naked capitalism

We’ve noted more than once that quite a few government statistics near and dear to analysts and investors, such as GDP, inflation, and employment growth, are pretty iffy.

So you don’t think we are unfairly singling out the government, some measures produced by the private sector are also questionable. A prime example is foreclosure statistics, which are of greater interest than usual, thanks to the soft housing market.

A story in the LA Times, “Getting a Fix on Forclosure Data,” tells us how the two most widely cited sources of foreclosure information, RealtyTrac and DataQuick, are almost certainly incorrect. RealtyTrac counts every step in the foreclosure process as a foreclosure, and is also charged with not correcting its data for multiple liens on the same property, resulting in figures that are almost certainly too high. Experts charge that DataQuick’s results are too low. And the differences are large. For the state of California, RealtyTrac reported 142,149 foreclosure filings in a February news release; DataQuick’s figure was 12,672.

But it is well nigh impossible to arrive at a correct answer due to problems of definition, as the article explains:

[F]oreclosure is really a process, one that can stretch over a year and vary from state to state.

It officially begins when the lender files a notice of default. This signals to investors that there’s trouble with the mortgage, and the beleaguered homeowner is often courted for a private sale. There’s also the possibility the owner can restructure the mortgage with his or her finance company.

If the borrower can’t negotiate a sale or refinance within three months or so, the house is scheduled for a public auction. Many of these homes wind up as the property of the lender. They are labeled REOs, short for “real estate owned.”

Deciding which of these moments constitutes “foreclosure” has become a matter of interpretation and dispute.

“No one can agree,” said Ryan Slack, chief executive of Propertyshark.com, a website that reported 2,453 foreclosure auctions in Los Angeles County in the first quarter.

That doesn’t mean that 2,453 families were forced out on the street, Slack cautioned. He estimated that more than half of the auctions were postponed or canceled.

Or does it? Once the foreclosure ball starts rolling, either the borrower somehow comes up with the money to get current, the property is sold (either by the owner or through the foreclosure process), or the debt is somehow renegotiated or refinanced. If a foreclosure is cancelled because the home was sold by the owner, they have lost their home. The difference between having it sold by the owner versus having it sold at a forced auction as stipulated in the mortgage is that the borrower’s credit record suffers less damage if he sells it himself (see here for a more technical description of the foreclosure process).

So technically, Slack is absolutely correct: no auction, no foreclosure. But the specter is that of people forced to decamp from their homes, and that can happen even in the absence of a foreclosure. From a policy standpoint, one would want to know both the number of foreclosures and sales due to defaults (one could never be 100% certain of the latter, and it would probably take a fair bit of spadework too).

The bottom line: whatever number you read about foreclosures, it is without a doubt wrong.

The Wall Street Journal reported on what appears to be a partial rebuttal by Wal-Mart of charges made by Julie Roehm, its deposed marketing executive.

A quick recap: Roehm was ousted last December. She sued for breach of contract and unfair dismissal. Wal-Mart counterclaimed, asserting that she had had an affair with a subordinate, taken gifts from suppliers in violation of company policy, and was seeking a job with an ad agency she hired. Roehm retorted, charging that other Wal-Mart execs had had affairs but were still employed, said that she had told vendors to bill the company for gifts, and that top management did not adhere strictly to its ethics policy. She focused on CEO Lee Scott, whose son has been employed by his close friend and Wal-Mart supplier Irwin Jacoba. Jacobs was also accused of selling Scott a large pink diamond and yachts at favorable prices.

The pink diamond may have been sighted. While it apparently wasn’t sold by a Jacobs entity, the transaction doesn’t pass the smell test. From the Wall Street Journal, “Wal-Mart Chief Bought Ring From Firm’s Vendor“:

Mr. Scott purchased the ring for his wife in April 2003 from The Aaron Group, a wholesale supplier of jewelry to Wal-Mart, said Robert Kempler, president of the New York-based company. Mr. Kempler declined to discuss the terms of the diamond sale other than to say Mr. Scott hadn’t received preferential pricing….

Mr. Kempler said he’d never heard of Mr. Jacobs, and he said everything about the transaction was “above board.” Mr. Jacobs called the allegations without any substance and has denied knowing anything about any diamond purchase by the Wal-Mart CEO….

Supplying a diamond ring for a chief executive’s wife would appear an unusual order for The Aaron Group, which on its Web site describes itself as a “maker of popular priced” jewelry. The company says its “target focus is the middle market consumer” with retail jewelry from $29.99 to $999. Among its retailing partners it says, are Wal-Mart and its Sam’s Club unit; JCPenney Co.; and Kohl’s Corp.

“Preferential” is in the eye of the beholder. How is one to judge a transaction that a company does that is well outside its ordinary line of business? I guarantee that if you or I called The Aaron Group a week before this story broke and asked them to find a large colored diamond, they’d laugh.

I happen to know people in “the trade,” as jewelry dealers in New York’s diamond district call themselves. If an ordinary retail person buys an ordinary diamond from a dealer, meaning a wholesaler, he is likely in this competitive day to charge only a “thin profit” of a 5% to 15% markup, provided he had an introduction and wasn’t high maintenance.. But if you were to buy that same diamond in a setting from a retailer, the markup on the stone would be at least two times, often three. And if it is a fancy stone (and colored diamonds are prized these days), it is much more likely to be found only at the tony retailers like Cartier, Van Cleef & Arpels, Harry Winston, or Tiffany, who most assuredly mark up three times.

Given that the stone was unusual, a dealer might have charged a higher markup even to a retail buyer who came in by referral. And if a custom setting was involved, he’d be even more likely to mark it up to a higher degree (fuss, going out to the right craftsman, etc.). And the dealers I know don’t cut breaks to wealthy people unless they have to (ie, they are clearly shopping and bargaining hard). So the facts argue that even a dealer would charge a reasonably full profit (close to two times) for this ring.

So I am just about certain that what Mr. Kempler is saying is completely misleading. First, the very fact that his company entered into this transaction is preferential treatment. As the Journal made clear, they aren’t in the business of selling fancy big diamonds. This was a special project, clearly an accommodation.

Second, since The Aaron Group doesn’t routinely sell this sort of ring, they could take the view that any price above their cost isn’t preferential. It’s even possible that they have done this before for friends of the company and actually have precedents.

But that still proves the point. This isn’t normal treatment, and there was value in this arrangement to Mr. Scott. Even if he paid a two times markup (unlikely), I guarantee you he didn’t pay three times. And consider the service he got: stones sent to him for his review, either shopping for an existing estate setting or designs for a new setting. This would have been a fair bit of work for the vendor to produce what was likely a Tiffany level product at a much lower than Tiffany price.

Scott is beginning to twist in the wind….

Earlier this month, the national science academies of the G8 plus those of China, India, Mexico, Brazil, South Africa, and India, issued a strongly worded joint statement about global warming and energy usage.

Let us stress that it is pretty much unheard of for this many independent science bodies to agree on such an unequivocal document. This is as official as it gets in the science community. Key statements:

Our present energy course is not sustainable

A goal of confining global warming to an average of 2 centigrade degrees above pre-industrial levels would be very challenging, and even this amount of warming would be likely to have some severe impacts

Responding to this demand while minimizing further climate change will need all the determination and ingenuity we can muster

The problem is not yet insoluble but becomes more difficult with each passing day

G8 countries bear a special responsibility for the current high level of energy consumption and the associated climate change. Newly industrialized countries will share this responsibility in the future

It is also noteworthy that the US joined, despite its government’s refusal to join Germany’s and the UK’s proposals at the upcoming GB meetings. Similarly, the Chinese also signed, despite its government’s obstructionist posture in the drafting of the latest IPCC report.

Yet, at least so far, this important document has gotten just about no coverage in the English language media. One has to wonder whether humanity has a collective death wish.

A few days ago, Chris Hayes’ article in The Nation, “Hip Heterodoxy,” set off a huge chatter among economics blogs raising the question of heterodoxy in the profession (which by all counts is very much in retreat).

The article below, “Life Among the Econ,” by Axel Leijonhufvud on the culture and ritual of the Econ, pointed out by Mark Thoma, is very long but quite amusing, particularly on the subject of “modls”:

The Econ tribe occupies a vast territory in the far North. Their land appears bleak and dismal to the outsider, and travelling through it makes for rough sledding; but the Econ, through a long period of adaptation, have learned to wrest a living of sorts from it. They are not without some genuine and sometimes even fierce attachment to their ancestral grounds, and their young are brought up to feel contempt for the softer living in the warmer lands of their neighbours. such as the Polscis and the Sociogs. Despite a common genetical heritage, relations with these tribes are strained-the distrust and contempt that the average Econ feels for these neighbours being heartily reciprocated by the latter-and social intercourse with them is inhibited by numerous taboos. The extreme clannishness, not to say xenophobia, of the Econ makes life among them difficult and perhaps even somewhat dangerous for the outsider. This probably accounts for the fact that the Econ have so far-not been systematically studied. Information about their social structure and ways of life is fragmentary and not well validated. More research on this interesting tribe is badly needed.

Caste and Status

The information that we do have indicates that, for such a primitive people, the social structure is quite complex. The two main dimensions of their social structure are those of caste and status. The basic division of the tribe is seemingly into castes; within each caste, one finds an elaborate network of status relationships.

An extremely interesting aspect of status among the Econ, if it can be verified, is that status relationships do not seem to form a simple hierarchical “pecking-order,” as one is used to expect. Thus, for example, one may find that A pecks B, B pecks C, and then C pecks A ! This nontransitivity of status may account for the continual strife among the Econ which makes their social life seem so singularly insufferable to the visitor.

Almost all of the travellers’ reports that we have comment on the Econ as a “quarrelsome race” who “talk ill of their fellow behind his back,” and so forth. Social cohesion is apparently maintained chiefly through shared distrust of outsiders. In societies with a transitive pecking-order, on the other hand, we find as a rule that an equilibrium develops in which little actual pecking ever takes place. The uncivilized anomaly that we find among the Econ poses a riddle the resolution of which must be given high priority in Econological research at this time.

What seems at first to be a further complication obstructing our understanding of the situation in the Econ tribe may, in the last analysis, contain the vital clue to this theoretical problem. Pecking between castes is traditionally not supposed to take place, but this rule is not without exceptions either. Members of high castes are not infrequently found to peck those of lower castes. While such behavior is regarded as in questionable taste, it carries no formal sanctions. A member of a low caste who attempts to peck someone in a higher caste runs more concrete risks-at the extreme, he may be ostracized and lose the privilege of being heard at the tribal midwinter councils.

In order to bring out the relevance of this observation. a few more things need to be said about caste and status in the tribe. The Econ word for caste is “field.” Caste is extremely important to the self-image and sense of identity of the Econ, and the adult male meeting a stranger will always introduce himself with the phrase “Such-and -such is my field.” The English root of this term is interesting because of the aversion that the Econ normally have to the use of plain English. The English words that have crept into their language are often used in senses that we would not recognize. Thus, in this case, the territorial connotation of “field” is entirely misleading for the castes do not live apart. The basic social unit is the village, or “dept.” The depts of the Econ always comprise members of several “fields.” In some cases, nearly every caste may be represented in a single dept.

A comparison of status relationships in the different “fields” shows a definite common pattern. The dominant feature, which makes status relations among the Econ of unique interest to the serious student, is the way that status is tied to the manufacture of certain types of implements, called “modls.” The status of the adult male is determined by his skill at making the “modl” of his “field.” The facts (a) that the Econ are highly status-motivated, (b) that status is only to be achieved by making ”modls,” and (c) that most of these “modls” seem to be of little or no practical use, probably accounts for the backwardness and abject cultural poverty of the tribe. Both the tight linkage between status in the tribe and modl-making and the trend toward making modls more for ceremonial than for practical purposes appear, moreover, to be fairly recent developments, something which has led many observers to express pessimism for the viability of the Econ culture.

Whatever may have been the case in earlier times. the “fields” of the Econ apparently do not now form a strong rank-ordering. This may be the clue to the problem of the non-transitivity of individual status. First, the ordering of two castes will sometimes be indeterminate. Thus, while the Micro assert their superiority over the Macro, so do the Macro theirs over the Micro, and third parties are found to have no very determined, or at least no unanimous, opinion on the matter. Thus the perceived prestige of one caste relative to another is a non-reflexive relation. In other instances, however, the ranking is quite clear. The priestly caste (the Math-Econ) for example, is a higher “field” than either Micro or Macro, while the Devlops just as definitely rank lower. Second, we know that these caste-rankings (where they can be made) are not permanent but may change over time. There is evidence, for example, that both the high rank assigned to the Math-Econ and the low rank of the Devlops are, historically speaking, rather recent phenomena. The rise of the Math- Econ seems to be associated with the previously noted trend among all the Econ towards more ornate, ceremonial modls, while the low rank of the Develops is due to the fact that this caste, in recent times, has not strictly enforced the taboos against association with the Polscis, Sociogs, and other tribes. Other Econ look upon this with considerable apprehension as endangering the moral fiber of the tribe and suspect the Develops even of relinquishing modl-making.

If the non-transitivity of Econ status seems at first anomalous, here at least we have a phenomenon with known parallels.[1] It may be that what we are observing among the Econ is simply the decay of a once orderly social structure that possessed a strong ranking of castes and, within each caste, a perfectly unambiguous transitive status ordering.

Grads, Adults, and Elders

The young Econ, or “grad,” is not admitted to adulthood until he has made a “modl” exhibiting a degree of workmanship acceptable to the elders of the “dept” in which he serves his apprenticeship. Adulthood is conferred in an intricate ceremony the particulars of which vary from village to village. In the more important villages, furthermore, (the practice in some outlying villages is unclear) the young adult must continue to demonstrate his ability at manufacturing these artifacts. If he fails to do so, he is turned out of the “dept” to perish in the wilderness. This practice may seem heartless, but the Econ regard it as a manhood rite sanctioned by tradition and defend it as vital to the strength and welfare of the dept. If life is hard on the young, the Econ show their compassion in the way that they take care of the elderly. Once elected an elder, the member need do nothing and will still be well taken care of.

Totems and Social Structure

While in origin the word “modl” is simply a term for a concrete implement, looking at it only in these terms will blind the student to key aspects of Econ social structure. “Modl” has evolved into an abstract concept which dominates the Econ’s perception of virtually all social relationships-whether these be relations to other tribes, to other castes, or status relations within his caste. Thus, in explaining to a stranger, for example, why he holds the Sociogs or the Polscis in such low regard, the Econ will say that “they do not make modls” and leave it at that.

The dominant role of “modl” is perhaps best illustrated by the (unfortunately very incomplete) accounts we have of relationships between the two largest of the Econ castes, the “Micro” and the “Macro.” Each caste has a basic modl of simple pattern and the modls made by individual members will be variations on the theme set by the basic modl of the caste. Again, one finds that the Econ define the social relationship, in this instance between two castes, in terms of the respective modl. Thus if a Micro-Econ is asked why the Micro do not intermarry with the Macro, he will answer: “They make a different modl,” or “They do not know the Micro modl.” (In this, moreover, he would be perfectly correct, but then neither, of course, would he know the Macro modl.)

Several observers have commented on the seeming impossibility of eliciting from the member of a “field” a coherent and intelligible account of what distinguishes his caste from another caste which does not, in the final analysis, reduce to the mere assertion that the modls are different. Although more research on this question is certainly needed, this would seem to lend considerable support to those who refer to the basic modl as the totem of the caste. It should be noted that the difficulty of settling this controversial question does not arise from any taboo against discussing caste with strangers. Far from being reticent, the Econ will as a rule be quite voluble on the subject. The problem is that what they have to say consists almost entirely of expressions of caste-prejudices of the most elemental sort.[2]

To the untrained eye, the totems of major castes will often look well-nigh identical. It is the great social significance attached to these minor differences by the Econ themselves that have made Econography (the study of Econ arts and handicrafts) the central field of modern Econology. As an illustration, consider the totems of the Micro and the Macro. Both could be roughly described as formed by two carved sticks joined together in the middle somewhat in the form of a pair of scissors (cf. Figure 1).

Certain ceremonies connected with these totems are of great interest to us because of the indications that they give about the origin of modlmaking among the Econ. Unfortunately, we have only fragmentary accounts by various travellers of these ceremonies and the interpretations of what they have seen that these untrained observers essay are often in conflict. Here, a systematic study is very much needed. The following sketchy account of the “prospecting”-ceremony among the Macro brings out several of the riddles that currently perplex Econologists working in this area:

The elder grasps the LM with his left hand and the IS with his right and, holding the totem out in front of himself with elbows slightly bent, proceeds in a straight line-‘gazing neither left nor right’ in the words of their ritual[3]-out over the chosen terrain. The grads of the village skip gaily around him at first, falling silent as the trek grows longer and more wearisome. On this occasion, it was long indeed and the terrain difficult . . . the grads were strung out in a long, morose and bedraggled chain behind their leader who, sweat pearling his brow, face cast in grim determination, stumbled onward over the obstacles in his path.. . At long last, the totem vibrates, then oscillates more and more; finally, it points, quivering, straight down. The elder waits for the grads to gather round and then pronounces, with great solemnity: “Behold, the Truth and Power of the Macro.”

It is surely evident from an account such as this why such a major controversy has sprung up around the main thesis of the ‘Implementarist’ School. This influential Econographic School argues that the art of modlcarving has its historical origin in the making of tools and useful “implements,” and that ceremonies such as the one described above reflect, in ritual form, the actual uses to which these implements were at one time put.

Fanciful as the ‘Implementarist’ hypothesis may seem, it would be injudicious to dismiss it out of hand. Whether the Macro-modl can be regarded as originally a “useful implement” would seem to hinge in the first place on whether the type of “prospecting” ritualized in the described ceremony produces actual results. The Macro themselves maintain that they strike gold this way. Some travellers and investigators support the contention, others dismiss it as mere folklore. The issues are much the same as those connected with attempts to appraise the divining-rod method of finding water. Numerous people argue that it works-but no scientific explanation of why it would has ever been advanced.

We do have some, apparently reliable, eyewitness’ reports of gold actually being struck by the Macro. While not disputing the veracity of all such reports, skeptical critics argue that they must be heavily discounted. It is said, for example, that the Econ word for “gold” refers to any yellowish mineral however worthless. Some Econologists maintain, moreover, that the prospecting ceremony is seldom, if ever, conducted over unknown ground and that what the eyewitnesses have reported, therefore, is only the “discovery” of veins that have been known to the Macro for generations.

One might ask how the practice manages to survive if there is nothing to it. The answer is simple and will not be unexpected to those acquainted with earlier studies of the belief-systems of primitive peoples. Instances are known when the ceremony has not produced any concrete results. When this happens, the Macro will take either of two positions. Either he will accuse the member performing the ceremony of having failed to follow ritual in some detail or other, or else defend the man’s claim that the gold is there by arguing that the digging for it has not gone deep enough.[4]

It is clear enough that, whichever position is taken, the “phenomena are saved” in the sense that the role of the totem in the belief-system of the caste remains unassailed.

Myths and Modls

In recent years, interest in controversies about whether certain Econ modls “work” or not (or in what sense they may be said to “work”) has dwindled. This is certainly not because the issue has been settled-it is fair to say that we are today less certain than ever of what the answers to the questions raised by the Implementarists would be. It is rather that our methodological perspective has changed so that the Implementarist issue is no longer seen as productive of “good” questions. The “New Econology.” as it is known, stresses Versteheiz and, correspondingly, rejects attempts to appraise Econ belief-systems according to rationalistic criteria purloined from modern natural sciences.[5]

It has become increasingly clear that the Econ associate certain, to them significant, beliefs with every modl, whether or not they also claim that modl to be a “useful tool.” That taking “usefulness” as the point of departure in seeking to understand the totemic culture of this people leads us into a blind alley is particularly clear when we consider the Math-Econ caste.

The Math-Econ are in many ways the most fascinating, and certainly the most colorful, of Econ castes. There is today considerable uncertainty whether the “priest” label is really appropriate for this caste, but it is at least easy to understand why the early travellers came to regard them in this way. In addition to the deeply respectful attitude evidenced by the average Econ towards them, the Math-Econ themselves show many cultural patterns that we are wont to associate with religious orders or sects among other peoples. Thus they affect a poverty that is abject even by Econ standards, and it seems clear that this is by choice rather than necessity. It is told that, to harden themselves, they periodically venture stark naked out into the chill winds of abstraction that prevail in those parts, Among the rest of the Econ, who ordinarily perambulate thickly bundled in wooly clothing, they are much admired for this practice. Furthermore. glossolalia-the ability to say the same thing in several different tongues[6] -is a highly esteemed talent among them.

The Math-Econ make exquisite modls finely carved from bones of walras. Specimens made by their best masters[7] are judged unequalled in both workmanship and raw material by a unanimous Econographic opinion. If some of these are “useful”-and even Econ testimony is divided on this point-it is clear that this is purely coincidental in the motivation for their manufacture.

There has been a great deal of debate in recent years over whether certain Econ modls and the associated belief-systems are best to be regarded as religious, folklore and mythology, philosophical and “scientific,” or as sports and games. Each category has its vocal proponents among Econologists of repute but very little headway has been made in the debate. The ceremonial use of modls (see above) and the richness of the general Econ culture in rituals has long been taken as evidence for the religious interpretation. But, as one commentator puts it, “If these beliefs are religious, it is a religion seemingly without faith.” This interpretation seems to have stranded on this contradiction in terms and presently is not much in favor. More interesting are the arguments of those who have come to view certain Econ belief-systems as a form of quasi-scientific cosmological speculation. As an illustration, Mrs. Robinson’s description of what she terms the “Doctrine of K,” which is found prevalent among the members of the powerful Charles River villages. inevitably brings to mind the debates of the ancient Ionian philosophers over whether water, air, or fire was the “basic stuff” of the universe. The Doctrine of K bears, in fact, striking resemblances to the teachings of Anaximander.[8] It is known, moreover, that in some other depts a “Doctrine of M” is taught but we do not as yet have an understandable account of it and know, in fact, little about it except that it is spurned (as heresy?) by the Charles River Econ. Spokesmen for the cosmology view buttress their arguments by pointing out the similarities between the Math-Econ and the Pythagorean brotherhood. Whether the Math-Econ know it or not, they point out, they do obey the ancient Pythagorean principle that “philosophy must be pursued in such a way that its inner secrets are reserved for learned men, trained in Math.”

The sports and games interpretation has gained a certain currency due to accounts of the modl-ceremonies of the Intern caste.[9] But even here it is found that, though the ceremony has all the outward manifestations of a game, it has to the participants something of the character of a morality play which in essential respects shapes their basic perception of the world.

The Econ and the Future

It would be to fail in one’s responsibility to the Econ people to end this brief sketch of life in their society without a few words about their future. The prospect for the Econ is bleak. Their social structure and culture should be studied now before it is gone forever. Even a superficial account of their immediate and most pressing problems reads like a veritable catalogue of the woes of primitive peoples in the present day and age.

They are poor-except for a tiny minority, miserably poor. Their population growth rate is among the highest in the world. Their land is fairly rich, but much of the natural resources that are their birth-right has been sold off to foreign interests for little more than a mess of pottage. Many of their young are turning to pot and message. In their poverty, they are not even saved from the problems of richer nations-travellers tell of villages half-buried in the refuse of unchecked modl-making and of the eye-sores left on the once pastoral landscape by the random strip-mining of the O’Metrs. It is said that even their famous Well Springs of Inspiration are now polluted.

In the midst of their troubles, the Econ remain as of old a proud and warlike race. But they seem entirely incapable of “creative response” to their problems. It is plain to see what is in store for them if they do not receive outside aid.

One may feel some optimism that the poverty problems can be solved. While population growth may slow down in time, one can have little hope that the ongoing disintegration of Econ culture will be halted or could be reversed. Here the sad and familiar story of a primitive people’s encounter with “modern times” is repeating itself once again. The list of symptoms is long and we will touch only on a few.

Econ political organization is weakening. The basic political unit remains the dept and the political power in the dept is lodged in the council of elders. The foundations of this power of the elders has been eroding for some time, however. Respect for one’s elders is no more the fashion among the young Econ than among young people anywhere else. Authority based on age and experience has weakened as recognized status has come increasingly to be tied to cleverness in modl-making. (As noted before, many elders will be inactive as modl-makers.) Although dept establishments have responded to these developments by cooptation of often very young modl-makers as “elders,” the legitimacy of the political structure in the eyes of the Econ people is obviously threatened-and the chances of a constructive political response to the tribe’s problems correspondingly lessened.

The Econ adult used to regard himself as a life-long member of his dept. This is no longer true-migration between depts is nowadays exceedingly common and not even elders of a village necessarily regard themselves as permanent members. While this mobility may help them to cope with the poverty problem, it obviously tends further to weaken political organization. Urbanization should be noted as a related problem-many villages are today three or four times as large as only a generation or two ago. Big conurbations, with large transient populations, and weak and ineffective political machinery-we are all familiar with the social ills that this combination breeds.

Under circumstances such as these, we expect alienation, disorientation, and a general loss of spiritual values. And this is what we find. A typical phenomenon indicative of the break-up of a culture is the loss of a sense of history and growing disrespect for tradition. Contrary to the normal case in primitive societies, the Econ priesthood does not maintain and teach the history of the tribe. In some Econ villages, one can still find the occasional elder who takes care of the modls made by some long-gone hero of the tribe and is eager to tell the legends associated with each. But few of the adults or grads, noting what they regard as the crude workmanship of these dusty old relics, care to listen to such rambling fairytales. Among the younger generations, it is now rare to find an individual with any conception of the history of the Econ. Having lost their past, the Econ are without confidence in the present and without purpose and direction for the future.

Some Econographers disagree with the bleak picture of cultural disintegration just given, pointing to the present as the greatest age of Econ Art. It is true that virtually all Econographers agree that present modlmaking has reached aesthetic heights not heretofore attained. But it is doubtful that this gives cause for much optimism. It is not unusual to find some particular art form flowering in the midst of the decay of a culture. It may be that such decay of society induces this kind of cultural “displacement activity” among talented members who despair of coping with the decline of their civilization. The present burst of sophisticated modl-carving among the Econ should probably be regarded in this light.

*Editor’s Note: Since many of our younger readers are, with the idealism so characteristic of contemporary youth, planning to launch themselves on a career of good deeds by going to live and work among the Econ, the editor felt that it would be desirable to invite an Econologist of some experience to write an account of this little known tribe. Diligent inquiry eventually turned up the author of the present paper. Dr. Leijonhufvud was deemed an almost perfect candidate for the assignment, for he was exiled nearly a decade ago to one of the outlying Econ villages (UCLA) and since then has not only been continuously resident there but has even managed to get himself named zin elder (under what pretenses-other than the growth of a grey beard-the editor has been unable to determine).

1. Cf., e.g., the observations concerning the Indian jajmani-system in Manning Nash, Primitive arid Peasant Economic Systems, Scranton, Pa., 1966, pp. 93ff. esp. p. 94: “For example, goldsmiths give polluting services to potters, and the potters receive pollution from herders, who in turn give polluting services to goldsmiths. In this exchange of ritually crucial interaction the goldsmiths see themselves above the potters and below the herders, but the herders are below the potters, yet above the goldsmith caste.” Precisely. [Return]

2. This observation is far from new. One finds it recorded, for example, in MacNuyp’s Voyages in the account of “The Voyage of H.M.S. Semantick to the Coast of Econland.” [Return]

3. The same wording appears in the corresponding Micro-ritual. It is reported that the Macro belittle the prospecting of the Micro among themselves saying that the Micro “can’t keep from gazing right.” The Micro, on their side, claim the Macro “gaze left.” No one has offered a sensible hypothesis to account for this particular piece of liturgical controversy. Chances are that farfetched explanations are out of place and that this should simply be accepted as just another humdrum example of the continual bickering among the Econ. [Return]

4. The latter rationalization is the more palatable since it puts the blame on a different caste, namely the O’Maitres or O’Metrs (transcriptions vary) who do the digging work of both the Macro and the Micro. [Return]

The “diggers” caste is of special interest to those concerned with the underdevelopment of the Econ. Traditionally the lowest Econ caste, the O’Metrs, were allowed to perform only the dirtiest manual tasks and-more significant in Econ eyes-lacked a totem of their own. In more recent times, however, it is through this caste that industrialization has begun to make some inroads among the Econ. Free from the prejudices instilled through an education concentrating on modlcarving and the associated totemic beliefs, the O’Metrs take willingly to modern machinery and have become quite proficient for example, at handling power shovels and power mills. The attitude of the rest of the tribe towards these erstwhile untouchables taking the lead in industrialization is, as one would expect, one of mingled scorn and envy.

5. C. Levi-Strauss, The Savage Mind should be mentioned here as essential reading for anyone with a serious interest in the belief-systems of the Econ. [Return]

6. I.e., in several Math tongues-the Indo-European languages, for example, do not count. [Return]

7. The budding collector of Econographica should know that most of the work found on the market today is imitative and done by apprentices. Much of it is nonetheless aesthetically superior to, say, the crudely carved totems of the Macro and certainly to the outsized, machine-made modls nowadays exported by the O’Metrs who have no artistic tradition to fall back on. [Return]

8. Arthur Koestler, The Sleepwalkers, New York 1968, pp. 22-23, aptly summarizes Anaximander’s teachings: “The raw material (of the universe) is none of the familiar forms of matter, but a substance without definite properties except for being indestructible and everlasting. Out of this stuff all things are developed, and into it they return; before this our world, infinite multitudes of other universes have already existed, and been dissolved again into the amorphous mass.” If one were to dignify this primitive doctrine with modern terminology, one would have to put Anaximander in the “putty-putty, bang-bang” category. [Return]

9. One observer casts his account of this ceremony explicitly in parlour-game terms: “Each player gets 2 countries, 2 goods, 2 factors, and a so-called Bowley Box …,” etc., etc., and also compares the Intern game, in terms of intellectual difficulty, with checkers. [Return]

Since our immediately preceding post reminded readers of the not-so-great quality of many government statistics, what measures can the public use to gauge the health of the economy?

John Dizard, in a Financial Times article, “Useful thinking from inside the box,” reminds us of a metric that was once used by some savvy investors (the sort who would be interviewed at a Barron’s Roundtable) as a reasonable proxy for overall growth trends: cardboard box demand. And the cardboard box indicator is sending warning signals:

Before Alan Greenspan was known for making scary speeches, market people knew he spent a lot of time looking at the market for cardboard boxes. Most things you use are put in a cardboard box at some point, and box use, production, inventories, and pricing are, therefore, useful indicators. Boxes, in this context, are specific to the North American market, as distinct from pulp and newsprint, which are global markets. What is the box world telling us?

According to my Houston [forest products] traders, not encouraging things. The conventional line from the Fed and the economy bulls is that the US housing market may be weak, but beginning to stabilise, and that the rest of the economy is continuing strong. The overall recovery in growth the Fed expects later this year would make a rate cut inadvisable.

However, the box story is not quite so bullish. As my trader says: “Box demand has been weak for the last five months or so. In April, supposedly you saw an uptick on a year-on-year basis, but on an average weekly basis it was still in decline. There was one extra shipping day in April 2007 compared with April 2006, and if you take that out, box shipments actually declined this April.

“Also, when we talk to people in the field about what is going on now, they say that they are not seeing any great increase in demand, and that there is no way that the producers will be able to get the increase in the containerboard price they are trying to impose.”

Still, the market for boxes, and the containerboard that is used to make them, is pretty finely balanced. Hesitant producers and consumers are keeping low inventories, which helps to prop up prices. And there is a trend to “consolidation” in the containerboard industry, which means that a smaller number of producers may, in the future, be able to use market power to keep up prices even in a weak environment.

“One trade we’re looking at is buying the back months in containerboard. It’s so backwardated that you could see a fall of $40 a tonne in prices [a typical decline in a recession], and your forward purchase would still not liquidate negative [be unprofitable].”

So is that our future: stagnant to falling real demand, but sticky, cartel-like prices and opportunities for a few traders of inefficient markets?
Sounds a lot like the 1970s. Not like what we’re seeing discounted in the equity markets.

Barry Ritholtz via Seeking Alpha gives yet another example of a disheartening trend, namely, that government-issued statistics that investors, economists, and businesses for analytical and planning purposes are increasingly dubious.

The case in point is the employment statistics. While the widely cited Bureau of Labor Statistics monthly employment report has showed tepid to reasonable employment growth, a more accurate count, Business Employment Dynamics, which comes out on a delayed basis, shows substantially lower job growth. For example, third quarter 2006 according to the employment report showed an addition of 442,000 jobs, while the BED found gains of 19,000. And the big culprit seems to be a “voodoo calculation, the “birth/death model” a plug to allow for business creation and failure (one we’ve commented on before). Note this feature was added in 2001.

From Seeking Alpha:

On Thursday, we discussed another employment measure, assembled from the quarterly census of state unemployment insurance records.

This measure is discussed in much greater detail this week in the Liscio Report, via Barron’s Alan Abelson:

UNLESS THE WORLD IMPLODES BEFORE THEN, this Friday the Bureau of Labor Statistics is slated to release May’s employment report. As the big day approaches, Wall Street, as it always does, will indulge in an orgy of guesswork as to what the numbers will be. That this is destined to prove an exercise in futility will not deter for a moment the participants from repeating it a month hence.

Actually, these cockeyed Nostradamuses are more deserving of sympathy than contempt. For apart from their own fallibility — which, since so many are card-carrying economists, is considerable — their prophecies are prey to the even more considerable whims, quirks and fantasies of Uncle Sam’s data assemblers.

Just how much such idiosyncracies distort the actual count of the gainfully employed and, by extension, of those out of work, is hard to pin down to the last decimal. But that it can be huge is evident in another report issued last week by that same Bureau of Labor Statistics (which might better be called the Bureau of Labored Statistics). It’s called Business Employment Dynamics, and we’d been in blissful ignorance of its existence until enlightened by that diligent duo, Philippa Dunne and Doug Henwood, responsible for the Liscio Report.

As Philippa and Doug explain, this series reports detailed gross job gains and losses in the private sector based on nearly complete coverage “of the employment universe provided by the unemployment insurance system.” More painstaking than the familiar monthly surveys of employment, the tally is published with a lag of several quarters; the one released earlier this month, for example, was for the third quarter of 2006. What it showed, though, was eye-opening.

Thus, compared with a gain for the quarter of 442,000 jobs reported in the so-called establishment survey, the Business Employment Dynamics, or BED, reckoning was a scant 19,000 additions. In manufacturing, the 9,000 jobs lost according to the payroll figures balloon into a loss of 95,000 jobs in the BED data; the improbable 20,000 additions in construction (think: housing) turns into a loss of 77,000 by BED’s measure; the 507,000 gain in private services shrinks to 108,00. And so it goes. Or, more accurately, so goes the job mirage.

One likely culprit, Philippa and Doug suggest, is that curious concoction known as the “birth/death” model used by the Bureau of Labor Statistics to estimate the gains/losses in jobs from the launching and demise of businesses. Thanks to this voodoo calculation, 156,000 were added in last year’s third quarter and a hefty 388,000 in the opening four months of this year. Nice going, indeed, considering that first-quarter GDP growth probably, when the dust clears, will have fallen below 1%, and April was a punk month.

All of which, among other things, solves a puzzle that seems to have bothered quite a few people: namely, how can the economy be running out of steam when there’s relatively little unemployment? The answer, pure and simple, is that there are significantly fewer folks working and significantly more folks out of a job than the official payroll numbers would have you believe. The next time someone assures you that the employment picture is bright, make sure he smiles when he says that. (emphasis added)

As we have laboriously argued over the past few years, this has not been a great post-recession cycle for private sector job creation. It has been a boom time, however, for creative accounting in government measurements.

The bottom line: New job creation has been mediocre, and wildly overstated by BLS since changes made to measuring jobs in 2001.

The Journal’s front page story, “Homeowners Abroad Take Currency Gamble in Loans,” had numerous anecdotes about how Eastern Europeans are active in the carry trade, borrowing in cheaper currencies, gambling that the interest rate savings won’t be offset by currency appreciation.

Some have compared the carry trade to picking up nickels in front of a steamroller. Retail players are the group least equipped to play this game, which until recently has been the province of professionals.

It’s one thing to have Japanese investing in foreign currencies for higher yield. Prevailing interest rates in Japan are so low as to be microscopic. With yen interest rates at 50 basis points versus foreign interest rates of 5-6%, they are getting 10 to 12 times more in income by going overseas. True, the yen is undervalued, but there is some debate as to what degree. Also recall that most Japanese are investing via multicurrency savings accounts, which are liquid (although in a rapidly moving market, they won’t be able to trade anywhere near as quickly as professional investors). If they are observant, the downside risk might be 30%. So for them, the trade is risky, but as practiced, not nuts. They are gambling with their savings, but if not done to excess, this as prudent currency diversification. Reports indicate that most investors are doing so only with a manageable porition of their assets. Indeed, senior Japanese financial executives I know who are close to regulators say the authorities think this sort of investing, within proper bounds, is sound policy.

By contrast, a adverse currency movement could literally put Eastern European borrowers out on the street, since they are putting what is almost certain to be their biggest asset at risk. The Wall Street Journal suggests that the yield differential is roughly 50%. In addition, these mortgages are illiquid. Borrowers cannot easily or quickly refinance, so if their currency bet moves against them, many will be stuck. In addition, with an adverse currency move, the principal will have gone up too, so even if they could refinance, they might not get enough to retire the initial mortgage, plus the new mortgage would probably be at higher interest rates (that’s why they traded out of their currency in the first place). It would take a massive currency moves to offset undo the yield differential at the time of borrowing, which would mean the gain in principal balance would be even greater.

)Yet this chart, shows the strategy is wildly popular. And despite the very large risks, regulators are permitting this sort of foolishness to occur (one would think it should at least be restricted to commercial borrowers).

Why are these regulators casting a blind eye? The Journal unwittingly gives the answer:

In Hungary, the foreclosure rate is only about 1%, and banks are able to hedge against currency risk. “We have extremely fat margins,” says Peter Kisbenedek, former CEO of Erste Bank Hungary, soon to be chief financial officer of Erste Holding, parent company of Austria’s Erste bank, with branches throughout Eastern Europe. “We can fund the risk.”

Put simply, this business is extremely lucrative for the intermediaries, and to hell with the customer (wait and see where that 1% foreclosure rate goes if you have a sharp movement in currencies). Regulators have to decide how to balance the interests of the organizations they oversee versus the public, and here there is no doubt here as to whose interest they favor.

Financial institutions used to be in the business of helping investors and borrowers find suitable vehicles for their needs. Increasingly, it has become an exercise in finding a chump.

This is a great post on Gristmill (courtesy Brad DeLong):

How to Talk to a Climate Skeptic

Below is a complete listing of the articles in “How to Talk to a Climate Skeptic,” a series by Coby Beck containing responses to the most common skeptical arguments on global warming. There are four separate taxonomies; arguments are divided by:

Stages of Denial,
Scientific Topics,
Types of Argument, and
Levels of Sophistication.

What follows is a very detailed outline under each heading. The post notes that the same article may appear in multiple listings.

I have spent the entire long weekend avoiding dealing with this article by David Ranson and Penny Russell, “Does the Fed Matter?” in Friday’s Wall Street Journal. The reason is that if I got going, there is so much in it that is off beam, misleading, or just plain wrong that it would be hard to know where to begin or end.

But I regard it as an important public service to point out the Journal’s foibles. The consensus opinion on the Journal is that its editorials are die-hard loyalist right wing, while the news pages are untainted (note we take issue with the perception of lack of news bias).

The op-ed articles live in a grey area. Most of them hew, predictably and closely, to the Journal’s editorial line. But some don’t. For example, I recall one actually saying nice things about Eliot Sptizer (admittedly compared to regulators) and another taking aim at 9 Fortune 500 companies that had promoted senior executives who had held only staff jobs to CEO over women who had had substantial, and successful, line experience.

And some are written by people of sufficient stature (and manage to steer clear of the Journal’s idee fixes) to be noteworthy in and of themselves. So I imagine many people look at the op-ed articles on a case-by-case basis.

The reason for dissecting this piece is that it makes a generally correct observation, namely, that the Fed is much less influential than it once was, which means that readers might be swayed by the authors’ assertion that the Fed’s impotence is a good thing.

But the logic they use to support their first observation, that the Fed’s powers are waning, is dubious:

Consumer spending grew at a healthy rate of 3.8% in real terms in the first quarter, despite the drop in overall GDP growth to 1.3%. Many on Wall Street find this a paradox: How can it be that consumer spending has been growing consistently at an unreduced rate in the past couple of years, while GDP growth fluctuates quarter to quarter? Shouldn’t they rise and fall together? Yet in fact, consumption has always moved more consistently from one period to another than GDP.

The relationship of this seeming paradox to the Fed’s relevance is this: It has been hiking interest rates between mid-2004 and mid-2006, meanwhile looking for the slowdown in consumer spending — and some relief from inflationary pressures — that it assumes will result. So far the lack of such a slowdown has put the Fed in a kind of no-man’s land: to hike or not to hike.

The presumption that the Fed’s policies are all about consumer spending is backwards. Yes, consumer spending now represents about 70% of the economy. But it hasn’t always been that important. Indeed, in the 1990s boom, technology spending was a big contributor to economic growth.

But the article really appears to be about this chart and its implications. We will grant that it is indeed an interesting chart, but not quite as central as the authors make it out to be (they both work for HC Wainwright).

Now if they had explained why this disconnect between Fed actions and consumer spending occurred, that would have been very useful. But correlation is not causation, and without some idea of what the causal link is, it is hard to reach any useful conclusions from this chart, save their top-line observation, that Fed interest rate hikes are less effective than before. They seek to draw a direct linkage (i.e., to find simple mechanism that no longer operate) when the story is likely pretty complex. For example, interest rate swaps were invented in the early 1980s but even by the early 1990s, banks were still structurally borrowing short and lending long, so when the Fed increased interest rates, it forced banks to increase their interest rates so they could maintain their margins.

The brave new world of finance is different in several respects. First, as we have noted before, banks and investment banks have increasingly structured their products to capture origination fees rather than interest spreads. And even in using their capital, they see themselves as traders rather than buy-and-hold investors.

The various swap markets are so deep (and bank assets are repackaged and tranched in dizzying ways) that banks have much more freedom to control the duration (finance speak for a notion that roughly approximates weighted average maturity) of their assets and liabilities. Thus, what happens on the short end of the yield curve just isn’t as determinative as it once was. That isn’t a story about consumers; it’s a story about how banking and the financial markets have changed.

But in an effort to prove their point, they develop a colorful fiction:

In the past the Fed was able to use various monetary mechanisms, including interest-rate pricing, to curb access to the credit markets. This would induce an economic slowdown as the business sector was forced to postpone growth and lay off employees. Sometimes it was more than enough to create a recession. But as the private-sector economy has grown, it has become more resilient. As a result of the globalization and increasing depth and reach of financial markets, interest-rate policy has become less and less effective at curbing the flow of capital. There has also been a kind of learning effect, as the business sector has gotten used to coping with credit-market uncertainties and the shock effect of interest-rate surprises has lessened….

Ready access to both equity and debt capital from a proliferating number of sources means that businesses are no longer forced to curtail their activities when the Fed impeded the banking system’s ability to provide credit. And since businesses thus no longer needed to lay off employees, employees no longer needed to cut back on their spending.

One would expect people who hold themselves as economists to have some respect for facts. But we see perilous little of that here.

One could just as easily say that the reason that we haven’t had a meaningful recession since the early 1990s isn’t the growth and adaptation of the private sector, but the growing gutlessness of the Fed. Greenspan, unlike his predecessors, wanted to be liked. Any time there was a serious slowdown or the threat of a market break (like the Thailand-Russia-LTCM crisis of 1997-1998, or the post 9/11 period), the Fed could be counted upon to flood the markets with liquidity (hence the expression, “the Greenspan put”).

Notice that this story is all about interest rates; it completely ignores the Fed’s other mechanism, money supply. Continuing high growth in broader measures of money (M3 here, M4 in the UK), are the big reason why the economy hasn’t slowed. It appears to be a combination of lack of interest (central bankers don’t watch money supply as closely as they once did) and greater difficulty (the mechanisms for staunching liquidity appear to be less effective than they once were).

Former Federal Reserve chairman William McChesney Martin defined the job of the Fed as taking away the punchbowl just when the party started getting good. It may be in this brave new world of finance that all the Fed can do is spike the punch.

Let’s continue parsing the piece:

Ready access to both equity and debt capital from a proliferating number of sources means that businesses are no longer forced to curtail their activities when the Fed impeded the banking system’s ability to provide credit.

Ahem, did this pair look at any data other than what went into their chart? Since 2004, large corporations, the sort that have access to the capital markets, have been net savers, an unprecedented development in a growing economy. They have been shrinking their companies, choosing to curtail their activities. Why? Mainly, to show better numbers to Wall Street. The shrinkage results from stock buybacks, curtailed investment, and cost (meaning headcount cutting).

As a result, the next part of their argument is clearly bogus:

And since businesses thus no longer needed to lay off employees, employees no longer needed to cut back on their spending.

Let’s name just a few companies that are cutting staff despite being profitable and enjoying a growing economy: IBM is about to start laying off 150,000 employees and will replace them with cheaper foreign hires. In 2005, after record profits, share buybacks, and handsome dividend payouts, and no black clouds on the horizon, Intel announced plans to get rid of 10,500 employees, roughly 10% of its staff. Citigroup will lay off 17,500 because their margins aren’t as good as their competitors.

These are not isolated cases. According to Bureau of Labor Statistics data, the average middle-aged male could expect to stay with his employer for 11 years. Now, he’s last only 7.5 years. And unemployment is longer: the average length of unemployment went from 13 weeks to 20 over the same timeframe. Yet the authors suggest that consumers happily keep on spending because employment has become more stable!

Mind you, this was the better part of the article. Let’s continue:

Every recession since 1945 has been attributable in large part to the credit squeeze produced by interest-rate hikes. In attempting to “cool off” an “overheated” economy, the Fed’s rate hikes in the past have killed off economic activity and inflicted pain on many sectors of society. To stop the spread of a disease (inflation) by killing the patient (the economy) is not a very productive way to proceed.

Again, nonsense or misleading or both. The terrible 1972-1973 recession was “largely” due to oil price shock. The 1980-1981 recession, admittedly nasty and very much a Fed creation, was seen as a triumph. Inflation had gotten so entrenched that it was impossible to produce meaningful financial statements (meaningful in an economic sense; those of you who are old enough to remember inflation accounting will know exactly what I mean), and the inability to understand where businesses truly stood had a crippling effect on investment and growth.

In the late 1980s, the Fed increased interest rates to staunch LBO lending, and that lending had become so profligate that its aftermath did considerable damage to the banking system (no, and the deals did not go bad due to the recession. Observers at the time agreed that some of the LBO companies were unsalvageable, and others were good companies that had been overleveraged). The recession of 1990-1991 was largely due to banks cutting lending because their capital bases were damaged. The Fed had started to cut rates in March of 1989. If the Fed hadn’t increased rates, the aftermath would have been worse. The only case where the Fed might stand guilty as charged is in the recession of 2000, but then again, that slowdown technically was not a recession (2 quarters of negative growth), so one could argue the Fed did a very good job of pricking the tech bubble without causing undue damage.

They digress into a discussion of the value of home equity loans in stabilizing consumer spending (eek!) and another whopper follows:

Widely disseminated predictions that the so-called housing “bubble” would collapse have deterred many home buyers, particularly those more interested in investment than simple shelter motives.

When we consider instead the price of the “median home,” we find that indices of home prices on a quality-adjusted basis, such as that published by the Office of Federal Housing Enterprise Oversight, were still showing no decline through the end of last year — merely a sharp deceleration in the gains. A reduction in the gain realized upon the sale of a home is not the same as a loss.

The Economist, among others, is the source of such predictions. And as we (and the Wall Street Journal on the day after this piece ran) have said, quality adjustment would make the fall in housing prices (and yes, Virginia, there has been a fall in average housing prices) even more pronounced.

The speciousness increases:

When we measure the price of homes in terms of an unstable unit such as the dollar, we are looking at only nominal gains, not real gains. Measured in terms of a stable measure of value such as gold, “real” house prices have been stable or declining throughout the last decade.

So let me get this straight: we are supposed to be happy because housing prices increased and that allowed consumers to continue to spend like drunkards despite stagnant wages and deteriorating job stability. But gee, we should take comfort in the fact that in gold terms, housing prices really haven’t gone up. If you buy that, that means consumers haven’t been spending their gains, they’ve been depleting their capital.

So to the final bit of alternative reality, Journal-style:

The data are telling us that consumer spending is continuing to grow without showing any sign of weakness. This is a happy conclusion, in spite of the heartburn it is giving to the Fed. It shows that nothing very bad is happening to the economy. As long as consumers experience stability or net gains in the equity value of their homes, and as long as unemployment remains low in the face of Fed tightening, consumers will have no difficulty maintaining the steadily rising stream of spending that is the underpinning of a healthy economy.

When I think of the disconnect between the declining trend of GDP growth and continued robust consumer spending, I get a different picture. Are you familiar with Road Runner cartoons? I see the image of Wile E. Coyote running off a cliff after Road Runner, suspended in air until he looks down.

Larry Summers keeps getting better and better as an op-ed writer. His current article in the Financial Times lays out a series of practical recommendations on what to do about climate change.

He focuses on the problem of the developing world, since they will account for 75% of the increase in greenhouse gases, and as China has made clear, they are reluctant to have their growth objectives compromised. Yet they are the ones who will suffer most as temperatures rise.

He is leery of placing overmuch hope in Kyoto Accord style processes, likening them to the League of Nations. He instead proposes that the World Bank help subsidize climate-related investments that produce benefits beyond those to the host nation.

He argues that it is critical for the US to start taking concrete steps to combat climate change (as long as the US is a free rider, it sets a bad precedent for everyone else). He also recommends making sustainable energy technology available to the developing world at a reduced price.

The piece has a lot of tough-minded, pragmatic ideas. Very much worth reading.

To Summers:

If global warming is the ultimate inconvenient truth, the most important inconvenient truth about global warming policy, argued in last month’s column, is what happens in the developing world. These countries will deliver three-quarters of the increase in global greenhouse gas emissions over the next generation, on current forecasts. Beyond the developing world’s preponderant impact on emissions, there is the additional reality that because so much of economic activity is mobile, policies that restrict emissions in some places but not everywhere may just relocate emissions not reduce them.

Developing countries recognise that today’s greenhouse gas problem was made mostly by industrial countries, that their own energy usage per capita represents about 20 per cent of the corresponding industrial country usage and that their citizens have pressing material needs. They are also keenly aware of the uncertainty surrounding projections of economic growth, patterns of production and future energy technologies. It is easy to sympathise with their extreme reluctance to commit to levels of emissions decades from now that are lower than what industrial countries are emitting today.

For these and other reasons, I argued last time that the Kyoto approach to climate change – through the setting of targets – could prove to be like the League of Nations approach to preserving peace: idealistic and visionary yet impractical, ultimately ineffective and perhaps even counterproductive because of the valuable political capital it consumes. I hope I am wrong but I fear that commitments to vast reductions in emissions decades hence are no more real than commitments to end aggressions or war.

What then should be done either instead of or as a complement to the Kyoto approach? The place to start is with the recognition that it is much easier for governments to make and keep commitments to policies they can control than to outcomes they cannot assure. Whatever targets are negotiated or set, emphasis should also be placed on concrete measures that will have meaningful impact.

First, the US must engage in an energy efficiency programme that takes effect without delay and has meaningful bite. As long as developing countries can point to the US as a free rider there will not be serious dialogue about what they are willing to do. I prefer carbon and/or gasoline tax measures to permit systems or heavy regulatory approaches because the latter are more likely to be economically inefficient and to be regressive. The key point is that after Kyoto, where there was US vision in setting goals but no on-the-ground action, there must be real policy commitments.

Second, the major industrial countries should commit to a very large increase in funding for research in technologies that offer the prospect of reducing the concentration of greenhouse gases, such as renewable energy, carbon sequestration and energy efficient engines. They should also learn a lesson from the pharmaceutical experience and commit to making intellectual property relating to clean energy available to developing countries on preferential terms. It may be that ambitious emissions- reduction targets can be achieved with existing technology, yet new technologies could help.

Third, the World Bank, and probably the regional development banks, should be reconstituted by their shareholders as “Banks for Development and the Global Environment” and take on as a major mission the provision of subsidised capital for projects that have environmental benefits that go beyond national borders. There is much that can be done to encourage energy efficiency in almost every sector within developing countries, yet national governments have inadequate incentives to take account of global impacts. Moreover, the institutions need a new role with respect to countries other than the poorest ones at a time when the leading developing countries are actually exporting rather than importing capital.

Fourth, a goal should be set of eliminating by 2025 the more than $200bn the world spends each year on energy subsidies, and enforced through strategies such as those used for inappropriate subsidies in trade. This is a clear case where environmental and economic imperatives coincide and it is one where external political commitment is likely to be desirable in many countries, just as in the trade area. This will require considerable work on the definition of and measurement of total energy subsidies. Such work will lay a foundation for the more ambitious efforts that may be needed in harmonising world energy prices above market levels in the future.

There is a final critical process element in the policy response. Given that viable solutions depend on significant changes in developing country policies and that these countries are unlikely to make them unless they see their own interests as at stake, it is essential that they be full participants in setting the global direction. They are surely likely to do more if they can help shape policy than if it is simply the Group of Seven leading industrialised nations seeking to bring them along.

Is all of this a sufficiently ambitious agenda? Perhaps not; and perhaps political efforts to generate commitments to ambitious if remote targets can be worthwhile as powerful forces for change, as with human rights in eastern Europe. But they must be married to more immediate if less dramatic steps that have real and practical effect.

Nouriel Roubini looked at the various stats released last week – the 16% increase in new home sales versus the 1.4% fall in home prices averaged across 32 metropolitan areas (Federal Housing Finance Board survey) and the 2.6% fall in existing home sales from March to April (National Association of Realtors) and focused on the outlier, the increase in new home sales. While other observers have used watered-down terms like “incentives” to describe the builder’s efforts to move product, Roubini says discounting and large ones at that. Moreover, given the size of the inventory overhang, he expect further price cuts.

Consider an additional factor not mentioned by Roubini: because subprime mortgages have become scarce, it’s a safe bet that the falloff in house sales is greatest in starter and other low-priced homes. That implies that the sales mix has probably shifted towards better homes. So that means, on a comparable house basis, that the price declines are like to be ever larger than the averages suggest.

To Roubini:

Analysts who take the view that the worst of the housing recession is behind us took comfort from the news this past week that new home sales in April rose by 16% relative to their March level; also in April the stock on unsold new homes fell 538,000, a figure that is a little lower than the very large levels of the last six months.

Does this mean that the housing recession has bottomed out? The answer is no for two reasons. First, the new home sales figures are not rosy once one understands why such sales went up. Second, all of the other housing indicators of the week (existing home sales and inventories, Toll Brothers’ plunge of earnings and revenues, FHFB data on falling Q1 home prices) suggest continued and persistent weakness of the housing market and a deepening recession in this sector.

Let us start with the first point. An increase of 16% in new home sales looks huge until you notice the following points: new home sales are still 29% down from their July 2005 peak; the inventory figures for new homes exclude cancellations. We know that cancellations are massive, in the 20 to 30% range based on data provided by the two largest home builders in the US (DR Horton and Toll Brothers). Therefore, the actual stock of unsold new homes is much larger, at least 20% higher than the reported figures.

More importantly, new home sales surged in April but the median price of a home fell – in one month – by 11% to $229k. Now think about Economics 101: higher equilibrium sales and lower equilibrium prices. How can you get that? The answer is simple: the increase in sales cannot be driven by an exogenous increase in the demand for homes as such increase would have led to higher sales and higher prices. The only way you get higher sales and lower prices is if the home supply function – at any price level – has increased so that in equilibrium the excess of unsold homes leads to more demand at a lower price. I.e. the April data are consistent with only with the view that home builders – desperate with a massive and record stock of unsold new homes – decided to start slashing prices to reduce this overhang.

Is that good news? No for two reasons: first, the excess supply of new homes is still so large that only much lower home prices will dent this overhang; second, lower home prices means lower home equity and lower home wealth for homeowners.

This article ran on MarketWatch, and I find it a sign of the times. Despite the supposedly sound state of the economy (if you call a tanking housing market and 1.3% GDP growth, which is negative in real terms, “sound”), MarketWatch nevertheless thought this story would appeal to its target audience, the investing class.

The article also features an interesting statistic: 19.9% of the complaints made to the FTC are about debt collectors, up from 17% in 2004. The FTC is also hosting a workshop later this year and is inviting the submission of papers and research.

I imagine the FTC in interested in learning how much of this increase in complaints is proportional to the number of deadbeats, and how much is due to increased debt collector aggressiveness. I wonder whether, due to the new tough bankruptcy laws, some consumers are deciding to hold their creditors at bay until the statue of limitations on their debt expires. By happenstance, I know a Washington-based tech entrepreneur who expanded his business right before the dot com bust, and successfully held off his creditors for six years (the Washington limit). It sounded truly miserable (and poverty is always miserable). Under the draconian new bankruptcy law, I suspect more people will go that route.

From MarketWatch:

Debt collectors are getting more aggressive. Don’t be surprised if a collector pressures you to immediately authorize an automatic debit from your checking account. You can do this by providing your checking account information over the telephone.

In some cases, according to the Federal Trade Commission, these debits have been more than the agreed-upon authorized amount.

Have you convinced a debt collector to stop calling? It likely won’t be the end. You may hear from several collectors down the road, thanks to “debt buyers,” which have been springing up since 1989, when creditors began selling debt.

The collection calls probably won’t stop if you move. Numerous data bases, including those available from government agencies and credit bureaus, can help track you down, which raises privacy concerns.

These are just some issues that have prompted the Federal Trade Commission to sponsor a debt collection workshop Oct. 10-11 at the FTC’s Satellite Building Conference Center, 601 New Jersey Ave., NW, Washington, D.C. The workshop could lead to recommendations in the FTC’s annual report to Congress.

The Federal Trade Commission pegs its 2006 debt collection complaints at 90,629, excluding identity theft and Do Not Call Registry complaints. Debt collection complaints against national banks have been dropping — to 2,560 in 2006 from 3,110 in 2004, says the Office of the Comptroller of the Currency. But some say numbers are skewed by the large number who filed bankruptcy prior to 2005 when bankruptcy reform took effect.

Third-party debt collection complaints were 19.9% of all FTC complaints in 2006. That’s up from 17% in 2004, says Thomas Kane, senior attorney in the FTC’s Division of Financial Practices. The rise comes as debt continues to soar — to $12.816 trillion in mortgage debt and consumer credit in 2006, based on the Nilson Report, Carpinteria, Calif.

Of particular concern: The large number of FTC complaints — 14,700 — that allege debt collectors are harassing consumers, often by calling them continuously. Also, some 8,000 debt collectors in 2006 were said to have used profane or abusive language.

Some have gone so far as to give consumers a false address to dispute a debt, so the creditor won’t receive that letter, Kane says.

“The easiest debt to collect is only a few months old,” explains Spencer Nilson, founder of the Nilson Report. “You know where they live.”

But every year, one-third of the population moves.

In the collector’s sights

Late with a credit-card payment? Expect a card issuer to contact you during the first six months via an in-house collection staff. If the original creditor can’t collect, the debt is outsourced to commission-based collection agencies and attorneys.

If still unsuccessful, the original issuer sells your debt, which leads to a third set of collectors. Some resell the debt again, so the chain continues. “It’s like traveling somewhere and going through six different airports,” Nilson says.

“Last year, the average amount paid for debt was 5.3 cents on the dollar,” according to Nilson. But the older the debt, the more it typically costs to collect. Databases may be needed or tracers hired. To make a profit with those mounting costs requires persistence.

What can you do if you’re in debt and wind up in this chain of events? Know your two most important rights with debt collectors, under the Fair Debt Collection Practices Act.

1. You may dispute a debt or portion of the debt in writing within 30 days of being notified. If you send a written dispute within 30 days, the debt collector must halt collection efforts until it provides written clarification of the debt. The debt collector also must notify you of this right.

2. You can stop a debt collector from contacting you by writing a letter to the collector telling him or her to stop. Once the collector receives your letter, he or she may not contact you again except to say there will be no further contact or to notify you of a specific action. This does not erase your debt.

Send all communications certified mail, return receipt requested. More debt and credit rights can be found at www.ftc.gov or by calling 1-877-FTC-HELP.
Also important:

* Check with your state’s attorney general at www.naag.org, for the limit on how long collectors legally can collect your debt. State limits generally range from four to 20 years, says Dennis Hammond, president of the Debt Marketplace Inc., Santa Fe Springs, Calif.
* Beware of accepting a new credit offer, no matter how attractive it looks, from a creditor you never repaid. Reason: Once that creditor renews your credit relationship, the clock starts ticking all over again on your state’s statute of limitations, Nilson warns.

Meanwhile, contrary to popular belief, interest on your old debt never stopped accruing. Plus, collection fees, attorney fees, and even tracing fees may be added. As more time passes, the price to buy your debt drops significantly, while the debt you owe quickly multiplies with accrued interest and fees. This provides even more incentive for debt buyers to collect successfully.

If by some bizarre happenstance you do not know who Eric Hobsbawm is, it is never too late to find out.

The Guardian’s website reported on a recent lecture he made on the declining role of empires. It’s a testament to the stature of the 89 year old Marxist historian that he was invited to speak at Barclays’ Wealth Pavilion.

His message: empires are on the way out, largely because the imperialists haven’t done a very good job of managing them. Too often they fail to recognize that they need to secure local cooperation and cannot over the long haul rule by force.

While we need a new form of international organization, there isn’t a viable one in the offing yet.

From the Guardian:

Looking like an elderly and defiant Woody Allen, Hobsbawm defied the bar stool placed in deference to his 89 years and delivered a magisterial lecture on the declines of empires during his lifetime, which began in the same year as the Russian Revolution.

He had seen the end of the British, Dutch, Belgian and Spanish empires. He had seen the rise and fall of the German and Soviet attempts at empire-building and soon, he predicted, the end of American attempts at imperial domination.

The American empire was visibly weakening in front of our eyes. It was by far the most dangerous military force in the world, but in all other respects it was fading. China would win in terms of manufacturing; it had lost international good will; its economy would falter. Countries such as South Korea needed no American lessons in modernising any more.

Simon Schama had introduced him in tones of genuine admiration, bordering on awe. He had been spellbound by his writing as a younger historian, by his staggering breadth and humanity.

It would have been interesting to hear Schama on the advantages of contemporary historians living to a very great age. Reviled by some colleagues for his refusal to repudiate communism after the Soviet invasion of Hungary – or, indeed, since – Hobsbawm came under further pressure to recant his life’s work after the fall of the Berlin Wall in 1989.

But here he was, nearly 20 years later, looking sharp as a pin and able to say, in effect: “Not so fast!”

This was the world today: lacking the relative stability of the cold war, with numerous new nation states apparently incapable of governing themselves and in danger of disintegration. We were living in a period of deeply unstable global disorder. No return to the old systems was possible and it was extremely unclear what would replace empires.

There followed a passage where he ranged around numerous empires – Roman, Alexandrian, Hapsburg, Spanish and more – concluding that empires had no hope of even brief survival without local cooperation and some form of local power. No modern state could ever again hope to rely on the obedience of subjects or to impose rule through a handful of rulers, even armed ones: for one thing, counter-insurgent access to weapons was too easy.

The age of empires and foreign interventions was over. We would have to find alternative ways of ordering the world. “But so far,” he ended, ” we haven’t found it and I can’t tell you how it is going to be found. I shall be dead when people try to do so.”

Schama didn’t quite let him off with what he called “a counsel of despair.” He pointed to interventions in, for instance, Sierre Leone. Well, said Hobsbawm, he wasn’t saying interventions could never work: but it helped if they were locally-inspired. Western attempts to impose “democracy” or a “superior” value system were doomed. And you were always faced with the problems of getting out of places in which you had no strategic interest. The United Nations wasn’t the answer: it could not act without the agreement of the major powers, and when the powers didn’t agree it didn’t act.

The discussion moved onto religion. Schama said that the collusion between the American right and fundamentalist Christianity was “not much more frightening than Islamic fundamentalism, but not much less frightening either.” Hobsbawm said he thought the Persian revolution of 1978/9 was probably comparable with the French revolution in terms of lasting significance.

Globalisation produced a world which was too big to be understood. The bigger the units you were dealing with the more you needed something closer to local communities to bring people together. Nor did he believe the “market state” had much future. Even Bush and Thatcher had failed to reduce the size of the state: they had failed because people actually wanted governments to do something about redistribution. Look at the popularity of Putin after the “total disaster” of the imposition of three years of free market economics post 1991.

Schama and Hobsbawm fell to talking about the web as another force of globalisation. Hobsbawm mused on how effectively it amplified the voice of what he called (with a straightforward disregard for PC niceties) “a community of nutters,” including religious zealots.

Schama: “So we’re utterly buggered?’

Hobsbawm. “That’s absolutely true.”

Cue the nearest Hay offers to a standing ovation. But still no answer to the Barclays question: does wealth bring you happiness?

This Financial Times story, “Growing biofuels demand raises food prices,” highlights increasing prices of grains and other soft commodities. The grain price rise merits particular attention, since it appears to be a structural rather than a cyclical increase. And higher grain prices in turn mean higher meat, milk, and egg prices.

What this story does not mention is that the combination of higher food prices on top of energy price increases may finally create the impetus for corresponding wage increases. That would represent the beginning of a wage-price spiral, every central banker’s nightmare.

From the FT:

Soft commodities are hardening. Corn, wheat, cocoa and coffee prices have all risen strongly in recent months, suggesting consumers will face an extended period of more expensive food.

This year, corn and wheat prices have reached their highest levels for a more than a decade, while coffee prices have hit an eight-year high and cocoa has risen to a four-year high.

Yet while price gains for cocoa and coffee have been driven by adverse weather affecting production during a period of rising consumption, analysts say grains prices are experiencing a structural shift, owing mainly to the growing demand for biofuels.

“Just as energy and metals prices have rallied sharply in real terms, a similar fate awaits grains, which remain significantly below the [inflation adjusted] highs of the 1970s and mid-1990s,” says Michael Hughes of Deutsche Bank.

Recent price strength has sparked fears that consumers could face higher bills, while policymakers are concerned that rising food prices will drive inflation higher. In addition, global food demand is rising strongly, thanks to economic growth.

Predictions for higher prices come in spite of expectations that global grain production will rise 6.2 per cent to a record 1.666bn tonnes in 2007-08, according to the International Grains Council. However, this will not match global consumption – forecast by the IGC at 1.680bn tonnes, up 3.1 per cent on the previous year.

The situation for cocoa and coffee is different from grains. Coffee’s strength has been driven by adverse weather affecting production in Vietnam and Brazil, the two largest producers.

Biofuels are gradually taking over as the main growth driver of agriculture demand. Goldman Sachs says that if government policies are adopted in full, global demand for biofuels could increase from 10bn gallons a year to 25bn gallons by 2010.

Goldman expects the trend rate of growth in demand for agricultural commodities to rise from 1.9 per cent a year between 1997 and 2006 to 2.6 per cent a year between 1996 and 2015.

This is expected to lead to an extended period of high prices. Goldman forecasts that five years from now, corn will trade at $5 a bushel, compared with about $3.50 on Monday, while wheat will rise from $4.50 to $6 a bushel.

Calculated Risk pointed us to a story in the Chicago Tribune, “Price slide nationally hides big gains in some metro areas,” which cites the Federal Housing Finance Board survey of 32 metropolitan areas. The report, which the article notes tends to produce more flattering results than some other analyses, found that, averaging new and resale home sales, prices fell by 1.4% in the first quarter.

For the data-minded, here is how this report stacks up:

One reason the housing finance board’s figures tend to be higher than those of other studies is that it includes new homes. Despite the giveaways and other come-ons used by builders to reduce inventories, new homes still lead the way when it comes to setting the price pace.

Another factor is that the survey covers the entire range of home sales, not just those with a mortgage at or below $417,000. That’s the benchmark placed on Fannie Mae and Freddie Mac, two key suppliers of funds for home loans….

Another key distinction is that the finance board’s survey covers a wider swath because it includes sales made with loans from all types of lenders. It is not limited to sales that involve Fannie Mae and Freddie Mac, which now touch, in one way or another, less than 50 percent of mortgages.

It also isn’t limited to houses sold through multiple-listing services….

And finally, the housing finance board’s research covers metropolitan areas as opposed to regions, even if the metro areas viewed are only the largest ones. So it tends to be more targeted than other studies.

The only drawback to the survey is that houses sold with government loans don’t count. Houses bought by families who turn to loans insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs tend to be priced lower than those sold with conventional loans, so the finance board’s prices skew somewhat higher than those in other surveys.

However, the FHA has been marginalized by subprime lenders, and the Wall Street Journal, in discussing the 2.6% fall in existing home sales from March to April, noted:

The median home price in April of $220,900 was just 0.8% below the year-earlier level. The median price can be misleading because the mix of sales between higher-and lower-priced homes changes. Lately, there may have been fewer sales of cheaper homes because of the huge drop in subprime lending. That would tend to skew the median higher, suggesting home prices may actually be declining more than the reported median suggests.

A shift in the mix of homes sold towards higher prices homes would seem to apply to any report on home price changes over the next few quarters, which means that one should assume that the price declines for comparable homes are likely to be greater.

Finally, readers should note that the metropolitan areas in this survey seem to correspond to MSAs (metropolitan statistical areas), which includes counties in a reasonable commuting distance. For example, the New York MSA has nearly 19 million people. The reason I am fairly confident that this survey is using a more inclusive definition of “metropolitan area” is that it reports that average sales prices in the New York-Long Island MSA were down 1.1%, when prices in Manhattan are up 20%.