i.want.world

Bank of America, the nation’s largest bank by assets, plunged 20 percent and Citigroup slid 16 percent, leading the KBW Bank Index (BKX) down 11 percent. It was the worst showing for the 24-company benchmark since April 20, 2009, when Bank of America told investors it was putting aside more money to cover a growing pool of uncollectible loans.

Meh. Those are the facts. They say that’s it's quite connected to America's downgrade and especially in the Asian markets, where Treasury securities are stockpiled there, which also continues to plummet. The thing is: if the U.S is not a AAA anymore then how can anyone be AAA? No one is not exposed to the U.S as a default risk. A lot of people seem to care what the S&P say.

Though, what I detest hearing is the often stated that 'it has never happened before'. So what? Given a cow that is fed everyday, every single incremental day that it is fed will firm up the cows belief in the benevolent considerate humans. Then one day, the unexpected happens. The same hand that fed the cow wringed its neck and a revision of belief incurs. Past data can not sufficiently provide you with the confidence to forecast. But there you go..

But in all my experience, I have never been in any accident. . . of any sort worth speaking about. I have seen but one vessel in distress in all my years at sea. I never saw a wreck and never have been wrecked nor was I ever in any predicament that threatened to end in disaster of any sort.

E. J . Smith, Captain, RMS Titanic

(1)  William C. Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, said in a speech last July:

Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of “dry tinder” in the form of excess reserves to do so. That is because the Federal Reserve has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference

(2)  On February 10th, Ben Bernanke proposed the elimination of all reserve requirements:

The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Of course, Bernanke’s proposal is the exact opposite of the 100% reserve system proposed by Nobel prize winning economist Milton Friedman and Laurence Kotlikoff, former Senior Economist for the President’s Council of Economic Advisers.

More importantly, if banks don’t make loans based on available reserves, but can enter into loan agreements first and then borrow any reserves needed, that means:

(1) This was never a liquidity crisis, but rather a solvency crisis, as I and many others have repeatedly tried to explain.  In other words, it was not a lack of available liquid funds which got the banks in trouble, it was the fact that they speculated and committed fraud,so that their liabilities far exceeded their assets.  If you don’t understand what I’m saying, please read this

and

(2) The giant banks are not needed, as the federal, state or local governments or small local banks or credit unions can create the credit instead, if the near-monopoly power the too big to fails are enjoying is taken away, and others are allowed to fill the vacuum.

The economy is shaping up and looking a lot 'better' comparatively to 2008. It has been said to 'be moving toward escape velocity..' But, I asked myself, what have we ultimately learned from this slow down and reality adjustment? The answer is absolutely nada, zilch, null. For one, we are infatuated at talking about events that already happened and quick to render and dish out ex-post analyses about how the inescapable was just looming to happen.

Uninterestingly, the crisis had nothing new about it that could have caught anyone off guard. Its scale was just larger than most. Yet the same fools are pouring over forecasts that were manufactured by the same individuals who are convinced that they can see the future.

To elaborate, Nicolas Taleb adds:

Over the past twenty-five hundred years of recorded ideas, only fools and Platonists (or, worse, the species called central bankers) have believed in engineered utopias. We see that the idea is not to correct mistakes and eliminate randomness from social and economic life through monetary policy, subsidies, and so on. The idea is simply to let human mistakes and miscalculations remain confined, and to prevent their spreading through the system, as Mother Nature does. Reducing volatility and ordinary randomness increases exposure to Black Swans-it creates an artificial quiet.

Complexity in the markets has indeed risen to a point where it's become ever more difficult to explain to most the daily businesses of a bank. It is this increase in complexity which I can gladly welcome due to the nature of complex systems:

In such systems, there is no way to make things a little bit simpler - the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn't regard the sudden decoherence of these societies as either a tragedy or a mistake-"[U]nder a situation of declining marginal returns collapse may be the most appropriate response", to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites. When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification.

Niall Ferguson writes:

One day, a seemingly random piece of bad news -- perhaps a negative report by a rating agency -- will make the headlines during an otherwise quiet news cycle. Suddenly, it will be not just a few policy wonks who worry about the sustainability of U.S. fiscal policy but the public at large, not to mention investors abroad. It is this shift that is crucial: A complex adaptive system is in big trouble when its component parts lose faith in its viability.

Over the last three years, the complex system of the global economy flipped from boom to bust -- all because a bunch of Americans started to default on their subprime mortgages, thereby blowing huge holes in the business models of thousands of highly leveraged financial institutions. The next phase of the current crisis may begin when the public begins to reassess the credibility of the radical monetary and fiscal steps that were taken in response.

Neither interest rates at zero nor fiscal stimulus can achieve a sustainable recovery if people in the United States and abroad collectively decide, overnight, that such measures will ultimately lead to much higher inflation rates or outright default. Bond yields can shoot up if expectations change about future government solvency, intensifying an already bad fiscal crisis by driving up the cost of interest payments on new debt. Just ask Greece.

Ask Russia too. Fighting a losing battle in the mountains of the Hindu Kush has long been a harbinger of imperial fall. What happened 20 years ago is a reminder that empires do not in fact appear, rise, reign, decline and fall according to some recurrent and predictable life cycle. It is historians who retrospectively portray the process of imperial dissolution as slow-acting. Rather, empires behave like all complex adaptive systems. They function in apparent equilibrium for some unknowable period. And then, quite abruptly, they collapse.

Washington, you have been warned.

No major surprise: government spending and high taxes has Austria ranked 22nd in this year's Index of Economic Freedom - right above Germany. In part due to recent unprecedented large stimulus plans, the world experienced for the second time in the history of the Index's publishing an overall decreased of economic freedom.

Terry Miller's presentation of the Index at the Hayek Institute pointed out that despite large government spending to promote growth, early evidence has shown that increase in spending has undoubtedly the negative effect -

yet another attestation of delusionary Keynesian economics propaganda.

Click here to download:

Index2010_ExecutiveHighlights.pdf (926 KB)

(download)

Click here to download:

Index2010_ExecutiveHighlights.pdf (926 KB)

"Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced." George Soros, FT.com January 23 2008.

Seismograph. The line indicates the daily volatility of the Dow Jones index, between 1901 and 2009.

ZARA

Sad but true.  The NGO ZARA (Zivilcourage und Anti-Rassismus Arbeit), which is famous for its fight against racism in Austria, is also fighting for its survival.

The org just celebrated its 10th anniversary last month. Unfortunately, the 1000 or more people who attended the party couldn’t save the org as 200 people supporting members are missing. There’s also lack of donations coming in. Due to lack of funds several projects have been turned down or simply cancelled.

Can we blame it on the recent financial crisis where many workers either lost their jobs or businesspeople losing faith in the economy. For many of us who earn the minimum wage it is pretty hard to part our hard-earned money. But somehow it is strange and dreadful to think that the Austrian government tried to save banks and reluctant to punish large firms that made a fool out of the people. Non-government organisations like ZARA and co. don’t receive any penny nor other means of support from the establishment except from the Greens and the socialists and other groups and individuals that promote the same ideals like ZARA. Because of the org’s mission to eradicate racism and help the victims of racist attacks in the country, the conservative politicians don’t see it as useful to their aims.

A huge bulk of ZARA staff is made up of volunteers. If we want ZARA to continue its work we must help the org to survive. If not now, then when? Or else it would be all too late.

David Reilly at Bloomberg notes that the pricing of credit default swaps on both the US government debt and Campbell’s is the same...

Here is the link. Hat tip goes to TheBrowser.

Following up on yesterday's post about quantifying political speech, Dartmouth's Michael Herron - who is a first-rate political scientist and data hound - points out that Obama was the first president to speak about "data" in his inaugural address, and only the second to mention "statistics."