Dear Chief Secretary to the Treasury,
I'm afraid to tell you there's no money left.
Signed, Liam Byrne

(Outgoing Labour Chief Secretary to the Treasury. May 2010)

Monday, 19 April 2010

Black Swan politics

Mrs Rigby has never been much of a philosopher, although she does think quite a lot, about quite a lot of things. Earlier today she read something in a shed that made her think, quite deeply and quite seriously.

Her thoughts have resulted in a very long post, she hopes you will manage to read it and follow it's meanders through to the end.

It all started with what she read, here. This is the beginning,
It just occurs to me that we have had two of the type of events that we are warned about in Nassim Nicholas Taleb's book The Black Swan.

That is potentially high consequence yet rare and unlikely events.

1) Nick Clegg manages to get away with claiming the Lib Dems are different in terms of the expenses ( the facts say otherwise ) and is allowed to brush off the funding of the Lib Dem party from dubious sources. The public responds with X Factor like support.

2) All air traffic is stopped because of a volcano in Iceland.
So, off Mrs R went to read about the Black Swan theory. It's interesting. There's more online than that Wikipedia article, but that one's enough for starters.

Apparently it all began with a poet/thinker called Juvenal, who said, "A good person is as rare as a black swan". He could say this because when he was around no Europeans had noticed Australia, so hadn't seen its' wildlife which, of course, includes black swans. There was, therefore, an assumption that all swans are white and all swans will always be white - and so it stayed for several hundred years.

Then the Dutch found their way to Australia, and saw some black swans - which made various 'thinkers' decide to use Juvenal's term to describe something fallacious, something as yet unproven, or something claimed to be 'always true' that carelessly ignores the 'what if' factor. It's that 'what if' factor that Mrs R will eventually return to.

Nassim Taleb seems a clever sort of chap, which is why Mrs Rigby is sharing this extract from an article - it's all about economics and was written a couple of weeks ago.
Ten Principles for a Black Swan Robust World:

1. What is fragile should break early while it is still small.
Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains.
Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and riskbearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.
The economics establishment (universities, regulators, central bankers, government officials, various organisations staffed with economists) lost its legitimacy with the failure of the system. It is irresponsible and foolish to put our trust in the ability of such experts to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks.
Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups. It is the asymmetry of the bonus system that got us here. No incentives without disincentives: capitalism is about rewards and punishments, not just rewards.

5. Counter-balance complexity with simplicity.
Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products. The complex economy is already a form of leverage: the leverage of efficiency. Such systems survive thanks to slack and redundancy; adding debt produces wild and dangerous gyrations and leaves no room for error. Capitalism cannot avoid fads and bubbles: equity bubbles (as in 2000) have proved to be mild; debt bubbles are vicious.

6. Do not give children sticks of dynamite, even if they come with a warning.
Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence.
Governments should never need to “restore confidence”. Cascading rumours are a product of complex systems. Governments cannot stop the rumours. Simply, we need to be in a position to shrug off rumours, be robust in the face of them.

8. Do not give an addict more drugs if he has withdrawal pains.
Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement.
Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs.
Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

In other words, a place more resistant to black swans.
Phew, reading all that makes Mrs R wonder about Britain's economy and what's been allowed to happen, because Taleb's ideas seem remarkably sensible, common sense in fact. They're all nice to read, but not entirely relevant to the rest of what Mrs R is going to say - although because of the dire state of our economy there is a tenuous sort of link.

You see whilst reading all that Mrs Rigby had what she thinks might be a 'Black Swan' moment of 'what if', and will try to show the various thought processes, snippets and badly remembered history lessons that took her there - all thanks to that Man in a Shed by the way.

Mrs R knows the Lib Dems are very much a, "What if ...? Oh, don't be so silly!" sort of political party that haven't really been given much credence at election time, not since Labour appeared and stole their voters - but she knows that once there were only two viable parties - "Whigs" and "Tories".

The Whigs were allowed to rebrand and rename themselves as "Liberals", and now "Lib Dems" - and so conceal their aristocratic past - but there have indeed been some great (and very wealthy) Liberal leaders. Here are a few - Earl Grey (of the tea), Viscount Melbourne (from Brocket Hall), Viscount Palmerston (from Broadlands, Romsey), Sir William Ewart Gladstone, The Earl of Oxford and Asquith (WW1), Lloyd-George who led a coalition government from 1916 to 1922 and was the last Liberal to live at Number 10.

The Conservatives, though, have never been allowed to completely drop the 'Tory' label, although their principles seem to have changed quite a bit over the centuries. Everybody knows the names of a few famous Conservative leaders - Bonar Law, Stanley Baldwin, Winston Churchill. Later ones are often the subject of open contempt and derision, and John Major's term as Prime Minister is remembered not for the positive, but because of sexual 'sleaze' and 'cash for questions' - matters that were so outlandish at the time as to bring down a government, but have recently become so very trivial and commonplace. Our labour government's shenanigans are by-passed, quickly forgotten and brushed under the carpet - by left-leaning media. It makes Mrs R wonder if there has ever, truly, been a pro-Tory or pro-Conservative press.

Aside from that, and vaguely linking with politician's backgrounds. Mr Blair wasn't from a poor family, his parents were wealthy enough to send him to board at Fettes. Mr Brown's parents were not poor either, when he was a child those in the Ministry were seriously upper middle class, and many kept themselves apart from the hoi polloi except for 'good deeds'. Clement Attlee's father was a solicitor. Harold Wilson's background was similar to that of Edward Heath and, although he had benefitted from attending a Grammar School, it was he who destroyed them.

Mrs R knows what happened during the period of the "Lib-Lab Pact", made in 1977 between Labour (Callaghan) and Liberal (Steel), which effectively kept Labour in power until the agreement fell apart in 1978. Prior to that there'd been the 1976 IMF loan, and afterwards was the Winter of Discontent that led to the 1979 election - which the Conservatives won.

We all know for sure that Mr Brown is desperate determined, to cling to power stay in office. He knows he's the right person for the job because he keeps on saying he is, and so do some of his supporters who trot out cliché ridden phrases that they can't possibly have made up on the spur of the moment. Maybe Mr Brown believes it because somebody once told him that his initials match the abbreviation of Great Britain, maybe he's the sort of person who believes in predestiny.

We all know that the various, media and otherwise, pollsters are predicting a tight election result. Some suggest that their sampling and standardising methods are open to question, but we'll never know for sure - but we do know that the media prefers the politics of the left, for their own reasons, and it is they who shape public opinion - in a country whose Prime Minister promised to intervene and "order the Home Secretary to investigate" the fictional legal case involving a character in a long running soap opera.

We know that for either the Lib Dems or Conservatives to win outright they need to poll significantly more votes than Labour, because of the way the Boundary Commission drew up the latest constituency boundaries.

We know that if the result is tight/close then our constitution allows Mr Brown time to try to negotiate a deal with another party - a deal that will keep him in Downing Street and also in charge of government. Time for negotiation has already been arranged, and extended to eighteen days for secret power-sharing agreements to be brokered. (What has been forgotten is that it also allows Mr Cameron and Mr Clegg eighteen days in which to negotiate and trade policies, and perhaps reach agreement in order to form a government.)

We know that Mr Brown will never negotiate with the Conservatives, we know he will never negotiate with BNP or any of the other lesser parties, which leaves Mr Clegg and the Liberals - who, even though they wouldn't openly admit it, can't ever have truly and honestly believe they might be leading lights in government after this general election. It's hard to imagine that up to last week they were even considering a "What if we nearly win?" scenario - yet, at the moment, this seems to be on the cards.

How many times has Mr Brown criticised the Conservatives for being inexperienced? Has he never once considered that, with 17 years in opposition, Labour too was inexperienced when they took over in 1997?

The last time Liberals took high office was in 1977, as a result of a short-lived power-sharing pact, yet Mr Brown doesn't criticise them for being short on experience, he might even, perhaps, fear envy acknowledge Mr Clegg's time in Europe, working alongside and negotiating with both Russia and China.

Mr Brown criticises Mr Cameron's youth, yet he is a year older than Mr Clegg. Mr Brown criticises Mr Cameron's background, whilst ignoring Mr Clegg's silver spoon.

Mrs R wonders if Mr Clegg could follow in Gladstone's footsteps and say "In time of peace nothing but dire necessity should induce us to borrow", or would he imitate Gladstone and be remembered locally as the man who cut down all the trees? (Which are only now being replaced by his descendants.)

But, all this aside, during last week's televised debate Mr Brown kept cosying up to Mr Clegg. He said, several times, "Yes, I agree with Nick." But, Mr Brown has since - on both TV and radio - rubbished the Lib Dem's policies. He knows which way up his bread is buttered though, so he won't try too hard, because he will have been told he might need some friends in order to stay a Number 10.

On Guido's chat for today's Foreign Affairs 'debate' (which was more of a BBC Q&A session) a serial spammer wrote,
"A Lib-Lab coalition will implement much-needed electoral reform, creating a permanent progressive majority in this country. The Tories will be finished."
Which brings Mrs R to her final point and a bit.

She knows, well maybe she doesn't know exactly, but she believes - feels it in her bones, that sort of thing - that this country cannot risk another year or more of Labour's money-spinning, social-engineering, divisive policies. She believes that if the Lib Dems, under Mr Clegg, form an alliance with Labour, under Mandelson Brown, it would be a catastrophe for Britain and would cause a lot of hurt and upset for too many decent people, many of whom are still wondering what on earth they've done to be so derided and vilified by their own government.

Mrs Rigby wonders if there's any political party that is able to ... to, well, speak out for Britain, for British traditions, for British values, and be able to do it without being branded either racist or xenophobic?


No, not that lot, not those who have loud demonstrations on the streets and wave flags. She means ordinary people, who know their own true worth and haven't a clue about being loud-mouthed and pushy, people that'd better learn quickly, before it really is too late.

Mrs R is going to go and lie down in a darkened room to give her brain a rest, and to warm up because she feels very, very, cold. Maybe she's been sitting still too long and that nasty cold east wind has got to her, or maybe that dastardly volcanic dust has filtered out the warmth of the sun, but something has sent a shiver down her spine.


Man in a Shed said...

I humbled to have been able to send you on this line of reasoning - if only by chance.

Mrs Rigby said...

Gosh, that's praise indeed.