On Wed, Jun 17, 2009 at 4:17 PM, Ted Winslow<egwinslow at rogers.com> wrote:
> Max Sawicky wrote:
>
>> Tell me if I'm wrong, but the thrust of this is that centralisation of
>> credit permits banditry and is potentially dangerous, but it is not quite
>> central to periodic breakdowns and crises under capitalism. For that you
>> need Keynes & Minsky.
>
>
> The essence of Keynes's explanation of a financial crisis is already in
> Marx. That would be the idea of the capitalist "passions" and the role in
> them of an irrational love of money as a possession. Marx, like Keynes,
> makes a reversion of money to this role the explanation of what he calls a
> "monetary crisis".
>
> Also like Marx, Keynes makes the "vulgar passions" whose dominance he takes
> as defining capitalism - i.e. "the essential characteristic of capitalism"
> is "the dependence upon an intense appeal to the money-making and
> money-loving instincts of individuals as the main motive force of the
> economic machine" - "passions" in the sense of Hegel. They are instrumental
> to the creation of the "material abundance" that would make the
> transcendence of capitalist psychopathology practicable. It's for this
> reason that he claimed 80 or so years ago that
>
> "For at least another hundred years we must pretend to ourselves and to
> every one that fair is foul and foul is fair; for foul is useful and fair is
> not. Avarice and usury and precaution must be our gods for a little longer
> still."
>
> Minsky and "Keynesians", Post and otherwise, largely ignores this aspect of
> Keynes, just as most Marxists ignore this aspect of Marx.
>
> Unlike Marx, Keynes provides an explanation for this ignorance. He roots it
> in the same psychopathology he claims dominates capitalist motivation in
> general.
>
> In addition to explaining this, the psychopathology will also explain the
> role played in the present crisis by the "Bedlamite" ideas currently
> dominant in economics (i.e. by "mathematical finance", another
> "“extraordinary example of how,
> starting with a mistake, a remorseless logician can end up in Bedlam").
>
> Expressed as the "efficient market hypothesis" these ideas played a key role
> in the development and functioning of modern financial derivative markets.
> In particular, the hypothesis underpins the Black Scholes Merton formula
> for pricing options and the "Gaussian copula function" devised by David Li
> to measure default correlation.
>
> These formulae, which assume that, in Keynes's words, “the existing state of
> opinion as expressed in prices and the character of existing output is based
> on a correct summing up of future prospects, so that we can accept it as
> such unless and until something new and relevant comes into the picture”
> (XIV 114), were used by traders to determine what prices should be, this
> fact alone falsifying the assumption underpinning them.
>
> The practically universal adoption of Li's "Gaussain copula function" fed
> the explosive growth of CDSs and CDOs including mortgage backed securities.
> Mathematics magically converted debts on which default was practically
> certain into securities rated Triple A (thus, among other things, making it
> profitable for those directly responsible for the mortgage lending to ignore
> the borrower's credit worthiness).
>
> Ted
>
>
>
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