Monday, December 22, 2008

Anarchists and the Greek Riots

The student-led anarchist riots in Greece have captivated my attention.

The above photo sums it all up, and this Atlantic Monthly article by Robert Kaplan offers further insight. In particular:

"[T]he uncontrolled surges and declines of capitalism have left haves and bitter have-nots, who, in Europe, often tend to be young people. And these young people now have the ability to instantaneously organize themselves through text messages and other new media, without waiting passively to be informed by traditional newspapers and television.

Sunday, October 12, 2008

A Very Specific Kind of Person

Excerpt from Fareed Zakaria's most recent article in Newsweek

Wall Street will also need to change. Paul Volcker has long argued that the recent spate of financial innovation was nothing of the kind: it simply shuffled around existing resources while contributing few real benefits to the economy. Such activity will now be reduced significantly. Boykin Curry, managing director of Eagle Capital, says, "For 20 years, the DNA of nearly every financial institution had morphed dangerously. Each time someone at the table pressed for more leverage and more risk, the next few years proved them 'right.' These people were emboldened, they were promoted and they gained control of ever more capital. Meanwhile, anyone in power who hesitated, who argued for caution, was proved 'wrong.' The cautious types were increasingly intimidated, passed over for promotion. They lost their hold on capital. This happened every day in almost every financial institution over and over, until we ended up with a very specific kind of person running things. This year, the capital that remains is finally being reallocated to more careful, thoughtful executives and investors—the Warren Buffetts … of the world."

Sunday, October 05, 2008

Hipster Revolutionaries

Barack Obama's association with Bill Ayers is yet another intriguing story. The Weather Underground was as militant as any other radical organization of the 1960s and 70s. The were definitely the most violent. I posted about them a while back. Read about it here.

A comparison of the Weather Underground and early American anarchists reveals some interesting discussion points. The Weathermen bombed a lot of government buildings, including the Pentagon and the State Department. However, only one person died in their attack, and he was a member of the group. Early American anarchists attempted many assassinations upon high-profile leaders, including Henry Clay Fricke and President William McKinley.

In the case of the 1970s, the major revolution came not from the radical left, but from the conservative right. In the case of the early anarchists, the revolution was not quite as obvious. Theodore Roosevelt assumed the presidency and changed the course of American history. Was his "victory" one for the right or for the left?

Wednesday, October 01, 2008

The JP Morgan of the 21st Century

Monday, September 29, 2008

The End of Risklessness

A month and a half ago, George W. Bush used a colorful metaphor to assess the financial crisis.

"There is no question about it. Wall Street got drunk," the president said.

"The question is, How long will it (take to) sober up and not try to do all these fancy financial instruments?"

Why is our current credit crunch worse than all previous ones except the Great Depression? I think I have to agree with the president on this one - "fancy financial instruments" are the reason.

I think the instruments Bush was talking about are the various and sundry derivatives that define modern markets today. They have evolved from obscure securities traded by quants and academics into a hedging force so powerful that almost any major company uses them in some way. Derivatives are ubiquitous. They are essential to risk management.

Consider that most of the chaos has stemmed from derivative write-downs (mortgage-backed securities, collateralized debt obligations) and derivative-induced counterparty risk (credit default swaps).

Derivatives create the illusion of risklessness. Certain investors buy and sell derivatives to earn a profit, but most companies utilize them to reduce risk. The current crisis evolved when investors began to rely too heavily upon derivatives without assessing the true risk of the underlying assets. The complexity of derivatives obfuscated the true exposure of a security to the point where investors did not truly understand their risk profile. The perception of reduced risk was significantly exaggerated. Real risk was ignored.

Subprime loans - the key roots of this crisis - were inherently risky. Never before had such cheap credit been offered to borrows who were not creditworthy. So why did banks, thrifts, and other lenders offer them? Because they could package those mortgages up and sell them as derivatives. They thought they could sell away their risk.

In my opinion, a key takeaway from this chaotic episode is that risk cannot be sliced and diced. No matter how fancy our financial instruments get, reducing risk will never totally eradicate it.

Tuesday, January 29, 2008

Two Books

Uncertainties about the Shadow Economy

What drives a person or business to the black market?

What are the differences between the "black" market and the "shadow" and the "underground" markets?

When are black market transactions less costly than mainstream market transactions?

Where do you draw the line between the legal and the illegal market?

How will e-cash affect the black market?

Friday, September 21, 2007

Banks andTrade

After the Fall of the Roman Empire, Europe entered a long period of stagnation dominated by feudalism, tribalism, and urbanization. During this time, Islam spread from Babylon to Gaul. The Islamic Empire built cities and temples the same way the Roman Empire did during its reign, and in these urban centers, Byzantine and Greek scholarship flourished.

Western Europe discovered the Classics. Hellenic and Hellenistic scholarship passed through the Islamic conduit, and the Renaissance had begun.

Like the Roman Empire, the Islamic Empire facilitated international trade by building infrastructure and encouraging good deals amongst sovereigns.

After years of medieval stagnation, Europe saw the rebirth of international trade.

Advances in transportation and navigation technology, basic accounting, early statistics, and other mathematics spurred the economic growth.

Banks are at the center of the commerce. Paper money and bills of exchange emerge as a reaction to the transport demands of trade. Naturally, each empire coins its own currency. Exchange rates are born.

Soon, banks serve as money-changers, lenders, and depositories. Bankers such as the Medicis in Italy and the Fuggers in Germany rise to such wealth and power that they become the financiers of kings, cities, and popes.

At the same time, the international trade volume creates a high demand for information - especially information regarding commodities prices in foreign ports. This demand for data gives birth to commodity exchanges. Stock exchanges soon follow.

The availability of information leads to the genesis of speculation.


As the European Renaissance broke out across the Continent, lenders began to shake the sinful stigma of usury. The Catholic Church began to relax its stance on usury because it began to understand the concept of risk. Church leaders first realized that commerce was the source of power, then they realized that lenders kick-start commerce. Lenders deserved to profit from their loans because they bore most of the risk. Lenders were no longer condemned for usury. Debt wrought the birthpangs of the free market.