Saturday, November 27, 2010

Today's Links

1---Manning the Barricades, The Economist Intelligence Unit, March 2009

Note: Still the best analysis of the financial crisis to date. (and it was written back in 2009!)

Excerpt: The credit crunch is dragging down the global economy and raising political tensions.

Collapsing credit has plunged the world economy into the deepest recession in more than 70 years. What began as a property bubble in the US has spread rapidly as troubled banks have stopped lending and consumers and businesses have stopped spending. As demand in the US and Europe evaporates, once- thriving emerging markets are losing their best customers and biggest investors. An increasingly synchronised global economy will contract in 2009 for the first time since World War II.

Eighteen months after it began, this economic chain reaction—from banks to markets to consumers to companies—is entering a new phase. Economic pain, reflected in millions of lost jobs and destroyed savings, has entered the political realm, causing some governments to collapse and threatening others. The risk of political instability is leading to a wave of trade protectionism, which is rippling across the globe. It was just such a political response in the 1930s, exemplified by America's infamous Smoot-Hawley tariffs, that deepened and prolonged the Great Depression.....

Scenario 3: The alternative risk scenario (10% probability)

Failing confidence in the dollar leads to its collapse, and the search for alternative safe-havens proves fruitless...

The current financial and economic crisis was caused by decisions that contributed to the build-up of large economic imbalances—most importantly, in the US current account. Under our alternative risk scenario, the external imbalance is corrected through sharp currency movements; the dollar depreciates to US$2:€1 for a sustained period, overshooting temporarily to an even weaker level. The depreciation occurs relatively quickly, in a period of less than a year....

A successive series of expensive fiscal stimulus packages scares holders of US treasuries and other assets affected by the US fiscal position. Although the US avoids default, the country’s sovereign credit rating comes under increasing pressure, the more so as the administration fails to deal with long-term fiscal challenges such as Social Security and Medicare. Spooked investors leave the US for other assets, sinking the dollar on their way out. (A bleak but thoroughly realistic scenario for the dollar.) (Reprinted by permission)

2--Eating the Irish, Paul Krugman, New York Times

Excerpt: Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses,... the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts... — ... those spending cuts have caused a severe recession...

But there is no alternative, say the serious people: all of this is necessary to restore confidence. Strange to say, however, confidence is not improving. On the contrary: investors have noticed that ... austerity measures are depressing the Irish economy — and are fleeing...

But Ireland is now in its third year of austerity, and confidence just keeps draining away. And you have to wonder what it will take for serious people to realize that punishing the populace for the bankers’ sins is worse than a crime; it’s a mistake.

3--The Retreat of Macroeconomic Policy, Bradford DeLong, Project Syndicate

Excerpt: For decades, I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. But the political reaction to the Great Recession has changed the way we should think about this issue....

Why is the idea, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?

It is now clear that the right-wing opponents to the Obama administration’s policies are ... objecting to the very idea that government should try to serve a stabilizing macroeconomic role.

Today, the flow of economy-wide spending is low. ... Yet..., here we are. The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-WWII near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.

4--Income, Spending, and Saving All Rose in October, The Atlantic

Excerpt: Americans got another good economic report this week about personal income, spending and saving. They all increased, according to the Bureau of Economic Analysis. Additionally, the income numbers since April were revised mostly upward. These statistics strengthen the argument that the U.S. economy continues to recover.

Just 0.8% saving growth isn't much to brag about, but it certainly beats September's 4.7% decline. Americans aren't as interested in saving recently as they were a year or two ago. Over the past six months average saving declined by nearly 1%.

Although less saving is a bad thing from the standpoint of Americans strengthening their balance sheets, there's a silver lining. If Americans are saving less as incomes rise, then this implies that they're becoming comfortable spending more. For firms to ramp up hiring, they must sense renewed consumer demand, and less saving appears to indicate that Americans they are consuming more goods and services.

5--Foreclosed Homes May Flood Spanish Market as Banks Offload Unwanted Assets, Bloomberg

Excerpt: The number of foreclosed homes for sale in Spain may triple next year as new accounting rules prompt lenders to dump their depreciating assets, according to the co-founder of a website that advertises repossessed properties.

About 100,000 houses and apartments owned by banks are now on the market, Fernando Acuna said in an interview. A quarter of them are listed on the website operated by his Madrid-based company, Pisos Embargados de Bancos, on behalf of 25 banks....

Property values will fall 20 percent over the next five years, Rodriguez y Rodriguez de Acuna estimates. Most of the declines will come in 2011, he said. Since the Spanish market’s peak in April 2007, home prices have dropped 22.5 percent, according to a survey by real-estate website and IESE Business School.

5--Deals, Tradition Lure Shoppers On Black Friday, Wall Street Journal

Excerpt:Shoppers across the nation lined up in the predawn chill for $198 flat-screen TVs, low-cost laptops and other bargains as Black Friday signaled the traditional start of the holiday shopping season--and offered retailers hope that this Christmas will be merrier than the last two.

"We're off to a strong start," said Jerry Storch, chairman and chief executive of Toys "R" Us Inc. He said that most Toys "R" Us locations across the country reported more customers than last year waiting for the stores to open. About 138 million Americans are expected to go shopping this weekend......

Still, there were many reminders that the economy remains weak and that consumers are adhering to their budgets and shopping lists for loved ones. For those consumers, no personal luxuries were indulged.

6--Shadow banks, shadow sovereigns, FT. Alphaville

Excerpt: This is not your usual sovereign contagion post.

We’ve argued once before that Ireland’s failed bondholder bailout has unleashed contagion that does not just threaten the eurozone. Sudden illiquidity could also strike banking systems across the core, returning markets to volatility last seen during the late-2008 crisis....

It’s practically a truism these days that a modern European sovereign default would be vastly larger in terms of size of debt, and much more legally complex than the Russian or Argentine restructuring that once held the records. Even without considering any tricky shadow bank connections. (The likelihood of a domino effect is great)

7--The Instability of Moderation, Paul Krugman, New York Times

Excerpt: The brand of economics I use in my daily work – the brand that I still consider by far the most reasonable approach out there – was largely established by Paul Samuelson back in 1948, when he published the first edition of his classic textbook. It’s an approach that combines the grand tradition of microeconomics, with its emphasis on how the invisible hand leads to generally desirable outcomes, with Keynesian macroeconomics, which emphasizes the way the economy can develop magneto trouble, requiring policy intervention....

I’ve always considered monetarism to be, in effect, an attempt to assuage conservative political prejudices without denying macroeconomic realities. What Friedman was saying was, in effect, yes, we need policy to stabilize the economy – but we can make that policy technical and largely mechanical, we can cordon it off from everything else. Just tell the central bank to stabilize M2, and aside from that, let freedom ring!

When monetarism failed – fighting words, but you know, it really did — it was replaced by the cult of the independent central bank. Put a bunch of bankerly men in charge of the monetary base, insulate them from political pressure, and let them deal with the business cycle; meanwhile, everything else can be conducted on free-market principles.....

the very success of central-bank-led stabilization, combined with financial deregulation – itself a by-product of the revival of free-market fundamentalism – set the stage for a crisis too big for the central bankers to handle. This is Minskyism: the long period of relative stability led to greater risk-taking, greater leverage, and, finally, a huge deleveraging shock. And Milton Friedman was wrong: in the face of a really big shock, which pushes the economy into a liquidity trap, the central bank can’t prevent a depression.

8--The Korean crisis and the threat of a wider war, WSWS

Excerpt: The potential for a catastrophic confrontation on the Korean peninsula is high. It is difficult to imagine another armed confrontation not provoking a major retaliation by the South Korean military.

What makes the situation all the more fraught with danger is the way in which it is being exploited by Washington to pursue its own strategic aims in the region, particularly vis-à-vis China.

US officials have acknowledged that the dispatch of the USS Washington and its accompanying destroyers and other escort ships to the Yellow Sea is aimed as much, if not more, at China as at North Korea.

“Mr. Obama’s decision to accelerate the deployment of an American aircraft carrier group to the region is intended to prod the Chinese,” the New York Times reported Thursday. “American officials hope that by presenting Beijing with an unpalatable result—the expansion of American maneuvers off its shores—China will decide that pressing North Korea is the lesser of two evils."

9--New Evidence Proves First Flag Made By Betsy Ross Actually Shirt For Gay Friend, The Onion

Excerpt: PHILADELPHIA—Historians at the University of Pennsylvania announced the discovery this week of a personal diary from the late 18th century that reveals the first U.S. flag sewed by Betsy Ross was originally intended as a shirt for her flamboyant gay friend Nathaniel.

"This has completely upended the accepted narrative behind the first American flag," said historian Kenneth Atwood, who led the team of scholars analyzing the long-forgotten journal of prominent Philadelphia homosexual Nathaniel Linsley. "Now we can say with certainty that our nation's most enduring symbol of freedom, strength, and prosperity is actually just the result of Nathaniel's desire for a sassy, tight-fitting top."...

"Thanks to the chance discovery of this diary, we now know that Nathaniel Linsley, a homosexual man, is the true father of the American flag," Atwood said. "And from now on, when we look up at Old Glory flying proudly above, we'll see the very same red, white, and blue that he wore tightly across his chest more than two centuries ago."

"Though, lamentably," Atwood added, "without the pricey sequin overlay he so desperately wanted.

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