Fed Up

As the financial crisis unfolded around us in 2007-2008, goverment officials repeatedly stood up and said “the worst is over”, “there’s no bubble”, “there’s no risk to the financial system”, and basically, “things are looking up folks! No need to worry!”

I’ve always wondered whether they were deliberately lying (perhaps to forestall a panic?), or just completely incompetent – after all, all the private investment advisors that I read were screaming “bubble!” – how could the Fed and the Treasury Dept. not know it?  Don’t they read blogs?  I’ve always leaned more toward the first hypothesis.  Until reading this book.

The author, who spent 9 years at the Fed, describes an environment dominated by Harvard economics PhDs, basically idiot savants like the students who “couldn’t figure out why barbers’ wages have risen over time, but the could solve a two-sector general equilibrium model with disembodied technical progress in one sector.” There was (probably still is) an overinflated sense of self-worth and entitlement. As the author says it “Trust us. We know better than you.”  She was continuously shut out of discussions because she didn’t have a PhD, and she kept using current financial data (like mortgage default rates) instead of the output of obscure econometric models.

(I completely understand that culture, because that used to be me.  As a young scientist, I had the attitude – along with many others – that I was basically very smart, and very nice, and so I should be left alone to do whatever interested me and my peers.   I would of course pick good topics, because I was smart and good! And after all, we knew best. Oh yeah, and other people should have to pay for it, too.)

The author, and many others, spent years continually warning the Fed that the financial crisis was coming, and after it arrived, that the Fed’s monetary policy would damage the economy.  She was completely correct, but no one would listen to her, or the others.  In fact, as usual, they were mocked, disparaged, and maginalized.

A large portion of the book simply recapped the series of Fed meetings, announcements, press conferences, etc., that the author uses to document what happened.  I found that part a little boring, but really enjoyed her descriptions of the culture and politics at the Fed.  In the end, her criticisms are harsh.

[Did the fed anticipate] ruining America’s pension systems? …Delaying household formation and all the consumer spending that goes with it? …Killing the move-up housing market?…Sadly, there were no angry protests, no million-man marches on Washington that sent shock waves through our country after the FOMC issues its press release. Only the quiet, unheralded losses of some fundamental freedoms: the freedom to save for our retirements risk free, the freedom to sleep in peace knowing our pensions are safe, and the freedom for US companies to invest in our nation’s future.

The unintended consequences of unconventional monetary policy run amok: pension systems at risk, unaffordable housing, malinvestment, rampant financial engineering by America’s top companies, stagnant wages, millions who have dropped out of the labor force, the stealth growth of the safety net financed by record low interest rates.  And of course, more asset price bubbles than ever before.

Lucifer’s Banker

This was an interview with Brad Birkenfeld, the whistleblower who ended banking secrecy.  He exposed over 19,000 Americans who were hiding money in the Swiss bank UBS to avoid taxes in the US.  The host called it “one of the best corporate crime books ever written.”

The story of how he came to the information and why he exposed it is interesting. But the really riveting part of this one is how deeply corrupt and complicit the US goverment was (after all, a lot of the rich are in goverment, or at least were, so you can be sure they were on the list).  Just a couple examples:

He published the name of one guy who had over $400 million in UBS. He was illegally selling oil to Saddam Hussein, and was living in New York.  He was never prosecuted.  He is a good friend of Rudy Guiliani.

Hillary Clinton, as Secretary of State, went over (secretly) to Switzerland to negotiate the settlement with UBS. UBS donated $500,000 to the Clinton Foundation during the negiotiations. After the settlement, they made a $32 million low-interest loan to the Foundation (prior to that they had only donated $60,000), and they hired Bill Clinton for some “fireside chats” with the CEO – to the tune of $1.52 million.  Of the 19,000 names Birkenfeld handed over, 4500 were handed over to the IRS.  It’s not clear who picked those 4500, what methodology was used to select them, or why the other 14,500 were not handed over.

I could go on and on – this was just the beginning of the stories of corruption, lawlessness, and conspiracy this guy uncovered.   It is breathtaking and a little terrifying.

Oh, and by the way – given that in the scandal, tens of billions of tax revenue had been hidden from the government, how many people do you think went to jail?  One – the whistleblower, Brad Birkenfeld.

Doing Time Like A Spy

This fascinating interview with John Kiriakou talks about his experiences as a whistleblower, revealing the CIA torture program.

Interesting facts: in the aftermath of the exposure of the illegal torture program, Kiriakou is the only person that went to jail.  That’s right, the whistleblower is the only person who went to jail; the people who broke the law did not.

He was charged under the Espionage Act.  The Espionage Act was passed during WWI.  It was used 3 times between 1917-2009.  The Obama Administration used it 8 times.

It’s worth listening to this to hear how visciously our government goes after truth-tellers.

Unicorn Governance

Of course, everyone knows that the private sector is vile. It’s populated by greedy, self-interested operators, caring for nothing other than themselves, probably willing to kill babies just to make a small profit. They’d betray their own mother just to get a leg up on the corporate ladder. (Although, I must say, in several decades working in the private sector, I’ve met very few people like this. So I should amend the above to say that my friends are all very nice people. It’s everyone else that is evil. I’m sure you feel the same.)

Luckily, we have government. Government, as we all know, is staffed by Angels of Altruism, Living Boddhisatvas of Selflessness that toil with no expectation of reward, solely for the opportunity to advance the Greater Good. Not theirs to keep up with the Joneses, or covet a new swimming pool, try to get ahead at work. Raises… prestige… influence & authority… a public servant craves not these things. And as selfless, infallible Scientific Philosopher Kings, when they attempt a solution to a problem, the solution always works, no need to follow up. And it never benefits special interests and always works for the benefit of the proverbial Little Guy. Therefore, we should give as much power to the government as they need – they will solve all problems.

Why do we believe fairy tales like this? We believe this even though the private sector and the government are quite often the same individuals! (Goldman Sachs is referred to as “Government Sachs” for it’s revolving doors to Treasury and the Fed; the FDA is sometimes called the public arm of Monsanto and Big Pharma). Somehow we think that when a Wall St. CEO, or a law partner at a big law firm, who clawed their ambitious way to the top, enter the government, they suddenly become saints, unconcerned with their own welfare, working only for others. (Of course, if they leave and return to the private sector, they become vile again. It’s like magic!).

In reality, the same sort of jockeying for position and prestige happens in the public sector. And since budgets are granted by Congress, and since budget is the single largest item of prestige for bureaucrats, the incentive to do almost anything to increase your budget is very strong. That includes “spinning” the facts, exaggerating the need, helping the media spread the word that if your budget is cut everyone is gonna die!

The most entrepreneurial, the most innnovative people behave like the worst bureaucrats or power hungry politicians 6 months after they have taken over the management of a public service institution, particularly if it is a government agency. – Peter Drucker

People identify a problem in reality and then demonstrate how that problem can be “solved” by government. But far too many such demonstrations feature a “then a miracle occurs” step. This step is the assumption that politicians and other government agents are superhuman — that when they are elected or appointed to political office, they are miraculously transformed into beings consistently more altruistic, knowledgeable, and wise than are business executives, consumers, and other people who operate only in the private sector. Source

The same thing happens with policy. As Ryan McMaken said,

A group of politicians get together, declare that they’re going to solve problem X, and then problem X is magically solved, so long as everyone supports the “solution.” Source

We rarely, if ever, go back to see if the policies actually worked. And if they didn’t work, it’s even rarer that we would say “well, that didn’t work, let’s try something else.” We just assume that the policies work as intended.

For example, we see poor people. We say, “we have to do something!” So we set up programs to “help the poor.” Everyone feels good about helping the poor. If it turns out, as appears to be the case (see Mary Ruwart’s book), that many of those policies actually hurt the poor, the people who try to publicize this fact are villified, called hard-hearted, and smeared until they go away. This is where it gets really weird and I don’t quite understand people. I mean, if you really cared about the poor, wouldn’t you want to know if the policies you supported ended up hurting them instead? I’m assuming you don’t want to hurt the poor. Or is it really the case that people don’t actually want to help the poor, they just want to feel good about thinking they helped the poor, and they resent the intrusion of reality into that little fantasy?

The branch of economics that deals with goverment as it is, rather than as we fantasize it to be, is called public choice theory. It’s really worth looking into.

Most goverment policies are ridiculously naive. Society is an incredibly complex mechanism. No one can predict the results of a given intervention. No one can say whether more people will be hurt or helped. The law of unintended consequences reigns supreme. And no one has nearly enough wisdom to say what’s “best” for everyone else. Everybody’s situation and preferences are unique. It takes incredible hubris and naivite to think a one-size-fits-all policy from Our Saviours On The Hill will brilliantly solve all the problems. It takes believing in Unicorn Government to assume that.

An example: in the 1970s someone decides that we were using too much gasoline. Cars didn’t get enough milage. Instead of a gas tax, Congress passed the CAFE standards for fuel efficiency (everyone loves regulations!). And guess what – gas consumption went down! Victory. Except…years later, when they looked, economists realized that society spent 3X to 10X more than necessary to get the amount of gasoline conservation that we got – a gas tax would have been much cheaper. And, because at first the only way carmakers knew to get better mileage was to make cars smaller, tens of thousands of people lost their lives in accidents that would not have died had they kept their old gas-guzzling “tanks.” I wonder what we could have done with that wasted money. And is curbing gasoline use worth the lives of tens of thousands of people?

Nassim Taleb’s book Antifragile discusses how complex systems (like society) become highly unstable when centralized control is attempted. Instead, distributed, localized control is needed for stability. I find it somewhat perplexing that so many people can be cheerleaders of Wisdom of Crowds and yet support centralized, one-size-fits-all policies from the irresistable force of central government.

We need to see the world for what it is, not the way we wish it would be. We need to examine the results of policy to judge it, not simply use a priori judgements based on the intent of the policy (“this policy is intended to help the poor, therefore it is good”).

Sorry, but there are no Unicorns.

Science + Public Policy = Disaster

In recent years, we’ve seen more of a marriage between science and public policy. Scientific results are turned into goverment mandates, all for the Greater Good. “The science is settled!!” the Wise thunder from the mountaintop, and us serfs have nothing left but to obey.

However, the history of science in government is pretty horrible. Some good comes out of it, for sure, but the negatives must surely outweigh the positives. Before we get into some pretty nasty examples, we should understand the reasons why.

The act of governing is a political act, that uses political processes – compromise, favor-trading (“log-rolling”), rhetoric, voting, concensus-building, etc. Science is, or at least should be, absolutely nothing like that. Einstein’s theory of relativity isn’t accepted because people traded support for it in return for Einstein’s support for, say, the Germ Theory of disease. Physicists didn’t vote for relativity. Instead, relativity stood the test of time, explaining the data better than any alternate theory. As a counter-example, let’s look at how the goverment’s stance that eating cholesterol causes heart disease started. The evidence was contradictory and weak, and there was a lot of disagreement among scientists. So they held a vote! If I remember properly, the original vote was something like 6-5. Once enshrined as government policy, research into alternative explanations was defunded, disagreeing voices were silenced (after all, you have to stay “on message”), and the public was hoodwinked into thinking “the science is settled.”  Now, it’s accepted that eating cholesterol has nothing to do with heart disease.  Whoops, sorry about that.

In politics, once the decision is made, everyone is expected to put aside previous allegiences and fall in behind the decision. Indeed, if lots of people continue to criticize the decision and propose alternatives, the populace would be confused and little progress could be made. In science, the exact opposite is true. When a new theory is put up, it is the duty of everyone to criticize it mercilessly – try to find all the observed phenomena and data that the theory cannot explain. It is these divergences that are key. If the theory can’t adapt elegantly to these gaps, it eventually dies and is replaced by something closer to the truth.

However, when dealing with science that has been infected with public policy, where politicial processes are applied to science, the opposite occurs. Naysayers are demonized. They lose tenure. They are vilified in the press. Their reputations are slandered. They are called “baby killers”, “nazis”, “heretics”, on and on – this kind of ad hominem attack has absolutely no place in a scientific discussion. Many great scientists have had awful personalities, and repugnant political views. This does not invalidate their ideas or their theories. Science should be, must be, impersonal.

It should be acknowledged that in the real world, science is indeed political. The “elders” who control the conferences, journals, and tenure approvals are unlikely to enthusiastically approve grants and promotions for some young upstart who is contradicting the very theories that they built their lives and reputations on. This is why Niels Bohr once said “Science progresses one funeral at a time.” When goverment gets involved, the crushing of dissent rises to a new level, having the force of law behind it.

Why does all this happen? An analysis using the branch of economics known as “public choice theory” from the book Beyond Politics gives a glimpse. Here the author is talking about climate change, but substitute your own favorite branch of science:

A public choice analysis of climate change politics predicts that the necessities of electoral politics will drive the climate change policy debate on the national level. Beaurocrats will use the process to increase budgets and influence, interest groups will seek political rents and use the process to pursue ideological committments having nothing to do with climate, voters will remain generally uninformed but sympathetic to “doing something,” and entrepreneurial politicians will maximize their chances of re-election by catering to both bureaucrats and special interests. It would be suprising if the process operated in any other way.

So climatologists, who otherwise would toil in relative obscurity, become rock stars (they are, after all, saving the world), and they get interviewed on TV, have their budgets increased tremendously, get tenure, and get a seat at the Big Table. Bureaucrats of the newly-formed Department of Saving the Climate get huge budgets (to dump iron sulfate or whatever in the atmosphere) and staffs, job security, and a seat at the Big Table. NGOs get validated, and since their expertise is needed, they get government funding and a seat at the Big Table. If it turns out the theory is wrong, it is in the interests of nobody to admit it (government agencies never want to admit they were wrong, because then they lose their authority with the public), and it is in the interests of everyone to pound their fists and proclaim “the science is settled!” and persecute the slobs with offending beliefs.

An excellent discussion of why science cannot solve public policy problems is discussed in this piece that explains that not supporting public climate change policy does not make you a “denier”.  “Believing” in climate change, and endorsing specific public policies meant to hopefully address it, are two orthogonal things.

For a great discussion of how this works with a particular example (government advice on nutrition), listen to this really thought-provoking interview with Gary Taubes , someone who has studied this problem in detail for years. He talks about how bad policy gets created, the law of unintended consequences, and the built-in reluctance to admit mistakes and inherent bias toward group-think that government bureaucracies inevitably display.

Another big problem is that science often has been, and is, wrong.  To create public policy based on “current science” can be disastrous if it turns out the science was wrong or incomplete, because public policy is incredibly hard to change and the government absolutely hates to admit it’s wrong.

Now let’s look at a couple examples.

Medicine

This is probably where the collusion between government and “science” does the most harm. In Europe, for example, goverment-sanctioned guidelines led to the deaths of around 800,000 people. You can read it here and here. I wonder what would happen if General Electric killed 800,000 people? Think there would be an outcry? But if Big Medicine (which is created, licensed, regulated, funded, protected and empowered by government so much that it might as well be the Department of Medicine) kills that many, no one really bats an eyelid.

The government decides what treatments are to be reimbursed, and what treatments are to be illegal, all on the advice of pharmaceutical lobbyists and doctors’ associations, even though medical practice is hopelessly out-of-date with research . In Australia, they even went so far as to pass a law that basically outlaws

The publication and/or dissemination of false or misleading health related information that may cause general community distrust of, or anxiety toward, accepted medical practice.

In other words, Australia has outlawed the free and open discussion of objective scientific results – IOW, they have outlawed the scientific method (I realize it says “false” information – but who decides if it’s false, especially before it’s been published and discussed!!).  (This happened, by the way, when a journalist decided to write an article on statins, and went and read the original scientific publications rather than the press releases, and was completely underwhelmed by the results). This is a huge giveaway to Big Pharma: once you can get a treatment, by hook or by crook, to be “accepted” according to some “expert witnesses”, it’s now basically illegal to criticise it. The priests who threw Galileo in jail would feel right at home in modern day society.

Nutrition

The government started recommending low-fat diets in the mid-20th century, and at the end of the 1970s created concrete guidelines on nutrition (again, listen to the Gary Taubes interview for details) (through the farm bill, the government also subsidizes overproduction of selected commoditites). Massive shifts in the diet of Americans ensued, leading directly to the obesity epidemic. The government recommended trans-fat based margarine over butter or other fats, and recommended reducing cholesterol in the diet. Recently, however, cholesterol has been removed as a “nutrient of concern” from almost every government’s list (the US was one of the last). New York recently banned trans-fat, and deaths from heart attacks and strokes have declined dramatically. Now, the first evidence against trans-fat was discovered in the 1960s by Dr. Fred Kummerow, and Dr. Mary Enig did extensive research in the 70s and 80s (Dr. Kummerow was ignored; Dr. Enig was villified). A mere 60 years after the first evidence against trans-fats was published, the FDA sprung into action (after all, they are protecting our health, right?) and instituted a voluntary partial ban on trans-fat to provisionally start in a couple years. The ban was so toothless that the Grocery Manufacturers Association (basically the defenders of junk food) sent a letter to it’s members stating “nothing had changed” with the FDA’s action (or rather, non-action). Given the rate of reduction of disease in New York, if it’s really due to the removal of trans-fat (and that conclusion is not “settled”), this means that the goverment’s advice likely killed tens of millions of people over the last half-century. I wonder if we are going to get a “sorry” note?  (How many people must die, do you think, before we get an apology? A hundred million not enough for you?) More likely, the people who try to write about and publicize this scandal will be crushed.

Climate Change

Personally, I really don’t know to what extent climate change is caused by humans, and I’m not here to debate that. But you can hear what happens if you dare challenge the consensus here. If you wonder who could want to crush scientific truth, ask yourself who would be the losers if tomorrow a study came out that completely debunking the entire narrative around global warming. They have the most incentive to keep the narrative going, and therefore the money flowing. This is a classic example of using negotiating, voting, and compromise to create a “scientific consensus” and the evil that comes from that. And you can hear what happens to people who dare to say “I don’t think this is quite correct.”

Don’t Trust the Experts

A bizarre outcome of all this is that you should not trust “experts” who interpret and summarize scientific fields of study.  Almost all of them belong to organizations that have strong conflicts of interest.  For example, in medicine:

It is simply no longer possible to believe much of the clinical research that is published, or to rely on the judgement of trusted physicians or authoritative medical guidelines. I take no pleasure in this conclusion, which I reached slowly and reluctantly over my two decades as an editor of The New England Journal of Medicine. – Dr. Marcia Angell.

And she’s not the only one:

Journals have devolved into information laundering operations for the pharmaceutical industry… science has taken a turn towards darkness – Richard Horton, Lancet editor.

and of course

The medical profession is being bought by the pharmaceutical industry, not only in terms of the practice of medicine, but also in terms of teaching and research. The academic institutions of this country are allowing themselves to be the paid agents of the pharmaceutical industry. I think it’s disgraceful.  – Arnold Seymour Relman, Harvard Professor of Medicine and Former Editor-in-Chief of the New England Medical Journal

You can read about how the research literature is co-opted and how the data is twisted. And that’s only medicine.  Other fields are similarly corrupted.  And the more money involved and/or the closer to government it is, the more corrupted it is.

To have a chance of understanding, you need to go back to the original research literature. Of course, that’s very time-consuming, so the next best bet is to find someone without conflicts of interest doing it out of their own interest.  It’s hard, but you can’t trust organizations or institutions. You need to find indivuals that you respect.

Summary

The closer we get to human behavior, the dicier this romance between public policy and science gets. For example, suppose someone published some research showing that straight couples are happier than gay couples. Would the goverment then be justified in forceably breaking up gay couples and demanding that they “go straight”? After all, the science is settled, so if you answered no, you are obviously an anti-science zealot.

Just remember, “the science is settled” is code for “this is the political consensus, and we are set to make a ton of money off of this. If you value your career, get with the program.”

You can hear more about fake science driving public policy, and more of the risks for public policy.

Basically, anytime anyone says “I know how you should live better than you do, and you’d better listen to me because I’m smarter than you, and not only that I’ll have you crushed if you don’t obey” you should run the other direction.