Ross Levin, a NYC hedge fund analyst with Arbiter Partners, who calls himself a “passive speculator in securities” met Lionel Lepine, a member of the Athabaskan Chipewyan First Nation whose family and friends living on the contaminated watershed upriver from the oil sands’ effluence are suffering from unprecedented numbers of cancerous tumours.

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A number of recent stories intersect here: Harper’s apology for past treatment of Canada’s First Nations, the pollution of the Athabaskan River north of the oil sands, the impatient development of nonrenewable resources, the meteoric rise of oil commodities market directly caused by irresponsible speculators playing with volatile, unpredictable hedge funds that play havoc with the market making a fortune for some while destroying economic, social and ecological environments all around them.

In a rapid visit to the local library yesterday I grabbed Jake Bernstein’s How the Futures Markets Work. Although it is quite old for the fast-paced risk management industry, there are certain fundamentals that ring true. He briefly traced the history futures contracts leading to the volatile environment where agricultural futures were replaced by the less predictable currency markets. Of course, his book was written long before the meteoric rise of private equity funds.

My concern remains with the absent ethical component on trading floors. Ethical responsibilities are as elastic as the regulations that govern the centuries old practice of hedging. In the period of late capitalism and the emergence of risk society, the cost of destructive unintended byproducts have created havoc in ways that far exceed the commodities/service value. The road to profits and impatient money, is paved with casualties.

Berstein’s facts of market life are telling. He encourages simple methods and systems which require few decisions and little mental conflict. Too much thought is not conducive to successful trading. Too much analysis costs lost opportunities. Keep systems simple. Control your emotions. Practice caring less so that you remain more objective. Don’t ask why. Knowing why may hinder you more than it will help you. Patterns are the best indicators available (What feeds into a “pattern” however is not a science). Timing is what makes money in the futures market (Bernstein 2000:282-3).

In other words, futures’ gurus encourage young hedge fund analysts to not think too much about factors such as displacement of peoples, the degradation of living conditions and the way in which they unwittingly contribute to making vulnerable ecologies and peoples even more vulnerable. Their gurus tell them to not think about the impact of their actions. They are told to not ask why the prices of essential commodities like fuel and food that they are playing with, are pushing certain groups into unimaginable levels of social exclusion. In the end groups at-risk to health degradation are always those least able to protect themselves. How convenient that the gurus do not factor in these social issues. They are entirely absent from finance reports.

But then a lot of information is purposely not included in financial and business reports. Bernstein argues that the simpler systems that take fewer things into consideration will lead to more profits. Yet when he lists off all the potential factors in operation in even a simple fundamental analysis, it is not at all simple. It begins with the highly complex. The algorithms involved may appear to be simplified through the use of databases that seem to generate accurate, objective hard facts. In reality, the accuracy of any query depends on what was fed into it.

Futures trading, also known as commodities trading, the final frontier of capitalism, became a popular speculative and investment vehicle in the US in the 1960s (Bernstein 2000:1). These financial instruments offer unlimited profit potential with relatively little capital. Speculators are drawn to the possibility of quick money or what I like to call impatient money. The great wealth accumulated from speculative financial instruments has spawned careers in brokerage, market analysis, computerized trading, computer software and hardware, accounting, law, advertising which themselves subdivide into more recent opportunities such as those related to risk-management.

While gurus such as Bernstein argue that gambling is for anyone but speculation is for professionals, the chaos and unpredictability of the current global economy have been linked to a growing culture of gambling in futures trading rather than level-headed professionalism. Gamblers create risk simply by placing a bet; professional speculators “transfer risk from the hedgers to the speculators” and it therefore called risk management instead of gambling.

“It rained last night so the price of soy beans will be down today.” Although the basis of fundamental analysis in economics is supply and demand, the actual fundamental analysis of specific markets that might generate accurate price predictions are complicated as numbers of factors overlap and massive quantities of data need to be considered. The simple equation involves how much of a commodity or service are buyers willing to pay at a given time and place. There used to be a correlation between price and consumption. Factors that impact on price of commodities include the state of the economy (local, regional, national and international – inflationary, recessionary with rising or falling employment), availability of alternate products or services, storage possibilities, weather, seasonality, price cycles, price trends, government subsidies, political influences, protectionist attitudes, international tensions, fear of war, hoarding, stockpiling, demand for raw materials (sugar, petroleum, copper, platinum, coffee, cocoa), currency fluctuations, health of the economy, level of unemployment, housing starts. Most technical systems are not effective in making traders money.

In spite of this there is still a persistent belief that there is an invisible hand that guides market correcting imbalances like a living organism or finely-tuned machine.

“Markets work perfectly as they respond to the multiplicity of forces that act upon them. It is our inability to find, parse, and correctly weight the impact of these factors that limits our results and success of our fundamentally based forecasts (Bernstein 2000:162).”

The bottom line is that wealth disparities continue to intensify and that these inordinate extremes of wealth and poverty destabilizes society. These distorted economic relationships deprive us of any sense of control over economic forces that threaten to disrupt the foundations of our existence. National governments have been either unwilling or unable to deal effectively with this situation in which we live where the deplorable superfluity of great wealth exists alongside the acute suffering of those living in miserable, demoralizing and degrading abject poverty even in countries like Canada.

Social equality is an entirely impracticable chimera. Even if equality could be achieved it could not be sustained. Wages and income should be unequal and should correspond to different efforts, skills and capacities. However, equal justice for all is not only necessary but urgently needed.

As long as those involved in the financial and energy industries remain in denial of their role by hiding behind economic and ideological polemics and simply dismissing concerns from others there can be no productive change. A fresh look at the problem should involve people like Lionel Lepine who are directly involved with decisions, along with experts from a wide spectrum of disciplines. There will not be a voluntary ethical turn so for now we desperately need public policies that will regulate industries.

Selected Timeline of Critical Events

1710 The first modern organized futures exchange began with the Dojima Rice Exchange in Osaka, Japan. The Japanese feudal landowners began to use certificates of receipt against future rice crops. As these futures certificates became financial instruments in the general economy the value of the certificates would rise and fall as the price of rice fluctuated. The Dojima Rice Exchange emerged as the world’s first futures market where speculators traded contracts for the future delivery of rice or “certificates of receipt.” The Japanese government outlawed the practice when futures contracts (where delivery never took place) began to have no relationship to the underlying cash value of the commodity leading to wild and unpredictable fluctuations (Bernstein 2000:30).

1848 The Chicago Board of Trade (CBOT) was formed as a price risk occurred in the grain markets of Chicago.

1865 The Chicago Board of Trade (CBOT) organized trading of futures contracts.

1919 – 1945 The Chicago Mercantile Exchange (CME) traded futures in eggs, butter, apples, poultry and frozen eggs (Bernstein 2000:70).

1960s Futures trading, also known as commodities trading, the final frontier of capitalism, became a popular speculative and investment vehicle in the US in the 1960s (Bernstein 2000:1).

1970s There was increasing volatility in international currency exchange rates as the Bretton Woods agreement began to break down. Business people transferred risk of volatility in international markets by hedging with speculators willing to take the risk. Futures markets began to expand into foreign currencies as fluctuated wildly competing against each other and the US dollar.

1972 The total volume of futures contracts trading was 18 million and the top ten most actively traded future contracts were agricultural futures (Bernstein 2000:71).

1974 The US Congress passed the Commodity Futures Trading Commission Act and established Commodity Futures Trading Commission (CFTC) to protect participants in the futures market from fraud, deceit and abusive practices such as unfair trading practices (price manipulation, prearranged trading, trading ahead of a customer), credit and financial risks, and sales practice abuses (Bernstein 2000:32). Individual nation states have similar regulating bodies.

1982 Futures trading in the US was self-regulating and anyone in the business had to become a member of the National Futures Association (NFA).

1986 The total volume of futures contracts trading was 184 million and the T bonds were among the most actively traded future contracts (Bernstein 2000:71).

1990 The price of crude oil rose dramatically when Hussein invaded Kuwait.

1999 The most actively traded future contracts were interest rates, futures, stock index futures, energy futures, currency futures and agricultural futures (Bernstein 2000:72).

2000 The Chicago Mercantile Exchange (CME) trades futures in livestock futures, currency futures, interest rate futures, stock index futures (Bernstein 2000:70).

2000 More than 90 foreign futures exchanges emerged with the ever-increasing demand for new financial instruments “to hedge against fluctuating interest rates, changing foreign exchange rates and institutional securities portfolios (Bernstein 2000:46).

2008 Calgary has a high percentage of young millionaires with lots of disposable income. There are also c.4000 homeless people in Calgary, the oil capital of Canada. c. 40% of the homeless are working poor who are unable to afford housing.

Webliography and Bibliography

Bernstein, Jake. 2000. How the Futures Markets Work. New York Institute of Finance.

The article (2008-05-29) entitled “Is it “peak oil” or a speculative bubble? Neither, really” published in The Economist generated a robust on-line debate. It has been criticized for offering limited or overly simplistic scenarios: text book supply-demand [1] and its extreme variation peak oil and speculation. What about the weak US dollar some ask? See Lewis (2008-06-09) [4] What about the long list of factors listed in the most recent (2008-05-13) Oil Market Report of the International Energy Agency (IEA)? [2] And what about the role of the increasingly complex, volatile, unpredictable, interconnected and potentially destructive financial instruments that are now available to anyone with access to the Internet and capital? The bank of the world’s central banks is very concerned about public policy and their own role in managing (or not) these unmanageable instruments [3]. There was a time when economists could argue that the market would correct itself invisibly. Now all hands are wearing gloves, players are blindfolded and nothing is predictable and certainly not transparent.

The OMR claimed that the system is self-adjusting to bring the market into balance as the bull market driven by demand potential that has outstripped the slow supply growth – notably non-OPEC. Prices had to rise to choke off demand growth (IEA 2008-05-13:3). Events such as accidents, unplanned or unannounced maintenance and technical problems (Canada and the US:, labour strikes (UK), political unrest (Iran), guerrilla activity (Nigeria), wars and weather-related (Canada) affected supply losses. US companies, in particular, had very low refinery activity allegedly due to maintenance and unplanned outages by Shell, Chevron, ExxonMobil, Valero and BP refineries all during the same period. Lower discretionary driving, more fuel-efficient cars, higher volumes of ethanol blended into the gasoline pool cut into some demand in the US. However, the poorest Americans in rural areas have begun to choose fuel over food to keep mobile. The emergence of other markets, including China of course, as net gasoline importers will offset the so-called gasoline crack. The OMR also indicated that many nation states fearful of even higher prices and concerned about supply security, have been rebuilding their inventories at any cost since January 2008. This has increased competition for oil, bolstered demand and increased price pressures in 2008. While Saudi Arabia is blamed for not increasing oil production to balance the supply-demand equation, one wonders at the maintenance requirements claimed by American oil refineries that have contributed to supply problems and record profits for their companies sustained during the same period.

The rising price of oil has also been linked to the increasingly opaque and highly complex financial instruments, that oil executives, politicians, bankers or economists seem to be unable to fully understand and therefore control let alone manage. The unintended consequences of these financial instruments contributed to the mortgage meltdown and the credit crisis. The Bank for International Settlement report also warned of a major principal-agent problem as buyers of derivative and futures contracts lack skills and information required “to manage the risks inherent in the complex instruments they are buying?” (BIS 2007-05-29:9). The Economist‘s on-line forum [1] included a suggestion that technological and communications advances as a democratization of gambling have contributed to expanding the high-risk field of hedge funds (once only for the UHNW or oil industry elites) to include new, inexperienced and aggressive players who are unconcerned about unintended consequences. The increased competition and rates of return were already declining in 2006 leading to riskier and more aggressive hedging evident even in established banking institutions. Many neglect due diligence and are engaged in originating credit then transferring the risk exposure to others through securitisation or derivatives markets (BIS 2007-05-29:9).

The Bank for International Settlement report also revealed concerns over a year ago that short-term inflation could lead to long-term inflation due to high crude oil commodity prices (BIS 2007-05-29:59).

The Bank for International Settlements (BIS) report included “pivotal questions in terms of regulation of the oil commodities markets:

  1. What is the appropriate role of monetary and credit aggregates in the formulation of monetary policy?
  2. Assuming that occasional the credit-driven boom-bust cycles are possible, should the public sector seek to prevent the build-up of imbalances, or rather just clean up afterwards?

“Indeed, in the light of massive and ongoing structural changes, it is not hard to argue that our understanding of economic processes may even be less today than it was in the past. On the real side of the economy, a combination of technological progress and globalisation has revolutionised production. On the financial side, new players, new instruments and new attitudes have proven equally revolutionary. And on the monetary side, increasingly independent central banks have changed dramatically in terms of both how they act and how they communicate with the public. In the midst of all this change, could anyone seriously contend that it is business as usual? There is, moreover, a special uncertainty in the area of monetary policy. While the commitment of central bankers to the pursuit of price stability has never been stronger, the role played by money and credit is being increasingly debated, against the backdrop of the uncertainty about the inflation process referred to above. For some central banks, and indeed many leading academics, neither money nor credit is thought to play any useful role in the conduct of monetary policy. For others, in contrast, the too rapid growth of such aggregates could be either a harbinger of inflation or the sign of a financially driven boom-bust cycle with its own unwelcome characteristics. Against this background, neither central banks nor the markets are likely to be infallible in their judgments. This has important implications. The implication for markets is that they must continue to do their own independent thinking. Simply looking into the mirror of the central banks’ convictions could well prove a dangerous strategy. The implication for policymakers is that they should continue to work on improving the resilience of the system to inevitable but unexpected shocks (BIS 2007-05-29:145-150).”

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“In the light of history, it is both important and welcome that creditors and debtors increasingly realise the extent to which their fortunes are now intertwined.” (BIS 2007-05-29:9).


[1] Useful comment on The Economist article by ….Professor ???:

“I might also add, in response to QueenElisabeth, that there is no reason to think inventories would be accumulating unless the futures price rose significantly above the spot price, as it does in many textbook examples indicating one way in which arbitrage drives the futures price into equivalence with the spot price. Since the world doesn’t often behave like textbook examples, the spot price is tracking the futures price closely because every up tick in the futures price causes an almost immediate decrease in supply (which is the part of the process that should lead to inventory accumulation), and a simultaneous increase in demand as buyers seek to avoid higher prices in the future. It’s the increase in demand in response to higher expected future prices, expectations created entirely by goings on in the futures market, that is keeping inventories low. The lack if inventory buildups, in other words, is no evidence of all that futures prices aren’t playing a role in rising oil prices, unless you believe the last word in financial theory can be found in the “derivatives” chapter of a Money, Banking and Financial Institutions textbook. Aside from the usual suspects seeking to exhonerate themselves, which tends to lead one toward the opposite conclusion they would have us reach, the fact that oil prices have risen by about 30% since mid-March suggests that something far more than supply and demand for use are driving oil prices to their current record levels. The coincidence of trouble in the CDO market and rapidly rising commodity prices, as the flow of funds quickens into areas that are less risky and promise higher returns than mortgage backed securities, such as highly liquid commodity derivitives, strenghtens the case for the speculation hypothesis even more. I might also add that, as a financial economist, I typically teach that futures play an important role in facillitating a more efficient inter-temporal allocation of goods that look to become more or less scarce in the future. If futures prices have no effect on the price of the underlying commodity, and therefore on efficient resource allocation, we should have no reluctance about drastically curtailing the market since they would then serve no meaningful economic function that couldn’t just as well be served by less volatile financial instruments like forward contract. If they do effect current prices, as I believe they do, then strict prohibitions against their use for certain puposes should seem no more out of the ordinary, given the importance of oil in determining the structure of the international division of labor, than–for instance–legal arrangements preventing private individuals who have no legitimate reason to be in the market from purchasing opium or plutonium. You can’t have it both ways: either futures prices drive current prices and play an important role in determining the distribution of income and allocation of resources, among many other things, or they’re just financial instruments that serve as substitutes for betting on athletic contests or political elections. If the latter is the case, why not work toward their elimination entirely, and the return to non-standardized forward contracts, which were the main hedging vehicle in oil markets prior to 1983? Of course, the price of forward contracts would serve just as well as futures to indicate what the market thinks is going to happen in the future, and what it would therefore be most prudent to do in the present. The argument made here, and by economists like Paul Krugman, focus on the absence of inventory buildups as evidence that speculation in oil futures is playing an insignificant role in the current run-up in oil prices. One would expect to see rising inventories only if the futures prices rose significantly above the spot price. The spot price has been tracking futures prices closely, however. Why? To put it as simply as possible, a rise in the futures price not only decreases supply, as those who have the commodity seek to withhold it from the market in order to get a higher price in the future, but also an increase in demand, as buyers seek to avoid the higher price in the future by buying in the present. The effect on spot prices is unambiguous, but the effect on the quantity of oil bought and sold should roughly offset. As a result, the price rises, the amount of oil bought and sold remains roughly constant, and inventories neither accumulate nor de-accumulate. It’s insane to attribute a 30% rise in oil prices since mid-March to increased demand for use. Speculation is playing a huge part in this current price run up, as it is in the market for many commodities.”

[2]The Oil Market Report (OMR), published under the responsibility of the Executive Director and Secretariat of the International Energy Agency (IEA) provides an overview of the global oil market including a full disclosure of supply and demand.

[3] A useful explanation of the complexity and volatility of the world economy and the confusion surrounding analysis based on supply and demand, can be found in the 77th annual report of the Bank for International Settlements (BIS).

“[More] scepticism might be expressed about some of the purported benefits of having new players, new instruments and new business models, in particular the “originate and distribute” approach which has become so widespread. These developments have clear benefits, but they may also have side effects, with associated costs. In emerging market economies, the essential point is that liberalisation needs to be preceded by structural changes that will allow financial systems to remain resilient in the face of both domestic and external shocks. While much progress has been made, much more is still needed” (BIS 2007-05-29:151).

[4] “The weak dollar has had very little impact on the rapid rise in energy prices, Eric Rosengren, president of the Boston Federal Reserve Bank, said today. Although the decline in the dollar against other currencies has been a popular explanation for oil’s record run, Rosengren said that the data show the increases in oil prices have far outstripped the pace of the slide of the dollar in recent years.” (Boston Globe 2008-06-10)


Excerpt from “Challenges in formulating a policy response” in BIS report:

“There are a number of difficult and important questions facing central bankers, to which there are no agreed answers. A first issue has to do with the appropriate role of monetary and credit aggregates in the formulation of monetary policy. A second issue isclosely related: assuming that occasional credit-driven boom-bust cycles are possible, should the public sector seek to prevent thebuild-up of imbalances, or rather just clean up afterwards? Concerning the first issue, three schools of thought can be identified, each with at least some adherents in most central banks. A first school emphasises the short-run effects on inflation of gaps betweenaggregate demand and supply, with longer-run inflation trends being largely determined by expectations about such gaps. The role of money and credit is generally played down by this group. A second school attaches more importance to monetary developments in influencing longer-run trends in inflation. In practice, this would imply a continuing emphasis on the influence of demand-supply gaps on inflation, but with policy conclusions being systematically cross-checked against the monetary data. Finally, a third school of thought also attributes great importance to monetary, but above all credit, developments, albeit for a rather different reason. Adherents of this school become concerned when they see rapid growth of the aggregates along with rising asset prices, particularly if also associated with substantial and sustained deviations of spending patterns from traditional norms. They admit that the medium-term outcome could be rising inflation, but fear rather more that a boom-bust cycle might have significant economic costs, potentially including unwelcome deflation over a longer-term horizon. Both historical experience and intellectual fashion have played a role in these divergences. Adherents of the first school would contend that forecasts of inflation using gap methodology have proven reasonably accurate in many countries over many years. Their refusal to countenance any more formal role for money rests in part on the unsuccessful “monetarist” experiment of the 1970s, but also on the failure of econometric work to reveal a stable and causal relationship with inflation in their countries. Supporters of the second school of thought would note that their belief in the money-inflation nexus is deeply rooted in theory. Moreover, the Deutsche Bundesbank and the Swiss National Bank have been translating such beliefs into effective anti-inflationary policies for decades. The third school of thought has been influenced not just by pre-World War II business cycle theory but also by the wrenching historical experience of the booms and busts referred to earlier. While fashions come and go, it appears that the influence of the second and third schools has been growing. In recent years, a number of central banks, when raising policy rates, have cited concerns about very rapid growth in both credit and asset prices. A number of other central banks have announced their intention to lengthen their normal policy horizon, to allow them to better evaluate the full range of possible effects arising from their policies. Finally, almost everywhere, one hears reference being made to the “normalisation” of policy rates, a concept which logically implies that the appropriateness of policy cannot be judged on its short-run impact alone. Behind this shift in thinking have been a number of influences.”

“Forecasting inflation using traditional methodologies has become more difficult everywhere. Central banks are therefore looking for new guideposts, and these include the use of monetary and credit aggregates. Indeed, research in some central banks has recently identified what appears to be a reliable relationship between their monetary aggregates and inflation over long periods. Moreover, with the passage of time, new crises and the further analysis of old ones have provided empirical evidence to support the specific arguments for concern expressed by the third school. Finally, as evidence has accumulated that the global economy is characterised both by many imbalances and by a flatter short-run Phillips curve, the potential economic losses in a subsequent downturn have also been revised upwards. In sum, the possible implications of getting policy wrong have grown. All of these factors have helped to spur debate, and even sometimes to change minds. A second question, eliciting diverse answers, is how best to deal with what seems to be the natural procyclicality of the financial system. Should policy sometimes lean against an upturn, even in the absence of inflationary pressures? And if so, how? Should it rather lean primarily against the subsequent downturn, and if so how? Or, reflecting our lack of understanding, and the shortcomings of each of the individual policy instruments we currently possess, should it do both, using a number of policy instruments simultaneously? Short of serious re-regulation of financial markets, which would create many harmful inefficiencies over time, this more pragmatic approach to procyclicality in the financial system might have much to recommend it.”

“The principal argument for tightening monetary policy in the upswing is to moderate the excesses in economic and financial behaviour and, in so doing, contain the costs of the downturn. There are of course some significant practical difficulties with this approach. How do policymakers evaluate when imbalances are building up to such a size as to warrant action? What degree of tightening would be required to moderate market euphoria, and might it do serious harm to unaffected parts of the economy? These points have been made repeatedly, and validly, in connection with the hurdles that central bankers would face in targeting asset prices. But the suggestion being made here is different. It is rather to react when a number of indicators – not just asset prices but also credit growth and spending patterns – are simultaneously behaving in a manner that indicates increasing exposures. In principle, such a configuration of developments would be both rarer and easier to identify. Moreover, the more widespread the euphoria, the less worry there will be that tighter policy might inflict collateral damage on unaffected sectors. (BIS 2007-05-29:145-150).”

Some useful terms

Arbitrage < Trade and Freight: “The purchase of physicals or futures in one market against the sale of physicals or futures in another market in order to exploit price differentials between these markets. In moving physical oil between markets, the price differential has to be large enough to cover freight, insurance, volumetric loss and other handling charges. When this condition is met, the ‘arbitrage window’ is said to be open.” (OMR 2008-0

Supply ‘Push’ < Trade and Freight: When trade is motivated by output surpluses at the point of origin often signalled by weakness in local refining margins and/or by weak relative prices.

Bearish and Bullish < Prices: Factors which are likely to depress prices are defined as bearish while factors which are likely to raise prices are defined as bullish.

Derivative contracts
based on different types of assets such as oil commodities, equities (including private equities), interest rates, etc reduce the risk for one party by increasing it for another. By entering into contracts based on imagined or virtual futures, contracts attempt to manage risk by mitigating uncertainties based on the availability of the commodity (supply) or on price uncertainties (demand).

Futures Contract < Prices: A regulated, legally binding agreement made on the trading floor of a futures exchange to buy or sell a fixed quantity of a commodity for delivery at a specified time and location in the future.

Futures Transaction < Prices: Purchase or sale of a futures contract; exchange of a futures position for the physical or cash commodity.

Hedge < Prices: A financial transaction to mitigate risk. For example, taking an equal and opposite position on the futures market to that held in physicals to reduce price exposure in physicals (see Short Position, Long Position, Basis Risk).

Long Hedge < Prices: The purchase of futures or other paper contracts, against the sale of physicals (to reduce exposure to a price rise). Also called a Buying hedge. (See Short Hedge.)

Long Position < Prices: The net exposure of a trader (or group of traders) when their bought (long) physical or paper exposure exceeds their sold (short) positions (see Short Position).

NYMEX – Prices: New York Mercantile Exchange, the commodities futures exchange.

Short Hedge < Prices: The sale of futures against the purchase of physicals (to reduce exposure when a price decline or bearish trend is perceived) (see Long Hedge).

Short Position < Prices: The net exposure of a trader (or group of traders) when their sold (short) physical or paper exposure exceeds their bought (long) positions (see Long Position).

Spot < Prices: A one-time open market transaction where physical oil or products are traded at current market rates. The term is also often used to refer to a front-month futures contract.

A Selected Timeline of Related Critical Events

1930-05-17 The Bank for International Settlements (BIS) was established as an international bank for central banks which promotes international monetary and financial cooperation and strongly advises caution against fraudulent schemes. It is still functional and valued as a source of research accuracy in 2008.

1930s The Bank for International Settlements (BIS) acknowledged that economics is not a science as revealed in such glaring knowledge gaps as this lack of predictions of the Great Depression of the 1930s (BIS 2007-05-29:139).

1970 “The Great Inflation in the 1970s took most commentators and policymakers completely by surprise, as did the pace of disinflation and the subsequent economic recovery after the problem was effectively confronted (BIS 2007-05-29:139).”

1990s Economists were unable to predict the crises which affected Japan and Southeast Asia in the early and late 1990s (BIS 2007-05-29:139).

1995 Due to a naive, under-regulated and poorly managed financial environment, Nick Leeson, a trader at an old respected financial institution, Barings Bank incurred a $1.3 B. loss for the bank causing its bankruptcy by making large, unauthorized investments in index futures trading.

1998 In terms of microeconomics, economists were unable to predict the failure of LTCM in 1998, “the firm faced price shocks in various markets that were almost 10 times larger than might reasonably have been expected based on previous history. As a result, its fundamental assumptions – that it was adequately diversified, had ample liquidity and was well capitalised – all proved disastrously wrong” (BIS 2007-05-29:139).

2005-Q4 The combined turnover in the world’s derivatives exchanges for exchange-traded derivatives (ETD) and over-the-counter (OTC) derivatives was $344 USD trillion (Bank for International Settlements).

2006 Buoyant economic growth from January through June 2006 led to concerns that the global economy might be approaching a “speed limit”. “Oil prices increased by more than 35% in dollar terms between February and August on the back of persistently strong demand growth. Moreover, signs that slack was evaporating in major economies gave rise to concerns about overheating. Long-term inflation expectations in financial markets rose temporarily in the first half of 2006, especially in the United States (see Chapter IV), and financial market volatility increased sharply, if briefly, in May (see Chapter VI).” (BIS 2007-05-29:12).

2007-06 The total outstanding notional amount of over-the-counter (OTC) derivatives market was $516 trillion USD (Bank for International Settlements).

2007-05 The Bank for International Settlement report revealed concerns that short-term inflation could lead to long-term inflation due to high crude oil commodity prices in the spring of 2007 (BIS 2007-05-29:59).”

2008-01 through 2008-06 The price of oil on the futures markets climbed 40% between January and June 2008 (Lewis 2008-06-09).

2008-06 “Oil’s six-year rally has gathered pace this year, with futures markets climbing by roughly 40 percent since January (Lewis 2008-06-09).”

2008-06-06 The dollar plunged on Friday after U.S. economic data showed the biggest jump in the U.S. unemployment rate for 22 years, denting expectations the Federal Reserve would raise interest rates. It has been suggested that The weakness of the U.S. currency has been a major factor behind price gains across the commodities complex as dollar-denominated raw materials are relatively cheap for non-dollar buyers and offer investors a potential hedge against inflation. (Lewis 2008-06-09).

2008-06-09 “Oil fell on Monday, but held close to record levels after the biggest one-day price gain in the history of the market left traders and analysts divided over the explanation (Lewis 2008-06-09).”

Who’s Who

The Bank for International Settlements (BIS) “is an international organisation which fosters international monetary and financial cooperation and serves as a bank for central banks. The BIS fulfils this mandate by acting as a forum to promote discussion and policy analysis among central banks and within the international financial community, a centre for economic and monetary research, a prime counterparty for central banks in their financial transactions and an agent or trustee in connection with international financial operations. The head office is in Basel, Switzerland and there are two representative offices: in the Hong Kong Special Administrative Region of the People’s Republic of China and in Mexico City. Established on 17 May 1930, the BIS is the world’s oldest international financial organisation. As its customers are central banks and international organisations, the BIS does not accept deposits from, or provide financial services to, private individuals or corporate entities. The BIS strongly advises caution against fraudulent schemes.” Bernanke, an MIT professor appointed by President Bush to head the Federal Reserve is also on the Board of Directors of the Bank for International Settlements.

Webliography and Bibliography

2008-05-29. “Double, double, oil and trouble.” The Economist print edition.

BIS. 2007-06-24. 77th Annual Report. Basel, Switzerland. 244 pp.

International Energy Agency (IEA). 2008-05-13. “Oil Market Report (OMR).” PARIS, France.

Krauss, Clifford. 2008-o6-09. “Rural U.S. Takes Worst Hit as Gas Tops $4 Average.” Business. New York Times.

Lawler, Alex. 2008-06-10. “Oil’s record jump defies single explanation.” Reuters UK.

Lewis, Barbara. 2008-06-09. “Oil falls after record $11 surge.” Reuters. Boston Globe.

Ticker. 2008-06-10. “Rosengren: Dollar’s impact on oil is modest.” Boston Globe.

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“Mortgage Meltdown” a digitage on Flickr

see also related webliography

1965-2005 Between 1965 to 2005 there was no national US real-estate bust as home prices surpassed inflation by a percentage point or two on average. However local reversals have taken place and some cities have never recovered (Christie 2005).

1973-5 US investors in the S&P 500 lost 14% in 1973 and 26% in 1974 but gained 37% in 1975 (Mann 2000).

1970s “The additional grades or risk have arisen from the willingness to underwrite mortgages for more risky borrowers, encouraged by the democratization of credit since the 1970s. Lending to more risky borrowers is, by definition, more risky. More loans to risky borrowers increases the total amount of risk to be sold in the marketplace” (Mason and Rosner 2007).

1980-1990 In Los Angeles real estate was turbocharged for nearly 10 years (Christie 2005).

1985 In Peoria, Ill. a more traditional area the average home price fell from $60,800 in 1981 to $51,400 in 1985 partially because of strikes and lay-offs at Caterpillar, the city’s biggest employer (Christie 2005).

1987 Canadian families saved 20 percent of their take-home pay (Ed 2007).
1987 Stock market crash
1988 In “oil patch” cities like Oklahoma City prices plummeted 26 percent from 1983 to 1988. They only returned to 1983 levels in 2003 fifteen years later. In Oklahoma City, the inflation-adjusted price in 1983 was $196,600. Today, it’s just $135,100 (Christie 2005).

1988 Houston home prices fell 22 percent from $111,000 in 1983 to $86,800 in 1988 rebounded only in 2003. Counting inflation, the average Houston home, which cost just $159,700 in 2004, is actually worth less [in 2005] than it was [in 1983]. When, adjusted for inflation, a home cost about $219,000 in 1983 (Christie 2005).

1988 – 1990s Real estate prices fell in Northern California first followed by the rest of the state “as employers fled, incomes dwindled, quakes rumbled, sales fell and prices slipped. [. . .] Silicon Valley’s housing market crashed into recession along with the state’s economy (Perkins 2001).

1989-90 The notorious price bubble of 1989-90 was linked to central banks specifically the Bank of Japan. “The Japanese economy continued to suffer during the early 1990s, and remained in recession until the end of 1993. Nominal GDP growth rates, which had been around 7 percent during the bubble period, fell beginning in 1990 and by 1991-93 were close to zero. Profits in the manufacturing sector fell 24.5 percent in 1991 and 32.1 percent in 1992. Bankruptcies began to rise starting in the latter half of 1990; by 1992, bankruptcies with debt more than Y10 million totaled 14,569 cases. Failures of real estate firms or of firms engaged in “active fund management” constituted more than half the corporate bankruptcies in 1991 and 1992 (Miller 2001).”

1991 Inflation-adjusted take-home pay in Canada froze to this level (Ed. 2007).”

1992 A new car in Canada cost $20, 000.

1992 – 2000 “Japan remained pretty stagnant in the last eight years, with the majority of the loss coming in the first two, when it eventually fell by more than 60%. There was never a big drop, just a constant and inexorable drift downward. Real estate prices plummeted, almost no Japanese company ended 1992 higher than it started 1990. In the interim, banks have failed (and if it weren’t for the financial props of the Japanese government, many more would have), and companies have had to reassess some of their basic assumptions, such as lifetime employment and large benefit packages” (Mann 2000).

1996 There was a housing market reversal in Los Angeles with average house price dropping from $222,200 in 1990 to $176,300 in 1996, a loss of 20.7 percent. “Furthermore, those are nominal prices, not real values. To calculate the loss more realistically you would have to figure in the cost of inflation: $222,200 in 1990 would have been worth $266,700 in 1996 dollars, which means the actual loss for homeowners buying in 1990 and selling in 1996 was closer to 34 percent (Christie 2005).”

1994- 1996 “In 1994, [Japanese] banks wrote off non-performing assets of Y5.7 trillion, exceeding the previous high of Y4.3 trillion in fiscal year 1993. As yet, no major bank has failed, although a number have reportedly encountered serious difficulties. In December, 1994, the Bank of Japan supervised the takeover of two credit cooperatives, the Tokyo Kyowa Credit Cooperative and the Anzen Credit Cooperative, through the creation of a bridge bank with government support. The Bank’s decision not to let these institutions fail and pay off depositors under the deposit guarantee program was based, largely, on concern for the potential systemic effects of a deposit payoff on public confidence in the banking system in general. The “jusen,” or housing finance banks, suffered the most serious problems; these institutions, which were typically organized and sponsored by major commercial banks and staffed, in part, by former officials from the Ministry of Finance, lost tens of billions of dollars as a result of the collapse of the price bubble, and became one of the most contentious political issues of the day during 1995-86 (Miller 2001)”.

1996 “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy? We as central bankers need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. Indeed, the sharp stock market break of 1987 had few negative consequences for the economy. But we should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.” – Alan Greenspan (December 5, 1996)**

1998 There was a market correction in the United States in October of 1998.
1992 – 2000 “Japan remained pretty stagnant in the last eight years, with the majority of the loss coming in the first two, when it eventually fell by more than 60%. There was never a big drop, just a constant and inexorable drift downward. Real estate prices plummeted, almost no Japanese company ended 1992 higher than it started 1990. In the interim, banks have failed (and if it weren’t for the financial props of the Japanese government, many more would have), and companies have had to reassess some of their basic assumptions, such as lifetime employment and large benefit packages” (Mann 2000).
2004 British Columbia graduates from university have an average debt of $20, 000.
2005 Real-estate investing spiked, pressuring prices upward. In Phoenix, according to Bill Jilbert, president and COO of the Coldwell Banker brokerage there, investors from Nevada and California have invaded the Arizona market, and “affordable housing has been pushed to extremes (Christie 2005).”
2000 In Tampa Bay Florida, high risk adjustable-rate mortgages (ARM) made homes “seem affordable when wages stagnated as prices soared. They were just the ticket for cash-out refinancings and home equity credit lines that bought cars and swimming pools and paid off credit card debt. “What happened in a lot of expensive real estate markets is that first-time home buyers who felt they could not afford a home otherwise, took on a loan that had lower monthly payments than a traditional mortgage would have,” said Allen Fishbein, director of housing policy for the Consumer Federation of America. “They weren’t being underwritten on the basis of the borrower’s reasonable capacity to handle these loans.” The payments started out manageable, especially since many loans offered teaser rates. But borrowers are getting a lesson in what the word “adjustable” means. More than $130-billion in mortgages payments were reset in 2006″ In 2006 nearly a third of Tampa Bay mortgages were the high-risk varieties, up from 10 percent in 2003 (Huntley 2006).
1991- 2005 “[I]ncreased complexity from increased grading of risk can also result in increased opacity. Risk that is more difficult to see, by virtue of complexity, is risk just the same. There are plenty of reasons to believe that the amount of risk in the marketplace has increased. Figure 3 shows that defaults on ABS and residential mortgage-backed securities (RMBS) increased substantially between 1991 and 2005″ (Mason and Rosner 2007).
2006 Fitch Global Structured Finance 1991-2005 Default Study revealed that, “the overwhelming majority of global structured finance defaults over the 1991-2005 period were from the U.S., accounting for more than 97 percent of the total. While the 1,000 U.S. defaults were mainly concentrated in the Asset-Backed Securities._ (ABS) sector, the 27 international defaults were primarily from the collateralized debt obligations (CDO) sector.” See Mason and Rosner (2007) warn that risk continues to increase, as ratings agencies revise their loss expectations to account for the dynamics of the mortgage meltdown. For instance, on March 27, Standard & Poor’s raised its expectation for losses on
2006 In Florida millions of homeowners were warned of the mortgage meltdown in which they will “face a financial nightmare brought on by a combination of higher interest rates, risky mortgages and a housing market gone cold (Huntley 2006).
2007 Since 1991 inflation-adjusted hourly wages rose only 10 cents (Ed. 2007).”
2007 A new car in Canada cost $32,000 a 60 percent increase from 1992 (Ed. 2007).”
2007Canadians collectively owe three quarters of a trillion dollars in personal debt. Canadian families not only have no savings, they draw on pension savings to make ends meet.

“The result of the easy credit is that an average family now owes far more than it takes in. That means we remain solvent only so long as the book value of our assets — things like our home, pension funds or investments — continue to increase (Ed. 2007).”

2007 British Columbia graduates from university have an average debt of $27, 000.

2007 It is now acceptable for Canadian families to pay 60 percent of income to pay monthly payments of their home mortgages (Ed. 2007).

2007 The British Columbia government will allow home owners who are over 55 to defer property tax payments for as long as they live. The government will claim unpaid taxes after you die or sell effectively placing the tax burden on the children (Ed. 2007).

2007 “The number of corporate failures in Japan rose for the third month in a row totaling 896 cases in December up 18.2%. November flops were up 6.5% and the number of companies going belly up in October were up 7.8%. The amount of debts the insolvent companies left behind were up 30.6% to 463.09 billion yen (Belew 2007).

2007 In March Bob Lawless reported in his blog that, “The folks at Automated Access to Court Electronic Records or AACER regularly collect data from all the bankruptcy courts for creditors and attorneys. They have a wealth of information that does not show up in the mainstream media. Most recently, they tell me that there were 58,640 total U.S. bankruptcy filings in February 2007 as compared to 55,088 total U.S. bankruptcy filings in January 2007. OK, that looks like a slight increase, but looks are deceiving. It’s actually a fairly hefty increase. The February filings were spread over only nineteen business days while the January filings were spread over twenty-one days. On a daily basis, the February filings were up 17.7% as compared to January (Lawless 2007).”

2007 Jayson Seth analysed data in National Association of Realtors (NAR) June 24, 2007 report. Seth argues that “America’s easy-credit, quick-flipping, borrow-now-and-forget-the-consequences lifestyle is coming to an increasingly painful, grinding halt” and the “confidence of homebuilders is at a 16-year low (Seth 2007).”

2007 Lawrence Yun, National Association of Realtors announced that the real estate market is softening due to psychological factors, tighter credit for subprime borrowers. NAR’s Lawrence Yun explained that since late 2006 housing sales have slowed as buyers double up with family, friends or just mortgage helper units in their homes to be able to pay for higher-priced homes.

2007 Mason and Rosner (2007) warn that risk continues to increase, as ratings agencies revise their loss expectations to account for the dynamics of the mortgage meltdown. For instance, on March 27, Standard & Poor’s raised its expectation for losses on 1. “Residential mortgage-backed securities (RMBS) market has experienced significant changes [from 1997-2007]” Furthermore they caution that “structural changes in mortgage origination and servicing have interacted with complex RMBS and highly volatile CDO funding structures to place the U.S. housing market at risk. Equally as important, however, is that housing market weaknesses feed back through financial markets to further weaken financial instruments backing today’s CDOs. Decreased housing starts that will result from lower liquidity in the MBS sector will further weaken credit spreads and depress CDO and MBS issuance. This feedback mechanism can create imbalances in the U.S. economy that, if left unchecked, could lead to prolonged domestic economic implications for U.S. standing in the world economic order [. . .] The potential for prolonged economic difficulties that also interfere with home ownership in the United States raises significant public policy concerns. Already we are witnessing restructurings and layoffs at top financial institutions. More importantly, however, is the need to provide stable funding sources for economic growth. The biggest obstacle that we have identified is lack of transparency.” (Mason and Rosner 2007).

2007 In a Marketplace interview Amy Scott asked interviewees about the disturbing consequences of the interconnections between banks, hedge funds, high risk mortgages and pension funds. In June two major hedge funds managed by the investment bank Bear Stearns, who purchased securities that were essentially a “repackaging of all kinds of risky mortgages” to tap into the subprime mortgage market are now verging on collapse as the number of borrowers defaulting on these mortgages increases. Joseph Mason explained that “this isn’t just a Wall Street problem. Your 401k or pension fund may be invested in similar mortgage-related securities.” The investor-base is broad and it is difficult to know who is at risk. “Investment managers don’t have to report their holdings. And unlike stocks, these securities aren’t quoted on an open market.” Mason has been a firm proponent of more transparency in financial dealings (Scott 2007).

2010-05-06 According to a report entitled “The Microstructure of the ‘Flash Crash’: Flow Toxicity, Liquidity Crashes and the Probability of Informed Trading” in The Journal of Portfolio Management, “The ‘flash crash’ of May 6th 2010 was the second largest point swing (1,010.14 points) and the biggest one-day point decline (998.5 points) in the history of the Dow Jones Industrial Average. For a few minutes, $1 trillion in market value vanished.” Report authors argued that the ‘flash crash’ was the result of the new dynamics at play in the current market structure.”

Easley, David, Lopez de Prado, Marcos M. and O’Hara, Maureen, “The Microstructure of the ‘Flash Crash’: Flow Toxicity, Liquidity Crashes and the Probability of Informed Trading.” (November 19, 2010). The Journal of Portfolio Management, Vol. 37, No. 2, pp. 118-128, Winter 2011. Available at SSRN:

See also article was written by Heather Stewart and Simon Goodley, for The Observer on Sunday 9th October 2011 00.06 Europe/London

Credit crunch, Financial crisis, Financial sector, Banking, Global recession, Stock markets, Business, Lehman Brothers, Margaret Thatcher,

The extremes of wealth and poverty threaten globalisation. North American companies lose jobs to the Chinese Special Economic Zone (SEZ) where factories often employ rural women to work in 19th century conditions to keep their costs low. Meanwhile the total pay of top managers in North America has increased from 1986 through 2006 to roughly 40 times the average and from 1966 to 110 times the average.

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Globalization “refers to the current transformation of the world economy the reduction of national barriers to trade and investment, the expansion of telecommunications and information systems, the growth of off-shore financial markets, the increasing role of multinational enterprises, the explosion of mergers and acquisitions, global inter-firm networking arrangements and alliances, regional economic integration and the development of a single unified global market. The phenomenon of globalization is accompanied by increasing international mobility,  the migration of workers, the growth of tourism and the increasing ease of international travel (Leary 1998:265).”

Selected Bibliography and Webliography

Leary, Virginia A. 1998. “Globalization and Human Rights.” In Symonides, Janusz (Ed.) Human Rights: New Dimensions and Challenges: Manual on Human Rights. Aldershot, UK: Ashgate Dartmouth Publishing Company Ltd. / UNESCO Publishing. pp. 265-276.

2007. “Rich man, poor man.” The Economist. Jan 18th 2007. Accessed January 18, 2007.


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