Culture

You call it corruption, we call it family values

May 11, 2009 3:28 pm

The story may be apocryphal but, si non e vero, e ben trovato. A World Bank official addresses the head of state of some emerging market country on the finer points of the World Bank’s new drive for improved governance at all levels of government and on the harm done by corruption. The Emerging grandee listens for a while and then reflects: “you call it corruption, we call it family values”. Has the UK become an emerging market or developing country as regards its tolerance for corrupt behaviour by public officials?

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Negative interest rates: when are they coming to a central bank near you?

May 7, 2009 2:27 am

The problem

I agree with Greg Mankiw[1] that it is time for central banks to stop pretending that zero is the floor for nominal interest rates. There is no theoretical or practical reason for not having the Federal Funds target rate and market rates at, say, minus five percent, if that is what your Taylor rule, or whatever heuristic guides your official policy rate, suggests.

Economics as a science and economic reality have never had problems with negative real (inflation-adjusted) interest rates. So what is the problem with nominal rates? In a word, it’s currency.

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Posted in Culture, Economics, European Union, Financial Markets, Monetary Policy, Politics, Terrorism | Permalink

What’s left of central bank independence?

May 5, 2009 10:54 pm

The modern independent central bank was born in New Zealand in 1989. It had a short life. The onset of the financial crisis of the north Atlantic region in August 2007 signalled the beginning of the end. Today, only the ECB still has a significant degree of operational independence left, and it will have to give that up if it is to be effective in the current phase of the crisis. In other words, the ECB is the last central bank to understand that, if it is to play a significant financial stability role, it cannot retain the degree of operational independence it was granted in the Treaty over monetary policy in the pursuit of price stability.

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Tags: HErE
Posted in Culture, Economics, European Union, Financial Markets, Monetary Policy, Politics | Permalink

Derivatives and attempted state capture in Kazakhstan

May 1, 2009 7:11 pm

CDS in Kazakhstan

A fascinating contribution by Gillian Tett in today’s Financial Times on the role of CDS in the default of the largest Kazakh bank, BTA, raises a number of wider issues. Last week, BTA went into partial default when Morgan Stanley and another bank demanded repayment of loans they had made to BTA and BTA was unable to comply. Tett also discovered that, just after calling in its loan to BTA, Morgan Stanley asked the International Swaps and Derivatives Association (ISDA) to start formal proceedings to settle credit default swaps contracts written on BTA. I don’t know the aggregate value of the credit default swap contracts written on BTA that Morgan Stanley owned, whether it was smaller or larger than the value of the loans to BTA called by Morgan Stanley, or who the writer(s) of these CDS contracts was or were. But it raises concerns.

The reason it raises concerns can be made clear with the following hypothetical example. Assume some large western bank, let’s call it St. Manley Organ Bank, has made a loan of size A to BTA or has bought its debt in amount A. As a creditor to BTA, St. Manley Organ would normally want to avoid a default by BTA, because St. Manley Organ is bound not to get paid in full in the event of a default by BTA.

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Gagging on Google

April 29, 2009 5:17 am

Google is to privacy and respect for intellectual property rights what the Taliban are to women’s rights and civil liberties: a daunting threat that must be fought relentlessly by all those who value privacy and the right to exercise, within the limits of the law, control over the uses made by others of their intellectual property. The internet search engine company should be regulated rigorously, defanged and if necessary, broken up or put out of business. It would not be missed.

In a nutshell, Google promotes copyright theft and voyeurism and lays the foundations for corporate or even official Big Brotherism.

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Ruminations on banking

April 15, 2009 4:41 pm

(1) The autodafé of the unsecured creditors is coming to a US bank near you

A binding budget constraint sure concentrates the mind, even for the US Treasury. There is just one way to make the US government’s policy towards the banks work. That is for the Congress to vote another $1.5 trillion worth of additional TARP money for the banks – $1 trillion to buy the remaining toxic assets off their balance sheets, and $0.5 trillion worth of additional capital. The likelihood of the US Congress voting even a nickel in additional financial support for the banks is zero.

There is no real money left in the original $700 bn TARP facility – somewhere between $ 100 bn and 150 bn – to do more than stabilise a couple of pawn shops. The Treasury has been playing for time by raiding the resources of the FDIC (which, apart from the meagre insurance premiums it collects, has no resources other than what the Treasury grants it) and of the Fed. The Fed has taken an open position in private credit risk to the tune of many hundreds of billions of dollars. Before this crisis is over, its exposure to private sector default risk could be counted in trillions of dollars.

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Posted in Culture, Economics, Ethics, European Union, Financial Markets, International Trade, Monetary Policy, Politics, Religion, Uncategorised | Permalink

Please torch my car

March 31, 2009 1:26 pm

Am I the only one to think that tax incentives for new car purchases – cash for clunkers, in the words of Alan Blinder - are a daft idea? Even Obama has succumbed to this rot, despite an encouraging toughening of his general stance on government financial support for the US car industry (workers, shareholders and even unsecured creditors of GM and Chrysler have to take a larger haircut if more federal aid is to be forthcoming. Now let’s apply the unsecured creditors part of this logic to the banking sector also!)

Fiscal incentives to induce automobile owners to trade in their jalopies and buy new cars have been introduced in many car producing countries, including Germany, France, Italy and Spain. A number of US states and Canadian provinces also have introduced such schemes. The rationale is partly a general Keynesian demand stimulus, partly a sector-specific subsidy to workers, managers, share holders and creditors in the automobile industry and other industries that depend on them. If the programme is temporary and the cash incentive substantial, such programmes are bound to work.

This artificial shortening of the economic life of a car seems nuts. It’s worse than getting paid to dig holes and fill them again. It’s like being paid to burn down your house to encourage the residential construction industry.

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Posted in Culture, Economics, Environment, Ethics, European Union, Politics | Permalink

Acceptable racism?

March 29, 2009 2:45 am

The president of Brasil, Lula da Silva, at a joint press conference on the 27th of March 2009 with Gordon Brown, the UK prime minister, made the following statement: “This crisis was caused by the irrational behaviour of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing.”

That statement is not merely ignorant and stupid. That statement is racist. As a white person with blue eyes, I am offended by it. I am waiting for Mr. Lula da Silva’s apology to the entire population of white people with blue eyes.

Having a white skin and blue eyes is clearly not necessary for causing the crisis. I am sure Citi CEO Vikram Pandit wants to claim at least some of the credit for the crisis. His predecessor, Chuck Prince is white but does not have blue eyes. He was named by Fortune Magazine In 2008 as one of eight economic leaders “who didn’t [see] the crisis coming”, and identified in January 2009 by Guardian City editor Julia Finch as one of twenty five people who were at the heart of the financial meltdown. He also made the famous statement in July 2007 that : “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing”. E. Stanley O’Neal, the former chairman, president and chief executive officer of Merrill Lynch, is an African American (I don’t know his eye colour).

Having a white skin and blue eyes is clearly not sufficient for causing the crisis or contributing to it. I will spare the readers of this blog the list of names of white people with blue eyes who did not cause this crisis.

President Lula da Silva may want to defend his racist remark by noting that white people with blue eyes were disproportionately represented among those who caused the crisis or contributed to it. He would no doubt be right. He also would be advised to take an introductory course on the distinction between statistical correlation/association and causation. Concepts like spurious correlation, omitted variables (wealth, class, education, gender to name but four of the most obvious ones), and common third factors driving a statistical association between two variables, would represent a welcome addition to the intellectual capital of the Brazilian president.

President Lula da Silva’s statement is an example of inappropriate racial profiling. Wikipedia defines racial profiling as “the inclusion of racial or ethnic characteristics in determining whether a person is considered likely to commit a particular type of crime or an illegal act or to behave in a “predictable” manner.”

For the would-be defenders of president Lula da Silva, let me be clear about what I mean by racism. I again use a definition drawn from Wikipedia: “Racism, by its simplest definition is the belief that race is the primary determinant of human traits and capacities and that racial differences produce an inherent superiority of a particular race. People with racist beliefs exhibit stereotype-based prejudices towards individuals and groups of people according to their race.”

Note that I am condemning the sin, not the sinner. I am not saying the president Lula da Silva is a racist. All I am asserting is that the statement he made – that white people with blue eyes are responsible for the crisis – is a racist statement.

To those who believe that a statement that is racist according to the definition quoted from Wikipedia is not really racist unless it is directed at a racial or ethnic group that is weak, oppressed or at the bottom of the social totem pole, I recommend a regular washing of the mind with soap and water.

The weak and the poor, and billions of others who are quite innocent of the mistakes, excesses and crimes that brought us the crisis are not helped by facile racist remarks attributing blame for the crisis coming from the leader of one of the key emerging markets. Racial divisions and stigmatization according to eye colour will not help humanity crawl out of the hole it is in. We have to pull together. President Lula da Silva’s statement threatens to pull us apart.

Posted in Culture, Economics, Ethics, Monetary Policy, Religion | Permalink

More on robbing the US tax payer and debauching the FDIC and the Fed

March 26, 2009 5:34 pm

The US authorities have no money to fulfil their ambition of stopping large US banks from failing without taking them into public ownership. The $300 bn left in the TARP kitty is all that is available for recapitalising banks, purchasing toxic assets and providing other financial support. Congress has thrown its toys out of the pram and is unwilling to appropriate more funds for the rescue of the banking sector.

As an aside: it is astonishing that Congress and much of the US populace are apoplectic about $165 mn (perhaps $182 mn) of bonuses paid to AIG executives and employees, when $170 billion or so of public money is at risk (and tens of billions probably already gone out of the window) in the rescue of this most undeserving of companies. Perhaps you can only get indignant about what you can comprehend… .

The US authorities are reduced to begging, stealing and borrowing the rest of the funds they believe they will need. The two main proximate sources of funds are the FDIC and the Fed. The ultimate sources of funds will be (1) the US tax payer and the beneficiaries of future US spending programs that will have to be cut, (2) the holders of nominally denominated liabilities of the US state, including the monetary liabilities of the Fed and US Treasury bills and bonds.

Owners of dollar-denominated debt instruments will see the real value of their claims on the government eroded by future inflation if, as I expect, the recent and prospective future increases in the US monetary base (driven by credit easing and, in the future also be quantitative easing) cannot be reversed in the future. The main obstacle to such a reversal will be the US fiscal authorities, who are unlikely to let the Fed dump large amounts of US Treasury debt, acquired by the Fed as part of its quantitative easing program, into the markets.

I believe that the raids by the US Treasury on the FDIC and on the Fed are illegitimate and, in the case of the FDIC, quite possibly illegal.

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The new toxic and bad legacy assets programs of the US Treasury: surreptitiously squeezing the tax payer and the Fed until the PPIPs squeak

March 24, 2009 10:51 pm

Ecce! The Public Private Partnership Investment Program (or should that be the Public-Private Investment Program?) is here, albeit not yet with quite enough information on some of the key practical details to make a full assessment.

A picture is worth a thousand words, so here is my transcription of a picture from the US Treasury’s own website:

Public-Private Investment Programmes
$75 to 100 billion of TARP&FSP capital
with financing from the FDIC and the Federal Reserve leverage $500 billion with potential to expand it to $1 trillion of purchasing power

Legacy Loans Program		Legacy securities Program

Capital	Financing	Capital	Financing
Public-Private Investment Funds	Funds will raise FDIC-Guaranteed Debt	Public-Private Investment Funds
Combines USG and private guarantees	FDIC will guarantee debt	Combines private financing with USG capital and potential USG leverage	Leverage from Federal Reserve
	Leverage up to 6 : 1		Builds on existing TALF framwork

There is very little Treasury money in it.

The first thing that struck me is how little money the Treasury appears to be putting in. On reflection, this is not surprising. The government simply has no money in the kitty to recapitalise banks or purchase toxic or bad assets on any scale. Of the $700bn TARP money, no more than $300 bn is left. The Congress is in one of its more infantilist phases and will not, unless and until the threat of utter financial collapse becomes even more apparent, appropriate new money for saving US banking.

If future recapitalisations of US banks (and other systemically important institutions), the cleaning of the balance sheets of legacy toxic assets and guarantees or subsidies for new lending and borrowing are constrained to cost no more than $300 bn, God help us all. If we have to wait too long for reality to dawn on the dunderheads in Congress, the decimal point on the $300.00 bn will surely have to be shifted one place to the right.

Continue reading: “The new toxic and bad legacy assets programs of the US Treasury: surreptitiously squeezing the tax payer and the Fed until the PPIPs squeak”

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