Links 10/17/10

‘Fractal’ mathematician Benoit Mandelbrot dies aged 85 BBC

How (not) to communicate new scientific information: a memoir of the famous brindley lecture Laurence Klotz, BJU International (hat tip Richard Smith)

Budapest Experiences A New Wave of Hate Der Spiegel (hat tip reader Paul S)

Commentary: Mortgages Lost in the Cloud BusinessWeek

Few silver linings when gold bubble bursts Financial Times

Through the looking glass again Ultimi Barbarorum (hat tip Richard Smith)

Banks Shared Clients’ Profits, but Not Losses Louise Story, New York Times. This is revealing.

How We Can Really Help Families Shaun Donovan, Huffington Post. Really disingenuous, but intriguing that an administration official feels compelled to put out these talking points. First, it conflates stopping new foreclosures (which the banks are doing on their own, thanks to their affidavit and other problems) with halting sales of properties owned by banks as a result of PAST foreclosures. Two different issues completely. Second, it was the Administration that created this “national foreclosure ban” straw man. There is no reason to halt foreclosures on properties where the original lender still holds the loan.

Mess Puts Homeowners in Limbo Wall Street Journal. This is actually not bad for the Journal. Features three people, all of whom are behind on payments, but at least one is plagued by confusion re which servicer she should be dealing with (!) and thinks she should be able to work out a resolution (she comes off sounding repsonsible).

The Recklessness of Quantitative Easing John Hussman (hat tip reader Scott)

Antidote du jour:

Picture 13

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    1. DownSouth


      Thanks for the link.

      It’s funny Rucker should mention the barrage of attacks Mandelbrot’s questioning of orthodox economics unleashed. “Mandelbrot doesn’t seem overly vain — as I’d heard him described by some rivals. Certainly he has good self-esteem, but I think it’s well-earned and justified,” Rucker wrote.

      I saw Mandelbrot in an interview with Nicholas Taleb Nassim, and he didn’t seem “vain” at all. Just the opposite. Oh well, the defenders of orthodox economics will do anything to defend their glass house, including attacking a person on form instead of substance. But it looks like Mandelbrot will be vindicated. For it’s becoming more apparent everyday that orthodox economics not only knows precious little about people, but about math as well.

      Just last night I stumbled upon this while reading, and it’s eminently germane to Mandelbrot and how he was one of the first to warn of the disastrous turn orthodox economics took towards simplistic mathematical models:

      Instead of making government work better, Samuelson concentrated on what amounted to inspirational poetry in “Economics”—-and he was hardly alone. Following the publication of his “Foundations of Economic Analysis” in 1947, much of the economics profession would follow in his path. The extensive mathematical symbolism has amounted to a special way of painting an inspiring picture of economic science at work, in the same way that space travel may have few practical benefits but seeks to uplift people’s spirits with a vision of the power of the human mind and the awesome ability given by scientific knowledge to manipulate natural forces for human purposes. D. McCloskey describes this tendency in modern economics as a new “Samuelson vice” (following the “Ricardian vice”)—-the tendency “in economics over the career of Paul Samuelson…[to] drift away from scientific values and towards mathematical ones” for their own sake. An economist can paint with a mathematical brush no less than a Van Gogh can use a brush of another kind.
      –Robert H. Nelson, Economics as Religion

      Mandelbrot was truly a great man, and I will mourn his passing.

      1. MyLessThanPrimeBeef

        A leopard cannot change its spots just like fiat money cannot abandone its monotheistic root – thou shall worship no other things other than fiat money…which means no idolatry of gold.

      2. alex

        ‘“Samuelson vice” …—-the tendency “in economics over the career of Paul Samuelson…[to] drift away from scientific values and towards mathematical ones’

        That’s brilliant! Only in economics do supposed scientists talk about axioms and theorems (which are strictly mathematical concepts) and ignore conformance with reality, but obsess over internal consistency (again appropriate for math but not science). Even in physics, which is deservedly considered the queen of mathematical sciences, nobody does those things.

      3. Doug Terpstra

        I recall that Taleb-Mandelbrot interivew also (though little of the specifics) and recall Mandelbrot as very unassuming and likable, even lovable.

        Yves devotes several pages to Mandelbrot in ECONNED, including the backlash against him by the economic clergy: “Mandelbrot’s findings were a fundamental blow to economic theory, and have recently been popularized by Nassim Nicholas Taleb, who describes the realm where normal distributions work as “Mediocristan” and the realm where wilder forms of rendomness apply as “Extremistan” and shows how most social, economic, and market outcomes reside there.”

        Later, “It isn’t so much that so-called financial innovations should be viewed with a great deal of skepticism. It is that the whole edifice of modern finance, even the mundane sort that retail investors use to manage their portfolios, is rotten.”

        “First, the investment apporaches that came out of financial economics greatly understate the risk of markets. As Benoit Mandelbrot discovered, and numerous analysts have since confirmed, specific markets show much greater swings than the standrd theories posit.”

      4. craazyman

        well even though I promote Contemporary Analysis as a new school of thought, at least I admit it’s a descriptive system like drawing and painting. ha ha ah. Glad to see the same motif in Mr. Nelson’s review. Although I would argue economics as it was developed is “A LOT” less than Van Gogh’s brush, not “no less”. At least Van Gogh had a thorough, almost fanatical knowledge of the forms of his expression and their relationship to visual and pychological reality. Economics is a pale fascimile. Not even a bad sketch.

      5. Sundog

        Since Rucker was also an academic mathematician, his relating that Mandelbrot had been characterized by rivals as “overly vain” may have something to do with Mandelbrot’s reputation in that world, in which I can imagine that vanity might be expressed via formidably esoteric means.

        Justin Fox is apparently doing some guest posts at Reuters thanks to Felix Salmon. In this short post, Fox gives a brief overview of Mandelbrot’s on-and-off association with finance. Second link is to Fox’s own blog, where he posted an excerpt from his book The Myth of the Rational Market.

  1. Ina Deaver

    I’m glad that you linked to Hussman this morning. He is dead on, as usual, but I thought that today’s piece was especially trenchant.

    Captive government and its stupidities.

  2. rcyran

    The Brindley link is fantastic. Can’t wait to share with all the absent-minded scientists in my family!
    Thanks, Yves

  3. Daniel de Paris

    According to the FT:
    “Those most hurt will be the investors who are the last ones out. These tend to be the smaller investors – just as in the real estate bubble, those who can least afford to lose. […]When it does (gold) go bust, and gold prices plummet, it will be a sign that the global economy has snapped back from economic chaos to prosperity. This will signal job growth, stable currencies, a stop to US Federal Reserve quantitative easing. Then there will be little reason to own gold.“.

    That’s a pleasure to be informed ahead of times by the FT. As they did on the FIRE economy, subprimes and other great bubbles.

    Thanks a lot for taking care of the “retail investor” (sic).

    1. Sundog

      I can’t really speak for the FT but no one who’d been reading that other Pearson publication The Economist would’ve been surprised by the collapses of the Japanese bubble, the tech bubble, or the US housing bubble, nor would I assert they timed it.

      I’m pretty sure that YS has mentioned more than once here that FT’s Gillian Tett was way out in front on credit market sketchiness in the mid-naughts.

      Gold will never go to zero, though, and the Scrooge McDuck thing has been around for thousands of years.

  4. fresno dan

    “How (not) to communicate new scientific information: a memoir of the famous brindley lecture Laurence Klotz, BJU International (hat tip Richard Smith)”

    Honestly, I don’t see a problem at all with that. If urologists can’t look at (or touch) a penis, they are in the wrong line of work.

  5. i on the ball patriot

    Yves said; “Second, it was the Administration that created this “national foreclosure ban” straw man. There is no reason to halt foreclosures on properties where the original lender still holds the loan.”

    There are lots of reasons to shut down the whole corrupt financial system. You ignore context.

    Deception is the strongest political force on the planet.

  6. Jesse

    That FT piece verges on propaganda in its subtle use of false premises.

    I am sorry to see Mandelbrot pass. His work on The Misbehaviour of Markets is a must read for those who wish to understand the false premises that underpin much of modern finance.

    I had worked with some of his fellows from the Watson Research Center back in the 1980’s on some areas of Claude Shannon’s information theory, in particular the storing and transmission of information: voice, video, and data, and the chaotic nature of subchannel noise in electrical loops. They had some stories to tell about ‘the boss.’

  7. dearieme

    Mandelbrot “wears .. trousers with a paperclip attached to the fly to make it easier to pull up and down”: and I thought that I’d invented that. Ah well. Mind you, the fly paper clip is what Economics could use just now.

  8. Gimlet

    Re: Banks share profits but not losses.

    It sounds as if the banks have managed to use a hedge/VC/PE compensation structure with the securities lending business they’re doing with the pension funds – but without needed to put in even the tiny skin in the game that those types of funds utilize. I’m most familiar with the VC models, but I’ve seen examples of them all. Typically they split profits 20/80 or 30/70 with the investors, don’t share in losses except to the extent of their actual ownership (usually less than 1%) and also take a 2-3% management fee on the total invested.

    One thing these types of stories highlight for me: pension funds should be employing experts and not the politically connected. The assumption of securities laws is that the pension funds are sophisticated investors because of the amounts they control, but these managers always come out looking like rubes who get fleeced by bank employees who know what they’re doing (and actually read their documents – or at least the summaries provided by their legal teams).

  9. agog

    Never mind, Jesse. A mere 12 hours later the top article on the FT website was:

    “South Korean central bank looks to gold –
    Move to diversify reserves from weak dollar”

    Too funny.

  10. Neil D

    Mortgage fraud link for today. At least this guy is going to jail.

    The defendants in the Brooklyn case also allegedly obtained permits to construct multi-unit housing in Queens and Brooklyn and, to finance the projects, subdivided the land tracts and staged sales of the properties financed by the mortgage loans, the U.S. said. They are accused of preparing false loan filings to create the appearance the properties were being purchased by credit- worthy individuals. One defendant provided fraudulent appraisals to support the price of the properties, even when no buildings existed or had fictional addresses, prosecutors said. Kontogiannis “controlled every aspect of the mortgage-lending process,” Lynch said in a statement today.
    Loans were financed by lenders controlled by Kontogiannis and later sold to Washington Mutual and DLJ, prosecutors said. The defendants stopped making the mortgage payments in 2007 with about $92 million in principal outstanding on the fraudulent mortgages, the government said.

  11. ChrisPacific

    Just take a point called Z in the complex plane
    Let Z1 be Z squared plus C
    And Z2 is Z1 squared plus C
    And Z3 is Z2 squared plus C
    And so on
    If the series of Z’s should always stay
    Close to Z and never trend away
    That point is in the Mandelbrot Set
    Mandelbrot Set
    You’re a Rorschach Test on fire
    You’re a day-glo pterodactyl
    You’re a heart-shaped box of springs and wire
    You’re one badass fucking fractal
    And you’re just in time to save the day
    Sweeping all our fears away
    You can change the world in a tiny way…

    Listen to this here if you like (scroll down to near the bottom)

    He will need to change the lyrics a bit for future performances.

  12. RN

    As someone who bought gold at $250 in 2000, I’m always on the lookout for solid reasoning to convince me to sell. So I was hoping the FT article could make a solid case.

    But the best he could do is say “bubbles pop”.


    But what constitutes a bubble? Etc, etc.

    But then, at the end of the article, he unveils his idiocy with:

    “… when it does go bust, and gold prices plummet, it will be a sign that the global economy has snapped back from economic chaos to prosperity. This will signal job growth, stable currencies, a stop to US Federal Reserve quantitative easing.”

    Hmmmmm. The global economy “snapping back” from “economic chaos to prosperity”?, “stable currencies”?, a stop to quantitative easing?

    Uh oh, those things are just around the corner! Any minute now! Better cash out!

    Has this moron read anything Rogoff has written? Or Krugman? Or Duy? Or even a newspaper lately?

    Quite the contrary: it sounds like he gets his economic opinion from Larry Kudlow.

    And we all know how good Larry’s track record is.

    And so, alas, I must continue to wait for that long-awaited convincing reasoning.

    Not an article worth an Yves link, not by a long shot. (Although I do just love the irony of this story coming out the same day as the article about they guy in Japan who sold his house 17 years later for a third the price!)

  13. Sundog

    When you’re trying to sell a highway that was once considered one of your nation’s great engineering marvels — 532 miles of hard-built road that required tons of dynamite, wood, and steel and the labor of thousands to bore seven mighty tunnels through the Allegheny Mountains — when you’re offering that up to petro-despots just so you can fight off a single-year budget shortfall, just so you can keep the lights on in the state house into the next fiscal year, you’ve entered a new stage in your societal development.


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