Showing posts from October, 2009

Selected Readings for a Thursday Morning

1. Under Attack, Credit Raters Turn to the First Amendment

First, a disclaimer on my recommendation for this Huffington Post investigation: a version of this story has been done before; it's not exactly anything new. To wit: Moody's and friends like to scurry behind the First Amendment when outraged investors seek recompense for losses after believing their inflated ratings.

I know the argument the credit raters are trying to make, but it always has offended me somewhat. You think of the great figures of American history who have invoked the First Amendment, and how it has been this core, unassailable principle that makes our democracy so powerful. And then Moody's ... well, subverts it to this end. I suppose my reaction is akin to the reaction you'd expect from a Fox commentator who discovered footage of a beatnik casually wiping his butt with the American flag.

For now the lesson we must learn is to treat the credit-rating agencies as untrustworthy, unfortunately, as th…

Nobody Rides for Free? Think again, Jackson Browne

Lately I've been thinking about the "free rider" problem in economics, partly because free riders are so easy to find once you start looking for them. It's an unbelievably easy Easter egg hunt.

The free rider of course is someone who partakes of a benefit but doesn't help pay the associated cost. If you live in a village of 1,000 people, and there's one dirt road in, absent a local government structure someone might try to collect funds to have the road paved. If 999 people contribute $1,000, but you don't deem the project worthy and decline to pay anything, then you "free ride" on that nice smooth road when it's finally covered with a shiny black layer of pavement.

This winter, I may be a swine flu free rider. How? I'm leaning against getting a protective shot. Part of my reasoning is: Because of the general feeling of panic, and the constant media drumbeat about the dangers of swine flu, millions will get vaccinated. They will help form …

What We Learn From the Financial Journalists

This past Tuesday, The New York Times was plugging the new book by its “merger and acquisition correspondent”, Andrew Ross Sorkin, big time. The book is called, Too Big to Fail: The Inside Story of How Washington and Wall Street Fought to Save the Financial System – and Themselves. That long and yet empty title is what you get when you try to include all the “hot” issues of the day in a single phrase. But the gimmick apparently works, or it could have been the heavy promotion: the book sold out in New York’s Barnes & Nobles.

I have not read the book, but from the excerpt in the Times, I know what is inside. Here is a passage:
Increasingly desperate that morning – “I feel like I’m playing Whack-a-Mole,” he complained to his peers – Mr. Fuld decided to call his old friend John Mack, the chief executive at Morgan Stanley, the second-largest investment bank after Goldman Sachs. After dialing Morgan’s New York office, Mr. Fuld was transferred to Paris, where Mr. Mack was visiting clients…

The Inanity of the Home Buyer Tax Credit Laid Bare

For anyone who missed it, Nemo at self-evident had a good post on why the tax credit for newbie home buyers is a really dumb idea (The First-time Home Buyer Tax Credit is Idiotic; he doesn't mince a lot of words). He had a follow-up here to explain it all in (brace yourself) the economic parlance of supply and demand curves.

I'll just cherry-pick a few reasons why the tax credit is stupid:
1. It forestalls the setttling out of home prices at their natural bottom, which is what we desperately need before the U.S. housing market can begin a sustained recovery.
2. It encourages first-time homebuyers to leverage up too much to buy a home (and what's more, they won't be buying at the natural bottom -- see point #1 -- so they stand a greater chance of winding up underwater on their mortgage).
3. Once you start shifting around the supply and demand curves, you find that the tax credit, if anything, induces developers to boost the supply of homes in the market. But the housing mar…

Health Care Reform? I'm Busy Counting My Gold, You Dark-skinned Whippersnapper!

That Time of Year: WSJ Op-Ed Defends Insider Trading

I say "that time of year" because periodically (okay, maybe not every year, but as sure as the swallows land at Capistrano), the WSJ runs an op-ed piece that defends the practice of insider trading.

This year's version is written by Donald J. Boudreaux and, owing to its sort of porky length, I am betting that it appears only online and not in the print Journal. Boudreaux makes enough sense that, if you want to see the real fright gallery for this Halloween-timed piece, check out the comments section afterwards. You'll find a lot of people -- they smell like traders to me; they have that sort of smart knowingness about the markets on a very micro level -- cheering him on. Clearly Boudreaux managed to quickly assemble his own amen corner.

So what is wrong with insider trading? Boudreaux offers many reasons why it's actually a good thing. But does his exuberant defense capture the whole picture?

First, what is insider trading? It's pretty much what it sounds like: …

Are the American People Really the American Sheeple?

Have we turned into a nation of sheep? Are we really so tractable and fleece-able as an outsider might think, considering the rather feeble response of the average American to the outrages of the financial crisis?

Everyone basically agrees on where we are now, one year after last fall's implosion. The Too Big to Fail banks are even bigger than before (and thus even more immune to failure). Wall Street bonuses and pay are rocketing higher again, even as 500 desperate people (including a master's degree holder and a seasoned business analyst) compete for a single lousy admin spot at a trucking school that barely pays $27,000 a year. The financial industry is battling the small elements of reform tooth and nail; God knows what resistance we'll get when we try to introduce big, meaningful reform.

What prompts my musing is this story in the Huffington Post showing the large, yawning gap -- chasm really, if you will -- that has opened up between Wall Street bonuses and the average…

What We Learn From the Businessmen

If you did not recognize the style of Death of a Deal Man, you do not know John Das Passos. If you are an American, that is doubly unacceptable. His is the only name you can utter when an anti-American foreigner claims that your country has not produced a single writer or artist of international standing. Das Passos’s U.S.A. trilogy is a masterpiece of fiction in form and content. Once in this blog I asked the philosophical question: What do we need to know about something so we could say we know it? When it came to people, Das Passos knew the answer; he gave it to us with an impossible mix of brevity and completeness that approached poetry. Read the biographies in the U.S.A. and judge for yourself.

I thought of Das Passos when I was reading Wasserstein’s death notices. Even the man’s obituaries were hurried, as if rushing to complete an about-to-expire deal. Deal making alone drove the narrative, as in this gem in the Wall Street Journal (Oct 15, p. C3):
A former editor of the school…

Is Naked Shorting Really as Benign as Mom and Apple Pie?

I found myself pondering this after reading Matt Taibbi's latest screed called Wall Street's Naked Swindle. Taibbi comes down hard on the practice, but then I wandered over to Clusterstock where John Carney says, in so many words, "Wrong, wrong, wrong, Taibbi -- naked shorting isn't a villain."

There are several comments I was going to make on Taibbi's piece, but I'll keep this entry manageable by looking only at naked short-selling of shares. For those already shaking their heads -- the phrase does sound indecent, on the very face of it -- this refers to a variation on the practice of short selling.

Short-selling stock is what you do when you think the price is going to drop. Let's say IBM is at $30 a share. You borrow 100 shares, sell them, wait until IBM falls to $10, then buy 100 shares on the market to replace those that you borrowed. Sweet payday: $30 x 100 - $10 x 100 = $2,000 in your pocket, ignoring transaction and borrowing costs.

Naked short s…

What We Learn From the Nobel Laureates

I had never heard of Oliver Williamson and Elinor Ostrom until they won the Nobel Memorial Prize in Economics this past week. So, what I know about their work is what I read in the papers. But that is sufficient; somewhere in this blog I wrote that everything you need to know is always right in front of your eyes!

Let us begin with Elinor Ostrom whose research, The New York Times tells us, led her to believe that something called the “tragedy of the commons” was inaccurate.Ms. Ostrom concluded in her research that the “tragedy of the commons” was an inaccurate concept. Particularly in 17th- and 18th-century England and Scotland, the concept described villagers’ overgrazing of their herds on the village commons, thereby destroying it as a pasture. The solution often invoked was to convert the commons to private property, on the ground that self-interested owners would protect their pasture land.Setting out to show that the tragedy of the commons is inaccurate is akin to setting out to s…

New York Times, Better Late Than Never Department

Yves Smith at naked capitalism savages the NYT for, well, stating the obvious with their story Bailout Helps Fuel a New Era of Wall Street Wealth.

She's right. To most sentient observers of the financial industry, that Wall Street was getting a big earnings shot of adrenalin through the bailout was evident after first-quarter earnings were reported. Back then though, as I recall, the media was still mesmerized by "green shoots" pixie dust. They were speculating about how the banks were turning themselves around.

But what we do we have today, two quarters later? A moribund economy (a close to 10 percent jobless rate with foreclosures creeping higher and the other shoe yet to drop on commercial real estate). This isn't the sort of economy you'd expect two quarters after the banking industry started turning itself around. But it is exactly what you'd expect after a massive government intervention to prop up the biggest players in the financial system (there's …

Wall Street and the “Real Economy”

A never-ending subject of thoughtful deliberation among economic and finance professors is the relation between the “Wall Street” and the “real economy” – whether the woes in the realm of finance spill over to the “real economy”.

You can see why the simple question remains an impossible puzzle. The very first step in answering it would be to define finance and explain what is meant by the real economy – without quotation marks. That, the university economics cannot do. Hence, the endless discussions and points and counterpoints.

In Vol. 4, I take up this question in detail. Before then, here is a news item from the New York Times to highlight the relation between finance and the real economy. The article is about the massing of lobbyist to influence the new law overhauling the financial industry. But since virtually every imaginable company could be touched by the comprehensive legislation proposed by the Obama administration, the surprisingly broad array of lobbyist trooping to Capito…

The Death of A Deal Man

Bruce ‘Bid’em-Up’ Wasserstein was born a deal maker. He was born in Brooklyn, went to the University of Michigan, studied business and law at Harvard, did a stint at Cambridge, became a Knox Fellow and authored a book, but his true love was deal making. He was called smart, driven, a chess player, a strategist, a tactician, but all he wanted to do was make deals. “In the deal world, there was Bruce, and then there was everyone else,” people said. He thrived in the deal making frenzy and he made deals always and everywhere so everywhere he went turned into the Deal World – the Hamptons, his Midtown office, home, planes, trains, automobiles. “Let’s make a deal,” he would say. And he made deals fast and furious, so fast and furious that once he overloaded First Boston’s phone system. His deals were many and varied: Philip Morri’s purchase of Kraft and General Foods; Ichan’s assault on AOL Time Warner; Kraft’s potential takeover of Cadbury; KKR’s takeover of RJR Nabisco; Texaco’s acquisit…

Financial Regulation, Theoretical Poverty (2 of 2)

In a perceptive line in The Critique of Dialectical Reasoning, Jean Paul Sartre writes that “the future comes to man through things in so far as it previously came to things through man.”

The idea is not new, but Sartre expresses it more eloquently than others. What he is saying is that, in the course of his material activities, man creates tools and organizations whose very presence compels him to act in a certain way, thus shaping the course of the history. Sartre’s example is a machine. “Thus, the machine demands to be kept in working order and the practical relation of man to materiality becomes his response to the exigencies of the machine,” he writes. Man is the product of his product.

As with machines, so with the financial systems. They, too, demand to be kept in working order. But unlike machines which are built on well-understood principles and can be relied upon to work in a precise manner, the working of financial markets remains hidden from the view because they are created…

Why "Bailout Nation" is Like Water Torture

Early on in this financial crisis (that has now "ameliorated" to become more or less just a protracted mess), the U.S. as a nation stood at a juncture. There were two roads that lay before us: A difficult one that would lead to more short-term pain, but better prospects for a swifter, and more fair, economic recovery. And an easier one that would minimize the immediate pain but that would prolong the necessary adjustments and fail to fix the inherent abuses that led to the crisis in the first place.

Of course we chose the second path. The U.S. has shown itself good at prescribing tough remedies to small weak countries in financial distress that need our help. Yes, metaphorically speaking, they should have their teeth filled without the benefit of Novacaine. But for ourselves, we want only the best in sedation dentistry.

The second path I think we should all agree to name "Bailout Nation," with the obligatory tip of the hat to Barry Ritholtz, who penned a book by that…

Financial Regulation, Theoretical Poverty (1 of 2)

One of the issues being debated these days is the regulation of over-the-counter derivatives, the privately negotiated, customized contracts that exist in a legal world parallel to their standardized, exchange-traded cousins. The Financial Times was surprised that even the European industrial companies had come out against the regulation:
Some of Europe’s industrial companies have warned they could shift their financial hedging away from Europe if proposed reforms of the vase over-the-counter (OTC) derivatives markets go ahead as proposed by the European Commission ... The comments show that opposition to a key part of US and European proposals for reform of the financial system is gathering from an unexpected quarter: industrial companies.The paper gave the reason for the opposition without, naturally, understanding the centrality of the issue to the current crisis:
Many companies use OTC derivatives, such as interest rate and currency swaps, to hedge routine business risks like fuel p…