Derivatives Need a Priest

By Sell on News, a macro equities analyst. Cross posted from MacroBusiness

Imagine two ways of framing a financial trading choice. The first way is in the pseudo scientific language of finance. “An optimal trading strategy will be to go short on Greek and Spanish government bonds to exploit a high likelihood of sell off and debt restructuring which will keep portfolio returns well above inflation going forward.” Or consider the same thing expressed this way: “If we sell off Greek and Spanish government bonds it will push Greek pensioners into poverty, cause deep harm to the social fabric, lead to destabilising political unrest and threaten the stability of the world financial system.” The first way of framing the choice is treating the financial strategy as a way of dealing with a machine; the language has nothing to do with people. The second way of framing it is moral: starting with the effects on people.

Of course, the latter way of framing the choice is never used by traders, analysts or economists. The assumption is that the global financial markets are there to serve capital, not people (if it benefits people, fine, but that is after the fact). It is conceived as a giant piece of machinery whose behaviour can be successfully interpreted by those clever enough. Of course, it is an illusion. The machinery is impelled by people trying to interpret the machinery; that is why forecasts and predictions have such a poor track record. Because markets are full of people with minds, predicting what those minds will think and do requires much more than a mechanistic analysis. Nevertheless, the capital markets are seen as a piece of machinery. If one looks at the metaphors, capital “flows”, for instance, is a sort of liquid looking for equilibrium (another popular metaphor).

The appearance over the last decade and half of massive amounts of meta-money, the $700 trillion of derivatives that represent twice the capital stock of the world, has made this “scientisation” of capital extreme (as seen in the use of NASA scientists on Wall Street). At least when it is bankers lending to individuals or business it is clear to all that real people are involved. Sure, capital comes first, the sums have to add up, but people are important, too. The same with conventional equity investment; the people, investors, boards and staff in the company, all matter to some extent. But when it is derivatives traders playing the numbers, there is no sense that people are on the other end. The same with high frequency trading on the stock markets; the algorithms do not include any people dimension. If they did, they could not work.

Robert Shiller argues for a return to morality, as discussed last week. James Montier of GMO argues that there should be a Hippocratic Oath in finance, an ethical standard that would restore some standards. But he, too, goes for an explicit scientific metaphor, physics in this case. He is trying to find ethics in the wrong place:

Bad Models, or, Why We Need a Hippocratic Oath in Finance

The National Rifle Association is well-known for its slogan “Guns don’t kill people; people kill people.” This sentiment has a long history and echoes the words of Seneca the Younger that “A sword never kills anybody; it is a tool in the killer’s hand.” I have often heard fans of financial modelling use a similar line of defence.

However, one of my favourite comedians, Eddie Izzard, has a rebuttal that I find most compelling. He points out that “Guns don’t kill people; people kill people, but so do monkeys if you give them guns.” This is akin to my view of financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands.

The intelligent supporters of models are always quick to point out that financial models are, of course, an abstraction from reality. Just as physicists can study worlds without frictions, financial modelers should not be attacked for trying to reduce the complexity of the “real world” into tractable forms.

Finance is often said to suffer from Physics Envy. This is generally held to mean that we in finance would love to write out complex equations and models as do those working in the field of Physics. There are certainly a large number of market participants who would love this outcome.

I believe, though, that there is much we could learn from Physics. For instance, you don’t find physicists betting that a feather and a brick will hit the ground at the same time in the real world. In other words, they are acutelyaware of the limitations imposed by their assumptions. In contrast, all too often people seem ready to bet the ranch on the flimsiest of financial models.

Someone intelligent (if only I could remember who!) once opined that rather than breaking the sciences into the usual categories of “Hard” and “Soft,” they should be split into “Easy” and “Difficult.” The “Hard” sciences are generally “Easy” thanks to the ability to perform repeated controlled experiments. In contrast, the “Soft” sciences are “Difficult” because they involve trying to understand human behaviour.

Put another way, the atoms of the feather and brick don’t try to outsmart and exploit the laws of physics. Yet financial models often fail for exactly this reason. All financial model underpinnings and assumptions should be rigorously reviewed to find their weakest links or the elements they deliberately ignore, as these are the most likely source of a model’s failure.”

What happens in markets has little to do with the behaviour of feathers or bricks, because feathers and bricks have no self awareness. This is typical of the positivism (something is only real if it can be measured) and reification (making inanimate things seem like animate things) that is inevitable when a pseudo-scientific approach is adopted. What I think is needed instead is the posing of two questions:

1. What is needed to make the system behave more responsibly towards people?

2. What should be the purpose of the financial system?

Neither question will be answered by looking to scientific method. Science only answers “what” questions” not “why” questions. It is silent on questions about meaning or purpose, they are outside its range. Yet the above two questions are really the questions that should be posed to regulators and governments, who at this point are cowed, or bought off, by the bullies in the large financial institutions.

The sometimes insightful, if a little odd, Robert Gottliebsen argues that banks should return to the Glass-Steagall separation That would be a start. But he also reckons that Wall Street is too powerful, and that attempts to rein in derivatives are doomed because the politicians are outgunned: Obama after the GFC and probably Romney too, if he wins. That may be true, but the fight is worth it.

So here’s an idea. Maybe we can ask how it was that a system created for people ended being blind to people, especially weaker people in places like Greece? In this anthrosphere we have created, the one thing we seem most averse to is putting human beings at the centre. Much better to see it as a machine, and to spend our time poking it to see how it works.

GMO White Paper_The Flaws of Finance_James Montier_May 2012

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. jsmith

    The whole formulation of the neoliberal model falls into error from the beginning through its assumption that the aim of everyone’s life is to maximize their economic potential.

    This assumption is flatly contradicted in real-world instances which everyone is familiar with:

    Taking a lower paying job due to various personal interests.

    Retiring early to pursue a non-paying hobby.

    Choosing a career that doesn’t “maximize” one’s abilities – e.g., a teacher instead of a bond trader.

    From these everyday occurrences – and there are many, many other variations on this phenomemon which people witness/experience everyday – the entire model is thus found to be nothing more than the philosophy of the sociopath i.e., the religion of those who DO actually only look to maximize their economic potential.

    The fact that altruism and other non-competitive human elements can’t be satisfactorily jammed into this philosophy should be recognized by everyone as the hallmark of its unfitness as an economic model or political philosophy for humanity.

    Neoliberalism is the economic/political philosophy of robotic sociopaths and thus it is no wonder that the billions of people who aren’t robotic sociopaths – i.e., the ones who are being killed and stolen from – have difficulty comprehending how so short-sighted and anti-human a philosophy could ever have been so successfully propagated up to this point in time.

    That is why people still want to “debate” the system or attempt to modify it: it is hard to believe that such an anti-human regime has been so successfully installed in most of the political systems of the age.

    I mean, what kind of human being would ever advocate such an abomination?

    The first step is recognizing that the current system is inherently anti-human from the get-go.

    The next step is to realize that it must be entirely dismantled.

        1. backwardsevolution

          kris – nationalize the banks, ensure all deposits, and then let them twist in the wind. Then split the too-big-to-fail up, sell them off, and begin again with a clear separation between commercial and investment arms.

          1. kris

            Thx a lot. That’s what I actually meant.
            It’s being told around that if JPM “investment side” fails, hell will ensue. Rubbish and pure propaganda.
            If that is allowed the system will be cleaned up from cancer.

      1. Mole


        Note that alot of this “money” is debt and will never ever make into circulation. As a matter of fact 95% of our currency is debt.

        In terms of letting the big banks die, this is a good thing. Denninger has a real good post that explains GDP and the parameters that make it expand and contract. The equation can be summed up by simply stating that if GDP is contracting, creating more currency/debt will not result in an expansion of GDP, it will actually contract it even more. So removing the excess currency, which the free markets are attempting to do by bankrupting banks, is beneficial to the GDP.

        1. F. Beard

          Your comment is so full of errors I won’t bother refuting it but as for Karl Denninger he reverses cause and effect and advises what is essentially blood letting to cure the economy.

        2. Mansoor H. Khan


          The currency (the JPM created bank deposit) is in circulation the minute it is spent (either by a borrower or invested by JPM via their investment division).

          The debt (promissory) and currency (bank deposit) are two different objects (created at the same time) but still independent of each other once created and once the bank deposit starts circulating.


        3. Lidia

          A high GDP is most decidedly NOT BENEFICIAL, as most national “products” are destruction and waste.

    1. Doug Terpstra

      Amen, jsmith! How does one reason with the criminally insane without descending into madness? You easily expose their flimsy founding premise and the absurdity of a life devoted solely to pecuniary interests, the hideous Gekko notion that all blessings flow from the love of money.

      The logic of the sociopath disintegrates rather quickly in sunlight. I expect it will not be long before a decisive majority of people come to that realization, an awakening that human society must be founded on radically different values.

    2. backwardsevolution

      jsmith – well said! “…the neoliberal model falls into error from the beginning through its assumption that the aim of everyone’s life is to maximize their economic potential.”

      But they are trying to FORCE us to live this way. It’s no wonder there is so much unhappiness in this world – people are on a treadmill, an assembly line, and they have been turned into a commodity.

      I feel great things are not being accomplished/discovered because we are all too busy trying to keep our heads above water.

  2. F. Beard

    Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands. MacroBusiness

    Why the blindness toward money creation? The banks are a government enforced/backed private money monopoly that lends out counterfeit money (so-called “credit”) for usury. Isn’t this obviously the problem?

    For there is no good tree which produces bad fruit, nor, on the other hand, a bad tree which produces good fruit. Luke 6:43

    1. Carla

      “Why the blindness toward money creation? The banks are a government enforced/backed private money monopoly that lends out counterfeit money (so-called “credit”) for usury. Is’nt this obviously the problem?”

      YES! Some of us get it. How can we get more of us to get it?

      1. F. Beard

        How can we get more of us to get it? Carla

        The idea of TINA must be refuted and it is being refuted though it takes time.

      2. jonboinAR

        Carla, It would take a lot of people like me to NOT get distracted and drop the ball. :-(

  3. J. Sterling

    Derivatives already have priests. In medieval times, when powerful men wanted to do something they knew was bad, they went ahead and did it, then paid priests to justify them to God.

    In modern times, when powerful men want to do something profitable to them that hurts other people, they go ahead and do it, then pay economists to explain that because of the free market, what looks bad is actually good, and what looks good would actually be bad. It’s counterintuitive!

    Shiller writes:
    Someone intelligent (if only I could remember who!)

    I think that was Jared Diamond, in 1987

    1. LeonovaBalletRusse

      They pay economists, priests, rabbis, imams, and preachers in “mega-churches” who profit from “spreading the word” that “greed is God” by any name. “Fall down and worship Him.”

      1. Flying Kiw

        “They pay economists, priests, rabbis, imams, and preachers in “mega-churches” who profit from “spreading the word” that “greed is God” by any name. “Fall down and worship Him.””

        No, they only pay politicians to engineer society for them. Economists make their money trying to explain why we should try to be like them with similar psychobabble to the “unleash your potential” pseudotherapist crowd while priests, rabbis and the rest merely wrap their babble in the pseudoreligious and the MSM wraps its babble in sex.

  4. josep

    The difference between the explinations is dependent on who, or which class, is going to be hurt.

    The finacial sentance is just telling you the wealthy will be just fine, who cares about anyone else. The other asks the wealthy to consider the lower classes, which won’t happen.

  5. Hugh

    “when it is derivatives traders playing the numbers, there is no sense that people are on the other end”

    Is there any evidence that this is true? Isn’t it rather more like the fighter pilot that drops his/her bombs from 20,000 feet or the drone controller who fires missiles from 10,000 miles away. They are not unaware of the carnage they inflict, but they are remote from it. The body parts and fine red mist do not touch them or affect them. And it is not just the physical separation from their violence but the layers of intellectual justification that go with it, indeed that put the onus on their victims.

    Isn’t this what Wall Street and kleptocracy are all about?

    I would say that this post suffers from the reformist fallacy. You can reform a system that is basically sound. You can not reform and can only replace one which is fundamentally rotten. Personally, I think the system is rotten. The extreme wealth inequality we have and the loss of all our public institutions to the service of the wealthy clearly show this to be the case. What I would like to see is the counter-argument, if there is one. What evidence is there that our institutions and economy serve our interests anymore? Because I am not seeing it.

    1. Carla

      What evidence is there that our institutions and economy serve our interests anymore? Because I am not seeing it anymore”

      I am not, either. But I’m not sure the evidence was ever there.

    1. Up the Ante

      “The system isn’t broken; it was built that way. ”
      No. The system was never perfect, was always a balancing act of some sort.

      “So here’s an idea. Maybe we can ask how it was that a system created for people ended being blind to people, especially weaker people in places like Greece? ” Lambert

      The advent of the Manhattan Project secrecy cult in World War II is arguably the beginning of the industrial scale subversion of the American govt.

      Events like the allowing of IBM to enable the Nazi holocaust speak of a disillusionment with humanity that metastized. A better question would be why so disillusioned as to allow such monstrous undertakings ? Balance lost the message for future generations.

  6. Enraged

    “Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands.” Not so sure…

    “Can New Index Beat a Chimp’s Stock Picks?
    By Daniel Solin
    Posted 12:30PM 01/18/10

    I was inspired to create the SRSI by Lusha, a chimpanzee in Russia. According to an article in the U.K. Daily Mail, Lusha’s stock picks outperformed 94% of the country’s investment funds. Her portfolio increased in value by 300%, leading to this insightful observation by the head of monetary policy at the Institute for the Economy in Transition in Moscow: “It shows that financial knowledge does not play a great role in giving forecasts to how the market will change (Hear that, Jamie? A chimp is more intelligent than you. Obama is such a poor judge of character!!!”

    So, there is our answer: we grab all those “experts” and throw them in the brand new FEMA camps. We give their jobs to chimps who’ll be more than happy to do it just for… bananas!

  7. sunny129

    JPM is facing two problems

    1. If the Economy deteriorates, their loss from ins against IG index9 will increase. If they wind it now, big losses!

    2. If they don’t want to unwind it, insurance premium for protection of that index is incrasing ny the day. They will BLEED SLOWLY. They have sold ins (IG index9)against 2017 but bought for Dec 2012 which may partially off set the loss but the end result results on the Economy!? This is no different than selling PUTS against S&P thinking Economy improves and the market goes up when put becomes cheaper to buy back. You also buy put as a hedge. But ‘timing-exp date’ of those puts is crucial. One has to be sure(?lucky) in both direction, timing and the speed of ascent or descent!

    Us Banks(JPM largest of them!) have written billions/trillions CDS against soverign debts of Europe. Once the Greece when exits (?) those derivatives will active. Claims and counter claims against the third parties proceed in the shadow banking.They all claim that they protective CDS- how much, against to whom, who is the insuring party and the exp date-no one knows b/c they didn’t WANT any body to know to begin with!

    This is 2008 all over again just x 10 times!

    1. Mark P.

      The estimates I’ve seen rate the TBTFs as being 85-92 percent of their own counterparties, risk-wise.

      Anyone here got any idea of what it might be?

  8. bluntobj

    There is a third way of framing the argument:

    “We will not create a market for the bonds of a second world nation that spends more than it produces; the resulting effects of too much debt are always suffering. We won’t enable short term thinking self serving governments and peoples in their debt addiction”

    Lending the money in the first place is the immoral act.

    1. F. Beard

      Lending the money in the first place is the immoral act. bluntobj

      What is immoral is lending money into existence thereby driving up prices such that even more borrowing is needed.

      1. Mole

        Well well well.

        So money creation without backing, thereby devaluing currency and driving up prices is bad.

        Thought I would never hear this coming from you.

        There you have it. The Beard himself…

        1. F. Beard

          Yep, money should not be lent into existence; it should be SPENT into existence. With government money that is no problem since some government money is required back in taxes. But the problem is private money. Why should anyone accept your money if it can’t be used for taxes? Because it is shiny? I think not, at least not in the longer run. A private money will have to offer real value to compete with fiat for the payment of private debts such as – in the case of common stock – a “share” in the wealth and power of the issuing company.

          1. Mole

            Sure it is Beard….

            Sot it is good for one side of the isle, but bad for the other… Why???

            Is that what the bible next to you has taught you?

          2. Mole

            And “sharing the wealth” is all BS. It’s pure BS.

            – Who is responsible for deciding who is lacking and who has more than enough? How do you manage that?

            – How do you manage one person working harding than the other?

            – How do manage one person being a drug adict, a loser, and throwing his money away?

            If you store food for your family, while I throw away my money on drugs, why should I be entitled to your food?

            If you store money for your family, while I throw away money on gambling, why should I be entitled to your money?

            – I can come up with another 1000 Hows, but will stop there.

            Why not let the person decide what they want? Why do you think the government can do a better job than free markets, nature, the god you yourself profess on your posts?

            Don’t get me wrong, I am not anti-government. I believe the government is one of the major cornerstones of American society, specially when it comes to social stability and order.

          3. F. Beard

            You don’t get it. The current gross wealth inequality occurred because of THEFT via counterfeiting – so-called “credit creation”. The so-called “credit worthy” were allowed to steal the purchasing power of the workers to automate and outsource their jobs away. In addition, the banks used consumer loans to drive up prices (especially housing) so as to force the population into debt.

            The solution is to abolish the counterfeiting and bailout the entire population equally till all credit debt is paid off.

            The “sharing” would occur afterwards as companies discovered honest interest rates were too high to remain competitive UNLESS they issued new stock.

          4. Mole

            I see. The middle class got shafted via counterfeiting and now they get shafted via “equality”.

            Do you suppose that the rich will stand still and stay in the country if this were to happen? Hint: Look at France, Italy, Spain for a sneak peak.

            But guess what Beard, the middle class cannot take a plane, they cannot transfer their wealth to another country. But the rich sure can do, easily. Not only that, the government will find “clauses” and “rules” to let them slide. Perhaps their holdings will be a “little” more than ours because of X blah (just make up an excuse).

            So this share the pain thing, it wont be against the rich you see. It will be against whatever remains of the middle class.

            I am amazed to hear you speak of Obama as the liar he is, yet you still put your faith in them.

          5. F. Beard

            I see. mole

            No you don’t. You just say you do and then throw some other old cliché (capital flight in this case) at the wall and hope it sticks.

            The universal bailout could be done without diluting the dollar if it was combined with a ban on further credit creation and metered appropriately.

  9. Enraged

    There have been many comments about American arrogance. During my travels to 48 United States and over 50 countries — most of those states and countries multiple times — some themes have emerged.

    There is a pervasive sense in the United States that we are THE best. I’ve seen this in four other countries: Canada, France, India, and China. While many Americans think they/we are THE best in the world (whatever THE best might be to the thinkers of those thoughts), significant numbers of Canadians and French will inform you they are superior to Americans (and to Germans and Brits), while Indians and Chinese are superior to all of us. Oh, and don’t forget Israelis who have a tendency to burst out saying they have the “Most moral country in the world!” (They say that with exclamation mark.) Israelis also say, “We have the most moral Army in the world!” Wasn’t so long ago that the Germans were likewise self-convinced. Today the Germans are convinced they are superior to Austrians who are superior to Germans. Both are superior to Turks and Americans, while Polish are superior to Russians who are superior to all their neighbors and to Americans. Czechs are superior to Slovaks. Many people accuse Koreans of a superiority complex. Goes on—in fact, this thought could go on for hours. There are many Thais who feel superior to hill tribesmen, Cambodians, and plenty of others, and Chinese who are superior to Tibetans, (but that’s redundant because Chinese are superior to everyone). Except Egyptians and Saudis, who both are superior to Indians and Chinese. And let’s not get started on religion—because the Hindus are convinced they are superior to all, and of course Jews have their own thoughts, as do Yezidis, Christians, and let’s not forget Muslims, Mormons, and Rastafarians, all of whom are “the chosen people,” like those found in Saudi Arabia. The first religion, and therefore most superior, is Yezidism, Hinduism, and Zoroastrianism and only God knows what else. Muslims look down on Sikhs. The first people on Earth were Koreans, Africans, Yezidis, and Adam & Eve, though some scientists say we came from monkeys. Many scientists believe all true science is superior to religions, but apparently this leaves, ironically, anthropology out in the cold, because anthropologists (isn’t that what this is all about?) can’t even make up their minds if they are scientists or not. Arabs are superior to Persians. But what exactly is an Arab? Do you know? I don’t. I tried to figure out what an Arab is and got very confused. In any case, Persians are superior to Arabs, and to Kurds, while Kurds also are superior to Arabs, though Arabs look down on Kurds. Some Arabs are Sunni Muslims while others are Shia or something else. Sunni think Shia are dumb. All Arabs and Persians are superior to Afghans who are superior to Russians and to Pakistanis who in turn are superior to Indians (apparently not realizing that Indians are superior to everyone, except Egyptians, Saudis, and Chinese), while Nepalese are superior to Indians, but again, the Nepalese apparently don’t realize the Indians don’t care because they will soon surpass China in population! (Which Indians will also say with an exclamation mark.) Inside Nepal, Brahmans are superior to Sherpas, though pretty girls prefer Gurkhas. This generation is inferior to that, while writers look down upon photographers and staff are superior to freelance. Newspapers were superior to bloggers.

    Northern Europe is superior to the whole of Southern Europe. Marines are superior to Soldiers. Oh Lord, I travel too much. Could go on for hours about all the arrogance out there. Just a little more: Aussies are superior to Americans and to Kiwis, while Kiwis are upset when we don’t know where they are. Gators are superior to Seminoles, but there is actually truth to this because Seminoles actually are inferior to Gators. Mammals are superior to reptiles. And to birds. And to fish. Bacteria and viruses are superior to mammals but neither talks about it.

    So there. Top that!

    1. sunny129

      The difference between two human beings on this earth genetically, including the facial fearures and skin color is 0.012%!

      As for the Monkey, the difference between the Hemoglobin of the blood of chimpazi vs human is one amino acid in the link.

      A human has killed the other human in the name of —-(race, gender, sex,language,religion,regional,sect,caste,skin pigment,belief in hereafter vs here now and what not!)

    2. Alt Survivalism

      More non-whites are being birthed than whites in the USA. Perhaps this is a good sign. “Many of our early white American heroes were slaveholders and war mongers par excellence.” and banksters

  10. scraping_by

    Much of the absurdity of economic models is based on the absurdity of money for the sake of money. Making it abstract digits on a ledger unconnected to real economic activity of getting and spending, working and saving, building and using, may make for fun times at the white board, but gets ugly when real people have to get pulled in.

    It was a University of Chicago thing, the New World of Economics, where they pretended real life questions could be answered with things like ‘utility’ or ‘marginal value.’ By exchanging the vocabulary of real world for social science, it suddenly had no limits, no tethers to mere reality. Slapping on the abstract of higher math, itself a parlor game with play pretend limits on its utility, just sends it further from real things of real value.

    It would be no problem if it stayed a closed system, sealed off from the rest of us. However, that is not the case. The federal government ‘deficit’ is an obvious rejoinder. The farmers stolen from in the MFG case are another.

    If money for the sake of money were true, or made true, there’d be no problem. However, the rest of us are being pulled in to other people’s games. “All models are false, but some are useful.” To whom, I wonder.

  11. DImon's Greeks

    Kingpin Sheila Blair had a tongue in cheek column suggesting with no seriousness, that we give each ‘Murican 10 million to equal things up with casino management of the .01%. Unfortunately this would still be unfair. all the other scams, hedges, hustles and fraud wouldn’t be attainable unless we create millions of lil’Goldmans across the land. Too small to fraudclose!

  12. Conscience of a Conservative

    Credit Default swaps are akin to bucket shop trading banned after the crash of 1908. We keep hearing how systemically dangerous they are, keep experiencing the blow-ups an learn nothing from the experience. They on’t reduce risk ,they magnify it.

  13. Jay

    Trading for profit (rather than for things which can be used to make a profit) is a zero-sum game. Nobody can win without somebody losing, and overhead costs mean that losses must exceed winnings. There’s no victimless way to do it, and there’s nothing special about derivatives in this matter.

  14. RDE

    I have an article I would like to suggest for posting, but find no way to contact you through the links on this blog. Please send me a contact email and I’ll forward it for your consideration.

  15. duggie73

    1. What is needed to make the system behave more responsibly towards people?

    Only untradable shares bought for their dividends to be legal- so companies are run for the long-term and the manipulation of accounts and share prices is minimised.

    Parity of treatment amongst creditors- so temptation to defraud during insolvency is reduced to a minimum.

    A locally controlled and geographically limited alternative money supply to serve as an alternative means of facilitating trade- breaking the current world monopoly of tradeable currency which only the terminally insane would expect to be at all times available at an appropriate level to carry out economic activity among all regions, classes and genders.

    2. What should be the purpose of the financial system?

    As it stands, a reduction in the size of the financial sector to the barest of minimums would do as a goal- work sucks, leisure’s good- and financial and insurance services do not of themselves add anything socially useful…a vastly inflated sense of self-importance directly proportional to a trader’s bank balance does no-one any favours.

    The purpose is to provide safe savings and to make sound loans for socially productive investment- for this to happen sensible, ethical hands on human judgement is essential- algorithms don’t and can’t cut it.

    Glad you asked.


  16. Shutterbuggery

    Personally, I realized something had gone off the rails decades ago when in passing a newsstand I spotted a new magazine named “Money”. Maybe some of you aren’t old enough to realize it but it was startling to see a monthly publication devoted to hoarding cash. In a couple years the word “money” started sounding crass. The New Graspers began using “Wealth” in polite company to differentiate themselves from the simple hoarders.

    But I still remember thinking “who the hell is gonna read this rag”?

    Little did I know an entire generation would become money hoarders, schemers, manipulators and grifters at the cost of their own souls.

  17. Susan the other

    The Financial Profession should do no harm. They acknowledge this. But instead of just taming it, we should start now to use it to stabilize southern Europe and all the dispossessed here in the US. Let’s cure this plague.

    1. Flying Kiwi

      “For what is a man profited, if he shall gain the whole world, and lose his own soul?” Matthew 16:26. (Thought I’d beat Friend Beard to that.)

      While not religious now I experienced a ‘normal’ religious childhood and even attended a Church school. As a result I received a grounding in the ethics that is the fundamental teaching of all ‘religions’ – expressed in Christianity as “Do unto others…” etc.

      Like all good students I went on to be able to distill the message from the method of delivery and its packaging and have tried to live my life with due regard to my fellow travellers.

      When Lord Frankenstein – sorry, Lloyd Blankfein – can declare that High Finance, ethics free, is the new religion “Doing God’s Work” mankind has pitched overboard ten-thousand years and more of groping in the dark for its common humanity.

  18. indio007

    There is a very basic problem that is the root of all this. It is the fallacy that corporations exist solely make profit and that the enterprise is simply a means to that end.

    For all the things wrong with Marc Zuckerberg, him stating that his business is not to make money is exactly correct. What should be shocking is that the statement shocked people.

    The purpose of the corporation is to perform a function that an individual can not do on their own. The reason the STATE gives them a charter in the first place is so the corporation can fill a public good or need. The public even gives the employees limited liability.

    I’ve never seen any law book that says corporations exist solely to make profit.

    Corporations as they stand now are simply a vehicle for the extraction of capital by the individuals operating that corporation. Their personal greed is a conflict of interest of epic proportions.

    1. Aquifer

      Marc Zuckerberg’s business is not to make money – except for Marc Zuckerberg …. Why else an “IPO” on the market? Why not just make his business a “PO” to the masses?

      1. Mole

        Which masses?

        In the US, Europe, Latin America, Asia?

        We need a serious collapse to wake these zombies up, seriously…

        Do you suppose that Facebook came about from zero investment? Are we so naive??/

    2. Mole

      Ahhhh… How can we look at the bad in others, yet we fail to see the bad in ourselves….

      Why would you be able to do whatever you want to do, but a company cannot? As long as you do not break the law, or a company breaks the law, you should be able to do as you wish. And I totally see this as morally correct.

      It is non of your business what the little idiot, Zuckerburg, does. I can care less for him, but desinty has chosen to give him Facebook, not me not you.

      This mentality that a company should be doing X or Z is totally incorrect, inmoral, and unfair in every sense.

  19. Aquifer

    Whitehead’s Fallacy of Misplaced Concreteness as applied to the market model of life …

    But why can’t we just chuck all “isms”? Folks want to chuck this “system” and replace it with what, exactly? When i ask this question, almost invariably another “ism” raises its head or hindquarters.

    Both “capitalism” and “socialism” are versions of “scientific materialism”, opposing theories of how to divide up the pie, as if that was all there is to life.

    When anyone suggests there is a non material or, dare i say, “spiritual”, component that is equally, if not more important, the derision starts, especially from “real” lefties, yet, IMO, it is that non material aspect that is the mark of “evolution” to a “higher level” to the extent there is such a thing.

    I suggest we chuck all “isms”, even, or perhaps foremost, “specieism”, and get down to figuring out what we all need, not simply to survive, but to flourish – which means first meeting basic material needs, as we need healthy bodies to house our brains and “souls”, then figure out how to maximize those non material aspects that make living actually worth it …

    1. Aquifer

      “Neither question will be answered by looking to scientific method. Science only answers “what” questions” not “why” questions. It is silent on questions about meaning or purpose, they are outside its range.”

      Thank you!

    2. Joe Rebholz

      ” … and get down to figuring out what we all need, not simply to survive, but to flourish – which means first meeting basic material needs, as we need healthy bodies to house our brains and “souls”, then figure out how to maximize those non material aspects that make living actually worth it … ”

      What we all need : Food, water, clothes, shelter (houses, etc.), health care, education, opportunities to contribute (jobs, etc.), maximal freedom (within the constraints of not harming others), non-violence …

      You said it nicely. Thanks.

    3. Lidia

      Capitalism and communism/socialism are two sides of the same coin of Industrialism (Work! Produce! Grow! Expand!) A new political philosophy needs to evolve since we are at the end of the Industrial Era.

  20. Aquifer

    I got the distinct impression from the article that the function of the “priest” that was needed was that of an exorcist – to drive away the demons, and that doesn’t mean just certain folks …

  21. backwardsevolution

    I agree with Kris – this was one great article, full of good insights.

    Thanks for posting it. Good stuff.

  22. tiebie66

    Is the problem not the same as exists in jurisprudence? Although the dimension is along a just/unjust rather than good/bad axis, there too, humans are core entities and morality is a key issue. One way in which it is approached is with procedural justice. Procedural justice is concerned with making and implementing decisions according to fair processes (not morality) because fair processes are considered to be the best guarantee for fair outcomes. When agents in the system are corrupt, fair processes are adulterated and justice impaired.

    Seems to me a Hippocratic oath for economic agents will be fruitless. However well an economic system is constructed, it will fail if the gatekeepers fail. Ironically, a properly designed economic ‘machine’, not susceptible to human whims, may be the best bet for a fair system.

  23. Jackrabbit

    The fundamental problems that lead to “immoral” outcomes have been know for some time:

    a) information asymettry
    The market is fueled by information. “Premium fuel” costs more than the average person can pay (and the cost has been rising). Those that can pay for ‘premium’, as a group, react faster and extract a cost on everyone else. Those who are privileged to use ‘premium’ want to be sure that they will continue to have that advantage.

    b) the agency problem
    People are lazy. Very few ordinary people care to learn enough or take the time to understand what is really going on in politics and the economy. They are trusting when it seems things are going well, and concerned for themselves when things are going badly. In addition, TPTB have a vested interest in ensuring that agency problems are not addressed.


    What is needed is not a futile/corruptible quest for imposing morality but real solutions to the underlying problems. Ethics oaths and other half solutions just paper over the underlying problems.

    Unfortunately, any real solution does not look likely until there is sufficient pain to cause a groundswell for real answers to deep-seated structural/cultural problems.

    Both of your questions are “What” questions! :)

  24. jsn

    Jesus, Lambert, you’re going to throw the money changers into the temple? It’ll just inflate the price of indulgences!

    But I really like your point about humanist framing: money is our tool, not we its’!

  25. Nate

    Agitation and destabilizing forces cause the biology of nature to gravitate toward the re stabilisation which is the very force the market makers harness to profit from. Parasites eventually die with the host. Climate of weather has become more erratic for the past 3 years and will get worse as fake money promote destructive economic activities. Capitalism at the last dying moment and out of control.

  26. Cruelintentions.

    NATO NEWS…Iraqi war vets give their medals back to NATO. Cops in Riot gear kettle peaceful protestors. SEE WGN NEWS FOR LIVE COVERAGE.

  27. Cruelintentions.

    CNN not reporting the truth on Nato.Fox news vitually silent on Nato protests.

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