News Flash: Economic Activity Unsustainable

Michael Mandel at Business Week wrote a great article about the current economic crisis. The article is entitled It's Not a Crisis of Confidence. Here is a quote:

The real problem with the economy is that long accepted patterns of cross-border technology transfer, trade, and finance are simply unsustainable.

The Limits of Self Interest

Alan Greenspan testified today about the credit crises. From the Reuters story there is one telling quote:

"Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."

So, the next time a policy maker chides you with the "let the market decide" mantra, take a deep breath, remember that self-interest and markets are super effective for determining some things, but they are not always right. Even Greenspan admits that.

Driveway Rehab

I called around last week asking for bids on cutting up a 30x12 foot concrete part of my driveway. We have plans to turn this area into gardens, and concrete just won't do. I called around for prices, and the cheapest I could get anyone to quote me was $600.

That's a lot of money for me, so after consulting with some friends, I decided to do this job myself. Some of the concrete came up easily. I would just stick a pry bar underneath, apply pressure to force it up, and then whack with a sledgehammer to break into smaller pieces. Eventually we plan to use these pieces for raised beds and footpaths. But I bet we will have plenty, so if you need some concrete, I would be happy to drop some off on your doorstep.

It is quite satisfying work, really, and afterward my muscles ached in a way that reminded me of a good days work. It is a feeling that doesn't come often from my "day job" as a software engineer. I thought the whole job would take me a day, but after about 8 hours of work I have gotten only a third up.

So, while I am grateful for the time I spent prying, heaving, and bending in the dirt, I am a bit vexed that I wasn't wasn't able to cut a deal with someone who might be better at it than I.

Six hundred dollars is a substantial sum of money, more than I was willing to pay. Why? Because I have a fixed supply of money coming in each month, and that supply just barely meets the demands of our household. There is no room in the budget for an unplanned $600 expense.

And yet, it took me 8 hours to get a third of the job done. Assuming that I improve some, I could get the rest of the job done in 12 hours. That's 20 hours total, meaning that for every hour I work, I save myself $30.

Looking at it another way, I earn $30 per hour for my labor moving concrete.

The guys I spoke with on the phone said they would get the job done with a crew of two guys in 6 hours. That's 12 hours total, or about $50 per hour.

Hmmm....

On the Rootfop

My neighbor Sjell was kind enough to come over and help fix a leak in my roof today. While we were up there we had one of those classic Seattle moments, when the sun finally breaks out of the clouds just before setting, and lights up everything with a golden glow.

So, I got my camera and took some pictures. Later I stitched them together into a single panaroma with a handy program called autostitch.

Derivative Regulation Contest Entry

Its looking like one of the most certain things to come out of this financial crisis is more regulation. I have spent a fair amount of time imagining how derivatives would be regulated.

Looking at the extremes, "outlawing" derivatives seems reasonable to consider. Assuming that this is enforceable, it would surely meet with lots of resistance from Wall Street. Discredited as it is, Wall Street still has most of the money, and most of the ears of our representatives.

It is my impression that laws like this often don't work. Companies have incentives to find ways to get around them, and will do so, just like people find ways around other prohibited, but attractive, activities. And there are all sorts of things that derivatives can provide that are useful in certain situations. If they are banished outright, I could imagine an underground economy that trades them.

Here is another idea.

The government could require that all financial companies publish their coefficients of risk. This data would be made available by the banks, to the government, daily. Since this is in the public trust, the numbers would have to be available publicly. That is, the banks would make public heretofore private information.

A consortium would be formed that would

1. choose a risk model
2. determine the important attributes and measurements to be reported
3. create a "reference implementation" that measures, calculates, stores, and publishes the risk data of the banks. In addition suites of acceptance tests that would validate other implementations
4. create another reference implementation that collates the daily data as reported from all the banks, and plugs it in to a meta-risk model that balances the risk of the banks together
5. choose limits on acceptible values for the bank's reported risk coefficients. This would include values derived from the data of a single bank. If a bank reported values that violated thes ranges, then the bank would suffer a penalty of some sort. The penalty should be substantial (such as losing management control) to discourage risky behavior.

The software would be freely available in source code form. All interfaces would be public. Thse data would be freely available via web services, hosted by the federal government. Anyone could read the interface documentation and create a web application.

Open source, open data, this makes sense since it is a public risk that is being regulated, like levels of Carbon emissions. Encourage other countries to use the software and contribute to its development.

A high profile government sponsored open source software project of this magnitude and this importance would attract the best minds in the country. Just in case the open source development model does not work for getting the project done, though, the government could also solicit bids for alternate implementations. Several companies could be hired to implement the project. There could even be a contest to create the best implementation.

In fact the whole project could be a contest. Offer a million dollar prize to the best proposal for a system to essentially manage the risk of the nations financial system.



So here's my entry.