[p2p-research] [p2p energy economy] Re: How the Derivatives Market Jumped of a Cliff On Its Way to a Party

Sat Feb 28 21:10:06 CET 2009

<<
On Sat, Feb 28, 2009 at 5:41 AM, Dante-Gabryell Monson <
dante.monson at gmail.com> wrote:
As I currently understand it:
fiat currency created through fractional
reserve<http://en.wikipedia.org/wiki/Fractional-reserve_banking>banking
; debt with interest needing ever more economic growth ( and new
markets, including speculative markets ) to create more debt with interest
to cover the interest owed to the banks,
monopolized by a few currencies by a globalized banking system cartel;
This, from my current point of view, creating the foundations, and even the
need for such pyramidal gambling structure.
>>

This explanation makes complete sense to me.

But the question I asked is more of a political one than an analytical one.

It is possible to simplify the problem in order to gain traction. That's
what I was thinking. You can rally people against "gambling" (don't even
elevate it philosophically to "speculation") but you cannot rally people
against the fractional reserve system because it is an abstraction that
obstructs the archetypes (or basic patterns) people familiar with: slavery,
or owing to a master ( as in paying "interest") and carelessness born of
greed (as in gambling.)

I think there is a better chance of popular support for a movement that
simply calls for abolishing interest and gambling on moral basis than
analytical basis.

Marc

*" Why don't we see a grassroots movement to abolish financial gambling
> markets? "*
>
> to very much an extent, you will find such kind of alter-globalization<http://en.wikipedia.org/wiki/Alter-globalization>grassroot ( or
> netroots <http://en.wikipedia.org/wiki/Netroots> ? or rhizomatic ? )
> movements converging through ecologies/brands such as ATTAC
>
> http://en.wikipedia.org/wiki/ATTAC
>
> which initially was created to demand taxation of speculation on stock
> markets ( "tobin tax" ).
>
> But then, it may not simply be the stock market, but also the current
> mainstream monetary creation architecture - the way money is created.
>
> further notes :
>
> As I currently understand it:
> fiat currency created through fractional reserve<http://en.wikipedia.org/wiki/Fractional-reserve_banking>banking ; debt with interest needing ever more economic growth ( and new
> markets, including speculative markets ) to create more debt with interest
> to cover the interest owed to the banks,
> monopolized by a few currencies by a globalized banking system cartel;
> This, from my current point of view, creating the foundations, and even the
> need for such pyramidal gambling structure.
>
> It might also be interesting to understand what we would want to define as
> speculation <http://en.wikipedia.org/wiki/Speculation>.
> Simply by accepting fiat currency<http://en.wikipedia.org/wiki/Fiat_currency>for a service or a product I offer, I might, through trusting the potential
> guarantee on such units ( as for example the guarantee to pay taxes with it
> ? ) , be speculating that these units can be used for other exchange
> purposes in a near or distant future ?
>
> Hence it might be interesting to have monetary creation systems with full
> transparency to all as to what or who guarantees, and what we deem being of
> value for a guarantee.  It also opens up the question of property, and
> accumulation of property, hence also the question of the commons. For
> example, Can individuals or entities accumulating property beyond their own
> use value needs responsibly guarantee / speculate (?)  their property in the
> interest of social and ecological well being and sustainability for all ?
>
> I feel such questions lead us back to ecologies such as p2pfoundation or
> the transitioner , which serve as aggregators for individuals with questions
> and potential alternatives for ( holoptic? - as opposed to
> http://en.wikipedia.org/wiki/Panopticon ) distributed systems, towards
> increased ( emergent ? ) collective intelligence ?
>
> ps: I mentionned ATTAC, just to name one of the possibly current best known
> alter-globalization convergence "brands" focusing on questions of finance in
> western europe and beyond / apparently active in about 40 countries in the
> world.
>
> But there are others.
>
> Possibly one may also want to mention other thinkthanks / thinknets
>
> http://www.greeneconomics.org.uk/
>
> http://www.neweconomics.org/gen/
>
> Also ... some of us here connected through p2pf ecologies ? ( around
> http://p2pfoundation.net , http://blog.p2pfoundation.net ,
> http://p2pfoundation.ning.com/ )
>
> and ( perhaps ? ) one may also mention some of our friends working on
> complementary currencies / alternative monetary creation systems - might be
> worth double checking what kind of speculative aspects might be included in
> various financial architectures proposed by each - :
>
> http://wiki.thetransitioner.org/ , open coin, bit coin, lietaer with
> terra's <http://en.wikipedia.org/wiki/Terra_Currency> , ... you, me ? ...
> :-)
>
>
>
>
> On Sat, Feb 28, 2009 at 10:44 AM, marc fawzi <marc.fawzi at gmail.com> wrote:
>
>>
>> It turns out that people have been warning about this for a long while,
>> which is part of the reason the person responsible for the formula (and for
>> the trillions of dollars in derivatives market growth due to it) was passed
>> on by the Nobel prize committee.
>>
>> I located the article I had found earlier this week:
>>
>> http://www.wired.com/techbiz/it/magazine/17-03/wp_quant
>>
>> It was basically a gambling formula that worked exceedingly well when
>> certain "things" in the environment were in confluence and blew up the
>> minute those things got out of sync somehow.  It's the greatest lesson not
>> to treat circumstantially strong correlation between independent random
>> variables as being due to some hidden determinism. That's exactly what the
>> formula did by boiling down correlation between independent random variables
>> to a constant.  All such models work great when they do but then suddenly
>> stop working without warning, like finding a trick to win at a gambling
>> table over and over again and then suddenly losing all the gains and then
>> some because the trick stops working and you have no clue why. I've seen
>> that happen to day traders in the stock market. They develop these unique
>> theories and make a ton of money but then they start to believe that they've
>> discovered some kind of hidden determinism and forget that what is random is
>> random.
>>
>> So in summary, both great depressions (1929 and 2008)  were due to
>> GAMBLING.
>>
>> Can we please have an economy withOUT gambling!!!?
>>
>> Someone should start a movement to demand the closure of all stock markets
>> and all derivatives market in all global markets. NOW. Enough is enough. The
>> definition of insanity is doing the same thing twice and expecting different
>> results. So the world is truly insane, what's new?
>>
>> I am not sure what attachment the world has to gambling?
>>
>> What will the effect be of closing down stock markets and derivatives
>> markets?
>>
>> Why don't we see a grassroots movement to abolish financial gambling
>> markets?
>>
>> Is the cocaine culture of Wall Street what is making traders think they
>> can conquer randomness? I'm serious. Does cocaine play a key role in Wall
>> Street's addiction to gambling?
>>
>> Marc
>>
>>
>> On Fri, Feb 27, 2009 at 12:15 AM, marc fawzi <marc.fawzi at gmail.com>wrote:
>>
>>> How the Derivatives Market Jumped of a Cliff On Its Way to a Party
>>>
>>> This is based on something I read recently but cannot locate atm....
>>>
>>> Someone had come up with a probabilistic formula to estimate the
>>> probability of risk associated with a given random pool of derivative
>>> securities. It worked 99% of the time in predicting the probability of risk
>>> by making the flawed assumption that a high degree of correlation between
>>> independent random variables (across different types of derivatives) was
>>> actually expressing some hidden causality (some magic in the way nature
>>> worked that no one had yet understood) when in fact all it was expressing
>>> was a very high degree of correlation between completely independent random
>>> variables.
>>>
>>> When statisticians play physicist they use the term "copula" which is the
>>> bundling of independent random variables with high correlation into a
>>> constant. This "copula" method assumes that there is some hidden causality
>>> that no one really understands but that can be used to calculate with high
>>> certainty the probability of risk associated with a random pool of
>>> derivative securities each with it's own set of independent random
>>> variables, without analyzing each derivative security individually, and
>>> without having to put only derivatives of the same type in the same pool. As
>>> if statistics had found some hidden causality in nature, which happens all
>>> the time, e.g. Gaussian distribution is common in nature but not universal
>>> yet it is assumed to be universal by some statisticians as if it's a
>>> physical law. In other words, high degree of correlation is often confused
>>> with causation or is taken to be hidden causation in order to simplify some
>>> probabilistic calculation (at the expense of misleading the user.)
>>>
>>> So bankers were able to bundle all sorts of derivatives into the same
>>> pools and rate them together using the said magic formula, which allowed a
>>> massive increase in the volume of trading in securities (went from double
>>> digit billions to double digit trillions in just over 10 years.)
>>>
>>> When the market conditions changed this copula (or assumed hidden
>>> causality) went out of the window and the magic formula's ability to predict
>>> the probability of risk associated with pools of derivatives went out of the
>>> window with it. So what we ended up with were credit securities pools that
>>> were rated AAA but had dog shit in them.
>>>
>>> ~~
>>>
>>> That satisfies my personal curiosity as to what happened.
>>>
>>> It could have been avoided if the person responsible for the now-infamous
>>> derivatives valuation formula did not treat causality (or lack of) in such a
>>> shallow and stupid way.
>>>
>>> Some kids have an imaginary friend. Some statisticians have an imaginary
>>> universe.
>>>
>>> Marc
>>>
>>
>>
>>
>>
>
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