Finance, Economy, Mathematics & Current Affairs through BICs

Corzine - BICs - Impressions - What is acceptable - Rent Seeking

2011-11-02T13:31:00.000-04:00

Everybody seems to be sporting about the latest travails of Mr. Corzine, but many if not most (or virtually all) of those who seem to be moralizing now surf or have surfed the same rent seeking privileges that have little to do with actual competence. Every now and then, the bubble pops, a few unlucky bad ones pay for all the systemic sins, but the system itself perdures, with incremental adjustment here and there.

True change, whether in politics, social values or rules for economic entitlement come only after a forceful clash in which absurd existing rules or laws may be trampled in the process for a fairer order to emerge.
The present crisis continues its slow bleed because that necessary purifying process did not occur. Even after the comparatively milder dot-com bubble popped, the clean up was more extensive and more were held accountable.

Despite all the gospel to the contrary, it can be uncommonly difficult for the uncompromising innovator that the system proclaims to value above all to be heard. This seems truer if such innovations precisely pertain to the core issues that have put the system to its knees.

We persist in looking for solutions where we are least likely to find them even though the historic record is unambiguous that lasting solutions to systemic problems more often than not come from outsiders. Up to now the system has failed to look/consider or even acknowledge solutions proposed by outsiders. One of the problems exarcerbating our socio-economic issues is that the existing power structure is poisoned by a system of "normative meritocracy" blinded by a codified system of merit that tend to undervalues when it does not simply obliterate all other forms of emerging and more relevant competencies.

Democracy in politics, branded academic credentials, peer review and other idealistically sounding principles collude to create dystopian realities for true innovators whose ideas and works can actually benefit the greater good.

BICs in the many ignored ideas and works it leads and spread throughout this blog can only be seen as an ultimate example of a flawed system of incentives and punishments. See also: US Patent No. 7,933,824 .

References:
US Patent No. 7,933,824.
NYT Editorial Nov 2, 2011: Mr. Corzine's Big Bet
NY Times- Nocera: Corzine Crashes like It's 2008
WSJ: Corzine Agonistes
Others Pay Price for Corzine’s Risky Revenge: William D. Cohan
Douthat: Our reckless meritocracy

Quantitative Easing: Fed to buy $600 billion of U.S. government bonds to drive down long term interest rates

2010-11-04T16:48:00.003-04:00

Comment:

Such a waste!
This is a very costly way of dragging down long term rates. As I have noted on many earlier posts, it once more makes me thing how much most cost-efficiently the fed could control long term rates with interest rate BICs that replicate the whole interest rate curve

See earlier posts on the topic:

http://kongtcheu.blogspot.com/2009/03/fed-will-inject-1-trillion-more-into.html
http://kongtcheu.blogspot.com/2009/04/ftcom-comment-opinion-let-central-banks.html

http://kongtcheu.blogspot.com/2009/07/op-ed-contributor-great-preventer.html

News References:

http://online.wsj.com/article/SB10001424052748703506904575592471354774194.html?mod=WSJ_hp_LEFTWhatsNewsCollection
http://www.nytimes.com/2010/11/04/business/economy/04fed.html?_r=1&ref=business

http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110305412.html

The Deficit Debate - BICs

2010-08-25T14:30:00.001-04:00

This post is meant to refer to a knol Ihave written in response to a recent question posed on the Institute for New Economic Thinking (INET) community website : “Will public deficit reduction encourage private sector growth, or undermine a needed stimulus to recovery & lead to Japan-style stagnation?” This lead me, in view of my work on BICs, to wonder whether the deficit is really the right metric to focus on and analyze the extent to which it could be misleading.

I argue that the government balance sheet, rather than its cash flow position -from which the deficit is computed - should really be what eyes are focused on. The focus on balance would have and should better focus minds on stimulating high returns investments for sustainable recovery and expansion, some of which I discuss.

BICs enter in the picture because using their methodological prescription would make reliable and practical the complex and almost canutian task of computing the values of the different items on the government balance sheet.

I am gratified that the debate INET moderating team has picked on some of my suggestions and highlighted them in the debate summary(http://ineteconomics.org/blog/inet-community-responds-deficit-debate) as: "As far as new, creative solutions to the debate, a few users, such as kongtcheu, have urged governments to invest in entrepreneurship and clean energy projects, suggesting that these investments will create jobs and growth in the future."" I meant to say more than that.

References

Kongtcheu, Phil. The Deficit Debate - BICs:Is the deficit the right metric to focus on ? And what prescriptions does this leads to? [Internet]. Version 45. Basis Instruments Contracts (BICs). 2010 Aug 25. Available from: http://knol.google.com/k/phil-kongtcheu/the-deficit-debate-bics/24v2kgtuvzk2v/30.

http://ineteconomics.org/blog/inet-community-responds-deficit-debate

IAFE 2010 Annual Conference - Talk: Physics envy may be hazardous to your wealth

2010-06-26T16:56:00.009-04:00

Physics envy may be hazardous to your wealth...YES, but how?
http://web.mit.edu/alo/www/Papers/physics8.pdf

This talk was quite interesting, delivered with quiet passion and confidence that was not obnoxious, or as one would say in Chinese 自信但不骄傲.

He proposed a thought provoking taxonomy for classifying various levels of risk and uncertainty

Taxonomy of Risk & Uncertainty:
Level 1: Complete Certainty i.e no randomness, as in physics, all parameters are deterministic;
Level 2: Risk without Uncertainty, i.e randomness but coming fully random variables whose law and parameters are completely identified;
Level 3: Fully Reducible Uncertainty;
With sufficient data, using existing statistical estimation methods, we can get to level 2.
Level 4: Partially Reducible Uncertainty
Parameters of random variables estimated as in Level 3may vary unpredictably
Level 5: Irreducible Uncertainty: Total uncertainty as to the nature and random variables driving observed data that can be improved with even more data.

Technical criticism:
At the very least,Level 2 & 3 should be merged. There is really no real life situation, except in controlled experiments, where the law of the random variable is written on the wall. You always have to estimate it. 4& 5 could be more tightly put together, so that really there are only 3 levels: No randomness, randomness with a precisely defined law and and randomness with a law that is not fully known.
Each of the last two levels creates the need for potentially redundant hedges.

(From memory 8 days later) One example he uses in the talk but that is not in the paper online and that caught my attention is the example of the Drawing of an urn containing let's say 100 balls colored black or white.

In the first example we know there are 50 white balls and 50 black balls.The question much one would pay to take part in a game where if one guesses correctly the color of the ball taken out of the urn, one receives let's say $100.

The conclusion here appears to be that one should pay $50.

In the second case we do not know how many black or red balls there are in the urn. Using iterative reasoning that boils down to what is known in information theory as a maximum entropy inference, it also appears one should pay $50.

He notes there is a psychological bias for red.

This leads me to my practical criticism of the paper

Practical Criticism:

This was an analysis of uncertainty from the viewpoint of a statistician/econometrician rather than from the viewpoint of a Risk Manager that is still prey to the mindset of a physicist in its analysis.

As I explained in my article in the Investment Professional last summer "BICs, the PPIP and the fallacies of expectations based risk management", the correct answer of what one should be willing to pay in the example he gives really is: "it all depends..."

Curiously, he refers admiringly in his online paper to Taleb's Black Swans without really addressing issues of hedging robustness that are the risk management dual correspondent of uncertainty issues.

References:

Smoke and Mirrors - BICS, the PPIP, and the Fallacies of Expectations-Based Risk Management

http://www.iafe.org/html/06182010.php

http://web.mit.edu/alo/www/Papers/physics8.pdf

http://www.newyorker.com/online/blogs/currents/2010/06/new-yorker-currents-nassim-taleb-on-risk-and-robustness.html

IAFE 2010 Annual Conference - Keynote Speech: The Possible Misdiagnosis of a Crisis

2010-06-19T11:15:00.003-04:00

A few words on some of the talks at the 2010 International Association of Financial Engineers meeting.
Let's start with the Keynote Speech: "The Possible Misdiagnosis of a Crisis" by Richard Roll,Japan Chair of Finance, UCLA & 2009 IAFE/SunGard Financial Engineer of the Year Winner
* The recent global financial crisis has been blamed on several factors
* Elementary principles of finance suggest that none of these explanations are likely
* There is an alternative diagnosis consistent with financial principles
* The current treatment may be exacerbating the symptoms

In his talk he used 3 hypotheses to conclude that the current crisis is due to the government's increased share of national wealth in the US economy at the expense of the private sector:
H1. The some of all assets equals the sum of liabilities on a balance sheet.
H2. Merkets are forward looking
H3. Total wealth in an economy decreases as the share of government ownership increases. As a way of benchmark he put forward the statistic that a 20% increase in total wealth by the government results in a 50% decrease in aggregate wealth.

H1 is axiomatic; H2 is reasonable. H3??? Well...

From these hypotheses he reasoned that the total loss of wealth in the US Economy caused by the real estate bust was due to an increase ownership of the government in the US economy.He stated that this was a fact that had been observed in many other countries including China India, Brazil. The more government retreated from the economy the more aggregate wealth increased.

First of all I have to tip my hat to him for sticking his neck out there and saying something that stirred strong emotions.

However, I was really surprised that such an eminent and seasoned scholar would make such an extraordinary dubious claim as in H3 and back it with such little evidence in a keynote speech.

The most compelling evidence to disprove this argument is a comparison of loss of wealth in the US during the dot com bust and the real estate bust. The dot com bust occurred in an environment where more laiseez faire, welfare reform arguments were the dominant philosophy with the repeal of the Glass–Steagall Act, the incoming republican administration and all that.The real estate bust in 2007 triggered a more aggressive government interventionist posture in the real economy. For a comparison, I turn to Jeffrey D. Benson of the blog American MacroEconomic Dynamism:

"How much wealth has actually been destroyed in the current housing decline versus the 2001 tech burst? According to the Case Shiller Indices (the most accurate housing guage available) In 2006, the value of U.S. residential real estate totaled US$ 22.4 trillion. Since this recording the national pricing indices (based on 20 metropolitan areas) has decline 19.87%. This is a loss of asset valuation equal to $4.5 Trillion. To put this loss into perspective, according to the International Monetary Fund the U.S. Gross Domestic Product in 2007 was 13.8 Trillion. So is this decline in value a direct hit to the Net Worth of the United States. Absolutely. If the value of liabilities declined proportionally to asset price then the answer would be no, but they clearly do not. The United States has significantly overstated it's wealth. Sound familiar?

In 2001 the Dot.com bubble was another significant overstatement of wealth. The Nasdaq Composite Index is a market capitalization weighted index of more than 5000 stocks. Comprising all Nasdaq-listed common stocks, it is the most commonly used index for tracking the Nasdaq. The Dow Jones Wilshire 5000 Total Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. No other index comes close to offering its comprehensiveness. For comparison, the NASDAQ listed securities compose 19% of the 5000 Total Market Index. The Market Capitalization of the Dow Jones Wilshire 5000 Full Cap was $16.7 Trillion as of April 30, 2008. Comparatively, the market cap at the end of Q1 in 2000 was approximately $16 trillion (only slightly smaller). However, between 2000 Q1 and Q1 2003 the index lost a stunning 43% of its valuation. In other words, $7.1 Trillion of wealth was lost."

In order to make a statement on China, the proxy by which a comparison would be made is India. Here again In China, we have state capitalism and a government controlled economy. India has a more liberal democratic tradition. So far China has outperformed India year after year for the past 3 decades.

In Russia, the failure of liberalization policies of the early 1990s led to the strong state reassertion and state capitalism under Putin with popular support.

In Africa in the late 80s and 1990s, the IMF liberal orthodoxy led to the crumbling of national welfare in so many economies...

And on and on and on....

How could such a respected scholar and from all appearances a nice and sound minded person make such a claim, I am still scratching my head...

As I have made the case many times before in my BICs book and Knol collection and blogs, the role of government is bound to increase as population density increase, and this is due to what I have called the holistic theorem.

References:
The 2010 IAFE Annual Conference

Housing Bubble vs. Tech Bubble Loss of Wealth in Dollars denominated terms by Jeffrey D. Benson of the blog American MacroEconomic Dynamism

Easy Money, Hard Truths

2010-05-27T10:09:00.000-04:00

I liked this piece in the times quite a lot. It is a useful refresher course on macroeconomics and articulate the deficit hawks thoughtful worries about ballooning deficits and debt. It argues fairly persuasively that the lack of apparent inflation in reported numbers might be a smoking mirror or at any rate unhealthy.

It is a fairly challenging counter argument to the "forget-about-the-deficit,-there-is-no- inflation,-expansionary-government-policies" Krugman regularly pushes in his pieces.

The weakness of this analysis in my view is that it is poorly prescriptive. Mindless belt tightening at all costs as one would would asphyxiate the economy making the current predicament even worse. Krugman pushes for expansion but in traditional sectors of the economy.

What I have failed to see in both analyses is the effort to help flow credit to start ups in the services industry who are likely to open up the new industries which are most likely to help the country grow out of its mounting liabilities. When I read about the paltry efforts to get money through the SBA, it is quite puzzling. Thomas Friedman regularly does a god job at drawing the need to focus efforts on high tech startups of the future, but again his prescription for helping flow money in a timely manner to this sector is neither refined nor well calibrated enough.

And this would get me to... BICs

References:

http://www.nytimes.com/2010/05/27/opinion/27einhorn.html?hp=&pagewanted=all

High Frequency Traders and Liquidity

2010-05-17T06:41:00.003-04:00

See: Speedy New Traders Make Waves Far From Wall St.

I was reading this article in the times and it just illustrated the fallacy of the argument that high frequency traders provide indispensable liquidity in the markets. Like all other normal or continuous trading assumptions about markets we question here this is one more. These assumptions work in normal times, but when they are most needed, they don't. And it makes dynamic or continuous time derivatives hedging potentially disastrous.

And this is where BICs, with there pre-determined contractual agreements provide economically valuable edge.

Derivatives Clearinghouses Are No Magic Bullet. Really ?

2010-05-06T12:44:00.007-04:00

See: http://online.wsj.com/article/SB10001424052748703871904575216251915383146.html

Derivatives Clearinghouses Are No Magic Bullet. Really? but not for the reason this guy gives...and he is a professor at some big Ivy league School!

I read this article with a certain sense of bemusement at the level of ignorance the author therein demonstrated. He seems to have no understanding of issues of 2-timing, N-timing in bilateral netting agreements. The issues he worries about would be addresses in centralized or interconnected hierarchical clearing system as explained in my knol and powerpoint/ youtube presentation

References:

The Holistic Theorem

http://online.wsj.com/article/SB10001424052748703871904575216251915383146.html

Unity of Purpose

See more presentations by kongtcheu | Upload your own PowerPoint presentations

Comments On "Chances Are..." By Steven Strogatz & BICs

2010-04-27T09:06:00.004-04:00

Reading this piece general public piece on conditional probabilities brought me back more than 17 years ago back when in my senior year in college I was being introduced to conditional probabilities. Indeed in the manner it was taught it was seen as impenetrably daunting and really hard to relate to anything practical. But overtime as I have assimilated the theoretical and practical use of conditional probabilities, I must say the formal approach, once assimilated is very mechanical in helping produce accurate estimations. What is often confounding in making estimates based on conditional probabilities, is that the language used corrupts thoughts. That is why examples such as the Monty Python one and the Mammogram results interpretation are so confounding to educated and otherwise intelligent people.

It seems to me educational curriculums should focus on teaching the intuitive and formal approaches simultaneously and move towards pointing out when the intuitive approach finds its limitations and must be overtaken by the more formal one.

I also realize how BICs as extensions and generalizations of the concept of conditional probabilities must be patiently taught to be better understood over time

References:

Chances Are, By Steven Strogatz. Opiniator piece in the NY Times 04/25/2010

BICs

The Wider Scope of BICs

BEWARE WHAT YOU WISH FOR: Goldman Sachs, Fabrice Tourre, Derivatives Clearing

2010-04-18T17:54:00.007-04:00

As I read the story of the SEC case against Goldman Sachs and one of its employees, I could not help but say to myself, BEWARE WHAT YOU WISH FOR, and this for two reasons:

1)The financial industry has been lobbying very hard against the requirement to settle all derivatives trades through a clearing house, essentially to protect the money making business of structuring customized deals for investors and various hedge funds and other market participants. What Goldman finds itself in the hot seat for is essentially for having brokered synthetic trades, the abacus deals between investors and a hedge fund that allowed the hedge fund to be short the real estate market on a large scale. If all such trades had been cleared through a clearinghouse, such an issue might not have arisen. Goldman seems to have made $15M on the deal and may have done hundred such deals, but now the stock price lost more than 12.5% and more than 12B in market cap on Friday and its reputation is seriously damaged.Is it worth it?

2)The second thought is about the trader Fabrice Tourre a product of the french mathematical education system who just as me straight out of college went to Wall Street. In many respect he is the perfect overachiever who did best on the path he was led onto without questioning too much its foundations. Now he is out there hanging. The guy is about six years younger than me and he helps me feel more secure about my choice in developing BICs of not going with the flow, even if it means in the short term paying a heavy price.

References:

http://www.nytimes.com/2010/04/17/business/17goldman.html?fta=y

WSJ Op-ed:Clearinghouses Are the Answer
Complex derivatives should be regulated like commodity futures.

On Financial Reform :Regulation Vs. Size of Banks, A false dichotomy?

2010-04-03T10:09:00.003-04:00

The debated on financial reform as summarized by Krugman in his latest piece in the NYT seems to have boiled down to the Volker position of limiting the size of financial institutions so that they do not reach a too big to fail size or the position of Krugman of tight and generalized regulation of Banks and shadow banks.

It seems to me that both analysis miss the simple but central ingredient needed to secure the financial system while not impending economic growth and that is a centralized clearing of all trades. Centralized clearing by nature remove a lot of the incentives in the buildup of too big to fail financial entities, it brings a level of transparency that all times gives regulator a clear picture of the dangers in the positions taken by financial/ economic actors.

A simple example to illustrate the power of centralized counterparty on trades. When you go online to buy an item or at the to a store and you use a credit card, that transaction is facilitated and secured by the existence of a centralized counterparty who keeps track of your assets and liabilities and authorize the transaction only when you have enough credit. No party to the transaction takes credit risk on the other and the system is robust. If the same worked among financial trading institutions the same efficiency and security would be gained, eliminating much of the systemic risks that are the source of current concerns.

See:

http://www.nytimes.com/2010/04/02/opinion/02krugman.html?src=me&ref=general

The Holistic Theorem

Too Big to Fail

See more presentations by kongtcheu | Upload your own PowerPoint presentations

Unity of Purpose

See more presentations by kongtcheu | Upload your own PowerPoint presentations

Greek Derivatives, Derivatives' Greeks, BICs and the Risk Management Illusions that lead to recent financial disasters

2010-03-19T10:48:00.002-04:00

This Knol article points to a strange coincidence of words and circumstances surrounding the Greek debacle and the dangers associated with the use of Greeks in financial derivatives risk management...
Check it out!

http://knol.google.com/k/phil-kongtcheu/greek-derivatives-derivatives-greeks/24v2kgtuvzk2v/23#

Negative Numbers, Rational Numbers, Complex Numbers and BICs

2010-03-08T07:15:00.005-05:00

This post is prompted by recent articles by Steven Strogatz in the New York Times where he explains how negative numbers , rational numbers, complex numbers come into the picture in order to better deal with real life problems. Prof. Strogratz is a professor of applied mathematics at Cornell University. His style is very entertaining. The articles are a very interesting and accessible read and some of the comments of readers are sometimes even more interesting.

Likewise, as I make the case in my Introductory article on BICs, the necessity for BICs emerge from the need to tractably manage the risk management problems brought about by the emergence of complex derivative contracts.

To Read:

http://opinionator.blogs.nytimes.com/2010/02/14/the-enemy-of-my-enemy/
http://opinionator.blogs.nytimes.com/2010/02/21/division-and-its-discontents/
http://opinionator.blogs.nytimes.com/2010/03/07/finding-your-roots/?hp
http://knol.google.com/k/introduction-to-basis-instruments-contracts-bics-for-mathematics-finance-and#view

The Stimulus Evidence One Year On

2010-02-24T07:20:00.006-05:00

I read this piece by Robert Barro in the WSJ shrugging my head in distrust over macro-economists and their analysis. To understand what I mean, contrast this piece with this one by Krugman written in January http://www.nytimes.com/2010/01/18/opinion/18krugman.html

The real moral of the story here is that there will always be a very reputable and leading economist to support whatever position one wants to take on a macro economic issue. Why is that? The answer lies in the number of assumptions one needs to make without much hedging backup to come to any prescription.

From the distance of BICs master obsessed with being able to hedge probabilistic assumptions, I was tinged by:
- the widespread assumption that multipliers used are fixed quantities,
- Wildly speculative sentences such as "...second, this multiplier provides a reasonable gauge (and likely an upper bound because of the strong wartime boost to labor supply due to patriotism) for the effects of nondefense government purchases.".
- I did not see any inflationary discount when adding up the numbers.

Citi Plans Crisis Derivatives

2010-02-11T12:43:00.003-05:00

This CLX plan appears to be a pickup from my article in the investment professional where I lambasted Krugman's analysis of the Treasury's PPIP and the fallacy of expectations based risk management he perpetuated in his analysis. In particular I pointed out the rise in funding cost at times of crisis not priced into such analysis to show how the computation of the so-called free lunch to PPIP investors was misguided.
The prescription in the article was to find replication contracts such as BICs that replicate the risks taken on as early as possible and keep uncertainty to a minimum.

However this contract, interesting as it may be only marginally addresses the range of risks. Anyway was it not Citi who would have needed such a contract last time? How could it safely be the underwriter?

Power-Reverse Dual Currency (PRDC) business & BICs

2010-02-04T12:05:00.003-05:00

On January, 28th, 2010, Risk.net reported that losses and increasing hedging costs have led many smaller firms to leave the Power-Reverse Dual Currency (PRDC) business, leaving a rump of major banks operating in the market. This represents yet another example where had a BICs market on the currencies and interest rates involved existed, there would have been no such issue. Not only hedging activity would have been contracted before hand, in addition the atomic structure of replicating BICs would have made nearly impossible for counterparties to identify what the contract held is in order to attempt a 'squeeze'; furthermore most of the individual BICs would be used for other hedging purposes unrelated to PRDCs, ensuring the liquidity of the market on those contracts.

Inroduction to BICs -Top Pick Knol Award ! Cheers!

2009-12-11T11:08:00.004-05:00

My article Introduction to Basis Instruments Contracts (BICs) for Mathematics, Finance, and Economics has received a Google Knol "Top Pick Knol Award". Cheers!

Ah! Someone highjacked the review section of the article and messed it up, Ritu..? anyways..

BICs Vs. The Tobin Tax

2009-11-27T13:05:00.001-05:00

I write this article as a commentary on Paul Krugman's support of a Tobin tax on all financial transactions.

It has gained steam lately after being picked up by British leaders including the top financial regulators and the prime minister as the Turner-Brown proposal. When French President Chirac would say this a few years ago, everybody laughed at him....

I think putting incentives that may or may not be short of a tax aimed at directing hedging and speculative activities on securitizing BICs that mirror the value of target underlyings without having an effect on them is the farsighted and most effective proposal that still stimulates rather than slow down economic activity.

in reference to:

"Turner-Brown"
- Op-Ed Columnist - Taxing the Speculators - NYTimes.com (view on Google Sidewiki)

Damned Yankees -Republican/Democrat President

2009-11-09T08:08:00.002-05:00

This thought of Republican Vs. Democrats having an impact on NYY winning odds crossed my mind but I did not have the extensive background of Mr. Fleisher on the observation. It is easy to add such an insight in the pricing of NYY odds of winning the series as an additional factor in assessing odds of winning individual games using the BICs framework.

The interested reader is invited to look at the Wolfram demonstration (http://demonstrations.wolfram.com/BasisInstrumentsContractsBICsInBaseballWorldSeriesOdds/)and build their own demo incorporating that factor

in reference to:

"Damned Yankees"
- Op-Ed Contributor - Damned Yankees - NYTimes.com (view on Google Sidewiki)

New York Yankees World Series Triumph!

2009-11-07T10:03:00.005-05:00

As a tribute to fellow New Yorkers, to Baseball and World Series fans the world over, I do dedicate my new Wolfram Demonstration on Baseball & BICs.

To the New York Yankees!

To a magnificent victory!

The Reach for a new paradigm: BICs

2009-11-04T09:46:00.001-05:00

The new paradigm is to be found in a widening of the concept of probability to mind trading, hedging and risk management issues. The traditional probabilistic framework by failing to account for risk and uncertainty, perpetuates dangerous expectations based fallacies. BICs (http://tinyurl.com/cyxhpa) theory are already a comprehensive theory to help effectively navigate these issues. See:http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html

in reference to:

"Economist Profiles In the wake of the worst financial crisis since the Great Depression, economists are racing to provide policy makers with the tools they need to avert a repeat -- a process that some believe could require a revolution in economic thought. In doing so, they are building on the work of colleagues who saw early on the dangers presented by an unstable financial sector. Here are some of the people who did the early work, and who are now using it to build new models of the economy."
- Crisis Compels Economists To Reach for New Paradigm - WSJ.com (view on Google Sidewiki)

World Bank launches distressed assets programme - Risk.net

2009-10-07T08:39:00.001-04:00

World Bank launches distressed assets programme - Risk.net: "World Bank launches distressed assets programme"

This program looks more like the Treasury PPIP/TARP and has copied the features of those, notably the "Public/Private" partnership dimension. Their is no discussion of the Equity/Debt distribution or source of the funds.

It is regrettable no one has thought about being a market maker on the distressed assets traded at refined levels of granularity as we proposed.

Public-Private Investment Program Almost Ready to Begin - NYTimes.com

2009-10-05T02:00:00.001-04:00

Public-Private Investment Program Almost Ready to Begin - NYTimes.com
This article has some important numbers to bear in mind:
"The International Monetary Fund estimated last week that financial institutions worldwide still held about $2.8 trillion in troubled mortgages and securities, and that they had booked losses on less than half that amount so far. A big share of those assets is in American banks.

The Public-Private Investment Program would acquire only a tiny fraction of those assets, amounting to $12 billion. All told, the Treasury said, the five firms have thus far raised $3.07 billion in private equity. The Treasury will match that amount, dollar for dollar, with its own equity investment. It will also provide up to $6.13 billion in financing guaranteed by the government.

In effect, the money-management firms will be able to buy about $12 billion in troubled assets. The firms will split any profits evenly with the Treasury, but taxpayers would ultimately be on the hook if the investments lost money."

Finally it looks like it is going to start at long last along the lines that we outlined in The Investment Professional
http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html

See also my knol articles:
1. Fair Value Pricing, Government Market Making and PPIP
2. Estimating Costs for PPIP Assets in a Market Making Framework & BICs

Op-Ed Columnist - No, It’s Not About Race - NYTimes.com

2009-09-19T09:53:00.001-04:00

Op-Ed Columnist - No, It’s Not About Race - NYTimes.com: "For example, for generations schoolchildren studied the long debate between Hamiltonians and Jeffersonians. Hamiltonians stood for urbanism, industrialism and federal power. Jeffersonians were suspicious of urban elites and financial concentration and believed in small-town virtues and limited government. Jefferson advocated “a wise and frugal government” that will keep people from hurting each other, but will otherwise leave them free and “shall not take from the mouth of labor the bread it has earned.”"

This Hamiltonian Vs. Jeffersonians divide which has recently been stated as Blue Vs. Red states is a very rational behavior even though it does not seem so a priori and can be explained via population density and the holistic theorem: The more concentrated a population, the more it makes sense for it to seek government intermediation. The more people there are, the more government intervention makes sense, on a linear cost bringing in quadratic benefits basis.

How Did Economists Get It So Wrong? - NYTimes.com

2009-09-07T04:29:00.004-04:00

How Did Economists Get It So Wrong? - NYTimes.com

This piece is well written and offers a plausible explanation within the framework of mainstream accepted knowledge. But it's explanations merely reflect what has emerged as conventional wisdom and the intellectual strengths and weaknesses of its author, namely strength in economic history understanding and relative weakness in mathematical fluency.

As a result the piece trashes mathematical skill and look to economic history in Keynesian analysis to seek prescriptions for the current predicament.

What Mr. Krugman may not be able to grasp is not that there are good maths and there are bad maths. The maths used in economic theory and neoclassical economic theory since the end of WWII is transposed from Physics and seems a priori impressive. But we seek to address economic issues. "It ain't Physics" . It is only suitable and built for a world with no constraints on resources, continuity of time and space, unrestricted trade i.e. no frictions, perfect rationality of operators, etc.

There have been recent attempts to correct those assumptions, but all withing the edifice of the traditional mathematical architecture.

Indeed behavioral economics and finance are descriptive theories and provide a well deserved criticism of rational agents theories, but these have not been translated in efficient prescriptive formulations.

BICs are built from the ground up to provide a more resilient framework for more effective formulations that reflect actual human economic reality and behavior. They provide the math to efficiently accommodate evolving economic realities

My biggest concern is with prescriptions that are derived from Mr. Krugman's analysis. They are backward looking and fail to integrate the economic transformations that have taken place since the 1930s, notably the advent of the Internet, the rise of the service and network economies, the relative decline of manufacturing as a source of economic wealth, globalization, the environment...

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PS: The following section made me scratch my head:"The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims."

Although the original vanilla call option was originally priced by Fischer Black using a CAPM based argument, derivatives pricing theory in all subsequent textbooks more the arbitrage arguments along Merton's Rational Pricing Theory. It is true that Merton makes a CAPM style argument to value derivatives in incomplete settings such as underlyings driven by jumps, but a robust and replicative pricing argument can still be made without reference to the CAPM and its outrageous assumptions, as I do with BICss.

OK, here let's just say the proposition on CAPM as the modern tool used to value derivatives is debatable. As far as I know, the CAPM is more commonly used in corporate finance for corporate valuation purposes where one uses the CAPM to obtain the required rate of return that is used to discount expected future earnings to deduce present value.

But what's really is a bit startling to me is the characterization of derivatives as "claims on claims"... Derivatives are contracts whose payout is is derived from(i.e. is a function of )the value of other observables(stocks, credit indices, temperature,...) at payout payment time(i.e. maturity).