After Hurricane Ivan, the government of the People's Republic of China (PRC) paid for the new $40 million national stadium, and provided the aid of over 300 labourers to build and repair it. During the opening ceremony, the anthem of the Republic of China (ROC, Taiwan) was accidentally played instead of the PRC's anthem, leading to the firing of top officials.

That's from Wikipedia.

 

A lot of islands are expensive but here it is pronounced.  Western "shopping mall" goods are not bought by many people in the core population, so the market consists mainly of low-elasticity demanders, namely tourists and wealthy expats.  A small number of buyers have to cover the fixed costs of transportation to the island plus the costs of a not-so-efficient retail sector.  Taxi fares are cartelized plus it's only locals on the informal buses, so even intra-city transport costs are high.  That means lots of local monopoly and yet higher prices.  To go from a typical tourist hotel to some semi-cheap local food isn't easy to do, and so it is possible to spend $30 or more on a mediocre breakfast and yes the portions are small too.

In turn that keeps away tourists and maintains the need to spread fixed costs across a small rather than a large number of buyers.  Chicken, egg, etc. 

There is good cheap food in the countryside, especially if you catch a jamboree or fish fry.

Addendum: They also use the East Caribbean Dollar, which perhaps for them is not an optimum currency area.  Should Grenada be pegging to the U.S. dollar?

1. The national debt.

2. Can jazz ever be cool again?

3. State tax oddities.

4. "Conservatism, if it means anything, is a resistance to ideology and the world of ideas ideology represents, whether that ideology is a function of the left or the right."  More here.

The ink keeps getting redder. It's not just America's near term fiscal outlook that is deteriorating; the longer-term picture is also getting worse, as Econbrowser's Menzie Chinn reveals in "Speaking of Unfunded Liabilities: Medicare Part D":

The Financial Report of the United States Government, 2009 was released last week. Perusing the tables, one encounters the gigantic new, unfunded entitlement enacted in 2003, namely Medicare Part D.

From page 50 of the report:

Note the last line, "Present value of future expenditures in excess of future revenue" (over a 75 year period). The figure is $7.2 trillion.

The report also has some interesting information about contingent liabilities [1] [2]. See Notes 18 and 19 (pages 99-101).

Three entrepreneurs are offering a share of their life’s income in exchange for cash upfront and have banded together to form the Thrust Fund, an online marketplace for such personal investments.

Kjerstin Erickson, a 26-year-old Stanford graduate who founded a non-profit called FORGE that rebuilds community services in Sub-Saharan African refugee camps, is offering 6 percent of her life’s income for $600,000.

(quoted here).  A closer look reveals that this is more of clever marketing play to interest donors in supporting a philanthropy.  What, for example, does Kjerstin want do with the money? She writes:

Some people may think that it's crazy to give up a percentage of your income for the sake of scaling a nonprofit venture. But to me, it makes perfect sense.

Well it does make perfect sense for Kjerstin but not so much for a profit-seeking investor (moreover any income would be taxed twice, a problem with equity financing in general but especially so here without corporate tax breaks.)  Investing in just one entrepreneur is also risky - why not subdivide the investment and invest in many?

Jeff at Cheap Talk raises a larger but closely related issue, "Why don’t we replace student loans with student shares?" In fact, Milton Friedman advocated income contingent loans in 1955. 

The counterpart for education would be to "buy" a share in an individual's earning prospects: to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings. In this way, a lender would get back more than his initial investment from relatively successful individuals, which would compensate for the failure to recoup his original investment from the unsuccessful. There seems no legal obstacle to private contracts of this kind, even though they are economically equivalent to the purchase of a share in an individual's earning capacity and thus to partial slavery

...One way to do this is to have government engage in equity investment in human beings of the kind described above. ...The individual would agree in return to pay to the government in each future year x per cent of his earnings in excess of y dollars for each $1,000 that he gets in this way. This payment could easily be combined with payment of income tax and so involve a minimum of additional administrative expense. The base sum, $y, should be set equal to estimated average--or perhaps modal--earnings without the specialized training; the fraction of earnings paid, x, should be calculated so as to make the whole project self-financing.

Another Nobelist of a more liberal stripe, James Tobin, helped to implement an income-contingent tuition program at Yale in the 1970s.  Alas, the program was terminated largely due to rent-seeking when many Yale graduates become so successful that the repayment amounts became substantial and the nouveau riche chose to default (also here).

Bill Clinton later tried to take the idea national but it didn't get very far in the United States.  (Not coincidentally Clinton had been a beneficiary of the Yale program.)

Australia, however, implemented an income contingent loan program in 1989. Australian students don't pay anything for university when they attend but once their income reaches a certain threshold they are charged through the income tax system.  Many other countries are experimenting with income contingent loans.    

Hat tip to Alexander Ooms.

The for-profit medical facilities are impressive.  It is a quiet country, full of quiet people, and it is much safer than Jamaica (e.g., no one trails your every movement).  Women, but not men, will hesitate before answering questions.  Even a simple query like "Where is the beach?" will draw a puzzled stare from hotel staff in the lobby.  Eventually an uncertain answer will be forthcoming, even though the office is only three minutes from the ocean.  A Sunday drive through the countryside will reveal many cricket matches.  The rum factory uses something not too far from Industrial Revolution technology.  Many feel their country is threatened by Muslim terrorists.  Grenada is not wealthy but rarely does it look like a total dump.  You can visit the rotting hulks of Russian and Cuban transport planes.  Nothing is cheap, as even street food can cost well over $10.  At the Jerk Chicken Hut they sell your leftovers to the other customers.

The bottom line: If you seek a good introduction to English-language Caribbean culture -- in a perfectly safe setting -- and don't mind the non-bargain prices, it is definitely recommended.

Humans found to have sixth taste – fat Sydney Morning Herald (hat tip reader Crocodile Chuck)

Europe bars Wall Street banks from government bond sales Guardian (hat tip reader Steve L)

Strategic defaults on homes on the rise SF Gate (hat tip reader conryw)

High standards at The Washington Post Glenn Greenwald, Salon

Lies, Damned Lies, and Chinese Statistics China Stakes (hat tip reader Michael)

Antidote du jour:

By Tom Adams, an attorney and former monoline executive

I’m usually cynical about these “genius of Wall Street” articles, but the Vanity Fair article “Larry Fink’s $12 Trillion Shadow” by Suzanna Andrews, about the head of the world’s largest money manager, BlackRock, raises the cliche to another level. My skepticism results both from the disconnect between the glowing tone of the article versus some of the information presented, as well as how the depiction of BlackRock is at odds with my own observations of the firm.

Let’s go past the puffery and do some quick computations:

I count losses on over $12 billion dollars of CDOs and CMBS plus losses on other large investments during the crisis in this article, which i suspect misses several billion of dollars of other losses elsewhere in the portfolio.

I count dozens of highly questionable conflicts of interest combined with a seriously problematic Fed (and Geithner, once again) refusing to disclose critical information about such for conflicts. David Patterson is in hot water over $6000 in yankee tickets and about $20,000 in conflicted horse racing fees, but Blackrock can receive hundreds of millions of dollars on two sides of a deal while getting paid for dozens of other highly conflicted, government related companies. On what planet does this make sense?

I count repeated examples of an egomaniac consolidating a dangerous level of power and doubling down on its level of too big to fail with a total disregard for the any sort of systemic risk this might present.

The article also makes much of the Aladdin model, which has proven a very effective marketing tool for the firm:

But while its size was impressive, what would distinguish BlackRock was its state- of-the-art system for evaluating and managing risk. With 5,000 computers running 24 hours a day, overseen by a team of engineers, mathematicians, analysts, and programmers, BlackRock’s “computer farm” could monitor millions of daily trades and scrutinize every single security in its clients’ investment portfolios to see how they would be affected by even the most minor changes in the economy. Churning through 200 million calculations each week, its computers could simulate every imaginable shift in interest rates, every conceivable change in the financial markets, and stress-test the performance of hundreds of thousands of securities in numerous global-crisis scenarios.

Let’s start with a simple observation: did the use of Aladdin model save any of BlackRock’s clients during the upheaval of 2007 and 2008? Exactly how well did those models anticipate the market perturbations that we saw? Pretty much every quant based model performed poorly during this period. But the article is silent on this point, which is telling. If Aladdin miraculously outdid the other strictly math-based risk models, one would expect Fink would have made sure to stress this point. There’s every reason to suspect that Aladdin is yet another example of what Nassim Nicholas Taleb calls statistically-based risk models: “non-performing airbags”. They do a great job of measuring day to day risk, and a poor one of preparing users for the sort of price movements that will kill investors using leverage. And now this model and this analysis is effectively the new monopolistic rating agency for government controlled investment portfolios while displaying even less transparency than Moody’s and S&P did when their opinions dominated the market.

The article similarly has a very curious discussion of how Fink was on a short list to head of Merrill, and lost out to John Thain. The most obvious reason is massive conflicts of interest, since as the piece notes, Merrill owned 40% of BlackRock, but the story features this tidbit first:

Fink would tell people that Merrill’s board had virtually assured him that the job was his, but that the offer evaporated after he demanded he first be allowed to perform a full analysis of

the bank’s mammoth subprime portfolio to gauge the extent of its problems.

How would BlackRock not know how much crap was in Merrill’s portfolio? Even if he wasn’t sure on the ownership of the many crappy CDO deals that Merrill had originated, wouldn’t his knowledge of AIG’s portfolio (which indicated who each counterparty was) have given him a pretty good clue to Merrill’s distribution strategy? i mean, if a lowly guy like me had heard back in March of 2007 that Merrill was stuck with over $20 billion of MBS and CDO bonds, how is it this supposed genius of Wall Street seemed so unaware that he would want to be head of an insolvent company?

Similarly, how the heck did Blackrock sign up for billions of dollars of Stuyvesant Town exposure at the absolute top of the market, based on the assumption that the investors could kick out rent regulated tenants, raise rents and bring in new higher paying tenants in an environment where real estate prices (including apartment rents) were very likely soon to be plummeting? How many bad (and obvious) assumptions went into that deal that Aladdin seemed to miss? Had anyone at Blackrock ever actually picked up a local paper in the last twenty five years, which might have given them some sense of the relationship that rent regulated tenants had with their landlords? On top of which – a multibillion dollar deal entirely within one zip code? Do you really need 600 people, running 5000 computers, 24 hours a day to come up with that analysis?

So why is Larry Fink and his company the subject of such a glowing article? I had actually thought he was a pretty good businessman before I read this but he comes off looking like a bad analyst, a vengeful ratfink and a parasite who made most of his and his company’s money through government connections, blatant breaches of conflict and rule bending (oh, but he does fly commercial, so he must be a real down to earth guy). Seriously, from the time of the S&L crisis, has he ever not had a big government contract to keep the lights on, while submitting million dollar a day contracts which the government then fights to keep secret in flagrant violation of all established practices?

Where would Blackrock be without the FDIC, the RTC, LTMC, Fannie Mae, Freddie Mac, AIG, dozens of desperate state pension funds? When will someone audit their fees and assess what exactly it is they get paid for and why it is Palooka Bank in Iowa couldn’t do a better job? At least Palooka Bank would probably know better than to bet billions of dollars of its own and other people’s money on a New York City landlords being able to magically toss tenants out on the street.

Perhaps articles like these, which are so wildly out of tune with the current popular attitudes towards Wall Street genius, are finally reaching a saturation point with journalists and publications. Even as they try to celebrate one of the great bankers, they seem to run short of noteworthy accomplishments beyond cozying up to the great government fee paying machine.

By Marshall Auerback, a fund manager and investment strategist and Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and a research associate of The Levy Economics Institute

Want to see the real consequence of smash mouth economics? Forget about Greece and take a look at Latvia. Its 25.5 per cent plunge in GDP over just the past two years (almost 20 per cent in this past year alone) is already the worst two-year drop on record. The country recently reported a 12% decline in annual wages in Q4 2009 versus Q4 2008. The IMF projects another 4 percent drop this year, and predicts that the total loss of output from peak to bottom will reach 30 percent. The magnitude of this loss of output in Latvia is more than that of the U.S. Great Depression downturn of 1929-1933.

Policies and systems built for failure

Mainstream economics insists that one path to full employment is via lower wages. If you want to sell more labor services, lower the price of them, namely wages. This is a classic fallacy of composition argument. What might work for one firm is unlikely to work for all firms. Wage cuts in the aggregate simply destroy aggregate spending power, unless the lost demand is made up for in other ways.

But even though Latvia’s external balance is improving (largely through a collapse of imports as a result of the collapse of domestic demand), the country is unable to deploy fiscal policy effectively due to the external constraints of its monetary system, which is predicated on the existence of a currency board system. True, the current account is now turning positive, but to suggest that every single country can “internally deflate” its economy via wage destruction of this magnitude to achieve this state of affairs is another fallacy of composition argument. The whole world cannot run trade surpluses, especially not if policy is designed to destroy demand via massive wage destruction.

More importantly, the very structure of a currency board is wrong. It requires a nation to have sufficient foreign reserves to facilitate 100 per cent convertibility of the monetary base (reserves and cash outstanding). Under this system, the central bank stands by to guarantee this convertibility at a fixed exchange rate against the so-called anchor currency. The government is then fiscally constrained and all spending must be backed by taxation revenue or debt-issuance. Pegging one’s currency, then, means that the central bank has to manage interest rates to ensure the parity is maintained and fiscal policy is hamstrung by the currency requirements (which is why organizations like the IMF love them so much; it ties governments’ hands). Latvia pegs its currency at 0.71 lat per Euro and joined the ERM in 2005 with the intent of qualifying for the euro zone. It operates a system similar to Argentina in the 1990s which ultimately collapsed and led to its default in 2001 (Argentina pegged against the US dollar).

The country’s debt is projected to be 74 per cent of GDP for this year, supposedly stabilizing at 89 per cent in 2014 in the best-case IMF scenario. A devaluation, however, would substantially raise the debt service ratios, given the high prevalence of foreign debt (about 89% of Latvia’s debt is euro denominated). The currency peg, then, not only restricted the Latvia government’s freedom of fiscal maneuver, but also created huge financial fragility because Latvians operated under the mistaken assumption that the peg was inviolable, encouraging borrowers to act with no sense of exchange rate risk. As in Argentina nearly a decade ago, a devaluation would, in all likelihood, lead to a default on external debt. Argentina did eventually manage a 25% recovery in output in the two years following Q1 2002, but only after a 190% devaluation (which was 300% at its maximum)

As Michael Hudson and Jeff Sommers have noted, “these debt levels place Latvia far outside the debt Maastricht debt limits for adopting the euro. Yet achieving entry into the euro zone has been the chief pretext of the Latvia’s Central Bank for the painful austerity measures necessary to keep its currency peg.” They also point out that maintaining that peg has burned through mountains of currency reserves that otherwise could have been invested in its domestic economy. It has also precluded the use of fiscal policy, since (by virtue of Latvia’s peg to the euro), the country operates under the same constraints as if it were already working within the Stability and Growth Pact rules.

‘Internal devaluation’ is a toxic remedy

With no room to adjust the exchange rate, the only other way to make the currency lose value is to engineer a real depreciation — that is, reduce labor costs and prices in order to make its tradable products more attractive. This is euphemistically being described as an “internal devaluation” — a one-off coordinated reduction of wages and prices across the board. It is, in reality, more like an “infernal devaluation”. It amounts to a domestic income deflation as wages are crushed in order to get the prices of tradable goods down enough so the current account balance increases sufficiently enough to carry the next wave of growth. The hidden assumption is that a debt deflation spiral does not do the host country in as domestic private incomes are deflated. The argument to justify this toxic remedy is that a reduction in nominal wages and salaries can help Latvia accomplish a boom in net exports, thereby enhancing an economic recovery which would quickly attenuate or short circuit any accompanying debt deflation dynamics that might have been set off at the inception of the internal devaluation.

Here, in a nutshell, is a country which shows us all of the misery that is enacted through the creation of self-imposed political constraints on policy. The Latvian government has voluntarily abandoned the policy tools that could make the lives of their citizens better. Policy makers have tied both their hands and their feet behind their backs so that markets could work their self-adjusting magic. They have pegged their currency; they are furiously slashing their net fiscal spending (under the IMF agreement they are due to cut their net position by 6.5 per cent of GDP — a huge fiscal contraction), and the economy continues to deteriorate.

This is something likely in store for Greece, which has recently introduced a new round of austerity measures in order to ensure the success of its latest bond offering. Greece and other countries now face the prospect falling private sector incomes – that is, after all, the direct and immediate result of higher taxes on businesses and households, and lower government expenditures. Euro area nominal GDP is already estimated by the OECD to have fallen over 3% in 2009. Unless the trade deficits of the nations pursuing fiscal retrenchment can swing sharply into surpluses (as lower domestic incomes lead to less import demand, and lower costs of production lead to higher exports), private debt defaults will now start to multiply and cascade through the system. Last week, as we mentioned, Moody’s placed 4 Greek banks on downgrade watch. This is just the start – the fiscal retrenchment has only just begun to take effect. By taking these steps to avoid a public debt default, we would suggest these economies are now poised for more private debt defaults.

We believe private investors do not yet get this connection, but it will be made very clear in the months ahead. Latvia, with a GDP collapse of nearly 25%, will become the poster child of the region in this regard. This private debt distress will back up into higher loan losses at German banks. Germany’s hard won current account surplus will continue to fade Loan growth is already dead in the water in Europe, and if the above analysis is correct, banker perceptions of private sector creditworthiness are about to go “pear shaped”, as they so delightfully put it in London.

Paradox of public thrift

But that’s not all. Each of these countries are about to discover what we will call the paradox of public thrift. Argentina discovered this in 2001-2. Latvia and Estonia have recently rediscovered it. Ireland is rediscovering it, and within the next three months, Greece will no doubt discover it as well. We will let Bill Mitchell’s comments depict the nature of this paradox for you, because it really does capture the essence of the dilemma at hand:

From Ireland: Gov’t took billions of €’s out of the economy in the form of public service pay cuts, pensions cuts, dole cuts + wave of private employees replaced by agency workers at minimum wage rates… Guess what? January tax receipts crashed yet again below projections. After two systemic budget cuts, the tax receipts keep tanking. The mainstream consensus? We need more cuts (except for bankers and top civil servants who don’t have to take wage cuts)! And the international bond market is happy with Ireland. One day we shall be able to compete with China on a level wage scale, and generous tax incentives for Multinationals. In the meantime, say hello to all the Irish immigrants for me.

This is the future discovery awaiting Greece, Spain, Portugal, Italy…and the UK…possibly Japan…and perhaps the US, although it could manage to skirt the issue for another year. In each of these nations, if the private sector is retrenching already, and the public sector tries to retrench on top of that, unless a massive swing in foreign trade can be accomplished, policy makers are unwittingly inviting falling private nominal incomes and private debt distress into the picture as they reverse fiscal stimulus.

As private incomes fall, tax revenues fall. In order to hit fiscal targets promised to global bond holders, further expenditure cuts must be implemented, and further tax hikes must be rolled out. As the Irish blogger reveals above, this is not a theory — it is already happening, but policy makers and investors are not willing to acknowledge it. Yet for those who understand the fiscal balance cannot be changed without influencing the cash flows and financial balances of the remaining sectors of the economy, the paradox of public thrift at this juncture is far too evident.

We are by no means defending the generous pension benefit levels of euro zone government workers, the early retirement ages, the corrupt tax practices, etc. These are decisions the citizens of each nation need to make on their own, preferably in full awareness of their consequences, both short and long run. It is not our place to dictate the trade-offs citizens chose in each nation.

The question we are raising, however, is whether the private leverage ratios in many of these countries will allow them to withstand the pressures of transitioning back to growth in the absence of fiscal autonomy. The now prevalent global quest for “fiscal sustainability” may place these economies on a path of private debt default, which is ultimately unsustainable for the economy as a whole. If fiscal retrenchment is to be enacted, then orderly private debt renegotiation and private asset liquidation must be accomplished at a large scale and in a timely fashion. Yet our experience is that this is no easy trick, as the near locking up of various financial channels following the Lehman debacle illustrated in no uncertain terms. Usually such a recipe delivers a financial implosion.

Even the Honorable David Walker, CEO of the Peter G. Peterson Institute, former Comptroller General, and ardent foe of government waste and reckless spending is coming to understand the precarious nature of the current situation. In a February 24th piece on Politico.com with Larry Mishel, Walker insists on the primacy of job creation at this juncture, and recognizes this may actually serve his goal of reducing fiscal deficits in the long run:

President Barack Obama is in a difficult position when it comes to deficits. Today’s high deficits will have to go even higher to help address unemployment. At the same time, many Americans are increasingly concerned about escalating deficits and debt. What’s a president to do?

The answer, from a policy perspective, is not that hard: A focus on jobs now is consistent with addressing our deficit problems ahead.

We have seen this movie before

That, dear readers, is the real deal, and it is not being reported or openly discussed. We have seen this movie before in Argentina almost a decade ago. They eventually got out with a massive “external” currency devaluation of 300% and an equally massive swing in the trade balance. But the costs of delay were enormous: from 1998-2001, Argentina suffered its worst recession ever and pushed 42% of its households into poverty.

And not every country can do what Argentina has done. Again, the whole world cannot run trade surpluses, the first mover has an advantage until the second mover moves, etc. Plus, Argentina had an explicit debt repudiation and a 300% “external” devaluation that was timed right with global recovery, hardly the sort of conditions that pertain today.

The US has so far managed to resist anything of this magnitude. But as the voices of fiscal retrenchment intensify, a future not unlike Latvia, Greece and Argentina could await. It has taken the people of Iceland to make the first stand against this growing neo-liberal madness. In a historic referendum, over 90 per cent of the population has rejected a proposal for the repayment of billions of pounds lent by Britain and Holland to compensate depositors in a failed Icelandic bank.

The deal would have saddled citizens of Iceland with an additional $16k in debt to compensate the UK and Holland with a $5.3 billion note for the failure of their local banks. This, in a country of a mere 300,000 citizens. The vote failure has already prompted the ratings agencies to downgrade the country to junk, as well as leaving an IMF-led loan in limbo. The “experts” are declaring this a disaster for Iceland, but they and their banking allies must secretly be dreading the result, demonstrating as it does that an international bailout watchdog is truly powerless when the people of the bailout recipient nation want to have nothing to do with a poisoned chalice of an economic “rescue”, which does nothing but create a country of indentured serfs.

It is now time for the rest of us to follow the Lilliputians of Iceland: to take the rentier juggernaut down before it completes the task. Time to pry the vampire squid off our faces so we can see the light of day again. Hopefully, Iceland represents the future, not Latvia.

By Richard Smith, a London-based capital markets IT specialist

Hmm, I wonder if Yves’s resolution authority post will become the econoblogosphere’s equivalent to Clochemerle’s shattered urinal and its entourage of rioters. Surely not; yet it’s impressive how often such modest, utilitarian objects – a pissoir, a blog post about a financial reform proposal – can unexpectedly become the focus of great public ire.

It’s clear that regulators need the legislative authority to wind down a financial firm – that’s been unfinished business since Glass-Steagall was abolished, which left FDIC flapping in the breeze, and bit the hapless Fed and Treasury very heavily in the backside once they finally noticed there was something of a financial crisis on; 12 September 2008, according to Hank Paulson’s memoirs. Better late than never, I suppose.

It’s clear that regulators need to monitor the exposures of large complex financial institutions. It’s clear that no-one has a clue how to wind down a large complex financial institution that has chunky derivatives exposures and large overseas deposits, otherwise there wouldn’t be this continuing low-key faff about Citigroup. It’s also clear that this administration doesn’t exactly have a glittering track record of grabbing the financial reform agenda by the throat, and that its flustered-looking second round initiatives, the Volcker rule and the resolution authority, are, for the moment at the very least, light on detail and short on plausibility.

So you might think a Naked Capitalism post politely (well, relatively politely, this is Yves, but anyhow, not at all angrily, see for yourself ) questioning The Epicurean Dealmaker’s attempted defence of the resolution authority idea would be a useful addition to this great debate we’re all having.

TED doesn’t think so. His counterblast comes in three pieces – first, a pointless ad hominem preamble in which he simply tells us all that Yves is tired and should go on holiday (this seems to be a wild overinterpretation of Yves’ latest doomed resolution to sort out her sleep schedule), second, a central piece actually about the pretext for the post in which he misses some of Yves’ points, and connects with others (since it will make him look better than he deserves, I will skip the rejoinders he gets right); third, a piece about the unfairness of describing folk working in the banking industry as banksters, with a little homily on anger attached.

But but but…like the thought or not, pretty much everyone working in the banking industry, even lowly little guys like me, and certainly including such grand figures as TED and Yves, is a beneficiary of the rapacity (in the good times) and bailouts (in the less good times). That’s the most illuminating part of the post, that glimpse of how TED sees the world and his place in it; somehow decoupled from inflated asset values and inflated fees, and not at all ashamed.

Yet we banksters certainly should be trying very hard to fix what’s broken, and feeling embarrassed rather than defiant and angry and a bit whiny; and, at least in the less exalted banking circles that I adorn, that’s exactly what’s happening. And some of us, at our different paces, constrained by our variously acute and conflicting requirements for food, shelter, capacity to look after our loved ones, and a sense of integrity, are looking for something altogether different to do. And that’s fair enough too, I should think.

TED’s final point seems to be for Yves to discover how tired, bitter, humorless, full of hate, angry, strident and self-righteous she is, and to understand the awful danger of being like that. At least, I think that’s the gist of his concluding and very egregious sermonet; he isn’t quite this direct about it, but I’m damned if I can work out who else the subject of all those epithets is meant to be. Get this scorcher:

Anger has a personal cost, too. Unless it is leavened with reason, and moderated by the acknowledgement that no-one is perfect, hate and anger can be highly corrosive. Justifiable anger is a wonderful source of energy, and a marvelous spur to action. But nurtured, coddled, and sustained overlong, anger can constrict the vision, dull perceptiveness, and calcify the brain. It can blind you to the good in others, to the alternatives available to you, and, in the end, to the truth. If left untreated too long, eventually others tire of your stridency and self-righteousness, and you sink back into justified and bitter obscurity, another valued voice in the debated stifled by irrelevance.

Is this crazy bombast actually serious? Unless it’s a wry piece of self-referential irony – TED’s capable of that sometimes, unlike many IB types. A moment of deliberate self-deflation, or just more ad hominem, with extra pomposity? The reader must decide for himself, because I just can’t tell, this time.

OK, I guess I've had enough doom-and-gloom for the moment. Time for something a bit more light-hearted.

The Christian Science Monitor has compiled a humorous list of their Top 10 favorite words birthed by the recession. Here are five of them:

1. Decruited, adj. To be fired from a position one has not even started yet.

Sample sentence: "At first I felt really bad about being decruited from that corporate law firm after spending two summers of law school interning for them. But then I decided to make the most of my funemployment and use my signing bonus to travel around Europe."

See also: uninstalled, prefired

2. Permatemp, n. The condition of being permanently employed as a temporary worker.

This could be due to lack of motivation to seek permanent employment, inability to find permanent employment, or the permatemp's belief that a company will eventually hire him/her for the job s/he is currently doing for lower pay and without benefits.

Sample sentence: "Wake up, Joe. You've been here for six months, your cubicle is decorated better than your living room, and the hiring manager still doesn't know your name. You're officially a permatemp, my friend."

3. Insource, v. To do oneself what one previously paid others to do.

Sample sentence: "No, I can't meet you for brunch this morning. I'm insourcing my laundry these days and have five loads piled up."

Alternate sample sentence: "I know my nails look like someone took a chainsaw to them, but I insource manicures now."

Antonym: outsource.

4. Intaxication, n. A sense of delight mingled with the perception of instant wealth that one feels upon receiving a tax refund.

Sample sentence: "It seemed like a good idea to charge that pair of Louboutins/small boat/Caribbean vacation to my credit card when I got my tax refund. But when I got my statement a week later, it was clear I was in a haze of intaxication at the time of purchase."

5. Madoff’d, v. To get ripped off in a particularly offensive fashion.

Sample sentence: "Oh man, that cab driver totally Madoff'd me. I gave him a $20 and he only gave me change for a $10."

To read the rest of "Recession Slang: 10 New Terms for a New Economy," click here.

In the classic Hans Christian Andersen fairy tale, "The Emperor's New Clothes," a crowd fooled into believing in a fantasy version of reality is brought down to earth by the words of a small boy.

Substitute "bank-sector and other investors" for "a crowd" and "actions of the FDIC" for "words of a small boy" and that goes some small way towards describing the potentially ugly fallout from developments detailed in the following Bloomberg BusinessWeek report, "‘On the Edge’ Banks Face Writedowns on FDIC Auctions":

A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month, including a loan to build a W Hotel in Atlanta, may trigger writedowns that weaken lenders nationwide.

Almost half of the loans were originated by Silverton Bank N.A., whose collapse last May was the biggest in Georgia history. Community banks that joined Silverton in providing $80 million for the 237-room hotel and condominium complex, as well as backing for 39 other projects, could be forced to write down their stakes to reflect sale prices.

The auctions may have wider repercussions. Of the $41 billion in assets seized from failed banks held by the FDIC as of the end of January, $15.6 billion are real estate loans and about 4 percent of those involve participations by other lenders, according to agency spokesman Andrew Gray.

“These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,” said Robert Reynolds, a lawyer at Reynolds Reynolds & Duncan LLC in Tuscaloosa, Alabama, who represents 25 lenders that took part in financing the W Hotel. “Our banks just cannot believe they’re being treated in a way that ultimately hurts the FDIC’s insurance fund, because some of them are right on the edge.”

Bank Failures

A total of 140 banks failed last year, and FDIC Chairman Sheila Bair said the number may be higher this year. It stands at 26 as of March 6. The agency said on Feb. 23 that 702 banks were on its “problem” list as of Dec. 31, up from 552 at the end of the third quarter. The FDIC’s insurance fund had a deficit of $20.9 billion at the end of the year.

“This whole thing is a mess waiting to happen across the country,” said Geoffrey Miller, a professor of securities law at New York University and director of the Center for the Study of Central Banks and Financial Institutions.

“Unlike the subprime mortgage problems, which hit mostly bigger financial institutions, the commercial real estate crisis is going to hit mostly smaller and regional banks,” Miller said. “It was common for them to make these loans and buy participations. It’s a systemic problem that the FDIC has to deal with.”

That view was echoed by John J. Collins, president of Community Bankers of Washington in Lakewood, Washington. Some banks in his state have expressed concern that they may have to take writedowns as a result of the FDIC sale of seized loans in which they participated, he said.

“We have a number of banks teetering on the edge, and we don’t need this problem,” Collins said in an interview.

‘Maximize’ Recovery

The FDIC is “required by statute to maximize its recovery on receivership assets,” Greg Hernandez, an agency spokesman, said in an e-mail. “This is achieved through a broad, competitive bid process.”

Hooh, boy.

There’s a nice spat a-brewing between two people I hardly know, but nevertheless consider friends. The Epicurean Dealmaker offered some thoughts on financial reform, and in particular “resolution authority”. Yves Smith took exception. TED took exception to her exception taking. I suspect the sparks have just begun.

Me, I’m a lovah not a fightah, so I’ll split the difference. TED is right that constructive ambiguity and discretionary power are prerequisite to an effective, non-public-raping resolution regime. But Yves is right to take him to task for leaving things there, because whatever gets writ in the ex post memoirs, there are predictable and repeatedly observed incentive problems that prevent regulators from using discretionary authority until it’s too late (and then they whine to stenographers about how powerless they were). Read Michael Pomerleano and Andrew Sheng, or watch Richard Carnell, or check out l’il ol me. To be fair to TED, I know he is cognizant of these incentives; elsewhere he has offered ideas on how to change them. (See e.g. his reformist manifesto. I believe TED has also proposed adopting the Singapore model, conjuring an extraordinarily well-paid, independent regulatory caste that would be structurally resistant to capture and could recruit talent competitive with Wall Street’s finest. But I can’t find that link.)

TED is right on here:

Ms. Smith appears to advocate “root and branch reform” of the system, which makes her, by definition, more radical than me. As befits my nature as an investment banker, I am a pragmatist and an incrementalist. I think the prospect of true root and branch reform of the domestic financial system—not to mention the global one with which it is inseparably interconnected—is such a vast and daunting task to undertake in our current sociopolitical environment as to be unlikely at best. Notwithstanding the theoretical attractions of radical reform—which I personally would favor, by the way—I would much rather cobble together a partially effective, imperfect resolution authority today than wait the ten or twenty years serious reform might take… Sympathetic or not, however, I would also like to caution Ms. Smith. Like many radical reformers, I suspect she would be surprised how little common ground she has with other would-be radical reformers. It is always a revelation to discover, as revolutionaries always have, just how little agreement you have with your peers when it comes to deciding just exactly which roots and branches of the ancien régime need to be trimmed.

As, um, a proponent of root-and-branch reform, these are the questions that keep me up at night. For the record, I think we will end up with root-and-branch reform, but I fear we’ll get it hard and painful following a much more serious crisis that we have already failed to avert. I think the Great Financial “Panic” of 2008 has shrunk into another LTCM or Enron, a moment we will someday look back upon and wonder why we failed to deal with problems that were so fucking obvious, but for now all we hear is “It worked!” I’m a middle-aged Jewish guy who thinks and writes about finance, makes much of his living as a speculator, and avoids honest work. The tail risk I worry about is that I’ll get to see the sort of financial reform I advocate from a wonderful vantage high atop a lamppost.

But that is precisely why I want to take issue with TED here:

Like many other econobloggers opining on the state of affairs in the world of finance, Ms. Smith has gotten into the nasty habit of using the term “banksters” to refer to members of the financial services industry. (It is in the title of yet another post of hers today.) The overarching metaphor behind this coinage—which, I emphasize again, is neither original nor limited to Ms. Smith—is that commercial bankers, investment bankers, insurance company employees, and presumably everyone else in the financial industry are uniformly engaged in a vast, intentional, and irredeemably criminal enterprise. Ms. Smith reinforces this metaphor often, including in the post dissected herein (with the crack of “financiers [looting] taxpayers”), and implicitly in the title of her new book, ECONNED.

Now, I am all for the charms of expedient exaggeration. (Although mine tend to be limited to sarcastic and humorous uses, rather than bitter and humorless character assassination.) It can be funny, and it can emphasize important points. But uniformly and universally excoriating millions of people who work in finance as gangsters, thieves, looters, and con men is just fucking dumb. It’s like saying all management consultants are morons, or everyone from Iowa is a hick. While there certainly must be examples of moronic management consultants and hayseed Iowans among the myriad constituents of each of those groups, no honest or intelligent person would believe all of them are that way. Why, then, do so many bloggers writing today tar the entire finance industry with the same tired, thoughtless old brush?

These casual, unthinking insults would not bother me if I did not think they lower and coarsen the important conversation we are having in society and the blogosphere about financial reform. Sure, investment banking has its fair share of crooks, but we are no different than the rest of society. Some of us, closer to the top and more successful, perhaps, probably do have a more highly developed sense of entitlement and aggressiveness than your average bear. But we are not criminals. We work the system, hard, to advance our own and our families’ personal and professional interests, but 99.9% of us are not out to rape and pillage the commonfolk of their daily bread. To think otherwise is just plain stupid.

I myself don’t use the term “banksters”. And I sympathize with TED. I like financial industry professionals, personally. I enjoy meeting bankers. They are usually smart, interested in the arcane crap I’m interested in, and assholes of the sort that I enjoy sparring with. Bankers are great fun, and they are not bad people.

But we are who we are collectively as well as individually. Large organizations can and do evolve to do evil things while isolating people individually from illegal or morally uncomfortable acts. That capacity can confer tremendous advantages over smaller, more personal and accountable, collectives. It’s harsh, but we don’t get a pass just because the particular lever we are paid to pull only shifts a cog in a vast machine whose overall function we don’t control. As moral agents, it is not enough to follow the law and let pecuniary incentives guide us. We have to take responsibility for the behavior of the collectives to which we belong.

We are all dirty. Seven years ago I supported a war that has been responsible for hundreds of thousands of deaths, and that has not achieved any of the positive ends I thought it would achieve. That was a moral error I’m not sure I deserve to have survived, and I’m a terrible hypocrite, because I don’t live like Mother Theresa to atone, but carry on as a comfortable American. I won’t point a finger at anyone and claim moral superiority.

But I am responsible, and it’s important that I know I am responsible. We all have an obligation, not to self-flagellate like monks, but to be aware of the systems in which we are situated, and to work a bit, at the margin, to correct them. Obviously, so long as there are badly skewed incentives, a bit at the margin won’t be enough. I won’t hold a grudge against some mid-level banker who put together crap CDOs because everyone was doing it, and who knew housing would collapse?, and it was very lucrative. But neither will I abstain from using words like “fraud” and “looting” to describe organized practices which, innocuous act by innocuous act, do in fact serve to extract wealth from many and distribute it to a well-organized, well-placed few. And if you work in the industry and that makes you uncomfortable, it should make you uncomfortable, even if your accuser is a hypocrite and morally reprehensible himself. We can and should make better rules and fix perverse incentives in the financial system. But we won’t be able to design a game so perfect that self-interested amoral agents plus an invisible hand ensure decent outcomes. We need industry participants to take responsibility for the organizations and practices in which they participate, and to take an active, serious role in policing those practices. That will require a cultural shift, an understanding that actions that are legal and profitable can be illegitimate and disreputable, and should be avoided even if competitors will profit from your scruples. If context makes that impossible, if behaving well implies that you’ll be fired or your firm will go bust, you (like Chuck Prince!) must try to alter that context.

Calling out misdeeds by hard names helps. Words like “looting”, “theft”, “fraud”, and “scam” are fair descriptions of a lot of common practices, even if some of the perpetrators worked 18 hour days putting together pages 120 through 237 of mind-numbing prospecti and meant only to earn a living.

Yves and TED and I all derive sustenance, one way or another, from the financial industry. Many, perhaps most, people with significant savings in the US, nearly all workers whose pension will support a financially comfortable retirement, are beneficiaries of practices that involved shifting wealth from others to us by means of questionable legitimacy. Many of us profited from asset bubbles; we extracted rewards from price signals that harmed the real economy rather than guiding smart decisions. This is not just about “them”. It is about us. We, the savers, the affluent, educated, hard-working “core” of American society have become thieves, or at best unwitting beneficiaries of theft. We ought to be uncivil to ourselves for that, and we ought to be trying to ensure it never happens again. Both Yves and TED are doing a good job, doing more than their parts to make sense of what’s happened and agitate for something better. But as for the people watering down derivatives reform, defending bank gigantism, shoving the CFPA into a cubicle six sub-basements beneath Ben Bernanke’s ass, well, I’m glad as hell to have people like Yves calling them out as “banksters”.

Jonathan Bernstein says that healthcare can't fail:
At this point, the main basis I have for believing the health care reform bill will pass (here's my latest while I was at the Dish...for perspective, here's Jonathan clubber Chait's view, and here's Nate Silver's take) is that I would be shocked if Barack Obama, Rahm Emanuel, Nancy Pelosi, and Henry Waxman moved things to this stage without knowing they could get the votes. We're talking about some very skilled pols, here.

I can't think of any historical precedent for a failure this large in a House vote -- a major policy with the full support of the president and the majority party leadership that got this close without winning. The two most notable floor defeats that I remember are the first vote on TARP in fall 2008, and the vote (if I recall correctly) on the rule on the Bush deficit reduction package in 1990. In both cases, radical Republicans defected from a bipartisan agreement, in both cases between majority Democrats and a Republican president. And in both cases the policy eventually passed.
Meanwhile, Karlyn Bowman of the American Enterprise Institute takes her own look back at history:
"The public mood is generally sour," Bowman said. "I can't think of any other big piece of legislation that had so much opposition" and later passed, she said.
They're both right!  Where does that leave us?  At a defining moment in American legislative history . . . the Mothra v. Godzilla, irresistable force v. immovable object, rock v. hard place of policymaking.  It can't pass and it can't fail.  Yet it must do one or the other.
All I can say is, pass the popcorn.

It's not good:

Grenada has been hit hard by the global economic slowdown with the two mainstays of the economy – tourism and foreign direct investment (FDI) – weakening significantly. Real gross domestic product is estimated to have declined by 7.7 percent in 2009, after 2.2 percent growth in 2008. Tourism dropped by about 13 percent year-on-year and FDI-related construction is estimated to have contracted by about 50 percent for the year, although the pace of decline slowed in the last quarter of 2009, reflecting an uptick in FDI inflows. Prices fell by 2.4 percent in the 12 months to December 2009, reflecting weak domestic demand and lower international food and fuel prices.

The current debt-to-gdp ratio here is 120%.  On Feb.1, they put in a fifteen percent VAT.  I am curious to see how long it takes them to spend that money and move back to major deficit mode.  Is there a systematic empirical study of this question?

Overall, it's hard to see where future economic growth will come from.  Grenada doesn't have enough night life to appeal to younger, non-yacht-owning American tourists, and wealthy British tourists and expats wonder why they should come so far, especially with such cheap European airfares and the use of English spreading globally.  The island doesn't seem to have much in the way of factories or light manufacturing.  Nutmeg is fine but doesn't hold a huge future and in the meantime the trees still have to recover from the hurricane.  One option would be to encourage more Indian and Chinese immigration.  Yet it seems to me the place is just well off enough that they don't feel compelled to make big changes and they will experience slow deterioration of their relative standing.

Happy birthday, bull market!  (Crossing Wall Street)

How overbought are the markets here?  (Trade to Learn)

The Nasdaq Composite is above pre-Lehman levels.  (Bespoke)

Equity mutual funds are burning through their cash on hand.  (Bloomberg)

Why a 17 or so VIX is not that surprising. (Options Zone)

Barton Biggs thinks global large cap stocks are wicked cheap.  (The Money Game)

Outperformance aside, by one measure small caps are still cheap.  (Trader’s Narrative)

Americans much prefer overseas stocks to their own.  (WSJ also The Money Game)

International diversification, over the long term.  (CXO Advisory Group)

The world’s biggest hedge fund managers.  (Pensions & Investments)

Why hedge funds like Mead Johnson Nutrition (MJN).  (market folly)

Whatever happened to nanotech?  (Bespoke)

Be careful when quoting fund dividend yields.  (EconomPic Data)

Why does J.P. Morgan (JPM) trade at book value?  (Breakingviews)

AIG (AIG) is out of “crown jewels” to sell.  (DealBook, Deal Journal)

John Hussman, “A deleveraging cycle is much like a secular bear market in that the market experiences a great deal of volatility, but tends to establish a sequence of troughs, each at lower levels of valuation (even if not at lower absolute prices).”  (Hussman Funds also The Technical Take)

Sorry critics, Tim Geithner’s plan worked.  The financial system was saved.  (New Yorker also Baseline Scenario)

Roger Lowenstein, “Protecting consumers and breaking up large banks is fine. But neither will prevent banks from acting stupidly again. The surest safeguard is to ensure that, when they do, they aren’t up to their necks in debt.”  (Bloomberg)

A new index of financial conditions.  (Econbrowser, FT Alphaville)

The Greek crisis has faded.  (MarketBeat, Clusterstock)

Portugal tries on an austerity program.  (FT Alphaville)

The problem of the long term unemployed remains.  (Calculated Risk)

Why a tax advantage for carried interest continues.  (New Yorker also Private Equity Beat)

An interview with the always interesting James Montier.  (Simoleon Sense)

On the benefits of regulatory vagueness.  “Like firemen, regulators confronting a financial emergency must have the freedom and the tools to do what they need to do.”  (The Epicurean Dealmaker)

“At its best, the econo-blogosphere can be the last haven of truly independent, non-captured, and crucially, informed, commentary able to affect policy and opinion makers positively. It used to do just that.”  (Ultimi Barbarorum)

Felix Salmon, “Big mainstream-media publications, when they hire people to write their blogs, generally hire people with no blogging experience at all — something which is both ill-conceived and dangerous. Some journalists make good bloggers; most don’t.”  (Reuters)

Transparency is the new alpha.  (Howard Lindzon)

Abnormal Returns Now is the real-time component of this site.  Check it out.

1. Markets in everything.

2. U.S. Memory Championship.

3. The MIT symposium on sports economics.

4. Ethnic mixes and divorce rates.

5. The real risk of driving a Toyota.

6. Best post so far on game theory and the health care votes to come.

In an effort to end the foreclosure crisis, the Obama administration has been trying to keep defaulting owners in their homes. Now it will take a new approach: paying some of them to leave.

There is much more here.  I would be surprised if the proposed incentive of $1,500 made a noticeable difference.  If I understand the program correctly, the servicing bank also gets $1,000, plus $1,000 toward a new loan.

Felix Salmon savages the New York Times, and Gretchen Morgenstern in particular, for the claim that credit default swaps have somehow been pivotal in the financial crises that have rocked the US and Europe.
In order to believe that CDS are "shaking Europe", you have to believe that when one market player buys sovereign credit protection off another market player, in a transaction both sides think they're going to make money on, finance ministries across the continent start to tremble. It's silly. Sovereign credit spreads have moved up and down in sometimes-dramatic fashion for decades, long before CDS were even invented. And they will continue to do so even if CDS are banned. And there's no indication whatsoever that volatility in European credit spreads is any higher now than it would have been absent the CDS market. Indeed, there's a colorable case that the opposite is true, and that the ability to hedge one's exposure in the CDS market has made the European sovereign bond market less volatile. As for the NYT's idea of the "purpose" of a CDS, all I can say is that I have no idea whatsoever where they got that one from. At least on the CDS/Greece connection, you can see how various European politicians love to be able to blame Goldman Sachs rather than themselves for their woes. But this just makes no sense at all. What "complex debt securities", exactly, can banks issue more easily if CDS reduce the risk to purchasers? Presumably we're not talking about simple bonds and loans here, since they're not complex at all. Is the idea that banks somehow help companies issue debt bundled with CDS insurance? I've seen a few monoline wraps in my time, but nothing like that
You see this sort of folk mythology among market watchers very frequently.  They note that there are financial instruments which convey negative information about the soundness of the underlying institution.  Furthermore, they quickly realize that just before institutions fail, there is often quite a lot of activity in those sorts of financial instruments.  Therefore, if you could only eliminate the instruments, you could also eliminate the failures!
Unfortunately, there is always some official around to make the case to gullible journalists that his institution's failure is the result of exotic financial predation, rather than his own mismanagement.  Thus Patrick Byrne has actually managed to convince people who can't read a financial statement that Overstock.com's problem lies with the naked short sellers, rather than the company's continued dismal performance.
But there are almost never people with enough capital to mount a "bear raid" on a company, much less a country.  If the majority of the market thinks the company or country is basically sound, a naked short seller may very temporarily depress the price--but it will quickly be bid back up again by bulls leaping on the aberration.  If it keeps falling, that's because there aren't a lot of optimistic buyers in the market.
In other words, short selling, or credit default swaps, may hasten price discovery--we may find out that people are bearish on the stocks or bonds a little faster than we otherwise would.  But the price would still fall, in the end, because stock buyers will offer lower prices, and bond buyers will demand a higher yield.
But the correlation is so bee-yoo-ti-ful, it's hard to convince anyone of this.  Who are they going to believe:  some stuffy economics paper, or their own lying eyes?
There's no question that credit default swaps can make things worse for the specific firms that get heavily involved in them . . . see American International Group for specifics.  But neither Greece nor the euro-zone got in trouble because Goldman Sachs led them down the primrose path. The trouble started with a garden-variety country that couldn't get its finances under control--and that's where the bulk of the trouble still resides.

For the second year in a row, a suit retailer is including a special new feature in its annual sale:  if you lose your job after buying the suit, they'll refund your money, and you can keep the suit.  
There are two ways to look at this.  Maybe it's marketing genius and Joseph A. Bank will attract so many customers that the gains will far outweigh any losses on the suits.
On the other hand, one suspects an adverse selection problem: the people most likely to take up this offer are those who have good reason to believe they are about to be laid off, and will need a new interview suit.
Of course, if they're doing it again, presumably it was a successful gambit last year.  We'll know the economy is recovering when promotions are no longer organized around potential joblessness.