What is the economy FOR?

Thanksgiving is a peculiarly US-American holiday that, by stressing the
important bonds of family and friends, provides us a good opportunity
to reflect on the often-neglected question of what the economy that we
(nearly) all participate in is actually for.

The word “economy” itself gives us a strong hint. “Eco”– seen also in
the science of “ecology– comes from “oikos”, a hearth or home.
“Nomos,” seen also in astronomy, gastronomy, etc., has to do with an
attempt at discovering the underlying laws in the field mentioned. So
we could say that what economics is fundamentally about is the
discovery of what makes for a well-provisioned home, or a
well-provisioned community at any larger level of which the family home
can be seen as a microcosm…. And then, of course, the practice of
using that understanding to make the arrangements and provisions
necessary for the home or community to be accordingly well-run.

It has to do with community, and with wellbeing. More precisely, it has
to do with the material components of the wellbeing of the community in

Notice that two words I haven’t mentioned thus far are “profits” and
“stock market.”

I’ll grant the proponents of Reagan-era “trickle down economics” this
much: At least they made some attempt to explain how it was that the
hyper-wealth of the plutocratic few who were expected to profit from
the Regan-era tax cuts– and in fact, did– would in some way connect
with the wellbeing of the great mass of currently non-wealthy people.

But since the 1980s, the overwhelmingly dominant view in US public
discourse has been one that sees stock market profits as ipso facto
desirable and good, and that has very often not even bothered to make
any argument at all about the connection between stock market profits
and the wellbeing of the national community as a whole. Just recall the
way economic news is presented in the mainstream media: the prominence
given to shifts in share prices; and the gross disproprotion between
the coverage given those shifts and that given major developments in
the real, brick-and-mortar lives of real Americans like plant
closings, evictions, shifts in the national figures regarding hunger or
infant mortality, or the health-care crisis in general.

The word “economy” has another, related meaning, too. It has to do with
good stewardship
of the available resources– as in the terms, “economy of words” or
“economy of force”.  Folding in this meaning, too, we could
say that a well-run national economy would be one that delivers good
outcomes on the broad indicators of human wellbeing to all members of
the nation concerned, and that does so with as little waste as
possible. Here, as you can see, the idea of good stewardship also
connects with the broader “ecology” of the environment.  

Continue reading “What is the economy FOR?”

Use the Detroit bailout to transform US transit

The Democrats’ campaign to win a quick bailout of the US’s Big Three, Detroit-based automakers seems to have stalled. That’s a good thing, since the only kind of substantive conditionality they’ve been mentioning so far is that the car companies should retool more of their production lines to produce “hybrid” or “flex-fuel” private cars.
That is ways too incremental and tiny of a change! These companies should undergo a much deeper transformation– so that between them they can become a hub for innovation and production related to a new, nation-spanning network of high-speed trains and other visionary transit solutions.
Thinking that turning to a mildly re-engineered version of the privately owned automobile will provide any kind of a longterm solution to the country’s transportation woes is short-term thinking indeed. The nation that is economically and politically successful in 2050 will be one that has an efficient, multi-layered mass transit system that produces the minimal level of greenhouse gas emissions and offers a rich quality of life to all citizens.
There is no way that any version of privately owned automobiles can do that. The reliance that this country has long had on privately owned cars– and the concomitant degradation of its mass-transit structure over many decades– has resulted not only in unacceptably high levels of emissions of noxious chemicals and reliance on foreign oil, but also in massive economic inefficiencies and the active exclusion of all non-owners and non-drivers of cars from full economic and social inclusion. These latter costs are hard to quantify, but they are certainly substantial.
We need a strong and compelling vision of what a fully “inclusive” and efficient national transit system would look like– and we also need a huge amount of investment to be poured into realizing it. Exactly similar to what Pres. Eisenhower did with the “interstate highway system” back in the 1950s– but this time a vision based on mass transit, not on the private auto.
Luckily, much of the technology for a national high-speed train (HST) system already exists, since such systems have been well developed in both Japan and Western Europe.
Some people have argued that the US population is too widely dispersed to allow a national passenger rail system ever to become profitable. Perhaps that is so. But taxpayer subsidies of a state-of-the-art national HST system would be a very worthwhile investment, bringing dividends in many areas of national life… Including, if this system is linked to significantly upgraded transit systems in all major urban areas, a great improvement in the quality of life of all citizens, whether they currently own and rely on cars or not, and in the general parameters of their social, economic, and political inclusion.
Such a system would also, if well designed, do a lot to revive areas of the middle of the country that have become economically depressed due to the seemingly irresistible pull of investment and people to the two coasts.
Regarding the “quality of life” question, here are some quick vignettes from me:

    1. A couple of years ago, we invited an Indian friend who was doing a term as a visiting professor in Winchester, Virginia, to come eat Thanksgiving dinner with us in Charlottesville, some 100 miles away. Dr. Prasad had no car and does not drive. I blithely suggested he check out the long-distance bus options to get to us. Winchester is the county seat of Frederick County and has a population of 24,000. But it has no long-distance bus service to anywhere else! No wonder if Prasad was feeling a little isolated and trapped there. But how about the thousands of longterm local residents who also, for whatever reason (epilepsy, vision problems, other disabilities, low income), do not drive? How isolated must they feel?
    2. Just yesterday, I was able to get great long-distance bus service from New York to Washington DC. I sat on a comfortable bus, worked online for five hours using its wireless internet, and arrived near my apartment in Washington DC, feeling quite refreshed.
    3. In 2000, four members of our family paid a three-week visit to a family of Japanese friends who over the years have scattered themselves into various different cities around Japan. We traveled nearly wholly by train, using ‘bullet’ inter-city trains that connected handily with the very well-run (and bilingually signed) local train systems in all the cities we visited. One day, our Japanese friend Masaru, a big-league tech entrepreneur, was going to play golf: He went to the golf course by train having previously sent his clubs ahead of him via one of the many companies that provide just exactly this service…
    4. When my daughter and her partner (now spouse) were living in Detroit I went to visit and we decided to all go to Chicago for a short weekend break. I booked us tickets on the Amtrak inter-city service. The train was the usual run-down, out-dated rolling-stock that’s all that Amtrak can afford, and I recall it took the train seven or eight hours to trundle slowly along the 280 miles that separate the two cities…
    5. Over the past 18 months, I’ve been trying to live as car-free a life as possible. Having exchanged the car I previously owned for a scooter back in 2006, earlier this year I gave that away, too. Now I come and go between Washington DC and Charlottesville using either Amtrak, the Greyhound buses, or car-pooling with friends; and in each city I have a bike. I know I’m lucky because I have a few back-ups when I absolutely need one. Bill the spouse still has his car, mainly in C’ville, and I use that with some frequency instead of always biking or bussing round town there; and I’ve rented a car maybe four times over the past year for the inter-city travel, when the Greyhound/Amtrak schedules didn’t work well for me. But still, being car-free has been a real pleasure. No need to worry about and pay for all those things car-owners worry about! Connected to a vibrant urban lifestyle instead of sitting in traffic unable to work and getting frustrated!

All of which is to say that re-imagining (and then rebuilding) the US transportation system as one that is based overwhelmingly on a speedy, efficient, and inclusive mass transit system is a project that can bring tremendous quality-of-life gains to most Americans and need not be looked at in terms of the “loss” of the “personal freedom” that car-ownership allegedly brings.
Freedom??? Freedom to do what? To sit stewing in a traffic jam tied to the task of driving but umnable to get anywhere for a good portion of each day? To emit unequaled amounts of pollutants into the air that everyone around the whole world breathes? To live a life of privilege insulated by the automakers’ glass and chrome from the reality of the lives of others– including those others who are excluded from the car-ownership “dream'”
No, I prefer the freedom of sitting in a mass-transit vehicle being driven by a professional while I read, write, work on the internet, or (if I choose) chat to my fellow-citizens. And yes, there would still be private vehicle “back-ups” for this lifestyle. But they need not be privately owned: Taxis, car rental companies, paratransit systems for the differently abled, and car-share companies like Zipcar should all be part of what is planned for. And yes, these supplementary car-based systems should all use be using the most fuel-efficient and emissions-free technology available.
But if the collections of talented and hard-working engineers, production people, and planners who form the backbone of “Detroit” are to be bailed out massively by the US taxpayers at this time, then surely we should do that on the basis of a National Transit Plan for 2050 that is visionary, far-reaching, inspiring, and attainable– and that doesn’t keep Americans still hog-tied to the socially divisive shibboleth of the private automobile.

G-20: When ‘Seven’ just isn’t enough

Pres. G.W. Bush may, as two NYT reporters wrote today, have been the first to insist that this weekend’s economic summit in Washington should include the leaders of all the “Group of 20” nations, not just the “G-7” or “G-8” that France’s Pres. Sarkozy originally suggested. But regardless of its authorship, it was an excellent idea.
The G-7 comprises the US, four European nations, Canada, and Japan. The G-8 (which may or may not be moribund at this point, after the Ossetian war of last August) includes those seven plus Russia. The G-20 includes those eight plus: Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea, Turkey, and the EU.
Given the scale and the unequally distributed effects of the present crisis, including these additional heads of state in the current confab makes a lot of sense. The effects of the financial crisis have been the greatest on economies that had deregulated their financial systems and substantially opened them up to contagion by western-originated toxins before the onset of the crisis last year. As I noted here at the end of October, one analysis of the macroeconomic vulnerability of various “developing” nations to the effects of the crisis showed that Brazil, Russia, India, and China (aka the BRIC countries) all had relatively low vulnerability. That is just one reason why many analysts are now, quite correctly, saying that if the global economy as a whole is to be spared the worst effects of the current crisis, then this will have to be achieved through the leadership efforts of the non-G-7 countries.
The authors of today’s NYT article give some indications of the degree to which US supremacy of the world system has declined under Bush. They quote Adam S. Posen, described delphically as someone “who advises foreign governments on economic coordination” as saying of Bush:

    He’s going to be much more the host and much less the chairman than he realizes… He’s going to be providing the snacks and the venue and making sure everybody’s comfortable, but he is not going to be driving the agenda; that’s the reality. The agenda-setting is with Gordon Brown and Nicolas Sarkozy and Hu Jintao.

Actually, contra Posen, I’d say that it will be Hu and all his fellow leaders of the BRIC countries who will be driving the agenda along with Brown and perhaps Sarkozy. Both Britain and France have been badly affected by the financial crisis.
It was apparently also Bush who insisted that the G-20 meeting be held in Washington rather than New York, which was Sarko’s original suggestion.
That might not have been such a good idea.
I suppose Bush’s original aim was to try to demonstrate that Washington DC is the still the center of the universe, rather than Turtle Bay, NY, home of the nefarious (in his view) United Nations…
But I think the main effect of his decision will be to demonstrate to everyone concerned just how lame (or dead) of a duck he has become in his own national capital.
Doubtless all the foreign leaders flocking to DC will be most eager of all to connect with anyone who has the ear of the uber-charismatic president-elect, rather than paying much attention to GWB.
The O-man, for his part, is sitting pretty in Chicago, in furtherance of his quite appropriate insistence that the country only has one president at a time, and that the current mess the economy’s in still sits firmly on GWB’s doorstep, not his.
Obama is sending two unofficial “envoys” to the meeting, in the shape of Madeleine Albright and former GOP Congressman Rep. Jim Leach. The choice of those two throwbacks to the 1990s is pretty sad. Leach, in particular, was one of the named authors of the 1999 Gramm-Leach-Bliley Act– the legislation that abolished New Deal-era reforms of the federal banking system.
Oh well, they’re only “unofficial.” The Obama administration still hasn’t been officially born, remember.
Meanwhile, this weekend, watch for the degree to which the BRIC leaders– particularly Pres. Hu– start getting taken much more seriously as leading voices in global economic governance.

Gender and casino capitalism

I hate to get into reductionist pop psychology but it is very evident that the vast heaving masses of traders one sees in all the photos of trading exchanges, and the leading lights of economic (mis-)governance in the west overwhelmingly come from one race and one gender.
What is it about so many (white) guys and their addiction to risky behavior that encourages them to shrug aside regulation of their betting games (that is, our financial markets) whenever they can?*
It is interesting, therefore, to read this story about Brooksley Born, a now-retired woman in her late 60s, who as head of the US’s Commodities Futures Trading Commission (CFTC) back in 1998 sought to regulate private derivatives contracts, warning that left unregulated they could “pose grave dangers to our economy.”
Well, she lost that round to Alan Greenspan and Robert Rubin, who argued that the CFTC didn’t have jurisdiction and refused to let the institutions they headed (the Fed and the Treasury Department) do anything to help with the task.
The Bloomberg piece linked to above notes that Born had been one of the first women admitted to Stanford Law School back in the 1960s. The article’s two (male) writers also say:

    While described as smart, charming and analytical by friends and colleagues, Born was seen by some as stubborn and lacking political savvy.

Hey, why didn’t these anonymous sources just seek to additionally demean her by describing her as “shrill” or “witch-like” while they were about it?
More recently, of course, the white guys who are sitting atop of all these roiling and deeply toxic markets have come to the conclusion that, gee, yes certainly the derivatives markets need to be regulated if capitalism is to be saved…
And that includes Greenspan , who now acknowledges he was “partially” wrong to oppose such regulation back in the 1990s.
The authors include this quote from Joseph Dial, who served as a CFTC commissioner from 1991 to 1997:

    “Brooksley was a voice crying in the wilderness…There’s no question in my mind, the current financial debacle had its genesis some 10 years ago.”

Of the US’s top economic regulators/officials right now, FDIC head Sheila Baer is the only female. And of the 17 members of Obama’s Transition Economic Advisory Board, only four are female.
… On a related note, Willem Buiter wrote this interesting analysis of the members of Obama’s TEAB. His conclusions?

    * They’re old!
    * Too few serious economists!
    * Far too many lawyers!
    * They are protectionist!
    * They are the unalluring faces of past failures!

I think all these are valid criticisms, except for the one about protectionism. The comments Buiter makes under the last of those rubrics are particularly to-the-point. I tend to agree with his judgment that Paul Volcker may the best of this admittedly lack-luster bunch.
But I wish he had also noted the gender and ethnic/racial imbalances on the board.
And besides, one of those on the board is Larry Summers… who has still not performed anything like an adequate mea culpa for the demeaning comments he made about women’s intellectual capacities back when he was at Harvard.
Fwiw, my bottom line on the issue is that females have just the same amount of intellectual potential as males, but that women tend to have different life experiences and social environments which encourage many or most of us to look at issues in social life in ways different from (and in general, more holistic than) the often rigidly linear thinking style used by most men.
An understanding of human psychology is, of course, central to any understanding of economics, and especially the psychology of markets. If economic actors really were all rationally optimizing, strictly self-serving versions of “homo economicus”, as traditional western economists considered them to be, they would still be capable also of looking beyond their immediate, narrow self-interest and take into consideration the health of “the market”, or “the economy” in general.
Instead of which, far too many of the “pioneers” and other players within the largely unregulated casino capitalism that has arisen in the past 15 years have been looking only at their own position relative to that of claimed peers or competitors… “If Trader X down the hall just bought his third Lamborghini, why, I have to get one too”… And what they haven’t taken into account are the interests of society as a whole, or low-income or other non-“trader” people within it, or the health of the supporting economy as a whole. Most women, I would say, would think more holistically about these matters and these social responsibilities; and be far more wary about engaging in very risky trading behavior.
(I’m just reading Kindleberger and Aliber’s classic book “Manias, Panics, and Crashes.” It has some great material about the dysfunctionality of the psychology of many participants in the financial markets.)
* One final note here. Of course J.M. Keynes, J.K. Galbraith and many other humanistic and “holistic” analysts of economics were also white men. But it is the heaving masses of participants in commodities and derivatives markets I’m criticizing here, along with the older white guys who run the firms they work for, and the people–overwhelmingly white and male– who run the relevant government departments, congressional committees, etc that in the 1990s were, in effect, “bought off” not to regulate, or to actively deregulate, those markets.

An informed eye on today’s casino capitalism

The current, and still escalating, crisis of the western world’s “casino capitalism” caught vast numbers of people– including policy makers and most other members of the political elite– completely by surprise.
One of the main elements of this surprise has been that, though these people generally thought they understood the basics of how the present western economic system works, it turned out that the basement of the house of capitalism contained not the stable foundational pillars of an understandable and predictable financial system but a wild casino party made up of high-rolling risk-takers, many of whom seemed intent on sawing down the few remaining pillars that held up the house of the real, bricks-and-mortar economy.
Who knew?
Also, who really understood how all these alphabet-soup, jargon-y type things like “CDOs”, “CDSs”, and even “BISTROs” really worked?
It turned out that just a few people, on either side of the Atlantic, realized there was a problem in the financial basement, and understood something of its dimensions. Our own great Paul Krugman, for one… Nouriel Roubini… And I’ve just discovered the voice of another important individual, one who started “blowing the whistle” on the craziness of casino capitalism some years ago.
Meet Gillian Tett, columnist and capital markets editor at the Financial Times
I just heard her contribution to this panel discussion of how the western MSM covered (or failed to cover) the very risky derivatives markets during the years they were gathering steam.
She makes some good points there, many based on her earlier academic training as a social anthropologist. One excellent point– relevant to gaining understanding of many issues, in addition to complex financial markets– is that it’s important to listen for “social silence”, what people don’t want to talk about, as well as “social noise” (what they do want to.)
Tett recounts how, even within the FT, she was originally, some years ago, viewed as something of an eccentric for arguing that the derivatives markets were a topic that deserved real consideration and coverage, and how hard it was for her to persuade her bosses there to assign her to covering these markets full-time…
She also talks about how hard it has been for people to deal with the “psychological shock” of the current crisis and how, for many people generally proud of their grasp of political and economic affairs, it has been quite hard to realize that they don’t even really understand what it is that this whole miasma of financial derivatives with weird and tricky names is even really about. (My short answer to this is, in many cases, they’re “about” nothing real or tangible at all. Just like tulip bulb futures, back in the day… But the problem with this whole derivatives market is that it has been able to gnaw away at the financial pillars of the real, brick-and-mortar economy, precisely because the big, real banks who constitute those pillars have gotten so deeply involved in the whole derivatives-trading business… )
Back in May, Tett wrote an excellent description of the whole problem in this lengthy FT feature article. Deep down in it, when considering the possibilities for “reform” of the derivatives markets– i.e., some form of effective regulation of them– she writes:

    It is an open bet whether any of these ideas for reform will fly. After all, when [financial] products become simpler and more transparent, the margins typically fall. Bankers, in other words, have a strong motive to retain complexity and opacity

There you have a big part of the problem, in a nutshell. “Bankers”– or rather, those predatory, arrogant individuals who make up a sizeable portion of the population of today’s bankers– “have a strong motive to retain complexity and opacity.” Exactly. That is what the rest of us need to understand.
Look, if these sad testosterone-driven guys– and they are, overwhelmingly, guys– want to go into dank basements somewhere and set up complex games of poker in which they compete against each other, as far as the rest of us are concerned, good luck to them. (Though I must say I strongly approve of, and try to stick closely to, the traditional Quaker testimony against gambling… It is a pastime that, history has proven, can quickly become addictive and extremely destructive to individuals and their families.)
But if that’s all these guys were doing– playing poker, or gambling on this or that possible turn of events in the real world… then, good luck to them.
The problem came when banks that supply essential financial services to the real-world economy of businesses and households got drawn into the casino-players’ gambling and started placing their own assets majorly at risk.
Back in 1933, it was precisely that risk– or rather, the fact that the banks had already, previously put their assets at risk in such games and in many cases lost them through unwise gambles– that moved the US Congress to pass the Glass-Steagall Act, which erected a wall of separation between real-world banks and the far more risky financial trading operations.
Each kind of institution was them subjected to a different form of regulation. In the case of the financial trading houses, regulation was much looser– but they also did not have the central government back-up that the newly created FDIC provided to the regular banks.
Glass-Steagall was repealed in 1999, through the Gramm-Leach-Bliley Act, which was spearheaded by the dreadful Phil Gramm and signed into law by Bill Clinton.
As part of President-elect Obama’s policy response to the current, possibly even more far-reaching financial/economic crisis a new, perhaps even tighter version of Glass-Steagall urgently needs to be passed.
That would prevent the crazed, gambling-addicted boys in the basement from being able to continue gnawing away at the foundational financial pillars of the real-world economy. (And maybe most of those gambling-addicted boys should be sent into a form of rehab that would involve doing some real work in the real world.)
But here’s what all of us interested in policy affairs need to understand: As Gillian Tett said, “The bankers have a strong motive to retain complexity and opacity.” The rest of us certainly do not, because it was in the dank miasma of that opacity that the whole house of the western economic world almost came tumbling down.
In other words, the interests of many of the individuals who currently call themselves bankers are not in line with those of society as a whole, and indeed are directly antithetical to our interests. It is only those bankers who give credible, well-understood promises to provide real, direct help to the real-life economy of tangible goods and services who should receive any help at all from the taxpayers’ dime. And then, only under strictly controlled conditions.
The rest of those casino addicts? Prosecute them for all crimes they have committed and send them, where necessary, into rehab.

A Gandhian talisman for Barack Obama

President-elect Obama faces many daunting challenges. Without a doubt the most daunting will be the still-escalating unraveling of the western-dominated financial system.
By the way, yesterday I taped a segment for Press TV’s ‘American Dream’ program. It will air tonight at 7 p.m. EST. At the top of the discussion, we three panelists were asked what the biggest challenge will be for the new president once he’s inaugurated. I said, without a doubt the economy, since everything that’s happening in that realm is unprecedented and fraught with uncertainty as well as risk, whereas the previously existing challenges in the area of foreign policy look, by contrast, much better understood and more handleable.
This morning, I walked in DC past the great, slightly over-life-size statue of Mahatma Gandhi that stands outside the Indian Embassy, near Dupont Circle. In addition to his amazing role “imagining” then organizing tirelessly to bring about the independence of India, Gandhi has also always been an inspiration to liberation activists and social/community organizers around the world.
Including Dr. Martin Luther King, Jr., who is so often cited as a major precursor and path-clearer for Barack Obama.
So I hope that as he makes his plans to deal with all the challenges he will face once he’s in office, President-elect Obama will take to heart the following words, that are inscribed at the foot of Gandhi’s statue:

    “I will give you a talisman. Whenever you are in doubt, or when the self becomes too much with you, apply the following test. Recall the face of the poorest and the weakest man [woman] whom you may have seen, and ask yourself, if the step you contemplate is going to be of any use to him [her]. Will he [she] gain anything by it? Will it restore him [her] to a control over his [her] own life and destiny? In other words, will it lead to swaraj [freedom] for the hungry and spiritually starving millions?
    Then you will find your doubts and your self melt away.”

The Gandhian Institute in Nagpur, India, describes these words on its website as “One of the last notes left behind by Gandhi in 1948, expressing his deepest social thought.”
I would just add that, as far as I understand it, the Hindu concept of “swaraj” is not just a sort of anything-goes type of permissive freedom, but really is synonymous with the idea that everyone, even those who are most marginalized or excluded from social, economic, and political power, should in conjunction with her/his fellows start to gain real control over her/his own destiny. So it has to do with self-control and self-empowerment as much as gaining freedom from the constraints imposed by others.
It strikes me that “swaraj” (an Indo-European way of saying “soi-raj”, self-rule) is very close to what Barack Obama has worked for throughout his entire life, from his days as a community organizer until today. Also, he might well have a copy of “Gandhi’s Talisman” framed and hung over his desk in the Oval Office.
Wouldn’t it be great if, in one of his early acts as president, he could come down and lay a wreath at Gandhi’s statue in Washington DC??
However, I have to say that, until now, I don’t see much evidence that, in planning his responses to the financial crisis, Obama is taking into sufficient consideration the effects his actions and decisions will have on the poorest and weakest people in society. Of the “experts” he surrounded himself with during yesterday’s economics-focused press conference (the full roster is given here), I could identify only Robert Reich as someone who has shown he cares deeply about, and understands the needs of, the poorest and weakest in society. The others all seemed to me to be big bankers and people who understand their claimed “needs”, much more than people who understand that the word “economy” is in the end derived from the concept of “oikos”, that is, the maintaining of a steady and sustainable home for all of our country’s families.

Differential effects of the financial crisis

I’ve been arguing for a while now that the present crisis of the western world’s “casino capitalism” will have much less of a total impact on China, India, and other big economies that have not yet taken the (as we now see) extremely risky step of deregulating their financial systems and thereby allowing/encouraging the growth of highly leveraged and often quite non-transparent derivatives markets.
On Friday, the NYT had a fascinating graphic that seemed to illustrate this point excellently. (Sorry I can’t embed it right now. I’ve forgotten how to do the resizing that would be needed.) It’s a scatter-chart produced by the London-based investment bankers Dresdner Kleinwort, plotting various “emerging market” countries according to DK’s estimation of their “financial vulnerability”, along the x-axis, and their “macroeconomic vulnerability”, along the y-axis.
Anyway, even a cursory glance at the graphic shows that DK’s analysts judge that Brazil, China, India, and Russia all have low “macroeconomic vulnerability” to the crisis. Those judged to have a lot are Mexico, Czech Republic, Hungary, Estonia (at the very top of the chart), Latvia, and Iceland.
Regarding financial vulnerability, Russia and India have notably more than China or Brazil.
I wanted to find out more about the methodology the DK analysts used in composing this chart– and I hoped they also had one that gauged the MV and the FV of the world’s big developed markets, too.
Actually, DK itself has fallen prey to the financial vulnerability of both Germany and the UK, where it has significant operations. Back in early September it got taken over by Germany’s largest bank, Commerzbank, which immediately fired DK’s chief exec and announced that 1,000 more of its 2,000 London-based employees would soon also be facing the chop.
I noodled around DK’s website a bit more, looking for some more open-source research products. I found none at all. The press page still contained links to many slightly outdated, very self-congratulatory plaudits about how deeply DK had been involved in various sectors of the derivatives markets. The press page is headed by a fashionably cropped image of a tulip.
Tulip, huh? Prescient or what?
And regarding another item in the “rise of China” file, I see that in 2012 China is set to overtake the US in the number of patents filed annually.

Paulson’s outrageous bailout explained

Excellent Princeton economist Uwe Reinhardt explains Henry (‘Goldman alum’) Paulson’s current bailout plan in straightforward terms on Willem Buiter’s FT blog:

    While Paulson loathes the idea of giving U.S. taxpayers a genuine, voting equity stake in the banks taxpayers are forced to bail out… [he] sees nothing wrong with extending such voting privileges to foreign investors, including the sovereign wealth funds of Middle Eastern potentates or of Communist China. For example, Paulson most likely was cheered by news that Mitsubishi UFJ, Japan’s largest megabank, will receive a genuine equity stake of up to 20 per cent in Morgan Stanley for a cash injection of about $9 billion. On the other hand, for an injection into Morgan Stanley of $10 billion of their funds, U.S. taxpayers will receive merely non-voting, callable, preferred stock, which effectively tells U.S. taxpayers to sit at a separate table and to shut up, like good little children.
    What prompts the Secretary of the Treasury to treat American taxpayers so contemptuously, as second-class stakeholders? Why is it so much more abhorrent to him to have designated representatives of U.S. taxpayers sit at a bailed out bank’s board table than granting that privilege to, say, a Middle Eastern sheik or a Japanese banker?
    … If, after this deal, anyone still believes that our hyperkinetic Secretary of the Treasury works tirelessly for the American taxpayer, rather than for his former colleagues on Wall Street who helped push the nation to the current economic precipice, I would offer that true believer some choice ocean-front property in Iowa. As John Kanas, CEO of North Fork Bancorp was quoted on the bailout in The Wall Street Journal (October 15, 2008: A16): “It looks like a pretty good deal for the recipients and probably a pretty tough deal for taxpayers. It seems quite explicit that there’s no strings attached to this money. It seems like a gift.

Just two more quick notes from me.
First: Why is no-one in Congress raising any serious protest about the fact that, shortly before Paulson announced the most recent bailout to US banks only, Goldman Sachs applied for– and was rapidly granted– permission to convert itself from a brokerage house into a bank?
The NYT has a good round-up of the extensive influence of the network of Goldman ‘alums’ inside the Bush– and Clinton– administrations, here. And ‘lest we forget,’ the NYT’s reporting on Goldman’s record-shattering 2006 profits and bonuses, is here. Bonuses that year averaged $622,000– though highly inequitably distributed amongst the employees…
Second, a gender note… Ever wonder, as I have, why all the pictures of people working on financial or commodities trading floors, or those ‘rogues’ galleries’ of the top execs of financial corporations– or, indeed, of the US Treasury Department– show images of overwhelmingly male participants??
Shannon Rupp tells us that Harvard researchers have figured out that,

    Wall Street’s red-suspendered boys… can’t help themselves because they have more testosterone than average, which makes them take big risks to earn big prizes. That’s an advantage when chasing woolly mammoths with wooden spears, but it’s likely to cause problems in money management…

I guess I could have guessed as much.
So now, what will the present President and Congress– or the next President and Congress– do about all this??

Crisis updates: Bush, Buiter

Our “first MBA president” took to the airwaves again this morning to try to shore up the still-sagging confidence of Americans in the country’s financial system. Once again, his performance failed to reassure.
I wanted to hear still-President Bush say, credibly, things like the following:

    * I understand how much this crisis and the uncertainty it has engendered are hurting you (the citizens), and I am very sorry that this happened on my watch.
    * We shall be conducting very thorough investigations into the causes of the current crisis, in order to learn how to avoid a recurrence by enacting new ways to regulate our financial system, and to punish any whose illegal financial manipulations helped spur the crisis.
    * We all need to understand that, as a nation, we are in this crisis together. Its effects will most likely get worse before they get better. I promise that I will work with congress and the state authorities to make sure that, together, we can help the most vulnerable of our fellow-citizens to weather this storm.

He did not say those things. Toward the end, he did admit that, “This is an anxious time.” But he tripped hurriedly over the words as though he wasn’t happy saying them.
Also, he stated the cause and nature of the crisis in a decidedly incomplete and misleading way. Here’s what he said:

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US financial system: A huge casino

I’ve been trying to understand how these financial instruments called “Credit Default Swaps” (CDSs) got to be so big. Fortune magazine has a good article on them this week. It’s by Nicholas Varchaver and Katie Benner.
So here’s why they’re so big. A CDS is a private contract between two parties that looks and sometimes can act almost like an insurance contract. For example, if you buy a bond, you can also buy a CDS contract that gives you “insurance” in case the bond gets defaulted on. But here’s the twist. The reporters write,

    you don’t have to own a bond to buy a CDS on it– anyone can place a bet on whether a bond will fail. Indeed, the majority of CDS now consists of bets on other people’s debt.
    … So what started out as a vehicle for hedging ended up giving investors a cheap, easy way to wager on almost any event in the credit markets. In effect, credit default swaps became the world’s largest casino.
    … There is at least one key difference between casino gambling and CDS trading: Gambling has strict government regulation. The federal [US] government has long shied away from any oversight of CDS.

Also, regular insurance is regulated by the states. But CDS contracts have always been completely unregulated…

Continue reading “US financial system: A huge casino”