The Sociology of Repo Swaps: Canadian Kool Aid Edition

Interest rates are the price for renting money. LIBOR rates is the price banks charge each other for renting money. Contrary to popular belief, the 2008 financial collapse was not initiated by mortgage derivatives, it was initiated by Repos, and their swaps. Repos (Repurchasing agreements between banks on short term lending between themselves) are specifically tied into the LIBOR rate. This is why the LIBOR scandal, which now includes the Royal Bank of Canada, is so important and sociologically interesting. If LIBOR was manipulated, then so were repos and swaps, which was the firing pin of the 2008 collapse. And there’s a strange Sociology to it, beyond banks acting badly to make a few (billion) bucks.

This is how repos, LIBOR and swaps work in a simplistic nutshell:


Basically, in this example, RBS makes a loan to both RBC and UBS. But it gives RBC favorable rates, while giving UBS not-so-favorable rates. RBC in turn swaps the UBS loan, pays off its RBS loan, and makes a half percent profit (rent). RBS gets both its 3% and 1% above LIBOR. And UBS gets a better rate (1.5%) than it would’ve otherwise gotten. Everyone wins on the swap – sort of. RBC and RBS make money, while UBS still has to pay rent on money, though at a lower rate.

Since UBS couldn’t change the swap rate, what if it could change the LIBOR rate so that mathematically, it ended up paying NO RENT on money? That’s exactly what UBS did. This is the LIBOR scandal in a nutshell. But it doesn’t end there. The Royal Bank of Canada did the same thing, to pay a lower rate on its repos, and instead of coming out .5% it came out ahead even more. And RBS did the same thing on its repos.

It’s not that banks were cheating the public – it’s all “commercial paper.” It’s that banks were cheating each other. In today’s neoliberalism, the penalties for cheating shareholders are far greater than if they just simply cheated the public. Which is why if the Royal Bank of Canada pays the 3x fines for it’s role in the LIBOR scandal, it would be bankrupt.

Canada has a similar program as the United States in the role of the FDIC. When a bank goes bankrupt, it’s taken into government receivership, and the “bad” parts” are stripped from the “good parts” to assure that depositors get their money back. The legal and philosophical question is: would, or should a government take a bank into receivership because of a foreign lawsuit? That’s the question that the Royal Bank of Canada’s part in LIBOR forces on the Political Economy front.

Here’s where the strange sociology comes in: not only did it take an institutional interaction for the LIBOR scandal to take place – multiple interactions between institutions, but it’s also something that banks have forced onto the general public – the United States from 2000-2008 and Canada today. Other than time and volume, there is little difference between repo swaps and debt consolidation.

Debt consolidation loans and balance transfer credit cards are similar to repo swaps, only on a longer term. If you have a stack of credit cards with balances (essentially, loans), then you can “swap” them out for one credit card at a lower interest rate. The same holds true for debt consolidation loans. Certainly banks encourage this. Banks get paid back at their original “rent” rate, and the consolidation bank get a cut. Meanwhile, you’re paying a lower interest rate than you otherwise would have. Except you cannot manipulate the “prime” interest rate.

What may work for institutions however, may not be in the best interest of everyday life. With Canadian household debt-to-income ratio now 165%, a majority of Canadians no longer believe that they will be debt-free in within 25 years. The same happened in the U.S.

Why doesn’t the Sociological Kool Aid of repo swaps work in the real world? That’s a complicated answer that involves income guarantees (or the lack thereof), institutions outliving people, to a few things in-between.

Mortgage derivatives came into play because when banks loan each other money in repos – even if it’s for overnight, they have to have collateral to back it up. Many banks used Mortgage Backed Securities from Bond markets, which were seen as “safe” assets for collateral. The problem was of course, that they weren’t. And when it was found out, banks stopped loaning each other money, which caused a run on investment banks, which…well, everyone knows the rest.

The original role of debt was to move capital (or income, or money) faster through the system that actually created wealth – albeit unequally. If you needed to buy a machine for $20,000 for your factory while you waited for your customers to pay $100,000, credit was helpful for the business enterprise. That machine created profit in the long run, and short-term debt facilitated that. Instead, through the practice of repo swaps (which started in the 1980s), where one debt is simply swapped for another, debt somehow managed to be considered wealth – and that message was passed along to the people through easy consumer credit.

The Sociological Kool Aid is that belief that debt is good, without actually saying that debt is good. Debit is (of course) NOT good. While consumption has been fueled by debt over the last 40 years, there is one economic social fact that is clear as day which came out of the 2008 crisis: debt never created wealth. Debt is not wealth. This social fact holds true across all people, all societies, and all institutions. Debt is not wealth whether you’re a bank, or a wage-worker.

Whether or not Canada’s central bank will step up to the plate to bail out the Royal Bank of Canada cheating shareholders – should it need to, is quite another sociological and economic quagmire.


Posted in Economics, Markets, Political Economy, Sociology, Uncategorized | Leave a comment

The Beatings Will Continue Until Confidence Improves

Three economists with the International Monetary Fund just released an article (PDF) citing that Austerity and Privatization, two aspects of the neoliberal agenda, are really bad things for economies. This is not all that shocking, as the data has supported this conclusion for the last 30 years. What is shocking are two things: first is how narrowly constrained the research was, which led to the same conclusions, and second was that the IMF has no intention of reversing its market-sponsored violence against people policy (also known as austerity).

The article reduces the neoliberal agenda to two main items (there are arguably more in real life): open competition, primarily through deregulation of financial markets that allow international capital to flow, and austerity. The report concludes that these policies will increase inequality, lower employment levels, decimate human capital, and all kinds of other “social costs.”

Without getting into the nuts & bolts of how the IMF operates, their main (stated) goal is global economic stability through “helping” countries that are in trouble, with loans (this is obviously a watered down version of the IMF mission). The idea of the IMF loans is this: lower debt-to-GDP so that global investors can be confident to invest in those countries, loosen regulation, get “big government” out of the way, and let the “free market” do the rest.

Yet when we look at the IMF bailouts of the main players since 2008, not only have none of them actually reduced their debt, they have exponentially increased due to IMF loans.

IMF debt.png

It makes sense that a country that is taking on loans takes on debt, but if the IMF’s stated purpose is to make debt less, then no country that has taken IMF loans has actually reduced their debt. Ireland is a significant example, because while Ireland has “recovered” for the most part, they have not been paying down, or haven’t been able to pay down, their debt to the IMF.

Here’s the catch of the article: the IMF analysis only applies to healthy countries. What’s good for the healthy goose, in their view, is not good for the starving goose.

The result is that the IMF, as a condition of the loan, gets to circumvent democracy, and make demands on countries that assure that the beatings will continue until investor confidence improves. It is not so much a Foucauldian Governmentally, where the subject is beaten for crimes against the Sovereign market – it’s about the Invisible Hand Jive that turns into an invisible fist.

Posted in Economics, Macroeconomics, Markets, Political Economy, Public Policy | Leave a comment

Quantitative Literacy: The Philosophy of Math (no math required)

bad-mathAs a society, I think we’ve all been conditioned to think of anything mathematical as “truth.” After all, if I have 2 apples, and I eat one, then I only have 1 apple left. Who could argue with that as truth? But what if I have 2 apples, and 2 oranges, and decide to eat an orange instead of an apple? Why did I choose the orange? What if I chose an apple? Were there social forces behind choosing the orange over the apple? What is the likelihood of my choosing an orange over an apple in the future? Now the “truth” is not so clear, and as even mathematicians point out, math is very much about philosophy.

The typical response I get, even from the Academy when it’s discovered that I hold an advanced degree in Economics, is along the lines of: “Oh, I can’t do math.” The fact is that 99% of Economists don’t actually “do math” (except as a prerequisite in Grad School). Economists largely, “do” 2 things: regression modeling and accounting. Neither of these fall in the realm of “math as truth,” and instead fall into math as a philosophy – that admittedly, gets peddled as “truth”, largely by Economists, knowing full well that what they are actually “doing” is philosophy (sometimes a euphemism for ideology).

Then there is the other side of the fence – the masses in society who have drank the Kool Aid in believing that just about anything involving math is “absolute truth.” There is a distinct difference between social activities that involve math, and social activities result in  math. The orange and apple example involve math. People moving from the east to the west to find jobs is a social activity that results in math (labour data, demographics, GDP, etc). In neither case does this describe absolute truth.

So there are a few rules to what I call the “non-math”, or math as a philosophy versus math as absolute truth that apply. This is especially true in what Market Economists and Finance specialists do, which is largely regression modeling (including DSGE models. More on that in a minute).

  1. All regressions rely on statistics.
  2. All statistics happened in the past
  3. Math is 2+2=4.
  4. “Non-math” is: 2+2=the coefficient of the variables used, at the intercept point
  5. It is not humanly possible to account for all variables (DSGE modeling).
  6. All forecasting models use 1-5, and are only as good as their variables

The philosophy of math is about the social constructs that we build around variables. Why are apples and oranges my only variables? What if in reality, I had the entire produce department from my local supermarket at my disposal? Would I only have one substitution choice out of hundreds of fruits if apples were out of season, or the price too high? What if a hurricane came and destroyed my stock of apples and oranges? These are the types of things that DSGE models try to answer, by tossing in every variable in, including the kitchen sink.

There are 2 main problems with DSGE models: 1) they have been historically horrible at predicting natural disasters, even though there is a variable for that. 2) they have been horrible at predicting human social behavior based on social constructs. Two examples come to mind: the 2008 Financial Armageddon, and the Hurricane Katrina in New Orleans. DSGE models were front and center as a method, and the fate of people’s lives were at stake.

This does not mean that modeling is useless. The best example of regression modeling can be found in Climate Change science. Using past data to predict future results in climate change has actually been pretty accurate. Katrina was the exception, and since then, climate scientists have tossed out the variable, and shifted to the statement: “storms will be worse than in the past.” That’s a pretty accurate statement! This is also in the realm of “natural sciences” which tends to be more accurate anyway.

Within social science, the best regressions can tell us trends that happened in the past, only up to the present time. For example, we know from regression models that the longer it takes for unemployed people to find jobs, the more likely it will be that they will stop looking for one. This is useful for policy, social safety nets, and digging deeper into issues such as discrimination. Forecasting though, predicting the future, has been underwhelming in its accuracy.

And then there are things that models cover up, instead of reveal. The best example is the gender unemployment gap versus the racial unemployment gap. While it is a “social fact” that women make less than men, in the United States, they still have a better chance of employment at all versus African Americans and Hispanics. Sociologists love to point out that being a black women in America is infinitely worse than just being a women, but it’s still better than being a Black man in America:


We can model this chart! But both Sociologists and economists rarely do. So while models told us that gender was an issue in the labour market, and that gender coupled with race was also an issue, it covered up the fact that there is inequality in labour markets within groups as well.

The philosophy of math actually has little to do with actual math. The philosophy of math is more about  methodology. Perhaps it is time that both academics and the general public to stop being afraid of the math that’s actually “non-math”, and stop accepting the “non-math” as absolute truth.

Posted in Econometrics, Economic Theory, Public Policy, Race, Socioeconomics, Sociological Theory, Statistics, Uncategorized | 1 Comment

Revisionist History: The 2008 Financial Crisis, Human Resources (Micro), and the Structure of Labour & Capital (Macro)

Hindsight isn’t always 20/20. So far removed from 2008, many politicians, and some economists have reframed the events of 2008 as the “Financial Crisis” in a way that didn’t make it seem so bad. In fact, it was a global meltdown. In 2008, I was working as a VP of Human Resources, and already engaged in a Sociology of Markets. What I saw was not a “business cycle” or even a “crisis” as worker after worker paraded through my office as I laid them off. What I saw was complete and utter economic devastation first on the micro level, and then on a global level.

Paul Krugman is taking some heat for suggesting that it was really small shadow banks and mortgage lenders (like Countrywide Mortgage) that was responsible for the “financial crisis” and that banks really aren’t too big. Rightly, he’s taking some heat for that. Clearly, Dr. Krugman had some political skin in the game, and that’s okay. However, to suggest that a tiny mortgage lender in Colorado took out half the GDP of NATO is ridiculous on its face. There’s something else worth remembering – yesterday’s Bear Sterns and Lehman Brothers is today’s Citibank and JP Morgan Chase. Remember – in the TARP agreement, with the elimination of investment versus commercial banks, commercial banks were required to buy the smoldering ashes of the investment banks, along with their “shadows.” In the post-2008 Apocalyptic world, shadow banking IS commercial banking. It’s an arrangement of institutions that society can’t seem to live without.

In the Summer of 2008, I was noticing some strange behavior in the markets. Other than precipitous drops in the investment banks, which I wasn’t really concerned with that the time, my company was dependent on two main sectors: new home construction, and manufacturing, which were leading economic indicators. I was used to seeing one or the other move cyclically, but this time I was seeing both move (mainly down) synchronistically. Additionally, the VIX was going wild. I sent an email to my CFO that simply said: “BRACE FOR IMPACT!” with some charts attached. This wasn’t “cyclical.”

I immediately moved my entire 401(k) to Treasuries – something I was lucky enough to have the ability to do. Prices on Treasuries were still low (though rising), and when the smoke cleared, I only lost $1000 as everyone plus their relatives flooded the Treasury bond market, driving prices up. Most were not so lucky.

Within three months, the stock exchanges around the world were shutting down on “sell triggers” on an hourly basis, the VIX was convulsing violently, and Jim Cramer, “Mr. Bull Market” was screaming at Fed Chair Ben Bernanke to open the Fed’s Discount Window – the “Nuclear Option” of depression monetarism. In Cramer’s words: “We have Armageddon!”

I watched in awe as Iceland, Ireland, Spain, and Greece all declared emergencies, capital controls, and bankruptcies. I watched in awe as home after home across all the places I wanted to retire someday, were either burned to the ground, or rotted to the ground in foreclosures.

My company, like most others, was on “austerity budget,” trying to stay afloat without laying anyone off, hoping the storm would pass. I renegotiated health insurance & worker’s comp insurance, saving an extra $5 Million. It also required the CEO to give up his “Cadillac Insurance.” He wasn’t too happy with that. Everyone took a 12% pay cut, including the CEO, that would never return – except for the CEO. When cash flow picked up enough, he got his 12% back – along with his Cadillac health insurance.

With credit markets in the Ice Age, it eventually became impossible to stay afloat, especially with the HR budget that we had. The only way for the company to survive was to start rounds of layoffs. The CEO said that the less senior people got thrown overboard first – a much different tack from what other companies were doing. He felt that if I threw the most senior people overboard, they would vote to unionize before they got their pink slips, and under the National Labor Relations Act, I couldn’t lay them off at that point. The CEO also felt that if the more senior people saw the blood in the water, it would “deescalate” any union mumblings. It did. The company would survive, but to this day, it is only a shadow of its former self, with raises for the CEO of course.

After 20 years in Human Resources, I no longer work in the Human Resource field.

Without getting into the technicalities of derivative swaps, the 2008 “Financial Crisis” wasn’t just about mortgages. It wasn’t about some off-the-grid mortgage company in Colorado. It wasn’t even about people taking out bad mortgages. And it wasn’t just about a crisis in finance. It was a socially and economically devastating series of events created by an arrangement of social institutions that were rooted in finance capital – which was creating debt in credit markets to fuel debt in housing markets – backed by the full faith and credit of the U.S. Treasury. These series of events destroyed homes, families, the labour force, cities, and entire nations. It crossed all sociopolitical and socioeconomic lines. It has forever changed the structure and nature of both labour and capital.

This wasn’t a “crisis.” This was  (in my words) an Economic Apocalypse. Or in Jim Cramer’s words, who is usually over-optimistic about markets, “We have Armageddon!” There is nothing in the system – nothing in the arrangement of institutions – nothing in the politics that has changed in any significant way that says that these events cannot happen again. Banks were too big to fail then, and they’re too big to fail now. The only difference is that instead of Lehman or Bear trading derivative swaps, it’s now Citigroup and JP Morgan Chase.

The facts are not in dispute. As minimizing as some economists and politicians want to make it, revisionist history doesn’t work so well on people whose memories are still fresh because they still feel the consequences.

Posted in Economics, Labor, Markets, Political Economy, Public Policy, Socioeconomics | Leave a comment

An Open Letter to Alberta Canada

Dear Alberta: The CBC says that Albertans think that non-Albertans do not have sympathy for you. Well, I do. But my sympathy goes beyond the masses of people unemployed. My sympathy extends to you in being duped by economists and politicians into thinking that there is actually a demand for Canadian oil that a pipeline will fix. The reason prices are down is because of a global supply glut – not the lack of a pipeline.

I really feel bad for you. As a labour economist and sociologist, it’s been my life’s work to find a way to give everyone a fair shot in the labour market system that we have, albeit a crappy one. The fact is that no one wants Canadian oil. It cannot be sold even if it could be produced for less than $65 per barrel. The fact is that the United States and OPEC are trying to out-compete each other, and the result has been an oversupply with lowering demand, which is driving prices down.

In other words, it’s an oil pissing contest between the U.S.Russia, and OPEC, as this chart from the U.S. Energy Information Administration (Feb 2016) shows.


This oil pissing contest shows no signs of ending soon, and Canadian oil just cannot survive the onslaught. You can ship all the oil east that you’d want, and it would still result in Alberta oil fields being closed down. While Canada has a long history of getting caught in staples traps – where it costs more to produce commodities than it can export it for, at the end of the day, no company can stand years of massive losses without going out of business, which would result in job losses anyway.

The only “oil” solution is to nationalize the oil sands, and provide government price supports. According to my calculations that would cost Canada about 30% of GDP if price supports continue two years or longer. I estimate it would cost at least 10% of GDP just to nationalize the oil industry in Canada.

To give an idea of what this means on markets as well: Canada’s credit gets downgraded, and the Bank of Canada would have to raise interest rates – which means the housing and credit bubbles burst. Millions of Canadians would lose their homes & cars, consumption would drop, and Albertans would be out of a job anyway – all for 10-30% of the national wealth to support Alberta’s oil industry.

Instead, what Alberta needs is SOCIAL supports – not price & market supports (also known as corporate welfare), and not a pipeline to carry goods to a market that doesn’t exist. These social supports include building infrastructure for public goods, extended EI benefits, working class tax breaks, environmental reclamation and government sponsored investment in wind energy, which Alberta has plenty of. It also means diversification in labour including manufacturing, clean energy sectors, service sectors (such as health care), and STEM education. It will be infinitely cheaper (0.1% of GDP as opposed to 30%), and create better long-run results both socially and economically.

It’s not that non-Albertans don’t care – they do! Some non-Albertans, like myself, specifically care enough to make Albertan families secure in the long-run with short-run social supports, and not let them get caught in the staples trap that sucks the life out of Canada as a whole for what will be short-term employment in a dying sector.

Posted in Demand, Economics, Environment, Labor, Markets, Public Policy, Sociology, Wages | Leave a comment

After the Fall: A Post Trump-ist Society

ct-fans-and-foes-of-donald-trump-photos-20160311This is an image from the Chicago Tribune that is indelibly burned into my mind. Yet as much as Trump is analyzed, the true object to think about is not the man, but the people. Win or lose, the people that support(ed) Trump are still a part of American society. They are not going to simply cease to exist. Most people of sanity in the world understand that a Trump win would be a disaster for the world. A Trump loss may be equally disastrous.

What will happen to that women in the picture after the election? Will she just go off and die somewhere? Will she join a part of a violent revolution? Will she have a moment of clarity and turn to self-reflection? Will others aggregate in her choices after the election? The fact is that we don’t know. And we don’t know for the tens of millions of other Trump supporters like her. This is the part that will perplex social science – and society as a whole – for decades, or even centuries.

The United States will forever be stained as the dark underbelly of American Society ever presents itself in the Trumpist state. The real question is, will the rest of the world “forget,” or will those people like the woman in the picture be stigmatized to such a degree that American Society will have no choice but to examine the state of its society? Again, no one knows.

One of the largest enigmas in Social Science, from Psychology to Sociology to Economics, is in post World War II Germany. While John Maynard Keynes may have pointed out the “Economic Consequences of the Peace,” few psychologists and sociologists really understand the depth and nature of Hitler’s followers. It’s not just that they were “brainwashed,” though that certainly happened; they openly claimed after the fact that they had no idea that Hitler lied to them, despite being forced to look at all the evidence that showed that they indeed, did know – or that there was no way that they couldn’t know.

In the post World War II era, the German people themselves were stigmatized by the world for the horrors that they consented to – even if some of that world blame was hypocritical. The Nuremberg trials were less about the actual trials, than they were about a type of Social day-of-reckoning en mass. It was a constant reminder to the German people, and the world, that the actions of the Third Reich were done with the full knowledge, faith and backing of the people. Hitler never came up with new ideas about Jews – he only reiterated the old ones that had been around for hundreds of years in the public sphere. He said what Germans had been thinking. German society, especially in the eyes of the world, would never be the same.

If Trump wins, it is indeed disastrous, putting the United States on a short-list of politically unstable states. A Trump loss without public or international accountability may be just as disastrous, putting the United States on a short-list of politically unstable states with another demagogue just around the corner. The rest of the world will await in fear of what they already knows is going to happen in a post-Trumpist society.

Posted in Political Economy, Politics, Sociology | Leave a comment

The Art of denial: 1982 Edition

Sociologists (and others, I don’t mean to pick on one group) are still insisting that people are being forced to work more hours in the exploitation of labor. While this was certainly the case in 1982, a lot has changed in the economy – just since 2000. Some data I ran from the OECD two years ago suggests that people are actually working less hours globally, and a new paper from both The Brookings Institute (PDF) and the NBER suggests the same trends in the U.S. since 2000. It’s not 1982 anymore.

Even when we hear reports that people are working in precarious jobs, requiring more than one job, especially in the G7, the data still shows that people are working less hours overall.


Avg hrs G7

What was striking about the OECD data is that outside of the G7, even those countries that are known to “exploit” their labor are doing a little less exploiting.

Avg hrs other

There’s no OECD data from the global south, but considering the trends from Mexico and Chile, it would be interesting to look at. Of course, after the global financial apocalypse in 2008 average hours worked fell off a cliff for the G7 countries from their previously declining trends.

Both Brookings and the NBER papers point to “labor fluidity” as being the cause: where workers from shrinking firms can no longer transfer their labor skills to growing firms. They point to the idea that both employer and employee are “risk adverse” to taking a chance – because after all, people seeking jobs have a choice whether or not they want to pay their bills. The idea of the sellers and buyers of labor being on equal ground in negotiation is a false premise. I suspect that the story is much deeper.

And I suspect that in the labor marketplace, time (vis-à-vis quantity of hours supplied by the employer) plays a much bigger role.

Those social sciences that keep insisting that people are working more hours needs to be relegated to the same dustbin of history that Reganomics is in. Exploitation may indeed be happening, but just not in the direction that it is traditionally thought of. Not only isn’t it 1982 anymore, it’s not 2000 anymore.

Posted in Labor, Sociological Theory, Sociology | Leave a comment