Thursday, December 30, 2010

What are the consequences of an ignorant body politic?

A question to ponder after looking at the distribution of results to a current affairs quiz by Pew:

Sunday, December 26, 2010

I've Often Had This Thought -- Now The Onion Elaborates

WASHINGTON—Citing a desire to gain influence in Washington, the American people confirmed Friday that they have hired high-powered D.C. lobbyist Jack Weldon of the firm Patton Boggs to help advance their agenda in Congress.

Known among Beltway insiders for his ability to sway public policy on behalf of massive corporations such as Johnson & Johnson, Monsanto, and AT&T, Weldon, 53, is expected to use his vast network of political connections to give his new client a voice in the legislative process.

Weldon is reportedly charging the American people $795 an hour.

"Unlike R.J. Reynolds, Pfizer, or Bank of America, the U.S. populace lacks the access to public officials required to further its legislative goals," a statement from the nation read in part. "Jack Weldon gives us that access."

"His daily presence in the Capitol will ensure the American people finally get a seat at the table," the statement continued. "And it will allow him to advance our message that everyone, including Americans, deserves to be represented in Washington."

The Rest.

Friday, December 24, 2010

Wednesday, December 22, 2010

Monetary Bouleversement

I'm not an economist, but.....

It seems China is going to buy several billions of Portugal's debt. They did the same for Greece, and if memory serves, with that they negotiated some terms for building a port facility to transit goods made in China.

If China buys euro debt, it lowers eurozone interest rates. If they buy US debt, they help keep US interest rates "contained".

So siting on $2T in reserves, doesn't that mean they can function like a central banker to the world and fine tune rates in various regions? That's better than Bennie and the Feds can do...

Maybe dollar hegemony is evaporating before our eyes without anybody sending a memo.

Tuesday, December 21, 2010

The Snows of Europa

I've suspected that the increased snow in Europe this year and last reflects global warming, but I've been too lazy to chase it down.

Thankfully, Monbiot has done some work and has a post that goes into some details.

Inter alia -- I didn't realize that Baffin has been 15 DEGREES warmer lately.


Nowhere to hide for us monkeyshines. Perhaps some day some extraterrestrials will comb through the wreckage and figure out what happened to our planet.

Monday, December 20, 2010

About as clear as it gets

John Hussman's piece this week has a clear synopsis of the financial events of the Great Recession in just a few paragraphs.
While most of you know this well, it is still useful to read a concise exposition of what happened, and why it didn't have to be handled the way it was.

The usual straw man argument is that it was TARP or Armageddon.


4) We did not avoid a second Great Depression because we bailed out financial institutions. Rather, the collapse in the economy and the surge in unemployment were the direct result of a gaping hole in the U.S. regulatory structure that prevented the rapid restructuring of insolvent non-bank financials. Policy makers then inappropriately extended the "too big to fail" doctrine to ordinary banks. Following a striking loss of public confidence that resulted from arbitrary policy responses, coupled with fear-mongering by exactly those who stood to benefit from public handouts, the self-fulfilling crisis was contained by a change in accounting rules that effectively disabled capital requirements for all financial companies. We are now left with a Ponzi scheme.

While it's clear that the four-second tape in Ben Bernanke's head is an endless loop saying "We let the banks fail in the Great Depression, and look what happened," any disruption caused by the "failure" of a financial institution is not due to financial losses to bondholders, but is instead due to the necessity of liquidating the assets in a disorganized, piecemeal way, as was the case with Lehman Brothers. Large, sometimes major banks fail every year without a material effect on the economy. The key is to have regulations that allow these failures to occur with the minimal amount of disruptive liquidation.

It is important to recognize that nearly every financial institution has enough debt to its own bondholders on the balance sheet to absorb all of its losses without any damage to depositors or customers. These bondholders lend at a spread, and they knowingly take a risk.

Bank regulations intelligently allow the FDIC to cut away the "operating" portion of a financial institution from the obligations to its bondholders and stockholders. Consider a bank with $100 billion of assets, against which it owes $60 billion of customer deposits, $30 billion of debt to its own bondholders, and $10 billion in shareholder equity. Now suppose those assets decline in value to just $80 billion, creating an insolvent institution ($80 billion in assets, $60 billion in deposit liabilities, $30 billion in debt to bondholders, and -$10 billion in equity). The "operating portion" is the $80 billion in assets, along with the $60 billion of customer deposits, which can be sold as a "whole bank" transaction for $20 billion to another institution. The stockholders are wiped out, while the bondholders get the $20 billion residual and take a loss on the rest. Depositors and customers now get statements with a different logo at the top. The seamless "failure" of Washington Mutual is a good example of this in action.

The problem with Bear Stearns and Lehman was that no equivalent set of regulations was in place to allow "cutting away" the operating portion of a non-bank institution. Instead, the Fed illegally expanded the definition of the word "discount" in Section 13(3) of the Federal Reserve Act and created a shell company to buy $30 billion of Bear Stearns' questionable long-term assets without recourse. The remaining entity was sold to JP Morgan, where Bear Stearns bondholders still stand to get 100 cents on the dollar plus interest. Lehman was allowed to "fail," but because there was still no set of regulations that allowed cutting away the operating entity, it had to be liquidated piecemeal.

Importantly, and even urgently, it was not this "failure" that produced the economic downturn. If you carefully observe what happened in 2008, the large-scale collapse of the financial markets and the U.S. economy started literally sixty seconds after TARP was passed by Congress on October 3, 2008. At that moment, the world was told not that the smooth operation of the global financial system would be ensured by taking receivership of failing financial institutions; not that the focus of policy would be the protection of depositors, customers, and U.S. fiscal stability; but instead that insolvent private balance sheets would now be defended, subject to the arbitrary decisions of policy makers in which nobody had confidence. Lehman's failure simply told investors that these decisions could be completely arbitrary, since there was really no operative distinction between Bear Stearns, which was saved, and Lehman, which was not. Moreover, in order to pass TARP, the public had to be convinced that a global meltdown would result if financial institutions weren't preserved in their existing form. In this way, policy makers created a crisis of confidence.

Skip forward and carefully observe what happened in 2009, and you'll see that the crisis was suspended once the FASB threw out rules requiring financial companies to report their assets at market value, while at the same time, the Federal Reserve illegally broadened the definition of "government agency" in Section 14(b) of the Federal Reserve Act in order to purchase $1.5 trillion of Fannie Mae and Freddie Mac obligations. These actions replaced the arbitrary discretion of policy makers with confidence that no major institution would be at risk of failing because, in effect, meaningful capital standards would no longer apply.

Thus, our policy makers first created a crisis of confidence, and then resolved it by legalizing a global Ponzi scheme.

As David Einhorn at Greenlight Capital has noted, "We learned the wrong lesson." We should have learned that existing capital standards were insufficient and that there was a large, gaping hole in our regulatory structure that failed to provide "resolution authority" for non-bank financial companies. Instead, we've learned the dangerously misguided notion that some institutions are simply too big to fail. This inevitably creates a situation where reckless misallocation of capital continues to be subsidized at increasing public cost, while bondholders go unscathed and insiders take bonuses with the same alacrity as Bernie Madoff's early investors.

In short, the downturn in the real economy occurred because regulators refused to take receivership of insolvent institutions, while pushing a story line that the entire global economy would crumble if bondholders had to take losses. This created a fear among depositors and consumers that the entire system was arbitrary and unstable, fueled periodic runs on various financial institutions, tightened the availability of credit to companies having nothing to do with real estate, and created a self-fulfilling prophecy of global economic weakness. Had our policy makers said "depositors and customers will be protected, we will immediately exercise resolution authority over insolvent institutions, and bondholders will not be spared" we could have simply had a "writeoff recession" in paper assets, rather than an implosion of the real economy and an explosion in public debt.

The facts simply do not support the idea that taking receivership of insolvent financials leads to economic distress. Rather, it properly rests losses on the bondholders, and preserves the operation of the financial system by bolstering its solvency. One might argue that we could not possibly let bondholders take the trillions of dollars of losses that would have been required in order to restructure debt and get the bad obligations off the books. This is absurd. A 20% stock market decline wipes out about $3 trillion in market value. Indeed, given the size and average maturity of the U.S. bond market, just the increase in interest rates that we've observed over the past 6 weeks has knocked off trillions in market value.

The financial markets are perfectly capable of taking losses. They don't do well with disorganized piecemeal liquidation - where perfectly good loans are called in and countless positions have to be unwound - but that isn't required if your regulatory structure allows receivership/conservatorship that can cut away and gradually transfer the operating portion of an institution. What the global economy is not capable of taking is the uncertainty that results when policy makers apply arbitrary rules, leaving all other decision makers in the economy frozen at the edge of their seats to discover what the results of those arbitrary decisions will be. We have learned the wrong lesson, and we continue to pay for it.

The rest of this week's Hussman's commentary here.

Sunday, December 19, 2010

Hot or Not?

One thing about entrepreneurialism that grabbed me was the same change-the-world impulse that animated political activity. So I found that aspect of the Facebook movie quite fun to watch. The sense of riding a big societal tsunami on a surfboard and landing high on a mountaintop was palpable, and certainly one of the most awe inspiring aspects of the ongoing migration of human activity to digital networks is the dizzying speed with which the right idea can explode.

On the other hand, I find that I'm not that engaged when I log on to FB.

Perhaps it's that I score high on neuroticism traits... This recent piece in the Economist on human happiness across the age spectrum suggests that your satisfaction with Facebook will be a function of your underlying traits -- and I must admit that I do enjoy a quiet night at home (when the kids are reading and not screaming)

"Whereas neuroticism tends to make for gloomy types, extroversion does the opposite. Those who like working in teams and who relish parties tend to be happier than those who shut their office doors in the daytime and hole up at home in the evenings."

So maybe I'm just a stay-at-home whether online or in the real world, but I doubt it. I love an evening of good conversation with people I enjoy being with -- in the end, I think that FB is basically too flat an experience for me. While humans are obviously social creatures, the inputs are multisensory -- and there is a huge amount of bandwidth in realtime verbal and nonverbal communication --- think about jokes or flirting-- body language, tone of voice, facial expression, etc. is all missing online. Then again, we are in the early innings of the digital revolution, so guys like Kurzweil are undoubtedly correct about how much more there is to come.

Maybe when we have holographic displays and multi-user 3D chats, things like Facebook 3.0 will be richer and more satisfying. As anyone who has tried to moderate a meeting will know, you'll need some serious algorithms for that. We do have those embedded in ourselves when we engage in a dinner party conversation..

As I get off a phone call with my friend 9 time zones away, feeling much more connected that his FB updates ever achieve for me, it's clear that a key element of human sociality is its essentially synchronous dimension. Asynchronous communication for social networking seems to put more distance between us, and seems to concede too much to the artificial constraints on time that is the essence of the modern world.

If we are to reclaim the human, that is gonna have to go. That can't happen til the world of work turns upside down.

This review of The Social Network by Zadie Smith is a great read, and saves me the trouble of writing more: here

Friday, December 17, 2010

Thursday, December 9, 2010

More on Sweden from Dilbert

Pretty funny:

If you haven't read any background about the so-called rape charges against Assange, you really should. Apparently Swedish laws are unique. If you have a penis, you're half a rapist before you even get through customs. And if your condom breaks, that's jail time. What I'm saying is that the Club Med in Sweden is a nervous place.

I was having a hard time making up my mind about Assange. On one hand, he might be hurting the interests of my country and putting people in danger. Death to him! On the other hand, a little extra government transparency might prevent more problems than it causes. Hero! It was a toss-up. Then Sweden turned Assange from a man-whore publicity hound into Gandhi. Advantage: Assange.

The rest here.

Tuesday, December 7, 2010

Julian Assange

This article from Counter Punch from several months ago is well worth a read for those who are not familiar with it.

The Swedish charges really do appear to be arising from a faux feminism run amok. I thought the charge of not calling the next day was a joke, but now I'm not so sure.

Jon Stewart, where are you?