Financial WMD
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Financial WMDs

Summary
Charles Ferguson argues that the US power structure has become highly corrupt. 

Ferguson identifies key events which contributed to the transformation:
Subsequently the George W. Bush administration used the situation to build a global bubble, which Wall Street leveraged.  The bursting of the bubble: managed by the Bush Administration and Bernanke Federal Reserve of 1913 was a response to a series of banking panics with the goal of responding effectively to stresses.  It setup:
  • At least 8 and not more than 12 private regional Federal Reserve banks.  Twelve were setup
  • Federal Reserve Board with seven members to govern the system.  The President appointed the seven, which must be confirmed by Congress.  In 1935 the Board was renamed and restructured. 
  • Federal Advisory Committee with twelve members
  • Single US currency - the Federal Reserve Note. 
; was advantageous to some. 

Ferguson concludes that the restructured and deregulated financial services industry is damaging to the American economy.  And it is supported by powerful, incentive aligned academics.   He sees the result being a rigged system

Ferguson offers his proposals for change and offers hope that a charismatic young FDR is President Franklin Delano Roosevelt.  He is notable for his contributions to the US CAS:
  • New Deal strategies including:
    • SSA
    • FFDCA 
    • IRC
  • Lend-lease which pushed the US and Japan into World War 2 and helped the US to become the world's predominant military power.  
  • Bretton Woods's agreement which economically constrained any politically driven collapse of the world economy after the war and helped the US to become the world's predominant economic power.  
will appear. 

Following our summary of his arguments, RSS is Rob's Strategy Studio comments on them framed by complex adaptive system (
This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
CAS
) theory.  Once the constraints are removed from CAS amplifiers, it becomes advantageous to leverage the increased
Flows of different kinds are essential to the operation of complex adaptive systems (CAS). 
Example flows are outlined.  Constraints on flows support the emergence of the systems.  Examples of constraints are discussed. 
flows
.  And it is often relatively damaging not to participate.  Corruption and parasitism is a long term relationship between the parasite and its host where the resources of the host are utilized by the parasite without reciprocity.  Often parasites include schematic adaptations allowing the parasite to use the hosts modeling and control systems to divert resources to them.   can become entrenched. 

Predator Nation
In Charles Ferguson's book 'Predator Nation' he describes the
This page reviews the inhibiting effect of the value delivery system on the expression of new phenotypic effects within an agent. 
extended phenotypic alignment
around corporate America's 80 yearlong strategies to undermine Franklin Roosevelt's (FDR is President Franklin Delano Roosevelt.  He is notable for his contributions to the US CAS:
  • New Deal strategies including:
    • SSA
    • FFDCA 
    • IRC
  • Lend-lease which pushed the US and Japan into World War 2 and helped the US to become the world's predominant military power.  
  • Bretton Woods's agreement which economically constrained any politically driven collapse of the world economy after the war and helped the US to become the world's predominant economic power.  
) New Deal.
It eventually reached from the Republican Party through the global financial network & into Democratic administrations. 
Opening Pandora's Box: The era of deregulation, 1980-2000
From 1972 to 1982 America experienced major setbacks:
  • The fall of South Vietnam
  • Watergate hearings and resignation of President Nixon
  • The Yom Kippur War, OPECs first oil embargo causing a recession in the US.  
  • Destabilization of Iran, the fall of the Shah and an Islamic revolution
  • OPEC tripling oil prices in 1979, leading to stagflation in the US. 
  • Soviet Union invaded Afghanistan
In this period the US is the United States of America.   financial network was archaic.  The network was separated into parts in the 1930s, by Glass-Steagall Act of 1933 prohibits commercial banks from engaging in the investment business.  , to constrain the
This page reviews the strategy of setting up an arms race.  At its core this strategy depends on being able to alter, or take advantage of an alteration in, the genome or equivalent.  The situation is illustrated with examples from biology, high tech and politics. 
infrastructure
Flows of different kinds are essential to the operation of complex adaptive systems (CAS). 
Example flows are outlined.  Constraints on flows support the emergence of the systems.  Examples of constraints are discussed. 
flows
that enabled the great depression.  The parts included:

And Ferguson identified fundamental economic shifts occurring at this time:
  • Asian competition based on just-in-time processes and lean production. 
  • Outsourcing supported by information technology reducing the value of American unskilled labor. 
  • Increased importance of an educated workforce. 
Ferguson asserts by 1980 it was clear American economic dominance was over, with:
  • Productivity growth falling from 3% in the 1960s to 1% by the 1970s. 
  • Radically better quality products from Japan: Cars, IBM compatible mainframe computers, Semiconductors;
  • Japan responded better to the oil shocks
But it was not obvious what should be done about it.  Ferguson argues the US should have: refocused on saving, improved
Salman Khan argues that the evolved global education system is inefficient and organized around constraining and corralling students into accepting dubious ratings that lead to mundane roles.  He highlights a radical and already proven alternative which offers effective self-paced deep learning processes supported by technology and freed up attention of teams of teachers.  Building on his personal experience of helping overcome the unjustified failing grade of a relative Khan:
  • Iteratively learns how to teach: Starting with Nadia, Leveraging short videos focused on content, Converging on mastery, With the help of neuroscience, and filling in dependent gaps; resulting in a different approach to the mainstream method. 
  • Assesses the broken US education system: Set in its ways, Designed for the 1800s, Inducing holes that are hidden by tests, Tests which ignore creativity.  The resulting teaching process is so inefficient it needs to be supplemented with homework.  Instead teachers were encouraging their pupils to use his tools at home so they could mentor them while they attended school, an inversion that significantly improves the economics. 
  • Enters the real world: Builds a scalable service, Working with a real classroom, Trying stealth learning, At Khan Academy full time,  In the curriculum at Los Altos, Supporting life-long learning. 
  • Develops The One World Schoolhouse: Back to the future with a one room school, a robust teaching team, and creativity enabled; so with some catalysis even the poorest can become educated and earn credentials for current jobs. 
  • Wishes he could also correct: Summer holidays, Transcript based assessments, College education;
  • Concludes it is now possible to provide the infrastructure for creativity to emerge and to support risk taking. 

Following our summary of his arguments RSS frames them from the perspective of complex adaptive system (CAS) theory.  Disruption is a powerful force for change but if its force is used to support the current teachers to adopt new processes can it overcome the extended phenotypic alignment and evolutionary amplifiers sustaining the current educational network? 

education
, information technology, tougher antitrust policy, energy conservation and greater understanding of other nations.  But instead President Reagan proposed a simple reassuring alternative strategy: Lower taxes, reduce government regulation, and strengthen the military; a strategy that has constrained all subsequent presidents

Reagan accomplished many of his goals: Tax cuts and deregulation.  But Ferguson argues he:

Junk Bonds, Leveraged Buyouts, and the Rise of Predatory Investment Banking
Michael Milken's research suggested previously unrated companies could have debt underwritten.  In 1977 Milken's employer investment bank Drexel Burnham Lambert, started underwriting 'junk' bond issues by unrated companies.  Ferguson writes that in an environment where the stock market had fallen severely many public companies were bargains, or could be made attractive by replacing poor management teams, able to be purchased with junk bonds:
Over time Junk bond financing pushed up the price of stocks which made the initial leveraged buyouts very profitable.  Further rounds of junk-bond financed LBOs were induced.  A bubble lasted through the 1980s.  Milken became a billionaire.  Even prison and fines did not impact his wealth is schematically useful information and its equivalent, schematically useful energy, to paraphrase Beinhocker.  It is useful because an agent has schematic strategies that can utilize the information or energy to extend or leverage control of the cognitive niche.  
.  Milken has since setup foundations which fund pro-business academic economists. 

Financial Innovation, Derivatives, and the 1987 Market Crash
Ferguson explains how the Wall Street boom aligned with growth in institutional stock portfolios supported by computerized portfolio management.  A stock market bubble was induced.  Portfolio insurance promised to allow a stock portfolio fund manager to protect against a market fall by buying put options that allow stocks in the portfolio to be sold when their floor is reached.  Actually the 'insurer' short sells stock-index futures, since these make the exchange trades managable, for cash at the floor price and then sells the portfolio stocks that have been purchased from the insurance counter party to fully limit the risk.  Unfortunately for the insurer, the market exchange was not obligated to buy the stocks in the counter parties portfolio at the price defined in the put and would not if it ran out of liquidity).  And the buyers of the stock index futures would sell the underlying stocks to hedge their positions.  The portfolio inurance products were enabled by software developed at UC Berkeley by finance professors Hayne Leland and Mark Rubinstein.  Once a portfolio manager selected a desired price floor the computers would trade automatically accelerating futures selling as markets fell shifting those positions into cash.  But once the hedge strategy was widely adopted it would result in a cascade of adaptive sales unless systemically regulated.  If the real stock markets responded by additional selling, a cycle develops and reinforces the selling activity as happened on 'Black Monday', October 19th 1987 when over $50 billion of equity assets were covered by portfolio insurance resulting in a stream of sell orders on the portfolio assets required to lock in the hedges. 
was deployed to mitigate the risk.  The strategy failed but the crash in 1987 was eventually stabilized by the Fed, under Chairman Alan Greenspan, with a flood of new money.  Ferguson concludes that regulation is required since any leveraged financial instrument:
Satyajit Das uses an Indonesian company's derivative trades to introduce us to the workings of the international derivatives system.  Das describes the components of the value delivery system and the key transactions.  He demonstrates how the system interacted with emerging economies expanding them, extracting profits and then moving on as the induced bubbles burst.  Following Das's key points the complex adaptive system (CAS) aspects are highlighted. 
Derivatives
including CDS is a credit-default swap, nominally insurance where the buyer of the CDS gets paid if the subject of the swap can't meet its obligations.  It appears to be insurance but insurance companies must set aside reserves to handle such claims.  Britain initially required that insurance buyers also have an insurable interest.  That is required in insurance markets to ensure buyers of insurance don't destroy their asset just to obtain the insurance.  CDS were not required to do the same, because it was decided they were not insurance which encouraged such abuses and risk taking.  Stocks could be sold short when they were backed by CDS.  And the swap market is limited making it easy to undermine its liquidity.  They carry considerable risk because:
  • They are governed by the CFMA, which ensures they are unregulated and opaque
  • The incentives encouraged problems - the more CDS you own the more you benefit from [causing] problems with the 'insured' assets.  And unlike traditional insurance you could buy as many CDS as you could afford. 
; can cause cascades of selling in a downturn. 

Deregulation Triumphant: The Clinton Administration
Ferguson argues that America's strong economic performance in the 1990s was due to: Internet-based innovation is the economic realization of invention and combinatorial exaptation. 
and entrepreneurship, venture capital and start-up system; which generated higher economy wide productivity and launched: Amazon, eBay, Yahoo, Google, Craigslist, Facebook and many smaller businesses.  And he notes that policy actions by the Clinton administration were catalytic: Privatizing parts of the Internet, reforming the telecommunications sector and constraining Microsoft. 

But Ferguson notes the Clinton administration's changes to the regulatory environment enabled the rapid concentration of the industry, the financial bubble and eventually the crash of 2008.  And he asserts the administration signalled, is an emergent capability which is used by cooperating agents to support coordination & rival agents to support control and dominance.  In eukaryotic cells signalling is used extensively.  A signal interacts with the exposed region of a receptor molecule inducing it to change shape to an activated form.  Chains of enzymes interact with the activated receptor relaying, amplifying and responding to the signal to change the state of the cell.  Many of the signalling pathways pass through the nuclear membrane and interact with the DNA to change its state.  Enzymes sensitive to the changes induced in the DNA then start to operate generating actions including sending further signals.  Cell signalling is reviewed by Helmreich.  Signalling is a fundamental aspect of CAS theory and is discussed from the abstract CAS perspective in signals and sensors.  In AWF the eukaryotic signalling architecture has been abstracted in a codelet based implementation.  To be credible signals must be hard to fake.  To be effective they must be easily detected by the target recipient.  To be efficient they are low cost to produce and destroy. 
their acquiescence of bad behavior by investment bankers.  Deregulation allowed the:
  • Development of 'innovative' financial instruments that supported the structuring of a securitization value delivery system
  • Use of short term cash incentives for every agent in the chain, encouraging conflicts of interest and removing penalties for causing losses. 

Taming Mortgages but Creating a Monster
Larry Fink's CMO is a:
  • Chief medical officer or a
  • Care maintenance organization or in finance a
  • Collateralized mortgage obligation.  The collateralized mortgage obligation was invented by Larry Fink (BlackRock) and team while they were at First Boston in 1983.  The key innovation was that the risk in these contracts was more predictable than in an MBS due to the presence of a trust that guaranteed payments to the bond holders.  The risk was separated into tranches with different credit ratings and yields.  The structure was used by the banking and securities companies to finance the subprime housing boom. 
helped S&Ls is savings and loan association.  These S&Ls were deregulated by the 1982 Garn-St. Germain act. 
to lend more money to home buyers by allowing banks, such as First Boston, to buy the prime rate mortgages from the S&Ls and sell them, packaged in the CMOs, onto investors. 

Ferguson argues there was a flaw in the securitization process, since it disconnected the initial credit decisions from subsequent credit risk and consequences.  This could be fixed by making sellers accept some of the impact of any subsequent losses.  But Ferguson explains the opposite actually happened with the securitization of sub-prime mortgages.  And with hedge funds is an investment fund that accepts investments from a limited number of accredited individual or institutional investors.  Hedge funds are able to use investment methods that are not allowed for other types of fund. 
trading the ABS is an asset-backed security defined as backed by nonconforming loans rather than Fannie Mae or Freddie Mac quality loans used in original MBS or CMO. 
s the opacity and quality of the securities fell.  CDS is a credit-default swap, nominally insurance where the buyer of the CDS gets paid if the subject of the swap can't meet its obligations.  It appears to be insurance but insurance companies must set aside reserves to handle such claims.  Britain initially required that insurance buyers also have an insurable interest.  That is required in insurance markets to ensure buyers of insurance don't destroy their asset just to obtain the insurance.  CDS were not required to do the same, because it was decided they were not insurance which encouraged such abuses and risk taking.  Stocks could be sold short when they were backed by CDS.  And the swap market is limited making it easy to undermine its liquidity.  They carry considerable risk because:
  • They are governed by the CFMA, which ensures they are unregulated and opaque
  • The incentives encouraged problems - the more CDS you own the more you benefit from [causing] problems with the 'insured' assets.  And unlike traditional insurance you could buy as many CDS as you could afford. 
s, issued by London based AIG Financial Products, were falsely assumed to offset the risk posed by the expanding leverage and falling quality. 

The Internet driven innovation is the economic realization of invention and combinatorial exaptation. 
justified a spike in startup IPOs.  But Ferguson notes only Wall Street analysts' corrupt valuations allowed loss making companies with no route to profitability equity investments when they went public.  And established companies used fraudulent accounting, connections and donations to exploit the Internet market bubble: Enron, WorldCom.  Enron board member Wendy Gramm, a former Chair of the CFTC is the commodity futures trading commission, the regulator of the futures and options markets, was created in 1974.  It enforced the CEA for these commodities. 
, was also wife of Senator Phil Gramm of Texas, the chairman of the Senate Banking Committee. 

Next wave of Financial Deregulation
The Clinton administration, Congress (Newt Gingrich, Phil Gramm) and the Federal reserve of 1913 was a response to a series of banking panics with the goal of responding effectively to stresses.  It setup:
  • At least 8 and not more than 12 private regional Federal Reserve banks.  Twelve were setup
  • Federal Reserve Board with seven members to govern the system.  The President appointed the seven, which must be confirmed by Congress.  In 1935 the Board was renamed and restructured. 
  • Federal Advisory Committee with twelve members
  • Single US currency - the Federal Reserve Note. 
(Alan Greenspan) drove financial deregulation with new laws: HOEPA is the home ownership and equity protection act.  It was developed by the Republican led Congress and signed ito law by President Clinton in 1994.  , repeal of Glass-Stegall Act of 1933 prohibits commercial banks from engaging in the investment business.  , CFMA is the commodity futures modernization act which constrained derivative market regulation, catalyzing the derivative fueled housing boom and 2008 recession.  It was supported by Senator Phil Gramm and the Republican led Congress, Federal reserve Chairman Alan Greenspan and the Clinton Administration's Treasury Department led by Larry Summers.  Former Treasury Secretary Robert Rubin also lobbied to over-rule Brooksley Born, the dissenting chair of the CFTC.  President Clinton signed the act into law in 2000.  , TRA of 1997 is the Tax Reform Act of 1997.  President Clinton reduced several federal taxes and allowed the first $500,000 in gains from selling a house to be nominally tax free if it was rolled into a new house purchase.  ; regulatory changes: But none from the Fed to leverage HOEPA, CFTC is the commodity futures trading commission, the regulator of the futures and options markets, was created in 1974.  It enforced the CEA for these commodities. 
's Brooksley Born overruled on the need for
Satyajit Das uses an Indonesian company's derivative trades to introduce us to the workings of the international derivatives system.  Das describes the components of the value delivery system and the key transactions.  He demonstrates how the system interacted with emerging economies expanding them, extracting profits and then moving on as the induced bubbles burst.  Following Das's key points the complex adaptive system (CAS) aspects are highlighted. 
derivative
regulation by Treasury is the department of the treasury.  it is a federal government executive department created by Act of Congress in 1789 to manage government revenue.  The Secretary of the Treasury is a Cabinet officer.  To support funding of high cost investments: Disaster recovery, Wars, Famines; the treasury can issue debt instruments and manage the national debt. 
Secretary Rubin, Summers, Greenspan and S.E.C. is the Securities and Exchange Commission.  It was provided with power to regulate the securities industry by the Securities act and Securities Exchange act.   chair Levitt; and reduced law enforcement.  The weakening of protections was not slowed by a concurrent wave of scandals involving dubious derivatives losses by Gibson cards, Air products, P&G, Sandoz, Orange County, Barings Bank, Daiwa Bank, Sumitomo Bank, LTCM was Long-Term Capital Management, a hedge fund that used Black-Scholes quantitative models to trade in derivatives.  The hedge fund's bets failed during the Asian and Russian debt crisis of 1998 and it had to be rescued by the Federal Reserve. 
.  The chief architects of deregulation were well remunerated: Rubin left the administration to join Citicorp making $120 million there.  Larry Summers eventually joined D.E. Shaw making $5.2 million from 2006 to 2008.  Other key people from the administration: Laura Tyson, Tom Donilon, Franklin Raines, Michael Froman, David Lipton; left to join banks, hedge funds is an investment fund that accepts investments from a limited number of accredited individual or institutional investors.  Hedge funds are able to use investment methods that are not allowed for other types of fund. 
and GSE is a Government Sponsored Entity.  Fannie Mae and Freddie Mac are examples.  s. 

After the 2008 financial crisis, AIGs collapse and $10 trillion in losses Greenspan finally admitted there had been "a flaw" in his model! 

Structural consolidation
Deregulation, technology and increased capitalization of computerized operations drove broad financial consolidation, creating huge financial conglomerates through mergers and acquisitions. 
By the time George W. Bush took office each segment of the US financial network was dominated by an oligopoly of highly collusive large firms:
They formed joint industry associations and leveraged shared lobbying and law firms and academic experts. 

Incentives
Ferguson notes a trend across the finance network.  Prior to the 1970s incentives were long term and demanded caution.  But then the nature of the incentives changed:
  • The New York Stock exchange only allowed private partnerships until 1971.  Then it relaxed the rule, just as investment banks started to go public.  Bankers started to get annual bonuses and stock options and these were annual and in cash by 2000.   Senior bankers were no longer required to place the majority of their own money at risk. 
  • Mortgage securitization disconnected lenders from repayments.  It incented volume.  And the opacity of the products, the fee structures, and the compensations encouraged bankers to sell junk. 
  • Until the 1970s rating agencies were paid by the buyers of securities they rated.  But by 2000 all three agencies were paid by the issuers, and also rated the debt of the banks themselves. 
  • Securities insurance companies adopted the same compensation schemes as the bankers.  Losses impacted the company not the sales representatives. 
  • Hedge funds is an investment fund that accepts investments from a limited number of accredited individual or institutional investors.  Hedge funds are able to use investment methods that are not allowed for other types of fund. 
    were compensated by a 2% fee per year of assets managed and 20% of all gains.  Losses did not count encouraging the managers to take risks with client money and accept ratings uncritically.  
  • Ferguson asserts regulatory and policy incentives were transformed after the Clinton administration limited enforcement of the law for financial companies. 

The Bubble, Part one: Borrowing and lending in the 2000s
Ferguson argues that after the
The IPO of Netscape is defined as the key emergent event of the New Economy by Michael Mandel.  Following the summary of Mandel's key points the complex adaptive system (CAS) aspects are highlighted. 
dot.com bubble
burst in 2000 the Bush administration used tax cuts, federal deficits, a housing bubble, and consumer spending based on second mortgage borrowing to engineer an unsustainable recovery.  He laments that there were massive job losses in manufacturing and services where these could be outsourced or automated.  The profits from productivity gains were captured by the wealthiest is schematically useful information and its equivalent, schematically useful energy, to paraphrase Beinhocker.  It is useful because an agent has schematic strategies that can utilize the information or energy to extend or leverage control of the cognitive niche.  
families.  Workers' wages stagnated or fell. 

A marriage of Convenience Produces a Bubble
Fed rate cuts, between 2000 and 2003, encouraged house prices to rise allowing house owners to capture valuation increases as loans and spend them on capital goods and second homes.  This process expanded the economy and helped
A key agent in the 1990 - 2008 housing expansion Countrywide is linked into the residential mortgage value delivery system (VDS) by Paul Muolo and Mathew Padilla.  But they show the VDS was full of amplifiers and control points.  With no one incented to apply the brakes the bubble grew and burst.  Following the summary of Muolo and Padilla's key points the complex adaptive system (CAS) aspects are highlighted. 
build a bubble
.  Ferguson notes that the situation was helped along by frauds against the borrowers who were tricked into using overly expensive loans. 

From 2003 to mid-2007 $3 trillion of [ABS is an asset-backed security defined as backed by nonconforming loans rather than Fannie Mae or Freddie Mac quality loans used in original MBS or CMO. 
] supported additional expansion globally, leveraging mortgages issued by new lightly regulated mortgage originators.  The ABS were repackaged into CDOs by investment banks to expose the high return/risk tranches for investors.  The CDO is a:
  • Care delivery organization in health care. 
  • Collateralized debt obligation in finance.  The idea is to transfer the credit risk rather than the loan itself.  The bank enters into a CDS on the loans with a SPV.  The CDO allows the bank to shift its loans outside the reach of regulators.  The CDO also can distribute the risk unevenly by tranching.  Equity is most at risk.  Then any subordinated debt. 
s were sweetened with securities insurance and AAA ratings.  Ferguson notes that more than half this increase in lending volume was subprime or equivalent and much of this was defective, depending on people who were speculating, committing fraud or being defrauded.  The defective CDOs were driven Ponzi style through the value chain.  Ferguson writes of clear evidence that many CEOs and senior executives lied to their investors, auditors, regulators, and the public during and after the bubble.  And President Clinton's TRA of 1997 is the Tax Reform Act of 1997.  President Clinton reduced several federal taxes and allowed the first $500,000 in gains from selling a house to be nominally tax free if it was rolled into a new house purchase.   encouraged flipping during the bubble.  The powerful amplifier pulled in house buyers and then trapped them, or worse in the collapse. 

Ferguson notes the massive fraud where realtors, loan brokers and mortgage originators, sales practices and deceptive low initial rate loan structures sustained with refinancing trapped borrowers in unnecessarily expensive and sometimes coerced loan agreements.  Illegal immigrants were particularly targets. 

Ferguson explains that the FBI was aware of the epidemic of mortgage fraud but they were focused on counterterrorism.  And he asserts the George W. Bush Administration deliberately disempowered the investigative and enforcement branches of the SEC is the Securities and Exchange Commission.  It was provided with power to regulate the securities industry by the Securities act and Securities Exchange act.  .  So mortgage lenders and Wall Street felt immune from criminal sanctions. 

Ferguson asks why the mortgage banks & Wall Street tolerated the frauds.  He concludes subprime lending was where the interest rates were highest, which allowed investment banks to build products, their investors wanted, with more yield.  And this induced very crooked behaviors. 

The Rise of Subprime Mortgage Lenders and the Shadow Banking Sector
Most of the loan originators financing mortgages used warehouse loans, is a loan extended from a large bank or Wall Street firm to a nonbank to originate mortgages. 
from Wall Street, based on short term credit.  They included: New Century, Ameriquest, Golden West Financial, Long Beach Mortgage, WMC and
A key agent in the 1990 - 2008 housing expansion Countrywide is linked into the residential mortgage value delivery system (VDS) by Paul Muolo and Mathew Padilla.  But they show the VDS was full of amplifiers and control points.  With no one incented to apply the brakes the bubble grew and burst.  Following the summary of Muolo and Padilla's key points the complex adaptive system (CAS) aspects are highlighted. 
Countrywide
.  Ferguson asserts the whole loan origination industry was totally unethical.  Most went bankrupt destroying capital but their former executives and sales personnel remain wealthy is schematically useful information and its equivalent, schematically useful energy, to paraphrase Beinhocker.  It is useful because an agent has schematic strategies that can utilize the information or energy to extend or leverage control of the cognitive niche.  
.  Ferguson laments that situation reoccurs throughout the book. 

Ferguson notes the unscrupulous manipulation of the buyers by the mortgage VDS

Once the bubble began rewarding corrupt practices the GSE is a Government Sponsored Entity.  Fannie Mae and Freddie Mac are examples.  s: Fannie Mae is the coloquial name for the FNMA which is:
  • The federal national mortgage association, a GSE.  It was made a publically traded company by the HUD act of 1968 to remove its debt from the federal budget.  
  • In 1970 FNMA was authorized to purchase conventional mortgages.  FHLMC was setup to ensure competition for FNMA in this task. 
  • In 1981 FNMA issued its first designated MBS. 
  • In 1992 the Democratic Congress and President Bush established HCDA which gave FNMA affordable housing goals set annually by HUD with Congressional approval.  
  • In 1999 the Clinton administration put pressure on FNMA to expand loans to low and moderate income borrowers.  FNMA took on additional subprime risk. 
  • In 2000 HUD placed anti-predatory lending rules on the affordable housing goals, but these constraints were dropped in 2004.  In effect they just pushed mortgage originators to Wall Street finance. 
  • Once mortgage originators started to use warehouse loans, the GSEs lost visibility and control of origination.  
  • The GSEs purchased AAA mortgages from commercial banks.  Many of these classifications were fraudulent leaving the GSEs with bad debt.  In 2008 to maintain the stability of the global economy the George W. Bush administration seized the GSEs and placed them in conservatorship under the FHFA, ensuring they could not collapse.  
  • In 2010 FNMA's stock was delisted from the NYSE.  They still trade over-the-counter. 
and Freddie Mac is the Federal home loan mortgage corporation (FHLMC), a GSE. 
, happily participated, leveraging their
This page discusses the benefits of bringing agents and resources to the dynamically best connected region of a complex adaptive system (CAS). 
central
position in the mortgage market. 

Wall Street makes a bubble and gives it to the world
Ferguson assesses how the Wall Street firms who purchased the mortgages, securitized them and sold them on to investors could have participated when they understood the toxic nature of the AAA rated assets.  He proposes five possibilities:
  1. The bonuses would make each participant fabulously wealthy is schematically useful information and its equivalent, schematically useful energy, to paraphrase Beinhocker.  It is useful because an agent has schematic strategies that can utilize the information or energy to extend or leverage control of the cognitive niche.  

  2. It is hard to fight a team or firm that is being hugely successful, in terms of short term bonuses. 
  3. Few people could see the systemic situation. 
  4. Once you are participating and realize there are problems identifying them will put you, your team and firm at risk of destruction.  
  5. Fraud was not punished.  Ferguson explains that no one on Wall Street lost out or was personally punished.  "The people responsible for the bubble are still wealthy, out of jail, socially accepted, and either retired or not, as they prefer.  Even those who really did lose something -- CEOs, eminences on boards of directors, business unit heads, people such as Richard Fuld, Robert Rubin, Angelo Mozilo, Stan O'Neal, or Joseph Cassano -- are still enormously wealthy as a result of having taken lots of cash out during the bubble, and/or from their severance payments."  
Ferguson notes that the George W. Bush administration and Federal Reserve of 1913 was a response to a series of banking panics with the goal of responding effectively to stresses.  It setup:
  • At least 8 and not more than 12 private regional Federal Reserve banks.  Twelve were setup
  • Federal Reserve Board with seven members to govern the system.  The President appointed the seven, which must be confirmed by Congress.  In 1935 the Board was renamed and restructured. 
  • Federal Advisory Committee with twelve members
  • Single US currency - the Federal Reserve Note. 
supported dangerous strategies by the banks.  In 2004 the SEC is the Securities and Exchange Commission.  It was provided with power to regulate the securities industry by the Securities act and Securities Exchange act.   allowed the five largest banks: Bear Sterns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley; to calculate their own leverage limits.  These banks used massive leverage, so that when the underlying assets declined by just 3% they went bankrupt unless rescued: Goldman Sachs and Morgan Stanley.  Other regulators reduced their risk-analysis and enforcement staff.  Ferguson lists examples of the resulting frauds: Charles Schwab sued: BNP Paribas,
A key agent in the 1990 - 2008 housing expansion Countrywide is linked into the residential mortgage value delivery system (VDS) by Paul Muolo and Mathew Padilla.  But they show the VDS was full of amplifiers and control points.  With no one incented to apply the brakes the bubble grew and burst.  Following the summary of Muolo and Padilla's key points the complex adaptive system (CAS) aspects are highlighted. 
Countrywide
, Bank of America, Citicorp, Credit Suisse, Deutsche Bank, Goldman Sachs, Greenwich Capital, HSBC is a major financial services and banking corporation.  It was originally the Hong Kong Shanghai Bank Corp. 
, Wells Fargo, Morgan Stanley, UBS; having analyzed 75,144 loans with 45% failing one of their four tests.  

Ferguson describes serious issues he identified at: Bear Stearns which securitized $192 billion, Goldman Sachs's GSAMP, Morgan Stanley which securitized $44 billion in one quarter of 2007;  Ferguson notes that his former colleague Laura Tyson, who was a board member of Morgan Stanley, criticized the short sellers is a multi part transaction where:
  • A borrowed tradable asset (this part of the transaction is not performed in the naked version) is sold under the assumption that the asset is going to fall in price during the period when it has been borrowed. 
  • Once the asset falls in price it is then purchased. 
  • The asset is returned to the lender, with any additional risk premium. 
  • The short seller keeps any profit.  If the asset gained value during the period of the short then the seller makes a loss.  
of Morgan Stanley stock and said the banks compensation practices did not contribute to its problems! 

The Rating Agencies
Ferguson explains that the ratings agencies: Moody's Standard & Poor's and Fitch; run an oligopoly.  They encouraged their entrenchment: the SEC recognizing their oligopoly, the NRSRO is nationally recognized statistical rating organizations: Moody's, Standard & Poor's and Fitch;
, government pension funds were required to invest in assets with a high NRSRO rating.  But the companies claimed that ratings were just free speech 'opinions,' limiting the legal liabilities.  If their power was threatened they would propose adjusting or not rating the assets owned by the combatant. 

Additionally the incentives and rewards of the NRSRO are paid by the product issuers.  Ferguson writes a cynical partnership ensued: corruption and exploitation; where the ratings agencies issued AAA ratings, and collected fees, on failed junk.  They rated expanding volumes of: MBS is mortgage backed security, a bond backed by the monthly payments homeowners make on their residences.  It was initially developed by Lew Ranieri at Salomon Brothers. 
, ABS is an asset-backed security defined as backed by nonconforming loans rather than Fannie Mae or Freddie Mac quality loans used in original MBS or CMO. 
, CDOs, CLOs, auction-rate securities, synthetic securities; given high ratings.  Moody's became the most profitable company in the Fortune 500.  And all three agencies failed to change the ratings of the investment banks as the banks products' core assets turned to junk. 

"Protection" and Financial Weapons of Mass Destruction
In part the continued high ratings could be justified because of CDS is a credit-default swap, nominally insurance where the buyer of the CDS gets paid if the subject of the swap can't meet its obligations.  It appears to be insurance but insurance companies must set aside reserves to handle such claims.  Britain initially required that insurance buyers also have an insurable interest.  That is required in insurance markets to ensure buyers of insurance don't destroy their asset just to obtain the insurance.  CDS were not required to do the same, because it was decided they were not insurance which encouraged such abuses and risk taking.  Stocks could be sold short when they were backed by CDS.  And the swap market is limited making it easy to undermine its liquidity.  They carry considerable risk because:
  • They are governed by the CFMA, which ensures they are unregulated and opaque
  • The incentives encouraged problems - the more CDS you own the more you benefit from [causing] problems with the 'insured' assets.  And unlike traditional insurance you could buy as many CDS as you could afford. 
'insurance'.  Ferguson argues that AIG was happy to sell its CDS and place itself at extreme risk because:
  1. Complexity and opacity of the market
  2. CEO and board of AIG were picked by Maurice Greenberg to be pliable and clueless. 
  3. The CDS business was initially hugely profitable and the same incentives were deployed at AIG, encouraging risky practices.  The CDS were issued by London based AIG Financial Products.  They generated $8 billion for AIG as well as $3.5 billion in cash bonuses for AIGFP by 2005. 
Ferguson laments CDSs reappeared in 2012 in the European sovereign debt crisis. 

Financial Culture and Corporate Governance During the Bubble
Ferguson concludes that the cocoon around investment banking executives: James Cayne, Richard Fuld, Stan O'Neal (Still on the board of Alcoa), Robert Rubin; and their boards, the executives huge wealth is schematically useful information and its equivalent, schematically useful energy, to paraphrase Beinhocker.  It is useful because an agent has schematic strategies that can utilize the information or energy to extend or leverage control of the cognitive niche.  
, perks and power, and the incentive system made them self-obsessed and indifferent to the fate of their companies, employees and customers.   Ferguson notes that once Rubin moved from Treasury is the department of the treasury.  it is a federal government executive department created by Act of Congress in 1789 to manage government revenue.  The Secretary of the Treasury is a Cabinet officer.  To support funding of high cost investments: Disaster recovery, Wars, Famines; the treasury can issue debt instruments and manage the national debt. 
Secretary to vice chairman of Citigroup he called Peter Fischer at Treasury, asking for help in preventing Enron's credit rating downgrade.  Citigroup was a major creditor and Enron was about to go bankrupt.  Citigroup was later fined for helping Enron conceal its losses.  Rubin was paid $120 million while at Citigroup.  Ferguson notes that Rubin is, in 2012, co-chair of the Council of Foreign Relations and a member of Harvard Corporation and was active on the Obama transition team moving in the same old unethical policymakers. 

Ferguson explains there was one company whose leaders aims to develop plans and strategies which ensure effective coordination to improve the common good of the in-group.  John Adair developed a leadership methodology based on the three-circles model. 
did not display such hubris.  Goldman Sachs were disciplined predators, who consequently made money during the bubble and then from its collapse.  He concludes they also lied to Congress in 2010. 

All Fall Down: Warnings, Predators, Crises, Responses
By 2002 prominent players were responding to the weaknesses being generated by the bubble: William Ackman 'shorted' MBIA, Magnetar Tricadia Harbinger Capital George Soros and John Paulson bet against mortgage securities at the end of the bubble together making over $25 billion and allowing Wall Street to extend the bubble, Goldman Sachs accurately timed the end of the bubble and made money from the bubble and collapse, J.P. Morgan Chase stayed out of the subprime market, Morgan Stanley leveraged the bubble but miss-timed the end tactically losing $9 billion, In 2004 Robert Gnaizda warned Alan Greenspan of problems with toxic mortgages hoping for action via HOEPA is the home ownership and equity protection act.  It was developed by the Republican led Congress and signed ito law by President Clinton in 1994.  , The IMF is the International Monetary Fund developed as part of the Bretton Woods agreements to provide liquidity to national gold denominated reserve banks at times of stress in the global financial network - a shortage of a particular currency which was inhibiting trade; in support of a broader Bretton Woods framework designed so as to ensure that currencies did not become misaligned with one another, and were a fair representation of what things were worth.  The IMF removed the need for nations to depend on private loans from commercial banks, such as Britain's dependence on J. P. Morgan during the 1920s and 30s.  The agreement required each Bretton Woods signatory to provide a capital investment or 'quota' into the fund which would subsequently correspond to the amount that the country could borrow from the fund in times of financial stress.  The top four countries and their quotas were set by IMF architect, Harry Dexter White, to match FDR's priorities:
  1. US - $2.9 billion, an amount the FDR administration could transfer from Exchange Stabilization Fund without any need to ask for Congress for funds. 
  2. UK - $1.45 billion
  3. USSR - slightly less than UK quota
  4. China - less than USSR. 
's Rajan warned central banks of toxic incentives inducing a financial meltdown; while the system resisted the undermining forces: MBIA got the SEC is the Securities and Exchange Commission.  It was provided with power to regulate the securities industry by the Securities act and Securities Exchange act.   to investigate Ackman, Greenspan ignored Gnaizda and Rajan while Larry Summers attacked Rajan. 

Amateur Hour Meets Let Them Eat Cake: Your Tax Dollars at Work
Ferguson laments that Federal Reserve of 1913 was a response to a series of banking panics with the goal of responding effectively to stresses.  It setup:
  • At least 8 and not more than 12 private regional Federal Reserve banks.  Twelve were setup
  • Federal Reserve Board with seven members to govern the system.  The President appointed the seven, which must be confirmed by Congress.  In 1935 the Board was renamed and restructured. 
  • Federal Advisory Committee with twelve members
  • Single US currency - the Federal Reserve Note. 
Chair Bernanke and Treasury is the department of the treasury.  it is a federal government executive department created by Act of Congress in 1789 to manage government revenue.  The Secretary of the Treasury is a Cabinet officer.  To support funding of high cost investments: Disaster recovery, Wars, Famines; the treasury can issue debt instruments and manage the national debt. 
Secretary Paulson denied the existence of a bubble or risk until too late.  Indeed he argues Paulson's Goldman Sachs was part of the lobbying effort that drove: Repeal of Glass-Steagall Act of 1933 prohibits commercial banks from engaging in the investment business.  , Banning the regulation of OTC derivatives is the commodity futures modernization act which constrained derivative market regulation, catalyzing the derivative fueled housing boom and 2008 recession.  It was supported by Senator Phil Gramm and the Republican led Congress, Federal reserve Chairman Alan Greenspan and the Clinton Administration's Treasury Department led by Larry Summers.  Former Treasury Secretary Robert Rubin also lobbied to over-rule Brooksley Born, the dissenting chair of the CFTC.  President Clinton signed the act into law in 2000.  , relaxing disclosure requirements for mortgage CDO is a:
  • Care delivery organization in health care. 
  • Collateralized debt obligation in finance.  The idea is to transfer the credit risk rather than the loan itself.  The bank enters into a CDS on the loans with a SPV.  The CDO allows the bank to shift its loans outside the reach of regulators.  The CDO also can distribute the risk unevenly by tranching.  Equity is most at risk.  Then any subordinated debt. 
s in 2004, relaxing the SEC is the Securities and Exchange Commission.  It was provided with power to regulate the securities industry by the Securities act and Securities Exchange act.  's leverage restrictions on investment banking in 2004.  And he notes Bernanke continued Greenspan's refusal to regulate the mortgage industry until 2007.  Then the Federal Reserve drafted HOEPA is the home ownership and equity protection act.  It was developed by the Republican led Congress and signed ito law by President Clinton in 1994.   regulations which were issued in mid-2008 by which time the crisis had developed.  Consequently Paulson and Bernanke had little regulatory support (monitoring and constraints) to understand the developing situation.  And Ferguson explains the administration had filled the upper ranks of the Treasury, SEC etc. with appointees with little relevant experience necessary to understand the global financial system's complexity and cope with the crisis. 

Ferguson accepts that once the crisis became acute, in September 2008, Paulson and Bernanke showed nerve and commitment.  But he is scathing about most participants: John Thain; and notes that Hank Paulson and Ben Bernanke did not adequately protect public money used to support the banks or protect the home owners who were impacted by mortgage defaults, foreclosures and unemployment. 

Crime and Punishment: Banking and the Bubble as Criminal Enterprises
Ferguson concludes that since the 1980s, much of the American (and global) financial sector has become criminalized, creating an industry culture is how we do and think about things, transmitted by non-genetic means as defined by Frans de Waal.  CAS theory views cultures as operating via memetic schemata evolved by memetic operators to support a cultural superorganism.  Evolutionary psychology asserts that human culture reflects adaptations generated while hunting and gathering.  Dehaene views culture as essentially human, shaped by exaptations and reading, transmitted with support of the neuronal workspace and stabilized by neuronal recycling.  Sapolsky argues that parents must show children how to transform their genetically derived capabilities into a culturally effective toolset.  He is interested in the broad differences across cultures of: Life expectancy, GDP, Death in childbirth, Violence, Chronic bullying, Gender equality, Happiness, Response to cheating, Individualist or collectivist, Enforcing honor, Approach to hierarchy; illustrating how different a person's life will be depending on the culture where they are raised.  Culture:
  • Is deployed during pregnancy & childhood, with parental mediation.  Nutrients, immune messages and hormones all affect the prenatal brain.  Hormones: Testosterone with anti-Mullerian hormone masculinizes the brain by entering target cells and after conversion to estrogen binding to intracellular estrogen receptors; have organizational effects producing lifelong changes.  Parenting style typically produces adults who adopt the same approach.  And mothering style can alter gene regulation in the fetus in ways that transfer epigenetically to future generations!  PMS symptoms vary by culture. 
  • Is also significantly transmitted to children by their peers during play.  So parents try to control their children's peer group.  
  • Is transmitted to children by their neighborhoods, tribes, nations etc. 
  • Influences the parenting style that is considered appropriate. 
  • Can transform dominance into honor.  There are ecological correlates of adopting honor cultures.  Parents in honor cultures are typically authoritarian. 
  • Is strongly adapted across a meta-ethnic frontier according to Turchin.  
  • Across Europe was shaped by the Carolingian empire. 
  • Can provide varying levels of support for innovation.  
  • Produces consciousness according to Dennet. 
that tolerates or even encourages systematic fraud.  This criminal behavior includes:
Ferguson describes the prosecutable crimes committed:
But like Taibbi he notes there were no prosecutions that punished the players themselves!

Agents of Pain: Unregulated Finance as a subtractive industry
Ferguson argues that the corrupt US financial network undermines the financial health of the economy in two major ways:
  1. Destabilization due to financial leverage, volatility, structural concentration, toxic incentives and information management catalyze bubbles and crises along with fraud.  They spill over into the broader economy destroying capital. 
  2. Parasitism is a long term relationship between the parasite and its host where the resources of the host are utilized by the parasite without reciprocity.  Often parasites include schematic adaptations allowing the parasite to use the hosts modeling and control systems to divert resources to them.   by the financial sector based on: legal and tax loopholes, constraints on information, barriers to market access, lack of protection for victims, monopoly practices and political subversion.  Ferguson laments that the opportunity encourages smart people to participate here rather than in value generating activities. 
Ferguson notes that the development of the financial sector has occurred while real economic performance has fallen.  Financial gains in the financial sector are skewed towards the top 1% of income earners.  Once the financial sector is removed from the US economy statistics real wages are seen to have fallen. 

He suggests the costs of financial deregulation have been huge:
All this benefited 50,000 to 100,000 people at the top of the financial services industry who became very wealthy is schematically useful information and its equivalent, schematically useful energy, to paraphrase Beinhocker.  It is useful because an agent has schematic strategies that can utilize the information or energy to extend or leverage control of the cognitive niche.  


Ferguson concludes these results should dispel the fantasy that an unregulated financial industry inevitably channels capital to its best uses.  And he notes it was just the latest of a
Satyajit Das uses an Indonesian company's derivative trades to introduce us to the workings of the international derivatives system.  Das describes the components of the value delivery system and the key transactions.  He demonstrates how the system interacted with emerging economies expanding them, extracting profits and then moving on as the induced bubbles burst.  Following Das's key points the complex adaptive system (CAS) aspects are highlighted. 
series
including: LTCM was Long-Term Capital Management, a hedge fund that used Black-Scholes quantitative models to trade in derivatives.  The hedge fund's bets failed during the Asian and Russian debt crisis of 1998 and it had to be rescued by the Federal Reserve. 
and the
The IPO of Netscape is defined as the key emergent event of the New Economy by Michael Mandel.  Following the summary of Mandel's key points the complex adaptive system (CAS) aspects are highlighted. 
Internet bubble
.  Then he looks at the details to show the inherent issues:
Ferguson explains how modern financial services are parasitic is a long term relationship between the parasite and its host where the resources of the host are utilized by the parasite without reciprocity.  Often parasites include schematic adaptations allowing the parasite to use the hosts modeling and control systems to divert resources to them.  :

The ivory tower
Ferguson describes the alignment of academia with the US financial network.  While he notes that:
  • 'Randomized' clinical trials of drugs when sponsored by pharmaceutical companies, have been found 3.6 times more likely to produce a positive result, and that
  • Physicians who had financial interests in diagnostic imaging centers were 4.5 times more likely to refer patients to such services; he is far more disappointed by the highly conflicted direction of the economics, business, law, political science and public policy schools.   
Ferguson provides a breakdown of this highly influential network.  A network that he argues is incented to influence legislation, public debate, regulation, prosecution, class-action lawsuits, antitrust judgements and taxes to the benefit of their sponsors.  The network includes:
This cluster of people controls the incentives (scientific papers) and reputations of the network of academics.  Ferguson argues that going against these influencers' [& their sponsors'] positions will limit: Advancement, Grants, Access to primary journals, Positions at think tanks etc.  Not surprisingly he suggests young academics focus their research and its conclusions to limit these constraints.  This has widely skewed academic positions regarding: Executive pay, Conflict-of-interest, Industrial organization, The Financial crisis, Antitrust analysis; (Dec 2016)


America as a rigged game
In 2000 the US is the United States of America.   stood pre-eminent with no significant competitors, a peace dividend and low unemployment.  But, Ferguson argues that over the last 30 years of Democratic and Republican administrations the US political-economic system has lost its way.  The dominant trend is severely negative with declining: Economic competitiveness, Basic fairness,
Salman Khan argues that the evolved global education system is inefficient and organized around constraining and corralling students into accepting dubious ratings that lead to mundane roles.  He highlights a radical and already proven alternative which offers effective self-paced deep learning processes supported by technology and freed up attention of teams of teachers.  Building on his personal experience of helping overcome the unjustified failing grade of a relative Khan:
  • Iteratively learns how to teach: Starting with Nadia, Leveraging short videos focused on content, Converging on mastery, With the help of neuroscience, and filling in dependent gaps; resulting in a different approach to the mainstream method. 
  • Assesses the broken US education system: Set in its ways, Designed for the 1800s, Inducing holes that are hidden by tests, Tests which ignore creativity.  The resulting teaching process is so inefficient it needs to be supplemented with homework.  Instead teachers were encouraging their pupils to use his tools at home so they could mentor them while they attended school, an inversion that significantly improves the economics. 
  • Enters the real world: Builds a scalable service, Working with a real classroom, Trying stealth learning, At Khan Academy full time,  In the curriculum at Los Altos, Supporting life-long learning. 
  • Develops The One World Schoolhouse: Back to the future with a one room school, a robust teaching team, and creativity enabled; so with some catalysis even the poorest can become educated and earn credentials for current jobs. 
  • Wishes he could also correct: Summer holidays, Transcript based assessments, College education;
  • Concludes it is now possible to provide the infrastructure for creativity to emerge and to support risk taking. 

Following our summary of his arguments RSS frames them from the perspective of complex adaptive system (CAS) theory.  Disruption is a powerful force for change but if its force is used to support the current teachers to adopt new processes can it overcome the extended phenotypic alignment and evolutionary amplifiers sustaining the current educational network? 

Education
, Politics; and concentration of power in: Financial services, Energy, Telecommunications, Media, Retailing, Agribusiness and food; with no increase in efficiency.  Small numbers of households have gained most of America's financial wealth is schematically useful information and its equivalent, schematically useful energy, to paraphrase Beinhocker.  It is useful because an agent has schematic strategies that can utilize the information or energy to extend or leverage control of the cognitive niche.  


Ferguson suggests these trends have resulted in the US being controlled by an amoral oligarchy that has progressively corrupted the Federal government and the political system.  Better and better for the super-rich.  For the bottom hundred million people the situation is not nice. 

Ferguson laments America's deterioration is now systemic and structural.  He sees both political parties focused on the wealthy few.  He notes the Obama administration adopted the same personnel and policies used by the Bush and Clinton administrations ensuring protection and privileges for the financial sector, while ignoring the plight of the Americans whose mortgages are still under water.  In consequence nothing has been done about addressing the long-term decline. 

Ferguson assumes America still has an open democratic society and change is still possible when the majority decide they have had enough.  He can't believe that the 50,000 people in the financial and political elite can hold the majority in check.  However he notes there are two difficult hurdles:
  1. The political parties and machinery have been high jacked in a way that will be difficult to recapture.  Both parties have the same agenda and are looking to limit the rise of other competitors or true reform efforts. 
  2. The corruption goes far beyond the financial services sector.  There are allies in: Telecommunications, Energy, Media, Health care, Agribusiness/food.  And all these powerful groups benefit from the status quo. 
Ferguson presents a model of national decline - a small company or nation develops a superior capability and becomes enormously successful defeating all rivals.  But then it begins to decay from within and collapses or is defeated by an aggressive new competitor.  He sees corruption as a complacent response to internal threats.  Complacency built from global dominance after world war II.  And corruption that feeds on its self.  Ferguson compares General Motors and Toyota in 1984 to illustrate the effects, but he notes the Japanese were twice as productive in many industries: Steel, Computers.  He suggests other countries financed new entries into these industries stimulating innovation is the economic realization of invention and combinatorial exaptation. 


Ferguson notes that the rise of China, India and other Asian nations offered American industry the option to outsource jobs and cost.  He argues that should have caused the US to improve
Salman Khan argues that the evolved global education system is inefficient and organized around constraining and corralling students into accepting dubious ratings that lead to mundane roles.  He highlights a radical and already proven alternative which offers effective self-paced deep learning processes supported by technology and freed up attention of teams of teachers.  Building on his personal experience of helping overcome the unjustified failing grade of a relative Khan:
  • Iteratively learns how to teach: Starting with Nadia, Leveraging short videos focused on content, Converging on mastery, With the help of neuroscience, and filling in dependent gaps; resulting in a different approach to the mainstream method. 
  • Assesses the broken US education system: Set in its ways, Designed for the 1800s, Inducing holes that are hidden by tests, Tests which ignore creativity.  The resulting teaching process is so inefficient it needs to be supplemented with homework.  Instead teachers were encouraging their pupils to use his tools at home so they could mentor them while they attended school, an inversion that significantly improves the economics. 
  • Enters the real world: Builds a scalable service, Working with a real classroom, Trying stealth learning, At Khan Academy full time,  In the curriculum at Los Altos, Supporting life-long learning. 
  • Develops The One World Schoolhouse: Back to the future with a one room school, a robust teaching team, and creativity enabled; so with some catalysis even the poorest can become educated and earn credentials for current jobs. 
  • Wishes he could also correct: Summer holidays, Transcript based assessments, College education;
  • Concludes it is now possible to provide the infrastructure for creativity to emerge and to support risk taking. 

Following our summary of his arguments RSS frames them from the perspective of complex adaptive system (CAS) theory.  Disruption is a powerful force for change but if its force is used to support the current teachers to adopt new processes can it overcome the extended phenotypic alignment and evolutionary amplifiers sustaining the current educational network? 

education
and skills within its work force but the reverse occurred.  Ferguson argues that this failure to respond was due to a lack of changes required in the US government.  He asserts this is due to corruption of government being a cheaper and easier way for companies to protect and enhance their markets. 

He laments that the Obama administration exemplified the problematic situation.  Not one reformer: Simon Johnson, Nouriel Roubini, Paul Krugman, Sheila Bair, Joseph Stiglitz, Jeffrey Sachs, Robert Gnaizda, Brooksley Born, Senator Carl Levin; got a significant position.  Obama went with Larry Summers, Gene Sperling, Tim Geithner, Mark Patterson from Goldman Sachs, Gary Gensler from Goldman Sachs, Mary Shapiro, Ben Bernanke, Eric Holder & Lanny Breuer from Covington, Michael Froman & Jacob Lew from Citigroup, Thomas Nides of Morgan Stanley etc.  The Obama administration resisted: reform of corporate governance, breaking up of the largest banks, closing legal loopholes; and when reform of financial services finally arrived, Ferguson asserts, it was the weak and hugely complicated Dodd-Frank is the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.  Its titles include:
  1. Financial Stability creates the FSOC and OFR. 
  2. Orderly Liquidation Authority
    • Section 619 is the Volcker Rule: prohibitions on proprietary trading and certain relationships. 
  3. Transfer of Powers to the Comptroller, the FDIC, and the Fed
  4. Regulation of Advisers to Hedge Funds and Others - which updated the powers of the Investment Company Act. 
  5. Insurance
  6. Improvements to Regulation
  7. Wall Street Transparency and Accountability
  8. Payment, Clearing and Settlement Supervision
  9. Investor Protections and Improvements to the Regulation of Securities
  10. Bureau of Consumer Financial Protection
  11. Federal Reserve System Provisions
  12. Improving Access to Mainstream Financial Institutions
  13. Pay It Back Act
  14. Mortgage Reform and Anti-Predatory Lending Act
  15. Miscellaneous Provisions
  16. Section 1256 Contracts
bill.  And the Obama justice department showed
Matt Taibbi describes the phenotypic alignment of the American justice system.  The result he explains relentlessly grinds the poor and undocumented into resources to be constrained, consumed and ejected.  Even as it supports and aligns the financial infrastructure into a potent weapon capable of targeting any company or nation to extract profits and leave the victim deflated. 

Taibbi uses five scenarios to provide a broad picture of the: activities, crimes, policing, prosecutions, court processes, prisons and deportation network.  The scenarios are: Undocumented people's neighborhoods, Poor neighborhoods, Welfare recipients, Credit card debtors and Financial institutions.

Following our summary of his arguments, RSS comments on them framed by complex adaptive system (CAS) theory.  The alignment of the justice system reflects a set of long term strategies and responses to a powerful global arms race that the US leadership intends to win. 

no interest in prosecuting banks or bankers


Ferguson explains that the:
Ferguson concludes that America is developing a 'caste' system where the circumstances of one's birth determine life outcomes.  He argues that improving educational opportunities and achievement could turn this around but public school finance being based on local property taxes constrains any response.  Inequality is amplified by the education funding mechanism. 

He laments that the incentives and corruption in the system are self-reinforcing. 


What should be done?
Ferguson lists his reform proposals:
  • Improving educational opportunity and quality
  • Bring the financial sector under control
  • Control the impact of money on US politics
  • Reform the individual and corporate tax structures
  • Strengthen antitrust and regulatory infrastructure
  • Create a universally accessible, high speed broadband Internet. 
Ferguson sees a future where American elites fight to retain their power but mass frustration and a major crisis will undermine them.  He judges Europe as unstable and fragmented.  But he concedes that frustration has so far led to the rise of Michele Bachman, Rick Perry, Ron Paul, Herman Cain, Newt Gingrich, and Sarah Palin.  He concedes in 2012 that President Obama appears the least troubling of the candidates for President.  He hopes that somewhere in the US is the United States of America.   is a courageous young leader aims to develop plans and strategies which ensure effective coordination to improve the common good of the in-group.  John Adair developed a leadership methodology based on the three-circles model. 
in the making, someone who can persuade the American people to rise up and throw the rascals out. 





This page introduces the complex adaptive system (CAS) theory frame.  The theory is positioned relative to the natural sciences.  It catalogs the laws and strategies which underpin the operation of systems that are based on the interaction of emergent agents. 
John Holland's framework for representing complexity is outlined.  Links to other key aspects of CAS theory discussed at the site are presented. 
CAS theory
views the US nation state as a CAS.  Ferguson argues parasites have taken control of this system.  Parasitism is a long term relationship between the parasite and its host where the resources of the host are utilized by the parasite without reciprocity.  Often parasites include schematic adaptations allowing the parasite to use the hosts modeling and control systems to divert resources to them.   is a general problem in CAS.  When infected systems persist, competition and internal responses will have limited and stabilized the level of such activity to be bearable by the system.  But the transitions Ferguson describes are too recent to ensure stability.  America could:

CAS require significant regulation to operate effectively.  They are
Plans emerge in complex adaptive systems (CAS) to provide the instructions that agents use to perform actions.  The component architecture and structure of the plans is reviewed. 
specified memetically
and always apply
Flows of different kinds are essential to the operation of complex adaptive systems (CAS). 
Example flows are outlined.  Constraints on flows support the emergence of the systems.  Examples of constraints are discussed. 
constraints
to the memetic and phenotypic is the system that results from the controlled expression of the genes.  It is typically represented by a bacterial cell or the body of a multi-cell animal or plant.  The point is that the genes provide the control surface and the abstract recipe that has been used to generate the cell. 
processes.  It should be no surprise that removing the regulatory constraints causes dramatic amplification effects including damaging positive feedback. 
  • By Jun 2017 financial regulators were seeing indications that they needed to increase protections, but were responding to political pressure to relax the regulations setup after 2008. 

Ferguson argues that American ascendency was waning by the 1980s.  Certainly the global
This page discusses the effect of the network on the agents participating in a complex adaptive system (CAS).  Small world and scale free networks are considered. 
economic network
was allowing the
This page reviews Christensen's disruption of a complex adaptive system (CAS).  The mechanism is discussed with examples from biology and business. 
disruption
of American economic
Plans are interpreted and implemented by agents.  This page discusses the properties of agents in a complex adaptive system (CAS). 
It then presents examples of agents in different CAS.  The examples include a computer program where modeling and actions are performed by software agents.  These software agents are aggregates. 
The participation of agents in flows is introduced and some implications of this are outlined. 
agents
by Japanese and Europeans.  But President Reagan responded effectively to the immediate threat with the Plaza accord, replacing Japanese sub-network based supplies with far less competitive Chinese ones.  Over time this 'fix' helped China build its export economy so that by 2000 its network of agents was disrupting the US agents.  George W. Bush attempted Reagan's solution, telling the Chinese to raise the value of their currency.  But China is a nuclear armed nation which refused to submit.  Subsequently the derivative weapons the US trained on China backfired on the US mortgage network. 
The disruptive amplifier restructured under President Reagan continued to disintermediate businesses which supported middle and working class jobs in the US.  A politically expedient fix for this stress was found in the
A key agent in the 1990 - 2008 housing expansion Countrywide is linked into the residential mortgage value delivery system (VDS) by Paul Muolo and Mathew Padilla.  But they show the VDS was full of amplifiers and control points.  With no one incented to apply the brakes the bubble grew and burst.  Following the summary of Muolo and Padilla's key points the complex adaptive system (CAS) aspects are highlighted. 
housing amplifier
that Reagan and President George W. Bush both leveraged.  It substituted housing capital growth for stagnating wages.   For a time the ploy worked politically. 

Ferguson is critical of the management of US firmsChristensen's analysis of
This page reviews Christensen's disruption of a complex adaptive system (CAS).  The mechanism is discussed with examples from biology and business. 
disruption
shows that it is a system property that will affect companies with great management. 

Ferguson makes clear that the core issue with junk bond catalyzed financing was the lack of regulation, including constraints on incentives.  But to RSS is Rob's Strategy Studio other details are also key:

As Ferguson stresses, the Clinton Administration was philosophically New Democrat.  Hence it brought together the Southern Democrat views of the US nation with leverage of information technology, Globalization and Wall Street funding.  RSS suggests the administration learned a lesson from President Reagan's plunge protection team: Financial services
Satyajit Das uses an Indonesian company's derivative trades to introduce us to the workings of the international derivatives system.  Das describes the components of the value delivery system and the key transactions.  He demonstrates how the system interacted with emerging economies expanding them, extracting profits and then moving on as the induced bubbles burst.  Following Das's key points the complex adaptive system (CAS) aspects are highlighted. 
provide powerful weapons
in the competition with other nations.  The administration could partner with Wall Street to capture the resources of other nations while weakening them. 

Ferguson describes a simple life cycle of a nation state.  RSS views the
Peter Turchin describes how major pre-industrial empires developed due to effects of geographic boundaries constraining the empires and their neighbors' interactions.  Turchin shows how the asymmetries of breeding rates and resource growth rates results in dynamic cycles within cycles.  After the summary of Turchin's book complex adaptive system (CAS) theory is used to augment Turchins findings. 
cliodynamic model
as more predictive.  Each new Federal administration brings a new 'generation' of experiences which often means that awareness of prior traps is forgotten over three generations and so mistakes are repeated.  After LBJ is President Lyndon Baines Johnson.   lost the South to the Democratic Party it was likely that electoral defeat would embolden external members of the former Democratic political elite to fight their way into power.  When the 'New Democrats' captured control of the central democratic party processes for developing a presidential campaign they cleared the way for a new set of 'southern' memes expressed through, then Arkansas governor, Bill Clinton. 

President Clinton responded to the collapse of the Soviet Union by reducing the funding for the military-industrial complex.  At a deeper level, Democrats and Republicans could redirect agency from combating major external threats to fighting internal ones.  To RSS this process is analogous to the collapse of external threats to the Roman Republic, which enabled the warrior aristocracy to focus inwards, transforming the republic into the Roman Empire, as described by Mary Beard

Ferguson proposes goals that will turn back the parasitism is a long term relationship between the parasite and its host where the resources of the host are utilized by the parasite without reciprocity.  Often parasites include schematic adaptations allowing the parasite to use the hosts modeling and control systems to divert resources to them.   he describes.  Catalytic, an infrastructure amplifier.   methods to improve educational opportunity have been
Salman Khan argues that the evolved global education system is inefficient and organized around constraining and corralling students into accepting dubious ratings that lead to mundane roles.  He highlights a radical and already proven alternative which offers effective self-paced deep learning processes supported by technology and freed up attention of teams of teachers.  Building on his personal experience of helping overcome the unjustified failing grade of a relative Khan:
  • Iteratively learns how to teach: Starting with Nadia, Leveraging short videos focused on content, Converging on mastery, With the help of neuroscience, and filling in dependent gaps; resulting in a different approach to the mainstream method. 
  • Assesses the broken US education system: Set in its ways, Designed for the 1800s, Inducing holes that are hidden by tests, Tests which ignore creativity.  The resulting teaching process is so inefficient it needs to be supplemented with homework.  Instead teachers were encouraging their pupils to use his tools at home so they could mentor them while they attended school, an inversion that significantly improves the economics. 
  • Enters the real world: Builds a scalable service, Working with a real classroom, Trying stealth learning, At Khan Academy full time,  In the curriculum at Los Altos, Supporting life-long learning. 
  • Develops The One World Schoolhouse: Back to the future with a one room school, a robust teaching team, and creativity enabled; so with some catalysis even the poorest can become educated and earn credentials for current jobs. 
  • Wishes he could also correct: Summer holidays, Transcript based assessments, College education;
  • Concludes it is now possible to provide the infrastructure for creativity to emerge and to support risk taking. 

Following our summary of his arguments RSS frames them from the perspective of complex adaptive system (CAS) theory.  Disruption is a powerful force for change but if its force is used to support the current teachers to adopt new processes can it overcome the extended phenotypic alignment and evolutionary amplifiers sustaining the current educational network? 

demonstrated by
Sal Khan



Charles Ferguson's Predator Nation describes the alignment of the major US political parties with Wall Street.  This alignment has supported the development of a powerful financial services industry.  The resulting inequality and corruption are highlighted in his insightful but disturbing book. 




























































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This page looks at schematic structures and their uses.  It discusses a number of examples:
  • Schematic ideas are recombined in creativity. 
  • Similarly designers take ideas and rules about materials and components and combine them. 
  • Schematic Recipes help to standardize operations. 
  • Modular components are combined into strategies for use in business plans and business models. 

As a working example it presents part of the contents and schematic details from the Adaptive Web Framework (AWF)'s operational plan. 

Finally it includes a section presenting our formal representation of schematic goals. 
Each goal has a series of associated complex adaptive system (CAS) strategy strings. 
These goals plus strings are detailed for various chess and business examples. 
Strategy
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This page uses an example to illustrate how:
  • A business can gain focus from targeting key customers,
  • Business planning activities performed by the whole organization can build awareness, empowerment and coherence. 
  • A program approach can ensure strategic alignment. 
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