Wednesday, February 24, 2010

The Complexities of Interconnectedness

The social problems are difficult to solve because they are social. Each problem is related to a slew of others that, combined, comprise the social system in its entirety.

Take the topical issue of health care in the U.S. Why are there about 50 million people without health insurance?

The answer is cost. People have no health insurance because they cannot afford it.

Why is health insurance so expensive? Anthem Blue Cross in California just sent a rate increase notice of about 39 percent to its customers. Can anything be done about these spiraling costs?

Well, many factors contribute to the high cost of health care in the U.S., the bureaucracy and dead weight of the private health insurance companies being one. One other factor is obesity. According to the Center for Disease Control, obesity costs the U.S. health care system about $150 billion a year, enough to cover the premiums for all the uninsured. To control healthcare costs, the epidemic of obesity must be controlled.

Why are people fat?

The answer is that: 1) they do not exercise; and 2) they eat junk food.

Why don’t people exercise in the U.S.?

That is lengthy subject. There is the country’s “car culture” where everyone drives because distances are long and driving is often the only means of getting from here to there. Many people could not walk even if they wanted to because in many cities there are simply no sidewalks. Many others could not walk even if they wanted to because they have no time. They leave home early in the morning and by the time they get back home, they are exhausted. So they vegetate in front of the TV with some junk food.

Why do they eat junk food?

In four words: because it is cheap. People eat what they can find and afford. Good quality food is expensive and will drive up the cost of maintaining the labor force – wages and salaries, that it. So it is not the matter of the fast food and processed food industry – and industrial hog farming and poultry and fish farms, what have you – producing unhealthy or mercury-laden food. It is that they produce cheap food which, like Walmart producing cheap clothes and other cheap stuff, helps keep the wages low. Where did you think the legendary U.S. labor productivity come from?

That is why about 50 million Americans do not have health care insurance!

I mention this because today the SEC announced some restrictions on the short sale of stock. If a stock falls 10 percent from the previous day’s close, until the next day, the short sales could only be executed on an uptick. This was the Depression era rule in effect the SEC abolished it in 2007.

The rule is not particularly radical or complicated. But its impact will go beyond the equities market. When triggered, it would bring options trading on the stock to a halt. That is because all option valuation models work on the assumption of continuous trading of the underlying stock without any restrictions. Absent that condition, the neutral hedge cannot be formed, which means that the option cannot be valued. From Vol. 2:
Years later, in their search for a solution to the option valuation problem, Black, Scholes and Merton were forced to abandon the contrivances of economics and financial theories and adopt an approach that was grounded in real-life. That change of approach shows itself in the methodology of derivation of the Black-Scholes model, which is based on arbitrage: constantly, in fact, continuously, buying and selling.
Recall one of the most critical problems of the crisis that continues to date was determining the “fair value” of securities. Setting aside the arguments for and against short selling and focusing on options only, the SEC’s decision might or might not prevent the downward spiral of stock but it will surely introduces more price uncertainty to an active and technically unrelated segment of the market.

I am neither defending nor criticizing decision because it – it being the decision – matters little. I just note, in confirmation of what I have already written – here and here, for example – and what I will write about systemic risk, that the complexities of interconnectedness at the advanced stage of the reign of finance capital are real, daunting, and not susceptible to being cured with band aids.

No comments: