Relevant and even prescient commentary on news, politics and the economy.

Working the Refs

So there was this big snowstorm that hit the East Coast a couple of weeks ago. (Not the one this weekend, that dumped about 2′ of snow on Upstate New York and a little more than a foot here in suburban New Jersey; the one that wiped out D.C. and gave the Party of No an excuse to do nothing.)

Snow in February. What a surprise! Clearly, not something that happens every year.

My high school classmates and others in the Midwest see the notice and say, “Yeah, gosh, sounds like January and February here.”

But This One is Different. Maybe because it gave the U.S. press an excuse to pay no attention to Haiti. Maybe because closing down D.C. meant that all the pundits got to whine and reveal their suffering.

And, just maybe, because it has become the all-purpose excuse for the February Employment Report. Or any other hint that the world is not perfect, and those “green shoots” haven’t been eaten by starving deer who were then shot by Big Bank Hunters.

The Usual Suspects are already out in force.* And the hedging (not in the risk management sense) has begun:

“We will have to wait until March to see if February is an aberration or a fundamental sign that the recovery in sales will be more subdued than hoped,” [Jessica Caldwell, Edmunds’ director of industry analysis said].

So anything that can be marginally interpreted as positive will be The Crest of a Wave, while anything that makes those legendary shoots look as if they were artificial flowers will get the rousing “Wait Until March!” cry.

All we really know is that—thanks to Senator Bunning and a pliant Democratic “leadership”—March, not April, is the Cruelest Month for about 1.2 million normally-working Americans.

But, gosh, the job gains for February might be understated by 5-8% of that total. So let’s not do anything hasty.

*Yes, it’s “pick on Brad DeLong day.” Didn’t you get the memo? (Also, I can’t find discussion of the topic at any of the Other Usual Suspects, though I haven’t checked The Big Picture.)

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Bankers Bonuses and Bank Reforms: why they are needed, what they might include, and are you angry yet?

by Linda Beale

Bankers Bonuses and Bank Reforms: why they are needed, what they might include, and are you angry yet?

A big title for a tiny little sketch of a post, I know. Not much time today folks, but if you can read only one blog posting, read the one at Naked Capitalism at the link provided at the end of this paragraph. Yves comments on the Independent’s article on bankers’ bonuses and the Wall Street firms’ incredible egos and greed. See US Banks Reject Effort by UK Bank Execs to Reign In Pay, Naked Capitalism, 022

 Beale here: As you all know, A Taxing Matter has been hitting that same nail with my tiny little hammer. I think the evidence suggests that we need to take some rather drastic actions, which might include any or even perhaps all of the following:
  • break up the investment banks;
  • regulate their leverage and their bonuses,
  • ban their flash trading
  • heavily regulate their involvement in speculative gambling with derivatives (i.e., betting on positions that they don’t own). And given that their resurging profits are due to two things–(1) resuming the same casino gambling that caused the 2008 crisis and Great Recession and cost millions their jobs and (2) feeding off the public trough for TARP direct funding (the AIG bailout, etc going directly into Goldman and JPMorgan Chase’s pockets) and implicit guarantees resulting in very cheap cost-of-funds permitting Goldman et al to make profits with federal loans–we need to add a new tax for the big banks as a charge for the government guarantee that they are getting rich off of (again). The tax should be a substantial enough bite that it will force the banks to both significantly reduce their leverage and significantly reduce their bonus payment system. It can be either in the form of an excise tax based on their leverage (since their borrowed funding is what costs the government in terms of bailout potential) or in the form of an income tax surcharge that is progressively structured so that the highest rate applies to banks with the greatest amount of leverage. It could even be a tax structured as a tax on each derivative position like credit default swaps entered into that isn’t backed by a long position (so not a true hedge but a speculative bet). I don’t knw for sure which form is best (comments welcome) but I sure as heck think some version or another should be passed, and soon, else we are in for a repeat that is more disastrous than the GOP-gifted Great Recession we are already experiencing. _________________________________

crossposted with ataxingmatter

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Memories of the Chilean Earthquake (1960)

by cactus

Yeah, I Felt the Big One: Memories of the Chilean Earthquake

My father had something of a Forrest Gump college experience, being “there” at a couple of unfortunate historical events. One example – in 1960, he was studying Physics at the institute in Bariloche, a town in the Andes in Argentina. That’s about 220 miles from Valdivia, Chile, more or less the epicenter of the 1960 earthquake that measured 9.5 on the Richter scale. That earthquake remains the largest one ever measured. (For comparison, last week’s earthquake in Chile was an 8.8.) It is worth noting – a tsunami resulting from the quake killed 61 people in Hawaii and 35 foot waves hit as far away as Japan and the Philippines.

Here are a couple excerpts of an e-mail my dad sent me:

YEAH, I FELT THE BIG ONE!!! The Mother Of All Earthquakes (MOAE)

That 1960 earthquake(s) was a different kind of animal. Usually there is a big quake and then several aftershocks follow. In MOAE there were at least 4 pre-cursors of magnitude around 8 and then the 9.5 hit.

In the early morning of May 21 I was with some other guys studying at the Chemistry lab. I noticed that liquid in a glass container was sloshing. I mentioned it to the others but they didn’t pay much attention.

At that time we were studying rather hard and didn’t know what was going in the outside world. We didn’t know that seismic activity had started at the other side of the Andes. There were 2 big quakes on the 21st and 2 more on the 22nd just on the other side of the Andes and we didn’t notice much.

Then around 5 in the afternoon of the 22nd, we were having tea or coffee at a cafeteria when a couple of big chandeliers started oscillating like a pendulum. We felt the ground moving and ran outside. We couldn’t stand so we sat at the curb which also was moving like crazy. There was also a very funny sound.

That was the huge 9.5 MOAE that had hit Valdivia a few hours earlier. There were many aftershocks – several with magnitude larger than 7.0 through June 4.

2 dormant volcanos awoke and 3 new ones emerged. All that time there was a thick rain of ashes coming down. We had to walk outside covering our faces with scarves.

by cactus

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When Economic Stress Becomes Terrorism

The Bell has an op-ed worth reading.

When Economic Stress Becomes Terrorism

Poverty, Rather Than Anti-Anything Ideology, Is the Common Thread

Joseph Stack is not a terrorist in the sense that we apply this word to operatives for al-Qaida and other groups and he certainly is not a Tea Party terrorist. The same is true for Terry Hoskins. However, both these men provide useful illustrations of the link between economic distress and terrorism.

Stack, of course, is the Austin Texas software engineer who last week set fire to his house and then flew his single-engine Piper Cherokee airplane into the Ecehelon building, housing government tax workers. Friends in Austin called him a straight-laced, quiet person who struck them as incapable of such carnage. However, those who knew him longer said Stack had great animosity for the IRS.

Back in the 1980s and 1900s, two entrepreneurial ventures started by Stack ultimately were put out of business by California’s Franchise Tax Board. The first was suspended for non-payment of back taxes totaling $1,153. The second was suspended for failure to file a tax return. Stack acknowledged his errors but was apparently driven over the edge by the federal government’s bailout last year of various troubled banks and auto companies.

Stack wrote that a little guy like him making little mistakes was ultimately hounded by the government in disputes that cost him his marriage, more than $40,000, and “ten years of my life.” Yet when the companies were deemed too big to fail, Stack wondered, “Why is it that a handful of thugs and plunderers can commit unthinkable atrocities . . . and when it’s time for their gravy train to crash under the weight of their gluttony and overwhelming stupidity, the force of the full federal government has no difficulty coming to their aid within days if not hours?”

Terry Hoskins probably is not known to most but in my hometown of Cincinnati he was making headlines locally at about the same time as Stack was making them nationally. Hoskins is a successful businessman. Several years ago, he built himself a sprawling, luxurious $350,000 home, complete with swimming pool and tennis courts. Over the years, he got into several payment disputes with RiverHills Bank, which holds the mortgage on his property.

When his brother and former business partner sued Hoskins, the IRS placed liens on his commercial properties. The bank promptly claimed his home as collateral. Hoskins asserts he eventually found someone else to loan him the $160,000 he needed to pay off the mortgage but the bank refused, saying it could get more from selling the house in foreclosure.

“When I see I owe $160,000 on a home valued at $350,000, and someone decides they want to take it – no, I wasn’t going to stand for that,” Hoskins said. So two weeks before he was due to turn the property over to the bank, Hoskins rented a bulldozer and turned his dream house into rubble. His business is scheduled to go up for auction on March 2 and Hoskins says he is considering leveling that building too.

Stack and Hoskins clearly committed acts of violence and wanton destruction but are they terrorists?

In response to Stack crashing his plane, Democratic Representative Lloyd Doggett of Texas released a statement calling it “a cowardly act of domestic terrorism.” Austin Police Chief Art Acevedo said he preferred to describe it as “a criminal act by a lone individual.” Jonathan Capehart of the Washington Post reports that caused an acquaintance of his to wryly observe, “If a white Texas guy flies into a government building, it is a contained criminal act.”

Democrats seem eager to depict Stack as a terrorist and none too coyly point out some striking similarities between his list of complaints and the sorts of things sometimes said/yelled at Tea Party gatherings. Republicans call this nonsense, insisting there is no equivalence – ideologically or in results – between Stack’s plane crash versus the men who crashed four commercial jet airliners into the Pentagon, World Trade Center, and a Pennsylvania field, killing thousands.

I have to agree that neither Stack nor Hoskins were likely inspired to their acts by Tea Party rhetoric, even if it turns out they attended or closely followed the events. While these gatherings attract their share of fringe individuals, they are far too loosely organized to be called an anti-government group. Nor is it fair to characterize Tea Partiers as exclusively Republicans, even if they generally trend toward conservatism.

Moreover, as Stack’s suicide note/manifesto, posted on the Internet hours before his death, reveals, the same individual can mix hatred toward big government, big business, and even big religion in equal measures.

However, I think it is a mistake not to consider the presence of distinctly terrorist elements in Stack’s and Hoskins’s mental states and actions. Robert Wright observes in today’s New York Times that, like other terrorists, Stack “saw himself as part of a cause, as one in a long line of fighters against tyranny.” More than a few Americans identify with that cause, even finding a heroic component in Stack’s desperation. Hoskins has received similar expressions of support.

Mark Potok, a Director at the Southern Poverty Law Center, which tracks hate groups, say that extreme and violent acts of rebellion, such as those committed by Stack and Hoskins, “[tap] into a very deep vein of rage against the government.”

Also like other terrorists, Stack had a message to get out and was willing to foster fear through violence until his grievances were addressed. “Sadly,” he wrote, “though I spent my entire life trying to believe it wasn’t so, violence not only is the answer, it is the only answer . . . Nothing changes unless there is a body count.”

Likewise, Hoskins hopes banks view his act of destruction as a kind of veiled threat, leading to a desired end. He told reporters he hoped to “make banks think twice before they try to take someone’s home, and if they are going to take it wrongly, the end result will be them tearing their house down like I did mine.”

When a crazed olive-skinned Muslim Army psychiatrist goes on shooting rampage at Fort Hood and/or crazed black-skinned Muslim student attempts to blow up an airplane with an underwear bomb, conservatives accused the Obama Administration as being soft on terror and decried resistance to wide scale profiling of Muslim males as “political correctness.” Yet when the attackers are white, middle-class males, these same conservatives are quick to dismiss them as unconnected lone crazies. It seems a tad inconsistent.

Yet in one sense, they may have a point. Wright and others think the term “terrorist” has become overused and ought to be dropped. I sympathize with their frustration. Terrorists” have come to connote all-powerful super-villains, so evil and so impossible to contain that our ordinary system of laws is powerless against them and citizens should gladly sacrifice basic rights for safety.

However, assuming we keep the term, Stack and Hoskins nicely demonstrate how economic distress can turn to terrorism. Granted, they are/were not Third World impoverished peasants. Both are/were affluent, educated, middle-class men who took advantage of numerous opportunities afforded them and made some foolish choices along the way that came back to haunt them.

Yet if the sudden loss of affluence – and perhaps more important, a sudden sense of no longer being in control – could drive these educated, middle-class men to acts of violent desperation, consider how a life of abject poverty with no hope of advancement might affect Third World Muslims or create guilt in Muslims living in Western democracies.

Radical Muslim clerics do not create the violent hatred that fuels terrorism anymore than Tea Party organizers; they simply use it constructively or destructively toward their own ends. The roots of terrorism and violence lie in poverty and hopelessness.

That is something to think about as we consider the current economic distress sweeping across this country and debate the best ways to address it. We are faced with a situation where more and more middle class are quietly drifting in desperation into an underclass.

If we do not address how to create employment and stem the bleeding of jobs overseas, if we do not address how to reduce the spiraling costs resulting from continued reliance on non-renewable energy sources, if we do not address how to reduce the spiraling costs from out-of-control healthcare and health insurance industries, we are heading for a reckoning.

Failure to deviate from the status quo means that the anti-government and anti-business activists of the near future will not need to poke about the fringes of society to find a few extreme individuals driven to desperation, such as Stack and Hoskins. Instead, their potential converts will be legion.

The Bell

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Corrective Note

A few years ago—probably four, though maybe more—I was doing some research at SIBL when the National Sport of Canada came on the television screens.

It wasn’t that I stopped to watch; that loyalty had been previously established. It was that everyone else who was walking between the floors stopped and watched for at least five minutes, and often longer.

So when the NYT declares that curling “has captivated the Type-A world of Wall Street almost by accident” as if this were news, I can safely state that it has been so for a while.

(h/t the blog of the London Review of Books)

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Catch-Up Links

I have been a Bad Blogger this week. (As opposed to my usual practice, which seems to be described as Blogging Badly.)

While I intend to continue the New Tradition (think of me as Waylon, without the speed), following are Snow Day Links:

D-Squared was on fire on Wednesday: both Bank Lending Channel and The Foundations of Mathematics and the Roots of Finance are essential.

For all those of you—looking straight at you, o six-footed one—who believe TARP was the right idea to save the economy, here’s another data point: “Overall bank lending in the US economy shrank 7.4% in 2009 — the sharpest drop since 1942.”

James Hamilton looks at Those Other Programs that support the banks without providing any funds to the rest of the economy (though I don’t think he put it that way).

With all the talk of Liquidity needs and Greek bonds, jck at Alea posts an essential chart.

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Duffie on speculative trading

by Linda Beale

Duffie on speculative trading (Part one of a series)

In today’s Wall St. Journal, Darrell Duffie, a finance professor at Stanford’s business school, argues “In Defense of Financial Speculation” (Wall St. J., Feb. 24, 2010, at A15). (Rdan here…AB posting is Feb. 26)

According to Duffie, speculators are beneficial. Here’s his argument.

1) speculators absorb risk that others don’t want, permitting investors to hedge their positions

2) speculators provide information about invetments–if they buy, fundamentals appear favorable; if they sell, fundamentals are not. That information helps market prices be more accurate.

3) speculation–defined as “accurately forecasting an investment’s fundamental strength or weakness”–is not the same as manipulation–defined as “when investors ‘attack’ a financial market in order to profit by changing the value of an investment.

Duffie admits that speculation “is not necessarily harmless. If a large speculator does not have enough capital to cover potential losses, he could destabilize financial markets if is position collapses.”

Are Duffie’s arguments strong enough to think, as he suggests, that curbing speculation in the credit default market isn’t necessary? Note that item 2 stems directly from the “efficient markets hypothesis”–that markets price items appropriately through sharing of information. But what we know suggests this isn’t true. We have an entire vocabulary for talking about the fact that without stabilizing intervention and protective regulation, market pricing–and the kinds of speculation that Duffie praises–tends to lead to market bubbles. The housing markets are a good example. People thought that housing was a good investment. Speculators got into housing to “flip” houses to make a profit. Other speculators bet on the housing market through collateral debt obligations and other types of mortgage backed securities. These were often tied with credit default swaps, which the counterparty banks saw as a “safe” bet that meant steady premiums without any payback day. The speculation is what made the housing market into a bubble. And when the bubble burst, many of the speculators had to be backed by the government to keep the financial system going. Prices weren’t an accurate reflection of value. They were only an accurate reflection of the casino mentality estimation of value. And the increased speculation in housing didn’t mean there was more accurate evaluation of fundamental values. It meant, in fact, that there was less and less accurate information, as lenders eager for loans to securitize accepted shoddier products and pushed for shoddier lending standards and as the securitization market’s key characteristic–the lack of a relationship between lender and debter–became the key variable that made speculative investment in housing too easy because the loss risk could, theoretically at least, be offloaded to the investors, guarantee counterparties and other third parties. Combine the speculative “casino” mentality with the lack of relationships between lending banks and buying families and you have a winner take all casino system where nobody but the winners are served. Here, that ended up being the big investment banks.

What about item 1–the hedging function that speculators serve by taking risks that others want to offload. Well, our system treats that as a plus. It is one of the factors that permits securitization and one of the factors that permits globalization of the risk–spreading it around in little pieces of losses. We tend to think that being able to hedge the potential future risks of a business is a definite priority. If we need energy a year out, we can buy futures. But is that really a plus? Would we be better off if the lender continued to bear the risk against the lender’s equity capital? Odds are loans would be harder to get but surer to pay off. And, yes, we’d need some ability to lubricate the pipes during financial difficult times. But notice that all of that speculative hedging function hasn’t done much to ensure that small businesses and working families are able to borrow now when they should be able to. So if it doesn’t function well when there is a financial crisis, why think that it is really working well when there isn’t?

And item 3–that speculation is ok, it’s just market manipulation that we have to worry about? Duffie suggests that there is a bright,easily definable line separating the two. I’d argue that there is not. Speculation becomes manipulation when it is too big, when there is too much risk and not enough capital to absorb it, when it creates a deceptive appearance of rationality but represents irrational exuburence. Speculation is just manipulation writ smalll–since speculation is a bet against what appears to be a market trend and making the bet can shift the market. Casino gambling doesn’t really look to fundamentals; it looks to perceptions of fundamentals. So long as the odds are breaking the gambler’s way, the gambler doesn’t care whether it’s rotten at the core or not. And of course, one of the problems with financial derivatives generally, and their use as speculative instruments in particular, is that they make it possible to finely tune financial scams–shadow banking systems can exist for countries (and the globe), and shadow financial realities can exist, since derivatives can be used as subterfuge. Financial transparency is one of the keys to maintaining democratic institutions without permitting country and system to be captured by ruling oligarchies.

Maybe I’ll wake up tomorrow and regret this post. Perhaps I’m a Luddite in tax prof clothing. But I can’t shake the thought that globalization–the idea that corporate entities should be able to operate their business world-wide without any “barriers” from the nations themselves–is at the heart of our systemic economic problems. The rage at the base of the tea party movement is real–it has been misdirected at government, as though government were the source of the problems, when it should have been directed against the Big Business mentality that casts morality aside and considers profit the only god–community, workers, and product quality/service be damned. The tea partiers’ rage itself is real, because people are so fed up with having no real choices, at being at the mercy of multinational corporations that set their own terms and, often, have near monopolies. This is especially true with health insurance, where the lightly regulated industry is made up of a few giants who often dominant their markets, leaving a typical person little ability to “shop” for a better deal. Even where you shop, once you create a business relationship you are in many ways at the mercy of the corporate giant. They change prices when they please, they charge ridiculous add-on fees for services that cost them only a small fraction of the fees they charge, they hide information and manipulate their clients–from cable providers to banks to mortgage lenders. They are no longer local, and they no longer care about your community or you as a client. It seems to me that if we want businesses that are more responsive to the typical person, we need businesses that are smaller, not businesses that are bigger. We need more Mom and Pop stores and less Wal-Martization of the country. Because in the long run, a company that is run like Walmart–to make the biggest profit possible for its owners, come hell or high water and without concern for the communities or people in them–may be able to offer goods at lower prices but it also offers jobs at lower pay. If we had those same goods sold by smaller stores that hired in the community and lived in the community, we might pay more but the employees would be paid more. In the long run, that is the secret of quality of life–having a population that has decent jobs so that they can afford to buy life’s necessities and a little more.

I suspect that there will be many others who join Duffie in defending financial speculation. But I find that his arguments about risk absorbing and pricing information fall short of convincing. If speculators really absorbed risk, there would be no worry about the risks falling back to the taxpayers. But in the case of the financial crisis, it was the taxpayers, ultimately, who got hit with the risk. There were many times more credit default swaps on debt than there was debt outstanding, creating an illusion of a well-diversified financial system with supports all around. But AIG held a significant percentage of the counterparty risk, and all the banks were dealing with AIG or some other counterparty that held significant amounts of risk. All that speculation didn’t do more than link us all together in one big Ponzi scheme. And while there was lots of information about what the speculators were buying, the result wasn’t widespread increase in fundamental knowledge–instead, it was “he’s getting rich with those mortgage-backed securities, I need to get in on that too” or “Bear Sterns is making lots of money with its securities packages; maybe I can get some of those subprime mortgage deals going for my bank” or “look at how much he made flipping that house in just two months; I gotta get some of that”.

Linda Beale crossposted with ataxingmatter

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A tale of two recoveries: Malaysia vs. Germany

by Rebecca Wilder

Today, North America saw the Q4 2009 GDP figures for Malaysia and Germany. In my view, the two releases accurately depict the developed vs. developing picture of economic recoveries: one is causing the other.

Malaysia’s real GDP, population 29,992,577 in 2008 according to the World Bank, grew 4.5% compared to the same period one year ago. The impetus behind headline number was domestic demand (GDP minus net exports), +3.9% Y/Y and external demand (exports), +7,3%.

The recovery in Malaysia is healthy. Domestic private consumption improved 1.7% Y/Y, while investment surged 8.2% over the same period (up from -7.9% in Q3).

The pace of contraction in German real GDP, population 82,140,043 according to the World Bank, slowed to -1.7% Y/Y from -4.7% Y/Y in Q3. On the surface, the trend is sound: the annual economic deterioration is slowing markedly. But below the hood, the true nature of the beast is present: only external demand and government spending are stabilizing GDP.

The growth rate in domestic demand is essentially moving laterally; it fell to -2.8% Y/Y from -1.6% Y/Y in Q3, and is now essentially unchanged from Q2 (-2.7% Y/Y) . Pockets here and there are improving – the decline in imports and machinery slowed somewhat; spending on machinery jumped 3 points to -18% Y/Y in Q4 (this is not much of an improvement).

Is this a country-level illustration of the world growth schism? Are Emerging Markets providing the impetus growth for all? I think so.

Rebecca Wilder crossposted with Newsneconomics

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