Category Archives: Web Article Review

financial technology

Here is an article about new “financial technology” by the author of a book called Money Changes Everything: How Finance Made Civilization Possible.

For example, even as we debate the relevance and usefulness of traditional financial institutions such as banks, another revolution is underway in the world of money. A mere decade after we thought we had mastered the intricacies of asset securitization, shadow banking and credit default swaps, an entirely new financial phenomenon has emerged. It is called FinTech – short for financial technology. FinTech involves the plumbing and wiring of the financial system. It is changing how we borrow, how we save, how we raise money for companies even how we assess our future; its possibilities, risks and relationships.

Some of these innovations you may already know: PayPal, Bitcoin, Financial Engines, Kickstarter, Prosper.com and Venmo. They are apps, payment systems, crowdfunding vehicles and peer to peer lending sites. Their use has spread rapidly along with other technological improvements in how we get things done. However these companies are the tip of a very large iceberg.

Many of the innovations in finance are buried in the complex, business to business infrastructure of the economy. These include new ways of detecting fraud, recording transactions, routing orders, valuing assets and even discovering hidden patterns in big data; massaging the fast, continuous flow of news, trades, tweets, satellite images, and Facebook posts. Financial companies – from the big players like Goldman Sachs and Blackrock down to your local bank and financial advisor believe FinTech will fundamentally alter their businesses — and they are rushing to get out ahead of competitors. This is because FinTech innovation tends to disrupt the existing structure. It disintermediates customers and providers of financial services, replacing them with peer-to-peer lending, instant money transfers, loans without loan officers, and investment without investment banks. These innovations are transformative, empowering and create a new infrastructure for exploring even greater opportunities but they threaten the status quo in ways that the securitization wave of the 2000’s never approached. Securitization mostly involved the same big players that ruled the markets in prior decades. FinTech brings a different cast of characters who are defining new communities of investors, new sources of knowledge and unfortunately new kinds of scams and risks. The top FinTech companies today include a lot of new names. How many of us have been following the likes of Credit Karma, Market Axcess, Square, Stripe and SoFi?

I’m all for cutting out the middlemen trying to rip us off. And I’m still looking for the perfect app for splitting a restaurant bill among a large party.

Robert Gordon

Robert Gordon has an op-ed in the New York Times talking about productivity growth, inequality, and the Presidential candidates’ stated policy positions.

Rapid productivity growth in the dot-com era of the late 1990s originated in computer manufacturing — information and communication technology equipment — but this manufacturing has vanished since almost all such equipment is now imported.

This effect of that new technology was another important source of growth. Out went typewriters and calculating machines, replaced by personal computers, spreadsheet and word-processing software, web browsers and e-commerce. Productivity also boomed in retailing, as Walmart and other “big box” stores revolutionized retail selection, layout and supply chain management.

But by 2004, the digital revolution had achieved most of its transition in business methods. Not much has changed in offices and at retail stores since then.

His basic thesis is that we are past the peak of this particular wave of technological progress, and he doesn’t see another wave on the horizon. So technology is not providing that slow but relentless underlying trend of productivity growth right now, and the shorter-term underlying cyclical factors are also on a downward trend (size of the skilled labor force, income inequality, uncertainty over health care, retirement and education). Tax and infrastructure investment policies suggested by the candidates could help somewhat with these shorter term factors. He generally supports socialist policies like we see in “Canada, Australia, and the Nordic countries”.

My own thoughts: It’s tough for politicians to support policies that advance long-term productivity growth, like great education and a level playing field for businesses of all sizes to innovate and compete. First of all, the costs of these policies come due during their terms in office while the benefits accrue long afterward. This is a basic problem of democracy – elected officials can be punished by voters for taking on those short term costs, and solutions can involve voluntarily transferring more power into the hands of un-elected technocrats, which they have little incentive to do. (Nonetheless, many other democratic countries manage to do better than us.) Second, the interests of a few big businesses (finance, fossil fuels and the military-industrial complex) have outsize, undemocratic influence over our (U.S.) politicians allowing them to write laws unfairly in their favor and at the expense of everyone else, even businesses in other industries. This problem could be solved by a courageous amendment to our constitution, but again politicians have little incentive to cut off their own sources of funding.

Politicians can talk about infrastructure because that creates short-term jobs while also helping the economy in the long-term. We need good planning though if we are going to build the smart infrastructure that can really reduce friction in the economy while minimizing environmental impacts and improving our living environments. We don’t have that currently, just some vague ideas about building lots of roads and bridges and maybe some power lines and we’re not sure about pipelines.

Gordon rails against “defined contribution” pension plans, but I still think there is a place for them. While social security is reasonably well run at the federal level, pension plans at the state, municipal and corporate level are terribly run. So I would say either get rid of all those in favor of an expansion of social security, or go to defined contribution. Plans could be designed to help individuals manage risk more effectively (using life cycle funds and annuitization, for example). In Singapore, the system is nominally defined contribution, but the government “tops up” individuals’ contributions – everybody contributes a similar amount as a percentage of their income, then the government matches contributions from lower-income individuals at a higher rate so they can end up with similar retirement savings as higher-income individuals. This could work in the U.S., but we would have to first prevent the finance industry from hijacking the rules to siphon off money for itself.

Of course, we can also hope that the wave of technological progress is in fact not past, we are just in a momentary lull before it continues to pick up in an exponential (but episodic) fashion as it has throughout history. I am 100% positive that the history of technology is not over. The only question in my mind is whether, if we are in fact in an episodic lull, it is going to last long enough to ruin a generation or two for us puny individual humans who only live 70 years or so.

cascading computer system failure at Delta

A cascading computer system failure knocked Delta airlines out of commission on August 8.

At least half of all Delta Air Lines flights Monday were delayed or canceled after a power outage knocked out the airline’s computer systems worldwide…

Delta representatives said the airline was investigating the cause of the meltdown. They declined to describe whether the airline’s information-technology system had enough built-in redundancies to recover quickly from a hiccup like a power outage…

Airlines depend on huge, overlapping and complicated systems to operate flights, schedule crews and run ticketing, boarding, airport kiosks, websites and mobile phone apps. Even brief outages can snarl traffic and cause long delays.

As the world becomes more automated, things might get smoother when everything is working well, but when something goes wrong it might get harder and harder to recover. Hopefully, major government, military and financial computer systems will have “enough built-in redundancies”.

They do, according to an article in The Week. Delta actually had backup systems in place, and the problem was that they didn’t kick in correctly. Major financial companies have even more layers of backups and pay more attention to them because they have even more at stake.

Delta, like most major airlines, likely had one or more back-up systems in place to take over in an emergency like this. Often a company has an extra system housed in its main data center identical to the main system, plus another one in a separate data center in case both local systems are taken out in a major event, like a fire. Some companies even have a third redundant system that is cloud-based or housed in a separate location.

“Some of these disruptions should not have occurred,” Hecht says. “Delta IT did something wrong that caused its redundancy structure to not function as needed. The problem was not the power failure itself; 99.9999 percent of power failures never cause service disruptions.” …

…most airlines use manual testing to verify their data protection, meaning a human being actually has to take time out of their day to test the system on a regular basis. Other industries, like banking and finance, rely on automatic systems to lower the risk of a full blackout. Automated systems can be pricey, and while Delta’s outage is probably costing the company a hefty sum (Southwest’s outage last month was expected to cost the airline up to $10 million), an hour-long outage in the banking sector would create far more mayhem and profit-loss, so finance companies are more likely to pay up for automated systems.

 

State of the Climate 2015

The American Meterological Society has released State of the Climate 2015. I would love to take a week and scrutinize each and every map and figure, but alas…

One thing that caught my eye was by far the coolest cover art I have ever seen on a scientific report! Seriously, have a look if you look at nothing else!

Another thing that caught my eye is the idea of an “accelerating hydrologic cycle”. I hadn’t heard that before, but I suppose it makes sense if there is more energy/heat being added to the Earth on balance.

Overlaying a general increase in the hydrologic cycle, the strong El Niño enhanced precipitation variability around the world. An above-normal rainy season led to major floods in Paraguay, Bolivia, and southern Brazil. In May, the United States recorded its all-time wettest month in its 121-year national record. Denmark and Norway reported their second and third wettest year on record, respectively, but globally soil moisture was below average, terrestrial groundwater storage was the lowest in the 14-year record, and areas in “severe” drought rose from 8% in 2014 to 14% in 2015. Drought conditions prevailed across many Caribbean island nations, Colombia, Venezuela, and northeast Brazil for most of the year. Several South Pacific countries also experienced drought. Lack of rainfall across Ethiopia led to its worst drought in decades and affected millions of people, while prolonged drought in South Africa severely affected agricultural production. Indian summer monsoon rainfall was just 86% of average. Extremely dry conditions in Indonesia resulted in intense and widespread fires during August–November that produced abundant carbonaceous aerosols, carbon monoxide, and ozone. Overall, emissions from tropical Asian biomass burning in 2015 were almost three times the 2001–14 average…

Records of observation-based global evaporation only span the satellite era. This has not prevented a handful of studies from attempting to disentangle the impact of climate change on trends in evaporation. Jung et al. (2010) suggested a reversal in the rise of evaporation since the late 1990s, which was later shown to be a temporary anomaly caused by ENSO (Miralles et al. 2014b). Nonetheless, these studies, together with more recent contributions (Zhang et al. 2015, 2016), have indicated the existence of a slight positive trend over the last few decades, in agreement with expectations derived from temperature trends and global greening, and the theory of an accelerating hydrological cycle…

The discussion of “biomass burning in Indonesia” caught my eye because it is one thing to read about it, and another to get a lungfull of it as my family did when living in Singapore in 2013. It was shocking – you looked out the window and could barely see the next high rise maybe 50 feet away. We had a newborn baby at the time and decided to go to the trouble of traveling interanationally with him to get him out of there. And it sounds like this year’s pollution was worse than what we experienced.

The tendency for increased drought in the tropics during El Niño leads to increased release of CO2 from increased tropical wildfires. In 2015, out-of-control agricultural biomass burning was exacerbated in Indonesia (see Sidebar 2.2) by ignition of the subsurface peat. These changes in terrestrial carbon storage likely contributed to the record 3.1 ppm increase in atmospheric CO2 at Mauna Loa Observatory from 1 January 2015 to 1 January 2016. The previous highest annual increase of 2.9 ppm occurred in 1998. Biomass burning in Indonesia also led to regional increases in atmospheric carbon monoxide, aerosols, and tropospheric ozone in 2015 (Sidebar 2.2). Huijnen et al. 2016 suggest that the 2015 carbon emissions from the Indonesian fires were the largest since those during the El Niño year of 1997 (section 2g7; Fig. 2.60), although still only 25% of the 1997 emissions…

The 2015 Indonesia fire season began in August, and by September much of Sumatra, Kalimantan, Singapore, and parts of Malaysia and Thailand were covered in thick smoke, affecting the respiratory health of millions of people. Visibility was also reduced to less than 10% of normal over Borneo, and large parts of the region could not be seen from space, as was documented for previous fire events in that region (Marlier et al. 2013; Wang et al. 2004). Preliminary estimates suggest that greenhouse gas emissions from the burning (in CO2 equivalent) exceeded Japan’s 2013 emissions from fossil fuel combustion (Van der Werf 2015). Even after the worst of the 2015 Indonesian fires were no longer burning, the remaining pollution stretched halfway around the globe.

Comparing the emissions to those from a major industrial economy like Japan puts the staggering scale in perspective. Beyond the effect on human health and the climate, this is also a loss of diverse tropical ecosystems and fertile soils.

McKinsey on Income Stagnation

The McKinsey Global Institute has noticed inequality in the world, and is concerned about automation making it worse. Part of their solution is – this is a bit shocking – “government taxes and transfers”. It appears they are talking about lower taxes and higher transfers, which they acknowledge might not be “sustainable”.

If the low economic growth of the past decade continues, the proportion of households in income segments with flat or falling incomes could rise as high as 70 to 80 percent over the next decade. Even if economic growth accelerates, the issue will not go away: the proportion of households affected would decrease, to between about 10 and 20 percent—but that share could double if the growth is accompanied by a rapid uptake of workplace automation.

The encouraging news is that it is possible to reduce the number of people not advancing. Labor-market practices can make a difference, as can government taxes and transfers—although the latter may not be sustainable at a time when many governments have high debt levels. For example, in Sweden, where the government intervened to preserve jobs during the global downturn, market incomes fell or were flat for only 20 percent of households, while disposable income advanced for almost everyone. In the United States, lower tax rates and higher transfers turned a decline in market incomes for four-fifths of income segments into an increase in disposable income for nearly all households. Efforts such as these—along with additional measures such as encouraging business leaders to adopt long-term thinking—can make a real difference. The trend of flat and falling real incomes merits bold measures on the part of government and business alike.

Dwight D. Eisenhower

Andrew Bacevich on BillMoyers.com shows how decisions that happen on a President’s watch, even an almost universally respected and even revered one like Eisenhower, can have consequences decades later.

As for Eisenhower, although there is much in his presidency to admire, his errors of omission and commission were legion. During his two terms, from Guatemala to Iran, the CIA overthrew governments, plotted assassinations and embraced unsavory right-wing dictators — in effect, planting a series of IEDs destined eventually to blow up in the face of Ike’s various successors. Meanwhile, binging on nuclear weapons, the Pentagon accumulated an arsenal far beyond what even Eisenhower as commander-in-chief considered prudent or necessary.

In addition, during his tenure in office, the military-industrial complex became a rapacious juggernaut, an entity unto itself as Ike himself belatedly acknowledged. By no means least of all, Eisenhower fecklessly committed the United States to an ill-fated project of nation building in a country that just about no American had heard of at the time: South Vietnam. Ike did give the nation eight years of relative peace and prosperity, but at a high price — most of the bills coming due long after he left office.

This caught my eye during a week when events during the Iranian Revolution (1979) are influencing the 2016 election. And the revolution was in turn caused CIA participation in destabilization of a democratically elected Iranian government in 1953. And the destabilization of Iran had begun far earlier under the British, who openly sought to control the natural resources of the region.

Bill Clinton’s decisions in the 1990s on trade, drugs, and financial deregulation are also being discussed in this election. I think we are already suspecting that George W. Bush’s invasions of Iraq and even Afghanistan in the early 2000s will go down as our country’s greatest blunders of modern times. I wonder how some of Obama’s decisions on intervention in the Middle East, relations with Russia and China, and financial regulation (or lack thereof) will turn out in the long run.

Dick, Bush, and Johnson

Ronald Feinman proposes a scenario where Gary Johnson, the libertarian candidate, could be become U.S. President in the fall, with Mike Pence as his Vice President.

in theory, if neither major party candidate wins 270 electoral votes, the election would be thrown to the House of Representatives for the first time since 1824. In a Republican controlled House, Gary Johnson, in theory, could be elected President with the lowest percentage of popular votes in American history, far less than John Quincy Adams’ 30.9 percent in 1824 or Abraham Lincoln’s 39.8 percent of the vote in 1860…

So at least, there is a long range possibility that on January 20, 2017, we could have our third President Johnson, after Andrew Johnson in 1865 and Lyndon B. Johnson in 1963. And we would have a Libertarian President, the first third party candidate in history to be elected President, albeit by the House of Representatives.

But at the same time, under the 12th Amendment to the Constitution, either Mike Pence or Tim Kaine would become Vice President, as only the top two candidates for the Vice Presidency can be considered by the Senate, although the top three candidates can be considered by the House of Representatives for President. Since the Senate is majority Republican, that would likely make Mike Pence Vice President to serve with Libertarian Gary Johnson as President, which would make for a very interesting and weird situation, never having occurred before in American history.

And this does not even account for the popular theory that voters are subconsciously attracted to candidates named Bush, Dick, or Johnson.

Earth Overshoot Day

Today (I’m writing on August 8) has been named Earth Overshoot Day 2016.

Earth Overshoot Day marks the point where we have pulled more resources, like fish, fuel and water, out of the planet than can be replenished. It’s also the point where we have put more pollution into the air and water than Earth can successfully deal with. Humans have been doing that for a long time, but ever since 1971, Overshoot Day has crept disconcertingly earlier and earlier. This year, Overshoot Day is a full 5 days earlier than last year. That’s the earliest it has ever been.

This is another way of attempting to communicate the ecological footprint concept. It would take 1.5 Earths to produce the amount of ecosystem services we deplete in one year, so that means we have depleted them two thirds of the way through the year, or month 8 of 12. The footprint is growing every year, which doesn’t just mean things are getting worse, it means they are getting worse at a faster rate. We don’t know how much worse they can get before our civilization enters decline, or whether the decline would be a sudden catastrophic one or a long slow one (which could have already begun without our realizing it.) But we know logically that there is such a point of no return. Reducing our footprint would be good, but it would just mean things were getting worse at a slower rate. To actually reverse our path toward the tipping point, we would have to reduce our footprint all the way to 1 Earth or push Earth Overshoot Day all the way back to December 31.