The Stimulus Evidence One Year On

I read this piece by Robert Barro in the WSJ shrugging my head in distrust over macro-economists and their analysis. To understand what I mean, contrast this piece with this one by Krugman written in January http://www.nytimes.com/2010/01/18/opinion/18krugman.html

The real moral of the story here is that there will always be a very reputable and leading economist to support whatever position one wants to take on a macro economic issue. Why is that? The answer lies in the number of assumptions one needs to make without much hedging backup to come to any prescription.

From the distance of BICs master obsessed with being able to hedge probabilistic assumptions, I was tinged by:
- the widespread assumption that multipliers used are fixed quantities,
- Wildly speculative sentences such as "...second, this multiplier provides a reasonable gauge (and likely an upper bound because of the strong wartime boost to labor supply due to patriotism) for the effects of nondefense government purchases.".
- I did not see any inflationary discount when adding up the numbers.

Citi Plans Crisis Derivatives

This CLX plan appears to be a pickup from my article in the investment professional where I lambasted Krugman's analysis of the Treasury's PPIP and the fallacy of expectations based risk management he perpetuated in his analysis. In particular I pointed out the rise in funding cost at times of crisis not priced into such analysis to show how the computation of the so-called free lunch to PPIP investors was misguided.
The prescription in the article was to find replication contracts such as BICs that replicate the risks taken on as early as possible and keep uncertainty to a minimum.

However this contract, interesting as it may be only marginally addresses the range of risks. Anyway was it not Citi who would have needed such a contract last time? How could it safely be the underwriter?

Power-Reverse Dual Currency (PRDC) business & BICs

On January, 28th, 2010, Risk.net reported that losses and increasing hedging costs have led many smaller firms to leave the Power-Reverse Dual Currency (PRDC) business, leaving a rump of major banks operating in the market. This represents yet another example where had a BICs market on the currencies and interest rates involved existed, there would have been no such issue. Not only hedging activity would have been contracted before hand, in addition the atomic structure of replicating BICs would have made nearly impossible for counterparties to identify what the contract held is in order to attempt a 'squeeze'; furthermore most of the individual BICs would be used for other hedging purposes unrelated to PRDCs, ensuring the liquidity of the market on those contracts.

Inroduction to BICs -Top Pick Knol Award ! Cheers!

My article Introduction to Basis Instruments Contracts (BICs) for Mathematics, Finance, and Economics has received a Google Knol "Top Pick Knol Award". Cheers!


Ah! Someone highjacked the review section of the article and messed it up, Ritu..? anyways..

BICs Vs. The Tobin Tax

I write this article as a commentary on Paul Krugman's support of a Tobin tax on all financial transactions.

It has gained steam lately after being picked up by British leaders including the top financial regulators and the prime minister as the Turner-Brown proposal. When French President Chirac would say this a few years ago, everybody laughed at him....

I think putting incentives that may or may not be short of a tax aimed at directing hedging and speculative activities on securitizing BICs that mirror the value of target underlyings without having an effect on them is the farsighted and most effective proposal that still stimulates rather than slow down economic activity.

in reference to:

"Turner-Brown"
- Op-Ed Columnist - Taxing the Speculators - NYTimes.com (view on Google Sidewiki)

Damned Yankees -Republican/Democrat President

This thought of Republican Vs. Democrats having an impact on NYY winning odds crossed my mind but I did not have the extensive background of Mr. Fleisher on the observation. It is easy to add such an insight in the pricing of NYY odds of winning the series as an additional factor in assessing odds of winning individual games using the BICs framework.

The interested reader is invited to look at the Wolfram demonstration (http://demonstrations.wolfram.com/BasisInstrumentsContractsBICsInBaseballWorldSeriesOdds/)and build their own demo incorporating that factor

in reference to:

"Damned Yankees"
- Op-Ed Contributor - Damned Yankees - NYTimes.com (view on Google Sidewiki)

New York Yankees World Series Triumph!

As a tribute to fellow New Yorkers, to Baseball and World Series fans the world over, I do dedicate my new Wolfram Demonstration on Baseball & BICs.


To the New York Yankees!



To a magnificent victory!

The Reach for a new paradigm: BICs

The new paradigm is to be found in a widening of the concept of probability to mind trading, hedging and risk management issues. The traditional probabilistic framework by failing to account for risk and uncertainty, perpetuates dangerous expectations based fallacies. BICs (http://tinyurl.com/cyxhpa) theory are already a comprehensive theory to help effectively navigate these issues. See:http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html

in reference to:

"Economist Profiles In the wake of the worst financial crisis since the Great Depression, economists are racing to provide policy makers with the tools they need to avert a repeat -- a process that some believe could require a revolution in economic thought. In doing so, they are building on the work of colleagues who saw early on the dangers presented by an unstable financial sector. Here are some of the people who did the early work, and who are now using it to build new models of the economy."
- Crisis Compels Economists To Reach for New Paradigm - WSJ.com (view on Google Sidewiki)

World Bank launches distressed assets programme - Risk.net

World Bank launches distressed assets programme - Risk.net: "World Bank launches distressed assets programme"

This program looks more like the Treasury PPIP/TARP and has copied the features of those, notably the "Public/Private" partnership dimension. Their is no discussion of the Equity/Debt distribution or source of the funds.

It is regrettable no one has thought about being a market maker on the distressed assets traded at refined levels of granularity as we proposed.

Public-Private Investment Program Almost Ready to Begin - NYTimes.com

Public-Private Investment Program Almost Ready to Begin - NYTimes.com
This article has some important numbers to bear in mind:
"The International Monetary Fund estimated last week that financial institutions worldwide still held about $2.8 trillion in troubled mortgages and securities, and that they had booked losses on less than half that amount so far. A big share of those assets is in American banks.

The Public-Private Investment Program would acquire only a tiny fraction of those assets, amounting to $12 billion. All told, the Treasury said, the five firms have thus far raised $3.07 billion in private equity. The Treasury will match that amount, dollar for dollar, with its own equity investment. It will also provide up to $6.13 billion in financing guaranteed by the government.

In effect, the money-management firms will be able to buy about $12 billion in troubled assets. The firms will split any profits evenly with the Treasury, but taxpayers would ultimately be on the hook if the investments lost money."

Finally it looks like it is going to start at long last along the lines that we outlined in The Investment Professional
http://www.theinvestmentprofessional.com/vol_2_no_3/abstract-bics.html


See also my knol articles:
1. Fair Value Pricing, Government Market Making and PPIP
2. Estimating Costs for PPIP Assets in a Market Making Framework & BICs