Thursday, October 28, 2010

Today's Best Reads

1--Only $4.2 billion To Buy This Election? Robert

Excerpt: Anyone who doubts the corrupting effect has not been paying attention. Our elected representatives have been acutely sensitive to the needs of Wall Street bankers, hedge-fund managers, and the executives of big pharma, big oil, and the largest health insurance companies. This is not because these individuals and interests are particularly worthy or specially deserving. It is because they are effectively bribing elected officials with their donations. Such donations are not made out of charitable impulse. They are calculated investments no less carefully considered than investments in particular shares of stock. They are shares in our democracy.

2--Mad Fed should beware of "unquantifiable" outcomes, Mark Gilbert, Bloomberg

Excerpt: “Nobody understands QE,” says Fred Goodwin, a strategist at Nomura International in London. “We have no idea how inflationary it really is. A patient juiced up on QE wants to party and it does not matter what anyone says. Don’t worry about what central banks are worried about; worry about unintended consequences.”

The Fed’s role as buyer of first resort has completely distorted the government-bond market. An innocuous report in the Wall Street Journal yesterday said the Fed would avoid the “shock and awe” tactic used in the initial $2 trillion buying spree and limit itself to “a few hundred billion dollars.” This managed to drive the 10-year Treasury yield up by 10 basis points to a five-week high of 2.7 percent.

...central banks are now one-trick ponies, stuck in a financial groundhog day with no fresh ideas. Their willingness to sacrifice their principles not only undermines their hard-won independence, it also allows their political masters to avoid the hard work of structural reform that might generate a genuine recovery. Instead, we are relying on transfusions of artificial central-bank liquidity.

3--Night of the Living Fed, Marketwatch

Excerpt: Grantham is especially harsh with former Fed Chairman Greenspan. “The net effect of deliberately encouraging the start of asset bubbles — particularly in the case of housing — and then neglecting them and leaving them to burst, created the worst domestic and global recession since 1932,” Grantham said.

“Capitalism has been manipulated far more, and more dangerously, by the last two Republican-appointed Fed bosses than everything else added together,” Grantham added. “It is naive, if fashionable, to blame the rather current lame Administration for all of our problems. They inherited a cake already baked, or better, ‘half-baked,’ and the master bakers were the current and former Fed bosses.”

4--Rainy-Day Funds Account For Half Of Big Banks' Earnings, Marshall Eckblad, Dow Jones News

Excerpt: Call it steroids for bank profits....The biggest U.S. banks virtually doubled their collective earnings in the third quarter just by injecting $8.1 billion into net income from funds they'd set aside to cover loan losses.

There are 18 commercial banks in the U.S. with at least $50 billion in assets, and together they earned an adjusted $16.8 billion in the third quarter. Of those profits, nearly half, or 48%, were from drawing down what bankers call loan-loss reserves, according to an analysis by Dow Jones Newswires....

Lenders are likely to disclose more releases from reserves for quarters to come. The reason: American banks set aside so much capital for loan losses during the financial crisis that they still hold bigger reserves than at any other time in modern history, according to Moody's Investors Service Inc.

"Going back to 1948, banks' reserves, as measured by total loans outstanding, are at the highest levels we've ever seen," said Gerard Cassidy, analyst at RBC Capital Markets.

At the heart of the issue is a set of arcane corporate governance accounting rules that call for banks to release loan-loss reserves as soon as they don't expect to need them, even against the protest of some bank officials...

For borrowers looking for capital, the shrinking loan-loss reserves at banks also show how lenders have pulled back from loans to riskier borrowers in the wake of the financial crisis

5--(Milton) Friedman On Japan, Paul Krugman, New York Times

Excerpt: (Friedman)“The Bank of Japan can buy government bonds on the open market…” he wrote in 1998. “Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand…loans and open-market purchases. But whether they do so or not, the money supply will increase…. Higher money supply growth would have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately.”

Krugman--Well, they did that: staring in 2000, the BOJ nearly doubled monetary base over a period of 3 years...And the money just sat there. Banks did not, in fact, expand loans. In fact, Japan’s experience is a key element of the case against monetarism. Just printing notes does not work when you’re in a liquidity trap.

6--A New Normal for Monetary Policy?, John Taylor's blog

A year and a half ago when the Fed’s extraordinary quantitative easing (QE) was shifting from emergency liquidity programs to large scale asset purchases, we convened a conference at Stanford’s Hoover Institution to discuss the shift. Jim Hamilton, of UC San Diego, in his talk Concerns about the Fed's New Balance Sheet and Peter Fisher of Blackrock in his talk The Market View expressed serious concerns about the extraordinary policies and the use of the Fed’s balance sheet to finance them. Don Kohn, then Fed Vice-Chair, attended and defended the Fed’s position

One concern expressed at the time (March 2009) was that such extraordinary measures would become a "new normal" for monetary policy, in which the Fed would not restrict its massive doses of QE to times of panics and other emergencies. Such a new normal would likely breed uncertainty and reduce the Fed’s independence, eventually leading to economic instability and inflation. I put it this way in my paper in the book, Road Ahead for the Fed, which came out of the conference:

“The danger I see is that as the recovery begins, or after we are a couple of years into it, people may feel that it’s not fast enough, or there is an unpleasant pause. Either could generate heavy pressure on the Fed to intervene…. Why would such interventions only take place in times of crisis? Why wouldn’t future Fed officials use them to try to make economic expansions stronger or to assist certain sectors and industries for other reasons?”

Many Fed officials dismissed the concerns about such a scenario, saying that the crisis was unique. Yet this is exactly the scenario that is now playing out. Sure enough, the recovery paused, and lo and behold, there is a QE2 in the works.

7--The Election: The Dangers of Gridlock in Economic Policy, Mark Thoma, Moneywatch

Excerpt: I have been a asked on several occasions how the election might impact the economy. I have three big concerns.

The first is that we will be gripped by the austerity movement that has captured Europe and that, as a result, we will withdraw stimulus too soon. Republicans have been promoting policies to reduce the deficit for some time now, spending cuts in particular are on the agenda. Many among the Republican leadership would have canceled the remaining stimulus already, including extensions to unemployment insurance, if they were in control....

I expect that we will have a slow, agonizing recovery, particularly for employment. I do not expect a double dip, but it’s not out of the question by any means, and we need to be ready in case it happens. Unfortunately, the election is likely to bring gridlock and it’s doubtful that Congress will be able to act in response to a second downturn.

8--Greek yields soar, The Big Picture

Excerpt: Greek 10-year bonds tumbled for a third consecutive day; yield jumped 58 bips 10.34% according to Bloomberg.

The EU revised Greek budget deficit above 15% of GDP. In a leading contender for understatement of the year, Finance Minister George Papaconstantinou said the nation had serious tax compliance issues.

Thus, the ongoing European drama between Greek tax scofflaws, German Industrial financiers, England/Ireland recession continues to play out — pressuring futures, widening spreads, and to leading towards the eventual denouement. Its hard to see how Greece avoids a Restructuring — which, truth be told, is merely a polite word for Default.....I place the survival of the EU in its current form at 50/50 . . .

9--Male castration: The easiest way to live to 100?, The Week

Excerpt: It's well known that women outlive men by about five to six years, says Thomas Kirkwood in Scientific American. But the reasons why have long been murky.....

In fact, high levels of testosterone, which boost male fertility, are quite bad for long-term survival. ... As many dog and cat owners can attest, neutered male animals often live longer than their intact counterparts. Indeed, the evidence supports the notion that male castration might be the ticket to a longer life.

Might the same be true of humans?... The historical record is not good enough to determine if eunuchs tend to outlive normal healthy men, but some sad records suggest that they do. A number of years ago castration of men in institutions for the mentally disturbed was surprisingly commonplace. In one study of several hundred men at an unnamed institution in Kansas, the castrated men were found to live on average 14 years longer than their uncastrated counterparts. (Hmmmm)


  1. I'll skip the extra years, but thank you very much!

  2. Mike,
    As to the cost of this election, I saw one article that said "we" will spend about $4 million per House seat in this election next week. $4 million for a job that pays, what?, about $150,000 a year? Man talk about cost over runs.
    I like that quote; "Nobody understands QE". Well, nobody is supposed to understand it. That is the beauty of the way this country is being run now. Nobody understands how it functions. Yes sir, 9/11 sure as hell DID change everything.