Author Archives: Yves Smith

UK About to Implement Massive Tax Break for Banks; Is the US Far Behind? (Updated)

The UK is about to implement a tax code change that amounts to a massive subsidy for large corporations, most of all big banks. The remarkable bit is that this is taking place when the UK is projected to fall short of its budget targets, at a time when the government professes to take that sort of thing seriously. Although we don’t hew to the logic of austerity in the wake of a financial crisis (the better course of action is to encourage debt renegotiations/writedowns, and offset the contractionary impact with fiscal stimulus), a big tax break is contrary to the official policy stance.

For those in the US who have steered clear of the budget drama on the other side of the pond, a story from from the Financial Times just over a week ago will give you a sense of the state of play:

George Osborne says he has little option but to push on with the harshest public spending cuts in living memory because a reversal would alarm the bond markets and plunge Britain into “financial turmoil”.

Krugman, Commodity Prices, and Speculators

Paul Krugman was gracious enough to acknowledge our past differences on the matter of commodities speculation, which was specifically about oil markets. It was the subject of a long running ~~argument~~ conversation between his blog and mine in spring 2008, which I recapped in ECONNED.

In brief, Krugman contended that the skyrocketing oil prices of early 2008 were the result of fundamental factors (and we pointed out that we were puzzled by his stance, since he, unlike the vast majority of Serious Economists, has been willing to call some past bubbles in their making). As he reiterates on his blog today, if the prices exceed the level dictated by supply and demand in the real economy, a standard microeconomic analysis would expect there to be inventory accumulation, aka hoarding.

The New York Times’ Half-Hearted Hatchet Job on the Bank of England’s Mervyn King

By Richard Smith, a UK based capital markets IT specialist, and Yves Smith

It’s always a fraught business when a foreign paper hazards into parsing UK politics. But one has to wonder at the unseemly spectacle of the Grey Lady giving such a distorted reading on Mervyn King, the governor of the Bank of England.

Were you to rely on the New York Times story on Monday, “A Crisis of Faith in Britain’s Central Banker,” you would think that this central banker is under assault on all fronts. While most of the article is on his fiscal/monetary policy stance, where King is taking a great deal of criticism, it also leads readers to believe he is isolated on bank reform as well. These are the first and third paragraphs of the piece:

Links 2/7/11

Assange threatens to sue ‘Guardian’ The Hindu (hat tip reader May S)

‘Cornell Dots’ That Light Up Cancer Cells Go Into Clinical Trials Science Daily (hat tip reader furzy mouse)

New Zealand scientists record ‘biodiversity breakdown’ BBC

World’s top architect Frank Gehry brands Paris residents ‘philistines’ after planning permission revoked Telegraph. Count me with the philistines. I’d rather have the trees.

Florida Foreclosure Mill King David Stern Shows Crime Sure Did Pay

The Associated Press has a juicy story on the rise and fall of Florida’s foreclosure mill kingpin David Stern (hat tip Lisa Epstein). It combines sordid detail with an account of how his business as a business went wildly off the rails.

For those new to this blog, the Law Offices of David Stern was the biggest foreclosure mill in Florida, one of the first to be targeted by a state attorney general, and per both reports on the ground as well as revelations from official and media investigations, one of the worst abusers of court procedures and borrower rights.

Aside from depicting how utterly out of control Stern was as a businessman, the AP story helps explain how the mortgage business got to be such a horrorshow. Moe Tkacik, a financial writer who has poked around the dark corners of the securitization and muni finance businesses, and I chatted a couple of nights ago about the foreclosure crisis. One of the questions that was nagging at her was who came up with the idea of robosigning?

AOL Buys Huffington Post

The most noteworthy bit of the AOL acquisition of HuffPo (aside from the price, which I assume will leak out sooner rather than later) is Arianna will run the AOL unit that will include the old HuffPo plus a bunch of other content businesses. It’s a pretty significant new media empire. From the joint announcement:

Links 2/6/11

If you are in DC, please consider Protest of President Obama’s Special Walk and Visit to U.S. Chamber of Commerce on Monday, Feb. 7 at 11 AM. If nothing else, it’s pretty unseemly for the so-called leader of the free world to kiss this ring.

Greenland’s race for minerals threatens culture on the edge of existence Guardian

Buddhism and Neuroscience Psychology Today (hat tip reader furzy mouse)

Chernobyl birds are small brained BBC

Bush visit to Switzerland cancelled over security fears Independent (hat tip reader buba)

Wallflowers at the Revolution Frank Rich, New York Times

Guest Post: Leverage, Inequality, and Crises

By Michael Kumhof, Deputy Division Chief, Modeling Unit, Research Department, IMF and Romain Rancière, Associate Professor of Economics at Paris School of Economics. Cross posted from VoxEU

Of the many origins of the global crisis, one that has received comparatively little attention is income inequality. This column provides a theoretical framework for understanding the connection between inequality, leverage and financial crises. It shows how rising inequality in a climate of rising consumption can lead poorer households to increase their leverage, thereby making a crisis more likely.

The US has experienced two major economic crises during the last century – 1929 and 2008. There is an ongoing debate as to whether both crises share similar origins and features (Eichengreen and O’Rourke 2010). Reinhart and Rogoff (2009) provide and even broader comparison.

One issue that has not attracted much attention is the impact of inequality on the likelihood of crises. In recent work (Kumhof and Ranciere 2010) we focus on two remarkable similarities between the two pre-crisis eras. Both were characterised by a sharp increase in income inequality, and by a similarly sharp increase in household debt leverage. We also propose a theoretical explanation for the linkage between income inequality, high and growing debt leverage, financial fragility, and ultimately financial crises.

Goldman “Partner” Hedging Circumvents Intent of Pay Reforms

While I don’t want to overdo the criticism of Wall Street pay practices (on second thought, I am not sure such a thing is possible), I’d be remiss if I neglected to highlight a very good job of analysis and reporting by Eric Dash of the New York Times (and Footnoted.org) on this topic.

The Times has been picking apart a partnership that Goldman preserved after it went public in 1999 and is the vehicle that holds stock options and shares allotted to the top producers of the firm, a 475 member group. It already holds 11.2% of the firm and its share is likely to increase as options vest.

The report published tonight reveals that members of the Goldman partnership would routinely hedge their Goldman exposures. That defeats the purpose of share grants and equity linked pay.

Links 2/5/11

How did Imbolc become Groundhog Day? Care2 (hat tip reader furzy mouse)

Amazon drought stirs climate fear BBC

‘Dating’ Site Imports 250,000 Facebook Profiles, Without Permission Wired

Fiber Capacity Maxing Out? Paul Kedrosky

The trouble with men Gillian Tett, Financial Times

The Specious Logic of Wall Street Pay

It’s remarkable how Masters of the Universe, the new financial elite first identified by Tom Wolfe in 1986, remember nothing and regret nothing. And why should they? Their position remains remarkably secure 25 years later.

We see the “Who us, take responsibility for our actions?” stance in full view courtesy one of their most effective spokesman, Steve Eckhaus, an attorney who has negotiated many big ticket Wall Street compensation contracts. From the Wall Street Journal:

“It was understandable why there was anger,” says Mr. Eckhaus, but “the crisis was not caused by Wall Street fat cats. It was caused by a confluence of economic, political and historical factors.”..

In general, he said his clients are “pure as the driven snow” and doing work that supports the economy and justifies their pay….

“You have to know what the profits are” to know what someone should make, said Mr. Eckhaus, noting Wall Street’s top performers usually gobble up 80% of the bonus pool. “Those who are responsible for profits should share in the profits in a way that rewards them.””

This is the usual “heads I win, tails you lose” logic. The rationale for bulging pay packets is that the producers created it, therefore they deserved their cut. But Eckhaus says any bad events are due only to bad luck. Sorry to tell you, but only narcissists and their agents take credit for good stuff and lay the blame on everyone else. Unfortunately, we breed for that in Corporate America, it happens to be a very effective career strategy in large organizations.

Links 2/4/11

British Border Agent Fired for Putting Wife on Terrorist Watch List Wired (hat tip reader furzy mouse)

Watchdog Group questions Google’s relationship with NSA NetworkWorld (hat tip reader May S). They’ve noticed only now?

Lambert Strether is still live blogging Egypt, if you don’t have time to watch AlJazeera and want to keep up to date.

The CIA on Egypt’s Economy, Financial Deregulation and Protest Nomi Prins (hat tip reader furzy mouse). From a few days ago but still relevant.

Revolution Is Bad for Business: No Quick Fix for Arab Youth’s Economic Woes Der Spiegel (hat tip reader Peter J). Ahem, democracy is bad for capitalism! Who’d have thunk it? And you can see where this argument will wind up…..

Please visit post to view full sized image.

Floyd Norris Makes Bizarre Comparison to 1983 to Put Smiley Face on Job Outlook

Ben Bernanke was talking up the economy yet again yesterday, and it appears Floyd Norris got the same memo.

I must digress a tad by giving The Daily Capitalist’s translation of Bernanke’s remarks:

Since August when we began to flood our primary dealers in Wall Street with newly printed money the market went up because they used the money to buy financial products, including stocks. We are trying to cause price inflation because the majority of the FOMC is concerned about price deflation. If we cause price inflation then we will fool everyone into thinking that because prices are going up, such as in the stock markets, that it is real growth even though it’s just price inflation. Even better the national debt can be paid down with cheap dollars. Yields on Treasurys initially went up because the bond vigilantes aren’t stupid: they know it will cause inflation so they wanted higher yields. But, ha, ha, the Euro went into the tank because of the PIIGS and money flooded back in to the US and drove Treasury yields back down, for the time being. Screw the vigilantes. The same thing happened when we tried QE1, but as we all know, that failed and we are desperately trying again because we don’t have too many arrows left in our quiver. Hey, if it had worked, would we be doing QE2? We are desperate because if unemployment doesn’t come down, the Obama Administration will be screwed and I’ll lose my job. We are ready to do QE3 because we don’t have a clue what else to do.

Now to Norris’ truly bizarre column, in which he argues that circumstances now are very much like those of 1983, when forecasters were not optimistic about the odds of unemployment falling quickly, when lo and behold, it did.

The problem is that there are some of us who are old enough to remember 1983, like yours truly. And 1983 has about as much resemblance to today as a merely badly out of shape athlete does to one who is in the hospital and is refusing surgery (or in our case, structural change).