15. Morphisms between Mega-States (continued)
c, Whistleblower Incentives and Protection under the Dodd-Frank Act 2010
Have you been able to draw the morphism?
You have of course four choices. Referring to Note 10, the four Mega-States are:
(1) [I][I]
(2) [I][B]
(3) [B][B]
(4) [B][I]
And the four morphisms between mega-states in the free functor direction (that is, in the direction of increasingly simplified structures of financial transactions) is:
(a) (1)->(2)
(b) (2)->(3)
(c) (3)->(4)
(d) (4)->(1)
In Note 15(a), we showed the Orderly Liquidation Authority (OLA) as the morphism from (2) to (3). The OLA is in a strong sense a catalyser and condenses more bailout to bailout situations.
In contrast, WIP if we were to guess, catalyses and compresses the bailout to innovation mega-state [B][I] to [I][I], that is, it is a (d) morphism.
You might ask why is WIP not (a), (b) or (c)? And why should it be (c)?
WIP is not (a) because it does not is unlikely to cause a bailout. It is not (b) because it does not enhance or reproduce bailouts.
However, there is an argument that WIP could be (c) because (i) instances of WIP could be initiated from a state of [B] to achieve a state of [I]. In other words, there is nothing logically or empirically impossible for the morphism (c) to eventuate from WIP. But the problem with this view is that WIP starts from a state of bailout, which not the case in fact.
All or almost all conceivable WIP scenarios will start from a state of innovation [I] since the informant will literally need to file original information with the SEC and/or the CFTC in order to qualify for the entitlement of a minimum of 10% and up to 30% upon discretion of the authorities of any and all recoveries from whatever legal actions and settlements over $1 million. The characteristic of this state is one of innovative private contracts, where even the government s prone to act as an initiator of bounty-hunting and qui tam in an incentive-based market system.
Therefore, given this market orientation of WIP, it exists as an element in the domain of many possible financial instruments. Thus, it helps seed and proliferate more and more financial innovation. Here, we mention, for instance the potential establishment of litigation funds, new directors' liability insurance, as well as indexes which could inform investors precisely on potential corporate liabilities.
Friday, 23 September 2011
Tuesday, 13 September 2011
n-Financial Theology: Some Precise Notation, 1 to 15
1. The brackets [ ] indicate an object.
2. The arrow -> is a morphism, which means some process, transformation, operation or function.
3. B stands for Bailout, and everything implied by that state of the world.
4. [B] means the object of Bailout, which is really just another way of saying Bailout as a state of the world with everything that is implied by that state of the world.
5. We might use [B] or B for the same thing.
6. I stands for Financial Innovation as a state of the world where financial innovation is acceptable, where there is a secondary Market in financial instruments.
7. [I] means the object of financial innovation and all that it means.
8. We write [I]->[B] to mean the financial innovative state of the world is transformed into a world of Bailouts.
9. For our purposes, we can leave out leave out the arrows (although later,we will put them back in) so [I]->[B] can be written as [I][B]. We can simplify further to BI. But for most of the time, in order to remind us of the special states of the world, we will use the bracketed notation.
Got all that?
Now we come to the theoretical parts.
10. If we pars the world into [B] and [I], then we have four possible mega-states of a two state world, as follows:
(1) [I][I]
(2) [I][B]
(3) [B][B]
(4) [B][I]
Note that between two states, we have the morphism of Default.
11. Morphism of Default is the Invariance of Default. It's important to note that we have a special phenomenon which defines the divide between the two objects in each of the mega-states of (1) through (4). That phenomenon is also a morphism and we call it Default. Default is a latent transformation and it is invariant in all four states. for example, notice how default is not only embedded in every contract you enter and perform but also how default must lurk in the shadows of any regime of financial contracts. It cannot go away. Default invariance has nothing to do with whether any particular contract is or is not in default except that each contract has this "quantitative quality" within its particular potentiality (in Aristotelian terms) or coordinate feature as in a Descartean axis. Later we shall see in the "Risk Symmetries Framework" that risk is "Perceived Risk" as the dependent variable to "Definition" which is the independent variable. But we get ahead of ourselves.
12. Invariance of Default leads to the Functor of Default. We shall see that [] objects are categories and the morphism between categories is a functor. So, more properly, where each state of the world [I] or [B] is a category, the functor is Default. Default functors going in the clockwise direction from (1) to (2), (2) to (3), (3) to (4) and (4) to (1) are "free functors" since they tend to add structure. In the anti-clockwise direction, the functors would tend to lose structure and are called forgetful functors.
13. Mini-States Pre- and Post- each State; Critical Key Sequences Ex Ante and Post Hoc. For each state before and each state after default, in other words in the object before and the object after default, we have specific legal and financial elements in some prescribed "order" which we call incremental states or "mini-states." Pre-mini-states to the state [I] is little "i" and written "-[i]", post-mini-state to the state [B] is "[b]+". It is the SEQUENCE of mini-states that correlate to three types of infinite series, which make explicit (1) definitely convergent, (2) definitely divergent and (3) indefinitely divergent phenomena. Having knowledge of which of the three series is involved in the pre- and post-sequence is sufficient to completely describe the structure of the key critical events of CAUSE and EFFECT of any of the States and Mega-States of the Great Cycle of Default. It is important to note that the STRUCTURE of Default has similar patterns through time and space, and that particular personalities and idiosyncrasies are not relevant except as they may be translated into one of three types of infinite series. Any action, behaviour, characteristic which we can name as phenomenon in our epistemology falls within one of the three types of infinity, and it is our ability to determine what type applies and in what sequence pre- and post-state and mega-state that allows us to determine legal and financial structure of the world.
14. Many Steps between Mega-States. The morphism between the mega-states (1), (2), (3), and (4) will simply be "legal and financial transactions" or simply, "transactions."
15. For purposes of study, we can map most any sort of financial regulation as a morphism between different mega-states.
(a) OLA as a Morphism of Potentiality between Mega-State (2) and (3). For example, the Orderly Liquidation Authority of the Dodd-Frank Act is a process of pre-qualification (input criteria) and implementation, from (2) to (3). In other words, from [I][B] -> [B][B]. This two-step process tends to place a resultant emphasis on [B][B], the mega-state (3).
(b) OLA as a Functor of Actuality between Mega-State (2) and (3). A OLA functor of actuality from (2) to (3) results in an acceleration and strengthening of the mega-state (3), which means Bailout to Bailout continues. In other words, governmental control increases geometrically. Fascistic and totalitarian control zooms up and market failure is generally seen in banking failures.
(c) Whistleblower Incentives and Protection (WIP) Provisions of the Dodd-Frank Act.
Exercise: how might WIP fit in the fourfold mega-states?
Answer: next blog.
2. The arrow -> is a morphism, which means some process, transformation, operation or function.
3. B stands for Bailout, and everything implied by that state of the world.
4. [B] means the object of Bailout, which is really just another way of saying Bailout as a state of the world with everything that is implied by that state of the world.
5. We might use [B] or B for the same thing.
6. I stands for Financial Innovation as a state of the world where financial innovation is acceptable, where there is a secondary Market in financial instruments.
7. [I] means the object of financial innovation and all that it means.
8. We write [I]->[B] to mean the financial innovative state of the world is transformed into a world of Bailouts.
9. For our purposes, we can leave out leave out the arrows (although later,we will put them back in) so [I]->[B] can be written as [I][B]. We can simplify further to BI. But for most of the time, in order to remind us of the special states of the world, we will use the bracketed notation.
Got all that?
Now we come to the theoretical parts.
10. If we pars the world into [B] and [I], then we have four possible mega-states of a two state world, as follows:
(1) [I][I]
(2) [I][B]
(3) [B][B]
(4) [B][I]
Note that between two states, we have the morphism of Default.
11. Morphism of Default is the Invariance of Default. It's important to note that we have a special phenomenon which defines the divide between the two objects in each of the mega-states of (1) through (4). That phenomenon is also a morphism and we call it Default. Default is a latent transformation and it is invariant in all four states. for example, notice how default is not only embedded in every contract you enter and perform but also how default must lurk in the shadows of any regime of financial contracts. It cannot go away. Default invariance has nothing to do with whether any particular contract is or is not in default except that each contract has this "quantitative quality" within its particular potentiality (in Aristotelian terms) or coordinate feature as in a Descartean axis. Later we shall see in the "Risk Symmetries Framework" that risk is "Perceived Risk" as the dependent variable to "Definition" which is the independent variable. But we get ahead of ourselves.
12. Invariance of Default leads to the Functor of Default. We shall see that [] objects are categories and the morphism between categories is a functor. So, more properly, where each state of the world [I] or [B] is a category, the functor is Default. Default functors going in the clockwise direction from (1) to (2), (2) to (3), (3) to (4) and (4) to (1) are "free functors" since they tend to add structure. In the anti-clockwise direction, the functors would tend to lose structure and are called forgetful functors.
13. Mini-States Pre- and Post- each State; Critical Key Sequences Ex Ante and Post Hoc. For each state before and each state after default, in other words in the object before and the object after default, we have specific legal and financial elements in some prescribed "order" which we call incremental states or "mini-states." Pre-mini-states to the state [I] is little "i" and written "-[i]", post-mini-state to the state [B] is "[b]+". It is the SEQUENCE of mini-states that correlate to three types of infinite series, which make explicit (1) definitely convergent, (2) definitely divergent and (3) indefinitely divergent phenomena. Having knowledge of which of the three series is involved in the pre- and post-sequence is sufficient to completely describe the structure of the key critical events of CAUSE and EFFECT of any of the States and Mega-States of the Great Cycle of Default. It is important to note that the STRUCTURE of Default has similar patterns through time and space, and that particular personalities and idiosyncrasies are not relevant except as they may be translated into one of three types of infinite series. Any action, behaviour, characteristic which we can name as phenomenon in our epistemology falls within one of the three types of infinity, and it is our ability to determine what type applies and in what sequence pre- and post-state and mega-state that allows us to determine legal and financial structure of the world.
14. Many Steps between Mega-States. The morphism between the mega-states (1), (2), (3), and (4) will simply be "legal and financial transactions" or simply, "transactions."
15. For purposes of study, we can map most any sort of financial regulation as a morphism between different mega-states.
(a) OLA as a Morphism of Potentiality between Mega-State (2) and (3). For example, the Orderly Liquidation Authority of the Dodd-Frank Act is a process of pre-qualification (input criteria) and implementation, from (2) to (3). In other words, from [I][B] -> [B][B]. This two-step process tends to place a resultant emphasis on [B][B], the mega-state (3).
(b) OLA as a Functor of Actuality between Mega-State (2) and (3). A OLA functor of actuality from (2) to (3) results in an acceleration and strengthening of the mega-state (3), which means Bailout to Bailout continues. In other words, governmental control increases geometrically. Fascistic and totalitarian control zooms up and market failure is generally seen in banking failures.
(c) Whistleblower Incentives and Protection (WIP) Provisions of the Dodd-Frank Act.
Exercise: how might WIP fit in the fourfold mega-states?
Answer: next blog.
Thursday, 8 September 2011
n-Metaphysics: Time as Apparent Dis-Entanglement and Love as n-Entanglement
1. Prof Kaku on a Discovery programme the other night illustrated "quantum entanglement" in a hilarious way. Take two hotdogs, one with mustard and the other with ketchup. If the two hotdogs interact with other, say they touch, then quantum mechanics says that before you bite into one of the hotdogs, mustard and ketchup is mixed up in both hotdogs, and only when you bite into one ("ah, that's a good mustard dog") that the ketchup dog is absolutely determined. This works vice versa. This also works if the hotdogs are separated in distance as far as the length of the entire universe. This sounds crazy and Einstein called this quantum phenomenon, "spooky action at a distance" because it was and is totally inexplicable.
2. I have been thinking about quantum mechanics and entanglement for about 40 years. It is by far the most accurate physical theory we have. So, I wonder what it means. What kinds of adjustments do we need to make, if any, to our everyday world view if we take quantum mechanics really seriously. There are a bunch of academics working on this in philosophy, maths and physics departments, and their thought experiments are like virtuoso performances which unfortunately are left in manuscript notation and never heard by general audiences. So, popularisers like Prof Kaku may need to resort to slapstick to get certain images across. Here's one image where mathematical wizardy is probably of no use: the concept of time.
3. You know the saying, "Time is God's way of making sure everything doesn't happen at once." Try the following thought experiment. Divide the visible universe in half. Since both halves are touching, they are entangled and therefore, whatever happens in one-half instantaneously affects the other half. Now imagine iterating the form of this argument ALL THE WAY DOWN so the entirety of the visible universe is parsed into oh so many compartments of say Planck's size (for physicists age 7, this is a trivial calculation for the visible universe, but for the entire universe, we just don't know its size over the light speed horizon.) For all intents and purposes, the entire visible universe would be mapped in what physicists call "configuration space" and the evolution of one possible universe through time would be a point moving along this fantastically complex space. Fortunately, we see this possible universe and can map any "rigid body" in this so-called "metric." OK, so far? The following is my killer point.
3. If we take quantum mechanics seriously throughout the thought experiment, then what happens to time? Thermodynamics tells us time is an arrow (non-Abelian) so that dis-order of any observable pattern is greater by any increment of time. But quantum mechanics is telling us something different about the universe. Maybe one way of putting this is to say information about anything and everything in the universe is timelessly preserved at the very edge of the universe. Nuts? If you are curious, you might dip into Leonard Susskind's Black Hole Wars, see:http://www.amazon.com/Black-Hole-War-Stephen-Mechanics/dp/0316016403. It's a very readable and fun book, and the good professor shows us how and why all the information in the universe is plastered onto the surface at the edge of the universe. I wish it were true. Imagine voyaging to the EDGE.
4. But my own intuition about time comes from the Aristotelian and Scholastic thought experiment in 2 above. I don't think you have to go to any distant edge but indeed, if we take the division argument seriously, it is not entirely objectionable that the connection to everything is right here and now. Time is annihilated in n-entanglement, another beautiful word for love.
2. I have been thinking about quantum mechanics and entanglement for about 40 years. It is by far the most accurate physical theory we have. So, I wonder what it means. What kinds of adjustments do we need to make, if any, to our everyday world view if we take quantum mechanics really seriously. There are a bunch of academics working on this in philosophy, maths and physics departments, and their thought experiments are like virtuoso performances which unfortunately are left in manuscript notation and never heard by general audiences. So, popularisers like Prof Kaku may need to resort to slapstick to get certain images across. Here's one image where mathematical wizardy is probably of no use: the concept of time.
3. You know the saying, "Time is God's way of making sure everything doesn't happen at once." Try the following thought experiment. Divide the visible universe in half. Since both halves are touching, they are entangled and therefore, whatever happens in one-half instantaneously affects the other half. Now imagine iterating the form of this argument ALL THE WAY DOWN so the entirety of the visible universe is parsed into oh so many compartments of say Planck's size (for physicists age 7, this is a trivial calculation for the visible universe, but for the entire universe, we just don't know its size over the light speed horizon.) For all intents and purposes, the entire visible universe would be mapped in what physicists call "configuration space" and the evolution of one possible universe through time would be a point moving along this fantastically complex space. Fortunately, we see this possible universe and can map any "rigid body" in this so-called "metric." OK, so far? The following is my killer point.
3. If we take quantum mechanics seriously throughout the thought experiment, then what happens to time? Thermodynamics tells us time is an arrow (non-Abelian) so that dis-order of any observable pattern is greater by any increment of time. But quantum mechanics is telling us something different about the universe. Maybe one way of putting this is to say information about anything and everything in the universe is timelessly preserved at the very edge of the universe. Nuts? If you are curious, you might dip into Leonard Susskind's Black Hole Wars, see:http://www.amazon.com/Black-Hole-War-Stephen-Mechanics/dp/0316016403. It's a very readable and fun book, and the good professor shows us how and why all the information in the universe is plastered onto the surface at the edge of the universe. I wish it were true. Imagine voyaging to the EDGE.
4. But my own intuition about time comes from the Aristotelian and Scholastic thought experiment in 2 above. I don't think you have to go to any distant edge but indeed, if we take the division argument seriously, it is not entirely objectionable that the connection to everything is right here and now. Time is annihilated in n-entanglement, another beautiful word for love.
Wednesday, 7 September 2011
LIBERALITY - The Third Moral Virtue of Good Contracts and The Spiritual Commitment of Great Souls
1. The third moral virtue St Thomas borrowed from Aristotle as a criterion for good contracts is liberality. Aristotle's view on liberality is worth reading for he sketches what might be called the munificent character. Most scholars have called this the "magnanimous soul" or "great soul." The major point to keep in mind is that liberality is not just about the quantity or frequency of giving, or in indeed, about the objects of giving, but that it comes from the nature of the person per se. As Aristotle says,
"Further, the liberal man is easy to deal with in money matters; for he can be got the better of, since he sets no store by money, and is more annoyed if he has not spent something that he ought than pained if he has spent something that he ought not, and does not agree with the saying of Simonides."
Source: Aristotle's Nicomachean Ethics, IV, http://www.sacred-texts.com/cla/ari/nico/nico035.
When one maps out the characteristics of the munificent character, and realises that this person is not necessarily materially or financially wealthy, then we might also realise that we have a specific counter-example of the caricatured "self-interested" homo oeconomicus so favoured by Adam Smith through the 20th century economists and those superficial propagandists of pseudo-philosophy like Ayn Rand and Leo Strauss. And we might also recognise prodigality as the opposite of liberality, where immediate indulgence and self-gratification spring from a certain type of character, and not from all characters.
2. There is a school of financial law today that goes by the name "law matters." Its thesis is that even the tinniest legal rule may have a huge effect on society. For example, simple disclosure rules forcing tens of millions of unread pages per month in the US. The idea of law matters is foundational and assumes a network of necessary rules that are linked together such that the operation of one rule affects another, and so on, throughout the system of rules.
3. This is a deeply Aristotelian conception. So, Aristotle's method was simply, OBSERVE what is to discover the parts of the whole. But then we face a conundrum of determining which parts fit with what whole, if at all. Aristotle posed this problem as the one versus the many. The problem echoes down the ages in many guises. For example, in my theoretically preferred approach which is linked to SET THEORY and CATEGORY THEORY, the problem is stated in terms of INTENSIONALITY versus EXTENSIONALITY, and in notation form as "singular attribute" versus "list of elements having said attribute." How a person resolves (or not) the tension of the "one versus many" conundrum says a lot about a person's intellectual preferences and biases. I use to think Hume was correct on this point and that no part is necessarily connected to any other part because the definition of a part was arbitrary. But as I get older I see the point St Thomas was making that the parts-to-whole argument MUST be aligned to a means-to-ends argument because whether we like it or not, we have a moral choice.
4. As Sadao Yoshioka, Shihan in Aikido, use to say, "the Way gets narrower and narrower as you move forward." We live together in a society where each of us has a part to play to the whole and curiously, this part (role) is given sense and becomes meaningful by our relationship to the whole. So, we have looting in London, and we have hedge arbitrage in investment banking. How are these parts related to the whole? Objective science may not give us the satisfactory answer because it can only help us determine the definition of the parts. How many think tank studies do we need before we must act? To have meaning, we need to translate whatever parts we have observed into a means towards an end. This means some kind of intellectual, moral and indeed, spiritual commitment without which no further meaningful action is possible.
"Further, the liberal man is easy to deal with in money matters; for he can be got the better of, since he sets no store by money, and is more annoyed if he has not spent something that he ought than pained if he has spent something that he ought not, and does not agree with the saying of Simonides."
Source: Aristotle's Nicomachean Ethics, IV, http://www.sacred-texts.com/cla/ari/nico/nico035.
When one maps out the characteristics of the munificent character, and realises that this person is not necessarily materially or financially wealthy, then we might also realise that we have a specific counter-example of the caricatured "self-interested" homo oeconomicus so favoured by Adam Smith through the 20th century economists and those superficial propagandists of pseudo-philosophy like Ayn Rand and Leo Strauss. And we might also recognise prodigality as the opposite of liberality, where immediate indulgence and self-gratification spring from a certain type of character, and not from all characters.
2. There is a school of financial law today that goes by the name "law matters." Its thesis is that even the tinniest legal rule may have a huge effect on society. For example, simple disclosure rules forcing tens of millions of unread pages per month in the US. The idea of law matters is foundational and assumes a network of necessary rules that are linked together such that the operation of one rule affects another, and so on, throughout the system of rules.
3. This is a deeply Aristotelian conception. So, Aristotle's method was simply, OBSERVE what is to discover the parts of the whole. But then we face a conundrum of determining which parts fit with what whole, if at all. Aristotle posed this problem as the one versus the many. The problem echoes down the ages in many guises. For example, in my theoretically preferred approach which is linked to SET THEORY and CATEGORY THEORY, the problem is stated in terms of INTENSIONALITY versus EXTENSIONALITY, and in notation form as "singular attribute" versus "list of elements having said attribute." How a person resolves (or not) the tension of the "one versus many" conundrum says a lot about a person's intellectual preferences and biases. I use to think Hume was correct on this point and that no part is necessarily connected to any other part because the definition of a part was arbitrary. But as I get older I see the point St Thomas was making that the parts-to-whole argument MUST be aligned to a means-to-ends argument because whether we like it or not, we have a moral choice.
4. As Sadao Yoshioka, Shihan in Aikido, use to say, "the Way gets narrower and narrower as you move forward." We live together in a society where each of us has a part to play to the whole and curiously, this part (role) is given sense and becomes meaningful by our relationship to the whole. So, we have looting in London, and we have hedge arbitrage in investment banking. How are these parts related to the whole? Objective science may not give us the satisfactory answer because it can only help us determine the definition of the parts. How many think tank studies do we need before we must act? To have meaning, we need to translate whatever parts we have observed into a means towards an end. This means some kind of intellectual, moral and indeed, spiritual commitment without which no further meaningful action is possible.
Wednesday, 31 August 2011
A Modest Proposal: The Fed Dead Mice Trade that Saves Greece and Therefore The World [Sarcasm on]
1. Joseph Coterill of FT Alphavile has a couple diagrams of the Finnish proposal to collateralise Greek assets. He discusses the negative pledge problem which basically says that Greece is not allowed to seek further foreign law bonds that are prejudicial to existing foreign law bonds. And if Greece doesn't get a waiver of this clause from the bondholders and then gets another foreign law bond, then it will be in default. Beautiful self snooker.
Source: Joseph Coterill (Aug 30, 2011) http://ftalphaville.ft.com/blog/2011/08/30/664341/finlands-greek-collateral-plan-breaks-negative-pledge/
Coterill then states that the Finns are spinning this negative pledge block into an opportunity to obtain more credit enhancement. So question is who and what will be used for credit enhancement? Earlier today, Zerohedge made the same point from a bit broader perspective:
"So instead the country's banks need direct foreign capital. However, this capital needs hard collateral pledged. Collateral which would have value in a worst case scenario, i.e., liquidation. Instead, what the EFSF has offered as "collateral" is the equity of the very same firms which will be immediately insolvent once this house of cards collapses, sending the bank equity collateral worthless, and buried under billions of debt liabilities, and in turn impairing the ECB which suddenly finds itself with hundreds of billions in worthless Greek paper, making additional funding for Finland, once it finds itself in a liquidity crisis, next to impossible."
Source: http://www.zerohedge.com/news/europes-ponzi-takes-twist-wacky-greek-bank-equity-be-used-loan-collateral
Source: Ibid.
3. How about a super credit enhancement? Why not borrow some AA+ US treasuries using the US Fed recently re-opened swap lines? A fiat currency denominated debt paying 100% value (after whopping fat Swiss commissions of course) for Greek assets. During TARP, the US Fed conducted the "dead mice" trade where it would pay 100% for RMBS having no tradable value. The US Fed could, should and maybe even would again "save" the world by accepting the "dead mice" from Greece. By the way, this does not have a nice ending.
Recommended reading: Kindleberger on Manias, Panics and Crashes.
Source: Joseph Coterill (Aug 30, 2011) http://ftalphaville.ft.com/blog/2011/08/30/664341/finlands-greek-collateral-plan-breaks-negative-pledge/
Coterill then states that the Finns are spinning this negative pledge block into an opportunity to obtain more credit enhancement. So question is who and what will be used for credit enhancement? Earlier today, Zerohedge made the same point from a bit broader perspective:
"So instead the country's banks need direct foreign capital. However, this capital needs hard collateral pledged. Collateral which would have value in a worst case scenario, i.e., liquidation. Instead, what the EFSF has offered as "collateral" is the equity of the very same firms which will be immediately insolvent once this house of cards collapses, sending the bank equity collateral worthless, and buried under billions of debt liabilities, and in turn impairing the ECB which suddenly finds itself with hundreds of billions in worthless Greek paper, making additional funding for Finland, once it finds itself in a liquidity crisis, next to impossible."
Source: http://www.zerohedge.com/news/europes-ponzi-takes-twist-wacky-greek-bank-equity-be-used-loan-collateral
Source: Ibid.
3. How about a super credit enhancement? Why not borrow some AA+ US treasuries using the US Fed recently re-opened swap lines? A fiat currency denominated debt paying 100% value (after whopping fat Swiss commissions of course) for Greek assets. During TARP, the US Fed conducted the "dead mice" trade where it would pay 100% for RMBS having no tradable value. The US Fed could, should and maybe even would again "save" the world by accepting the "dead mice" from Greece. By the way, this does not have a nice ending.
Recommended reading: Kindleberger on Manias, Panics and Crashes.
Good Contracts: Moral Principle 2 - Commutative Justice
1. St. Thomas Aquinas identified 3 virtues which serve as criteria for determining whether a contract qualified as morally good. In a previous note, we detailed the first virtue called Promise-keeping. In this note, we investigate the second virtue, Commutative Justice. And in a future note, the third, liberality.
2. Commutative Justice is the most conceptually mathematical of the three virtues. Commutative simply means that which relates to exchange, substitution or interchangeability. In mathematics, to say something commutes means that we can change the order of operations and obtain the same result. This idea is central to how we think of operations in the abstract, and generally speaking, when we say we can be sure something is the same as another, it is probably because we would also hold that there is a commutative relation to our beliefs. We'll speak a lot more about commutativity when we investigate Category Theory. But for now, we examine St Thomas' not so primitive bifurcated concept of commutative justice. First, the Arithmetic and then, the Geometric.
3. Arithmetic Commutative Justice. The Arithmetic arises in a bilateral exchange formation. When two parties exchange goods for value, the Arithmetic justice is simply that the value between the parties should be relatively equivalent or balanced. The notion of balancing equivalence probably comes from the act of using scales to measure a point of equivalence by approximating the point of equivalence by adding (or subtracting) lesser weights In this way, fairness can be found by the operation of addition. For about 8 centuries, this concept of fairness in bilateral exchange comes back frequently in the law, despite attempts to relegate it into meaninglessness under 19th century morally de-linked interpretations of contracts. See, for example, the doctrine of "nominal consideration" where mere legal recital of a valued for exchange is sufficient to overcome the bar of unfairness. Note also that in more recent consumer contract legislation from the mid-1960's, there are explicit attempts to bring back this sense of fairness where there is very unequal bargaining power between the corporate monopolistic price-setter and debt-addicted consumer slave. In a high powered radical reconceptualisation of Arithmetic Commutative Justice (ACJ, please forgive the acronym because life is too short to spell everything out explicitly), we see its reflection in a Risk Symmetries Framework where the x-axis is Perceived Risk and the y-axis is Definition (i.e. Increments of information) where horizontal line segments divided into equivalent length left and right segments relative to a middle vertical line represent a fair trade of perceived risk. Under a Risk Symmetries Framework, we have the theorem: Equivalent bilateralisation of perceived risk between two parties at the same level of Definition results in a commutative risk trade. This will become clearer much later on--hopefully, I can explain what this means clearly enough so we can use it in a natural way to understand risk in our daily lives. Some of my students know that I have an 80 page unpublished paper on the Risk Symmetries Framework which explains modern finance theory and behavioural finance theory locked up in my drawer which is based on answering the question, "What is the fundamental unit of psychological space that preserves risk?" When I wrote it, I thought it could be based on group theory. Now, I realise that that was much too narrow a view. Anyway, this is a digression. Let us return to commutative justice of the Geometric kind.
3. Geometric Commutative Justice (GCJ). If ACJ involves two parties, then GCJ involves groups of three or more. Just as we are concerned with distribution in ACJ so are we with GCJ. The question is naturally how to distribute equally among many. Aristotle and St Thomas appear to be socially or social structurally conservative on this point. Note when Aristotle uses the term "individual," he means the class of individuals. So distribution to various groups means distribution in proportion to those classes or groups of individuals. Compare the normativity of say Rawls' second formulation of his principle of justice wherein we are asked to imagine the most socio-economically deprived class of individuals in society, and to not implement any law that would do harm to such a group. The Aristotelian-Aquinian position by contrast would say that so long as the distribution to the various groups in society replicated the hierarchical structure of society, that would be considered just. For Aristotle and St Thomas, we have a ready reckoning tool where geometric justice simply means to replicate the interests of those in the existing social hierarchy while for Rawls, everyone is tasked to become a Socratic philosopher questioning every law for the sake of protecting those most vulnerable to its effects. What may be interesting is to determine which groups various presidential candidates intend to replicate. For example, Obama appears to exaggerate the differences between groups in the socio-economic hierarchy (classic class war rhetoric) and for this reason, he appears geometrically commutatively unjust to all groups in society. Strange place to be in? Obviously, back room deals with Wall St and war mongering without Congressional approval just don't add up for all Americans.
2. Commutative Justice is the most conceptually mathematical of the three virtues. Commutative simply means that which relates to exchange, substitution or interchangeability. In mathematics, to say something commutes means that we can change the order of operations and obtain the same result. This idea is central to how we think of operations in the abstract, and generally speaking, when we say we can be sure something is the same as another, it is probably because we would also hold that there is a commutative relation to our beliefs. We'll speak a lot more about commutativity when we investigate Category Theory. But for now, we examine St Thomas' not so primitive bifurcated concept of commutative justice. First, the Arithmetic and then, the Geometric.
3. Arithmetic Commutative Justice. The Arithmetic arises in a bilateral exchange formation. When two parties exchange goods for value, the Arithmetic justice is simply that the value between the parties should be relatively equivalent or balanced. The notion of balancing equivalence probably comes from the act of using scales to measure a point of equivalence by approximating the point of equivalence by adding (or subtracting) lesser weights In this way, fairness can be found by the operation of addition. For about 8 centuries, this concept of fairness in bilateral exchange comes back frequently in the law, despite attempts to relegate it into meaninglessness under 19th century morally de-linked interpretations of contracts. See, for example, the doctrine of "nominal consideration" where mere legal recital of a valued for exchange is sufficient to overcome the bar of unfairness. Note also that in more recent consumer contract legislation from the mid-1960's, there are explicit attempts to bring back this sense of fairness where there is very unequal bargaining power between the corporate monopolistic price-setter and debt-addicted consumer slave. In a high powered radical reconceptualisation of Arithmetic Commutative Justice (ACJ, please forgive the acronym because life is too short to spell everything out explicitly), we see its reflection in a Risk Symmetries Framework where the x-axis is Perceived Risk and the y-axis is Definition (i.e. Increments of information) where horizontal line segments divided into equivalent length left and right segments relative to a middle vertical line represent a fair trade of perceived risk. Under a Risk Symmetries Framework, we have the theorem: Equivalent bilateralisation of perceived risk between two parties at the same level of Definition results in a commutative risk trade. This will become clearer much later on--hopefully, I can explain what this means clearly enough so we can use it in a natural way to understand risk in our daily lives. Some of my students know that I have an 80 page unpublished paper on the Risk Symmetries Framework which explains modern finance theory and behavioural finance theory locked up in my drawer which is based on answering the question, "What is the fundamental unit of psychological space that preserves risk?" When I wrote it, I thought it could be based on group theory. Now, I realise that that was much too narrow a view. Anyway, this is a digression. Let us return to commutative justice of the Geometric kind.
3. Geometric Commutative Justice (GCJ). If ACJ involves two parties, then GCJ involves groups of three or more. Just as we are concerned with distribution in ACJ so are we with GCJ. The question is naturally how to distribute equally among many. Aristotle and St Thomas appear to be socially or social structurally conservative on this point. Note when Aristotle uses the term "individual," he means the class of individuals. So distribution to various groups means distribution in proportion to those classes or groups of individuals. Compare the normativity of say Rawls' second formulation of his principle of justice wherein we are asked to imagine the most socio-economically deprived class of individuals in society, and to not implement any law that would do harm to such a group. The Aristotelian-Aquinian position by contrast would say that so long as the distribution to the various groups in society replicated the hierarchical structure of society, that would be considered just. For Aristotle and St Thomas, we have a ready reckoning tool where geometric justice simply means to replicate the interests of those in the existing social hierarchy while for Rawls, everyone is tasked to become a Socratic philosopher questioning every law for the sake of protecting those most vulnerable to its effects. What may be interesting is to determine which groups various presidential candidates intend to replicate. For example, Obama appears to exaggerate the differences between groups in the socio-economic hierarchy (classic class war rhetoric) and for this reason, he appears geometrically commutatively unjust to all groups in society. Strange place to be in? Obviously, back room deals with Wall St and war mongering without Congressional approval just don't add up for all Americans.
Monday, 29 August 2011
Moral Virtue Número Uno: Promise-keeping->Detecting Frausters->Gravest Punishment is Being Laughed Out of Court
1. In the St Thomas Aquinian view of the moral foundations of contracts, there are 3 virtues: (1) promise-keeping, (2) commutative justice and (3) liberality. A contract may be said to be good morally if it satisfies at least one of these criteria. In a previous note, I had defined these virtues. I'd like to argue that fraudsters are simply those who can't keep promises. Now, there is a lot of research on "how and why people lie" but the main points of this note are on "How to detect fraudsters?" and "What to do after detection?"
2. Fraudsters are easily detected by simply checking their references. Madoff, the $60 billion fraudster who got a 150 year jail sentence lied convincingly all the way up to the day he confessed. I heard that Judge Denny Cheng, who handed out the sentence was swayed by evidence showing Madoff's hardened heart. On the day before publicly confessing, a widow with a handicapped daughter told Madoff that she was giving him all her money and that this was all they had to support herself and her daughter. Madoff put his arm around the lady and whispered, "Don't worry. I'll take care of you and your daughter." He took her money and the next day announced to the world he was broke. I researched Madoff (and created a 50-page anti-fraud checklist based on a complaint against Madoff's main feeder fund called Fairfield --this could be useful to investors and fund managers and I have parked it in my computer) and found that one of the reasons he was able to dupe people is because the duped never bothered to check his references! In Europe, he would name 6 US banks and in the US, he would name 6 European banks. The duped never bothered to check. The bankers who did check never did business with Madoff. In today's world, you should be very careful about physical gold, gold funds and hi-return sovereign bond funds. Anyone selling you these are very dangerous, indeed!
3. What to do with a fraudster after you've detected one? This depends on you. Remember a fraudster is a bit charming, so in the majority of meetings, you will end up paying. Remember nothing is for free and that deals that "have no risk" or offer an abnormal rate of return, or something for which you don't need to pay the full price either or both in terms of time or money, are simply "junk." One of the insanely funny things I learned while trading as an investment banker is that I couldn't trust my "boss" or his "boss" to tell me the truth about anything that affected my personal welfare. I learned to take statements such as "believe me" from my superiors to be the strongest sell signals! I recently experienced a very similar incidence of this sort of funny behaviour at a university. And when I use to employ people, I found they would dip their hands in the cookie jar. In governance theory, we call this the agency problem. The classic agency solution is to offer employees a stock option scheme! Laughable, no? Will a stock option scheme eradicate dishonesty, lies, cheating and stealing? I don't think so.
4. Best is to be vigilant. In Aikido, if someone had broken the code of conduct, eg, broken a promise to a Sensei, stolen from the dojo, lied in public etc., the punishment was quite amazing. The punishment wasn't a stripping of one's rank or being thrown out of the dojo or even a demotion. The gravest punishment was to be called before the senior teachers and for the teachers to "laugh." No fraudster wants to be laughed at. It means he or she cannot be taken seriously. Next time you come across a fraudster, try laughing. It usually is disconcerting enough to spill the beans.
2. Fraudsters are easily detected by simply checking their references. Madoff, the $60 billion fraudster who got a 150 year jail sentence lied convincingly all the way up to the day he confessed. I heard that Judge Denny Cheng, who handed out the sentence was swayed by evidence showing Madoff's hardened heart. On the day before publicly confessing, a widow with a handicapped daughter told Madoff that she was giving him all her money and that this was all they had to support herself and her daughter. Madoff put his arm around the lady and whispered, "Don't worry. I'll take care of you and your daughter." He took her money and the next day announced to the world he was broke. I researched Madoff (and created a 50-page anti-fraud checklist based on a complaint against Madoff's main feeder fund called Fairfield --this could be useful to investors and fund managers and I have parked it in my computer) and found that one of the reasons he was able to dupe people is because the duped never bothered to check his references! In Europe, he would name 6 US banks and in the US, he would name 6 European banks. The duped never bothered to check. The bankers who did check never did business with Madoff. In today's world, you should be very careful about physical gold, gold funds and hi-return sovereign bond funds. Anyone selling you these are very dangerous, indeed!
3. What to do with a fraudster after you've detected one? This depends on you. Remember a fraudster is a bit charming, so in the majority of meetings, you will end up paying. Remember nothing is for free and that deals that "have no risk" or offer an abnormal rate of return, or something for which you don't need to pay the full price either or both in terms of time or money, are simply "junk." One of the insanely funny things I learned while trading as an investment banker is that I couldn't trust my "boss" or his "boss" to tell me the truth about anything that affected my personal welfare. I learned to take statements such as "believe me" from my superiors to be the strongest sell signals! I recently experienced a very similar incidence of this sort of funny behaviour at a university. And when I use to employ people, I found they would dip their hands in the cookie jar. In governance theory, we call this the agency problem. The classic agency solution is to offer employees a stock option scheme! Laughable, no? Will a stock option scheme eradicate dishonesty, lies, cheating and stealing? I don't think so.
4. Best is to be vigilant. In Aikido, if someone had broken the code of conduct, eg, broken a promise to a Sensei, stolen from the dojo, lied in public etc., the punishment was quite amazing. The punishment wasn't a stripping of one's rank or being thrown out of the dojo or even a demotion. The gravest punishment was to be called before the senior teachers and for the teachers to "laugh." No fraudster wants to be laughed at. It means he or she cannot be taken seriously. Next time you come across a fraudster, try laughing. It usually is disconcerting enough to spill the beans.
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