16 ms·

How Economic Gobbledygook Divides Us

38 points by kawera 10y ago

crdoconnor 10y ago
Though he doesn't address it in the article, this story illustrates one reason why financial language is intentionally obfuscated: "The traders negotiated a new trade with OCM. It reached a new plane of creativity. Under the transaction, the offending transaction was canceled at no cost to OCM. In its place was a new swap. The new transaction was for $600 million. Under the swap, for the next three years, OCM would pay a fixed dollar amount. The amount was $4 million a month. In return the dealer would pay OCM an amount calculated according to a complicated formula: Maximum of [0; NP x {7 x [(LIBOR2 x 1/ LIBOR) – (LIBOR4 x LIBOR-3)]} x days in the month / 360] Where NP = $600 million LIBOR = 6 month Dollar LIBOR rates The financial engineering was dazzling. There was just one problem. The complex equation, if you did the algebra, always equaled zero. The dealer would never pay OCM anything. OCM would be paying the dealer $4 million each month for three years. This was the intended effect." http://www.minyanville.com/businessmarkets/articles/traders-guns-and-money-libor-satyajit/9/10/2010/id/30021?page=full http://www.minyanville.com/businessmarkets/articles/traders-...
- deleted 10y ago
  [deleted]
- arethuza 10y ago
  Surely the client in such a deal should be sophisticated enough to do the calculation themselves and realise that the trade was never going to make them any money?
  - crdoconnor 10y ago
    Sure. Why not. If we make the assumption that fraud can't exist, we might as well make the assumption that the principal/agent doesn't exist, corruption doesn't exist, naivete doesn't exist and clients who miss minor details don't exist.
    - arethuza 10y ago
      If they committed fraud then the client could go to the police, if they simply didn't read the contract they were signing up for then that's their fault. NB Obviously this doesn't apply to consumer contracts, but if you are making trades that big presumably you should know that you are swimming with sharks and act accordingly.
  - neffy 10y ago
    From the article, the client was facing bankruptcy and would probably have signed anything that - I´m guessing Goldman Sachs, since apparently none of the big legal firms was prepared to touch the case - put in front of them. But even if that wasn´t the case, a lot of finance is essentially "robbery by math", by people who can do complicated calculations and figure out ways to route things around the financial system with weird financial instruments, from people who can´t, and who also have the Donald Duck $ sign in front of their eyes blinding them.
    - maxerickson 10y ago
      For that example the premise would then be that an organization large enough to throw away $48 million a year is incapable of seeking a sophisticated agent that will act in the interest of the organization. Maybe the problem is that such an agent doesn't exist. But if such deals are really commonplace it's a pretty sweet opportunity for there to be no one taking advantage of it.
      - neffy 10y ago
        Blatant cancelling issues, one would certainly hope so - but the original structure that got them into trouble was much more problematic. (Similar to some of the shenanigans within the US btw. that got a few counties into trouble.) fwiw - the ability to think through that kind of structure appears to be a lot commoner in computer scientists and similarly trained engineers, than it does in economist/finance types - but even there, it´s not exactly common. You have to be able to juggle inverse foreign exchange relationships against some knowledge of trading and banking relationships within and between countries, and project over time. It´s a distributed systems problem if you think it through - and we all know how easy those are to troubleshoot.
- tvanantwerp 10y ago
  First thing I would do if I worked for OCM would've been to plug that formula and some historic data into Excel. That's gross negligence if nobody did that.
- kasey_junk 10y ago
  I completely agree with your overall point, but in the OCM anecdote there was a near criminal level of incompetence on OCMs side as well. Their business became a currency swap business, literally they were not profitable without it, yet they did not know what a swap was.
michaelt 10y ago
“It’s not free trade, it’s stupid trade,” Donald Trump has said during his presidential campaign — a slogan that contradicts every tenet of mainstream economics, as well as a quarter of a millennium of accumulated economic data. [...] if you live in a one-industry town and the main workplace has closed, you are unlikely to agree with the professional consensus instead of your own lived reality of loss and decline. I'm going to be honest: When it comes to economics, I've read several popular books, and I know what consensus to parrot to sound well informed (Free trade is a net benefit! Ricardian comparative advantage!) but the truth is I don't really /understand/ any of that. Not enough to honestly claim I'm convinced by it. I'm basically going with what the experts seem to say. If I was living in the Soviet Union I'm sure I'd be parroting the views of a different set of experts and saying completely different things with exactly the same conviction.
- maxerickson 10y ago
  I worked for a while with someone who grew up in soviet Poland. When the store had pickles and mustard and nothing else, they got the idea that maybe something was up.
- conanbatt 10y ago
  I like Milton Friedman's explanation or ideas behind supporting free trade. https://www.youtube.com/watch?v=zk3ruapRQZk https://www.youtube.com/watch?v=zk3ruapRQZk Of course, reality and practicality can change the implementation or feasibility of an idea, but the mere concept of restricted trade being more economically efficient is non-sensical to me. As an example, if restricting trade were positive, would you say that it would be a good policy to restrict trade between states in the US? And then withing cities? I like one of MF's arguments that restricted trade is what you do to your enemies in war, or to yourself in peace. What does happen is that the profits of such movement are globalized, so even though at world-level its more efficient, there could be locals that dont profit from it. Free trade increases economic efficiency, but it represents different people, and it doesnt distribute that wealth in a controlled manner. Bear in mind that world-wide poverty has decreased at an unprecedented pace and theres little doubt that it was globalization that catalyzed that. I also relate this to what Varoufakis speaks about with Greece and Germany: Greece will never have trade surplus because it's not a productive country like Germany, and reducing taxes and salaries don't necesarily fix the problem: but Germany investing in Greece in products and services that serve Germans can compensate the deficit and maintain economic efficiencies. That is, what I think the failed promise of free trade is that the gains of globalization did not benefit a huge part of the population, but if some of that did then the situation would stabilize.
m52go 10y ago
I highly recommend Economics In One Lesson by Henry Hazlitt. Comprehensive economics 101 in simple language, probably middle-school level.
- snrplfth 10y ago
  It's a good recommendation. Even if someone disagrees with it, it's the ideal primer in understanding what the arguments and ideas behind classical/marginalist/Hayekian economics actually are (rather than just hearing about them secondhand.)
- eli_gottlieb 10y ago
  How can it be right if it's middle-school level?
  - snrplfth 10y ago
    How can a textbook saying "the planets and asteroids orbit around the sun" be right if it's middle-school level? Or one saying "life is generally divided into five kingdoms" be right if it's middle-school level? In each case, there's some added detail and complications ("actually they orbit the 'barycentre' of both bodies", "viruses are hard to categorize, and some lifeforms are obligate symbiotes") but the essential facts and basic logic of the theory is there.
  - m52go 10y ago
    My point: it's written in middle-school language, aka plain language. It's adult-level economics (although I'm not sure what that even means).
soVeryTired 10y ago
I think I can sympathise with people being distrustful of economics and finance (I say this as someone who works in the industry). When I read what economists have to say about free trade, for example, it makes me incredibly skeptical. I admit I'm not up to date with the latest graduate-level economic models. But I have read about Ricardian comparative advantage. When I looked into the assumptions behind that model, I realised they were utter nonsense. In turn, that made me reluctant to believe anything else that economists wrote on the subject. The same thing happened with banking. The standard macro model where banks lend out central bank reserves with the overall constraint on credit creation being 1/(reserve requirement) is kinda-sorta what happens, but the details are all wrong. As far as I can tell, economists don't want to change the details of this story because then they have to re-write another part of their theory (IS/LM), and that forms the keystone of a lot of standard theory. To summarise, I haven't seen much from academic economics that inspires confidence. So why should I trust them?
- lmm 10y ago
  > But I have read about Ricardian comparative advantage. When I looked into the assumptions behind that model, I realised they were utter nonsense. In turn, that made me reluctant to believe anything else that economists wrote on the subject. Could you be more specific? It's a simplistic model sure, but just about every field of study or industry uses simplified models. As a first-order approximation it seems reasonable.
  - crdoconnor 10y ago
    The theory of comparative advantage assumes comparative advantage is static. Either you have a rich industrial base or you don't. Either you have gold deposits or you don't. Either you have cheap labor or you don't. It falls to pieces once you consider that comparative advantage is dynamic. While gold deposits are either there or not, an industrial base can be built using judicious application of tariffs and subsidies. As with most assumptions in economics (e.g. perfect information), it serves a purpose, although that purpose isn't to simplify the models - but to aid in the creation of politically useful models.
  - 10y ago
swiftisthebest 10y ago
We aren't mad at the experts. We just think they're navel-gazing, self-important idiots.
- Balgair 10y ago
  Hey! That is totally not true! I have seen them look at their arm hairs on occasion.
dominotw 10y ago
Hard to find a Trump free article on nytimes these days. I wonder if its a staff mandate at nytimes to somehow pencil in trump stuff in every article.
- trendia 10y ago
  Maybe it's the cause (or result) of their 95% drop in profit last quarter.
  - sanderjd 10y ago
    Or the simpler explanation of there being an election tomorrow? It would be pretty surprising if newspapers in the US weren't spending most of their inches on the election right now...
    - dominotw 10y ago
      >Or the simpler explanation of there being an election tomorrow? There are 2 candidates this election.
- deleted 10y ago
  [deleted]
zacharytelschow 10y ago
Huh. I thought it was the much more simple argument of: "Everyone needs to contribute because we're in this together, you're selfish for wanting what you produce" vs "half the country doesn't pay for anything and government is wasteful" argument that was dividing us. I'm glad to hear it's the complexity of the arguments, not the core viewpoints they represent, that are the source all the bitterness and ugliness we face.
- sanderjd 10y ago
  I suspect neither side sees their argument in your simplified summaries (I certainly don't see my viewpoint in either of those), which is sort of the point.
zacharytelschow 10y ago
Huh. I thought it was the much more simple argument of: "Everyone needs to contribute because we're in this together, you're selfish for wanting what you produce" vs "half the country doesn't pay for anything and government is wasteful" argument that was dividing us. I'm glad to hear it's the complexity of the arguments, not the core viewpoints they represent, that are the source all the bitterness and ugliness we face.
tim333 10y ago
The problem is deeper than Gobbledygook - Economics is just kind of complicated and sometimes counterintuitive when you get into it regardless of the language. Things like that in a recession it is sensible for individuals to cut spending but it can make sense for the government to borrow and run deficits just go past most people. I'm not quite sure what the answer is.
MisterBastahrd 10y ago
The average economic education in the US is so poor that there's an entire political movement predicated on the fears that people have that the US will be unable to service its debts. They actually think that the national debt is the same thing as personal debt.
csense 10y ago
One of the things that many economic experts agree on is that "deflation = bad", if things will cost less tomorrow and people realize it today, then nobody will ever spend anything and the entire economy will be hosed. In the computer industry, deflation is one of the facts of life for many decades -- just about anything, e.g. gigahertz, gigabytes, cores, etc. will cost less tomorrow, and people realize it today. So the economic theory says that due to having been in the grips of deflation for many decades, the computer industry should be a barren wasteland with almost no investment, employment, or opportunity because no sane investor would ever spend any money on anything because their money would be able to get more of what they would have spent it on if they're just patient. This is one thing that makes me very skeptical of the experts. Of course the following passage also succinctly describes my experiences having grown up in the Rust Belt: > if you live in a one-industry town and the main workplace has closed, you are unlikely to agree with the professional consensus instead of your own lived reality of loss and decline.

38 points by kawera 10y ago

Though he doesn't address it in the article, this story illustrates one reason why financial language is intentionally obfuscated: "The traders negotiated a new trade with OCM. It reached a new plane of creativity. Under the transaction, the offending transaction was canceled at no cost to OCM. In its place was a new swap. The new transaction was for $600 million. Under the swap, for the next three years, OCM would pay a fixed dollar amount. The amount was $4 million a month. In return the dealer would pay OCM an amount calculated according to a complicated formula: Maximum of [0; NP x {7 x [(LIBOR2 x 1/ LIBOR) – (LIBOR4 x LIBOR-3)]} x days in the month / 360] Where NP = $600 million LIBOR = 6 month Dollar LIBOR rates The financial engineering was dazzling. There was just one problem. The complex equation, if you did the algebra, always equaled zero. The dealer would never pay OCM anything. OCM would be paying the dealer $4 million each month for three years. This was the intended effect." http://www.minyanville.com/businessmarkets/articles/traders-guns-and-money-libor-satyajit/9/10/2010/id/30021?page=full http://www.minyanville.com/businessmarkets/articles/traders-...

deleted 10y ago
[deleted]
arethuza 10y ago
Surely the client in such a deal should be sophisticated enough to do the calculation themselves and realise that the trade was never going to make them any money?
- crdoconnor 10y ago
  Sure. Why not. If we make the assumption that fraud can't exist, we might as well make the assumption that the principal/agent doesn't exist, corruption doesn't exist, naivete doesn't exist and clients who miss minor details don't exist.
  - arethuza 10y ago
    If they committed fraud then the client could go to the police, if they simply didn't read the contract they were signing up for then that's their fault. NB Obviously this doesn't apply to consumer contracts, but if you are making trades that big presumably you should know that you are swimming with sharks and act accordingly.
- neffy 10y ago
  From the article, the client was facing bankruptcy and would probably have signed anything that - I´m guessing Goldman Sachs, since apparently none of the big legal firms was prepared to touch the case - put in front of them. But even if that wasn´t the case, a lot of finance is essentially "robbery by math", by people who can do complicated calculations and figure out ways to route things around the financial system with weird financial instruments, from people who can´t, and who also have the Donald Duck $ sign in front of their eyes blinding them.
  - maxerickson 10y ago
    For that example the premise would then be that an organization large enough to throw away $48 million a year is incapable of seeking a sophisticated agent that will act in the interest of the organization. Maybe the problem is that such an agent doesn't exist. But if such deals are really commonplace it's a pretty sweet opportunity for there to be no one taking advantage of it.
    - neffy 10y ago
      Blatant cancelling issues, one would certainly hope so - but the original structure that got them into trouble was much more problematic. (Similar to some of the shenanigans within the US btw. that got a few counties into trouble.) fwiw - the ability to think through that kind of structure appears to be a lot commoner in computer scientists and similarly trained engineers, than it does in economist/finance types - but even there, it´s not exactly common. You have to be able to juggle inverse foreign exchange relationships against some knowledge of trading and banking relationships within and between countries, and project over time. It´s a distributed systems problem if you think it through - and we all know how easy those are to troubleshoot.
tvanantwerp 10y ago
First thing I would do if I worked for OCM would've been to plug that formula and some historic data into Excel. That's gross negligence if nobody did that.
kasey_junk 10y ago
I completely agree with your overall point, but in the OCM anecdote there was a near criminal level of incompetence on OCMs side as well. Their business became a currency swap business, literally they were not profitable without it, yet they did not know what a swap was.

michaelt 10y ago

“It’s not free trade, it’s stupid trade,” Donald Trump has said during his presidential campaign — a slogan that contradicts every tenet of mainstream economics, as well as a quarter of a millennium of accumulated economic data. [...] if you live in a one-industry town and the main workplace has closed, you are unlikely to agree with the professional consensus instead of your own lived reality of loss and decline. I'm going to be honest: When it comes to economics, I've read several popular books, and I know what consensus to parrot to sound well informed (Free trade is a net benefit! Ricardian comparative advantage!) but the truth is I don't really /understand/ any of that. Not enough to honestly claim I'm convinced by it. I'm basically going with what the experts seem to say. If I was living in the Soviet Union I'm sure I'd be parroting the views of a different set of experts and saying completely different things with exactly the same conviction.

maxerickson 10y ago
I worked for a while with someone who grew up in soviet Poland. When the store had pickles and mustard and nothing else, they got the idea that maybe something was up.
conanbatt 10y ago
I like Milton Friedman's explanation or ideas behind supporting free trade. https://www.youtube.com/watch?v=zk3ruapRQZk https://www.youtube.com/watch?v=zk3ruapRQZk Of course, reality and practicality can change the implementation or feasibility of an idea, but the mere concept of restricted trade being more economically efficient is non-sensical to me. As an example, if restricting trade were positive, would you say that it would be a good policy to restrict trade between states in the US? And then withing cities? I like one of MF's arguments that restricted trade is what you do to your enemies in war, or to yourself in peace. What does happen is that the profits of such movement are globalized, so even though at world-level its more efficient, there could be locals that dont profit from it. Free trade increases economic efficiency, but it represents different people, and it doesnt distribute that wealth in a controlled manner. Bear in mind that world-wide poverty has decreased at an unprecedented pace and theres little doubt that it was globalization that catalyzed that. I also relate this to what Varoufakis speaks about with Greece and Germany: Greece will never have trade surplus because it's not a productive country like Germany, and reducing taxes and salaries don't necesarily fix the problem: but Germany investing in Greece in products and services that serve Germans can compensate the deficit and maintain economic efficiencies. That is, what I think the failed promise of free trade is that the gains of globalization did not benefit a huge part of the population, but if some of that did then the situation would stabilize.

m52go 10y ago

I highly recommend Economics In One Lesson by Henry Hazlitt. Comprehensive economics 101 in simple language, probably middle-school level.

snrplfth 10y ago
It's a good recommendation. Even if someone disagrees with it, it's the ideal primer in understanding what the arguments and ideas behind classical/marginalist/Hayekian economics actually are (rather than just hearing about them secondhand.)
eli_gottlieb 10y ago
How can it be right if it's middle-school level?
- snrplfth 10y ago
  How can a textbook saying "the planets and asteroids orbit around the sun" be right if it's middle-school level? Or one saying "life is generally divided into five kingdoms" be right if it's middle-school level? In each case, there's some added detail and complications ("actually they orbit the 'barycentre' of both bodies", "viruses are hard to categorize, and some lifeforms are obligate symbiotes") but the essential facts and basic logic of the theory is there.
- m52go 10y ago
  My point: it's written in middle-school language, aka plain language. It's adult-level economics (although I'm not sure what that even means).

soVeryTired 10y ago

I think I can sympathise with people being distrustful of economics and finance (I say this as someone who works in the industry). When I read what economists have to say about free trade, for example, it makes me incredibly skeptical. I admit I'm not up to date with the latest graduate-level economic models. But I have read about Ricardian comparative advantage. When I looked into the assumptions behind that model, I realised they were utter nonsense. In turn, that made me reluctant to believe anything else that economists wrote on the subject. The same thing happened with banking. The standard macro model where banks lend out central bank reserves with the overall constraint on credit creation being 1/(reserve requirement) is kinda-sorta what happens, but the details are all wrong. As far as I can tell, economists don't want to change the details of this story because then they have to re-write another part of their theory (IS/LM), and that forms the keystone of a lot of standard theory. To summarise, I haven't seen much from academic economics that inspires confidence. So why should I trust them?

lmm 10y ago
> But I have read about Ricardian comparative advantage. When I looked into the assumptions behind that model, I realised they were utter nonsense. In turn, that made me reluctant to believe anything else that economists wrote on the subject. Could you be more specific? It's a simplistic model sure, but just about every field of study or industry uses simplified models. As a first-order approximation it seems reasonable.
- crdoconnor 10y ago
  The theory of comparative advantage assumes comparative advantage is static. Either you have a rich industrial base or you don't. Either you have gold deposits or you don't. Either you have cheap labor or you don't. It falls to pieces once you consider that comparative advantage is dynamic. While gold deposits are either there or not, an industrial base can be built using judicious application of tariffs and subsidies. As with most assumptions in economics (e.g. perfect information), it serves a purpose, although that purpose isn't to simplify the models - but to aid in the creation of politically useful models.
- 10y ago

swiftisthebest 10y ago

We aren't mad at the experts. We just think they're navel-gazing, self-important idiots.

Balgair 10y ago
Hey! That is totally not true! I have seen them look at their arm hairs on occasion.

dominotw 10y ago

Hard to find a Trump free article on nytimes these days. I wonder if its a staff mandate at nytimes to somehow pencil in trump stuff in every article.

trendia 10y ago
Maybe it's the cause (or result) of their 95% drop in profit last quarter.
- sanderjd 10y ago
  Or the simpler explanation of there being an election tomorrow? It would be pretty surprising if newspapers in the US weren't spending most of their inches on the election right now...
  - dominotw 10y ago
    >Or the simpler explanation of there being an election tomorrow? There are 2 candidates this election.
deleted 10y ago
[deleted]

zacharytelschow 10y ago

Huh. I thought it was the much more simple argument of: "Everyone needs to contribute because we're in this together, you're selfish for wanting what you produce" vs "half the country doesn't pay for anything and government is wasteful" argument that was dividing us. I'm glad to hear it's the complexity of the arguments, not the core viewpoints they represent, that are the source all the bitterness and ugliness we face.

sanderjd 10y ago
I suspect neither side sees their argument in your simplified summaries (I certainly don't see my viewpoint in either of those), which is sort of the point.

zacharytelschow 10y ago

tim333 10y ago

The problem is deeper than Gobbledygook - Economics is just kind of complicated and sometimes counterintuitive when you get into it regardless of the language. Things like that in a recession it is sensible for individuals to cut spending but it can make sense for the government to borrow and run deficits just go past most people. I'm not quite sure what the answer is.

MisterBastahrd 10y ago

The average economic education in the US is so poor that there's an entire political movement predicated on the fears that people have that the US will be unable to service its debts. They actually think that the national debt is the same thing as personal debt.

csense 10y ago

One of the things that many economic experts agree on is that "deflation = bad", if things will cost less tomorrow and people realize it today, then nobody will ever spend anything and the entire economy will be hosed. In the computer industry, deflation is one of the facts of life for many decades -- just about anything, e.g. gigahertz, gigabytes, cores, etc. will cost less tomorrow, and people realize it today. So the economic theory says that due to having been in the grips of deflation for many decades, the computer industry should be a barren wasteland with almost no investment, employment, or opportunity because no sane investor would ever spend any money on anything because their money would be able to get more of what they would have spent it on if they're just patient. This is one thing that makes me very skeptical of the experts. Of course the following passage also succinctly describes my experiences having grown up in the Rust Belt: > if you live in a one-industry town and the main workplace has closed, you are unlikely to agree with the professional consensus instead of your own lived reality of loss and decline.