Tuesday, December 7, 2010

Libertarians VII Real World Fatal Errors of Objectivism (Part C) 96

Libertarians have the wrong heroes; the ideal exemplars are profoundly inconsistent
John Galt leads a strike with no organizatiuon, no demands, no potential for negotiation, and the strike leaders themselves comfortable and out of reach. Another strike leader pretends to be a playboy in order to bankrupt corrupt corporations. The libertarians themselves have spent decades needling the political process with wonky positions and candidates who never win. Perhaps this is because they stand for minimal government (“minarchism”) or anarchy with capitalism triumphant (anarcho-capitalism). This makes no sense to me: capitalism comes exclusively from a stable government with a stable currency and established due process and rule of law. A capitalistic corporation is a legal fiction, an organization that exists entirely at law. For such a structure, anarchy is inherently poisonous. Where is libertarian support for a stable currency, for equality under the law, for ending the under-prosecution of white collar crime? Too often libertarians are merely nerds providing us with poor copies of Ayn Rand's art deco heroes; this doesn't get traction in the real world.
Libertarians are astoundingly stupid about human nature, specifically, the human personality
     The proof is their awesome deafness to the grand masters of human nature
Shakespeare wrote about the enormous difficulty of transferring power to another generation, of preserving one's conscience, of dealing with suspicion and mistrust. His personae adopted to the changes in their lives and grew in complexity. Rand flippantly dismissed Shakespeare as a “naturalist” and her followers don't waste their time on him. Greek mythology is another gold mine abandoned by the libertarians. The Greeks have a coded tapestry of wisdom in their mythology – the real story is in the relationships between the Olympian gods and the genealogy of emerging gods. These are stories that have been told for thousands of years, though they don't register as significant to the libertarian elite. And why is their no place in the libertarian pantheon for the great French anti-statist La Rochefoucauld? Who never wastes a word with his Maxims?
Libertarians quarrel among each other to the point of babbling and incoherence
The link in the immediately previous blog posting to Chris Wolf's article on libertarianism as a group of mutually hostile sects is a classic. It strongly indicates that Rand didn't do her homework with respect to explaining her philosophy in terms cogent and consistent with the profession and its specialties; hence, unending subsequent quarrels. See also Walker's “The Ayn Rand Cult” from the previous links.
Libertarians do not understand power at all; therefore they deserve none
     Libertarians talk about reason and logic but are amateurs at logical argumentation
     Libertarians know nothing about the wise application of power
          coming from wisdom literature
          coming from game theory
              coming from new forms of logic (such as contract bridge bidding conventions)

Apparently the libertarians believe the state is unnecessary and should be systematically destroyed. But humans enjoy living in a stable sociopolitical structure and are loathe to leave it. There's a lot more to government than protection from physical violence. There should also be the ability to peacefully arbitrate civil disputes. There must be a justifiable confidence in the operation of the state's police power, a realistic judgment in favor of a state's actual performance with respect to due process. Strengthening this process is not statism nor parasitism.

The Norman barons didn't gather at Runnymede on June 15, 1215, to establish a capitalistic utopia. They gathered to place a limit on state power and perfect the institutions of government themselves, rather than eliminate government nor perfect it. Instead they sought to limit government power and channel it to specific necessary functions while outlawing egregious and existing excesses.
Rather than asserting that they knew all the answers, they were patient enough to accept a system in which time and precedent, English Common Law, would provide stable guidance rather than either arbitrary power or reductionist legislation.
Libertarians do not demonstrate a clear understanding of logical argumentation. They tend to quarrel among themselves and immediately label any outsider who questions their conclusions. Argumentation is a contract between parties to arrive at the truth, not a mere game of posturing and garnering followers. When an issue is know fully known, though a decision is required in the near future, an approximation of truth, a strong inference, is acceptable to proceed further with the search. Libertarians seem to abhor these approximations and likelihoods. Only eternal and embedded absolutes are ever accepted for consideration of truthfulness. It thus provides an impossible standard that prohibits any action at all from being taken.
Whether to fight politically, as well as whom to fight, are questions requiring wisdom. This requires wisdom and common sense with respect to tactical politics. But such guidance seems to be lacking in libertarians, who rely on written instructions and the tomes of current psychological, epistemic or philosophical fads. The Roman writers on governance, the Renaissance thinkers about the nature of government, the reformers and the realists (and here I mean La Rochefoucaud and Machiavelli a well as the train of philosophers and writers in England who led to John Locke, where existed the voice of a respected founding source of limited government?)  Respect and understanding for the wise application of power is nowhere evident among libertarians.
There is new knowledge available to the discipline of governance, particularly, game theory. Though this should be very useful in demonstrating the utility of minimalist government, I can find no interest in this area by Libertarians. Reason itself is affected by these advances. The advent of clever new conventions in contract bridge bidding, just as an example, represent a new form of logic. And this clever game knowledge has a great deal to do with decision of whether a government should take action or not, go to war or not, go to court or not, expand services or not.
Libertarians seem too often thoroughly fascinated with an ideal world that is unlikely to come to pass.

The Libertarian philosophy is dangerous and potentially ruinous to civilization

The example here is Alan Greenspan and his management of the Federal Reserve as derivatives grew larger and larger as unregulated financial instruments. Here is a timeline of events over the last 37 years that has led to the present financial and banking quagmire. Note the insignificant predictive power of Alan Greenspan and his consistent siding with the bringers-of-disaster rather than with common sense, rule of law, responsibility and simple learning from the examples of failure that provided ample warning along the way.

= = = = = Derivatives Crisis Timeline of Developing Events = = = = = = = = = =

Derivatives Crisis TIMELINE

1972 Accounting standards in the U.S. No longer generated by public accountants through the Accounting Principles Board but by the seven-member Financial Accounting Standards Board (FASB) including required members from industry, academe, and financial analysts in addition to members from public accountancy. Thus the politicization of accountant rules began in earnest.

1973 Fischer Black, Robert Merton and Myron Scholer develop a formula which sets a price on an option. This formula, adopted from a physics formula for transfer of heat in liquids, eventually wins a Nobel prize.

1973 Chicago Board Options Exchange opens

1982 James Simons starts Renaissance Technologies, commonly called “Rentec,” one of the first and most important firms specializing in automated trading. Algorithmic trading or automated trading, also known as algo trading, black-box trading or robo trading includes a special class called “high frequency trading.See:


October 19, 1987 Stock market losses 22% of value in a single day

Late 1987 -- Plunge Protection Team formed

1988 Renaissance Technologies launches the Medallion Fund, which includes commodities futures, treasury bonds, currency swaps, and foreign bonds. Essentially swallowed Axcom Trading Advisors in 1992. This fund has become one of the very most successful speculative funds and charges high fees.

Fall 1993 Metallgesellschaft refining and Marketing US subsidiary closed after American subsidiary’s offer to oil companies of a fixed price for ten years collapses.

1994 Orange County California went broke over interest rate spread differential bets. The bankrupt county recovered $400 million of its losses from Merrill Lynch.

1995 Bankers Trust loses $200 million lawsuit over its derivatives.

February 1995 Barings Bank, Britain’s oldest merchant bank, goes broke because of $1 billion in unauthorized trading by Nick Leeson

mid-nineties: APL computer language came out of Harvard. This is a language of compact instructions, so dense that it is difficult to edit and very difficult to proof the language for programming errors. This language and its offshoots is typically used for the “iterations” on which derivatives contracts are initially valued.

April, 1998, Commodity Futures Trading Commission (CFTC) Chair Brooksley E. Born meets with Greenspan, Rubin and Levitt and loses the fight to have all derivatives conform to CFTC requirements

May 7, 1998, CFTC issues a “concept release” about derivatives and their risk

July 5, 1998 Salomon Brothers arbitrage unit announced as disbanding

August, 1998 Russia defaults on its loans

September, 1998, Long Term Capital Management fails

Late 1999 Gramm-Leach-Bliley Act is passed, dismantling the walls separating commercial banks, investment banks and insurance companies. The act did not provide for any SEC oversight of investment bank holding companies.

December 15, 2000, the Commodity Futures Modernization Act is passed (authored by Senate Banking Committee Chairman Phil Gramm [R-TX]). Details are at:


2004 SEC proposes a voluntary system of market regulation. The big investment banks opted to join but the holding companies would be permitted to follow their own computer models to assess how much risk they were taking. The SEC would get access to make sure the complex capital and risk-management models were up to the job.

2005 Renaissance Technologies launches the Renaissance Institutional Equities Fund for institutional investors.

2006 High frequency trading accounts for 60% of trades on the London Stock Exchange. The percentage of trades attributable to high frequency traders would increase in 2007 and 2008 for both the London and New York exchanges.

March 17, 2008 Bear Stearns (a large investment bank) acquired by JP Morgan Chase with FED guarantee

September 7, 2008 Fannie Mae and Freddie Mac placed in conservatorship by Federal Housing Finance Agency

September 14, 2008 Bank of America announced its intention to acquire Merrill Lynch (transaction finalized on December 5, 2008)

September 15, 2008 Lehman Brothers files for bankruptcy

September 16, 2008 A.I.G. is suddenly broke from a derivatives-based liquidity crisis. Fed loans AIG $85 billion.

Third week of September, 2008 – US stock market tanks

September 25, 2008 Washington Mutual seized by the Office of Thrift Supervision

September 26, 2008 SEC Chairman Christopher Cox shuts down the voluntary program. All five brokerages in the program had either filed for bankruptcy, been absorbed or converted into commercial banks.

September 28, 2008 SEC suspends the “mark to market” rule of a new pronouncement, FASB 157, although it has no authority to do so.

October 9, 2008 FED loans AIG another $37.8 billion

November 10, 2008 US Treasury announces it will purchase $40 billion in new AIG preferred stock (this is in addition to the two previously mentioned FED loans).

2009 High frequency trading accounts for 73% of all equity trading in the USA. James Simons, founder of Renaissance Technologies, retires.

May 6, 2010 a “flash crash” of extreme volatility occurs and is blamed on high frequency trading. Congress is still investigating as of September, 2010.

September 21, 2010 “Preliminary report” by the Securities and Exchange Commission and the Commodities Futures Trading Commission on the flash crash released – see http://www.sec.gov/sec-cftc-prelimreport.pdf

= = = = = = = = = = and = = = = = = = = = =

Libertarianism is directly responsible for the greatest non-warfare crisis in human history
     As this crisis developed, libertarians were easily co-opted, manipulated, manipulated, and herded like cattle
Here's how it can be done by the pros

[this is a vital, brilliant, thorough link – please read it carefully]

William K. Black - professor of economics and law, and the senior regulator during the S&L crisis - pointed out last week, Austrian economics has been twisted by the powers-that-be and bastardized into a basis for arguing that there should be no prosecutions for fraud or criminal conduct
quote from the link immediately above

a rule against fraud is not an essential or even necessarily an important ingredient of securities markets” – an incredible statement made in Easterbrook and Posner's 1991 economics and law textbook quoted in the link immediately above

“Fraud is impossible because securities markets are “efficient” and act as if they were guided by an “invisible hand.” Markets cannot be efficient if there is accounting control fraud, so we know (on the basis of circular reasoning) that securities fraud cannot exist. Indeed, when Easterbrook and Fischel try to explain why the securities markets automatically exclude frauds their faith-based logic becomes even more humorous. They claim that honest securities issuers send one or more of three “signals” of honesty to guide investors to purchase their securities – and that only honest firms can send any of these three signals.
1. Hire a top tier audit firm
2. Have their CEO own a substantial amount of stock in the company
3. Cause their firm to have extreme leverage “
  • this quote from the link above exactly matches Alan Greenspan's 1998 opposition to Brooksley Born's contention that all derivatives should be traded on listed exchanges (see my timeline above in this blog post). Greenspan certainly knew of the frauds of the early 90s listed in my timeline. Certainly.
Greenspan's opposition to listing all derivatives on a regulated exchange was decisive in allowing them to remain privately traded without supervision (“over the counter” is the industry nickname). Greenspan did not oppose the repeal of Glass-Steagall by the Gramm-Leach-Bliley Act of 1998* nor the trading of derivatives free from state regulation in The Commodity Futures Modernization Act of 2000**.

*Gramm-Leach-Bliley overturned the Glass-Steagall 1933 prohibition of combining insurance companies, brokerage firms and banks. The 1933 act was a result of the market crashes in 1929 and 1931. It sought to protect consumers from large organizations combining these functions to their own profit against individual investors.

** The Commodity Futures Modernization Act of 2000 redefined over-the-counter derivatives between “sophisticated parties” as instruments not to be regulated as futures under the Commodities Exchange Act or as securities under the federal securities laws. This act also renewed a 1992 provision preventing states from regulating such instruments as gambling activity.

Thus the multi-trillion dollar crash of 2008, leading to international markets hanging in threat of a follow-on crash, can be laid at the desk of Alan Greenspan, who made the critical decisions in 1998 and 2000 based on a libertarian ideology rather than the facts and the obvious threat of fraud inherent in keeping them unregulated and free from the constraints and reporting requirements of exchanges. Libertarian ideology has created a “rolling” worldwide financial crisis. The notational value of all derivatives worldwide is between $1.4 and $1.6 QUADRILLION dollars, or $1,400 to $1,600 trillions. This is covered by a worldwide economy of $70 trillion. It is the hugest ever non-warfare crisis in worldwide history.

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