Chaos on Wall Street - CNNMoney.com

Summary:
Allen Sloan describing how the current economic slowdown is fundamentally from others (except one) and what the implications are. Difference lies in that normally the economy slows down first, creating financial problems. This time, it's the markets bringing down the economy. Only other time this has happened was 1929. Fed's attempts to reassure markets by cutting rates isn't working. Inter-bank credit markets have dried up due to fear, losses and uncertainty. Commercial banks, not investment banks are Fed's responsibility, but can let the financial system fail. Difference in ethos between commercial banks and investment banks. Fed attempting to bail out investment banks with tax payers' money. Low interest rates, weakening dollar, rescue packages and emergency loans for banks, ... Wall Street enablers of the mortgage mess and other financial excesses are able to escape the full cost of their folly, while the public picks up the cost. US financial institutions will emerge from this episode weakened compared with those in the rest of the world. (Published: 31/03/08)

Notes:

• current slowdown different from other slowdowns
• it is the markets slowing down the economy
• normally, the economy goes bad first, which then creates financial problems
• crucial distinctions, because markets are harder to fix than the economy
• Alan Meltzer: it is an unusual situation, but not unprecedented
• precedent: 1929
• was followed by the Great Depression
• 25% unemployment, social unrest, mass hunger, millions of people's savings wiped out in bank collapses
• Great Depression is not going to happen this time
• 1929 slowdown morphed into a Great Depression in large part because the Fed tightened credit rather tan loosening it
• is why Bernanke's Fed is cutting rates rapidly and throwing everything but the kitchen sink at today's problems
• However: Bernanke's rate cutting isn't working
• markets where the financial institutions borrow, lend and trade among themselves have been paralysed by losses, fear and uncertainty
• you can't get rid of losses, fear and uncertainty by cutting rates!
• the giant institutions are feared to death
• had to come back time after time and report additional losses on their securities holdings after telling the market that they had cleaned everything up
• "it's whack-a-mole finance - the problems keep appearing in unexpected places"
• had problems with MBS, CDOs, CLOs, financial insurers, SIVs, asset-backed commercial paper, auction rate securities, liquidity puts, ...
• they realise that if you don't know what's in your own portfolio, how can you know what's in the portfolio of people who want to borrow from you?
• in addition, big firms are short of capital because of their losses and are afraid of not being able to borrow enough short-term money to fund their obligations
• conclusion: credit has dried up
• investment banks vs. commercial banks
• commercial banks are obliged to take the long term view
• mess up and you have no reputation, no bank, no job
• heavily supervised by the Fed
  
• investment banks
• different ethos prevails
• if you take big, even reckless bets and win, you have a great year and get a great bonus
• if you lose money, you lose your investor's money rather than your own
• and you don't have to give back last year's bonus
• loosely supervised by the SEC
  
• Fed trying to reassure the markets by inventing new ways to inundate the financial system with staggering amounts of short-term money
• much of this money is available not only to commercial banks (Fed's responsibility), but also the investment banks
• normally aren't allowed to borrow from the Fed
• tax payer is paying for all this
• e.g. Fed extends $500b of emergency loans to firms in need of short-term money
• they're paying around 2.5% interest to Fed
• is way below what they'd pay to borrow in the open market, if they could borrow
• difference between the open-market price and the 2.5% is paid by the tax-payer
• is better than letting the system collapse
• but it's a serious subsidy to outfits that made a lot of money on the way up and are now whining about the losses
• private profits, socialized losses
• has a blackmail kind of feel to it
• economy held hostage by investment banks
  
• Fed has fronted $29b to Bear Stearns, which in turn offloaded $30b of its financial toxic waste into a fund run on the Fed's behalf
• those securities aren't worth $29b, otherwise JP Morgan wouldn't have needed the Fed's money
• Fed - i.e. taxpayer - is paying the difference between $29b and whatever the stuff is worth
• Wall Street enablers of the mortgage mess and other financial excesses are able to escape the full cost of their folly, while the public picks up the cost
• good news: sooner or later all this money thrown at the debt markets will stabilize thngs
• but cost will be steep
• "those of us who have been prudent, lived within our means, and didn't overborrow are paying a huge price for this."
• income on Treasury bills, money funds and cash deposits has dropped sharply owing to the Fed's rate cuts
• wealth has eroded relative to foreign currencies and commodities
• loss of faith in the dollar by foreign creditors is direct result of the Fed cutting short-term rates
• has helped run up the price of commodities that are priced in dollars
• may in turn be stirring up inflation
• will get harder and harder to finance country's trade and federal budget deficits
• with falling dollar carrying such low interest rates
• US financial institutions will emerge from this episode weakened compared with those in the rest of the world

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The Sting of Poverty - Boston Globe

Summary:
Drake Bennett on Charle Karelis' take on poverty. Traditional economics doesn't apply to the poor. Seeing world not in terms of goods to be consumed but problems to be alleviated. Bee sting metaphor. Need to reduce number of economic hardships the poor have to deal with. No strings attached. (30/03/2008)


Notes:

• Economists: poor people have strongest incentive to subscribe to a Puritan work ethic: each dollar earned worth more than to someone with higher income
• Opposite seems to the case: poor are disproportionately likely to drop out of school, have children in their teens, abuse drugs, commit crimes, not to save money, not to work
• Different interpretations
  
• Social conservatives: poor people lack smarts/willpower to make right choices
• Social liberals: racial prejudice and crippling conditions of ghetto to blame; denying poor any choice in their fate
• Neoconservatives: antipoverty programs to blame, bribing people to stay poor
• Charles Karelis (George Washing University): traditional economics doesn't apply to poor:
  
• when poor, economic worldview shaped by deprivation, seeing world not in terms of goods to be consumed by as problems to be alleviated
• Bee sting metaphor: person with one sting highly motivated to get it treated; person with multiple stings does not have much incentive to get one sting treated, other will still throb; the more of a painful or undesirable thing one has (ie the poorer one is) the less likely one is to do anything about any one problem
• Poverty less a matter of having few goods than having lots of problems
• Poverty and wealth not two ends of spectrum, but fundamentally different experiences, each working on human psyche in its own way
• at some point between the two, people stop thinking in terms of goods and start thinking in terms of problems; enormous consequences
• economists by and large well-of, failed to see this shift
• antipoverty initiatives all along ideological spectrum unlikely to work; economists and poverty experts need to reconsider "scarcity," one of most basic ideas in economics
• Econ 101 created tired, phony debate about cause of poverty
• Karelis taking issue with law of diminishing marginal utility (the more we have of something, the less any additional unit of that thing means to us)
• applies in many cases but logic flips when dealing with privation rather than plenty
• dents in car, dishes in sink
• Karelis: being poor = having to deal with a multitude of problems; even if one works hard enough to pay off half of costs, some fairly imposing ones still remain, creating large disincentive to bestir oneself to work at all
• Karelis: core of proble not self-discipline or lack of opportunity; cause of poverty is poverty
• policy makers worried that the more aid government gives the poor, the less likely they are to work to provide for themselves (the "helping conundrum")
• Karelis disagrees: reducing number of economic hardships that poor have to deal with makes them more, not less, likely to work
• simply giving the poor money with no strings attached rather than using it to try to encourage specific behaviors would be just as effective, with less bureaucracy
• early 1970s study: aid tends to discourage work
• Karelis: data from that experiment ambiguous

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Nationalism at core of China's angry reaction to Tibetan protests - International Herald Tribune

Summary:

Jim Yardley on perceptions by Chinese people of protests in Tibet and Western media coverage; underminin of Olympic Games; inflaming nationalist sentiment; China cannot be divided; Tibetan ingratitude for years of subsidies, benefits and investment (30/03/2008)

Notes:

• reaction of people: "government is being weak and cowardly," "Dalai Lama trying to separate country, not acceptable"
  • Chinese officials' labelling of Dalai Lama as "jackal," "terrorist" response to people's sentiment; call for "People's War" to fight separatism of Tibet
  • government trying to position itself as defender of motherland; playing to national pride and insecurities
  • but Chinese people want to see tougher stance still
• China wants to present welcoming image to world, with Olympics in 5 months time
  • playing nationalist card not without risk
• state media inundating public with reports from Lhasa about suffering of Han Chinese merchants and brutal deaths of Chinese citizens; no coverage about Tibetan grievances
  • government fanning racial hatred?
  • effect is to sharpen domestic ethnic tensions (rather than external focus, e.g. Japanese)
• government steering and inflaming nationalism, or nationalistic public attitudes beyond gov't control?
• many Chinese (home and abroad) viewing increasing attacks on China as attempt to undermine Games
  • Darfur, global warming, air pollution, human rights, Taiwan, Tibet
• Tibet usually low profile issue in China, compared to e.g. Taiwan
  • but many see it as attempt to split the country
• Wen Jibao: China willing to talk to Dalai Lama if he gives up desire for independence + acknowledged that Tibet and Taiwan are inseparable from China
• internet filled with angry comments about meeting between Pelosi and Dalai Lama
  • "Chinese people on verge of taking to the streets"
• Tibet crisis shows leadership has stepped back into the party's harsher past
  • Buddhist monks in Tibet subjected to punitive "patriotic education" campaigns
  • language used is Cultural Revolution hyberbole
  • propaganda machine operating in full gear
  • leadership lack of confidence?
• since government has shrugged off socialist ideology and made economic development country's top priority, nationalism new state religion
• Sun Yat-sen
  • Chinese revolutionary
  • described country's 5 ethnic groups: Han (92%), Manchu, Hui, Mongolian and Tibetan
  • "five fingers" of China; without one, country not whole
• nationalism as an ideology to keep China together
• many Chinese see Tibetan protests as attack on core identity; attack on state, but also attack on what it means to be Chinese
  • Chinese nationalist sentiment inflamed by perceived Western sympathy for Tibetan protests
  • anger focused on foreign media
  • media perceived more sympathetic to Tibetans in Lhasa than Chinese who lost lives and property in riots
  • mislabelling of photographs showing Nepalese police beating Tibetan protestors as Chinese
  • but government refused to allow media into Tibet
• Chinese nationalism in past has led to violence
  • cfr anti-Japanese protests; government had to intervene after first manipulating it
• for most Chinese, bottom line is you should never divide China
• little known in China about Tibet's different interpretation of its history
  • regard Tibetans as having been granted special subsidies and benefits because of ethnic status
  • years of building roads, high-altitude railroad and other infrastructure
  • protests come across as ingratitude
  • Tibetans taking advantage of Chinese tolerance towards all sorts of religions

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Darwin on my mind - Literary Review of Canada

Summary:

Michael Ruse reviewing "Why Think? Evolution and the Rational Mind" by Ronald de Sousa; thinking is expensive; why think? making choices and the social aspect; Wason test: can't solve simple problems; Plantinga and Darwin's doubt; confidence in our mathematical abilities (March 2008)

Notes:

• most organisms do not think; most organisms certainly not rational; yet they do alright
• rationality not necessarily key to success
• thinking is expensive
• requires big brains; in turns requires lots of protein, "which, outside modern yuppie societies generally means meat"
• Jack Sepkoski: "I see intelligence as just one of a variety of adapations among tetrapods for survival. Running fast in a herd while being as dumb as shit, I think, is a very good adaptation for survival."
• Why do we think?
• Ruse: need to make more choices
• more choices need to be made because humans have moved into realms where things change constantly (food availability, temperature ranges, predator threats,...); also can't go it alone: choices involving working with others
• few offsprings due to cost of producing thinkers; ensuring survival of offspring requires more thinking
• "As we - and, for much of the journey, other higher mammals - went down the path of big brains, we became better able to be thinkers but more dependent on being thinkers"
• selection produced slightly better brains that led to success and so forth
• de Sousa: human thought not like the calculation of a perfect, all-purpose computer
• we think well in situations where thinking well might be of benefit, and not so well when thinking is irrelevant
• e.g. Wason test
• Alvin Plantinga: what counts in evolution is success and not the truth
• so how can we ever be sure of the truth? perhaps none of our thoughts can tell us about reality; perhaps all like beings in a dream world
• "Darwin's doubt": Darwin: "With me the horrid doubt always arises whether the convictions of man's mind, which has been developed from the mind of the lower animals, are of any value or at all trustworthy. Would anyone trust in the convictions of a monkey's mind, if there are any convictions in such a mind?"
• de Sousa
• our mathematical abilities cannot be result of natural selection; mathematics part of our present rather than our evolutionary past;
• "mathematics can uncover aspects of the universe of which neither the usefulness nor even the existence could possibly have been manifested in the Environment of our Evolutionary Adaptations in which the basic function of the brain were being shaped by natural selection"
• hard to see how it works so well (solution of all sorts of technological and scientific problems) if it isn't true
• de Sousa on irrationality
• we sometimes flub even quite simple calculation;
• e.g. probability of having cancer that affects 0.01% of population having been diagnosed using a test with 98% reliability:
• we panic, but probability is less than 0.5%
• "We can work work out the right answers, but it is not easy - and there is a good reason why it is not easy. Human reason is a faculty evolved to help us survive in certain contexts, rather than reach the truth on every occasion, and historically we have rarely been challenged to work things out at such abstract levels."
• Note to self: this sounds much like Sunnstein's talk on worst-case scenarios

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History lesson - Economist.com

Summary:

Comparison between current financial crisis and Nordic crisis; similar in terms of boom and bust; different in terms of complexity of financial system then and now; Bear Stearns; blurring boundary between insolvency and illiquidity (19/03/2008)

Notes:

• Fed's $30b temporary shows role central bank now much wider than used to be
• Bearn Stearns was deemed to central to complex web of America's financial system to be allowed to fail
• financial crises in poorer countries tend to be deeper and more costly
• Argentina (1980s): 55% of GDP to fix
• Finland (1990s): 8%
• banking crisis Norway: similarity with current crisis;
• bust followed economic and asset-price booms fired by deregulation of credit, low interest rates and lax supervision
• when it became apparent three biggest banks were insolvent, they were privatised
• state actually made profit
• Denmark avoided storm by applying stricter capital rules
• these days much harder for regulators to which banks are insolvent
• bad debt hidden within complex securities, value of which is almost impossible to measure when markets dried up
• trouble lies as much with financial markets as with banks that trade in them
• growing complexity of links between banks is reason why BS could not be left to collapse, though 15 years ago would not have worried regulators
• BS demise also shows boundary between illiquidity and insolvency fast dissolving
• sold for a fraction of book value after being shut out of lending markets; yet not clear whether it was insolvent (ie assets worth less than it owned)
• more banks may fall into liquidity traps that snared BS and Northern Rock
• due to entanglement of short-term funding and long-term derivatives
• opportunity for government to buy assets at huge discount

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Sins of Emission - Wall Street Jornal

Summary:
Dieter Helm (Oxford) claims that the apparent decoupling of economic growth and emissions in the West (slowing CO2 output growth) is smoke and mirrors. The West has outsourced its carbon emissions to China and India. China is energy-intensive but highly export oriented. West consumes its products, therefore the West "owns" the emissions. European Commission's proposal to cut carbon emission by 20% by 2020 is not far-reaching enough. Cost of halting global warming will be far greater than believed. Living standards in the West will have to be significantly reduced if goal is to be achieved. The West is living beyond its - and the planet's - means. (Published: 10/03/08)

Notes:

• Kyoto framework
• looks at the emissions that countries produce within their border
• seductively flattering
• both the US and Europe have seen their CO2 output growth slowing even as economic growth has marched on
• it might appear that economic growth and emissions have been decoupled
• smoke and mirrors!
• projected growth of global emissions clearly tracks the growth of energy demand
• world's CO2 output is likely to increase by 50% by 2030
• paralleling the growth of energy demand and economic growth
• no global decoupling!
• US and Europeans say this is because of China and India and their failure to match our emissions reductions
• US insists that any post-Kyoto agreement must at a a minimum involve emissions caps on China as well
• indeed, there will be no solution to global warming if China builds 1,000 new coal power stations in the next couple of decades
• Only half the right
• critical question: "Who owns the emissions?"
• China is an energy-intensive, export-oriented country
• makes many of the highly polluting industrial products which used to be made in the US and Europe
• We have exported our smoke-stack industries to developing countries like China and import their products!
• if this carbon outsourcing is factored back in, UK's impressive emissions cuts over the past two decades don't look so impressive anymore
• rather than falling by 15% since 1990, they actually rose by around 19%
• US and EU together account for nearly half of world GDP
• it is consumption, not production, that matters
• if global warming is to be limited, the US and Europe will have to take much more drastic action to reduce those emissions embedded in their own consumption
• their appropriate emissions-reduction targets will have to be based on the consumption of goods that cause those emissions in the first place
• conclusions
• true scale of required emissions reductions in the Western world will be much higher
• impact on economic growth and living standards will be more severe in the West than so far believed
• US and Europe refuse to acknowledge that halting the relentless rise in the concentration of greenhouse gases in the atmosphere will take a significant slice out of economic growth
• living standards will have to be cut if our consumption is going to be environmentally sustainable
• we are living beyond our - and the planet's - means
• politicians should stop pretending that the enormous challenge of decarbonizing the major economies can be done on the cheap

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