Links 4/17/09

The futurologists don’t want to hear it, but live performance is booming Simon Jenkins, Guardian

1,500 farmers commit mass suicide in India Independent (hat tip reader Carrick)

Deflation Has Gone Global Michael Shedlock

Spit and Acquit New York Times

Supply and demand cannot explain 2008 gas price rise: US FERC Platts (hat tip reader Michael)

Checking In On the Four Bad Bears Paul Kedrosky

Stress tests deepen headache for Obama Financial Times

Vampire pensions could be a corporate nightmare Charles Millard, Financial Times. The media is catching up with Leo.

IMF warns over parallels to Great Depression Telegraph

A Minsky Meltdown: Lessons for Central Bankers Janet Yellen (hat tip Richard Kline via Calculated Risk)

Green Shoots and Glimmers Paul Krugman

JPMorgan ready to return $25bn Tarp cash Independent.

No Easy Workout New York Times

CDS blamed for role in bankruptcy filings Financial Times. We discussed more than a year ago that CDS contracts could give holders an incentive to push companies into bankruptcy. It apparently happened twice last week.

Any angels left in heaven? Sam Jones, FT Alphaville (hat tip reader Steve L)

Antidote du jour:

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  1. Carrick

    I don't know how to phrase this, or present this comparison, without causing some offense, but I'll throw it out there — food for thought.

    1,500 farmers in the Indian state of Chattisgarh were driven by systemic problems (debt & poverty, disastrous Govt enviro/devl plannig, usury), to commit suicide.

    This was also the day that Bush's torture memos were released. Twice as many people died on sept 11, and we turned the world upside down (preemptive war, loss of international compassion/goodwill/support, abandonment of the Geneva Convention, etc — U.S. Govt sanctioned torture of prisoners, some unintentionally unto death), responding to it.

    Even if the India event wasn't an intentional protest, it is a cry for attention. It didn't get a spot of ink in any US papers, or a blip from the 24/7 cable news yapfests. Which is why its hard to know whether this was a real "mass suicide" protest, or just a popular trend there.

    Either way.. two large losses of life – both born of poverty and systemic problems. One, we turned the world upside down for, the other doesn't even see a bullet point on A16. Both born out of poverty, for the most part. There is something to be drawn out from this (I don't know what), about how one group destroys itself in protest, while the other destroys the outside world — one gets ignored, and the other sees heaven & earth moved to return its misery. Both end with dead poor people — neither response shows a recognition of the relationship between systemic poverty and horrendous violence.

  2. Carrick

    And now for something completely different…

    Officers serving with Scotland’s largest force list “Jedi” as their official religion

    A spokeswoman for Strathclyde Police confirmed: “At the time of the request, 10 (eight police officers and two police staff) had recorded their religion as Jedi.”
    She added that the force monitored “six strands of diversity” – age, disability, gender, race religion and belief, and sexual orientation.
    The force said the information was provided voluntarily and securely stored.
    About 390,000 people listed their religion as Jedi in the 2001 Census for England and Wales. In Scotland the figure was a reported 14,000.”

  3. Richard Kline

    I read through Janet Yellen’s speech on the actions of and proactions against asset price bubbles with considerable interest. From my own reading on the historical instances over twenty years ago, it was apparent from my perspective that bubbles are exceedingly costly in the mid and long-term, and that it should be a principle charge of public financial authorities to prevent them, if necessary erring on the side of caution when their early stages might not be easy to assess. (Their middle stages are evident to anyone who cares to see them, though yes, judging their inception is no _certain_ thing.) From the mid-90s, I was flabbergasted in a word that Alan Greenspan, and for that matter most other Ango-American appointed or trained regulators felt no such necessity, the recent instance of the Savings and Loan _BUBBLE_ notwithstanding. To me, home prices were already dangerously bloated in the late 90s, with bubble behaviors in effect such as homeowners regularly doing refis to pull out equity for other speculation. But no, we had to live this one out.

    Yellen’s discussion is thorough and credible in all its points, and worth the time of anyone who wants to read it through. I want to draw attention to two points only within it. The first is that this is the first instance of a major policy actor in the US—Janet Yellen is the Pres. of the SF Fed, and one of the better minds in public finance in the country—saying, in effect, ‘Yes, the powers that be _should_ intervene to stop bubbles in action.’ Even two years ago, two, such a remark would have drawn howls of derision and condemnation from all the neoliberal cheerleaders of deregulation and “Let them get rich,” who have controlled both public financial policy and the debate about its conduct. Someone has to be first, but the change in tune, and one here well reasoned, is significant. It must be a charge of public financial authorities to _proactively_ prevent bubbles from occurring.

    The second point is more complex, and an expansion on what is, to me, the most salient of her remarks on how bubbles should be restrained/contained by the public authorities. Yellen makes a good point concisely that monetary policy—interest rate manipulation—is not a particularly apt tool for this purpose. All one could get the last twenty years of neoliberals to discuss was where to target the rate, as if they had no fingers but only thumbs. But interest rates are slow to act, effect the real economy widely beyond whatever financial system modality is pumping the bubble, and can be circumvented to a degree by things like the carry trade finance as we have seen. So this point is a further important concession that public authorities cannot simply sit on their hands while nodding at rates. Yellen points out that regulatory and supervisory interventions are likely to be better brakes on bubbles, though qualifying the utility of supervisory actions (scrutinizing a firms books) as sufficient alone.

    I would say, though, that it is important to see bubbles happening in a ‘financial space’ defined in aggregate by the variables that constrain or enable speculative activity in a particular asset class. To use the variables that Yellen mentions here alone, we have a rate variable, a regulatory requirement matrix variable, and a supervisory variable. To contain something as active and widespread as a bubble mania, it will be necessary to contract the condition space _as a whole_. In my view, if one simply tightened up regulations before hand, or even had some useful requirements that scaled in, the bubble mania would push sideways along the variable dimension that is not contained. [I’m sorry if this is dense folks, but there are only so many ways to talk about this.] This was what happened with SIVs at regulated banks like Citi, for example. They were not allowed to carry some assets on their books above a certain amount, but with credit so widely available they chartered legally distinct entities using their own ‘guarantees’ to keep the costs down, and bubbled up their purchasing around the regulation. Supervisorial scrutiny of Citi’s books in 2006 would not have adequately weighted those SIV guarantees, because with money cheap the vehicles could arguably rollover their financing indefinitely.

    One has to represent the entire space of major variables behind a bubble, or more broadly behind an asset price trajectory. I’m not really talking about 20-30 variables here, but take a look at a half-dozen or less that make that price trajectory possible. To constrain change, overt action has to be made on all of them, or the speculation will simply slide. This does not mean necessarily, returning to the three dimensions pirated from Yellen’s example, that rates must rise, too. But the financing costs to entities speculating in the asset class _must_ rise as those prices enter bubble levels, the entities speculating become dangerously large, or either one. Yes, this requires government regulators to *horrors* tell private actors what they can and can’t do rather than taking a ‘push all boats thusward via rates’ approach. In the US, this is thought to be, well _communism_ or something. But the key variable in the recent bubble was, in fact, excessive credit creation, and extremely east access to it by major players in the bubble such as mortgage brokers at one end and securitization desks at the other. No amount of regulation or supervision would have constrained ‘bubble-like’ outcomes with such easy credit. At the same time, if the public authorities chose henceforth to make credit difficult to get for certain kinds of transactions—as for instance in making high margin requirements for purchasing stock after the 29 Crash—but did not otherwise have, say, close supervisorial scrutiny, we simply create opportunities for more Enrons to shuffle large-scale shell games.

    Constraining actions must move proactively on all dimensions of an asset price dysfunction. Some dimensions are much more important for some kinds of dysfunctions, yes. I might even go so far as to say that case by case historical judgments would likely have to be made as to which levers are the best ones to pull on. But if we only pull on two or three when the financial event space runs to five or six, the bubble will just flow sideways. As a final not cribbed from the series of posts on systemic actions for the financial system last May, it is best not to think of such interventions as on-off switches. Regulation on/regulation off. Easy credity/no credit. It’s better to have interventions which _scale into effect_ as situations change. If entity A does more than X business per quarter in said speculative asset, their costs need be increased per transaction, and their reserves indexed up a step. Small steps, but ones that increase exponentially as their involvement and exposure increase. Willem Buiter’s cogent remart that the scaling of reserve requirements could be used as an inherent ‘governor’ on the size increases of large financials is exactly of this kind. No regulator needs t make the jugement call, the levels are preset, and all market participants can see when, if, and as they are scaled in. And so on. They are automatic, and the judgment call, if any, involves _delaying_ their implementation for which cause must be shown.

    Yellen’s remarks are a good first step, however.

  4. Richard Kline

    As a follow up to Tax Day links, that video of the performance of Susan Boyle was _absolutely AWESOME_. I had tears running down my face. It has to be borne in mind that this was a minimally trained voice at 47; just incredible. If one passed on the street Umm Kuhthum, Pastora Pavon, or Patsy Kline—more than one of whom looked like the weather side of a barn to be deliberabely unkind—one would also have paid them no mind and hurried on the faster . . . Until they opened their mouths, at which point they, too, would cease to be a footnote in ones story but instead one one would become more eyes and ears uncountable in _their_ stories. Some of you will know what I mean when I say how satisfying indeed it must be to MS. Boyle to have Amanda Holden—who could snap the fingers on her pretty little hand and there would be fifty guys there asking her what time it was before the echo died away—say what ‘an absolute privilege’ it was to hear her perform; the exact words which occurred to me. That’s not just making the team, it’s making the team ask for your autograph. And deservedly so in the hearts and minds of all.

    I had to go sit amongst blossom snow for a time after that one.

  5. LeeAnne

    raising margin rates when a market gets over heated isn’t rocket science.

    It was routine before Greenspan. Greenspan is a devotee of a dangerous cult.

  6. Nemo

    Actually, the TARP term sheet says they can repay the money early if they perform a “qualified equity offering” of 25% of the injection.

    The language reads:

    Senior Preferred may not be redeemed for a period of three years from the date of this investment, except with the proceeds from a Qualified Equity Offering (as defined below) which results in aggregate gross proceeds to the QFI of not less than 25% of the issue price of the Senior Preferred.The key word is “except”.

  7. a stranger

    Nemo & Yves –

    Equity offering is not true anymore, even with the term sheet. Read the American and Recovery Investment Act. Section VII. The original act was amended to:
    Subject to consultation with the appropriate Federal banking agency (as that term is defined in section 3 of the Federal Deposit Insurance Act), if any, the Secretary shall permit a TARP recipient to repay any assistance previously provided under the TARP to such financial institution, without regard to whether the financial institution has replaced such funds from any other source or to any waiting period, and when such assistance is repaid, the Secretary shall liquidate warrants associated with such assistance at the current market price."

    All they require is that the regulators approve of it, which can be with or without an equity offering.

  8. Ramesh

    Ouch, that mass suicide in India article is terrible. First of all there was no mass suicide…it’s about the large number of suicides among farmers in the Indian state of Chattisgarh. The article mentions 1500 suicides but not the time frame. Is this number abberant? Let’s do a quick bit of research.

    – Chittisgarh population: 21000000 (source Wiki)
    – India male suicide rate: 12.2/100000

    (as a sanity check, the rates are 19.5, 13 and 5.5 in Canada, China and Colombia, to pick a few random countries…so India isn’t particularly aberrant)

    Assuming Chittisgarh has the same suicide rate as the whole country, we’d expect about 2500 suicides a year. The wiki article mentions that 80% of the state’s population is rural, so that means 2000 suicides among rural men in Chittisgarh. It doesn’t seem unreasonable to imagine that 75% of rural men are farmers.

    Which gives us 1500 farmer suicides per year. Once again, Sturgeon’s law is confirmed (“90% of everything is crap”)

  9. tyaresun


    Trying to pass of the 1500 suicides as something normal is reprihensible. It is too bad that the Indian politicians or the Indian media want sweep it under the rug. All they want to talk about is the Tata Nano and India Shining etc.

    The fact is that the liberalization over the last decade has increased income inequality even in a poor country like India. The average nutrition level has actually decreased over this period of time.

    The country will break up if India continues on this path. Just look at the Naxalite attacks during this election season.

  10. Ramesh

    tyaresun, I’m not trying to minimize anything. I happen to strongly believe that India’s economic “miracle” won’t be legitimate until it materially improves the lives of the vast numbers of the poor.

    However, I don’t believe that any cause is well served by parroting misleading statistics to further an agenda (even an agenda I believe in). The story of farmer suicides immediately raised my skepticism. Every single suicide in the world is a tragedy (there are about 1 million suicides annually worldwide). The context for the report of the 1500 “mass” suicides in Chittisgarh is that the farmers “committed suicide after being driven to debt by crop failure”. When such a causal claim is being made, I don’t think it’s unreasonable to compare the suicide numbers to the typical background suicide rate that occurs in any population. As it happens, there’s an enormous range of suicide rates among countries, from low single digits (e.g. 3.4/100000 in Paraguay) to high double digits (75/100000 in Lithuania). India happens to be in the middle of the pack worldwide. My back of the envelope calculation in my earlier post shows that 1500 suicides per year among farmers in Chittisgarh is consistent with expected numbers, and hence “normal”. I don’t see what’s reprehensible about it.

    BTW: my analysis is based on some hard data and some assumptions, the key ones being:

    – Chittisgarh’s suicide rate is the same as the Indian national average
    – 75% of the rural male population are farmers
    – the 1500 figure in the article refers to an annual number

    If these assumptions are incorrect, than I may be wrong and the reported suicides are abnormal, which may lead to different public policy implications than if they were “normal” (in the sense of being consistent with historical epidemiological norms). However, it seems very premature to look at a number like 1500 suicides and immediately leap to rash conclusions that something outrageous is going on.

  11. emca

    In response to Richard Kline’s above comments on regulation, while I agree that market regulation should be part of a broader approach to problem of hyperactive speculation, restrictions placed through regulation on certain players alone might have been enough to avoid the woe we’re seeing. Who are those players? The many people who took on mortgages that, in a more reflective environment, would not have permitted. These are not people with sophistication, expertise or time to move sideways or circumnavigate regulatory obstacles. With the enforcement of very simple qualifications of 1/3 verified income, 20 down and fix 30 yr, there would have been no shaky assets to broker and leverage. True this would have not prevent other potential bubbles (as such the, but it is real estate speculation that has been the historic worst case culprit of unrealistic expansion of wealth and the resultant return to reality and that’s what we need to look to.
    Again this isn’t saying your observations lack merit, only that in face of the tiger, those at the source of cycles marked by asset inflation, will tread no further. Regulation in these cases, in and of itself, will work.

  12. Anonymous Jones

    Bernanke’s at it again today, trying to be an apologist for financial innovation. He’s going down the tried and true path, “Sure, I agree with you. There were some excesses. But it wasn’t all bad, and someday we’ll try to reign in the excesses.” Of course, he and the other banksters will in fact do nothing to reign in the excesses.

    I’m beyond frustrated at something that is so easy to understand and has so much empirical support.

    Each actor in the financial sector has the incentive to maximize income. This is sound theory that has a wealth of empirical support. The actors maximize income (at least in the short term) by taking the income as early as possible and not reserving against apparent risks (shifting risks to someone else or to ‘themselves’ but down the line (e.g., bankruptcy for looting)). *This* is what financial innovation is and has been — a means to hide risk. This is how you make more money. Why wouldn’t they do this? It would be crazy not to try to shift risks onto others and keep as much as possible for yourself.

    If we now take all the current losses for “innovative” financial products along with all the salaries and bonuses paid to those who took income early and shifted the risk to someone else, what net societal benefit to financial innovation was there? Even if some intrepid economist could show a net gain, the vast hidden costs (relative consumption problems, loss of faith in the social fabric) of a dramatically unfair wealth redistribution to those in the financial sector who simply shifted the risk to others must surely outweigh any net dollar gain.

    What I think is most disgusting is that they already pulled off the heist. They got the money. We have a dramatically skewed wealth distribution. But it’s not enough. They want even more. And most people just don’t care. It astonishes me.

  13. Justin

    Isn’t the trouble with that Indian suicide article that “mass suicide” doesn’t describe what the article says? Mass suicide is something like Jonestown or the Heaven’s Gate people. What happened in Chattisgarh is a massive increase in the suicide rate, not a mass suicide.

  14. Carrick

    I think the “mass suicide” title is misleading. The lack of specifics in the article is cause for skepticism also. The article claims that they were driven by debt to commit suicide — is this anecdotal, or was a genuine survey done?

    Your back of envelope calculation sounds good, it suffers from the same lack of info that the article does though — is 1500 75% of Chattisgahr’s suicides, or was a survey done of surviving family members to identify the deceased as “driven by debt?” 1,500 may be on par for the national average, but there may be 1,500+ other reguar suicides in Chattisgahr as well. What’s Chattisgahr’s current suicide rate, and how does it compare with that of the last 30 years?

    I was skeptical of the title initially, but moved on from it when I started thinking about violence as protest in general. In general, when people inflict it on themselves we dismiss them, when they direct it outward we usually just punish them — both cases we ignore the systemic problems that instigated it. Not that its surprising or intentionally cruel, just that its counterproductive.

    Anyway, without specific data on Chattisgahr, is hard to discredit or embrace the article.

  15. Richard Kline

    So emca, no and yes. I have no problem with raising downpayments and simplifying terms for mortgages for most folks. There were reasons why there was a standard 30-year for most home mortgages. But really, you have the cart before the horse with what you are arguing. Going uphill.

    Point one: speculation in home prices over a generation had pushed even the lowest home prices out of the reach of normal incomes. This was not new, and had been underway long before lending standards were completely corrupted. I’m all for more restrictive terms if we also constrain the market in such a way that there is a reasonable supply of housing that can be purchased on those terms. In my town, for example, you could buy a home in the city limits as of 2006 and afford it unless you had two six-figure incomes in your family. Even now, all they build are ‘luxury condos.’ That’s a market problem separate from my above remarks, but it influences the reality situation which leads individuals to try for more house than they can afford. You call it irresponsibility; in may cases it was excessive optimism borne of rising prices and no options. Consider that.

    Then there is the more salient issue of ‘Whose malfeasance?” The mortgage brokers offering confidence man terms are far more to blame, in my eyes than the marks who were fooled. Regulations to ‘prevent fools’ seldom work, but in this case would be misplaced as well. Regulations to ‘jail predatory lenders’ work rather better: they can be identified before the fact and the supply dries up as the big fish dry on the rack. Were those folks taking option arms with 0% down fools? Of course. They didn’t cause this crisis, so blaming them principally suggests a serious misunderstanding of the nature of the present problem, to me.

    Subprime didn’t cause this crisis; they are a symptom. Prime mortgages are starting to default, I might note. Their putative value doubled in many areas, but has not snapped back toward half. The resulting neg eq is breaking the legs of those badly placed for the loss, even if they could afford their original purchase. I won’t detail this, because _prime_ buyers didn’t cause this crisis, either.

    Maladaption of securitization caused this crisis. Bondtraders onselling rotten bales were the real bubble. Shadow banking system demand for ‘product’ abetted by shadow banking system vaporbucks are what made it possible. Housing was simply the principle modality. In case you didn’t notice, my friend, we have what would be a mid-size bubble _on its own_ in securitized LBO debt, with a nasty carbuncle on it of securitized credit card debt. This is an area were regulation, per Janet Yellen, would be the appropriate modality for future remediation. But also that endless credit provision would have to be constrained or it would simply flow to another area. If not houses, than something else.

    I return to my main point, though: to constrain a bubble a-building containment on all principal parameters has to be kept constantly in mind, or the bubble will just flow sideways. Not as severely, perhaps but still. After all, in the mid-90s, the bubble was in equities, with home real estate just a sideline. When equities went bust-away, the bubble flowed sideways into the readiest modality for bond desk speculation. When even home mortgages were proving insufficient by, say, 2005, mal-securitization surged into securitized LBO debt. Choking off one parameter is insufficient. But again, restraining interest rates would impact the real economy more than this speculative process, since the carry trade and the ability to onsell the ASBs offshore where of principal importance in growing the bubble to its eventual size. This internationalization of capital flows is another reason why _national_ regulations alone will be insufficient to restrain subsequent bubbles.

  16. Juan

    Excellent comments Richard. I’m wondering whether transnational regulations can even be put in place and if so, how to overcome uneven degrees of enforcement. Same time, and as I’m sure you know, displacement can also be temporal or via creation of new spaces.

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