Prieur’s readings (July 17, 2009)

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This post provides links to a number of thought-provoking articles I have read over the past few days that you may also find of interest.

• Andy Kessler (The Wall Street Journal): The Bernanke market, July 16, 2009,
We won’t get real growth until Congress and Treasury get policy right.

• Irwin Stelzer (Times Online): American account: Barack Obama’s cures may just kill any recovery, July 12, 2009.

• Paul McCulley (Pimco – Global Central Bank Focus): What if?,
So what should Washington do, if and when – and I stress “if and when”; I’m not making a forecast here! – private sector aggregate (nominal) demand growth looks like it’s going to languish in Japan style for the indefinite future? The answer: Take one cup of Krugman’s advice for Japan and two cups of Bernanke’s advice for Japan – responsibly act irresponsibly relative to orthodoxy. Yes, as Bernanke intoned, there are no free lunches. But no lunch doesn’t work for me. Or the American people. While it is true, as Keynes intoned, that we are all dead in the long run, I see no reason to die young from orthodoxy-imposed anorexia.

• Paul Krugman (The New York Times): Boiling the frog, July 12, 2009.
I started thinking about boiled frogs recently as I watched the depressing state of debate over both economic and environmental policy. These are both areas in which there is a substantial lag before policy actions have their full effect – a year or more in the case of the economy, decades in the case of the planet – yet in which it’s very hard to get people to do what it takes to head off a catastrophe foretold. And right now, both the economic and the environmental frogs are sitting still while the water gets hotter.

• Randall Forsyth (Barron’s): Yogi’s recession, July 15, 2009
As the bard of baseball said, it ain’t over ’til it’s over.

• Martin Wolf (Financial Times): After the storm comes a hard climb, July 14, 2009.
The worst of the financial crisis may be behind us, but the financial system remains undercapitalised and weighed down with an as yet unknown burden of doubtful assets. The probability of mischief down the road is close to 100%.

• Mike Rorty (The Atlantic): Shadow banking: What it is, how it broke, and how to fix it, July 13, 2009.
We hear a lot of chatter about the shadow banking system and its crucial role in the financial crisis. But rarely do we find time to step back and ask the basic questions: What is shadow banking, where did it come from, how did it operate, what role did it play in this crisis and how do we deal with it going forward?

• Nassim Nicholas Taleb and Mark Spitznagel (Financial Times): Time to tackle the real evil: too much debt, July 13, 2009.
The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s. This does not sit well with globalization. Our view is that government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity. There is no other option.

• Van Hoisington and Dr. Lacy Hunt (John Mauldin’s Outside the Box): Debt acts as a brake on the monetary engine, July 13, 2009.
One of the more common beliefs about the operation of the U.S. economy is that a massive increase in the Fed’s balance sheet will automatically lead to a quick and substantial rise in inflation. An inflationary surge of this type must work either through the banking system or through non-bank institutions that act like banks which are often called “shadow banks”. The process toward inflation in both cases is a necessary increasing cycle of borrowing and lending. As of today, that private market mechanism has been acting as a brake on the normal functioning of the monetary engine.

• Anatole Kaletsky (Times Online): Don’t worry about rate rises, fear stagflation, July 16, 2009.
There’s good news and bad. National bankruptcy will probably be staved off, but real longer-term dangers do lie ahead.

• Philip Stephens (Financial Times): The Middle East chess game Obama needs to win, July 17, 2009.
The president has sprinted from continent to continent with the speed and confidence of a grandmaster. He has made the opening moves in almost all of the important games, opting for boldness over caution. But what happens in the Middle East could well tip the outcome of many other games.

• Martin Wolf (Financial Timers): Adapting to Britain’s mediocre prospects, July 17, 2009.
The grim fiscal outlook will have to be dealt with, but this presents an opportunity for the political parties to rethink public sector priorities.

• Rob Arnott (Research Affiliates – Rafi® Fundamentals): Too far, too fast?, July 2009.
A capital market system adjusting to a new world of “fair” risk premiums is not the environment to assume additional hefty gains from risky assets trading at average valuations.

• Justin Baer (Financial Times): Monday Interview: Man on the money with Buffett, July 12, 2009.
At Berkshire Hathaway’s annual meetings in Omaha, Charlie Munger plays the role of Warren Buffett’s cantankerous sidekick, whose reliable catchphrase, “I’ve got nothing to add,” and blunt observations may seem to serve only to complement the folksy charm of his more-famous business partner.

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