Fascism’s Incognito – Conjuncted

“Being asked to define fascism is probably the scariest moment for any expert of fascism,” Montague said.
Communism-vs-Fascism
Brecht’s circular circuitry is here.
Allow me to make cross-sectional (both historically and geographically) references. I start with Mussolini, who talked of what use fascism could be put to by stating that capitalism throws itself into the protection of the state when it is in crisis, and he illustrated this point by referring to the Great Depression as a failure of laissez-faire capitalism and thus creating an opportunity for fascist state to provide an alternative to this failure. This in a way points to the fact that fascism springs to life economically in the event of capitalism’s deterioration. To highlight this point of fascism springing to life as a reaction to capitalism’s failure, let me take recourse to Samir Amin, who calls the fascist choice for managing a capitalist society in crisis as a categorial rejection of democracy, despite having reached that stage democratically. The masses are subjected to values of submission to a unity of socio-economic, political and/or religious ideological discourses. This is one reason why I call fascism not as a derivative category of capitalism in the sense of former being the historic phase of the latter, but rather as a coterminous tendency waiting in dormancy for capitalism to deteriorate, so that fascism could then detonate. But, are fascism and capitalism related in a multiple of ways is as good as how socialism is related with fascism, albeit only differently categorically.
It is imperative for me to add by way of what I perceive as financial capitalism and bureaucracy and where exactly art gets sandwiched in between the two, for more than anything else, I would firmly believe in Brecht as continuing the artistic practices of Marxian sociology and political-economy.
The financial capitalism combined with the impersonal bureaucracy has inverted the traditional schematic forcing us to live in a totalitarian system of financial governance divorced from democratic polity. It’s not even fascism in the older sense of the term, by being a collusion of state and corporate power, since the political is bankrupt and has become a mediatainment system of control and buffer against the fact of Plutocracies. The state will remain only as long as the police systems are needed to fend off people claiming rights to their rights. Politicians are dramaturgists and media personalities rather than workers in law.  If one were to just study the literature and paintings of the last 3-4 decades, it is fathomable where it is all going. Arts still continue to speak what we do not want to hear. Most of our academics are idiots clinging on to the ideological culture of the left that has put on its blinkers and has only one enemy, which is the right (whatever the hell that is). Instead of moving outside their straightjackets and embracing the world of the present, they still seem to be ensconced in 19th century utopianism with the only addition to their arsenal being the dramatic affects of mass media. Remember Thomas Pynchon of Gravity’s Rainbow fame (I prefer calling him the illegitimate cousin of James Joyce for his craftiness and smoothly sailing contrite plots: there goes off my first of paroxysms!!), who likened the system of techno-politics as an extension of our inhuman core, at best autonomous, intelligent and ever willing to exist outside the control of politics altogether. This befits the operational closure and echoing time and time again that technology isn’t an alien thing, but rather a manifestation of our inhuman core, a mutation of our shared fragments sieved together in ungodly ways. This is alien technologies in gratitude.
We have never been natural, and purportedly so by building defence systems against the natural both intrinsically and extrinsically. Take for example, Civilisation, the most artificial construct of all humans had busied themselves building and now busying themselves upholding. what is it? A Human Security System staving off entropy of existence through the self-perpetuation of a cultural complex of temporal immortalisation, if nothing less and vulnerable to editions by scores of pundits claiming to a larger schemata often overlooked by parochiality. Haven’t we become accustomed to hibernating in an artificial time now exposed by inhabiting the infosphere, creating dividualities by reckoning to data we intake, partake and outtake. Isn’t analysing the part/whole dividuality really scoring our worthiness? I know the answer is yes, but merely refusing to jump off the tongue. Democracies have made us indolent with extremities ever so flirting with electronic knowledge waiting to be turned to digital ash when confronted with the existential threat to our locus standi.
But, we always think of a secret cabal conspiring to dehumanise us. But we also forget the impersonality of the dataverse, the infosphere, the carnival we simply cannot avoid being a part of. Our mistaken beliefs lie in reductionism, and this is a serious detriment to causes created ex nihilo, for a fight is inevitably diluted if we pay insignificance to the global meshwork of complex systems of economics and control, for these far outstrip our ability to pin down to a critical apparatus. This apparatus needs to be different from ones based on criticism, for the latter is prone to sciolist tendencies. Maybe, one needs to admit allegiance to perils of our position and go along in a Socratic irony before turning in against the admittance at opportune times. Right deserves tackling through the Socratic irony, lest taking offences become platitudinous. Let us not forget that the modern state is nothing but a PR firm to keep the children asleep and unthinking and believing in the dramaturgy of the political as real. And this is where Brecht comes right back in, for he considered creation of bureaucracies as affronting not just fascist states, but even communist ones. The above aside, or digression is just a reality check on how much complex capitalism has become and with it, its derivatives of fascism as these are too intertwined within bureaucratic spaces. Even when Brecht was writing in his heydays, he took a deviation from his culinary-as-ever epic theatre to found a new form of what he called theatre as learning to play that resembled his political seminars modeled on the rejection of the concept of bureaucratic elitism in partisan politics where the theorists and functionaries issued directives and controlled activities on behalf of the masses to the point of submission of the latter to the former. This point is highlighted not just for fascist states, but equally well for socialist/communist regimes reiterating the fact that fascism is potent enough to develop in societies other than capitalistic ones.
Moving on to the point when mentions of democracy as bourgeois democracy is done in the same breath as regards equality only for those who are holders of capital are turning platitudinous. Well, structurally yes, this is what it seems like, but reality goes a bit deeper and thereafter fissures itself into looking at if capital indeed is what it is perceived as in general, or is there more to it than meets the eye. I quip this to confront two theorists of equality with one another: Piketty and Sally Goerner. Piketty misses a great opportunity to tie the “r > g” idea (after tax returns on capital r > growth rate of economy g) to the “limits to growth”. With a careful look at history, there are several quite important choice points along the path from the initial hope it won’t work out that way… to the inevitable distressing end he describes, and sees, and regrets. It’s what seduces us into so foolishly believing we can maintain “g > r”, despite the very clear and hard evidence of that faiIing all the time… that sometimes it doesn’t. The real “central contradiction of capitalism” then, is that it promises “g > r”, and then we inevitably find it is only temporary. Growth is actually nature’s universal start-up process, used to initially build every life, including the lives of every business, and the lives of every society. Nature begins building things with growth. She’s then also happy to destroy them with more of the same, those lives that began with healthy growth that make the fateful choice of continuing to devote their resources to driving their internal and external strains to the breaking point, trying to make g > r perpetual. It can’t be. So the secret to the puzzle seems to be: Once you’ve taken growth from “g > r” to spoiling its promise in its “r > g” you’ve missed the real opportunity it presented. Sally Goerner writes about how systems need to find new ways to grow through a process of rising intricacy that literally reorganizes the system into a higher level of complexity. Systems that fail to do that collapse. So smart growth is possible (a cell divides into multiple cells that then form an organ of higher complexity and greater intricacy through working cooperatively). Such smart growth is regenerative in that it manifests new potential. How different that feels than conventional scaling up of a business, often at the expense of intricacy (in order to achieve so called economies of scale). Leaps of complexity do satisfy growing demands for productivity, but only temporarily, as continually rising demands of productivity inevitably require ever bigger leaps of complexity. Reorganizing the system by adopting ever higher levels of intricacy eventually makes things ever more unmanageable, naturally becoming organizationally unstable, to collapse for that reason. So seeking the rise in productivity in exchange for a rising risk of disorderly collapse is like jumping out of the fry pan right into the fire! As a path to system longevity, then, it is tempting but risky, indeed appearing to be regenerative temporarily, until the same impossible challenge of keeping up with ever increasing demands for new productivity drives to abandon the next level of complexity too! The more intricacy (tight, small-scale weave) grows horizontally, the more unmanageable it becomes. That’s why all sorts of systems develop what we would call hierarchical structures. Here, however, hierarchal structures serve primarily as connective tissue that helps coordinate, facilitate and communicate across scales. One of the reasons human societies are falling apart is because many of our hierarchical structures no longer serve this connective tissue role, but rather fuel processes of draining and self-destruction by creating sinks where refuse could be regenerated. Capitalism, in its present financial form is precisely this sink, whereas capitalism wedded to fascism as an historical alliance doesn’t fit the purpose and thus proving once more that the collateral damage would be lent out to fascist states if that were to be the case, which would indeed materialize that way.
That democracy is bourgeois democracy is an idea associated with Swedish political theorist Goran Therborn, who as recent as the 2016 US elections proved his point by questioning the whole edifice of inclusive-exclusive aspects of democracy, when he said,
Even if capitalist markets do have an inclusive aspect, open to exchange with anyone…as long as it is profitable, capitalism as a whole is predominantly and inherently a system of social exclusion, dividing people by property and excluding the non-profitable. a system of this kind is, of course, incapable of allowing the capabilities of all humankind to be realized. and currently the the system looks well fortified, even though new critical currents are hitting against it.
Democracy did take on a positive meaning, and ironically enough, it was through rise of nation-states, consolidation of popular sovereignty championed by the west that it met its two most vociferous challenges in the form of communism and fascism, of which the latter was a reactionary response to the discontents of capitalist modernity. Its radically lay in racism and populism. A degree of deference toward the privileged and propertied, rather than radical opposition as in populism, went along with elite concessions affecting the welfare, social security, and improvement of the working masses. This was countered by, even in the programs of moderate and conservative parties by using state power to curtail the most malign effects of unfettered market dynamics. It was only in the works of Hayek that such interventions were beginning to represent the road to serfdom thus paving way to modern-day right-wing economies, of which state had absolutely no role to play as regards markets fundamentals and dynamics. The counter to bourgeois democracy was rooted in social democratic movements and is still is, one that is based on negotiation, compromise, give and take a a grudgingly given respect for the others (whether ideologically or individually). The point again is just to reiterate that fascism, in my opinion is not to be seen as a nakedest form of capitalism, but is generally seen to be floundering on the shoals of an economic slowdown or crisis of stagflation.
On ideal categories, I am not a Weberian at heart. I am a bit ambiguous or even ambivalent to the role of social science as a discipline that could draft a resolution to ideal types and interactions between those generating efficacies of real life. Though, it does form one aspect of it. My ontologies would lie in classificatory and constructive forms from more logical grounds that leave ample room for deviations and order-disorder dichotomies. Complexity is basically an offspring of entropy.
And here is where my student-days of philosophical pessimism surface, or were they ever dead, as the real way out is a dark path through the world we too long pretended did not exist.
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Fascism’s Incognito – Brechtian Circular Circuitry. Note Quote.

Carefully looking at the Brechtian article and unstitching it, herein lies the pence (this is reproduced via an email exchange and hence is too very basic in arguments!!):

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1. When Brecht talks of acceding to the capitulation of Capitalism, in that, being a historic phase and new and old at the same time, this nakedest manifestation of Capitalism is attributed to relationality, which are driven by functionalist propositions and are non-linear, reversible schemas existing independently of the specific contents that are inserted as variables. This may sound a bit philosophical, but is the driving force behind Brecht’s understanding of Capitalism and is perfectly corroborated in his famous dictum, “Reality as such has slipped into the domain of the functional.” This dictum underlines what is new and what is old at the same time.
2. Sometime in the 30s, Brecht’s writings corroborated the linkages between Capitalism and Fascism, when the victories of European fascism prompted consideration of the relationship between collective violence and regressive social configurations. At its heart, his corpus during the times was a defining moment of finance capital, an elaborate systemic treatment of economic transactions within the literary narrative with fascistic overtones. It is here the capitalist is consummate par excellence motivated by the rational calculus (Ayn Rand rings the bells!!!). Eschewing the narrative desire of the traditional dramatic novel, Brecht compels the readers without any recourse to emotional intensity and catharsis, and capturing the attention via phlegmatic and sublimated pleasures of logical analysis, riddle solving, remainder less, and bookkeeping. This coming together of the financial capital with the rise in European Fascism, despite leading to barbaric times in due course, brought forth the progeny of corporation merging with the state incorporating social functions into integrated networks of production and consumption. What Brecht reflects as barbaric is incidentally penned in these tumultuous ear, where capital evolves from Fordist norms into Corporations and in the process atrophy human dimensions. This fact is extrapolated in contemporary times when capital has been financialized to the extent of artificial intelligences, HFTs and algorithmic decision making, just to sound a parallel to Nature 2.0.
But, before digressing a bit too far, where is Brecht lost in the history of class consciousness here? With capital evolving exponentially, even if there is no or little class consciousness in the proletariat, there will come a realization that exploitation is widespread. This is the fecund ground when nationalist and fascist rhetoric seeds into a full-grown tree, inciting xenophobias infused with radicalization (this happened historically in Italy and in Germany, and is getting replicated on micro-to-macro scales contemporarily). But, what Brecht has failed to come to terms with is the whole logic of fascists against the capitalist. Fascists struggle with the capitalist question within their own circles (a far-fetched parallel drawn here as regards India is the right ideologue’s opposition to FDI, for instance). Historically speaking and during times when Bertotl was actively writing, there were more working class members of the Italian fascists than anyone else with anti-capitalist numbers. In Nazi Germany, there were close to 30 per cent within stormtroopers as minimal identifies and sympathizers with communism. The rest looked up to fascism as a stronger alternative to socialism/communism in its militancy. The intellectual and for moral (might be a strikethrough term here, but in any case…) tonic was provided for by the bourgeois liberals who opposed fascism for their capitalist bent. All in all, Brecht could have been prescient to say the most, but was too ensconced, to say the least, in Marxist paradigms to analyze this suturing of ideological interests. That fascism ejected itself of a complete domineering to Capitalism, at least historically, is evident from the trajectory of a revolutionary syndicalist, Edmondo Rossoni, who was extremely critical of internationalism, and spearheaded Italian fascist unions far outnumbering Italian fascist membership. Failure to recognize this fractious relationship between Fascism and Capitalism jettisons the credibility of Brechtian piece linked.
3. Althusser once remarked that Brecht’s work displays two distinct forms of temporality that fail to achieve any mutual integration, which have no relation with one another, despite coexisting and interconnecting, never meet one another. The above linked essay is a prime example of Althusser’s remark. What Brecht achieves is demonstrating incongruities in temporalities of capital and the human (of Capitalism and Barbarianism/Fascism respectively), but is inadequate to take such incongruities to fit into the jigsaw puzzle of the size of Capitalism, not just in his active days, but even to very question of his being prescient for contemporary times, as was mentioned in point 2 in this response. Brecht’s reconstructing of the genealogy of Capitalism in tandem with Fascism parses out the link in commoditized linear history (A fallacy even with Marxian notion of history as history of class consciousness, in my opinion), ending up trapped in tautological circles, since the human mind is short of comprehending the paradoxical fact of Capitalism always seemingly good at presupposing itself.
It is for these reasons, why I opine that Brecht has a circular circuitry.

Margin Calls – Note Quote.

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Unlike FOREX margin, which is a single yet dynamic figure that constantly fluctuates based on the notional value of the contracts being traded, futures margin is relatively static. Although the exchange and brokerage firms have the right to increase, or decrease, margin requirements at any time, changes are typically infrequent.

The premise of margin is to mitigate risk exposure to the exchange and brokerage firms by ensuring that traders have enough funds on deposit to cover losses that might reasonably be seen within a trading session. Accordingly, futures exchanges set margin rates based on current market volatility and not necessarily the nominal value of the contract, which is the dominant method in FOREX. Nominal value is the total worth of the currency contract when leverage is eliminated. However, as the nominal value increases, the futures exchanges tend to increase margin simply because, at higher prices, currencies tend to see larger price moves and expose traders to additional risk.

When traders refer to their futures margin requirement, they are referring to the initial margin. In other words, “initial margin” and “margin” are often used synonymously. In detail, initial margin is the amount of capital the exchange requires a trader to have on deposit to hold a given currency futures contract beyond the close of trade on the session the order was executed. For example, if the initial margin for a standard-sized Euro futures contract is $5,400, a trader should have at least this much in a trading account to execute a trade that is intended to be held overnight. Day traders are not necessarily subject to the same requirements.

The minimum account balance that must be maintained at the close of trade to avoid a margin call is known as the maintenance margin. Futures exchanges typically set the maintenance margin at about 70% to 80% of the initial margin. Should an account balance dip below the maintenance margin requirement, as measured by the close of trade on any particular day, a margin call is generated and the trader is required to bring the account back above the initial margin. This can be done through position liquidation, adding funds to the trading account, or even mitigating margin using option hedges. Once an official margin call is triggered, it is no longer enough to bring the equity above the maintenance margin level; the account must meet the initial margin. A margin call is triggered only if the account is in violation at the close of a trading session. At any point intraday, it is nearly irrelevant. Therefore, it is quite possible for an account to experience a margin deficit in the middle of the trading day only to be off the hook by the close of trade, and vice versa. This differs from FOREX, where traders are commonly issued intraday margin calls. This is because their margin requirement is being consistently measured as opposed to solely at the end of the trading day, as is the protocol in futures.

Margin calls state account details such as open positions, required initial and maintenance margin, the margin deficiency, and current account value. In addition to a formal notice, brokerage firms display margin call details on the trader’s daily statements, including the number of days the margin call has been active. Futures brokers typically give traders two or three days to eliminate a margin call on their own accord, but each brokerage firm is different. Deep-discount brokers tend to be much less lenient when it comes to margin calls and forced account liquidation.

If a client goes one step beyond a simple margin call and is in danger of losing more than the funds on deposit, it is not uncommon for risk management clerks to force liquidate positions regardless of the brokerage firm and service type, and they have every right to do so.

If traders must have the initial margin on deposit to enter a trade, there are exceptions for those who enter a trade based on the premise of offsetting their risk and obligation by the end of that particular trading session. For those traders engaged in the practice of day trading, brokerage firms, and even individual brokers, will often negotiate a discounted margin rate offering more leverage than is granted to traders who are holding positions overnight. For the purpose of margin, day trading is any activity in which trades are entered and exited within a single trading session. In today’s world, the currency futures markets trade nearly 24 hours per day. Therefore, it is entirely possible for a trade to be entered in the evening, held overnight, and offset before the close of the day session to be treated as a “day trade.” Conversely, although this trade was held “overnight,” under the usual pretense of the phrase, both the entry and the exit occurred within a single trading session and, therefore, falls into the day-trading category in regard to margin.

Depending on a trader’s established relationship with his brokerage firm, or more importantly an individual broker, the margin charged on any intraday positions may be anywhere from 50% to 10% of the exchange’s stipulated overnight rate. Naturally, only those clients believed to be responsible enough to have access to excessively low margin requirements are awarded the privilege; irresponsible traders are viewed as a credit risk to the brokerage and might not be granted the same freedoms. This is similar to the threats posed by those with low credit scores to a credit card company. With that said, as a means of risk management implemented by brokerage firms, some platforms are now capable of automatically liquidating accounts in danger of losing more than what is currently deposited. In the case of auto-liquidation, brokers might extend even more lenient margin policies to day traders simply because the luxury of auto-liquidation mitigates risk to the firm. Similar to the way a trader analyzes the market in terms of risk and reward, brokerage firms assess clients on a risk/reward basis and proceed accordingly. Brokerage revenue is commission based; they want you to trade, but not if it isn’t worth the potential consequences.

Futures brokers who have auto-liquidate capabilities often ask clients to sign a disclosure statement acknowledging they are aware that positions might be offset without prior consent to the client if the account is deemed to be in danger of going negative, although they technically have the right to do so even without the agreement. A common practice among futures brokers is to strategically place a stop order at a price that would prevent the account from losing more than is on deposit. However, as futures traders become more and more self-directed, this courtesy is slowly becoming less popular simply because in some ways it poses additional risk and potential liability to the broker. For example, “unruly” clients can easily cancel a stop order placed on their behalf to prevent a debit balance, and brokers simply don’t have time to babysit accounts to ensure clients don’t do so. In addition, if a stop order is placed for a specific number of contracts and the trader reduces the size of the position without adjusting the stop order, he might attempt to hold the brokerage firm liable for any erroneously resulting trades.

Imagining Infrastructures – The Materiality of the Conceptual

The modern usage of the term infrastructure has gone through a series of permutations from early emphasis on logistics, organisation, and the expanding scope of technological networks to more recent interest in the intersections with landscape, ecology, and alternative theorisations of urban materiality. In this event is explored questions relating to the meaning and conceptualization of urban infrastructures. The question of infrastructure will serve as an entry point for wider reflections on the changing experience of nature, modernity, and urban space.

The Banking Business…Note Quote

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Why is lending indispensable to banking? This not-so new question has garnered a lot of steam, especially in the wake of 2007-08 crisis. In India, however, this question has become quite a staple of CSOs purportedly carrying out research and analysis in what has, albeit wrongly, begun to be considered offshoots of neoliberal policies of capitalism favoring cronyism on one hand, and marginalizing priority sector focus by nationalized banks on the other. Though, it is a bit far-fetched to call this analysis mushrooming on artificially-tilled grounds, it nevertheless isn’t justified for the leaps such analyses assume don’t exist. The purpose of this piece is precisely to demystify and be a correctional to such erroneous thoughts feeding activism. 

The idea is to launch from the importance of lending practices to banking, and why if such practices weren’t the norm, banking as a business would falter. Monetary and financial systems are creations of double entry-accounting, in that, when banks lend, the process is a creation of a matrix/(ces) of new assets and new liabilities. Monetary system is a counterfactual, which is a bookkeeping mechanism for the intermediation of real economic activity giving a semblance of reality to finance capitalism in substance and form. Let us say, a bank A lends to a borrower. By this process, a new asset and a new liability is created for A, in that, there is a debit under bank assets, and a simultaneous credit on the borrower’s account. These accounting entries enhance bank’s and borrower’s  respective categories, making it operationally different from opening bank accounts marked by deposits. The bank now has an asset equal to the amount of the loan and a liability equal to the deposit. Put a bit more differently, bank A writes a cheque or draft for the borrower, thus debiting the borrower’s loan account and crediting a payment liability account. Now, this borrower decides to deposit this cheque/draft at a different bank B, which sees the balance sheet of B grow by the same amount, with a payment due asset and a deposit liability. This is what is a bit complicated and referred to as matrix/(ces) at the beginning of this paragraph. The obvious complication is due to a duplication of balance sheet across the banks A and B, which clearly stands in need of urgent resolution. This duplication is categorized under the accounting principle of ‘Float’, and is the primary requisite for resolving duplicity. Float is the amount of time it takes for money to move from one account to another. The time period is significant because it’s as if the funds are in two places at once. The money is still in the cheque writer’s account, and the cheque recipient may have deposited funds to their bank as well. The resolution is reached when the bank B clears the cheque/draft and receives a reserve balance credit in exchange, at which point the bank A sheds both reserve balances and its payment liability. Now, what has happened is that the systemic balance sheet has grown by the amount of the original loan and deposit, even if these are domiciles in two different banks A and B. In other words, B’s balance sheet has an increased deposits and reserves, while A’s balance sheet temporarily unchanged due to loan issued offset reserves decline. It needs to be noted that here a reserve requirement is created in addition to a capital requirement, the former with the creation of a deposit, while the latter with the creation of a loan, implying that loans create capital requirement, whereas deposits create reserve requirement.  Pari Passu, bank A will seek to borrow new funding from money markets and bank B could lend funds into these markets. This is a natural reaction to the fluctuating reserve distribution created at banks A and B. This course of normalization of reserve fluctuations is a basic function of commercial bank reserve management. Though, this is a typical case involving just two banks, a meshwork of different banks, their counterparties, are involved in such transactions that define present-day banking scenario, thus highlighting complexity referred to earlier. 

Now, there is something called the Cash Reserve Ratio (CRR), whereby banks in India (and elsewhere as well) are required to hold a certain proportion of their deposits in the form of cash. However, these banks don’t hold these as cash with themselves for they deposit such cash (also known as currency chests) with the Reserve Bank of India (RBI). For example, if the bank’s deposits increase by Rs. 100, and if the CRR is 4% (this is the present CRR stipulated by the RBI), then the banks will have to hold Rs. 4 with the RBI, and the bank will be able to use only Rs. 96 for investments and lending, or credit purpose. Therefore, higher the CRR, lower is the amount that banks will be able to use for lending and investment. CRR is a tool used by the RBI to control liquidity in the banking system. Now, if the bank A lends out Rs. 100, it incurs a reserve requirement of Rs. 4, or in other words, for every Rs. 100 loan, there is a simultaneous reserve requirement of Rs. 4 created in the form of reserve liability. But, there is a further ingredient to this banking complexity in the form of Tier-1 and Tier-2 capital as laid down by BASEL Accords, to which India is a signatory. Under the accord, bank’s capital consists of tier-1 and tier-2 capital, where tier-1 is bank’s core capital, while tier-2 is supplementary, and the sum of these two is bank’s total capital. This is a crucial component and is considered highly significant by regulators (like the RBI, for instance), for the capital ratio is used to determine and rank bank’s capital adequacy. tier-1 capital consists of shareholders’ equity and retained earnings, and gives a measure of when the bank must absorb losses without ceasing business operations. BASEL-3 has capped the minimum tier-1 capital ratio at 6%, which is calculated by dividing bank’s tier-1 capital by its total risk-based assets. Tier-2 capital includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss revenues, and undisclosed reserves. tier-2 capital is supplementary since it is less reliable than tier-1 capital. According to BASEL-3, the minimum total capital ratio is 8%, which indicates the minimum tier-2 capital ratio at 2%, as opposed to 6% for the tier-1 capital ratio. Going by these norms, a well capitalized bank in India must have a 8% combined tier-1 and tier-2 capital ratio, meaning that for every Rs. 100 bank loan, a simultaneous regulatory capital liability of Rs. 8 of tier-1/tier-2 is generated. Further, if a Rs. 100 loan has created a Rs. 100 deposit, it has actually created an asset of Rs. 100 for the bank, while at the same time a liability of Rs. 112, which is the sum of deposits and required reserves and capital. On the face of it, this looks like a losing deal for the bank. But, there is more than meets the eye here. 

Assume bank A lends Mr. Amit Modi Rs. 100, by crediting Mr. Modi’s deposit account held at A with Rs. 100. Two new liabilities are immediately created that need urgent addressing, viz. reserve and capital requirement. One way to raise Rs. 8 of required capital, bank A sells shares, or raise equity-like debt or retain earnings. The other way is to attach an origination fee of 10% (sorry for the excessively high figure here, but for sake of brevity, let’s keep it at 10%). This 10% origination fee helps maintain retained earnings and assist satisfying capital requirements. Now, what is happening here might look unique, but is the key to any banking business of lending, i.e. the bank A is meeting its capital requirement by discounting a deposit it created of its own loan, and thereby reducing its liability without actually reducing its asset. To put it differently, bank A extracts a 10% fee from Rs. 100 it loans, thus depositing an actual sum of only Rs. 90. With this, A’s reserve requirement decrease by Rs. 3.6 (remember 4% is the CRR). This in turn means that the loan of Rs. 100 made by A actually creates liabilities worth Rs. Rs. 108.4 (4-3.6 = 0.4 + 8). The RBI, which imposes the reserve requirement will follow up new deposit creation with a systemic injection sufficient to accommodate the requirement of bank B that has issued the deposit. And this new requirement is what is termed the targeted asset for the bank. It will fund this asset in the normal course of its asset-liability management process, just as it would any other asset. At the margin, the bank actually has to compete for funding that will draw new reserve balances into its position with the RBI. This action of course is commingled with numerous other such transactions that occur in the normal course of reserve management. The sequence includes a time lag between the creation of the deposit and the activation of the corresponding reserve requirement against that deposit. A bank in theory can temporarily be at rest in terms of balance sheet growth, and still be experiencing continuous shifting in the mix of asset and liability types, including shifting of deposits. Part of this deposit shifting is inherent in a private sector banking system that fosters competition for deposit funding. The birth of a demand deposit in particular is separate from retaining it through competition. Moreover, the fork in the road that was taken in order to construct a private sector banking system implies that the RBI is not a mere slush fund that provides unlimited funding to the banking system.  

The originating accounting entries in the above case are simple, a loan asset and a deposit liability. But this is only the start of the story. Commercial bank ‘asset-liability management’ functions oversee the comprehensive flow of funds in and out of individual banks. They control exposure to the basic banking risks of liquidity and interest rate sensitivity. Somewhat separately, but still connected within an overarching risk management framework, banks manage credit risk by linking line lending functions directly to the process of internal risk assessment and capital allocation. Banks require capital, especially equity capital, to take risk, and to take credit risk in particular. Interest rate risk and interest margin management are critical aspects of bank asset-liability management. The asset-liability management function provides pricing guidance for deposit products and related funding costs for lending operations. This function helps coordinate the operations of the left and the right hand sides of the balance sheet. For example, a central bank interest rate change becomes a cost of funds signal that transmits to commercial bank balance sheets as a marginal pricing influence. The asset-liability management function is the commercial bank coordination function for this transmission process, as the pricing signal ripples out to various balance sheet categories. Loan and deposit pricing is directly affected because the cost of funds that anchors all pricing in finance has been changed. In other cases, a change in the term structure of market interest rates requires similar coordination of commercial bank pricing implications. And this reset in pricing has implications for commercial bank approaches to strategies and targets for the compositional mix of assets and liabilities. The life of deposits is more dynamic than their birth or death. Deposits move around the banking system as banks compete to retain or attract them. Deposits also change form. Demand deposits can convert to term deposits, as banks seek a supply of longer duration funding for asset-liability matching purposes. And they can convert to new debt or equity securities issued by a particular bank, as buyers of these instruments draw down their deposits to pay for them. All of these changes happen across different banks, which can lead to temporary imbalances in the nominal matching of assets and liabilities, which in turn requires active management of the reserve account level, with appropriate liquidity management responses through money market operations in the short term, or longer term strategic adjustment in approaches to loan and deposit market share. The key idea here is that banks compete for deposits that currently exist in the system, including deposits that can be withdrawn on demand, or at maturity in the case of term deposits. And this competition extends more comprehensively to other liability forms such as debt, as well as to the asset side of the balance sheet through market share strategies for various lending categories. All of this balance sheet flux occurs across different banks, and requires that individual banks actively manage their balance sheets to ensure that assets are appropriately and efficiently funded with liabilities and equity. The ultimate purpose of reserve management is not reserve positioning per se. The end goal is balance sheets are in balance. The reserve system records the effect of this balance sheet activity. And even if loan books remain temporarily unchanged, all manner of other banking system assets and liabilities may be in motion. This includes securities portfolios, deposits, debt liabilities, and the status of the common equity and retained earnings account. And of course, loan books don’t remain unchanged for very long, in which case the loan/deposit growth dynamic comes directly into play on a recurring basis. 

Commercial banks’ ability to create money is constrained by capital. When a bank creates a new loan, with an associated new deposit, the bank’s balance sheet size increases, and the proportion of the balance sheet that is made up of equity (shareholders’ funds, as opposed to customer deposits, which are debt, not equity) decreases. If the bank lends so much that its equity slice approaches zero, as happened in some banks prior to the financial crisis, even a very small fall in asset prices is enough to render it insolvent. Regulatory capital requirements are intended to ensure that banks never reach such a fragile position. In contrast, central banks’ ability to create money is constrained by the willingness of their government to back them, and the ability of that government to tax the population. In practice, most central bank money these days is asset-backed, since central banks create new money when they buy assets in open market operations or Quantitative Easing, and when they lend to banks. However, in theory a central bank could literally spirit money from thin air without asset purchases or lending to banks. This is Milton Friedman’s famous helicopter drop. The central bank would become technically insolvent as a result, but provided the government is able to tax the population, that wouldn’t matter. The ability of the government to tax the population depends on the credibility of the government and the productive capacity of the economy. Hyperinflation can occur when the supply side of the economy collapses, rendering the population unable and/or unwilling to pay taxes. It can also occur when people distrust a government and its central bank so much that they refuse to use the currency that the central bank creates. Distrust can come about because people think the government is corrupt and/or irresponsible, or because they think that the government is going to fall and the money it creates will become worthless. But nowhere in the genesis of hyperinflation does central bank insolvency feature….

 

Lévy Process as Combination of a Brownian Motion with Drift and Infinite Sum of Independent Compound Poisson Processes: Introduction to Martingales. Part 4.

Every piecewise constant Lévy process Xt0 can be represented in the form for some Poisson random measure with intensity measure of the form ν(dx)dt where ν is a finite measure, defined by

ν(A) = E[#{t ∈ [0,1] : ∆Xt0 ≠ 0, ∆Xt0 ∈ A}], A ∈ B(Rd) —– (1)

Given a Brownian motion with drift γt + Wt, independent from X0, the sum Xt = Xt0 + γt + Wt defines another Lévy process, which can be decomposed as:

Xt = γt + Wt + ∑s∈[0,t] ΔXs = γt + Wt + ∫[0,t]xRd xJX (ds x dx) —– (2)

where JX is a Poisson random measure on [0,∞[×Rd with intensity ν(dx)dt.

Can every Lévy process be represented in this form? Given a Lévy process Xt, we can still define its Lévy measure ν as above. ν(A) is still finite for any compact set A such that 0 ∉ A: if this were not true, the process would have an infinite number of jumps of finite size on [0, T], which contradicts the cadlag property. So ν defines a Radon measure on Rd \ {0}. But ν is not necessarily a finite measure: the above restriction still allows it to blow up at zero and X may have an infinite number of small jumps on [0, T]. In this case the sum of the jumps becomes an infinite series and its convergence imposes some conditions on the measure ν, under which we obtain a decomposition of X.

Let (Xt)t≥0 be a Lévy process on Rd and ν its Lévy measure.

ν is a Radon measure on Rd \ {0} and verifies:

|x|≤1 |x|2 v(dx) < ∞

The jump measure of X, denoted by JX, is a Poisson random measure on [0,∞[×Rd with intensity measure ν(dx)dt.

∃ a vector γ and a d-dimensional Brownian motion (Bt)t≥0 with covariance matrix A such that

Xt = γt + Bt + Xtl + limε↓0 X’εt —– (3)

where

Xtl = ∫|x|≥1,s∈[0,t] xJX (ds x dx)

X’εt = ∫ε≤|x|<1,s∈[0,t] x{JX (ds x dx) – ν(dx)ds}

≡ ∫ε≤|x|<1,s∈[0,t] xJ’X (ds x dx)

The terms in (3) are independent and the convergence in the last term is almost sure and uniform in t on [0,T].

The Lévy-Itô decomposition entails that for every Lévy process ∃ a vector γ, a positive definite matrix A and a positive measure ν that uniquely determine its distribution. The triplet (A,ν,γ) is called characteristic tripletor Lévy triplet of the process Xt. γt + Bt is a continuous Gaussian Lévy process and every Gaussian Lévy process is continuous and can be written in this form and can be described by two parameters: the drift γ and the covariance matrix of Brownian motion, denoted by A. The other two terms are discontinuous processes incorporating the jumps of Xt and are described by the Lévy measure ν. The condition ∫|y|≥1 ν(dy) < ∞ means that X has a finite number of jumps with absolute value larger than 1. So the sum

Xtl = ∑|∆Xs|≥10≤s≤t ∆Xs

contains almost surely a finite number of terms and Xtl is a compound Poisson process. There is nothing special about the threshold ∆X = 1: for any ε > 0, the sum of jumps with amplitude between ε and 1:

Xεt = ∑1>|∆Xs|≥ε0≤s≤t ∆Xs = ∫ε≤|x|≤1,s∈[0,t] xJX(ds x dx) —– (4)

is again a well-defined compound Poisson process. However, contrarily to the compound Poisson case, ν can have a singularity at zero: there can be infinitely many small jumps and their sum does not necessarily converge. This prevents us from making ε go to 0 directly in (4). In order to obtain convergence we have to center the remainder term, i.e., replace the jump integral by its compensated version,

X’εt = ∫ε≤|x|≤1,s∈[0,t] xJ’X (ds x dx) —– (5)

which, is a martingale. While Xε can be interpreted as an infinite superposition of independent Poisson processes, X’εshould be seen as an infinite superposition of independent compensated, i.e., centered Poisson processes to which a central-limit type argument can be applied to show convergence. An important implication of the Lévy-Itô decomposition is that every Lévy process is a combination of a Brownian motion with drift and a possibly infinite sum of independent compound Poisson processes. This also means that every Lévy process can be approximated with arbitrary precision by a jump-diffusion process, that is by the sum of Brownian motion with drift and a compound Poisson process.

Revisiting Financing Blue Economy

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Blue Economy has suffered a definitional crisis ever since it started doing the rounds almost around the turn of the century. So much has it been plagued by this crisis, that even a working definition is acceptable only contextually, and is liable to paradigmatic shifts both littorally and political-economically. 

The United Nations defines Blue Economy as: 

A range of economic sectors and related policies that together determine whether the use of oceanic resources is sustainable. The “Blue Economy” concept seeks to promote economic growth, social inclusion, and the preservation or improvement of livelihoods while at the same time ensuring environmental sustainability of the oceans and coastal areas. 

This definition is subscribed to by even the World Bank, and is commonly accepted as a standardized one since 2017. However, in 2014, United Nations Conference on Trade and Development (UNCTAD) had called Blue Economy as

The improvement of human well-being and social equity, while significantly reducing environmental risks and ecological scarcities…the concept of an oceans economy also embodies economic and trade activities that integrate the conservation and sustainable use and management of biodiversity including marine ecosystems, and genetic resources.

Preceding this by three years, the Pacific Small Islands Developing States (Pacific SIDS) referred to Blue Economy as the 

Sustainable management of ocean resources to support livelihoods, more equitable benefit-sharing, and ecosystem resilience in the face of climate change, destructive fishing practices, and pressures from sources external to the fisheries sector. 

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As is noteworthy, these definitions across almost a decade have congruences and cohesion towards promoting economic growth, social inclusion and the preservation or improvement of livelihoods while ensuring environmental sustainability of oceanic and coastal areas, though are markedly mitigated in domains, albeit, only definitionally, for the concept since 2011 till it has been standardized in 2017 doesn’t really knock out any of the diverse components, but rather adds on. Marine biotechnology and bioprospecting, seabed mining and extraction, aquaculture, and offshore renewable energy supplement the established traditional oceanic industries like fisheries, tourism, and maritime transportation into a giant financial and economic appropriation of resources the concept endorses and encompasses. But, a term that threads through the above definitions is sustainability, which unfortunately happens to be another definitional dead-end. But, mapping the contours of sustainability in a theoretical fashion would at least contextualize the working definition of Blue Economy, to which initiatives of financial investments, legal frameworks, ecological deflections, economic zones and trading lines, fisheries, biotechnology and bioprospecting could be approvingly applied to. Though, as a caveat, such applications would be far from being exhaustive, they, at least potentially cohere onto underlying economic directions, and opening up a spectra of critiques. 

If one were to follow global multinational institutions like the UN and the World Bank, prefixing sustainable to Blue Economy brings into perspective coastal economy that balances itself with long-term capacity of assets, goods and services and marine ecosystems towards a global driver of economic, social and environmental prosperity accruing direct and indirect benefits to communities, both regionally and globally. Assuming this to be true, what guarantees financial investments as healthy, and thus proving no risks to oceanic health and rolling back such growth-led development into peril? This is the question that draws paramount importance, and is a hotbed for constructive critique of the whole venture. The question of finance, or financial viability for Blue Economy, or the viability thereof. What is seemingly the underlying principle of Blue Economy is the financialization of natural resources, which is nothing short of replacing environmental regulations with market-driven regulations. This commodification of the ocean is then packaged and traded on the markets often amounting to transferring the stewardship of commons for financial interests. Marine ecology as a natural resource isn’t immune to commodification, and an array of financial agents are making it their indispensable destination, thrashing out new alliances converging around specific ideas about how maritime and coastal resources should be organized, and to whose benefit, under which terms and to what end? A systemic increase in financial speculation on commodities mainly driven by deregulation of derivative markets, increasing involvement of investment banks, hedge funds and other institutional investors in commodity speculation and the emergence of new instruments such as index funds and exchange-traded funds. Financial deregulation has successfully transformed commodities into financial assets, and has matured its penetration into commodity markets and their functioning. This maturity can be gauged from the fact that speculative capital is structurally intertwined with productive capital, which in the case of Blue Economy are commodities and natural resources, most generically. 

But despite these fissures existing, the international organizations are relentlessly following up on attracting finances, and in a manner that could at best be said to follow principles of transparency, accountability, compliance and right to disclosure. The European Commission (EC) is partnering with World Wildlife Fund (WWF) in bringing together public and private financing institutions to develop a set of Principles of Sustainable Investment within a Blue Economy Development Framework. But, the question remains: how stringently are these institutions tied to adhering to these Principles? 

Investors and policymakers are increasingly turning to the ocean for new opportunities and resources. According to OECD projections, by 2030 the “blue economy” could outperform the growth of the global economy as a whole, both in terms of value added and employment. But to get there, there will need to be a framework for ocean-related investment that is supported by policy incentives along the most sustainable pathways. Now, this might sound a bit rhetorical, and thus calls for unraveling. the international community has time and again reaffirmed its strong commitment to conserve and sustainably use the ocean and its resources, for which the formations like G7 and G20 acknowledge scaling up finance and ensuring sustainability of such investments as fundamental to meeting their needs. Investment capital, both public and private is therefore fundamental to unlocking Blue Economy. Even if there is a growing recognition that following “business s usual” trajectory neglects impacts on marine ecosystems entailing risks, these global bodies are of the view that investment decisions that incorporate sustainability elements ensure environmentally, economically and socially sustainable outcomes securing long-term health and integrity of the oceans furthering shared social, ecological and economic functions that are dependent on it. That financial institutions and markets can play this pivotal role only complicates the rhetorics further. Even if financial markets and institutions expressly intend to implement Sustainable Development Goals (SDGs), in particular Goal 14 which deals with conservation and sustainable use of the oceans, such intentions to be compliant with IFC performance Standards and EIB Environmental and Social Principles and Standards. 

So far, what is being seen is small ticket size deals, but there is a potential that it will shift on its axis. With mainstream banking getting engaged, capital flows will follow the projects, and thus the real challenge lies in building the pipeline. But, here is a catch: there might be private capital in plentiful seeking impact solutions and a financing needs by projects on the ground, but private capital is seeking private returns, and the majority of ocean-related projects are not private but public goods. For public finance, there is an opportunity to allocate more proceeds to sustainable ocean initiatives through a bond route, such as sovereign and municipal bonds in order to finance coastal resilience projects. but such a route could also encounter a dead-end, in that many a countries that are ripe for coastal infrastructure are emerging economies and would thus incur a high cost of funding. A de-risking is possible, if institutions like the World Bank, or the Overseas Private Investment Corporation undertake credit enhancements, a high probability considering these institutions have been engineering Blue Economy on a priority basis. Global banks are contenders for financing the Blue Economy because of their geographic scope, but then are also likely to be exposed to a new playing field. The largest economies by Exclusive Economic Zones, which are sea zones determined by the UN don’t always stand out as world’s largest economies, a fact that is liable to drawing in domestic banks to collaborate based on incentives offered  to be part of the solution. A significant challenge for private sector will be to find enough cash-flow generating projects to bundle them in a liquid, at-scale investment vehicle. One way of resolving this challenge is through creating a specialized financial institution, like an Ocean Sustainability Bank, which can be modeled on lines of European Bank for Reconstruction and Development (EBRD). The plus envisaged by such a creation is arriving at scales rather quickly. An example of this is by offering a larger institutional-sized approach by considering a coastal area as a single investment zone, thus bringing in integrated infrastructure-based financing approach. With such an approach, insurance companies would get attracted by looking at innovative financing for coastal resiliency, which is a part and parcel of climate change concerns, food security, health, poverty reduction and livelihoods. Projects having high social impact but low/no Internal Rate of Return (IRR) may be provided funding, in convergence with Governmental schemes. IRR is a metric used in capital budgeting to estimate the profitability of potential investments. It is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. NPV is the difference between the present value of cash inflows and present value of cash outflows over a period of time. IRR is sometimes referred to as “economic rate of return” or “discounted cash flow rate of return.” The use of “internal” refers to the omission of external factors, such as the cost of capital or inflation, from the calculation. The biggest concern, however appears in the form of immaturity of financial markets in emerging economies, which are purported to be major beneficiaries of Blue Economy. 

The question then is, how far viable or sustainable are these financial interventions? Financialization produces effects which can create long-term trends (such as those on functional income distribution) but can also change across different periods of economic growth, slowdown and recession. Interpreting the implications of financialization for sustainability, therefore, requires a methodological diverse and empirical dual-track approach which combines different methods of investigations. Even times of prosperity, despite their fragile and vulnerable nature, can endure for several years before collapsing due to high levels of indebtedness, which in turn amplify the real effects of a financial crisis and hinder the economic growth. Things begin to get a bit more complicated when financialization interferes with environment and natural resources, for then the losses are not just merely on a financial platform alone. Financialization has played a significant role in the recent price shocks in food and energy markets, while the wave of speculative investment in natural resources has and is likely to produce perverse environmental and social impact. Moreover, the so-called financialization of environmental conservation tends to enhance the financial value of environmental resources but it is selective: not all stakeholders have the same opportunities and not all uses and values of natural resources and services are accounted for.