Book Review 353: Against the Gods

AGAINST THE GODS: THE REMARKABLE STORY OF RISK, By Peter L. Bernstein. 383 pages. Wiley paperback, $18.95.

When “Against the Gods” was published in 1996, it was taken seriously. Parts of it still can be, but subsequent events have turned Peter Bernstein’s thesis into a bad joke.

His idea is that over a period of around 800 years, men (no women) thinking about mathematical descriptions of events figured out how to manage risk for the good of all of us.

Only in the past generation, though, did they really nail it. Prior to that time, humans considered themselves at the mercy of fate or capricious deities — hence the title. These mathematicians showed how there are regularities and constraints that we can use to guide our planning. Good for them.

It began with gamblers trying to understand their chances. These chances are now very well understood, at least by those who understand them. The casinos are full of people who do not.

In the 19th century, the mathematicians began to try to understand far more complex systems, including those in which humans can make choices. The villain here was Francis Galton, who wildly overinterpreted some apparent regularities that appear across unrelated systems.

This is the reversion to the mean, and here is where Bernstein starts becoming ridiculous.  Especially as it is applied to markets, which was Bernstein’s job. He had a company that advised fund managers.

If you think about it, it is really hard to find examples of any system that reverts to its mean. Physical systems have to come to equilibrium, and the example of a balloon obeying the ideal gas laws is probably the favorite example.

But it is hard to find an example of a real physical system reverting to a mean; or even to define such a mean. Did the atmospheres of the Moon and Venus revert to a mean? Is a black hole a reversion to a mean?

The temperature of the Earth, which has not varied too much from its current value for nearly 4 billion years, is the only example I can think of.

Anyway, when it comes to stocks and other investments, Bernstein is downright comical. The price of tulip bulbs, for example. They went way up in the 17th century and then came down, which Bernstein says should not have surprised investors who got in late. But today I can buy a tulip bulb for a fraction of a fraction of a fraction of a penny of the 17th century price; the price is so low that it cannot be computed in terms that would mean anything to a resident of Amsterdam 400 years ago.

So what mean was that reverting to?

As Bernstein finished “Against the Gods,” two of the book’s heroes, Merton and Scholes, were advising a hedge fund, Long Term Capital Management, how to manage risk. By the time the paperback edition came out, LTCM was broke and, far from reducing overall risk, it was so big that it had manufactured global systemic risk that had not existed before.
In his summation, Bernstein does recognize the joker in the deck, although he fails to assign it its proper weight.

By the ‘90s, the people who thought they understood how to manage risk — and were paid immense amounts to do so — were in love with derivatives. Handicapping the first wave of disastrous derivatives in the early ‘90s, Bernstein opined:

“There is no inherent reason why a hedging instrument should wreak havoc on its owner. . . . These disasters in derivative deals among big-name companies occurred for the simple reason that corporate executives ended up adding to their exposure to volatility rather than limiting it. They turned the company’s treasury into a profit center (once they noticed that hedges, which are a zero-sum game, sometimes yielded big gains).”

But nothing is more predictable than that managers in a free market system will do so. They have to, and everything in their ideology tells them they are right to do so.

Bernstein’s final pages are odd. After spending 300 pages telling us that risk has become scientifically manageable, for the benefit of all of us, he then describes how it hasn’t.

Long before the Bush Crash, the mortgage crisis in derivatives was brewing — it had nothing whatever to do with the Community Reinvestment Act — and here Bernstein did almost anticipate risk correctly. Though only in a footnote, he warned: “these mortgage-backed securities are complex, volatile, and much too risky for amateur investors to play around with.”

Too risky for the pros, too. I wonder what Peter L. Bernstein Inc. was advising its clients about mortgage-backed securities in 2006-7 or thereabouts. 

(I just realized that this Bernstein is the same idiot who wrote “Wedding of the Waters,” a ridiculous book about the Erie Canal. I wish I had connected the names sooner and not wasted my time on this silly book. On the other hand, Bernstein was in his time an influential popularizer of theories of investment, so it was useful to learn what doofus ideas Wall Street will buy.)







 

Institutional amnesia

“My first job as speaker is to protect the institution,” Mr. Boehner said, as he left the institution of the House of Representatives.

I wonder what  the Speaker thought he was doing for the institution when he allowed it to conduct 54 -- or six, if you use rightwing math -- pointless votes to end Obamacare.

This is a newly popular meme among rightwing failures. Just last week, Scott Walker announced that he was protecting the nomination process by leading himself out of it:

"Today, I believe that I am being called to lead by helping to clear the field in this race so that a positive, conservative message can rise to the top of the field," Walker said.

I guess Bob Dole was the last consciously humorous Republican but he wasn't nearly as funny as these guys.

American Hezbollah

One of the very favorite claims of historically illiterate rightwingers (which is almost all of them) is that the Democratic Party was the party of the Ku Klux Klan and that for a long time some of its most powerful leaders were racists of a brutal and blatant sort.

All true. Up to a point. Southern rightwingers -- racists and theocrats for the most part -- were Democrats for a century following the Civil War, although they made for an uncomfortable fit with a party that, observed nationally, was urban, wet, pro-labor and full of Catholics and Jews.

The typical Southern Democrat was rural, dry (at least publicly), anti-labor and hated Catholics and Jews. (Growing up Catholic in Georgia, I learned that firsthand.)

(As an historical side note, it is common for political parties to keep their old names while they evolve into something more or less opposite of what they were: in France the Radicals turned into a rightwing party; and similar changes can be found in many countries, including ours.)

It was not inevitable that the Democratic Party would be captured by its liberal wing and shed its racists and anti-Semites and theocrats. Party managers could not point to any national election won by a Democrat that could have been pulled off without the Solid South. And as long as the seniority system was regnant in Congress, the party relied on long-serving Southerners to keep control of the committee apparatus.

So it was somewhat of a surprise in 1948 when the national party embraced a mildly egalitarian platform (following a rousing speech by the young mayor of Minneapolis, Hubert Humphrey), and allowed itself to split on racial lines with South Carolina racist Strom Thurmond bearing the  banner of the Dixiecrats.

There was no comparable division in the Republican Party, no sectional powerhouse pushing that party in the direction of intolerance.

So when the Republican Party became the party of racism, it did not jump. It was pushed.

The pusher was Richard Nixon, a man that historian Rick Pearlstein calls the master politician of his age. (He makes a good case for that in "Nixonland.")

Nixon was a closet racist, so he had no personal qualms about trying to change the ethos of the party. In those days, the party still took pride in its Lincolnesque origin, and it had a liberal wing, and even a few Jewish leaders, like Sen. Jacob Javits.

It is remarkable that Nixon was able to pull off his Southern Strategy. The appeal of the anti-labor, militaristic party to Southerners was apparent, but it was not superficially apparent why the national Republicans should want to embrace the violent, scummy Southerners.

But he managed it without a whimper from the national party, suggesting that the party's more or less tolerant platforms were no more than a form of political nostalgia. It turned out the national party was full of anti-black and anti-Semitic haters, and all they needed was a leader to tell them it was acceptable not to to admit it but to legislate it.

This is not controversial history. Observers at the time noted it and people still living (like me) can remember how it happened.

Only recently, as part of the Big Lie campaign of vilification have Republican partisans taken to jeering at Democrats as -- still -- the party of the KKK. 

So we have the theocratic, historic Democrat Kim Davis -- or at least her lawyer -- to thank for a breath of honesty today. Davis was a Democrat because people in her part of the country are Democrats by habit. There is no evidence that she shares any political ideas in common with the party.

So she's turning Republican. She and her whole family, we are told. Significantly, she did not wake up and discover that the Republican Party was in tune with her theocratic notions. Her recent personal history revealed to her that the Democrats aren't. You may think she has not been paying attention for about the last 50 years, but better late than never, I guess:

“She has come to the conclusion that the Democratic Party has left her,” Mathew D. Staver, a lawyer for Ms. Davis, said in a statement.

I don't know if Davis is a racist. I've seen no indication that she is. If she isn't, her new friendship may be a bit awkward.

But anyway, thanks Kim Davis. You may be a bigoted homophobic hypocrite living in sin with a man who isn't your Christian husband, but you are a political realist.

Why have a CEO?

Some leftists have agitated for years against the high pay of American business executives, at least the ones at the tippy top. In the rest of th world, including Europe, CEOs are paid much, much less.

But what if they have misstated the problem? What if businesses don't need CEOs at all?

Take Volkswagen. It's fired CEO, Martin Winterkorn, says he had no knowledge of a scheme to fake emissions equipment.

I don't believe that, but what if he is being honest?

Somebody was in a position to bet the company. And did, and lost the bet.

So what was the point of having a chief executive?

Muslim v. Adventist cage match

I have been waiting in vain for the commentariat to say the obvious about Ben Carson's candidacy. But nobody has, so RtO will have to do it from scratch. (I hate when that happens.)

As an example in point-missing, take today's Washington Post analysis of the polls. Reporter Janell Ross is surprised to find that Carson's support among evangelicals, while high, is not his basic strength, or even as high as Trump's share.

Well, duh. Carson is a Seventh-day Adventist. Obviously, most evangelicals -- low information voters if ever there were any -- don't know that yet, although I interpret the low number as a sign they are beginning to find out.

Evangelicals hate Adventists even more than they hate Mormons or Catholics. And since evangelicals count for the most in Republican primaries, Carson is finished.

As RtO pointed out a few days ago ("Changing  faces of the candidates," Aug. 27), there's never been a Catholic winner since Kennedy, and he won by stuffing ballot boxes. It's possible the nation will someday elect a Catholic president, although I doubt that day is close, but an Adventist? Never gonna happen.

Even if Carson throws the holy rollers some red meat about Muslims.

The Fireproof Hotel approach to business

In a market economy, you will almost always win if you can fake it.

I have called this the Fireproof Hotel phenomenon, but it operates everywhere.

In mail-order Viagra, for example. If you don't actually put any Viagra in it, you get the money but the customer never complains. Sweet.

In fact, the whole dietary supplement business is based entirely on the Fireproof Hotel strategy:

Canadian researchers tested 44 bottles of popular supplements sold by 12 companies. They found that many were not what they claimed to be, and that pills labeled as popular herbs were often diluted — or replaced entirely — by cheap fillers like soybean, wheat and rice.

But, as I say, it operates everywhere. In the supply of replacement parts for aeroplanes. And in cars.

Here's how it works. The honest businessman (assuming you can find one) wants to market his hotel rooms as safer, so maybe he can charge more because the rooms are better, so he spends a lot of money to build a Fireproof Hotel.

His competitor just paints "Fireproof Hotel" on the side of a cheap firetrap, charges the same as the honest businessman and pockets the difference. Over time, the fake "Fireproof Hotel" is preferred by investors because it earns a higher rate of return (its management is "more efficient") and the real Fireproof Hotel has to pay an additional penalty (on top of its honest construction costs) to borrow capital, if indeed it can access capital at all.

Along the way, the occasional traveler will be burnt alive, but, hey, that's just part of the risk/reward system that guarantees that some entrepreneurs will succeed while others fail.

And that's what the story about Volkswagen's sensors that defeat emissions controls is all about.

The man responsible for the death-dealing software, Ferdinand Piech, was recently ousted, and it would be nice to say that it was retribution for cheating, but in fact it appears it was because Piech was not ruthless enough.

Capitalism can be cruel, even to capitalists. but the cruelty is relative. The drivers killed by GM's and Toyota's killer technologies are still dead but Piech is still a living multibillionaire -- about $9,000,000,000.

Enjoying it less

I am enjoying the Republican race for the bottom, er, presidency a lot less than I expected.

True, the stupidity level is even higher than it was in 2012 when Bachmann and Santorum defined the lower level. This year, heaven help us, they'd be in the top 2 quintiles. Well, top 3 anyway.

It's the meanspiritedness that's taking the joy out. It's hard to believe that I could ever miss Reagan's pollyannish high spirits, and I don't. But it turns out there's worse things in a politician than being an ignorant, superstitious soap salesman.


 And no, I'm not thinking here of Trump. Everybody else is doing that. Penn Jillette already said all that needed saying last year.

I am thinking of Jeb Bush and his hard-to-believe response in the second debate about his brother:

“As it relates to my brother, there’s one thing I know for sure,” Bush quipped. “He kept us safe. I don’t know if you remember, Donald. Do you remember the rubble, you remember the firefighter with his arms around him? He sent a clear signal that the United States would be strong and fight Islamic terrorism. And he did keep us safe.”

The blogosphere jumped on Bush, posting pictures of the flaming world Trade Center.  That was useful but unfair.

Clearly, Bush was not referring to what Bush II did or didn't do prior to the attacks of Sept. 11, 2001; and we can argue fruitlessly about whether that could have been avoided.

Just as clearly, what Bush III meant was what Bush II did after Sept. 11. So it is fair and necessary to parse what Bush III must think about that.

The invasion of Afghanistan failed but it was at least intended to address the situation revealed by September 11. But no one can assert that the invasion of Iraq had anything to do with al Queda.

And Bush II did not keep Americans safe in Iraq. If you can believe Wikileaks, the total was something over 3,000 killed. (The apparent total during Bush's presidency was 3,771 "friendlies," that is, Americans plus our allies.)

I am old enough to remember how the rightwing savaged Jimmy Carter for saying that the Iran hostage crisis ended without loss of American life. It was clear that Carter was limiting his remark to the hostages, but he was ripped for leaving out the 8 Americans killed in the Keystone Kops rescue mission.

Meanspirited but arguably within the boundaries of fair political discourse.

Bush's statement beggars belief. It was not merely insensitive and callous toward the thousands who died for a mistake (not to mention the tens of thousands who were maimed), but it proves that he doesn't understand anything about what happened.

That ought to disqualify him from further consideration; but Trump's birtherism hasn't disqualified him; Huckabee's theocratic beliefs haven't disqualified him. Fiorina's business incompetence hasn't disqualified her. Walker's cheesiness hasn't disqualified him.

I am enjoying Fiorina. She is a sad, deluded example of the Peter Principle at its most disheartening, sort of like Harold Stassen, who also had some youthful success that ruined him. But she is funny.

Not meanspirited.

But most of the rest of them? A decent person wouldn't stay in the same room with them.

Tea Partier spills beans

One of the odder outbursts of rightwing know-nothingism (this week, anyway) was a flap created by a homeschooling mom in (my home state of) Tennessee, who alleged that the local public school was recruiting kids into Islam, when everybody knows the purpose of public schools is to recruit kids into Southern Baptism.

This is such routine crap that even obsessives like People for the American Way didn't react.

But wait! There's more!

It will not surprise you to learn that obnoxious bigot busybody Patty Kinkead has written and self-published a book for children explaining the Tea Party view of society.

But it will delight you to learn that the Tea Party mascot/recruiter in the story is a squirrel and his mission is to gather nuts.

Perfect.

Fish where the fish are

I often see, in comments on crime stories, statements like: "You never see anyone rob a gunshop."

Like every other gun nut mantra, it's easily shown to be nonsense.

As part of my other blog (Kamaainaloan.com), I scan the Internet once a week or so for "pawn shop news."  Most weeks, there's a story about a robbery at a pawn shop. (Pawn shops are not especially robbery-prone; there are something like 13,000 of them, and they don't get knocked over more often than, say, ice cream parlors.)

Most pawnshops -- over 90%, probably -- are gun dealers. But that doesn't keep bad guys from robbing them. In fact, it seems to be an attractant for robbers. It unquestionably is for burglars.

This week's survey turned up two examples of armed robbers robbing gun shops. and getting away with it, at least for a time. In one robbery, it appears the goal was to get a gun.

If you keep a gun around, and somebody gets shot, it's likely to be you.

UPDATE, Monday, Sept. 14

In case anyone thinks the original examples were unusual, we have this example from Houston of serial robberies of gunshops. I am familiar with the area and its pawnshops. It is where I get my pastrami fix when I'm in Houston, at Kenny & Ziggy's deli.

The Bentley getaway car and the AK-47 were nice touches.

If you are curious about the mental life of gun nuts, I suggest reading the comments. Have Maalox handy. It's revolting.

Generous to a fault

So, the Vatican is going to give residence to two -- count 'em, 2! -- Syrian refugee families:

The Vatican Will Take in Two Refugee Families as the Pope Asks Catholics to Help with Europe's Migrant Crisis

 There's room for more. The Vatican sheltered way more Nazi mass murderers who were refugees from Allied justice in 1945.

The Republicans are coming for your freedom

You may have heard the foofaraw over Kim Davis referred to (among leftist commenters) as an attempt to impose a theocracy on America, and if you are not well-acquainted with holy rollers, you may have sighed and thought, 'That's a bit overwrought, don't you think?'

But in fact a theocracy is precisely what the rightwing is after. Not all the rightwing, perhaps, but clearly most of it, as this compilation of rightwing political statements proves.

Lindevaldsen told students in a speech entitled, 'Do Government Officials Have Authority to Impose Their Morals on Others?' that any law that is not 'consistent with Scripture' -- or, more accurately, their interpretation of scripture -- is no law at all, and therefore, officials are obligated to break such laws since 'civil government only has the authority that God has established.'

You never heard of Lindevaldsen, but she's dean of the Liberty law school, who replaced Mat Staver, Davis's attorney, in that job. (Liberty Counsel, by the way, describes itself as "this ministry," in case you think it is a law firm.)

More to the point, of the 5 theocrats singled out by Rightwing Watch, two have been serious contenders for the Republican nomination for president.

Although they are far out there, they are not at all fringe figures. They are mainstream GOP.

You may also have seen commenters compare Davis with Gavin Newsom who as mayor of San Francisco declared a "sanctuary city" and declined to cooperate with immigration sweeps.

The relevant distinction is that Newsom did not declare that a higher, non-governmental power justified his policy. And, in fact, (probably) rightwing elected officials have for decades declined to cooperate with immugration and Defense requests for assistance, and no one at Liberty has raised a peep.

That is, if you can imagine that Texas sheriffs are sometimes rightwingers.  The evidence is in Joseph Schott's 1975 autobiography, "No Left Turns: The FBI in Peace and War."

When assigned to liaise with rural sheriffs, Special Agent Schott discovered they would pick up deserters only for the Navy. The Navy got preferential service because it paid sheriffs $40 a head for deserters, while the Army and Air Force paid less.

Lindevaldsen told students in a speech entitled, “Do Government Officials Have Authority to Impose Their Morals on Others?,” that any law that is not “consistent with Scripture” — or, more accurately, their interpretation of scripture — is no law at all, and therefore, officials are obligated to break such laws since “civil government only has the authority that God has established.” - See more at: http://www.rightwingwatch.org/content/five-bizarre-ways-kim-davis-supporters-have-defended-her-lawbreaking#sthash.MiVxuvFI.dpuf

Lindevaldsen told students in a speech entitled, “Do Government Officials Have Authority to Impose Their Morals on Others?,” that any law that is not “consistent with Scripture” — or, more accurately, their interpretation of scripture — is no law at all, and therefore, officials are obligated to break such laws since “civil government only has the authority that God has established.” - See more at: http://www.rightwingwatch.org/content/five-bizarre-ways-kim-davis-supporters-have-defended-her-lawbreaking#sthash.MiVxuvFI.dpuf

Lindevaldsen told students in a speech entitled, “Do Government Officials Have Authority to Impose Their Morals on Others?,” that any law that is not “consistent with Scripture” — or, more accurately, their interpretation of scripture — is no law at all, and therefore, officials are obligated to break such laws since “civil government only has the authority that God has established.” - See more at: http://www.rightwingwatch.org/content/five-bizarre-ways-kim-davis-supporters-have-defended-her-lawbreaking#sthash.MiVxuvFI.dpuf

One reason to welcome NextEra

One thing about being a newspaper reporter: You don't have to have a good memory, because you take notes about everything. And I saved mine when I retired.

RtO has no opinion one way or the other about NextEra, but RtO does have an opinion about Hawaiian Electric Industries. It stinks. Anybody would be better running our electric utility.

In case you, and Gov. Ige and Mayor Arakawa and -- apparently -- everybody in the state of Hawaii but me have forgotten, following Hurricane Iniki in 1992, HEI stiffed the poor shmucks who had bought homeowners' insurance from HEI's wholly-owned subsidiary Hawaiian Insurance and Guaranty.

Then president Bob Clarke said it would wreck HEI if he honored its contracts, so HEI just didn't pay. If your house blew away, tough.  It's a dog eat dog world out there, and your dog was Clarke's lunch.

Clarke is retired now, although he continues to offer his worst in state history mismanagement advice at the Shidler College of Business (which is why I have no respect for the school), but as Mitt Romney reminded us, corporations are people too.

Not decent people, though. Since 1992, HEI has earned enough to make its Iniki victims whole.

Did it? Of course not. It may be a person but it's a corporation too. Decency is not in its bag of tricks. Some people have consciences but corporations never do. 

Living in sin

So there's this bigot named Kim Davis who's getting a lot of attention. Way more than she deserves, considering that there are over 3,000 counties in the United States and all but three are now marrying homosexual couples.

Since nobody else is stating the obvious, it's time for RtO to do it. I prefer to let other people do it and then give them a hat tip.

Probably what's going on is, the reporters don't know much about evangelical Christianity, and the Christian bigots making hay out of Davis's cause are not going to point out the obvious because then there'd be no more hay.

Davis's position is that she's defending god's rules about marriage. Her version of god is quite clear about this, you gotta marry your brother-in-law's widow (if one is available) and stay married. Stay married in any case. (There are other requirements but they don't enter into the instant case.)

Back in the day, Davis was a marryin' fool. Four times and nary a chance to wear those fetching widow's weeds.

Well, that was before she became a Christian. Well, up to four years ago, she was one but she either didn't take it personal or she was in one of those slack cults.  So she got in a real hard-nosed cult and learned she shouldn't have been doing all that divorcing and sinning against the Eighth (or Ninth, depending on who's counting) Commandment. She repented and was forgiven.

Except she's still sinning. She should go back to husband #1, to whom she is still married in the rules of the Bible; or at least stop cohabiting with husband #4 (who was also #2).