Wednesday, March 31, 2010
The chief action in the shadow banking sector, Gorton says, looks something like this. Corporate treasurers flush with liquid funds buy securities from investment banks under repurchase agreements. My initial question was: where do the funds to repurchase the securities come from? I think the answer must be: from liquidating the securities. Which raises the further question: why don't the corporate treasurers hold the securities directly and liquidate them themselves? This is where Diamond/Dybvig comes in, I think. (Someone who knows what's really going on out there, I'm happy to be corrected. I'm begging to be, but indulge me a little longer!)
The idea in the article is that there is one asset available which is illiquid. If held for one period it yields a gross return of 1 upon liquidation; if held until maturity (for 2 periods) it yields a gross return of 2. Savers prefer a more liquid asset - one with a higher return if liquidated even at the cost of a smaller return if held for 2 periods. Savers may be of two types. One type wants to consume only in one period; the other type only values consumption in 2 periods. They learn their type only after one period. Each has the same probability of being a type 1 and my chance of being type 1 is independent of yours. With a large enough number of us, there is no uncertainty about the proportion who will be type 1's. So say all of us would maximize expected utility with an asset which gave us 1.28 if we turn out to be type 1's and 1.813 if we turn out to be type 2's. And suppose the probability of being type 1 is 1/4. There are 100 of us endowed with one unit, which is the cost of the asset. A "bank" pools the deposits and buys 100 units of the asset. After 1 period, they liquidate 32 units of the asset for one unit each, allowing them to pay each of the 25 type 1's 1.28 each. The remaining 68 units of the asset mature next year, paying 2 each, allowing them to pay 136/75 = 1.813 to each of the 75 type 2's, as promised. So the "bank" doesn't hold liquid reserves at all - like Gorton's shadow banks as I understand them. Mutatis mutandis: think one-period repos. 75 of the corporate treasurers are happy to renew their purchases after one period, so what the bank owes them is exactly offset by what they owe the bank and no funds move in either direction. The other 25 do not want to renew, so the shadow bank liquidates 32 of the assets.
Does this sound remotely plausible?
Monday, March 29, 2010
Anyway, there are several reasons not to panic and even to think that while the Chinese are clearly annoyed, their weak buying is probably not due to some massive vendetta/collective punishment. One fact is that last month the Chinese actually ran a trade deficit, suggesting that their currency may not be all that undervalued after all, even if their bilateral surplus with the US remains large. This situation would mean that they are probably buying few foreign securities at all as they do not have the current account inflow to do so. Even if their currency is still undervalued, their high growth rate compared to other countries suggests one would expect their imports to be rising more rapidly than their exports.
Another aspect of this was pointed out by a commenter at econbrowser named Tom, who noted that the Fed has just turned a policy corner towards a more restrictive stance, having just brought to a final end its policy of propping up the housing market with MBS purchases. Many of us had been pointing for some time to March 23-25 as a point when there might be a spike in interest rates as this policy finally came to an end. So, the spike has happened, and we should probably be glad that it has not been worse, especially given the weak buying by the Chinese due to the change in their balance of payments situation, as this could have led to a renewed collapse of the US housing market and a fall into a definite double dip of the recession.
Friday, March 26, 2010
Way to go, capitalism!
Wednesday, March 24, 2010
Echoes from the Late Nineteenth Century
Introduction: Constant Capital and Crises
An understanding of constant capital is an overlooked, but necessary component of crisis theory. This paper uses the experience of the 19th century U.S. economy illustrate the relationship between constant capital and economic crises. The rapid technological advances of the time led to a lethal combination for capital. Investment in constant capital suffered rapid devalorization, while growing productivity saturated markets, creating what was then known as The Great Depression.
Constant Capital and Labor, Living and Dead
Read complete paper
Mathematical Optimization and Economic Theory, Michael Intiligator. This fantastically lucid book taught me micro in grad school, helping me see (although this is nowhere mentioned in the book itself) that the math embodies a precise social theory. (Or, to be more exact, a pre-social theory.)
Atlantic Crossings: Social Politics in a Progressive Age, Daniel Rodgers. This is spectacularly well-written, but its main impact has been to alter my thinking about "reform" by seeing familiar issues in broad historical perspective. Also, the lives of reformers themselves often seem to trace a similar arc.
Monday, March 22, 2010
Fortunately, I have studied the data, and Guatemala is the answer! Public spending on health care is barely above 1% and not likely to rise! Hallalujah! And, we foreigners can figure to hog the available health care facilities, which certainly have plenty of excess capacity, given that only about 40% of the population uses hospitals! Or alternatively, we can all move to Guinea, where witch doctors are more widely used in the private market than any public sector health care! Long live the free market in health care!!!!
I also would put 100 years of Solitude on my list, along with Peter. The other eight are then:
Stanley Elkin, The Franchiser or George Mills
Dickens, David Copperfield or Bleak House or Dombey and Son
Anything and Everything by Wodehouse, with the Blandings Castle novels firemost
Charles Taylor, Sources of the Self
Hannah Arendt, The Human Condition
Smith, The Theory of Moral Sentiments
Sunday, March 21, 2010
During high school (an impressionable time):
Rhinoceros, Eugène Ionesco
Mo Tzu: Basic Writings, Burton Watson (trans.)
Late teens, early 20s:
Technics and Civilization, Lewis Mumford
Presentation of Self in Everyday Life, Erving Goffman
Communitas, Paul and Perceval Goodman
Time of wandering:
100 Years of Solitude, Gabriel García Márquez
Since becoming an economist:
Rise and Fall of Freedom of Contract, P. S. Atiyah
John Dewey and American Democracy, Robert Westbrook
It's interesting that I couldn't think of a single economics book that left an imprint. What have I been missing?
Saturday, March 20, 2010
Presumably, the idea would be for teachers to increase their days of work in return for reductions in salary. Sadly, the problem is a teachers’ union, which is also responsible for the bad weather during the winter.
In the words of the author, “This issue brings out the teacher unions, too, demanding more pay for extra hours, hence fatter school-system budgets in a lean fiscal time. Little wonder that taxpayers are legitimately wary.”
And who says that the Wall Street Journal does not have a good sense of humor?
Finn, Chester E. Jr. 2010. “The Case for Saturday School.” Wall Street Journal (20 March): p. W 1.
Friday, March 19, 2010
So, now, some days later, have decided to add some commentary.
1. The Lord of the Rings, J.R.R. Tolkien
Read first when I was 12 in hardbook when nobody knew about it. Blew me away and still does. My all time fave.
2. 1984, George Orwell
I was at the peak of my libertarian phase when I read this (age 14), but I am still deeply struck by its vision of tyranny based on double speak and all that.
3. The Worldly Philosophers, Robert Heilbroner
Not the greatest book on economics, but I read it at the time that I switched into economics, and it played a role. Later I would read many of the classics, but I would say that for all the simplifications, Heilbroner's takes generally held up pretty well on the earlier economists.
4. Collected Poems, Wallace Stevens
I write poetry, and I could list some others, but Stevens has a certain perfection and profundity. I just heard earlier this evening that Hemingway beat him up out of jealousy because he knew Stevens was a genuine genius.
5. Joseph and His Brothers, Thomas Mann
Buddenbrooks and The Magic Mountain get read more and get more attention, but this longest book of Mann's is more profound in my view. It was where I really became aware of how the western monotheisms took so deeply of the preceding paganism, and it also deeply altered my view of the role of Jews in history.
6. Some Cambridge Controversies in the Theory of Capital, Geoffrey C. Harcourt
This was the book that first threw me into realizing that orthodox economic theory had serious problems. Some of my earliest publications were inspired by it.
7. Gravity's Rainbow, Thomas Pynchon
Deeply altered my view of what happened in the first part of the 20th century and and the interconnections between technology and various intellectual disciplines. I remain a big fan of Pynchon.
8. Remembrance of Things Past, Marcel Proust
Tyler Cowen praised this one for its "interiority." It has that, but its depiction of the subjective aspect of time as well as of the many layerings of social hypocrisy and obsession is also outstanding, as well as the sheer quality of the writing itself.
9. Structural Stability and Morphogenesis: An Outline of a Theory of Models, Rene Thom
This is the book that first laid out catastrophe theory, which has long since interested me. However, this is also a multidisciplinary book of philosophy and not merely of mathematics, obscure in many ways and disturbing.
10. Chaos: Making a New Science, James Gleick
This is a pop-schlop book ultimately, but it did put together the pieces of what was going on in chaos theory quite well. I had been aware, but this helped me focus on what was going on in this topic, yet another of my ongoing obsessions.
Wednesday, March 17, 2010
Browne, Andrew and Jason Dean. 2010. "Business Sours on China: Foreign Executives Say Beijing Creates Fresh Barriers; Broadsides, Patent Rules." Wall Street Journal (17 March): p. A 1.
Foreign businesses say their relationship with China is starting to sour, as tougher government policies and intensifying domestic competition combine to make one of the world's most important markets less friendly to multinationals.
Interviews with executives, lawyers, and consultants with long experience in China point to developments they say are making it much harder for many foreign companies to succeed. They say the changes suggest Beijing is reassessing China's long-standing emphasis on opening its economy to foreign business -- epitomized by the changes it made to join the World Trade Organization in 2001 -- and tilting toward promoting dominant state companies.
In the latest broadside against foreigners, authorities in a wealthy province near Shanghai Tuesday assailed the quality of luxury clothing brands from the West, including Hermès, Tommy Hilfiger and Versace.
Technology executives say they are highly concerned about government procurement rules issued late last year that would favor local suppliers who have "indigenous innovation." The rules, if implemented, could limit foreign access to tens of billions of dollars in contracts for computers, telecommunications gear, office equipment and other goods.
Patent rules imposed Feb. 1 threaten to increase costs in China for foreign innovators in industries such as pharmaceuticals, and let authorities force foreign drug companies to license production to local companies at state-set prices.
Executives in several industries say the liberalization spurred by China's WTO entry is stalling. Foreign makers of wind turbines and solar panels say they are being shut out of big renewable-energy projects. Regulatory barriers effectively cap participation in insurance: Foreign companies had just 4.7% of China's life-insurance market as of June, and 1% of its property and casualty market, according to PricewaterhouseCoopers.
Canaves, Sky. 2010. "China Slams Luxury Goods' Quality." Wall Street Journal (17 March): p. B. 2.
In a statement posted on its Web site, the Zhejiang Administration of Industry and Commerce said that "International designer clothes, blindly worshipped by Chinese consumers and enjoying 'super national treatment' in the country, have once again proven unsuitable for China".
According to the Zhejiang notice, 48 out of 85 samples of imported clothing from 30 international brands failed to meet Chinese product quality standards. The brands also included Versace, Dolce & Gabbana and Zara. The authorities say that they have impounded all of the clothes with the same model numbers as the samples that failed to meet the standards, but the rest of the companies' products aren't affected. It was unclear if any fines would be levied. The harsh tone of the attack appeared to be out of proportion to the actual infractions: half of the complaints were over usage labels, including laundry instructions that failed to meet Chinese requirements. Nevertheless, the statement was carried widely by China's official media. While the immediate financial impact of the sanctions against the luxury brands is likely to be limited, the negative publicity could be damaging. Foreign brands sell at a huge premium to local brands, justified in part by the perception of quality.
Actually I am not impressed by this proposal. The argument of their defenders that they will have better knowledge of their regions if they supervise their local banks makes sense to me. Also, they are the ones that actually operate the discount windows that lend to the banks in their regions. Again, they will know better about this lending if they know what is going on with those banks. This proposal looks just plain silly to me, frankly.
Some observers have argued that the Board needs beefing up by "real economists" to offset the supposedly hawkish set of district bank presidents, many of them distinguished Ph.D. monetary economists with strong views and large egos, who may be dominating the FOMC. In contrast with the Board of Governors who are appointed by presidents with approval by the Senate for 14 year terms (which none ever finish anymore), district bank presidents are appointed by Boards of Directors of the district banks, with the approval of the Board of Governors, and often represent local economic interests as well as the sometimes peculiar views of the specific district banks, with some known for particular views. Thus, the St. Louis and Richmond Feds have long been viewed as bastion of old-fashioned monetarism, while the Minneapolis Fed (with its connections to the University of Minnesota) is viewed as a fountainhead of new classical economics.
I shall list all the current governors and district bank presidents below with some information about each, while noting that indeed Kohn was senior to all, with a University of Michigan Ph.D. and starting at the Kansas City Fed in 1970 before going to Washington where he became Greenspan's right hand man in many high level staff positions before joining the Board of Governors and becoming Vice Chairman. Yellen served on the staff in Washington in 1977-78, as well as the Board of Governors in 1994-97, before becoming SF Fed president in 2004, a definite insider with a distinguished academic record (and Nobel Prize winning husband), if not as much of one as Kohn. BTW, it should be noted that she may not accept the appointment as it would involve a pay cut of about $200,000 per year.
Board of Governors (continuing):
Ben Bernanke, Chairman, econ PhD MIT 1979, distinguished publication record,
Bd of Govs, 2002-05, Chairman, 2006-
Kevin Warsh, J.D. Harvard, 1995, Bd of Govs, 2006-
Elizabeth Duke, MBA, Old Dominion (year?), Bd of Govs, 2008-
came up through Virginia banking system, Chair Bd of Directors, ABA, 2004-06
Daniel Tarullo, J.D. University of Michigan, 1977, Bd of Govs, 2009-
District Bank Presidents (continuing, not listing Yellen at San Francisco Fed):
Boston: Eric Rosengren, econ PhD, U. of Wisconsin, 1986, at Boston Fed since 1985, president since 2007
New York: William Dudley, (first among equals and permanently on FOMC, which includes five district bank presidents at any time), econ PhD, UC-Berkeley, 1982, at NY Fed since 2007, president since 2009, formerly at Goldman Sachs
Philadelphia: Charles Plosser, econ Phd, U. of Chicago, 1976, strong new classical orientation and distinguished publication record, formerly associated with strongly monetarist Shadow Open Market Committee, president since 2006
Cleveland: Sandra Pianalto, econ MA George Washington U., (year?), at Cleveland since 1983, president since 2003
Richmond: Jeffrey Lacker, econ PhD, U. of Wisconsin, 1984, at Richmond since 1989, president since 2004. Despite having strongly Keynesian major prof, Donald Hester, Lacker seems to have gone native at the Richmond Fed with a strongly hawkish reputation.
Atlanta: Dennis Lockhart, econ and foreign policy MA, Johns Hopkins, 1971. At Citibank/Citigroup, 1971-88. At Atlanta since becoming president, 2007.
Chicago: Charles Evans, econ PhD, Carnegie-Mellon (year?), distinguished publication record, at Chicago since 1991, president since 2007.
St. Louis: James Bullard, econ PhD, Indiana, 1990. distinguished publication record and interested in agent based modeling and complex dynamics, currently serving as adjunct prof at Washington U., and as coeditor of the Journal of Economic Dynamics and Control. At St. Louis since 1990, president since 2008.
Minneapolis: Narayana Kotchelakota, econ PhD U. of Chicago, 1987, formerly at U. of Minnesota and strong new classical with distinguished publication record. At Minneapolis since becoming president, 2009.
Kansas City: Thomas Hoenig, econ PhD Iowa State (year?), at KC Fed since 1973, making him senior person of this group in Fed, president since 1991, also senior at that level.
Dallas: Richard Fisher, highest degree unlisted. Background in private banking starting in 1975 at Brown, Harrisman, later a diplomat, trade rep for NAFTA negotiations and also at Kissinger Associates. At Dallas as president since 2005.
"This false distance is present everywhere: in spy films, in Godard, in modern advertising, which uses it continually as a cultural allusion. It is not really clear in the end whether this 'cool' smile is the smile of humour or that of commercial complicity. This is also the case with pop, and its smile ultimately encapsulates all its ambiguity: it is not the smile of critical distance, but the smile of collusion"— Jean Baudrillard (The Consumer Society: Myths and Structures)
Tuesday, March 16, 2010
Of all my books, Manufacturing Discontent may seem to have the least links with Marxism. After I published The Invention of Capitalism: Classical Political Economy and the Secret History of Primitive Accumulation, some people argued that the subject was purely historical and had no contemporary relevance. Of course, the seizure of property continues throughout the world, even in the United States, where government can take property through the law of eminent domain and then turn it over to private interests.
Read the entire commentary at:
Monday, March 15, 2010
The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration. It's time to start cashing them in. For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits — billions more each year. Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes — nearly $29 billion more. Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors.
Let’s do some simple arithmetic. If the Social Security Trust Fund has $2.5 trillion in government bonds – at the current interest rate of 4.5% it receives around $112 billion in interest income. So if benefits exceed payroll contributions by only $29 billion, wouldn’t the Trust Fund assets grow by $83 billion? Of course, Mr. Ohlemacher seems to be of the belief that these Trust Fund assets are supposed to cover those General Fund deficits. Ahem!
Sunday, March 14, 2010
The loosening of government restrictions opened the country up to a flood of pamphlets. A recent critic noted that "greater freedom to print is more deviously related to the prevalence of accusations of lying" (Condren 1997, p. 125). Arbuthnot, himself, pointed to the role of "the great fondness of the malicious and miraculous: the tendency of the soul towards the malicious, springs from self-love, or a pleasure to find mankind more wicked, base, or unfortunate than ourselves."
Arbuthnot also promised to explore whether political lying should be the exclusive right of the government.
Not being erudite enough to follow through with Dr. Arbuthnot's project, I appeal to you to complete his work.
Arbuthnot, John. 1712. Proposals for Printing a Very Curious Discourse, In Two Volumes in Quarto, Intitled, Psuedologia Politike, or, A Treatise of the Art of Political Lying: With an Abstract of the First Volume of the Said Treatise (London: Printed for John Morphew, near Stationers-Hall).
Also see the proposal at
The starting point should be the insight of Hayek and his Austrian colleagues that most economically valuable knowledge is local and tacit. Only those directly involved in the production and consumption of goods and services can really know about quality, difficulty, uncertainty and other not-fully-quantifiable or codifiable dimensions of economic life. This is why organization and control has to be decentralized.
The Austrian prediction of the downfall of central planning was finally validated in 1989—even sooner, for those who were following the internal debates about prices and planning taking place in the Communist world. By the fall of the Berlin wall there were no defenders left for the notion, or “conceit”, that a single, all-powerful bureau could intelligently manage a complex modern economy.
In very general terms, planning failed on two counts, both related to the ubiquity of local and tacit knowledge. First, because crucial economic information could not be codified, relations between the center and the enterprises had to be based on trust. One way the planners could convince themselves that their underlings were reporting correctly was, to put it bluntly, terror: the threat that misreporting or failure to follow orders would be punished as an “economic crime”, with horrible personal consequences. We still see the reflection of this approach in China. Yet sufficient trust could not be established even in the most autocratic regimes, and as political systems liberalized, the scope for these principal-agent conflicts grew ever larger. One universal post-1989 discovery is that the official statistics were rubbish, and there were dark practices in every corner.
The second problem is simply the complexity of modern economic life and its resistance to being encapsulated into the statistics that planners depend on. Plans were “wrong”, not just for errors in judgment or poorly chosen models, but because they were inherently unable to supply the answers to the questions that were most pressing on the ground. They could not make use of the non-quantifiable information that producers and users of goods possessed, nor could they interact constructively with the decision-making that is unavoidable at a local level. The great dream of computerization, for instance, that advocates thought would revolutionize central planning, never panned out. This was the purest, most direct vindication for the Austrian critique of centralized socialism.
The fundamental contradiction of Austrian thought, however, is between its awareness of the person-, activity-, and placed-based nature of knowledge and its assumption, never really defended, that markets can succeed in assembling this knowledge and guiding local decision-making. In saying this, I am not claiming that markets should have no role or cannot accomplish any informational or allocative function—only that they do not solve the problem posed by the centrality of local and tacit knowledge. But don’t take my word for it; see how this conceit collapsed in the financial meltdown of the past two years.
The “financialization” revolution of the post-1980 period was based on the assumption that market valuation of assets was rational and correct, and that owners of these assets would, in the process of maximizing their wealth, provide the best possible guidance for the dispersed producers whose work created the revenue flows which the assets capitalized. Control of enterprises would be transferred to the financial markets, which would decide which producers would be supported or shut down, and which would choose managers and evaluate their performance.
Alas, the same two faults we witnessed with central planning were reproduced in “central markets”, dishonesty and decision failure. In modern economies, for instance, intangible factors play perhaps the largest role in wealth creation, and this defeats any attempt to base valuation solely on accounting algorithms. Unscrupulous actors, interested only in their own personal gain, used this opportunity to deceive regulators and counterparties, to the extent that trillions of dollars were transferred to insiders while the rest of us were stuck with claims on fictitious assets. Whole companies were brought down, for instance, by equity funds that quietly stripped them of their financial value, leaving them too indebted to survive, and leaving gullible buyers of this debt with shredded balance sheets. No doubt a large part of this fraud could have been avoided had the insiders not gamed the political system and eviscerated regulation, but it would be a mistake to simply assume that regulation alone would be enough. The problem of the regulator is not so different from that of the central planner: how do you know whether an instrument or deal is value-destroying if you cannot independently ascertain what the actual value is?
Similarly, even well-motivated “abstract investors”, owners of funds who shuffle claims on a wide variety of enterprises and rely only on accounting data, and not the local and tacit knowledge of those on the scene, cannot really know what actions will make production more efficient at using resources and meeting social needs. The problem is the inability of accounting data to encompass the dispersed and non-codifiable information that workers, buyers, and managers generate and rely on. The “market for corporate control”, for instance, simply assumes that the information available to financial markets is sufficient to determine which managers are doing their jobs well and which need to be sacked. There are some success stories, in which entrenched managers, demonstrably failing in their obligations, were flushed out by external investors, but also many horror stories in which hard-earned craft and wisdom were expunged, and viable enterprises were destroyed. The inability of financial markets to assume the role of global economic management should not be laid at the feet of any particular individuals; it is intrinsic and is due to the same factors that caused central planners to fail.
Perhaps the main difference between 1989 and 2008 is that we had a ready narrative for the collapse of state-managed economies: for decades the failure of Communism had been predicted and explained for us, and the message was transmitted through the mass media for all to hear. The message regarding the shortcomings of financial markets is not as well-developed, however, nor is it being disseminated with the same ideological fervor. Yet experiences do not teach lessons all by themselves; they need to be narrated and understood. If we are to benefit from the upheaval we are still going through and find our way to a more stable and socially rational system of economic organization, we will need to clarify the story and find words to tell it.
Saturday, March 13, 2010
Friday, March 12, 2010
I began going to China Star a few years ago after learning of it through Cowen's dining guide and after my daughter, Sasha, enrolled at George Mason University. China Star has become her favorite restaurant in the area, so we have now eaten there numerous times and know many of their dishes well. So, it was not surprising that with these articles out and Sasha home for spring break, we would be tempted to try Taste of China only an hour's drive away from Harrisonburg in Charlottesville. We got there about 5:30 and had to wait about 45 minutes for a seat (no reservations; the frenzy is intense). We ordered some dishes that are also served at China Star, such as spicy beef and tripe and also Szechwan chili chicken on the bone ("Qung Qing chili chicken" at Taste of China). Chang's current stuff is more subtle that the versions at China Star, and indeed astoundingly tasty. But it lacks a certain bite, certainly compared to China Star.
I suspect that what has happened is that Chang's long sojourn in places like Knoxville has Americanized him a bit, and perhaps he has accepted his celebrity as well. So, there is no separate menu for the hard core stuff, although the menu is separated into Chinese and "Chinese American" (conventional Chinese) sections. He seems to have toned down a bit, now that he is in effect appealing to masses waiting in long lines, not that I begrudge him his success (he was long rumored to keep moving because he "feared success"). In any case, his food is still extremely good.
I do recognize that we ate there only once, so it is possible that it was unuusally mild. It is also probably the case that one could ask for it to be spicier and he would deliver. I am a bit put off by the mob scene there, but if I do eat there again, I shall ask for them to give me the real punch and not the wimpy style.
Thursday, March 11, 2010
Certainly it’s better than nothing, which happens to be the status quo. (In theory the Fed should be doing this already, but in practice they have no interest.) If we had had such an Institute five years ago, perhaps they would have added their voice to those in the economics and finance professions who said leverage was careening out of control.
But the approach embodied in the bill currently gestating in the Senate Banking Committee is built on a compromise that puts sound risk management, well, at risk. It goes like this:
As we have come to realize, a large part of the instability of global finance resulted from the pyramiding of increasingly complex financial instruments. There was an arms race between quants to develop evermore devious contracts, whose terms would be triggered by intricate combinations of market outcomes. Firms invested heavily in these strategies, and algorithms and instruments were jealously guarded as intellectual property. Trades were conducted in private, with no central registry, much less a public reporting of their terms. The terrible truth we learned in 2008 is that no one could possibly know how the system as a whole would respond to the seismic shocks of bubble-bursting, illiquidity and default. We waited breathlessly, week after week, to see how the unraveling would take place: real-time, real-life enactment was the only way the structural properties would be revealed.
Would an Institute of Finance be able to figure out the stability and dynamics of the system before it collapses? It depends on the information they are able to get. If they have access only to the data that are already publicly available, they’ll be in the same boat that independent analysts are in already. And true enough, many of us were able to see aspects of this crisis in advance, and we sounded the alarms. It is also true, however, that no one saw the entire process (we saw chunks of it), and our voices were drowned out by those who thought our fears were overblown. If the Finance Institute becomes one more such voice in the wilderness, will it make a difference?
But the discussions under way have broached the possibility that Institute staff would receive more reporting data than is currently made public, under a guarantee of confidentiality. This could make their pronouncements more credible and influential. Yet there are two shortcomings. First, it can be assumed that the Institute will not get all the trading details, only some. There will be negotiations with the banks, equity funds and other players, and deals will be cut. Even so, you can be sure that the details of some trades, perhaps the most essential for those who want to analyze the health of the system, will be withheld precisely because they are both profitable and risky, and participants want to milk them to the end. Second, it is the unfathomable complexity of interacting algorithms that is at issue. The players can’t figure it out, and, even with piles of trading data, it is likely that civil servants will be stumped too.
There is a much simpler, more effective solution. Require all contracts to be traded on exchanges, and all their terms to be reported publicly. (Perhaps the identity of the parties could be confidential; this is all.) There would be no intellectual property in financial instruments, and no incentive to devise ultra-complex variations. Algorithms used internally by investors to decide what positions to take would still be proprietary, of course, but these pose few systemic challenges. Contracts would standardize in convenient ways, and the public as a whole would be in a position to assess where the system is heading. You could be your own Institute of Finance.
What is the downside? Less profit opportunity in finance, a more routine, predictable, boring role for the financial sector, and fewer job openings for math jocks on Wall St. That’s probably enough to kill the idea politically, but from a public point of view, this down is all up, up, up.
This has been issued openly due to a massive political backlash against the advisory letter to state colleges and universities from Attorney General Kenneth Cuccinelli telling them that they could not forbid discrimination against gays in employment. Even campus Republican groups have objected, with fully universal condemnation coming out of campuses at all levels, as well as from business elites in Northern Virginia worried about the impact on the reputation of the Virginia system of higher education, and also gay activist groups descending en masse on Richmond to protest. Unsurprisingly Cuccinelli still has his defenders, including the wacko Delegate Robert Marshall who recently blamed disabled children on abortion and is now claiming that Cuccinelli's critics are motivated by "anti-Catholic" bias. Gag.
Tuesday, March 9, 2010
Note: Black indicates "economic" factors, green "cultural" and red (or plum) "political". These are loose distinctions, of course. Most of the boxes are self-explanatory, except for the following:
"From ISI to ELI" refers to the collapse of import-substituting industrialization and its replacement with export-led industrialization.
"Deproductivization" describes the erosion of productivist motives in US institutions and policies, including education, infrastructure, regional and industrial policy.
The "Finance Perspective" signifies both financialization as a conceptual framework and the ascendancy of financial interests in the political sphere.
There simply wasn't space for a box for trade liberalization, which is influenced by the IT revolution, US geopolitics and the finance perspective, and which encouraged the shift to ELI, while acquiring its distinctive characteristics in conjunction with (how do we show this?) deproductivization. It played a significant role, directly and indirectly, in the emergence of global imbalances.
Global financial integration was influenced by geopolitics and the finance perspective, took on its particular form as a result of the failure of risk management, facilitated domestic US financial excesses (and excesses in other deficit countries), and was a central conduit for the propagation of the crisis.
I need at least one more dimension to show all this.
Monday, March 8, 2010
The Bill of Rights is pretty well shredded. Freedom of speech is fast becoming the special privilege of corporations. Economic pressures, fueled by greedy shareholders, have eviscerated the press, leaving freedom the press virtually meaningless.
The most important part of the Fifth Amendment is probably the takings clause, which is interpreted to restrict the right of the government to regulate property.
Perhaps, the Second Amendment is the most important amendment, giving people the right to arm themselves with anything short of a nuclear weapon.
All this right-wing nonsense might be somewhat understandable if it were necessary to provide for a good life; however, the economy is becoming as dysfunctional as the ridiculous political system.
Watching people rebel politically or in the streets in Iceland and Greece, while people in the United States express their frustrations with the tea party, makes me noxious. My problem with the tea party movement is one of political jealousy. Many of the participants share my frustration at the class bias of the system, but they seem confused, mistaking late capitalism or socialism. Sure, the tax system is rigged against ordinary people, but it works in favor of the same people who are running the tea party movement.
Unfortunately, the left (if there is such a thing) seems unable to articulate a strong call to action. Instead, our anger bubbles up periodically -- today, over the evisceration of education; tomorrow, over an escalation or extension of the war; or maybe even the promotion of a protest candidate, but a systematic program is nowhere to be found in the public dialogue.
What is to be done (but vent)? I hope not.
Sunday, March 7, 2010
Friday, March 5, 2010
"The International Monetary Fund recently found that banks that spent more to influence policy over the last decade were more likely to take more securitization risks, have larger loan defaults and experience sharper stock falls during crucial points of the crisis."
Cyran, Robert and James Pethokoukis. 2010. "Formidable Lobbyists." New York Times (3 March): p. B 2.
Wednesday, March 3, 2010
"DR MARCUS SCAMMELL, MARINE ECOLOGIST: Every time we took a water sample test in that catchment the water came back toxic."
..."St Marys is surrounded by natural forest. And we’ve found no evidence of toxicity in the St Marys catchment. However in the St Helens catchment directly below this monoculture of plantation trees, we had permanently present toxin."
...."DR MARCUS SCAMMELL, MARINE ECOLOGIST: The timber companies themselves refer to these as genetically improved. They don’t say how they’re improved."
..."DR CHRIS HICKEY, NATIONAL INSTITUTE OF WATER AND ATMOSPHERIC RESEARCH,NZ: The Tasmanian trees generated a lot more foam and this foam was a lot more stable than the Victorian leaves. The significance of this is that... in that the toxin is carried in the foams - this is the mode by which the toxin can be transferred within the catchment and moved down the river system and into an estuarine environment."
...."DR CHRIS HICKEY, NATIONAL INSTITUTE OF WATER AND ATMOSPHERIC RESEARCH,NZ: We wouldn't see this necessarily in the laboratory or even expect to sort of look for this sort of effect. You're only going to see it once you get things on a very large scale monoculture. It's a classic case of potential unintended circumstances, unintended effects from something that’s on a large scale like plantation forestry. ..."
"....DR CHRIS HICKEY, NATIONAL INSTITUTE OF WATER AND ATMOSPHERIC RESEARCH,NZ: Since our original experiments we designed a second series of experiments whereby we would chemically analyse both leaf material from eucalyptus nitens and foam material, and then follow that up with bioassays with both our fresh water cladocerans and our blue mussels. So this is some sort of forensic toxicology work that we’re doing. What we’ve been able to do is come very close to showing that there’s a common chemical fraction in both the eucalyptus nitens leaves and in the toxicity in the foams. So from that we really feel we’re very close to being able to confirm that the eucalyptus nitens is the primary source of toxicity in the foams. We just haven’t been able to actually get down to the final fingerprinting and molecular weight determinations which will give us our final linkage to the eucalyptus nitens..."
In June 2009 the World rainforest reported that a large global corporation called 'ArborGen' was planning to release genetically engineered tree products in the US and Brazil.
"This is a major step toward the unregulated commercial release of large-scale plantations of GE eucalyptus trees."
However, from the comments made by Dr Chris Hickey above, it looks like this disastrous genie is already out of the bag - whether the trees are genetically improved/engineered or not. Giant Eucalyptus (and other) monocultures have been planted across immeasurably huge land areas, particularly across the southern hemisphere. This has been organised and carried out by global 'forest' companies, in league with governments, over the last 15 years in particular.
The scale of these monocultures, is sufficient in itself, to generate unnatural buildup of toxins in the drinking water catchments where they have been planted.
Let me tell you why you are here. You are here because you know... that there’s something wrong with the world. You don’t know what it is, but it’s there, like a splinter in your mind, driving you mad. It is this feeling that has brought you to me. [ ... ] The Matrix is a system, Neo. That system is our enemy.
(Morpheus, in Wachowski and Wachowski 1999)
 Something In The Water Part 2 - Transcript
PROGRAM TRANSCRIPT: Monday, 22 February , 2010
 Arborgen Seeks to Legalize GE Eucalyptus Trees in U.S. -Brazil is Not Far Behind
“Eucalyptus is the perfect neoliberal tree. It grows quickly, turns a quick profit in the global market and destroys the earth.”—Jaime Aviles, La Jornada
Tuesday, March 2, 2010
Much of the book and the discussion focused on the so-called "new concensus" three equation model, which are an IS curve giving aggregate demand, a Phillips curve, and than a policy curve essentially implying a Taylor rule with the central bank setting nominal interest rates. This implies endogenous money, a concept much liked by many Post Keynesian economists, although many argue it holds more broadly than just when central banks exogenously set interest rates. Sawyer pursued the endogenous money argument further, and Smithin offered an alternative three equation model with the Phillips curve and the Taylor rule replaced by short and long run supplies of inflation equations. It was over whether the Post Keynesians had any alternatives to the new consensus model and also could explain hyperinflation where Mankiw stepped in to question. Smithin replied with his three equation model, although the equivalent of the IS curve seemed much more complicated than the usual variety, too much so for a Principles text anyway, if not perhaps a higher level one. Mankiw did not seem convinced.
A sub-text was that it is unclear if these Post Keynesian models did much better in explaining recent events than the now silly looking standard model. Most observers would say that the big winner in all this has been Hyman Minsky, generally labeled a Post Keynesian, although he did not particularly like the label (and Paul Davidson claims he was not one, or a proper one). A couple of the chapters in the book, if not the session, attempt to bring Minsky in, but it is unclear that all this has been resolved clearly. In another session at the conference, another author from the book, Marc Lavoie, agreed that in a world where central banks lose control of actual interest rates as they fall below corridor levels, the standard endogenous money model may be out the window along with the more conventional model. It is too bad that Minsky is no longer with us when we need him (and he used to be a regular attender of the EEA meetings, sigh... ).
“For the first time the world is functioning as a single economy…there is no such thing as a US economy.”
Those are the words written by John Naisbitt and Patricia Aburdene in their 1990 book entitled ‘Megatrends 2000 – The next ten years…major changes in your life and world.” [ 1]
The authors were attempting to explain why the then current hysteria being beat up by Wall Streeters about the US trade and budget deficit was a sham.
“It was said that these twin monsters would surely bring the most powerful economy to its knees, perhaps even lower, if something were not done.” [ 2]
However, the way in which the official national statistics were calculated ensured that the US twin deficits were largely a mirage.
Looking at the trade deficit Naisbitt and Aburdene write “the only things that are counted are what customs officals check off on their clipboards at ports of entry, the goods and tangibles of the industrial period. Non-tangibles such as book rights, royalties and fees were simply not counted. Further, the products of US companies who operated in foreign nations also didn’t count.
“In 1986 foreign branches of American companies sold $720 billion worth of goods overseas, seven times the so-called trade deficit for that year. Almost 20 percent of the merchandise imported into the United States is manufactured by foreign branches of American companies. The United States’ biggest import item by far is money. Its largest exports by far are bonds, stocks, and other financial instruments.” [ 3]
The authors rightly question why “commentators in the media and elsewhere …assess the health of the overall US economy by examining a single incomplete statistic.”
“There is a need for new concepts and new data if we are to understand the new global economy. Because they are using old concepts (eg, a collection of nation-states trading concrete goods) and old data, alarmists shout about perceived trade deficits and yell for protectionist measures borrowed from the old era. Much is made of the United States now being ‘the world’s largest debtor nation’. To begin with, half that so-called debt is in stock in US companies. In a truly global economy, does it really matter that ten shares of AT&T stock are now owned by an Englishman in Manchester rather than a banker in Wichita?” [ 4]
As if anticipating US citizen concern about foreign ownership of US corporations, the authors point out that
only 5 percent of the assets of the US economy are owned by foreigners. Readers are reassured that the truth is that America and Britain were buying up the world:
“So what if foreigners own 5 percent of American assets? Many of the purchasing corporations are owned by American and other people from all over the world. What’s foreign?” [ 5]
“The right course for a sophisticated country is to invest the money it earns in the most profitable way. That is what ‘deficit-ridden’ American and ‘deficit-ridden’ Britain have both done….The United States is buying more businesses overseas - $309 billion worth in 1987 – than all other countries together are buying in the United States. Furthermore, US assets abroad are grossly understated because Americans have been on the buying side for a long time, and the worth of those assets is carried at the original cost rather than current market value.” [ 6]
Megatrends 2000 quickly flips over the negative reports of rainforest depletion, increasing poverty, environmental pollution, corruption and exploitation. The book celebrates the passing of the year 1984, a year Naisbitt and Aburdene assert passed without the dehumanization of modern society prophesied by George Orwell.
Looking to the new millennium it is observed that:
“Wealth has not led to increased greed, as conventional cynicism would have us believe.” [ 7]
On the contrary
“Wealth is a great peacemaker” say the writers. [ 8]
This is a book that, on the one hand, takes great care to examine the fallibilities of the monetary accounting of a nation as well as the fast pace of change in the world’s economic system. But on the other hand the authors carelessly disregard the economic and social history of humanity in their declarations of simple truths.
The world has changed dramatically, indeed. The logic of the US and the UK funding their phantom ‘trade deficits’ by exploiting the wealth of other nations somehow eluded analysis. A mere ten years into our grand new Millennium the actions of the ‘leaders’ of the industrialized nations continue to be vastly destructive to the future of life on the planet. Despite the incredible financial wealth accumulated through stepped up global exploitation by these ‘successful’ corporations our ‘leaders’ are now implementing brutal austerity measures like gutting the already half-funded healthcare and aged pensions to bail them out. Yet again, and again.
 John Naisbitt and Patricia Aburdene. ‘Megatrends 2000 – The next ten years…major changes in your life and world.” Sidgwick and Jackson Limited London. 1990. ISBN 0 283 06016 6. Page 26.
 Ibid. Page 24.
 Ibid. Page 26.
 Ibid. Page 27.
 Ibid Page 29.
 Ibid. Page 28.
 Ibid. Page 288
 Ibid. Page 289