Bob Carlson

February 5, 2016

The China Myth

Filed under: Emerging stock markets,Financial crisis — Bob @ 6:09 pm

One of the vigorous discussions regarding the problems in China is whether or not the people running China are competent. Everyone knows they are autocratic and anticapitalist. But many people believe China has a bright economic future because its leaders are competent. Unlike the messy processes in democracies, China’s leaders can decide what needs to be done and do it. They don’t have to convince anyone else, compromise, or make deals. The problems over the last year, especially regarding the stock markets and currency, are denting the aura of Chinese competence and causing some to say it always was a myth. Here’s an article that looks into the question in detail.

The other systemic cause of incompetence is the well-known ill of progressive degeneration of talent in an autocratic regime. Government service in an autocracy often carries high moral costs for talented individuals: It leads to the loss of personal dignity in a political hierarchy where the only thing that matters is the status of an official (that is why Chinese officials have business cards with minute details of their official ranks and status that Western businessmen would find totally incomprehensible). Junior or subordinate officials in this system are routinely humiliated and mistreated by their superiors. With the private sector offering better opportunities and psychological well-being, most talented individuals would prefer to seek their fortune outside the government.

Consequently, government service tends to attract not only less talented but also more opportunistic individuals who otherwise cannot compete in the marketplace. Such individuals can reap outsized rewards if they are willing to toil inside the Chinese bureaucracy and endure the daily indignities inflicted on them by their bosses.

February 1, 2016

The Case for Holding Gold

Filed under: Financial crisis — Bob @ 6:42 pm

Here’s an interesting article profiling some of the people who are forecasting a financial and societal collapse in the near future. They explain why and some of their recommended coping strategies, including having sufficient gold coins and bullion in hand.

“Goldbugs” is the term used against them, because they believe rare metals will be the only thing left standing when the system drives itself off the cliff for the last time. Buy gold. Buy silver. You will need them to barter with local trappers and foragers in the Manhattan of 2020.

The End doesn’t have to happen one way, Rubino points out. Any number of events could trigger it—the coming Chinese slowdown, the Eurozone starting to break apart. Even just a dramatic fall in the value of the yen. The system is now so inherently unbalanced that the trigger could be anything that had big knock-on effects, that could cause enough uncertainty to breed into contagion. In that scenario, as bankers lost faith in the system, America’s colossal need to finance its national debt through borrowing in the bond markets would mean paying higher and higher interest rates to finance that debt, leading the world’s largest economy into the exact same death spiral of unaffordable repayments as the Greeks.

January 26, 2016

A Worst Case Scenario

Filed under: Economy,Financial crisis — Bob @ 1:20 pm

William White is an economist not to be ignored. He currently is with the OECD and previously was chief economist at the Bank for International Settlements. In that previous position he issued early warnings about the emerging financial bubbles and financial crisis to come. Now, he is saying that quantitative easing only made things worse and that there are many bankruptcies and other problems to come. He made his case in a recent presentation at the Davos conference, and this article summarizes his talk. He blames the situation on central banks and traces it back to 1987.

Mr White, who also chief author of G30′s recent report on the post-crisis future of central banking, said it is impossible know what the trigger will be for the next crisis since the global system has lost its anchor and is inherently prone to breakdown.

A Chinese devaluation clearly has the potential to metastasize. “Every major country is engaged in currency wars even though they insist that QE has nothing to do with competitive depreciation. They have all been playing the game except for China – so far – and it is a zero-sum game. China could really up the ante.”

Mr White said QE and easy money policies by the US Federal Reserve and its peers have had the effect of bringing spending forward from the future in what is known as “inter-temporal smoothing”. It becomes a toxic addiction over time and ultimately loses traction. In the end, the future catches up with you. “By definition, this means you cannot spend the money tomorrow,” he said.

January 7, 2016

6 Issues Financial Regulators are Missing

Filed under: Economy,Financial crisis — Bob @ 6:20 pm

This post is based on a recent speech by a U.S. financial regulator. His point is that, like most reform laws, the Dodd-Frank Financial Regulation law focused on “fighting the last war.” The same sequence of events isn’t likely to happen again, but there are potential problems out there that could cause very large negative effects. Regulators can’t focus on them, because they’re required to follow the Dodd-Frank law.

The hue and cry of the ongoing financial market reforms under Dodd-Frank and the FSB leaves market regulators and participants with very little available bandwidth to assess and prepare for the next financial crisis – a crisis that will certainly be unlike the last one.

Just as “peacetime generals are always fighting the last war” and “economists fight the last depression,” so too do financial regulators outlaw past market abuses that are not a looming threat to our financial markets and economies. The Dodd-Frank Act and its unceasing implementation are uniquely positioned to ensure U.S. market regulators stay focused on the past.

December 17, 2015

Reviewing the Financial Crisis

Filed under: Economy,Financial crisis — Bob @ 1:33 pm

The recent problems in the high-yield bond market are rekindling memories of the financial crisis that began in 2008. I think the PDF at this link is a good summary of what led up to the financial crisis and can help you decide if the current situation will lead to something similar. I don’t believe it will, because there aren’t a lot of parallels between that situation and today’s. But people will be hurt in the current crisis, largely because the low interest rates offered in traditional income investments forced some investors to seek higher yields in junk bonds and other investments they didn’t understand.

I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess.

In the United States we like to believe we are a capitalist society based on individual responsibility. But we are what we do. Not what we say we are. Not what we wish to be. But what we do. And what we do in the United States is make it easy to gamble with other people’s money—particularly borrowed money—by making sure that almost everybody who makes bad loans gets his money back anyway. The financial crisis of 2008 was a natural result of these perverse incentives. We must return to the natural incentives of profit and loss if we want to prevent future crises.

October 19, 2015

What Are the “Out of the Labor Force” Americans Doing?

Filed under: Economy,Financial crisis — Bob @ 8:13 am

Since the financial crisis, there’s been a lot of research and discussion about the decline in labor force participation. That’s the percentage of the working age population that is either working or looking for work. It’s been declining steadily. This post goes into detail about what those who aren’t in the labor force are doing. It’s interesting. It probably corrects some widespread misperceptions but doesn’t answer all the questions.

Fed policy, of course, isn’t a magic cure-all for a sick labor market. If lots of people are out of the labor force because they are retired or can’t find work because their skills aren’t useful, low interest rates won’t do them much good. Whether or not low rates are still warranted depends on why so many Americans aren’t in the labor force anymore.

Some of the decline results from the fact that the population is older, which means more retirees per worker. The President’s Council of Economic Advisors estimates half of the decline (pdf) since the recession’s start can be blamed on an aging population. But lots of working age Americans, aged 16 to 64, aren’t in the labor force either.

October 16, 2015

Contradicting Bernanke

Filed under: Economy,Financial crisis — Bob @ 9:54 am

In his recent autobiography, former Fed Chairman Ben Bernanke said that the government didn’t rescue Lehman Brothers because it lacked the legal authority to do so. That is consistent with arguments I’ve heard and seen from the other major players in the events. But this article repeats an argument that staffers at the government concluded that there was authority to rescue Lehman Brothers and argues further that at least one of the key players had already decided that there wouldn’t be any more bailouts.

On September 29, 2014, a New York Times story by Peter Eavis and James B. Stewart reported that unnamed economists at the New York Fed had analyzed Lehman’s financial condition before that fateful weekend, and believed that, as the article stated, “Lehman might, in fact, be a candidate for rescue.” In other words, these economists had concluded that Lehman had sufficient collateral for a loan from the Fed, but they were never asked for their views. This suggests that neither Bernanke nor anyone else really wanted to knowwhether Lehman could be rescued.

October 8, 2015

Highlights from Bernanke’s Book

Filed under: Economy,Financial crisis — Bob @ 12:38 pm

In this post, Tyler Cowen summarizes the highlights he found in Ben Bernanke’s autobiography.

The bottom lines: This book has way, way more economics than I expected and probably more than the publisher wanted.  It really is Ben’s attempt to defend his place in history, and yes the book does deliver a huge dose of Bernanke.  This is not ghostwritten fluff.  It does not however dish much “dirt” or shed much new light on the key episodes of the financial crisis.  Both in public and in the book Ben has been extremely gentlemanly.  Still, as I kept on reading I could not escape the feeling that he is deeply, deeply annoyed by many of his critics, and very much determined to tell the story from his point of view.  That is what you get from this book.

October 6, 2015

Bernanke vs. Financial Executives

Filed under: Economy,Financial crisis — Bob @ 5:20 pm

Former Fed Chairman Ben Bernanke has a book out. The book is basically his autobiography with special emphasis on the financial crisis period. I’ve read several reviews and article on the book. It sounds like the main problem is that Bernanke waited until this book to say things that would have been helpful during the financial crisis and in the years after. This article emphasizes his view that more financial executives should have been prosecuted and sent to prison. He also wrote piece for The Wall Street Journal in which he said that other branches of the government should have helped the Fed with better actions to restore economic growth.

With publication of his memoir, The Courage to Act, on Tuesday by W.W. Norton & Co., Bernanke has some thoughts about what went right and what went wrong. For one thing, he says that more corporate executives should have gone to jail for their misdeeds. The Justice Department and other law-enforcement agencies focused on indicting or threatening to indict financial firms, he notes, “but it would have been my preference to have more investigation of individual action, since obviously everything what went wrong or was illegal was done by some individual, not by an abstract firm.”

He also offers a detailed rebuttal to critics who argue the government could and should have done more to rescue Lehman Brothers from bankruptcy in the worst weekend of a tumultuous time. “We were very, very determined not to let it collapse,” he says. “But we were out of bullets at that point.”

October 5, 2015

The Only Mortgage Banker to be Punished

Filed under: Financial crisis — Bob @ 12:20 pm

None of the bankers behind the mortgage and housing crisis faced criminal charges, and only a few faced civil suits from the government. Most of those suits were settled. This articles updates the story of the only mortgage banker to be sued by the government and found liable at trial. She owes a $1 million fine to the government. She’s appealing her case now.

While jurors pinned liability on Mairone and her employer, Countrywide acquirer Bank of America Corp., they, too, questioned why she was the only individual named in U.S. Attorney Preet Bharara’s complaint. Angelo Mozilo, Countrywide’s chief executive officer, settled out of court despite billions in mortgage-related losses. And Mairone’s supervisor, subprime-mortgage unit CEO Greg Lumsden, wasn’t sued.

“Rebecca was part of a group of mid-level and senior managers that made every decision together,” Lumsden said in an interview. “There’d be no value created for anyone there to do anything that wasn’t ethical or right.”

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