite a lot. Asking them to provide even more in the way of structural subsidies is going to be tough, although I suppose we are at least showing them a path to sustainability. The question is going to be – can we rely on enough fiscal support for Greece to smooth the path of adjustment and welfare spending to make the internal devaluation bearable for the Greek government? Hmm, how much political autonomy are we going to ask Greece to give up?”

If you answer “I think we are going to need escrow accounts and a tax commissioner at the very least”, go to 45.

If you answer “I just don’t see it as politically feasible to put a German taxman in charge of the Greek finance ministry”, go to 19.

32:
“I’m sure you know what you’re doing”, Maynard says, with perhaps a flicker of sarcasm. “At some point in this process, we may have to start thinking about exactly how much, but let’s put that to one side for the time being. The next decision relates to the Greek current account. Are we going to aim to bring it roughly into balance?”

If you answer “There isn’t a sustainable solution which involves Greece structurally consuming more than it produces. We need to get the economy back into balance”, turn to 14.
If you answer “I don’t think current account balance is a realistic aim. Greece is going to need structural fiscal transfers, like Alabama or Wales”, turn to 48.

33:
Maynard is scribbling notes on his legal pad. “So”, he says, “We’ve got a disorderly default here, and Greece is going to leave the euro in order to get back to current account balance, and we are going to be asking for fiscal transfers and subsidies to maintain living standards in Greece during the readjustment. This makes a kind of sense, but wow … you are doing a lot of damage to the economy of Euroland here. This has a financial crisis and credit crunch really quite likely across the Euro area, which is hardly the best environment for financing a generous fiscal bailout for Greece. Are you sure you don’t want to rethink your debt strategy?”

If you want to rethink your debt strategy, go back to 14

“Presuming you don’t, then well – leaving the Euro is at least going to mean that we don’t have to worry about executing an internal devaluation. But Greece has quite a big import bill, and it is going to be asking for transfer payments to pay for medicines and fuel. Greece isn’t Iceland, it doesn’t have much of a stock of overseas assets to draw on. So, what governance arrangements would we be thinking of when arranging this transfer package?”

If you reply “Clearly there will have to be a tax commissioner and considerable loss of sovereignty”, go to 54.
If you reply “There is no need for governance changes. The adjustment package can just take place through EU structural funds, although obviously the amounts will have to be very big”, go to 20.

34:
Maynard pours himself another cup of tea. “This seems like a pretty aggressive way to treat the Troika, if we are assuming that Greece will still be dealing with them. But hey, let’s game it out. We’re keeping them in the Euro, and looking for structural fiscal transfers to fund a structural current account deficit (which is presumably going to have its counterpart in a structural fiscal deficit). And I suppose the idea is that we are going to get them to throw themselves on the mercy of the court, claiming that the domestic political tensions were just too urgent to support the debt burden for another minute. Might work, I guess. So, are we going the full monty in terms of Greece giving up sovereignty?”

If you answer “Yup”, go to 8
If you answer “Nope”, go to 50

35:
“Tough guy!”, Maynard grins. “So we’re going to advise Greece to maintain service on the debt, with no external help. In or out of the Euro?”

If you reply “Out”, go to 43.
If you reply “In”, go to 30.

36:
Maynard puts his pad of paper down and looks you in the eye. “I have to warn you that this kind of scheme, where the burden of adjustment is taken away by a big investment in infrastructure, is quite a long way away from the mainstream. And there aren’t very many credible examples of them working”, he says. “But what the hey, we’re here to think out of the box sometimes. What kind of governance arrangements are we thinking about?”

If you answer “Actually, I was thinking of a scheme based on a more stimulative monetary policy from the ECB”, go to 17.
If you answer “A big IMF program”, go to 56.
If you answer “I don’t think the Greek system will bear big governance changes. We will have to do it through EU structural funds”, go to 11

37:
Maynard’s nose wrinkles. “Since you’ve just declared a disorderly moratorium, negotiating for fiscal support from the people you’ve just defaulted on is perhaps going to be a little bit difficult. Not wholly impossible I suppose – as Greece still maintains the threat of Euro exit, which would be considerably more inconvenient for them – but very difficult. You’ve also got the anti-stimulative effect of the internal devaluation to think about, so from the perspective of the Greek people, this is still going to look and feel a lot like austerity, combined with the humiliation of default.”

“I don’t like this plan. It does reduce debt levels, but in a needlessly swashbuckling way that is likely to cause as many problems as it solves. Quite apart from anything, we would need a subsidiary plan to reconstruct the Greek banking sector. I will submit it under your name, but I have little hope that it will prove acceptable to either the Greek or the Troika side”.

You might have heard him muttering an insult under his breath as he walks out, but you might have been mistaken.

THE END

38:
“OK”, says Maynard, between sips of tea. “This is getting somewhere. Negotiated writedown within the euro and then … what?”

If you answer “An IMF program, to go alongside the structural current account financing”, go to 5.
If you answer “Big structural investment funding from the EIB or something similar, to offset the structural current account deficit”, go to 53

39:
“Right”, says Maynard, pouring two cups of tea. “That’s the meat of the package right there. Now – are we putting together a plan which involves Greece staying in the Euro?”

If you answer “Yes, definitely”, go to 4.
If you answer “I can’t see how it can”, go to 55.

40:
“So this is a sort of ‘graceful exit’ idea then?”, Maynard asks. If we can keep Greek society together, then we get money from the Troika to rebuild the banking system after the consequences of Euro exit, and to smooth the consumption path. But I worry about the politics. If you put an IMF program in place, it’s going to be very difficult to avoid your goal of not pursuing too much austerity or internal devaluation. And the standard of living in Greece is going to have to fall quite a lot in the near term, as the price of essential imports rises. Greece currently has twice the GDP of Turkey and I think it’s quite likely that your plan would end up narrowing that gap considerably. It seems more or less politically feasible to me, but the economics are pretty tough for Greece and Euroland. I’ll type it up and submit it, but I honestly think we have to be able to do better than this.”

“Do we?”, you reply.

“I don’t know”.

THE END

41:
Maynard is clearly worried. “This is going to be a very tough sell indeed for the Eurozone partners. You’re asking them to keep Greece in the Euro and keep making either new loans or fiscal transfers, in the context of a disorderly default. Are you sure you don’t want to revisit that decision?”

If you do, go back to 14

You silence him with a look. He walks over to the refreshments trolley and pours himself a cup of tea.

“I am not at all sure about this. But let’s fill in the rest of the details. Is the plan going to involve an internal devaluation?”

If you answer “Yes. There will need to be wage controls and benefit cuts. We need to get the cost of production in Greece down far enough for it to be able to compete within Europe”, turn to 9.
If you answer “No. That’s bad cyclical policy.”, turn to 6.

42:
Maynard makes a face. “If the Greek government was capable of delivering an outcome like that, it’s hard to see how they would have got into this situation in the first place. Frankly, the fate of the structural funds that have already gone in is unlikely to make anyone optimistic about doing the same thing on ten times the scale. I’ll give it a try and get it typed up, but it seems very unlikely to me that this is politically sellable, and even if the Troika have a sudden attack of generosity, it probably won’t work. Still, dream big”.

He leaves his cup of tea behind and walks out of your office.

THE END.

43:
“I was joking”, Maynard says, a somewhat concerned expression on his face. “Greece can’t leave the Euro and plan to stay current on Euro-denominated debt. Shall we back up a few stages?”

Go to 47

44:
Maynard gulps his tea. “Quite ambitious. Do you really think that the only thing wrong with the Greek economy is that it hasn’t had enough foreign investment poured into it? This is going to be a tough sell for Germany, and not just for them. But let’s game it out – what are the governance arrangements you’re thinking of?”

If you answer “A radical overhaul. All the investment spending should be carried out by the European Investment Bank, while the Greek budget falls under the responsibility of a specially appointed fiscal commissioner”, turn to 28.
If you answer “I don’t think any specific governance arrangements are either feasible or desirable. All the investment spending can be carried out under the normal mechanisms of EU structural funds”, turn to 13.

45:
“Baby steps in the direction of fiscal union!”, Maynard exclaims. “I wonder, though, is it really workable? This is effectively the German solution for the DDR - we effectively mutualise the past debt liability, hand over political control to a more functional entity, who is going to impose wage cuts, and then put a regime of transfer payments in place to smooth the adjustment path. I can’t say it’s not sensible, but the DDR had a fairly tough adjustment path and for obvious reasons, I don’t think we can count on the transfer payments being anywhere near as generous. I’ll just go and get it typed up – I think the troika will be glad to see this spelled out, but I do worry that you’re asking the Greek side to bear much more in the way of austerity and humiliation than it’s capable of”.

THE END

46:
“OK, we’re getting somewhere”, Maynard says. “A big writedown of the debt will help a lot in terms of the fiscal balance, and then we can move to talking about the level of the structural fiscal transfers. This is basically taking us toward fiscal union, so it can’t be done quickly, but I can see how it’s moving in the right direction. Do we have Greece staying in the Euro?”

If you answer “No, they leave the Euro”, go to 12.
If you answer “Of course, yes”, go to 38.

47:
Maynard pulls a face. “Well, at least we’re being politically realistic here. Plan for the worst and hope for the best, I suppose. That really cuts down our options and makes them in general much more unpalatable. I guess the debt strategies boil down to disorderly default, or tough it out”.

If you reply “Well, disorderly default it is then”, go to 23.
If you reply “Well, tough it out it is then”, go to 35.

48:
“I think we’re scoring points for economic realism here, but storing up political difficulties for ourselves later”, Maynard says. “But let’s game this one out then. What’s the debt strategy?”

If you say “That the current process is a can-kicking farce. We should just plan for a straightforward default on the debt”, turn to 2.
If you say “That part of the fiscal contribution is going to have to take the form of a significant further reduction in the debt by the official sector, over and above the private sector contribution already made”, turn to 46.
If you say “That we have to find a solution within the constraints of the current nominal debt level. We’ve got a certain amount of private sector writedown, but there won’t be any more”, turn to 29

49:
“So”, Maynard says, “The plan is that we’re only going for the current debt restructuring offer, and looking to get back to current account balance in some way. I guess that means we’re saving the fiscal transfers for later, to soften the burden of adjustment. Might make sense, I guess – although I think a lot of people are going to question the debt dynamics without any further restructuring. And this plan has them staying in the Euro, yes?”

If you answer “Yes”, go to 3.
If you answer “No”, go to 24.

50:
“Rrrrright”, Maynard says. “I am not really seeing the troika handing over a load of no-strings cash for an indefinite period with no control over how it’s spent. But go on, amaze me. Is there any element of internal devaluation or restructuring in this one?”

If you answer “No, there isn’t. I would be looking for structural funds to invest in productivity improvements. There are a load of projects in the tourism and transport industries”, go to 21.
If you answer “Yes, there is”, go to 15

51:
Maynard is no longer even pretending to be polite. “With respect, this is ideological bouillabaisse. It sounds like you have heard of ‘Keynesian stimulus’, perhaps at university, and decided it was a good thing. Greece doesn’t need a cyclical policy; it still has the problem of consuming in excess of its production. And in any case, even if you carried out that fiscal policy, you are offsetting it with the antistimulative effect of the internal devaluation. Not that you could carry out this fiscal policy – you planned a disorderly default, don’t you remember? That means that you can’t run deficit financing, because nobody would lend to you. Except the troika, but you burned your bridges there by declaring a unilateral moratorium. You can submit this plan if you like, but you’ll have to get it typed up yourself. I’m not having my name anywhere near it”.

He throws his papers down onto your desk with some force, and slams the door on the way out.

THE END.

52:
Maynard smiles. “The full Argentina, eh? Before you start congratulating yourself, I think we should remember that Greece doesn’t have a natural gas monopoly like YPF. It isn’t an exporter of primary commodities priced in dollars. It’s a tourism and shipping economy, and its GDP per capita is rather more than twice that of Argentina. I am less than sure how well the Argentine outcome forecasts the likely consequences of Greece doing the same. I don’t know how they would pay for essential imports, and suspect that the answer might be quite unpleasant. On the other hand, I suppose it might be the cathartic event that is needed for a thorough transformation of Greek politics. I’ll write it up.”

He is whistling the theme from Evita as he walks out the door.

THE END

53:
“If”, Maynard says with a sigh, “unlimited amounts of money were available on a structural basis, this would be my favourite solution of all. Something like it is Yanis Vourofakis’ ‘Modest Proposal’. But it doesn’t seem to me to have the ring of political possibility – Germany has politics too you know. And if we are going to try to smooth Greece’s path to fiscal balance, while concentrating the transfers in new capital investment projects rather than budget consumption spending, then we are going to keep running into financing constraints. Maybe, just maybe, Greece can grow its way out trouble, but I think it is going to be difficult to convince anyone that this will happen in the absence of a plan for thorough and complete transformation of Greece’s political institutions. Let’s run it up the flagpole, though, and see if anyone salutes it.”

THE END

54:
Maynard is staring at his legal pad. “This looks like a mess to me. Greece has defaulted, left the euro, and had a tax commissioner appointed – how many more humiliations can you heap on them? Economically it has a certain internal logic but politically it is all over the place and I think that kills the chance of the transfer payments which you need if you’re going to achieve primary balance after the default without massively contractionary domestic fiscal policy. We can type it up and submit it, but I think it’s only going to be looked at as an example of the kind of idea that an economist might come up with”.

THE END

55:
“There’s a bit of tension in that, don’t you think?”, Maynard asks. “You’re negotiating a debt writedown for Greece, and then we plan for them to leave the Euro. That’s going to need to be carefully handled, or the Eurolanders are going to seriously doubt their good faith. It’s also quite likely that this would cause a financial crisis and credit crunch in Euroland, which would seriously impair their ability to help Greece. Still, let’s game this out. I suppose we don’t have to address the question of internal devaluation if we have an external devaluation, but we’re going to need a lot of fiscal transfers in the meantime. What sort of terms are we going to arrange them on?”

If you answer “It’s going to need to be a pretty strict IMF program”, go to 40.
If you answer “I don’t agree that we will need big fiscal transfers. Once Greece is outside the Euro, it can start building back growth again”, go to 16.

56:
“I can’t see the IMF going for that at all”, Maynard says. “Without some action on the debt burden, the money is pouring in from the official creditors on the investment side, but then pouring out to the official creditors on the debt side. It’s effectively just a somewhat random redistribution of income between the official community. Unless you’re going to attempt to achieve fiscal surplus, but in that case you are proposing so much in the way of spending cuts and tax rises that it’s hard to see what you had against internal devaluation. This is messy, horrible can-kicking in the most pejorative sense, avoiding all the tough decisions. Submit it if you like, but I wash my hands of it”.

He doesn’t meet your eye or wish you well as he leaves your office.

THE END

57:
Maynard shrugs and say “Well then, if you think that there is no chance of a negotiated writedown, and you want to follow this line, then I think the only ethical thing you can do is refuse to submit a proposal. There’s no point in just wasting everyone’s time with a disorderly default, followed by a proposal for no-strings cash for pie-in-the-sky regional development funds, to be administered by the same Greek government structures that got them into this mess”.

He mutters something as he walks out of your office. It sounds like “Well, what can you do?”. There is a look of grudging respect in his eyes as he shakes your hand.

THE END

Meet the Pick-A-Pay Option ARM. This was a lending product that, among other features, allowed for “negative amortization” – a feature under which the principal was not repaid but rather rolled up, meaning that the borrower was effectively dependent on future refinancing. It was not a subprime product, but it allowed people to take on huge amounts of mortgage debt, and contributed to the “payment shock” which sent so many of them into repossession and bankruptcy. As the link above shows, the Pick-A-Pay mortgage product was the subject of a number of compensation settlements with affected borrowers.

What’s the connection? Well, as founders of Golden West Financial, a mortgage lender which was sold to Wachovia Bank in 2006 (the proceeds of which financed that very large charitable contribution), Herb and Marion Sandler were responsible for introducing the Pick-A-Pay mortgage to the market.

Ah.

Read on, there’s two or three more twists before the end of this story …

Obviously, this looks like it might be political gold for anyone wanting to do an “oh my god those hypocritical liberals” story. Which is more or less what Sixty Minutes did two and a half years ago, relying heavily on whistleblower testimony from a loan salesman who characterized Golden West (trading under the name “World Savings Bank”) as “sitting on an Enron”, and “granting people too many loans who simply didn’t qualify”. They interviewed a borrower called Betty Townes who had taken out sequential Pick-A-Pay mortgages, refinancing their way into a mountain of debt and inevitable bankruptcy when the cycle turned.

Except that …

Well, it turned out that the whistleblower in question had in fact been sacked for persistent incompetence and rudeness, and had his case thrown out of arbitration with an award of zero. Not very much of the rest of the story (or similar hatchet jobs in the New York Times and elsewhere) held up either. In fact, Golden West had always been almost parodically careful as a lender, carrying out far more due diligence and credit checks on their borrowers than most other banks. They also eschewed most of the aggressive marketing practices of the industry, and rather than securitizing their mortgages, they kept them on their own balance sheet. And the Sandlers for the most part managed to get apologies and at least part retractions from most of the media outlets that ran these stories. Even five years later, the pre-2007 vintages of Pick-A-Pay have performed vastly better than the ones which Wachovia (later taken over by Wells Fargo) continued to write in 2007 and 2008 under the same brand name.

So, it turns out that the doyens of the progressive funding sphere were also extremely careful, cautious and ethical bankers. If only everyone were so good.

Except that …

Except that well, do you remember Betty Townes from a few paragraphs ago? She was a real person, and what she said happened to her, did. And although I called the New York Times article on the Sandlers a “hatchet job” two paragraphs ago, and the NYT did make some changes to it (most prominently, changing the headline from “Once Mortgage Pioneers, Now Pariahs”), the newspaper basically stands by its reporting of all the factual claims made. And, although the performance of pre-07 Pick-A-Pays is definitely better than other option-ARMs out there, that still leaves room for them to be pretty bad.

What it shows is that a combination of the best will in the world, the most cautious and conservative funding structure and an utterly exemplary set of lending practices, will still leave you writing a whole lot of crap and causing huge amounts of suffering if there is a once in a lifetime asset price bubble going on. As I believe I have said both here and on my own blog, big macroeconomic problems like the US housing bubble and recession have macroeconomic causes, not microeconomic ones. And that’s an end to it.

Or is it?

Well, not quite. It should be noted that, although Herb Sandler vehemently denies having sold out in 2006 in order to cash out at the top of the market (ie, he does not claim to have had any foresight about the crash), 2006 was the cusp year; the year during which house prices, particularly in the Californian market where Golden West did the majority of its business. After the takeover (and things are complicated somewhat by the existence of an interregnum, when Sandler remained in charge of the business under new ownership), Wachovia started to write option-ARM business that couldn’t possibly have been justified under the Sandlers’ business practices. An awful lot of bankruptcy-creating, repossession-generating, outright bad business was done during this period and it has certainly contributed a lot of really bad securities to the market, helping to spread the contagion of the financial crisis, and contributed much more than its fair share to the overhang of foreclosures. It ought to be a sensible goal of regulation to prevent this sort of thing, and it could do so by helping to ensure that future mortgage banking is more like Golden West. And yes (oh god it kills me to admit this), that regulation would have to work by condign punishment of people who committed lending practices like those observed in the California market in 2007 and 2008, many of which were outright fraudulent. Are you happy now?

Well you shouldn’t be.

By definition, anything that was done in 2007 or 2008 isn’t really a “cause of the crisis”. The contagious financial panic of 2008 was, in fact, largely contained thanks to the prompt activity of the Federal Reserve (in America anyway, in Europe we have problems of our own). The USA is in a recession now because of a massive disappearance of housing wealth, not anything else. And the disappearance of housing wealth was due to the bubble built up before 2006, not in 07-08.

With the best will in the world, as I say, if there is a massive imbalance in the real economy (in this case, the decision to accommodate Chinese exchange rate policy and run a consequent current account deficit), there will be a similar imbalance in the financial sector which intermediates it (in this case, equilibrates the resulting capital flows). And doubly so if the official policy of the central bank at the time is to create a housing market boom, and the official anti-bubble policy of the central bank is to allow the bubble to grow, on a promise that action will be taken to mitigate the consequences when it pops. Although it’s had all sorts of twists and turns, at the end of this story, I’m not judging the main characters to be either heroes or villains, because economics isn’t a morality tale.

• People in the Guardian comments section really, really hate bankers

I know, I was just as surprised. I’ve been doing my own amateur social anthropology exercise too. By which I mean that I’ve got a Twitter account and some spare time, and as a result, have been collecting[1] prime specimens of banker abuse. So far, I’ve gathered that I, personally, have stolen from every single benefits claimant in England, and that Sir Fred Goodwin (crime: got a big pension, managed a bank poorly) is clearly a bigger criminal than Sir Anthony Blunt (crime: betrayed dozens of serving agents to Stalinist Russia). And, of course, during the recent London riots, dozens of variations on “who is the real criminal – the man who smashes a shop window and steals an iPod, or the man who gets paid a bonus?”

Because, at the end of the day, Dr Harold Shipman murdered 52 infirm old women in order to steal money from their wills, but bankers, get bonuses. Who is the real criminal, eh??

It is without any anticipation of popularity or agreement (or even any real hope of not being called an asshole on my own blog, although I must say that would be jolly nice if you were in the mood) that I tell you that I think this is all rather a pack of bollocks.

So read on …

Luyendijk’s qualified defence of bankers against the rage element in the Comment is Free community basically seems to hinge on the fact (which is basically true) that lots of people in the financial industry didn’t really have very much to do with the decisions that led to the current financial crisis. It’s actually a good point well made, and although I try not to rely on it too much in self-defence at parties, I do occasionally feel the need to point out to professional Northeners who are about to do a number about “the City of London”, that the only two banks to actually go bust in the UK were Northern Rock (based in Newcastle) and Bradford & Bingley (based in Bradford). Also requiring rescue and state funding were RBS (Edinburgh) and HBOS (Edinburgh and Halifax, though the decisions that really caused the damage were taken in Halifax).

But as I say, I don’t really want to rely on this sort of defence myself, because it’s a bit of a cop out for a number of reasons. The financial market system stands or falls as a system, and I think it’s a really bad idea to make anything important in your politics depend on blaming it for the crisis. Two reasons for this;

First, as I said three years ago, macroeconomic events have macroeconomic causes, not microeconomic ones. Bad, stupid products[2] like Option ARMS or subprime buy-to-let teaser mortgages, were not invented by the industry out of sheer cackling evil; they were invented because they were the only way to get the people into the houses, given how expensive property had become. This was, as Dean Baker keeps reminding us, a housing bubble first and foremost and a financial bubble second; we are in a recession basically because of the disppearance of a huge amount of household sector wealth.

How expensive property had become … this is one that I’d like to linger on, because it rather points out that the number of people who a) benefited from and b) causally contributed to, the bubble and bust is rather bigger than you might think. The “Location, Location, Location” crowd (which in one way or the other, means pretty much the entire British middle class) are in this one up to their eyeballs, and if they want to rage at “bankers” while sitting on their still-massive property gains, then I for one am not inclined to take them any more seriously than the man who eats sausage but won’t talk to the pig-sticker.

However, of course, there were plenty of people who didn’t own houses in the 90s and 00s, and who thus didn’t benefit from the boom, who are suffering as a result of the recession, including the benefit claimants from whose mouths I was accused of taking the bread. Even in this case, though, I think that making a big deal about “the bankers caused this crisis/stole from us/etc” is a big mistake.

And that’s basically for the simple reason that there is no hope for egalitarian politics if you are going to build it on such weak grounds. This was the lasting contribution of Jerry Cohen’s criticism of Marx. The demands of egalitarian justice are not based in some convoluted proof that the rich have in some way stolen from the poor. The case for redistributive taxation does not rest on bankers’ bonuses being stolen goods, or even on them being undeserved. If you try to agitate for egalitarian policies based on this kind of argument, you are never going to make a strong case, because in the first place, “bankers” didn’t actually steal that money, for the most part, and secondly, if you are giving all the agency to “bankers” then you are accepting the first premis of the “wealth creators” rhetoric, and this is going to destroy you, politically, across the business cycle.

There’s also an economic version of the same argument. The answer to the question “Hospitals, or bank bailouts?” is “deficit spending, you ass!”. Money for the banking sector bailouts hasn’t come out of the mouths of babes and Sure Start centres; the austerity measures were a specific and separable decision, made by people who ought to be held accountable for it.

So my basic message here is that economics isn’t a morality play, even in the face of a depression. Even morality isn’t a morality play, most of the time. I wasn’t actually responsible for the housing crash and nor were most of my mates. We didn’t close down your local library or put your student fees up; that was the coalition government who did that. In general, if you want to build a better society, the message from the more thinking and socially responsible element of the financial sector is “send us the bill and spare us the lecture”.

[1] Oh all right, “trolling for”

[2] For which there should be consequences for the people who sold them, just on an encourager les autres basis. Financial regulation is not a morality play, either.

Meanwhile, in terms of the educational experience, much has been made of the presence of Richard Dawkins, Niall Ferguson, Stephen Pinker, etc etc on the “professoriate” and indeed a lot of the press commentary appears to have inadvertently implied that these academic megastars will be doing the teaching. But, sharp cookies will have noted, none of them appear to have resigned from their existing posts or given any notice that they intend to do so, despite the fact that NCH is planning on getting the first bums on seats in Autumn 2012. In fact, close perusal of the fine print reveals that what the “Professoriate” are going to be providing is lecture courses, and the actual syllabus delivery will come from a staff “to be recruited”; given that the “Subject Convenors” seem to me to be fairly normal middle-ranking UK profs, I would guess that the teaching will also come from the middle ranks of the British academic proleteriat. (Just by way of comparison, when I did my MSc at London Business School, I was actually taught by Paul Marsh, Dick Brealey, Paul Geroski et al; there were PhD students teaching mathematical “boot-camp” style classes but for the most part the research staff were right out in front of the paying punters).

It’s also somewhat opaque to me how NCH is going to go about awarding University of London degrees (although to be frank, this is not particular to Grayling Hall – lots of things to do with the governance of the University of London are difficult to understand and this has caused problems in the past). I haven’t seen any announcement that the NCH has become a college of the UoL, and so I don’t think it has or plans to (it is going to be awarding a “diploma” of its own in things like “business skills” and other such&such, which to me implies that it isn’t intending to seek degree-granting status in its own right). This earlier Wikipedia edit (from a newly created Wikipedia account) seems to suggest that it will be offering units of the “University of London International Programmes”, which seems possible, although in the absence of a specific statement from NCH it’s hard to tell exactly what’s going on. Not being an academic, I’ve no real feel for how much of a task it might be to create five or six brand new undergraduate syllabi from scratch, but given that the teaching staff consists currently of three “Convenors” and a bunch of vacancies, it would seem reasonable to me to assume that considerable use might be made of off-the-peg material in the first few years at least.

So who would this appeal to? The answer “people with significantly more money than sense” comes to mind. The prospectus is all about “Oxford, Cambridge this, Ivy League that”, but the actual educational offering appears to be more like an attempt to recreate the American concept of the liberal arts college education. And when I say “liberal arts college education”, the phrase “liberal arts college” is meant to convey the impression “eyeball-searingly overpriced”. Brian Weatherson pointed out to me on Twitter that Oberlin College in America has a schedule of fees that can rack up $200k (ie, the cost of slightly less than three world-class MBA courses) for an undergraduate tuition. This thing, if it has any chance of paying a return on the money invested, is going to be targeted at the seriously rich – probably the international rich – and it is not going to be made appreciably more egalitarian by the proposed scholarship grants.

Of course, the proprietors don’t actually need there to be lots and lots of people prepared to pay that kind of money for the chance to touch the hem of a media don’s robe – they just need there to be enough such people to meet the running costs plus profit. Chris said, when the state sector tuition fees went up, that “ Personally, I’m appalled by the prospect of teaching the finer points of egalitarian justice in an elite institution to the children of the wealthy who will then go on to high-paid jobs in the financial sector, whilst higher education as a whole contracts and access to the arts and humanities is reduced in an increasingly unequal society“; apparently AC Grayling (and Ronald Dworkin, ye gods) have different tastes or stronger stomachs.

Update: What a way to make a living. Applications coaching for Grayling Hall?

First, this is an amazingly praiseworthy exercise. In one of the more successful posts on my personal blog, I noted that “the vital importance of audit” is one of the things they drill into you in business school. In general, people who don’t systematically keep track of how projections turned out, tend to get the quality of predictions they deserve. However, having said that, I would make two fairly significant qualifications to the methodology involved, from the perspective of someone who basically makes a living out of making predictions and assessing those of others.

First, not all bets are equal. The performance metric used by the Hamilton team judges pundits on the basis of a pass-fail record of their predictions, equal weight given to each. But in the real world, people make predictions with a greater or lesser degree of certainty. You can be right materially less often than 50% of the time (“worse than a coin flip” or “ugly” by the paper’s classification) and still make a lot of money if you bet big when you are reasonably confident of being right, and bet small when you are less sure. This fact is what makes card-counting in blackjack work, for example – a card-counter still wins fewer than half the hands by number, but wins big bets and loses small ones. Similarly, it is axiomatic in backgammon that no amount of skill in moving the pieces will make up for poor play with the doubling cube. In principle, since the HC dataset contains a variable for the degree of certainty with which a prediction was expressed, the skill metric could be adjusted to take this into account – I suspect this would end up further polarising the scores but not necessarily changing their rank order.

Second, staying wrong is worse than being wrong. Predicting the future is hard, which is why so many people do it so badly. Predicting the recent past ought to be a lot easier, which is why it’s somewhat more surprising that it is also, in general, done quite badly. To use a nautical analogy, while it’s obviously great to be able to forecast the weather, it is often just as usual to have a nimble crew that can quickly trim your sails when the wind has changed. Philip Tetlock’s original study on prediction and pundits suggested that pundits often made mistakes by being too keen to predict change and underestimating the likelihood of the status quo, but this isn’t wholly a bad quality – hanging on to an outdated view of the world is often really very dangerous, and the risk/reward tradeoff is usually asymmetric[1]. I think it would be harder to measure this in quantitative ways, but it is highly worth bearing in mind.

So, although the development of even rudimentary forms of audit is a great boon to the democratic public (and probably a lot more so than yet another inconclusive study of “media bias” one way or the other), I think it needs to be taken with two caveats. The biggest villain is not the guy who gets it wrong. The people who will cost you money and reputation over the long run are first, the guy who says he’s more certain than he really is, and second, the guy who won’t admit he’s wrong when he knows he is. Hang on to your wallet out there.

[1] As Bob McTeer said ” Fortunately, most of the time the question is whether to zig or not to zig. When you are contemplating a zig, a zag is usually not even a consideration.”

At least one economist burst out laughing on hearing about the S&P announcement. “They did what?” exclaimed James Galbraith, a professor of economics at the University of Texas in Austin, who formerly served as executive director of the Congressional Joint Economic Committee. “This is remarkable! It certainly will confirm the suspicions of those who have questioned S&P’s competence after its performance on the mortgage debacle.”

I can confirm that although it was “at least one” economist that burst out laughing, it was not “at most one”.

This is currently mainly being covered as an excuse to do larf-o-larf items about “weren’t people funny about women drivers in the 1970s! But actually women are safer drivers! Imagine!”. In actual fact the car insurance thing is not that big of a deal since the no-claims bonus swamps any gender effect within a couple of years; all it really means is that nobody will insure teenagers at all, which I count as not necessarily an unmitigated cost. The real issue is pensions.

Women live longer than men. That’s one of the few actuarially reliable things you can say about life expectancy[1]. And so it requires more resources to provide a given level of life expectancy for women than it does for men. (NB: it is easy to get confused about this – remember that “risk” in context always means “financial risk to the insurer” rather than “health outcome or mortality risk to the insured”, and that living for a long time is bad news for the person who’s agreed to pay you an annuity).

Because it costs more to give women a retirement income, you can basically choose two options from the following three:

1) Equal retirement incomes for women and men
2) Equal commitment of society’s resources to providing retirement savings for women and men
3) A functioning pension annuity industry

There are a load of interesting questions about the nature of equality which might be considered relevant to the choice between 1) and 2) (although they might be considered a lot more practically relevant in a society where there was a greater degree of equality in lifetime earnings). I’m just interested to see that for the first time, a major society has decided that 3) is potentially the one to give up on. Edit: Just realised I probably ought to give my own favoured solution – I think it’s fairly obvious that 2) is the one to give up on and we just have to accept that the biological facts of the matter are that society needs to arrange things so that a given woman has a larger pool of retirement savings allocated to each other than an otherwise qualitatively identical man[2]. It’s rather like the number of social and economic consequences that we accept as flowing from the biological fact that women give birth and men don’t. Historically, capitalist economies have implicitly given up on 1), by allowing retirement incomes to be determined by savings out of lifetime labour income.

[1] by the way, don’t hold out too much hope for genetic testing as a silver bullet solution that will give us all individualised life expectancies and annuity rates. And even if it does, those rates will still be better for men as a group than women as a group, so the discrimination problem will still be there).

[2] the concept of “a woman and man who are identical in all properties except gender” perhaps not being terribly firmly anchored in reality, but as an actuarial construct I can probably save it.

The Great Homeopathic Cocktail Bar

December, as we all know, is the month when people who never go out, go out. All the cheer and goodwill and merrymaking is apt to render the pubs and dive bars more or less uninhabitable, and even the expensive places less than congenial. So it was lucky that I first came across the World’s Greatest Homeopathic Barman in the dour month of January, season of short pockets and long evenings.

The world was decidedly out of the party mood, but I wasn’t; memory fails me as to whether it was a horse or a South American republic, but I’d achieved a minor coup of the financial sort and was looking for somewhere to erase the sweet pain of all that money. Walking down Cornhill between the tube stop and the Leadenhall, I noticed that a new place had opened up on the site of an Irish-themed pub which had recently taken authenticity to extremes by going bankrupt. I shoved open the door and went in.

There’s a kind of sublime beauty to an unreviewed and poorly signed licensed premises, on a notorious graveyard street and newly opened in the worst month of the year. A small room can feel as empty as the Negev Desert at four o’clock on a Wednesday afternoon, you know, and this was only Tuesday. I was more or less the only thing in the place that hadn’t been sketched in by Edward Hopper, but hey ho. To have made a bolt for the door and somewhere with a fireplace would have seemed like kicking the place while it was down.

As so often in all manner of circumstances, I found myself deciding on a course of action by pondering the maxim “What Would JK Galbraith Do?”. Since the answer is nearly always something like “written a couple of best-sellers, had a three-martini lunch with the President, then scooted off to his chalet in Gstaad to get some quality skiing in before dispensing bons mots at a party with Edith Piaf and a couple of Agnellis”, I find it strangely comforting to know that I don’t have the talent to do the right thing, and thus might as well please myself. By way of minor homage, I ordered three martinis, to arrive sequentially.

I’ll say this for the chap, his timing was excellent. As the glass collar round the top of the liquid extended, he began to pour. As the lemon peel made its first coquettish bump against my top lip, I could hear the sweet Latin percussion of the stirring-spoon. And as I put the empty glass down, the ring of crystal on zinc was answered within a semiquaver by the slightly heavier bump of a full glass of the same. Quite a trick to work out the speed at which I was drinking, particularly from a noncylindrical glass, and fast work to match pace with a thirsty young stockbroker (as I then was). Clearly, this was an attentive craftsman close to the height of his mixological powers. The actual drink, however, was filthy.

After a second and half way down the third, I decided to take an interest in why this might be the case. Not in a chemical or culinary sense, it was glaringly obvious what was wrong there. But rather, my curiosity was piqued by the sociological, psychological and hell, even political nexus of causes and effects which had brought this swill to my glass. You never know with these things, it might have an interesting root cause; I recall a particularly profitable operation in Brent Crude that had begun by politely inquiring of an Aberdonian trawlerman why he was not drunk. Expecting not much more than a gob full of acession-state-accented apologies, but in the general spirit of nothing ventured, nothing gained, I broke the monastic silence of the place.

“Young man”, I ventured (I was, it pains me to say, a bit of a knob in those days), “Let me first reassure you that I am not angry” (I had something of a combative face in those days). “But I am, however, curious, as to why you have just served me three glasses of undiluted room temperature gin, and I am sure that you must be just as curious as to why I drank them. Shall we compare notes?”

It was a conversational gambit designed to start things off on the right foot, the right foot being the one into which I had persuaded my shoemaker to install a steel toe-cap, the better to pursue advantage in crowded conditions on the Northern Line. But I was surprised to discover that the fellow’s consternation had little to do with fears of violent reprisal, but were mainly motivated by a sort of existential crisis of confidence.

Lukas, it seemed, had served mixed drinks with the best of them at the Paris Ritz, the Waldorf-Astoria and everywhere else on that circuit. But he’d jacked it in and taken up a defunct lease in the City, to follow a vision; the vision of bringing the crude pseudoscience of bartending together with the noble art of homeopathic medicine. The cocktail he had painstakingly constructed for me had been made from a base of gin, mixed with gin from a bottle which had once contained a drop of vermouth, and stirred assidously over gin from a bottle which had once contained a sliver of ice. Lukas had been up all the night before, pouring and re-pouring the gin, to ensure that these original ingredients had long since been rinsed away.

In principle, of course, this dilution and redilution ought to have raised the concoction to its apotheosis; a sort of divine essence of all the martini’s possibilities. In practice, the fact that I had unerringly identified the contents as warm gin, and rather cheap off-brand gin at that, had been a crestfalling experience and one that threatened to undermine the integrity of the whole concept. Of course the fact that I don’t believe in homeopathy or any of that horse-manure was no comfort to the man. The whole point of the sweet science of homeopathic bartending is that it’s meant to work even if you don’t believe in it. Lukas was at the point of questioning whether a series of articles in the Journal of Consciousness Expansion were really a sound basis for a business plan.

Now I hate to see a grown man cry for longer than eight or nine minutes, so I soon befriended the plucky little battler and encouraged him to “get back up on that horse”. Perhaps the homeopathic martini was a step too far for the early days – he should try easier cocktails and work up to it. So I had a homeopathic screwdriver – warm cheap supermarket vodka. A homeopathic daiquiri – warm cheap supermarket rum. All night we toiled, talking like brothers about everything and nothing; sadly none of the glassware survived our frequent bitter rages, but we found a supply of paper cups, apparently pilfered by the previous owners from a nearby McDonald’s. Until (and I maintain that this is how it happened – the intellectual property lawyers be damned) I had my inspiration.

We were on our third or fourth attempt at a homeopathic Manhattan. Lukas had lined up four identical bottles of supermarket scotch, labelled “Heritage Bourbon”, “Aromatic Bitters”, and so forth to indicate the molecules each had once contained. The drink was at the point of assembly when I drawled, with perhaps an elegant hint of slobber …

“Curious, isn’t it, that such a rigorously constructed homeopathic drink should be garnished with a whole maraschino cherry?”. Lukas looked at me with a wild expression, rather like that of Victor Frankenstein on being asked if he’d thought about switching power suppliers. In a flash, he had drawn back the offending cherry from its position immediately above my cup, hurled it onto the bar-top, pricked it with a needle and shaken the needle in the direction of the cocktail, from a safe distance of six feet. It was as brilliant a piece of improvised dilution as I’d seen in my life up to that point.

I sipped the drink. It was nectar. It was even cold.

Our celebrations were intense, of course, and ended in filth and in prison as these things often do. But a sensation had clearly been born.

I was but an infrequent visitor over the next six months – although Lukas considered me an honoured friend, I was inconveniently barred from the three surrounding streets for a short while, meaning I could only attend by the use of a helicopter. But I read the reviews and they were extraordinary. Critical opinion was not wholly favourable, true – a fair number of reviewers thought that The Great Homeopathic Cocktail Bar was a dingy hole serving paper cups of warm cheap spirits, and I could see their point. But the general consensus was that it was largely irrelevant whether Lukas was a master of gastronomic libations or a deluded nerk selling rotgut. It was something more important than that.

Whatever the merits of the actual drinks, it was said, the modern consumer was aching for a bartender who would provide a personal connection and recognise them as an individual, rather than simply churning out formulaic remedies to their symptoms. And Lukas was good at that – he had a pair of those dark, searching soulful eyes that are described as “almost human” when they occur in spaniels. And, of course, the patrons appreciated the way in which he rendered himself vulnerable to them, simply by the act of serving such terrible drinks. At any point, a stag party from Liverpool or somewhere might have blown into the bar, not realising they were in the presence of greatness, and trashed the place in angry disgust. Punters appreciate it when a man lays his neck on the line to that extent.

As time went on, however, the novelty faded, and the dog days of the summer holidays were not kind to Lukas and his Great Homeopathic Cocktail Bar. Things in fact reached such a pass that one day in August, while dancing an improvised celebratory jig down Cornhill in recognition of a triumph in the Ashes (or in the collateralised debt market, I forget which), I found that the bouncers which had previously been placed outside Lukas’ door to beat back the baying crowds had instead grabbed me by the scruff and chucked me in. The place was cavernous once more, filled with only a few local alcoholics, their numbers bolstered by half a dozen tourists who had read an old Time Out in a bus station and thought the place was still fashionable. Even I could see that it wasn’t.

The problem, of course, as the host confided to me over a lachrymose whisky-sour, is that the provision of a humane, personal, individual connection is something that really doesn’t have much in the way of economies of scale. In order to pay the ground rent, Lukas needed to shift X glasses over the bar per evening, and when divided by X, the amount of time provided by the licensing hours made it more or less impossible to give each homeopathic beverage more than about a minute and a half. “How do you engage with a holistic individual, in ninety seconds?”, he pleaded.

To ask the question is to answer it, of course, and I think we came up with this one independently at the same time (as I have later testified under oath). The problem was one intrinsic to homeopathy, and thus it must have a homeopathic solution. And because it was a very serious homeopathic problem, the solution would have to be correspondingly weak.

Henceforth, Lukas would make fleeting eye contact with one customer, for about half a second, every third alternate Wednesday if there was an R in the month. This would be the sole and total extent of his personal consideration of them; otherwise they were to be treated strictly as an undifferentiated mass of service units. Diluted in thus fashion, the human engagement and involvement of his service would be unimaginably powerful.

Well, I don’t need to tell you what a success that was; if you were around in London, and maintained even the most casual interest in the nightclub scene, you’ll remember it. All through the autumn, he packed them in, and the Christmas party season was looking amazing. What with one thing and another (and a short but vigorous argument with one of the bouncers, who was later deported for unrelated reasons), I didn’t get back there myself until the shortest day in December. And thank God I did.

Any bar in the City is going to be pretty unpleasant in the last week before hols, and a fashionable one serving paper cups full of warm spirits more so than most. It was heaving, crushed, shoulder to shoulder and cheek to jowl. I hopped on my left foot and kicked shins with my right, and eventually hacked out a path to my favourite spot at the bar. Everything was about as merry as it was disgusting, but Lukas was stressed to breaking point and clearly in pain. He was leaping about, pouring drinks three at a time, desperately trying not to make eye contact with anyone.

It couldn’t last, of course – have you ever tried to simultaneously avoid the gaze of two hundred people, all of whom are trying to catch your eye? And when it did, my god, it was awful. The crowd turned, like a mobbing of crows, angrily waving their suddenly-disgusting cocktails. Thank heaven Lukas had the luck or foresight to have continued serving his drinks in paper cups, because if that lot had glass in their hands, I doubt he’d have lived. Like the man of action I sometimes am, I rushed back and bustled him out into the bar kitchen. Here was a man in dire need of a pep talk.

“Lukas!” I shouted, grasping his lapels for emphasis and kicking his shins to shut him up. “Your customers are furious! How much do you care about your customers, Lukas?”

“I care!”, he sobbed unattractively. “I care so much! Homeopathic drinks are my life! I care so, so much about those people”.

“No, you’re not listening”, I growled. “How much do you care? How much passion do you have? How much do you care?”

“I really, really care!” The tears and snot were flying in all directions, in distinctly more than homeopathic quantities.

I lost all restraint and started shaking him. “HOW MUCH DO YOU CARE, LUKAS? HOW MUCH DO YOU CARE?!”. A paper cup flew through the open door and hit him in the face. It appeared to be full of warm spittle.

Thankfully, the penny dropped shortly before he lost consciousness. Possibly he understood what I meant; perhaps the paper cup broke his will. Either way, he did that Baron Victor stare again, and hissed:

“I hardly care at all! I once cared, but now I am almost completely indifferent! I COULD NOT POSSIBLY CARE LESS!”

Have you ever seen a crowd go from friendly, to violent, and then just like that, back to happy again? Astonishing. The pressure-wave of concentrated bonhomie had us both grasping onto the fittings for support. By the time I left they were singing songs in his honour and chanting his name.

Obviously, it went from strength to strength since then. The concept got franchised to death of course – I hear that there are chains of bars all over the MidWest serving warm, half-diluted cocktails to rapturous customers. Lukas, professional to the last, takes infinite pains not to find out about them or to display more than an atom of interest in their management or standards. You might have been to one without knowing it.

And as I’ve mentioned, there’s a fair old amount of litigation going on – a private equity fund made a homeopathic investment, and there was some disagreement as to whether this meant they put up a hundredth of a penny and got 90% of the equity, or vice versa. Every now and then Lukas’ firm of homeopathic lawyers ask me for a witness statement; I write the letter “e” in the top corner of a large piece of paper and it seems to satisfy them, but I really honestly want no further involvement, even if it means sacrificing my due credit for nearly all the crucial innovations. I’m just happy to know that if a little knowledge is a dangerous thing, then I’m probably the safest man in Europe.

THE END

Well, after reading that I think you can agree that we’re all 2800-odd words nearer our deaths. But is there an important point to be made here about the nature of risk and reward? Probably not, but there’s a sort of semi-attached one.

Which is related to this piece of sterling common sense from Phil Edwards, proprietor of the gaping silence blog. It’s a psot targeted at “craft beer”, which is related to a point I’ve made myself in the past – that beer and whisky, unlike wine, are industrial products rather than agricultural ones, and that small-batch production of either is a very modern development of somewhat questionable sense.

But I think I’d like to take this for the time being in a somewhat different direction, one which is rather at a tangent to Phil’s cultural point, and one which, Mr Angry commenters may be pleased to hear, probably doesn’t involve mentioning Budweiser all that much. Instead, consider Guinness, the pre-packaged, industrially brewed pasteurised commodified nitrokeg beer that somehow gets a free pass from ale enthusiasts.

Now, Guinness is beloved to statisticians, of course, for inventing the t-distribution. And it’s worth thinking about why it was that a turn-of-the-century brewery would be interested in the ratio of the a normally distributed variable to the square root of a chi-square distributed variable divided by its degrees of freedom. And the answer, of course, is that William “Student” Gosset was responsible for quality control in the Guinness brewery, and thus was very much in need of a distribution which would tell him exactly how significant the variations were in the characteristics of his various samples, and whether they indicated an underlying problem.

The development of the science of quality control in the twentieth century is really interesting, and another example of a road not taken by economics, but that’s not really my point. The point I’m currently interested in is that many of the things which people think about in terms of “risk management” are actually problems of quality control.

The reason that shifting your thinking from “risk management” to “quality control” is an interesting thing to do is that it gets you away from a creeping cultural assumption that risk is in some way related to return. This is in fact, as Eric Falkenstein keeps proving, not even true in its paradigm case, the stock market – more or less however you measure it, high risk shares have lower average returns, not higher. Eric has a complicated theory of why this might be the case, involving benchmarking and the role of institutional investors, but I think it’s simpler than that – it’s just that the main source of risk in the world is mistakes, that a “high risk” share is one that has a lot of bad surprises happening to it, and that it’s not particularly complicated to understand why a prevalence of mistakes and bad surprises isn’t correlated with higher returns.

Consider booze once more; the (possibly fictitious) barman in this article (via Unfogged comments), the basis for Lukas in my story, doesn’t sell “industrial liquor” – he refuses to stock any brand that produces more than a thousand cases a year. What can we say about a distillery that operates on that scale? Well, that unless it is superlatively well-run (and in many cases even then), it is going to see considerable variation in the taste of its product from batch to batch.

It is logically possible that this variation might be a good thing – that each case of liquor will taste wonderful in a distinctive and separate way. But it’s massively more likely that any such variation is going to take the form of some batches being of inferior quality. The risk is wholly skewed to the downside, which is why even small brewing and distilling operations take the utmost pains to eliminate batch-to-batch variation – and of course there is an economy of scale here, because the cost to Diageo of throwing away a single poor-quality distilling run is proportionately much smaller than to a micro-scale producer.

Of course, dogmatism about the superiority of industrial product is just as silly as dogmatism about superiority of craft production. In some cases the random variation really can be a good thing. There are such things as vintage years in wines, and it is possible for improvised music to deliver things that composed music really doesn’t. But they’re very much the exceptions; as someone who listened to a lot of heavy metal in the 1980s, I can report back that the improvised guitar solo is not necessarily a thing of wonder; in general, a lot of the problem with jazz is basically one of quality control.

I think everyone can see where I’m going with this; to the wider point that Frank Furedi and similar commentators are right to say that over the period since the war, modern society has become increasingly obsessed with risk reduction, but wrong to say that this is a bad thing. “Risk” is the risk that something bad will happen, which is why people want to get rid of it. And it is for the most part not correlated with anything good in any kind of straightforward way; if we all threw away health and safety regulations, we wouldn’t actually get a new Internet invented or a massive surge of freedom and well-being, we’d just get the occasional broken toe and bout of food poisoning.

And looking at the things that can’t be fitted into this model, and at the kinds of risks which really are related to returns, gives you more of an appreciation of what we actually really mean by risks. Silicon Valley entrepreneurs take great big risks with their livelihoods (and furthermore, take uninsurable risks), but notoriously, they tend to be absolutely obsessive about quality-control issues – they don’t take needless unrewarded risks. Not coincidentally, film stuntmen seem to make a similar distinction between the risks they’re taking and things which are quality-control issues; the guy who is about to jump his car over a flaming building will be mightily careful about the fitting of his safety harness.

And so there we are. I think perhaps a more practical bit of advice than you might find in The Black Swan is to a) recognise that this is an industrial world, and that most risks aren’t worth taking, but b) to recognise that the man who proposes to live off the public dole simply by virtue of owning a million dollars’ worth of treasury stock isn’t really morally all that far above any other kind of bludger, and so c) to take a few, well organised risks, with a clear view of the benefit that you anticipate from taking them, and d) be as tough as you can on the quality control. Happy Christmas, Eid, Hannukah, Kwanzaa, Yul, Diwali (actually that one’s gone), or whatever other Winterval you choose to celebrate, and here’s hoping that next year, whatever else it brings, will be slightly less full of avoidable mistakes than recent ones.

The argument I want to establish here is that the decision about whether or not to vote Demcrat (versus the alternative of abstaining or voting for a minor party) is a serious one, which is up to the conscience of the individual voter to make, and which deserves respect from other people whether they agree with it or not. Obviously in making that argument, I’m going to have to venture into a number of unpalatable home truths about the Democrats as they are currently organised (abstract: ineffectual, cowardly, surprisingly warlike, soft-right, generally an obstacle to the development of social democratic politics), but let’s get this clear right up front – voting Democrat might often be the right thing to do in any given case, depending on local conditions; it might even usually be the right thing to do. What I’m not going to accept, however, is that it is always or definitionally the right thing to do.

Given that, it’s also the case that (because what we’re talking about here is largely the electoral politics of a protest vote), a mid term election in which control of the Senate (“Control” having an unusual and specialised meaning here – the Democrats have after all had “control” of the Senate for quite some time, and even enjoyed a “filibuster proof majority” for about a year, and see how much good this did them ) is unlikely to change is about the lowest-stakes environment there could be. Barack Obama, the popular and world-historical leader will not be standing; the somewhat less attractive Democratic slate will in general consist of “a bunch of old white guys, most of them rather rightwing”. Not only is it highly unlikely, for paradox-of-voting reasons, that yours will be the crucial vote, but even if it is, it will have elected a candidate who is then highly unlikely to be the crucial vote on any proposal of interest, and who cannot even be relied upon to vote the right way if he is. So given the generally lower level of stakes, an election like this one is likely to be a happy hunting ground for protest votes. And so this is a serious business – I really do think that more likely than not, most CT readers with a vote to waste should be giving serious consideration to wasting it. On with the show …

The Bait and Switch

The key point I want to make here is that when major party activists put the guilt-trip on supporters significantly to their left, they engage in what looks like very fallacious reasoning. The point is that a voter considering a protest vote against the Dems from the left has three options on election day:

First, stay at home
Second, vote for their minor party or abstain
Third, vote Democrat

And the thing is that the major party activist has to steer them between the Scylla and Charybdis of the first two choices, both of which might superficially look more attractive than voting for a candidate you don’t support. To do so, they need to make two contradictory arguments.

Obviously the problem to overcome in getting you to drag your ass (note American spelling) down to the polling station is the Paradox of Voting. Which isn’t really a paradox; it could more accurately be titled “The Actual Extremely Low Expected Value Of Voting”. This requires an appeal to your civic sense of duty; remember Martin Luther King, etc. In other words, they need you to see it as your duty to society to vote, or alternatively to see your vote as an important form of political expression.

However, once your ass is duly dragged and you’re in the voting booth, the last thing they want you to do is your civic duty (which would be to vote for the candidate you think is the best; that’s how voting systems work, strategic or tactical behaviour is a pathology of a badly designed system) or political expression (which also wouldn’t have you voting for their guy). Once you’re there, they want to argue in purely instrumental terms – you have to vote for the Democrats because if you vote for your minority party, you have no chance at all of being the marginal voter.

It looks inconsistent, because it is. Particularly in a midterm election, when you have a very small chance of being the deciding vote for a Congressman who in turn has a very small chance of being the deciding vote on an issue of importance (and given that this is the Democrats we are talking about, you have to take into account votes of importance where your congressman is the swing vote for the wrong side), the expected value of your vote is very small indeed, and the costs of it are the psychological toll on your own morale, plus the opportunity cost of whatever else you might have done with the time.

The mistake here is in treating a descriptive model (the spatial competition framework underlying the median voter theorem) as a normative one. It’s a model which is meant to predict which ice cream cart you choose out of two, not one that’s meant to persuade you to buy an ice cream if you don’t want one. There is no such political or obligation; I know that there are some souls in the grip of the model who probably would vote for a policy of exterminating X puppies over a policy of exterminating X+1, but it seems pretty clear that there is some point at which it becomes obvious that a morally and politically valid response is simply to declare that the fundamental basis of the implied contract has broken down, and that it’s a reasonable choice to simply refuse to participate further. (Simple proof by reductio ad absurdum: if this wasn’t the case, then the government of Myanmar could sponsor a local branch of the Khmer Rouge to stand against them on a Year Zero ticket, thereby obliging Aung San Suu Kyi to vote for them).

Put simply, however much worse the Republicans are than the Democrats, this isn’t a reason for voting Democrat unless you have good reason to believe that your vote will make a difference. Which the Paradox of Voting shows that it generally won’t, and therefore a decision to vote Democrat ought to be justified with positive reasons why it’s a good thing to be identified with.

So what’s the alternative?

Basically, non-electoral politics. For someone whose politics are to the left of the mainstream of the Democratic Party, time and effort spent on getting Democratic candidates elected has to compete against the opportunity cost, which is usually a single-issue group of some kind. And in this competition, the Democratic Party has two big handicaps. First, on an awful lot of key issues for people on the left (gay marriage, environmental regulation, redistributive taxation), its policies aren’t very left wing. And second, whatever its policy agenda it has next to no party discipline and very little in the way of efficient organisation for achieving its goals. Unless the issue closest to your heart is “more money and job security for incumbent Democratic politicians”, it is not all that likely that the Democratic Party is the best vehicle for its pursuit. I think that the case for spending time and money on supporting the campaigns of Democrat candidates (unless you actually like their politics) is very hard to make when one considers the opportunity cost.

But is there an argument in favour of withholding one’s vote for the Democrats on specifically progressive grounds? Well maybe. The direct opportunity cost of doing so is much lower than the opportunity cost of spending time, money and mental energy on campaigning for an unattractive candidate. The only benefit of specifically refusing to vote Democrat on political grounds is a quite nebulous strategic one – that a large part of the problem with respect to the current situation of the Democrats is that they take lots of their voters for granted, and that as a result they represent the interests of a set of people really quite unlike their typical supporter. This is probably true, but it seems to me that there’s only a very unclear and twisty path between this fact and any strategy of moving the party to the left in order to pick up the Daily Kos vote. There are so many slips twixt that cup and lip that there probably wouldn’t be any tea left at all.

But … although the expected strategic value of withholding one’s vote from the Democrats is pretty close to zero, so is the expected value of voting for them. Although party promotional material always wants to turn every election into a direct plebiscite on the next Supreme Court Justice, with Dick Cheney standing against the late Fred Rogers, actually it isn’t. And since the entire case for persuading you to use your vote for a party you don’t support is a strategic one, it’s hardly possible to then claim it illegitimate to bring other possible strategies to bear. The strategy “always vote for the Democratic candidate, no matter what” is a corner strategy with no sensitivity to conditions – it’s very unlikely to be correct in all possible cases.

This is a grown-up calculation for everyone to make independently. Good luck to all our readers and however you choose to use your vote, use it. For values of “use it” which include the making of a conscious choice not to do so.

Actually it’s a little less exciting than it looks on first appearances. While I would personally consider barrels of unmatured whisky to be a reasonable investment in a pension fund[2] (they’re long-dated assets and more or less realisable), I did rather wonder on seeing the headline how they’d got that one past the trustees and it appears that they didn’t. If you look closely at the features of the deal mentioned in the Guardian story, it looks a lot more like a secured loan[3] than any deal under which the pension fund would be taking the price risk and reward on the booze.

One thing worth noting is that the optionality and liquidity of the investment is discussed explicitly as a key part of the value of whisky in the barrel – at any given time, you can decide not only when to bottle the stuff (NB: part of the cost of bottling a 10 year old whisky is that you lose the ability to bottle 15 year old whisky five years in the future – ignoring this option value will reliably drive you out of the distillery business), but you can choose whether to do so as a single malt or part of a blend. Brown spirits are a great example to use in your economics or business class, because time and long-term planning are absolutely intrinsic to the industry – you can use lean production and just-in-time methods to build anything from Toyotas to iPods, but the only way to get a barrel of 10 year old whisky is to start with a barrel of 9 year old whisky and wait.

[1] I see the charts on that post did not survive one of our server moves, and I’ve long since lost the dataset (which, slightly worryingly, people setting up investment schemes marketed to the public ask me for roughly once a year). But the loss to science is not all that great – basically the curve in question was a flat line at around 5% nominal – also if you dig right down into the comments thread, you’ll see that Nick made a few points about barrel versus bottle aging[2] and angels’ share which make me suspect that the actual calculations were a bit spurious.

[2] Differing characteristics of whisky versus wine, considered purely in financial terms: Whisky matures in barrels rather than bottles, so some of it evaporates every year which has to be factored into the yield. More importantly though, whisky is an industrial product rather than an agricultural one; the quality and other characteristics are standardised, and you know pretty much exactly how it’s going to taste at different ages. This is why it makes sense to think in terms of a forward curve in planning for a distillery, but probably a lot less so for a vineyard. Whisky’s a bond, wine is an equity.

[3] The basic idea is that if the Diageo pension fund still has a deficit in 15 years’ time, Diageo will buy back the whisky for £430m, and Diageo will pay a fee to the fund of £25m/year in the meantime. If the deficit has been closed by 2025 by markets going up or otherwise, Diageo buys back the Scotch for a nominal sum. Also, it’s not 25m specific barrels that have been transferred to the pension fund – Diageo can take out and replace barrels if they want or need to bottle them. The Scotch here is basically collateral for a long-dated put option – if only AIG had owned a wine cellar.

Oliver Kamm has commented that his blog at The Times will also be behind the pay wall. The comments section to his post on the matter is full of those who have said that this decision means that they will no longer read his blog, and these comments include those made by many long term readers. His blog will also not be read by the majority of users of the Internet around the world, even for those using Google to search for information. If they have to pay, they will not bother and try and read something else. […]

No doubt Oliver will continue writing his blog, and the next time Noam Chomsky writes something silly, he will expose him. But this will not assist an average Internet user around the world confronted with a Chomsky argument in an on line debate. For them, the day that The Times starts charging for content will be the day that Oliver Kamm ceases to exist.

Oliver Kamm’s bit of the blogosphere conversation, RIP. If only someone were able to write a suitable obituary.

In so far as these things matter, I totes claim bragging rights over calling the end of the bubble in Ireland, in writing in October 2006 and my only regret is that I changed jobs and started doing something else before I had time to milk it[1]. My basic point at the time was that the rental yield on Irish property at the time was estimated at 3.25% (Daft.ie had begun to calculate a rental yield index, tragically too late – I believe unless someone knows different that at the time I was in possession of the only even acceptably accurate time series of data on Irish rental yields), and that with the most recent ECB rate rise to 3.75%, the logic of the myopic-expectations buy-or-rent model[2] was about to start working in reverse. As it did. I’ve mentioned on a number of occasions that in actual fact, this was a policy-caused bubble, and that’s true in Ireland as well. But of course, the actual mechanisms by which a bubble is inflated, since they are based on a combination of the winner’s curse and limited liability, tend to involve the sorts of tales of sharp elbows, social capital and low risk aversion which can be made to look absolutely awful with the benefit of hindsight and/or in a court of law. So let the games begin …

Of course, there’s a world of difference between “Ship of Fools” and Dean Baker’s “False Profits”. For one thing, although at a very high level the Irish boom was a product of the ECB’s need to keep the rust belts of France and Italy out of depression, there is not much mileage in an Irish commentator calling for the ECB governor to be sacked. And so it is that Fintan O’Toole’s “Ship of Fools” concentrates less on the high-level policy failures and more on the nuts-and-bolts of the shady deals and unwise decisions that let the Irish boom get so big and so much more destructive than, say, the Spanish one. Henry has written on this in detail, so I’ll hand over that to him, both because I don’t have the detailed knowledge, but more importantly for the reason that I think any British person writing about the Irish economic situation at the moment really needs to check his motives.

Which is to say that, hey Irish people, shall I tell you a secret? That economic miracle of yours – it just killed us inside. The Gore Vidal proverb[4] doesn’t capture the half of it. My God. Even me, commenting on this site of all sites, couldn’t occasionally resist the occasional outburst of sheer green-eyed jealousy at any signs of the Irish contributors mentioning that the place seemed to be doing all right these days. I can’t find the bit where I literally started going “look it’s all housing and construction you know, it’ll end in tears” to Kieran, but I vividly remember it happened. And this was not an untypical attitude among Brits during the period.

Part of the reason of course was that during the boom years, Ireland did take the advantage to export some incredible, complete, total and utter pricks to the rest of the world in the hope that they’d stay gone. I mean, it hardly behoves a London stockbroker to make a comment of this sort, but even by that benchmark the newly enriched Irish business/political class turned up some world-beaters. And, like the Icelanders they floated a fair couple of companies on the London market that turned out to be not quite as great as they’d appeared, and like the Icelanders, they were given to occasionally, usually when drink had been taken on, providing us with lectures about the secret of their economic success which gave the strong impression of having been cribbed from Thomas Friedman books.

Unlike the Icelanders, of course, there was always a certain amount of edge to the relationship between us and the Irish Raiders though. For one thing, of course, there was the legacy of empire[5]; it really was not so long ago that Irish people in London were treated as somewhere between an oppressed minority and a public health problem[6].

For another, though, there was never any real threat to us from the Vikings. Broadly speaking, the financial community knew what they were up to. They were a bunch of foreigners with seemingly no clue what they were doing, more or less unlimited amounts of money borrowed from their local banks, a burning ambition to pick up iconic and prestigious business assets, and seemingly no concept at all of a fair or even reasonable valuation. People like that, one finds, are generally well liked in Throgmorton Street; you might have to put up with the odd economics lecture, but usually they’ll make it worth your while to hang on. Generations of such ambitious foreigners have breezed through the City, usually leaving with armfuls of previously unshiftable dogs and sans wallet. Come one come all, as long as you pay cash etc.

The Irish, on the other hand … well, what was their big idea? From the late 90s onward, it was clear that Ireland was determined to become the entrepot and offshore haven between Europe and America, sitting in the North Atlantic with a low tax rate, a population of intelligent and creative people with somewhat lax morality, a loose system of financial regulation with slap-on-the-wrist enforcement, in general a place where you went in order to do things that you were slightly ashamed of and didn’t want to do back home. And well … isn’t that, kind of, our job? I think this was the real source of English ressentiment of the Irish miracle – after all, even the most ancient of enemies can reconcile and make up, but competitors are opposed to each other by definition.

And that, I think, shows us what the underlying social reality is behind the corpus delicti set out in “Ship of Fools”. The difference between the two places, and the reason why the City abides, bruised and humiliated but still here, while the Financial Centre in Dublin currently looks really rather past-tense, is that the sort of brinkmanship that is required to play the regulatory arbitrage game, and to make sure that the get-er-done mentality of the best dealmaking lawyers and bankers doesn’t get totally out of hand, is one of the ultimate ‘thick’ social institutions. The kind of culture under which the most dreaded punishment is the “cold shoulder” of the Takeover Panel is not something you can throw up overnight.

So anyway, it turns out that this review was more in the LRB style of a semi-attached essay but what can you do? Go read Henry’s post, he’ll tell you what the book was about.

[1] The publication of that report gave me one of the only moments in my career which would make a good anecdote for a Michael Lewis book. I was, unsurprisingly, not popular with Irish investors and ended up doing a tour of Dublin to explain myself. At the end of a long day, I found myself in front of a character who started his speech by saying “well, you know, of course I’m not an economist like yourself, I’m just a thick Paddy me …”. Having basically lost both all patience and all hope of getting any business, I launched into a short speech, the gist of which was[3] “excuse me mate, when I was a teenager I worked on the Holyhead-Dun Laoghire ferry, and during that period I met enough colourful Irish characters to last me a lifetime. The other thing I learned was that when you hear an Irish person talking to an English person and describing themselves as “just a thick Paddy”, you should check your wallet”.

[2] “Myopic expectations” – in my model, agents assumed that the current level of interest rates would prevail forever. “Buy versus rent model” – just what it sounds like, based on my assessment of the typical financing structure. It wasn’t quite as simple as that, but it wasn’t much more complicated.

[3] Of course, as is traditional for a mass-market business thriller, it didn’t happen exactly like that. Also I was lying at the time – my brother had worked on the ferry, not me.

[4] “Whenever a friend succeeds, a little something in me dies”

[5] During the Celtic Tiger years, and after reading excerpts from Liam Kennedy’s essay, I used to find it a useful technique when in the presence of an Irish person (or, frankly, an Englishman or American with any hint of Irish heritage) who I believed to be whining, to theatrically exclaim “400 years of oppression and now this!”[8]. I’m not saying it was big or clever, or even completely free of bigotry. I’m just saying it worked. Probably still does.

[6] I actually live in a rather chichi leafy avenue in North London, and there are still people in my street who remember when my attractive Georgian townhouse was occupied by three large Irish families. There are one of two aging Irish tramps hanging round the area who appear on the occasions I’ve spoken to them to be utterly confused about what happened to what had previously been a quite well-defined social role.

[7] Actually, eight hundred years, as Henry reminded me.