042510 Swapping the Risk of Fault

Swapping the Risk of Fault

Today I researched derivatives to see if they could be done away with altogether. So far I’ve found that those who support the existence of derivatives do so for two reasons: first they claim that derivatives are useful in helping with “price discovery”. A futures contract with the nearest expiration date is taken to best determine the price of a commodity. Thus a derivatives contract on a commodity is a way of distilling all of the knowledge and “expert opinion” about a commodity into a price.

The second benefit of derivatives is said to be that they function to manage risk. To take a risk on a stock or a commodity an investor can simply buy the stock or buy a futures contract on the commodity. If he wants to avoid being fully exposed on the downside, he can buy a derivative to hedge the risk. Of course he could buy “puts” on stocks to accomplish the same thing. But if he wants to bet on a stock index like the Dow Jones Industrial Index it would be simpler and cheaper to buy a derivative rather than buy a variety of stocks. So a market in derivatives makes the market more efficient by allowing the investor to buy a single instrument which in effect bets on the direction of the market rather than having to buy a variety of stocks and pay the associated commissions. Incidentally it allows the investor to leverage his money because he is simply betting on the profit or loss in the market rather pay the full value of each stock. Thus the purchase of a derivative is a real convenience.

Because of the Great Recession some are looking for a way to curtail the excessive risk that many big banks took by creating and selling derivatives. One way would be to only allow a trader to buy derivatives to the extent that he (the individual or institution) owned the stock or commodity —or owned a futures contract to buy the commodity. This rule would not be intended to eliminate the convenience factor of derivatives mentioned above. Rather it is intended to reduce the total amount of risk that a trader could take. Speculation or betting on the market without actual ownership of a stock or commodity would be prohibited. Derivatives could only serve as insurance on a trader’s risk, i.e. as a hedge against devastating loss. Hedging against risk is a legitimate practice, just like taking out insurance on your spouse to protect against the financial consequences of your spouse’s untimely death. But it is not legitimate to take out life insurance on a stranger. I sure wouldn’t want some stranger to be in a position to make a lot of money if I were to suddenly die. I’m not a paranoid person but if a couple of neighbors took out big policies so they would profit handsomely from my untimely death, I could get paranoid pretty fast. Insurance laws have generally required that someone have an “insurable interest” in order to buy a life insurance policy.

Would such an arrangement, prohibiting betting on the market when you don’t own the stock or commodity involved, harm the market? Currently derivatives and similar instruments account for big profit centers within large investment firms. In the short run those firms would be harmed by losing those profit centers. But in the long run would the financial markets be any worse at serving their essential purpose? I doubt it.


The basic question I am left with is whether the market would be better off if we did not allow derivatives except to the extent that a trader owned the underlying asset. I believe that the markets would not be fundamentally damaged despite some short term ripples caused by the reduction or elimination of the profit center now provided by derivatives and similar financial instruments. Another side effect might be that the size of the financial sector could shrink. As the best and brightest brains have gone into banking and developed very tricky and complicated financial instruments, and made a lot of money, have those brains really been put to a good use for society at large? Economist Paul Krugman said that when financial experts are asked to name a financial instrument developed in the last 50 years that has clearly helped mankind, they are unable to name one. If those best and brightest brains in the future become scientists, doctors, physicists and engineers might not the future be a different story from the present?

So I am inclined to want to return to the days when banking was simple, narrowly focused and banks were not allowed to be involved in investment nor in the buying and selling of risk that essentially is gambling. My position on this subject is not rigid. I know that I am no financial expert and the world of finance is sophisticated. I could be convinced otherwise if information came my way indicating that derivatives are a good thing. But there has been a Great Recession and many knowledgeable people believe that the unregulated derivates market is partly responsible. Thus unless the derivatives market is changed it continues to pose a risk of the same thing happening again. So to convince me that derivatives are a good thing I would need to be convinced that their value balances the risk they pose to individual firms and to the global economy. At this point they must be considered on the defensive. It is incumbent on their supporters to prove their worth rather than on their critics to prove their lack of worth.

A Shrill Moral Pitch

The kids came over with their kids and Lizzy is just so cute it is amazing. Alex was in a sour mood because she visited her cousin today and he threw something—a potato I think— hitting her and leaving a bruise on her cheek. She was embarrassed. She was likely mad at him but that is hard for a child to grasp and know how to handle. I said little, but now I think I should have said something about how she felt. The hope is that would increase her insight, acceptance of her feelings and with that, acceptance of herself.

Mark talked a lot about politics. I did not disagree but sometimes political talk in a fervent one-sided style is not enjoyable to me. Earlier I listened to Rocky Anderson at church and he talked about Human Rights, the people that were killed en mass in WWII, Cambodia, Bosnia and Rwanda, and are now being killed in Darfur, enslaved or made to be sexual slaves. It is horrific stuff, and it is true that more should be done about it. But Rocky is an evangelical moralist that leaves one feeling one could never do enough to fight the evildoers. Somehow, even if it is all true (and I think it mostly is true), it does not captivate or motivate me. It is the absolute moralistic tone of it. I am left thinking: Who are the evil doers? What motivates them? Do they have a sense of the harm they do? Is it a part of the war experience, or do they simply take an opportunity at hand to act like animals? If so, why do they make that choice?

So I guess I’m not much of a crusader against evil, even when I think it is evil.

In the coming week I am hoping to finish the taxes, make a plan to finish the pledge drive and set some new directions. I’d like to start work on the presentation on ethics for the U of U. So far my idea is to pull out my old work and update it.

Another thing I could get involved in is an explication in these pages of some root beliefs about abortion—when life starts and why choice is better than no choice. I could even go into why I am a liberal rather than a conservative. These would not be diatribes, but, I hope, reasoned positions that lay out the beliefs and values involved, along with facts and personal preferences. The lead would be abortion as there are so many bogus notions about it and vague but strongly held beliefs. That would be my lead subject next time.

Thump in the Daytime to Music

Yesterday Lorri and I got ready to go to our first performance as organists.
Just as we were rushing to leave the phone rang. Lorri took the call while I finished dressing. Her expression was altogether changed as she hung up. “It’s Michelle,” she said. “She passed out at the doctor’s office and we have to go get her.” It sounded urgent and I was not dressed, so I told her to go ahead and I would be ready to go when she got back. “And leave her car and the clinic?” she asked. That at least made it seem that Michelle was probably OK and we would be going on to the recital. “Oh yes,” I said; “I’ll finish getting ready and meet you in the car.”

We rushed and were out of the house with all our accoutrements in 90 seconds. Lorri drove, which was good as she drove a lot faster than I would have. On the way I pried her for more details but very little was forthcoming.

At the clinic Michelle was in the waiting room and jumped up when she saw us. When she was cleared to go she gave me her keys and I got in her car and followed her and Lorri home. At home we made a quick turn-a-round and were off to the recital. Lorri explained to me on the way what had happened: dizzy after the procedure on her toenail they had her lie down for a while. When she seemed better they sent her to the waiting room. There she fainted and awoke with a bunch of people standing around her, including the doctor. They did not want her to drive home so she called us, her parents. The doctor told her to drink lots of fluids and if it happened again to come back for a full workup. Lorri had Michelle call the rheumatologist. She thinks it is one of her medications that has been associated with fainting before.

Be best part of the music experience for me was that I practiced and practiced so that I wouldn’t mess it up too bad. A couple of times I got all of the notes right and the beat right all of the way through. That produced a really good feeling. Maybe the feeling was mastery or accomplishment. But I think it was more than that. It was the feeling of being with the music and in tune with it – a feeling of being connected with the music. That is what I will be striving for as I practice future songs. The next step up after that will be to add flourishes to the music to go beyond the basic music and embellish it somewhat. I would guess after that the feeling will be that I “own” the music and am creating my own arrangement.

Today I got my exercycle—hand bicycle. Now I will be able to push myself more to exercise and get beyond the pain in the shoulder. It will be a great relief when I am able to do that.

Thump in the night 040710

Today went to the dentist for a broken tooth and I saw Dr. Eric. I had a root canal. No fun. It took up far too much of my day, and tomorrow there are two activities which will take up most of another day.

The other thing that took time was Facebook. I started off with just a couple of friends and most of the time I ignored it. But lately it has taken a bunch of time. For some unknown reason I’m getting lots of friend requests both at SVUUS and from old California high school friends—and from acquaintances. It is as though it just became a fad among both groups. One friend leads to another and if you respond to peoples’ messages or posts they respond to yours and time slips away. Now I am involved with a couple of conversations that I would just as soon drop, but when people reveal personal stuff it is hard to just abandon the conversation. I’m not sure what the etiquette is on Facebook about such things. One problem is that people soon find out I am a counselor and seem to feel free to reveal stuff.

I enjoy writing, working on the database and playing the organ. Enjoyment on the organ has slipped a little. I think that I need to spend more time playing. Also, if I can stop looking at the keys I’ll learn to locate them automatically, then I could focus on doing new things and enjoying the music.

I still have some days, though when I tell people that my brain is just not working. It is like the old notion of biorhythms—that when your biorhythms are down you just don’t function well, but when they are up you are golden. I hate the dysfunctional days when it seems that I live in a dystopia. The other thing, though, is that when I’m not sleeping or when there is stress, or there is a physical problem (today it was the dentist), then the gut does not work as well. Two days ago I was able to stop the shoulder from keeping me awake, and I stopped taking ibuprofen on an empty stomach, then the gut started feeling better. Improvement in the mental acuity was not so noticeable, but I think the biorhythms nudged up a little. I still occasionally do feel angry—I overreact, at least internally, with anger. I am not sure if that is a result of stress caused by the sore shoulder or by something else. I’ll have to pay attention and see if I can figure that out.

Michelle has been having bad days and good days. I like it when she feels better—and it is very noticeable. But I feel bad when she is having a bad day. It may be sympathy, or it may simply be that I feel unable to help her. I find myself doing things for her if I can think of things to do, like making and taking her some Gatorade so she will get more hydrated. A few nights ago, in the middle of the night there was a loud thump and Michelle yelled “No!”. At first I thought the dog jumped on her bed in the middle of the night. But when I went to investigate she was lying in her doorway very groggy. At the time it seemed that she had fallen, probably passed out, but not had a seizure. Of course we can’t be sure. The next day she was sore in a couple of places and did not remember calling out. I woke Lorri and we helped her to bed. But it didn’t seem that we did enough as her parents. I probably have some guilt about her lupus as well as helplessness. As I write this I feel angry at the disease and feel frustrated. So the biggest factors for me are anger and helplessness. She has gotten into Facebook as well. For her it is a good thing. She works at home and doesn’t go out enough, so the sociality is a good thing for her.

Today was another not-much day. Yesterday l got overworked at physical therapy and spent the day paying the price. It’s easing off a little as the evening stretches into night.

The grand kids visited this afternoon-evening. Both girls spent a lot of time with me and that’s fun, although it really eats up time I was spending on other things. But then, what is time for?

I looked at some of the blogs at Google, but haven’t found much so far that is useful to me. The ideal would be to find a couple of good (well written) blogs that careen back and forth from the personal to broader concerns. Another useful thing would be more about blogs—the types, the formatting, etc. But I would guess that the kind I am looking for would discuss specific events then flow to more general thoughts about the events that would lead to solutions or points that would be the real gems of the blog. They could be touching with emotional impact or poignant with more profound import in the conclusion or finish. The very best would not merely repeat themes of a philosophical nature nor repeat a world view, attitude or mood. Rather they would describe how life events—on the micro or macro level—would lead to observations that would go beyond the philosophical to describe a more personal analysis that captures what one person can be aware of and then give voice to. Some might even end with prepositions.

So far I’ve noticed that mine start with the events of the day described briefly and then jump to political observations. There is reluctance, I fear, to wax more personal because that truly would be more revealing than would be comfortable. Partly for me, but more, I think, for others with whom I lead my life. The concern is that others I love would read it and feel more exposed than they wanted to be. I am finding that I can be revealing of my thought processes to some extent especially when not talking about personal events. However it is precisely the lack of much personal which will limit the emotional impact or poignancy. So it will take more time and practice to be able to give better blog. It will take more work to find out more about the fears that make it hard.