Esoteric derivatives contribute to chaos on markets

The explosive growth of derivative products has played a role in increasing and spreading market irrationality and a movement away from fundamentals in influencing stock market traders. During the period 2000 to the collapse in 2007 -09 this explosion of artificial tradable collateralized debt obligations including synthetic portfolios and other exotica like credit default swaps greatly exaggerated the impact of the collapse of the housing bubble. This may well have happened during the most recent stock market swoon driven in part by shenanigans in short selling the volatility index, the VIX which we must note is constructed using the implied volatility of a wide range of the S&P 500 index from both calls and puts.The index is expectations driven and is not the literal variance but rather the implied variance based on the premiums that investors are willing to pay for the right to buy or sell stocks.The VIX takes the weighted average of all the option prices and attaches a single number to them which is called the VIX. For example if the VIX is 22 that means that the S&P is expected to stay within plus or minus 22 % range over a year a percentage of the time which represents one standard deviation. So clearly very few investors will understand how contingent and uncertain this product is nor also that it is expectations based and there is a built in margin of considerable error given the uncertain nature of probability. Choosing to short an index like this is a very risky strategy and it can and did backfire badly spreading its negative sentiment and panic selling. Further regulatory reform is in order.

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Irrational fears once again drive markets down excessively

Once again the irrational fundamentals on which the stock market is based have come to the surface with today ‘s over 4 % fall so far in the value of the Dow Jones index.At one point the market was down over 5 %. This is a significant one day drop in the Dow but by no means anywhere near the largest one day drop in its history. Previous shocking drops were of the order of 11 % or more at various unstable times in the history of the markets. Post Keynesians generally understand that markets are driven up and down by irrational exuberance followed by irrational fear. The irrational exuberance since President Trump was elected has been followed now by irrational fears that inflation is about to break out.

There is no credible evidence of  that at this time though it may possibly become a problem if accelerating economic growth drives the unemployment rate below 2-3 %. The likelihood of that however is small because the Fed has foolishly signalled it leans toward interest rate increases when in reality none are necessary. Instead if the Fed becomes obstinately opposed to growth and low unemployment by shifting to a more monetarist policy approach then it will reinforce fear rather than continued optimism. Also the nature of wage setting under conditions imposed by globalization and Neo-con agenda setting make it difficult for workers to raise their wage. Of course as part of this spread of irrational fear there are also hysterical claims being made about the American public sector deficit and debt. The debt is easily managed in a growing economy and its burden is vastly exaggerated. The most recent figure for the gross federal debt to GDP statistic was for Quarter 3  2017. The value was 103.8%. Well below its historical maximum. Furthermore this is the figure for gross debt while the better more meaningful data point is for net debt to GDP which is smaller. To arrive at this value you subtract from gross debt:  financial assets corresponding to debt instruments, monetary gold and special drawing rights, currency and deposits, debt securities, loans, insurance, pensions, standardized guaranteed schemes and other accounts receivable.

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Poli 489 2018 course outline Advanced seminar on inequality Prof. Harold Chorney

Poli 489 Course outline (under construction)
Professor Harold Chorney
Wed. H633-1
18:00- 20:15

The real estate bubble and the crash of 2007 -09 uncovered serious strains in the economic and social fabric of global capitalism. The recovery from what turned out to be the most serious recession since the great depression of the 1930s has been slower than hoped for and very uneven. In North America largely because the Fed reinforced the Keynesian fiscal stimulus with significant quantitative easing thereby ensuring appropriately low interest rates, the performance of the recovery has been more solid than in Europe where the European central bank and the European Union have both retarded the recovery by refusing until quite recently to use quantitative easing and stressing fiscal austerity rather than Keynesian policies. As a consequence European unemployment is still very high in a number of countries and Europe appears to be teetering on the edge of deflation and stagnation. But in addition to these negative features of the recovery, the crash and slow recovery laid bare the terrible and widening gap in socio-economic inequality as well as growing poverty in many countries. This course will focus on the issue of inequality and equity in a number of leading global economies in an effort to document the problem, analyse emerging trends and evaluate policy proposals and programs designed to counter it.

Texts: Thomas Piketty, Capital in the 21st century , 2014 The Belknap press of Harvard University, 2014 also available in the original French edition Le capital au XXIe siècle editions du Seuil.
Joseph Stiglitz, The Price of inequality, Norton, 2013.

Robert Reich, Saving Capitalism For the Many, Not the Few, 2015:Alfred Knopf.


Additional readings:

Michael Savage, Tipping Point :Richest 1 % on target to own 67% of all wealth by 2030.April 8, The Guardian 2018.

John McMurtry, Unequal Freedoms: The Global Market as an Ethical System

Dana Flavelle, Canada’s inequality growing, Stats Can Toronto Star, Sept.11, 2014.

Peter Clarke, Keynes:the rise, Fall and Return of the 20th Century’s Most Influential Economist
Joeseph Stiglitz interview with Lynn Parramore in Salon magazine.…/joseph_stiglitz_thomas_piketty_gets_income_inequality_ wrong_partner/‎
Meghnad Desai, Marx’s Revenge:The Resurgence of Capitalism and the Death of Statist Socialism, Verso. 2004.
Amartya Sen, Development as Freedom, anchor books, NYC, 1999.,
Ethan Kapstein, Sharing the Wealth,W.W. Norton, 1999.
Frank Stilwell, Political Economy:the Contest of Economic ideas, Oxford University Press, 2012.
John Kenneth Galbraith, The Economics of Innocent Fraud,Houghton Miflin,Boston&NYC, 2004
Helen Sasson, Between Friends, Perspectives on John Kenneth Galbraith Essays by Derek Bok, Carlos Fuentes, Peter Galbraith et al, Houghton Miflin , 1999.
James Galbraith, Created Unequal:The Crisis in American Pay,Twentieth Century fund, The Free Press,Simon&Schuster, 1999.
Samuel Hollander,Classical Economics,University of Toronto Press, 1992.
Alvin Finkel, Our Lives:Canada after 1945, James Lorimer&Company, 1997.
Robert Heilbroner, The Worldly Philosophers,Simon%Schuster, NYC, revised edition 1965.
Between Capitalism and Socialism:Essays in Political economics, Vintage,Random House, 1970
Robert Lekachman, Greed is Not Enough, Pantheon, NYC, 1982.
John Porter, The Vertical Mosaic, University of Toronto Press
Wallace Clement The Canadian Corporate Elite
A.A. Hunter, Class Tells:On Social Inequality in Canada, 1986
David Harvey, Limits to Capital,Verso, 2006.
Thorstein Veblen, The Theory of the Leisure Class,Macmillan, 1912,Mentor edition 1953.
C.W. Mills, Power,politics and People
Steve Keen, Debunking Economics, Zed books, U.K.2001,London&NYC.
H.Bougrine & Mario Seccareccia eds. Introducing Macroeconomic analysis,Edmund Montgomery, Toronto, 2010.
Adam Harmes, The Return of the State, Protestors, Power Brokers and the New Global Compromise, Douglas and McIntyre, Vancouver&Toronto, 2004.
Tony Cutler, Karel Williams&John Williams, Keynes, Beveridge and beyond, Routledge&Kegan Paul,London&NYC, 1986.

Brishen Rogers et al, Work Inequality Basic Income Boston Review forum 2, 2017

Students will be asked to consult the quality and financial press including The Wall Street Journal, The Financial Times, the Guardianthe New York Times and the Globe and Mail , Le Monde ,Le figaro, Liberation various issues and weekly during the course for relevant articles to the discussion.

Each student will required to present a topic in class in combination with one other student 20 % and make available a short 2-3 page synopsis of the presentation to all students and to me. Complete a term essay 40 % and write a final test 40 %.

Course weekly topics:

1.Introduction and overview:

2.The ethical basis of Democracy and markets :Flaws at inception.R.H.Tawney and the Acquisitive society.C.B. Macpherson, Hobbes, Locke, Bentham and Mill, Arrow, Debreau and Sraffa, Marx’s critique.

3. Keynes, full employment and the Beveridge Welfare state.the neo-conservative epoch and the return of inequality.

4.The crash and the sudden growth of inequality as an issue.

5. From Veblen to Keynes to C.W.Mills to J.K.Galbraith; James Galbraith.

6. Thomas Piketty and Joseph Stiglitz

7. Piketty and Stiglitz continued Robert Reich

8 .Reich, Piketty and Stiglitz continued

9. The Canadian case an exception? Innis, Porter, Clement, Hunter,John Macionis global inequality; The American case :Michael Hout, Inequality by Design.

10. Marx, Ricardo,Malthus Keynes and the distribution question in age of globalization

11. Distribution and development :Amartya Sen

12. Distribution and the environment, carbon taxes, stable states, guaranteed annual incomes, GDP and trade issues.

13. Review and conclusion.

Term essay: The term essay worth 40 % should be free of grammatical error footnoted or end noted with a bibliography and be 9- 12 pages in length. It will be due in the first week of March after reading week. Topics to be announced later.

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Montreal elects environmentalist and left of centre Valerie Plante as its next mayor

Montreal where I have lived ever since 1982 when I moved here from Toronto has once again turned to the left and to bicycle riding environmentalists and community activists for its new mayor and governing party. The election turnout was an unimpressive  42.5 % but the result was nonetheless spectacular.

Ms. Valérie Plante represents a fairly radical but highly creative force in Quebec politics. She defeated Denis Coderre decisively capturing 243,242 votes to Coderre’s 216,104 votes. Projet Montreal also won the majority of the seats on council -34 of the 65 available.This will enable them to implement their platform but also makes them vulnerable to arrogance in the exercise of power.

Ms. Plante is the first woman to win elected power as mayor in Montreal’s long history as a First Nations community and then European colonial outpost linked to the fur trade and later  entrepôt to the interior for the development of the Canadian  staple economy, head quarters  of the Grand Trunk Railway and then commercial capital of Canada rivalling New York  for control of trade to the hinterland and now second largest metropolis in Canada. Her party Projet Montréal originally established by an idealistic urban planner Richard Bergeron and outspoken advocate of much improved and ecological public transportation has previously been the major opposition force to more conservative centrist parties who governed Montreal during the difficult decade that included the economic slump and the corruption scandal.Mr. Bergeron had switched sides and joined the Coderre administration. He lost his seat on council in this election. Politics is often cruel and lots of very good people fall victim to the fickle electorate because of the allure of illusory fame or simply because they sincerely believe they can change things for the better.

Montreal is a particularly beguiling case.It is the only great metropolis in the world where two of the world’s great languages and cultures ,English and French, co-exist albeit uneasily. It has a dynamic multicultural personality where many languages are spoken and cultural influences from many parts of the world are encountered daily. Both Plante and Coderre were very open to this diversity. It also not unlike metropolises like Chicago and  New York has had larger than life personalities as mayors. In Montreal we have had several boss politicians like Camille Houde and Jean Drapeau who between them governed Montreal for close to 50 years !

I have explored Montreal’s diversity and the effect of linguistic duality in my research on cities , my writing on urban politics and the quest for community and the issue of class consciousness.(see my books City of Dreams :Social Theory and the Urban experience Toronto :1992&2002; Toward a Humanist Political Economy co-authored with Phillip Hansen Black Rose Books, Montreal: 1992) I have also written at length on the critical role infrastructure investment needs to play in our cities.I focus on this in  my numerous writings on Keynes, public finance, infrastructure investment and quantitative easing as a necessary policy to recover from severe business cycle downturns and restore lower unemployment.(See for example The Deficit and Debt Management:An Alternative to Monetarism, Ottawa, 1984:Canadian Centre for Policy alternatives; Revisiting Deficit Hysteria, Labour Le travail, No.54 Fall 2004; After the Crash, Rediscovering Keynes and the Origins of Quantitative Easing available on my  website paper presented to the annual meetings of the Canadian economics association, June 2011, University of Ottawa; John Maynard Keynes and the General theory after 75 years , preface to a presentation to the Canadian Economics Association special panel reconsidering Keynes in a time of crisis, June 3, 2011, University of Ottawa.See also Tim Thomas, ed. The Politics of the City Toronto:ITP Nelson, 1997 )

Mr Denis Coderre got elected to the job of mayor four years ago on a platform of restoring the city , rebuilding its infrastructure and metropolitan status and cleaning up corruption. In many respects he succeeded but he fell victim to some of the frustration felt by people over the  chaotic landscape that has emerged while Montreal rebuilds its autoroutes and replaces antiquated infrastructure in many districts of the metropolis.To be fair this is a problem that will be faced by by many  North American metropolises as they seek to repair their infrastructure and rebuild and expand public transportation. Along with the pressure of rising land values and inflating house  and condo prices and exorbitant rents these problems are increasing.

One has to go back to the regime of the late Jean Doré and the Montreal Citizens Movement which defeated the legendary conservative nationalist politician Jean Drapeau in 1986 to find as left wing and progressive a mayor as Plante aspires to be. Doré governed for 8 years and eventually  became more of a reforming technocrat than a left wing idealist. We shall see how political power and the challenge of meeting Montreal’s growing public transportation  and infrastructure needs transforms Ms. Plante and her party. In the meantime bonne chance !

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President Trump selects Jerome Powell as new Fed chair replacing Janet Yellen

In what may well turn out to be a controversial decision President Trump has broken with precedent and decided not to reappoint Janet Yellen to a second term as Fed chair despite praising her for her excellent work as chair. Yellen is a high powered Keynesian economist with a very strong academic background. Her chosen successor Jerome Powell has served on the Fed board for a number of years has a strong background in business, a former partner in the Carlyle Group a major investment company and is a trained lawyer. He lacks formal training in economics however. So for the first time in  37 years the new Fed chair will not be an economist. In the past one of the longest serving Fed chairs William McChesney Martin (1951-1970) who served five presidents from Harry Truman to Richard Nixon and one of the most influential Marriner Eccles (1934-1948) did not have degrees in economics. However, both were effective chairs.Martin had a background in Wall Street and had done graduate work in economics at Columbia university although his first degree was in English and Latin from Yale. Also his father helped write the Federal Reserve Act in 1913 and was later governor and then president of the Federal Reserve of St. Louis. In Eccles’s case  he was a very successful businessman and banker who in some ways independently anticipated the work of Keynes.

Powell has voted with Yellen on keeping interest rates low for as long as was needed to promote recovery. But he is apparently more sceptical of quantitative easing. So it remains to be seen if once he assumes the chair next February he seeks to accelerate the unwinding of the program which clearly has played an important role in healing the American economy after the crash.Unemployment is now 4.1 % and trending  slowly downward. It would be a mistake not to let this trend continue by prematurely raising interest rates.

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Fed and Bank of Canada hold back on rate rises: Stimulus continues Smart decisions

Recently both the Federal Reserve  and the Bank of Canada made smart decisions not to increase rates despite pressure from some less well informed quarters that they should do so as believers in the NAIRU rate are still convinced that inflation will rear its head now that unemployment is 4 .2% in the US and approaching 6% in Canada. But the most recent inflation rate on all items excluding food and gasoline prices which were affected by hurricane disruptions shows no sign yet of approaching their targeted inflation rate of 2 %. The US rate was a mere 1.3 % and the Canadian rate was also below the 2 % target.

The Canadian Finance Minister Bill Morneau also delivered an upbeat fall economic statement that celebrated the fact that growth continued to be moderately strong, the projected budgetary deficit was expected to be lower than predicted and unemployment could well drop below 6 % in the coming months. All in all a vindication of the policy position I have been suggesting for a long time. The most effective way to respond to an economic shock like the crash and subsequent slump is to run a significant  budget deficit which invests in people, their social and educational needs and physical infrastructure combined with a strongly accommodating monetary policy using quantitative easing where appropriate to ensure low interest rates. This is what has been done and the results are positive.


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The JFK docs: Canada Cuba and the U.S.

The recent release of previously secret archival files in the JFK archive has come at a very busy time in American and world news. The release is a massive one which will take some time to absorb and analyze. So far my reading of the first batch of documents confirms that the Kennedy administration in the early 1960s was obsessed with Fidel Castro and Cuba and was prepared to consider assassination,kidnapping and sabotage of crops and agricultural Cuban workers and the training in secret of armed Cuban exiles to invade Cuba to overthrow Castro. Part of their motivation was the American  fury in discovering that the Soviet union had secretly installed missiles in Cuba which were a clear national security risk to the U.S. This was revealed to the American people on October 22 and the crisis was not resolved until October 28 1962 when JFK announced that Mr.Khrushchev had agreed to remove the missiles .Only later did we learn that the US agreed to remove its missiles from Turkey as a quid pro quo.


I remember these days very clearly as they dominated my high school experience. Part of it was the American  fear that Cuba would be a successful demonstration to Latin America that a communist society was possible and provide to the naïve the “demonstration “that  problems of poverty and underdevelopment could be solved by resort to communist and radical socialist ideology. At the time Canada also played a role in these events. One of the documents mentions consideration under the general rubric of operation Mongoose which had as its explicit goal removing Castro from power. ‘’  The objective of  operation Mongoose is the overthrow of the Castro regime’’ (p.20 Doc ID 32112987 JFK docs) It also contains the sentence” General Carter said that the CIA would examine the possibilities of sabotaging airplane parts which are scheduled to be shipped from Canada to Cuba. ” This sentence  appears in  the document on operation Mongoose on the 14th of September1962.(doc.ID32112987& 32112745)


Had the Diefenbaker government known this they would have raised a storm of protest. Diefenbaker was already alienated from the JFK government over disputes with  the U,S. over trade and recognition of Cuba and trade with China and other disputes over general trade issues and a certain poor personal relationship between the two leaders-they disliked each other and rubbed one another the wrong way. (See Knowlton Nash   Kennnedy and Diefenbaker the feud that toppled a Government McClelland and Stewart, 1991) As well the Americans wanted Canada to accept nuclear armed Bomarc missiles on its territory but Diefenbaker was reluctant to agree without certain American concessions on joint control.  Diefenbaker  lost his majority in  the election on June 18 1962 and was reduced to a small minority government which later in 1963 fell to the Lester Pearson led Liberals. Had the details of US consideration of sabotaging Canadian exports to Cuba been public knowledge the election might well have turned out differently.

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