Requiem

2. Schelling Point-1

2

Schelling Point

The American Republic will endure until the day Congress discovers it can bribe the public with the public's money.

— generally attributed to Alexis de Tocqueville, possibly originated by Alexander Fraser Tytler

Lindsey Postrel, the owner/editor/operator of the Cogent News media site with the motto “Liberation not Regulation,” had been saying for over a decade, “Factual news is currently out of style, but I’m confident that will change. Reality has a habit, after all, of making itself felt in the long run.” She found herself tantalized by the possibility that right here, right now, was the teachable moment when factuality would make its dramatic comeback.

Factuality had made a partial comeback, at least among a small community of rich people, almost two years earlier when Lindsey blew the lid off California’s semi-secret plan to balance its budget by running civil forfeitures against all the millionaires in California. That scoop had put her on the map, increasing her readership and viewership by a factor of ten.

And today, judging by the numbers she was seeing for people logging into her show, she could have another factor of ten increase if these next interviews went as expected.

Lindsey introduced Colin Wheeler, whom most of her audience already knew, then smiled at the rather severe-looking middle-aged woman seated next to her. “Lenora Thornhill, I’m delighted to meet you.” Lindsey turned to the cameras. “Dr. Thornhill is the Expedition Commander for the Fuxing fleet of the BrainTrust, so it’s a delightful accident that we could get her here today for a few words on the sociology of economic catastrophes.” She turned back to Lenora. “And why are you here at this remarkable moment?”

Lenora gave the cameras a stiff smile. “I came back, as it happens, to hear Dr. Everest’s presentation on SmartCoin.” She let her head slide to the side. “And I needed to talk to my business partner, Jim Caplan, about some changes to the framework.”

Lindsey nodded. “That’s the Accel Educational Framework, which those of you on the BrainTrust have surely encountered before.” Lindsey gave Lenora a shrewd look. “And your husband had nothing to do with your presence?”

Lenora’s smile turned warmer. “Of course. I was hoping to have a few moments of private time with him as well.” Her husband had gotten stuck, after years of pleasant toil as a software engineer, with the job of COO for the Accel Corporation. He rarely managed to leave the archipelago.

Lindsey leaned forward. “So, back to the question of the day. What causes a bubble to burst? Why do people suddenly start panic-selling the goods they’ve bought so eagerly?”

Lenora nodded. “So, in the times leading up to the pop of a bubble, some people know that they are in a bubble, and they know the bubble will burst.” She sighed. “Sometimes, as in the dotcom crash at the turn of the century, just about everyone knows a crash is just around the corner. But—”

Colin picked up the thread. “But until the moment the pop occurs, there’s money to be made riding it, like a surfer catching the leading edge of a tsunami.” His voice acquired dry irony. “It’s all great as long as you manage the last few moments of the trip with luck far in excess of your common sense.”

Lindsey pushed forward. “So, bubbles invariably hang on until…what?”

Lenora jumped in. “Until a game theoretic phenomenon known as a ‘Schelling point’ arises.”

Lindsey sat back. “Ahh. The Schelling point: the moment everyone knows that everyone knows that this is the moment to do a particular thing.”

Lenora nodded. “Schelling points have been with humanity for a very long time, although this form of coordinated cooperation with no communication operated in anonymity until Schelling identified it in 1960.”

Colin gave an example. “In ancient China, when a dynasty became too corrupt for the people to tolerate, it came to be understood by everyone that they would wait until the death of the emperor before revolting. Everyone knew that everyone knew that the time to rebel was at the funeral.”

Lenora nodded enthusiastically, picking up on Colin’s delight with the example. “Eventually, the bureaucrats of ancient China figured out that their predecessors tended to meet their own untimely demises when the Emperor died, and they fought back. Those governmental powers, upon seeing the emperor was not long for this world, would craft rumors that the emperor might be dead, but maybe not. The death then occurred months before the bureaucrats allowed it to be known that the emperor had been dead for a long time. No Schelling point, no rebellion.”

Colin summarized, “This bureaucratic strategy worked often enough to become popular among corrupt governments everywhere.”

Lindsey listened thoughtfully. “Okay, then. For a financial system, what kind of event qualifies as a Schelling point that will burst a bubble?”

Lenora shrugged. “Sometimes it’s an event in the field of finance. The Great Recession’s moment of truth came when Lehman Brothers went bankrupt, and everyone suddenly knew that everyone knew the jig was up, and the real estate mortgages, cdos, and cds held by all the financial institutions were worth no more than the paper upon which they were printed.”

Colin gave a very different example. “Sometimes, however, when a bubble has grown huge, an incident that has little to do with the financial system can supply the trigger. On 9/11 in 2001, the destruction of the Twin Towers in New York kicked off the dotcom crash, even though the coming or going of a couple of skyscrapers on the East Coast had virtually nothing to do with the revenues, profits, schedules, or opportunities in Silicon Valley.”

Lenora gave the audience a harsh smile. “A century from now, people will still argue about the direct effects of the announcement of the death of America’s President for Life on matters of business and debt.”

Colin wrapped up. “But a century from now, no one will disagree that it was the trigger to blast open the very gates of hell through which we are now falling.”

The Great Crash rolled around the world at the speed of light. Markets with daily crash limits halted trading in minutes; some markets that were already closed because it was nighttime did not bother to open. The world of finance slammed to a halt on every continent and in every city.

But the BrainTrust was not on a continent. Financiers and brokers aboard the GS Prime and Wells Morgan never shut down their servers; they worked twenty-four/seven. When a remarkable enough opportunity arose, even the financiers who lay dead asleep leapt from their beds to join the action.

For a full-service financial house, economic booms were not the only exciting opportunities. Economic hiccups—every kind of financial volatility—offered lucrative possibilities for the creative mind. A crash of monumental proportions like this one provided monumental profit potential. Aboard the GS Prime, no one slept.

Keenan Stull had tried to sleep, but it did not work out. His phone sang the opening of Paula Abdul’s Cold Hearted Snake well before dawn.

His wife turned away from him, muttering, “Tell Larry the next time I see him, I’m going to kill him.”

Keenan rolled out of bed. “Larry.” Larry Winters was the CEO of GS. Officially he was Keenan’s boss’s boss, though for obscure reasons, Larry chose to call Keenan directly whenever he wanted things done.

Larry didn’t waste time on pleasantries. He went directly to the criticisms. “Where are you? The whole world’s gone mad, and you’re nowhere to be found.”

This hardly seemed fair since Keenan had answered the phone on the first ring. “What’s happening?”

A choking sound came across the phone. “Don’t you know? The Crash! The Crash!”

Keenan immediately knew what that meant in all its dire potentialities. The adrenalin spike lifted him nearly off his toes. Not only was it a disaster, but it was also the opportunity of a lifetime. “Tell me while I dress.”

Larry offered a GS-oriented perspective. “The Army started shooting civilians in a riot at the White House. Apparently the President’s dead and gone. Moments later, the Crash began.” Larry hesitated before admitting the following. “You know the parking service we offer? So that after hours, you can trade shares at the closing price? That we then sell in the morning?”

Keenan ran for the door with a sinking feeling. “Yes, the one I’ve been telling you for years we need to hedge better.”

Larry barely acknowledged this. “It was very lucrative, especially since the regulators made it illegal dirtside years ago. But today, even though we shut down the service about fifteen minutes into the Crash, it was too late.”

Keenan drew the obvious conclusion. “So now we’re holding a lot of commitments we’re going to lose our shirts on.”

Larry still had to defend himself. “Adding up all the wins and losses over the years, it’s still been a great business, and we’ve gotten a lot of goodwill with our regular customers. You know, people desperate to get out of their dying portfolios while they still have something to save.” His voice became commanding. “But we need to switch gears.”

Keenan hurtled down the ramp to the Tower of Babel deck with its passage walls rendered with scenes of Babylon. He hadn’t bothered to wrap a tie around his neck. Today it just didn’t seem important. “Give me a few minutes to get some things started.”

He hung up, grabbed appropriate people as he swept past their offices, and went to work.

At his command, the GSDC, a compute server ship built solely to supply the petaflops needed for GS’ most extreme analyses, burned tremendous compute power extrapolating the prices at which they would be able to sell additional assets, and started offering these considerably lower prices—with considerably higher margins for the risk GS was reluctantly accepting. Panicked sellers paused, swallowed, and accepted the losses rather than risk losing even more.

Then Keenan’s people realized the prices were falling so low that the markets would close for a second day before the trades people begged GS to undertake for them could be executed.

So yet another new strategy was required. Fortunately, Keenan had expected that. He already had his team programming suitable smart contracts to handle the derivatives with which they would hedge their new future.

Keenan’s phone started playing Paula Abdul’s song again. He blew out a harsh breath. Larry was supposed to wait for Keenan to call, but apparently, he couldn’t.

Keenan held the phone a little away from his ear as Larry came on the line. “So, Keenan, what’s the plan? You have one by now, I hope.”

Keenan frowned. “You know, I always thought I was up for anything, but let’s be honest—this is new. This situation calls for caution, but—”

Larry finished the sentence. “But with an opportunity this big, you’ve gotta leave caution behind. I’m expecting something better than caution from you, Keenan. All our competitors have effectively closed their doors. They’re no more useful to customers than the stock markets, which are all closed. Be bold.” His voice developed a tinge of menace. “Of course, you have to be right as well.”

Keenan rubbed his temples. “So, I’ve been trying to answer the question, what assets will still be worth something in the morning? Deutschmarks, of course.” The mark had made a spectacular comeback after Germany withdrew from the Eurozone a decade earlier, when France led the southern euro countries in an austerity revolt and ran the printing presses to supply cash for the profligate and bankrupt southerners. “But there’s not enough German currency to hedge the entire world.”

He took a deep breath. His boss suffered from a puzzling dislike of all things BrainTrust despite the profits Keenan had reaped there. “There is, however, one asset we can rely upon.”

The CEO raised an eyebrow. “And that is?”

Lindsey Postrel turned to her next guest, a diminutive Balinese woman with glasses and a white lab coat. “Dr. Dash, I’m so pleased you could make it.”

Dash smiled warmly. “I’m happy to be here. It’s good to see you again, Lindsey.”

Lindsey turned to the cameras. “I know I don’t have to tell you this, but Dr. Dash is of course the heroine who cured the bioterror plagues that threatened to destroy the world. She then destroyed the threat that more such pandemics would arise.” When Lindsey said Dash had “destroyed the threat,” what she really meant was “killed the bastard who’d created the pandemics in the first place,” but Lindsey knew Dash hated being reminded of that incident, especially in public.