Links 11/15/08

Dead Parrot sketch is 1,600 years old Telegraph

Toxic Cloud Masks Warming Effects Wall Street Journal (hat tip reader Don)

Snowy game, VR goggles take burn victims’ minds off of pain ars technica

Let’s Have Another Cup of Coffee Michael Kinsley, New York Times

Lehman’s bankruptcy ’10 times more complicated than Enron’ Indpendent

House price recovery ‘could take ten years’ Times Online

In a Down Economy, Spam Sales Are Up New York Times

I’m Sorry, I Haven’t a Clue Macro Man

Can Smoot-Hawley return in a wholly different guise? Michael Pettis (hat tip reader mft). Note this picks up on an idea we sighted earlier and was generally pooh-poohed, that China would engineer a slightly weaker RMB to try to preserve its export markets. The head of the PBoC is now saying that could happen (and indeed, the RMB has been falling since July 1).

Saudi Arabia Spends $3.5 Billion to Buy Gold in the Past Two Weeks Jesse’s Café Américain

Four insurers hope to buy thrifts, access TARP Calculated Risk. This is disgusting, but I already have plenty to rant about, and others seem to have picked up on this travesty.

Citigroup, Whachovia, Sheila Bair and a post I didn’t make… John Hempton (hat tip reader Jeffrey). A bland title for an explosive post.

Letter from Iceland Financial Times. A must read.

Antidote du jour:

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  1. Independent Accountant

    In 1987 Citigroup added $3 billion to its loan loss reserve for third world debt. I remember looking at Citi’s financials then and concluding Citigroup had been insolvent for years. It took a few years but the Fed was able to “reliquify” the system and keep the big banks afloat. Is Citigroup insolvent today? Almost certainly. That’s part of the Fed’s motivation for suppressing short-term interest rates, to let big banks “ride the yield curve” to solvency. We’ve seen this act before. Only a collapse of the dollar might get in Zimbabwe Ben’s way.

  2. Matt Dubuque

    Amazing “Letter from Iceland”, wasn’t it?

    This article gives some hint of what a hyperdeflationary context would look like, with a few key differences.

    An environment where NOBODY, but nobody, has any money.

    Zero liquidity. Zero credit.

    This article gives an idea of that risk we need to manage.

    Fortunately Paul Volcker, who had the courage in 1982 to stand up to Milton Friedman based on the research of the Kansas City Fed and the advice of Wayne Angell, has both the courage and the credibility to help us in the big transition.

    The markets correctly trust that Volcker would NEVER countenance a return to inflation and this gives him the credibility to fight deflationary bursts as they are likely to occur.

    Matt Dubuque

  3. River

    RE: Can Smoot-Hawley Return In A Different Guise…

    Yes, and it will. We know from past experience that when pressure from citizens is applied that those in power will react, even if power realizes that their actions will cause further deterioriation in the world economy. Trade tarrifs, currency manipulation, export tax credit, etc, can and have led to wars.

    Countries that import large quantities of commodities and export large quantities of value added finished product can have their economies destroyed by recessions.

    See history of Japan leading up to WW2, as one example.

  4. River

    Off Topic: 'Iran Switches Reserves To Gold'

    '"With the plans of the presidency…the country's money reserves were changed into gold so that we wouldn't be faced with many problems in the future," presidential adviser Mojtaba Samareh-Hashemi was quoted as saying by business daily Poul.'

    I noticed that gold trades yesterday were tending to move away from the strong relationship to the dollar that has prevailed for a some time;ie, while the dollar strengthened, gold was doing likewise. That said, one day does not a trend make.

  5. Anonymous

    PWC paying 2007 level wages to Lehman staffers? I cringe every time the people in the financial sector take it as a matter of fact that they just have to pay out the inflated old pay and bonuses or people will leave. Leave where? To a bar-tending job?

    Frittering away money on bonuses and excessive pay is like killing troubled companies by a thousand paper cuts. How are share holders, investors and creditors served by that?

  6. Don

    "If you hear lawmakers and pundits repeating these like mantras, you can be sure that the financial regulation facelift is off to a bad start. "

    A hugely important post on Bloomberg by Susan Antilla if you believe, as I do, that fraud, negligence, and fiduciary mismanagement are more important issues than CDS's, CDO's, complexity, ignorance of risk, etc.:

    "Listen carefully for these words and phrases as politicians get to work on an overhaul of U.S. financial regulation in the months ahead: “duplicative,'' “balkanized,'' and the twin “quilts'' — “patchwork quilt'' and “crazy quilt.''

    If you hear lawmakers and pundits repeating these like mantras, you can be sure that the financial regulation facelift is off to a bad start.

    Those are the adjectives often used to describe the role of state securities regulators, the 50 local cops on the securities beat whose presence has long been a thorn in the deregulatory side of the financial industry.

    Although the role of state regulators has been derided as wasteful (they regulate something that's supposedly already being regulated), expensive (it costs big bucks to pay lawyers to comply, and even bigger bucks to pay lawyers if you don't comply and get caught) and petty (they're just trying to steal the thunder from the real regulators in Washington), those who support the states see it differently.

    “If you take away the states' power, there is only one game in town — the Securities and Exchange Commission,'' says Renee Jones, associate professor of law at Boston College. “That's a risk to investors.''

    Yet there's a significant prospect that, amid plans to streamline financial regulation in ways that address the current financial crisis, state regulators might lose some of their power."

    Understand this, they look into the treatment of average investors, and please remember the recent performance of the SEC.

    “Given this opportunity to change the law, I think they will pounce on this,'' Jones says, referring to members of our sterling financial industry, their lobbyists and various politicians who are always keen to get government at any level to stop badgering business with rules.

    It's far more desirable to be regulated by the SEC — four recent reports by the agency's inspector general will help you understand why — than by, say, Texas, where Securities Commissioner Denise Crawford says her underpaid and overworked civil servants find it rewarding “to see the results when bad guys get put in jail.''

    “The folks in my office are not looking to go to work for Wall Street,'' says Crawford, drawing a comparison to the well- worn career path that propels smart but underpaid SEC staffers into lucrative jobs defending financial firms.

    To get an idea of what she's talking about, go to your favorite Web search engine and plug in “former Securities and Exchange Commission.'' The results are thick with gushing press releases that announce the hiring of regulators by industry."

    Good Lord, actual sense. The power of the financial lobby is immense. Exhibit A: TARP.

    "The North American Securities Administrators Association, an investor-protection organization made up of 67 state, provincial, and territorial administrators in the U.S., Canada, and Mexico, tallied 2,276 enforcement actions and returned $616 million to investors in 2007, racking up 1,062 years of jail time for offenders who ended up being prosecuted. And that's only a partial tally that excludes 32 members that haven't gotten around to sending NASAA their data.

    By comparison, the SEC in its most recent annual reporting period brought 671 enforcement cases and returned more than $1 billion to investors.

    It was Kansas that started all this trouble back in 1911, adopting laws to address crooked promoters who fleeced investors in the state. Jones says that every state except for Nevada had enacted similar law — known as “blue sky'' — by the early 1930S.

    State regulators in their earliest days didn't have what it took to ward off the Great Depression, though, and Congress passed the Securities Act of 1933, which a year later led to the creation of the SEC as a federal regulator. Thus, there would be two layers of supervision to handle problems in the financial markets, Jones says."

    We need a blue sky right now to deal with all these dreadful weather words we've been hearing.

    "Business interests have successfully slashed the authority of the states during several rounds of political fighting over the years. Most notably, in 1996 the National Securities Markets Improvement Act, or NSMIA, took away the states' authority to oversee registration and review of public companies whose securities were sold to investors in their jurisdictions.

    Even though their powers were reduced, the states roared back. Former New York State Attorney General Eliot Spitzer exposed and punished Wall Street firms for conflicts of interest between investment-banking departments, which underwrote securities sales by public companies, and research departments, which touted the stocks of those clients.

    This year, regulators from Massachusetts and 11 other states brought cases against major banks and securities firms that had marketed auction-rate securities to investors as “safe,'' only to see that market collapse. The states negotiated agreements that got customers' money back."

    Can't have financial advisers taken to task for lying, exaggerating, etc. It's the system, the complexity, the models, etc. We can't blame human beings for these problems. It gums the system up, and our models include gullible clients.

    "The SEC hopped on those auction-rate cases after the tough work already had been done by those crazy-quilt regulation duplicators in the states. Massachusetts, for example, sued UBS AG on June 26 and settled with the firm jointly with other NASAA members and the SEC on Aug. 8.

    You would hardly know that, though, to read an Oct. 6 statement by the President's Working Group on Financial Markets at the U.S. Treasury Department, whose research is often cited as a starting point for regulatory overhaul.

    “In the past few months, the SEC, with others in law enforcement, have restored liquidity to Auction-Rate Security investors in the largest securities buyback in the nation's history with tens of billions of dollars of liquidity being restored to tens of thousands of investors,'' the group gushed.

    It isn't a far stretch to divine that Treasury is looking to downplay the role of the unnamed “others in law enforcement'' who actually did the work.

    SEC spokesman John Nester said the agency was involved with the auction-rate case “from the get-go.'' William Galvin, secretary of state of Massachusetts, remembers it differently. “We certainly consulted with the SEC,'' he said. “But the idea that they were leading the charge is absurd.''

    And so is the idea of cutting back on what the states are allowed to do in the financial arena. Memo to Congress: if you're looking for talent to run the new regulatory world, skip the SEC. The phone numbers you need are a click away in the records of your state payroll back home."

    Looks to me like these state fellows get it, and are doing the heavy lifting. Please understand this: Regulations are one thing, fraud, negligence, and fiduciary mismanagement are another.

    Don the libertarian Democrat

  7. doc holiday

    Wiki History Lesson anyone? Déjà vu all over again?

    The groups that primarily benefited from Italian Fascist social policy were the middle and lower-middle classes who filled the jobs in the vastly expanding government – the government expanding from about 500,000 to a million jobs in 1930 alone.

    … “once Mussolini acquired a firmer hold of power… laissez-faire was progressively abandoned in favour of government intervention, free trade was replaced by protection[ism] and economic objectives were increasingly couched in exhortations and military terminology.” De Stefani was forced to resign in 1925 because his policy of free trade was opposed by many Italian business leaders, who favored protectionism and subsidies to insulate domestic business from international competition. In 1926, Mussolini gave an impassioned speech demanding monetary policies to halt inflation and stabilize the Italian currency (the lira). He also took the final step of officially banning any kind of strike action. From 1927 to 1929, under the leadership of the new Finance Minister Alberto Beneduce, the Italian economy experienced a period of deflation, driven by the government’s monetary policies.

    In 1929, Italy was hit hard by the Great Depression. The Italian economy, having just emerged from a period of monetary stabilization, was not ready for this shock. Prices fell and production slowed. Unemployment rose from 300,787 in 1929 to 1,018,953 in 1933. Trying to handle the crisis, the Fascist government nationalized the holdings of large banks which had accrued significant industrial securities. The government also issued new securities to provide a source of credit for the banks and began enlisting the help of various cartels (consorzi) that had been created by Italian business leaders since 1922. The government offered recognition and support to these organizations in exchange for promises that they would manipulate prices in accordance with government priorities. A number of mixed entities were formed, called instituti or enti nazionali, whose purpose it was to bring together representatives of the government and of the major businesses.

    In 1925 there was a great increase in speculation and short runs against the lira.
    The lira continued to decline into 1926. It can be argued that this was not a bad thing for Italy – cheaper and more competitive exports, dearer imports. Politically however the declining lira was disliked; Mussolini apparently saw it as “a virility issue”, the decline was an attack on his prestige. In the Pesaro Speech of August 18, 1926, he began the “Battle for the Lira”. Mussolini made a number of strong pronouncements and set his position of returning the lira to its 1922 level, “Quota 90.” This policy was implemented through an extended deflation of the economy; the country rejoined the gold standard, money supply was reduced and interest rates raised. This produced a sharp recession, which Mussolini took up as a sign of his assertion of power over “troublesome elements” – a slap to both capitalist speculators and trade unions.

    The Quota 90 (Italian: Quota novanta) was a controversial revaluation of the lira undertaken by Mussolini, announced on August 18, 1926 at a speech in Pesaro, pegging the exchange rate to 92.46 lira against the Pound sterling (19 lira against the US Dollar) by December 1927, which had been the prevailing market rate when Mussolini took power in 1922.
    The Quota has been described as the “most controversial measure undertaken by [Mussolini’s] government before 1929,” despite the general consensus that some revaluation was necessary among Italian bankers and industrialists. Minister of Finance Giuseppe Volpi—who preferred a rate of 120 or 125 against the pound—considered the quota a drastic overvaluation. Many historians regard the Quota as motivated by Mussolini’s desire to “exert his will” rather than economic rationality, as a “political decision”, or as a “proof of force” against industrialists. In response to requests from Volpi and industrialists to reconsider the Quota, Mussolini threatened even lower rates.
    An August 8, 1926 letter from Mussolini to Volpi claimed that “the fate of the regime is tied to the lira.”

    The revaluation led to a massive increase in mergers in 1928 and 1929, beginning a process of industrial consolidation which culminated in 1932 with .88% of corporations controlling 51.7% of corporate capital.
    The Quota was accompanied by industrial and agricultural wage reductions in 1927, which overcompensated for the reduction in prices, decreasing the real wage and thus the purchasing power of most Italians; unemployment also rose, especially in the agricultural South.

  8. lineup32

    re-Trade: far too much hand wringing over this issue given the multi-national corp driven economic life we live. Rather more real life problems may at sometime really kill this issue and that is high energy cost causing the cost of moving goods so high that local production is a better alternative. We saw a snip of this during the recent energy run up which will come about again as production falls due to lower prices and higher production costs and of course oil is a finite resource.

  9. Doug

    Well dere mates har har har would not read much into the GOLD buys by Saudi and Iran – probably not much of a leap for them ‘rabs as what they know best is oil. We Americans are too smart for that we know that in a deflationary BUST gold goes hella down… SO when the time comes we love our techno gaddits world can’t do without those for long so we be stock pile wat we know best SO we opt for things like RAM chips from Micron Technologies or spools of raw solar wafer sheets from JASO.

  10. Anonymous


    Repeat after me: Gold does not do well in garden variety inflation. Look at the record of the last 25 years. Gold does well in deflation and hyperinflation, in times when people do not want to hold financial assets.

    I do not know why that is so hard to understand. Gold and cash substitutes do well in deflation.

  11. Anonymous

    Look at the premium and waiting time for physical gold delivery. In my opinion, if 20% or so of ALL investors requested physical rather than paper gold, we would quickly find out what the true price of bullion is.

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