the rational post » finance & economics

one island, two worlds

The Editor — Tue, 02 Feb 2010 22:02:16 +0000

It isn’t surprising that so-called “ambulance economics” has gained mass policy appeal as the global economy descends into madness. The battlefield, after all, is no place for quiet research and careful study. But even the most pressing humanitarian disasters could use a little “clinical economics” to help decision-makers better chart out the way forward. Recent poverty relief efforts in Haiti, for instance, should certainly focus first on the bare essentials of sustenance, sanitation, and security. Once politicians and development professionals are able to stop the bleeding, however, the really critical work actually begins in terms of supporting the long-term prosperity of the country. In that spirit, any path forward should take into consideration the unique historical,…

demise of the dollar

The Editor — Tue, 06 Oct 2009 13:34:28 +0000

This type of geopolitical conspiracy would be easy to dismiss from any other source, but speculation of an imminent de-dollarization by some of the world’s largest oil consumers is even more chilling when it’s penned by one of Britain’s most celebrated international journalists…

The demise of the dollar
By Robert Fisk, October 6, 2009

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to…

why capitalism fails

The Editor — Thu, 01 Oct 2009 05:02:57 +0000

Humanity is rarely more receptive to change than during the depths of a crisis. At various times, war, famine, and financial paralysis have offered societies around the world an opportunity to revisit their fundamental character. But just as political, economic, and social systems are descending toward chaos, a current of optimism emerges – if only for a moment. The second derivative inflects, like the speed of a car just before a crash. Avoiding Armageddon — or at least pushing it back — releases a shockwave of positive sentiment. Green shoots emerge and reformists are branded as meddling fools who almost ruined a good thing. Stability returns, trust is restored, and the economy springs back to life…

dead parrot of finance

The Editor — Sun, 09 Aug 2009 16:47:25 +0000

As capital markets continue to increase in scale and scope, there is a natural tendency to believe that they have also become more accurate at valuation. Scores of “rational” investors acting in their own self-interest, based on their own proprietary information along with anything publicly available, make their best guess about the value of a particular security – from a simple common share of IBM to a bet on the amount of rainfall next April. Those who believe the future looks bright will buy, and those who think better days are behind will sell.

Millions of these independent agents tug back and forth on the price of everything everyday, pledging or withdrawing their capital until a harmonious equilibrium…

macrofinancial stability

The Editor — Sun, 05 Jul 2009 01:46:45 +0000

Armchair financial quarterbacks would do well to tune out the mass media every so often and tune into the real global dialogue on the nature of the recent crisis and our prospects for a sustainable recovery. It is no coincidence that those whose perspective is truly global consider the fundamental nature of our modern political economy in terms of decades not days, systems not statistics, and welfare not wealth.

In this speech, given just weeks before the March 2008 arranged marriage of Bear Stearns and JPMorgan, this banker to central bankers dissects the credit crisis of 2007 and calls attention to dangerous fault-lines that presaged the apocalyptic deleveraging of the next 18 months…

Past financial crises, the current financial…

ten market rules to remember

The Editor — Sat, 13 Jun 2009 20:19:03 +0000

“Bob Farrell was a legend at Merrill Lynch & Co. for several decades. Farrell had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987’s crash. He retired as chief stock market analyst at the end of 1992, but continued to occasionally publish. Rumor has it for a humongous donation to Farrell’s favorite charity, you can get on his very exclusive email list. Marketwatch gathered some of Farrell’s more famous observations, and republished them as 10 Market Rules to Remember.” – via The Big Picture

TBP about rising gas prices crowding out retail and industrial consumption. The premise is sound but fails to acknowledge the already stimulative effect of a $2.50 decline in prices from their 2008 peak…

As if the US consumer didn’t have enough to worry about, following the DOE data, the front gasoline contract is rallying to the highest level since Oct 15th ‘08. This morning, AAA said the national average for unleaded gasoline rose to $2.63, the most since Oct 28th ‘08, up from the recent low of $1.62 at the end of Dec. To quantify, the US uses about 9mm barrels of gasoline per day with 42 gallons in each barrel, thus…

stimulus maximus

The Editor — Wed, 11 Feb 2009 01:00:59 +0000

A visual schematic of America’s stimulus dollars at work, as proposed under the recently approved House bill…

flow of funds

The Editor — Fri, 06 Feb 2009 05:26:30 +0000

The frightening this about this table isn’t lavish CEO pay after record bank losses, nor the 9-figure scale of the payouts, but just how closely the bailout money matches the total bonus pool in almost every case. Granted, base compensation in investment banking is nearly equivalent to the minimum wage, but there are a lot of people – roughly 3.6 million in America alone – that would jump at the chance to make $150,000 for 90 hour work-weeks, if only they could…

SOURCE: The Big Picture
*Total of top five bonus packages (including stocks) received by highest-ranking officers.**Estimated as 60 percent of compensation where exact figures are not available.

synchronicity

The Editor — Sun, 01 Feb 2009 15:58:15 +0000

This TED talk by mathematician Steven Strogatz “shows how flocks of creatures (like birds, fireflies and fish) manage to synchronize and act as a unit when no one’s giving orders”. The parallels to market behavior and financial panic are implicit but obvious. We often perceive of our decisions during a crisis as unique and self-preservational, but the tendency toward spontaneous order is a powerful impulse. Coordinated reaction to natural threats, be it a hungry seal or predator hawk, can often increase a group’s biological fitness and probility of survival, while a coordinated reaction to financial crises can actually amplify individual risk – like Strogatz’s example of London’s Millenium Bridge – and only make matters worse…

mad money

The Editor — Sun, 25 Jan 2009 17:07:03 +0000

For nearly a quarter century, Milton Friedman’s monetarists and their acolytes at the Federal Reserve have pursued American prosperity on the assumption that the sheer quantity of money in the economy, along with the degree to which it turns over annually, are the principal levers shaping macroeconomic fundamentals. For the better part of the 20th century that assumption held true as money supply was carefully managed, rising when the economy needed a boost and contracting when it was overheating.

The theory draws its roots from a colossal failure by the Federal Reserve during the Great Depression. It suggests that the severity of the recession could have been mitigated if only the Bank had flooded the system…

black (scholes) hole

The Editor — Thu, 22 Jan 2009 16:36:18 +0000

Scientists and market commentators have long been aware of the susceptibility of the markets to any single investment philosophy. The rise of early program trading contributed to the historic one-day loss of nearly 23% on Black Monday in 1987. Recent experiments with risk securitization may cost trillions of borrowed dollars to unwind and decades to fully digest. In this piece by veteran commentator Michael Lewis, the blame is placed squarely on the flawed assumptions of the Black-Scholes model, and the degree to which its methodology spread from the arcane trading desks of the world’s biggest investment banks to the private retirement savings of the beleaguered middle class…

Inside Wall Street’s Black Hole
by

underground economies

The Editor — Thu, 15 Jan 2009 22:07:48 +0000

The existence of black markets in virtually every economy on the planet is a testament to human resourcefulness and natural entrepreneurship. For those that are building tunnels under Gaza’s border with Egypt, $100,000 and a few months work can generate up to $10,000 a day in fees, and help to provide critical supplies and less critical desires into the struggling Gaza strip. One economist has estimated that roughly 90% of the annexed economy is driven by these covert smuggling operations. Unfortunately, along with tea, cows, washing machines, and gas flow AK-47s, drugs, and anti-aircraft missiles as soaring Gazan demand meets profitable Egyptian supply…

Photo Essay: Gaza’s (Literal) Underground Economy
By Preeti Aroon in November 2008…

size doesn’t matter

The Editor — Sat, 10 Jan 2009 23:42:07 +0000

Assuming that our lot in life is simply a function of hard work, acquired skills, and a bit of good luck, the only real difference between liberals and conservatives is the degree to which we believe that those who fall on hard times – for whatever reason beyond their control – deserve a helping hand. How we publicly spend on that assistance is not only a question of socio-political philosophy, but also a matter of practical statecraft. Whether “leveling the playing field” or simply “setting the rules of the game”, pharohs, kings, and presidents have all made use of their regulatory oversight with varying degrees of success. This piece in the Boston Review by noted macroeconomist Dean Baker explores the…

originative sin

The Editor — Fri, 09 Jan 2009 21:25:25 +0000

The latest in a long series of articles on the Rational Post sharing a common refrain: those who forget economic history are condemned to repeat it…

Originative sin: the future of banking

By John Plender at FT.com, January 4 2009

For the late John Kenneth Galbraith, an acute observer of market folly, finance and innovation were fundamentally incompatible. Every new financial instrument, he said, “is, without exception, a small variation on an established design, one that owes its distinctive character to the … brevity of financial memory”. The world of finance “hails the invention of the wheel over and over again, often in a slightly more unstable version”.

After the devastating collapse of a credit bubble…