Prieur’s readings (July 20, 2009)

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This post provides links to a number of interesting articles I have read over the past few days that you may also enjoy.

• John Hussman (Hussman Funds): Tending seeds – reacting, responding, planting and watering, July 20, 2009.

In recent weeks, I’ve emphasized the very mixed nature of market conditions, which regardless of longer-term headwinds, remain very ambiguous regarding near term direction. For investors, the shifts in trend and the lack of clear direction create some difficulties, particularly for those who tend to react rather than respond to market fluctuations.

• Paul Krugman (The New York Times): The joy of Sachs, July 16, 2009.
The bottom line is that Goldman’s blowout quarter is good news for Goldman and the people who work there. It’s good news for financial superstars in general, whose paychecks are rapidly climbing back to precrisis levels. But it’s bad news for almost everyone else.

• Rob Kirby (GoldSeek): Deceptions, deceit and distrust, July 17, 2009.
With the former investment banks being granted commercial banking status due to the unfolding financial crisis in late 2008 – it was widely reported in the mainstream financial press that this “change” would mean that these banks would be subject to more oversight and hence, more transparency would result regarding their derivatives activities. Ladies and gentlemen, nothing could be further from the truth.

• What went wrong with economics, July 16, 2009.
Economists need to reach out from their specialised silos: macroeconomists must understand finance, and finance professors need to think harder about the context within which markets work. And everybody needs to work harder on understanding asset bubbles and what happens when they burst. For in the end economists are social scientists, trying to understand the real world. And the financial crisis has changed that world.

• Ambrose Evans-Pritchard (Telegraph): Fiscal ruin of the Western world beckons, July 18, 2009.
For a glimpse of what awaits Britain, Europe, and America as budget deficits spiral to war-time levels, look at what is happening to the Irish welfare state.

• Paul Craig Roberts (CounterPunch): What economy?, July 16, 2009.
There is no economy left to recover. The US manufacturing economy was lost to offshoring and free trade ideology. It was replaced by a mythical “New Economy”. The “New Economy” was based on services. Its artificial life was fed by the Federal Reserve’s artificially low interest rates, which produced a real estate bubble, and by “free market” financial deregulation, which unleashed financial gangsters to new heights of debt leverage and fraudulent financial products.

• William Greider (The Nation): Dismantling the temple, July 15, 2009.
The financial crisis has propelled the Federal Reserve into an excruciating political dilemma. The Fed is at the zenith of its influence, using its extraordinary powers to rescue the economy. Yet the extreme irregularity of its behavior is producing a legitimacy crisis for the central bank. The remote technocrats at the Fed who decide money and credit policy for the nation are deliberately opaque and little understood by most Americans. For the first time in generations, they are now threatened with popular rebellion.

• Philip Augar (Financial Times): Insiders cannot provide answers on finance, July 19, 2009.
That those involved in the inception of the financial services industry’s problem should now lead the public debate on its solution is astonishing.

• Anthony Bolton (Financial Times): In short, those sellers can be a mine of information, July 16, 2009.
It’s time short sellers were viewed in the boardroom and by regulators not as the devil incarnate but as a potential mine of information that could help forestall a repeat of last year’s near-death experience.

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1 comment to Prieur’s readings (July 20, 2009)

  • Re:What went wrong with economics –The central cause was not people (greedy, corrupt, materialistic, etc.), nor regulation or lack of regulation, nor erroneous economic theories. Did these exist? Of course, however, none of these would have been significant enough were it not for the one central enabler and amplifier – ignorance of risk.
    This fundamental flaw of using various forms of ‘normal’ parameters, especially risk itself, that exists in MFT, has been well known for over a decade. Unfortunately however, while this fact is well known in academia and in literature, it is still the central course in the universities and the mainstay of the financial industry. Why? Because they have nothing else to offer or to use. There is no other comparable framework and people do not just drop what has been their source of bread and butter. Nassim Taleb, now famous author of “The Black Swan,” went so far as to suggest that the universities all stop teaching finance ‘completely’ until they can come up with something else. He used the analogy of a passenger plan that kept crashing – it would be grounded until it was safe.
    How could something so esoteric as MFT be a cause of our economic disaster? Because, deep down it was the virtual core of the generic cause: ignorance of risk. Allen Greenspan said that he did not understand. The Chairman/CEO of City Bank said that he did not understand. The government clearly did not understand. The heads of the many failed financial businesses clearly did not understand. Yet, there were those who did understand and were not heard.
    Without ignorance of the true risks and potential outcomes, none of the surface causes would have had enough effect or maybe not have happened. Our problem was caused by the twin collapses of the bubbles in the housing market/mortgage market and the financial markets, both abetted by low interest rates and compliant politicians. The excesses in the financial market, the mortgage industry, the housing market and the looseness of money were the product of ignorance (fully supported by MFT) of true risk. The ‘materialistic’ consumer reacted rationally to the environment, but even that would have been mitigated by a credit industry with a better understanding of their true risks. The growth of the Federal debt would have been constrained by more rational debt risk and by better understanding of the true national risks.
    Would broad awareness of the true risks really have changed this cycle as suggested above? I don’t know – it could not have hurt. Given that there was substantial awareness on the part of many analysts and investigators, it is clear that what we are missing is not the tools of analysis, but rather a culture and structure for absorption.
    For this reason, I call upon the Congress and the Administration to create an independent financial research organization whose job it is to harness and promote the productivity of the nations ample financial research institutions and personnel resources; and to assure an active and extensive review and discussion of financial and risk concepts; and lastly to promote the general education of the public in this regard.
    Malcolm Williams

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