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

Two worlds ready or not

Simon Johnson at Baseline Scenario notes that (bolding mine)

On the fringes of the World Economic Forum meeting in Davos this week, there was plenty of substantive discussion – including about the dangers posed by our “too big to fail”/”too big to save” banks, the consequences of widening inequality (reinforced by persistent unemployment in some countries), and why the jobs picture in the U.S. looks so bad.

But in the core keynote events and more generally around any kind of CEO-related interaction, such themes completely failed to resonate. There is, of course, variation in views across CEOs and the people work intellectual agendas on their behalf, but still the mood among this group was uniformly positive – it was hard to detect any note of serious concern.

Many of the people who control the world’s largest corporations are quite comfortable with the status quo post-financial crisis. This makes sense for them – and poses a major problem for the rest of us.The thinking here is fairly obvious. The CEOs who provide the bedrock of financial support for Davos have mostly done well in the past few years. For the nonfinancial sector, there was a major scare in 2008-09; the disruption of credit was a big shock and dire consequences were feared. And for leaders of the financial sector this was more than an awkward moment – they stood accused, including by fellow CEOs at Davos in previous years, of incompetence, greed, and excessively capturing the state.

But all of this, from a CEO perspective, is now behind them. Profits are good – this is the best bounce back on average in the post-war period; given that so many small companies are struggling, it is reasonable to infer that the big companies have done disproportionately well (perhaps because their smaller would-be competitors are still having more trouble accessing credit). Executive compensation at the largest firms will no doubt reflect this in the months and years ahead.

In terms of public policy, the big players in the financial sector have prevailed – no responsible European, for example, can imagine a major bank being allowed to fail (in the sense of defaulting on any debt). And this government support for banks has translated into easier credit conditions for the major global corporations represented at Davos.

The public policy issue of the day, from the point of view of such CEOs, is simple. There needs to be sufficient fiscal austerity to strengthen public balance sheets – so that states can more effectively stand behind their banks in the future, and to keep currencies from moving too much. Leading bankers, in particular, insisted on the paramount importance of providing unlimited government support to their sector during 2008-09; now they insist with equal or greater vigor that support to all other parts of society be curtailed.

This is where cognitive dissonance creeps in. Most CEOs feel that the provision of general public goods is not their responsibility, although they are very happy to help guide (or capture) the provision of public goods specific to their firm.

For the big multinational companies current US trade policy also works quite well. What is not talked about are conditions for US companies that are mainly domestic.

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Atul Gawande Strikes Again

This outstanding article about preventive care for high cost patients is outside the New Yorker paywall. It is very much worth reading.

Like Ezra Klein, I found one of the drier examples very informative

The firm had already raised the employees’ insurance co-payments considerably [skip] employee health costs continued to rise—climbing almost ten per cent each year. The company was baffled.

Gunn’s team took a look at the hot spots. The outliers, it turned out, were predominantly early retirees. Most had multiple chronic conditions—in particular, coronary-artery disease, asthma, and complex mental illness. One had badly worsening heart disease and diabetes, and medical bills over two years in excess of eighty thousand dollars. The man, dealing with higher co-payments on a fixed income, had cut back to filling only half his medication prescriptions for his high cholesterol and diabetes. He made few doctor visits. He avoided the E.R.—until a heart attack necessitated emergency surgery and left him disabled with chronic heart failure.

The higher co-payments had backfired, Gunn said. While medical costs for most employees flattened out, those for early retirees jumped seventeen per cent. The sickest patients became much more expensive because they put off care and prevention until it was too late.


They got a young Harvard internist named Rushika Fernandopulle to run a clinic exclusively for workers with exceptionally high medical expenses.


I got a glimpse of how unusual the clinic is when I sat in on the staff meeting it holds each morning to review the medical issues of the patients on the appointment books. There was, for starters, the very existence of the meeting. I had never seen this kind of daily huddle at a doctor’s office, with clinicians popping open their laptops and pulling up their patient lists together. Then there was the particular mixture of people who squeezed around the conference table. As in many primary-care offices, the staff had two physicians and two nurse practitioners. But a full-time social worker and the front-desk receptionist joined in for the patient review, too. And, outnumbering them all, there were eight full-time “health coaches.”


Few had clinical experience. I asked each of the coaches what he or she had done before working in the Special Care Center. One worked the register at a Dunkin’ Donuts. Another was a Sears retail manager. A third was an administrative assistant at a casino.

“We recruit for attitude and train for skill,” Fernandopulle said.


compared with the Las Vegas workers, the Atlantic City workers in Fernandopulle’s program experienced a twenty-five-per-cent drop in costs.

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Nyhan on Reagan

Read Brendan Nyhan. He is very convincing.

The post is too good to excerpt but I was particularly struck by a figure

the claim that he “transformed Americans’ attitude about government” is not well-supported. Consider UNC political scientist Jim Stimon’s measure of public mood (Excel spreadsheet [sic it is really just a *.gif]), which captures Americans’ demand for more or less government spending over time


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A Few Graphs on Real GDP Growth Rates versus Taxes and the Size of Government

by Mike Kimel

A Few Graphs on Real GDP Growth Rates versus Taxes and the Size of Government
Cross posted at the Presimetrics blog.

This post has a few simple graphs showing the relationship between the growth in real GDP and a few other variables: the top marginal tax rate, spending by the federal government as a share of GDP, and non defense spending by the federal government as a share of GDP. I also plan to link the three graphs together into a bit of a story, a story which extends from my recent posts, and which I intend to build on over the next few weeks.

One note before we begin – all of the data in this post comes from the National Income and Product Accounts (NIPA) tables which go back to 1929, or the IRS (tax rates go back to 1913), so the graphs will all begin in 1929.

Figure 1 shows the % growth in real GDP from one year to the next on the primary vertical axis and the top marginal income tax rate for that year on the secondary vertical axis.

Figure 1.

A couple things to notice… to the naked eyeball, there doesn’t seem to be all that much of a relationship between marginal rates and growth, despite the commonly accepted story line about how higher marginal rates lead to slower economic growth. Making matters worse for conventional wisdom, the correlation between the top marginal tax rate in any given year and the growth rate from that year to the next has been positive for every time period in the little table that is pasted in the graph. In other words, for all the years for which official data exists, higher tax rates have been accompanied by faster economic growth and lower tax rates were accompanied by slower economic growth. (Regular readers know this also applies at the state and local level.) Anyone telling you that lower tax rates lead to faster economic growth in the U.S. either should begin by explaining why this time it’s different or has nothing useful to say about the subject. (And I guess it is becoming a tradition, but let me ask – please don’t bother me with Romer and Romer. It doesn’t say what you think it says. It doesn’t even say what Romer and Romer think it says.)

Now, the American mythos circa 2011 also tells you that that the bigger the government, the slower the economic growth. (Note – since the tax rates I showed are federal tax rates, I am going to use the federal government here rather than “total” government. If I went with the entire government it wouldn’t change all that much of the verbiage below.) Figure 2 shows the % growth in real GDP from one year to the next on the primary vertical axis and the size of the federal government relative to GDP for that year on the secondary vertical axis.

Figure 2.

Well, for most of the sample, it seems the correlation between growth rates and the size of the Federal government is positive. That is to say, the larger the federal government’s role in the economy in any given year, the faster the growth rate from that year to the next. However… the correlation turned negative in the tail end of the sample. (See the note at the bottom of the graph – the federal government shrunk under Bill Clinton (in fact, it shrunk every single year of his term, which means you can’t credit Newt Gingrich, at least not if you’re honest), and then rose in six of the eight years GW was in office.)

Figure 3 is similar, but instead of the Federal government’s entire piece of GDP, it shows non-defense Federal spending as a share of GDP:

Figure 3.

Now, the non-defense piece of government spending is the stuff Republicans and libertarians really hate – welfare, fighting epidemics, infrastructure, etc. And it turns out that for much of the sample, in years when that bad stuff has made up a bigger part of the economy, the economy went on to grow more quickly from that year to the next.

Now… let me repeat a few facts (in a slightly different order than they came up):

1. The top marginal tax rate is positively correlated with real GDP growth over the coming year. The correlation dips a bit in the ‘70s and ‘80s, though it never goes negative.

2. Non-defense federal spending as a share of GDP is positively correlated with real GDP growth over the coming year until the 1980s.

3. The size of the federal government is positively correlated with real GDP growth over the coming year until the 1990s.

So what’s a story that fits these and other known facts? I think it’s one where the economy was growing rapidly for many of the years from 1933 to about 1973. That year, due to a combination of various forms of incompetence* malaise and fat sideburns started setting in. A story line started making the rounds: the tax rate is too high and government is too big. The tax rate is too high thing caught on with the public first – after all, nobody likes to pay taxes. The historic relationship between tax rates and growth began to fray, but it never quite died. Nevertheless, it led to a political groundswell and tax rates were, in fact, cut tremendously in the 1980s. Growth rates subsequently fell.

However, the 1980s brought with it something else, another political change in public perceptions. The government is not solution, or even a help, but rather a problem. (Truth be told, the cachet of the government had been falling for a while, but St. Ronald the Reagan and his acolytes really opened the floodgates.) The military excluded, of course. The result: in many fields, competent people who in earlier years would have gone to work for the government instead went into such value-adding enterprises as market manipulation and financial arson. The correlation between non-defense government spending as a share of GDP and real growth went negative. The problem with maligning the non-defense portion of the government is that ill-will doesn’t stay contained. Eventually, the correlation between even defense spending and the economy flipped.

So where are we now? Some of the very things that created the very rapid growth from 1947 to 1973, who’s kidding who, make that from 1933 to 1973, were taken apart, first in the public perception and second on the ground. And we’ve been growing more slowly, and at times, not at all, ever since.

As always, anyone who wants my spreadsheet is welcome to it. Drop me a line at my first name (mike) period my last name (there’s only one “m” in my last name) period Because I’m getting requests for a lot of different files, be clear about which post for which you want the spreadsheet.

Data sources:

Real GDP from NIPA Table 1.1.6.

Federal gov’t spending, federal non-defense gov’t spending, and nominal GDP from NIPA Table 1.1.5.

Top marginal tax rates from IRS SOI historical table 23.

Incidentally – I mentioned last week I intended to cover the fact that a number of the graphs I’ve been putting up are bimodal. That’s still on my radar screen. I just realized I want to build my narrative in a slightly different order.

* Incompetence by the Nixon administration (too much spending, an adherence to the gold standard, and price controls), incompetence by the Arthur Burns led-Fed (inflation, which only got exacerbated by Burns’ attempts to ensure Nixon’s re-election in 1972), incompetence by the USSR (failure to keep the Arab countries from realizing that regardless of their advantage in numbers and materiel, they were too ridiculously incompetent to expect success from attacking a second rate local power yet again), and incompetence by Henry Kissinger (reigning in the Israeli military when it was 60 miles from Cairo and about the same distance from Damascus… which eventually led to the Oil Embargo, not to mention the Middle East we see today).

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Update on conditions in Ireland…another letter from Ireland

The first letter from Ireland is here

Update on conditions in Ireland…a second letter from Ireland

Ireland, Land of Thieves, Charlatans and Sodomites… Zeus-Boy

We’re forced to do silly things out of desperation, things that other nations don’t have to resort to. For instance, we’ve the lowest corporate tax rate in Europe at 12.5%. Sarkozy recently excoriated us for this. But we use it as an incentive to bait the multi-nationals. We’ve no other choice. Why else would the big companies bother locating here? If the labour market is cheaper elsewhere then we have to compete somehow, we’re told. We lure them in by offering them tax shelters. We even set aside developed estates for them and we build their factories when they come, with the Taoiseach on hand to cut the ribbons. Their overheads remain very low and then we allow them to siphon all their profits out of the country. Talk about being recolonized by self-imposed deference, but Ireland is a dependent economy and does what it must do to survive.

There are other options, of course. There’s the old reliable one of emigration. 100,000 people will leave Ireland this year alone, and the numbers are rising, again. That’s one way of solving unemployment, but it’s not completely or satisfactorily solving our problem. Our crisis. As of this month, the CSO (Central Statistics Office) quotes the unemployment rate at 14.1%, that’s over 400,000 people out of work. Those people will be on the dole or getting some version of welfare, which starts at €197 per week and rises according to number of dependents.

The CSO’s figures are frightening. They say that of the over 800,000 mortgages in the country, worth €120 billion, 40,000 are in arrears and that figure will rise to 70,000 in the coming year: the banks will be forced to repossess these houses. But the banks don’t want all that property. What good is it to them? They especially don’t want to be shackled with toxic real estate when so many are already in negative equity. Every town and village in the country sports its token ghost estate, the relic of the boom years, a reminder of the savage greed that swiftly plunged us into ruin. More on that in a bit. The ESB [Electricity Supply Board] are shutting off service to 50 homes per month for non-payment of bills.

Health Care in Ireland is totally banjaxed: My father who is 80 spent three nights on a trolley in a hallway last year because there were no beds available. He is no longer able to regulate his body temperature because he suffers from leukemia and other complications, so he nearly shivered to death in the one place he went to for care. My sister is a doctor but she could do nothing. Our Health Care system was dismantled and then rebuilt in order to centralize it, hospitals were closed all over the country and acute services scaled back or abandoned altogether. A moratorium on hiring nurses and doctors was instituted and all administrative staff downsized.

The Minister for Health who oversaw this fiasco, Mary Harney, has just resigned her ministerial post and will get a lump sum of €310,000 plus a pension when she leaves office. We like to reward incompetence in Ireland. Education isn’t faring any better: we dumb down our students and prepare them for a life of servitude and passivity. A moratorium has also been placed on the hiring of new teachers, a freeze more like, and funding has been withdrawn from special needs projects. Almost every other state run body is experiencing the same level of incompetence, and yet the nation is expected to grow its economy enough to pay its debts and still balance its books.

It’s not helpful to speak about the criminal behavior that got our country into this debacle. We’re not allowed to focus on the deranged and delusional freak-show that was the hybrid known as the Celtic Tiger. Our attention is quickly diverted if we mention how local councils all over the country used their zoning powers to wheedle dirty money from developers [this being their only way to raise money] in order to line the pockets of avaricious landowners and bankers. Many of these useless developments were erected on flood plains or dangerously unsuitable terrain. It didn’t matter so long as the bonanza was in full tilt.

We’re supposed to forget that the bankers were throwing money at these developers and builders, money they didn’t have, and never had, money they were borrowing from German savers anxious to invest their surplus. Nobody thought for one second any of this would have to be repaid. Meanwhile, a select group were living the high life, like oil barons or movie stars jetting here and there, flying their private planes and helicopters all over the country to race meetings and golf tournaments and toddler birthday parties. And when they ran out of suitable sump holes in Ireland they spread their good cheer abroad. Over €1,265 billion was invested by Irish citizens abroad in 2009. One shouldn’t mention that the bankers were in the pockets of the builders, who were in the pockets of the developers, who were in the pockets of the politicians and that the resulting circle jerk which met in secret every few days, regular as clockwork, had a grand old wanking session. It is downright begrudgery to allude to the financial regulator or the governor of the Central Bank or to ask how they could sleep so soundly through the nightmare that was the rape of their country.

But the house of cards was destined to collapse and when it eventually did we all know what happened next. It’s yesterday’s news now: the good old boys in the government provided all the safety nets their hand-shandy buddies needed, bailouts, emergency loans, triage funding, congratulatory pats on the ass and golden mickey shakes when they fled the country. It has emerged that our Taoiseach personally guaranteed the odious thugs at Anglo and used NTMA money [resources reserved by Treasury Management for the daily running of the country], to infuse their defunct and toxic bank with the exchequer ‘s funds. The government then nationalized those broken banks, claimed their problems were systemic and shackled the tax-payer with their very private and self-inflicted debt.

The banks debts has now become our sovereign debts, just as NAMA nationalized all the ghost estates and turned the inflated and non-buyable property over to the citizens, as if they’d acquired a new portfolio. Merrill-Lynch was solicited for its counsel prior to the fiasco and advised against a blanket bank guarantee.
That didn’t matter, cronies is cronies, the old boys club needed bailing and the subservient and pliant peasantry could be directed to cough and pay up. That’s what we do so well in Ireland – we rant and rave, we purge and we vent the pent, we get sloshed or high, then we return home in the early hours with our dignity between our legs, all limp and shriveled up, poxed and ridden, and we bend the deferential knee, bare our arses for the ritualistic buggery and we thank our sado-masochistic sodomites for giving us a good hammering. We did it for 800 years. It’s in our blood. And when the Brits left, we installed the church as sodomite-in-chief, just in case we might think ourselves free, self-determining, and independent. We daren’t ask or hold anyone accountable. What’s the use when the slick politicians will only lie and cheat their way out of culpability anyway? We’ll shoulder the burden and we’ll always be ready with the Vaseline.

Besides, our politicians are incorrigible, especially the fuckheads in Fianna Fáil, who’ve been in power for most of our republic’s history. They’ve sold our future into slavery, thrown away our sovereignty, reduced a nation to penury, dismantled an infrastructure that was the envy of the civilized world, broken every institution, shown contempt for the people and utterly disgraced our country. They’ve said to our neighbours across the pond, ‘you were right all along; we were incapable of governing ourselves. We tried and look at the mess we made of things.’ Instead of focusing on the emergency state we now find ourselves in with mass emigration, mass unemployment, a colossal and unmanageable debt, inflation rising and a very bleak future in store, what do these fuckers do? They propose patriotism for the rest of us and entitlement for themselves: we are expected to live on fresh air as they feather their own nests. I can only imagine if a man like Dan Breen were alive today to see what has been made of his sacrifice.

Instead of serving the people, as they were elected to do, these fools turn inward and bicker amongst themselves; their only public statements now are pontifications about their own virtues and to engage in cynical electioneering. Instead of working together, all of them, to save the country they destroyed, they resort to internecine feuds, screaming and yelling at one another across the floor of the Dáil chamber, tearing one another asunder, raising votes of no confidence in their own leader, voting in and out that leader, threatening to resign, and then resigning [six cabinet ministers resigned their posts last week], but not before receiving their handsome Ex Gratia lump sums and, rather than face the truth of his political demise, the leader who has lost half his cabinet persists in the delusion that he can still run the country with a mandate, he refuses to step down or call an election, but then finally he agrees to resign as the leader of his party while remaining as Taoiseach. Such grotesque shenanigans have robbed the people of any confidence they might still have had in the political process. People are pissed off, royally pissed off, not that they will do anything about it.
Our country is a joke, a farce. We’re a disgrace.

Our politicians are gombeen men and women. They’re still only out for number one. While the country is being flushed down into the sewer and the citizenry is drowning in tidal waves of slurry, these clueless, incompetent and shameless bastards are only worried only about whether their political party will survive, whether this or that machination is good for the party, whether the party will be strengthened or weakened going in to the next general election. It’s all a load of tripe. They don’t care about the people. They’ve grown so cynical and greedy, with their Mercs and perks, their expense accounts and their lump sums and pensions, their endless bailouts and their profligate sense of entitlement that the people don’t even compute in their perfidious calculus. It’s all about themselves, their self-interest, their advancement, their self-aggrandizement.

They will never want for anything again, so it’s easy for them to be cavalier about austerity and to bandy about the patriotic buzz words. They’re secure and protected. And we’re the mindless cretins who have protected them. Ireland is broken and on a deathward spiral. The country’s in a shambles and why wouldn’t it be when Biffo’s is the ugly mug we present to the world. If it’s true people get the representatives they deserve, then we Irish aren’t worth a bucketful of rabid mongrel’s piss.

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Egyptian CDS in line with Portuguese CDS

It occurred to me that some Angry Bear readers may be interested in a short analysis of the Egyptian bond market. Professionally, I’m a macroeconomic analyst and portfolio manager on a global fixed income team. Since we do trade emerging market debt, of which Egyptian debt is categorized, I’ll be happy to comment.

The gist of the article is this: markets are pricing the probability of default in Portugal and Egypt similarly – I’d sell protection on the Egyptian debt. At this point, I should state the following disclaimer: this is not a trade recommendation, nor does this represent my firm’s views on Egypt or Portugal.

Some bond market developments of late:

  1. Egypt holds a BBB- rating on its local currency debt by Fitch and S&P (BB+ on its foreign currency debt). The local currency debt in Egypt is at the lowest of the investment-grade ratings, while on January 20, 2011, Fitch put Egypt on credit-watch negative.
  2. The Egyptian pound is heavily managed. Over the last week, the USD gained just 0.9% against the pound. Maintaining a stronger nominal currency is common in developing economies to temper the effects of import prices (in this case, food).
  3. The 5.75% 10-yr Egyptian international bond, which is denominated in USD, sold off 7% over the last week. According to JP Morgan, Egypt is well underperforming the index (Egpyt is roughly 0.5% of the index): the year to date total return on the Egyptian international bonds is -10%, while that of the JP Morgan Emerging Market Bond Index Global (EMBIG) is -0.7%.
  4. Credit default swap spreads jumped 50% over the last week to 454 basis points (bps), according to one Bloomberg source (no link, subscription required). CDS are bilateral contracts between two parties, so pricing varies somewhat – but the trend is the same among all sources: up. This means that it’s becoming increasingly expensive to buy protection against Egyptian sovereign default.

If you want to know more about CDS, please see a helpful 2009 publication by Deutsche Bank.

And this is where it gets interesting: it currently costs the same to buy 5-yr protection on Egyptian bonds (454 bps) as on Portuguese bonds (456 bps). And Portugal is rated A- (negative outlook).

(more after the jump)
The chart above illustrates a panel of CDS data for countries with similar market risk, where S&P’s local currency rating is listed in the legend. The CDS quoted above are priced in USD, rather than the local currency; but the spreads do quantify the market’s assigned probability of default : 29.3% for Egypt vs. 29% for Portugal (with a 30% recovery rate on both).

Generally the decision to default comes in two flavors: the ‘willingness’ and ‘ability’ to pay. Also, default can take many forms, like missed coupon payments, terming out debt liabilities, or bankruptcy (corporate).

Willingess. A quick analysis of ‘governance’ indicators at the World Bank says that on the face of it, Portugal is probably more willing to pay its debts. The governance measures are corruption, government effectiveness, political stability, regulatory quality, rule of law, and voice and accountability. Read about the methodology of the governance indicators here and get the data here.

In sum, Portugal ranks much higher on the total of the World Bank governance indicators, 6.4, compared to -2.6 for Egypt (I use a strict sum of the 6 components).

Ability. According to the IMF’s most recent World Economic Outlook (October 2010 database), Egypt is expected to grow an average 13.9% per year in nominal terms over the next three years (2010-2013). In contrast, Portugal is expected to grow just 1.7% on average for the next three years.

According to Bloomberg, on January 27, 2011, the yield on a Portuguese 1-year local bond is 3.42%, while that for a local Egyptian bond is 10.99%. I’ll take odds of payment on the one with nominal growth that exceeds the payment – Egypt.

A quick look at the WEI shows the following statistics for 2011:

Country Subject Descriptor 2011
Egypt General government net lending/borrowing -7.622
Portugal General government net lending/borrowing -5.232
Egypt General government net debt 60.993
Portugal General government net debt 82.864
Egypt General government gross debt 71.725
Portugal General government gross debt 87.086
Egypt Current account balance -1.605
Portugal Current account balance -9.171
International Monetary Fund, World Economic Outlook Database, October 2010

The 2011 outlook demonstrates the following: government deficits are similar in Portugal and Egypt; government debt is higher in Portugal, a country that has no monetary sovereignty; Portugal has relatively fewer reserves (comparing gross debt to net debt); and the current account deficit in Portugal dwarfs that of Egypt.

If I was an investment bank, I’d rather sell protection on Egypt than Portugal at these prices.

Rebecca Wilder

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Third Time, Someone Will Believe: Manage Risk or It Manages You

As the late Allison Snow-Jones noted, economics depends on working mathematics. Mathematics, in turn, depend on the conditions being described correctly. If I build a model in which two things are independent, they have to be independent for my model to work. Or, to quote a quoting:

Many months ago, I quoted the brilliant Janet Tavakoli‘s book Credit Derivatives and Synthetic Structures:

The trader then went on to tell me that Commercial Bank of Korea would sell credit default protection on bonds issued by the Commercial Bank of Korea.
“That’s very interesting,” I countered, “but the credit default option is worthless.”
“But people are doing it,” persisted the trader.
“That’s because they don’t know what they’re doing,” I affirmed. “The correlation between Commercial Bank of Korea and itself is 100 percent. I would pay nothing for that credit protection. It is worthless for this purpose.”
The trader mustered his best grammar, chilliest tone, and most authoritative voice: “There are those who would disagree with you.” (p. 85)

That apparently includes the Spanish government:

The Frob capital injection comes in the form of convertible preference shares from the Frob, or Spain’s Fund for Orderly Bank Restructuring. As a reminder, the Frob itself has lending capacity of €15bn and can leverage itself to €99bn by issuing bonds — guaranteed by the Kingdom of Spain — to private investors.

And the equity it lends to banks really resembles more of a subordinated loan than actual loss-absorbing capital. What’s more, it pays a coupon and is excluded from core Tier 1 calculations under incoming Basel III rules for this very reason.

Did we mention the Frob is also backed by Spain?

I realise all the attention is on Egypt right now—and it should be&mdaash;but the rest of the world is going to be there on Monday, too. And traditional “sovereign risk management” still has a ways to go.

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Jonathan Chait hits Paul Ryan out of the Park*

It’s easy as ABC

Hilariously, the result of Ryan’s Dave-like search through the budget — and the only example of a putative budget savings mentioned anywhere in the piece — is his claim to have discovered a savings in the student loan program. In fact, this example is exactly the opposite of what Ryan (and the story) proclaim.

[skipped part about how the old program gave billions a year to banks for no discernable reason]

Ryan is a fervent ally of the college lending industry. In 2007, he was one of only 71 Republicans to vote against the College Student Relief Act, which would have cut the interest rate on many student loans, including the FFEL program, in half. Inside Higher Ed notedthat the bill would cut “deeply and directly into lenders’ profits.” The bill passed the House 356-71, but stalled in the Senate.

So, that’s the one idea this fresh-faced reformer comes up with the balance the budget: shovel billions of dollars in extra subsidies to an inefficient and wildly corrupt industry whose water he has faithfully carried. And this isn’t an exception –Ryan’s record is one of wild fiscal profligacy. I realize he’s cute and energetic and exudes an aw-shucks Midwestern earnestness, but the reality bears absolutely no relation to the image.

Ouch. Given the rules of the poliitical game that’s got to leave no mark.

* This is a metaphor and has nothing to do with assaulting people with baseball bats.

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Why do Dictators Draft People Into Their Armies ?

Last night and today I watched on Al Jazeera (streaming) what sure looks like a Egyptian revolution. At the moment Hosni Mubarak is still President, however, he is not in control. The apparent turning point occured when he sent the army to suppress demonstrations after the vastly outnumbered security police didn’t manage. This is a throw of the dice and he knew it. I read in the New York Times

“This is the revolution of all the people,” declared the side of a second tank in downtown Cairo. Egyptian men all serve in the army, giving it a very different relationship to the people from that of the police.

An army of drafties can’t be trusted to side with a dictator against a crowd of demonstrators. The security police are volunteers who understand the choice they are making, are thoroughly disciplined and fairly well paid. Actually a few of them took off their badges and joined the demonstration, but most held their lines and fired tear gas and rubber bullets until they withdrew last night.

In Italy, people have only fairly recently been confident that there won’t be a military coup. The fact that attempted dictators can’t rely on drafties was key to the decision to maintain universal military service (to protect Italy from what ? Slovenia ?) until recently.

So why did Mubarak draft his subjects and give them guns and tanks ? A small well paid professional army would have been more reliable and certainly powerful enough to terrify civilians armed with stones and the occasional molotof cocktail. Why did he feel the need to have a huge army ? There is no way the Egyptian army could defeat Israel (been there tried that). There is no way any other conceivable adversary could last a week against the Egyptian army or even a much smaller army.

Why ? My guess is that the generals want to command a huge army for reasons of ego and they have always had the power to overthrow Mubarak. On the other hand the people only become dangerous to him when they are united.

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Dylan Ratigan Town Hall Session on Jobs, Innovation

Hat tip Yves Smith for pointing us to this:

8 PM EST Watch Dylan Ratigan Town Hall Session on Jobs, Innovation

Check in here at 8 PM to watch the Dylan Ratigan “Innovation in America” panel discussion as part of its Steel On Wheels Tour tonight at 8pm EST at the University of Denver.

The panel will include Andrew Jenks, from MTV’s World of Jenks, Nicole Glaros, Managing Director of TechStars Boulder, and Matt Miller of The Washington Post and host of Left, Right & Center.

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