links for 2008-10-06

• Some Bodkin! - Economic Principals
• Full of Doubts, U.S. Shoppers Cut Spending - NYTimes.com
• The Promise and Peril of Comprehensive Deposit Insurance - Paul Kedrosky
• Doha on ice - Free exchange
• Why are the Dutch leaving the Netherlands? - Vox EU
• China’s Central Bank Welcomes U.S. Bailout Plan - Real Time Economics
• Wisdom of the Ancients - Yet another Sheep
• A Paragraph in a NYT story on Fannie Mae stands out to me - Richard Green
• The international finance multiplier - Paul Krugman
• David Warsh's Economic Principals Gets It right - Adam Smith's Lost Legacy
• America's Sovereign Wealth Fund - Bubble Meter
• United States of Appetite - Culture11
• Refutation of Mallaby - Robert's Stochastic thoughts
• The Fed will cut in October - it’s already started - News N Economics
• Summers: Economic Threat $8,000 Per Family - Real Time Economics
• Modern Subprime Finance, 101 - Paul Kedrosky

Comments

[Bubblicious]

Let's say that you were a partner of the firm North, Hegerl and Cicerone and charged with issuing an opinion on the financial statements of Team Capital Management Inc.(TCM) And let's say that you were doing so in heady pre-crash days when markets were going up and mark-to-market accounting was something that the companies wanted to do.

The footnotes to the TCM statements said that mark-to-market accounting had not been used for non-arms-length investments in securities issued by Briffa MXD Inc. which had shown a lack of "sensitivity" to rising world stock market prices, while mark-to-market accounting had been used for a high-flying Finnish penny stock (Kortajarvi Lake Gold). And while TCM statements did not mention their holdings in controversial Bristlecone Estates, a project that was much in the news, it turned out that mark-to-market accounting had been used on this speculation as well.

In the MD&A (Management Discussion and Analysis), the company said that they were profitable even without their investments in U.S. mortgages. Elsewhere in the footnotes, they said that TCM was profitable even without mark-to-market accounting in the Finnish penny gold stock. However, the combined effect wasn't discussed.

Can the partners in North, Hegerl and Cicerone certify that these statements meet GAAP?

http://www.climateaudit.org/?p=3951

[anne]

http://krugman.blogs.nytimes.com/2008/10/05/the-international-finance-multiplier/

October 5, 2008

The International Finance Multiplier
By Paul Krugman

Back in the day, economists used to talk about the foreign trade multiplier * — international business cycle linkages via flows of goods and services. The basic idea was that since one country's imports are other countries' exports, a recession in one country would be transmitted to the rest of the world as slumping demand here led to an export plunge abroad.

That's not what's happening now, or at least not yet. We're experiencing a global crisis, but a different kind of linkage is at work — call it the international finance multiplier. It operates through the balance sheets of highly leveraged financial institutions, which do a lot of cross-border investment. When these institutions lose heavily in one market — say, US mortgage-backed securities — they find themselves undercapitalized, and have to sell off assets across the board. This drives down prices, putting pressure on the balance sheets of other HLIs, and so on.

And so a crisis originating in Florida condos and San Diego McMansions is causing havoc for Greek banks. Financial globalization, it turns out, means globalized financial crises.

I'm writing up a little model of how this works, coming soon.

* http://www.jstor.org/pss/2227785

[anne]

http://krugman.blogs.nytimes.com/2008/10/05/son-of-mlec/

October 5, 2008

Son of MLEC
By Paul Krugman

Yves Smith realizes * that the Paulson plan, at least as originally laid out, is a reprise of the failed Master Liquidity Enhancement Conduit.

I saw that right away: **

"Is this the son of MLEC, another attempt to create something out of nothing through fancy financial footwork?"

* http://www.nakedcapitalism.com/2008/10/paulson-plan-mlec-version-20.html

** http://krugman.blogs.nytimes.com/2008/09/20/doubts-about-the-rescue/

[anne]

http://krugman.blogs.nytimes.com/2008/09/20/doubts-about-the-rescue/

September 20, 2008

Doubts About the Rescue
By Paul Krugman

There's something I don't quite understand about how the big rescue plan is supposed to work. Maybe this is naive; but let me put it out there.

So, here's my problem: what we have now are a bunch of financial institutions in trouble, because they're highly leveraged, and have mortgage-related assets on their books. And they can't raise cash because nobody wants to buy those assets. The Paulson plan will in effect create a market for toxic paper, thereby supposedly unfreezing the markets.

But what if the institutions are fundamentally broke, even if the liquidity squeeze is relieved?

I think of a hypothetical institution, which tradition says we should call Capital Decimation Partners. CDP's balance sheet looks like this:

Assets -- Liabilities

OK stuff 465 -- Debt 500
Toxic waste 50

Decimation doubts.

Now, obviously CDP is in trouble if it can't sell the toxic waste at all. But suppose that Hank Paulson does his reverse auction, and it turns out that the Treasury's price for toxic waste is 40 cents on the dollar. Even so, CDP is still underwater. So what does Treasury do then?

One answer, I suppose, is that we think that there aren't too many firms in that position — and that those that will still fail, even with the Paulson Plan, aren't going to disrupt the markets too much when they go down. But do we know that?

What I haven't heard anything about is how Treasury might recapitalize firms that will be bankrupt even with the purchase facility, yet need to be kept in being.

So I'm starting to worry. Is this the son of MLEC, * another attempt to create something out of nothing through fancy financial footwork?

* Master Liquidity Enhancement Conduit - http://www.nytimes.com/2007/10/19/business/19norris.html

[anne]

http://krugman.blogs.nytimes.com/2008/10/06/dow-10000-2/

October 6, 2008

Dow 10,000!
By Paul Krugman

From the wrong direction.

It’s worth remembering this passage, * from Robert Shiller’s Irrational Exuberance:

"When the Dow Jones Industrial Average first surpassed 10,000 in March 1999, Merrill Lynch took out a full-page newspaper ad with a headline saying, 'Even those with a disciplined long-term approach like ours have to sit back and say "wow." ' In the bottom left corner of the page, next to a stock plot ending up at 10,000, appeared the words 'HUMAN ACHIEVEMENT.' If this is an achievement worth congratulating, then we should congratulate employees whenever they submit glowing self-evaluation reports."

* http://press.princeton.edu/chapters/p6779.html

[rufus]

Is today 'Black' Monday, the dark reference we will opine in years to come? Or is the bottom not in sight yet? My 'speculative' guess would be around $7-8k, the bottom some predicted in 2001-2002, before monetary policy went throttle up.

[anne]

Working from a sense of ignorance about the financial crisis, since I have no sense I understand what is happening, as reflected in the bond market, I assume we are beginning a severe economic decline. The limits of credit flow and the fear involved in the market turmoil, have to be already severely limiting business-consumer activity, but that leads me back to thinking about Japan and the effectiveness with which Japan handled a stock market and housing bubble and actual sustained deflation with never more than a shallow quick recession.

Japan relied on government spending as an economic insulator.

[anne]

http://www.washingtonpost.com/wp-dyn/content/article/2008/10/06/AR2008100600641_pf.html

October 6, 2008

Survey Finds 'Bleak Picture' for World's Mammals
By Juliet Eilperin - Washington Post

BARCELONA -- A quarter of the world's wild mammal species are at risk of extinction, according to a comprehensive global survey released here this morning.

The new assessment -- which took 1,700 experts in 130 countries five years to complete -- paints "a bleak picture," leaders of the project wrote in a paper being published in the journal Science. The overview, made public at the quadrennial World Conservation Congress of the International Union for the Conservation of Nature (IUCN), covers all 5,487 wild species identified since 1500. It is the most thorough tally of land and marine mammals since 1996....

[anne]

http://www.iucn.org/news_events/news/index.cfm

October 6, 2008

IUCN Red List Reveals World’s Mammals in Crisis

[The report will follow.]

[anne]

What I still fail to understand is why absent the possibility of having the largest banks protect each other as Japan assured would happen from 1994 on, we could not have used the Swedish model with Treasury buying portions of banks troubled banks, as any bankers would have asked, to immediately increase reserves and assure lending. Then, be at least prepared for a significant increase in domestic spending to protect and build employment levels.

[anne]

http://www.nytimes.com/2008/10/07/science/earth/07mammal.html?ref=world&pagewanted=print

October 7, 2008

One in Four Mammals Threatened, Study Finds
By JAMES KANTER

One in four mammals is in danger of disappearing because of habitat loss, hunting and climate change, a global conservation body warned on Monday.

[anne]

http://krugman.blogs.nytimes.com/2008/10/06/a-note-on-the-global-crisis/

October 6, 2008

A Note On the Global Crisis
By Paul Krugman

OK, so I did a short writeup of how I’m currently thinking about the crisis, with a few figures and some ad hoc equations. You can read it at http://www.princeton.edu/~pkrugman/finmult.pdf .

[anne]

http://iucn.org/about/work/programmes/species/red_list/index.cfm

October 6, 2008

The IUCN Red List of Threatened Species 2008

[Wow.]

[Patricia Shannon]

http://www.sciencedaily.com/releases/2008/10/081006154952.htm

ScienceDaily (Oct. 6, 2008) — The most comprehensive assessment of the world’s mammals has confirmed an extinction crisis, with almost one in four at risk of disappearing forever, according to The IUCN Red List of Threatened Species™, revealed at the IUCN World Conservation Congress in Barcelona.

The new study to assess the world’s mammals shows at least 1,141 of the 5,487 mammals on Earth are known to be threatened with extinction. At least 76 mammals have become extinct since 1500. But the results also show conservation can bring species back from the brink of extinction, with five percent of currently threatened mammals showing signs of recovery in the wild.

“Within our lifetime hundreds of species could be lost as a result of our own actions, a frightening sign of what is happening to the ecosystems where they live,” says Julia Marton-Lefèvre, IUCN Director General. “We must now set clear targets for the future to reverse this trend to ensure that our enduring legacy is not to wipe out many of our closest relatives.”

The real situation could be much worse as 836 mammals are listed as Data Deficient. With better information more species may well prove to be in danger of extinction.

“The reality is that the number of threatened mammals could be as high as 36 percent,” says Jan Schipper, of Conservation International and lead author in a forthcoming article in Science.

[Patricia Shannon]

We are the only species capable of saving the earth from the next big asteroid. Instead, we are creating conditions that will have the same effect in the near future.

[Patricia Shannon]

I expect the reason that U.S. and Europe are not included in the worst areas is that they wiped out so many species before these studies began.

http://www.sciencedaily.com/releases/2008/10/081006154952.htm

Habitat loss and degradation affect 40 percent of the world’s mammals. It is most extreme in Central and South America, West, East and Central Africa, Madagascar, and in South and Southeast Asia. Over harvesting is wiping out larger mammals, especially in Southeast Asia, but also in parts of Africa and South America.

[Patricia Shannon]

I was so struck by this poem when I heard it, that I have set it to music.

Vampire Clan
copyright Louise Bennett 1995

We are a vampire clan,
sucking blood from the earth,
as if the earth could plan
for infinite vampire births.

Sucking blood from the earth,
some say the land will die,
for infinite vampire births
cannot sustain themselves. Why?

Some say the land will die,
the children have nothing,
and cannot sustain them selves. Why?
Should we take a stand?

The children have nothing,
we take more than we replace.
Should we take a stand,
are we not a human race?

We take more than we replace
as if the earth could plan.
Are we not a human race?
We are a vampire clan

[anne]

Patricia Shannon:

I expect the reason that U.S. and Europe are not included in the worst areas is that they wiped out so many species before these studies began.

[I wonder, but there are in the world certain hot spots of astonishing diversity that may be traditional and relatively more threatened and reading further may answer the question.]

[rufus]

MARK HULBERT
Capitulation watch continues in vain
Commentary: Market timers actually became more bullish on Monday
By Mark Hulbert, MarketWatch
Last update: 12:01 a.m. EDT Oct. 7, 2008Comments: 4ANNANDALE, Va. (MarketWatch)

http://www.marketwatch.com/news/story/contrarian-analysis-
gold-market-sentiment/story.aspx?guid=%7B54114A93%2DED92%
2D406B%2DA10A%2D0155BCBE1451%7D

-- It certainly felt like capitulation on Monday, after the Dow Jones Industrial Average plunged more than 800 points intra-day before recovering to end the day down "just" 370 points.
But, then again, it has felt like capitulation on a lot of other days in recent weeks too.
And yet, as we know all too well now, those earlier days of apparent capitulation turned out to be nothing more than false alarms.
So the fact that Monday felt like capitulation tells us little about whether it indeed will mark the final low of the bear market.
To determine whether it will, therefore, we have to go beyond our subjective feelings and focus instead on the hard data: Did sentiment really and truly drop far enough on Monday to constitute genuine capitulation?
From where I sit as monitor of several hundred newsletters, I'm afraid my answer is "no." Believe it or not, the editor of the average short-term market-timing newsletter actually reduced his bearishness Monday.
Consider the Hulbert Stock Newsletter Sentiment Index (HSNSI), which reflects the average recommended stock market exposure among a subset of short-term stock market-timing newsletters tracked by the Hulbert Financial Digest. As of Monday evening, the HSNSI stood at minus 33.5%.
As of last Friday's close, in contrast, the HSNSI stood at minus 36.1%.
Believe it or not, in other words, the HSNSI actually rose slightly on the day -- by 2.6 percentage points -- despite Monday's market tumult.
That's telling enough.
But, as I have mentioned on several occasions in recent days, that's not the only source of contrarian concern about the HSNSI. Even at Friday's minus 36.1%, this sentiment index was still markedly higher than where it stood in early July. And though the market wasn't in great shape then, from the perspective of the markets today it looks awfully attractive.
Why should there be less fear among the market-timing newsletters today than then? Why should sentiment actually have increased on a day like Monday?
In large part, I'm convinced, it's because newsletter editors are so eager to declare that a bottom has been formed.
Every time we have a big down day like we had on Monday, some of the short-term market-timing newsletter editors conclude that capitulation has taken place -- and hence decide to become more bullish. This process keeps the HSNSI from dropping as far as it otherwise would, and prevents genuine capitulation from occurring.
It's worth remembering a truism about market psychology that has been too often overlooked in recent weeks: When genuine capitulation finally takes place, few will recognize it as such at the time.
In contrast, an eagerness to declare that capitulation has occurred probably means that it hasn't.
None of this is to say that the stock market won't stage a short-term rally in the wake of Monday's action. After all, the Dow's 400-plus-point recovery from its intra-day Monday low has created a certain degree of positive momentum.
But, from a contrarian perspective of newsletter sentiment, it's hard to conclude that this likely rally will meet any better fate than any of the other short-term rallies that ensued subsequent to all the other recent occasions in which investors thought that capitulation had taken place.

Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.

[Patricia Shannon]

What is "capitulation" in this context? Many of us who read this blog are not economists, just people trying to learn.

[anne]

Mark Hulbert has long surveyed stock analysts and from the surveys looks for investment patterns, the pattern looked for in a capitulation being so negative a sense among analysts that a market bottom is considered to be somewhat near. What to make of such analysis of analysts, I have no idea.

[Patricia Shannon]

Thank you for the explanation, Anne

[kthomas]

"....sense among analysts that a market bottom is considered to be somewhat near."

Price to earnng ratios are still very skewed, and a lot of firms are still hiding behind all this murky accounting. I want to believe we are near the bottom, but think that is wishful thinking.

And since housing is still such a huge (embarassing) component in our economy, and that fact that prices continue to fall.....we have a ways to go.

I wanted to ask you about outsourcing of jobs, anne. Why has this not been brought up as a topic, yet? Believe me, this is the next big issue.

[anne]

A critical issue is jobs, not outsourcing but jobs as such, domestic job creation is the need and that has been ignored through this Administration. The count really makes no difference, whether 4.8 or 7.5 million jobs have been created since January 2001 as Alan Krueger writes. * Either figure is impossible. At an anemic 100,000 jobs created a month, there would be 1.2 million new jobs a year or there have been 8.4 million jobs created by December 2007.

We were at no more than 7.5 million new jobs in September 2008, not 8.4 million or far more than double that during the Clinton years. The change in economic emphasis has had a stark effect, a sudden change in international structures.

* http://economix.blogs.nytimes.com/2008/10/06/whos-left-out-of-us-job-reports/

October 6, 2008

How Bad Has Job Growth Really Been Over the Last 8 Years?
By Alan B. Krueger