Category Archives: Economic fundamentals

Marshall Auerback: The Economic Policy Behind Intervention in Libya Chases Its Own Tail

By Marshall Auerback, a hedge fund manager and portfolio strategist. Cross posted from New Deal 2.0

Any intentions of boosting the economy will be obliterated by our spending on military actions.

As my friend Chuck Spinney has noted in an exchange of emails, President Obama’s actions in Libya show that he has caved in to the “humanitarian interventionists” in his administration, as well as British/French/American post-colonial and oil interests. The result: yet another war with a Muslim country that has done nothing to us. Additionally, the fact that we are doing nothing to staunch the Saudi/Bahraini/Yemeni crackdowns smacks of hypocrisy and will hurt us even more on the Arab streets.

The Stigmatization of the Unemployed

One thing I have never understood in America is the way that people who lose their jobs become pariahs in the job market. We’ve now had a spate of commentary on the fact that official unemployment figures are looking a tad less dreadful by dint of the fact that increasing numbers of the long term unemployed have dropped out of the job market entirely. Even the conservative Washington Post woke up last week, Rip Van Winkle like, to take note of the growing number of long-term unemployed. Bizarrely, or perhaps as a fit illustration of the spirit of the day, the article was titled: “Hidden workforce challenges domestic economic recovery.” In other words, they are Bad People because if the economy ever picks up, they might come out of the woodwork and start looking for jobs!

Is Nuclear Power Worth the Risk?

One of the interesting features during the Fukushima reactor crisis were the fistfights that broke out in comments between the defenders of nuclear power and the opponents. The boosters argued that the worst case scenario problems were overblown, both in terms of estimation of the odds of occurrence and the likely consequences. The critics contended that nuclear power was not economical ex massive subsidies, that there was no “safe” method of waste disposal, and that nuclear plants were always subject to corners-cutting, both in design and operation, so the ongoing hazards were greater than they appeared.

Reader Crocodile Chuck passed along a story from the Bulletin of Atomic Scientists, “The Lessons of Fukushima“, by anthropologist Hugh Gusterson. Here is the key section:

Satyajit Das: The Economic Calculus of Japan’s Tragedy

By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”

The behaviour of financial markets over recent days confirms British Prime Minister Lloyd George’s observation that “financiers in a panic do not make a pretty sight”. While workers in the Fukushima nuclear plant risked death trying to bring damaged reactors under control, financiers cowered in fear. Oscillating between boom and doom, they sought opportunities to benefit from death and destruction.

Instant experts on the nuances of nuclear power generation and the Japanese economy have crowded the airwaves providing ‘analysis’.

Quelle Surprise! New Home Construction Plunges

How could anyone have expected new home building to be anything more than anemic with housing prices expected to fall nationwide in 2011? Did some forecasters miss the fact that there are a lot of foreclosures in the pipeline given the current level of serious delinquencies as well as a lot of shadow (homeowners who would like to sell but are not putting their homes on the market due to depressed prices in their market?)

Japan Earthquake Shows Business Reengineering Relies on Bogus Thinking Similar to Financial Engineering

Gillan Tett’s latest offering in the Financial Times discusses the woes that have befallen various major companies that find themselves exposed as a result of having extended supply chains that have Japan-based manufacturing as an important part. She correctly depicts this as a symptom of a much larger problem, of having pushed the idea of wringing out production costs too far. But perhaps due to space constraints, she fails to draw out the most important conclusion: just as with financial engineering, management incentives favored ignoring risk, and the resulting blow ups were predictable.

Tett tells us the Japan-related disruptions are merely the most visible symptom of a widespread pathology:

Will Ireland Threaten to Default?

We were surprised that Ireland capitulated so quickly to pressure from its Eurozone confreres and accepted a punitive bailout of its government, when it was in fact its banks that were a mess. As we noted in November:

Note that the Irish government is still holding out for a banking-system-only bailout, even if the funds are channeled through the government. Since I am not aware of any IMF bailout being done on this format, it’s likely to be a sticking point if the Irish refuse to back down (recall that the government itself is under no immediate funding pressure; they have six months before they need to go to market, which is an eternity in crisis-land).

The other major bone of contention is Ireland’s super-low corporation tax, which served as a significant incentive for multinationals to set up shop in Ireland. The Germans and French are insistent that it be increased to balance the budget. The Irish objections here are plausible, particularly since the low rates are a cornerstone of their national strategy (do you want 12.5%, the current corporate tax rate, of a decent sized number or 25% of a vastly smaller number?). The Irish have made it clear that they are non-negotiable on this point, and as keenly as the rest of the eurozone would like to beat Ireland back into line, I doubt they’d be willing to risk negotiations failing over this issue.

Fast forward, the Irish agree to a deal, the ruling party suffers substantial losses precisely for accepting the terms demanded by the eurozone and the IMF, and the new incumbents are much less willing to play nicely with counterparties who are engaging in what amounts to “every man out for himself” behavior, no matter what spin is put on their demands.

Japanese Stock Market in Free Fall on Nuclear Fears, Nikkei Down Nearly 13%

The stock market decline in Japan thus far today is second worst to the 1987 crash. As a mere mortal with delayed Bloomberg readings, Topix is now down “only” 12.64 versus a recent 13.18% and the Nikkei is off 12.74%, having recovered a smidge from down 14.1%. Good thing I didn’t listen to some recent stock market recommendations that the Japanese stock market would be up 20% in the first six months of this year.

The yen has firmed only modestly, to 81.55, due to Bank of Japan emergency liquidity operations only partially offsetting a rally. Note the BoJ’s operations are being criticized for being inadequate (ahem, do you think even a central bank can stand in front of a freight train of a major reset in economic fundamentals, unless it chooses to intervene in the stock market directly? Given the current and potential economic damage, the Japanese bond and money markets don’t sound too terrible with call money rates in a much wider trading range than normal. 008% to 0.13% versus the BofJ’s target of 0.1%, so the BoJ appears to be addressing what it considers to be its main priority). From Bloomberg:

A New “Whocoulddanode” Defense, This Time of Coddling Banksters in the Crisis

I hate shooting the messenger even when he lets us know that he is a tad invested in the information he is conveying, but sometimes it is warranted. Floyd Norris now tells us that maybe it wasn’t such a good idea to have been so generous to the banks during the crisis. He cites the usual reasons: the recovery is shallow, the officialdom missed the opportunity created by the crisis to restructure the financial system, sparing bondholders created moral hazard, and we are now stuck with banks in the driver’s seat. His lament, as the headline accurately summarizes, is “Crisis Is Over, But Where’s The Fix?”

The problem is that his account is larded with a rationalization of the decisions made at the time to treat major financial firms with soft gloves:

At the time, rescuing seemed more important than reforming. The world economy was breaking down because of a lack of financing. Trade flows collapsed, and companies and individuals stopped spending. It seemed clear that halting the slide was critical…

A surprising citadel of that second-guessing is at the International Monetary Fund, where researchers this week concluded that the rescues “only treated the symptoms of the global financial meltdown.”

“Second guessing” is simply misleading.

Richard Koo: How the West is Repeating Japan’s Mistakes

Richard Koo’s book The Holy Grail of Economics is the definitive work on what he calls “balance sheet recessions”. He explain, among other things, why QE2 is not likely to be successful.

Guest Post: Half a century of large currency appreciations – Did they reduce imbalances and output?

By Marcus Kappler, Helmut Reisen, Moritz Schularick, and Edouard Turkisch. Cross posted from VoxEU.

If China only allowed its currency to appreciate, the global economy would rebalance and stabilise – or so the argument goes. This column studies the historical record of large exchange-rate revaluations. It supports the idea that currency appreciations have an impact on the current account but argues that this can come at a cost – the reduction in exports risks putting the brakes on global growth.

Satyajit Das: Potemkin Villages – The Truth about Emerging Markets

By Satyajit Das, the author of “Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives”

Martin Gilman (2010) No Precedent, No Plan: Inside Russia’ 1998 Default; MIT Press, Cambridge, Massachusetts

Victor C. Shih (2008) Factions and Finance in China; Cambridge University Press, Cambridge, Massachusetts

Carl E Walter and Fraser J. T. Howie (2010) Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise; John Wiley, Singapore

According to myth, Russian minister Grigory Potyomkin ordered the erection of fake settlements, consisting of hollow facades of villages along the Dnieper River, to impress Empress Catherine II, about the value of her new conquests during her visit to Crimea in 1787. More than two centuries later, emerging market nations have borrowed the strategy. These three books provide insights into the Potemkin-village-like structure of emerging economies.