Messrs Geithner, Bernanke, and yet another gentleman from the former investment bank Goldman Sachs, (Bill Dudley who replaced Geithner as President of the NY Fed), went before the House Financial Service Committee to answer questions about the AIG bailout today .
Notwithstanding the alternately inane, occasionally relevant but hopelessly mangled, or just downright painful questioning from House members typically out of their depth, ie: the usual, m* was rather looking forward to today's hearing. The opportunity to focus attention on the decision process behind one of the most extraordinary actions taken thus far in the crisis, the initial and now ongoing operation to keep AIG on life support, seems long overdue.
Mere hours after Lehman Brothers was inartfully "allowed" to file for bankruptcy (most market participants having been lulled into complacency by the extraordinary measure of a $40bn Fed loan to JPM to help smooth the passage of Bear Stearns into its long goodnight), the Fed and Treasury reversed course, again, and advanced AIG $85bn (for 80% of the firms equity) to meet collateral calls from its trading counterparties and prevent a bankruptcy.
The justification put forward at the time, that a "disorderly" bankruptcy risked unknown but assuredly catastrophic effects on the financial system and the economy, was the party line in today's hearing. And yet as the taxpayers' tab continues to mount, after multiple rounds of capital injection, extraordinary funding facilities, and last week's unveiling of the Fed's nuclear option, debt monetization, we have no further understanding of our financial saviors' analysis than a platitude about risk and catastrophe. For this we have unleashed trillions.
Surely, we the people deserve grittier stuff than that. Its our dime. It's pithy, sure, but m* wants to know where are the Powerpoint slides? Where are the charts? Surely there is a scratch-pad someplace with AIG's off balance sheet liabilities and the potential losses a potential bankruptcy might have entailed? A meeting agenda, a presentation, a back of an envelope?
Or have these gentlemen from the Fed, and now Treasury, led us down a course of treatment, founded on no more than a fear of an uncertain and painful future, that risks transforming our financial corpus beyond all recognition? If the analysis is correct, and the course of action appropriate, what is there to hide? Gentlemen, the envelope please.
Tuesday, March 24, 2009
Thursday, March 19, 2009
Bonus Round
Who can keep up with all the four-letter acronyms emanating from the organs of state capitalism these days? Like a bad winter bug, if you work at a "TARP Bank," TARP’s revenge made the rounds today. The House, in a spasm of populist retribution, passed legislation and the Senate considered legislation to punitively tax bonuses awarded to financial workers whose firms accepted TARP funds, willingly or unwillingly, and well, is anyone surprised? m* is not.
TARP was dumb money, perpetual capital at 5% interest plus a puny passel of warrants, as part of a dubious plan, details to be worked out later, for purchasing bad “assets” from banks. In reality it was a $700bn blank check from the Government, gifted in haste to a group of important banks whether they needed it or not, (later expanded to consumer credit firms and automakers) by an unlikely trio of ministers enthralled with the Street and their own savior complexes.
The Street played its part in the con when
Granted, after their near death experiences, the management of certain of those lucky (unlucky?) institutions might have been expected to behave more discreetly with the fruits of the fleecing, a bit more congruent with the act of charity dis-enfranchised and increasingly unemployed taxpayers had visited on them. But this is Wall Street folks. Greed and fear are reliably available. Forbearance has always been in short supply. And besides, wasn’t the premise that these institutions (and their bankers) were too valuable to lose?
But where Wall Street went wrong was not in taking the money and running. It was in embarrassing Congress. Having blithely signed over a large portion of the Treasury on a bill they didn’t understand to an industry they can’t comprehend, now "those same folks" (as big O. would say), reacting to public outcry over what amount to personal bailouts for financial employees, are mad as hell that the blank check they wrote was not spent how they wanted and that they didn't know. Wall Street traded securities for cash. Congress traded cash for praise. Wall Street pocketed the cash. Congress, having found praise fleeting, now wants the cash back. Bonus round.
Monday, March 10, 2008
The "L" Word
Unless one is actually involved in the credit markets in an institutional way, one is unlikely to appreciate quite how much of the "L" thing, or leverage, is at work in the system. There seems to be a lack of appreciation on this point, particularly among those who inform or decide policy.
Recent characterizations of the credit markets as panicking "irrationally", or needing a "face-slap" moment to break the hold of a fearful mindset strike m* as uninformed about the dynamics of leverage. This is not a panic. To the contrary, the accelerating sell-offs in credit indicies and spreads reflect the most rational and serious behavior: de-leveraging.
Prior to last fall, institutional money was typically levered in loan markets at 10x, levered in asset-backed debt 20x, and brokerage firms doing the lending levered at 30x. By way of contrast, a typical equity hedge fund is levered only 2-3x. As holders of many no down payment to very low down payment sub-prime mortgages have found out, it takes only a hiccup in asset values to create negative equity (for a buy and hold investor) or technical insolvency (for a mark-to-market investor), whether one runs a loan fund, a mortgage fund, a brokerage house, or even a government chartered home mortgage lender (50x in case you were wondering).
Lulled into a false sense of security and extrapolating the trend, the Street gorged at the credit banquet. And it's Risk Management function, more a portfolio optimization scheme for maximizing profits at VaR-ious levels of statistical risk, proved its worth in last summer's quant meltdown - which is to say, not much.
In these conditions then, with asset values having more than hiccup'd, the need for cash and the resultant pressure on the prices of assets most held by the levered players is quite simple. Whether today's rumors of trouble at Bear Stearns "bear out" or not, the potential for a liquidity crisis at a well known name has never been higher. It is likely that this cycle sees major broker failures, or last ditch acquisitions of them on the brink (see BoA/Countrywide). Those who said the problem would be "contained" to the home mortgage sector may have been confused about how far that sector stretched - all the way to Wall Street.
Recent characterizations of the credit markets as panicking "irrationally", or needing a "face-slap" moment to break the hold of a fearful mindset strike m* as uninformed about the dynamics of leverage. This is not a panic. To the contrary, the accelerating sell-offs in credit indicies and spreads reflect the most rational and serious behavior: de-leveraging.
Prior to last fall, institutional money was typically levered in loan markets at 10x, levered in asset-backed debt 20x, and brokerage firms doing the lending levered at 30x. By way of contrast, a typical equity hedge fund is levered only 2-3x. As holders of many no down payment to very low down payment sub-prime mortgages have found out, it takes only a hiccup in asset values to create negative equity (for a buy and hold investor) or technical insolvency (for a mark-to-market investor), whether one runs a loan fund, a mortgage fund, a brokerage house, or even a government chartered home mortgage lender (50x in case you were wondering).
Lulled into a false sense of security and extrapolating the trend, the Street gorged at the credit banquet. And it's Risk Management function, more a portfolio optimization scheme for maximizing profits at VaR-ious levels of statistical risk, proved its worth in last summer's quant meltdown - which is to say, not much.
In these conditions then, with asset values having more than hiccup'd, the need for cash and the resultant pressure on the prices of assets most held by the levered players is quite simple. Whether today's rumors of trouble at Bear Stearns "bear out" or not, the potential for a liquidity crisis at a well known name has never been higher. It is likely that this cycle sees major broker failures, or last ditch acquisitions of them on the brink (see BoA/Countrywide). Those who said the problem would be "contained" to the home mortgage sector may have been confused about how far that sector stretched - all the way to Wall Street.
Wednesday, February 20, 2008
Six Point Eight
From the minutes of the Fed's Jan 30th meeting released today:
"The higher-than-expected rates of overall and core inflation since October, which were driven in part by the steep run-up in oil prices, had caused participants to revise up somewhat their projections for inflation in the near term. The central tendency of participants’ projections for core PCE inflation in 2008 was 2.0 to 2.2 percent, up from the 1.7 to 1.9 percent central tendency in October. However, core inflation was expected to moderate over the next two years, reflecting muted pressures on resources and fairly well-anchored inflation expectations. Overall PCE inflation was projected to decline from its current elevated rate over the coming year, largely reflecting the assumption that energy and food prices would flatten out. Thereafter, overall PCE inflation was projected to move largely in step with core PCE inflation."
Also today the BLS released it's CPI report showing inflation running at 4.3% over the last twelve months. Over the last three months, the all items index increased at a 6.8% annual rate. Yesterday, China reported it's CPI has also increased over the last three months at a 6.8% annual rate. It should be clear now, if it has not been for some time, that resource competition among the world's economies is fierce, and inflation pressures globally, especially in the case of food and energy, are approaching levels where inflation expectations become rather less "well-anchored."
Yesterday, the value of fiat money globally was reduced by 5% against the price of just about any commodity traded on organized markets. Crude breached $100, and items from palladium and platinum, to wheat and gold made all time highs anew. And yet in the foggy corridors of the Fed, where "muted pressures on resources" are "expected" and softer food and energy prices are "assumed" it seems the future course of monetary policy depends on the Fed's ability to pick the top in commodity prices, a decidedly naive and costly strategy.
The Fed is depending on a slowdown in domestic consumption from the over-levered consumer to relieve resource pressure globally and soon, while aggressively lowering rates in a desperate attempt to keep that same consumer's spending habit alive. The contradiction is clear. The question is then how many more six-point-eights can you stand? The chart below says not many.
Bloomberg: Spot Gold
"The higher-than-expected rates of overall and core inflation since October, which were driven in part by the steep run-up in oil prices, had caused participants to revise up somewhat their projections for inflation in the near term. The central tendency of participants’ projections for core PCE inflation in 2008 was 2.0 to 2.2 percent, up from the 1.7 to 1.9 percent central tendency in October. However, core inflation was expected to moderate over the next two years, reflecting muted pressures on resources and fairly well-anchored inflation expectations. Overall PCE inflation was projected to decline from its current elevated rate over the coming year, largely reflecting the assumption that energy and food prices would flatten out. Thereafter, overall PCE inflation was projected to move largely in step with core PCE inflation."
Also today the BLS released it's CPI report showing inflation running at 4.3% over the last twelve months. Over the last three months, the all items index increased at a 6.8% annual rate. Yesterday, China reported it's CPI has also increased over the last three months at a 6.8% annual rate. It should be clear now, if it has not been for some time, that resource competition among the world's economies is fierce, and inflation pressures globally, especially in the case of food and energy, are approaching levels where inflation expectations become rather less "well-anchored."
Yesterday, the value of fiat money globally was reduced by 5% against the price of just about any commodity traded on organized markets. Crude breached $100, and items from palladium and platinum, to wheat and gold made all time highs anew. And yet in the foggy corridors of the Fed, where "muted pressures on resources" are "expected" and softer food and energy prices are "assumed" it seems the future course of monetary policy depends on the Fed's ability to pick the top in commodity prices, a decidedly naive and costly strategy.
The Fed is depending on a slowdown in domestic consumption from the over-levered consumer to relieve resource pressure globally and soon, while aggressively lowering rates in a desperate attempt to keep that same consumer's spending habit alive. The contradiction is clear. The question is then how many more six-point-eights can you stand? The chart below says not many.
Bloomberg: Spot Gold
Thursday, November 1, 2007
Tipping Point
It seems like only yesterday m* was receiving angst ridden calls and despairing messages from market participants of a certain disposition over the Fed's rate deliberations earlier this week. "I can't believe they are going to do this again!" many of them went - a lament all too familiar to readers with dollar savings and insufficient appetite for the likes of China H's, Google, and Gold, not to risk capital but to protect it!
When after four years of steady decline, the dollar plums new depths against third world scrip and plain old rocks and minerals every day for two months while the official story of benign inflation, strong dollar, and credit containment continues to go un-examined as long as something is moving higher somewhere, even m* is at risk of losing perspective on the proceedings.
Standing over the sink with a toothbrush yesterday, dazed perhaps by the carnage effected on the central store of value in the whole incredible system, m* mentally reviewed the long line of casualties who clung to their rational thought processes too long in the face of this paper bull and contemplated the unthinkable, capitulation.
Were it not for this astonishing and subversive little piece entitled "Inflation-Lessons From History" from Morgan Stanley's Joachim Fels, m* might still be there, brush in hand.
"Since the anchor of the gold standard has been lost, the price level has had only one direction: up. Deflation is virtually ruled out in our paper currency system, and risks to prices are almost entirely on the upside. This is because central banks have become very averse to deflation, and because they usually don't correct for upside one-off surprises for inflation."
Now that's hardly Fiat Money Inflation in France but for a sell-side monetary strategist (as well as a pretty good sport in the old Frankfurt office) it is pretty telling. It also is exactly what m* has been thinking to make sense of the current conditions. It's not just a profligate Fed. Or the inexorable forces of Globalization. Nor a sick Japan or even a scheming China. Though it is very much all of the above. The issue is greater than all of those. It is the matter of paper money.
Mr. Fels is of course too kind to Central Bankers (he knows quite a few) in presuming that they actually have a choice. In m*'s way of thinking, under fiat money, deflation is not merely "ruled out." It is simply impossible. Only inflation, or reflation are possible developments. Or, as m* heard from one wisened FX hand talking about Citigroup today, "Everyone is talking about the banks shrinking. Banks can not shrink. They can only get bigger!" The invisible hands of the system in an open economy with fiat money are too strong for any individual institution acting independently to resist. Unfettered credit creation and socialized monetization of that credit are inevitable. The idealized notion of a Central Bank soundly managing a money supply, resisting inflation and currency debasement is simply wrong.
Right on schedule The Big Picture this week went back to first principles:
m* has been off kilter for weeks wondering how long the disconnect between what was perceived and what was real could continue, (Keynes got that one too) - or how to suspend judgment long enough to participate with the crowd as the bear resignations flow in. The FT's John Dizard caved yesterday: "All Elements in Place for an Equity Bull Run." Alas it was not to be. And a good thing too.
The credit crunch is indeed back and it seems awfully hard to see how more cheap money is going to help (though of course it always helps). No the bigger issue is that the long run futility of efforts to reign in rising prices, to ignore the simple reality that the enormous economic orthodoxy is built to ignore, and the little understood but fundamentally important inflation expectations are on a collision course.
For those who have paid close attention, the tipping point for the housing bubble is well past. The tipping point for the credit bubble is recently past. The tipping point for the dollar collapse is an ongoing event. Today, markets got a glimmer of insight into what it all means. The containment story is slipping away. Faith in price stability is slipping away.
When the 99% of folks who expect and rely on a stable store of wealth as fair trade for their labors come to understand that they have been had, times will get very interesting indeed. m* thinks the scene this week signals that tipping point.
It's a new world.
When after four years of steady decline, the dollar plums new depths against third world scrip and plain old rocks and minerals every day for two months while the official story of benign inflation, strong dollar, and credit containment continues to go un-examined as long as something is moving higher somewhere, even m* is at risk of losing perspective on the proceedings.
Standing over the sink with a toothbrush yesterday, dazed perhaps by the carnage effected on the central store of value in the whole incredible system, m* mentally reviewed the long line of casualties who clung to their rational thought processes too long in the face of this paper bull and contemplated the unthinkable, capitulation.
Were it not for this astonishing and subversive little piece entitled "Inflation-Lessons From History" from Morgan Stanley's Joachim Fels, m* might still be there, brush in hand.
"Since the anchor of the gold standard has been lost, the price level has had only one direction: up. Deflation is virtually ruled out in our paper currency system, and risks to prices are almost entirely on the upside. This is because central banks have become very averse to deflation, and because they usually don't correct for upside one-off surprises for inflation."
Now that's hardly Fiat Money Inflation in France but for a sell-side monetary strategist (as well as a pretty good sport in the old Frankfurt office) it is pretty telling. It also is exactly what m* has been thinking to make sense of the current conditions. It's not just a profligate Fed. Or the inexorable forces of Globalization. Nor a sick Japan or even a scheming China. Though it is very much all of the above. The issue is greater than all of those. It is the matter of paper money.
Mr. Fels is of course too kind to Central Bankers (he knows quite a few) in presuming that they actually have a choice. In m*'s way of thinking, under fiat money, deflation is not merely "ruled out." It is simply impossible. Only inflation, or reflation are possible developments. Or, as m* heard from one wisened FX hand talking about Citigroup today, "Everyone is talking about the banks shrinking. Banks can not shrink. They can only get bigger!" The invisible hands of the system in an open economy with fiat money are too strong for any individual institution acting independently to resist. Unfettered credit creation and socialized monetization of that credit are inevitable. The idealized notion of a Central Bank soundly managing a money supply, resisting inflation and currency debasement is simply wrong.
Right on schedule The Big Picture this week went back to first principles:
What would he make of the AMT and 15% dividend and capital gains tax relative to ordinary income at 35% to 50% after state, local, social security and those non-tax taxes medicare, and medicaid?"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth."
--John Maynard Keynes
The Economic Consequences of the Peace, 1919. pp. 235-248.
m* has been off kilter for weeks wondering how long the disconnect between what was perceived and what was real could continue, (Keynes got that one too) - or how to suspend judgment long enough to participate with the crowd as the bear resignations flow in. The FT's John Dizard caved yesterday: "All Elements in Place for an Equity Bull Run." Alas it was not to be. And a good thing too.
The credit crunch is indeed back and it seems awfully hard to see how more cheap money is going to help (though of course it always helps). No the bigger issue is that the long run futility of efforts to reign in rising prices, to ignore the simple reality that the enormous economic orthodoxy is built to ignore, and the little understood but fundamentally important inflation expectations are on a collision course.
For those who have paid close attention, the tipping point for the housing bubble is well past. The tipping point for the credit bubble is recently past. The tipping point for the dollar collapse is an ongoing event. Today, markets got a glimmer of insight into what it all means. The containment story is slipping away. Faith in price stability is slipping away.
When the 99% of folks who expect and rely on a stable store of wealth as fair trade for their labors come to understand that they have been had, times will get very interesting indeed. m* thinks the scene this week signals that tipping point.
It's a new world.
Thursday, October 25, 2007
Rolling Thunder
The funny thing about the times we live in, and the institutions that, ahem, serve "us" is that when a stock market turn-around like the one on Wednesday is put down to rumors of a surprise rate cut, it's accepted without the bat of an eyelid. Never mind the train cars full of traders having heard how Europe was trading that day heading to the city early to face an anticipated tidal wave of sell orders. Never mind the tenuous nature of current v-shaped earnings expectations with "back to normal for '08" (as if the last 12 quarters have been anything but normal) looking more and more, well, nuts really. Never mind the chart picture that has PPT conspiracy watchers in a lather.
What should be no surprise is that the housing bubble continues to unwind. What also should be no surprise is that every dip in the market with just a hint of panic (and that's most of them now - since valuation was tossed aside for the greater fools of private equity, followed by shots of rate cut tequila) will be met with calls for more cuts. Soon enough m* thinks, even the existence of the PPT and its "interventions" will simply become accepted as fact, so cynical and so desperate for a bail out has the Street become. Public calls for the necessity of interventions will soon follow.
m* remembers well that Japan actually had a PPT during the unwind of that great bubble which served no one but the politicians who could claim to be "doing something" while owners of real estate and equities saw nominal prices decline 75% over the 90's. There are scant reasons to expect different this time.
But the Rolling Thunder in the title of todays post refers to something even more ominous and was sparked by todays utter meltdown (with tree in the forest effect) of the fantasy that the credit crisis of July and August ended with a 50bp freebie from the Fed and new equity highs.
On the surface, today's rumors of sub-prime write downs at AIG, the further erosion in Merrill Lynch (also on rumors of further writedowns - yes even with yesterdays announced $8bn writedowns), and the long overdue implosions of the "cya" facilitators who previously insured municipal debt and more recently took their thoroughly dubious business model into the structured credit space, are just echoes of the summer's difficulties, nothing much to worry about now that the Fed is on our side and earnings from the global boom will most certainly hold up . Except that developments in the credit space are continuing to unravel. FT: Mortgage bond index declines 30%.
To those former CDO manufacturers and buyers now picketing Moodys and clamoring for more Fed assistance m* asks, if the insurer of your structured CDO deal is levered 100x, is that really insurance? Forget the rating agencies, insuring structured credit deals is (was?) the ultimate "cya" business.
What's important about this, coinciding with the failure of the delaying action formerly known as MLEC - the SIV PPT, is the realisation on the street that while Merrill took an $8bn writedown, it's very likely they, like everyone else, are still holding the stuff. Moreover, to the extent they did sell some, its more likely they sold what they could (the higher quality paper with perhaps some transparency) and are left with a portfolio even heavier (on a relative basis) in the toxic unsellable stuff than before.
The July-August asset backed market crisis was actually very orderly - the market simply closed. The panic was real, the paper markdowns painful, but there was relatively little selling. It was obvious to everyone that selling would only hurt one's own remaining positions more. It was better to wait it out if possible rather than force the issue with prices in a market with no buyers.
However that situation was always going to be temporary, hence the proposed master SIV as a vehicle to delay the day of reckoning indefinitely. That moratorium is now over. Over the last few days, m* has heard of several deals that would "never never" be unwound before maturity now being shut down, their assets liquidated. The lenders need the cash. Debt is finding its way back to banks balance sheets. Asset backed commercial paper is coming due. Not much of it will be re-extended and the forced selling that the market successfully avoided in July-August is quietly spreading.
What should be no surprise is that the housing bubble continues to unwind. What also should be no surprise is that every dip in the market with just a hint of panic (and that's most of them now - since valuation was tossed aside for the greater fools of private equity, followed by shots of rate cut tequila) will be met with calls for more cuts. Soon enough m* thinks, even the existence of the PPT and its "interventions" will simply become accepted as fact, so cynical and so desperate for a bail out has the Street become. Public calls for the necessity of interventions will soon follow.
m* remembers well that Japan actually had a PPT during the unwind of that great bubble which served no one but the politicians who could claim to be "doing something" while owners of real estate and equities saw nominal prices decline 75% over the 90's. There are scant reasons to expect different this time.
But the Rolling Thunder in the title of todays post refers to something even more ominous and was sparked by todays utter meltdown (with tree in the forest effect) of the fantasy that the credit crisis of July and August ended with a 50bp freebie from the Fed and new equity highs.
On the surface, today's rumors of sub-prime write downs at AIG, the further erosion in Merrill Lynch (also on rumors of further writedowns - yes even with yesterdays announced $8bn writedowns), and the long overdue implosions of the "cya" facilitators who previously insured municipal debt and more recently took their thoroughly dubious business model into the structured credit space, are just echoes of the summer's difficulties, nothing much to worry about now that the Fed is on our side and earnings from the global boom will most certainly hold up . Except that developments in the credit space are continuing to unravel. FT: Mortgage bond index declines 30%.
To those former CDO manufacturers and buyers now picketing Moodys and clamoring for more Fed assistance m* asks, if the insurer of your structured CDO deal is levered 100x, is that really insurance? Forget the rating agencies, insuring structured credit deals is (was?) the ultimate "cya" business.
What's important about this, coinciding with the failure of the delaying action formerly known as MLEC - the SIV PPT, is the realisation on the street that while Merrill took an $8bn writedown, it's very likely they, like everyone else, are still holding the stuff. Moreover, to the extent they did sell some, its more likely they sold what they could (the higher quality paper with perhaps some transparency) and are left with a portfolio even heavier (on a relative basis) in the toxic unsellable stuff than before.
The July-August asset backed market crisis was actually very orderly - the market simply closed. The panic was real, the paper markdowns painful, but there was relatively little selling. It was obvious to everyone that selling would only hurt one's own remaining positions more. It was better to wait it out if possible rather than force the issue with prices in a market with no buyers.
However that situation was always going to be temporary, hence the proposed master SIV as a vehicle to delay the day of reckoning indefinitely. That moratorium is now over. Over the last few days, m* has heard of several deals that would "never never" be unwound before maturity now being shut down, their assets liquidated. The lenders need the cash. Debt is finding its way back to banks balance sheets. Asset backed commercial paper is coming due. Not much of it will be re-extended and the forced selling that the market successfully avoided in July-August is quietly spreading.
Monday, October 8, 2007
Ricardo Revisited
After last week's bleeding heart post about the downside to our absolute acceptance of the concept of free trade, m* finally got around to opening up the October issue of The Atlantic, a magazine recently suffering from a summer-long bout of irrelevance, and worse - has anyone else had about enough of Robert D. Kaplan's context-free sycophantic martial worship?
However there were two very timely items directly connected with the free-trade (or not) discussion that m* heartily recommends. (A nominal subscription to read the articles is required). First up was a lively debate in the letters section on James Fallows' partly good, partly just bizarre, July/August essay on the terms of trade with China, "China Makes, the World Takes." Peter Navarro, author of the book "The Coming China Wars" counters Fallows' rosy piece by highlighting the darkside of the industrialization and globalization picture:
"China’s competitive advantage in world manufacturing markets is largely due to a web of illegal export subsidies, rampant counterfeiting and piracy, a grossly undervalued currency, and lax environmental and health and safety regulations. While they have benefited the American firms and other multinational companies that are offshoring to China, these mercantilist practices have put tens of millions of people out of work around the world—from the American Rust Belt to Mexican maquiladoras to the markets of Lesotho."
This may be a good place to also direct readers to an astonishing piece on the PIMCO website entitled "Renegade Economics: The Bretton Woods ll Fiction" where the authors take to task both the US and China for practicing "renegade economics" but in particular lay serious criticism on China for playing the competitive devaluation card (and getting away with it) for the better part of fifteen years. In their minds, much of the seeds of the current "savings glut/credit bubble" were sown in Chinese - as opposed to Japanese or US - monetary (and political) policy. Considering the relative importance of the China bid for the $700 billion of bonds in the Pimco portfolio, m* finds this an interesting position to advocate.
Back to the Atlantic, senior editor Clive Crook writes about the current backpedaling among prominent mainstream (well, orthodox anyway) economists on the benefits of free trade and that one true idea in all of economics, Ricardo's comparative advantage, in "Beyond Belief."
He writes, "For nearly 200 years, the principle of comparative advantage, and the ideas that flowed from it, divided the world into two camps: those with basic economic literacy; and the rest." Um, Clive? m* would like to mention that it's a pretty big world out there. He goes on to note that while challenges to the thesis on technical grounds have thus far been vanquished, notable members of the profession seem to have a problem reconciling it's conclusion with their own observation of the times.
How ironic, for that is essentially the problem with economics in a nutshell. The key that Crook misses in his glib recounting of contemporary research is not that theory is necessarily wrong, but that it often has little if anything to say about the "adjustment path" to being right. In other words, those economists whose shift is "both momentous and disturbing" are taking notice of an heretofore under-appreciated intermediate term, where the frictions of adjustment between equilibria occur. Since "in the long run we are all dead," this time-frame is therefore of importance to many people, likely even a few noted economists and senior editors.
For a serious exposition (with a humorous image) of "adjustment path" see Krugman's recent paper on the dollar and the potential for what he calls a "Wile E. Coyote moment."
However there were two very timely items directly connected with the free-trade (or not) discussion that m* heartily recommends. (A nominal subscription to read the articles is required). First up was a lively debate in the letters section on James Fallows' partly good, partly just bizarre, July/August essay on the terms of trade with China, "China Makes, the World Takes." Peter Navarro, author of the book "The Coming China Wars" counters Fallows' rosy piece by highlighting the darkside of the industrialization and globalization picture:
"China’s competitive advantage in world manufacturing markets is largely due to a web of illegal export subsidies, rampant counterfeiting and piracy, a grossly undervalued currency, and lax environmental and health and safety regulations. While they have benefited the American firms and other multinational companies that are offshoring to China, these mercantilist practices have put tens of millions of people out of work around the world—from the American Rust Belt to Mexican maquiladoras to the markets of Lesotho."
This may be a good place to also direct readers to an astonishing piece on the PIMCO website entitled "Renegade Economics: The Bretton Woods ll Fiction" where the authors take to task both the US and China for practicing "renegade economics" but in particular lay serious criticism on China for playing the competitive devaluation card (and getting away with it) for the better part of fifteen years. In their minds, much of the seeds of the current "savings glut/credit bubble" were sown in Chinese - as opposed to Japanese or US - monetary (and political) policy. Considering the relative importance of the China bid for the $700 billion of bonds in the Pimco portfolio, m* finds this an interesting position to advocate.
Back to the Atlantic, senior editor Clive Crook writes about the current backpedaling among prominent mainstream (well, orthodox anyway) economists on the benefits of free trade and that one true idea in all of economics, Ricardo's comparative advantage, in "Beyond Belief."
He writes, "For nearly 200 years, the principle of comparative advantage, and the ideas that flowed from it, divided the world into two camps: those with basic economic literacy; and the rest." Um, Clive? m* would like to mention that it's a pretty big world out there. He goes on to note that while challenges to the thesis on technical grounds have thus far been vanquished, notable members of the profession seem to have a problem reconciling it's conclusion with their own observation of the times.
How ironic, for that is essentially the problem with economics in a nutshell. The key that Crook misses in his glib recounting of contemporary research is not that theory is necessarily wrong, but that it often has little if anything to say about the "adjustment path" to being right. In other words, those economists whose shift is "both momentous and disturbing" are taking notice of an heretofore under-appreciated intermediate term, where the frictions of adjustment between equilibria occur. Since "in the long run we are all dead," this time-frame is therefore of importance to many people, likely even a few noted economists and senior editors.
For a serious exposition (with a humorous image) of "adjustment path" see Krugman's recent paper on the dollar and the potential for what he calls a "Wile E. Coyote moment."
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