Posts Tagged ‘Derivatives’

Derivatives’ Temporal Perversity

September 27, 2010



Abstract: A ridiculously simple trick allows the financial plutocracy to make ever more money, hence gather ever more power.



Is the present public-private financial system one of the largest criminal enterprise ever? It depends how one defines "crime".

Was the Feudal system a crime? Yes; it arose from the Roman republic, and clearly violated it. How? By putting most of the riches, and therefore, powers, in just a few hands. In the USA, in 2009, 25 hedge fund managers made more than a billion dollars of personal profits, each. Less well known is that, in the final analysis, they use public money to do so. The public would not be too happy if it understood that. The following is a contribution towards understanding the sticky plutocratic web the public finds itself ensnared with.

Of course, by the time the Feudal system violated civilization, the res-publica was a distant memory. The plutocracy had captured everything, even minds, and left them only sports to talk about, and a few little things below their nose. To subjugate people, one needs to overwhelm their mental defenses first, and put their minds inside very small boxes.

The modus operandi of the public-private financial system is still not understood. even the Nobel Prize level economist take a wide berth, lest they lose their credibility and profitable aura of respect. This helps to explain why Barack Obama did not do much against it. Neither Obama’s advisers, nor his critics (Stiglitz, Krugman, Johnson) have gone to the core of the problems posed by the private-public financial system, and deconstructed its logic. At the core of private-public finance is a bargain a la Faust, which is now violated by the plutocratic side. But here I will mostly talk about something more technical.



In this essay, we dismantle the fundamental reason why derivatives ought to be (mostly) outlawed, and not just vaguely tweaked (as Obama’s vaunted "financial reform" has it). It is not because slavery is technically possible, that it should be tolerated.

Obama gave a talk to the hyper rich at the home of Richard Richman. The worthy in attendance had paid $30,000, yes more than half the yearly average family income in the USA, to conspire together and hear from their public servant, the president of the USA that:

"Democrats, just congenitally, tend to get — to see the glass as half empty. (Laughter.) … If you get the financial reform bill passed — then, well, I don’t know about this particular derivatives rule, I’m not sure that I’m satisfied with that."

Obama cannot understand what derivatives are about. Nor do most people. Derivatives constitute a violation of the fundamental Faustian bargain of the state with banks. The reason why they cannot be understood is that derivatives have been designed to maximize wealth for the financial plutocrats, and this depends upon hiding their true nature.

When one searches for an explanation about what derivatives are, one typically hits haughty Partial Differential Equations (PDEs), describing some "options" trading. In other words, one is confronted to a level of complexity common people, including common lawyers such as the USA president, have not studied. Actually complexity of option trading is a bit reminiscent  of the level of complexity of Quantum Mechanics, which uses PDEs to compute probability waves.

99% of the population does not have a clue what a PDE is (a PDE is a way to relate rates of changes in various directions, or dimensions, it’s not witchcraft, but not far from it, because there is no general theory). The trick of hiding greed behind a PDE was so neat that the obsequious servants of plutocracy gave a Nobel Prize for it.

In truth, one can understand the basic mechanism for feeding greed at will through derivatives without much more than high school mathematics. (I already explained that in the past, but in a more cursory fashion.) So we will now review some high school mathematics to show that DERIVATIVE TRADING CAN CREATE MONEY FOR THOSE WHO PRACTICE IT WITHOUT ANY ADDED VALUE WHATSOEVER FOR THE PUBLIC, WHILE INDULGING IN THE CLEAR CRIME OF SUCKING MONEY OUT OF THE REST OF SOCIETY.



Financial derivatives are related to what is commonly called a derivative in analysis. Before understanding derivatives, one has to understand the function they come from. Derivatives, in turn, are themselves functions.

What is a function? Well, in mathematics something that allows to compute numbers, using numbers. At least that is the way Descartes thought of it, and he used algebra to describe said functions, starting "Algebraic Geometry".

Another way to look at the idea of function is to draw a curve "f" on page, with an x axis horizontal, a y axis vertical, and for each vertical line only one intersection (x, "f(x)") with f, where "f(x) is the height of the intersection point thus obtained. The simples f is a line, with f(x) = ax + b. More generally polynomial functions of degree n were contemplated: f(x) = a + bx + cxx + c xxx +… u (x^n). I don’t know how to write xy with this computer, and many mathematicians have opted for the subterfuge: x^y. So x^n is nx’s multiplied together.

In any case the derivative of a function f, df, is the curve obtained from f by looking at its slope, or rate of change, at every single point, creating a new correspondence between numbers and numbers. So if f is constant, in other words flat, the slope is zero, so df is zero. We have excluded above functions with infinite slopes. The slope of a line is constant, and for ax, it’s a. The slope of a(x^n) is: [an(x ^(n-1))].

Thus, in some sense the derivative of a polynomial f of degree n, being a polynomial of degree (n-1) is smaller than f (more exactly |f(x)|> |df(x)|, for x large enough). Also df is of lower degree than f, thus simpler. A lot of mathematics consists into studying the (hopefully) simpler df instead of f. This carries on in higher dimensions, with the study of differential forms and tangent bundles instead of studying directly the objects they came from.

A lot of the equations of physics are about rates of change. For example, the Maxwell equations of the electromagnetic field f reduce to df = 0 and *df = j. Not bad, since in their initial version, those equations covered an entire page, or so. (Here the differentiation operator d is a version of differentiation adapted to higher dimensions, namely the 4 dimensions of space-time, and * is another operator).



Something natural to consider is infinite polynomial. An example is e(x) = 1 + x + x^2/2! +… + x^n/n! +…. This function, e, is called the exponential. As x^n grows in its general term, it gets divided fiercely by factorial n, n! =… (n-1) (n). Exponential is equal to its own derivative: de = e. some mathematicians have called it the most important function in mathematics.

e is related to the trigonometric functions, cosine and sine. clip_image002


The sine and cosine functions graphed on the Cartesian plane.

Both the sine and cosine functions satisfy the differential equation

ddy = y”= -y

That is to say, each is the additive inverse of its own second derivative. So this is true if y = cos(x), say. Now suppose y is different; y(x) = cos (ax). Then dy (x) = -asin(ax), and y”(x) = -a^2 cos(x). Thus the differential equation has changed. It’s now: y” = – a^2 y!

This is all high school mathematics, and does not fly very high. However this is the sort of trivialities that the extremely profitable financial "industry" of derivatives rests on. I am not sorry to make fun of them by exposing what they have been really up to, it’s purely intentional.



Functions found in nature, at the classical scale, tend to have derivatives commensurate with the functions they come from (a non rigorous, but crucial subtlety). For example, sea waves can have steep faces, and can even invert in a tube (something excluded in the simplest functions in calculus, as we held above).

However, the waves’ slopes are, in general pretty tame (not when the waves break, once again, because then they become fierce, very powerful). The third derivatives of waves are actually always very tame: if sea waves are coming 50 meters apart (wavelength 50 meters), the third derivative slowly goes from slight positive to slight negative, every ten seconds, or so, etc…

Now a financial market is also animated by waves. Waves of selling and buying. In a so called "trading" (by opposition to "trending") market, traders can hope to make money by buying and selling at opportune times. In the past such wave were constrained because people were buying and selling, and they need to eat, sleep, and rest. According to real time, or, one should say, animal time. Not so for computers; they go according to clock time, ever faster. (And we have no Quantum computers yet, where time may disappear all together.)

Sea waves of a given height cannot go faster than they do: their heights and speeds are strictly connected by what mathematicians call a bijection: to a particular height, a particular speed, and conversely.

If traders were buying and selling sea waves, there is an upper limit to how much money they could make in a given unit of time.

But modern traders are not just Masters of the Universe, they are Masters of Time. They have created a fake, derived universe, complete with fake, created time.

Traders, using electronics can trade more and more, and thus increase clock time as the computer makers say, and for the good reason that the traders use computers to do so. Hence they can augment the frequency of the waves they trade: up and down, ever faster. In other words instead of looking at cosine(t), where t is universal time, greedy traders look at cosine(gt), where g can be made arbitrarily large, and stands for greed. As g augments, frequencies go ever higher.

This pernicious activity has even a name: HIGH FREQUENCY TRADING. (It has other nefarious effects, because, done carefully, it allows big banks to control the direction of trading, but that is another story!)

Augmenting the frequency of the trading also augments the wave heights of the derivative (now -[g sine(gt))] and the second derivative, now [-g^2cos(t)!)]. So not only can electronic traders trade more and more, and make more and more profits, but they fabricate thus ever greater leverage for themselves!

What is going there? Very simple; instead of having a market normalized by reality, the reality of cosine(t)), with t as real biological time, which has ruled markets since ever, the electronic traders can now trade an arbitrarily large market, arbitrarily large market, by trading the derivatives. (Augmenting the frequency allows to augment the total volume of finance involved, which is now of the order of 20 times world GDP!)

This, of course, sucks money out of reality, and invest it in something which does not exist, except as a figment of imagination.

Thus unemployment is not just a question of having sent the jobs far away overseas, but also of having invested capital in the alternative, derivative universe.

Obama accuse the "professional left" –"you know who you are!", to get in the arcane details of derivative trading. But he is the one who indulge in it, why not understanding the math.

Instead there should be derivative trading only when proven safe and effective. Besides arbitrarily high "High Frequency" trading ought to be unlawful (as it puts ever more arbitrarily high amounts of money in ever fewer hands.)

In general, Obama needed a vision in finance, not tinkering. The vision existed before; F.D. Roosevelt OUTLAWED FINANCIAL SPECULATION BY BANKS. It’s only normal; banks have been given the astounding, very profitable privilege of creating most of the money. With the idea (that’s the Faustian bargain) that they, the banks, in turn, would finance profitable projects in house-management ("eco-nomy").So they were richly paid to do that. Instead they ran away with the money to a derivative universe.

With the derivatives and the like, banks divert their astounding privilege towards "plutonomy" (for wealth management) as the chief economist at City put it.

To ask to go back to FDR’s clear principle is not to ask much. FDR was from a plutocratic family, he was no foaming at the mouth Marxist. Actually Sarkozy, the conservative, right wing president of France echoed president Roosevelt by calling for the separation of banks and financial speculation.

In any case, we have seen that the fundamental mechanism at work with derivatives is a trick to take the money of the people, and leverage it ever more, for ever few.

But Obama, all engorged with himself, instead of being humble, celebrates "THE" " financial reform bill". He knows the title, and seems really impressed by it. It sounds magical: "historical health care reform": done! "Historical financial reform!": done!

But a big title does not make a big idea. To re-form finance, for real, one would need to achieve, at least the cognitive level reached in 1933 by FDR. Instead Obama chose as adviser Summers who believes that endless summers came to plutocracy when it created ever more money for itself, thanks to computers, and the TIME RENORMALIZATION TRICK I exposed above… with seed money provided by the central bank, that is the public. "I don’t make public policy" as Geithner, fifth in line for the throne, intone categorically. No need indeed: policy was made long ago, and nobody in the public noticed.

Creating ever more money for plutocracy is nothing new, and civilization’s greatest pitfall, ever since civilization appeared, and got stalked by the exponential function.

Plutocracy does not rule with the mind of the people, which is many, and thus clever, but with the mind of Pluto, which is lonely, and thus vengeful, vicious and dumb. Just one mind does not a civilization make.

Talking to elite plutocrats paying $30,000 per person to hear the president of the USA, close and personal, will not make any of that easier to understand for a president who runs on money like a jumbo jet runs on fuel. It just makes for the world’s most expensive brothel.


Patrice Ayme


Technical note; The preceding will enrage many a derivative trader. So they will say that I understand derivatives not, and the proof is that there are many other types. Well, not really, deep down inside. But when the plutocrat is forced to think deep inside plutocracy, all he meets is his master, Pluto. Hence his rage. (And when did you see a female hedge creature?)

I also suggested in the past to put a speed limit (for example with a tax ; Oxfam now concurs) and to differentiate between commercial operators (such as airlines buying futures contract on jet fuel) and speculators (who would get fewer privileges).


Technical note on how derivatives and, in particular, futures, move underlying market: Krugman could not find a mechanism for that connection, and thus long argued it did not exist. But the preceding can be modified to make it so.

Suppose S is the total amount of money available in a field, say O (like oil). S will tend to go to the “overlying” derivatives market, because there is more leverage there. So instead of investing with, say S, with the underlying commodity O, if S is invested in derivatives, it will be like investing with 10S. On a market, that of the derivative, which is enormously more variable (for the temporal renormalization reason explained above), capable of (say) ten times the swings. Result: investing with the derivatives is just as if one were investing with 100 times the capital S one started with.

Now, of course, there is no more money to support the underlying commodity itself (because all speculators are invested in derivatives, since it is as they were 100 times richer). Hence small fluctuations in selling or buying of the underlying commodity will have a huge effects on O. And of course the buying, or selling, will be dominated by the psychological effect of what the derivatives, esp. the futures are doing. To do the detailed math of all this is just, well, details…


Evil Are Most Derivatives

May 22, 2010



Abstract: Germany, a republic, has seized the destiny of its currency in its hands, by outlawing some "derivatives" and "naked shorts on financial stocks" (when, unbelievably, financial pirates sell what they don’t own yet).

Meanwhile, finally, the Obama administration is pushing through a financial bill that has some teeth against so called "Shadow Banking", the vampire that hid in the night to suck the world dry.

The tyranny of "Shadow banking" and its associated derivatives has drained the developed world out of capital. Most capital was confiscated by an immense conspiracy hidden in plain sight behind notions so complicated that people fall asleep before understanding them, any time they try.

That is precisely why finance was made so complicated. Thus the prestidigitator makes elaborated moves and lenifying speech. But these prestidigitators of evil are part of the same establishment that makes war all over the world, as they invite us to bathe in oil. So let me present some simple aspects, again, of the greatest larceny that ever was. (As the Senate will now debate with Congress on the financial regulation bill, this is timely.)



The financial pirates and their media and academic helpers have been using the grossest propaganda to come to the rescue of financial piracy as an industry.

In particular, the popular right wing talk shows in the USA are making a relentless drive against the "progressive". Those are people so extreme that they view Franklin Roosevelt as a "dictator" (Glenn Beck said as he evoked with horror the financial reforms of Roosevelt, which brought unprecedented calm and prosperity until they were dismantled by Lawrence Summers). The rabid, but very popular right wing talk show hosts are amply helped by university professors, just as the Nazis were.

When the Nazis showed up, a mistake was made by people who thought progressively: they did not take the Nazis seriously. The technical point is this. Those right wing extremists think, like crocodiles think. Thinking does not make the croc right, but it makes it much more dangerous. The croc does not think very well, still, it is the duty of the intellectual to outwit it. Otherwise the intellectual will be killed, just like the innocent children were, by the Nazis.

As it is right now the direct "defense" budget of the USA is 708 billion dollars (without counting the budget of the secret "intelligence" agencies, including the CIA, which may well be above 30 billion). This is about half of the federal budget of the USA under G. W. Bush.

The same people who love financial piracy also love "defense" budgets getting ever more enormous. It is the same general idea of predation onto others, predation onto the world. To have a vague idea of the consequences, please visit the nice beaches in the Gulf of Mexico, and enjoy the oil. Otherwise, think of the dead in Iraq and Afghanistan (two wars arguably started decades ago by agents of the Western powers, agents of the shadowy type; this, by the way, goes well with "Shadow Banking", and this is no coincidence.)

A recall from history, 2070 years ago: so preoccupied were the plutocrats with smothering the Roman republic, that they let pirates gain control of the Mediterranean. Even on the sea closest to Rome, it was not safe. The young Caesar himself was captured, and held captive in Corsica, until a colossal ransom was paid by his family (as the pirates let him go, he promised to have them all crucified). At the time, pirates controlled entire regions, and possessed large fortified cities and their ports. Earlier Rome had controlled the entire Mediterranean sea. But no more. Pirates ruled.

Finally the republic had enough, and gave full powers to the very young and famous general, Pompeii. To everybody’s amazement, Pompeii destroyed all the pirates, throughout the Mediterranean, in three months. Three months. It had proven easy to destroy the pirates. What had been missing was trying to do so. We are facing a similar situation, with the financial pirates. They can be easily destroyed. All we have to fear is greed itself, among those who lead.

Recently the New York Times ran an editorial about "What Is Philosophy". The author, a paid philosopher, meekly proposed that philosophy consisted in "taking one’s time" (from something Socrates mumbled). Another philosophy professor commented more soberly that anybody who, like himself and the NYT author, was paid for philosophizing, was not the real thing.

I fully agree with the second professor, and would go further. We may also have the same opinion about economists. Economists hide behind jargon and mathematics, but the field is fundamentally philosophical: economy is about managing the house, not about assembling dissembling jargon, as salaried economists seem to enjoy doing.

Notice that, far from being professors, most significant philosophers were rebels. Those who were not rebels, such as Kant, a professor to the Prussian state, in Koenigsberg (now Kaliningrad) taught what the state wanted them to teach: obedience. Eichmann, the notorious mass assassin of Jews, said that he applied Kant’s teaching strictly, and quoted him cogently during his trial in Jerusalem. Hegel and Heidegger are other examples of "philosophy" professors serving the state (the Nazi state in the second case, and many lost souls still believe Heidegger to be a genius).

The Obama administration, and others (Krugman, Johnson, Stiglitz, etc.) have said that they want to prevent a repeat of the crisis of 2008. But that is too meek a point: the whole developed world economy is crashing, and it has been crashing for a full decade; 2008 was just a bump during a much larger crash.

China and India are not crashing though, precisely because they have (giant) government banks, doing what banks have always been supposed to do: sheltering savings from savers, lending them to worthy projects in the real world. This activity develops the economy. The two largest banks in the world, by far, are Chinese, and no doubt the severest punishments are ready for their managers, should they misstep.

It is revealing that the "developed" world is called developed, as if it did not need to be developed any further, an implicit admission by plutocrats that, from now on, only their own fortunes shall develop significantly (so called "GDP" growth).

In the fractional reserve system (be it in China or the West, such is the system), banks are always government, privately managed. This is so true that the central bank of the USA, a creature of the banks, is also viewed as a government entity.

Why is the developed world economy crashing with its research, basic services, employment and, um, further development? Why are China and India developing by leaps and bounds? It is two sides of the same question. "Developed world" banks have been allowed to confiscate most of the capital, and trade it among themselves in an unreal market, the derivatives.

There are many types of derivatives. As their name indicates, they are all derivative to functions in the real world. To describe most of them as insurance or equity is inappropriate. Honest to goodness derivatives have existed for 5 centuries, in Japan, China, and Europe. They existed for about a century, in connection with the future prices of farm products, in the USA, in Chicago. In all these cases, they were appropriately provisioned contracts. They could, indeed, behave as insurance (a farmer could insure his real world production with futures going the other way, and since he was the expert, it would profit him, a bit as a casino can rig the bets to profit from them, just so).

Not so anymore today. The derivatives the world economy is crumbling below today have become a metastatic cancer devouring all capital, and more, pumping all the world potential energy, and more.

Thanks to Rubin and Summers, those plutocrats serving themselves and their kind, under the naive puppet in chief Clinton, derivatives were derived from anything whatever, in all and any ways. For example derivatives squared, derivatives of derivatives. A market of these derivatives was made, consisting in bets among banks and hedge funds about how things will go. This "market" became as large as twenty times the entire world economy. Hidden from view was the fact that this was all public financed (be it only from the zero interest rate policy).

The defense of derivatives by finance professors would be hysterically hilarious, if the leadership by financiers had not been so tragic already (from the wars they caused to the poverty they fabricate) . To say that "If derivatives are bad, then so too is the equity in any type of company, small or large, private or public, including those that produce real products and commodities…" is revealing: the author, a finance professor, thus admits implicitly that derivatives produce nothing real.

Question: can we afford to have most the world free capital producing nothing real? And, since the banks have the fiduciary duty, through the factional reserve banking system to leverage public money into the money most people use, how can we tolerate that most of our money is used for nothing real?

When 300 billion of house mortgages defaulted, up to 24,000 billion dollars of derivatives were potentially lost, in the USA alone (Europe has its own derivatives too).

Insurance without any funds to pay for it is pure theft. This was the case of Credit Default Swaps. The taxpayers were left with the bill. The plot between Goldman Sachs and AIG was nothing more than planned robbery, and the government, represented by Paulson, past chair of Goldman Sachs, seconded by Geithner (who was paid by the banks), played its role.

Derivatives such as naked shorts are little more than taking fire insurance on the neighbor’s house with the ability to set it on fire in all impunity.

Derivatives ought to be allowed only when safe, and effective, for the people and entities engaging in these contracts, and for the system at large, which is the entire world economy. The world cannot function when the derivative is twenty times bigger than the real thing. Those who do not understand that ought to take the most basic calculus class imaginable.

I understand, though, that the incredible leverage provided by derivatives has created an entire corruptocracy, from financiers to their valets teaching the wrong notions to the young and naive. They don’t need to know calculus: being dominated by greed is enough to them. Greed is not just good, it’s the only thing. Even calculus cannot stand in the way of greed, they think, and they bleat.

Loosely, but correctly, calculus says that the derivatives are always much smaller than what they derive from. But today’s corrupt financiers adulate derivatives that are twenty times bigger than what they derive from (calculation: yearly "GDP" of derivatives divided by worth of GDP of "developed" world).

It is always revealing to listen to the fanatics of derivatives, and shadow banking. When you inform them that banks should be forbidden to speculate (a principle espoused by Sarkozy, president of France, and Volcker, past Fed chair, and adviser to Obama), they do as if you were naïve. They always say:"Oh, if you outlaw this, and outlaw that, the banks, and hedge funds, will do it in the shadows, where the government will not be able to see anything, or do anything."

That is funny, because those contradictors, those plutophiles, assume that financiers can easily violate the law, that is apparently what they do best: they just have to go back to the shadows, and do their thing, and can get away with it. Question: what happened to the state of law?

Well, the time has come for the republic to grab a few of the biggest financial geniuses, and make believe "philanthropists", and send them to jail for a long time, for financial piracy. Examples are always instructive.

So what is evil? Well, the will to hurt others, just what derivatives have been doing. Evil is a derivative of survival, but that does not mean we should worship it, as if we were crocodiles, eating each other. How do we get out of it? Well, by being genuine, not derivative.

Patrice Ayme


P/S: One finds above a hard mathematical idea: the derivative OUGHT to be less than the function it derives from. This principle OUGHT to be imposed both globally and locally (on the set of all derivatives, and on each derivative too). Not having it is tantamount to pathological mathematics (of the sort called counter examples in analysis: a highly fractal function can be smaller than its derivative, but such functions do not exist in the real world, except at the Quantum scale; imposing them boils down to imposing a macroscopic quantal world, where prediction is impossible, and catastrophe, the norm).

Economically that will force created money back into the real economy, where it could be used to prevent oil spills and make fusion-fission reactors, besides teaching the young.

In any case, my principle, that the derivative OUGHT to be less than the function it derives from, ought to guide regulators. Call it the Non Pathological Requirement.

Derivative World Sucks Real World Dry.

December 21, 2009




Abstract: the leaders of the USA have diverted, through otherworldly derivatives and exaggerated compensation for themselves, so much capital in a socially and economically useless way, that the economy could only falter. Larry Summers, the plutocratic genius, has been in command of the wrecking of the ship of state for 30 years.


"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street." says Obama. So far, though, it’s exactly what has happened. If you run for office and then eat poison, of your own volition, it means you ran for office to eat poison.

Obama and his little helpers HAD to save the banks, and even the bank holding companies. As institutions. They did not have to help the individuals who created the problem, but that is what they have done so far. Actually saving those who caused the problem, some of whom belong in prison, is the one thing the administration should not have done. (Since those who promoted and encouraged torture are not under investigation, but still role models or professors of the American justice system, this goes with the territory, namely poor actors are left in place, as sacred icons).

More than G. W. Bush, and arguably, more than anybody else, it is Larry Summers who created the problem. After all, he was on the scene before Rubin. (See Annex on Summers.)

Summers was internal economic affair advisor at the WHITE HOUSE under Feldstein, chair of Reagan’s economic advisers. He was twenty something, then Harvard made him a full professor at 28 years of age. Of these things American genius is made. Ten percent short term unemployment rate, a stalled economy, a disappearing middle class, the rich so rich that they get money from the poor: this is Summers for you.

"What’s really frustrating me right now is that you’ve got these same banks who benefited from taxpayer assistance who are fighting tooth and nail with their lobbyists up on Capitol Hill, fighting against financial regulatory control" Obama added. The word "bank" has to be considered carefully here. What Obama means is actually the upper management of said banks.

The bottom line is that finance is supposed to be the link between savers and entrepreneurs. Savers save, producing capital. Then entrepreneurs are lent said capital. In the 1920s, this failed: banks invested in Wall street, then lost a lot of money, as Wall Street crashed due to overproduction, and the rise of tariffs by 50%, which collapsed international trade. The Banking Act of 1933 was passed to outlaw the practice of having banks play at the casino of Wall Street.

Why? Because there is actually a limited quantity of capital. Capital is produced, through the fractional reserve system, as a multiplier of how much banks are allowed to lend, relative to the reserves they keep. The looser the regulation, the greater the multiplier, the more capital is created, true. But still, in the end, the capital is finite.

Notice that THE VERY EXISTENCE OF THE REGULATION OF THE MULTIPLIER BY THE STATE MAKE BANKS INTO AN ARM OF THE STATE. So, basically BANKERS ARE CIVIL SERVANTS. Banks are given a fiduciary prerogative, and duty, that of creating money, a function the state used to have, for a few millennia, and nobody else had, under the penalty of death. Modern bankers investing in derivatives are basically counterfeiters. The fact is they don’t really own that money, they were entrusted in creating it, they have no right to lose it all, especially after paying themselves bonuses, and profits for a few individuals at hedge funds and the upper class attached to them exclusively.

Indeed finance became, thanks to the deregulation work of Rubin, Summers and Greenspan, under Clinton, not just as bad as in the 1920s, but much worse. In the 1920s, banks could just invest in stocks, which are ownerships in companies, something real. Financial derivatives did not exist .

The craziness of the 1920s was outlawed by the Banking Act of 1933 ("Glass-Steagall"). Rubin, Greenspan, Summers repelled the Banking Act. clip_image002

It was actually the committee to sink the world. Or more exactly the committee to make the world irrelevant. The committee to derivate the world. Indeed, the difference with the 1920s is that an extra worldly concept, that of financial derivatives, had blossomed and disconnected with all economic justification, although it connected with completely fraudulent contracts, that all top bonus bankers knew very well were fraudulent.

Derivatives are bets on the evolution of the price of whatever. Derivatives, thus, can be whatever. Differently from a real casino, which is regulated, and where one knows what one is betting about, Summers (see his inspiring face higher up and lower down), was adamant that derivatives ought not to be regulated.

Why did Summers think that? Well, why does the crocodile thinks the way it does? Well, Summers does not hide rotten carcasses up the river bank; he is way more sophisticated than that, but, otherwise, just the same. Same morality: I eat you, therefore I am. A genius, plutocratic style.

Summers lives on top of the world, he owns mansions, made at least eight million dollar income in 2008, the American oligarchs think he is a genius, and the president of the USAs eats in his hand and coos. Summers would say what Obama did say:"Look where I am!" (Namely you are nothing, I am everything, the mark of someone who has decided the measure of man is the measure of power, on other men, thus forsaking all what makes the genus Homo special; hence the comparison with crocodiles above; crocs don’t a civilization make, they just eat their way through it).

Derivatives are only justified if and only if they play the role they were originally made for as they evolved around Chicago, long ago: as insurance for commercial operators. ALL AND ANY OTHER USAGE OF DERIVATIVES OUGHT TO BE OUTLAWED. Or regulated away, whatever.

As I said, capital is limited. Big banks have been investing most of the world’s capital in bets not connected to the physical world, and did so while it was not justified as insurance. Total world yearly GDP is about 50,000 billion dollars. Before the crash of 2008, the total derivatives market was about 600,000 billion dollars. Now it has been reflated, and it is about 800,000 billion dollars. Yes, about 16 times world’s GDP. In other words, the world has become hostage to something that does not exist. Any small negative fluctuation of that world that does not exist, that world of derivatives, will, and did crash completely the real economy. Moreover, if there is no negative outcome but further "profits" in the derivative world, it means that more capital will be diverted there, starving further the real world.

The situation, as it is, is grotesque: the collaborators of Roosevelt who outlawed the violation of its fiduciary duty by the banking industry in 1933, would have found the present situation not just way worse than what they outlawed, but completely demented.

For example American International Group, AIG, sold derivatives posing at insurance, without making anything resembling sufficient provisions. Nor could it have. Those private engagements were honored by poor people in the USA , because so decided the Wall Street operators at the White House.

In particular, 12.9 billion dollars went given to Goldman Sachs, in the name of the American People. Goldman then called that a profit, and used all of it for bonuses (total government gifts to Goldman Sachs were several times that). Goldman Sachs is not a poor homeowner, incapable of paying his debt, but, it, and its kind, are the future paymaster of a lot of the individuals leading the American government.

Ethics was not invented to please philosophers. Ethics did not come out of God. Ethics comes out of what is customary (its etymology says). In other words, it has got to be sustainable. WHAT WE HAVE NOW, THE ENTIRE MONEY OF THE WORLD SENT BY CORRUPT CIVIL SERVANTS (ALL WHAT BONUS BANKERS ARE) TO A DERIVATIVE WORLD IS NOT SUSTAINABLE, SO IT CAN’T EVER BECOME CUSTOMARY, SO IT IS NOT ETHICAL.

If Obama wants bankers to finance the real economy, as they are supposed to do, it’s no use begging them to do so. Instead, it’s time to become ethical.


Patrice Ayme



The US pay czar limits the pay of executives at companies receiving a bailout. Without undercutting the ability of the firm to secure talented management.  ”It’s a delicate balance!  Very difficult indeed.”  To which Sherry Jarrell replies: "Well, Mr. Czar, difficult for you, maybe, but a piece of cake for the labor market.  That’s exactly what the labor market does, day in and day out, quite naturally.

Compensation should not be the purview of an appointed administrator serving at the pleasure of the executive branch of the U.S. Government."

But I say:

1) Self referential loops have proven a problem in logic. Should not they be a problem in the market, or is it that the market has nothing to do with logic?

The CEO class, in the USA, is self referential.

2) Europe has now more big companies than the USA. Still, big European executives are paid at least ten times less than their USA equivalents. How come the market is so different in Europe? Is the fact that more compensation in Europe goes to talent located on lower rungs of companies, related to the higher performance of European companies in the last decade? After all, the total compensation being finite, paying more for talent at the CEO level means paying less for talent just below.

An interesting aside is that CEO in the USA are much taller than average. Are size and compensation the only way they can dominate their subjects?

A few years ago, Renault was all set to buy General Motors. At the last minute, though, Renault executives learned that GM executives intended to pay themselves more than ten times what Renault-Nissan executives were paid. So Renault scuttled the deal. US taxpayers are left with the bill: more than 60 billion dollars, no? (And GM will fail within a year or two.)

It is true there are markets, and they can deal. But they are more or less free.

There are not just markets. There are also classes too, and they can dominate, with extra market mechanisms. The CEO class in the USA sits on each others’ boards, determining each others’ compensations. In some other countries, this sort of incest is more limited (in others, it’s worse: China). In Germany, union representatives sit on boards.

Generally those who really love their jobs will do them for free. Too much compensation is actually a distraction. And bad markets, thus exists. They are not just bear markets, they can lead to captive markets, and oligarchies…


Annex 2: In crocs we trust:


Why He Falters

A plutocratic genius, Summers has long been considered by the reigning oligarchy a top U.S. economic brain. As head of the National Economic Council (NEC), Summers exerts maximum sway over U.S. economic policy as the top White House economic adviser during the worst economic crisis since the Great Depression. That was a long time coming, since Summers and company worked hard dismantling the USA as Reagan economic advisers.

The former Clinton Treasury secretary’s name topped the list for a return trip to head the Treasury department in 2009. Instead, that slot went to a Summers’ protégé: New York Fed Chairman Geithner.


September 27, 2008


There is a huge financial crisis developing and something huge needs to be done, that is correct (see P/S 4 for a hint of the extend).  

But why was the incredible 700 billion dollars gift to Wall Street (more than 6% of GDP) ever proposed? In its initial form, it was like offering a truck full of gasoline to an arsonist, so he could replenish himself.

But let’s hear it from one of the pillars of the democratic establishment. Paul Krugman writes the following in a New York Times editorial (September 26, 2008):

“Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option. Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression. It’s true that we don’t know for sure that the parallel is a fair one.

Maybe we can let Wall Street implode and Main Street would escape largely unscathed. But that’s not a chance we want to take.”

An amazing quote, word for word straight from the NYT editorial, denoting an astounding view of the world, a total incapability to think out of the Wall Street box. Paul Krugman himself, the self declared “Conscience of a Liberal”, famous economist at Princeton and anti Bush New York Times editorialist of long standing, believes we cannot let “Wall Street implode”.

Really? Why not? Professor Krugman does not explain. He seems at a loss for concepts. No wonder: everything indicates that it’s the other way around. Wall Street is the problem. Why should imploding a big problem be a bigger problem? Keeping on sending money to Wall Street may keep on depriving Main Street of money. Sending money to Wall Street instead of Main Street is exactly what has happened in the last few decades. Maybe it’s time to try something completely different.

At this point, though, the establishment has been working as one. What the establishment, and its associated plutocracy, wants is money from The People. This has long been true, but now that the plutocracy and its associated establishment are in serious financial trouble, the request has become urgent. The plutocracy (and, indirectly the establishment) has been dabbling in FUTURES AND DERIVATIVES. Unregulated all.

The total worth of the world is about 100 trillion dollars, and the total world GDP is not even half that. Nevertheless, the supposed “value” of all derivatives invented by “Wall Street” is in excess of 500 trillion dollars. Yes, you read this correctly: the total value of Wall Street, according to Wall Street, is at least five times the total value of the world. No wonder Wall Street needs help! It has gone completely nuts. But what it needs is not more money: according to itself, it’s worth already five times the planet. What it needs is cognitive therapy.

Many of these futures and derivatives are leveraged out of mortgage-based securities. Most of the money invested in these nonsensical instruments was borrowed by the plutocracy from the banks where The People puts its money. This is the connection, People, that they tried to hid from you! They already took your money where it cannot be seen, and now they want more.

In other words, “Main Street’s” money (that Wall Street found in banks) was lent to hedge funds owned by extremely rich individuals, so they could leverage themselves to make themselves even more fabulously rich. Now that this leverage is working the other way, two things are occurring: the banks can’t be reimbursed, and the hedge fund industry (worth two trillions dollars in the USA) is in danger of being wiped out (bringing many of the hyper rich to ruin). This is probably what is the real reason for the panic of the Bush administration.

The simple solution to all this, for the People at large, for “Main Street”, that is for the real economy, is to nationalize all failing institutions that are necessary for the ongoing functioning of the economy (in the Great Depression, the Fed let thousands of banks necessary to the functioning of the economy close, a horrible mistake). In other words, let the government provide necessary banks with all the capital needed for operations necessary for the ongoing functioning of the economy . Simple. And don’t send the money to the rich: that could cause a new Great Depression.

Why? As we said, and what Professor Krugman does not seem to understand, is that too much money to the extremely rich caused the crisis to start with.

Now we are taking the patient, Main Street, who suffers from dangerous anemia, and draining it of blood some more, to feed the vampire, Wall Street, some more, lest it becomes anemic too.

More seriously, there is only that much money that the economy can create. Too much money sent to Wall Street meant not enough money for Main Street. Otherwise said, people can work only so many hours; if they spend too much time working for Wall Street, they spend not enough time working for main Street. In the end, they literally get depressed. This is no joke: an important factor in the Great Depression was the unwillingness to lend, from sheer depressed spirits, something that has shown up recently, and has an important psychological component. 

Hedge Funds and obscure, unregulated derivatives are unnecessary to “Main Street”. They have actually hindered “Main Street”, by siphoning money away from it, and by building inequalities sky high, to the point where they are damaging the world economy. Let most of the derivatives die. It’s time to do triage.

Nationalizing (hence saving) only functions and/or institutions useful to “Main Street” will save the economy. All “Wall Street” has been doing is destroying the real economy. Time for a change.

But that change will not be easy. Politicians and university professors (the decision makers) are paid very little (say a maximum of 175 K in a country where CEOs can make billions). Their only hope to make it big financially is by pleasing the plutocracy. And if one does not make it big in a plutocracy, one is nothing. That’s one of the main self-reinforcing mechanism of the plutocracy.

Patrice Ayme.

P/S 1: This is a small appetizer of a much longer work that analyzes and compares the present situation with the Great Depression. All this work confirms that there is only one way out, and that making more gifts to Wall Street will only make the situation worse. Coming soon.

P/S 2: Similar crises in Europe were well resolved by nationalizing. That makes sense both in the capitalistic and the socialistic models. Last time this happened on a large scale (5% GDP) was during the Norway-Sweden banking crisis (1992). Resolution by nationalization was highly successful. But Europe does not have the tradition of giving ever more riches to the rich. It is understood in Europe that, when the socioeconomic inequalities become too great, catastrophic consequences are not far behind: mass poverty, strife and war.

P/S 3: The trading of derivatives will have to be severely limited, both in who can trade them (the “commercials”) and by how much (that’s pure mathematics: the greater the order of the derivative, the more it impacts its integrals; so, to prevent astronomical leverage, one has to restrict down to zero the derivatives’ variation as their order goes up; that this is not the law yet was made possible by the lack of intuitive knowledge of infinitesimal calculus by lawmakers).

P/S 4: How big is the lending crisis? It is rumored that the losses to banks would be already around 130 billion dollars. Since banks are allowed by international law to lend a bit more than ten times their capital, this is a loss of 1.5 trillion dollars in lending capacity. Injecting directly 130 billions of dollars from the Treasury (i.e., The People) under the form of capital (hence equity) would recreate directly that capacity. The initial Bush crisis plan did not do that, though.