Quotulatiousness

May 24, 2012

A Greek exit is an existential threat to the Euro

Filed under: Economics, Europe — Tags: , , , — Nicholas @ 09:55

John Kay explains why it’s not just a simple cut-and-run for Greece or the rest of the Euro:

When countries joined the single currency, a relatively simple piece of domestic legislation converted contracts in drachmas, pesetas, markkas and Deutschmarks into contracts in euros at a prescribed exchange rate. But you cannot simply reverse that process when countries leave the single currency. You have to prescribe which contracts are now to be fulfilled in drachmas and which remain in euros or converted into Deutschmarks. That determination is politically fraught, technically complex and subject to long legal challenges.

About two years ago some large businesses and wealthy individuals began seriously to ask, “if the euros were to unwind, in which currency would my asset or contract be denominated?” The issue is not whether the euro coins in your pocket carry an Athenian owl or German imperial eagle. The issue is the status of bank deposits and loans, residential mortgages and commercial contracts, as well as wages and prices. The drain of funds from Greek banks is an indication that ordinary people are now thinking in these terms.

Europe’s hapless politicians, having asserted that exit from the single currency was impossible, must now claim that exit would be relatively easy. Only then can they plausibly threaten the Greek electorate with expulsion if they vote the wrong way. But exit was never impossible, never easy and even when it was publicly unthinkable central banks would have been negligent not to have put in place contingency plans.

That is why even though Greece is a small part of the eurozone, a Greek exit is an existential threat to it. Once a path to exit has been defined, business and individuals will have a template for understanding the consequences of further unwinding.

May 8, 2012

Hayek and Keynes

Filed under: Economics, History, Media — Tags: , , , , — Nicholas @ 08:32

Brian Lee Crowley recounts some of the interactions between F.A. Hayek and John Maynard Keynes in the National Post:

This year marks the 20th anniversary of the death of Friedrich August Hayek, the Viennese-born Nobel Prize-winning economist and philosopher, who led the intellectual equivalent of the D-Day charge against central planning in the postwar era. His lessons are worth remembering in 2012, especially now that left-wing politicians in France, Greece and elsewhere seem intent on forgetting them.

Hayek’s great adversary was John Maynard Keynes, whose faith in the ability of government economic planners to “correct” the operation of markets inspired generations of disciples in government and academe. In the long run, Hayek got the better of the argument with Keynes. Indeed, his ideas contributed to the fall of the Berlin Wall, and continue to influence economic thought to this day.

Hayek and Keynes were punctilious professional colleagues and scholarly rivals. Yet for all the correctness that characterized their relations — Hayek was, for example, Keynes’s guest when the London School of Economics fled the Nazi bombings to the relative safety of Cambridge — the Austrian could not shake a profound distrust of Keynes.A brilliant economist, captivating teacher, witty conversationalist and bon vivant, Keynes seemed to almost everyone who knew him a Renaissance man and one of his country’s most powerful minds. Hayek found Keynes glib and superficial, but it was Keynes’ intellectual dilettantism that most appalled him. When Keynes wrote A Treatise on Money in 1930, Hayek spent a year carefully analyzing it, and then wrote a devastating review. At their next meeting, Hayek was outraged when Keynes airily said that he now agreed with Hayek, having long since changed his mind. Hayek always regretted that this incident led him to neglect replying to Keynes’ next book. By the time Hayek was alive to the danger, it was too late.

Celebrating the birthday of F. A. Hayek

Filed under: Economics, History, Humour, Media — Tags: , , , , — Nicholas @ 08:16

And the sequel, which some think is even better than the original, Fight of the Century:

May 2, 2012

Jim Flaherty on why the IMF should not go too far to rescue the Eurozone

Filed under: Cancon, Economics, Europe, Government — Tags: , , , — Nicholas @ 08:44

As I’ve mentioned before, Jim Flaherty is the federal finance minister and also my local MP. I don’t always agree with him (especially around budget time when he channels his inner spendthrift), but he makes some excellent points in this article at The Telegraph:

At the meeting of the International Monetary Fund recently, Canada decided against contributing more resources to support the eurozone. We also argued that all countries borrowing from the IMF should be treated equally. We took these positions because we believe they are in the best interests of the eurozone, of the IMF, and of the international community.

We have always supported the IMF’s important systemic role in promoting economic stability by providing loans to countries that have exhausted their domestic options, and placing these countries on a path to sustainability through time-limited interventions. But it is not the IMF’s role to substitute for national governments.

[. . .]

Ultimately, the adequacy of the actions taken will be judged by the markets. Repeated expressions of confidence by politicians are futile if the markets continue to cast their vote of non-confidence. The markets’ confidence in political leadership will only be restored when it is clear that politicians are willing to see the full scope of the problem, to focus on the key issues instead of pursuing sideshows such as the financial transactions tax, and to set out and implement a plan for tackling these issues.

[. . .]

We cannot avoid the question of fairness. Eurozone members benefit from increased exports and price stability. Spreading the risks of the eurozone around the world, while its benefits accrue primarily to its members, is not the way to resolve this crisis. We cannot expect non-European countries, whose citizens in many cases have a much lower standard of living, to save the eurozone. Further, the IMF, with roughly $400 billion, already has adequate resources to deal with imminent needs.

H/T to Elizabeth for sending me the link.

April 29, 2012

QotD: Bankers, Marx’s dream workers

Filed under: Economics, Humour, Quotations — Tags: , , — Nicholas @ 09:54

In a way bankers are Marx’s dream, it’s the workers getting the fruits of their labours. It’s funny that the left is usually angry at shareholders, for taking money out of companies and thereby bringing down workers’ salaries. Yet with the banks they want shareholders to press the banks to do exactly that, and curb pay.

Joris Luyendijk, “External auditor: ‘Nobody at a bank can have a complete overview any more’”, The Guardian, 2012-04-28

March 22, 2012

Reason.tv: Jim the Realtor

Filed under: Economics, Humour, USA — Tags: , , — Nicholas @ 08:01

“When I come into a house with buyers, I start picking it apart,” says San Diego’s Jim Klinge, known on the internet as ‘Jim the Realtor,’ a wise-cracking real estate agent who posts his honest, painful, and sometimes hilarious assessment of bank-owned properties on his Youtube channel: youtube.com/jimtherealtor.

While both the Bush and Obama administration have advocated programs aimed at keeping people in their homes, Klinge argues that this is the exact wrong approach and is only prolonging the agony in the housing market.

March 14, 2012

The culture of Goldman Sachs

Filed under: Economics, History, Humour, USA — Tags: , — Nicholas @ 11:31

Joshua M. Brown responds to the “why I’m leaving x” meme, specifically about Goldman Sachs variants:

The “culture” of Goldman Sachs was, is and always will be about making money, often at the expense of a client. Do you even know where the term “wirehouse” originally came from? Let me help you out with that. In the 1920′s, there was no CNBC or internet — there was only news delivered by wire and cable, stock market news and prices included. The “wirehouse” firms like Goldman would transmit stock and bond prices to their far-flung offices around the country from Wall Street where the action was taking place. It is a peculiar and yet telling fact of history that during the Crash of 1929, not a single major Wall Street brokerage firm went under. Wanna know why? Because when the sell-off began, they dumped all their holdings prior to wiring the news out to the rest of the investing public and their clientele across the country. Sound familiar, motherfucker? THAT is your firm’s culture, going back a hundred and fifty years.

Deal with it or leave and open an Etsy store.

February 28, 2012

Did Greece get bailed out or did it default? A little from column A and a bit from column B

Filed under: Economics, Europe, Government, Politics — Tags: , , , , — Nicholas @ 09:56

Detlev Schlichter explains what happened in the “big fat Greek bailout”:

Greece was bailed out for the second time in four months. Or did it default? Well, a bit of both, I guess.

All bondholders are equal. But some are more equal than others. If you are the ECB, your Greek bonds were exchanged, par for par, for new Greek bonds, and you can go on pretending that they are worth their principal amount. You won’t have to report a loss for now. But if you are a ‘private’ entity — and that is a rather loosely used term these days as it includes the banking industry which is either now partially owned by the state or to a considerable degree dependent on ongoing support from the lender-of-last resort — more than half your Greek investment was wiped out. So Greece defaulted. But as you ‘agreed’ to the ‘haircut’ it was in fact a ‘voluntary restructuring’, although you really had no choice.

[. . .]

I guess we shouldn’t lose sight of the fact that Greece’s economic model is fundamentally unsustainable, whichever way you cut it. Greece has been living beyond its means for a long time, and has managed to do so by flying under air-cover of the EMU project and with the tailwind of cheap credit and easy money. Spending by the Greek state accounts for more than half of registered economic activity, and a third of the workforce is employed by the public sector. ‘Activities’ are being subsumed under the heading of ‘Greek GDP’ that nobody would voluntarily pay for, that are to a large degree wasteful, and that are simply unaffordable under anything but the most bizarrely generous credit conditions, i.e. precisely those that Greece enjoyed from 2001 to 2008. Easy money has been used to paper over grave economic imbalances. Some of what is generously labelled ‘GDP’ should be discontinued — and fast.

To even suggest that such an economic model would be manageable if Greece, a country with about three quarters of the population of metropolitan Los Angeles but with less than half of L.A.’s GDP, only had its own paper currency and could inflate and devalue to its heart’s content, is economically illiterate. No country ever prospered by running budget deficits funded by the printing press or by creating domestic inflation. Devaluing your currency may give your exporters a shot in the arm — for about five minutes. But it scares your domestic savers away for years to come and severely diminishes your ability to keep or attract capital, the backbone of any sustainable economic model. To even try and attempt to ‘inflate away’ a debt load worth 160 percent of a generously calculated GDP would cause economic damage of gigantic proportion. One must have swallowed the Keynesian mythology of deficit-spending whole to believe that the country could borrow and print itself out of this mess. A proper default on its existing debt and rebuilding from a lower base — but with a hard currency — are the better options.

January 10, 2012

What a difference a decade makes

Filed under: Economics, History, USA — Tags: , , , — Nicholas @ 10:53

Megan McArdle reports from her business school’s ten-year reunion on the fates of her fellow MBA students:

It was my 10-year reunion at the University of Chicago Booth School of Business. Obviously I wanted to see if people had gotten fatter, balder, and wrinklier. (Surprisingly, not really.) But I also wanted to know what had become of us, and our careers.

Ten years ago, we graduated into a country where the Twin Towers were still standing, Webvan was a going concern, and the unemployment rate was 4.5 percent. Many of us headed to New York or other cities to become what Tom Wolfe, in The Bonfire of the Vanities, called “the Masters of the Universe” — the financiers who can earn lottery-size sums on a single deal. Others went to Silicon Valley start-ups, or became the consultants who worked with them. I couldn’t find anyone at the reunion who admitted to trading dodgy residential mortgage-backed securities, but we participated in all the other madness of two decades of financial froth—and got smashed in two crashes.

We weren’t the people who inflated the bubbles; we were the ones hired, and then fired, by those people. We were the ones who happened to be standing next to the guy who was pushing the buttons when everything went to hell.

[. . .]

I have a theory about what happened to us, and our nation: when too much money is piled together in one place, it starts to decay, and as it does, it emits some sort of unidentified chemical that short-circuits the parts of your brain controlling common sense. When my class matriculated in 1999, ads for a firm called Discover Brokerage featured a tow-truck driver whose passenger notices in the cab a picture of the home — an island — that the driver has purchased with his fabulous online-trading profits. The passenger looks taken aback while the driver muses, “Technically, it’s a country.”

What’s even more amazing than the fact that this ad was ever made is that this sort of triple-distilled balderdash could intoxicate a large group of very smart people at one of the nation’s top finance schools.

Oh, don’t get me wrong: none of us was simpleminded enough to take those ads literally. Oh, ho-ho, no, not us! No, we made only the most erudite and sophisticated sorts of mistakes, like gang-rushing banking internships, and telling ourselves we were “consumption smoothing” as we used student loans to finance vacations. Believe it or not, many of us talked frequently about the echoes of 1929 — but we still didn’t necessarily act on that insight, as the markets cratered in the early 2000s.

For my summer 2000 internship at Merrill Lynch, I chose the technology-banking group despite having watched the March 2000 NASDAQ crash from the lobby of Merrill’s auditorium, where we were supposed to be undergoing orientation. Ignoring the helpless, angry flapping of the HR staff, a bunch of us spent the afternoon telling nervous jokes and watching the eerie flicker that billions of dollars give off when they evaporate on live TV.

December 31, 2011

A billion here, a trillion there, pretty soon you’re talking about imaginary money

Filed under: Economics, Government, USA — Tags: , , — Nicholas @ 11:35

Mark Steyn on the crossing of the psychological Rubicon:

At the end of 2011, America, like much of the rest of the Western world, has dug deeper into a cocoon of denial. Tens of millions of Americans remain unaware that this nation is broke – broker than any nation has ever been. A few days before Christmas, we sailed across the psychological Rubicon and joined the club of nations whose government debt now exceeds their total GDP. It barely raised a murmur — and those who took the trouble to address the issue noted complacently that our 100 percent debt-to-GDP ratio is a mere two-thirds of Greece’s. That’s true, but at a certain point per capita comparisons are less relevant than the sheer hard dollar sums: Greece owes a few rinky-dink billions; America owes more money than anyone has ever owed anybody ever.

Public debt has increased by 67 percent over the past three years, and too many Americans refuse even to see it as a problem. For most of us, “$16.4 trillion” has no real meaning, any more than “$17.9 trillion” or “$28.3 trillion” or “$147.8 bazillion.” It doesn’t even have much meaning for the guys spending the dough: Look into the eyes of Barack Obama or Harry Reid or Barney Frank, and you realize that, even as they’re borrowing all this money, they have no serious intention of paying any of it back. That’s to say, there is no politically plausible scenario under which the 16.4 trillion is reduced to 13.7 trillion, and then 7.9 trillion and, eventually, 173 dollars and 48 cents. At the deepest levels within our governing structures, we are committed to living beyond our means on a scale no civilization has ever done.

December 23, 2011

Choosing the right historical figures to appear on Canadian banknotes

Filed under: Cancon, Media, Randomness — Tags: , , — Nicholas @ 12:36

Colby Cosh has some thoughts on who we should be celebrating by including their images on our currency:

Hilarity! Both of the metropolitan broadsheets in Alberta are throwing a tantrum about the Mint’s plans to dump the Famous Five feminists of the 1920s from the $50 bill and replace them with a picture of an icebreaker. Like most pundits who take a thwack at the occasional issue of personages and emblems on our currency, the authors of these editorials act like they have never been east of Flin Flon.

I ask you to sincerely disregard the epic loathsomeness of the Famous Five — that quintet of unsmiling prohibitionists, pacifists, and white supremacists, at least three of whom bear direct personal responsibility for a four-decade regime of sexual sterilization of the “unfit” in Alberta. Leave aside, too, the fact that women would obviously have been admitted to the Senate soon enough if there had never been a Persons Case. No, I ask you merely to look at the people other countries put on their paper currency. With the exception of Australia, which shares our fetish for early female politicians utterly unknown elsewhere, you’ll find they mostly like to put world-historical figures on there. Japan honours Noguchi, who discovered the syphilis spirochete. England honours Darwin and Adam Smith. Sweden remembers Linnaeus and Jenny Lind. New Zealand commemorates Edmund Hillary and Ernest Rutherford.

He invites the readership to provide their choices for banknotization. I thought the obvious suggestion was to include Geddy Lee, Alex Lifeson, and Neil Peart — our Holy Trinity — on the banknotes.

December 13, 2011

The Zero Sum Fallacy

Filed under: Economics, Humour — Tags: , , , — Nicholas @ 09:02

P.J. O’Rourke on the big economic issue that the Occupy folks always get wrong:

The “Occupy This, That and the Other Place” people are right about the sins of the financial system and right about the evil of government supporting and subsidizing this malfeasance. It’s not fair that 1 percent of Americans are rolling in dough while the rest of us are scrimping to pay for our Internet connection so we can go on Groupon.

But the Occupiers are wrong about something much more important. They believe in the Zero Sum Fallacy — the idea that there is a fixed amount of the good things in life. Anything I get, I’m taking from you. If I have too many slices of pizza, you have to eat the Dominos box. The Zero Sum Fallacy is a bad idea — dangerous to economics, politics, and world peace. It means any time we want good things we have to fight with each other to get them. We don’t. We can make more good things. We can make more pizza — or more tofu, windmills and solar panels, if you like.

The Zero Sum Fallacy is just that, a fallacy. Economic history since the Industrial Revolution proves — be the rich however stinking rich — we ordinary people can make more of the good things in life. But we have to make them ourselves, with our knowledge, skills and hard work. Government can’t give us good things. Government doesn’t make things, it just redistributes them. This brings us back to fighting with each other.

December 8, 2011

The Law of Misguided Subsidies

Filed under: Economics, Government, Media, Politics — Tags: , , , — Nicholas @ 09:44

T.J. Rogers explains the latest corollary to the well-known Law of Unintended Consequences (for examples of that law in operation, see your local, regional, or national government):

Wall Street understands how to make money, up-market or down. “Margin Call” may fuel Occupy movement ire, but in creating mortgage-backed securities, Wall Street did nothing other than facilitate home-financing access to the next tier of less-qualified home buyers, as demanded by every president since Bill Clinton. After that, the bankers did exactly what their shareholders wanted: bundle those risky loans into securities, sell them to lock in the profits, and dump the risk right back onto the federal government — where it belonged.

My purpose is not to debate the morality of mortgage-backed securities but to update the Law of Unintended Consequences with the corollary Law of Misguided Subsidies: Whenever Washington disrupts a market by dumping subsidies into it, Wall Street will find a way to pocket a majority of the money while the intended subsidy beneficiaries are harmed by the resulting market turmoil.

Rogers also explains why so many “special Limited Liability Corporations (LLCs)” are getting into the solar power business — not the manufacturing side, but the retail side. The profit margins are obscene. If the government hadn’t set up the market to work this way with their subsidies, the profit margins would be much lower.

December 1, 2011

Economists no longer bring out the “big guns”: now they reach for the “bazooka”

Filed under: Economics — Tags: , , — Nicholas @ 12:58

Terence Corcoran has lots of examples in his latest Financial Post column:

For months now Europe has been searching for the big bazooka of economic policy to get it out of its fiscal mess. Exactly when bazookas became a core principle of economic policy isn’t clear, but it is today everywhere in use. Google “euro and bazooka” and you’ll see what I mean.

In the high precincts of economic analysis, there is general agreement that Wednesday’s move by central banks, including the Bank of Canada, the Federal Reserve and the Bank of England, to make cheap dollar loans available to European banks, while a major bailout event, falls short of reaching the level of intervention required by the high priests of bazookanomics. “It’s not the bazooka the market was seeking,” said a Wall Street Journal report.

One of the early users of the word was Hank Paulson. As U.S. treasury secretary in 2008, he famously said, “If you have a bazooka in your pocket and people know it, you probably won’t have to use it.” At the time, his theory was that the U.S. government would not have to take over control of Fannie Mae and Freddie Mac because just having the power to take them over was good enough stop a bond market run on the two bankrupt mortgage backers at the heart of the U.S. housing crash.

November 29, 2011

Megan McArdle: Barney Frank will be missed

Filed under: Economics, Government, USA — Tags: , , — Nicholas @ 09:29

Yeah, read that title again. She’s not kidding at all:

Guess which Democrat now becomes the ranking member on the financial services committee? That’s right, none other than our favorite batty aunt, Maxine Waters. The woman who, during a major hearing with the cameras on her, asked the heads of Goldman Sachs and State Street bizarre questions about how they set the limits on their consumer credit cards*. She asked Ken Lewis, the head of Bank of America, a question about “offshore loss mitigation caps” (a term of which I — and also, clearly, Ken Lewis — had never heard) that was so bizarre — and garbled — that he was flummoxed into silence; he sat there squirming like a third grader being picked on by the teacher.

When he finally got the courage to ask what she meant, it became clear that Maxine Waters had no idea what she meant; I assume she’d either taken hasty and incomplete notes when her staffers briefed her about what to ask, or had flubbed reading the question, and couldn’t bring herself to admit on C-SPAN that she hadn’t really bothered preparing for the hearing to the extent, of, say, familiarizing herself with the institutions whose heads she was grilling, or actually bothering to understand the questions she was going to ask. It was kind of hilarious, until you realized that this was her job, and that she voted on critical financial regulatory questions.

Nor is this an isolated pattern; every time I see Maxine Waters at a hearing I know that the questions are going to be bizarre, and that Congresswoman Waters will make them even stranger with garbled readings and off-topic follow-ups.

* If I actually have to tell you this, these financial institutions do not really deal with consumers, much less their credit cards. I’m not picking on you — you have an excuse. You’re not a member of the financial services committee.

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