TANSTAAFL

We can use the TANSTAAFL adage from economics more widely. Basically, it says that someone always pays; an analog might be that entropy increases.

So, this can apply to engineering in a manner that would remind us that the supply-chain model has many assumptions about which we need to be careful. To the managers of any project: you cannot get anything better (assuming that you can - another adage deals with the greener grass syndrome) without paying (that is, your AAHs (NoooPs) are not free, and, as we see, you pay in many ways other than money and time - remember that reputation and good can also in the list of payables). But, let's defer this discussion to a later date.

There is too much on the financial plate to cover yet. Airplanes and other physical products can be tested in the real world; progress there comes with sweat that is measurable. In the market, we have all sorts of uses of 'free' which is very problematic.

Like, free market (start with the criticisms) or free trade or ... It's rather ironic to hear a market type (for example, those who are CBOE-ing) say that there's no free lunch, yet arguing at the same time for a free market. Sometimes one wonders if 'free' in this context means to be unburdened by any type of constraint that would enhance transparency.

Sheesh, nothing is 'free' ought to be the adage.

Except we see this: some one thing may be 'free' to some party, yet a proper accounting will show that someone, somewhere pays. In the market, we see the greased slide of monies from the pockets of the hapless to the pockets of those who are 'free' to exploit the situation. Even that 'greased slide' is not free; by the way, the hapless pay more for it than do others.

As a reminder, this blog deals with how 'oops and loops lead to oops. Well, how many oops have we seen in the financial realm of late? And, proper analysis will show a steady movement toward instability through decisions of the past few decades.

We can go back all the way to 1973 and CBOE's introduction of the option market; yet, we can go back further. But, that may be immaterial, as understanding what the basic issue is so as to know how to cope can take a message from Markov. In short, it doesn't matter how we got to where we are, future states and decisions are based on what we know and do now.

Remarks:

10/26/2010 -- Adam knew the failings of 'free markets' quite well.

11/20/2009 -- It's near-zero.

11/06/2009 -- There ain't no train, just like there ain't no free lunch (TANSTAAFL).

09/09/2009 -- To look at some issues addressed here, we'll need to consider Alan's reign.

08/10/2009 -- As promised, FEDaerated is here.

12/18/2008 -- Fairy dusting continues with made-off results. But, we can construct with robust methods, including leveraging.

Modified: 10/26/2010

To the hilt

This blog started by looking at a particular development project's status with the intent to comment on a few modern predicaments that have been exacerbated by computational confusion. Well, in engineering, as said before, we have a real world that comes into play.

The same world influences the market, and things financial, but in an entirely different way that cannot seem to get its head out of gaming (apologies to the Olympic athletes, as gaming can have an honorable connotation or two).

In the 08/18/08 WSJ, Ethan Penner describes one aspect of the current problem in his op-ed ("How Low Interest Rates Contributed to the Credit Crisis"). Penner has one example that we can expand upon and comment about here. The following analysis will just be a small beginning.

Penner says that a key factor is that some retirement fund techniques will require a huge return in order to pay up as they promised (by the way, the use of entitlement applies here on several sides - who is more 'entitlement' laden in thought than some CEOs and some financial types?) . How many times have we heard 20% returns plus?

So, if the going rate for some real investment type is 6.5%, how does one get more? Well, the tranche method (Penner also has some thoughts on securitization's future) played that game, too. But, let's use a little story.

Supposing we had 100K bucks (later in the story, we'll multiply that by several 10s; as well, dampen any notion of rationality for a few sentences). Well, in the easy money and high liquidity times, we could have found someone who would have loaned us 900K bucks which would have given us a cool 1M bucks in total. Now, if we could get the money (900K bucks) at 5%, then we would make 1.5% for each of the nine 100Ks. The accumulation of return would give us the 20% on our original 100K bucks.

Get it? Smart or not?

Now, apply your multiple of 10s to the 100K bucks. Lots of people were making money this way; of course, what we saw, or read about, were the big winners. Then, we also heard about big losers.

Hah! Is this how an economy ought to work? Actually, a whole industry has been set up the past 20 years to foster this time of gaming which, by necessity, moves money from the pockets of the multitude of hapless to the golden (and more) purses of the favored few (those who have infinite entitlement - versus those who are only looking for some food and shelter).

By the way, this little example can be applied many ways to what goes on daily in the markets. We'll be getting back to that.

But, we'll also pose, and try to answer, some questions. Like, who would put $900K upon $100K (9 to 1 if you're counting)? In the old days, this type of number would have been a fraction (think the multiplier effect in macroeconomics). Why would I as a rational holder of $900K let you get the 1.5%?

If this type of leveraging was then extended (almost recursively), what value is there (of course, we see with unwinding that things do dissipate)? This brings up another side. If the one with the 100K bucks gets 900K bucks more and then has a -5% return, that would reduce the 100K bucks by half. But wait, the 5% would still be payable, so the 100K bucks would be even less.

Gosh, ought we to get the financial thing on some natural basis, not unlike using thermodynamics (no endorsement is intended, implicitly or otherwise) as some economists argue?

So, where is the accounting for all this? Some seem to think that the 'risk' ontology is sufficient; these need to look closely at quasi-empirical issues.

Remarks:

04/03/2011 -- Need to look at some background. Too, tranche and trash.

03/17/2011 -- Politicos might actually be compounding the issues.

08/24/2009 -- Last year, Ben blinked and panicked. He frantically pulled out all stops as if with no thought for tomorrow. Now, he has no use for 'mea culpa' big daddy that he is. Ben, start to unwind now. The Vienna School's view that these things are undecidable (which is a computational issue) is right on.

07/23/2009 -- After the bust and the rebound, toxic assets are still a problem due to tranche realities.

06/07/2009 -- Say what?

12/17/2008 -- We'll use made-off in lieu of ponzi, henceforth.

10/27/2008 -- Yes, things fell apart for several reasons: fiction, leverage, and more.

10/11/2008 -- It keeps getting more interesting.

08/24/2008 -- This example where we see a 9 to 1 increase off of $100K is equivalent to a reserve ration of 10% which can be considered a historically low figure for the reserve or a high multiplier. This notion is related to leveraging in the sense of creating something out of nothing from one view. Of course, as argued before, the lowering of the reserve ration goes hand in hand with increasing use of mathematics through growing computational prowess which can exacerbate the Minsky ponzi tendencies, as we've seen of late. If we're going to model the economy via computation, why not base it on some physical analog, like energy (no endorsement intended)?

Modified: 04/03/2011