[Book review] The Big Short

8 guys in Wall Street, one with the Asperger syndrome, found out that the world’s financial system was about to collapse. MICHAEL LEWIS’s book is the story about their journeys to bet against the market and make a profit from the incoming catastrophe.

Throughout the book, we are introduced to the inside of Wall Street firms and the money making machine by harvesting the average citizens. There are 2 ways to read the book: you read the book first or you can watch the movie first. However, I suggest the movie should be considered first because no matter how much MICHAEL LEWIS was trying to simplify those confusing financial terms (some of them were so complicated that even analysts in Wall Street at that time could not understand. That was one of many reasons that led to the crisis: the lack of complete understanding), he would never be as good as “Margot Robbie in a bubble-bath to explain”. FYI, Michael Lewis was also the author of "Money Ball", which Brad Pitt made a movie out of it and gained much attention in 2011.

I have to admit that I am a fan of this book. Michael Lewis made everything so clear and obvious that usually in the first chapters we jumped to some questions, or conclusions such as: “Why did they do that? That was wrong” – “It made no sense” – “Come on, the bankers, the analysts in Wall Street, they were supposed to be the best of the best: why couldn’t they see what was coming?”. However, in the following chapters, MICHAEL LEWIS had a special way to answer those questions. We just needed to pay much attention to every single words in the book, especially at the end of each chapters, and then the answers would appear.

All of the nonsense often came from 2 things and the first one was greed.

Without greed, the bankers in Wall Street would not lower the credit standard in order to produce more mortgage-backed bonds. Without greed, the borrowers would not fall for the teaser fixed interest rate and would not have loans that were over their capability. Without greed, the Wall Street firms would not fool the market by marking those “triple B” as “triple A”.

The second thing was what our guys taught us: “The most difficult subjects can be explained to the most slow-witted man if he has not formed any ideas of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him”. Mike Burry, Steve Eisman, Grep Lippmann did not keep for themselves what was wrong with the market. They even tried to share it with everyone but no one listened to them. Those "analysts", in fact, did not analyze anything. The investors trusted the rating agencies. The rating agencies trusted the big Wall Street firms. The Wall Street firms believed in their bankers and analysts. That was like a chain reaction. One thing failed and others would blow up.

The bets against the market, the system in the book gave us a lesson: the market was not always right and functioning correctly. The 2008 crisis was not the first one, and perhaps, not the last neither. There is always chances for us. Just remember to open our minds to let new ideas in.

Karl Zed

Rational Human and Irrational me.

It all started with a Bang some years ago. Before that Bang, there was nothing. Then, there is a thing that we call “time”. Make no mistake, human is the only creature, the only animal that has a clock. Birds do not own a clock. Neither do fish and mammals. Chickens wake us up every day thanks to the sun. Birds sing every day because of the need to mate. And sharks travel across the oceans ceaselessly just to hunt. Those animals do that every year, every month, every day and every minute. They do not stop because they are old. They only stop when they cannot. To them, there is no clock and thus, no fear for death. We have a clock. We are the only animal who think about time. We stay in the present, but we think about the past and think of the future. And here comes our irrationality.

 

Have you ever made a mistake?

 

And tell me, how did you react then?

 

To begin with, I believe that we all want to travel back in time to undo our mistake. That is absolutely the best and the simplest solution: jump on a machine, go back 1 day and stop ourselves from stupidity. There would be no consequences that needs dealing with. There is only one problem with that solution: we cannot do that. We cannot travel back in time, at least now. Sometimes, we try to fool ourselves with the thought that if we can focus with all of our energy and effort then it would be enough to get us back before the event. Sadly, such thing does not happen. And every night, when we fall asleep, we dream that we can undo everything. Then we wake up, sweating, realizing that it is just a dream (and I consider that a punishment for my mistake).

But what happens if 100 years from now, we are able to travel back in time? When will we go? Before the mistake? Or before the final world cup match so we can bet? Or to when we were born, so we could remake our whole life with no mistake? And how many times do we need to time-travel to make our life perfect? Where is our limit? And what is the point of that? Mistake is something very much unwanted. However, I do believe it is somehow necessary for us. Mistake can make us lose something, and it can also make us realize how important that thing is.

And believe me on that: if there is still no one from the future traveling back to stop us, then how bad can our decision be?

 

Why should we irrationally want to go back in time then?

 

Now that we are done with the past, we look to the future. Every mistake must be fixed. However, some mistakes are simply unfixable. Dramatically, we have no idea which one can be fixed until we finish trying. Of course, human is smart and there is always a solution: the soothsayer. I do not know about you but I myself once went to a soothsayer to ask about my future generally. Then, a [weird] friend asked me:

“What’s the point?”

“I wanna know my future. That’s the point”

“No. That’s the reason. I mean, what’s the point after all? What do you expect from that? You want to hear compliments from him? You want to be told that your future is good so that you can be lazy? Or you are so weak and scared that you fear facing all the difficulties ahead?”

[silent]

 

She did have a point, indeed.

I used to make a mistake that I really wanted to fix it. But I was not sure if I could. Thus, I started asking my friends’ opinion on my problem. However, only 2 seconds before I started asking my question, I recalled the above conversation. After all, what is the point? There could only be 2 possibilities:

1/ I could fix the mistake, thus I would do that.

2/ I could not fix mistake. I would still do that.

 

If you make a mistake and really want to fix it, go do that. There is no need to know whether it is possible or not. No.  I make a mistake, and I will go fixing it no matter what people say. Perhaps even though it is unfixable or the soothsayer says that it would be a waste a time, I will still do that. The result no longer matters because when we have something, someone very important to us, we cannot afford to lose them, to lose it.

 

And even though the future may get tough, if we really long for something or someone, we will always irrationally start the journey no matter what.

 

Because I know, at the end of every long hard journey, the destination will become wonderful. And I know, if I do not start that journey, I will regret for the rest of my life.

 

Which one is the irrational? The one who wants to look at the future or the one who does everything to fix the mistake even though it may not work?

 

Am I irrational?

An excuse from a liar

Imagine a situation.

You are standing at a railway. In front of you a train is coming fast and there seems to be no way to stop it. On the track there are 5 kids playing with no knowledge of the coming train. And on the other track there is a man standing. Besides you there is a switch. If you pull the switch, the train will turn and run over the man. If you do not, the train will kill the kids.

What will you do?

You will kill the man to save the kids, or you ignore everything and just let it happen?

Make no mistake, 5 kids is surely a better bet than 1 man alone. Shall we pull the switch?

I do not believe most of us will do this easily because we will all face a question:

“Which behavior is more moral here?”

Our society is result-oriented. We judge, value, rank ourselves based on result, which means behaviors. If you do things correctly, you are good. Otherwise, you are bad. If you kill the man in the above situation, theoretically, you are doing a good thing because there is no way a life of one man is worth more than 5. And then you will live the rest of your life with the guilty of killing a man.

I myself believe that behaviors is just not enough to judge a person’s morality. We are taught that lying is a sin, and it is forbidden. However, a doctor lies to comfort his victims in their last days. A prison guard gives the criminals last meal before his death penalty. A coach lies to motivate his teammate before an unbalanced game. We lie to ourselves every day to feel better.

What we do, what we behave does not matter 100%. What we think, what we intend is much more important. Life is not always easy. Sometimes, we cannot give seat on a bus to an old person because we are too tired too. Sometimes, we have a white lie. Sometimes, we have to do stuff that we do not want to do. Sometimes, we hope that people will understand our real intents, not our behaviors.

And will we forgive other people’s behaviors?

Kz

Merry Christmas 2013

It has been a long time since the last time I posted. Job has driven me crazy and squeezed all my time. But this is Christmas. Please regard this post as a gift from me to you.

Merry Christmas.

An economist’s Christmas

A little Christmas levity courtesy of Lombard Street’s Dario Perkins:

If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three.’ As Winston Churchill noted, economists rarely agree on anything. And the topic of Christmas should be no different. Here is our guide to the macroeconomics of Christmas:

Keynesians – place a lot of emphasis on the ‘macro stabilization’ properties of Christmas. Ideally, they would vary the number of Christmases each year according to the state of the economy. This is best summarized by Paul Krugman’s depression paper ‘Wish it could be Christmas every day’, in which he also acknowledges his love of British glam rock. The Keynesians would like to see a larger role for the state, including publically-funded Santas.

Austrians – Believe Christmas is dangerous because it inevitably ends with a nasty January hangover. Also worry about the moral hazard implications of gift-giving and the propensity for overinvestment in Christmas decorations. Reject the idea of ‘public’ holidays, arguing the free market would lead to a better outcome.

Monetarists – Convinced they are the only ones who know how Christmas ‘really works’ and quickly become frustrated with other economists’ lack of understanding. Their thinking can be reduced to a simple identity, though this is vulnerable to shifts in the velocity of Santa’s circulation. Hardcore monetarists believe in the tight control of chocolate coins to prevent the hyper-inflation of waist lines and the hyper-activity of small children.

Chicago School – argue Christmas has no meaningful impact because gift-giving nets out. Fully rational individuals will anticipate this and adjust their behaviour accordingly.

Macroprudentialists – busy thinking up ways to ‘smooth out’ Christmas. They would like to ‘lean against’ the festive season, perhaps by tightening credit and raising alcohol prices in mid-November and reversing these policies in early January. Some hardliners would like to introduce quantitative controls on Santa’s toy factory.

Secular stagnationists – claim Christmas hasn’t been as much fun since the mid-1990s, but can’t really explain why. Perhaps it has something to do with the music.

And, of course, the central banks are equally divided:

The Federal Reserve – big fans of Christmas and even have their own Santa lookalikey (though, unlike the real Mr C, he is set to retire soon). Becoming frustrated that Santa’s sleigh isn’t one of their policy tools and that they can only influence Christmas indirectly by giving presents to bankers and hoping they re-gift them to the rest of society.

The ECB – Generally in favour of Christmas but have a small and powerful minority who believe gift-giving is immoral and must eventually lead to hyper-inflation. President increasingly frustrated with this group’s sobering impact on their annual Christmas party.

The Bank of England – committed to enjoying Christmas on the 25^thDecember, subject to several clearly specified caveats and ‘knock-out’ factors. Have produced a 24,000 page paper explaining how these work.

The Bank of Japan – spent 20 years telling everyone Santa didn’t exist and that Christmas was a waste of time. Have now changed their minds, but seem to have a credibility problem.

And not forgetting:

The UK government – See Christmas as a good opportunity for the Queen to educate the masses, but worried about its intrinsic ‘socialist tendencies’. Ideally would like everyone to work on Christmas day so the UK can better compete with China. (Plutocrats are excluded, to support the demand for yachts/jets/country houses.) Believes Santa should be re-deployed to take money from poor benefit recipients and re-gift it as state-subsidized mortgages to potential voters.

US Congress – It just won’t feel the same this year without their version of the traditional Christmas family row.

Art is a lie that makes us realize the truth

Today I learn something very interesting from my Spanish teacher. Normally, she would teach me a unit in my textbook, but this evening she talked about Picasso.

Perhaps, I do not need to introduce him to you. He is very famous for his paintings. However, I guess many of you here do not agree with those art experts that his paintings are magnificently beautiful. I did not, either.  But it was the story of 10 hours ago. As I stated above, my teacher told me something about his paintings and it really made me wonder.

But I will skip the details of her lecture [sorry, but I need to have something up my sleeve). If you want to know, I think Google provides us a very wide range of choices. The main point here is that after her lecture, I still do not find any beauty in his paintings [ironic, I guess]. The only thing that I got from that very interesting lecture was the understanding of his paintings. Picasso is always said to have created very incomprehensible paintings. He is nothing like some artists that we are familiar with, such as Leonardo Da Vinci, or my favorite Van Gogh. To normal eyes like ours, Picasso’s art in the cubism period is very hard to comprehend. However, today, my teacher made his paintings more understandable. He was not drawing meaninglessly. Every detail in his works made sense. And only when you have some decent knowledge about art can you understand and find them priceless.

[Still I do not find it beautiful]

I have always wondered why people pay millions of dollar to buy a painting [except for some investment cases]. Some of the paintings are not really beautiful. But now I understand. Those rich people, like us, do not see any beauty in those marvelous paintings. The only reason why they accept to pay a lot for those arts is that they understand them and we do not. When they place a painting of Picasso on the wall, they are not showing to the world its beauty. They are showing to the world that they understand the art, the meaning behind it. The painting is not a source of decoration, but a certificate of knowledge because only people who have enough knowledge would pay for that. It has become a tool to emphasize the gap between those who have known and those who have not.

 “Art is a lie that makes us realize the truth” – Picasso.

I have to admit that I really want to have a Picasso’s painting in my room now. But I am afraid that I still do not have enough knowledge about his paintings to have one.

Maybe one day.

Maybe never.

Kz

When good intention turns bad

(This morning I read an article on Spiegel (a German magazine which is my favorite) about how legalizing prostitution has failed in Germany, and I have to say it did offer me a different perspective on this sensitive topic)

Recently, there has been suggestion about making prostitution become legal in Vietnam. As a typical eastern people, we find it quite uncomfortable to talk about such idea. We all know the negative side of prostitution through our school books. We all know where to find it through our friends. But we do not want to talk about it all. However, currently, this topic has gained much attention from the public.

Most people when argue about legalizing prostitution often base on 2 points:

1/ The benefits if we manage it.

2/ The morality of doing prostitution: for both buyers and sellers.

The first point is the reason why people want to legalize prostitution. There are some benefits according to them. They believe that by organizing this smoke-free industry, we can help reduce the STD, especially HIV/AIDS. We can even tax those sellers and increase government budget. They argue that we can never ever make that profession totally vanish. Therefore we should instead manage it and benefit from it.

The second point is why people turn down the idea. They blame the man who buys the service. And they even blame the woman who sells that. Eastern culture hardly accepts that very natural biological demand.

However, there is something missing here. People have forgotten to mention the prostitute’s benefits if we legalize their jobs.

After all, we are all only talking about ourselves, about “we”, “we”, “we”. We take HIV/AIDS into account because we are afraid that we may get infected somehow. We consider management because we cannot stop it at the first place. We want tax so that we have more to spend. We talk about moral because we do not want our husbands to be spoiled. But we forget to talk about the main person here: the prostitute.

What will happen to the prostitute if we legalize her profession?

When a girl accepts her job at a brothel, she has to work intensively, sometimes more than the pre-legalization period. How can this happen?

It is because when we legalize prostitution, we will create a free market for it. Free market means more competitors, new standard and tax. Now that the brothel owners have to improve the facilities to meet the law standard, pay tax, compete with each other, they will have to increase the commission received from their employees. The prostitute therefore needs to work harder if they want to maintain the same wage.

Human trafficking will be a big concern as brothel owners will be searching widely to have more employees. Because now they stand on a more firm and legal ground, they can easily employ more women than before to meet the increasing demand. More women will take a risk of working as prostitute and their futures are uncertain for the career only lasts 20 years at most.

Moreover, there will be no easy way to quit as the brothel owners always know how to get things on track. Even when prostitution becomes legal, police are still not a reliable support. People know that there is a blur connection between the police and those brothel owners. Before the legalization, if a prostitute breaks out because of being abused, she will receive much help and sympathy from the community. But if prostitution becomes a legal job such as banking or teaching, I do not think she will receive the same amount of that because now everyone is equal and she is no longer miserable for we are all similar at our own jobs.

In the end, the prostitute does not benefit more if her profession is legalized. They will perhaps be safer. But there are also new problems they have to face. The law will not fully protect them.

When we study economics, we learn about benefit and cost. Any project whose benefit is bigger than its cost should be carried out. But we do not pay attention to who will benefit and to who will pay the cost. We cannot know exactly whether the benefit of legalizing prostitution is bigger than its cost or not. But there is one thing we have done: we have talked about the society so much that we almost forget those women.

The society may have a win. But this win will stink if the main character does not.

  

Kz

The cost of Korean war [and everything]

Recently, there have been concerns about a war between 2 brothers: Koreans. North Korean, led by Kim Jong Un, is said to be ready for a war against America and South Korean. Put aside all the politics, how will the war cost if it breaks out?

The first cost to be estimated is the cost of carrying the war. It consists of the cost of buying weapons, curing the wounded and restructuring. Because both countries already have their arsenal, the cost of weapons will only be a major factor in case the war does not end early. Take both sides’ military ability into consideration and we may all agree that the war will not endure long and the winner is South Korea. Then, we can neglect the cost of weapons in this war. However, if the North is able and willing to launch a nuclear missile, the casualty and damage will be very severe, which will lead to the dramatic increase in cost to cure and restructure.

The second cost will be the opportunity cost. South Korea is one of the most developed countries in the world. Currently, there are some Korean companies which dominate the world market in some areas such as technology, car, … Moreover, South Korea stands between China and Japan, which is also a very busy sea lane. A war will drag down the South Korea’s economy and close the shipping lane from China to Japan which crosses Korea. The whole world will suffer from the war, not only the Asian neighbors. We will have to witness a rise in smartphone’s price, and a rise in price of products made in Japan with materials from China.

Totally, the cost for the Korean, according to many experts, will be about 0.5% world’s GDP - $350 million.

It may look small if we know that the stimulus plan of US solely costs more than $700 billion. However, this figure may increase much if the war happens next year due to the discount rate. Discount rate helps us to calculate the future value of the present cost and vice versa. If the world’s economy is expanding faster than the discount rate, then delaying the Korean war will only make it more expensive because 0.5% GPD of the future will greater than 0.5% GPD today. Moreover, if the North keeps threatening by carrying out small attacks but not a massive campaign, the cost of war will add up and get infinite, not to mention the casualty.

However, the total cost may get decreased if we take the war’s consequences into account. What will happen after the Korean war? North Korea is likely to be liberated from the recent regime. There is a high chance that after many years of suffering, they will abandon the Socialism model and purchase Capitalism model instead. In 2012, GDP of North Korea is about $40 billion. Assumingly the country, like many other emerging economies, will grow at an average 7% over 10 years. Then, after a decade after war, GDP of North Korea will duple and reach $80 billion. The figure does not look impressive. In fact, if North Korea wants to compensate for the damage it caused, it needs at least 35 years.  But that is the perspective from 100 years ago. Today, the world is getting used to the word “globalization”. No countries, except North Korea, are now standing alone in the open market. If there is change coming to North Korea, the whole world economy will benefit from it. The world can export its product to the 25 million people market, and also import low cost goods from that. It is difficult to calculate exactly how much the benefit will be, but we can sure that it will decrease the compensation time greatly. Moreover, recently, the world has sent billions of dollar to aid people in North Korea. If the war breaks out, the North loses, the regime changes, then that cash flow will turn into investment instead of aid. And that investment will help reduce the cost of war.

Obviously, no one wants a war, especially South Korea. But if it has to be done, then the earlier the better.

War is bad. We know that. But it is not completely bad. It can kill thousands of people but it can also save millions of people. Sometimes, we are biased to think something is completely bad or good. We look at something and immediately know its nature thanks to the knowledge of other people. We do not mind calculating again. We learn about the benefit and cost, but we hardly apply it successfully because we sometimes cannot estimate correctly the benefit in short-run and the cost in long-run.

The greatest trick the devil ever pulls is to convince the world that it does not exist.

April, 2013.

Kz and Inor.