Let’s have fun with Law and Finance Theory. It’s time to apply the Default Invariance theory (a Naïve Category Theory of Law and Finance) to the US Fed’s policies, especially, quantitative easing (QE). We see that the intellectual roots of QE originated with the meditations on asset-pricing of portfolios of the Nobel Laureate Professor Tobin and through his students, Yellen (the designated 67 year old Fed Chair) and Hamada (the 77 year old cheerleader and architect of Abenomics in Japan), we are in the midst of a vast “financial experiment” run in the real economy. Consider that approximately $1trillion per year since 2008 has been pumped into the US financial system in the name of a theory that’s called “operation twist” – where the singular manipulation of short-term interest rates of financial assets within a a very large portfolio is assumed to causally impact long-term interest rates up or down, and thus, indirectly incentivize the real-asset market. That’s the Nobel Prize winning thesis in a nutshell. Interestingly, Prof Eugene Fama, who won the Nobel Prize in economics this year, says such manipulations are balance sheet transfers of meaningless impact to the real economy--just the opposite of Tobin et al. For Tobin, Yellen & Hamada, see bloomberg/news/2013-10-31/yalies-yellen-hamada-putting-tobin-s-twist-theory-to-work-in-qe.html I am advocating a completely different theory. My formalism assumes regulatory arbitrage, asymmetric information, and as my former PhD student Dr. Viktoria Baklanova emphasizes, “humans are bad animals” – in other words, default is everywhere and is therefore, invariant. Asset creation is a form of financial contracts, and financial contracts are a form of a commuting square where the terminal object is Pay, Not-Pay or Pay & Not-Pay. These terminal objects imply three different approximations of law and finance space, such that the algebraic-topological transformation resolves to a point, line or ring, respectively. These three approximations are extreme generalizations of structure that allow us to examine any legal-financial proposal (akin to a contract, regulation or action translated into arrow-diagrams) and come up with mappings that further allow us to make “predictions” like “deciding where we would like to go on a map.” Under the third approximation, Dr. Yellen’s and Dr Hamada’s are so misconceived that their advice is like saying we should go to Brooklyn from Manhattan by taking an Emirates aircraft to Singapore. In my lecture tonight (131104) in “International Corporate Governance, Managing Global Risk, Ethics and Culture,” I shall extend the general mapping (making use of Universal Mapping Properties) from “Contract Law,” to “Torts and Criminal Law.” We will pay particular attention to a mapping I have “discovered” called the “m-morphism.” The m-morphism allows us to contemplate routes before the horizon of default and suggest finite real solutions in the risk homological chain complex that resolve infinite contingency to simple social rituals. On the way, I shall propose, “Why Financial Derivatives are Anthropomorphic Physical Laws at the end of Any and All Libertarian Universes.”
Posted on: Mon, 04 Nov 2013 10:20:53 +0000
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