Soros' point of view

Recently, I got accross through a friend a very interesting article from George Soros' webpage. It deals with the causes of the financial crisis. Here I present some extracts from it together with some comments.

The article is very interesting and touches to start with with the reason for the crisis that we have all heard already:

"The misconception is derived from the prevailing theory of financial markets, which, as mentioned earlier, holds that financial markets tend toward equilibrium and that deviations are random and can be attributed to external causes. This theory has been used to justify the belief that the pursuit of self-interest should be given free rein and markets should be deregulated. I call that belief market fundamentalism and claim that it employs false logic. Just because regulations and all other forms of governmental interventions have proven to be faulty, it does not follow that markets are perfect."

We tend to believe that if regulators let the system be, it must be ok, but as Soros says,

"It is important to recognize that regulators base their decisions on a distorted view of reality just as much as market participants-perhaps even more so because regulators are not only human but also bureaucratic and subject to political influences"

The point I wanted to stress, though, is the effect that has had on the crisis the absolute ignorance of banks when it came to calculate the risks of some of the products they sell:

"Financial engineering involved the creation of increasingly sophisticated instruments, or derivatives, for leveraging credit and "managing" risk in order to increase potential profit. An alphabet soup of synthetic financial instruments was concocted: CDOs, CDO squareds, CDSs, ABXs, CMBXs, etc. This engineering reached such heights of complexity that the regulators could no longer calculate the risks and came to rely on the risk management models of the financial institutions themselves."

Anyone working in investment banks can tell you that the fact that regulators trusted the risk models from the banks is the real problem. Some of the risk models that banks had (have!) for credit products are a joke. You get 20-year-olds managing millions in risk they don't even understand. It all boils down, I must say, to very simplistic models in the first place (quants!). It is the need to produce new models as fast as you can that leads to innacuracies. Again, the hurry coming from the ever present greed.


About this problem of all-too-complex products, Soros says

"Sophisticated financial engineering of the kind I have mentioned can render the calculation of margin and capital requirements extremely difficult if not impossible. In order to activate such requirements, financial engineering must also be regulated and new products must be registered and approved by the appropriate authorities before they can be used."

But the problem is, in my opinion, that you can never be sure that the regulator knows what he is doing! How do we know that they understand the products. I believe there should be a limit in the leverage products can offer (leverage = potential gains vs initial investment), because the higher the leverage, the higher the inherent risk and potential damage. Actually, Soros points this out as well at the end:

"Since the risk management models used until now ignored the uncertainties inherent in reflexivity, limits on credit and leverage will have to be set substantially lower than those that were tolerated in the recent past."

Of course, that would make banks less profitable and, therefore, limit the speed to which management can get rich, which is a good thing. However, that's certainly not the panacea we are looking for, and one feels that something of a greater magnitude is necessary. A full change in the financial systems, which may be even too much to take for the leaders of our world, including Mr Obama.

The trader's point of view

Following on my last post on the G20 protests, I thought it would be fair enough to give a chance to a trader's opinion on the whole economic world crisis. I had at work a very interesting conversation with some of my trader colleagues. When I asked them if they still believed that a pure, crude, free non-intervention capitalist market is the way to go they did not hesitate for a moment: yes.

I raised my eyebrow. 'Really?', I asked. They were outraged by how the governments are not only not taking more responsibility for what has happened, but also actually blaming the greed of the bankers for it. As they put it, this is a very naive way of shifting the anger of the public toward them (us, should I say).

For them, the reasons for this crisis is clear: the non-inclusion of the house prices in the inflation index, the CPI (Consumer Price Index). Let me explain: the only tool for intervention that governments have to control the markets and the overall economy are the interest rates. The interest rates are the rates that banks need to pay to borrow money from the Bank of England overnight to cover their daily mismatches. Banks borrow money from each other as well, at a rate that is slightly higher than the interest rate set by the BoE (for the added risk that banks can potentially default). Ultimately, the interest rates will determine (in a normal market) the mortgage rates citizens pay to the banks when they buy a house.


The other thing to understand is which rules does the BoE follow to change the interest rates. The main aim of the BoE is to maintain inflation under control, so prices are stable. The inflation is measured with the CPI, which is a basket of prices of several products, such as food, transport, fuel... Indeed, in the BoE website, we can read the quote The Bank sets interest rates to keep inflation low, issues banknotes and works to maintain a stable financial system.

So, in a nutshell, the BoE looks at inflation and changes rates accordingly, determining how much do we pay for our mortgages and, therefore, controlling how much money we have at the end of the month to spend in other things (clothes, food, shoes, holidays...). The less money we have, the less we spend, stopping prices from increasing. And vice versa. So if inflation increases, the BoE increases rates, and vice versa.

Now, once we understand that, does it make sense to anyone that house prices are not included in the CPI? Think about it: for years, the CPI index was under perfect control, while house prices were increasing at alarming rates (15%-20% a year for the past 5 years or so). Narrowmindedly, the BoE found no reason to increase rates because the CPI was within target, while the housing bubble was growing. Even if rates were not quite low, people found it easy to get massive mortgages, without stopping to think that they were paying stupidly high prices for their houses. Banks were happy to give money away because as long as house prices were going up, they would make a profit from reposessions as well.

And we all know the rest of the story: when the bubble burst, everybody was caught in underpants, and now the BoE rushes to lower rates (we are at 0.5% now) to get us to spend again. The point of my colleagues was that had the house prices been in the CPI calculation, inflation would have raised above target as soon as house prices would have started to go up, triggering the BoE's reaction of increasing rates much earlier and potentially stopping the housing bubble that eventually started it all in the US.


This is not to say that free capitalism is still the way to go, certainly not in my opinion. I believe that in the same sense that we have laws to control other human impulses, we should try and do our best to control greed, because it damages society ultimately. But it does tells us that most of us don't know near as much as we should before drawing hasty conclusions condemning bankers as full responsible for this situation.

I believe it is positive and legitimate to go and protest against capitalism as we know it (indeed, other socioeconomical systems are possible), but it may not be a bad idea to get out there again asking for a fair inclusion of house prices into the CPI: it is simply reasonable.

G20: put people first!

Hi y'all, it's been a while.

Anyway, we were yesterday raising our voices to tell all sorts of things to the G20 heroes: climate change, financial crisis, job losses... the list was quite long actually. The point was to try to show the discontent over the whole world-wide situation. As for me, I finally found the banner that said exactly what I wanted to say:

Capitalism isn't working

If you still do not believe this, have another look. Resources are limited, put it in your head. Aiming at a 6% yearly growth is a death sentence for the planet and us eventually. Let's take it easy shall we? Start all over, and just LIVE. We are not saying that it is easy to find a better economic system, but at least there are some proposals out there already worth having a look. A good summary of the economic systems can be found here. The most innovative (and never tried!) systems include Participatory economics and or Economic democracy.


So much to say for a cloudy Saturday morning. But it's the echo that counts, let's make it resonate.

The LHC rap

Now this is cool:

Physics is cool ;)

I'm cool: no you're not.

What can I say, before we had hippies, punks, grunge, although it felt as if they had something else than the clothes... nowadays, everybody is full of s**t, if you pardon my French. Even when I was at uni we had a name for them, "pijipis". Fuck, I may have actually been one myself. As I see it, yougsters today are full of nothing but themselves.

The fucking truth

Might be because it's Sunday night. To those ofended, get on with it.

Quote: John Fante

Oh for a Mexican girl! I used to think of her all the time, my Mexican girl. I didn't have one, but the streets were full of them, the Plaza and Chinatown were afire with them, and in my fashion they were mine, this one and that one, and some day when another cheque came it would be a fact. Meanwhile it was free and they were Aztec princessesand Mayan princesses, the peon girls in the Grand Central Market, in the Church of Our Lady, and I even went to Mass to look at them. That was sacrilegious conduct but it was better than not going to Mass at all, so that when I wrote home to Colorado to my mother I could write with truth. Dear Mother: I went to Mass last Sunday.

...

'Arturo', she said. 'Why do we fight all the time?'
I didn't know. I said something about temperaments, but she shook her head and crossed her knees, and a sense of her fine thighs being lifted lay heavily in my mind, thick suffocating sensation, warm lush desire to take them in my hands. Every move she made, the soft turn of her neck, the large breasts swelling under the smock, her fine hands upon the bed, the fingers spread out, these things disturbed me, a sweet painful heaviness dragging me into stupor. Then the sound of her voice, restrained, hinting of mockery, a voice that talked to my blood and bones.

Ask the dust, 1939

Rastafaris

The Rastafari movement was born in Jamaica in 1930 when news of the crowning of Ras Tafari (Haile Selassie) as King of Ethiopia, attracted the attention of various Jamaicans who had been to some extent influenced by Marcus Garvey. Haile Selassie is known to be Jah because of his direct ascendancy to King Menelik, son of King Solomon and the Queen of Sheba and King David and because of his inherited title, King of Kings, Lord of Lord, Conquering Lion of the Tribe of Judah, which identifies him as the living Jah whose coming was foretold in the Bible, Psalm 68.4, Revelation 5:2-5, 19:16, 22:16.

Various persons connected Garvey's prophecies of the crowning of a black king who would deliver black people from their oppressors, with certain biblical passages that confirmed to them that Selassie was indeed the Messiah.

Rastafari is not dreadlocks and a joint. It is a way of life that is not dependent on feigned social freedoms. Rastafari prefers to opt instead for something less material and more meaningful-truths and rights. In other words... being in the world but not of it.

Herb, Marijuana, Collie or Ganja are considered a Sacrament to Rastafarians and is used to act as a channel to a calm and conscious temporal spirit much as Christians and Jews use red wine. Rastas believe that this use of Ganja was granted to them by the words of Jesus in the fields of Zion, "God gives man all green herbs, trees and plants bearing fruit with seeds". This he did while standing in a field of Cannabis. Genesis Book 1 verses 11,12,29. Rastas also believe that smoking Ganjas will allow them to use positive common consciousness.

The Rastafari wear dreadlocks as an expression of inner spirituality. For them, the term "dread" refers to a "fear of the Lord", expressed in part as alienation from the perceived decadence and other evils of contemporary society and a return to the Covenant with the Almighty, Jah Rastafari.

Quote: Fernando Pessoa

Habíamos acabado de cenar. A mi lado, mi amigo el banquero, gran comerciante y notable estraperlista, fumaba como quien no piensa. La conversación, que había ido languideciendo, yacía muerta ante nosotros. Intenté reanimarla al tuntún, con algo que recordé de pronto. Me volví hacia él, sonriendo.

- Por cierto: hace poco alguien me dijo que en tiempos usted fue anarquista...

- Lo fui y lo soy. A ese respecto no he cambiado. Soy anarquista.

...

Por anarquismo entiendo aquella doctrina social extrema que proclama que no ha de haber entre los hombres mas diferencias o desigualdades que las puramente naturales, y que no han de pesar sobre los hombres penas y males distintos a aquellos que Naturaleza reparte...

La abolición, pues, de todas las castas, de la aristocracia, del dinero, de todas las convenciones sociales que promueven la desigualdad. La abolición, también, de todas las desigualdades sociales que se oponen a la Naturaleza: las patrias, las religiones, el matrimonio...

...

- Intenté dilucidar cuál era la primera, la más importante de las ficciones sociales. Sería esa la que debería, antes que ninguna otra, intentar subyugar, intentar reducir a la inactividad. La más importante, al menos en nuestro tiempo, es el dinero. ¿Cómo subyugar al dinero, o más precisamente, a la fuerza, la tiranía del dinero?...

...Lo más simple era apartarme de la esfera de su influencia, es decir, de la civilización; irme al campo a comer raíces y beber agua de los manantiales, andar desnudo y vivir como un animal. Pero eso, aunque no entrañase la menor dificultad, no era combatir las ficciones sociales; ni siquiera era combatir: era huir... ¿Cómo subyugar al dinero combatiéndolo?... Sólo de un modo - adquiriéndolo, adquiriéndolo en cantidad suficiente como para no sufrir su influencia; y cuanto mayor fuera la cantidad en que lo adquiriese, más libre estaría de su influencia...

O banqueiro anarquista, 1922.
Merci Raul.

Esbjorn Svensson died this weekend

Yes, he died while diving, while enjoying himself... What a loss. As in many other corners of the Internet, I wanted to dedicate tonight my corner to this great man, this talented genius, that made so many lives sound much better.

We still have a gem to discover. The last work of E.S.T. will be released this year, Lencocyte. Such a shame no more will come.

To you, Esbjorn, rest in peace.

Radiohead in BCN

I went with my brother Joan to Barcelona to see Radiohead in concert at Fórum (12-6-08). The event was called the DayDream festival, but to be honest it was just a mascarade to have a massive Radiohead bash: all the bands performing were even friends of the band (Liars), admired by the band (Faust, Modeselektor) or playing covers of the band (Enemc).


It was my 4rth Radiohead concert, my second one in Spain and the third one I watched with my good friend Albert. The night was promising: the sea, the weather, the people and the expectations, which never quite high enough for a band of this caliber, of this god-like stature. I was in for a dream-like ride, and oh dear I had one.

There were many highlights during the concert: the opening 15 Step, Bodysnatchers (so powerful), Airbag of course, The National Anthem as usual... Faust Arp was beautiful, with only Thom and Johnny on stage, already a favourite. If I had to choose the top 3 moments of the concert, those would be Optimistic (since I had never seen it live and absolutely love it), Videotape (in an almost completely different version from the CD, with all the members of the band involved in it) and, on the top spot, the opening of the second encore, the beautifully weird You and Whose Army?, a favourite of mine, with Johnny and Thom appearing both on the backstage screen from a cam over the piano, with Thom giving us his craziest looks.


For many reasons, I believe this was the best Radiohead concert I've been to. Never heard Thom's voice so strong, so convincing, to fragile when intended, so beautifully diverse. Joan mentioned to me surprised how they sound 'as in the CD'. Nope. They sound better. Bad bands never sound quite as in the CD. Great bands improve their recordings. Each song had a new twist, a new arrangement. Johnny would try a new riff, Thom a new voice line, Phil some new rhythm. Altogether, they owned the night and I found myself in a musical orgy, surrounded my thousands but alone with my pleasure, probably helped by Moroccan wonders. No wonder they are the best band in the world. Nobody gets even close to this.

I recorded a couple of videos during the concert. I post here two of them, quite large fragments of Pyramid song and of Paranoid Android. The track list included most of the new songs from In Rainbows (how I like Arpeggi/weird fishes and Jigsaw!), and some b-sides. They were all great. I just can't quite resist the classics. Enjoy.