Michigan (And Maybe Ohio): Lose Your Home, Lose Your Vote

I have been naive enough to have believed we live in a democracy, although the evidence contradicting that view is more obvious with every passing day. Michigan Republicans plan to challenge the eligibility of voters whose homes have been foreclosed. Talk about adding insult to injury.

From Michigan Messenger (hat tip Credit Slips):

The chairman of the Republican Party in Macomb County Michigan, a key swing county in a key swing state, is planning to use a list of foreclosed homes to block people from voting in the upcoming election as part of the state GOP’s effort to challenge some voters on Election Day.

“We will have a list of foreclosed homes and will make sure people aren’t voting from those addresses,” party chairman James Carabelli told Michigan Messenger in a telephone interview earlier this week. He said the local party wanted to make sure that proper electoral procedures were followed.

State election rules allow parties to assign “election challengers” to polls to monitor the election. In addition to observing the poll workers, these volunteers can challenge the eligibility of any voter provided they “have a good reason to believe” that the person is not eligible to vote. One allowable reason is that the person is not a “true resident of the city or township.”

The Michigan Republicans’ planned use of foreclosure lists is apparently an attempt to challenge ineligible voters as not being “true residents.”....

The Macomb County party’s plans to challenge voters who have defaulted on their house payments is likely to disproportionately affect African-Americans who are overwhelmingly Democratic voters. More than 60 percent of all sub-prime loans — the most likely kind of loan to go into default — were made to African-Americans in Michigan, according to a report issued last year by the state’s Department of Labor and Economic Growth...

Carabelli is not the only Republican Party official to suggest the targeting of foreclosed voters. In Ohio, Doug Preisse, director of elections in Franklin County (around the city of Columbus) and the chair of the local GOP, told The Columbus Dispatch that he has not ruled out challenging voters before the election due to foreclosure-related address issues.....

Challenging all voters registered to foreclosed homes could disrupt some polling places, especially in the Detroit metropolitan area. According to the real estate Web site RealtyTrac, one in every 176 households in Wayne County, metropolitan Detroit, received a foreclosure filing during the month of July. In Macomb County, the figure was one household in every 285, meaning that 1,834 homeowners received the bad news in just one month. The Macomb County foreclosure rate puts it in the top three percent of all U.S. counties in the number of distressed homeowners.

Steve Waldman: "Inequality and the Credit Crisis"

Steve Waldman has a great little post on how the end of the consumer credit bubble is going to expose rifts papered over by the illusion of rising living standards for all. In fact, average real wages have been stagnant since the mid-1970s; the gains in income have accrued entirely to those at the top of the food chain.

Thomas Palley has made a similar argument with a different emphasis. He contends that policy-makers retreated from full employment as a goal, since it allows workers to demand higher wages, which in turn causes inflation. Reducing worker bargaining power led to disinflation, lower interest rates led to rising asset prices, which in combination with financial innovation, created an until-recently reinforcing cycle whereby rising asset prices funded consumption. Palley noted that that cycle was at its limits, and Waldman discusses the implications.

My favorite section:

Credit was the means by which we reconciled the social ideals of America with an economic reality that increasingly resembles a "banana republic". We are making a choice, in how we respond to this crisis, and so far I'd say we are making the wrong choice. We are bailing out creditors and going all personal-responsibility on debtors. We are coddling large institutions of prestige and power, despite their having made allocative errors that would put a Soviet 5-year plan to shame. We applaud the fact that "wage pressures are contained", protecting the macroeconomy of the wealthy from the microeconomy of the middle class.

Go read it here.

Are You Sure You Want What You Want?

The question in the headline may seem odd, but consider. Many of the things we want are desires adeptly created by marketing and/or peer influence. It's easy to recognize in teen agers.

Cassandra brings us a more vivid example of how ideas and desires can be influenced:

I was simply wondering whether all this is financial furor is simply, well, psychological, behavioural, maybe even imagined? And if so, perhaps, rather than embarking upon some of the messy heavy lifting and austerity seemingly required to alter consumption, savings and political orientation problems, we can simply alter our minds. Enter Neuro-Linguistic Programming. Why has this been relegated to the likes of McDonalds and the soap-powder advertisers, when the world of high-finance is simply screaming out for quick and easy solutions to the big financial and economic problems of our day such as sustaining the price s of level-3 assets, monoline solvency, performance of Alt-A or BBB mortgage tranches as well as extending the maximum amount of leverage households and the US government might safely assume before the lenders say no?

Tony Robbins uses NLP along with other tricks, and I know some people who claim they employ it to great effect.

The demo below, according to Cassandra, shows

the fabulous Derren Brown operate upon a dyed-in-the wool cynic like english actor-director-writer Simon Pegg

BTW, the way he touches Pegg's shoulder and hand is significant, although I don't know enough about the technique to say how.

Financial Times Advocates Newspeak!

The total surveillance society program is further along in London than in the US (the prevalence of CCTV, for instance), but it's still a shocker to see a comment in the Financial Times, which many consider to be the best paper in the English language, advocating Newspeak.

For those of you who need a refresher, English writer George Orwell's best known work, 1984, describes a totalitarian state which has perfected the art of mind control. One of its tools is Newspeak. From Wikipedia:

Newspeak is a fictional language in George Orwell's novel Nineteen Eighty-Four. In the novel, it is described as being "the only language in the world whose vocabulary gets smaller every year." Orwell included an essay about it in the form of an appendix in which the basic principles of the language are explained. Newspeak is closely based on English but has a greatly reduced and simplified vocabulary and grammar. This suits the totalitarian regime of the Party, whose aim is to make any alternative thinking – "thoughtcrime", or "crimethink" in the newest edition of Newspeak – or speech impossible by removing any words or possible constructs which describe the ideas of freedom, rebellion and so on. One character says admiringly of the shrinking volume of the new dictionary: "It's a beautiful thing, the destruction of words."

Now from the op-ed in the Financial Times by Michael Skapinker, which, a la Newspeak, recommends sharply reducing the vocabulary used in writing for the convenience of foreigners. We've too often seen, however, that seemingly beneficial initiatives can be turned to other ends.

From the Financial Times:

When I spoke to a recent Brussels conference of business translators, one of them asked me if the Financial Times had any plans to publish a separate edition in simplified English.....

On the Eurostar back to London, I pondered what a simplified FT might look like. The first issue to tackle, I thought, would be vocabulary. In his book The English Language, David Crystal says that a medium-sized English dictionary has about 100,000 words in it. Even native speakers know only a fraction of these....

Mr Crystal, in his book, recounts an attempt to work out how many words the average native English-speaker does know. This involved taking a sample of entries from different parts of a dictionary and asking the subject to count how many she recognised. Extrapolating her answer to the whole dictionary suggested she understood 38,300 words and regularly used 31,500.

How many words would a non-native speaker need to understand a simplified form of English? Several people have investigated this over the years and have come up with a similar answer: fewer than 1,000. One of the pioneers of simplified language, Charles Kay Ogden, devised what he called Basic English in the 1920s. It used only 850 words – sufficient, he said, to communicate.

The Aerospace and Defence Industries Association of Europe, a champion of simplified English, has devised a system that uses no more than 900 words. The association’s involvement demonstrates what often drives simplified English: the need for safety.

When pilots or sailors from different countries talk to each other, they usually do so in English. English is the international language and, in spite of challenges from Spanish or Mandarin, is likely to remain that way throughout our lifetimes.

Air traffic controllers, pilots and sailors began speaking to each other in English and soon developed a language they could all understand. A limited but effective vocabulary was one part of it, but they also needed forms of speech that they could all recognise. Misunderstandings meant people could die.

So in 1980, Mr Crystal writes, a project was set up on Essential English for International Maritime Use. Also known as Seaspeak, this relied on standard, easily understood phrases. So instead of “What did you say?” or “I can’t hear you” or “Please repeat that”, sailors and coast guard officials were told to opt for “Say again.”

The European aerospace association’s effort began a year earlier when the Association of European Airlines asked aircraft manufacturers to improve the comprehensibility of maintenance manuals. Many airline technicians were not native English speakers and found the documents difficult.

In 1986 the manufacturers issued their first guide to Simplified Technical English, which was then adopted by the Air Transport Association of America and has since become an international standard.

The standard is specific in its instructions, which aim to ensure that once someone has learnt a word in one form, they will not encounter it in another. So manufacturers are told the word “follow” should always mean “come after” and not “obey”. So you can say “obey the safety instructions” but not “follow the safety instructions”.

You can see why this might be useful in aircraft maintenance books but it would be unnecessarily restrictive in reporting the credit crisis.

But at least one news organisation has developed a simplified English service, and it did it some time back. The Voice of America broadcast its first programme in what it calls “Special English” in 1959.

This has a slightly bigger vocabulary – 1,500 words. It also has style rules: use short sentences that contain only one idea. Use the active voice. Do not use idioms. And above all, speak slowly. Special English broadcasters speak at two-thirds of normal speed.

To a native speaker, the effect is soporific. To a non-native speaker, the increase in comprehension must be thrilling. Simplified English may not be for everyone, but with the rise in the number of people around the world working in English, I suspect we will see more of it.

The problem is it will be too tempting to make a more robust version of Simplified English serve for everyone. Just imagine how it will take dumbing down to a new level.

"The key to happiness is freedom not income"

Off and on, usually provoked by the release of a new study, the media will turn to the question of happiness and incomes. While the Wall Street Journal has exhibited a tendency to tout research that shows that the rich are happier, the results are far less clear-cut. Once a certain income level has been reached (typically, enough to provide for a middle class standard of living in that society and allow one to accumulate a cushion for emergencies) more money does not produce much if any gains in happiness. And some findings have been under-reported in the US. For instance, while some studies have found that being in the top income group or having high educational attainment is correlated with higher levels of happiness, living in socially stratified societies leads to less satisfaction across all groups. And remember, Nigeria, hardly a bastion of wealth, has scored as the happiest country in a multi-year international survey.

An article today in the Financial Times suggests that researchers may have been looking at the wrong axis in looking for a strong correlation between income and happiness. Roberto Foa (a researcher in the same international survey mentioned above) contends that freedom is a far more important factor than economic attainment.

If Foa is correct, the post 9/11 surveillance apparatus and restrictions on civil liberties may have a bigger impact than the security-minded might contend. I'll admit to being easily riled, but all sorts of people now seem to feel entitled to make intrusive information requests (for instance, hotel clerks demanding to see photo IDs for rooms that are pre-paid). But only someone who had had a lobotomy could be indifferent to airport security, (particularly when they abuse their authority). And the right to assemble and present one's views, even in passive ways like wearing T-shirts with wrong message, is under attack.

And don't kid yourself that they aren't watching. Your humble blogger got an e-mail from the Department of State inviting me to participate in a webcast (on the economics of Colombia, of all things). The fact that the Department of State (and who knows who else) is monitoring bloggers is scary (I suppose I had naively hoped there were so many that we were all part of a crowd).

From the Financial Times:

In recent years, a small army of happiness gurus has lined up to proclaim the ills of modern society, and its failure to make us feel better. We have more money, say some, but family life has eroded. We live longer, but crime has risen. Some have even blamed affluence itself, arguing that the dizzying range of lifestyle options that we now confront frustrates the pursuit of happiness.

Yet contrary to the assertions of pessimists, newly released data, recently published in an article with colleagues from Jacobs University Bremen and the University of Michigan, shows that today’s world is a happier one. From 1981 to the present, more than 350,000 people from 90 countries were asked about their happiness and their satisfaction with life as a whole...

How is it that the world is getting happier? In the words of Thucydides, the secret of happiness is freedom. In each survey respondents were also asked to rate their sense of free choice in life. In all but three countries where perceived freedom rose, subjective well-being rose also. A chart, produced by the authors, shows how these increases in free choice and subjective well-being are strikingly related.

The world in which we live today is unquestionably a free one. For the first time in history, most of the world is governed democratically, the rights of women and minorities are widely acknowledged, and people, ideas and investment can cross borders. Since the study began in 1981, dozens of middle-income countries have democratised, relieving many from fear of repression: every country making a transition from authoritarian rule to democracy shows a rising sense of free choice. In addition, there has been a sharp rise in the acceptance of gender equality and alternative lifestyles. Countries where this revolution has been most pronounced, such as Canada and Sweden, continue to show rising well-being.

Arguably, no region has experienced this transformation as rapidly as eastern Europe. In the space of two decades, several countries that were members of the Soviet bloc have become members of the European Union, with new freedoms to travel, work and live as never before imaginable. Not only has the proportion claiming to be “very happy” risen in every country except Serbia and Belarus, but this trend has been wholly driven by the younger generation. Among eastern Europeans aged 15-24, the proportion saying they were “very happy” was 9 per cent at the start of the 1990s, roughly the same as in other age groups. By 2006, this proportion had more than doubled, and steady rises were also evident among those in their 30s and 40s. Country after country in the study...exhibits this trend.....

So if the world is becoming happier, what are the implications? First, that the expansion of political and social freedoms over the past quarter of a century is vindicated...

Second, the results may engender caution towards attempts to engineer happiness through public policy. The happy countries include social democracies such as Sweden and Denmark, and more laisser faire economies such as Australia and the US. What they have in common are not their policies but institutions: democracy, rule of law and social tolerance. People are largely capable of engineering their own happiness when given the means to do so.

Third, the link from free choice to rising happiness suggests that the appropriate benchmark of development is not income per capita, but individual freedoms and capabilities. This is the human development perspective associated with Amartya Sen, the Nobel laureate. While income and well-being are closely correlated at early stages of development, once the threat of starvation recedes, social and political freedom appears to be as important.

Though the past 25 years have brought a happier world, there is no certainty that the next 25 will continue to do so. Many low and middle-income countries have experienced exceptionally high rates of growth, ranging from 4 to 11 per cent, while richer countries have undergone falling work hours and social liberation. There is no guarantee that either will persist indefinitely.

Meanwhile democratisation is a one-shot occurrence, and the collapse of communism is in the past. Today, there are as many countries that appear to be sliding into soft authoritarianism and state failure as there are countries that are becoming consolidated democratic cultures, while the future of the global economic order is itself in jeopardy. It would be a huge irony if the benefits of liberal institutions for human happiness were to become evident precisely at the moment when those gains are most at risk.

Note that Foa suggested that international mobility, meaning both freedom to travel and ability to relocate, are part of the happiness equation, and both are becoming more rather than less restricted.

Wall Street Losses a Disaster for New York City Finances

One of the shifts in leading edge conventional wisdom is the "cities are cool" sentiment. It's a lagging indicator, so lagging as to set for a near-term reversal.

Mind you, I like cities and particularly like not owning a car, which limits me to particularly densely populated and/or enlightened metropolises. The logic of the new-found enthusiasm for city living among the chattering classes was in part a recognition that high cost energy makes suburban living much more expensive (it's not just the driving but also the expense of heating an isolated home versus even a similar-sized space ensconced in a larger apartment building). The other factor os quality of life, which until recently, was perceived to be better in the 'burbs. But now that kids no longer amuse themselves in the neighborhood but instead have activities and play dates, and cities offer convenience, street life, and closer proximity play dates, suddenly urban living looks child-friendly.

But the charm of cities depends on adequate municipal budgets. It wasn't until the Giuliani era that the number of parents deciding to remain in the City grew sharply, and with good reason. Even in the fat years of the 1980s, Manhattan wasn't entirely safe. I was lucky. I merely had my wallet stolen more times than I can remember,

Perhaps a better indicator: during the later 1980s, I lived in a townhouse on a very nice block (69th between Park and Madison). The building had an outer door that was unlocked and a keyed inner door. I was the first person out of the building in the morning and inevitably had to step over a homeless person sleeping between the two doors. I would walk down Madison and there would be at least one homeless person on each side of the street sleeping in the doorways of the fancy boutiques.

All cities will be hit by declining tax revenues, but New York will fare worse due to its dependence on financial services. Despite the view that foreign buyers will keep the real estate market from declining too far, a return to 1980s conditions may dampen their enthusiasm.

From Bloomberg:

Wall Street's mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services, Mayor Michael Bloomberg said.

Some companies are seeking refunds from the city on taxes they prepaid, saying losses have cut their tax liability to zero. The banks pay tax on 110 percent of earnings in advance as a ``safe harbor,'' protecting against penalties for underpayment.

``I think it will be a number of years before Wall Street starts paying taxes again,'' the mayor said at a press conference yesterday in Manhattan. ``They will carry forward all of those losses.''...

New York Governor David Paterson called the Legislature back to work next week in an emergency session to address widening deficits as revenue, including tax receipts from Wall Street, declines. Sixteen of the state's largest banks sent taxes totaling $5 million to the state treasury in the most recent reporting period, a 97 percent decrease from a year earlier, when they accounted for $173 million in revenue, Paterson said.

The state faces a $26 billion deficit over the next three years and a $630 million shortfall in the current year that began April 1, Paterson has said. The governor yesterday outlined $630 million in administrative spending cuts he intends to apply this year, and he called upon the Legislature to cut at least $600 million more later in August.

``A lot of what we're facing now are the diminished revenues from Wall Street...,'' Paterson, a Democrat who took over as governor in March following Eliot Spitzer's resignation, said yesterday.

In the city, where Wall Street provides about 5 percent of jobs and more than 20 percent of total personal income, deficits are projected to widen to $2.3 billion in fiscal 2010 beginning next July, growing to $5.96 billion and $5.4 billion in 2011 and 2012, city Comptroller William Thompson has said.

``I think we still haven't come to grips with how deep will be the impact on New York City's and the state's economy and budget resulting from this credit crisis,'' said Kathryn Wylde, president of the Partnership for New York City, a civic group of corporate chief executives organized to promote commerce....

``I am worried about the state's bond rating, and it will start to fall if the governor doesn't do something about his budget problems now,'' Bloomberg said. ``The rating agencies are cognizant of what's happening to our economy.''

Alternative Stores of Value for the New Millennium

(Submitted by "Cassandra" from Cassanadra Does Tokyo)

Considering our location high on the ridgeline above the steep slopes of deflation on one side and the inflationary abyss n the other, and despite our slip (in the last two weeks) seemingly towards deflation, I thought it apt to offer up some non-traditional stores of value given the teetering banking system, near vertical ascent of commodities, and the still highly departed real estate indices as multiples of median incomes, all which cause consternation when it comes to preserving capital (at least for the contrarian). Of course, everyone is encouraged to share their own.

Anyone who's ever happened upon any episode of Antiques Roadshow is familiar with the increasing value of things vintage. Factory Farming and GMO crops that require pesticide and ever-more expensive nitrates could result in nice premiums to the colourful but gnarly-looking heirloom varieties (pictured left). And in the worst case, should things not work out as planned, they would make for delicious eating!

Garden sculpture too provides a fascinating utilitarian place to keep your money both safe and close by - especially if its a veritable work of the late Alexander Calder. Indeed, too big to steal, it simply sits, making itself wondrously beautiful to all who gaze upon it, and best of all, appreciates - even on weekends! Fortunately, such behemoths don't fit on Ken Griffin's roof terrace, so their values remain tame by comparison to smaller, more portable impressionist wall-hangings.

The Dutch have always been sober-minded despite their paradoxical tolerance of cannabis, evidenced here by their practical love-affair with the Windmill. Considering how long these beauties have been around, they must have ultra-long depreciation schedules that would warm the heart of even the most parsimonious purchasers.

War, depressions, floods have not deterred the thronging masses of football fans and the popular spirit of athletic competition. The problem is that professional sports has been gripped by a "Location Location Location"-like mantra that has lead well-heeled psychic-income-seeking egos to pay top-dollar (and pound!) for trophies that will likely hemorrhage cash when the going gets errr ummmm tough - at least until the proverbial screws are turned in earnest. Second-tier sports clubs (like Millwall for example, or even Hamilton Academical) share the same consumer non-durable demand characteristics for a fraction of the price of, say, Chelsky. And Millwall has the added benefit of providing Vinnie Jones-like muscle for less-than-salubrious "other pursuits" if things do, in fact, get even tougher-than-expected.

Little could be more basic than transport. So if oil has "peaked" and cold nuclear fusion, and the BTF Flux-Capacitor remain far-off pipe-dreams, what could be better than owning your own existing commuter rail service?!? Japan remains one of the few places where private rail service demonstrably works AND throws off reasonable cash-flow which after almost two decades of ratings compression are almost attractive. No NIMBY complaints as the lines are laid and more or less paid for. OK so Nagoya Rail's (pictured here) dated commuter cars need capex for sprucing up, but the earnings yields are reasonsably attractive (compared to JGBs) and there is reputed to be large under-valued land holdings still on the books if ever asset prices in Japan do revive.

One of the greatest stores of value, amusingly, has been paper. Not newsprint, or the ordinary kind, but the type bearing the likeness of the legendary Honus Wagner. The T207 has continued appreciate at quasi-exponential rates, long after my cousin paid for his Harvard education with the unlikely (at the time) and short-sighted (in retrospect) sale for a sum of five-digits. Compared to current values, he might as well have given it away...

Diamond-encrusted skulls, while not MY my metaphorical cup of tea, apparently are de rigeur in certain circles. I certainly am not qualified to pass judgment on this particular one's artistic merit. Nor do I wish (here) to sully those whose opinion of such a piece tends towards the favorable. So despite my inherent aesthetic and financial skepticism, I bring to your attention that it remains possible that - as with Faberge eggs - such curios might in fact turn out to be sound (and portable!) long term stores of value.

While Waterworld set Kevin Costner's career back a few notches, it did (years after, at least) provide some things to ruminate about (outside of what Zimbabwe might resemble were it ruled by a crazed Dennis Hopper instead of lunatic Robert Mugabe. But in a world of increasingly sought-after petrol and high energy costs, what could be more useful, apt, and elegantly graceful than a beautiful wooden sloop using nothing but the power of the wind for locomotion. As a boat owner, I do not dispute that the happiest days in boat owner's life are the day one buys it, and the day one sells it. Yet, I cannot help but dream that in such an environment a modest, but beautiful sailing vessel will become MORE cherished (and valued!!!) with time. Oh, and true to form, no kevlar - cloth sails only please!

Stands of timber are at once both majestic and economically useful. I've got some. Swenson's got some. Brad Pitt and Angelina Jolie just got some 500-odd ha with their Chateau in southern France. I still like RYN and PCL for their combination of still-cheap implied valuation, potential inflation hedge, and the fact that I salivate at the thought of how many large and small-denomination currency notes can be printed with the paper from a single hectare...

Everyone should have a trusty vintage Alembic in their garage, barn, or cellar, though few in fact do, which makes having one all the more attractive. Since long before Shakespeare's day (epoch and associated alchemist pictured with 16th century still adjacently) the Alembic has provided merriment and valuable liquid goods of exchange for many an entrepreneur and moonshiner. The raw inputs are as plentiful as the multitudes of flavourful and potent outputs. Nice copper Alembics, in addition to their economic usefulness, and yields of hi-proof nectar, also have valuable collectible potential as well as (in a pinch) being a good source of scrap, making for an SOV-triple play!

A Grove of Olive Trees is romantic. It is also beautiful. It's pure economic yield, while less-than-lotterific (unless depicted by van Gogh as the one here), hasn't prevented the earth on which they stand from appreciating, albeit in fits and starts, and certainly not without hiccups that often last as long as an entire generation. Of course, I am not qualified (as a northerner) to wax too lyrically about their bounty and positive externalities, something I will leave for Charles Butler's investment manifesto, in this most wise and overlooked of posts.

Jim Grant: "Why No Outrage?"

Jim Grant, who writes and publishes Grant's Interest Rate Observer, is a rare figure on Wall Street: extraordinarily well versed in financial history, literate, possessed with a Victorian sensibility, which is very much on display here.

His essay today in the Wall Street Journal is very much worth reading (and appears to be accessible without a subscription). I hope this selection provokes thought and discussion.

I have a different line of thought than Grant's. Are we outraged about anything? Are there any protests of meaningful size that one can think of? No. And yet there would seem to be plenty to be upset about, not just matters financial. Frustrated resignation is the norm.

From the Wall Street Journal:

The doctrine of activist central banking owes much to its progenitor, the Victorian genius Walter Bagehot. But Bagehot might not recognize his own idea in practice today. Late in the spring of 2007, American banks paid an average of 4.35% on three-month certificates of deposit. Then came the mortgage mess, and the Fed's crash program of interest-rate therapy. Today, a three-month CD yields just 2.65%, or little more than half the measured rate of inflation. It wasn't the nation's small savers who brought down Bear Stearns, or tried to fob off subprime mortgages as "triple-A." Yet it's the savers who took a pay cut -- and the savers who, today, in the heat of a presidential election year, are holding their tongues.

Possibly, there aren't enough thrifty voters in the 50 states to constitute a respectable quorum. But what about the rest of us, the uncounted improvident? Have we, too, not suffered at the hands of what used to be called The Interests? Have the stewards of other people's money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people's wrath?

The American people are famously slow to anger, but they are outdoing themselves in long suffering today. In the wake of the "greatest failure of ratings and risk management ever," to quote the considered judgment of the mortgage-research department of UBS, Wall Street wears a political bullseye. Yet the politicians take no pot shots...

The most blistering attack on the ancient target of American populism was served up last October by the then president of the Federal Reserve Bank of St. Louis, William Poole. "We are going to take it out of the hides of Wall Street," muttered Mr. Poole into an open microphone, apparently much to his own chagrin.

If by "we," Mr. Poole meant his employer, he was off the mark, for the Fed has burnished Wall Street's hide more than skinned it.... To facilitate the rescue of that system, the Fed has sacrificed the quality of its own balance sheet. In June 2007, Treasury securities constituted 92% of the Fed's earning assets. Nowadays, they amount to just 54%. In their place are, among other things, loans to the nation's banks and brokerage firms, the very institutions whose share prices have been in a tailspin. Such lending has risen from no part of the Fed's assets on the eve of the crisis to 22% today. Once upon a time, economists taught that a currency draws its strength from the balance sheet of the central bank that issues it. I expect that this doctrine, which went out with the gold standard, will have its day again.

Wall Street is off the political agenda in 2008 for reasons we may only guess about. Possibly, in this time of widespread public participation in the stock market, "Wall Street" is really "Main Street." Or maybe Wall Street, its old self, owns both major political parties and their candidates. Or, possibly, the $4.50 gasoline price has absorbed every available erg of populist anger, or -- yet another possibility -- today's financial failures are too complex to stick in everyman's craw.

I have another theory, and that is that the old populists actually won. This is their financial system. They had demanded paper money, federally insured bank deposits and a heavy governmental hand in the distribution of credit, and now they have them. The Populist Party might have lost the elections in the hard times of the 1890s. But it won the future.

Before the Great Depression of the 1930s, there was the Great Depression of the 1880s and 1890s. Then the price level sagged and the value of the gold-backed dollar increased. Debts denominated in dollars likewise appreciated....

The winners and losers conducted a spirited debate about the character of the dollar and the nature of the monetary system. "We want the abolition of the national banks, and we want the power to make loans direct from the government," Mary Lease -- "Mary Yellin" to her fans -- said. "We want the accursed foreclosure system wiped out.... We will stand by our homes and stay by our firesides by force if necessary, and we will not pay our debts to the loan-shark companies until the government pays its debts to us."

By and by, the lefties carried the day. They got their government-controlled money (the Federal Reserve opened for business in 1914), and their government-directed credit (Fannie Mae and the Federal Home Loan Banks were creatures of Great Depression No. 2; Freddie Mac came along in 1970). In 1971, they got their pure paper dollar. So today, the Fed can print all the dollars it deems expedient and the unwell federal mortgage giants, Fannie Mae and Freddie Mac, combine for $1.5 trillion in on-balance sheet mortgage assets and dominate the business of mortgage origination (in the fourth quarter of last year, private lenders garnered all of a 19% market share).

Thus, the Wall Street of the Morgans and the Astors and the bloated bondholders is today an institution of the mixed economy. It is hand-in-glove with the government, while the government is, of course -- in theory -- by and for the people. But that does not quite explain the lack of popular anger at the well-paid people who seem not to be very good at their jobs.

Since the credit crisis burst out into the open in June 2007, inflation has risen and economic growth has faltered. The dollar exchange rate has weakened, the unemployment rate has increased and commodity prices have soared. The gold price, that running straw poll of the world's confidence in paper money, has jumped. House prices have dropped, mortgage foreclosures spiked and share prices of America's biggest financial institutions tumbled.

One might infer from the lack of popular anger that the credit crisis was God's fault rather than the doing of the bankers and the rating agencies and the government's snoozing watchdogs. And though greed and error bear much of the blame, so, once more, does human progress. At the turn of the 21st century, just as at the close of the 19th, the global supply curve prosperously shifted. Hundreds of millions of new hands and minds made the world a cornucopia again. And, once again, prices tended to weaken. This time around, however, the Fed intervened to prop them up. In 2002 and 2003, Ben S. Bernanke, then a Fed governor under Chairman Alan Greenspan, led a campaign to make dollars more plentiful. The object, he said, was to forestall any tendency toward what Wal-Mart shoppers call everyday low prices. Rather, the Fed would engineer a decent minimum of inflation.

In that vein, the central bank pushed the interest rate it controls, the so-called federal funds rate, all the way down to 1% and held it there for the 12 months ended June 2004. House prices levitated as mortgage underwriting standards collapsed. The credit markets went into speculative orbit, and an idea took hold. Risk, the bankers and brokers and professional investors decided, was yesteryear's problem.

Now began one of the wildest chapters in the history of lending and borrowing. In flush times, our financiers seemingly compete to do the craziest deal. They borrow to the eyes and pay themselves lordly bonuses. Naturally -- eventually -- they drive themselves, and the economy, into a crisis. And to the scene of this inevitable accident rush the government's first responders -- the Fed, the Treasury or the government-sponsored enterprises -- bearing the people's money. One might suppose that such a recurrent chain of blunders would gall a politically potent segment of the population. That it has evidently failed to do so in 2008 may be the only important unreported fact of this otherwise compulsively documented election season.

Mary Yellin would spit blood at the catalogue of the misdeeds of 21st-century Wall Street: the willful pretended ignorance over the triple-A ratings lavished on the flimsy contraptions of structured mortgage finance; the subsequent foreclosure blight; the refusal of Wall Street to honor its implied obligations to the holders of hundreds of billions of dollars worth of auction-rate securities, the auctions of which have stopped in their tracks; the government's attempt to prohibit short sales of the guilty institutions; and -- not least -- Wall Street's reckless love affair with heavy borrowing.

For every dollar of equity capital, a well-financed regional bank holds perhaps $10 in loans or securities. Wall Street's biggest broker-dealers could hardly bear to look themselves in the mirror if they didn't extend themselves three times further... Managing balance sheets as highly leveraged as Wall Street's requires a keen eye and superb judgment. The rub is that human beings err....The more immediate risk today is that Wall Street, sweating to fill out this year's bonus pool, runs itself and the rest of the American financial system right over a cliff.

It's just happened, in fact, under the studiously averted gaze of the Street's risk managers. Today's bear market in financial assets is as nothing compared to the preceding crash in human judgment. Never was a disaster better advertised than the one now washing over us. House prices stopped going up in 2005, and cracks in mortgage credit started appearing in 2006. Yet the big, ostensibly sophisticated banks only pushed harder.

Bear Stearns is kaput and Lehman Brothers is reeling, but Morgan Stanley perhaps best illustrates the gluttonous ways of Wall Street....under Chief Executive John Mack, [it] set out to catch up to the rest of the pack. In the spring of 2006, it unveiled a trillion-dollar balance sheet, Wall Street's first. It expanded in every faddish business line, not excluding, in August 2006, subprime-mortgage origination (the transaction, intoned a Morgan Stanley press release, "provides us with new origination capabilities in the non-prime market, which we can build upon to provide access to high-quality product flows across all market cycles"). Nor did it pull in its horns as the boom wore on but rather protruded them all the more, raising its ratio of assets to equity to the aforementioned 33 times at year-end 2007 from 26.5 times at the close of 2004. Naturally, it did not forget the help. Last year, Morgan Stanley paid out 59% of its revenues in employee compensation, up from 46% in 2004.

Huey Long, who rhetorically picked up where Lease left off, once compared John D. Rockefeller to the fat guy who ruins a good barbecue by taking too much. Wall Street habitually takes too much. It would not be so bad if the inevitable bout of indigestion were its alone to bear. The trouble is that, in a world so heavily leveraged as this one, we all get a stomach ache. Not that anyone seems to be complaining this election season.

US: The Most Deceitful Form of Socialism?

Willem Buiter has a characteristically colorful post, "Time for comrade Paulson to pull the plug on the Fannie and Freddie charade" on the prospect of a Fannie and Freddie rescue. Why is it the British can fulminate better than we Americans do?

But Buiter's beef isn't the operation of the GSEs but the philosophy behind them, the hydra-headed and not fully visible ways the US has socialized real estate (did you know about the Farm Credit Banks, for instance?). He provided a good summary of the history and dramatis personae.

The whole post makes for great reading. Let me give some key extracts, which I wish I had written:

Are Fannie Mae and Freddie Mac adequately capitalised, as asserted recently by US Treasury Secretary Hank Paulson, Federal Reserve Board Chairman Ben Bernanke and their regulator Office of Federal Housing Enterprise Oversight Director James B. Lockhart III? The answer is: obviously not, if these two government-sponsored enterprises of the US federal government had to make a living on normal private commercial terms. Obviously not if they were subject to the market discipline preached by Paulson and Bernanke, but not practiced when it comes to large financial institutions perceived as systemically important (too large or too interconnected to fail) or too politically sensitive to fail.....

There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican admininstrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.

The abuse of the Fed as a quasi-fiscal agent of the federal government in the rescue of Bear Stearns is without precedent, and quite possibly without legal justification. The creation of the Delaware SPV that houses $30 billion worth of the most toxic waste from the Bear Stearns balance sheet (with only $1 billion of JP Morgan money standing between the tax payer and the likely losses on the $29 billion committed by the Fed to fund the SPV on a non-recourse basis) is the clearest example of quasi-fiscal obfuscation I have come across in an advanced industrial country. The decision by the Fed to ‘invite’ the primary dealers and their clearers to collude in the (over) pricing of illiquid collateral offered by the primary dealers to the Fed at the newly created TSLF and PDCF (by the Fed accepting the pricing/valuation by the clearers of the illiquid collateral) is another example of the abuse of the Fed as a vehicle for channeling taxpayer-financed subsidies to the primary dealers. This form of socialism for the rich is therefore well-established.

The chair of the Senate Banking Committee, Chris Dodd, has said the Fed and the Treasury were considering opening the Fed’s discount window to Fannie and Freddie. I am afraid he may be right. After all, an injection of the liquidity by the Fed is so much more politically expedient than an explicit fiscal subsidy, even though their economic effect is identical. This would not be a liquidity enhancement operation by the Fed, which would be a legitimate operation for the central bank to engage in. It would be a quasi-fiscal recapitalisation of two insolvent institutions, which is not part of the mandate of the Fed.

The financial assistance offered to US homeowners through the spagetti of federal financial inducements (ranging from the tax deductability of nominal interest payments to the subsidisation of mortgage financing provided by the FHA and the GSEs) is not primarily socialism for the rich. It is socialism for the electorally sensitive, rather like the agricultural welfare state that exists in the US.

So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie Mae. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.

So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.

Cost of Japan's Competitiveness: Increasing Poverty

Many foreign observers of Japan don't get past the "lost decade/deflation" headline. They miss the fact that Japan has a robust export sector and continues to run high trade surpluses, despite the supposed difficulty of advanced economies competing with emerging markets.

But how has this outcome been achieved? As Michiyo Nakamoto tells us in a Financial Times comment "Poverty widens the cracks in Japan's facade," by squeezing workers. Japan in a generation went from a system of lifetime employment to high use of part-time and temporary workers, The latter have poor earnings over their working years and face poverty in their middle age. Worse, Japan has comparatively weak safety nets (one of the reasons for its high savings rate) and less reliance on extended families than some other cultures.

Now America also has a working poor, but it does not include the college educated in large numbers. In Japan, graduates during the "lost decade," save those who attended elite universities, are at risk of not landing a permanent job and thus suffering from marginal attachment to the workforce. Could America be heading down Japan's path?

From the Financial Times:

Not long before representatives of the world’s richest nations convened in Toyako for the glitziest event in the history of this remote Japanese fishing community, a very different scene unfolded just a few hundred kilometres south. Angry day labourers in Nishinari, Osaka, threw stones and firebombs at riot police, overturned a car and set fire to garbage, venting their frustration at their inability to find work.

The violence, which involved an estimated 200 people and went on for two days last month, was a long way from the serene facade that Japanese society normally presents to the world. But the riots were just one extreme manifestation of the social cracks that are appearing in a country that has often, if half-jokingly, been referred to as the world’s most successful socialist state.

Following more than a decade of economic stagnation, Japan is no longer the gentle place it used to be for the weaker members of its society.

In a relatively short time, the world’s second largest economy has been transformed from a cohesive, egalitarian society to one saddled with the ills of the neo-liberalist model: a growing underclass, social alienation, widening income disparities and simmering discontent. The country’s once-vaunted social and labour contracts have failed to keep up with the changes wrought by globalisation, leaving a large number of people barely managing to survive.

Although unemployment in Japan, at about 4 per cent, is by no means high, the number of so-called “working poor”, who earn less than Y2m ($18,600, €11,800, £9,400) annually – a level considered to be close to, if not at, the poverty line – has risen at an alarming rate. In 1997, 5m workers fell in that category but by last year the number had doubled to 10m, according to a government survey.

The rise in working poor stems largely from a sharp increase in non-regular workers as Japanese companies restructure their workforces to cut costs and remain globally competitive. Non-regular workers, including part-time workers, temporary workers and others, comprise more than a third of the total workforce, according to government statistics. In addition, there are at least 1.8m “freeters”, who take on whatever temporary jobs they can find and generally have no benefits. Thousands of freeters, in their 20s and 30s, sleep in internet cafés and are unable to find stable employment because they lack a permanent address.

Japan’s minimum wage, at Y687 an hour, is in danger of falling to the lowest level among Organisation for Economic Co-operation and Development countries once the US implements legislation to raise its minimum wage. Japan is still, relatively speaking, an egalitarian society, where income disparities are nowhere near as large as they are in many western societies. But the old social and labour contract – which promised income stability, assured that hard work would be rewarded, healthcare would be within everyone’s reach and people could retire knowing that their pensions would keep them off the streets – no longer applies to a considerable proportion of the Japanese public.

There is growing concern that spreading poverty is leading to an increase in suicide, crime and the divorce rate and even aggravating Japan’s falling birth rate. “Poverty is not just a situation of low wages but isolation from society, from family, friends and workplace,” says Tsuyoshi Takagi, president of the Japanese Trade Union Confederation. “Japan’s silent public is reaching the limit [of its patience],” he says.

As public frustration has grown, the finger is being pointed at past policies of deregulation, particularly of the labour market. There are calls for tighter regulation, higher taxes on the rich and a redistribution of wealth. In a bid to placate a worried public, the government has responded with plans to ban – in principle – the contracting of unskilled day labourers.

But in an era of global competition, turning back the clock on labour reforms would be a simplistic response to a complex problem. A labour contract based on lifetime employment and seniority, coupled with companies hiring straight out of college, rewards those already in the system with stable employment, pay and benefits, no matter how unproductive they may be, says Naohiro Yashiro, professor of labour economics at the International Christian University. It also penalises those who have slipped through the cracks, regardless of their potential.

Many of the working poor are those who, having failed to secure a place within the system to begin with, become destitute as they grow older and their chances of finding even part-time work decrease. Many freeters, for example, cannot find full-time work because Japanese companies are reluctant to hire anyone who has not been in stable employment. The system also discourages much-needed venture businesses, since the opportunity costs for anyone who dares opt out of it are prohibitively high, Prof Yashiro says.

Japan, no doubt, needs to rebuild its social safety net, with greater security for its ageing population and measures to improve conditions for those outside the regular workforce. But unless Japan can also find a way to promote labour mobility and allow those who have fallen out of the employment system to come back in, it may not be too far-fetched to conceive of the social unrest witnessed in Nishinari spreading to other parts of the country.

"Hedge Fund Manager Describes Rock Bottom"

The New York Times has a peculiar story on hedge fund manager John Devaney who managed to lose all his investors' money. Not 80% or 90%. All.

And it wasn't as if the fund somehow blew up spectacularly over a short period. Devaney froze redemptions a year ago. That begs the question: had he started liquidating then, would his investors have gotten a better recovery? I suspect the answer is yes, but either way, the Times should have probed that question.

Yet the Times engages in one-sided reporting totally lacking in skepticism or irony:

One by one, John Devaney sold his treasures, hoping to forestall what was in the end inevitable. He sold his Renoir and his Gulfstream, his home and his helicopter. Even his cherished yacht — gone.

But on Wednesday Mr. Devaney, who made and then lost a fortune trading mortgage investments, finally called it quits. He shut his hedge fund, and told his investors that all their money was gone too.

“I’m devastated, I’m totally devastated,” Mr. Devaney said by telephone from Aspen, Colo. “I feel horrible that I’ve lost my own money and that so many people who saw the skills I have and trusted in us have now been hurt.”...

In an interview Wednesday, Mr. Devaney called himself a fighter and described his efforts to avoid the collapse of his fund during the last year. He said he had personally lost more than $150 million. And he described his plans to rebuild his business and reputation.

“I’ve taken as much pain as virtually anybody in this industry,” Mr. Devaney said. “I am bleeding, personally.”

He said he was determined to recover money for his investors last July, when he froze his funds, blocking investors from removing their money. But in September, a bank demanded he repay a large loan. That bank, which he would not name, seized 40 percent of the equity in his hedge funds. His accountants and lawyers told him to shut down his funds. But he did not, he said, because he wanted to try to save his investors’ money.

“Other guys who are only looking at dollars and cents would have shut the fund down,” he said. “I have battled it out to try to save all my investors.”

In September, Mr. Devaney said he stopped receiving management fees on the funds, paying expenses out of his own pocket. He was also staggering beneath a $50 million trading loss in his main broker-dealer business, United Capital Markets Holding, which is still in business.

The only money Mr. Devaney made last year came from his personal liquidations — some at a profit, like his Renoir, which he bought for $9 million and sold for $13.5 million...

For all his troubles, Mr. Devaney was unbowed Wednesday.

“Do I pack up everything and quit?” he said. “Do I retire? No!”

This appears to have been an exercise of ego over common sense. His advisors told him to shutter the funds, yet Devaney threw good money after bad trying to trade his way out of a very big hole.

And we are supposed to feel sorry for him because he had to sell his paintings, his airplane, and yacht? Please. Where did the money to buy them come from?

Probably the worst aspect of this article is the headline. For most people, "rock bottom" would be being homeless, or living in a car or tent, which is happening here in increasing numbers. But we are still apparently measuring Masters of the Universe by different standards.

Hoisted From Comments: Has Neo-Liberalism Failed to Deliver the Goods?

Reader Juan provided a well-argued and provocatively-worded critique of so-called market fundamentalism yesterday that I thought would provide grist for thought and discussion. The main argument in favor of less regulated commerce, both domestically, in the form of deregulation, and internationally, via more liberal trade regimes, is that it generates higher growth. Juan argues that the results have been the reverse.

From Juan, in response to a comment in italics by reader DownSouth:

The one place I might disagree with you is to the question as to what high oil prices represent. Are they a further manifestation of market fundamentalism run amok? Or are they the antithesis of this, a refusal by non-OECD countries to participate in a market system that demands natural resources and agricultural products on the cheap?

If price of oils was determined by cost of production/supply/demand rather than trade in financial instruments, I would place more weight on 'refusal to participate'. As it's developed since 1987, it strikes me that the producing nations and major integrated oilcos' abilities to move price has been substantially diminished.

Neo-liberal market fundamentalisms include financial opening and deregulation which, in different forms, were applied on a world scale right along with the theft of public goods through privatizations, et cet -- a 'grand' global looting had been unleashed in a (partially directed) effort to overcome systemic crisis.

Here let me repeat something which I wrote elsewhere three months ago:

Between 1965 and 1973, the U.S. manufacturing sector's rate of profit fell by 40%, a decline that worsened with the 1974-5 recession, was hit again by the severe early 80's slump, began recovering in the 1990s but peaked in 1997, falling into 2003 since which there has been some rise but - in all cases over the last decades - never to pre-1965-73 levels.

Andrew Glyn considered the world to have been "suddenly projected from boom to crisis” with the first phase of above.

The failure of political Keynesianism, and then monetarist policies to ressurect rate of profit dovetailed with a 'we don't know what to do so lets try 19th c laissez-faire on a world scale' set of policies demanded by the U.S., given voice by Reagan and Thatcher in her famous statement: 'There Is No Alternative [to a worldwide free market]', or TINA.

Borders to capital flow in all its manifestations had to be everywhere broken; state owned industries had to be privatized; poor fiscal management had to be tightened and almost everywhere on the backs of the working class and poor as needed social services were cut and cut again. Debt payments, no matter how great a percentage of export earnings, had to be made if a government were to expect future access to IMF and World Bank funds.

Neoclassical economists and their theories provided ideological justification; a sort of 'we are all neoliberals now' attitude infected world leaders until, in 1989, John Williamson coined the term 'Washington Consensus', which was very much not the consensus of those most subject to the various 'shock therapies'.

So, how did the world do under this set of misguided fundamentalisms?

"Real global GDP growth averaged 4.9%a year in the Golden Age years from 1950 through 1973, but dropped to 3.4% annually in the unstable period between 1974 and1979. Dissatisfied with the instability, inflation, low profits and falling financial asset prices of the 1970s, advanced country elites pushed hard for a switch to a more business friendly political-economic system; global Neoliberalism was the result. World GDP growth averaged 3.3% a year in the early Neoliberal period of the 1980s, then slowed dramatically to 2.3% from 1990-99 as Neoliberalism strengthened, making the 1990s by far the slowest growth decade of the post war era." (James Crotty)

As would be expected, the post-1973 annual growth rate of world real gross domestic investment fell substantially through 1996.

With the exception of parts of Asia, economic development throughout the world failed to gain traction, chronic excess capacity on one hand and credit fueled financial exuberance on the other.

Given the system's inability to create employment so rapidly as required, a glut of labor and an expanding informal sectors as well. All the 'better' to intensify the international (and domestic) competition among workers, drive and hold wages down so also make consumer credit increasingly important to retention of living standards, no matter that this has been only another transfer to loan capital.

Average weekly earnings, constant 1982 dollars, for all private nonfarm workers in the U.S. peaked in 1972 at $331.59, falling to $257.95 in 1992 until 'recovering' to $277.57 in 2004 and likely having faltered again since then.

It is at least interesting that conditions of surplus labor, lower wages, deficit funding, tech innovations, etc, have not been able to generate another long wave expansionary phase. One might even suspect that finance has been 'pumping' too much from the real and that 'long-felt unease' is related to this.'

The primary contradictions which I've seen developing over the last number of decades have been:

1. the ending of national economies v. what can only be national states, a contradiction between economic mode of organization and national states.

2. progressive expansion of fictitious capital v. the possibility of satisfying such claims, a 'satisfying' which depends upon a) global creation of surplus value and b) substitution of credit for a relative insufficiency of realized surplus value (profit). This has provided much of the 'advanced' world with what is no more than a superficial prosperity even as it has also helped undermined its real basis. The spectacle of finance hides too much.

3. In combination, the above two have generated greater class, ethnic, international and subnational tensions. The social relations of the world capital system have become quite strained, which is not to say that capitalism is 'doomed' but that its present form has become increasingly untenable and a 'change in state' is almost certainly unavoidable, in fact seems to be underway.

Economics PhD: Key to Success in Central Banking?

Free Exchange, in Guts or PhD?, contends that that having a PhD in economics is crucial for modern central bankers:

When Paul Volcker, Stan Fischer, Jacob Frenkel and Jean-Pierre Roth discussed what central bankers and academics learn from each other at a conference last month, the line that stayed with me was Mr Fischer's comment that "central banking has become a profession." The current Bank of Israel governor went on to claim that academic economics was a big help to him in trying to decide how to run Israel's monetary policy. Mr Frankel, who formerly held Mr Fischer's job, agreed and said that having an economics PhD was a plus. But Mr Volcker, a former chairman of the Federal Reserve, would have none of it.

A central bank governor's most essential trait was "guts" and some management abilities, said Mr Volcker. When discussing Ben Bernake's qualities, he focused on the Fed chairman's two terms on the local school board; Mr Bernanke's MIT PhD, Princeton professorship and outstanding research were only also-run traits....

But the world is changing. Today’s central bank governors frequently have PhDs. I’ve listed the degrees of the 27 Eurosystem governors: 8 PhDs, two of them from MIT, 4 Masters and Mervyn King’s FBA (Cambridge). All but a couple from very small nations had some sort of economics degree, except, of course, the French governor (an énarque).

The post then goes on to provide a table showing the training of central bankers in various countries.

This analysis is utter rubbish. All it shows it that an economics doctorate is now increasingly important in getting appointed as a central banker. It in no way, shape or form proves that this training is helpful in doing the job. In fact, one could make a strong case in the US that the Fed is badly hampered by being overweight with PhDs and underweight individuals with substantive experience in finance and markets, which long ago was considered important. Prior to Arthur Burns, who was considered to be a disaster, no Fed chairman had been an academic. Limited real-world experience makes them woefully ill-equipped to question what banks and brokers are telling them.

Susan Webber, in a Conference Board Review article, Fit vs. Fitness, wrote at some length about how convention-driven hiring standards can lead to sub-optimal results. One example (emphasis hers);

Columbia University professor Amar Bhide coined the phrase “novelty aversion” to describe how investors shun ventures that are unprecedented—notably, both Federal Express and Cisco found it difficult to secure early funding. It isn’t much of a stretch to extend his logic to hiring and promotion. Both venture capitalists and corporations are in the business of picking winners—the former attractive investments, the latter talented employees....

This preference for the familiar also leads companies to adhere to the same hiring rules of thumb, whether or not they are correct