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Journal: Some figures on the housing bubble 1

Journal by blue trane provides some numbers:

The total value of housing units in the United
States amounts to $19.3 trillion, with $10.6 trillion
in mortgage debt and the remaining $8.7 trillion
representing equity in those units as of June 2008.

Of the approximately 80 million houses in the
United States, 27 million are paid off, while the
remaining 53 million have mortgages. Of those
households with mortgages, 5 million (or 9 percent)
were behind in their payments and roughly 3
percent were in foreclosure as of mid-2008.

So, say 10% of $10.6 trillion was at risk of default, or $1 trillion.

The notional amount of CDS
increased from less than $1 trillion in 2001 to slightly
more than $62 trillion in 2007, before declining to
$47 trillion on October 31, 2008.

So the derivative market inflated the real value of the mortgages by about a factor of 6, and then magnified the size of the possible default problem by a factor of 15.

I'm reminded of a sentence from John Lanchester's book, I.O.U. (another journal of mine on the book):

"Even once it's explained, however, it still seems wholly contrary to common sense that the market for products that derive from real things should be unimaginably vaster than the market for the things themselves."

Note that the total value of derivatives, according to the May 2014 BIS Statistical Release, was $710 trillion. So the $62 trillion 2007 figure has been increased by a factor of 10, again.


The Fed bought up trillions of the MBS assets, thereby letting off the hook the CDS holders who had insured them, I think. Pension funds held a lot of CDSes, so a SIGTARP report stated that it was prompted to action to save retirement accounts. Yet when Detroit experienced a dramatic increase in its liabilities due to an interest-rate swap with UBS, the Fed and the national government did not step in to help. Why not?

Fed Chairman Bernanke stated somewhere that helping state and local governments were too political for the Fed to get involved in. So it is the realm of fiscal policy. Why couldn't he say outright that the government can run a deficit to help out state and local governments? It worked for the Fed helping banks; why shouldn't it work for the government helping states and cities?

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Journal: The Trolls 81

Journal by Tom

Wow, it's been 15 years but I've finally got my own personal troll! :-)

I must apologize to everyone I've ever called a troll now that I've seen a real one. Yeah, there are trollish comments, but this... it's a different league. If you ever wondered who these brain-damaged morons were who set up geocities homepages with blinking purple text on blue background with red dots in Comic Sans - that kind of different league.

Now it does make me wonder about trolls in general. Has there been a study on this? I really wonder if psychologists have tackled this because quite honestly, you cannot be mentally stable and post in this and this content at the same time. So I do wonder if trolls on the Internet (the real trolls, not the people occasionally posting something stupid) do have a mental problem. It definitely looks like it. Probably insecurity issues, definitely an exaggerated need for attention, might be related to borderline syndrome or schizoprenia.

And, of course, the Internet provides:

As someone who has had to deal with family members suffering from mental illness, let me tell you that it's not funny. So despite the fact that they are, in fact, obnoxious, aggravating assholes, these sad little fucks also need help and their miserable little existence is not something you'd want to trade for yours, no matter how much you think your life sucks. Trust me, with a mental illness on top, it'll suck more.

Obviously, we can't offer therapy to people who usually comment anonymously and will often go to great lengths to avoid being tracked down. What we can do, however, is get a better understanding for how they act this way (they can't help it, mental illness is stronger than your conscious mind) and that the best thing we can do for them is to not continue the feedback loop. "Don't feed the trolls" - old wisdom there.

The last link in that list contains a few more ideas.

Now that I'm at the end, I kind of regret the smiley face at the top. But I'm leaving it in because this journal entry is a bit of a journey, even if it is short. Thanks to some Internet resources, a bit of research and connecting the dots, I've come a short way, changing my mind a little on this particular sub-sub-sub-part of life.


A short additional statement on how to treat trolling. From what I've gathered from the resources above, a few comments (both here and in the various spammed threads) and my own life experience:

First, don't feed the trolls. Most of them seek attention, so if you stop giving it to them, they become frustrated and go away. Notice that they seek attention, not validation. A rebuke or an angry rant or even a shootout of personal insults satisfies them as much as anything else. Much like the old PR saying "there is no negative publicity", it is all about the attention itself, not about its content.

Second, stand your ground. Do not leave the site or stop commenting just because you're being trolled. It takes a bit to do that, yes. Trolls consider it a "victory" if they shut you up, either by simple flooding or by frustrating you enough to disappear. In their twisted minds, it gives them validation and somehow proves that they were right.

Third, if you see someone else being trolled, give them support. Doesn't take much - a single sentence is more than enough. Someone under attack by a real troll is being flooded. The troll will commonly post under multiple aliases or otherwise attempt to appear as more than one person. Psychological experiments such as Solomon Asch's show how we humans as social animals experience conformance pressure. So give that other person support by showing him that the flood he's getting is no the only opinion around. It doesn't matter if he consciously knows it's just one troll, the pressure is subconscious.


I'd like to have comments disabled on this journal entry, for obvious reasons, but you can't publish a journal entry with comments disabled, so... 1000:1 bet that he's stalking the journal as well and will add his drivel below?

Also, if the formatting looks atrocious, turn off beta and revert to classic. Seriously.

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Journal: Privacy and Secrecy 9

Journal by ShieldW0lf

These two concepts are presented as being synonymous in popular discussion. A "You can't have one without the other." kind of thing.

This concerns me greatly.

I could write at great length about the threat secrecy poses to human culture, and have before, but that's not what I'm going to do right now.

I've had conversations in the past where I claimed people never had privacy in the first place, that between the government and the schools and the banks and credit card companies and whatnot, their movements and activities have been monitored since the day they were born.

But this was never precisely right. Because privacy doesn't require secrecy. That is what I want to talk about.

First, a couple of illustrations:

When you go to the bathroom, it's not a secret what you're going in there for. We know you're going in there to release waste. You know that we know. But we would generally agree that this gives you privacy.

When you live with roommates, and you take your special someone to your room and hang a tie on the door, we know what you're in there for. You know that we know. But you still feel a sense of privacy, and you still do what you went in there to do.

So. What makes these situations private, when they're not even vaguely secret?

The lack of a requirement to interact.

It's a matter of social decorum. Good manners.

At the end of the day, I don't really care that you know I took a dump. What I care about is that I don't have to carry on a conversation about it. I don't even want to have the "conversation of the eyes". I want to forget, for a moment, that you exist.

I don't think I'm exceptional in this regard.

So, clearly, you can have privacy without secrecy.

Let's examine something a little more pervasive.

Unless you've been hiding under a rock for the last 15 years, you're probably familiar with the "Reality TV" concept.

These people are living in a fishbowl. They have no secrets, and they know it.

But you can clearly see that, despite this, they will seek out a space where they are physically alone so they can have some privacy. And you can clearly see them relax, because their need for privacy has been fulfilled.

Why? There are likely more people observing them that ever before... how can they possibly feel like they have privacy?

The answer is, they don't need to react to you. They don't need to respond to things you say. That automatic reflex we have to decipher what your eyes are saying never kicks in. That is what they really crave.

So. One more illustration. Not even anecdotal. Could not tell you when or where I heard this, but here goes:

The story is, there is an Asian culture where everyone is packed in so tightly, and their building construction affords them no secrecy because their walls are so thin that a man walking past your house can see and hear right through your rice paper walls.

Nevertheless, these people successfully find the privacy they need. Because they do not react to things that are none of their business. They know their place.

There is a lesson here for us.

We are grappling with a real problem in our civilization. We have forged tools with the power to extend our senses further than our great grandparents could have ever dreamed. But we have not yet demonstrated the maturity to handle it.

The result of this is that there is a small class of people who have access to vast amounts of information about everyone, and a large class of people who have very little access and what access they have has been carefully chosen to control their opinions.

The small class of people and the large class of people are both fighting to preserve this state of affairs. The large class are defending the "right to secrecy" because they feel they are fighting to protect their privacy from their ill mannered fellows. The small class are defending the right to secrecy because they have an unfair advantage over their fellows and they wish to preserve that state of affairs.

Simultaneously, you have people who are fighting for "transparency", because they recognize the unfair advantage that is held by a group that seeks to control them, and they wish that unfair advantage erased.

In this way, we are turned against ourselves by those who would rule us.

I've argued this point exhaustively in online forums under my standard pseudonym, and have been jeered at, and invited to publish my real name, address and banking information.

This is what we're up against. I've got skeletons in my closet, same as everyone. I'm flawed, but I'm confident I'm no more flawed than any of you. If the veils of secrecy came crashing down for one and all, I'm confident that it would be impossible for anyone to attack my character and reputation without being seen for a gross hypocrite.

But, to go first is to allow hypocrites to destroy you, and to fail in your attempt to address the problem.

It's a difficult problem. I'm not sure how to get from where we are to where I believe we need to be. I see it as a real possibility that we will destroy our own potential to grow beyond the limitations of our fragile flesh rather than develop the maturity to cope with this situation.

However, I think that creating a sense of the distinction between privacy and secrecy is an essential step towards having a dialog that will lead us there.

Thank you for reading.

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Journal: Soylent News 4

Journal by TheRaven64

I've not been posting on Slashdot much this week, because I've been trying out Soylent News, which is using (and old version of) Slashcode (with some improvements) and lacks corporate overlords. It seems to have captured most of what I like about discussions in Slashdot, although is suffering slightly from not having nearly as many active users (50 or so comments is still the norm and it probably needs 100+ to be sustainable).
If you've not visited yet, I'd recommend giving it a go.

I'm TheRaven over there.

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Journal: Web pages jumping around

Journal by blue trane

I was just reading the introduction to an article on Slashdot's front page. Suddenly, the page refreshed, and reloaded leaving me with a view of the top of the site. I had lost my place, my concentration, and the train of thought I was engaged in.

The early internet wasn't like this. Now, when a page loads it jumps around. So I start reading some text, and suddenly an ad above the area loads, and the text jumps off the screen.

This happens even on wikipedia.

Is it a deliberate strategy on the part of advertisers to get you to notice their ads?

Is it an unintended consequence of loading pages in parts, not leaving enough space for the top parts?

Is my viewing experience not important to the developers?

Whatever, it is really annoying to me when i'm reading something and then suddenly the browser moves it out of my view.

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Journal: Paradise Cove 1

Journal by blue trane

January 5, 2014

One of the main goals of this road trip was to visit the site of Rockford's trailer.

In the 1970s, according to the evidence in the Rockford Files, Paradise Cove had free public access to the public beach. In one episode (The Queen of Peru) a motor home parks next to Rockford's trailer and Rockford, despite being annoyed by the kids' noise-making, nevertheless tells the father that he has a right to park there since it's a public beach.

Today, Paradise Cove seems to have been fully privatized. The Paradise Cove Cafe charges for beach access ($20 for walk-in, $30 for beach parking). There is a large trailer park in the Cove which now covers the hills behind Rockford's trailer, which in the 1970s were wild. In one episode, Rocky runs up the hill behind the trailer; today there are fences and roads and signs saying "No access to the General Public".

Things were better in 1970s pre-Reagan America.

I liked Rockford because money didn't faze him. He met a lot of very rich people, but he didn't want what they had. At the ends of lots of episodes he gets stiffed out of his fee or reward money; his reaction is invariably to laugh it off. Sometimes he wins, and celebrates. When he doesn't though he doesn't lose his cool. Money played some part in the game Rockford played, but it wasn't the goal. He didn't worship money or use it to keep score.

Another reason I like The Rockford Files is the sunshine under which a lot of the outdoor shots were filmed. It's 75 degrees here in the middle of winter. Looking at maps in the chilly Pacific Northwest, I wanted to see what some warm weather felt like. Today I went for a swim!

Some more pictures of Paradise Cove, and also the mudrock (?) formations in the adjacent Santa Monica hills, are in this folder of road trip pictures.

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Journal: Stockton

Journal by blue trane

"The Miwok Indians lived in the Central Valley among the delta's waterways, using them for food and transportation." (,_California)

Stockton is a shock after coming from Indian Grinding Rock Park, where the Miwok ground acorns.

The park was relatively quiet, and the air was fresh. Lots of trees.

Stockton is industrialized, with a constant sound of trucks and trains. I'm in a Motel 6, next to a large trucking yard. All through the night trucks drove past. There's also a garbage dump down the road.

I went for a run to get out of the room which was giving me a headache. I passed an electric traffic warning sign on a small trailer, alerting drivers to a street closure. The end date of the closure was 12/31/2013; it's 1/4/2014 now. So they haven't taken away the out-of-date warning sign. Symptomatic of the city's budget problems?

I should have stayed at the park campsite. The charge was $30, and I didn't have it in cash.

This city reinforces the feeling that western civilization has gone completely wrong, and the Miwok had a better idea of how to live. The air was fresh in the park; here, back in the motel room, already the headache is coming back.

What if we had not overrun the Miwok in the mad rush for gold? Things could have been done differently; white settlers could have coexisted with the Indians, mutually benefited. Civilization could have brought technology but learned to keep population down and live in balance with the environment. We could have had a much more utopian setting instead of the Stockton that exists today.

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Journal: Burr

Journal by blue trane

From "Burr", by Gore Vidal, page 420:

An usher opened the front door. In the muddy courtyard, a groom stood with my horse. Jefferson looked at me curiously. "I must say that I had rather thought you would be coming back to live here."

"To this house?" I asked most pleasantly.

"Why not? But I meant to Washington City, to this Congress, representing one of the western states."

"It is still a possibility."

"You ought not to waste yourself, Colonel."

"I do not think that it is I who have done the wasting."

Jefferson blushed; and bade me farewell.

From Matthew Davis's biography of Burr (in the Preface):

I soon discovered that Colonel Burr was far more tenacious of his military, than of his professional, political, or moral character. His prejudices against General Washington were immoveable. They were formed in the summer of 1776, while he resided at headquarters; and they were confirmed unchangeably by the injustice which he said he had experienced at the hands of the commander-in-chief immediately after the battle of Long Island, and the retreat of the American army from the city of New-York. These grievances he wished to mingle with his own history; and he was particularly anxious to examine the military movements of General Washington on different occasions, but more especially at the battle of Monmouth, in which battle Colonel Burr commanded a brigade in Lord Stirling's division.

Further on:

Four days after, viz., the 28th of June, the battle of Monmouth was fought. It was on this occasion that General Washington ordered the arrest of General Lee: 1stly, For disobedience of orders in not attacking the enemy on the 28th of June, agreeably to repeated instructions; 2dly, For misbehaviour before the enemy on the same day, by making an unnecessary, disorderly, and shameful retreat; 3dly, For disrespect to the commander-in-chief, in two letters, dated the 20th of June. On the 12th of August the courtmartial, of which Lord Stirling was president, found Lee guilty, and sentenced him to be suspended from any command in the armies of the United States for the term of twelve months. The history of the battle of Monmouth, with all the consequences that followed, has long since been given to the world by the friends and the opponents of the respective parties. It is only necessary to state here, that Colonel Burr, on that occasion, was ranked among the supporters of Lee, and had himself real or imaginary cause of complaint against the commander-in-chief.

In this action Colonel Burr commanded a brigade in the division of Lord Stirling, composed of his own regiment and some Pennsylvanians, under the immediate command of Lieutenant-colonel Dummer. Gordon, in his History of the American Revolution, says, "The check the British received gave time to make a disposition of the left wing and second line of the main army in the wood, and on the eminence to which he had been directed and was retreating. On this were placed some batteries of cannon by Lord Stirling, who commanded the left wing, which played upon the British with great effect, and, seconded by parties of infantry detached to oppose them, effectually put a stop to their advance. The British, finding themselves warmly opposed in front, attempted to turn the American left flank, but were repulsed."

Shortly after the action had become general, Burr discovered a detachment of the enemy coming from the borders of a wood on the southward. He instantly put his brigade in motion for the purpose of checking them. It was necessary to cross a morass, over which a bridge was thrown. He ordered Lieutenant-colonel Dummer to advance with the Pennsylvania detachment, and that he would bring up the rear with his own regiment. After a part of the brigade was over the bridge, Colonel Barber, aid to General Washington, rode up, and said that the orders of the commander-in-chief were that he should halt. Colonel Burr remonstrated. He said his men, in their present position, were exposed to the fire of the enemy, and that his whole brigade must now cross the bridge before they could halt with any safety. Colonel Barber repeated that the orders of General Washington were peremptory that he should halt, which was accordingly done, and the brigade, in their divided state, suffered severely. Lieutenant-colonel Dummer was killed; Colonel Burr's horse was shot under him; and those who had crossed the bridge were compelled to retreat.

So, Burr had the feeling of being wasted those in command over him at Monmouth.

(More on the Battle of Monmouth:,

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Journal: Israeli inflation

Journal by blue trane


The linkage system was very successful. In major economies around the world, consumers often feel the pinch of just 2-7% annual inflation. But Israelis, who had to deal with a much higher inflation rate, went about their business practically unaffected. For three and a half decades, their real income was protected by this index-linked mechanism. Furthermore, over this period the standard of living rose at an average rate of close to 4% annually.

However perfect, the linkage machine itself was fueling the fire of inflation at an increasing pace. As inflation evolved into hyperinflation, the price spiral was taking a toll on economic output. Dealing with daily linkage adjustments and their repercussions was draining the time and resources of households and businesses.

In July 1985, the government adopted the Economic Stabilization Policy, which called for interference in the economy to an extent that would be considered "reactionary" among economic theorists. A total freeze of prices of all goods and services was imposed and the linkage mechanism was suspended. Everything from price tags in shops and stores, charges for services, prices specified in contracts, wages and public budgets to foreign exchange rates, remained fixed at the exact nominal quotation on the day the policy was declared.

It worked. In 1985, inflation fell to 185% (less than half the rate in 1984). Within a few months, the authorities began to lift the price freeze on some items; in other cases it took almost a year. In 1986, inflation was down to just 19%.

The linkage system was reinstated as soon as the stabilization policy showed signs of success, although the Bank of Israel began to take stricter measures to supervise the monetary aspects of the economy.

Can linkage be automated so that it becomes seamless, and inflation transparent?

Can some method similar to Brazil's response to hyperinflation be used to fight the psychology of inflation?


People would still have and use the existing currency, the cruzeiro. But everything would be listed in URVs, the fake currency. Their wages would be listed in URVs. Taxes were in URVs. All prices were listed in URVs. And URVs were kept stable - what changed was how many cruzeiros each URV was worth.

Say, for example, that milk costs 1 URV. On a given day, 1 URV might be worth 10 cruzeiros. A month later, milk would still cost 1 URV. But that 1 URV might be worth 20 cruzeiros.

The idea was that people would start thinking in URVs - and stop expecting prices to always go up.

From Generating a Sharp Disinflation: Israel 1985, by Michael Bruno:

In the past two years it became evident that balance-of-payments and
foreign reserve difficulties may arise even when the current account
improves, due to problems associated with the capital account. In part, at
least, these problems stem from loss of public confidence in the government's
ability to control the economic system, leading to massive private
purchases of foreign currency and capital flight.

Unfortunately, the most common explanation of rising inflation due
to an increase in the government deficit (argument a) can at best account
for a rise in Israel's inflation rate in the early 1970's but not in
subsequent periods. The step-wise leaps in inflation from 30-40 percent in
1973-76 to nearly 500 percent annually in 1984-85 (point 851 in Figure la
refers to January-July 1985) occurred while the budget deficit, though
large, was more or less stable at 12-15% of GDP (see Table 2).

An alternative and somewhat complementary line of argument to that of
the inflation tax explains the step-wise nature of the inflationary process
in terms of price level shocks (which account for the jumps) coupled
with full monetary accommodation (which explains why a price level shock
translates into a jump in the rate of inflation). The price shocks may be
entirely exogenous (e.g. oil and raw material price increases in 1973 and
1979 or the shock introduced with the October 1977 reform) or may be
induced by balance of payments difficulties (leading to devaluations and
price increasing fiscal measures such as subsidy cuts, as in 1974, 1983,

Why, under this view, has inflation almost always only gone up and not
down ? one reason may be that positive and negative price shocks are not
symmetric in their effects on the dynamics of inflation. When the general
thrust of fiscal and monetary policy is expansionary and there is a temp-
orary unexpected downward shift in the inflation rate expectations will
not be revised downward. The effect of such asymmetries is to make a
sequence of positive and negative shocks of zero mean impart an upward
thrust to the inflation rate.

So, inflation is psychological to a large degree. It seems there are wild expectations of inflation that fuel themselves. The fix for inflation is to somehow get people to stop expecting inflation; I think the actual budget deficit amounts don't really matter. It's the perceived effects of deficits in people's minds. Change those prejudices and you can deal with inflation without having to reduce government spending.

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Journal: Govt deficits and private surpluses 2

Journal by blue trane
In Gurley and Shaw's Money in a theory of finance, Table 3 on page 29 presents a "social balance sheet" for a "rudimentary finance" economy. In the table, the government's tax receipts are zero, while its purchases of goods and services are 10. So the government runs a deficit, in this "Rudimentary Finance" model. Further on (pages 38-39):

We have shown that real incremental demand for money during growth can be satisfied, in the rudimentary economy, by deflation of prices and money wage rates. But it can be satisfied too by growth in nominal money at stable levels of prices and money wage rates. If price and wage levels are to be stable during growth, the private sectors of the rudimentary economy must maintain surplus budgets and government must run a continuous deficit. The private sectors must save, lend, and accumulate nominal money while government must dissave, borrow, and issue money.


I think Stephanie Kelton makes a similar point, in What Happens When the Government Tightens its Belt? (Part I) and Part II. From Part I:

Because the economyâ(TM)s financial flows are a closed system - every payment must come from somewhere and end up somewhere - one sectorâ(TM)s surplus is always the other sectorâ(TM)s deficit. As the government "tightens" its belt, it "lightens" its load on the teeter-totter, shifting the relative burden onto you.

This chart drives home the point graphically. Kelton's model is not "rudimentary"; it models the existing economy. Gurley and Shaw are talking about price and wage stability during growth. But the overall idea is the same: public sector deficits are necessary for private sector profits.

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Journal: Focus vs. Dispersion

Journal by blue trane

Just awoke from a dream where I felt Tracie was influencing it, lying in the next bed in this hotel room. We've made an appointment for Tykee and Buddy at a vet tomorrow, in Seattle, and decided to take all the birds on a little vacation, to spend the night in this hotel, before going to the vet's tomorrow, further north.

In the dream I experienced a series of sensations I can best describe by comparing them to tubes. At first I was a tube that bent, flexibly; then I became aware of a straightening, strengthening impulse; the tube that I was became focusing, as if electricity sent through it would travel straighter, faster. Or if a bullet was shot through it, the bullet would go further because the tube protected it from outside influences such as wind.

At first the stronger, straighter, focusing tube seemed obviously better than the bent, flexible, dispersive, porous one that I had been before. But I was uncomfortable, made more so by Tracie's audible groan or snore that accompanied me waking up with the thought of these two tubes still vivid. It seemed as if she was highlighting or reinforcing the thought that the straighter tube was better; but I wanted to resist that idea.

Other episodes followed, containing the same theme of a flexible, dispersive tube followed by a straighter, more rigid, more focusing one. Each set of tubes was conveying something different; a bullet, then sound, then electricity, photons, light, etc.

At the end of each episode, Tracie woke me with some audible sound, a grunt or a groan or a snore, and I had the feeling she approved of the more focused tube that I had become (or become aware of) in the dream. But I resisted the idea that the focused tubes were better.

In thinking about the series of dream episodes, I realized I was more naturally bent towards the dispersive element, the unfocused tubes that spread out signals. I think there is some dispersive vs. focusing force in nature. I think society currently chooses to reward the focusing impulse. This is arbitrary, a fickle whim. Why can't society support both forces? It is a matter of politics, policy, not physics. The two forces exist in nature without judgment; why can't society let them coexist without prejudice?

I thought that birds tend towards the dispersive, the chaotic, the spreading: bird calls have wide frequency ranges, spread out over a broad spectrum rather than focused like a tuning fork. Birds also disperse seeds far and wide. When birds eat they shake their heads, spreading some of the seeds they're eating around them.

Armstrong's trumpet sound is like a bird call in that it too is spread out over a wide frequency range. Armstrong's genius was that he could also focus, play perfectly in sync when he wanted with other performers. Armstrong could combine the two tendencies for dispersion and focus, for discipline and elasticity, in one performance or in one note.

In monetary policy, the two forces are called "discipline" vs. "elasticity". My tendency is to support elasticity, creating more money, expanding the money supply, ending the artificial scarcity of money. The disciplinary approach believes in making money scarce, raising interest rates, forcing austerity policies on others.

I think monetary and/or fiscal discipline should be voluntary. Each individual should decide for themselves if they want to practice austerity in their own lives. Government should enable each individual to make a free choice, for themselves. Government can encourage austerity but should not impose it.

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Journal: Balancing Budgets

Journal by blue trane

I think balancing budgets becomes a fussy compulsion, almost a fetish: you want things to look neat. You want the figures to come out even, regardless of the consequences for individuals you don't know, far off at a distance somewhere. When the people who experience the repurcussions of your budget-balancing have no communication with you, and you only hear about their plight mediated through many third parties, it becomes easy to tell yourself a story about why they are suffering, and ignore or discount their real situation; because your own story, that you want your ledger book to "look nice", is so much more compelling and immediate.

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Journal: Detroit's bankruptcy 4

Journal by blue trane

From a thread in the Economics of Money and Banking, Part Two MOOC:


The money view? Banking regulations? Exploitation? Why did this happen?


Robert S Mitchell:

"In the swap deals, the banks would pay the city if rates rose, while the city would pay the banks if they fell. As it turned out, rates fell and the city had to pay the banks about $50 million a year and pledge $11 million a month in casino tax revenue as collateral."


"Detroit's financial expenses have increased significantly, and that is a direct result of the complex financial deals Wall Street banks urged on the city over the last several years, even though its precarious cash flow position meant these deals posed a great threat to the city. The biggest contributing factor to the increase in Detroitâ(TM)s legacy expenses is a series of complex deals it entered into in 2005 and 2006 to assume $1.6 billion in debt. Instead of issuing plain vanilla general obligation bonds, the city financed the debt using certificates of participation (COPs), which is a financial structure that municipalities often use to get around debt restrictions. Eight hundred million dollars of these COPs carried a variable interest rate, which the city synthetically converted to a fixed rate using interest rate swaps.

These swaps carried hidden risks, and these risks increased after the Federal Reserve drove down interest rates to near zero in response to the financial crisis. The deals included provisions that would allow the banks to terminate the swaps under specified conditions and collect termination payments, which would entitle the banks to immediate payment of all projected future value of the swaps to the bank counterparties. Such conditions included a credit rating downgrade of the city to a level below âoeinvestment grade,â appointment of an emergency manager to run the city and failure of the city to make timely payments. Projected future value balloons in low, short-term rate conditions. This is because the difference between the fixed swap payments made by the city and the floating swap payments projected to be paid by the banks increases. Because all of these events have occurred, the banks are now demanding upwards of $250-350 million in swap termination payments."


I wonder if the LIBOR rate manipulation affected Detroit's interest rate swaps, since LIBOR was manipulated downward, and Detroit's swaps were long on rates.



It seems like fraud on the public to me. Thank you for your information.


Robert S Mitchell:

I was reminded of Professor Mehrling's explanation of how AIG failed, in Lecture 20 "Credit Derivatives". From the Lecture 20 Notes:

"When the referenced risky asset started to fall in price, the value of the insurance rose. This is a liability of AIG, so it cut into their capital buffer (AIG had no dedicated reserves against these CDS because it thought they were essentially riskfree). Not only that, but AIG had agreed to post collateral, and mark the CDS to market, so these losses were not just book losses but involved payments into a segregated account that Goldman Sachs controlled, about 30 billion at the time AIG failed."

AIG was exposed on credit default swaps, Detroit was exposed on interest rate swaps. But in both cases, the banks on the other side had written into the contract terms that triggered big payments, in case of a ratings downgrade for example. So when rates went down, Detroit was downgraded by the ratings agencies, and UBS (similar to what Goldman Sachs did in the case of AIG) demanded payment immediately of the future projected values of the swaps.

The Fed bailed AIG out, though. From wikipedia:

"AIG's credit rating was downgraded and it was required to post additional collateral with its trading counter-parties, leading to a liquidity crisis that began on September 16, 2008 and essentially bankrupted all of AIG. The United States Federal Reserve Bank stepped in, announcing the creation of a secured credit facility of up to US$85 billion to prevent the company's collapse, enabling AIG to deliver additional collateral to its credit default swap trading partners."

Why doesn't the Fed and/or the government step up to help Detroit? Why not have a SIGTARP for distressed cities, and states?

According to Kevin Puvalowski, testifying before Congress, shown in Q&A with Neil Barofsky, from about 50:35 to 51:13:

"And if you add all of those programs up, and assume that every program was fully subscribed at the same time, you get a total amount of support, from the government, of 23.7 trillion dollars."

$23.7 trillion for banks, but the government can't help Detroit with something like $18 billion? (And that figure might be inflated to better make the Emergency Manager's case).

SIGTARP mentions "retirement accounts" as a concern of the FRBNY leading to the AIG bailout, on page one of its report. Why isn't it concerned about the retirement accounts of the inhabitants of Detroit?

User Journal

Journal: Gore Vidal's "Burr"

Journal by blue trane

From pages 252-253:

The Colonel stopped abruptly; pushed aside the various depositions on the baize-covered table.

"Let us turn to less weighty matters. Let us consider the home life of Massa Tom, in the autumn of 1795."

From pages 255-256:

At about ten in the morning toward the end of September, I stood below the hill on which the mansion Monticello was a-building. All was confusion. A large forge manned (or rather boy-ed) by a dozen black children was turning out nails. The apostle of the agrarian life gaily admitted to now being a wholesale manufacturer.

"I have no choice," said Jefferson who greeted me at the smithy. "The crops pay for rebuilding the house. The nails pay for groceries. I calculate at my present rate of production I shall be out of debt in four years." I complimented him. I too have had my nail manufactories which were to get me out of debt. But somehow the nails never do the trick.


Suddenly Jefferson's horse shied. Savagely he jerked at the animal's mouth till blood came with the foam; all the while using his whip until the poor creature was heavily wealed. It was my first experience of the way he always treated horses.


We rode through a meadow filled with brick kilns. Slaves were everywhere, hard at work. I was surprised to see how "bright" they were. I do not know if that word is still in use in the south, but in those days a slave with a large degree of white blood was knows as "bright." It made me most uneasy to see so many men and women whose skins were a good deal fairer than my own belonging to Mr. Jefferson.


From page 257:

"I inherited the bright slaves from my father-in-law John Wayles." Jefferson sighed. "It is no secret - there are no secrets in Virginia - that many of them are his children." Sally Hemings was a daughter of Wayles which made her the half-sister of Jefferson's late wife. Certainly the girl bore a remarkable resemblance to Martha Wayles, if the portrait in the dining-room at Monticello was to be trusted. Amusing to contemplate that in bedding his fine-looking slave, Jefferson was also sleeping with his sister-in-law! One would have enjoyed hearing him moralize on that subject.


From pages 263-264:

I indicated the small boy who was now perilously climbing a tree. "Your grandson is going to hurt himself."

Jefferson flushed deeply. "That is a child of the place. A Hemings, I think."

Since the child was obviously son or grandson to him, I had seriously blundered and, as in law, ignorance is not a defence. It was a curious sensation to look about Monticello and see everywhere so many replicas of Jefferson and his father-in-law. It was as if we had all of us been transformed into dogs, and as a single male dog can re-create in his own image an entire canine community, so Jefferson and his family had grafted their powerful strain upon these slave Africans, and like a king dog (or the Sultan at the Grande Porte) Jefferson could now look about him and see everywhere near-perfect consanguinity.

Them as has, gets.