A Weird Cosmology - Part 1.1 - TIME

I intend to start wandering into a weird area called “what I think”. In so doing I hope to lay out perhaps a different way to see reality. I would expect that some people might find my thoughts: stupid, intellectual puffery, irrelevant, emotional, immoral, naive.... I have no idea. I don’t pretend that this represents a cohesive system of thought or that this represents latest scientific thinking. It doesn’t.  I believe that rationality as we define it in western culture is way overblown in importance - so if I am accused of being irrational - so be it.

What I am going to say is nonetheless an honest attempt to put down what I think. It is simply a theory of the nature of reality - and I am cool with that. All good theories are meant to be disproven anyway. But for now, its my working theory.

The first and perhaps gateway concept is: time isn’t what we think. We think of time flowing from the past to the future, and that we currently exist “now”. This is the “arrow of time” - it goes ever forward and never backwards.

Except that it doesn’t. Time isn’t an arrow - its closer to a string, or path. It exists always at once and what we think we experience is simply a point on that string. That point on the string, which we consider to be “now”, will exist forever, just as will all the other points on the string. Even though I say “forever”, in this view of time, the idea of forever does not exist. All time exists concurrently such that the only time is forever now. But again, there is no concept of forever.

One way to think of this is that time is simply another dimension, but one in which we as humans can only see at one point.  But otherwise its just another dimension. And does it just extend in one direction - like a string or line, or does it extend in all directions.? I think: all directions.

Strangely enough, my view of time is at least partly supported by the seeming opposite camps of science and religion. From the scientific side, the standard concept of time has been under attack for decades. To see a sample, look at the Wikipedia link to Eternalism  or this excellent site on the Arrow of Time or this link to a Scientific American article That Mysterious Flow by Paul Davis. I don’t want to go into all this scientific theory because there is a massive amount written on this out there and I understand very little of it. But if you want to explore the scientific side of the issue there is plenty to find.

From a religious standpoint, the idea of an omniscient god (God?) has always incorporated a similar view of time. If an omniscient god knows all points of the past, present and future in infinite detail, then they all exist concurrently. Our existence represents a time line and all points are equal.

If time is as I suppose, then why do we experience it like an arrow? Well I ask: If you experienced it any other way, would you be able to function in what we think of as reality? Would you be declared insane?  - no let me change that:  you would be insane! Or alternately you might not be considered conscious.

And there it is:  consciousness as we define consciousness depends on a particular perception of time. In fact, I would argue that consciousness could be defined as the subjective awareness of the passage of time. We see time as an arrow because that is a prerequisite for human consciousness. If we saw it in any other way, we would not be humans.  As a expansion to this thought, if something were to experience time in a different way, we would probably not recognize it as conscious.

Well that is a taste of my weird cosmology. I hope to continue it at a later time.

Intellectual Disclaimer

Many of the ideas I express in this blog are strictly my own, but when it comes to networks and power laws, many of the ideas come from others. As an introduction to some of these thoughts I recommend the following books:

Ubiquity by Buchanan  - this is the best introduction to the universality of networks and power law concepts
Linked by Barabasi - this is a good discussion of network growth and structure
Why Stock Markets Crash by Sornette - this is a quantitative discussion on network simulation of markets
Fooled by Randomness and The Black Swan by Taleb  - Not for the timid but I recommend anything by Taleb - more than anything, these are works of philosophy and epistemology
The Misbehavior of Markets by Mandelbrot - an attack on traditional market analysis by one of the greats of chaos theory
The Tipping Point by Gladwell  - This was done before much of the current theory was thought about - but it explores the same phenomenon as Linked

Anger Management

In response to David's excellent comment on Capitalism at the Brink, regarding the justifiable anger people have about the financial crisis:  I agree with almost everything you said.


Anger is a natural reaction. Heck - I'm angry about it. I have particular people in mind when I think of attitudes that "led" to this - and when I think of them, I get angry.  Unfortunately, I think my own anger gets mixed into my blog post - but in a weird way - I'm angry at my own anger.

Intellectually, I think the search for causes and villains is in at least some sense unfounded. What happened in the markets is like an earthquake, or avalanche, or like a panic in a crowded room. It is a natural byproduct of the physical and social structure which developed so successfully over the last 40 years. As we drove our economy to more efficiency, less redundancy, and fired anyone who didn't produce immediate results, we created a very successful economy, but also one that was reaching criticality. Was it inevitable that it would happen when it did and in that particular way - no. But it was inevitable it would happen sometime and in some way and when it did - it was inevitable that we would all be angry.

There was a  massive inflow of liquidity/financing made available over the last 30 years and it was this liquidity flow which ultimately stopped. But it was also this massive liquidity flow which led to the stock market and real estate rally over the same time. [And at least in part, these financial innovations were a response to the establishment of ERISA and pension plans in the 80's. Pension plans needed something new to invest in, and our capitalist system created it.] The same phenomenon that led to the economic success of which we are so proud as a nation was both the cause of and result of the processes and practices that blew up.

I am proposing that this crash - and all such crashes - are natural and inevitable byproducts of dynamic "living" systems. If you look hard enough, you may be able to find a triggering event of such a crash, but most likely, every major event was itself caused by a series of smaller and smaller inconspicuous triggering events. Pareto theorized that diverse systems of society and economies can result in a particular and relatively stable pattern of wealth distributions. I'm saying the same thing about how such systems behave over time.

I also believe that a good paradigm for thinking of such a living system is that of a dynamic network.

We see networks everywhere - in a wide range of natural and man made phenomenon. Networks occur naturally - simply as a response to things interacting with with their environment. We see these networks when look out the window at our ecosystem, when we have peaceful relationships with our neighbors, when we see our stocks rally and fall, when we turn on the power to our home. They can lead to amazingly successful growth (Google for example) and equally devastating failures. When things go our way - we think of them as natural and normal. When capitalism "worked" it was because of its inherent superiority and the work ethic of the American people. When it fails - lets find the culprit and string him up.

I also believe that networks display a signature - or fingerprint in their behavior. This signature is the power law distribution, such as the Pareto distribution.

So it is in this context I find the crisis so absolutely fascinating - so cool!  But at the same time -  Yes - those b____s on Wall Street are getting huge bonuses because We bailed them out. I just wish I weren't so angry about it.

[Note that the 80/20 rule is an example of a Pareto distribution - there can be any number of actual parameters - and the Pareto Distribution is just an example of a power law distribution - so when I say networks exhibit power law distributions - I don't mean they all have 80/20 Pareto distributions. Its just that the 80/20 rule is known and hopefully illustrates the point]

Capitalism at the Brink

Recent data released by the Federal Reserve sheds more light as to just how bad things really were in late 2008 - and arguably even today. This Washington Post article summarizes some of it: http://www.washingtonpost.com/wp-dyn/content/article/2010/12/01/AR2010120104658.html?sid=ST2010120106876.  As we all should know at this point,  the Fed was helping a lot more than was admitted to. I looked at what I think was the raw data behind this article (http://www.federalreserve.gov/newsevents/reform_cpff.htm )  and I looked at just the first 3 months of the data. Between the end of October 2008 and January 2009, the Federal Reserve purchased from securities dealers, banks and finance companies over $380 billion worth of commercial paper. Commercial paper is (was) typically considered to be the highest quality, most liquid type of capital market security. The fact that the Fed had to buy this paper means 2 things: 1) the banks, dealers and finance companies would probably not have been able to raise money (by selling these short-term investments they owned) without the Fed help (and therefore may have defaulted themselves). 2) The issuers of this commercial paper were most likely unable to borrow though the capital markets themselves, and thus may have also defaulted. The issuers (ultimate borrowers) of the paper included "good" companies like GE, Caterpiller, Toyota and Harley Davidson.  So in effect, by being willing to buy commercial paper issued by these companies, the Federal Reserve was telling the shell-shocked capital markets to "Please calm down! - Look!  We will buy assets from you if you get in a liquidity pinch yourself. So don't worry about buying commercial paper, because if you need to sell it you will always be able to look to us." This was just one small part of what was the implicit government guarantee of the financial system. It also is an indication of how quickly a financial crisis was going to translate into "real America".  Defaults of major US companies were imminent and would escalate rapidly.

By the way, I spoke to a couple of people recently who claim that they received no benefit from the bailout. I contend that while we can look at some evil individuals who unfairly benfited by this disastor, the biggest aggregate group of beneficiaries are : anyone with a bank account, retirement plan, money market account,  stocks, real estate and anyone who owns or works for a business who borrows money from anyone or who has customers with any of those assets.  In fact, I would go so far as to say anyone who relies on a functioning civilization was a beneficiary.

I am amazed at the number of people who have, say, a retirement income and bank accounts, and think they are insulated from this issue.   Just look at the balance sheet of a retirement fund or of a bank. You will not find your cash anywhere! Instead you will find things like stocks, real estate, business loans, commercial paper and deposits in other banks.

The Inequality Formula

As a follow-up to my discussion on the Pareto Distribution and the distribution of wealth in society, I note a recent article in Bloomberg Businessweek magazine from October 25, 2010.  ( http://www.businessweek.com/magazine/content/10_44/b4201008238184.htm ) This article "The Inequality Delusion" by Drake Bennet discusses an upcoming study by two psychologists [Dan Ariely from Duke and Michael Norton from Harvard Business School] on how wealth in the US is actually distributed and how starkly this distribution differs from most peoples' expectation. For example, when people in a large survey were asked what percentage of the nation's wealth was controlled by the richest 20%, the average response was 59%.  When asked what they believed would be an ideal percentage, the average response was that the richest 20% of the people should control just 32% of the nation's wealth.

The "actual" percentage of the nation's wealth controlled by the richest 20% is...... 84%!    Shocking!    Well, maybe not too shocking since this is essentially what Pareto found in his initial studies of the same phenomenon through history.  It is essentially the 80/20 rule as described by the Pareto Distribution.

I'll admit I was a little surprised by this article. First, do people on average really believe that the richest 20% of the people should control just 32% of the nation's wealth?  Wow!  Second, while my guess on the survey question would have been 80% because that is roughly what Pareto found, I am still surprised at how close it was to that number. As big a fan as I am about this whole concept, I feel there has got to be a tremendous data problem - specifically: "how do you measure wealth?" I would think that the variability of wealth measurement methods and quality of data would significantly shift the results from study to study. Also, socialist or communist societies have a whole different conception of wealth and ownership. My feeling is that in a communist society the same 80/20 rule may still hold, but only if you change the concept of wealth ownership to "ability to control resources" such as through political power. My understanding is that Pareto himself was socialist/communist earlier in his life but became disillusioned when he saw the politically powerful in these economic systems displaying the same wealth/power grabbing behavior as their non-socialist counterparts.

Pareto and the Role of Government

One of the things I like about Vilfredo Pareto is that he was interested in the organizational structures of society - particularly governments. Through his early career, he was at times a capitalist, socialist and a communist. But in his later years he came to believe that all forms of government result in the same distribution of power and wealth (though of course to different sets of people). All governments, whether a communist one or democratic capitalist one,  result in a massive underclass and a small elite group controlling an overwhelming share of power and wealth.  With all forms of government sharing this common flaw, the best government is the one that maintains order while at the same time producing the least drag on society - i.e the one that is most efficient. One of Pareto's students at the Italian university where he taught was Benito Mussolini - who later claimed Pareto was the ideological inspiration of his Fascist government.

To quote Wilkipedia:

Pareto's discovery that power laws applied to income distribution embroiled him in political change and the nascent Fascist movement, whether he really sided with the Fascists or not. Fascists such as Mussolini found inspiration for their own economic ideas in his discoveries. He had discovered something that was harsh and Darwinian, in Pareto's view. And this fueled both the anger and the energy of the Fascist movement because it fueled their economic and social views. He wrote that, as Mandelbrot summarizes:

"At the bottom of the Wealth curve, he wrote, Men and Women starve and children die young. In the broad middle of the curve all is turmoil and motion: people rising and falling, climbing by talent or luck and falling by alcoholism, tuberculosis and other kinds of unfitness. At the very top sit the elite of the elite, who control wealth and power for a time -- until they are unseated through revolution or upheaval by a new aristocratic class. There is no progress in human history. Democracy is a fraud. Human nature is primitive, emotional, unyielding. The smarter, abler, stronger, and shrewder take the lion's share. The weak starve, lest society become degenerate: One can, Pareto wrote, 'compare the social body to the human body, which will promptly perish if prevented from eliminating toxins.' Inflammatory stuff -- and it burned Pareto's reputation."^[4]

Pareto had argued that democracy was an illusion and that a ruling class always emerged and enriched itself. For him, the key question was how actively the rulers ruled. For this reason he called for a drastic reduction of the state and welcomed Benito Mussolini's rule as a transition to this minimal state so as to liberate the "pure" economic forces.^[6]

To quote Pareto's biographer:

"In the first years of his rule Mussolini literally executed the policy prescribed by Pareto, destroying political liberalism, but at the same time largely replacing state management of private enterprise, diminishing taxes on property, favoring industrial development, imposing a religious education in dogmas".^[7]

Karl Popper called him the "Theoretician of Totalitarianism".^[4]

source: Wikipedia

I'd like to think that Pareto was misunderstood.  He was an old man at the time and would die early in Mossolini's rule. I have read that Pareto also strongly favored freedom of the press and the rights of individuals. So rather than being a Fascist, he may have just as easily been ideologically closer to Goldwater Republicanism or libertarianism. But regardless of what you call him, I admire his intellectual curiosity, independence and courage. He stands apart from any particular form of government and instead asks questions about the properties of all governments and societies. He concludes that regardless of which particular government rules, there is a consistent underlying structure to society - one that follows the Pareto distribution.

Khan Academy

I feel compelled to mention this web-site: http://www.khanacademy.org/ . Per Wikipedia:
"The Khan Academy is a not-for-profit educational organization created and sustained by Salman Khan. With the stated mission "of providing a high quality education to anyone, anywhere", the Academy supplies a free online collection of more than 1,400 videos on mathematics, science, and economics."
It is a fantastic resource of anyone wanting to learn math or physics or brush up on forgotten skills.

If you have any desire to learn or relearn these subjects - please go to this site. If you want to see how technology and the internet can make a real positive difference in the world - go to this site. If you want to hear and see an excellent teacher - go to this site.

One of the things I enjoy about math is that it engages the mind in a fruitful activity divorced from the  emotional slavery of everyday life. Its good clean fun - much like chess.  Most math books are written with some other idea in mind - and even with my enlightened attitude, I quickly hit a wall in my understanding or just get bored with them.  Khan's web-site puts the fun back into learning.

Moses and Monotheism - by Sigmund Freud Part 2

If Moses Was an Egyptian...

Part 2 of this book assumes that Moses was an Egyptian and explains how an Egyptian could come to be the founder of the Jewish religion.  The ancient Egyptian religion was polytheistic and very concerned with death and the afterlife, while the Jewish religion was rigidly monotheistic and does not speak of the afterlife. So how could an Egyptian found the Jewish religion?

The answer is that for a short period, perhaps 17 years, an Egyptian Pharaoh established a new religion that was remarkably similar to the one later adopted by the Jews. In roughly 1330 BC Pharaoh Akhenaten (or Ikhnaton) established a new monotheistic religion that worshiped a moral, just sun god, Aton (Aten), and deemphasized the role of death and afterlife.

Freud speculates that this new religion based on the worship of Aton later became the core of the Jewish religion. He also points out that circumcision was practiced by the Egyptians long before adopted by the Jews and that the Egyptians considered it a sign of distinction from the barbarians elsewhere.  It was a mark of cultural superiority - and as such would have been adopted by Moses.

Exodus
Moses was probably a member of Akhenaten's household, or part of the nobility that had accepted this new monotheistic religion. After Akhenaten was overthrown, the old religions were reestablished. Moses gathered ("chose") a disaffected portion of the population, the Jews, and left Egypt to establish a new state where the religion of Aton could be practiced.  Moses would have just left Egypt, without the need of miracles, because following the overthrow of the Pharoah, the country was in state of turmoil, with no central leader.

To make a long story short, the refugees went east and eventually met up with a another tribe, the Midianites, who were probably kin, that lived in the area of Qades. Moses died somewhere along the way - proabably killed by the refugees themselves. His teachings were kept alive by his immediate family and followers, later called the Levites.

The Midianties worshipped a different god, Jahve (Jehovah) who was a volcano/fire/lightening/mountain god. After a few generations (Freud speculates two generations) these two religions merged into one. Many of the names and forms of the Midiante religion were kept, but the substance was primarily that of the Egyptian Moses. This new blended religion contained miracles and other inventions designed to create one unified and glorious story that gave credit to both cultures.

Dualism
I was most interested in this last part of Freud's account.  I have always felt that the Bible described two very different gods, one of light which is universal, indescribable and concerned with living a moral and just life. The other god was very human in appearance and his passions - and particularly vengeful and jealous.

Frued's account would explain this dualism. In reference to the Mediante god, he states, "The god Jahve ... was probably in no way a remarkable being. A rude, narrow-minded local god, violent and bloodthirsty, he had promised his adherents to give them 'a land flowing with milk and honey' and encouraged them to rid the country of its present inhabitants 'with the edge of the sword.'" This god was probably not even monotheistic, but just one more local god.

The god of the Egyptian Moses however was an entirely different nature - and Freud credits the Jewish people that it is from this version that they draw their inspiration.

Moses and Monotheism - by Sigmund Freud Part 1

This book was first published in 1939. My Mom just gave me a copy and I find it interesting .  Moses was a central figure in three of the world's "great" religions - Judaism, Christianity and Islam. I will give a thumbnail sketch of the first of the three chapters.

Moses an Egyptian

The Birth of Moses - Traditional Approach 
By way of background, Wikipedia gives the following text concerning the birth of Moses:

In the Exodus account, the birth of Moses occurred at a time when an unnamed Egyptian Pharaoh had commanded that all male Hebrew children born be killed by drowning in the river Nile. Jochebed, the wife of the Levite Amram, bore a son and kept him concealed for three months.^[6][8][9] When she could keep him hidden no longer, rather than deliver him to be killed, she set him adrift on the Nile River in a small craft of bulrushes coated in pitch.^[8] Moses' sister Miriam observed the progress of the tiny boat until it reached a place where Pharaoh's daughter (Bithiah^[6],Thermuthis ^[10]) was bathing with her handmaidens. It is said that she spotted the baby in the basket and had her handmaiden fetch it for her. Miriam came forward and asked Pharaoh's daughter if she would like a Hebrew woman to nurse the baby.^[6] Thereafter, Jochebed was employed as the child's nurse. He grew up and was brought to Pharaoh's daughter and became her son and a younger brother to the future Pharaoh of Egypt. Moses would not be able to become Pharaoh because he was not the 'blood' son of Bithiah, and he was the youngest.
Exodus and Flavius Josephus do not mention whether this daughter of Pharaoh was an only child or, if she was not an only child, whether she was an eldest child or an eldest daughter. Nor do they mention whether Thermuthis later had other natural or adopted children. If Rameses II is the Pharaoh of the Oppression, as was traditionally thought, identifying her would be extremely difficult as Rameses II is thought to have fathered over a hundred children. The daughter of Pharaoh named him Mosheh, similar to the Hebrew word mashah, "to draw out".

In the Moses story related by the Quran, Jochebed is commanded by God to place Moses in an ark and cast him on the waters of the Nile, thus abandoning him completely to God's protection. Pharaoh's wife Asiya, not his daughter, found Moses floating in the waters of the Nile. She convinced Pharaoh to keep him as their son because they were not blessed with any children.   (source Wikipedia)

Freud's Approach: Moses an Egyptian

Freud's approach was that Moses was not a Jew, but an Egyptian - and he supports this approach with three arguments:

1) The name "Moses" does not fit properly into the story. It was supposedly given to him by the Egyptian princess who found him and is usually attributed to being from Hebrew where it is written as  Mosche.  Freud quotes from Judisches Lexikon , "The Biblical interpretation of the name: 'He that is drawn out of the water' is folk etymology; the active Hebrew form itself of the name (Mosche can best mean only "the drawer out" [Moses as a baby was drawn out of the water - he wasn't the "drawer" - JSM] ) cannot be reconciled with this solution."  Freud continues "This argument can be supported by two further reflections; first that it is nonsensical to credit an Egyptian princess with a knowledge of Hebrew etymology, and, secondly that the water from which the child was drawn was most probably not the water of the Nile."

2) Instead of being from Hebrew, the name Moses is most likely related to the word "mose" in Egyptian, meaning "child". It is usually preceded by the fathers name. We see a similar pattern in the names of Egyptian kings such as Ramses (Ra-mose or child of Ra) or Thotmes (Thut-mose - child of Thut).

3) Freud's third argument relies on a concept he refers to as the "average myth" and it relates to the "fact" that most peoples develop myths around their most important heroes, kings religious figures etc.. This is a very interesting idea and is very similar to those of Joseph Campbell in his writings on mythology. I will note the Freud does not take credit for this idea.

The Average Myth

• the hero's true parents are from the highest station (such as a king)
• The hero's conception is hindered by difficulties such as abstinence or temporary sterility [I think virgin birth qualifies here - but that is a different story]. During the pregnancy an oracle or dream warns the father of danger related to the child's birth
• The father figure gives the order that the baby be killed or exposed to extreme danger. In most cases the baby is usually placed in a casket and delivered to the waves.
• The child is saved by animals or common people and suckled by a woman of humble birth.
• When grown, the hero rediscovers his noble heritage, has strange adventures, takes vengeance on his father and attains fame with his people.

Freud expands on this framework and gives a long list of mythological and historical figures that fit within it.  Freud states that in the average myth, it is the first family, the one that exposes the child to danger, that is usually a fiction created by the myth. The lowly family into which the child is adopted is his real family.

In this case, Moses of myth was born of lowly Jewish parents and was adopted into a noble household. The Egyptian family (the second family in the myth) was the real family. Moses was an Egyptian from the very start and that the part about the Jewish mother was a myth created to support his later stature in the Jewish culture.

Freud concludes the first section conceding that the evidence of Mose's Egyptian birth is far from proof - but that the entire story is shrouded in religious mystery.  He certainly believes that it is a reasonable argument - and if it is true, it sheds a completely different light on the story of Moses and the Jewish faith. His next chapter is If Moses Was an Egyptian.

Random Thoughts
I find it interesting that Freud, the father of psychoanalysis, looked into cultural beliefs (the mind of society)  as though he were looking into an individual's mind.  There is an implied idea that society is a consciousness.

I also find it interesting that Freud, a Jew, would even take on this topic - And he notes in the book that he does so with some reservation. But he did it anyway and it sounds like from the many references he quotes in the book, he wasn't the only one.
Finally, I find it interesting that my Mom, a Christian, would pass this book on to me. But I believe that if faith rests in the heart rather than in religious doctrine, the mind is free to explore.

I love the history of Rome

I was listening to Professor Bob ("History According to Bob" podcast) today talk about one of my favorite topics - the late Roman Republic, and he made an interesting point. He was talking about the first triumvirate  - the political alliance between Crassus, Pompey and Caesar which lasted roughly seven years following 60BC.  Prof. Bob's interesting point was that the triumvirate was formed in an attempt to break the stranglehold that ultra-conservative republicans had over the Senate.  The way Prof Bob described it was that a relatively small group of ultra-conservatives (which included Cicero and Cato the Younger) had banded together to block any reforms and any actions that appeared to lessen the control of the Senate.

Pompey and Caesar, independent of each other, were proposing certain reforms which were being blocked - in spite of the reforms' overall popularity and general senate support. But the ultra-conservatives, through coercion, filibuster and political dealing stopped every attempt. Prof Bob's point was that both Caesar and Pompey were not acting against the Republic, they were just trying to make needed reforms, and they were going through the normal channels. But because they couldn't get through the "no reform" wall, they had to go around it - and by acting together, and with the help (i.e money) of Crassus - they had the unified political power to force the reforms through.  The irony is that by stopping all reform, the ultra-conservatives made the First Triumvirate necessary. And the First Triumvirate can be thought of as one of the first steps towards the destruction of the Republic and the establishment of the Empire.

Reformists or Just Politicians?

Pompey had just come back from the eastern Mediterranean where he had just completed two very successful military campaigns. While in the east he negotiated several excellent treaties and had also promised settlement rights to his veterans.  Now he needed the Senate to ratify his deals - but Cicero and company were against this headstrong young man making such deals without the traditional Senatorial oversight and held them up. Had Pompey done what his predecessors had done (Sulla and Marius) he would have kept his army and marched into Rome and forced the Senate to approve his deals. And had he been Sulla or Marius, about 1/3 of the Senate would be dead by the end of this. But no - Pompey was a good Republican and was sick of the murder and mayhem of the prior 50 years - so he did everything by the book - only to be stopped by small group of "traditionalist".

Caesar at this point wasn't the military genius of later years but was nonetheless very popular among the general population. He had proposed some very popular land reforms to counter the trend of farm land falling into the hands of the wealthy Senators, leaving a growing population of unemployed, poor citizens in the city.  Again, Cicero and company were against all reform.

I don't know why Crassus was in the deal, though since he was by far the richest man around ("as rich as Crassus" is a phrase still used today), I can see why Pompey and Caesar where happy to have him around. Apparently Crassus and Pompey weren't on the best of terms and Caesar, the weakest of the three triumvirates, was the glue that held the three together.

So by standing in the way of the man with the army (Pompey), the man with the people (Caesar) and the man with the money (Crassus), the ultra-conservatives accelerated their own eventual downfall.

Or at least that is one conclusion. I must say that even as I wrap up this episode of history with a tidy bow, I know that such conclusions are not to be trusted. As much fun as it is to look back at history and say "event 'A' leads to event 'B' and then ultimately to 'C'", we really don't know. But it is still fun to think about.

"Too Big to Fail" a book by Andrew Ross Sorkin - A Review and Comments

I just finished Too Big to Fail and found it enjoyable, but not so much that I would definitely recommend it. I think I enjoyed it more than many people would because I was  in the financial industry, did business with all of the firms mentioned in the book and I was familiar with a few of the people. 

The book covers the financial crisis from the failure of Bear Stearns in early 2008 through the failure of Lehman and AIG and it ends with the introduction of the TARP program in late 2008.  There is a little back story on the career of a few of the major people such as Bernanke, Paulson, Geithner and Fuld (at Lehman) but most of the book is structured as sequential snapshots of conversations and meetings. The pacing of these snapshots is leasurely at first but by the end is frenetic as the book switches back and forth in minute to minute conversations as people desperately try to stop a immanent economic catastrophe. I found this pacing annoying because I had a hard time following the timeline. Early on, there could be months between snapshots but by the end they were minute to minute - and it wasn’t clear just when things were happening. But this escalating pacing did provide what little sense of story the book had.




This book is a documentary - not a story. It covers a lot conversations among a long list of people most of us have never heard of and in whom we probably have no interest. And it covers events which, if viewed in isolation, without proper context, have little meaning. So while I say this book is a documentary - it is arguably not a good documentary because a good documentary should give the reader a sense of context as to what led up to the events, what sort of environment they took place in and why they were important. 

That said, I found the book interesting - but I have a painfully intimate knowledge of the institutional money flows that keep businesses afloat and the economy running.  So I already had a sense of context. I imagine that most people who follow the markets will also have enough sense of context to enjoy the book - but perhaps may not understand the sense of imminent catastrophe that drove the actors.

I have a few takeaways:

1) People were amazingly naive for an amazingly long time.  Keep in mind that the institutional money markets had the equivalent of a heart attack in the late summer of 2007 and never recovered. This was more than 6 months before Bear Stearns fell and more than a year before Lehman failed.  The institutional money market is like the blood flowing through the body of the economy. It is taken for granted, but if it stops flowing, it isn’t long before the major organs fail. The body in this case had enough money in its system to last 6 months, then the organs started to fail.  Concentrating on poor asset quality and the mortgage market is like a Doctor concentrating on a broken arm or perhaps even cancer. Bad, but certainly not immediately fatal. The immediate problem was that patient was dying from lack of blood flowing through the body.

2) People were so fixated on hedge funds selling short financial stocks and fraud in the mortgage industry that they seem to have ignored the far more important fact that  money - the blood of the system, had stopped flowing. As evidence of this, the book relays many conversations where CEOs are ranting about short sellers driving down their stock price and as though that was the real problem. And yet none of the companies were at risk of collapse because their stock was going down. The companies were collapsing because they were running out of money - as in cash. And even while they were trying to sell any and every asset in the company to pay off the next bill coming due, they ranted about short sellers.  Financial companies always have big bills coming due - they are 70% to 99% financed by debt. They don’t need to pay off the stockholders. They need to pay off their debt coming due.

3) It seems that Goldman Sachs alumni are everywhere. The book never pointed to this being a real problem, but I can sure see that when it looked like “even Goldman Sachs” would fail within the week, then the line in the sand was drawn right then and there.  No one could imagine a world without Goldman Sachs.

4) Senior executives didn’t seem to understand their own business. [no surprise] This was particularly clear at AIG when they woke up to the fact one day that Securities Lending was going to cost them a boatload of money and it sounded like they didn’t even know what Securities Lending was. The whole “short-sellers” controversy that CEO’s ranted about was just an indication they didn’t realize the real issue. The regulators weren’t any better. They ignored the fact that AIG was insolvent for months before it finally fell. They were looking at Lehman when “surprise surprise”  AIG collapses. All of these events followed a fairly clear trajectory and the regulators should have been able to connect the dots.

5) Even when the ship is sinking - people still think “will my deck chair be comfortable”. CEO’s cared about short-sellers because they drove down stock prices and that is where the CEO’s had their wealth. Never mind that the company is dying - how is the stock doing.  Also, even in the final dying moments of the firms, people still stalled and delayed so they would have a great job in the new company. 

6) In the final days before TARP, Geithner ran the show - he was the real deal maker. He sounds like an egomaniac and someone eager to make the “necessary” decision. Paulson sounds like he was in denial but then “woke up” and made TARP happen.  In the book, Bernanke sounds like someone always running a few weeks behind events. Cox at the SEC and Fuld at Lehman were punchlines to a bad joke.

7) My interpretation of the events surrounding the BofA / Merrill combination is that Ken Lewis, the CEO of BofA, was an idiot. Merrill Lynch was failing!! It could have been bought from the Government the very next day for free and with probable Government guarantees attached. But Ken Lewis was so wrapped up in his victory dance that he was buying THE Merrill Lynch at a “cheap” price that he completely missed the fact that THE Merrill Lynch was now worthless.  And it doesn’t sound like the Government promised him anything. They were hoping BofA was going to buy Lehman. It sounds like the Government wasn’t even that aware that Merrill was about to fail until it almost did.

8) Although the book was full of egomaniacs, jerks, nice guys and idiots, there were no real “bad guys” and no real “good guys” as related to the crisis. Everyone was just caught up in something they had never experienced before and was responding in their own individual way, usually just looking out for themselves or just trying to get through the day. No one plotted to destroy the world.  

9) There was a point where the people in the book, well at least most of the people, seemed to have woken up to the problem. It’s like there was a light switch. First it was “we will not support...” and then it was “oh shit...” 

When this “oh shit....” realization finally hit, no one really talked about what “oh shit...” meant. It is pretty clear that at a minimum their “oh shit...” meant that all the investments banks would fail. Morgan Stanley was within days of failure and Goldman Sachs would fail “30 seconds” behind that. Then what?  Wachovia Bank was already failing and had to be merged,  Citi and Bank of America had major issues. Were they next?  Other than the unthinkable event of Goldman Sachs failing, the closest the book came to really descibing the full “oh shit...” scenario is that GE would soon fail. But the book never went farther and it implies that the major players kept their mouth shut on just how bad it could be. I believe they kept their mouth shut because they were truly afraid and they didn’t want to voice their real concerns from fear it would accelerate the problem.

So I will give my full version of “oh shit...” If allowed to run unchecked, the small amount of money still flowing through the system would have shut down completely. Investors, due to a combination of prudence, legal requirements and due to their own cash needs would be forced to stop investing in anything that wasn’t Government backed. The investment banks would fail within a week - this meant Morgan Stanley and Goldman Sachs. Citi and BofA would have had major funding crisis within days primarily due to their need to fund massive commercial paper programs. The Government would have been forced to step in at some point - though in this scenario, only small depositors would be covered so there would be trillians of dollars lost to investors and large depositors. All other banks would soon face a funding crisis and would be forced to operate with “negative capital”.  GE would have been unable to roll its short term-debt within weeks and would be forced into bankruptcy. (actually most of this was already being talked about) All commercial finance companies would fail along with GE. With the collapse of commercial funding, businesses would be forced to liquidate assets and stop their activities. Even companies who didn’t borrow would see their customers disappear. Layoffs would begin in real earnest.

But then it gets really scary. Municipalities would not be able to issue debt and make payrolls. Basic services would gradually be cut back. Pension funds, foundations, universities, health systems would take massive losses across all asset classes, but worse yet, most their cash is invested in short term debt of financial companies which are no longer paying off. Without cash, pension payments and payrolls are missed. In fact all companies put their payroll and working capital cash in banks and money market funds.  These companies can’t make payrolls.   The courts would be come clogged. The Government would be forced to call out the military to handle a suddenly impoverished under-policed populace. Foreign governments would begin to default... (Greece, Hungary, Egypt, Spain, Iceland, England, Russia...)   Let’s just say it gets a lot worse even from here.  The world collapses along the same mechanisms that in better times make it work.

I believe this is what really scared the shit out of Paulson and company. He looked over the edge and saw the abyss.  What was unthinkable in our normal world, became the all too possible.

So that is the real meaning “Too Big to Fail”. If a failure leads to even the possibility of global financial and social meltdown, then its just too big and can’t be allowed to happen.

10) In school, we are taught to think using the paradigm of a “normal” distribution - the traditional bell curve.  If you think of the world as following a normal distribution of events, then no natural failure is truly too big. Bad things can happen, but they aren’t really really bad and eventually everything will return to normal.  This is the world view of those who say “let them fail - we will recover”. In this pretend world, truly catastrophic failures can’t happen on their own. So if they do happen, they must be caused by someone doing something massively evil. I would say that this is the base-case view of most people, even those who don’t know what a normal distribution is. It is certainly the view pushed by the media and politicians.

But if you think of a world built using networks (such as a financial system) then the distribution of possible events isn’t normal distributed - it follows a Pareto/power-law distribution. And under this paradigm, events can truly become too too big - where a single event can dramatically affect the entire system. - even destroy it.  And under this paradigm, catastrophic events can occur naturally. You can always find scapegoats after the fact, but they are not really the cause.

More on Pareto Distributions

In 1896, Vilfredo Pareto researched the distribution of income and wealth patterns of different countries and in different times. Through this research he found that, across the population of a country, both income and wealth are distributed in a special pattern - one that follows a function: log(N) = log(A) + m log(x) [where N represents the number of people with wealth greater than x, and where A and m are constants]. After fitting the data to this function, Pareto found that about 20% of the people controlled roughly 80% of the wealth in a country - and that this relationship held across the different times and places he studied. This finding was the birth of the "80/20 Rule."

Pareto’s equations didn’t stop there though. They didn’t just predict the data at the 80/20 point and stop. They predicted an entire probability distribution. If you follow the logic of the Pareto Principle:

• the bottom 80% of the population controls only 20% of a country's wealth = “the poor”
• the top 20% of the population controls 80% of the wealth = “wealthy”
• the top 4% of the population (20% of 20%) controls 64% (80% of 80%) of the total wealth = “very wealthy”
• the top 0.8% of the population controls 51% of the total wealth = “the super wealthy”

This type of distribution isn't just limited to income and wealth distributions. We see Pareto and power law distributions in the financial markets, geology, physics, politics, traffic patterns, the internet and biology - just to name a few. For example, you might see the Pareto distribution in the occurrence of forest fires in California. If we applied the same 80/20 pattern here you might find that:

• the smallest 80% of the fires in California cause only 20% of the damage - most of these fires would not be reported or even noticed.
• the largest 20% of the fires cause 80% of the damage
• the top 4% of the fires cause 64% of the damage
• the top 0.8% of the fires cause 51% of the damage - these are the ones that make the news.

As a disclaimer. I used the 80/20 rule here just to illustrate the basic idea of the Pareto distribution. In reality, the idea of a Pareto distribution encompasses an infinite number of distributions which follow the function given above - but you can think of them as all having roughly the same shape and ideas of the 80/20 rule.

One thing is clear - this new type of distribution is not normal. By that I mean it isn't a “normal” distribution or bell curve you might have studied in college. A "normal" distribution tends to be well behaved in a statistical sense. It describes environment where wild events happen very rarely and when they do, they aren't so wild that they mess up the averages. Pareto distributions (and power law distributions) on the other hand can describe environments where wild events are also rare, but when they do happen they can be very, very wild - far wilder than would be conceivable using a normal distribution. Out of the thousands of earthquakes that occur every year, most are not even felt, but then one occurs which destroys a city. Or after months and months of "normal" financial markets, we get a massive and rapid selloff. These events wouild be typical of power law distributions.

What causes these distributions to show up? We don’t know yet. But one theory is that they all come from types of environments that can be structured as networks. I believe that the Pareto/power law distribution is in fact a signature or fingerprint of a networked environment. Along the same line of thinking, if you are dealing in an environment that operates as a network, you should expect to see this type of distribution to show up. If this theory is true, it provides the answers as to why we see the 80/20 rule so often in business settings. Business environments are all about networks - supply chain networks, computer networks, networks of traders, all sorts of networks but most importantly - social networks.

Why I named this the Pareto Project

“Give me the fruitful error any time, full of seeds, bursting with its own corrections. You can keep your sterile truth for yourself.” -Vilfredo Pareto

I named my website after Vilfredo Pareto (1848 - 1923) - an Italian economist, sociologist and philosopher. My interest in Pareto originally stemmed from the probability distribution which bares his name: the Pareto Distribution. This distribution is often referred to by other names such as the Pareto principal or as the popular business rule-of thumb: “the 80/20 rule”.

From a business context, the amazing thing about the 80/20 rule is that it shows up so often - so often in fact that an entire industry exists to promote the idea that “80% or your business results come from 20% of your effort” or some such phrase.

But as it turns out, it isn’t just business settings that the Pareto distribution shows up - it seems to show up almost everywhere. It, along with the closely related probability distributions known as “power-law distributions”, shows up in business, financial markets, the structure of the internet, sociology, economics, politics, physics, geology, biology...

Over the years in virtually every topic that I found interesting - I ended up finding these probability distributions. And since this site is devoted to “topics I find interesting”, the name “Pareto Project” seemed appropriate. Plus, I just like the way it sounds.