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July 22, 2009

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Derek

Very interesting.. we should discuss this sometime. The comment system will not suffice.

James

There are only a few points I'm not on board with - most of them minimally. For instance:

"All financial instruments must reveal the exact model for value including underlying asset models & assumptions – this will be public data. They need not reveal formulas (trade secrets), but customers must have the ability to model during & after purchase."

Things like this don't need enforced transparency. Laws like this just make the customer (in this case, usually a sophisticated customer) feel disproportionately secure about their investments and encourage overvaluing of the assets. If the seller of some asset with an obfuscated model wants to make any money, they're going to have to convince their customers of the asset's merit anyway.

You should put this on a google docs page though, and get a few people to collaborate on it. It'd be interesting to work on with a group - as there's going to be a lot more that could go into it, including rationalizations.

James

Oh also - you should check out http://lesswrong.com

Nick Pinkston

James,

To be honest, I think the notion that consumers will overprice assets because of this in the long term is just silly. Markets normalize when any new change is added. Since everyone would have to use this system, aggregate asset prices would raise by the same rate (hence no "real" change). The current state of financial products is at an inefficient Nash equilibrium so-to-speak at which everyone experiences externality effects of overly opaque financial products.

Increased ransparency can sometimes have the effects of raising interest rates. Ben Bernanke made the same argument with auditting the Fed, however the reason there is because the Fed is doing risky shit that should be priced higher - if we all new what was under the hood.

A lot of the issues of these assets is that no one knows how all the esoteric language adds up to form value. If they could be modeled openly, the financial industry could predict their value far easier and would lead to faster clearing of said products.

Do you disagree?

James

I do. Government endorsement of assets can definitely cause people to overvalue them. It's one of those behavioral psych things that tweaks peoples' rationality a bit. People feel protected, and underestimate the risks. If they can't understand the value of an asset on their own, they probably shouldn't invest in it.

I'd make many similar arguments as well. The FDA telling people what they can and can't ingest causes people to eat shit food (and way too much of it...) and take unhealthy (but "approved") drugs, for instance.

Nick Pinkston

I think you might be misunderstanding me. Transparency, as I see it, does not regulate which assets can be sold - that's an approval process, and you're right to think that's a bad idea because it is. I don't want government endorsements either for the same reason you're implying of market distortion and beyond that regulatory stifling of financial innovation.

Transparency is actually the reason the HFCS products are priced less than their sugar-using counterparts. Yes, sugar is more expensive, but the market won't buy a higher priced & higher quality good unless they can actually tell that it's better. In food, they have a list of ingredients on the side. I always check the label to see if HFSC, etc. is in the food I'm eating - these are the benefits of transparency.

Your argument would say that the government approval of HFSC makes it priced higher, but the mainstream food market is all regulated meaning this premium comes with all food. HFSC products are priced less because it's lower quality.

I think that investments should carry a similar public disclosure of ingredients in the form of formulas, variables, constants, etc. They could still sell whatever assets they want, but you'd be able to more easily see what you were getting into. The issue with current language of these instruments is that the "secret sauce" is behind closed doors. You can't predict these assets if you don't know their composition.

You always hear about how complicated it is to "unravel" these instruments, and the reason is that you have get the seller companies to reveal the derivatives it's based on, etc.

The reason they don't open them now in a free market is because it's an oligarchy where everyone doesn't want to rock the boat, and it's very complicated to get a competitor in the market because of the high barriers to entry, both business and regulatory.

If transparency would be instated, I would guarantee that a website would come out that would have every product modeled (or have the ability to enter the formula) that would show you the risks in an easy way.

What do you think?

Seth

So, I'm just browsing this because fuck it's long, but I'm surprised you want to open the borders to more immigration. I remember you talking about protecting sovereignty back when. Why the change?

Seth

And I guess I should specify that you were saying protecting sovereignty by tightening borders and limiting immigration

Nick Pinkston

Yea, you are right. Back when I was very aligned to the Ron Paul campaign I was a closed boarders guy, but I've since recognized that it's another form of coercion. It seems that the only purpose it serves is slow cultural influx which has good and bad effects.

I can see issues with cultural influx, jobs moving out, etc., however I think it's a good thing. I think I'm biased toward immigrants because they're dreamer. They're trying to lift themselves up - unlike most of the zombies walking around in America today.

Therefore: Damn the boarders! Bring on the immigrants!

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