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May 23rd, 2011

I had dinner with my old college classmate Elisabeth Sperling; we once lived in this magical world called the Dudley Coop, a pair of old Victorian houses at Harvard housing 35 undergraduates. Living there was one of the most intense experiences of my life — everyone who lived there, I think, was strongly affected by it. It had a long history; SDS ran a printing press in the basement of the place in the 60’s, there was graffiti all over the walls spanning decades, the main house (3 Sacramento St, or “3 Sac”) once had the sign “Center for High-Energy Metaphysics” on it, and Elisabeth and Eva decided, one day, to recreate the sign, which still hangs, today, over the entrance.

For many, many years after I left the Coop I had dreams about the place; in particular, in my dreams I would often find hidden passageways with more rooms. (Later I found out many of my fellow former Coopers had the same recurring dream, oddly enough.) We lived together, cooked together, had strange conversations late into the night. There was an air of possibility, of new ideas, a sense that at any moment we might stumble upon the secret to the universe in one of those bull sessions. And I think we did, at times, touch on parts of it; it wasn’t just a feeling that it might happen, it really did, sometimes, in fragments.

It’s been many years since I’ve spent a lot of time with Elisabeth (not for want of trying — long story); we talked about all sorts of things, ranging from educational policy to Deming quality control to the tech industry … but we also talked about the old days. She reminded me of a few incidents which stood out for her in her mind, things I did — for example, one of her most vivid memories of me was when, one day, she was making bread in the kitchen, and the counter was covered in flour, and I came in and just leaned over until my nose was an inch from the flour, and I stayed like that, for quite a while, not making a sound, until Elisabeth couldn’t resist coming over and tapping me on the back of my head so I got flour on my nose. We both laughed, of course, and she asked me what I had been doing. I said, “I was experimenting with horizontal and vertical.”

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May 10th, 2011

I think there are two major, semi-independent problems with the economy:

1) Real wages for the middle and lower classes have been stagnant for the last few decades (particularly the last decade) while income for the top 1% has skyrocketed and continues to climb. The net effect of the above is that, due to massive improvements in efficiency and productivity, wealth generated by American businesses has gone up steadily for decades, nearly all of the benefit of this has accrued to the ownership class.

2) The speculators invented a crazy system of securities in the wake of financial deregulation which hinged on an unbelievably stupid application of the Gaussian copula function for estimating default correlation. This one mistake amplified what could have been a “normal” real estate bubble into a bubble of gargantuan proportions. The danger to the real economy was drastically worsened by the repeal of Glass-Steagall and the lack of regulatory oversight of the shadow banking system. As far as bubbles, they’re not all alike; I personally would much rather see a bubble caused by excessive speculation on actual companies (i.e., IPOs) than a bubble caused by speculation on synthetic securities whose value was based on a fantasy. At least venture capitalists are trying to build something new, and if we have to go through some mild crashes as a result, I think that’s worth some risk (the economic consequences of the tech crash of 2000 were far less severe than the synthetic¬† securities crash of 2008).

It seems to me that 1 and 2 are relatively independent problems. 1) is probably caused by the decline of unions, the rise of Ayn Rand thinking among the upper classes: the ownership class believes that it truly is virtually solely responsible for the generation of wealth, almost single-handedly taking all increases in proceeds and giving none of it to the people who actually do the work. Furthermore the drastic lowering of tax rates on the wealthy has further contributed to this steady, unfair imbalance. 2) is a problem of speculative bubbles and insulating the regular banking system from the speculative system. Obama addressed 2) to some degree with financial regulatory reform: the creation of a somewhat weakened Volcker Rule, intended to isolate speculative activity to some degree from the operation of “normal” banking, regulation of the shadow banking system, and so forth, but he has not yet significantly addressed 1).

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