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Friday, February 15, 2013

On the Futurization of Swaps: Systemic Risk Evading Financial Reform

According to the Dodd-Frank financial reform Act of 2010, financial firms are required to set aside higher reserves to cover losses on trades of derivative securities, including those that “swap” the risk of default in the basis of a given security, such as mortgages. As if drug addicts or alcoholics shirking boundaries, traders set about getting around the “margin requirements” by treating “swaps” as futures, which do not require the higher reserves. Whereas a futures contract for corn to sell at a certain price limits residual risk, swaping the risk of the default of an investment puts a party on the line for the entire investment. Moreover, unlike futures contracts, swaps have significant systemic risk because claims can all be made at once, overwhelming the parties assuming the liability in the swaps (e.g. AIG in September 2008). Wall Street over-discounts such high-risk, low-probability outcomes.  Less in reserve means more money is available to put into high-risk investments—hence more profit today. Accordingly, the trajectory already as of the beginning of 2013 was toward yet another systemic collapse of the financial system.
“As the market gravitates to the cheaper platform -- and it’s cheaper because it’s unsafe—that creates risk for everyone,” James Cawley, CEO of trade execution firm Javelin Capital Markets, told The Huffington Post.  Put another way, market participants were operating according to the greatest profit, the greater risk notwithstanding. “In a distress scenario, you basically have what you had from AIG in 2008,” Cawley said. “Then someone has to step in, and we all know who that someone is: the U.S. taxpayer.” So the question is perhaps that of whether the SEC has the taxpayer’s back or is enabling a cozy revolving door with Wall Street firms.
Lest it be supposed that the U.S. Treasury Department would see to it that the Dodd-Frank reserve requirements would not be circumvented during President Obama’s second term, Senator Hatch speaking at Jack Lew’s confirmation hearing in early 2013 raised the question of whether Lew would act to constrain banks’ risky proprietary trading, given that he had headed units at Citigroup that were involved in just such practices that would violate the Volcker Rule in Dodd-Frank.
Wall Street holding on in Washington. Jack Lew at his confirmation hearing for Treasury Secretary. Lew had been the chief operating officer at units at Citibank.     NPR
For example, Lew was COO of Alternative Investments at Citi. MAT and Falcon investment funds were sold there as low-risk. Yet those funds were actually hedge funds with high risk.  Lew, who was COO of the unit by the time of the implosion, refused to offer the misled customers full refunds.  At least fourteen arbitration panels subsequently gave the customers the full refunds they sought. If Lew was not willing to right matters then, how could the taxpayer have faith in his willingness as Treasury Secretary to go up against his prior world to protect the public? Although he had not been involved in selling the funds, he did manage units that engaged in risky proprietary trading and he failed to right the wrong done to customers. The public would be justified in wondering if they too would be left on the hook rather than protected by their government should Wall Street once again get out of hand.
One of the downsides of plutocracy, or the rule of wealth, is that the excesses of reckless greed are not met by a viable exogenous constraint from the state because the government is the agent rather than master of wealth. As Senator Dick Durbin had said after the banks’ complicity in the financial crisis of 2008, “Congress is owned by the banking lobby.” As long as this condition holds, Wall Street will have the edge in circumventing even regulations that are in its own systemic interest.


Eleazar Melendez, “Wall Street Setting Itself Up For Next Derivatives Crisis, Market Participants Warn,” The Huffington Post, February 14, 2013.


Wednesday, February 13, 2013

Wrestling Out, Dancing In: The Modern Olympics

Even as custom or tradition that has outlived its justification—which is not the same as usefulness—is essentially deadwood, there is presumptuousness in redefining a concept or event without regard to how it is understood. For example, Stephanie Meyers disregarded one of the major confining attributes of the vampire lore in enabling the vampires of the Twilight saga to not only stand in the sunlight, but actually sparkle!  It was as though Meyers felt she need not be constrained to fit into the folklore; she could essentially redefine it. Were a reader to object, “that’s not a vampire then!” she would presumptuously state matter-of-factly, “yes it is.” This is essentially subjectivity presuming to define social reality as a projection of whatever the self wills. Any constraint on the self is presumptuously thrown off as though with impunity.  Modernity itself may have this attitude in paying too little heed to established definitions and practices in seeking to redefine them (mindlessly retaining customs being the other side of the coin).  The Olympics may be a case in point.
In February 2013, the International Olympic Committee decided to remove wrestling form the 2020 Olympics. That the sport was among those of the ancient Olympic games in Greece was apparently an easily-dismissible factor. Although the committee did not disclose its reasons, the desire to draw younger viewers, who follow potential alternatives such as climbing and wakeboarding, was likely among the committee members’ reasons.

                                                                                                     Wrestling was a sport in ancient Greece, as depicted here on this ancient vase.     BBC
Although including new sports to make the Olympics relevant to a contemporary audience is advisable, and keeping the games from growing without limit is doubtlessly prudent, taking from one of the most Olympic sports risks removing the distinctiveness of the games, as rooted in the sports of the ancient games. “I think this is a really stupid decision,” an Olympic historian said. “It was in the ancient Olympics. It has been in the modern Olympics since 1896.” The decision looks even more stupid relative to the committee’s action to retain “rhythmic gymnastics,” which is basically dancing to music. In one manifestation, the “gymnastic athletes” conduct artistic movements with ribbons.  Watching the performance, a viewer is apt to wonder how dance had become a sport—not to mention an Olympic sport. Meanwhile, the ancient Olympic sport of wrestling is expendable.
Two underlying problems, or mentalities, are evinced in this case study. First, if rhythmic gymnastics is a sport simply because it is scored and has an international federation, then virtually anything under the sun could be classified as a sport. The very term sport could become a near-tautology. One person could mean one thing by the term while another person means something else.  The term itself could become mere reflections of personal ideological agendas.
Secondly, dismissing something elemental to a concept while continuing to admit and tolerate applications exogenous to the unmolested concept essentially “morphs” the concept into another without being intellectually honest in renaming the concept. If dance rather than wrestling is the way the Olympics are to go, then at least shouldn’t the games be renamed so people do not expect them to be the modern expression of the ancient games. In other words, in expressing the basis of the games still in ancient Greece, such as by starting the torch at the original site, and yet shifting the games away from the ancient games and toward activities that may not even be sports, the International Olympic Committee was at the very least sending mixed signals—or worse, trying to have it both ways. The result could be that the concept, Olympics, becomes severely blurred in meaning. The culprit is the presumptuous ego bristling at any possible constraint.


Jere Longman, “Olympics Moves to Drop Wrestling in 2020,” The New York Times, February 12, 2013.



Tuesday, February 12, 2013

E.U. Budget: Misconceptions

So many misconceptions have riddled through perceptions of the E.U.’s budget that the European Commission published a “myth-buster” page on its web-site. As against the claim that the E.U.’s budget is enormous, for example, the Commission points out that the 2011 budget was about €140 billion, while the combined budgets of the 27 states was €6.3 trillion. In fact, the E.U.’s budget was less than that of the budgets of medium-sized states such as Austria and Belgium. Whereas the E.U. budget represented about 1% of the E.U.’s GDP (the total value of all goods and services produced in the E.U.), the typical state’s budget is 44% of the state’s GDP. Relative to economic activity, the E.U. budget is not enormous, the Commission concludes.
In terms of the growth of the E.U. budget, the Commission points out that between 2000 and 2010, the state budgets increased by 62% while the E.U. budget increased by only 37 percent. Lest it be argued that the state budgets are more democratically determined, the European Parliament, the members of which are directly elected by E.U. citizens, must approve the E.U. budget.
In case it is presumed that most of the E.U. budget goes to administration, the Commission points out that administrative expenses amount to less than 6% of the total E.U. budget, with salaries accounting for half of that 6 percent. More than 94% of the budget, according to the Commission, “goes to citizens, regions, cities, farmers and businesses.” In this regard, the spending is not qualitatively different from state spending. In fact, state and local officials typically select the E.U.-sponsored projects best suited to the officials’ respective areas.
Lest it be thought most of the E.U. budget goes to farmers, direct aid to farmers and market-related programs was just 30% of the budget in 2011, and rural development spending was only 11 percent. For perspective, around 70% of the EC’s budget in 1985 was spent on agriculture. Put another way, the E.U. has diversified, hence reaching more citizens.


Myths and Facts,” E.U. Commission.

Monday, February 11, 2013

U.S. Postal Service: Home Delivery Up Next?

After years of billion-dollar losses, the U.S. Postal Service announced in February 2013 that the “long-held tradition of Saturday delivery” would come to an end. Only packages would still be delivered on Saturdays. The Postal Service expected the change to save $2 billion a year. That even such a minor “tradition” would have had such staying power amid billions of dollars of losses supports the old adage, old habits die hard. It is as if even a minor change from a long-standing practice would throw us into chaos. Our tolerance for ending things that have been around seemingly forever is far too limited.
Moreover, the human aversion to changing long-standing customs or practices adversely narrows perception itself. For example, the much costlier, labor-intensive practice of delivering mail to homes was as though above critique. Particularly with many Americans paying their bills online, the “need” for mail delivery even five days a week to one’s house can alternatively be viewed as antiquated.  It is as if that practice had gone on as though without any thought on it itself.
                                               Is this highly labor-intensive custom really necessary?    source: zimbio
The door-to-door salesmen selling vacuums or Bibles had surely become a relic long after the film Paper Moon popularized the lifestyle. Why then have we held on to the notion that mail should be delivered to one’s apartment building or house? We go to stores to get food and medicine. Particularly with so many people paying bills online, is mail so much more vital than food or medicine that we couldn’t just as well stop by our local post office to pick up our mail a few times a week? At the very least, we would not be bothered by the anxiety of whether a threatening notice is waiting for us at home. Just as computer technology has enabled the automation of stored-book retrieval in a few academic libraries (e.g., the University of Chicago), the Postal Service could automate mail retrieval so millions of P.O. Boxes would not be necessary.
In short, we humans are not very good at “thinking outside the box” of current custom. Put another way, habits that have gone on seemingly forever have a habit of going on mindlessly. The U.S. Postal Service has suffered greatly from this particular human proclivity. Perhaps with a wider perspective other institutions can be found that are similarly suffering assumed demands to perpetuate practices that are no longer justified.

U.S. Postal Service Right to End Era of Saturday Delivery: Poll,” The Huffington Post, February 9, 2013.

Sunday, February 10, 2013

E.U. Budget Cuts: David Cameron’s Strategy

The budget deal reached by the state governments represented in the European Council in Feburary 2013 would mark the first decrease in the E.U.’s seven-year budget , pending approval by the European Parliament. According to The Telegraph, “the deal sets members’ total payments to the EU for 2014-20 at €908.4 billion (£770 billion). Payments were £800 billion for the previous seven-year round.” This was precisely what the conservative British prime minister at the time, David Cameron, wanted.  “I think the British people can be proud,” he said after the deal had been reached. “Every previous year these deals have been agreed, spending has gone up,” he added. “Not this time.”  Beyond the relevance of the prime minister’s rather obvious small-government fiscal-conservative ideology, his “victory” in the European Council is in line with his strategy to keep his state in the Union.

Britain's David Cameron finally at home in the E.U.?    Negotiating with other state officials at the European Council. Source: thepressnews.com
The full essay is at "Essays on the E.U. Political Economy," available at Amazon.