The Paradox of Voting in Large Numbers

People who do not vote have recently received lot of flak from ardent voters who see voting as the route to political reform. With educated, and by extension intelligent, voters remaining aloof, elections are being decided by the ignorant, the stupid, and the unwashed. Let's for the moment ignore the unspoken elitism in this assertion.

Ardent voters think voter participation is important for the proper functioning of a democracy. I'll assume they don't merely worship voting as a fetishist homage to the goddess of democracy; instead, they see a practical utility and necessity in people expressing their preference for political candidates. I assume there are real issues are stake here, and voting-in the wrong party can lead to significant harm to the nation and its people. (We are not talking about electing the village idiot, please.) If that's the case, dear reader, would you necessarily be calling for more and more people to vote? What are your objectives? Getting the right people to power, or vote for voting's sake?

Assume there are these two major political parties in India: People's Front of India (PFI) and Indian People's Front (IPF). For some very good reasons you passionately support PFI and are vehemently against IPF's political agenda. You think it's very important that PFI is elected to power and not IPF. As a voter how would you go about ensuring that PFI wins and IPF loses?

Of course, the least you would do is to go and vote yourself. But you are only one among half a billion voters. Your vote is practically useless. You need to encourage a large number of people to vote for your party. So you write a blog post lambasting apathetic voters for their indifference and ask them to go out and vote.

But you have to be careful that you ask only the educated people to come forward and vote; as we noted above, the ignorant, the stupid, and the unwashed are already voting in large numbers. You don't want any more of them queuing up to vote in the next fraudster for a kilo of rice. In fact, as far as possible you should discourage the unwashed masses from voting.

Secondly, you don't just ask people to vote for whoever they think fit; they might just vote for IPF and cause your party to lose the election. Remember, it's very important for PFI to win this time. So you should ask people to specifically vote for PFI. As far as possible your blog post should discourage even educated people who are inclined to vote for IPF.

Masses of people, even those with graduate degrees, tend to be unpredictable. You might think all educated people would obviously vote for your party, because it stands for this, that, and sundry goodness of life. Well, it may not be so obvious to everyone. There is a high possibility that they are swayed by IPF's rhetoric and end up voting for them. What's worse, they might just agree with IPF's agenda, however pernicious it is.

If the election is as important as you think, you would actually call for people to boycott the election, while secretly organizing diehard PFI supporters to turn up on voting day. Sounds Machiavellian, but remember this is an important election. You have to do whatever it takes to get PFI to win. Swaying 5% of the population is easier than convincing 100% of the population to vote one way or the other.

So we have a paradox: Asking people to come out in large numbers doesn't necessarily elect the right party. In fact, it might just have the opposite effect. Your best bet is to keep your flock together while keeping the swing-voters off the streets. I don't suggest you do this, but where really dire issues were at stake, public-minded people have even resorted to using violence to keep the ignorant voters away from the polling booth.

So here is my question to people who are deploring the selfish apathy of people who don't vote: what are you trying to achieve? You never say I should go and vote for Congress (or BJP or whoever). You never recommend a particular candidate. Perhaps you think that would be partisanship. But isn't that the whole point of elections? One party is significantly better than the other, and you know which one. You want me to vote, but not for the wrong party. You should want me to vote for your party, or not at all. Briefly, you are doing it wrong. Can we have some honest partisanship, please? Can we have some frank discussion around issues? Let's not merely call for a ritualistic prostration before the voting machine goddess and hope people press the right button.

(If this discussion has left a bad taste in your mouth and brown-shirts dancing in your head, it was quite intentional. Democratic politics even when done with the best of intentions is a slimy, ugly activity, especially when done with the determination to win. Let's be honest about it.)

Of Russian Tourists Bearing Euros

Articles on what caused the global financial crisis abound. So do articles on how to fix the crisis. Parables that simplify the crisis to its bare essentials tend to give us a better grasp of the situation. Here's one parable that lends insight into what caused the financial crisis. Below is another parable I received from a good friend, which attempts to provide a solution to the crisis.

A MUST READ. SIMPLE BUT BRILLIANT.

It is August. In a small town on the South Coast of France, holiday season is in full swing, but it is raining so there is not too much business happening. Everyone is heavily in debt.

Luckily, a rich Russian tourist arrives in the foyer of the small local hotel. He asks for a room and puts a €100 note on the reception counter, takes a key and goes to inspect the room located up the stairs on the third floor.
The hotel owner takes the banknote in hurry and rushes to his meat supplier to whom he owes €100.

The butcher takes the money and races to his supplier to pay his debt.
The wholesaler rushes to the farmer to pay €100 for pigs he purchased some time ago.

The farmer triumphantly gives the €100 note to a local prostitute who gave him her services on credit.

The prostitute goes quickly to the hotel, as she owed the hotel for her hourly room use to entertain clients.

At that moment, the rich Russian is coming down to reception and informs the hotel owner that the proposed room is unsatisfactory and takes his €100 back and departs.

There was no profit or income. But everyone no longer has any debt and the small town people look optimistically towards their future.

COULD THIS BE THE SOLUTION TO THE Global Financial Crisis?

As the title of the story states, simple and brilliant. All that was required to settle everybody's debt was a temporary loan from an external party. Could this be the solution to the Global Financial Crisis?

Well, it depends. It depends on whether the story correctly describes the global financial crisis in the first place. If the story is describing a different problem altogether, then the solution it provides cannot possibly solve the financial crisis. To understand the story better, we need to identify the underlying assumptions in the story. But before that, below is a diagram of how credit flowed from each actor to another.


And here's how cash flowed from each actor to his/her debt holder:


Keeping in mind the credit and cash flows, here are a few assumptions that I found the story is making, and we'll see if these assumptions hold true for our real world:

1. 1. Debt obligation is strictly circular. The net debt obligation for the society as a whole is zero, once every actor pays €100 to his/her creditor. This means the problem is illiquidity, not insolvency. In sum total the town is solvent; only individually the actors are temporarily insolvent.


2. 2. The Russian tourist is the only tourist to have arrived to the town in a long while.


3. 3. There is no fractional reserve bank in the town. A fractional reserve bank could issue a fake banknote (without any underlying savings) and solve everyone's debt obligations the same way the Russian tourist did.


4. 4. Indeed, there is no bank of any kind in the town at all. Neither is there any intermediary who has €100 spare, and who could lend it to any of the actors in the story, thereby ending the debt circle. It also means the wealth of individual actors as well as the net accumulated wealth of the town is zero. That's a shaky economy if you ask me, but as we'll see, it could be worse.


5. 5. There is no entrepreneur in the town who is ready to bring the creditors-cum-debtors to a common platform (for a fee) and help settle each other's debts.

Well, do these assumptions apply to our real world? If they don't then the story is describing a different problem than what we have on our hands. Also, then, the solution it offers—-an outside actor injecting temporary liquidity—-is also not applicable to us. So here's the comparison:

1. 1. The net debt obligation of our society is not zero. In fact, it cannot be zero in a fractional reserve banking system. When every actor has paid back his debts to his fellow man, there will still remain people who owe money to the banks. The banks do not just lend money deposited with it by the townsfolk; they lend ten times the deposits. These loans must be paid back by producing goods in future. It cannot be settled in a circular manner, because these loans do not just denote some else's savings, moving from person to person in a round robin. It follows that the problem is not illiquidity, since the net debt obligation of the society is not zero. The problem is insolvency. There are some people who cannot pay back the loans till they have produced goods of equal value.


2. 2. There is already an institution in our society, which is the equivalent of the Russian tourist. It's the Central Bank. This institution is always ready to inject liquidity into the system, and is continually doing so. This institution does not depend on lending actual savings deposited with it. It can and does lend out fake money in unlimited quantities at even zero interest rates. With a resident Russian tourist in the hotel, the circular debt trap shouldn't have happened at all. So why did it? Because it's not a circular debt trap.


3. 3. Some individuals in our economy have accumulated savings aka wealth, but the net wealth of the society is negative, since the net debt of our society is positive. All the debt cannot possibly be settled, since the total debt exceeds the wealth by many orders of magnitude. A temporarily loan will only help refinance existing debt; it will not help foreclose debts. These debts can be either defaulted on, or paid off in future by producing goods of equivalent value. There is no magical workaround.

The key takeaways from the comparison above are these: a) the net wealth of our society is negative while the net debt obligations are positive. b) the problem is insolvency and not illiquidity.

Since the story is describing a situation almost opposite of what we have in our real world, the solution it offers—-of a white knight with a wad of cash—-will not work for us either. But that bit of wisdom is not stopping the Monetarists and the Keynesians from touting injection of trillions of dollars into the system to solve the non-existent illiquidity problem. Somebody please tell them to go revisit their assumptions.

POSTSCRIPT

There is another solution to the predicament of debt-trapped citizens of the French Riviera, which does not require the involvement of a Russian-tourist-ex-machina. It just requires one actor to write a negotiable IOU. Let's say the Butcher writes an IOU and gives it to the Wholesaler. The Wholesaler can then give the Butcher's IOU to the Farmer, asking him to take his €100 from the Butcher. The Farmer can pass on the IOU to the Prostitute, who in turn can give the IOU to the Hotelier. The Hotelier will then simply return the Butcher's IOU to him, and viola! Everybody is debt free! Unfortunately securitisation of debt is an evil not yet invented in the innocent French town, so it needed a central banker to issue fake notes to do the IOU's job.

The IOU trick works because the net indebtedness of the town is zero. Every IOU is a promise to pay for a service or good already consumed, but every actor has also already produced goods worth €100. The total debt floating around is exactly equal to the total goods produced.

Suppose the farmer had enjoyed €1,000 worth of the Prostitute's amour (one can get carried away with that sort of thing, you know) but had only produced €100 worth of pigs, the Prostitute would be left with IOU worth €900 from the farmer, after everyone's debts are settled. Not even the Russian Knight's loan of €100 would make any difference. The farmer would have no recourse but to produce €900 worth of pigs, sell it to the wholesaler to settle his debts with the Prostitute. Till then the Prostitute is likely to see a recession in her business, and everyone else, too, who provided her services.

Now consider that a large number of people in our society are like the farmer who got carried away. They have consumed, but not produced anything yet. IOUs are already floating around. The banks are ready to offer even more loans to people to continue their consumption. Will that solve the problem or exacerbate it?

This Election, Do Exercise Your Illusion of Choice

The month-long general elections in India begin today. Voters (in the largest democracy in the world, we are reminded repeatedly) will vote for the next regime to rule from New Delhi. I do not know, dear reader, what your political beliefs are, so in this post I'll not focus on the correctness or vileness of any particular policy propounded by the political parties. I'll just stick to analysing this "choice" we seem to have, which we are being endless exhorted to exercise thoughtfully.

Politicians are telling us every half-minute how important it is that they are elected, as opposed to the craven, corrupt, spineless, adulterous, unprincipled, sold-out, low-IQ, lunatic, capitalist, socialist, communist, fundamentalist alternative (often in her own party). That's only to be expected. After all politicians make their living getting elected, just as we do by serving our fellow man. Even newspapers have come out with large advertisements exhorting their readers to make the "right choice". The FM radios talking-heads are gushing about our patriotic duty of casting the vote, and to please make the "right choice". Corporates (yes, you read that right) have come out with employee-awareness campaigns to encourage them to go out and do the right thing. Advertisements are chiding people for not waking up (and drinking their brand of caffeine).

From what I can make out this seems to be an important election for the country, though I haven't quite understood why it's any more or less important than any previous election. We have had economic crisis, rampant terrorism, grinding poverty, starvation, violent crime, communal riots, caste-violence, reservations, corruption, natural disasters, epidemics, and of course, wholesale violation of individual rights, every single year since time immemorial. There have been democratically elected regimes since 1950, and every election was deemed particularly important at that time. Politicians with all shades of ideologies have had their shot at solving the problems we are still facing 60 years later. To name a few: Kafkaesque bureaucratic socialism (Nehruvian Congress), socialist dictatorship (Indira Congress), free-lunch social-democracy (Janata Party, Janata Dal), Hindu-fundamentalist nationalism (Vajpayee BJP), Kleptocratic state-capitalism (Narasimha Rao and Manmohan Congress), and dim-witted communism (the commie parties in West Bengal and Kerala). Honourable mentions are the completely loony right, completely loony left, and just plain loony regional parties.

Today we still have all the problems that all politicians of all stripes have promised to solve in all elections, and more often than not, managed to make them much, much worse. Yet we are told, this is a particularly important election, and the choice I make is very important to the fate of the nation. No doubt the nation (and the world) is facing (and has always faced) terrible problems, but how important can my vote be if all it does is elect one bombastic clown from a bunch, a clown who himself, or at least his ideology, has been a miserable failure in the past at doing anything about the problems? We might as well, play hopscotch on election day and declare that it's a particularly important game of hopscotch in the history of the Indian sub-continent.

The bottom-line, dear reader, is that the problems the politicians are crying hoarse about are very real, but electing yet another Govt is not going to make any difference. The reason might be that Govts are very poor tools for solving problems, though they are very good at creating them, prolonging them, and making them worse. This has been historically true in all times and all cultures. To put things in perspective, this election isn't any important than the thousands of elections that have happened worldwide, or will happen in the future.

As for the dire seriousness involved in making the "right choice", you can't go wrong if you close your eyes and randomly press any button on the voting machine. Your vote, right or wrong, will not play the slightest role in deciding who the Prime Minister would be. In any case, the party that comes to power will only continue bloviating like the previous Govt, till we reach another particularly important election five years down, and the importance of making the right choice is again pressed upon us.

My attempt in this post has been to show that the election isn't important, the choices offered are indistinguishable in any meaningful sense, my right or wrong choice is not going to decide the next regime, and that the right or wrong politician isn't going to make any difference to the problems we face, except probably make them worse. The individual voter isn't a particularly important stakeholder in the grand scheme of things.

I will leave the dear reader with this question: Why are certain bodies constantly telling us how important this election is, and how important it is make the "right choice" this time? I can understand politicians, but newspapers, private companies, FM radios? What would be the "wrong choice" in their minds? Do they think having important elections is the trendy thing and shows that India is ready to join the league of advanced nations where they always have important elections? Or are they helping keep up the illusion that the democratic method of selecting the ruling regime is relevant to an average voter?

Monty Pythonesque Sketch on Theft by Finding

A British student was arrested by the police when he tried to deposit with them a mobile phone he found on the street. His crime? Theft by Finding. Yeah, there is such a crime in the UK. Though UK has turned almost exactly into what George Orwell feared, this incident is so bizarre that only a Monty Python sketch could do justice to it. And "acegibson" at redit.com has done just that: written a brilliant Pythonesque sketch. It's quoted in full to preserve for posterity. Maybe 1984 will not be entirely without humour.

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"I'd like to return this cell phone."

"Markenson's, two doors down, thank you."

"No, no. I didn't buy it, I found it."

"Best of luck getting a refund then, thank you. Good day."

"No, you don't seem to understand. I'm turning it in to you."

"If Markenson's won't give you a refund, why should we?"

"No! You're the police! I found this cell phone and I want to return it to its original owner."

"Oh, I see. Harry, have any of the boys reported a lost cell phone?"

"Don't think so, Grimm."

"Sorry, it's not ours. Perhaps someone at Markenson's lost it. Good day."

"Damn it all! I know who the owner is! I called them on this very phone! They're coming here to collect it as we speak!"

"Why would they be coming here? We don't have it."

"Of course you don't, you git! I have it! It's right bleedin' here!"

(shows the officer the phone)

"So the owner of that phone..."

"Yes."

"is coming here..."

"Yes."

"to pick it up."

"Exactly!"

"And what, pray tell, are you doing with it?"

"I found it!!"

"Oh, did you?"

"Yes, I did."

"And how did you find it?"

"It was just laying there."

"Was it?"

"Yes."

"Alright, you're going to have to come with me, Mr. Findy Fingers."

"What for???"

"Are you or are you not the owner of that phone there in your hand?"

"I'm not!"

"So you admit it!"

"This is insane! I found it! It was just laying there!"

"That's what they all say. Come now, let's have a DNA sample."

"Oh, bollocks!"

"No, sir, we just swab your cheek. That's a good chap. Come along."

"This is ridiculous! I merely found this phone and turned it in out of a sense of civic duty! I didn't expect a sort of Spanish Inquisition!

(looks at door)

"I said, 'I didn't expect a sort of Spanish Inquisition!'"

"Yes, we heard you, sir, didn't we, Harry?"

"Loud and clear, Grimm."

"But I thought..."

"Obviously."

"Then this isn't...?"

"Afraid not."

"I see."

"Quite."

"So you'll be wanting my DNA then?"

"There's a good chap. Has anyone ever told you you look like Michael Palin?"

"I get that a lot."

(The door opens. An Eric-Idle-looking fellow comes in.)

"Can I help you, sir?"

"Ah, yes, I'm here for a phone?"

"Markenson's, two doors down, thank you."

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• Replica Monty Python hand grenade causes bomb scare in London (boingboing.net)

The Road to Pondicherry

Yours truly is sorry to admit he was not able to observe Earth Hour this weekend. He was on the road to Pondicherry celebrating the twin miracles of human civilisation: petroleum and the automobile.

The road from Bangalore to Pondicherry is excellent in parts and drivable otherwise. It makes for a pleasant 6 hour drive, peppered with unexpected potholes, sedated cattle, drunk truck-drivers, village children, laid-back cyclists, and other regulars of the National highway network, ambling in and out of your way.

Pondicherry is a pleasant little seaside town, neat and clean, with the air of a potemkin village. The French quarters have streets with quaint French names like Rue Romain Rolland and Rue Dumas. The restaurants serve expensive, bland dishes with faux French names. The hotels are either too expensive or too shoddy. The service is pathetic in both. Somehow the potemkin village-ish air gives one a feel that Pondicherry is a collaborative rip-off scheme.

And then there was the Auroville, which attracts thousands of goofy, do-gooder foreigners. Is there a shop, hotel, restaurant, shoe-shine boy in Pondicherry that isn't named Mother or Auro?

Of course, it wasn't all that bad. In India one learns to enjoy life in spite of all hazards. I had a good time guzzling beer, eating seafood, walking along the beach road, and of course, bathing in the sea. Tip: Kingfisher beats Fosters any day.

I spent one night in a "home stay" arrangement with a gentleman who rents out rooms in his house. I recommend this highly. The rents tend to be negotiable and affordable, and the service almost flattering, and for a good reason, too. These mom-and-pop arrangements are competing with well-known hotels with properties on the beach-front.

If you are into counter-economics, you have another good reason to patronise these home-stays. They don't pay a paisa of income tax, sales-tax, service-tax, what have you. It's entirely black, underground, unaccounted. They offer services, you pay money, and voilà, value is created without the Govt supervising this dangerous transaction! What's more this value is not included in the national GDP numbers. I suspect India's GDP (after you subtract the money spent/destroyed by various Govt bodies) is probably 2-3 times the official figures, all because a huge amount of wealth is created in the "unorganised" sector. Though the central Govt has been trying hard to "organise" this sector it continues to thrive. Guess people don't like to be taxed any more than they like to be ripped-off.

Props also to a certain restaurant near the Alliance Francaise for allowing its patrons to have a quiet smoke at the table. Smoking on private property is banned in India. This entrepreneur was breaking the law to serve his customers. Caveat: I don't smoke and find the smell of tobacco smoke offensive. But I made a trade-off. The Garlic Beef and Shrimp Fried Rice was affordable and I didn't mind a distant whiff of second-hand smoke.

That's all about my road trip. At the risk of being sued for libel (or being shot) I must mention that Mother Sea View Residency on Rue Bazaar St. Laurent has the most rotten service I have experienced for money. Or for free. A pox on all their houses.

Recession Demystified

A good friend sent me this helpful guide to understanding the current financial mess. Many thanks to whoever wrote this witty piece. My comments at the bottom.

---

Linda is the proprietor of a bar in Cork. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Image via Wikipedia

Word gets around and as a result increasing numbers of customers flood into Linda's bar. Taking advantage of her customers' freedom from immediate payment constraints, Linda increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Linda's borrowing limit. He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager (subsequently of course fired due to his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Linda's bar. However they cannot pay back the debts. Linda can not fulfill her loan obligations and claims bankruptcy. DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better, stabilizing in price after dropping by 80%.

The suppliers of Linda's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor. The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties (and vested interests). The funds required for this purpose are obtained by a tax levied on the non-drinkers.

---

Now, dear reader, if you are like most caring human beings, you would at this point probably be rather outraged by how a mere bartender was allowed to bring down global free-market capitalism. Surely something could have been done? Surely no one should be allowed to just give away alcohol on the mere word of drunkards? And what about the bank? Why were they even allowed to keep lending money to a foolish enterprise? Surely this once for all proves that unsupervised free-market is not self-regulating; instead it is a mortal danger to the stability of the global financial system?

But if you are not the caring sort you might be asking a different question: How was it even possible for this doubtful scheme to continue as long as it did?

Linda might have been a little dim on risk assessment of unemployed alcoholics, but who doesn't make bad judgements now and then? At most, by end of the month she would have realised that her soaked customers were not going to pay back, and she better stop lending further to them. If she persisted in her misguided business model--out of the wine of human kindness, let's say--by mid of the second month she would have run out of cash, her suppliers would have stopped the supply, and she would have been bankrupt. A couple of jobs lost, but a sound economic lesson learnt.

But as we saw Linda's bank stepped in to finance her. Normally banks do a great deal of enquiry before they lend a penny. It's unlikely, but perhaps the bank manager and his risk officer were fooled by Linda's sudden surge in profits. Besides, they didn't have to carry the risk for long. The bank's headquarters "securitised" Linda's debt and sold the bonds to others, thereby passing the risk to others.

But a question duly arises: why would anyone buy exotic instruments like ALKBONDs and PUKEBONDs? What's the surety of the return of interest and capital? The anecdote doesn't mention it, but the bank probably had the bonds rated by one of the top rating agencies in the world. Then another investment bank underwrote the bonds, thus guaranteeing that investors will get their money back if Linda defaults on her debts.

So far so good. But how can a few bonds of a bar proprietor shake up the global financial system? How much money are we talking about here? A million dollars? A billion dollars? That's a barely drop in the financial ocean.

Again, the story doesn't get into details, but Linda's PUKEBONDs did not just lie with a pension fund till terminated. Investment banks borrowed money from other banks, leveraging PUKEBOND collateral up to 1:32, i.e., for every dollar of PUKEBOND they borrowed 32 dollars. The borrowed money was used to buy more PUKEBONDs, which drove up the price of PUKEBONDs, consequently increasing the value of the collateral. The lender bank was more than happy to lend more money to investment banks to buy more PUKEBONDs. Then the underwriters of Linda's bonds sold their credit-default obligations to other banks, passing the risk to them. Options and futures were written on the bonds and the credit-default swaps, which were hungrily bought by Investment banks, private equity funds, hedge funds, etc. In effect, Linda's bonds were sold and again packaged and resold, ad infinitum, till a massive pyramid of securities was created that rested on the few bonds Linda's bank had initially issued.

Surprisingly, no one ever realised that this Ponzi scheme was plain nutty! Why is that?

If one digs deeper one will see that the root of the problem was with everyone's incorrect perception of risk, vis-a-vis the possible gains, starting from Linda. Finance is the art of balancing risk and reward in a transaction and making a profit. But speculators need to perceive risk correctly. If they are led to believe that a transaction is less risky than it normally is, they'll rush to make a profit on risk arbitrage. They'll invest more money than warranted, creating an unsustainable boom.

Now we come to nub of the problem: what made the speculators get an incorrect perception of risk?

Firstly, rating agencies rated the PUKEBONDs as AAA or such like. Since the PUKEBONDs were essentially junk, why did rating agencies stake their reputation rating them as AAA? It so happens that some rating agencies are officially recognised by Govts, and at the same time regulation demands that all bonds be rated by these rating agencies. This gives those rating agencies a regulatory monopoly which they are tempted to abuse. Secondly, mandatory rating of bonds creates conflict of interest and incentives for corruption in the rating agencies who are paid by the same people whose bonds they are rating. The point to note here is that Govt intervention, not the lack of it, created the unintended consequences which led to junk being rated as gold. The singular ratings of the PUKEBONDs led everyone involved to incorrectly perceive that they were playing with something exotic but essentially safe.

But we are not done yet. As we saw, Linda's shady bonds were being packaged and sold, and again leveraged, repackaged and resold, in an ever rising pyramid, till the total money involved probably touched trillions of dollars! Since most of these transactions were being done on borrowed money, this would surely have created a great demand for money. We know from Econ 101, higher demand leads to higher prices. In case of loans, higher demand for money would lead to higher interest rates. Till a point would be reached where the interest rates would be so high that buying PUKEBONDs on loan would make the risk not worth the returns from the bonds. Surely this should have put the scam to an end before it reached trillion dollar figures?

Well, no actually. Thanks to the Central banks of the world, the total amount of credit available in the market is in theory unlimited. When demand for credit increases, Central banks just print some more money and lend it out. The self-regulating system of demand and supply fails in case of money, because central banks have the Govt given authority to counterfeit money and lend it out at any arbitrarily low rate they think fit.

So finally we have our answer: The two factors we discussed above, both creations of Govts, led investors to have an incorrect perception of risk involved in PUKEBONDs. They also allowed the Ponzi scheme to run as long as it did. The market did not self-correct in time, because Govt intervention did not allow it to self-correct. It's not unsupervised free-market, but Govt supervision that's a mortal danger to the stability of global finance.

Final thoughts: Markets are self-regulating, even when they are not free. Always. There are no exceptions. What we are seeing today is a much delayed, but vicious self-correction of the market. The more delayed a correction is the more vicious it gets, and the more people are hurt. It's best for Govt to leave markets alone, not try to supervise it, or make it better. It only interferes with the self-regulating mechanisms of markets and delays the self-correction. "Stimulus", "bailouts", and other shenanigans of Govts worldwide is a last ditch attempt to postpone the self-correction to another day. It's better for Linda to lose her bar today, than for the whole world to lose their shirts tomorrow.

Austrian Restaurant Cycle Theory

Thomas Woods gives this simple and intuitive example that explains business cycles, misallocation of resources, and Keynesian stimulus economics in one small paragraph:

"Consider a circus that comes to town for a few weeks. A restaurant owner may expand his seating capacity in the false expectation that the circus and the related demand for his food that it brings in its wake will last forever. But when the circus leaves town, he'll find he has "idle resources" on his hands. We should not want to put these idle resources to work. Doing so would only draw labor and other resources away from other sectors of the economy, where they are employed in the satisfaction of real consumer demand. The expansion of the restaurant should not have occurred in the first place. We should want this bubble activity to shrink back down to size, in order that other, non-bubble activities in the economy can be correspondingly strengthened."

Further down in the article Woods writes, "The economics profession, by and large, has embarrassed itself with a Keynesianism so crude it would not satisfy a bright sixth-grader."

Which begs the question, why? Why are seemingly bright people lining up behind Keynesian voodoo economics? Yours truly tried to answer it as succinctly as possible:

"Between two public policies with uncertain outcomes, a person will choose the one which promises immediate personal gain."

Economists are people, too.