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Weekend reflections

January 16th, 2010

It’s time again for weekend reflections, which makes space for longer than usual comments on any topic. Civilised discussion and no coarse language please.

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  1. PSC
    January 16th, 2010 at 19:34 | #1

    Paraphrasing someone from Paul Krugman’s blog:

    * market bubbles, even if they do occur, are completely unpredictable, therefore we should not try to prevent or mitigate them by having governments implement policy to deflate bubbles or assist those harmed by them.

    Corollary?
    * severe floods, even if they do occur, are completely unpredictable, therefore we should not try to prevent or mitigate them by having governments build levees for flood control or provide aid to those suffering the aftereffects.

  2. Alice
    January 16th, 2010 at 19:39 | #2

    @PSC
    LOL PSC – Good call.

    No we just leave it to the river to decide who drowns in the flood or who’s house or farm gets destroyed…of course those who think they can walk on water always like to remind us that people who drown in floods do so because they didnt work hard enough to be able to afford their own user pays swimming lessons beforehand.

  3. Freelander
    January 16th, 2010 at 20:57 | #3

    @PSC

    Very good.

    We should not mess with either because floods are the work of God and it would be blasphemy to try to mitigate an act of God, and, similarly, trying to mitigate the work of the invisible hand of the divine market would also be blasphemous.

  4. January 17th, 2010 at 02:27 | #4

    Ok, lets look at flooding as an example of complex systems.

    There is lots of evidence that flood mitigation works actually make severe floods worse. Flood mitigation works traditional try to get water way as quickly as possible. All well and good, but what happens when there is more water that they are designed for? There are areas where the systems choke, where things are far worse than if there had been no mitigating work. Most mitigation work in the Murray Darling are designed this way.

    There are actually mitigation works that specifically set out to save some property at the cost of destroying others, legal cases have ensued.

    Some of the new generation of works actually work on the opposite principle, trying to hold water high in river systems by creating small empondments. Dry most of the time, but capable of holding initial flows of water. This design philosophy can be seen in newer parts of Canberra.

    A lot of new flood problem areas are/will be where old development regulation based on past experience have been thrown out. State or local government thirsty for development at the cheapest cost have pushed through changes for short term gains. I can think of a number of country cities and towns that have seen much growth in the last 20 years. The next flood of reasonable size (last seen in ’70s or ’80s) will cause a lot more damage next time round.

    So in hindsight, what would be the best way to handle flooding. I’ld say, that you wouldn’t do 95% of existing mitigation works. Only levee towns themselves. Outside towns, limit private levees to the smaller of 1% of land area or 2 ha/5 acres per house.

    I’m going to add two other factor to consider. Both effect how floods are managed.

    Firstly, also in hindsight, how we would manage our broader environment has changed. Current farming practices, carried out from 1788 onward would drastically change the current landscape.

    Secondly, pushing in the other direction, is privatisation. Current trends in flood mitigation & broader environmental management both favour slowing down waters movement through the landscape. This is not in the financial interests of the state governments in particular. During the water law reforms of the ’80s & ’90s, the state & territory governments effective took control of & then privatised a lot of water. Water they want out of the landscape and into their control for resale asap. The states have a conflict of interest between treasury & environmental management!

    A simple look at a complex environment.

    So what are the equivalent to levees in the financial system?

    At the private level, strict investment risk prohibition for superannuation funds. That mean doubling reasonable benefit limits (RBL) for starters. Low RBLs have pushed investors into choosing higher preforming/riskier funds to get reasonable private pension benefits.

    At the cooperate level, there is no levees. These guys are playing the field. They and their shareholders (should) know the risks. Picking & avoiding bubbles is part of what business managers & investors do.

    Turns out flooding is just as complex, faddish and prone to poor information as economics is, just on a slower time scale.

  5. Freelander
    January 17th, 2010 at 02:56 | #5

    @Gnoll110

    Yes. Don’t even think about trying to mess with the works of the divine. The divine always works in mysterious ways.

  6. Alice
    January 17th, 2010 at 05:42 | #6

    @Gnoll110
    Gnoll – “Some of the new generation of works actually work on the opposite principle, trying to hold water high in river systems by creating small empondments.”

    I have actually seen the small empondment systems at work in a documentary. It is within the capability of say individual landowners to make small empondments in eg creeks that may be dry sometimes so that when it rains these small empondments, easily constructed, slow down the water which is then absorbed sideways through the banks and better fertility of the land results. Seemed like a very good idea to me for the individual landowners in such a situation with the right style of flow – obviously though – if its much bigger than a creek or small watercourse its not going to be practical. I wouldnt agree that you could get rid of 95% of existing flood mitigation on this idea at all. The conditions for small empondments do not apply to medium or even major river systems.

  7. Ikonoclast
    January 17th, 2010 at 06:52 | #7

    The best way to avoid flooding is to build on high ground. I am amazed by the number of towns and housing estates I see that are clearly built on flood plains or too close to natural flood channels.

    I am not sure that the flood/bubble analogy works as it compares natural physical systems to man made notional systems. The best way to avoid bubbles is to realise that they are the natural result of an unregulated man-made system. To avoid bubbles, regulate wisely. The democratic government has a role to play. Otherwise, why have a democracy if you are just going to let the money men, and women, run the country?

  8. Donald Oats
    January 17th, 2010 at 13:57 | #8

    The 1956 flood high watermark in Murray Bridge is for all to see, in yellow/white on the bridges. However, that didn’t stop the housing development on normal floodplains roughly 100-200m from the river embankment. If it should flood, would the council get sued? Are the developers free of liability via the development approval process? Who knows…but I won’t be buying one of those properties and waiting to find out.
    On the other hand, the 1956 flood repeated probably wouldn’t make it past NSW/Nth Vic nowadays. Maybe I will buy one… :-D

  9. January 17th, 2010 at 14:57 | #9

    @Alice
    Large empondments systems did exist in the Australia landscape. The best preserved example in the Murray Darling is the Macquarie Marshes.

    The extinction of the mega fauna/fire stick burning and then the arrival hard hoofed grazers have destroyed them almost completely. We should try to restore river systems. Most mitigation works don’t work to this end and often work against restoring balance. That why I would actively remove some mitigation works and not maintain others. The works we should keep or build should support one of the following objectives. Firstly, protect the lives & highest value assets of those who live in & working these ecosystems. Secondly, create and or maintain these more diverse ecosystems

    @Ikonoclast Totally agree about building on unsuitable land. In 200+ years we have drained wetlands, forgotten where once were and then built on them. Sometimes that ‘forgetting’ has been intentional.

    @Donald Oats
    Do you know the hight of the 1870 flood at Murray Bridge?

    @Everyone
    May I suggest people read the writing of conservation farmer, Peter Andrews.
    http://en.wikipedia.org/wiki/Peter_Andrews_(agricultural_pioneer)
    Back from the Brink: How Australia’s Landscape can be Saved.
    Beyond The Brink: Peter Andrews’ Radical Vision For A Sustainable Australian Landscape.

    Peter has done a lot of work on this, including going back to the explorers’ dairies to read their first hand accounts of what the inland rivers were like before the hard hoofed grazers arrived.

    I take the view that economics is a subset of ecology. That economic is the ecology of human societies. There are pulsing systems[1] in ecology, we shouldn’t be surprised that they exist in economics too.

    @Freelander
    Making flippant hasty generalisations that people who you disagree with must be literal creationist/fundamentalist nutters don’t count as considered debate. Try harder.

    [1] David Holmgren, Permaculture Principle & Pathways Beyond Sustainability, p248.

  10. Donald Oats
    January 17th, 2010 at 15:13 | #10

    @Gnoll110

    Not right now. Might check up on 1870 flood and get back. However, big changes to system took place from 1870 through to present. Not sure if Murray Bridge was actually a town, back in 1870, come to think of it.

  11. paul walter
    January 17th, 2010 at 15:32 | #11

    Freelander, are you inferring that Haiti is an example of “market forces”, at work?
    Something getting closer to the”Vogon Freeway”school of developmental theory, by these lights!

  12. Freelander
    January 17th, 2010 at 16:05 | #12

    @paul walter

    God? Or market? Or both? Just one of those mysteries…

  13. Freelander
    January 17th, 2010 at 16:08 | #13

    @paul walter

    Or an unintended consequence of a plea for the blessed intercession of Mary MacKillop?

  14. Freelander
    January 17th, 2010 at 16:11 | #14

    @paul walter

    Maybe the result of a simple look at a complex environment?

  15. Ken
    January 17th, 2010 at 16:54 | #15

    Are market bubbles unpredicatable? Economists seem to know that they will occur even if the details of when and how big. Perhaps some form of financial empondment is required.

  16. Alice
    January 17th, 2010 at 17:12 | #16

    @Gnoll110
    I take your point Gnoll. Id like to see economics as a subset (or with a mindset that at least considers) ecology as well actually.

  17. Tristan Ewins
    January 18th, 2010 at 11:33 | #17

    Lots of material on climate change today (Jan 18th) at On Line Opinion…

    http://www.onlineopinion.com.au/

    Also my own article on Emissions Trading, direct investment in sustainable energy infratructure etc too…

    see: http://www.onlineopinion.com.au/view.asp?article=9923

    Comments welcome at OLO and/or here

    sincerely,

    Tristan

  18. TerjeP (say Tay-a)
    January 18th, 2010 at 12:11 | #18

    I think market bubbles are largely mythical. Markets rise and markets fall but they don’t rise and fall (much) without good reason. Just because the reasons are not always apparent to comentators does not mean there are no reasons. If bubbles do exists as an irrational aboration then predicting them is going to be mighty tough. Who can say when rational people will on mass cease being rational. And if the problem is widespread then on the occassion of mass madness shouldn’t we suspend elections lest governments get elected by mad people driven by irrational excitement. We should probably round up the children also at such times just to keep them safe.

    Perhaps the most famous bubble was the Dutch tulip bubble. However that has been shown to have been a quite rational response to government intervention that modified private contracts. I’ve yet to encounter a so called bubble that on digging couldn’t be explained by circumstances extrinsic to the buying and selling process. Yes sometimes people pay too much for something bases on poor information or analysis but that poverty of information isn’t a product of buying and selling. Ignorance can occur in any sphere of society.

    Managing bubbles isn’t even a new idea. It is something that statists have talked about and acted on for many centuries, usually with no general public good, but benefit only for narrow interest groups.

  19. Freelander
    January 18th, 2010 at 12:15 | #19

    @TerjeP (say Tay-a)

    I think your existence is largely mythical. You believe you exist. But do you really know?

  20. paul walter
    January 18th, 2010 at 12:20 | #20

    “I am, therefore I think”…

  21. TerjeP (say Tay-a)
    January 18th, 2010 at 12:48 | #21

    Freelander – I’m a product of your imagination. You’re really just talking to yourself. I hope that realisation sooths you.

  22. Alice
    January 18th, 2010 at 20:45 | #22

    @TerjeP (say Tay-a)
    “I think market bubbles are largely mythical.”

    Tell that to those who lived through the great depression Terje, and those who lived through the 1890s crash and those who have lost their life savings in the GFC.

    Ive lived through bubbles in my primary school Terje – havent you? I lost a lot of my marbles after making a huge stash there for a while. It isnt any different in the adult world. A craze is a craze and a speculative bubble is just the adult version.

  23. Freelander
    January 18th, 2010 at 21:03 | #23

    @Alice

    More of the market worship; the market moves in mysterious ways; the ways of the market are not ours to understand. All hail to the divine market.

    The market price is always right, do da, do da…. Lose your money, you just might, do da, do da… What you get, is what is right, do da, do da… If you lose, you deserve your plight, do da, do da…

  24. TerjeP (say Tay-a)
    January 18th, 2010 at 21:41 | #24

    Alice – I never said that depressions, recessions or economic collapse are mythical. I said that market bubbles are largely mythical. The fact that stock market or financial market “crashes” often precedes such economic trouble isn’t evidence of either causation or evidence of market bubbles. If anything it suggests that markets entail particiants that are forward looking and often predictive.

    Marble crazes collapse due to a collapse in demand. And I accept that the collapse in demand is often due to a collapse in the status of marbles which may in turn be driven by a falling price. In short there is a feedback loop that is somewhat intrinsic to the market mechanism rather than the decline in demand being purely extrinsic. And both supply and demand may be altered not just by price but by the rate and direction of price change in market. I accept that this can happen with any status item and that this effect does drive fashion markets. This is why I said that bubbles are largely mythical rather than simply non existant. My point is that most stock portfolios are not driven by social status and most dramatic price rises and falls can generally be explained by extrinsic factors.

    Even if we accept that bubbles are real and frequent enough to want to do something about it is another matter to claim that regulators have the right foresight to improve things. I don’t see much historical evidence that they get it right more often than wrong.

  25. January 18th, 2010 at 22:06 | #25

    @Alice @TerjeP

    I’ll agree with TerjeP. The economy only pulses, like ecology, because of underlying changes in the factors the contribute to the pulsing factor (population, price, pollution)

    I’ll agree with Alice too. Because psychology (& imperfect information) can play a large role in economic value & perceived situations, the belief can become reality, until the underlying reality make itself apparent. So a bubble is when perceived reality & reality diverge. When the perceived reality is near universe, the bubble is unstoppable…

    You can give yourself a headache running around and around in these mental circle. :P

  26. Ubiquity
    January 18th, 2010 at 22:57 | #26

    Terje

    I think a financial or economic bubble is pretty real, caused by the inflation of value of some part of the economy based mostly on positive feedback .

    The original causes of these bubbles are extrinsic (such as external regulators right ?)in nature as you pointed out:

    “I’ve yet to encounter a so called bubble that on digging couldn’t be explained by circumstances extrinsic to the buying and selling process. Yes sometimes people pay too much for something bases on poor information or analysis but that poverty of information isn’t a product of buying and selling.”

    As people become aware of an idea, they tend to focus on facts and ideas that support it, while ignoring those that don’t. As more people catch on to the idea they emphasize their own supporting facts, so the idea becomes even more popular, attracting more supporters, reinforcing itself until at some critical tipping point it takes on a life of its own.

    Positive feedback loops in human interaction can be dangerous. A classic example is the the inflation of housing prices that played a big part in the current financial crisis, was generated when people made money by buying, financing, and selling homes, leading even more people to do so, which increased housing values further, which led even more people to pile on, and so forth.

    As if missing the intial existrinsic causes isn’t enough, the problems continue when we react to these bubbles in “big ways” such as a global stimulus package, they end up being very costly with arguably minimal benefit.

    I suspect the idea bubbles generated by the positive feedback loops inherent in human interactions might become even more prevalent, more persuasive, and possibly more damaging to our political decision-making, as new technologies and social networks continue to improve the speed and efficiency of interaction itself.

    One things for certain though, these bubble will always burst.

  27. TerjeP (say tay-a)
    January 20th, 2010 at 07:04 | #27

    The other thing that I think may happen in marble crazes is an increase in supply of marbles. The first few kids bring marbles to school and play keepies. A large stash of marbles comes to indicate social standing because it signifies skill and talent. More kids join the game and the craze builds. However what ends it is when parents come into it and are pursuades to buy their kids a stash of marbles. In essence the market gets flooded. At some point the association between marbles and skill becomes decoupled and the social value of marbles collapses. In short there is some positive feedback within the playground but there is also the extrinsic effect of parent benevolence.

    At my primary school marbles got banned after a massive craze. The ban didn’t prevent the value collapsing (it came after the event). It did drain the supply however. We moved onto yo-yos. And then oversized toy trucks and then action figures and well actually I could never quite keep up. Whilst it came after my time I think Pokomon cards for a time came close to being a universal schoolground currency.

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