HOW WOULD MARX EXPLAIN DERIVATIVES?

A student in my International Political Economy class wrote:

"However, I'd say that it's the reverse that's more true, that the Central Banks are slaves to the markets. The Central Banks can only do so much, and you can bet a million that the private banks will be there to make money when they've done all that they can..."

Which elements in the market are slave to whom, could be analyzed from a Marxist perspective. The capitalist system is the market. The market is motivated by the pursuit of capital above all, not the pursuit of survival. Physical assets and financial products are bought and sold on the market.


Since Marx' death, financial derivatives have arisen that are not based on industrial labor or surplus value derived from labor power. He predicted the rise of credit, but not derivatives, which are a form of gambling ...even on the weather (did you know there are weather derivatives?)

Marx'' analysis of money as a commodity, is useful here. A commodity has use value and exchange value. It's useful for its commensurability in the exchange of commodities, in this case, financial assets like derivatives.

Marx teaches us to relate assets, capital and money back to class interests. Derivatives are a form of competition among hoarders of money. In other words, derivatives hoard and withhold money from the production process (not to speak of the tax shelters that also hoard trillions of dollars). Derivatives prevent the freedom of money to circulate. But I don't think that just eliminating derivatives is going to 'solve' a capitalist crisis, which occur regularly with or without derivatives.

What do you think?

THE LIBOR RATE: SHOULD THE GLASS-STEAGL ACT BE REVIVED?

UPDATED April 28, 2015
UPDATED July 8, 2013
UPDATE: Timothy Geitner, US Treasury Secretary, knew of Libor corruption in 2008, but used the rigged Libor rate to back up bail out funds. See this:
http://www.huffingtonpost.com/2012/07/26/timothy-geithner-libor-in_n_1707012.html
I guess the fox is looking after the chicken coop.

For those of you that think corruption is the purview of low income countries, consider the Libor scandal of last year and ongoing. According to Bloomberg.co,  the survey system Libor was established 26 years ago to determine banks’ daily estimates of how much it would cost them to borrow from one another for different time frames and in different currencies. Banks self-reported  their interest rates. Libor was not regulated or monitored by an outside, independent agency.

Recall that the current Western-based business model allows the high-street bank to speculate using clients’ monies. 

The  US Banking (also known as Glass-Steagall) Act of 1933 made speculation and investment banking illegal and introduced government-backed insurance for bank deposits.   The Act is often referred to as part of the New Deal, to restore credibility and fairness in the banking industry.

It was repealed in 1999 under President Clinton, under the principle of free trade. In fact, the repeal led to an orgy of gambling with savings and checking accounts of ordinary people, which some analysts say is a cause of the 2008 economic crisis.

Investment banking led to interbank borrowing to maintain investments in money markets. 

The financial crisis of 2008 made inter bank borrowing more difficult. There was less liquid cash. This in turn led investment bankers to lie to each other through Libor, about their interest rates – fixing them at virtually identical lower rates.   

This gave the impression that more liquid cash was available  to banks in the short term,  and that interbank loans were secure even though actual borrowing costs were higher. Individual bankers themselves stood to gain personally from bonuses and their own investments.

On Sept. 13, 2006, a senior Barclays trader in New York e- mailed the person who submitted a falsely low rate, “Hi Guys, We got a big position in 3m libor for the next 3 days. Can we please keep the lib or fixing at 5.39 for the next few days. It would really help.”

At least a dozen firms are being probed by regulators worldwide for colluding to rig the Libor rate. Barclays bank in the UK is being investigated for this fraud, by the UK Parliament. Anyone who purchased derivatives based on an artificially lowered Libor rate, has lost money.  Barclay's president Bob Diamond has stepped down in disgrace.  Barclays was fined a record $451 million. A friend of mine's  Barclays “relationship manager” said he was under orders not to comment, and referred to an incomprehensible statement by Diamond.

Since 1997, Diamond had built up Barclays Capital - the banks' investment wing – producing $4.7bn profits in 2011. 

An editorial in the Financial Times stated: 'For all the diversification benefits, the cultural tensions between investment and retail banking can only be resolved by totally separating the two, of formal Glass-Steagall-style lines.'

LIBOR FIXING PROMPTED BY FEARS OF NATIONALIZED BANKING

The revival of the Glass-Steagl Act is not the only threat to ‘free market’ banking. The biggest fear, according to Diamond himself, is that the government might nationalize Barclays as a response to the global economic crisis.

"If Whitehall was told 'Barclays is at the highest of Libor', they might say to themselves, 'My goodness, they can't fund, we need to nationalize them,' as they had nationalized other British banks," said Mr. Diamond. "We were desperate. We had £6.7 billion of equity being raised. If rumors got on the market that we couldn't fund, then maybe we wouldn't have been able to complete the equity raising."

According to James Cox, an expert on securities law at Duke University Law School: "The other shoes have finally dropped in the LIBOR investigation. Seven other shoes, in fact. Attorneys general in New York and Connecticut have subpoenaed seven of the world's biggest banks, including Citigroup and JPMorgan Chase here in the U.S. In broad strokes, the allegations are similar to the ones Barclays settled last month: that the banks abused their power when self-reporting the LIBOR interest rate -- the rate banks use when lending to each other."

Bloomberg.com suggests that US banks will be let off the hook, see:

http://www.bloomberg.com/news/2013-06-27/where-are-the-libor-cases-against-u-s-banks-.html

The Volcker  Rule of 2013 attempts to restrict some kinds of speculative investment by US banks, i.e. curb big risky bets. 

Sources:

http://www.marketplace.org/topics/business/libor-scandal-reaches-major-us-banks

http://online.wsj.com/article/SB10001424052702304141204577506602345146644.html

Read more: http://www.dailymail.co.uk/news/article-2168716/Libor-scandal-live-Bob-Diamond-physically-sick-evidence-Barclays-staff-fixing-rates.html#ixzz1zfWg9PXD

ALTRUISM VS SELFISHNESS - WHAT STUDIES SHOW

Updated July 24, 2015

The human nature question is, I believe, absolutely pivotal to the study of politics and economics. Very often, I hear my students say that competitiveness and aggression combined with profit making, are driven by biological urges. But biological studies are positing another scenario.

There is an 'altruistic gene' according to biologists:

"...researchers discovered that people with either of two of the variations of the COMT gene (called the Val/Val and Val/Met variations) donated twice as much money to the charity as people with the other variation (called Met/Met), regardless of their gender. In fact, more than 20 percent of the people with the altruistic variations donated all of their money.

In the general population, the number of people with the altruistic variations of the COMT gene varies by ethnicity, says study author Christian Montag, a psychologist at the University of Bonn. Among Caucasians, the ethnicity of all the participants in this particular study, roughly 75 percent carry one of the two altruistic variations: 25 percent carry the val/val, 50 percent carry the val/met, and 25 percent carry the met/met variant.

While researchers have had evidence for years that altruistic behavior is at least partly influenced by genetics, that evidence has come mainly from studies of twins reporting how altruistic they are, which have found that people with identical genetic material show similar patterns of altruism. This is the first study to link altruism to a specific gene.

Psychologist Sebastian Markett, a study co-author also at the University of Bonn, says the results show how a single genetic mutation can have a large effect on our behavior. But he believes science still has much to learn about the genetics of altruism.

'There must be more genes which influence altruistic behavior whose association has not been discovered yet,” he says. “Our future objective will be to identify all of those genes and how they interact with each other to eventually put a pretty complicated puzzle together—with the goal to understand who we are and why we are how we are.'"

http://greatergood.berkeley.edu/article/item/is_there_an_altruism_gene

But...the richer you get, the more selfish you are! See this

"Lower-class” individuals—i.e., folks without much money or education—demonstrate more compassion and empathy than their wealthy counterparts, according to a series of psychological studies".

Read more: http://moneyland.time.com/2011/08/12/study-the-rich-really-are-more-selfish/#ixzz1yFoStV91

A new book, WEALTH SECRETS OF THE 1 % by economist Sam Wilkin, posits the very wealthy are more likely to skirt the law by using certain mechanisms that. "involve 'some sort of scheme for defeating the forces of market competition'. Many involve legal manoeuvrings or the exercising of political influence.I haven't read the book so I can't say what methodology Wilkin used to arrive at this conclusion.

INTL 5400 INTERNATIONAL POLITICAL ECONOMY WEEK 1

The prompt this week read: Which international relations theories are evident in the ideas expressed by Gertner, Laduke, Waring, Pinky, Marx (as explained by David Harvey and "Spark Notes"), and President Eisenhower?

The readings reflect different interpretations of political economy, which can be defined as “THE STUDY OF POLITICAL DISTRIBUTIONS OF POWER AS MANIFESTED BY ECONOMIC ACTIVITY.”

 

Up until the global economic crisis of 2007-8, the dominant theories of political economy were

 a) Realism/strategic hegemony. This focuses on the role of the state in the economy, as a matter of national security. Pinky and President Eisenhower address this theory, implicitly. Pinky is more critical of arms spending, from a normative point of view.

 b) Liberalism. This theory advocates a market free from government intervention. President Eisenhower advocates a strong defense of the nation, but  takes a more liberal perspective, in warning against centralization of elite power through arms spending (the military-industrial complex).

 But, advocates of both theories failed to predict coming events accurately. Famously, Queen Elisabeth, in the UK, asked an assembly of UK economists in 2009 why none of them had foreseen the looming economic crisis prior to 2008.

 Solutions to the crisis have been both realist and liberal in nature. The governments of the US and UK for example, have released more money into the economy, a form of government intervention, while encouraging fiscal austerity and supply side reform as advocated by liberalism or neoliberalism.

Fiscal austerity=budget cuts, especially of social services. No increase of taxes on the wealthy sector.

 Supply-side reform=De-regulation or liberalization means the opening up of markets to greater competition. It advocates the growth of financial products such as derivatives, the gambling on future prices.

 Critics say that these solutions are neither innovative or likely to succeed in the long term, because they replicate the same policies that have brought about the crisis in the first place.

One such critic is Adair Turner, a prominent UK economic policymaker. He says that the crises poses fundamental questions about our economic situation. Many of his ideas are reflected in the readings in Week 1, INTL 5400.

Some of his  principle questions are:

 1) Does the conventional emphasis on maximizing GDP make sense?

 2) Should we reconstruct the way in which economics is taught and practised?

 3) Should economics be a moral and not a natural science?

 Constructivism is the theory that allows for the introduction of moral and ethical norms into considerations of politics and economics.

 In Week 1, we are introduced to a number of norms in the context of political economy: Laduke from an indigenous Native American point of view, Waring from a feminist point of view, Marx from the point of view of labor power, without which, he argues, it would be impossible to create profit, or surplus value. Finally, Gertner critiques the Gross Domestic Product as negating moral concerns. He discusses  non-monetized standards, such as the Human Development Index (HDI) which introduce norms such as human good health and environmental sustainability, into the measurement of economic activity.

ANALYTICAL, EMPIRICAL AND NORMATIVE FEMINIST INTERNATIONAL RELATIONS ANALYSIS

Let’s review some examples of True’s empirical, analytical and normative categories of feminist IR theory, as applied to the readings this week. NORMATIVE CHANGE The women in DRIVE THE DEVIL BACK TO HELL highlight this idea of RADICALLY changing the norms and principles by which society lives. The UNSC resolution that incorporates women into peacekeeping, is another example of normative change. ANALYTICAL FEMINISM Analytical feminism brings previously ignored analytical categories to light. An example of this, would be the legal response to war rapes.As Parker points out, it is a norm that war rape is immoral, but no compensation have been given to victims, and the perpetrators have gone unpunished. Parker is ensuring that war rape is to be analyzed in the legal arena, with practical results to follow. EMPIRICAL FEMINISM This simply means that after one has identified ‘invisibilized’ analytical categories, you compile data about them. How is this done? Authors of “Half the Sky,” Nicholas Kristof and Sheryl WuDunn, believe that universities should require all graduates to spend some amount of time in the developing world. This type of education in the West could lead to a future more focused on different types of “power” and seeing INTERNATIONAL POLITICS INVOLVE INTIMATE RELATIONSHIPS, PRIVATE LIVES, AND PERSONAL IDENTITIES.” (True, 2005)

IS TURKEY IN THE MIDDLE EAST?

This is the Notes from this class, Week 1: HOW DID THE ‘MIDDLE EAST’ GET NAMED? It's a relatively modern term, popularized by Alfred Mahan in early 1900s, an American imperialist. It is a political term, and does not denote a geographical region. “Writing for London's National Review [in 1902], Mahan used the new term in calling for the British to strengthen their naval power in the Persian Gulf. 'As scholar Roderic Davison explains, Mahan’s Middle East "was an indeterminate area guarding a part of the sea route from Suez to Singapore.’ The new coinage played off the terms Near East and Far East,"already in use. “ Carolina Center for the Study of the Middle East and Muslim Civilizations, http://www.unc.edu/mideast/where/mahan-1902.shtml Additional thoughts: Today, the “Middle East” is still an indeterminate political region. There is no consensus internationally, as to what countries should be included. One could equally include Afghanistan, Armenia, Azerbaijan or Georgia. In the 19th Century, Turkey was the 'Near East,' and India, China, Central Asia, and Southeast Asia were the 'Far East.’ TURKEY It is believed that 40% of the Turkish population have European origins. Turkey joined the North Atlantic Treaty Organization (NATO) in 1952, considered itself a part of Greater Europe and joined various European institutions. The question becomes, does the government and state of Turkey, today consider itself to be part of the Middle East? This question has economic ramifications, and that is why it’s so sensitive. The Turkish state believes it has fulfilled the criteria to join the European Union. It is therefore not making official claims to be part of the Middle East. See this: http://www.guardian.co.uk/commentisfree/2009/aug/06/turkey-eu-membership The Turks themselves consider this question of whether Turkey is part of the Middle East, to be highly controversial. There are various thoughts. Some want Turkey to be seen as straddled between Europe and the Middle East, but not always facing the West or identified as a “Middle Eastern” country. Some want more of a cultural identification with the Middle East. The question also revolves around Turkish attitudes towards Israel. Recent events (the killing of a Turkish humanitarian activist by Israeli forces) have precipitated a shift against the UK/US/Israeli alliance, and towards Arab and Iranian anti-Zionist sentiments. What is clear is that Turkey is a pivotal 'swing vote' in the region. Given the controversy, I was faced with a hard choice, and decided to simply leave Turkey out of the list of assigned "Middle Eastern" countries in this class! However, it can be part of a topic for your final paper, for example, on Turkish-Syrian relations.

STUDENT INFOBYTES: WORLD BANK, IMF, MALAYSIA, US COTTON SUBSIDIES ETC

I continue to be amazed by students' final papers in my INTL 5400 International Political Economy class. Here are some recent extracts. Jose wrote in my INTL 5400 2010 class about corruption and the World Bank: Today, the World Bank has lost focus of its primary mission and has developed into an ineffective bureaucracy. Of the 66 less developed countries receiving money from the World Bank for more than 25 years, 37 are no better off today than they were when they received such loans. Of these 37 countries, most (20 in all) are poorer today than they were before receiving aid from the Bank...The underlying corruption of the World Bank is evident in its encouragement of the activities of corrupt government officials across the globe. Reference: Johnson, Bryan. The Heritage Foundation. 16 May 2006. Michael wrote in my 2011 Spring class about US subsidies: To shed light on a wider analytic frame concerning US cotton subsidies and protectionism, it is important to have a short look at the country’s history of agricultural subsidies as well agricultural facts: There are an estimated group of 400 crops, which are grown in the US for agricultural usage. While this represents a good biodiversity range, Kwan point outs that from these 400 food and cash crops grown in the US, the minority of five crops receives the vast majority of all US agricultural subsidies. These commodity crops are corn, cotton, rice, soybeans, and wheat. She notes that “ALTHOUGH THE UNITED STATES PAID $164.7 BILLION IN FARM SUBSIDIES FROM 1995 TO 2005, OVER SEVENTY PERCENT—APPROXIMATELY $115.5 BILLION—WAS SPENT ON JUST THOSE FIVE CROPS”(Kwan,575). From these five crops, cotton and cotton farmers receive the biggest share. Joseph Stiglitz, winner of the Nobel Prize in economics, calculates that “THE UNITED STATES SPENDS $34 BILLION A YEAR SUBSIDISING COTTON: MUCH OF THE COTTON IS GROWN IN AREAS WHERE THEY SHOULD NOT BE GROWING COTTON[…] SO IT IS NOT ONLY BAD FOR OUR ECONOMY, BUT IS ALSO ACTUALLY BAD FOR OUR ENVIRONMENT.” (Stiglitz,6). References: Kwan, Charlene C. "Fixing the Farm Bill: Using the "Permanent Provisions" in Agricultural Law to Achieve Wto Compliance." Boston College Environmental Affairs Law Review 36.2 (2009): 571-606. Stiglitz, Joseph E. Fair Trade for All. How Trade Can Promote Development. Brooks World Poverty Institute Inaugural Lecture., Manchester, UK. Clovis Ouangraoua, in the same class, wrote about Malaysia's bid for independence from World Bank: In fact, MALAYSIA IS THE ONLY EXCEPTION, WHERE EXTRAORDINARILY LARGE FDI INFLOWS (6.6 percent of GDP) WERE LARGER THAN BANK AND PRIVATE SECTOR BORROWING (3.6 percent of GDP). (Steven Radelet, Jeffrey D. Sachs “The Onset of the East Asian Financial Crisis” in Currency Crises, , University of Chicago Press, January 2000, P. 122, http://www.nber.org/chapters/c86 91, accessed 03/07/2012). This exceptional result, the country owes it to a competitive realism strategy that allowed it to shelter its financial markets against foreign markets’ intervention. By rejecting IMF’s policies, Malaysia stood out. The IMF would later be forced to admit that the strategy did pay off despite initial claims of the contrary.