Category Archives: Market inefficiencies

The Global Minotaur: An Interview with Yanis Varoufakis

Yves here. I hate to throw a spanner in the works, but as much as Varoufakis’ view may sound persuasive, I strongly suggest you read Andrew Dittmer’s translation of a very important paper by Claudio Borio and Piti Disyatat of the Bank of International Settlements, “Global imbalances and the financial crisis: Link or no link?”

Yanis Varoufakis is a Greek economist who currently heads the Department of Economic Policy at the University of Athens. From 2004 to 2007 he served as an economic advisor to former Greek Prime Minister George Papandreou. Yanis writes a popular blog which can be found here. His latest book ‘The Global Minotaur: America, the True Origins of the Financial Crisis and the Future of the World Economy’ is available from Amazon.

Interview conducted by Philip Pilkington

Philip Pilkington: In your book The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy you lay out the case that this ongoing economic crisis has very deep roots. You claim that while many popular accounts – from greed run rampant to regulatory capture – do explain certain features of the current crisis, they do not deal with the real underlying issue, which is the way in which the current global economy is structured. Could you briefly explain why these popular accounts come up short?

David Stockman Disses Private Equity Business Acumen on Dylan Ratigan Show

By dint of news flow, we are having a private equity fest tonight. David Stockman, the former Reagan budget director, made a cogent case against the idea that being at the helm of a private equity firm has much to do with knowing how to run a business on Dylan Ratigan. I thought readers would enjoy this segment, not simply due to the content but also because Stockman is a compelling and blunt speaker.

Marx Versus Capitalism Versus You

By Sell on News, a macro equities analyst. Cross posted from MacroBusiness

It is a measure of how un-self critical modern economics has been, that the Marxists are starting to appear to be making the most sense of the current crises. The supine acceptance that “the market is always right” — a truism only to traders and vested interests — means that there has been precious little understanding developed about how markets can go wrong. Or what is wrong, as well as right, with markets and the modern practices of capitalism. An article in the London Review of Books came to my attention recently by Benjamin Kunkel that shows how Marxist analysis is actually looking quite pertinent to the current mess.

Tape Painting or Real Rally?

By Marshall Auerback and Edward Harrison Marshall here. That was an impressive rally into the close in New York. Stocks ended up across the board. Yves Smith, who was off the grid today, asked “was there any news driving” the rally into the close or was it just tape painting. Here’s what I wrote: No, […]

Should Elizabeth Warren Run for President?

As the manufactured debt ceiling crisis provides an unflattering window into the reckless incompetence of pretty much all of our elected officials in DC, more and more readers have been calling for Elizabeth Warren to run for President.

The idea of punishing Obama by introducing a wild card into his stacked deck is enormously appealing. The assumption that he can abuse his everyman base as badly as he wants to because they won’t vote for someone further to the right (no matter how little further to the right that really is) after the bait and switch of his campaign is still seen as a viable strategy by most political commentators.

But discomfiting Obama isn’t a very good reason for Warren to consider throwing her hat into the ring. And as we’ve observed in past posts, the Harvard professor attracts a tremendous amount of projection. It would be hard for her, or anyone, to live up to the hopes vested in her.

We’ll take a dispassionate look at the notion of having Warren run for President. The bottom line is there is a sound case to be made for the idea, and it trumps having her run for the Senate. And if she is to go this route, she should primary Obama rather than run as a third party candidate.

How Algorithms Shape Our World

I don’t know about you, but I’m suffering from debt ceiling/Eurozone mess fatigue and thought readers might enjoy a wee respite. This engaging presentation by Kevin Slavin provides some useful food for thought about how the use of algorithms are coming to literally reshape our world.

Felix Salmon Misreads AAA Bond Demand to Say “Overcaution” Caused Crisis

Lordie, I can’t believe someone who professes to understand markets has written, at length, that caution, no, “excess of overcaution,” was a major contributor to the criss. Or has Felix Salmon been spending too much time with lobbyists from ISDA and SIFMA?

I hate seeming rude, but Felix has a habit of tearing into Gretchen Morgenson for errors much less significant than the one he made in a post today. He wrote, apropos this chart, which comes from FT Alphaville:

Doug Smith: The Maximum Wage

By Douglas K. Smith, author of On Value and Values: Thinking Differently About We In An Age Of Me

We face severe and growing income inequality with negative effects on people and the economy. Yet, no surprise, the ‘can’t do’ right wing continues a scorched earth campaign against the minimum wage. These self-promoting haters actually prefer no wages and indentured servitude – for example using prisoners to replace employees and cheerfully promoting ‘internships’ for the unemployed.

They glory in income inequality and wish it to expand instead of contract. Enough of that. They are destroyers of the American Dream.

But people who seek to shrink income inequality — to insure life, liberty and the pursuit of happiness for all and not just some — must now focus as much on the maximum wage as the minimum wage.

So, be it proposed:

“That any enterprise receiving taxpayer funds shall not compensate that enterprise’s highest paid person in an amount greater than twenty-five times what the lowest compensated person receives.”

Mirabile Dictu! Central Bankers Getting Concerned About Bank Capital Levels Rather Late in the Reform Game

Something very peculiar is afoot. Well after the bank regulatory reform debate was supposedly settled, central bankers seem to be reopening that discussion. It’s puzzling because the very reason the banks won so decisively was that central bankers were not prepared to get all that tough with their charges.

I’m not clear what has led central bankers to get a bit of religion. Is it the spectacle of the Bank of England talking about breaking up the banks (they won’t get their way thanks to bank lobbyist working over the Independent Banking Commission, but no one doubted their sincerity)? Or the Swiss National Bank imposing 19% capital requirements, which as we discussed, is likely to lead to the investment banking are of UBS being domiciled elsewhere (assuming a country capable of bailing it out will have it)? Or perhaps it is central bankers being forced to recognize that their Plan A of extend and pretend and super low interest rates simply won’t lead banks getting to meaningfully higher capital levels when the staff continues to take egregious amounts out in compensation? Or have they realized how bad bank balance sheets are in the Eurozone and how tight the linkages still are among the major capital markets players, and they belatedly realize they need them to be much more shock resistant?

The bottom line is that various central bankers have taken the surprising step of insisting their banks meet more stringent requirements for the biggest banks than those originally planned to be to be included in Basel III. Per Bloomberg:

Complexity and War or How Financial Firms Wreck Economies for Fun and Profit

There’s a great post up, “Human Complexity: The Strategic Game of ? and ?,” by Richard Bookstaber, former risk manager, author of the book A Demon of Our Own Design and currently an advisor to the Financial Stability Oversight Council. As insightful as it is, Bookstaber does not draw out some obvious implications, perhaps because they might not be well received by his current clients: that the current preferred profit path for the major capital markets firms is inherently destructive.

I suggest you read the post in its entirety. Bookstaber sets out to define what sort of complexity is relevant in financial markets:

The measurement of complexity in physics, engineering, and computer science falls into one of three camps: The amount of information content, the effect of non-linearity, and the connectedness of components.

Information theory takes the concept of “entropy” as a starting point…

Do We Need Big Banks?

Yves here. I normally let VoxEU articles stand on their own, but this topic, of whether the bank PR that bigger banks are essential stands up to scrutiny, is near and dear to my heart.

Note that the authors point to a 1990s study that finds that a $25 billion in assets bank was the optimal size. There were a fair number of studies done then of bank size versus efficiency. I’m a bit surprised that this is the one that is most often cited, since it also came up with the biggest size threshold at which a negative cost curve kicked in (meaning the bank became more costly to run). One study found that the slightly negative cost curve started at $100 million in assets (!); more typical was somewhere between $1 and $5 billion. And remember, these studies were done in the days when banks returned checks, and check processing was believed to have strong scale economies (ie, if check processing was a bigger proportion of total costs then than now, it could arguably have increased scale economies).

Some academics were frustrated with these results. I recall reading a paper where the author argued that there were theoretical cost savings to being bigger (duh) and basically contended that the empirical data had to be wrong.

Guest Post: Market Ecology

→ Rajiv Sethi

The erudite and very readable RT Leuchtkafer has posted yet another comment for the Securities and Exchange Commission to digest. This one was prompted by a paper by Andrei Kirilenko, Albert Kyle, Mehrdad Samadi and Tugkan Tuzun that provides a fascinating glimpse into the kinds of trading strategies that are common in asset markets today and the manner in which they interact to determine the dynamics of asset prices.

Why the Krugman “I See No Commodities Speculation” Analysis is Flawed

Paul Krugman correctly anticipated that I would be unable to resist taking issue with him again regarding his view that the recent increase in commodities prices are warranted by the fundamentals.

Note that I am not saying in this post that “commodities prices have increased as a result of speculation.” That takes more granular analysis of conditions in various markets; we’ll be looking at some that look suspect in the coming days and weeks.

I intend to accomplish something much simpler in this post: to dispute the logic of Krugman’s overarching argument. He professes to be empirical, but as we will show, he is looking at dangerously incomplete data, so his conclusions rest on what comes close to a garbage in, garbage out analysis. And that’s been a source of frustration given his considerable reputation and reach.

Satyajit Das: Derivatives Regulation Dance

By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives.” Cross posted from Wilmott

A question of values …

Derivative contracts are valued on a mark-to-market (“MtM”) basis. This requires valuation of the contracts based on the current market price.

OTC derivatives trade privately. Market prices for specific transactions are not directly available. This means current valuations rely on pricing models.

There are significant differences in the complexity of the models and the ability to verify and calibrate inputs. More complex products used sophisticated financial models, often derived from science or statistical methodology. There are frequently differences in choice, exact factorisation and even numerical implementation of the models. Different dealers may use different models.

Some required inputs for the models are available from markets sources. The nature of the OTC market and the limited trading in certain instruments mean that key input parameters must frequently be “estimated” or “bootstrapped” from available data. In certain products, the limited number of active dealers means that “market” prices are sometimes no more than the dealer’s own quote being fed back after being collated and “scrubbed” by an external data provider. This is referred to prosaically as “mark-to-myself”.