Tongue in cheek, but not quite there

My bedside table is a victim of the debt crisis – how else can I explain it being overburdened by Reinhart & Rogoff’s This time is different (2010), Galbraith’s The Great Crash 1929 (1954) and Mackay’s Extraordinary Popular Delusions (1841) ?  Apparently Reinhart & Rogoff”s book nearly topped the Amazon best-seller list (only beaten by Stieg Larsson), but is it better than Galbraith or Mackay? I don’t think so, even though Reinhart & Rogoff make an incredible important argument about national debt crisis, and crises more generally. They happen often, play out in various ways and there is a lot of novel data and research in the book (!) to prove it.  But it’s a pain to read…

I don’t understand why it is so bloody difficult for them to make their argument simply and clearly.  The writing – or possibly the editing  – is quite frankly poor. Never mind that they make a lot of technical points first, that’s fine; it’s the general structure of the writing which is frustrating. Whenever an argument begins to be developed (and you have to get to chapter 4 before arguments appear) they interrupt the story with two-page text-boxes, unrelated tables or other random elements. All of them valuable in their own right, but none of them in an order that makes much sense. Consider the opening of chapter five on page 68:

We open our tour of the panorama of financial crisis by discussing sovereign default on external debt… (Some background on the historical emergence of sovereign debt markets is provided in box 5.1). Figure 5.1 plots the percentage of all independent countries… [and between 1820-1840s] nearly half the countries in the world were in default (including all 

That’s where the page ends… ! The next two and half pages are one long text box, and thereafter the sentence ”(including all…” is completed. By the next page we get to see figure 5.1 (promised at the start), but they throw in figure 5.2 for good measure, not that it’s clear what it means yet (Reinhart & Rogoff 2010: 68-72).

It’s annoying. And particularly so as Renhart & Rogoff has such an important point to make, with such interesting data. Apparently it took 10 years to write this book. I wish they’d spent some more time editing. There is a reason why Galbraith’s and Mackay’s work not only became standard references in the literature (as Reinhart & Rogoff’s will), but also became classics (which Reinhart & Rogoff’s won’t). The classics are well researched and well written. At times wonderfully so; as with Galbraith’s commentary on how banks very efficiently lend money to speculators, which does lead to some instability:

Banks supply funds to brokers, brokers to customers and the collateral [which customers use to leverage stock transactions] goes back to the banks… Wall Street, in these matters,  is like a lovely and accomplished woman who must wear black cotton stockings, heavy woollen underwear, and parade her knowledge as a cook because, unhappily, her supreme accomplishment is as a harlot. (1954 [2009: 47-8])

Or Mackay’s oft cited example, of the craziness that attends bubbles when investor’s ahve faith in firms that have no business plans and no experience:

An absolute classic

But the most absurd and preposterous of all, and which showed, more completely than any other, the utter madness of the people, was one started by an unknown adventurer, entitled ‘A company for carrying on an undertaking of great advantage, but nobody to know what it is’. Were not the fact stated by scores of credible witnesses, it would be impossible to believe that any person could be duped by such a project… Next morning at nine o’clock, this great man opened an office in Cornhill. Crowds of people beset his doors, and when he shut up at three o’clock… He was thus, in five hours, the winner of £2,000. He was philosoper enough to be contented with his venture, and set off the same evening for the Continent. He was never heard from again. (Mackay 1841 [2006: 46])

Reinhart & Rogoff has much to contribute with their book. A good read is tragically not one of them, and that may stop its transition from good research into great piece of work. What a shame.

Some of them are also patting themselves on the back for having the strategic vision and ability to not only weather the storm, but to come out stronger… So what doesn’t kill you, makes you stronger and causes temporary amnesia it seems.

The Federal government spent some $700bn on “shoring up the banking sector“, meaning that the total net profits posted by the big banks is a piddly 1.5% of the money injected to cover their own losses, so lets not get ahead of ourselves just yet. Accounting for all that money, the Inspector of the Troubled Asset Relief Program (TARP) has just released this report: Noting that banks have reportedly spent a large chunk of the money available. More specifically, 43% bolstered their capital cushion, 31% invested elsewhere, 14% repaid debt and 4% made acquisitions – although this is based solely on what the banks told the commissioner, there has been no oversight, of course.

Goldman and J.P. Morgan have repaid on their commitments to TARP, but they wouldn’t be around had it not been for TARP in the first place. Doubts remain how much of the system would. Goldman in particular netted a nice round $125bn in relief, so before they prepare to pay a $900,000 average salary this year, maybe they should try and read last years newspapers.

Then again, what’s the point? It seems the newspapers, media and stockmarkets have also all forgotten what happened and who ended up paying for it. It wasn’t the bankers who paid – even the head of Fannie Mae is in fact the Inspector of TARP by now – so little hope of the government taking much charge. So there you have it. Short memories and the markets are back to their usual short term behavior. Paging Dr. Minsky and Dr. Keynes.

Tip of the Hat to Dave Shukla for pointing me to this FT article on the TARP report in the first place.

Fell over laughing. Not quite sure what to make of it. But near the end, Andrew Leonard writes:

Neoclassical economics tells us that markets know best and individuals, en masse, will make rational decisions based on the information presented to them. The theory has taken some severe blows lately (and is utterly demolished in Justin Fox’s soon-to-be-published “The Myth of the Rational Market”),

There are a number of books coming out this year on the history of finance (more to come on that next week) but this one might be a good read….

And obviously, the world of finance is facing it’s own problem.

The Levy Institute recently published a policy note by Professor Martin Shubik on The “Unintended Consequences” Game. It’s interesting to say the least. (You know how when someone asks you what you thought of something and you answer “It’s interesting.”? And it’s always a bad sign? Well, yeah this is probably one of those times …) I’m not quite sure what to make of it. Professor Shubik is partially right. When something bad happens (i.e. financial crisis), the public and the politicians look for a scapegoat and a quick-fix solution ASAP. And that quick-fix will end up having loopholes galore since it was obviously just thrown together. But his solution is really puzzling.

His solution:

Create within the Department of Justice a small operational “war gaming group” for all major new legislation…. A game is designed around a new piece of legislation, and a first prize of, say, $1 million is to be awarded to the competing lawyer or team of lawyers who finds the most egregious loophole. The competition is open to any lawyer, or to any student registered in an accredited law school.

It’s an interesting idea, though. Having a group of people vet a bill so that no loopholes can be created. But there are so many unanswered questions. Is his intention to have the major legislation be scrutinized by the lawyers before it gets passed? Won’t that just add another layer of political legislation that no one wants? And what happens if there are loopholes that the “war gaming group” missed? Will they have to return the money? Would it be cynical and wrong of me to say that most legislation is aided by lobbyists/corporations so that they put the loopholes in there in the first place? And the problem with loopholes and cracks: you may not know there is one until its too late. Sometimes loopholes/crack manifest itself when you poke and prod too much. And with the ever-changing technology, loopholes just form themselves as technology evolves. Either way, it’s a topic that makes you ponder.

–Jeanne akaJStor

This crisis is the culmination of events and trends reaching back, depending on your perspective, four, seven, seventeen, twenty-two, twenty-seven, thirty-eight, sixty-five, or a hundred and two years. (…) The causes are technological, mathematical, cultural, demographic, financial, economic, behavioral, legal, and political. Among the dozens of contributors and culprits, real or perceived, are the personal computer, the abandonment of the gold standard, the abandonment of Glass-Steagall, the end of fixed commissions, the rating agencies, mortgage-backed securities, securitization in general, credit derivatives, credit-default swaps, Wall Street partnerships going public, the League of Nations, Bretton Woods, Basel II, CNBC, the S.E.C., disintermediation, overcompensation, Barney Frank and Chris Dodd, Phil Gramm and Jim Leach, Alan Greenspan, black swans, red tape, deregulation, outdated regulation, lax enforcement, government pressure to lower lending standards, predatory lending, mark-to-market accounting, hedge funds, private-equity firms, modern finance theory, risk models, “quants,” corporate boards, the baby boomers, flat-screen televisions, and an indulgent, undereducated populace.

I am glad we sorted that out.

Belgium, Ireland, Switzerland, the Netherlands and the UK all have more than 3 times their GDP in private bank liabilities. Unsure where this might lead to, it is at least better than the original figure which put Ireland at a staggering 800% liabilities to GDP – although it turned out that Dresdner Kleinwort – the German consulting company – who had originally composed the chart had fallen prey to a bit of global risk themselves as they corrected the graphs with the comment

“I’m afraid to say, It looks like our outsourcing guys in Manila used the wrong exchange rate in compiling the data for Ireland. I’ve re-checked the figures and the number for Ireland is 368%.” (Financial Times)

Ignoring Manila’s fun at the FT’s expense, this calculation doesn’t start to count the government deficits or trade deficits, so with that is mind the picture is even less cheerful. An interesting question is of course whether the G10 countries have always been this heavily leveraged?

This via Turbulence Ahead and Stephen Kinsella‘s blog.