The Economist

"Counter Insurgency: Central counterparties may not be all they are cracked up to be", The Economist, 06.27.2009, 83.

Central Counterparties act as the buyer to every seller in a market, and the seller to every buyer. They collect margins on every trade; members put money into a reserve fund as well. Traders only have to worry about the creditworthiness of one entity, with which they can net off their trades. If a big trader goes under the financial system is less likely to go with it.
Not everyone is happy about this trend. Craig Pirrong of the University of Houston worries that CCPs dull the incentive to trade prudently. Traders are more likely to take on risky positions because some of the losses they may generate are ultimately borne by others - the CCP and its other members. As for a CCP itself, however well intentioned it may be, it cannot monitor traders' complex derivative prositions as well as they themselves can. And it is probably less motivated to try.


"Can pay, won't pay: It is easier to dump a home loan if a friend has done so too", The Economist, 06.27.2009, 83.

Anger about bail-outs of banks or carmakers does not weaken the moral barrier to default. But people who live in neighbourhoods where home repossessions are frequent are more likely to welsh on loans. Homeowners who know someone who has defaulted strategically are 82% more likely to say they would do so, too. The likelihood of strategic default rises more quickly once the rate of local home foreclosures reaches a critical level. That hints at a vicious cycle of foreclosures that both depress home prices and weaken the social and economic barriers to further defaults.

[Critical Mass]


The Economist

"No empty threat: Credit-default swaps are pitting firms against their own creditors", The Economist, 06.20.2009, 79.

Bankruptcy codes assume that creditors always attempt to keep solvent firms out of bankruptcy. Six Flags and others are finding that financial innovation has undermined that premise.
Some investors take an even more predatory approach. By purchasing a material amount of a firm's debt in conjunction with a disproportionately large number of CDS contracts, rapacious lenders (mostly hedge funds) can render bankruptcy more attractive than solvency.
About two years ago Henry Hu of the University of Texas began noticing odd behavior in bankruptcy proceedings - one bemuse courtroom witnessed a junior creditor argue that the valuation placed on a firm was too high. With default rates climbing, he sees perverse incentives as a looming threat to financial stability.

[Perverse Incentives, Unintended Consequences]

"Like father, like son: There is a benefit in looking like dad", The Economist, 06.20.2009, 85.

There are few more foolish actions, from an evolutionary point of view, than raising another male's progeny.
The result, published in the latest edition of Animal Behaviour, is that children who looked and smelled like their fathers did indeed enjoy more paternal care than those who did not. They averaged +1 on the paternal investment index. The 'non-resemblers', those adjudged by outsiders not to smell or look like their fathers, averaged -1. This mattered, for there was also a strong connection between paternal investment and a child's nutritional state. Children whose index was +2 had an average BMI of 16.5. Those whose index was -2 averaged a BMI of 15.


The Economist

"Economics focus: Fatalism v fetishism", The Economist, 06.13.2009, 82.

Countries grow by shifting labour and investment from traditional activities, where productivity is stagnant, to new industries, which abound in economies of scale or opportunities to assimilate better techniques.