6th Critical Finance Studies Conference

The call for papers for this year’s Critical Finance Studies conference just went out, which can be found here. Joyce Goggin and Thomas Bay are the conference organizers. SpecMat was at last year’s conference at Stockholm Business University. We’ll also be at this year’s conference, at The University of Amsterdam.


Topology & Fiscal Federalism in the EU

In his analogous coda on the perennial search for the phase singularities of cardiac arrhythmias (i.e., the arrhythmia’s temporospacial raison d’être), biologist Arthur Winfree draws on an industrial consultant’s inability to compile a complete set of answers for his/her final report. As is the nature of a human’s cerebral difficulty in approaching the intensive properties of dynamical systems, which are not only often unpredictable, but simultaneously function within a highly topological temporospacial scale (thus, rendering it almost entirely impossible to create any sort of cerebral tableau), the consultant concludes that his/her report has not, in fact, acted as a true coda, but simply created further confusion and further questions, which have naturally arisen out of the attempt to circumscribe some preliminary answers. But for Winfree, the lack of concrete answers ought not to predicate a state of delirum. Rather, the confusion is now superior a posteriori, as in it has elevated the questions to a “higher level,” (i.e. the consultant and the affected parties are now questioning which key fits in which lock, rather than deliriously questioning what the rudimentary purpose of the lock mechanism even is).

As the thing called finance evolves, the political economist, the financial consultant, et.al fall more and more in line with Winfree’s allegory. This is currently the case in the European Union, which is facing, amongst other things, post-crisis financial fragility, which the International Monetary Fund confabulated on in a report[1] prepared for last weekend’s G20 Summit in Australia. A posteriori the IMF has now begun raising pertinent questions regarding the future security of and in finance in the Eurozone. The report states that intensive international financial regulations in the EU have the potential to boost the global economy’s size by over $2 trillion in the face of the current state of fragile, post-crisis recovery in Europe. While global economic and financial activity has picked up amongst advanced international economies, the IMF report states that substantial exogenous and endogenous risks continues to plague emerging economies (e.g. Brazil, Indonesia, Turkey, South Africa), which have recently experienced volatility in equity markets, rising balance-sheet spreads, and currency depreciation. Among the proposed measures, the IMF has called for product and labor market reforms and increased cooperative, international policy measures, which if implemented, and correctly, will supposedly both raise economic growth by 0.5 percentage points annually, and reduce the risk of future shocks to the global financial system.

The IMF report—which builds upon recent discussions throughout the EU to implement a more dynamic EU-wide paradigm of financial regulations and implementation—has brought a topological approach to post-crisis financial questions. Before the implementation of the Euro in 2001, the EU struggled, some may even say failed,[2] in its implementation of a single European currency. Subsequently, its Growth and Stability Pact[3] faltered in the face of credulity due to “purely mathematical parameters without any discretionary powers or political instruments to enforce it.”[4]

As of late, discussions throughout the EU have pointed toward a system of so-called fiscal federalism, whereby the deployment of EU-wide Euro Bonds could act as a form of risk-averting securitization in which the pooling (i.e. de-differentiating) of Euro bonds would result in the tranching (i.e. re-differentiating) of said bonds in order to create a nomadic form of debt oscillation between EU member states—essentially, the move toward a more defined EU-wide financial system, similar to the U.S.’s federal/state relationship. From a topological (and Deleuzian) standpoint, the proposed idea of fiscal federalism roots itself within dynamical systems theory, along with a form of Nietzschean genealogy, in which Euclidian lock-and-key tests are eschewed in replacement of an empirical, constitutive approach to the inherently international dynamism of financial markets and their interconnected relationship with different systems, such as political relationships and regulations. The IMF reports a perennial state of post-crisis fragility existing within the EU, which requires, according to the IMF, the aforementioned topological approach (i.e. as of now, advanced economies appear to be ascending; however, we know future external shocks or perturbations will inevitably disrupt the oscillation of debt within the not-so-financially-unified EU). The presumption behind fiscal federalism is a type of Deleuze-cum-Rawls ideology, in which the difference principle is applied to states within a union—granting the premise that economic inequality is inevitable amongst states: therefore, the better-off states buoy-up the struggling states via a dynamic, but centralized system of pooling and tranching with so-called Eurobonds (a sort of distributive-financial justice).

Here’s Winfree on dynamical systems’ susceptibility to lethal stimuli with regards to the circadian rhythms of mosquitos: “The focus is on the organization in time that we sense in circadian rhythms and its susceptibility to shattering by a flash of light near midnight; and on the quicker rhythms of the mammalian heartbeat, their electrical signatures, and the susceptibility of the rhythm to lethal disruption by an unfortunately timed stimulus.”[5]

Compare Winfree’s work with the critique in last week’s IMF report, which states, “[a] new risk stems from very low inflation in the euro area, where long-term inflation expectations might drift down, raising deflation risks in the event of a serious adverse shock to activity…Vulnerabilities related to built-up positions, including a substantial increase in foreign holdings of domestic sovereign bonds and higher leverage, both in the form of more direct FX borrowing by corporations and a rapid increase in domestic credit, could amplify the impact of shocks.”[6]

As advanced economies continue to grow, a number of insidious progressions within the world of finance have the potential to “amplify the impact of a shock,” such as foreign holdings of domestic sovereign bonds and assets (e.g. Goldman Sach’s recent purchase of Denmark’s previously-public DONG Energy). However, the IMF report approaches the potentiality of shocks from a topological viewpoint, taking in mind domestic, foreign, money and capital markets with regards to international finance and macroeconomics, while additionally drawing upon bifurcated systems such as China’s shadow banking sector and the effects of international corporate funding.

That being said, the IMF report is not without criticism. Robin Harding of the Financial Times has referred to the recommended regulations as “politically difficult,” stating, “[i]t is not clear whether coordinating reforms at the G20 will make individual countries more likely to carry them out.”[7] Following the release of previously-secret documents last Friday regarding the Fed’s expansion of hundreds of billions of dollars in aid to foreign countries in 2008, discussions appear to be moving more toward the international interconnectivity of finance. “To the rest of the world, I don’t think these transcripts are going to be very reassuring,” Eswar S. Prasad, a Cornell economist and author of ‘The Dollar Trap,’” was quoted in Tuesday’s New York Times. “What they show is that the U.S. policymakers are very narrowly focused on U.S. interests, and their actions are not so much determined by any moral obligation to save the world economy, but rather a clear self-interest in preserving U.S. economic interests.”[8] Thus, the EU may predicate further financial decisions on alleviating what some see as a potentially detrimental relationship with the U.S via topological regulations. That being said, the IMF report, while not entirely comprehensive, approaches the U.S.-E.U. relationship from a topological stance, calling for specified regulations regarding international financial relationships rather than instituting a series of credulous, codified regulations aimed at alleviating ostensibly pernicious behavior (i.e. the Fed’s recent consideration to subject U.S. arms of foreign banks to annual stress tests).[9] Regardless, the IMF report and the movement toward fiscal federalism appears to be moving towards a more dynamical and topological approach, or at least—as with Winfree’s industrial consultant—increasingly asking the right questions.

[1] International Monetary Fund, Global Prospects and Policy Challenges. Feb. 22-23, 2014. http://www.imf.org/external/np/g20/pdf/2014/021914.pdf

[2] Romano Prodi, “A big step toward fiscal federalism in Europe,” The Financial Times. 20 May, 2010. Web. http://www.ft.com/intl/cms/s/0/3f74c1d8-6444-11df-8618-00144feab49a.html – axzz2uFsW6ZHD

[3] An EU financial “regulation,” which attempted to avert risk within member states (i.e., a given nation’s debt could not exceed 60 percent of its GDP)

[4] Note 3 [supra]

[5] Arthur Winfree, When Time Breaks Down: The Three-Dimensional Dynamics of Electrochemical Waves and Cardiac Arrhythmias, (New Jersey: Princeton University Press, 1987), 6.

[6] Note 2 [supra]

[7] Robin Harding, “IMF says Reforms Could Add $2.25tn to Global Economy,” Financial Times, 19 Feb. 2014. Web. http://www.ft.com/intl/cms/s/0/dc48dfa2-99b1-11e3-b3a2-00144feab7de.html?siteedition=intl – axzz2tqmgxD1p

[8] Neil Irwin. “Fed Extended Rescue Effort Globally in 08’ Crisis,” International New York Times. 25 Feb. 2014. Print.

[9] Banks are selling assets or considering moving business into legal structures outside the purview of U.S. regulators…Bank executives say the steps they are considering are legitimate ways of adhering to increasingly onerous regulations, while minimizing costs to shareholders…The new rules are likely to force European banks to add billions of dollars to loss-absorbing capital to their U.S. units.” Max Colchester and David Enrich. “Banks Parry U.S. Rules,” from The Wall Street Journal. 11 Feb. 2014. (a) To avert this regulation, U.S. companies can sell so-called convertible bonds to their parent companies to build equity in order to fall above this $50 million threshold. Analysts worry of the bonds’ potential to harm the system by quantitatively increasing the substratum of funding debt. So-called convertible bonds are another example of shocks resulting in the bifurcation of trajectories. I.e., in Deleuzian terms this utilization of lock-and-key mechanisms w/r/t regulations continues to ignore the substratum of attraction w/r/t banks and financial institutions following consistent singularities (e.g., risk management, building capital and increasing equity.) However, these “onerous” regulations are meant to better tests banks’ potential risks and strengths in the face of future perturbations, which the tests will attempt to track. Thus, there is a slight paradox of Deleuzian ideologue at play within the Fed’s actions. The intent of the stress tests seemingly revolve around the need to map the actualization of future (i.e., virtual) financial shocks and perturbations (i.e., a sort of Winfree-esque test to track the affects of perturbations on a given system. Here, the light is simply replaced with the Fed’s stress test, while the mosquitos mime the foreign arms of U.S. banks). However, ironically, the tests are simply an off-shoot of a larger regulation, which, like the Volcker Rule, seemingly eschews a contextual view of financial intermediaries; thus, surrendering itself to exactly what the WSJ states: banks are seeking to continue on their longstanding trajectories toward attractors by simply bifurcating their trading schema into different areas (convertible bonds).

— by Alex Montero

note 1. Topology & the Ontology of Finance

puzzles-7-bridges-map-eulerThe epistemologists of finance (from Marxist economists to quants) are geometers, in that the latter set out to measure quantities (e.g. areas, volumes, values of angles, lengths of sides). However, its not so much that none of these things matter to the topologist as that, first, such quantities prove ordinary whereas topology concerns itself with the singular, and second, in the final analysis there never is any final analysis but only a perpetual becoming of different quantities with their singularities (viz. topological invariants) and affects (viz. traits of expression).The ontologist of finance is for this reason a topologist.

And from the synthetic we can now derive the referent….

Our set of tutorials on the nomadic distributive capacities of synthetic finance formally commenced here, and then went here.

If you’ve moved with us, you now have a good enough understanding of credit default swaps, total return swaps, single name credit derivatives in general, and tranches (the latter of which is the redifferentiating counterstep to the dedifferentiating step of pooling -as the two steps to any securitization).

Now then, it’s time to move deeper into our consideration of the fungible material process of structuring finance assets -i.e. taking a preexisting generic or synthetic asset, dividing the asset, and (you know the drill:) in the course of its division, we are now capable of changing the asset in kind. So take an asset, any asset, and securitize it; this asset has been transmogrified: it is now a security (and all the economic properties that differentiate concomitant with this act therein!).

A correlative point to keep in mind here, is that as the geometer observes the loosening of a series of invariance requirements present and placed on Euclidean (or even some non-Euclidean) geometric transformations, and as we ascend down the scale of regressive differentiation in mathematics’ birth to form of topology, topological transformations, and topological invariants, it is not the case that there is now too much white symmetry, and everything is rendered into some kind of formless, homogeneous, thoroughly dedifferentiated blob of geometric properties. No, not at all. In fact, as we observe the loosening of invariance requirements that were previously in place, we see the birth to differentiation of a wholly new set of geometric properties which were real and virtual but still yet unactualized, and therefore inaccessible, under more rigid restrictions marking the earlier class of transformations. For example, continuity, closure, and so on; these new properties are specific to topology only because and as a result of the act of loosening. We see the same thing and more so with the synthetic financial economic transformations we call synthetic exchange.  We have already seen this in our earlier work on Tranches. We will continue to see this throughout.

Now please follow this link to learn about the role of CLNs in Tranching.

Tranching, A redifferentiating technology, is now available

Ontological inquiries into the mechanisms of financial systemic oscillations and their entrainment by capital flows, leverage ratios, and other critical economic stimuli, has led us to thinking more generally about phase-setting experiments. To this end, we will be modelling a universal synthetic CDO and a H2O fall economy to realize a fully-equitable H2O fall economy -Lozano says here you’d get all the war machine of the market without the conservativism of State-violenced capitalism, and the pistons of difference can pump away, free from the sedentarist constraints of re-distribution.

Great, we think. Tell me more. How?

This post is an entry en media res with a series of tutorials (the first 3 of which can be accessed here) on how to use synthetically-structured financial assets as an instrument for effecting a radical nomadic distribution -we could label these series of tutorials Communism & Credit Derivatives if we were hoping people might get the wrong idea about the right object, or rather the right idea about the wrong object, but we’re not going to do this. We didn’t just do this.

Structured finance is fundamentally a technology for de-differentiating (pooling) and re-differentiating (tranching) risk and cash flow -fungibly, flexibly, plastically, and as we wish. Tranching comprises an activity by which we divide an asset (generic or synthetic), and in the process of dividing we change that asset in kind.

So the purpose of this post is to tell you that you can read about Tranches, that is to say our tutorial on Tranches can be found, here.

So once we grasp the powerful material capacities of Tranching -its capacities to arrange economic singularities-  we will then be able to think about CLNs (which is the derivation of a generic referent from a synthetic exchange -i.e. the value of a referent here derives from the derivative, the copy fashions its own model), and then after that, we’ll be ready to directly consider how to build a synthetic CDO; and then after that we’ll be able to think about tinkering with a few things in a traditional synthetic CDO to get a universal synthetic CDO, the latter of which is the technology whose radical nomadic distributive capacities can only with some difficulty be overstated.

We’ll explain the H2O fall economy sometime later.

and regressive differentiation continues

buy-green-desks-inmodern-rekindle-deskOne of the more interesting hallmark features of the wholesale transformation to the biota of capital markets these past (roughly) 50 years as been the line of flight from any meaningful distinction between between debt and equity. Like Euclidean geometry, its not so much that the principle of its equivalence classes is so much always “wrong” as it is only sometimes right -of course, how the figure/asset behaves when moving from one to another place in space all depends on the structure to its space of motion.

This trend -i.e of the regressive differentiation between debt and equity- was perhaps first best formally observed by Modigliani and Miller, but since then has been reformulated, both epistemologically (by BSM, etc.) and ontologically (convertible bonds, etc.) time and time again. Issues surrounding the resulting material obfuscation has most recently been reinvoked as a subset debate of the big debate over Dodd-Frank’s ostensible ban on banks’ ability to continue to trade their own capital.  Burne and Tracy’s “Debt Bundles Unloaded Before Bank-Rule Shift” (WSJ, January 9th 2014) report that the $300 bn CLO market has been rumbling as of late in light of the issue of whether banks have to ‘divest themselves of their CLO notes’, precisely because its unclear whether such notes, whose values are tied to the value of of the portfolio of loans,  are debt or equity? If the notes are equity, no, they cannot keep them on their balance sheet; but if they’re debt, then perhaps they may be held. The problem is, no one seems to know for sure: is it debt or is it equity? -the answer is likely “yes, it is”!

The piece can be found here, but is probably less interesting than the aforementioned issue it raises.

Single-Name Credit Derivatives are now available

We will ultimately want to illustrate that artificial leverage and natural leverage are two kinds of leverage that differ in kind.

Artificial leverage is exogenously introjected into the asset (to augment the volume of gains and losses), while natural leverage is endogenous, intensive, natural, i.e. built into the exchange of the asset itself.

We wish to demonstrate that structured finance is an organic mode of production of natural leverage, which if universally distributed, could be infinite.

When we show these two things, we will be doing so in order to convey that a universal waterfall economy amounts to a phase-resetting mechanism whereby the rhythm, rate, and plastic channels to the distribution of all risk and cash flow can be hyperfungibly annihilated, modified, or altogether reset -and importantly, in a way that is nontotalitarian, nonplanned, noncapitalist, but somehow a set of “free” markets (if we are still permitted to use that term) that are fully-equitable and make all parties involved better off. No biggie.

It is true that this truth is predicated on the existence of topological invariants, singularities, and affects to the spatial timing of the nonlinear oscillators comprising financial markets (of course if one grasps the subtle but profound ontological claim made by dynamical systems theory (that Deleuze aptly labels the univocity of being) the argument has already been made, and we have no good reason to doubt the radical nomadic distributive capacities of nonadditive stimuli endemic to nonlinear systems when induced into conditions far-from-equilibrium).

This requires our reader to understand what the hell even is a waterfall economy?

To begin to answer this latter question, Lozano here at specmat (who, again, is only one specmater -he doesn’t even speak for himself, let alone anyone else) has elected to pursue the strategy of tutorials -in derivative satisfaction of the project objectives of The Lives of Concepts of Finance– on synthetic finance: he will move from ontological examinations of single-name credit default swaps, single-name total return swaps, and single-name credit derivatives (all three of which are currently available here and here and here), to then some key concepts in structured finance (e.g. tranches, CLNs, CDOs); and from there we will be an informed position to appreciate the impetus of the aformentioned claim.

We will also greatly augment our understanding of synthetic finance, which will aid our understanding of Deleuze’s Guidebook to Synthetic Finance (which will recommence shortly).   

Some of last year’s new year’s resolutions for this year

The New Year is often conceived as about new beginnings. Of course this is not so much “new” beginnings, per se, i.e. as in novel or “never actual until now”, but usually the recommencement of old beginnings, or at least the rebeginning of old commencements (which is not the same as the former). These in turn are often thought to involve some sort of abstract rededication to our present conception of our future selves.

Now I try not to introspect too much, in part because the soul of man is dark. So here at SpecMat we’re rededicating ourselves not to ourselves but to our project -and not to any project in the future, but to our new resolution to further pursue our old and last year’s project, this year, and the next. What are the terms of our resolution? In truth there are a many, but a few of which we are not presently too impatient to speak of herein:

First, we must get more rigorous about our primary study of finance (er, we need to start jogging 6 miles now instead of slowing down after 5; or is it limit ourselves to 3 alcoholic beverages instead of 8?). For my part I’m going to try to stop using the word financialization, not because there’s anything in particular wrong about the word, and not that I object to others using it, but because of what the word tells me about my own too-general (viz. nonontological) mode of thinking when I’m using it. Its necessary to be (as D&G put it) rigorous and anexact -not unrigorous and general. The rigor, in my opinion, comes from ontological specificity plain and simple; and the anexact-ical quality implies topological invariants, singularities, and group-theoretic principles (which amount to the proper posing of problems) about symmetry, but implies nothing about -izations or -isms.  These are hard to avoid en masse, but I’m going to try 6 miles, not 10, so I think I can go without using the term for a little while at least.

We must get more technical about our ontology by returning to the question of epistemology (er, I want to get a big promotion; or is it make $5 mil instead of being satisfied with $4 mil?). This means returning once again to our “textbooks”. Its time to continue to think seriously about continuous recalibration (I’m going to begin my move by moving through, or rather with, Merton and Ayache). And why? In short, because structured finance -or rather its pooling (dedifferentiation) and tranching (redifferentiation) processes can be arranged to effect a natural leverage -that, if universally implemented, would/could effect a fully functional waterfall economy. And when you do a little arithmetic, you see that you could effect nomadic distribution through the infinite leveraging capacities of universalized tranches. Yes we will emphasize conditions far-from equilibrium (I have something I want to tell you about “what Benard cells tell us about finance”), and yes it all has to do with nonadditive causal processes in a nonlinear system, and yes…. But wait, lets back up, what is this arithmetic? A Waterfall Economy + a universal synthetic CDO = a fully-equitable (but not equal!) waterfall economy. Its simple! I’ll explain this in more depth in 2014.

We should not let up on The Lives of Concepts of Finance (er, I need to do more situps, because I can’t do that many situps right now, and after all how can you ever start doing more situps if you don’t practice this by doing situps?).

There’s other stuff as well, but let’s just stop here for a minute: Let’s recommence our old beginning by giving a life to a concept of finance.

Here’s a first concept that anyone who wants to begin to think about what more our economic institutions could become (but which they presently in fact are not) will need to know. (-and since we didn’t get yet to the term of our resolution “don’t insult your neighbor’s intelligence” (and we certainly didn’t get to the resolution of “stop using parentheses so often”), this won’t be a problem)

Click here for learning about the life of a credit default swap. It’s a concept. It will help us better understand Deleuze’s Guidebook, whose recommencement is also a New Year’s resolution; and later when we begin to elaborate how to build a non-orientable economic surface with structured finance (as part of our Infinite Leverage project, and necessary for understanding how to effect a fully-equitable Waterfall Economy).

Deleuze on the Volcker Rule

The Deleuzian dynamical model of our financial system, theoretically synonymous with the view of “the plumbing behind the walls,” as Perry Mehrling calls it, provides not only a multidimensional, topological map of interlocking markets, banks, hedge funds and the Fed to name a few, but an empirical, constitutive understanding of the ripple effect of certain regulations, especially in regards to the shadow banking sector, which Mehrling correctly notes “relied symbiotically—some might say parasitically—on ties with [the traditional banking system][1]. As we now understand, a posteriori, there were a few driving forces behind the growth of the shadow banking system, to which a recently approved regulation has the symbiotic potential to contribute.

Explained simplistically, within the traditional system, or Jimmy Stewart banking, banks used deposits to make loans to other community households and faced four general risks—repetitions, or singularities, in the morphogenetic process—solvency risk, interest rate risk, liquidity risk and credit risk.[2] As a semi-bifurcated system, shadow banking arose as these trajectories continuously attempted to meet the aforementioned singularities to alleviate risks through the purchase of credit default swaps and the utilization of securitized loans as collateral for borrowing asset-backed commercial paper and repos in the wholesale money market.[3] As the name entails, trading within the shadow banking system predominantly exists off banks’ balance sheets, often in the unregulated territory of Cayman Island hedge funds. However, from the traditional perspective, as a pseudo-entrained[4] system, Mehrling notes that a traditionalist perspective backed the acceptance of shadow banking, which for all intents and purposes was, and to an extent still is, the Ghost of Jimmy Stewart’s Past.

So in 2013 what has the rise, fall and subsequent post-crisis rise of shadow banking taught the political economist?  On Dec. 10, 2013, five regulatory agencies approved the long-awaited Volcker rule, which seeks to set a ban on propriety trading.[5] As the history of shadow banking has shown us, and as some critics[6] have rightfully pointed out, a simple regulatory ban on propriety trading does not take in mind the multidimensional potentialities of financial instruments, which, as intensive properties of a hyper-fungible dynamical system, hold the potential to bifurcate into a new system (i.e. shadow banking) when faced with an external perturbation (i.e. the Volcker Rule).

Herein lies, to the most recent and literal extent, what a Deleuzian approach to financial case studies (or with the Volcker Rule, a lack-thereof) ought to provide the spectrum of heterodox political economy. When we understand the multidimensional nature of the dynamical system that is finance—i.e the symbiotic relationship between shadow banking and propriety trading, which further coincides with liquidity in both money and capital markets—we, by proxy, understand the virtual potentiality of the paradoxical Volcker Rule, a regulation that in its roughly 1,000 pages, makes only one mention of its potential to “drive risk-taking to the shadow banking system”[7] and, thus, increase the very trading it sought to deplete.

With every move toward risk-averting singularities, the shadow banking system has become differentiated and bifurcated from on-balance sheet proprietary trading. As these singularities act as a substratum of repetition, the singularity of proprietary trading will continue to act as an attractor. But now, with the institution of the Volcker rule, these trajectories hold the potential to pass into the continuously expanding bifurcated multiplicity that is shadow banking. Because, as we now know, what is shadow banking but the actualized potential of intermediaries attempting to consistently meet the singularity of risk alleviation through the shadows of off-balance sheet proprietary trading?

Arthur Winfree’s work on the seemingly untraceable phase singularities of cardiac arrhythmias may offer the best coda in regards to what a Deleuzian approach provides the political economist when observing the potentiality of regulatory attempts to change the trajectory of risk securitization:

“What does any of this mean? Perhaps not much. Our situation is like that of the anonymous industrial consultant whose final report concludes; ‘We have not succeeded in answering all your problems. The answers that we have found only serve to raise a whole new set of questions. In some ways we feel we are as confused as ever, but we believe we are confused on a higher level and about more important things.”[8]

by Alex Montero

[1] Mehrling, Perry The New Lombard Street pg. 116

[2] Mehrling, Perry The New Lombard Street pg 117. While, Mehrling only lists solvency and liquidity as the prominent risks faced by traditional banks, Saunders and Allen introduce interest rate risk (as interest rates rise, long term loans become unprofitable) and credit risk, and leave out solvency risk in their empirical study of the crisis. However, it appears that the banking system’s consistent exposure to all four as repeated driving forces, or singularities to some extent, played a part in the creation and growth of the shadow banking sector.

[3] Mehrling, Perry The New Lombard Street pg. 118

[4] I say pseudo-entrained since, while shadow banking ostensibly appeared as an unregulated–and unsecure–independent reincarnation of traditional banking, the crisis proved its symbiotic relationship with money market liquidity, which in turn affected capital market liquidity.

[8] Winfree, Arthur. When Time Breaks Down page 29.

Archimedes & Leverage. a first note

Archimedes did not invent the technology of the lever, but deployed a little geometric reasoning to exploit its basic physical principal. Plutarch relays Archimedes’ use of the principal of mechanical advantage, by way of simple block-and-tackle pulley, to lever a ship by hand.

‘…Archimedes, who was a kinsman and friend of King Hiero, wrote to him that with any given force it was possible to move any given weight; and emboldened, as we are told, by the strength of his demonstration, he declared that, if there were another world, and he could go to it, he could move this. Hiero was astonished, and begged him to put his proposition into execution, and show him some great weight moved by a slight force. Archimedes therefore fixed upon a three-masted merchantman of the royal fleet, which had been dragged ashore by the great labours of many men, and after putting on board many passengers and the customary freight, he seated himself at a distance from her, and without any great effort, but quietly setting in motion with his hand a system of compound pulleys, drew her towards him smoothly and evenly, as though she were gliding through the water.’ [1]

If later, an economic historian like A.P. Usher turns the latter-half of his craft to write a History of Mechanical Inventions, and in the process observes that Archimedes achieves his great material feat on the back of the block-and-tackle pulley, it’s because such instrument is a subclass of a class of instrument known to financial economics and mechanics alike –namely, the instrument of a ‘lever’.


To lever is to leverage. And leverage, in its utmost generality, is that activity which –in a thoroughly non-theological sense– miraculously seizes while yet preserving an input power to manage force against movement, to therein realize an excess of output force incommensurate with its input. In mechanics, as our careful reader will already detect in Plutarch’s version, and no doubt understandably so, we see all emphasis fall to the spatiality of leverage, with little more than an implicit nod to the productive role of positive differences whose spatial mediation requires a certain metrics of oscillation, and is therefore also and equally so temporal in kind.

To then commence our inquiry into leverage, we will naively implore Archimedes: ‘to lift a heavy ship by mortal hand? – Archimedes, please tell us, how this is possible?’

His curt reply will be, ‘through leverage.’

Or when feeling more loquacious, he may even elaborate, ‘by way of agent employing an otherwise inert instrument to exploit a set of positive differences between spatio-temporal properties.’

Or more fully still, that ‘when a quasi-causal operator arranges differences in force at different distances around a fulcrum, a certain timing is arranged in space –or rather a spatial distribution begins to ‘take up’ difference, to make up difference in time; the order of this distribution is the production of differences in temporalities, different temporalities are differentiated. This is, in short, the transformation of an inert object of the lever into a powerful technology capable of pivoting-on, and exploiting, but simultaneously (and paradoxically so) also producing such differences.

For indeed, we will now add, and by repeating our definition of leverage in its ‘utmost generality’: when positive differences are arranged at a sensitive point in an oscillation, at a critical value, and with the correct quantity and quality of inducement, the otherwise inert fulcrum spins on its singularity, and transforms into a dynamical instrument capable of producing an amplification of output power in excess of its original input. How far removed is this dynamic of leverage from the dynamic of leverage deployed in finance. As we will see, not very. It’s all a matter of knowing the difference between artificial leverage –sedentary, cardinal, convergent, and non-additive by nature– and natural leverage –which is nomadic, ordinal, divergent, and non-additive by nature.

So from here we commence our inaugural examination of financial leverage, and as we begin to move towards the proposition of infinite leverage. What do we have? We have a singularity combined with a set of affects, i.e. capacities to affect and in turn to be affected; there is the arrangement and exploitation of positive differences in space-time through intervention by a quasi-causal operator; and the dynamical use of an inert instrument to affect nonadditive outputs to matter and energy. These will suffice as our illustratives –our material illustratives for the miraculous power of leverage.


[1] This passage is worth reading in full:

‘For the art of mechanics, now so celebrated and admired, was first originated by Eudoxus and Archytas, who embellished geometry with its subtleties, and gave to problems incapable of proof by word and diagram, a support derived from mechanical illustrations that were patent to the senses. For instance, in solving the problem of finding two mean proportional lines, a necessary requisite for many geometrical figures, both mathematicians had recourse to mechanical arrangements, adapting to their purposes certain intermediate portions of curved lines and sections. But Plato was incensed at this, and inveighed against them as corrupters and destroyers of the pure excellence of geometry, which thus turned her back upon the incorporeal things of abstract thought and descended to the things of sense, making use, moreover, of objects which required much mean and manual labour. For this reason mechanics was made entirely distinct from geometry, and being for a long time ignored by philosophers, came to be regarded as one of the military arts.

And yet even Archimedes, who was a kinsman and friend of King Hiero, wrote to him that with any given force it was possible to move any given weight; and emboldened, as we are told, by the strength of his demonstration, he declared that, if there were another world, and he could go to it, he could move this. Hiero was astonished, and begged him to put his proposition into execution, and show him some great weight moved by a slight force. Archimedes therefore fixed upon a three-masted merchantman of the royal fleet, which had been dragged ashore by the great labours of many men, and after putting on board many passengers and the customary freight, he seated himself at a distance from her, and without any great effort, but quietly setting in motion with his hand a system of compound pulleys, drew her towards him smoothly and evenly, as though she were gliding through the water.’