Yello Bostich, Remix contest at Beatport

What does a guy like me, with way too much time on his hands do for fun? Well those that follow the production on this blog know I have a passion for mixing electronic music. Getting familiar with the tool Live by Ableton, has been a ton of fun over the past 2 years.
Yello Bostich -- Strange Creatures Remix by marc fleury
Recently Beatport (one of the biggest DJ download sites) has been running an open Yello contest to remix Bostich and Oh Yeah! (Oh Yeah was their biggest cross-over hit in the 80's). I have picked up Bostich because it was typical Yello for me, crazy fast music with moments of lyrical/chorus genius. I try to key on those elements and stretch them out, replay them in a different order. Besides the drum beat, that I had to redo, everything else is from the original with just sound work. Interesting how the resulting sound is techno.

KNOWLEDGEABLE FEEDBACK APPRECIATED ON SOUNDCLOUD ENTRY.

Exponential Monetary Growth under Basel 2

I have been reading this working paper by Trond Andresen.

ABSTRACT: A Basel-type bank regulation regime has the side effect of endogenous money growth. The growth rate turns out to be inversely proportional to the required minimum capital/asset ratio. This money growth contributes to avoiding debt crises, as opposed to non-bank lending which increases debt but not money stock, and is therefore dangerous in the long run. Banks often prefer to sell loans onwards. It is shown that this doesn't only decrease the bank's risk, it may also imply faster asset growth for the selling bank by allowing an increase in the flow of new extended loans.

I will try and present the equations of the first part, offer a generalization of the framework, and briefly discuss the results.

The papers look at the balance sheet of an idealized bank, it has assets, and liabilities. Double entry accounting states:

Assets + Cash = Debt + Equity. (0)

Which can be read as all assets and cash need to be coming from debt or paid-in equity. This equations holds in time as the bank starts earning money. Equity is then defined as liquidation value, where you liquidate all assets, add cash, pay debt and what is left is distributed to equity.

The quantities studied are:

A, the amount of assets the bank holds. This is the amount of loans that are extended. A loan is something that pays ia*A to the banks (think of your mortgage, a 7%). It cost you ia*A ($/YR). This model captures bad debt in the form of lambda*A. Lambda is the rate of default on debt. Think about sub-prime, lambda was assumed to be 15%, it turned out to be 30%. It also models repayments as r*A, r being the portion of loans repaid per year. The assets also grow at the rate of new loans which we call l.

The equation of growth of A (noted A') is straightforward

A' = l - r*A -lamda*A (1)

And reads "The rate of growth of the assets is the amount of new loans minus the loans that are repaid minus the loans that default". If you can read the above equation as the sentence, nothing more complicated will be coming your way.

The equation for the growth (rate of change) of Liabilities is the following

L' = l -r*A - beta*(ia*A-il*L) - ec (2)

The first element is l is the same the new loans. The reason they show up here as well is that all cash that is lent by the banks is deposited back in the banks.

r*A is the amount of loans that are repaid. To repay a loan you pay with money from your deposit. So it is substracted here.

The bank makes money on the difference between the rates in and out. It gets paid a flow ia*A (think your mortgage at 7%). In turn, it pays, il*L to you on your deposits (think 3%). That is captured by the flow (ia*A-il*L). The flow from operation is the profit margin of this flow, which we call beta. Hence the beta*(ia*A-il*L).

Here, compared to the Andresen original, we have introduced a new variable ec as the amount of paid-in capital raised during the period. This is a flow of new equity issued.

We define C as the amount of cash the bank has on hand. Cash grows as the company makes it from operations per the rate above or it is raised on the markets. Cash in turn is drained as it is loaned out, we call this flow lc. This is captured by the following equation on the first derivative, or rate of growth of C which we note C':

C' = beta*(ia*A-il*L) + ec -lc (3)

new loans are created all the time, this is where debt money is lent into existence we call this flow ln. The total amount of loans at each period is:

l = lc+ln (4)

These five equations define a banking sector that emits debt money, raises capital, generates earnings.

As a further requirement we impose a Basel 2 constraint on the system. It is defined with the capital ratio, where capital/assets is not to go below a threshold we call k.
C/A = k (5)

Equations (1-4,5) define a simple model of a bank under Basel rules.

To study it, we can at this stage run computer simulations without loosing generality. However we can introduce further simplifications to find the Andresen equations.

Specifically if we impose C'= 0 and C=0

(5) <=> (A-L+C)/A = k <=> A(1-k)=L

Or a hard linear relation between assets and liabilities, expressed by k.

and

(3)<=> lc = beta*(ia*A-il*L) + ec

Which simply states that all cash-flow from profits and paid-in equity are recycled as loans in this assumption.

Then (1) resolves to

A' = (beta*i-lambda)/k*A + ec/k (6)

With i = beta*(ia-il*(1-k))

(6) is the slightly generalized form of the Andresen differential equation. ec is in practice a function of time, the amount of cash raised by the banks over a period of time but if we simplify by assuming ec=0 (no cash raised) then (6) resolves to the Andresen case which has the solution:

A = A0*exp(gt) (7)

defining

g = (beta*i-lambda)/k) (8)

Assuming all cash flow from operations is relent out, assets will grow exponentially with time under Basel 2. QED.

A comment on debt money growth rates

Look at equation (8)

If beta*i > lambda, then g > 0 and debt money grows exponentially.

If however bad debts spikes beyond the capacity of the business to generate free cash, then

lambda > beta*i <=> g<0

In this case, the debt-money supply needs to shrink exponentially to satisfy Basel. In other words, Basel compliance means a deflationary dynamic after a bad debt shock. A shrinking money supply can trigger a deflationary depression.

Equation (6) offers some relief but means new equity needs to be raised to satisfy A'>0.

Next we will look at central banks and how deficit spending can stabilize the money supply.

What is Thanksgiving?

An English woman asked me this simple enough question today. Thanksgiving is the biggest American family holiday. It takes place on the last Thursday of November and is also the biggest air travel date in the US. As a family holiday, it is associated with all the things people usually conjure up when they think of family obligations, and people they only see once a year, with whom they may or may not get on well. My favorite movie about Thanksgiving and the modern American family is Home for the Holidays starring Holly Hunter.

In grade school, American children dress up as Pilgrims and Indians and are taught how the Pilgrims escaped religious persecution in England and gave thanks for their very first successful harvest in the New World, with a celebratory feast to which they invited their new friends, the Indians. Of course some of these escapees of religious persecution didn’t turn out to be the most tolerant people themselves. Then perhaps the Indians weren’t thankful when we later killed them and took their land, but only kill-joys bring that stuff up.

Thanksgiving also comes with various required dishes that many Americans hate, but prepare anyway because otherwise it wouldn’t feel like Thanksgiving—the chief ones are turkey, sweet potatoes, wild rice, cranberries and pumpkin pie. Depending on your individual tastes, the recipes you select, and your cooking ability, these dishes can either be mouth-watering or stomach-churning. In my case, having a Mother Who Could Cook turned me into the worst of both worlds--a judgmental eater, who never bothered to learn any of the basic holiday dishes because there was always somebody there willing and happy to cook them for me and everybody else.

Since I will be away from home and want to cook my own Thanksgiving dinner, my good friend has suggested I go to the Butterball website, which even has a turkey hotline. Whenever, I despair of my country, I am comforted to see this return to our roots and thoughtful marketing, aimed at me, the consumer. The Butterball website dispenses useful information like how long to bake your turkey based on its weight, how big a turkey you should get based on the number of people you are inviting and a recipe selection that caters to the two Americas—those whose lofty and unachievable ideals that lead them to attempt a demi-glace once a year, and those who happily grab the bouillon cube and water; those make their own pie crusts and those who grab the ready-made variety off the freezer shelf at the grocery store. In the US, there’s even a new option for centrists—the roll-out circle of pie crust that you can feel good about pressing into your pan, sometimes it’s even made with real butter.

A family member who once worked in Unilever’s baby foods division described the middle-ground consumer as the Holy Grail of Marketing. I asked her what Unilever thought about women like me who breast-fed for a year and made their own baby food? She said: “We don’t even bother to try and market to people like you. Our ideal consumer is the guilt-ridden mother who is willing to pay more to give her baby healthier off-the-shelf options.” After four children, whom I duly breastfed and made healthy home-made purees for, that woman is me! I’m glad to learn that I matter, that someone cares. Thank you for giving me those choices Butterball!

By the way, it was once brought to my attention in blog comments, some of you are offended by the fact I and other citizens of the US call ourselves Americans. Yes, some of us are aware that we are only one country in the continent of North America. However, if you can’t find any grossly more offensive use of imperialist, Euro-centric, US-centric linguistic manipulation to focus on, shame on you. Please devote your energies to finding and marketing a better alternative, preferably identifying with the struggle of indigenous native peoples…and not a16th century Italian mapmaker.

Book Review: The Hemingses of Monticello

I picked this up as an impulse buy at the book store, and I'm glad I did. Like most Americans, I associated Monticello with Thomas Jefferson. Although I hadn’t read any Jefferson biographies, what I had read about him lead me to admire him as a Great Man of the Enlightenment—humanist, writer, builder of nations, universities, and of course, his own very lovely neoclassical house on a hill—Monticello—Italian for little mountain.

I wasn’t ignorant of the contradictions of the writer of “We hold these truths to be self-evident: that all men are created equal; that they are endowed by their Creator with certain unalienable rights; that among these are life, liberty, and the pursuit of happiness…” being a slave-owner, who had a long-term relationship and fathered multiple children with one of his slaves. I just didn’t see the interest of commenting on the obvious contradictions or indulging in historical “what if” fantasies. Thankfully, neither does Annette Gordon-Reed.

Her book is not about de-bunking Jefferson. She’s more interested in members of his family, about whom much less is known—the eponymous "Hemingses of Monticello". Gordon-Reed focuses on the Hemings for two convenient reasons: their connection to a well-known American historical figure, the fact that, due to this connection, there is somewhat more documentation about them than their peers in the plantation South.

What did this South look like? Gordon-Reed describes a pre-Revolutionary population of opportunistic frontier pioneers, living off tobacco as a cash crop. The English govt. gave the settlers land based on a head-count system—a certain number of acres for themselves and every other person whose passage they paid to the Colonies. Over time, the primary labor for the plantations evolved from English-born indentured servants to imported, enslaved Africans and their descendants. She explains that the typical Colonial plantation-owner was deeply indebted, usually to English trading firms and speculates that the self-interest in canceling that debt, as well as the Colonists’ desire to further encroach westward into the Indian lands (limited by Britain pre-Revolution) were less lofty ideals that may have accompanied “no taxation without representation.”

The story begins with Elizabeth Hemings, the daughter of an African-born woman and an English ship’s captain. There is some evidence to the effect that Hemings’ father recognized that he had a daughter and may have wanted to free her, but could not because her mother was the property of another man, who refused to sell her. She explains how, the word mulatto, for mixed-race people of African and European descent comes from the word mule, an animal that cannot reproduce itself—that the Colonies had laws against miscegenation but they were only applied to poor whites or situations where the mother was white and the father was black. When plantation-owners like Jefferson’s father-in-law, John Wayles, took slave mistresses, like Elizabeth Hemings, and fathered children with them, the law looked the other way.

The growing number of these mixed-race children and the constant fear of slave revolts, caused the colonists to significantly depart from English law. The English tradition would have granted the child the legal status of the father, which would have meant freedom. Instead the Colonies looked to Roman law as inspiration, basing a child’s legal status on that of its mother—thus the children of free fathers and enslaved mothers, would remain enslaved.

The Hemingses were Thomas Jefferson’s family in the literal sense, not just from a paternalistic plantation owner’s view. Many of Elizabeth Hemings’s children were his wife’s half-brothers and half-sisters. When he married Martha Wayles, Elizabeth and her children came with her to Monticello. One of these half-sisters was Sara (called Sally) Hemings, who became Jefferson’s mistress and the father of his children, after his wife’s death. Gordon-Reed explains how the Hemings family’s mixed-race status and blood connections to the Wayles/Jeffersons gave them a privileged status at Monticello—many of them were taught to read and write, they were given better clothes than their enslaved brethren, taught trades, exempted from field labor, given more freedom of movement. Some members of the Hemings family eventually received their freedom, something that would not be an option for the enslaved people of Monticello, outside that family. Gordon-Reed makes the point that house work, while physically less taxing than field labor, was certainly arduous enough and presented the stress of negotiating emotional and physical proximity to the plantation masters. It also cut them off from the more Afro-centric traditions/culture that the fieldworkers were able to maintain.

Gordon-Reed is careful about not generalizing or making assumptions where they cannot be made. She notes that an enslaved woman, like Elizabeth Hemings, could not refuse sex with a white man, whether the children that resulted from these relationships were the product of rape, or whether there existed some emotional attachment with the children’s father depended on individual circumstances, not documented for the historical researcher. She notes that the same was more or less true for white women and their husbands. While these women had a relationship that existed “in law,” they often did not necessarily choose or love these husbands.

One of the more striking facts that I learned about Jefferson is that his wife died from complications resulting from her frequent pregnancies and childbirth. Gordon-Reed points out that while he apparently loved his wife and was inconsolable at her death, he could not have been ignorant of his role in the circumstances causing her death. On her deathbed, Martha Jefferson made her husband promise never to take another wife, a promise Gordon-Reed speculates was likely motivated by her own experience with two stepmothers and the desire to protect her children. Jefferson kept his promise to his wife, and later when seeking another outlet for sexual companionship, looked no farther than with her enslaved half-sister, thus keeping it all in the family, with a woman who did not have a legal status and could never be a step-mother to his children in the eyes of the law.

I haven’t finished the book yet, but it does shine a not-very-comforting light on a not-so-distant era, a world where the children of the plantation owners would be given an enslaved child their own age to be a companion and later servant, a world where the house on the mountain is a symbol for the desire to aesthetically and morally distance oneself from the harsh realities of the plantation economy and the enslaved peoples that make it work; a house that was literally built and run by Jefferson’s own mixed-race family members; a reminder that the leisure to pursue the accomplishments achieved by Thomas Jefferson were underwritten by the enslaved labor of the people who tended to him, to his family, and his plantation. It also gives a face to those enslaved people, and looks at how they carved an identity for themselves, particularly, how a mixed-race family like Hemings both benefited from and paid a price for the different and ambiguous status they occupied within the Peculiar Institution.

The apology of Geithner: AIG

Geithner was pewned like a noob. Yves Smith of naked capitalism wants Geithner lynched for how he handled the AIG situation. This was covered in another entry called "don't send a boy to do a man's job" namely that Geithner, could have negotiated a better deal than paying PAR on CDS.

It gets a bit technical but bear with me.

One first important fact is that in the CDS bucket AIG was holding there was a 4:1 naked to covered ratio. Why is this important? SocGen and reportedly Calyon and DB all held the CDOs. So these guys were taking serious REAL losses on subprime. But for each one taking a loss, there were 4 just SPECULATING, mostly worldwide Hedge Funds through primary dealers IB.

A first real shame, imho, is that these speculating HF clients would have taken NO LOSS on a default of the payments but the premium they paid, the notional was never put in play by these guys. NAKED CDS IS THE FIRST SPECULATING ABSURDITY. G-boy could have in principle said "you and you were speculating, not taking real losses so screw you, we are not paying jack shit, go fuck yourselves". Of course in real-life this means a bunch of law suits and contract breaking and is plain impractical because see below.

But to put things in perspective, guys like Paulson (not Hank, the hedge fund guy) were deified as the “geniuses that saw it coming and pocketed $2B out of it”. Top dogs indeed! I squarely put the blame at the feet of the instruments of mass destruction they used, NAKED CDS on synthetic and straight subprime CDOs to speculate. Run some numbers: if Paulson personally made $2B and assuming he gets 50% of a 20% performance fee that means the fund brought in $20B (at least, if he gets 10% it was 100B the fund brought in), well RIGHT THERE is your CDS mess money. And how do we pay for it? with hunger in the US! I am not even joking or being facetious on this one. The direct result of the massive speculating was an amplification of damage.

Second, I am trying to replay the picture in my head, I am not sure G-boy had much room to maneuver. It is the “fait accompli” theory. He had his back against the wall. Let me try and explain how I see it.

GS and most Investment Banks (IB) were just holding back-to-back agreements.

Case A: One hedge fund was long, the other short. IB has no beef holding 2 canceling swaps, one short one long with 2 HF. I will call this HF-HF

Case B: One hedge fund was short, bought from IB, IB re-insures with AIG, the final trade has a structure that looks like AIG-HF, as opposed to HF-HF.

It is speculated that panic of AUG 07 was triggered by the unwind of a large portfolio of HF-HF. Remember that naked CDS just created 4 times the volume of liquidity that was put in the first place through CDOs on subprime. This to me is a mind-boggling mistake since it created a LIQUIDITY IMPLOSION. Quants started barfing. If the subprime debacle was $250B of real losses, a 4x multiplier meant: on top of $250 of vanishing assets, the HF+IB system had to come up with $1000 (yep, 1 TRILLION) in ACTUAL liquidity over a relatively short period of time. This is assuming 100% of CDOs were covered. Adjust the numbers for the proportion of CDO that were covered (?10%, i am making up) and you still arrive at the pretty scary numbers of $100B of liquidity. This in my mind, is the suspect #1 catalyst for the 07 quant panic. (A liquidity implosion triggered by CDO subprimes and fueled by naked and covered CDS) So a few HF went POOF! and took the market with them, in a generalized LTCM panic moment.

But more importantly, in the second scenario AIG-HF, you see where the system fell down. Here is how the run plays out imho (pure speculation :) . The CDS goes nuclear as the subprime virus spreads, it triggers liquidity needs at the HF level then the IB level. This is where things get complicated. At this point, the liquidity is GONE from the IB and the velocity of the money is nil as the recipients are not putting it back in game. We got a liquidity drain followed by a liquidity desert. So the liquidity stops at the recipients who go cash amid imploding Bear and markets. So first of all any haircut on naked OR on covered would have resulted in a real liquidity loss at the IB level as the CDS horse had left the barn. Anything less than par would have in fact left holes in place AT THE IB level. Of course the real shame to me is that the HF level (or proprietary IB desk) that was speculating all along (naked) got paid in the first place AND triggered the liquidity crunch. The crisis of insolvency was driven and realized by a crisis of liquidity. In retrospect the authorities were right to first treat liquidity problems even in the face of insolvency.

Then the dynamics laid out in the referenced blog take over, namely, AIG is nationalized anyway, so there is no threat of a legal bankruptcy possible anyway, the french and the german, not only are facing real losses but also understand that the FED will NOT hamper the US IBs and just hide behind their counterparts.

A tell tale sign is that 2% cut UBS offers. Think about it, the underlying CDOs where 70-90 down? That tells you UBS was acting as a IB broker and had ALREADY paid par on their contracts.

And why did they pay par in the first place? because unlike their US govt, they had 1/ contractual obligations (IB-HF) that would have resulted in lawsuits bar bankruptcy negociations 2/ They KNEW uncle sam would ultimately FOLD when confronted with the FAIT ACCOMPLI described above.

G-boy was a tool, a pawn, there was NOTHING he could do. The FED has been put in place to prevent runs on the IB system in 1907, that is its charter, what it does. That is what it did. A/ Audit the FED B/ Ban naked CDS. The AIG/CDS payment was a systemic disgrace where no one bears the blame.

The free market, if left to its own devices, creates monsters. It is high time the pendulum swing back from "laissez faire" with some skull cracking force.

Google Wave for Scientific research

As I dive into financial modeling and under the probing of a friend, I asked myself if google waves would lend themselves to scientific research and collaboration. After 30 minutes of late night browsing I must say I am blown away. Found a program called Latexy for Latex formulas, a program called igor for reference management, wolfram alpha has a robot, mathematica proper talks about doing one. Most important I think that the time feature will be killer to see how the research evolves and progresses... sort of a built in CVS.

But the thing that really blew me away was the mass of people. Within a couple of weeks (ok months if you were really early on the beta), some of the specialized discussions are really cool and it is the first time I really felt the "mass of people" right there in my face, 300 of them, discussing the topic I wanted to discuss (how to include LaTeX into waves).

I have started a wave on endogenous money growth in modern monetary system. I will share it as a public wave as soon as I have some meat in there :) I am excited, impressed and giggling like a little girl. New technology that I think I can use does that to me. Some aspects of it still puzzle me, when I first saw it as a forum replacement, i was not so excited, but for targeted applications like this, it could be killer. I want to believe. I want to believe it is not slideware and will be definitely giving it a serious ride.

State Capitalism

On the 20th anniversary of the fall of Berlin Wall, Martin Wolf has a thought provoking commentary in the FT:

Similarly, at a global level, radical reforms must be made in the financial and monetary systems. To put it bluntly, the banking system has been gaming the taxpayer on an intolerable scale. This must end, in one of two ways: the sector must be made subject to the market or become a heavily regulated ward of the state. Again, the curbing of huge credit bubbles must be an integral element in the formation of regulatory and monetary policies. Finally, the dependence of the global monetary system on the currency of an over-indebted superpower is neither desirable nor sustainable.

Powerful words, that barely need translation. The basis is
1- The banking system HAS BECOME PARASITIC
2- They must be nationalized or allowed to fail. "Free Market" is an illusion.
3- The world reserve currency cannot be only the dollar since the FED will print away its over indebtedness.

I would go one step further, the FED may have stabilized the current mess but truth be told, the more I learn about "money" the more disturbed I am by what the FED is. A cartel of private interest with unlimited access to the public purse by way of controlling the printing presses. It is an alien scenario.