A Client Is Not a Counterparty
– Jesse Eisinger put up an interesting piece
yesterday at DealBook
, reporting on a series of transactions conducted by Goldman Sachs in 2008 and 2010. He uses it to illustrate what he and many other people seem to view as an insoluble dilemma: how to distinguish between market-making by investment banks and proprietary trading. The distinction is an important one, as Mr. Eisinger explains, because the so-called Volcker Rule in the new Dodd-Frank financial regulation regime severely limits investment banks’ proprietary trading and investment activities….First of all, we need to tease apart the various different roles Goldman Sachs played in this little drama. The fact that one firm played multiple roles does not prevent us from distinguishing among them, or pointing out the important differences each has.
China’s Dangerous Food Crisis – While we can argue all day long about whether the United States has significant "non-core" inflation in food and energy prices—it does —there is no doubt at all about what is happening in China. Tom Stevenson of the Telegraph (UK) reported on the situation. . The Xinhua news agency reported last week that a basket of 18 staple vegetables was 62% higher in the first 10 days of November than in the same period last year. Nothing instills the fear of God in a Chinese leader more than soaring food prices, which may be followed by food riots and general chaos in the streets, which may be followed by the Guillotine. Not lacking motivation, China’s leaders are implementing price controls, subsidies and cracking down on hoarding. Unfortunately for them, China’s economy is overheating and right now there appear to be more problems than China’s government can reasonably be expected to handle. But that’s the subject of another post. I will stick to their food problems today.
Indecent Financial Proposal: IMF Lending to Ireland
– No, I’m not talking about further dalliances
by IMF Managing-Director Dominique Strauss Kahn with his underlings which have spawned a bestseller
in France on his alleged penchant for indecent proposals. However, I am still
talking about Europeans abusing power at the international lender of last resort. (Even with a rather timid redistribution of voting shares away from European countries to fast-growing Asian ones, the impression remains that the Fund is dominated by Western voices–especially since it’s still customary that the Europeans get to choose its head and the Americans its first managing director.) A few days ago, I read former IMF Chief Economist Simon Johnson repeat an entirely legitimate criticism
of the IMF being asked to bail out Ireland in an FT article by Alan Beattie: The Irish case shows how far the fund has drifted from its original purpose. Some officials say it needs to hold a debate about its role. Originally set up to administer the post-war system of fixed exchange rates, the IMF was constructed to tide over countries suffering balance of payments problems while the governments returned to solvency by cutting spending or raising taxes.
S&P Rating vs. CDS Implied Rating of European Sovereign Credit; Huge Flaws in the Bond Rating Methodology
– An interesting article by Index Universe
shows how Ratings Differences Highlight Eurozone Risk
.The article compares risk as measured by a Standard and Poor’s rating vs. a CDS rating that is calculated based on credit market derivatives. A table highlights the differences. Some of the differences are enormous.For those interested in various Bond ETFs, there’s much more information in the three page article. Here is the table from page two. In Steer Clear Of Bond Ratings
Paul Amery for Index Universe
writes … Ratings agencies are too slow to react to deteriorating creditworthiness, and when they do react, cuts tend to come in one fell swoop. In Greece’s case, the ratings cut to junk by Moody’s in June was one of four “notches” in one go, for example (from A3 to Ba1).
Conversations with a banker: ATMs and the Money Supply
– I met a friend of mine last weekend who holds a regional manager-type position at a bank. We got to talking about banking and economics (go figure) and she described a particularly interesting problem they were discussing at work: What is the optimal policy to refill an ATM with cash? I’ve never really thought about it before – I guess I always assumed that once the ATM starts to run out of cash, they send a truck over and refill it. Turns out, that’s not the case – at least for this particular bank in this region. The ATMs are filled up such that they run out of money around 1% of the time before they are refilled. This happens when the amount of money taken out is 2.5 standard deviations from the average (where the mean and sd will differ based on seasonality and day-of-the week). If an ATM typically dispenses $30,000 over a period of time with an s.d. of $10,000, then we’d see it filled up to $55,000.
The Idiocy of Starve-the-Beast Theory
It ought to be obvious from the experience of the George W. Bush administration that cutting taxes has no effect whatsoever even on restraining spending, let alone actually bringing it down. Just to remind people, Bush inherited a budget surplus of 1.3 percent of the gross domestic product from Bill Clinton in fiscal year 2001. The previous year, revenues had been 20.6 percent of GDP, spending had been 18.2 percent, and there had been a budget surplus of 2.4 percent.
– A prime reason why we have a budget deficit problem in this country is because Republicans almost universally believe in a nonsensical idea called starve the beast (STB). By this theory, the one and only thing they need to do to be fiscally responsible is to cut taxes. They need not lift a finger to cut spending because it will magically come down, just as a child will reduce her spending if her allowance is cut — the precise analogy used by Ronald Reagan to defend this doctrine in a Feb. 5, 1981, address to the nation
Monetarism: the hegemony that need not speak its name by Nick Rowe – Paul Krugman does not feel the Monetarist hegemony he swims in. The only part of Monetarism that he does feel, and that he now identifies with Monetarism, is that one small part of Monetarism that failed to achieve hegemonic status. Milton Friedman in 1970’s believed that M2 growth ought to be kept small and constant – the k% rule. Milton Friedman lost that battle. But he won every other battle. He won the war. Here’s Paul: "I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities. What Friedman was saying was, in effect, yes, we need policy to stabilize the economy – but we can make that policy technical and largely mechanical, we can cordon it off from everything else. Just tell the central bank to stabilize M2, and aside from that, let freedom ring!
European Markets in Limbo as Irish Bailout Takes Shape
– European finance ministers will gather here Sunday to complete a multibillion-euro bailout for Ireland as financial markets waited to see if a restructuring of Irish banks would mean losses for bondholders. The hastily arranged meeting, after another week of turmoil for countries using the euro
currency, prompted speculation that Europe would seek to bolster confidence beyond Ireland by promising support, if needed, for other vulnerable economies like Portugal and Spain. Policy makers hope that swift action can quell the fear of contagion ahead of the opening of the markets Monday. In a move that underlined the importance attached by the European Union to Sunday’s meeting, telephone consultations took place before it began among the French president, Nicolas Sarkozy; the German chancellor, Angela Merkel; the president of the European Central Bank, Jean-Claude Trichet; the president of the European Council, Herman Van Rompuy; and the president of the European Commission, Jose Manuel Barroso, according to a statement from E.U. officials.
Oh No, QE2 Might Actually Work!
– Lawrence Lindsey is concerned
that QE2 might work as intended. He is afraid that if QE2 actually spurs an economic recovery there will be higher interest rates that, in turn, will create a fiscal crisis: Lindsey is correct that an economic recovery will raise interest rates. In fact, rising yields
will be a sure sign of economic recovery. His concerns, however, about a fiscal crisis seem rather misplaced on several fronts. First, it would be easier to deal with fiscal problems in a growing economy created by QE2 than in a Japan-style economic slump created by an aborted QE2. Second, keeping monetary policy tight by having no QE2 would create other problems that his analysis ignores, like further pressure for trade protectionism. Third, tight monetary policy would increase the likelihood of more fiscal deficits and fiscal problems. Consequently, I will cast my lot with QE2 and pass on the Lindsey prescription of tighter monetary policy.
Iceland Is No Ireland as State Kept Free of Bank Debt – Iceland’s President Olafur R. Grimsson said his country is better off than Ireland thanks to the government’s decision to allow the banks to fail two years ago and because the krona could be devalued. “The difference is that in Iceland we allowed the banks to fail,” Grimsson said in an interview with Bloomberg Television’s Mark Barton today. “These were private banks and we didn’t pump money into them in order to keep them going; the state did not shoulder the responsibility of the failed private banks.” “How far can we ask ordinary people — farmers and fishermen and teachers and doctors and nurses — to shoulder the responsibility of failed private banks,” said Grimsson. “That question, which has been at the core of the Icesave issue, will now be the burning issue in many European countries.”
Is the Recession Over, or is Extend and Pretend More Pervasive? – Yves Smith – A hedge fund manager and I had a flurry of e-mails over the weekend, prompted by various “The recession is over” declarations, particularly one lauding Timothy Geithner’s skills as a forecaster. I think our shared view is that to call this recession over is tantamount to calling an operation successful when the patient is tethered to an oxygen tank and needs 24 hour nursing care. In other words, the designation may be technically correct, but also shows how low the threshold of “success” is considered to be. One of his comments: It’s weird, but even here in the heart of our wealthy suburb, and people APPEAR to be as affluent as ever, but scratch beneath the surface, and many are experiencing money strains. It’s like we just continue extend and pretend and then people use the recurrence of bad habits as a sign that Geithner was right. It’s nauseating. And somehow 10% unemployment doesn’t matter any more!!??? I also know of cases exactly like the situation he alludes to…
Tax Hikes, Status Competitiveness, and Social Stratification – Yves Smith – Taxes on top earners are the lowest they’ve been in nearly three generations, yet their complaints about the prospect of an increase to a level that is still awfully low by recent historical standards is remarkable. In my youth, if someone complained much about their taxes, it was taken as a sign that they either had no class or were under some financial stress. Some of this caviling no doubt reflects the degree to which the plutocrats are firmly in control of the political process. They can openly lobby for blantanly self-serving policies, and adopt a non-negotiable posture. But something else is afoot too, and these bitter protests seem to be another side effect of social stratification. As we’ve pointed out, highly unequal societies are unhealthy for their members, even members of the highest strata. Not only do they score worse on all sorts of indicators of social well-being, from crime rates to teenage births to average lifespan, but they exert a toll even on the rich. Not only do the rich have less fun, but a number of studies have found that income inequality lowers the life expectancy even of the rich. Micheal Prowse explains in the Financial Times:
Register of Deeds asks AG to investigate mortgage group – County Register of Deeds John O’Brien on Nov. 18 announced he has sent a letter to Attorney General Martha Coakley requesting that she investigate whether or not the Mortgage Electronic Registration Systems, Inc. has failed to pay the proper recording fees required when a lender assigns a mortgage to another entity. The MERS system includes such banking conglomerates as Bank of America, Countrywide Home Loans, Wells Fargo Bank and others, according to the Register of Deeds. O’Brien said it has come to his attention that a number of states have alleged in court filings that MERS intentionally failed to pay recording fees, and failed to disclose the transfer and assignments of interest in property, solely to avoid and decrease the recordation fees owed to the counties and the state. In addition, he said MERS may have wrongfully bypassed Massachusetts recording requirements thereby frustrating the borrower’s right to know the true identity of the holder of their mortgage.