It lacks inlay

NAZARETH, Pa. -- At a bustling factory on the outskirts of this eastern Pennsylvania town, one of the world's oldest guitar makers is using a Depression-era strategy to keep production flowing and avert layoffs.

Workers at C.F Martin & Co. are putting finishing touches on the solid-wood 1 Series model, so named for its simplicity. It lacks inlay, as did the company's stripped-down 1930s model, and is expected to sell for less than $1,000, breaking a key price point and far less than its $100,000 limited-edition guitars made of Brazilian rosewood. More popular Martins generally sell for $2,000 to $3,000.

Guitar Maker Revives No-Frills Act from '30s (Wall St Journal, 6 July 2009)

"Green shoots" may be weeds

Growing pessimism about the prospects for a global economic recovery sent stock and commodity prices tumbling on Monday while new data showed that leading US corporate executives were cashing out of their share holdings at a rapid pace.

US government bond yields followed equity prices lower, confounding analysts who had expected that Treasury rates would rise this week as the federal government auctioned off a record $104bn of debt.

Analysts said the market mood was captured by a World Bank report that said the global economy would contract 2.9 per cent this year, compared with a previous estimate of a 1.7 per cent fall. A White House spokesman said later in the day that the US unemployment rate was likely to rise to 10 per cent in the next couple of months.

[...]

“The smartest players in the US stock market – the top insiders who run public companies – are not betting their own money on an economic recovery,” said Charles Biderman, chief executive of TrimTabs. [emphasis added - bc]

Financial Times: Pessimistic executives cash out of shares (23 June 2009)

Roubini: "We can't subsidize the banks forever"

The results of the government's stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape.

This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak -- $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators' conclusions.

The hope was that the stress tests would be the start of a process that would lead to a cleansing of the financial system. But using a market-based scenario in the stress tests would have given worse results than the adverse scenario chosen by the regulators. For example, the first quarter's unemployment rate of 8.1% is higher than the regulators' "worst case" scenario of 7.9% for this same period. At the rate of job losses in the U.S. today, we will surpass a 10.3% unemployment rate this year -- the stress test's worst possible scenario for 2010.

We Can't Subsidize The Banks Forever (Matthew Richardson and Nouriel Roubini, Wall Street Journal, 5 May 2009)

Financial Times: Study puts ideal US interest rate at -5%

The ideal interest rate for the US economy in current conditions would be minus 5 per cent, according to internal analysis prepared for the Federal Reserve’s last policy meeting.

The analysis was based on a so-called Taylor-rule approach that estimates an appropriate interest rate based on unemployment and inflation.

A central bank cannot cut interest rates below zero. However, the staff research suggests the Fed should maintain unconventional policies that provide stimulus roughly equivalent to an interest rate of minus 5 per cent.

Fed staff separately estimated what size and type of unconventional operations, including asset purchases, might provide this level of stimulus. They suggested that the Fed should expand its asset purchases by even more than the $1,150bn (€885bn, £788bn) increase policymakers authorised at the last meeting, which included $300bn of Treasury purchases.

The assessment that the US central bank needs to provide stimulus equivalent to a substantially negative interest rate is unlikely to have changed ahead of this week’s policy meeting.

Financial Times: Study puts ideal US interest rate at -5% (27 April 2009)

Counterfeit handbags: better ROI than cocaine or hashish

Naples anti-organized crime prosecutor Roberti said the Camorra has pumped up what once was a kind of cottage industry, with crime clan bosses knitting closer ties with mobsters in China, where fake designer clothing, shoes and accessories are now churned out in factories for the mob.

Trafficking in fake designer goods — which investigators suspect the Camorra is also peddling in the United States, France, Britain and Germany — is now becoming more profitable for the Neapolitan syndicate that dealing in cocaine and hashish, said Mainolfi, the customs and tax police general.

He has calculated that for every euro it costs to manufacture the counterfeit designer goods, the Camorra earns 10 euros, while for every euro spent to run drug trafficking, it earns six or seven euros.

The fakes, sold in street stalls and clothing shops in the Naples and Rome areas, arrive by the tons in Naples' sprawling, chaotic port, where custom officials manage to check only some 5 percent of the shipping containers being unloaded, Mainolfi said.

Italy's Mafia thrives in global financial meltdown (Associated Press)

Economic systems explained on the "you have two cows" model

An update to a very old joke:

ROYAL BANK OF SCOTLAND VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of
credit opened by your brother-in-law at the bank, then execute a
debt/equity swap with an associated general offer so that you get all
four cows back, with a tax exemption for five cows.
The milk rights of the six cows are transferred via an intermediary to a
Cayman Island Company secretly owned by the majority shareholder who
sells the rights to all seven cows back to your listed company.
The annual report says the company owns eight cows, with an option on
one more.
You sell one cow to buy a new president of the United States, leaving
you with nine cows.
No balance sheet provided with the release.
The public then buys your bull.

The biggest losers, fiscal division

The 2009 Fortune 500 came out last week.

Biggest money losers in the elite club:

1. AIG
2. Fannie Mae
3. Freddie Mac
4. GM
5. Citigroup
6. Merrill Lynch
7. ConocoPhillips
8. Ford Motor
9. Time Warner
10. CBS
    

There are a lot of names, of course, missing entirely from the 2009 edition (based on 2008 results, of course):

• Lehman Brothers
• Wachovia
• Washington Mutual
• Countrywide Financial
• Electronic Data Systems
• Anheuser-Busch
• Bear Stearns

I wonder what the 2010 list will look like.

Counting counties

Slate crunches the numbers (the US Labor Department's county-by-county employment figures, in this case) and comes up with an interactive graphic showing job gains and losses from January 2007 to February 2009:

The economic crisis, which has claimed more than 5 million jobs since the recession began, did not strike the entire country at once. A map of employment gains or losses by county tells the story of how those job losses first struck in the most vulnerable regions and then spread rapidly to the rest of the country. As early as August 2007, for example—several months before the recession officially began—jobs were already on the decline in southwest Florida; Orange County, Calif.; much of New Jersey; and Detroit, while other areas of the country remained on the uptick.

Using the Labor Department's local area unemployment statistics, Slate presents the recession as told by unemployment numbers for each county in America.

When did your county's jobs disappear? An interactive map of vanishing employment across the country (Chris Wilson, Slate)

A couple of still screenshots that do not do the animation justice:


January 2007


February 2009

How the finance industry took over the American economy

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

The Quiet Coup - The Atlantic, May 2009

An ocean of unwitting involuntary shareholders, previously known as taxpayers

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — "our partners in the government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

"The Big Takeover," Matt Taibbi, Rolling Stone, 19 March 2009

Thought for the day

"It’s good to see the stocks rebounding. I haven’t seen anything shoot up this fast since Amy Winehouse." - Craig Ferguson, The Late Late Show

There's no justice like angry mob justice

Internal memo from AIG Corporate Security, leaked to Gawker, advising employees about how to stay safe in public in the, uh, changed political and economic climate.

It's not gambling because we've specifically exempted it

In the manic years of this decade, credit default swaps took off as a way to bet on the likelihood of default by a firm or an investment portfolio, without having to own any financial interest in the firm or portfolio. That is definitely not insurance, it is gambling. The reason it is not illegal gambling is that, in 2000, Congress specifically exempted credit default swaps from state gaming laws.

The result? Eric Dinallo, the insurance superintendent for New York State, has said that some 80 percent of the estimated $62 trillion in credit default swaps outstanding in 2008 were speculative.

Following the A.I.G. Money (editorial, New York Times)

This is a very interesting point that I haven't seen raised elsewhere... the specific exemption from regulation as illegal gambling.

Kleptocracy

A classic board game (born in the last great American financial upheaval) - now updated for the modern era.

Related...

I Did Not Know This:

In 1941 the British Secret Service had John Waddington Ltd., the licensed manufacturer of [Monopoly] outside the U.S., create a special edition for World War II prisoners of war held by the Nazis.^[5] Hidden inside these games were maps, compasses, real money, and other objects useful for escaping. They were distributed to prisoners by the International Red Cross.

Cool.  And so smart.

It's that time of year again: Berkshire Hathaway's Annual Chairman's Letter

Mr. Buffett, in his annual letter closely read by shareholders and nonshareholders alike, said he didn't expect an improved economy any time soon but did expect better times eventually.

"Our country has faced far worse travails in the past," he said. "Without fail, however, we've overcome them." He declined to draw a correlation between stocks and economics, saying that while he was certain the economy would be "in shambles for 2009" that "does not tell us whether the stock market will rise or fall."

In 2008, Berkshire's Class A stock fell 32%. This year the shares are down about 19%, slightly better than the Dow Jones Industrial Average.

Mr. Buffett credited the federal government for stepping in with massive assistance last year, saying the intervention was "essential" to avoiding a total breakdown. But he cautioned there could be "unwelcome aftereffects," such as inflation.

On oil, he said "odds are good that oil sells far higher in the future than the current $40 to $50 price. But so far I have been dead wrong." And on Treasurys, he contended that the "investment world has gone from underpricing risk to overpricing it." Future historians will comment on the Internet bubble of the 1990s and the housing bubble of the early 2000s, he said, but " the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

Warren Buffett's Berkshire Hathaway Reports Worst Year Ever In Annual Letter to Shareholders (Wall Street Journal)

Related: Berkshire Hathaway 2008 Chairman's Letter (PDF)

The game is up

Chalk another prediction up in the "win" column for Nouriel Roubini: all signs point to nationalization of major US consumer banks in the very near future.

The game is up: within the next few weeks, if not days, the US government will have to step in and nationalise one or more banks.

The likely candidates to the dubious honour of being owned by Washington Inc can be found at the end of a sad trail of credit losses, management mishaps and share price collapses.

Come on down, Citigroup, Bank of America and a motley crew of regional and community banks. Barack Obama, US president, will have to draw on his vast oratorical skills to avoid using the N-word but make no mistake: the authorities are going in.

[...]

Crushed under a pile of toxic assets, paralysed by wafer-thin balance sheets and deserted by fearful investors, once-mighty institutions such as Citi and BofA are barely able to perform basic functions such as lending and underwriting.

In fact, the only reason they have not joined Lehman Brothers, Bear Stearns and Washington Mutual on the financial scrapheap is that taxpayers have propped them up with more than $500bn in cash injections and guarantees.

At this stage, some form of nationalisation is both a political and financial imperative. On the political front, the concept has won backing from unexpected quarters. This newspaper’s account of Alan Greenspan’s conversion from icon of free-market liberalism to proponent of a temporary nationalisation was mind-boggling.

To couple that with a similar U-turn by Lindsey Graham, a Republican senator who has built a political career out of his love of small government, was just astonishing.

The reality is that even the right wing of the political spectrum realises that banks cannot be left to their own devices while in receipt of federal funds.

[...]

Banks will not like it – and Citi, for one, is already agitating for yet another bail-out without nationalisation. But as the financial chain comes under unprecedented strain, the time has come to take out its weakest links.

FT.com / Markets / On Wall Street: Nationalisation is most likely way out of US banking mess (Francesco Guererra)

Losers must die in full view

U.S. Treasury Secretary Timothy Geithner is about to get some advice from an unexpected quarter... Sudhir Venkatesh's retired gangsta friends from Chicago:

Mr. Secretary, let’s face it: you need real experts, those who have felt the consequences associated with moral hazards, those who have found out that mistakes in markets mean no skin in the game (or no skin at all, for that matter).

[...]

[The Thugz] have agreed to return to the couch and channel their wisdom for the benefit of the country. By the way, you should know that they are big fans of your work at the New York Fed. Most of them fared nicely in the late 1990’s by catering to the growing white-collar workforce who demanded cocaine, escorts, sexual services, etc. Of course, since most of these customers worked in the financial services industry, my boys feel like they owe you a solid.

[...]

The unanimous opinion among The Thugz was that you must base your work around a time-tested law of ghetto capitalism: losers must die in full view. What? This doesn’t make sense. O.K., well, let me explain. Your first mistake (more accurately, your predecessor’s error) was to mix the bad apples (banks) with the good (banks). By doing so, you forgot what makes capitalism so much fun: winners win at the losers’ expense, and everyone gets to watch and laugh. Sort of like public hangings, except reported on the financial pages. Otherwise, why read The Wall Street Journal?

The moral is: don’t ever take the joy of death away from the public. Because if you don’t see losers in pain, you begin to think the game is rigged. And we all know the game is fair, open, and transparent … yes?

A Letter from the Thugz (Sudhir Venkatesh, writing at the Freakonomics Blog)

Where is my money, idiot?

The current recession has revealed the weaknesses in the structures of modern capitalism. But it also revealed as useless the mathematical contortions of academic economics. There is no totemic power.

This for two reasons:

(1) Almost no-one predicted the world wide downtown. Academic economists were confident that episodes like the Great Depression had been confined to the dust bins of history. There was indeed much recent debate about the sources of “The Great Moderation” in modern economies, the declining significance of business cycles.

Indeed as we have seen this year on the academic job market, macroeconomists had turned their considerable talents to a bizarre variety of rococo academic elaborations. With nothing of importance to explain, why not turn to the mysteries of online dating, for example.

I myself was so confident of the consensus of the end of the business cycle that I persuaded my wife after the collapse of Lehman Brothers to invest all her retirement savings in the stock market, confident that the Fed would soon make things right and we could profit from the panic of a gullible public. The line “Where is my money, idiot?” is hers.

(2) The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1. What is the multiplier from government spending? Does government spending crowd out private spending? How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.

The bailout debate has also been conducted in terms that would be quite familiar to economists in the 1920s and 1930s. There has essentially been no advance in our knowledge in 80 years.

Gregory Clark, professor of economics at UC-San Diego, writing at The Atlantic's business blog and quoted by Dan Ariely at Predictably Irrational: How the crash is reshaping economics (20 Feb 2009)

Hat tip: Tarus

Uh, didn't Socrates kinda beat hell out of people with this technique back in the day?

True confession: I am a business professor who does not understand the financial crisis. Ask me to explain things like derivatives and I'll look blankly at you. My credentials in economics, negotiation and law should qualify me to speak, but often the news leaves me slack-jawed with confusion. Bring me to a panel discussion, and I'll ask dumb questions. In short, I am a role model. I want my students to be more like me.

Each semester, I introduce my students to a key idea: I want them to join me in the fight against the fear of looking dumb. Overcoming that fear can save them from serious traps.

Ask the dumb questions (Seth Freeman, USA Today, 13 Jan 2009)

See also: Dumb is the new smart ("Public Offering," the Columbia Business School blog)

(via bNet)

Sully or Suleman?

Q: What's more depressing than the economic slowdown?

A: Maybe "Octomom" is America's future:

A major reason people are blue about the future is not the stores [closing], not the Treasury secretary, not everyone digging in. It is those things, but it's more than that, and deeper.

It's Sully and Suleman, the pilot and "Octomom," the two great stories that are twinned with the era. Sully, the airline captain who saved 155 lives by landing that plane just right—level wings, nose up, tail down, plant that baby, get everyone out, get them counted, and then, at night, wonder what you could have done better. You know the reaction of the people of our country to Chesley B. Sullenberger III: They shake their heads, and tears come to their eyes. He is cool, modest, competent, tough in the good way. He's the only one who doesn't applaud Sully. He was just doing his job.

This is why people are so moved: We're still making Sullys. We're still making those mythic Americans, those steely-eyed rocket men. Like Alan Shepard in the Mercury rocket: "Come on and light this candle."

But Sully, 58, Air Force Academy '73, was shaped and formed by the old America, and educated in an ethos in which a certain style of manhood—of personhood—was held high.

What we fear we're making more of these days is Nadya Suleman. The dizzy, selfish, self-dramatizing 33-year-old mother who had six small children and then a week ago eight more because, well, she always wanted a big family. "Suley" doubletalks with the best of them, she doubletalks with profound ease. She is like Blago without the charm. She had needs and took proactive steps to meet them, and those who don't approve are limited, which must be sad for them. She leaves anchorwomen slack-jawed: How do you rough up a woman who's still lactating? She seems aware of their predicament.

Any great nation would worry at closed-up shops and a professional governing class that doesn't have a clue what to do. But a great nation that fears, deep down, that it may be becoming more Suley than Sully—that nation will enter a true depression.

Is "Octomom" America's Future? (Peggy Noonan, Wall Street Journal, 13 Feb 2009)