Tag: Wall Street

In praise of Yves Smith

Helping thousands better understand this crisis

Yves’ Blog Naked Capitalism has been mentioned many times on Learning from Dogs. Indeed, she was one of the Blog authors highlighted recently in this Post.

I fail to understand how she finds the hours in the day to write in such detail – but those of us interested in getting under the skin of our present economic situation are all the better for it. Here’s a great example that was published on the 23rd February. I quote the opening paragraphs and then link to the rest of her post. From here on is her piece:

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Martin Wolf, the Financial Times’ highly respected chief economics editor, weighs in with a pretty pessimistic piece tonight. This makes for a companion to Peter Boone and Simon Johnson’s Doomsday cycle post from yesterday.

Let us cut to the chase of Wolf’s argument:

Now, after the implosion, we witness the extraordinary rescue efforts. So what happens next? We can identify two alternatives: success and failure.

By “success”, I mean reignition of the credit engine in high-income deficit countries. So private sector spending surges anew, fiscal deficits shrink and the economy appears to being going back to normal, at last. By “failure” I mean that the deleveraging continues, private spending fails to pick up with any real vigour and fiscal deficits remain far bigger, for far longer, than almost anybody now dares to imagine. This would be post-bubble Japan on a far wider scale.

Yves here. Notice he associates success and failure with polar options. But how can you “reignite the credit engine” when the financial system is undercapitalized even before allowing for the need to take further writedowns? The IMF has found the converse in its study of 124 banking crises, that purging bad debt is a painful but necessary precursor to growth. So I fail to understand how Wolf envisages that “skip Go, collect $200″ of releveraging quickly comes about. And in fact, it turns out that Wolf’s “success” is a straw man:

[to read the rest click here, Ed]

By Paul Handover

Free speech!

Hats off to some intrepid commentators

We are going through unprecedented troubled times and the way ahead looks very uncertain. The whole world could be participating in the ‘lost decade’ that Japan experienced previously.

But this article is not about doom and gloom! It is about recognising the commitment to open and honest reporting being undertaken by (at least) these three individuals. Three commentators that this author follows in admiration and awe.

Learning from Dogs has nothing like the following of James Kwak, Yves Smith and Karl Denninger but the LfD authors do have an inkling of the work involved in writing not one but often several articles each day. It is a huge commitment.

First James Kwak of Baseline Scenario. Simon Johnson is, perhaps, the more well-known of this duo that comprise Baseline Scenario but it is James that puts in the leg-work. Here’s a taste of a recent article from James:

Radio Stories

I spend a lot of time in the car driving to and from school, so I end up listening to a lot of podcasts (mainly This American Life, Radio Lab, Fresh Air, and Planet Money). I was catching up recently and wanted to point out a few highlights.
Last week on Fresh Air, Terry Gross interviewed Scott Patterson, author of The Quants, and Ed Thorp, mathematician, inventor of blackjack card counting (or, at least, the first person to publish his methods), and, according to the book, also the inventor of the market-neutral hedge fund.

Large chunk snipped ……

I finally got around to listening to Planet Money’s interview with Russ Roberts from December. Russ Roberts and I are pretty sure to disagree on almost any actual policy question. But what I liked about his interview was that he basically admitted that policy questions cannot be settled by looking at the empirical studies. On whether the minimum wage increases or decreases employment for example, he says that he can poke holes in the studies whose conclusions he doesn’t agree with, but other people can poke holes in the studies he agrees with. In Roberts’s view, people’s policy positions are determined by their prior normative commitments.

I don’t completely agree. I don’t think that these questions, like the one about the minimum wage, are inherently unanswerable in the sense that the answer does not exist. But I agree that empirical studies are unlikely to get to the truth, particularly on a politically charged question, because there are so many ways to fudge an empirical study. As one of my professors said, there are a million ways you can screw up a study, and only one way to do it right. But I agree with the general sentiment. We are living in an age of numbers, where people think that statistics can answer any question. Statistics can answer any question, but they can answer it in multiple ways depending on who is sitting at the keyboard.

By James Kwak

Read about Yves Smith & Karl Denninger

We may need a new term for Fed “Profits”

It’s more than semantics to understand what we mean by The Fed’s profits.

The Federal Reserve, it has been reported, earned record “profits” of over $46 billion in the year ending December 31, 2009. The previous record profit was $34.6 billion in 2007. The Fed earned $31.7 billion in 2008. The financial crisis has apparently been very good for the Fed, although, as a non-profit entity, all its profits are turned over to the Treasury. As an aside, I wonder what the Treasury plans to do with its windfall?Reduce taxes? Hmmm.

Be careful, however. “Profits” are a bit of a misnomer for the Fed’s activities, because they pay for what they do by creating money out of thin air. To buy a financial instrument such a treasury bill or mortgage-backed security, which is added to the left-hand-side of their balance sheet as an asset valued at cost, they create (and I do mean “create,” in the true sense of the word) an equivalent amount of deposits on the right-hand-side of their balance sheet. It does not “cost” them resources as it would you, or me, or a business. The “expense” is deducts from revenues to arrive at this period’s profits consist mainly of employee salaries.

So if the Fed purchased a bunch of assets with reserves that they created, where do the “profits” come from? Keep in mind, there are two major drivers of profits. One is efficiency, or doing more with your resources. The second is pricing power, being able to charge an above-competitive price for a good or service either because you own something scarce or you make up the rules of the game.

First, two minor sources of income to the Fed are the interest and fees it charges for operating the financial system, such as check clearing and interbank electronic payments, and those it charged participants in the emergency loan programs it undertook to support credit cards and auto loans.

By far the largest source of revenue to the fed, however, came from its open market operations and the purchase of toxic assets. The Fed had about $1.8 trillion in U.S. government debt and mortgage-related securities on its books by the end of 2009, four times the level in 2008, and the interest payments it collected on this huge pile of assets generated much of their (so-called) profits. But interest payments are only one source of returns on financial assets. The other is “capital gains” or “price appreciation.” If and when the Fed sells these assets, some of them considered “toxic,” there is a real risk that they will incur significant capital losses. For example, the central bank recorded a $3.8 billion decline in the value of loans it made in bailing out Bear Stearns and AIG.

So the Fed’s profits are this period’s interest income minus the Fed’s minimal operating expenses; the capital base on which it earns income is basically “free.” And all of these figures focus on one-period accounting entries, ignoring the huge potential negative stock of value the Fed’s activities are generating.

Don’t misunderstand. The Fed provides an invaluable service to the national and world economies, and they generally execute those services very well. But when they begin to try to act like a business, replacing existing investment banking with their own activities, and parade around profit figures as if they meant the same thing as private industry profits, we must step back and take a moment to understand that Fed profits mean something entirely different from corporate profits.

By Sherry Jarrell

Establishing “cause and effect”

In this second of two posts on John Bougearel’s guest post at Naked Capitalism, Sherry Jarrell provides an economist’s response.

Response to “2010: Foreseeable and Unforeseeable Risks …”

In this wide-ranging and comprehensive piece, John Bougearel warns of the repercussions on the world economy of the steps taken to remedy the financial crisis. He warns of the impact of the Federal Reserve absorbing the toxic assets and shaky collateral on its balance sheet, and of the unsustainability of Social Security and Medicare in an aging demographic. On these basic facts, I agree.

One of the most difficult things for any writer to do when talking about economics and finance is to establish cause and effect. In trying to analyze past policy decisions and recommend future actions, however, it is absolutely imperative to distinguish cause and effect. In my view, Mr. Bougearel’s overview is either silent on this issue or implicitly assigns blame to the markets, when it belongs squarely on the doorstep of misguided government regulations. Continue reading “Establishing “cause and effect”” →

The Room For Policy Error is Enormous

In this first of two posts on John Bougearel’s guest post at Naked Capitalism, Paul Handover suggests that we read it and think about the implications.

A rather sobering reminder of the potential challenges for 2010

I am a subscriber to Naked Capitalism, thoroughly recommended by the way, and recently Yves published a guest post

by John Bougearel, author of Riding the Storm Out and Director of Financial and Equity Research for Structural Logic.

I wrote to both Yves and John asking for permission to reproduce the article in full but, so far, no replies have been received. Therefore the following are some important quotes from the article which I recommend you read in full by going to Naked Capitalism.

Read the rest of this Post

Paul Krugman’s Endless Ego

A small challenge to a Nobel prize winner in Economics!

In a recent New York Times op-ed, Paul Krugman continues his boundless quest to become the “it” guy in the world of economics. I have taken issue with his command of basic economic facts in the past — a gutsy, if not insane thing to do given the man was awarded a Nobel Prize in Economics.

krugman_award_photo — Krugman accepting the Nobel Prize

This post is more about ego than economics, however.

In this op-ed, Mr. Krugman says (and I kid you not),

…But after the debacle of the past two years, there’s broad agreement — I’m tempted to say, agreement on the part of almost everyone not on the financial industry’s payroll — with Mr. Turner’s assertion that a lot of what Wall Street and the City do is “socially useless.” And a transactions tax could generate substantial revenue, helping alleviate fears about government deficits. What’s not to like?

Well, I disagree with the idea that what Wall Street does is socially useless. And I am not on the financial industry’s payroll.

Nope, I’m just a simple economist, using my head, training, and experience to consider this idea, map out the pros and cons, and analyze the logical end-game of such a tax. I conclude that it is a really bad idea.

Why? There are lots of reasons, but I will mention only two.

One, raising taxes reduces private economic activity, which will curtail growth, reduce tax revenues and increase the deficit.
Two, taxes distort the price signal between suppliers and demanders of goods and services, including financial capital, reducing economic efficiency.

His reasons? Other than citing one academic study (while ignoring the many others that reach a different conclusion), he gives no economic reasons for his views. Instead, he make claims. He claims, for example, that “socially damaging behavior … caused our current crisis.” He says that the financial services industry is “bloated” and needs to be cut down to size. He says that the new tax is okay because it raises revenues for the government which, he claims, should make us all feel better about the deficit and, apparently, the size and nature of government spending under Obama. And, the lamest of all, for no other reason than to hide behind their skirt, he claims the existence of some phantom majority, apparently to create the impression that anyone with a different view is clearly in the minority. A tactic that should be beneath a Noble Prize winner, but one that runs through his work with increasing frequency over time.

But, Mr. Krugman, I so disagree with you. And even in an op-ed piece — perhaps especially in an op-ed piece – I believe that one needs to reign in an ego that would parade claims as facts, especially when each of those claims is disputed by your fellow economists, none of whom stooped so low as to imply that you were paid for your views.

By Sherry Jarrell

Beams of light in the darkness

These are very strange times: thank goodness for Blogs.

Learning from Dogs is a relatively young Blog (first Post was July 15th, 2009) but already it has opened the eyes of all the authors to the power of plain speaking. All of us involved in bringing you a dozen Posts a week find inspiration for our creative juices from the corners, far and wide, of the virtual world of digital communications, the World Wide Web.

Because we are in the midst of huge turmoil it’s very difficult to see the underlying trends of change at work. But see them we must if we are to be smart and work out, for the best, what needs to be done at the scale of the individual and the family.

So with that theme in mind, go to the Blog called Jesse’s Café Américain and read a recent Post about the behaviour of the price of gold. But also read beyond the subject of gold and reflect on the deeper message.

Here’s an extract from that Post:

Read the rest of this Post

Remarkable people: Warren Buffett

What does Bill Gates admire about Warren Buffet?

On this blog about integrity, and in these difficult economic times, it is particularly poignant to note that Bill Gates cites Warren Buffett’s integrity. This was during a recent event at Columbia Business School in New York City, see below.

While many of the questions from MBA students and the answers from Gates and Buffett are not new, Buffett’s brief witty and topical comments provide considerable insight into his thinking.

It is particularly interesting to get a sense of how the world is viewed by people with their perspective. When asked about the outlook for America, both Gates and Buffett answered that it is very good. Warren Buffett even offered any of the MBA students $100,000 in return for 10% of their future earnings. Later, he increased the offer to $150,000, if they received training in personal communication skills!

Watch them together on CNBC at Columbia Business School, New York City on November 12, 2009.

Maybe you are interested in further information about Warren Buffett, if so you are not alone. The BBC, among others, have taken a strong interest in him recently.

You might like to read and view some recent stories on the “Oracle of Omaha” including:

Despite a setback in 2008, Warren Buffett’s long term investment success is without question.

By John Lewis

Goldman Sachs – doing God’s work!

A fascinating and revealing interview in the Sunday Times.

This article in the British Sunday Times was published on November 8th and I’m sure many will have read it. But for those that didn’t it really is worth settling down to a reasonably long read. For you will learn that Goldman Sachs:

It’s the site of the best cash-making machine that global capitalism has ever produced, and, some say, a political force more powerful than governments. The people who work behind the brass-trim glass doors make more money than some countries do. They are the rainmakers’ rainmakers, the biggest swinging dicks in the financial jungle. Their assets total $1 trillion, their annual revenues run into the tens of billions, and their profits are in the billions, which they distribute liberally among themselves. Average pay this recessionary year for the 30,000 staff is expected to be a record $700,000. Top earners will get tens of millions, several hundred thousand times more than a cleaner at the firm. When they have finished getting “filthy rich by 40”, as the company saying goes, these alpha dogs don’t put their feet up. They parachute into some of the most senior political posts in the US and beyond, prompting accusations that they “rule the world”. Number 85 Broad Street is the home of Goldman Sachs.

The world’s most successful investment bank likes to hide behind the tidal wave of money that it generates and sends crashing over Manhattan, the City of London and most of the world’s other financial capitals. But now the dark knights of banking are being forced, blinking, into the cold light of day. The public, politicians and the press blame bankers’ reckless trading for the credit crunch and, as the most successful bank still standing, Goldman is their prime target. Here, politicians and commentators compete to denounce Goldman in ever more robust terms — “robber barons”, “economic vandals”, “vulture capitalists”. Vince Cable, the Lib Dem Treasury spokesman, contrasts the bank’s recent record results — profits of $3.2 billion in the last quarter alone — and its planned bumper bonus payments with what has happened to ordinary people’s jobs and incomes in 2009.

and later on in conversation with the Chairman and CEO, Lloyd Blankfein:

“Is it possible to have too much ambition? Is it possible to be too successful?” Blankfein shoots back. “I don’t want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation. As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I’d like them to continue to do what they are doing. I don’t want to put a cap on their ambition. It’s hard for me to argue for a cap on their compensation.”

So, it’s business as usual, then, regardless of whether it makes most people howl at the moon with rage? Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe will go on raking it in, getting richer than God? An impish grin spreads across Blankfein’s face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker “doing God’s work”

Indeed!

By Paul Handover

Reflecting on insider trading

Time to Reassess Insider Trading Rules?

On the face of it, prohibiting insider trading seems to be fair and reasonable.

US insider trading laws, refined over time in court on a case-by-case basis, define “trading on the basis of inside information” as any time a person trades while aware of material nonpublic information (US Securities and Exchange Commissions Rule 10b5-1, which also creates an affirmative defense for pre-planned trades.) SEC regulation FD (“Fair Disclosure”) also requires that if a company intentionally discloses material non-public information to one person, it must simultaneously disclose that information to the public at large; in an unintentional disclosure, the company must make a public disclosure “promptly.” Lastly, the Williams Act gives the SEC regulatory authority over insider trading in takeovers and tender offers.

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