the rational post » regulation

oil slick = euro trick

The Editor — Sat, 15 May 2010 01:15:35 +0000

Stopping the spread of financial contagion is deceptively similar to plugging a ruptured deep-sea oil well: the cost is epic, the risk of failure is catastrophic, and expectations of success may be more hopeful than realistic. Recent efforts to address both crises share so many elements that a few tweaks to the following report on the Gulf catastrophe also freakishly describes efforts by the Eurozone to head off the risk of cascading sovereign defaults…

[European Central Bank] to [inject $1 trillion] to stop flow from [Club Med economies]
Adapted from an article on guardian.co.uk Friday 7 May 2010

The [$1 trillion facility] that remains [Europe's] best hope of containing the disaster in [Greece, Spain and

…

failure by design

The Editor — Fri, 23 Apr 2010 03:22:42 +0000

Churchill argued that democracy is the worst form of government, except for all the others. With capitalism now falling under similar fire, modern politicians, businesspeople and academics are once again questioning both the failures of free markets and the failures of government. As pundits gather on either side of the debate — casting blame and contempt across the regulatory divide — one often overlooked explanation for all the recent chaos is the time-honored tendency for human society to self-destruct. Behavioral economists and psychologists are having a field day watching our worst decision-making biases play themselves out in political and capital markets. But few in the legislative capitals of the world have taken…

turning a new leaf?

The Editor — Wed, 07 Apr 2010 20:56:52 +0000

Mr. Dollar testified before the Financial Crisis Inquiry Commission today about the challenges of a self-regulating market and the dangers that lie ahead. While his belief in free market capitalism remains unshaken, Greenspan’s warnings about the key attributes that should underpin a stable banking system — adequate capitalization, liquidity, and regulatory oversight — cast a surprising shot across the bow of modern banking giants who have grown a little too comfortable with their bailout blanket and artificially low interest rates.

Whether the economy tips back into chaos or not remains to be seen, but the rare regulatory prudence recommended in the Maestro’s testimony is a welcome conservative voice in the growing chorus to…

the spanish prisoner

The Editor — Thu, 11 Feb 2010 06:03:49 +0000

“Zapatero is not a good driver. It’s like a boat, which in calm waters steers fine, but when it gets bumpy, they are not prepared.” The same could be said for many of the world’s C-level leaders, so it’s perhaps not surprising that both companies and countries are finding out the hard way that credit can dry up when the sea gets choppy…

Not a bull in sight as the bears go after Spain
From the nosebleed seats of the E.U., government cries out ‘We are not Greece’

By Barbara Kollmeyer, MarketWatch

MADRID (MarketWatch) — Eduardo Fernandez Agudo is old enough to have lived through other economic crisis in Spain, but the current one has…

volcker rules

The Editor — Tue, 02 Feb 2010 12:20:15 +0000

A perennial hot ticket on the lecture circuit at economic clubs and grad schools around the planet, Paul Volcker‘s influence is finally starting to resonate where it counts: at both ends of Pennsylvania Avenue. As his testimony in front of the Senate Banking Committee looms, the broader premise of a more responsible financial services sector pursuing sustainable, profitable growth needs to get out in clear journalistic prose from a messenger untarnished by the last 18 months of political and economic triage. This Sunday NYTimes op-ed attempts to do just that, despite the complexity of the topic. Unfortunately, it falls a little short for those either too stubborn or greedy to…

reflections on a year of crisis

The Editor — Sun, 23 Aug 2009 02:56:01 +0000

A comprehensive if somewhat subjective view of the two years since the credit crisis first broke, direct from the horse’s mouth. Perhaps more interesting than any insider account of the Fed’s frantic response to the meltdown of the banking system is the degree to which the Chairman was concerned with the human impact of his macroeconomic policy-making…

Reflections on a Year of Crisis
Chairman Ben S. Bernanke

Speech at the Federal Reserve Bank of Kansas City’s Annual Economic Symposium, Jackson Hole, Wyoming, August 21, 2009

By the standards of recent decades, the economic environment at the time of this symposium one year ago was quite challenging. A year after the onset of the current crisis in August…

ascending and descending

The Editor — Wed, 29 Jul 2009 14:47:15 +0000

As speculative euphoria once again grips financial markets and investors emerge from their fallout shelters in search of higher yield, it is entirely possible that we failed to learn anything from the last 12-18 months of market volatility. After the markets bottomed out on March 9, our valuation anchors were rebased. Could our economic prospects really be that grim? Could all that leverage – all that cash – simply vanish from the financial system overnight? Of course not, went the refrain, and the markets have since pared back almost half of their 2008 losses during one of the largest bear market rallies since the 1930s.

As the “wealth effect”…

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…

syntax error

The Editor — Tue, 17 Mar 2009 02:40:01 +0000

Contagion could be used to describe much of the activity in the capital markets over the last 40 years, as global financial flows have accelerated, trade and capital barriers have disappeared, regulatory oversight has diminished, and financial innovation has made the packaging and sale of securities as easy as ordering a Big Mac combo. From defaults on recycled petrodollars in the early 1980s, to the Mexican peso crisis in 1994, to the “Asian Contagion” in 1997-98, and most recently the Great Collapse of 2008, what began as sanity checks on asset values and risk metrics quickly evolved into stampedes of herding capital feeling to higher ground. In this look at the nature and understanding systemic collapse, Kotok explores whether…

strong arm of the lawmakers

The Editor — Fri, 13 Feb 2009 18:48:38 +0000

Few economists now doubt that private household spending and corporate investment will rescue the economy on their own. The debate now lies in the scale and scope of the government’s intervention, as the only institution with the access to capital, macroeconomic scope, and investment horizon needed to jump-start the labor market, keep production cycles from seizing up, and create the necessary conditions for manageable lending and spending to resume.

In the following commentary, David Kotok of Cumberland Advisors suggests that any stimulus of this size shouldn’t be rushed or it risks not achieving the plan’s most basic objectives: immediate job creation and demand stabilization. While fiscal conservatives and liberals argue over the relative effects of tax…

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

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…

princely finance

The Editor — Fri, 02 Jan 2009 20:44:05 +0000

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…

oh canada

The Editor — Fri, 14 Nov 2008 00:36:38 +0000

Currently the envy of Hank Paulson and virtually every Finance Minister around the globe, Jim Flaherty describes how the world’s leading middle-power managed to side-step most of the financial devastation that’s haunting global financial markets, and what the world can learn from its sure-footed path…

“Boring” Canada’s Financial Tips for the World

The following guest column by the Honourable Jim Flaherty, Minister of Finance, appeared in today’s Financial Times. In it, Minister Flaherty outlines Canada’s five-point plan to restore stability to the international financial system.

“The financial crisis that began 14 months ago in the US has intensified and spread around the world, threatening to roll back economic progress that has been made over the past…

bailout

The Editor — Sun, 12 Oct 2008 20:24:56 +0000

As finance ministers from around the world congregate in Washington D.C. this weekend, various “solutions” will be floated that either compliment, contradict, or completely ignore America’s best efforts to fix its broken banking system. Coordination will be critical to preventing a protracted global recession, and Paulson and Bernanke’s ambitious plan – as examined below by a pair of Senior Fellows from the Brookings Institution – will either be the first step toward rational intrabank lending, or the final nail in the coffin of deregulated financial services…

Making the Rescue Package Work: Asset and Equity Purchases
The Brookings Institution, October 10, 2008

If the main purpose of the Emergency Economic Stabilization Act of 2008 is to…