Hubbard's behaviour falls into the realm of evaluation for  positive economics not normative economics. He and others like him should be disavowed en masse for their lack of professional integrity and the call is not  even close. And we need to get to a point in society where we stop giving people  a pass for unethical behaviour just because it is legal. We are seriously undermining the case for democracy when we allow elites to fix the rules and  dance around their edges.

For the record - I have only voted against the conservative party once in my eighteen years of voting eligibility. But everything conservatism stood for when I was young - pro family pro small business- is being undermined by current catering to oligarchy elites by the right. 

Yet another in a long list of financial disasters in an improperly regulated global financial market. Same as it ever was.

"Doyle said it was not just a matter of the fund's incompetence  amid the global crisis and in surveillance ahead of the eurozone  crisis, but because the institution deliberately shirked its responsibilities.

 'The substantive difficulties in these crises, as with others,  were identified well in advance but were suppressed here,' he  wrote.
'Timely sustained warnings were of the essence. So the failure  of Fund to issue them is a failing of the first order,' Doyle said.That inaction has caused suffering for many, including Greece,  and 'the  second global reserve currency (euro) is on the brink'.
The IMF has been 'playing catch-up' in reactive responses in  last-ditch efforts to save it, the economist charged."

From your lips to God's ears.

Bank of England and Geithner (then chair of the NY Fed) knew about the LIBOR rigging as early as 2008. They allowed the rigging to continue for at least another year. Geithner said so in his own emails.

The Economist has hit the trifecta of stupid on its last three covers. I am starting to wonder if their writers are some Ayn Randish - Stepford Wives type clones. At very least the magazine seems to be turning into a corporate whore.

Think I am exaggerating?
Their cover for their print edition, May 12-18th, shows a picture of Achilles voting with the caption Europe's Achille's heel.

"If a majority of Greeks again vote to reject the spending cuts and reforms that go with their country’s bail-out, then euro-zone governments—in particular,  Germany’s—will face a drastic choice. Mrs Merkel will either accommodate Greece and swallow the moral hazard of rewarding defiance or, more likely, stand firm and cut the Greeks adrift."

The problem is not democracy or that European voters are rejecting austerity. At some point if you are going to anally rape me I am going to figure it out and resist. I may be asleep when the rape starts, but given your actions, unless you club me unconscious, I am going to wake up. The problem is that the austerity adjustment mechanisms will require sustained high
unemployment and will destroy the wealth of the middle class.

To quote Pettis on Spanish adjustment:
 
How  will we deal with the rising debt burden?  Typically we do so by confiscating  the wealth of small and medium enterprises or by confiscating the savings of the middle classes, and usually we do both. 

I am pretty sure that the middle class taxpayer in the European  periphery knows who's benefit the austerity measures are for - Germany's. 

With respect to their latest cover on China. How strong is China’s economy?

"Until recently most economists believed that China was heavily dependent on exports. But it has carried on growing even as its current-account surplus has  shrunk, and trade has subtracted from growth, not added to it. The country is undoubtedly investment-dependent, but its biggest problem is malinvestment not overinvestment. Most people believe that its past malinvestment will impede  future growth. This special report has raised doubts about that. Clearly China  would be better off had it not wasted so much capital. But if the capital stock  is not as good as it should be, that gives the country all the more room for  improvement.

Wrong on sooo many levels. Yeah, when you "invest" in millions of units of housing that are empty then this is both a misallocation of capital and an overinvestment of capital. You have lit money on fire. This money is gone forever. Also, "The Economist" provides no hope or insight as to why a flawed investment process (driven by corrupt SOEs) will do better the next time around.

Here is Jim Chanos on China's debt

Then their cover showing public companies as an endangered species. Woolly mammoths with brands like Facebook going over a cliff.

 They begin the article:
"The number of public companies has fallen dramatically over the past decade—by  38% in America since 1997 and 48% in Britain. The number of initial public offerings (IPOs) in America has declined from an average of 311 a year in
1980-2000 to 99 a year in 2001-11. Small companies, those with annual sales of less than $50m before their IPOs—have been hardest hit. In 1980-2000 an average  of 165 small companies undertook IPOs in America each year. In 2001-09 that
number fell to 30. Facebook will probably give the IPO market a temporary boost—several other companies are queuing up to follow its lead—but they will do  little to offset the long-term decline."

So they pick, as the reference point, the 20 years of one of the  biggest bull markets in history (that contains the dot com bubble) and compare it with a bear market that contains the popping of the dot com bubble, the fraud scandals like Enron, and the Great Recession. Wow, are you intellectually dishonest.

They end the article with a free market bromide:
"Public companies built the railroads of the 19th century. They filled the world  with cars and televisions and computers. They brought transparency to business life and opportunities to small investors. Because public companies sell shares to the unsophisticated, policymakers are right to regulate them more tightly than other forms of corporate organisation. But not so tightly that entrepreneurs start to dread the prospect of a public listing. The public company has long been the locomotive of capitalism. Governments should not derail it."

With the way the Facebook IPO was handled does “The Economist” still think the problem with IPO’s is too much regulation?

I am sorry,  but this magazine is turning into FOX News.




 

I picked up a copy of``` Psychology Today`` last Christmas and I came across an interesting article on road design and safety. It turns out that the flatest, widest  roads are the most dangerous. Engineers are now designing roads with obstacles and making them more narrow in order to make them safer.

I had been thinking a lot, before running into that article, about this very idea wih resepct to central bank behaviour. I believe the US Federal Reserve telegraphs too much in terms of its policy intentions and the market has become somewhat addicted to the Federal Reserve bailing it out in times of trouble. I don´t think it is healthy for the market to perceive a ``Bernake put``. Furthermore, as I mentioned in an earleir post ``We are all hedge fund managers now`` the central bank is creating an incentive to market particpants to play much of the same game in selling short term risk. This is apparent from the levels of the VIX in the aftermath of the global finanacial crisis.

To me optimal central bank policy would have a level of randomnss, where interest rates could go up even in a recession even without inflation being sparked.  This would have the effect of increasing volatility and cause everybody in the economy to delever because VaR models set their limits on the basis of volatility. Taken far enough it would encourage long term contracting and thus further reduce interest rate exposure to the broader economy. Clearly, this is  going to be a problem as we move to higher interest rates because everyone is on the short end  floating - getting to fixed is going to be tricky.

And yet as much as unpredicatable is optimal; it is very difficult to operationailze. Imagine if the Fed would say , ``our randomenss model tells us we need to set short term rates at 3% - right now``. A recent blog post highlights this tension:


Much like John Boyd, Sun Tzu emphasised the role of deception in war: “All warfare is based on deception”. In the context of regulation, “deception” is best understood as the need for the regulator to be unpredictable. This is not uncommon in other war-like economic domains. Google, for example, must maintain the secrecy and ambiguity of its search algorithms in order to stay one step ahead of the SEO firms’ attempts to game them. An unpredictable regulator may seem like a crazy idea but in fact it is a well-researched option in the central banking policy arsenal. In a paper for the Federal Reserve bank of Richmond in 1999, Jeffrey Lacker and Marvin Goodfriend analysed the merits of a regulator adopting a stance of ‘constructive ambiguity’. They concluded that a stance of constructive ambiguity was unworkable and could not prevent the moral hazard that arose from the central bank’s commitment to backstop banks in times of crisis. The reasoning was simple: constructive ambiguity is not time-consistent. As Lacker and Goodfriend note: “The problem with adding variability to central bank lending policy is that the central bank would have trouble sticking to it, for the same reason that central banks tend to overextend lending to begin with. An announced policy of constructive ambiguity does nothing to alter the ex post incentives that cause central banks to lend in the first place. In any particular instance the central bank would want to ignore the spin of the wheel.” Steve Waldman summed up the time-consistency problem in regulation well when he noted: “Given the discretion to do so, financial regulators will always do the wrong thing.” In fact, Lacker has argued that it was this stance of constructive ambiguity combined with the creditor bailouts since Continental Illinois that the market understood to be an implicit commitment to bailout TBTF banks.