12 December 2014   1 comment

The US Congress barely passed a budget today.  The passage of the bill was threatened, in part, by the opposition of economic progressives to a part of the bill that repealed part of previous legislation that exempted Federal Deposit insurance for bank holdings known as “derivatives.”  Derivatives are not physical assets such as a bank deposit.  They are, rather, bets on the expected future value of certain physical assets.  For example, you can make a deal with someone else that the price of oil will go up by $10.  If the price does go up by that amount, you get paid.  If the price fails to go up by that amount, you must pay.  Such bets are fine in a casino, where one has to pay immediately when a game is over.  The problem with financial derivatives is that people buy and sell those derivatives even before the outcome of the bet is clear.  So, in essence, banks can now use the Federal Deposit Insurance money to get bailed out if their derivative bets fail.

The problem with the legislation is that it takes away the pain of making a bad bet.  It therefore encourages riskier behavior.  It hardly seems appropriate to use public money to insulate banks from bad bets, particularly since if the bet turns out to be a good one, all the benefits accrue only to the bank.  Additionally, however, the size of these bets is huge.  Banks  currently have about $303 trillion in derivatives;  at the same time, the banks have only about $14 trillion in physical assets.  The following chart breaks down the distribution of assets vs. derivatives for major banks:

It is not at all clear how the Federal Deposit Insurance Company (FDIC) can handle the magnitude of these risks.

The climate talks in Lima, Peru, are entering the final day of the conference.  As of yesterday, the delegates had successfully written one paragraph, and the obstacle to progress is an old one.  The idea that rich and poor countries should have different standards for climate change responsibilities (an idea known as “common but differentiated responsibilities”) is entrenched in the 1992 UN Convention on Climate Change.  The idea is rooted in the truth that rich countries should shoulder the heaviest burdens for ameliorating climate change, but also rests on a partial truth that rich countries are principal polluters.  With the economic emergence of India and China, it is no longer the case that only rich countries are polluters of global dimensions.  The UN needs to come to grips with the fact that exemptions for poor countries that also contribute to the global problem no longer make environmental sense even if the exemptions make sense in terms of economic justice.

Poland has expressed deep concern over Russian military activities in the Baltic region.  On Monday, there were more than 30 Russian flights in the region.  Although none of the flights intruded upon national airspace, the level of activity is unprecedented, signalling a level of preparation that seemingly has no training objective.

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Posted December 13, 2014 by vferraro1971 in World Politics

One response to “12 December 2014

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  1. And we worry about Europe’s economy? How can this be done when everyone knows how dangerous derivatives are? Lets make the 1% richer .

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