Sunday, 22 February 2009

Palan-doozan at the Helm

In Farsi, palan–with two long ‘a’s, like the French pronunciation of Sagan – is the saddle for donkeys. Saddle for horses is zeen. Zeen is a noble product, made of leather by skilled craftsmen. Palan is made of cloth and, being exclusively for donkeys, does not require much skill. In fact, you don’t really make palan. You sew it, stitch it from rough cloth. That is the job of a palan-dooz (plural: palan-doozan), someone who stitches palan. It is the lowest of the specialized jobs, just one notch above the unskilled laborer.

In Divan-e Shams, Rumi asks the rhetorical question: What does a palan-dooz do wherever he goes? Why, he stitches palan; that is all he knows.

Geithner is now at the Treasury. The New York Times described his plan for rescuing a banking and financial system that is brought to its knees by the over-supply of junk securities purchased with 95% financing at low interest rates:
The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.

Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.

Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond [their] equity.
So the game that brought down the house is slated go on, only that now the U.S. government will provide the borrowed funds, thanks to its printing press. (Keep in mind that the $1 trillion mentioned is only for starters.) What that would do the position of the dollar as the reserve currency and, from there, to the U.S. power and international standing, will be slow in coming but it will come with the inevitability of night coming after the day.

Recently, Prime Minster Erdogn of Turkey told his critics who were pushing for what he considered a rash decision: “Dear friends, we are not running a grocery store here; we are running the Turkish Republic.”

That distinction is lost on Bob Rubin and his disciples. In his days, he ran the Treasury like a hedge fund. His disciples, including the “brilliant” Larry Summers, think of it as a private equity fund. That sets the direction and limitation of any solution they devise.

The most outstanding feature of the systemic risk brought about by speculative capital – what constitutes risk – is that it narrows the range of the activities within the system at the same time that it excludes the consideration of solutions from the “outside”. A vague realization of this destructive tendency is behind looking for the solutions “outside the box”. More than any revelation, though, the corporate catechism is the confirmation of the limitations within which the system must operate – until it no longer can.

Sunday, 15 February 2009

Indices Gone Wild

Here is a news story from the Feb 12 Financial Times about the West Texas Intermediate no longer being a reliable measure of oil prices:
The global market’s most important pricing benchmark, the West Texas Intermediate crude contract, was criticised yesterday for “sending mixed and misleading price signals, not only to the market but to economic forecasters, government officials and policymakers”.

The International Energy Agency warned that “deterioration in the fragile WTI pricing mechanism would only serve to reinforce the view that the crude has become an irrevocably broken benchmark”. The damning verdict on the WTI contract, which is traded on the New York Mercantile Exchange, by the energy watchdog of the developed world reflects concern among analysts, traders and investors in commodity indices.

Mike Witter, global head of oil research at Société Générale, said: “Brent is more representative of the global market right now and the disconnect between WTI and Brent is an issue.”
Here is a news story in the same paper from October of last year about Libor not being a reliable measure of interbank lending:
The British Bankers’ Association has opened the door to “evolutionary change” in how it calculates London Interbank Offered Rate – Libor – in response to growing criticism about the accuracy of the global benchmark for borrowing costs …

However, bankers fear the index has become distorted in recent months, particularly in dollar markets, because it is calculated according to the bank’s perceived funding costs rather than actual trades. As a result, some bankers are calling for greater use of indices derived from actual market trades.
You see the similarities, including the wording that puts the blame for misbehaving and misleading the public on the index.

Indices, by definition, reflect the markets; only the markets they are reflecting now are the markets of crisis. One of the characteristics of a speculative capital induced crisis is the destruction of arbitrage relations, so that it is not possible to hedge the positions. That impossibility appears as a “disconnect”, by which traders mean that they could not make risk-free profit from differences that finance theorist had insisted had to be arbitrageable.

In the case of Libor, we saw what the disconnect entailed. Libor stood more than 200 basis points over the Fed Funds for months. In theory, a bank could borrow at the Fed Funds rate of 50 basis points and lend it in the interbank market at 2.50% for an easy profit of 2%. But no bank could do it because: i) their credit lines at the Fed were maxed out and they had no acceptable collateral; ii) whatever sums they could borrow were immediately needed; and iii) they did not trust the counterparty bank to stay solvent.

We shall see in coming weeks what the disconnect in the oil market entails.

All this, too, is a part of the destruction about which I wrote earlier, here and here.

Monday, 9 February 2009

A Change in the Order

Since early January, I have been working on Vols. 4 and 5 of Speculative Capital, putting hundreds of pages of disjointed writings into a recognizable manuscript form. This is the most time-consuming part of writing a book for me, where the broad outline of the book, the title and order of the chapters, takes shape. The process involves incorporating hundreds of “notes to myself”, references to books and newspaper articles and random thoughts jotted down over the years into a coherent ensemble with well-defined chapters. The last part is especially challenging because many thoughts, at times expressed in tens of consecutive pages, could be placed under different headings with equal justification. It requires long, concentrated hours to determine the chapter headings and the text that should come under it.(It is said of Andrew Lloyd Webber’s music that the scores in all his musicals are interchangeable. I would take no offense at similar charge pertaining to the text in Speculative Capital and would in fact welcome it as a sign of the coherence of the theory; the entire Speculative Capital series is logically but one book.) Dialectics precludes arbitrariness. Each chapter of Speculative Capital must logically lead to the next. It is the progression of these “means” in the dialectical method that is precisely the end. (It was the enforcing of this logical progression a decade ago in a book supposed to be on derivatives that led to the Theory of Speculative Capital.)

I bring up this background because in streamlining the manuscript of Vols. 4 and 5 I realized that their order was wrong. Systemic Risk, planned as the final Vol. 5, must come before Dialectics of Finance, currently slated to be Vol. 4. Therefore, the next book in the Speculative Capital series will be Systemic Risk. It will be followed by the 5th and final Vol., Dialectics of Finance.

Before settling on the decision, I had to convince myself that it was not influenced by the “opportunism” of rushing a book on systemic risk to market in the midst of a systemic crisis, however unconscious and subliminal that influence might be. This was especially pertinent because Systemic Risk could be completed and published sooner than Dialectics of Finance. But I think that my decision was independent of these considerations.

Systemic collapse is an historical event created from the self-destructive movements of speculative capital, the latest and most developed form of finance capital. The development of finance capital is the subject of Dialectics of Finance, which subject “contains” the systemic risk.

The Theory of Speculative Capital helps us see and understand the mechanical aspects of the current crisis. In the 10-part Credit Woes series and several other entries in this blog I have broadly described the various dimensions of the collapse. Vol. 4 will provide further details.

But what explains the price fall – collapse is really the word – across all markets? Why did the prices collapse?

Those with monopoly on high quality thoughts who monopolize the Op-Ed pages and the TV air time inform us that the reason is Bubble. Bubble explains everything. The economy has bubbles as the water has, they tell us. And economic Bubble has popped. That is the answer.

In reality, the price collapse we are witnessing is due to the transformation of values to prices. You do not hear about this topic because it is difficult!

Say, you pay $200k for land, spend $200k on the material and pay $200k for workers to build you a house. The value of the house is $600k. The offer you get, in line with the market price, is $420. The “whereabouts” of the $180k loss is the subject of this transformation, which takes us to realm of value – the exchange value, to be exact. The value is a social concept. Like other social concepts such as honor or morality, it has no meaning to man on a desert island. To understand value, then, we have to go beyond the technical description of the financial events and study the social relations as well. That is precisely the realm of Dialectics of Finance, where the movement of finance capital is investigated in the entirety of its social interconnections. The works of writers of our time, the philosophers of our time and the justices of our time are thus relevant to our investigation.

When I began the Speculative Capital series more than a decade ago, the collapse of the financial markets seemed its logical end, the terminal point for the self-destructive movements of speculative capital. What else could there be after the system-wide collapse of the financial institutions?

But that view is mechanical because it sets an arbitrary ending point for the investigation. A systemic collapse, of however unprecedented scope and intensity, does not spell the end of finance capital. It merely begins a new phase for it. Speculative capital is self destructive, but it is also self reinvigorating and self reconstructing. (Such is the nature of dialectical attributes!) After each crisis, it rises again in a new form to declare: En ma fin est mon commencement. No serious student of finance could ignore these developments.
Truth, the cognition of which is the business of philosophy, became in the hands of Hegel no longer an aggregate of finished dogmatic statements which, once discovered, had merely to be learned by heart. Truth lay now in the process of cognition itself, in the long historical development of science, which mounts from lower to even higher levels of knowledge without ever reaching, by discovering so-called absolute Truth, a point at which it can proceed no further, and where it would have nothing more to do but to fold its hands and admire the absolute Truth to which it had attained.
I would not be finished after the delivery of Systemic Risk. I have barely begun to write.