Links 8/20/10

‘Terror bird’ was prize fighter BBC

Canadian pot growers use wild bears to guard stash Raw Story

Cigarette smoke causes harmful changes in the lungs even at the lowest levels PhysOrg

The Brain: What Happens to a Linebacker’s Neurons? Discovery

Australian election on knife edge BBC

Rennen um Rohstoffe: Forscher entdecken großes Ölfeld in Afghanistan Der Spiegel (hat tip Tom F). the headline says it all: Race for Raw Materials: Investigators Discover Great Oil Field in Afghanistan.

Report Paints New Picture of Gulf Oil Science. Team Obama efforts to declare “Mission Accomplished” and portray the impact on the leak as comparatively minor and fast to mend keeps bumping into observable reality.

Time for debate on equity market structure Gillian Tett, Financial Times

Crowded trades in capital arb Deus Ex Macchiato

The Wingnuts go after Fannie and Freddie Randy Wray

Developed economies could get trapped in a limbo land of zero inflation Gavyn Davies, Financial Times

Greek crisis refuses to go away Ambrose Evans-Pritchard, Telegraph (hat tip reader Scott)

Hotel Occupancy Rate: Almost back to 2008 levels Calculated Risk

The Washington Post Says Bill Gates Is Broke Dean Baker

The Boom Not The Slump: The Right Time For Austerity Arjun Jayadev, Mike Konczal

Appeasing the Bond Gods Paul Krugman, New York Times

Needed: a new economic paradigm Joseph Stiglitz, Financial Times (hat tip reader Don B)

Antidote du jour:

Picture 4

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  1. Ignim Brites

    Krugman asks: “What will it take to break the hold of this cruel cult on the minds of the policy elite? When, if ever, will we get back to the job of rebuilding the economy?” The answer is: secession of the saltwater states.

  2. Jim Haygood

    After the disastrous record of Fannie Mae and Freddie Mac, L. Randall Wray thinks he can categorize their critics as ‘wingnuts’?

    In his peculiar usage, ‘wingnut’ doesn’t mean ‘nutcase.’ It means ‘anyone who don’t agree with my blindly-held “government is always good” ideology.’

    Does anyone else suspect that ‘Wray’ may a pen name for Paul Kurgman, so that Kurgman can vent his fury at the hardheads who just can’t see it his way?

    1. Anonymous Jones

      Jim Haygood, this is your twice-daily lucky minute!

      Forgetting that your ‘disastrous record’ comment is dubious, Wray’s rant is in fact quite poor. The problem with FNM/FRE is not what the nutcases think (per usual, the nutcases/hypocrites/delusional sociopaths are not broken clocks but actually clocks set at the wrong time and thus always and invariably wrong about everything), but that these two organizations in fact do the exact opposite of what most people want/expect them to. They make housing more expensive!

      Wray says “Without Fannie and Freddie there would be no home financing or refinancing going on right now.” OK, first, that’s completely and totally inaccurate. There would be financing going on, just at much higher interest rates for loans to purchase at much lower prices. Second, even if it were true, maybe that would be a good thing! Maybe it’s all the financing and refinancing activity that is sucking the life out of a society and an economy choked with debt. Look, I’m not a liquidationist, and I’m not some knee-jerk anti-government ignoramus, but it’s very difficult to see institutions with the market power of FNM/FRE and not wonder, “wow, I kinda think this concentration of power is maybe not a good thing.” The great takeaway from The Road to Serfdom is that fostering competition is generally a very good thing (alas, it does not always work when there are externalities or failures of total information or consumer insensitivity to long-term side effects).

      Anyway, enough with the apparatchiks running a country-wide financing program. The government never had any business competing in this market. It should be *regulating* this market to protect consumers against fraud and against predators. It should not be creating its own monopoly.

    2. Jim Haygood

      You don’t find $148 billion (to date) in losses ‘disastrous’? Cool, cut me a check while you’re at it! And I’ll credit you with being right thrice a day (hint: a clock that runs backward).

      Of course subsidized financing raises housing prices — as I stated yesterday in another forum.

      Fannie and Freddie have completed their mission of creating a national securitized market for mortgages. Now they can declare victory, get on their bikes, and pedal home. Fat chance!

      1. Deus-DJ

        Considering Fannie/Freddie constitute a large part of the housing market your comments are somewhat foolish. Furthermore, simply stating how much losses they’ve had without asking how it happened to them is simply the easy for you to say “omg look at big govt!!”. Thus, your comment is nothing more than a rant.

  3. Jim Haygood

    Now let me tear a strip of flesh off Kurgman [sic]. Unlike his alter ego Wray, Kurgman ritually, reflexively denigrates his intellectual opponents as ‘rightists’ and ‘Republicans,’ the worst insults his tiny walnut brain can conceive of. No reference to any actual political party is intended; he’s just saying they’re rotten, bloody-minded rascals.

    I’m by no means an Austerian(TM). But Kurgman misstates their arguments: Austerians, he claims, want to cut deficits to ‘appease the bond vigilantes.’ Not so — deficit concerns pertain to long-term solvency. ‘Bond vigilantes,’ if such even exist, are merely the inexorable market forces which would be engaged during a sovereign default.

    But Kurgman implacably rattles on: ‘So how do austerians deal with the reality of interest rates that are plunging, not soaring? The latest fashion is to declare that there’s a bubble in the bond market: investors aren’t really concerned about economic weakness; they’re just getting carried away.’

    Listen up, Kurgman: the Treasury market is characterized by a single issuer — both the largest financial entity on the planet, and the law-giver and enforcer in the market. Its central bank, the Federal Reserve, is buying Treasury securities in an announced program. So are foreign central banks, to recycle their trade surpluses.

    Of course the officially-administered Treasury market is being driven to absurd heights. Judging from the experience of the 1930s, some participants fear that deflation could coexist with both large countercyclical deficits and pathologically low Treasury yields. Ironically, yields pushed lower by the Fed’s buying only serve to reinforce deflationary expectations, creating a self-feeding, self-defeating vicious spiral.

    Moreover, contrary to rational expectations theory, markets are usually out of line with their equilibrium values, due to excessively optimistic or pessimistic crowd expectations. As in the outbreak of the Greek crisis, sovereign bonds can transition from overbought to oversold in a matter of weeks, almost like transitioning between the quantum states of ‘greed’ (yield hunger) and ‘fear’ (default avoidance).

    Like all Bubbles, the Treasury bubble has an ultimate solvency limit. Economists don’t know where it is, and neither do I (not being no economist). But there is nothing unthinkable about the 10-year yield being pushed to 2 percent … then one fine Monday, a Treasury auction fails. And a month later, the 10-year note yield has rocketed skyward to 10 percent.

    I can guarantee you if this happens, Kurgman will calling for the heads of the ‘rightist reactionaries’ who wrecked the bond market and bankrupted our ‘good government.’

    1. aet

      Your given example may not be unthinkable, but is it in fact unprecedented?
      That is, has it occurred before, for any sovereign borrower, and if so, where and when?

      I have little doubt that many examples of the scenario which you describe has occurred in the “private sector”.

      And I am also aware that, simply because it has not happened before, does not mean that it will not happen again.

      Nevertheless, IMO an example from history would serve as a better caution than mere “thinkability”.

      1. KJMClark

        Indeed. An asteroid could hit without warning tomorrow and wipe out all human life. That, at least, has happened before. The odds against it are ‘astronomical’; right up there with the world just out of the blue deciding that no one has any interest in buying US treasuries anymore. Seems like there would be some warning of such an event, like bond yields rising. But wait! They’re still falling…

      2. Jim Haygood

        I mentioned the Greek crisis. The Greek sovereign yield spread over bunds went from around 65 bps in pre-crisis years to as high as 847 bps afterward, in less than a year.

        This dramatic revaluation is an example of a highly-discontinous, step-function change in market pricing and sentiment, in response to a ‘surprise.’

        1. borkman

          If you are going to persuade people, you need relevant examples. Greece isn’t. It’s been explained ad nauseum here that Greece is in the position of a US state, it doesn’t issue its own currency. Greece and the States can go bankrupt.

          The constraint on a sovereign that creates its own currency isn’t default. It’s inflation.

          Do we see remotely any risk of inflation right now? Read the news, the risk is DEFLATION.

          1. Jim Haygood

            Argentina issued its own currency, but defaulted in 2002.

            Then you’re going to say, but wait, the peso isn’t an international reserve currency.

            However, the J-yen is … and probably will serve as the leading indicator of what happens when a reserve-currency country reaches its default/inflation constraint.

            There’s no inflation in Japan now, but there will be if the BOJ is obliged to monetize all new JGB issues to hold interest rates down to an affordable, fractional level. Japan can’t possibly afford to pay ‘normal’ long-term rates of 3% to 5% anymore.

            Inflation is a long-term constraint. When the reserve-currency countries are finally hit with rating downgrades or bond auction failures, then the monetization will accelerate, and so will inflation.

            As Rogoff and Reinhart have adduced, different countries have different levels of debt tolerance, based on their credit history. The bond market is giving the US and Japan the rope to hang themselves, at teaser rates. Then it will declare, ‘No new credit, and a double-digit penalty interest rate applies.’

            Wait and see.

        2. liberal

          Argentina issued its own currency, but defaulted in 2002.

          Uh, Argentina was on a currency peg.

          Furthermore, while I don’t know much about this topic, it appears that much of the defaulted debt was not denominated in Argentina’s own currency. (I don’t have time now to research how much.) The issue being discussed here, on the other hand, is default under the condition that the debt is denominated in the debtor country’s own currency. A very different situation.

          1. aliena

            “The lessons of Argentina in 2000 have not been learned. Argentina was roped into a currency board with the US in the 1990s which guaranteed peso-convertibility into US dollars.

            What this effectively meant was that US monetary policy dominated Argentina – it could not set its own interest rates. This was fine for a short-period while the US economy was growing but by 1996, as the US Federal Reserve tightened monetary policy and risk premia on Argentinean debt rose the appreciating currency started to choke trade.”

            Read more:

      3. aet

        So…no examples from history?
        I suppose a discontinuous sudden hike in rates it could happen to “new sovereigns”, like, for instance, in the first twenty or thirty years of the existence of the USA itself.

        Could this be some kind of institutional memory at work, reading those conditions into today’s world?

  4. joebhed

    On thee Stiglitz – Soros Financial Times piece.

    It’s easy to agree that today’s economic paradigm is in need of something different.
    But, not necessarily something new.

    I would bet that nothing Soros and Stiglitz will come up with from their international scholars circle will come close to what I am posting in this link.

    A Program for Monetary Reform includes as one of its authors, the Hon Paul Douglas, esteemed UChicago economist, US Senator, author of the Douglas Committee Report and head of the Congressional Sub-Committee on Monetary, Credit and Fiscal Policies. Other authors include Profs Irving Fisher of Yale, Charles Whittlesey and Frank Graham, both of Princeton, Wilford King and Earl J. Hamilton.

    A Program for Monetary Reform is available here:

    The paradigm being proposed is dynamic – an achievable standard of stable buying power as the value for the nation’s money, the restoration of monetary sovereignty in the nation’s circulating medium, tightly controlled by an independent monetary authority, the end of debt-money creation by private bankers, replaced with government-issuance of our money without debt and full-reserve banking.

    Anyone reading this 1939 document can see why it was supported publicly by over 400 economists. When was the last time something like that happened?
    Answer – not since.

    It is nothing less than a renewed monetary policy paradigm, providing the level playing field framework necessary for economic stability.

    Have a read.

  5. jbmoore

    Regarding the Stiglitz article, it should not take a Nobel Prize winner to urge his profession to come up with a better framework to address the flaws and failure of the old framework. A profession whose job is to describe and model reality should do that automatically as a matter of scientific ethic and principle. The existence of such an article is a rather sad and damning indictment on the state of the economics profession and US economic policy in general.

    1. liberal

      The existence of such an article is a rather sad and damning indictment on the state of the economics profession and US economic policy in general.

      Sure, but clearly economics as a profession was already shown to be a laughingstock by the housing/credit bubble and its aftermath.

  6. EmilianoZ

    Andy Xie sees Armageddon. Most of the stimulus has leaked outside the US and now it’s coming home to roost. Stagflation is on its way. Everybody start buying gold and commodities! The endgame is near.

    One quote:
    “One often hears that labor costs are only one tenth of the cost at most factories. But, the components that often account for over half of the cost are made by labor in other factories. The infrastructure and logistics services have significant labor costs too. The total labor content for export goods is probably over one third in emerging economies. When labor cost rises at 20-30 percent per annum, it becomes a serious source of inflation.”

    One for all and everyone for himself!

  7. MyLessThanPrimeBeef

    Pot growers using wild bears to guard stash?

    I am sorry, but I have had enough of animals taking jobs away from humans. Jobs are for humans only. Only humans should be burdened with jobs.

    Give all the work currently done by guard dogs back to humans!!!

    That’s one way to reduce unemployment.

    It amazes me that some humans have a problem with other humans (we all belong to the same species, albeit different races) taking away jobs, but are not alarmed when animals do it – they are even stranger, more foreign, more alien, not being of the same species as us.

    It just goes to show that we only hate those close to us. And we can’t stant most those similar to us who go further than us and we are less likely to be jealous of successful people with different backgrounds.

  8. propertius

    After perusing the Telegraph article on the Greek debt death spiral, I noticed the following article:

    which contained the following statement:

    So for every first-class physicist from Imperial College who ends up earning £200,000 as an analyst in the City, there must be an origami graduate from the University of Coketown who is suffering hard times.

    Perhaps if this hypothetical “first-class physicist” were working on, say, *physics* rather than complex arbitrage schemes we’d all be better off. The world needs high-temperature superconductors, faster integrated circuits, and new energy sources a lot more than it needs yet another hedge fund. Too bad we’re not willing to invest in actual science any more.

  9. Andrew Bissell

    Gawd, the Wray piece is awful. Just another proposal to shove more and more credit into an asset class that’s already choking on it.

    Once the GSEs are fully nationalized though, I suppose that America’s overindebted home borrowers can take comfort in the fact that they owe inflated debts on overpriced assets to the United States government, instead of Wall Street. And the ones without mortgages can still feel a sense of civic pride in helping subsidize real estate credit by eating the losses from any bad mortgage loans. Wow, what relief!

  10. leroguetradeur

    You can’t make housing more affordable by subsidizing purchasers. If you do it through assuming risks for lenders by securitization, the result is predatory lending, as lenders cease to worry about risk and invent more and more absurd loans, no longer getting hit by defaults. In addition, the increased volume of loans leads to more bids which raises prices. If you do it by direct grant, same thing, more bids and higher prices.

    The result is to make housing just as unaffordable as before. The problem was never that some people could afford housing but just could not get loans to buy it, and if we changed their ability to get loans, then everything, including the price of the houses, would stay the same, except now they would own houses with mortgage payments they could afford.

    The problem was in the first place that their incomes were not high enough to afford to buy some assets at the prevailing prices, houses being among them. At least, houses where they wanted to buy them. Intervening in the market so as to take default risk away from lenders and give it to the taxpayer was never going to fix this, it just had the predictable result of increasing house prices and making houses less affordable. At the same time, the increase in prices ignited the housing and credit bubble.

    You cannot get there from here. It only looks that way because the first ones in do OK. They buy on the new terms before the bubble gets going. They do fine. But they are a tiny minority of those who get sucked in over the life of the scheme.

    So yes, the country needs to go back to a situation where there is no Fannie or Freddie, loans are not securitized, and large downpayments are the norm, and fewer people can buy houses. Only those with incomes large enough that they can afford the mortgages. The problem is the incomes, not the loan availability. This is the lesson both of the twenties and the recent crash. If working peoples incomes are too low to afford things, you will not have a growing economy in the medium term.

    Galbraith pointed out the phenomenon in the Great Crash, but did not diagnose it correctly. All credit bubbles produce this phenomenon. It is in the nature of a credit bubble that working salaries stagnate or fall in real terms. But that is another and more complicated story than the Fannie Freddie one. The FF story is about the futility of addressing one problem by creating another. The probllem was thought to be lack of mortgage availability. The problem that was created was a housing and credit bubble and taxpayer funded loan defaults.

    1. Yves Smith Post author

      You claim to have read ECONNED. Fannie and Freddie had almost nothing to do with the crisis. There were longer term factors I described, but the most immediate causes were Greenspan’s negative interest rates, which created a hunt for yield, and the growth of the shadow banking system. 75% of the 2006-2007 subprime bonds went to CDOs! There was also a bubble in takeover loans, all risk spreads were grossly underpricing risk. But you blame it on Fannie and Freddie.

      Fannie and Freddie are suffering roughly 2% defaults and 4% serious delinquencies, even in an economy with uenployment at 16.5% (I think U-6 is the better measure of realities on the ground). You can object to how they are being used now, I think it’s a big mistake, but you can’t pin the crisis on them.

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