Only in America ccould this Reuters article, “It’s a boson:” Higgs quest bears new particle, appear in a political blog.  Only in America would the following statement describing the standard model in physics be controversial:

It is the last undiscovered piece of the Standard Model that describes the fundamental make-up of the universe. The model is for physicists what the theory of evolution is for biologists.

I think I like the following description of the Higgs boson.

Scientists struggling to explain the theory have likened Higgs particles to a throng of paparazzi photographers; the greater the “celebrity” of a passing particle, the more the Higgs bosons get in its way and slow it down, imparting it mass; but a particle such as a photon of light is of no interest to the paparazzi and passes through easily – a photon has no mass.

A local newspaper has this column, A simple remedy for a Wall Street danger, behind a pay firewall. The article is by

James M. Stone, former chairman of the Commodity Futures Trading Commission and commissioner of insurance for Massachusetts, is CEO of the Plymouth Rock group of property and casualty insurance companies.

It should be safe to assume that James M. Stone knows what he is talking about, at least until proven otherwise.

A few quotes from the article ought to be enough to boggle your mind.

All three of the largest US banks have open derivatives positions in excess of 24,000 percent of their equity capital. Neither models nor markets can protect them from small percentage imbalances. In addition, bank trading relationships around the world are so interconnected that if one goes down all are threatened. No CEO or board of directors, however talented and honorable, can oversee trading at the multi-trillion dollar scale with perspective and precision enough to assure the avoidance of systemic impairment. Nor can any government oversight body.
.
.
.
Bank lobbyists insist that all this trading is needed to facilitate commercial transactions, but don’t be fooled. The open derivatives positions at the three largest US banks exceed twice the GNP of the world. Add in large European and Asian banks, and the commercial hedging argument becomes a parody.
.
.
.
Under present rules, banks are free to put us all at risk in derivatives trading without creating any offsetting cushion. Every derivatives transaction involves some basis risk (that two paired commodities will not continue to move in unison), some counterparty risk (that the trade will not honored by the other party), and some human error risk. Accountants and regulators know well that netting massive positions to zero cannot reflect true exposure.

Among other people who understand the problems of “netting massive positions to zero” are mathematicians, computer scientists, chemist, physicists, and engineers.  Let me see if I can present an example to people who might not get the implications of what Stone is saying.

Supposing that a bank’s $75 trillion in derivatives positions consist of $37,501,000,000,000 on one side of a transaction and $37,502,000,000,000 counterbalancing position.  The unbalance between these two positions is 0.003%.  That would be an amazing accuracy to achieve in any human endeavor.  The only issue is that the approximately 0.003% imbalance amounts to $1 billion dollars.

So you say, $1 billion is a lot of money, but it is small potatoes compare to $75 trillion.  Taking Stone’s figure of derivatives positions of over 24,000 percent of equity capital gives a figure of about $312 billion of equity capital.  That still seems pretty big compared to a $1 billion loss.  However, $312 billion equity capital is only 0.4% of the derivatives positions.  If there were a mistake of 0.4% in the balance of the positions that turns out to be a realized loss, then the bank’s equity capital is wiped out.

Leverage is a wonderful money making tool if it doesn’t turn against you.  Also compare the $75 trillion of private leverage to the $14 trillion in government debt that has the Republicans so concerned.

So let me cut to the chase and give you Stone’s proposed solution:

Whenever a new position is taken, there should be a mandatory accompanying reserve or capital charge. This would have a two-fold benefit. It would increase protection for both the public and the banks and it would dull the appeal of hazardously oversized trading accounts. Although regulators should set the actual amounts, imagine that the charge was uniformly 0.1 percent of the notional position value. Open positions of $75 trillion in derivatives would require $75 billion put aside, an amount large enough to make that trading scale unappealing. Charges to match the risk created would bring trading volumes back to sensible size with a minimum of new regulations and no need to outlaw useful commercial practices. They would simply acknowledge that all derivatives positions, however useful, impose some risk on the holders and the public. Current scale imposes an unmanageable risk.

It is a shame that this article is behind a pay firewall meaning that more people will not get to read the article.

July 5, 2012

RichardH has discovered that the article has emerged from behind the paywall. A simple remedy for a Wall Street danger appeared in The Boston Globe.

The UK Daily Mail has the story Presidential candidate Mitt Romney owns offshore company which means he could be even RICHER than the estimated $250million.

The use of offshore companies such as Sankaty is allowed under U.S. tax laws. They are typically set up as shell corporations by private equity and hedge funds to route investments from large foreign and institutional investors, such as large pension plans, into corporate takeovers.

The money is used to provide equity and buy up debt. In turn, the investors gain U.S. tax advantages by passing their funds through the offshore ‘blocker’ corporations, avoiding a high 35 per cent tax on earnings that the Internal Revenue Service describes as ‘unrelated business income.’

This story has details of tax dodges that most of us could never even imagine.  If Romney and his ilk were not so adept at using their financial clout in Congress to mold the tax laws to their liking, they would not be nearly as rich.  It is easy to win a game by following the rules scrupulously, when you, yourself, make up the rules to follow.

If members of Congress cannot be convicted of accepting bribes for enacting this tax treatment, then perhaps they could at least be convicted of conflict of interest.  Who do you suppose is going to bring these charges and prosecute the cases?

In the article America the greatest?, Leonard Pitts, Jr. sums it up perfectly:

True greatness, after all, is not declared. It is achieved.

This is part 1 of a three part series on The Real News – Ed Herman on Global Finance.

The three parts of the interview are titled:
Ed Herman, Co-Author of “Manufacturing Consent” Pt 1
Ed Herman on “Humanitarian Imperialism”
Ed Herman on Global Finance

I’ll include the first video below to whet your appetite, but it isn’t even the most controversial part of the series.

I don’t find it too hard to accept what Herman says in parts 1 and 3, but part 2 is the most challenging for me. My mind just does not want to believe that aggression in defense of humanitarian causes can never be justified. It is easy to accept the premise that aggression in defense of humanitarian causes is a concept that can and is abused. It is going to take me a while to digest part 2.

Anything that is that challenging is probably worth the time to consider. At least it is when presented by a person who attempts to discuss it rationally. I don’t think you will ever convince me that it isn’t a waste of time to listen to the likes of Rush Limbaugh, for instance.

I find the following ad to be more effective than the one in my previous post What a president believes matters. What do you think?

I found the current ad and some supporting data in the link,

Learn More: http://OFA.BO/Vu7cxb, that came from the previous post.

What do you think of this political ad from President Obama?

Learn More: http://OFA.BO/Vu7cxb

What a president believes matters.

Mitt Romney’s companies were pioneers in outsourcing US jobs to low-wage countries. He supports tax breaks for companies that ship jobs overseas.

President Obama believes in in-sourcing.

He fought to save the US auto industry, and favors tax cuts for companies that bring jobs home.

Outsourcing versus in-sourcing. It matters.

Truth Out is carrying Robert Reich’s piece Justice Roberts’ Switch. There may be some interesting points made in the article.  However, just because I like Robert Reich and agree with him on most points doesn’t mean I can’t recognize when he uses a silly argument.

Roberts nonetheless upheld the law because, he reasoned, the penalty to be collected by the government for non-compliance with the law is the equivalent of a tax – and the federal government has the power to tax. By this bizarre logic, the federal government can pass all sorts of unconstitutional laws – requiring people to sell themselves into slavery, for example – as long as the penalty for failing to do so is considered to be a tax.

Robert Reich is guilty of the same syllogistic logic the court usually uses. If a bill to sell yourself into slavery were enforced by a tax, it would be similar in this aspect to the current decision about the mandate which is enforced by a tax.  Just because it is similar in this one aspect of judging its constitutionality, logic doesn’t permit you to draw the conclusion that it must be similar in every other aspect of judging its constitutionality. So you couldn’t rule the slavery bill unconstitutional on the tax argument, but you could rule it was unconstitutional for many other reasons.

Just like you can find some aspects in which a corporation is like a person, that does not mean that you can conclude that a corporation is like a person in every other imaginable aspect. Each aspect has to be judged on its own as to whether or not a corporation is like a person. The path of logic is that you judge an aspect on its merits and then you put it into the like or the not like category. You don’t just start a like category, use logic to find something to put in that category, and then based on this one item automatically put everything you can imagine into the same category without examining each item on its own merits.

If someone told you that corporations were formed by the sexual mating of a male corporation and a female corporation, would you accept this despite your own reasoning just because you do believe that corporations are like people in some ways?

Maybe Plato was assuming that people would get his irony when he described the absurd results of applying Socrates’ syllogisms as described in The Republic. From my experience in college, even professors think that Plato was describing a good logical argument used by Socrates.

In fact “reductio ad absurdum” is a Latin term meaning to reduce a logical argument to an absurd result in order to prove the logic is faulty.  Which doesn’t mean that “reductio ad absurdum” proofs cannot be absurd themselves.

To be “fair”, I am including this weeks Republican address to the nation.

I only watched the first minute or two before I was overwhelmed by the duplicity of this address.

Nobody says that the Supreme Court decision is a seal of approval of Obamacare. The decision merely says that the law is constitutional. It passes no judgment on whether it is good or bad.

The tax that the Republicans are talking about only applies to people who could afford to have health insurance, but refuse to do so. Of the people making less than $250,000 a year to whom the President says this does not raise their taxes, how many fall into the above category? If there are any, we could just call this a stupidity tax. If you are making less than $250,000 a year and can afford to buy health insurance, you would be pretty stupid not to do so, unless you had liquid assets large enough to cover unexpected medical bills that could be in the millions of dollars.

Here is an unusual weekly address from President Obama. The usual ones are forma set-pieces from the White house.

Of course the press will always turn this into a contest as in the article Obama focuses on Colorado wildfires.

President Barack Obama won a major victory this week when the Supreme Court upheld his health care law, but it was Republicans – and Republicans alone — who were eager to discuss the decision during Saturday’s dueling radio addresses.

Yes, I do get the irony that I have done the same think by adding the link to and quote from the article. Actually, I suppose it is a good thing, for a change, that the article can merely point out the difference without trying to find that in some way the reaction of the two sides of the Supreme Court issue are morally equivalent.