January 16, 2009
the end of wall street
(The past, present, and future of Wall Street according to its official biographer…)
What Happened
Published by The Editor on January 16th, 2009
Navigation | the rational post
January 15, 2009
underground economies
Finance & Economics, History & Society, In Other Words, The Middle East
(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
Since Hamas gained control of Gaza in June 2007, Israel has blockaded the flow of goods into and out of the territory. But when trade is closed aboveground, the economy simply moves underground, in more ways than one.
The land down under: Except for basic humanitarian supplies, Israel has blockaded the flow of goods into Gaza since June 2007, when Hamas, a militant Islamist group committed to Israel’s destruction, ousted its more secular rival, Fatah. The blockade has led to a new economic structure—a literal underground economy—in which everything from food to gasoline to underwear is illicitly imported from Egypt via underground tunnels into Rafah, which sits on Egypt’s border at the Sinai Peninsula. Above, Palestinian men pull a bag of smuggled food, milk, and other supplies from an underground tunnel linking Rafah, in southern Gaza, to Egypt, on June 27.
Published by The Editor on January 15th, 2009
January 10, 2009
size doesn’t matter
Finance & Economics, Financial Crisis, History & Society, In Other Words
(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. The degree to which 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 limited imagination often used in the design of modern regulation, then asks us to consider not simply how much or how little the government ought to regulate, but more importantly how efficiently and effectively it can achieve a desired distribution of resources…)
Free Market Myth by Dean Baker
Regulation is everywhere. Let’s choose who benefits.
The extraordinary financial collapse of recent months has been commonly described as a testament to the failure of deregulation. The events are indeed testament to a failure—a failure of public policy. Blaming deregulation is misleading.
In general, political debates over regulation have been wrongly cast as disputes over the extent of regulation, with conservatives assumed to prefer less regulation, while liberals prefer more. In fact conservatives do not necessarily desire less regulation, nor do liberals necessarily desire more. Conservatives support regulatory structures that cause income to flow upward, while liberals support regulatory structures that promote equality. “Less” regulation does not imply greater inequality, nor is the reverse true.
Framing regulation debates in terms of more and less is not only inaccurate; it hugely biases the argument toward conservative positions by characterizing an extremely intrusive structure of, for example, patent and copyright rules, as the free market. In the realm of insurance and finance over the last two decades, calls for deregulation have been cover for rules tilted starkly toward corporate interests. And the recent change in bankruptcy law, hailed by conservatives, requires much greater government involvement in the economy.
False ideological claims have circumscribed the public debate over regulation and blinded us to the wide range of choices we can make. Without these claims, what would guide regulatory policy? What kinds of choices would we have?
Published by The Editor on January 10th, 2009
January 9, 2009
originative sin
Finance & Economics, Financial Crisis, History & Society, In Other Words
(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 that had seen explosive growth in new financial instruments, many politicians might feel Galbraith, if anything, understates the damage wrought by financial innovation.
So the post-bubble policy agenda is bound to address important questions. Is financial innovation a blessing or a curse? Given, at the very least, that it is double-edged, should innovation in finance be curbed, or kept far removed from the conventional commercial banking sector? And how possible is it anyway to control the inventiveness of banking’s rocket scientists on Wall Street and in London or the eagerness of their employers to make money from their ideas?
Published by The Editor on January 9th, 2009
January 8, 2009
the end of 20th century finance
Finance & Economics, Financial Crisis, History & Society
(A eulogy for 20th century finance by one of its greatest poets…)
The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?
Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?
Published by The Editor on January 8th, 2009
January 5, 2009
the forever war
In Other Words, The Middle East
(If there’s any doubt remaining among global power-brokers that short-term foreign policy objectives are fundamentally flawed, recent events in the Levant have provided ample evidence. Such tribal conflict has played out in the Garden of Eden since northern Neanderthals and southern proto-human colonies first crossed paths during the last major Ice Age. Since that time, control over the region has changed hands a number of times, from Semetic tribes to Egyptian pharaohs to Roman Catholics to Muslim traders to Christian crusaders to Muslim Turks, and so forth. For every fence that was built and every line that was drawn, rivals always built a bigger ladder or dug a deeper tunnel. And so the feud was passed from generation to generation, weaving itself into the very fabric of the region’s fraternal cultures.
As war in the Promised Land erupts yet again, one can only hope that a definitive 21st century loss on all sides will be enough to drive the hard-liners from each camp toward a soft power compromise. But as history suggests, persistent tribal war simply galvanizes the next generation of fundamentalists. That’s precisely why a lasting peace has never materialized in a land where history is counted not in centuries but in millennia, and success not in compromise but in the other clan’s blood…)
Beyond Gaza
January 5, 2009 by Michael Moraz
Israeli infantry soldiers enter the Gaza Strip on January 4. (AP/Sebastian Scheiner)
Israel’s attacks into the Hamas-led Gaza Strip press into their second week with Israeli troops in possession of the northeastern reaches of the territory and diplomacy, to date, making very little impression. Early French efforts to head off a ground invasion failed, though President Nicolas Sarkozy appears determined to keep trying (CSMonitor). UN Security Council deliberations, tempered by knowledge that Washington will veto anything too critical of Israel, have led to stalemate (NYT). Egypt, a target of wrath from around the Arab world for maintaining its tight grip on the southern Gaza border crossing at Rafah (LAT), may have most at stake, and continues to press for a truce that would allow humanitarian aid into the battered enclave and possibly offer a foundation for wider talks. But Israel, so far, has proven unreceptive. Driving home Israel’s intention to continue with military operations, Foreign Minister Tzipi Livni rejected a Russian mediation offer (Haaretz), telling Moscow “we have no intention to … legitimize them and pass messages on to them.”
Published by The Editor on January 5th, 2009
conspiracy theory
Finance & Economics, History & Society, In Other Words
(For those still convinced that the Federal Reserve is the lynchpin in some grander economic conspiracy, this brief history of central banking in America should put some of your doubts to rest…)
Myth #1: The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a few senators in a secret meeting.
On the Georgian resort hideaway of Jekyll Island (which has some excellent golf courses, by the way), there once met a coalition of Wall Street bankers and U.S. senators. This secret 1910 meeting had a sinister purpose, the conspiracy theorists say. The bankers wanted to establish a new central bank under the direct control of New York’s financial elite. Such a plan would give the Wall Street bankers near total control of the financial system and allow them to manipulate it for their personal gain.G. Edward Griffin lays out this conspiratorial version of history in his book The Creature from Jekyll Island. His amateurish take on history is highly suspect, however. Gerry Rough, in a series of well- researched essays on U.S. banking history, reveals many historical inaccuracies, inconsistencies, and even contradictions in Griffin’s book and others of its genre. Instead of reproducing Rough’s work here, I offer the reader a substantially more accurate view of the events leading up to the creation of the Federal Reserve System in 1913. To get a proper historical perspective, the story of begins just prior to the Civil War…
Published by The Editor on January 5th, 2009
January 4, 2009
china inc.
Finance & Economics, History & Society
(This counter-factual analysis of China’s path toward capitalism reveals that the country’s biggest cities aren’t necessarily the engines of dynamic Asian progress that modern commentators have suggested, and that the country’s future may lie in rural areas where entrepreneurship and competition have thrived since Deng Xiaoping’s Four Modernizations…)
Private ownership: The real source of China’s economic miracle
December 2008 • Yasheng Huang
The credibility of American-style capitalism was among the earliest victims of the global financial crisis. With Lehman Brothers barely in its grave, pundits the world over rushed to perform the last rites for US economic ideals, including limited government, minimal regulation, and the free-market allocation of credit. In contemplating alternatives to the fallen American model, some looked to China, where markets are tightly regulated and financial institutions controlled by the state. In the aftermath of Wall Street’s meltdown, fretted Francis Fukuyama in Newsweek, China’s brand of state-led capitalism is “looking more and more attractive.” Washington Post columnist David Ignatius hailed the global advent of a Confucian-inspired “new interventionism”; invoking Richard Nixon’s backhanded tribute to John Maynard Keynes, Ignatius declared, “We are all Chinese now.”
But before proclaiming the dawn of a new Chinese Century, leaders and executives around the world would do well to reconsider the origins of China’s dynamism. The received wisdom on the country’s economic miracle—it was a triumph of technocracy, in which the Communist Party engineered a gradual transition to the market by relying on state-controlled businesses—gets all the important details wrong. This standard account holds that entrepreneurship, private-property rights, financial liberalization, and political reform played only a small role. Yet my research, based on a detailed analysis of the Chinese government’s survey data and government documents at the central and local levels, indicates that property rights and private entrepreneurship provided the dominant stimulus for high growth and lower levels of poverty.
Published by The Editor on January 4th, 2009
January 2, 2009
princely finance
Finance & Economics, Financial Crisis, History & Society, In Other Words
(This brief history of regal extortion draws some parallels to today’s “sinister” Federal Reserve, though the links are less tenuous than Dr. Hoye and others often suggest…)
PRINCELY FINANCE AND TAXATION
Bob Hoye, INSTITUTIONAL ADVISORS
With a degree in geophysics and a number of fascinating summers in mining exploration, one winter in “the bush” quickly led Bob into the financial markets. This included experience on the trading desk and in the research department of a large investment dealer, which led to institutional stock and bond sales.
Bob’s review of financial history provided the forecasting models designed to anticipate significant trend reversals in the sometimes alarming volatility typical of the transition from rampant speculation in tangible assets to fabulous speculation in financial assets.
One would have hoped that financial rip-offs committed by medieval princes would have been permanently shelved when liberal enlightenment ended the divine right of kings. Recent imperious announcements by Chairman Bernanke to use the “printing press” to inflate anything they can should be considered startling only in the resort to honesty. Euphemisms for currency depreciations started with the original promoters of the Fed and the tout was that a “flexible” currency would prevent serious financial contractions.
Although policymakers have been convinced that currency depreciation would keep every “recovery” going, the 95 percent depreciation of the dollar’s purchasing power has exaggerated the booms and busts. This is particularly ironical as government intervention did not prevent massive contractions such as with the commodities collapse of 1921 and with the collapse of virtually everything after 1929. Moreover, the timing and percent declines on this fall’s crash replicated those of 1929 with remarkable fidelity. That infamous crash had replicated the 1873 example.
Published by The Editor on January 2nd, 2009
December 31, 2008
false prophets
Financial Crisis, History & Society, In Other Words
(As the Annus Horribilis finally comes to an end, many forecasters in the policy and financial communities have been left licking their wounds. This effort from Moises Naim and his team at Foreign Policy tries to capture the best of the worst and is certainly worth a look…)
The 10 Worst Predictions for 2008
in Foreign Policy
Prognostication is by far the riskiest form of punditry. The 10 commentators and leaders on this list learned that the hard way when their confident predictions about politics, war, the economy, and even the end of humanity itself completely missed the mark.
ONE. “If [Hillary Clinton] gets a race against John Edwards and Barack Obama, she’s going to be the nominee. Gore is the only threat to her, then. … Barack Obama is not going to beat Hillary Clinton in a single Democratic primary. I’ll predict that right now.” —William Kristol, Fox News Sunday, Dec. 17, 2006
Weekly Standard editor and New York Times columnist William Kristol was hardly alone in thinking that the Democratic primary was Clinton’s to lose, but it takes a special kind of self-confidence to make a declaration this sweeping more than a year before the first Iowa caucus was held. After Iowa, Kristol lurched to the other extreme, declaring that Clinton would lose New Hampshire and that “There will be no Clinton Restoration.” It’s also worth pointing out that this second wildly premature prediction was made in a Times column titled, “President Mike Huckabee?” The Times is currently rumored to be looking for his replacement.
TWO. “Peter writes: ‘Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?’ No! No! No! Bear Stearns is fine! Do not take your money out. … Bear Stearns is not in trouble. I mean, if anything they’re more likely to be taken over. Don’t move your money from Bear! That’s just being silly! Don’t be silly!” —Jim Cramer, responding to a viewer’s e-mail on CNBC’s Mad Money, March 11, 2008
Hopefully, Peter got a second opinion. Six days after the volatile CNBC host made his emphatic pronouncement, Bear Stearns faced the modern equivalent of an old-fashioned bank run. Amid widespread speculation on Wall Street about the bank’s massive exposure to subprime mortgages, Bear’s shares lost 90 percent of their value and the investment bank was sold for a pittance to JPMorgan Chase, with a last-minute assist from the U.S. Federal Reserve.
Published by The Editor on December 31st, 2008
housing freefall
Finance & Economics, Financial Crisis, In Other Words
Published by The Editor on December 31st, 2008
December 17, 2008
pity the nation
Financial Crisis, History & Society, In Other Words
(Words from Lebanese poet Khalil Gibran in 1934…)
Pity the nation that wears a cloth it does not weave,
eats a bread it does not harvest,
and drinks a wine that flows not from its own wine-press.
Pity the nation that acclaims the bully as hero,
and that deems the glittering conqueror bountiful.
Pity the nation that despises a passion in its dream,
yet submits in its awakening.
Pity the nation that raises not its voice
save when it walks in a funeral,
boasts not except among its ruins,
and will rebel not save when its neck
is laid between the sword and the block.
Pity the nation whose statesman is a fox,
whose philosopher is a juggler, and whose art is the art of patching and mimicking.
Pity the nation that welcomes its new ruler with trumpetings, and farewells him with hootings,
only to welcome another with trumpetings again.
Pity the nation whose sages are dumb with years and whose strong men are yet in the cradle.
Pity the nation divided into fragments, each fragment deeming itself a nation.
Published by The Editor on December 17th, 2008
December 10, 2008
republican economics
(Noted economist John Kenneth Galbraith once noted that the financial memory is limited to 20 or 30 years, and author Mark Twain suggested that history might not repeat itself but certainly rhymes. Together, these two simple observations may help to explain why so many of our structural crises are simply echoes of previous human folly…)
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First credit crunch traced back to Roman republic
Mark Brown, The Guardian, Friday 28 November 2008
Politicians searching for historical precedents for the current financial turmoil should start looking a bit further back after an Oxford University historian discovered what he believes is the world’s first credit crunch in 88BC. The good news is that Philip Kay knows how the Romans got themselves into financial bother. The bad news is no one knows how they got themselves out of it.
“The essential similarity between what happened 21 centuries ago and what is happening in today’s UK economy is that a massive increase in monetary liquidity culminated with problems in another country causing a credit crisis at home. In both cases distance and over-optimism obscured the risk,” said Kay, a supernumerary fellow at Wolfson College.
The monetary historian is giving a lecture today in which he will reveal how Cicero, the Roman orator, gave a speech in 66BC in which he alluded to the credit crunch. Cicero was arguing that Pompey the Great should be given military command against Mithridates VI, king of Pontus on the Black sea coast of what is now Turkey. He reminded his audience of events in 88BC, when the same Mithridates invaded the Roman province of Asia, on the western coast of Turkey. Cicero claimed the invasion caused the loss of so much Roman money that credit was destroyed in Rome itself.
Published by The Editor on December 10th, 2008