This is a very educational documentary about the development of finance as a science – especially what has to do with derivatives pricing – and a very famous application of it, the creation of the LTCM fund and what brought it down. Events that were repeated after 10 years in 2008. The documentary is in Youtube in 5 pieces.
Part 1, Part 2, Part 3, Part 4, Part 5.
The transcript of the movie can be found here.
I take some facts, about the role of oil prices in the economy, from the article of Roubini on FT found here.
“About two-thirds of the world’s proven oil reserves and almost half of its gas reserves are in the Middle East.”
“Three out of the past five global recessions have followed a Middle East geopolitical shock that led to a spike in oil prices. In the other two global recessions, oil prices also played a role. The Yom Kippur war of 1973 triggered a sharp increase that led to the global stagflation – recession cum inflation – of 1974-75. The Iranian revolution in 1979 led to a similar stagflationary rise in oil prices that triggered the 1980 recession (a double-dip recession for the US in 1980 and 1982). The Iraqi invasion of Kuwait in August 1990 led to a spike in oil prices at the time when the savings and loan crisis was already tipping the US into a recession; the US and most advanced economies then entered a short recession that lasted until the spring of 1991, when the war against Iraq was won. Even in the 2001 global recession – triggered by the bursting of the technology bubble – oil played a modest role as the second Palestinian intifada and broader Middle East tensions led to a modest but significant increase in prices.”
“Oil prices were also significant in the most recent global recession. The US entered a recession in December 2007 following the subprime bust, but this became global only in the autumn of 2008. This global recession was not triggered only by the collateral damage of Lehman’s bankruptcy. By the summer of 2008, oil prices had doubled in about 12 months, reaching a peak of $148 a barrel. That was a massive negative terms of trade and real income shock not just for the US, most of Europe and Japan but also for China and all the other net oil/energy-importing emerging markets. An already fragile global economy was tipped into an outright global recession.”
“This rise – and the related increase in other commodity prices, especially food – pushes up inflation in already overheating emerging market economies where oil and food prices represent up to two-thirds of the consumption basket.”
“But if oil prices were to rise much further, these economies would slow down sharply and some might even experience a double-dip recession. Finally, rising commodity prices increase investors’ risk aversion and may lead to a reduction in consumer and business confidence that is both negative for financial markets and the real economy.”
Mr. Jacques Attali, counsel of president François Mitterrand, admits in an interview given to greek journalists that the deficiencies of the Euro project were known at the time of EMU's creation. Mr. Attali says that they knew that Euro and eurozone economies would have problems if the creation of the Euro was not associated with centralized eurozone fiscal policy. He emphasizes that EU decided to move towards greater expansion rather than deeper expansion which would have strengthened European economies. Another important comment he makes is that Europe has been reactive rather than proactive. In addition, he finds that the reflexes of European leaders have declined significantly and currently the responses are very much delayed. Currently, the developments are dictated by the markets, rather than by the politicians. Politicians follow with great delay, something that was not the case during the years of François Mitterrand, as he says. To listen to the interview, which is in Greek click here.
Recently a certain one labor union in Greece closed the Ports of Piraeus and Corinth. Piraeus closed for two days. In Corinth two European Union owned ships were blocked for more than fifteen days. Surprisingly, though, and even though courts decided against the blocking of both ports and in favor of free trade and free transportation, the government took the side of the minority-representing union, by not imposing the law-and-order that by the constitution is supposed to maintain. These are clear signs of mercantilism and agreements under the table between the government and the union. For this reason and in order to provide some evidence of the bad consequences of these practices in the economy, I cite two articles on mercantilism. The first one is borrowed from the Library of Economics and Liberty and the second one from Wikipedia. Hopefully, the general public in Greece will become more aware of the welfare implications of mercantilism.