If I have seen further it is by standing on the shoulders of giants.

Friday, December 30, 2011

GREAT INTERVIEW: 'Money Needs Laws' with Former Deutsche Bank CEO

As the former head of Deutsche Bank, Hilmar Kopper was once the most powerful banker in Germany. In an interview with SPIEGEL, the 76-year-old takes stock of his career and the current crisis shaking Europe. The three main constants he has seen in the world, he says, are "money, avarice and greed."

SPIEGEL: Mr. Kopper, to this day, you are still viewed as one of Germany's most accomplished financial professionals. When was the last time you were berated as a banker?

Kopper: Oh, it happens all the time. But sometimes people also ask for explanations. At any rate, I try to grapple with their accusations, even though they are often irrational, full of resentment and almost devoid of any knowledge about the subject. I am an old man and no longer have to worry about offending people. Of course, that doesn't mean that I have become the apologist of my profession. After all, I've been a banker for more than 55 years, and I still like doing it!

SPIEGEL: Then you ought to be worried, because resentment toward your industry now extends into the upper classes.

Kopper: Since when is the upper class a benchmark of judgment? I admit that banks haven't done everything well and correctly. There were excesses, like unnecessary financial products and false incentives. In short, mistakes were made, the kinds of mistakes that have been inherent in every innovation and every bubble from time immemorial, and that emerge when the bubble bursts. Everything has its price.

SPIEGEL: National lawmakers can hardly keep up with the pace of monetary transactions. And there are hardly any international controls.

Kopper: There was a promise of better international regulation. But this promise hasn't been kept, at least not until now. I certainly find fault with that. We mustn't forget that regulators, custodians and rating agencies also bear some responsibility.

SPIEGEL: Many of your active colleagues tend to duck away whenever someone asks for an explanation or even an opinion.

Kopper: I can understand the reluctance of my younger colleagues. The level of discussion is simply too flat. And then they're afraid of being asked the question: What have you yourself done? It resembles the question that my generation still asked its fathers: Where were you in this war?

SPIEGEL: People don't die in the financial crisis ...

Kopper: ... but values do -- in every sense of the word.

SPIEGEL: A letter bomb addressed to your successor, Josef Ackermann, was recently received at Deutsche Bank. That too is an expression of anger.

Kopper: Such actions have also taken place in the past. One shouldn't take this sort of thing so seriously, particularly as the people pulling the strings are apparently always willing to sacrifice the "wrong ones": secretaries, messengers, postal workers. But it also shows where the hatred that has been stirred up can lead. And besides, "the banker" as such doesn't really exist.

SPIEGEL: There's one sitting in front of us.

Kopper: I'm old school, so to speak. Often, when people are berating "the banks," they're really talking about completely different things: derivatives, commodities trading, foreign currency.

SPIEGEL: These are all businesses in which banks are involved.

Kopper: But usually just on behalf of pension funds, very large hedge and sovereign funds and wealthy investors. Never in the history of mankind has there been so much money in circulation, and never before was it possible to trade with it so quickly. And never before has this money used the entire planet as a playing field, as is the case today in the era of globalization. That's the way it is and the way it will remain. There can be no turning back the clock. How shortsighted people must be when they hold bankers responsible for this development!

SPIEGEL: Who do you think is primarily responsible for the crises?

Kopper: We're dealing with multi-causal failure. It didn't just start with the American central bank, the Federal Reserve, which permanently made money cheap after the attacks of Sept. 11, 2011. It was the declared goal of American policy, under Presidents Bill Clinton and George W. Bush, that every American was to own his own home. Many poor people, in particular, were lured in, people who couldn't afford this dream at all. The banks turned this into a huge business, the rating agencies provided incorrect ratings, and many countries -- both the United States and in Europe -- did not have their debt under control before the financial crisis erupted.

SPIEGEL: Do you have any sympathy for the new Occupy movement?

Kopper: Forgive me for being so direct, but I've hardly heard it utter a single reasonable sentence so far. It's all vague criticism of capitalism, markets and the market economy in general. I'm not interested in political correctness and I'm not about to pretend to have any sympathy for this movement now. It isn't just politicians of all stripes who have been doing this lately. No, I really don't understand the Occupy people.

SPIEGEL: It seems to us that the main problem is that many people don't even understand what the issues are that concern the European Central Bank (ECB), the European Financial Stability Facility (EFSF) and the International Monetary Fund (IMF) in the fight against swaps and bonds, and for bailout funds and leverage.

Kopper: Well, I can easily explain the leverage for increasing the size of the EFSF: What does a mother do when the doorbell rings and the relatives are standing outside? She goes into the kitchen, and you hear the sound of the water she is adding to the soup to make it last longer. That's how leverage works. It makes the soup thinner.

SPIEGEL: Comprehensibility would also create confidence.

Kopper: You know, I still receive a very small pension from the British government. I was a member of various boards of directors there, which meant I was automatically included in the social security system. It comes to about seven pounds a week. And whenever the amount is adjusted, I receive a wonderfully short and clear letter from the British government agency. We have to return to that in all respects. To comprehensibility. Then people will be enthusiastic.

SPIEGEL: There is actually money available to finance goods and services. But nowadays, it often simply generates more money.

Kopper: Whether you like it or not, the goal, everywhere and always, is to turn money into more money. What other purpose do foreign currency reserves have? In the past, they were truly intended to collateralize currencies like the deutsche mark. But today? The Bundesbank's gold is nothing more than a slice of the nation's assets and, at the same time, the basis for speculation. That's why politicians always want to get their hands on it.

SPIEGEL: Every year, real goods and services worth about $70 trillion (€54 trillion) are created worldwide. In the same time period, turnover on the foreign currency markets amounts to $1.007 quadrillion. The virtual world is completely disconnecting itself from reality.

Kopper: Of course this is seen as a discrepancy, which some like to connect to the demand that banks become more involved in the real economy and issue commercial loans. But that is precisely what they do, most of all.

Continue reading - SPIEGEL - Former Deutsche Bank CEO Hilmar Kopper: 'Money Needs Laws'

Thursday, December 29, 2011

The Federal Reserve's Covert Bailout of Europe

America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.

The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.

The Fed's support is in addition to the ECB's €489 billion ($638 billion) low-interest loans to 523 euro-zone banks last week. And if 2008 is any guide, the dollar swaps will again balloon to supplement the ECB's euro lending.

This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.

The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed's reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed's Swap Operations report, and the ECB website.)

No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments. It is difficult to count the number of things wrong with this arrangement.

First, the Fed has no authority for a bailout of Europe. My source for that judgment? Fed Chairman Ben Bernanke met with Republican senators on Dec. 14 to brief them on the European situation. After the meeting, Sen. Lindsey Graham told reporters that Mr. Bernanke himself said the Fed did not have "the intention or the authority" to bail out Europe. The week Mr. Bernanke promised no bailout, however, the size of the swap lines to the ECB ballooned by around $52 billion.

Second, these Federal Reserve swap arrangements foster the moral hazards and distortions that government credit allocation entails. Allowing the ECB to do the initial credit allocation—to favored banks and then, some hope, through further lending to spendthrift EU governments—does not make the problem better.

Third, the nontransparency of the swap arrangements is troublesome in a democracy. To his credit, Mr. Bernanke has promised more openness and better communication of the Fed's monetary policy goals. The swap arrangements are at odds with his promise. It is time for the Fed chairman to provide an honest accounting to Congress of what is going on.

Mr. O'Driscoll, a senior fellow at the Cato Institute, was vice president at the Federal Reserve Bank of Dallas and later at Citigroup.

Source: WSJ - The Federal Reserve's Covert Bailout of Europe

Iowa State Senator Kent Sorenson Endorses Ron Paul for President

Former Iowa chairman for U.S. Rep. Michele Bachmann pivots to Paul camp citing, “Ron Paul has established himself as the clear choice.”

ANKENY, Iowa – 2012 Republican Presidential candidate Ron Paul was endorsed today by Iowa State Senator Kent Sorenson (R-Indianola) in a major pivot that promises to give Paul extra momentum in the run-up to the January 3, 2012 Iowa Caucus.

In making his endorsement Sen. Sorenson is leaving his post as Iowa chairman for U.S. Rep. Michele Bachmann’s presidential campaign here. The resignation and endorsement take effect immediately.

“Congressman Paul is delighted to accept the endorsement of Senator Kent Sorenson, whose blessing and assistance carry a great deal weight in Iowa. The fact that he doesn’t take this decision lightly tells a great deal about the Senator and Ron Paul. This endorsement is a rare find and we hope it pushes us nearer to our goal of a strong top-three finish at the January caucus,” said Ron Paul 2012 National Campaign Chairman Jesse Benton.

Kent Sorenson was elected to the Iowa Senate in 2011 and represents District 37 after serving in the Iowa House of Representatives from 2009 to 2011, representing District 74. The senator is a member of several committees including the Judiciary, Natural Resources and Environment, and State Government committees. He is also the ranking member of both the Senate and Joint Oversight Committees and a member of the Advisory Council for Agricultural Education, the Family Development and Self-Sufficiency Council, and the Human Rights Board.

Senator Sorenson has been leader in the fight in defense of traditional family values, the sanctity of life, and a restoration of Second Amendment rights.

The full endorsement statement from Senator Sorenson follows.

Sorenson Statement

The decision I am making today is one of the most difficult I have made in my life. But given what's at stake for our country, I have decided I must take this action.

Today, I am switching my support from Michele Bachmann to Ron Paul for the 2012 Iowa Caucuses and the presidency of the United States.

I still maintain an immense amount of respect for Michele. The reasons are many. She’s never betrayed conservatives on issues like taxes, the Right to Life, and the Second Amendment. So over the past few months, I have been saddened at the dismissive way she's been treated among some conservatives especially after winning the Iowa Straw Poll.

But the fact is, there is a clear top tier in the race for the Republican nomination for President, both here in Iowa and nationally. Ron Paul is easily the most conservative of this group.

The truth is, it was an excruciatingly difficult decision for me to decide between supporting Michele Bachmann and Ron Paul at the beginning of this campaign. Dr. Paul and his supporters were a major help in my successful campaigns for Iowa House and Senate even when I couldn’t count on the support of the Republican establishment here in Iowa.

Of course, battling the establishment is nothing new for Dr. Paul or for myself. During my time in the General Assembly, I’ve established myself as a leader in the fights for traditional marriage, the Right to Life, and the protection of the Second Amendment – sometimes even against the wishes of my own party.

Since my election, I’ve learned that doing the right thing isn’t always easy. It’s easy to see why so many legislators “sell out” once elected. The pressure to do so is immense.

But what America needs now is a President who will not just “go along to get along.” Instead, we must send someone who puts doing what is right above all else to the White House. That candidate is Ron Paul.

Ron Paul is the only candidate to predict the current mess we find ourselves in economically, and he's the only candidate to offer a true plan to cut spending and balance our budget.

He's also consistently spoken out against government spending, assaults on individual liberties, and unnecessary trillion-dollar military adventurism for over 30 years. Polls show he is the Republican candidate that can take on and defeat President Obama in November 2012.

Like all true conservatives, I wholeheartedly agree with Ron Paul that government is too big, and both parties share in the blame. We agree that it is immoral to print money and pass on mounds of debt to the next generation. We agree that life begins at conception and must be protected. We both believe that the Second Amendment must be defended unwaveringly, and that there are too many wars being fought with no end in sight and no obvious path to a defined victory.

Of course, as a state legislator, I recognize that Dr. Paul's strong views on the 10th Amendment will enable me to fight for what I believe in right in my own backyard instead of having to constantly wait on one-size-fits-all "solutions" from Washington, D.C.

With the entire Republican establishment intent on smearing Ron Paul and his dedicated supporters, I understand this decision could impact the way people see me and my entire political career. But this is the right decision, and one in which I proudly stand behind.

To the truly wonderful people I met on the Bachmann campaign, I look forward to working with them in the future as we further the fights for the Right to Life, traditional marriage, and the restoration of our Second Amendment rights here in Iowa. I personally wish her all the best as she continues to battle in Congress.

As for conservatives who are rightly concerned with defeating establishment Republicans Mitt Romney, Newt Gingrich and – even more importantly – Barack Obama in 2012, Ron Paul has established himself as the clear choice.

If you are as frustrated as I am with what's been done by the ruling class, I urge you to join me in supporting Dr. Paul. We can send the national big government political establishment a message they will never forget by voting for Ron Paul for President in the January 3 Iowa Caucuses.

Source: TIME - Iowa State Senator Kent Sorenson Endorses Ron Paul for President

Kent Sorenson on CNN discussing his switch from Bachmann to Paul

Mitt Romney: I’ll Vote For Ron Paul if He’s the Nominee – Dec 28 2011

Ron Paul Ad - Washington Machine

The Compassion of Dr. Ron Paul

Tuesday, December 27, 2011

Tim Harford: Trial, error and the God complex

Economics writer Tim Harford studies complex systems -- and finds a surprising link among the successful ones: they were built through trial and error. In this sparkling talk from TEDGlobal 2011, he asks us to embrace our randomness and start making better mistakes.

Tim Harford: Trial, error and the God complex

Monday, December 26, 2011

Ron Paul: The Movie

In an age of shameless hypocrisy
where all still swear allegiance to a Constitution
they have no intention to obey...

One man has stood for decades
against the tides of corruption...
Often he has stood alone...
No more.

Ron Paul: The Movie

Saturday, December 24, 2011

How Physics Got Weird

Quantum physics has never been more topical. Schrödinger's "dead and alive" cat has entered popular lore, parallel universes have emerged from science fiction to become part of serious scientific speculation, and quantum computers offer the prospect of a leap forward as great again as the leap from the abacus to the classical computer itself. Quantum physicists have even achieved teleportation—although as yet only of photons, not people. So the time is very much ripe for a collection pulling together many of the great scientific papers of the 20th century that comprised the quantum revolution. There have been similar collections before (notably John Wheeler and Wojciech Zurek's 1983 "Quantum Theory and Measurement"), but with Stephen Hawking's name attached, the latest version is likely to reach a much wider audience than its predecessors.

Prospective readers should be warned, though, that the contents are not for the faint-hearted. They are the real thing, written by such luminaries as Max Planck, Albert Einstein, Werner Heisenberg and Erwin Schrödinger, and presented more or less as they were originally published, though with the benefit of introductions setting each section in context. There has been some judicious editing (and some I regard as injudicious, such as the savage cutting of the paper in which Schrödinger published his famous puzzle, in which an unseen cat is paradoxically both alive and dead), but there is very little here that would be an easy read for anyone without a degree in physics. But if you have either the stamina to plow through the whole story, or the inclination to dip in for favorite nuggets, this is the place to find the history behind much of the research making headlines today.

The story starts with Planck's discovery at the beginning of the 20th century of the mathematical law that describes the nature of the radiation emitted by an object as it is heated (bizarrely known as "black body" radiation)—a result that also established that light and other forms of energy came in discrete units (the "quanta" from which the subject takes its name). The collection proceeds through Einstein's 1905 proof that "particles of light"—later dubbed photons—were real, to the application of these ideas to atomic physics and the revelation in the 1920s that the quantum world is stranger than anything that had been imagined.

The discovery of wave-particle duality in 1924 (by Louis de Broglie) and quantum uncertainty in 1927 (by Heisenberg) made quantum physics as much a branch of philosophy as science, stirring arguments that continue to the present day about how to interpret what the equations are telling us. Is it really possible that quantum systems—perhaps even cats—exist in a state of unreality until we look at them and force them to take on one configuration or another? Or are there many, perhaps infinitely many, different realities, in which all possible outcomes of quantum choices are played out simultaneously (the so-called "many worlds" hypothesis)? Is it possible that instantaneous communications link quantum entities across vast spaces, so that actions affecting one particle also instantaneously change the characteristics of a distant counterpart? (Though Einstein called this unsettling prospect "spooky action at a distance," the answer is "yes"; experiments have proved it.)

Against this philosophical debating, hard-core physicists such as Richard Feynman (who is represented here not just by a paper on the work for which he received the Nobel Prize but by his science-fiction-like suggestion that the particles known as positrons are electrons traveling backward in time), Sin-Itiro Tomonaga and Julian Schwinger ignored the philosophy and got on with solving the equations—after they had found the right ones to solve—coming up with a complete, unified description of everything in the universe except gravity. Bringing gravity into the quantum fold remains the Holy Grail of physicists.

There are two serious omissions from the book, which shows signs of having been put together hastily, and one bizarre inclusion. Louis de Broglie's paper introducing the idea that electrons could be treated as waves (which impressed Einstein and led Schrödinger to his Nobel-winning work on quantum theory) is conspicuous by its absence, as is the 1957 paper by Hugh Everett that made the "many worlds" idea, which remains the best resolution of the Schrödinger's cat puzzle, part of mainstream science.

Of course, something has to give, even in a volume this size, but space for these ideas could be found by leaving out the extract from a popular book by George Gamow, which no more deserves a place here than an extract from, say, Mr. Hawking's "A Brief History of Time." It is also inexcusable in a book of this kind to have no index or guide to further reading. And I may be a pedant, but if you are going to use a Shakespeare quotation in the title of a book, you should get it right: The words Shakespeare put in the mouth of Prospero at the end of "The Tempest" are actually "We are such stuff as dreams are made on; and our little life is rounded with a sleep."

That said, on balance "The Dreams That Stuff Is Made Of" is a welcome addition to the quantum library. At $30, it is remarkably good value; but do not be sucked in by the publisher's claim that it "introduces the nonscientific reader to the mind-bending world of quantum physics." Approach this with no knowledge of science and your mind may well get bent, but you are unlikely to get much insight into what is going on.

Source: WSJ - Book Review: The Dreams That Stuff Is Made Of

Friday, December 23, 2011

Fed’s Once-Secret Data Released to Public

Bloomberg News today released spreadsheets showing daily borrowing totals for 407 banks and companies that tapped Federal Reserve emergency programs during the 2007 to 2009 financial crisis. It’s the first time such data have been publicly available in this form.

To download a zip file of the spreadsheets, go to http://bit.ly/Bloomberg-Fed-Data. For an explanation of the files, see the one labeled “1a Fed Data Roadmap.”

The day-by-day, bank-by-bank numbers, culled from about 50,000 transactions the U.S. central bank made through seven facilities, formed the basis of a series of Bloomberg News articles this year about the largest financial bailout in history.

“Scholars can now examine the data and continue the analysis of the Fed’s crisis management,” said Allan H. Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh and the author of three books on the history of the U.S. central bank.

The data reflect lending from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Term Auction Facility, the Term Securities Lending Facility, the discount window and single-tranche open market operations, or ST OMO.

Bloomberg News obtained information about the discount window and ST OMO through the Freedom of Information Act. While the Fed initially rejected a request for discount-window information, Bloomberg LP, the parent company of Bloomberg News, filed a federal lawsuit to force disclosure and won in the lower courts. In March, the U.S. Supreme Court decided not to intervene in the case, and the Fed released more than 29,000 pages of transaction data.

Additional Data

The Fed later supplied additional data to fill in gaps in its initial response. Bloomberg News is updating an interactive graphic it first published in August to add the new information.

Congress required the Fed to post data to its website in December 2010 on six broad-based programs, its assistance to Bear Stearns Cos. and American International Group Inc. (AIG) and more general information on its mortgage-backed securities purchases and so-called foreign-currency liquidity swaps. Those data were presented in spreadsheets that made it difficult to gauge how much individual banks were borrowing from the various programs on any given day.

Some reported totals from media outlets and government studies varied widely. In connection with today’s release, here’s a by-the-numbers explanation of the variations:

$1.2 trillion -- The Fed’s actual lending to banks and financial companies at its single-day peak, Dec. 5, 2008, through the seven programs Bloomberg News studied in depth.

Emergency measures that targeted specific companies -- Bear Stearns, AIG, Citigroup Inc. and Bank of America Corp. -- were excluded from Bloomberg’s analysis because they were previously disclosed. Loans to these companies from the other seven programs were included.

Bloomberg excluded foreign-currency liquidity swaps because names of commercial banks that borrowed under the program haven’t been disclosed to the public.

Continue reading - Bloomberg - Fed’s Once-Secret Data Released to Public

China's Real Estate Bubble May Have Just Popped

For years analysts have warned of a looming real estate bubble in China, but the predicted downturn, the bursting of that bubble, never occurred -- that is, until now. In a telling scene two months ago, Shanghai property developers started slashing prices on their latest luxury condos by up to one-third. Crowds of owners who had recently bought apartments at full price converged on sales offices throughout the city, demanding refunds. Some angry investors went on a rampage, breaking windows and smashing showrooms.

Shanghai homeowners are hardly the only ones getting nervous. Sudden, steep price reductions are upending real estate markets across China. According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone. And the free fall may continue for some time. Centaline, another leading property agency, estimates that developers have built up 22 months' worth of unsold inventory in Beijing and 21 months' worth in Shanghai. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that "the biggest bubble of the century," as it was called earlier this year, has just popped, with serious consequences not only for one of the world's most promising economies -- but internationally as well.

What makes the future look particularly bleak is the lack of escape routes. If Chinese investors panic and rush for the exits, they will discover that in a market awash with developer discounts, buyers are very hard to find. The next three months will be a watershed moment for a Chinese investor class that has been flush with cash for years but lacking a place to put it. Instead of developing a more balanced, consumer-based economy, an entire regime of Beijing technocrats -- drunk on investment-led growth -- let the real estate market run red hot for too long and, when forced to act, lacked the credibility to cool the sector down. That failure threatens to undermine the country's continued economic rise.

Real estate woes are already sending shockwaves through China's broader economy. Chinese steel production -- driven in large part by construction -- is down 15 percent from June, and nearly one-third of Chinese steelmakers are now losing money. Chinese radio reports that half of all real estate agents in the southern city of Shenzhen have closed up shop. According to Centaline, more than 100 local government land auctions failed last month, and land sale revenues in Beijing are down 15 percent this year. Without them, local governments have no way to repay the heavy loans they have taken out to fund ambitious infrastructure projects, or the additional loans they will need to keep driving GDP growth next year.

In a few cities, such as coastal Wenzhou and coal-rich Ordos, the collapse in property prices has sparked a full-blown credit crisis, with reports of ruined businessmen leaping off building rooftops; some are fleeing the country. The central bank's decision on December 5 to lower the reserve requirement ratio for the first time in three years signaled a broader move to pump money into the economy. Beijing has directed banks in Wenzhou to extend emergency loans to troubled borrowers. Of course, officials could halt the sell-off simply by handing developers enough cheap loans to allow them to carry their inventory. But such a strategy risks re-inflating the bubble.

The impact of a housing downturn would have a significant impact globally. International suppliers who have been fueling China's construction boom -- iron-ore miners in Australia and Brazil, copper miners in Chile, lumber mills in Canada and Russia, and multinational equipment makers such as Caterpillar and Komatsu -- could be hard hit. Heavy losses on real estate and related lending could damage investment and consumer confidence, undermining the rising tide of Chinese demand that has been a much-needed growth engine for everything from Boeing airplanes to Volkswagen and GM automobiles to KFC and McDonald's fast food.

Understanding how this came to pass means parsing the host of distortions and mind games that characterize China's real estate market. Residential real estate construction now accounts for nearly ten percent of the country's total GDP -- four percentage points higher than it did at the peak of the U.S. housing bubble in 2005. Bullish analysts have long argued that large-scale urbanization and rapidly rising incomes warrant such an extraordinary boom.

But new urban residents are not the immediate drivers of China's recent run-up in real estate. Chinese investors, large and small, are the ones creating the market. For more than a decade, they have bet on longer-term demand trends by buying up multiple units -- often dozens at a time -- which they then leave empty with the belief that prices will rise. Estimates of such idle holdings range anywhere from 10 million to 65 million homes; no one really knows the exact number, but the visual impression created by vast "ghost" districts, filled with row upon row of uninhabited villas and apartment complexes, leaves one with a sense of investments with, literally, nothing inside.

The craze for vacant real estate is due in large part to a lack of attractive alternatives. Strict controls on capital outflows prevent most Chinese citizens from investing any real money abroad. Chinese bank deposits earn very low interest rates -- lower, for the past year now, than the rate of consumer inflation. The public sees the country's domestic stock exchanges, which have endured volatile ups and downs over the last few years, as little more than high-risk casinos. In contrast, real estate, which has not seen a sustained downturn since China first converted to private homeownership in the 1990s, has long looked like a sure bet.

Beijing's response to the global financial crisis added jet fuel to the fire. To maintain GDP growth of nearly ten percent during a massive downturn in global demand, China's leaders engineered a lending boom that expanded the country's money supply by roughly two-thirds. Real estate was already the preferred place for the Chinese to stash cash; now, investors had that much more cash to stash. Prices rose accordingly: In many locations, the cost of prime new properties doubled in just two years.

But this run of speculation has bid up the price of housing and left people who actually need a place to live in the lurch. Given the prices prevailing earlier this spring, the average wage earner in Beijing would have had to work 36 years to pay for an average home, compared to 18 years in Singapore, 12 in New York, and five in Frankfurt. The bidding war has further pushed developers to build ever more costly luxury properties that investors crave but few ordinary people can afford.

By the spring of 2010, China's leaders were growing increasingly worried that skyrocketing prices were sowing the seeds of social unrest. In response, Beijing imposed a series of cooling measures to rein in speculative demand. These included a stipulation for larger down payments, tougher qualifications for mortgages, residency requirements for home purchasers, and limits on the number of units a family could buy. Although these restrictions were mainly confined to Beijing and Shanghai, where central authorities hold the greatest sway, they were meant to send a clear signal that China's leaders wanted property prices to level off.

Real estate developers, however, believed they had seen this movie before. They had witnessed earlier cooling campaigns, as recently as early 2008. Each lasted a few months before reverting back to business as usual. Local governments depend on a healthy real estate market to generate revenue from land sales (as the state owns the land), and property development has long been a key driver of the GDP growth that the central government both demanded and prized. Let them see the effects of a slowdown, developers figured, and China's leaders would rush back in to support the sector. They always had before.

So the property developers bet against cooling. They continued borrowing and building, even in the face of a relatively soft and uncertain market. Until that point, Chinese developers had been able to move everything they built, usually pre-selling it before it was finished. But starting in the late spring of 2010, they began piling up substantial stocks of unsold inventory, for the day when the government would, so they thought, relent and demand would come surging back.

Because the industry kept on building, there has been no negative impact on GDP. Real estate investment has continued growing at nearly 30 percent annually. But inflation began to rise from 1.5 percent in January 2010 to a peak of 6.5 percent in July 2011, and authorities began to sweat. They broadened their cooling efforts. The central bank tightened credit expansion, and China's economy began to slow. As 2011 progressed, developers scrambled for new lines of financing to keep their overstocked inventories. They first relied on bank loans (until they were cut off), then high-yield bonds in Hong Kong (until the market soured), then private investment vehicles (sponsored by banks as an end run around lending constraints), and finally, in some cases, loan sharks. By the end of last summer, many Chinese developers had run out of options and were forced to begin liquidating inventory. Hence, the price slashing: 30, 40, and even 50 percent discounts.

The biggest unanswered question is whether existing investors -- the people holding all those sold but empty "ghost" condos and villas -- will join in the sell-off, which could turn the market's retreat into a rout. So far, that has not materialized. Unlike highly leveraged developers, most multi-home buyers invested their own money and do not face the same immediate pressures to sell. However, their willingness to hold idle properties depends on real estate's reliability as a store of value -- a rationale that seems to be disintegrating before home buyers' eyes. While pre-owned home prices in Beijing fell only three percent last month, transaction volumes there and in other cities have plummeted (down 50 percent year on year in Shenzhen, 57 percent in Tianjin, and 79 percent in Changsha), suggesting that many owners would like to sell -- so long as it is not at a loss -- but are having trouble finding buyers. Would-be residents, who once felt pressured to buy before prices rose even further, now prefer to wait and look around for a better deal.

In recent weeks, a growing chorus has called on the government to lift restrictions on multiple home purchases -- revealing, when push comes to shove, just how much the market has come to depend on investor, rather than end-user, demand. But both types of demand depend, in their own way, on the assumption of ever-rising prices. Unless that assumption can somehow be restored, neither looser regulation nor looser lending will persuade the Chinese to pile back into property. Just as elsewhere, China's monetary authorities may find themselves, as it's said, pushing on a string of unwilling demand.

Ironically, as Chinese investors start pulling their money out of property, many are putting it into bank- and trust-sponsored "private wealth management" vehicles that promise high fixed rates of return but channel the proceeds into investments -- like real estate developers and local government bonds -- whose returns are themselves predicated on ever rising property prices. Many fear this repackaging of real estate risk is laying the foundation for a follow-on crisis that some are labeling the Chinese equivalent of Wall Street's collateralized-debt-obligation mess.

While frightening, the popping of China's real estate bubble is not all bad news. Cheaper, more affordable housing could also unlock the savings of China's working-class families, unleashing greater consumer demand and helping to rebalance the global economy. Investment long bottled up in idle real estate could flow to more productive pursuits. These adjustments have been put off too long. This is why at least some of China's leaders appear determined to force a correction despite the risks. But they know they are walking a razor's edge.

Source: China's Real Estate Bubble May Have Just Popped

Apart from Universes | David Deutsch

An excerpt contained in Many Worlds? Everett, Quantum Theory, and Reality

Apart from Universes - David Deutsch
Apart from universes - David Deutsch from Philosophy of Physics on Vimeo.

Monday, December 19, 2011

What Would John Maynard Keynes Tell Us To Do Now?

Half a decade has passed since the bursting of a huge asset-price bubble, and the U.S. economy is still depressed. More than ten million Americans are jobless, and many more are working part time. The gross domestic product has yet to recover its pre-bust level. In Florida and other areas where the speculative frenzy ran hot, vast developments stand empty. Overseas, things are no better, and in some places they’re worse. Britain looks much like America. In Continental Europe, a debt crisis is wreaking havoc. Democratically elected governments appear powerless to turn things around. Political extremism is on the rise.

So conditions are grim when, on New Year’s Day, 1935, the English economist John Maynard Keynes mails a letter to George Bernard Shaw. “I believe myself to be writing a book on economic theory which will largely revolutionize—not, I suppose, at once but in the course of the next ten years—the way the world thinks about economic problems,” Keynes tells his friend. “I can’t expect you, or anyone else, to believe this at the present stage. But for myself I don’t merely hope what I say,—in my own mind, I’m quite sure.” Keynes is right. When “The General Theory of Employment, Interest and Money” appears, in February, 1936, it provides an intellectual justification for the large-scale public-works programs that Keynes has been advocating for years, and that F.D.R.’s Administration has recently launched as part of the New Deal. Keynes argues against the idea that the economy will recover on its own, and in favor of active measures—the manipulation of public expenditures, taxes, and interest rates—to spur growth and employment. His theory will become the keynote of a new era of economic policymaking. The main impediment to such policies, Keynes writes, is the lingering influence of outmoded theories:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

Today, some regard Keynes himself as that academic scribbler, entrancing a generation of mindless followers. For many others, he’s the economist whose sweeping theory, shaped by a Great Depression, remains the surest guide out of our current woes. In the wake of the global financial crisis of 2007-09, President George W. Bush and President Barack Obama both launched tax-relief and spending initiatives designed to stimulate growth. Nicolas Sarkozy, in France, and Gordon Brown, in Britain, proclaimed the end of the free-market era. We were all Keynesians, and knew it—for about five minutes.

In 2010, Britain’s new government turned away from expansionary policies and introduced major budget cuts, making arguments that harked back to Keynes’s opponents in the nineteen-thirties, such as Friedrich Hayek, an Austrian economist who taught at the London School of Economics. Soon Greece, Ireland, and other debt-burdened European countries were launching ever more Draconian austerity programs. On this side of the Atlantic, with unemployment remaining stubbornly high, conservative economists insisted that the Keynesian medicine had failed to cure the patient and had perhaps even worsened the disease—an argument seized upon by Republican politicians.

“Keynesian policy and Keynesian theory is now done,” Governor Rick Perry, of Texas, declared during a Republican Presidential candidates’ debate last month. “We’ll never have that experiment on America again.” The following night, however, President Obama proposed what, in all but name, was another Keynesian stimulus package: a four-hundred-and-fifty-billion-dollar jobs program, consisting of tax cuts and increases in federal spending.

Seventy-five years after the publication of “The General Theory,” there is a fierce and consequential argument about what, in Keynes’s economic theory, is living and what, as Perry would have it, is “done.” Has the global economy’s stuttering progress since 2008 demonstrated the limitations of Keynesian policies—or the dangers of abandoning them prematurely?

The publishing industry, at least, has been bullish on Keynes in the past few years. Robert Skidelsky, the author of a monumental three-volume Keynes biography, responded to the financial crisis with a new primer titled “Keynes: The Return of the Master.” Another eminent English historian, Peter Clarke, followed up with “Keynes: The Rise, Fall and Return of the 20th Century’s Most Influential Economist,” while new collections on Keynes and Keynesianism have appeared from Cambridge University and M.I.T. This fall, there is “Capitalist Revolutionary: John Maynard Keynes,” by Roger E. Backhouse, an economic historian at the University of Birmingham, and Bradley W. Bateman, an economist at Denison University; “Keynes Hayek: The Clash That Defined Modern Economics,” by the British journalist Nicholas Wapshott; and “Grand Pursuit,” a history of economics by Sylvia Nasar, the author of “A Beautiful Mind,” which devotes many pages to Keynes and his contemporaries.

So what was the core of his message? Before the Great Depression, most economists adhered to a Newtonian conception of the economy as a self-correcting system. When the economy entered a slump, businesses laid off workers and shut down factories—but these negative trends contained their own remedy. The trick was to look at price changes. Unemployment drove down wages (the price of labor) until firms found it profitable to start hiring again. Idling factories drove down interest rates (the price of borrowing) until entrepreneurs found it worthwhile to take out loans and re-start production. Before very long, prosperity would be restored. Attempts to hasten this process were liable to interfere with the natural forces of adjustment and make things worse. As Hayek wrote in “Prices and Production” (1931), “The only way permanently to ‘mobilize’ all available resources is . . . not to use artificial stimulants—whether during a crisis or thereafter—but to leave it to time to effect a permanent cure.”

In “The General Theory,” Keynes took aim at this view of the world. His central insight was that the economy was driven not by prices but by what he called “effective demand”—the over-all level of demand for goods and services, whether cars or meals in fancy restaurants. If car manufacturers perceived that the demand for their products was lagging, they wouldn’t hire new workers, however low wages fell. If a restaurateur had vacant tables night after night, he would have no incentive to borrow money and open a new venture, even if his bank was offering him cheap loans. In such a situation, the economy could easily remain stuck in a rut, until some outside agency—the government was Keynes’s favored candidate—intervened and spurred spending. Only then would private businesses be emboldened to expand production and hire workers.

Nasar, in her capacious and absorbing book, makes the key point well:

What made the General Theory so radical was Keynes’s proof that it was possible for a free market economy to settle into states in which workers and machines remained idle for prolonged periods of time. . . . The only way to revive business confidence and get the private sector spending again was by cutting taxes and letting business and individuals keep more of their income so they could spend it. Or, better yet, having the government spend more money directly, since that would guarantee that 100 percent of it would be spent rather than saved. If the private sector couldn’t or wouldn’t spend, the government would have to do it. For Keynes, the government had to be prepared to act as the spender of last resort, just as the central bank acted as the lender of last resort.

For three decades after the Second World War, Keynes’s theory provided the framework for policymaking on both sides of the Atlantic. The West enjoyed a time of rapid growth and rising standards of living, and although it would be simplistic to ascribe these trends solely to the prescriptions of policymakers, economists who balked at Keynesian doctrine were often cast aside.

Three-quarters of a century later, Keynes’s notion of “effective demand,” now usually called “aggregate demand,” is still a mainstay of policymaking around the world. Whenever the economy stumbles and unemployment starts climbing, discussion inevitably centers on what can be done to boost spending and investment. Few economists, on the left or the right, seriously advise the government to sit on its hands and let the price system work its magic. Rather, the conversation turns on what methods the authorities should use to stimulate the economy, besides cutting interest rates. Liberal economists, like Paul Krugman and Joseph Stiglitz, usually favor infrastructure spending. Conservative economists, like Greg Mankiw and Glenn Hubbard, tend to prefer tax cuts. But neither group questions the need for the government to step in and bolster demand.

In the course of his career, Keynes advocated tax cuts and interest-rate cuts, but he didn’t limit himself to those measures. During the nineteen-twenties, when the unemployment rate reached double figures, and British monetary policy was hamstrung by the gold standard, Keynes called for additional spending on public housing, roadworks, and other civic projects. “Let us be up and doing, using our idle resources to increase our wealth,” he wrote in 1928. “With men and plants unemployed, it is ridiculous to say that we cannot afford these new developments. It is precisely with these plants and these men that we shall afford them.”

With the onset of the Great Depression, Keynes stepped up his calls for action. But, as outlays on unemployment benefits increased and tax revenues declined, the budget deficit ballooned, generating alarm at His Majesty’s Treasury. In the summer of 1931, the government made deep spending cuts, intending to restore confidence in government finances. Keynes warned that the effect would be to worsen the slump, throwing more people out of work. He said that budget deficits were a by-product of recessions, and that they served a useful purpose: “For Government borrowing of one kind or another is nature’s remedy, so to speak, for preventing business losses from being, in so severe a slump as the present one, so great as to bring production altogether to a standstill.”

As the Depression deepened, seeming to confirm his warnings, Keynes sharpened his theoretical arguments. In 1933, drawing on an article by his student Richard Kahn, he made the case that one dollar of additional government spending—on a new railway station, say—could ultimately generate two dollars, or even more, in additional output and income. This was the so-called “multiplier” effect. As the unemployed were set to work on public projects, he reasoned, they would spend their wages on other goods and services, which would prompt businesses to take on more workers. Those workers, in turn, would spend more, leading to further hiring, and so on. What’s more, all of these newly employed workers would be paying taxes, which would bring down the budget deficit. “It is a complete mistake to believe that there is a dilemma between schemes for increasing employment and schemes for balancing the Budget,” Keynes wrote. “There is no possibility of balancing the Budget except by increasing the national income, which is much the same thing as increasing employment.”

In Keynes’s day, many people—including politicians sympathetic to Keynes—were suspicious of the multiplier. The whole thing smacked of sophistry. Wapshott, in a long overdue and well-researched book that usefully gathers together much hitherto scattered information, recounts Keynes’s 1934 visit to the White House, where he expounded the logic of the multiplier to F.D.R. After he left, Roosevelt remarked to Frances Perkins, his Labor Secretary, “I saw your friend Keynes. He left a whole rigmarole of figures. He must be a mathematician rather than a political economist.” Despite the enormous public-works projects of the New Deal, F.D.R. didn’t formally adopt deficit spending as a policy tool. Indeed, he kept a keen eye on the red ink. In 1937, with the economy on the mend, he ordered tax hikes and spending cuts, which caused the economy to crater again. President Truman was even more suspicious of Keynesian theorizing. “Nobody can ever convince me that Government can spend a dollar that it’s not got,” he told Leon Keyserling, a Keynesian economist who chaired his Council of Economic Advisers. “I’m just a country boy.”

The multiplier continues to spark controversy. Echoing the arguments that Keynes’s opponents at the Treasury made during the nineteen-thirties, conservative economists like Robert Barro, at Harvard, argue that it is close to zero: for every dollar the government borrows and spends, spending elsewhere in the economy falls by almost the same amount. Whenever individuals see the government boosting spending or cutting taxes on a temporary basis, Barro maintains, they figure that these policies will eventually have to be paid for in the form of higher taxes. As a result, they set aside extra money in savings, which cancels out the stimulus.

Barro’s caution may apply in certain conditions—say, a highly indebted economy with close to full employment. It’s certainly true that the Keynesian multiplier varies according to how stimulus funds are spent; how the central bank reacts to higher government spending (if it raises interest rates, interest-sensitive spending will fall, reducing the multiplier); and, most important, whether workers and machinery are lying idle. But Keynes didn’t advocate deficit spending for an economy at full employment. It was only when the economy was in a deep slump, he thought, that higher output “could be provided without much change of price by home resources which are at present unemployed.”

This jibes with history. Immediately before and during the Second World War, the U.S. government borrowed unprecedented sums to finance the military buildup, and the economy finally recovered from the Great Depression. In 1937, one in seven American workers was jobless; in 1944, one in a hundred was. A wartime economy may present a special case, but a recent working paper published by the National Bureau of Economic Research looked at data going back to 1980 and found that government investments in infrastructure and civic projects had a multiplier of 1.8—pretty close to Keynes’s estimate.

So why didn’t the Obama Administration’s 2009 stimulus package usher in a true recovery? Keynes would have pointed out that, with households and firms intent on paying down debts and building up their savings in the aftermath of a credit binge, large-scale deficit spending is needed merely to prevent a recession from turning into a depression. With interest rates already close to zero, Keynes would have argued that the economy was stuck in a “liquidity trap,” greatly limiting the Federal Reserve’s scope for further action. He would also have noted that the stimulus was—especially compared with the devastation it meant to address—rather small: equivalent to less than two per cent of G.D.P. a year for three years. Even this overstates its magnitude, given that much of the increase in federal spending was offset by budget cuts at the state and local levels. In its totality, government spending didn’t increase much at all. Between 2007 and the first half of this year, it rose by about three per cent in real dollars.

Besides, recovering from a financial meltdown requires more than government spending: the banking system has to be recapitalized (in the nineteen-nineties, Japan’s cash-hoarding “zombie banks” were a drag on its stimulus programs); bad debts have to be written down; sector-specific problems must be addressed. Following the crisis of 2008, both the Bush and the Obama Administrations moved promptly to shore up the banking system, but they neglected to deal with the housing debacle. A more effective mortgage-modification program for homeowners who are under water on their loans would have helped. In 2009, when the Obama Administration launched a refinancing program, it predicted that between three and four million people would get some relief, but so far fewer than one million mortgages have been modified. The lingering effects of the housing crisis continue to weigh down the rest of the economy.

Finally, Keynes would have directed our attention to international problems. A confirmed internationalist, Keynes would undoubtedly have supported the head of the Chinese central bank’s call, in 2009, for the creation of a new global reserve currency to be issued and controlled by the International Monetary Fund. (Keynes proposed almost precisely the same thing in 1944, at Bretton Woods, where he helped design a new international economic system, but the Americans ruled it out.) The rationale is that if the issuer of the reserve currency acts irresponsibly, the rest of the world is at its mercy, so it might be better to have an international currency that no single country controls. For now, the Chinese proposal has gone nowhere; the world’s focus is elsewhere. But, as the Asian economies continue their rise, it is sure to come back onto the agenda.

And Keynes would have had strong views about the European sovereign-debt crisis. The U.K. economy of his day, like the current U.S. economy, was dependent on global capital flows, and Keynes knew what excessive government debts could do to an economy. In 1919, he was an adviser to the British delegation at the peace talks in Paris, which saddled Germany and Austria with crushing debts. Outraged by this Carthaginian settlement, he wrote his first best-seller, “The Economic Consequences of the Peace,” warning that the Versailles Treaty would prove disastrous for the victors as well as for the defeated. Today, he would be advocating major debt write-downs for countries like Greece and Portugal. The so-called “rescue packages” that these nations have received in recent years have barely reduced their debt, while the austerity policies imposed on them have plunged their economies deeper into the abyss, exactly as Keynesian theory would predict.

Indeed, these days the strongest evidence for Keynesianism has been negative. The recent slowdown in the U.S. economy occurred just as Obama’s 2009 stimulus package was running dry. The U.K. economy provides an even more striking case study. As in this country, the authorities reacted to the 2008 financial crisis by cutting interest rates, boosting public expenditure, and allowing the budget deficit to rise sharply. In 2009 and in the first part of 2010, the economy began to recover. But since the middle of last year, when the Conservative-Liberal coalition announced substantial budget cuts to balance the budget, growth has virtually disappeared. “The reason the current strategy will fail was succinctly stated by John Maynard Keynes,” Robert Skidelsky and the economist Felix Martin wrote in the Financial Times recently. “Growth depends on aggregate demand. If you reduce aggregate demand, you reduce growth.”

Continue reading - What Would John Maynard Keynes Tell Us To Do Now?

CHINA REVOLT - Inside Wukan: the Chinese village that fought back

For the first time on record, the Chinese Communist party has lost all control, with the population of 20,000 in this southern fishing village now in open revolt.

The last of Wukan’s dozen party officials fled on Monday after thousands of people blocked armed police from retaking the village, standing firm against tear gas and water cannons.

Since then, the police have retreated to a roadblock, some three miles away, in order to prevent food and water from entering, and villagers from leaving. Wukan’s fishing fleet, its main source of income, has also been stopped from leaving harbour.

The plan appears to be to lay siege to Wukan and choke a rebellion which began three months ago when an angry mob, incensed at having the village’s land sold off, rampaged through the streets and overturned cars.

Although China suffers an estimated 180,000 “mass incidents” a year, it is unheard of for the Party to sound a retreat.

But on Tuesday The Daily Telegraph managed to gain access through a tight security cordon and witnessed the new reality in this coastal village.

Thousands of Wukan’s residents, incensed at the death of one of their leaders in police custody, gathered for a second day in front of a triple-roofed pagoda that serves as the village hall.

For five hours they sat on long benches, chanting, punching the air in unison and working themselves into a fury.

At the end of the day, a fifteen minute period of mourning for their fallen villager saw the crowd convulsed in sobs and wailing for revenge against the local government.

“Return the body! Return our brother! Return our farmland! Wukan has been wronged! Blood debt must be paid! Where is justice?” the crowd screamed out.

Wukan’s troubles began in September, when the villagers’ collective patience snapped at an attempt to take away their land and sell it to property developers.

“Almost all of our land has been taken away from us since the 1990s but we were relaxed about it before because we made our money from fishing,” said Yang Semao, one of the village elders. “Now, with inflation rising, we realise we should grow more food and that the land has a high value.”

Continue reading - Telegraph - Inside Wukan: the Chinese village that fought back

Saturday, December 17, 2011

Ron Paul at the Fox News Iowa GOP Debate

Ron Paul Highlights at the Fox News Iowa GOP Debate

Full Fox News Iowa GOP Debate, Sioux City

The House of Rothschild

Secret History of the International Bond Market

The House of Rothschild

MUST READ! Physics Envy

Trained as a physicist, Emanuel Derman once served as the head of quantitative analysis at Goldman Sachs and is currently a professor of industrial engineering and operations research at Columbia University. With "Models Behaving Badly" he offers a readable, even eloquent combination of personal history, philosophical musing and honest confession concerning the dangers of relying on numerical models not only on Wall Street but also in life.

Mr. Derman's particular thesis can be stated simply: Although financial models employ the mathematics and style of physics, they are fundamentally different from the models that science produces. Physical models can provide an accurate description of reality. Financial models, despite their mathematical sophistication, can at best provide a vast oversimplification of reality. In the universe of finance, the behavior of individuals determines value—and, as he says, "people change their minds."

In short, beware of physics envy. When we make models involving human beings, Mr. Derman notes, "we are trying to force the ugly stepsister's foot into Cinderella's pretty glass slipper. It doesn't fit without cutting off some of the essential parts." As the collapse of the subprime collateralized debt market in 2008 made clear, it is a terrible mistake to put too much faith in models purporting to value financial instruments. "In crises," Mr. Derman writes, "the behavior of people changes and normal models fail. While quantum electrodynamics is a genuine theory of all reality, financial models are only mediocre metaphors for a part of it."

Throughout "Models Behaving Badly," Mr. Derman treats us to vignettes from his interesting personal history, which gave him a front-row seat for more than one model's misbehavior. Growing up in Cape Town, South Africa, he witnessed the repressive and failed political model of apartheid. Later he became disillusioned with the utopian model of the kibbutz in Israel. He started out professionally in the 1970s as a theoretical physicist. He then migrated to the center of the financial world in the 1980s, using a mix of mathematics and statistics to value securities for the trading desk at Goldman Sachs in New York. He had hoped to use the methods of physics to build a grand, unified theory of security pricing. After 20 years on Wall Street, even before the meltdown, he became a disbeliever.

He sums up his key points about how to keep models from going bad by quoting excerpts from his "Financial Modeler's Manifesto" (written with Paul Wilmott), a paper he published a couple of years ago. Among its admonitions: "I will always look over my shoulder and never forget that the model is not the world"; "I will not be overly impressed with mathematics"; "I will never sacrifice reality for elegance"; "I will not give the people who use my models false comfort about their accuracy"; "I understand that my work may have enormous effects on society and the economy, many beyond my apprehension."

Sampling from models that behave well, Mr. Derman gives an eloquent description of James Clerk Maxwell's electromagnetic theory in a chapter titled "The Sublime." He writes: "The electromagnetic field is not like Maxwell's equations; it is Maxwell's equations." In another chapter, titled "The Absolute," he outlines Spinoza's "Theory of Emotions"—a description of the nature of emotions that did for man's inner life, Mr. Derman says, "what Euclid did for geometry." But then he turns to financial models—behaving badly.

The basic problem, according to Mr. Derman, is that "in physics you're playing against God, and He doesn't change His laws very often. In finance, you're playing against God's creatures." And God's creatures use "their ephemeral opinions" to value assets. Moreover, most financial models "fail to reflect the complex reality of the world around them."

It is hard to argue with this basic thesis. Nevertheless, Mr. Derman is perhaps a bit too harsh when he describes EMM—the so-called Efficient Market Model. EMM does not, as he claims, imply that prices are always correct and that price always equals value. Prices are always wrong. What EMM says is that we can never be sure if prices are too high or too low.

The Efficient Market Model does not suggest that any particular model of valuation—such as the Capital Asset Pricing Model—fully accounts for risk and uncertainty or that we should rely on it to predict security returns. EMM does not, as Mr. Derman says, "stubbornly assume that all uncertainty about the future is quantifiable."

The basic lesson of EMM is that it is very difficult—well nigh impossible—to beat the market consistently. This lesson, or "model," behaves very well when investors follow it. It says that most investors would be better off simply buying a low-cost index fund that holds all the securities in the market rather than using either quantitative models or intuition in an attempt to beat the market. The idea that significant arbitrage opportunities are unlikely to exist (and certainly do not persist) is precisely the mechanism behind the Black-Scholes option-pricing model that Mr. Derman admires as a financial model behaving pretty well.

Such a quibble aside, it is undeniable that "Models Behaving Badly" itself performs splendidly. Bringing ethics into his analysis, Mr. Derman has no patience for coddling the folly of individuals and institutions who over-rely on faulty models and then seek to escape the consequences. He laments the aftermath of the 2008 financial meltdown, when banks rebounded "to record profits and bonuses" thanks to taxpayer bailouts. If you want to benefit from the seven fat years, he writes, "you must suffer the seven lean years too, even the catastrophically lean ones. We need free markets, but we need them to be principled."

Source: WSJ - Physics Envy

“I can calculate the motions of the heavenly bodies, but not the madness of people” -Sir Issac Newton

Perhaps, time to read Mises's magnum opus - Human Action?

Friday, December 16, 2011

Practical Post Scarcity: Open Source Solutions | Open Source Ecology

This is a well-made explanation of artificial material scarcity and how it can be addressed by open source economic development.

This is the core of Open Source Ecology's work on the Global Village Construction Set. Scenes in the video from hay baling onwards are the developments taking place at Factor e Farm in Missouri, USA. This is part of going the last mile on the construction toolkit part of the Global Village construction set. This is the core of Open Source Ecology's work on the Global Village Construction Set. Scenes from hay baling onwards are developments taking place at Factor e Farm in Missouri, USA. This is part of going the last mile on the construction toolkit part of the Global Village construction set.

Practical Post Scarcity: Open Source Solutions

Distributive Enterprise


Debate between Peter Schiff, David Rosnick, and Roger Farmer.

UCLA Econ Debate

China's epic hangover begins

China's credit bubble has finally popped. The property market is swinging wildly from boom to bust, the cautionary exhibit of a BRIC's dream that is at last coming down to earth with a thud.

It is hard to obtain good data in China, but something is wrong when the country's Homelink property website can report that new home prices in Beijing fell 35pc in November from the month before. If this is remotely true, the calibrated soft-landing intended by Chinese authorities has gone badly wrong and risks spinning out of control.

The growth of the M2 money supply slumped to 12.7pc in November, the lowest in 10 years. New lending fell 5pc on a month-to-month basis. The central bank has begun to reverse its tightening policy as inflation subsides, cutting the reserve requirement for lenders for the first time since 2008 to ease liquidity strains.

The question is whether the People's Bank can do any better than the US Federal Reserve or Bank of Japan at deflating a credit bubble.

Chinese stocks are flashing warning signs. The Shanghai index has fallen 30pc since May. It is off 60pc from its peak in 2008, almost as much in real terms as Wall Street from 1929 to 1933.

"Investors are massively underestimating the risk of a hard-landing in China, and indeed other BRICS (Brazil, Russia, India, China)... a 'Bloody Ridiculous Investment Concept' in my view," said Albert Edwards at Societe Generale.

"The BRICs are falling like bricks and the crises are home-blown, caused by their own boom-bust credit cycles. Industrial production is already falling in India, and Brazil will soon follow."

"There is so much spare capacity that they will start dumping goods, risking a deflation shock for the rest of the world. It no surprise that China has just imposed tariffs on imports of GM cars. I think it is highly likely that China will devalue the yuan next year, risking a trade war," he said.

China's $3.2 trillion foreign reserves have been falling for three months despite the trade surplus. Hot money is flowing out of the country. "One-way capital inflow or one-way bets on a yuan rise have become history. Our foreign reserves are basically falling every day," said Li Yang, a former central bank rate-setter.

The reserve loss acts as a form of monetary tightening, exactly the opposite of the effect during the boom. The reserves cannot be tapped to prop up China's internal banking system. To do so would mean repatriating the money – now in US Treasuries and European bonds – pushing up the yuan at the worst moment.

The economy is badly out of kilter. Consumption has fallen from 48pc to 36pc of GDP since the late 1990s. Investment has risen to 50pc of GDP. This is off the charts, even by the standards of Japan, Korea or Taiwan during their catch-up spurts. Nothing like it has been seen before in modern times.

Fitch Ratings said China is hooked on credit, but deriving ever less punch from each dose. An extra dollar in loans increased GDP by $0.77 in 2007. It is $0.44 in 2011. "The reality is that China's economy today requires significantly more financing to achieve the same level of growth as in the past," said China analyst Charlene Chu.

Ms Chu warned that there had been a "massive build-up in leverage" and fears a "fundamental, structural erosion" in the banking system that differs from past downturns. "For the first time, a large number of Chinese banks are beginning to face cash pressures. The forthcoming wave of asset quality issues has the potential to become uglier than in previous episodes".

Investors had thought China was immune to a property crash because mortgage finance is just 19pc of GDP. Wealthy Chinese often buy two, three or more flats with cash to park money because they cannot invest overseas and bank deposit rates have been minus 3pc in real terms this year.

But with price to income levels reaching nosebleed levels of 18 in East coast cities, it is clear that apartments – often left empty – have themselves become a momentum trade.

Professor Patrick Chovanec from Beijing's Tsinghua School of Economics said China's property downturn began in earnest in August when construction firms reported that unsold inventories had reached $50bn. It has now turned into "a spiral of downward expectations".

A fire-sale is under way in coastal cities, with Shanghai developers slashing prices 25pc in November – much to the fury of earlier buyers, who expect refunds. This is spreading. Property sales have fallen 70pc in the inland city of Changsa. Prices have reportedly dropped 70pc in the "ghost city" of Ordos in Inner Mongolia. China Real Estate Index reports that prices dropped by just 0.3pc in the top 100 cities last month, but this looks like a lagging indicator. Meanwhile, the slowdown is creeping into core industries. Steel output has buckled.

Beijing was able to counter the global crunch in 2008-2009 by unleashing credit, acting as a shock absorber for the whole world. It is doubtful that Beijing can pull off this trick a second time.

"If investors go for growth at all costs again they are likely to find that it works even less than before and inflation returns quickly with a vengeance," said Diana Choyleva from Lombard Street Research.

The International Monetary Fund's Zhu Min says loans have doubled to almost 200pc of GDP over the last five years, including off-books lending.

This is roughly twice the intensity of credit growth in the five years preceeding Japan's Nikkei bubble in the late 1980s or the US housing bubble from 2002 to 2007. Each of these booms saw loan growth of near 50 percentage points of GDP.

The IMF said in November that lenders face a "steady build-up of financial sector vulnerabilities", warning if hit with multiple shocks, "the banking system could be severely impacted".

Mark Williams from Capital Economics said the great hope was that China would use its credit spree after 2008 to buy time, switching from chronic over-investment to consumer-led growth. "It hasn't work out as planned. The next few weeks are likely to reveal how little progress has been made. China may ride out the storm over the next few months, but the dangers of over-capacity and bad debt will only intensify".

In truth, China faces an epic deleveraging hangover, like the rest of us.

Continue reading - Telegraph - China's epic hangover begins

Thursday, December 15, 2011

Georgia Tech Identifies Coming Media Megatrends in FutureMedia Outlook 2012

The coming years will bring increased personalization, innovation and flexibility in the media landscape, according to the Georgia Institute of Technology. These findings were announced in today’s release of the FutureMediaSM Outlook 2012, a multimedia report that offers Georgia Tech’s annual viewpoint on the future of media and its impact on people, business and society over the next five to seven years.

“Georgia Tech’s work in Future Media is part of our new Institute for People and Technology,” said Georgia Tech President G. P. “Bud” Peterson. “By partnering with business and industry on interdisciplinary research, we are able to identify trends and challenges and work to develop transformative solutions.”

According to FutureMedia Outlook 2012, six megatrends will have a pervasive impact:

Smart Data: In an increasingly noisy world, we'll have to sift, filter and be smarter about what matters.
People Platforms: Beyond “true personalization,” people will not just be consumers. They will be socially driven platforms made of algorithms from personal and associated data that they design and tailor themselves.
Content Integrity: Pervasive mobile devices, sprawling networks, clouds and multi-layered platforms have made it more difficult to detect and address our digital vulnerabilities, drawing us to trusted content sources.
Nimble Media: Media is evolving from a set of fixed commodities into an energetic, pervasive medium that allows people to navigate across platforms and through different content narratives.
6th Sense: Extraordinary innovations in mixed reality will change the way we see, hear, taste, touch, smell and make sense of the world – giving us a new and powerful 6th sense.
Collaboration: We will harness the power of many in an increasingly conversational and participatory world.

For each of the six megatrends, the Outlook 2012 presents fresh and objective insights into those technologies and business practices that will significantly impact the converging media ecosystem. In addition, the report includes demonstrative clips and video interviews with leading Georgia Tech researchers offering real-world examples of how the Institute is proactively innovating in these areas.

“Breakthrough research, innovation and collaboration with our partners have given us a rich and pragmatic basis from which to formulate this annual FutureMedia Outlook,” said Renu Kulkarni, founder and executive director of FutureMedia.

The FutureMedia Outlook 2012 follows FutureMedia Fest 2011, an annual event that explores the media’s disruptive power on people and business. The three-day Fest, held November 15-17, featured compelling keynote addresses, panel discussions, dynamic start-up and research demos, and workshops with top executives, investors, innovators, entrepreneurs, academics and researchers. Panelists and speakers included leaders from Twitter, Mashable, Turner Broadcasting and CNN.

View Report: FutureMediaSM Outlook 2012

Source: Georgia Tech Identifies Coming Media Megatrends in FutureMedia Outlook 2012

Frontline Medicine - Rebuilding Lives

This program shows some of the latest medical advances towards healing injured soldiers and how this innovation may translate to the general public.

Frontline Medicine - Rebuilding Lives (Part 1)

Frontline Medicine - Rebuilding Lives (Part 2)

Frontline Medicine - Rebuilding Lives (Part 3)

Frontline Medicine - Rebuilding Lives (Part 4)

Tuesday, December 13, 2011

Isaac Newton’s Personal Notebooks Go Digital

The largest collection of Isaac Newton's papers has gone digital, committing to open-access posterity the works of one of history's greatest scientist.

Among the works shared online by the Cambridge Digital Library are Newton's own annotated copy of Principia Mathematica and the 'Waste Book,' the notebook in which a young Newton worked out the principles of calculus.

Other of his myriad accomplishments include the laws of gravity and motion, a theory of light -- pictured above are notes on optics -- and his construction of the first reflecting telescope.

Newton was also notoriously idiosyncratic and irascible, obsessed with the occult and vicious towards scientific rivals; a full account of his life and science can be found in James Gleick's Isaac Newton, and a partial but entertaining fictionalization in Neal Stephenson's Baroque Cycle. But the papers come straight from the master.

“Anyone, wherever they are, can see at the click of a mouse how Newton worked and how he went about developing his theories and experiments," said Grant Young, the library's digitization manager, in a press release. "Before today, anyone who wanted to see these things had to come to Cambridge. Now we’re bringing Cambridge University Library to the world.”

Approximately 4,000 pages of material are available now, and thousands more will be uploaded in coming months. On the following pages is a sampling of the the library.

Source: Isaac Newton’s Personal Notebooks Go Digital

Download: Sir Issac Newton's Trinity College Notebook

Visit: Cambridge Digital Library

US REVOLT - Large Protests at Port of Oakland

Protesters staged occupations across the United States this morning as part of a coast-to-coast day of action aimed to shut down shipping ports all over the US. Starting in the early morning hours, demonstrators waged protests up and down the West Coast in one of the most wide-impact attacks on the one percent yet

Occupy shipwrecks ports on West Coast

Raw Video: Large Protests at Port of Oakland

Occupational Hazard: OWS targets West Coast ports


Police arrest OWS protesters at World Financial Center

Why is the U.S. Fucked Up? 8 Lectures from Occupy Harvard Teach-In Provide Answers

Last Wednesday, the Occupy movement gained a little more intellectual momentum when eight faculty members from Harvard, Boston College, and N.Y.U. gathered in Cambridge to present a daylong Teach-In. In one talk, Archon Fung (Ford Foundation Professor of Democracy and Citizenship and Co-Director of Transparency Policy Project at Harvard) took a vague thesis of the Occupy movement — “Shit is Fucked Up and Bullshit” — and gave it some academic depth in a data-filled talk called “Why Has Inequality Grown in America? And What Should We Do About It?” The other talks are available on YouTube (see links below) or via audio stream:

Archon Fung, Ford Foundation Professor of Democracy and Citizenship and Co-Director of Transparency Policy Project, Kennedy School of Government, Harvard University

Archon Fung - Why Has Inequality Grown in America? What Should We Do?

Stephen Marglin, Walter Barker Professor of Economics, Faculty of Arts and Sciences, Harvard University

Stephen Marglin Heterodox Economics: Alternatives to Mankiw's Ideology

Richard Parker, Lecturer in Public Policy and Senior Fellow at the Shorenstein Center, Kennedy School of Government, Harvard University

Richard Parker - Wall Streetʼs Role in the European Financial Crisis

Andrew Ross, Professor of Social and Cultural Analysis, New York University

Andrew Ross - The Occupy Movement and Student Debt Refusal

Juliet Schor, Professor of Sociology, Boston College

Juliet Schor - Economics for the 99%

Christine Desan, Professor of Law, Harvard Law School, Harvard University

Christine Desan - Booms and Busts: The Legal Dynamics of Modern Money

Brad Epps, Professor of Romance Languages & Literatures and Department Chair for Studies in Women, Gender, and Sexuality, Faculty of Arts and Sciences, Harvard University

Brad Epps - Fear and Power

John Womack, Robert Woods Bliss Professor of Latin American History and Economics, Faculty of Arts and Sciences, Harvard University

John Womack, Vigilance, Inquiry, Alienation & Hope at Harvard and in the US

The Book of Jobs | Joseph E. Stiglitz

It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling—the real income of a typical American household is now below the level it was in 1997.

We knew the crisis was serious back in 2008. And we thought we knew who the “bad guys” were—the nation’s big banks, which through cynical lending and reckless gambling had brought the U.S. to the brink of ruin. The Bush and Obama administrations justified a bailout on the grounds that only if the banks were handed money without limit—and without conditions—could the economy recover. We did this not because we loved the banks but because (we were told) we couldn’t do without the lending that they made possible. Many, especially in the financial sector, argued that strong, resolute, and generous action to save not just the banks but the bankers, their shareholders, and their creditors would return the economy to where it had been before the crisis. In the meantime, a short-term stimulus, moderate in size, would suffice to tide the economy over until the banks could be restored to health.

The banks got their bailout. Some of the money went to bonuses. Little of it went to lending. And the economy didn’t really recover—output is barely greater than it was before the crisis, and the job situation is bleak. The diagnosis of our condition and the prescription that followed from it were incorrect. First, it was wrong to think that the bankers would mend their ways—that they would start to lend, if only they were treated nicely enough. We were told, in effect: “Don’t put conditions on the banks to require them to restructure the mortgages or to behave more honestly in their foreclosures. Don’t force them to use the money to lend. Such conditions will upset our delicate markets.” In the end, bank managers looked out for themselves and did what they are accustomed to doing.

Even when we fully repair the banking system, we’ll still be in deep trouble—because we were already in deep trouble. That seeming golden age of 2007 was far from a paradise. Yes, America had many things about which it could be proud. Companies in the information-technology field were at the leading edge of a revolution. But incomes for most working Americans still hadn’t returned to their levels prior to the previous recession. The American standard of living was sustained only by rising debt—debt so large that the U.S. savings rate had dropped to near zero. And “zero” doesn’t really tell the story. Because the rich have always been able to save a significant percentage of their income, putting them in the positive column, an average rate of close to zero means that everyone else must be in negative numbers. (Here’s the reality: in the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income.) What made this level of indebtedness possible was the housing bubble, which Alan Greenspan and then Ben Bernanke, chairmen of the Federal Reserve Board, helped to engineer through low interest rates and nonregulation—not even using the regulatory tools they had. As we now know, this enabled banks to lend and households to borrow on the basis of assets whose value was determined in part by mass delusion.

The fact is the economy in the years before the current crisis was fundamentally weak, with the bubble, and the unsustainable consumption to which it gave rise, acting as life support. Without these, unemployment would have been high. It was absurd to think that fixing the banking system could by itself restore the economy to health. Bringing the economy back to “where it was” does nothing to address the underlying problems.

The trauma we’re experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems. Even if we correctly respond to the trauma—the failures of the financial sector—it will take a decade or more to achieve full recovery. Under the best of conditions, we will endure a Long Slump. If we respond incorrectly, as we have been, the Long Slump will last even longer, and the parallel with the Depression will take on a tragic new dimension.

Until now, the Depression was the last time in American history that unemployment exceeded 8 percent four years after the onset of recession. And never in the last 60 years has economic output been barely greater, four years after a recession, than it was before the recession started. The percentage of the civilian population at work has fallen by twice as much as in any post-World War II downturn. Not surprisingly, economists have begun to reflect on the similarities and differences between our Long Slump and the Great Depression. Extracting the right lessons is not easy.

Many have argued that the Depression was caused primarily by excessive tightening of the money supply on the part of the Federal Reserve Board. Ben Bernanke, a scholar of the Depression, has stated publicly that this was the lesson he took away, and the reason he opened the monetary spigots. He opened them very wide. Beginning in 2008, the balance sheet of the Fed doubled and then rose to three times its earlier level. Today it is $2.8 trillion. While the Fed, by doing this, may have succeeded in saving the banks, it didn’t succeed in saving the economy.

Reality has not only discredited the Fed but also raised questions about one of the conventional interpretations of the origins of the Depression. The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s. The problem today, as it was then, is something else. The problem today is the so-called real economy. It’s a problem rooted in the kinds of jobs we have, the kind we need, and the kind we’re losing, and rooted as well in the kind of workers we want and the kind we don’t know what to do with. The real economy has been in a state of wrenching transition for decades, and its dislocations have never been squarely faced. A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.

Continue reading - The Book of Jobs by Joseph E. Stiglitz