The Big Picture |  |
- Mid-Week PM Reads
- Natural Disasters in the United States, 1980 – 2011
- Watch out for China
- FOMC minutes, it’s “about keeping interest rates low”
- Debt Levels Alone Don’t Tell the Whole Story
- 10 Wednesday Reads
- The Cost of Theoclassical Economics and Economists
- Just as AAPL always beats, AA always misses
- Occupy Wall Street’s Nattering Nabobs of Negativity
- A New Day Dawns
| Posted: 12 Oct 2011 01:15 PM PDT Afternoon train reading:
What are you reading?
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| Natural Disasters in the United States, 1980 – 2011 Posted: 12 Oct 2011 11:30 AM PDT Fascinating chart from the Re-insurance industry:nsurance industry of US Natural disasters: Number of Events (January – June Only)
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| Posted: 12 Oct 2011 11:00 AM PDT Markets are acting as if everything is great. A much stronger Euro and a weaker US$ is certainly helping equity markets. EM’s are going for growth policies, rather than taking measures to curb inflation. The current Euro/£ strength seems overdone, though Gold/Oil is responding accordingly. Equity markets remain dependent on the situation in Europe – however, continued political deadlock etc in the US is being ignored – dangerous. US economic data has been better than expected and reduced longer term interest rates is resulting in record low mortgage rates with a massive amount of mortgage refi’s, increasing disposable income – clearly positive. The US housing market remains the key to the US economy. US season is beginning – Alcoa’s results were disappointing. Europe is to blame apparently – expect many more such issues. At the end of the day, I believe that even Europe will have to push the inflation button – there is no alternative. The ECB/Germany remain the key obstacles, but QE by the ECB, personally I think its coming. Whilst Europe is on every one’s radar, events in China are deteriorating rapidly. The attempts by the authorities to organise a “soft landing”, through monetary tightening are not going well. Will be bad news for the miners/A$. Look like great shorts pretty soon. ~~~ Kiron Sarkar is a qualified UK accountant, Kiron joined the M&A dept of N M Rothschild in London. He was then appointed head of M&A of Rothschild (Hong Kong). On his return to the UK, he was a founding member of the Rothschild international privatisation team. Subsequently headed up the Central and Eastern European ("CEE") team – rated No 1 in 4 out of 5 years (Privatisation International). On leaving Rothschild, he worked as privatisation adviser to the UK Governments Know How Fund, which was established to advise Governments in CEE on policy, privatisation, economic, financial, regulatory and other issues. Subsequently European Head of Media, Tech and Telecoms at CIBC World markets. Following CIBC, Kiron advised on telecoms and energy deals in CEE.
Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.
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| FOMC minutes, it’s “about keeping interest rates low” Posted: 12 Oct 2011 10:38 AM PDT The minutes from the OT FOMC meeting in Sept revealed the different options that are still available to them in their continuous attempt to help the economy. While the information from the Aug meeting “did not suggest contraction in activity…stresses in global financial markets, sluggish growth in households’ real incomes, and heightened uncertainty about economic prospects seemed to have contributed to lower consumer and business sentiment and to be weighing on economic growth.” Also, they saw continued weakness in labor markets and continued to believe that inflation will recede from here. It is this belief that triggered more action with the consensus going with OT. Two members wanted even more and three wanted nothing more. With respect to QE3 at some point in the future, “a NUMBER (my emphasis) of participants saw large scale asset purchases as potentially a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted.” Yep, they still believe money printing can make things better. Fed member Pianalto today in a separate speech summed up monetary policy with this, it’s “about keeping interest rates low.” Bottom line, the Fed will continue with even cheaper money to counter the consequences of the previous period of Greenspan/Bernanke cheap money.
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| Debt Levels Alone Don’t Tell the Whole Story Posted: 12 Oct 2011 08:30 AM PDT Net debt as a percentage of G.D.P. The charts show debt figures for 2007 and 2010 for eight members of the euro zone, expressed as a percentage of gross domestic product for both the public and private sectors, and I.M.F. forecasts for public sector debt in 2013. Click for lager chart: Source:
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| Posted: 12 Oct 2011 07:30 AM PDT Here is what I am working through this AM:
What are you reading? >
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| The Cost of Theoclassical Economics and Economists Posted: 12 Oct 2011 05:30 AM PDT Hernando de Soto is an extremely interesting Peruvian economist who is simultaneously deeply conservative and highly innovative. He published a column in the Washington Post on October 7, 2011 entitled "The Cost of Financial Ignorance" that caused me to reexamine "The Washington Consensus" [TWC].I agree with de Soto, but his title would have been more accurate if it read: "The Costs of Theoclassical Economics and Economists." The nature of the TWC is itself highly contested, so I will hold off providing "the" definition of TWC other than to warn that its originator and its proponents are engaged in historical revisionism to try to hide the damage TWC has done. I agree with de Soto’s criticisms of financial deregulation. Indeed, I will (briefly) add to those criticisms. But de Soto’s argument that the deregulators violated TWC is not correct. Indeed, the opposite is true – TWC encouraged the disastrous deregulation. TWC had 10 points of supposed consensus. Three of them are of greatest relevance to de Soto’s column and my response. John Williamson is a deficit hyper-hawk with the Peterson Institute for International Economics. The Peterson Institute’s mission, if you are a supporter, is to save the Republic from an avalanche of debt by making major cuts to Social Security, etc. Williamson created the ten-point TWC in preparation for a November 1989 conference as a purported statement of consensus policies favored by economists in the U.S. government, IMF, and the World Bank as to how best to spur development in Latin America. Three of Williamson’s points are of particular relevance to de Soto’s column and my response. In reviewing them, I discovered that Williamson, stung and embittered by the criticism of TWC, began to rewrite the original points. That would have been fine; of course, if what he was doing was changing his recommendations based on the facts. However, Williamson, and now de Soto, are passing off the revisionist points of the TWC as if they were Williamson’s original points when the actual TWC doctrines contradict the revisionism and caused catastrophic crises. I will also show (briefly) that this revisionism establishes the validity of a broader criticism of TWC by economists such as Luiz-Carlos Bresser Pereira (Brazil’s former finance minister) that most distresses Williamson. Williamson has created a revisionist history for two TWC policies that are the subject of this column. Privatization
Deregulation
Williamson made his TWC proposals at a time when the three "de’s" – deregulation, desupervision, and de facto decriminalization had created the criminogenic environment that unleashed the epidemic of accounting control fraud that drove the second phase of the S&L debacle. The debacle was widely described as the nation’s worst financial scandal and Williamson’s original TWC article mentions it but ignores the accounting control fraud and its ties to financial deregulation. The original TWC did not recognize or warn of the risk of corrupt private parties (i.e., the CEOs running control frauds) that drive financial crises. TWC did the opposite; it provided strong, unambiguous support for deregulation. Indeed, he expressly argued that there was a consensus in Washington that deregulation, which had just caused the U.S.’s worst financial scandal in its history, was "successful." This supposed consensus on the success of deregulation ignores the severe crisis that the deregulation caused and the dramatic reregulation of the industry that we had implemented in 1983-86. It also ignores the adoption of the Financial Institution Reform, Recovery and Enforcement Act of 1989. FIRREA reregulated and "bailed out" the S&L industry. President Bush, who had chaired President Reagan’s Financial Deregulatory Task Force, had recognized the catastrophic error of the very consensus deregulatory policies that had led to the S&L debacle and drafted FIRREA to undue his errors. It is remarkable that Williamson presented a discredited deregulatory policy that had caused catastrophic losses and been repudiated by its leader as a desirable "consensus" policy that Latin America should adopt. Williamson’s privatization discussion further confirms his fallacious theoclassical dogma that private elites could not be accounting control frauds and could not survive bankruptcy. The language he uses reveals the dogmatic nature of the consensus. He explains that it is "an article of faith" that the private sector is efficient (despite the S&L debacle) because of modern executive compensation and the discipline of bankruptcy. It is the combination of the powerfully perverse incentives produced by modern executive and professional compensation with the three "de’s" that combined to produce the criminogenic environments that drive our recurrent, intensifying financial crises. Williamson’s failure to understand the multiple limits of bankruptcy’s limits in restraining financial crises driven by epidemics of accounting control fraud is total. First, individual accounting control fraud can delay bankruptcy for years and become massively insolvent through accounting fraud. Creditors do not discipline accounting control frauds – they fund their massive growth. Second, epidemics of accounting control fraud can hyper-inflate financial bubbles and simultaneously delay the collapse for many more years and cause the losses to become crippling. Third, once the fraud epidemic and bubble collapse bankruptcy is not stabilizing but systemically destabilizing. Accounting control frauds, particularly if it hyper-inflates a bubble, can cause cascade failures as the losses they impose on their creditors can render them insolvent. Fourth, private sector banks, even investment banks with no deposit insurance, are frequently bailed out by the public sector when they are sufficiently politically connected or considered to be systemically dangerous institutions (SDIs) whose failures could trigger systemic collapses. Here is how Williamson’s revisionist history of those same three points as he offered it on November 6, 2002. The title of the article shows that it was part of his effort to defend TWC: "Did the Washington Consensus Fail?"
I have no criticism of Williamson modifying his original 1989 views on privatization in a 2002 publication that acknowledges that he now has a better understanding of the risks of corruption causing privatization to become perverse. I fault him for claiming that his original statement of TWC covered only regulations restricting entry and exit. His 1990 paper does not limit his support of deregulation to easing entry barriers and it does not exempt safety and environmental rules. (I also fault him for not understanding that such regulations are essential to the safety of banking – easy entry poses critical risk.) By April 22, 2009, Williamson had added to his historical revisionism in order to defend TWC from criticism that its policies had helped create the global crisis.
Williamson’s original TWC document did not "make it clear" that its deregulation recommendation excluded banking supervision. Williamson is deeply embittered by criticisms of TWC. He refers to them as "foaming" at the mouth like rabid dogs. He dismisses economists who respect Keynes’ work as leftist cranks: "Left-wing believers in “Keynesian” stimulation via large budget deficits are almost an extinct species." Williamson cites the following exchange as evidence that he had become a "global whipping boy" because he developed TWC.
Williamson thinks Bresser Pereira’s statement is obviously false, but the fact that Williamson has succumbed repeatedly to the temptation to improve his original statement of TWC via historical revisionism shows that Bresser Pereira’s warning to Williamson was correct. Williamson’s description of the means by which he determined the existence of a "consensus" also disqualifies him as the arbiter of judging what TWC really was.
Think about Williamson’s exchange with Feinberg in late 1989. Williamson tells Feinberg that he thinks that there is a consensus in Washington, D.C. that a particular idea, e.g., deregulation is unambiguously good, and Feinberg responds that there isn’t a mere consensus – there’s universal agreement in favor of deregulation. Meanwhile, deregulation has just caused the U.S. to suffer its worst financial scandal, a scandal so severe that the President of the United States – formerly the leader of financial deregulation – changes his policies and reregulates the S&L industry. The top industry advocate of deregulation, Charles Keating of Lincoln Savings infamy, has been revealed to be a control fraud. The S&L regulators have been reregulating for six years in a desperate effort to stem the epidemic of accounting control fraud. None of this penetrates the theoclassical bubble inhabited by Williamson and Feinberg. If the three economists Williamson chose as discussants truly "spanned the range of ideological views in Washington" then Washington has to start seeing other people. The narrow range of differences in the views of the scholars Williamson chose as his discussants for the conference made it easy for them to form a "consensus" and to conclude that all of "Washington" and "Latin America" shared that consensus. Williamson demonstrated his self-blindness with this conclusion:
He thinks there really is a Universal Convergence in favor of theoclassical economic dogma and that his dogmas are universally good for the world and supported by all intelligent persons.
De Soto’s Revisionism about Property Rights De Soto’s column provides the revisionist interpretation of the tenth TWC point. Williamson originally phrased it this way: Property Rights
In 2002, Williamson used similar phrases to describe the tenth point.
Here is de Soto’s revisionism about the meaning of point ten of TWC. Note that under de Soto’s account of the facts, Bernanke is also guilty of historical revisionism about TWC. De Soto uncritically asserts that TWC was a great success in Latin America and that the U.S. needs to adopt TWC. Precisely the opposite was true – TWC’s policies deregulatory and privatization policies proved criminogenic in much of Latin America, just as they did in the U.S. S&L debacle. TWC led to such severe problems that electorates through most of Latin America have voted out of office TWC supporters. The U.S. crisis was driven by the criminogenic environment that TWC principles created.
I agree with de Soto that transparency is vital and that anti-fraud provisions are essential if markets are to approach efficiency. I also agree that government must provide these functions. Contrary to theoclassical economics’ predictions, when we forbade effective regulation of financial derivatives the result was not efficient markets, an optimal level of disclosures, financial stability, or the exclusion of fraud. Theoclassical dogma, as was the norm, proved to be false. The problem is that TWC did not embrace transparency and effective financial regulation. It proposed the opposite – deregulation – and its proponents did not serve as vigorous proponents of effective financial regulation in the U.S. or in Latin America. Economists stress the reliability of "revealed preferences" – not self-serving statements after the fact that rewrite history. The revealed preferences of Williamson during the lead up to the crisis demonstrate that he did not understand and strive to counter criminogenic environments, the perverse incentives of modern executive and professional compensation, epidemics of control fraud, Gresham’s dynamics, the hyper-inflation of financial bubbles, or the collapse of effective financial regulation led at agencies run by anti-regulators. De Soto is correct that Williamson should have made point 10 of TWC far broader, embracing effective regulation as an essential component of effective and stable markets, but he knows that Williamson did not do so. Instead, point 10 simply held that private parties should be able to own property. De Soto errs in praising Bernanke. Bernanke was a strong anti-regulator, consistent with TWC. He appointed Patrick Parkinson as head of all Fed supervision. Parkinson is an anti-regulatory economist with no real supervisory or examination experience. Parkinson was the Fed’s lead economist urging Congress to remove the CFTC’s statutory authority to regulate credit default swaps (CDS). The effort to squash CFTC Chair Born’s proposed rule restricting CDS succeeded and created a regulatory black hole that contributed greatly to systemic risk for the reasons de Soto explained in his recent column. De Soto is correct that regulation and effective markets are not mutually exclusive choices. Rather, financial markets are better able to remain effective when regulation provides the necessary transparency and reduces fraud risks. Financial deregulation in the U.S. and the EU was the enemy of effective markets, honest bankers, customers, and shareholders. The fact that Bernanke thinks that the theoclassical anti-regulatory dogma contained in TWC was the solution rather than the problem in the U.S. demonstrates that he has failed to learn the most basic lessons about the crisis. Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions. Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives. Follow him on Twitter: @WilliamKBlack
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| Just as AAPL always beats, AA always misses Posted: 12 Oct 2011 05:03 AM PDT If there is one guarantee in earnings season it’s that AAPL will beat estimates. If there is a 2nd guarantee, it’s that AA will miss and thus investors are not extrapolating anything to the rest of the market today from what Alcoa delivered. However, the demand drop they saw from Europe will be felt elsewhere. Today, European Commission Pres Barroso will unveil their proposals for bank recaps, another Greek debt restructuring and the functioning of the EFSF. With respect to the competing vision of how to recap one’s banks, after hearing comments from the French Budget Minister, the French seem to be coming around to what the German’s want. That is, private sector involvement first, followed by gov’t help if needed and not firstly going to the EFSF. Slovakia will likely vote within days to finally approve the EFSF in return for a new gov’t. The Shanghai index, in a delayed response to the Chinese gov’t buying its own bank stocks, rose 3%. In the US, purchase apps rose 1.1% and refi’s were up 1.3%. II: Bulls 34.4 v 34.4, holding at lowest since Aug ’10. Bears 46.3 v 45.2, highest since Mar ’09 when it got into the 50′s
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| Occupy Wall Street’s Nattering Nabobs of Negativity Posted: 12 Oct 2011 04:24 AM PDT
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| Posted: 12 Oct 2011 04:04 AM PDT G’Wednesday morning. I am recovering from a whirlwind 48 hours of dinners, conference details, drinks, and of course, a full day of MC’ing, speaking and meeting many wonderful people. I will try to get a post up later of the best comments and quotes of the conference, and later this week we will post all of the presentations from the conference. I need to regain my sea legs, review what I missed yesterday, including a bad miss by Alcoa in their Q3 earnings (14 cents vs 22 consensus). The price weighted Dow won’t be affected much (AA is a $9 stock) but I cannot help but wonder if this is company specific or a broader cost problem. The explosive moves in the Euro, the 1000 point face ripper over the past seven days, and the prospect for Q3 earnings will keep me hopping today. Markets have quickly gone to overbought from oversold; Doug Kass blames leveraged ETFs for the late day shenanigans, but I suspect it is a combination of ETF AND HFT that makes things so volatile. I see the Fed is considering oversight of “nonbank financial companies.” My suggestion: Why don’t you consider oversight of actual financial companies? After the way you guys did your actual job, why should we extend the jurisdiction of your regulatory incompetence? Try regulating banks (for a change) and then we can discuss nonbanks. We are running out of prestigious positions to promote failing NY Fed Presidents up to . . .
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