Friday, February 26, 2010

Rating the rat's ass

The Big Picture today captured a sentiment I feel just about every time I read of one of the rating agencies actions.

Worthless in a Bull Market, Damaging in a Bear Market.

The big 3 credit ratings firms seem to have missed nearly every major crisis, collapse, bankruptcy and default of the past few decades.

These companies are actually less than useless.  They are a parasite on a parasite, providing a way for the parasitical financial system to cover its ass beforehand so that it doesn't even have to not 'work' for its food.  It's disgraceful and they should cease to exist.  Unfortunately, we don't have anything resembling a real market where people would actually have to do their own research and take responsibility for their own analysis or lack thereof, and so these schmucks still play a central role in the credit markets. 

When you think about it, you realize that this is actually the same pattern as always -- the people robbing you get together and sell you "protection" that tries to convince you that the robbery is there for your own good.  You can't get along without them.

Thursday, February 25, 2010

Debt-fueled spending binge

profligate government

slow to adjust, likely delaying recovery

pushing the nation closer to the brink of financial ruin

Goldman Sachs other big banks to help mask

promising change in Washington

growing body of research suggests

All proudly brought to you by Capitalism Inc. (and this morning's paper).

Posted via email from The Capitalist Axiomatic

Tuesday, February 23, 2010


Lobbying is really just free speech.

In 1967, then-Prime Minister Indira Gandhi imported 18,000 tons of hybrid wheat seeds from Mexico. The effect was miraculous. The wheat harvest that year was so bountiful that grain overflowed storage facilities.

Those seeds required chemical fertilizers to maximize yield. The challenge was to make fertilizers affordable to farmers who lacked the cash to pay for even the basics—food, clothing and shelter.

Back then, giving cash or vouchers to millions of farmers living all over India seemed like an impossible task fraught with the potential for corruption. So the government paid subsidies to fertilizer companies, who agreed to sell for less than the cost of production, at prices set by the government.

The subsidies were designed to make up the difference between the production price and sale price—and to give the producers a 12% after-tax return on any equity investment.

Fertilizer manufacturing companies sprang up around the country. Nagarjuna Fertilizers & Chemicals Ltd. became one of the most profitable publicly listed companies in India.

In 1991, with the cost of the subsidy weighing heavily on India's finances, Manmohan Singh, then finance minister and now prime minister, pushed to eliminate it. Most fertilizer companies lobbied fiercely to retain the program. Many legislators also resisted ending the subsidy, fearing a backlash from farmers.

"The business interests lobbied and the business interests prevailed," says Ashok Gulati, the director in Asia of the International Food Policy Research Institute, a Washington-based think tank, who was involved in the policy discussions at the time. A last-minute compromise eliminated the subsidy on all fertilizers except for urea.

"That's when the imbalanced use of fertilizers began," says Pratap Narayan, ex-director general of the industry group, the Fertilizer Association of India.

Or at least that's what Socrates said just before he hit the hemlock.

Monday, February 22, 2010


Had my eyes dilated this afternoon so I ended up watching Andrew Lo of MIT show you how to make gloss out of dross.

The story is pretty old, but if you want a simple and easy to understand mathematical example of how securitization works, this is your man.  He illustrates how you can take two risky mortgages, stick them together, assume they are statitically independent and create one big safe bond and one small hunk of shit.  One thing I hadn't ever considered is that you were able to bet directly on the correlation between the two initial bonds being higher than people thought.  In retrospect it's obvious, the structure is designed to exploit the assumed statistical independence of the bond, so if you reverse engineer it, by going long the shit and short the AAA piece, there's free money to be made by violating the initial assumption.  He explains it better in the video though.

Thursday, February 18, 2010

Wednesday, February 17, 2010

I think that's it

Simon Johnson in today's WSJ

Since these struggling countries share the euro, run by the European Central Bank in Frankfurt, their currencies cannot fall in this fashion. So they are left with the need to massively curtail demand, lower wages and reduce the public sector workforce. The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed directly to the onset of the Great Depression in the 1930s.

This is how our era rhymes with the Great Depression.  Places that see massive credit fueled bubbles need some means to devalue in one swell foop if they are not to spend an eternity working out from under their debts.  What you need is some mechanism for writing them off quickly rather than slowly.  Devaluation is the time tested way of doing this.

The neo-classicists (such as Helicopter Ben) almost understood this.  BB made his mark by demonstrating that the depression eased as countries went off the gold standard (aka devalued).  He thinks the depression was caused by bad monetary policy, and that if you just expanded the monetary base enough soon enough (even if you hadn't had anything to devalue against) the interlocking debt situation would have sorted itself out.  When he hears "devaluation" he just sees "increase in the money supply".  After all, in aggregate, debt doesn't even exist.  Unless he's badly blinkered ideologically (and it seems not), I doubt he believes it's that simple anymore. 

This analysis would be true if you could get the general price level to automatically rise by increasing the money supply (aka inflation) or if the whole works was the result of a sudden and irrational panic that triggered a debt-deleveraging cycle.  If it was just a panic you can prime the pump and ignore debt entirely, things will start again.  If not, you can always generate inflation and real debts would be written off in this case.  But there's a big difference between devaluaing and increasing the monetary base if nobody wants to make the loans that would put the base to work and spark inflation.  Without the possibility of devaluation, you will get a balance sheet recession.  This is what we're finally coming to understand.

Money is real and debt is real.  And now there's nothing to devalue it against.  The weaker Euro members are stuck with Germany, and the US is stuck with Europe and especially China.  None of the places that are deep in debt can spark a recovery by devaluing because they are pegged to the people they need to devalue against.  If you can't devalue, you get debt-deleveraging and the accompanying serious deflation.  Or you do what Japan did and the state borrows and spends to mitigate the deleveraging and keep the deflation mild.  But politically, the state can't borrow enough, so you get stagnation.  Devaluation is the only quick way, and it no longer exists. 

Who knew that going off the gold standard would actually make us less able to control the effective money supply when times got tough?

Thursday, February 11, 2010

I can't resist

Naked Capitalism comes up with this howler today.

I’m late to this, as everyone with an operating brain cell, starting with Simon Johnson to Paul Krugman is duly horrified by the remarks that Obama made in a Bloomberg interview, published this AM:

President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

Yves here. There are only two, not mutually exclusive, conclusions one can reach from reading this tripe: that Obama is a lackey of the financiers, and putting the best spin he can on their looting, or he is a fool.

Now, it's not that I disagree with the sentiment here.  There's no way that you can legitimately say that Dimon and Blankfein "earned" this money in the free market, unless of course you extend your definition of the free market to include market for rules in Washington (I will not bore you again with the resulting distinction between markets and capitalism). 

No, my reaction is just to point out that SJ, PK, and NC cannot be serious with all these gasps of horror.  Children.  Please.  When will you learn? 

There are not only two options here.  The third option is that OBAMA IS A POLITICIAN.  We didn't vote for change.  We voted for more of the same shit, this time in blackface.  So when we get exactly the same bullshit ritual kowtowing to the wonders of a "free" market that is to real, socially useful markets as the Sicilian mafia is to family ... well, we shouldn't be surprised.  Politically, this is what sells.  Witness the healthcare "debate".  Keep your grubby socialist paws off my corrupt mafia state.

Squeezing real change out of this guy is like asking for blood from a stone.  May I suggest a different approach.


Posted via email from The Capitalist Axiomatic

Wednesday, February 3, 2010

Free beer culture

My devoted fans will no doubt recall my obsession with the Google book settlement and my irritation with the endless carping about a fundamentally noble goal. Most every objection I have read to this agreement is based on poor reasoning, or is an obvious shill for the publishing industry, or is simply a byproduct of the everyone-hates-a-winner attitude that so many folks seem to have with successful businesses. But I have found a new objection that I think bears considering. It's actually a whole new type of objection, written by someone who, not surprisingly (given that he is a close personal hero of mine), was as skeptical of earlier critiques as I.

And with that intro, I give you the hardest-workin' man in law-biz, LL.

There is much to praise in this settlement. Lawsuits are expensive and uncertain. They take years to resolve. The deal Google struck guaranteed the public more free access to free content than "fair use" would have done. Twenty percent is better than snippets, and a system that channels money to authors is going to be liked much more than a system that does not. (Not to mention that the deal is elegant and clever in ways that a contracts professor can only envy.)

Yet a wide range of companies, and a band of good souls, have now joined together to attack the Google settlement. Some charge antitrust violations. Some fear that Google will collect information about who reads what--violating reader privacy. And some just love the chance to battle this decade's digital giant (including last decade's digital giant, Microsoft). The main thrust in almost all of these attacks, however, misses the real reason to be concerned about the future that this settlement will build. For the problem here is not just antitrust; it is not just privacy; it is not even the power that this (enormously burdensome) free library will give this already dominant Internet company. Indeed, the problem with the Google settlement is not the settlement. It is the environment for culture that the settlement will cement. For it practically guarantees that we will repeat the cultural-environmental errors of our past, by now turning books into documentary film.

It's interesting that in the background of this, you can really hear the influence of Michael Heller's Gridlock Economy, and I hope you're going to be hearing it a lot, because I believe his basic idea was pretty deep. Too many owners spoil the broth. If we cut culture up into tiny, isolated and unusable chunks, it will become, um ... unusable. Culture is unique commons that needs both incentives for expansion and protections for the shared access that constitutes its value. This is why it is both similar to and different from the tragic commons of land, and why it requires a property regime suited to it specifically. Thoughts are not turf.

I only know that the two extremes that are before us would, each of them, if operating alone, be awful for our culture. The one extreme, pushed by copyright abolitionists, that forces free access on every form of culture, would shrink the range and the diversity of culture. I am against abolitionism. And I see no reason to support the other extreme either--pushed by the content industry--that seeks to license every single use of culture, in whatever context. That extreme would radically shrink access to our past.

Instead we need an approach that recognizes the errors in both extremes, and that crafts the balance that any culture needs: incentives to support a diverse range of creativity, with an assurance that the creativity inspired remains for generations to access and understand. This may be too much to ask. The idea of balanced public policy in this area will strike many as oxymoronic. It is thus no wonder, perhaps, that the likes of Google sought progress not through better legislation, but through a clever kludge, enabled by genius technologists. But this is too important a matter to be left to private enterprises and private deals. Private deals and outdated law are what got us into this mess. Whether or not a sensible public policy is possible, it is urgently needed.

Lessig's objection has the ring of truth to me. Despite my barking defense of it, there is something disturbing in the Google settlement -- precisely the fact that it had to happen to begin with. If we had anything resembling a political system to deal with these questions I would certainly prefer that option. Google forcing the issue in this way is second best. Yet it is the only viable option we are left with.