On optimism and chocolate teapots


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“MP BECOMES FIRST EVER PERSON TO FORGET HE HAD PAID OFF HIS
MORTGAGE

 

“..Martin Bishop, from Darlington, said:

 

“Complete strangers will remember where they were and what
they were doing when I pay off my mortgage. I fully intend for it
to be this generation’s Kennedy assassination.”

 

      
From ‘The Daily Mash’, motto “It’s news to us”.

 

 

Suppose they threw an Economic
Recovery but nobody came ? The last few weeks have seen all kinds of motley
rent-a-quotes pontificating about green shoots, or rather a slowing down in the
rate of economic deterioration, but a slowdown in the rate of something
worsening is hardly the same as a recovery
, not least because all
economic data are inevitably subject to subsequent revision. And if existing
data are unreliable, how to describe the accuracy of economic forecasts ? The
Bank of England, for example, in its quarterly inflation reports uses “fan
charts” that reflect various probability distributions. The problem with their
latest projections for UK GDP is that they are all over the place; forecast
output growth for 2011-2012 is seen at anything from +6% to -2%. Well, thanks
for that.

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A bull market that few are buying


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“We refused to touch credit default swaps. It would be like
buying insurance on the Titanic from someone on the Titanic.”

 

      
Nassim Taleb.

 

 

It’s not just what you know, it’s
who you know. And it’s not just who you know, it’s who you pay off. As the
Center for Public Integrity reports (as cited in last week’s Financial Times),
the largest US originators of subprime mortgages spent roughly $370 million on
lobbying and campaign donations in Washington during the past decade in
attempts to stave off tighter regulation of their industry. The study

 

“shows that most of the top 25
originators, most of which are now bankrupt, were either owned or heavily
financed by the nation’s largest banks, including Citigroup, Goldman Sachs,
Wells Fargo, JP Morgan and Bank of America,”

 

who collectively originated $1
trillion in subprime mortgages (almost three quarters of the total) between
2005-2007. That $370 million was money well spent though, given that it was
followed, in turn, as the mortgage market imploded, by $700 billion – so far –
in troubled asset relief funds – otherwise known as taxpayers’ money. Who said
crime doesn’t pay ? That’s a return on capital some 1,891 times bigger than the
original “investment”. Now that’s leverage. Strangely enough,
US politicians have been largely silent about their own complicity in the theft
of the century.

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Debt, doubt and disease


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“I respect faith, but doubt is what gets you an education.”

 

      
Wilson Mizner.

 

 

You come to realise just how
vulnerable the modern world is to sudden distress when you play Dark Realms
Studios’ Pandemic 2.
The game has you in the role of a contagious disease and you gain points by
spreading infection (which, of course, meets the accusation of appearing
tasteless, but the game predates the current outbreak of Swine Flu by at least
a year). Throughout the game, aircraft gently scud across the globe and ships
slowly track across the oceans; their freight may or may not be deadly. Our
convenience of modern transport comes at a price.

 

And
infectious outbreak is the perfect metaphor for the storm that has raged across
markets over the past two years. For disease, read credit. For plague carriers,
read banks. And, in their turn, homeowners, and investors. Very few of us were
immune..

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Unthinkable, Part II


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“I saw an interesting thing
today. A man was being arrested by the Military Police; probably an urban
guerrilla. Rather than be taken alive, he exploded a grenade hidden in his
jacket, taking the command vehicle with him.”

 

The various men look up as Michael eats his cake, wondering what the
point of it is.

 

“It occurred to me: the police
are paid to fight, and the Rebels are not.”

 

       Michael
Corleone (Al Pacino) in ‘The Godfather Part II’; screenplay by Mario Puzo and
Francis Ford Coppola.

 

 

At first sight, the title looks
melodramatic; then you remember what actually happened last year. Bear Stearns,
Lehman Brothers, Merrill Lynch, AIG.. $30 trillion in notional equity market
wealth destroyed.. unprecedented measures taken by the world’s monetary
authorities.. a nuclear winter of complete distrust settling in on the global
banking system. In that context, ‘The age of the unthinkable’ (Joshua Ramo –
Little, Brown; March 2009) is aptly labelled.

 

There are many intriguing citings
and conceptions in ‘..unthinkable’, but that of Deutschlands
Geisteshelden
is one of the best: a 200 square foot canvas by Anselm
Kiefer to which the web is unlikely to do much justice;

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Ever get the feeling you’ve been cheated ?


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“Get a grip on financial regulation ! Hedge funds, short
selling, spread betting, leveraged buyouts must be curtailed. Regulate them
hard ! Better, ban them !”

 

      
Reader’s posting (“PCMyrs, Tonbridge”) on the BBC’s G20 weblog.

 

 

Where to start ? With all due
respect to PCMyrs, the financial
crisis was not caused by the activities of hedge funds – a disparate and fast
dwindling band of asset managers in any case following myriad trading approaches.
It was not caused by short selling, either. For every short seller, there has
to be a buyer taking the other side of the trade. One might as well suggest
banning equity purchases, on the basis that they involve somebody else selling
stock. This crisis was not caused by spread betting. It was not even caused by
leveraged buyouts – although the recent rapid impoverishment of private equity
fund holders was. If one can identify just one proximate cause of the Panic of
2007 – ..?, it was the uncontrolled growth of credit nurtured by weak
regulators, fanatical central bankers and conflicted politicians, and
supercharged by banks and, yes, greedy homeowners and investors. To suggest
that ineffectual financial regulation should be replaced by the effective closure
of free markets is akin to saying that because swimmers occasionally drown,
water should be made illegal. Meanwhile, the G20 summit, in time honoured
fashion, gave rise to all sorts of ludicrously unrealistic hopes of some
“co-ordinated solution” by the participants. And workers in the City were
obliged to co-exist, briefly, with a handful of yobs comfortably outnumbered
but nevertheless goaded on by press photographers.

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A low dishonest decade marches on


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“The challenges the United States faces are familiar
territory to the people at the IMF. If you hid the name of the country and just
showed them the numbers, there is no doubt what old IMF hands would say:
nationalize troubled banks and break them up as necessary.”

 

      
Simon Johnson in ‘The Atlantic’ magazine.

 

 

Stephen Armstrong, writing about
cult US police drama ‘The Wire’ in yesterday’s Sunday Times, sums up ‘the
problem’ as follows:

 

“this whole show feels like a
relentless and completely amoral battlefield in a decaying city where everyone
is corrupt, incompetent, unpleasant or downright criminal, and anyone who tries
for redemption is brutally killed.”

 

He might as well have been
writing about the financial markets circa 2009. W.H. Auden also captured the
current mood in ‘September
1, 1939’
which contains the following lines:

 

“I sit in one of the dives

On Fifty-second street

Uncertain and afraid

As the clever hopes expire

Of a low dishonest decade..

Lest we should see where we are,

Lost in a haunted wood,

Children afraid of the night,

Who have never been happy or
good..”

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Studying bottoms


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“We, uh, needed to keep these highly expert people in their seats.”

 

      
AIG spokeswoman Christina Pretto to Matt Taibi
of ‘Rolling Stone’.

 

 

Politicians must be hugely
grateful that the electorate and the media can be so easily manipulated. Which
figure, for example, is the bigger, and more worthy of investigation: the $165 million
(now known, like all their other figures, to be a lie) given in bonuses to
staff at AIG, or the $173 billion that has been given to the
firm as a bailout by taxpayers ? Both figures illustrate why governments
shouldn’t run financial companies. The witch-hunt is all very enjoyable as a
spectator sport*, but it is grossly distracting from the weightier issues of
the day. But then governments in deficit are financial companies, essentially,
of the worst sort, and the supposed cure to the current economic malaise –
government spending, and lots of it – may end up being worse than the disease.

 

Sovereign entities, goes the
conventional thinking that led to the then worst US financial crisis in history
in the early 1980s, don’t default. The table below, courtesy of Bedlam Asset
Management, would suggest otherwise:

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Japanese lessons


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“The [Japanese] central bank’s
implementation of quantitative easing at a time of zero interest rates was
similar to a shopkeeper who, unable to sell more than 100 apples a day at Y100
each, tries stocking his shelves with 1,000 apples, and when that has no
effect, adds another 1,000. As long as the price remains the same, there is no
reason consumer behaviour should change – sales will remain stuck about 100
even if the shopkeeper puts 3,000 apples on display. This is essentially the
story of quantitative easing, which not only failed to bring about economic
recovery, but also failed to stop asset prices from falling well into 2003.”

 

      
Richard Koo, ‘The Holy Grail of Macro Economics:
Lessons from Japan’s Great Recession’ (John Wiley 2008).

 

 

President Harry S Truman famously
called for a one-handed economist, given the propensity of his economic
advisors to blather “on the one hand.. and on the other..” Those who like their
economics comparably definitive should warm to Richard Koo, Chief Economist of
Nomura Research Institute, whose book on the Japanese recession amounts to one
of the clearest explanations of the mess we’re now in. The
Centre for Strategic & International Studies
carries a presentation
from Richard Koo which summarizes his book. Seekers after truth would be well
advised to turn off Bubblevision and Pestovision
and quietly contemplate Mr. Koo’s considered presentation for the hour or so that
it lasts.

 

There is a particularly
interesting anecdote about 31 minutes into the presentation. Mr. Koo refers to
the Latin American debt crisis of the early 1980s – which at the time amounted
to the worst banking crisis in US history. Nassim Taleb pointed out in ‘The
Black Swan’ that

 

“In the summer of 1982, large
American banks lost close to all their past earnings (cumulatively), about
everything they ever made in the history of American banking – everything.”

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Not any more


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[After Clouseau accidentally reduces a piano to a pile of
rubble]

 

Mrs. Leverlilly:            “You’ve
ruined that piano.. But that’s a priceless Steinway !”

 

Clouseau:                    “Not
any more !”

 

      
From ‘The Pink Panther Strikes Again’ (screenplay
by Blake Edwards and Frank Waldman)

 

 

“It is now clear,” wrote the late
Hyman Minsky in ‘Stabilizing an Unstable Economy’ (1986, Yale University Press)
in his preface to the book,

 

“that output, employment, and
prices in advanced capitalist economies with complicated and evolving financial
structures are liable to fluctuate. It is also clear that the instability
natural to our type of economy has been stabilized since World War II. In
particular, even though there have been enormous stresses and strains in the
economic and financial system, a collapse of asset values, an uncontrolled
epidemic of bankruptcies, and a deep and long-lasting depression have been
avoided.”

 

Well, not any more. The latest
development in the rolling financial crisis was last week’s shock deterioration
in the health of UK life assurers, with shares in the UK’s biggest insurer,
Aviva, falling by a third after the company announced a pre-tax loss of over
£11 billion. Legal & General shares fell by 29% and those of Prudential by
a fifth. Is there any part of the financial services sector that is still
uninfected ?

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The economics of depression


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“There will be no interruption of our permanent prosperity.”

 

      
Myron Forbes, President, Pierce Arrow Motor Car
Co., January 1928.

 

“Stock prices have reached what looks like a permanently
high plateau.”

 

      
Economist Irving Fisher, October 1929.

 

“[1930 will be] a splendid employment year.”

 

      
US Department of Labour, New Year’s forecast,
December 1929.

 

“..the central problem of depression-prevention has been
solved, for all practical purposes..”

 

         
Robert Lucas, winner of the 1995 Nobel Memorial Prize in Economics, in
his presidential address to the American Economic Association in 2003.

 

 

Hindsight, of course, is a
wonderful thing. Scour Ben Bernanke’s 2004 speech, ‘The
Great Moderation’
as much as you may, the text yields little by way of
explicit hubris, although the soon-to-be Fed chairman does tend to suggest, as
economist Paul Krugman – another Nobel Laureate – hints,

 

“much as Lucas had, that modern
macroeconomic policy had solved the problem of the business cycle – or, more precisely,
reduced the problem to the point that it was more of a nuisance than a
front-rank issue.”

 

And it is certainly clear from
Krugman’s ‘The Return of Depression Economics and the crisis of 2008’ (Penguin,
2008) that economists love few things more than bitch-slapping their academic
rivals. So why are academic politics so vicious ? In a quotation that has been
variously credited, amongst others, to Woodrow Wilson, Henry Kissinger, Richard
Neustadt and Wallace Sayre, the response would seem to be: because the stakes
are so low. Perhaps if economists were managing money, say, as opposed to
footling with models and largely sterile theories in a hugely complex and
fecund world, they might be more respectful of each other.

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Dilbert, Dow and Gold Theory


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“I’m only happy when it rains,

You wanna hear about my new obsession ?

I’m riding high upon a deep depression

I’m only happy when it rains;

Pour some misery down on me..”

         
‘I’m only happy when it rains’ by Garbage.

 

 

It is as if Al-Qaeda were now in
charge of the world’s central banks. Policy makers seem to believe that the
best way for cash-strapped banks to attract desperately-needed capital is to
reduce deposit interest rates to zero. But savers are not the only innocents
being forcibly impoverished. Dresdner’s Peter Tasker expressed the problem of
sovereign misfortune nicely in connection with Japan:

 

“It seems so unfair. Those who
partied hardest should get the worst hangovers. Japan stayed in its room
sipping mineral water. Yet it is now suffering from a humdinger of a headache.”

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