Monday, November 21, 2016

Might BlackRock Become the Next Lehman Brothers?

America desperately needs better leadership and we in Texas should step up and provide that leadership.  We must understand banking and finance to safeguard America from more calamities like the Great Depression and the Great Recession.  One example of a company that deserves careful attention is BlackRock, Inc., a multinational investment management corporation based in New York City.  A recent article in the New York Times, This Man Oversees $5 Trillion by Landon Thomas, Jr. was published in the Sunday September 15, 2016 edition.

Here is what we need to notice.  The company was founded and is led by Laurence D. Fink, who  while at First Boston pioneered securitized mortgages along with Lewis Ranieri at Salomon Brothers, which led to the subprime melt-down and the Great Recession.  Now Mr. Fink has built up BlackRock and his firm has a software program called Aladdin (Asset Liability and Debt and Derivatives Investment Network).  This software is supported by 2,300 of BlackRock’s 13,000 employees.  Seventy-five firms — including Deutsche Bank and Freddie Mac — managing a total of $10 trillion, now use it.  BlackRock believes by feeding data to this program they can master risk.  Aladdin might be due for a fall.

Remember Knight Capital Group suffered a software problem that destroyed the company.  On August 1, 2012, Knight Capital deployed untested software to their production software systems, not a test system, but the real-deal.   The company quickly lost $400 million and was liquidated.  The Aladdin program is used to manage $5 trillion of BlackRock assets and another $10 trillion of assets in 75 companies that use the program.  Do you remember the Flash Crash on May 6, 2010?  Hundreds of billions of dollars were quickly lost on the stock market.  The market recovered.  The real losses were not divulged.  Imagine what a $15 trillion death dive would do to the world financial system.

Consider software design and reliability.  In November 1999 the Mars Climate Orbiter burned up because of a trivial software error, a failure to convert units from English to metric.  Then in December 25, 2003 the European Space Agency  ExoMars lander Schiaparelli crashed into Mars.  The heat shield and parachute ejected too early.  Another software error.  If rocket scientists cannot guarantee flawless software on something as simple as Mars satellites,  why would financial firms be more successful with more complex programs?

We in Texas need to master software design and software reliability so we can safe financial software, and so we can analyze and repair flawed financial software before it becomes too late.  Lehman Brothers was not as big as BlackRock when its demise dragged the world into the Great Recession.

John Connally and James Baker were Texans who were Secretary of the Treasury.  Surely someday another Texan will fill that roll and I hope that Texan understands the danger software poses to the world financial system.  But we  must do more than hope.  We must prepare our future leaders with education and experience to fill roles like Secretary of the Treasury.

Robert

This article is a thread within the The Texas Software Reliability Project.
This is also a thread within The Texas Banking and Finance Project

Saturday, October 22, 2016

Leadership and Morality in Dostoyevsky

The 2016 Presidential election has had people thinking about morality.  The Brothers Karamazov by Fyodor Dostoyevsky raises a few points about morality.  In this blog post I point out these points.

Dostoyevsky suggests a link between atheism and socialism.  He suggests that a person interested in doing good who does not believe in God would be inclined to become a socialist.  The passage below is from Chapter V:  Elders.

As soon as he [Alyosha] reflected seriously he was convinced of the existence of God and immortality, and at once he instinctively said to himself: “I want to live for immortality, and I will accept no compromise.” In the same way, if he had decided that God and immortality did not exist, he would at once have become an atheist and a socialist. For socialism is not merely the labor question, it is before all things the atheistic question, the question of the form taken by atheism today, the question of the tower of Babel built without God, not to mount to heaven from earth but to set up heaven on earth.

Dostoyevsky also suggests that without a belief in God, in immortality, then natural law is destroyed.  Because natural law is the foundation of the U.S. Constitution, Dostoyevsky suggests that atheism spells the death of the U.S. Constitution, the foundation of our civil government and our liberties.  Furthermore, Dostoyevsky suggests morality will be turned upside down.  That what was moral will become immoral, and what was immoral will become moral.  This moral inversion is coming true.  Presidential candidate Hillary Clinton has called Christians deplorable homophobes and the U.S. news media is uplifting trans-sexuals as the new American heroes.  Here is a long but important passage from The Brothers Karamazov, Chapter VI: Why Is Such A Man Alive?  There is a discussion in quarters of Father Païssy, a Russian monk.  Dmitri is the oldest brother, Ivan the middle brother, and Alyosha the youngest, who wishes to become a  monk. Adelaida Ivanovna Miusov is Fyodor Karamazov's first wife, Dmitri's mother

"Ivan Fyodorovitch is smiling at us. He must have something interesting to say about that also. Ask him.”

“Nothing special, except one little remark,” Ivan replied at once. “European Liberals in general, and even our liberal dilettanti, often mix up the final results of socialism with those of Christianity. This wild notion is, of course, a characteristic feature. But it’s not only Liberals and dilettanti who mix up socialism and Christianity, but, in many cases, it appears, the police—the foreign police, of course—do the same. Your Paris anecdote is rather to the point, Pyotr Alexandrovitch.”


“I ask your permission to drop this subject altogether,” Miüsov repeated. “I will tell you instead, gentlemen, another interesting and rather characteristic anecdote of Ivan Fyodorovitch himself. Only five days ago, in a gathering here, principally of ladies, he solemnly declared in argument that there was nothing in the whole world to make men love their neighbors. That there was no law of nature that man should love mankind, and that, if there had been any love on earth hitherto, it was not owing to a natural law, but simply because men have believed in immortality. Ivan Fyodorovitch added in parenthesis that the whole natural law lies in that faith, and that if you were to destroy in mankind the belief in immortality, not only love but every living force maintaining the life of the world would at once be dried up. Moreover, nothing then would be immoral, everything would be lawful, even cannibalism. That’s not all. He ended by asserting that for every individual, like ourselves, who does not believe in God or immortality, the moral law of nature must immediately be changed into the exact contrary of the former religious law, and that egoism, even to crime, must become not only lawful but even recognized as the inevitable, the most rational, even honorable outcome of his position. From this paradox, gentlemen, you can judge of the rest of our eccentric and paradoxical friend Ivan Fyodorovitch’s theories.”

“Excuse me,” Dmitri cried suddenly; “if I’ve heard aright, crime must not only be permitted but even recognized as the inevitable and the most rational outcome of his position for every infidel! Is that so or not?”

“Quite so,” said Father Païssy.

“I’ll remember it.”

Having uttered these words Dmitri ceased speaking as suddenly as he had begun. Every one looked at him with curiosity.

“Is that really your conviction as to the consequences of the disappearance of the faith in immortality?” the elder asked Ivan suddenly.

“Yes. That was my contention. There is no virtue if there is no immortality.”


America in 2016 has turned morality upside down.  According to Dostoyevsky, this is because too many of our leaders are atheists. It is up to you, my friends and neighbors, to ponder why morality in America has turned upside down. And to ponder how we can find moral leaders, if we have a true understanding of morality instead of an inverted sense of morality.

Robert

The version of The Brothers Karamazov by Fyodor Dostoyevsky from which I quoted was the translation by Constance Garnett and is available free, online, at Project Gutenberg:
https://www.gutenberg.org/files/28054/28054-0.txt

Sunday, May 31, 2015

Eight Hundred Years of the Magna Carta

The Magna Carta was signed on June 15, 1215, eight hundred years next month.  We in Texas look from our Texas Revolution to the American Revolution for inspiration,  Our country's founding fathers looked to the Magna Carta and the Glorious Revolution of 1688 for inspiration.  We need to remember the  importance of the Magna Carta as we map the future for Texas and America:  the importance of a government constrained by laws for the protection of our liberties.

The Wall Street Journal had a wonderful article about the Magna Carta that you can read by googling "Magna Carta: Eight Centuries of Liberty by Daniel Hannan."

Here are a few quotes from the lengthy article to whet your appetite: 

The idea of the law coming up from the people, rather than down from the government, is a peculiar feature of the Anglosphere.

America’s Founders ... saw parliamentary government not as an expression of majority rule but as a guarantor of individual freedom. How different was the Continental tradition, born 13 years later with the French Revolution, which saw elected assemblies as the embodiment of what Rousseau called the “general will” of the people.

In that difference, we may perhaps discern explanation of why the Anglosphere resisted the chronic bouts of authoritarianism to which most other Western countries were prone.

The defense of liberty is your job and mine. It is up to us to keep intact the freedoms we inherited from our parents and to pass them on securely to our children.


And who is Daniel Hannan?  Mr. Hannan is a British member of the European Parliament for the Conservative Party, a columnist for the Washington Examiner and the author of “Inventing Freedom: How the English-speaking Peoples Made the Modern World.”

A great Texas must be built upon the rule of law.  Texas needs great lawyers and statesmen.

Robert

Saturday, April 4, 2015

The Special Methods Software Project

I have suggested a number of projects that can contribute to software development and economic growth in the state of Texas.  I mentioned the  Special Methods Software Project when I laid out the Texas Software Initiative, but I did not define it then.  There are a number of specialty areas in computer science that can have economic impact, but are little studied and have limited use.  However, the impact of special methods can be significant.  Here is a short list of special topics.

  1. Artificial Intelligence and Expert Systems
  2. Autonomous Agents
  3. Cellular Automata Software
  4. Genetic Algorithms
  5. Complexity Theory

This list is not exclusive, and not be any means exhaustive, but it is a starting point for discussion.  Google's self-driving car is an example of an autonomous agent.  Some people think the Google car can reduce traffic jams and save lives by reducing the effects of bad driving.  Some people think it is part of a plan to replace truck drivers with robots, throwing more people out of work.  Software certainly has an impact on our society.

I can recommend a good book as a start into the field complexity:  Complexity: A Guided Tour by Melanie Mitchell.  I have read it from cover-to-cover and found it fascinating.  This book by Dr. Mitchell is intended for the general audience and I found it at the public library. 

Another book that is interesting, although a bit quirky, is The Sciences of the Artificial by Herbert Simon.  This book by Dr. Simon does not use advance math, so in a sense it is accessible to the general reader. On the other hand, you are getting access to the mind of a brilliant man.  This is a treat, but you must be patient and follow him where he goes. I like to hold a book in my hand, so it is nice to know you can buy a copy from Amazon.com.  But if you are not sure about this book, you can peruse a PDF copy before buying a paperback copy.

Why take the time to be patient with Herbert Simon's book?  Let's consider just a few of his honors:
  1. Turing Award (1975)
  2. Nobel Prize in Economics (1978)
  3. von Neumann Theory Prize (1988)
Dr. Simon was is an intellectual heavyweight, but this is book is accessible.  Here is a quote from the preface to "The Sciences of the Artificial:" 
"... of particular relevance is the recent vigorous eruption of interest in complexity and complex systems. In the previous editions of this book I commented only briefly on the relation between general ideas about complexity and the particular hierarchic form of complexity with which the book is chiefly concerned. I now introduce a new chapter to remedy this deficit. It will appear that the devotees of complexity (among whom I count myself) are a rather motley crew, not at all unified in our views on reductionism. Various among us favor quite different tools for analyzing complexity and speak nowadays of "chaos," "adaptive systems," and "genetic algorithms." In the new chapter 7, "Alternative Views of  Complexity'' ("The Architecture of Complexity" having become chapter 8), I sort out these themes and draw out the implications of artificiality and hierarchy for complexity."

These specialty software topics are fascinating and can contribute economically to the state of Texas.

This post is part of the The Texas Software Initiative.

Robert

Saturday, December 13, 2014

A Future With No Economic Growth?

Here is an article about a citizen of Japan, Masaru Kosaka, who believes it is possible to have a happy life in an economy with no economic growth:  "Japan May Be In A Post-Growth Era, With Or Without Abe" by Anthony Kuhn, NPR News, December 12, 2014.  The reference to Abe in the title is Shinzo Abe, Japan's Prime Minister, who has been struggling to boost economic growth in Japan.

As I have suggested before, the key economic challenge of our time is maintaining economic growth without population growth.  The last article I wrote on this topic was:  Sustainable Growth and a Synthetic Economy (Sunday, December 1, 2013).

Robert

Sunday, December 1, 2013

Sustainable Growth and a Synthetic Economy

Unlimited  population growth is unsustainable.  We cannot sustain an infinite population on a planet with finite resources.  Some countries are already facing a population decline as the birthrate drops.  People are manifesting an instinct to dampen population growth, but governments are trying to counter this natural decline in population growth.  Governments either provide incentives like the French to make child rearing less expensive for parents, or use immigration like the USA and England to boost population growth.  Our economies at present depend on a growing population to fuel economic growth.  Based on current economic understanding, a stable, sustainable population would lead to economic stagnation.

When you hear about sustainability, usually it is in the context of reducing consumption to compensate for a growing population  What we need instead of conservation is to let population growth flatten and then stop, but we do not know how to run national economies with zero population growth.  I started thinking about economic growth without population growth back in 2008.  In 2012 I suggested a simulated economy consisting of simulated consumers and producers, simulated goods and currency could grow without the constraints of limited population and resources.  I suggested in 2012 that it would be tricky to transfer simulated (synthetic) money into the real world.  I also suggested that financial derivatives were actually instruments of a simulated economy, with the wealth from derivatives being treated as though it is real wealth instead of synthetic wealth, potentially debasing our currency.

In 2013 we can see more confusion between real and simulated economies as virtual currencies like Bitcoin receive increased attention. There are newspaper articles asking if you should have some Bitcoins in your investment portfolio.  Let us remember auction rate securities.  They were used for decades by investors, then failed in the 2008 banking crisis.  Auction rate securities were more real than virtual currencies like Bitcoin, but eventually fell apart as investments.  There will probably be a speculative bubble for Bitcoin, but it will turn to tears.

If we developed synthetic, simulated economies rationally we could debate the transition of synthetic wealth into real currency and plan the move of simulated money into the real world.  Instead, some players in the economy are going straight to the fabrication of simulated wealth and are attempting to move this simulated wealth into our economy behind our backs.

I had envisioned algorithms that created music through artificial intelligence.  I envisioned simulated musicians selling algorithmically developed music to simulated consumers.  We would own crowds of simulated consumers that would vote on the music they liked.  Real people would sample the outputs occasionally and select algorithmically developed music to move into the real world to sell to real people.  A synthetic economy can be created rationally.  I have heard that marketing firms will provide an artist with a crowd of artificial followers on Twitter.  Elements of a simulated economy are forming.

However, instead of a rationally developed new economy of simulated or synthetic growth, we have clever people manipulating our economic system to fabricate money out of thin air.  Besides Bitcoin and derivatives, consider the Quantitative Easing program.  Here is a brief explanation of quantitative easing (QE) from the Financial Times:  "...the most important step in QE is that the central bank creates new money for use in an economy. Only a central bank can do this because its money is accepted as payment by everybody.  Sometimes dubbed incorrectly "printing money" a central bank simply creates new money at the stroke of a computer key, in effect increasing the credit in its own bank account."

If we are not careful, the mixing of synthetic wealth with real wealth can dilute the value of the dollar and diminish our savings and investments. The pressures of a simulated economy are building and wanting to spring into creation, but the best parts are being over-looked while the most dangerous parts of synthetic wealth creation are being introduced into our economy without adequate public debate.  You might think a simulated economy is science fiction.  I think that synthetic wealth creation is a Frankenstein's monster.

We need to pay attention before it is too late.

Robert


Wednesday, March 13, 2013

Government's Role in Innovation

A website called SFGate ran a story recently on innovation:  The hypocrisy in Silicon Valley's big talk on innovation by James Temple (Sunday, March 10, 2013). 

The article by Mr. Temple included this quote:
"None of this argues for government keeping its nose out of the business of innovation, it makes the case for it taking a leading role - for leveraging its unique position to address these obvious market failures. Only governments had the long view and available cash to fund things like supercolliders, deep space programs and - oh yeah - the development of the Internet."

As I mentioned in an earlier post [1], the best scientific innovation from the government is done by the U.S. military.  Generally speaking, the U.S. government should stay out of game of funding innovation for economic growth because the tendency is to provide pork-barrel funding.  Give the U.S. military adequate funding and leave it alone with regard to innovation and it will create what it needs and the result is technology with civilian uses that really drive economic growth, like computers and the internet.

Robert

References:
[1]  Military Research Drives Economic Growth  Sunday, May 13, 2012