naked capitalism

By George Washington of Washington’s Blog.

The Wall Street Journal admits this week that economists blew it:

The pain of the financial crisis has economists striving to understand precisely why it happened and how to prevent a repeat…

The crisis exposed the inadequacy of economists’ traditional tool kit, forcing them to revisit questions many had long thought answered, such as how to tame disruptive boom-and-bust cycles…
“We could be looking at a paradigm shift,” says Frederic Mishkin, a former Federal Reserve governor now at Columbia University.

That shift could change the way central bankers do their job, possibly leading them to wade more deeply into markets. They could, for example, place greater emphasis on the amount of borrowing in the economy, rather than just the interest rates at which borrowing is done. In boom times, that could lead them to restrict how much money various players, ranging from hedge funds to home buyers, can borrow

I have repeatedly pointed out the flaws in mainstream economics. See this, this, this, this and this.

But the Journal makes it sound like the policy-makers and economists who deployed faulty models were innocently ignorant of any larger truths:

The models “were not able to draw up the red flags,” says Tim Besley, a professor at the London School of Economics who served on the Bank of England’s policy-making committee until recently.

Barry Ritholtz has an excellent criticism of the article, pointing out:

There are many areas I would have liked to see the [journal's] article explore: The lack of Scientific Method, the mostly awful performance of economists, its misunderstanding of the value of modeling, the bias inherent in Wall Street variant of economics, and lastly, the corruption of economics by politics...

Let’s start with the basics. Hard “science” — Physics, Biology, Chemistry, and all variants thereto — begins humbly. They try to describe the universe around us by creating theories, and then testing them. These theorems are always preliminary. Even when testing validates them, Science is always prepared — even eager — to replace them with newer theories that are proven to be even more valid.

The humility of science begins with an admission: We know nothing. We seek to learn through experiment and logic, and constantly evolve more and more accurate explanations. Scientific belief evolves gradually over time. Nothing is assumed, presumed, or hypothesized as true. Indeed, research is a presumption that current theories are inadequate or incomplete. The practice of science is a an ongoing search for better explanations, more proof, further verification — for Truth.

Science is the ultimate “show me” state.

Economics has a somewhat, shall we call it, less rigorous approach. Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.

No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else’s 401ks in half. That is called criminal incompetence.

Where was I? Ahhh, our sad tale of the practitioners of the dismal arts.

Starting from a false premise that fails to understand the most basic behaviors of the Human animal, economics proceeds to build an edifice of cards on a foundation of sand. (How could that possibly go astray?) Like a moonshot off by a few inches at launch, by the time the we reach further into time and space, the trajectory is off by millions of miles . . .

Economics … creates an illusion of precision where none exists. The belief in their models led to all manner of mischief, from subprime to derivatives to risk management…

The Behaviorists have been fighting the mainstream for decades now, trying to correct the errors of the basic building blocks of the dismal science.

But I would go further in my criticism of the economic profession by arguing that the decisions to use faulty models was an economic and political choice, because it benefited the economists and those who hired them.

For example, the elites get wealthy during booms and they get wealthy during busts. Therefore, the boom-and-bust cycle benefits them enormously, as they can trade both ways.

Specifically, as Simon Johnson, William K. Black and others point out, the big boys make bucketloads of money during the booms using fraudulent schemes and knowing that many borrowers will default. Then, during the bust, they know the government will bail them out, and they will be able to buy up competitors for cheap and consolidate power. They may also bet against the same products they are selling during the boom (more here), knowing that they’ll make a killing when it busts.

But economists have pretended there is no such thing as a bubble. Indeed, BIS slammed the Fed and other central banks for blowing bubbles and then using “gimmicks and palliatives” afterwards.

It is not like economists weren’t warning about booms and busts. Nobel prize winner Hayek and others were, but were ignored because it was “inconvenient” to discuss this “impolite” issue.

Likewise, the entire Federal Reserve model is faulty, benefiting the banks themselves but not the public.

However, as Huffington Post notes:

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.

“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”

The problems of a massive debt overhang were also thoroughly documented by Minsky, but mainstream economists pretended that debt doesn’t matter.

And – even now – mainstream economists are STILL willfully ignoring things like massive leverage, hoping that the economy can be pumped back up to super-leveraged house-of-cards levels.

As the Wall Street Journal article notes:

As they did in the two revolutions in economic thought of the past century, economists are rediscovering relevant work.

It is only “rediscovered” because it was out of favor, and it was only out of favor because it was seen as unnecessarily crimping profits by, for example, arguing for more moderation during boom times.

The powers-that-be do not like economists who say “Boys, if you don’t slow down, that bubble is going to get too big and pop right in your face”. They don’t want to hear that they can’t make endless money using crazy levels of leverage and 30-to-1 levels of fractional reserve banking, and credit derivatives. And of course, they don’t want to hear that the Federal Reserve is a big part of the problem.

Indeed, the Journal and the economists it quotes seem to be in no hurry whatsoever to change things:

The quest is bringing financial economists — long viewed by some as a curiosity mostly relevant to Wall Street — together with macroeconomists. Some believe a viable solution will emerge within a couple of years; others say it could take decades.

Note: I am not necessarily saying that mainstream economists were intentionally wrong, or that they lied because it led to promotions or pleased their Wall Street, Fed or academic bosses.

But it is harder to fight the current and swim upstream then to go with the flow, and with so many rewards for doing so, there is a strong unconscious bias towards believing the prevailing myths. Just like regulators who are too close to their wards often come to adopt their views, many economists suffered “intellectual capture” by being too closely allied with Wall Street and the Fed.

As Upton Sinclair said:

It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

By Edward Harrison of Credit Writedowns

This comes via the FT:

Saudi Arabia on Wednesday decided to drop the widely used West Texas Intermediate oil contract as the benchmark for pricing its oil, dealing a serious blow to the New York Mercantile Exchange.

The decision by the world’s biggest oil exporter could encourage other producers to abandon the benchmark and threatens the dominance of the world’s most heavily traded oil futures contract. It is the main contract traded on Nymex.

Before anyone tries to spin this as an anti-dollar move, you should read what else the FT article says:

In January, WTI, which usually trades at a premium of $1-$2 a barrel to Brent, fell sharply, leaving it at a discount of almost $12 – a record gap. This dislocation in the market continued well into the summer.

From January, Saudi Arabia will base the price of oil for its US customers on a new index developed by Argus, the London-based oil pricing company.

The Argus Sour Crude Index will track the price in the physical market of a basket of US Gulf Coast crudes, including Mars, Poseidon and Southern Green Canyon.

The point of this move is not to undermine the dollar but to get away from the WTI contract where prices have been artificially inflated due to storage shortages at Cushing.

A friend familiar with this market also indicated that big bank punters active in this market will like this move as well as it helps them evade the position limits and regulation of the CFTC. He says, “In fact, the lack of transparency and regulation on the Dubai Merc was one of the reasons why you had such successful speculation in the oil market during the spring of 2008.”

I see a spike in oil prices as a risk to any sustained recovery. Anyone with more insight into why the Saudis made this move, do comment.

Enjoy (hat tip Michael Panzner):

Submitted by Edward Harrison of Credit Writedowns

John Meriwether, the 62-year old former Salomon bond trader and LTCM wizard is back for, what is this, his fourth go round.

For those of you who don’t remember the 1980s, John Meriwether was the biggest of the ‘big swinging dicks’ on Wall Street, leading Salomon Brothers to huge profits in its fixed income division. Lionized in the eponymous book “Liar’s Poker” and inspiration for Bonfire of the vanities, Meriwether and Salomon’s rise marked the change from a bulge bracket culture dominated by deal makers and IBD (Investment banking Division) white shoe bankers to one dominated by the foul-mouthed traders and math geek quants of fixed income.  The change at Goldman Sachs from a firm dominated by IBD to one dominated by trading is testament to this. Unfortunately for Meriwether, his career path since reaching the top has been rather rocky.

First there was the enormous Treasury bond scandal, in which Meriwether subordinate Paul Mozer put in fake Treasury bids on behalf of clients in an attempt to corner the market for on-the-run securities. Lax oversight got Meriwether a $50,000 fine and Salomon a $290 million fine, the largest ever to that date. Salomon head John Gutfreund resigned and Warren Buffett came in to serve as Chairman (Phibro which was recently offloaded to Occidental Petroleum by Citigroup is a Salomon Brothers company, by the way).  Meriwether left.

Soon, Meriwether was back at it at Long-Term Capital Management, the Greenwich-based hedge fund he founded in 1993 and which was famously leveraged 100 to 1, not including derivatives exposure of $1 trillion on a capital base of $5 billion. This company produced spectacular 40+% profits year after year before going spectacularly bust in 1998 after Russia devalued its currency and defaulted on its debt (see Frontline’s recent video which has a part on LTCM).

Meriwether miraculously was able to start again, literally the next year, helped by a bubble in shares which increased appetite for risk. He started JWM Partners in 1999. After years of gains, this fund too produced staggering losses (44% last year) and was liquidated.

Now that shares are up some 60% in US markets, guess what, John W. Meriwether is back… and he’s taking investors.  This one is called JM Advisors Management, also based in Greenwich.

The fund is expected use the same strategy as both LTCM and JWM to make money: so-called relative value arbitrage, a quantitative investment strategy Mr Meriwether pioneered when he led the hugely successful bond arbitrage group at Salomon Brothers in the 1980s.

The strategy, described by the Nobel Prize-winning economist Myron Scholes as being akin to a giant vacuum cleaner “sucking up nickels from all over the world”, can be highly successful in periods following market dislocations.

Relative value trades profit by betting on unusual pricing relationships between securities, anticipating a return to an historically modelled “normal” state between them.

Traders say the strategy has the potential to deliver huge returns in the current market, with many banks’ proprietary trading desks having scaled back their operations and far fewer hedge funds in existence.

I bet the money is pouring in.

The timing here is interesting given what is happening in mortgages and banking. Meriwether was at the center of the creation of the mortgage-backed securities market with his colleague Lewis Ranieri. Franklin Bank Corp., a bank run by Ranieri was recently seized by the FDIC as it ran into difficulties in the financial crisis due to poor lending. The seizure cost taxpayers $1.6 billion.

However, the much more important tidbit on the mortgages front comes in terms of foreclosure activity. Because of an August ruling by the Kansas Supreme Court (Yves linked out to a story on this today), we could be seeing some major changes in the way foreclosures happen. A post at Credit Writedowns, “Why mortgages aren’t modified and what a ruling stopping foreclosures means” chronicles the case in greater detail.

Sources

Meriwether setting up new hedge fund – Sam Jones, FT (also with the FT Alphaville Team)

Meriwether – FT Lex

By George Washington of Washington’s Blog.

In 2000, America was described as the sole remaining superpower – or even the world’s “hyperpower”. Now we’re in real trouble (at the very least, you have to admit that we’re losing power and wealth in comparison with China).

How did it happen so fast?

As everyone knows, the war in Iraq – which will end up costing $3-5 trillion dollars – was launched based upon false justifications. Indeed, the government apparently planned both the Afghanistan war (see this and this) and the Iraq war before 9/11.

And the financial system collapsed last year due to looting and fraud.

How Empires Fall

But Paul Farrel provides a bigger-picture analysis, quoting Jared Diamond and Marc Faber.

Diamond’s book ’s, Collapse: How Societies Choose to Fail or Succeed, studies the collapse of civilizations throughout history, and finds:

Civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power…

One of the choices has depended on the courage to practice long-term thinking, and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions

And PhD economist Faber states:

How [am I] so sure about this final collapse?

Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent … overspends … costly wars … wealth inequity and social tensions increase; and society enters a secular decline.

[Quoting 18th century Scottish historian Alexander Fraser Tytler:] The average life span of the world’s greatest civilizations has been 200 years progressing from “bondage to spiritual faith … to great courage … to liberty … to abundance … to selfishness … to complacency … to apathy … to dependence and … back into bondage”

[Where is America in the cycle?] It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical “society cycle.” … The U.S. is somewhere between the phase where it moves “from complacency to apathy” and “from apathy to dependence.”

In other words, America’s rapid fall is not really that novel after all.

How Consumers, Politicians and Wall Street All Contributed to the Fall

On the individual level, people became “fat and happy”, the abundance led to selfishness (”greed is good”), and then complacency, and then apathy.

Indeed, if you think back about tv and radio ads over the last couple of decades, you can trace the tone of voice of the characters from Gordon Gecko-like, to complacent, to apathetic and know-nothing.

On the political level, there was no courage in the White House or Congress “to practice long-term thinking, and to make bold, courageous, anticipatory decisions”. Of course, the bucket loads of donations from Wall Street didn’t hurt, but there was also a religion of deregulation promoted by Greenspan, Rubin, Gensler and others which preached that the economy was self-stabilizing and self-sustaining. This type of false ideology only can spread during times of abundance and complacency, when an empire is at its peak and people can fool themselves into thinking “the empire has always been prosperous, we’ve solved all of the problems, and we will always prosper” (incidentally, this type of false thinking was also common in the 1920’s, when government and financial leaders said that the “modern banking system” – overseen by the Federal Reserve – had destroyed instability once and for all).

And as for Wall Street, the best possible time to pillage is when your victim is at the peak of wealth. With America in a huge bubble phase of wealth and power, the Wall Street looters sucked out vast sums through fraudulent subprime loans, derivatives and securitization schemes, Ponzi schemes and high frequency trading and dark pools and all of the rest.

Like the mugger who waits until his victim has made a withdrawal from the ATM, the white collar criminals pounced when America’s economy was booming (at least on paper).

Given that the people were in a contented stupor of consumption, and the politicians were flush with cash and feel-good platitudes, the job of the criminals became easier.

A study of the crash of the Roman – or almost any other – empire would show something very similar.

By George Washington of Washington’s Blog.

The battle to reform the American banking system needs to include reimposing the barrier between investment banking and depository banking (Glass-Steagall), pay incentives based on what is best for Americans and not just the top executives, the end of too big to fail, and other changes which are frequently discussed by financial writers. These are vital issues.

But there is more to the battle for reform than you might know.

New York Versus the Rest of the Country

If you are happy with the banking system, and don’t think it needs to be reformed, then you probably work for one of the banks headquartered in New York.

Indeed, the banks outside of New York have acted much more conservatively, used more conservative capital ratios and less leverage and gotten less involved in credit derivatives and other speculative investments.

Buy a banker in the Midwest a drink, and he will probably rail against the giant New York banks for causing the financial crisis, costing the smaller, better run banks a lot of money and huge fees, and driving many smaller banks out of business.

And even within the Federal Reserve, what the New York Fed and Bernanke are saying is wholly different from what the heads of the regional Fed banks are saying. The Fed banks in Philadelphia and Kansas City and Dallas and elsewhere disagree with what the New York Fed and Fed’s Open Market Committee are doing. See this and this.

So the battle isn’t between bankers versus outsiders. It is between the giant New York money-centered banks and the rest of the country.

Reserve Requirements

Congresswoman Kaptur said last week:

We used to have capital ratios. We need to get back to them. Ten to one. For every dollar in your bank, you can lend ten. You know what J.P. Morgan did? A hundred to one. And then with derivatives, who knows how much?

Remember, Milton Friedman – the monetary economist worshipped as the guy with all of the answers in the latter part of the 20th century – advocated for 100% reserves.

Friedman has been deified as the economist to follow. But his views on reserve requirements have been completely ignored.

Goldman Using Taxpayer Dollars to Buy Stock in China?

As everyone knows, Goldman became a “bank holding company” in September, to be able to access funds from the Fed at essentially zero percent interest.

But in a new interview with Bill Moyers, Simon Johnson noted that in August of 2009, Goldman switched again – to a “financial holding company”.

What’s the difference?

Johnson says that being a financial holding company means that Goldman can borrow money from the Fed at essentially no cost, and then invest it in any thing it wants. For example, Johnson says that Goldman has bought a large share of the stock of a Chinese automaker. Johnson says that if the investment succeeds, Goldman will reap the profits; but if it fails, the taxpayers are on the hook.

Banks Have the Power to Create Money

Congresswoman Kaptur also said last week:

Banks have the power to create money. And decide how much that is worth.

What is Kaptur talking about?

Here Comes the Judge

Well, in First National Bank v. Daly (often referred to as the “Credit River” case) the court found that the bank created money without having the reserves:

[The president of the First National Bank of Montgomery] admitted that all of the money or credit which was used as a consideration [for the mortgage loan given to the defendant] was created upon their books, that this was standard banking practice exercised by their bank in combination with the Federal Reserve Bank of Minneaopolis, another private bank, further that he knew of no United States statute or law that gave the Plaintiff [bank] the authority to do this.

The court also held:

The money and credit first came into existence when they [the bank] created it.

(Here’s the case file).

Nobel Economists, Congressmen, the Fed and Treasury Agree

Still confused?

Well, let’s hear from some top economists.

As PhD economist Steve Keen pointed out recently, 2 Nobel-prize winning economists have shown that the assumption that reserves are created from excess deposits is not true:

The model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.

Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.

Kydland and Prescott observed at the end of their paper that:

Introducing money and credit into growth theory in a way that accounts for the cyclical behavior of monetary as well as real aggregates is an important open problem in economics.

In other words, if the conventional view that excess reserves (stemming either from customer deposits or government infusions of money) lead to increased lending were correct, then Kydland and Prescott would have found that credit is extended by the banks (i.e. loaned out to customers) after the banks received infusions of money from the government. Instead, they found that the extension of credit preceded the receipt of government monies.

Keen explained in an interview Friday that 25 years of research shows that creation of debt by banks precedes creation of government money, and that debt money is created first and precedes creation of credit money.

As Mish has previously noted:

Conventional wisdom regarding the money multiplier is wrong. Australian economist Steve Keen notes that in a debt based society, expansion of credit comes first and reserves come later.

This angle of the banking system has actually been discussed for many years by leading experts:

“[Banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts.”
- 1960s Chicago Federal Reserve Bank booklet entitled “Modern Money Mechanics”

“The process by which banks create money is so simple that the mind is repelled.”
- Economist John Kenneth Galbraith

[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.
- Robert B. Anderson, Secretary of the Treasury under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report

“Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they ‘create’ it.”
-Congressman Wright Patman, Money Facts (House Committee on Banking and Currency, 1964)

“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented.
- Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920s.

Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created — brand new money.
- Graham Towers, Governor of the Bank of Canada from 1935 to 1955

Monetary reformers argue that the government should take the power of money creation back from the private banks and the Federal Reserve system.

Indeed, PhD economist and candidate for Florida governor Farid Khavari wants to create a Bank of the State of Florida, to create credit without burdening the state and its citizens with high interest charges by private banks.

The state of North Dakota already has such a bank.

The bottom line is that monetary reformers argue that letting banks create credit and money and then charge high interest rates creates massive levels of debt for states and taxpayers. They argue that the power to create money should be reclaimed by the government and taken away from the private banks.

Personally, I agree with the monetary reformers. But even for those who think this is too radical a proposition, the question is whether a system where debt has to constantly and continually expand to keep the economy afloat is sustainable.

The Ever-Expanding Bubble

In a hearing held on September 30, 1941 in the House Committee on Banking and Currency, then-Chairman of the Federal Reserve (Mariner S. Eccles) said:

That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.

Indeed, Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta, said:

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.

America’s banking system needs to be fundamentally reformed.

I have to admit, I have a weakness for the intersection of the daft and science:

Male readers will no doubt assume that this means the original owner of the gas mask bra must strip in the case of emergency, and that that the real point of this exercise. But the bra was designed by a woman who demonstrated at the ceremony that it could be removed discreetly. Hhm, I am sure such niceties would not be observed in a bona fide emergency.

The BBC gives a recap of the ceremony:

The Ig Nobel Prizes were presented to the winners by genuine Nobel laureates….

Past winners also returned to take part in the celebrations. They included Kees Moeliker, the discoverer of homosexual necrophilia in the mallard duck, and Dr Francis Fesmire, who devised the digital rectal massage as cure for intractable hiccups.

Each new winner was permitted a maximum of 60 seconds to deliver an acceptance speech. The time limit was enforced by an intractable eight-year-old girl.

The evening also featured numerous tributes to the evening’s theme of “Risk”.

A 15-minute risk cabaret concert by the Penny-Wise Guys preceded the ceremony, during which the band paid special tribute to fraudster Bernie Madoff.

Other winners per the Boston Globe:

Veterinary medicine: Dr. Catherine Douglas and Dr. Peter Rowlinson of Newcastle University, Newcastle-Upon-Tyne, UK, for showing that cows who have names give more milk than cows that are nameless.

Peace: Dr. Stephan Bolliger, Dr. Steffen Ross, Dr. Lars Oesterhelweg, Dr. Michael Thali, and Beat Kneubuehl of the University of Bern, Switzerland, for determining — by experiment — whether it is better to be smashed over the head with a full bottle of beer or with an empty bottle.

Economics: The directors, executives, and auditors of four Icelandic banks — Kaupthing Bank, Landsbanki, Glitnir Bank, and Central Bank of Iceland — for demonstrating that tiny banks can be rapidly transformed into huge banks, and vice versa — and for demonstrating that similar things can be done to an entire national economy.

Chemistry: Javier Morales, Miguel Apátiga, and Victor M. Castaño of Universidad Nacional Autónoma de México, for creating diamonds from liquid — specifically from tequila.

Medicine: Dr. Donald L. Unger, of Thousand Oaks, California, for investigating a possible cause of arthritis of the fingers, by diligently cracking the knuckles of his left hand — but never cracking the knuckles of his right hand — every day for more than 60 years.

Physics: Katherine K. Whitcome of the University of Cincinnati, Daniel E. Lieberman of Harvard University, and Liza J. Shapiro of the University of Texas for analytically determining why pregnant women don’t tip over.

Literature: Ireland’s police service, An Garda Siochana, for writing and presenting more than 50 traffic tickets to the most frequent driving offender in the country — Prawo Jazdy — whose name in Polish means “Driver’s License.”

Mathematics: Gideon Gono, governor of Zimbabwe’s Reserve Bank, for giving people a simple, everyday way to cope with a wide range of numbers — from very small to very big — by having his bank print bank notes with denominations ranging from 1 cent to 1 hundred trillion dollars.

Biology: Fumiaki Taguchi, Song Guofu, and Zhang Guanglei of Kitasato University Graduate School of Medical Sciences in Sagamihara, Japan, for demonstrating that kitchen refuse can be reduced more than 90 percent in mass by using bacteria extracted from the feces of giant pandas.

It isn’t uncommon for a theme or a trend to dominate how investors and analysts view a particular sector. For instance, when barriers to interstate banking were lowered, then dropped, bank consolidation was all anyone seemed able to think about, even though there were other important developments in the industry. During that era, at McKinsey, a slide show made fun of typical presentations to banking clients. One had a cartoon of an a school of little fish fleeing an enormous fish with a wide open mouth and sharp teeth. Caption: “Citibank is about to enter your market.”

But while some banks were gobbled up by bigger ones, it was often because it served the executives to do so, rather than because it was a business imperative. Well-run small banks can do well; in fact, beyond a not-very-high threshold, banks do not show economies of scale (it may be that the diseconomies of scope outweigh the scale advantages within particular activities).

Similarly, in the dot com era, even stodgy industrial companies would feel compelled to show that they were somehow taking part of this (the seemingly) earth shaking change.

The rising influence of China is another sea change that investors and companies can nevertheless overdo. This tidbit comes from Andrew Kaplan, a hedge fund manager who focuses on the technology and alternative energy sectors:

From American Superconductor’s June quarterly earnings call, 7/30/09:

In 2008, China grew its installed base of wind turbines to about 12 gigawatts of power and early this year declared that it intended to add another 10 gigawatts or more in 2009…more recent reports state that China may exceed 150 gigawatts by 2020. To put all those numbers in perspective, one gigawatt is enough electricity to power…about 3,000,000 Chinese homes. It’s quite clear that the opportunity in China is tremendous and we are definitely taking advantage of the situation.

The 150 gw number by 2020, while it seems large, would be largely achieved if China kept its pace of wind installations flat with its 2009 number (10 gw).

China’s population is 1.3 billion. At current growth rate, population will be 1.4 billion in 2020.

Average household size in China (blended avg of urban + rural) is 4.0.

So in 2020 there will be 350 million Chinese households.

Given that 1 gw of wind can power 3,000,000 Chinese homes, 150 gw of wind will be able to power 450 million Chinese homes.

So in 2020 wind will account for 129% of Chinese household electricity use.

That’s all. You may now return to regularly scheduled programming. (and, yes, I know that households are not the only consumers of electricity. But, believe it or not, wind is not the only source of electricity in China).

Reader Barbara pointed out this Tom Paxton rendition, which did not get the attention it deserved during the throes of the crisis. Enjoy!

By George Washington of Washington’s Blog.

The talking heads say that financial blogs aren’t trustworthy.

But the whole debate about blogs versus mainstream media is nonsense.

In fact, many of the world’s top PhD economics professors and financial advisors have their own blogs. For example (in no particular order):

• Nouriel Roubini

• Paul Krugman
  

• Nassim Nicholas Taleb

• Simon Johnson

• Frank Shostak

• Willem Buiter
  

• Tyler Cohen
  

• Greg Mankiw
  

• Richard Baldwin
  

• Mark Thoma
  

• Michael Pettis
  

• Brad DeLong

• James Hamilton and Menzie Chinn

• Michel Chossudovsky

• Michael Hudson

• Yves Smith

• Rolfe Winkler

And the conclusions of economists who don’t have their own blogs are collected by other bloggers and on YouTube videos. For example, this blog rounds up everything Marc Faber says.

And you’ve got blogs like Zero Hedge that break stories about Goldman and high-frequency trading months before the mainstream media. And insightful commentators like Barry Ritholtz and Mish and many others.

So what is “news”? What the talking heads choose to cover? Or what various leading experts are saying – and oftentimes heatedly debating one against the other – on their blogs?

I would argue that mainstream newspapers haven’t just lost readers because of the Internet as an abstract new medium, but that they lost readers because they became – with some exceptions – nothing but official stenographers for the powers-that-be.  No wonder people have lost all faith in them.

Indeed, as of February, only 5% of the pundits discussing various government bailout plans on cable news shows are real economists. Why not hear what real economists and financial experts say?

To the extent that blogs offer actual news and the mainstream media does not, the latter will continue to lose eyeballs and ad revenues to the former.

Of course, many financial blogs are not very good.  The trick is to learn which are trustworthy and accurate.

And this is not to imply that all mainstream commentators are short on facts. Some are really good.  Once again, the trick is find the good ones.